**Exhibit99.01**

 

**RISKFACTORS**

 

*You should considerthe following risk factors in evaluating us, our business and an investment inour securities.  Any of the followingrisks, as well as other risks and uncertainties, could harm our business andfinancial results and cause the value of our securities to decline.  The risks below are not the only ones facingour company.  Additional risks notcurrently known to us or that we currently deem immaterial also may impair ourbusiness.  Unless the context requires otherwise,references herein to “we,” “us,” “our,” “KMG America” or the “Company” areintended to mean KMG America Corporation and its consolidated subsidiaries,including, without limitation, Kanawha Insurance Company (“Kanawha”).  References to our “predecessor” are intendedto mean Kanawha prior to it being acquired by KMG America.*

 

**RisksRelating To Our Business**

 

**If we are unable to implement our businessstrategy or operate our business as we currently expect,our growth and profitability will be adversely affected.**

 

KMG America was formed in 2004 to acquireKanawha and to operate and grow Kanawha’s insurance and other relatedbusinesses.  Our initial operationsprimarily consist of the operations that we acquired from Kanawha, and we havelimited name recognition or reputation in the insurance industry outside ofKanawha’s historic geographic market in the southeastern United States.  Our business plan is to grow Kanawha’sworksite insurance marketing and distribution business into a national businesstargeting larger employers by hiring experienced sales personnel, marketing ourproducts nationwide and introducing new life and health insuranceproducts.  Our ability to fully implementour business plan will be affected by market conditions, legislative andregulatory changes and other factors, many of which are beyond our control, andwe cannot assure you that we will be able to successfully complete thisnationwide expansion.

 

Businesses,such as ours, which are small and growing, present substantial business andfinancial risks and may suffer significant losses.  While we commenced our operations usingsenior management who are experienced in the life and health insuranceindustry, members of our management team may not be able to successfullymaintain their relationships in the industry. Further, we have had to and must continue to hire and train many keyemployees and other staff, develop business relations, establish operatingprocedures, obtain additional facilities, implement new systems and completeother tasks necessary for the conduct of our intended business activities.  If we are unable to implement these actionsin a timely and cost-effective manner, our business, results of operations orfinancial condition may be adversely affected. As a result of industry factors or factors specific to us, we may haveto alter our anticipated methods of conducting our business, such as thenature, amount and types of risks we assume.

 

**We may require additional capital in thefuture which may not be available on favorable terms or at all.  If we cannot obtain adequate capital, we maynot be able to fund our growth in accordance with our business strategy.**

 

A key component of our business strategy isto transform Kanawha’s southeastern United States worksite insurance marketingand distribution business into a national business that targets largeremployers by hiring experienced sales personnel, marketing our productsnationwide and introducing new life and health insurance products.  We may need to raise additional funds throughfinancings in order to fully implement our business plan.  The subordinated promissory note we issued inconnection with the acquisition of Kanawha restricts our ability to incuradditional debt because (1) pursuant to the terms of the subordinatedpromissory note, KMG America may not incur additional debt unless, at the timethe debt is incurred and after giving effect to such debt, (a) KMG America’sratio of debt to shareholders’ equity does not exceed 45% and (b) KMG America’sratio of debt, less trust preferred securities, to shareholders’ equity doesnot exceed 35%, and (2) KMG America will be in default under the promissorynote if Kanawha incurs, guarantees or assumes debt or issues any capital stockhaving any preference over the Kanawha capital stock held by KMG America.  The amount and timing of our capitalrequirements depend on many factors, including our ability to write newbusiness successfully and to establish premium rates and reserves at levelssufficient to cover our losses. In the future, we or our operating subsidiariesmay enter into term or revolving credit facilities with 

 

1

----

 

one or moresyndicates of lenders.  However, wecurrently have no commitment from any lender with respect to a creditfacility.  Any equity or debt financing,if available at all, may be on terms that are not favorable to us. If we areable to raise capital through equity financings, the interest of holders of ourcommon stock will be diluted, and the securities we issue may have rights,preferences and privileges that are senior to our common stock.  If we cannot obtain adequate capital, ourbusiness, results of operations and financial condition will be adverselyaffected.

 

We are not currently planning to make anyother significant capital expenditures or acquisitions in 2005 or subsequentyears.  However, we have significantlyexpanded outlays relating to marketing and sales activities, including outlaysrequired to build a national sales organization, andwe intend to make further substantial outlays over the next several years.  These outlays include such expenses assalaries and cash incentive compensation, employee benefits, occupancy andinformation technology expenses of additional sales personnel, advertising andmarketing costs, consulting and recruiting. Our business plan requires additional outlays associated with thedevelopment of a national insurance company including our leasing office spacefor our new principal executive offices, expenses for executive management andadditional financial, actuarial and underwriting personnel, infrastructuredevelopment and back-office expenses, as well as incremental costs associatedwith being a public company.

 

We anticipate that these costs will be offsetover time by increased sales production resulting from hiring additional salespersonnel and increased cross-selling, as well as efficiencies resulting fromgreater scale, and that we will not need to borrow funds or incur indebtednessto cover these costs.  However, duringthe first twelve months following our initial public offering, we do not expectthat our anticipated costs described above to implement our business strategywill be offset by incremental revenues, resulting in a net use of cash ofapproximately $5.0 million to $6.0 million during this period.  This cash outlay was and will be funded witha portion of the proceeds of our initial offering.

 

**We are incurring increased costs not incurredby our predecessor as a result of being a public company.**

 

As a public company, we have incurred andwill incur significant legal, accounting and other expenses that neither we norour predecessor incurred as private companies prior to our initial publicoffering, including costs associated with our public company reportingrequirements.  For example, we areimplementing additional policies regarding internal controls and disclosurecontrols and procedures.  We areincurring costs associated with corporate governance requirements, includingrequirements under the Sarbanes-Oxley Act of 2002, as well as new rulesimplemented by the Securities and Exchange Commission and the New York StockExchange, because our common stock is listed on such exchange.  These rules and regulations are increasingour legal and financial compliance costs and making some activities more time-consumingand costly.  These rules and regulationsmay also make it more difficult for us to obtain director and officer liabilityinsurance, which may make it more difficult for us to attract and retainqualified individuals to serve on our board of directors or as executiveofficers.

 

**We depend on our key executives.  We may not be able to hire and retain keyemployees or successfully integrate our new management team to fully implementour business strategy, which could delay or prevent us from fully implementingour business strategy and could significantly and negatively affect ourbusiness.**

 

Our success depends largely on our seniormanagement.  While we already employ anumber of key managers, we will need to attract additional managers for many ofthe product lines we intend to offer in order to fully implement our businessstrategy.  Further, we must attract andretain additional experienced underwriters, actuarial staff and risk analysisand modeling personnel in order to successfully operate and grow ourbusinesses.  The number of available,qualified personnel in the insurance and reinsurance industry available to fillthese positions may be limited.  Ourinability to attract and retain these additional personnel or the loss of theservices of any of our senior executives or key employees could delay orprevent us from fully implementing our business strategy and couldsignificantly and negatively affect our business.  After our management team and other personnelare assembled, our ability to implement our business strategy will depend ontheir successful integration.  We cannotassure you that we will successfully integrate our executive or otherpersonnel.  In addition, we may attemptto hire executives or other personnel, individually or in groups, from othercompanies in the insurance and reinsurance industry that may seek to retain, orprevent us from hiring, their executives and other personnel.  These companies may have agreements thatrestrict those persons from soliciting employees of these companies and workingfor competitors.  We cannot assure youthat we will be successful in hiring any executives or other personnel who aresubject to these restrictions or whose 

 

2

----

 

employer seeks toprevent us from hiring them or that we will not be subject to litigation orincur liabilities in connection with our hiring, or attempting to hire, suchexecutives or other personnel.

 

Employment agreements with most of ourexecutive officers and certain key employees have terms of approximately threeyears and may be renewed at our option for one additional year by providing theemployee with written notice.  Generally,either the employee or we may terminate these agreements with or without causesubject to applicable severance provisions and restrictive covenants, includingnon-compete and non-solicitation provisions.

 

**We may not be able to manage our growtheffectively, which could have a material adverse effect on our business,results of operations and financial condition.**

 

We intend to grow our business in the future,which could require additional capital, systems development and humanresources.  We cannot assure you that wewill be able to meet our capital needs, expand our systems effectively,allocate our human resources optimally, identify and hire qualified employeesor incorporate effectively the components of any businesses we may acquire inour effort to achieve growth.  Thefailure to manage our growth effectively could have a material adverse effecton our business, results of operations and financial condition.

 

**Our future performance cannot be predictedbased on the financial information included in our Form 10-K.**

 

KMG America was recently formed for thepurpose of acquiring Kanawha and to operate and grow Kanawha’s insurance andother related businesses.  We intend totransform Kanawha’s southeastern United States worksite insurance marketing anddistribution business into a national business that targets larger employers byhiring experienced sales personnel, marketing our products nationwide andintroducing new life and health insurance products.

 

As a relatively newly formed company, whoseinsurance-related operations did not commence until December 21, 2004, KMGAmerica has no operating history on which you can base an estimate of ourfuture earnings prospects.  Kanawha’sbusiness is intended to be only a portion of our consolidated business in thefuture and our predecessor’s business is not representative of our primarybusiness strategy.  As a result, thehistorical results of our predecessor presented in our Form 10-K are notcomparable with or representative of the actual results that we expect toachieve once we fully implement our business strategy and will not be helpfulin helping you make investment decisions with respect to shares of our commonstock.

 

**Our services may expose us to professionalliability in excess of our insurance coverage, which could cause us to incurmaterial losses.**

 

We may have liability to clients for errorsor omissions in the services we perform. These liabilities could exceed our insurance coverage and the fees wederive from those services.  We maintaingeneral liability insurance, umbrella and professional liabilityinsurance.  The cost of maintaining theseinsurance policies is rising. We cannot assure you that this insurance will besufficient to cover any liabilities we incur or that we will be able tomaintain our insurance at reasonable rates or at all.  If we terminate our policies and do notobtain retroactive coverage, we will be uninsured for claims made aftertermination even if these claims are based on events or acts that occurredduring the term of the policy.  Inaddition, we cannot assure you that we will be able to obtain insurancecoverage for the new services or areas into which we expand on favorable termsor at all.

