KMG America Corporation (the �Company� or �KMG America�) (NYSE:
KMA) today reported net income of $2.0 million, or $0.09 per
diluted share for the third quarter of 2006, compared to net income
for the third quarter of 2005 of $1.3 million, or $0.06 per diluted
share. The company reported operating income for the third quarter
of $2.1 million, or $0.10 per diluted share, compared to operating
income for the second quarter of 2006 of $1.1 million, or $0.05 per
diluted share, and third quarter of 2005 operating income of $1.2
million, or $0.06 per diluted share. KMG America�s Chief Executive
Officer, Kenneth Kuk, commented, �Our third quarter operating
income results of $0.10 per share are consistent with our internal
forecast and better than the analysts� consensus estimate of $0.08
per share. This quarter�s results marks the seventh consecutive
profitable quarter since the IPO with operating earnings up over
70% compared to the third quarter of 2005 and double the results
reported in the second quarter 2006. Most key measurements continue
a very positive trend including increasing sales and reduced
operating losses on our new large case business.� THIRD QUARTER
FINANCIAL RESULTS Third quarter 2006 operating income (see
discussion of non-GAAP financial measures below) improved to $2.1
million compared to second quarter 2006 operating income of $1.1
million, largely due to favorable claims experience in the Kanawha
legacy business and revenue growth from the new large case sales
activity. Third quarter 2006 earnings results reflect several
unusual items that are largely offsetting. The favorable items
include a pretax reimbursement of $0.3 million from our D&O
carriers for certain prior period litigation expenses related to
the ReliaStar lawsuit. The current quarter also includes a pretax
offset of $0.2 million from reimbursement of current quarter
litigation expenses related to the ReliaStar lawsuit, and we would
expect continuing legal expense reimbursements as the lawsuit
progresses towards a conclusion. Also included in the current
quarter results is a one-time pretax financial benefit of $0.6
million resulting from an indemnification from the previous
shareholders of Kanawha. These favorable items were mostly offset
by the recognition of $0.9 million of stop loss claims relating to
specific cases written in 2005 as we transition from formula
reserving to actual claims experience as this block grows and
matures. Volatility, both favorable and unfavorable, is not
uncommon in small, growing books of business. Cases giving rise to
these excess claims have since been re-priced or did not renew. The
discussion of operating earnings that follows has been segregated
into earnings attributed to the Kanawha legacy business and the
earnings of the new large case activity. The Company believes that
segregating the earnings results of the new large case activity
provides a more meaningful comparison of the underlying strength in
the earnings produced by Kanawha�s legacy business. This earnings
derivation is described later in �Notes on Financial Presentation.�
The discussion below focuses on third quarter 2006 results compared
to the second quarter 2006 results. KANAWHA LEGACY ACTIVITY RESULTS
Operating income attributed to the Kanawha legacy business for the
third quarter of 2006 was $4.3 million, or $0.19 per diluted share,
up 21% compared to $3.6 million of operating income reported in the
second quarter of 2006 due largely to favorable claims experience
across all of its business segments and the $0.6 million pretax
benefit related to the indemnification from the previous
shareholders of Kanawha mentioned above. The benefit ratio reported
for the Kanawha legacy business for the third quarter of 2006
improved to 75.3% compared to 82.2% reported in the second quarter
of 2006. Earned premiums reported in the Kanawha legacy business
for the third quarter of 2006 declined to $24.4 million, compared
to $25.5 million reported in the second quarter of 2006 due to
lapses of certain legacy worksite cases, the impact of an
experience rating refund adjustment on one large treaty in the
