Sierra Reports Year-End, 4Q 2004 Results

January 31, 2005

Nevada-based Sierra Health Services Inc. reported that income from continuing operations for the quarter ended Dec. 31, 2004 was $27.9 million, or $0.83 per diluted share, compared to income from continuing operations of $24.0 million, or $0.68 per diluted share, for the quarter ended Dec. 31, 2003, an increase in earnings per share of 22 percent. In the fourth quarter of 2003, the net loss from discontinued operations was $19.2 million or $0.53 per diluted share. Included in the fourth quarter of 2004, were net gains from the company’s military health services operations of $9.2 million, offset by a net expense of $9.5 million related to the sold workers’ compensation insurance business.

Income from continuing operations for the year ended Dec. 31, 2004 was $123.1 million or $3.58 per diluted share, compared to $82.1 million, or $2.34 per diluted share for the year ended Dec. 31, 2003. Net losses from discontinued operations were $389,000 for the year, compared to net losses of $19.8 million for 2003. Net income for the year was $122.7 million, or $3.57 per diluted share, compared to $62.3 million, or $1.79 per diluted share, for 2003, an increase of 97 percent.

Revenues for the quarter were $332.7 million, a decrease of 11 percent over the $373.4 million for the same period in 2003. This decrease is due to the cessation of healthcare delivery operations in the third quarter of 2004 at the company’s military health services subsidiary. Medical premium revenues from the company’s core managed care business were $296.6 million for the quarter, an increase of 21 percent over the $245.1 million for the same period in 2003. Annual revenues were $1.6 billion for 2004, compared to $1.5 billion for 2003, an increase of 6 percent.

In the fourth quarter, Sierra purchased 468,000 shares of its common stock in the open market for $21.5 million, at an average price of $46.05 per share. During the year 2004, the company purchased 3.4 million shares of its common stock for $133.8 million, at an average price of $39.51 per share. At its December 2004 meeting Sierra’s board of directors authorized the company to purchase an additional $50.0 million of its common stock, in addition to the $70.0 million authorized earlier in 2004. At Dec. 31, 2004 the company had $71.4 million authorized and available for share repurchases. Additionally, as previously reported, the company has amended its revolving credit facility to increase the availability to $100.0 million from $65.0 million and to allow for increased flexibility in future share repurchases.

Cash flow from continuing operations was $69.4 million for the fourth quarter of 2004 and $166.2 million for the year ended Dec. 31, 2004. This compares to $83.8 million for the fourth quarter of 2003 and $151.9 million for the year ended Dec. 31, 2003. The reduction in the fourth quarter cash flow from operations is due to the phase-out of the company’s military health services operations, which had negative cash flow from operations of $3.5 million for the quarter compared to positive cash flow from operations of $22.4 million for the same period in 2003. In the fourth quarter, the company’s managed care and corporate operations reported positive cash flow from operations of $72.9 million.

Sierra had previously announced that it had expected to earn between $3.15 and $3.25 per diluted share for the year 2005. The company now believes it will earn between $3.20 and $3.30 per diluted share for 2005.

Part of the proceeds from the sale of the workers’ compensation insurance operations, effective March 31, 2004, was a $62.0 million note receivable, which is due to the company in early 2010. The note is subject to adjustment, up or down, based on loss development that occurs after the sale date through Dec. 31, 2009. During the fourth quarter, the company engaged a new independent actuary to evaluate the loss development on the run-out of the company’s former workers’ compensation insurance operations. Based on the independent actuarial projections, the company recorded a $15.0 million valuation allowance on the $62.0 million note receivable. The valuation allowance expense was partially offset by a reduction in excess accrued liabilities associated with the sale. The net expense of $9.5 million was included in the company’s general and administrative expenses for the quarter along with $2.0 million in workers’ compensation administrative service costs.

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