KMG America Reports Net Income for Third Quarter 2005.MINNEAPOLIS Minneapolis (mĭn'ēăp`əlĭs), city (1990 pop. 368,383), seat of Hennepin co., E Minn., at the head of navigation on the Mississippi River, at St. Anthony Falls; inc. 1856. -- KMG KMG Kerr-McGee KMG Koi Mil Gaya (Hindi movie) KMG Kunming, China - Kunming (Airport Code) KMG Kent Messenger Group (UK) America America [for Amerigo Vespucci], the lands of the Western Hemisphere—North America, Central (or Middle) America, and South America. The world map published in 1507 by Martin Waldseemüller is the first known cartographic use of the name. Corporation (NYSE NYSE See: New York Stock Exchange :KMA KMA Kiss My Ass KMA Korea Meteorological Administration KMA Koninklijke Militaire Academie (Royal Military Academy; Netherlands) KMA Knoxville Museum of Art KMA Kentucky Medical Association KMA Korean Medical Association ) today reported net income for the third quarter of 2005 of $1.3 million, or $.06 per diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. share, and operating income Operating Income The profit realized from a business' own operations. Notes: This would not include income from things such as investments in other firms. Also referred to as operating profit or recurring profit. of $1.2 million, or $.06 per diluted share. KMG America Chairman, President and Chief Executive Officer, Kenneth Kuk KUK Kurukshetra University (India) KUK Kultur- und Kongreßzentrum (German) KUK Krebs Und Kiefer (German consulting engineers) KUK Kaiserlich Und Königlich , commenting on these results said, "We are satisfied with our third quarter earnings results, which are slightly better than the consensus analyst estimate of $.05 per share. Additionally, as of early October October: see month. , we have successfully achieved our full year sales representative hiring objective. We are actively marketing our new stop loss and group life products, and we have good early sales results to report." Mr. Kuk added, "The third quarter results include $3.9 million of incremental costs Costs which are additional costs to the Service appropriations that would not have been incurred absent support of the contingency operation. See also financial management. attributable attributable emanating from or pertaining to attribute. attributable proportion see attributable risk (below). attributable risk to new KMG America activity compared to $4.0 million in the second quarter of 2005. We produced $1.4 million of incremental Additional or increased growth, bulk, quantity, number, or value; enlarged. Incremental cost is additional or increased cost of an item or service apart from its actual cost. direct premiums in the third quarter related to sales from the new sales distribution channel." KMG America (the "Company") previously announced its intention to hire at least 20 new sales representatives in 2005. That objective was accomplished in early October and the Company now has sales representatives in 16 major markets across America. Sales representative hiring will resume shortly after January January: see month. 1, 2006, which will permit sales management Sales Management Role and Goal Importance of sales management is critical for any commercial organization. Expanding business in not possible without increasing sales volumes, and effective sales management goal is to organize sales team work in such a manner that ensures a to focus on successfully concluding 2005 and assisting with the important January 1 policy renewal period. Sales expectations from the new sales force for full year 2005 should exceed the original estimate of $13 million but may fall short of the $20 million objective established more recently. The Company continues to be optimistic op·ti·mist n. 1. One who usually expects a favorable outcome. 2. A believer in philosophical optimism. op about January 1 policy renewals. The Company views productivity per sales representative as a key early indicator Indicator Anything used to predict future financial or economic trends. Notes: In the context of technical analysis, an indicator is a mathematical calculation based on a securities price and/or volume. The result is used to predict future prices. of whether KMG America is successfully executing its business strategy. There is strong evidence that Company sales personnel employed for over six months are producing annualized annualized Of or relating to a variable that has been mathematically converted to a yearly rate. Inflation and interest rates are generally annualized since it is on this basis that these two variables are ordinarily stated and compared. new premium at the expected levels. This is particularly noteworthy considering the limited product menu available and the fact that the important January renewal sales period has not yet been available to them. Product development is progressing on schedule with the stop loss insurance product approved in most of the Company's 45 targeted states; group life insurance is approved in over half of the targeted states; and the new group disability insurance products have been filed and are being considered by the states for approval. The focus now is on improving the array of voluntary products available through the Company's primary subsidiary, Kanawha Kanawha (kənô`wə), principal river of W.Va., 97 mi (156 km) long, formed by the confluence of the New and Gauley rivers, S central W.Va., and flowing NW to the Ohio River at Point Pleasant; Charleston, W.Va. Insurance Company ("Kanawha"). THIRD QUARTER FINANCIAL RESULTS For the third quarter of 2005, KMG America reported net income of $1.3 million, or $.06 per diluted share, compared to net income for the second quarter of 2005 of $0.7 million, or $.03 per diluted share, and third quarter 2004 net income of $3.6 million (third quarter 2004 net income includes realized gains Realized Gain A gain resulting from selling an asset at a price higher than the original purchase price. Notes: There may be tax consequences for a realized profit. of $3.0 million, net of taxes). On an operating income basis, third quarter 2005 income was $1.2 million, or $.06 per diluted share, compared to operating income of $0.7 million, or $.03 per diluted share, in the second quarter of 2005, and $3.2 million, or $.14 per diluted share, in the third quarter of 2004 on a pro forma As a matter of form or for the sake of form. Used to describe accounting, financial, and other statements or conclusions based upon assumed or anticipated facts. The phrase pro forma basis (pro forma operating income in the third quarter of 2004 is adjusted to reflect the application of purchase accounting consistent with the earnings measurement basis in 2005). The primary reasons for the decreased earnings in the third quarter 2005 to third quarter 2004 comparisons continue to be the increased expenses from the new KMG America activity related to building the new sales and underwriting Underwriting 1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). 