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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q/A Amendment No. 1
 
 (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 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
    
    42-1458424(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    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 May 4, 2004 was as follows: Common Stock
    
    39,321,389 shares
 Exhibit index  - Page 38
Page 1 of 39 1




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EXPLANATORY NOTE This Amendment No. 1 on Form 10-Q/A is being filed to amend our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2004, to adjust the
cumulative effect of change in accounting made in connection with our adoption
of 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 revision was to include reinsurance related to the additional
liability originally established, which reduced the impact of the
implementation of SOP 03-1 as a result of our review of an American Institute
of Certified Public Accountants Q&A drafted in June 2004. In addition, certain
amounts have been reclassified to conform to the on-going
presentation of SOP 03-1. This Amendment No. 1 on Form 10-Q/A amends: · Part I, Item 1 (Financial Statements) and Item 2 (Managements Discussion
and Analysis of Financial Condition and Results of Operations) to revise the
cumulative effect of change in accounting for adopting SOP 03-1. See note 2 to
the accompanying consolidated financial statements for the effects on the
accompanying consolidated financial statements and Managements Discussion and
Analysis of Financial Condition and Results of Operations. · Exhibits 31.1, 31.2, 32.1 and 32.2 (Certifications) have been updated. Part
I, Item 4 (Controls and Procedures) has not been amended since our initial
quarterly report for the quarter ended March 31, 2004, on Form 10-Q, but is
restated herein in its entirety as it is referenced in the updated Exhibits
31.1 and 31.2. The unaudited financial
statements and related notes and MD&A set forth in this amendment
have been revised to reflect the restatements described above and,
except for these revisions, do not reflect events and developments
subsequent to March 31, 2004. 2




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INDEX Page No.PART I - FINANCIAL INFORMATION
    
    
    5Item 1.
    
    Financial Statements
    
    
    5Consolidated Balance Sheets March 31, 2004 (Unaudited) and December 31, 2003
    

    
    5Consolidated Statements of Income (Unaudited) For the Three Months Ended March 31, 2004 and 2003
    
    
    7Consolidated Statements of Comprehensive Income (Unaudited) For the Three Months Ended March 31, 2004 and 2003
    
    
    8Consolidated
Statements of Stockholders Equity For the Three Months Ended March 31, 2004 (Unaudited) and the Year Ended December 31, 2003
    
    
    9Consolidated Statements of Cash Flows (Unaudited) For the Three Months Ended March 31, 2004 and 2003
    
    
    10Notes to Consolidated Financial Statements (Unaudited)
    
    
    12Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    35PART
II - OTHER INFORMATION
    
    
    36Item 6.
    
    Exhibits and Reports on
Form 8-K
    
    
    36Signatures
    
    
    37Index to Exhibits
    
    
    38Statement 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
  3




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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 currently proposed
federal measures that may significantly affect the insurance business including
limitations on antitrust immunity, minimum solvency requirements, and changes
to the tax advantages of 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 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; (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. 4




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PART I - FINANCIAL INFORMATION 
 Item 1. Financial Statements AMERUS GROUP CO. 
   March 31,
    
    December 31,2004
    
    2003(unaudited)AssetsInvestments:Securities available-for-sale at fair value:Fixed maturity securities
    
    $
    14,642,276
    
    
    $
    13,944,961Equity securities
    
    
    76,201
    
    
    
    74,890Short-term investments
    
    
    25,207
    
    
    
    28,556Securities held for trading purposes at fair value:Fixed maturity securities
    
    
    2,022,366
    
    
    
    2,089,502Equity securities
    
    
    5,722
    
    
    
    1,652Short-term investments
    
    
    586
    
    
    
    591Mortgage loans
    
    
    849,776
    
    
    
    968,572Real estate
    
    
    33
    
    
    
    33Policy loans
    
    
    490,245
    
    
    
    494,646Other investments
    
    
    460,897
    
    
    
    339,436Total investments
    
    
    18,573,309
    
    
    
    17,942,839Cash and cash equivalents
    
    
    409,529
    
    
    
    274,150Accrued investment income
    
    
    215,058
    
    
    
    205,492Premiums, fees and other receivables
    
    
    44,066
    
    
    
    42,761Reinsurance receivables
    
    
    700,784
    
    
    
    663,452Deferred policy acquisition costs
    
    
    978,510
    
    
    
    1,021,856Capitalized bonus interest
    
    
    89,380
    
    
    
    98,274Value of business acquired
    
    
    391,139
    
    
    
    419,582Goodwill
    
    
    226,291
    
    
    
    224,075Property and equipment
    
    
    49,237
    
    
    
    48,849Other assets
    
    
    298,015
    
    
    
    311,305Separate account assets
    
    
    262,031
    
    
    
    261,657Assets of discontinued operations
    
    
    
    
    
    
    27,950Total assets
    
    $
    22,237,349
    
    
    $
    21,542,242
 See accompanying notes to consolidated financial statements. 5




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AMERUS GROUP CO.
CONSOLIDATED BALANCE SHEETS
($ in thousands) March 31,
    
    December 31,2004
    
    2003(unaudited)Liabilities and Stockholders EquityLiabilities:Policy reserves and policyowner funds:Future life and annuity policy benefits
    
    $
    17,157,605
    
    
    $
    16,994,255Policyowner funds
    
    
    1,337,180
    
    
    
    1,306,16018,494,785
    
    
    
    18,300,415Accrued expenses and other liabilities
    
    
    809,242
    
    
    
    443,589Dividends payable to policyowners
    
    
    365,655
    
    
    
    321,233Policy and contract claims
    
    
    66,827
    
    
    
    58,880Income taxes payable
    
    
    73,907
    
    
    
    50,274Deferred income taxes
    
    
    104,081
    
    
    
    80,861Notes payable
    
    
    545,601
    
    
    
    596,101Separate account liabilities
    
    
    262,031
    
    
    
    261,657Liabilities of discontinued operations
    
    
    
    
    
    
    19,421Total liabilities
    
    
    20,722,129
    
    
    
