UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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 September 30, 2012

or

o 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   o 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   o 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 o  Accelerated filer o  Non-accelerated filer o Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  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 November 2, 2012 was 81,273,053 (excluding 67,420,878 shares held as treasury stock).

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 Nine Months Ended September 30, 2012 and 2011	3
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011	4
Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011	5
Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2012 and 2011	6
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011	7
Condensed Notes to Consolidated Financial Statements	8
Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3—Quantitative and Qualitative Disclosures About Market Risk	56
Item 4—Controls and Procedures	57
Part II—OTHER INFORMATION
Item 1—Legal Proceedings	58
Item 1A—Risk Factors	58
Item 2—Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3—Defaults Upon Senior Securities	58
Item 4—Mine Safety Disclosures	58
Item 5—Other Information	58
Item 6—Exhibits	59
Signatures	60

2

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 September 30,					Nine Months Ended September 30,
	2012			2011		2012			2011
Revenues
Health plan services premiums	$	2,578,689		$	2,487,767	$	7,818,565		$	7,379,951
Government contracts	169,811			175,845		527,421			1,221,987
Net investment income	16,355			15,188		63,356			64,114
Administrative services fees and other income	1,854			2,174		16,300			6,974
Divested operations and services revenue	12,863			10,976		25,668			34,446
Total revenues	2,779,572			2,691,950		8,451,310			8,707,472
Expenses
Health plan services (excluding depreciation and amortization)	2,281,388			2,149,310		6,983,502			6,389,881
Government contracts	151,815			127,884		467,531			1,080,864
General and administrative	222,425			215,952		688,457			822,083
Selling	61,053			57,965		181,004			175,947
Depreciation and amortization	7,907			6,937		22,722			24,066
Interest	8,021			7,774		24,895			23,632
Divested operations and services expenses	17,587			32,873		59,973			133,558
Adjustment to loss on sale of Northeast health plan subsidiaries	—			315		—			(40,822		)
Total expenses	2,750,196			2,599,010		8,428,084			8,609,209
Income from continuing operations before income taxes	29,376			92,940		23,226			98,263
Income tax provision	8,898			35,131		5,712			80,268
Income from continuing operations	20,478			57,809		17,514			17,995
Discontinued operations:
Income (loss) from discontinued operation, net of tax	—			4,003		(18,452		)	(6,078		)
(Adjustment to) gain on sale of discontinued operation, net of tax	(2,450		)	—		116,990			—
(Loss) income on discontinued operation, net of tax	(2,450		)	4,003		98,538			(6,078		)
Net income	$	18,028		$	61,812	$	116,052		$	11,917
Net income per share—basic:
Income from continuing operations	$	0.25		$	0.66	$	0.21		$	0.20
(Loss) income on discontinued operation, net of tax	$	(0.03	)	$	0.05	$	1.20		$	(0.07	)
Net income per share—basic	$	0.22		$	0.71	$	1.41		$	0.13
Net income per share—diluted:
Income from continuing operations	$	0.25		$	0.65	$	0.21		$	0.20
(Loss) income on discontinued operation, net of tax	$	(0.03	)	$	0.05	$	1.18		$	(0.07	)
Net income per share—diluted	$	0.22		$	0.70	$	1.39		$	0.13
Weighted average shares outstanding:
Basic	81,607			87,675		82,451			90,479
Diluted	82,039			88,874		83,447			91,899

See accompanying condensed notes to consolidated financial statements.

3

HEALTH NET, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Net income	$	18,028		$	61,812		$	116,052		$	11,917
Other comprehensive income before tax:
Unrealized gains (losses) on investments available-for-sale:
Unrealized holding gains arising during the period	36,554			16,219			64,126			44,604
Less: Reclassification adjustments for gains included in earnings	(4,272		)	(5,369		)	(29,661		)	(32,320		)
Unrealized gains on investments available-for-sale, net	32,282			10,850			34,465			12,284
Defined benefit pension plans:
Prior service cost arising during the period	—			—			—			—
Net loss arising during the period	—			—			—			—
Less: Amortization of prior service cost and net loss included in net periodic pension cost	1,038			157			3,114			471
Defined benefit pension plans, net	1,038			157			3,114			471
Other comprehensive income, before tax	33,320			11,007			37,579			12,755
Income tax expense related to components of other comprehensive income	13,065			4,286			26,280			5,141
Other comprehensive income, net of tax	20,255			6,721			11,299			7,614
Comprehensive income	$	38,283		$	68,533		$	127,351		$	19,531

See accompanying condensed notes to consolidated financial statements.

4

HEALTH NET, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

(Unaudited)

	September 30,			December 31,
	2012			2011
ASSETS
Current Assets:
Cash and cash equivalents	$	312,579		$	230,253
Investments-available-for-sale (amortized cost: 2012-$1,607,413, 2011-$1,528,091)	1,671,678			1,557,997
Premiums receivable, net of allowance for doubtful accounts (2012-$2,854, 2011-$3,318)	310,804			251,911
Amounts receivable under government contracts	206,560			234,740
Other receivables	244,924			225,004
Deferred taxes	40,647			46,659
Other assets	151,042			117,876
Total current assets	2,938,234			2,664,440
Property and equipment, net	174,932			145,302
Goodwill	565,886			605,886
Other intangible assets, net	18,128			20,699
Deferred taxes	5,737			49,685
Investments-available-for-sale-noncurrent (amortized cost: 2012-$0, 2011-$2,450)	—			2,147
Other noncurrent assets	107,386			119,510
Total Assets	$	3,810,303		$	3,607,669
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Reserves for claims and other settlements	$	1,032,248		$	912,126
Health care and other costs payable under government contracts	58,410			88,440
Unearned premiums	128,194			176,733
Accounts payable and other liabilities	325,636			240,281
Total current liabilities	1,544,488			1,417,580
Senior notes payable	399,044			398,890
Borrowings under revolving credit facility	100,000			112,500
Other noncurrent liabilities	220,489			235,553
Total Liabilities	2,264,021			2,164,523
Commitments and contingencies
Stockholders’ Equity:
Preferred stock ($0.001 par value, 10,000 shares authorized, none issued and outstanding)	—			—
Common stock ($0.001 par value, 350,000 shares authorized; issued 2012-148,689 shares; 2011-146,804 shares )	149			147
Additional paid-in capital	1,323,150			1,278,037
Treasury common stock, at cost (2012- 67,419 shares of common stock; 2011-64,847 shares of common stock)	(2,092,459		)	(2,023,129		)
Retained earnings	2,287,511			2,171,459
Accumulated other comprehensive income	27,931			16,632
Total Stockholders’ Equity	1,546,282			1,443,146
Total Liabilities and Stockholders’ Equity	$	3,810,303		$	3,607,669

See accompanying condensed notes to consolidated financial statements.

