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Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended March 31, 2011
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 001-31574
 
AMERIGROUP Corporation
(Exact name of registrant as specified in its charter)
 
     
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
  54-1739323
(I.R.S. Employer
Identification No.)
     
4425 Corporation Lane,
Virginia Beach, VA
(Address of principal executive offices)
  23462
(Zip Code)
 
Registrant’s telephone number, including area code:
(757) 490-6900
 
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.  Yes þ     No o
 
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).  Yes þ     No o
 
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):
 
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of April 29, 2011, there were 49,603,017 shares outstanding of the Company’s common stock, par value $0.01 per share.
 


 

 
AMERIGROUP Corporation and Subsidiaries
 
Table of Contents
 
                 
        Page
 
      Financial Statements     3  
        Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010     3  
        Condensed Consolidated Income Statements for the three months ended March 31, 2011 and 2010     4  
        Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2011     5  
        Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010     6  
        Notes to Condensed Consolidated Financial Statements     7  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     20  
      Quantitative and Qualitative Disclosures About Market Risk     31  
      Controls and Procedures     32  
 
Part II. Other Information
      Legal Proceedings     32  
      Risk Factors     32  
      Unregistered Sales of Equity Securities and Use of Proceeds     33  
      Defaults Upon Senior Securities     33  
      (Removed and Reserved)     33  
      Other Information     33  
      Exhibits     33  
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT


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Table of Contents

 
Part I. Financial Information
 
Item 1.   Financial Statements
 
AMERIGROUP Corporation and Subsidiaries
 
(Dollars in thousands, except per share data)
(Unaudited)
 
                 
    March 31,
    December 31,
 
    2011     2010  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 601,950     $ 763,946  
Short-term investments
    307,072       230,007  
Premium receivables
    110,315       83,203  
Deferred income taxes
    27,952       28,063  
Provider and other receivables
    27,109       32,861  
Prepaid expenses
    25,198       13,538  
Other current assets
    9,227       7,083  
                 
Total current assets
    1,108,823       1,158,701  
Long-term investments
    807,260       639,165  
Investments on deposit for licensure
    119,158       114,839  
Property, equipment and software, net of accumulated depreciation of $182,713 and $174,683 at March 31, 2011 and December 31, 2010, respectively
    99,074       96,967  
Other long-term assets
    14,050       13,220  
Goodwill
    260,496       260,496  
                 
Total assets
  $ 2,408,861     $ 2,283,388  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
Claims payable
  $ 539,767     $ 510,675  
Bank overdrafts
    64,404       40,890  
Unearned revenue
    100,231       103,067  
Accrued payroll and related liabilities
    46,871       71,253  
Contractual refunds payable
    51,645       44,563  
Accounts payable, accrued expenses and other
    105,310       80,393  
                 
Total current liabilities
    908,228       850,841  
Long-term convertible debt
    248,591       245,750  
Deferred income taxes
    7,146       7,393  
Other long-term liabilities
    12,296       13,767  
                 
Total liabilities
    1,176,261       1,117,751  
                 
Stockholders’ equity:
               
Common stock, $0.01 par value. Authorized 100,000,000 shares; outstanding 48,272,578 and 48,167,229 at March 31, 2011 and December 31, 2010, respectively
    560       554  
Additional paid-in capital
    566,361       543,611  
Accumulated other comprehensive income
    27       627  
Retained earnings
    934,480       864,003  
                 
      1,501,428       1,408,795  
Less treasury stock at cost (8,214,445 and 7,759,234 shares at March 31, 2011 and December 31, 2010, respectively)
    (268,828 )     (243,158 )
                 
Total stockholders’ equity
    1,232,600       1,165,637  
                 
Total liabilities and stockholders’ equity
  $ 2,408,861     $ 2,283,388  
                 
 
See accompanying notes to condensed consolidated financial statements.


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AMERIGROUP Corporation and Subsidiaries
 
(Dollars in thousands, except per share data)
(Unaudited)
 
                 
    Three Months Ended
 
    March 31,  
    2011     2010  
 
Revenues:
               
Premium
  $ 1,535,795     $ 1,366,767  
Investment income and other
    4,120       4,882  
                 
Total revenues
    1,539,915       1,371,649  
                 
Expenses:
               
Health benefits
    1,256,962       1,141,572  
Selling, general and administrative
    116,459       117,423  
Premium tax
    40,448       31,472  
Depreciation and amortization
    9,090       8,710  
Interest
    4,179       3,990  
                 
Total expenses
    1,427,138       1,303,167  
                 
Income before income taxes
    112,777       68,482  
Income tax expense
    42,300       26,300  
                 
Net income
  $ 70,477     $ 42,182  
                 
Net income per share:
               
Basic net income per share
  $ 1.46     $ 0.83  
                 
Weighted average number of common shares outstanding
    48,265,104       50,550,754  
                 
Diluted net income per share
  $ 1.37     $ 0.82  
                 
Weighted average number of common shares and dilutive potential common shares outstanding
    51,534,794       51,226,435  
                 
 
See accompanying notes to condensed consolidated financial statements.


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AMERIGROUP Corporation and Subsidiaries
 
Three Months Ended March 31, 2011
(Dollars in thousands)
(Unaudited)
 
                                                                 
                      Accumulated
                         
                Additional
    Other
                      Total
 
    Common Stock     Paid-in
    Comprehensive
    Retained
    Treasury Stock     Stockholders’
 
    Shares     Amount     Capital     Income     Earnings     Shares     Amount     Equity  
 
Balances at January 1, 2011
    48,167,229     $ 554     $ 543,611     $ 627     $ 864,003       7,759,234     $ (243,158 )   $ 1,165,637  
Common stock issued upon exercise of stock options and vesting of restricted stock grants
    560,560       6       15,169                               15,175  
Compensation expense related to share-based payments
                4,856                               4,856  
Tax benefit related to share-based payments
                2,725                               2,725  
Employee stock relinquished for payment of taxes
    (14,883 )                             14,883       (878 )     (878 )
Common stock repurchases
    (440,328 )                             440,328       (24,792 )     (24,792 )
Unrealized loss on available-for-sale securities, net of tax
                      (600 )                       (600 )
Net income
                            70,477                   70,477  
                                                                 
Balances at March 31, 2011
    48,272,578     $ 560     $ 566,361     $ 27     $ 934,480       8,214,445     $ (268,828 )   $ 1,232,600  
                                                                 
 
See accompanying notes to condensed consolidated financial statements.


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AMERIGROUP Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
 
                 
    Three Months Ended March 31,  
    2011     2010  
 
Cash flows from operating activities:
               
Net income
  $ 70,477     $ 42,182  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    9,090       8,710  
Loss on disposal or abandonment of property, equipment and software
    159       8  
Deferred tax expense (benefit)
    227       (821 )
Compensation expense related to share-based payments
    4,856       4,427  
Convertible debt non-cash interest
    2,841       2,661  
Other
    3,451       1,903  
Changes in assets and liabilities (decreasing) increasing cash flows from operations:
               
Premium receivables
    (27,112 )     (44,041 )
Prepaid expenses, provider and other receivables and other current assets
    (9,873 )     (15,567 )
Other assets
    (1,296 )     (783 )
Claims payable
    29,092       20,184  
Accounts payable, accrued expenses, contractual refunds payable and other current liabilities
    5,917       28,949  
Unearned revenue
    (2,836 )     (51,172 )
Other long-term liabilities
    (1,471 )     (3,489 )
                 
Net cash provided by (used in) operating activities
    83,522       (6,849 )
                 
Cash flows from investing activities:
               
Proceeds from sale of trading securities
          2,950  
Proceeds from sale of available-for-sale securities
    199,843       213,793  
Purchase of available-for-sale securities
    (449,244 )     (248,224 )
Proceeds from redemption of investments on deposit for licensure
    22,685       18,315  
Purchase of investments on deposit for licensure
    (27,177 )     (21,481 )
Purchase of property, equipment and software
    (10,890 )     (6,435 )
Purchase of contract rights and related assets
          (13,420 )
                 
Net cash used in investing activities
    (264,783 )     (54,502 )
                 
Cash flows from financing activities:
               
Net increase in bank overdrafts
    23,514        
Customer funds administered
    2,643       1,611  
Proceeds from exercise of stock options
    15,175       1,852  
Repurchase of common stock shares
    (24,792 )     (6,982 )
Tax benefit related to share-based payments
    2,725       139  
                 
Net cash provided by (used in) financing activities
    19,265       (3,380 )
                 
Net decrease in cash and cash equivalents
    (161,996 )     (64,731 )
Cash and cash equivalents at beginning of period
    763,946       505,915  
                 
Cash and cash equivalents at end of period
  $ 601,950     $ 441,184  
                 
Supplemental disclosures of non-cash information:
               
Employee stock relinquished for payment of taxes
  $ (878 )   $ (700 )
                 
Unrealized (loss) gain on available-for-sale securities, net of tax
  $ (600 )   $ 242  
                 
 
See accompanying notes to condensed consolidated financial statements.


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AMERIGROUP Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share data)
(Unaudited)
 
1.  Interim Financial Reporting
 
Basis of Presentation
 
The accompanying Condensed Consolidated Financial Statements as of March 31, 2011 and for the three months ended March 31, 2011 and 2010 of AMERIGROUP Corporation and its subsidiaries (the “Company”), are unaudited and reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position at March 31, 2011 and operating results for the interim periods ended March 31, 2011 and 2010. The December 31, 2010 Condensed Consolidated Balance Sheet was derived from the audited consolidated financial statements as of that date. Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
 
The Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2010 contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 23, 2011. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2011.
 
2.  Earnings per Share
 
Basic net income per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted net income per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding plus other potentially dilutive securities. Restricted shares and restricted share units subject to performance and/or market conditions are only included in the calculation of diluted net income per common share calculations if all of the necessary performance and/or market conditions have been satisfied and the impact is not anti-dilutive. All potential dilutive securities are determined by applying the treasury stock method. The following table sets forth the calculations of basic and diluted net income per share:
 
                 
    Three Months Ended
 
    March 31,  
    2011     2010  
 
Basic net income per share:
               
Net income
  $ 70,477     $ 42,182  
                 
Weighted average number of common shares outstanding
    48,265,104       50,550,754  
                 
Basic net income per share
  $ 1.46     $ 0.83  
                 
Diluted net income per share:
               
Net income
  $ 70,477     $ 42,182  
                 
Weighted average number of common shares outstanding
    48,265,104       50,550,754  
Dilutive effect of stock options and non-vested stock awards
    1,823,865       675,681  
Dilutive effect of assumed conversion of the 2.0% Convertible Senior Notes
    1,351,908        
Dilutive effect of warrants
    93,917        
                 
Weighted average number of common shares and dilutive potential common shares outstanding
    51,534,794       51,226,435  
                 
Diluted net income per share
  $ 1.37     $ 0.82  
                 


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AMERIGROUP Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements — (Continued)
 
Potential common stock equivalents representing 13,682 shares and 2,801,645 shares for the three months ended March 31, 2011 and 2010, respectively, were not included in the computation of diluted net income per share because to do so would have been anti-dilutive.
 
