KMG America Reports Second Quarter 2006 Net Income of $0.05 Per Share; KMG America Will Host an Investor Web Cast Today, Monday, August 7th at 10:00 A.M. EDT

Business Wire, August 7, 2006

MINNEAPOLIS -- KMG America Corporation -- (the "Company" or "KMG America") (NYSE:KMA) today reported net income for the second quarter ended June 30, 2006 of $1.0 million, or $0.05 per diluted share, compared to net income for the first quarter of 2006 of $1.2 million, or $0.06 per diluted share, and second quarter 2005 net income of $0.7 million, or $0.03 per diluted share.

KMG America's Chief Executive Officer, Kenneth Kuk, commented, "While second quarter earnings are much improved compared to the same period last year, results are below our expectations due primarily to adverse claims experience in portions of the Kanawha legacy business. Claims fluctuations from quarter to quarter are inherent to our business and we are satisfied that the Kanawha legacy block of business will continue to provide a stable contribution to earnings over time."

Mr. Kuk added, "Regarding our new larger case activity, seasonally-adjusted second quarter sales growth is apparent in spite of our decision to limit new sales representative hiring. And productivity per sales rep appears consistent with our objectives. Our intent is to maintain 20-22 sales reps until adequate margins are demonstrated."

2006 OUTLOOK

The Company previously offered guidance of $0.35 to $0.40 operating earnings per share for 2006. In light of the recent quarter and year-to-date results and considering the margin compression issues in the stop loss product, the Company currently estimates operating earnings per share to be in the range of $0.28 to $0.32 for the full year of 2006.

SECOND QUARTER FINANCIAL RESULTS

Second quarter 2006 operating income (see discussion of non-GAAP financial measures below) declined slightly to $1.1 million compared to first quarter 2006 operating income of $1.2 million, due primarily to adverse claims experience in the Kanawha legacy business and increased litigation expenses. Second quarter 2006 operating income increased to $1.1 million, compared to second quarter 2005 operating income of $0.7 million, due primarily to revenue growth from the new larger case sales activity and improved investment income that more than offset the adverse claims experience.

After-tax operating losses attributed to the new KMG America growth initiatives increased slightly to $2.5 million in the second quarter of 2006 as a result of the increased litigation expense this quarter, compared to the $2.4 million reported in the first quarter of 2006, but favorable compared to the $2.6 million reported in the second quarter of 2005. Direct premiums related to the sales activity from the new KMG America distribution channel increased to $7.1 million (before reinsurance ceded) compared to $6.2 million in the first quarter of 2006, and $0.1 million in the second quarter of 2005. Expenses (net of deferrals) totaled $4.7 million in the second quarter of 2006 compared to $4.3 million in the first quarter of 2006 and $4.0 million in the second quarter of 2005.

Operating income attributed to the Kanawha legacy business for the second quarter of 2006 was $3.6 million, or $0.16 per diluted share, flat compared to $3.6 million, or $0.16 per diluted share, in the first quarter of 2006, and up slightly compared to the second quarter 2005 operating income of $3.3 million, or $0.15 per diluted share. Favorable investment income in the current quarter was largely offset by adverse claims experience. The Company believes that excluding the earnings results of the new KMG America sales activity during the initial period when startup expenses exceed incremental new premiums provides a more meaningful comparison of the trends in earnings produced by Kanawha's legacy business, which serves to fund the initial 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 second quarter 2006 results are compared to the first quarter 2006 results.

Premium Revenue

Net premiums for the second quarter of 2006 increased to $30.7 million, compared to $29.8 million in the first quarter of 2006. The increase is due to incremental premiums related to the new KMG America sales distribution channel that produced $7.1 million of new direct earned premiums ($5.2 million net of reinsurance) in the second quarter of 2006 compared to $6.2 million of new direct earned premiums ($4.5 million net of reinsurance) in the first quarter of 2006.

Investment Income

Investment income in the second quarter of 2006 increased to $7.6 million, compared to $7.2 million in the first quarter of 2006, due to improved investment portfolio yield. The second quarter 2006 investment portfolio yield averaged 5.25%, based on average cash and invested assets excluding FAS 115 unrealized gains (losses), an improvement of 30 basis points from the 4.95% average yield reported in the first quarter of 2006. The second quarter investment income included approximately $175,000 of pretax benefit related primarily to an adjustment to the prepayment assumption in the mortgage backed securities portfolio because of rising interest rates this year. The second quarter 2006 average yield would have been 5.10% on a "normalized" basis after adjusting for items that do not occur evenly over time. Average cash and invested assets declined slightly (after removing increasing unrealized capital losses due to rising interest rates) due to the conversion of financial assets into deferred acquisition cost assets that result from new product sales, and continuing high level of incremental expenses relative to new revenues associated with the build out of the new sales and underwriting operation.