Annual Report for AmerUs Group Co.
 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


Form 10-K

þ Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 
For the fiscal year ended December 31, 2002 Commission File Number: 000-30898


AmerUs Group Co.

(Exact name of Registrant as specified in its charter)

699 Walnut Street

Des Moines, Iowa 50309-3948
(Address of principal executive offices, including zip code)
     
Iowa
(State or other jurisdiction of incorporation or organization)
  42-1458424
(I.R.S. Employer Identification No.)

Registrant’s telephone number, including area code (515) 362-3600


Securities registered pursuant to Section 12(b) of the Act:

     
Name of Each Exchange
Title of Each Class on Which Registered


Common Stock (no par value)   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

      Indicate by check mark whether the Registrant (1) has filed all reports 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 o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     Yes o                 No x

  Aggregate market value of voting stock held by non-affiliates of the Registrant as of March 3, 2003: $1,032,885,907

      Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)     Yes x.                 No o

      Number of shares outstanding of each of the Registrant’s classes of common stock on March 3, 2003 was as follows:

     
Common Stock
  39,027,897 shares

DOCUMENTS INCORPORATED BY REFERENCE

Notice of 2003 Annual Meeting of Shareholders and Proxy Statement

(incorporated into Part III)




 

TABLE OF CONTENTS

         
Page

Part I    
Item 1.
  Business   2
Item 2.
  Properties   17
Item 3.
  Legal Proceedings   17
Item 4.
  Submission of Matters to a Vote of Security Holders   17
Part II    
Item 5.
  Market for Registrant’s Common Equity and Related Stockholder Matters   18
Item 6.
  Selected Financial Data   20
Item 7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   21
Item 7A.
  Quantitative and Qualitative Disclosures About Market Risk   44
Item 8.
  Financial Statements and Supplementary Data   46
Item 9.
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   46
Part III    
Item 10.
  Directors and Executive Officers of the Registrant   46
Item 11.
  Executive Compensation   46
Item 12.
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   46
Item 13.
  Certain Relationships and Related Transactions   46
Item 14.
  Controls and Procedures   46
Part IV    
Item 15.
  Exhibits, Financial Statement Schedules, and Reports on Form 8-K   47
Index to Exhibits   48
Signatures   55
Power of Attorney   55
Index to Consolidated Financial Statements   F-1
Index to Consolidated Financial Statement Schedules   S-1


 

SAFE HARBOR STATEMENT

      All statements, trend analyses and other information contained in this report relative to markets for our products and trends in our operations or financial results, as well as other statements including words such as “anticipate”, “believe”, “plan”, “estimate”, “expect”, “intend”, and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. 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 our 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 laws, regulations and interpretations, which may affect the relative tax advantages of some of our products; (g) increasing competition in the sale of insurance and annuities and the recruitment of sales representatives; (h) regulatory changes, actions, interpretations or pronouncements including those relating to the regulation of insurance companies and the regulation and sale of their products, (i) our ratings and those of our subsidiaries by independent rating organizations which we believe are particularly important to the sale of our products; (j) the performance of our investment portfolios; (k) the impact of changes in standards of accounting; (l) our ability to integrate the business and operations of acquired entities; (m) expected protection products and accumulation products margins; (n) the impact of anticipated investment transactions; and (o) unanticipated litigation or regulatory investigations or examinations.

      There can be no assurance that other factors not currently anticipated by us will not materially and adversely affect our results of operations. You are cautioned not to place undue reliance on any forward-looking statements made by us or on our behalf. Forward-looking statements speak only as of the date the statement was made. We undertake no obligation to update or revise any forward-looking statement.

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PART I

ITEM 1.     BUSINESS

Web Access to Reports

      We make our periodic and current reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, available, free of charge at our website as soon as practicable after such reports are filed electronically with or furnished to the U.S. Securities and Exchange Commission. Our internet website address to obtain such filings is www.amerus.com.

Definitions

      When used in this document, the terms “AmerUs,” “we,” “our” and “us” refer to AmerUs Group Co. (including American Mutual Holding Company and AmerUs Life Holdings, Inc. as predecessor entities of AmerUs Group Co.), an Iowa corporation, and our consolidated subsidiaries, unless otherwise specified or indicated by the context.

General

      We are a holding company whose subsidiaries are primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life insurance and annuity products to individuals and businesses in all 50 states, the District of Columbia and the U.S. Virgin Islands. We have two reportable operating segments: protection products and accumulation products. The protection products segment was formerly known as the life insurance segment and the accumulation products segment was formerly known as the annuity segment. The primary offerings of the protection products segment are interest-sensitive whole life, equity-indexed life, universal life and term life insurance policies. The primary offerings of the accumulation products segment are individual deferred fixed annuities, equity- indexed annuities and funding agreements.

      We were founded in 1896 as the mutual insurer Central Life Assurance Company. In 1996, we became the first Mutual Holding Company, or MHC, a structure that allows mutuals to access the public equity markets, which AmerUs did in 1997 with its initial public offering. In 2000, AmerUs reorganized its MHC structure through a full demutualization and became a 100% public stock company.

      We have had positive organic growth in our businesses. We have also successfully executed a series of strategic acquisitions that have helped generate sales growth, as well as balance our product and geographic distribution. The following is a summary of these acquisitions and the benefits created:

  •  In 1994, Central Life Assurance Company and American Mutual Life Insurance Co. merged providing us with significant scale in our life insurance operations. The merger resulted in our becoming one of the 25 largest mutual insurers in America at that time.
 
  •  In October 1997, the acquisition of Delta Life Corporation launched our annuity business. At the time of the acquisition, Delta Life had about $2.0 billion in assets and specialized in single-premium deferred annuity and equity-indexed annuity products.
 
  •  In December 1997, we acquired AmVestors Financial Corporation, predecessor to AmerUs Annuity Group Co., which specialized in the sale of individual fixed annuity products. The acquisition further strengthened our presence in asset accumulation and retirement and savings markets.
 
  •  In 2001, we acquired Indianapolis Life Insurance Company, an Indiana life insurance company, and its subsidiaries which had $5.8 billion in consolidated assets at the time of the acquisition. The acquisition allowed us to strengthen our life insurance business and ultimately provided us with a better balance of annuities and life insurance products.

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      We sold certain lines of business and made the decision to exit certain other businesses in 1998. These businesses are referred to as discontinued operations and include the following activities: banking, residential real estate brokerage, and mortgage banking.

Subsidiaries

      We have four main direct subsidiaries: AmerUs Life Insurance Company, or ALIC, an Iowa life insurance company; AmerUs Annuity Group Co., or AAG, a Kansas corporation; AmerUs Capital Management Group, Inc., or ACM, an Iowa corporation; and ILICO Holdings, Inc., an Indiana corporation.

      AAG owns, directly or indirectly, two Kansas life insurance companies: American Investors Life Insurance Company, Inc., or American; and Financial Benefit Life Insurance Company, or FBL. Delta Life and Annuity Company, or Delta, was merged into American effective December 31, 2002.

      ILICO Holdings, Inc., has one wholly-owned subsidiary, Indianapolis Life Insurance Company, or ILIC, an Indiana life insurance company. ILIC has three wholly-owned subsidiaries: Bankers Life Insurance Company of New York, or Bankers Life, a New York life insurance company; IL Securities, Inc., an Indiana corporation; and IL Annuity and Insurance Company, or IL Annuity, a Kansas life insurance company. When used in this document, the term “ILICO” refers to ILICO Holdings, Inc. and its consolidated subsidiaries.

Organization as of December 31, 2002

(CHART)

(A)  ILICO Holdings, Inc. is owned by AmerUs Group Co. (92.2%) and AmerUs Life Insurance Company (7.8%)

Reorganization

      We were formerly known as American Mutual Holding Company, or AMHC and were a mutual insurance holding company, with our principal asset being a 58% interest in AmerUs Life Holdings, Inc., or ALHI. Public stockholders owned the remaining 42% interest in ALHI with their interest referred to as minority interest. ALHI was a holding company which directly or indirectly owned three principal life insurance subsidiaries: ALIC, American and Delta. On September 20, 2000, we converted to stock form, changed our name to AmerUs Group Co. and acquired the minority interest of ALHI by issuing our common stock in exchange for the outstanding shares of ALHI held by the public. The value of the stock exchange was approximately $298 million and ALHI was merged into us simultaneously with the stock exchange.

      Prior to our conversion to a stock company, which is referred to as a demutualization, we were owned by individuals and entities who held insurance policies or annuity contracts issued by ALIC. Such individuals and entities were considered members. In connection with our demutualization, we distributed cash, policy credits

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and our newly issued common stock to those members in exchange for their membership interests. The value of the distribution totaled approximately $792 million.

      The acquisition of the minority interest of ALHI by us was accounted for as a purchase and 42% of the book value of the assets and liabilities of ALHI was adjusted to market value as of the acquisition date. Approximately 42% of the ALHI earnings for our fiscal periods prior to the acquisition date are deducted from our results of operations on the line titled “minority interest” in our consolidated statements of income. From the acquisition date forward, our results of operations include 100% of such earnings.

Closed Block

      We have established two closed blocks of policies: (a) the first on June 30, 1996 in connection with the reorganization of ALIC from a mutual company to a stock company, and (b) the second on March 31, 2001 in connection with the reorganization of ILIC from a mutual company to a stock company (collectively, the closed block). 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 give reasonable assurance to owners of insurance policies that, after the reorganizations 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 crediting continued. The assets, including revenue therefrom, allocated to the closed block will accrue solely to the benefit of the owners of policies included in the closed block until the closed block no longer exists. We will continue to pay guaranteed benefits under all policies, including policies included in the closed block, in accordance with their terms. In the event that the closed block’s assets are insufficient to meet the benefits of the closed block’s guaranteed benefits, general assets would be utilized to meet the contractual benefits of the closed block’s policyholders.

Acquisition

      On May 18, 2001, we completed the acquisition of ILICO for an amount of cash, policy credits and shares of our common stock equal to the value of 9.3 million shares of our common stock. The purchase price totaled a value of approximately $326 million. The acquisition was accounted for as a purchase and the total purchase price was allocated to the assets and liabilities of ILICO based on the relative fair values as of the acquisition date. See further discussion in note 15 to the consolidated financial statements.

