KMA Kmg Amer Corp

KMG America Reports Net Income for First Quarter 2005 MINNEAPOLIS, May 16 /PRNewswire-FirstCall/ -- KMG America Corporation (NYSE:KMA) today reported net income for the first quarter of 2005 of $1.0 million, or $.05 per diluted share. 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 for the quarter ended March 31, 2004 and December 31, 2004, reflect the historical operations of Kanawha only and do not include GAAP purchase accounting "PGAAP" adjustments reflecting the acquisition or KMG America's operations from December 21, 2004, through December 31, 2004. Results of operations, cash flows and changes in shareholders' equity for the quarter ended March 31, 2005, and KMG America's financial position as of December 31, 2004, and March 31, 2005, have been adjusted for PGAAP adjustments reflecting the Kanawha acquisition. Pro forma statements of operations for 2004 are presented that adjust the first quarter 2004 and the fourth quarter 2004 statements of operations for the actual dollar value impact that the December 31, 2004, balance sheet PGAAP adjustments had on the first quarter 2005 statement of operations to allow for a more meaningful comparison of period- over-period results. A reconciliation of pro forma net income back to GAAP net income is provided in the attached tables. Additionally, in order to facilitate period-over-period comparisons, expenses relating to the new KMG America activity (which includes expenses incurred in Kanawha related to the acquisition in the fourth quarter of 2004, as well as expenses of the new executive office, holding company and new sales and underwriting management and related staffing in both years), have been identified separately on the income statements. Operating trends specific to the Kanawha predecessor business are therefore more easily identified. For the first quarter of 2005, KMG America reported net income of $1.0 million, or $.05 per diluted share, compared to net income for the first quarter of 2004 of $0.1 million. Net income for the first quarter of 2004 was impacted by a one-time expense which reduced investment income in March of 2004 for a pretax $1.6 million incentive payment ($1.0 million net of taxes) to one of Kanawha's outside investment managers. Operating income in the first quarter of 2005 was $1.0 million (excludes realized investment gains of $0.0 million, net of taxes), or $.05 per diluted share, compared to operating income of $1.0 million (excludes realized investment gains of $0.1 million, net of taxes and a one-time incentive payment of $1.0 million, net of taxes) in the first quarter of 2004. Net income for the first quarter of 2005 was $1.0 million, or $.05 per diluted share, compared to pro forma net income for the first quarter of 2004 of $2.2 million, or $0.10 per diluted share. Pro forma net income for first quarter 2004 included the one-time pretax expense of $1.6 million in March of 2004 relating to the aforementioned incentive payment. Operating income in the first quarter of 2005 was $1.0 million (excludes realized investment gains of $0.0 million, net of taxes), or $.05 per diluted share, compared to pro forma operating income of $3.1 million (excludes realized investment gains of $0.1 million, net of taxes and a one-time incentive payment of $1.0 million, net of taxes), or $.14 per diluted share, in the first quarter of 2004. KMG America Chairman, President and Chief Executive Officer, Kenneth Kuk, commenting on these results, said, "KMG America's first quarter 2005 results are largely influenced by the success we've experienced in building our national sales organization more quickly than expected as well as our decision to invest at the shorter end of the yield curve where we believe there is more relative value, but lesser current yields. Additionally the costs of the infrastructure required to operate as a public company didn't exist in the comparative period of 2004. At this stage of our development our objective is to build the foundation for future growth while maintaining a level of profitability. Our first quarter results are consistent with that strategy." Expenses in the first quarter of 2005 compared to first quarter of 2004 increased by $3.4 million primarily due to $2.4 million of start up expenditures related to growing our national sales organization and the additional infrastructure required to operate as a public company incurred in the first quarter of 2005. Policyholder benefits in the first quarter of 2005 compared to the first quarter of 2004 decreased by $2.1 million and was favorably impacted by the PGAAP adjustment to record policy and contract reserves at fair value at December 31, 2004. This adjustment produced increased reserve balances, which should result in smaller reserve