Health Net 2014 Annual Report Download - page 90

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stabilization provisions of the ACA was $86.8 million as of December 31, 2014. HHS recognizes, in both final
regulations and guidance, it is obligated to make the risk corridors program payments without regard to budget
neutrality. Although HHS anticipates the program will be budget neutral, the ACA requires HHS to make full payments
to those issuers with risk corridors ratios above 103 percent. Additionally, HHS states in final regulations and guidance
that if the program’s collections, including any potential carryover from prior years, are insufficient to satisfy its
payment obligations, the agency will use other sources of funding to meet its payment obligations, subject to the
availability of appropriations. If corridor collections are insufficient in 2014, HHS explains that it shall fulfill its
obligations for the 2014 benefit year by using funds collected for the 2015 benefit year prior to making payments on
2015 obligations. Our net payable balance for the risk adjustment program related to the premium stabilization
provisions of the ACA was $72.4 million as of December 31, 2014. The final determination and settlement of amounts
due or payable from these premium stabilization provisions for the year ended December 31, 2014 is not expected to
occur until, at the earliest, the third or fourth quarter of 2015. See Note 2 to our consolidated financial statements, under
the heading "Accounting for Certain Provisions of the ACA" for additional information regarding ACA-related fees and
premium stabilization provisions. Depending on the amounts due or payable as a result of these provisions, our
financial condition, cash flows and results of operations could be materially adversely affected.
Cash and Investments
As of December 31, 2014, the fair value of our investment securities available-for-sale was $1.8 billion, which
includes both current and noncurrent investments. Noncurrent investments were $4.6 million as of December 31, 2014.
We hold high-quality fixed income securities primarily comprised of corporate bonds, asset-backed securities,
mortgaged-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 currently primarily comprised of investment grade securities with 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, 2014, our investment portfolio includes $438.5 million,
or 24.4% 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, 2014, our investment portfolio also included $732.2 million, or 40.8% of our
portfolio holdings, of obligations of state and other political subdivisions and $588.4 million, or 32.8% of our portfolio
holdings, of corporate debt securities. We had gross unrealized losses of $9.8 million as of December 31, 2014, and
$56.6 million as of December 31, 2013. Included in the gross unrealized losses as of December 31, 2014 and December
31, 2013 are $0.9 million and $8.1 million, respectively, related to noncurrent investments available-for-sale. 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 additional other-than-temporary impairments, which may be material, may be recorded in future
periods. No impairment was recognized during the years ended December 31, 2014 or 2013.