Amerigroup second quarter total revenues increase 6.3% to $1.53 billion

Amerigroup Corporation (NYSE: AGP) today announced that net income for the second quarter of 2011 was $44.3 million, or $0.83 per diluted share, versus net income of $67.2 million, or $1.31 per diluted share, for the second quarter of 2010 and compared to $70.5 million, or $1.37 per diluted share, for the first quarter of 2011.  Total revenues for the second quarter were $1.53 billion, a 6.3% increase versus $1.44 billion in the second quarter of 2010 and compared to $1.54 billion in the first quarter of 2011.

Second quarter 2011 results were negatively impacted by a retroactive premium adjustment in the State of Georgia of approximately $13.8 million, or $0.16 per diluted share.  

Highlights include:

• Membership increased 15,000 members, or 0.8%, to approximately 2.0 million at the end of the second quarter compared to the first quarter of 2011.  
• Health benefits expense was 84.1% of premium revenue for the second quarter of 2011.  
• Selling, general and administrative expenses were 8.0% of total revenues for the second quarter of 2011.
• Cash flow provided by operations was $31 million and $115 million for the three and six months ended June 30, 2011, respectively.
• Unregulated cash and investments were $255 million as of June 30, 2011 compared to $269 million as of March 31, 2011.
• Medical claims payable as of June 30, 2011 totaled $520 million compared to $540 million as of March 31, 2011.
• Days in claims payable was 37, compared to 39 days in the first quarter of 2011.
• The Company repurchased approximately 815,000 shares of its common stock during the second quarter, at an aggregate cost of $55.2 million, pursuant to its ongoing share repurchase program.  
• On July 25, 2011, the Louisiana Department of Health and Hospitals announced that Amerigroup was one of five managed care organizations selected through competitive procurement to offer healthcare coverage to Medicaid recipients in Louisiana. The State indicated that the managed care organizations will enroll collectively approximately 900,000 members statewide, including children and families served by Medicaid's Temporary Assistance for Needy Families (TANF) as well as people with disabilities.  Of the five managed care organizations selected, the Company is one of three providers that will offer services on a full-risk basis.  Pending final contract negotiations, the Company anticipates beginning operations in early 2012.

"We are pleased with the underlying results in the quarter.  Excluding prior period items, second quarter performance was in-line with our expectations," said James G. Carlson, Chairman and CEO of Amerigroup.  "Furthermore, we are delighted that Louisiana has selected us to serve low-income citizens through its new Medicaid Coordinated Care Network. For the last 17 years, we have developed innovative initiatives to help our members live healthier lives and at the same time lower healthcare costs for states."

Premium Revenue

Premium revenue for the second quarter of 2011 increased 6.6% to $1.52 billion versus $1.43 billion in the second quarter of 2010.  Sequentially, premium revenue decreased $12.4 million, or 0.8%.  

Premium revenue in the second quarter was negatively impacted by approximately $13.8 million due to a retroactive premium adjustment in the State of Georgia related to a reconciliation of duplicate member records.  This premium adjustment reduced diluted earnings per share by $0.16.

The Company recently identified anomalies in the Georgia monthly membership files indicating that the State was not current in its process of merging duplicate member records. For various reasons, it is common for the State to assign members more than one Medicaid number, which results in multiple member records and duplicate premium payments for the same member.  In normal course, the State attempts to correct these duplicate member records in a timely manner.

Based on the Company's inquiry to the State regarding the volume of anomalies in the monthly membership files, Georgia's Department of Community Health initiated a comprehensive review that uncovered systemic membership record problems impacting contracted health plans as far back as the start of the program in 2006.  Following its review, the State notified the health plans of the premium the State believes should be returned due to duplicate payments.  The Company has established an estimated liability for premium payments that it believes will be returned to the State during this process.

In addition, these overstated membership files were used by the State to determine the per member premium rates paid to health plans over numerous contract years.  Inclusion of these duplicate members resulted in lower per member rates for those years and, as a result, the Company expects that these historical premium rate calculations will be revisited to adjust the per member rates upward. While the Company has been advised that the State intends to address these premium rate issues through settlement agreements with the health plans, the Company has not established a receivable for any such amount because, in the Company's opinion, any settlement value cannot be estimated with an adequate level of precision at this time.