increases in the future. This adjustment also favorably impacts the benefits to premium ratios that are discussed in the segment results below. Investment income in the first quarter of 2005 compared to the first quarter of 2004 increased by $1.3 million due primarily to a one-time incentive payment of $1.6 million to one of Kanawha's outside investment managers in March, 2004. Investment income for the first quarter of 2005 was also adversely impacted by $0.5 million of amortization related to the approximately $18 million adjustment to fair value made to the cost basis of Kanawha's fixed income and mortgage loan investments at December 31, 2004. Investment portfolio yield declined to 4.60% in the first quarter of 2005 compared to 5.95% in the first quarter of 2004, reflecting this fair value adjustment as well as the continued effect of the low interest rate environment and our decision to seek shorter term investments where we perceive more value currently. We did invest during the first quarter of 2005 approximately $25 million of the approximately $117 million of cash and equivalents on December 31, 2004 in longer term securities when the 10 year Treasury rate increased in mid-to-late March by over 50 basis points above its first quarter low. A subsequent decline in rates caused us to put further longer term investments on hold. The decline in average portfolio yield had a proportional impact on the first quarter business segment results discussed below. FIRST QUARTER BUSINESS SEGMENT RESULTS All business segment earnings variances are stated on a pro forma pretax operating income basis. Prior periods include adjustments to the first quarter 2004 and fourth quarter 2004 statements of operations for the actual dollar value impact that the December 31, 2004, balance sheet PGAAP adjustments had on the first quarter 2005 statements of operations, and exclude realized investment gains. Operating income for the first quarter of 2004 also excludes the one-time $1.6 million incentive payment to one of Kanawha's outside investment managers in March, 2004. This variance discussion corresponds to the pro forma segment results tables that are attached. 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, disability, dental, indemnity health and critical illness insurance. The worksite insurance segment reported pretax operating income of $0.1 million in the first quarter of 2005, compared to pro forma pretax operating income of $1.6 million in the first quarter of 2004, a reduction of $1.5 million. Expenses were higher by $1.3 million due largely to $0.9 million of expenses incurred in the first quarter of 2005 that were not incurred in the first quarter of 2004 related to the new sales organization that will target larger employers nationwide. Premiums in the first quarter of 2005 increased by $0.6 million from the comparable period in 2004 reflecting improved sales results from Kanawha's distribution channel that targets smaller employers primarily in the southeastern United States. The benefit ratio in the first quarter of 2005 was 74.3% compared to 75.5% (pro forma basis) in the first quarter of 2004, reflecting slightly favorable claims experience. The first quarter 2005 benefit ratio of 74.3% compared unfavorably to the fourth quarter of 2004 pro forma benefit ratio of 67.0% due primarily to unfavorable claims experience in the cancer and medicare supplement lines. 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 insurance segment reported pretax operating income of $0.9 million in the first quarter of 2005, compared to pro forma pretax operating income of $1.5 million in the first quarter of 2004. Premiums in the first quarter of 2005 increased by $0.3 million from the comparable period in 2004 due to higher renewal premiums, offset by lower new sales premiums. The benefit ratio in the first quarter of 2005 was 78.7%, up from 75.4% (pro forma basis) in the first quarter of 2004 due largely to the overall weighting effect of lower new business sales in the first quarter of 2005. New business sales typically have a lower initial benefit ratio compared to renewal business. 