KMA Kmg Amer Corp

KMG America Corporation (the �Company� or �KMG America�) (NYSE:KMA) today reported net income of $2.9 million, or $0.13 per diluted share for the fourth quarter of 2006, compared to net income for the fourth quarter of 2005 of $1.6 million, or $0.07 per diluted share. The Company reported operating income for the fourth quarter of $2.4 million, or $0.11 per diluted share, compared to operating income for the third quarter of 2006 of $2.1 million, or $0.10 per diluted share, and fourth quarter of 2005 operating income of $1.5 million, or $0.07 per diluted share. On a year-to-date basis, the Company reported net income of $7.2 million, or $0.33 per diluted share for the full year of 2006 compared to $4.7 million, or $0.21 per diluted share for the full year of 2005. On an operating income basis, the Company reported $6.8 million, or $0.31 per diluted share for the full year of 2006 compared to $4.4 million, or $0.20 per diluted share for the full year of 2005. KMG America�s Chief Executive Officer, Kenneth Kuk, commented, �Our fourth quarter operating income of $0.11 per share is above analysts� expectations as well as our internal forecast. Net income of $.13 per share also exceeded expectations. This quarter�s results mark the eighth consecutive profitable quarter since KMA�s IPO with operating earnings up more than 60% compared to the fourth quarter of 2005, 12% compared to a strong third quarter of 2006 and up 55% for the full year compared to 2005. All sales and earnings indicators are steadily progressing in the right direction.� FOURTH QUARTER FINANCIAL RESULTS Fourth quarter 2006 operating income (see discussion of non-GAAP financial measures below) improved to $2.4 million compared to third quarter 2006 operating income of $2.1 million. Fourth quarter 2006 earnings results include some largely offsetting unusual items discussed in the following paragraphs. The Company experienced favorable results in the Kanawha legacy business due in part to a lower benefit ratio in its long-term care business compared to the third quarter of 2006. Amortization of DAC/VOBA (�deferred acquisition costs�/�value of business acquired�) also improved by $1.6 million in the fourth quarter of 2006 compared to the third quarter of 2006, due in part to the impact of improved persistency in the legacy Worksite segment. The favorable persistency experienced in the fourth quarter followed somewhat poor persistency in the third quarter of 2006. The fourth quarter of 2006 also includes a pretax benefit of $1.0 million related to the discount associated with retiring and replacing the Company�s $15 million subordinated note with bank debt. Largely offsetting these favorable items is the Company�s decision to increase loss reserves on its stop loss business by $2.2 million pretax in the fourth quarter of 2006 related to claims that exceeded pro forma pricing expectations on cases written through 2006. The cases giving rise to excess stop loss reserves have since been re-priced or were not renewed. As a result of the compressed margins in the stop loss market to-date, the Company has decided to increase its pro forma loss ratio on its stop loss business starting in the first quarter of 2007. While the margins available in the stop loss market have not yet materialized at pricing expectations, the Company does see signs of the market firming heading into 2007 which the Company believes should result in more favorable margins going forward. 