Health Net Reports Net Income of $91 Million or $.76 Per Diluted Share

Health Net, Inc. (NYSE:HNT) today announced 2006 third quarter net income per diluted share of $.76 compared with net income per diluted share of $.67 in the third quarter of 2005, a 13.4 percent increase. The $.76 includes the effect of two items noted by the company in a press release it issued on October 16, 2006. The first item is a $70,095,000 pretax charge for the refinancing of the company’s Senior Notes due 2011 that was completed on August 14, 2006. The second item is a tax benefit that resulted from a loss on the sale of a subsidiary and its affiliates in the third quarter of 2006. This tax benefit reduced the company’s effective tax rate in the third quarter of 2006 to 1.8 percent. Absent this tax benefit, the company’s effective tax rate would have been 38.4 percent. The net effect of these two items reduced net income by $.08 per diluted share in the quarter. Excluding these two items, third quarter earnings per diluted share would have been $.84, a 25.4 percent increase over the $.67 per diluted share earned in the third quarter of 2005. Management believes the earnings per diluted share figure of $.84 that excludes the $.08 effect of the two items in the third quarter of 2006 is more reflective of the company’s underlying operating performance and a more accurate representation of the change in the company’s performance between the two periods. Effective as of the end of the third quarter ended September 30, 2006, Health Net is reporting certain revenue items, primarily from its Administrative Services Only (ASO) business and other like businesses, in a separate line item entitled "Administrative services fees and other income” on its Condensed Consolidated Statements of Operations. Such revenue items had previously been reported as part of Health plan services premiums (See Note (a) in the company’s Notes to Condensed Consolidated Financial Statements in the attached tables). Other highlights of Health Net’s third quarter 2006 results included: Days claims payable (DCP) rose by 1.6 days to 42.5 days compared with the second quarter of 2006. When adjusted for capitation, provider settlements and Medicare Part D costs, DCP rose by 2.3 days sequentially to 55.1 days. Reported operating cash flow was a negative $50,283,000. This amount includes only two monthly payments from the Centers for Medicare & Medicaid Services (CMS) in the third quarter of 2006. Health Net received the third monthly payment for the third quarter on October 2, 2006. Had Health Net received all three monthly CMS payments during the third quarter, operating cash flow would have been approximately $170 million, or approximately 1.8 times reported net income in the quarter. A 100 basis point sequential improvement in the company’s health plan services Medical Care Ratio (MCR) between the second and third quarters of 2006, consistent with historical seasonal utilization patterns. The health plan MCR improved by 70 basis points compared with the third quarter of 2005, as a result of higher premiums and moderating health care cost trends. The company’s pretax margin in the quarter was 2.9 percent. Excluding the pretax refinancing charge described above, the pretax margin would have been 5.0 percent, an 80 basis point improvement compared with the third quarter of 2005. Management believes the 5.0 percent figure, derived by excluding the impact of the $70,095,000 pretax refinancing charge, is more reflective of the company’s underlying operating performance and a more accurate representation of the changes in the company’s performance relative to the third quarter of 2005. "We are pleased that the third quarter again demonstrated the inherent strength of our diverse government and commercial businesses,” said Jay Gellert, president and chief executive officer of Health Net. "We believe the earnings were of a high quality as margins expanded and both normalized operating cash flow and days claims payable improved sequentially, as we expected they would,” Gellert added. Revenues Health Net’s total revenues increased 6.2 percent in the third quarter of 2006 to $3,247,425,000 from $3,058,773,000 in the third quarter of 2005. Health plan revenues increased 9.9 percent to $2,622,065,000 in the third quarter of 2006 compared to $2,386,332,000 in the third quarter of 