Health Net 2015 Annual Report Download - page 197

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-36
Level 2—Pricing inputs are other than quoted prices in active markets, which are either directly or
indirectly observable as of the reporting date, and fair value is determined through the use of models and/or other
valuation methodologies that are based on an income approach. Examples include, but are not limited to,
multidimensional relational model, option adjusted spread model, and various matrices. Specific pricing inputs
include quoted prices for similar securities in both active and non-active markets, other observable inputs such as
interest rates, yield curve volatilities, default rates, and inputs that are derived principally from or corroborated by
other observable market data. Investments that are generally included in this category include asset-backed
securities, corporate bonds and loans, and state and municipal bonds.
Level 3—Pricing inputs are unobservable for the investment and include situations where there is little, if
any, market activity for the investment. The inputs into the determination of fair value require significant
management judgment or estimation using assumptions that market participants would use, including assumptions
for risk. Level 3 includes an embedded contractual derivative asset and/or liability held by the Company
estimated at fair value. Significant inputs used in the derivative valuation model include the estimated growth in
Health Net health care expenditures and estimated growth in national health care expenditures. The growth in
these expenditures was modeled using a Monte Carlo simulation approach.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In
such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant
to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in
its entirety requires judgment and considers factors specific to the investment.
The following tables present information about our assets and liabilities measured at fair value on a recurring
basis at December 31, 2015 and 2014, and indicate the fair value hierarchy of the valuation techniques utilized by us to
determine such fair value (dollars in millions):
Level 1
Level 2-
current Level 2- noncurrent Level 3 Total
As of December 31, 2015
Assets:
Cash and cash equivalents ................................... $ 996.9 $ — $ — $ — $ 996.9
Investments—available-for-sale
Asset-backed debt securities:
Residential mortgage-backed securities..... $ — $ 226.9 $ — $ — $ 226.9
Commercial mortgage-backed securities ... — 199.2 — — 199.2
Other asset-backed securities ..................... — 129.5 — — 129.5
U.S. government and agencies:
U.S. Treasury securities.............................. 31.9 — — — 31.9
U.S. Agency securities ............................... — — — — —
Obligations of states and other political
subdivisions................................................... — 936.5 — — 936.5
Corporate debt securities................................... — 694.4 27.6 — 722.0
Total investments at fair value.............................. $ 31.9 $ 2,186.5 $ 27.6 $ — $ 2,246.0
Embedded contractual derivative......................... — — — 5.7 5.7
Total assets at fair value................................................. $ 1,028.8 $ 2,186.5 $ 27.6 $ 5.7 $ 3,248.6