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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q   (Mark One) / x /     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 OR /    /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from  to Commission File Number 001-15166 AMERUS GROUP CO.  IOWA
    
    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 November 1, 2004 was as follows: Common Stock 39,175,969 shares Exhibit index - Page 42
Page 1 of 43




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INDEX Page No.PART I - FINANCIAL INFORMATION
    
    
    4Item 1.
    
    Financial Statements
    
    
    4Consolidated Balance Sheets September 30, 2004 (Unaudited) and December 31, 2003
    
    
    4Consolidated Statements of Income (Unaudited) For the Three and Nine Months Ended September 30, 2004 and 2003
    
    
    6Consolidated Statements of Comprehensive Income (Unaudited) For the Three and Nine Months Ended September 30, 2004 and 2003
    
    
    7Consolidated
Statements of Stockholders Equity For the Nine Months Ended September 30, 2004 (Unaudited) and the Year Ended December 31, 2003
    
    
    8Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 2004 and 2003
    
    
    9Notes to Consolidated Financial Statements (Unaudited)
    
    
    11Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 4.
    
    Controls and Procedures
    
    
    38PART II - OTHER INFORMATION
    
    
    39Item 1.
    
    Legal Proceedings
    
    
    39Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    39Item 6.
    
    Exhibits
    
    
    40Signatures
    
    
    41Index to Exhibits
    
    
    42Computation of Ratios of Earnings to Fixed ChargesCertification of Chief Executive OfficerCertification of Chief Financial Officer1350 Certification of Chief Executive Officer1350 Certification of Chief Financial Officer
  2




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SAFE HARBOR STATEMENT This Quarterly Report on Form 10-Q, including the Managements Discussion
and Analysis of Financial Condition and Results of Operations, contains
statements which constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, including statements
relating to trends in operations and financial results and the business and the
products of the Registrant and its subsidiaries, as well as other statements
including words such as anticipate, believe, plan, estimate, expect,
intend, and other similar expressions. Forward-looking statements are made
based upon managements current expectations and beliefs concerning future
developments and their potential effects on the Company. Such forward-looking
statements are not guarantees of future performance. Factors that may cause
our actual results to differ materially from those contemplated by these
forward-looking statements include, among others, the following possibilities:
(a) general economic conditions and other factors, including prevailing
interest rate levels and stock and bond market performance, which may affect
our ability to sell our products, the market value of our investments and the
lapse rate and profitability of policies; (b) our ability to achieve
anticipated levels of operational efficiencies and cost-saving initiatives and
to meet cash requirements based upon projected liquidity sources; (c) customer
response to new products, distribution channels and marketing initiatives; (d)
mortality, morbidity, and other factors which may affect the profitability of
our insurance products; (e) our ability to develop and maintain effective risk
management policies and procedures and to maintain adequate reserves for future
policy benefits and claims; (f) changes in the federal income tax and other
federal laws, regulations, and interpretations, including federal regulatory
measures that may significantly affect the insurance business including
limitations on antitrust immunity, minimum solvency requirements, and changes
to the tax advantages offered by life insurance and annuity products or
programs with which they are used; (g) increasing competition in the sale of
insurance and annuities and the recruitment of sales representatives; (h)
regulatory changes, interpretations, initiatives or pronouncements, including
those relating to the regulation of insurance companies and the regulation and
sale of their products and the programs in which they are used; (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. 3




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PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements AMERUS GROUP CO. 
   September 30,
    
    December 31,2004
    
    2003(unaudited)AssetsInvestments:Securities available-for-sale at fair value:Fixed maturity securities
    
    $
    15,181,826
    
    
    $
    13,944,961Equity securities
    
    
    76,743
    
    
    
    74,890Short-term investments
    
    
    7,017
    
    
    
    28,556Securities held for trading purposes at fair value:Fixed maturity securities
    
    
    1,754,240
    
    
    
    2,089,502Equity securities
    
    
    10,550
    
    
    
    1,652Short-term investments
    
    
    
    
    
    
    591Mortgage loans

    
    
    847,391
    
    
    
    968,572Real estate
    
    
    32
    
    
    
    33Policy loans
    
    
    485,515
    
    
    
    494,646Other investments
    
    
    279,262
    
    
    
    339,436Total investments
    
    
    18,642,576
    
    
    
    17,942,839Cash and cash equivalents
    
    
    537,673
    
    
    
    274,150Accrued investment income
    
    
    217,832
    
    
    
    205,492Premiums, fees and other receivables
    
    
    44,417
    
    
    
    42,761Reinsurance receivables
    
    
    690,114
    
    
    
    663,452Deferred policy acquisition costs
    
    
    1,184,022
    
    
    
    1,021,856Capitalized bonus interest
    
    
    118,409
    
    
    
    98,274Value of business acquired
    
    
    381,937
    
    
    
    419,582Goodwill
    
    
    226,291
    
    
    
    224,075Property and equipment
    
    
    45,582
    
    
    
    48,849Other assets
    
    
    308,398
    
    
    
    311,305Separate account assets
    
    
    242,447
    
    
    
    261,657Assets of discontinued operations
    
    
    
    
    
    
    27,950Total assets
    
    $
    22,639,698
    
    
    $
    21,542,242
 See accompanying notes to consolidated financial statements. 4




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AMERUS GROUP CO.
CONSOLIDATED BALANCE SHEETS
($ in thousands) September 30,
    
    December 31,2004
    
    2003(unaudited)Liabilities and Stockholders EquityLiabilities:Policy reserves and policyowner funds:Future life and annuity policy benefits
    
    $
    17,503,744
    
    
    $
    16,994,255Policyowner funds
    
    
    1,418,770
    
    
    
    1,306,16018,922,514
    
    
    
    18,300,415Accrued expenses and other liabilities
    
    
    845,276
    
    
    
    443,589Dividends payable to policyowners
    
    
    319,141
    
    
    
    321,233Policy and contract claims
    
    
    57,088
    
    
    
    58,880Income taxes payable
    
    
    32,104
    
    
    
    50,274Deferred income taxes
    
    
    115,674
    
    
    
    80,861Notes payable
    
    
    546,073
    
    
    
    596,101Separate account liabilities
    
    
    242,447
    
    
    
    261,657Liabilities of discontinued operations
    
    
    
    
    
    
    19,421Total liabilities
    
    
    21,080,317
    
    
    
    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; 43,942,340 shares issued and
39,113,503 shares outstanding in 2004;
43,836,608 shares issued and 39,194,602 shares
outstanding in 2003
    
    
    43,942
    
    
    
    43,836Additional paid-in capital
    
    
    1,188,526
    
    
    
    1,184,237Accumulated other comprehensive income (loss)
    
    
    113,046
    
    
    
    84,519Unearned compensation
    
    
    (1,303
    )
    
    
    (1,361
    )Retained earnings
    
    
    379,773
    
    
    
    255,006Treasury stock, at cost (4,828,837 shares in 2004
and 4,642,006 shares in 2003)
    
    
    (164,603
    )
    
    
    (156,426
    )Total stockholders equity
    
    
    1,559,381
    
    
    
    1,409,811Total liabilities and stockholders equity
    
    $
    22,639,698
    
    
    $
    21,542,242
 See accompanying notes to consolidated financial statements. 5




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AMERUS GROUP CO. 
   For The Three Months Ended September 30,
    
    For The Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003(unaudited)Revenues:Insurance premiums
    
    $
    64,582
    
    
    $
    64,355
    
    
    $
    199,110
    
    
    $
    225,597Product charges
    
    
    61,455
    
    
    
    40,634
    
    
    
    165,301
    
    
    
    136,168Net investment income
    
    
    261,988
    
    
    
    244,278
    
    
    
    770,174
    
    
    
    751,098Realized/unrealized capital gains (losses)
    
    
    2,513
    
    
    
    8,542
    
    
    
    (42,122
    )
    
    
    75,365Other income
    
    
    17,458
    
    
    
    16,848
    
    
    
    54,359
    
    
    
    50,460407,996
    
    
    
    374,657
    
    
    
    1,146,822
    
    
    
    1,238,688Benefits and expenses:Policyowner benefits
    
    
    225,572
    
    
    
    198,602
    
    
    
    632,351
    
    
    
    683,725Underwriting, acquisition and other expenses
    
    
    45,918
    
    
    
    40,734
    
    
    
    130,456
    
    
    
    114,533Restructuring costs
    
    
    
    
    
    
    1,551
    
    
    
    
    
    
    
    17,415Amortization of deferred policy acquisition costs
and value of business acquired
    
    
    45,272
    
    
    
    44,198
    
    
    
    151,461
    
    
    
    137,175Dividends to policyowners
    
    
    24,538
    
    
    
    22,016
    
    
    
    60,958
    
    
    
    86,330341,300
    
    
    
    307,101
    
    
    
    975,226
    
    
    
    1,039,178Income from continuing operations
    
    
    66,696
    
    
    
    67,556
    
    
    
    171,596
    
    
    
    199,510Interest expense
    
    
    7,810
    
    
    
    7,864
    
    
    
    24,144
    
    
    
    22,238Income before income tax expense
    
    
    58,886
    
    
    
    59,692
    
    
    
    147,452
    
    
    
    177,272Income tax expense
    
    
    16,024
    
    
    
    19,402
    
    
    
    26,074
    
    
    
    58,499Net income from continuing operations
    
    
    42,862
    
    
    
    40,290
    
    
    
    121,378
    
    
    
    118,773Income from discontinued operations, net of tax
    
    
    
    
    
    
    545
    
    
    
    3,899
    
    
    
    1,567Net income before cumulative effect of change in accounting
    
    
    42,862
    
    
    
    40,835
    
    
    
    125,277
    
    
    
    120,340Cumulative effect of change in accounting, net of tax
    
    
    
    
    
    
    
    
    
    
    (510
    )
    
    
    Net income
    
    $
    42,862
    
    
    $
    40,835
    
    
    $
    124,767
    
    
    $
    120,340Net income from continuing operations per common share:Basic
    
    $
    1.09
    
    
    $
    1.03
    
    
    $
    3.09
    
    
    $
    3.03Diluted
    
    $
    1.05
    
    
    $
    1.02
    
    
    $
    2.98
    
    
    $
    3.01Net income per common share:Basic
    
    $
    1.09
    
    
    $
    1.04
    
    
    $
    3.17
    
    
    $
    3.07Diluted
    
    $
    1.05
    
    
    $
    1.03
    
    
    $
    3.07
    
    
    $
    3.05Weighted average common shares outstanding:Basic
    
    
    39,237,840
    
    
    
    39,208,151
    
    
    
    39,307,268
    
    
    
    39,144,872Diluted
    
    
    40,768,893
    
    
    
    39,650,473
    
    
    
    40,667,066
    
    
    
    39,453,126
 See accompanying notes to consolidated financial statements. 6




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AMERUS GROUP CO. 
   For The Three Months Ended September 30,
    
    For The Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003(unaudited)Net income
    
    $
    42,862
    
    
    $
    40,835
    
    
    $
    124,767
    
    
    $
    120,340Other comprehensive income (loss), before tax:Unrealized gains (losses) on securities:Unrealized holding gains (losses) arising during period
    
    
    145,117
    
    
    
    (46,732
    )
    
    
    14,369
    
    
    
    84,644Less: Reclassification adjustment for gains (losses)
included in net income
    
    
    5,415
    
    
    
    27,370
    
    
    
    (29,519
    )
    
    
    45,143Other comprehensive income (loss), before tax
    
    
    139,702
    
    
    
    (74,102
    )
    
    
    43,888
    
    
    
    39,501Income tax (expense) benefit related to items of other
comprehensive income
    
    
    (48,896
    )
    
    
    25,936
    
    
    
    (15,361
    )
    
    
    (13,826
    )90,806
    
    
    
    (48,166
    )
    
    
    28,527
    
    
    
    25,675Comprehensive income (loss)
    
    $
    133,668
    
    
    $
    (7,331
    )
    
