KMG America Corporation -- (the "Company" or "KMG America")
(NYSE:KMA) today reported net income for the second quarter ended
June 30, 2006 of $1.0 million, or $0.05 per diluted share, compared
to net income for the first quarter of 2006 of $1.2 million, or
$0.06 per diluted share, and second quarter 2005 net income of $0.7
million, or $0.03 per diluted share. KMG America's Chief Executive
Officer, Kenneth Kuk, commented, "While second quarter earnings are
much improved compared to the same period last year, results are
below our expectations due primarily to adverse claims experience
in portions of the Kanawha legacy business. Claims fluctuations
from quarter to quarter are inherent to our business and we are
satisfied that the Kanawha legacy block of business will continue
to provide a stable contribution to earnings over time." Mr. Kuk
added, "Regarding our new larger case activity, seasonally-adjusted
second quarter sales growth is apparent in spite of our decision to
limit new sales representative hiring. And productivity per sales
rep appears consistent with our objectives. Our intent is to
maintain 20-22 sales reps until adequate margins are demonstrated."
2006 OUTLOOK The Company previously offered guidance of $0.35 to
$0.40 operating earnings per share for 2006. In light of the recent
quarter and year-to-date results and considering the margin
compression issues in the stop loss product, the Company currently
estimates operating earnings per share to be in the range of $0.28
to $0.32 for the full year of 2006. SECOND QUARTER FINANCIAL
RESULTS Second quarter 2006 operating income (see discussion of
non-GAAP financial measures below) declined slightly to $1.1
million compared to first quarter 2006 operating income of $1.2
million, due primarily to adverse claims experience in the Kanawha
legacy business and increased litigation expenses. Second quarter
2006 operating income increased to $1.1 million, compared to second
quarter 2005 operating income of $0.7 million, due primarily to
revenue growth from the new larger case sales activity and improved
investment income that more than offset the adverse claims
experience. After-tax operating losses attributed to the new KMG
America growth initiatives increased slightly to $2.5 million in
the second quarter of 2006 as a result of the increased litigation
expense this quarter, compared to the $2.4 million reported in the
first quarter of 2006, but favorable compared to the $2.6 million
reported in the second quarter of 2005. Direct premiums related to
the sales activity from the new KMG America distribution channel
increased to $7.1 million (before reinsurance ceded) compared to
$6.2 million in the first quarter of 2006, and $0.1 million in the
second quarter of 2005. Expenses (net of deferrals) totaled $4.7
million in the second quarter of 2006 compared to $4.3 million in
the first quarter of 2006 and $4.0 million in the second quarter of
2005. Operating income attributed to the Kanawha legacy business
for the second quarter of 2006 was $3.6 million, or $0.16 per
diluted share, flat compared to $3.6 million, or $0.16 per diluted
share, in the first quarter of 2006, and up slightly compared to
the second quarter 2005 operating income of $3.3 million, or $0.15
per diluted share. Favorable investment income in the current
quarter was largely offset by adverse claims experience. 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 second
quarter 2006 results are compared to the first quarter 2006
results. Premium Revenue Net premiums for the second quarter of
2006 increased to $30.7 million, compared to $29.8 million in the
first quarter of 2006. The increase is due to incremental premiums
related to the new KMG America sales distribution channel that
produced $7.1 million of new direct earned premiums ($5.2 million
net of reinsurance) in the second quarter of 2006 compared to $6.2
million of new direct earned premiums ($4.5 million net of
reinsurance) in the first quarter of 2006. Investment Income
Investment income in the second quarter of 2006 increased to $7.6
million, compared to $7.2 million in the first quarter of 2006, due
to improved investment portfolio yield. The second quarter 2006
investment portfolio yield averaged 5.25%, based on average cash
and invested assets excluding FAS 115 unrealized gains (losses), an
improvement of 30 basis points from the 4.95% average yield
reported in the first quarter of 2006. The second quarter
investment income included approximately $175,000 of pretax benefit
related primarily to an adjustment to the prepayment assumption in
the mortgage backed securities portfolio because of rising interest
rates this year. The second quarter 2006 average yield would have
been 5.10% on a "normalized" basis after adjusting for items that
do not occur evenly over time. Average cash and invested assets
declined slightly (after removing increasing unrealized capital
losses due to rising interest rates) due to the conversion of
financial assets into deferred acquisition cost assets that result
from new product sales, and continuing high level of incremental
expenses relative to new revenues associated with the build out of
the new sales and underwriting operation. Policyholder Benefits
Policyholder benefits on a segment basis for the second quarter of
