Health Net 2014 Annual Report Download - page 162

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-52
Note 12—Regulatory Requirements
All of our health plans as well as our insurance subsidiaries ("regulated subsidiaries") are required to maintain
minimum capital standards and certain restricted accounts or assets, in accordance with legal and regulatory
requirements. For example, under the Knox-Keene Health Care Service Plan Act of 1975, as amended, our California
health plans are regulated by the California Department of Managed Health Care ("DMHC") and must comply with
certain minimum capital or tangible net equity requirements. Our non-California health plans as well as our insurance
subsidiaries must comply with their respective state's minimum regulatory capital requirements. As necessary, we make
contributions to and issue standby letters of credit on behalf of our regulated subsidiaries to meet risk based capital
("RBC") or other statutory capital requirements under various state laws and regulations, and to meet the capital
standards of credit rating agencies. In addition, in California and in certain other jurisdictions, our regulated subsidiaries
are required to maintain minimum investment amounts for the restricted use of the regulators in certain limited
circumstances. See the “Restricted Assets” section in Note 2 for additional information.
Certain of our subsidiaries report their accounts in conformity with accounting practices prescribed or permitted
by state insurance regulatory authorities, or statutory accounting. These subsidiaries are domiciled in various
jurisdictions and prepare statutory financial statements in accordance with accounting practices prescribed or permitted
by the respective jurisdictions' insurance regulators. Prescribed statutory accounting practices are set forth in a variety
of publications of the National Association of Insurance Commissioners ("NAIC") as well as state laws, regulations and
general administrative rules. The NAIC has developed a codified version of the statutory accounting principles,
designed to foster more consistency among the states for accounting guidelines and reporting.
Statutory reporting varies in certain respects from GAAP. Typical differences of statutory reporting as compared
to GAAP reporting are the reporting of fixed maturity securities at amortized cost, not recognizing certain assets
including those that are non-admitted for statutory purposes and certain reporting classifications. Statutory-basis capital
and surplus of our health plan subsidiaries was $188.5 million and $138.6 million at December 31, 2014 and 2013,
respectively. Statutory-basis net (loss) income of our health plan subsidiaries was approximately $(130.5) million,
$(158,000) and $44,000 for the years ended December 31, 2014, 2013 and 2012, respectively.
Our subsidiaries that are regulated by DMHC report their accounts in conformity with GAAP. GAAP equity of
our DMHC regulated subsidiaries was $1.3 billion and $1.2 billion at December 31, 2014 and 2013, respectively.
GAAP net income of our DMHC regulated subsidiaries was $202.3 million, $140.7 million and $122.1 million for the
years ended December 31, 2014, 2013 and 2012, respectively. We are a holding company and, therefore, our ability to
pay dividends depends on distributions received from our subsidiaries, which are subject to regulatory capital
requirements and other requirements of state law and regulation. As a result of these regulatory capital requirements and
other requirements of state law and regulation, certain regulated subsidiaries are subject to restrictions on their ability to
make dividend payments, loans or other transfers of cash to us, or their ability to do so is conditioned upon prior
regulatory approval or non-objection. Such restrictions, unless amended or waived, limit the use of any cash generated
by these subsidiaries to pay our obligations or make dividends. The maximum amount of dividends that can be paid by
the regulated subsidiaries to us without prior approval of the state regulatory authorities is subject to restrictions relating
to statutory surplus, statutory income and tangible net equity. See Note 6 for further discussion of restrictions on our
ability to pay dividends to our stockholders that are contained in our revolving credit facility.
Based on operations as of December 31, 2014, the amount of statutory capital and surplus or net worth of our
regulated subsidiaries necessary to satisfy regulatory requirements was $487.0 million in the aggregate. As of
December 31, 2014, the amount of capital and surplus or net worth that was unavailable for the payment of dividends or
return of capital to us was approximately $487.0 million in the aggregate. As of December 31, 2014, the amount of
restricted net assets of our regulated subsidiaries was approximately $119.2 million in the aggregate. Management
believes that as of December 31, 2014 all of our active regulated subsidiaries met their respective regulatory
requirements relating to maintenance of minimum capital standards and restricted accounts or assets in all material
respects.