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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q   (Mark One) [X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 OR [  ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission File Number 001-15166 AMERUS GROUP CO.  IOWA
(State or other jurisdiction of
incorporation or organization)
    
    42-1458424
(I.R.S. Employer
Identification No.)
 699 Walnut Street
Des Moines, Iowa 50309-3948
(Address of principal executive offices) Registrants telephone number, including area code (515) 362-3600 Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.   Yes
[X]   No [  ] Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).   Yes
[X]   No [  ] The number of shares outstanding of each of the Registrants classes of common
stock on August 3, 2004 was as follows: Common Stock
    
    39,110,013 shares
 Exhibit index - Page 42
Page 1 of 43 1




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INDEX  
 Page No.PART I - FINANCIAL INFORMATION
    
    
    4Item 1. Financial Statements
    
    
    4Consolidated Balance Sheets June 30, 2004 (Unaudited) and December 31, 2003
    
    
    4Consolidated Statements of Income (Unaudited) For the Three and Six Months Ended June 30, 2004 and 2003
    
    
    6Consolidated Statements of Comprehensive Income (Unaudited) For the Three and Six Months Ended June 30, 2004 and 2003
    
    
    7Consolidated Statements of Stockholders Equity For the Six Months Ended June 30, 2004 (Unaudited) and the Year Ended December 31, 2003
    
    
    8Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2004 and 2003
    
    
    9Notes to Consolidated Financial Statements (Unaudited)
    
    
    11Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    37PART II - OTHER INFORMATION
    
    
    38Item 1. Legal Proceedings
    
    
    38Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    38Item 4. Submission of Matters to a Vote of Security Holders
    
    
    38Item 6. Exhibits and Reports on Form 8-K
    
    
    40Signatures
    
    
    41Index to Exhibits
    
    
    42Amended and Restated Articles of IncorporationAmended and Restated BylawsAmended and Restated Retirement AgreementStatement Re: Computation of Earnings Per ShareComputation of Ratios of Earnings to Fixed ChargesCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial Officer
  2




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SAFE HARBOR STATEMENT This Quarterly Report on Form 10-Q, including the Managements Discussion
and Analysis of Financial Condition and Results of Operations, contains
statements which constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, including statements
relating to trends in operations and financial results and the business and the
products of the Registrant and its subsidiaries, as well as other statements
including words such as anticipate, believe, plan, estimate, expect,
intend, and other similar expressions. Forward-looking statements are made
based upon managements current expectations and beliefs concerning future
developments and their potential effects on the Company. Such forward-looking
statements are not guarantees of future performance. Factors that may cause
our actual results to differ materially from those contemplated by these
forward-looking statements include, among others, the following possibilities:
(a) general economic conditions and other factors, including prevailing
interest rate levels and stock and bond market performance, which may affect
our ability to sell our products, the market value of our investments and the
lapse rate and profitability of policies; (b) our ability to achieve
anticipated levels of operational efficiencies and cost-saving initiatives and
to meet cash requirements based upon projected liquidity sources; (c) customer
response to new products, distribution channels and marketing initiatives; (d)
mortality, morbidity, and other factors which may affect the profitability of
our insurance products; (e) our ability to develop and maintain effective risk
management policies and procedures and to maintain adequate reserves for future
policy benefits and claims; (f) changes in the federal income tax and other
federal laws, regulations, and interpretations, including federal
regulatory measures that
may significantly affect the insurance business including limitations on
antitrust immunity, minimum solvency requirements, and changes to the tax
advantages offered by life insurance and annuity products or programs with which they
are used; (g) increasing competition in the sale of insurance and annuities and
the recruitment of sales representatives; (h) regulatory changes,
interpretations, initiatives or pronouncements, including those relating to the regulation
of insurance companies and the regulation and sale of their products; (i) our
ratings and those of our subsidiaries by independent rating organizations which
we believe are particularly important to the sale of our products and
the programs in which they are used; (j) the
performance of our investment portfolios; (k) the impact of changes in
standards of accounting; (l) our ability to integrate the business and
operations of acquired entities; (m) expected protection products and
accumulation products margins; (n) the impact of anticipated investment
transactions; and (o) unanticipated litigation or regulatory investigations or
examinations. There can be no assurance that other factors not currently anticipated by
us will not materially and adversely affect our results of operations. You are
cautioned not to place undue reliance on any forward-looking statements made by
us or on our behalf. Forward-looking statements speak only as of the date the
statement was made. We undertake no obligation to update or revise any
forward-looking statement. 3




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PART I - FINANCIAL INFORMATION 
 Item 1. Financial Statements AMERUS GROUP CO. 
 
 June 30,
    
    December 31,2004
    
    2003(unaudited)AssetsInvestments:Securities available-for-sale at fair value:Fixed maturity securities
    
    $
    14,428,207
    
    
    $
    13,944,961Equity securities
    
    
    77,818
    
    
    
    74,890Short-term investments
    
    
    20,426
    
    
    
    28,556Securities held for trading purposes at fair value:Fixed maturity securities
    
    
    1,848,933
    
    
    
    2,089,502Equity securities
    
    
    5,507
    
    
    
    1,652Short-term investments
    
    
    580
    
    
    
    591Mortgage loans
    
    
    843,624
    
    
    
    968,572Real estate
    
    
    33
    
    
    
    33Policy loans
    
    
    486,087
    
    
    
    494,646Other investments
    
    
    328,754
    
    
    
    339,436Total
investments
    
    
    18,039,969
    
    
    
    17,942,839Cash and cash equivalents
    
    
    459,209
    
    
    
    274,150Accrued investment income
    
    
    207,531
    
    
    
    205,492Premiums, fees and other receivables
    
    
    41,869
    
    
    
    42,761Reinsurance receivables
    
    
    722,097
    
    
    
    663,452Deferred policy acquisition costs
    
    
    1,266,258
    
    
    
    1,021,856Capitalized bonus interest
    
    
    130,865
    
    
    
    98,274Value of business acquired
    
    
    408,482
    
    
    
    419,582Goodwill
    
    
    226,291
    
    
    
    224,075Property and equipment
    
    
    48,218
    
    
    
    48,849Other assets
    
    
    299,125
    
    
    
    311,305Separate account assets
    
    
    254,939
    
    
    
    261,657Assets of discontinued operations
    
    
    
    
    
    
    27,950Total assets
    
    $
    22,104,853
    
    
    $
    21,542,242
 See accompanying notes to consolidated financial statements. 4




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AMERUS GROUP CO.
CONSOLIDATED BALANCE SHEETS
($ in thousands) June 30,
    
    December 31,2004
    
    2003(unaudited)Liabilities and Stockholders EquityLiabilities:Policy reserves and policyowner funds:Future life and annuity policy benefits
    
    $
    17,313,623
    
    
    $
    16,994,255Policyowner funds
    
    
    1,423,847
    
    
    
    1,306,16018,737,470
    
    
    
    18,300,415Accrued expenses and other liabilities
    
    
    747,643
    
    
    
    443,589Dividends payable to policyowners
    
    
    254,378
    
    
    
    321,233Policy and contract claims
    
    
    47,343
    
    
    
    58,880Income taxes payable
    
    
    38,545
    
    
    
    50,274Deferred income taxes
    
    
    54,633
    
    
    
    80,861Notes payable
    
    
    545,838
    
    
    
    596,101Separate account liabilities
    
    
    254,939
    
    
    
    261,657Liabilities of discontinued operations
    
    
    
    
    
    
    19,421Total liabilities
    
    
    20,680,789
    
    
    
    20,132,431Stockholders equity:Preferred Stock, no par value, 20,000,000 shares
authorized, none issued
    
    
    
    
    
    
    Common Stock, no par value, 230,000,000 shares
authorized; 43,919,601 shares issued and
39,084,296 shares outstanding in 2004;
43,836,608 shares issued and 39,194,602 shares
outstanding in 2003
    
    
    43,920
    
    
    
    43,836Additional paid-in capital
    
    
    1,187,189
    
    
    
    1,184,237Accumulated other comprehensive income (loss)
    
    
    22,240
    
    
    
    84,519Unearned compensation
    
    
    (1,440
    )
    
    
    (1,361
    )Retained earnings
    
    
    336,911
    
    
    
    255,006Treasury stock, at cost (4,835,305 shares in 2004
and 4,642,006 shares in 2003)
    
    
    (164,756
    )
    
    
    (156,426
    )Total stockholders equity
    
    
    1,424,064
    
    
    
    1,409,811Total liabilities and stockholders equity
    
    $
    22,104,853
    
    
    $
    21,542,242
 See accompanying notes to consolidated financial statements. 5




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AMERUS GROUP CO. 
 
 For The Three Months Ended June 30,

    
    For The Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(unaudited)Revenues:Insurance premiums
    
    $
    63,791
    
    
    $
    79,637
    
    
    $
    134,528
    
    
    $
    161,242Product charges
    
    
    54,284
    
    
    
    48,703
    
    
    
    103,846
    
    
    
    95,534Net investment income
    
    
    251,311
    
    
    
    251,707
    
    
    
    508,186
    
    
    
    506,820Realized/unrealized capital gains (losses)
    
    
    (44,550
    )
    
    
    58,969
    
    
    
    (44,635
    )
    
    
    66,824Other income
    
    
    19,098
    
    
    
    17,257
    
    
    
    38,701
    
    
    
    33,612343,934
    
    
    
    456,273
    
    
    
    740,626
    
    
    
    864,032Benefits and expenses:Policyowner benefits
    
    
    168,350
    
    
    
    261,765
    
    
    
    406,779
    
    
    
    485,125Underwriting, acquisition and other expenses
    
    
    45,737
    
    
    
    33,443
    
    
    
    86,338
    
    
    
    73,799Restructuring costs
    
    
    
    
    
    
    12,670
    
    
    
    
    
    
    
    15,864Amortization of deferred policy acquisition costs
and value of business acquired
    
    
    58,278
    
    
    
    45,902
    
    
    
    106,189
    
    
    
    92,975Dividends to policyowners
    
    
    10,936
    
    
    
    29,740
    
    
    
    36,420
    
    
    
    64,314283,301
    
    
    
    383,520
    
    
    
    635,726
    
    
    
    732,077Income from continuing operations
    
    
    60,633
    
    
    
    72,753
    
    
    
    104,900
    
    
    
    131,955Interest expense
    
    
    7,936
    
    
    
    7,575
    
    
    
    16,334
    
    
    
    14,374Income before income tax expense
    
    
    52,697
    
    
    
    65,178
    
    
    
    88,566
    
    
    
    117,581Income tax expense
    
    
    3,921
    
    
    
    22,002
    
    
    
    10,050
    
    
    
    39,102Net income from continuing operations
    
    
    48,776
    
    
    
    43,176
    
    
    
    78,516
    
    
    
    78,479Income from discontinued operations, net of tax
    
    
    
    
    
    
    535
    
    
    
    3,899
    
    
    
    1,022Net income before cumulative effect of change in accounting
    
    
    48,776
    
    
    
    43,711
    
    
    
    82,415
    
    
    
    79,501Cumulative effect of change in accounting, net of tax
    
    
    
    
    
    
    
    
    
    
    (510
    )
    
    
    Net income
    
    $
    48,776
    
    
    $
    43,711
    
    
    $
    81,905
    
    
    $
    79,501Net income from continuing operations per common share:Basic
    
    $
    1.24
    
    
    $
    1.10
    
    
    $
    2.00
    
    
    $
    2.01Diluted
    
    $
    1.20
    
    
    $
    1.10
    
    
    $
    1.93
    
    
    $
    1.99Net income per common share:Basic
    
    $
    1.24
    
    
    $
    1.12
    
    
    $
    2.08
    
    
    $
    2.03Diluted
    
    $
    1.20
    
    
    $
    1.11
    
    
    $
    2.02
    
    
    $
    2.02Weighted average common shares outstanding:Basic
    
    
    39,327,182
    
    
    
    39,161,780
    
    
    
    39,342,363
    
    
    
    39,112,346Diluted
    
    
    40,760,364
    
    
    
    39,404,467
    
    
    
    40,619,242
    
    
    
    39,354,894
 See accompanying notes to consolidated financial statements. 6




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AMERUS GROUP CO. 
 
 For The Three Months Ended June 30,
    
    For The Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(unaudited)Net income
    
    $
    48,776
    
    
    $
    43,711
    
    
    $
    81,905
    
    
    $
    79,501Other comprehensive income (loss), before tax:Unrealized gains (losses) on securities:Unrealized holding gains (losses) arising during period
    
    
    (197,725
    )
    
    
    101,516
    
    
    
    (130,748
    )
    
    
    131,376Less: Reclassification adjustment for gains (losses)
included in net income
    
    
    4,421
    
    
    
    5,397
    
    
    
    (34,935
    )
    
    
    17,773Other comprehensive income (loss), before tax
    
    
    (202,146
    )
    
    
    96,119
    
    
    
    (95,813
    )
    
    
    113,603Income tax (expense) benefit related to items of other
comprehensive income
    
    
    70,751
    
    
    
    (33,642
    )
    
    
    33,534
    
    
    
    (39,761
    )Other comprehensive income (loss), net of taxes
    
    
    (131,395
    )
    
    
    62,477
    
    
    
    (62,279
    )
    
    
    73,842Comprehensive income (loss)
    
    $
    (82,619
    )
    
    $
    106,188
    
    
    $
    19,626
    
    
    $
    153,343
 See accompanying notes to consolidated financial statements. 7




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AMERUS GROUP CO. 
 