    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; 43,909,617 shares
issued and 39,318,135 shares outstanding in
2004; 43,836,608 shares issued and
39,194,602 shares
outstanding in 2003
    
    
    43,910
    
    
    
    43,836Additional paid-in capital
    
    
    1,186,917
    
    
    
    1,184,237Accumulated other comprehensive income (loss)
    
    
    153,635
    
    
    
    84,519Unearned compensation
    
    
    (1,697
    )
    
    
    (1,361
    )Retained earnings
    
    
    288,135
    
    
    
    255,006Treasury stock, at cost (4,591,482 shares in 2004
and 4,642,006 shares in 2003)
    
    
    (155,680
    )
    
    
    (156,426
    )Total stockholders equity
    
    
    1,515,220
    
    
    
    1,409,811Total liabilities and stockholders equity
    
    $
    22,237,349
    
    
    $
    21,542,242
 See accompanying notes to consolidated financial statements. 6




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AMERUS GROUP CO. 
   For The Three Months Ended March 31,2004
    
    2003(unaudited)Revenues:Insurance premiums
    
    $
    70,737
    
    
    $
    81,605Product charges
    
    
    49,562
    
    
    
    46,831Net investment income
    
    
    256,875
    
    
    
    255,113Realized/unrealized capital gains (losses)
    
    
    (85
    )
    
    
    7,855Other income
    
    
    19,603
    
    
    
    16,356396,692
    
    
    
    407,760Benefits and expenses:Policyowner benefits
    
    
    238,429
    
    
    
    223,361Underwriting, acquisition and other expenses
    
    
    40,601
    
    
    
    40,356Restructuring costs
    
    
    
    
    
    
    3,193Amortization of deferred policy acquisition costs
and value of business acquired
    
    
    47,911
    
    
    
    47,074Dividends to policyowners
    
    
    25,484
    
    
    
    34,574352,425
    
    
    
    348,558Income from continuing
operations
    
    
    44,267
    
    
    
    59,202Interest expense
    
    
    8,398
    
    
    
    6,799Income before income tax
expense
    
    
    35,869
    
    
    
    52,403Income tax expense
    
    
    6,129
    
    
    
    17,101Net income from continuing operations
    
    
    29,740
    
    
    
    35,302Income from discontinued operations, net of tax
    
    
    3,899
    
    
    
    487Net income before cumulative effect of change in accounting
    
    
    33,639
    
    
    
    35,789Cumulative effect of change in accounting, net of tax
    
    
    (510
    )
    
    
    Net income
    
    $
    33,129
    
    
    $
    35,789Net income from continuing operations per common share:Basic
    
    $
    0.76
    
    
    $
    0.91Diluted
    
    $
    0.74
    
    
    $
    0.90Net income per common share:Basic
    
    $
    0.84
    
    
    $
    0.92Diluted
    
    $
    0.82
    
    
    $
    0.91Weighted average common shares outstanding:Basic
    
    
    39,263,367
    
    
    
    38,984,807Diluted
    
    
    40,434,902
    
    
    
    39,217,951
 See accompanying notes to consolidated financial statements. 7




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AMERUS GROUP CO. 
   For The Three Months Ended March2004
    
    2003(unaudited)Net income
    
    $
    33,129
    
    
    $
    35,789Other comprehensive income (loss), before tax:Unrealized gains (losses) on securities:Unrealized holding gains (losses) arising during period
    
    
    88,879
    
    
    
    29,859Less: Reclassification adjustment for gains (losses)
included in net income
    
    
    (17,453
    )
    
    
    12,376Other comprehensive income (loss), before tax
    
    
    106,332
    
    
    
    17,483Income tax expense related to items of other
comprehensive income
    
    
    (37,216
    )
    
    
    (6,119
    )Other comprehensive income (loss), net of taxes
    
    
    69,116
    
    
    
    11,364Comprehensive income
    
    $
    102,245
    
    
    $
    47,153
 See accompanying notes to
consolidated financial statements. 8




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See accompanying notes to consolidated financial statements. 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 securites 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,129
    
    
    
    
    
    
    
    33,129Net unrealized gain (loss) on securities
    
    
    
    
    
    
    
    
    
    
    68,970
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68,970Net unrealized gain (loss) on derivatives
designated as cash flow hedges
    
    
    
    
    
    
    
    
    
    
    146
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    146Stock issued under various incentive
plans, net of forfeitures
    
    
    74
    
    
    
    2,680
    
    
    
    
    
    
    
    (336
    )
    
    
    
    
    
    
    
    
    
    
    746
    
    
    
    3,164Balance at March 31, 2004
    
    $
    43,910
    
    
    $
    1,186,917
    
    
    $
    153,635
    
    
    $
    (1,697
    )
    
    $
    
    
    
    $
    288,135
    
    
    $
    (155,680
    )
    
    $
    1,515,220
 See accompanying notes to consolidated financial statements. 9




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AMERUS GROUP CO. 
   For The Three Months EndedMarch 31,2004
    
    2003(unaudited)Cash flows from operating activitiesNet income
    
    $
    33,129
    
    
    $
    35,789Adjustments 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 on universal life and annuity products
    
    
    (40,433
    )
    
    
    (54,225
    )Interest credited to policyowner account balances
    
    
    120,594
    
    
    
    126,940Change in option value of equity-indexed products
and market value adjustments on total
return strategy annuities
    
    
    23,733
    
    
    
    (8,602
    )Realized/unrealized capital (gains) losses
    
    
    85
    
    
    
    (7,855
    )DAC and VOBA amortization
    
    
    47,911
    
    
    
    47,074DAC and VOBA capitalized
    
    
    (88,790
    )
    
    
    (91,769
    )Change in:Accrued investment income
    
    
    (9,566
    )
    
    
    (2,012
    )Reinsurance receivables
    
    
    (18,370
    )
    
    
    (61,190
    )Securities held for trading purposes:Fixed maturities
    
    
    82,999
    
    
    
    83,691Equity securities
    
    
    (4,029
    )
    