5

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 Income (Loss)		Total
	Shares	Amount				Shares		Amount
Balance as of January 1, 2011	145,121	$	145	$	1,221,301	(50,474	)	$	(1,626,856	)	$	2,099,339	$	487	$	1,694,416
Net income											11,917				11,917
Other comprehensive income													7,614		7,614
Exercise of stock options and vesting of restricted stock units	1,604	2		27,209											27,211
Share-based compensation expense				21,345											21,345
Tax benefit related to equity compensation plans				1,113											1,113
Repurchases of common stock						(11,706	)	(325,212		)					(325,212		)
Balance as of September 30, 2011	146,725	$	147	$	1,270,968	(62,180	)	$	(1,952,068	)	$	2,111,256	$	8,101	$	1,438,404
Balance as of January 1, 2012	146,804	$	147	$	1,278,037	(64,847	)	$	(2,023,129	)	$	2,171,459	$	16,632	$	1,443,146
Net income											116,052				116,052
Other comprehensive income													11,299		11,299
Exercise of stock options and vesting of restricted stock units	1,885	2		16,587											16,589
Share-based compensation expense				23,413											23,413
Tax benefit related to equity compensation plans				5,113											5,113
Repurchases of common stock						(2,572	)	(69,330		)					(69,330		)
Balance as of September 30, 2012	148,689	$	149	$	1,323,150	(67,419	)	$	(2,092,459	)	$	2,287,511	$	27,931	$	1,546,282

See accompanying condensed notes to consolidated financial statements.

6

HEALTH NET, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	116,052		$	11,917
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Amortization and depreciation	22,722			24,066
Adjustment to loss on sale of business	—			(40,822		)
Gain on sale of discontinued operation	(116,990		)	—
Share-based compensation expense	23,413			21,345
Deferred income taxes	24,883			(14,400		)
Excess tax benefit on share-based compensation	(6,059		)	(1,279		)
Net realized (gain) loss on investments	(29,661		)	(32,320		)
Other changes	6,832			11,679
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
Premiums receivable and unearned premiums	(173,387		)	305,568
Other current assets, receivables and noncurrent assets	(78,203		)	(70,468		)
Amounts receivable/payable under government contracts	3,218			26,453
Reserves for claims and other settlements	158,581			(68,987		)
Accounts payable and other liabilities	47,765			50,445
Net cash (used in) provided by operating activities	(834		)	223,197
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments	1,132,836			1,632,037
Maturities of investments	97,815			148,196
Purchases of investments	(1,283,227		)	(1,742,649		)
Purchases of property and equipment	(55,030		)	(32,136		)
Net cash received from sale of business	248,238			—
Purchase price adjustment on sale of Northeast Health Plans	—			82,101
Sales (purchases) of restricted investments and other	6,024			(9,647		)
Net cash provided by investing activities	146,656			77,902
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases	16,589			12,309
Excess tax benefit on share-based compensation	6,059			1,279
Repurchases of common stock	(69,330		)	(313,440		)
Borrowings under financing arrangements	110,000			697,500
Repayment of borrowings under financing arrangements	(122,500		)	(552,500		)
Net increase (decrease) in checks outstanding, net of deposits	34			(40,817		)
Customer funds administered	(4,348		)	(79,232		)
Net cash used in financing activities	(63,496		)	(274,901		)
Net increase in cash and cash equivalents	82,326			26,198
Cash and cash equivalents, beginning of period	230,253			350,138
Cash and cash equivalents, end of period	$	312,579		$	376,336
SUPPLEMENTAL CASH FLOWS DISCLOSURE:
Interest paid	$	16,990		$	16,783
Income taxes paid	5,058			28,209

See accompanying condensed notes to consolidated financial statements.

7

HEALTH NET, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

Health Net, Inc. prepared the accompanying unaudited consolidated financial statements following the rules and regulations of the Securities and Exchange Commission (SEC) for interim reporting. In this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms “Company,” “Health Net,” “we,” “us,” and “our” refer to Health Net, Inc. and its subsidiaries. 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, 2011 (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. In addition, 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.

On April 1, 2012, we completed the sale of the business operations of our Medicare stand-alone Prescription Drug Plan (Medicare PDP) business to Pennsylvania Life Insurance Company, a subsidiary of CVS Caremark Corporation (CVS Caremark). As a result of the sale, the operating results of our Medicare PDP business, previously reported within our Western Region Operations reportable segment, have been reclassified as discontinued operations in our consolidated statements of operations for the three and nine months ended September 30, 2012 and 2011. See Note 3 for more information on the sale of our Medicare PDP business.

2. SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

Cash equivalents include all highly liquid investments with maturity of three months or less when purchased. We had checks outstanding, net of deposits, of $34,000 as of September 30, 2012 and $0 as of December 31, 2011. Checks outstanding, net of deposits are classified as accounts payable and other liabilities in the consolidated balance sheets and the changes are reflected in the line item net increase (decrease) in checks outstanding, net of deposits within the cash flows from financing activities in the consolidated statements of cash flows.

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. We analyze all debt investments that have unrealized losses for impairment consideration and assess the intent to sell such securities. If such intent exists, impaired securities are considered other-than-temporarily impaired. Management also assesses if we 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, we assess whether the amortized costs of the securities can be recovered. If management anticipates recovering an amount less than the amortized cost of the securities, 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. During the three and nine months ended September 30, 2012 and 2011, respectively, no losses were recognized from other-than-temporary impairments.

Fair Value of Financial Instruments

The estimated fair value amounts of cash equivalents, investments available-for-sale, premiums and other receivables, notes receivable and notes payable have been determined by using available market information and

8

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 premiums and other 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 $417.8 million and $423.1 million as of September 30, 2012 and December 31, 2011, respectively. For the periods ending September 30, 2012 and December 31, 2011, the fair value of our variable-rate borrowings under our revolving credit facility was $100.0 million and $112.5 million, respectively. The fair value of our fixed-rate borrowings was determined using the quoted market price, which is a Level 1 input in the fair value hierarchy. The fair value of our variable-rate borrowings was estimated to equal the carrying value because the interest rates paid on these borrowings were based on prevailing market rates. Since the pricing inputs are other than quoted prices and fair value is determined using an income approach, our variable-rate borrowings are classified as a Level 2 in the fair value hierarchy. See Notes 7 and 8 for additional information regarding our financing arrangements and fair value measurements, respectively.

