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EX-10.6 - FIRST AMENDMENT TO HEALTH NET, INC. 401(K) SAVINGS PLAN - HEALTH NET INCdex106.htm
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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

Commission File Number: 1-12718

 

 

HEALTH NET, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   95-4288333

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

21650 Oxnard Street, Woodland Hills, CA   91367
(Address of principal executive offices)   (Zip Code)

(818) 676-6000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

x  Large accelerated filer    ¨  Accelerated filer    ¨  Non-accelerated filer    ¨  Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

The number of shares outstanding of the registrant’s Common Stock as of August 2, 2010 was 97,424,779 (excluding 47,537,411 shares held as treasury stock).

 

 

 


Table of Contents

HEALTH NET, INC.

INDEX TO FORM 10-Q

 

     Page

Part I—FINANCIAL INFORMATION

  

Item 1—Financial Statements (Unaudited)

   3

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009

   3

Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009

   4

Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2010 and 2009

   5

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009

   6

Condensed Notes to Consolidated Financial Statements

   7

Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations

   27

Item 3—Quantitative and Qualitative Disclosures About Market Risk

   47

Item 4—Controls and Procedures

   48

Part II—OTHER INFORMATION

  

Item 1—Legal Proceedings

   49

Item 1A—Risk Factors

   49

Item 2—Unregistered Sales of Equity Securities and Use of Proceeds

   49

Item 3—Defaults Upon Senior Securities

   49

Item 4—(Removed and Reserved)

   49

Item 5—Other Information

   49

Item 6—Exhibits

   50

Signatures

   51

 

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Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

HEALTH NET, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010     2009    2010     2009

REVENUES

         

Health plan services premiums

   $ 2,507,318      $ 3,152,783    $ 5,034,825      $ 6,292,034

Government contracts

     851,939        832,088      1,661,398        1,591,427

Net investment income

     16,567        20,432      36,489        44,753

Administrative services fees and other income

     1,837        8,387      10,693        18,279

Northeast administrative services fees and other

     59,301        0      109,661        0
                             

Total revenues

     3,436,962        4,013,690      6,853,066        7,946,493
                             

EXPENSES

         

Health plan services (excluding depreciation and amortization)

     2,163,191        2,718,039      4,374,447        5,439,818

Government contracts

     811,386        791,044      1,583,288        1,516,046

General and administrative

     237,378        332,188      484,474        687,098

Selling

     56,574        81,359      115,405        162,769

Depreciation and amortization

     8,466        15,708      17,129        31,748

Interest

     8,761        11,518      18,645        21,085

Northeast administrative services expenses

     71,951        0      153,829        0

Loss (adjustment to loss) on sale of Northeast health plan subsidiaries

     (8,171     0      (8,171     0

Asset impairment

     6,000        0      6,000        0

Early debt extinguishment charge

     3,532        0      3,532        0
                             

Total expenses

     3,359,068        3,949,856      6,748,578        7,858,564
                             

Income from operations before income taxes

     77,894        63,834      104,488        87,929

Income tax provision

     32,828        23,694      43,332        25,754
                             

Net income

   $ 45,066      $ 40,140    $ 61,156      $ 62,175
                             

Net income per share:

         

Basic

   $ 0.46      $ 0.39    $ 0.61      $ 0.60

Diluted

   $ 0.45      $ 0.38    $ 0.61      $ 0.60

Weighted average shares outstanding:

         

Basic

     98,896        103,854      99,965        103,810

Diluted

     99,687        104,323      100,894        104,294

See accompanying condensed notes to consolidated financial statements.

 

3


Table of Contents

HEALTH NET, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

 

    June 30, 2010     December 31, 2009  
    (Unaudited)        

ASSETS

   

Current Assets:

   

Cash and cash equivalents

  $ 425,663      $ 682,803   

Investments—available for sale (amortized cost: 2010—$1,459,490; 2009—$1,372,090)

    1,487,497        1,376,142   

Premiums receivable, net of allowance for doubtful accounts (2010—$4,306; 2009—$6,283)

    351,953        288,719   

Amounts receivable under government contracts

    277,465        270,810   

Incurred but not reported (IBNR) health care costs receivable under TRICARE North contract

    280,151        281,140   

Other receivables

    101,602        111,608   

Deferred taxes

    39,217        46,527   

Other assets

    188,578        187,086   
               

Total current assets

    3,152,126        3,244,835   

Property and equipment, net

    119,356        131,480   

Goodwill

    605,886        611,886   

Other intangible assets, net

    26,111        28,108   

Deferred taxes

    83,403        89,479   

Investments-available for sale-noncurrent (amortized cost: 2010—$3,493; 2009—$23,626)

    2,985        20,870   

Other noncurrent assets

    161,098        155,993   
               

Total Assets

  $ 4,150,965      $ 4,282,651   
               

LIABILITIES AND STOCKHOLDERS’ EQUITY

   

Current Liabilities:

   

Reserves for claims and other settlements

  $ 934,879      $ 951,655   

Health care and other costs payable under government contracts

    91,930        90,815   

IBNR health care costs payable under TRICARE North contract

    280,151        281,140   

Unearned premiums

    145,590        135,772   

Loans payable and other financing arrangement

    0        104,007   

Accounts payable and other liabilities

    410,961        366,125   
               

Total current liabilities

    1,863,511        1,929,514   

Senior notes payable

    398,583        398,480   

Borrowings under revolving credit facility

    100,000        100,000   

Other noncurrent liabilities

    155,131        158,874   
               

Total Liabilities

    2,517,225        2,586,868   
               

Commitments and contingencies

   

Stockholders’ Equity:

   

Preferred stock ($0.001 par value, 10,000 shares authorized, none issued and outstanding)

    0       0  

Common stock ($0.001 par value, 350,000 shares authorized; issued 2010—144,957 shares; 2009—144,175)

    145        154   

Additional paid-in capital

    1,209,130        1,190,203   

Treasury common stock, at cost (2010—47,534 shares of common stock; 2009—41,020 shares of common stock)

    (1,548,166     (1,389,722

Retained earnings

    1,956,252        1,895,096   

Accumulated other comprehensive income

    16,379        52   
               

Total Stockholders’ Equity

    1,633,740        1,695,783   
               

Total Liabilities and Stockholders’ Equity

  $ 4,150,965      $ 4,282,651   
               

See accompanying condensed notes to consolidated financial statements.

 

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Table of Contents

HEALTH NET, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in thousands)

(Unaudited)

 

    Common Stock     Additional
Paid-In
Capital
    Common Stock
Held in Treasury
    Retained
Earnings
  Accumulated
Other
Comprehensive
(Loss) Income
    Total  
    Shares   Amount       Shares     Amount        

Balance as of January 1, 2009

  143,753   $ 144      $ 1,182,067      (40,045   $ (1,367,319   $ 1,944,100   $ (6,866   $ 1,752,126   

Comprehensive income:

               

Net income

              62,175       62,175   

Change in unrealized loss on investments, net of tax impact of $2,633

                4,756        4,756   

Defined benefit pension plans:

               

Prior service cost and net loss

                181        181   
                                                       

Total comprehensive income

                  67,112   
                                                       

Exercise of stock options and vesting of restricted stock units

  244                 0  

Share-based compensation expense

        11,825                11,825   

Net tax detriment related to equity compensation plans

        (3,015             (3,015

Repurchases of common stock

        (98     (1,506         (1,506
                                                       

Balance as of June 30, 2009

  143,997   $ 144      $ 1,190,877      (40,143   $ (1,368,825   $ 2,006,275   $ (1,929   $ 1,826,542   
                                                       

Balance as of January 1, 2010

  144,175   $ 154      $ 1,190,203      (41,020   $ (1,389,722   $ 1,895,096   $ 52      $ 1,695,783   

Comprehensive income:

               

Net income

              61,156       61,156   

Change in unrealized gain on investments, net of tax impact of $10,007

                16,196        16,196   

Defined benefit pension plans:

               

Prior service cost and net loss

                131        131   
                     

Total comprehensive income

                  77,483   
                     

Exercise of stock options and vesting of restricted stock units

  782     (9     1,055                1,046   

Share-based compensation expense

        23,121                23,121   

Tax detriment related to equity compensation plans

        (5,249             (5,249

Repurchases of common stock

        (6,514     (158,444         (158,444
                                                       

Balance as of June 30, 2010

  144,957   $ 145      $ 1,209,130      (47,534   $ (1,548,166   $ 1,956,252   $ 16,379      $ 1,633,740   
                                                       

See accompanying condensed notes to consolidated financial statements.

 

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Table of Contents

HEALTH NET, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

    Six Months Ended
June 30,
 
    2010     2009  

CASH FLOWS FROM OPERATING ACTIVITIES:

   

Net income

  $ 61,156      $ 62,175   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

   

Amortization and depreciation

    17,129        31,748   

Share-based compensation expense

    23,121        11,825   

Deferred income taxes

    3,378        22,003   

Excess tax benefit on share-based compensation

    (473     0  

Asset and investment impairment charges

    6,000        12,384   

Net realized gain on investments

    (10,881     (15,388

Other changes

    (9,768     13,809   

Changes in assets and liabilities, net of effects of acquisitions and dispositions:

   

Premiums receivable and unearned premiums

    (53,416     (102,337

Other current assets, receivables and noncurrent assets

    1,264        74,269   

Amounts receivable/payable under government contracts

    (5,540     (31,188

Reserves for claims and other settlements

    (16,776     (94,632

Accounts payable and other liabilities

    95,950        (44,660
               

Net cash provided by (used in) operating activities

    111,144        (59,992
               

CASH FLOWS FROM INVESTING ACTIVITIES:

   

Sales of investments

    660,070        639,333   

Maturities of investments

    108,958        106,048   

Purchases of investments

    (835,625     (713,219

Sales of property and equipment

    19        3,835   

Purchases of property and equipment

    (9,009     (9,863

Purchase price adjustment on sale of Northeast health plans

    (8,415     0   

Sales (purchases) of restricted investments and other

    4,464        463   
               

Net cash (used in) provided by investing activities

    (79,538     26,597   
               

CASH FLOWS FROM FINANCING ACTIVITIES:

   

Proceeds from exercise of stock options and employee stock purchases

    1,046        0  

Excess tax benefit on share-based compensation

    473        0  

Repurchases of common stock

    (173,494     (1,506

Borrowings under revolving credit facility

    100,000        25,000   

Repayment of borrowings under financing arrangements

    (216,771     (92,444
               

Net cash used in financing activities

    (288,746     (68,950
               

Net decrease in cash and cash equivalents

    (257,140     (102,345

Cash and cash equivalents, beginning of year

    682,803        668,201   
               

Cash and cash equivalents, end of period

  $ 425,663      $ 565,856   
               

SUPPLEMENTAL CASH FLOWS DISCLOSURE:

   

Interest paid

  $ 14,620      $ 13,084   

Income taxes paid

    49,279        23,699   

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

   

Accretion of deferred revenues into earnings

  $ 29,147      $ 4,116   

Amortization of discounts into earnings

    13,411        4,116   

See accompanying condensed notes to consolidated financial statements.

 

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Table of Contents

HEALTH NET, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.    BASIS OF PRESENTATION

Health Net, Inc. (referred to herein as Health Net, the Company, we, us or our) prepared the accompanying unaudited consolidated financial statements following the rules and regulations of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules and regulations, certain notes or other financial information that are normally required by accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted if they substantially duplicate the disclosures contained in the annual audited financial statements. The accompanying unaudited consolidated financial statements should be read together with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2009 (Form 10-K).

We are responsible for the accompanying unaudited consolidated financial statements. These consolidated financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results in accordance with GAAP. In accordance with GAAP, we make certain estimates and assumptions that affect the reported amounts. Actual results could differ from those estimates and assumptions.

Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be indicative of those for the full year.

Certain items presented in the operating cash flow section of the consolidated statements of cash flows for the six months ended June 30, 2009 have been reclassified within the operating cash flow section. This reclassification had no impact on our operating cash flows, net earnings or balance sheets as previously reported.

On December 11, 2009, we completed the sale (the Northeast Sale) of all of the outstanding shares of capital stock of our health plan subsidiaries that were domiciled in Connecticut, New Jersey, New York and Bermuda (Acquired Companies) that had conducted businesses in our Northeast Operations segment (see Note 3) to UnitedHealth Group Incorporated (United). The sale was made pursuant to a Stock Purchase Agreement (Stock Purchase Agreement), dated as of July 20, 2009, by and among the Company, Health Net of the Northeast, Inc., Oxford Health Plans, LLC (Buyer) and, solely for the purposes of guaranteeing Buyer’s obligations thereunder, United. At the closing of the Northeast Sale, affiliates of United also acquired membership renewal rights for certain commercial health care business conducted by our subsidiary, Health Net Life Insurance Company (Health Net Life) in the states of Connecticut and New Jersey (the Transitioning HNL Members). We will continue to serve the members of the Acquired Companies under Administrative Services Agreements we entered into with United and certain of its affiliates (the United Administrative Services Agreements) until all members are either transitioned to legacy United products or non-renewed. As part of the Northeast Sale, we retained certain financial responsibilities for the profits and losses of the Acquired Companies, subject to specified adjustments, for the period beginning on the closing date and ending on the earlier of the second anniversary of the closing date and the date that the last United Administrative Services Agreement is terminated. Accordingly, subsequent to the Northeast Sale, our Northeast Operations segment includes the operations of the businesses that are providing administrative services pursuant to the United Administrative Services Agreements, as well as the operations of Health Net Life in Connecticut and New Jersey prior to the renewal dates of the Transitioning HNL Members. The Northeast Operations had approximately $82.6 million and $695.9 million in total revenues in the three months ended June 30, 2010 and 2009, respectively, which represented 2% and 17% of our total revenues for the three months ended June 30, 2010 and 2009, respectively, and $158.5 million and $1,371.3 million in total revenues in the six months ended June 30, 2010 and 2009, respectively, which represented 2% and 17% of our total revenues for the six months ended June 30, 2010 and 2009, respectively.

 

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The Northeast Operations had a combined pretax loss of $9.4 million and $47.0 million for the three and six months ended June 30, 2010, respectively, and $23.2 million and $26.4 million for the three and six months ended June 30, 2009, respectively. As of June 30, 2009, we had approximately 577,000 total health plan members in the Northeast Operations.

2.    SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

Cash equivalents include all highly liquid investments with maturity of three months or less when purchased.

Investments

Investments classified as available-for-sale, which consist primarily of debt securities, are stated at fair value. Unrealized gains and losses are excluded from earnings and reported as other comprehensive income, net of income tax effects. The cost of investments sold is determined in accordance with the specific identification method and realized gains and losses are included in net investment income. The Company analyzes all debt investments that have unrealized losses for impairment consideration and assesses the intent to sell such securities. If such intent exists, impaired securities are considered other-than-temporarily impaired. Management also assesses if the Company may be required to sell the debt investments prior to the recovery of amortized cost, which may also trigger an impairment charge. If securities are considered other-than-temporarily impaired based on intent or ability, management assesses if the amortized costs of the securities can be recovered. If management anticipates recovering an amount less than its amortized cost, an impairment charge is calculated based on the expected discounted cash flows of the securities. Any deficit between the amortized cost and the expected cash flows is recorded through earnings as a charge. All other temporary impairment changes are recorded through other comprehensive income. See Note 4 to our consolidated financial statements for additional disclosures.

Fair Value of Financial Instruments

The estimated fair value amounts of cash equivalents, investments available for sale, trade accounts and notes receivable and notes payable have been determined by using available market information and appropriate valuation methodologies. The carrying amounts of cash equivalents approximate fair value due to the short maturity of those instruments. Fair values for debt and equity securities are generally based upon quoted market prices. Where quoted market prices were not readily available, fair values were estimated using valuation methodologies based on available and observable market information. Such valuation methodologies include reviewing the value ascribed to the most recent financing, comparing the security with securities of publicly traded companies in a similar line of business, and reviewing the underlying financial performance including estimating discounted cash flows. The carrying value of trade receivables, long-term notes receivable and nonmarketable securities approximates the fair value of such financial instruments. The fair value of notes payable is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt with the same remaining maturities. The fair value of our fixed rate borrowings was $374.0 million and $468.0 million as of June 30, 2010 and December 31, 2009, respectively. As of December 31, 2009, our fixed rate borrowings included our senior notes and amortizing financing facility. In May 2010, we terminated and repaid in full our amortizing financing facility (see Note 6 for information on the termination of our amortizing financing facility). The fair value of our variable rate borrowings under our revolving credit facility was $100.0 million as of June 30, 2010 and December 31, 2009, which was equal to the carrying value because the interest rates paid on these borrowings were based on prevailing market rates. See Note 6 to our consolidated financial statements for additional information regarding our financing arrangements.

