Health Net 2011 Annual Report Download - page 97

from changes in the level or volatility of interest rates, prepayment speeds and/or the shape and slope of the yield
curve. In addition, we are exposed to the risk of loss related to changes in credit spreads. Credit spread risk arises
from the potential changes in an issuer’s credit rating or credit perception that may affect the value of financial
instruments.
We attempt to manage the interest rate risks related to our investment portfolios by actively managing the
asset duration of our investment portfolios. The overall goal for the investment portfolios is to provide a source
of liquidity and support the ongoing operations of our business units. Our philosophy is to actively manage assets
to maximize total return over a multiple-year time horizon, subject to appropriate levels of risk. Each business
unit has additional requirements with respect to liquidity, current income and contribution to surplus. We manage
these risks by setting risk tolerances, targeting asset-class allocations, diversifying among assets and asset
characteristics, and using performance measurement and reporting.
We use a value-at-risk (“VAR”) model, which follows a variance/co-variance methodology, to assess the
market risk for our investment portfolio. VAR is a method of assessing investment risk that uses standard
statistical techniques to measure the worst expected loss in the portfolio over an assumed portfolio disposition
period under normal market conditions. The determination is made at a given statistical confidence level.
We assumed a portfolio disposition period of 30 days with a confidence level of 95% for the computation of
VAR for 2011. The computation further assumes that the distribution of returns is normal. Based on such
methodology and assumptions, the computed VAR was approximately $10.9 million as of December 31, 2011.
Our calculated VAR exposure represents an estimate of reasonably possible net losses that could be
recognized on our investment portfolios assuming hypothetical movements in future market rates and are not
necessarily indicative of actual results which may occur. It does not represent the maximum possible loss nor any
expected loss that may occur, since actual future gains and losses will differ from those estimated, based upon
actual fluctuations in market rates, operating exposures, and the timing thereof, and changes in our investment
portfolios during the year.
Except for those securities held by trustees or regulatory agencies (see Note 2 to our consolidated financial
statements), all of our investment securities are designated as “available-for-sale” assets. As such, they are
reflected at their estimated fair value, with the difference between cost and estimated fair value reflected in
accumulated other comprehensive income, net of tax, a component of Stockholders’ Equity (see Note 4 to the
consolidated financial statements). All of our investment securities are fixed income securities. Approximately
39% of our available-for-sale investment securities are asset-backed securities (“ABS”)/mortgage-backed
securities (“MBS”). Approximately 79% of the ABS/MBS are agency securities. Therefore, we believe that our
exposure to credit-related market value risk for our MBS is limited. Generally, in a rising interest rate
environment, the estimated fair value of fixed income securities would be expected to decrease; conversely, in a
decreasing interest rate environment, the estimated fair value of fixed income securities would be expected to
increase. However, these securities may be negatively impacted by illiquidity in the market. The recent
disruptions in the credit markets have negatively impacted the liquidity of investments. However, such
disruptions did not have a material impact to the liquidity of our investments. A worsening of credit market
function or sustained market downturns could have negative effects on the liquidity and value of our investment
assets.
Borrowings under our revolving credit facility, which totaled $112.5 million as of December 31, 2011, are
subject to variable interest rates. For additional information regarding our revolving credit facility, see
“—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and
Capital Resources.” Our floating rate borrowings, if any, are presumed to have equal book and fair values
because the interest rates paid on these borrowings, if any, are based on prevailing market rates.
The fair value of our fixed rate borrowing, which consists of only our Senior Notes, as of December 31,
2011 was approximately $423.1 million, which was based on quoted market prices. Where quoted market prices
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