Health Plan Services Health Care Cost

The cost of health care services is recognized in the period in which services are provided and includes an estimate of the cost of services that have been incurred but not yet reported. Such costs include payments to primary care physicians, specialists, hospitals and outpatient care facilities, and the costs associated with managing the extent of such care.

Our health care cost can also include from time to time remediation of certain claims as a result of periodic reviews by various regulatory agencies. We estimate the amount of the provision for health care service costs incurred but not yet reported (IBNR) in accordance with GAAP and using standard actuarial developmental methodologies based upon historical data including the period between the date services are rendered and the date claims are received and paid, denied claim activity, expected medical cost inflation, seasonality patterns and changes in membership, among other things.

Our IBNR best estimate also includes a provision for adverse deviation, which is an estimate for known environmental factors that are reasonably likely to affect the required level of IBNR reserves. This provision for adverse deviation is intended to capture the potential adverse development from known environmental factors such as our entry into new geographical markets, changes in our geographic or product mix, the introduction of new customer populations such as our Seniors and Persons with Disabilities population in California, variation in benefit utilization, disease outbreaks, changes in provider reimbursement, fluctuations in medical cost trend, variation in claim submission patterns and variation in claims processing speed and payment patterns, changes in technology that provide faster access to claims data or change the speed of adjudication and settlement of claims, variability in claim inventory levels, non-standard claim development, and/or exceptional situations that require judgmental adjustments in setting the reserves for claims.

We consistently apply our IBNR estimation methodology from period to period. Our IBNR best estimate is made on an accrual basis and adjusted in future periods as required. Any adjustments to the prior period estimates are included in the current period. As additional information becomes known to us, we adjust our assumptions accordingly to change our estimate of IBNR. Therefore, if moderately adverse conditions do not occur, evidenced by more complete claims information in the following period, then our prior period estimates will be revised downward, resulting in favorable development. However, any favorable prior period reserve development would increase current period net income only to the extent that the current period provision for adverse deviation is less than the benefit recognized from the prior period favorable development. If moderately adverse conditions occur and are more acute than we estimated, then our prior period estimates will be revised upward, resulting in unfavorable development, which would decrease current period net income. In each of the reporting periods for the three months ended September 30, 2012 and 2011, there were no material reserve developments related to prior years. For the nine months ended September 30, 2012, health care cost was impacted by approximately $33 million attributable to the revision of the previous estimate of incurred claims for prior years as a result of adverse prior year development. We believe this unfavorable reserve development for the nine months ended September 30, 2012 was primarily due to significant delays in claims submissions for the fourth quarter of 2011 arising from issues related to a new billing format required by the Health Insurance Portability and Accountability Act of 1996 (HIPAA) coupled with an unanticipated flattening of commercial trends and higher commercial large group claims trend. For the nine months ended September 30, 2011,

9

health care cost was impacted by approximately $97 million of favorable reserve development related to prior years. This favorable development was primarily due to adjustments to our reserves that related to variables and uncertainties associated with our assumptions. As our reserve balance for older months of service decreased, and estimates of our incurred costs for older dates of service became more certain and predictable, our estimates of incurred claims related to prior periods were adjusted accordingly.

There were nomaterial changes to the provision for adverse deviation for the three and nine months ended September 30, 2012 and 2011.

The majority of the IBNR reserve balance held at each quarter-end is associated with the most recent months' incurred services because these are the services for which the fewest claims have been paid. The degree of uncertainty in the estimates of incurred claims is greater for the most recent months' incurred services. Revised estimates for prior periods are determined in each quarter based on the most recent updates of paid claims for prior periods. Estimates for service costs incurred but not yet reported are subject to the impact of changes in the regulatory environment, economic conditions, changes in claims trends, and numerous other factors. Given the inherent variability of such estimates, the actual liability could differ significantly from the amounts estimated.

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 primary customer of our Government Contracts reportable segment with fees and premiums associated with this customer accounting for 96% of our Government Contracts revenue. In addition, the federal government is a significant customer of our Western Region Operations reportable segment as a result of our contract with Centers for Medicare & Medicaid Services (CMS) for coverage of Medicare-eligible individuals. Furthermore, all of our Medicaid/Medi-Cal revenue is derived in California through our relationship with the State of California Department of Health Care Services (DHCS). As a result, DHCS is a significant customer of our Western Region Operations reportable segment.

Comprehensive Income

Comprehensive income includes all changes in stockholders’ equity (except those arising from transactions with stockholders) and includes net income (loss), 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.

10

Our accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2012 and 2011 is as follows:

	Unrealized Gains (Losses) on investments available-for-sale		Defined Benefit Pension Plans			Accumulated Other Comprehensive Income (loss)
Three Months Ended September 30:			(Dollars in millions)
Balance as of July 1, 2011	$	6.0	$	(4.6	)	$	1.4
Other comprehensive income for the three months ended September 30, 2011	6.6		0.1			6.7
Balance as of September 30, 2011	$	12.6	$	(4.5	)	$	8.1
Balance as of July 1, 2012	$	19.6	$	(11.9	)	$	7.7
Other comprehensive income for the three months ended September 30, 2012	19.6		0.6			20.2
Balance as of September 30, 2012	$	39.2	$	(11.3	)	$	27.9
Nine Months Ended September 30:
Balance as of January 1, 2011	$	5.3	$	(4.8	)	$	0.5
Other comprehensive income for the nine months ended September 30, 2011	7.3		0.3			7.6
Balance as of September 30, 2011	$	12.6	$	(4.5	)	$	8.1
Balance as of January 1, 2012	$	29.8	$	(13.2	)	$	16.6
Other comprehensive income for the nine months ended September 30, 2012	9.4		1.9			11.3
Balance as of September 30, 2012	$	39.2	$	(11.3	)	$	27.9

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 performance share units (PSUs) were vested) outstanding during the periods presented.

The inclusion or exclusion of common stock equivalents arising from stock options, RSUs and PSUs in the computation of diluted earnings per share is determined using the treasury stock method. For the three and nine months ended September 30, 2012, respectively, 432,000 and 996,000 shares of dilutive common stock equivalents were outstanding. For the three and nine months ended September 30, 2011, respectively, 1,199,000 and 1,420,000 shares of dilutive common stock equivalents were outstanding.