 

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Concentrations of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, investments and premiums receivable. All cash equivalents and investments are managed within established guidelines, which provide us diversity among issuers. Concentrations of credit risk with respect to premiums receivable are limited due to the large number of payers comprising our customer base. The federal government is the only customer of our Government Contracts segment, with premiums and fees accounting for 100% of our Government Contracts revenue. In addition, the federal government is a significant customer of the Company’s Western Region Operations segment as a result of contracts with the Centers for Medicare & Medicaid Services (CMS) for coverage of Medicare-eligible individuals.

Comprehensive Income

Comprehensive income includes all changes in stockholders’ equity (except those arising from transactions with stockholders) and includes net income, net unrealized appreciation (depreciation), after tax, on investments available-for-sale and prior service cost and net loss related to our defined benefit pension plan.

Accumulated other comprehensive gains (losses) are as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2010             2009             2010             2009      
     (Dollars in millions)  

Investments:

        

Unrealized gains (losses) on investments available-for-sale as of April 1 and January 1

   $ 3.5      $ (8.2   $ 1.0      $ (7.3

Net change in unrealized gains on investments available-for-sale

     16.3        9.6        23.3        14.8   

Reclassification of unrealized gains to earnings

     (2.6     (3.9     (7.1     (10.0
                                

Unrealized gains (losses) on investments available for sale as of June 30

     17.2        (2.5     17.2        (2.5
                                

Defined benefit pension plans:

        

Prior service cost and net loss amortization as of April 1 and January 1

     (0.9     0.5        (0.9     0.4   

Net change in prior service cost and net loss amortization

     0.1        0.1        0.1        0.2   
                                

Prior service cost and net loss amortization as of June 30

     (0.8     0.6        (0.8     0.6   
                                

Accumulated other comprehensive income (loss)

   $ 16.4      $ (1.9   $ 16.4      $ (1.9
                                

Earnings Per Share

Basic earnings per share excludes dilution and reflects net income divided by the weighted average shares of common stock outstanding during the periods presented. Diluted earnings per share is based upon the weighted average shares of common stock and dilutive common stock equivalents (this reflects the potential dilution that could occur if stock options were exercised and restricted stock units (RSUs) and restricted shares were vested) outstanding during the periods presented.

Common stock equivalents arising from dilutive stock options, restricted common stock and RSUs are computed using the treasury stock method. For the three and six months ended June 30, 2010, these amounted to 791,000 and 929,000 shares, respectively, which included 360,000 and 490,000 common stock equivalents from dilutive RSUs. There were 469,000 and 484,000 shares of common stock equivalents, including 416,000 and 432,000 common stock equivalents from dilutive RSUs, for the three and six months ended June 30, 2009, respectively.

 

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Options to purchase an aggregate of 2,712,000 and 2,700,000 shares of common stock, during the three and six months ended June 30, 2010, respectively, and 5,701,000 and 5,732,000, during the three and six months ending June 30, 2009, respectively, were considered antidilutive and were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common stock for each respective period. Outstanding options expire at various times through April 2019.

We completed our $700 million stock repurchase program (the Completed Stock Repurchase Program) in February 2010. On March 18, 2010, our Board of Directors authorized a new $300 million stock repurchase program (the New Stock Repurchase Program). The remaining authorization under our New Stock Repurchase Program as of June 30, 2010 was $228.1 million. See Note 5 for more information regarding these stock repurchase programs.

Goodwill and Other Intangible Assets

The carrying amount of goodwill by reporting unit is as follows:

 

     Western Region
Operations
   Northeast
Operations
    Total  
     (Dollars in millions)  

Balance as of December 31, 2009

   $ 605.9    $ 6.0      $ 611.9   

Impairment related to Northeast Operations

     0      (6.0     (6.0
                       

Balance as of June 30, 2010

   $ 605.9    $ 0      $ 605.9   
                       

The intangible assets that continue to be subject to amortization using the straight-line method over their estimated lives are as follows:

 

     Gross
Carrying
Amount
   Accumulated
Amortization
    Intangible
Assets Sold
    Fair Value
Adjustment
    Net
Balance
   Weighted
Average Life
(in years)
     (Dollars in millions)

As of June 30, 2010:

              

Provider networks

   $ 40.5    $ (32.1   $ 0     $ 0     $ 8.4    19.4

Customer relationships and other

     29.5      (11.8     0       0       17.7    11.1
                                        
   $ 70.0    $ (43.9   $ 0     $ 0     $ 26.1   
                                        

As of December 31, 2009:

              

Provider networks

   $ 40.5    $ (31.5   $ 0     $ 0     $ 9.0    19.4

Employer groups

     76.8      (24.3     (46.2     (6.3     0    0

Customer relationships and other

     29.5      (10.4     0       0       19.1    11.1

Trade name

     3.2      (3.2     0       0       0    1.5

Covenant not-to-compete

     2.2      (2.2     0       0       0    2.0
                                        
   $ 152.2    $ (71.6   $ (46.2   $ (6.3   $ 28.1   
                                        

We performed our annual impairment test on our goodwill and other intangible assets as of June 30, 2010 for our Western Region Operations and Northeast Operations reporting units. As a result, we recorded an impairment of $6 million related to the goodwill for our Northeast Operations. We performed a two-step impairment test in determining the existence of impairment and the amount of the impairment. In the first step, we compared the fair values to the related carrying values and concluded that the carrying value of the Northeast Operations was impaired and that the carrying value of the Western Region Operations was not impaired. In the second step, we measured the amount by comparing the implied value of the Northeast Operations’ goodwill to the carrying amount of such goodwill. Based on the results of our Step 2 test, we concluded that the implied value of the Northeast Operations’ goodwill was zero, which resulted in an impairment charge for the total carrying value of $6 million.

 

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We also re-evaluated the useful lives of our other intangible assets and determined that the estimated useful lives of our other intangible assets properly reflected the current estimated useful lives.

During the three months ended September 30, 2009, following the execution of the Stock Purchase Agreement, we compared the Acquired Companies’ adjusted carrying value to their estimated fair value less cost to sell. The carrying value of the assets and liabilities held for sale exceeded the fair value less cost to sell by approximately $6 million, which was recognized as an impairment as of September 30, 2009. The remaining intangible assets of $46.2 million were classified as held for sale as of September 30, 2009 and were subsequently sold upon the closing of the Northeast Sale on December 11, 2009.

Estimated annual pretax amortization expense for other intangible assets for the current year and each of the next four years ending December 31 is as follows (dollars in millions):

 

Year

   Amount

2010

   $ 3.8

2011

     3.5

2012

     3.4

2013

     3.4

2014

     2.8

Restricted Assets

We and our consolidated subsidiaries are required to set aside certain funds which may only be used for certain purposes pursuant to state regulatory requirements. We have discretion as to whether we invest such funds in cash and cash equivalents or other investments. As of June 30, 2010 and December 31, 2009, the restricted cash and cash equivalents balances totaled $5.4 million and $5.6 million, respectively, and are included in other noncurrent assets. Investment securities held by trustees or agencies were $12.1 million and $9.9 million as of June 30, 2010 and December 31, 2009, respectively, and are included in investments available-for-sale.

Interest Rate Swap Contracts

On May 26, 2010, in connection with the termination of our amortizing financing facility (Note 6), we terminated the interest rate swap agreement we entered into in 2007 (2007 Swap). Under the 2007 Swap, we had paid an amount equal to LIBOR times a notional principal amount and had received in return an amount equal to 4.294% times the same notional principal amount. We recognized a pretax loss of $5.4 million in the three months ended June 30, 2010 in connection with the termination and settlement of the 2007 Swap, which is included in our administrative services fees and other income for that period.

On June 30, 2010, we terminated the interest rate swap agreement that we entered into on March 12, 2009 (2009 Swap). The 2009 Swap was designed to reduce variability in our net income due to changes in variable interest rates. We recognized a pretax loss of $0.2 million in the three months ended June 30, 2010 in connection with the termination and settlement of the 2009 Swap, which is included in our administrative services fees and other income for that period.

Subsequent Accounting for the Northeast Sale

We are required to continue to serve the members of the Acquired Companies under the United Administrative Services Agreements until all members are either transitioned to a legacy United entity or non-renewed. We expect the United Administrative Services Agreements to be in effect for approximately two years following the December 11, 2009 closing date of the transaction. Under the United Administrative Services Agreements, we provide claims processing, customer services, medical management, provider network access and other administrative services to United and certain of its affiliates. We recognize the revenue that we earn from providing these administrative services in the period these services are provided, and we report such revenue in the line item, Northeast administrative services fees, in our consolidated statements of operations.

 

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Also included in the Northeast administrative services fees is the amortization of the value of services to be provided under the United Administrative Services Agreements. In connection with the Northeast Sale, the United Administrative Services Agreements were fair valued at $48 million and recorded as deferred revenue. The deferred revenue is being amortized and recorded as Northeast administrative services fees using a level of effort approach. During the three and six months ended June 30, 2010, $24.6 million and $27.1 million, respectively, were amortized from deferred revenue and recorded as Northeast administrative services fees. In addition, we are entitled to 50% of the profits or losses associated with the Acquired Companies’ Medicare business for the year ending December 31, 2010 (subject to a cap of $10 million of profit or loss). As of June 30, 2010, we have accrued $4.6 million in connection with 50% of the profits associated with the Acquired Companies’ Medicare business. As part of the Northeast Sale, we retained certain financial responsibilities for the Acquired Companies for the period beginning on the closing date of the transaction and ending on the earlier of the second anniversary of the closing date and the date that the last United Administrative Services Agreement is terminated. Accordingly, the Northeast administrative services fees include a Quarterly Net Payment (QNP) to be paid to United in accordance with the terms of the Stock Purchase Agreement. The QNP is a defined term in the Stock Purchase Agreement and represents the net profit or loss from the wind-down of the Acquired Companies, as adjusted in accordance with the Stock Purchase Agreement. We report expenses we incur in providing these administrative services as a separate line item, Northeast administrative services expenses, in our consolidated statements of operations.

Under the Stock Purchase Agreement, United is required to pay us additional consideration as the members of the Acquired Companies transition to other United products to the extent such amounts exceed the initial minimum payment of $60 million that United made to us at closing (referred to as contingent membership renewal). As of June 30, 2010, $8.2 million is due from United in connection with contingent membership renewals and was recorded as an adjustment to the loss on sale of the Northeast health plan subsidiaries in the three and six months ended June 30, 2010.

Award of New TRICARE Contract

On May 13, 2010, we were awarded the new Managed Care Support Contract for the TRICARE North Region. We are currently the managed care contractor for the TRICARE North Region. This new contract is effective April 1, 2011. We are currently in the process of evaluating the accounting and reporting requirements and the impact to our consolidated results of operations and financial condition in 2011 from the new contract.

3.    SEGMENT INFORMATION

During the year ended December 31, 2009, we reviewed our reportable segments following the execution of the agreements for the Northeast Sale, which was completed on December 11, 2009. As a result of the Northeast Sale and the entry into the United Administrative Services Agreements to provide administrative services post-closing, we operate the Northeast business in a manner that is different than the rest of our health plans. Under the terms of the United Administrative Services Agreements, we assist United and its affiliates in operating the Acquired Companies, including winding-down the entities. The rest of our health plans are operated as continuing core health plans. Prior to this change in our reportable segments, the Western Region Operations and the Northeast Operations had been aggregated into a single reportable segment called Health Plan Services.

As a result of our review of the reportable segments, we expanded our reportable segments to Western Region Operations, Government Contracts and Northeast Operations. Our Western Region Operations reportable segment includes the operations conducted in California, Arizona and Oregon for our commercial, Medicare (including Part D) and Medicaid health plans, our health and life insurance companies and our behavioral health and pharmaceutical services subsidiaries. Our Government Contracts reportable segment has not changed and continues to include government-sponsored managed care plans through the TRICARE program and other health care-related government contracts. Our Government Contracts segment administers one large, multi-year managed health care government contract and other health care-related government contracts. For periods prior to the Northeast Sale, our Northeast Operations reportable segment included the operations conducted in

 

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Connecticut, New Jersey and New York for our commercial, Medicare and Medicaid health plans. For periods following the Northeast Sale, our Northeast Operations reportable segment includes the operations of our businesses that are providing administrative services to United and its affiliates pursuant to the United Administrative Services Agreements and the operations of Health Net Life in Connecticut and New Jersey prior to the renewal dates of the Transitioning HNL Members.

We evaluate performance and allocate resources based on segment pretax income. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 2 to the consolidated financial statements included in our Form 10-K, except that intersegment transactions are not eliminated.

Certain charges, including those related to our operations strategy and corporate overhead cost reduction efforts are excluded from the calculation of segment pretax income because they are not managed within the reportable segments.

Our segment information is as follows:

 

     Western Region
Operations
   Government
Contracts
   Northeast
Operations
    Corporate/
Other/
Eliminations
    Total
     (Dollars in millions)

Three Months Ended June 30, 2010

         

Revenues from external sources

   $ 2,507.9    $ 851.9    $ 82.6      $ (5.4 )   $ 3,437.0

Intersegment revenues

     13.0      0      0       (13.0     0

Segment pretax income (loss)

     58.1      41.5      (9.4     0       90.2

Segment assets

   $ 3,442.4    $ 548.5    $ 160.1      $ 0     $ 4,151.0

Three Months Ended June 30, 2009

         

Revenues from external sources

   $ 2,485.7    $ 832.1    $ 695.9      $ 0     $ 4,013.7

Intersegment revenues

     9.4      0.1      0.1       (9.6     0

Segment pretax income (loss)

     63.6      41.0      (23.2     0       81.4

Segment assets

   $ 3,201.2    $ 592.6    $ 1,009.2      $ 0     $ 4,803.0

Six Months Ended June 30, 2010

            

Revenues from external sources

   $ 5,038.6    $ 1,661.4    $ 158.5      $ (5.4 )   $ 6,853.1

Intersegment revenues

     25.1      0      0       (25.1     0

Segment pretax income (loss)

     98.8      79.5      (47.0     0       131.3

Segment assets

   $ 3,442.4    $ 548.5    $ 160.1      $ 0     $ 4,151.0

Six Months Ended June 30, 2009

            

Revenues from external sources

   $ 4,983.8    $ 1,591.4    $ 1,371.3      $ 0     $ 7,946.5

Intersegment revenues

     20.4      0.2      0.1        (20.7     0

Segment pretax income (loss)

     101.3      75.4      (26.4     0       150.3

Segment assets

   $ 3,201.2    $ 592.6    $ 1,009.2      $ 0     $ 4,803.0

Our health plan services premium revenue by line of business is as follows:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010    2009    2010    2009
     (Dollars in millions)

Commercial premium revenue

   $ 1,434.0    $ 1,916.8    $ 2,871.4    $ 3,841.3

Medicare premium revenue

     770.7      946.1      1,557.6      1,880.4

Medicaid premium revenue

     302.6      289.9      605.8      570.3
                           

Total Health Plan Services premiums

   $ 2,507.3    $ 3,152.8    $ 5,034.8    $ 6,292.0
                           

 

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A reconciliation of the total reportable segments’ measures of profit to our consolidated income from continuing operations before income taxes for the three and six months ended June 30, 2010 and 2009 is as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
          2010               2009              2010             2009      
     (Dollars in millions)  

Pretax income:

        

Western Region Operations

   $ 58.1      $ 63.6      $ 98.8      $ 101.3   

Government Contracts

     41.5        41.0        79.5        75.4   

Northeast Operations

     (9.4     (23.2     (47.0     (26.4
                                

Total segment pretax income

     90.2        81.4        131.3        150.3   

Corporate/Other

     (12.3     (17.6     (26.8     (62.4
                                

Income from continuing operations before income taxes as reported

   $ 77.9      $ 63.8      $ 104.5      $ 87.9   
                                

4.    INVESTMENTS

We are required to evaluate whether we have the intent to sell any of our debt securities or more likely than not will be required to sell any such debt security before its anticipated recovery. Additional disclosures are required for interim and annual periods about securities in unrealized loss positions for which an other-than-temporary impairment has or has not been recognized.

Investments classified as available-for-sale, which consist primarily of debt securities, are stated at fair value. Unrealized gains and losses are excluded from earnings and reported as other comprehensive income, net of income tax effects. The cost of investments sold is determined in accordance with the specific identification method, and realized gains and losses are included in net investment income. We periodically assess our available-for-sale investments for other-than-temporary impairment. Any such other-than-temporary impairment loss is recognized as a realized loss, which is recorded through earnings, if related to credit losses.

We classified $3.0 million and $20.9 million as investments available-for-sale-noncurrent as of June 30, 2010 and December 31, 2009, respectively, because we do not intend to sell and we believe it may take longer than a year for such impaired securities to recover. This classification does not affect the marketability or the valuation of the investments, which are reflected at their market value as of June 30, 2010 and December 31, 2009.

