KMG America Corporation (NYSE:KMA) today reported net income for
the third quarter of 2005 of $1.3 million, or $.06 per diluted
share, and operating income of $1.2 million, or $.06 per diluted
share. KMG America Chairman, President and Chief Executive Officer,
Kenneth Kuk, commenting on these results said, "We are satisfied
with our third quarter earnings results, which are slightly better
than the consensus analyst estimate of $.05 per share.
Additionally, as of early October, we have successfully achieved
our full year sales representative hiring objective. We are
actively marketing our new stop loss and group life products, and
we have good early sales results to report." Mr. Kuk added, "The
third quarter results include $3.9 million of incremental costs
attributable to new KMG America activity compared to $4.0 million
in the second quarter of 2005. We produced $1.4 million of
incremental direct premiums in the third quarter related to sales
from the new sales distribution channel." KMG America (the
"Company") previously announced its intention to hire at least 20
new sales representatives in 2005. That objective was accomplished
in early October and the Company now has sales representatives in
16 major markets across America. Sales representative hiring will
resume shortly after January 1, 2006, which will permit sales
management to focus on successfully concluding 2005 and assisting
with the important January 1 policy renewal period. Sales
expectations from the new sales force for full year 2005 should
exceed the original estimate of $13 million but may fall short of
the $20 million objective established more recently. The Company
continues to be optimistic about January 1 policy renewals. The
Company views productivity per sales representative as a key early
indicator of whether KMG America is successfully executing its
business strategy. There is strong evidence that Company sales
personnel employed for over six months are producing annualized new
premium at the expected levels. This is particularly noteworthy
considering the limited product menu available and the fact that
the important January renewal sales period has not yet been
available to them. Product development is progressing on schedule
with the stop loss insurance product approved in most of the
Company's 45 targeted states; group life insurance is approved in
over half of the targeted states; and the new group disability
insurance products have been filed and are being considered by the
states for approval. The focus now is on improving the array of
voluntary products available through the Company's primary
subsidiary, Kanawha Insurance Company ("Kanawha"). THIRD QUARTER
FINANCIAL RESULTS For the third quarter of 2005, KMG America
reported net income of $1.3 million, or $.06 per diluted share,
compared to net income for the second quarter of 2005 of $0.7
million, or $.03 per diluted share, and third quarter 2004 net
income of $3.6 million (third quarter 2004 net income includes
realized gains of $3.0 million, net of taxes). On an operating
income basis, third quarter 2005 income was $1.2 million, or $.06
per diluted share, compared to operating income of $0.7 million, or
$.03 per diluted share, in the second quarter of 2005, and $3.2
million, or $.14 per diluted share, in the third quarter of 2004 on
a pro forma basis (pro forma operating income in the third quarter
of 2004 is adjusted to reflect the application of purchase
accounting consistent with the earnings measurement basis in 2005).
The primary reasons for the decreased earnings in the third quarter
2005 to third quarter 2004 comparisons continue to be the increased
expenses from the new KMG America activity related to building the
new sales and underwriting organization, and the additional costs
and infrastructure required to operate as a public company. These
new expenses (before deferrals of acquisition costs related to
voluntary product sales) totaled $3.9 million and $4.0 million in
the third and second quarters of 2005, respectively. Partially
offsetting these increased expenses are incremental direct premiums
related to the sales activity from the new KMG America distribution
channel of $1.4 million and $0.1 million in the third and second
quarters of 2005, respectively. Operating after tax losses
attributed to the KMG America new activity were $2.2 million and
$2.6 million in the third and second quarters of 2005,
respectively. Excluding the earnings results attributable to KMG
America new activity, third quarter 2005 operating income would be
$3.5 million, or $.16 per diluted share, compared to $3.3 million,
or $.15 per diluted share, in the second quarter 2005, and third
quarter 2004 pro forma operating income of $3.2 million, or $.14
per diluted share. The Company believes that excluding the earnings
results of the KMG America new activity provides a more meaningful
comparison of the trends in earnings produced by Kanawha's legacy
business, which serves to fund the initial outlay of expenses
associated with building the new sales and underwriting
organization and the infrastructure needed to operate as a public
company. The more notable earnings drivers are discussed below
where the third quarter of 2005 results are compared to the second
quarter of 2005 results. Premium Revenue Premiums for the third
quarter of 2005 were $26.4 million, down $0.4 million compared to
$26.8 million in the second quarter of 2005. This trend is largely
due to sharply increased lapses resulting from steep rate increases
on a specific worksite short term disability income policy form, as
well as a seasonality effect in long term care premium from quarter
to quarter. Partially offsetting this decline is the emergence of
incremental premiums related to the sales activity of the KMG
America new sales distribution channel that produced $1.4 million
of new direct premiums ($1.0 million net of reinsurance) in the
current quarter. Investment Income Investment income in the third
quarter of 2005 was $7.1 million, an increase of $0.3 million
compared to $6.8 million in the second quarter of 2005. The