For the three and nine months ended September 30, 2012, respectively, an aggregate of 4,342,000 and 1,819,000 shares of common stock equivalents were considered anti-dilutive and were not included in the computation of diluted earnings per share. For the three and nine months ended September 30, 2011, respectively, 2,853,000 and 2,165,000 shares of common stock equivalents were considered anti-dilutive and were not included in the computation of diluted earnings per share. Stock options expire at various times through April 2019.

In March 2010, our Board of Directors authorized a $300 million stock repurchase program (2010 stock repurchase program). We completed our 2010 stock repurchase program in April 2011. In May 2011, our Board of Directors authorized a new stock repurchase program for the repurchase of up to $300 million of our outstanding common stock (2011 stock repurchase program). As of December 31, 2011, the remaining authorization under our 2011 stock repurchase program was $76.3 million. On March 8, 2012, our Board of Directors approved a $323.7 million increase to our 2011 stock repurchase program. The remaining authorization under our 2011 stock repurchase program as of September 30, 2012 was $350.0 million. See Note 6 for more information regarding our 2010 and 2011 stock repurchase programs.

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Goodwill and Other Intangible Assets

We performed our annual impairment test on our goodwill and other intangible assets as of June 30, 2012 for our Western Region Operations reporting unit and also re-evaluated the useful lives of our other intangible assets. No goodwill impairment was identified. We also determined that the estimated useful lives of our other intangible assets properly reflected the current estimated useful lives.

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

	Western Region Operations	Total
	(Dollars in millions)
Balance as of December 31, 2011	$605.9	$605.9
Goodwill allocated to Medicare PDP business sold	(40.0)	(40.0)
Balance as of September 30, 2012	$565.9	$565.9

On April 1, 2012, we completed the sale of our Medicare PDP business. See Note 3 for additional information regarding the sale of our Medicare PDP business. Our Medicare PDP business was previously reported as part of our Western Region Operations reporting unit. As of March 31, 2012, we re-allocated a portion of the Western Region Operations reporting unit goodwill to the Medicare PDP business based on relative fair values of the reporting unit with and without the Medicare PDP business. Our measurement of fair value is based on a combination of the income approach based on a discounted cash flow methodology and the discounted total consideration received in connection with the sale of our Medicare PDP business. After the reallocation of goodwill, we performed a two-step impairment test to determine the existence of any impairment and the amount of the impairment. In the first step, we compared the fair value to the related carrying value and concluded that no impairment to either the carrying value of our Medicare PDP business or our Western Region Operations reporting unit had occurred. Based on the result of the first step test, we did not need to complete the second step test. See Note 8 for goodwill fair value measurement information.

Due to the many variables inherent in the estimation of a business’s fair value and the relative size of recorded goodwill, changes in assumptions may have a material effect on the results of our impairment test. The discounted cash flows and market participant valuations (and the resulting fair value estimates of the Western Region Operations reporting unit) are sensitive to changes in assumptions including, among others, certain valuation and market assumptions, the Company’s ability to adequately incorporate into its premium rates the future costs of premium-based assessments imposed by the Patient Protection and Affordable Care Act and the Health Care and Reconciliation Act of 2010, and assumptions related to the achievement of certain administrative cost reductions and the profitable implementation of the dual eligibles pilot program. Changes to any of these assumptions could cause the fair value of our Western Region Operations reporting unit to be below its carrying value. As of June 30, 2011 and June 30, 2012, the ratio of the fair value of our Western Region Operations reporting unit to its carrying value was approximately 180% and 115%, respectively.

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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	Net Balance	Weighted Average Life (in years)
	(Dollars in millions)
As of September 30, 2012:
Provider networks	$40.5	$(34.4)	$6.1	19.4
Customer relationships and other	29.5	(17.5)	12.0	11.1
	$70.0	$(51.9)	$18.1
As of December 31, 2011:
Provider networks	$40.5	$(33.6)	$6.9	19.4
Customer relationships and other	29.5	(15.7)	13.8	11.1
	$70.0	$(49.3)	$20.7

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

Year	Amount
2012	$	3.4
2013	3.4
2014	2.8
2015	2.6
2016	2.0

Restricted Assets

We and our consolidated subsidiaries are required to set aside certain funds that 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 September 30, 2012 and December 31, 2011, the restricted cash and cash equivalents balances totaled $0.9 million and $5.3 million, respectively, and are included in other noncurrent assets. Investment securities held by trustees or agencies were $26.2 million and $20.7 million as of September 30, 2012 and December 31, 2011, respectively, and are included in investments available-for-sale.

Divested Operations and Services

Divested operations and services revenues and expenses include items related to the run-out of our Northeast business that was sold on December 11, 2009. Prior to the first quarter of 2012, these line items had been called Northeast administrative services fees and other revenues and expenses. Due to the sale of our Medicare PDP business on April 1, 2012, starting with the first quarter of 2012, Divested operations and services revenues and expenses also include transition-related revenues and expenses related to the sale of our Medicare PDP business. We provide Medicare PDP transition-related services to CVS Caremark in connection with the transaction. We expect to continue to provide the majority of these services through December 31, 2012, although certain transition-related services may continue through December 31, 2013. See Note 3 for additional information regarding the sale of our Medicare PDP business and the sale of our Northeast business, and see Note 4 for information regarding the change to our reportable segments as a result of the sale of our Medicare PDP business.

Government Contracts

On April 1, 2011, we began delivering administrative services under a new Managed Care Support Contract (T-3) with the United States Department of Defense (DoD) for the TRICARE North Region. The T-3 contract was awarded to us on May 13, 2010. We were the managed care contractor for the DoD's previous TRICARE contract in the North Region, which ended on March 31, 2011.

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The T-3 contract has five one-year option periods. On March 15, 2011, the DoD exercised option period 2 (without exercising option period 1), due to a delay of approximately one year in the government's initial award of the T-3 contract. Accordingly, option period 2 commenced on April 1, 2011. On March 22, 2012, the DoD exercised option period 3, which commenced on April 1, 2012. If all remaining option periods are exercised, the T-3 contract would conclude on March 31, 2015.

We provide various types of administrative services under the contract, including: provider network management, referral management, medical management, disease management, enrollment, customer service, clinical support service, and claims processing. We also provided assistance in the transition into the T-3 contract, and will provide assistance in any transition out of the T-3 contract. These services are structured as cost reimbursement arrangements for health care costs plus administrative fees earned in the form of fixed prices, fixed unit prices, and contingent fees and payments based on various incentives and penalties.