The shares issuable upon conversion of the Company’s 2.0% Convertible Senior Notes (the “2.0% Convertible Senior Notes”) due May 15, 2012 which were issued effective March 28, 2007 in the aggregate principal amount of $260,000 (See Note 8) were not included in the computation of diluted net income per share for the three months ended March 31, 2010 because to do so would have been anti-dilutive.
 
The Company’s warrants to purchase shares of its common stock sold on March 28, 2007 and April 9, 2007 (See Note 8) were not included in the computation of diluted net income per share for the three months ended March 31, 2010 because to do so would have been anti-dilutive.
 
3.  Fair Value Measurements
 
The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
 
Cash, premium receivables, provider and other receivables, prepaid expenses, other current assets, claims payable, bank overdrafts, unearned revenue, accrued payroll and related liabilities, contractual refunds payable and accounts payable, accrued expenses and other current liabilities: The fair value of these financial instruments approximates the historical cost because of the short maturity of these items.
 
Cash equivalents, short-term investments, long-term investments (other than auction rate securities), investments on deposit for licensure, cash surrender value of life insurance policies (included in other long-term assets), long-term convertible debt, deferred compensation (included in other long-term liabilities): Fair value for these items is determined based upon quoted market prices.
 
Auction rate securities (included in long-term investments) and the forward contract related to certain auction rate securities (included in other long-term assets at March 31, 2010): Fair value for these items is determined based upon discounted cash flow analyses.
 
Assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheets are categorized based upon a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
 
Level 1 — Observable inputs such as quoted prices in active markets:  The Company’s Level 1 securities consist of money market funds, debt securities of government sponsored entities, Federally insured corporate bonds and U.S. Treasury securities. Level 1 securities are classified as short-term investments, long-term investments and investments on deposit for licensure in the accompanying Condensed Consolidated Balance Sheets. These securities are actively traded and therefore the fair value for these securities is based on quoted market prices on one or more securities exchanges.
 
Level 2 — Inputs other than quoted prices in active markets that are either directly or indirectly observable:  The Company’s Level 2 securities consist of certificates of deposit, commercial paper, corporate bonds and municipal bonds and are classified as short-term investments, long-term investments and investments on deposit for licensure in the accompanying Condensed Consolidated Balance Sheets. The Company’s investments in securities classified as Level 2 are traded frequently though not necessarily daily. Fair value for these securities is determined using a market approach based on quoted prices for similar securities in active markets or quoted prices for identical securities in inactive markets.
 
Level 3 — Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions:  The Company’s Level 3 securities consist of auction rate securities issued by


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AMERIGROUP Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements — (Continued)
 
student loan corporations established by various state governments. The auction events for these securities failed during early 2008 and have not resumed. Therefore, the estimated fair values of these securities have been determined utilizing an income approach, specifically discounted cash flow analyses. These analyses consider among other items, the creditworthiness of the issuer, the timing of the expected future cash flows, including the final maturity associated with the securities, and an assumption of when the next time the security is expected to have a successful auction. These securities were also compared, when possible, to other observable and relevant market data. As the timing of future successful auctions, if any, cannot be predicted, available-for-sale auction rate securities are classified as long-term investments in the accompanying Condensed Consolidated Balance Sheets.
 
Transfers between levels, as a result of changes in the inputs used to determine fair value, are recognized as of the beginning of the reporting period in which the transfer occurs. There were no transfers between levels for the periods ended March 31, 2011 and December 31, 2010.
 
Assets
 
The Company’s assets measured at fair value on a recurring basis at March 31, 2011 were as follows:
 
                                 
          Fair Value Measurements at Reporting Date Using  
          Quoted Prices in
          Significant
 
          Active Markets for
    Significant Other
    Unobservable
 
          Identical Assets
    Observable Inputs
    Inputs
 
          (Level 1)     (Level 2)     (Level 3)  
 
Cash equivalents:
                               
Certificates of deposit
  $ 140,313     $     $ 140,313     $  
Commercial paper
    23,302             23,302        
Debt securities of government sponsored entities
    82,996       82,996              
Money market funds
    364,087       364,087              
Available-for-sale securities:
                               
Auction rate securities
    17,394                   17,394  
Certificates of deposit
    13,153             13,153        
Commercial paper
    4,494             4,494        
Corporate bonds
    300,704             300,704        
Debt securities of government sponsored entities
    434,896       434,896              
Federally insured corporate bonds
    21,350       21,350              
Municipal bonds
    387,322             387,322        
U.S. Treasury securities
    31,638       31,638              
                                 
Total assets measured at fair value
  $ 1,821,649     $ 934,967     $ 869,288     $ 17,394  
                                 


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AMERIGROUP Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements — (Continued)
 
The Company’s assets measured at fair value on a recurring basis at December 31, 2010 were as follows:
 
                                 
          Fair Value Measurements at Reporting Date Using  
          Quoted Prices in
          Significant
 
          Active Markets for
    Significant Other
    Unobservable
 
          Identical Assets
    Observable Inputs
    Inputs
 
          (Level 1)     (Level 2)     (Level 3)  
 
Cash equivalents:
                               
Certificates of deposit
  $ 137,215     $     $ 137,215     $  
Commercial paper
    34,742             34,742        
Corporate bonds
    1,002             1,002        
Money market funds
    584,427       584,427              
Municipal bonds
    3,764             3,764        
U.S. Treasury securities
    1,000       1,000              
Available-for-sale securities:
                               
Auction rate securities
    21,293                   21,293  
Certificates of deposit
    13,651             13,651        
Commercial paper
    14,793             14,793        
Corporate bonds
    237,916             237,916        
Debt securities of government sponsored entities
    332,051       332,051              
Federally insured corporate bonds
    21,454       21,454              
Municipal bonds
    300,817             300,817        
U.S. Treasury securities
    21,721       21,721              
                                 
Total assets measured at fair value
  $ 1,725,846     $ 960,653     $ 743,900     $ 21,293  
                                 
 
The following table presents the changes in the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods ended March 31, 2011 and December 31, 2010:
 
                 
    Three Months Ended
    Twelve Months Ended
 
    March 31, 2011     December 31, 2010  
 
Balance at beginning of period
  $ 21,293     $ 58,003  
Total net realized loss included in earnings
          (290 )
Total net unrealized gain included in other comprehensive income
    326       2,790  
Sales
          (12,000 )
Calls by issuers
    (4,225 )     (27,210 )
                 
Balance at end of period
  $ 17,394     $ 21,293  
                 
 
At March 31, 2011 and December 31, 2010, the Company did not elect the fair value option available under current guidance for any financial assets and liabilities that were not required to be measured at fair value.


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AMERIGROUP Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements — (Continued)
 
During the three months ended March 31, 2011 and 2010, proceeds from the sale or call of certain investments in auction rate securities, the net realized gains and the amount of prior period net unrealized losses reclassified from accumulated other comprehensive income on a specific-identification basis were as follows (excludes the impact of the forward contract discussed below):
 
                 
    Three Months Ended
 
    March 31,  
    2011     2010  
 
Proceeds from sale or call of auction rate securities
  $ 4,225     $ 7,870  
Net realized gain recorded in earnings
          201  
Net unrealized loss reclassified from accumulated other comprehensive income, included in realized gain above
          (80 )
 
During the fourth quarter of 2008, the Company entered into a forward contract with a registered broker-dealer, at no cost, which provided the Company with the ability to sell certain auction rate securities to the registered broker-dealer at par within a defined timeframe, beginning June 30, 2010. These securities were classified as trading securities because the Company did not intend to hold these securities until final maturity. Trading securities are carried at fair value with changes in fair value recorded in earnings. The value of the forward contract was estimated using a discounted cash flow analysis taking into consideration the creditworthiness of the counterparty to the agreement. The forward contract was included in other long-term assets. As of June 30, 2010, all of the remaining trading securities under the terms of this forward contract were repurchased by the broker-dealer; therefore, the forward contract expired. For the three months ended March 31, 2010, a gross realized gain of $281 was recorded to earnings relating to these trading securities. As the trading securities increased in value for the three months ended March 31, 2010, a corresponding decrease in fair value of $280 for the forward contract was recorded to earnings.
 
Liabilities
 
The 2.0% Convertible Senior Notes are carried at cost plus the value of the accrued discount in the accompanying Condensed Consolidated Balance Sheets, or $248,591 and $245,750 as of March 31, 2011 and December 31, 2010, respectively. The estimated fair value of the 2.0% Convertible Senior Notes is determined based upon a quoted market price. As of March 31, 2011 and December 31, 2010, the fair value of the borrowings under the 2.0% Convertible Senior Notes was $389,025 and $303,550, respectively, compared to the face value of $260,000.


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AMERIGROUP Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements — (Continued)
 
4.  Short- and Long-Term Investments and Investments on Deposit for Licensure
 
The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale short- and long-term investments and investments on deposit for licensure held at March 31, 2011 were as follows:
 
                                 
          Gross
    Gross
       
    Amortized
    Unrealized
    Unrealized
    Fair
 
    Cost     Holding Gains     Holding Losses     Value  
 
Auction rate securities, maturing in greater than ten years
  $ 18,425     $     $ 1,031     $ 17,394  
Cash equivalents, maturing within one year
    346                   346  
Certificates of deposit, maturing within one year
    13,153                   13,153  
Commercial paper, maturing within one year
    4,495             1       4,494  
Corporate bonds, maturing within one year
    102,024       511       14       102,521  
Corporate bonds, maturing between one year and five years
    196,965       1,558       340       198,183  
Debt securities of government sponsored entities, maturing within one year
    221,039       280       11       221,308  
Debt securities of government sponsored entities, maturing between one year and five years
    206,788       131       711       206,208  
Debt securities of government sponsored entities, maturing between five years and ten years
    7,388             8       7,380  
Federally insured corporate bonds, maturing within one year
    21,072       279       1       21,350  
Money market funds, maturing within one year
    22,193                   22,193  
Municipal bonds, maturing within one year
    137,802       57       1       137,858  
Municipal bonds, maturing between one year and five years
    22,572       202       9       22,765  
Municipal bonds, maturing between five years and ten years
    159,166       902       1,852       158,216  
Municipal bonds, maturing in greater than ten years
    68,472       291       280       68,483  
U.S. Treasury securities, maturing within one year
    30,625       6             30,631  
U.S. Treasury securities, maturing between one year and five years
    921       86             1,007  
                                 