 AccumulatedAdditional
    
    Other
    
    
    
    
    
    Unallocated
    
    
    
    
    
    
    
    
    
    TotalPaid-In
    
    Comprehensive
    
    Unearned
    
    ESOP
    
    Retained
    
    Treasury
    
    StockholdersCommon Stock
    
    Capital
    
    Income (Loss)
    
    Compensation
    
    Shares
    
    Earnings
    
    Stock
    
    EquityBalance at December 31, 2002
    
    $
    43,656
    
    
    $
    1,179,646
    
    
    $
    88,522
    
    
    $
    (458
    )
    
    $
    (1,443
    )
    
    $
    109,517
    
    
    $
    (156,492
    )
    
    $
    1,262,9482003:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    161,147
    
    
    
    
    
    
    
    161,147Net unrealized gain (loss) on securities
    
    
    
    
    
    
    
    
    
    
    1,971
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,971Net unrealized gain (loss) on derivatives
designated as cash flow hedges
    
    
    
    
    
    
    
    
    
    
    2,476
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,476Change in accounting transfer of unrealized gain
on available-for-sale securities to trading
    
    
    
    
    
    
    
    
    
    
    (5,204
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,204
    )Stock issued under various incentive
plans, net of forfeitures
    
    
    180
    
    
    
    11,717
    
    
    
    
    
    
    
    (903
    )
    
    
    
    
    
    
    
    
    
    
    66
    
    
    
    11,060PRIDES purchase contract adjustments
and allocated fees and expenses
    
    
    
    
    
    
    (7,280
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,280
    )Dividends declared on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,658
    )
    
    
    
    
    
    
    (15,658
    )Allocation of shares in leveraged ESOP
    
    
    
    
    
    
    154
    
    
    
    
    
    
    
    
    
    
    
    1,443
    
    
    
    
    
    
    
    
    
    
    
    1,597Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    (3,246
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,246
    )Balance at December 31, 2003
    
    
    43,836
    
    
    
    1,184,237
    
    
    
    84,519
    
    
    
    (1,361
    )
    
    
    
    
    
    
    255,006
    
    
    
    (156,426
    )
    
    
    1,409,8112004 (unaudited):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,905
    
    
    
    
    
    
    
    81,905Net unrealized gain (loss) on securities
    
    
    
    
    
    
    
    
    
    
    (62,679
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62,679
    )Net unrealized gain (loss) on derivatives
designated as cash flow hedges
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    400Stock issued under various incentive
plans, net of forfeitures
    
    
    84
    
    
    
    2,952
    
    
    
    
    
    
    
    (79
    )
    
    
    
    
    
    
    
    
    
    
    823
    
    
    
    3,780Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,153
    )
    
    
    (9,153
    )Balance at June 30, 2004
    
    $
    43,920
    
    
    $
    1,187,189
    
    
    $
    22,240
    
    
    $
    (1,440
    )
    
    $
    
    
    
    $
    336,911
    
    
    $
    (164,756
    )
    
    $
    1,424,064
 See accompanying notes to consolidated financial statements. 8




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AMERUS GROUP CO. 
 
 For The Six Months EndedJune 30,2004
    
    2003(unaudited)Cash flows from operating activitiesNet income
    
    $
    81,905
    
    
    $
    79,501Adjustments to reconcile net income to net cash
provided by operating activities:Cumulative effect of change in accounting
    
    
    510
    
    
    
    Gain on sale of discontinued operations
    
    
    (3,899
    )
    
    
    Product charges
    
    
    (103,846
    )
    
    
    (95,534
    )Interest credited to policyowner account
balances
    
    
    233,800
    
    
    
    251,959Change in option value of equity indexed products
and market value adjustments on total
return strategy annuities
    
    
    (13,555
    )
    
    
    27,209Realized/unrealized capital (gains) losses
    
    
    44,635
    
    
    
    (66,824
    )DAC and VOBA amortization
    
    
    106,189
    
    
    
    92,975DAC and VOBA capitalized
    
    
    (186,658
    )
    
    
    (192,274
    )Change in:Accrued investment income
    
    
    (2,039
    )
    
    
    (777
    )Reinsurance receivables
    
    
    (84,928
    )
    
    
    (14,526
    )Securities held for trading purposes:Fixed maturities
    
    
    209,725
    
    
    
    18,566Equity securities
    
    
    (3,883
    )
    
    
    (1,813
    )Liabilities for future policy benefits
    
    
    34,302
    
    
    
    96,694Accrued expenses and other liabilities
    
    
    304,053
    
    
    
    474,559Policy and contract claims and other
policyowner funds
    
    
    105,585
    
    
    
    57,126Income taxes:Current
    
    
    (14,301
    )
    
    
    (22,528
    )Deferred
    
    
    7,654
    
    
    
    29,269Other, net
    
    
    (13,898
    )
    
    
    2,264Net cash provided by operating activities
    
    
    701,351
    
    
    
    735,846Cash flows from investing activities:Purchase of fixed maturities available-for-sale
    
    
    (3,192,310
    )
    
    
    (5,601,015
    )Proceeds from sale of fixed maturities available-for-sale
    
    
    1,627,612
    
    
    
    4,175,359Maturities, calls and principal reductions of
fixed maturities available-for-sale
    
    
    700,210
    
    
    
    1,157,234Purchase of equity securities
    
    
    (42,255
    )
    
    
    (7,155
    )Proceeds from sale of equity securities
    
    
    39,429
    
    
    
    12,180Change in short-term investments, net
    
    
    19,859
    
    
    
    (1,933
    )Purchase of mortgage loans
    
    
    (54,242
    )
    
    
    (80,332
    )
 9




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AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
($ in thousands) For The Six Months EndedJune 30,2004
    
    2003(unaudited)Proceeds from repayment and sale of mortgage loans
    
    
    185,341
    
    
    
    55,689Purchase of real estate and other invested assets
    
    
    (37,473
    )
    
    
    (200,854
    )Proceeds from sale of real estate and other
invested assets
    
    
    77,024
    
    
    
    (4,153
    )Change in policy loans, net
    
    
    8,559
    
    
    
    4,746Proceeds from sale of discontinued operations
    
    
    15,000
    
    
    
    Other assets, net
    
    
    611
    
    
    
    (798
    )Net cash used in investing activities
    
    
    (652,635
    )
    
    
    (491,032
    )Cash flows from financing activities:Deposits to policyowner account balances
    
    
    1,099,912
    
    
    
    1,030,023Withdrawals from policyowner account balances
    
    
    (907,933
    )
    
    
    (773,630
    )Change in debt, net
    
    
    (50,263
    )
    
    
    (102,517
    )Stock issued under various incentive plans, net of
forfeitures
    
    
    3,780
    
    
    
    7,099Purchase of treasury stock
    
    
    (9,153
    )
    
    
    Proceeds from issuance of PRIDES
    
    
    
    
    
    
    137,398Adoption and allocation of shares in leveraged ESOP
    
    
    
    
    
    
    37Net cash provided by financing activities
    
    
    136,343
    
    
    
    298,410Net increase in cash
    
    
    185,059
    
    
    
    543,224Cash and cash equivalents at beginning of period
    
    
    274,150
    
    
    
    102,612Cash and cash equivalents at end of period
    
    $
    459,209
    
    
    $
    645,836Supplemental disclosure of cash activities:Interest paid
    
    $
    16,261
    
    
    $
    15,449Income taxes paid
    
    $
    18,372
    
    
    $
    15,967
 See accompanying notes to consolidated financial statements. 10




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AMERUS GROUP CO. 
 
 (1) CONSOLIDATION AND BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States (GAAP) for interim financial information and the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by GAAP for annual financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. All adjustments were of a normal
recurring nature, unless otherwise noted in the Notes to Consolidated Financial
Statements. Operating results for the six months ended June 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. The consolidated balance sheet at December 31, 2003 has
been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by GAAP for complete
financial statements. For further information and for capitalized terms not
defined in this Form 10-Q, refer to the consolidated financial statements and
notes thereto included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2003. The accompanying consolidated financial statements include the accounts
and operations of the Company and its wholly-owned subsidiaries, principally
AmerUs Life Insurance Company (ALIC), AmerUs Annuity Group Co. and its
subsidiaries (collectively, AAG), AmerUs Capital Management Group, Inc. (ACM),
and ILICO Holdings, Inc., the holding company of Indianapolis Life Insurance
Company (ILIC) and its subsidiaries (collectively, ILICO). All significant
intercompany transactions and balances have been eliminated in consolidation. The Company has certain stock-based employee compensation plans which are
accounted for under the recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations. The plans are stock option plans for which no stock-based
employee compensation cost is reflected in net income, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of Statement of Financial Accounting
Standards (SFAS) 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation: For The Three Months Ended June 30,

    
    For The Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003($ in thousands, except share data)Net income, as reported
    
    $
    48,776
    
    
    $
    43,711
    
    
    $
    81,905
    
    
    $
    79,501Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
    
    
    (919
    )
    
    
    (980
    )
    
    
    (2,081
    )
    
    
    (2,078
    )Pro forma net income
    
    $
    47,857
    
    
    $
    42,731
    
    
    $
    79,824
    
    
    $
    77,423Earnings per share:Basic - as reported
    
    $
    1.24
    
    
    $
    1.12
    
    
    $
    2.08
    
    
    $
    2.03Basic - pro forma
    
    $
    1.22
    
    
    $
    1.09
    
    
    $
    2.03
    
    
    $
    1.98Diluted - as reported
    
    $
    1.20
    
    
    $
    1.11
    
    
    $
    2.02
    
    
    $
    2.02Diluted - pro forma
    
    $
    1.17
    
    
    $
    1.08
    
    
    $
    1.97
    
    
    $
    1.97
 11




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##### Table of Contents



Certain amounts in the 2003 financial statements have been reclassified to
conform to the 2004 financial statement presentation. (2) EARNINGS PER SHARE Basic earnings per share of common stock are computed by dividing net
income by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share assumes the issuance of common shares
applicable to stock options calculated using the treasury stock method. Diluted earnings per share applicable to the Companys Optionally
Convertible Equity-linked Accreting Notes (OCEANsSM) are determined using the
if-converted method for the number of days in the period in which the common
stock price conversion condition is met. The common stock price conversion
condition was not met for the six months ended June 30, 2004 and 2003. No
undistributed net income has been allocated to the convertible securities
holders since their participation in dividends with common stockholders is
limited to the amount of the annual regular dividend. Diluted
earnings per share applicable to the Companys PRIDESSM securities
are determined using the treasury stock method as it is currently anticipated
that holders of the PRIDES are more likely to tender cash in the future for the
securities forward contract. The PRIDES added 777,528 and 650,534 shares to
the diluted earnings per share calculation for the three and six months ended
June 30, 2004, respectively. (3) CLOSED BLOCK The Company has established two closed blocks, which we refer to as the
Closed Block. The first was established on June 30, 1996 in connection with
the reorganization of ALIC from a mutual company to a stock company. The
second was established as of March 31, 2000 in connection with the
reorganization of ILIC from a mutual company to a stock company. Insurance
policies which had a dividend scale in effect as of each Closed Block
establishment date were included in the Closed Block. The Closed Block was
designed to provide reasonable assurance to owners of insurance policies
included therein that, after the reorganization of ALIC and ILIC, assets would
be available to maintain the dividend scales and interest credits in effect
prior to the reorganization if the experience underlying such scales and
credits continues. Summarized financial information of the Closed Block as of June 30, 2004
and December 31, 2003 and for the three months and six months ended June 30,
2004 and 2003 are as follows: 12




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##### Table of Contents



June 30,
    
    December 31,2004
    
    2003($ in thousands)Liabilities:Future life and annuity policy benefits
    
    $
    2,816,832
    
    
    $
    2,845,365Policyowner funds
    
    
    8,573
    
    
    
    9,232Accrued expenses and other liabilities
    
    
    60,299
    
    
    
    44,473Dividends payable to policyowners
    
    
    173,314
    
    
    
    173,703Policy and contract claims
    
    
    11,732
    
    
    
    22,694Policyowner dividend obligation
    
    
    70,152
    
    
    
    134,386Total Liabilities
    
    
    3,140,902
    
    
    
    3,229,853Assets:Fixed maturity securities available-for-sale at fair value
    
    
    1,946,412
    
    
    
    2,027,177Mortgage loans
    
    
    77,065
    
    
    
    80,170Policy loans
    
    
    337,434
    
    
    
    346,823Cash and cash equivalents
    
    
    1,052
    
    
    
    3,492Accrued investment income
    
    
    32,178
    
    
    
    32,629Premiums and fees receivable
    
    
    85,993
    
    
    
    55,134Other assets
    
    
    17
    
    
    
    17Total Assets
    
    
    2,480,151
    
    
    
    2,545,442Maximum future earnings to be recognized from assets and
liabilities of the Closed Block
    
    $
    660,751
    
    
    $
    684,411
 13




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##### Table of Contents



For The Three Months Ended June 30,2004
    
    2003($ in thousands)Operations:Insurance premiums
    
    $
    44,684
    
    
    $
    55,009Product charges
    
    
    1,311
    
    
    
    2,685Net investment income
    
    
    36,235
    
    
    
    37,577Realized gains (losses) on investments
    
    
    (4,473
    )
    
    
    275Policyowner benefits
    
    
    (58,495
    )
    
    
    (56,690
    )Underwriting, acquisition and other expenses
    
    
    (918
    )
    
    
    (1,115
    )Dividends to policyowners
    
    
    (9,019
    )
    
    
    (27,738
    )Contribution from the Closed Block before income taxes
    
    $
    9,325
    
    
    $
    10,003
 For The Six Months Ended June 30,2004
    
    2003($ in thousands)Operations:Insurance premiums
    
    $
    97,280
    
    
    $
    117,815Product charges
    
    
    1,401
    
    
    
    6,224Net investment income
    
    
    71,969
    
    
    
    77,316Realized/unrealized gains (losses) on investments
    
    
    (3,643
    )
    
    
    7,344Policyowner benefits
    
    
    (113,665
    )
    
    
    (128,519
    )Underwriting, acquisition and other expenses
    
    
    (2,007
    )
    
    
    (2,246
    )Dividends to policyowners
    
    
    (32,418
    )
    
