Health Net Reports a 23.1 Percent Increase to $0.80 Per Diluted Share in Second Quarter 2007 Earnings

Health Net, Inc. (NYSE:HNT) today announced that 2007 second quarter net income was $92.0 million, or $0.80 per diluted share. Net income for the second quarter of 2006 was $77.0 million, or $0.65 per diluted share. Following are key highlights for the second quarter of 2007: Pretax margin of 4.3 percent, a 40 basis point improvement compared to the second quarter of 2006; Medicare Advantage membership grew by 39,000 members, or 19.8 percent, compared to the second quarter of 2006; Membership in the company’s small group and individual segment increased by 4.1 percent compared to the second quarter of 2006; The administrative expense ratio of 9.8 percent improved 140 basis points from the second quarter of 2006; The company completed its $80 million acquisition of The Guardian Life Insurance Company of America’s 50 percent interest in the Healthcare Solutions (HCS) business; Health Net of California was selected by the California Farm Bureau Federation as the underwriter for its 60,000-member health plan effective July 1, 2007; The company issued an aggregate of $400 million in 6 3/8% Senior Notes due in June 2017 and entered into a new $900 million, five-year revolving credit agreement which replaced its $700 million revolving credit agreement; and The company repurchased 360,300 shares of its Common Stock at an average price of $53.07 in the second quarter ended June 30, 2007. Membership Total health plan enrollment during the second quarter of 2007 grew by 13,000 members to 3.7 million members compared to the same period in 2006 and by 55,000 members, or 1.5 percent, sequentially. Commercial enrollment, including both at-risk and Administrative Services Only (ASO) membership, declined by 65,000 members, or 2.8 percent, to 2.3 million members in the second quarter of 2007 compared to same period in 2006. It increased by 21,000 members, or 0.9 percent, sequentially. The year-over-year decrease was primarily due to expected attrition in commercial large group and ASO membership while the sequential increase was due to growth in the small group and individual segment. The company’s small group and individual segment experienced strong growth of 28,000 members, or 4.1 percent, in the second quarter of 2007 compared to the second quarter of 2006. Sequentially, the individual and small group segments grew by 20,000 members, or 2.9 percent. Enrollment in the company’s Medicare Advantage plans was 236,000 members at the end of the second quarter of 2007. This reflects an increase of 39,000 members, or 19.8 percent, since the end of the second quarter of 2006 and an increase of 13,000 members, or 5.8 percent, since the end of the first quarter of 2007. Membership in the company’s Medicare Part D plans at the end of the second quarter of 2007 was 348,000, an increase of 60,000 members, or 20.8 percent, from the end of the second quarter of 2006. Medicare Part D membership increased by 7,000 members, or 2.1 percent, since the end of the first quarter of 2007. State Health Plan enrollment at the end of the second quarter of 2007 was 839,000 members, a decline of 21,000 members, or 2.4 percent, since the end of the second quarter of 2006. Sequentially, State Health Plan enrollment increased by 14,000 members, or 1.7 percent, primarily in the Medi-Cal program in Los Angeles County and the Healthy Families program in California. "It’s clear we have generated enrollment momentum, especially in commercial risk membership. Our strategy of focusing on the small group and individual segment is working,” said Jay M. Gellert, president and chief executive officer of Health Net. Revenues and Health Care Costs Health Net’s total revenues increased 6.1 percent in the second quarter of 2007 to $3.5 billion from $3.3 billion in the second quarter of 2006. Health plan services premium revenues increased 8.2 percent to $2.8 billion in the second quarter of 2007 compared to $2.6 billion in the second quarter of 2006. Health Net’s Government contracts revenues decreased 2.1 