KMA Kmg Amer Corp

KMG America Corporation -- (the "Company" or "KMG America") (NYSE:KMA) today reported net income for the first quarter ended March 31, 2006 of $1.2 million, or $0.06 per diluted share, compared to net income for the fourth quarter of 2005 of $1.6 million, or $0.07 per diluted share, and first quarter 2005 net income of $1.0 million, or $0.05 per diluted share. KMG America's Chief Executive Officer, Kenneth Kuk, commented, "Although slightly below our expectations due to some unanticipated charges that are likely to be one-time in nature, the first quarter earnings and sales results are consistent with the annual guidance KMG America offered recently. The previously announced margin compression was apparent in the quarterly results of our new large case activity and this too was contemplated in the guidance numbers." Mr. Kuk added, "Long term care claims showed significant improvement after several quarters of increases which should reduce concerns about that trend. We also continue to gain momentum in the market as more and more consultants and brokers gain confidence in KMG America's ability to deliver first rate products and administrative services." FIRST QUARTER FINANCIAL RESULTS First quarter 2006 operating income (see discussion of non-GAAP financial measures below) decreased to $1.2 million compared to fourth quarter 2005 operating income of $1.5 million, due to the introduction of option expensing and a one-time refund of premiums resulting from a mass cancellation of an older policy form described below. First quarter 2006 operating income increased to $1.2 million, compared to first quarter 2005 operating income of $1.0 million, due primarily to improved results in the Kanawha legacy business -- particularly the Senior segment -- driven by higher investment income that more than offset increased expenses associated with the new KMG America sales activity. After-tax operating losses attributed to the new KMG America growth initiatives increased to $2.4 million in the first quarter of 2006 from $2.2 million in the fourth quarter of 2005 and $1.6 million in the first quarter of 2005. While incremental direct premiums related to the sales activity from the new KMG America distribution channel increased to $6.2 million (before reinsurance ceded) compared to $2.3 million in the fourth quarter of 2005, they were more than offset by higher expenses. Expenses (before deferrals of acquisition costs related to voluntary product sales) totaled $5.0 million in the first quarter of 2006 compared to $4.4 million in the fourth quarter of 2005 and $1.1 million in the first quarter of 2005. Excluding the operating results attributable to new KMG America growth initiatives, first quarter 2006 operating income was $3.6 million, or $0.16 per diluted share, compared to $3.7 million, or $0.17 per diluted share, in the fourth quarter of 2005, and first quarter 2005 operating income of $2.5 million, or $0.12 per diluted share. This reduction in operating income compared to the fourth quarter of 2005 is due primarily to the unusual items described below. The Company believes that excluding the earnings results of the new KMG America sales activity during the initial period when startup expenses exceed incremental new premiums provides a more meaningful comparison of the trends in earnings produced by Kanawha's legacy business, which serves to fund the initial 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 first quarter 2006 results are compared to the fourth quarter 2005 results. Premium Revenue Premiums for the first quarter of 2006 increased to $29.8 million, compared to $27.5 million in the fourth quarter of 2005. The increase is primarily due to incremental premiums related to the new KMG America sales distribution channel that produced $6.2 million of new direct earned premiums ($4.5 million net of reinsurance) in the first quarter of 2006 compared to $2.3 million of new direct earned premiums ($1.8 million net of reinsurance) in the fourth quarter of 2005. The first quarter 2006 premiums were also adversely affected by an unusual $0.3 million premium refund attributed to a mass cancellation of an older Kanawha policy form in the state of Georgia, which is likely to be one-time in nature. Investment Income Investment income in the first quarter of 2006 was $7.2 million, flat compared to $7.2 million in the fourth quarter of 2005 in spite of an improvement in the investment portfolio yield. Cash and invested assets declined slightly (after removing increasing unrealized capital losses due to rising interest rates) due to the continuing high level of incremental startup expenses and