Health Net 2002 Annual Report Download - page 48

46 | HEALTH NET, INC.
GOODWILL
We test goodwill for impairment annually based on the
estimated fair value of the reporting units which comprise
our Health Plan Services and Government Contracts
reportable segments. We test for impairment on a more
frequent basis in cases where events and changes in
circumstances would indicate that we might not recover
the carrying value of goodwill. Our measurement of fair
value was based on utilization of both the income and
market approaches to fair value determination. We used an
independent third-party professional services firm with
knowledge and experience in performing fair value
measurements to assist us in the impairment testing and
measurement process. The income approach was based on
a discounted cash flow methodology. The discounted cash
flow methodology is based upon converting expected cash
flows to present value. Annual cash flows were estimated
for each year of a defined multi-year period until the
growth pattern becomes stable. The expected interim cash
flows expected after the growth pattern becomes stable
were calculated using an appropriate capitalization tech-
nique and then discounted. The market approach used a
market valuation methodology which included the selec-
tion of companies engaged in a line (or lines) of business
similar to the Company to be valued, an analysis of the
comparative operating results and future prospects of the
Company in relation to the guideline companies selected.
The market price multiples are selected and applied to the
Company based on the relative performance, future
prospects and risk profiles of the Company in comparison
to the guideline companies. Methodologies for selecting
guideline companies include the exchange methodology
and the acquisition methodology. The exchange method-
ology is based upon transactions of minority-interests in
publicly traded companies engaged in a line (or lines) of
business similar to the Company. The public companies
selected are defined as guideline companies. The acquisi-
tion methodology involved analyzing the transaction
involving similar companies that have been bought and
sold in the public marketplace. There are numerous
assumptions and estimates underlying the determination of
the estimated fair value of our reporting units, including
certain assumptions and estimates related to future earn-
ings based on current and future initiatives. If these initia-
tives do not accomplish their targeted objectives, the
assumptions and estimates underlying the goodwill impair-
ment tests could be adversely affected and have a material
effect upon our results of operations or financial condition.
RECOVERABILITY OF LONG-LIVED ASSETS AND INVESTMENTS
We periodically assess the recoverability of our long-lived
assets including property and equipment and other long-
term assets and investments where events and changes in
circumstances would indicate that we might not recover
the carrying value. Significant judgment is required during
the determination of the estimated fair values of the long-
lived assets and assessment of other-than-temporary
decline in value, if applicable. We make certain assump-
tions regarding estimated future cash flows from the long-
lived assets, other economic factors and, if applicable, the
eventual disposition of the long-lived assets. If the carrying
value of these long-lived assets is deemed to be not fully
recoverable, such assets are impaired and written down to
their estimated fair values.
STATUTORY CAPITAL REQUIREMENTS
Certain of the Company’s subsidiaries must comply with
minimum capital and surplus requirements under applic-
able state laws and regulations, and must have adequate
reserves for claims. As of December 31, 2002, we esti-
mated that our regulated subsidiaries had more than $825
million in statutory net worth, or more than $425 million
in excess of current regulatory requirements. We generally
manage our aggregate regulated subsidiary capital against
150% of Risk Based Capital (RBC) Company Action
Levels, although RBC standards are not yet applicable to
all of our regulated subsidiaries. Certain subsidiaries must
maintain ratios of current assets to current liabilities
pursuant to certain government contracts. The Company
believes it is in compliance with these contractual and
regulatory requirements in all material respects.
As necessary, we make contributions to and issue
standby letters of credit on behalf of our subsidiaries to
meet risk-based capital or other statutory capital require-
ments under state laws and regulations. Our parent
company contributed $10.5 million to certain of its
subsidiaries to meet capital requirements during the year
ended December 31, 2002. Except for the $10.5 million
capital contribution, our parent company did not make
any capital contributions to its subsidiaries to meet risk-
based capital or other statutory capital requirements under
state laws and regulations during the year ended December
31, 2002 or thereafter through the date of the filing of this
Annual Report to Stockholders.
Effective January 1, 2001, certain of the states in
which our regulated subsidiaries operate adopted the codi-
fication of statutory accounting principles. As of December
31, 2002, the adoption of the codification of statutory
accounting principles did not have a material impact on