KMG America Corporation (the �Company� or �KMG America�) (NYSE:KMA)
today provided a brief update on the progress of the review of its
strategic alternatives and reported results for the second quarter
of 2007. UPDATE ON STRATEGIC ALTERNATIVES REVIEW PROCESS As
previously disclosed, the Company retained Keefe Bruyette &
Woods, Inc. (�KBW�) to advise management and the Board of Directors
regarding strategic alternatives, including the possible sale or
merger of the Company. The process is underway and advanced
negotiations are occurring. �The review of strategic alternatives
is progressing well,� KMG America�s CEO Kenneth E. Kuk said. �We
are currently in negotiations and expect to provide an update as to
the ultimate outcome within the next few weeks. While we remain
optimistic, we must reiterate that there are no guarantees that
this process will result in a transaction.� SECOND QUARTER
FINANCIAL RESULTS The Company today reported operating income of
$0.6 million, or $0.03 per diluted share, for Q2 2007 compared to
Q2 2006 operating income of $1.1 million, or $0.05 per diluted
share. The analysts� consensus estimate for Q2 2007 was $0.06 per
share. The Company reported net income for Q2 2007 of $0.6 million,
or $0.03 per diluted share, compared to net income in Q2 2006 of
$1.0 million, or $0.05 per diluted share. Q2 2007 operating results
reflect two unusual items including an increase in tax liabilities
of $0.4 million, or $0.02 per diluted share, due to the Company�s
decision not to implement a corporate structure change pending the
completion of the review of strategic alternatives. As a result,
the Company was unable to offset tax losses incurred at the holding
company. The second item relates a one-time pretax charge of $0.3
million, or $.01 per diluted share, as a reserve for a potential
refund of reinsurance premiums related to possible over-billings
extending back to 2001. Mr. Kuk commented, �Excluding the impact of
the two unusual items, operating earnings would have been $0.06 per
share, consistent with the analysts� consensus estimate.
Additionally, we are making good progress on several important
fronts. Our sales channels continue to produce at a reasonable pace
despite the uncertainties created by our announcement to seek
strategic alternatives. Our long term care block continues to
perform at a satisfactory level and our stop loss claims pattern
appears to have stabilized consistent with actions implemented in
the first quarter.� 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 financial performance of Kanawha�s legacy business period to
period. This earnings derivation is described later in �Notes on
Financial Presentation.� KANAWHA LEGACY RESULTS Q2 2007 operating
income attributed to the Kanawha legacy business was $3.3 million,
or $0.15 per diluted share, a decrease from $3.6 million, or $0.16
per diluted share, in Q2 2006. The decline is due primarily to a
$0.3 million pretax charge for the potential reinsurance premium
refunds discussed above and a reduction in earned premiums that was
largely offset by favorable investment income. Earned premiums
reported in Q2 2007 for the Kanawha legacy business were $24.4
million compared to $25.5 million in Q2 2006, due to lower premiums
in the legacy Worksite and Acquired businesses. The Acquired
business premium for Q2 2007 included the $0.3 million reduction
due to the reinsurance premium refund accrual mentioned earlier.
These lower premiums were partially offset by a $0.4 million
increase in Senior segment premiums which was largely due to the
impact of approved rate increases. Investment income for Q2 2007
improved to $8.4 million compared to $7.6 million in Q2 2006, due
primarily to the impact of the investment proceeds from the
issuance of $35 million of trust preferred securities in late
March, 2007. This increase in investment income was largely offset
by a related increase in interest expense. The benefit ratio
reported for the Kanawha legacy business for Q2 2007 increased to
84.6% compared to 82.2% in Q2 2006. The legacy Worksite business
experienced a benefit ratio of 75.2% in Q2 2007 compared to 70.4%
in Q2 2006, due to reduced premiums and a slight increase in
benefit costs. The Senior segment produced a second quarter 2007
benefit ratio of 78.8% compared to 78.3% in the second quarter of
2006. While incurred claims in the Senior segment were down in Q2
2007 compared to Q2 2006, benefit costs increased as a result of
increased policy reserves. The benefit ratios reported in the
Acquired segment are impacted by experience refunds within certain
reinsurance treaties that reduce premiums and policyholder benefits
equally. Excluding the impact of these refunds, Q2 2007 benefit
ratio was 186.8% compared to 174.9% in Q2 2006, reflecting in part,
the impact of the reinsurance premium refund accrual of $0.3
million discussed above. Excluding the impact of this premium
refund accrual, the benefit ratio for the Acquired segment for Q2
2007 would have been 164.6% reflecting overall improved claims
experience. The high benefit ratios reported in the Acquired
segment reflect the fact that much of this business is paid up
relative to current and future premium. NEWER LARGE CASE ACTIVITY
RESULTS Operating losses attributed to the newer large case
activity were $2.6 million, or $0.12 per diluted share, in Q2 2007,
compared to $2.5 million, or $0.11 per diluted share, in Q2 2006.
