KMG America Retains Keefe, Bruyette and Woods to Explore Strategic Alternatives; Announces Q1 2007 Results Including Charges Intended to Strengthen Business Outlook

Business Wire, May 7, 2007

KMG America Investor Webcast Today, Monday, May 7th at 10:00 A.M. Eastern

MINNEAPOLIS -- KMG America Corporation (the "Company" or "KMG America") (NYSE: KMA) today reported financial results for the first quarter ended March 31, 2007. The financial results reflect two special charges: the establishment of a valuation allowance against its non-life deferred tax asset of $6.5 million, or $0.29 per diluted share, and a pretax charge for increased claims and reserves on stop loss business of $6 million, or $0.17 per diluted share. Taking these two special charges into account, the Company reported a Q1 2007 net loss of $9.4 million, or $0.42 per diluted share, compared to net income of $1.2 million, or $0.06 per diluted share for the first quarter of 2006. Excluding the valuation allowance and stop loss charges, actions intended to enhance the Company's financial position, operating income for the first quarter of 2007 would have been $1.0 million, or $0.05 per diluted share.

Reflecting these special charges as well as the Company's Q1 operating performance, KMG America reported a book value at March 31, 2007 of $8.26 per share.

KEEFE, BRUYETTE & WOODS (KBW) RETAINED TO PURSUE STRATEGIC ALTERNATIVES

KMG America's Chief Executive Officer, Kenneth Kuk, commented, "The late March revision of our ratings outlook from "stable" to "negative" has forced us to consider a range of alternatives that afford the best chance to maintain our A.M. Best A- rating. We believe several actions including establishing incremental reserves in the first quarter are initial steps to facilitate our efforts to achieve that objective. Further, we believe there are several options available to us that will satisfy rating agency concerns. We had retained KBW to help us explore a variety of strategic alternatives, including the possible sale or merger of the Company with a more highly rated firm. The KBW-led process is underway, and discussions are ongoing with several interested parties. Of course, there are no guarantees that this process will result in a transaction."

FIRST QUARTER DEVELOPMENTS

After a comprehensive review of its stop loss book of business, the Company recognized a $6 million charge for increased claims and reserves that reflects recent experience on stop loss cases. The Company began writing annually renewable stop loss in mid-2005, and initially relied on pricing assumptions, a common industry practice relative to new books of stop loss business, to establish expected loss ratios due to lack of credible actual claims experience. In contrast, companies with mature books of stop loss typically establish claim reserves as a function of experience studies derived from the historical performance of its business. Because actual claims on stop loss cases typically are not fully reported until after the end of the policy period, it is a common practice to increase or decrease claims reserves once the actual claims experience becomes known. After a few years, these adjustments tend to be offsetting.

As experience has emerged, the Company has recognized additional claims and reserves reflecting the recent adverse claims experience. The Company also decided to increase claims assumptions on business prospectively, reflecting a more conservative estimate of future claims on this business. As a result of these actions, the Company believes the likelihood of additional claim reserve increases in the future is greatly reduced.

In order to address the current imbalance toward stop loss in its overall new sales mix, the Company has restructured the sales incentive compensation plan for its sales organization with increased incentives for sales of core group life/disability and voluntary benefit products. Additionally, the Company is limiting new sales of stop loss by means of more conservative pricing and a requirement that sales of stop loss be packaged with other products.

The Company also established a $6.5 million valuation allowance as a non-cash charge to offset the portion of the deferred tax asset relating to the holding company. Due to the unique way life insurance company earnings are taxed at the federal level, the Company will not be able to deduct holding company expenses on its life insurance federal tax return for a number of years. The Company determined it would be prudent to establish the valuation allowance at this time to afford greater flexibility in implementing a variety of actions this year, including those intended to address the issues raised by AM Best.

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 primarily on first quarter 2007 results compared to the fourth quarter 2006 results.