Premium revenue for the quarter was also compressed by accruals for experience rebate in Texas, applicable medical loss ratio floors, and other gain sharing arrangements with State customers, as well as other routine prior period revenue adjustments that, on balance, were slightly negative.

Investment Income and Other Revenues

Second quarter investment income and other revenues were $4.0 million versus $8.6 million in the second quarter of 2010, and compared to $4.1 million in the first quarter of 2011.  As previously reported, in the second quarter of 2010 investment income and other revenues included $4.0 million related to the sale of a trademark.  

Health Benefits

Health benefits expense, as a percent of premium revenue, was 84.1% for the second quarter of 2011 versus 82.3% in the second quarter of 2010, and compared to 81.8% in the first quarter of 2011.  

The sequential increase in the health benefits ratio was due in part to the retroactive premium adjustment in Georgia that unfavorably impacted the health benefits ratio by 80 basis points.  

Favorable reserve development (net of associated accruals for experience rebate in Texas, applicable medical loss ratio floors, and other gain sharing arrangements with State customers) positively impacted the health benefits ratio in the second quarter by 50 basis points compared to 140 basis points in the first quarter of 2011.  

While medical cost trends remained modest during the quarter relative to long-term norms, there are emerging signs that trends have begun to move up from the unusually low levels experienced in prior quarters.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were 8.0% of total revenues for the second quarter of 2011 versus 7.5% in the second quarter of 2010, and compared to 7.6% for the first quarter of 2011.  Selling, general and administrative expenses increased sequentially, primarily due to scheduled compensation increases which were consistent with Company expectations.

Premium Taxes

Second quarter premium taxes were $40.4 million versus $33.2 million for the second quarter of 2010, and compared to $40.4 million in the first quarter of 2011.  

Balance Sheet Highlights

Cash and investments at June 30, 2011 totaled $1.84 billion of which $255 million was unregulated compared to $269 million of unregulated cash and investments at March 31, 2011.  During the quarter, the Company repurchased approximately 815,000 shares of its common stock at an aggregate cost of $55.2 million, pursuant to its ongoing share repurchase program.  

The debt-to-total-capital ratio decreased to 16.6% as of June 30, 2011 from 16.8% as of March 31, 2011.

Medical claims payable as of June 30, 2011 totaled $520 million compared to $540 million as of March 31, 2011.  Days in claims payable represented 37 days of health benefits expense compared with 39 days in the previous quarter.  The primary factor that drove the decline in days in claims payable was an increase in claims processing speed aided in part by an increase in the claims auto-adjudication rate.  

Included on page 11 is a table presenting the components of the change in medical claims payable for each of the six-month periods ended June 30, 2011 and 2010.  

Cash Flow Highlights

Cash flow from operations totaled $115 million for the six months ended June 30, 2011, and $31.1 million for the three months ended June 30, 2011.  Cash flow in the quarter was negatively impacted by a decrease in the medical claims payable liability due primarily to an increase in claims processing speed. Additionally, cash flow was negatively impacted by the normal occurrence of two estimated income tax payments during the second quarter.

Outlook

The Company's updated parameters associated with the full-year 2011 outlook can be found on page 11 of this release.  

The Company has raised its full-year 2011 health benefits ratio range to 83.1% – 84.1% compared to the previous range of 82.8% – 83.8%.  The change reflects the impact of rate renewals that are likely to be more modest than previously expected, retroactive premium reductions, and a slightly higher medical cost trend assumption in future quarters.  

In addition, the Company raised its full-year 2011 selling, general and administrative ratio range to 7.8% plus or minus 20 basis points from the previous expectation of 7.6% plus or minus 20 basis points to reflect incremental spending in support of the large number of potential expansion opportunities in both new and existing markets, including additional expenses to begin operations in Louisiana.  

Finally, the Company now expects that the net income margin for the full-year 2011 will be toward the upper-end of the Company's long-term net income margin range of 2.5% – 3.5%.