 

**We rely on independent agents and brokers andon internal sales representatives to market many of our products, and aninability to attract or retain these independent agents and brokers or internalsales representatives could impair our ability to compete and market ourinsurance products and services.**

 

We distribute most of our insurance productsand services through a variety of distribution channels, including:

 

•                  independent employee benefits specialists;

 

•                  brokers;

 

3

----

 

•                  managinggeneral agents;

 

•                  life agents;

 

•                  financial institutions;

 

•                  association groups; and

 

•                  other third-party marketing organizations.

 

While one of the primary objectives of ourbusiness strategy is to develop an internal sales force to market our worksiteinsurance products to large employers nationwide, we intend to continue Kanawha’spractice of using independent insurance agents and brokers to market seniormarket insurance products and worksite insurance products to smallemployers.  Our relationships with thesevarious distributors are significant both for our revenues and profits.  These independent agents and brokers act asadvisors to our customers and market and distribute our products.  Generally, independent agents and brokers arenot exclusively dedicated to us and usually also market products of ourcompetitors.  Strong competition existsamong insurers to form relationships with agents and brokers of demonstratedability.  We compete with other insurersfor representation by sales representatives, agents and brokers primarily onthe basis of our financial position, support services, compensation and productfeatures.  An interruption in, or changesto, our relationships with various third-party distributors or our inability torespond to regulatory changes could impair our ability to compete and marketour insurance products and services and materially adversely affect ourbusiness, results of operations and financial condition.

 

We have internal sales representatives whoseroles in the distribution process vary by segment.  We depend in large part on our salesrepresentatives to develop and maintain client relationships.  Our inability to attract and retain effectivesales representatives could materially adversely affect our business, resultsof operations and financial condition.

 

**We may be unable to accurately predictbenefits, claims and other costs or to manage those costs through our losslimitation methods, which could result in our incurring greater claims lossesthan we anticipate.**

 

Our profitability depends in large part onaccurately predicting benefits, claims and other costs, including medical anddental costs, as well as the frequency and magnitude of claims on ourdisability and other coverages.  It alsodepends on our ability to manage future benefit and other costs through productdesign, underwriting criteria, utilization review or claims management (ourefforts to mitigate the extent of losses incurred by those insured under ourpolicies and the corresponding benefit costs) and, in health and dentalinsurance, negotiation of favorable provider contracts.  Utilization review is a review processdesigned to control and limit medical expenses, which includes, among otherthings, requiring certification for admission to a health care facility andcost-effective ways of handling patients with catastrophic illnesses.  Claims management entails the use of avariety of means to mitigate the extent of losses incurred by insureds and thecorresponding benefit cost, which includes efforts to improve the quality ofmedical care provided to insureds and to assist them with vocationalservices.  The aging of the populationand other demographic characteristics and advances in medical technologycontinue to contribute to rising health care costs.

 

Our ability to predict and manage costs andclaims, as well as our results of operations and financial condition may beadversely affected by:

 

•                  changesin health and dental care practices;

 

•                  inflation;

 

•                  new technologies;

 

•                  the cost of prescription drugs;

 

•                  clusters of high cost cases;

 

4

----

 

•                  changes in the regulatory environment;

 

•                  economic factors;

 

•                  the occurrence of catastrophes; and

 

•                  numerous other factors affecting the cost of health anddental care and the frequency and severity of claims in all our businesssegments.

 

The judicial and regulatory environments,changes in the composition of the kinds of work available in the economy,market conditions and numerous other factors may also materially adverselyaffect our ability to manage claim costs. As a result of one or more of these factors or other factors, claimscould substantially exceed our expectations, which could have a materialadverse effect on our results of operations and financial condition.

 

As industry practices and legal, judicial,social and other environmental conditions change, unexpected and unintendedissues relating to claims and coverage may emerge.  These issues could materially adverselyaffect our results of operations and financial condition by either extending coveragebeyond our underwriting intent or by increasing the number or size of claims orboth.  We may be limited in our abilityto respond to such changes by insurance regulations, existing contract terms, contract filing requirements, market conditions or otherfactors.

 

**Our actual claims losses may exceed ourreserves for claims, which may require us to establish additional reserves thatmay materially reduce our earnings, profitability and capital.**

 

We maintain reserves to cover our estimatedultimate exposure for claims and claim adjustment expenses with respect toreported and unreported claims incurred but not reported as of the end of eachaccounting period.  Reserves, whethercalculated under United States generally accepted accounting principles, orGAAP, or statutory accounting principles, or SAP (rules and proceduresprescribed or permitted by state insurance regulatory authorities which, ingeneral, reflect a liquidity, rather than going concern, concept ofaccounting), do not represent an exact calculation of exposure, but instead representour best estimates, generally involving actuarial projections at a given time,of what we expect the ultimate settlement and administration of a claim orgroup of claims will cost based on our assessment of facts and circumstancesthen known.  The adequacy of reserves isimpacted by future trends in claims severity, frequency, judicial theories ofliability and other factors.  Thesevariables are affected by both external and internal events over which we haveno control, such as:

 

•                  changes in the economic cycle;

 

•                  emerging medical perceptions regarding physiological orpsychological causes of disability or the need for long-term care services;

 

•                  emerging health issues and new methods of treatment oraccommodation;

 

•                  inflation;

 

•                  judicial trends;

 

•                  legislative changes; and

 

•                  claims handling procedures.

 

Many of these items are not directlyquantifiable, particularly on a prospective basis. Reserve estimates arerefined as experience develops. Adjustments to reserves, both positive and negative, are reflected inthe statement of operations of the period in which such estimates areupdated.  Because establishment ofreserves is an inherently uncertain process involving estimates of futurelosses, we cannot assure you that our ultimate losses will not exceed existingclaims reserves.  Moreover, future lossdevelopment could require reserves to be increased, which could have a materialadverse effect on our earnings in the periods in which such increases are made.

 

5

----

 

Policy and claim reserves were $441 million,and $462 million and $531 million as of December 31, 2002, 2003 and 2004,respectively.  These reserves arereevaluated each year, and we have determined that they were adequate as of December 31,2004, and no material adjustments for deficiencies were necessary.

 

**We may incur losses if there are significantdeviations from our assumptions regarding the period that our existinginsurance policies will remain in force.**

 

The prices and expected future profitabilityof our life insurance, long-term care insurance, and group life and healthinsurance are based in part upon expected patterns of premiums, expenses andbenefits, using a number of assumptions, including those related topersistency, which is the probability that a policy or contract will remain inforce from one period to the next.  Theeffect of persistency on profitability varies for different products.  For most of our life insurance, group lifeand health insurance products, actual persistency that is lower than ourpersistency assumptions could have an adverse impact on profitability,especially in the early years of a policy or contract, primarily because wewould be required to accelerate the amortization of expenses we deferred in connectionwith the acquisition of the policy or contract.

 

For our long-term care insurance and someother health insurance policies, actual persistency that is longer than ourpersistency assumptions could have a negative impact on profitability.  If these policies remain in force longer thanwe assumed, we could be required to make greater benefit payments than weanticipate when we price these products.

 

Historically, as has generally been the casethroughout the long-term care insurance industry, we have been adverselyaffected by deviations from our assumptions about how many of our long-termcare insurance policies would remain in force from year to year.  More policies than expected have remained inforce.  While this has increased premiumincome, it has also required higher reserves for anticipated future claims, thenet effect of which has been to reduce profitability.

 

Because our assumptions regarding persistencyexperience are inherently uncertain, reserves for future policy benefits andclaims may prove to be inadequate if actual persistency experience is differentfrom those assumptions.  Although some ofour products permit us to increase premiums during the life of the policy orcontract, we cannot guarantee that these increases will be sufficient tomaintain profitability.  Moreover, manyof our products do not permit us to increase premiums or limit those increasesduring the life of the policy or contract. Significant deviations in experience from pricing expectations regardingpersistency could have an adverse effect on the profitability of our products.

 

**Our investment portfolio is subject toseveral risks that may diminish the value of our invested assets and affect oursales and profitability.**

 

*Our investment portfolio may suffer reducedreturns or losses that could reduce our profitability.*

 

As of December 31, 2004, much of ourinvestment portfolio consisted of fixed maturity securities, such as corporateand government bonds, United States Treasury securities and asset backed debtsecurities, and less than 1% of our investments were equity securities.  A portion of our fixed income securities haveequity components, which reduce their current yield.  We intend to sell many of these securitiesand reinvest the proceeds in higher yielding instruments that do not haveequity components, which will likely result in higher current earnings andreduced capital gains.  Investmentreturns are an important part of our overall profitability and significantfluctuations in the fixed income market could impair our profitability,financial condition and cash flows.  Ourinvestments are subject to market-wide risks and fluctuations, as well as torisks inherent in particular securities. In particular, volatility of claims may force us to liquidate fixed maturitysecurities prior to maturity, which may cause us to incur capital losses.  If we do not structure our investmentportfolio so that it is appropriately matched with our insurance liabilities,we may be forced to liquidate investments prior to maturity at a significantloss to cover such liabilities.

 

6

----

 

*The performance ofour investment portfolio is subject to fluctuations due to changes in interestrates and**market conditions.*

 

Changes in interest rates can negativelyaffect the performance of some of our investments. Interest rate volatility canreduce unrealized gains or create unrealized losses in our portfolios.  Interest rates are highly sensitive to manyfactors, including governmental monetary policies, domestic and internationaleconomic and political conditions and other factors beyond our control.  Fluctuations in interest rates may affect ourreturns on, and the market value of, fixed maturity investments, whichcomprised more than 88.8% of the carrying value of our total investments as of December 31,2004.

 

The fair market value of the fixed maturitysecurities in our portfolio and the investment income from these securitiesfluctuate depending on general economic and market conditions.  The fair market value generally increases ordecreases in an inverse relationship with fluctuations in interest rates, whilenet investment income realized by us from future investments in fixed maturitysecurities generally will increase or decrease with interest rates.  In addition, actual net investment incomeand/or cash flows from investments that carry prepayment risk, such as mortgage-backedand other asset-backed securities, may differ from those anticipated at thetime of investment as a result of interest rate fluctuations.  In periods of declining interest rates,mortgage prepayments generally increase and mortgage-backed securities,commercial mortgage obligations and bonds in our investment portfolio are morelikely to be prepaid or redeemed as borrowers seek to borrow at lower interestrates, and we may be required to reinvest those funds in lower interest-bearinginvestments.  As of December 31,2004, mortgage-backed and other asset-backed securities representedapproximately 31% of the carrying value of our total investments.

