Worksite Insurance Business

        Kanawha's worksite insurance business provides voluntary life and health insurance products to employers and their employees in the southeastern United States. The primary insurance products that Kanawha underwrites include: individual life insurance; group life insurance ; short-term disability insurance; dental insurance; critical illness insurance; and indemnity health insurance. We may introduce new varieties of some of these products such as individual life insurance, group life insurance, disability life insurance, and dental insurance, and we may introduce new products such as medical stop-loss insurance , vision insurance, and accidental death and dismemberment insurance.

        Kanawha's worksite marketing business currently targets mostly small employers and groups in the southeastern United States generally having fewer than 200 individual employees or members. Presently, Kanawha's worksite insurance products are typically placed with sponsoring employers located primarily in the southeastern United States through independent agents. As part of our business strategy, we intend to develop an internal sales force that will market our products nationwide to larger worksite market employers and associations as well as intermediaries such as employee benefit consultants and other producers specializing in worksite marketing such as VBOs , enrollment firms, internal wholesalers, employee benefit consultants and national and regional insurance brokers. Our senior management team has industry relationships with many of these types of organizations, and we believe these relationships will be instrumental in developing a nationwide worksite marketing organization and should lead to high levels of sales productivity per sales force representative and increase profit margins over time.

        The worksite insurance market is large, stable and growing, as evidenced by the following characteristics (based on March 2004 estimates from Eastbridge Consulting Group, Inc.):

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over $14 billion of annual voluntary premiums were in force in the United States in 2003;



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new sales of voluntary worksite products totaled approximately $4.3 billion in the United States in 2003; and



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one of the fastest growing segments of the life and health insurance industry over the past six years, with average annual increases in new sales of voluntary products of approximately 14%.

        In addition to voluntary premiums, annual group life and health premiums generated through the worksite market exceeded $100 billion in 2002, according to the American Council of Life Insurers 2003 Fact Book.

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        KMG America's target market (workplaces with between 50 and 10,000 employees) includes over 290,000 businesses in the United States as of August 3, 2004, according to Dun & Bradstreet. We anticipate growth in voluntary products for the next several years as employers increasingly shift benefit costs to employees.

        Worksite marketing is an efficient and convenient way to distribute individual insurance products to employees by deducting premiums from their paychecks and packaging offerings with employer sponsored group coverages. Some of the marketing and distribution advantages of the worksite marketing approach include:

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the credibility of employer sponsored plans;



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the convenience of payroll deductions;



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the ability to market employee and employer coverages together as packaged products;



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pre-qualification and selection of vendors and benefits;



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simplified underwriting features;



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time saving and enrollment efficiencies; and



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the assistance of the sponsoring employer's human resources department.

        Our sales and marketing personnel will be eligible to participate in a broad-based equity incentive plan. We believe offering equity incentives that are tied to performance will provide us with a significant competitive advantage compared to most worksite insurance companies, which generally do not offer equity incentives to their sales and marketing personnel.

Senior Market Insurance Business

        Kanawha's senior market insurance business is a provider in the southeastern United States of individual insurance products tailored to the needs of older individuals. The primary insurance products that this business offers include long-term care insurance that it underwrites and Medicare supplement insurance underwritten by another carrier. The senior market of the life and health insurance industry focuses on providing insurance and other product offerings to senior citizens, whose product needs, risk and underwriting properties differ substantially from the general market. Kanawha's senior market products are marketed primarily by independent agents located primarily in the southeastern United States. These agents generally target individuals directly, not employers or groups as Kanawha's worksite insurance business does. Kanawha's senior market insurance business is licensed to offer senior market insurance products in 45 states.

        While growing Kanawha's senior market insurance business will not be a primary objective of our business strategy, we intend to operate this business efficiently and may consider expanding its geographic target market to select markets throughout the nation. We believe this business will complement our worksite insurance business and has growth potential due to several current demographic trends such as the increase in the proportion of older individuals in the United States population and the continued rise in medical and health care costs.