2006 were impacted by reserve reallocations between the Kanawha
legacy segments as a result of implementing final purchase GAAP
reserves and replacing the preliminary reserving methodology in use
since the Kanawha acquisition at the end of 2004. Both policyholder
benefits and the corresponding benefit ratio by segment are
affected by this reallocation with no impact to the total company
results in 2005 and the first six months of 2006. To facilitate
period-over-period comparisons for the legacy segment results, all
periods have been reclassified to a pro forma basis as if the final
purchase GAAP reserve methodology was implemented as of December
31, 2004. See discussion of non-GAAP financial measures below for a
more detailed description. Policyholder benefits for the second
quarter of 2006 increased slightly to $24.4 million compared to
$23.4 million in the first quarter of 2006, due to higher claims
reported in the senior segment and increased benefits related to
incremental sales in the new KMG America worksite segment. The
total company benefit ratio was 79.5% in the second quarter of 2006
compared to 78.3% in the first quarter of 2006. The benefit ratio
in Kanawha's legacy worksite segment improved to 70.4% in the
second quarter of 2006, compared to 73.3% in the first quarter of
2006, reflecting in part an improvement from the ratio in the first
quarter which had been affected by the one-time return of premium
noted then. The benefit ratio in the senior segment increased to
78.3% in the second quarter of 2006, compared to 71.6% in the first
quarter of 2006, reflecting higher claim reserves on open claims in
the second quarter compared to the first quarter of 2006 and a
policy reserve pattern created by uneven policy anniversaries from
quarter to quarter. The acquired business segment second quarter
2006 benefit ratio increased to 414.7%, compared to the first
quarter 2006 benefit ratio of 381.4%, due largely to a single large
claim reported in the second quarter of 2006. The unusually high
benefit ratio reported in the acquired segment reflects the fact
that much of this business is paid up relative to current and
future premium, as well as the impact of sizable experience rating
refunds on one acquired block that reduce premiums and claims by
the same amount. The acquired segment benefit ratio can also
experience period-to-period fluctuations due to claims volatility
and experience rated refunds. Excluding these experience refunds,
the second quarter 2006 benefit ratio was 174.9% compared to 161.5%
in the first quarter of 2006. Insurance Commissions Insurance
commissions (before deferrals of policy acquisition costs) for the
second quarter of 2006 were $5.3 million compared to $5.1 million
in the first quarter of 2006, reflecting increased sales
production. Insurance commissions, net of deferrals for the second
quarter of 2006, declined slightly to $2.9 million compared to $3.0
million in the first quarter of 2006 due to an increased mix of
voluntary product sales where commissions are deferred. Acquisition
costs are not deferred on group and stop loss sales. Expenses,
Taxes, Licenses and Fees General insurance expenses, taxes,
licenses and fees (before deferrals of non-commission policy
acquisition costs) for the second quarter of 2006 were $15.0
million, flat compared to $15.0 million in the first quarter of
2006. General insurance expenses, taxes, licenses and fees net of
deferrals for the second quarter of 2006 were $13.2 million, up
slightly compared to $13.0 million in the first quarter of 2006.
Amortization of Deferred Acquisition Costs (DAC)/Value of Business
Acquired (VOBA) Amortization of DAC/VOBA for the second quarter of
2006 was $1.2 million, flat when compared to the $1.2 million
reported in the first quarter of 2006. A large claim reported in
the acquired business segment and a subsequent reduction in
insurance in-force caused a temporary unfavorable accelerated VOBA
adjustment of $0.2 million in the current quarter. Provision for
Income Taxes The Company experienced an effective tax rate of 34.0%
in the second quarter of 2006, essentially flat compared to the
33.9% reported in the first quarter of 2006, but higher than the
24.4% effective tax rate reported in the second quarter of 2005.
The low effective tax rate in the second quarter of 2005 resulted
from applying a net operating loss carry forward in a subsidiary
for which a valuation allowance had been established against the
deferred tax asset. NOTES ON FINANCIAL PRESENTATION Non-GAAP
Financial Measures -0- *T -- 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), 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 segment results -- To supplement the financial
statements presented on a GAAP basis, the Company reported pro
forma segment results, which is a non-GAAP measure. Second quarter
2006 segment results were impacted by the reallocation of portions
of policy reserves and corresponding investment income between the
Kanawha legacy reporting segments. When KMG America acquired
Kanawha insurance company in December of 2004, an additional
provision for adverse deviations related to all legacy business was
added to policy reserves, and allocated primarily to the acquired
business segment and a smaller amount to the life products included
in the legacy portion of the worksite insurance business segment.