 

Because substantially all of our fixedmaturity securities are classified as available-for-sale, changes in the marketvalue of these securities are reflected in our balance sheet.  Similar treatment is not available for liabilities.  Therefore, interest rate fluctuations willaffect the value of our investments and could materially adversely affect ourresults of operations and financial condition.

 

We intend to expand Kanawha’s pre-acquisitionasset/liability matching strategy to reduce the adverse effects of interestrate volatility and to engage asset/liability management specialists toimplement our asset/liability matching strategy.  However, these strategies will not be able tocompletely eliminate, and may fail to significantly reduce, the adverse effectsof interest rate volatility, and we cannot assure you that significantfluctuations in the level of interest rates will not have a material adverseeffect on our results of operations and financial condition.

 

We calculate reserves for long-term care andlife waiver of premium claims using net present value calculations based oncurrent interest rates at the time claims are funded and on expectationsregarding future interest rates.  Waiverof premium is a provision in a life insurance policy that stipulates that if aninsured has a total disability that lasts for a specified period, the insuredno longer has to pay premiums.  Thiswaiver lasts for the duration of the disability or for a stated period, duringwhich time the life insurance coverage provides continued coverage.  If interest rates decline, reserves for newclaims would need to be calculated using lower discount rates, which wouldincrease the net present value of those claims and the required reserves.  Depending on the magnitude of the decline,this could have a material adverse effect on our results of operations andfinancial condition.  In addition,investment income may be lower than that assumed in setting premium rates,which could also have a material adverse effect on our profitability.

 

*Our investmentportfolio is subject to credit risk.*

 

We are subject to credit risk in ourinvestment portfolio, primarily from our investments in corporate bonds andpreferred stocks.  Defaults by thirdparties in the payment or performance of their obligations could reduce ourinvestment income and realized investment gains or result in investmentlosses.  Further, the value of anyparticular fixed maturity security is subject to impairment based on thecreditworthiness of the issuer.  As of December 31,2004, we held approximately $409.6 million of fixed maturity securities, orapproximately 88.8% of the carrying value of our total invested assets at thatdate.  Our fixed maturity portfolio alsoincludes below investment grade securities (which are debt securities rated byone of the national rating agencies at a rating that reflects greater risksthan investment grade securities, including the possibility of default orbankruptcy by the issuer of the security). Below investment grade securities comprised approximately 2.2% of thecarrying value of our total fixed maturity securities at December 31,2004.  These investments generallyprovide higher expected returns but present greater risk and can be less liquidthan investment grade securities.  Asignificant increase in defaults and impairments on our fixed maturitysecurities portfolio could materially adversely affect our results ofoperations and financial condition. Other-than-temporary impairment losses on our available-for-salesecurities were approximately $0.5 million for the year ended December 31,2004.

 

7

----

 

As of December 31, 2004, less than 1% ofthe carrying value of our total investments was invested in common stock;however, our predecessor had higher percentages of common stock in itsportfolio in the past and we may increase the percentage of our portfolio thatis invested in common stock in the future. Investments in common stock generally provide higher total returns, butpresent greater risk to preservation of principal than fixed incomeinvestments.

 

*Some of ourinvestments are illiquid.*

 

Our predecessor has in the past invested, andwe may in the future invest, in relatively illiquid securities includinginfrequently traded public fixed maturity securities, privately placed fixedmaturity securities, mortgage loans, policy loans, limited partnershipinterests, real estate investments and restricted investments held bysecuritization.  These asset classesrepresented approximately 12.4% of the carrying value of our total cash andinvested assets as of December 31, 2004. If we require significant amounts of cash on short notice in excess ofour normal cash requirements, we may have difficulty selling these investmentsin a timely manner, be forced to sell them for less than we otherwise wouldhave been able to realize, or both.  Ourinability to quickly dispose of illiquid investments could have an adverseeffect on our results of operations and financial condition.

 

*The risk parametersof our investment portfolio may not target an appropriate level of risk, whichmay reduce**                               ourprofitability and diminish our ability to compete and grow.*

 

We seek to earn returns on our investments toenhance our ability to offer competitive rates and prices to ourcustomers.  Accordingly, our investmentdecisions and objectives are a function of the underlying risks and productprofiles of each of our business segments. However, we may not succeed in targeting an appropriate overall risklevel for our investment portfolio.  As aresult, the return on our investments may be insufficient to meet our profittargets over the long-term.  If inresponse, we choose to increase our product prices to maintain profitability,we may diminish our ability to compete and grow.

 

*We may incurenvironmental liability as a result of our mortgage loan portfolio and realestate investments or**                             as aresult of our ownership of real property.*

 

We have invested, and intend to invest, inreal estate and maintain a mortgage loan portfolio.  As of December 31, 2004, 5.1% of ourinvestment assets were mortgage loans and we did not have any real estateinvestments, although we do own and occupy a group of buildings in Lancaster,South Carolina where most of our operations are located and an office buildingin Fort Mill, South Carolina.  Liabilityresulting from environmental problems at properties securing our mortgage loanportfolio and real estate investments or other owned real estate may harm ourfinancial strength and reduce our profitability.  Under the laws of several states,contamination of a property may give rise to a lien on the property to securerecovery of the costs of the cleanup.  Insome states, this kind of lien has priority over the lien of an existingmortgage against the property, which would impair our ability to foreclose onthat property should the related loan be in default.  In addition, under the laws of some statesand under the federal Comprehensive Environmental Response, Compensation andLiability Act of 1980 (“CERCLA”), under certain circumstances, we may be liablefor costs of addressing releases or threatened releases of hazardous substancesthat require remedy at a property securing a mortgage loan held by us.  We also may face this liability afterforeclosing on a property securing a mortgage loan held by us after a loandefault.

 

Under CERCLA and other applicableenvironmental laws, we will be liable for environmental conditions, damages andremediation of property owned by us, even if the liability arises from theactions or conduct of previous owners of the property, including the actions orconduct of Kanawha prior to the December 21, 2004, closing of the Kanawhaacquisition.  Although the formershareholders and optionholders of Kanawha have agreed to indemnify us for someenvironmental losses we incur with respect to real property we acquired fromKanawha, this protection is limited, and we are exposed to liability forenvironmental conditions existing on real property prior to our acquisition ofKanawha to the extent this liability exceeds the indemnification coverage or tothe extent that we are not indemnified against this liability.

 

8

----

** **

**The indemnification available to us under theKanawha purchase agreement may not be sufficient to cover all our losses,claims or liabilities arising from breaches of the purchase agreement.**

 

The former shareholders and optionholders ofKanawha have agreed to indemnify us for losses we incur as a result of breachesof the representations, warranties and covenants made by the former Kanawhashareholders and optionholders in the purchase agreement pursuant to which weacquired all of the stock of Kanawha. However, there are significant limitations on this indemnification.  For example, (1) some losses are notindemnifiable until they exceed a deductible of $750,000 and are notindemnifiable after they exceed indemnification limits, and (2) our right to indemnificationfor most losses, claims or liabilities arising from breaches of the purchaseagreement expires between June 21, 2006 and December 21, 2008.  We cannot assure you that the indemnificationavailable to us under the purchase agreement is sufficient to cover all losses,claims or liabilities arising from potential breaches of the representations,warranties and covenants made by the former Kanawha shareholders andoptionholders in the purchase agreement.

 

**The financial strength of Kanawha, ourinsurance subsidiary, is rated by A.M. Best and S&P, and a decline in theseratings could affect our standing in the insurance industry and cause our salesand earnings to decrease.**

 

Financial strength ratings have become anincreasingly important factor in establishing the competitive position ofinsurance companies.  Kanawha is rated byA.M. Best and Standard & Poor’s (“S&P”).  The financial strength ratings reflect A.M.Best’s and S&P’s opinions of Kanawha’s financial strength, operatingperformance, competitive position and ability to meet its obligations topolicyholders.  These ratings are subjectto periodic review by A.M. Best and S&P, and we cannot assure you thatKanawha will be able to retain these ratings.

 

Kanawha has an A.M. Best financial strengthrating of A- (excellent), which is the second highest of ten categories and thelowest within the category based on modifiers (i.e., A and A- are excellent).

 

S&P’s current financial strength ratingfor Kanawha is A- (strong), with a stable outlook, which is the third highestof nine categories and the lowest within the category based on modifiers (i.e.,A+, A and A- are strong).

 

Rating agencies review their ratingsperiodically and Kanawha’s current ratings may not be maintained in thefuture.  If Kanawha’s ratings are reducedfrom their current levels by A.M. Best or S&P, or placed under surveillanceor review with possible negative implications, our competitive position in theinsurance industry could suffer.  Factorsthat could cause the rating agencies to reduce our ratings include:

 

•                  the competitive environment in the insurance industry, whichmay adversely affect our revenues;

 

•                  the inherent uncertainty in determining reserves for futureclaims, which may cause us to increase our reserves for claims;

 

•                  the outcome of pending litigation and regulatoryinvestigations, which may adversely affect our financial position andreputation; and

 

•                  possible changes in the methodology or criteria applied bythe rating agencies.

 

As customers and their advisors placeimportance on our financial strength ratings, we may lose customers and competeless successfully if Kanawha’s rating is downgraded. In addition, ratings willimpact our ability to attract investment capital on favorable terms.  If our financial strength ratings are reducedfrom Kanawha’s current levels by A.M. Best or S&P, our cost ofborrowing would likely increase, our sales and earnings could decrease and ourresults of operations and financial condition could be materially adverselyaffected.

 

In addition, the standards used by ratingagencies in determining financial strength are different from capitalrequirements set by state insurance regulators. We may need to take actions in response to changing standards set by anyof the ratings agencies, as well as statutory capital requirements, which couldcause our business and operations to suffer.

 

In addition to the financial strength ratingsof our insurance subsidiary, ratings agencies also may publish credit ratings(which reflect the opinions of rating agencies, such as S&P, regarding ourability to repay our indebtedness) for our company.  The credit ratings have an impact on theinterest rates we pay on the money we 

 

9

----

 

borrow.  Therefore, a downgrade in our credit ratingscould increase our cost of borrowing and have an adverse effect on our resultsof operations and financial condition.