Dispositions

      ILIC previously owned The Indianapolis Life Group of Companies, Inc., or IL Group. IL Group owned Bankers Life, IL Securities, Inc., IL Annuity, and Western Security Life Insurance Company, or WSLIC, an Arizona life insurance company. Effective on March 5, 2002, IL Group was dissolved and its four wholly-owned subsidiaries became direct subsidiaries of ILIC. In addition, on March 29, 2002, WSLIC was sold with its insurance business transferred to ILIC prior to the sale. The sale of the corporate organization and insurance licenses resulted in a gain of approximately $1.9 million which is included in realized gains and losses on investments.

Financial Information

      Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. See note 1 to the consolidated financial statements for additional information about GAAP and our significant accounting policies.

      We measure our profit or loss and total assets by operating segments. We have two reportable operating segments: protection products and accumulation products. See a further discussion of our operating segments in “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Protection Products Segment

Products

      Our protection products segment consists of individual fixed life insurance premiums from traditional life insurance products, universal life insurance products and equity-indexed life insurance products as set forth in the following table:

                           
Sales Activity by Product
For The Years Ended December 31,

2002 2001 2000



($ in thousands)
Traditional life insurance:
                       
 
Whole life
  $ 4,236     $ 6,842     $ 14,161  
 
Interest-sensitive whole life
    30,622       12,411        
 
Term life
    16,390       7,763       7,223  
Universal life
    32,570       21,794       10,992  
Equity-indexed life
    45,843       25,865       7,137  
     
     
     
 
Direct first year annualized premiums
    129,661       74,675       39,513  
Private label term life premiums
    8,970       6,637        
     
     
     
 
 
Total
  $ 138,631     $ 81,312     $ 39,513  
     
     
     
 

      Traditional Life Insurance Products. Traditional life insurance products include whole life, interest-sensitive whole life and term life insurance products.

      Whole life insurance is designed to provide benefits for the life of the insured. This product generally provides for level premiums and a level death benefit and requires payments in excess of the mortality cost in earlier years to offset increasing mortality costs in later years. Sales of whole life insurance decreased in 2002 and 2001, as compared to each prior year, due in part to our increased marketing focus on equity-indexed life products which has resulted in a shift in sales from whole life to equity-indexed. In addition, there has been an overall general industry decline in sales of whole life products. We ceased taking new applications for sales of whole life insurance on December 31, 2002.

      Interest-sensitive whole life insurance also provides benefits for the life of the insured. However, this product has flexible premium and benefit patterns not available with traditional whole life plans. Cash value accumulation is interest sensitive and responds to current interest and mortality rates. Sales of interest-sensitive whole life insurance are all attributable to ILICO.

      Term life insurance provides life insurance protection for a specific time period (which generally can be renewed at an increased premium). Such policies are mortality-based and offer no cash accumulation feature. Term life insurance is a highly competitive and quickly changing market. Term life insurance sales increased in 2002 and 2001, as compared to each prior year, due to the acquisition of ILICO.

      We also distribute term products of ILICO through strategic alliances with private label partners. Under private label arrangements, ILICO designs and issues products that are distributed through other life insurance companies, our private label partners. ILICO reinsures a portion of the risks on those products which we refer to as our private label sales. We have three private label partners that are actively writing new business. During the second quarter of 2002, we ceased recruiting new private label partners.

      For the year ended December 31, 2002, sales of whole life, interest-sensitive whole life and term life insurance products represented 3%, 24% and 13%, respectively, of direct first year annualized premiums for individual life insurance products sold.

      Universal Life Insurance Products. We offer universal life insurance products, which provide flexible benefits for the insured. Within product limits and state regulations, policyowners may vary the amount and timing of premiums and the amount of the death benefit of their policies and keep the policies in force, as long

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as there are sufficient policy funds available to cover all policy charges for the next coverage period. Premiums, net of specified expenses, are credited to the policy, as is interest, generally at a rate determined from time to time by us. Specific charges are made against the policy for the cost of insurance and for expenses. We invest the premiums we receive from the sale of universal life insurance products in our investment portfolio. Our gross margin from these products is the yield we earn on our investment portfolio plus the internal product charges less interest credited to policies and less mortality and other expenses.

      Sales of universal life increased in 2002 and 2001 primarily as a result of the acquisition of ILICO. Excluding ILICO, universal life sales decreased $1.9 million and $5.0 million in 2002 and 2001, respectively, due to the introduction and growth in sales of equity-indexed life products in 2000. The weighted average crediting rate for universal life insurance liabilities was 5.39% for the year 2002, 5.63% for the year 2001 and 5.62% for the year 2000. The crediting rate has been lowered as a result of reduced investment yields associated with the declining interest rate environment. For the year ended December 31, 2002, sales of universal life insurance products represented 25% of direct first year annualized premiums for individual life insurance products sold.

      Equity-Indexed Life Products. We also offer equity-indexed life insurance products which are similar in structure to universal life products but allow the policyowner to elect an interest earnings strategy for a portion of the account value earnings. Earnings are credited based in part on increases in the appropriate indices, primarily the Standard & Poor’s 500 Composite Stock Index(R) (S&P 500 Index), excluding dividends. The earnings credit is subject to a participation rate and an annual cap. Our gross margin on our equity-indexed life products is similar to that of our universal life insurance products. However, due to the equity-indexed earnings strategies, we invest a portion of the premiums we receive from the sale of these products in call options. We may affect the cost of the call options by adjusting interest crediting parameters that are provided for in the policy. Our return on the call options is generally expected, in a growing equity market, to correspond to the earnings we are contractually bound to credit on the equity-indexed strategies. The remainder of the premium is invested in our investment portfolio to support the contractual minimum guarantees that may come into effect if the equity index declines. The structure of our product, together with the allocation of our equity-indexed life product premiums between call options and our investment portfolio, are intended to provide for a positive gross margin in both increasing and decreasing equity markets.

      Equity-indexed life insurance sales increased in 2002 and 2001 following our focus on product marketing beginning in 2000. We are a leading writer of equity-indexed life products in the United States. Sales of the equity-indexed life product as a percentage of direct first year individual life insurance annualized premiums was approximately 35% in 2002.

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      The following table sets forth our collected life insurance premiums, including collected premiums associated with the closed block, for the periods indicated:

                             
Collected Premiums by Product
For The Years Ended December 31,

2002 2001 2000



($ in thousands)
Individual life premiums collected:
                       
 
Traditional life:
                       
   
First year and single
  $ 149,740     $ 113,126     $ 83,849  
   
Renewal
    344,715       274,784       185,078  
     
     
     
 
   
Total
    494,455       387,910       268,927  
 
Universal life:
                       
   
First year and single
    75,761       45,597       27,306  
   
Renewal
    128,869       109,485       73,737  
     
     
     
 
   
Total
    204,630       155,082       101,043  
     
     
     
 
 
Equity-indexed life:
                       
   
First year and single
    78,797       40,504       5,265  
   
Renewal
    14,526       4,212        
     
     
     
 
   
Total
    93,323       44,716       5,265  
     
     
     
 
Total individual life
    792,408       587,708       375,235  
 
Reinsurance assumed
    48,664       30,740       1,464  
 
Reinsurance ceded
    (220,589 )     (74,152 )     (40,740 )
     
     
     
 
Total individual life, net of reinsurance
  $ 620,483     $ 544,296     $ 335,959  
     
     
     
 

      Individual life insurance premiums collected increased in 2002 and 2001 due to the additional premiums from the acquisition of ILICO and increased equity-indexed life sales.

      Reinsurance assumed increased in 2002 and 2001. The entire amount of the increase is from the ILICO acquisition. ILICO private labels various term life products and previously private labeled second-to-die products which are no longer being sold but which continue to have renewal premiums. The products are designed by ILICO, issued by ILICO’s private label partners and then assumed in whole or in part by ILICO. We have three private label partners that are actively writing new business. During the second quarter of 2002, we ceased recruiting new private label partners.

      Beginning January 1, 2000, ALIC entered into a new reinsurance arrangement that reduced its retention to 10% of the net amount of risk on any one policy not to exceed company retention limits for the majority of policies issued since July 1, 1996 and for the majority of new business going forward. ALIC’s retention limits on any one life vary by age and rating table and are generally between $150,000 and $500,000. In addition, effective July 1, 2000, ALIC entered into a reinsurance agreement covering its closed block policies. Under this agreement, ALIC has reinsured approximately 90% of the closed block net amount at risk not previously reinsured. ALIC also entered into an indemnity reinsurance agreement effective December 31, 2001 covering universal life policies of the open block issued prior to July 1, 1996, that was subsequently replaced by another indemnity reinsurance agreement effective October 1, 2002 covering 90% of the net amount at risk not previously reinsured of any one policy. As a result of these new agreements, ceded reinsurance premium for ALIC was $127.3 million in 2002, $35.2 million in 2001 and $40.7 million in 2000. The remainder of the ceded premium was from ILICO and amounted to $93.3 million in 2002 and $39.0 million in 2001. ILICO’s reinsurance agreements effectively reduce ILICO’s retention limit to between $150,000 and $500,000.

      We also entered into new reinsurance agreements effective December 31, 2002, which did not impact collected premiums in 2002 but will affect collected premiums beginning January 1, 2003. ALIC entered into

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an 80% modified coinsurance quota share and coinsurance agreement covering certain individual life policies of the closed block with a related reinsurance premium of $1.5 million accrued as of December 31, 2002. Also, ILIC entered into a reinsurance agreement to cover 100% quota share of retained net amounts at risk for certain open block and closed block policies in force at December 31, 2002, for which a reinsurance premium of $0.9 million was accrued at December 31, 2002.

