KMG America Reports First Quarter 2006 Net Income of $0.06 Per Share; KMG America Will Host an Investor Web Cast Today, Monday, May 8th at 10:00 A.M. EST

Business Wire, May 8, 2006

MINNEAPOLIS -- KMG America Corporation -- (the "Company" or "KMG America") (NYSE:KMA) today reported net income for the first quarter ended March 31, 2006 of $1.2 million, or $0.06 per diluted share, compared to net income for the fourth quarter of 2005 of $1.6 million, or $0.07 per diluted share, and first quarter 2005 net income of $1.0 million, or $0.05 per diluted share.

KMG America's Chief Executive Officer, Kenneth Kuk, commented, "Although slightly below our expectations due to some unanticipated charges that are likely to be one-time in nature, the first quarter earnings and sales results are consistent with the annual guidance KMG America offered recently. The previously announced margin compression was apparent in the quarterly results of our new large case activity and this too was contemplated in the guidance numbers."

Mr. Kuk added, "Long term care claims showed significant improvement after several quarters of increases which should reduce concerns about that trend. We also continue to gain momentum in the market as more and more consultants and brokers gain confidence in KMG America's ability to deliver first rate products and administrative services."

FIRST QUARTER FINANCIAL RESULTS

First quarter 2006 operating income (see discussion of non-GAAP financial measures below) decreased to $1.2 million compared to fourth quarter 2005 operating income of $1.5 million, due to the introduction of option expensing and a one-time refund of premiums resulting from a mass cancellation of an older policy form described below. First quarter 2006 operating income increased to $1.2 million, compared to first quarter 2005 operating income of $1.0 million, due primarily to improved results in the Kanawha legacy business -- particularly the Senior segment -- driven by higher investment income that more than offset increased expenses associated with the new KMG America sales activity.

After-tax operating losses attributed to the new KMG America growth initiatives increased to $2.4 million in the first quarter of 2006 from $2.2 million in the fourth quarter of 2005 and $1.6 million in the first quarter of 2005. While incremental direct premiums related to the sales activity from the new KMG America distribution channel increased to $6.2 million (before reinsurance ceded) compared to $2.3 million in the fourth quarter of 2005, they were more than offset by higher expenses. Expenses (before deferrals of acquisition costs related to voluntary product sales) totaled $5.0 million in the first quarter of 2006 compared to $4.4 million in the fourth quarter of 2005 and $1.1 million in the first quarter of 2005.

Excluding the operating results attributable to new KMG America growth initiatives, first quarter 2006 operating income was $3.6 million, or $0.16 per diluted share, compared to $3.7 million, or $0.17 per diluted share, in the fourth quarter of 2005, and first quarter 2005 operating income of $2.5 million, or $0.12 per diluted share. This reduction in operating income compared to the fourth quarter of 2005 is due primarily to the unusual items described below. 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 first quarter 2006 results are compared to the fourth quarter 2005 results.

Premium Revenue

Premiums for the first quarter of 2006 increased to $29.8 million, compared to $27.5 million in the fourth quarter of 2005. The increase is primarily due to incremental premiums related to the new KMG America sales distribution channel that produced $6.2 million of new direct earned premiums ($4.5 million net of reinsurance) in the first quarter of 2006 compared to $2.3 million of new direct earned premiums ($1.8 million net of reinsurance) in the fourth quarter of 2005. The first quarter 2006 premiums were also adversely affected by an unusual $0.3 million premium refund attributed to a mass cancellation of an older Kanawha policy form in the state of Georgia, which is likely to be one-time in nature.

Investment Income

Investment income in the first quarter of 2006 was $7.2 million, flat compared to $7.2 million in the fourth quarter of 2005 in spite of an improvement in the investment portfolio yield. Cash and invested assets declined slightly (after removing increasing unrealized capital losses due to rising interest rates) due to the continuing high level of incremental startup expenses and the acquisition costs associated with new business now being written in increasing amounts. The first quarter 2006 investment portfolio yield averaged 4.95%, based on average cash and invested assets excluding FAS115 unrealized gains (losses), an improvement of 7 basis points from the 4.88% average yield reported in the fourth quarter of 2005.