As of June 30, 2010 and December 31, 2009, the amortized cost, gross unrealized holding gains and losses, and fair value of our current investments available-for-sale and our investments available-for-sale-noncurrent, after giving effect to other-than-temporary impairments were as follows:

 

     June 30, 2010
     Amortized
Cost
   Gross
Unrealized
Holding
Gains
   Gross
Unrealized
Holding
Losses
    Carrying
Value
     (Dollars in millions)

Current:

          

Asset-backed securities

   $ 615.8    $ 13.6    $ (0.3   $ 629.1

U.S. government and agencies

     105.0      0.7      0        105.7

Obligations of states and other political subdivisions

     418.9      3.8      (1.5     421.2

Corporate debt securities

     319.8      12.0      (0.3     331.5

Other securities

     0      0      0       0
                            
   $ 1,459.5    $ 30.1    $ (2.1   $ 1,487.5
                            

 

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Table of Contents
     June 30, 2010
     Amortized
Cost
   Gross
Unrealized
Holding
Gains
   Gross
Unrealized
Holding
Losses
    Carrying
Value
     (Dollars in millions)

Noncurrent:

          

Asset-backed securities

   $ 0.6    $ 0    $ (0.1   $ 0.5

U.S. government and agencies

     0      0      0       0

Obligations of states and other political subdivisions

     0      0      0       0

Corporate debt securities

     2.9      0      (0.4 )     2.5

Other securities

     0      0      0       0
                            
   $ 3.5    $ 0    $ (0.5   $ 3.0
                            
     December 31, 2009
     Amortized
Cost
   Gross
Unrealized
Holding
Gains
   Gross
Unrealized
Holding
Losses
    Carrying
Value
     (Dollars in millions)

Current:

          

Asset-backed securities

   $ 546.8    $ 2.1    $ (4.9   $ 544.0

U.S. government and agencies

     128.1      0.1      (2.0     126.2

Obligations of states and other political subdivisions

     391.8      6.1      (2.6     395.3

Corporate debt securities

     305.4      6.2      (1.1     310.5

Other securities

     0      0.1      0       0.1
                            
   $ 1,372.1    $ 14.6    $ (10.6   $ 1,376.1
                            
     December 31, 2009
     Amortized
Cost
   Gross
Unrealized
Holding
Gains
   Gross
Unrealized
Holding
Losses
    Carrying
Value
     (Dollars in millions)

Noncurrent:

          

Asset-backed securities

   $ 23.6    $ 0    $ (2.7   $ 20.9

U.S. government and agencies

     0      0      0       0

Obligations of states and other political subdivisions

     0      0      0       0

Corporate debt securities

     0      0      0       0

Other securities

     0      0      0       0
                            
   $ 23.6    $ 0    $ (2.7   $ 20.9
                            

As of June 30, 2010, the contractual maturities of our current investments available-for-sale were as follows:

 

     Amortized
Cost
   Estimated
Fair Value
     (Dollars in millions)

Due in one year or less

   $ 21.4    $ 21.6

Due after one year through five years

     393.4      401.1

Due after five years through ten years

     255.1      261.6

Due after ten years

     173.8      174.1

Asset-backed securities

     615.8      629.1

Other securities

     0      0
             

Total available-for-sale

   $ 1,459.5    $ 1,487.5
             

 

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As of June 30, 2010, the contractual maturities of our investments available-for-sale—noncurrent were as follows:

 

     Amortized
Cost
   Estimated
Fair Value
     (Dollars in millions)

Due in one year or less

   $ 0    $ 0

Due after one year through five years

     2.9      2.5

Due after five years through ten years

     0      0

Due after ten years

     0      0

Asset-backed securities

     0.6      0.5

Other securities

     0      0
             

Total available-for-sale

   $ 3.5    $ 3.0
             

Proceeds from sales of investments available-for-sale during the three and six months ended June 30, 2010 were $215.9 million and $660.1 million, respectively. Gross realized gains and losses totaled $4.1 million and $0.1 million, respectively, for the three months ended June 30, 2010, and $12.5 million and $1.6 million, respectively, for the six months ended June 30, 2010. Proceeds from sales of investments available-for-sale during the three and six months ended June 30, 2009 were $307.4 million and $639.3 million, respectively. Gross realized gains and losses totaled $7.4 million and $1.4 million, respectively, for the three months ended June 30, 2009, and $18.3 million and $3.0 million, respectively, for the six months ended June 30, 2009.

The following table shows our current investments’ fair values and gross unrealized losses for individual securities that have been in a continuous loss position through June 30, 2010:

 

    Less than 12 Months     12 Months or More     Total  
    Fair
  Value  
  Unrealized
Losses
    Fair
Value
  Unrealized
Losses
    Fair
Value
  Unrealized
Losses
 
    (Dollars in millions)  

Asset-backed securities

  $ 22.5   $ (0.1   $ 7.3   $ (0.2   $ 29.8   $ (0.3

U.S. government and agencies

    4.0     0        0     0       4.0     0   

Obligation of states and other political subdivisions

    124.8     (1.4     2.9     (0.1     127.7     (1.5

Corporate debt securities

    18.3     (0.3     0     0       18.3     (0.3

Other securities

    0     0       0     0       0     0  
                                         
  $ 169.6   $ (1.8   $ 10.2   $ (0.3   $ 179.8   $ (2.1
                                         

The following table shows our noncurrent investments’ fair values and gross unrealized losses for individual securities that have been in a continuous loss position through June 30, 2010:

 

    Less than 12 Months     12 Months or More     Total  
    Fair
  Value  
  Unrealized
Losses
    Fair
Value
  Unrealized
Losses
    Fair
Value
  Unrealized
Losses
 
    (Dollars in millions)  

Asset-backed securities

  $ 0   $ 0     $ 0.5   $ (0.1   $ 0.5   $ (0.1

U.S. government and agencies

    0     0       0     0       0     0  

Obligation of states and other political subdivisions

    0     0       0     0       0     0  

Corporate debt securities

    2.5     (0.4 )     0     0       2.5     (0.4 )

Other securities

    0     0       0     0       0     0  
                                         
  $ 2.5   $ (0.4 )   $ 0.5   $ (0.1   $ 3.0   $ (0.5
                                         

 

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The following table shows the number of our individual securities included in current investments that have been in a continuous loss position at June 30, 2010:

 

     Less than
12 Months
   12 Months
or More
   Total

Asset-backed securities

   13    4    17

U.S. government and agencies

   1    0    1

Obligation of states and other political subdivisions

   22    3    25

Corporate debt securities

   5    0    5

Other securities

   0    0    0
              
   41    7    48
              

The following table shows the number of our individual securities included in noncurrent investments that have been in a continuous loss position at June 30, 2010:

 

     Less than
12 Months
   12 Months
or More
   Total

Asset-backed securities

   0    1    1

U.S. government and agencies

   0    0    0

Obligation of states and other political subdivisions

   0    0    0

Corporate debt securities

   2    0    2

Other securities

   0    0    0
              
   2    1    3
              

The following table shows our current investments’ fair values and gross unrealized losses for individual securities that have been in a continuous loss position through December 31, 2009:

 

    Less than 12 Months     12 Months or More     Total  
    Fair
Value
  Unrealized
Losses
    Fair
Value
  Unrealized
Losses
    Fair
Value
  Unrealized
Losses
 
    (Dollars in millions)  

Asset-backed securities

  $ 384.7   $ (4.2   $ 15.0   $ (0.7   $ 399.7   $ (4.9

U.S. government and agencies

    111.2     (2.0     0     0       111.2     (2.0

Obligation of states and other political subdivisions

    110.9     (2.2     11.2     (0.4     122.1     (2.6

Corporate debt securities

    110.3     (1.1     0     0       110.3     (1.1

Other securities

    0     0       0     0       0     0  
                                         
  $ 717.1   $ (9.5   $ 26.2   $ (1.1   $ 743.3   $ (10.6
                                         

The following table shows our noncurrent investments’ fair values and gross unrealized losses for individual securities that have been in a continuous loss position through December 31, 2009:

 

    Less than 12 Months     12 Months or More     Total  
    Fair
Value
  Unrealized
Losses
    Fair
Value
  Unrealized
Losses
    Fair
Value
  Unrealized
Losses
 
    (Dollars in millions)  

Asset-backed securities

  $ 0.6   $ (0.1   $ 20.3   $ (2.6   $ 20.9   $ (2.7

U.S. government and agencies

    0     0       0     0       0     0  

Obligation of states and other political subdivisions

    0     0       0     0       0     0  

Corporate debt securities

    0     0       0     0       0     0  

Other securities

    0     0       0     0       0     0  
                                         
  $ 0.6   $ (0.1   $ 20.3   $ (2.6   $ 20.9   $ (2.7
                                         

 

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The above referenced investments are interest-yielding debt securities of varying maturities. The unrealized loss position for these securities is due to market volatility. Generally, in a rising interest rate environment, the estimated fair value of fixed income securities would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of fixed income securities would be expected to increase. These securities may also be negatively impacted by illiquidity in the market.

The investments listed above are investment grade securities with an average rating of “AA” and “Aa2” 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. We have the ability and current intent to hold to recovery all securities with an unrealized loss position.

5.    STOCK REPURCHASE PROGRAM

We completed the Completed Stock Repurchase Program in February 2010. During the three months ended March 31, 2010, we repurchased 3,258,795 shares of our common stock for aggregate consideration of approximately $79.4 million under our Completed Stock Repurchase Program. On March 18, 2010, our Board of Directors authorized our New Stock Repurchase Program pursuant to which a total of $300 million of our common stock can be repurchased. During the three and six months ended June 30, 2010, we repurchased 2,880,861 shares and 2,952,851 shares, respectively, of our common stock for aggregate consideration of approximately $70.1 million and $71.9 million, respectively, under our New Stock Repurchase Program. The remaining authorization under our New Stock Repurchase Program as of June 30, 2010 was $228.1 million.

Subject to Board approval, we may repurchase our common stock under our New Stock Repurchase Program from time to time in privately negotiated transactions, through accelerated share repurchase programs or open market transactions, including pursuant to a trading plan in accordance with Rules 10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended. The timing of any repurchases and the actual number of share repurchases will depend on a variety of factors, including the stock price, corporate and regulatory requirements, restrictions under the Company’s debt obligations, and other market and economic conditions. The New Stock Repurchase Program may be suspended or discontinued at any time.

As of June 30, 2010, we had repurchased a cumulative aggregate of 43,695,730 shares of our common stock under our Completed Stock Repurchase Program (since its inception in 2002) and our New Stock Repurchase Program (since its inception in March 2010) at an average price of $32.77 per share for aggregate consideration of $1,431.7 million. We used net free cash available, including proceeds from the Northeast Sale, to fund the share repurchases.

6.    FINANCING ARRANGEMENTS

Termination of Amortizing Financing Facility

On May 26, 2010, we terminated our five-year non-interest bearing, $175 million amortizing financing facility with a non-U.S. lender that we entered into on December 19, 2007 by exercising our option to call the facility. In connection with the call, we recorded a $3.5 million pretax early debt extinguishment charge, which includes $7.7 million of unamortized imputed discount, an offsetting $7.7 million of unamortized deferred participation fee, a $3.0 million call premium and a $0.5 million write-off of remaining debt issuance costs. We also recognized a pretax loss of $5.4 million for the termination and settlement of the 2007 Swap (see Note 2), which is included in our administrative services fees and other income. We paid a total of $116.8 million, including the $3.0 million call premium, to retire the total outstanding debt. We used a combination of a $100 million draw on our revolving credit facility and operating cash to repay the amortizing financing facility.

Senior Notes

On May 18, 2007, we issued $300 million in aggregate principal amount of 6.375% Senior Notes due 2017. On May 31, 2007, we issued an additional $100 million of 6.375% Senior Notes due 2017 which were consolidated with, and constitute the same series as, the Senior Notes issued on May 18, 2007 (collectively,

 

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Senior Notes). The aggregate net proceeds from the issuance of the Senior Notes were $393.5 million and were used to repay outstanding debt.

The indenture governing the Senior Notes limits our ability to incur certain liens, or consolidate, merge or sell all or substantially all of our assets. In the event of the occurrence of both (1) a change of control of Health Net, Inc. and (2) a below investment grade rating by any two of Fitch, Inc., Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services within a specified period, we will be required to make an offer to purchase the Senior Notes at a price equal to 101% of the principal amount of the Senior Notes plus accrued and unpaid interest to the date of repurchase. As of June 30, 2010, no default or event of default had occurred under the indenture governing the Senior Notes.

The Senior Notes may be redeemed in whole at any time or in part from time to time, prior to maturity at our option, at a redemption price equal to the greater of:

 

   

100% of the principal amount of the Senior Notes then outstanding to be redeemed; or

 

   

the sum of the present values of the remaining scheduled payments of principal and interest on the Senior Notes to be redeemed (not including any portion of such payments of interest accrued to the date of redemption) discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the applicable treasury rate plus 30 basis points

plus, in each case, accrued and unpaid interest on the principal amount being redeemed to the redemption date.

Each of the following will be an Event of Default under the indenture governing the Senior Notes:

 

   

failure to pay interest for 30 days after the date payment is due and payable; provided that an extension of an interest payment period by us in accordance with the terms of the Senior Notes shall not constitute a failure to pay interest;

 

   

failure to pay principal or premium, if any, on any note when due, either at maturity, upon any redemption, by declaration or otherwise;

 

   

failure to perform any other covenant or agreement in the notes or indenture for a period of 60 days after notice that performance was required;

 

   

(A) our failure or the failure of any of our subsidiaries to pay indebtedness for money we borrowed or any of our subsidiaries borrowed in an aggregate principal amount of at least $50,000,000, at the later of final maturity and the expiration of any related applicable grace period and such defaulted payment shall not have been made, waived or extended within 30 days after notice or (B) acceleration of the maturity of indebtedness for money we borrowed or any of our subsidiaries borrowed in an aggregate principal amount of at least $50,000,000, 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.

Our Senior Notes payable balances were $398.6 million and $398.5 million as of June 30, 2010 and December 31, 2009, respectively.

Revolving Credit Facility

On June 25, 2007, we entered into a $900 million five-year revolving credit facility with Bank of America, N.A. as Administrative Agent, Swingline Lender, and L/C Issuer, and the other lenders party thereto. We entered into an amendment to the credit facility on April 29, 2008, which was administrative in nature. As of June 30, 2010, $100.0 million was outstanding under our revolving credit facility and the maximum amount available for borrowing under the revolving credit facility was $484.1 million (see “—Letters of Credit” below).

 

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Amounts outstanding under our revolving credit facility will bear interest, at our option, at (a) the base rate, which is a rate per annum equal to the greater of (i) the federal funds rate plus one-half of one percent and (ii) Bank of America’s prime rate (as such term is defined in the facility), (b) a competitive bid rate solicited from the syndicate of banks, or (c) the British Bankers Association LIBOR rate (as such term is defined in the facility), plus an applicable margin, which is initially 70 basis points per annum and is subject to adjustment according to our credit ratings, as specified in the facility.

Our revolving credit facility includes, among other customary terms and conditions, limitations (subject to specified exclusions) on our and our subsidiaries’ ability to incur debt; create liens; engage in certain mergers, consolidations and acquisitions; sell or transfer assets; enter into agreements which restrict the ability to pay dividends or make or repay loans or advances; make investments, loans, and advances; engage in transactions with affiliates; and make dividends. In addition, we are required to maintain a specified consolidated leverage ratio and consolidated fixed charge coverage ratio throughout the term of the revolving credit facility.

Our revolving credit facility contains customary events of default, including nonpayment of principal or other amounts when due; breach of covenants; inaccuracy of representations and warranties; cross-default and/or cross-acceleration to other indebtedness of the Company or our subsidiaries in excess of $50 million; certain ERISA-related events; noncompliance by us or any of our subsidiaries with any material term or provision of the HMO Regulations or Insurance Regulations (as each such term is defined in the facility); certain voluntary and involuntary bankruptcy events; inability to pay debts; undischarged, uninsured judgments greater than $50 million against us and/or our subsidiaries; actual or asserted invalidity of any loan document; and a change of control. If an event of default occurs and is continuing under the revolving credit facility, the lenders thereunder may, among other things, terminate their obligations under the facility and require us to repay all amounts owed thereunder.

Letters of Credit

We can obtain letters of credit in an aggregate amount of $400 million under our revolving credit facility. The maximum amount available for borrowing under our revolving credit facility is reduced by the dollar amount of any outstanding letters of credit. As of June 30, 2010 and December 31, 2009, we had outstanding letters of credit for $315.9 million and $321.3 million, respectively, resulting in a maximum amount available for borrowing under the revolving credit facility of $484.1 million and $478.7 million, respectively. As of June 30, 2010 and December 31, 2009, no amounts had been drawn on any of these letters of credit.

7.    FAIR VALUE MEASUREMENTS

We record assets and liabilities at fair value in the consolidated balance sheets and categorize them based upon the level of judgment associated with the inputs used to measure their fair value and the level of market price observability. We also estimate fair value when the volume and level of activity for the asset or liability have significantly decreased or in those circumstances that indicate when a transaction is not orderly.