      The following table sets forth information regarding our life insurance in force for each date presented:

                           
Individual Life Insurance in Force
As of December 31,

2002 2001 2000



($ in thousands)
Traditional life
                       
 
Number of policies
    451,933       405,077       245,143  
 
GAAP life reserves
  $ 3,236,223     $ 3,101,938     $ 1,744,038  
 
Face amounts
  $ 56,883,000     $ 49,655,000     $ 23,466,000  
Universal life
                       
 
Number of policies
    147,469       151,982       110,323  
 
GAAP life reserves
  $ 1,425,746     $ 1,380,379     $ 943,569  
 
Face amounts
  $ 19,095,000     $ 18,792,000     $ 12,257,000  
Equity-indexed life
                       
 
Number of policies
    23,679       10,591       2,930  
 
GAAP life reserves
  $ 126,821     $ 51,004     $ 13,015  
 
Face amounts
  $ 4,574,000     $ 2,028,000     $ 478,000  
Total life insurance
                       
 
Number of policies
    623,081       567,650       358,396  
 
GAAP life reserves
  $ 4,788,790     $ 4,533,321     $ 2,700,622  
 
Face amounts
  $ 80,552,000     $ 70,475,000     $ 36,201,000  

      The acquisition of ILICO in 2001 increased the number of policies in force by 213,000, GAAP life reserves by $1.7 billion and face amounts by $31.2 billion at December 31, 2001.

Distribution Systems

      Our subsidiaries sell life insurance in all 50 states, the District of Columbia and the U.S. Virgin Islands. The states with the highest geographic concentration of sales, based on statutory premiums, are California, Illinois, Iowa, Minnesota, New York and Texas in 2002. These states account for approximately 47% of our statutory premiums.

      Our target customers are individuals in the middle and upper income brackets and small businesses. We market our life insurance products on a national basis primarily through a Preferred Producer agency system, a Personal Producing General Agent (PPGA) distribution system and through Independent Marketing Organizations (IMOs). We currently employ 19 regional vice presidents who are responsible for supervising these distribution systems within their assigned geographic regions.

      Under the Preferred Producer agency system, a contractual arrangement is entered into with the Preferred Producer general agent for the sale of insurance products by the Preferred Producer agents and brokers assigned to the Preferred Producer general agent’s agency. The Preferred Producer general agents are primarily compensated by receiving a percentage of the first year commissions paid to Preferred Producer agents and brokers in the Preferred Producer general agent’s agency and by renewal commissions on premiums subsequently collected on that business. In addition, the Preferred Producers receive certain fringe benefits and other allowances.

      The Preferred Producer general agents are independent contractors and are generally responsible for the expenses of operating their agencies, including office and overhead expenses and the recruiting, selection, contracting, training and development of Preferred Producer agents and brokers in their agency. As of December 31, 2002, we had 75 Preferred Producer general agents in 27 states, through which approximately

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1,200 Preferred Producer agents sell our products. While Preferred Producer agents in the Preferred Producer agency system are non-exclusive, most agents use our products for a majority of their new business for the type of products offered by us. No single Preferred Producer general agency accounts for more than 2% of the total first year life commissions paid by us.

      Preferred Producer agents are also independent contractors and are primarily compensated by commissions on first year and renewal premiums collected on business written by them plus certain fringe benefits and other allowances. In addition, Preferred Producer agents can earn bonus commissions, graded by production and persistency on their business.

      Under the PPGA system, we contract primarily with individuals who are experienced individual agents or head a small group of experienced individual agents. These individuals are independent contractors and are responsible for all of their own expenses. These individuals often sell products for other insurance companies, and may offer selected products we offer rather than our full line of insurance products. The PPGA system is comprised of approximately 1,300 PPGAs, with approximately 3,500 agents.

      PPGAs are compensated by commissions on first year and renewal premiums collected on business written by themselves and the agents in their units. In addition to a base commission, PPGAs may earn bonus commissions on their business, graded by production and persistency.

      We have also developed programs to sell life insurance through select IMOs. The customers targeted and the products sold are similar to those of the Preferred Producer agency system and the PPGA system.

      Under the IMO system, a contractual arrangement is entered into with an IMO to promote our insurance products to their network of agents and brokers. The IMO receives a commission and override commission on the business produced. We currently have approximately 90 IMOs under contract.

      We also distribute term products of ILICO through strategic alliances with private label partners. Under private label arrangements, ILICO designs and manufactures products that are distributed through the field forces of other life insurance companies, our private label partners. We currently have three private label partners actively writing new business.

Accumulation Products Segment

Products

      Our accumulation products segment offerings consist of individual deferred fixed annuities (comprised of traditional deferred fixed annuities and equity-indexed fixed annuities), variable annuities and funding agreements. Annuities provide for the payment of periodic benefits over a specified time period. Benefits may commence immediately or may be deferred to a future date. Fixed annuities generally are backed by a general investment account and credited with a rate of return that is periodically reset. Variable annuities provide for the policyholder to direct all or a portion of his or her account balance into an investment that effectively passes the market risks and rewards of holding that investment to the policyholders. Funding agreements are arrangements for which we receive deposit funds and for which we agree to repay the deposit and a contractual return for the duration of the contract. Our annuity deposits consisted of approximately 61% from deferred fixed annuity products, approximately 38% from equity-indexed annuity products and approximately 1% from

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variable annuity products in 2002. Funding agreement deposits totaled $875 million in 2002. The following table sets forth deposits for the periods indicated:
                             
Deposits by Product
For The Years Ended December 31,

2002 2001 2000



($ in thousands)
Annuities
                       
 
Fixed annuities:
                       
   
Deferred fixed annuities
  $ 1,099,872     $ 1,322,725     $ 1,107,147  
   
Equity-indexed annuities
    683,819       612,043       374,503  
 
Variable annuities
    6,230       27,483        
     
     
     
 
 
Total Annuities
    1,789,921       1,962,251       1,481,650  
Funding agreements
    875,000              
     
     
     
 
   
Total
    2,664,921       1,962,251       1,481,650  
Reinsurance assumed
          194,317        
Reinsurance ceded
    (60,916 )     (175,485 )     (34,534 )
     
     
     
 
Total deposits, net of reinsurance
  $ 2,604,005     $ 1,981,083     $ 1,447,116  
     
     
     
 

      Deferred Fixed Annuity Products. We offer a variety of interest rate crediting strategies on our traditional deferred fixed annuity products. These strategies include initial interest crediting rates with guarantees for periods of one to five years. Following the initial guarantee period, we may adjust the credited interest rate annually, subject to the minimum interest rates specified in the contracts. Such minimum guarantee rates currently range from 3% to 4.5%. 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. We invest the deposits we receive from deferred fixed annuity product sales in our investment portfolio. We call the difference between the yield we earn on our investment portfolio and the interest we credit on our deferred fixed annuities our investment spread. The investment spread is a major driver of the profitability of our deferred fixed annuity products. Deferred fixed annuity deposits decreased $222.9 million in 2002 compared to 2001 as a result of deploying capital to funding agreements which are intended to provide a higher return on equity. In 2001, deferred fixed annuity deposits increased $215.6 million compared to 2000 which was primarily attributable to product repricing, increased marketing efforts and the acquisition of ILICO.

      Effective October 1, 2000, we entered into a reinsurance agreement to cede 35% of certain fixed annuity production on a modified coinsurance basis. Fixed annuity production ceded under this agreement totaled approximately $160.3 million in 2001 and $34.2 million in 2000. In the fourth quarter of 2001, the agreement was cancelled and the previously ceded premiums were recaptured amounting to $194.3 million. ILICO reinsures approximately 75% of its fixed annuities on a modified coinsurance basis which increased reinsurance ceded by approximately $4.7 million in 2002 and $15.2 million in 2001.

      Equity-Indexed Annuities. We offer equity-indexed annuity products that provide various interest crediting strategies, including strategies linked to equity and investment grade bond indices. For deposits allocated to indexed crediting strategies, interest is credited to these products based in part on the increases in the applicable indices, less any applicable fees and subject to any applicable caps. Similar to our deferred fixed annuity products, we invest the deposits we receive from equity-indexed annuity product sales in our investment portfolio. In addition, for deposits allocated to equity-indexed crediting strategies, we use a portion of the deposits to purchase call options. We may affect the cost of the call options by adjusting interest crediting parameters that are provided for in the policy. Our return on the call options is generally expected, in a growing equity market, to correspond to the earnings we are contractually bound to credit on the equity-indexed strategies. The remainder of the deposit is invested in our investment portfolio to support the

10


 

contractual minimum guarantees that may come into effect if the equity index declines. The gross spread on deposits allocated to our equity-indexed strategy is:

          The yield we earn on our investment portfolio,

          Less the cost of the call options,
          Less any interest credited to policyholders due to minimum guarantees in effect.

      The gross spread, similar to the investment spread on deferred fixed annuity products, is a major driver of profitability of our equity-indexed annuity products. The structure of our product, together with the allocation of our equity-indexed strategy deposits between call options and our investment portfolio, are intended to provide for a positive gross spread in both increasing and decreasing equity markets.

      Equity-indexed annuity sales increased in 2002 and 2001 as compared to the prior year periods due to its popularity with consumers and agents following the introduction of new products in 2000. In the third quarter of 2002, we entered into a new modified coinsurance reinsurance agreement to cede 25% of certain equity-indexed annuity products which amounted to $56.2 million of ceded premium in 2002.

      Variable Annuities. Through our acquisition of ILICO, we obtained a variable annuity product line. In the first quarter of 2002, we ceased new sales of these products, except for new policies issued as part of existing employer-sponsored qualified plan contracts. All sales were discontinued effective September 30, 2002. Our agents are encouraged to make new sales of variable annuities through the Ameritas Joint Venture. As these sales are through the joint venture, they do not appear in our direct sales amounts. See “Ameritas Joint Venture” below. The assets and liabilities related to the direct variable annuities are shown on the consolidated balance sheets as “separate account assets” and “separate account liabilities.”

      Funding Agreements. We placed primarily fixed rate funding agreements totaling $875 million in 2002. Funding agreements are arrangements for which we receive deposit funds and for which we agree to repay the deposit and a contractual return for the duration of the contract. Total funding agreements as of December 31, 2002, amounted to $1.125 billion compared to $250 million at December 31, 2001.

      The following table sets forth information regarding fixed annuities in force for each date presented:

                           
Annuities in Force
As of December 31,

2002 2001 2000



($ in thousands)
Deferred fixed and immediate annuities
                       
 
Number of policies
    181,581       176,857       161,087  
 
GAAP annuity reserves
  $ 7,579,869     $ 6,909,793     $ 5,956,929  
Equity-indexed annuities
                       
 
Number of policies
    76,863       73,921       17,426  
 
GAAP annuity reserves
  $ 3,724,598     $ 3,749,971     $ 792,988  
Total fixed annuities
                       
 
Number of policies
    258,444       250,778       178,513  
 
GAAP annuity reserves
  $ 11,304,467     $ 10,659,764     $ 6,749,917  

      The acquisition of ILICO in 2001 increased the total number of annuity policies by 57,000 and GAAP annuity reserves by $2.9 billion at December 31, 2001.

