Humana Inc (HUM) 2005 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Fourth Quarter 2005 KMG America Corporation Earnings Conference Call. My name is Cindy and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. Kenneth Kuk, Chairman, Chief Executive Officer and President. Please precede, sir.

Good morning. Welcome to KMG America’s Fourth Quarter and Full-Year 2005 Conference Call. I have with me this morning Scott DeLong our CFO, Jim Nelson our General Counsel and Tom Sass who is in charge of operations.

Before we begin, I want to mention that certain statements made during this call relating to KMG America’s future operations, performance, growth plan and expectations of future developments are forward looking statements under federal securities laws. These statements are based on various assumptions and estimates that are subject to a number of risks and uncertainties. These risks as discussed in our fourth quarter earnings release issued yesterday afternoon and our Form 10K to be filed next week. In light of these risks, actual results may differ materially from those expressed in any forward looking statements made during this call and should be considered carefully. KMG America assumes no risk or obligation to publicly update or revise any forward looking statements.

We announced yesterday afternoon that KMG America’s fourth quarter net earnings were 1.6 million and full-year 2005 net earnings were $4.6 million. Earnings per share of $0.07 for the quarter are in line with the analysts consensus estimate and represent the fourth consecutive quarter of positive earnings for KMG America since the IPO. Net earnings per share for the full-year were $0.21. Scott DeLong will comment on earnings in more detail in a few minutes.

I would now like to address several sales and operational items including sales results for January 2006, sales productivity per rep, the status of sales rep hiring and several other factors which will impact earnings in 2006 and beyond.

As we reported in early January, sales results for our new large case business were $29 million for the full-year 2005 and the period January 1 through February 1, 2006. These sales results were consistent with our early January 2005 estimate and below our original plan of 35 million, which still confirm that KMG America has been embraced by the benefits market place. We obviously have demonstrated KMG America can be a successful competitor in the group and voluntary segment of the life insurance business. And our performance so far is a tribute to our sales management and sales organization and our growing reputation of KMG America’s administrative platform. We continue to gain traction and credibility in the marketplace.

Since our last report on rep hiring, we have experienced some attrition in our sales organization. The number of KMG America’s sales reps at year-end stood at 18, which was down two from when I last reported. One of the two was lured back to its former employer and we had performance issues with the other rep that required us to terminate him. So far in 2006, we’ve added two sales reps and had one additional departure of a rep that had not written any business for KMG America. As of today, we have 19 sales reps. We are actively recruiting and we continue to believe we can grow our sales force to 25 reps by mid-second quarter.

Productivity for per rep data is becoming more meaningful as time passes. Based on our experience to date, the range of annualized production per rep is between 2.9 million and 3.5 million per rep, depending on assumptions used in the calculation. In reality, we think we are well within the acceptable range of productivity at this stage. And believe productivity will continue to improve as our product offering is completed.

Updating you on our product filing status, our stop loss product has been approved in 44 or 46 states in which we are licensed. Group life is approved in 35 of 46 states, but not yet in the important Texas and Massachusetts markets. Both our long and short-term disability products have been approved in 28 of 46 states. We are getting state approvals on group life at a slower rate than we did on stop loss. While disability approvals are about where we would have expected, having to filed a couple months after group life. There really is no explanation for the group life delays and we continue to expect that we will get all of our products approved in the 46 states where we are licensed. It’s just a matter of time. Our focus in 2006 is in approving our voluntary product offerings.

Moving on to premium growth. As most of you are aware, we wrote more stop loss business in 2005 than January of 2006 than planned, largely because of some of these state approval delays. Over the past several weeks, we have conducted a detailed margin analysis of our stop loss block, much of which was written in January of 2006. That review indicates that the margins we obtained are somewhat less than our original model assumed. The good news is, is that stop loss is annually renewable and the rates can be adjusted upward as this market confirms. Also, stop loss is typically reinsured at a higher rate than group life and voluntary products. Because of these factors, there will be reduced overall net premium in 2006, versus company and analyst expectations.

While its premature in our evolution of our business to provide specific earnings guidance, we do want to report that the combination of reduced margins and higher reinsurance coverage percentages for stop loss will negatively impact both revenue growth and earnings in 2006 and possibly in 2007 as well. This margin and revenue short fall, will be partially offset by improved claims management on several existing blocks of business, restructured reinsurance agreements and several aggressive expense management initiatives. For example, we have announced to our associates that our defined benefit pension plan will be frozen as of 9/30/06 and replaced by a larger 401K match. Further, these expense management initiatives are being implemented in senior management compensation with 2005 bonus awards being trimmed substantially below levels indicated by the incentive plans.