the acquisition costs associated with new business now being written in increasing amounts. The first quarter 2006 investment portfolio yield averaged 4.95%, based on average cash and invested assets excluding FAS115 unrealized gains (losses), an improvement of 7 basis points from the 4.88% average yield reported in the fourth quarter of 2005. Policyholder Benefits Policyholder benefits for the first quarter of 2006 increased to $23.4 million compared to $21.3 million in the fourth quarter of 2005, due primarily to increased benefits related to incremental sales in the new KMG America worksite segment, partially offset by lower claims in the senior segment. The total Company benefit ratio was 78.3% in the first quarter of 2006 compared to 77.7% in the fourth quarter of 2005. The benefit ratio in Kanawha's legacy worksite segment was 75.3% in the first quarter of 2006, compared to 67.3% in the fourth quarter of 2005, reflecting primarily the effect of the unusual one-time premium refund mentioned earlier and other special policy reserve adjustments. The benefit ratio in the senior segment improved to 80.0% in the first quarter of 2006, compared to 88.7% in the fourth quarter of 2005, reflecting lower open claims and favorable dispositions of earlier claims. The acquired business segment first quarter 2006 benefit ratio increased to 194.4%, compared to the fourth quarter 2005 benefit ratio of 115.8% due largely to higher claims in three acquired blocks . The acquired segment benefit ratio can experience unusual period-to-period fluctuations due to both claims volatility and experience rated refunds that reduce both premiums and benefits by an equal amount but do not impact earnings. Expenses, Taxes, Licenses and Fees General insurance expenses, taxes, licenses and fees (before deferrals of policy acquisition costs) for the first quarter of 2006 increased to $15.0 million compared to $14.7 million in the fourth quarter of 2005, due primarily to the newly implemented option expensing requirements. Amortization of Deferred Acquisition Costs (DAC)/Value of Business Acquired (VOBA) Amortization of DAC/VOBA for the first quarter of 2006 increased to $1.2 million compared to the $0.7 million in the fourth quarter of 2005, reflecting both scheduled or expected increases in DAC and VOBA amortization as well as the impact of delayed approval of long term care rate increases in the senior segment resulting in higher amortization of VOBA. The accelerated VOBA amortization could reverse once the scheduled rate increases are effective. Unusual Items First quarter 2006 financial results contain three unusual items that are likely to be one-time in nature. One was the previously mentioned $0.3 million premium refund attributed to a mass cancellation of an older Kanawha policy form. The second item relates to accelerated VOBA amortization of $0.2 million due to the regulatory approval delay in certain long term care rate increase in the legacy senior segment. Some have been recently approved, and others have been filed, with approval expected later this year. The third is a $0.3 million mismatch of a life insurance endowment benefit and the associated policy reserve in the legacy worksite segment that could reverse during a later quarter this year. Pro forma operating income as reported this quarter has not been adjusted for these unusual items. NOTES ON FINANCIAL PRESENTATION 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 (except for realized investment gains/losses that are directly offset by executive deferred compensation expense) and certain other unusual items that are likely to be one-time in nature, 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. A reconciliation of the non-GAAP financial measures contained in this release to the most comparable GAAP measures appears in the attached tables. FORWARD LOOKING INFORMATION 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. KMG America Corporation assumes no obligation to publicly update or revise any forward-looking statements. ABOUT KMG AMERICA CORPORATION KMG America is a holding company that was formed to acquire the Southeastern regional insurance company, Kanawha Insurance, and to operate and grow Kanawha's insurance and other related businesses nationwide. KMG offers a broad mix of individual and group insurance products and stop-loss coverage along with third-party administration services to employers and to working Americans. For more information visit: www.kmgamerica.com. WEB CAST KMG America will host an investor and analyst web cast today, Monday, May 8, 2006, at 10:00 a.m. EST. The web cast and replay will be available via the following