Investments measured and reported at fair value using Level inputs are classified and disclosed in one of the following categories:

Level 1—Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level 1 include U.S. Treasury securities and listed equities. We do not adjust the quoted price for these investments, even in situations where we hold a large position and a sale could reasonably impact the quoted price.

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 which 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

 

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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, municipal bonds, auction rate securities and interest rate swap asset.

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. The investments included in Level 3 are auction rate securities which have experienced failed auctions at one time or are experiencing failed auctions and thus have minimal liquidity. These bonds have frequent reset of coupon rates and have extended to the legal final maturity. The coupons are based on a margin plus a LIBOR rate and continue to pay above market rates. As with most variable or floating rate securities, we believe that based on a market approach, the fair values of these securities are equal to their par values due to the short time periods between coupon resets and based on each issuer’s credit worthiness.

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 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 June 30, 2010

              

Assets:

              

Investments—available-for-sale

              

Asset-backed debt securities:

              

Residential mortgage-backed securities

   $ 0    $ 543.7    $ 0.5    $ 0    $ 544.2

Commercial mortgage-backed securities

     0      66.1      0      0      66.1

Other asset-backed securities

     0      19.3      0      0      19.3

U.S. government and agencies:

              

U.S. Treasury securities

     16.0      0      0      0      16.0

U.S. Agency securities

     0      89.7      0      0      89.7

Obligations of states and other political subdivisions

     0      411.2      0      10.0      421.2

Corporate debt securities

     0      331.5      2.5      0      334.0

Other securities

     0      0      0      0      0
                                  

Total assets at fair value

   $ 16.0    $ 1,461.5    $ 3.0    $ 10.0    $ 1,490.5
                                  

 

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     Level 1    Level 2-
current
   Level 2-
noncurrent
   Level 3    Total

As of December 31, 2009

              

Assets:

              

Investments—available-for-sale

              

Asset-backed debt securities:

              

Residential mortgage-backed securities

   $ 0    $ 498.5    $ 0.6    $ 0    $ 499.1

Commercial mortgage-backed securities

     0      42.2      20.3      0      62.5

Other asset-backed securities

     0      3.3      0      0      3.3

U.S. government and agencies:

              

U.S. Treasury securities

     26.7      0      0      0      26.7

U.S. Agency securities

     0      99.5      0      0      99.5

Obligations of states and other political subdivisions

     0      385.3      0      10.0      395.3

Corporate debt securities

     0      310.5      0      0      310.5

Other securities

     0.1      0      0      0      0.1
                                  
     26.8      1,339.3      20.9      10.0      1,397.0
                                  

Interest rate swap net asset

     0      4.5      0      0      4.5
                                  

Total assets at fair value

   $ 26.8    $ 1,343.8    $ 20.9    $ 10.0    $ 1,401.5
                                  

We had no transfers between Levels 1 and 2 of financial assets or liabilities that are fair valued on a recurring basis during the three and six months ended June 30, 2010 and 2009. In determining when transfers between levels are recognized, our accounting policy is to recognize the transfers based on the actual date of the event or change in circumstances that caused the transfer.

The changes in the balances of Level 3 financial assets that are fair valued on a recurring basis for the three and six months ended June 30, 2010 and 2009 were as follows (dollars in millions):

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
          2010              2009             2010            2009    

Beginning balance on April 1 and January 1

   $ 10.0    $ 10.2    $ 10.0    $ 10.2

Total gains and losses

           

Realized in net income

     0      0      0      0

Unrealized in accumulated other comprehensive income

     0      0      0      0

Purchases, sales, issuances and settlements

     0      0      0      0

Transfers into (out of) Level 3

     0      0      0      0
                           

Ending balance

   $ 10.0    $ 10.2    $ 10.0    $ 10.2
                           

Change in unrealized gains (losses) included in net income related to assets still held

   $ 0    $ 0    $ 0    $ 0
                           

The following table presents information about financial assets measured at fair value on a non-recurring basis during the three and six months ended June 30, 2010 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    Level 3    Total Loss  

As of June 30, 2010

           

Goodwill—Northeast Operations

   $ 0    $ 0    $ 0    $ (6.0
                             

 

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The changes in the balances of Level 3 financial assets that are fair valued on a non-recurring basis for the three and six months ended June 30, 2010 were as follows (dollars in millions):

 

     Three Months Ended
June 30, 2010
    Six Months Ended
June 30, 2010
 

Beginning Northeast Operations’ goodwill balance on April 1 and January 1

   $ 6.0      $ 6.0   

Impairment related to Northeast Operations

     (6.0     (6.0
                

Ending Northeast Operations’ goodwill balance

   $ 0      $ 0   
                

See Note 2 for a discussion on the goodwill valuation and the impairment of the Northeast Operations’ goodwill.

8.    LEGAL PROCEEDINGS

AmCareco Litigation

We are a defendant in two related litigation matters pending in Louisiana and Texas state courts, both of which relate to claims asserted by three separate state receivers overseeing the liquidation of three health plans in Louisiana, Texas and Oklahoma that were previously owned by our former subsidiary, Foundation Health Corporation (FHC), which merged into Health Net, Inc. in January 2001. In 1999, FHC sold its interest in these plans to AmCareco, Inc. (AmCareco). We retained a minority interest in the three plans after the sale. Thereafter, the three plans became known as AmCare of Louisiana (AmCare-LA), AmCare of Oklahoma (AmCare-OK) and AmCare of Texas (AmCare-TX). In 2002, three years after the sale of the plans to AmCareco, each of the AmCare plans was placed under state oversight and ultimately into receivership. The receivers for each of the AmCare plans filed suit against us contending that, among other things, we were responsible as a “controlling shareholder” of AmCareco following the sale of the plans for post-acquisition misconduct by AmCareco and others that caused the three health plans to fail and ultimately be placed into receivership.

On June 16, 2005, a consolidated trial of the claims asserted against us by the three receivers commenced in state court in Baton Rouge, Louisiana. The claims of the receiver for AmCare-TX were tried before a jury and the claims of the receivers for the AmCare-LA and AmCare-OK were tried before the judge in the same proceeding. On June 30, 2005, the jury considering the claims of the receiver for AmCare-TX returned a verdict against us in the amount of $117.4 million, consisting of $52.4 million in compensatory damages and $65 million in punitive damages. The Court later reduced the compensatory and punitive damages awards to $36.7 million and $45.5 million, respectively, and entered judgments against us in those amounts.

The proceedings regarding the claims of the receivers for AmCare-LA and AmCare-OK concluded on July 8, 2005. On November 4, 2005, the Court issued separate judgments on those claims and awarded $9.5 million in compensatory damages to AmCare-LA and $17 million in compensatory damages to AmCare-OK, respectively. The Court later denied requests by AmCare-LA and AmCare-OK for attorneys’ fees and punitive damages. We thereafter appealed both judgments, and the receivers for AmCare-LA and AmCare-OK each appealed the orders denying them attorneys’ fees and punitive damages.

On December 30, 2008, the Court of Appeal issued its judgment on each of the appeals. It reversed in their entirety the trial court’s judgments in favor of the AmCare-TX and AmCare-OK receivers, and entered judgment in our favor against those receivers, finding that the receivers’ claims failed as a matter of law. As a result, those receivers’ cross appeals were rendered moot. The Court of Appeal also reversed the trial court judgment in favor of the AmCare-LA receiver, with the exception of a single breach of contract claim, on which it entered judgment in favor of the AmCare-LA receiver in the amount of $2 million. On January 14, 2009, the three receivers filed a request for rehearing by the Court of Appeal. On February 13, 2009, the Court of Appeal denied the request for a rehearing. Following the Court of Appeal’s denial of the requests for rehearing, each of the

 

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receivers filed applications for a writ with the Louisiana Supreme Court. On December 18, 2009, the Louisiana Supreme Court granted the receivers’ writs, and oral argument was held on March 16, 2010.

In light of the original trial court judgments against us, on November 3, 2006, we filed a complaint in the U.S. District Court for the Middle District of Louisiana and simultaneously filed an identical suit in the 19th Judicial District Court in East Baton Rouge Parish seeking to nullify the three judgments that were rendered against us on the grounds of ill practice which resulted in the judgments entered. We have alleged that the judgments and other prejudicial rulings rendered in these cases were the result of impermissible ex parté contacts between the receivers, their counsel and the trial court during the course of the litigation. Preliminary motions and exceptions have been filed by the receivers for AmCare-TX, AmCare-OK and AmCare-LA seeking dismissal of our claim for nullification on various grounds. The federal judge dismissed our federal complaint and we appealed to the U.S. Fifth Circuit Court of Appeals. On July 8, 2008, the Fifth Circuit issued an opinion affirming the district court’s dismissal of the federal complaint, albeit on different legal grounds from those relied upon by the district court. The state court nullity action has been stayed pending the resolution of our jurisdictional appeal in the federal action and has remained stayed during the pendency of the appeal of the underlying judgments.

We intend to vigorously defend ourselves against the claims brought in these matters; however, these proceedings are subject to many uncertainties, and, given their complexity and scope, their final outcome, including the outcome of appeals, cannot be predicted at this time. It is possible that in a particular quarter or annual period our financial condition, results of operations, cash flow and/or liquidity could be materially and adversely affected by an ultimate unfavorable resolution of, or development in, any or all of these proceedings depending, in part, upon our financial condition, results of operations, cash flow or liquidity in such period. However, at this time, management believes that the ultimate outcome of these proceedings should not have a material adverse effect on our financial condition, results of operations, cash flow and liquidity.

Miscellaneous Proceedings

In the ordinary course of our business operations, we are also subject to periodic reviews and audits by various regulatory agencies with respect to our compliance with a wide variety of rules and regulations applicable to our business, including, without limitation, the Health Insurance Portability and Accountability Act of 1996, or HIPAA, rules relating to pre-authorization penalties, payment of out-of-network claims and timely review of grievances and appeals, which may result in remediation of certain claims and the assessment of regulatory fines or penalties. From time to time, we receive subpoenas and other requests for information from such regulatory agencies, as well as from state attorneys general. There also continues to be heightened review by regulatory authorities of, and increased litigation regarding, the health care industry’s business practices, including, without limitation, premium rate increases, utilization management, appeal and grievance processing, information privacy, rescission of insurance coverage and claims payment practices.

In addition, in the ordinary course of our business operations, we are party to various other legal proceedings, including, without limitation, litigation arising out of our general business activities, such as contract disputes, employment litigation, wage and hour claims, real estate and intellectual property claims, claims brought by members seeking coverage or additional reimbursement for services allegedly rendered to our members, but which allegedly were denied, underpaid or not paid, and claims arising out of the acquisition or divestiture of various business units or other assets. We are also subject to claims relating to the performance of contractual obligations to providers, members, employer groups and others, including the alleged failure to properly pay claims and challenges to the manner in which we process claims. In addition, we are subject to claims relating to the insurance industry in general, such as claims relating to reinsurance agreements, information security breaches, rescission of coverage and other types of insurance coverage obligations.

We intend to vigorously defend ourselves against these legal and regulatory proceedings to which we are currently a party; however, these other proceedings are subject to many uncertainties. It is possible that in a particular quarter or annual period our financial condition, results of operations, cash flow and/or liquidity could

 

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be materially adversely affected by an ultimate unfavorable resolution of or development in these or any other legal and/or regulatory proceedings depending, in part, upon our financial condition, results of operations, cash flow or liquidity in such period. Management believes that the ultimate outcome of any of these regulatory and legal proceedings currently pending against us, after consideration of applicable reserves and potentially available insurance coverage benefits, should not have a material adverse effect on our financial condition, results of operations, cash flow and liquidity.

Potential Settlements

We regularly evaluate legal proceedings and regulatory matters pending against us, including those described above in this Note 8, to determine if settlement of such matters would be in the best interests of the Company and its stockholders. We record reserves and accrue costs for certain significant legal proceedings and regulatory matters which represent our best estimate of the probable loss, including related future legal costs, for such matters, both known and incurred but not reported. However, our recorded amounts might differ materially from the ultimate amount of any such costs. The costs associated with any settlement of the various legal proceedings and regulatory matters to which we are or may be subject from time to time, including those described above in this Note 8, could be substantial and, in certain cases, could result in a significant earnings charge in any particular quarter in which we enter into a settlement agreement and could have a material adverse effect on our financial condition, results of operations, cash flow and/or liquidity.

In 2007, in connection with a settlement agreement on a class action litigation, we established a reserve of $40 million to compensate certain eligible class members who can prove that they paid out of pocket costs for certain out of network claims or who have received balance bills for such services. In June 2010, based on updated information and developments during the second quarter of 2010, we reduced the settlement reserve to $26 million. This increased net income per diluted share by $0.08 and $0.08 for the three and six months ended June 30, 2010, respectively. Given the complexity and scope of the settlement, it is possible that the reserve amount may be further adjusted in the future.

9.    VARIABLE INTEREST ENTITIES

Effective January 1, 2010, we adopted the new accounting rules on consolidation of variable interest entities (VIE). In order to determine if the Company is the primary beneficiary and must consolidate the entity we evaluate the following:

 

   

the structure and purpose of the entity;

 

   

the risks and rewards created by and shared through the entity; and

 

   

the entity’s ability to direct the activities, receive its benefits and absorb its losses.

We are required to reconsider the initial determination of whether an entity is a VIE if certain types of events (“reconsideration events”) occur. If one or more reconsideration events occur, the holder of a variable interest in a previously determined VIE must reconsider whether that entity continues to be a VIE. Likewise, the holder of a variable interest in an entity that previously was not a VIE must reconsider whether the entity has become a VIE. The Company performs ongoing qualitative analyses of its involvement with these variable interest entities to determine if consolidation is required.

The adoption of these new rules had no impact on our previous accounting for the variable interest entities as described below.

Effective upon the closing date of the Northeast Sale (see Notes 1, 2 and 3), in accordance with the consolidation rules in effect as of December 31, 2009, we determined that the Acquired Companies were variable interest entities of which we were not the primary beneficiary and we did not hold a controlling financial interest in those companies. Accordingly, we deconsolidated the Acquired Companies as of December 31, 2009. We

 

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re-evaluated the consolidation of these variable interest entities upon adoption of the new accounting rules and have determined that we are not the primary beneficiary and we do not hold a controlling financial interest in those companies. Accordingly, these variable interest entities continued to be deconsolidated from our financial results as of March 31, 2010. We noted no reconsideration events during the three months ended June 30, 2010; accordingly, the Acquired Companies continue to be deconsolidated from our financial results as of June 30, 2010. Factors considered in determining deconsolidation include our loss of effective control over the Acquired Companies given their sale and our concurrent entry into the United Administrative Service Agreements, which provided United the power to direct significant activities of the Acquired Companies. Also, both the Company and United share in the exposure from obligations to absorb losses, however, United is the primary obligor of these obligations. We retained certain financial responsibilities for the Acquired Companies for the period beginning on the closing date and ending on the earlier of the second anniversary of the closing date and the date that the last United Administrative Services Agreement is terminated. Under the United Administrative Services Agreements, we provide claims processing, customer services, medical management, provider network access and other administrative services to United and certain of its affiliates. As part of the transaction, we have provided a guarantee to United to perform under the provisions of the United Administrative Service Agreements and have entered into a covenant-not-to-compete.

The total revenues were $588.0 million and $671.3 million and net losses were $30.1 million and $16.0 million related to the Acquired Companies for the three months ended June 30, 2010 and 2009, respectively. The total revenues were $1,253.1 million and $1,321.6 million and net losses were $55.9 million and $21.9 million related to the Acquired Companies for the six months ended June 30, 2010 and 2009, respectively. There are no assets or liabilities from these variable interest entities recorded on our consolidated financial statements as of June 30, 2010 or December 31, 2009, except for the net balances due to the purchaser of $34.0 million, as of June 30, 2010.

In conjunction with our entrance into the amortizing financing facility (see Note 6), we formed certain entities for the purpose of facilitating the financing facility. We act as managing general partner, sole member or sole shareholder of these entities, as the case may be, and the non-U.S. lender acted as a limited partner of one of these entities until we terminated our amortizing financing facility in May 2010 (see Note 6). These entities are primarily funded with the initial financing from the non-U.S. lender of $175 million and inter-company borrowings that totaled $1.2 billion as of June 30, 2010. The inter-company borrowings are fully eliminated in our consolidated financial statements. The entities’ net obligation is not required to be collateralized. We had consolidated these variable interest entities as of December 31, 2009, and we had continued to consolidate these entities upon the adoption of the new consolidation rules since we are their primary beneficiary and we held a controlling financial interest. Factors considered in determining to consolidate include the Company’s effective control over the entities, given our power to direct significant activities of the entities as a managing general partner. Also, though both the Company and the limited partner had exposure to obligations to absorb losses/residual return, the Company had a more significant exposure from the risk of loss/residual return.

