Health Net 2011 Annual Report Download - page 84

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Our operating results for the year ended December 31, 2010 were impacted by $61.2 million in pretax costs
related to our operations strategy and other cost management initiatives, $9.0 million in early debt
extinguishment and related interest rate swap termination costs reduced by a $46.5 million benefit from litigation
reserve true-ups.
Our operating results for the year ended December 31, 2009 included $123.6 million in pretax costs relating
to our operations strategy and reductions from litigation reserve true-ups. In 2009, we recorded a $174.9 million
pretax asset impairment charge as a result of entering into the Stock Purchase Agreement in connection with the
Northeast Sale.
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, 2011, the fair value of the investment securities available-for-sale was $1.6 billion,
which includes both current and noncurrent investments. Noncurrent investments were $2.1 million, or less than
1% of the total investments available-for-sale as of December 31, 2011. 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 fixed-income securities,
substantially all of which are investment grade, 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 currently comprised of investment grade securities with an average rating of
“AA-” and “Aa3” as rated by S&P and/or Moody’s, respectively. At this time, there is no indication of default on
interest and/or principal payments under our holdings. We have the ability and current intent to hold to recovery
all securities with an unrealized loss position. As of December 31, 2011, our investment portfolio includes
$622.3 million, or 39.9% 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 included $518.1 million, or 33.2% of
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