Acquired Business segment, and to the seasonality effect of policy
anniversaries of long term care policies reported in the Senior
segment. Amortization of DAC/VOBA (�deferred acquisition
costs�/�value of business acquired�) increased to $1.4 million in
the third quarter of 2006 compared to $1.0 million reported in the
second quarter of 2006 due largely to the impact of increased
lapses in the worksite segment and the delayed impact of both
recently approved and pending rate increases in the long term care
block of business that tends to accelerate amortization. The
amortization of VOBA on the long term care business is expected to
moderate as the pending rate increases are approved. NEW LARGE CASE
ACTIVITY RESULTS Operating losses attributed to the new large case
activity improved to $2.2 million, or $0.09 per diluted share,
compared to a loss of $2.5 million, or $0.11 per diluted share
reported in the second quarter of 2006. Contributing factors to the
improvement include positive growth in premium revenue driven by
increased sales and the favorable impact of the reimbursement of
ReliaStar litigation expenses from our D&O carrier. These
favorable items were partially offset by increased claims on 2005
stop loss cases. Premium revenue (net of reinsurance) increased to
$9.8 million in the third quarter of 2006 compared to $5.2 million
reported in the second quarter of 2006. Third quarter 2006 sales
results (as measured by new annualized issued premiums) attributed
to the new large case activity improved to $12.8 million, compared
to $8.2 million for the second quarter of 2006. On a year-to-date
basis, sales improved to $36.8 million compared to full year 2005
sales of $12.2 million. The third quarter and year-to-date 2006
sales results include $5.3 million of annualized premium related to
the acquisition of a small block of life insurance policies that
had a small but favorable effect on third quarter earnings.
Excluding the small block acquisition, the benefit ratio reported
for the new large case activity in the third quarter increased to
71.5% (79.4% as reported) compared to 66.1% reported in the second
quarter of 2006, driven primarily by the $0.9 million of excess
stop loss claims related to certain cases written in 2005
recognized in the current quarter. NEW STATISTICAL SUPPLEMENT
AVAILABLE ON WEBSITE Substantial content changes have been made to
the Company�s earnings press release this quarter concurrent with
the initial publication of a new statistical supplement on the
kmgamerica.com website. The statistical supplement can be accessed
on the website via the �Investor Relations� tab, �Financial
Reports� tab, and found under the �Quarterly & Other Reports�
section. This change shortens and simplifies the press release
while focusing attention on the overall earnings strength of and
trends in Kanawha�s legacy business, while segregating the revenue
and earnings performance of the new large case activity. Much of
the financial statement and explanatory detail previously included
in the press release will now be found in the new statistical
supplement. A derivation of �normalized� earnings is provided in
the statistical supplement for the current and prior quarters to
identify and remove unusual or temporary items and to help analysts
and investors focus on recurring earnings trends. While this
reporting basis requires management�s subjective judgment, the
details are identified and described so the investors and analysts
can form their own opinions. WEB CAST The Company will host an
investor and analyst web cast today, Monday, November 6, 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, November 20,
2006. 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. 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), 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.
Presentation of Earnings Results: During the first two years of
operations, the Company has separated the financial performance of
KMG America into two primary components: �Kanawha legacy activity�
and �new large case activity.� This is done to highlight the