percent in the second quarter of 2007 to $613.9 million from $627.0 million in the second quarter of 2006. The decrease in revenues was driven by the government assuming payment responsibility for health care expenditures for active duty personnel in the civilian sector as of the third quarter of 2006 and by the continued impact of improved Option Period 3 health care costs. The health plan medical care ratio (MCR) was 84.7 percent in the second quarter of 2007 compared to 84.0 percent in the second quarter of 2006. This expected increase was driven partly by higher MCRs in the company’s government programs. The commercial MCR in the second quarter of 2007 was 84.5 percent, up 20 basis points compared to the second quarter of 2006. The commercial premium yield increased 8.4 percent in the second quarter of 2007 compared to the second quarter of 2006. Commercial health care costs rose by 8.6 percent on a per member per month (PMPM) basis in the second quarter of 2007 compared to the second quarter of 2006. "Due to the impact of the Guardian transaction and the new California Farm Bureau membership which we added effective July 1, 2007, we are revising our full year 2007 premium yield expectations to approximately 9.0 percent,” said Gellert. "We expect to see commercial health care cost trends approximately 50 to 60 basis points below this amount.” The Government contracts cost ratio was 92.9 percent in the second quarter of 2007, representing a 120 basis point improvement compared with the second quarter of 2006. "We continue to experience excellent health care cost performance and high beneficiary satisfaction in the TRICARE North Region,” said Jim Woys, Health Net’s interim chief financial officer. Administrative Expenses In the second quarter of 2007, total general, administrative and depreciation expenses decreased by $16.6 million to $277.0 million compared to $293.6 million in the second quarter of 2006. "The administrative expense ratio improved 140 basis points compared to the second quarter of 2006 due to our continued focus on expense management and some modest one-time benefits,” said Woys. "In addition, the second quarter is seasonally the lowest period of G&A spend during the year. As we move into the third and fourth quarters of 2007, we expect G&A to increase due to higher marketing expenses for open enrollment in both the commercial and Medicare lines of business and from additional expenses related to the HCS transaction.” Health Net’s selling expenses of $76.8 million in the second quarter of 2007 increased by $17.2 million compared to the second quarter of 2006. "Our selling ratio of 2.7 percent increased 40 basis points compared to the second quarter of 2006 as we continued to focus on growing the individual, small and mid-size employer segments and strengthening our partnerships with the agents and brokers who sell our products. As a result of this focus, commercial new sales increased by 87,000 members, or 27.0 percent, compared to the second quarter of 2006,” said Gellert. Balance Sheet Cash and investments as of June 30, 2007 were $2.4 billion compared with $2.1 billion as of December 31, 2006. Reserves for claims and other settlements increased by $35.7 million to $1.1 billion at June 30, 2007. Days claims payable (DCP), including provider settlements, capitation payments and Medicare Part D expenses, increased by 0.8 days to 41.7 days in the second quarter of 2007 compared to 40.9 days in the second quarter of 2006. DCP increased by 0.4 days compared to the first quarter of 2007. Excluding provider settlements, capitation payments and Medicare Part D, DCP increased by 0.9 days to 55.3 days at June 30, 2007, from 54.4 days at March 31, 2007, and by 2.4 days compared with 52.9 days at June 30, 2006 (see footnote (a) in the Notes to Condensed Consolidated Financial Statements in the accompanying tables). The company’s debt-to-total capital ratio was 17.0 percent as of June 30, 2007 compared to 21.9 percent as of December 31, 2006 and 33.0 percent on June 30, 2006. During the second quarter of 2007, the company repurchased 