Given the discontinuation of long term care sales activity combined
with the uncertainty in the amount and timing in obtaining
approvals for rate increases for long term care policies from state
insurance regulators, the company has deemed it appropriate to
reallocate much more of the initial provision for adverse
deviations to the senior segment. The triggering event for
implementing this reallocation of policy reserves at the current
time is the implementation of the final reserve methodology which
replaces the preliminary reserve methodology which has been in use
since inception. The result of the reallocation of reserves between
Kanawha legacy segments was to increase reserves by $37.5 million
in the senior segment, offset by reduced reserves of $31.2 million
in the acquired segment and $6.3 million in the legacy portion of
the worksite segment. There was no impact to overall policy
reserves or to reported earnings to date. The Company believes
reserve adequacy testing of policy reserves currently underway will
indicate that overall earnings over the next few years will not be
adversely impacted by this reallocation. This reallocation of
reserves between the Kanawha legacy segments distorts the current
quarter reported policyholder benefits and the resulting reported
benefit ratios by segment. To provide a meaningful
period-over-period comparison by reporting segment, policy reserves
and investment income contained in the segment results over the
past six quarters have been reclassified on a pro forma basis in
the attached financial tables and are also reflected in the
subsequent discussion of segment results above. *T 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 Company, 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, August 7,
2006, at 10:00 a.m. EDT. 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,
August 21, 2006. -0- *T KMG America Corporation Consolidated
Statements of Income (GAAP basis, unaudited) (in thousands, except
share data and percentages) Quarter Ended Year-to-Date
----------------------------- ------------------- June 30, March
31, June 30, June 30, June 30, 2006 2006 2005 2006 2005 ---------
--------- --------- --------- --------- Insurance premiums, net of
reinsurance $ 30,662 $ 29,811 $ 26,817 $ 60,473 $ 53,015 Net
investment income 7,619 7,206 6,800 14,825 13,453 Commission and
fee income 4,117 4,219 3,671 8,336 7,239 Realized investment gains
(115) 211 19 96 46 Other income 923 986 978 1,909 1,770 ---------
--------- --------- --------- --------- Total revenues 43,206
42,433 38,285 85,639 75,523 Policyholder benefits 24,373 23,354
20,646 47,727 41,076 Insurance commissions, net of deferrals 2,924
2,981 2,377 5,905 5,043 Expenses, taxes, fees and depreciation
13,213 13,049 13,103 26,262 24,579 Amortization of DAC and VOBA (1)
1,155 1,178 1,214 2,333 2,299 --------- --------- ---------
--------- --------- Total benefits and expenses 41,665 40,562
37,340 82,227 72,997 Income before income taxes 1,541 1,871 945
3,412 2,526 (Provision) for income taxes (524) (635) (231) (1,159)
(792) --------- --------- --------- --------- --------- Net income
$ 1,017 $ 1,236 $ 714 $ 2,253 $ 1,734 =============================
=================== Net income per share Basic $ 0.05 $ 0.06 $ 0.03
$ 0.10 $ 0.08 Diluted $ 0.05 $ 0.06 $ 0.03 $ 0.10 $ 0.08
Weighted-average shares outstanding: Basic 22,201 22,133 22,072
22,168 22,072 Diluted 22,218 22,138 22,072 22,197 22,106 Effective
tax rate 34.0% 33.9% 24.4% 34.0% 31.4% Benefit ratio (2) 79.5%
78.3% 77.0% 78.9% 77.5% Expense ratio (3) 49.7% 50.6% 54.8% 50.1%
53.0% Average portfolio yield (4) 5.25% 4.95% 4.69% 5.10% 4.64%
Average invested assets $532,746 $519,669 $485,978 $525,911
$477,699 Average cash/equivalents & short terms (4) 47,363
62,679 94,583 55,353 102,189 --------- --------- ---------
--------- --------- Total average cash and invested assets $580,109
$582,348 $580,562 $581,264 $579,888 =============================
=================== (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 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). KMG America Corporation Supplemental
Financial Information - Unaudited (in thousands, except share data)
Quarter Ended Year-to-Date -----------------------------
------------------- June 30, March 31, June 30, June 30, June 30,
2006 2006 2005 2006 2005 --------- --------- --------- ---------
--------- Pro forma operating income (loss): (1) Worksite insurance
business $ 861 $ 297 $ 137 $ 1,158 $ 153 Senior market insurance
1,852 2,138 1,281 3,990 2,499 Third party administration business
375 410 209 785 390 Acquired business (444) (279) 379 (723) 658
Corporate and other (1,592) (1,339) (1,304) (2,931) (1,996)
--------- --------- --------- --------- --------- Total operating
income $ 1,052 $ 1,227 $ 702 $ 2,279 $ 1,704 Total excluding KMGA
new activity $ 3,557 $ 3,583 $ 3,311 $ 7,139 $ 5,904 (see table