Total
  $ 1,233,446     $ 4,303     $ 4,259     $ 1,233,490  
                                 


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AMERIGROUP Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements — (Continued)
 
The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale short- and long-term investments and investments on deposit for licensure held at December 31, 2010 were as follows:
 
                                 
          Gross
    Gross
       
    Amortized
    Unrealized
    Unrealized
    Fair
 
    Cost     Holding Gains     Holding Losses     Value  
 
Auction rate securities, maturing in greater than ten years
  $ 22,650     $     $ 1,357     $ 21,293  
Cash equivalents, maturing within one year
    306                   306  
Certificates of deposit, maturing within one year
    13,651                   13,651  
Commercial paper, maturing within one year
    14,797             4       14,793  
Corporate bonds, maturing within one year
    105,826       555       10       106,371  
Corporate bonds, maturing between one year and five years
    129,949       1,772       176       131,545  
Debt securities of government sponsored entities, maturing within one year
    170,209       416             170,625  
Debt securities of government sponsored entities, maturing between one year and five years
    161,684       207       465       161,426  
Federally insured corporate bonds, maturing within one year
    21,097       360       3       21,454  
Money market funds, maturing within one year
    20,009                   20,009  
Municipal bonds, maturing within one year
    101,572       40       13       101,599  
Municipal bonds, maturing between one year and five years
    29,539       129       24       29,644  
Municipal bonds, maturing between five years and ten years
    121,547       964       1,171       121,340  
Municipal bonds, maturing in greater than ten years
    48,576       12       354       48,234  
U.S. Treasury securities, maturing within one year
    18,113       52             18,165  
U.S. Treasury securities, maturing between one year and five years
    3,479       78       1       3,556  
                                 
Total
  $ 983,004     $ 4,585     $ 3,578     $ 984,011  
                                 
 
For the three months ended March 31, 2011 and 2010, a net unrealized loss of $963 and a net unrealized gain of $472, respectively, was recorded to accumulated other comprehensive income as a result of changes in fair value for investments classified as available-for-sale.


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AMERIGROUP Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements — (Continued)
 
The following table shows the fair value of the Company’s available-for-sale investments with unrealized losses that are not deemed to be other-than-temporarily impaired at March 31, 2011. Investments are aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
 
                                                 
    Less than 12 Months     12 Months or Greater  
          Gross
                Gross
       
          Unrealized
    Total
          Unrealized
    Total
 
    Fair
    Holding
    Number of
    Fair
    Holding
    Number of
 
    Value     Losses     Securities     Value     Losses     Securities  
 
March 31, 2011:
                                               
Auction rate securities
  $     $           $ 17,394     $ 1,031       5  
Commercial paper
    1,995       1       1                    
Corporate bonds
    137,639       354       53                    
Debt securities of government sponsored entities
    204,254       730       50                    
Federally insured corporate bond
    4,028       1       1                    
Municipal bonds
    135,592       2,142       53                    
                                                 
Total temporarily impaired securities
  $ 483,508     $ 3,228       158     $ 17,394     $ 1,031       5  
                                                 
 
The temporary declines in value at March 31, 2011 are primarily due to fluctuations in short-term market interest rates and the lack of liquidity of auction rate securities. Auction rate securities that have been in an unrealized loss position for greater than 12 months have experienced losses due to the lack of liquidity for these instruments, not as a result of impairment of the underlying debt securities. Additionally, the Company does not intend to sell these securities prior to maturity or recovery and it is not likely that the Company will be required to sell these securities prior to maturity; therefore, there is no indication of other-than-temporary impairment for these securities.
 
5.  Market Updates
 
Pending Contractual Revisions
 
Texas
 
In April 2011, the Texas Health and Human Services Commission (“HHSC”) issued a request for proposal for the re-bid of the Medicaid and Children’s Health Insurance Program (“CHIP”) Managed Care Services Contract. Proposals are due in May 2011 and the Company anticipates a contract award date during the latter half of the year with an operational start date in early 2012. If the Company is not awarded this contract or if the level of the Company’s business in Texas is reduced through the re-bidding process, the Company’s results of operations, financial position or cash flows in future periods could be materially and adversely affected.
 
Georgia
 
The Company’s Temporary Assistance for Needy Families and CHIP contract between its Georgia health plan and the State of Georgia expires June 30, 2011 with the State’s option to renew the contract for one additional one-year term. The State has notified the Company of its intent to renew its contract effective July 1, 2011 and to amend the Company’s existing contract to include one additional year and one additional option to renew for a one-year term for an ultimate potential contract term ending on June 30, 2014 at the outermost. Additionally, the State has indicated its intent to reprocure the contract through a competitive bidding process sometime prior to this contract termination.


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AMERIGROUP Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements — (Continued)
 
Other Market Updates
 
Texas
 
In February 2011, the Company’s Texas health plan began serving aged, blind and disabled (“ABD”) members in the six-county service area surrounding Forth Worth, Texas through an expansion contract awarded by HHSC. As of March 31, 2011, approximately 29,000 members were served by the Company’s Texas health plan under this contract. Previously, the Company served approximately 14,000 ABD members in the Dallas and Fort Worth areas under an administrative services only contract that terminated on January 31, 2011.
 
6.  Summary of Goodwill and Acquired Intangible Assets
 
On March 1, 2010, the Company’s New Jersey health plan acquired the Medicaid contract rights and rights under certain provider agreements of University Health Plans, Inc. for strategic reasons. The purchase price of $13,420 was financed through available cash. The entire purchase price was allocated to goodwill and other intangibles, which includes $2,200 of specifically identifiable intangibles allocated to the rights to the Medicaid service contract and the assumed provider contracts.
 
Other acquired intangible assets, included in other long-term assets in the accompanying Condensed Consolidated Balance Sheets, at March 31, 2011 and December 31, 2010 are as follows:
 
                                 
    March 31, 2011     December 31, 2010  
    Gross Carrying
    Accumulated
    Gross Carrying
    Accumulated
 
    Amount     Amortization     Amount     Amortization  
 
Membership rights and provider contracts
  $ 28,171     $ (26,243 )   $ 28,171     $ (26,106 )
Non-compete agreements and trademarks
    946       (946 )     946       (946 )
                                 
    $ 29,117     $ (27,189 )   $ 29,117     $ (27,052 )
                                 
 
7.  Claims Payable
 
The following table presents the components of the change in claims payable for the periods presented:
 
                 
    Three Months Ended
    Twelve Months Ended
 
    March 31, 2011     December 31, 2010  
 
Claims payable, beginning of period
  $ 510,675     $ 529,036  
Health benefits expense incurred during the period:
               
Related to current year
    1,307,566       4,828,321  
Related to prior years
    (50,604 )     (106,215 )
                 
Total incurred
    1,256,962       4,722,106  
Health benefits payments during the period:
               
Related to current year
    900,625       4,359,216  
Related to prior years
    327,245       381,251  
                 
Total payments
    1,227,870       4,740,467  
                 
Claims payable, end of period
  $ 539,767     $ 510,675  
                 
 
Health benefits expense incurred during both periods was reduced for amounts related to prior years. The amounts related to prior years include the impact of amounts previously included in the liability to establish it at a


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AMERIGROUP Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements — (Continued)
 
level sufficient under moderately adverse conditions that were not needed and the reduction in health benefits expense due to revisions to prior estimates.
 
8.  Convertible Senior Notes
 
As of March 31, 2011, the Company had $260,000 outstanding in aggregate principal amount of 2.0% Convertible Senior Notes issued March 28, 2007 and due May 15, 2012, the carrying amount of which was $248,591 and $245,750 as of March 31, 2011 and December 31, 2010, respectively. The unamortized discount of $11,409 at March 31, 2011, will continue to be amortized over the remaining fourteen months until maturity.
 
Upon conversion of the 2.0% Convertible Senior Notes, the Company will pay cash up to the principal amount of the 2.0% Convertible Senior Notes converted. With respect to any conversion value in excess of the principal amount, the Company has the option to settle the excess with cash, shares of its common stock, or a combination thereof based on a daily conversion value, as defined in the Indenture. The initial conversion rate for the 2.0% Convertible Senior Notes is 23.5114 shares of common stock per one thousand dollars of principal amount of 2.0% Convertible Senior Notes, which represents a 32.5% conversion premium based on the closing price of $32.10 per share of the Company’s common stock on March 22, 2007 and is equivalent to a conversion price of approximately $42.53 per share of common stock. Consequently, under the provisions of the 2.0% Convertible Senior Notes, if the market price of the Company’s common stock exceeds $42.53, the Company will be obligated to settle, in cash or shares of its common stock at its option, an amount equal to approximately $6,100 for each dollar in share price that the market price of the Company’s common stock exceeds $42.53, or the conversion value in excess of the principal amount of the 2.0% Convertible Senior Notes. In periods prior to conversion, the 2.0% Convertible Senior Notes would also have a dilutive impact to earnings if the average market price of the Company’s common stock exceeds $42.53 for the period reported. As of March 31, 2011, the 2.0% Convertible Senior Notes had a dilutive impact to earnings per share as the average market price of the Company’s common stock for the three months ended March 31, 2011 of $54.61 exceeded the conversion price of $42.53.
 
Concurrent with the issuance of the 2.0% Convertible Senior Notes, the Company purchased convertible note hedges covering, subject to customary anti-dilution adjustments, 6,112,964 shares of its common stock. The convertible note hedges allow the Company to receive shares of its common stock and/or cash equal to the amounts of common stock and/or cash related to the excess conversion value that the Company would pay to the holders of the 2.0% Convertible Senior Notes upon conversion. The convertible note hedges are expected to reduce the potential dilution upon conversion of the 2.0% Convertible Senior Notes in the event that the market value per share of the Company’s common stock, as measured under the convertible note hedges, at the time of exercise is greater than the strike price of the convertible note hedges, which corresponds to the initial conversion price of the 2.0% Convertible Senior Notes and is subject to certain customary adjustments. If, however, the market value per share of the Company’s common stock exceeds the strike price of the warrants (discussed below) when such warrants are exercised, the Company will be required to issue common stock. Both the convertible note hedges and warrants provide for net-share settlement at the time of any exercise for the amount that the market value of the common stock exceeds the applicable strike price.
 
Also concurrent with the issuance of the 2.0% Convertible Senior Notes, the Company sold warrants to acquire, subject to customary anti-dilution adjustments, 6,112,964 shares of its common stock at an exercise price of $53.77 per share. If the average market price of the Company’s common stock during a defined period ending on or about the settlement date exceeds the exercise price of the warrants, the warrants will be settled in shares of its common stock. Consequently, under the provisions of the warrant instruments, if the market price of the Company’s common stock exceeds $53.77 at exercise, the Company will be obligated to settle in shares of its common stock an amount equal to approximately $6,100 for each dollar that the market price of its common stock exceeds $53.77 resulting in a dilutive impact to its earnings. As of March 31, 2011, the warrant instruments had a dilutive impact to earnings per share as the average market price of the Company’s common stock for the three months ended March 31, 2011 of $54.61 exceeded the $53.77 exercise price of the warrants.