We have recently completed our 2006 budgets, which now include the updated data as well as, option expense and expect earnings per share to be in the $0.35 to $0.40 range. While are earnings ramp is apparent and the long-term outlook remains excellent, the early trajectory is lower than expected. We are clearly not happy with this result and will continue to seek strategies to improve 2006 results. However, we continue to believe that mid-teen ROEs are very realistic over time, and that the platform we are building continues to offer the potential for a significant earnings growth.

I would like to give a brief update on the status of our investment portfolio. As we have previously indicated, our investment strategy has been to be opportunistic and move into longer term investments as rates increase. We have continued to do that and now are close to 100% invested. The holding company has an appropriate amount of cash to fund operations and our insurance company has little excess liquidity. Our overall yield has risen to approximately 5.00%, which is roughly 40 points higher than in the first quarter of 2005. Finally, our A- rating has been recently affirmed by AM Best, with a stable outlook.

Scott DeLong will now discuss financial results in more detail and then we will be available for questions.

I’ll start with a few words about our fourth quarter financial performance and then discuss our 2006 revenue and earnings outlook. Our $0.07 of operating income this quarter, compares to $0.06 last year and $0.03 in the second quarter. So, we are beginning to achieve a bit of ramp in earnings as the new large case activity begins to show revenue growth and the investment portfolio improves as we get close to full deployment of the excess cash and short-term investments we’ve had throughout 2005.

We’re satisfied with the fourth quarter result for two reasons. First, Kanawha’s legacy business continues to perform adequately with operating income this quarter of $0.17 compared to $0.16 last year quarter, $0.15 in the second quarter and $0.12 in the first quarter. Comparing the performance of the legacy business to the last quarter, premium revenue and investment income were up and the benefit ratio improved from 84% to 78%. These favorable effects were partially offset by somewhat higher expenses and a drop in other income after the $300,000 favorable legal settlement in the third quarter. Second, losses from the rapid ramp of expenses related to our new activity, now appears to have peaked. And we should see declining losses going forward as premium growth form the new sales activity out paces expense growth there. Operating losses from the new activity were $0.10 in the fourth quarter, compared to $0.10 in the third quarter and $0.12 in the second quarter.

I’d like to say a bit more about the performance of Kanawha’s legacy business. The average portfolio yield was up another 7 basis points from the third quarter. We should see additional sequential quarterly increases throughout this year in that yield. While cash plus short-term and instruments average 95 million during the fourth quarter, we were at 70 million at year-end and should be very close to full investment by the end of the first quarter this year. The benefit ratio, which is policy holder benefits divided by earned premium, improved significantly from the third quarter in both the legacy worksite segment and the acquired business segments. We had thought that the rise in the third quarter benefits ratio had been impacted by some short-term factors in the acquire business segment and from then rapid lapsation of policies in a large disability income case in the worksite segment, and that does appear to have been true. Partially offsetting this favorable benefits ratio trend in these two segments was a continuing increase in the benefit ratio and the senior segment. In addition to an increase in a newly opened claims, this trend reflects the continuing aging of this closed block as well as the slower than expected pace of increased - - rate increase filings and approvals.

I’ll conclude the fourth quarter earnings discussion with a brief update on the earnings impact of the new KMG America activity. Sales which are measured by new annualized premium were up from 4.4 million in the third quarter to 6.2 million in the fourth quarter. Earned premium after reinsurance increased from 1 million to 1.8 million over the same time period. The benefit ratio in this new business was essentially flat compared to the third quarter at 62%. Expenses net of deferred acquisition costs were up 300,000 over the third quarter, because of continued expansion of the sales and underwriting staff. As I said earlier, as we look ahead, we should begin seeing more rapid increases in revenues associated with new large case activity compared to expense growth. Contributing to this trend should be a decline in cost associated with SOX compliance and other first year compliances behind us.

Now, I’d like to make some comments about our earnings outlook for 2006. As Ken indicated, we are not initiating formal earnings guidance going forward, but it is time to try to bring street expectations in line with our recently completed review of key earnings drivers. This culminates a year long analysis of all the factors that will impact earnings this year and beyond. While our analysis will certainly be ongoing, we are now able to draw some meaningful conclusions from our important fourth quarter and January sales results, which has yielded valuable data regarding sales prospects and product margin potential for all of 2006. Some of these factors are more general and are indicative of current market demands and competitive conditions, while other factors are more specific to KMG America. We also recently completed a review of a key reinsurance treaty and should benefit from the renegotiated terms. And we’ve taken a fresh look at how the interest rate environment and current outlook is likely to affect portfolio yields and have looked and current revenue and earnings trends in the Kanawha legacy business among other tings.