2005. In the third quarter of 2006, Health Net’s Government contracts revenue fell by 12.4 percent from the third quarter of 2005, as lower health care claims costs caused revenue to decline. "In health plans, we continue to see year-over-year revenue increases. In government contracts, the declines in costs and revenue demonstrate our success in keeping health care affordable for the families of our men and women in the military,” Gellert said. Commercial premium yields per member per month (PMPM) increased 7.2 percent in the third quarter of 2006 compared to the third quarter of 2005. "Year-to-date commercial PMPM premiums are up around 8 percent, and that’s right on target for our plan, including the impact of our Universal Care acquisition,” noted Gellert. Total health plan enrollment declined by approximately 31,000 members in the third quarter of 2006 compared to the second quarter of 2006. Commercial enrollment, including both at-risk and ASO membership, declined by 18,000 members, or approximately 1 percent, in the third quarter of 2006 compared to the second quarter of 2006. Much of the decrease was attributable to expected enrollment declines resulting from the transition of members from Universal Care to Health Net. Health Net acquired Universal Care on March 31, 2006. The remaining 13,000-member decline was due to Medicaid attrition from ongoing enforcement of eligibility requirements. "We expected to see a decline in the Universal enrollment as we moved through 2006,” said Gellert. "Overall commercial enrollment is very close to our expectations.” Health Care Costs The health plan MCR improvement in the third quarter resulted from ongoing moderating trends in physician, hospital and pharmacy expenses compared with 2005. Commercial health care costs rose by 8.0 percent PMPM between the third quarters of 2005 and 2006. "These cost trends are consistent with our 7.5 percent 2006 full year guidance,” Gellert stated. "Our sequential MCR is down by 100 basis points and our PMPM commercial gross margin expanded. The year-over-year health care cost comparison is inflated due to unusually low reported experience in 2005.” The Government contracts cost ratio of 93.9 percent in the third quarter of 2006 represented a significant improvement compared with the third quarter of 2005. "The improvement resulted from the good work done by everyone in containing cost increases in this program. We are very pleased that our efforts, in partnership with our customer, are saving the Federal government money while providing beneficiaries the care they need,” Gellert added. Administrative Expenses In the third quarter of 2006, total general, administrative and depreciation expenses increased by $53,825,000 to $299,679,000 compared to $245,854,000 in the third quarter of 2005. The increase is consistent with higher levels of such spending by the company throughout 2006. "We continue to invest in our future through expanded product offerings, increased marketing and improved operations,” Gellert commented. Debt Refinancing On August 14, 2006, the company completed a series of transactions related to the redemption of all $400 million of its Senior Notes due 2011. The transaction costs incurred in connection with the redemption totaled $70,095,000 on a pretax basis and were recorded as a separate, non-recurring item in the third quarter of 2006. Balance Sheet Highlights and Interest Expense Reserves for claims and other settlements increased by $59,576,000 to $1,035,958,000 at September 30, 2006, from $976,382,000 at June 30, 2006. DCP increased by 1.6 days to 42.5 days in the third quarter of 2006, from 40.9 days in the second quarter of 2006. These amounts include the effects of provider settlements, capitation payments and Medicare Part D. DCP, excluding provider settlements, capitation payments and the impact of Medicare Part D expenses, increased by 2.3 days to 55.1 days in the third quarter of 2006 compared to the second quarter of 2006 (see note (d) in the company’s Notes to Condensed Consolidated Financial Statements in the attached tables). The company employs an average claims reserves methodology in calculating DCP. At the end of the third quarter of 2006, the company had $500 million in debt. Health Net’s debt-to-total capital ratio was 20.7 percent at September 30, 2006. Interest expense increased in the third