Distribution Systems

      We sell annuities in all 50 states, the District of Columbia and the U.S. Virgin Islands. The states with the highest geographic concentration of sales, based on statutory premiums, are Arizona, California, Florida, Iowa, Ohio, Pennsylvania and Texas in 2002. These states account for approximately 51% of our statutory premiums.

      We direct our marketing efforts towards the asset accumulation, conservative savings and retirement markets. We market our annuity products on a national basis primarily through networks of independent

11


 

agents. The independent agents are supervised by regional vice presidents and regional directors or IMOs. At December 31, 2002, we had approximately 18,000 independent agents licensed to sell our annuity products. In addition, the Preferred Producer Agency and PPGA systems discussed previously are utilized to market certain annuity products.

      Our IMOs consist of approximately 36 contracted organizations and five wholly-owned organizations. The IMOs are responsible for recruiting, servicing and educating agents in an effort to promote our products. The IMOs receive an override commission based on the business produced by their agents. Our wholly-owned organizations accounted for approximately 43% of our annuity sales in 2002. No single agent accounted for more than 1% of total annuity sales in 2002. We do not have exclusive agency agreements with our agents and we believe most of these agents sell products similar to ours for other insurance companies.

      We also sell annuities through a bank distribution system. The customers targeted and the products sold are similar to those sold by the independent agent networks. We own an independent marketing organization that is associated with over 950 community banks in the southeast region of the United States. Fixed annuity products are the primary product focus of this organization.

      Under the bank distribution system, we contract with banks and marketing organizations for the sale of annuities by agents who are employees of the banks. Commissions are paid to the banks. At December 31, 2002, we had approximately 75 banks and 7 marketing organizations under contract through which approximately 300 agents sell our products. We provide training and servicing support to the banks and marketing organizations.

Ameritas Joint Venture

      We participate in a joint venture, the Ameritas Joint Venture, with Ameritas Life Insurance Corp. (or Ameritas) through ALIC’s 34% ownership interest in AMAL Corporation, a Nebraska corporation. AMAL Corporation’s operations are conducted through Ameritas Variable Life Insurance Company, (or AVLIC), Ameritas Investment Corp. (or AIC), and The Advisors Group, Inc. (or TAG), its three wholly-owned subsidiaries. AVLIC is licensed to conduct business in 47 states and the District of Columbia. AIC and TAG are registered broker-dealers. Our partner in the Ameritas Joint Venture, Ameritas, is a Nebraska mutual life insurance company which has been in existence for more than 100 years.

      Our investment in the Ameritas Joint Venture provides access to a line of existing variable life insurance and annuity products while providing a lower-cost entry into an established business, helping to eliminate significant start-up costs and allowing for immediate potential earnings.

      The Ameritas Joint Venture offers through AVLIC fixed annuity products, flexible premium and single premium variable universal life insurance products and variable annuities. Variable products provide for allocation of funds to a general account or to one or more separate accounts under which the owner bears the investment risk. Through AVLIC’s fund managers, owners of variable annuities and life insurance policies are able to choose from a range of investment funds offered by each manager. Under the current terms of the joint venture agreement, ALIC and Ameritas direct their new variable annuities and variable life insurance through the Ameritas Joint Venture.

      The variable life insurance products and the fixed and variable annuities offered by the Ameritas Joint Venture are distributed through our Preferred Producer general agency, PPGA and Bank distribution systems, as well as through the distribution systems of Ameritas and AVLIC.

      Under the current terms of the joint venture agreement, we purchased an additional 5% of AMAL Corporation in March 2001, for $7.2 million as certain premium growth targets were met which brought our total ownership in AMAL Corporation to 39%. During 2002, Ameritas contributed additional investments, certain in-force business and other assets to the Ameritas Joint Venture which resulted in the reduction of our ownership from 39% to 34%. In addition, in December 2002, both Ameritas and ALIC contributed additional cash which amounted to $5 million by ALIC to maintain our 34% interest. ALIC and Ameritas Life Insurance Company each have guaranteed the policyholder obligations of AVLIC. The guarantee of each party is joint and several, and will remain in effect until certain conditions are met.

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      As of December 31, 2002, AMAL Corporation had total consolidated assets of $2,212 million and total consolidated shareholder’s equity of $141 million on a GAAP basis. AVLIC had $8,767 million of insurance in force and $73 million in surplus as of December 31, 2002, on a statutory basis.

Competition

      We operate in a highly competitive industry. We compete with numerous life insurance companies and other entities including banks and other financial institutions, many of which have greater financial and other resources. We believe that the principal competitive factors in the sale of insurance products are product features, price, commission structure, perceived stability of the insurer, financial strength ratings, value-added service and name recognition. Many other companies are capable of competing for sales in our target markets (including companies that do not presently compete in such markets). Our ability to compete for sales is dependent upon our ability to successfully address the competitive factors.

      In addition to competing for sales, we compete for qualified agents and brokers to distribute products. Strong competition exists among insurance companies for agents and brokers with demonstrated ability. We believe that the bases of competition for the services of such agents and brokers are commission structure, support services, prior relationships and the strength of an insurer’s products. Although we believe that we have good relationships with our agents and brokers, our ability to compete will depend on our continued ability to attract and retain qualified persons.

Ratings

      Ratings with respect to financial strength are an increasingly important factor in establishing the competitive position of insurance companies. The following are the ratings as of March 1, 2003 for our major insurance subsidiaries currently writing new business:

                         
Company Rating Service Rating Type Rating




American
    Standard & Poor’s       insurer financial strength       A+ (strong)  
American
    A. M. Best       financial condition       A (excellent)  
American
    Moody’s       insurance financial strength       A3 (good)  
ALIC
    Standard & Poor’s       insurer financial strength       A+ (strong)  
ALIC
    A. M. Best       financial condition       A (excellent)  
ALIC
    Moody’s       insurance financial strength       A3 (good)  
Bankers Life
    Standard & Poor’s       insurer financial strength       A+ (strong)  
Bankers Life
    A. M. Best       financial condition       A (excellent)  
ILICO
    Standard & Poor’s       insurer financial strength       A+ (strong)  
ILICO
    A. M. Best       financial condition       A (excellent)  
ILICO
    Moody’s       insurance financial strength       A3 (good)  

      Two of our insurance subsidiaries, FBL and IL Annuity, are not currently writing new business. The ratings for FBL were a Standard & Poor’s rating of BBB+ (good) and an A.M. Best rating of B+ (very good). IL Annuity has a Standard & Poor’s rating of BB+ (marginal) and an A.M. Best rating of A (excellent).

      On September 6, 2002, Moody’s Investor Services changed the rating outlook for all of our insurance subsidiaries to negative from stable. The change occurred as part of Moody’s assessment of its current life insurers’ ratings given the current operating environment. A negative outlook indicates that if certain trends continue or worsen, Moody’s believes the insurance subsidiaries ratings may have to be adjusted downward.

13


 

Insurance Underwriting

      We follow detailed, uniform underwriting practices and procedures in our insurance business which are designed to assess risks before issuing coverage to qualified applicants. We have professional underwriters who evaluate policy applications on the basis of information provided by applicants and others.

Reinsurance

      In accordance with industry practices, we reinsure portions of our life insurance exposure with unaffiliated insurance companies under traditional indemnity reinsurance arrangements. Such reinsurance arrangements are in accordance with standard reinsurance practices within the industry. We enter into these arrangements to assist in diversifying risks and to limit the maximum loss on risks that exceed policy retention limits. Indemnity reinsurance does not fully discharge our obligation to pay claims on business we reinsure. As the ceding company, we remain responsible for policy claims to the extent the reinsurer fails to pay such claims. We annually monitor the creditworthiness of our primary reinsurers, and have experienced no material reinsurance recoverability problems in recent years.

      For accounting purposes, premiums and expenses in the income statement are reported net of reinsurance ceded. Policy reserves, policyowner funds and other related assets and liabilities are not reduced for reinsurance ceded in the balance sheet, rather a reinsurance receivable is established for such balance sheet items. Due to the ILICO acquisition, reinsurance receivables increased as shown on our balance sheet to $856.1 million at December 31, 2002 compared to $732.0 million at December 31, 2001 and $318.4 million at December 31, 2000.

      We reinsure mortality risk on individual life insurance policies. Our retention is generally between $150,000 and $500,000 on any single life depending on the type of policy reinsured. We also reinsure certain annuity business primarily on a modified coinsurance basis.

      At December 31, 2002 and 2001, we ceded life insurance with a face amount of $51.4 billion with 47 unaffiliated reinsurers and life insurance with a face amount of $49.5 billion with 36 unaffiliated reinsurers, respectively. The following is a summary of our principal life reinsurers as of December 31, 2002:

                         
% of Total
Face A.M. Best Face Amount
Reinsurer Amount Ceded Rating Reinsured




(In Billions)
RGA Reinsurance Company
  $ 16.0       A+       31 %
Reassure America Life Insurance Company (A)
    6.2       A++       12  
Employers Reassurance Corporation
    5.3       A++       10  
Swiss Re Life & Health America Inc. (A)
    3.4       A++       7  
Lincoln National Life Insurance Company (A)
    3.3       A+       6  
Transamerica Occidental Life Insurance Company
    2.5       A+       5  
(A) Affiliated companies
                       

      At December 31, 2002 and 2001, we ceded fixed and equity-indexed annuities having reserves of $1.5 billion and $1.7 billion, respectively. The following is a summary of our principal annuity reinsurers as of December 31, 2002:

                         
% of Total
A.M. Best Face Amount
Reinsurer Reserves Ceded Rating Reinsured




(In Billions)
Transamerica Occidental Life Insurance Company
  $ 0.9       A+       61 %
RGA Reinsurance Company
    0.4       A+       29  

Employees

      As of December 31, 2002, we had 1,415 full-time employees. None of these employees are covered by a collective bargaining agreement and we believe that our relations with our employees are satisfactory.

