Health Net 2009 Annual Report Download - page 137

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
jurisdiction for the Company is California, and tax years subject to examination by that jurisdiction are 2004 and
forward. Presently we are under examination by various state taxing authorities. We do not believe that any
ongoing examination will have a material impact on our consolidated balance sheet. In addition, we do not
anticipate any significant changes to our liability for unrecognized tax benefits within the next 12 months.
Note 12—Regulatory Requirements
All of our health plans as well as our insurance subsidiaries are required to maintain minimum capital
standards and certain restricted accounts or assets, in accordance with legal and regulatory requirements. For
example, under the Knox-Keene Health Care Service Plan Act of 1975, as amended, California plans must
comply with certain minimum capital or tangible net equity requirements. Our non-California health plans, as
well as our insurance companies, must comply with their respective state’s minimum regulatory capital
requirements. In addition, in California and in certain other jurisdictions, licensees are required to maintain
minimum investment amounts for the restricted use of the regulators in certain limited circumstances. Within the
scope of state requirements established by the regulators, we have discretion as to whether we invest such funds
in cash and cash equivalents or other investments. Such restricted cash and cash equivalents, as of December 31,
2009 and 2008, totaled $5.6 million and $63.5 million, respectively. In 2008, this amount included $59.2 million
of cash and cash equivalents held by our Northeast subsidiaries, compared to $0 in 2009. Investment securities
held by trustees or agencies pursuant to state regulatory requirements were $9.9 million and $55.3 million as of
December 31, 2009 and 2008, respectively. In 2008, this amount included $41.4 million of investment securities
held by our Northeast subsidiaries, compared to $0 in 2009. See the “Restricted Assets” section in Note 2 for
additional information.
As necessary, we make contributions to and issue standby letters of credit on behalf of our subsidiaries to
meet risk based capital (RBC) or other statutory capital requirements under various state laws and regulations,
and to meet the capital standards of credit rating agencies. During the year ended December 31, 2009, we made
capital contributions of $119.5 million to various subsidiaries to increase RBC or other statutory capital to a
higher level compared to the past. The capital contributions were generally not required to meet regulatory
requirements, but were made to enhance the financial condition of the subsidiaries for credit rating and other
purposes. As a result of the regulatory capital requirements and other requirements of state law and regulation,
certain subsidiaries are subject to restrictions on their ability to make dividend payments, loans or other transfers
of cash to us, or their ability to do so is conditioned upon prior regulatory approval or non-objection. Such
restrictions, unless amended or waived, limit the use of any cash generated by these subsidiaries to pay our
obligations. The maximum amount of dividends which can be paid by the insurance company subsidiaries to us
without prior approval of the insurance departments is subject to restrictions relating to statutory surplus,
statutory income and unassigned surplus. Management believes that as of December 31, 2009 all of our active
health plans and insurance subsidiaries met their respective regulatory requirements in all material respects.
Note 13—Commitments and Contingencies
Legal Proceedings
Litigation Related to the Sale of Businesses
AmCareco Litigation
We are a defendant in two related litigation matters pending in Louisiana and Texas state courts, both of
which relate to claims asserted by three separate state receivers overseeing the liquidation of three health plans in
Louisiana, Texas and Oklahoma that were previously owned by our former subsidiary, Foundation Health
Corporation (FHC), which merged into Health Net, Inc. in January 2001. In 1999, FHC sold its interest in these
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