Sierra Health Services Reports 2nd Quarter 2007 Earnings

Sierra Reports 2nd Quarter 2007 Earnings

2007 Earnings Guidance Raised to $1.80 to $1.86

Sierra Health Services, Inc. (NYSE:SIE) reported today that net income for the quarter ended June 30, 2007 was $39.4 million or $0.67 per diluted share, compared to $33.5 million or $0.54 per diluted share for the same period in 2006, an earnings per share increase of 24%. The earnings for the quarter included the benefit of positive prior period reserve development, a positive retroactive rate adjustment on the Company’s Medicare Advantage product offering and higher than projected earnings from its Medicare Prescription Drug (PDP) basic product. The combination of these three items represents approximately $15.4 million in pre-tax earnings. These positive items were partially offset by a $6.5 million pre-tax adjustment to the premium deficiency reserve established in the first quarter on the Company’s enhanced benefits PDP product.

Revenues for the quarter were $482.0 million, a 14% increase over the $424.4 million for the same period in 2006. Medical premium revenues were $457.2 million, an increase of 14% over the $400.7 million for the same period in 2006. Medical premium revenues for the current quarter include $41.5 million for Sierra’s basic PDP product, compared to $49.7 million in 2006. Premium revenues for the quarter also include $31.0 million for the Company’s enhanced PDP product, which was not offered in 2006. Revenues from professional fees for the quarter were $14.4 million, compared to $12.9 million for the same period in 2006, an increase of 12%. Investment and other revenues for the quarter were $10.4 million, a decrease of 4% from the $10.9 million for the same period in 2006.

Excluding the impact of both PDP products, Sierra’s medical care ratio for the quarter was 75.5%, a decrease of 220 basis points sequentially and 140 basis points from the second quarter of 2006. Sierra’s consolidated medical care ratio was 76.8%, compared to 77.8% for the same period in 2006 and 90.2% sequentially. The positive prior period reserve development and Medicare Advantage retroactive rate adjustment, totaling approximately $10.4 million, significantly impacted this ratio in the quarter. In the first quarter of 2007, the consolidated medical care ratio included the impact of the premium deficiency reserve for the enhanced PDP product, as well as the effect of seasonality in the expenses related to both the enhanced and basic PDP products.

Sierra’s medical claims payable balance was $191.8 million at June 30, 2007, compared to $219.2 million at March 31, 2007. The decrease from March 31, 2007 is primarily related to balances associated with the PDP along with positive prior period reserve development. Days in claims payable, which is the medical claims payable balance divided by the average medical expenses per day for the period, were 48 days for the second quarter of 2007, compared to 42 days for the second quarter of 2006 and 45 days sequentially. Excluding both PDP products, days in claims payable were 49 days for the second quarter of 2007, compared to 45 days for the same period in 2006 and 50 days sequentially.

For the quarter, general and administrative expenses, as a percentage of premium revenue, increased 40 basis points to 13.0% from 12.6% for the same period in 2006. The general and administrative expenses for the quarter include $6.5 million recorded as an additional premium deficiency reserve on the enhanced PDP product. General and administrative expenses also include $2.3 million in merger related expenses.

Cash flow from operations for the six months ended June 30, 2007 was $109.5 million, which includes seven months of payments from the Centers for Medicare and Medicaid Services (CMS). Adjusted for the timing of payments from CMS, cash flow from operations for the six month period was $11.8 million. Cash flow from operations was $24.3 million for the quarter, compared to $10.5 million for the same period in 2006. The increase in cash flow from operations for the second quarter was primarily due to an increase in cash flows from our PDP products during the quarter compared to the same period in 2006.

No share repurchases were made during the quarter. The Company has halted its share repurchase program pending the merger with UnitedHealth Group.

In the second quarter of 2007, Sierra’s core combined commercial membership grew by 2% or 4,800 lives. For the first six months of the year, the Company grew 1,600 combined HMO and PPO commercial lives, despite the loss of 11,000 lives in January 2007, as previously reported. For the quarter, combined Medicare Advantage membership was flat. For the first six months of the year, Medicare Advantage HMO membership decreased by 100 lives, which was offset by growth in PPO membership of 500 lives and Private Fee-for-Service membership of 900 lives.

“While a number of uncommon items are impacting our earnings, Sierra’s core operations continue to perform well,” said Anthony M. Marlon, M.D. “Revenue growth is within our targets and, despite the loss of three accounts at the beginning of the year, commercial HMO membership is solid. Additionally, the Company continues to work through the state and federal regulatory processes required to close our proposed merger with UnitedHealth Group. I believe we are on track for an expected close in the fourth quarter of this year.”

Sierra had previously announced it had expected to earn between $1.76 and $1.86 per share for the year 2007. The Company now expects to earn between $1.80 and $1.86 per share for the year 2007. This revised guidance continues to include the recorded losses on the Company’s enhanced PDP product offering along with costs associated with its pending merger with UnitedHealth Group.

Sierra will host a conference call with investors, analysts and the general public on Tuesday, July 31, 2007 at noon (Eastern Time). Interested parties can access the call by dialing 888-988-9162 (using the passcode: EARNINGS). Listeners may also access the conference call free over the Internet by visiting the investors page of Sierra’s website at www.sierrahealth.com.

Sierra Health Services, Inc., based in Las Vegas, is a diversified healthcare services company that operates health maintenance organizations, indemnity insurers, preferred provider organizations, prescription drug plans and multi-specialty medical groups. Sierra’s subsidiaries serve over 860,000 people through health benefit plans for employers, government programs and individuals. For more information, visit the Company’s website at www.sierrahealth.com.

Statements in this news release that are not historical facts are forward-looking and based on management’s projections, assumptions and estimates; actual results may vary materially. Forward-looking statements are subject to certain risks and uncertainties, which include but are not limited to: 1) potential adverse changes in government regulations, contracts and programs, including the Medicare Advantage program, the Medicare Prescription Drug Plan and any potential reconciliation issues, Medicaid and legislative proposals to eliminate or reduce ERISA pre-emption of state laws that would increase potential managed care litigation exposure; 2) competitive forces that may affect pricing, enrollment, renewals and benefit levels; 3) unpredictable medical costs, malpractice exposure, reinsurance costs, changes in provider contracts and inflation; 4) impact of economic conditions; 5) changes in healthcare reserves; 6) the effects of the termination of the HCA contract; 7) the amount of actual proceeds to be realized from the note receivable related to the sale of the workers’ compensation insurance operation; and 8) receipt of certain regulatory approvals and the satisfaction or waiver of other conditions pertaining to the proposed merger with UnitedHealth Group. Further factors concerning financial risks and results may be found in documents filed with the Securities and Exchange Commission and which are incorporated herein by reference.

Consequently, all of the forward-looking statements made in this press release are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by Sierra will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, Sierra or its business or operations. Sierra assumes no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events or otherwise.