We looked at the published earnings models of the four analysts that follow our company and based on a variety of factors both old and new, we have concluded the that premium revenues and earnings estimates are above those we now believe are realistically achievable in 2006.

I’m going to comment on the following key earnings drivers and assumptions, which should provide analysts and investors with sufficient data to adjust their estimate to account for recent developments and our revised outlook for the business. These factors are first sales premium revenue and margin for the new large case activity. Second, reinsurance costs on the new activity. And third, the impact of stock buybacks and stock option expensing.

Now, relative to sales premium revenue and margins for the new activity. We expect sales and premium revenue from the new large case activity to increase rapidly throughout 2006. While we are not giving specific guidance on sales, I note that two of the analysts following KMA have published sales assumptions for the new large case sales channel for 2006. The average of the two estimates is 77 million, a figure which we would agree is reasonable. But where should this assumption lead you in terms of earned premium for the year? We have roughly 25 million of new annualized premium sold in 2005 and we’ll get most of a full year of earned premium from the early 2006 sales of 17 million. So, if you take 90% of those two numbers to account for modest lapses on the voluntary products, as well as slightly less than a full-year of premium earned on the January sales, the resulting amount if just under 40 million, which should be a good approximation for new direct earned premium in 2006 on sales already made through the early part of this year. Now, if you subtract a 17 million of initial sales from the analyst, 77 million average estimate for all of 2006. You’ll have 60 million of sales for the balance of 2006. Now, let’s estimate that about one-third of the remaining 60 million of 2006 sales will be actually earned during 2006. And adding that to the earned premium above for sales already made will give you between 55 and 60 million of total direct earned premium for the new large case activity in 2006, before factoring in reinsurance costs.

Now, due to slower than anticipated timing of our product approvals, many of our early sales have been single product offerings, particularly stop loss with other products we expect to quote later. This dynamic makes it more difficult to displace existing carriers and simultaneously achieve full product margins. Furthermore, stop loss may be just emerging from a soft pricing environment with early signs that pricing is firming. Stand alone group life sales are always competitive with better margins usually available with follow-on voluntary benefits sales and when that group life case renews. Benefit ratios, which are policy holder benefits divided by net earned premium on voluntary benefits are typically lower because the expense load is higher per unit of premium on the individual payroll deduct products. While we can’t comment specifically on expected benefit ratios by product, because of competitive considerations, I would note that overall, we would expect benefit ratios for the new activity to be in the mid to high 60’s this year and improving over time as the multi-product sales strategy is implemented, sales grow and more business renews.

Now a few words on the reinsurance cost on this new activity, the second factor I mentioned above. It’s not clear to what extent reinsurance cost for the new activity has been factored in to analyst estimates for 2006. Two of our products are heavily reinsured, stop loss and group disability. And given the timing of product approvals, stop loss has been a particularly large source of premium growth so far as we’ve noted. While the reinsurance cost in stop loss is high as 35 to 45% of direct premium, depending on case size. Our net premium on stop loss is probably significantly below what analysts might have modeled. For group disability, we reinsure 85% of the risk, while there is only a modest amount of reinsurance on group life. And finally, we don’t utilize much reinsurance on our voluntary products, which we expect to make up a material percentage of new total new activity sales over time. Overall, the reinsurance cost on new activity will likely be above what analysts had expected at a little below 30% of direct earned premium in 2006 and a declining percentage in future years as stop loss falls, as percentage of total premium, and is replaced with a higher percentage group life and voluntary products. While reinsurance is an indispensable risk management tool, it does reduce premium revenue without a proportional reduction in acquisition and operating expenses so overall margins are reduced along with revenues.

Now, some comments about stock buyback and stock option expense. To some small degree, the consensus analyst’s estimate for 2006 seems to reflect an early 2006 buyback. Given our current sales forecast, we expect that all existing capital will be needed to support our growth plan, while maintaining our financial strength ratings. We would therefore consider any buyback activity in 2006 as very unlikely. Now, option expensing will go into effect in the first quarter of 2006, though this expense does not yet appear to be reflected in all analyst estimates. We have been providing 10K footnote disclosures throughout 2005 for the pro forma affect on EPS from the new expensing rules. Our 2005 10K will show that 1,414,000 options were issued and are outstanding as of the end of 2005, with an additional 300,000 shares currently authorized for future use, mostly in 2006. All were issued at market prices, typically with four year vesting. The pro forma disclosure adjusted for the options yet to be granted in 2006, would indicate that EPS will likely be reduced by $0.04 per share in 2006, based on the Black-Scholes option pricing model. I would note that neither Ken nor I or indeed the entire senior management team has received any incremental options since the IPO. All have been used as long-term incentives for staff and sales representative recruitment.