below) Operating income per share: Basic $ 0.05 $ 0.06 $ 0.03 $
0.10 $ 0.08 Diluted $ 0.05 $ 0.06 $ 0.03 $ 0.10 $ 0.08 Diluted -
excl. KMGA new activity $ 0.16 $ 0.16 $ 0.15 $ 0.32 $ 0.27
Weighted-average shares outstanding: Basic 22,201 22,133 22,072
22,168 22,072 Diluted 22,218 22,138 22,072 22,197 22,106 KMG
America new activity: Insurance premiums, net of reinsurance $
5,167 $ 4,535 $ 96 $ 9,702 $ 96 Net investment income - - - - -
--------- --------- --------- --------- --------- Total revenues
5,167 4,535 96 9,702 96 Policyholder benefits 3,413 3,072 70 6,485
70 Insurance commissions, net of deferrals 709 639 14 1,348 14
Expenses, taxes, fees and depreciation 4,704 4,254 4,027 8,958
6,473 Amortization of DAC and VOBA 194 194 - 388 - ---------
--------- --------- --------- --------- Total benefits and expenses
9,020 8,159 4,111 17,179 6,557 --------- --------- ---------
--------- --------- Income (loss) before income taxes (3,853)
(3,624) (4,015) (7,477) (6,461) Benefit for income taxes 1,349
1,268 1,405 2,617 2,261 --------- --------- --------- ---------
--------- Net income (loss) $ (2,504) $(2,356) $(2,610) $(4,860) $
(4,200) ============================= =================== (1) Pro
forma 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. Segment pro forma
operating income results reflect the impact of policy reserve
reallocations and corresponding investment income allocations by
segment, net of income taxes. These reserve and investment income
reallocations only impact the Kanawha legacy segment operating
income results and do not impact the total company results. KMG
America Corporation and Subsidiary Consolidated Balance Sheets (in
thousands, except share data) June 30, 2006 December 31, 2005
---------------- ----------------- (Unaudited) Assets: Cash and
cash equivalents $ 6,946 $ 32,583 Investments 542,908 543,307
---------------- ----------------- Total cash and investments
549,854 575,890 Accrued investment income 6,051 5,917 DAC 21,250
14,032 VOBA 70,760 72,639 Other assets (1) 146,782 128,887
---------------- ----------------- Total assets $ 794,697 $ 797,365
================ ================= Liabilities and shareholders'
equity: Total policy and contract liabilities $ 560,569 $ 547,894
Deferred income taxes 7,165 13,061 Other liabilities (2) 50,611
48,927 ---------------- ----------------- Total liabilities 618,345
609,882 Total shareholders' equity 176,352 187,483 ----------------
----------------- Total liabilities and shareholders' equity $
794,697 $ 797,365 ================ ================= Book value per
share: Basic $ 7.94 $ 8.47 Diluted $ 7.93 $ 8.47 Book value per
share: (excl FAS 115) (3) Basic $ 8.80 $ 8.70 Diluted $ 8.78 $ 8.70
Ending shares outstanding: Basic 22,207 22,126 Diluted (4) 22,241
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, $16.2 million of outstanding principal and accrued
interest on a subordinated note as of June 30, 2006, and other
miscellaneous liabilities. Outstanding principal and accrued
interest on the subordinated note as of December 31, 2005 was $15.8
million. (3) The book values are recalculated excluding $19.0
million of unrealized capital losses, net of taxes, on June 30,
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. PRO FORMA SEGMENT RESULTS (Unaudited) (in
thousands) Quarter Ended Year-to-Date -----------------------------
------------------- June 30, March 31, June 30, June 30, June 30,
2006 2006 2005 2006 2005 --------- --------- --------- ---------
--------- Worksite insurance business - Legacy: Insurance premiums,
net of reinsurance $ 14,159 $ 13,972 $ 14,932 $ 28,131 $ 29,590 Net
investment income 1,876 1,739 1,654 3,615 3,275 Commissions and fee
income - - - - - Realized investment gains - - - - - Other income
50 46 41 96 90 --------- --------- --------- --------- ---------
Total revenues 16,085 15,757 16,627 31,842 32,955 Policyholder
benefits 9,964 10,241 10,551 20,205 21,401 Insurance commissions,
net of deferrals 854 882 787 1,736 1,865 Expenses, taxes, fees and
depreciation 2,323 2,271 2,503 4,594 5,198 Amortization of DAC and
VOBA 332 584 894 916 1,714 --------- --------- --------- ---------
--------- Total benefits and expenses 13,473 13,978 14,735 27,451
30,178 --------- --------- --------- --------- --------- Income
before income taxes $ 2,612 $ 1,779 $ 1,892 $ 4,391 $ 2,777
============================= =================== Total assets
$156,794 $157,983 $161,556 $156,794 $161,556
============================= =================== Worksite
insurance business - KMGA: Insurance premiums, net of reinsurance $
5,167 $ 4,535 $ 96 $ 9,702 $ 96 Net investment income - - - - -
Commissions and fee income - - - - - Realized investment gains - -
- - - Other income - - - - - --------- --------- ---------
--------- --------- Total revenues 5,167 4,535 96 9,702 96