Third-Party Administration Business

        Kanawha's third-party administration business provides a wide range of insurance product administration, claims handling, eligibility administration, call center and support services. This business primarily administers the insurance plans offered by Kanawha's worksite insurance business and senior market insurance business, including Kanawha's existing in force policies. Kanawha's third-party administration business also provides administrative and managed care services to third parties, such as employers with self-funded health care plans, other insurance carriers, reinsurers and managed care

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plans. Kanawha's third-party benefits administration business focuses on three primary services: insured products administration; self-funded healthcare plan administration; and managed care services.

        We believe that Kanawha's third-party administration business has the capacity to administer additional policies, and we intend for it to administer the increasing volume of policies that we anticipate will be sold by our worksite insurance business as we attempt to grow that business. As the third-party administration business administers a higher volume of policies, we believe that our per policy administration costs will decrease and our consolidated net profits will increase. In addition, as our national worksite marketing business develops, we intend to opportunistically market our third-party administration services to self-insured plans, stop loss insurers, pharmacy benefit organizations, managed care service providers, other insurance carriers and reinsurers nationwide.

Life and Health Insurance Industry Overview

Market composition

        Life and health insurance industry premiums, including annuities, in the United States exceeded $500 billion for the year 2002, with approximately $200 billion of statutory equity capital for the year 2002 according to A.M. Best's Aggregates & Averages Life-Health Report—2003 Edition. Industry participants include large national and international insurers as well as small and medium-sized insurers with varying levels of geographic coverage and/or product lines. Industry participants also include divisions of multi-line insurance carriers, whose operations may include property and casualty insurance, financial guaranty insurance and/or other specialty insurance lines. Within the overall life and health insurance industry, the worksite marketing segment in which we plan to conduct most of our operations, was estimated by Eastbridge Consulting Group, Inc., to produce over $14 billion of annual voluntary premiums in 2003 in addition to over $100 billion of group life and health premiums for 2002, as reported by the American Council of Life Insurers 2003 Fact Book. This segment of the life and health insurance business includes a number of insurers, some of which target only the worksite marketing segment of the industry, and some of which offer varying levels of group and individual life, disability, annuity and health products to the employer market while also targeting other market segments.

Operating characteristics of the life and health insurance industry as compared to the property and casualty insurance industry

        In general, the life and health insurance industry has natural limits on volatility because most transactions will cover a significant number of covered lives whose mortality and morbidity , i.e., risk of injury or disability, are relatively independent of each other (exceptions include natural and man-made catastrophes, including terrorist events, in which the covered individuals affected are often younger and concentrated in close proximity to one another). This is different from the property and casualty insurance industry, in which risks are more heterogeneous in nature, policy language is more ambiguous, and broad social trends (such as mass tort litigation, jury award trends, and judicial and legislative decision making), catastrophes and the emergence of new exposures over time reduce the levels of independence between the underwritten risks so that large losses may occur. As a result, the life and health insurance business has relatively low underwriting risk compared to the property and casualty insurance business and is not subject to "commodity-like" pricing cycles and major catastrophe and/or mass tort exposures where risk has historically not been adequately considered when determining premium rates based on experience or where new risks have emerged over time and may not have been considered at all when determining premium rates.

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Life and Health Market Environment and Opportunities

        We believe we will be well positioned to benefit from a number of significant demographic, governmental and market trends that are currently impacting the life and health insurance industry, including:

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an aging United States population with growing financial protection needs;



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employers shifting benefit costs to employees;



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continued rise in medical and health care costs; and



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recently enacted Medicare legislation and medical savings account proposals.

Competitive Factors

        We believe that factors that will enable us to compete effectively will include:

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an experienced management team that has a proven track record and an entrepreneurial culture;



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strong relationships with key clients, distributors and industry personnel;



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a unique product mix and complementary businesses;



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strong capabilities in third-party administration;



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a disciplined approach to underwriting and risk management; and



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excellent financial strength.