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AMERIGROUP Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements — (Continued)
 
The convertible note hedges and warrants are separate transactions which will not affect holders’ rights under the 2.0% Convertible Senior Notes.
 
As of March 31, 2011, the Company’s common stock was last traded at a price of $64.25 per share. Based on this value, if converted at March 31, 2011, the Company would have been obligated to pay the principal of the 2.0% Convertible Senior Notes plus an amount in cash or shares equal to $132,758. An amount equal to $132,758 would be owed to the Company in cash or in shares of its common stock through the provisions of the convertible note hedges resulting in net cash outflow equal to the principal amount of the 2.0% Convertible Senior Notes. At this per share value, the Company would be required to deliver approximately $64,064 in shares of the Company’s common stock under the warrant instruments or approximately 997,000 shares of its common stock at that price per share.
 
9.  Commitments and Contingencies
 
Florida Premium Recoupment
 
On March 14, 2011, AMERIGROUP Florida, Inc. received written notices (the “Notices”) from the Florida Agency for Health Care Administration (“AHCA”) regarding an audit, conducted by a third party, of Medicaid claims paid under contracts between AHCA and Florida Medicaid managed care organizations for the period October 1, 2008 through December 31, 2010. The Notices claim that AHCA paid premium to AMERIGROUP Florida, Inc. for members who were not eligible to be enrolled in the Medicaid program at the time AHCA and other State agencies enrolled these purportedly ineligible members. The Notices also seek recoupment of premium payments to AMERIGROUP Florida, Inc. attributable to the purportedly ineligible members in the amount of $2,900. The Notices relate to two Florida counties and the Company believes that it may receive similar notices for other counties in which it operates or has operated in Florida.
 
The Company is evaluating its appeal rights and believes that it has substantial defenses to the claims asserted in the Notices for premium recoupment. The accompanying Condensed Consolidated Financial Statements reflect the Company’s best estimate of its liability for the claims set forth in the Notices as of March 31, 2011. However, the Company is unable to estimate the amount or nature of any potential claims for premium recoupment in the other Florida counties in which it operates or has operated because the Company has not received a notice from AHCA or the third party audit firm for such claims. As a result, there can be no assurances that the ultimate outcome of this matter will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
 
Letter of Credit
 
Effective July 1, 2010, the Company renewed a collateralized irrevocable standby letter of credit, initially issued on July 1, 2009, in an aggregate principal amount of approximately $17,400, to meet certain obligations under its Medicaid contract in the State of Georgia through its Georgia subsidiary, AMGP Georgia Managed Care Company, Inc. The letter of credit is collateralized through investments held by AMGP Georgia Managed Care Company, Inc.
 
Legal Proceedings
 
Employment Litigation
 
On November 22, 2010, a former AMERIGROUP New York, LLC marketing representative filed a putative collective and class action Complaint against AMERIGROUP Corporation and AMERIGROUP New York, LLC in the United States District Court, Eastern District of New York styled as Hamel Toure, Individually and on Behalf of All Other Persons Similarly Situated v. AMERIGROUP CORPORATION and AMERIGROUP NEW YORK, L.L.C. f/k/a CAREPLUS, L.L.C. (Case No.: CV10-5391). The Complaint alleges, inter alia, that the plaintiff and certain other employees should have been classified as non-exempt employees under the Fair Labor Standards Act (“FLSA”) and during the course of their employment should have received overtime and other compensation under


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AMERIGROUP Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements — (Continued)
 
the FLSA from October 22, 2007 until the entry of judgment and under the New York Labor Law from October 22, 2004 until the entry of judgment. The Complaint requests certification of the action as a class action, designation of the action as a collective action, a declaratory judgment, injunctive relief, an award of unpaid overtime compensation, an award of liquidated and/or punitive damages, pre-judgment and post-judgment interest, as well as costs and attorneys’ fees. The plaintiff recently amended the Complaint to include a nationwide collective/class action on behalf of other similarly situated former and current associates who have worked as marketing representatives for any subsidiary health plan of the Company during the time period from November 2007 to the present.
 
In addition, the Company recently learned that a Complaint making substantially the same allegations as the Toure case has been filed in the United States District Court, Eastern District of New York. The case is styled as Andrea Burch, individually and on behalf of all others similarly situated v. AMERIGROUP CORP., d/b/a AMERIGROUP; AMERIGROUP NEW YORK, LLC, d/b/a AMERIGROUP (Case No.: CV11-1895).
 
At this early stage of the aforementioned cases, the Company is unable to make a reasonable estimate of the amount or range of loss that could result from an unfavorable outcome because the scope and size of the potential class has not been determined, no discovery has occurred and no specific amount of monetary damages has been alleged. The Company believes it has meritorious defenses to the claims against it and intends to defend itself vigorously.
 
Other Litigation
 
The Company is involved in various other legal proceedings in the normal course of business. Based upon its evaluation of the information currently available, the Company believes that the ultimate resolution of any such proceedings will not have a material adverse effect, either individually or in the aggregate, on its financial position, results of operations or cash flows.
 
10.  Share Repurchase Program
 
The Board of Directors authorized the repurchase of up to $400,000 of shares of the Company’s common stock under the Company’s ongoing share repurchase program on August 5, 2009. Pursuant to this share repurchase program, the Company repurchased and placed into treasury 440,328 shares of its common stock at an aggregate cost of $24,792 during the three months ended March 31, 2011. As of March 31, 2011, the Company had remaining authorization to purchase up to an additional $199,515 of shares of its common stock under the share repurchase program.
 
11.  Long-Term Incentive Plan
 
In March 2011, under the terms of existing compensation plans, the Company granted performance-based restricted stock units and performance-based cash awards to certain of its senior executives. These awards are earned based upon the Company’s performance against pre-established targets, including return on equity, net income margin and revenue growth over the three-year performance period. In addition to the performance conditions, these awards also include a market condition, which under certain performance conditions, may ultimately impact the number of restricted stock units and total cash awarded. The market condition is satisfied if the Company’s total shareholder return is above the median total shareholder return of the Company’s peer group as determined by the Compensation Committee of the Board of Directors (See Part II, Item 5. of the Company’s Annual Report on Form 10-K filed with the SEC on February 23, 2011 for a list of the companies that comprise the Company’s peer group.) Under the terms of the awards, participants have the ability to earn between 0% — 200% of their target award based upon the attainment of performance and/or market conditions as defined.
 
Performance-based restricted stock units are classified as equity awards. The fair value of the awards subject to the market condition is calculated using a Monte Carlo valuation model. Expense associated with the performance-based restricted stock units subject to the market condition is recognized regardless of whether the market condition


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AMERIGROUP Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements — (Continued)
 
is met. A target of 77,828 performance-based restricted stock units were granted with the ability for participants to earn 0 to 155,656 units.
 
The following details of performance-based restricted stock units outstanding as of March 31, 2011 are provided based on current assumptions of future performance:
 
                 
        Weighted -
        Average Grant
    Shares   Date Fair Value
 
Outstanding units at January 1, 2011
           
Granted at target level
    77,828     $ 58.83  
Adjustments above/(below) target level
           
Expired
           
Forfeited
           
                 
Outstanding units at March 31, 2011
    77,828     $ 58.83  
                 
Vested units at March 31, 2011
             
Unvested units at March 31, 2011
    77,828          
Unrecognized compensation expense
  $ 4,943,105          
Weighted average remaining period (years)
    2.92          
 
Performance-based cash awards are classified as liability awards because they are settled in cash. The fair value of the performance-based cash liability is re-evaluated using the Monte Carlo valuation model at each reporting date. A target of $4,515 performance-based cash awards were granted with the ability for participants to earn $0 to $9,030.
 
Expense for both the performance-based restricted stock units and the performance-based cash is recognized based on the total expected award and the period elapsed as of each reporting date. For the three months ended March 31, 2011, a total of $470 was recognized related to grants of performance-based restricted stock units and performance-based cash.
 
12.  Comprehensive Earnings
 
Differences between net income and total comprehensive income resulted from net unrealized (losses) gains on the investment portfolio as follows:
 
                 
    Three Months Ended March 31,  
    2011     2010  
 
Net income
  $ 70,477     $ 42,182  
Other comprehensive income:
               
Unrealized (loss) gain on available-for-sale securities, net of tax
    (600 )     242  
                 
Comprehensive income
  $ 69,877     $ 42,424  
                 


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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-looking Statements
 
This Quarterly Report on Form 10-Q, and other information we provide from time-to-time, contains certain “forward-looking” statements as that term is defined by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements regarding our expected future financial position, membership, results of operations or cash flows, our growth strategy, our competition, our ability to refinance our debt obligations, our ability to finance growth opportunities, our ability to respond to changes in government regulations and similar statements including, without limitation, those containing words such as “believes,” “anticipates,” “expects,” “may,” “will,” “should,” “estimates,” “intends,” “plans” and other similar expressions are forward-looking statements.
 
Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward-looking statements as a result of, but not limited to, the following factors:
 
  •  our inability to manage medical costs;
 
  •  our inability to operate new products and markets at expected levels, including, but not limited to, profitability, membership and targeted service standards;
 
  •  local, state and national economic conditions, including their effect on the premium rate increase process and timing of payments;
 
  •  the effect of laws and regulations governing the healthcare industry, including the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 and any regulations enacted thereunder;
 
  •  changes in Medicaid and Medicare payment levels and methodologies;
 
  •  increased use of services, increased cost of individual services, pandemics, epidemics, the introduction of new or costly treatments and technology, new mandated benefits, insured population characteristics and seasonal changes in the level of healthcare use;
 
  •  our ability to maintain and increase membership levels;
 
  •  our ability to enter into new markets or remain in our existing markets;
 
  •  changes in market interest rates or any disruptions in the credit markets;
 
  •  our ability to maintain compliance with all minimum capital requirements;
 
  •  liabilities and other claims asserted against us;
 
  •  demographic changes;
 
  •  the competitive environment in which we operate;
 
  •  the availability and terms of capital to fund acquisitions, capital improvements and maintain capitalization levels required by regulatory agencies;
 
  •  our ability to attract and retain qualified personnel;
 
  •  the unfavorable resolution of new or pending litigation; and
 
  •  catastrophes, including acts of terrorism or severe weather.
 
Investors should also refer to our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission (“SEC”) on February 23, 2011 for a discussion of risk factors. Given these risks and uncertainties, we can give no assurances that any forward-looking statements will, in fact, transpire, and therefore caution investors not to place undue reliance on them.


