Health Net 2006 Annual Report Download - page 131

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A reconciliation of the statutory federal income tax rate and the effective income tax rate on income is as
follows for the years ended December 31:
2006 2005 2004
Statutory federal income tax rate .............................................. 35.0% 35.0% 35.0%
State and local taxes, net of federal income tax effect .............................. 2.9 5.4 4.1
Tax exempt interest income .................................................. (0.9) (0.5) (0.3)
Goodwill and intangible assets amortization ..................................... — 0.1 0.5
Examination settlements .................................................... — — (2.7)
Sale of subsidiaries ......................................................... (6.2) (0.6) (1.7)
Other, net ................................................................ 0.4 (0.5) 1.9
Effective income tax rate .................................................... 31.2% 38.9% 36.8%
Significant components of our deferred tax assets and liabilities as of December 31 are as follows:
2006 2005
(Dollars in millions)
DEFERRED TAX ASSETS:
Accrued liabilities ............................................................. $ 57.6 $100.9
Insurance loss reserves and unearned premiums ..................................... 16.2 16.9
Tax credit carryforwards ........................................................ 1.6 0.5
Accrued compensation and benefits ............................................... 50.8 38.1
Net operating loss carryforwards ................................................. 74.3 57.8
Other ....................................................................... 5.8 9.1
Deferred tax assets before valuation allowance ...................................... 206.3 223.3
Valuation allowance ........................................................... (21.2) (19.7)
Net deferred tax assets .......................................................... $185.1 $203.6
DEFERRED TAX LIABILITIES:
Depreciable and amortizable property ............................................. $ 57.4 $ 45.5
Deferred revenue .............................................................. 27.3 19.0
Other ....................................................................... 12.6 14.2
Deferred tax liabilities .......................................................... $ 97.3 $ 78.7
In 2006, 2005 and 2004, income tax benefits attributable to employee stock option and restricted stock
transactions of $21.3 million, $21.3 million and $2.5 million, respectively, were allocated to stockholders’
equity.
As of December 31, 2006, we had federal and state net operating loss carryforwards of approximately
$116.6 million and $256.6 million, respectively. The net operating loss carryforwards expire at various dates
through 2026.
Limitations on utilization may apply to approximately $36.4 million and $50.6 million of the federal and
state net operating loss carryforwards, respectively. Accordingly, valuation allowances have been provided to
account for the potential limitations on utilization of these tax benefits. Of the $21.2 million total valuation
allowance, $13.1 million is related to the prior acquisition of a subsidiary. In the event the deferred tax assets for
the net operating loss carryforwards of this subsidiary are realized, the future tax benefits will be allocated to
reduce the associated goodwill.
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