2. The process of issuing insurance policies. organization, and the additional costs and infrastructure required to operate as a public company. These new expenses (before deferrals of acquisition costs related to voluntary product sales) totaled $3.9 million and $4.0 million in the third and second quarters of 2005, respectively. Partially offsetting these increased expenses are incremental direct premiums related to the sales activity from the new KMG America distribution channel of $1.4 million and $0.1 million in the third and second quarters of 2005, respectively. Operating after tax losses attributed to the KMG America new activity were $2.2 million and $2.6 million in the third and second quarters of 2005, respectively. Excluding the earnings results attributable to KMG America new activity, third quarter 2005 operating income would be $3.5 million, or $.16 per diluted share, compared to $3.3 million, or $.15 per diluted share, in the second quarter 2005, and third quarter 2004 pro forma operating income of $3.2 million, or $.14 per diluted share. The Company believes that excluding the earnings results of the KMG America new activity provides a more meaningful comparison of the trends in earnings produced by Kanawha's legacy business, which serves to fund the initial outlay of expenses associated with building the new sales and underwriting organization and the infrastructure needed to operate as a public company. The more notable earnings drivers are discussed below where the third quarter of 2005 results are compared to the second quarter of 2005 results. Premium Revenue Premiums for the third quarter of 2005 were $26.4 million, down $0.4 million compared to $26.8 million in the second quarter of 2005. This trend is largely due to sharply increased lapses resulting from steep rate increases on a specific worksite short term disability income policy form, as well as a seasonality effect in long term care premium from quarter to quarter. Partially offsetting this decline is the emergence of incremental premiums related to the sales activity of the KMG America new sales distribution channel that produced $1.4 million of new direct premiums ($1.0 million net of reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. ) in the current quarter. Investment Income Investment income in the third quarter of 2005 was $7.1 million, an increase of $0.3 million compared to $6.8 million in the second quarter of 2005. The investment portfolio yield in the third quarter of 2005 was 4.81% based on average cash and invested assets, an improvement from 4.69% in the second quarter of 2005. As a result of the capital raised in the IPO (Initial Public Offering) The first time a company offers shares of stock to the public. While not a computer term per se, many founders, employees and insiders of computer companies have found this acronym more exciting than any tech term they ever heard. in late December December: see month. of 2004 and other cash raised by Kanawha from targeted dispositions of certain securities in its investment portfolio late in the third quarter of 2004, the Company had total cash and cash equivalents of about $130 million at the end of 2004. Throughout 2005, the Company has remained liquid and short as a result of our decision to target shorter term investments where we perceive per·ceive v. 1. To become aware of directly through any of the senses, especially sight or hearing. 2. To achieve understanding of; apprehend. more value currently. These short term holdings amount to about $80 million today after redeploying approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. $30 million during the month of October into longer term investments with yields ranging from 5.60% to 5.90%, and durations from 7 to 8.5 years. The Company expects to continue to redeploy re·de·ploy tr.v. re·de·ployed, re·de·ploy·ing, re·de·ploys 1. To move (military forces) from one combat zone to another. 2. these shorter term assets into longer term assets if interest rates continue to rise as we expect. Policyholder Policyholder An individual who owns an insurance policy. Benefits Policyholder benefits for the third quarter of 2005 were $21.9 million, an increase of $1.2 million compared to $20.7 million in the second quarter of 2005. The total Company benefit ratio was 82.8% in the third quarter of 2005 compared to 77.0% in the second quarter of 2005. The benefit ratio for the Company as a whole in the third quarter reflects higher benefit ratios across all legacy segments, especially in the legacy worksite activity and acquired segment generally reflecting unfavorable claims experience in certain areas. The benefit ratio applicable to the legacy worksite activity was also adversely affected by the impact of two rate increases within the past year on one disability income policy form that caused premiums to decline rapidly in the third quarter, as noted above. The benefit ratio for the Senior segment increased because premium revenue declined as noted above; however, policyholder benefits did decrease slightly from the second quarter. The benefit ratio for the Acquired Business segment increased primarily because of increased high amount claims in the third quarter on one treaty reinsuring individual major medical insurance. The benefit ratio associated with the new KMG America worksite activity was 61.7% in the third quarter of 2005 compared to 72.9% in the second quarter of 2005. The decline between quarters is related to product mix, with relatively more voluntary product premium booked in the third quarter. The lower benefit ratios reported for the new KMG America worksite activity compared to the legacy worksite activity reflects the lower claims rate on newly issued business with level premiums over the life of the policies. Expenses, taxes, licenses and fees General insurance expenses, taxes, licenses and fees (before deferrals of policy acquisition costs) for the third quarter of 2005 were $14.4 million, a decrease of $0.7 million compared to $15.1 million in the second quarter of 2005. Third quarter of 2005 expenses declined compared to the second quarter of 2005, primarily due to $0.3 million of lower incentive compensation accrual accrual, n continually recurring short-term liabilities. Examples are accrued wages, taxes, and interest. , $0.2 million of lower legal and audit fees and favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. group insurance expenses resulting from improved claims experience in our self insured The person who obtains or is otherwise covered by insurance on his or her health, life, or property. The insured in a policy is not limited to the insured named in the policy but applies to anyone who is insured under the policy. insured n. plan of $0.3 million. The Company completed an internal review of the acquisition costs that are being deferred and made some adjustments relative to historical deferral deferral - Waiting for quiet on the Ethernet. policies at Kanawha to reflect the new business model and the more rapid growth in new business expected. These adjustments impact the comparisons to prior periods. This methodology change resulted in an increase of acquisition cost deferrals of $0.3 million in the third quarter of 2005 compared to the second quarter of 2005. The Company expects this new deferral policy to continue going forward. Amortization of Deferred Acquisition Costs (DAC