    $
    153,294
    
    
    $
    146,015
 See accompanying notes to consolidated financial statements. 7




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AMERUS GROUP CO. 
    AccumulatedAdditional
    
    Other
    
    
    
    
    
    Unallocated
    
    
    
    
    
    
    
    
    
    TotalPaid-In
    
    Comprehensive
    
    Unearned
    
    ESOP
    
    Retained
    
    Treasury
    
    StockholdersCommon Stock
    
    Capital
    
    Income (Loss)
    
    Compensation
    
    Shares
    
    Earnings
    
    Stock
    
    EquityBalance at December 31, 2002
    
    $
    43,656
    
    
    $
    1,179,646
    
    
    $
    88,522
    
    
    $
    (458
    )
    
    $
    (1,443
    )
    
    $
    109,517
    
    
    $
    (156,492
    )
    
    $
    1,262,9482003:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    161,147
    
    
    
    
    
    
    
    161,147Net unrealized gain (loss) on securities
    
    
    
    
    
    
    
    
    
    
    1,971
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,971Net unrealized gain (loss) on derivatives
designated as cash flow hedges
    
    
    
    
    
    
    
    
    
    
    2,476
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,476Change in accounting transfer of unrealized gain
on available-for-sale securities to trading
    
    
    
    
    
    
    
    
    
    
    (5,204
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,204
    )Stock issued under various incentive
plans, net of forfeitures
    
    
    180
    
    
    
    11,717
    
    
    
    
    
    
    
    (903
    )
    
    
    
    
    
    
    
    
    
    
    66
    
    
    
    11,060PRIDES purchase contract adjustments
and allocated fees and expenses
    
    
    
    
    
    
    (7,280
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,280
    )Dividends declared on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,658
    )
    
    
    
    
    
    
    (15,658
    )Allocation of shares in leveraged ESOP
    
    
    
    
    
    
    154
    
    
    
    
    
    
    
    
    
    
    
    1,443
    
    
    
    
    
    
    
    
    
    
    
    1,597Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    (3,246
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,246
    )Balance at December 31, 2003
    
    
    43,836
    
    
    
    1,184,237
    
    
    
    84,519
    
    
    
    (1,361
    )
    
    
    
    
    
    
    255,006
    
    
    
    (156,426
    )
    
    
    1,409,8112004 (unaudited):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124,767
    
    
    
    
    
    
    
    124,767Net unrealized gain (loss) on securities
    
    
    
    
    
    
    
    
    
    
    28,016
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,016Net unrealized gain (loss) on derivatives
designated as cash flow hedges
    
    
    
    
    
    
    
    
    
    
    511
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    511Stock issued under various incentive
plans, net of forfeitures
    
    
    106
    
    
    
    4,289
    
    
    
    
    
    
    
    58
    
    
    
    
    
    
    
    
    
    
    
    976
    
    
    
    5,429Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,153
    )
    
    
    (9,153
    )Balance at September 30, 2004
    
    $
    43,942
    
    
    $
    1,188,526
    
    
    $
    113,046
    
    
    $
    (1,303
    )
    
    $
    
    
    
    $
    379,773
    
    
    $
    (164,603
    )
    
    $
    1,559,381
 See accompanying notes to consolidated financial statements. 8




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AMERUS GROUP CO. 
   For The Nine Months Ended September 30,2004
    
    2003(unaudited)Cash flows from operating activitiesNet income
    
    $
    124,767
    
    
    $
    120,340Adjustments 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
    
    
    (165,301
    )
    
    
    (136,168
    )Interest credited to policyowner account
balances
    
    
    356,201
    
    
    
    357,606Change in option value of equity indexed products
and market value adjustments on total
return strategy annuities
    
    
    (5,926
    )
    
    
    22,527Realized/unrealized capital (gains) losses
    
    
    42,122
    
    
    
    (75,365
    )DAC and VOBA amortization
    
    
    151,461
    
    
    
    137,175DAC and VOBA capitalized
    
    
    (276,886
    )
    
    
    (262,920
    )Change in:Accrued investment income
    
    
    (12,340
    )
    
    
    (12,855
    )Reinsurance receivables
    
    
    (71,970
    )
    
    
    279,984Securities held for trading purposes:Fixed maturities
    
    
    325,145
    
    
    
    44,166Equity securities
    
    
    (8,952
    )
    
    
    (473
    )Short-term investments
    
    
    579
    
    
    
    Liabilities for future policy benefits
    
    
    22,420
    
    
    
    (245,130
    )Accrued expenses and other liabilities
    
    
    401,684
    
    
    
    530,153Policy and contract claims and other
policyowner funds
    
    
    112,784
    
    
    
    46,069Income taxes:Current
    
    
    (20,740
    )
    
    
    (30,051
    )Deferred
    
    
    19,508
    
    
    
    53,425Other, net
    
    
    27,857
    
    
    
    21,802Net cash provided by operating activities
    
    
    1,019,024
    
    
    
    850,285Cash flows from investing activities:Purchase of fixed maturities available-for-sale
    
    
    (4,271,467
    )
    
    
    (9,308,393
    )Proceeds from sale of fixed maturities available-for-sale
    
    
    2,115,844
    
    
    
    6,615,403Maturities, calls and principal reductions of
fixed maturities available-for-sale
    
    
    921,812
    
    
    
    2,027,662Purchase of equity securities
    
    
    (43,053
    )
    
    
    (8,267
    )Proceeds from sale of equity securities
    
    
    42,036
    
    
    
    13,695Change in short-term investments, net
    
    
    28,691
    
    
    
    4,595Purchase of mortgage loans
    
    
    (86,676
    )
    
    
    (143,567
    )
 9




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AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS  (Continued)
($ in thousands) For The Nine Months Ended September 30,2004
    
    2003(unaudited)Proceeds from repayment and sale of mortgage loans
    
    
    214,816
    
    
    
    92,414Purchase of real estate and other invested assets
    
    
    (55,512
    )
    
    
    (339,763
    )Proceeds from sale of real estate and other
invested assets
    
    
    104,977
    
    
    
    226,853Change in policy loans, net
    
    
    9,131
    
    
    
    5,241Proceeds from sale of discontinued operations
    
    
    15,000
    
    
    
    Other assets, net
    
    
    (3,652
    )
    
    
    (3,464
    )Net cash used in investing activities
    
    
    (1,008,053
    )
    
    
    (817,591
    )Cash flows from financing activities:Deposits to policyowner account balances
    
    
    1,655,736
    
    
    
    1,684,637Withdrawals from policyowner account balances
    
    
    (1,349,432
    )
    
    
    (1,182,474
    )Change in debt, net
    
    
    (50,028
    )
    
    
    (102,433
    )Stock issued under various incentive plans, net of
forfeitures
    
    
    5,429
    
    
    
    10,051Purchase of treasury stock
    
    
    (9,153
    )
    
    
    Proceeds from issuance of PRIDES
    
    
    
    
    
    
    136,483Adoption and allocation of shares in leveraged ESOP
    
    
    
    
    
    
    37Net cash provided by financing activities
    
    
    252,552
    
    
    
    546,301Net increase in cash
    
    
    263,523
    
    
    
    578,995Cash and cash equivalents at beginning of period
    
    
    274,150
    
    
    
    102,612Cash and cash equivalents at end of period
    
    $
    537,673
    
    
    $
    681,607Supplemental disclosure of cash activities:Interest paid
    
    $
    23,947
    
    
    $
    29,642Income taxes paid
    
    $
    28,281
    
    
    $
    15,102Supplemental disclosure of non-cash operating activities:Capitalization of bonus interest
    
    $
    38,130
    
    
    $
    31,768
 See accompanying notes to consolidated financial statements. 10




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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 nine months ended September 30, 2004 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. The consolidated balance sheet at December 31, 2003
has been derived from the audited financial statements at that date but does
not include all of the information and footnotes required by GAAP for complete
financial statements. For further information and for capitalized terms not
defined in this Form 10-Q, refer to the consolidated financial statements and
notes thereto included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2003. The accompanying consolidated financial statements include the accounts
and operations of the Company and its wholly-owned subsidiaries, principally
AmerUs Life Insurance Company (ALIC), AmerUs Annuity Group Co. and its
subsidiaries (collectively, AAG), AmerUs Capital Management Group, Inc. (ACM),
and ILICO Holdings, Inc., the holding company of Indianapolis Life Insurance
Company (ILIC) and its subsidiaries (collectively, ILICO). All significant
intercompany transactions and balances have been eliminated in consolidation. The Company has certain stock-based employee compensation plans which are
accounted for under the recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations. The plans are stock option plans for which no stock-based
employee compensation cost is reflected in net income, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of Statement of Financial Accounting
Standards (SFAS) 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation: For The Three Months Ended September 30,
    
    For The Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003($ in thousand, except share data)Net income, as reported
    
    $
    42,862
    
    
    $
    40,835
    
    
    $
    124,767
    
    
    $
    120,340Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
    
    
    (926
    )
    
    
    (1,014
    )
    
    
    (3,007
    )
    
    
    (3,092
    )Pro forma net income
    
    $
    41,936
    
    
    $
    39,821
    
    
    $
    121,760
    
    
    $
    117,248Earnings per share:Basic - as reported
    
    $
    1.09
    
    
    $
    1.04
    
    
    $
    3.17
    
    
    $
    3.07Basic - pro forma
    
    $
    1.07
    
    
    $
    1.02
    
    
    $
    3.10
    
    
    $
    3.00Diluted - as reported
    
    $
    1.05
    
    
    $
    1.03
    
    
    $
    3.07
    
    
    $
    3.05Diluted - pro forma
    
    $
    1.03
    
    
    $
    1.00
    
    
    $
    2.99
    
    
    $
    2.97
 11




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##### Table of Contents



Certain amounts in the 2003 financial statements have been reclassified to
conform to the 2004 financial statement presentation. (2) EARNINGS PER SHARE Basic earnings per share of common stock are computed by dividing net
income by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share assumes the issuance of common shares
applicable to stock options calculated using the treasury stock method. Diluted earnings per share applicable to the Companys Optionally
Convertible Equity-linked Accreting Notes (OCEANsSM) are determined using the
if-converted method for the number of days in the period in which the common
stock price conversion condition is met. The common stock price conversion
condition was not met for the nine months ended September 30, 2004 and 2003.
No undistributed net income has been allocated to the convertible securities
holders since their participation in dividends with common stockholders is
limited to the amount of the annual regular dividend. Diluted
earnings per share applicable to the Companys PRIDESSM securities
are determined using the treasury stock method as it is currently anticipated
that holders of the PRIDES are more likely to tender cash in the future for the
securities forward contract. The PRIDES added 859,038 and 720,035 shares to
the diluted earnings per share calculation for the three and nine months ended
September 30, 2004, respectively. (3) CLOSED BLOCK The Company has established two closed blocks, which we refer to as the
Closed Block. The first was established on June 30, 1996 in connection with
the reorganization of ALIC from a mutual company to a stock company. The
second was established as of March 31, 2000 in connection with the
reorganization of ILIC from a mutual company to a stock company. Insurance
policies which had a dividend scale in effect as of each Closed Block
establishment date were included in the Closed Block. The Closed Block was
designed to provide reasonable assurance to owners of insurance policies
included therein that, after the reorganization of ALIC and ILIC, assets would
be available to maintain the dividend scales and interest credits in effect
prior to the reorganization if the experience underlying such scales and
credits continues. Summarized financial information of the Closed Block as of September 30,
2004 and December 31, 2003 and for the three months and nine months ended
September 30, 2004 and 2003 are as follows: 12




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##### Table of Contents



September 30,
    
    December 31,2004
    
    2003($ in thousands)Liabilities:Future life and annuity policy benefits
    
    $
    2,806,307
    
    
    $
    2,845,365Policyowner funds
    
    
    8,466
    
    
    
    9,232Accrued expenses and other liabilities
    
    
    69,894
    
    
    
    44,473Dividends payable to policyowners
    
    
    163,157
    
    
    
    173,703Policy and contract claims
    
    
    12,020
    
    
    