    
    (57,649
    )Contribution from the Closed Block before income taxes
    
    $
    18,917
    
    
    $
    20,285
 14




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##### Table of Contents



(4) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company accounts for derivatives, including certain derivative
instruments embedded in other contracts, at fair value. Accounting for gains
and losses resulting from changes in the values of derivatives is dependent
upon the use of the derivative and its qualification for special hedge
accounting. During the first six months of 2004 and 2003, realized/unrealized
capital gains (losses) included an unrealized loss of $19.5 million and an
unrealized gain of $19.4 million, respectively, from the change in fair value
on the trading securities primarily backing the total return strategy products.
Additionally, the first six months of 2004 and 2003 included an unrealized
gain of $12.1 million and $15.7 million, respectively, from the change in fair
value on call options used as a natural hedge of embedded options within equity
indexed products. Policyowner benefits included an offsetting adjustment to
contract liabilities for fair value changes in options embedded within the
equity indexed products and fair value changes on total return strategy annuity
contracts amounting to a decrease in expense of $13.6 million and an increase
in expense of $27.2 million for the first six months of 2004 and 2003,
respectively. In 2002, the Company undesignated a cash flow hedge and is now
amortizing the amount in accumulated other comprehensive income (AOCI) to
earnings over the remaining life of the swap, which amounted to $0.8 and $2.5
million in expense in the first six months of 2004 and 2003, respectively. The
Company estimates that less than $0.1 million of after-tax derivative losses,
included in AOCI, will be reclassified into earnings within the next twelve
months. AOCI included an unrealized gain of $0.4 million and $1.8 million from
the fair value change in interest rate swaps used to hedge the floating rate
funding agreement liability during the first six months of 2004 and 2003,
respectively. The following table summarizes the income (loss) impact of the market
value adjustments on trading securities, derivatives and the cash flow hedge
amortization for the six months ended June 30, 2004 and 2003: For the Six Months Ended June 30, 2004Total Return
    
    Equity LinkedProducts
    
    Products
    
    Other
    
    Total($ in thousands)Fixed maturity securities held for trading
    
    $
    (16,092
    )
    
    $
    
    
    
    $
    (3,407
    )
    
    $
    (19,499
    )Options on equity indexed products
    
    
    
    
    
    
    14,297
    
    
    
    (2,209
    )
    
    
    12,088Market value adjustment to liabilities
    
    
    9,244
    
    
    
    481
    
    
    
    3,830
    
    
    
    13,555Cash flow hedge amortization
    
    
    
    
    
    
    
    
    
    
    (813
    )
    
    
    (813
    )DAC amortization impact of
net adjustments above
    
    

    147
    
    
    
    (5,095
    )
    
    
    573
    
    
    
    (4,375
    )Pre-tax total
    
    
    (6,701
    )
    
    
    9,683
    
    
    
    (2,026
    )
    
    
    956Income taxes
    
    
    2,345
    
    
    
    (3,389
    )
    
    
    710
    
    
    
    (334
    )After-tax total
    
    $
    (4,356
    )
    
    $
    6,294
    
    
    $
    (1,316
    )
    
    $
    622
 For the Six Months Ended June 30, 2003Total Return
    
    Equity LinkedProducts
    
    Products
    
    Other
    
    Total($ in thousands)Fixed maturity securities held for trading
    
    $
    18,160
    
    
    $
    
    
    
    $
    1,196
    
    
    $
    19,356Options on equity indexed products
    
    
    
    
    
    
    13,565
    
    
    
    2,106
    
    
    
    15,671Market value adjustment to liabilities
    
    
    (12,327
    )
    
    
    (14,882
    )
    
    
    
    
    
    
    (27,209
    )Cash flow hedge amortization
    
    
    
    
    
    
    
    
    
    
    (2,478
    )
    
    
    (2,478
    )DAC amortization impact of
net adjustments above
    
    
    (439
    )
    
    
    624
    
    
    
    (794
    )
    
    
    (609
    )Pre-tax total
    
    
    5,394
    
    
    
    (693
    )
    
    
    30
    
    
    
    4,731Income taxes
    
    
    (1,889
    )
    
    
    244
    
    
    
    (11
    )
    
    
    (1,656
    )After-tax total
    
    $
    3,505
    
    
    $
    (449
    )
    
    $
    19
    
    
    $
    3,075
 15




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##### Table of Contents



(5) FEDERAL INCOME TAXES The effective income tax rate for the six months ending June 30, 2004 and
2003 varied from the prevailing corporate rate as a result of tax exempt
interest and dividends received deduction. The effective tax rate for the six
months ending June 30, 2004 was also reduced by a reduction in the income tax
accrual and a change in the deferred tax asset valuation allowance. The
accrual reduction, amounting to $5.2 million recorded in the first quarter of
2004 and $2.7 million recorded in the second quarter of 2004, was for the
release of provisions originally established for potential tax adjustments
which have been settled or eliminated. In addition, during the second quarter
of 2004, a deferred tax valuation allowance was reduced $10.4 million as a
result of the realization of capital loss carryforwards. (6) COMMITMENTS AND CONTINGENCIES In recent years, the life insurance industry, including the Company and
its subsidiaries, have been subject to an increase in litigation pursued on
behalf of purported classes of insurance purchasers, questioning the conduct of
insurers in the marketing of their products. The Company is routinely involved
in litigation and other proceedings, including class actions (such as pending
class action lawsuits related to the use of purportedly inappropriate sales
techniques and products for the senior market), reinsurance claims and
regulatory proceedings arising in the ordinary course of its business. Some of
these claims and legal actions are in jurisdictions where juries are given
substantial latitude in assessing damages, including punitive and exemplary
damages. In addition, regulatory bodies, such as state insurance departments
and attorneys general, periodically make inquiries and conduct examinations
concerning our compliance with insurance and other laws. We respond to such
inquiries and cooperate with regulatory examinations in the ordinary course of
business. Our litigation is subject to many uncertainties, and given its complexity
and scope, the outcomes cannot be predicted. It is possible that our results
of operations or cash flow in a particular quarterly or annual period could be
materially affected by an ultimate unfavorable resolution of pending litigation
and regulatory matters depending, in part, upon the results of operations or
cash flow for such period. Management believes, however, that the ultimate
outcome of all pending litigation and regulatory matters, after consideration
of applicable reserves, should not have a material adverse effect on our
financial position. (7) EMPLOYEE BENEFIT PLANS The Company has a frozen defined benefit pension plan and also has defined
benefit plans which provide supplemental retirement benefits to certain agents
and executives. In addition to pension benefits, the Company also provides
certain health care and life insurance benefits for retired employees. The
following is a summary of net periodic benefit cost for these plans for the six
months ended June 30, 2004 and 2003: 16




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##### Table of Contents



Six Months Ended June 30,2004
    
    2003($ in thousands)Components of net periodic benefit cost:Service cost
    
    $
    163
    
    
    $
    142Interest cost
    
    
    3,100
    
    
    
    3,100Expected return on plan assets
    
    
    (2,428
    )
    
    
    (2,453
    )Amortization of prior service cost
    
    
    44
    
    
    
    20Amortizaton of actuarial loss
    
    
    124
    
    
    
    22Net periodic benefit cost
    
    
    1,003
    
    
    
    831Curtailment
    
    
    (951
    )
    
    
    Total (income) expense
    
    $
    52
    
    
    $
    831
 During the first six months of 2004, a gain of $1.0 million was recognized
as a result of curtailing health care and life insurance benefits associated
with the sale of the discontinued operations in January 2004. (8) ASSETS HELD FOR SALE The Company listed its office building located in Indianapolis, Indiana,
with a real estate broker during the second quarter of 2003. On June 30, 2003,
the Company determined that the plan of sale criteria in SFAS 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, had been met.
Accordingly, the carrying value of the building was adjusted to its estimated
fair value less costs to sell, amounting to $15.5 million, which was based upon
comparable properties marketed in Indianapolis at that time. The resulting
$7.7 million pre-tax impairment loss was recorded as a restructuring cost in
the consolidated statement of income in the second quarter of 2003. As provided by SFAS 144, the Company determined in the first quarter of
2004 that the fair value of the building required further adjustment based on
prevailing market conditions for the property which have extended the time
required to sell the building. The resulting change in fair value of the
building was an additional $12.2 million pre-tax impairment loss which has been
recorded in realized/unrealized capital losses in the consolidated statement of
income. The carrying value of the building that is held for sale is included
in the other assets line item of the consolidated balance sheet and amounted to
$3.3 million at June 30, 2004 and $15.5 million at December 31, 2003. (9) DISCONTINUED OPERATIONS In November 2003, the Company entered into an agreement to sell a
wholly-owned subsidiary which conducts residential financing operations. The
assets, liabilities and results of the residential financing operations have
been classified as discontinued operations. The sale was completed in January
2004, resulting in an after-tax gain of $3.9 million. Income from discontinued
operations net of tax was as follows: 17




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##### Table of Contents



For The Three Months Ended June 30,
    
    For The Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003($ in thousands, except share data)Operating income from discontinued operations, net of
income taxes of $357 and $682 for second quarter and year to date 2003, respectively
    
    $
    
    
    
    $
    535
    
    
    $
    
    
    
    $
    1,022Gain on sale of discontinued operations, net of
income taxes of $2,571 in 2004
    
    
    
    
    
    
    
    
    
    
    3,899
    
    
    
    $
    
    
    
    $
    535
    
    
    $
    3,899
    
    
    $
    1,022Net income from discontinued operations per common share:Basic
    
    $
    
    
    
    $
    0.02
    
    
    $
    0.10
    
    
    $
    0.02Diluted
    
    $
    
    
    
    $
    0.01
    
    
    $
    0.10
    
    
    $
    0.03Weighted average common shares outstanding:Basic
    
    
    39,327,182
    
    
    
    39,161,780
    
    
    
    39,342,363
    
    
    
    39,112,346Diluted
    
    
    40,760,364
    
    
    
    39,404,467
    
    
    
    40,619,242
    
    
    
    39,354,894
 (10) ADOPTION OF SOP 03-1 Effective January 1, 2004, the Company adopted Statement of Position 03-1
(SOP 03-1), Accounting and Reporting by Insurance Enterprises for Certain
Non-Traditional Long-Duration Insurance Contracts and for Separate Accounts,
issued by the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants. The adoption of SOP 03-1 resulted
in establishing additional policy reserve liabilities for fees charged for
insurance benefit features which are assessed in a manner that is expected to
result in profits in earlier years and losses in subsequent years. The total
effect of adopting SOP 03-1 (including reinsurance recoverables) as of January
1, 2004 and the establishment of reinsurance recoveries, amounted to a decrease
of $0.8 million ($0.5 million after-tax) in net income which has been reflected
as a cumulative effect of a change in accounting. The basic and diluted
earnings per common share for the change in accounting amounted to $0.01 for
the six months ended June 30, 2004. In addition, the adoption of SOP 03-1 established guidance for the
accounting and presentation of costs related to sales inducements. There was
no change to the Companys method of accounting for sales inducements; however,
the capitalized costs are now separately disclosed in the consolidated balance
sheet and the related amortization expense is included in policyowner benefits
in the consolidated statement of income. Prior to 2004, the capitalized costs
were included in deferred policy acquisition costs and the amortization expense
was included in the amortization of deferred policy acquisition costs. The
2003 amounts have been reclassified to conform with the 2004 presentation. (11) OPERATING SEGMENTS The Company has two operating segments: Protection Products and
Accumulation Products. Products generally distinguish a segment. A brief
description of each segment follows: Protection Products. The primary product offerings consist of
interest-sensitive whole life, term life, universal life and equity indexed
life insurance policies. These products are marketed on a national basis
primarily through a Preferred Producer agency system, a Personal Producing
General Agent (PPGA) distribution system and Independent Marketing
Organizations (IMOs). 18




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##### Table of Contents



Accumulation Products. The primary product offerings consist of
traditional fixed annuities and equity indexed annuities, marketed on a
national basis primarily through IMOs and independent brokers, and insurance
contracts issued through funding agreements. The product offerings within each segment are of a very similar nature.
Insurance premiums of the protection products segment primarily include term
life products. Product charges of the protection products segment include
interest-sensitive whole life, universal life and equity indexed life insurance
products. Product charges of the accumulation products segment include
traditional fixed and equity indexed annuities. Due to the similarity of
products within each segment, premiums and product charges are shown by segment
and not by specific product type. The Company uses the same accounting policies and procedures to measure
operating segment income and assets as it uses to measure its consolidated
income from operations and assets with the exception of the elimination of
certain items which management believes are not necessarily indicative of
overall operating trends. These items are shown between segment pre-tax
operating income and net income on the following operating segment tables and
are as follows:  1)
    
    Realized gains and losses on open block assets.2)
    
    Market value changes and amortization of assets and
liabilities associated with the accounting for derivatives, such as:  
    
    Unrealized gains and losses on open block options and
securities held for trading.
    
    Change in option value of equity indexed products and
market value adjustments on total return strategy annuities.
    