Policyholder benefits 3,413 3,072 70 6,485 70 Insurance
commissions, net of deferrals 709 639 14 1,348 14 Expenses, taxes,
fees and depreciation 2,138 1,952 1,694 4,090 2,554 Amortization of
DAC and VOBA 194 194 - 388 - --------- --------- ---------
--------- --------- Total benefits and expenses 6,454 5,857 1,778
12,311 2,638 --------- --------- --------- --------- ---------
Income before income taxes $ (1,287) $ (1,322) $ (1,682) $ (2,609)
$ (2,542) ============================= =================== Total
assets $ 7,132 $ 4,738 $ - $ 7,132 $ -
============================= =================== Senior market
insurance business: Insurance premiums, net of reinsurance $ 10,705
$ 10,675 $ 11,128 $ 21,380 $ 21,729 Net investment income 2,272
2,050 1,599 4,322 3,053 Commissions and fee income - - - - -
Realized investment gains - - - - - Other income 760 809 799 1,569
1,456 --------- --------- --------- --------- --------- Total
revenues 13,737 13,534 13,526 27,271 26,238 Policyholder benefits
8,381 7,641 8,670 16,022 16,509 Insurance commissions, net of
deferrals 1,269 1,367 1,472 2,636 2,961 Expenses, taxes, fees and
depreciation 734 765 988 1,499 2,127 Amortization of DAC and VOBA
504 472 425 976 796 --------- --------- --------- ---------
--------- Total benefits and expenses 10,888 10,245 11,555 21,133
22,393 --------- --------- --------- --------- --------- Income
before income taxes $ 2,849 $ 3,289 $ 1,971 $ 6,138 $ 3,845
============================= =================== Total assets
$249,677 $239,985 $217,435 $249,677 $217,435
============================= =================== PRO FORMA SEGMENT
RESULTS (Unaudited) - Continued (in thousands) Quarter Ended
Year-to-Date ----------------------------- ------------------- June
30, March 31, June 30, June 30, June 30, 2006 2006 2005 2006 2005
--------- --------- --------- --------- --------- Third party
administration business: Insurance premiums, net of reinsurance $ -
$ - $ - $ - $ - Net investment income - - - - - Commissions and fee
income 4,025 4,134 3,583 8,159 7,066 Realized investment gains - -
- - - Other income - - - - 1 --------- --------- ---------
--------- --------- Total revenues 4,025 4,134 3,583 8,159 7,067
Policyholder benefits - - - - - Insurance commissions, net of
deferrals - - - - - Expenses, taxes, fees and depreciation 3,448
3,503 3,261 6,951 6,467 Amortization of DAC and VOBA - - - - -
--------- --------- --------- --------- --------- Total benefits
and expenses 3,448 3,503 3,261 6,951 6,467 --------- ---------
--------- --------- --------- Income before income taxes $ 577 $
631 $ 322 $ 1,208 $ 600 =============================
=================== Total assets $ 10,142 $ 10,063 $ 8,304 $ 10,142
$ 8,304 ============================= =================== Acquired
business: Insurance premiums, net of reinsurance $ 631 $ 629 $ 661
$ 1,260 $ 1,599 Net investment income 2,089 1,955 1,924 4,044 3,841
Commissions and fee income - - - - - Realized investment gains - -
- - - Other income 23 16 18 39 31 --------- --------- ---------
--------- --------- Total revenues 2,743 2,600 2,603 5,343 5,471
Policyholder benefits 2,617 2,399 1,355 5,016 3,096 Insurance
commissions, net of deferrals 91 94 103 185 202 Expenses, taxes,
fees and depreciation 593 608 667 1,201 1,371 Amortization of DAC
and VOBA 125 (72) (105) 53 (210) --------- --------- ---------
--------- --------- Total benefits and expenses 3,426 3,029 2,020
6,455 4,459 --------- --------- --------- --------- ---------
Income before income taxes $ (683) $ (429) $ 583 $ (1,112) $ 1,012
============================= =================== Total assets
$164,917 $169,470 $174,942 $164,917 $174,942
============================= =================== Corporate &
other: Insurance premiums, net of reinsurance $ - $ - $ - $ - $ -
Net investment income 1,383 1,462 1,623 2,845 3,285 Commissions and
fee income 92 85 88 177 173 Realized investment gains - - - - -
Other income 90 115 121 205 192 --------- --------- ---------
--------- --------- Total revenues 1,565 1,662 1,832 3,227 3,650
Policyholder benefits - - - - - Insurance commissions, net of
deferrals - - - - - Expenses, taxes, fees and depreciation -
Kanawha legacy 1,472 1,450 1,659 2,922 2,943 - KMG America (KMGA)
new activity 2,566 2,302 2,333 4,868 3,919 Amortization of DAC and
VOBA - - - - - --------- --------- --------- --------- ---------
Total benefits and expenses 4,038 3,752 3,992 7,790 6,862 ---------
--------- --------- --------- --------- Income (loss) before income
taxes $ (2,473) $ (2,090) $ (2,160) $ (4,563) $ (3,212)
============================= =================== Income before
income taxes excluding KMGA new activity $ 93 $ 212 $ 173 $ 305 $
707 Total assets $206,034 $211,677 $227,294 $206,034 $227,294
============================= =================== RECLASSIFICATION
OF HISTORICAL PRO FORMA SEGMENT QUARTERLY RESULTS (Unaudited) (in
