Health Net 2015 Annual Report Download - page 86

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has retained the right and ability to source risk corridors program payments from user fees under both the risk corridors
program and other programs.
Our net payable balance for the risk adjustment program related to the premium stabilization provisions of the
ACA was $44.0 million and $72.4 million as of December 31, 2015 and December 31, 2014, respectively. Risk
adjustment and reinsurance amounts for 2014 were substantially settled during the year ended December 31, 2015. See
"—Overview—Health Care Reform Legislation and Implementation—Premium Stabilization Programs" and "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.
We have made and are continuing to make significant efforts to design and implement a cohesive strategy with
respect to the exchanges and these premium stabilization programs, but these programs, among other things, are subject
to risks inherent in untested initiatives and government programs, and the relevant legislative and regulatory framework
for the exchanges and the 3Rs remains subject to change and interpretation over time. Whether due to legislative or
regulatory uncertainty or otherwise, if these premium stabilization programs prove ineffective in mitigating our
financial risks, including but not limited to adverse selection risk, if we experience significant payment delays with
respect to any 3R receivables, including without limitation, our risk corridor receivables, or if we are unable to
successfully adapt our strategy to these or any other future changes in our markets, our financial condition, cash flows,
liquidity and results of operations may be materially adversely affected.
Cash and Investments
As of December 31, 2015, the fair value of our investment securities available-for-sale was $2.2 billion, which
includes both current and noncurrent investments. Noncurrent investments were $27.6 million as of December 31,
2015. 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, 2015, our investment portfolio includes $555.6 million,
or 24.7% of our portfolio holdings, of asset-backed (including mortgage-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, 2015, our investment portfolio also included $936.5 million, or 41.7%
of our portfolio holdings, of obligations of state and other political subdivisions and $722 million, or 32.1% of our
portfolio holdings, of corporate debt securities. We had gross unrealized losses of $24.2 million as of December 31,
2015, and $9.8 million as of December 31, 2014. Included in the gross unrealized losses as of December 31, 2015 and
December 31, 2014 are $6.6 million and $0.9 million, respectively, related to noncurrent investments available-for-sale.
We believe that these impairments are temporary and do not believe that it is likely that we will be required to further
impair any other securities in an unrealized loss position before recovery of its amortized cost basis. Given the current
market conditions with historic low oil prices 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. Impairment of $2.0 million was recognized during the year ended December 31, 2015
(see Note 4 to the consolidated audited financial statements). No impairment was recognized during the years ended
December 31, 2014 or 2013.