Health Net 2011 Annual Report Download - page 48

• require us to dedicate a substantial portion of cash flow from operations to pay principal and interest on
our debt, which would reduce funds available to fund stock repurchases, working capital, capital
expenditures and other general operating requirements;
• increase our vulnerability to general adverse economic and industry conditions or a downturn in our
business; and
• place us at a competitive disadvantage compared to our competitors that have less debt.
We continually evaluate options to refinance our outstanding indebtedness. Our ability to obtain any
financing, whether through the issuance of new debt securities or otherwise, and the terms of any such financing
are dependent on, among other things, our financial condition, financial market conditions within our industry
and generally, credit ratings and numerous other factors. In the past, credit markets experienced unusual
uncertainty, and liquidity and access to capital markets continue to be constrained. Concern about the stability of
the markets generally has led many lenders to reduce and in some cases cease to provide funding to borrowers.
See “—If the current unfavorable economic conditions continue or further deteriorate, it could adversely affect
our revenues and results of operations.” Consequently, in the event we need to access the credit markets,
including to refinance our debt, there can be no assurance that we will be able to obtain financing on acceptable
terms or within an acceptable time, if at all. If we are unable to obtain financing on terms and within a time
acceptable to us it could, in addition to other negative effects, have a material adverse effect on our operations,
financial condition, ability to compete or ability to comply with regulatory requirements.
Downgrades in our debt ratings may adversely affect our business, financial condition and results of
operations.
Claims paying ability, financial strength, and debt ratings by nationally recognized statistical rating
organizations are increasingly important factors in establishing the competitive position of insurance companies
and managed care companies. We believe our claims paying ability and financial strength ratings also are
important factors in marketing our products to certain of our customers. In addition, our debt ratings impact both
the cost and availability of future borrowings and, accordingly, our cost of capital. Rating agencies review our
ratings periodically and there can be no assurance that our current ratings will be maintained in the future. Our
ratings reflect each rating agency’s independent opinion of our financial strength, operating performance, ability
to meet our debt obligations or obligations to policyholders and other factors, and are subject to change. Potential
downgrades from ratings agencies, should they occur, may adversely affect our business, financial condition and
results of operations.
We are a holding company and substantially all of our cash flow is generated by our subsidiaries. Our
regulated subsidiaries are subject to restrictions on the payment of dividends and maintenance of minimum
levels of capital.
As a holding company, our subsidiaries conduct substantially all of our consolidated operations and own
substantially all of our consolidated assets. Consequently, our cash flow and our ability to pay our debt depends,
in part, on the amount of cash that we receive from our subsidiaries. Our subsidiaries’ ability to make any
payments to us will depend on their earnings, business and tax considerations, legal and regulatory restrictions
and economic conditions. Under the California Knox-Keene Health Care Service Plan Act of 1975, as amended,
certain of our subsidiaries must comply with certain minimum capital or tangible net equity (“TNE”)
requirements. In addition, certain of our subsidiaries have agreed to certain undertakings to the Department of
Managed Health Care, restricting dividends and loans to affiliates, to the extent that the payment of such would
reduce its TNE below 130% of the minimum requirement, or reduce its cash-to-claims ratio below 1:1. In
addition, in certain states our regulated subsidiaries are subject to risk-based capital requirements, known as
RBC. These laws require our regulated subsidiaries to report their results of risk-based capital calculations to the
departments of insurance in their state of domicile and the National Association of Insurance Commissioners.
Failure to maintain the minimum RBC standards could subject certain of our regulated subsidiaries to corrective
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