strength of, and trends in, the Kanawha business activity that
existed prior to the acquisition (Kanawha legacy activity), and
segregate these results from the financial performance related to
transforming KMG America into a new public company with a new
national marketing focus (new large case activity). The financial
results in the �new large case activity� includes all public
company costs, the cost of the new management team, and all
incremental sales and underwriting costs and product revenues
associated with sales generated by the new national sales
organization. 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 the
Company�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. The Company assumes no
obligation to publicly update or revise any forward-looking
statements. KMG America Corporation Consolidated Statements of
Income (GAAP basis, unaudited) (in thousands, except share data and
percentages) � � Quarter Ended Year-to-Date 9/30/06� 6/30/06�
9/30/05� 9/30/06� 9/30/05� Operating income(1): Insurance premiums,
net of reinsurance $ 34,235� $ 30,662� $ 26,423� $ 94,708� $
79,438� Net investment income 7,453� 7,619� 7,089� 22,278� 20,542�
Commission and fee income 4,018� 4,117� 3,773� 12,354� 11,012�
Other income � 1,275� � 923� � 1,200� � 3,184� � 2,970� Total
revenues 46,981� 43,321� 38,485� 132,524� 113,962� � Policyholder
benefits 26,186� 24,373� 21,890� 73,913� 62,966� Insurance
commissions, net of deferrals 3,246� 2,924� 2,239� 9,151� 7,282�
Expenses, taxes, fees and depreciation, net of deferrals 12,578�
13,274� 12,058� 38,704� 36,637� Amortization of DAC and VOBA(2) �
1,682� � 1,155� � 463� � 4,015� � 2,762� Total benefits and
expenses 43,692� 41,726� 36,650� 125,783� 109,647� � Operating
income before income taxes 3,289� 1,595� 1,835� 6,741� 4,315�
(Provision) for income taxes � (1,150) � (543) � (586) � (2,323) �
(1,362) Operating income � 2,139� � 1,052� � 1,249� � 4,418� �
2,953� � Operating income per share - diluted $ 0.10� $ 0.05� $
0.06� $ 0.20� $ 0.13� � Items excluded from operating income:
Realized investment gains (losses) 7� (115) 278� 103� 324� Deferred
compensation expense adjustment(3) � (181) � 61� � (141) � (317) �
(141) Total items excluded from operating income, before tax (174)
(54) 137� (214) 183� Income taxes, not applicable to operating
income � 61� � 19� � (48) � 75� � (64) Total items excluded from
operating income, after tax � (113) � (35) � 89� � (139) � 119� Net
income $ 2,026� � $ 1,017� � $ 1,338� � $ 4,279� � $ 3,072� � Net
income per share - diluted $ 0.09� $ 0.05� $ 0.06� $ 0.19� $ 0.14�
� Weighted-average shares outstanding - diluted: 22,208� 22,218�
22,094� 22,199� 22,084� � Operating income split: Kanawha legacy $
4,293� $ 3,557� $ 3,451� $ 11,432� $ 9,354� New large case activity
� (2,153) � (2,504) � (2,202) � (7,014) � (6,401) Total company $
2,139� $ 1,052� $ 1,249� $ 4,418� $ 2,953� � Operating income per
share - diluted Kanawha legacy $ 0.19� $ 0.16� $ 0.16� $ 0.51� $
0.42� New large case activity $ (0.09) $ (0.11) $ (0.10) $ (0.31) $
(0.29) Total company $ 0.10� $ 0.05� $ 0.06� $ 0.20� $ 0.13� �
Annualized operating return on average equity: Kanawha legacy
activity(4) 9.7% 8.2% 8.5% 8.8% 7.8% Total company 4.4% 2.2% 2.6%
3.0% 2.1% � (1) Operating income is a non-GAAP measure, and is
defined as net income excluding realized gains (losses), except for
realized gains (losses) that are directly offset by executive
deferred compensation expense, net of income taxes. (2) DAC:
deferred acquisition costs; VOBA: value of business acquired. (3)
Offsetting expense for realized gains (losses) related to executive
deferred compensation trading activity. (4) Equity attributed to
Kanawha legacy consists of the initial allocation of IPO proceeds
of $155 million increased by retained earnings from the Kanawha
legacy business. KMG America Corporation and Subsidiary
Consolidated Balance Sheets (in thousands, except share data) �
September 30, 2006 December 31, 2005 (Unaudited) Assets: Cash and
cash equivalents $ 11,271� $ 32,583� Investments � 564,631� �
543,307� Total cash and investments 575,902� 575,890� Accrued
investment income 6,422� 5,917� DAC 24,548� 14,032� VOBA 70,794�
72,639� Other assets(1) � 144,247� � 128,887� Total assets $
821,913� $ 797,365� � Liabilities and shareholders' equity: Total
policy and contract liabilities $ 567,862� $ 547,894� Deferred
income taxes 14,404� 13,061� Other liabilities(2) � 49,680� �
48,927� Total liabilities 631,946� 609,882� Total shareholders'
equity � 189,967� � 187,483� Total liabilities and shareholders'
equity $ 821,913� $ 797,365� � Book value per share: Basic $ 8.55�
$ 8.47� Diluted $ 8.55� $ 8.47� � Book value per share: (excl FAS
115)(3) Basic $ 8.90� $ 8.70� Diluted $ 8.90� $ 8.70� � Ending
shares outstanding: Basic 22,209� 22,126� Diluted(4) 22,209�
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, $14.9 million of outstanding
principal and accrued interest on a subordinated note as of
September 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 $7.8 million of unrealized capital losses,
net of taxes, on September 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. KMG America
Corporation Statistical and Operating Data at or for the Periods
Indicated - Unaudited (in thousands, except percentages) � Quarter
Ended Year-to-Date 9/30/06� 6/30/06� 9/30/05� 9/30/06� 9/30/05�
SALES RESULTS (issued and paid for annualized premiums): � Worksite
insurance segment - Kanawha legacy: Life $ 448� $ 623� $ 709� $
1,473� $ 2,005� Cancer 360� 441� 542� 1,287� 1,480� Disability
income 545� 633� 821� 1,811� 3,065� Other A&H � 263� � 276� �
328� � 749� � 1,302� Total worksite - Kanawha Legacy 1,616� 1,973�
2,400� 5,320� 7,852� � Worksite insurance segment - New large case
activity: Core Group Products: Life $ 339� $ 180� $ -� $ 1,670� $
-� Stop loss 5,502� 5,487� 2,993� 23,765� 4,121� Disability income
269� 40� -� 458� -� Other A&H -� -� -� -� -� Voluntary Benefit
Products: Life(1) 5,519� 935� 219� 6,576� 228� Cancer 20� 64� 18�
125� 98� Disability income 695� 1,165� 836� 3,138� 1,427� Other
A&H � 443� � 365� � 299� � 1,144� � 300� Total worksite - New
large case activity 12,787� 8,236� 4,365� 36,876� 6,174� � Other
Kanawha legacy sales: Long term care � 60� � 52� � 360� � 415� �
1,356� � Total sales $ 14,463� � $ 10,261� � $ 7,125� � $ 42,611� �
$ 15,382� � OTHER KMG AMERICA KEY FINANCIAL INDICATORS: � Effective
tax rate 34.9% 34.0% 32.2% 34.4% 31.7% � Benefit ratio - total
company(2): 76.5% 79.5% 82.8% 78.0% 79.3% Kanawha legacy only 75.3%
82.2% 83.7% 79.3% 79.5% New large case activity only 79.4% 66.1%
61.7% 73.1% 62.7% � Expense ratio - total company(3): 45.8% 49.9%
48.9% 48.4% 51.6% Kanawha legacy only 42.8% 39.7% 37.6% 40.9% 40.8%
New large case activity only 54.3% 108.5% 373.9% 82.1% 928.5% �
Average portfolio yield(4) 5.11% 5.25% 4.81% 5.10% 4.69% � Average
invested assets $ 544,679� $ 532,746� $ 482,435� $ 532,174� $
477,893� Average cash/equivalents & short terms(4) � 38,813� �
47,363� � 107,271� � 50,746� � 106,424� Total average cash and
invested assets $ 583,492� $ 580,109� $ 589,707� $ 582,920� $
584,318� � Earned premiums and fees - total company: $ 38,253� $
34,779� $ 30,196� $ 107,062� $ 90,450� Kanawha legacy only 28,419�
29,612� 29,187� 87,526� 89,345� New large case activity only 9,834�
5,167� 1,009� 19,536� 1,105� � (1) Life sales for the third quarter
2006 and nine months year-to-date 2006 include $5.3 million of life
sales related to a small block acquisition effective September 1,
2006 (primarily voluntary term life policies) (2) Benefit ratio is
defined as total policyholder benefits divided by total net
premiums. (3) Expense ratio is defined as commissions, expenses and
amortization of DAC/VOBA (on operating income basis) divided by
earned premiums plus commissions/fees. (4) Average portfolio yield
is defined as net investment income divided by average 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 (the "Company" or "KMG America") (NYSE: KMA)
today reported net income of $2.0 million, or $0.09 per diluted
share for the third quarter of 2006, compared to net income for the
third quarter of 2005 of $1.3 million, or $0.06 per diluted share.