When we terminated our amortizing financing facility and fully repaid the outstanding balance in May, 2010, we determined that this constituted a reconsideration event and reevaluated the VIE status of these entities. Due to our termination of our amortizing financing facility, we have repaid the outstanding balance in full and own 100% of the controlling financial interest of these entities as of June 30, 2010. Accordingly, we continue to be their primary beneficiary and have consolidated these entities with our financial results as of June 30, 2010.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

CAUTIONARY STATEMENTS

The following discussion and other portions of this Quarterly Report on Form 10-Q contain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and Section 27A of the Securities Act of 1933, as amended, regarding our business, financial condition and results of operations. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with these safe-harbor provisions. These forward-looking statements involve risks and uncertainties. All statements other than statements of historical information provided or incorporated by reference herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “may,” “should,” “could,” “estimate” and “intend” and other similar expressions are intended to identify forward-looking statements. Managed health care companies operate in a highly competitive, constantly changing environment that is significantly influenced by, among other things, aggressive marketing and pricing practices of competitors and regulatory oversight. Factors that could cause our actual results to differ materially from those reflected in forward-looking statements include, but are not limited to, the factors set forth under the heading “Risk Factors” in our Form 10-K and this Form 10-Q, and the risks discussed in our other filings from time to time with the SEC.

Any or all forward-looking statements in this Form 10-Q and in any other public filings or statements we make may turn out to be incorrect. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many of the factors discussed in our filings with the SEC may impact future results. These factors should be considered in conjunction with any discussion of operations or results by us or our representatives, including any forward-looking discussion, as well as comments contained in press releases, presentations to securities analysts or investors or other communications by us or our representatives. You should not place undue reliance on any forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date thereof. Except as may be required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that arise after the date of this report.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations, together with the consolidated financial statements included elsewhere in this report, should be read in their entirety since they contain detailed information that is important to understanding Health Net, Inc. and its subsidiaries’ results of operations and financial condition.

OVERVIEW

General

We are an integrated managed care organization that delivers managed health care services through health plans and government sponsored managed care plans. We are among the nation’s largest publicly traded managed health care companies. Our mission is to help people be healthy, secure and comfortable. We provide health benefits to approximately 6.0 million individuals across the country through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as “Part D”), Medicaid, TRICARE and Veterans Affairs programs. Our behavioral health services subsidiary, Managed Health Network (MHN), provides behavioral health, substance abuse and employee assistance programs to approximately 5.5 million individuals, including our own health plan members. Our subsidiaries also offer managed health care products related to prescription drugs, and offer managed health care product coordination for multi-region employers and administrative services for medical groups and self-funded benefits programs.

 

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How We Report Our Results

We expanded our reportable segments in the quarter ended September 30, 2009 following the execution of the Stock Purchase Agreement in connection with the Northeast Sale. We currently operate within three reportable segments, Western Region Operations, Government Contracts and Northeast Operations, each of which is described below. Prior to the quarter ended September 30, 2009, we operated within two reportable segments, Health Plan Services and Government Contracts.

Our health plan services are provided under our Western Region Operations reportable segment, which includes the operations of our commercial, Medicare (including Part D) and Medicaid health plans, primarily in Arizona, California and Oregon as well as the operations of our health and life insurance companies, and our behavioral health and pharmaceutical services subsidiaries in several states including Arizona, California and Oregon. We have approximately 3.0 million medical members (including Medicare Part D members) in our Western Region Operations reportable segment.

Our Government Contracts segment includes our government-sponsored managed care federal contract with the U.S. Department of Defense (the Department of Defense or DoD) under the TRICARE program in the North Region and other health care related government contracts. Under the TRICARE contract for the North Region, we provide health care services to approximately 3.1 million Military Health System (MHS) eligible beneficiaries (active duty personnel and TRICARE/Medicare dual eligible beneficiaries), including 1.8 million TRICARE eligibles for whom we provide health care and administrative services and 1.3 million other MHS-eligible beneficiaries for whom we provide administrative services only, or ASO. We also provide behavioral health services to military families under the Department of Defense Military Family Life Counseling contract. On May 13, 2010, we were awarded the new Managed Care Support Contract for the TRICARE North Region. This new contract is effective April 1, 2011. We are currently evaluating our reporting requirements and the impact to our consolidated results of operations and financial condition in 2011 from the new contract.

For periods prior to the Northeast Sale, our Northeast Operations reportable segment included our commercial, Medicare and Medicaid health plans, the operations of our HMOs in Connecticut, New York and New Jersey and our New York insurance company. Following the Northeast Sale, our Northeast Operations reportable segment includes the operations of our businesses that are providing administrative services to United and its affiliates pursuant to the United Administrative Services Agreements, as well as the operations of Health Net Life in Connecticut and New Jersey prior to the renewal dates of the Transitioning HNL Members.

How We Measure Our Profitability

Our profitability depends in large part on our ability to, among other things, effectively price our health care products; manage health care costs, including reserve estimates and pharmacy costs; contract with health care providers; attract and retain members; and manage our general and administrative (G&A) and selling expenses. In addition, factors such as state and federal health reform legislation and regulation, competition and general economic conditions affect our operations and profitability. The effect of escalating health care costs, as well as any changes in our ability to negotiate competitive rates with our providers, may impose further risks to our ability to profitably underwrite our business, and may have a material impact on our business, financial condition or results of operations.

We measure our Western Region Operations reportable segment profitability based on medical care ratio (MCR) and pretax income. The MCR is calculated as health plan services expense (excluding depreciation and amortization) divided by health plan services premiums. The pretax income is calculated as health plan services premiums and administrative services fees and other income less health plan services expense and G&A and other net expenses. See “—Results of Operations—Western Region Operations Reportable Segment—Western Region Operations Segment Results” for a calculation of the MCR and pretax income.

 

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Health plan services premiums include health maintenance organization (HMO), point of service (POS) and preferred provider organization (PPO) premiums from employer groups and individuals and from Medicare recipients who have purchased supplemental benefit coverage (which premiums are based on a predetermined prepaid fee), Medicaid revenues based on multi-year contracts to provide care to Medicaid recipients, and revenue under Medicare risk contracts, including Medicare Part D, to provide care to enrolled Medicare recipients. Medicare revenue can also include amounts for risk factor adjustments and additional premiums that we charge in some places to members who purchase our Medicare risk plans. The amount of premiums we earn in a given period is driven by the rates we charge and enrollment levels. Administrative services fees and other income primarily include revenue for administrative services such as claims processing, customer service, medical management, provider network access and other administrative services. Health plan services expense includes medical and related costs for health services provided to our members, including physician services, hospital and related professional services, outpatient care, and pharmacy benefit costs. These expenses are impacted by unit costs and utilization rates. Unit costs represent the health care cost per visit, and the utilization rates represent the volume of health care consumption by our members.

G&A expenses include those costs related to employees and benefits, consulting and professional fees, marketing, premium taxes and assessments, occupancy costs and litigation and regulatory-related costs. Such costs are driven by membership levels, introduction of new products, system consolidations, outsourcing activities and compliance requirements for changing regulations. These expenses also include expenses associated with corporate shared services and other costs to reflect the fact that such expenses are incurred primarily to support health plan services. Selling expenses consist of external broker commission expenses and generally vary with premium volume.

We measure our Government Contracts segment profitability based on government contracts cost ratio and pretax income. The government contracts cost ratio is calculated as government contracts cost divided by government contracts revenue. The pretax income is calculated as government contracts revenue less government contracts cost. See “—Results of Operations—Government Contracts Reportable Segment—Government Contract Segment Results” for a calculation of the government contracts ratio and pretax income.

Government Contracts revenue is made up of two major components: health care and administrative services. The health care component includes revenue recorded for health care costs for the provision of services to our members, including paid claims and estimated incurred but not reported claims (IBNR) expenses for which we are at risk, and underwriting fees earned for providing the health care and assuming underwriting risk in the delivery of care. The administrative services component encompasses fees received for all other services provided to both the government customer and to beneficiaries, including services such as medical management, claims processing, enrollment, customer services and other services unique to the managed care support contract with the government. Government Contracts revenue and expenses include the impact from underruns and overruns relative to our target cost under the applicable contracts.

We measure our Northeast Operations segment profitability based on pretax income. The pretax income is calculated as Northeast Operations segment total revenues, including Northeast administrative services fees, less Northeast segment total expenses, including Northeast administrative services expenses. Under the United Administrative Services Agreements, we provide claims processing, customer services, medical management, provider network access and other administrative services. Administrative services fees are recognized as revenue in the period services are provided. See “—Results of Operations—Northeast Operations Reportable Segment Results” for a calculation of our pretax income.

Health Care Reform Legislation

During the first quarter of 2010, the U.S. Congress passed and the President signed into law the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, which will result in significant changes to the U.S. health care system and alter the dynamics of the health care insurance industry. The provisions of the new legislation include, among others, imposing significant new taxes and fees on

 

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health insurers, including an excise tax on high premium insurance policies, stipulating a minimum medical care ratio, new annual fees on companies in our industry which may not be deductible for income tax purposes, limiting Medicare Advantage payment rates, mandated additional benefits, elimination of medical underwriting for medical insurance coverage decisions, or “guaranteed issue,” increased restrictions on rescinding coverage, prohibitions on some annual and all lifetime limits on amounts paid on behalf of or to our members, requirements that limit the ability of health plans to vary premiums based on assessments of underlying risk, limitations on the amount of compensation paid to health insurance executives that is tax deductible, additional regulations governing premium rate increase requests, requirements that individuals obtain coverage and the creation of government controlled “exchanges” where individuals and small business groups may purchase health coverage.

Some provisions of the health care reform legislation become effective in 2010, including those that increase the restrictions on rescinding coverage, those that bar health insurance companies from placing lifetime limits on “essential benefits,” which are only partially defined, and those that prohibit annual limits below specified caps for some benefit plans. However, some of the potentially more significant changes, including the annual fees on health insurance companies, the excise tax on high premium insurance policies, the guaranteed issue requirements, the requirement that individuals obtain coverage, and the creation of exchanges, as described above, do not become effective until 2014 or later. Implementation of other provisions generally varies from as early as enactment or six months from the date of enactment to as late as 2018. In advance of the September 2010 federal implementation date, we have voluntarily provided the option of continuing coverage for adult dependents up to age 26 who are currently enrolled on their parents’ health care policies. In addition, we have reaffirmed our existing policy against rescinding members without approval from an external third-party reviewer, which has been in effect since 2007 and exceeds the requirements of the health care reform legislation.

Various aspects of the health care reform legislation could have an adverse impact on our revenues and the cost of operating our business. For example, the new legislation will lower the rates of Medicare payments we receive, may make it more difficult for us to attract and retain members, increase the amount of certain taxes and fees we pay, impose a sales tax on medical device manufacturers and increase the amount of fees pharmaceutical manufacturers pay (both of which in turn could increase our medical costs), require rebates related to minimum medical care ratios and require premium rate review. We could also face additional competition, as competitors seize on opportunities to expand their business as a result of the new legislation though there remains considerable uncertainty about the impact of these changes on the health insurance market as a whole and what actions our competitors could take. Because of the magnitude, scope and complexity of the new legislation, we also will need to dedicate substantial resources and incur material expenses to implement the new legislation, including implementing the current and future regulations that will provide guidance and clarification on important parts of the legislation. Any delay or failure by us to execute our operational and strategic initiatives with respect to health care reform or otherwise appropriately react to the new legislation and implementing regulations could result in operational disruptions, disputes with our providers, regulatory issues, damage to our existing or potential member relationships or other adverse consequences. Moreover, there are numerous steps required to implement this new legislation, with clarifying regulations and other guidance expected over several years, including, for example, regulation necessary to determine the methodology of calculating minimum medical care ratios. New guidance on certain parts of the federal reform legislation has been issued (for example, guidance relating to guaranteed issuance of coverage to children under age 19, coverage for preventive health services without cost-sharing, pre-existing conditions exclusions, lifetime and annual limits, rescissions and patient protections), but we are still awaiting further guidance on a number of key topics such as the determination of medical loss ratios, rate review and essential benefits. Various health insurance reform proposals are also emerging at the state level. Additionally, in California, the ongoing state budget deficits continue to threaten funding for the current Medicaid program and Children’s Insurance Program, and, accordingly, the future expansion of these programs authorized by federal health care reform is uncertain. Due to the unsettled nature of these reforms and the numerous steps required to implement them, we cannot predict how future regulations and laws, including state laws, implementing the new legislation will impact our business. As a result, although we continue to evaluate the impacts of the new legislation, it could have a material adverse effect on our business, financial condition and results of operations.

 

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In addition, federal and state governmental authorities also are considering additional legislation and regulations which could negatively impact us. Among other potentially new laws and regulations, federal and state regulators are considering new requirements that would restrict our ability to implement changes to our premium rates. These changes could lower the amount of premiums increases we receive or extend the amount of time that it takes for us to obtain regulatory approval to implement increases in our premium rates. We cannot predict whether additional legislation or regulations will be enacted at the federal and state levels, and if they are, what provisions they will contain or what effect they will have on us.

Recent Developments

On May 13, 2010, we were awarded the new Managed Care Support Contract for the TRICARE North Region. We are currently the managed care contractor for the TRICARE North Region. The total potential contract value including a ten-month transition period and five one-year option periods for health care delivery, plus a transition-out period, is approximately $17.2 billion. The new contract is effective April 1, 2011.

RESULTS OF OPERATIONS

Consolidated Results

The table below and the discussion that follows summarize our results of operations for the three and six months ended June 30, 2010 and 2009.

 

     Three Months Ended
June 30,
   Six Months Ended
June  30,
     2010     2009    2010     2009
     (Dollars in thousands, except per share)

REVENUES

         

Health plan services premiums

   $ 2,507,318      $ 3,152,783    $ 5,034,825      $ 6,292,034

Government contracts

     851,939        832,088      1,661,398        1,591,427

Net investment income

     16,567        20,432      36,489        44,753

Administrative services fees and other income

     1,837        8,387      10,693        18,279

Northeast administrative services fees and other

     59,301        0      109,661        0
                             

Total revenues

     3,436,962        4,013,690      6,853,066        7,946,493
                             

EXPENSES

         

Health plan services (excluding depreciation and amortization)

     2,163,191        2,718,039      4,374,447        5,439,818

Government contracts

     811,386        791,044      1,583,288        1,516,046

General and administrative

     237,378        332,188      484,474        687,098

Selling

     56,574        81,359      115,405        162,769

Depreciation and amortization

     8,466        15,708      17,129        31,748

Interest

     8,761        11,518      18,645        21,085

Northeast administrative services expenses

     71,951        0      153,829        0

Loss (adjustment to loss) on sale of Northeast health plan subsidiaries

     (8,171     0      (8,171     0

Asset impairment

     6,000        0      6,000        0

Early debt extinguishment charge

     3,532        0      3,532        0
                             

Total expenses

     3,359,068        3,949,856      6,748,578        7,858,564
                             

Income from operations before income taxes

     77,894        63,834      104,488        87,929

Income tax provision

     32,828        23,694      43,332        25,754
                             

Net income

   $ 45,066      $ 40,140    $ 61,156      $ 62,175
                             

Net income per share:

         

Basic

   $ 0.46      $ 0.39    $ 0.61      $ 0.60

Diluted

   $ 0.45      $ 0.38    $ 0.61      $ 0.60

 

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For the three and six months ended June 30, 2010, we reported net income of $45.1 million or $0.45 per diluted share and $61.2 million or $0.61 per diluted share, respectively, as compared to net income of $40.1 million, or $0.38 per diluted share and $62.2 million or $0.60 per diluted share, respectively, for the same periods in 2009. Pretax margin was 2.3 percent and 1.5 percent for the three and six months ended June 30, 2010, respectively, compared to 1.6 percent and 1.1 percent for the same periods in 2009. Our consolidated results of operations for the three and six months ended June 30, 2010 were impacted by the Northeast Sale. See Note 1 to our consolidated financial statements for more information on the Northeast Sale. The Northeast Operations had a combined pretax loss of $9.4 million and $47.0 million for the three and six months ended June 30, 2010, respectively, compared to a pretax loss of $23.2 million and $26.4 million for the three and six months ended June 30, 2009, respectively, reflecting the ongoing run-out and wind-down of the Northeast Operations.

Our total revenues decreased 14.4 percent in the three months ended June 30, 2010 to $3.4 billion from $4.0 billion in the same period in 2009 and decreased 13.8 percent in the six months ended June 30, 2010 to $6.9 billion from $7.9 billion in the same period in 2009. Health plan services premium revenues decreased by approximately 20.5 percent to $2.5 billion and by approximately 20.0 percent to $5.0 billion in the three and six months ended June 30, 2010, respectively, compared with $3.2 billion and $6.3 billion in the three and six months ended June 30, 2009, respectively. Health plan services expenses decreased from $2.7 billion and $5.4 billion in the three and six months ended June 30, 2009, respectively, to $2.2 billion and $4.4 billion in the three and six months ended June 30, 2010, respectively. These decreases were primarily due to the Northeast Sale. Investment income decreased to $16.6 million and $36.5 million in the three and six months ended June 30, 2010, respectively, compared with $20.4 million and $44.8 million in the three and six months ended June 30, 2009, respectively. These decreases were primarily due to a decrease in realized gains recognized in 2010 compared to 2009.