Everything I’ve discussed so far about our business fundamentals relates to the new large case activity. I’ll round out the earnings outlook discussion with some observations regarding the legacy activity. This activity produced $0.17 per share of operating income in the fourth quarter, which equates to an annual run-rate of $0.68. We expect earnings on this business to improve modestly in 2006 perhaps around 5% for the full-year compared to this run-rate; primarily as a result of higher investment income. The average portfolio yield in the fourth quarter of [4.88%] should increase slightly each quarter and should average just above 5% for the full-year. This yield expectation for 2006 is below what we were expecting as recently as last fall. For 2006, we would expect earned premium to be flat year-over-year in the legacy activity as a result of the drop-off in new long-term care product sales in the second half of 2005, but then increasing modestly in later years with continuing sales in the small case worksite segment, which would be partially offset by the continuing runoff in the acquire business segment. Looking past 2006, we would expect this legacy earnings base to be rather flat with modest revenue increases of say 5% and improving expense ratios offset by increasing benefit ratios as the closed blocks age.

In conclusion, our $0.35 to $0.40 operating earnings per share range, we now expect for 2006, is clearly below the lowest current analysts estimate of $0.50. Our earnings expectation equates to a return on average equity around 4% or so in 2006. But we expect it to grow nicely thereafter. Our senior management team believes that stabilized returns on average equity in the mid-teens range continue to be very achievable through our business model. Although due to events somewhat beyond our direct control, we now expect we will miss our original projected target to achieve these returns by year-end 2007, by a matter of quarters. I know I’ve covered a lot of ground over the last few minutes, but we will be filing these comments in a 8K soon after this webcast, which should be available to you in electronic form very shortly.

With that, I’ll turn it back to Ken for the Q&A session.

Thank you, Scott. We are available for questions now.

Thank you, sir.

[OPERATOR INSTRUCTIONS]

And your first question comes from the line of David Lewis of SunTrust Robinson, please proceed.

Thank you and good morning.

Good morning.

A couple of questions, one do you see any consistent issues with the state approvals or is it just bureaucratic process that most companies go through?

It’s - - this is Ken Kuk. It’s strictly a bureaucratic process. I have reviewed detailed discussions that have been held with the insurance departments and we’re just working through normal issues. A couple of important states are taking longer than we would have expected.

And as far as Texas and Massachusetts would you expect - - and I know its hard to second guess what the regulators are going to do, but would you anticipate by the end of the first quarter, by the end of the second quarter or any guesstimate of timing, since its been out there for probably, what - - four months now?

This is Ken Kuk again. David, it could be this afternoon and it might be the end of June, we have no idea.

Okay. Second question on the recruiting and retention of the producers. Some that have left obviously and voluntarily and those voluntary departures, is that - - is the frustration the lack of the product portfolio to date, which obviously will get resolved quickly some of the state approvals or just personnel or individual issues? Obviously you don’t know fully how producers are going to react to more entrepreneurial type of organization, but give us a sense of what you see and kind of the morale of the existing producers.

There was no frustration related departures. We lost one individual who was lured back to this former employer. We understand that that was a possibility. We believe that person to be a really outstanding rep and we were very sad to have him return to his former employer. We had the irregularity that we referred to that - - where we had to terminate one employee and the other individual was offered a promotion to a senior management position. And I would note that that individual had not produced any new premium for us. We just concluded a - - what we refer to as [Benefits U] a training session here in Lancaster with all of our sales reps and support staff from around the nation. The energy and enthusiasm level is excellent. There are no embedded problems that I’m aware within our sales organization. These were three departures that were driven by specific events.

Okay, just a final question for right now. I know the proxy will be out soon, what is the incentive comp targets for 2006, 2007 and if you have anything for 2008 you could talk about it. What are the targets and focal points going to be?

Well, the targets will be related to earnings per share for the most part. Obviously there are sales expense and other factors, but the substantial portion of the incentive plans will be driven by earnings per share. We do not give specific guidance so we can not give more details about the incentive plans, but they are heavily driven by earnings per share.

Now is the absolute earnings per share, is it going to be off of some base looking at the growth rate and obviously all of that would translate into ultimately the ROE.

It’s based upon absolute earnings per share numbers.

And based on the $0.35 to $0.40 that you unofficially thrown out there, does that mean that management gets a full bonus based on that or some portion? Or how would that work?

There would not be a full bonus at $0.40 per share.

Right, thank you very much.

Thank you. Your next question comes from the line of Stewart Johnson of FBR, please proceed.