links: www.kmgamerica.com, analyst/investor tab -- for all investors; www.streetevents.com -- for institutional investors; www.fulldisclosure.com -- for retail investors. The replay will be available starting approximately 2 hours after the original web cast. The replay will be available through Monday, May 22, 2006. -0- *T KMG America Corporation Consolidated Statements of Income (GAAP basis, unaudited) (in thousands, except share data and percentages) Quarter Ended ---------------------------------- 3/31/2006 12/31/2005 3/31/2005 ---------- ----------- ---------- Insurance premiums, net of reinsurance $ 29,811 $ 27,450 $ 26,198 Net investment income 7,206 7,203 6,653 Commission and fee income 4,219 3,553 3,568 Realized investment gains 211 34 27 Other income 986 898 792 ---------- ----------- ---------- Total revenues 42,433 39,138 37,238 Policyholder benefits 23,354 21,322 20,430 Insurance commissions, net of deferrals 2,981 2,353 2,666 Expenses, taxes, fees and depreciation 13,049 12,643 11,476 Amortization of DAC and VOBA (1) 1,178 706 1,085 ---------- ----------- ---------- Total benefits and expenses 40,562 37,024 35,657 Income before income taxes 1,871 2,114 1,581 (Provision) for income taxes (635) (702) (561) ---------- ----------- ---------- Net income before accounting changes 1,236 1,412 1,020 Cumulative accounting changes, net of tax - 176 - ---------- ----------- ---------- Net income $ 1,236 $ 1,588 $ 1,020 ================================= Net income per share Basic $ 0.06 $ 0.07 $ 0.05 Diluted $ 0.06 $ 0.07 $ 0.05 Weighted-average shares outstanding: Basic 22,133 22,108 22,072 Diluted 22,138 22,110 22,156 Benefit ratio (2) 78.3% 77.7% 78.0% Expense ratio (3) 50.6% 50.6% 51.2% Average portfolio yield (4) 4.95% 4.88% 4.60% Average invested assets $ 519,669 $ 495,358 $ 473,352 Average cash/equivalents & short terms (4) 62,679 95,232 105,578 ---------- ----------- ---------- Total average cash and invested assets $ 582,348 $ 590,591 $ 578,929 (1) DAC: Deferred Acquisition Costs; VOBA: Value of Business Acquired. (2) Benefit ratio is defined as policyholder benefits (equal to incurred claims plus increases in policyholder active life reserves) divided by net premiums. (3) Expense ratio defined as commissions, expenses and amortization of DAC/VOBA divided by earned premiums plus commissions/fees. (4) Average portfolio yield is defined as net investment income divided by average cash and invested assets excluding the impact of FAS115 unrealized gains (losses) plus average cash and equivalents. Average cash/equivalents and short term assets include the portion of initial public offering proceeds that are invested short (less than 2 year maturities). *T -0- *T KMG America Corporation Supplemental Financial Information - Unaudited (in thousands, except share data) Quarter Ended --------------------------------- 3/31/2006 12/31/2005 3/31/2005 ---------- ----------- ---------- Operating income (loss): (1) Worksite insurance business $ 20 $ 324 $ 95 Senior market insurance 1,141 670 602 Third party administration business 410 172 181 Acquired business 502 789 729 Corporate and other (847) (491) (604) ---------- ----------- ---------- Total operating income $ 1,227 $ 1,463 $ 1,002 Total excluding KMGA new activity $ 3,583 $ 3,685 $ 2,592 (see table below) Operating income per share: Basic $ 0.06 $ 0.07 $ 0.05 Diluted $ 0.06 $ 0.07 $ 0.05 Diluted - excl. KMGA new activity $ 0.16 $ 0.17 $ 0.12 Weighted-average shares outstanding: Basic 22,133 22,108 22,072 Diluted 22,138 22,110 22,156 KMG America new activity: Insurance premiums, net of reinsurance $ 4,535 $ 1,824 $ - Net investment income - - - ---------- ----------- ---------- Total revenues 4,535 1,824 - Policyholder benefits 3,072 1,137 - Insurance commissions, net of deferrals 639 182 - Expenses, taxes, fees and depreciation 4,254 3,858 2,446 Amortization of DAC and VOBA 194 65 - ---------- ----------- ---------- Total benefits and expenses 8,159 5,242 2,446 Income (loss) before income taxes (3,624) (3,418) (2,446) (Provision) for income taxes 1,268 1,196 856 ---------- ----------- ---------- Net income (loss) $ (2,356)$ (2,222)$ (1,590) ================================= (1) Operating income is defined as net income excluding realized investment gains/losses (except for realized investment gains/losses that are directly offset by executive deferred compensation expense), net of income taxes and certain unusual items, net of income taxes. *T -0- *T KMG America Corporation and Subsidiary Consolidated Balance Sheets (in thousands, except share data) March 31, 2006 December 31, 2005 -------------- ----------------- (Unaudited) Assets: Cash