Health Net 2014 Annual Report Download - page 54

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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 $570.7 million as of December 31, 2014, representing approximately 11 percent of our total
assets and 33 percent of our consolidated stockholders' equity at December 31, 2014.
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 assets or 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 Operations—Liquidity and Capital Resources—Critical Accounting Estimates—Goodwill and Other
Intangible Assets” for further discussion of our procedures related to goodwill and other intangible assets.
The value of our investment portfolio and our goodwill could be adversely impacted by varying economic and market
conditions which could, in turn, have a negative effect on our results of operations and stockholders' equity.
Our investment portfolio is comprised primarily of available-for-sale investment securities such as interest-
yielding debt securities of varying maturities. As of December 31, 2014, our available-for-sale investment securities
were approximately $1.8 billion. The value of fixed-income securities is highly sensitive to fluctuations in short- and
long-term interest rates, with the value decreasing as such rates increase and increasing as such rates decrease. These
securities may also be negatively impacted by illiquidity in the market. We closely monitor the fair values of our
investment securities and regularly evaluate them for any other-than-temporary impairments. We have the intent and
ability to hold our investments for a sufficient period of time to allow for recovery of the principal amount invested.
The current economic environment and the volatility of capital markets could negatively impact the liquidity of
investments, such as the debt securities we hold, and a worsening in these markets could have negative effects on the
liquidity and value of our investment assets. In addition, such uncertainty has increased the difficulty of assessing
investment impairment and the same influences tend to increase the risk of potential impairment of these assets.
Over time, the economic and capital market environment may decline or provide additional insight regarding the
fair value of certain securities, which could change our judgment regarding the impairment of certain investments. This
could result in realized losses relating to other-than-temporary declines being charged against future income. There is
continuing risk that declines in fair value may occur and material other-than-temporary impairments may result in
realized losses in future periods, which could have an adverse effect on our results of operations, liquidity and financial
condition. See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—
Liquidity and Capital Resources” for additional information regarding our investment portfolio.
In addition, our regulated subsidiaries are also subject to state laws and regulations that govern the types of
investments that are allowable and admissible in those subsidiaries' portfolios. There can be no assurance that our
investment assets will produce total positive returns or that we will not sell investments at prices that are less than the
carrying value of these investments. Changes in the value of our investment assets, as a result of interest rate
fluctuations, illiquidity or otherwise, could have a negative effect on our stockholders' equity. In addition, if it became