Health Net 2006 Annual Report Download - page 132

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Included in our tax provision for 2006 is a $31.8 million tax benefit from the sale of a subsidiary primarily
due the difference in the amount of goodwill included in the carrying value of the stock prior to sale. The
difference in carrying value and resulting loss on sale has been reported as a permanent difference in accordance
with SFAS No. 109 “Accounting for Income Taxes.” This practice has been consistently applied with respect to
prior, substantially similar transactions.
Our tax returns for 2003 and 2004 are currently undergoing an examination by the Internal Revenue Service.
No assessments have been proposed to date for these tax years. In 2004, the Internal Revenue Service completed
an examination of our tax returns for tax years 2000 through 2002. Resulting examination adjustments were not
material, and we agreed to the adjustments. As a result of the examination closure for those years, our liability for
unrecognized tax benefits was adjusted in 2004 to reflect the examinations adjustments as well as the reduction
of estimated contingent tax costs in accordance with our policy outlined in Note 2.
Note 11—Regulatory Requirements
All of our health plans as well as our insurance subsidiaries are required to periodically file financial
statements with regulatory agencies in accordance with statutory accounting and reporting practices. Under the
Knox-Keene Health Care Service Plan Act of 1975, as amended, California plans must comply with certain
minimum capital or tangible net equity requirements. Our non-California health plans, as well as our health and
life insurance companies, must comply with their respective state’s minimum regulatory capital requirements
and, in certain cases, maintain minimum investment amounts for the restricted use of the regulators. Within the
scope of state statutes and/or other parameters established by the regulators, we have discretion as to whether we
invest such funds in cash and cash equivalents or other investments. Restricted cash and cash equivalents, as of
December 31, 2006 and 2005, totaled $6.7 million and $5.1 million, respectively. Investment securities held by
trustees or agencies pursuant to state regulatory requirements were $111.6 million and $132.1 million as of
December 31, 2006 and 2005, respectively. See the “Restricted Assets” section in Note 2 for additional
information.
As necessary, we make contributions to and issue standby letters of credit on behalf of our subsidiaries to
meet RBC or other statutory capital requirements under state laws and regulations. Health Net, Inc. did not make
any capital contributions to its subsidiaries to meet RBC or other statutory capital requirements under state laws
and regulations during the twelve months ended December 31, 2006.
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 us. Such restrictions,
unless amended or waived, limit the use of any cash generated by these subsidiaries to pay our obligations. The
maximum amount of dividends which can be paid by the insurance company subsidiaries to us without prior
approval of the insurance departments is subject to restrictions relating to statutory surplus, statutory income and
unassigned surplus. Management believes that as of December 31, 2006, all of our health plans and insurance
subsidiaries met their respective regulatory requirements.
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