Health Net 2004 Annual Report Download - page 69

contributed $32 million to certain of its subsidiaries to meet capital requirements during the year ended December 31, 2004. Of the
$32 million, we contributed $20 million to our New Jersey health plan, $9 million to our Bermuda subsidiary and $3 million to our
insurance company in New York. Except for the $32 million in capital contributions, our parent company did not make any capital
contributions to its subsidiaries to meet risk-based capital or other statutory capital requirements under state laws and regulations
during the year ended December 31, 2004 or thereafter through the date of the filing of this Annual Report on Form 10-K.
Legislation has been or may be enacted in certain states in which our 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.
As a result of the above requirements and other regulatory requirements, certain subsidiaries are subject to restrictions on their
ability to make dividend payments, loans or other transfers of cash to their parent companies. Such restrictions, unless amended or
waived, or unless regulatory approval is granted, limit the use of any cash generated by these subsidiaries to pay our obligations. The
maximum amount of dividends which can be paid by our insurance company subsidiaries without prior approval of the applicable
state insurance departments is subject to restrictions relating to statutory surplus, statutory income and unassigned surplus.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to interest rate and market risk primarily due to our 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 fluctuations in
interest rates and in equity prices. Interest rate risk is a consequence of maintaining variable interest rate earning investments and
fixed rate liabilities or fixed income investments and variable rate liabilities. We are exposed to interest rate risks arising 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 that changes in an issuer’s
credit rating or credit perception may affect the value of financial instruments.
We have several bond portfolios to fund reserves. We attempt to manage the interest rate risks related to our investment
portfolios by actively managing the asset/liability duration of its 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 2004. The
computation further assumes that the distribution of returns is normal. Based on such methodology and assumptions, the computed
VAR was approximately $14.9 million as of December 31, 2004.
Our calculated value-at-risk 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
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