14


 

Government Regulation

      We are subject to regulation by the states in which our insurance subsidiaries are domiciled and/or transact business. State insurance laws generally establish supervisory agencies with broad administrative and supervisory powers related to granting and revoking licenses, transacting business, regulating the payment of dividends to stockholders, establishing guaranty fund associations, licensing agents, approving policy forms, regulating sales practices, regulating premium rates for some lines of business, establishing reserve requirements, prescribing the form and content of required financial statements and reports, determining the reasonableness and adequacy of statutory capital and surplus, and regulating the type and amount of investments permitted.

      Every state in which our insurance companies are licensed administers a guaranty fund, which provides for assessments of licensed insurers for the protection of policyowners of insolvent insurance companies. Assessments can be partially recovered through a reduction in future premium taxes in some states.

      Risk-based capital, or RBC, standards for life insurance companies were adopted by the National Association of Insurance Commissioners, known as the NAIC and require insurance companies to calculate and report for statutory basis financial statements information under a risk-based capital formula. The RBC requirements are intended to allow insurance regulators to identify at an early stage inadequately capitalized insurance companies based upon the types and mixtures of risks inherent in such companies’ operations. The formula includes components for asset risk, liability risk, interest rate exposure and other factors. As of December 31, 2002, each of our life insurance companies’ RBC levels were in excess of authorized control level RBC thresholds established by insurance regulators.

      Although the federal government generally does not directly regulate the insurance business, federal initiatives and changes in federal law can often have an impact on the business in a variety of ways. Current and proposed federal measures that may significantly affect the insurance business include limitations on antitrust immunity, minimum solvency requirements, changes to the tax advantages of life insurance and annuity products or the programs with which they are used. Such changes may affect the level of sales and the financial impact of the policies on policyowners and the Company. The effect of these changes cannot currently be evaluated but they could potentially be adverse. New savings and dividend proposals and the removal of barriers restricting banks from engaging in the insurance and mutual fund business could also have an adverse impact on the Company.

Executive Officers of the Company

      The following provides information about AmerUs Group Co.’s executive officers:

                 
Name of Individual Age Title



  Roger Brooks       65     Chairman of the Board of Directors and President and Chief Executive Officer of AmerUs Group Co.
  Victor N. Daley       59     Executive Vice President, Chief Administration and Human Resources Officer of AmerUs Group Co.
  Thomas C. Godlasky       47     Executive Vice President and Chief Investment Officer of AmerUs Group Co.
  Mark V. Heitz       49     President and Chief Executive Officer of AmerUs Annuity Group, American Investors Life Insurance Company, and Financial Benefit Life Insurance Company
  Gary R. McPhail       54     President and Chief Executive Officer of AmerUs Life Insurance Company and Indianapolis Life Insurance Company
  Melinda S. Urion       49     Executive Vice President and Chief Financial Officer of AmerUs Group Co.
  Brian J. Clark       37     Senior Vice President and Chief Product Officer of AmerUs Group Co.

15


 

ROGER K. BROOKS — Des Moines, Iowa.

      Chairman, president and chief executive officer of AmerUs Group Co. since May 1997 and president and chief executive officer from its formation in July 1996 to May 1997. Previously, Mr. Brooks was the chief executive officer of predecessor or affiliated companies since 1974. He is a director of AMAL. Mr. Brooks has been a director of AmerUs Group Co. since its formation in July 1996, and previously served as a director of predecessor or affiliated companies since 1971. His current term expires in May 2004.

VICTOR N. DALEY — Des Moines, Iowa.

      Executive vice president, chief administration and human resources officer of AmerUs Group Co. since February 2000, and senior vice president, chief administration and human resources officer of AmerUs Group Co. and predecessor or affiliated companies since September 1995. From April 1989 to September 1995, Mr. Daley was senior vice president and chief administrative officer of Royal Insurance, Charlotte, North Carolina.

THOMAS C. GODLASKY — Des Moines, Iowa.

      Executive vice president and chief investment officer of AmerUs Group Co. and predecessor or affiliated companies since January 1995. Mr. Godlasky has also been president of AmerUs Capital Management since January 1998. From February 1988 to January 1995, he was manager of the Fixed Income and Derivatives Department of Providian Corporation, Louisville, Kentucky. He is a director of AVLIC and AIC, wholly-owned subsidiaries of AMAL.

MARK V. HEITZ — Topeka, Kansas.

      President and chief executive officer of AAG, American and FBL, Topeka, Kansas since December 1997. Previously, Mr. Heitz served as the president, general counsel and director of AAG from December 1986 until December 1997. Mr. Heitz also served as president, general counsel and director of American from October 1986 until December 1997.

GARY R. McPHAIL — Des Moines, Iowa.

      President and chief executive officer of ALIC since May 1997 and president and chief executive officer of ILICO since October 2001. Mr. McPhail was executive vice president — marketing and individual operations of New York Life Insurance Company, New York, New York, from July 1995 to November 1996. From June 1990 to July 1995, he was president of Lincoln National Sales Corporation, Fort Wayne, Indiana. Mr. McPhail is a director of AMAL, AIC and AVLIC.

MELINDA S. URION — Des Moines, Iowa

      Executive vice president and chief financial officer of AmerUs Group Co. since March 2002. Prior to joining AmerUs Group Co., she was senior vice president and chief financial officer at Fortis Financial Group, Woodbury, Minnesota, from December 1997 to April 2001. From July 1988 to November 1997, Ms. Urion served in various accounting and executive positions with American Express Financial Corp, Minneapolis, Minnesota, including senior vice president of finance and chief financial officer from November 1995 to November 1997. Ms. Urion is a director of AVLIC.

BRIAN J. CLARK — Des Moines, Iowa.

      Senior vice president and chief product officer of AmerUs Group Co. since August 2001. Mr. Clark has been with AmerUs Group Co. since 1988 and has previously served ALIC as chief financial officer and as senior vice president in various departments and functions, including product development, product management and asset and liability management.

16


 

ITEM 2.     PROPERTIES

      The following table summarizes the properties we lease and own at December 31, 2002:

                                               
Square Feet Occupied By:

Protection Accumulation Leased to Total
Property Address Products Products Other(1) Third Parties Square Feet Use of Other Square Feet







Properties leased from unaffiliated parties:                                            
  699 Walnut Street                 53,000       16,000       69,000     Executive offices and corporate
  Des Moines, Iowa                                           operations
 
  611 Fifth Avenue     62,000       2,000       56,000             120,000     Technology, corporate opera-
  Des Moines, Iowa                                           tions and cafeteria facilities
 
  65 Froehlich Farms                                            
  Boulevard     15,000       3,000       6,000             24,000     Technology and cafeteria
  Woodbury, New York                                           facilities
 
  Various                 28,000             28,000     Corporate operations and records
                                            and supply storage
 
Properties owned:
                                           
 
  555 South Kansas                                            
  Avenue           67,000             45,000       112,000      
  Topeka, Kansas                                            
 
  2960 North Meridian     127,000       8,000       46,000       17,000       198,000     Technology and cafeteria
  Indianapolis, Indiana                                           facilities


  (1)  Other includes shared services that are utilized by both the protection products and accumulation products segments.

ITEM 3.     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 involved in litigation, including class actions, reinsurance claims and regulatory proceedings, arising in the ordinary course of its business. Some of these claims and legal actions are in jurisdictions where juries are given substantial latitude in assessing damages, including punitive damages. Although no assurances can be given and no determinations can be made at this time, the Company believes that the ultimate liability, if any, with respect to these claims and legal actions, would have no material effect on its results of operations and financial position.

      As previously disclosed, one of the Company’s subsidiaries, IL Annuity, has had a dispute with the reinsurer of a block of its annuity business. In December of 2002, the reinsurer began arbitration proceedings against IL Annuity claiming approximately $11.3 million and other appropriate relief related to investment charges in connection with a reinsurance agreement between the reinsurer and IL Annuity. The arbitration process is in its preliminary stages. Although predicting the outcome is not feasible, the Company believes it has strong defenses against the claims, and based upon currently available information, that any liability arising from these claims would not have a material adverse effect on the Company’s consolidated financial position or results of operations.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None.

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PART II

 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      Our common stock is listed and traded on the New York Stock Exchange (NYSE) under the symbol “AMH.” The following table sets forth, for the periods indicated, the high and low sales prices per share of AmerUs Group Co. common stock as quoted on the NYSE and the dividends per share declared during such quarter.

                         
AmerUs Common Stock

High Low Dividends



2001
                       
First Quarter
  $ 32.0000     $ 27.0000     $ 0.00  
Second Quarter
  $ 36.5000     $ 28.5600     $ 0.00  
Third Quarter
  $ 35.2000     $ 30.9000     $ 0.00  
Fourth Quarter
  $ 36.4300     $ 30.2700     $ 0.40  
2002
                       
First Quarter
  $ 39.5000     $ 34.0000     $ 0.00  
Second Quarter
  $ 39.9000     $ 34.4500     $ 0.00  
Third Quarter
  $ 37.2100     $ 28.2100     $ 0.00  
Fourth Quarter
  $ 32.2600     $ 25.8700     $ 0.40  

Holders

      As of March 3, 2003, the number of holders of record of each class of common equity was as follows:

         
Number of
Holders

Common stock
    124,121  

Equity Compensation Plan Information

      The following table sets forth information regarding our equity compensation plans:

                           
(c) Number of Securities
(a) Number of (b) Weighted Remaining Available for
Securities To Be Average Exercise Future Issuance Under
Issued Upon Exercise Price of Equity Compensation
of Outstanding Outstanding Plans (Excluding
Options, Warrants Options, Warrants Securities Reflected
Plan Category and Rights and Rights in Column(a))




Equity compensation plans approved by security holders
    3,469,317     $ 27.10       8,364  
Equity compensation plans not approved by security holders(1)
    305,881       29.89       53,600  
     
     
     
 
 
Total
    3,775,198     $ 27.33       61,964  
     
     
     
 


  (1)  Includes phantom stock units issued under the MIP Plan to senior executives and other management employees and stock appreciation rights under the Non-Employee Plan which may be paid in cash or Company common stock. Historically, the Company’s practice has been to pay participants, on exercise of a stock appreciation right or the end of the deferral period relative to phantom stock units, as applicable, in cash only.