    
    Short-term investments
    
    
    
    
    
    
    (2,779
    )Liabilities for future policy benefits
    
    
    (41,764
    )
    
    
    4,693Accrued expenses and other liabilities
    
    
    161,338
    
    
    
    97,185Policy and contract claims and other policyowner funds
    
    
    48,237
    
    
    
    17,692Income taxes:Current
    
    
    24,953
    
    
    
    (1,687
    )Deferred
    
    
    (17,710
    )
    
    
    (3,580
    )Other, net
    
    
    (18,003
    )
    
    
    16,196Net cash provided by operating activities
    
    
    300,925
    
    
    
    195,561Cash flows from investing activities:Purchase of fixed maturities available-for-sale
    
    
    (1,491,077
    )
    
    
    (2,073,313
    )Proceeds from sale of fixed maturities available-for-sale
    
    
    892,538
    
    
    
    2,093,786Maturities, calls and principal reductions of
fixed maturities available-for-sale
    
    
    293,607
    
    
    
    448,308Purchase of equity securities
    
    
    (37,116
    )
    
    
    (9,258
    )Proceeds from sale of equity securities
    
    
    35,962
    
    
    
    9,498Change in short-term investments, net
    
    
    10,503
    
    
    
    14,267Purchase of mortgage loans
    
    
    (24,268
    )
    
    
    (26,717
    )
 10




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AMERUS GROUP CO.   For The Three Months EndedMarch 31,2004
    
    2003(unaudited)Proceeds from repayment and sale of mortgage loans
    
    
    148,101
    
    
    
    22,696Purchase of real estate and other invested assets
    
    
    (80,971
    )
    
    
    (83,562
    )Proceeds from sale of real estate and other invested assets
    
    
    31,942
    
    
    
    11,998Change in policy loans, net
    
    
    4,402
    
    
    
    3,668Proceeds from sale of discontinued operations
    
    
    15,000
    
    
    
    Other assets, net
    
    
    3,793
    
    
    
    (6,251
    )Net cash (used in) provided by investing activities
    
    
    (197,584
    )
    
    
    405,120Cash flows from financing activities:Deposits to policyowner account balances
    
    
    508,716
    
    
    
    508,643Withdrawals from policyowner account balances
    
    
    (429,342
    )
    
    
    (313,947
    )Change in debt, net
    
    
    (50,500
    )
    
    
    22,240Stock issued under various incentive plans, net of forfeitures
    
    
    3,164
    
    
    
    728Adoption and allocation of shares in leveraged ESOP
    
    
    
    
    
    
    37Other, net
    
    
    
    
    
    
    60Net cash provided by financing activities
    
    
    32,038
    
    
    
    217,761Net increase in cash
    
    
    135,379
    
    
    
    818,442Cash and cash equivalents at beginning of period
    
    
    274,150
    
    
    
    102,612Cash and cash equivalents at end of period
    
    $
    409,529
    
    
    $
    921,054Supplemental disclosure of cash activities:Interest paid
    
    $
    7,818
    
    
    $
    9,332Income taxes paid
    
    $
    78
    
    
    $
    13,602
 See accompanying notes to consolidated financial statements. 11




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##### Table of Contents



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 three months ended March 31, 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 March 31,2004
    
    2003($ in thousands, except share data)Net income, as reported
    
    $
    33,129
    
    
    $
    35,789Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
    
    
    (1,162
    )
    
    
    (1,098
    )Pro forma net income
    
    $
    31,967
    
    
    $
    34,691Earnings per share:Basic  as reported
    
    $
    0.84
    
    
    $
    0.92Basic  pro forma
    
    $
    0.81
    
    
    $
    0.89Diluted  as reported
    
    $
    0.82
    
    
    $
    0.91Diluted  pro forma
    
    $
    0.79
    
    
    $
    0.88
 12




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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)
    
    RESTATEMENT OF FINANCIAL INFORMATION The consolidated financial statements as of and for the three months ended
March 31, 2004, have been restated to revise the adoption of SOP 03-1 effective
January 1, 2004 for reinsurance. During the second quarter of 2004, it was
determined, based on a review of an American Institute of Certified Public
Accountants Q&A drafted in June 2004, that reinsurance should be considered for
the additional liabilities being established. The cumulative effect of
adopting SOP 03-1 as of January 1, 2004 originally recorded in the first
quarter of 2004 has now been revised to include the impact of reinsurance
related to the additional liability originally established, which
reduced the original cumulative effect of accounting change expense net of
tax from $7.3 million to $0.5 million. The basic and diluted
earnings per common share for the change in accounting amounted to $0.02 and
$0.01, respectively, for the three months ended March 31, 2004. The following
table presents certain captions of the consolidated financial statements as of
and for the three months ended March 31, 2004 that were revised to reflect the
change in adopting SOP 03-1 ($ in thousands, except share data): Previously reported
    
    RestatedConsolidated balance sheet:Reinsurance receivables
    
    $
    681,822
    
    
    $
    700,784Deferred policy acquisition costs
    
    
    960,935
    
    
    
    978,510Capitalized bonus interest
    
    
    120,844
    
    
    
    89,381Total assets
    
    
    22,232,276
    
    
    
    22,237,349Future life and annuity policy benefits
    
    
    17,162,955
    
    
    
    17,157,605Deferred income taxes
    
    
    100,433
    
    
    
    104,081Total liabilities
    
    
    20,723,831
    
    
    
    20,722,129Retained earnings
    
    
    281,360
    
    
    
    288,135Total stockholders equity
    
    
    1,508,445
    
    
    
    1,515,220Total liabilities and stockholders equity
    
    
    22,232,276
    
    
    
    22,237,349Consolidated statements of income:Cumulative effect of change in accounting, net of tax
    
    
    (7,285
    )
    
    
    (510
    )Net income
    
    
    26,354
    
    
    
    33,129Net income per common share  basic
    
    
    0.67
    
    
    
    0.84Net income per common share  diluted
    
    
    0.65
    
    
    
