KMA Kmg Amer Corp

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.