Health Net 2013 Annual Report Download - page 86

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addition, if our customers experience financial issues, they may not be able to pay, or may delay payment of, accounts
receivable that are owed to us. Further, our customers or potential customers may force us to compete more vigorously
on factors such as price and service to retain or obtain their business. A significant decline in membership in our plans
and the inability of current and/or potential customers to pay their premiums as a result of unfavorable conditions may
adversely affect our business, including our revenues, profitability and cash flow.
Cash and Investments
As of December 31, 2013, the fair value of our investment securities available-for-sale was $1.6 billion, which
includes both current and noncurrent investments. Noncurrent investments were $59.8 million, or 3.7% of the total
investments available-for-sale as of December 31, 2013. We hold high-quality fixed income securities primarily
comprised of corporate bonds, mortgage-backed bonds, municipal bonds and bank loans. 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 fixed-income securities, which are largely
investment grade, while maintaining liquidity in each portfolio sufficient to meet our cash flow requirements and
attaining an expected total return on invested funds.
Our investment holdings are primarily currently comprised of investment grade securities and have an average
rating of “A+” and “A1” as rated by S&P and/or Moody’s, respectively. At this time, there is no indication of default on
interest and/or principal payments under our holdings. We have the ability and current intent to hold to recovery all
securities with an unrealized loss position. As of December 31, 2013, our investment portfolio includes $390.5 million,
or 24.0% of our portfolio holdings, of mortgage-backed and asset-backed securities. The majority of our mortgage-
backed securities are Fannie Mae, Freddie Mac and Ginnie Mae issues, and the average rating of our entire 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. As of December 31, 2013, our investment portfolio also included $757.0 million, or 46.5% of our
portfolio holdings, of obligations of state and other political subdivisions and $455.6 million, or 28.0% of our portfolio
holdings, of corporate debt securities.
We had gross unrealized losses of $56.6 million as of December 31, 2013, and $2.7 million as of December 31,
2012. Included in the gross unrealized losses as of December 31, 2013 are $8.1 million related to noncurrent
investments available-for-sale. There were no noncurrent investments available-for-sale as included in the gross
unrealized losses as of December 31, 2012. 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 material other-than-temporary impairments may be
recorded in future periods. No impairment was recognized during the years ended December 31, 2013 or 2012.
Liquidity
We believe that expected cash flow from operating activities, existing cash reserves and other working capital and
lines of credit are adequate to allow us to fund existing obligations, repurchase shares of our common stock, introduce
new products and services, enter into new lines of business and continue to operate and develop health care-related
businesses as we may determine to be appropriate at least for the next twelve months. We regularly evaluate cash
requirements for, among other things, current operations and commitments, for acquisitions and other strategic
transactions, to address legislative or regulatory changes such as the ACA, and for business expansion opportunities,
such as the CCI, Medicaid expansion under the ACA and our participation in Arizona's Medicaid program in Maricopa
County. We may elect to raise additional funds for these purposes, either through issuance of debt or equity, the sale of
investment securities or otherwise, as appropriate. Based on the composition and quality of our investment portfolio,
our expected ability to liquidate our investment portfolio as needed, and our expected operating and financing cash
flows, we do not anticipate any liquidity constraints as a result of the current credit environment. However, continued
turbulence in U.S. and international markets and certain costs associated with the implementation of health care reform
legislation, our proposed participation in the CCI, Medicaid expansion under the ACA and the Medicaid program in
Arizona, among other things, could adversely affect our liquidity.
Our cash flow from operating activities is impacted by, among other things, the timing of collections on our
amounts receivable from state and federal governments and agencies. Our receivable from CMS related to our Medicare