Health Net 2010 Annual Report Download - page 77

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Our operating results for the year ended December 31, 2009 included a $174.9 million pretax asset
impairment charge as a result of entering into the Stock Purchase Agreement with United. Our operating results
for the year ended December 31, 2009 also included $123.6 million in pretax expenses for severance charges and
other costs associated with our operations strategy and reductions from litigation reserve true-ups.
Our operating results for the year ended December 31, 2008 included $119.6 million pretax charges
recorded as part of G&A expenses primarily for severance and other costs associated with our operations
strategy. This amount also includes attorney’s fees and regulatory fines associated with our rescission practices
and in connection with the settlement agreement for the McCoy, Wachtel and Scharfman class action lawsuits.
Our operating results for the year ended December 31, 2008 also included $37.5 million recorded as part of
health plan services expenses for estimated litigation and regulatory actions related to our rescission practices in
Arizona and California and claim-related matters in connection with the settlement agreement for the McCoy,
Wachtel and Scharfman class action lawsuits, $14.6 million loss from other-than-temporary impairments in our
available-for-sale investments and money market funds recorded in net investment income, and $3.4 million
impairment of assets of a small, non-core subsidiary recorded in administrative services fees and other income.
LIQUIDITY AND CAPITAL RESOURCES
Market and Economic Conditions
The current state of the global economy and market conditions continue to be challenging with relatively
high levels of unemployment, diminished business and consumer confidence, and volatility in both U.S. and
international capital and credit markets. Market conditions could limit our ability to timely replace maturing
liabilities, or otherwise access capital markets for liquidity needs, which could adversely affect our business,
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.
Cash and Investments
As of December 31, 2010, the fair value of the investment securities available-for-sale was $1.7 billion,
which includes both current and noncurrent investments. Noncurrent investments were $8.8 million, or less than
1% of the total investments available–for-sale. We hold high-quality fixed income securities primarily comprised
of corporate bonds, mortgage-backed bonds and municipal bonds. We evaluate and determine the classification
of our investments based on management’s intent. We also closely monitor the fair values of our investment
holdings and regularly evaluate them for other-than-temporary impairments.
Our cash flow from investing activities is primarily impacted by the sales, maturities and purchases of our
available-for-sale investment securities and restricted investments. Our investment objective is to maintain safety
and preservation of principal by investing in a diversified mix of high-quality, investment grade securities while
maintaining liquidity in each portfolio sufficient to meet our cash flow requirements and attaining an expected
total return on invested funds.
Our investment holdings are comprised of investment grade securities with an average rating of “AA” and
“Aa2” as rated by S&P and/or Moody’s, respectively. At this time, there is no indication of default on interest
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