Health Net 2010 Annual Report Download - page 125

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Letters of Credit
We can obtain letters of credit in an aggregate amount of $400 million under our revolving credit facility.
The maximum amount available for borrowing under our revolving credit facility is reduced by the dollar amount
of any outstanding letters of credit. As of December 31, 2010 and 2009, we had outstanding letters of credit of
$249.1 million and $321.3 million, respectively, resulting in a maximum amount available for borrowing under
the revolving credit facility of $650.9 million and $478.7 million, respectively. As of December 31, 2010 and
2009, no amounts had been drawn on any of these letters of credit.
Note 7—Fair Value Measurements
We record assets and liabilities at fair value in the consolidated balance sheets and categorize them based
upon the level of judgment associated with the inputs used to measure their fair value and the level of market
price observability. We also estimate fair value when the volume and level of activity for the asset or liability
have significantly decreased or in those circumstances that indicate when a transaction is not orderly.
Investments measured and reported at fair value using Level inputs are classified and disclosed in one of the
following categories:
Level 1—Quoted prices are available in active markets for identical investments as of the reporting
date. The types of investments included in Level 1 include U.S. Treasury securities and listed equities. We
do not adjust the quoted price for these investments, even in situations where we hold a large position and a
sale could reasonably impact the quoted price.
Level 2—Pricing inputs are other than quoted prices in active markets, which are either directly or
indirectly observable as of the reporting date, and fair value is determined through the use of models and/or
other valuation methodologies which are based on an income approach. Examples include but are not
limited to multidimensional relational model, option adjusted spread model, and various matrices. Specific
pricing inputs include quoted prices for similar securities in both active and non-active markets, other
observable inputs such as interest rates, yield curve volatilities, default rates, and inputs that are derived
principally from or corroborated by other observable market data. Investments that are generally included in
this category include asset-backed securities, corporate bonds and loans, municipal bonds, auction rate
securities and interest rate swap asset.
Level 3—Pricing inputs are unobservable for the investment and include situations where there is little,
if any, market activity for the investment. The inputs into the determination of fair value require significant
management judgment or estimation using assumptions that market participants would use, including
assumptions for risk. The investments included in Level 3 are auction rate securities which have
experienced failed auctions at one time or are experiencing failed auctions and thus have minimal liquidity.
These bonds have frequent reset of coupon rates and have extended to the legal final maturity. The coupons
are based on a margin plus a LIBOR rate and continue to pay above market rates. As with most variable or
floating rate securities, we believe that based on a market approach, the fair values of these securities are
equal to their par values due to the short time periods between coupon resets and based on each issuer’s
credit worthiness.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of
input that is significant to the fair value measurement. Our assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
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