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Overview
 
We are a multi-state managed healthcare company focused on serving people who receive healthcare benefits through publicly funded healthcare programs, including Medicaid, Children’s Health Insurance Program (“CHIP”), Medicaid expansion programs and Medicare Advantage. We believe that we are better qualified and positioned than many of our competitors to meet the unique needs of our members and the government agencies with whom we contract because of our focus solely on recipients of publicly funded healthcare, medical management programs and community-based education and outreach programs. We design our programs to address the particular needs of our members, for whom we facilitate access to healthcare benefits pursuant to agreements with applicable state and Federal government agencies. We combine medical, social and behavioral health services to help our members obtain quality healthcare in an efficient manner. Our success in establishing and maintaining strong relationships with government agencies, healthcare providers and our members has enabled us to retain existing contracts, obtain new contracts and establish and maintain a leading market position in many of the markets we serve. We continue to believe that managed healthcare remains the only proven mechanism that improves health outcomes for our members while helping our government customers manage the fiscal viability of their healthcare programs. We are dedicated to offering real solutions that improve healthcare access and quality for our members, while proactively working to reduce the overall cost of care to taxpayers.
 
Summary highlights of our first quarter of 2011 include:
 
  •  Membership increased by 104,000 members, or 5.6%, to 1,967,000 members as of March 31, 2011 compared to 1,863,000 members as of March 31, 2010;
 
  •  Total revenues of $1.5 billion for the first quarter of 2011, a 12.3% increase over the first quarter of 2010;
 
  •  Health benefits ratio (“HBR”) of 81.8% of premium revenues for the first quarter of 2011 compared to 83.5% in the first quarter of 2010;
 
  •  Selling, general and administrative expense (“SG&A”) ratio of 7.6% of total revenues for the first quarter of 2011 compared to 8.6% in the first quarter of 2010;
 
  •  Cash provided by operations was $83.5 million for the three months ended March 31, 2011;
 
  •  Unregulated cash and investments of $268.9 million as of March 31, 2011;
 
  •  We repurchased 440,328 shares of common stock for approximately $24.8 million during the first quarter of 2011; and
 
  •  On February 1, 2011 we began providing managed healthcare services to STAR+PLUS members under an expansion contract in the six-county service area surrounding Forth Worth, Texas.
 
Our results for the three months ended March 31, 2011 reflect the impact of modest membership growth. Additionally, increases in premium revenue reflect the impact of a full period of a benefit expansion to provide long-term care services to eligible members in Tennessee which began in March 2010, the net effect of premium rate changes from the prior year and the impact of a contract award through competitive procurement to expand healthcare coverage to seniors and people with disabilities in the six-county service area surrounding Forth Worth, Texas. Health benefits expense for the three months ended March 31, 2011 reflects moderating cost trends for current and prior periods, the latter of which generated favorable development related to prior periods.
 
Health Care Reform
 
On March 23, 2010, the Patient Protection and Affordable Care Act was signed into law and on March 30, 2010, the Health Care and Education Reconciliation Act of 2010 was signed into law (collectively, the “Acts”). The Acts provide comprehensive changes to the U.S. healthcare system, which will be phased in at various stages over the next several years. Among other things, the Acts are intended to provide health insurance to approximately 32 million uninsured individuals of whom approximately 20 million are expected to obtain health insurance through the expansion of the Medicaid program beginning in 2014. Funding for the expanded coverage will initially come largely from the Federal government.


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To date, the Acts have not had a material effect on our results of operations, liquidity or cash flows; however, we continue to evaluate the provisions of the Acts and believe that the Acts may provide us with significant opportunities for membership growth in our existing markets and, potentially, in new markets in the future. There can be no assurance that we will realize this growth, or that this growth will be profitable. Further, there are several pending lawsuits challenging the constitutionality of the Acts so there can be no assurance that the Acts will take effect as originally enacted or at all.
 
There are numerous steps required to implement the Acts, including promulgating a substantial number of new and potentially more onerous regulations that may affect our business. Further, there has been resistance to expansion at the state level, largely due to budgetary pressure. Because of the unsettled nature of these reforms and numerous steps required to implement them, we cannot predict what additional health insurance requirements will be implemented at the Federal or state level, or the effect that any future legislation or regulation, or the pending litigation challenging the Acts, will have on our business or our growth opportunities. Although we believe the Acts will provide us with significant opportunity, the enacted reforms, as well as future regulations, legislative changes and judicial decisions may in fact have a material adverse effect on our results of operations, financial position or liquidity.
 
The Acts also include the imposition of a significant new non-deductible Federal premium-based assessment and other assessments on health insurers. If this Federal premium-based assessment is imposed as enacted, and if the cost of the Federal premium-based assessment is not included in the calculation of our premium rates, or if we are unable to otherwise adjust our business model to address this new assessment, our results of operations, financial position or liquidity may be materially adversely affected.
 
Pending Contractual Revisions
 
Texas
 
In April 2011, the Texas Health and Human Services Commission (“HHSC”) issued a request for proposal for the re-bid of the Medicaid and CHIP Managed Care Services Contract. Proposals are due in May 2011 and we anticipate a contract award date during the latter half of the year with an operational start date in early 2012. If we are not awarded this contract or if the level of our business in Texas is reduced through the re-bidding process, our results of operations, financial position or cash flows in future periods could be materially and adversely affected.
 
Georgia
 
Our Temporary Assistance for Needy Families (“TANF”) and CHIP contract with the State of Georgia expires June 30, 2011, with the State’s option to renew the contract for one additional one-year term. The State has notified us of its intent to renew our contract effective July 1, 2011 and to amend our existing contract to include one additional year and one additional option to renew for a one-year term for an ultimate potential contract term ending on June 30, 2014 at the outermost. Additionally, the State has indicated its intent to reprocure the contract through a competitive bidding process sometime prior to this contract termination. If we are not awarded this contract through the re-bidding process, our results of operations, financial position or cash flows in future periods could be materially and adversely affected.
 
Other Market Updates
 
Texas
 
In February 2011, we began serving aged, blind and disabled (“ABD”) members in the six-county service area surrounding Forth Worth, Texas through an expansion contract awarded by HHSC. As of March 31, 2011, approximately 29,000 members were served by our Texas health plan under this contract. Previously, we served approximately 14,000 ABD members in the Dallas and Fort Worth areas under an administrative services only (“ASO”) contract that terminated on January 31, 2011.


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Contingencies
 
Florida Premium Recoupment
 
On March 14, 2011, AMERIGROUP Florida, Inc. received written notices (the “Notices”) from the Florida Agency for Health Care Administration (“AHCA”) regarding an audit, conducted by a third party, of Medicaid claims paid under contracts between AHCA and Florida Medicaid managed care organizations for the period October 1, 2008 through December 31, 2010. The Notices claim that AHCA paid premium to AMERIGROUP Florida, Inc. for members who were not eligible to be enrolled in the Medicaid program at the time AHCA and other State agencies enrolled these purportedly ineligible members. The Notices also seek recoupment of premium payments to AMERIGROUP Florida, Inc. attributable to the purportedly ineligible members in the amount of $2.9 million. The Notices relate to two Florida counties and we believe that we may receive similar notices for other counties in which we operate or have operated in Florida. Further, we believe that the other Florida Medicaid managed care organizations have received similar notices for this time period.
 
We are evaluating our appeal rights and believe that we have substantial defenses to the claims asserted in the Notices for premium recoupment. The accompanying Condensed Consolidated Financial Statements reflect our best estimate of our liability for the claims set forth in the Notices as of March 31, 2011. However, we are unable to estimate the amount or nature of any potential claims for premium recoupment in the other Florida counties in which we operate or have operated because we have not received a notice from AHCA or the third party audit firm for such claims. As a result, there can be no assurances that the ultimate outcome of this matter will not have a material adverse effect on our financial position, results of operations or cash flows.
 
Georgia Letter of Credit
 
Effective July 1, 2010, we renewed a collateralized irrevocable standby letter of credit, initially issued on July 1, 2009, in an aggregate principal amount of approximately $17.4 million, to meet certain obligations under our Medicaid contract in the State of Georgia through our Georgia subsidiary, AMGP Georgia Managed Care Company, Inc. The letter of credit is collateralized through cash held by AMGP Georgia Managed Care Company, Inc.
 
Employment Litigation
 
On November 22, 2010, a former AMERIGROUP New York, LLC marketing representative filed a putative collective and class action Complaint against AMERIGROUP Corporation and AMERIGROUP New York, LLC in the United States District Court, Eastern District of New York styled as Hamel Toure, Individually and on Behalf of All Other Persons Similarly Situated v. AMERIGROUP CORPORATION and AMERIGROUP NEW YORK, L.L.C. f/k/a CAREPLUS, L.L.C. (Case No.: CV10-5391). The Complaint alleges, inter alia, that the plaintiff and certain other employees should have been classified as non-exempt employees under the Fair Labor Standards Act (“FLSA”) and during the course of their employment should have received overtime and other compensation under the FLSA from October 22, 2007 until the entry of judgment and under the New York Labor Law from October 22, 2004 until the entry of judgment. The Complaint requests certification of the action as a class action, designation of the action as a collective action, a declaratory judgment, injunctive relief, an award of unpaid overtime compensation, an award of liquidated and/or punitive damages, pre-judgment and post-judgment interest, as well as costs and attorneys’ fees. The plaintiff recently amended the Complaint to include a nationwide collective/class action on behalf of other similarly situated former and current associates who have worked as marketing representatives for any of our subsidiary health plans during the time period from November 2007 to the present.
 
In addition, we recently learned that a Complaint making substantially the same allegations as the Toure case has been filed in the United States District Court, Eastern District of New York. The case is styled as Andrea Burch, individually and on behalf of all others similarly situated v. AMERIGROUP CORP., d/b/a AMERIGROUP; AMERIGROUP NEW YORK, LLC, d/b/a AMERIGROUP (Case No.: CV11-1895).
 
At this early stage of the aforementioned cases, we are unable to make a reasonable estimate of the amount or range of loss that could result from an unfavorable outcome because the scope and size of the potential class has not been determined, no discovery has occurred and no specific amount of monetary damages has been alleged. We believe we have meritorious defenses to the claims against us and intend to defend ourselves vigorously.


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Results of Operations
 
The following table sets forth selected operating ratios for the three months ended March 31, 2011 and 2010. All ratios, with the exception of the HBR, are shown as a percentage of total revenues:
 
                 
    Three Months Ended
 
    March 31,  
    2011     2010  
 
Premium revenue
    99.7 %     99.6 %
Investment income and other
    0.3       0.4  
                 
Total revenues
    100.0 %     100.0 %
                 
Health benefits(1)
    81.8 %     83.5 %
Selling, general and administrative expenses
    7.6 %     8.6 %
Income before income taxes
    7.3 %     5.0 %
Net income
    4.6 %     3.1 %
 
 
(1) The HBR is shown as a percentage of premium revenue because there is a direct relationship between the premium received and the health benefits provided.
 
Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
 
Summarized comparative financial information for the three months ended March 31, 2011 and 2010 is as follows (dollars in millions, except per share data; totals in the table below may not equal the sum of individual line items as all line items have been rounded to the nearest decimal):
 
                         
    Three Months Ended March 31,  
                % Change
 
    2011     2010     2011-2010  
 
Revenues:
                       
Premium
  $ 1,535.8     $ 1,366.8       12.4  
Investment income and other
    4.1       4.9       (15.6 )
                         
Total revenues
    1,539.9       1,371.6       12.3  
Expenses:
                       
Health benefits
    1,257.0       1,141.6       10.1  
Selling, general and administrative
    116.5       117.4       (0.8 )
Premium tax
    40.4       31.5       28.5  
Depreciation and amortization
    9.1       8.7       4.4  
Interest
    4.2       4.0       4.7  
                         
Total expenses
    1,427.1       1,303.2       9.5  
                         
Income before income taxes
    112.8       68.5       64.7  
Income tax expense
    42.3       26.3       60.8  
                         
Net income
  $ 70.5     $ 42.2       67.1  
                         
Diluted net income per share
  $ 1.37     $ 0.82       67.1  
                         
 
Premium Revenue
 
Premium revenue for the three months ended March 31, 2011 increased $169.0 million, or 12.4%, to $1.5 billion from $1.4 billion for the three months ended March 31, 2010. The increase was due in part to increases in full-risk membership across the majority of our existing products and markets, most significantly in the State of Texas. These membership increases are partially due to continuing high levels of unemployment and the generally


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adverse macroeconomic environment driving increases in the number of people eligible for publicly funded healthcare programs. In addition, premium revenue increased as a result of our entry into the Tennessee TennCare CHOICES program in March 2010, premium rate and mix changes and our Texas expansion into the Forth Worth STAR+PLUS program on February 1, 2011.
 
Membership
 
The following table sets forth the approximate number of members we served in each state as of March 31, 2011 and 2010. Because we receive two premiums for members that are in both the Medicare Advantage and Medicaid products, these members have been counted twice in the states where we operate Medicare Advantage plans.
 
                 
    March 31,  
    2011     2010  
 
Texas(1)
    582,000       510,000  
Georgia
    270,000       250,000  
Florida
    263,000       250,000  
Maryland
    207,000       197,000  
Tennessee
    205,000       202,000  
New Jersey
    133,000       158,000  
New York
    109,000       113,000  
Nevada
    82,000       69,000  
Ohio
    55,000       56,000  
Virginia
    39,000       37,000  
New Mexico
    22,000       21,000  
                 
Total
    1,967,000       1,863,000  
                 
 
 
(1) Membership includes approximately 13,000 ABD members under an ASO contract as of March 31, 2010. This contract terminated January 31, 2011.
 
As of March 31, 2011, we served approximately 1,967,000 members, reflecting an increase of approximately 104,000 members, or 5.6%, compared to March 31, 2010. The increase is primarily a result of membership growth in the majority of our products and markets driven by a surge in Medicaid eligibility, which we believe was driven by continuing high levels of unemployment and general adverse economic conditions in addition to the impact of the expansion in the Forth Worth, Texas STAR+PLUS program on February 1, 2011. This growth was partially offset by contraction in our New Jersey health plan as a result of changes in our provider network causing member selection of our health plan to decrease.
 
The following table sets forth the approximate number of our members who receive benefits under our products as of March 31, 2011 and 2010. Because we receive two premiums for members that are in both the Medicare Advantage and Medicaid products, these members have been counted in each product.
 
                 
    March 31,  
Product   2011     2010  
 
TANF (Medicaid)
    1,394,000       1,309,000  
CHIP
    268,000       269,000  
ABD (Medicaid)(1)
    215,000       197,000  
FamilyCare (Medicaid)
    72,000       72,000  
Medicare Advantage
    18,000       16,000  
                 
Total
    1,967,000       1,863,000  
                 


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(1) Membership includes approximately 13,000 members under an ASO contract in Texas as of March 31, 2010. This contract terminated January 31, 2011.
 
Investment income and other revenue
 
Investment income and other revenue was $4.1 million and $4.9 million for the three months ended March 31, 2011 and 2010, respectively.
 
Our investment portfolio is comprised of fixed income securities and cash and cash equivalents, which generated investment income totaling $3.9 million for the three months ended March 31, 2011 compared to $4.2 million for the three months ended March 31, 2010. The decrease in investment income is primarily a result of decreased rates of return on fixed income securities due to current market interest rates. Our effective yield could remain at or below the current rate as of March 31, 2011 for the foreseeable future, which would result in similar or reduced returns on our investment portfolio in future periods. The performance of our investment portfolio is interest rate driven and, consequently, changes in interest rates affect our returns on, and the fair value of, our portfolio which can materially affect our results of operations or liquidity in future periods.
 
Other revenue decreased from $0.7 million for the three months ended March 31, 2010 to $0.2 million for the three months ended March 31, 2011 due to the termination of the ASO contract in the Dallas and Fort Worth service areas of Texas on January 31, 2011.
 
Health benefits expenses
 
Expenses relating to health benefits for the three months ended March 31, 2011 increased $115.4 million, or 10.1%, to $1.3 billion compared to $1.1 billion for the three months ended March 31, 2010. Our HBR decreased to 81.8% for the three months ended March 31, 2011 compared to 83.5% for the same period of the prior year. The decrease in health benefits expense as it relates to premium revenue resulted primarily from moderating cost trends for current and prior periods, the latter of which generated favorable development related to prior periods. HBR was also favorably impacted by the net effect of premium rate changes in connection with annual contract renewals.
 
The following table presents the components of the change in claims payable for the periods presented (in thousands):
 
                 
    Three Months Ended
    Twelve Months Ended
 
    March 31, 2011     December 31, 2010  
 
Claims payable, beginning of period
  $ 510,675     $ 529,036  
Health benefits expense incurred during the period:
               
Related to current year
    1,307,566       4,828,321  
Related to prior years
    (50,604 )     (106,215 )
                 
Total incurred
    1,256,962       4,722,106  
Health benefits payments during the period:
               
Related to current year
    900,625       4,359,216  
Related to prior years
    327,245       381,251  
                 
Total payments
    1,227,870       4,740,467  
                 
Claims payable, end of period
  $ 539,767     $ 510,675  
                 
 
Health benefits expense incurred during both periods were reduced for amounts related to prior years. The amounts related to prior years include the impact of amounts previously included in the liability to establish it at a level sufficient under moderately adverse conditions that were not needed and the reduction in health benefits expense due to revisions to prior estimates.


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Selling, general and administrative expenses
 
SG&A for the three months ended March 31, 2011 and 2010 was $116.5 million and $117.4 million, respectively. Our SG&A to total revenues ratio was 7.6% for the three months ended March 31, 2011 compared to 8.6% for the three months ended March, 31, 2010. The decrease in the SG&A ratio is primarily the result of leverage gained through an increase in premium revenue due to existing market growth, our entry into the Tennessee TennCare CHOICES program in March 2010, premium rate and mix changes and our Texas expansion into the Forth Worth STAR+PLUS program on February 1, 2011.
 
Premium tax expense
 
Premium taxes were $40.4 million and $31.5 million for the three months ended March 31, 2011 and March 31, 2010, respectively. The increase in premium tax expense for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 is primarily due to the termination of premium tax in the State of Georgia in October 2009 which was subsequently reinstated at a lower rate in July 2010 as well as increased premium revenues in the State of Tennessee primarily as a result of our entry into the TennCare CHOICES program in March 2010. Additionally, premium revenue growth in the majority of the other markets where premium tax is levied contributed to the increase.
 
Provision for income taxes
 
Income tax expense for the three months ended March 31, 2011 was $42.3 million with an effective tax rate of 37.5% compared to $26.3 million of income tax expense with an effective tax rate of 38.4% for the three months ended March 31, 2010. The change in the effective tax rate for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010 is primarily attributable to a decrease in the blended state income tax rate.
 
Net income
 
Net income for the three months ended March 31, 2011 was $70.5 million, or $1.37 per diluted share, compared to net income of $42.2 million, or $0.82 per diluted share for the three months ended March 31, 2010. The increase in net income is primarily attributable to an increase in premium revenue as a result of existing market growth, our entry into the Tennessee TennCare CHOICES program in March 2010, premium rate and mix changes and our Texas expansion into the Forth Worth STAR+PLUS program on February 1, 2011. The increase was also a result of moderating cost trends for current and prior periods, the latter of which generated favorable development related to prior periods.
 
Liquidity and Capital Resources
 
We manage our cash, investments and capital structure so we are able to meet the short- and long-term obligations of our business while maintaining financial flexibility and liquidity. We forecast, analyze and monitor our cash flows to enable prudent investment management and financing within the confines of our financial strategy.
 
Our primary sources of liquidity are cash and cash equivalents, short- and long-term investments, and cash flows from operations. As of March 31, 2011, we had cash and cash equivalents of $602.0 million, short- and long-term investments of $1.1 billion and restricted investments on deposit for licensure of $119.2 million. Cash, cash equivalents, and investments which are unregulated totaled $268.9 million at March 31, 2011.
 
Universal Automatic Shelf Registration
 
On December 15, 2008, we filed a universal automatic shelf registration statement with the SEC which enables us to sell, in one or more public offerings, common stock, preferred stock, debt securities and other securities at prices and on terms to be determined at the time of the applicable offering. The shelf registration provides us with the flexibility to publicly offer and sell securities at times we believe market conditions make such an offering attractive. Because we are a well-known seasoned issuer, the shelf registration statement was effective upon filing. No securities have been issued under the shelf registration.


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Share Repurchase Program
 
Under the authorization of our Board of Directors on August 5, 2009, we maintain a share repurchase program that allows us to repurchase up to $400.0 million shares of our common stock. Pursuant to this share repurchase program, we repurchased and placed into treasury 440,328 shares of our common stock at an aggregate cost of $24.8 million during the three months ended March 31, 2011. As of March 31, 2011, we had remaining authorization to purchase up to an additional $199.5 million of shares of our common stock under the share repurchase program.
 