    0.82Consolidated statements of comprehensive income:Net income
    
    
    26,354
    
    
    
    33,129Comprehensive income (loss)
    
    
    95,470
    
    
    
    102,245Consolidated statements of stockholders equity:Net income
    
    
    26,354
    
    
    
    33,129Retained earnings ending balance
    
    
    281,360
    
    
    
    288,135Total stockholders equity ending balance
    
    
    1,508,445
    
    
    
    1,515,220
  (3)
    
    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. 13




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##### Table of Contents



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 three months ended March 31, 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 523,539 shares to the diluted
earnings per share calculation for the three months ended March 31, 2004.  (4)
    
    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 March 31, 2004
and December 31, 2003 and for the three months ended March 31, 2004 and 2003
are as follows: 14




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##### Table of Contents



March 31,
    
    December 31,2004
    
    2003($ in thousands)Liabilities:Future life and annuity policy benefits
    
    $
    2,827,434
    
    
    $
    2,845,365Policyowner funds
    
    
    8,978
    
    
    
    9,232Accrued expenses and other liabilities
    
    
    34,634
    
    
    
    44,473Dividends payable to policyowners
    
    
    171,662
    
    
    
    173,703Policy and contract claims
    
    
    25,606
    
    
    
    22,694Policyowner dividend obligation
    
    
    182,729
    
    
    
    134,386Total Liabilities
    
    
    3,251,043
    
    
    
    3,229,853Assets:Fixed maturity securities available-for-sale at fair value
    
    
    2,038,035
    
    
    
    2,027,177Mortgage loans
    
    
    78,645
    
    
    
    80,170Policy loans
    
    
    342,398
    
    
    
    346,823Other investments
    
    
    300
    
    
    
    Cash and cash equivalents
    
    
    4,843
    
    
    
    3,492Accrued investment income
    
    
    32,447
    
    
    
    32,629Premiums and fees receivable
    
    
    80,771
    
    
    
    55,134Other assets
    
    
    17
    
    
    
    17Total Assets
    
    
    2,577,456
    
    
    
    2,545,442Maximum future earnings to be recognized from assets and liabilities of the Closed Block
    
    $
    673,587
    
    
    $
    684,411
 15




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##### Table of Contents



For The Three Months Ended March 31,2004
    
    2003($ in thousands)Operations:Insurance premiums
    
    $
    52,596
    
    
    $
    62,808Product charges
    
    
    90
    
    
    
    3,538Net investment income
    
    
    35,734
    
    
    
    39,739Realized gains (losses) on investments
    
    
    830
    
    
    
    7,069Policyowner benefits
    
    
    (55,170
    )
    
    
    (71,829
    )Underwriting, acquisition and other expenses
    
    
    (1,089
    )
    
    
    (1,131
    )Dividends to policyowners
    
    
    (23,399
    )
    
    
    (29,912
    )Contribution from the Closed Block before income taxes
    
    $
    9,592
    
    
    $
    10,282
 16




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##### Table of Contents



(5) 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 three months of 2004 and 2003,
realized/unrealized gains (losses) on investments included an unrealized gain
of $17.7 million and an unrealized gain of $2.3 million, respectively, from the
change in fair value on the trading securities primarily backing the total
return strategy products. Additionally, the first three months of 2004 and
2003 included an unrealized gain of $6.2 million and an unrealized loss of $9.6
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 an
increase in expense of $22.0 million and reduction in expense of $8.6 million
for the first three months of 2004 and 2003, respectively. In 2002, the
Company undesignated a cash flow hedge and is now amortizing the amount in AOCI
to earnings over the remaining life of the swap, which amounted to $0.5 and
$1.4 million in expense in the first three months of 2004 and 2003,
respectively. The Company estimates that $0.3 million of after-tax derivative
losses, included in AOCI, will be reclassified into earnings within the next
twelve months. Accumulated Other Comprehensive Income (AOCI) included an
unrealized gain of $0.1 million and $0.9 million from the fair value change in
interest rate swaps used to hedge the floating rate funding agreement liability
during the first three months of 2004 and 2003, respectively. The following table summarizes the income (loss) impact of the market
value adjustments on trading securities and derivatives and the cash flow hedge
amortization for the three months ended March 31, 2004 and 2003: For the Three Months Ended March 31, 2004Total Return
    
    Equity LinkedProducts
    
    Products
    
    Other
    
    Total($ in thousands)Fixed maturity securities held for trading
    
    $
    14,606
    
    
    $
    
    
    
    $
    3,046
    
    
    $
    17,652Options on equity-indexed and other products
    
    
    
    
    
    
    7,148
    
    
    
    (985
    )
    
    
    6,163Market value adjustment to liabilities
    
    
    (12,772
    )
    
    
    (9,166
    )
    
    
    (1,795
    )
    
    
    (23,733
    )Cash flow hedge amortization
    
    
    
    
    
    
    
    
    
    
    (462
    )
    
    
    (462
    )DAC amortization impact of
net adjustments above
    
    
    694
    
    
    
    1,635
    
    
    
    331
    
    
    
    2,660Pre-tax total
    
    
    2,528
    
    
    
    (383
    )
    
    
    135
    
    
    
    2,280Income taxes
    
    
    (885
    )
    
    
    134
    
    
    
    (47
    )
    
    
    (798
    )After-tax total
    
    $
    1,643
    
    
    $
    (249
    )
    
    $
    88
    
    
    $
    1,482
 For the Three Months Ended March 31, 2003Total Return
    
    Equity LinkedProducts
    
    Products
    
    Other
    
    Total($ in thousands)Fixed maturity securities held for trading
    
    $
    2,281
    
    
    $
    
    
    
    $
    38
    
    
    $
    2,319Options on equity-indexed and other products
    
    
    
    
    
    
    (10,705
    )
    
    
    1,093
    
    
    
    (9,612
    )Market value adjustment to liabilities
    
    
    (1,678
    )
    
    
    10,280
    
    
    
    
    
    
    
    8,602Cash flow hedge amortization
    
    
    