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, primarily for the insurance products offered by 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 $0.3 million in the first quarter of 2005, compared to pretax operating income of $0.4 million in the first quarter of 2004. While both fee income and expenses were higher in the first quarter of 2005 than in the comparable prior year period, expense growth in the first quarter of 2005 modestly outpaced the growth in fee income resulting in a slight decrease in pre-tax operating income. Some of the expense growth is attributable to the success of our strategy of targeting employers with a larger number of employees than Kanawha previously targeted. Acquired Business Our predecessor acquired over time, through assumption and indemnity reinsurance transactions, a number of closed blocks of life and health insurance business. The acquired business segment reported pretax operating income of $1.1 million in the first quarter of 2005, compared to pro forma pretax operating income of $0.9 million in the first quarter of 2004. The improvement is due primarily to improved claims experience. The benefit ratio improved to 127.4% in first quarter of 2005, compared to 155.8% (pro forma basis) in the first quarter of 2004. The first quarter 2005 benefit ratio of 127.4% compares favorably to the fourth quarter 2004 pro forma benefit ratio of 210.2% due to improvements across most of the acquired blocks of business. Corporate and Other This segment includes investment income earned on the investment portfolio allocated to capital and surplus, as well as all realized investment capital gains and losses which are not allocated by line of business. 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 first quarter 2005 pretax operating loss of $0.9 million, compared to pro forma pretax operating income of $0.3 million in the first quarter of 2004, a decline of $1.2 million. The reason for the earnings decline was $1.4 million of expenses attributed to establishing the infrastructure required to operate as a public company. These expenses did not exist in the first quarter of 2004. BUSINESS DEVELOPMENTS Mr. Kuk, commenting on the execution of KMG's business plan, stated: "We slowed the pace of growth of our new sales organization in the first quarter but remain on track to have 2005 hiring objectives accomplished by the end of the third quarter. Other critical initiatives include product development, efficiency studies of our administrative operation, and in depth analysis of Kanawha's distribution systems. We are ahead of our plan on all fronts and clearly satisfied with our progress." FIRST QUARTER 2005 EARNINGS CONFERENCE CALL KMG America will hold a conference call on Monday, May 16, at 10:00 a.m. Eastern Standard Time to discuss its first quarter 2005 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 Q1 Conference Call. Please register approximately 5 minutes prior to the call. A rebroadcast will be available after noon on May 16 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 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 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 the financial statements presented on a GAAP basis, the company reported "pro forma" financial information that adjusts first quarter 2004 and the fourth quarter 2004 statements of operations for the actual dollar value impact that the December 31, 2004, balance sheet PGAAP adjustments had on the first quarter 2005 statement of operations. 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 first quarter of 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 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 Income (GAAP basis, unaudited) (in thousands, except percentages) KMG America Predecessor Predecessor Quarter Ended March 31, December 31, March 31, 2005 2004 2004 Insurance premiums $26,198 $25,604 $25,338(1) Net investment income 6,653 6,029 5,390 Commission and fee income 3,568 3,303 3,352 Realized investment gains 27 3,141 215 Other income 792 852 747 Total revenues 37,238 38,929 35,042 Policyholder benefits 20,430 21,961 22,541 Insurance commissions, net of deferrals 2,666 2,540 2,345 General insurance expenses - Kanawha only 7,107 7,096 6,095 General insurance expenses - KMGA new activity 2,353 1,144 -- Insurance taxes, licenses and fees 1,320 1,306 1,129 Depreciation 696 535 703 Amortization of DAC and VOBA (2) 1,085 2,641 2,091 Total benefits and expenses 35,657 37,223 34,904 Income before income taxes 1,581 1,706 138 (Provision) for income taxes (561) (819) (47) Net income $1,020 $887 $91 Operating income (loss) (3) $1,002 $(1,155) $960 Operating income excluding KMGA new expenses $2,532 $(411) $960 Benefit ratio (4) 78.0% 85.8% 89.0% Average portfolio yield (5) 4.60% 4.90% 5.95% Average invested assets $499,265 $447,445 $459,721 Average cash and equivalents $79,664 $44,250 $3,602 (1) Net investment income for the quarter ended March 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 non- recurring items, net of income taxes, which, for the quarter ended March 31, 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 first quarter 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) March 31, 2005 December 31, 2004 (1) (Unaudited) Assets: Cash and cash equivalents $41,929 $117,400 Investments 530,669 461,141 Total cash and investments 572,598 578,541 Accrued investment income 