 

**The financial strength ratings of Kanawha,our insurance subsidiary, are not evaluations for the benefit of investors inour common stock and are not recommendations to buy,sell or hold shares of our common stock.**

 

The financial strength ratings of Kanawha,our insurance subsidiary, reflect each rating agency’s current opinion ofKanawha’s financial strength, operating performance and ability to meetobligations to policyholders and contractholders.  These factors are of concern topolicyholders, contractholders, agents, sales intermediaries and lenders.Ratings are not evaluations for the benefit of investors in our commonstock.  They are not ratings of ourcommon stock and should not be relied upon when making a decision to buy, holdor sell our shares of common stock or any other security.

 

**A failure to effectively maintain andmodernize our information systems could cause us to experience adverseconsequences, including: inadequate information on which to base pricing,underwriting and reserving decisions; the loss of existing, or difficulties inattracting new, agents, brokers and customers; litigation exposure; orincreases in administrative expenses, all of which could adversely affect ourbusiness.**

 

Our business depends upon our ability toremain current with technological advances. This is particularly important in our administrative and managed caredivision, where our systems, including our ability to keep our systems fullyintegrated with those of our clients, are critical to the operation of ourbusiness.  Our failure to update oursystems to reflect technological advancements or to protect our systems mayadversely affect our relationships and ability to do business with our clients.

 

In addition, our business dependssignificantly on effective information systems. We will have to commit significant resources to maintain and enhance ourexisting information systems and develop new information systems to keep pacewith continuing changes in information processing technology, evolving industryand regulatory standards and changing customer preferences.  If we pursue acquisitions, we may acquireadditional information systems.  Ourfailure to maintain effective and efficient information systems, or our failureto efficiently and effectively consolidate our information systems to eliminateredundant or obsolete applications, could have a material adverse effect on ourresults of operations and financial condition. If we do not maintain adequate systems we could experience adverseconsequences, including:

 

•                  inadequate information on which to base pricing,underwriting and reserving decisions;

 

•                  the loss of existing agents, brokers and customers;

 

•                  difficulty in attracting new agents, brokers and customers;

 

•                  customer, provider and agent disputes;

 

•                  regulatory problems, such as failure to meet prompt paymentobligations;

 

•                  litigation exposure; or

 

•                  increases in administrative expenses.

 

In 2003, a subsidiary of Kanawha entered intoan agreement to outsource a substantial portion of its information technologyand document management functions to CGI Information Systems & ManagementConsultants, Inc. (“CGI Group”).  Theterm of this agreement is 10 years, and it may be terminated by Kanawha’ssubsidiary without cause starting in November 2006 upon six months’ noticeand at any time upon 30 days’ notice for cause that remains uncured.  In 2004, we paid over $4.0 million tomaintain and modernize our information systems, including payments under ouragreement with CGI Group.  In 2005, weexpect to pay over $4.0 million for the same purposes. These cost estimates, aswell as future cost estimates, may underestimate the costs necessary tomaintain and modernize our information systems, and the fees we pay to CGIGroup may exceed the costs we would have incurred had we not outsourced certainfunctions to CGI Group.

 

10

----

 

As a newly public company, we are subject toextensive financial and reporting requirements that apply to publiccompanies.  Our management information,internal control and financial reporting systems have required and may requirefurther enhancements and development to satisfy the financial and otherreporting requirements that we must comply with as a public company.

 

**Failure to protect our clients’ confidentialinformation and privacy could result in the loss of customers, reduce ourprofitability and/or subject us to fines and penalties.**

 

A number of our businesses are subject toprivacy regulations and to confidentiality obligations.  For example, the collection and use ofpatient data in our third-party administration business is the subject ofnational and state legislation, including the Health Insurance Portability andAccountability Act, or HIPAA, and some of our activities are subject to theprivacy regulations of the Gramm-Leach-Bliley Act.  We also have contractual obligations toprotect certain confidential information that we obtain from our existingvendors and clients, generally in the same manner and to the same extent as weprotect our own confidential information. The actions we take to protect such confidential information will varyby business segment and may include among other things:

 

•                  training and educating our employees regarding ourobligations relating to confidential information;

 

•                  actively monitoring our record retention plans and anychanges in state or federal privacy and compliance requirements;

 

•                  draftingappropriate contractual provisions into any contract that raises proprietaryand confidentiality issues;

 

•                  maintainingsecure storage facilities for tangible records; and

 

•                  limitingaccess to electronic information and maintaining a “clean desk policy” aimed atsafeguarding certain confidential information.

 

In addition, we are in the process ofdeveloping, implementing and maintaining a comprehensive written informationsecurity program with appropriate administrative, technical and physicalsafeguards to protect such confidential information.  If we do not properly comply with privacyregulations and protect confidential information, we could experience adverseconsequences, including regulatory problems, loss of reputation and clientlitigation.

 

**We may be required to accelerate theamortization of deferred acquisition costs and value of business acquired,which would increase our expenses and reduce our profitability.**

 

Deferred acquisition costs, or DAC, representcosts which vary with and are primarily related to the sale and issuance of ourinsurance policies and investment contracts that are deferred and amortizedover the estimated life of the related insurance policies.  These costs include commissions in excess ofultimate renewal commissions, direct mail and printing costs, sales materialand some support costs, such as underwriting and policy and contract issuanceexpenses.  Under GAAP, DAC is deferredand recognized over the expected life of the policy or contract in relation toeither the premiums or gross profits from the underlying contracts. Inaddition, when we acquire a block of insurance policies or investmentcontracts, we assign a portion of the purchase price to the right to receivefuture net cash flows from existing insurance and investment contracts andpolicies.  This intangible asset, calledvalue of business acquired, or VOBA, represents the actuarially estimatedpresent value of future cash flows from the acquired policies.  We amortize the value of this intangibleasset in a manner similar to the amortization of DAC.  Our amortization of DAC and VOBA generallydepends upon anticipated profits from investments, surrender and other policyand contract charges and mortality and maintenance expense margins.  Unfavorable experience with regard toexpected expenses, investment returns, mortality, morbidity or withdrawals orlapses may cause us to accelerate the amortization of DAC or VOBA, or both, orto record a charge to increase benefit reserves.

 

We regularly review DAC and VOBA to determineif they are recoverable from future income. If we determine that these costs are not recoverable, they are chargedto expenses in the financial period in which we make this determination.  For example, if we determine that we areunable to recover DAC from profits over the life of a block of insurancepolicies, or if withdrawals or surrender charges (which are fees charged to apolicyholder when a life 

 

11

----

 

insurance policy is surrendered for its cash value prior to the end ofthe surrender charge period, which fee is intended to cover new policyacquisition costs and subsequent administrative expenses) associated with earlywithdrawals do not fully offset the unamortized acquisition costs related tothose policies, we have to recognize the additional DAC amortization as acurrent-period expense.  We alsoregularly review the recoverability of VOBA for impairment.

 

**We may not find suitable acquisitioncandidates or new insurance ventures, and even if we do, we may notsuccessfully integrate any acquired companies or successfully invest in newventures, which may limit our potential for growth or have a material adverseeffect on our results of operations and financial condition.**

 

While our primary focus is organic growth ofour existing businesses by expanding our product and marketing capabilities, weevaluate opportunities to grow through strategic alliances and acquisitions ofblocks of business and/or companies that are compatible with our core businesses.  Accordingly, we intend to evaluate from timeto time possible acquisition transactions and the start-up of complementarybusinesses, and at any given time, we may be engaged in discussions withrespect to possible acquisitions and new ventures.  While our business model is not dependent uponacquisitions or new insurance ventures, the time frame for achieving or furtherimproving upon our desired market positions can be significantly shortenedthrough opportune acquisitions or new insurance ventures.  We cannot assure you that we will be able toidentify suitable acquisition transactions or insurance ventures, that suchtransactions will be financed and completed on acceptable terms or that ourfuture acquisitions or ventures will be successful.  The process of integrating any companies wedo acquire or investing in new ventures could have a material adverse effect onour results of operations and financial condition.

 

In addition, implementation of an acquisitionstrategy may entail a number of risks, including among other things:

 

•                  inaccurate assessment of liabilities;

 

•                  difficulties in realizing projected efficiencies, synergiesand cost savings;

 

•                  failure to achieve anticipated revenues, earnings or cashflow; and

 

•                  an increase in our indebtedness and limitations upon ourability to access additional capital when needed.

 

Our failure to adequately address theseacquisition risks could materially adversely affect our results of operationsand financial condition.

 

**The inability of Kanawha to pay dividends tous in sufficient amounts could harm our ability to meet our obligations and payshareholder dividends.**

 

As a holding company whose principal assetsare the capital stock of Kanawha and our indirect subsidiaries, we relyprimarily on dividends and other statutorily permissible payments from Kanawha,our insurance subsidiary, to meet our obligations for payment of interest andprincipal on outstanding debt obligations, dividends to shareholders (includingany dividends on our common stock) and corporate expenses.  The ability of Kanawha to pay dividends andto make such other payments in the future will depend on its statutory surplus(which is the excess of assets over liabilities as determined in accordancewith statutory accounting principles set by state insurance regulatoryauthorities), future statutory earnings (which are earnings as determined inaccordance with statutory accounting principles) and regulatory restrictions.Except to the extent that we are a creditor with recognized claims against oursubsidiaries, claims of the subsidiaries’ creditors, including policyholders,have priority with respect to the assets and earnings of the subsidiaries overthe claims of our creditors.  If any ofour subsidiaries becomes insolvent, liquidate or otherwise reorganize, ourcreditors and shareholders will have no right to proceed against the assets ofthat subsidiary or to cause the liquidation, bankruptcy or winding-up of thesubsidiary under applicable liquidation, bankruptcy or winding-up laws.  The insurance laws of South Carolina, whereKanawha, our insurance subsidiary, is domiciled, will govern any proceedingsrelating to Kanawha.  In the event ofinsolvency, the South Carolina Department of Insurance will act as a liquidatoror rehabilitator for Kanawha.  Bothcreditors and policyholders of Kanawha would be entitled to payment in fullfrom Kanawha’s assets before we, as a shareholder, would be entitled to receiveany distribution from Kanawha.