See D/A converter and discretionary access control. DAC - Digital to Analog Converter )/Value of Business Acquired (VOBA VOBA Value of Business Acquired VOBA Virtual Office Business Administration VOBA Votoms Online Battling Arena VOBA Virtual Office Business Assistant (NetOffice) ) Amortization of DAC/VOBA for the third quarter of 2005 was $0.5 million, a decrease of $0.7 million compared to the $1.2 million in the second quarter of 2005. The Company is required under FAS 60 to adjust VOBA amortization to reflect actual persistency, which was favorable compared to original expectations. The current impact from favorable persistency was $0.4 million of reduced amortization, which varied by segment. Non-recurring Items Two offsetting non-recurring items were included in the third quarter 2005 financial results. First, the senior segment contained a one-time one-time adj. 1. or one·time a. Occurring or undertaken only once: a one-time winner in 1995. b. pre-tax pre-tax adj → anterior al impuesto pre-tax adj → avant impôt(s) pre-tax adj → al lordo d'imposta charge of $0.3 million in the third quarter of 2005 for severance The act of dividing, or the state of being divided. The term severance has unique meanings in different branches of the law. Courts use the term in both civil and criminal litigation in two ways: first, when dividing a lawsuit into two or more parts, and second, when and other termination The point where a line, channel or circuit ends. See SCSI termination and hybrid. costs relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc the sale of the Fort Myers Fort Myers, city (1990 pop. 45,206), seat of Lee co., SW Fla., on the Caloosahatchee River, near the Gulf of Mexico; founded 1850, inc. 1905. It has a tourist trade and light industry and is a shipping point for citrus fruits, winter vegetables, flowers (especially agency office, which closed October 4, 2005. Second, the corporate segment includes $0.3 million in other income reflecting a legal settlement during the third quarter of 2005 in favor of upon the side of; favorable to; for the advantage of. See also: favor the Company. THIRD QUARTER 2005 EARNINGS CONFERENCE CALL KMG America will hold a conference call on Monday Monday: see week. , November November: see month. 14, at 10:00 a.m. Eastern Time to discuss its third quarter 2005 results. This call is being webcast by Thomson/CCBN and can be accessed from KMG America's website, www.kmgamerica.com. Please click on "Analyst/Investor" and there will be a link on the top right for the Q3 Conference Call. Please register approximately 5 minutes prior to the call. A rebroadcast will be available after noon on November 14 and may be accessed using the same instructions. The webcast is also being distributed through the Thomson StreetEvents Network to both institutional and individual investors. Individual investors can listen to the call at www.fulldisclosure.com, Thomson/CCBN's individual investor portal, powered by StreetEvents. Institutional investors Institutional Investor A non-bank person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. can access the call via Thomson's password-protected event management site, StreetEvents (www.streetevents.com). NOTES ON FINANCIAL PRESENTATION KMG America was formed on January 21, 2004, and commenced its insurance operations shortly before December 21, 2004, when it completed its initial public offering of common stock and used a portion of the proceeds to complete its acquisition of Kanawha Insurance Company. Results of operations, cash flows and changes in shareholders' equity Shareholders' Equity A firms' total assets minus its total liabilities. Equivalently, it is share capital plus retained earnings minus treasury shares. Shareholders' equity is the amount by which a company is financed through common and preferred shares. for the quarter and nine months ended September September: see month. 30, 2004 (the predecessor predecessor - parent periods indicated on the attached financial tables), reflect the historical operations of Kanawha only and do not include GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). purchase accounting ("PGAAP") adjustments reflecting the acquisition. Results of operations, cash flows and changes in shareholders' equity for the quarter ended September 30, 2005, and the quarter ended June June: see month. 30, 2005 and KMG America's financial position as of December 31, 2004, and September 30, 2005, have been adjusted for PGAAP adjustments reflecting the Kanawha acquisition. 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), net of income taxes and certain non-recurring items, 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 indicative: see mood. 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 Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.[] As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. with GAAP. --Pro Forma forma, adj/n minor elements between the members of a botanical species. Financial Information - To supplement the financial statements presented on a GAAP basis, the Company reported "pro forma" financial information that adjusts the statements of income for the quarter and nine months ended September 30, 2004 for the actual dollar value impact that the December 31, 2004 balance sheet PGAAP adjustments had on the quarter and nine months ended September 30, 2005 statements of income, respectively. Such pro forma financial information is a non-GAAP measure. Management believes this pro forma non-GAAP measure provides investors, potential investors, securities analysts and others with useful additional information to evaluate the performance of the business, because these purchase accounting adjustments relating to the Kanawha acquisition have been incorporated in KMG America's financial statements for the quarter and nine months ending September 30, 2005, and will be incorporated in later reporting periods. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the results of operations or financial position of the Company 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. This press release contains forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. that are made pursuant to the safe harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. provisions of the Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and of 1995. The accuracy of such statements is subject to a number of risks, uncertainties and assumptions that may cause KMG America Corporation's actual results to differ materially from those expressed in the forward-looking statements including, but not limited to: implementation of its business strategy; hiring and retaining key employees; predicting and managing claims and other costs; fluctuations in its investment portfolio; financial strength ratings of its insurance subsidiary; government regulations, policies and investigations affecting the insurance industry; competitive insurance products and pricing; reinsurance costs; fluctuations in demand for insurance products; possible recessionary trends in the U.S. economy; and other risks that are detailed from time to time in reports filed by the Company with the Securities and Exchange Commission.