thousands) Quarter Ended
----------------------------------------------------------- Jun 30,
Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, 2006 2006 2005 2005 2005
2005 --------- --------- --------- --------- --------- ---------
Worksite insurance business - Legacy: Insurance premiums, net of
reinsur- ance $ 14,159 $ 13,972 $ 13,912 $ 14,097 $ 14,932 $ 14,658
Net invest- ment income 1,876 1,739 1,732 1,715 1,654 1,621 Commis-
sions and fee income - - - - - - Realized invest- ment gains - - -
- - - Other income 50 46 42 40 41 49 --------- --------- ---------
--------- --------- --------- Total revenues 16,085 15,757 15,686
15,852 16,627 16,328 Policy- holder benefits 9,964 10,241 9,327
10,838 10,551 10,850 Insurance commis- sions, net of deferrals 854
882 833 745 787 1,078 Expenses, taxes, fees and depre- ciation
2,323 2,271 2,539 2,414 2,503 2,695 Amorti- zation of DAC and VOBA
332 584 766 992 894 820 --------- --------- --------- ---------
--------- --------- Total benefits and expenses 13,473 13,978
13,465 14,989 14,735 15,443 --------- --------- --------- ---------
--------- --------- Income before income taxes $ 2,612 $ 1,779 $
2,221 $ 863 $ 1,892 $ 885
=========================================================== Benefit
ratio 70.4% 73.3% 67.0% 76.9% 70.7% 74.0%
=========================================================== Total
assets $156,794 $157,983 $160,712 $161,457 $161,556 $163,144
=========================================================== Quarter
Ended -----------------------------------------------------------
Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Dec 31, 2006 2006 2005 2005
2005 2005 --------- --------- --------- --------- ---------
--------- Senior market insurance business: Insurance premiums, net
of reinsur- ance $ 10,705 $ 10,675 $ 10,135 $ 10,376 $ 11,128 $
10,601 Net invest- ment income 2,272 2,050 1,922 1,781 1,599 1,454
Commis- sions and fee income - - - - - - Realized invest- ment
gains - - - - - - Other income 760 809 747 732 799 657 ---------
--------- --------- --------- --------- --------- Total revenues
13,737 13,534 12,804 12,889 13,526 12,712 Policy- holder benefits
8,381 7,641 8,482 8,339 8,670 7,839 Insurance commis- sions, net of
deferrals 1,269 1,367 1,240 1,294 1,472 1,489 Expenses, taxes, fees
and depre- ciation 734 765 770 1,098 988 1,139 Amorti- zation of
DAC and VOBA 504 472 150 (392) 425 371 --------- ---------
--------- --------- --------- --------- Total benefits and expenses
10,888 10,245 10,642 10,339 11,555 10,838 --------- ---------
--------- --------- --------- --------- Income before income taxes
$ 2,849 $ 3,289 $ 2,162 $ 2,550 $ 1,971 $ 1,874
=========================================================== Benefit
ratio 78.3% 71.6% 83.7% 80.4% 77.9% 73.9%
=========================================================== Total
assets $249,677 $239,985 $233,165 $225,457 $217,435 $209,281
===========================================================
RECLASSIFICATION OF HISTORICAL PRO FORMA SEGMENT QUARTERLY RESULTS
(Unaudited) - Continued (in thousands) Quarter Ended
----------------------------------------------------------- Jun 30,
Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, 2006 2006 2005 2005 2005
2005 --------- --------- --------- --------- --------- ---------
Acquired business: Insurance premiums, net of reinsur- ance $ 631 $
629 $ 1,579 $ 941 $ 661 $ 938 Net invest- ment income 2,089 1,955
1,983 1,978 1,924 1,917 Commis- sions and fee income - - - - - -
Realized invest- ment gains - - - - - - Other income 23 16 18 20 18
13 --------- --------- --------- --------- --------- ---------
Total revenues 2,743 2,600 3,580 2,939 2,603 2,868 Policy- holder
benefits 2,617 2,399 2,376 2,089 1,355 1,741 Insurance commis-
sions, net of deferrals 91 94 99 98 103 99 Expenses, taxes, fees
and depreci- ation 593 608 695 675 667 704 Amorti- zation of DAC
and VOBA 125 (72) (276) (258) (105) (105) --------- ---------
--------- --------- --------- --------- Total benefits and expenses
3,426 3,029 2,894 2,604 2,020 2,439 --------- --------- ---------
--------- --------- --------- Income before income taxes $ (683) $
(429) $ 686 $ 335 $ 583 $ 429
=========================================================== Benefit
ratio 414.7% 381.4% 150.5% 222.0% 205.0% 185.6%
=========================================================== Total
assets $164,917 $169,470 $170,702 $173,097 $174,942 $176,963
=========================================================== Quarter
Ended -----------------------------------------------------------
Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, 2006 2006 2005 2005
2005 2005 --------- --------- --------- --------- ---------
--------- Corporate and other Insurance premiums, net of reinsur-
ance $ - $ - $ - $ - $ - $ - Net invest- ment income 1,383 1,462
1,566 1,614 1,623 1,662 Commis- sions and fee income 92 85 50 78 88