 

12

----

 

The payment of dividends to us by Kanawha inexcess of a certain amount (i.e., extraordinary dividends) must be approved bythe State of South Carolina department of insurance.  Extraordinary dividends, for which regulatoryapproval is required, include dividends whose fair market value together withthat of other dividends made within the preceding twelve months: (1) whenpaid from other than earned surplus, exceed the lesser of (a) ten percentof the insurer’s surplus as regards policyholders or (b) the net gain fromoperations, not including net realized capital gains or losses; or(2) when paid from earned surplus, exceed the greater of (a) tenpercent of the insurer’s surplus as regards policyholders or (b) the netgain from operations, not including net realized capital gains or losses.  If insurance regulators determine thatpayment of an ordinary dividend or any other payments by our insurancesubsidiary to us (such as payments under a tax sharing agreement or paymentsfor employee or other services) would be adverse to policyholders or creditors,the regulators may block such payments that would otherwise be permittedwithout prior approval.  We cannot assureyou that there will not be further regulatory actions restricting the abilityof Kanawha, our insurance subsidiary, to pay dividends.  If the ability of our insurance subsidiary topay dividends or make other payments to us is materially restricted byregulatory requirements, it could adversely affect our ability to pay anydividends on our common stock and/or service our debt and pay our othercorporate expenses.

 

**We may face losses if morbidity rates ormortality rates differ significantly from our pricing expectations.**

 

We set prices for our life insurance andlong-term care insurance based upon expected claims and payment patterns, usingassumptions for morbidity rates and mortality rates of our policyholders andcontractholders.  The long-termprofitability of these products depends upon how our actual experience compareswith our pricing assumptions.  Forexample, if morbidity rates are higher, or mortality rates are lower, than ourpricing assumptions, we could be required to make greater payments underlong-term care insurance policies than we had projected.  Similarly, if mortality rates are higher thanour pricing assumptions, we could be required to make greater payments underour life insurance policies with guaranteed minimum death benefits than we hadprojected.

 

Our and our predecessor’s experience with ourpaycheck protector disability income plan is one example of a product thatfailed to meet our and our predecessor’s pricing assumptions with regard tomorbidity or mortality rates in the past. The paycheck protector disability income plan provides insuredindividuals with a percentage of their income in the event they becomedisabled.  The policies providesupplemental coverage in addition to all other disability benefits andcoverages, and their terms are tailored for different occupations.  Our and our predecessor’s cumulative claimsexperience for this product has been 40% higher than expected.  This is due primarily to higher than expectedclaims due to higher than expected morbidity and mortality rates in one largegroup of policies issued to employees of a single employer.  This group’s experience has produced claimsapproximately 100% higher than expected.

 

The risks of a deviation of the actualmorbidity and mortality rates from the expected rates are particularlysignificant for our long-term care insurance products. Long-term care insurancepolicies provide for long-duration coverage and, therefore, our actual claimsexperience will emerge over many years after pricing assumptions have beenestablished.  Moreover, as a relativelynew product in the market, long-term care insurance does not have the extensiveclaims experience history of life insurance, and as a result, our ability toforecast future claim rates for long-term care insurance is more limited thanfor life insurance.

 

Consistent with other carriers offering long-termcare insurance in the life and health insurance industry, our and ourpredecessor’s claims in certain states have exceeded those anticipated when thelong-term care products were developed. Most significantly, our and our predecessor’s cumulative claimsexperience for long-term care products in the state of Florida has been 25%higher than expected.

 

**Our reputation in the long-term careinsurance market, our ability to market and sell new long-term care insuranceand our ability to retain existing policyholders may be adversely affected ifwe raise premiums on our in force long-term care insurance products.**

 

Although the terms of many of our long-termcare insurance policies permit us to increase premiums during the premium-payingperiod, any implementation of a premium increase could have an adverse effecton our reputation, our ability to market and sell new long-term care insuranceproducts and our ability to retain existing policyholders.

 

13

----

 

**RisksRelating To Our Industry**

 

**Recently announced governmentalinvestigations and litigation alleging the illegal use of bid-rigging schemesand contingent commissions by insurance companies and brokers may adverselyaffect our industry and us (1) by negatively impacting the level andvolatility of stock prices of companies operating in the insurance industry,(2) if we become the subject of investigations or related litigation of thistype, or (3) if industry regulation, practices and customs change in waysthat are detrimental to the success of our business strategy.**

 

Within the last twelve months, the New YorkState Attorney General and other state agencies have filed lawsuits accusingseveral large insurance brokers of fraudulent behavior, including alleged participationin bid-rigging schemes and acceptance of improper payments from insurers inexchange for agreeing not to shop for competitive quotes for customers of theinsurers.  The New York State AttorneyGeneral’s office and other state regulatory agencies are investigating a numberof property and casualty and health and life insurers for alleged participationin these schemes, as well as arrangements whereby a particular insurer pays aninsurance broker additional or contingent commissions for placing a particularvolume of insurance or insurance which leads to a certain level of insurerprofitability.  This lawsuit and theseinvestigations have resulted in negative publicity and increased pricevolatility for securities of insurance companies.

 

In addition, the scope of industryparticipants subject to investigation and enforcement actions is expanding andlikely will continue to expand.  While wehave not been subpoenaed or named in a lawsuit, we cannot assure you that wewill not become involved in an investigation or be named as a defendant in anenforcement action or lawsuit.

 

One possible result of these investigationsand attendant lawsuits is that many insurance industry practices and customsmay change, including, but not limited to, the manner in which insurance ismarketed and distributed through independent brokers and agents.  Our business strategy requires us to relyheavily on both independent brokers and agents and our internal sales force tomarket and distribute insurance products. We cannot predict how industry regulation, customs and practices withrespect to the use of brokers and agents may change.  Such changes, however, could adversely affectour ability to implement our business strategy, which could materially affectour growth and profitability.

 

**Consolidation in the insurance andreinsurance industry could lead to lower margins for us and less demand for ourproducts and services.**

 

The insurance and reinsurance industry isundergoing a process of consolidation as industry participants seek to enhancetheir product and geographic reach, client base, operating efficiency andmarket share through merger and acquisition activities.  The larger entities resulting from thesemerger and acquisition activities may seek to use the benefits of consolidationto, among other things, implement price reductions for their products andservices.  If competitive pressurescompel us to reduce our prices, our operating margins will decrease.

 

As the insurance industry consolidates,competition for customers may become more intense and the importance ofobtaining and properly servicing each customer will become greater.  We could incur greater expenses in connectionwith obtaining and retaining customers, which could reduce our operatingmargins and profitability.

 

**Our business, results of operations andfinancial condition may be adversely affected by many factors beyond ourcontrol, including factors affecting the insurance and reinsurance industry asa whole and general economic, financial market and political conditions, all ofwhich may cause the market price of our common stock to decline.**

 

The results of operations of companies in theinsurance and reinsurance industry historically have been subject tosignificant fluctuations and uncertainties. Our profitability may be affected significantly by the following:

 

•                  Differencesbetween actual and expected losses that we cannot reasonably anticipate usinghistorical loss data and other identifiable factors at the time we price ourproducts.  Kanawha’s experience with itspaycheck protector disability income plan described above is one example of aproduct that failed to meet Kanawha’s pricing assumptions with regard tomorbidity or mortality rates in the past. Kanawha’s cumulative claims experience for this product is 40% higherthan it expected.  This is due primarilyto higher than expected claims due to higher than 

 

14

----

 

expectedmorbidity and mortality rates in one large group of policies issued to employeesof a single employer.  This group’sexperience has produced claims approximately 100% higher than Kanawhaexpected.  In another example, consistentwith other carriers offering long-term care insurance in the life and healthinsurance industry, Kanawha’s claims in certain states have exceeded thoseanticipated when long-term care products were developed.  Most significantly, our and Kanawha’scumulative claims experience for long-term care products in the state ofFlorida has been 25% higher than expected.

 

•                  Volatileand unpredictable developments, including man-made, weather-related and othernatural catastrophes or terrorist attacks, or large court awards for particulardamages resulting from claims against us.

 

•                  Changesin the level of reinsurance capacity. For example, in the aftermath of the September 11, 2001, terroristattacks, the reinsurance markets for many products have been restricted, andKanawha has experienced increased costs related to catastrophe reinsurance andsome other annually renewable reinsurance.

 

•                  Changesin the amount of our loss reserves (which are the liabilities we will establishto reflect the estimated cost of claims payments and related expenses that wewill ultimately be required to pay in respect of insurance we write) resultingfrom new types of claims and new or changing judicial interpretations relatingto the scope of insurers’ liabilities.

 

•                  Fluctuationsin equity markets, interest rates, credit risk and foreign currency exposure,inflationary pressures and other changes in the investment environment, whichaffect returns on invested assets and may impact the ultimate payout of losses.For example, the investment environment of the past several years adverselyaffected our predecessor’s investment portfolio, which had significant creditlosses in 2001 and 2002 and rates of return on its bond portfolio lower thanits original expectations.

 

In addition, the demand for the types ofinsurance we offer can vary significantly, rising as the overall level ofeconomic activity increases and falling as that activity decreases, which willcause our revenues to fluctuate. These fluctuations in results of operationsand revenues may cause the price of our common stock to decline and to bevolatile.

 

Our results of operations and financialcondition may be materially adversely affected from time to time by generaleconomic, financial market and political conditions.  These conditions include:

 

•                  Levelsof employment.  As unemploymentincreases, employers have fewer employees requiring insurance.

 

•                  Levelsof consumer lending.  As consumer lendingdecreases, individuals have less disposable cash and may choose not to purchaseour insurance products, may terminate existing policies or permit them to lapseor may choose to reduce the amount of coverage purchased.

 

•                  Levelsof inflation.  We are exposed toinflation risk because we invest substantial funds in nominal assets, which arenot indexed to the level of inflation, but the underlying liabilities areindexed to the level of inflation.  Basedon policy count, approximately 5.1% of our life insurance policies withreserves of approximately $8.1 million as of December 31, 2004, have deathbenefits that are guaranteed to grow based on inflation-linked indices. Intimes of rapidly rising inflation, the growth in amount of credited deathbenefit on these liabilities increases relative to the investment income earnedon the nominal assets, resulting in an adverse impact on earnings.  In addition, we are exposed to inflation riskwith respect to some major medical insurance policies to the extent thatmedical costs increase with inflation at a greater pace than our ability toincrease premiums.  Inflation may also effect the adequacy of our reserves, making them inadequateand requiring us to increase our reserves.

