Health Net 2013 Annual Report Download - page 120

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-16
Checks outstanding, net of deposits are classified as accounts payable and other liabilities in the consolidated balance
sheets and the changes are reflected in the line item net increase (decrease) in checks outstanding, net of deposits within
the cash flows from financing activities in the consolidated statements of cash flows.
Investments
Investments classified as available-for-sale, which consist primarily of debt securities, are stated at fair value.
Unrealized gains and losses are excluded from earnings and reported as other comprehensive income, net of income tax
effects. The cost of investments sold is determined in accordance with the specific identification method and realized
gains and losses are included in net investment income. We analyze all debt investments that have unrealized losses for
impairment consideration and assess the intent to sell such securities. If such intent exists, impaired securities are
considered other-than-temporarily impaired. Management also assesses if we may be required to sell the debt
investments prior to the recovery of amortized cost, which may also trigger an impairment charge. If securities are
considered other-than-temporarily impaired based on intent or ability, we assess whether the amortized costs of the
securities can be recovered. If management anticipates recovering an amount less than the amortized cost of the
securities, an impairment charge is calculated based on the expected discounted cash flows of the securities. Any deficit
between the amortized cost and the expected cash flows is recorded through earnings as a charge. All other temporary
impairment charges are recorded through other comprehensive income. During the years ended December 31, 2013,
2012 and 2011, no losses were recognized from other-than-temporary impairments.
Fair Value of Financial Instruments
The estimated fair value amounts of cash equivalents, investments available-for-sale, premiums and other
receivables, notes receivable and notes payable have been determined by using available market information and
appropriate valuation methodologies. The carrying amounts of cash equivalents approximate fair value due to the short
maturity of those instruments. Fair values for debt and equity securities are generally based upon 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 carrying
value of premiums and other receivables, long-term notes receivable and nonmarketable securities approximates the fair
value of such financial instruments. The fair value of notes payable is estimated based on the quoted market prices for
the same or similar issues or on the current rates offered to us for debt with the same remaining maturities. The fair
value of our fixed-rate borrowings was $434.5 million and $424.0 million as of December 31, 2013 and 2012,
respectively. The fair value of our variable-rate borrowings under our revolving credit facility was $100.0 million and
$100.0 million as of December 31, 2013 and 2012, respectively, which was equal to the carrying value because the
interest rates paid on these borrowings were based on prevailing market rates. The fair value of our fixed-rate
borrowings was determined using the quoted market price, which is a Level 1 input in the fair value hierarchy. The fair
value of our variable-rate borrowings was estimated to equal the carrying value because the interest rates paid on these
borrowings were based on prevailing market rates. Since the pricing inputs are other than quoted prices and fair value is
determined using an income approach, our variable-rate borrowings are classified as a Level 2 in the fair value
hierarchy. See Notes 6 and 7 for additional information regarding our financing arrangements and fair value
measurements, respectively.
Restricted Assets
We and our consolidated subsidiaries are required to set aside certain funds which may only be used for certain
purposes pursuant to state regulatory requirements. We have discretion as to whether we invest such funds in cash and
cash equivalents or other investments. As of December 31, 2013 and 2012, the restricted cash and cash equivalents
balances totaled $5.3 million and $0.8 million, respectively, and are included in other noncurrent assets. Investment
securities held by trustees or agencies were $23.8 million and $25.5 million as of December 31, 2013 and 2012,
respectively, and are included in investments available-for-sale. For additional information on our regulatory
requirements, see Note 12.