Health Net 2007 Annual Report Download - page 64

Net Investment Income
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Net investment income increased by $9.2 million, or 8%, for the year ended December 31, 2007 as
compared to the same period in 2006. The increase was primarily from income on higher cash balances in 2007
than in 2006.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Net investment income increased by $38.2 million, or 52%, for the year ended December 31, 2006 as
compared to the same period in 2005. The increase was primarily due to an increase in book yields as a result of
generally higher interest rates across the yield curve. We also recognized an investment gain and investment
interest income of approximately $6 million and $3 million, respectively, from the liquidation of the U.S.
Treasury securities portfolio that we established to fund the redemption of our senior notes in the year ended
December 31, 2006. Included in net investment income for 2005 was $(0.6) million of net realized (loss) on sale
of investments.
General, Administrative and Other Costs
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
G&A costs increased by $110.2 million, or 9%, for the year ended December 31, 2007 as compared to the
same period in 2006. The increase in costs was primarily driven by a $105.3 million charge for attorney’s fees
and regulatory fines related to the litigation and regulatory-related matters and arbitration settlement (see “Item
3. Legal Proceedings” for additional information on these litigation matters). Our G&A expense ratio decreased
to 11.1% for the year ended December 31, 2007 from 11.2% for the same period in 2006. The charge recorded in
2007 impacted the ratio by 90 basis points.
The selling costs ratio increased to 2.9% for the year ended December 31, 2007 from 2.4% when compared
to the same period in 2006. These increases are consistent with an increase in commercial new sales and higher
rate of broker commissions for our small group and individual membership.
Amortization and depreciation expense increased by $17.4 million for the year ended December 31, 2007 as
compared to the same period in 2006 primarily due to the addition of new assets placed in production related to
various information technology system projects and the amortization of intangible assets from the Guardian
Transaction.
Interest expense decreased by $18.7 million, or 37%, for the year ended December 31, 2007 as compared to
the same period in 2006. The decreases were primarily due to lower interest rates on our Senior Notes in 2007
compared with the senior notes we redeemed in the third quarter of 2006, and lower interest on our term and
bridge loans and revolver borrowings as a result of lower outstanding balances and early termination of the debt.
See “—Debt Refinancing” and “Liquidity and Capital Resources—Senior notes” below.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
G&A costs increased by $208.5 million, or 22%, for the year ended December 31, 2006 as compared to the
same period in 2005. Our G&A expense ratio also increased to 11.2% for the year ended December 31, 2006
from 10.0% for the same period in 2005. The increase was primarily due to our increased spending for our
Medicare expansion plans, an increase in marketing activities for new product development, the addition of the
members from the Universal Care Acquisition, new business bid costs and recognition of stock option expense as
a result of adopting SFAS No. 123(R). See Note 2 to our consolidated financial statements for further
information on the impact of SFAS No. 123(R).
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