    
    
    
    
    
    
    
    (1,412
    )
    
    
    (1,412
    )DAC amortization impact of
net adjustments above
    
    
    (157
    )
    
    
    256
    
    
    
    (21
    )
    
    
    78Pre-tax total
    
    
    446
    
    
    
    (169
    )
    
    
    (302
    )
    
    
    (25
    )Income taxes
    
    
    (157
    )
    
    
    60
    
    
    
    106
    
    
    
    9After-tax total
    
    $
    289
    
    
    $
    (109
    )
    
    $
    (196
    )
    
    $
    (16
    )
   17




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##### Table of Contents



(6)
    
    FEDERAL INCOME TAXES The effective income tax rate for the three months ending March 31, 2004
varied from the prevailing corporate rate primarily as a result of a reduction
in the income tax accrual. The accrual reduction, amounting to $5.2 million,
was for the release of provisions originally established for potential tax
adjustments which have been settled or eliminated.  (7)
    
    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, 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
damages. Although no assurances can be given and no determinations can be made
at this time, the Company believes that the ultimate liability, if any, with
respect to these claims and legal actions, would have no material effect on its
results of operations and financial position.  (8)
    
    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
three months ended March 31, 2004 and 2003: Three Months Ended March 31,2004
    
    2003($ in thousands)Components of net periodic benefit cost:Service cost
    
    $
    82
    
    
    $
    71Interest cost
    
    
    1,550
    
    
    
    1,550Expected return on plan assets
    
    
    (1,214
    )
    
    
    (1,226
    )Amortization of prior service cost
    
    
    22
    
    
    
    10Amortizaton of actuarial loss
    
    
    62
    
    
    
    11Net periodic benefit cost
    
    
    502
    
    
    
    416Curtailment
    
    
    (951
    )
    
    
    Settlement
    
    
    
    
    
    
    393Total (income) expense
    
    $
    (449
    )
    
    $
    809
 During the first three months of 2004, a gain of $0.9 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. 18




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##### Table of Contents



(9)
    
    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
current offering prices for the property, resulting in 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 March 31, 2004
and $15.5 million at December 31, 2003.  (10)
    
    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: For The Three Months Ended March 31,2004
    
    2003($ in thousands, except share data)Operating income from
discontinued operations, net of
income taxes of $325 in 2003
    
    $
    
    
    
    $
    487Gain on sale of discontinued
operations, net of
income taxes of $2,571 in
2004
    
    
    3,899
    
    
    
    $
    3,899
    
    
    $
    487Net income from discontinued
operations per common share:Basic
    
    $
    0.10
    
    
    $
    0.01Diluted
    
    $
    0.10
    
    
    $
    0.01Weighted average common shares
outstanding:Basic
    
    
    39,263,367
    
    
    
    38,984,807Diluted
    
    
    40,434,902
    
    
    
    39,217,951
 19




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##### Table of Contents



(11)
    
    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, 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 $0.02 and $0.01, respectively, for the three months
ended March 31, 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.  (12)
    
    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). 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: 20




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##### Table of Contents



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) and
value of business acquired (VOBA) related to the realized gains and
losses on the open block investments and the derivative adjustments.4)
    
    Restructuring costs.5)
    
    Other income from non-insurance operations.6)
    
    Interest expense.7)
    
    Income tax expense.8)
    
    Income from discontinued operations.9)
    
    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 continuing in
nature, 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. 21




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##### Table of Contents



Operating Segment Income
($ in thousands) Three Months Ended March 31, 2004Protection
    
    Accumulation
    
    
    
    
    
    TotalProducts
    
    Products
    
    All Other
    
    ConsolidatedRevenues:Insurance premiums
    
    $
    69,716
    
    
    $
    723
    
    
    $
    298
    
    
    $
    70,737Product charges
    
    
    35,459
    
    
    
    14,103
    
    
    
    
    
    
    
    49,562Net investment income
    
    
    81,258
    
    
    
    174,263
    
    
    
    1,354
    
    
    
    256,875Realized gains (losses) on closed block investments
    
    
    830
    
    
    
    
    
    
    
    
    
    
    
    830Other income
    
    
    906
    
    
    
    17,388
    
    
    
    1,508
    
    
    
    19,802188,169
    
    
    
    206,477
    
    
    
    3,160
    
    
    
    397,806Benefits and expenses:Policyowner benefits
    
    
    93,395
    
    
    
    120,818
    
    
    
    21
    
    
    
    214,234Underwriting, acquisition, and other expenses
    
    
    16,958
    
    
    
    18,729
    
    
    
    4,914
    
    
    
    40,601Amortization of DAC and VOBA, net of
open block loss adjustment of $1,260
    
    
    19,241
    
    
    
    29,930
    
    
    
    
    
    
    
    49,171Dividends to policyowners
    
    
    25,484
    
    
    
    
    
    
    
    
    
    
    
    25,484155,078
    
    
    
    169,477
    
    
    
    4,935
    
    
    
    329,490Segment pre-tax operating income
    
    $
    33,091
    
    
    $
    37,000
    
    
    $
    (1,775
    )
    
    
    68,316Realized gains (losses) on open block assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,730
    )Unealized gains (losses) on open block options and
trading investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,815Change in option value of equity-indexed
products and market value adjustments on
total return strategy annuities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,733
    )Cash flow hedge amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (462
    )Amortization of DAC and VOBA due to open
block gains and losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,260Other income from non-insurance operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (199
    )Income from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,267Interest (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,398
    )Income tax (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,129
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,899Cumulative effect of change in accounting, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (510
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    33,129
 22




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##### Table of Contents



Operating Segment Income
($ in thousands) Three Months Ended March 31, 2003Protection
    
    Accumulation
    
    
    
    
    
    TotalProducts
    
    Products
    
    All Other
    
    ConsolidatedRevenues:Insurance premiums
    
    $
    80,161
    
    
    $
    1,183
    
    
    $
    261
    
    
    $
    81,605Product charges
    
    
    36,338
    
    
    