360,300 shares of its Common Stock at an average price of $53.07. From the end of the second quarter of 2007 through July 31, 2007, the company repurchased 831,700 shares. Since Health Net restarted its share repurchase program in November 2006, through July 31, 2007, the company has repurchased more than 7.6 million shares at an average price of $47.90. In the second quarter of 2007, the company issued $400 million in aggregate principal amount of 6 3/8% Senior Notes due 2017. The net proceeds of the offering were used to repay amounts outstanding under a term loan agreement and the company’s revolving credit facility. Also, the company entered into a new $900 million, five-year revolving credit agreement that replaced its $700 million revolving credit agreement. Interest expense decreased by $5.6 million in the second quarter of 2007 compared to the second quarter of 2006, due to the redemption of the company’s 8 3/8% Senior Notes due 2011 in the third quarter of 2006, which had a higher interest rate than its term and bridge loans and new Senior Notes issued in the second quarter of 2007. Cash Flow Operating cash flow was $135.7 million in the second quarter of 2007, or 1.5 times net income. For the first half of 2007, Health Net’s operating cash flow was $479.7 million, which includes seven monthly payments from the Centers for Medicare & Medicaid Services (CMS), including one extra payment of approximately $265 million. Adjusted to include only six monthly payments in the first half of 2007, operating cash flow would have been approximately $215 million, or 1.2 times net income. Outlook Health Net expects earnings per diluted share of $0.99 in the third quarter of 2007, and $3.66 for the full year of 2007 based on expected average shares outstanding of 114 million. Conference Call As previously announced, Health Net will discuss the company’s second quarter results during a conference call scheduled on Wednesday, August 1, 2007, at approximately 11:00 a.m. Eastern Time. To listen to the call, please dial 800-811-8824, code 7178740. A live webcast and replay of the conference call also will be available at www.healthnet.com. The conference call webcast is open to all interested parties. A replay of the conference call will be available from August 1, 2007 through August 5, 2007, by dialing 888-203-1112, code 7178740. Anyone listening to the company's conference call will be presumed to have read Health Net's Annual Report on Form 10-K for the year ended December 31, 2006, Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, and other reports filed by the company from time to time with the Securities and Exchange Commission. About Health Net Health Net, Inc. is among the nation’s largest publicly traded managed health care companies. Its mission is to help people be healthy, secure and comfortable. The company’s health plans and government contracts subsidiaries provide health benefits to approximately 6.6 million individuals across the country through group, individual, Medicare, Medicaid and TRICARE and Veterans Affairs programs. Health Net’s behavioral health subsidiary, MHN, provides mental health benefits to approximately 7.0 million individuals in all 50 states. The company’s subsidiaries also offer managed health care products related to prescription drugs, and offer managed health care product coordination for multi-region employers and administrative services for medical groups and self-funded benefits programs. For more information on Health Net, Inc., please visit the company’s Web site at www.healthnet.com. Cautionary Statements This release contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, that involve a number of risks and uncertainties. All statements, other than statements of historical information provided herein, may be deemed to be forward-looking statements. These statements are based on management’s analysis, judgment, belief and expectation only as of the date hereof, and are subject to uncertainty and changes in circumstances. Without limiting the foregoing, the words "believes,” "anticipates,” "plans,” "expects,” "may,” "should,” "could,” "estimate,” "intend” and other similar expressions are intended to identify forward-looking statements. Actual results could differ materially due to, among other things, rising health care costs, negative prior period claims reserve developments, trends in medical care ratios, issues relating to provider contracts, litigation costs, operational issues, health care reform and general business conditions. Additional factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, the risks discussed in the "Risk Factors” section included within the company's most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q filed with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements. The company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date of this release. Health Net, Inc. Condensed Consolidated Statements of Operations (Amounts in thousands, except per share, PMPM and ratio data)   Quarter Ended June 30, March 31, June 30, REVENUES:   2006     2007     2007   Health plan services premiums $ 2,599,079 $ 2,777,259 $ 2,811,186 Government contracts 626,957 607,995 613,865 Net investment income 26,256 31,364 27,884 Administrative services fees and other income   13,830     12,294     11,243   Total revenues   3,266,122     3,428,912     3,464,178     EXPENSES: Health plan services 2,181,975 2,341,074 2,381,279 Government contracts 590,117 567,099 570,518 General and administrative 288,670 291,285 270,003 Selling 59,630 69,129 76,842 Depreciation 4,950 6,541 6,969 Amortization 1,275 1,092 2,044 Interest   13,449     9,560     7,824     3,140,066     3,285,780     3,315,479     Income from operations before income taxes 126,056 143,132 148,699 Income tax provision   49,023     54,547     56,669   Net income $ 77,033   $ 88,585   $ 92,030     Basic earnings per share $ 0.67 $ 0.79 $ 0.82   Diluted earnings per share $ 0.65 $ 0.77 $ 0.80     Weighted average shares outstanding: Basic 115,213 111,970 112,122 Diluted 118,305 114,759 114,808   Pretax margin (Income from operations before income taxes / Total revenues) 3.9 % 4.2 % 4.3 % Health plan services MCR 84.0 % 84.3 % 84.7 % Government contracts cost ratio 94.1 % 93.3 % 92.9 % Administrative ratio ((G&A+Dep) / (HP serv prem + admin serv fees and other income)) 11.2 % 10.7 % 9.8 % Selling costs ratio (Selling costs / HP serv prem) 2.3 % 2.5 % 2.7 % Days claims payable(a) 40.9 41.3 41.7 Days claims payable - adjusted(a) 52.9 54.4 55.3 Effective tax rate 38.9 % 38.1 % 38.1 % Health plan services premiums PMPM $ 241.75 $ 259.35 $ 260.18 Health plan services costs PMPM $ 202.95 $ 218.62 $ 220.39 Health Net, Inc. Condensed Consolidated Balance Sheets (Amounts in thousands, except ratio data)   December 31, June 30,   2006     2007   ASSETS Current Assets Cash and cash equivalents $ 704,806 $ 976,150 Investments - available for sale 1,416,038 1,421,537 Premiums receivable, net 302,355 206,513 Amounts receivable under government contracts 199,569 229,134 Incurred but not reported (IBNR) health care costs receivable under TRICARE North contract 272,961 271,327 Other receivables 106,135 105,093 Deferred taxes 54,702 69,369 Other assets   161,280     179,722   Total current assets 3,217,846 3,458,845 Property and equipment, net 151,184 163,877 Goodwill, net 751,949 751,949 Other intangible assets, net 42,835 119,463 Deferred taxes 33,137 92,127 Other noncurrent assets   100,071     145,703   Total Assets $ 4,297,022   $ 4,731,964     LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Reserves for claims and other settlements $ 1,048,796 $ 1,084,461 Health care and other costs payable under government contracts 52,384 53,528 IBNR health care costs payable under TRICARE North contract 272,961 271,327 Unearned premiums 164,099 415,256 Bridge loan 200,000 - Accounts payable and other liabilities   371,263     315,688   Total current liabilities 2,109,503 2,140,260 Senior notes payable - 397,968 Revolver payable and other financing arrangement 300,000 - Other noncurrent liabilities   108,554     243,943   Total Liabilities   2,518,057     2,782,171     Stockholders' Equity Common stock