 

•                  Insuranceindustry cycles.  The life and healthindustry is occasionally affected by moderate pricing cycles, and in theseperiods it may become difficult to underwrite policies at premium levels thatare profitable.

 

•                  Movementsof the financial markets.  Unpredictablemovements and volatility in the financial markets may diminish the value of,and returns on, our portfolio of investment assets.

 

15

----

 

Fluctuations in interest rates, monetarypolicy, demographics, and legislative and competitive factors may alsoinfluence our performance.  Duringperiods of economic downturn:

 

•                  individualsand businesses may choose not to purchase our insurance products and otherrelated products and services, may terminate existing policies or contracts orpermit them to lapse or may choose to reduce the amount of coverage purchased;

 

•                  businesses may have fewer employees requiring insurancecoverage due to rising unemployment levels;

 

•                  new disability insurance claims and claims on otherspecialized insurance products tend to rise; and

 

•                  insureds tend to increase their utilization of health anddental benefits if they anticipate becoming unemployed or losing benefits.

 

**The insurance and related businesses in whichwe operate may be subject to periodic negative publicity, which may negativelyimpact our financial condition and operating results.**

 

Due to the nature of the market for theinsurance and related products and services we provide, we interact with anddistribute our products and services ultimately to individual consumers.  There may be a perception that thesepurchasers are unsophisticated and need consumer protection.  Accordingly, from time to time, consumeradvocate groups or the media may focus attention on our products and servicesand subject our industry to negative publicity. We may also be negatively impacted if another company in our industryengages in practices resulting in increased public attention to ourbusinesses.  For example, in the fourthquarter of 2004, the New York State Attorney General’s Office filed a lawsuitaccusing one of the nation’s largest insurance brokers of fraudulent behavior,including alleged participation in bid-rigging schemes and acceptance of improperpayments from insurance carriers in exchange for agreeing not to shop quotesfor their customers.  A number ofinsurance companies, including life and health insurers, are also beinginvestigated by the New York State Attorney General’s office or otherregulatory bodies for their alleged participation in these schemes oragreements.  The negative publicityassociated with this lawsuit and investigation has precipitated increasedvolatility in the prices of securities issued by companies throughout theinsurance industry.  Negative publicitymay also result in increased regulation and legislative scrutiny of industrypractices as well as increased litigation, which may further increase our costsof doing business and adversely affect our profitability by impeding ourability to market our products and services, requiring us to change ourproducts or services or increasing the regulatory burdens under which we willoperate.

 

**Catastrophe losses, including man-madecatastrophe losses, could cause unanticipated increases in claims frequency andseverity, which could materially reduce our profitability and have a materialadverse effect on our results of operations and financial condition.**

 

Our insurance operations expose us to claimsarising out of catastrophes. In the future, we may experience catastrophelosses that may materially reduce our profitability or have a material adverseeffect on our results of operations and financial condition.  Catastrophes can be caused by various naturalevents, including hurricanes, disease, earthquakes, fires and epidemics, or canbe man-made catastrophes, including terrorist attacks or accidents such asairplane crashes.  The frequency andseverity of catastrophes are inherently unpredictable, and catastrophe lossescan vary widely.  It is possible thatboth the frequency and severity of man-made catastrophes will increase and thatwe will not be able to implement exclusions from coverage in our policies orobtain reinsurance for losses from catastrophes.  The extent of losses from a catastrophe is afunction of both the total amount of insured exposure in the area affected bythe event and the severity of the event.

 

Claims resulting from natural or man-madecatastrophes could cause substantial volatility in our financial results forany fiscal quarter or year and could materially reduce our profitability orharm our financial condition.  Ourability to write new business also could be affected.  Increases in healthcare costs and thegeographic concentration of our insureds and the effects of inflation couldincrease the severity of claims from catastrophes in the future.

 

Our voluntary life and health insuranceoperations could be materially impacted by catastrophes such as terroristattacks or by an epidemic that causes a widespread increase in mortality,morbidity or disability rates or that causes an increase in the need formedical care.  The mortality rate refersto the relationship of the frequency of deaths 

 

16

----

 

of individualmembers of a group to the entire group membership over a specified period oftime.  The morbidity rate refers to therelationship of the incidence of disease or disability contracted by individualmembers of a group to the entire group membership over a specified period oftime.  Losses due to catastrophes couldhave a material adverse effect on our results of operations and financialcondition.

 

Our ability to manage these risks depends inpart on our successful utilization of catastrophic life reinsurance to limitthe size of life insurance losses from a single event or multiple events, andlife and disability reinsurance to limit the size of life or disabilityinsurance exposure on an individual insured life.  It also depends in part on state regulationsthat may prohibit us from excluding such risks or from withdrawing from orincreasing premium rates in catastrophe-prone areas.  Catastrophe reinsurance may not be availableat commercially acceptable rates in the future. This means that the occurrence of a significant catastrophe couldmaterially reduce our profitability and have a material adverse effect on ourresults of operations and financial condition.

 

**Reinsurance arrangements and any derivativeinstruments we use to hedge our business risks may not be available or adequateto protect us against our business risks, and we will be subject to the riskthat the counterparties to our reinsurance arrangements and derivativeinstruments may default on their obligations, all of which could adverselyaffect our business, results of operations and financial condition.**

 

As part of our overall risk and capacitymanagement strategy, we purchase reinsurance for some risks underwritten by ourvarious business segments.  Marketconditions beyond our control will determine the availability and cost of thereinsurance protection we purchase.  Forexample, after the terrorist assaults of September 11, 2001, reinsurancefor man-made catastrophes became generally unavailable due to capacityconstraints and, to the limited extent available, much more expensive.  The high cost of reinsurance or lack ofaffordable coverage could adversely affect our results of operations andfinancial condition.  If we fail toobtain sufficient reinsurance, it could adversely affect our ability to writefuture business.

 

As part of our business, we reinsure somelife and health risks with reinsurers. Although these reinsurers are liable to us to the extent of the cededreinsurance (the portion of an insurance policy liability that has beenreinsured), we remain liable as the direct insurer on all risks reinsured.  As a result, ceded reinsurance arrangementsdo not eliminate our obligation to pay claims. We are subject to credit risk with respect to our ability to recoveramounts due from reinsurers.  Ourreinsurers may not pay the reinsurance recoverables that they owe to us or theymay not pay such recoverables on a timely basis.  A reinsurer’s insolvency, underwritingresults or investment returns may affect its ability to fulfill reinsuranceobligations.

 

Our reinsurance facilities generally aresubject to annual renewal with respect to new insurance policies written.  Reinsurance for policies previously reinsuredgenerally remains in effect even if the reinsurance carrier elects not toreinsure new insurance policies.  We maynot be able to maintain our current reinsurance facilities and, even wherehighly desirable or necessary, we may not be able to obtain other reinsurancefacilities in adequate amounts or at favorable rates.  If we are unable to renew our expiringfacilities or to obtain new reinsurance facilities, either our net exposureswould increase or, if we are unwilling to bear an increase in net exposures, wemay have to reduce the level of our underwriting commitments.  Either of these potential developments couldmaterially adversely affect our results of operations and financial condition.

 

In addition, Kanawha has sold businessesthrough reinsurance ceded to third parties. For example, in December 2003,Kanawha ceded all of its in force annuity products through 100% coinsurancecontracts, which are arrangements in which the coverage ceded to the reinsureron an individual policy is in the same form as that of the direct policy issuedto the policyholder, to Madison National Life Insurance Company.  However, we would be responsible foradministering this business in the event of a default by the reinsurer.  We may not have the administrative systemsand capabilities to process this business. Accordingly, we may need to obtain those capabilities in the event of aninsolvency of one or more of the reinsurers of these businesses.  We might be forced to obtain suchcapabilities on unfavorable terms, with a resulting material adverse effect onour results of operations and financial condition.

 

While we do not currently use derivativeinstruments to hedge business risks, we may use derivative instruments in thefuture to hedge various business risks. We may enter into a variety of derivative instruments, includingoptions, forwards, interest rate and currency swaps and options to enter intointerest rate and currency swaps 

 

17

----

 

with a number ofcounterparties.  If our counterpartiesfail to honor their obligations under the derivative instruments, our hedges ofthe related risk will be ineffective. That failure could have an adverse effect on our financial condition andresults of operations.

 

**We face significant competitive pressures inour businesses, which may reduce premium rates and prevent us from pricing ourproducts at rates that enable us to earn a profit.**

 

In each of our lines of business, we competewith other insurance companies or service providers, depending on the line andproduct. Competitors include insurance companies and financialinstitutions.  Our main competitorsinclude life and health insurance companies and the Blue Cross & BlueShield affiliates in the states in which we write business.  Commercial competitors include benefits andlife insurance companies as well as not-for-profit dental plans.  We are among the smallest competitors interms of national market share in our business lines and in some cases thereare one or more major market players in a particular line of business.

 

Competition in the businesses we pursue isbased on many factors, including quality of service, product features, price, scope of distribution, scale, financial strength ratings andname recognition.  We compete forcustomers and distributors with many insurance companies and other financialservices companies. We compete not only for business and individual customers,employer and other group customers, but also for agents and distributionrelationships. Some of our competitors may offer a broader array of productsthan we do, may have a greater diversity of distribution resources, may havebetter brand recognition, may from time to time have more competitive pricing,may have lower cost structures or, with respect to insurers, may have higherfinancial strength or claims paying ratings. Some may also have greaterfinancial resources with which to compete. Also, as a result of the Gramm-Leach-Bliley Act, which was enacted in November 1999,financial institutions are now able to affiliate with other insurance companiesto offer services similar to our own. This has resulted in new competitors with significant financialresources entering some of our target markets. Moreover, some of our competitors may have a lower target for returns oncapital allocated to their business than we do, which may lead them to pricetheir products and services lower than we do. In addition, from time to time, companies enter and exit the markets in which we operate, which increases competition attimes when there are new entrants.  Forexample, several large insurance companies have recently entered the market forindividual health insurance products.  Wemay lose business to competitors offering competitive products at lower pricesor for other reasons, which could materially adversely affect our results ofoperations and financial condition.

