Health Net 2009 Annual Report Download - page 72

Cash and Investments
As of December 31, 2009, the fair value of the investment securities available-for-sale was $1.4 billion,
which includes both current and noncurrent investments. Such amount includes noncurrent investments of $20.9
million, or 1.5% of the total investments available for sale. We hold high-quality fixed income securities
primarily comprised of corporate bonds, mortgage-backed bonds and municipals bonds. We evaluate and
determine the classification of our investments based on management’s intent. We also closely monitor the fair
values of our investment holdings and regularly evaluate them for other-than-temporary impairments.
Our cash flow from investing activities is primarily impacted by the sales, maturities and purchases of our
available-for-sale investment securities and restricted investments. Our investment objective is to maintain safety
and preservation of principal by investing in a diversified mix of high-quality, investment grade securities while
maintaining liquidity in each portfolio sufficient to meet our cash flow requirements while attaining the highest
total return on invested funds.
Our investment portfolio includes $564.9 million, or 40% of our portfolio holdings, of mortgage-backed and
asset-backed securities. Such amount includes current and noncurrent mortgage-backed and asset-backed
securities of $544.0 million, or 96.3% of the total mortgage-backed and asset-backed securities, and $20.9
million, or 3.7% of the total mortgage-backed and asset-backed securities, respectively. The majority of our
mortgage-backed securities are Fannie Mae, Freddie Mac and Ginnie Mae issues, and the average rating of our
asset-backed securities is AA/Aa1. However, any failure by Fannie Mae or Freddie Mac to honor the obligations
under the securities they have issued or guaranteed could cause a significant decline in the value or cash flow of
our mortgage-backed securities. Our investment portfolio also includes $10.0 million, or 1% of our portfolio
holdings, of auction rate securities (ARS). These ARS have long-term nominal maturities for which the interest
rates are reset through a dutch auction process every 7, 28 or 35 days. At December 31, 2009, these ARS had at
one point or are continuing to experience “failed” auctions. These securities are entirely municipal issues and
rates are set at the maximum allowable rate as stipulated in the applicable bond indentures. We continue to
receive income on all ARS. If all or any portion of the ARS continue to experience failed auctions, it could take
an extended amount of time for us to realize our investments’ recorded value.
We had gross unrealized losses of $13.3 million as of December 31, 2009, and $32.8 million as of
December 31, 2008. Included in the gross unrealized losses as of December 31, 2009 are $2.7 million related to
noncurrent investments available for sale. We believe that these impairments are temporary and we do not intend
to sell these investments. It is not likely that we will be required to sell any security in an unrealized loss position
before recovery of its amortized cost basis. Given the current market conditions and the significant judgments
involved, there is a continuing risk that further declines in fair value may occur and additional material other-
than-temporary impairments may be recorded in future periods. After performing our impairment analysis, we
noted that one of our prime residential mortgage-backed securities may suffer losses under certain stressed
scenarios. As a result, we recognized an impairment related to the credit loss in the amount of $60,000 during the
year ended December 31, 2009. This amount represents the difference between the present value of the
Company’s best estimate of future cash flows using the latest performance indicators and the amortized cost
basis.
During the year ended December 31, 2008, we recognized a $14.6 million loss from other-than-temporary
impairments of our cash equivalents and available-for-sale investments. Such other-than-temporary impairments
primarily were as a result of investments in corporate debt from Lehman Brothers, money market funds from
The Reserve and preferred stock from Fannie Mae and Freddie Mac. In September 2008, The Reserve announced
its intention to liquidate its money market fund and froze all redemptions until an orderly liquidation process
could be implemented. As a result, in the third quarter of 2008, we reclassified $372 million in estimated net
asset value we had invested in The Reserve money market funds from cash equivalents to investments
available-for-sale. As of December 31, 2008, we held $50.4 million in the Reserve Primary Institutional Fund
and $69.2 million in the Reserve U.S. Government Fund. On January 16, 2009, The Reserve paid out in full the
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