and additional paid-in capital 1,028,018 1,100,623 Treasury common stock, at cost (891,294 ) (966,691 ) Retained earnings 1,653,478 1,836,015 Accumulated other comprehensive loss   (11,237 )   (20,154 ) Total Stockholders' Equity   1,778,965     1,949,793   Total Liabilities and Stockholders' Equity $ 4,297,022   $ 4,731,964     Debt-to-Total Capital Ratio 21.9 % 17.0 % Health Net, Inc. Condensed Consolidated Statements of Cash Flows (Amounts in thousands)   Quarter Ended June 30, March 31, June 30,   2006     2007     2007     CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 77,033 $ 88,585 $ 92,030 Adjustments to reconcile net income to net cash (used in) provided by operating activities:   Amortization and depreciation 6,225 7,633 9,013 Share-based compensation expense 5,195 5,240 6,529 Other changes 4,007 (1,510 ) (3,067 ) Changes in assets and liabilities, net of the effects of dispositions: Premiums receivable and unearned premiums (36,388 ) 181,344 40,925 Other receivables, deferred taxes and other assets (107 ) (16,980 ) 89,397 Amounts receivable/payable under government contracts 359 (1,122 ) (27,299 ) Reserves for claims and other settlements (10,734 ) 49,157 (13,492 ) Accounts payable and other liabilities   (63,055 )   31,680     (58,380 ) Net cash (used in) provided by operating activities   (17,465 )   344,027     135,656     CASH FLOWS FROM INVESTING ACTIVITIES: Sales of investments 44,374 383,857 86,689 Maturities of investments 30,248 60,004 46,730 Purchases of investments (110,683 ) (419,172 ) (190,873 ) Proceeds from sale of property and equipment - 83,870 12,878 Purchases of property and equipment (12,679 ) (19,629 ) (13,394 ) Net cash paid for acquisition of Guardian assets - (69,780 ) (10,497 ) Sales and purchases of restricted investments and other   (497,437 )   (3,970 )   (35,592 ) Net cash (used in) provided by investing activities   (546,177 )   15,180     (104,059 )   CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options and employee stock purchases 20,895 30,652 11,949 Repurchases of common stock (1,107 ) (55,893 ) (13,891 ) Excess tax benefits from share-based compensation 2,221 10,399 3,789 Borrowings under financing arrangements 497,334 100,000 393,535 Repayment of borrowings under financing arrangements   -     (200,000 )   (400,000 ) Net cash provided by (used in) financing activities   519,343     (114,842 )   (4,618 )   Net (decrease) increase in cash and cash equivalents (44,299 ) 244,365 26,979 Cash and cash equivalents, beginning of period   870,224     704,806     949,171   Cash and cash equivalents, end of period $ 825,925   $ 949,171   $ 976,150   Health Net, Inc. Notes to Condensed Consolidated Financial Statements   Notes:   (a) Management believes that days claims payable (excluding capitation, provider settlements and Medicare Part D), a non-GAAP financial measure, provides useful information to investors because, in excluding those health care costs for which no or minimal reserves are maintained, it is a more accurate reflection of days claims payable calculated from claims-based reserves than is days claims payable, which does not exclude such costs. This non-GAAP financial information should be considered in addition to, not as a substitute for, financial information prepared in accordance with GAAP. The following table provides a reconciliation of the differences between days claims payable (excluding capitation, provider settlements and Medicare Part D) and days claims payable, the most directly comparable financial measure calculated and presented in accordance with GAAP:   Q2 2006 Q1 2007 Q2 2007 (Dollars in millions) Reserve for Claims and Other Settlements $975 .4 $1,098 .0 $1,084 .5 Less: Capitation Payable, Provider Settlements and Medicare Part D (110 .3) (101 .1) (98 .8) Adjusted Reserve for Claims and Other Settlements 865 .1 996 .9 985 .7   (1 ) Average Reserve for Claims and Other Settlements 980 .8 1,073 .4 1,091 .2   (2 ) Average Adjusted Reserve for Claims and Other Settlements 865 .4 980 .2 991 .2   (3 ) Health Plan Services Cost 2,182 .0 2,341 .1 2,381 .3 Less: