A.M. Best Affirms FSR and Debt Ratings of Sierra Health Services

May 13, 2004

A.M. Best Co. has affirmed the financial strength ratings of B+ (Very Good) of Sierra Health Services Inc.’s (Sierra) core HMO, Health Plan of Nevada Inc (both of Las Vegas, Nev.), and its health insurance company, Sierra Health and Life Insurance Company Inc. (Los Angeles, Calif.). Concurrently, A.M. Best has affirmed the debt rating of “bb-” on Sierra’s $115 million 2.25 percent senior unsecured convertible debentures due 2023. The outlook for all ratings is revised to positive from stable.

Membership and revenue growth at the Nevada companies, primarily Health Plan of Nevada, continues to be strong. The companies have increased their leading market share in the growing Las Vegas area where a successful integrated delivery network provides a competitive advantage. A.M. Best expects strong growth to continue over the medium term, aided by Las Vegas’ favorable demographic projections.

Sierra’s consolidated cash earnings and debt service capability have improved substantially. A.M. Best expects this positive trend to continue during 2004. A meaningful drag on the strong earnings of Health Plan of Nevada from the workers’ compensation company is substantially behind the company with its divestiture completed on March 31, 2004. Additionally, the loss of the bid for the new TRICARE contract has eliminated expansion risk and reduced demands on capital at Sierra.

Despite the excellent cash earnings trend at Health Plan of Nevada, Sierra’s balance sheet strengthening has been below A.M. Best’s expectations because of management’s focus to right-size the company’s capital structure through aggressive share repurchase. In A.M. Best’s opinion, high financial leverage–exceeding 40 percent–may be understated due to potential future write-downs of the carrying value of the disposed workers’ compensation business note receivable.

This financial leverage ratio is mitigated somewhat as Sierra’s only outstanding debt is the 2.25 percent senior unsecured convertible debentures due in March 2023, which Sierra could repay with equity. Also, the holding company cash balance and risk-based capital at Health Plan of Nevada, while adequate for the current rating level, could benefit from further strengthening, improving corporate financial flexibility.

A.M. Best believes Sierra’s forecast cash earnings, if achieved and retained within the enterprise, could address these financial strength issues during the near term, supporting the positive outlook. Given the enterprise’s previous financial strength challenges, a stable business profile is a key prerequisite for additional positive rating actions.

The financial strength ratings of B+ (Very Good) have been affirmed and assigned positive outlooks for the following subsidiaries of Sierra Health Services Inc.:

Health Plan of Nevada Inc.
Sierra Health and Life Insurance Company Inc.

The following debt rating has been affirmed and assigned a positive outlook:

Sierra Health Services Inc. —

“bb-“on $115 million 2.25 percent senior unsecured convertible debentures, due 2023

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