In the fourth quarter of 1999, the Company’s PHC subsidiaries changed the word Principal in their names to Coventry. All aspects of the health plans’ operations, such as member coverage and access, remain unchanged. After the merger on April 1, 1998, the PHC plans continued to use the Principal brand name under the terms of the License Agreement as amended, between the parties, even though the Plans were no longer subsidiaries of Principal Life.
Principal Life has agreed that, prior to April 2003, it will vote its shares of common stock in favor of any acquisition required to be approved by our shareholders, that a special committee of our board of directors has recommended and a majority of our shareholders, other than Principal Life, has approved. The special committee will consist of members of our board of directors that are neither management nor designees of Principal Life. Prior to April 2003, Principal Life has also agreed to vote its shares for the election of directors nominated by the nominating committee of the board of directors and not to oppose or seek removal of any person nominated by this nominating committee. Once the previously agreed upon limitations imposed on Principal Life expire in April 2003, Principal Life could acquire additional shares of our common stock to the point that it exercises virtually complete control over the Company.
We face periodic audits under our contracts with federal and state government agencies, and these audits could have adverse findings that may negatively impact our business.
Investments - The Company accounts for investments in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The Company considers all of its investments as available-for-sale, and accordingly, records unrealized gains and losses, net of deferred income taxes, as a separate component of stockholders’ equity. Realized gains and losses on the sale of these investments are determined on a specific identification basis.
Goodwill amortization expense for the years ended December 31, 2000, 1999 and 1998 was approximately $8.6 million, $8.0 million, and $8.2 million, respectively. All other amortization was approximately $1.6 million, $6.6 million, and $5.4 million for the years ended December 31, 2000, 1999 and 1998, respectively. In accordance with SFAS 121 and Accounting Principles Board Opinion (“APB”) No. 17 “Accounting for Intangible Assets”, the Company periodically evaluates the realizability of goodwill and intangible assets and the reasonableness of the related lives in light of factors such as industry changes, individual market competitive conditions, and operating income.
Segment reporting - Effective December 31, 1998, the Company adopted SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” This standard requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. SFAS No. 131 also requires that all public business enterprises report information about the revenues derived from the enterprise’s products or services (or groups of similar products and services), about the countries in which the enterprise earns revenues and holds assets and about major customers regardless of whether that information is used in making operating decisions. The Company has two reportable segments: Commercial products and Government products. The products are provided to a cross section of employer groups through the Company’s health plans in the Midwest, Mid-Atlantic, and Southeastern United States.
Derivative Instruments - In June 1998, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of the derivatives would be accounted for depending on the use of the derivatives and whether they qualify for hedge accounting. In June 1999, the FASB also issued SFAS No. 137, which defers the effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, which amends SFAS No. 133 with regards to specific hedging risks, foreign-currency-denominated assets and liabilities, and intercompany derivatives. Effective January 1, 2001, the Company adopted SFAS No. 133 (as amended by SFAS No. 137 and SFAS No. 138). Accordingly, a transition gain of $0.9 million, net of tax, will be recorded in the first quarter of 2001 related to one financial instrument classified as derivative in nature. The adjustment will be shown separately as a cumulative effect of a change in accounting principle.
In the fourth quarter of 1999, the Company notified the Indiana Department of Insurance of its intention to close its subsidiary, Coventry Health Care of Indiana, Inc., formerly Principal Health Care of Indiana, Inc. As of December 31, 2000, the health plan had no remaining members throughout the state. As a result of the cost associated with exiting the Indiana market, the Company recorded a reserve of $2.0 million in the fourth quarter of 1999. The Company closed the health plan in the fourth quarter of 2000 and had expended approximately $1.3 million of the reserve as of December 31, 2000.
Proceeds from the sale and maturities of investments were approximately $425.3 million and $253.5 million for the years ended December 31, 2000 and 1999, respectively. Gross investment gains of approximately $0.1 million and gross investment losses of approximately $1.1 million were realized on these sales for the year ended December 31, 2000. This compares to gross investment gains of approximately $1.0 million and gross investment losses of approximately $1.2 million on these sales for the year ended December 31, 1999.
As discussed in Note K to the consolidated financial statements, the Company has reinsurance agreements with major insurance companies. The Company monitors the insurance companies’ financial ratings to determine compliance with standards set by state law. The Company has a credit risk associated with these reinsurance agreements to the extent the reinsurers are unable to pay valid reinsurance claims of the Company.
O. STATUTORY INFORMATION The Company’s HMO subsidiaries are required by the respective domicile states to maintain minimum statutory capital and surplus in aggregate of approximately $88.5 million at December 31, 2000. Combined statutory capital and surplus of the Company’s HMOs was approximately $203.4 million at December 31, 2000. The states in which the Company’s HMOs operate require HMOs to maintain deposits with the Department of Insurance. These deposits, as part of cash equivalents and investments, totaled $22.4 million at December 31, 2000.