The company reported operating income for the third quarter of $2.1
million, or $0.10 per diluted share, compared to operating income
for the second quarter of 2006 of $1.1 million, or $0.05 per
diluted share, and third quarter of 2005 operating income of $1.2
million, or $0.06 per diluted share. KMG America's Chief Executive
Officer, Kenneth Kuk, commented, "Our third quarter operating
income results of $0.10 per share are consistent with our internal
forecast and better than the analysts' consensus estimate of $0.08
per share. This quarter's results marks the seventh consecutive
profitable quarter since the IPO with operating earnings up over
70% compared to the third quarter of 2005 and double the results
reported in the second quarter 2006. Most key measurements continue
a very positive trend including increasing sales and reduced
operating losses on our new large case business." THIRD QUARTER
FINANCIAL RESULTS Third quarter 2006 operating income (see
discussion of non-GAAP financial measures below) improved to $2.1
million compared to second quarter 2006 operating income of $1.1
million, largely due to favorable claims experience in the Kanawha
legacy business and revenue growth from the new large case sales
activity. Third quarter 2006 earnings results reflect several
unusual items that are largely offsetting. The favorable items
include a pretax reimbursement of $0.3 million from our D&O
carriers for certain prior period litigation expenses related to
the ReliaStar lawsuit. The current quarter also includes a pretax
offset of $0.2 million from reimbursement of current quarter
litigation expenses related to the ReliaStar lawsuit, and we would
expect continuing legal expense reimbursements as the lawsuit
progresses towards a conclusion. Also included in the current
quarter results is a one-time pretax financial benefit of $0.6
million resulting from an indemnification from the previous
shareholders of Kanawha. These favorable items were mostly offset
by the recognition of $0.9 million of stop loss claims relating to
specific cases written in 2005 as we transition from formula
reserving to actual claims experience as this block grows and
matures. Volatility, both favorable and unfavorable, is not
uncommon in small, growing books of business. Cases giving rise to
these excess claims have since been re-priced or did not renew. The
discussion of operating earnings that follows has been segregated
into earnings attributed to the Kanawha legacy business and the
earnings of the new large case activity. The Company believes that
segregating the earnings results of the new large case activity
provides a more meaningful comparison of the underlying strength in
the earnings produced by Kanawha's legacy business. This earnings
derivation is described later in "Notes on Financial Presentation."
The discussion below focuses on third quarter 2006 results compared
to the second quarter 2006 results. KANAWHA LEGACY ACTIVITY RESULTS
Operating income attributed to the Kanawha legacy business for the
third quarter of 2006 was $4.3 million, or $0.19 per diluted share,
up 21% compared to $3.6 million of operating income reported in the
second quarter of 2006 due largely to favorable claims experience
across all of its business segments and the $0.6 million pretax
benefit related to the indemnification from the previous
shareholders of Kanawha mentioned above. The benefit ratio reported
for the Kanawha legacy business for the third quarter of 2006
improved to 75.3% compared to 82.2% reported in the second quarter
of 2006. Earned premiums reported in the Kanawha legacy business
for the third quarter of 2006 declined to $24.4 million, compared
to $25.5 million reported in the second quarter of 2006 due to
lapses of certain legacy worksite cases, the impact of an
experience rating refund adjustment on one large treaty in the
Acquired Business segment, and to the seasonality effect of policy
anniversaries of long term care policies reported in the Senior
segment. Amortization of DAC/VOBA ("deferred acquisition
costs"/"value of business acquired") increased to $1.4 million in
the third quarter of 2006 compared to $1.0 million reported in the
second quarter of 2006 due largely to the impact of increased
lapses in the worksite segment and the delayed impact of both
recently approved and pending rate increases in the long term care
block of business that tends to accelerate amortization. The
amortization of VOBA on the long term care business is expected to
moderate as the pending rate increases are approved. NEW LARGE CASE
ACTIVITY RESULTS Operating losses attributed to the new large case
activity improved to $2.2 million, or $0.09 per diluted share,
compared to a loss of $2.5 million, or $0.11 per diluted share
reported in the second quarter of 2006. Contributing factors to the
improvement include positive growth in premium revenue driven by
increased sales and the favorable impact of the reimbursement of
ReliaStar litigation expenses from our D&O carrier. These
favorable items were partially offset by increased claims on 2005
stop loss cases. Premium revenue (net of reinsurance) increased to
$9.8 million in the third quarter of 2006 compared to $5.2 million
reported in the second quarter of 2006. Third quarter 2006 sales
results (as measured by new annualized issued premiums) attributed
to the new large case activity improved to $12.8 million, compared
to $8.2 million for the second quarter of 2006. On a year-to-date
basis, sales improved to $36.8 million compared to full year 2005
sales of $12.2 million. The third quarter and year-to-date 2006
sales results include $5.3 million of annualized premium related to
the acquisition of a small block of life insurance policies that
had a small but favorable effect on third quarter earnings.