    Cash flow hedge amortization.  3)
    
    Amortization of deferred policy acquisition costs (DAC),
value of business acquired (VOBA) and bonus interest related to the
unrealized and realized gains and losses on the open block
investments and the derivative adjustments.4)
    
    Restructuring costs.5)
    
    Certain reinsurance adjustments.6)
    
    Other income from non-insurance operations.7)
    
    Interest expense.8)
    
    Income tax expense.9)
    
    Income from discontinued operations.10)
    
    Cumulative effect of change in accounting. These items will fluctuate from period to period depending on the
prevailing interest rate and economic environment or are not part of the core
insurance operations. As a result, management believes they do not reflect the
ongoing earnings capacity of the Companys operating segments. Premiums, product charges, policyowner benefits, insurance expenses,
amortization of DAC and VOBA and dividends to policyowners are attributed
directly to each operating segment. Net investment income and closed block
realized gains and losses on investments are allocated based on
directly-related assets required for transacting the business of that segment.
Other revenues and benefits and expenses which are deemed not to be associated
with any specific segment are grouped together in the All Other category.
These items primarily consist of holding company revenues and expenses,
operations of the Companys real estate management subsidiary, and accident and
health insurance. Assets are segmented based on policy liabilities directly attributable to
each segment. There are no significant intersegment transactions.
Depreciation and amortization, excluding amortization of DAC and VOBA as
previously discussed, are not significant. There have been no material changes
in segment assets since December 31, 2003. 19




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##### Table of Contents



Operating Segment Income
($ in thousands) Three Months Ended June 30, 2004Protection
    
    Accumulation
    
    
    
    
    
    TotalProducts
    
    Products
    
    All Other
    
    ConsolidatedRevenues:Insurance premiums
    
    $
    62,427
    
    
    $
    859
    
    
    $
    505
    
    
    $
    63,791Product charges
    
    
    41,640
    
    
    
    12,644
    
    
    
    
    
    
    
    54,284Net investment income
    
    
    81,186
    
    
    
    168,218
    
    
    
    1,907
    
    
    
    251,311Realized/unrealized gains (losses) on closed
block investments
    
    
    (4,473
    )
    
    
    
    
    
    
    
    
    
    
    (4,473
    )Other income
    
    
    928
    
    
    
    16,847
    
    
    
    (37
    )
    
    
    17,738181,708
    
    
    
    198,568
    
    
    
    2,375
    
    
    
    382,651Benefits and expenses:Policyowner benefits
    
    
    91,205
    
    
    
    114,261
    
    
    
    (179
    )
    
    
    205,287Underwriting, acquisition, and other expenses
    
    
    19,115
    
    
    
    20,219
    
    
    
    6,403
    
    
    
    45,737Amortization of DAC and VOBA, net of
open block loss adjustment of $7,002
    
    
    25,527
    
    
    
    25,749
    
    
    
    
    
    
    
    51,276Dividends to policyowners
    
    
    10,934
    
    
    
    2
    
    
    
    
    
    
    
    10,936146,781
    
    
    
    160,231
    
    
    
    6,224
    
    
    
    313,236Segment pre-tax operating income
    
    $
    34,927
    
    
    $
    38,337
    
    
    $
    (3,849
    )
    
    
    69,415Realized/unrealized gains (losses) on open block assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,851
    )Unrealized gains (losses) on open block options and
trading investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31,226
    )Change in option value of equity indexed
products and market value adjustments on
total return strategy annuities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,288Cash flow hedge amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (351
    )Amortization of DAC and VOBA due to open
block gains and losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,002
    )Other income from non-insurance operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,360Income from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,633Interest (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,936
    )Income tax (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,921
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    48,776
 20




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##### Table of Contents



Operating Segment Income
($ in thousands) Three Months Ended June 30, 2003Protection
    
    Accumulation
    
    
    
    
    
    TotalProducts
    
    Products
    
    All Other
    
    ConsolidatedRevenues:Insurance premiums
    
    $
    76,512
    
    
    $
    1,059
    
    
    $
    485
    
    
    $
    78,056Product charges
    
    
    39,804
    
    
    
    8,899
    
    
    
    
    
    
    
    48,703Net investment income
    
    
    80,706
    
    
    
    168,183
    
    
    
    2,818
    
    
    
    251,707Realized/unrealized gains (losses) on closed
block investments
    
    
    275
    
    
    
    
    
    
    
    
    
    
    
    275Other income
    
    
    993
    
    
    
    15,647
    
    
    
    391
    
    
    
    17,031198,290
    
    
    
    193,788
    
    
    
    3,694
    
    
    
    395,772Benefits and expenses:Policyowner benefits
    
    
    92,614
    
    
    
    126,512
    
    
    
    (130
    )
    
    
    218,996Underwriting, acquisition, and other expenses
    
    
    21,175
    
    
    
    16,779
    
    
    
    3,655
    
    
    
    41,609Amortization of DAC and VOBA, net of
open block gain adjustment of $3,907
    
    
    20,918
    
    
    
    21,077
    
    
    
    
    
    
    
    41,995Dividends to policyowners
    
    
    29,740
    
    
    
    
    
    
    
    
    
    
    
    29,740164,447
    
    
    
    164,368
    
    
    
    3,525
    
    
    
    332,340Segment pre-tax operating income
    
    $
    33,843
    
    
    $
    29,420
    
    
    $
    169
    
    
    
    63,432Realized/unrealized gains (losses) on open block assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,374Unrealized gains (losses) on open block options and
trading investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,320Change in option value of equity indexed
products and market value adjustments on
total return strategy annuities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,811
    )Cash flow hedge amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,065
    )Amortization of DAC and VOBA due to open
block gains and losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,907
    )Reinsurance adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,854Restructuring costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,670
    )Other income from non-insurance operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    226Income from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,753Interest (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,575
    )Income tax (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,002
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    535Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    43,711
 21




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##### Table of Contents



Operating Segment Income
($ in thousands) Six Months Ended June 30, 2004Protection
    
    Accumulation
    
    
    
    
    
    TotalProducts
    
    Products
    
    All Other
    
    ConsolidatedRevenues:Insurance premiums
    
    $
    132,143
    
    
    $
    1,582
    
    
    $
    803
    
    
    $
    134,528Product charges
    
    
    77,099
    
    
    
    26,747
    
    
    
    
    
    
    
    103,846Net investment income
    
    
    162,444
    
    
    
    342,481
    
    
    
    3,261
    
    
    
    508,186Realized/unrealized gains (losses) on closed
block investments
    
    
    (3,643
    )
    
    
    
    
    
    
    
    
    
    
    (3,643
    )Other income
    
    
    1,834
    
    
    
    34,235
    
    
    
    1,471
    
    
    
    37,540369,877
    
    
    
    405,045
    
    
    
    5,535
    
    
    
    780,457Benefits and expenses:Policyowner benefits
    
    
    184,600
    
    
    
    235,079
    
    
    
    (158
    )
    
    
    419,521Underwriting, acquisition, and other expenses
    
    
    36,073
    
    
    
    38,948
    
    
    
    11,317
    
    
    
    86,338Amortization of DAC and VOBA, net of
open block loss adjustment of $5,742
    
    
    44,768
    
    
    
    55,679
    
    
    
    
    
    
    
    100,447Dividends to policyowners
    
    
    36,418
    
    
    
    2
    
    
    
    
    
    
    
    36,420301,859
    
    
    
    329,708
    
    
    
    11,159
    
    
    
    642,726Segment pre-tax operating income
    
    $
    68,018
    
    
    $
    75,337
    
    
    $
    (5,624
    )
    
    
    137,731Realized/unrealized gains (losses) on open block assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,581
    )Unrealized gains (losses) on open block options and
trading investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,411
    )Change in option value of equity indexed
products and market value adjustments on
total return strategy annuities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,555Cash flow hedge amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (813
    )Amortization of DAC and VOBA due to open
block gains and losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,742
    )Other income from non-insurance operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,161Income from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104,900Interest (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,334
    )Income tax (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,050
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,899Cumulative effect of change in accounting, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (510
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    81,905
 22




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##### Table of Contents



Operating Segment Income
($ in thousands) Six Months Ended June 30, 2003Protection
    
    Accumulation
    
    
    
    
    
    TotalProducts
    
    Products
    
    All Other
    
    ConsolidatedRevenues:Insurance premiums
    
    $
    156,673
    
    
    $
    2,242
    
    
    $
    747
    
    
    $
    159,662Product charges
    
    
    76,142
    
    
    
    19,392
    
    
    
    
    
    
    
    95,534Net investment income
    
    
    164,452
    
    
    
    337,856
    
    
    
    4,512
    
    
    
    506,820Realized/unrealized gains (losses) on closed
block investments
    
    
    7,344
    
    
    
    
    
    
    
    
    
    
    
    7,344Other income
    
    
    2,046
    
    
    
    30,413
    
    
    
    531
    
    
    
    32,990406,657
    
    
    
    389,903
    
    
    
    5,790
    
    
    
    802,350Benefits and expenses:Policyowner benefits
    
    
    193,282
    
    
    
    256,374
    
    
    
    (110
    )
    
    
    449,546Underwriting, acquisition, and other expenses
    
    
    41,616
    
    
    
    32,714
    
    
    
    7,635
    
    
    
    81,965Amortization of DAC and VOBA, net of
open block gain adjustment of $10,452
    
    
    40,482
    
    
    
    42,041
    
    
    
    
    
    
    
    82,523Dividends to policyowners
    
    
    64,314
    
    
    
    
    
    
    
    
    
    
    
    64,314339,694
    
    
    
    331,129
    
    
    
    7,525
    
    
    
    678,348Segment pre-tax operating income
    
    $
    66,963
    
    
    $
    58,774
    
    
    $
    (1,735
    )
    
    
    124,002Realized/unrealized gains (losses) on open block assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,453Unrealized gains (losses) on open block options and
trading investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,027Change in option value of equity indexed
products and market value
adjustments on
total return strategy annuities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,209
    )Cash flow hedge amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,478
    )Amortization of DAC and VOBA due to open
block gains and losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,452
    )Reinsurance adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,854Restructuring costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,864
    )Other income from non-insurance operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    622Income from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    131,955Interest (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,374
    )Income tax (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,102
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,022Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    79,501
 23




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##### Table of Contents



Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations Managements Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) addresses the consolidated financial condition of AmerUs
Group Co. as of June 30, 2004, compared with December 31, 2003, and our
consolidated results of operations for the three months and six months ended
June 30, 2004 and 2003. You should read the following analysis of our
consolidated financial condition and results of operations in conjunction with
our MD&A and audited consolidated financial statements included in our Annual
Report on Form 10-K for the year ended December 31, 2003, and Unaudited
Consolidated Financial Statements included elsewhere in this Quarterly Report
on Form 10-Q. NATURE OF OPERATIONS We are a holding company whose subsidiaries are primarily engaged in the
business of marketing, underwriting and distributing a broad range of
individual life, annuity and insurance deposit products to individuals and
businesses in 50 states, the District of Columbia and the U.S. Virgin Islands.
We have two reportable operating segments: protection products and accumulation
products. The primary offerings of the protection products segment are
interest-sensitive whole life, term life, universal life and equity indexed
life insurance policies. The primary offerings of the accumulation products
segment are individual fixed annuities (comprised of traditional fixed
annuities and equity indexed annuities) and funding agreements. FINANCIAL HIGHLIGHTS Our financial highlights are as follows: For The Three Months Ended June 30,
    
    For The Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003($ in thousands, except per share data)Segment pre-tax operating income:Protection Products
    
    $
    34,927
    
    
    $
    33,843
    
    
    $
    68,018
    
    
    $
    66,963Accumulation Products
    
    
    38,337
    
    
    
    29,420
    
    
    
    75,337
    
    
    
    58,774Other operations
    
    
    (3,849
    )
    
    
    169
    
    
    
    (5,624
    )
    
    
    (1,735
    )Total segment pre-tax operating income
    
    
    69,415
    
    
    
    63,432
    
    
    
    137,731
    
    
    
    124,002Non-segment expense, net (A)
    
    
    20,639
    
    
    
    19,721
    
    
    
    55,826
    
    
    
    44,501Net income
    
    $
    48,776
    
    
    $
    43,711
    
    
    $
    81,905
    
    
    $
    79,501Diluted net income per share
    
    $
    1.20
    
    
    $
    1.11
    
    
    $
    2.02
    
    
    $
    2.02
 June 30,
    
    December 31,2004
    
    2003Total assets
    
    $
    22,104,853
    
    
    $
    21,542,242Stockholders equity
    
    $
    1,424,064
    
    
    $
    1,409,811
  (A)
    
    Non-segment expense, net consists primarily of open block realized/unrealized gains and losses, derivative related market value adjustments, reinsurance adjustments, non-insurance
operations, restructuring costs, interest expense, income taxes, discontinued operations and cumulative effect of change in accounting. 24




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##### Table of Contents



Operating segment income increased for both the protection products and
accumulation products segments in the 2004 periods, compared to the respective
periods in 2003. Protection products earnings were primarily impacted by
increased open block product margins and lower operating expenses in 2004. Our
accumulation products pre-tax operating segment income increased primarily due
to the continued shift in our business from traditional fixed annuities to
higher margin equity indexed annuities and more assets under management.
     