    22,694Policyowner dividend obligation
    
    
    145,062
    
    
    
    134,386Total Liabilities
    
    
    3,204,906
    
    
    
    3,229,853Assets:Fixed maturity securities available-for-sale at fair value
    
    
    2,009,231
    
    
    
    2,027,177Mortgage loans
    
    
    74,594
    
    
    
    80,170Policy loans
    
    
    337,667
    
    
    
    346,823Cash and cash equivalents
    
    
    6,110
    
    
    
    3,492Accrued investment income
    
    
    32,383
    
    
    
    32,629Premiums and fees receivable
    
    
    104,331
    
    
    
    55,134Other assets
    
    
    17
    
    
    
    17Total Assets
    
    
    2,564,333
    
    
    
    2,545,442Maximum future earnings to be recognized from assets and
liabilities of the Closed Block
    
    $
    640,573
    
    
    $
    684,411
 For The Three Months Ended September 30,2004
    
    2003($ in thousands)Operations:Insurance premiums
    
    $
    45,859
    
    
    $
    43,037Product charges
    
    
    1,966
    
    
    
    1,560Net investment income
    
    
    36,974
    
    
    
    37,350Realized gains (losses) on investments
    
    
    1,910
    
    
    
    3,915Policyowner benefits
    
    
    (54,314
    )
    
    
    (55,427
    )Underwriting, acquisition and other expenses
    
    
    (678
    )
    
    
    (744
    )Dividends to policyowners
    
    
    (22,651
    )
    
    
    (19,962
    )Contribution from the Closed Block before income taxes
    
    $
    9,066
    
    
    $
    9,729
 For The Nine Months Ended September 30,2004
    
    2003($ in thousands)Operations:Insurance premiums
    
    $
    143,138
    
    
    $
    160,853Product charges
    
    
    3,368
    
    
    
    7,784Net investment income
    
    
    108,943
    
    
    
    114,666Realized/unrealized gains (losses) on investments
    
    
    (1,732
    )
    
    
    11,259Policyowner benefits
    
    
    (167,981
    )
    
    
    (183,946
    )Underwriting, acquisition and other expenses
    
    
    (2,684
    )
    
    
    (2,991
    )Dividends to policyowners
    
    
    (55,069
    )
    
    
    (77,611
    )Contribution from the Closed Block before income taxes
    
    $
    27,983
    
    
    $
    30,014
 13




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##### Table of Contents



(4) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company accounts for derivatives, including certain derivative
instruments embedded in other contracts, at fair value. Accounting for gains
and losses resulting from changes in the values of derivatives is dependent
upon the use of the derivative and its qualification for special hedge
accounting. In addition, we also have trading securities that back our total
return strategy traditional annuity products. During the first nine months of
2004 and 2003, realized/unrealized capital gains (losses) included an
unrealized loss of $4.9 million and an unrealized gain of $10.8 million,
respectively, from the change in fair value on the trading securities primarily
backing the total return strategy products. Additionally, the first nine
months of 2004 and 2003 included an unrealized loss of $5.3 million and an
unrealized gain of $23.0 million, respectively, from the change in fair value
on call options used as a natural hedge of embedded options within equity
indexed products. Policyowner benefits included an offsetting adjustment to
contract liabilities for fair value changes in options embedded within the
equity indexed products and fair value changes on total return strategy annuity
contracts amounting to a decrease in expense of $5.9 million and an increase in
expense of $22.5 million for the first nine months of 2004 and 2003,
respectively. In 2002, the Company undesignated a cash flow hedge and is now
amortizing the amount in accumulated other comprehensive income (AOCI) to
earnings over the remaining life of the swap, which amounted to $1.0 and $3.2
million in expense in the first nine months of 2004 and 2003, respectively.
The Company estimates that less than $0.1 million of after-tax derivative
losses, included in AOCI, will be reclassified into earnings within the next
twelve months. AOCI included an unrealized gain of $0.5 million and $2.2
million from the fair value change in interest rate swaps used to hedge the
floating rate funding agreement liability during the first nine months of 2004
and 2003, respectively. The following table summarizes the income (loss) impact of the market
value adjustments on trading securities, derivatives and the cash flow hedge
amortization for the nine months ended September 30, 2004 and 2003: 14




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##### Table of Contents



For the Nine Months Ended September 30, 2004Total Return
    
    Equity LinkedProducts
    
    Products
    
    Other
    
    Total($ in thousands)Fixed maturity securities held for trading
    
    $
    (4,511
    )
    
    $
    
    
    
    $
    (419
    )
    
    $
    (4,930
    )Options
    
    
    
    
    
    
    (2,606
    )
    
    
    (2,717
    )
    
    
    (5,323
    )Market value adjustment to liabilities
    
    
    (2,480
    )
    
    
    7,400
    
    
    
    1,006
    
    
    
    5,926Cash flow hedge amortization
    
    
    
    
    
    
    
    
    
    
    (953
    )
    
    
    (953
    )DAC amortization impact of
net adjustments above
    
    
    
    
    
    
    (2,199
    )
    
    
    
    
    
    
    (2,199
    )Pre-tax total
    
    
    (6,991
    )
    
    
    2,595
    
    
    
    (3,083
    )
    
    
    (7,479
    )Income taxes
    
    
    2,447
    
    
    
    (908
    )
    
    
    1,079
    
    
    
    2,618After-tax total
    
    $
    (4,544
    )
    
    $
    1,687
    
    
    $
    (2,004
    )
    
    $
    (4,861
    )
 For the Nine Months Ended September 30, 2003Total Return
    
    Equity LinkedProducts
    
    Products
    
    Other
    
    Total($ in thousands)Fixed maturity securities held for trading
    
    $
    9,609
    
    
    $
    
    
    
    $
    1,230
    
    
    $
    10,839Options
    
    
    
    
    
    
    19,729
    
    
    
    3,231
    
    
    
    22,960Market value adjustment to liabilities
    
    
    (5,871
    )
    
    
    (16,656
    )
    
    
    
    
    
    
    (22,527
    )Cash flow hedge amortization
    
    
    
    
    
    
    
    
    
    
    (3,241
    )
    
    
    (3,241
    )DAC amortization impact of
net adjustments above
    
    
    (576
    )
    
    
    (1,472
    )
    
    
    (771
    )
    
    
    (2,819
    )Pre-tax total
    
    
    3,162
    
    
    
    1,601
    
    
    
    449
    
    
    
    5,212Income taxes
    
    
    (1,108
    )
    
    
    (559
    )
    
    
    (157
    )
    
    
    (1,824
    )After-tax total
    
    $
    2,054
    
    
    $
    1,042
    
    
    $
    292
    
    
    $
    3,388
 (5) FEDERAL INCOME TAXES The effective income tax rate for the nine months ending September 30,
2004 and 2003 varied from the prevailing corporate rate primarily as a result
of tax exempt interest and dividends received deduction. The effective tax
rate for the nine months ending September 30, 2004 was also reduced by a
reduction in the income tax accrual and a change in the deferred tax asset
valuation allowance. The accrual reduction, amounting to $3.7 million in the
third quarter of 2004 represents an overpayment of tax in prior years for which
a refund is expected. There were also accrual reductions of $7.9 million in
the first six months of 2004, for the release of provisions originally
established for potential tax adjustments which have been settled or
eliminated. In addition, during the second quarter of 2004, a deferred tax
valuation allowance was reduced $10.4 million as a result of the realization of
capital loss carry forwards. (6) COMMITMENTS AND CONTINGENCIES In recent years, the life insurance industry, including the Company and
its subsidiaries, have been subject to an increase in litigation pursued on
behalf of purported classes of insurance purchasers, questioning the conduct of
insurers in the marketing of their products. The Company is routinely involved
in litigation and other proceedings, including class actions (such as pending
class action lawsuits related to the use of purportedly inappropriate sales
techniques and products for the senior market), reinsurance claims and
regulatory proceedings arising in the ordinary course of its business. Some of
these claims and legal actions are in jurisdictions where juries are given
substantial latitude in assessing damages, including punitive and exemplary
damages. In addition, regulatory bodies, such as state insurance departments
and attorneys general, periodically make inquiries and conduct examinations 15




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##### Table of Contents



concerning our compliance with insurance and other laws. We respond to such
inquiries and cooperate with regulatory examinations in the ordinary course of
business. Our litigation is subject to many uncertainties, and given its complexity
and scope, the outcomes cannot be predicted. It is possible that our results
of operations or cash flow in a particular quarterly or annual period could be
materially affected by an ultimate unfavorable resolution of pending litigation
and regulatory matters depending, in part, upon the results of operations or
cash flow for such period. Management believes, however, that the ultimate
outcome of all pending litigation and regulatory matters,
after consideration of applicable reserves, should not have a material adverse
effect on our financial position. (7) EMPLOYEE BENEFIT PLANS The Company has a frozen defined benefit pension plan and also has defined
benefit plans which provide supplemental retirement benefits to certain agents
and executives. In addition to pension benefits, the Company also provides
certain health care and life insurance benefits for retired employees. The
following is a summary of net periodic benefit cost for these plans for the
nine months ended September 30, 2004 and 2003: Nine Months Ended September 30,2004
    
    2003($ in thousands)Components of net periodic benefit cost:Service cost
    
    $
    200
    
    
    $
    212Interest cost
    
    
    4,595
    
    
    
    4,649Expected return on plan assets
    
    
    (3,642
    )
    
    
    (3,679
    )Amortization of prior service cost
    
    
    66
    
    
    
    30Amortization of actuarial loss
    
    
    191
    
    
    
    33Net periodic benefit cost
    
    
    1,410
    
    
    
    1,245Curtailment
    
    
    (951
    )
    
    
    Total (income) expense
    
    $
    459
    
    
    $
    1,245
 During the first nine months of 2004, a gain of $1.0 million was
recognized as a result of curtailing health care and life insurance benefits
associated with the sale of the discontinued operations in January 2004. On December 8, 2003, President Bush signed the Medicare Prescription Drug,
Improvement and Modernization Act into law. This law provides for a federal
subsidy to sponsors of retiree health care benefit plans that provide a
prescription drug benefit that is at least actuarially equivalent to the
benefit established by the law. The Company has determined that the drug
benefits provided under the postretirement benefits program for Medicare
eligible retirees are not actuarially equivalent to the benefit established by
law, and therefore the Company will not be eligible to receive the federal
subsidy. (8) ASSETS HELD FOR SALE The Company listed its office building located in Indianapolis, Indiana,
with a real estate broker during the second quarter of 2003. On June 30, 2003,
the Company determined that the plan of sale criteria in SFAS 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, had been met. 16




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##### Table of Contents



Accordingly, the carrying value of the building was adjusted to its estimated fair value less costs to sell,
amounting to $15.5 million, which was based upon comparable properties marketed in Indianapolis at that time.
The resulting $7.7 million pre-tax impairment loss was recorded as a restructuring cost in the consolidated
statement of income in the second quarter of 2003. As provided by SFAS 144, the Company determined in the first quarter of 2004 that the fair value of the
building required further adjustment based on prevailing market conditions for the property which extended the
time required to sell the building. The resulting change in fair value of the building was an additional $12.2
million pre-tax impairment loss which was recorded in realized/unrealized capital losses in the consolidated
statement of income. During the third quarter of 2004, the building was sold and a realized capital gain of $0.4
million has been included in realized/unrealized capital losses. The carrying value of the building held for
sale was included in the other assets line item of the consolidated balance sheet and amounted to $15.5 million
at December 31, 2003. (9) DISCONTINUED OPERATIONS In November 2003, the Company entered into an agreement to sell a
wholly-owned subsidiary which conducts residential financing operations. The
assets, liabilities and results of the residential financing operations have
been classified as discontinued operations. The sale was completed in January
2004, resulting in an after-tax gain of $3.9 million. Income from discontinued
operations net of tax was as follows: For The Three Months Ended September 30,
    
    For The Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003($ in thousands, except share data)Operating income from discontinued operations, net of
income taxes of $364 and $1,046 for third quarter and
year to date 2003, respectively
    