Equity Compensation Plans not Approved by Security Holders

      The Company adopted the AmerUs Group Co. MIP Deferral Plan on September 1, 1998 (referred to as the MIP Plan, or SEIP, with respect to senior executives). The description of the material features of the AmerUS Group Co. MIP Deferral Plan is contained in footnote A to the “Executive Compensation and

18


 

Related Information” table in the Company’s Notice of 2003 Annual Meeting of Shareholders and Proxy Statement (Proxy) and is incorporated herein by reference. Other management employees participate in the MIP Plan on essentially the same terms as senior executives’ participation which is described in the Proxy.

      On February 12, 1999, the Company adopted the AmerUs Group Co. Non-Employee Stock Option Plan (Non-Employee Plan) to give agents of the Company and/or its subsidiaries who make significant contributions to the success of the Company and/or its subsidiaries an interest in the Company’s performance. Under the Non-Employee Plan, participants may receive stock options and/or stock appreciation rights. On exercise of stock appreciation rights, a participant may be paid in cash or stock, in the discretion of the Company.

Dividends

      We had declared and paid a quarterly dividend of $0.10 per share of common stock, from the second quarter of 1997 through the first quarter of 2000. Beginning in 2000, our Board of Directors approved moving from a quarterly dividend of $0.10 per share of common stock to an annual dividend of $0.40 per share of common stock beginning in 2000. The declaration and payment of dividends in the future is subject to the discretion of the Board of Directors and will be dependent upon the financial condition, results of operations, cash requirements, future prospects, regulatory restrictions on the payment of dividends by the life insurance subsidiaries and other factors deemed relevant by the Board of Directors.

      Under our revolving credit agreement, we are prohibited from paying dividends on common stock in excess of an amount equal to 3% of the consolidated net worth as of the last day of the preceding fiscal year.

      In connection with the 8.85% Capital Securities, Series A (the “Capital Securities”), issued in 1997 by AmerUs Capital I, a subsidiary trust, we have agreed not to declare or pay any dividends on the Company’s capital stock (including the common stock) during any period for which we elect to extend interest payments on our junior subordinated debentures, except for stock dividends where the dividend stock is the same stock as that on which the dividend is being paid. Dividends on our capital stock cannot be paid until all accrued interest on the Capital Securities has been paid. The Capital Securities have an outstanding principal balance of $48.1 million at December 31, 2002.

      As of December 31, 2002, we have outstanding $0.2 million of 6.86% quarterly income preferred securities (QUIPS) which mature July 27, 2003. Dividends on our capital stock cannot be paid until all accrued interest on the QUIPS have been paid.

      On March 6, 2002, we issued and sold in a private placement $185 million aggregate original principal amounts of optionally convertible equity-linked accreting notes (OCEANs). The OCEANs are senior subordinated debt and were issued and sold in an original principal amount of $1,000 per OCEAN, with a principal amount at maturity of $1,270 per OCEAN. The maturity date of the OCEANs is March 6, 2032. The OCEANs will have aggregate principal amount at maturity of $235 million. The notes are convertible into shares of AmerUs Group Co.’s common stock at an initial conversion price (subject to adjustment) of $37.60 per share only if the sale price of the common stock exceeds $47.85 per share for at least 20 trading days in a 30-day trading period or in certain other limited circumstances. The OCEANs were registered on Form S-3 filed with the Securities and Exchange Commission on September 20, 2002.

      As a holding company, our principal assets consist of all of the outstanding shares of the common stock of our life insurance subsidiaries. Our ongoing ability to pay dividends to shareholders and meet other obligations, including operating expenses and any debt service, primarily depends upon the receipt of sufficient funds from our life insurance subsidiaries in the form of dividends, interest payments or loans.

      Based on statutory insurance regulations and 2001 results, our insurance subsidiaries could have paid an estimated $80.5 million in dividends in 2002 without obtaining regulatory approval. Of this amount, our subsidiaries paid to us $20.6 million in dividends in 2002. Based on 2002 results, our subsidiaries can pay an estimated $82.3 million in dividends in 2003 without obtaining regulatory approval.

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ITEM  6. SELECTED FINANCIAL DATA

      The following table sets forth certain financial and operating data of the Company.

                                             
As of or for the Year Ended December 31,

2002 2001 (A) 2000 1999 1998





($ in millions, except for per share data)
Consolidated Income Statement Data:
                                       
Revenues:
                                       
 
Insurance premiums
  $ 350.8     $ 305.9     $ 266.2     $ 268.6     $ 267.1  
 
Product charges
    161.5       146.1       99.9       90.8       87.7  
 
Net investment income
    994.0       873.2       699.5       665.4       629.9  
 
Realized/unrealized gains (losses) on investments
    (149.9 )     (90.6 )     (29.0 )     (1.4 )     11.0  
 
Other income
    72.0       47.0       35.3       22.8       15.5  
     
     
     
     
     
 
Total revenues
    1,428.4       1,281.6       1,071.9       1,046.2       1,011.2  
     
     
     
     
     
 
Benefits and expenses:
                                       
 
Policyowner benefits
    890.7       753.0       624.4       630.2       620.3  
 
Total insurance and other expenses
    314.7       283.1       227.5       216.0       193.6  
 
Dividends to policyowners
    104.9       98.9       74.3       70.8       77.0  
     
     
     
     
     
 
Total benefits and expenses
    1,310.3       1,135.0       926.2       917.0       890.9  
     
     
     
     
     
 
Income from continuing operations
    118.1       146.6       145.7       129.2       120.3  
Interest expense
    25.5       26.0       29.7       29.0       27.9  
     
     
     
     
     
 
Income before tax expense and minority interest
    92.6       120.6       116.0       100.2       92.4  
Income tax expense
    29.7       39.5       42.5       33.7       29.1  
Minority interest
                21.7       28.1       26.9  
     
     
     
     
     
 
Net income from continuing operations
    62.9       81.1       51.8       38.4       36.4  
Discontinued operations (net of tax):
                                       
 
Income (loss) from discontinued operations
                            (7.8 )
 
Gain on sale of discontinued operations
                            74.9  
     
     
     
     
     
 
Net income before cumulative effect of change in accounting for derivatives
    62.9       81.1       51.8       38.4       103.5  
Cumulative effect of change in accounting for derivatives, net of tax
          (8.2 )                  
     
     
     
     
     
 
Net income
  $ 62.9     $ 72.9     $ 51.8     $ 38.4     $ 103.5  
     
     
     
     
     
 
Net income from continuing operations per share (B and E):
                                       
 
Basic
  $ 1.57     $ 2.20     $ 2.48     $ 2.21     $ 2.10  
 
Diluted
  $ 1.56     $ 2.17     $ 2.46     $ 2.20     $ 2.07  
Weighted average number of shares outstanding (in millions) (B):
                                       
 
Basic
    40.0       36.9       20.9       17.4       17.4  
 
Diluted
    40.4       37.5       21.0       17.5       17.6  
Dividends declared per common share (C)
  $ 0.40     $ 0.40     $ 0.40     $     $  
Consolidated Balance Sheet Data:
                                       
 
Total invested assets
  $ 16,932.5     $ 15,052.4     $ 9,606.8     $ 9,059.7     $ 9,166.0  
 
Total assets
  $ 20,293.7     $ 18,299.2     $ 11,471.5     $ 11,091.9     $ 10,786.8  
 
Notes payable
  $ 511.3     $ 384.6     $ 413.3     $ 387.9     $ 357.8  
 
Total liabilities
  $ 19,030.7     $ 17,060.6     $ 10,643.5     $ 10,010.8     $ 9,633.0  
 
Minority interest
  $     $     $     $ 309.1     $ 364.3  
 
Total stockholders’ equity
  $ 1,262.9     $ 1,238.5     $ 828.0     $ 772.0     $ 789.5  
Other Operating Data:
                                       
 
Adjusted net operating income (C)
  $ 144.5     $ 114.0     $ 62.3     $ 49.1     $ 39.3  
 
Adjusted net operating income per common share:
                                       
   
Basic
  $ 3.62     $ 3.09     $ 2.98     $ 2.82     $ 2.26  
   
Diluted
  $ 3.58     $ 3.05     $ 2.97     $ 2.81     $ 2.23  
 
Ratio of earnings to fixed charges (D)
    4.53       5.10       3.95       3.43       2.86  

20


 


(A) Financial data for 2001 includes the results for ILICO, subsequent to the acquisition date of May 18, 2001.
 
(B) Our predecessor, AMHC, was originally formed in 1996 as a mutual holding company and therefore, had no shares of common stock outstanding until its demutualization on September 20, 2000. On September 20, 2000, we distributed 17.4 million shares of common stock to our former members and exchanged our common stock for the 12.6 million shares of common stock held by the public in ALHI, our former subsidiary and another of our predecessor entities, on a one-for-one basis. Our operating income for the full fiscal years presented above primarily reflects the operating income of ALHI. Therefore, adjusted net operating income and net income from continuing operations per share was calculated based on the number of shares of stock we owned of ALHI through September 20, 2000. Since then, adjusted net operating income and net income from continuing operations per share has been calculated based on the shares of our common stock actually outstanding.
 
(C) We did not have common stock until our demutualization on September 20, 2000, therefore, there were no dividends to declare on common stock for the years 1998 and 1999. ALHI, our predecessor to our company did declare dividends on its common stock of $0.40 per share for the years ended December 31, 1999 and 1998.
 
(D) Adjusted net operating income reflects net income adjusted to eliminate certain items (net of applicable income taxes and minority interest) which our management believes are not indicative of overall operating trends, including net realized gains or losses on investments. Different items are likely to occur in each period presented and others may have different opinions as to which items may warrant adjustment. The adjusted net operating income shown does not constitute net income computed in accordance with GAAP. See additional description of Adjusted Net Operating Income included in Item 7.
 
(E) Basic and diluted adjusted net operating income per common share is calculated using the weighted average number of shares as shown in the table above.
 
(F) For purposes of computing the ratio of earnings to fixed charges, “earnings” consist of income from operations before income taxes, fixed charges and pre-tax earnings required to cover preferred stock dividend requirements. “Fixed charges” consist of interest expense on debt, amortization of debt expense and preferred stock dividend requirements.
 