I also have a couple of questions. When I think about your business I think about the legacy Kanawha business and I think about the new sales operation that you’re ramping up. And I’m encouraged by what I see out of the legacy business, in fact, it’s coming in ahead of what I had expected. And even if you look at the new sales operation as you’re ramping it up, I think about that in two pieces, one being the voluntary business and the other being the core group life business. And the voluntary business as well, I’m encouraged in terms of sales and so forth. But there is a real issue in the core group business.

And the three products that I look at, group life, group disability, and stop loss. You’re having problems rolling two of them. I first of all want to ask, why would the delay, even if you have it rolled the group life product at least rolled at to half the sales force, you still haven’t sold anything. That’s a concern. And the second, I want to be sure that the margin issue you cited with the stop loss insurance is related to reinsurance costs and not a claims issue. And then I have a follow-up.

Okay, this is Kenneth Kuk again. The fact is that you can’t sell what you don’t have. And the sales that occur in the group products more than in stop loss or voluntary for January 1 renewals the sale occurs early in the fourth quarter or before. We did not have product available to participate in that activity other than stop loss and voluntary. So, its not that we haven’t sold any, its that we didn’t have it available for sale. Now, that we have it available for sale, we’re seeing quotes rise very, very rapidly. So, I don’t believe that there is an issue regarding our ability to sell it or the product design. It’s just a function of not having it available for sale for January 1. To the extent that we can sell stop loss, I think we can sell group life and group disability and obviously we’ve demonstrated we can sell voluntary.

But, aren’t there sales made outside of the renewal period? I would think that one guy somewhere would have sold something having to do with a group life product.

Oh, we’ve had group life sales, Stewart. We’ve had over $1 million of group life sales in January and we continue to quote that product very aggressively. As I said, quotes are growing rapidly.

I’m talking about the fourth quarter.

There’s just not much activity in group life other than on the first of the month. So we could have had a group life sale or two on December 1, but didn’t. But that would have been the only month that we would have had that product available to sell.

Okay, so the rollout was the issue I wanted to focus on and the other is the margin issue with the stop loss. I want to be sure that is attributed to reinsurance cost and not claims.

It’s absolutely - - that’s absolutely the case. It is the price that is available in the market and the reinsurance cost. The claims are clearly in line with expectations, although we have to say it is very early in the process to come to any conclusions about claims.

Okay and I guess the last question I have if Scott could maybe put a little perspective on - - clearly the unofficial guidance that you’re putting out is below the consensus number, but could you give us some perspective on the contribution due to the delayed rollout of the two products, versus the lower margin on the stop loss business? What’s the driver of your bringing down expectations?

Well, there’s a number of things including to some extent the continuing drag on our portfolio yield in light of the interest rate environment. But, we just have to emphasize the impact of the delayed product approvals. We had a higher percentage of our overall sales in stop loss than would have been the case had we had the broader portfolio available. That was the way we could get sales. And because of the very substantial reinsurance of stop loss, together with the competitive nature of that product that that continues our margins were reduced on those sales that were heavily concentrated in stop loss.

Now, as I had said and I think as Ken had also indicated, there are signs that the pricing environment for stop loss is improving. Further, as our product rollout continues, we would expect a higher concentration of group life and voluntary products than is currently the case and that should improve our margins. If for no other reason the reinsurance deduction in premium will be less.

Well, let me ask it a different way, if you had to do away with one of the two issues, the margin or the delayed product rollout which would you rather get rid of?

Well, they go hand in hand.

Stewart, this is Ken. I think that the margin is by far the more significant issue, because stop loss margins on average over time, can be every bit as good as group life. It’s just that we are in a period right now and I have in the past indicated that stop loss is the only product that we have that has some cyclicality to it. Where the pricing is soft, we surely, we’re in a position to not have this margin problem. And still have only sold stop loss. So, it’s clearly much more related to margin.

Okay and I understand the connection, you’re selling more of the stop loss insurance because you don’t have the other two products available.

That’s right.

Okay and then the last question I want to ask has to do with the AM Best rating. I know you said that the rating was affirmed. Has that been affirmed in light of your most recent press release?

Yes.

Okay, all right, thank you.

Thank you. And your next question comes from the line of [Craig Siegenthaler] of Credit Suisse, please proceed.

Thank you. Just was looking for further color on your sales results over the last 14 months or so. First I want to know what was the sales number for the fourth quarter? And also you talked about including January, I think even February ’06, what were the sales results thus far, just so that you can break it out a little bit?

This is Ken Kuk, January and February 1 sales results were about $16 million, 16 something.

Then did that leave 25 for the rest of the year?