Net income increased in the 2004 periods compared to the respective 2003
periods primarily as a result of higher operating segment income, reductions in
income tax accruals and deferred income tax asset valuation allowances, and the
gain on the sale of our residential financing subsidiary. The increase was
partially offset by realized and unrealized losses on assets. Total assets increased $563 million during the first six months of 2004
primarily as a result of net cash received from collected premiums and
deposits, positive cash flows from operating activities and the utilization of
securities lending and borrowing arrangements and dollar-roll repurchase
investment transactions. Liabilities increased primarily due to policy
reserves and policyowner funds which increased due to the higher volume of
insurance in force. Stockholders equity increased $14 million for the first
six months of 2004 primarily as a result year-to-date net income of $82
million. The net income added to equity was reduced by the change in
unrealized gains on available-for-sale investments and treasury stock purchases
which decreased equity $62 million and $9 million, respectively. The
unrealized gains included in accumulated other comprehensive income are
presented after related adjustments to DAC, VOBA, capitalized bonus interest,
closed block policyowner dividend obligation, unearned revenue reserves and
deferred income taxes. PROTECTION PRODUCTS Our protection products segment primarily consists of interest-sensitive
whole life, term life, universal life and equity indexed life insurance
policies. These products are marketed on a national basis primarily through a
Preferred Producer agency system, PPGA distribution system and IMOs. Included
in protection products is the closed block of ALIC and the closed block of ILIC
established when the companies reorganized from mutual companies to stock
companies. When protection products are sold, we invest the premiums we
receive in our investment portfolio and establish a liability representing our
commitment to the policyowner. We manage investment spread by seeking to
maximize the return on these invested assets, consistent with our
asset/liability and credit quality needs. We enter into reinsurance
arrangements in order to reduce the effects of mortality risk and the statutory
capital strain from writing new business. All income statement line items are
presented net of reinsurance amounts. Protection products in force totaled
$98.9 billion at June 30, 2004 and $98.6 billion at December 31, 2003.
Protection products in force is a performance measure utilized by investors,
analysts and the Company to assess the Companys position in the industry. A
summary of our protection products segment operations follows: 25




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##### Table of Contents



For The Three Months Ended June 30,
    
    For The Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003($ in thousands)Revenues:Insurance premiums
    
    $
    62,427
    
    
    $
    76,512
    
    
    $
    132,143
    
    
    $
    156,673Product charges
    
    
    41,640
    
    
    
    39,804
    
    
    
    77,099
    
    
    
    76,142Net investment income
    
    
    81,186
    
    
    
    80,706
    
    
    
    162,444
    
    
    
    164,452Realized gains (losses) on closed block
investments
    
    
    (4,473
    )
    
    
    275
    
    
    
    (3,643
    )
    
    
    7,344Other income
    
    
    928
    
    
    
    993
    
    
    
    1,834
    
    
    
    2,046Total revenues
    
    
    181,708
    
    
    
    198,290
    
    
    
    369,877
    
    
    
    406,657Benefits and expenses:Policyowner benefits (bonus interest
amortization, net of open
block gain/loss adjustment
    
    
    91,205
    
    
    
    92,614
    
    
    
    184,600
    
    
    
    193,282Underwriting, acquisition and other expenses
    
    
    19,115
    
    
    
    21,175
    
    
    
    36,073
    
    
    
    41,616Amortization of DAC and VOBA, net of open
block
gain/loss adjustment
    
    
    25,527
    
    
    
    20,918
    
    
    
    44,768
    
    
    
    40,482Dividends to policyowners
    
    
    10,934
    
    
    
    29,740
    
    
    
    36,418
    
    
    
    64,314Total benefits and expenses
    
    
    146,781
    
    
    
    164,447
    
    
    
    301,859
    
    
    
    339,694Pre-tax
operating income - Protection
Products segment
    
    $
    34,927
    
    
    $
    33,843
    
    
    $
    68,018
    
    
    $
    66,963
 Pre-tax operating income from our protection products increased 3.2% in
the second quarter of 2004 and 1.6% in the first six months of 2004 compared to
the respective 2003 periods. The increase was primarily due to higher open
block product margins and lower operating expenses. The increase was partially
reduced by higher DAC and VOBA amortization. The key drivers of our protection
products business include sales, persistency, net investment income, mortality
and expenses. Sales.Sales are a key driver of our business as they are a leading
indicator of future revenue trends to emerge in segment operating income. Sales
are presented as annualized premium, which is in accordance with industry
practice, and represent the amount of new business sold during the period.
Sales are a performance metric which we use to measure the productivity of our
distribution network and for compensation of sales and marketing employees and
agents. The following table summarizes annualized premium by life insurance
product: Sales Activity by ProductFor The Three Months Ended June 30,
    
    For The Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003($ in thousands)Traditional life insurance:Whole life
    
    $
    3
    
    
    $
    18
    
    
    $
    8
    
    
    $
    220Interest-sensitive whole life
    
    
    1,411
    
    
    
    5,818
    
    
    
    4,829
    
    
    
    12,838Term life
    
    
    3,577
    
    
    
    3,628
    
    
    
    7,147
    
    
    
    7,340Universal life
    
    
    9,235
    
    
    
    9,438
    
    
    
    16,769
    
    
    
    16,378Equity indexed life
    
    
    19,291
    
    
    
    11,750
    
    
    
    36,594
    
    
    
    25,227Direct
    
    
    33,517
    
    
    
    30,652
    
    
    
    65,347
    
    
    
    62,003Private label term life
premiums
    
    
    
    
    
    
    1,756
    
    
    
    
    
    
    
    3,693Total
    
    $
    33,517
    
    
    $
    32,408
    
    
    $
    65,347
    
    
    $
    65,696
 Direct first year annualized premiums increased 9.3% in the second quarter
of 2004 and 5.4% on a year-to-date basis in 2004 compared to the respective
2003 periods. We continue to focus our marketing efforts on equity indexed life
products. In the first six months of 2004, sales of equity indexed life
products were $36.6 million as compared to $25.2 million for 2003 and comprised
56% of total direct sales in the first six months of 2004 compared to 41% in
the first six months of 2003. We are a leading writer of equity indexed life
products in the United States. Interest-sensitive whole life insurance sales
decreased in both periods of 2004 compared to 2003 due to uncertainty in
government tax policy and regulation. 26




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##### Table of Contents



Premiums and Product Charges.We recognize premiums on traditional life
insurance policies as revenues when the premiums are due. Amounts received as
payments for universal life and equity indexed life insurance policies are not
recorded as premium revenue, but are instead recorded as a policyowner
liability. Revenues from the
universal life and equity indexed life policies consist of charges for the
cost of insurance, policy administration and policy surrender and are included
on the line item product charges. All revenue is reported net of reinsurance
ceded. Insurance premium revenue was lower in the second quarter and first six
months of 2004 as compared to the same periods in 2003 primarily due to lower
sales of traditional products and the continued decline in closed block in
force business. Product charge revenue was higher in the second quarter and
first six months of 2004 as compared to the same periods in 2003 due to growth
in the equity indexed life block of business which was partially offset by
higher reinsurance premiums as we reinsure this block of business. Persistency.Persistency is a key driver of our business because it
shows the policies which remain in our block of business and is measured by the
lapse rate. A low lapse rate means higher persistency indicating more business
is remaining in force to generate future revenues. Annualized lapse rates,
based on a rolling four quarter period, were 6.3% in the first six months of
2004 and 2003. Our persistency experience remains within our pricing
assumptions. Net Investment Income.Net investment income is a key driver of our
business as it reflects earnings on our invested assets. Net investment income
increased for the second quarter and decreased for the first six months of 2004
as compared to the same periods a year ago. The year-to-date earned rate of the
investment portfolio was 6.42% compared to 6.84% a year ago. Lower yields
primarily contributed to the decrease in net investment income as compared to a
year ago. For the quarter, the decrease in yields was offset by the growth in
protection products assets which increased approximately $252 million from
2003. Mortality and Benefit Expense.Mortality is a key driver of our business
as it impacts the amount of our benefit expense. We utilize reinsurance to
reduce the effects of mortality risk. Benefit expense was lower in the second
quarter of 2004 and year-to-date 2004 as compared to the respective prior
periods of 2003, due to the continued decline in closed block in force
business. Underwriting, Acquisition and Other Expenses.Underwriting, acquisition
and other expenses are a key driver of our business as they are costs of our
operations. Expenses decreased for the second quarter and first six months of
2004 compared to the same periods of 2003 primarily due to lower operating
expenses resulting from the restructuring activities that took place in 2003
and in prior years to integrate the ILICO life operations. Amortization of DAC and VOBA.The amortization of DAC and VOBA increased
for the second quarter and first six months of 2004 as compared to the
respective periods in 2003. DAC and VOBA are generally amortized in proportion
to policy gross margins which increased in 2004, resulting in higher
amortization expense. Dividends to Policyowners.In addition to basic policyowner dividends,
dividend expense includes increases or decreases to the closed block
policyowner dividend obligation liability carried on the consolidated balance
sheet. The actual results of the closed block are adjusted to equal the
expected earnings based on the actuarial calculation at the time of formation
of the closed block (which we refer to as the closed block glide path). The
adjustment to have the closed block operating results equal the closed block
glide path is made to dividend expense. If the actual results for the period
exceed the closed block glide path, increased dividend expense is recorded as a
policyowner dividend obligation to reduce the actual closed block results. For
actual results less than the closed block glide path, dividend expense is
reduced to increase the actual closed block results. As a result of this
accounting treatment, operating earnings only include the predetermined closed
block glide path. 27




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##### Table of Contents



Dividend expense decreased for the second quarter and first six months of
2004 compared to the same periods of 2003. This reduction was primarily the
result of realized losses on closed block investments in 2004 as compared to
realized gains in 2003 and lower closed block net investment income for both
periods. These reductions decreased closed block earnings.

     Outlook.We expect to continue to shift our sales to higher return
products, in particular the equity indexed life products. We also expect to
continue to realize operating efficiencies created by the restructuring of the
protection products operations and centralization of our administrative
functions. ACCUMULATION PRODUCTS Our accumulation products segment primary offerings consist of individual
fixed annuities and funding agreements. The fixed annuities are marketed on a
national basis primarily through IMOs and independent brokers. Similar to our
protection products segment, we invest the premiums we receive from
accumulation product deposits in our investment portfolio and establish a
liability representing our commitment to our policyowner. We manage investment
spread by seeking to maximize the return on our invested assets consistent with
our asset/liability management and credit quality needs. When appropriate, we
periodically reset the interest rates credited to our policyowner liability.
Accumulation products reserves totaled $11.9 billion at June 30, 2004 and $11.7
billion at December 31, 2003. A summary of our accumulation products segment
operations follows: For The Three Months Ended June 30,
    
    For The Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003($ in thousands)Revenues:Immediate annuity and supplementary
contract premiums
    
    $
    859
    
    
    $
    1,059
    
    
    $
    1,582
    
    
    $
    2,242Product charges
    
    
    12,644
    
    
    
    8,899
    
    
    
    26,747
    
    
    
    19,392Net investment income
    
    
    168,218
    
    
    
    168,183
    
    
    
    342,481
    
    
    
    337,856Other income
    
    
    2,626
    
    
    
    2,780
    
    
    
    5,377
    
    
    
    5,855Total revenues
    
    
    184,347
    
    
    
    180,921
    
    
    
    376,187
    
    
    
    365,345Benefits and expenses:Policyowner benefits
    
    
    114,261
    
    
    
    126,512
    
    
    
    235,079
    
    
    
    256,374Underwriting, acquisition and other expenses
    
    
    8,006
    
    
    
    6,666
    
    
    
    15,238
    
    
    
    13,135Amortization of DAC and VOBA
    
    
    25,749
    
    
    
    21,077
    
    
    
    55,679
    
    
    
    42,041Dividends to policyowners
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    Total benefits and expenses
    
    
    148,018
    
    
    
    154,255
    
    
    
    305,998
    
    
    
    311,550IMO Operations:Other income
    
    
    14,221
    
    
    
    12,867
    
    
    
    28,858
    
    
    
    24,558Other expenses
    
    
    12,213
    
    
    
    10,113
    
    
    
    23,710
    
    
    
    19,579Net IMO operating income
    
    
    2,008
    
    
    
    2,754
    
    
    
    5,148
    
    
    
    4,979Pre-tax
operating income - Accumulation
Products segment
    
    $
    38,337
    
    
    $
    29,420
    
    
    $
    75,337
    
    
    $
    58,774
 Pre-tax operating income from our accumulation products operations
increased 30.3% in the second quarter of 2004 and 28.2% in the first six months
of 2004 compared to the respective 2003 periods primarily due to higher assets
under management and increased product spreads from our higher margin products.
The drivers of profitability in our accumulation products business include
deposits, persistency, product spread, expenses and IMO operations. Deposits.Deposits are a key driver of our business as this is a measure
which represents collected premiums to be deposited to policyowner accounts for
which we will earn a future product spread. Deposits are presented as
collected premiums, which are measured in accordance with industry practice,
and represent the amount of new business sold during the period. Deposits are
a performance metric which we use to measure the productivity of our
distribution network and for compensation of sales and marketing employees and
agents. The following table summarizes our accumulation products segment
deposits: 28




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##### Table of Contents



Deposits by ProductFor The Three Months Ended June 30,
    
    For The Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003($ in thousands)AnnuitiesDeferred fixed annuities:Traditional fixed annuities
    
    $
    78,577
    
    
    $
    101,200
    
    
    $
    160,747
    
    
    $
    243,862Equity indexed annuities
    
    
    348,482
    
    
    
    367,255
    
    
    
    645,357
    
    
    
    600,445Variable annuities
    
    
    806
    
    
    
    901
    
    
    
    1,658
    
    
    
    1,888Total annuities
    
    
    427,865
    
    
    
    469,356
    
    
    
    807,762
    
    
    
    846,195Funding agreements
    
    
    85,000
    
    
    
    
    
    
    
    85,000
    
    
    
    Total
    
    
    512,865
    
    
    
    469,356
    
    
    
    892,762
    
    
    
    846,195Reinsurance ceded
    
    
    (3,871
    )
    
    
    (7,551
    )
    
    
    (7,067
    )
    
    
    (15,619
    )Total deposits, net of reinsurance
    
    $
    508,994
    
    
    $
    461,805
    
    
    $
    885,695
    
    
    $
    830,576
 Direct annuity deposits decreased 8.8% in the second quarter of 2004 and
4.5% year-to-date for 2004 compared to the respective periods of 2003. Deposits
decreased in 2004 as compared to 2003 primarily due to lower traditional fixed
annuity deposits caused by the low interest rate environment. We have shifted
our product mix towards our higher returning equity indexed annuities. Equity
indexed annuities comprised 80% of total direct annuity deposits in the first
six months of 2004 compared to 71% in the first six months of 2003. Our
wholly-owned and proprietary organizations accounted for approximately 77% of
our annuity deposits in the first six months of 2004 compared to 75% in the
first six months of 2003. Product Charges.The deposits we receive on accumulation products are not
recorded as revenue but instead as a policyowner liability. Surrender charges
collected on accumulation products are recorded as revenue and shown as a
product charge. Product charges increased in the second quarter and first six
months of 2004 as compared to the respective 2003 periods due to the growth in
the business. Persistency.Persistency is a key driver of our business as it refers to
the policies which remain in our block of business and is measured by a
withdrawal rate. A low withdrawal rate means higher persistency indicating
more business is remaining in force to generate future revenues. Withdrawals
represent funds taken out of accumulation products by policyowners not
including those due to the death of policyowners. Annuity withdrawal rates
without internal replacements, based on a rolling four quarter period,
increased in 2004 and amounted to 9.0% and 8.7% for the first six months of
2004 and 2003, respectively. Annuity withdrawals without internal replacements
totaled $582.3 million and $652.9 million for the first six months of 2004 and
2003, respectively. Our withdrawal experience
remained within our pricing assumptions. Withdrawal rates increased for
the first six months of 2004 as compared to 2003 as prior year withdrawals were
reduced as a result of the low interest rate environment. Product Spread.Product spread is a key driver of our business as it
measures the difference between the income earned on our invested assets and
the rate which we credit to policyowners, with the difference reflected as
segment operating income. Asset earned rates and liability crediting rates,
based on a rolling four quarter period, were as follows for accumulation
segment products: 29