KMG America Corporation and Predecessor
Consolidated Statements of Income (GAAP basis, unaudited)
(in thousands, except percentages)
KMG America Predecessor KMG America Predecessor
------------------- ---------- ----------- -----------
Quarter Ended Nine Months Ended
------------------------------- -----------------------
9/30/2005 6/30/2005 9/30/2004 9/30/2005 9/30/2004
--------- --------- --------- ----------- ---------
Insurance
premiums, net
of
reinsurance $26,423 $26,817 $25,245 $79,438 $77,232
Net investment
income (1) 7,089 6,800 6,852 20,542 19,173
Commission and
fee income 3,773 3,671 3,337 11,012 10,173
Realized
investment
gains 278 19 4,563 324 6,291
Other income 1,200 978 799 2,970 2,257
--------- --------- --------- ----------- ---------
Total
revenues 38,763 38,285 40,796 114,286 115,126
Policyholder
benefits 21,890 20,646 21,667 62,966 68,215
Insurance
commissions,
net of
deferrals 2,239 2,377 2,371 7,282 7,150
Expenses,
taxes, fees
and
depreciation 12,199 13,103 8,726 36,778 24,883
Amortization
of DAC and
VOBA (2) 462 1,215 2,472 2,762 6,828
--------- --------- --------- ----------- ---------
Total
benefits
and
expenses 36,790 37,341 35,236 109,788 107,076
Income before
income taxes 1,973 944 5,560 4,498 8,050
(Provision)
for income
taxes (634) (231) (1,980) (1,426) (2,746)
--------- --------- --------- ----------- ---------
Net income $1,339 $713 $3,580 $3,072 $5,304
=============================== =======================
Operating
income (3) $1,250 $701 $588 $2,953 $2,278
Operating
income excl.
KMGA new
activity $3,452 $3,310 $588 $9,354 $2,278
(see table
below)
Benefit ratio
(4) 82.8% 77.0% 85.8% 79.3% 88.3%
Average
portfolio
yield (5) 4.81% 4.69% 5.71% 4.66% 5.84%
Average
invested
assets $573,349 $552,052 $460,539 $520,562 $454,852
Average cash
and
equivalents 16,358 28,511 19,691 67,512 18,219
--------- --------- --------- ----------- ---------
Total average
cash and
invested
assets $589,707 $580,562 $480,230 $588,074 $473,071
KMG America new
activity:
Insurance
premiums, net
of
reinsurance $1,009 $96 $- $1,105 $-
Net investment
income - - - - -
--------- --------- --------- ----------- ---------
Total
revenues 1,009 96 - 1,105 -
Policyholder
benefits 623 70 - 693 -
Insurance
commissions,
net of
deferrals 103 14 - 117 -
Expenses,
taxes, fees
and
depreciation 3,549 4,027 - 10,022 -
Amortization
of DAC and
VOBA (2) 121 - - 121 -
--------- --------- --------- ----------- ---------
Total
benefits
and
expenses 4,396 4,111 - 10,953 -
(Loss) before
income taxes (3,387) (4,015) - (9,848) -
Benefit for
income taxes 1,185 1,405 - 3,447 -
--------- --------- --------- ----------- ---------
Net (loss) $(2,202) $(2,610) $- $(6,401) $-
=============================== =======================
(1) Net investment income for the nine months ended September 30,
2004, included a one-time expense in March 2004, for a $1.6
million incentive payment to one of Kanawha's outside investment
managers at the conclusion of the contract period.
(2) DAC: Deferred Acquisition Costs; VOBA: Value of Business Acquired.
(3) Operating income is defined as net income excluding realized
investment gains (losses), net of income taxes and certain
non-recurring items, net of income taxes. Operating income for the
nine months ended September 30, 2004 included the one-time $1.0
million, net of tax, incentive payment identified in footnote 1.
(4) Benefit ratio is defined as policyholder benefits (equal to
incurred claims plus increases in policyholder active life
reserves) divided by net premiums.
(5) Average portfolio yield is defined as net investment income
divided by average invested assets plus average cash and
equivalents. Note that the nine months ended September 30, 2004
average portfolio yield excludes the impact of the one-time pretax
$1.6 million incentive payment identified in note 1.
KMG America Corporation and Subsidiary
Consolidated Balance Sheets
(in thousands, except share data)
September 30, December 31,
2005 2004 (1)
-------------- -------------
(Unaudited)
Assets:
Cash and cash equivalents $17,624 $117,400
Investments 575,220 461,141
-------------- -------------
Total cash and investments 592,844 578,541
Accrued investment income 5,262 4,912
DAC 10,306 -
VOBA 72,743 74,481
Other assets (2) 120,968 112,117
-------------- -------------
Total assets $802,123 $770,051
============== =============
Liabilities and shareholders' equity:
Total policy and contract
liabilities $543,069 $530,915
Deferred income taxes 12,256 6,502
Other liabilities (3) 59,024 44,846
-------------- -------------
Total liabilities 614,349 582,263
Total shareholders' equity 187,774 187,788
-------------- -------------
Total liabilities and shareholders'
equity $802,123 $770,051
============== =============
Book value per share: (4)
Basic $8.49 $8.51
Diluted $8.49 $8.44
Book value per share: (excl FAS 115) (5)
Basic $8.63 $8.51
Diluted $8.63 $8.44
Ending shares outstanding:
Basic 22,106 22,072
Diluted (6) 22,106 22,242
(1) December 31, 2004 balance sheet is stated on PGAAP accounting
basis and reflects the balance sheets of both the Predecessor and
KMG America as of December 31, 2004. Please refer to the
supplemental schedule included here with the details of the PGAAP
and KMG America adjustments.
(2) Other assets include reinsurance balances recoverable, real estate
and equipment, federal income tax recoverable and other assets.
