Health Net 2014 Annual Report Download - page 94

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indebtedness for money we borrowed or any of our subsidiaries borrowed in an aggregate principal amount
of at least $50 million, if that acceleration results from a default under the instrument giving rise to or
securing such indebtedness for money borrowed and such indebtedness has not been discharged in full or
such acceleration has not been rescinded or annulled within 30 days after notice; or
• events in bankruptcy, insolvency or reorganization of our Company.
Statutory Capital Requirements
Certain of our subsidiaries must comply with minimum capital and surplus requirements under applicable state
laws and regulations, and must have adequate reserves for claims. As necessary, we make contributions to and issue
standby letters of credit on behalf of our subsidiaries to meet risk-based capital (“RBC”) or other statutory capital
requirements under state laws and regulations. We believe that as of February 23, 2015, all of our active health plans
and insurance subsidiaries were in compliance with their respective regulatory requirements relating to maintenance of
minimum capital standards, surplus requirements and adequate reserves for claims in all material respects.
By law, regulation and governmental policy, our health plan and insurance subsidiaries, which we refer to as our
regulated subsidiaries, are required to maintain minimum levels of statutory capital and surplus. The minimum statutory
capital and surplus requirements differ by state and are generally based on balances established by statute, a percentage
of annualized premium revenue, a percentage of annualized health care costs, or RBC or tangible net equity (“TNE”)
requirements. The RBC requirements are based on guidelines established by the National Association of Insurance
Commissioners. The RBC formula, which calculates asset risk, underwriting risk, credit risk, business risk and other
factors, generates the authorized control level (“ACL”), which represents the minimum amount of capital and surplus
believed to be required to support the regulated entity’s business. For states in which the RBC requirements have been
adopted, the regulated entity typically must maintain the greater of the Company Action Level RBC, calculated as
200% of the ACL, or the minimum statutory capital and surplus requirement calculated pursuant to pre-RBC guidelines.
Because our regulated subsidiaries are also subject to their state regulators’ overall oversight authority, some of our
subsidiaries are required to maintain minimum capital and surplus in excess of the RBC requirement, even though RBC
has been adopted in their states of domicile.
Under the California Knox-Keene Health Care Service Plan Act of 1975, as amended (“Knox-Keene”), certain of
our California subsidiaries must comply with TNE requirements. Under these Knox-Keene TNE requirements, actual
net worth less unsecured receivables and intangible assets must be more than the greater of (i) a fixed minimum
amount, (ii) a minimum amount based on premiums or (iii) a minimum amount based on health care expenditures,
excluding capitated amounts. In addition, certain of our California subsidiaries have made certain undertakings to the
DMHC to restrict dividends and loans to affiliates, to the extent that the payment of such would reduce such entities'
TNE below the minimum requirement or 130% of the minimum requirement. As of February 23, 2015, all of our
subsidiaries subject to the TNE requirements and the undertakings to DMHC exceeded the minimum requirements.
Legislation may be enacted in certain states in which our subsidiaries operate imposing substantially increased
minimum capital and/or statutory deposit requirements for HMOs in such states. Such statutory deposits may only be
drawn upon under limited circumstances relating to the protection of policyholders.
As a result of the above requirements and other regulatory requirements, certain of our subsidiaries are subject to
restrictions on their ability to make dividend payments, loans or other transfers of cash to their parent companies. Such
restrictions, unless amended or waived or unless regulatory approval is granted, limit the use of any cash generated by
these subsidiaries to pay our obligations. The maximum amount of dividends that can be paid by our insurance
company subsidiaries without prior approval of the applicable state insurance departments is subject to restrictions
relating to statutory surplus, statutory income and unassigned surplus.