investment portfolio yield in the third quarter of 2005 was 4.81%
based on average cash and invested assets, an improvement from
4.69% in the second quarter of 2005. As a result of the capital
raised in the IPO in late December of 2004 and other cash raised by
Kanawha from targeted dispositions of certain securities in its
investment portfolio late in the third quarter of 2004, the Company
had total cash and cash equivalents of about $130 million at the
end of 2004. Throughout 2005, the Company has remained liquid and
short as a result of our decision to target shorter term
investments where we perceive more value currently. These short
term holdings amount to about $80 million today after redeploying
approximately $30 million during the month of October into longer
term investments with yields ranging from 5.60% to 5.90%, and
durations from 7 to 8.5 years. The Company expects to continue to
redeploy these shorter term assets into longer term assets if
interest rates continue to rise as we expect. Policyholder Benefits
Policyholder benefits for the third quarter of 2005 were $21.9
million, an increase of $1.2 million compared to $20.7 million in
the second quarter of 2005. The total Company benefit ratio was
82.8% in the third quarter of 2005 compared to 77.0% in the second
quarter of 2005. The benefit ratio for the Company as a whole in
the third quarter reflects higher benefit ratios across all legacy
segments, especially in the legacy worksite activity and acquired
segment generally reflecting unfavorable claims experience in
certain areas. The benefit ratio applicable to the legacy worksite
activity was also adversely affected by the impact of two rate
increases within the past year on one disability income policy form
that caused premiums to decline rapidly in the third quarter, as
noted above. The benefit ratio for the Senior segment increased
because premium revenue declined as noted above; however,
policyholder benefits did decrease slightly from the second
quarter. The benefit ratio for the Acquired Business segment
increased primarily because of increased high amount claims in the
third quarter on one treaty reinsuring individual major medical
insurance. The benefit ratio associated with the new KMG America
worksite activity was 61.7% in the third quarter of 2005 compared
to 72.9% in the second quarter of 2005. The decline between
quarters is related to product mix, with relatively more voluntary
product premium booked in the third quarter. The lower benefit
ratios reported for the new KMG America worksite activity compared
to the legacy worksite activity reflects the lower claims rate on
newly issued business with level premiums over the life of the
policies. Expenses, taxes, licenses and fees General insurance
expenses, taxes, licenses and fees (before deferrals of policy
acquisition costs) for the third quarter of 2005 were $14.4
million, a decrease of $0.7 million compared to $15.1 million in
the second quarter of 2005. Third quarter of 2005 expenses declined
compared to the second quarter of 2005, primarily due to $0.3
million of lower incentive compensation accrual, $0.2 million of
lower legal and audit fees and favorable group insurance expenses
resulting from improved claims experience in our self insured plan
of $0.3 million. The Company completed an internal review of the
acquisition costs that are being deferred and made some adjustments
relative to historical deferral policies at Kanawha to reflect the
new business model and the more rapid growth in new business
expected. These adjustments impact the comparisons to prior
periods. This methodology change resulted in an increase of
acquisition cost deferrals of $0.3 million in the third quarter of
2005 compared to the second quarter of 2005. The Company expects
this new deferral policy to continue going forward. Amortization of
Deferred Acquisition Costs (DAC)/Value of Business Acquired (VOBA)
Amortization of DAC/VOBA for the third quarter of 2005 was $0.5
million, a decrease of $0.7 million compared to the $1.2 million in
the second quarter of 2005. The Company is required under FAS 60 to
adjust VOBA amortization to reflect actual persistency, which was
favorable compared to original expectations. The current impact
from favorable persistency was $0.4 million of reduced
amortization, which varied by segment. Non-recurring Items Two
offsetting non-recurring items were included in the third quarter
2005 financial results. First, the senior segment contained a
one-time pre-tax charge of $0.3 million in the third quarter of
2005 for severance and other termination costs relating to the sale
of the Fort Myers agency office, which closed October 4, 2005.
Second, the corporate segment includes $0.3 million in other income
reflecting a legal settlement during the third quarter of 2005 in
favor of the Company. THIRD QUARTER 2005 EARNINGS CONFERENCE CALL
KMG America will hold a conference call on Monday, November 14, at
10:00 a.m. Eastern Time to discuss its third quarter 2005 results.
This call is being webcast by Thomson/CCBN and can be accessed from
KMG America's website, www.kmgamerica.com. Please click on
"Analyst/Investor" and there will be a link on the top right for
the Q3 Conference Call. Please register approximately 5 minutes
prior to the call. A rebroadcast will be available after noon on
November 14 and may be accessed using the same instructions. The
webcast is also being distributed through the Thomson StreetEvents
Network to both institutional and individual investors. Individual
investors can listen to the call at www.fulldisclosure.com,
Thomson/CCBN's individual investor portal, powered by StreetEvents.
Institutional investors can access the call via Thomson's
password-protected event management site, StreetEvents
(www.streetevents.com). NOTES ON FINANCIAL PRESENTATION KMG America
was formed on January 21, 2004, and commenced its insurance
operations shortly before December 21, 2004, when it completed its
initial public offering of common stock and used a portion of the
proceeds to complete its acquisition of Kanawha Insurance Company.