In accordance with GAAP, we evaluate, at the inception of the contract and as services are delivered, all deliverables in the service arrangement to determine whether they represent separate units of accounting. The delivered items are considered separate units of accounting if the delivered items have value to the customer on a standalone basis (i.e., they are sold separately by any vendor) and no general right of return exists relative to the delivered item. While we identified two separate units of accounting within the T-3 contract, no determination of estimated selling price was performed because both units of accounting are performed ratably over the option periods and, accordingly, the same methodology of revenue recognition applies to both units of accounting.

Therefore, we recognize revenue related to administrative services on a straight-line basis over the option period, when the fees become fixed and determinable.

The T-3 contract includes various performance-based incentives and penalties. For each of the incentives or penalties, we adjust revenue accordingly based on the amount that we have earned or incurred at each interim date and are legally entitled to in the event of a contract termination.

The transition-in process for the T-3 contract began in the second quarter of 2010. We had deferred transition-in costs of $43.8 million, which we began amortizing on April 1, 2011 on a straight-line basis, and we had related deferred revenues of $52.5 million, which are being amortized over the customer relationship period. Fulfillment costs associated with the T-3 contract are expensed as incurred.

Revenues and expenses associated with the T-3 contract are reported as part of Government contracts revenues and Government contracts expenses, respectively, in the consolidated statements of operations and included in our Government Contracts reportable segment.

The TRICARE members are served by our network and out-of-network providers in accordance with the T-3 contract. We pay health care costs related to these services to the providers and are later reimbursed by the DoD for such payments. Under the terms of the T-3 contract, we are not the primary obligor for health care services and accordingly, we do not include health care costs and related reimbursements in our consolidated statements of operations. Health care costs for the T-3 contract that are paid and reimbursable amounted to $638.8 million and $1,957.2 million for the three and nine months ended September 30, 2012, respectively, and amounted to $569.4 million and $991.0 million for the three and nine months ended September 30, 2011, respectively.

In addition to the beneficiaries that we service under the T-3 contract, we provide behavioral health services to military families under the DoD Military and Family Life Counseling, formerly Military and Family Life Consultant (MFLC) program. On August 15, 2012, we entered into a new MFLC contract awarded by the DoD. The new contract has a five-year term that includes a 12-month base period and four 12-month option periods. As a result of the revised terms and structure of the new MFLC contract and the government's decision to award the new MFLC contract to multiple contractors, we anticipate that the revenues we receive from the new contract will be substantially reduced in comparison to our original MFLC contract.

CMS Risk Adjustment Data Validation Audit Methodology

On February 24, 2012, CMS published its final payment error calculation methodology for Medicare Advantage risk adjustment data validation contract-level audits (RADV audits). CMS will begin applying the final methodology for RADV audits of the 2011 payment year. The final methodology provides for payment recovery based on extrapolated estimates of payment error rates. However, the final methodology also includes, among other things, a fee-for-service adjuster, which would limit our payment liability to an error rate in excess of CMS' own fee-for-service error rate. CMS' final methodology is complex and we continue to evaluate its potential impact on us, but potential payment adjustments could have a material adverse effect on our results of operations and financial condition.

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3. SALE OF MEDICARE PDP BUSINESS AND NORTHEAST BUSINESS

Sale of Medicare PDP Business

On April 1, 2012, our subsidiary Health Net Life Insurance Company (HNL) sold substantially all of the assets, properties and rights of HNL used primarily or exclusively in our Medicare PDP business to CVS Caremark and CVS Caremark assumed certain related liabilities and obligations of HNL as set forth in the related Asset Purchase Agreement. At the closing of the sale, CVS Caremark paid to us $169.9 million (PDP Purchase Price) in cash, representing $400 multiplied by 424,820, the number of individuals enrolled as members of a PDP plan of HNL as of the closing date. The PDP Purchase Price was subject to adjustment based on pretax cash flow, net asset valuation and prepaid expenses (the financial adjustment) and enrollee numbers related to our Medicare PDP business, each as set forth in the Asset Purchase Agreement. In June 2012, we received $78.3 million in cash from CVS Caremark, which represented the net financial adjustment to the PDP Purchase Price. We recognized a $132.8 million pretax gain on the sale of our Medicare PDP business, or $117.0 million net of tax, and this after tax gain was reported as Gain on sale of discontinued operation, net of tax.

In connection with the transaction, we are not permitted to offer Medicare PDP plans for one year following the closing, subject to certain exceptions. We continue to provide prescription drug benefits as part of our Medicare Advantage plan offerings.

In addition, we provide Medicare PDP transition-related services to CVS Caremark in connection with the transaction. We expect to continue to provide the majority of these services through December 31, 2012, although certain transition-related services may continue through December 31, 2013. We recognized the value of future transition-related services to be provided under the Asset Purchase Agreement of $12.0 million as deferred revenue at fair value as of April 1, 2012. This deferred revenue is amortized on a straight-line basis over a nine-month period. The fair value of such deferred revenue was estimated using the income approach based on discounted cash flows. This fair value measurement is based on significant unobservable Level 3 inputs, which include costs associated with providing the transition-related and other services and a discount rate of 1.2 percent. See Note 8 for additional information regarding the fair value measurement of this deferred revenue. Revenues and expenses from these transition-related services are reported as part of Divested operations and services revenue and expenses (see Notes 2 and 4).

As a result of the sale, the operating results of our Medicare PDP business, previously reported within the Western Region Operations reportable segment, have been reclassified as discontinued operations in our consolidated statements of operations for the three and nine months ended September 30, 2012 and 2011. Our revenues related to our Medicare PDP business were $0 and $191.8 million for the three and nine months ended September 30, 2012, respectively, and $94.6 million and $381.5 million for the three and nine months ended September 30, 2011, respectively. These revenues were excluded from our continuing operating results and included in income (loss) from discontinued operation. Our Medicare PDP business had a pretax income (loss) of $0 and $(28.8) million for the three and nine months ended September 30, 2012, respectively, and $6.2 million and $(9.5) million for the three and nine months ended September 30, 2011, respectively. As of September 30, 2011, we had approximately 381,000 Medicare stand-alone Prescription Drug Plan members. As of September 30, 2012, we had no Medicare stand-alone Prescription Drug Plan members.

