Health Net 2004 Annual Report Download - page 68

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arising in periods subject to examination. These amounts are released from the reserve upon closure of such examinations and new
amounts are added for specific issues for new tax years.
Statutory Capital Requirements
Certain of our subsidiaries must comply with minimum capital and surplus requirements under applicable state laws and
regulations, and must have adequate reserves for claims. Certain subsidiaries must maintain ratios of current assets to current
liabilities pursuant to certain government contracts. Management believes that as of December 31, 2004, all of our health plans and
insurance subsidiaries met their respective regulatory requirements.
By law, regulation and governmental policy, our health plan and insurance subsidiaries, which we refer to as our regulated
subsidiaries, are required to maintain minimum levels of statutory net worth. The minimum statutory net worth requirements differ by
state and are generally based on balances established by statute, a percentage of annualized premium revenue, a percentage of
annualized health care costs, or risk based capital (“RBC”) requirements. The RBC requirements are based on guidelines established
by the National Association of Insurance Commissioners (“NAIC”). The RBC formula, which calculates asset risk, underwriting risk,
credit risk, business risk and other factors, generates the authorized control level (“ACL”), which represents the minimum amount of
net worth believed to be required to support the regulated entity’s business. For states in which the RBC requirements have been
adopted, the regulated entity typically must maintain the greater of the Company Action Level RBC, calculated as 200% of the ACL,
or the minimum statutory net worth requirement calculated pursuant to pre-RBC guidelines. Because our regulated subsidiaries are
also subject to their state regulators’ overall oversight authority, some of our subsidiaries are required to maintain minimum capital
and surplus in excess of the RBC requirement, even though RBC has been adopted in their states of domicile. We generally manage
our aggregate regulated subsidiary capital against 300% of ACL, although RBC standards are not yet applicable to all of our regulated
subsidiaries. In addition to the foregoing requirements, our regulated subsidiaries are subject to restrictions on their ability to make
dividend payments, loans and other transfers of cash or other assets to the parent company.
The reported and required statutory net worth for our regulated subsidiaries as of December 31, 2004 are summarized as
follows:
As necessary, we make contributions to and issue standby letters of credit on behalf of our subsidiaries to meet risk-based
capital or other statutory capital requirements under state laws and regulations. Health Net, Inc.
65
Regulated Subsidiaries
Statutory
Net Worth
As Reported
Statutory
Net Worth
As Required
(Dollars in millions)
Health Net of California, Inc.
$219.5
$122.7
Managed Health Network
14.0
2.9
Health Net Life Insurance Company
168.9
160.8
Health Net of Arizona, Inc.
51.0
29.7
Health Net Health Plan of Oregon, Inc.
39.5
23.1
Health Net of Connecticut, Inc.
88.7
71.0
Health Net Insurance of Connecticut, Inc.
2.5
2.0
Health Net of New Jersey, Inc.
61.7
59.2
Health Net of New York, Inc.
36.4
35.2
Health Net Insurance of New York, Inc.
59.5
54.8
MHN Reinsurance Company of Arizona, Inc.
2.4
1.6
All other (1)
22.2
16.7
(1) Includes Gem Insurance Company (sold effective February 28, 2005), Health Net Services (Bermuda) Ltd., and Health Net of
Pennsylvania, Inc.