Health Net 2011 Annual Report Download - page 149

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
example, under the Knox-Keene Health Care Service Plan Act of 1975, as amended, California plans must comply
with certain minimum capital or tangible net equity requirements. Our non-California health plans, as well as our
insurance companies, must comply with their respective state’s minimum regulatory capital requirements. In
addition, in California and in certain other jurisdictions, licensees are required to maintain minimum investment
amounts for the restricted use of the regulators in certain limited circumstances. Within the scope of state
requirements established by the regulators, we have discretion as to whether we invest such funds in cash and cash
equivalents or other investments. Such restricted cash and cash equivalents, as of December 31, 2011 and 2010,
totaled $5.3 million and $0.4 million, respectively. Investment securities held by trustees or agencies pursuant to
state regulatory requirements were $20.7 million and $25.8 million as of December 31, 2011 and 2010, respectively.
See the “Restricted Assets” section in Note 2 for additional information.
As necessary, we make contributions to and issue standby letters of credit on behalf of our subsidiaries to
meet risk based capital (RBC) or other statutory capital requirements under various state laws and regulations,
and to meet the capital standards of credit rating agencies. During the year ended December 31, 2011, we made
capital contributions of $24 million to a subsidiary to maintain our target RBC. As a result of the regulatory
capital requirements and other requirements of state law and regulation, certain subsidiaries are subject to
restrictions on their ability to make dividend payments, loans or other transfers of cash to us, or their ability to do
so is conditioned upon prior regulatory approval or non-objection. Such restrictions, unless amended or waived,
limit the use of any cash generated by these subsidiaries to pay our obligations. The maximum amount of
dividends which can be paid by the insurance company subsidiaries to us without prior approval of the insurance
departments is subject to restrictions relating to statutory surplus, statutory income and unassigned surplus.
Management believes that as of December 31, 2011 all of our active health plans and insurance subsidiaries met
their respective regulatory requirements relating to maintainance of minimum capital standards and restricted
accounts or assets in all material respects.
Note 13—Commitments and Contingencies
Legal Proceedings
Litigation and Investigations Related to Unaccounted-for Server Drives
We are a defendant in three related litigation matters pending in California state and federal courts relating
to information security issues. On January 21, 2011, International Business Machines Corp. (IBM), which
handles our data center operations, notified us that it could not locate several hard disk drives that had been used
in our data center located in Rancho Cordova, California. We have since determined that personal information of
approximately two million former and current Health Net members, employees and health care providers is on
the drives. Commencing on March 14, 2011, we provided written notification to the individuals whose
information is on the drives. To help protect the personal information of affected individuals, we offered them
two years of free credit monitoring services, in addition to identity theft insurance and fraud resolution and
restoration of credit files services, if needed.
On March 18, 2011, a putative class action relating to this incident was filed against us in the U.S. District
Court for the Central District of California (the Central District of California), and similar actions were later filed
against us in other federal and state courts in California. A number of those actions were transferred to and
consolidated in the U.S. District Court for the Eastern District of California (the Eastern District of California),
and the two remaining actions are currently pending in the Superior Court of California, County of San Francisco
(San Francisco County Superior Court) and the U.S. District Court for the Central District of California. The
consolidated amended complaint in the federal action pending in the Eastern District of California is filed on
behalf of a putative class of over 800,000 of our current or former members who received the written
notification, and also names IBM as a defendant. It seeks to state claims for violation of the California
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