KMG America Reports Net Income for Third Quarter 2005

Business Wire, Nov 14, 2005

MINNEAPOLIS -- KMG America Corporation (NYSE:KMA) today reported net income for the third quarter of 2005 of $1.3 million, or $.06 per diluted share, and operating income of $1.2 million, or $.06 per diluted share.

KMG America Chairman, President and Chief Executive Officer, Kenneth Kuk, commenting on these results said, "We are satisfied with our third quarter earnings results, which are slightly better than the consensus analyst estimate of $.05 per share. Additionally, as of early October, we have successfully achieved our full year sales representative hiring objective. We are actively marketing our new stop loss and group life products, and we have good early sales results to report."

Mr. Kuk added, "The third quarter results include $3.9 million of incremental costs attributable to new KMG America activity compared to $4.0 million in the second quarter of 2005. We produced $1.4 million of incremental direct premiums in the third quarter related to sales from the new sales distribution channel."

KMG America (the "Company") previously announced its intention to hire at least 20 new sales representatives in 2005. That objective was accomplished in early October and the Company now has sales representatives in 16 major markets across America. Sales representative hiring will resume shortly after January 1, 2006, which will permit sales management to focus on successfully concluding 2005 and assisting with the important January 1 policy renewal period.

Sales expectations from the new sales force for full year 2005 should exceed the original estimate of $13 million but may fall short of the $20 million objective established more recently. The Company continues to be optimistic about January 1 policy renewals.

The Company views productivity per sales representative as a key early indicator of whether KMG America is successfully executing its business strategy. There is strong evidence that Company sales personnel employed for over six months are producing annualized new premium at the expected levels. This is particularly noteworthy considering the limited product menu available and the fact that the important January renewal sales period has not yet been available to them.

Product development is progressing on schedule with the stop loss insurance product approved in most of the Company's 45 targeted states; group life insurance is approved in over half of the targeted states; and the new group disability insurance products have been filed and are being considered by the states for approval. The focus now is on improving the array of voluntary products available through the Company's primary subsidiary, Kanawha Insurance Company ("Kanawha").

THIRD QUARTER FINANCIAL RESULTS

For the third quarter of 2005, KMG America reported net income of $1.3 million, or $.06 per diluted share, compared to net income for the second quarter of 2005 of $0.7 million, or $.03 per diluted share, and third quarter 2004 net income of $3.6 million (third quarter 2004 net income includes realized gains of $3.0 million, net of taxes). On an operating income basis, third quarter 2005 income was $1.2 million, or $.06 per diluted share, compared to operating income of $0.7 million, or $.03 per diluted share, in the second quarter of 2005, and $3.2 million, or $.14 per diluted share, in the third quarter of 2004 on a pro forma basis (pro forma operating income in the third quarter of 2004 is adjusted to reflect the application of purchase accounting consistent with the earnings measurement basis in 2005).

The primary reasons for the decreased earnings in the third quarter 2005 to third quarter 2004 comparisons continue to be the increased expenses from the new KMG America activity related to building the new sales and underwriting organization, and the additional costs and infrastructure required to operate as a public company. These new expenses (before deferrals of acquisition costs related to voluntary product sales) totaled $3.9 million and $4.0 million in the third and second quarters of 2005, respectively. Partially offsetting these increased expenses are incremental direct premiums related to the sales activity from the new KMG America distribution channel of $1.4 million and $0.1 million in the third and second quarters of 2005, respectively. Operating after tax losses attributed to the KMG America new activity were $2.2 million and $2.6 million in the third and second quarters of 2005, respectively.

Excluding the earnings results attributable to KMG America new activity, third quarter 2005 operating income would be $3.5 million, or $.16 per diluted share, compared to $3.3 million, or $.15 per diluted share, in the second quarter 2005, and third quarter 2004 pro forma operating income of $3.2 million, or $.14 per diluted share. The Company believes that excluding the earnings results of the KMG America new activity provides a more meaningful comparison of the trends in earnings produced by Kanawha's legacy business, which serves to fund the initial outlay of expenses associated with building the new sales and underwriting organization and the infrastructure needed to operate as a public company. The more notable earnings drivers are discussed below where the third quarter of 2005 results are compared to the second quarter of 2005 results.