Results of operations, cash flows and changes in shareholders'
equity for the quarter and nine months ended September 30, 2004
(the predecessor periods indicated on the attached financial
tables), reflect the historical operations of Kanawha only and do
not include GAAP purchase accounting ("PGAAP") adjustments
reflecting the acquisition. Results of operations, cash flows and
changes in shareholders' equity for the quarter ended September 30,
2005, and the quarter ended June 30, 2005 and KMG America's
financial position as of December 31, 2004, and September 30, 2005,
have been adjusted for PGAAP adjustments reflecting the Kanawha
acquisition. Non-GAAP Financial Measures -- Operating Income - To
supplement the financial statements presented on a GAAP basis, the
Company reported operating income, which is a non-GAAP measure.
Operating income is defined as net income excluding realized
investment gains (losses), net of income taxes and certain
non-recurring items, net of income taxes. Management believes this
non-GAAP measure provides investors, potential investors,
securities analysts and others with useful additional information
to evaluate the performance of the business, because it excludes
items that management believes are not indicative of the operating
results of the business. In addition, this non-GAAP measure is used
by management to evaluate the operating performance of the Company.
The presentation of this additional information is not meant to be
considered in isolation or as a substitute for net income
determined in accordance with GAAP. -- Pro Forma Financial
Information - To supplement the financial statements presented on a
GAAP basis, the Company reported "pro forma" financial information
that adjusts the statements of income for the quarter and nine
months ended September 30, 2004 for the actual dollar value impact
that the December 31, 2004 balance sheet PGAAP adjustments had on
the quarter and nine months ended September 30, 2005 statements of
income, respectively. Such pro forma financial information is a
non-GAAP measure. Management believes this pro forma non-GAAP
measure provides investors, potential investors, securities
analysts and others with useful additional information to evaluate
the performance of the business, because these purchase accounting
adjustments relating to the Kanawha acquisition have been
incorporated in KMG America's financial statements for the quarter
and nine months ending September 30, 2005, and will be incorporated
in later reporting periods. The presentation of this additional
information is not meant to be considered in isolation or as a
substitute for the results of operations or financial position of
the Company determined in accordance with GAAP. A reconciliation of
the non-GAAP financial measures contained in this release to the
most comparable GAAP measures appears in the attached tables. This
press release contains forward-looking statements that are made
pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The accuracy of such statements is
subject to a number of risks, uncertainties and assumptions that
may cause KMG America Corporation's actual results to differ
materially from those expressed in the forward-looking statements
including, but not limited to: implementation of its business
strategy; hiring and retaining key employees; predicting and
managing claims and other costs; fluctuations in its investment
portfolio; financial strength ratings of its insurance subsidiary;
government regulations, policies and investigations affecting the
insurance industry; competitive insurance products and pricing;
reinsurance costs; fluctuations in demand for insurance products;
possible recessionary trends in the U.S. economy; and other risks
that are detailed from time to time in reports filed by the Company
with the Securities and Exchange Commission. -0- *T KMG America
Corporation and Predecessor Consolidated Statements of Income (GAAP
basis, unaudited) (in thousands, except percentages) KMG America
Predecessor KMG America Predecessor ------------------- ----------
----------- ----------- Quarter Ended Nine Months Ended
------------------------------- ----------------------- 9/30/2005
6/30/2005 9/30/2004 9/30/2005 9/30/2004 --------- ---------
--------- ----------- --------- Insurance premiums, net of
reinsurance $26,423 $26,817 $25,245 $79,438 $77,232 Net investment
income (1) 7,089 6,800 6,852 20,542 19,173 Commission and fee
income 3,773 3,671 3,337 11,012 10,173 Realized investment gains
278 19 4,563 324 6,291 Other income 1,200 978 799 2,970 2,257
--------- --------- --------- ----------- --------- Total revenues
38,763 38,285 40,796 114,286 115,126 Policyholder benefits 21,890
20,646 21,667 62,966 68,215 Insurance commissions, net of deferrals
2,239 2,377 2,371 7,282 7,150 Expenses, taxes, fees and
depreciation 12,199 13,103 8,726 36,778 24,883 Amortization of DAC
and VOBA (2) 462 1,215 2,472 2,762 6,828 --------- ---------
--------- ----------- --------- Total benefits and expenses 36,790
37,341 35,236 109,788 107,076 Income before income taxes 1,973 944
5,560 4,498 8,050 (Provision) for income taxes (634) (231) (1,980)
(1,426) (2,746) --------- --------- --------- ----------- ---------
Net income $1,339 $713 $3,580 $3,072 $5,304
=============================== ======================= Operating
income (3) $1,250 $701 $588 $2,953 $2,278 Operating income excl.
