Health Net 2013 Annual Report Download - page 50

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Downgrades in our debt ratings may adversely affect our business, financial condition and results of operations.
Claims paying ability, financial strength, and debt ratings by nationally recognized ratings agencies are
increasingly important factors in establishing the competitive position of insurance companies and managed care
companies. We believe our claims paying ability and financial strength ratings also are important factors in marketing
our products to certain of our customers. In addition, our debt ratings impact both the cost and availability of future
borrowings and, accordingly, our cost of capital. Rating agencies review our ratings periodically and there can be no
assurance that our current ratings will be maintained in the future. Our ratings reflect each rating agency's independent
opinion of our financial strength, operating performance, ability to meet our debt obligations or obligations to
policyholders and other factors, and are subject to change. Potential downgrades from ratings agencies, should they
occur, may adversely affect our business, financial condition and results of operations.
We are a holding company and substantially all of our cash flow is generated by our subsidiaries. Our regulated
subsidiaries are subject to restrictions on the payment of dividends and maintenance of minimum levels of capital.
As a holding company, our subsidiaries conduct substantially all of our consolidated operations and own
substantially all of our consolidated assets. Consequently, our cash flow and our ability to pay our debt depends, in part,
on the amount of cash that we receive from our subsidiaries. Our subsidiaries' ability to make any payments to us will
depend on their earnings, business and tax considerations, legal and regulatory restrictions and economic conditions.
Under California’s Health Care Service Plan Act of 1975, as amended (also known as the Knox-Keene Act), our
subsidiaries that are licensed under the Knox-Keene Act must comply with certain minimum capital or tangible net
equity (“TNE”) requirements ranging up to 130% of a specified minimum TNE for larger and older licensees such as
Health Net of California. In addition, each of our subsidiaries regulated under the Knox-Keene Act have agreed to
certain undertakings to the Department of Managed Health Care, restricting dividends and loans to affiliates, to the
extent that the payment of such would reduce its TNE below 130% of the minimum requirement, or reduce its cash-to-
claims ratio below 1:1. In addition, in certain states our regulated subsidiaries are subject to risk-based capital
requirements, known as RBC. These laws require our regulated subsidiaries to report their results of risk-based capital
calculations to the departments of insurance in their state of domicile and the National Association of Insurance
Commissioners. Failure to maintain the minimum RBC standards could subject certain of our regulated subsidiaries to
corrective action, including increased reporting and/or state supervision. In addition, in most states, we are required to
seek prior approval before we transfer money or pay dividends from our regulated subsidiaries that exceed specified
amounts as determined by the state’s formula. If our regulated subsidiaries are restricted from paying us dividends or
otherwise making cash transfers to us, it could have material adverse effect on our results of operations and free cash
flow. For additional information regarding our regulated subsidiaries' statutory capital requirements, see “Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources—Statutory Capital Requirements.”
The value of our intangible assets may become impaired.
Goodwill and other intangible assets represent a significant portion of our assets. Goodwill and other intangible
assets were approximately $579.7 million as of December 31, 2013, representing approximately 15 percent of our total
assets and 36 percent of our consolidated stockholders' equity at December 31, 2013.
In accordance with applicable accounting standards, we periodically evaluate our goodwill and other intangible
assets to determine whether all or a portion of their carrying values may be impaired, in which case a charge to income
may be necessary. This impairment testing requires us to make assumptions and judgments regarding estimated fair
value including assumptions and estimates related to future earnings and membership levels based on current and future
plans and initiatives, long-term strategies and our annual planning and forecasting processes, as well as the expected
weighted average cost of capital used in the discount process. If estimated fair values are less than the carrying values
of goodwill and other intangible assets, we may be required to record impairment losses against income. Any future
evaluations resulting in an impairment of our goodwill and other intangible assets could materially impact our results of
operations and stockholders' equity in the period in which the impairment occurs. A material decrease in stockholders'
equity could, in turn, negatively impact our debt ratings or potentially impact our compliance with existing debt
covenants.
From time to time, we divest businesses that we believe are less of a strategic fit for the company or do not
produce an adequate return. Any such divestiture could result in significant asset impairment charges, including those
related to goodwill and other intangible assets, which could have a material adverse effect on our financial condition
and results of operations. See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of