Our operating results for the three months ended June 30, 2010 include:

 

   

$24.9 million of expenses, approximately 65 percent of which are related to the Company’s corporate overhead cost reduction efforts resulting from the Northeast transaction, approximately 25 percent are related to the Company’s operations strategy, and the remainder is related to legal and regulatory expenses, and

 

   

a $3.2 million net benefit comprised of:

 

  a) $9.4 million in pretax losses, of which, $6.0 million was non-cash related to the Northeast transaction;

 

  b) $9.0 million in expenses, of which, approximately $6.0 million was non-cash to retire the Company’s short-term debt; and

 

  c) a $21.6 million non-cash benefit to health plan expenses from a litigation reserve true-up that offset the above expenses.

See Note 2 to our consolidated financial statements for more information on our goodwill impairment and the adjustment to the loss on sale of the Northeast health plan subsidiaries and Note 8 for more information on the litigation reserve true-up. See “—Liquidity and Capital Resources—Capital Structure—Termination of Amortizing Financing Facility” for additional information on the termination of our amortizing financing facility. Our operating results for the three and six months ended June 30, 2009 included $19.7 million and $66.5 million, respectively, in pretax costs for operations strategy reduced by $2.1 million and $4.2 million, respectively, benefits from litigation reserve true-ups. These costs are excluded from our measurement of reportable segment operating performance since they are not managed within our reportable segments and are excluded from the segment results reviewed by our chief operating decision maker.

Days claims payable for the second quarter of 2010 was 39.3 days compared with 41.6 days in the second quarter of 2009. On an adjusted basis (adjusting for divested businesses, capitation, provider and other claim settlements and Medicare Part D), days claims payable in the second quarter of 2010 was 53.6 days compared with 55.0 days in the second quarter of 2009. The decline in days claims payable was due to lower reserve for claims and other settlements combined with higher health care costs for the three months ended June 30, 2010 compared with the three months ended June 30, 2009.

 

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We believe that adjusted days claims payable, a non-GAAP financial measure, provides useful information to investors because the adjusted days claims payable calculation excludes amounts related to divested businesses and health care expenses for which no or minimal reserves are maintained. Therefore adjusted days claims payable may present a more accurate reflection of days claims payable calculated from claims-based reserves than does days claims payable, which does not exclude such costs. This non-GAAP financial information should be considered in addition to, not as a substitute for, financial information prepared in accordance with GAAP. The following table provides a reconciliation of the differences between adjusted days claims payable and days claims payable, the most directly comparable financial measure calculated and presented in accordance with GAAP. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating the adjusted amounts, you should be aware that we have incurred expenses that are the same as or similar to some of the adjustments in the current presentation and we may incur them again in the future. Our presentation of the adjusted amounts should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

 

    Three Months
Ended June  30,
2010
    Three Months
Ended June  30,

2009
 
    (Dollars in millions)  

Reconciliation of Days Claims Payable:

 

(1) Reserve for Claims and Other Settlements

  $ 934.9      $ 1,243.5   

Less: Reserve for Claims and Other Settlements for Divested Businesses

    0        (251.7

Less: Capitation Payable, Provider and Other Claim Settlements and Medicare
Part D

    (155.6     (196.9
               

(2) Reserve for Claims and Other Settlements—Adjusted

  $ 779.3      $ 794.9   

(3) Health Plan Services Cost

  $ 2,163.2      $ 2,718.0   

Less: Health Plan Services Cost for Divested Businesses

    0        (563.2

Less: Capitation Payable, Provider and Other Claim Settlements and Medicare
Part D

    (839.0     (838.9
               

(4) Health Plan Services Cost—Adjusted

  $ 1,324.2      $ 1,315.9   

(5) Number of Days in Period

    91        91   

= (1) / (3) * (5) Days Claims Payable—(using end of period reserve amount)

    39.3        41.6   

= (2) / (4) * (5) Days Claims payable—Adjusted (using end of period reserve amount)

    53.6        55.0   

Income Tax Provision

Our income tax expense and the effective income tax rate for the three and six months ended June 30, 2010 and 2009 are as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2010             2009             2010             2009      
     (Dollars in millions)  

Income tax expense

   $ 32.8      $ 23.7      $ 43.3      $ 25.8   

Effective income tax rate

     42.1     37.1     41.5     29.3

The effective income tax rate differs from the statutory federal tax rate of 35% for the three and six months ended June 30, 2010 due primarily to state income taxes, tax-exempt investment income, the adjustment of a valuation allowance against a deferred tax asset pertaining to a capital loss carryforward, and non-deductible goodwill impairment. The effective income tax rate differs from the statutory tax rate of 35% for the three and six months ended June 30, 2009 due primarily to state income taxes, tax-exempt investment income, and favorable outcomes of examination settlements.

The effective income tax rate for the three months and six months ended June 30, 2010 is higher compared to the same periods in 2009 due primarily to the favorable outcomes of the examination settlements recorded in 2009 and not in 2010.

 

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Western Region Operations Reportable Segment

Our Western Region Operations segment includes the operations of our commercial, Medicare (including Part D) and Medicaid health plans, the operations of our health and life insurance companies primarily in California, Arizona and Oregon and our behavioral health and pharmaceutical services subsidiaries in several states including Arizona, California and Oregon.

Membership (in thousands)

 

     June 30,
2010
   June 30,
2009
   Increase/
(Decrease)
    %
Change
 

California

          

Large Group

   836    908    (72   (7.9 )% 

Small Group and Individual

   355    380    (25   (6.6 )% 
                      

Commercial Risk

   1,191    1,288    (97   (7.5 )% 

ASO

   5    3    2      66.7
                      

Total Commercial

   1,196    1,291    (95   (7.4 )% 

Medicare Advantage

   132    134    (2   (1.5 )% 

Medi-Cal

   877    827    50      6.0
                      

Total California

   2,205    2,252    (47   (2.1 )% 
                      

Arizona

          

Large Group

   53    64    (11   (17.2 )% 

Small Group and Individual

   39    39    0      0.0
                      

Commercial Risk

   92    103    (11   (10.7 )% 

Medicare Advantage

   49    65    (16   (24.6 )% 
                      

Total Arizona

   141    168    (27   (16.1 )% 
                      

Oregon

          

Large Group

   52    86    (34   (39.5 )% 

Small Group and Individual

   47    47    0      0.0
                      

Commercial Risk

   99    133    (34   (25.6 )% 

Medicare Advantage

   38    24    14      58.3
                      

Total Oregon

   137    157    (20   (12.7 )% 
                      

Total Health Plan Enrollment

          

Large Group

   941    1,058    (117   (11.1 )% 

Small Group and Individual

   441    466    (25   (5.4 )% 
                      

Commercial Risk

   1,382    1,524    (142   (9.3 )% 

ASO

   5    3    2      66.7
                      

Total Commercial

   1,387    1,527    (140   (9.2 )% 

Medicare Advantage

   219    223    (4   (1.8 )% 

Medicare PDP (stand-alone)

   434    458    (24   (5.2 )% 

Medi-Cal/Medicaid

   877    827    50      6.0
                      
   2,917    3,035    (118   (3.9 )% 

Total Western Region Operations enrollment at June 30, 2010 was approximately 3 million members, a decrease of approximately 3.9 percent compared with enrollment at June 30, 2009. Total enrollment in our California health plan decreased 2.1 percent from June 30, 2009 to June 30, 2010.

Western Region Operations commercial enrollment declined by 9.2 percent from June 30, 2009 to 1.4 million members on June 30, 2010. Enrollment in our small group and individual segment in the Western

 

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Region Operations decreased by approximately 5.4 percent, from 466,000 at June 30, 2009 to 441,000 at June 30, 2010. These enrollment changes are consistent with the overall weak economy in the Company’s Western commercial markets.

Enrollment in our Medicare Advantage plans in the Western Region Operations at June 30, 2010 was 219,000 members, a decrease of 1.8 percent compared with June 30, 2009. The decline in Medicare Advantage membership was due to a loss of 16,000 members in Arizona and 2,000 members in California, partially offset by a gain of 14,000 members in Oregon. Membership in our Medicare PDP plans was 434,000 at the end of the second quarter of 2010, a 5.2 percent decrease compared with the end of the second quarter of 2009. This decline in Medicare PDP membership was driven by changes in our termination policy for nonpayment of member premiums. Our Medicare Part D plans were offered in 49 states and the District of Columbia in the second quarter of 2010 and were offered in all 50 states and the District of Columbia in the second quarter of 2009.

Medicaid enrollment in California on June 30, 2010, increased by 50,000 members, or 6.0 percent, from June 30, 2009 to 877,000 members. We attribute the increase in Medicaid enrollment to an increase in the Medicaid-eligible population due to economic factors.

Western Region Operations Segment Results

 

     Three Months Ended June 30,     Six Months Ended
June  30,
 
     2010     2009     2010     2009  
     (Dollars in thousands, except per share and PMPM data)  

Health plan services premiums

   $ 2,484,282      $ 2,468,879      $ 4,986,640      $ 4,948,051   

Net investment income

     16,324        10,642        35,901        22,152   

Administrative services fees and other income

     7,275        6,147        16,107        13,547   
                                

Total revenues

     2,507,881        2,485,668        5,038,648        4,983,750   

Health plan services

     2,164,164        2,135,694        4,354,057        4,309,632   

General and administrative

     212,699        207,796        436,576        416,500   

Selling

     55,750        57,941        113,475        116,435   

Depreciation and amortization

     8,448        9,526        17,069        19,148   

Interest

     8,761        11,154        18,645        20,721   
                                

Total expenses

     2,449,822        2,422,111        4,939,822        4,882,436   
                                

Income from operations before income taxes

     58,059        63,557        98,826        101,314   

Income tax provision

     21,967        23,524        37,346        37,696   
                                

Net income

   $ 36,092      $ 40,033      $ 61,480      $ 63,618   
                                

Basic earnings per share

   $ 0.36      $ 0.39      $ 0.62      $ 0.61   

Diluted earnings per share

   $ 0.36      $ 0.38      $ 0.61      $ 0.61   

Pretax margin

     2.3     2.6     2.0     2.0

Commercial premium yield

     9.3     9.5     8.8     9.7

Commercial premium PMPM (d)

   $ 340.38      $ 311.47      $ 338.40      $ 310.90   

Commercial health care cost trend

     9.1     10.4     8.7     10.2

Commercial health care cost PMPM (d)

   $ 293.81      $ 269.35      $ 292.13      $ 268.83   

Commercial MCR (e)

     86.3     86.5     86.3     86.5

Medicare Advantage MCR (e)

     88.5     85.6     88.3     87.6

Medicare Part D MCR (e)

     85.9     90.0     91.8     91.9

Health plan services MCR (a)

     87.1     86.5     87.3     87.1

G&A expense ratio (b)

     8.5     8.4     8.7     8.4

Selling costs ratio (c)

     2.2     2.3     2.3     2.4

 

(a) MCR is calculated as health plan services cost divided by health plan services premiums revenue.

 

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(b) The G&A expense ratio is computed as G&A expenses divided by the sum of health plan services premiums and administrative services fees and other income.
(c) The selling costs ratio is computed as selling expenses divided by health plan services premiums revenue.
(d) PMPM is calculated based on commercial at-risk member months and excludes ASO member months.
(e) MCR is calculated as commercial, Medicare Advantage, Medicare Part D health care cost divided by commercial, Medicare Advantage, Medicare Part D premium, as applicable.

Revenues

Total revenues in the Western Region Operations increased slightly less than 1 percent to $2.5 billion for the three months ended June 30, 2010, and increased 1.1 percent to $5.0 billion for the six months ended June 30, 2010, compared to the same periods in 2009. Health plan services premiums revenues in the Western Region Operations increased less than 1 percent to $2.5 billion for the three months ended June 30, 2010 and increased less than 1 percent to $5.0 billion for the six months ended June 30, 2010, compared to the same periods in 2009. The increase is primarily driven by increased premium yields in PDP and Medicaid programs, partially offset by overall membership declines.

Investment income in the Western Region Operations was $16.3 million and $35.9 million for the three and six months ended June 30, 2010, respectively, compared with $10.6 million and $22.2 million for the three and six months ended June 30, 2009, respectively, due to higher investment balances and realized gains.

Health Plan Services Expenses

Health plan services expenses in the Western Region Operations were $2.2 billion and $4.4 billion in the three and six months ended June 30, 2010, respectively, compared to $2.1 billion and $4.3 billion in the three and six months ended June 30, 2009, respectively.

Commercial Premium Yield and Health Care Cost Trends

In the Western Region Operations, commercial premium yields PMPM increased by 9.3 percent to approximately $340 for the three months ended June 30, 2010 compared with approximately $311 in the same period of 2009, and increased by 8.8 percent to approximately $338 for the six months ended June 30, 2010 compared with approximately $311 in the same period of 2009. These increases in premium yields were primarily driven by large groups in California and Oregon.

Commercial health care costs PMPM in the Western Region Operations increased by 9.1 percent to approximately $294 and by 8.7 percent to approximately $292 for the three and six months ended June, 30, 2010, respectively, compared with approximately $269 for the three and six months ended June 30, 2009. The increase is primarily due to retroactivity adjustment in the shared risk settlement.

Medical Care Ratios

The health plan services MCR in the Western Region Operations was 87.1 percent and 87.3 percent for the three and six months ended June 30, 2010, respectively, compared with 86.5 percent and 87.1 percent for the three and six months ended June 30, 2009, respectively.

The Western Region Operations commercial MCR was 86.3 percent for the three and six months ended June 30, 2010, compared with 86.5 percent for the three and six months ended June 30, 2009. The 20 basis point improvement is primarily due to our continuing pricing discipline.

The Medicare Advantage MCR in the Western Region Operations was 88.5 percent and 88.3 percent for the three and six months ended June 30, 2010, respectively, compared with 85.6 percent and 87.6 percent for the three and six months ended June 30, 2009, respectively. The year over year increase in the Medicare Advantage MCR is due to the increase in the health care cost trend outpacing the increase in the premium yield.

 

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The Medicare Part D MCR was 85.9 percent and 91.8 percent for the three and six months ended June 30, 2010, respectively, compared with 90.0 percent and 91.9 percent for the three and six months ended June 30, 2009, respectively. The 410 basis point improvement is consistent with the Company’s 2010 Medicare bid.

G&A, Selling and Interest Expenses

G&A expense in the Western Region Operations was $212.7 million and $436.6 million for the three and six months ended June 30, 2010, respectively, compared with $207.8 million and $416.5 million for the three and six months ended June 30, 2009, respectively. The G&A expense ratio increased 10 basis points from 8.4 percent for the three months ended June 30, 2009 to 8.5 percent for the three months ended June 30, 2010. The G&A expense ratio increased 30 basis points from 8.4 percent for the six months ended June 30, 2009 to 8.7 percent for the six months ended June 30, 2010. These increases are primarily due to increases in insurance, taxes and fees.

Selling expense in our Western Region Operations was $55.8 million and $113.5 million for the three and six months ended June 30, 2010, respectively, compared with $57.9 million and $116.4 million for the three and six months ended June 30, 2009, respectively.

Interest expense was $8.8 million and $18.6 million for the three and six months ended June 30, 2010, respectively, compared with $11.2 million and $20.7 million for the three and six months ended June 30, 2009, respectively. The decline is due to the decrease in the Company’s total outstanding debt, including the retirement of our amortizing financing facility in May 2010. See “—Liquidity and Capital Resources—Capital Structure—Termination of Amortizing Financing Facility” for additional information.

Government Contracts Reportable Segment

Under our TRICARE contract for the North Region, we provided health care services to approximately 3.1 million eligible beneficiaries in the MHS as of June 30, 2010, and approximately 3.0 million eligible beneficiaries as of June 30, 2009. Included in the 3.1 million eligibles as of June 30, 2010 were 1.8 million TRICARE eligibles for whom we provide health care and administrative services and 1.3 million other MHS-eligible beneficiaries for whom we provide administrative services only. As of June 30, 2010 and 2009, there were approximately 1.5 million TRICARE eligibles enrolled in TRICARE Prime under our North Region contract.

Our TRICARE North Region contract was scheduled to end on March 31, 2009 and was extended by the Department of Defense TRICARE Management Authority, or TMA, through March 31, 2010. In March 2010, we were notified that the TMA exercised its options to extend the TRICARE North Region contract for option period 7 and option period 8. The exercise of these option periods extends our TRICARE North Region contract through March 31, 2011. On May 13, 2010, we were awarded the new Managed Care Support Contract for the TRICARE North Region effective April 1, 2011. The total potential contract value including a ten-month transition period and five one-year option periods for health care delivery, plus a transition-out period, is approximately $17.2 billion.