The modest increase in operating losses was due to a higher tax
liability related to the inability to establish a deferred tax
asset for Q2 2007 losses incurred at the holding company which
contributed to a $0.4 million operating income reduction in Q2
2007, or $0.02 per diluted share. Premium revenue (net of
reinsurance) for Q2 2007 was $17.3 million compared to $5.2 million
in Q2 2006 due to the cumulative growth of sales activity across
all lines. Q2 2007 sales results (as measured by new annualized
issued premiums) attributed to the new large case activity were
$4.5 million compared to $8.2 million reported in Q2 2006. Q2 2007
was a transitory quarter for the new large case sales channel due
to the disruption caused by the negative actions taken by the
rating agencies and the de-emphasis of stop loss sales activity
implemented to improve the overall sales mix. Voluntary benefit
product sales for Q2 2007 were $2.1 million compared to Q1 2007
sales of $1.5 million, and $2.5 million in Q2 2006. Stop loss sales
as a percent of total sales attributed to the new large case
channel for Q2 2007 declined to 54% compared to 86% in Q1 2007 and
67% in Q2 2006, reflecting the Company�s increased focus on
voluntary and group product sales through the worksite. The benefit
ratio reported for the new large case activity in Q2 2007 was 83.3%
compared to the 66.1% in Q2 2006, due primarily to the increased
claim reserve assumptions in the stop loss business that were
implemented in Q1 2007. Expenses for Q2 2007 decreased to $4.5
million compared to $4.7 million in the prior year�s quarter, due
to reduced litigation expenses and improved expense management.
STATISTICAL SUPPLEMENT AVAILABLE ON COMPANY WEBSITE The statistical
supplement can be accessed later today 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. WEBCAST The Company will host an investor and analyst
webcast today, Tuesday, August 7, 2007, at 10:00 a.m. Eastern. The
webcast and replay will be available via: www.kmgamerica.com,
analyst/investor tab � for all investors; www.streetevents.com �
for institutional investors; and www.earnings.com � for retail
investors. The replay will be available starting approximately two
hours after the original webcast. The replay will be available
through Tuesday, August 21, 2007. 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: The Company has separated the
financial performance of KMG America into two primary components:
�Kanawha legacy activity� and �newer large case activity�. This is
done to highlight the financial performance and trends in the
Kanawha business activity that existed prior to the 2004
acquisition (Kanawha legacy activity), and segregate these results
from the financial performance related to transforming KMG America
into a public company with a national marketing focus (newer large
case activity). The financial results in the �newer 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 6/30/2007 6/30/2006
6/30/2007 6/30/2006 Operating income (1): Insurance premiums, net
of reinsurance $ 41,687 $ 30,662 $ 81,603 $ 60,473 Net investment
income 8,377 7,619 16,253 14,825 Commission and fee income 4,072
4,117 8,240 8,336 Other income � 1,193 � � 923 � � 2,252 � � 1,909
� Total revenues 55,329 43,321 108,348 85,543 � Policyholder
benefits 35,054 24,373 72,597 47,727 Insurance commissions, net of
deferrals 4,022 2,924 8,174 5,905 Expenses, taxes, fees and
depreciation, net of deferrals 13,474 13,274 27,906 26,126
Amortization of DAC and VOBA (2) � 1,108 � � 1,155 � � 3,189 � �
2,333 � Total benefits and expenses 53,658 41,726 111,866 82,091 �
Operating income (loss) before income taxes 1,671 1,595 (3,518 )
3,452 (Provision) for income taxes � (1,063 ) � (543 ) � (6,064 ) �
(1,173 ) Operating income (loss) � 608 � � 1,052 � � (9,582 ) �
2,279 � � Operating income (loss) per share - diluted $ 0.03 $ 0.05
$ (0.43 ) $ 0.10 � Items excluded from operating income: Realized
investment gains (losses) 244 (115 ) 191 96 Deferred compensation
expense adjustment (3) � (320 ) � 61 � � (378 ) � (136 ) Total
items excluded from operating income, before tax (76 ) (54 ) (187 )
(40 ) Income taxes, not applicable to operating income � 27 � � 19
� � 65 � � 14 � Total items excluded from operating income, after
tax � (49 ) � (35 ) � (122 ) � (26 ) Net income (loss) $ 559 � $
1,017 � � $ (9,704 ) � $ 2,253 � � Net income (loss) per share -
diluted $ 0.03 $ 0.05 $ (0.44 ) $ 0.10 � Weighted-average shares
outstanding - diluted: 22,214 22,218 22,213 22,197 � Operating
income split: Kanawha legacy $ 3,252 $ 3,557 $ 5,966 $ 7,139 Newer