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##### Table of Contents



June 30,2004
    
    2003Asset earned rate
    
    
    5.74
    %
    
    
    6.27
    %Liability credited rate
    
    
    3.67
    %
    
    
    4.25
    %Product spread
    
    
    2.07
    %
    
    
    2.02
    %
 The product spread, based on a rolling four quarter period, increased five
basis points to 207 basis points for the first six months of 2004 compared to
the first six months of 2003. Liability crediting rates were lowered
throughout 2003 and the first six months of 2004 to correspond with the decline
in investment yields caused by lower rates on new and reinvested funds. At June 30, 2004, the account value of traditional annuities totaled $6.8
billion of which approximately 96% have minimum guarantee rates ranging from 3%
to 4%. For traditional annuities with an account value of $5.0 billion, the
credited rate was equal to the minimum guarantee rate, and as a result, the
credited rate cannot be lowered. We also offer an interest rate crediting
strategy that credits the policy with a return generally based upon the
interest rates it earns on assets supporting the respective policies less
management fees. Traditional annuities with an account value of $5.3 billion
had a one-year interest guarantee period while annuities with an account value
of $1.2 billion had a multi-year guarantee for which the credited rate cannot
be decreased until the end of the multi-year period. At the end of the
multi-year period, we will have the ability to lower the crediting rate to the
minimum guaranteed rate by an average of approximately 275 basis points. The
remaining multi-year period is generally either one or two years. Due to these
limitations on the ability to lower interest crediting rates and the potential
for additional credit defaults and lower reinvestment rates on investments, we
could experience spread compression in future periods. Amortization of DAC and VOBA.The amortization of DAC and VOBA increased
for the second quarter and first six months of 2004 compared to the respective
periods in 2003. DAC and VOBA are generally amortized in proportion to policy
gross margins which increased in 2004, resulting in higher amortization
expense. IMO Operations.IMO Operations are a key driver of our business as the
earnings from the IMOs are a significant component of the accumulation products
segment operating income. IMOs have contractual arrangements to promote our
insurance products to their networks of agents and brokers. Additionally, they
also contract with third party insurance companies. We own five such IMOs. The
income from IMO operations primarily represents annuity commissions received by
our IMOs from those third party insurance companies. Net IMO operating income
in 2004 remained consistent with 2003 levels. Outlook.We anticipate increased product sales from our IMOs but
decreased product sales from other distribution channels as we manage our sales
in this current low interest rate environment. We also expect to continue
the shift of our product mix to higher return products, in particular the
equity indexed annuity products. We will continue to manage our spreads as we
strive for our desired profitability in this economic environment. OTHER The other segment is our non-core lines of business outside of protection
and accumulation products. These lines of business include holding company
revenues and expenses, operations of our real estate management subsidiary, and
accident and health insurance. The pre-tax operating loss in the first six
months of 2004 increased compared to the same period of 2003 primarily due to
increased holding company expenses related to compliance with Sarbanes-Oxley
internal control regulations and lower investment income of our real estate
management subsidiary. 30




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##### Table of Contents



INCOME STATEMENT RECONCILIATION A reconciliation of our segment pre-tax operating income to net income as
shown in our consolidated statements of income follows: For The Three Months Ended June 30,
    
    For The Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003($ in thousands)Segment pre-tax operating income:Protection Products
    
    $
    34,927
    
    
    $
    33,843
    
    
    $
    68,018
    
    
    $
    66,963Accumulation Products
    
    
    38,337
    
    
    
    29,420
    
    
    
    75,337
    
    
    
    58,774Other operations
    
    
    (3,849
    )
    
    
    169
    
    
    
    (5,624
    )
    
    
    (1,735
    )Total segment pre-tax operating
income
    
    
    69,415
    
    
    
    63,432
    
    
    
    137,731
    
    
    
    124,002Non-segment items  increases
(decreases) to income:Realized and unrealized losses
on assets and liabilities:Realized/unrealized gains
(losses) on open block assets
    
    
    (8,851
    )
    
    
    16,374
    
    
    
    (33,581
    )
    
    
    24,453Unrealized gains (losses) on
open block options and
trading investments
    
    
    (31,226
    )
    
    
    42,320
    
    
    
    (7,411
    )
    
    
    35,027Change in option value of equity
indexed products
and market value adjustments on
total return
strategy annuities
    
    
    37,288
    
    
    
    (35,811
    )
    
    
    13,555
    
    
    
    (27,209
    )Cash flow hedge amortization
    
    
    (351
    )
    
    
    (1,065
    )
    
    
    (813
    )
    
    
    (2,478
    )Amortization of DAC & VOBA due
to open block
realized gains and losses
    
    
    (7,002
    )
    
    
    (3,907
    )
    
    
    (5,742
    )
    
    
    (10,452
    )Reinsurance adjustments
    
    
    
    
    
    
    3,854
    
    
    
    
    
    
    
    3,854Restructuring costs
    
    
    
    
    
    
    (12,670
    )
    
    
    
    
    
    
    (15,864
    )Other income from non-insurance
operations
    
    
    1,360
    
    
    
    226
    
    
    
    1,161
    
    
    
    622Income from continuing operations
    
    
    60,633
    
    
    
    72,753
    
    
    
    104,900
    
    
    
    131,955Interest expense
    
    
    (7,936
    )
    
    
    (7,575
    )
    
    
    (16,334
    )
    
    
    (14,374
    )Income tax expense
    
    
    (3,921
    )
    
    
    (22,002
    )
    
    
    (10,050
    )
    
    
    (39,102
    )Net income from continuing
operations
    
    
    48,776
    
    
    
    43,176
    
    
    
    78,516
    
    
    
    78,479Income from discontinued
operations, net of tax
    
    
    
    
    
    
    535
    
    
    
    3,899
    
    
    
    1,022Cumulative effect of change in
accounting, net of tax
    
    
    
    
    
    
    
    
    
    
    (510
    )
    
    
    Net income
    
    $
    48,776
    
    
    $
    43,711
    
    
    $
    81,905
    
    
    $
    79,501
 Realized and Unrealized Gains (Losses) on Assets and Liabilities.
Realized gains (losses) on open block assets will fluctuate from period to
period depending on the prevailing interest rate, the economic environment and
the timing of investment sales and credit events. As part of managing our
invested assets, we routinely sell securities and realize gains and losses. In
addition, in the first quarter of 2004, we had a pre-tax impairment loss on our
Indianapolis, Indiana office building of $12.2 million. We listed this office
building with a real estate broker during the second quarter of 2003 as part of
our restructuring plan and recorded a pre-tax impairment loss of $7.7 million
at that time. As provided by SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, we determined in the first quarter of 2004 that
the fair value of the building required further adjustment based on current
offering prices for the property. The carrying value of the building that is
held for sale is included in the other assets line item of the consolidated
balance sheet and amounted to $3.3 million at June 30, 2004 and $15.5 million
at December 31, 2003. Unrealized gains (losses) on open block options and trading investments
also will fluctuate from period to period depending on the prevailing interest
rate, the economic environment, the timing of investment sales and credit
events. We use options to hedge our equity indexed products. In accounting
for derivatives, we adjusted our options to market value, which, due to the
economic environment and stock market conditions, resulted in an unrealized
gain of $5.9 million and $12.1 million in the second quarter and first six
months of 2004, respectively, and an unrealized gain of $25.0 million and $15.7
million in the second quarter and first six months of 2003, respectively. In
addition, we also have trading securities that back our total return strategy
traditional annuity products. The market value adjustment on the trading
securities resulted in a loss of $37.1 million and $19.5 million in the second
quarter and first 31




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six months of 2004, respectively, and a gain of $17.3 million
and $19.4 million in the second quarter and first six months of 2003,
respectively. Most of the unrealized gains and losses on the options and
trading securities are offset by similar adjustments to the option portion of
the equity indexed product reserves and to the total return strategy annuity
reserves. The reserve adjustments are reflected in policyowner benefits
expense in the consolidated statements of income and are included in the fair
value change as decreased expense of $37.3 million and $13.6 million in the
second quarter and first six months of 2004, respectively, and additional
expense of $35.8 million and $27.2 million in the second quarter and first six
months of 2003, respectively, explained in the following paragraph. The fair value change in options embedded within our equity indexed
products and the fair value changes on our total return strategy fixed annuity
contracts are being recorded at fair value. As previously discussed, these
fair value changes are offset by similar adjustments to unrealized gains
(losses) on investments related to the fair value changes on the options that
hedge the equity indexed products and on the trading securities that back the
total return strategy products. The reduction in such contract expense is less
than the change in investment income primarily due to the inability to lower
crediting rates below minimum guaranteed rates. Reinsurance Adjustments.Reinsurance related adjustments in the first six
months of 2003 consist of the release of an $8.2 million liability in
conjunction with the settlement and amendment of a reinsurance arrangement and
a $4.3 million true-up of pre-2003 reinsurance settlements under a reinsurance
arrangement between ILICs open block and closed block. Both of the
reinsurance adjustments were recorded in the second quarter of 2003. Restructuring Costs.Restructuring costs relate to our consolidation of
various functions in connection with a restructuring of our protection products
and accumulation products operations and investment activities which began in
the third quarter of 2001. The restructuring charges expensed in the first six
months of 2003 included pre-tax severance and termination benefits of $0.8
million for severance accrual adjustments and other pre-tax costs of $15.0
million primarily related to the impairment loss on the Indianapolis office
building, expenses associated with the
merger of IL Annuity into ILICO and systems conversion costs. Charges for
all restructuring activities were completed in 2003. Income Tax Expense.The effective income tax rate for the first six
months of 2004 varied from the prevailing corporate rate primarily as a result
of reductions in the income tax accrual and deferred tax asset valuation
allowances. The accrual reductions, amounting to $5.2 million in the first
quarter of 2004 and $2.7 million in the second quarter of 2004, were for the
release of provisions originally established for potential tax adjustments
which have been settled or eliminated. In addition, the deferred tax asset
valuation allowance was reduced $10.4 million in the second quarter of 2004 as
a result of the realization of capital loss carryforwards. Discontinued Operations.In November 2003, we entered into an agreement
to sell our residential financing operations. The results of the residential
financing operations have been classified as discontinued operations. The sale
was completed in January 2004, resulting in an after-tax gain of $3.9 million. Change in Accounting.Effective January 1, 2004, the Company adopted SOP
03-1 resulting in the establishment of additional policy reserve liabilities
for fees charged for insurance benefit features which are assessed in a manner
that is expected to result in profits in earlier years and losses in subsequent
years. The total effect of adopting SOP 03-1 (including reinsurance
recoverables) as of January 1, 2004, amounted to a decrease of $0.8 million
($0.5 million after-tax) in net income which has been reflected as a cumulative
effect of a change in accounting. ACCOUNTING DEVELOPMENTS The Financial Accounting Standards Boards Emerging Issues Task Force
(EITF) has reached a tentative conclusion on EITF No. 04-8, The Effect of
Contingently Convertible Debt on Diluted Earnings Per Share, that contingently
convertible debt instruments are subject to the if-converted method for
earnings per share calculations regardless of whether the instrument has met
its contingent conversion features. If the EITF should become
effective in its current form, our Optionally Convertible Equity- 32




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##### Table of Contents



linked
Accreting Notes would be subject to the new earnings per share guidance
proposed by the EITF, and if the Company did not take action to
mitigate the effect of the pronouncement, would result in more shares being outstanding in the diluted earnings per share
calculation. We will continue to monitor the
status of the EITF as the project is finalized. LIQUIDITY AND CAPITAL RESOURCES AmerUs Group Co. As a holding company, AmerUs Group Co.s cash flows from operations
consist of dividends from subsidiaries, if declared and paid, interest from
income on loans and advances to subsidiaries (including a surplus note issued
to us by ALIC), investment income on our assets and fees which we charge our
subsidiaries, offset by the expenses incurred for debt service, salaries and
other expenses. The payment of dividends by our insurance subsidiaries is regulated under
various state laws. Generally, under the various state statutes, our insurance
subsidiaries dividends may be paid only from the earned surplus arising from
their respective businesses and must receive the prior approval of the
respective state regulator to pay any dividend that would exceed certain
statutory limitations. The current statutes generally limit any dividend,
together with dividends paid out within the preceding 12 months, to the greater
of (i) 10% of the respective companys policyowners statutory surplus as of
the preceding year end or (ii) the statutory net gain from operations for the
previous calendar year. Generally, the various state laws give the state
regulators discretion to approve or disapprove requests for dividends in excess
of these limits. Based on these limitations and 2003 results, our life
insurance subsidiaries could pay us an estimated $50 million in dividends in
2004 without obtaining regulatory approval. Our subsidiaries paid no dividends
in the first six months of 2004. We also consider risk-based capital levels,
capital and liquidity operating needs, and other factors prior to paying
dividends from the insurance subsidiaries.