Excluding the small block acquisition, the benefit ratio reported
for the new large case activity in the third quarter increased to
71.5% (79.4% as reported) compared to 66.1% reported in the second
quarter of 2006, driven primarily by the $0.9 million of excess
stop loss claims related to certain cases written in 2005
recognized in the current quarter. NEW STATISTICAL SUPPLEMENT
AVAILABLE ON WEBSITE Substantial content changes have been made to
the Company's earnings press release this quarter concurrent with
the initial publication of a new statistical supplement on the
kmgamerica.com website. The statistical supplement can be accessed
on the website via the "Investor Relations" tab, "Financial
Reports" tab, and found under the "Quarterly & Other Reports"
section. This change shortens and simplifies the press release
while focusing attention on the overall earnings strength of and
trends in Kanawha's legacy business, while segregating the revenue
and earnings performance of the new large case activity. Much of
the financial statement and explanatory detail previously included
in the press release will now be found in the new statistical
supplement. A derivation of "normalized" earnings is provided in
the statistical supplement for the current and prior quarters to
identify and remove unusual or temporary items and to help analysts
and investors focus on recurring earnings trends. While this
reporting basis requires management's subjective judgment, the
details are identified and described so the investors and analysts
can form their own opinions. WEB CAST The Company will host an
investor and analyst web cast today, Monday, November 6, 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, November 20,
2006. 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. 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), 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.
Presentation of Earnings Results: During the first two years of
operations, the Company has separated the financial performance of
KMG America into two primary components: "Kanawha legacy activity"
and "new large case activity." This is done to highlight the
strength of, and trends in, the Kanawha business activity that
existed prior to the acquisition (Kanawha legacy activity), and
segregate these results from the financial performance related to
transforming KMG America into a new public company with a new
national marketing focus (new large case activity). The financial
results in the "new large case activity" includes all public
company costs, the cost of the new management team, and all
incremental sales and underwriting costs and product revenues
associated with sales generated by the new national sales
organization. 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 the
Company'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. The Company assumes no
obligation to publicly update or revise any forward-looking
statements. -0- *T KMG America Corporation Consolidated Statements
of Income (GAAP basis, unaudited) (in thousands, except share data
and percentages) Quarter Ended Year-to-Date
-------------------------- ------------------- 9/30/06 6/30/06
9/30/05 9/30/06 9/30/05 -------- -------- -------- ---------
--------- Operating income(1): ------------------------ Insurance
premiums, net of reinsurance $34,235 $30,662 $26,423 $ 94,708 $
79,438 Net investment income 7,453 7,619 7,089 22,278 20,542
Commission and fee income 4,018 4,117 3,773 12,354 11,012 Other
income 1,275 923 1,200 3,184 2,970 -------- -------- --------
--------- --------- Total revenues 46,981 43,321 38,485 132,524
113,962 Policyholder benefits 26,186 24,373 21,890 73,913 62,966