In addition to the 3.1 million eligible beneficiaries that we service under the TRICARE contract for the North Region, we administer contracts with the U.S. Department of Veterans Affairs to manage community based outpatient clinics in 8 states covering approximately 18,000 enrollees.

 

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Government Contracts Segment Results

The following table summarizes the operating results for the Government Contracts segment for the three and six months ended June 30, 2010 and 2009:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  
     (Dollars in thousands, except per share data)  

Government contracts revenues

   $ 851,939      $ 832,088      $ 1,661,398      $ 1,591,427   

Government contracts cost

     810,466        791,044        1,581,902        1,516,046   
                                

Income from operations before income taxes

     41,473        41,044        79,496        75,381   

Income tax provision

     17,042        17,047        32,545        31,091   
                                

Net income

   $ 24,431      $ 23,997      $ 46,951      $ 44,290   
                                

Basic earnings per share

   $ 0.25      $ 0.23      $ 0.47      $ 0.43   

Diluted earnings per share

   $ 0.25      $ 0.23      $ 0.47      $ 0.42   

Government contracts cost ratio

     95.1     95.1     95.2     95.3

Government contracts revenues increased by $19.9 million, or 2.4 percent, for the three months ended June 30, 2010 and by $70 million, or 4.4 percent, for the six months ended June 30, 2010 as compared to the same periods in 2009. These increases were primarily due to an increase in health care services provided under a new option year in the TRICARE contract and growth in the family counseling business with the DoD. The Government Contracts cost ratio was 95.1 percent and 95.2 percent for the three and six months ended June 30, 2010, respectively, compared with 95.1 percent and 95.3 percent for the three and six months ended June 30, 2009, respectively.

Northeast Operations Reportable Segment Results

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  
     (Dollars in thousands, except per share data)  

Health plan services premiums

   $ 23,036      $ 683,904      $ 48,185      $ 1,343,983   

Net investment income

     243        9,790        588        22,601   

Administrative services fees and other income

     22        2,240        46        4,732   

Northeast administrative services fees and other

     59,301        0        109,661        0   
                                

Total revenues

     82,602        695,934        158,480        1,371,316   

Health plan services

     20,660        584,402        42,023        1,134,421   

General and administrative

     687        104,747        9,844        204,019   

Selling

     824        23,418        1,930        46,334   

Depreciation and amortization

     18        6,182        60        12,600   

Interest

     0        364        0        364   

Northeast administrative services expenses

     71,951        0        153,829        0   

Loss (adjustment to loss) on sale of Northeast health plan subsidiaries

     (8,171     0        (8,171     0   

Asset impairment

     6,000        0       6,000        0  
                                

Total expenses

     91,969        719,113        205,515        1,397,738   
                                

Loss from operations before income taxes

     (9,367     (23,179     (47,035     (26,422

Income tax (benefit)

     (1,343     (9,899     (16,336     (11,539
                                

Net loss

   $ (8,024   $ (13,280   $ (30,699   $ (14,883
                                

Basic loss per share

   $ (0.08   $ (0.13   $ (0.31   $ (0.14

Diluted loss per share

   $ (0.08   $ (0.13   $ (0.31   $ (0.14

Basic weighted average shares outstanding

     98,896        103,854        99,965        103,810   

Diluted weighted average shares outstanding

     98,896        103,854        99,965        103,810   

 

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The Northeast Operations had approximately $82.6 million and $695.9 million in total revenues in the three months ended June 30, 2010 and 2009, respectively, which represent 2 percent and 17 percent of our total revenues for the three months ended June 30, 2010 and 2009, respectively. The Northeast Operations had approximately $158.5 million and $1,371.3 million in total revenues in the six months ended June 30, 2010 and 2009, respectively, which represent 2 percent and 17 percent of our total revenues for the six months ended June 30, 2010 and 2009, respectively. The Northeast Operations had a combined pretax loss of $9.4 million and $47.0 million for the three and six months ended June 30, 2010, respectively, and $23.2 million and $26.4 million for the three and six months ended June 30, 2009, respectively. Our operating results for the three and six months ended June 30, 2010 were impacted by $6.0 million goodwill impairment reduced by an $8.2 million adjustment to loss on sale of Northeast health plan subsidiaries. See Note 2 to our consolidated financial statements for additional information regarding the goodwill impairment and the adjustment to loss on sale of Northeast health plan subsidiaries.

The Northeast Operations had $23.0 million and $48.2 million of health plan services premiums and $20.7 million and $42.0 million of health plan services costs for the three and six months ended June 30, 2010, respectively. We will continue to serve the members of the Acquired Companies under the United Administrative Services Agreements until they are either transitioned to a legacy United entity or non-renewed. We expect the United Administrative Services Agreements to remain in effect through 2011. The revenues and expenses associated with providing services under the United Administrative Services Agreements were $59.3 million and $72.0 million for the three months ended June 30, 2010, respectively, and $109.7 million and $153.8 million for the six months ended June 30, 2010, respectively, and they are shown separately in the accompanying consolidated statements of operations.

Corporate/Other

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  
     (Dollars in thousands, except per share data)  

Charges included in health plan services costs

   $ (21,633 )   $ (2,057 )   $ (21,633 )   $ (4,235

Charges included in government contract costs

     920        0       1,386        0  

Charges included in G&A

     23,992        19,645        38,054        66,579   

Early debt extinguishment charge and related interest rate swap termination

     8,992        0       8,992        0  
                                

Loss from operations before income taxes

     (12,271     (17,588     (26,799     (62,344

Income tax benefit

     (4,838     (6,978     (10,223     (31,494
                                

Net loss

   $ (7,433   $ (10,610   $ (16,576   $ (30,850
                                

Basic loss per share

   $ (0.08   $ (0.10   $ (0.17   $ (0.30

Diluted loss per share

   $ (0.08   $ (0.10   $ (0.17   $ (0.30

Our operating results for the three and six months ended June 30, 2010 were impacted by $33.9 million and $48.4 million, respectively, in pretax costs related to our operations strategy, other cost management initiatives and early debt extinguishment and related interest rate swap termination, reduced by a $21.6 million benefit from a litigation reserve true-up. See Note 8 for more information regarding the litigation reserve true-up. See “—Liquidity and Capital Resources—Capital Structure—Termination of Amortizing Financing Facility” for additional information regarding the early debt extinguishment charge. Our operating results for the three months ended June 30, 2009 included $19.6 million in pretax costs relating to our operations strategy reduced by a $2.1 million benefit from a litigation reserve true-up. Our operating results for the six months ended June 30, 2009 included $66.6 million in pretax costs relating to our operations strategy reduced by a $4.2 million benefit from a litigation reserve true-up. These costs are excluded from our measurement of reportable segment operating performance since they are not managed within our reportable segments and are excluded from the segment results reviewed by our chief operating decision maker.

 

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LIQUIDITY AND CAPITAL RESOURCES

Market and Economic Conditions

The current state of the global economy and market conditions continue to be challenging with high levels of unemployment, diminished business and consumer confidence, and volatility in both U.S. and international capital and credit markets. Market conditions could limit our ability to timely replace maturing liabilities and access to capital markets for liquidity needs, which could adversely affect our financial condition and results of operations. Furthermore, if our customer base experiences cash flow problems and other financial difficulties, it could, in turn, adversely impact membership in our plans. For example, our customers may modify, delay or cancel plans to purchase our products, may reduce the number of individuals to whom they provide coverage, or may make changes in the mix or products purchased from us. In addition, if our customers experience financial issues, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us. Further, our customers or potential customers may force us to compete more vigorously on factors such as price and service to retain or obtain their business. A significant decline in membership in our plans and the inability of current and/or potential customers to pay their premiums as a result of unfavorable conditions may adversely affect our business, including our revenues, profitability and cash flow.

Cash and Investments

As of June 30, 2010, the fair value of the investment securities available-for-sale was $1.5 billion, including noncurrent investments of $3.0 million, which is less than 1% of the total investments available-for-sale. We hold high-quality fixed income securities primarily comprised of corporate bonds, mortgage-backed bonds and municipals bonds. 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, investment grade securities while maintaining liquidity in each portfolio sufficient to meet our cash flow requirements and attaining an expected total return on invested funds.

Our investment portfolio includes $629.6 million, or 42% of our portfolio holdings, of mortgage-backed and asset-backed securities. Such amount includes current and noncurrent mortgage-backed and asset-backed securities of $629.1 million, or 99% of the total mortgage-backed and asset-backed securities, and $0.5 million, or less than 1% of the total mortgage-backed and asset-backed securities, respectively. 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. Our investment portfolio also includes $10.0 million, or less than 1% of our portfolio holdings, of auction rate securities (ARS). These ARS have long-term nominal maturities for which the interest rates are reset through a dutch auction process every 7, 28 or 35 days. At June 30, 2010, these ARS had at one point or are continuing to experience “failed” auctions. These securities are entirely municipal issues and rates are set at the maximum allowable rate as stipulated in the applicable bond indentures. We continue to receive income on all ARS. If all or any portion of the ARS continue to experience failed auctions, it could take an extended amount of time for us to realize our investments’ recorded value.

We had gross unrealized losses of $2.6 million as of June 30, 2010, and $13.3 million as of December 31, 2009. Included in the gross unrealized losses as of June 30, 2010 and December 31, 2009 are $0.5 million and $2.7 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

 

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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 material other-than-temporary impairments may be recorded in future periods. No impairment was recognized during the three and six months ended June 30, 2010.

Liquidity

We believe that cash flow from operating activities, existing working capital, lines of credit and cash reserves are adequate to allow us to fund existing obligations, repurchase shares under our stock repurchase program, introduce new products and services, and continue to develop health care-related businesses at least for the next twelve months. We regularly evaluate cash requirements for current operations and commitments, and for capital acquisitions and other strategic transactions. We may elect to raise additional funds for these purposes, either through issuance of debt or equity, the sale of investment securities or otherwise, as appropriate. Based on the composition and quality of our investment portfolio, our expected ability to liquidate our investment portfolio as needed, and our expected operating and financing cash flows, we do not anticipate any liquidity constraints as a result of the current credit environment. However, continued turbulence in U.S. and international markets and certain costs associated with the implementation of the health care reform legislation could adversely affect our liquidity.

Our cash flow from operating activities is impacted by, among other things, the timing of collections on our amounts receivable from our TRICARE contract for the North Region. Health care receivables related to TRICARE are best estimates of payments that are ultimately collectible or payable. The timing of collection of such receivables is impacted by government audit and negotiation and can extend for periods beyond a year. Amounts receivable under government contracts were $277.5 million and $270.8 million as of June 30, 2010 and December 31, 2009, respectively. Our cash flow from operating activities is also impacted by the timing of collections on our amounts receivable from CMS. Our receivable related to our Medicare business was $179.1 million as of June 30, 2010 and $102.7 million as of December 31, 2009.

Operating Cash Flows

Our net cash flow provided by (used in) operating activities for the six months ended June 30, 2010 compared to the same period in 2009 is as follows:

 

     June 30,
2010
   June 30,
2009
    Change
2010 over 2009
     (Dollars in millions)

Net cash provided by (used in) operating activities

   $ 111.1    $ (60.0   $ 171.1

The increase of $171.1 million in operating cash flow is primarily the result of timing of Medicaid payments received in 2010 versus 2009 and a decrease in operations strategy-related payments.

Investing Activities

Our net cash flow (used in) provided by investing activities for the six months ended June 30, 2010 compared to the same period in 2009 is as follows:

 

     June 30,
2010
    June 30,
2009
   Change
2010 over 2009
 
     (Dollars in millions)  

Net cash (used in) provided by investing activities

   $ (79.5   $ 26.6    $ (106.1

Net cash used in investing activities increased during the six months ended June 30, 2010, primarily due to a $94.8 million increase in the net purchases of available for sale securities.

 

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Financing Activities

Our net cash flow used in financing activities for the six months ended June 30, 2010 compared to the same period in 2009 is as follows:

 

     June 30,
2010
    June 30,
2009
    Change
2010 over 2009
 
     (Dollars in millions)  

Net cash used in financing activities

   $ (288.7   $ (69.0   $ (219.7

Net cash used in financing activities increased during the six months ended June 30, 2010, primarily due to a $172.0 million increase in stock repurchases and a $99.3 million increase in amounts paid under the amortizing financing facility due to the termination and payoff of such facility, partially offset by a reduction in net revolver repayments of $50.0 million.

See “—Capital Structure” below for additional information regarding our share repurchases, the termination of our amortizing financing facility and our revolving credit facility.

Capital Structure

The company’s debt-to-total capital ratio was 23.4 percent as of June 30, 2010 compared with 26.2 percent as of December 31, 2009 and 25.2 percent as of June 30, 2009. Both the quarter-over-quarter and sequential decreases were the result of the repayment of our amortizing financing facility in May 2010. See “—Termination of Amortizing Financing Facility” below for additional information.

Share Repurchases. We completed our Completed Stock Repurchase Program in February 2010. During the three months ended March 31, 2010, we repurchased 3,258,795 shares of our common stock for aggregate consideration of approximately $79.4 million under our Completed Stock Repurchase Program. On March 18, 2010, our Board of Directors authorized our New Stock Repurchase Program. During the three and six months ended June 30, 2010 we repurchased 2,880,861 shares and 2,952,851 shares, respectively, of our common stock for aggregate consideration of approximately $70.1 million and $71.9 million, respectively, under our New Stock Repurchase Program. The remaining authorization under our New Stock Repurchase Program as of June 30, 2010 was $228.1 million.

As of June 30, 2010, we had repurchased a cumulative aggregate of 43,695,730 shares of our common stock under our Completed Stock Repurchase Program (since its inception in 2002) and our New Stock Repurchase Program (since its inception in March 2010) at an average price of $32.77 per share for aggregate consideration of $1,431.7 million. We used net free cash available, including proceeds from the Northeast Sale, to fund the share repurchases. For additional information on our Completed Stock Repurchase Program and our New Stock Repurchase Program, see Note 5 of our consolidated financial statements.

Under the Company’s various stock option and long-term incentive plans, employees and non-employee directors may elect for the Company to withhold shares to satisfy minimum statutory federal, state and local tax withholding and/or exercise price obligations, as applicable, arising from the exercise of stock options. For certain other equity awards, the Company has the right to withhold shares to satisfy any tax obligations that may be required to be withheld or paid in connection with such equity award, including any tax obligation arising on the vesting date. These repurchases were not part of either of our stock repurchase programs.

 

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The following table presents monthly information related to repurchases of our common stock, including shares withheld by the Company to satisfy tax withholdings and exercise price obligations as of June 30, 2010:

 

Period

   Total Number
of Shares
Purchased (a)
    Average
Price Paid
per Share
   Total
Price Paid
   Total Number
of Shares
Purchased as
Part of Publicly
Announced
Programs (b)
   Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Programs (b) (c)

January 1—January 31

   1,860,658      $ 25.11    $ 46,718,458    1,860,658    $ 36,009,731

February 1—February 28

   1,574,703 (d)      23.37      36,793,907    1,398,137    $ 3,349,489

March 1—March 31

   124,618 (d)      24.55      3,058,783    71,990    $ 298,208,500

April 1—April 30

   947,024 (d)      23.00      21,777,457    874,361    $ 278,082,672

May 1—May 31

   901,852 (d)      23.09      20,827,267    901,500    $ 257,263,326

June 1 —June 30

   1,105,292 (d)      26.42      29,205,453    1,105,000    $ 228,065,155
                           
   6,514,147 (d)    $ 24.31    $ 158,381,325    6,211,646   

 

(a) During the six months ended June 30, 2010, we did not repurchase any shares of our common stock outside our publicly announced stock repurchase programs, except shares withheld in connection with our various stock option and long-term incentive plans.
(b) On March 18, 2010, our Board of Directors authorized our New Stock Repurchase Program, pursuant to which a total of $300 million of our common stock can be repurchased. Our Completed Stock Repurchase Program, which had $3.3 million in remaining repurchase authority as of February 22, 2010, was deemed to be completed with the authorization of our New Stock Repurchase Program. The Completed Stock Repurchase Program was announced in April 2002, and we announced additional repurchase authorizations under the program in August 2003, October 2006 and October 2007.
(c) Our New Stock Repurchase Program does not have an expiration date, and our Completed Stock Repurchase Program did not have an expiration date. Accordingly, during the six months ended June 30, 2010, we did not have any repurchase program that expired or was terminated, other than our Completed Stock Repurchase Program, and we did not terminate any repurchase program prior to its expiration date.
(d) Includes shares withheld by the Company to satisfy tax withholding and/or exercise price obligations arising from the vesting and/or exercise of restricted stock units, stock options and other equity awards.