large case activity � (2,643 ) � (2,504 ) � (15,548 ) � (4,860 )
Total company $ 608 $ 1,052 $ (9,582 ) $ 2,279 � Operating income
per share - diluted Kanawha legacy $ 0.15 $ 0.16 $ 0.27 $ 0.32
Newer large case activity $ (0.12 ) $ (0.11 ) $ (0.70 ) $ (0.22 )
Total company $ 0.03 $ 0.05 $ (0.43 ) $ 0.10 � Annualized operating
return on average equity: Kanawha legacy activity (4) 6.8 % 8.2 %
6.3 % 8.3 % Total company 1.3 % 2.2 % -10.1 % 2.4 % � (1) Operating
income is a non-GAAP measure, and 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. (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 business consists of the initial allocation of 2004
IPO proceeds of $155 million increased by retained KMG America
Corporation and Subsidiary Consolidated Balance Sheets (in
thousands, except share data) � � � June 30, 2007 December 31, 2006
(Unaudited) Assets: Cash and cash equivalents $ 26,797 $ 21,744
Investments � 587,028 � 558,336 Total cash and investments 613,825
580,080 Accrued investment income 6,789 6,503 DAC 36,044 28,454
VOBA 69,143 70,766 Other assets (1) � 144,483 � 145,911 Total
assets $ 870,284 $ 831,714 � Liabilities and shareholders' equity:
Total policy and contract liabilities $ 596,472 $ 572,364 Deferred
income taxes 9,940 14,735 Other liabilities (2) � 88,835 � 52,563
Total liabilities 695,247 639,662 Total shareholders' equity �
175,037 � 192,052 Total liabilities and shareholders' equity $
870,284 $ 831,714 � Book value per share: Basic $ 7.88 $ 8.65
Diluted $ 7.88 $ 8.61 � Book value per share: (excl FAS 115) (3)
Basic $ 8.56 � $ 8.96 Diluted $ 8.56 $ 8.93 � Ending shares
outstanding: Basic 22,216 22,212 Diluted (4) 22,216 22,299 � � (1)
Other assets include reinsurance balances recoverable, real estate
and equipment, federal income tax recoverable and other assets. (2)
Other liabilities include $38.6 million of accounts payable and
accrued expenses, $14.1 million of outstanding bank debt and $36.1
million of subordinated debt securities. (3) The book values are
recalculated excluding $15.1 million of unrealized capital losses,
net of taxes, on June 30, 2007. Unrealized capital losses were $7.1
million, net of taxes, on December 31, 2006. (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 6/30/2007 6/30/2006 6/30/2007 6/30/2006 SALES
RESULTS (issued and paid for annualized premiums): � Worksite
insurance segment - Kanawha legacy: Life $ 777 $ 623 $ 1,611 $
1,025 Cancer 394 441 860 927 Disability income 365 633 893 1,266
Other A&H � 296 � � 276 � � 658 � � 486 � Total worksite -
Kanawha Legacy 1,832 1,973 4,022 3,704 � Worksite insurance segment
- Newer large case activity: Core Group Products: Life (43 ) 180
1,683 1,331 Stop loss 2,406 5,487 29,505 18,263 Disability income
38 40 1,391 189 Other A&H - - - - Voluntary Benefit Products:
Life 648 935 986 1,057 Cancer 73 64 132 105 Disability income 999
1,165 1,820 2,443 Other A&H � 341 � � 365 � � 578 � � 701 �
Total worksite - New large case activity 4,462 8,236 36,095 24,089
� Other Kanawha legacy sales: Long term care � 79 � � 52 � � 122 �
� 355 � � Total sales $ 6,373 � � $ 10,261 � � $ 40,239 � � $
28,148 � � OTHER KMG AMERICA KEY FINANCIAL INDICATORS: � Effective
tax rate 64.9 % 34.0 % -161.9 % 34.0 % � Benefit ratio - total
company (1): 84.1 % 79.5 % 89.0 % 78.9 % Kanawha legacy only 84.6 %
82.2 % 84.2 % 81.2 % Newer large case activity only 83.3 % 67.7 %
95.9 % 66.8 % � Expense ratio - total company (2): 40.7 % 49.9 %
43.7 % 49.9 % Kanawha legacy only 42.9 % 39.7 % 44.0 % 40.0 % Newer
large case activity only 36.9 % 108.5 % 43.2 % 110.2 % � Average
portfolio yield (3) 5.29 % 5.25 % 5.25 % 5.10 % � Average invested
assets $ 583,254 $ 532,746 $ 572,824 $ 525,911 Average
cash/equivalents & short term assets (3) � 50,473 � � 47,363 �
� 46,639 � � 55,353 � Total average cash and invested assets $
633,728 $ 580,109 $ 619,463 $ 581,264 � Earned premiums and fees -
total company: $ 45,759 $ 34,779 $ 89,843 $ 68,809 Kanawha legacy
only 28,466 29,612 56,701 59,107 Newer large case activity only
17,293 5,167 33,142 9,702 � (1) Benefit ratio is defined as total
policyholder benefits divided by total net premiums. (2) Expense
ratio is defined as commissions, expenses and amortization of
DAC/VOBA (on operating income basis) divided by earned premiums
plus commissions/fees. (3) Average portfolio yield is defined as
net investment income divided by average invested assets, excluding
the impact of FAS 115 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 in securities that mature in less than 2 years.
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