Health Net 2010 Annual Report Download - page 78

and/or principal payments. We have the ability and current intent to hold to recovery all securities with an
unrealized loss position. Our investment portfolio includes $648.2 million, or 39% of our portfolio holdings, of
mortgage-backed and asset-backed securities. The majority of our mortgage-backed securities are Fannie Mae,
Freddie Mac and Ginnie Mae issues, and the average rating of our entire asset-backed securities is AA+/Aa1.
However, any failure by Fannie Mae or Freddie Mac to honor the obligations under the securities they have
issued or guaranteed could cause a significant decline in the value or cash flow of our mortgage-backed
securities. Our investment portfolio also includes $535.9 million, or 32% of our portfolio holdings of obligations
of state and other political subdivisions. Such amount consists of current and non-current obligations of $527.1
million or 98%, and $8.8 million or 2% of the total obligations of state and other political subdivisions,
respectively. Our investment portfolio also includes $9.9 million, or less than 1% of our portfolio holdings, of
auction rate securities (ARS). These ARS have long-term nominal maturities for which the interest rates are reset
through a dutch auction process every 7, 28 or 35 days. At December 31, 2010, these ARS had at one point or are
continuing to experience “failed” auctions. These securities are entirely municipal issues and rates are set at the
maximum allowable rate as stipulated in the applicable bond indentures. We continue to receive income on all
ARS. If all or any portion of the ARS continue to experience failed auctions, it could take an extended amount of
time for us to realize our investments’ recorded value.
We had gross unrealized losses of $14.1 million as of December 31, 2010, and $13.3 million as of
December 31, 2009. Included in the gross unrealized losses as of December 31, 2010 and December 31, 2009 are
$1.7 million and $2.7 million, respectively, related to noncurrent investments available-for-sale. We believe that
these impairments are temporary and we do not intend to sell these investments. It is not likely that we will be
required to sell any security in an unrealized loss position before recovery of its amortized cost basis. Given the
current market conditions and the significant judgments involved, there is a continuing risk that further declines
in fair value may occur and additional material other-than-temporary impairments may be recorded in future
periods. No impairment was recognized during the year ended December 31, 2010. During the year ended
December 31, 2009, we recognized an other-than-temporary impairment loss of $60,000.
Liquidity
We believe that expected cash flow from operating activities, existing cash reserves and other working
capital and lines of credit are adequate to allow us to fund existing obligations, repurchase shares under our stock
repurchase program, introduce new products and services, and continue to operate and develop health care-
related businesses at least for the next 12 months. We regularly evaluate cash requirements for current operations
and commitments, and for capital acquisitions and other strategic transactions. We may elect to raise additional
funds for these purposes, either through issuance of debt or equity, the sale of investment securities or otherwise,
as appropriate. Based on the composition and quality of our investment portfolio, our expected ability to liquidate
our investment portfolio as needed, and our expected operating and financing cash flows, we do not anticipate
any liquidity constraints as a result of the current credit environment. However, continued turbulence in U.S. and
international markets and certain costs associated with the implementation of health care reform legislation could
adversely affect our liquidity.
Our cash flow from operating activities is impacted by, among other things, the timing of collections on our
amounts receivable from state and federal governments and agencies. Our receivable from CMS related to our
Medicare business was $121.0 million as of December 31, 2010 and $102.7 million as of December 31, 2009.
The receivable from DHS related to our California Medicaid business was $112.3 million as of December 31,
2010 and $82.2 million as of December 31, 2009. Our receivable from the DoD for the TRICARE contract for
the North Region were $266.5 million and $270.8 million as of December 31, 2010 and December 31, 2009,
respectively. The timing of collection of such receivables is impacted by government audit and negotiation, as
well as the budget process, and can extend for periods beyond a year.
During 2010, we recognized $23.7 million in pretax charges primarily related to our operations strategy and
other cost management initiatives, reductions for litigation reserve true-ups, and Northeast Sale related expenses.
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