    $
    
    
    
    $
    545
    
    
    $
    
    
    
    $
    1,567Gain on sale of discontinued operations, net of
income taxes of $2,571 in 2004
    
    
    
    
    
    
    
    
    
    
    3,899
    
    
    
    $
    
    
    
    $
    545
    
    
    $
    3,899
    
    
    $
    1,567Net income from discontinued operations per common share:Basic
    
    $
    
    
    
    $
    0.01
    
    
    $
    0.10
    
    
    $
    0.04Diluted
    
    $
    
    
    
    $
    0.01
    
    
    $
    0.10
    
    
    $
    0.04Weighted average common shares outstanding:Basic
    
    
    39,237,840
    
    
    
    39,208,151
    
    
    
    39,307,268
    
    
    
    39,144,872Diluted
    
    
    40,768,893
    
    
    
    39,650,473
    
    
    
    40,667,066
    
    
    
    39,453,126
 (10) ADOPTION OF SOP 03-1 Effective January 1, 2004, the Company adopted Statement of Position 03-1
(SOP 03-1), Accounting and Reporting by Insurance Enterprises for Certain
Non-Traditional Long-Duration Insurance Contracts and for Separate Accounts,
issued by the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants. The adoption of SOP 03-1 resulted
in establishing additional policy reserve liabilities for fees charged for
insurance benefit features which are assessed in a manner that is expected to
result in profits in earlier years and losses in subsequent years. The total
effect of adopting SOP 03-1 (including reinsurance recoverables) as of January
1, 2004 and the establishment of reinsurance recoveries, amounted to a decrease
of $0.8 million ($0.5 million after-tax) in
net income which has been reflected as a cumulative effect of a change in
accounting. The basic and diluted earnings per common share for the change in
accounting amounted to $0.01 for the nine months ended September 30, 2004. 17




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##### Table of Contents



In addition, the adoption of SOP 03-1 established guidance for the
accounting and presentation of costs related to sales inducements. There was
no change to the Companys method of accounting for sales inducements; however,
the capitalized costs are now separately disclosed in the consolidated balance
sheet and the related amortization expense is included in policyowner benefits
in the consolidated statement of income. Prior to 2004, the capitalized costs
were included in deferred policy acquisition costs and the amortization expense
was included in the amortization of deferred policy acquisition costs. The
2003 amounts have been reclassified to conform with the 2004 presentation. (11) EARNINGS PER SHARE For The Three Months Ended September 30,2004
    
    2003Number of
    
    Per Share
    
    
    
    
    
    Number of
    
    Per ShareNet Income
    
    Shares
    
    Amount
    
    Net Income
    
    Shares
    
    Amount($ in thousands, except per share amounts)Basic EPSNet income from continuing operations
    
    $
    42,862
    
    
    
    39,238
    
    
    $
    1.09
    
    
    $
    40,290
    
    
    
    39,208
    
    
    $
    1.03Effect of dilutive securitiesOptions
    
    
    
    
    
    
    672
    
    
    
    (0.02
    )
    
    
    
    
    
    
    442
    
    
    
    (0.01
    )PRIDES
    
    
    
    
    
    
    859
    
    
    
    (0.02
    )
    
    
    
    
    
    
    
    
    
    
    Diluted EPS
    
    $
    42,862
    
    
    
    40,769
    
    
    $
    1.05
    
    
    $
    40,290
    
    
    
    39,650
    
    
    $
    1.02
 For The Nine Months Ended September 30,2004
    
    2003Number of
    
    Per Share
    
    
    
    
    
    Number of
    
    Per ShareNet Income
    
    Shares
    
    Amount
    
    Net Income
    
    Shares
    
    Amount($ in thousands, except per share amounts)Basic EPSNet income from continuing operations
    
    $
    121,378
    
    
    
    39,307
    
    
    $
    3.09
    
    
    $
    118,773
    
    
    
    39,145
    
    
    $
    3.03Effect of dilutive securitiesOptions
    
    
    
    
    
    
    640
    
    
    
    (0.05
    )
    
    
    
    
    
    
    308
    
    
    
    (0.02
    )PRIDES
    
    
    
    
    
    
    720
    
    
    
    (0.06
    )
    
    
    
    
    
    
    
    
    
    
    Diluted EPS
    
    $
    121,378
    
    
    
    40,667
    
    
    $
    2.98
    
    
    $
    118,773
    
    
    
    39,453
    
    
    $
    3.01
 (12) ACCOUNTING DEVELOPMENTS The Financial Accounting Standards Boards Emerging Issues Task Force
(EITF) has reached a final consensus on EITF No. 04-8, The Effect of
Contingently Convertible Debt on Diluted Earnings Per Share, that contingently
convertible debt instruments are subject to the if-converted method for
earnings per share calculations regardless of whether the instrument has met
its contingent conversion features. The change in method will result in
additional diluted shares both historically and prospectively. The EITF
concluded that its consensus would have the same transition as the upcoming
amendment to FASB Statement No. 128, Earnings per Share. That amendment is
expected to be effective for periods ending after December 15, 2004. As a
result, our OCEANs are subject to the new earnings per share 18




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##### Table of Contents



guidance of the
EITF. The Company plans to have an exchange offering in the fourth quarter of
2004 to offer to replace the OCEANs. This offer, if successful,
should reduce the dilutive impact of the EITF. (13) 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:  1)
    
    Realized/unrealized 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 unrealized and
realized gains and losses on the open block investments and the
derivative adjustments.4)
    
    Restructuring costs.5)
    
    Certain reinsurance adjustments.6)
    
    Other income from non-insurance operations.7)
    
    Interest expense.8)
    
    Income tax expense.9)
    
    Income from discontinued operations.10)
    
    Cumulative effect of change in accounting. These items will fluctuate from period to period depending on the
prevailing interest rate and economic environment or are not part of the core
insurance operations. As a result, management believes they do not reflect the
ongoing earnings capacity of the Companys operating segments. 19




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##### Table of Contents



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. 20




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##### Table of Contents



Operating Segment Income
($ in thousands) Three Months Ended September 30, 2004Protection
    
    Accumulation
    
    
    
    
    
    TotalProducts
    
    Products
    
    All Other
    
    ConsolidatedRevenues:Insurance premiums
    
    $
    62,829
    
    
    $
    541
    
    
    $
    1,212
    
    
    $
    64,582Product charges
    
    
    45,029
    
    
    
    16,426
    
    
    
    
    
    
    
    61,455Net investment income
    
    
    83,909
    
    
    
    177,599
    
    
    
    480
    
    
    
    261,988Realized/unrealized gains (losses) on closed
block investments
    
    
    1,911
    
    
    
    
    
    
    
    
    
    
    
    1,911Other income
    
    
    810
    
    
    
    16,144
    
    
    
    529
    
    
    
    17,483194,488
    
    
    
    210,710
    
    
    
    2,221
    
    
    
    407,419Benefits and expenses:Policyowner benefits
    
    
    96,350
    
    
    
    121,073
    
    
    
    380
    
    
    
    217,803Underwriting, acquisition, and other expenses
    
    
    18,134
    
    
    
    21,739
    
    
    
    6,045
    
    
    
    45,918Amortization of DAC and VOBA, net of
open block loss adjustment of $2,495
    
    
    21,443
    
    
    
    26,324
    
    
    
    
    
    
    
    47,767Dividends to policyowners
    
    
    24,537
    
    
    
    1
    
    
    
    
    
    
    
    24,538160,464
    
    
    
    169,137
    
    
    
    6,425
    
    
    
    336,026Segment pre-tax operating income
    
    $
    34,024
    
    
    $
    41,573
    
    
    $
    (4,204
    )
    
    
    71,393Realized/unrealized gains (losses) on open block assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,443Unrealized gains (losses) on open block options and
trading investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,841
    )Change in option value of equity indexed
products and market value adjustments on
total return strategy annuities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,629
    )Cash flow hedge amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (140
    )Amortization of DAC and VOBA due to open
block gains and losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,495Other income from non-insurance operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25
    )Income from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66,696Interest (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,810
    )Income tax (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,024
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    42,862
 21




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##### Table of Contents



Operating Segment Income
($ in thousands) Three Months Ended September 30, 2003Protection
    
    Accumulation
    
    
    
    
    
    TotalProducts
    
    Products
    
    All Other
    
    ConsolidatedRevenues:Insurance premiums
    
    $
    62,640
    
    
    $
    1,482
    
    
    $
    233
    
    
    $
    64,355Product charges
    
    
    28,770
    
    
    
    11,864
    
    
    
    
    
    
    
    40,634Net investment income
    
    
    76,412
    
    
    
    166,355
    
    
    
    1,511
    
    
    
    244,278Realized/unrealized gains (losses) on closed
block investments
    
    
    3,915
    
    
    
    
    
    
    
    
    
    
    
    3,915Other income
    
    
    1,037
    
    
    
    15,549
    
    
    
    169
    
    
    
    16,755172,774
    
    
    
    195,250
    
    
    
    1,913
    
    
    
    369,937Benefits and expenses:Policyowner benefits
    
    
    85,628
    
    
    
    117,597
    
    
    
    (704
    )
    
    
    202,521Underwriting, acquisition, and other expenses
    
    
    17,608
    
    
    
    19,537
    
    
    
    3,589
    
    
    
    40,734Amortization of DAC and VOBA, net of
open block gain adjustment of $2,347
    
    
    18,938
    
    
    
    22,913
    
    
    
    
    
    
    
    41,851Dividends to policyowners
    
    
    22,016
    
    
    
    
    
    
    
    
    
    
    
    22,016144,190
    
    
    
    160,047
    
    
    
    2,885
    
    
    
    307,122Segment pre-tax operating income
    
    $
    28,584
    
    
    $
    35,203
    
    
    $
    (972
    )
    
    
    62,815Realized/unrealized gains (losses) on open block assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,855Unrealized gains (losses) on open block options and
trading investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,228
    )Change in option value of equity indexed
products and market value adjustments on
total return strategy annuities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,682Cash flow hedge amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (763
    )Amortization of DAC and VOBA due to open
block gains and losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,347
    )Restructuring costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,551
    )Other income from non-insurance operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93Income from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,556Interest (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,864
    )Income tax (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,402
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    545Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    40,835
 22




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##### Table of Contents



Operating Segment Income
($ in thousands) Nine Months Ended September 30, 2004Protection
    
    Accumulation
    
    
    
    
    
    TotalProducts
    
    Products
    
    All Other
    
    ConsolidatedRevenues:Insurance premiums
    
    $
    194,972
    
    
    $
    2,123
    
    
    $
    2,015
    
    
    $
    199,110Product charges
    
    
    122,128
    
    
    
    43,173
    
    
    
    
    
    
    
    165,301Net investment income
    
    
    246,353
    
    
    
    520,080
    
    
    
    3,741
    
    
    
    770,174Realized/unrealized gains (losses) on closed
block investments
    
    
    (1,732
    )
    
    
    
    
    
    
    
    
    
    
    (1,732
    )Other income
    
    
    2,644
    
    
    
    48,579
    
    
    
    2,000
    
    
    
    53,223564,365
    
    
    
    613,955
    
    
    
    7,756
    
    
    
    1,186,076Benefits and expenses:Policyowner benefits
    
    
    280,950
    
    
    
    356,152
    
    
    
    222
    
    
    
    637,324Underwriting, acquisition, and other expenses
    
    
    54,207
    
    
    
    58,887
    
    
    
    17,362
    
    
    
    130,456Amortization of DAC and VOBA, net of
open block loss adjustment of $3,247
    
    
    66,211
    
    
    
    82,003
    
    
    
    
    
    
    
    148,214Dividends to policyowners
    
    
    60,955
    
    
    
    3
    
    
    
    
    
    
    
    60,958462,323
    
    
    
    497,045
    
    
    
    17,584
    
    
    
    976,952Segment pre-tax operating income
    
    $
    102,042
    
    
    $
    116,910
    
    
    $
    (9,828
    )
    
