Health Net 2007 Annual Report Download - page 81

Recoverability is assessed based on the carrying amount of the asset and the sum of the undiscounted cash
flows expected to result from the remaining period of use and the eventual disposal of the asset. An impairment
loss is recognized when the carrying amount is not recoverable and exceeds the fair value of the asset.
Income Taxes
We record deferred tax assets and liabilities based on differences between the book and tax bases of assets
and liabilities (see Note 10 to the consolidated financial statements). The deferred tax assets and liabilities are
calculated by applying enacted tax rates and laws to taxable years in which such differences are expected to
reverse. We establish a valuation allowance in accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes.” We continually review the adequacy of
the valuation allowance and recognize the benefits from our deferred tax assets only when an analysis of both
positive and negative factors indicate that it is more likely than not that the benefits will be realized.
We file tax returns in many tax jurisdictions. Often, application of tax rules within the various jurisdictions
is subject to differing interpretation. Despite our belief that our tax return positions are fully supportable, we
believe that it is probable certain positions will be challenged by taxing authorities, and we may not prevail on
the positions as filed. Accordingly, we maintain a liability for the estimated amount of contingent tax challenges
by taxing authorities upon examination, in accordance with Financial Accounting Standards Board Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which we adopted as of January 1, 2007. Prior to
2007, we maintained a liability pursuant to SFAS No. 5, “Accounting for Contingencies.” FIN 48 clarifies the
accounting for uncertain taxes recognized in a company’s financial statements in accordance with SFAS No. 109,
“Accounting for Income Taxes.” The interpretation requires us to analyze the amount at which each tax position
meets a “more likely than not” standard for sustainability upon examination by taxing authorities. Only tax
benefit amounts meeting or exceeding this standard will be reflected in tax provision expense and deferred tax
asset balances. The interpretation also requires that any differences between the amounts of tax benefits reported
on tax returns and tax benefits reported in the financial statements be recorded in a liability for unrecognized tax
benefits. The liability for unrecognized tax benefits is reported separately from deferred tax assets and liabilities
and classified as current or noncurrent based upon the expected period of payment. See Note 10 to the
consolidated financial statements for additional disclosures related to FIN 48 policies and the impact of adoption.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to interest rate and market risk primarily due to our investing and borrowing activities.
Market risk generally represents the risk of loss that may result from the potential change in the value of a
financial instrument as a result of fluctuations in interest rates and in equity prices. Interest rate risk is a
consequence of maintaining variable interest rate earning investments and fixed rate liabilities or fixed income
investments and variable rate liabilities. We are exposed to interest rate risks arising from changes in the level or
volatility of interest rates, prepayment speeds and/or the shape and slope of the yield curve. In addition, we are
exposed to the risk of loss related to changes in credit spreads. Credit spread risk arises from the potential
changes in an issuer’s credit rating or credit perception that will affect the value of financial instruments.
We have several bond portfolios to fund reserves. We attempt to manage the interest rate risks related to our
investment portfolios by actively managing the asset duration of our investment portfolios. The overall goal for the
investment portfolios is to provide a source of liquidity and support the ongoing operations of our business units.
Our philosophy is to actively manage assets to maximize total return over a multiple-year time horizon, subject to
appropriate levels of risk. Each business unit has additional requirements with respect to liquidity, current income
and contribution to surplus. We manage these risks by setting risk tolerances, targeting asset-class allocations,
diversifying among assets and asset characteristics, and using performance measurement and reporting.
We use a value-at-risk (VAR) model, which follows a variance/co-variance methodology, to assess the
market risk for our investment portfolio. VAR is a method of assessing investment risk that uses standard
statistical techniques to measure the worst expected loss in the portfolio over an assumed portfolio disposition
period under normal market conditions. The determination is made at a given statistical confidence level.
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