Health Net 2014 Annual Report Download - page 53

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We have a material amount of indebtedness and may incur additional indebtedness, or need to refinance existing
indebtedness, in the future, which may adversely affect our operations.
Our indebtedness includes $400 million in aggregate principal amount of 6.375% Senior Notes due 2017. Our
Senior Notes payable balance was $399.5 million as of December 31, 2014. In addition, we have a $600 million five-
year revolving credit facility that expires in October 2016. As of December 31, 2014, we had $100.0 million
outstanding under our revolving credit facility. For a description of our Senior Notes and our revolving credit facility,
see “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and
Capital Resources—Capital Structure.” We may incur additional debt in the future. Our existing indebtedness, and any
additional debt we incur in the future through drawings on our revolving credit facility or otherwise could have an
adverse effect on our business and future operations. For example, it could:
• 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 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 ratings agencies 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 California’s Health Care Service Plan Act of 1975, as amended (also known as the Knox-Keene Act), our
subsidiaries that are licensed under the Knox-Keene Act must comply with certain minimum capital or tangible net
equity (“TNE”) requirements ranging up to 130% of a specified minimum TNE for larger and older licensees such as
Health Net of California. In addition, each of our subsidiaries regulated under the Knox-Keene Act 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. 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 action, including increased reporting and/or
state supervision. In addition, in most states, we are required to seek prior approval before we transfer money or pay