5,223 4,912 DAC 3,015 -- VOBA 73,740 74,481 Other assets 113,584 112,117 Total assets $768,160 $770,051 Liabilities and shareholders' equity: Total policy and contract liabilities $533,778 $530,915 Deferred income taxes 6,224 6,502 Other liabilities 43,718 44,846 Total liabilities 583,720 582,263 Total shareholders' equity 184,440 187,788 Total liabilities and shareholders' equity $768,160 $770,051 Book value per share: Basic $8.36 $8.51 (2) Diluted $8.34 $8.44 (2) Ending shares outstanding: Basic 22,072 22,072 Diluted (3) 22,104 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 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. (3) Diluted shares were calculated using the treasury stock method. KMG America Corporation and Predecessor Consolidated Statements of Income - (Unaudited) (in thousands, except share data and percentages) Predecessor Pro Forma Adjusted to KMG America PGAAP Quarter Ended March 31, December March 31, 2005 31, 2004 2004 Insurance premiums $26,198 $25,604 $25,338 Net investment income 6,653 5,561 4,922 Commissions and fees 3,568 3,303 3,352 Realized investment gains 27 3,141 215 Other income 792 852 747 Total revenues 37,238 38,461 34,574 Policyholder benefits 20,430 19,331 19,911 Insurance commissions, net of deferrals 2,666 2,540 2,345 General insurance expenses - Kanawha only 7,107 7,096 6,095 General insurance expenses - KMGA new activity 2,353 1,144 -- Insurance taxes, licenses and fees 1,320 1,306 1,129 Depreciation 696 678 846 Amortization of DAC & VOBA 1,085 1,430 880 Total benefits and expenses 35,657 33,525 31,206 Income before income taxes 1,581 4,936 3,368 (Provision) for income taxes (561) (1,950) (1,178) Net income $1,020 $2,987 $2,191 Pro forma net income per share: Basic $0.05 $0.14 $0.10 Diluted $0.05 $0.13 $0.10 Pro forma operating income (loss):(1) Worksite Insurance $94 $693 $1,052 Senior Market 597 982 964 Third Party Administration 179 54 268 Acquired 723 (244) 566 Corporate and Other (592) (541) 209 Total pro forma operating income $1,002 $945 $3,060 - Total excluding KMGA new expenses $2,532 $1,688 $3,060 Pro forma operating income per share: Basic $0.05 $0.04 $0.14 Diluted $0.05 $0.04 $0.14 Weighted-average shares outstanding:(2) Basic 22,072 22,072 22,072 Diluted 22,156 22,242 22,156 Benefit ratio 78.0% 75.5% 78.6% Average portfolio yield 4.60% 4.52% 5.59% (1) 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, which, for the quarter ended March 31, 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 first quarter of 2004 assume the same number of shares outstanding as the first quarter of 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 first quarter 2004 and the fourth quarter 2004 statements of operations for the actual dollar impact that the December 31, 2004, balance sheet PGAAP adjustments had on the first quarter 2005 statement of operations. 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 America Predecessor Quarter Ended March 31, December 31, March 31, 2005 2004 2004 Worksite Insurance Business: Insurance premiums $14,658 $14,002 $14,025 Net investment income 1,782 1,384 1,710 Commissions and fees -- -- -- Net realized gains -- -- -- Other income 49 45 130 Total revenues 16,489 15,431 15,865 Policyholder benefits 10,890 9,382 10,589 Commissions, net of deferrals 1,078 1,061 873 Expenses, taxes, fees and depreciation * 2,695 2,688 2,297 Expenses - KMGA new activity only 860 -- -- Amortization of DAC 820 983 490 Total benefits and expenses 16,343 14,114 14,249 Income (loss) before federal income taxes $146 $1,317 $1,616 Income (loss) before federal income taxes excluding KMGA new expenses $1,006 $1,317 $1,616 Total Assets $168,714 $169,761 $152,155 Senior Market Insurance Business: Insurance premiums $10,601 $10,267 $10,323 Net investment income 1,012 930 730 Commissions and fees -- -- -- Net realized gains -- -- -- Other income 657 677 495 Total revenues 12,270 11,874 11,548 Policyholder benefits 8,345 7,143 7,779 Commissions, net of deferrals 1,489 1,373 1,365 Expenses, taxes, fees and depreciation * 1,139 1,021 544 Amortization of DAC 371 472 379 Total benefits and expenses 11,344 10,009 10,067 Income before federal income taxes $926 $1,865 $1,481 Total Assets $168,486 $160,382 $125,541 * includes expenses for Kanawha legacy only PRO FORMA SEGMENT RESULTS (Unaudited) - Continued (in thousands) KMG America Predecessor Quarter Ended March 31, December 31, March 31, 2005 2004 2004 Third Party Administration Business: Insurance premiums $ -- $ -- $ -- Net investment income -- -- -- Commissions and fees 3,483 3,235 3,346 Net realized gains -- -- -- Other income 1 -- 1 Total revenues 3,484 3,235 3,347 Policyholder benefits -- -- -- Commissions, net of deferrals -- -- -- Expenses, taxes, fees and depreciation * 3,206 3,132 2,935 