KMA Kmg Amer Corp

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