Insurance commissions, net of deferrals 3,246 2,924 2,239 9,151
7,282 Expenses, taxes, fees and depreciation, net of deferrals
12,578 13,274 12,058 38,704 36,637 Amortization of DAC and VOBA(2)
1,682 1,155 463 4,015 2,762 -------- -------- -------- ---------
--------- Total benefits and expenses 43,692 41,726 36,650 125,783
109,647 Operating income before income taxes 3,289 1,595 1,835
6,741 4,315 (Provision) for income taxes (1,150) (543) (586)
(2,323) (1,362) -------- -------- -------- --------- ---------
Operating income 2,139 1,052 1,249 4,418 2,953 -------- --------
-------- --------- --------- Operating income per share - diluted $
0.10 $ 0.05 $ 0.06 $ 0.20 $ 0.13 Items excluded from operating
income: ------------------------ Realized investment gains (losses)
7 (115) 278 103 324 Deferred compensation expense adjustment(3)
(181) 61 (141) (317) (141) -------- -------- -------- ---------
--------- Total items excluded from operating income, before tax
(174) (54) 137 (214) 183 Income taxes, not applicable to operating
income 61 19 (48) 75 (64) -------- -------- -------- ---------
--------- Total items excluded from operating income, after tax
(113) (35) 89 (139) 119 -------- -------- -------- ---------
--------- Net income $ 2,026 $ 1,017 $ 1,338 $ 4,279 $ 3,072
============================================== Net income per share
- diluted $ 0.09 $ 0.05 $ 0.06 $ 0.19 $ 0.14 Weighted-average
shares outstanding - diluted: 22,208 22,218 22,094 22,199 22,084
Operating income split: ------------------------ Kanawha legacy $
4,293 $ 3,557 $ 3,451 $ 11,432 $ 9,354 New large case activity
(2,153) (2,504) (2,202) (7,014) (6,401) -------- -------- --------
--------- --------- Total company $ 2,139 $ 1,052 $ 1,249 $ 4,418 $
2,953 Operating income per share - diluted ------------------------
Kanawha legacy $ 0.19 $ 0.16 $ 0.16 $ 0.51 $ 0.42 New large case
activity $ (0.09) $ (0.11) $ (0.10) $ (0.31) $ (0.29) Total company
$ 0.10 $ 0.05 $ 0.06 $ 0.20 $ 0.13 Annualized operating return on
average equity: ------------------------ Kanawha legacy activity(4)
9.7% 8.2% 8.5% 8.8% 7.8% Total company 4.4% 2.2% 2.6% 3.0% 2.1% (1)
Operating income is a non-GAAP measure, and is defined as net
income excluding realized gains (losses), except for realized gains
(losses) that are directly offset by executive deferred
compensation expense, net of income taxes. (2) DAC: deferred
acquisition costs; VOBA: value of business acquired. (3) Offsetting
expense for realized gains (losses) related to executive deferred
compensation trading activity. (4) Equity attributed to Kanawha
legacy consists of the initial allocation of IPO proceeds of $155
million increased by retained earnings from the Kanawha legacy
business. *T -0- *T KMG America Corporation and Subsidiary
Consolidated Balance Sheets (in thousands, except share data)
September 30, 2006 December 31, 2005 -------------------
----------------- (Unaudited) Assets: Cash and cash equivalents $
11,271 $ 32,583 Investments 564,631 543,307 -------------------
----------------- Total cash and investments 575,902 575,890
Accrued investment income 6,422 5,917 DAC 24,548 14,032 VOBA 70,794
72,639 Other assets(1) 144,247 128,887 -------------------
----------------- Total assets $ 821,913 $ 797,365
=================== ================= Liabilities and shareholders'
equity: Total policy and contract liabilities $ 567,862 $ 547,894
Deferred income taxes 14,404 13,061 Other liabilities(2) 49,680
48,927 ------------------- ----------------- Total liabilities
631,946 609,882 Total shareholders' equity 189,967 187,483
------------------- ----------------- Total liabilities and
shareholders' equity $ 821,913 $ 797,365 ===================