    
    209,124Realized/unrealized gains (losses) on open block assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,138
    )Unrealized gains (losses) on open block options and
trading investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,252
    )Change in option value of equity indexed
products and market value adjustments on
total return strategy annuities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,926Cash flow hedge amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (953
    )Amortization of DAC and VOBA due to open
block gains and losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,247
    )Other income from non-insurance operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,136Income from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171,596Interest (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,144
    )Income tax (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,074
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,899Cumulative effect of change in accounting, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (510
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    124,767
 23




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##### Table of Contents



Operating Segment Income
($ in thousands) Nine Months Ended September 30, 2003Protection
    
    Accumulation
    
    
    
    
    
    TotalProducts
    
    Products
    
    All Other
    
    ConsolidatedRevenues:Insurance premiums
    
    $
    219,313
    
    
    $
    3,724
    
    
    $
    980
    
    
    $
    224,017Product charges
    
    
    104,912
    
    
    
    31,256
    
    
    
    
    
    
    
    136,168Net investment income
    
    
    240,863
    
    
    
    504,212
    
    
    
    6,023
    
    
    
    751,098Realized/unrealized gains (losses) on closed
block investments
    
    
    11,259
    
    
    
    
    
    
    
    
    
    
    
    11,259Other income
    
    
    3,083
    
    
    
    45,962
    
    
    
    700
    
    
    
    49,745579,430
    
    
    
    585,154
    
    
    
    7,703
    
    
    
    1,172,287Benefits and expenses:Policyowner benefits
    
    
    278,909
    
    
    
    373,970
    
    
    
    (814
    )
    
    
    652,065Underwriting, acquisition, and other expenses
    
    
    59,224
    
    
    
    52,251
    
    
    
    11,224
    
    
    
    122,699Amortization of DAC and VOBA, net of
open block gain adjustment of $12,800
    
    
    59,421
    
    
    
    64,954
    
    
    
    
    
    
    
    124,375Dividends to policyowners
    
    
    86,330
    
    
    
    
    
    
    
    
    
    
    
    86,330483,884
    
    
    
    491,175
    
    
    
    10,410
    
    
    
    985,469Segment pre-tax operating income
    
    $
    95,546
    
    
    $
    93,979
    
    
    $
    (2,707
    )
    
    
    186,818Realized/unrealized gains (losses) on open block assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,307Unrealized gains (losses) on open block options and
trading investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,799Change in option value of equity indexed
products and market value adjustments on
total return strategy annuities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,527
    )Cash flow hedge amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,241
    )Amortization of DAC and VOBA due to open
block gains and losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,800
    )Reinsurance adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,854Restructuring costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,415
    )Other income from non-insurance operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    715Income from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    199,510Interest (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,238
    )Income tax (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58,499
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,567Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    120,340
 24




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##### Table of Contents



Item 2. Managements Discussion And Analysis Of Financial Condition And
Results Of Operations Managements Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) addresses the consolidated financial condition of AmerUs
Group Co. as of September 30, 2004, compared with December 31, 2003, and our
consolidated results of operations for the three months and nine months ended
September 30, 2004 and 2003. You should read the following analysis of our
consolidated financial condition and results of operations in conjunction with
our MD&A and audited consolidated financial statements included in our Annual
Report on Form 10-K for the year ended December 31, 2003, and Unaudited
Consolidated Financial Statements included elsewhere in this Quarterly Report
on Form 10-Q. NATURE OF OPERATIONS We are a holding company whose subsidiaries are primarily engaged in the
business of marketing, underwriting and distributing a broad range of
individual life, annuity and insurance deposit products to individuals and
businesses in 50 states, the District of Columbia and the U.S. Virgin Islands.
We have two reportable operating segments: protection products and accumulation
products. The primary offerings of the protection products segment are
interest-sensitive whole life, term life, universal life and equity indexed
life insurance policies. The primary offerings of the accumulation products
segment are individual fixed annuities (comprised of traditional fixed
annuities and equity indexed annuities) and funding agreements. FINANCIAL HIGHLIGHTS Our financial highlights are as follows: For The Three Months Ended September 30,
    
    For The Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003($ in thousands, except per share data)Segment pre-tax operating income:Protection Products
    
    $
    34,024
    
    
    $
    28,584
    
    
    $
    102,042
    
    
    $
    95,546Accumulation Products
    
    
    41,573
    
    
    
    35,203
    
    
    
    116,910
    
    
    
    93,979Other operations
    
    
    (4,204
    )
    
    
    (972
    )
    
    
    (9,828
    )
    
    
    (2,707
    )Total segment pre-tax operating income
    
    
    71,393
    
    
    
    62,815
    
    
    
    209,124
    
    
    
    186,818Non-segment expense, net (A)
    
    
    28,531
    
    
    
    21,980
    
    
    
    84,357
    
    
    
    66,478Net income
    
    $
    42,862
    
    
    $
    40,835
    
    
    $
    124,767
    
    
    $
    120,340Diluted net income per share
    
    $
    1.05
    
    
    $
    1.03
    
    
    $
    3.07
    
    
    $
    3.05
 September 30,
    
    December 31,2004
    
    2003Total assets
    
    $
    22,639,698
    
    
    $
    21,542,242Stockholders equity
    
    $
    1,559,381
    
    
    $
    1,409,811
  (A)
    
    Non-segment expense, net consists primarily of open block realized/unrealized gains and losses, derivative related market value
adjustments, reinsurance adjustments, non-insurance operations, restructuring costs, interest expense, income taxes, discontinued
operations and cumulative effect of change in accounting. 25




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##### Table of Contents



Operating segment income increased for both the protection products and
accumulation products segments in the 2004 periods, compared to the respective
periods in 2003. Protection products earnings were primarily impacted by
increased open block product margins and lower operating expenses in 2004. Our
accumulation products pre-tax operating segment income increased primarily due
to the continued shift in our business from traditional fixed annuities to
higher margin equity indexed annuities and more assets under management. Net income increased in the 2004 periods compared to the respective 2003
periods primarily as a result of higher operating segment income, reductions in
income tax accruals and deferred income tax asset valuation allowances, and the
gain on the sale of our residential financing subsidiary. The increase was
partially offset by realized and unrealized losses on assets. Total assets increased $1.1 billion during the first nine months of 2004
primarily as a result of net cash received from collected premiums and
deposits, positive cash flows from operating activities and the utilization of
securities lending and borrowing arrangements. Liabilities increased primarily
due to policy reserves and policyowner funds which increased due to the higher
volume of insurance in force and additional securities lending and borrowing
arrangements. Stockholders equity increased $149.6 million for the first nine
months of 2004 primarily as a result year-to-date net income of $124.8 million
and additional unrealized gains on available-for-sale investments of $28.0
million. The additions to equity were reduced by treasury stock purchases
which decreased equity $9.2 million. The unrealized gains included in
accumulated other comprehensive income are presented after related adjustments
to DAC, VOBA, capitalized bonus interest, closed block policyowner dividend
obligation, unearned revenue reserves and deferred income taxes. PROTECTION PRODUCTS Our protection products segment primarily consists of interest-sensitive
whole life, term life, universal life and equity indexed life insurance
policies. These products are marketed on a national basis primarily through a
Preferred Producer agency system, PPGA distribution system and IMOs. Included
in protection products is the closed block of ALIC and the closed block of ILIC
established when the companies reorganized from mutual companies to stock
companies. When protection products are sold, we invest the premiums we
receive in our investment portfolio and establish a liability representing our
commitment to the policyowner. We manage investment spread by seeking to
maximize the return on these invested assets, consistent with our
asset/liability and credit quality needs. We enter into reinsurance
arrangements in order to reduce the effects of mortality risk and the statutory
capital strain from writing new business. All income statement line items are
presented net of reinsurance amounts. Protection products in force totaled
$100.5 billion at September 30, 2004 and $98.6 billion at December 31, 2003.
Protection products in force is a performance measure utilized by investors,
analysts and the Company to assess the Companys position in the industry. A
summary of our protection products segment operations follows: 26




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##### Table of Contents



For The Three Months Ended September 30,
    
    For The Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003($ in thousands)Revenues:Insurance premiums
    
    $
    62,829
    
    
    $
    62,640
    
    
    $
    194,972
    
    
    $
    219,313Product charges
    
    
    45,029
    
    
    
    28,770
    
    
    
    122,128
    
    
    
    104,912Net investment income
    
    
    83,909
    
    
    
    76,412
    
    
    
    246,353
    
    
    
    240,863Realized gains (losses) on closed block investments
    
    
    1,911
    
    
    
    3,915
    
    
    
    (1,732
    )
    
    
    11,259Other income
    
    
    810
    
    
    
    1,037
    
    
    
    2,644
    
    
    
    3,083Total revenues
    
    
    194,488
    
    
    
    172,774
    
    
    
    564,365
    
    
    
    579,430Benefits and expenses:Policyowner benefits
    
    
    96,350
    
    
    
    85,628
    
    
    
    280,950
    
    
    
    278,909Underwriting, acquisition and other expenses
    
    
    18,134
    
    
    
    17,608
    
    
    
    54,207
    
    
    
    59,224Amortization of DAC and VOBA, net of open block
gain/loss adjustment
    
    
    21,443
    
    
    
    18,938
    
    
    
    66,211
    
    
    
    59,421Dividends to policyowners
    
    
    24,537
    
    
    
    22,016
    
    
    
    60,955
    
    
    
    86,330Total benefits and expenses
    
    
    160,464
    
    
    
    144,190
    
    
    
    462,323
    
    
    
    483,884Pre-tax
operating income - Protection Products segment
    
    $
    34,024
    
    
    $
    28,584
    
    
    $
    102,042
    
    
    $
    95,546
 Pre-tax operating income from our protection products increased 19.0% in
the third quarter of 2004 and 6.8% in the first nine months of 2004 compared to
the respective 2003 periods. The increase was primarily due to higher open
block product margins and lower operating expenses. The increase was partially
reduced by higher DAC and VOBA amortization. The key drivers of our protection
products business include sales, persistency, net investment income, mortality
and expenses. Sales. Sales are a key driver of our business as they are a leading
indicator of future revenue trends to emerge in segment operating income. Sales
are presented as annualized premium, which is in accordance with industry
practice, and represent the amount of new business sold during the period.
Sales are a performance metric which we use to measure the productivity of our
distribution network and for compensation of sales and marketing employees and
agents. The following table summarizes annualized premium by life insurance
product: Sales Activity by ProductFor The Three Months Ended September 30,
    
    For The Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003($ in thousands)Traditional life insurance:Whole life
    
    $
    1
    
    
    $
    7
    
    
    $
    9
    
    
    $
    227Interest-sensitive
whole life
    
    
    1,076
    
    
    
    4,121
    
    
    
    5,905
    
    
    
    16,959Term life
    
    
    3,228
    
    
    
    3,421
    
    
    
    10,375
    
    
    
    10,761Universal life
    
    
    6,700
    
    
    
    7,553
    
    
    
    23,469
    
    
    
    23,931Equity indexed life
    
    
    17,357
    
    
    
    11,449
    
    
    
    53,951
    
    
    
    36,676Direct
    
    
    28,362
    
    
    
    26,551
    
    
    
    93,709
    
    
    
    88,554Private label term life premiums
    
    
    
    
    
    
    488
    
    
    
    
    
    
    
    4,181Total
    
    $
    28,362
    
    
    $
    27,039
    
    
    $
    93,709
    
    
    $
    92,735
 Direct first year annualized premiums increased 6.8% in the third quarter
of 2004 and 5.8% on a year-to-date basis in 2004 compared to the respective
2003 periods. We continue to focus our marketing efforts on equity indexed life
products. In the first nine months of 2004, sales of equity indexed life
products were $54.0 million as compared to $36.7 million for 2003 and comprised
57.6% of total direct sales in the first nine months of 2004 compared to 41.4%
in the first nine months of 2003. We are a leading writer of equity indexed
life products in the United States. Interest- 27




