KMA Kmg Amer Corp

KMG America Reports Net Income for Fourth-Quarter and Full-Year 2004 -- IPO and acquisition of Kanawha Insurance Company completed in December 2004 MINNEAPOLIS, March 31 /PRNewswire-FirstCall/ -- KMG America Corporation (NYSE:KMA) today reported net income for fourth quarter and full year 2004. KMG America was formed on January 21, 2004, and commenced its 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. For accounting purposes, Kanawha is treated as KMG America's predecessor entity, and the Kanawha acquisition is treated as if it closed on December 31, 2004. Accordingly, the statement of operations for fourth quarter and full year 2004 are reported for Kanawha on a historical basis without GAAP purchase accounting adjustments reflecting the acquisition, and are not combined with the separate statement of operations for KMG America for the period from the closing of the IPO through December 31, 2004. KMG America's financial position as of December 31, 2004, has been adjusted for GAAP purchase accounting adjustments to reflect the acquisition. Additionally, pro forma statements of operations for 2003 and 2004 are presented as if the Kanawha acquisition had occurred on January 1, 2003, and include pro forma purchase accounting adjustments reflecting the restatement of assets and liabilities to fair value on the pro forma purchase date. A reconciliation of pro forma net income back to GAAP net income is provided in the attached tables. For full year 2004, Kanawha's net income was $6.2 million, compared to net income for full year 2003 of $7.8 million. Net income for full year 2004 was reduced by a one-time expense in March 2004 for a $1.6 million incentive payment to one of Kanawha's outside investment managers. For full year 2004, Kanawha's operating income was $1.1 million, compared to operating income for full year 2003 of $2.8 million. Operating income for full year 2004 excludes realized investment gains of $6.1 million, net of income taxes, and the $1.0 million expense attributable to the one-time incentive payment, net of income taxes. Operating income for full year 2003 excludes realized investment gains of $4.9 million, net of income taxes. Through December 31, 2004, KMG America reported a loss of $0.2 million. For the fourth quarter of 2004, Kanawha's net income was $0.9 million, compared to $1.5 million in the fourth quarter of 2003. Operating income in the fourth quarter of 2004 was a loss of $1.2 million (excludes realized investment gains of $2.0 million, net of income taxes), compared to income of $0.8 million (excludes realized investment gains of $0.8 million, net of taxes) in the fourth quarter of 2003. For full year 2004, pro forma net income was $16.3 million, or $0.73 per diluted share, compared to pro forma net income for full year 2003 of $14.4 million, or $0.65 per diluted share. Pro forma net income for full year 2004 included the one-time pretax expense of $1.6 million in March relating to the aforementioned incentive payment. For full year 2004, pro forma operating income was $11.2 million, or $ 0.50 per diluted share, compared to pro forma operating income for full year 2003 of $9.5 million, or $0.43 per diluted share. Pro forma operating income for 2004 excludes realized investment gains of $6.1 million, net of income taxes, and the $1.0 million expense charge attributable to the one-time incentive payment, net of income taxes. Pro forma operating income for full year 2003 excludes realized investment gains of $4.9 million, net of income taxes. For the fourth quarter of 2004, pro forma net income was $3.4 million, or $0.15 per diluted share, compared to pro forma net income of $3.2 million, or $0.14 per diluted share in the fourth quarter of 2003. Pro forma operating income in the fourth quarter of 2004 was $1.4 million (excludes realized investment gains of $2.0 million, net of taxes), or $0.06 per diluted share, compared to $2.4 million (excludes realized investment gains of $0.8 million, net of taxes), or $0.11 per diluted share, in the fourth quarter of 2003. KMG America Chairman and CEO, Kenneth Kuk, commenting on these results, said, "Kanawha's fourth quarter results were marginally lower than our expectations but generally consistent with recent quarterly results. Among other things, earning results were negatively impacted by our decision not to invest accumulated excess cash in anticipation