(3) Other liabilities include accounts payable and accrued expenses,
$15.6 million of outstanding principal and accrued interest on a
subordinated note as of September 30, 2005, and other
miscellaneous liabilities.
(4) Book values per share on December 31, 2004, are based on the
number of shares issued in the IPO plus restricted shares issued
subsequent to the IPO.
(5) The book values are recalculated excluding $3.1 million of
unrealized capital losses, net of taxes, on September 30, 2005.
Unrealized capital gains were $0 on December 31, 2004.
(6) Diluted shares were calculated using the treasury stock method.
KMG America Corporation and Predecessor
Consolidated Statements of Income - Unaudited, Predecessor 2004
Results Adjusted to PGAAP (Pro Forma)
(in thousands, except share data and percentages)
KMG America Predecessor
--------------------- -------------
Quarter Ended
-----------------------------------
9/30/2005 6/30/2005 9/30/2004
---------- ---------- -------------
(Pro Forma)
Insurance premiums, net of
reinsurance $26,423 $26,817 $25,245
Net investment income 7,089 6,800 6,360
Commissions and fee income 3,773 3,671 3,337
Realized investment gains 278 19 4,563
Other income 1,200 978 799
---------- ---------- ----------
Total revenues 38,763 38,285 40,304
Policyholder benefits 21,890 20,646 18,609
Insurance commissions, net of
deferrals 2,239 2,377 2,371
Expenses, taxes, fees and
depreciation 12,199 13,103 8,868
Amortization of DAC & VOBA 462 1,215 926
---------- ---------- ----------
Total benefits and expenses 36,790 37,341 30,774
Income before income taxes 1,973 944 9,530
(Provision) for income taxes (634) (231) (3,370)
---------- ---------- ----------
Net income $1,339 $713 $6,161
================================
Net income per share:
Basic $0.06 $0.03 $0.28
Diluted $0.06 $0.03 $0.28
Operating income (loss) : (1)
Worksite insurance business $(535) $77 $625
Senior market insurance 948 652 1,424
Third party administration
business 367 209 138
Acquired business 500 728 736
Corporate and other (30) (966) 246
---------- ---------- ----------
Total operating income $1,250 $701 $3,169
Total excluding KMGA new
activity $3,452 $3,310 $3,169
Operating income per share:
Basic $0.06 $0.03 $0.14
Diluted $0.06 $0.03 $0.14
Diluted - excl. KMGA new
activity $0.16 $0.15 $0.14
Weighted-average shares
outstanding:
Basic 22,090 22,072 22,090 (2)
Diluted 22,094 22,156 22,094 (2)
Benefit ratio 82.8% 77.0% 73.7%
Average portfolio yield (3) 4.81% 4.69% 5.30%
KMG America Predecessor
------------- -----------
Nine Months Ended
-------------------------
9/30/2005 9/30/2004
------------- -----------
(Pro Forma)
Insurance premiums, net of reinsurance $79,438 $77,232
Net investment income 20,542 17,745
Commissions and fee income 11,012 10,173
Realized investment gains 324 6,291
Other income 2,970 2,257
----------- ----------
Total revenues 114,286 113,698
Policyholder benefits 62,966 59,790
Insurance commissions, net of deferrals 7,282 7,150
Expenses, taxes, fees and depreciation 36,778 25,311
Amortization of DAC & VOBA 2,762 2,956
----------- ----------
Total benefits and expenses 109,788 95,207
Income before income taxes 4,498 18,491
(Provision) for income taxes (1,426) (6,400)
----------- ----------
Net income $3,072 $12,091
======================
Net income per share:
Basic $0.14 $0.55
Diluted $0.14 $0.55
Operating income (loss) : (1)
Worksite insurance business $(363) $2,105
Senior market insurance 2,202 3,655
Third party administration business 757 645
Acquired business 1,957 1,743
Corporate and other (1,600) 915
----------- ----------
Total operating income $2,953 $9,064
Total excluding KMGA new activity $9,354 $9,064
Operating income per share:
Basic $0.13 $0.41
Diluted $0.13 $0.41
Diluted - excl. KMGA new activity $0.42 $0.41
Weighted-average shares outstanding:
Basic 22,078 22,078 (2)
Diluted 22,084 22,084 (2)
Benefit ratio 79.3% 77.4%
Average portfolio yield (3) 4.66% 5.44%
(1) Operating income is defined as net income excluding realized
investment gains (losses), net of income taxes and certain
non-recurring items, net of income taxes. Operating income for the
nine months ended September 30, 2004, included the one-time $1.0
million, net of tax, incentive payment to one of Kanawha's outside
investment managers in March, 2004.
(2) Shares outstanding for the three months and nine months ended
September 30, 2004 assume the same number of shares outstanding as
the three months and nine months ended September 30, 2005,
respectively.
(3) Average portfolio yield is defined as net investment income
divided by average invested assets plus average cash and
equivalents. Note that nine months year-to-date 2004 average
portfolio yield excludes the impact of the one-time pretax $1.6
million incentive payment identified in note 1.
PRO FORMA SEGMENT RESULTS (Unaudited)
(in thousands)
To supplement the financial statements presented on a GAAP basis, the
Company reported "pro forma" financial information that adjusts the
income statements for the quarter and nine months ended September 30,
2004 for the actual dollar impact that the December 31, 2004, balance
sheet PGAAP adjustments had on the income statements for the quarter
and nine months ended September 30, 2005, respectively. Pretax
operating income excludes realized investment gains and non-recurring
items such as the one-time $1.6 million incentive payment to one of
Kanawha's outside investment managers in March, 2004.