KMGA new activity $3,452 $3,310 $588 $9,354 $2,278 (see table
below) Benefit ratio (4) 82.8% 77.0% 85.8% 79.3% 88.3% Average
portfolio yield (5) 4.81% 4.69% 5.71% 4.66% 5.84% Average invested
assets $573,349 $552,052 $460,539 $520,562 $454,852 Average cash
and equivalents 16,358 28,511 19,691 67,512 18,219 ---------
--------- --------- ----------- --------- Total average cash and
invested assets $589,707 $580,562 $480,230 $588,074 $473,071 KMG
America new activity: Insurance premiums, net of reinsurance $1,009
$96 $- $1,105 $- Net investment income - - - - - ---------
--------- --------- ----------- --------- Total revenues 1,009 96 -
1,105 - Policyholder benefits 623 70 - 693 - Insurance commissions,
net of deferrals 103 14 - 117 - Expenses, taxes, fees and
depreciation 3,549 4,027 - 10,022 - Amortization of DAC and VOBA
(2) 121 - - 121 - --------- --------- --------- -----------
--------- Total benefits and expenses 4,396 4,111 - 10,953 - (Loss)
before income taxes (3,387) (4,015) - (9,848) - Benefit for income
taxes 1,185 1,405 - 3,447 - --------- --------- ---------
----------- --------- Net (loss) $(2,202) $(2,610) $- $(6,401) $-
=============================== ======================= (1) Net
investment income for the nine months ended September 30, 2004,
included a one-time expense in March 2004, for a $1.6 million
incentive payment to one of Kanawha's outside investment managers
at the conclusion of the contract period. (2) DAC: Deferred
Acquisition Costs; VOBA: Value of Business Acquired. (3) Operating
income is defined as net income excluding realized investment gains
(losses), net of income taxes and certain non-recurring items, net
of income taxes. Operating income for the nine months ended
September 30, 2004 included the one-time $1.0 million, net of tax,
incentive payment identified in footnote 1. (4) Benefit ratio is
defined as policyholder benefits (equal to incurred claims plus
increases in policyholder active life reserves) divided by net
premiums. (5) Average portfolio yield is defined as net investment
income divided by average invested assets plus average cash and
equivalents. Note that the nine months ended September 30, 2004
average portfolio yield excludes the impact of the one-time pretax
$1.6 million incentive payment identified in note 1. KMG America
Corporation and Subsidiary Consolidated Balance Sheets (in
thousands, except share data) September 30, December 31, 2005 2004
(1) -------------- ------------- (Unaudited) Assets: Cash and cash
equivalents $17,624 $117,400 Investments 575,220 461,141
-------------- ------------- Total cash and investments 592,844
578,541 Accrued investment income 5,262 4,912 DAC 10,306 - VOBA
72,743 74,481 Other assets (2) 120,968 112,117 --------------
------------- Total assets $802,123 $770,051 ==============
============= Liabilities and shareholders' equity: Total policy
and contract liabilities $543,069 $530,915 Deferred income taxes
12,256 6,502 Other liabilities (3) 59,024 44,846 --------------
------------- Total liabilities 614,349 582,263 Total shareholders'
equity 187,774 187,788 -------------- ------------- Total
liabilities and shareholders' equity $802,123 $770,051
============== ============= Book value per share: (4) Basic $8.49
$8.51 Diluted $8.49 $8.44 Book value per share: (excl FAS 115) (5)
Basic $8.63 $8.51 Diluted $8.63 $8.44 Ending shares outstanding:
Basic 22,106 22,072 Diluted (6) 22,106 22,242 (1) December 31, 2004
balance sheet is stated on PGAAP accounting basis and reflects the
balance sheets of both the Predecessor and KMG America as of
December 31, 2004. Please refer to the supplemental schedule
included here with the details of the PGAAP and KMG America
adjustments. (2) Other assets include reinsurance balances
recoverable, real estate and equipment, federal income tax
recoverable and other assets. (3) Other liabilities include
accounts payable and accrued expenses, $15.6 million of outstanding
principal and accrued interest on a subordinated note as of
September 30, 2005, and other miscellaneous liabilities. (4) Book
values per share on December 31, 2004, are based on the number of
shares issued in the IPO plus restricted shares issued subsequent
to the IPO. (5) The book values are recalculated excluding $3.1
million of unrealized capital losses, net of taxes, on September
30, 2005. Unrealized capital gains were $0 on December 31, 2004.
(6) Diluted shares were calculated using the treasury stock method.
