Health Net 2007 Annual Report Download - page 82

We assumed a portfolio disposition period of 30 days with a confidence level of 95% for the computation of
VAR for 2007. The computation further assumes that the distribution of returns is normal. Based on such
methodology and assumptions, the computed VAR was approximately $8.3 million as of December 31, 2007.
Our calculated VAR exposure represents an estimate of reasonably possible net losses that could be
recognized on our investment portfolios assuming hypothetical movements in future market rates and are not
necessarily indicative of actual results which may occur. It does not represent the maximum possible loss nor any
expected loss that may occur, since actual future gains and losses will differ from those estimated, based upon
actual fluctuations in market rates, operating exposures, and the timing thereof, and changes in our investment
portfolios during the year.
Except for those securities held by trustees or regulatory agencies (see note 2 to our consolidated financial
statements), all of our investment securities are designated as “available-for-sale” assets. As such, they are
reflected at their estimated fair value, with the difference between amortized cost and estimated fair value
reflected in accumulated other comprehensive income, a component of Stockholders’ Equity. (See Note 4 to the
consolidated financial statements). Virtually, all of our investment securities are fixed income securities.
Generally, in a rising interest rate environment, the estimated fair value of fixed income securities would be
expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of fixed
income securities would be expected to increase. In addition, approximately 32% of our available-for-sale
investment securities are mortgage-backed securities (MBS) and asset-backed securities (ABS). Over 95% of the
MBS is collateralized by mortgages which are backed by federal agencies. Therefore, we believe that our
exposure to credit-related market value risk for our MBS is limited. These securities may also be negatively
impacted by illiquidity in the market. The recent disruptions in the credit markets have negatively impacted the
liquidity of investments. However, such disruptions did not have a material impact to the liquidity of our
investments. A worsening of credit market disruptions or sustained market downturns could have negative effects
on the liquidity and value of our investment assets.
Borrowings under our revolving credit facility, of which there were none as of December 31, 2007, are
subject to variable interest rates. For additional information regarding our revolving credit facility, see
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and
Capital Resources.” Our floating rate borrowings, if any, are presumed to have equal book and fair values
because the interest rates paid on these borrowings, if any, are based on prevailing market rates.
The fair value of our fixed rate borrowings, including our Senior Notes and financing facility as of
December 31, 2007, was approximately $541.4 million, which was based on 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
following table presents the expected cash outflows relating to market risk sensitive debt obligations as of
December 31, 2007. These cash outflows include expected principal and interest payments consistent with the
terms of the outstanding debt as of December 31, 2007.
2008 2009 2010 2011 2012 Thereafter Total
(Amounts in millions)
Fixed-rate borrowings:
Principal .............................. $35.0 $35.0 $35.0 $35.0 $35.0 $400.0 $575.0
Interest ............................... 25.5 25.5 25.5 25.5 25.5 111.7 239.2
Valuation of interest rate swap contracts ..... (0.8) (2.2) (1.1) (0.3) — — (4.4)
Cash outflow on fixed-rate borrowings .......... $59.7 $58.3 $59.4 $60.2 $60.5 $511.7 $809.8
79