CONTACTS:
FOR IMMEDIATE RELEASE
OLDWICK, N.J. - NOVEMBER 25, 2002 12:00 AM (EST)
A.M. Best Co. has affirmed the financial strength ratings of B++ (Very Good) for several of PacifiCare Health Systems, Inc.'s (PacifiCare) [NYSE: PHSY] (Santa Ana, CA) health maintenance organizations (HMOs) and insurance subsidiaries. A.M. Best also raised the financial strength rating to B++ (Very Good) from B+ (Very Good) of PacifiCare of Nevada. Additionally, A.M. Best has assigned an initial debt rating of "bb-" to PacifiCare's existing senior unsecured notes and "b+" to the recently issued convertible subordinated notes. The outlooks are stable except for the Texas HMO, which remains negative.
The ratings reflect PacifiCare's significant market presence in commercial and Medicare+Choice market segments, improvement in earnings, recapitalization and extension of debt, improving product diversification and excellent brand name recognition. These strengths are partially offset by PacifiCare's volatility of earnings, Medicare+Choice concentration and high financial leverage.
While PacifiCare's earnings weakened substantially during 2000 and 2001, profitability has improved in 2002. A.M. Best acknowledges the improvement in earnings is directly attributable to the great strides PacifiCare has made in stabilizing its business model, improving pricing and health care cost controls and culling unprofitable membership. Earnings will most likely continue to improve as pricing for January 2003 renewals reflects further commercial margin improvement. Nevertheless, A.M. Best notes PacifiCare still capitates approximately 48% of its hospital contracts and shares risk on 52%. Physician contracts are capitated at 78% and 22% are shared risk.
A significant challenge for the medium term, is the execution of a shift in product mix. Although the improvement in this year's corporate profitability has been driven by commercial business, A.M. Best's preference would be several more quarters of positive trends. The Medicare+Choice business segment, which accounts for only 25% of the total membership, still contributes approximately 53% of the company's revenues and approximately 46% of the gross profit.
PacifiCare's financial flexibility and capitalization have improved, although leverage is still considered high. A.M. Best's concern regarding PacifiCare's financial flexibility last year is greatly reduced with the extension of the senior credit facility to January 2005 and the issuance of $500 million of senior notes, which mature in 2009.
PacifiCare's financial leverage is aggressive for a managed health care organization, and its debt-to-capital at September 30, 2002, was approximately 37%.Debt to capital increased in 2002 due to a significant write-off of goodwill, which ultimately decreased stockholders' equity. A.M. Best acknowledges that PacifiCare has continued to reduce its financial leverage by periodic debt payments. Over the next one-two years, financial leverage is expected to be reduced to/or below 30%.
The following ratings have been assigned to the debt:
PacifiCare Health Systems, Inc.-
- "bb-" on senior unsecured notes
- "b+" on convertible subordinated notes
The financial strength rating has been raised to B++ (Very Good) from B+ (Very Good) for the following subsidiary of PacifiCare Health Systems, Inc.:
- PacifiCare of Nevada
The financial strength ratings have been affirmed at B++ (Very Good) for the following subsidiaries of PacifiCare Health Systems, Inc.:
- PacifiCare of Arizona
- PacifiCare of California
- PacifiCare of Colorado
- PacifiCare of Oklahoma
- PacifiCare of Oregon
- PacifiCare of Washington
- PacifiCare Behavioral Health of California
- PacifiCare Dental
- PacifiCare Life and Health Insurance Co.
- PacifiCare Life Assurance Co.
The financial strength rating remains unchanged at B+ (Very Good) with a negative outlook for the following subsidiary of PacifiCare Health Systems, Inc.:
- PacifiCare of Texas
A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source.