    10,493
    
    
    
    
    
    
    
    46,831Net investment income
    
    
    83,746
    
    
    
    169,673
    
    
    
    1,694
    
    
    
    255,113Realized gains (losses) on closed block investments
    
    
    7,069
    
    
    
    
    
    
    
    
    
    
    
    7,069Other income
    
    
    1,053
    
    
    
    14,766
    
    
    
    140
    
    
    
    15,959208,367
    
    
    
    196,115
    
    
    
    2,095
    
    
    
    406,577Benefits and expenses:Policyowner benefits
    
    
    100,668
    
    
    
    129,863
    
    
    
    20
    
    
    
    230,551Underwriting, acquisition, and other expenses
    
    
    20,441
    
    
    
    15,935
    
    
    
    3,980
    
    
    
    40,356Amortization of DAC and VOBA, net of
open block gain adjustment of $6,545
    
    
    19,565
    
    
    
    20,964
    
    
    
    
    
    
    
    40,529Dividends to policyowners
    
    
    34,574
    
    
    
    
    
    
    
    
    
    
    
    34,574175,248
    
    
    
    166,762
    
    
    
    4,000
    
    
    
    346,010Segment pre-tax operating income
    
    $
    33,119
    
    
    $
    29,353
    
    
    $
    (1,905
    )
    
    
    60,567Realized gains (losses) on open block assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,079Unealized gains (losses) on open block options and
trading investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,293
    )Change in option value of equity-indexed
products and market value adjustments on
total return strategy annuities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,602Cash flow hedge amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,412
    )Amortization of DAC and VOBA due to open
block gains and losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,545
    )Restructuring costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,193
    )Other income from non-insurance operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    397Income from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59,202Interest (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,799
    )Income tax (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,101
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    487Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    35,789
 23




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##### Table of Contents



Item 2.
    Managements Discussion And Analysis Of Financial Condition And
Results Of Operations The following analysis of the consolidated results of operations and
financial condition of AmerUs Group Co. should be read in conjunction with the
Consolidated Financial Statements and related notes. 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 March 31,2004
    
    2003($ in thousands, except per share data)Segment pre-tax operating income:Protection Products
    
    $
    33,091
    
    
    $
    33,119Accumulation Products
    
    
    37,000
    
    
    
    29,353Other operations
    
    
    (1,775
    )
    
    
    (1,905
    )Total segment pre-tax operating income
    
    
    68,316
    
    
    
    60,567Non-segment expense, net (A)
    
    
    35,187
    
    
    
    24,778Net income
    
    $
    33,129
    
    
    $
    35,789Diluted earnings per share
    
    $
    0.82
    
    
    $
    0.91
 March 31,
    
    December 31,2004
    
    2003Total assets
    
    $
    22,237,349
    
    
    $
    21,542,242Stockholders equity
    
    $
    1,515,220
    
    
    $
    1,409,811
  (A)
    
    Non-segment expense, net consists primarily of open block realized gains and losses, derivative
related market value 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 in the first quarter of 2004 for the protection
products segment was comparable to that of 2003. Operating segment income for
the accumulation products segment increased in the first quarter of 2004 as
compared to the same period in 2003. Protection products earnings were
primarily impacted by decreased net investment income in the first quarter of
2004 due to lower investment yields. This was partially offset by lower
operating expenses. 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 higher assets
under management. Net income decreased in the first quarter of 2004 compared to the first
quarter of 2003 primarily as a result of an impairment loss on our
Indianapolis, Indiana office building. The decrease was partially reduced by
the gain on the sale of our residential financing subsidiary. Total assets increased $695.1 million during the first quarter of 2004
primarily as a result of the utilization of securities lending and borrowing
arrangements and dollar-roll repurchase investment transactions. Stockholders
equity increased $105.4 million for the first quarter of 2004 primarily as a
result of unrealized gains on available-for-sale investments which amounted to
$69.0 million and year-to-date net income of $33.1 million. 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
$99.0 billion at March 31, 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 March 31,2004
    
    2003($ in thousands)Revenues:Insurance premiums
    
    $
    69,716
    
    
    $
    80,161Product charges
    
    
    35,459
    
    
    
    36,338Net investment income
    
    
    81,258
    
    
    
    83,746Realized gains (losses) on closed block investments
    
    
    830
    
    
    
    7,069Other income
    
    
    906
    
    
    
    1,053Total revenues
    
    
    188,169
    
    
    
    208,367Benefits and expenses:Policyowner benefits
    
    
    93,395
    
    
    
    100,668Underwriting, acquisition and other expenses
    
    
    16,958
    
    
    
    20,441Amortization of DAC and VOBA, net of open block
gain/loss adjustment
    
    
    19,241
    
    
    
    19,565Dividends to policyowners
    
    
    25,484
    
    
    
    34,574Total benefits and expenses
    
    
    155,078
    
    
    
    175,248Pre-tax operating income  Protection Products segment
    
    $
    33,091
    
    
    $
    33,119
 Pre-tax operating income from our protection products was at nearly the
same level in the first quarter of 2004 as that of 2003. Net investment income
was lower in the first quarter of 2004 due to lower investment yields. These
decreases were offset by lower operating expenses. 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 March 31,2004
    
    2003($ in thousands)Traditional life insurance:Whole life
    
    $
    5
    
    
    $
    203Interest-sensitive whole life
    
    
    3,418
    
    
    
    7,020Term life
    
    
    3,570
    
    
    
    3,712Universal life
    
    
    7,534
    
    
    
    6,940Equity-indexed life
    
    
    17,303
    
    
    
    13,477Direct
    
    
    31,830
    
    
    
    31,352Private label term life premiums
    
    
    
    
    