ITEM  7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      The following analysis of the consolidated financial condition and results of operations of AmerUs Group Co. should be read in conjunction with the Selected Financial Data and Consolidated Financial Statements and related notes.

Nature of Operations

      We are a holding company whose subsidiaries are primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life, annuity and insurance deposit products to individuals and businesses in 50 states, the District of Columbia and the U.S. Virgin Islands. We have two reportable operating segments: protection products and accumulation products. The protection products segment was formerly known as the life insurance segment and the accumulation products segment was formerly known as the annuity segment. 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 and funding agreements.

      We acquired ILICO which had assets of approximately $6 billion on May 18, 2001. Its operations have been included with ours since that date.

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Financial Highlights

      Our financial highlights are as follows:

                             
For The Years Ended December 31,

2002 2001 2000



($ in thousands, except per share data)
Adjusted pre-tax operating income (A):
                       
 
Protection Products
  $ 129,739     $ 95,955     $ 59,073  
 
Accumulation Products
    120,655       95,912       88,209  
 
Other operations
    (6,622 )     6,138       11,982  
     
     
     
 
   
Total adjusted pre-tax operating income
  $ 243,772     $ 198,005     $ 159,264  
Adjusted net operating income (A)
  $ 144,533     $ 114,047     $ 62,311  
Net income
  $ 62,866     $ 72,907     $ 51,840  
Diluted earnings per share:
                       
 
Adjusted net operating income (A)
  $ 3.58     $ 3.05     $ 2.96  
 
Net income
  $ 1.56     $ 1.95     $ 2.46  
Total assets
  $ 20,293,665     $ 18,299,152     $ 11,471,522  
Stockholders’ equity (without AOCI)
  $ 1,174,426     $ 1,225,848     $ 845,143  

(A) Adjusted operating income does not constitute net income computed in accordance with accounting principles generally accepted in the United States, or GAAP. See Adjusted Net Operating Income section for additional information.

      Adjusted pre-tax operating income in both of our operating segments increased in 2002 and 2001 as compared to each of the prior years. Growth in our protection products adjusted pre-tax operating income in 2002 was primarily attributable to the acquisition of ILICO combined with a slight growth in product margins and a decline in operating expenses. The increase in the protection products adjusted pre-tax operating income in 2001 was primarily due to the acquisition of ILICO together with decreased insurance expenses and level gross margins. Our accumulation products pre-tax operating income also increased in 2002 and 2001 due to the acquisition of ILICO. In addition, increased Independent Marketing Organizations (IMOs) operating income and the discontinuation of goodwill amortization in 2002 also contributed to the growth in accumulation products earnings. Adjusted pre-tax operating income from other operations primarily consists of holding company revenues and expenses and operations of our real estate management subsidiary. Adjusted pre-tax operating income from other operations has declined each year as compared to the prior year as we reduce our investments in real estate management. In addition, we had more revenues at our holding company in 2000 from cash equivalents we were holding to fund the demutualization payments to our former members in October of 2000.

      Net income increased in 2001 compared to 2000 primarily as a result of the growth in our protection products and accumulation products segments. In addition, 2000 net income was reduced for amounts applicable to minority interest shareholders through September 2000, when we acquired such interest. Partially offsetting these additions to net income were increased realized losses on investments and increased net unrealized losses from SFAS 133 related market value adjustments on trading securities, derivatives and certain annuity contracts. Net income decreased in 2002 compared to 2001 primarily as a result of realized losses on investments, unrealized losses from SFAS 133 and increased restructuring charges. The 2002 reductions in net income were partially offset by the growth in our protection and accumulation products segments. See the Adjusted Net Operating Income section for a further discussion of the items included in net income but excluded from operating income.

      Total assets increased $2.0 billion during 2002 primarily as a result of the placement of funding agreements totaling $875 million, growth in annuity sales, net of surrenders, and increased investment market values. Total assets increased $6.8 billion during 2001 primarily due to the acquisition of ILICO.

      Stockholders’ equity, excluding accumulated other comprehensive income (AOCI), declined $51.4 million in 2002 as a result of treasury stock purchases of $112.1 million and dividends of $15.5 million. The stock

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repurchases and dividends were partially offset by an increase in equity for 2002 net income of $62.9 million. Stockholders’ equity, excluding AOCI, increased $380.7 million in 2001, primarily due to the issuance of $232.4 million worth of stock in connection with the acquisition of ILICO, the issuance of $127.5 million of stock in connection with the conversion of capital securities, and net income. Treasury stock purchases in 2001 were $45.0 million.

Adjusted Net Operating Income

      The following table reflects net income adjusted to eliminate certain items which management believes do not necessarily indicate overall operating trends. Adjusted net operating income is the basis we use to assess our overall performance. Adjusted net operating income as described by us may not be comparable to similarly titled measures reported by other companies, including insurance companies. The adjusted net operating income shown below does not constitute net income computed in accordance with GAAP. The adjustments are presented net of income taxes. In addition, the adjustments for 2000 and prior years are also presented after minority interest.

                                           
For the Years Ended December 31,

2002 2001 2000 1999 1998





($ in thousands, except per share data)
Net Income
  $ 62,866     $ 72,907     $ 51,840     $ 38,436     $ 103,499  
Non-core realized losses (A)
    66,386       25,475       5,153       6,030       2,946  
Net amortization of DAC and VOBA due to non-core realized gains or losses (B)
    (10,869 )     (3,613 )     (4,028 )     805       (74 )
Net effect of accounting differences from the adoption of SFAS 133 (C)
    14,638       6,417                    
Demutualization costs (D)
    1,186       969       10,063       6,322        
Restructuring costs (E)
    13,225       5,476                    
Other income from non-insurance operations (F)
    (2,898 )     (1,820 )     (717 )     (2,504 )     (67,053 )
Cumulative effect of change in accounting for derivatives (G)
          8,236                    
     
     
     
     
     
 
Adjusted Net Operating Income
  $ 144,534     $ 114,047     $ 62,311     $ 49,089     $ 39,318  
     
     
     
     
     
 
Adjusted Net Operating Income per common share (H):
                                       
 
Basic
  $ 3.62     $ 3.09     $ 2.98     $ 2.82     $ 2.26  
     
     
     
     
     
 
 
Diluted
  $ 3.58     $ 3.05     $ 2.96     $ 2.81     $ 2.23  
     
     
     
     
     
 
Weighted average common shares outstanding (H):
                                       
 
Basic
    39,972,328       36,949,198       20,922,371       17,390,165       17,372,136  
     
     
     
     
     
 
 
Diluted
    40,398,378       37,453,428       21,035,518       17,467,132       17,609,748  
     
     
     
     
     
 


(A) Represents total realized gains or losses on investments less core realized gains or losses (defined as gains or losses from the closed block and gains or losses on the convertible preferred stock and bond portfolios). Non-core realized gains or losses may vary widely between periods. Such amounts are determined by management’s timing of individual transactions or current market conditions and do not necessarily correspond to the underlying operating trends.
 
(B) Represents amortization of DAC and value of business acquired (VOBA) on the non-core realized gains or losses that are included in our product margins.

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(C) Represents the net effect of Statement of Financial Accounting Standard (SFAS) 133, “Accounting for Derivative Instruments and Hedging Activities,” related accounting entries. The accounting entries consist of cash flow hedge amortization, market value adjustments on trading securities, derivatives, certain annuity contracts, and the associated change in amortization of DAC and VOBA resulting from such adjustments.
 
(D) Represents costs directly related to our demutualizations. The costs consist primarily of legal, actuarial and consulting expenses.
 
(E) Represents costs of restructuring our operations to eliminate duplicative functions. The costs consist primarily of relocation of employees, severance and termination benefits, and system conversions.
 
(F) Represents the net income from our residential financing and property operations which is not part of our insurance operations.
 
(G) Represents the cumulative effect of change in accounting for derivatives, as of January 1, 2001, resulting from our adoption of SFAS 133.
 
(H) Our predecessor, AMHC, was originally formed in 1996 as a mutual holding company and, therefore, had no shares of common stock outstanding until the demutualization of our group on September 20, 2000. On September 20, 2000, we distributed 17.4 million shares of our common stock to our former members and exchanged our common stock for the 12.6 million shares of common stock held by the public in ALHI, our former subsidiary and another of our predecessor entities, on a one-for-one basis. Our operating income primarily reflects the operating income of ALHI. Therefore, adjusted net operating income per share was calculated based on the number of shares of stock we owned of ALHI through September 30, 2000. Since then, adjusted net operating income per share has been calculated based on the shares of our common shares actually outstanding.

      The increase in adjusted net operating income in 2002 compared to 2001 was primarily attributable to the acquisition of ILICO which operations have been included in our consolidated financial statements since May 18, 2001 and the growth in our protection products and accumulation products segments as explained in the next two sections. The increase in adjusted net operating income in 2001 compared to 2000 was primarily due to the acquisition of ILICO and the reduction in income applicable to the minority interests.

Segment Income

      We use the same accounting policies and procedures to measure operating segment income as we use to measure consolidated income from operations 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 adjusted pre-tax operating income and income from continuing operations on the following operating segment tables and are as follows:

        1) Realized gains and losses on non-core investments.
 
        2) Market value changes and amortization of assets and liabilities associated with the application of SFAS 133, such as:

  •  Unrealized gains and losses on 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 DAC and VOBA related to the realized gains and losses on the non-core investments and the SFAS 133 adjustments.
 
        4) Demutualization costs.
 
        5) Restructuring costs.
 
        6) Other income from non-insurance operations.

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      These items will fluctuate from period to period depending on the prevailing interest rate and economic environment, are not continuing in nature, or are not part of the core insurance operations. As a result, management believes they do not reflect the ongoing earnings capacity of our operating segments.

