Health Net 2010 Annual Report Download - page 47

We are a holding company and a substantial amount of our cash flow is generated by our subsidiaries. Our
regulated subsidiaries are subject to restrictions on the payment of dividends and maintenance of minimum
levels of capital.
As a holding company, our subsidiaries conduct substantially all of our consolidated operations and own
substantially all of our consolidated assets. Consequently, our cash flow and our ability to pay our debt depends,
in part, on the amount of cash that we receive from our subsidiaries. Our subsidiaries’ ability to make any
payments to us will depend on their earnings, business and tax considerations, legal and regulatory restrictions
and economic conditions. In addition, in certain states our regulated subsidiaries are subject to risk-based capital
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 contains 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. 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. Our revolving
credit facility requires 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 also requires 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---Revolving Credit Facility” for details regarding the
revolving credit facility.
The restrictive covenants under our revolving credit 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 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.
Acquisitions, divestitures and other significant transactions may adversely affect our business.
We continue to evaluate the profitability realized or that we expect to be realized by our existing businesses
and operations. From time to time we review, from a strategic standpoint, potential acquisitions and divestitures
in light of our core businesses and growth strategies. The success of any such acquisition or divestiture depends,
in part, upon our ability to identify suitable buyers or sellers, negotiate favorable contractual terms and, in many
cases, obtain governmental approval. For acquisitions, success is also dependent upon efficiently integrating the
acquired business into the Company’s existing operations. For divestitures, success may also be dependent upon
efficiently reducing general and administrative or other functions for our remaining operations. In the event the
structure of the transaction results in continuing obligations by the buyer to us or our customers, a buyer’s
inability to fulfill these obligations could lead to future financial loss on our part.
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