Termination of Amortizing Financing Facility. On May 26, 2010, we terminated our five-year non-interest bearing, $175 million amortizing financing facility with a non-U.S. lender that we entered into on December 19, 2007 by exercising our option to call the facility. We paid a total of $116.8 million to retire the facility, which included the outstanding balance of $113.8 million and a $3.0 million call premium. We used a combination of a $100 million draw on our revolving credit facility and operating cash to repay the financing facility. See Note 2 to our consolidated financial statements for information on the termination of the 2007 Swap, which was terminated in connection with the termination of our amortizing financing facility.

Senior Notes. On May 18, 2007, we issued $300 million in aggregate principal amount of 6.375% Senior Notes due 2017. On May 31, 2007, we issued an additional $100 million of 6.375% Senior Notes due 2017 which were consolidated with, and constitute the same series as, the Senior Notes issued on May 18, 2007 (collectively, the “Senior Notes”). The aggregate net proceeds from the issuance of the Senior Notes were $393.5 million and were used to repay outstanding debt.

The indenture governing the Senior Notes limits our ability to incur certain liens, or consolidate, merge or sell all or substantially all of our assets. In the event of the occurrence of both (1) a change of control of Health Net, Inc. and (2) a below investment grade rating by any two of Fitch, Inc., Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services, within a specified period, we will be required to make an offer to purchase the Senior Notes at a price equal to 101% of the principal amount of the Senior Notes plus accrued and unpaid interest to the date of repurchase. As of June 30, 2010, we were in compliance with all of the covenants under the indenture governing the Senior Notes.

 

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The Senior Notes may be redeemed in whole at any time or in part from time to time, prior to maturity at our option, at a redemption price equal to the greater of:

 

   

100% of the principal amount of the Senior Notes then outstanding to be redeemed; or

 

   

the sum of the present values of the remaining scheduled payments of principal and interest on the Senior Notes to be redeemed (not including any portion of such payments of interest accrued to the date of redemption) discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the applicable treasury rate plus 30 basis points

plus, in each case, accrued and unpaid interest on the principal amount being redeemed to the redemption date.

Each of the following will be an Event of Default under the indenture governing the Senior Notes:

 

   

failure to pay interest for 30 days after the date payment is due and payable; provided that an extension of an interest payment period by us in accordance with the terms of the Senior Notes shall not constitute a failure to pay interest;

 

   

failure to pay principal or premium, if any, on any note when due, either at maturity, upon any redemption, by declaration or otherwise;

 

   

failure to perform any other covenant or agreement in the notes or indenture for a period of 60 days after notice that performance was required;

 

   

(A) our failure or the failure of any of our subsidiaries to pay indebtedness for money we borrowed or any of our subsidiaries borrowed in an aggregate principal amount of at least $50,000,000, at the later of final maturity and the expiration of any related applicable grace period and such defaulted payment shall not have been made, waived or extended within 30 days after notice or (B) acceleration of the maturity of indebtedness for money we borrowed or any of our subsidiaries borrowed in an aggregate principal amount of at least $50,000,000, 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.

Revolving Credit Facility. On June 25, 2007, we entered into a $900 million five-year revolving credit facility with Bank of America, N.A. as Administrative Agent, Swingline Lender, and L/C Issuer, and the other lenders party thereto. We entered into an amendment to the credit facility on April 29, 2008, which was administrative in nature. Our revolving credit facility provides for aggregate borrowings in the amount of $900 million, which includes a $400 million sub-limit for the issuance of standby letters of credit and a $50 million sub-limit for swing line loans. In addition, we have the ability from time to time to increase the facility by up to an additional $250 million in the aggregate, subject to the receipt of additional commitments. The revolving credit facility matures on June 25, 2012.

Amounts outstanding under the new revolving credit facility will bear interest, at our option, at (a) the base rate, which is a rate per annum equal to the greater of (i) the federal funds rate plus one-half of one percent and (ii) Bank of America’s prime rate (as such term is defined in the facility), (b) a competitive bid rate solicited from the syndicate of banks, or (c) the British Bankers Association LIBOR rate (as such term is defined in the facility), plus an applicable margin, which is initially 70 basis points per annum and is subject to adjustment according to our credit ratings, as specified in the facility.

Our revolving credit facility includes, among other customary terms and conditions, limitations (subject to specified exclusions) on our and our subsidiaries’ ability to incur debt; create liens; engage in certain mergers, consolidations and acquisitions; sell or transfer assets; enter into agreements which restrict the ability to pay

 

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dividends or make or repay loans or advances; make investments, loans, and advances; engage in transactions with affiliates; and make dividends. In addition, we are required to maintain a specified consolidated leverage ratio and consolidated fixed charge coverage ratio throughout the term of the revolving credit facility.

Our revolving credit facility contains customary events of default, including nonpayment of principal or other amounts when due; breach of covenants; inaccuracy of representations and warranties; cross-default and/or cross-acceleration to other indebtedness of the Company or our subsidiaries in excess of $50 million; certain ERISA-related events; noncompliance by us or any of our subsidiaries with any material term or provision of the HMO Regulations or Insurance Regulations (as each such term is defined in the facility); certain voluntary and involuntary bankruptcy events; inability to pay debts; undischarged, uninsured judgments greater than $50 million against us and/or our subsidiaries; actual or asserted invalidity of any loan document; and a change of control. If an event of default occurs and is continuing under the facility, the lenders thereunder may, among other things, terminate their obligations under the facility and require us to repay all amounts owed thereunder.

As of June 30, 2010, we were in compliance with all covenants under our revolving credit facility.

We can obtain letters of credit in an aggregate amount of $400 million under our revolving credit facility. The maximum amount available for borrowing under our revolving credit facility is reduced by the dollar amount of any outstanding letters of credit. As of June 30, 2010, we had outstanding an aggregate of $315.9 million in letters of credit and outstanding borrowings under the revolving credit facility of $100.0 million. As a result, the maximum amount available for borrowing under the revolving credit facility was $484.1 million as of June 30, 2010, and no amount had been drawn on the letters of credit.

Interest Rate Swap Contract. On June 30, 2010, we terminated the 2009 Swap. The 2009 Swap was designed to reduce variability in our net income due to changes in variable interest rates. We recognized a pretax loss of $0.2 million in the three months ended June 30, 2010 in connection with the termination and settlement of the 2009 Swap.

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. Management believes that as of June 30, 2010, all of our active health plans and insurance subsidiaries met their respective regulatory requirements 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 net worth. The minimum statutory net worth 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 risk-based capital (RBC) 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 net worth 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 net worth 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. Historically, we generally managed our aggregate regulated subsidiary capital above 300% of ACL, although RBC standards are not yet applicable to all of our regulated subsidiaries. At June 30, 2010, we had sufficient capital to exceed 400% of ACL.

As necessary, we make contributions to and issue standby letters of credit on behalf of our subsidiaries to meet RBC or other statutory capital requirements under state laws and regulations. During the six months ended

 

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June 30, 2010, we made no such capital contributions. In addition, we made no capital contributions to any of our subsidiaries to meet RBC or other statutory capital requirements under state laws and regulations thereafter through August 4, 2010.

Legislation has been or 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 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.

CONTRACTUAL OBLIGATIONS

Pursuant to Item 303(a)(5) of Regulation S-K, we identified our known contractual obligations as of December 31, 2009 in our Form 10-K. During the six months ended June 30, 2010, there were no significant changes to our contractual obligations as previously disclosed in our Form 10-K.

OFF-BALANCE SHEET ARRANGEMENTS

As of June 30, 2010, we did not have any off-balance sheet arrangements as defined under Item 303(a)(4) of Regulation S-K.

CRITICAL ACCOUNTING ESTIMATES

In our Form 10-K, we identified the critical accounting policies, which affect the more significant estimates and assumptions used in preparing our consolidated financial statements. Those policies include revenue recognition, health plan services, reserves for contingent liabilities, amounts receivable or payable under government contracts, goodwill and recoverability of long-lived assets, investments, income taxes and the consolidation of variable interest entities. We have not changed existing policies from those previously disclosed in our Form 10-K. Our critical accounting policy on estimating reserves for claims and other settlements and the quantification of the sensitivity of financial results to reasonably possible changes in the underlying assumptions used in such estimation as of June 30, 2010 is discussed below. There were no other significant changes to the critical accounting estimates as disclosed in our Form 10-K.

Reserves for claims and other settlements include reserves for claims (IBNR and received but unprocessed claims), and other liabilities including capitation payable, shared risk settlements, provider disputes, provider incentives and other reserves for our Western Region Operations reporting segment.

We estimate the amount of our reserves for claims primarily by using standard actuarial developmental methodologies. This method is also known as the chain-ladder or completion factor method. The developmental method estimates reserves for claims based upon the historical lag between the month when services are rendered and the month claims are paid while taking into consideration, among other things, expected medical cost inflation, seasonal patterns, product mix, benefit plan changes and changes in membership. A key component of the developmental method is the completion factor which is a measure of how complete the claims paid to date are relative to the estimate of the claims for services rendered for a given period. While the completion factors

 

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are reliable and robust for older service periods, they are more volatile and less reliable for more recent periods since a large portion of health care claims are not submitted to us until several months after services have been rendered. Accordingly, for the most recent months, the incurred claims are estimated from a trend analysis based on per member per month claims trends developed from the experience in preceding months. This method is applied consistently year over year while assumptions may be adjusted to reflect changes in medical cost inflation, seasonal patterns, product mix, benefit plan changes and changes in membership.

An extensive degree of actuarial judgment is used in this estimation process, considerable variability is inherent in such estimates, and the estimates are highly sensitive to changes in medical claims submission and payment patterns and medical cost trends. As such, the completion factors and the claims per member per month trend factor are the most significant factors used in estimating our reserves for claims. Since a large portion of the reserves for claims is attributed to the most recent months, the estimated reserves for claims are highly sensitive to these factors. The following table illustrates the sensitivity of these factors and the estimated potential impact on our operating results caused by these factors:

 

Completion Factor (a)

Percentage-point

Increase (Decrease)

in Factor

  

Western Region Operations

Health Plan Services

(Decrease) Increase

in Reserves for Claims

2%

   $(43.2) million

1%

   $(22.0) million

(1)%

   $ 22.8 million

(2)%

   $ 46.5 million

Medical Cost Trend (b)

Percentage-point

Increase (Decrease)

in Factor

  

Western Region Operations

Health Plan Services

Increase (Decrease)

in Reserves for Claims

2%

   $ 23.6 million

1%

   $ 11.8 million

(1)%

   $(11.8) million

(2)%

   $(23.6) million

 

  (a) Impact due to change in completion factor for the most recent three months. Completion factors indicate how complete claims paid to date are in relation to the estimate of total claims for a given period. Therefore, an increase in the completion factor percent results in a decrease in the remaining estimated reserves for claims.
  (b) Impact due to change in annualized medical cost trend used to estimate the per member per month cost for the most recent three months.

Other relevant factors include exceptional situations that might require judgmental adjustments in setting the reserves for claims, such as system conversions, processing interruptions or changes, environmental changes or other factors. All of these factors are used in estimating reserves for claims and are important to our reserve methodology in trending the claims per member per month for purposes of estimating the reserves for the most recent months. In developing our best estimate of reserves for claims, we consistently apply the principles and methodology described above from year to year, while also giving due consideration to the potential variability of these factors. Because reserves for claims include various actuarially developed estimates, our actual health care services expense may be more or less than our previously developed estimates. Claims processing expenses are also accrued based on an estimate of expenses necessary to process such claims. Such reserves are continually monitored and reviewed, with any adjustments reflected in current operations.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to interest rate and market risk primarily due to our investing and borrowing activities. Market risk generally represents the risk of loss that may result from the potential change in the value of a

 

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financial instrument as a result of fluctuations in interest rates and/or market conditions and in equity prices. Interest rate risk is a consequence of maintaining variable interest rate earning investments and fixed rate liabilities or fixed income investments and variable rate liabilities. We are exposed to interest rate risks arising from changes in the level or volatility of interest rates, prepayment speeds and/or the shape and slope of the yield curve. In addition, we are exposed to the risk of loss related to changes in credit spreads. Credit spread risk arises from the potential that changes in an issuer’s credit rating or credit perception may affect the value of financial instruments. We believe that no material changes to any of these risks have occurred since December 31, 2009.

For a more detailed discussion of our market risks relating to these activities, refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk, included in our Form 10-K.

 

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon the evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of such period.

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the six months ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

A description of the legal proceedings to which the Company and its subsidiaries are a party is contained in Note 8 to the consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q, and is incorporated herein by reference.

 

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” of the Form 10-K, as updated by our quarterly report on Form 10-Q for the quarter ended March 31, 2010, which could materially affect our business, financial condition, results of operations or future results. The risks described in the Form 10-K, as updated by our quarterly report on Form 10-Q for the quarter ended March 31, 2010, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially adversely affect our business, cash flows, financial condition and/or results of operations. During the quarter ended June 30, 2010, there were no material changes to the risk factors disclosed in our Form 10-K, as updated by our quarterly report on Form 10-Q for the quarter ended March 31, 2010.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(c) Purchases of Equity Securities by the Issuer

We completed the Completed Stock Repurchase Program in February 2010. On March 18, 2010, our Board of Directors authorized the New Stock Repurchase Program, pursuant to which a total of $300 million of our common stock can be repurchased. As of June 30, 2010, the remaining authorization under the New Stock Repurchase Program was $228.1 million.

Under the Company’s various stock option and long-term incentive plans, employees and non-employee directors may elect for the Company to withhold shares to satisfy minimum statutory federal, state and local tax withholding and/or exercise price obligations, as applicable, arising from the exercise of stock options. For certain other equity awards, the Company has the right to withhold shares to satisfy any tax obligations that may be required to be withheld or paid in connection with such equity award, including any tax obligation arising on the vesting date.

A description of the Completed Stock Repurchase Program and the New Stock Repurchase Program and tabular disclosure of the information required under this Item 2 is contained in Note 5 to the consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q and in Part I—“Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Structure—Share Repurchases.”

 

Item 3. Defaults Upon Senior Securities.

None.

 

Item 4. [Removed and Reserved.]

 

Item 5. Other Information.

None.

 

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Item 6. Exhibits.

The following exhibits are filed as part of this Quarterly Report on Form 10-Q:

 

Exhibit

Number

 

Description

  *10.1   Health Net, Inc. Compensation Recovery Policy (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 17, 2010 (File No. 1-12718) and incorporated herein by reference).
  *10.2   Form of Nonqualified Stock Option Agreement under the Health Net, Inc. 2006 Long-Term Incentive Plan, as amended (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 17, 2010 (File No. 1-12718) and incorporated herein by reference).
  *10.3   Form of Performance Share Award Agreement (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on June 17, 2010 (File No. 1-12718) and incorporated herein by reference).
  *10.4   Form of Restricted Stock Unit Agreement (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on June 17, 2010 (File No. 1-12718) and incorporated herein by reference).
  *10.5   Form of Restricted Stock Agreement (filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on June 17, 2010 (File No. 1-12718) and incorporated herein by reference).
  *10.6   First Amendment to the Health Net, Inc. 401(k) Savings Plan, as amended and restated effective January 1, 2008.
    31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    32.1   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**101  

The following materials from Health Net, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, formatted in XBRL (eXtensible Business Reporting Language):

(1) Consolidated Statements of Operations for the three and six months ended June 30, 2010,

(2) Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009, (3) Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2010 and 2009,

(4) Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009 and (5) Condensed Notes to Consolidated Financial Statements, tagged as blocks of text.

 

 

* Management contract or compensatory plan or arrangement.
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

HEALTH NET, INC.

(REGISTRANT)

Date: August 3, 2010

  By:  

/s/    JOSEPH C. CAPEZZA        

    Joseph C. Capezza
    Chief Financial Officer and Principal Accounting Officer

 

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EXHIBIT INDEX

 

Exhibit

Number

 

Description

  *10.1   Health Net, Inc. Compensation Recovery Policy (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 17, 2010 (File No. 1-12718) and incorporated herein by reference).
  *10.2   Form of Nonqualified Stock Option Agreement under the Health Net, Inc. 2006 Long-Term Incentive Plan, as amended (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 17, 2010 (File No. 1-12718) and incorporated herein by reference).
  *10.3   Form of Performance Share Award Agreement (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on June 17, 2010 (File No. 1-12718) and incorporated herein by reference).
  *10.4   Form of Restricted Stock Unit Agreement (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on June 17, 2010 (File No. 1-12718) and incorporated herein by reference).
  *10.5   Form of Restricted Stock Agreement (filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on June 17, 2010 (File No. 1-12718) and incorporated herein by reference).
  *10.6   First Amendment to the Health Net, Inc. 401(k) Savings Plan, as amended and restated effective January 1, 2008.
    31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    32.1   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**101   The following materials from Health Net, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, formatted in XBRL (eXtensible Business Reporting Language): (1) Consolidated Statements of Operations for the three and six months ended June 30, 2010, (2) Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009, (3) Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2010 and 2009, (4) Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009 and (5) Condensed Notes to Consolidated Financial Statements, tagged as blocks of text.

 

* Management contract or compensatory plan or arrangement.
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.