We haven’t given sales guidance for the year. Scott has indicated that the analyst - -

During the call I heard like a 25 million for new sales and then the 16, what was that 25?

25 - - this is Scott DeLong, the 25 was what was sold in 2004 rolling forward - - or 2005. The premiums would be rolling forward into 2006 and then we also talked about that 16 million as being in position to contribute nearly a full-year of earned premium.

I’m guessing February was also a pretty strong quarter - - I mean pretty strong month there? Because doing the math, I think that only leaves 5 for January. So, February must have been strong.

I’m not sure I’m following your math?

Because wasn’t your target 30 million for full-year ’05, plus January?

That’s right.

Okay, well 16, 25 roughly 40 million that’s 10 million for February.

No, that’s not right.

Not all of that 25 that was sold in 2005 was in the fourth quarter.

Okay. Got it. Second question is your benefit ratio improved dramatically in the acquired segment, is this kind of a one time event, do you expect it to normalize? Or do you think it will continue around this level?

Well, we’ve - - that’s composed of a lot of things and it’s been volatile, but what I noted in the call was the vastly improved benefit ratio in the fourth quarter of 116% versus the third quarter where it was 164%. That fourth quarter number was in line with the benefit ratio in the first and second quarter. So, we viewed the third quarter as that outlier.

And final question, I think you just gave some color on this in the first question, I guess you have 19 sales reps now, 20 were hired in ’05, two hired thus far in ’06 and then you lost three over the last couple of months. And I think your initial guidance was five reps for the full year ’06, which means you’ve three more to go about. Is that roughly correct?

we are going to have 25 reps this year, so we will hire six more. We obviously had to hire three more than we had expected to.

Okay, excellent that’s it, thank you very much.

Thank you. And your next question comes from the line of Mike Grasher of Piper Jaffray, please proceed.

Thank you. Good morning. Most of the questions have been answered, but Scott maybe you could give a little bit more detail. I think you’ve mentioned something about $0.68 in ’05 on the legacy business. Can you break that out in any more detail as far as the contribution from the senior market, the acquired? And then I assume that that includes TPA as well.

Well, this is Scott. Let’s just go to the segment table in the press release.

In terms of sort of as you look ahead into ’06, then I think you talked about 5% increase above that or from that. How that might play out among the different segments.

I would of the four segments, the worksite, the small employer worksite segment, the acquired business segment, the senior segment and the TPA and we’ll not talk about the corporate segment for now. Two of those four I would view as growth segments, the worksite segment and the TPA. Now the TPA is not a large contributor but it has been growing very nicely, has very nice margins and we want to see that continue. This time a year ago, the senior market segment was also a growth segment, but given the decision in mid-year to stop the sales of new products and to shut down the agency that supported that segment. That is now a closed block.

We’ve observed the benefits ratio increasing in that segment in part because it is a closed block, in part because there have been some additional claims above expectation. Now the job there to aggressively manage that is to keep up the filings of rating increases and bird-dogging those filings until we get those approved. That continues to be something that we need to do. We fell behind a little bit on that toward the end of this year. We wouldn’t expect the senior market segment to grow in terms of earnings. But by the same token, we wouldn’t expect it to decline or decline very rapidly. We would expect the acquired business segment because it is by its nature a closed block to climb. So we have two growth segments, one more significant than the other in terms of materiality and two closed blocks. You put all of that into a blender and what comes out is that guidance that I gave.

Okay, that’s helpful. Then on the TPA it looks like the margins in ’05 were up a bit or improved over ’04. Is this something that to be stable at ’05 levels or can we see further improvement in the margins here?

Just to be sure, you’re talking about the TPA?

Yes, exactly.

Yes, oh that is one of the things we like about that business is there is a significant fixed cost component and once you drive your revenues beyond the point where you can fund those fixed costs, the incremental margins are very attractive, 25 to 30% I’m told. So, we want to continue to grow that business for that reason. Furthermore, the infrastructure that supports the third party administration business is the same infrastructure that supports the business we underwrite. So, by growing the TPA business along with growing our underwritten business, we achieve economies of scale that are improved margins on both sides. So, growth in one area of the TPA activity, helps the margins in the other area and vise versa.

Okay, thank you and maybe I missed this earlier, but did you give a guidance or any range of guidance for a yield on the investment portfolio?

Yes, this is Scott DeLong again, I had indicated that the average yield over the fourth quarter was 4.88% and we expect that to increase sequentially, although not in large leaps and bounds. But then looking at the average for the full year of 2006 we would expect that portfolio yield to be slightly above 5%.

Okay, thank you.

Thank you.

[OPERATOR INSTRUCTIONS]

And your next question comes from the line of Dan Hooper of Peninsula Capital, please proceed.