Capitation Payments, Provider Settlements and Medicare Part D (692 .6) (720 .9) (751 .5) (4 ) Adjusted Health Plan Services Cost 1,489 .4 1,620 .2 1,629 .8   (5 ) Number of Days in Period 91 90 91   = (1)/(3) x (5) Days Claims Payable 40 .9 41 .3 41 .7 = (2)/(4) x (5) Days Claims Payable (Excl. Capitation, Provider Settlements and Medicare Part D) 52 .9 54 .4 55 .3 Health Net, Inc. Enrollment Data - By State (In thousands) Change from March 31, 2007 June 30, 2006 June 30, March 31, June 30, Increase/ % Increase/ % 2007 2007 2006 (Decrease) Change (Decrease) Change California Large Group 1,013 1,009 1,063 4 0.4 % (50 ) (4.7 )% Small Group and Individual 425 413 422 12   2.9 % 3   0.7 % Commercial Risk 1,438 1,422 1,485 16 1.1 % (47 ) (3.2 )% ASO 5 5 5 0   0.0 % 0   0.0 % Total Commercial 1,443 1,427 1,490 16 1.1 % (47 ) (3.2 )% Medicare Advantage 112 108 104 4 3.7 % 8 7.7 % Medi-Cal 708 694 726 14   2.0 % (18 ) (2.5 )% Total California 2,263 2,229 2,320 34   1.5 % (57 ) (2.5 )%   Connecticut Large Group 142 143 156 (1 ) (0.7 )% (14 ) (9.0 )% Small Group and Individual 27 29 31 (2 ) (6.9 )% (4 ) (12.9 )% Commercial Risk 169 172 187 (3 ) (1.7 )% (18 ) (9.6 )% ASO 58 57 69 1   1.8 % (11 ) (15.9 )% Total Commercial 227 229 256 (2 ) (0.9 )% (29 ) (11.3 )% Medicare Advantage 43 40 32 3 7.5 % 11 34.4 % Medicaid 85 85 87 0   0.0 % (2 ) (2.3 )% Total Connecticut 355 354 375 1   0.3 % (20 ) (5.3 )%   New York Large Group 116 116 120 0 0.0 % (4 ) (3.3 )% Small Group and Individual 117 109 96 8   7.3 % 21   21.9 % Commercial Risk 233 225 216 8 3.6 % 17 7.9 % ASO 15 15 17 0   0.0 % (2 ) (11.8 )% Total Commercial 248 240 233 8 3.3 % 15 6.4 % Medicare Advantage 9 8 7 1   12.5 % 2   28.6 % Total New York 257 248 240 9   3.6 % 17   7.1 %   New Jersey Large Group 32 36 47 (4 ) (11.1 )% (15 ) (31.9 )% Small Group and Individual 62 61 58 1   1.6 % 4   6.9 % Commercial Risk 94 97 105 (3 ) (3.1 )% (11 ) (10.5 )% ASO 18 19 20 (1 ) (5.3 )% (2 ) (10.0 )% Total Commercial 112 116 125 (4 ) (3.4 )% (13 ) (10.4 )% Medicaid 46 46 47 0   0.0 % (1 ) (2.1 )% Total New Jersey 158 162 172 (4 ) (2.5 )% (14 ) (8.1 )%   Arizona Large Group 80 78 72 2 2.6 % 8 11.1 % Small Group and Individual 53 52 47 1   1.9 % 6   12.8 % Commercial Risk 133 130 119 3 2.3 % 14 11.8 % Medicare Advantage 48 45 35 3   6.7 % 13   37.1 % Total Arizona 181 175 154 6   3.4 % 27   17.5 %   Oregon Large Group 96 96 99 0 0.0 % (3 ) (3.0 )% Small Group and Individual 35 35 37 0   0.0 % (2 ) (5.4 )% Commercial Risk 131 131 136 0 0.0 % (5 ) (3.7 )% Medicare Advantage 20 20 19 0   0.0 % 1   5.3 % Total Oregon 151 151 155 0   0.0 % (4 ) (2.6 )%   Other States Medicare Advantage 4 2 0 2   100.0 % 4       Medicare PDP (stand-alone) 348 341 288 7   2.1 % 60   20.8 %                         Total Health Plan Enrollment Large Group 1,479 1,478 1,557 1 0.1 % (78 ) (5.0 )% Small Group and Individual 719 699 691 20   2.9 % 28   4.1 % Commercial Risk 2,198 2,177 2,248 21 1.0 % (50 ) (2.2 )% ASO 96 96 111 0   0.0 % (15 ) (13.5 )% Total Commercial 2,294 2,273 2,359 21 0.9 % (65 ) (2.8 )% Medicare Advantage 236 223 197 13 5.8 % 39 19.8 % Medicare PDP (stand-alone) 348 341 288 7 2.1 % 60 20.8 % Medi-Cal/Medicaid 839 825 860 14   1.7 % (21 ) (2.4 )%     Total Health Plans   3,717 3,662 3,704 55   1.5 % 13   0.4 %     TRICARE - North Contract Eligibles   2,913 2,930 2,932 (17 ) (0.6 )% (19 ) (0.6 )% Health Net, Inc. Enrollment Data - Line of Business (In thousands) Change from March 31, 2007 June 30, 2006 June 30, March 31, June 30, Increase/ % Increase/ % 2007 2007 2006 (Decrease) Change (Decrease) Change   Large Group California 1,013 1,009 1,063 4 0.4 % (50 ) (4.7 )% Connecticut 142 143 156 (1 ) (0.7 )% (14 ) (9.0 )% New York 116 116 120 0 0.0 % (4 ) (3.3 )% New Jersey 32 36 47 (4 ) (11.1 )% (15 ) (31.9 )% Arizona 80 78 72 2 2.6 % 8 11.1 % Oregon 96 96 99 0   0.0 % (3 ) (3.0 )% 1,479 1,478 1,557 1   0.1 % (78 ) (5.0 )%   Small Group and Individual California 425 413 422 12 2.9 % 3 0.7 % Connecticut 27 29 31 (2 ) (6.9 )% (4 ) (12.9 )% New York 117 109 96 8 7.3 % 21 21.9 % New Jersey 62 61 58 1 1.6 % 4 6.9 % Arizona 53 52 47 1 1.9 % 6 