KMG America Corporation and Predecessor Consolidated Statements of
Income - Unaudited, Predecessor 2004 Results Adjusted to PGAAP (Pro
Forma) (in thousands, except share data and percentages) KMG
America Predecessor --------------------- ------------- Quarter
Ended ----------------------------------- 9/30/2005 6/30/2005
9/30/2004 ---------- ---------- ------------- (Pro Forma) Insurance
premiums, net of reinsurance $26,423 $26,817 $25,245 Net investment
income 7,089 6,800 6,360 Commissions and fee income 3,773 3,671
3,337 Realized investment gains 278 19 4,563 Other income 1,200 978
799 ---------- ---------- ---------- Total revenues 38,763 38,285
40,304 Policyholder benefits 21,890 20,646 18,609 Insurance
commissions, net of deferrals 2,239 2,377 2,371 Expenses, taxes,
fees and depreciation 12,199 13,103 8,868 Amortization of DAC &
VOBA 462 1,215 926 ---------- ---------- ---------- Total benefits
and expenses 36,790 37,341 30,774 Income before income taxes 1,973
944 9,530 (Provision) for income taxes (634) (231) (3,370)
---------- ---------- ---------- Net income $1,339 $713 $6,161
================================ Net income per share: Basic $0.06
$0.03 $0.28 Diluted $0.06 $0.03 $0.28 Operating income (loss) : (1)
Worksite insurance business $(535) $77 $625 Senior market insurance
948 652 1,424 Third party administration business 367 209 138
Acquired business 500 728 736 Corporate and other (30) (966) 246
---------- ---------- ---------- Total operating income $1,250 $701
$3,169 Total excluding KMGA new activity $3,452 $3,310 $3,169
Operating income per share: Basic $0.06 $0.03 $0.14 Diluted $0.06
$0.03 $0.14 Diluted - excl. KMGA new activity $0.16 $0.15 $0.14
Weighted-average shares outstanding: Basic 22,090 22,072 22,090 (2)
Diluted 22,094 22,156 22,094 (2) Benefit ratio 82.8% 77.0% 73.7%
Average portfolio yield (3) 4.81% 4.69% 5.30% KMG America
Predecessor ------------- ----------- Nine Months Ended
------------------------- 9/30/2005 9/30/2004 -------------
----------- (Pro Forma) Insurance premiums, net of reinsurance
$79,438 $77,232 Net investment income 20,542 17,745 Commissions and
fee income 11,012 10,173 Realized investment gains 324 6,291 Other
income 2,970 2,257 ----------- ---------- Total revenues 114,286
113,698 Policyholder benefits 62,966 59,790 Insurance commissions,
net of deferrals 7,282 7,150 Expenses, taxes, fees and depreciation
36,778 25,311 Amortization of DAC & VOBA 2,762 2,956
----------- ---------- Total benefits and expenses 109,788 95,207
Income before income taxes 4,498 18,491 (Provision) for income
taxes (1,426) (6,400) ----------- ---------- Net income $3,072
$12,091 ====================== Net income per share: Basic $0.14
$0.55 Diluted $0.14 $0.55 Operating income (loss) : (1) Worksite
insurance business $(363) $2,105 Senior market insurance 2,202
3,655 Third party administration business 757 645 Acquired business
1,957 1,743 Corporate and other (1,600) 915 ----------- ----------
Total operating income $2,953 $9,064 Total excluding KMGA new
activity $9,354 $9,064 Operating income per share: Basic $0.13
$0.41 Diluted $0.13 $0.41 Diluted - excl. KMGA new activity $0.42
$0.41 Weighted-average shares outstanding: Basic 22,078 22,078 (2)
Diluted 22,084 22,084 (2) Benefit ratio 79.3% 77.4% Average
portfolio yield (3) 4.66% 5.44% (1) Operating income is defined as
net income excluding realized investment gains (losses), net of
income taxes and certain non-recurring items, net of income taxes.
Operating income for the nine months ended September 30, 2004,
included the one-time $1.0 million, net of tax, incentive payment
to one of Kanawha's outside investment managers in March, 2004. (2)
Shares outstanding for the three months and nine months ended
September 30, 2004 assume the same number of shares outstanding as
the three months and nine months ended September 30, 2005,
respectively. (3) Average portfolio yield is defined as net
investment income divided by average invested assets plus average
cash and equivalents. Note that nine months year-to-date 2004
average portfolio yield excludes the impact of the one-time pretax
$1.6 million incentive payment identified in note 1. PRO FORMA
SEGMENT RESULTS (Unaudited) (in thousands) To supplement the
financial statements presented on a GAAP basis, the Company
reported "pro forma" financial information that adjusts the income
statements for the quarter and nine months ended September 30, 2004
for the actual dollar impact that the December 31, 2004, balance
sheet PGAAP adjustments had on the income statements for the
quarter and nine months ended September 30, 2005, respectively.