    
    1,937Total
    
    $
    31,830
    
    
    $
    33,289
 26




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##### Table of Contents



Direct first year annualized premiums increased 1.5% in the first quarter
of 2004 compared to 2003. We continue to focus our marketing efforts on
equity-indexed life products. In the first three months of 2004, sales of
equity-indexed life products were $17.3 million as compared to $13.5 million
for 2003 and comprised 54% of total direct sales in the first quarter of 2004
compared to 43% in the first quarter of 2003. We are a leading writer of
equity-indexed life products in the United States. 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 first quarter of 2004 as
compared to the first quarter of 2003 primarily due to lower sales of
traditional products and the continued decline in closed block in force
business. Product charge revenue was slightly lower in 2004 as compared to
2003 due to additional reinsurance. 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
quarter of 2004 compared to 7.2% in the first quarter of 2003. Our persistency
experience remained 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
decreased for the first three months of 2004 as compared to the same period a
year ago. The decrease for the quarter was primarily due to lower effective
yields as compared to 2003. The earned rate of the investment portfolio was
6.48% compared to 6.98% a year ago. The decrease in net investment income
caused by the lower yields was partially offset by the growth in protection
products assets of approximately $215 million from 2003. Mortality and Benefit Expense.Mortality is a key driver of our business
as it is a component of benefit expense. We utilize reinsurance to reduce the
effects of mortality risk. We experienced unfavorable open block mortality in
the first quarter of 2004 which was primarily offset by reinsurance. We
experienced favorable closed block mortality in the first quarter of 2004 as
compared to the same period a year ago which increased the policyowner dividend
obligation liability. 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 first quarter of 2004 compared to the
first quarter 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. 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 first quarter of 2004 compared to the
first quarter of 2003. This reduction was primarily the result of lower
realized gains on closed block investments in 2004 as compared to 2003,
decreasing 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 $11.8 billion at March 31, 2004 and
$11.7 billion at December 31, 2003. A summary of our accumulation products
segment operations follows: For The Three Months Ended March 31,2004
    
    2003($ in thousands)Revenues:Immediate annuity and supplementary contract premiums
    
    $
    723
    
    
    $
    1,183Product charges
    
    
    14,103
    
    
    
    10,493Net investment income
    
    
    174,263
    
    
    
    169,673Other income
    
    
    2,751
    
    
    
    3,075Total revenues
    
    
    191,840
    
    
    
    184,424Benefits and expenses:Policyowner benefits
    
    
    120,818
    
    
    
    129,863Underwriting, acquisition and other expenses
    
    
    7,232
    
    
    
    6,469Amortization of DAC and VOBA
    
    
    29,930
    
    
    
    20,964Total benefits and expenses
    
    
    157,980
    
    
    
    157,296IMO Operations:Other income
    
    
    14,637
    
    
    
    11,691Other expenses
    
    
    11,497
    
    
    
    9,466Net IMO operating income
    
    
    3,140
    
    
    
    2,225Pre-tax operating income  Accumulation Products segment
    
    $
    37,000
    
    
    $
    29,353
 Pre-tax operating income from our accumulation products operations
increased 26% in the first quarter of 2004 compared to 2003 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 are deposits, persistency, product spread, expenses and IMO
operations. 28




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##### Table of Contents



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: Deposits by ProductFor The Three Months Ended March 31,2004
    
    2003($ in thousands)AnnuitiesDeferred fixed annuities:Traditional fixed annuities
    
    $
    82,170
    
    
    $
    142,662Equity-indexed annuities
    
    
    296,875
    
    
    
    233,190Variable annuities
    
    
    852
    
    
    
    987Total annuities
    
    
    379,897
    
    
    
    376,839Reinsurance ceded
    
    
    (3,196
    )
    
    
    (8,068
    )Total deposits, net of reinsurance
    
    $
    376,701
    
    
    $
    368,771
 Direct annuity deposits increased 0.8% for the first quarter of 2004
compared to the same quarter a year ago. Deposits increased in the first
quarter of 2004 as compared to 2003 as we had slowed annuity production in the
first quarter of 2003 due to the low interest rate environment. We also have
shifted our product mix towards our higher returning equity-indexed annuities
resulting in equity-indexed annuities comprising 78% of total direct annuity
deposits in the first quarter of 2004 compared to 62% in the first quarter of
2003. Our wholly-owned and proprietary organizations accounted for
approximately 75% of our annuity deposits in the first quarter of 2004 compared
to 71% in the first quarter of 2003. Product Charges.The deposits we receive on accumulation products are not
recorded as revenue but instead as a policyowner liability. Surrender charges
are recorded as revenue as a product charge. Product charges increased in the
first quarter of 2004 as compared to 2003 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,
continued to improve in 2004 and amounted to 9.0% and 10.2% for the first three
months of 2004 and 2003, respectively. Annuity withdrawals without internal
replacements totaled $295.8 million and $341.8 million for the first three
months of 2004 and 2003, respectively. Our withdrawal experience remained
within our pricing assumptions. Withdrawal rates declined for the first
quarter of 2004 as compared to 2003 as our annuity products provide a favorable
investment return in this current low interest 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, the difference is 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



For The Three Months Ended March 31,2004
    
    2003Asset earned rate
    
    
    5.82
    %
    
    
    6.46
    %Liability credited rate
    
    
    3.81
    %
    
    
    4.40
    %Product spread
    
    
    2.01
    %
    
    
    2.06
    %
 The product spread, based on a rolling four quarter period, decreased five
basis points to 201 basis points in the first quarter of 2004 compared to the
first quarter of 2003. Liability crediting rates were lowered throughout 2003
and the first quarter of 2004 to correspond with the decline in investment
yields caused by lower rates on new and reinvested funds. At March 31, 2004, the account value of traditional annuities totaled $6.9
billion of which approximately 97% have minimum guarantee rates ranging from 3%
to 4%. For 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 $5.4 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 300 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 first quarter of 2004 compared to the first quarter of 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
increased $0.9 million in 2004 compared to 2003. 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 quarter
of 2004 was comparable with the first quarter of 2003. 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 March 31,2004
    
    2003Segment pre-tax operating income:Protection Products
    
    $
    33,091
    
    
    $
    33,119Accumulation Products
    
    
    37,000
    
    
    
    29,353Other operations
    
    
    (1,775
    )
    