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 fourth quarter 2006 results compared to the third quarter 2006 results. KANAWHA LEGACY ACTIVITY RESULTS Operating income attributed to the Kanawha legacy business for the fourth quarter of 2006 was $5.7 million, or $0.26 per diluted share, up 33% compared to $4.3 million, or $0.19 per diluted share, reported in the third quarter of 2006. The increase was due primarily to the favorable results in the Company�s long term care book of business and a turnaround in persistency in the Company�s Worksite segment. The benefit ratio reported for the Kanawha legacy business for the fourth quarter of 2006 improved to 72.0% compared to 75.3% reported in the third quarter of 2006 due primarily to the favorable claims and reduced policy reserve increases in the Senior segment�s long term care business, including a $0.5 million one-time pretax correction to certain long term care policy reserve factors in the fourth quarter. Earned premiums reported in the Kanawha legacy business for the fourth quarter of 2006 were $24.4 million, essentially flat compared to the third quarter of 2006 as increases attributed to the impact of rate increases in the Senior segment were largely offset by declining premium in the legacy Worksite segment. It should be noted that reported premium in the legacy Worksite segment in the third quarter included a one-time $0.3 million benefit related to the indemnification from the previous owners of Kanawha Insurance Company. Amortization of DAC/VOBA declined to a negative $0.2 million in the fourth quarter of 2006 compared to an increase of $1.4 million in the third quarter of 2006 due in part to the impact of a turnaround in persistency in the legacy Worksite segment that reduced the amortization of DAC/VOBA in the current quarter after accelerated amortization in the third quarter of 2006. Additionally, amortization of VOBA relating to long term care policies was reduced by $0.5 million pretax in the fourth quarter as the result of a one-time correction to the persistency adjustment. While the Kanawha legacy business continues to provide a stable earnings pattern, it should be noted that earnings attributed to this business are generally stronger in the third and fourth quarters of a calendar year when compared to the first and second quarters of the year. This is due primarily to the distribution of long term care policy anniversaries that are weighted towards the first half of the year and the related impact of the timing of reserve increases. Also contributing to this seasonal earnings pattern are worksite sales and related earned premium revenue which tend to be weighted toward the end of the year. NEW LARGE CASE ACTIVITY RESULTS Operating losses attributed to the new large case activity increased to $3.4 million, or $0.15 per diluted share, compared to a loss of $2.2 million, or $0.09 per diluted share reported in the third quarter of 2006 due primarily to the $2.2 million increased loss reserves reported in the fourth quarter of 2006 related to adverse claims development in stop loss cases written through 2006, compared to the $0.9 million additional loss reserve added in the third quarter of 2006. Premium revenue (net of reinsurance) for the fourth quarter of 2006 was $8.8 million compared to $9.8 million reported in the third quarter of 2006. The third quarter of 2006 premium included a $2.7 million initial reserve transfer related to the acquisition of a small block of life insurance policies on September 1, 2006. Excluding the impact of this initial reserve transfer, premium revenue for the fourth quarter of 2006 would have increased by $1.7 million, or 24% compared to the third quarter of 2006 due to increased sales activity. Fourth quarter 2006 sales results (as measured by new annualized issued premiums) attributed to the new large case activity were $8.4 million, compared to $12.8 million reported in the third quarter of 2006, which included $5.3 million of annualized premium related to the small acquisition mentioned above. Excluding the small acquisition, voluntary benefit life sales for the fourth quarter of 2006 increased to $2.0 million compared to third quarter sales of $0.2 million. On a year-to-date basis, sales improved to $45.3 million compared to full year 2005 sales of $12.2 million. The benefit ratio reported for the new large case activity in the fourth