Health Net 2010 Annual Report Download - page 48

Potential acquisitions or divestitures present financial, managerial and operational challenges, including
diversion of management attention from existing businesses, difficulty with integrating or separating personnel
and financial and other systems, significant post-closing obligations, increased expenses, assumption of unknown
liabilities, indemnities and potential disputes with the buyers or sellers. We completed the sale of our Northeast
operations on December 11, 2009. Certain of the risks associated with that divestiture are described in “—Under
the United Administrative Services Agreements, we are obligated to provide administrative services in
connection with the wind-down and run-off of the acquired business, which exposes us to operational and
financial risks” and “—Under the agreements that govern the Northeast Sale, we have retained responsibility for
certain liabilities of the acquired business, which could be substantial.” Further, 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.
The value of our intangible assets may become impaired.
Goodwill and other intangible assets represent a significant portion of our assets. Goodwill and other
intangible assets were approximately $630 million as of December 31, 2010, representing approximately 15
percent of our total assets and 37 percent of our consolidated stockholders’ equity at December 31, 2010.
In accordance with applicable accounting standards, we periodically evaluate our goodwill and other
intangible assets to determine whether all or a portion of their carrying values may be impaired, in which case a
charge to income may be necessary. This impairment testing requires us to make assumptions and judgments
regarding estimated fair value including assumptions and estimates related to future earnings and membership
levels based on current and future plans and initiatives, long-term strategies and our annual planning and
forecasting processes, as well as the expected weighted average cost of capital used in the discount process. If
estimated fair values are less than the carrying values of goodwill and other intangible assets with indefinite lives
in future impairment tests, or if significant impairment indicators are noted relative to other intangible assets
subject to amortization, we may be required to record impairment losses against income. Any future evaluations
requiring an impairment of our goodwill and other intangible assets could materially impact our results of
operations and stockholders’ equity in the period in which the impairment occurs. A material decrease in
stockholders’ equity could, in turn, negatively impact our debt ratings or potentially impact our compliance with
existing debt covenants.
From time to time, we divest businesses that we believe are less of a strategic fit for the company or do not
produce an adequate return. Any such divestiture could result in significant asset impairment charges, including
those related to goodwill and other intangible assets, which could have a material adverse effect on our financial
condition and results of operations. For example, in connection with the Northeast Sale, in the year ended
December 31, 2009 we recorded $174.9 million in total asset impairments. Upon the consummation of the
Northeast Sale on December 11, 2009, we recorded a pretax loss on sale of $105.9 million. While these non-cash
impairment charges and pretax loss had no impact on our liquidity position, they did have a significant adverse
effect on our results of operations for the year ended December 31, 2009.
The value of our investment portfolio and our goodwill could be adversely impacted by varying economic
and market conditions which could, in turn, have a negative effect on our results of operations and
stockholders’ equity.
Our investment portfolio is comprised primarily of available-for-sale investment securities such as interest-
yielding debt securities of varying maturities. As of December 31, 2010, our available-for-sale investment
securities were approximately $1.7 billion. The value of fixed-income securities is highly sensitive to fluctuations
in short- and long-term interest rates, with the value decreasing as such rates increase and increasing as such rates
decrease. These securities may also be negatively impacted by illiquidity in the market. We closely monitor the
fair values of our investment securities and regularly evaluate them for any other-than-temporary impairments.
We have the intent and ability to hold our investments for a sufficient period of time to allow for recovery of the
principal amount invested.
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