KMG
KMG America Predecessor America Predecessor
--------------------- ----------- ---------- -----------
Quarter Ended Nine Months Ended
--------------------------------- ----------------------
9/30/2005 6/30/2005 9/30/2004 9/30/2005 9/30/2004
---------- ---------- ----------- ---------- -----------
Worksite (Pro Forma) (Pro Forma)
insurance
business -
Legacy:
Insurance
premiums,
net of
reinsurance $14,097 $14,932 $14,109 $43,687 $42,307
Net
investment
income 1,537 1,603 1,560 4,922 4,870
Commissions
and fee
income - - - - -
Realized
investment
gains - - - - -
Other income 40 41 55 130 219
---------- ---------- ----------- ---------- -----------
Total
revenues 15,674 16,576 15,724 48,739 47,396
Policyholder
benefits 10,878 10,591 9,827 32,359 31,087
Insurance
commissions,
net of
deferrals 745 787 901 2,610 2,719
Expenses,
taxes, fees
and
depreciation 2,414 2,503 2,648 7,612 7,278
Amortization
of DAC and
VOBA 992 894 1,387 2,706 3,073
---------- ---------- ----------- ---------- -----------
Total
benefits
and
expenses 15,029 14,775 14,763 45,287 44,157
---------- ---------- ----------- ---------- -----------
Income before
income taxes $645 $1,801 $961 $3,452 $3,239
================================= ======================
Total assets $167,107 $167,166 $152,110 $167,107 $152,110
================================= ======================
Worksite
insurance
business -
KMG America
new activity:
Insurance
premiums,
net of
reinsurance $1,009 $96 $- $1,105 $-
Net
investment
income - - - - -
Commissions
and fee
income - - - - -
Realized
investment
gains - - - - -
Other income - - - - -
---------- ---------- ----------- ---------- -----------
Total
revenues 1,009 96 - 1,105 -
Policyholder
benefits 623 70 - 693 -
Insurance
commissions,
net of
deferrals 103 14 - 117 -
Expenses,
taxes, fees
and
depreciation 1,630 1,694 - 4,184 -
Amortization
of DAC and
VOBA 121 - - 121 -
---------- ---------- ----------- ---------- -----------
Total
benefits
and
expenses 2,477 1,778 - 5,115 -
---------- ---------- ----------- ---------- -----------
(Loss) before
income taxes $(1,468) $(1,682) $- $(4,010) $-
================================= ======================
Total assets $- $- $- $- $-
================================= ======================
Senior market
insurance
business:
Insurance
premiums,
net of
reinsurance $10,376 $11,128 $10,119 $32,105 $31,793
Net
investment
income 1,195 1,137 971 3,344 2,741
Commissions
and fee
income - - - - -
Realized
investment
gains - - - - -
Other income 732 799 619 2,188 1,670
---------- ---------- ----------- ---------- -----------
Total
revenues 12,303 13,064 11,709 37,637 36,204
Policyholder
benefits 8,845 9,176 7,290 26,366 23,550
Insurance
commissions,
net of
deferrals 1,294 1,472 1,366 4,255 4,109
Expenses,
taxes, fees
and
depreciation 1,098 988 1,077 3,225 2,675
Amortization
of DAC and
VOBA (392) 425 (214) 404 247
---------- ---------- ----------- ---------- -----------
Total
benefits
and
expenses 10,845 12,061 9,519 34,250 30,581
---------- ---------- ----------- ---------- -----------
Income before
income taxes $1,458 $1,003 $2,190 $3,387 $5,623
================================= ======================
Total assets $185,675 $177,147 $144,409 $185,675 $144,409
================================= ======================
Third party
administration
business:
Insurance
premiums,
net of
reinsurance $- $- $- $- $-
Net
investment
income - - - - -
Commissions
and fee
income 3,696 3,583 3,261 10,762 10,060
Realized
investment
gains - - - - -
Other income - - - 1 1
---------- ---------- ----------- ---------- -----------
Total
revenues 3,696 3,583 3,261 10,763 10,061
Policyholder
benefits - - - - -
Insurance
commissions,
net of
deferrals - - - - -
Expenses,
taxes, fees
and
depreciation 3,131 3,261 3,048 9,598 9,068
Amortization
of DAC and
VOBA - - - - -
---------- ---------- ----------- ---------- -----------
Total
benefits
and
expenses 3,131 3,261 3,048 9,598 9,068
---------- ---------- ----------- ---------- -----------
Income before
income taxes $565 $322 $213 $1,165 $993
================================= ======================
Total assets $10,327 $8,304 $8,032 $10,327 $8,032
================================= ======================
Acquired
business:
Insurance
premiums,
net of
reinsurance $941 $661 $1,017 $2,540 $3,132
Net
investment
income 1,866 1,915 2,121 5,844 6,627
Commissions
and fee
income - - - - -
Realized
investment
gains - - - - -
Other income 20 18 30 51 80
---------- ---------- ----------- ---------- -----------
Total
revenues 2,827 2,594 3,168 8,435 9,839
Policyholder
benefits 1,543 809 1,492 3,547 5,152
Insurance
commissions,
net of
deferrals 98 103 104 300 322
Expenses,
taxes, fees
and
depreciation 675 667 687 2,046 2,047
Amortization
of DAC and
VOBA (258) (105) (247) (468) (364)
---------- ---------- ----------- ---------- -----------
Total
benefits
and
expenses 2,058 1,474 2,036 5,425 7,157
---------- ---------- ----------- ---------- -----------
Income before
income taxes $769 $1,120 $1,132 $3,010 $2,682
================================= ======================
Total assets $207,229 $209,610 $199,787 $207,229 $199,787
================================= ======================
Corporate &
other:
Insurance
premiums,
net of
reinsurance $- $- $- $- $-
Net
investment
income 2,490 2,145 1,708 6,432 5,059
Commissions
and fee
income 78 88 76 251 113
Realized
investment