Business Strategy

        Our objective is to achieve superior financial performance by transforming Kanawha's position as a regional voluntary life and health insurance company into a national life and health insurance company with an expanded product mix and nationwide marketing focus. We intend to achieve this by executing the following strategies in pursuit of profitable growth:

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expand our experienced management team;



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develop a nationwide marketing organization primarily focused on worksite marketing;



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implement performance-based equity compensation incentives;



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expand the types and varieties of insurance products and related services that we offer;



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develop a client-focused strategy by offering more bundled packages of multiple insurance products and services that are tailored to meet our customers' needs;



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improve the efficiency of our third-party administration business as it administers the increasing volume of policies that we intend to sell, which we expect will decrease per policy administration costs and increase our consolidated net profits;



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improve capital management to enhance risk-adjusted returns on investments and long-term growth in shareholder value;



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maintain a disciplined risk management approach through flexible underwriting and pricing strategies, diversification of products, industry, geography, and customers and the use of reinsurance; and



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pursue acquisitions opportunistically.

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Investments

        Investment returns will be an important part of our overall profitability. For the three-month period ended March 31, 2004, Kanawha's net investment income was approximately $7.0 million (before a one-time incentive payment of $1.6 million to one of Kanawha's outside investment managers at the conclusion of the contract period) and its net realized gains on investments were approximately $0.2 million, which collectively accounted for approximately 20.5% of its total revenues during this period. For the year ended December 31, 2003, Kanawha's net investment income was approximately $27.1 million and its net realized gains on investments were approximately $7.6 million, which collectively accounted for approximately 22.1% of its total revenues during this period. As of March 31, 2004, much of Kanawha's investment portfolio consisted of fixed maturity securities, such as corporate and government bonds, United States Treasury securities and asset backed debt securities, and less than 1% of its investments were equity securities. A portion of Kanawha's fixed income securities have equity components, which reduce their current yield. We intend to sell many of these securities and reinvest the proceeds in higher yielding instruments, which will likely result in higher current earnings and reduced capital gains.

Financial Strength Ratings

        Currently, Kanawha has an A.M. Best financial strength rating of A- (excellent). Based on our discussions with A.M. Best, we have received a pro forma indicative rating of A- (excellent) for Kanawha after we acquire it based on our prospective business plan. S&P's financial strength rating of Kanawha is A (strong), with a negative outlook, without consideration of our intended use of the net proceeds of this offering.

Formation and Organizational Structure

        KMG America was formed as a Virginia corporation in January 2004 and does not have any historical operations. Upon completion of the Kanawha acquisition, KMG America will own, directly or indirectly, all of the capital stock of Kanawha and its subsidiaries. KMG America will not conduct any insurance business itself, but will be an insurance holding company, conducting its insurance and other businesses through Kanawha and other operating subsidiaries.

        Following the Kanawha acquisition, Kanawha, which will be our insurance subsidiary, will be a direct subsidiary of KMG America, and Kanawha's non-insurance subsidiaries, which perform marketing, distribution, administration and other unregulated non-insurance functions, will be direct and indirect subsidiaries of Kanawha. Kanawha will continue to be subject to state insurance laws and regulations and extensive regulatory oversight, including regulations that limit the amount of dividends and other distributions it can pay to KMG America. Our non-insurance subsidiaries generally will not be subject to state insurance laws, regulations and oversight. However, because our non-insurance subsidiaries will be owned, directly or indirectly, by Kanawha, any dividends or distributions made by them to Kanawha will be subject to the state insurance regulations that limit dividends and distributions that Kanawha can make to KMG America. See "Our Structure and the Kanawha Acquisition—Formation and Organizational Structure."

Kanawha Acquisition

        KMG America has entered into a stock purchase agreement with the shareholders and optionholders of Kanawha to acquire all of Kanawha's outstanding capital stock concurrently with the closing of this offering for a net cash purchase price of approximately $143.9 million, subject to adjustment based on Kanawha's net worth as of the last day of the quarter ending immediately prior to the closing date. KMG America's obligation to close the acquisition is conditioned upon the closing of

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this offering. The Kanawha acquisition is also subject to other customary closing conditions. See "Our Structure and the Kanawha Acquisition—Kanawha Acquisition."

        Our principal executive offices will be located in the Minneapolis/St. Paul, Minnesota metropolitan area, and following the Kanawha acquisition, our insurance and other businesses will be located primarily in Lancaster, South Carolina. Our telephone number is (952) 474-8674.

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