A.M. Best Affirms Ratings of Sierra Health Services Subsidiaries.

Business Editors & Insurance Writers

OLDWICK, N.J.--(BUSINESS WIRE)--June 3, 2002

A.M. Best Co. has affirmed the financial strength ratings of B (Fair) for Health Plan of Nevada, Inc., Sierra Health and Life Insurance Company, Inc., and Sierra Insurance Group, the regulated subsidiaries of Sierra Health Services, Inc. (Sierra) (NYSE: SIE), Las Vegas.

The outlook is positive. Sierra's cash earnings have improved substantially as a result of the termination of its Texas HMO business and a refocus on its core southern Nevada market. These are offset by the degree of financial leverage maintained by the holding company and the resulting strain placed upon its subsidiary operations to service debt.

Sierra's earnings improved as a result of its exit from the Texas HMO market and multiple cost reduction initiatives. Specifically, the ratio of earnings before interest and taxes to interest expense improved from (-)1.7 times to 4.9 times between 2000 and first quarter 2002, and operating cash flows to total operating revenues improved from 2.2% to 8.8%, both representing Sierra's strong ability to generate cash from operations. Between 2000 and first quarter 2002, Sierra's management team utilized this positive trend to reduce its financial leverage from 76% to 53%. A.M. Best anticipates the organization will continue to reduce its financial leverage actively over the near term.

However, A.M. Best believes the organization is still leveraged too high for secure ratings, and the operating companies remain vulnerable to adverse changes in underwriting, economic and regulatory conditions. A.M. Best also believes Sierra's insurance and non-regulated subsidiaries could continue to be challenged to meet holding company debt service requirements over the near term. Nonetheless, the organization's refocused business profile and improved earnings drove the positive outlook on its financial strength ratings.

In 2000, Sierra's debt to capital ratio jumped to 76%, primarily due to a serious business impairment at its Texas HMO operations. During October 1998, Sierra purchased the assets of Kaiser Foundation Health Plan of Texas and Permanente Medical Association of Texas, financing both largely with debt. The acquisition substantially increased the financial leverage of the organization, and the Texas plan's ongoing operating difficulties suppressed the overall earnings and capital accumulation capacity of the enterprise. Largely as a result of the problems in the Texas market, stockholders' equity declined from $304 million at the end of 1998 to $90 million at the end of 2000, resulting in a jump in the debt to capital ratio. During 2001, Sierra attempted to stem the losses generated by Texas Health Choice, LC, its Texas-based HMO. However, provider network negotiations identified an unsustainable reimbursement cost trend, and in September 2001, Sierra decided to exit that market, which was completed by April 17, 2002.

The earnings and capital decline resulted in a breach of Sierra's bank credit facility covenants, thereby impairing financial flexibility. In late 2001, Sierra restructured the $47 million of outstanding debentures issued at a downstream holding company, CII Financial, in part for less than full value. Going forward, the elimination of the drag on earnings from the Texas HMO operations should grow equity and reduce financial leverage.

The following subsidiaries' financial strength ratings of B (Fair) have been affirmed with a positive outlook:

- Health Plan of Nevada, Inc.

- Sierra Health and Life Insurance Company, Inc.

- Sierra Insurance Group

- California Indemnity Insurance Company

- Commercial Casualty Insurance Company

- CII Insurance Company

- Sierra Insurance Company of Texas

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.