quarter of 2006 by $1,962,000 compared with the second quarter of 2006, as the company serviced higher average levels of debt associated with the redemption of its Senior Notes completed in the quarter. "We expect to see a substantial reduction in interest expense in the fourth quarter as a result of the redemption of our Senior Notes,” Gellert added. Cash Flow and Investment Income Operating cash flow was negative $50,283,000 in the third quarter of 2006. As noted earlier, the company received only two of the three CMS payments it should have received in the third quarter. "Had we received all three payments in the third quarter, we would have had positive operating cash flow equal to approximately 1.8 times net income. We believe this result underscores the cash generating potential of Health Net going forward,” Gellert explained. Investment income rose by $6,942,000 in the quarter compared with the second quarter of 2006. Health Net noted that the increase was the result of the fact that it maintained a high balance of treasury securities for approximately half the quarter in connection with the redemption of its Senior Notes and also recorded an investment gain on the sale of those securities. Outlook Health Net believes that its earnings per diluted share for the full year 2006 will be between $2.94 and $2.98, including the net $.08 per diluted share impact of the two items recorded in the third quarter of 2006. Excluding the impact of these two items, the company believes earnings per diluted share would be between $3.02 and $3.06. The company also is reaffirming prior guidance that its earnings per diluted share in the fourth quarter will be between $.88 and $.92. The company also issued specific guidance for 2007 earnings of $3.60 per diluted share based on a fully diluted share count of 117 million. On October 16, 2006, Health Net announced that its board of directors approved a resumption of the company’s previously established stock repurchase program. The board also approved a $235 million increase in the repurchase authorization. As a result, Health Net’s current authorization under the stock repurchase program is an aggregate amount of up to $450 million. The company is seeking to amend its bank credit agreements to obtain greater flexibility to engage in stock repurchases. The company’s credit agreements currently limit such purchases, other than purchases made with proceeds from a financing transaction undertaken specifically to fund stock repurchases, to $75 million (plus exercise proceeds and tax benefits from the exercise of employee stock options) in any consecutive four-quarter period, less other restricted payments made in such period. "We are very pleased that we will be resuming our stock repurchase program and that the board has demonstrated its confidence in our ability to generate cash flow that can be used for the stock repurchase program,” Gellert concluded. Conference Call As previously announced, Health Net will discuss the company’s third quarter results during a conference call scheduled on Friday, November 3, 2006, at approximately 11:00 a.m. Eastern Time. To listen to the call, please dial 800.811.7286, code 4578148. 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 November 3, 2006 through November 7, 2006, by dialing 888.203.1112, code 4578148. 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, 2005, Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006, 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 HMO, POS, insured PPO and government contracts subsidiaries provide health benefits to approximately 6.6 million individuals in 27 states and the District of Columbia through group, individual, Medicare, Medicaid and TRICARE and Veterans Affairs programs. Health Net’s behavioral health subsidiary, MHN, provides behavioral health, substance abuse and employee assistance programs (EAPs) to approximately 7.3 million individuals in various 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 subsequent 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, per member and ratio data)   Third Quarter Fourth Quarter First Quarter Second Quarter Third Quarter Ended Ended Ended Ended Ended Sept. 30, Dec. 31, March 31, June 30, Sept. 30, REVENUES:   2005    2005    2006    2006    2006  Health plan services premiums(a) $ 2,386,332  $ 2,354,722  $ 2,524,374  $ 2,599,079  $ 2,622,065  Government contracts 639,626  560,491  615,897  615,557  560,540  Net investment income 19,536  20,239  23,359  26,256  33,198  Administrative services fees and other income(a)   13,279    14,706    23,000    25,230    31,622  Total revenues   3,058,773    2,950,158    3,186,630    3,266,122    3,247,425    EXPENSES: Health plan services 2,000,661  1,952,309  2,108,712  2,185,641  2,179,161  Government contracts 614,794  535,800  587,980  580,052  526,581  General and administrative 241,847  266,043  290,823  295,064  294,052  Selling 55,000  53,200  56,611  59,630  62,853  Depreciation 4,007  4,220  4,758  4,955  5,627  Amortization 861  861  591  1,275  1,092  Interest   11,789    11,690    12,226    13,449    15,411  2,928,959  2,824,123  3,061,701  3,140,066  3,084,777  Debt refinancing(b)   -    -    -    -    70,095  Total expenses   2,928,959    2,824,123    3,061,701    3,140,066    3,154,872    Income from operations before income taxes 129,814  126,035  124,929  126,056  92,553  Income tax provision   51,609    49,366    48,336    49,023    1,651  (c) Net income $ 78,205  $ 76,669  $ 76,593  $ 77,033  $ 90,902    Basic earnings per share $ 0.69  $ 0.67  $ 0.67  $ 0.67  $ 0.78    Diluted earnings per share $ 0.67  $ 0.65  $ 0.65  $ 0.65  $ 0.76      Weighted average shares outstanding: Basic 113,371  114,276  114,594  115,213  115,867  Diluted 116,543  117,902  118,398  118,305  118,830    Pretax margin (Income from operations before income taxes/Total revenues) 4.2% 4.3% 3.9% 3.9% 2.9% Health plan services MCR(a) 83.8% 82.9% 83.5% 84.1% 83.1% Government contracts cost ratio 96.1% 95.6% 95.5% 94.2% 93.9% Administrative ratio ((G&A+Dep)/(HP serv prem + admin serv fees and other income)) 10.2% 11.4% 11.6% 11.4% 11.3% Selling costs ratio (Selling costs/HP serv prem)(a) 2.3% 2.3% 2.2% 2.3% 2.4% Days claims payable(d) 48.8  49.4  43.2  40.9  42.5  Days claims payable - adjusted (d) 61.1  63.5  58.1  52.8  55.1  Effective tax rate 39.8% 39.2% 38.7% 38.9% 1.8% (c) Health plan services premiums PMPM(a) $ 238.92  $ 239.88  $ 244.78  $ 241.75  $ 244.49  Health plan services costs PMPM $ 200.31  $ 198.88  $ 204.48  $ 203.29  $ 203.19  Health Net, Inc. Condensed Consolidated Balance Sheets (Amounts in thousands, except ratio data)   Sept. 30, Dec. 31, March 31, June 30, Sept. 30,   2005    2005    2006    2006    2006  ASSETS Current Assets Cash and cash equivalents $ 1,027,848  $ 742,485  $ 870,224  $ 825,925  $ 825,369  Investments - available for sale 1,150,738  1,363,818  1,356,386  1,382,583  1,399,478  Premiums receivable, net(a) 127,020  132,019  163,237  214,173  235,267  Amounts receivable under government contracts 122,295  122,796  143,625  135,433  130,306  Incurred but not reported (IBNR) health care costs receivable under TRICARE North contract 263,329  265,517  295,800  318,827  299,878  Other receivables(a) 85,873  79,572  93,154  131,218  123,586  Deferred taxes 110,445  93,899  99,866  57,141  33,379  Restricted assets for senior notes redemption -  -  -  499,557  -  Other assets   107,618    111,512    147,600    159,662    138,850  Total current assets 2,995,166  2,911,618  3,169,892  3,724,519  3,186,113  Property and equipment, net 112,218  125,773  136,727  144,436  155,395  Goodwill, net 723,595  723,595  751,949  751,949  751,949  Other intangible assets, net 19,271  18,409  47,062  45,532  44,183  Deferred taxes 29,527  31,060  46,560  48,574  51,557  Other noncurrent assets   143,555    130,267    137,645    132,186    101,719  Total Assets $ 4,023,332  $ 3,940,722  $ 4,289,835  $ 4,847,196  $ 4,290,916    LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Reserves for claims and other settlements $ 1,057,848  $ 1,040,171  $ 986,525  $ 976,382  $ 1,035,958  Health care and other costs payable under government contracts 62,778  62,536  62,529  60,325  40,461  IBNR health care costs payable under TRICARE North contract 263,329  265,517  295,800  318,827  299,878  Unearned premiums 218,527  106,586  324,063  338,611  140,939  Bridge loan -  -  -  200,000  200,000  Senior notes payable -  -  -  376,052  -  Accounts payable and other liabilities   404,362    364,266    434,605    389,130    256,096  Total current liabilities 2,006,844  1,839,076  2,103,522  2,659,327  1,973,332  Senior notes payable 391,106  387,954  379,983  -  -  Term loan -  -  -  300,000  300,000  Other