Cash and Investments
 
Cash provided by operations was $83.5 million for the three months ended March 31, 2011 compared to cash used in operations of $6.8 million for the three months ended March 31, 2010. The increase in cash flows was primarily a result of an increase in cash flows generated from working capital changes of $56.8 million and an increase in net income of $28.3 million. Cash used in operating activities for working capital changes was $4.8 million for the three months ended March 31, 2011 compared to $61.6 million for the three months ended March 31, 2010. The decrease in cash used in operating activities for working capital changes primarily resulted from increased cash flows from routine changes in the timing of receipts of premium from government agencies of $65.3 million and variability in claims payable, which is impacted by growth in our markets offset by increased claims processing speeds, of $8.9 million. These increases were partially offset by a net decrease in cash provided through changes in accounts payable, accrued expenses, contractual refunds payable and other current liabilities of $23.0 million due primarily to fluctuations in variable compensation accruals, which are directly related to our attainment of financial performance goals, offset by an increase in cash provided through changes in income tax accruals.
 
Cash used in investing activities was $264.8 million for the three months ended March 31, 2011 compared to $54.5 million for the three months ended March 31, 2010. The increase in cash used in investing activities of $210.3 million is due primarily to an increase in the net purchases of investments of $219.2 million during the three months ended March 31, 2011 compared to the three months ended March 31, 2010, partially offset by the impact of our New Jersey health plan’s acquisition of the Medicaid contracts rights from University Health Plans, Inc. for $13.4 million in March 2010 not recurring. We currently anticipate total capital expenditures for 2011 to be between approximately $35.0 million and $45.0 million related primarily to technological infrastructure development and enhancement of core systems to increase scalability and efficiency. For the three months ended March 31, 2011, total capital expenditures were $10.9 million.
 
Our investment policies are designed to preserve capital, provide liquidity and maximize total return on invested assets. As of March 31, 2011, our investment portfolio consisted primarily of fixed-income securities with a weighted average maturity of approximately twenty-two months. We utilize investment vehicles such as auction rate securities, certificates of deposit, commercial paper, corporate bonds, debt securities of government sponsored entities, Federally insured corporate bonds, money market funds, municipal bonds and U.S. Treasury securities. The states in which we operate prescribe the types of instruments in which our subsidiaries may invest their funds. The weighted average taxable equivalent yield on consolidated investments as of March 31, 2011 was approximately 1.1%. As of March 31, 2011, we had total cash and investments of approximately $1.8 billion.


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The following table shows the types, percentages and average Standard and Poor’s (“S&P”) ratings of our holdings within our investment portfolio at March 31, 2011:
 
                 
    Portfolio
    Average S&P
 
    Percentage     Rating  
 
Auction rate securities
    0.9 %     AAA  
Cash, bank deposits and commercial paper
    2.3 %     AAA  
Certificates of deposit
    8.4 %     AAA  
Corporate bonds
    16.4 %     A+  
Debt securities of government sponsored entities, Federally insured corporate bonds and U.S. Treasury securities
    31.1 %     AAA  
Money market funds
    19.8 %     AAA  
Municipal bonds
    21.1 %     AA+  
                 
      100.0 %     AA+  
                 
 
As of March 31, 2011, $17.4 million of our investments were comprised of securities with an auction reset feature (“auction rate securities”) issued by student loan corporations established by various state governments. Since early 2008, auctions for these auction rate securities have failed, significantly decreasing our ability to liquidate these securities prior to maturity. As we cannot predict the timing of future successful auctions, if any, our auction rate securities are classified as available-for-sale and are carried at fair value within long-term investments. The weighted average life of our auction rate securities portfolio, based on the final maturity, is approximately twenty-three years. We currently believe that the $1.0 million net unrealized loss position that remains at March 31, 2011 on our auction rate securities portfolio is primarily due to liquidity concerns and not the creditworthiness of the underlying issuers. We currently have the intent to hold our auction rate securities to maturity, if required, or if and when market stability is restored with respect to these investments. During the three months ended March 31, 2011, certain investments in auction rate securities were called at par for net proceeds of $4.2 million.
 
Cash provided by financing activities was $19.3 million for the three months ended March 31, 2011, compared to cash used in financing activities of $3.4 million for the three months ended March 31, 2010. The increase in cash flows from financing activities is due primarily to an increase in the change in bank overdrafts of $23.5 million and an increase in proceeds from employee stock option exercises of $13.3 million offset by an increase in repurchases of our common stock of $17.8 million.
 
We believe that existing cash and investment balances and cash flows from operations will be sufficient to support continuing operations, capital expenditures and our growth strategy for at least 12 months. Our debt-to-total capital ratio at March 31, 2011 was 16.8%. We utilize the debt-to-total capital ratio as a measure, among others, of our leverage and financial flexibility. We believe our current debt-to-total capital ratio allows us flexibility to access debt financing should the need or opportunity arise; however, the financial markets have experienced periods of volatility and disruption from time-to-time. Future volatility and disruption is possible and unpredictable. In the event we need to access additional capital, our ability to obtain such capital may be limited and the cost of any such capital will depend on the market condition and our financial position at the time we pursue additional financing.
 
Convertible Senior Notes
 
As of March 31, 2011, we had $260.0 million outstanding in aggregate principal amount of 2.0% Convertible Senior Notes (the “2.0% Convertible Senior Notes”) due May 15, 2012. The 2.0% Convertible Senior Notes are governed by an Indenture dated as of March 28, 2007 (the “Indenture”). The 2.0% Convertible Senior Notes are senior unsecured obligations of the Company and rank equal in right of payment with all of our existing and future senior debt and senior to all of our subordinated debt. The 2.0% Convertible Senior Notes bear interest at a rate of 2.0% per year, payable semiannually in arrears in cash on May 15 and November 15 of each year and mature on May 15, 2012, unless earlier repurchased or converted in accordance with the Indenture.
 
Upon conversion of the 2.0% Convertible Senior Notes, we will pay cash up to the principal amount of the 2.0% Convertible Senior Notes converted. With respect to any conversion value in excess of the principal amount,


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we have the option to settle the excess with cash, shares of our common stock, or a combination thereof based on a daily conversion value, as defined in the Indenture. The initial conversion rate for the 2.0% Convertible Senior Notes is 23.5114 shares of common stock per one thousand dollars of principal amount of 2.0% Convertible Senior Notes, which represents a 32.5% conversion premium based on the closing price of $32.10 per share of our common stock on March 22, 2007 and is equivalent to a conversion price of approximately $42.53 per share of common stock. Consequently, under the provisions of the 2.0% Convertible Senior Notes, if the market price of our common stock exceeds $42.53 we will be obligated to settle, in cash or shares of our common stock at our option, an amount equal to approximately $6.1 million for each dollar in share price that the market price of our common stock exceeds $42.53, or the conversion value in excess of the principal amount of the 2.0% Convertible Senior Notes. In periods prior to conversion, the 2.0% Convertible Senior Notes would also have a dilutive impact to earnings if the average market price of our common stock exceeds $42.53 for the period reported. At conversion, the dilutive impact would result if the conversion value in excess of the principal amount of the 2.0% Convertible Senior Notes, if any, is settled in shares of our common stock. The conversion rate is subject to adjustment in some events but will not be adjusted for accrued interest. In addition, if a “fundamental change” occurs prior to the maturity date, we will in some cases increase the conversion rate for a holder of 2.0% Convertible Senior Notes that elects to convert their 2.0% Convertible Senior Notes in connection with such fundamental change. As of March 31, 2011, the 2.0% Convertible Senior Notes had a dilutive impact to earnings per share as the average market price of our common stock for the three months ended March 31, 2011 of $54.61 exceeded the conversion price of $42.53.
 
Concurrent with the issuance of the 2.0% Convertible Senior Notes, we purchased convertible note hedges covering, subject to customary anti-dilution adjustments, 6,112,964 shares of our common stock. The convertible note hedges are expected to reduce the potential dilution upon conversion of the 2.0% Convertible Senior Notes in the event that the market value per share of our common stock, as measured under the convertible note hedges, at the time of exercise is greater than the strike price of the convertible note hedges. Consequently, under the provisions of the convertible note hedges, we are entitled to receive cash or shares of our common stock in an amount equal to the conversion value in excess of the principal amount of the 2.0% Convertible Senior Notes from the counterparty to the convertible note hedges.
 
Also concurrent with the issuance of the 2.0% Convertible Senior Notes, we sold warrants to acquire, subject to customary anti-dilution adjustments, 6,112,964 shares of our common stock at an exercise price of $53.77 per share. If the average market price of our common stock during a defined period ending on or about the settlement date exceeds the exercise price of the warrants, the warrants will be settled in shares of our common stock. Consequently, under the provisions of the warrant instruments, if the market price of our common stock exceeds $53.77 at exercise we will be obligated to settle in shares of our common stock an amount equal to approximately $6.1 million for each dollar that the market price of our common stock exceeds $53.77 resulting in a dilutive impact to our earnings. As of March 31, 2011, the warrant instruments had a dilutive impact to earnings per share as the average market price of our common stock for the three months ended March 31, 2011 of $54.61 exceeded the $53.77 exercise price of the warrants.
 
The convertible note hedges and warrants are separate transactions which do not affect holders’ rights under the 2.0% Convertible Senior Notes.
 
As of March 31, 2011, our common stock was last traded at a price of $64.25 per share. Based on this value, if converted at March 31, 2011, we would have been obligated to pay the principal of the 2.0% Convertible Senior Notes plus an amount in cash or shares equal to $132.8 million. An amount equal to $132.8 million would be owed to us in cash or in shares of our common stock through the provisions of the convertible note hedges resulting in net cash outflow equal to the principal amount of the 2.0% Convertible Senior Notes. At this per share value, we would be required to deliver approximately $64.1 million in shares of our common stock under the warrant instruments or approximately 997,000 shares of our common stock at that price per share.
 
The principal of our 2.0% Convertible Senior Notes may be repaid with proceeds from debt or equity financing, existing unregulated cash and investments, or a combination thereof. If we determine that debt or equity financing is appropriate, our access to these markets may be limited as our results of operations cannot be predicted. Additionally, any disruptions in the credit markets similar to that of the recent recession could further limit our flexibility in planning for, or reacting to, changes in our business and industry and addressing our future capital


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requirements. Further, to the extent the counterparties to the convertible note hedges are unwilling or unable to fulfill the obligations under the convertible note hedges, our financial condition could be materially adversely affected.
 
Our access to additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to our industry, our credit ratings and credit capacity, as well as lenders’ perception of our long- or short-term financial prospects. On March 30, 2011, as a result of our improved financial flexibility, growing operational scale and associated strong cash-flow generation capacity, Standard and Poor’s Ratings Services raised its counterparty credit and senior debt ratings on the Company from BB to BB+.
 
Similarly, our access to additional financing may be impaired if regulatory authorities or rating agencies take negative actions against us or if lenders develop a negative perception of our long- or short-term financial prospects. If a combination of these factors were to occur, our internal sources of liquidity may prove to be insufficient, and in such case, we may not be able to successfully obtain additional financing on favorable terms or at all.
 
