Health Net 2007 Annual Report Download - page 74

the Bridge Loan Agreement on March 22, 2007, partially funded by a $100 million draw on our $700 million
revolving credit facility.
Statutory Capital Requirements
Certain of our subsidiaries must comply with minimum capital and surplus requirements under applicable
state laws and regulations, and must have adequate reserves for claims. Management believes that as of
December 31, 2007, all of our health plans and insurance subsidiaries met their respective regulatory
requirements, in all material respects.
By law, regulation and governmental policy, our health plan and insurance subsidiaries, which we refer to as
our regulated subsidiaries, are required to maintain minimum levels of statutory net worth. The minimum
statutory net worth requirements differ by state and are generally based on balances established by statute, a
percentage of annualized premium revenue, a percentage of annualized health care costs, or risk-based capital
(RBC) requirements. The RBC requirements are based on guidelines established by the National Association of
Insurance Commissioners. The RBC formula, which calculates asset risk, underwriting risk, credit risk, business
risk and other factors, generates the authorized control level (ACL), which represents the minimum amount of
net worth believed to be required to support the regulated entity’s business. For states in which the RBC
requirements have been adopted, the regulated entity typically must maintain the greater of the Company Action
Level RBC, calculated as 200% of the ACL, or the minimum statutory net worth requirement calculated pursuant
to pre-RBC guidelines. Because our regulated subsidiaries are also subject to their state regulators’ overall
oversight authority, some of our subsidiaries are required to maintain minimum capital and surplus in excess of
the RBC requirement, even though RBC has been adopted in their states of domicile. We generally manage our
aggregate regulated subsidiary capital above 300% of ACL, although RBC standards are not yet applicable to all
of our regulated subsidiaries. At December 31, 2007, we had sufficient capital to exceed this level. In addition to
the foregoing requirements, our regulated subsidiaries are subject to restrictions on their ability to make dividend
payments, loans and other transfers of cash or other assets to the parent company.
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. During the year ended
December 31, 2007, we made capital contributions of $76.4 million to various subsidiaries to maintain RBC or
other statutory capital requirements. Of this amount, $48.9 million was directly related to the Guardian
Transaction. 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 thereafter through February 25, 2008.
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 that 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.
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