Scott, this is actually [Mike], with regard of this guidance of the EPS numbers that you put out, were you guys - - since you’ve been public I know there have been some things out of your control, plus the Sarbox. Were you guys just trying to get out there in front of this and sort of take, get all this news out all at one time and reset everybody for once and for all? Is that kind of what was going through your mind when you thought about the $0.35 to $0.40 number?

This is Scott DeLong, that’s exactly right. It had been our intent not that uncommon actually to delay giving specific guidance as long as we could. Obviously, we have a business here that to some extent is a start up. It makes it a bigger challenge for both analysts and investors as well as us to make accurate projections, when so much of what you’re projecting doesn’t exist at the time you’re making that projection. To some extent that’s true for every company, but for a start up, the amount of the activity that doesn’t exist that you’re projecting is very large.

With that said, after a full-year and particularly with that final piece of very, very important information on margins available to us in the sales late in 2005 and early in 2006, we felt we had enough information to give a thoughtful comment to the investment community and in combination with what we saw out there relative to street expectations. We just felt it was time. We aren’t committing to commencing quarter-to-quarter and year-to-year guidance from here. We’ll see how that develops, but we just felt on that a one time basis we needed to do that at this time.

Do you think - - is the biggest piece of that predictability these state approvals through products you’re trying to fill out. Once you get that done and behind you, does the predictability of your business go up quite a bit?

Dan, this is Ken Kuk. The answer is yes and I want to make sure that we come to the right conclusion that we have one problem. We have contributing factors like state approvals, but the one problem that we have is the margin on stop loss. We’ve built the sales organization and that’s doing just fine. We’re well accepted in the marketplace. Our administrative platform is proving to be more powerful than we thought it was.

The acquisition the Kanawha numbers are at expectations or better. And we’ve just got an incredible amount of enthusiasm for the future. But we have this one problem and that is the margins that we were able to get out on stop loss. If we had had state approvals in place earlier for the other products, we would have had - - we would have been able to balance those margin issues out. So, again, I repeat, I just want to make sure that we don’t come to the wrong conclusion about KMA as a result of this really isolated problem.

Okay.

Thank you. And you have a follow-up question come from the line of David Lewis of SunTrust Robinson, please proceed.

Thank you. I know you’ve already given as much guidance as you want on the future with your unofficial 2006, but hypothetically looking at ’07 and ’08 as your original trend was to get to the mid double digit ROE by the end of ’07. Is it fair to say that based on the process you see today with state approvals that we might see [New Co] turn profitable by the end of ’06 and that we could get to a 13 to 15% ROE level sometime in 2008?

I think that’s accurate. The issue that we have now is with the ROE run-rate that we expect in ’06, even if all of the other things fall into place, like the product approvals and so forth, that we don’t think that we can get a ROE ramp that will get us to a run-rate in the mid-teens by the end of ’07. Now, we don’t think that this is a problem of being delayed by years, but we think a matter of quarters. Although we haven’t completed all the analytical work we need to, to really nail when we think that is going to happen. It’s pretty apparent to us that it should be quarters rather than years.

Okay and Scott just to make sure based on your comments Kanawha’s trending in line to better than expected. I assume there would not be any recoverability issues on the [inaudible], is that fair.

David we have to do that test and show the results to the independent auditor once per year. We’ve done that relative to this year and we’re in good shape. We would expect to continue to be in shape, but that’s something you look at each and every year. There is a scenario that we wouldn’t expect, but certainly there is a scenario where the results someday in the future might not look as good as it looks right now.

All right, I understand. And just finally on the senior citizen block rate increases. Do you feel that - - you said you kind of fell behind a little bit late in the year. Is it more your doings of just the fact that Florida in particular tends to drag their feet on giving those rate increases?

Well, this is Scott again. Those are both accurate statements. Some states are pushed back harder than others and Florida is certainly one of those. But part of it is our own doing. We’ve had a truly enormous amount of activity we’ve had to complete relative to becoming the new public company, completing the conversion to purchase accounting, et cetera. we have a talented but small actuarial staff that handles both financial requirements as well as product requirements. And there - - we just slipped behind a bit.

I understand, thank you.

And your next question is a follow-up coming from the line of Mike Grasher of Piper Jaffray, please proceed.

Just a quick follow-up wanted to clarify that the margin analysis that will be in the 10K?

No, what I - - now this is Scott DeLong. Everything that I said I tried to lay it out piece by piece, will be in the script of the conference call that we will file with the SEC very, very shortly, probably within an hour.

Okay, thank you.

And your next question is a follow-up from the line of Stewart Johnson of FBR, please proceed.

