KMG America Reports Third Quarter 2006 Operating Income of $0.10 Per Share, Net Income of $0.09 Per Share

Business Wire, Nov 6, 2006

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MINNEAPOLIS -- KMG America Corporation (the "Company" or "KMG America") (NYSE: KMA) today reported net income of $2.0 million, or $0.09 per diluted share for the third quarter of 2006, compared to net income for the third quarter of 2005 of $1.3 million, or $0.06 per diluted share. The company reported operating income for the third quarter of $2.1 million, or $0.10 per diluted share, compared to operating income for the second quarter of 2006 of $1.1 million, or $0.05 per diluted share, and third quarter of 2005 operating income of $1.2 million, or $0.06 per diluted share.

KMG America's Chief Executive Officer, Kenneth Kuk, commented, "Our third quarter operating income results of $0.10 per share are consistent with our internal forecast and better than the analysts' consensus estimate of $0.08 per share. This quarter's results marks the seventh consecutive profitable quarter since the IPO with operating earnings up over 70% compared to the third quarter of 2005 and double the results reported in the second quarter 2006. Most key measurements continue a very positive trend including increasing sales and reduced operating losses on our new large case business."

THIRD QUARTER FINANCIAL RESULTS

Third quarter 2006 operating income (see discussion of non-GAAP financial measures below) improved to $2.1 million compared to second quarter 2006 operating income of $1.1 million, largely due to favorable claims experience in the Kanawha legacy business and revenue growth from the new large case sales activity.

Third quarter 2006 earnings results reflect several unusual items that are largely offsetting. The favorable items include a pretax reimbursement of $0.3 million from our D&O carriers for certain prior period litigation expenses related to the ReliaStar lawsuit. The current quarter also includes a pretax offset of $0.2 million from reimbursement of current quarter litigation expenses related to the ReliaStar lawsuit, and we would expect continuing legal expense reimbursements as the lawsuit progresses towards a conclusion. Also included in the current quarter results is a one-time pretax financial benefit of $0.6 million resulting from an indemnification from the previous shareholders of Kanawha. These favorable items were mostly offset by the recognition of $0.9 million of stop loss claims relating to specific cases written in 2005 as we transition from formula reserving to actual claims experience as this block grows and matures. Volatility, both favorable and unfavorable, is not uncommon in small, growing books of business. Cases giving rise to these excess claims have since been re-priced or did not renew.

The discussion of operating earnings that follows has been segregated into earnings attributed to the Kanawha legacy business and the earnings of the new large case activity. The Company believes that segregating the earnings results of the new large case activity provides a more meaningful comparison of the underlying strength in the earnings produced by Kanawha's legacy business. This earnings derivation is described later in "Notes on Financial Presentation." The discussion below focuses on third quarter 2006 results compared to the second quarter 2006 results.

KANAWHA LEGACY ACTIVITY RESULTS

Operating income attributed to the Kanawha legacy business for the third quarter of 2006 was $4.3 million, or $0.19 per diluted share, up 21% compared to $3.6 million of operating income reported in the second quarter of 2006 due largely to favorable claims experience across all of its business segments and the $0.6 million pretax benefit related to the indemnification from the previous shareholders of Kanawha mentioned above. The benefit ratio reported for the Kanawha legacy business for the third quarter of 2006 improved to 75.3% compared to 82.2% reported in the second quarter of 2006.

Earned premiums reported in the Kanawha legacy business for the third quarter of 2006 declined to $24.4 million, compared to $25.5 million reported in the second quarter of 2006 due to lapses of certain legacy worksite cases, the impact of an experience rating refund adjustment on one large treaty in the Acquired Business segment, and to the seasonality effect of policy anniversaries of long term care policies reported in the Senior segment. Amortization of DAC/VOBA ("deferred acquisition costs"/"value of business acquired") increased to $1.4 million in the third quarter of 2006 compared to $1.0 million reported in the second quarter of 2006 due largely to the impact of increased lapses in the worksite segment and the delayed impact of both recently approved and pending rate increases in the long term care block of business that tends to accelerate amortization. The amortization of VOBA on the long term care business is expected to moderate as the pending rate increases are approved.

NEW LARGE CASE ACTIVITY RESULTS

Operating losses attributed to the new large case activity improved to $2.2 million, or $0.09 per diluted share, compared to a loss of $2.5 million, or $0.11 per diluted share reported in the second quarter of 2006. Contributing factors to the improvement include positive growth in premium revenue driven by increased sales and the favorable impact of the reimbursement of ReliaStar litigation expenses from our D&O carrier. These favorable items were partially offset by increased claims on 2005 stop loss cases.