Regulatory Capital and Dividend Restrictions
 
Our operations are conducted through our wholly-owned subsidiaries, which include Health Maintenance Organizations (“HMOs”), one health insuring corporation (“HIC”) and one Prepaid Health Services Plan (“PHSP”). HMOs, HICs and PHSPs are subject to state regulations that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state, and restrict the timing, payment and amount of dividends and other distributions that may be paid to their stockholders. Additionally, certain state regulatory agencies may require individual regulated entities to maintain statutory capital levels higher than the state regulations. As of March 31, 2011, we believe our subsidiaries are in compliance with all minimum statutory capital requirements. The parent company may be required to fund minimum net worth shortfalls or choose to increase capital at its subsidiary health plans during the remainder of 2011 using unregulated cash, cash equivalents, investments or a combination thereof. We believe, as a result, that we will continue to be in compliance with these requirements at least through the end of 2011.
 
The National Association of Insurance Commissioners (“NAIC”) has defined risk-based capital (“RBC”) standards for HMOs and other entities bearing risk for healthcare coverage that are designed to measure capitalization levels by comparing each company’s adjusted surplus to its required surplus (“RBC ratio”). The RBC ratio is designed to reflect the risk profile of HMOs. Within certain ratio ranges, regulators have increasing authority to take action as the RBC ratio decreases. There are four levels of regulatory action, ranging from (a) requiring insurers to submit a comprehensive plan to the state insurance commissioner, to (b) requiring the state insurance commissioner to place the insurer under regulatory control. Eight of our eleven states have adopted RBC as the measure of required surplus. At March 31, 2011, our RBC ratio in each of these states exceeded the requirement thresholds at which regulatory action would be initiated. Although not all states had adopted these rules at March 31, 2011, at that date, each of our active health plans had a surplus that exceeded either the applicable state net worth requirements or, where adopted, the levels that would require regulatory action under the NAIC’s RBC rules.
 
Item 3.   Quantitative and Qualitative Disclosures About Market Risk
 
Our Condensed Consolidated Balance Sheets include a number of assets whose fair values are subject to market risk. Due to our significant investment in fixed-income investments, interest rate risk represents a market risk factor affecting our consolidated financial position. Increases and decreases in prevailing interest rates generally translate into decreases and increases in fair values of those instruments. The financial markets have experienced periods of volatility and disruption, which have impacted liquidity and valuations of many financial instruments. While we do not believe we have experienced material adverse changes in the value of our cash equivalents and investments, disruptions could impact the value of these assets and other financial assets we may hold in the future. There can be no assurance that future changes in interest rates, creditworthiness of issuers, prepayment activity, liquidity available in the market and other general market conditions will not have a material adverse impact on our results of operations, liquidity, financial position or cash flows.


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As of March 31, 2011, substantially all of our investments were in high quality securities that have historically exhibited good liquidity.
 
The fair value of our fixed-income investment portfolio is exposed to interest rate risk — the risk of loss in fair value resulting from changes in prevailing market rates of interest for similar financial instruments. However, we have the ability to hold fixed-income investments to maturity. We rely on the experience and judgment of senior management to monitor and mitigate the effects of market risk. The allocation among various types of securities is adjusted from time-to-time based on market conditions, credit conditions, tax policy, fluctuations in interest rates and other factors. In addition, we place the majority of our investments in high-quality, liquid securities and limit the amount of credit exposure to any one issuer. As of March 31, 2011, an increase of 1% in interest rates on securities with maturities greater than one year would reduce the fair value of our fixed-income investment portfolio by approximately $22.2 million. Conversely, a reduction of 1% in interest rates on securities with maturities greater than one year would increase the fair value of our fixed-income investment portfolio by approximately $19.8 million. The above changes in fair value are impacted by securities in our portfolio that have a call provision feature. We believe this fair value presentation is indicative of our market risk because it evaluates each investment based on its individual characteristics. Consequently, the fair value presentation does not assume that each investment reacts identically based on a 1% change in interest rates.
 
Item 4.   Controls and Procedures
 
(a) Evaluation of Disclosure Controls and Procedures.  Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
(b) Changes in Internal Controls over Financial Reporting.  During the first quarter of 2011, in connection with our evaluation of internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, we concluded there were no changes in our internal control procedures that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Part II. Other Information
 
Item 1.   Legal Proceedings
 
The information required under this Item 1 of Part II is contained in Item 1 of Part I of this Quarterly Report on Form 10-Q in Note 9 to the Condensed Consolidated Financial Statements, and such information is incorporated herein by reference in this Item 1 of Part II.
 
Item 1A.   Risk Factors
 
Certain risk factors may have a material adverse effect on our business, financial condition and results of operations and you should carefully consider them. There has been no material change in our risk factors as previously disclosed in Part I., Item 1.A., Risk Factors, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the SEC on February 23, 2011.


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Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
 
Set forth below is information regarding the Company’s stock repurchases during the three months ended March 31, 2011:
 
                                 
                      Approximate Dollar
 
                      Value of Shares
 
                Total Number of
    (or Units)
 
          Average
    Shares (or Units)
    that May Yet Be
 
    Total Number of
    Price Paid
    Purchased as Part of
    Purchased Under
 
    Shares (or Units)
    per Share
    Publicly Announced
    the Plans or
 
    Purchased
    (or Unit)
    Plans or Programs(1)
    Programs(2)
 
Period   (#)     ($)     (#)     ($)  
 
January 1 — January 31, 2011
    63,541       47.20       63,541       221,308,127  
February 1 — February 28, 2011
    122,124       57.34       122,124       214,305,965  
March 1 — March 31, 2011(3)
    269,546       58.13       254,663       199,515,246  
                                 
Total
    455,211       56.39       440,328       199,515,246  
                                 
 
 
(1) Shares purchased during the first quarter of 2011 were purchased as part of our existing authorized share repurchase program pursuant to Rule 10b5-1 of the Exchange Act as well as in open market purchases as permitted by Rule 10b5-18 of the Exchange Act. On March 8, 2011, we entered into a trading plan in accordance with Rule 10b5-1 of the Exchange Act, to facilitate repurchases of our common stock pursuant to our ongoing share repurchase program (the “Rule 10b5-1 plan”). The Rule 10b5-1 plan effectively terminated the previous Rule 10b5-1 plan and became effective on May 3, 2011 and expires on May 1, 2013, unless terminated earlier in accordance with its terms.
 
(2) The ongoing share repurchase program authorized by the Board of Directors allows us to repurchase up to $400.0 million shares of our common stock from and after August 5, 2009. No duration has been placed on the repurchase program and we reserve the right to discontinue the repurchase program at any time.
 
(3) Our 2009 Equity Incentive Plan allows, upon approval by the plan administrator, stock option recipients to deliver shares of unrestricted Company common stock held by the participant as payment of the exercise price and applicable withholding taxes upon the exercise of stock options or vesting of restricted stock. During March 2011, certain employees elected to tender 14,883 shares to the Company in payment of related withholding taxes upon vesting of restricted stock.
 
Item 3.   Defaults Upon Senior Securities
 
None.
 
Item 4.   (Removed and Reserved)
 
Item 5.   Other Information
 
None.
 
Item 6.   Exhibits
 
The exhibits listed on the accompanying Exhibit Index immediately following the Signatures page are incorporated by reference into this report.


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Signatures
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
AMERIGROUP Corporation
 
  By: 
/s/  James G. Carlson
James G. Carlson
Chairman, Chief Executive
Officer and President
 
Date: May 3, 2011
 
AMERIGROUP Corporation
 
  By: 
/s/  James W. Truess
James W. Truess
Chief Financial Officer and
Executive Vice President
 
Date: May 3, 2011


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EXHIBITS
 
Exhibits.
 
The following exhibits, which are furnished with this Quarterly Report on Form 10-Q or incorporated herein by reference, are filed as part of this Quarterly Report on Form 10-Q.
 
The agreements included or incorporated by reference as exhibits to this Quarterly Report on Form 10-Q contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties were made solely for the benefit of the other parties to the applicable agreement and (i) were not intended to be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) may have been qualified in such agreement by disclosures that were made to the other party in connection with the negotiation of the applicable agreement; (iii) may apply contract standards of “materiality” that are different from “materiality” under the applicable securities laws; and (iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement.
 
The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this Quarterly Report on Form 10-Q not misleading.
 
         
Exhibit
   
Number   Description
 
         
  3 .1   Amended and Restated Certificate of Incorporation (incorporated by reference to exhibit 3.1 to our Amendment No. 2 to our Registration Statement on Form S-3 (No. 333-108831) filed on October 9, 2003).
         
  3 .2   Amended and Restated By-Laws of the Company (incorporated by reference to exhibit 3.1 to our Current Report on Form 8-K filed on February 14, 2008).
         
  4 .1   Form of share certificate for common stock (incorporated by reference to exhibit 3.3 to our Amendment No. 3 to our Registration Statement on Form S-1 (No. 333-347410) filed on July 24, 2000).
         
  4 .2   Indenture related to the 2.0% Convertible Senior Notes due 2012 dated March 28, 2007, between AMERIGROUP Corporation and The Bank of New York, as trustee (including the form of 2.0% Convertible Senior Note due 2012) (incorporated by reference to exhibit 4.1 to our Current Report on Form 8-K filed on April 3, 2007).
         
  4 .3   Registration Rights Agreement dated March 28, 2007, between AMERIGROUP Corporation, Goldman Sachs, & Co., as representative of the initial purchasers (incorporated by reference to exhibit 4.2 to our Current Report on Form 8-K filed on April 3, 2007).
         
  10 .1   Amendment to the AMERIGROUP Corporation Severance Plan (incorporated by reference to exhibit 10.1 to our Current Report on Form 8-K filed on April 1, 2011).
         
  10 .2   Amendment No. 3 to Employment Agreement between AMERIGROUP Corporation and James G. Carlson (incorporated by reference to exhibit 10.2 to our Current Report on Form 8-K filed on April 1, 2011).
         
  31 .1   Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002, dated May 3, 2011.
         
  31 .2   Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002, dated May 3, 2011.
         
  32     Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002, dated May 3, 2011.
         
  *101 .INS   XBRL Instance Document
         
  *101 .SCH   XBRL Taxonomy Extension Schema Document
         
  *101 .CAL   XBRL Taxonomy Extension Calculation Linkbase Document
         
  *101 .DEF   XBRL Taxonomy Extension Definition Linkbase Document


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Exhibit
   
Number   Description
 
         
  *101 .LAB   XBRL Taxonomy Extension Label Linkbase Document
         
  *101 .PRE   XBRL Taxonomy Extension Presentation Linkbase Document
 
 
* In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

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