We have a $200 million revolving credit facility with a syndicate of
lenders (which we refer to as the Revolving Credit Agreement). As of June 30,
2004, there was no outstanding loan balance under the facility. The Revolving
Credit Agreement provides for typical events of default and covenants with
respect to the conduct of business and requires the maintenance of various
financial levels and ratios. Among other covenants, we (a) cannot have a
leverage ratio greater than 0.35:1.0, (b) cannot have an interest coverage
ratio less than 2.50:1.0, (c) are prohibited from paying cash dividends on
common stock in excess of an amount equal to 3% of consolidated net worth as of
the last day of the preceding fiscal year, (d) must cause our insurance
subsidiaries to maintain certain levels of risk-based capital, and (e) are
prohibited from incurring additional indebtedness for borrowed money in excess
of certain limits typical for such lines of credit. We closely monitor all of
these covenants to ensure continued compliance. The Company has several options for deploying excess capital, including
supporting higher sales growth, reducing debt levels, pursuing acquisitions and
buying back common stock. Our Board of Directors approved a stock purchase
program effective August 9, 2002, under which we may purchase up to three
million shares of our common stock at such times and under such conditions, as
we deem advisable. The purchases may be made in the open market or by such
other means as we determine to be appropriate, including privately negotiated
purchases. The purchase program supercedes all prior purchase programs. We
plan to fund the purchase program from a combination of our internal sources,
dividends from insurance subsidiaries and the Revolving Credit Agreement.
Approximately 2.0 million shares remain available for repurchase under this
program. There were 244,400 shares purchased in the first six months of 2004
for $9.2 million. Holding company cash was utilized to purchase the shares. We manage liquidity on a continuing basis. One way is to minimize our
need for capital. We accomplish this by attempting to use our capital as
efficiently as possible and by developing capital-efficient products in our
insurance subsidiaries. We also manage our mix of sales by focusing on the
more capital-efficient products. In addition, we use reinsurance agreements,
where cost-effective, to reduce capital strain in the insurance subsidiaries.
We also focus on 33




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##### Table of Contents



optimizing the consolidated capital structure to properly
balance the levels and sources of borrowing and the issuance of equity
securities. Insurance Subsidiaries The sources of cash of our insurance subsidiaries consist primarily of
premium receipts; deposits to policyowner account balances; income from
investments, sales, maturities and calls of investments and repayments of
investment principal. The uses of cash are primarily related to withdrawals of
policyowner account balances, investment purchases, payment of policy
acquisition costs, payment of policyowner benefits, payment of debt, income
taxes and current operating expenses. Insurance companies generally produce a
positive cash flow from operations, as measured by the amount by which cash
flows are adequate to meet benefit obligations to policyowners and normal
operating expenses as they are incurred. The remaining cash flow is generally
used to increase the asset base to provide funds to meet the need for future
policy benefit payments and for writing new business. Management believes that the current level of cash and available-for-sale,
held for trading and short-term securities, combined with expected net cash
inflows from operations, maturities of fixed maturity investments, principal
payments on mortgage-backed securities and sales of its insurance products,
will be adequate to meet the anticipated short-term cash obligations of the
life insurance subsidiaries. Matching the investment portfolio maturities to the cash flow demands of
the type of insurance being provided is an important consideration for each
type of protection product and accumulation product. We continuously monitor
benefits and surrenders to provide projections of future cash requirements. As
part of this monitoring process, we perform cash flow testing of assets and
liabilities under various scenarios to evaluate the adequacy of reserves. In
developing our investment strategy, we establish a level of cash and securities
which, combined with expected net cash inflows from operations and maturities
and principal payments on fixed maturity investment securities, are believed
adequate to meet anticipated short-term and long-term benefit and expense
payment obligations. There can be no assurance that future experience regarding
benefits and surrenders will be similar to historic experience since withdrawal
and surrender levels are influenced by such factors as the interest rate
environment and general economic conditions and the claims-paying and financial
strength ratings of the insurance subsidiaries. We take into account asset/liability management considerations in the
product development and design process. Contract terms for the
interest-sensitive products include surrender and withdrawal provisions which
mitigate the risk of losses due to early withdrawals. These provisions
generally do one or more of the following: limit the amount of penalty-free
withdrawals, limit the circumstances under which withdrawals are permitted, or
assess a surrender charge or market value adjustment relating to the underlying
assets. In addition to the interest-sensitive products, our insurance subsidiaries
have issued funding agreements totaling $960 million outstanding as of June 30,
2004, consisting primarily in six to ten year fixed rate insurance contracts.
The assets backing the funding agreements are legally segregated and are not
subject to claims that arise out of any other business of the insurance
subsidiaries. The funding agreements are further backed by the general account
assets of the insurance subsidiaries. The segregated assets and liabilities
are included with general account assets in the financial statements. The
funding agreements may not be cancelled by the holders unless there is a
default under the agreements, but the insurance subsidiaries may terminate the
agreements at any time. We also have variable separate account assets and liabilities representing
funds that are separately administered, principally for variable annuity
contracts, and for which the contractholder bears the investment risk.
Separate account assets and liabilities are reported at fair value and amounted
to $255 million at June 30, 2004. Separate account contractholders have no
claim against the assets of the general account. The operations of the
separate accounts are not included in the accompanying consolidated financial
statements. 34




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##### Table of Contents



Through their respective memberships in the Federal Home Loan
Banks (FHLB) of Des Moines and Topeka, ALIC and American are eligible to borrow
under variable-rate short term federal funds arrangements to provide additional
liquidity. These borrowings are secured and interest is payable at the current
rate at the time of each advance. There were no borrowings under these
arrangements outstanding at June 30, 2004. In addition, ALIC has long-term
fixed rate advances from FHLB outstanding of $12.9 million at June 30, 2004. The insurance subsidiaries may also obtain liquidity through sales of
investments. The investment portfolio as of June 30, 2004 had a carrying value
of $18.0 billion, including closed block investments. The level of capital in the insurance companies is regulated by risk-based
capital formulas and is monitored by rating agencies. On June 21, 2004,
Moodys Investors Service changed its outlook to stable from negative for all
of our insurance subsidiaries. In order to maintain appropriate capital
levels, it may be necessary from time to time for AmerUs Group Co. to provide
additional capital to the insurance companies. We participate in a securities lending program whereby certain fixed
maturity securities from the investment portfolio are loaned to other
institutions for a short period of time. We receive a fee in exchange for the
loan of securities and require initial collateral equal to 102 percent of the
market value of the loaned securities to be separately maintained. Securities
with a market value of approximately $324.8 million and $154.6 million were on
loan under the program and we were liable for cash collateral under our control
of approximately $332.5 million and $158.8 million at June 30, 2004 and
December 31, 2003, respectively. The collateral held under the securities
lending program has been included in cash and cash equivalents in the
consolidated balance sheet and the obligation to return the collateral upon the
return of the loaned securities has been included in accrued expenses and other
liabilities. We may also enter into securities borrowing arrangements from time to time
whereby we borrow securities from other institutions and pay a fee. Securities
borrowed amounted to $133 million and none at June 30, 2004, and December 31,
2003, respectively, and are also included in accrued expenses and other
liabilities in the consolidated balance sheet. At June 30, 2004, the statutory surplus of the insurance subsidiaries was
approximately $836 million. Management believes that each life insurance
company has statutory capital which provides adequate risk based capital that
exceeds required levels. In the future, in addition to cash flows from operations and borrowing
capacity, the insurance subsidiaries may obtain their required capital from
AmerUs Group Co. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk The main objectives in managing our investment portfolios and our
insurance subsidiaries are to maximize investment income and total investment
returns while minimizing credit risks in order to provide maximum support to
the insurance underwriting operations. Investment strategies are developed
based on many factors including asset liability management, regulatory
requirements, fluctuations in interest rates and consideration of other market
risks. Investment decisions are centrally managed by investment professionals
based on guidelines established by management and approved by the board of
directors. Market risk represents the potential for loss due to adverse changes in
the fair value of financial instruments. The market risks related to our
financial instruments primarily relate to the investment portfolio, which
exposes us to risks related to interest rates, credit quality and prepayment
variation. Analytical tools and monitoring systems are in place to assess each
of these elements of market risk. Interest rate risk is the price sensitivity of a fixed income security to
changes in interest rates. Management views these potential changes in price
within the overall context of asset and liability management. Actuarial 35




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##### Table of Contents



professionals estimate the payout pattern of our liabilities, primarily lapses,
to determine duration, which is the present value of the fixed income
investment portfolios after consideration of the duration of these liabilities
and other factors, which management believes mitigates the overall effect of
interest rate risk. For variable and equity indexed products, profitability on the portion of
the policyowners account balance invested in the fixed general account option,
if any, is also affected by the spreads between interest yields on investments
and rates credited to the policies. For the variable products, the policyowner
assumes essentially all the investment earnings risk for the portion of the
account balance invested in the separate accounts. For the equity indexed
products, we purchase primarily call options that are designed to match the
return owed to contract holders who elect to participate in one or more market
indices. Profitability on the portion of the equity indexed products tied to
market indices is significantly impacted by the spread on interest earned on
investments and the sum of (1) the cost of underlying call options purchased to
match the returns owed to contract holders and (2) the minimum interest
guarantees owed to the contract holder, if any. Profitability on the equity
indexed products is also impacted by changes in the fair value of the embedded
option which provides the contract holder the right to participate in market
index returns after the next anniversary date of the contract. This impacts
profitability as we only purchase one-year call options to fund the returns
owed to the contract holders at the inception of each contract year. This
practice matches with the contract holders rights to switch to different
indices on each anniversary date. The value of the forward starting options
embedded in the equity indexed products can fluctuate with changes in
assumptions as to future volatility of the market indices, risk free interest
rates, market returns and the lives of the contracts. The following table provides information about our fixed maturity
investments and mortgage loans for both our trading and other than trading
portfolios at June 30, 2004. The table presents amortized cost and related
weighted average interest rates by expected maturity dates. The amortized cost
approximates the cash flows of principal amounts in each of the periods. The
cash flows are based on the earlier of the call date or the maturity date or,
for mortgage-backed securities, expected payment patterns. Actual cash flows
could differ from the expected amounts. Expected Cash Flows6 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    Expected2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter
    
    Cash Flows
    
    Fair Value($ in millions)Fixed maturity securities
available-for-sale
    
    $
    530
    
    
    $
    1,059
    
    
    $
    911
    
    
    $
    1,068
    
    
    $
    1,169
    
    
    $
    917
    
    
    $
    8,623
    
    
    $
    14,277
    
    
    $
    14,428Average interest rate
    
    
    6.1
    %
    
    
    6.0
    %
    
    
    6.8
    %
    
    
    7.7
    %
    
    
    5.5
    %
    
    
    5.5
    %
    
    
    5.7
    %Fixed maturity securities
held for trading purposes
    
    $
    61
    
    
    $
    199
    
    
    $
    188
    
    
    $
    191
    
    
    $
    278
    
    
    $
    198
    
    
    $
    734
    
    
    $
    1,849
    
    
    $
    1,849Average interest rate
    
    
    4.3
    %
    
    
    2.9
    %
    
    
    2.9
    %
    
    
    4.3
    %
    
    
    3.3
    %
    
    
    2.9
    %
    
    
    4.4
    %Mortgage loans
    
    $
    30
    
    
    $
    62
    
    
    $
    59
    
    
    $
    55
    
    
    $
    67
    
    
    $
    63
    
    
    $
    508
    
    
    $
    844
    
    
    $
    874Average interest rate
    
    
    7.5
    %
    
    
    7.6
    %
    
    
    7.6
    %
    
    
    7.5
    %
    
    
    7.5
    %
    
    
    7.5
    %
    
    
    7.3
    %Total
    
    $
    621
    
    
    $
    1,320
    
    
    $
    1,158
    
    
    $
    1,314
    
    
    $
    1,514
    
    
    $
    1,178
    
    
    $
    9,865
    
    
    $
    16,970
    
    
    $
    17,151
 In accordance with our strategy of minimizing credit quality risk, we
consistently invest in high quality marketable securities. Fixed maturity
securities are comprised of U.S. Treasury, government agency, mortgage-backed
and corporate securities. Approximately 62% of our fixed maturity securities
are issued by the U.S. Treasury or U.S. government agencies or are rated A or
better by Moodys, Standard and Poors, or the NAIC. Less than 7.7% of the
bond portfolio is below investment grade. Fixed maturity securities have an
average life of approximately 8.13 years. Prepayment risk refers to the changes in prepayment patterns that can
either shorten or lengthen the expected timing of the principal repayments and
thus the average life and the effective yield of a security. Such risk exists
primarily within the portfolio of mortgage-backed securities. Management
monitors such risk regularly. We invest primarily in those classes of
mortgage-backed securities that have average or lower prepayment risk. 36




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Our use of derivatives is generally limited to hedging purposes and has
principally consisted of using interest rate swaps and options. These
instruments, viewed separately, subject us to varying degrees of market and
credit risk. However when used for hedging, the expectation is that these
instruments would reduce overall market risk. Credit risk arises from the
possibility that counterparties may fail to perform under the terms of the
contracts. Equity price risk is the potential loss arising from changes in the value
of equity securities. In general, equities have more year-to-year price
variability than intermediate term grade bonds. However, returns over longer
time frames have been consistently higher. All of the above risks are monitored on an ongoing basis. A combination
of in-house systems and proprietary models and externally licensed software are
used to analyze individual securities as well as each portfolio. These tools
provide the portfolio managers with information to assist them in the
evaluation of the market risks of the portfolio. 
 Item 4. Controls and Procedures (a) Based upon their evaluation as of the end of the period covered by this
Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures as defined
in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, are
effective for recording, processing, summarizing and reporting the information
we are required to disclose in our reports filed under such act. (b) There was no change in our internal control over financial reporting during
our last fiscal quarter that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting. 37