of an improving interest rate environment. Additionally, certain hiring expenses associated with our growth strategy were incurred in the fourth quarter." FOURTH QUARTER BUSINESS SEGMENT RESULTS FOR PREDECESSOR AND KMG AMERICA Kanawha reported a fourth quarter 2004 operating loss of $1.2 million (excluding realized investment gains of $2.0 million, net of taxes), compared to fourth quarter 2003 income of $0.8 million (excludes realized investment gains of $0.8 million, net of taxes). The primary drivers of the unfavorable comparison were lower investment income, higher accident and health claims, and increased hiring expenses. The decline in investment income was driven by the effect of the low interest rate environment generally, as well as the decision to reconfigure our investment portfolio to be consistent with investment strategies employed by publicly traded life insurance companies and the decision not to invest accumulated cash pending a more favorable interest rate environment. Average portfolio yield was 4.90% in the fourth quarter of 2004, compared to 5.96% in the fourth quarter of 2003. The decline in average portfolio yield had a proportional impact on the fourth quarter business segment results discussed below. All business segment earnings variances are stated on a GAAP pretax income basis. Worksite Insurance The worksite insurance segment includes life and health insurance products that are marketed primarily to employers and their employees in the southeastern United States. Products include life insurance, disability, dental, indemnity health and critical illness. The worksite segment reported a pretax operating loss of $0.7 million in the fourth quarter of 2004, compared to operating income of $0.6 million in the fourth quarter of 2003. The main reasons for the earnings decline include lower investment income ($0.5 million) and higher accident and health claims ($0.6 million) reflective of poor experience in two disability worksite cases. Management has discontinued new sales in these cases and is exploring alternatives for improving performance in 2005. These increased claims caused the benefit ratio to increase to 73.7% in the fourth quarter of 2004, compared to 71.6% in the fourth quarter of 2003. Premiums declined by $0.8 million reflecting the decision to discontinue issuing annuities at the end of 2003, with an offsetting decline in policyholder benefits. Senior Market Insurance The senior market insurance segment includes long term care insurance products marketed directly to individual customers by independent agents primarily in the southeastern United States. The senior market segment reported pretax operating income of $1.0 million in the fourth quarter of 2004, compared to operating income of $0.9 million in the fourth quarter of 2003. Premiums were down slightly reflecting lower new sales largely offset by higher renewal premiums. The benefit ratio increased slightly to 80.7% in the fourth quarter of 2004, compared to 80.5% in the fourth quarter of 2003. Third Party Administration The third party administration segment provides a wide range of insurance product administration, claims handling, eligibility administration, call center and support services for our worksite insurance and senior market businesses. It also provides administrative and managed care services to third parties. The third party administration segment reported pretax operating income of $0.1 million in the fourth quarter of 2004, compared to income of $0.2 million in the fourth quarter of 2003. While fee income and expenses were down slightly in the fourth quarter, both revenues and pretax income were up for the year, with pretax income more than doubling. Acquired Business Our predecessor acquired over time, through assumption and indemnity reinsurance transactions, a number of blocks of life and health insurance business. The acquired business segment reported a pretax operating loss of $1.7 million in the fourth quarter of 2004, compared to a loss of $1.2 million in the fourth quarter of 2003. Net investment income declined $0.5 million compared to the fourth quarter of 2003. Both premiums and policyholder benefits declined reflective of increased lapses consistent with a closed block of business in runoff. The benefit ratio increased to 251% in fourth quarter of 2004, compared to 203% in the fourth quarter of 2003, driven by adverse