Northeast Sale

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 and had conducted businesses in Connecticut, New Jersey, New York and Bermuda (Acquired Companies) to an affiliate of UnitedHealth Group Incorporated (United). As part of the Northeast Sale, we were required to continue to serve the members of the Acquired Companies and provide certain administrative services to United until July 1, 2011 under administrative services agreements, and we are required to provide run-out support services under claims servicing agreements with United, which will be in effect until the last run out claim under the applicable claims servicing agreement has been adjudicated. All revenues and expenses related to the Northeast Sale, including those relating to the administrative services and/or claims servicing agreements and any revenues and expenses related to the run-out, are reported as part of Divested operations and services revenue and expenses. During the three and nine months ended September 30, 2012, we recorded no adjustment to the loss on sale of Northeast health plan subsidiaries, and during the three and nine months ended September 30, 2011, we recorded a $0.3 million addition and $40.8 million reduction to the loss on sale of Northeast health plan subsidiaries, respectively.

4. SEGMENT INFORMATION

Following the execution of the Asset Purchase Agreement to sell our Medicare PDP business in the first quarter

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of 2012, we reviewed our reportable segments. As a result of this review, beginning in the first quarter of 2012, our Divested Operations and Services reportable segment, formerly called the "Northeast Operations" reportable segment, also includes the transition-related expenses of our Medicare PDP business that was sold on April 1, 2012. Accordingly, all services provided in connection with divested businesses are now reported as part of our Divested Operations and Services reportable segment.

We operate within three reportable segments, Western Region Operations, Government Contracts and Divested Operations and Services. Our Western Region Operations reportable segment includes the operations of our commercial, Medicare and Medicaid health plans, our health and life insurance companies, and our behavioral health and pharmaceutical services subsidiaries. These operations are conducted primarily in California, Arizona, Oregon and Washington. As a result of the classification of our Medicare PDP business as discontinued operations, our Western Region Operations reportable segment excludes the operating results of our Medicare PDP business for the three and nine months ended September 30, 2012 and 2011. Our Government Contracts reportable segment includes government-sponsored managed care and administrative services contracts through the TRICARE program, the Department of Defense MFLC program and other health care-related government contracts. For the three and nine months ended September 30, 2011, our Divested Operations and Services reportable segment included the operations of our businesses that provided administrative services to United in connection with the Northeast Sale. Beginning in the first quarter of 2012, our Divested Operations and Services reportable segment also includes the transition-related revenues and expenses of our Medicare PDP business that was sold on April 1, 2012. Prior period segment information has been conformed to this current presentation in this Quarterly Report on Form 10-Q. See Note 3 for more information regarding the sale of our Medicare PDP business and the Northeast Sale.

The financial results of our reportable segments are reviewed on a monthly basis by our chief operating decision maker (CODM). We continuously monitor our reportable segments to ensure that they reflect how our CODM manages our company.

We evaluate performance and allocate resources based on segment pretax income. Our assets are managed centrally and viewed by our CODM on a consolidated basis; therefore, they are not allocated to our segments and our segments are not evaluated for performance based on assets. The accounting policies of our reportable segments are the same as those described in Note 2 to the consolidated financial statements included in our Form 10-K, except that intersegment transactions are not eliminated.

We also have a Corporate/Other segment that is not a business operating segment. It is added to our reportable segments to provide a reconciliation to our consolidated results. The Corporate/Other segment includes costs that are excluded from the calculation of segment pretax income because they are not managed within the segments and are not directly identified with a particular operating segment. Accordingly, these costs are not included in the performance evaluation of our reportable segments by our CODM. In addition, certain charges, including but not limited to those related to our operations strategy and corporate overhead cost reduction efforts, as well as asset impairments, are reported as part of Corporate/Other.

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Our segment information for the three and nine months ended September 30, 2012 and 2011 is as follows:

	Western Region Operations		Government Contracts		Divested Operationsand Services			Corporate/Other/ Eliminations			Total
	(Dollars in millions)
Three Months Ended September 30, 2012
Revenues from external sources	$	2,596.9	$	169.8	$	12.9		$	—		$	2,779.6
Intersegment revenues	2.7		—		—			(2.7		)	—
Segment pretax income (loss)	20.2		21.1		(4.7		)	(7.2		)	29.4
Three Months Ended September 30, 2011
Revenues from external sources	$	2,505.1	$	175.9	$	11.0		$	—		$	2,692.0
Intersegment revenues	3.0		—		—			(3.0		)	—
Segment pretax income (loss)	71.8		48.1		(22.4		)	(4.6		)	92.9
Nine Months Ended September 30, 2012
Revenues from external sources	7,898.2		527.4		25.7			—			8,451.3
Intersegment revenues	8.3		—		—			(8.3		)	—
Segment pretax income (loss)	12.6		66.6		(34.4		)	(21.6		)	23.2
Nine Months Ended September 30, 2011
Revenues from external sources	7,448.6		1,222.0		36.9			—			8,707.5
Intersegment revenues	8.9		—		—			(8.9		)	—
Segment pretax income (loss)	207.1		146.2		(58.9		)	(196.1		)	98.3

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
	(Dollars in millions)
Commercial premium revenue	$	1,420.4	$	1,494.8	$	4,310.0	$	4,466.0
Medicare premium revenue	682.9		605.3		2,089.4		1,844.8
Medicaid premium revenue	475.4		387.7		1,419.2		1,066.9
Total Western Region Operations health plan services premiums	2,578.7		2,487.8		7,818.6		7,377.7
Total Divested Operations and Services health plan services premiums	—		—		—		2.3
Total health plan services premiums	$	2,578.7	$	2,487.8	$	7,818.6	$	7,380.0

5. 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. 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.

During the three and nine months ended September 30, 2012 and 2011, we recognized no losses from other-than-temporary impairments of our cash equivalents and available-for-sale investments.

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We had no noncurrent available-for-sale investments as of September 30, 2012. As of December 31, 2011, we classified $2.1 million as investments available-for-sale-noncurrent because we did not intend to sell and we believed 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 December 31, 2011.