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##### Table of Contents



PART II - OTHER INFORMATION 
 Item 1. Legal Proceedings In recent years, the life insurance industry, including the Company and
its subsidiaries, have been subject to an increase in litigation pursued on
behalf of purported classes of insurance purchasers, questioning the conduct of
insurers in the marketing of their products. The Company is routinely involved
in litigation and other proceedings, including class actions (such as pending
class action lawsuits related to the use of purportedly inappropriate sales
techniques and products for the senior market), reinsurance claims and
regulatory proceedings arising in the ordinary course of its business. Some of
these claims and legal actions are in jurisdictions where juries are given
substantial latitude in assessing damages, including punitive and exemplary
damages. In addition, regulatory bodies, such as state insurance departments
and attorneys general, periodically make inquiries and conduct examinations
concerning our compliance with insurance and other laws. We respond to such
inquiries and cooperate with regulatory examinations in the ordinary course of
business. Our litigation is subject to many uncertainties, and given its complexity
and scope, the outcomes cannot be predicted. It is possible that our results
of operations or cash flow in a particular quarterly or annual period could be
materially affected by an ultimate unfavorable resolution of pending litigation
and regulatory matters depending, in part, upon the results of operations or
cash flow for such period. Management believes, however, that the ultimate
outcome of all pending litigation and regulatory matters, after consideration
of applicable reserves, should not have a material adverse effect on our
financial position. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities The following table sets forth information regarding purchases of equity
securities for the six months ended June 30, 2004: (c) Total number
    
    (d) Maximum numberof shares (or
    
    (or approximate dollar(a) Total
    
    (b) Average
    
    units) purchased
    
    value) of sharesnumber of
    
    price paid
    
    as part of publicly
    
    (or units) that mayshares (or units)
    
    per share
    
    announced plans
    
    yet be purchased underPeriod
    
    purchased (1)
    
    (or units)
    
    or programs
    
    the plans or programs (2)01/01/2004-01/31/2004
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    2,271,90002/01/2004-02/29/2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,271,90003/01/2004-03/31/2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,271,90004/01/2004-04/30/2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,271,90005/01/2004-05/31/2004
    
    
    244,400
    (2)
    
    
    37.45
    
    
    
    244,400
    
    
    
    2,027,50006/01/2004-06/30/2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,027,500Total
    
    
    244,400
    
    
    $
    37.45
    
    
    
    244,400
  (1)
    
    Does not include shares withheld from employee stock awards to satisfy applicable tax withholding obligations.(2)
    
    In August 2002, our board of directors authorized a repurchase program of up to 3 million shares of our
outstanding common stock. There is no expiration date for this program. 38




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders At the annual meeting of the Companys shareholders on May 13, 2004, the
Companys shareholders approved (1) the reelection of Roger K. Brooks, Thomas
C. Godlasky, Stephen Strome, and F.A. Wittern, Jr.; (2) the amendment of the
Companys articles of incorporation; (3) the issuance of shares in connection
with the Companys management incentive plan; and (4) the ratification of the
appointment by the Board of Directors of the Company of Ernst & Young LLP as
the Companys independent auditors. The result of the vote is as follows: Election of Roger K. Brooks For:
    
    
    25,772,051Withheld:
    
    
    899,675
 Election of Thomas C. Godlasky For:
    
    
    26,251,455Withheld:
    
    
    420,271
 Election of Stephen Strome For:
    
    
    26,380,453Withheld:
    
    
    291,273
 Election of F.A. Wittern For:
    
    
    26,369,453Withheld:
    
    
    302,273
 Amend the Companys Articles of Incorporation For:
    
    
    24,820,151Against:
    
    
    1,409,436Abstaining:
    
    
    442,139
 Issue Shares in Conjunction with the Companys Management Incentive Plan For:
    
    
    19,566,467Against:
    
    
    3,996,192Abstaining:
    
    
    440,647
 Ratification of Ernst & Young LLP For:
    
    
    26,055,559Against:
    
    
    429,574Abstaining:
    
    
    186,593
 The term of the following other directors of the Company continued after
the meeting: David A. Arledge; Alecia A. DeCoudreaux; Thomas F. Gaffney; John
W. Norris, Jr.; Andrew J. Paine, Jr.; Jack C. Pester; and John A. Wing. 39




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##### Table of Contents



Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits A list of exhibits included as part of this report is set forth in the
Exhibit Index which immediately precedes such exhibits and is hereby
incorporated by reference herein.  (b)
    
    The following reports on Form 8-K were filed during the quarter
ended June 30, 2004:Form 8-K dated May 4, 2004 announcing the release of first quarter
2004 earnings and furnishing supplemental financial information of
AmerUs Group Co. 40




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. DATED:
    
    August 6, 2004
    
    AMERUS GROUP CO.By
    
    /s/ Melinda S. UrionMelinda S. UrionExecutive Vice President,Chief Financial Officer and Treasurer(Principal Financial Officer)By
    
    /s/ Brenda J. CushingBrenda J. CushingSenior Vice President and Controller(Principal Accounting Officer)
 41




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##### Table of Contents



AMERUS GROUP CO. AND SUBSIDIARIES 
 INDEX TO EXHIBITS ExhibitNo.
    
    Description2.1
    
    Combination and Investment Agreement, dated February 18, 2000, among American Mutual
Holding Company, AmerUs Life Holdings, Inc., Indianapolis Life Insurance Company and The Indianapolis Life Group of
Companies, Inc., filed as Exhibit 2.1 to AmerUs Life Holdings, Inc.s report on Form 8-K/A on March 6, 2000, is hereby
incorporated by reference.2.2
    
    Purchase Agreement, dated as of February 18, 2000, by and between American Mutual
Holding Company and AmerUs Life Holdings, Inc., filed as Exhibit 2.5 on Form 10-K, dated March 8, 2000, is hereby
incorporated by reference.2.3
    
    Agreement and Plan of Merger, dated December 17, 1999, by and between American Mutual
Holding Company and AmerUs Life Holdings, Inc., filed as Exhibit 2.6 on Form 10-K, dated March 8, 2000, is hereby
incorporated by reference.2.4
    
    Amendment No. 1 to Agreement and Plan of Merger, dated February 18, 2000, by and between
American Mutual Holding Company and AmerUs Life Holdings, Inc., filed as Exhibit 2.7 on Form 10-K, dated March 8, 2000,
is hereby incorporated by reference.2.5
    
    Letter Agreement, dated December 17, 1999, by and between American Mutual Holding
Company and AmerUs Life Holdings, Inc., filed as Exhibit 2.8 on Form 10-K, dated March 8, 2000, is hereby incorporated
by reference.2.6
    
    Notification Agreement, dated as of February 18, 2000, by and among American Mutual
Holding Company, AmerUs Life Holdings, Inc. and Bankers Trust Company, filed as Exhibit 2.9 on Form 10-K, dated March
8, 2000, is hereby incorporated by reference.2.7
    
    Amendment No. 2 to Agreement and Plan of Merger, dated April 3, 2000, by
and between American Mutual Holding Company and AmerUs Life Holdings,
Inc., filed as Exhibit 2.10 on Form 10-Q, dated May 15, 2000, is hereby
incorporated by reference.2.8
    
    Amendment No. 1 to the Purchase Agreement, dated April 3, 2000, by and
between American Mutual Holding Company and AmerUs Life Holdings, Inc.,
filed as Exhibit 2.11 on Form 10-Q, dated May 15, 2000, is hereby
incorporated by reference.2.9
    
    Amendment to Combination and Investment Agreement dated February 18, 2000
among American Mutual Holding Company, AmerUs Life Holdings, Inc.,
Indianapolis Life Insurance Company and The Indianapolis Life Group of
Companies, Inc., dated September 18, 2000, filed as Exhibit 2.2 to Form
8-K12G3 of the Registrant dated September 21, 2000, is hereby incorporated
by reference.2.10
    
    Stock Purchase Agreement, dated January 1, 2002, by and among AmerUs
Annuity Group Co., and the Stockholders of Family First Advanced Estate Planning and Family First Insurance Services, filed as
Exhibit 2.13 on Form 10-Q dated August 12, 2002, is hereby incorporated by reference.3.1*
    
    Amended and Restated Articles of Incorporation of the Registrant dated May 21, 2004.3.2*
    
    Amended and Restated Bylaws of the Registrant dated May 21, 2004.4.1
    
    Amended and Restated Trust Agreement dated as of February 3, 1997 among
AmerUs Life Holdings, Inc., Wilmington Trust Company, as property trustee,
and the administrative trustees named therein (AmerUs Capital I business
trust), filed as Exhibit 3.6 to the registration statement of AmerUs Life
Holdings, Inc. and AmerUs Capital I on Form S-1, Registration Number
333-13713, is hereby incorporated by reference.4.2
    
    Indenture dated as of February 3, 1997 between AmerUs Life Holdings, Inc.
and Wilmington Trust Company relating to the Companys 8.85% Junior
Subordinated Debentures, Series A, filed as Exhibit 4.1 to the
registration statement of AmerUs Life Holdings, Inc. and AmerUs Capital I
on Form S-1, Registration Number, 333-13713, is hereby incorporated by
reference.4.3
    
    Guaranty Agreement dated as of February 3, 1997 between AmerUs Life
Holdings, Inc., as guarantor, and Wilmington Trust Company, as trustee,
relating to the 8.85% Capital Securities, Series A, issued by AmerUs
Capital I, filed as Exhibit 4.4 to the registration statement on Form S-1,
Registration Number, 333-13713, is hereby incorporated by reference.4.4
    
    Certificate of Trust of AmerUs Capital III filed as Exhibit 4.7 to the registration statement of
AmerUs Life Holdings, Inc., AmerUs Capital II and AmerUs Capital III, on Form S-3 (No.
 42




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##### Table of Contents



ExhibitNo.
    
    Description333-50249), is hereby incorporated by reference.4.5
    
    Senior Indenture, dated as of June 16, 1998, by and between AmerUs Life
Holdings, Inc. and First Union National Bank, as Indenture Trustee,
relating to the AmerUs Life Holdings, Inc.s 6.95% Senior Notes, filed as
Exhibit 4.14 on Form 10-Q, dated August 13, 1998, is hereby incorporated
by reference.4.6
    
    Subordinated Indenture, dated as of July 27, 1998, by and between AmerUs
Life Holdings, Inc. and First Union National Bank, as Indenture Trustee,
relating to AmerUs Life Holdings, Inc.s 6.86% Junior Subordinated
Deferrable Interest Debentures, filed as Exhibit 4.15 on Form 10-Q, dated
August 13, 1998, is hereby incorporated by reference.4.7
    
    First Supplement to Indenture dated February 3, 1997 among American
Mutual Holding Company, AmerUs Life Holdings, Inc. and Wilmington Trust
Company as Trustee, relating to the Companys 8.85% Junior Subordinated
Debentures, Series A, dated September 20, 2000, filed as Exhibit 4.14 on
Form 10-Q dated November 14, 2000, is hereby incorporated by reference.4.8
    
    Assignment and Assumption Agreement to Amended and Restated Trust
Agreement, dated February 3, 1997 between American Mutual Holding Company
and AmerUs Life Holdings, Inc., dated September 20, 2000, filed as Exhibit
4.15 on Form 10-Q dated November 14, 2000, is hereby incorporated by
reference.4.9
    
    Assignment and Assumption to Guaranty Agreement, dated February 3, 1997
between American Mutual Holding Company and AmerUs Life Holdings, Inc.,
dated September 20, 2000, filed as Exhibit 4.16 on Form 10-Q, dated
November 14, 2000, is hereby incorporated by reference.4.10
    
    First Supplement to Senior Indenture dated June 16, 1998, relating to
AmerUs Life Holdings,
Inc.s 6.95% Senior Notes, among American Mutual Holding Company, AmerUs
Life Holdings, Inc. and First Union National Bank, as Trustee, dated
September 20, 2000, filed as Exhibit 4.23 on Form 10-Q, dated November
14, 2000, is hereby incorporated by reference.4.11
    
    Indenture dated as of March 6, 2002 between AmerUs Group Co. and BNY
Midwest Trust Company, as Trustee, filed as Exhibit 4.1 on form 8-K/A,
dated February 28, 2002, is hereby incorporated by reference.4.12
    
    Form of Purchase Contract Agreement between AmerUs Group Co. and Wachovia
Bank, National Association (formerly known as First Union National Bank),
as Purchase Contract Agent, filed as Exhibit 4.1 on Form 8-A12B, dated May
22, 2003, is hereby incorporated by reference.4.13
    
    Form of Pledge Agreement among AmerUs Group Co., BNY Midwest Trust
Company, as Collateral Agent, Custodial Agent and Securities Intermediary
and Wachovia Bank, National Association (formerly known as First union
National Bank), as Purchase Contract Agent, filed as Exhibit 4.2 on Form
8-A12B dated May 22, 2003, is hereby incorporated by reference.4.14
    
    Form of Remarketing Agreement among AmerUs Group Co., Wachovia Bank,
National Association (formerly known as First Union National Bank), as
Purchase Contract Agent, and the Remarketing Agent named therein, filed as
Exhibit 4.3 on Form 8-A12B dated May 22, 2003, is hereby incorporated by
reference.4.15
    
    Form of Income PRIDES (included in Exhibit 4.1 as Exhibit A thereto),
filed as Exhibit 4.1 on Form 8-A12B, dated May 22, 2003, is hereby
incorporated by reference.4.16
    
    Officers Certificate attaching form of Senior Notes initially due 2008,
filed as Exhibit 4.7 on Form 8-A12B, dated May 22, 2003, is hereby
incorporated by reference.10.1*
    
    Amended and Restated Retirement Agreement, dated August 22, 2003, by and
between Victor N. Daley and AmerUs Group Co.11*
    
    Statement Re: Computation of Earnings Per Share.12*
    
    Computation of Ratios of Earnings to Fixed Charges.31.1*
    
    Certification of Chief Executive Officer of Periodic Report Pursuant to Rule 13a-15(e) or Rule 15d-15(e).31.2*
    
    Certification of Chief Financial Officer of Periodic Report Pursuant to Rule 13a-15(e) or Rule 15d-15(e).32.1*
    
    Certification of Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350.32.2*
    
    Certification of Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350.
 * Included herein 43