    
    (1,905
    )Total segment pre-tax operating income
    
    
    68,316
    
    
    
    60,567Non-segment items  increases (decreases) to income:Realized and unrealized losses on assets and liabilities:Realized/unrealized gains (losses) on open block assets
    
    
    (24,730
    )
    
    
    8,079Unrealized gains (losses) on open block options and
trading investments
    
    
    23,815
    
    
    
    (7,293
    )Change in option value of equity-indexed products
and market value adjustments on total return
strategy annuities
    
    
    (23,733
    )
    
    
    8,602Cash flow hedge amortization
    
    
    (462
    )
    
    
    (1,412
    )Amortization of DAC & VOBA due to open block
realized gains and losses
    
    
    1,260
    
    
    
    (6,545
    )Restructuring costs
    
    
    
    
    
    
    (3,193
    )Other income from non-insurance operations
    
    
    (199
    )
    
    
    397Income from continuing operations
    
    
    44,267
    
    
    
    59,202Interest expense
    
    
    (8,398
    )
    
    
    (6,799
    )Income tax expense
    
    
    (6,129
    )
    
    
    (17,101
    )Net income from continuing operations
    
    
    29,740
    
    
    
    35,302Income from discontinued operations, net of tax
    
    
    3,899
    
    
    
    487Cumulative effect of change in accounting, net of tax
    
    
    (510
    )
    
    
    Net income
    
    $
    33,129
    
    
    $
    35,789
 31




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##### Table of Contents



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 result was an additional $12.2 million
pre-tax impairment loss which has been recorded in realized/unrealized capital
losses on open block assets. 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 March 31, 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 $6.2 million in the first quarter of 2004 and a loss of $9.6 million in
the first quarter of 2003. 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 gain of $17.7 million in the
first quarter of 2004 and a gain of $2.3 million in the first quarter of 2003.
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
additional expense of $23.7 million in the first quarter of 2004 and a
reduction of expense of $8.6 million in the first quarter of 2003 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. 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
quarter of 2003 included pre-tax severance and termination benefits of $0.7
million for severance accrual adjustments and other pre-tax costs of $2.5
million primarily related to systems conversion and relocation of employees.
Charges for all restructuring activities were completed in 2003. Income Tax Expense.The effective income tax rate for the first quarter
of 2004 varied from the prevailing corporate rate primarily as a result of a
reduction in the income tax accrual. The accrual reduction, amounting to $5.2
million, was for the release of provisions originally established for potential
tax adjustments which have been settled or eliminated. 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. As described in note 2 32




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to the consolidated financial statements, the cumulative effect of adopting SOP
03-1 was revised to include the impact of reinsurance related to the additional policy
reserve liabilities established under SOP 03-1. The restated 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. 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. We intend to rely primarily on dividends and interest income from our
insurance subsidiaries in order to make dividend payments to our shareholders.
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 quarter 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 March 31,
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. We may resume purchasing shares of our common stock
pursuant to the repurchase program previously approved by the Companys Board
of Directors. 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 2.3
million shares remain available for repurchase under this program. There were
no shares purchased in the first quarter of 2004. 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 33




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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 optimizing the consolidated capital structure to properly balance
the levels and sources of borrowing and the issuance of equity securities. Insurance Subsidiaries The cash flows 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. Cash outflows 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 $875 million outstanding as of March
31, 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 unless there is a default under the
agreement, but the insurance subsidiaries may terminate the agreement 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 $262 million at March 31, 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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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 March 31, 2004. In addition, ALIC has long-term
fixed rate advances from FHLB outstanding of $13 million at March 31, 2004. The insurance subsidiaries may also obtain liquidity through sales of
investments. The investment portfolio as of March 31, 2004 had a carrying value
of $19 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. 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 dollar-roll repurchase agreement transactions. Such
transactions involve the lending of a mortgage-backed security to a holding
institution and a simultaneous agreement to purchase a substantially similar
security for forward settlement at a lower dollar price. The proceeds are
invested in short-term investments at a positive spread until the settlement
date of the similar security. During this same time period, we will reflect
the mortgage-backed security sold to the holding institution as a fixed
maturity security, the cash received for such security as cash and short-term
investments, and our repurchase obligation as an other liability. The amount
outstanding to repurchase securities under dollar-roll repurchase agreements
was $63.7 million at March 31, 2004 and none at December 31, 2003. We also 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 $292.4 million and $154.6 million were on
loan under the program and we were liable for cash collateral under our control
of approximately $298.8 million and $158.8 million at March 31, 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 $141 million and none at March 31, 2004, and December 31,
2003, respectively, and are also included in accrued expenses and other
liabilities in the consolidated balance sheet. At March 31, 2004, the statutory surplus of the insurance subsidiaries was
approximately $772 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 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. 35




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PART II  OTHER INFORMATION 
 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 March 31, 2004:Form 8-K dated January 12, 2004 announcing adjusted net operating income guidance.Form 8-K dated January 27, 2004 furnishing certain information presented by Roger K. Brooks,
Chairman and CEO of the Company, at the Citigroup Smith Barney Financial Services conference.Form 8-K dated February 12, 2004 announcing the
release of fourth quarter 2003 earnings and
furnishing supplemental financial information of AmerUs Group Co.Form 8-K dated February 25, 2004 furnishing materials used in connection with the Companys
investor conference held and also presented via webcast on February 25, 2004. 36




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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)
 37




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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 filed as Exhibit 3.1 on Form
10-Q, dated November 14, 2000 is hereby incorporated by reference.3.2
    
    Amended and Restated Bylaws of the Registrant, filed as Exhibit 3.2 on
Form 10-K, dated March 15, 2002, is hereby incorporated by reference.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.
 38




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ExhibitNo.
    
    Description4.4
    
    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.
333-50249), 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.4.17
    
    Form of Purchase Agreement between AmerUs Group Co. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, filed as Exhibit 1.1 on For 8-K,
dated as of May 28, 2003, is hereby incorporated by reference.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 39