As of September 30, 2012 and December 31, 2011, 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:

	September 30, 2012
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Carrying Value
	(Dollars in millions)
Current:
Asset-backed securities	$	575.0	$	22.9	$	—		$	597.9
U.S. government and agencies	26.0		—		—			26.0
Obligations of states and other political subdivisions	609.9		23.6		—			633.5
Corporate debt securities	396.5		17.9		(0.1		)	414.3
	$	1,607.4	$	64.4	$	(0.1	)	$	1,671.7

	December 31, 2011
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Carrying Value
	(Dollars in millions)
Current:
Asset-backed securities	$	611.9	$	10.6	$	(0.2	)	$	622.3
U.S. government and agencies	32.5		—		—			32.5
Obligations of states and other political subdivisions	498.7		19.5		(0.1		)	518.1
Corporate debt securities	385.0		4.3		(4.2		)	385.1
	$	1,528.1	$	34.4	$	(4.5	)	$	1,558.0
Noncurrent:
Corporate debt securities	$	2.4	$	—	$	(0.3	)	$	2.1

As of September 30, 2012, the contractual maturities of our current investments available-for-sale were as follows:

	Amortized Cost		Estimated Fair Value
Current:	(Dollars in millions)
Due in one year or less	$	33.0	$	33.1
Due after one year through five years	190.4		197.2
Due after five years through ten years	406.4		427.2
Due after ten years	402.6		416.3
Asset-backed securities	575.0		597.9
Total current investments available-for-sale	$	1,607.4	$	1,671.7

Proceeds from sales of investments available-for-sale during the three and nine months ended September 30, 2012 were $117.6 million and $1,132.8 million, respectively. Gross realized gains and losses totaled $4.3 million and $36,000, respectively, for the three months ended September 30, 2012, and $30.1 million and $0.4 million, respectively, for the nine months ended September 30, 2012. Proceeds from sales of investments available-for-sale

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during the three and nine months ended September 30, 2011 were $434.2 million and $1,632.0 million, respectively. Gross realized gains and losses totaled $7.9 million and $2.5 million, respectively, for the three months ended September 30, 2011, and $37.2 million and $4.9 million, respectively, for the nine months ended September 30, 2011.

The following tables show our investments’ fair values and gross unrealized losses for individual securities that have been in a continuous loss position through September 30, 2012 and December 31, 2011. These investments are interest-yielding debt securities of varying maturities. We have determined that the unrealized loss position for these securities is primarily 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 following table shows our current investments' fair values and gross unrealized losses for individual securities in a continuous loss position as of September 30, 2012:

	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	$	6.0	$	—		$	—	$	—	$	6.0	$	—
U.S. government and agencies	10.3		—			—		—		10.3		—
Obligations of states and other political subdivisions	9.8		—			0.3		—		10.1		—
Corporate debt securities	8.5		(0.1		)	—		—		8.5		(0.1		)
	$	34.6	$	(0.1	)	$	0.3	$	—	$	34.9	$	(0.1	)

The following table shows the number of our individual securities-current that have been in a continuous loss position at September 30, 2012:

	Less than 12 Months	12 Months or More	Total
Asset-backed securities	9	1	10
U.S. government and agencies	2	—	2
Obligations of states and other political subdivisions	5	1	6
Corporate debt securities	8	—	8
	24	2	26

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, 2011:

	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	$	30.5	$	(0.2	)	$	1.1	$	—		$	31.6	$	(0.2	)
U.S. government and agencies	—		—			—		—			—		—
Obligations of states and other political subdivisions	7.5		—			3.0		(0.1		)	10.5		(0.1		)
Corporate debt securities	149.3		(4.1		)	1.4		(0.1		)	150.7		(4.2		)
	$	187.3	$	(4.3	)	$	5.5	$	(0.2	)	$	192.8	$	(4.5	)

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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, 2011:

	Less than 12 Months					12 Months or More				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in millions)
Corporate debt securities	$	2.1	$	(0.3	)	$	—	$	—	$	2.1	$	(0.3	)

6. STOCK REPURCHASE PROGRAM

On March 18, 2010, our Board of Directors authorized our 2010 stock repurchase program pursuant to which a total of $300 million of our common stock could be repurchased. We completed our 2010 stock repurchase program in April 2011. During the nine months ended September 30, 2011, we repurchased 4.9 million shares of our common stock for aggregate consideration of approximately $149.8 million under our 2010 stock repurchase program. As of December 31, 2011, we had repurchased an aggregate of 10.8 million shares of our common stock under our 2010 stock repurchase program at an average price of $27.80 per share for aggregate consideration of $300.0 million.

On May 2, 2011, our Board of Directors authorized our 2011 stock repurchase program pursuant to which a total of $300.0 million of our outstanding common stock could be repurchased. As of December 31, 2011, the remaining authorization under our 2011 stock repurchase program was $76.3 million. On March 8, 2012, our Board of Directors approved a $323.7 million increase to our 2011 stock repurchase program. Subject to the approval of our Board of Directors, we may repurchase our common stock under our 2011 stock repurchase program from time to time in privately negotiated transactions, through accelerated stock 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 shares of stock repurchased 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. Our 2011 stock repurchase program may be suspended or discontinued at any time.

During the three and nine months ended September 30, 2012, we repurchased 1.5 million shares and 2.1 million shares, respectively, of our common stock for aggregate consideration of $36.1 million and $50.0 million, respectively, under our 2011 stock repurchase program. The remaining authorization under our 2011 stock repurchase program as of September 30, 2012 was $350.0 million.

7. FINANCING ARRANGEMENTS

Revolving Credit Facility

In October 2011, we entered into a $600 million unsecured revolving credit facility due in October 2016, which includes a $400 million sublimit for the issuance of standby letters of credit and a $50 million sublimit for swing line loans (which sublimits may be increased in connection with any increase in the credit facility described below). In addition, we have the ability from time to time to increase the credit facility by up to an additional $200 million in the aggregate, subject to the receipt of additional commitments. As of September 30, 2012, $100.0 million was outstanding under our revolving credit facility and the maximum amount available for borrowing under the revolving credit facility was $440.6 million (see "—Letters of Credit" below).

Amounts outstanding under our revolving credit facility bear interest, at the Company’s option, at either (a) the base rate (which is a rate per annum equal to the greatest of (i) the federal funds rate plus one-half of one percent, (ii) Bank of America, N.A.’s “prime rate” and (iii) the Eurodollar Rate (as such term is defined in the credit facility) for a one-month interest period plus one percent) plus an applicable margin ranging from 45 to 105 basis points or (b) the Eurodollar Rate plus an applicable margin ranging from 145 to 205 basis points. The applicable margins are based on our consolidated leverage ratio, as specified in the credit facility, and are subject to adjustment following the Company’s delivery of a compliance certificate for each fiscal quarter.

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 that 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 be in compliance at the end of each fiscal quarter with a specified consolidated leverage ratio and consolidated fixed charge coverage ratio.

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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 the Company 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 credit facility) in a manner that could reasonably be expected to result in a material adverse effect; certain voluntary and involuntary bankruptcy events; inability to pay debts; undischarged, uninsured judgments greater than $50 million against us and/or our subsidiaries that are not stayed within 60 days; 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

Pursuant to the terms of our revolving credit facility, we can obtain letters of credit in an aggregate amount of $400 million and the maximum amount available for borrowing is reduced by the dollar amount of any outstanding letters of credit. As of September 30, 2012 and December 31, 2011, we had outstanding letters of credit of $59.4 million and $59.4 million, respectively, resulting in a maximum amount available for borrowing of $440.6 million and $428.1 million, respectively. As of September 30, 2012 and December 31, 2011, no amounts had been drawn on any of these letters of credit.