Pretax operating income excludes realized investment gains and
non-recurring items such as the one-time $1.6 million incentive
payment to one of Kanawha's outside investment managers in March,
2004. KMG KMG America Predecessor America Predecessor
--------------------- ----------- ---------- ----------- Quarter
Ended Nine Months Ended ---------------------------------
---------------------- 9/30/2005 6/30/2005 9/30/2004 9/30/2005
9/30/2004 ---------- ---------- ----------- ---------- -----------
Worksite (Pro Forma) (Pro Forma) insurance business - Legacy:
Insurance premiums, net of reinsurance $14,097 $14,932 $14,109
$43,687 $42,307 Net investment income 1,537 1,603 1,560 4,922 4,870
Commissions and fee income - - - - - Realized investment gains - -
- - - Other income 40 41 55 130 219 ---------- ----------
----------- ---------- ----------- Total revenues 15,674 16,576
15,724 48,739 47,396 Policyholder benefits 10,878 10,591 9,827
32,359 31,087 Insurance commissions, net of deferrals 745 787 901
2,610 2,719 Expenses, taxes, fees and depreciation 2,414 2,503
2,648 7,612 7,278 Amortization of DAC and VOBA 992 894 1,387 2,706
3,073 ---------- ---------- ----------- ---------- -----------
Total benefits and expenses 15,029 14,775 14,763 45,287 44,157
---------- ---------- ----------- ---------- ----------- Income
before income taxes $645 $1,801 $961 $3,452 $3,239
================================= ====================== Total
assets $167,107 $167,166 $152,110 $167,107 $152,110
================================= ====================== Worksite
insurance business - KMG America new activity: Insurance premiums,
net of reinsurance $1,009 $96 $- $1,105 $- Net investment income -
- - - - Commissions and fee income - - - - - Realized investment
gains - - - - - Other income - - - - - ---------- ----------
----------- ---------- ----------- Total revenues 1,009 96 - 1,105
- Policyholder benefits 623 70 - 693 - Insurance commissions, net
of deferrals 103 14 - 117 - Expenses, taxes, fees and depreciation
1,630 1,694 - 4,184 - Amortization of DAC and VOBA 121 - - 121 -
---------- ---------- ----------- ---------- ----------- Total
benefits and expenses 2,477 1,778 - 5,115 - ---------- ----------
----------- ---------- ----------- (Loss) before income taxes
$(1,468) $(1,682) $- $(4,010) $- =================================
====================== Total assets $- $- $- $- $-
================================= ====================== Senior
market insurance business: Insurance premiums, net of reinsurance
$10,376 $11,128 $10,119 $32,105 $31,793 Net investment income 1,195
1,137 971 3,344 2,741 Commissions and fee income - - - - - Realized
investment gains - - - - - Other income 732 799 619 2,188 1,670
---------- ---------- ----------- ---------- ----------- Total
revenues 12,303 13,064 11,709 37,637 36,204 Policyholder benefits
8,845 9,176 7,290 26,366 23,550 Insurance commissions, net of
deferrals 1,294 1,472 1,366 4,255 4,109 Expenses, taxes, fees and
depreciation 1,098 988 1,077 3,225 2,675 Amortization of DAC and
VOBA (392) 425 (214) 404 247 ---------- ---------- -----------
---------- ----------- Total benefits and expenses 10,845 12,061
9,519 34,250 30,581 ---------- ---------- ----------- ----------
----------- Income before income taxes $1,458 $1,003 $2,190 $3,387
$5,623 ================================= ======================
Total assets $185,675 $177,147 $144,409 $185,675 $144,409
================================= ====================== Third
party administration business: Insurance premiums, net of
reinsurance $- $- $- $- $- Net investment income - - - - -
Commissions and fee income 3,696 3,583 3,261 10,762 10,060 Realized
investment gains - - - - - Other income - - - 1 1 ----------
---------- ----------- ---------- ----------- Total revenues 3,696
3,583 3,261 10,763 10,061 Policyholder benefits - - - - - Insurance
commissions, net of deferrals - - - - - Expenses, taxes, fees and
depreciation 3,131 3,261 3,048 9,598 9,068 Amortization of DAC and
VOBA - - - - - ---------- ---------- ----------- ----------
----------- Total benefits and expenses 3,131 3,261 3,048 9,598
9,068 ---------- ---------- ----------- ---------- -----------
Income before income taxes $565 $322 $213 $1,165 $993
================================= ====================== Total
assets $10,327 $8,304 $8,032 $10,327 $8,032
================================= ====================== Acquired
business: Insurance premiums, net of reinsurance $941 $661 $1,017
$2,540 $3,132 Net investment income 1,866 1,915 2,121 5,844 6,627
Commissions and fee income - - - - - Realized investment gains - -
- - - Other income 20 18 30 51 80 ---------- ---------- -----------
---------- ----------- Total revenues 2,827 2,594 3,168 8,435 9,839
Policyholder benefits 1,543 809 1,492 3,547 5,152 Insurance
commissions, net of deferrals 98 103 104 300 322 Expenses, taxes,
fees and depreciation 675 667 687 2,046 2,047 Amortization of DAC
and VOBA (258) (105) (247) (468) (364) ---------- ----------
----------- ---------- ----------- Total benefits and expenses
2,058 1,474 2,036 5,425 7,157 ---------- ---------- -----------
---------- ----------- Income before income taxes $769 $1,120
$1,132 $3,010 $2,682 =================================
====================== Total assets $207,229 $209,610 $199,787
$207,229 $199,787 =================================
====================== Corporate & other: Insurance premiums,