================= Book value per share: Basic $ 8.55 $ 8.47 Diluted
$ 8.55 $ 8.47 Book value per share: (excl FAS 115)(3) Basic $ 8.90
$ 8.70 Diluted $ 8.90 $ 8.70 Ending shares outstanding: Basic
22,209 22,126 Diluted(4) 22,209 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, $14.9
million of outstanding principal and accrued interest on a
subordinated note as of September 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 $7.8 million of
unrealized capital losses, net of taxes, on September 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. *T -0- *T KMG America Corporation
Statistical and Operating Data at or for the Periods Indicated -
Unaudited (in thousands, except percentages) Quarter Ended
Year-to-Date ----------------------------- -------------------
9/30/06 6/30/06 9/30/05 9/30/06 9/30/05 --------- ---------
--------- --------- --------- SALES RESULTS (issued and paid for
annualized premiums): Worksite insurance segment - Kanawha legacy:
--------------------- Life $ 448 $ 623 $ 709 $ 1,473 $ 2,005 Cancer
360 441 542 1,287 1,480 Disability income 545 633 821 1,811 3,065
Other A&H 263 276 328 749 1,302 --------- ---------
------------------- --------- Total worksite - Kanawha Legacy 1,616
1,973 2,400 5,320 7,852 Worksite insurance segment - New large case
activity: ------------------------------ Core Group Products: Life
$ 339 $ 180 $ - $ 1,670 $ - Stop loss 5,502 5,487 2,993 23,765
4,121 Disability income 269 40 - 458 - Other A&H - - - - -
Voluntary Benefit Products: Life(1) 5,519 935 219 6,576 228 Cancer
20 64 18 125 98 Disability income 695 1,165 836 3,138 1,427 Other
A&H 443 365 299 1,144 300 --------- ---------
------------------- --------- Total worksite - New large case
activity 12,787 8,236 4,365 36,876 6,174 Other Kanawha legacy
sales: Long term care 60 52 360 415 1,356 --------- ---------
------------------- --------- Total sales $ 14,463 $ 10,261 $ 7,125
$ 42,611 $ 15,382 =================================================
OTHER KMG AMERICA KEY FINANCIAL INDICATORS: Effective tax rate
34.9% 34.0% 32.2% 34.4% 31.7% Benefit ratio - total company(2):
76.5% 79.5% 82.8% 78.0% 79.3% --------------------- Kanawha legacy
only 75.3% 82.2% 83.7% 79.3% 79.5% New large case activity only
79.4% 66.1% 61.7% 73.1% 62.7% Expense ratio - total company(3):
45.8% 49.9% 48.9% 48.4% 51.6% --------------------- Kanawha legacy
only 42.8% 39.7% 37.6% 40.9% 40.8% New large case activity only
54.3% 108.5% 373.9% 82.1% 928.5% Average portfolio yield(4) 5.11%
5.25% 4.81% 5.10% 4.69% Average invested assets $544,679 $532,746
$482,435 $532,174 $477,893 Average cash/equivalents & short
terms(4) 38,813 47,363 107,271 50,746 106,424 --------- ---------
--------- --------- --------- Total average cash and invested
assets $583,492 $580,109 $589,707 $582,920 $584,318 Earned premiums
and fees - total company: $ 38,253 $ 34,779 $ 30,196 $107,062 $
90,450 --------------------- Kanawha legacy only 28,419 29,612
29,187 87,526 89,345 New large case activity only 9,834 5,167 1,009
19,536 1,105 (1) Life sales for the third quarter 2006 and nine
months year-to-date 2006 include $5.3 million of life sales related
to a small block acquisition effective September 1, 2006 (primarily
voluntary term life policies) (2) Benefit ratio is defined as total
policyholder benefits divided by total net premiums. (3) Expense
ratio is defined as commissions, expenses and amortization of
DAC/VOBA (on operating income basis) divided by earned premiums
plus commissions/fees. (4) Average portfolio yield is defined as
net investment income divided by average 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
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