Health Net 2015 Annual Report Download - page 52

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• increase our vulnerability to general adverse economic and industry conditions or a downturn in our
business; and
• place us at a competitive disadvantage compared to our competitors that have less debt.
We continually evaluate options to refinance our outstanding indebtedness. Our ability to obtain any financing,
whether through the issuance of new debt securities or otherwise, and the terms of any such financing are dependent on,
among other things, our financial condition, financial market conditions within our industry and generally, credit ratings
and numerous other factors. In the event we need to access the credit markets, including to refinance our debt prior to
the upcoming expirations, there can be no assurance that we will be able to obtain financing on acceptable terms or
within an acceptable time, if at all. If we are unable to obtain financing on terms and within a time acceptable to us it
could, in addition to other negative effects, have a material adverse effect on our operations, financial condition, ability
to compete or ability to comply with regulatory requirements.
Downgrades in our debt ratings may adversely affect our business, financial condition and results of operations.
Claims paying ability, financial strength, and debt ratings by nationally recognized ratings agencies are
increasingly important factors in establishing the competitive position of insurance companies and managed care
companies. We believe our claims paying ability and financial strength ratings also are important factors in marketing
our products to certain of our customers. In addition, our debt ratings impact both the cost and availability of future
borrowings and, accordingly, our cost of capital. Rating agencies review our ratings periodically and there can be no
assurance that our current ratings will be maintained in the future. Our ratings reflect each rating agency's independent
opinion of our financial strength, operating performance, ability to meet our debt obligations or obligations to
policyholders and other factors, and are subject to change. Potential downgrades from ratings agencies, should they
occur, may adversely affect our business, financial condition and results of operations.
We are a holding company and substantially all of our cash flow is generated by our subsidiaries. Our regulated
subsidiaries are subject to restrictions on the payment of dividends and maintenance of minimum levels of capital.
As a holding company, our subsidiaries conduct substantially all of our consolidated operations and own
substantially all of our consolidated assets. Consequently, our cash flow and our ability to pay our debt depends, in part,
on the amount of cash that we receive from our subsidiaries. Our subsidiaries' ability to make any payments to us will
depend on their earnings, business and tax considerations, legal and regulatory restrictions and economic conditions.
Under California’s Health Care Service Plan Act of 1975, as amended (also known as the Knox-Keene Act), our
subsidiaries that are licensed under the Knox-Keene Act must comply with certain minimum capital or tangible net
equity (“TNE”) requirements ranging up to 130% of a specified minimum TNE for larger and older licensees such as
Health Net of California. In addition, each of our subsidiaries regulated under the Knox-Keene Act has agreed to certain
undertakings to the DMHC, restricting dividends and loans to affiliates, to the extent that the payment of such would
reduce its TNE below 130% of the minimum requirement. In addition, in certain states our regulated subsidiaries are
subject to risk-based capital requirements, known as RBC. These laws require our regulated subsidiaries to report their
results of risk-based capital calculations to the departments of insurance in their state of domicile and the National
Association of Insurance Commissioners. Failure to maintain the minimum RBC standards could subject certain of our
regulated subsidiaries to corrective action, including increased reporting and/or state supervision. In addition, in most
states, we are required to seek prior approval before we transfer money or pay 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 $568 million as of December 31, 2015, representing approximately 8.9 percent of our total
assets and 31.0 percent of our consolidated stockholders' equity at December 31, 2015.
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