claims experience as well as the increased claims indicative of the aging in closed blocks of level premium policies. Approximately 70% of the reserves associated with the policies in the acquired block are paid up, which also contributes to the high benefit ratios in both years. Corporate and Other This segment includes investment income earned on the investment portfolio allocated to capital and surplus, as well as all realized investment gains and losses. This segment also includes marketing allowances, commissions and related expenses pertaining to product sales for other insurance carriers, which are currently not material. In addition, this segment includes certain unallocated expenses, primarily deferred compensation and incentive compensation costs, and other unallocated immaterial items. The corporate and other segment reported a fourth quarter 2004 pretax operating loss of $0.2 million (excludes $3.1 million of realized investment gains), compared to fourth quarter 2003 income of $0.4 million (excludes $1.2 million of realized investment gains). The decline was driven by lower investment income ($0.3 million) and increased expenses ($0.3 million) driven largely by additional hiring expenses. Realized investment gains were $3.1 million in the fourth quarter of 2004, compared to $1.2 million in the fourth quarter of 2003. KMG America KMG America, the holding company, reported a pretax operating loss of $0.3 million for the fourth quarter of 2004. These results include the operations since the date of the acquisition (December 21, 2004) and includes a small amount of investment income earned on excess capital, as well as accrued expenses for incentive compensation and other compensation related to two members of the new executive management team. BUSINESS DEVELOPMENTS Kenneth Kuk, KMG America's Chairman and CEO, commenting on the execution of KMG's business plan, stated: "We are clearly progressing more rapidly in the execution of our plan than expected. The hiring of sales representatives, product development and our branding efforts are all proceeding very well. It is encouraging to see the reception KMG America is getting in the marketplace. We've created the kind of energy necessary to achieve both short and longer term objectives." "Our senior management team has been expanded with the addition of Paul Moore and Paul Kraemer as national sales managers, Tom Sass as head of underwriting and operations, and Jim Nelson as General Counsel. Additionally, Dale Vaughan has been promoted to President of Kanawha Insurance Company. A good working relationship is developing between Kanawha and the new management team." "KMG America's plan called for 25 new sales reps to be added in 2005. As of the end of the first quarter, 10 reps have been hired and several others are pending. To a certain extent, we're suffering from our own success because as hiring is proceeding more rapidly than expected, we are incurring costs sooner than anticipated. We're currently modeling hiring expenses to try to find an appropriate balance between 2005 sales and expenses as well as 2006 results. We expect to exceed 2005 sales objectives and getting more sales representatives productive sooner should provide enhanced sales success in 2006. The hiring objective of 25 sales representatives could be accomplished by mid-summer if KMG America elects to maintain the current pace." "Kanawha's administrative capabilities are proving to be very expandable. A special unit has been established to shepherd early transactions through the system to insure proper handling, but there seems to be no doubt about the quality of Kanawha's third party administrator. While most of Kanawha's relationships are in the southeast, additional staff is being added to cover expanded sales efforts nationally." FOURTH QUARTER EARNINGS CONFERENCE CALL KMG America will hold a conference call on Thursday, March 31, at 10:00 a.m. Eastern Standard Time to discuss its fourth quarter and full year 2004 results. This call is being webcast by Thomson/CCBN and can be accessed from KMG America's website, http://www.kmgamerica.com/ . Please click on "Analyst/Investor" and there will be a link on the top right for the Q4 Conference Call. Please register approximately 5 minutes prior to the call. A rebroadcast will be available after noon on March 31 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 http://www.fulldisclosure.com/, Thomson/CCBN's individual investor portal, powered by StreetEvents. Institutional investors can access the call via Thomson's password-protected event management site, StreetEvents ( http://www.streetevents.com/ ). Non-GAAP Financial Measures -- Operating Income - To supplement Kanawha's 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 excluding 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 of the operating results of the business. In addition, this non-GAAP measure is used by management to evaluate the operating performance of the company. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net income determined in accordance with GAAP. -- Pro Forma Financial Information - To supplement KMG America's financial statements presented on a GAAP basis, the company reported "pro forma" financial information as if the Kanawha acquisition had occurred on January 1, 2003. Such pro forma financial information is a non-GAAP measure. The pro forma financial information has been adjusted for the application of purchase accounting adjustments reflecting the restatement to fair value of Kanawha's assets and liabilities as of the pro forma purchase date of January 1, 2003. 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 will be incorporated in KMG America's financial statements for 2005 and 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 that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The accuracy of such statements is subject to a number of risks, uncertainties and assumptions that may cause 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 Operations (in thousands, except where noted) KMG America Period Predecessor through Three Months Ended Twelve Months Ended Dec 31, 12/31/04 12/31/03 12/31/04 12/31/03 2004 Unaudited Premiums $25,604 $26,926 $102,836 $106,416 $- Net investment income 6,029 7,132 25,202 (1) 27,073 18 Commission and fee income 3,303 3,385 13,475 13,018 - Realized investment gains 3,141 1,196 9,433 7,601 - Other income 852 807 3,108 2,317 - Total revenue 38,929 39,446 154,054 156,425 18 Policyholder benefits 21,961 22,579 90,175 89,261 - Insurance commissions 2,540 2,327 9,690 9,074 - General insurance expenses 8,240 7,735 27,795 29,539 284 Insurance taxes, licenses and fees 1,306 876 4,678 4,708 4 Depreciation 535 685 2,492 3,005 - Amortization of DAC and VOBA (2) 2,641 3,028 9,468 9,588 - Total benefits & expenses 37,223 37,230 144,298 145,175 288 Total income before income taxes 1,706 2,216 9,756 11,250 (270) Provision for income taxes (819) (689) (3,566) (3,500) 94 Net income $887 $1,527 $6,190 $7,750 $(176) Operating income (3) $(1,155) $750 $1,068 $2,810 $(176) Benefit ratio (4) 85.8% 83.9% 87.7% 83.9% Average portfolio yield (5) 4.90% 5.96% 5.55% 5.73% Average invested assets $447,445 $459,591 $448,518 $449,708 Average cash and equivalents $44,250 $19,386 $33,236 $22,461 (1) Net investment income for the year ended December 31, 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 excluding the one-time $1.0 million, net of tax, incentive payment identified in footnote 1 above. (4) Benefit ratio is defined as policyholder benefits divided by net premiums. (5) Average portfolio yield is defined as net investment income divided by average invested assets plus cash and equivalents. Note that full year 2004 excludes the one-time $1.6 million incentive payment identified in note 1. KMG America Corporation and Predecessor Consolidated Balance Sheets (in thousands, except per share data) KMG America Predecessor December 31, 2004 (1) 2003 Assets: Cash and cash equivalents $117,400 $7,205 Investments 461,141 477,200 Total cash and investments 578,541 484,405 Accrued investment income 4,912 5,387 Deferred acquisition costs (DAC) - 80,657 Value of business acquired (VOBA) 74,481 29,605 Goodwill - 1,258 Other assets 112,117 83,858 Total assets $770,051 $685,170 Liabilities and shareholders' equity: Total policy and contract liabilities $530,915 $462,015 Deferred income taxes 6,502 22,827 Other liabilities 44,846 26,851 Total liabilities 582,263 511,693 Total shareholders' equity 187,788 173,477 Total liabilities and shareholders' equity $770,051 $685,170 Book value per share: Basic $8.51 see footnote (2) Diluted $8.44 see footnote (2) Ending shares outstanding: Basic 22,072 see footnote (2) Diluted (3) 22,242 see footnote (2) (1) 2004 balance sheet is stated on purchase GAAP (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 Pro Forma schedules that follow for the details of the PGAAP and KMG America adjustments. (2) Book values per share on December 31, 2004, are based on the number of shares issued in the IPO plus shares issued to the founders prior to the IPO. Historical per share values for our predecessor are not shown as of December 31, 2003, because they are not comparable. (3) Diluted shares were calculated using the treasury stock method. SEGMENT RESULTS in thousands Three Months Ended Twelve Months Ended 12/31/04 12/31/03 12/31/04 12/31/03 Worksite Insurance Business: Unaudited Insurance premiums $14,002 $14,767 $56,309 $58,433 Net investment income 1,078 1,565 5,028 5,944 Commission and fee income - - - - Realized investment gains - - - - Other income 45 190 264 386 Total revenue 15,125 16,522 61,601 64,763 Policyholder benefits 10,323 10,566 44,293 45,130 Insurance commissions 1,061 1,049 3,780 4,028 Expenses, taxes, fees and depreciation 2,688 2,582 9,966 11,150 Amortization of DAC and VOBA 1,715 1,732 6,209 5,201 Total benefits & expenses 15,787 15,929 64,248 65,509 Income (loss) before federal income taxes $(662) $593 $(2,647) $(746) Total Assets $169,761 $151,372 Senior Market Insurance Business: Insurance premiums $10,267 $10,337 $42,060 $41,546 Net investment income 982 739 3,878 2,427 Commission and fee income - - - - Realized investment gains - - - - Other income 677 480 2,347 1,564 Total revenue 11,926 11,556 48,285 45,537 Policyholder benefits 8,288 8,324 35,829 33,146 Insurance commissions 1,373 1,164 5,482 4,587 Expenses, taxes, fees and depreciation 1,021 661 3,695 2,928 Amortization of DAC and VOBA 273 461 641 826 Total benefits & expenses 10,955 10,610 45,647 41,487 Income (loss) before federal income taxes $971 $946 $2,638 $4,050 Total Assets $160,382 $115,751 Third Party Administration Business: Insurance premiums $- $- $- $- Net investment income - - - - Commission and fee income 3,235 3,379 13,295 13,008 Realized investment gains - - - - Other income 0 35 1 63 Total revenue 3,235 3,414 13,296 13,071 Policyholder benefits - - - - Insurance commissions - - - - Expenses, taxes, fees and depreciation 3,132 3,195 12,200 12,564 Amortization of DAC and VOBA - - - - Total benefits & expenses 3,132 3,195 12,200 12,564 Income (loss) before federal income taxes $103 $219 $1,096 $507 Total Assets $8,186 $8,859 SEGMENT RESULTS - Continued in thousands Three Months Ended Twelve Months Ended 12/31/04 12/31/03 12/31/04 12/31/03 Acquired Business: Unaudited Insurance premiums $1,335 $1,822 $4,467 $6,437 Net investment income 1,848 2,363 8,507 9,230 Commission and fee income - - - - Realized investment gains - - - - Other income 35 38 115 122 Total revenue 3,218 4,223 13,089 15,789 Policyholder benefits 3,350 3,689 10,053 10,985 Insurance commissions 106 114 428 459 Expenses, taxes, fees and depreciation 783 739 2,831 3,038 Amortization of DAC and VOBA 653 835 2,618 3,561 Total benefits & expenses 4,892 5,377 15,930 18,043 Income (loss) before federal income taxes $(1,674) $(1,154) $(2,841) $(2,254) Total Assets $215,851 $203,215 Corporate & Other: Insurance premiums $- $- $- $- Net investment income 2,121 2,465 7,789 9,472 Commission and fee income 68 6 180 10 Realized investment gains 3,141 1,196 9,433 7,601 Other income 95 64 381 182 Total revenue 5,425 3,731 17,783 17,265 Policyholder benefits - - - - Insurance commissions - - - - Expenses, taxes, fees and depreciation 2,457 2,119 6,273 7,572 Amortization of DAC and VOBA - - - - Total benefits & expenses 2,457 2,119 6,273 7,572 Income (loss) before federal income taxes $2,968 $1,612 $11,510 $9,693 Total Assets $157,714 $205,974 KMG America Corporation: Insurance premiums $- $- Net investment income 18 18 Commission and fee income - - Realized investment gains - - Other income - - Total revenue 18 18 Policyholder benefits - - Insurance commissions - - Expenses, taxes, fees and depreciation 288 288 Amortization of DAC and VOBA - - Total benefits & expenses 288 288 Income (loss) before federal income taxes $(270) $(270) Total Assets $58,157 KMG America Corporation Pro Forma Consolidated Statement of Operations - (Unaudited) (in thousands, except earnings per share data) Three Months Ended Twelve Months Ended 12/31/04 12/31/03 12/31/04 12/31/03 Premiums $25,604 $26,926 $102,836 $106,416 Net investment income 5,752 6,868 24,093 (1) 26,017 Commission and fee