Health Net 2005 Annual Report Download - page 67

On March 1, 2005, we entered into an amendment to our senior credit facility. The amendment, among other
things, amends the definition of Consolidated EBITDA to exclude up to $375 million relating to cash and
non-cash, non-recurring charges in connection with litigation and provider settlement payments, any increase in
medical claims reserves and any premiums relating to the repayment or refinancing of our Senior Notes to the
extent such charges cause a corresponding reduction in Consolidated Net Worth (as defined in the senior credit
facility). Such exclusion from the calculation of the Consolidated EBITDA was applicable to the five fiscal
quarter periods commencing with the fiscal quarter ended December 31, 2004 and ending with the fiscal quarter
ended December 31, 2005.
On August 8, 2005, we entered into a second amendment to our senior credit facility. The second
amendment, among other things, amends the definition of Minimum Borrower Cash Flow Fixed Charge
Coverage Ratio to exclude from the calculation of Minimum Borrower Cash Flow Fixed Charge Coverage Ratio
any capital contributions made by the parent company to its regulated subsidiaries if such capital contribution is
derived from the proceeds of a sale, transfer, lease or other disposition of the parent company’s assets.
Statutory Capital Requirements
Certain of our subsidiaries must comply with minimum capital and surplus requirements under applicable
state laws and regulations, and must have adequate reserves for claims. Management believes that as of
December 31, 2005, all of our health plans and insurance subsidiaries met their respective regulatory
requirements.
By law, regulation and governmental policy, our health plan and insurance subsidiaries, which we refer to as
our regulated subsidiaries, are required to maintain minimum levels of statutory net worth. The minimum
statutory net worth requirements differ by state and are generally based on balances established by statute, a
percentage of annualized premium revenue, a percentage of annualized health care costs, or risk-based capital
(RBC) requirements. The RBC requirements are based on guidelines established by the National Association of
Insurance Commissioners (NAIC). The RBC formula, which calculates asset risk, underwriting risk, credit risk,
business risk and other factors, generates the authorized control level (ACL), which generally represents the
minimum amount of net worth believed to be required to support the regulated entity’s business. Although RBC
standards are not yet applicable to all of our regulated subsidiaries, for states in which the RBC requirements
have been adopted, the regulated entity typically must maintain the greater of the Company Action Level RBC,
calculated as 200% of the ACL, or the minimum statutory net worth requirement calculated pursuant to pre-RBC
guidelines. Because our regulated subsidiaries are also subject to their state regulators’ overall oversight
authority, some of our subsidiaries are required to maintain minimum capital and surplus in excess of the RBC
requirement, even though RBC has been adopted in their states of domicile. We generally manage our aggregate
regulated subsidiary capital against 300% of ACL. At December 31, 2005, we had sufficient capital to exceed
this level. In addition to the foregoing requirements, our regulated subsidiaries are subject to restrictions on their
ability to make dividend payments, loans and other transfers of cash or other assets to the parent company.
As necessary, we make contributions to and issue standby letters of credit on behalf of our subsidiaries to
meet RBC or other statutory capital requirements under state laws and regulations. Health Net, Inc. elected to
contribute $140.4 million in cash and $33.1 million in property to certain of its subsidiaries during the year ended
December 31, 2005 to further strengthen such subsidiaries’ RBC. Except for the $140.4 million and $33.1
million in capital contributions, our parent company did not make any capital contributions to its subsidiaries to
meet RBC or other statutory capital requirements under state laws and regulations during the year ended
December 31, 2005 or thereafter through the date of the filing of this Annual Report on Form 10-K.
Legislation has been or may be enacted in certain states in which our subsidiaries operate imposing
substantially increased minimum capital and/or statutory deposit requirements for HMOs in such states. Such
statutory deposits may only be drawn upon under limited circumstances relating to the protection of
policyholders.
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