quarter of 2006 increased to 94.6% compared to the 79.4% reported in the third quarter of 2006. The benefit ratio for both periods were adversely impacted by increased loss reserves related to excess stop loss claims associated with historical cases written through 2006, which amounted to increased claim reserves of $2.2 million and $0.9 million in the fourth and third quarters of 2006, respectively. Expenses for the fourth quarter of 2006 were $5.3 compared to $4.1 million reported in the third quarter of 2006, an increase of $1.2 million. Contributing factors include increased litigation expenses and increased production-related bonus accruals related to full year sales, which together added $1.1 million pretax to expenses in the fourth quarter. The Company booked a non-recurring favorable benefit of $1.0 million pretax in the fourth quarter of 2006 related to the discount associated with retiring and replacing the Company�s $15 million subordinated note with bank debt. This discount was recorded in revenue as a gain on the extinguishment of debt. STATISTICAL SUPPLEMENT AVAILABLE ON COMPANY WEBSITE The statistical supplement can be accessed on the Company�s website of www.kmgamerica.com via the �Investor Relations� tab, �Financial Reports� tab, and found under the �Quarterly & Other Reports� section. A derivation of �normalized� earnings (a non-GAAP measure) 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 in detail so the investors and analysts can form their own opinions. WEB CAST The Company will host an investor and analyst web cast today, Monday, March 12, 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, March 26, 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 America 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� include 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 (unaudited) (in thousands, except share data and percentages) � � Quarter Ended Year-to-Date 12/31/06� 9/30/06� 12/31/05� 12/31/06� 12/31/05� Operating income (1): � Insurance premiums, net of reinsurance $ 33,261� $ 34,235� $ 27,450� $ 127,969� $ 106,888� Net investment income 7,668� 7,453� 7,203� 29,946� 27,745� Commission and fee income 4,151� 4,018� 3,553� 16,505� 14,565� Gain on extinguishment of debt 1,021� -� -� 1,021� -� Other income 1,267� 1,275� 898� 4,451� 3,868� Total revenues 47,368� 46,981� 39,104� 179,892� 153,066� � Policyholder benefits 25,929� 26,186� 21,322� 99,842� 84,288� Insurance commissions, net of deferrals 3,574� 3,246� 2,353� 12,725� 9,635� Expenses, taxes, fees and depreciation, net of deferrals 14,085� 12,578� 12,530� 52,789� 49,167� Amortization of DAC and VOBA (2) 91� 1,682� 706� 4,106� 3,468� Total benefits and expenses 43,679� 43,692� 36,911� 169,462� 146,558� � Operating income before income taxes 3,689� 3,289� 2,193� 10,430� 6,508� (Provision) for income taxes (1,303) (1,150) (730) (3,625) (2,092) Operating income 2,386� 2,139� 1,463� 6,805� 4,416� � Operating income per share - diluted $ 0.11� $ 0.10� $ 0.07� $ 0.31� $ 0.20� � Items excluded from operating income: Realized investment gains (losses) 1,115� 7� 34� 1,218� 358� Deferred compensation expense adjustment (3) (264) (181) (113) (581) (254) Cumulative effect of accounting changes -� -� 271� -� 271� Total items excluded from operating income, before tax 851� (174) 192� 637� 375� Income taxes, not applicable to operating income (298) 61� (67) (223) (131) Total items excluded from operating income, after tax 553� (113) 125� 414� 244� Net income $ 2,939� � $ 2,026� � $ 1,588� � $ 7,219� � $ 4,660� � Net income per share - diluted $ 0.13� $ 0.09� $ 0.07� $ 0.33� $ 0.21� � Weighted-average shares outstanding - diluted: 22,213� 22,208� 22,110� 22,202� 22,091� � Operating income split: Kanawha legacy $ 5,747� $ 4,293� $ 3,685� $ 17,179� $ 13,039� New large case activity (3,361) (2,153) (2,222) (10,374) (8,623) Total company $ 2,386� $ 2,139� $ 1,463� $ 6,805� $ 4,416� � Operating income per share - diluted Kanawha legacy $ 0.26� $ 0.19� $ 0.17� $ 0.77� $ 0.59� New large case activity $ (0.15) $ (0.09) $ (0.10) $ (0.46) $ (0.39) Total company $ 0.11� $ 0.10� $ 0.07� $ 0.31� $ 0.20� � Annualized operating return on average equity: Kanawha legacy activity (4) 12.6% 9.7% 8.9% 9.7% 8.1% Total company 4.8% 4.4% 3.1% 3.5% 2.3% � (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) � � � December 31, 2006 December 31, 2005 (Unaudited) Assets: Cash and cash equivalents $ 21,744� $ 32,583� Investments 558,336� 543,307� Total cash and investments 580,080� 575,890� Accrued investment income 6,503� 5,917� DAC 28,454� 14,032� VOBA 70,766� 72,639� Other assets (1) 145,911� 128,887� Total assets $ 831,714� $ 797,365� � Liabilities and shareholders' equity: Total policy and contract liabilities $ 572,364� $ 547,894� Deferred income taxes 14,735� 13,061� Other liabilities (2) 52,563� 48,927� Total liabilities 639,662� 609,882� Total shareholders' equity 192,052� 187,483� Total liabilities and shareholders' equity $ 831,714� $ 797,365� � Book value per share: Basic $ 8.65� $ 8.47� Diluted $ 8.61� $ 8.47� � Book value per share: (excl FAS 115) (3) Basic $ 8.96� $ 8.70� Diluted $ 8.93� $ 8.70� � Ending shares outstanding: Basic 22,212� 22,126� Diluted (4) 22,299� 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, $14.1 million of outstanding bank debt. � (3) The book values are recalculated excluding $7.0 million of unrealized capital losses, net of taxes, on December 31, 2006. Unrealized capital losses were $5.0 million, net of taxes, on December 31, 2005. � (4) Diluted shares were calculated using the treasury stock method. KMG America Corporation Statistical and Operating Data at or for the Periods Indicated - Unaudited (in thousands, except percentages) � Quarter Ended Year-to-Date 12/31/06� 9/30/06� 12/31/05� 12/31/06� 12/31/05� SALES RESULTS (issued and paid for annualized premiums): � Worksite insurance segment - Kanawha legacy: Life $ 1,088� $ 448� $ 448� � $ 2,561� $ 2,453� Cancer 487� 360� 504� � 1,774� 1,984� Disability income 790� 545� 1,249� � 2,601� 4,314� Other A&H 1,113� 263� 1,098� � 1,862� 2,400� Total worksite - Kanawha Legacy 3,478� 1,616� 3,299� � 8,798� 11,151� � Worksite insurance segment - New large case activity: Core Group Products: Life $ 58� $ 339� $ -� � $ 1,728� $ -� Stop loss 4,626� 5,502� 4,124� � 28,391� 8,245� Disability income 3� 269� -� � 461� -� Other A&H -� -� -� � -� -� Voluntary Benefit Products: Life (1) 2,026� 5,519� 167� � 8,602� 395� Cancer 260� 20� 125� � 385� 223� Disability income 899� 695� 1,331� � 4,037� 2,758� Other A&H 516� 443� 244� � 1,660� 544� Total worksite - New large case activity 8,387� 12,787� 5,991� � 45,263� 12,165� � Other Kanawha legacy sales: Long term care 45� 60� 260� � 460� 1,616� � Total sales $ 11,910� � $ 14,463� � $ 9,550� � $ 54,522� � $ 24,932� � OTHER KMG AMERICA KEY FINANCIAL INDICATORS: � Effective tax rate 35.3% 34.9% 33.4% 34.8% 32.3% � Benefit ratio - total company (2): 78.0% 76.5% 77.7% 78.0% 78.9% Kanawha legacy only 72.0% 75.3% 78.8% 77.5% 79.3% New large case activity only 94.6% 79.4% 62.3% 79.8% 62.5% � Expense ratio - total company (3): 47.4% 45.8% 50.3% 48.2% 51.3% Kanawha legacy only 38.0% 42.8% 39.4% 40.2% 40.4% New large case activity only 78.0% 54.3% 225.1% 80.8% 490.4% � Average portfolio yield (4) 5.19% 5.11% 4.88% 5.12% 4.75% � Average invested assets $ 552,980� $ 544,679� $ 495,358� $ 536,738� $ 484,763� Average cash/equivalents & short terms (4) 37,946� 38,813� 95,232� 48,390� 99,406� Total average cash and invested assets $ 590,925� $ 583,492� $ 590,591� $ 585,129� $ 584,169� � Earned premiums and fees - total company: $ 37,412� $ 38,253� $ 31,003� $ 144,474� $ 121,453� Kanawha legacy only 28,599� 28,419� 29,179� 116,125� 118,524� New large case activity only 8,813� 9,834� 1,824� 28,349� 2,929� � (1) Life sales for the third quarter 2006 and twelve 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).