85 Realized invest- ment gains - - - - - - Other income 90 115 89
407 121 71 --------- --------- --------- --------- ---------
--------- Total revenues 1,565 1,662 1,705 2,099 1,832 1,818
Policy- holder benefits - - - - - - Insurance commis- sions, net of
deferrals - - - - - - Expenses, taxes, fees and depre- ciation - -
- - - - - Kanawha legacy 1,472 1,450 1,427 1,191 1,659 1,284 - KMG
America (KMGA) new activity 2,566 2,302 1,866 1,919 2,333 1,586
Amorti- zation of DAC and VOBA - - - - - - --------- ---------
--------- --------- --------- --------- Total benefits and expenses
4,038 3,752 3,293 3,110 3,992 2,870 --------- --------- ---------
--------- --------- --------- Income before income taxes $ (2,473)
$ (2,090) $ (1,588) $ (1,011) $ (2,160) $ (1,052)
=========================================================== Total
assets $206,034 $211,677 $221,683 $231,785 $227,294 $210,366
=========================================================== KMG
America Corporation Reconciliation of Operating Income and
Consolidated Statements of Income (Unaudited) (in thousands) KMG
America Corporation: Quarter Ended Year-to-date
--------------------------- ----------------- June 30, March 31,
June 30, June 30, June 30, 2006 2006 2005 2006 2005 --------
--------- -------- -------- -------- Net income as reported $ 1,017
$ 1,236 $ 714 $ 2,253 $ 1,734 Reconciliation to operating income:
Exclude realized investment gains/losses, 115 (211) (19) (96) (46)
Exclude offsetting deferred compensation expense (1) (61) 197 - 136
- Taxes on the above (19) 5 7 (14) 16 -------- --------- --------
-------- -------- Operating income $ 1,052 $ 1,227 $ 702 $ 2,279 $
1,704 ============================================= KMG America
Corporation Reconciliation of Operating Income, Consolidated
Statements of Income, and Segment Assets (Unaudited) (in thousands)
Senior Quarter Ended market
-----------------------------------------------------------
insurance Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, business:
2006 2006 2005 2005 2005 2005 --------- --------- ---------
--------- --------- --------- Income (loss) before taxes as
reported $(36,239) $ 1,756 $ 1,030 $ 1,458 $ 1,003 $ 926 Reconcili-
ation to operating income: Reallo- cation of invest- ment income
(1) 706 639 625 586 462 442 Reallo- cation of policy reserves (1)
38,382 894 507 506 506 506 --------- --------- --------- ---------
--------- --------- Pro forma income before taxes 2,849 3,289 2,162
2,550 1,971 1,874 Taxes @ 35% (997) (1,151) (757) (893) (690) (656)
--------- --------- --------- --------- --------- --------- Pro
forma operating income after taxes $ 1,852 $ 2,138 $ 1,405 $ 1,658
$ 1,281 $ 1,218
=========================================================== Assets
as reported $249,677 $201,603 $193,889 $185,675 $177,147 $168,486
Reallo- cation of assets (1) - 38,382 39,276 39,782 40,288 40,795
--------- --------- --------- --------- --------- --------- Pro
forma assets $249,677 $239,985 $233,165 $225,457 $217,435 $209,281
===========================================================
Acquired Quarter Ended business:
----------------------------------------------------------- Jun 30,
Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, 2006 2006 2005 2005 2005
2005 --------- --------- --------- --------- --------- ---------
Income before taxes as reported $ 31,744 $ 773 $ 1,214 $ 769 $
1,120 $ 1,121 Reconcili- ation to operating income: Reallo- cation
of invest- ment income (1) (17) (26) 19 112 9 (146) Reallo- cation
of policy reserves (1) (32,410) (1,176) (547) (546) (546) (546)
--------- --------- --------- --------- --------- --------- Pro
forma income before taxes (683) (429) 686 335 583 429 Taxes @ 35%
239 150 (240) (117) (204) (150) --------- --------- ---------
--------- --------- --------- Pro forma operating income after
taxes $ (444) $ (279) $ 446 $ 218 $ 379 $ 279
=========================================================== Assets
as reported $164,917 $201,880 $204,288 $207,229 $209,620 $212,188
Reallo- cation of assets (1) - (32,410) (33,586) (34,132) (34,678)
(35,225) --------- --------- --------- --------- ---------
--------- Pro forma assets $164,917 $169,470 $170,702 $173,097
$174,942 $176,963
=========================================================== (1) Pro
forma reconciling adjustments reflect the reclassification of
policy reserves, assets and corresponding investment income between
Kanawha legacy reporting segments that relate to the implementation
of the final purchase GAAP reserves as if the implementation
occurred as of December 31, 2004. The reclassifications by segment
did not impact total company results. KMG America Corporation
Reconciliation of Operating Income, Consolidated Statements of
Income, and Segment Assets (Unaudited) - Continued (in thousands)
Worksite Quarter Ended insurance
-----------------------------------------------------------