Senior Notes

In 2007 we issued $400 million in aggregate principal amount of 6.375% Senior Notes due 2017 (Senior Notes). 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 September 30, 2012, 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 twelve30-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 million, 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 million, if that acceleration results from a default under the instrument giving rise to or securing such indebtedness for money borrowed and such indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days after notice; or

• events in bankruptcy, insolvency or reorganization of our Company.

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Our Senior Notes payable balances were $399.0 million as of September 30, 2012 and $398.9 million as of December 31, 2011.

8. FAIR VALUE MEASUREMENTS

We record certain 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 types 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 that are based on an income approach. Examples include, but are not limited to, multidimensional relational model, option adjusted spread model, and various matrices. Specific pricing inputs include quoted prices for similar securities in both active and non-active markets, other observable inputs such as interest rates, yield curve volatilities, default rates, and inputs that are derived principally from or corroborated by other observable market data. Investments that are generally included in this category include asset-backed securities, corporate bonds and loans, and state and municipal bonds.

Level 3—Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgment or estimation using assumptions that market participants would use, including assumptions for risk. The investments included in Level 3 are auction rate securities that 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. Also included in the Level 3 category is an embedded contractual derivative held by the Company estimated at fair value. Significant inputs used in the derivative valuation model include the estimated growth in Health Net health care expenditures and estimated growth in national health care expenditures. The growth in these expenditures was modeled using a Monte Carlo simulation approach.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.

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The following tables present information about our assets and liabilities measured at fair value on a recurring basis at September 30, 2012 and December 31, 2011, 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 September 30, 2012:
Assets:
Cash and cash equivalents	$	312.6	$	—	$	—	$	—	$	312.6
Investments—available-for-sale
Asset-backed debt securities:
Residential mortgage-backed securities	$	—	$	372.0	$	—	$	—	$	372.0
Commercial mortgage-backed securities	—		201.7		—		—		201.7
Other asset-backed securities	—		24.2		—		—		24.2
U.S. government and agencies:
U.S. Treasury securities	26.0		—		—		—		26.0
U.S. Agency securities	—		—		—		—		—
Obligations of states and other political subdivisions	—		633.3		—		0.2		633.5
Corporate debt securities	—		414.3		—		—		414.3
Total investments at fair value	$	26.0	$	1,645.5	$	—	$	0.2	$	1,671.7
Embedded contractual derivative	—		—		—		7.2		7.2
Total assets at fair value	$	338.6	$	1,645.5	$	—	$	7.4	$	1,991.5

	Level 1		Level 2- current		Level 2- noncurrent		Level 3		Total
As of December 31, 2011:
Assets:
Cash and cash equivalents	$	230.3	$	—	$	—	$	—	$	230.3
Investments—available-for-sale
Asset-backed debt securities:
Residential mortgage-backed securities	$	—	$	495.3	$	—	$	—	$	495.3
Commercial mortgage-backed securities	—		94.4		—		—		94.4
Other asset-backed securities	—		32.6		—		—		32.6
U.S. government and agencies:
U.S. Treasury securities	25.5		—		—		—		25.5
U.S. Agency securities	—		7.0		—		—		7.0
Obligations of states and other political subdivisions	—		517.9		—		0.2		518.1
Corporate debt securities	—		385.1		2.1		—		387.2
Total investments at fair value	$	25.5	$	1,532.3	$	2.1	$	0.2	$	1,560.1
Embedded contractual derivative	—		—		—		5.3		5.3
Total assets at fair value	$	255.8	$	1,532.3	$	2.1	$	5.5	$	1,795.7

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 nine months ended September 30, 2012 and 2011. 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.

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The changes in the balances of Level 3 financial assets for the three months endedSeptember 30, 2012 and 2011 were as follows (dollars in millions):

	Three Months Ended September 30,
	2012								2011
	Available-For-Sale Investments		Embedded Contractual Derivative			Total			Available-For-Sale Investments			Embedded Contractual Derivative		Total
Opening balance	$	0.2	$	15.0		$	15.2		$	9.9		$	0.8	$	10.7
Transfers into Level 3	—		—			—			—			—		—
Transfers out of Level 3	—		—			—			—			—		—
Total gains or losses for the period
Realized in net income	—		(7.8		)	(7.8		)	(2.4		)	0.7		(1.7		)
Unrealized in accumulated other comprehensive income	—		—			—			—			—		—
Purchases, issues, sales and settlements
Purchases/additions	—		—			—			—			—		—
Issues	—		—			—			—			—		—
Sales	—		—			—			(7.3		)	—		(7.3		)
Settlements	—		—			—			—			—		—
Closing balance	$	0.2	$	7.2		$	7.4		$	0.2		$	1.5	$	1.7
Change in unrealized gains (losses) included in net income for assets held at the end of the reporting period	$	—	$	—		$	—		$	—		$	—	$	—

The changes in the balances of Level 3 financial assets for the nine months endedSeptember 30, 2012 and 2011 were as follows (dollars in millions):

	Nine Months Ended September 30,
	2012						2011
	Available-For-Sale Investments		Embedded Contractual Derivative		Total		Available-For-Sale Investments			Embedded Contractual Derivative		Total
Opening balance	$	0.2	$	5.3	$	5.5	$	9.9		$	—	$	9.9
Transfers into Level 3	—		—		—		—			—		—
Transfers out of Level 3	—		—		—		—			—		—
Total gains or losses for the period
Realized in net income	—		1.9		1.9		(2.4		)	1.5		(0.9		)
Unrealized in accumulated other comprehensive income	—		—		—		—			—		—
Purchases, issues, sales and settlements
Purchases/additions	—		—		—		—			—		—
Issues	—		—		—		—			—		—
Sales	—		—		—		(7.3		)	—		(7.3		)
Settlements	—		—		—		—			—		—
Closing balance	$	0.2	$	7.2	$	7.4	$	0.2		$	1.5	$	1.7
Change in unrealized gains (losses) included in net income for assets held at the end of the reporting period	$	—	$	—	$	—	$	—		$	—	$	—

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The following table presents information about financial assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2012 and indicates the fair value hierarchy of the valuation techniques utilized by us to determine such fair value (dollars in millions):

Level 1