 

In some markets, we compete withorganizations that have substantial market share.  In addition, organizations with sizablemarket share or provider-owned plans may be able to obtain favorable financialarrangements from health care providers that are not available to us.  Without our own similar arrangements, we maynot be able to compete effectively in such markets.

 

New competition could also cause the supplyof insurance to change, which could affect our ability to price our products atattractive rates and adversely affect our underwriting results.  Although there are some impediments facingpotential competitors who wish to enter the markets we serve, new competitorsmay still enter our target markets, affording our customers significantflexibility in moving to other insurance providers.

 

**Our business is subject to risks related tolitigation and regulatory actions that could have a material adverse effect onour business, results of operations and financial condition.**

 

In addition to the occasional employment-relatedlitigation to which all businesses are subject, we are a defendant in actionsarising out of insurance and other related business operations.  In addition, we are, involved in variousregulatory investigations and examinations relating to our operations.  We may from time to time be subject to avariety of legal and regulatory actions relating to current and past businessoperations, including, but not limited to:

 

•                  disputes over coverage or claims adjudication;

 

•                  disputes regarding sales practices, disclosures, premiumrefunds, licensing, regulatory compliance and compensation arrangements;

 

18

----

 

•                  disputes with our agents, producers or network providersover compensation and termination of contracts and related claims;

 

•                  disputes relating to premiums charged or changes to premiumscharged;

 

•                  disputesconcerning past premiums charged by companies acquired by us for coverage thatmay have been based on factors such as race;

 

•                  disputes with customers regarding the ratio of premiums tobenefits in our various business segments;

 

•                  disputesalleging illegal packaging of credit insurance products with other productsprovided by financial institutions;

 

•                  disputes with taxing authorities regarding our taxliabilities; and

 

•                  disputes relating to some businesses acquired or disposed ofby us.

 

In addition, plaintiffs continue to bring newtypes of legal claims against insurance and related companies. Current andfuture court decisions and legislative activity may increase our exposure tothese types of claims.  Multiparty orclass action claims may present additional exposure to substantial economic,non-economic or punitive damage awards. The loss of even one of these claims, if it resulted in a significantdamage award or a judicial ruling that was otherwise detrimental, could have amaterial adverse effect on our results of operations and financialcondition.  This risk of potentialliability may make reasonable settlements of claims more difficult toobtain.  We cannot determine with anycertainty what new theories of recovery may evolve or what their impact may beon our businesses.  As of December 31,2004, we did not have any accounting reserves for potential liabilities fromlitigation or regulatory actions.

 

**We are subject to extensive governmentalregulation, which increases our costs and could restrict how we conduct ourbusiness.**

 

Our operating subsidiaries are subject toextensive regulation and supervision in the jurisdictions in which they dobusiness.  This regulation is generallydesigned to protect the interests of policyholders, as opposed to shareholdersand other investors.  To that end, thelaws of the various states establish insurance departments with broad powerswith respect to such matters as:

 

•                  licensingcompanies to transact business;

 

•                  authorizinglines of business;

 

•                  mandatingcapital and surplus requirements;

 

•                  regulatingunderwriting limitations;

 

•                  imposingdividend limitations;

 

•                  regulatingchanges in control;

 

•                  licensing agents and distributors of insurance products;

 

•                  placinglimitations on the minimum and maximum size of life insurance contracts;

 

•                  restrictingcompanies’ ability to enter and exit markets;

 

•                  admittingstatutory assets (which are assets determined in accordance with statutoryaccounting principles);

 

•                  mandatingsome insurance benefits;

 

19

----

 

•                  restrictingcompanies’ ability to terminate or cancel coverage;

 

•                  requiringcompanies to provide various types of coverage;

 

•                  regulatingpremium rates, including the ability to increase premium rates;

 

•                  approvingpolicy forms;

 

•                  regulatingtrade and claims practices;

 

•                  imposingprivacy requirements;

 

•                  establishingreserve requirements and solvency standards;

 

•                  restrictingcertain transactions between affiliates;

 

•                  regulatingthe content of disclosures to debtors in the credit insurance area;

 

•                  regulatingthe type, amounts and valuation of investments;

 

•                  mandatingassessments or other surcharges for guaranty funds (which are state mandatedfunds funded by contributions from insurance companies operating in aparticular state and maintained to cover the obligations to policyholders ofinsolvent insurance companies);

 

•                  regulatingmarket conduct and sales practices of insurers and agents; and

 

•                  restrictingcontact with consumers, such as the recently created national “do not call”list, and imposing consumer protection measures.

 

Some jurisdictions require us to providecoverage to persons who would not otherwise be considered eligible byinsurers.  Each of these jurisdictionsdictates the types of insurance and the level of coverage that must be providedto such involuntary risks.  Our share ofthese involuntary risks is mandatory and generally a function of our respectiveshare of the voluntary market by line of insurance in each jurisdiction.  We are exposed to risk of losses inconnection with mandated participation in such schemes in those jurisdictionsin which they are effective.  Inaddition, HIPAA requires us to comply with insurance reform provisions as wellas requirements relating to the privacy of individuals.  HIPAA guarantees the issuance andrenewability of certain health insurance coverage for individuals and smallgroups (generally 50 or fewer employees) and limits exclusions based onpre-existing conditions.  Most of theinsurance reform provisions of HIPAA became effective for plan years beginning July 1,1997.

 

If regulatory requirements impede our abilityto raise premium rates, utilize new policy forms or terminate, deny or cancelcoverage in any of our businesses, our results of operations and financialcondition could be materially adversely affected.  The capacity for an insurance company’s growthin premiums is in part a function of its statutory surplus.  Maintaining appropriate levels of statutorysurplus, as measured by statutory accounting principles, is consideredimportant by insurance regulatory authorities and the private agencies thatrate insurers’ claims-paying abilities and financial strength.  Failure to maintain specified levels ofstatutory surplus could result in increased regulatory scrutiny andenforcement, action by regulatory authorities or a downgrade by ratingagencies.

 

We may be unable to obtain or maintain allrequired licenses and approvals, and our business may not fully comply with thewide variety of applicable laws and regulations or the relevant authority’sinterpretation of the laws and regulations. Some regulatory authorities have relatively broad discretion to grant,renew or revoke licenses and approvals. If we do not have the requisite licenses and approvals or do not complywith applicable regulatory requirements, the insurance regulatory authoritiescould prohibit or temporarily suspend us from carrying on some or all of ouractivities or impose a monetary penalty on us. That type of action could materially adversely affect our results ofoperations and financial condition.

 

20

----

 

**Changes in regulation may reduce ourprofitability and limit our growth.**

 

Legislation or other regulatory reforms thatincrease the regulatory requirements imposed on us or that change the way weare able to do business may significantly harm our business, results ofoperations or financial condition.  Forexample, some states, including the states in which we currently do most of ourbusiness and most of the states in which we intend to do business in thefuture, have imposed new time limits for the payment of uncontested coveredclaims and require health care and dental service plans to pay interest onuncontested claims not paid promptly within the required time period.  Some of these states have also granted theirinsurance regulatory agencies additional authority to impose monetary penaltiesand other sanctions on health and dental plans engaging in certain “unfairpayment practices.”  If we were unablefor any reason to comply with these requirements, it could result insubstantial costs to us and may materially adversely affect our business,results of operations and financial condition.

 

Legislative or regulatory changes that couldsignificantly harm us and our subsidiaries include, but are not limited to:

 

•                  legislation that holds insurance companies or managed carecompanies liable for adverse consequences of medical or dental decisions;

 

•                  limitations on premium levels or the ability to raisepremiums on existing policies;

 

•                  increases in minimum capital, reserves and other financialviability requirements;

 

•                  imposition of fines, taxes or other penalties for improperlicensing, the failure to “promptly” pay claims, however defined, or otherregulatory violations;

 

•                  increasedlicensing requirements;

 

•                  prohibitions or limitations on provider financial incentivesand provider risk-sharing arrangements;

 

•                  imposition of more stringent standards of review of ourcoverage determinations;

 

•                  new benefit mandates;

 

•                  increasedregulation relating to the use of associations and trusts in the sale ofindividual health insurance;

 

•                  limitationson our ability to build appropriate provider networks and, as a result, managehealth care and utilization due to “any willing provider” legislation, whichrequires us to take any provider willing to accept our reimbursement;

 

•                  limitationson the ability to manage health care and utilization due to direct access lawsthat allow insureds to seek services directly from specialty medical providerswithout referral by a primary care provider; and

 

•                  restriction on solicitation of pre-funded funeral insuranceconsumers by funeral board laws.

 

*Potential Changes inState Regulations*

 

State legislatures regularly enact laws thatalter and, in many cases, increase state authority to regulate insurancecompanies and insurance holding companies. Further, state insurance regulators regularly reinterpret existing lawsand regulations, and the National Association of Insurance Commissioners, orNAIC, regularly undertakes regulatory projects, all of which can affect ouroperations.  In recent years, the stateinsurance regulatory framework has come under increased federal scrutiny andsome state legislatures have considered or enacted laws that may alter orincrease state authority to regulate insurance companies and insurance holdingcompanies.  Further, the NAIC and stateinsurance regulators are re-examining existing laws and regulations,specifically focusing on modifications to holding company regulations,interpretations of existing laws and the development of new laws.

 

21

----

 

*Potential Changes inFederal Regulations*

 

Although the United States federal governmentdoes not directly regulate the insurance business, changes in federallegislation and administrative policies in several areas, including changes inthe Gramm-Leach-Bliley Act, financial services regulation and federal taxation,could significantly harm the insurance industry and us. Federal legislation andadministrative policies in areas such as employee benefit plan regulation,financial services regulation and federal taxation can reduce ourprofitability.  In addition, statelegislatures and the United States Congress continue to focus on health careissues.  There are many aspects ofemployee benefits plans that state laws may not regulate because the federalEmployee Retirement Income Security Act, or ERISA, and the rules andregulations thereunder, in many instances prohibit or preempt any state lawsgoverning employee benefit plans that would conflict with the provisions ofERISA.  There have been recentlegislative attempts to limit ERISA’s preemptive effect on state laws and, inaddition, courts have read the rules promulgated under ERISA to preempt statelaws less broadly in recent years than they did in the past.  For example, the United States Congress has,from time to time, considered legislation relating to changes in ERISA topermit application of state law remedies, such as consequential and punitivedamages, in lawsuits for wrongful denial of benefits, which, if adopted, couldincrease our liability for damages in future litigation. Additionally, newinterpretations of existing laws and the passage of new legislation may harmour ability to sell new policies and increase our claims exposure on policieswe issued previously.