net of reinsurance $- $- $- $- $- Net investment income 2,490 2,145
1,708 6,432 5,059 Commissions and fee income 78 88 76 251 113
Realized investment gains - - - - - Other income 407 121 95 599 286
---------- ---------- ----------- ---------- ----------- Total
revenues 2,975 2,354 1,879 7,282 5,458 Policyholder benefits - - -
- - Insurance commissions, net of deferrals - - - - - Expenses,
taxes, fees and depreciation - Kanawha legacy 1,191 1,659 1,447
4,134 4,160 - KMG America (KMGA) new activity 1,919 2,333 - 5,838 -
Amortization of DAC and VOBA - - - - - ---------- ----------
----------- ---------- ----------- Total benefits and expenses
3,110 3,992 1,447 9,972 4,160 ---------- ---------- -----------
---------- ----------- Income (loss) before income taxes $(135)
$(1,638) $432 $(2,690) $1,298 =================================
====================== Income before income taxes excluding KMGA
new activity $1,784 $695 $432 $3,148 $1,298 Total assets $231,785
$227,294 $219,567 $231,785 $219,567
================================= ====================== KMG
America Corporation Reconciliation of Pro Forma Consolidated
Statements of Income (Unaudited) (in thousands) KMG America
Predecessor KMG America Predecessor ------------------- ---------
------------ ----------- Quarter Ended Nine Months Ended
----------------------------- ------------------------ 9/30/2005
6/30/2005 9/30/2004 9/30/2005 9/30/2004 --------- ---------
--------- ------------ ----------- Net income as reported $1,339
$713 $3,580 $3,072 $5,304 Restatement to purchase accounting: (1)
Adjustment to investment income (2) - - (492) - (1,428) Adjustment
to change in benefit reserves (3) - - 3,058 - 8,425 Amortization of
other intangible assets (4) - - (142) - (428) Amortization of DAC
and VOBA (5) - - 1,546 - 3,872 Taxes on the above - - (1,390) -
(3,654) --------- --------- --------- ------------ ----------- Net
income - pro forma $1,339 $713 $6,161 $3,072 $12,091
============================= ======================== (1)
Adjustment of statements of income for the quarter and nine month
periods ended September 30, 2004, for the actual dollar value
impact that the December 31, 2004, balance sheet PGAAP adjustments
had on the statements of income for the quarter and nine month
periods ended September 30, 2005, respectively. (2) Reflects the
amortization of fair value adjustment to the cost basis of
Kanawha's fixed income and mortgage loan investments. (3) To record
the adjustment to historical benefit expense to reflect the new
benefit expense relating to the future policy and contract reserves
restated to fair value. (4) To record amortization of the fair
value of $7.7 million of certain intangible assets including
product approvals in 45 states and future revenues associated with
the customer relationships of Kanawha Healthcare Solutions, a
wholly-owned direct subsidiary of Kanawha. (5) Reflects the
adjustment to remove historical amortization of DAC and VOBA and to
record amortization of the restated VOBA established on the balance
sheet as of December 31, 2004. Kanawha Predecessor Reconciliation
of Pro Forma Reporting Segment Results (Unaudited) (in thousands)
Worksite Insurance Segment Senior Insurance Kanawha Legacy Segment
---------------------- ---------------------- Quarter Nine Months
Quarter Nine Months Ended Ended Ended Ended 9/30/2004 9/30/2004
9/30/2004 9/30/2004 ---------- ----------- ---------- -----------
Pretax income as reported $(588) $(1,985) $275 $1,667 Restatement
to Purchase Accounting: (1) Adjustment to investment income (2) 308
920 (52) (156) Adjustment to change in benefit reserves (3) 1,009
2,883 1,531 3,991 Amortization of DAC and VOBA (4) 232 1,421 436
121 ---------- ----------- ---------- ----------- Pretax operating
income - pro forma $961 $3,239 $2,190 $5,623 ======================
====================== Acquired Insurance Corporate and Other
Segment Segment ---------------------- ----------------------
Quarter Nine Months Quarter Nine Months Ended Ended Ended Ended
9/30/2004 9/30/2004 9/30/2004 9/30/2004 ---------- -----------
---------- ----------- Pretax income as reported $(254) $(1,167)
$5,915 $8,542 Adjust for realized investment gains $(4,564)
$(6,292) Adjust for one-time incentive payment $- $1,552 Adjustment
to deferred comp expense (5) (39) 84 Restatement to Purchase
Accounting: (1) Adjustment to investment income (2) (10) (32) (738)
(2,160) Adjustment to change in benefit reserves (3) 518 1,551 - -
Amortization of other intangible assets (6) (142) (428)
Amortization of DAC and VOBA (4) 878 2,330 - - ----------
----------- ---------- ----------- Pretax operating income - pro
forma $1,132 $2,682 $432 $1,298 ======================
====================== (1) Adjustment of statements of income for
the quarter and nine month periods ended September 30, 2004, for
the actual dollar value impact that the December 31, 2004, balance
sheet PGAAP adjustments had on the statements of income for the
quarter and nine month periods ended September 30, 2005,
respectively. (2) Reflects the amortization of fair value
adjustment to the cost basis of Kanawha's fixed income and mortgage
loan investments. (3) To record the adjustment to historical
benefit expense to reflect the new benefit expense relating to the
future policy and contract reserves restated to fair value. (4)
Reflects the adjustment to remove historical amortization of DAC