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sensitive whole life insurance sales decreased in both periods
of 2004 compared to 2003 due to our shift in sales focus to equity indexed
products and uncertainty in government tax policy and regulation. 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 in 2004 was comparable to the third quarter of
2003 and was lower in the first nine months of 2004 as compared to the first
nine months of 2003 primarily due to lower sales of traditional products and
the continued decline in closed block in force business. Product charge
revenue was higher in the third quarter and first nine months of 2004 as
compared to the same periods in 2003 due to growth in the equity indexed life
block of business. Persistency.Persistency, which we measure in terms of a lapse rate, is
a key driver of our business because it shows the policies which remain in our
block of business. 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 6.7% as of September 30,
2004 compared to 6.2% as of September 30, 2003. This slight increase in our
lapses primarily resulted from the dividend reductions we made on our policies.
This increased lapse rate is still within our pricing assumptions. Net Investment Income.Net investment income is a key driver of our
business as it reflects earnings on our invested assets. Net investment income
increased for the third quarter and first nine months of 2004 as compared to
the same periods a year ago primarily as a result of the growth in protection
products assets which were approximately $286 million higher than 2003. The
year-to-date earned rate of the investment portfolio was 6.42% compared to
6.65% a year ago. Mortality and Benefit Expense.Mortality is a key driver of our business
as it impacts the amount of our benefit expense. We utilize reinsurance to
reduce the effects of mortality risk. Benefit expense was higher in the third
quarter of 2004 and year-to-date 2004 as compared to the respective prior
periods of 2003, due primarily to the growing block of in force business. Our
mortality experience is in line with our pricing assumptions. 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 were comparable between third quarter periods and
decreased for the first nine months of 2004 compared to the same period of
2003. The decrease for the first nine months of 2004 as compared to 2003 was
primarily due to lower operating expenses resulting from the restructuring
activities that took place in 2003 and in prior years to integrate the ILICO
life operations. Amortization of DAC and VOBA.The amortization of DAC and VOBA increased
for the third quarter and first nine months of 2004 as compared to the
respective periods in 2003. DAC and VOBA are generally amortized in proportion
to policy gross margins which increased in 2004, resulting in higher
amortization expense. Dividends to Policyowners.In addition to basic policyowner dividends,
dividend expense includes increases or decreases to the closed block
policyowner dividend obligation liability carried on the consolidated balance
sheet. The actual results of the closed block are adjusted to equal the
expected earnings based on the actuarial calculation at the time of formation
of the closed block (which we refer to as the closed block glide path). The
adjustment to have the closed block operating results equal the closed block
glide path is made to dividend expense. If the actual results for the period
exceed the closed block glide path, increased dividend expense is recorded as a
policyowner dividend obligation to reduce the actual closed block results. For
actual results less than the closed block glide path, dividend 28




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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. Dividend expense increased for the third quarter and decreased for the
first nine months of 2004 compared to the same periods of 2003. The
year-to-date reduction was primarily due to the decreased closed block
earnings, resulting from lower closed block revenues and net investment income
as the closed block in force business continues to decline, and closed block
dividend reductions. 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 $12.0 billion at September 30, 2004 and
$11.7 billion at December 31, 2003. A summary of our accumulation products
segment operations follows: For The Three Months Ended September 30,
    
    For The Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003($ in thousands)Revenues:Immediate annuity and supplementary contract premiums
    
    $
    541
    
    
    $
    1,482
    
    
    $
    2,123
    
    
    $
    3,724Product charges
    
    
    16,426
    
    
    
    11,864
    
    
    
    43,173
    
    
    
    31,256Net investment income
    
    
    177,599
    
    
    
    166,355
    
    
    
    520,080
    
    
    
    504,212Other income
    
    
    2,681
    
    
    
    2,898
    
    
    
    8,058
    
    
    
    8,753Total revenues
    
    
    197,247
    
    
    
    182,599
    
    
    
    573,434
    
    
    
    547,945Benefits and expenses:Policyowner benefits
    
    
    121,073
    
    
    
    117,597
    
    
    
    356,152
    
    
    
    373,970Underwriting, acquisition and other expenses
    
    
    7,896
    
    
    
    9,401
    
    
    
    21,334
    
    
    
    22,536Amortization of DAC and VOBA
    
    
    26,324
    
    
    
    22,913
    
    
    
    82,003
    
    
    
    64,954Dividends to policyowners
    
    
    1
    
    
    
    
    
    
    
    3
    
    
    
    Total benefits and expenses
    
    
    155,294
    
    
    
    149,911
    
    
    
    459,492
    
    
    
    461,460IMO Operations:Other income
    
    
    13,463
    
    
    
    12,651
    
    
    
    40,521
    
    
    
    37,209Other expenses
    
    
    13,843
    
    
    
    10,136
    
    
    
    37,553
    
    
    
    29,715Net IMO operating income (loss)
    
    
    (380
    )
    
    
    2,515
    
    
    
    2,968
    
    
    
    7,494Pre-tax operating income - Accumulation Products segment
    
    $
    41,573
    
    
    $
    35,203
    
    
    $
    116,910
    
    
    $
    93,979
 Pre-tax operating income from our accumulation products operations
increased 18.1% in the third quarter of 2004 and 24.4% in the first nine months
of 2004 compared to the respective 2003 periods primarily due to higher assets
under management and increased product spreads from our higher margin products.
The drivers of profitability in our accumulation products business include
deposits, persistency, product spread, expenses and IMO operations. 29




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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 September 30,
    
    For The Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003($ in thousands)AnnuitiesDeferred fixed annuities:Traditional fixed annuities
    
    $
    68,222
    
    
    $
    103,966
    
    
    $
    228,969
    
    
    $
    347,828Equity indexed annuities
    
    
    358,773
    
    
    
    392,630
    
    
    
    1,004,130
    
    
    
    993,075Variable annuities
    
    
    561
    
    
    
    682
    
    
    
    2,219
    
    
    
    2,570Total annuities
    
    
    427,556
    
    
    
    497,278
    
    
    
    1,235,318
    
    
    
    1,343,473Funding agreements
    
    
    
    
    
    
    
    
    
    
    85,000
    
    
    
    Total
    
    
    427,556
    
    
    
    497,278
    
    
    
    1,320,318
    
    
    
    1,343,473Reinsurance ceded
    
    
    (2,063
    )
    
    
    (5,345
    )
    
    
    (9,130
    )
    
    
    (20,964
    )Total deposits, net of reinsurance
    
    $
    425,493
    
    
    $
    491,933
    
    
    $
    1,311,188
    
    
    $
    1,322,509
 Direct annuity deposits decreased 14.0% in the third quarter of 2004 and
8.0% year-to-date for 2004 compared to the respective periods of 2003. Deposits
decreased in 2004 as compared to 2003 primarily due to a slow down in
traditional annuity sales. We have shifted our sales focus to our higher
margin equity indexed annuities. Equity indexed annuities comprised 81.4% of
total direct annuity deposits in the first nine months of 2004 compared to
74.1% in the first nine months of 2003. Our wholly-owned and proprietary
organizations accounted for approximately 78% of our annuity deposits in the
first nine months of 2004 compared to 76% in the first nine months of 2003. Product Charges.The deposits we receive on accumulation products are not
recorded as revenue but instead as a policyowner liability. Surrender charges
collected on accumulation products are recorded as revenue and shown as a
product charge. Product charges increased in the third quarter and first nine
months of 2004 as compared to the respective 2003 periods due to the growth in
the business. Persistency.Persistency is a key driver of our business as it refers to
the policies which remain in our block of business and is measured by a
withdrawal rate. A low withdrawal rate means higher persistency indicating
more business is remaining in force to generate future revenues. Withdrawals
represent funds taken out of accumulation products by policyowners not
including those due to the death of policyowners. Annuity withdrawal rates
without internal replacements, based on a rolling four quarter period, amounted
to 8.8% as of September 30, 2004 and 2003. Annuity withdrawals without
internal replacements totaled $841.7 million and $1,063.5 million for the first
nine months of 2004 and 2003, respectively. Our withdrawal experience remained
within our pricing assumptions. Product Spread.Product spread is a key driver of our business as it
measures the difference between the income earned on our invested assets and
the rate which we credit to policyowners, with the difference reflected as 30




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segment operating income. Asset earned rates and liability crediting rates,
based on a rolling four quarter period, were as follows for accumulation
segment products: For The Nine Months Ended September 30,2004
    
    2003Asset earned rate
    
    
    5.76
    %
    
    
    6.05
    %Liability credited rate
    
    
    3.60
    %
    
    
    4.06
    %Product spread
    
    
    2.16
    %
    
    
    1.99
    %
 The product spread, based on a rolling four quarter period, increased
seventeen basis points to 216 basis points for the first nine months of 2004
compared to the first nine months of 2003. Liability crediting rates were
lowered throughout 2003 and the first nine months of 2004 to correspond with
the decline in investment yields caused by lower rates on new and reinvested
funds. At September 30, 2004, the account value of traditional annuities totaled
$6.6 billion of which approximately 95% have minimum guarantee rates ranging
from 3% to 4%. For traditional annuities with an account value of $4.9
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 $1.2 billion
had a multi-year guarantee for which the credited rate cannot be decreased
until the end of the multi-year period. At the end of the multi-year period,
we will have the ability to lower the crediting rate to the minimum guaranteed
rate by an average of approximately 275 basis points. The remaining multi-year
period is generally either one or two years. Due to these limitations on the
ability to lower interest crediting rates and the potential for additional
credit defaults and lower reinvestment rates on investments, we could
experience spread compression in future periods. Amortization of DAC and VOBA.The amortization of DAC and VOBA increased
for the third quarter and first nine months of 2004 compared to the respective
periods in 2003. DAC and VOBA are generally amortized in proportion to policy
gross margins which increased in 2004, resulting in higher amortization
expense. 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 third quarter and the first nine months
of 2004 compared to the same periods of 2003. The decreases were primarily due
to continued process improvements to enhance operating efficiencies. 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
decreased in the third quarter and first nine months of 2004 compared to the
respective 2003 periods primarily due to changes in distribution strategies and
higher operating expenses, including litigation costs. 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. 31




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##### Table of Contents



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 nine
months of 2004 increased compared to the same period of 2003 primarily due to
increased holding company expenses, such as compliance with Sarbanes-Oxley
internal control regulations and succession activities, and lower
investment income of our real estate management subsidiary. 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 September 30,
    
    For The Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003($ in thousands)Segment pre-tax operating income:Protection Products
    
    $
    34,024
    
    
    $
    28,584
    
    
    $
    102,042
    
    
    $
    95,546Accumulation Products
    
    
    41,573
    
    
    
    35,203
    
    
    
    116,910
    
    
    
    93,979Other operations
    
    
    (4,204
    )
    
    
    (972
    )
    
    
    (9,828
    )
    
    
    (2,707
    )Total segment pre-tax operating income
    
    
    71,393
    
    
    
    62,815
    
    
    
    209,124
    
    
    
    186,818Non-segment
items - increases (decreases) to income:Realized and unrealized losses on assets and liabilities:Realized/unrealized gains (losses) on open block assets
    
    
    3,443
    
    
    
    5,855
    
    
    
    (30,138
    )
    
    
    30,307Unrealized gains (losses) on open block options and
trading investments
    
    
    (2,841
    )
    
    
    (1,228
    )
    
    
    (10,252
    )
    
    
    33,799Change in option value of equity indexed products
and market value adjustments on total return
strategy annuities
    
    
    (7,629
    )
    
    
    4,682
    
    
    
    5,926
    
    
    
    (22,527
    )Cash flow hedge amortization
    
    
    (140
    )
    
    
    (763
    )
    
    
    (953
    )
    
    
    (3,241
    )Amortization of DAC & VOBA due to open block
realized gains and losses
    
    
    2,495
    
    
    
    (2,347
    )
    
    
    (3,247
    )
    
    
    (12,800
    )Reinsurance adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,854Restructuring costs
    
    
    
    
    
    
    (1,551
    )
    
    
    
    
    
