Health Net 2009 Annual Report Download - page 38

requirements, known as RBC. These laws require our regulated subsidiaries to report their results of risk-based
capital calculations to the departments of insurance in their state of domicile and the National Association of
Insurance Commissioners. Failure to maintain the minimum RBC standards could subject certain of our
regulated subsidiaries to corrective action, including increased reporting and/or state supervision. In addition, in
most states, we are required to seek prior approval before we transfer money or pay dividends from our regulated
subsidiaries that exceed specified amounts. If our regulated subsidiaries are restricted from paying us dividends
or otherwise making cash transfers to us, it could have material adverse effect on our results of operations and
Health Net, Inc.’s free cash flow. For additional information regarding our regulated subsidiaries’ statutory
capital requirements, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources—Statutory Capital Requirements.”
Our revolving credit facility and our financing facility contain restrictive covenants that could limit our
ability to pursue our business strategies.
On June 25, 2007, we entered into a $900 million five-year revolving credit facility. On December 19, 2007,
we entered into a $175 million financing facility. See “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Structure” for
additional information regarding our revolving credit facility and our financing facility. Our revolving credit
facility and our financing facility require us to comply with various covenants that impose restrictions on our
operations, including our ability to incur additional indebtedness, pay dividends, make investments or other
restricted payments, sell or otherwise dispose of assets and engage in other activities. Our revolving credit
facility and our financing facility also require us to comply with certain financial covenants, including a
maximum leverage ratio and a minimum fixed charge coverage ratio. See “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Structure
Amortizing Financing Facility” for details regarding the revolving credit facility and the financing facility.
The restrictive covenants under our revolving credit facility and our financing facility could limit our ability
to pursue our business strategies. In addition, any failure by us to comply with these restrictive covenants could
result in an event of default under the revolving credit facility, our financing facility, and, in some circumstances,
under the indenture governing our Senior Notes, which, in any case, could have a material adverse effect on our
financial condition.
Downgrades in our debt ratings may adversely affect our business, financial condition and results of
operations.
Claims paying ability, financial strength, and debt ratings by nationally recognized rating agencies are
increasingly important factors in establishing the competitive position of insurance companies and health benefits
companies. Ratings information by nationally recognized rating agencies is broadly disseminated and generally
used throughout the industry. We believe our claims paying ability and financial strength ratings are important
factors in marketing our products to certain of our customers. In addition, our debt ratings impact both the cost
and availability of future borrowings and, accordingly, our cost of capital. On July 15, 2009, in light of our
announcement that we were not selected by the Department of Defense to be the Managed Care Support
Contractor under the T3 North Region contract, Fitch Ratings announced that the outlook for the Company
remained negative and downgraded the Company’s default issuer rating to “BB-” (speculative) from “BBB-”
(lower medium grade), downgraded our senior debt rating to “B+” (highly speculative) from “BB+”
(noninvestment) and downgraded our insurer financial strength rating to “BBB-” from “BBB+,” both of which
are lower medium grade ratings. On the same day, Standard & Poor’s Rating Services (S&P) announced that the
outlook for the Company remained negative and lowered its counterparty credit rating of the Company to “BB-”
from “BB” and, at the same time, affirmed the “BBB-” financial strength and counterparty credit ratings of our
core operating subsidiaries, Health Net of California and Health Net Life Insurance Company. Moody’s Investors
Service also announced on the same day that it had placed the Company’s “Ba3” senior debt ratings under review
for possible downgrade, also due to the loss of the T3 North Region contract. For additional detail regarding the
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