and cash equivalents $ 11,361 $ 32,583 Investments 549,859 543,307 ----------- ------------- Total cash and investments 561,220 575,890 Accrued investment income 5,997 5,917 DAC 17,543 14,032 VOBA 71,761 72,639 Other assets (1) 137,395 128,887 ----------- ------------- Total assets $ 793,916 $ 797,365 =========== ============= Liabilities and shareholders' equity: Total policy and contract liabilities $ 554,727 $ 547,894 Deferred income taxes 10,822 13,061 Other liabilities (2) 47,284 48,927 ----------- ------------- Total liabilities 612,833 609,882 Total shareholders' equity 181,083 187,483 ----------- ------------- Total liabilities and shareholders' equity $ 793,916 $ 797,365 =========== ============= Book value per share: Basic $ 8.16 $ 8.47 Diluted $ 8.16 $ 8.47 Book value per share: (excl FAS 115)(3) Basic $ 8.74 $ 8.70 Diluted $ 8.74 $ 8.70 Ending shares outstanding: Basic 22,201 22,126 Diluted (4) 22,203 22,131 (1) Other assets include reinsurance balances recoverable, real estate and equipment, federal income tax recoverable and other assets. (2) Other liabilities include accounts payable and accrued expenses, $16.0 million of outstanding principal and accrued interest on a subordinated note as of March 31, 2006, and other miscellaneous liabilities. (3) The book values are recalculated excluding $12.9 million of unrealized capital losses, net of taxes, on March 31, 2006. Unrealized capital losses were $5.0 million, net of taxes, on December 31, 2005. (4) Diluted shares were calculated using the treasury stock method. *T -0- *T SEGMENT RESULTS (Unaudited) (in thousands) Quarter Ended ----------------------------------- 3/31/2006 12/31/2005 3/31/2005 ---------- ----------- ----------- Worksite insurance business - Legacy: Insurance premiums, net of reinsurance $ 13,972 $ 13,912 $ 14,658 Net investment income 1,595 1,602 1,782 Commissions and fee income - - - Realized investment gains - - - Other income 46 42 49 ---------- ----------- ----------- Total revenues 15,613 15,556 16,489 Policyholder benefits 10,523 9,367 10,890 Insurance commissions, net of deferrals 882 833 1,078 Expenses, taxes, fees and depreciation 2,271 2,539 2,695 Amortization of DAC and VOBA 584 766 820 ---------- ----------- ----------- Total benefits and expenses 14,260 13,505 15,483 ---------- ----------- ----------- Income before income taxes $ 1,353 $ 2,051 $ 1,006 ================================== Total assets $ 163,955 $ 166,402 $ 168,714 ================================== Worksite insurance business - KMGA: Insurance premiums, net of reinsurance $ 4,535 $ 1,824 $ - Net investment income - - - Commissions and fee income - - - Realized investment gains - - - Other income - - - ---------- ----------- ----------- Total revenues 4,535 1,824 - Policyholder benefits 3,072 1,137 - Insurance commissions, net of deferrals 639 182 - Expenses, taxes, fees and depreciation 1,952 1,992 860 Amortization of DAC and VOBA 194 65 - ---------- ----------- ----------- Total benefits and expenses 5,857 3,376 860 ---------- ----------- ----------- Income before income taxes $ (1,322)$ (1,552)$ (860) ================================== Total assets $ 4,738 $ - $ - ================================== Senior market insurance business: Insurance premiums, net of reinsurance $ 10,675 $ 10,135 $ 10,601 Net investment income 1,411 1,297 1,012 Commissions and fee income - - - Realized investment gains - - - Other income 809 747 657 ---------- ----------- ----------- Total revenues 12,895 12,179 12,270 Policyholder benefits 8,535 8,989 8,345 Insurance commissions, net of deferrals 1,367 1,240 1,489 Expenses, taxes, fees and depreciation 765 770 1,139 Amortization of DAC and VOBA 472 150 371 ---------- ----------- ----------- Total benefits and expenses 11,139 11,149 11,344 ---------- ----------- ----------- Income before income taxes $ 1,756 $ 1,030 $ 926 ================================== Total assets $ 201,603 $ 193,889 $ 168,486 ================================== *T -0- *T SEGMENT RESULTS (Unaudited) - Continued (in thousands) Quarter Ended --------------------------------- 3/31/2006 12/31/2005 3/31/2005 ---------- ----------- ----------- Third party administration business: Insurance premiums, net of reinsurance $ - $ - $ - Net investment income - - - Commissions and fee income 4,134 3,502 3,483 Realized investment gains - - - Other income - 2 1 ---------- ----------- ----------- Total revenues 4,134 3,504 3,484 Policyholder benefits - - - Insurance commissions, net of deferrals - - - Expenses, taxes, fees and depreciation 3,503 3,240 3,206 Amortization of DAC and VOBA - - - ---------- ----------- ----------- Total benefits and expenses 3,503 