Health Net 2007 Annual Report Download - page 109

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Investments
Investments classified as available-for-sale, which consist primarily of debt securities, are stated at fair
value. Unrealized gains and losses are excluded from earnings and reported as other comprehensive income, net
of income tax effects. The cost of investments sold is determined in accordance with the specific identification
method and realized gains and losses are included in net investment income. We periodically assess our
available-for-sale investments for other-than-temporary impairment. Any such other-than-temporary impairment
loss is recognized as a realized loss and measured as the excess of carrying value over fair value at the time the
assessment is made.
Fair Value of Financial Instruments
The estimated fair value amounts of cash equivalents, investments available for sale, trade accounts and
notes receivable and notes payable have been determined by us using available market information and
appropriate valuation methodologies. The carrying amounts of cash equivalents approximate fair value due to the
short maturity of those instruments. Fair values for debt and equity securities are generally based upon quoted
market prices. Where quoted market prices were not readily available, fair values were estimated using valuation
methodologies based on available and observable market information. Such valuation methodologies include
reviewing the value ascribed to the most recent financing, comparing the security with securities of publicly
traded companies in a similar line of business, and reviewing the underlying financial performance including
estimating discounted cash flows. The carrying value of trade receivables, long-term notes receivable and
nonmarketable securities approximate the fair value of such financial instruments. The fair value of notes payable
is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us
for debt with the same remaining maturities. The fair value of our fixed rate borrowings, including our Senior
Notes and financing facility was $541.4 million as of December 31, 2007. The fair value of our variable rate
borrowings, our bridge and term loans, as of December 31, 2006 was approximately $500 million, which was
equal to the carrying value because the interest rates paid on these borrowings were based on prevailing market
rates. See Note 6 for our financing arrangements.
Restricted Assets
We and our consolidated subsidiaries are required to set aside certain funds which may only be used for
certain purposes pursuant to state regulatory requirements. We have discretion as to whether we invest such
funds in cash and cash equivalents or other investments. As of December 31, 2007 and December 31, 2006, the
restricted cash and cash equivalents balances totaled $30.5 million and $6.7 million, respectively, and are
included in other noncurrent assets. Investment securities held by trustees or agencies were $79.3 million and
$111.6 million as of December 31, 2007 and 2006, respectively, and are included in investments
available-for-sale.
On May 31, 2007 we entered into an agreement with The Guardian Life Insurance Company of America
(Guardian) to, in substance, purchase Guardian’s 50% interest in the HealthCare Solutions (HCS) business (see
Note 3). In connection with this transaction, we agreed to establish escrowed funds to secure the payment of
projected claims for former Guardian liabilities under the HCS arrangement during the claims run-out period.
This restricted cash balance amounted to $37 million and is included in other noncurrent assets on the
accompanying consolidated balance sheet as of December 31, 2007.
Interest Rate Swap Contracts
On December 19, 2007, we entered into a five-year, $175 million amortizing financing facility with a
non-U.S. lender (see Note 6). In connection with the financing facility, we entered into an interest rate swap
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