12.8 % Oregon 35 35 37 0   0.0 % (2 ) (5.4 )% 719 699 691 20   2.9 % 28   4.1 %   Commercial Risk California 1,438 1,422 1,485 16 1.1 % (47 ) (3.2 )% Connecticut 169 172 187 (3 ) (1.7 )% (18 ) (9.6 )% New York 233 225 216 8 3.6 % 17 7.9 % New Jersey 94 97 105 (3 ) (3.1 )% (11 ) (10.5 )% Arizona 133 130 119 3 2.3 % 14 11.8 % Oregon 131 131 136 0   0.0 % (5 ) (3.7 )% 2,198 2,177 2,248 21   1.0 % (50 ) (2.2 )%   ASO California 5 5 5 0 0.0 % 0 0.0 % Connecticut 58 57 69 1 1.8 % (11 ) (15.9 )% New York 15 15 17 0 0.0 % (2 ) (11.8 )% New Jersey 18 19 20 (1 ) (5.3 )% (2 ) (10.0 )% 96 96 111 0 0.0 % (15 ) (13.5 )%   Total Commercial California 1,443 1,427 1,490 16 1.1 % (47 ) (3.2 )% Connecticut 227 229 256 (2 ) (0.9 )% (29 ) (11.3 )% New York 248 240 233 8 3.3 % 15 6.4 % New Jersey 112 116 125 (4 ) (3.4 )% (13 ) (10.4 )% Arizona 133 130 119 3 2.3 % 14 11.8 % Oregon 131 131 136 0   0.0 % (5 ) (3.7 )% 2,294 2,273 2,359 21 0.9 % (65 ) (2.8 )%   Medicare Advantage California 112 108 104 4 3.7 % 8 7.7 % Connecticut 43 40 32 3 7.5 % 11 34.4 % New York 9 8 7 1 12.5 % 2 28.6 % Arizona 48 45 35 3 6.7 % 13 37.1 % Oregon 20 20 19 0 0.0 % 1 5.3 % Other States 4 2 0 2   100.0 % 4     236 223 197 13 5.8 % 39 19.8 %   Medi-Cal/Medicaid California 708 694 726 14 2.0 % (18 ) (2.5 )% Connecticut 85 85 87 0 0.0 % (2 ) (2.3 )% New Jersey 46 46 47 0   0.0 % (1 ) (2.1 )% 839 825 860 14 1.7 % (21 ) (2.4 )%   Medicare PDP (stand-alone) 348 341 288 7   2.1 % 60   20.8 %                         Total Health Plan Enrollment Large Group 1,479 1,478 1,557 1 0.1 % (78 ) (5.0 )% Small Group and Individual 719 699 691 20   2.9 % 28   4.1 % Commercial Risk 2,198 2,177 2,248 21 1.0 % (50 ) (2.2 )% ASO 96 96 111 0   0.0 % (15 ) (13.5 )% Total Commercial 2,294 2,273 2,359 21 0.9 % (65 ) (2.8 )% Medicare Advantage 236 223 197 13 5.8 % 39 19.8 % Medicare PDP (stand-alone) 348 341 288 7 2.1 % 60 20.8 % Medi-Cal/Medicaid 839 825 860 14   1.7 % (21 ) (2.4 )%     Total Health Plans   3,717 3,662 3,704 55   1.5 % 13   0.4 % Health Net, Inc. Reconciliation of Reserves for Claims and Other Settlements (In millions)   Health Plan Services YTD 6/2007 Year 2006 Year 2005   Reserve for claims(a), beginning of period $ 754.2 $ 768.7 $ 794.6   Incurred claims related to: Current Year 2,826.8 5,222.0 5,130.4 Prior Years(c) (2.3 ) (77.3 ) (114.5 ) Total Incurred(b) 2,824.5 5,144.7 5,015.9   Paid claims related to: Current Year 2,071.0 4,485.7 4,401.3 Prior Years 688.1   673.5   640.5   Total Paid(b) 2,759.1 5,159.2 5,041.8   Reserve for claims(a), end of period 819.6 754.2 768.7 Add: Claims Payable 173.7 203.9 177.2 Other(d) 91.2   90.7   94.3     Reserves for claims and other settlements, end of period $ 1,084.5   $ 1,048.8   $ 1,040.2     (a) Consists of incurred but not reported claims and received but unprocessed claims and reserves for loss adjustment expenses. (b) Includes medical claims only. Capitation, pharmacy and other payments including provider settlements are not included. (c) This line represents the change in reserves attributable to the difference between the original estimate of incurred claims for prior years and the revised estimate. In developing the revised estimate, there have been no changes in the approach used to determine the key actuarial assumptions, which are the completion factor and medical cost trend. Claims liabilities are estimated under actuarial standards of practice and generally accepted accounting principles. The majority of the reserve balance held at each quarter-end is associated with the most recent months’ incurred services because these are the services for which the fewest claims have been paid. The majority of the adjustments to reserves relate to variables and uncertainties associated with actuarial assumptions. The degree of uncertainty in the estimates of incurred claims is greater for the most recent months’ incurred services. Revised estimates for prior years are determined in each quarter based on the most recent updates of paid claims for prior years. (d) Includes accrued capitation, shared risk settlements, provider incentives and other reserve items.