Health Net 2009 Annual Report Download - page 71

• $105.3 million recorded as part of G&A expenses during the year ended December 31, 2007 for
attorney’s fees, regulatory fines, arbitration settlement and estimated liability for litigation unrelated to
the class action lawsuits.
Income Tax Provision
Our income tax expense and the effective income tax rate for the years ended December 31, 2009, 2008 and
2007 are as follows:
2009 2008 2007
(Dollars in millions)
Income tax expense .......................................... $23.8 $52.1 $165.2
Effective tax rate ............................................ 94.2% 35.4% 46.0%
The effective income tax rate differs from the statutory federal tax rate of 35% for the year ended
December 31, 2009 due primarily to state income taxes, tax-exempt investment income, nondeductible goodwill
impairment, and the tax benefit associated with the Northeast Sale.
The effective income tax rate differs from the statutory federal tax rate of 35% for the year ended
December 31, 2008 due primarily to state income taxes, tax-exempt investment income, and a favorable outcome
related to prior year nondeductible class action lawsuit expenses. The effective income tax rate differs from the
statutory federal tax rate of 35% for the year ended December 31, 2007 due primarily to state income taxes,
tax-exempt investment income, the establishment of a valuation allowance against certain deferred tax assets, and
nondeductible class action lawsuit expenses.
The effective income tax rate in 2009 is an inverse ratio to the pretax loss. We reported a tax expense
associated with a pretax loss because a significant portion of the loss on sale of our Northeast health plan
subsidiaries and the associated goodwill impairment is nondeductible for tax reporting purposes. The impact of
these nondeductible items is the primary cause of the large change in tax rates between 2008 and 2009. The
effective income tax decreased from 2007 to 2008 primarily due to the favorable outcome related to the prior
year nondeductible class action lawsuit expenses.
LIQUIDITY AND CAPITAL RESOURCES
Market and Economic Conditions
The current state of the global economy and market conditions continue to be challenging with high levels
of unemployment, diminished business and consumer confidence, and volatility in both U.S. and international
capital and credit markets. These conditions continue to negatively impact the availability of funding to
borrowers. Market conditions could limit our ability to timely replace maturing liabilities and access the capital
markets to meet liquidity needs, which could adversely affect our financial condition and results of operations.
Furthermore, if our customer base experiences cash flow problems and other financial difficulties, it could, in
turn, adversely impact membership in our plans. For example, our customers may modify, delay or cancel plans
to purchase our products, may reduce the number of individuals to whom they provide coverage, or may make
changes in the mix or products purchased from us. In addition, if our customers experience financial issues, they
may not be able to pay, or may delay payment of, accounts receivable that are owed to us. Further, our customers
or potential customers may force us to compete more vigorously on factors such as price and service to retain or
obtain their business. A significant decline in membership in our plans and the inability of current and/or
potential customers to pay their premiums as a result of unfavorable conditions may adversely affect our
business, including our revenues, profitability and cash flow.
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