    
    (17,415
    )Other income from non-insurance operations
    
    
    (25
    )
    
    
    93
    
    
    
    1,136
    
    
    
    715Income from continuing operations
    
    
    66,696
    
    
    
    67,556
    
    
    
    171,596
    
    
    
    199,510Interest expense
    
    
    (7,810
    )
    
    
    (7,864
    )
    
    
    (24,144
    )
    
    
    (22,238
    )Income tax expense
    
    
    (16,024
    )
    
    
    (19,402
    )
    
    
    (26,074
    )
    
    
    (58,499
    )Net income from continuing operations
    
    
    42,862
    
    
    
    40,290
    
    
    
    121,378
    
    
    
    118,773Income from discontinued operations, net of tax
    
    
    
    
    
    
    545
    
    
    
    3,899
    
    
    
    1,567Cumulative effect of change in accounting, net of tax
    
    
    
    
    
    
    
    
    
    
    (510
    )
    
    
    Net income
    
    $
    42,862
    
    
    $
    40,835
    
    
    $
    124,767
    
    
    $
    120,340
 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, during the third quarter of 2004, we sold our Indianapolis, Indiana
office building. We had previously listed this office building with a real
estate broker during the second quarter of 2003 as 32




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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 and we recognized a pre-tax impairment loss of $12.2 million in
realized/unrealized losses on assets. The sale of the building in the third
quarter of 2004 resulted in a pre-tax gain of $0.4 million. The carrying value
of the building held for sale had been included in the other assets line item
of the consolidated balance sheet and amounted to $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
loss of
$17.4 million and $5.3 million in the third quarter and first nine months
of 2004, respectively, and an unrealized gain of $7.6 million and $23.0 million
in the third quarter and first nine months of 2003, respectively. In addition,
we also have trading securities that back our total return strategy traditional
annuity products. The market value adjustment on the trading securities
resulted in a gain of $14.5 million and a loss of $4.9 million in the third
quarter and first nine months of 2004, respectively, and a loss of $8.8 million
and a gain of $10.8 million in the third quarter and first nine months of 2003,
respectively. Most of the unrealized gains and losses on the options and
trading securities are offset by similar adjustments to the option portion of
the equity indexed product reserves and to the total return strategy annuity
reserves. The reserve adjustments are reflected in policyowner benefits
expense in the consolidated statements of income and are included in the fair
value change as additional expense of $7.6 million and decreased expense of
$5.9 million in the third quarter and first nine months of 2004, respectively,
and decreased expense of $4.7 million and additional expense of $22.5 million
in the third quarter and first nine months of 2003, respectively, explained in
the following paragraph. The fair value change in options embedded within our equity indexed
products and the fair value changes on our total return strategy fixed annuity
contracts are being recorded at fair value. As previously discussed, these
fair value changes are offset by similar adjustments to unrealized gains
(losses) on investments related to the fair value changes on the options that
hedge the equity indexed products and on the trading securities that back the
total return strategy products. Reinsurance Adjustments.Reinsurance related adjustments in the first
nine months of 2003 consist of the release of an $8.2 million liability in
conjunction with the settlement and amendment of a reinsurance arrangement and
a $4.3 million true-up of pre-2003 reinsurance settlements under a reinsurance
arrangement between ILICs open block and closed block. Both of the
reinsurance adjustments were recorded in the second quarter of 2003. Restructuring Costs.Restructuring costs relate to our consolidation of
various functions in connection with a restructuring of our protection products
and accumulation products operations and investment activities which began in
the third quarter of 2001. The restructuring charges expensed in the first
nine months of 2003 included pre-tax severance and termination benefits of $0.7
million for severance accrual adjustments and other pre-tax costs of $16.7
million primarily related to the impairment loss on the Indianapolis office
building, expenses associated with the merger of IL Annuity into ILICO and
systems conversion costs. Charges for all restructuring activities were
completed in 2003. Income Tax Expense.The effective income tax rate for the first nine
months of 2004 varied from the prevailing corporate rate primarily as a result
of reductions in the income tax accrual and deferred tax asset valuation
allowances. The accrual reduction amounting to $3.7 million in the third
quarter of 2004 represents an overpayment of tax in prior years for which a
refund is expected. There were also accrual reductions of $7.9 million in the
first six months of 2004, for the release of provisions originally established
for potential tax adjustments which have been settled or eliminated. In
addition, the deferred tax asset valuation allowance was reduced $10.4 million
in the second quarter of 2004 as a result of the realization of capital loss
carry forwards. 33




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Discontinued Operations.In November 2003, we entered into an agreement
to sell our residential financing operations. The results of the residential
financing operations have been classified as discontinued operations. The sale
was completed in January 2004, resulting in an after-tax gain of $3.9 million. Change in Accounting.Effective January 1, 2004, the Company adopted SOP
03-1 resulting in the establishment of additional policy reserve liabilities
for fees charged for insurance benefit features which are assessed in a manner
that is expected to result in profits in earlier years and losses in subsequent
years. The total effect of adopting SOP 03-1 (including reinsurance
recoverables) as of January 1, 2004, amounted to a decrease of $0.8 million
($0.5 million after-tax) in net income which has been reflected as a cumulative
effect of a change in accounting. ACCOUNTING DEVELOPMENTS The Financial Accounting Standards Boards Emerging Issues Task Force
(EITF) has reached a final consensus on EITF No. 04-8, The Effect of
Contingently Convertible Debt on Diluted Earnings Per Share, that contingently
convertible debt instruments are subject to the if-converted method for
earnings per share calculations regardless of whether the instrument has met
its contingent conversion features. The change in method will result in
additional diluted shares both historically and prospectively. The EITF
concluded that its consensus would have the same transition as the upcoming
amendment to FASB Statement No. 128, Earnings per Share. That amendment is
expected to be effective for periods ending after December 15, 2004. As a
result, our OCEANs are subject to the new earnings per share guidance of the
EITF. We plan to have an exchange offering in the fourth quarter of 2004 to
offer to replace the OCEANs. This offer, if successful,
should reduce the dilutive impact of the EITF. LIQUIDITY AND CAPITAL RESOURCES AmerUs Group Co. As a holding company, AmerUs Group Co.s cash flows from operations
consist of dividends from subsidiaries, if declared and paid, interest from
income on loans and advances to subsidiaries (including a surplus note issued
to us by ALIC), investment income on our assets and fees which we charge our
subsidiaries, offset by the expenses incurred for debt service, salaries and
other expenses. The payment of dividends by our insurance subsidiaries is regulated under
various state laws. Generally, under the various state statutes, our insurance
subsidiaries dividends may be paid only from the earned surplus arising from
their respective businesses and must receive the prior approval of the
respective state regulator to pay any dividend that would exceed certain
statutory limitations. The current statutes generally limit any dividend,
together with dividends paid out within the preceding 12 months, to the greater
of (i) 10% of the respective companys policyowners statutory surplus as of
the preceding year end or (ii) the statutory net gain from operations for the
previous calendar year. Generally, the various state laws give the state
regulators discretion to approve or disapprove requests for dividends in excess
of these limits. Based on these limitations and 2003 results, our life
insurance subsidiaries could pay us an estimated $77 million in dividends in
2004 without obtaining regulatory approval. Our subsidiaries paid no dividends
in the first nine months of 2004. We also consider risk-based capital levels,
capital and liquidity operating needs, and other factors prior to paying
dividends from the insurance subsidiaries. We have a $200 million revolving credit facility with a syndicate of
lenders (which we refer to as the Revolving Credit Agreement). As of September
30, 2004, there was no outstanding loan balance under the facility. The
Revolving Credit Agreement provides for typical events of default and covenants
with respect to the conduct of business and requires the maintenance of various
financial levels and ratios. Among other covenants, we (a) cannot have a
leverage ratio greater than 0.35:1.0, (b) cannot have an interest coverage
ratio less than 2.50:1.0, (c) are prohibited from paying cash dividends on
common stock in excess of an amount equal to 3% of consolidated net worth as of
the last day of the preceding fiscal year, (d) must cause our insurance
subsidiaries to maintain certain levels of risk-based capital, and (e) are
prohibited from incurring additional indebtedness for borrowed money in excess
of 34




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##### Table of Contents



certain limits typical for such lines of credit. We closely monitor all of
these covenants to ensure continued compliance. The Company has several options for deploying excess capital, including
supporting higher sales growth, reducing debt levels, pursuing acquisitions and
buying back common stock. Our Board of Directors approved a stock purchase
program effective August 9, 2002, under which we may purchase up to three
million shares of our common stock at such times and under such conditions, as
we deem advisable. The purchases may be made in the open market or by such
other means as we determine to be appropriate, including privately negotiated
purchases. The purchase program supercedes all prior purchase programs. We
plan to fund the purchase program from a combination of our internal sources,
dividends from insurance subsidiaries and the Revolving Credit Agreement.
Approximately 2.0 million shares remain available for repurchase under this
program. There were 244,400 shares purchased in the first nine months of 2004
for $9.2 million. Holding company cash was utilized to purchase the shares. We manage liquidity on a continuing basis. One way is to minimize our
need for capital. We accomplish this by attempting to use our capital as
efficiently as possible and by developing capital-efficient products in our
insurance subsidiaries. We also manage our mix of sales by focusing on the
more capital-efficient products. In addition, we use reinsurance agreements,
where cost-effective, to reduce capital strain in the insurance subsidiaries.
We also focus on optimizing the consolidated capital structure to properly
balance the levels and sources of borrowing and the issuance of equity
securities. Insurance Subsidiaries The sources of cash of our insurance subsidiaries consist primarily of
premium receipts; deposits to policyowner account balances; income from
investments, sales, maturities and calls of investments and repayments of
investment principal. The uses of cash are primarily related to withdrawals of
policyowner account balances, investment purchases, payment of policy
acquisition costs, payment of policyowner benefits, payment of debt, income
taxes and current operating expenses. Insurance companies generally produce a
positive cash flow from operations, as measured by the amount by which cash
flows are adequate to meet benefit obligations to policyowners and normal
operating expenses as they are incurred. The remaining cash flow is generally
used to increase the asset base to provide funds to meet the need for future
policy benefit payments and for writing new business. Management believes that the current level of cash and available-for-sale,
held for trading and short-term securities, combined with expected net cash
inflows from operations, maturities of fixed maturity investments, principal
payments on mortgage-backed securities and sales of its insurance products,
will be adequate to meet the anticipated short-term cash obligations of the
life insurance subsidiaries. Matching the investment portfolio maturities to the cash flow demands of
the type of insurance being provided is an important consideration for each
type of protection product and accumulation product. We continuously monitor
benefits and surrenders to provide projections of future cash requirements. As
part of this monitoring process, we perform cash flow testing of assets and
liabilities under various scenarios to evaluate the adequacy of reserves. In
developing our investment strategy, we establish a level of cash and securities
which, combined with expected net cash inflows from operations and maturities
and principal payments on fixed maturity investment securities, are believed
adequate to meet anticipated short-term and long-term benefit and expense
payment obligations. There can be no assurance that future experience regarding
benefits and surrenders will be similar to historic experience since withdrawal
and surrender levels are influenced by such factors as the interest rate
environment and general economic conditions and the claims-paying and financial
strength ratings of the insurance subsidiaries. We take into account asset/liability management considerations in the
product development and design process. Contract terms for the
interest-sensitive products include surrender and withdrawal provisions which
mitigate the risk of losses due to early withdrawals. These provisions
generally do one or more of the following: limit the 35