gains - - - - -
Other income 407 121 95 599 286
---------- ---------- ----------- ---------- -----------
Total
revenues 2,975 2,354 1,879 7,282 5,458
Policyholder
benefits - - - - -
Insurance
commissions,
net of
deferrals - - - - -
Expenses,
taxes, fees
and
depreciation
- Kanawha
legacy 1,191 1,659 1,447 4,134 4,160
- KMG America
(KMGA) new
activity 1,919 2,333 - 5,838 -
Amortization
of DAC and
VOBA - - - - -
---------- ---------- ----------- ---------- -----------
Total
benefits
and
expenses 3,110 3,992 1,447 9,972 4,160
---------- ---------- ----------- ---------- -----------
Income (loss)
before
income taxes $(135) $(1,638) $432 $(2,690) $1,298
================================= ======================
Income before
income taxes
excluding
KMGA new
activity $1,784 $695 $432 $3,148 $1,298
Total assets $231,785 $227,294 $219,567 $231,785 $219,567
================================= ======================
KMG America Corporation
Reconciliation of Pro Forma Consolidated Statements of Income
(Unaudited)
(in thousands)
KMG America Predecessor KMG America Predecessor
------------------- --------- ------------ -----------
Quarter Ended Nine Months Ended
----------------------------- ------------------------
9/30/2005 6/30/2005 9/30/2004 9/30/2005 9/30/2004
--------- --------- --------- ------------ -----------
Net income as
reported $1,339 $713 $3,580 $3,072 $5,304
Restatement to
purchase
accounting:
(1)
Adjustment to
investment
income (2) - - (492) - (1,428)
Adjustment to
change in
benefit
reserves (3) - - 3,058 - 8,425
Amortization
of other
intangible
assets (4) - - (142) - (428)
Amortization
of DAC and
VOBA (5) - - 1,546 - 3,872
Taxes on the
above - - (1,390) - (3,654)
--------- --------- --------- ------------ -----------
Net income -
pro forma $1,339 $713 $6,161 $3,072 $12,091
============================= ========================
(1) Adjustment of statements of income for the quarter and nine month
periods ended September 30, 2004, for the actual dollar value
impact that the December 31, 2004, balance sheet PGAAP adjustments
had on the statements of income for the quarter and nine month
periods ended September 30, 2005, respectively.
(2) Reflects the amortization of fair value adjustment to the cost
basis of Kanawha's fixed income and mortgage loan investments.
(3) To record the adjustment to historical benefit expense to reflect
the new benefit expense relating to the future policy and contract
reserves restated to fair value.
(4) To record amortization of the fair value of $7.7 million of
certain intangible assets including product approvals in 45 states
and future revenues associated with the customer relationships of
Kanawha Healthcare Solutions, a wholly-owned direct subsidiary of
Kanawha.
(5) Reflects the adjustment to remove historical amortization of DAC
and VOBA and to record amortization of the restated VOBA
established on the balance sheet as of December 31, 2004.
Kanawha Predecessor
Reconciliation of Pro Forma Reporting Segment Results (Unaudited)
(in thousands)
Worksite Insurance
Segment Senior Insurance
Kanawha Legacy Segment
---------------------- ----------------------
Quarter Nine Months Quarter Nine Months
Ended Ended Ended Ended
9/30/2004 9/30/2004 9/30/2004 9/30/2004
---------- ----------- ---------- -----------
Pretax income as reported $(588) $(1,985) $275 $1,667
Restatement to Purchase
Accounting: (1)
Adjustment to investment
income (2) 308 920 (52) (156)
Adjustment to change in
benefit reserves (3) 1,009 2,883 1,531 3,991
Amortization of DAC and
VOBA (4) 232 1,421 436 121
---------- ----------- ---------- -----------
Pretax operating income -
pro forma $961 $3,239 $2,190 $5,623
====================== ======================
Acquired Insurance Corporate and Other
Segment Segment
---------------------- ----------------------
Quarter Nine Months Quarter Nine Months
Ended Ended Ended Ended
9/30/2004 9/30/2004 9/30/2004 9/30/2004
---------- ----------- ---------- -----------
Pretax income as reported $(254) $(1,167) $5,915 $8,542
Adjust for realized
investment gains $(4,564) $(6,292)
Adjust for one-time
incentive payment $- $1,552
Adjustment to deferred
comp expense (5) (39) 84
Restatement to Purchase
Accounting: (1)
Adjustment to investment
income (2) (10) (32) (738) (2,160)
Adjustment to change in
benefit reserves (3) 518 1,551 - -
Amortization of other
intangible assets (6) (142) (428)
Amortization of DAC and
VOBA (4) 878 2,330 - -
---------- ----------- ---------- -----------
Pretax operating income -
pro forma $1,132 $2,682 $432 $1,298
====================== ======================
(1) Adjustment of statements of income for the quarter and nine month
periods ended September 30, 2004, for the actual dollar value
impact that the December 31, 2004, balance sheet PGAAP adjustments
had on the statements of income for the quarter and nine month
periods ended September 30, 2005, respectively.
(2) Reflects the amortization of fair value adjustment to the cost
basis of Kanawha's fixed income and mortgage loan investments.
(3) To record the adjustment to historical benefit expense to reflect
the new benefit expense relating to the future policy and contract
reserves restated to fair value.
(4) Reflects the adjustment to remove historical amortization of DAC
and VOBA and to record amortization of the restated VOBA
established on the balance sheet as of December 31, 2004.