business: Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, 2006 2006
2005 2005 2005 2005 --------- --------- --------- ---------
--------- --------- Income before taxes as reported $ 7,185 $ 31 $
499 $ (823) $ 119 $ 146 Reconcili- ation to operating income:
Reallo- cation of invest- ment income (1) 112 144 130 178 51 (161)
Reallo- cation of policy reserves (1) (5,972) 282 40 40 40 40
--------- --------- --------- --------- --------- --------- Pro
forma income before taxes 1,325 457 669 (605) 210 25 Taxes @ 35%
(464) (160) (234) 212 (74) (9) --------- --------- ---------
--------- --------- --------- Pro forma operating income after
taxes $ 861 $ 297 $ 435 $ (393) $ 137 $ 16
=========================================================== Assets
as reported $163,926 $168,693 $166,402 $167,107 $167,166 $168,714
Reallo- cation of assets (1) - (5,972) (5,690) (5,650) (5,610)
(5,570) --------- --------- --------- --------- --------- ---------
Pro forma assets $163,926 $162,721 $160,712 $161,457 $161,556
$163,144
===========================================================
Corporate Quarter Ended & other:
----------------------------------------------------------- Jun 30,
Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, 2006 2006 2005 2005 2005
2005 --------- --------- --------- --------- --------- ---------
Income before taxes as reported $ (1,726) $ (1,319) $ (893) $ 2 $
(1,619) $ (890) Reconcili- ation to operating income: Exclude
realized invest- ment gains/ losses, 115 (211) (34) (278) (19) (27)
Exclude offset- ting deferred compen- sation expense (2) (61) 197
113 141 - - Reallo- cation of invest- ment income (1) (801) (757)
(774) (876) (522) (135) --------- --------- --------- ---------
--------- --------- Pro forma income before taxes (2,473) (2,090)
(1,588) (1,011) (2,160) (1,052) Taxes 881 752 1,296 1,836 856 361
--------- --------- --------- --------- --------- --------- Pro
forma operating income after taxes $ (1,592) $ (1,338) $ (292) $
825 $ (1,304) $ (691)
=========================================================== (1) Pro
forma reconciling adjustments reflect the reclassification of
policy reserves, assets and corresponding investment income between
Kanawha legacy reporting segments that relate to the implementation
of the final purchase GAAP reserves as if the implementation
occurred as of December 31, 2004. The reclassifications by segment
did not impact total company results. (2) Offsetting expense for
realized gains(losses) related to executive deferred compensation
trading activity KMG America Corporation Statistical and Operating
Data at or for the Periods Indicated (in thousands, except
percentages) OTHER FINANCIAL DATA Unaudited Quarter Ended
Year-to-Date ----------------------------- ------------------- June
30, March 31, June 30, June 30, June 30, 2006 2006 2005 2006 2005
--------- --------- --------- --------- --------- Sales - issued
and paid for annualized premiums: Worksite insurance segment -
Kanawha Legacy Life $ 623 $ 402 $ 677 $ 1,025 $ 1,296 Cancer 441
486 430 927 938 Disability income 633 633 933 1,266 2,244 Other
A&H 276 210 315 486 974 --------- --------- --------- ---------
--------- Total worksite - Kanawha Legacy 1,973 1,731 2,355 3,704
5,452 Worksite insurance segment - KMG America (KMGA) New Activity
Core Group Products: Life $ 180 $ 1,151 $ - $ 1,331 $ - Stop loss
5,487 12,776 1,128 18,263 1,128 Disability income 40 149 - 189 -
Other A&H - - - - - Voluntary Benefit Products: Life 935 122 9
1,057 9 Cancer 64 41 80 105 80 Disability income 1,165 1,278 591
2,443 591 Other A&H 365 336 1 701 1 --------- ---------
--------- --------- --------- Total worksite - KMGA New Activity
8,236 15,853 1,809 24,089 1,809 Senior market insurance segment
Long term care 52 303 549 355 996 --------- --------- ---------
--------- --------- Total senior market insurance 52 303 549 355
996 --------- --------- --------- --------- --------- Total sales $
10,261 $ 17,887 $ 4,713 $ 28,148 $ 8,257
================================================= Quarter Ended
Year-to-Date ---------------------------- -------------------- June
30, March 31, June 30, June 30, June 30, 2006 2006 2005 2006 2005
--------- --------- --------- --------- --------- Segment pro forma
benefit ratios: (1) Worksite insurance - Kanawha legacy 70.4% 73.3%
70.7% 71.8% 72.3% Worksite insurance - KMGA new activity 66.1%
67.7% n/a 66.8% n/a Senior market insurance 78.3% 71.6% 77.9% 74.9%
76.0% Acquired business 414.7% 381.4% 205.0% 398.1% 193.6% Total
company 79.5% 78.3% 77.0% 78.9% 77.5% (1) benefit ratio is defined
as total policyholder benefits divided by total net premiums. Pro
forma results restate the segment benefit ratios as if the
finalized purchase GAAP reserving methodology adopted in the second
quarter of 2006 was in place since December 31, 2004. *T
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