Health Net 1998 Annual Report Download - page 29

F O U N DAT IO N HEALT H SYSTEMS, I N C . 2 7
Facility is ava i l a ble for five ye a rs , until July 2002, but it
m a y be extended under certain circumstances for two
additional ye a rs .The outstanding balance under the
C redit Facility has decreased from $1.265 billion at
December 31, 1997 to $1.225 billion at December 3 1 ,
19 9 8 .As of March 18, 19 9 9 , the amount outstanding
under the Credit Facility totaled $1.175 billion with
i n t e rest at LIBOR plus 1.50%.
In February 1999,the Company entered into
an agreement to sell its pharmacy benefits manage-
ment business to an unrelated third party for $70 mil-
lion in cash.The Company intends to use the net
proceeds from the sale to reduce corporate debt.
T h e Company has initiated a formal plan to dispose
of certain non-core health plans included in the
C o m p a ny ’s Health Plan Services segment. It is antici-
pated that the sales of these health plans will be
completed during the first half of 1999.
The Company’s subsidiaries must comply
with certain minimum capital requirements under
applicable state laws and regulations.The long-term
portion of principal and interest payments under the
promissory notes issued to the California Wellness
Foundation in connection with the Health Net con-
version to for-profit status is subordinated to Health
Net meeting tangible equity requirements under
applicable California statutes and regulations.During
1998,the Company contributed $132.1 million to
its subsidiaries to meet risk-based or other capital
requirements of the regulated entities.As of Decem-
ber 31, 1998,the Company’s subsidiaries were in
compliance with minimum capital requirements.
Legislation has been or may be enacted in
certain states in which the Company’s subsidiaries
operate imposing substantially increased minimum
capital and/ or statutory deposit requirements for
HMOs in such states. Such statutory deposits may
only be drawn upon under limited circumstances
relating to the protection of policyholders.The
Company’s HMO subsidiary operating in New
Jersey was required to increase its statutory deposits
by approximately $51 million in 1998 pursuant to
such legislation.
Q U A N T I TATI VE AND QUALITATI VE DI SCLOSURES
ABOUT MARKET RI SK
The Company is exposed to interest rate and marke t
risk primarily due to its investing and borrowing
activities.Market risk generally represents the risk
of loss that may result from the potential change in
the value of a financial instrument as a result of fluc-
tuations in interest rates and in equity pri c e s . I n t e re s t
rate risk is a consequence of maintaining fixed income
i nve s t m e n t s .The Company is exposed to interest rate
risks arising from changes in the level or volatility of
i n t e rest rates,p re p ayment speeds and/or the shape and
slope of the yield curve. In addition,the Company is
exposed to the risk of loss related to changes in cre d i t
spreads.Credit spread risk arises from the potential
that changes in an issuer’s credit rating or credit per-
ception may affect the value of financial instru m e n t s .
The Company has several bond portfolios to
fund reserves.The Company attempts to manage the
interest rate risks related to its investment portfolios
by actively managing the asset/ liability duration
of its investment portfolios.The overall goal of the
investment portfolios is to support the ongoing
operations of the Company's business units.The
Company’s 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 will have additional requirements with
respect to liquidity, current income and contribution
to surplus.The Company manages these risks by
setting risk tolerances, targeting asset-class allocations,
d i v e rsifying among assets and asset characteri s t i c s ,a n d
using performance measurement and reporting.
The Company uses a value-at-risk model to
assess the market risk of its investments.The estima-
tion of potential losses that could arise from changes
in market conditions is typically accomplished
through the use of statistical models which seek to
predict risk of loss based on historical price and
volatility patterns.The Company's measured value at
risk for its investments from continuing operations,
using a 95% confidence level, was approximately
$3.4 million at December 31,1998.
The Company’s calculated value-at-risk
e x p o s u re re p resents an estimate of re a s o n a bly possibl e
net losses that could be recognized on its investment
portfolios assuming hypothetical movements in
future market rates and are not necessarily indicative
of actual results which may occur. It does not repre-
sent the maximum possible loss nor any expected