(5) To offset the increase in executive deferred compensation expense
with the portion of realized capital gains that gave rise to the
deferred compensation expense increase.
(6) To record amortization of the fair value of $7.7 million of
certain intangible assets including product approvals in 45 states
and future revenues associated with the customer relationships of
Kanawha Healthcare Solutions, a wholly-owned direct subsidiary of
Kanawha.
KMG America Corporation and Predecessor
Consolidated Balance Sheet (Unaudited) - December 31, 2004
(in thousands, except per share data)
Purchase
KMG GAAP KMG
Kanawha America Adjustments America
Historical Historical Incr (Decr) Consolidated
---------------------------------- ------------
Assets:
Cash and cash
equivalents $69,268 $48,132 $- $117,400
Investments 459,844 - 1,297 (1) 461,141
---------------------------------- ------------
Total cash and
investments 529,112 48,132 1,297 578,541
Accrued investment
income 4,909 3 - 4,912
Deferred acquisition
costs (DAC) 87,339 - (87,339)(2) -
Value of business
acquired (VOBA) 26,579 - 47,902 (3) 74,481
Goodwill 1,258 - (1,258)(4) -
Other assets 90,971 117 21,029 (5) 112,117
---------- ---------- ------------ ------------
Total Assets $740,168 $48,252 $(18,369) $770,051
================================== ============
Liabilities and
shareholders'
equity:
Total policy and
contract
liabilities $486,654 $- $44,261 (6) $530,915
Deferred income
taxes 28,117 - (21,615)(7) 6,502
Other liabilities 29,484 16,236 (874)(8) 44,846
---------- ---------- ------------ ------------
Total Liabilities 544,255 16,236 21,772 582,263
Total shareholders'
equity 195,913 32,016 (40,141) 187,788
---------- ---------- ------------ ------------
Total liabilities
and shareholders'
equity $740,168 $48,252 $(18,369) $770,051
================================== ============
Book value per
share:
Basic $8.51
Diluted $8.44
Ending shares
outstanding:
Basic 22,072
Diluted 22,242
(1) To value Kanawha's investment portfolio at its estimated fair
value.
(2) To eliminate Kanawha's deferred acquisition cost balance.
(3) To eliminate Kanawha's value of business acquired and replace it
with the present value of future profits of the business acquired.
(4) To eliminate Kanawha's goodwill balance.
(5) To record the fair value of certain intangible assets including
trade names ($6.1 million); licenses to conduct insurance in 45
states ($3.7 million); product approvals in 45 states ($2.8
million); future revenues associated with the customer
relationships of Kanawha HealthCare Solutions ($4.9 million); and
change in fair value of reinsurance receivable asset ($3. 5
million) related to ceded portion of policy and contract reserves
referenced in footnote 6.
(6) To record the change in Kanawha's policy and contract reserves to
fair value (direct before reinsurance ceded).
(7) To adjust the deferred tax liability of Kanawha to account for the
difference between the estimated fair value of the net assets
acquired and the tax basis of the net assets acquired.
(8) To adjust miscellaneous other liabilities to estimated fair value.
KMG America Corporation and Predecessor
Statistical and Operating Data at or for the Periods Indicated
(in thousands, except percentages)
OTHER FINANCIAL DATA
Unaudited KMG
KMG America Predecessor America Predecessor
--------------------- ----------- ---------- -----------
Quarter Ended Nine Months Ended
--------------------------------- ----------------------
9/30/2005 6/30/2005 9/30/2004 9/30/2005 9/30/2004
---------- ---------- ----------- ---------- -----------
Sales - issued and paid for
annualized premiums:
Worksite insurance segment -
Kanawha Legacy
Life $709 $677 $556 $2,005 $1,599
Cancer 542 430 542 1,480 1,727
Disability
income 821 933 1,562 3,065 3,707
Other A&H 328 315 437 1,302 1,029
---------- ---------- ----------- ---------- -----------
Total
worksite -
Kanawha
Legacy 2,400 2,355 3,097 7,852 8,062
Worksite insurance segment -
KMG America (KMGA) New Activity
Core Group
Products:
Life $- $- $- $- $-
Stop loss 2,993 1,128 - 4,121 -
Disability
income - - - - -
Other A&H - - - - -
Voluntary
Benefit
Products:
Life 219 9 - 228 -
Cancer 18 80 - 98 -
Disability
income 836 591 - 1,427 -
Other A&H 299 1 - 300 -
---------- ---------- ----------- ---------- -----------
Total
worksite -
KMGA New
Activity 4,365 1,809 - 6,174 -
Senior market
insurance
segment
Long term
care 360 549 517 1,356 2,933
---------- ---------- ----------- ---------- -----------
Total
senior
market
insurance 360 549 517 1,356 2,933
Total sales $7,125 $4,713 $3,614 $15,382 $10,995
================================= ======================
Quarter Ended Nine Months Ended
--------------------------------- ----------------------
9/30/2005 6/30/2005 9/30/2004 9/30/2005 9/30/2004
---------- ---------- ----------- ---------- -----------
Pro forma
benefit
ratios: (1)
Worksite
insurance -
Kanawha
legacy 77.2% 70.9% 69.7% 74.1% 73.5%
Worksite
insurance -
KMGA new
activity 61.7% 72.9% - 62.7% -
Senior market
insurance 85.2% 82.5% 72.0% 82.1% 74.1%
Acquired
business 164.0% 122.4% 146.7% 139.6% 164.5%
Total
company 82.8% 77.0% 73.7% 79.3% 77.4%
(1) benefit ratio is defined as total policyholder benefits divided by
total net premiums and are all stated on a pro forma basis.
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