Amortization of DAC -- -- -- Total benefits and expenses 3,206 3,132 2,935 Income before federal income taxes $278 $103 $412 Total Assets $8,406 $8,186 $7,171 Acquired Business: Insurance premiums $938 $1,335 $990 Net investment income 2,063 1,837 2,201 Commissions and fees -- -- -- Net realized gains -- -- -- Other income 13 35 25 Total revenues 3,014 3,207 3,216 Policyholder benefits 1,195 2,806 1,542 Commissions, net of deferrals 99 106 107 Expenses, taxes, fees and depreciation * 704 783 686 Amortization of DAC (105) (25) 11 Total benefits and expenses 1,893 3,670 2,346 Income (loss) before federal income taxes $1,121 $(463) $870 Total Assets $212,188 $215,851 $201,033 Corporate & Other: Insurance premiums $ -- $ -- $ -- Net investment income 1,797 1,410 1,833 Commissions and fees 85 68 6 Net realized gains -- -- -- Other income 71 95 95 Total revenues 1,953 1,573 1,934 Policyholder benefits -- -- -- Commissions, net of deferrals -- -- -- Expenses, taxes, fees and depreciation * 1,423 1,456 1,608 Expenses - KMGA new activity only 1,447 1,144 -- Amortization of DAC -- -- -- Total benefits and expenses 2,870 2,600 1,608 Income (loss) before federal income taxes $(917) $(1,027) $326 Income (loss) before federal income taxes excluding KMGA new expenses $530 $117 $326 Total Assets $210,366 $157,714 $223,489 * includes expenses for Kanawha legacy only KMG America Corporation Reconciliation of Pro Forma Consolidated Statements of Income (Unaudited) (in thousands) KMG America Predecessor Predecessor Quarter Ended March 31, December 31, March 31, 2005 2004 2004 Net income as reported $1,020 $887 $91 Restatement to Purchase Accounting:(1) Adjustment to investment income(2) -- (468) (468) Adjustment to change in benefit reserves (3) -- 2,630 2,630 Amortization of other intangible assets (4) -- (143) (143) Amortization of DAC and VOBA (5) -- 1,211 1,211 Taxes on the above -- (1,131) (1,131) Net income - Pro Forma $1,020 $2,987 $2,191 (1) Pro forma restatement of earnings to include 1Q05 PGAAP adjustments in all comparable periods. (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 Senior Insurance Segment Segment December March December March 31, 2004 31, 2004 31, 2004 31, 2004 Pretax income as reported $(662) $(363) $971 $587 Restatement to Purchase Accounting:(1) Adjustment to investment income(2) 306 306 (52) (52) Adjustment to change in benefit reserves (3) 941 941 1,145 1,145 Amortization of DAC and VOBA (5) 732 732 (199) (199) Pretax operating income - pro forma $1,317 $1,616 $1,865 $1,481 Acquired Corporate and Insurance Segment Other Segment December March December March 31, 2004 31, 2004 31, 2004 31, 2004 Pretax income as reported $(1,674) $(341) $2,968 $(157) Adjust for realized investment gains $(3,141) $(215) Adjust for one-time incentive payment $1,552 Restatement to Purchase Accounting:(1) Adjustment to investment income(2) (11) (11) (711) (711) Adjustment to change in benefit reserves (3) 544 544 -- -- Amortization of other intangible assets (4) (143) (143) Amortization of DAC and VOBA (5) 678 678 -- -- Pretax operating income - pro forma $(463) $870 $(1,027) $326 (1) Pro forma restatement of earnings to include 1Q05 PGAAP adjustments in all comparable periods. (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. 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 (Decr) America Historical Historical 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 percentages) OTHER FINANCIAL DATA Unaudited KMG America Predecessor Predecessor Quarter Ended March 31, December 31, March 31, 2005 2004 2004 Sales - issued and paid for annualized premiums: Worksite insurance segment Life $619 $611 $437 Cancer 508 654 567 Disability income 1,311 1,619 949 Total worksite insurance 2,438 2,884 1,953 Senior market insurance segment Long term care 447 513 1,333 Total senior market insurance 447 513 1,333 All other 659 2,152 324 Total sales $3,544 $5,549 $3,610 Quarter Ended March 31, December 31, March 31, 2005 2004 2004 Pro forma benefit ratios: (1) Worksite insurance 74.3% 67.0% 75.5% Senior market insurance 78.7% 69.6% 75.4% Acquired business 127.4% 210.2% 155.8% Total company 78.0% 75.5% 78.6% (1) benefit ratio is defined as total policyholder benefits (equal to incurred claims plus increases in policyholder active life reserves) divided by total net premiums and are all stated on a pro forma basis by incorporating the actual first quarter 2005 PGAAP adjustments into the fourth quarter 2004 and first quarter 2004 results for comparability purposes. DATASOURCE: KMG America Corporation CONTACT: Sylvia Knight of KMG America Corporation, +1-888-313-4534, ext. 5956, Web site: http://www.kmgamerica.com/ http://www.fulldisclosure.com/ http://www.streetevents.com/

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