noncurrent liabilities   123,376    124,617    129,507    108,222    106,897  Total Liabilities   2,521,326    2,351,647    2,613,012    3,067,549    2,380,229    Stockholders' Equity Common stock and additional paid-in capital 899,400  911,672  932,254  967,265  992,497  Treasury common stock, at cost (633,153) (633,375) (636,252) (640,623) (640,623) Retained earnings 1,247,496  1,324,165  1,400,758  1,477,791  1,568,693  Accumulated other comprehensive loss   (11,737)   (13,387)   (19,937)   (24,786)   (9,880) Total Stockholders' Equity   1,502,006    1,589,075    1,676,823    1,779,647    1,910,687  Total Liabilities and Stockholders' Equity $ 4,023,332  $ 3,940,722  $ 4,289,835  $ 4,847,196  $ 4,290,916    Debt-to-Total Capital Ratio 20.7% 19.6% 18.5% 33.0% 20.7% Health Net, Inc. Condensed Consolidated Statements of Cash Flows (Amounts in thousands)   Third Quarter Fourth Quarter First Quarter Second Quarter Third Quarter Ended Ended Ended Ended Ended Sept. 30, Dec. 31, March 31, June 30, Sept. 30,   2005    2005    2006    2006    2006    CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 78,205  $ 76,669  $ 76,593  $ 77,033  $ 90,902  Adjustments to reconcile net income to net cash provided by (used in) operating activities:   Amortization and depreciation 4,868  5,081  5,349  6,230  6,719  Debt refinancing charge -  -  -  -  70,095  Share-based compensation expense -  -  4,435  5,195  5,191  Other changes 3,229  3,032  4,344  4,002  3,680  Changes in assets and liabilities, net of the effects of dispositions: Premiums receivable and unearned premiums(a) 114,245  (116,940) 186,259  (36,388) (218,766) Other receivables, deferred taxes and other assets(a) 4,901  18,476  (50,639) (6,327) 39,109  Amounts receivable/payable under government contracts (51,886) (743) (20,836) 5,988  (14,737) Reserves for claims and other settlements (7,617) (17,677) (53,647) (10,143) 59,576  Accounts payable and other liabilities   28,826    (35,706)   34,046    (52,523)   (92,052) Net cash provided by (used in) operating activities   174,771    (67,808)   185,904    (6,933)   (50,283) CASH FLOWS FROM INVESTING ACTIVITIES: Sales of investments 13,283  179,102  228,995  44,374  47,397  Maturities of investments 20,215  41,037  15,770  30,248  29,683  Purchases of investments (126,917) (437,250) (252,973) (110,683) (71,344) Proceeds from sale of property and equipment 417  -  -  -  4,242  Purchases of property and equipment (13,242) (17,738) (15,730) (12,679) (20,420) Cash paid/disposed for acquisition/sale of business -  -  (73,100) (494) (405) Sales and purchases of restricted investments and other   (8,840)   9,093    (9,027)   (496,943)   523,336  Net cash (used in) provided by investing activities   (115,084)   (225,756)   (106,065)   (546,177)   512,489    CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options and employee stock purchases 29,331  8,423  10,380  20,895  15,136  Repurchases of common stock (227) (222) (1,724) (1,107) -  Excess tax benefits from share-based compensation -  -  3,099  2,221  2,688  Borrowings under term and bridge loan agreements -  -  -  497,334  -  Senior notes redemption and interest rate swap settlement -  -  -  -  (465,045) Net Medicare Part D deposits (payments)   -    -    36,145    (10,532)   (15,541) Net cash provided by (used in) financing activities   29,104    8,201    47,900    508,811    (462,762)   Net increase (decrease) in cash and cash equivalents 88,791  (285,363) 127,739  (44,299) (556) Cash and cash equivalents, beginning of period   939,057    1,027,848    742,485    870,224    825,925  Cash and cash equivalents, end of period $ 1,027,848  $ 742,485  $ 870,224  $ 825,925  $ 825,369  Health Net, Inc. Notes to Condensed Consolidated Financial Statements   Notes:   (a) Effective in the third quarter ended September 30, 2006, we have reported certain revenue items, primarily from our administrative services only (ASO) business and other like businesses, in a separate line item titled administrative services fees and other income on our condensed consolidated statements of operations. Historically, ASO and related revenue amounts were reported as part of health plan services premiums. In recent periods, the revenues from these businesses have increased to a level where we believe that reporting them separately would provide more insight on the nature of our operations. We have also reclassified the related receivables from premiums receivable to other receivables on our condensed consolidated balance sheets. All impacted prior period financial information reflect this reclassification change. This reclassification had no impact on net earnings, stockholders' equity or cash flow from operating activities as previously reported.   (b) Reflects $59 million senior notes redemption and $11 million interest rate swap settlement costs.   (c) Reflects $32 million tax benefit from sale of Pennsylvania subsidiaries.   (d) 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:   Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 (Dollars in millions) Reserve for Claims and Other Settlements $1,057.8  $1,040.2  $986.5  $976.4  $1,036.0  Less: Capitation Payable, Provider Settlements and Medicare Part D (105.2) (95.4) (120.5) (110.3) (100.5) Adjusted Reserve for Claims and Other Settlements 952.6  944.8  866.0  866.1  935.5    (1) Average Reserve for Claims and Other Settlements 1,061.7  1,049.0  1,013.3  981.5  1,006.2    (2) Average Adjusted Reserve for Claims and Other Settlements 942.7  948.7  905.4  866.1  900.8    (3) Health Plan Services Cost 2,000.7  1,952.3  2,108.7  2,185.6  2,179.2  Less: Capitation Payments, Provider Settlements and Medicare Part D (580.8) (578.5) (705.9) (692.6) (674.1) (4) Adjusted Health Plan Services Cost 1,419.9  1,373.8  1,402.8  1,493.0  1,505.1    (5) Number of Days in Period 92  92  90  91  92    = (1)/(3)*(5) Days Claims Payable 48.8  49.4  43.2  40.9  42.5  = (2)/(4)*(5) Days Claims Payable (Excl. Capitation, Provider Settlements and Medicare Part D) 61.1  63.5  58.1  52.8  55.1  HEALTH NET, INC. Medical Covered Lives at September 30, 2006 (in Thousands)                                                   Commercial - Large Group(a) Commercial - Small Group & Individual Commercial Risk Subtotal ASO Commercial Subtotal 9/06  6/06  9/05  9/06  6/06  9/05  9/06  6/06  9/05  9/06  6/06  9/05  9/06  6/06  9/05    Arizona 72  72  69  48  47  50  120  119  119  -  -  -  120  119  119 California 1,053  1,063  1,088  419  422  391  1,472  1,485  1,478  6  5  7  1,478  1,490  1,485 Connecticut 155  156  177  30  31  32  185  187  209  68  69  69  253  256  278 New Jersey 44  47  61  57  58  83  101  105  145  19  20  18  120  125  163 New York 121  120  116  96  96  103  217  216  218  17  17  21  234  233  239 Oregon 99  99  102  37  37  36  136  136  138  -  -  -  136  136  138                               Total 1,544  1,557  1,612  687  691  695  2,231  2,248  2,307  110  111  115  2,341  2,359  2,422   Year over Year (4)% (1)% (3)% (4)% (3)% Sequential   (1)%     (1)%     (1)%     (1)%     (1)%         Medicare Risk Medicaid Health Plan Total 9/06  6/06  9/05  9/06  6/06  9/05  9/06  6/06  9/05    Arizona 34  35  31  -  -  -  154  154  150  California 104  104  94  717  726  703  2,299  2,320  2,282  Connecticut 33  32  26  83  87  90  369  375  394  New Jersey -  -  -  47  47  40  167  172  203  New York 7  7  6  -  -  -  241  240  245  Oregon 19  19  15  -  -  -  155  155  153                    Total 197  197  172  847  860  833  3,385  3,416  3,427    Year over Year 15% 2% (1)% Sequential   (0)%     (2)%     (1)%         9/06  6/06  9/05  Medicare PDP (Stand-Alone) 294  288  -          9/06  6/06  9/05  TRICARE North Contract(b) 2,944  2,932  2,962    (a) Commercial Large Group includes Medicare Supplement (b) Includes Tricare eligible for which we have health care risk, and those for which we provide Administrative Services Only (ASO), primarily active duty Health Net, Inc. Reconciliation of Reserves for Claims and Other Settlements (In millions)   Health Plan Services YTD 9/2006 Year 2005 Year 2004   Reserve for claims(a), beginning of period $ 768.7  $ 794.6  $ 777.1    Incurred claims related to: Current Year 3,926.9  5,130.4  5,048.3  Prior Years(c)   (75.9)   (114.5)   8.7  Total Incurred(b) 3,851.0  5,015.9  5,057.0    Paid claims related to: Current Year 3,197.0  4,401.3  4,286.9  Prior Years   666.4    640.5    752.6  Total Paid(b) 3,863.4  5,041.8  5,039.5    Reserve for claims(a), end of period 756.3  768.7  794.6  Add: Claims Payable 179.9  177.2  288.3  Other(d)   99.8    94.3    86.4    Reserves for claims and other settlements, end of period $ 1,036.0  $ 1,040.2  $ 1,169.3    (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.