Best Upgrades FSR Ratings of Sierra Health Services

November 18, 2004

A.M. Best Co. has upgraded the financial strength rating to B++ (Very Good) from B+ (Very Good) of Sierra Health Services Inc.’s core HMO subsidiaries, 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.). A.M. Best has also upgraded to “bb” from “bb-” the debt rating of Sierra’s $115 million of 2.25 percent senior unsecured convertible debentures, due 2023. The rating outlook has been revised to stable from positive.

Sierra’s improved financial flexibility supports the rating upgrade. Management has grown the holding company’s cash balance and Health Plan of Nevada’s risk-based capital, while right-sizing the firm’s capital structure through share repurchase. Financial leverage approximating 22 percent–adjusted conservatively by A.M. Best for the convertible debentures’ equity characteristics–is reasonable. Management has supplemented these improvements with an amended line of credit, extending its term for five years and expanding its capacity to $100 million.

A.M. Best anticipates management would continue to utilize cash flows to expand the holding company’s cash balance while continuing to repurchase common shares. Importantly, Sierra has repurchased sufficient common shares to satisfy the convertible debentures’ conversion feature. A.M. Best does not foresee management expanding risk-based capital at Health Plan of Nevada, which is adequate for the financial strength rating given the parent’s financial flexibility.

Sierra’s operating ratios and debt service capability compare well to its peers’ results. A meaningful drag on the strong earnings of Health Plan of Nevada from the workers’ compensation company and the Texas HMO business is substantially behind the company with the divestiture of the former and the run-out of the latter. Additionally, the loss of the bid for the new TRICARE contract has eliminated the risk of entry into new regions and a business that generated less robust returns.

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 and the transition of self-insured employer groups to Sierra’s cost-effective integrated delivery system.

The following debt rating has been upgraded and assigned a stable outlook: Sierra Health Services Inc. to “bb” from “bb-” on $115 million of 2.25 percent senior unsecured convertible debentures, due 2023.

The financial strength rating has been upgraded to B++ (Very Good) and assigned a stable outlook for the following subsidiaries of Sierra Health Services Inc.: Health Plan of Nevada Inc. and Sierra Health and Life Insurance Company Inc.

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