and VOBA and to record amortization of the restated VOBA
established on the balance sheet as of December 31, 2004. (5) To
offset the increase in executive deferred compensation expense with
the portion of realized capital gains that gave rise to the
deferred compensation expense increase. (6) To record amortization
of the fair value of $7.7 million of certain intangible assets
including product approvals in 45 states and future revenues
associated with the customer relationships of Kanawha Healthcare
Solutions, a wholly-owned direct subsidiary of Kanawha. KMG America
Corporation and Predecessor Consolidated Balance Sheet (Unaudited)
- December 31, 2004 (in thousands, except per share data) Purchase
KMG GAAP KMG Kanawha America Adjustments America Historical
Historical Incr (Decr) Consolidated
---------------------------------- ------------ Assets: Cash and
cash equivalents $69,268 $48,132 $- $117,400 Investments 459,844 -
1,297 (1) 461,141 ---------------------------------- ------------
Total cash and investments 529,112 48,132 1,297 578,541 Accrued
investment income 4,909 3 - 4,912 Deferred acquisition costs (DAC)
87,339 - (87,339)(2) - Value of business acquired (VOBA) 26,579 -
47,902 (3) 74,481 Goodwill 1,258 - (1,258)(4) - Other assets 90,971
117 21,029 (5) 112,117 ---------- ---------- ------------
------------ Total Assets $740,168 $48,252 $(18,369) $770,051
================================== ============ Liabilities and
shareholders' equity: Total policy and contract liabilities
$486,654 $- $44,261 (6) $530,915 Deferred income taxes 28,117 -
(21,615)(7) 6,502 Other liabilities 29,484 16,236 (874)(8) 44,846
---------- ---------- ------------ ------------ Total Liabilities
544,255 16,236 21,772 582,263 Total shareholders' equity 195,913
32,016 (40,141) 187,788 ---------- ---------- ------------
------------ Total liabilities and shareholders' equity $740,168
$48,252 $(18,369) $770,051 ==================================
============ Book value per share: Basic $8.51 Diluted $8.44 Ending
shares outstanding: Basic 22,072 Diluted 22,242 (1) To value
Kanawha's investment portfolio at its estimated fair value. (2) To
eliminate Kanawha's deferred acquisition cost balance. (3) To
eliminate Kanawha's value of business acquired and replace it with
the present value of future profits of the business acquired. (4)
To eliminate Kanawha's goodwill balance. (5) To record the fair
value of certain intangible assets including trade names ($6.1
million); licenses to conduct insurance in 45 states ($3.7
million); product approvals in 45 states ($2.8 million); future
revenues associated with the customer relationships of Kanawha
HealthCare Solutions ($4.9 million); and change in fair value of
reinsurance receivable asset ($3. 5 million) related to ceded
portion of policy and contract reserves referenced in footnote 6.
(6) To record the change in Kanawha's policy and contract reserves
to fair value (direct before reinsurance ceded). (7) To adjust the
deferred tax liability of Kanawha to account for the difference
between the estimated fair value of the net assets acquired and the
tax basis of the net assets acquired. (8) To adjust miscellaneous
other liabilities to estimated fair value. KMG America Corporation
and Predecessor Statistical and Operating Data at or for the
Periods Indicated (in thousands, except percentages) OTHER
FINANCIAL DATA Unaudited KMG KMG America Predecessor America
Predecessor --------------------- ----------- ----------
----------- Quarter Ended Nine Months Ended
--------------------------------- ---------------------- 9/30/2005
6/30/2005 9/30/2004 9/30/2005 9/30/2004 ---------- ----------
----------- ---------- ----------- Sales - issued and paid for
annualized premiums: Worksite insurance segment - Kanawha Legacy
Life $709 $677 $556 $2,005 $1,599 Cancer 542 430 542 1,480 1,727
Disability income 821 933 1,562 3,065 3,707 Other A&H 328 315
437 1,302 1,029 ---------- ---------- ----------- ----------
----------- Total worksite - Kanawha Legacy 2,400 2,355 3,097 7,852
8,062 Worksite insurance segment - KMG America (KMGA) New Activity
Core Group Products: Life $- $- $- $- $- Stop loss 2,993 1,128 -
4,121 - Disability income - - - - - Other A&H - - - - -
Voluntary Benefit Products: Life 219 9 - 228 - Cancer 18 80 - 98 -
Disability income 836 591 - 1,427 - Other A&H 299 1 - 300 -
---------- ---------- ----------- ---------- ----------- Total
worksite - KMGA New Activity 4,365 1,809 - 6,174 - Senior market
insurance segment Long term care 360 549 517 1,356 2,933 ----------
---------- ----------- ---------- ----------- Total senior market
insurance 360 549 517 1,356 2,933 Total sales $7,125 $4,713 $3,614
$15,382 $10,995 =================================
====================== Quarter Ended Nine Months Ended
--------------------------------- ---------------------- 9/30/2005
6/30/2005 9/30/2004 9/30/2005 9/30/2004 ---------- ----------
----------- ---------- ----------- Pro forma benefit ratios: (1)
Worksite insurance - Kanawha legacy 77.2% 70.9% 69.7% 74.1% 73.5%
Worksite insurance - KMGA new activity 61.7% 72.9% - 62.7% - Senior
market insurance 85.2% 82.5% 72.0% 82.1% 74.1% Acquired business
164.0% 122.4% 146.7% 139.6% 164.5% Total company 82.8% 77.0% 73.7%
79.3% 77.4% (1) benefit ratio is defined as total policyholder
benefits divided by total net premiums and are all stated on a pro
forma basis. *T
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