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##### Table of Contents



amount of penalty-free
withdrawals, limit the circumstances under which withdrawals are permitted, or
assess a surrender charge or market value adjustment relating to the underlying
assets. In addition to the interest-sensitive products, our insurance subsidiaries
have issued funding agreements totaling $960 million outstanding as of
September 30, 2004, consisting primarily in six to ten year fixed rate
insurance contracts. The assets backing the funding agreements are legally
segregated and are not subject to claims that arise out of any other business
of the insurance subsidiaries. The funding agreements are further backed by
the general account assets of the insurance subsidiaries. The segregated
assets and liabilities are included with general account assets in the
financial statements. The funding agreements may not be cancelled by the
holders unless there is a default under the agreements, but the insurance
subsidiaries may terminate the agreements at any time. We also have variable separate account assets and liabilities representing
funds that are separately administered, principally for variable annuity
contracts, and for which the contractholder bears the investment risk.
Separate account assets and liabilities are reported at fair value and amounted
to $242 million at September 30, 2004. Separate account contractholders have no
claim against the assets of the general account. The operations of the
separate accounts are not included in the accompanying consolidated financial
statements. 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 September 30, 2004. In addition, ALIC has
long-term fixed rate advances from the FHLB outstanding of $12.7 million at
September 30, 2004. The insurance subsidiaries may also obtain liquidity through sales of
investments. The investment portfolio as of September 30, 2004 had a carrying
value of $18.6 billion, including closed block investments. The level of capital in the insurance companies is regulated by risk-based
capital formulas and is monitored by rating agencies. On June 21, 2004,
Moodys Investors Service changed its outlook to stable from negative for all
of our insurance subsidiaries. Also, on October 19, 2004, Standard & Poors
re-affirmed our current A+ rating and our stable outlook. In order to
maintain appropriate capital levels, it may be necessary from time to time for
AmerUs Group Co. to provide additional capital to the insurance companies. We participate in a securities lending program whereby certain fixed
maturity securities from the investment portfolio are loaned to other
institutions for a short period of time. We receive a fee in exchange for the
loan of securities and require initial collateral equal to 102 percent of the
market value of the loaned securities to be separately maintained. Securities
with a market value of approximately $386.6 million and $154.6 million were on
loan under the program and we were liable for cash collateral under our control
of approximately $397.0 million and $158.8 million at September 30, 2004 and
December 31, 2003, respectively. The collateral held under the securities
lending program has been included in cash and cash equivalents in the
consolidated balance sheet and the obligation to return the collateral upon the
return of the loaned securities has been included in accrued expenses and other
liabilities. We may also enter into securities borrowing arrangements from time to time
whereby we borrow securities from other institutions and pay a fee. Securities
borrowed amounted to $128.1 million and none at September 30, 2004, and
December 31, 2003, respectively, and are also included in accrued expenses and
other liabilities in the consolidated balance sheet. At September 30, 2004, the statutory surplus of the insurance subsidiaries
was approximately $910 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. 36




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk The main objectives in managing our investment portfolios and our
insurance subsidiaries are to maximize investment income and total investment
returns while minimizing credit risks in order to provide maximum support to
the insurance underwriting operations. Investment strategies are developed
based on many factors including asset liability management, regulatory
requirements, fluctuations in interest rates and consideration of other market
risks. Investment decisions are centrally managed by investment professionals
based on guidelines established by management and approved by the board of
directors. Market risk represents the potential for loss due to adverse changes in
the fair value of financial instruments. The market risks related to our
financial instruments primarily relate to the investment portfolio, which
exposes us to risks related to interest rates, credit quality and prepayment
variation. Analytical tools and monitoring systems are in place to assess each
of these elements of market risk. Interest rate risk is the price sensitivity of a fixed income security to
changes in interest rates. Management views these potential changes in price
within the overall context of asset and liability management. Actuarial
professionals estimate the payout pattern of our liabilities, primarily lapses,
to determine duration, which is the present value of the fixed income
investment portfolios after consideration of the duration of these liabilities
and other factors, which management believes mitigates the overall effect of
interest rate risk. For variable and equity indexed products, profitability on the portion of
the policyowners account balance invested in the fixed general account option,
if any, is also affected by the spreads between interest yields on investments
and rates credited to the policies. For the variable products, the policyowner
assumes essentially all the investment earnings risk for the portion of the
account balance invested in the separate accounts. For the equity indexed
products, we purchase primarily call options that are designed to match the
return owed to contract holders who elect to participate in one or more market
indices. Profitability on the portion of the equity indexed products tied to
market indices is significantly impacted by the spread on interest earned on
investments and the sum of (1) the cost of underlying call options purchased to
match the returns owed to contract holders and (2) the minimum interest
guarantees owed to the contract holder, if any. Profitability on the equity
indexed products is also impacted by changes in the fair value of the embedded
option which provides the contract holder the right to participate in market
index returns after the next anniversary date of the contract. This impacts
profitability as we only purchase one-year call options to fund the returns
owed to the contract holders at the inception of each contract year. This
practice matches with the contract holders rights to switch to different
indices on each anniversary date. The value of the forward starting options
embedded in the equity indexed products can fluctuate with changes in
assumptions as to future volatility of the market indices, risk free interest
rates, market returns and the lives of the contracts. The following table provides information about our fixed maturity
investments and mortgage loans for both our trading and other than trading
portfolios at September 30, 2004. The table presents amortized cost and
related weighted average interest rates by expected maturity dates. The
amortized cost approximates the cash flows of principal amounts in each of the
periods. The cash flows are based on the earlier of the call date or the
maturity date or, for mortgage-backed securities, expected payment patterns.
Actual cash flows could differ from the expected amounts. 37




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##### Table of Contents



Expected Cash Flows3 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter
    
    Cash Flows
    
    Fair Value($ in millions)Fixed maturity securities
available-for-sale
    
    $
    246
    
    
    $
    1,067
    
    
    $
    932
    
    
    $
    1,055
    
    
    $
    1,199
    
    
    $
    957
    
    
    $
    9,196
    
    
    $
    14,652
    
    
    $
    15,182Average interest rate
    
    
    6.3
    %
    
    
    5.9
    %
    
    
    6.3
    %
    
    
    6.0
    %
    
    
    5.7
    %
    
    
    5.8
    %
    
    
    5.9
    %Fixed maturity securities
held for trading purposes
    
    $
    15
    
    
    $
    146
    
    
    $
    161
    
    
    $
    175
    
    
    $
    259
    
    
    $
    281
    
    
    $
    717
    
    
    $
    1,754
    
    
    $
    1,754Average interest rate
    
    
    4.4
    %
    
    
    3.2
    %
    
    
    2.9
    %
    
    
    4.0
    %
    
    
    3.1
    %
    
    
    1.9
    %
    
    
    3.9
    %Mortgage loans
    
    $
    16
    
    
    $
    53
    
    
    $
    58
    
    
    $
    55
    
    
    $
    68
    
    
    $
    64
    
    
    $
    533
    
    
    $
    847
    
    
    $
    893Average interest rate
    
    
    7.2
    %
    
    
    7.5
    %
    
    
    7.5
    %
    
    
    7.4
    %
    
    
    7.4
    %
    
    
    7.4
    %
    
    
    7.1
    %Total
    
    $
    277
    
    
    $
    1,266
    
    
    $
    1,151
    
    
    $
    1,285
    
    
    $
    1,526
    
    
    $
    1,302
    
    
    $
    10,446
    
    
    $
    17,253
    
    
    $
    17,829
 In accordance with our strategy of minimizing credit quality risk, we
consistently invest in high quality marketable securities. Fixed maturity
securities are comprised of U.S. Treasury, government agency, mortgage-backed
and corporate securities. Approximately 62% of our fixed maturity securities
are issued by the U.S. Treasury or U.S. government agencies or are rated A or
better by Moodys, Standard and Poors, or the NAIC. Less than 7.8% of the
bond portfolio is below investment grade. Fixed maturity securities have an
average life of approximately 8.4 years. Prepayment risk refers to the changes in prepayment patterns that can
either shorten or lengthen the expected timing of the principal repayments and
thus the average life and the effective yield of a security. Such risk exists
primarily within the portfolio of mortgage-backed securities. Management
monitors such risk regularly. We invest primarily in those classes of
mortgage-backed securities that have average or lower prepayment risk. Our use of derivatives is generally limited to hedging purposes and has
principally consisted of using interest rate swaps and options. These
instruments, viewed separately, subject us to varying degrees of market and
credit risk. However when used for hedging, the expectation is that these
instruments would reduce overall market risk. Credit risk arises from the
possibility that counterparties may fail to perform under the terms of the
contracts. Equity price risk is the potential loss arising from changes in the value
of equity securities. In general, equities have more year-to-year price
variability than intermediate term bonds. However, returns over longer time
frames have been consistently higher. All of the above risks are monitored on an ongoing basis. A combination
of in-house systems and proprietary models and externally licensed software are
used to analyze individual securities as well as each portfolio. These tools
provide the portfolio managers with information to assist them in the
evaluation of the market risks of the portfolio. 
 Item 4. Controls and Procedures (a) Based upon their evaluation as of the end of the period covered by this
Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures as defined
in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, are
effective for recording, processing, summarizing and reporting the information
we are required to disclose in our reports filed under such act. (b) There was no change in our internal control over financial reporting during
our last fiscal quarter that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting. 38




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##### Table of Contents



PART II - OTHER INFORMATION 
 Item 1. Legal Proceedings In recent years, the life insurance industry, including the Company and
its subsidiaries, have been subject to an increase in litigation pursued on
behalf of purported classes of insurance purchasers, questioning the conduct of
insurers in the marketing of their products. The Company is routinely involved
in litigation and other proceedings, including class actions (such as pending
class action lawsuits related to the use of purportedly inappropriate sales
techniques and products for the senior market), reinsurance claims and
regulatory proceedings arising in the ordinary course of its business. Some of
these claims and legal actions are in jurisdictions where juries are given
substantial latitude in assessing damages, including punitive and exemplary
damages. In addition, regulatory bodies, such as state insurance departments
and attorneys general, periodically make inquiries and conduct examinations
concerning our compliance with insurance and other laws. We respond to such
inquiries and cooperate with regulatory examinations in the ordinary course of
business. Our litigation is subject to many uncertainties, and given its complexity
and scope, the outcomes cannot be predicted. It is possible that our results
of operations or cash flow in a particular quarterly or annual period could be
materially affected by an ultimate unfavorable resolution of pending litigation
and regulatory matters depending, in part, upon the results of operations or
cash flow for such period. Management believes, however, that the ultimate
outcome of all pending litigation and regulatory matters, after consideration
of applicable reserves, should not have a material adverse effect on our
financial position. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities The following table sets forth information regarding purchases of equity
securities for the nine months ended September 30, 2004: (c) Total number
    
    (d) Maximum numberof shares (or
    
    (or approximate dollar(a) Total
    
    (b) Average
    
    units) purchased
    
    value) of sharesnumber of
    
    price paid
    
    as part of publicly
    
    (or units) that mayshares (or units)
    
    per share
    
    announced plans
    
    yet be purchased underPeriod
    
    purchased (1)
    
    (or units)
    
    or programs
    
    the plans or programs (2)01/01/2004-01/31/2004
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    2,271,90002/01/2004-02/29/2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,271,90003/01/2004-03/31/2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,271,90004/01/2004-04/30/2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,271,90005/01/2004-05/31/2004
    
    
    244,400
    (2)
    
    
    37.45
    
    
    
    244,400
    
    
    
    2,027,50006/01/2004-06/30/2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,027,50007/01/2004-07/31/2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,027,50008/01/2004-08/31/2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,027,50009/01/2004-09/30/2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,027,500Total
    
    
    244,400
    
    
    $
    37.45
    
    
    
    244,400
  (1)
    
    Does not include shares withheld from employee stock awards to satisfy applicable tax withholding obligations.  (2)
    
    In August 2002, our board of directors authorized a repurchase program of up to 3 million shares of our
outstanding common stock. There is no expiration date for this program. 39




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##### Table of Contents



Item 6. 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. 40




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. DATED: November 4, 2004
    
    AMERUS GROUP CO.By
    
    /s/ Melinda S. UrionMelinda S. UrionExecutive Vice President,Chief Financial Officer and Treasurer(Principal Financial Officer)By
    
    /s/ Brenda J. CushingBrenda J. CushingSenior Vice President and Controller(Principal Accounting Officer)
 41




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##### Table of Contents



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




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##### Table of Contents



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