3,240 3,206 ---------- ----------- ----------- Income before income taxes $ 631 $ 264 $ 278 ================================== Total assets $ 10,063 $ 11,103 $ 8,406 ================================== Acquired business: Insurance premiums, net of reinsurance $ 629 $ 1,579 $ 938 Net investment income 1,981 1,964 2,063 Commissions and fee income - - - Realized investment gains - - - Other income 16 18 13 ---------- ----------- ----------- Total revenues 2,626 3,561 3,014 Policyholder benefits 1,223 1,829 1,195 Insurance commissions, net of deferrals 94 99 99 Expenses, taxes, fees and depreciation 608 695 704 Amortization of DAC and VOBA (72) (276) (105) ---------- ----------- ----------- Total benefits and expenses 1,853 2,347 1,893 ---------- ----------- ----------- Income before income taxes $ 773 $ 1,214 $ 1,121 ================================== Total assets $ 201,880 $ 204,288 $ 212,188 ================================== Corporate & other: Insurance premiums, net of reinsurance $ - $ - $ - Net investment income 2,219 2,340 1,797 Commissions and fee income 85 50 85 Realized investment gains - - - Other income 115 89 71 ---------- ----------- ----------- Total revenues 2,419 2,479 1,953 Policyholder benefits - - - Insurance commissions, net of deferrals - - - Expenses, taxes, fees and depreciation - Kanawha legacy 1,450 1,427 1,284 - KMG America (KMGA) new activity 2,302 1,866 1,586 Amortization of DAC and VOBA - - - ---------- ----------- ----------- Total benefits and expenses 3,752 3,293 2,870 ---------- ----------- ----------- Income (loss) before income taxes $ (1,333)$ (814)$ (917) ================================== Income before income taxes excluding KMGA new activity $ 969 $ 1,052 $ 669 Total assets $ 211,677 $ 221,683 $ 210,366 ================================== *T -0- *T KMG America Corporation Reconciliation of Operating Income Consolidated Statements of Income (Unaudited) (in thousands) KMG America Corporation: Quarter Ended ---------------------------------- 3/31/2006 12/31/2005 3/31/2005 ---------- ----------- ---------- Net income as reported $ 1,236 $ 1,588 $ 1,020 Reconciliation to operating income: Exclude realized investment gains/losses, (211) (34) (27) Exclude offsetting deferred compensation expense (1) 197 113 - Exclude cumulative accounting changes - (271) - Taxes on the above 5 67 9 ---------- ----------- ---------- Operating income $ 1,227 $ 1,463 $ 1,002 ================================= Corporate and Other Segment: Quarter Ended ---------------------------------- 3/31/2006 12/31/2005 3/31/2005 ---------- ----------- ---------- Pretax income as reported $ (1,324)$ (689)$ (899) Reconciliation to operating income: Exclude realized investment gains/losses, (211) (34) (27) Exclude offsetting deferred compensation expense (1) 197 113 - Exclude cumulative accounting changes - (271) - Taxes on the above 5 67 9 ---------- ----------- ---------- Operating income $ (1,333)$ (814)$ (917) ================================= (1) Offsetting expense for realized gains(losses) related to executive deferred compensation trading activity *T -0- *T KMG America Corporation Statistical and Operating Data at or for the Periods Indicated (in thousands, except percentages) OTHER FINANCIAL DATA Unaudited Quarter Ended ---------------------------------- 3/31/2006 12/31/2005 3/31/2005 ---------- ----------- ---------- Sales - issued and paid for annualized premiums: Worksite insurance segment - Kanawha Legacy Life $ 402 $ 448 $ 619 Cancer 486 504 508 Disability income 633 1,249 1,311 Other A&H 210 1,098 659 ---------- ----------- ---------- Total worksite - Kanawha Legacy 1,731 3,299 3,097 Worksite insurance segment - KMG America (KMGA) New Activity Core Group Products: Life $ 1,151 $ - $ - Stop loss 12,776 4,124 - Disability income 149 - - Other A&H - - - Voluntary Benefit Products: Life 122 167 - Cancer 41 125 - Disability income 1,278 1,331 - Other A&H 336 244 - ---------- ----------- ---------- Total worksite - KMGA New Activity 15,853 5,991 - Senior market insurance segment Long term care 303 260 447 ---------- ----------- ---------- Total senior market insurance 303 260 447 Total sales $ 17,887 $ 9,550 $ 3,544 ================================= Quarter Ended ---------------------------------- 3/31/2006 12/31/2005 3/31/2005 ---------- ----------- ---------- Segment benefit ratios: (1) Worksite insurance - Kanawha legacy 75.3% 67.3% 74.3% Worksite insurance - KMGA new activity 67.7% 62.3% n/a Senior market insurance 80.0% 88.7% 78.7% Acquired business 194.4% 115.8% 127.4% Total company 78.3% 77.7% 78.0% (1) benefit ratio is defined as total policyholder benefits divided by total net premiums. *T