Health Net 2010 Annual Report Download - page 82

Our revolving credit facility includes, among other customary terms and conditions, limitations (subject to
specified exclusions) on our and our subsidiaries’ ability to incur debt; create liens; engage in certain mergers,
consolidations and acquisitions; sell or transfer assets; enter into agreements which restrict the ability to pay
dividends or make or repay loans or advances; make investments, loans, and advances; engage in transactions
with affiliates; and make dividends. In addition, we are required to maintain a specified consolidated leverage
ratio and consolidated fixed charge coverage ratio throughout the term of the revolving credit facility.
Our revolving credit facility contains customary events of default, including nonpayment of principal or
other amounts when due; breach of covenants; inaccuracy of representations and warranties; cross-default and/or
cross-acceleration to other indebtedness of the Company or our subsidiaries in excess of $50 million; certain
ERISA-related events; noncompliance by us or any of our subsidiaries with any material term or provision of the
HMO Regulations or Insurance Regulations (as each such term is defined in the facility); certain voluntary and
involuntary bankruptcy events; inability to pay debts; undischarged, uninsured judgments greater than $50
million against us and/or our subsidiaries; actual or asserted invalidity of any loan document; and a change of
control. If an event of default occurs and is continuing under the facility, the lenders thereunder may, among
other things, terminate their obligations under the facility and require us to repay all amounts owed thereunder.
As of December 31, 2010, we were in compliance with all covenants under our revolving credit facility.
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, we had outstanding an aggregate of $249.1 million
in letters of credit. There were no amounts outstanding under the revolving credit facility as of December 31,
2010. As a result, the maximum amount available for borrowing under the revolving credit facility was $650.9
million as of December 31, 2010, and no amount had been drawn on the letters of credit. As of the filing date of
this report, we had no outstanding borrowings under the revolving credit facility.
Interest Rate Swap Contract
On June 30, 2010, we terminated the interest rate swap agreement that we entered into on March 12, 2009
(“2009 Swap”). The 2009 Swap was designed to reduce variability in our net income due to changes in variable
interest rates. We recognized a pretax loss of $0.2 million in the three months ended June 30, 2010 in connection
with the termination and settlement of the 2009 Swap, which is included in our administrative services fees and
other income for the year ended December 31, 2010.
Statutory Capital Requirements
Certain of our subsidiaries must comply with minimum capital and surplus requirements under applicable
state laws and regulations, and must have adequate reserves for claims. Management believes that as of
December 31, 2010, all of our active health plans and insurance subsidiaries met their respective regulatory
requirements in all material respects.
By law, regulation and governmental policy, our health plan and insurance subsidiaries, which we refer to as
our regulated subsidiaries, are required to maintain minimum levels of statutory net worth. The minimum
statutory net worth requirements differ by state and are generally based on balances established by statute, a
percentage of annualized premium revenue, a percentage of annualized health care costs, or risk-based capital
(“RBC”) or tangible net equity (“TNE”) requirements. The RBC requirements are based on guidelines
established by the National Association of Insurance Commissioners. The RBC formula, which calculates asset
risk, underwriting risk, credit risk, business risk and other factors, generates the authorized control level
(“ACL”), which represents the minimum amount of net worth believed to be required to support the regulated
entity’s business. For states in which the RBC requirements have been adopted, the regulated entity typically
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