Health Net 2009 Annual Report Download - page 78

Interest Rate Swap Contract
On March 12, 2009, we entered into an interest rate swap agreement (2009 Swap) under which we pay an
amount equal to 2.245% times a notional principal amount and in return we receive an amount equal to LIBOR
times the same notional principal amount. The 2009 Swap is designed to reduce variability in our net income due
to changes in variable interest rates.
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, 2009, all of our active 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. Historically, we generally
managed 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, 2009, we had sufficient capital to exceed 400%
of ACL, a higher level compared to the past.
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, 2009, we made capital contributions of $119.5 million to various subsidiaries to increase RBC or
other statutory capital compared to a higher level compared to the past. The capital contributions were generally
not required to meet regulatory requirements, but were made to enhance the financial condition of the
subsidiaries. Health Net, Inc. made no capital contributions to any of its subsidiaries to meet RBC or other
statutory capital requirements under state laws and regulations thereafter through February 22, 2010.
In addition, pursuant to the Stock Purchase Agreement relating to the Northeast Sale, we have agreed to
contribute additional capital to the Acquired Companies to meet statutory capital requirements as required by
governmental authorities. The amount of such contributions, if any, will be added to the payments we are entitled
to receive under the Stock Purchase Agreement.
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
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