 

A number of legislative proposals have beenmade at the federal level over the past several years that could impose addedburdens on us.  These proposals would,among other things, mandate benefits with respect to certain diseases ormedical procedures, require plans to offer an independent external review ofcertain coverage decisions and establish a national health insuranceprogram.  Any of these proposals, ifimplemented, could adversely affect our results of operations or financialcondition.  Federal changes in Medicareand Medicaid that reduce provider reimbursements could have negativeimplications for the private sector due to cost shifting.  When the government reduces reimbursementrates for Medicare and Medicaid, providers often try to recover shortfalls byraising the prices charged to privately insured customers.  State small employer group and individualhealth insurance market reforms to increase access and affordability forconsumers could also reduce our profitability by precluding us fromappropriately pricing for risk in our individual and small employer grouphealth insurance policies.

 

In addition, the United States Congress andsome federal agencies from time to time investigate the current condition of insuranceregulation in the United States to determine whether to impose federalregulation or to allow an optional federal incorporation, similar tobanks.  Bills have been introduced in theUnited States Congress from time to time that would provide for a federalscheme of chartering insurance companies or an optional federal charter forinsurance companies.  Meanwhile, thefederal government has granted charters in years past to insurance-likeorganizations that are not subject to state insurance regulations, such as riskretention groups.  It is difficult topredict the likelihood of a federal chartering scheme and its impact on theindustry or on us.

 

We cannot predict with certainty the effectany proposed or future legislation, regulations or NAIC initiatives may have onhow we will conduct our business. In addition, the insurance laws orregulations adopted or amended from time to time may be more restrictive or mayresult in materially higher costs than current requirements.

 

**The continued threat of terrorism, theoccurrence of terrorist acts and ongoing military actions could adverselyaffect our business, results of operations and financial condition.**

 

The continued threat of terrorism and ongoingmilitary actions, as well as heightened security measures in response to thesethreats and actions, may cause significant volatility in global financialmarkets, disruptions to commerce and reduced economic activity.  These consequences could have an adverseeffect on the value of the assets in our investment portfolio.  We cannot predict whether, or the extent towhich, companies in which we invest may suffer losses as a result of financial,commercial or economic disruptions, or how any such disruptions might affect theability of those companies to pay interest or principal on theirsecurities.  The continued threat ofterrorism also could result in increased reinsurance prices and potentiallycause us to retain more risk than we otherwise would retain if we were able toobtain reinsurance at lower prices.  Inaddition, the occurrence of terrorist actions could result in higher claimsunder our insurance policies than we anticipate.

 

22

----

 

**Genetic mapping research and other medicaladvances could adversely affect the financial performance of our life insuranceand long-term care insurance businesses.**

 

Genetic mapping research includes proceduresfocused on identifying key genes that render an individual predisposed tospecific diseases, such as cancer or Alzheimer’s disease.  Other medical advances, such as diagnosticimaging technologies, also may be used to detect the early onset of diseasessuch as cancer and heart disease.  Webelieve that if individuals learn through genetic testing or other medicaladvances that they are predisposed to particular conditions that may reducelife longevity or require long-term care, they will be more likely to purchaseour life and long-term care insurance policies or not permit existing policesto lapse.  In contrast, if individualslearn that they are genetically unlikely to develop the conditions that reducelongevity or require long-term care, they will be less likely to purchase ourlife and long-term care insurance products. In addition, such individuals that are existing policyholders will bemore likely to permit their policies to lapse.

 

If we had access to the same genetic or othermedical information as our prospective policyholders and contractholders, thenwe would be able to take this information into account in pricing our life andlong-term care insurance policies. However, there are a number of regulatory proposals that would makegenetic and other medical information confidential and unavailable to insurancecompanies.  Legislators in some stateshave recently introduced similar legislation. If these regulatory proposals were enacted,prospective policyholders and contractholders would only disclose thisinformation if they chose to do so voluntarily.  These factors could lead us to reduce salesof products affected by these regulatory proposals and could result in adeterioration of the risk profile of our portfolio, which could lead topayments to our policyholders and contractholders that are higher than weanticipated.

 

**RisksRelating To Our Common Stock**

 

**Future offerings of debt securities, whichwould be senior to our common stock upon liquidation, and future offerings ofequity securities, which would dilute our existing shareholders and may besenior to our common stock for the purposes of dividend distributions, mayadversely affect the market price of our common stock.**

 

In the future, we may attempt to increase ourcapital resources by offering debt securities or offering additional equitysecurities, including commercial paper, medium-term notes, senior orsubordinated notes and series of preferred stock or common stock.  Upon liquidation, holders of our debtsecurities and shares of preferred stock and lenders with respect to our otherborrowings will receive a distribution of our available assets prior to theholders of our common stock.  Additionalequity offerings may dilute the holdings of our existing shareholders or reducethe market price of our common stock, or both. Our preferred stock, if issued, could have a preference on liquidatingdistributions or a preference on dividend payments that could limit our abilityto make a dividend distribution to the holders of our common stock.  Because our decision to issue securities inany future offering will depend on market conditions and other factors beyondour control, we cannot predict or estimate the amount, timing or nature of ourfuture offerings. Holders of our common stock bear the risk of our futureofferings reducing the market price of our common stock and diluting theirstock holdings in us.

 

**We do not currently intend to pay dividendsand any determination to pay dividends in the future will be at the discretionof our board of directors.  Consequently,it is uncertain when, if ever, we will declare dividends to our shareholders.**

 

We currently intend to retain any profits toprovide capacity to write insurance and reinsurance and to accumulate reservesand surplus for the payment of claims. As a result, our board of directors currently does not intend to declaredividends or make any other distributions. Our board of directors plans to periodically reevaluate our dividendpolicy. Any determination to pay dividends in the future will be at thediscretion of our board of directors and will depend upon our results ofoperations, financial condition and other factors deemed relevant by our boardof directors. Consequently, it is uncertain when, if ever, we will declaredividends to our shareholders.

 

**Applicable insurance laws and anti-takeoverprovisions under Virginia state law and in our amended and restated articles ofincorporation and our bylaws may make it difficult to effect a change ofcontrol of us or change our board of directors and officers, which maynegatively affect the price per share of our common stock.**

 

The Virginia Stock Corporation Act, ouramended and restated articles of incorporation and our bylaws contain variousprovisions that may make it more difficult for a third party to acquire, or maydiscourage acquisition bids for, our company. These provisions includeprovisions that, among other things:

 

23

----

 

•                  divideour board of directors into three classes of directors serving staggeredthree-year terms;

 

•                  permitour board of directors to issue one or more series of preferred stock;

 

•                  limitthe ability of shareholders to remove directors;

 

•                  limitthe ability of shareholders to fill vacancies on our board of directors;

 

•                  imposeadvance notice requirements for shareholder proposals and nominations ofdirectors to be considered at shareholder meetings;

 

•                  requirethe affirmative vote of holders of more than two-thirds of our outstandingshares of common stock to amend the provisions of our amended and restatedarticles of incorporation;

 

•                  requirethe affirmative vote of holders of more than two-thirds of our outstandingshares of common stock to approve mergers and consolidations or the sale of allor substantially all of our assets; and

 

•                  requireapproval of material acquisition transactions (such as mergers, shareexchanges, and material dispositions of corporate assets not in the ordinarycourse of business) between our company and any holder of more than10 percent of any class of our outstanding voting shares by the holders ofat least two-thirds of the remaining voting shares of our company.

 

These provisions could have the effect ofdiscouraging a potential acquirer from making a tender offer or otherwiseattempting to obtain control of our company and could limit the price thatinvestors would be willing to pay in the future for shares of our common stock.

 

Before a person can acquire control of aUnited States insurance company, prior written approval must be obtained fromthe insurance commissioner of the state where the domestic insurer isdomiciled.  State statutes in South Carolina,where Kanawha, our insurance subsidiary, is domiciled, provide that controlover a domestic insurer is presumed to exist if any person, directly orindirectly, owns, controls, holds with the power to vote, or holds proxiesrepresenting, 10% or more of the voting securities of the domesticinsurer.  Prior to granting approval ofan application to acquire control of a domestic insurer, a state insurancecommissioner will typically consider such factors as the financial strength ofthe applicant, the integrity of the applicant’s board of directors andexecutive officers, the applicant’s plans for the future operations of thedomestic insurer and any anti-competitive results that may arise from theconsummation of the acquisition of control. These state laws could have the effect of discouraging a potentialacquiror from making a tender offer or otherwise attempting to obtain controlof our company and could limit the price that investors would be willing to payin the future for shares of our common stock.

 

In addition, the applicable insurance lawsand anti-takeover provisions of Virginia law, our amended and restated articlesof incorporation and bylaws may make it more difficult for our shareholders tochange our directors or officers or the strategies and policies implemented byour directors and officers.

 

**Our stock and the stocks of other companiesin the insurance industry are subject to stock price and trading volumevolatility, and you may be unable to resell your shares of our common stock at orabove the price you paid for them.**

 

From time to time, the stock price and thenumber of shares traded of companies in the insurance industry experienceperiods of significant volatility. Company-specific matters, such as fluctuations in our operating performanceas well as developments generally in the insurance industry and in theregulatory environment may cause this volatility.  Accordingly, broad market and industryfluctuations may adversely affect the trading price of our common stock,regardless of our actual operating performance, and you may be unable to resellyour shares of our common stock at or above the price you paid for them.

 

Recently, stock prices of companies in theinsurance industry have experienced substantial volatility as a result of civilcomplaints filed in the last twelve months by the Attorney General of the Stateof New York and 

 

24

----

 

investigationsinitiated by several other state agencies against several large insurancebrokers.  Also contributing to thisvolatility have been subsequent press reports indicating that these ongoinginvestigations of the insurance industry are expanding to include additionalcompanies and practices.  The recentvolatility in insurance industry stocks may continue for the foreseeable futureand may affect the price of our stock.

 

25

----