income 3,303 3,385 13,475 13,018 Realized investment gains 3,141 1,196 9,433 7,601 Other income 852 807 3,108 2,317 Total revenue 38,652 39,182 152,945 155,369 Policyholder benefits 18,582 19,923 76,658 78,637 Insurance commissions 2,540 2,327 9,690 9,074 General insurance expenses 8,437 7,922 28,583 30,288 Insurance taxes, licenses and fees 1,306 876 4,678 4,708 Depreciation 678 828 3,063 3,576 Amortization of DAC & VOBA 1,514 2,515 4,961 7,535 Total benefits & expenses 33,057 34,391 127,633 133,818 Total income before income taxes 5,595 4,791 25,312 21,551 Provision for income taxes (2,181) (1,590) (9,011) (7,104) Net income $3,414 $3,201 $16,301 $14,447 Pro forma net income per share: Basic $0.15 $0.15 $0.74 $0.65 Diluted $0.15 $0.14 $0.73 $0.65 Pro forma operating income: (2) Worksite Insurance $746 $890 $2,792 $1,411 Senior Market 1,538 1,414 5,525 5,843 Third Party Administration 41 151 695 349 Acquired (310) (91) 1,091 1,263 Corporate and Other (643) 61 1,076 639 Total pro forma operating income $1,372 $2,424 $11,179 $9,506 Pro forma operating income per share: Basic $0.06 $0.11 $0.51 $0.43 Diluted $0.06 $0.11 $0.50 $0.43 Weighted-average shares outstanding: Basic 22,072 22,072 22,072 22,072 Diluted 22,242 22,242 22,242 22,242 Benefit ratio 72.6% 74.0% 74.5% 73.9% (1) Net investment income for the year ended December 31, 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) Operating income is defined as net income excluding realized investment gains (losses), net of income taxes, and excluding the one-time $1.0 million, net of tax, incentive payment identified in footnote 1 above. KMG America Corporation Reconciliation of Pro Forma Consolidated Statement of Operations - (Unaudited) (in thousands) Three Months Ended Twelve Months Ended 12/31/04 12/31/03 12/31/04 12/31/03 Net Income as Reported $887 $1,527 $6,190 $7,750 Restatement to Purchase Accounting: (1) Adjustment to investment income (2) (277) (264) (1,109) (1,056) Adjustment to change in benefit reserves (3) 3,379 2,656 13,517 10,624 Subordinated note Interest expense (4) (197) (186) (788) (749) Amortization of other intangible assets (5) (143) (142) (571) (571) Amortization of DAC and VOBA (6) 1,127 513 4,507 2,054 Taxes on the above (1,362) (902) (5,445) (3,604) Net Income - Pro Forma $3,414 $3,201 $16,301 $14,447 (1) Pro forma restatement of earnings as if acquisition occurred on January 1, 2003. (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) Includes the interest expense on the $15 million zero coupon subordinated note. (5) 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. (6) Reflects the adjustment to remove historical amortization of deferred acquisition costs (DAC) and value of business acquired (VOBA) and to record amortization of the restated VOBA established on the balance sheet as of the January 1, 2003 pro forma purchase date. KMG America Corporation and Predecessor Consolidated Balance Sheet (Unaudited) - December 31, 2004 (in thousands, except per share data) Purchase GAAP KMG Adjustments KMG Kanawha America Incr America Historical Historical (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 reserve 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 where noted) OTHER FINANCIAL DATA Three Months Twelve Months Unaudited Ended Ended 12/31/04 12/31/03 12/31/04 12/31/03 Sales - issued and paid for annualized premiums: Worksite insurance segment Life $611 $1,196 $2,174 $4,562 Cancer 654 936 2,381 2,846 Disability income 1,619 1,214 5,325 3,848 Total worksite insurance 2,884 3,346 9,880 11,256 Senior market insurance segment Long term care 513 2,142 3,446 8,768 Total senior market insurance 513 2,142 3,446 8,768 All other 2,152 941 3,182 2,669 Total sales $5,549 $6,429 $16,508 $22,693 Life Insurance Inforce - face amount in millions: Individual 1,377 1,409 Group 2,535 2,584 Benefit ratios: (1) Worksite insurance 73.7% 71.6% 78.7% 77.2% Senior market insurance 80.7% 80.5% 85.2% 79.8% Acquired business (2) 251.0% 202.5% 225.1% 170.7% Total company 85.8% 83.9% 87.7% 83.9% (1) benefit ratio is defined as total policyholder benefits divided by total net premiums (2) acquired benefit ratio is impacted by a significant portion of the business being paid up (approximately 70% of inforce reserves). DATASOURCE: KMG America Corporation CONTACT: Sylvia Knight of KMG America Corporation, +1-888-313-4534, ext. 5956, Web site: http://www.kmgamerica.com/

Copyright