I have an ROE related question, you know in ’06 we’re looking at an ROE of 4% and we’re going to ramp up to a mid-teens ROE, obviously the valuation is going to be very different. But, if we were to look at a peer group ROE closer to 12% you’ve gone through the ramp up period, can you give us an idea of when you might get to a peer group ROE?

This is Ken Kuk. Well, clearly we’re not going to get to mid-teens by the end of ’07. But I would guess that during that timeframe we would be coming close to that type of ROE that 10 to 12% type ROE. It’s really difficult to put a specific quarter on that kind of a question. But, we see no reason to conclude that mid-teen ROEs aren’t available. We don’t have - - we don’t think we have margin problems on any of the rest of our problems. We don’t think there are any issues relative to our ability to sell. We don’t think there are any issues regarding our ability to administer that. So we think we can get there. But identifying a specific quarter that we would reach a certain ROE is very difficult.

Okay and then just kind of a general question and it has to do with the transition you’re making from your position at ReliaStar where you’ve kind of gone through a number of these issues to your position to KMA, which is more of a start up. How much of your time do you and Scott and the auditors and the lawyers and so forth spend on one time ramp issues versus getting the business - - running the business on an established basis. I’m just trying to figure out how much of your time is being absorbed by start up versus actually running the business and how is that transition going?

This is Ken Kuk again. I have said in the past that I spend about 15% of my time on issues related to being a public company, investor issues, those types of activities. The bulk of my time is spent on interacting with sales organization and staff on running the business. It’s hard to differentiate between what is start up activity and what is running the business activity, because what we are now is a start up and we have to run the business.

So, about Scott could you answer that. I mean getting the 10K in order the first time the first is - - that track that you’re on now and eventually, I want to hear when you guys are going to be able to give us a better sense of when you’re reporting earnings, just to begin with?

Yes, this is Scott. The percentage of my time in year one is getting some of these basic public company activities in place is a very high percentage. Some of those basic building blocks just represent a different to some extent from the way we want to manage the business and use analytical tools to assist in managing that business, versus the way those things were dealt with in the past. But a good part of it has to do with doing SOX compliance activity, doing 10Qs and 10K filings, doing quarterly hard closes that weren’t done in the past. And that’s all part of getting ourselves up and running. And as I look to 2006, there will be a bit more of that, but I would expect the share of my time will drop considerably to what is now close to 100% to something hopefully much, much less than that.

And can we look forward to maybe an advance notice on the next earnings release?

Well, this was kind of the extreme, this quarter we have tended to give more than a few hours of notice. What happened this quarter was we had to take almost a month out of the filing deadline we had last year, plus this year unlike last year, we had to complete all of the enormous quantity of activities associated with initial SOX compliance. We didn’t want to announce earnings before we know we were going to be able to actually release earnings on that date. We actually beat our absolute deadline by seven days, I believe, well actually more than seven.

I know it seems late to you and we apologize for giving you such short notice, its objective to do at least as good as we did in recent quarters if not give you weeks rather than days of notice. That would be our hope. We don’t want to be the one at the end of the line reporting earnings either. So, it will be our objective to accelerate the entire process. I think we’ll be much better by the end of 2006, than we were at the end of 2005.

Okay, just an idea for the suggestion box. You did have some extra time to file, maybe say we will be reporting earnings in two days, so people can prepare for it rather than just releasing. But I understand the position you’re in.

Well, we very much would have liked to have given a weeks notice, let alone two days. We just weren’t in the position to do that, unless we said, well, we’ll just wait until Monday when we intend to file the K we’ll announce earnings. But we know you were anxious to have those earnings, so we decided to put them out as soon as we could.

Anxious is a good word. Thanks guys.

Thank you.

Ladies and gentlemen this concludes the Q &A portion of the call. I would like to turn the call back over to management for any closing remarks.

Thank you. We would like to thank you for your participation in today’s call. We fully appreciate that [missing] estimates is unacceptable and we’re not happy about having to deliver the message that current estimates for ’06 are too high. However, in our judgment it would be a mistake to focus strictly on the short-term when KMA has accomplished so many of our original objectives and the prospects for the future continue to look so promising. We have demonstrated we can sell our products on a broad base scale nationally.

The market has accepted KMG America is a strong industry participant. Our earnings ramp is underway and the market continues to be stable. We will stay the course and we remain confident in our ability to reach our goal of mid-teen ROEs and thereby deliver value to our shareholders. Thank you for all your support and confidence in launching an aggressive growth plan. It is inevitable there will be some bumps along the road, but the long-term opportunity remains as significant as when we started this journey. Thank you.

Thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect your lines. Have a great day.