Health Net 2013 Annual Report Download - page 97

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to: significant decreases in the market price of the asset, significant adverse changes in the business climate or legal
factors, current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses
associated with the use of the asset and current expectation that the asset will more likely than not be sold or disposed
of significantly before the end of its estimated useful life.
If we identify an indicator of impairment, we assess recoverability by comparing the carrying amount of the asset
to the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An
impairment loss is recognized when the carrying amount is not recoverable and is measured as the excess of carrying
value over fair value.
During the year ended December 31, 2013, we recorded $1.2 million in impairment charges to general and
administrative expenses primarily for internally developed software.
Income Taxes
We record deferred tax assets and liabilities based on differences between the book and tax bases of assets and
liabilities. The deferred tax assets and liabilities are calculated by applying enacted tax rates and laws to taxable years in
which such differences are expected to reverse. We establish a valuation allowance in accordance with the provisions of
the Income Taxes Topic of the Financial Accounting Standards Board ("FASB') codification. We continually review the
adequacy of the valuation allowance and recognize the benefits from our deferred tax assets only when an analysis of
both positive and negative factors indicate that it is more likely than not that the benefits will be realized.
We file tax returns in many tax jurisdictions. Often, application of tax rules within the various jurisdictions is
subject to differing interpretation. Despite our belief that our tax return positions are fully supportable, we believe that it
is probable certain positions will be challenged by taxing authorities, and we may not prevail on all of the positions as
filed. Accordingly, we maintain a liability for the estimated amount of contingent tax challenges by taxing authorities
upon examination. We analyze the amount at which each tax position meets a “more likely than not” standard for
sustainability upon examination by taxing authorities. Only tax benefit amounts meeting or exceeding this standard will
be reflected in tax provision expense and deferred tax asset balances. Any differences between the amounts of tax
benefits reported on tax returns and tax benefits reported in the financial statements is recorded in a liability for
unrecognized tax benefits. The liability for unrecognized tax benefits is reported separately from deferred tax assets and
liabilities and classified as current or noncurrent based upon the expected period of payment.
In 2014, due to the impact of the non-deductibility, for federal income tax purposes, of the health insurer fee, we
expect our effective income tax rate will be significantly higher than the 35% statutory federal tax rate and will exceed
50%, excluding unusual charges or benefits. See "—Overview—Health Care Reform Legislation and Implementation"
above.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to interest rate and market risk primarily due to our investing and borrowing activities. Market
risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument
as a result of fluctuations in interest rates and/or market conditions and in equity prices. Interest rate risk is a
consequence of maintaining variable interest rate earning investments and fixed rate liabilities or fixed income
investments and variable rate liabilities. We are exposed to interest rate risks arising from changes in the level or
volatility of interest rates, prepayment speeds and/or the shape and slope of the yield curve. In addition, we are exposed
to the risk of loss related to changes in credit spreads. Credit spread risk arises from the potential changes in an issuer’s
credit rating or credit perception that may affect the value of financial instruments.
We attempt to manage the interest rate risks related to our investment portfolios by actively managing the asset
duration of our investment portfolios. The overall goal for the investment portfolios is to provide a source of liquidity
and support the ongoing operations of our business units. Our philosophy is to actively manage assets to maximize total
return over a multiple-year time horizon, subject to appropriate levels of risk. Each business unit has additional
requirements with respect to liquidity, current income and contribution to surplus. We manage these risks by setting risk
tolerances, targeting asset-class allocations, diversifying among assets and asset characteristics, and using performance
measurement and reporting.
We use a value-at-risk (“VAR”) model, which follows a variance/co-variance methodology, to assess the market
risk for our investment portfolio. VAR is a method of assessing investment risk that uses standard statistical techniques
to measure the worst expected loss in the portfolio over an assumed portfolio disposition period under normal market
conditions. The determination is made at a given statistical confidence level.