Protection Products

      Our protection products segment consists of whole life, 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 forms to stock forms of ownership. When protection products are sold, we invest the premiums we receive in our investment portfolio and establish a liability representing our commitment to the policyholder. We manage investment spread by seeking to maximize the return on these invested assets, consistent with our asset/ liability and credit quality needs. Protection products in force totaled $80.0 billion at December 31, 2002, $70.5 billion at December 31, 2001 and $36.2 billion at December 31, 2000. A summary of our protection products segment operations follows:

                             
For the Years Ended December 31,

2002 2001 2000



($ in thousands)
Revenues:
                       
 
Insurance premiums
  $ 341,114     $ 300,690     $ 252,157  
 
Universal life product charges
    120,161       110,403       65,126  
 
Net investment income
    335,111       283,330       212,100  
 
Core realized gains (losses) on investments
    (2,400 )     8,720       (695 )
 
Other income
    4,026       1,947        
     
     
     
 
   
Total revenues
    798,012       705,090       528,688  
     
     
     
 
Benefits and expenses:
                       
 
Policyowner benefits
    429,339       384,159       308,177  
 
Underwriting, acquisition and other expenses
    70,801       69,035       51,532  
 
Amortization of DAC and VOBA, net of non-core gain/loss adjustment
    63,267       56,996       35,570  
 
Dividends to policyowners
    104,866       98,945       74,338  
     
     
     
 
   
Total benefits and expenses
    668,273       609,135       469,617  
     
     
     
 
Adjusted pre-tax operating income — Protection Products segment
  $ 129,739     $ 95,955     $ 59,071  
     
     
     
 

      Adjusted pre-tax operating income from our protection products increased 35% in 2002 and 62% in 2001 compared to the respective prior years. The increase in 2002 was due to a slight growth in product margins, a decline in operating expenses and the acquisition of ILICO. The increase in 2001 was primarily due to the acquisition of ILICO together with decreased insurance expenses and level gross margins. The key drivers of our protection products business include sales, persistency, net investment income, mortality and expenses.

      Sales, Premiums and Product Charges. Annualized premium for new products issued represents sales for protection products. As illustrated in the Sales Activity Product table presented in “Item 1 Business — Protection Products Segment,” direct first year annualized premiums increased 74% in 2002 compared to 2001 and 89% in 2001 compared to 2000. The increases were primarily due to the acquisition of ILICO during the second quarter of 2001. Excluding the sales from ILICO, life insurance sales increased 31% in 2002 and 11% in 2001. We experienced growth in almost all our protection product lines with significant increases coming from our interest-sensitive whole life and equity-indexed life products. Interest-sensitive whole life insurance has flexible premium and benefit patterns and its cash value accumulation changes with current interest and mortality rates. The equity-indexed life product allows the policyowner to elect an earnings strategy for a portion of the account value whereby earnings are credited based primarily on increases in the S&P 500 Index, excluding dividends. The earnings credit is subject to a participation rate and an annual cap. Sales of interest-

25


 

sensitive whole life and equity-indexed life products were $76.5 million in 2002 as compared to $33.6 million in 2001 and $7.1 million in 2000. We are a leading writer of equity-indexed life products in the United States.

      We also distribute term products of ILICO through strategic alliances with private label partners. Under private label arrangements, ILICO designs and issues products that are distributed through other life insurance companies, our private label partners. ILICO reinsures a portion of the risks on those products which we refer to as our private label sales. We have three private label partners that are actively writing new business. During the second quarter of 2002, we ceased recruiting new private label partners.

      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 policyholder liability. Revenues from the universal life and equity-indexed life policies consist of product charges for the cost of insurance, policy administration and policy surrender. All revenue is reported net of reinsurance ceded. Insurance premium revenue and product charge revenue increased in 2002 and 2001 as compared to the respective prior years primarily due to the acquisition of ILICO.

      Persistency. Annualized lapse rates were as follows:

                           
For the Years Ended
December 31,

2002 2001 2000



Lapse rate:
                       
 
Including ILICO
    7.28 %     7.70 %      
 
Excluding ILICO
    6.81 %     7.34 %     6.44 %

      Our persistency experience remained within our pricing assumptions. Our lapse rate, including ILICO, for 2002 as compared to 2001 and 2000 increased as expected due to the completion of ILICO’s demutualization payout in July 2001. Lapses tend to decline in anticipation of a demutualization transaction as policyholders want to remain policyholders so they will be eligible for the demutualization payout. Following a demutualization, lapses tend to increase for a period before they return to a more normal level. Our lapse rate, excluding ILICO, decreased in 2002 compared to 2001 and increased in 2001 compared to 2000. ALIC experienced higher lapse rates in 2001 following the completion of a demutualization in the third quarter of 2000.

      Net Investment Income. Net investment income increased in 2002 and 2001 compared to the respective prior years. The increases were primarily attributable to the acquisition of ILICO partially offset by lower effective yields. The effective yield of the investment portfolio was 7.22% in 2002 compared to 7.32% in 2001 and 7.94% in 2000. The decrease in yields in 2002 and 2001 was primarily a result of the lower interest rate market.

      Mortality and Benefit Expense. For 2002 and 2001, we experienced favorable mortality but, due to the acquisition of ILICO, total benefit expense is higher than in the respective prior years. Total policyowner benefits for ILICO were $186.9 million for the full year of 2002 and $127.4 million for the portion of the year after its acquisition in May 2001. In addition, we had increased reinsurance recoveries in 2002 and 2001, which decrease benefit expense, as a result of the additional reinsurance arrangements entered into in 2002, 2001 and 2000.

      Underwriting, Acquisition and Other Expenses. Expenses increased in 2002 and 2001 compared to the respective prior years, primarily due to the acquisition of ILICO. The addition of expenses associated with ILICO of $30.1 million and $19.5 million for 2002 and 2001, respectively, were partially offset by increased reimbursement from reinsurers for commission and expense allowances. Commission and expense allowances increased as more policies were subject to reinsurance. In addition, expenses decreased due to expense structure changes resulting from the integration with ILICO.

      Outlook. We expect to continue to increase sales through our multiple distribution channels and to continue to shift to higher return products, in particular the equity-indexed life products. We also expect to

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continue to realize operating efficiencies created by the restructuring and centralization of our administrative functions as discussed later in “Non-recurring Expenses.”

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 deposits we receive from accumulation product sales in our investment portfolio and establish a liability representing our commitment to our policyholder. 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 policyholder liability. Accumulation products in force totaled $11.3 billion at December 31, 2002, $10.7 billion at December 31, 2001 and $6.7 billion at December 31, 2000. A summary of our accumulation products segment operations follows:

                             
For the Years Ended December 31,

2002 2001 2000



($ in thousands)
Revenues:
                       
 
Immediate annuity and supplementary contract premiums
  $ 8,702     $ 5,083     $ 13,768  
 
Annuity product charges
    41,349       35,652       34,814  
 
Net investment income
    653,220       577,913       468,404  
 
Core realized/unrealized gains (losses) on investments
                (16,597 )
 
Other income
    11,778       8,474       2,806  
     
     
     
 
   
Total revenues
    715,049       627,122       503,195  
     
     
     
 
Benefits and expenses:
                       
 
Policyowner benefits
    483,151       419,132       315,508  
 
Underwriting, acquisition and other expenses
    34,040       41,401       36,343  
 
Amortization of DAC and VOBA, net of non-core gain/loss adjustment
    91,300       78,891       65,902  
     
     
     
 
   
Total benefits and expenses
    608,491       539,424       417,753  
     
     
     
 
IMO Operations:
                       
 
Other income
    48,642       27,724       18,981  
 
Other expenses
    34,545       19,510       16,211  
     
     
     
 
   
Net IMO operating income
    14,097       8,214       2,770  
     
     
     
 
Adjusted pre-tax operating income — Accumulation Products segment
  $ 120,655     $ 95,912     $ 88,212  
     
     
     
 

      Adjusted pre-tax operating income from our accumulation products operations increased 26% in 2002 and 9% in 2001 compared to the respective prior years. The increases in 2002 and 2001 were primarily due to the acquisition of ILICO in 2001 and increased IMO operating income. In addition, the increase in 2002 was also due to the discontinuation of goodwill amortization. The drivers of profitability in our accumulation products business are sales, persistency, investment spread, expenses and IMO operations.

      Sales and Product Charges. Deposits we receive for annuities and funding agreements represent sales for accumulation products. As illustrated in the Deposits by Product table presented in “Item 1 Business — Accumulation Products Segments,” direct accumulation product sales increased 36% in 2002 compared to 2001 and 32% in 2001 as compared to 2000. Total annuity sales decreased 9% in 2002 compared to 2001 and increased 32% in 2001 compared to 2000. The 2002 decrease resulted from the deployment of capital to funding agreements which should provide a higher return on equity. The 2001 increase in annuity sales was primarily due to product repricing, increased marketing efforts and the acquisition of ILICO.

      We placed primarily fixed rate funding agreements totaling $875 million in 2002. Funding agreements are arrangements for which we receive deposit funds and for which we agree to repay the deposit and a contractual

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return for the duration of the contract. Total funding agreements as of December 31, 2002 amounted to $1.125 billion compared to $250 million at December 31, 2001 and 2000.

      The deposits we receive on accumulation products are not recorded as revenue but instead as a policyholder liability. Surrender charges are recorded as revenue as an annuity product charge. Annuity product charges increased in 2002 and 2001 as compared to each prior year due to the growth in business and the acquisition of ILICO.

      Persistency. Withdrawals represent funds taken out of accumulation products by policyowners not including those due to the death of policyowners. Annuity withdrawal rates both with and without internal replacements continued to improve in 2002 as compared to 2001 and 2000. Annuity withdrawals and annualized annuity withdrawal rates were as follows:

                             
For the Years Ended December 31,

2002 2001 2000



Annuity withdrawal rates:
                       
 
Withdrawals including internal replacements:
                       
   
Including ILICO
    11.02 %     12.47 %      
   
Excluding ILICO
    7.36 %     10.69 %     16.75 %
 
Withdrawals excluding internal replacements:
                       
   
Including ILICO
    10.55 %     11.42 %      
   
Excluding ILICO
    6.70 %     9.16 %     13.95 %
Annuity withdrawals ($ in millions):
                       
 
Including ILICO
  $ 1,354.0     $ 1,222.6        
 
Excluding ILICO
  $ 687.2     $ 884.7     $ 1,258.6  

      Our withdrawal experience remained within our pricing assumptions. Withdrawal rates declined in 2002 and 2001 as compared to the respective prior years as our annuity products provide a favorable investment return in this current low interest rate and declining equity market environment.

      Investment Spread. Investment results and interest crediting rates were as follows for deferred fixed annuities:

                           
For the Years Ended
December 31,

2002 2001 2000



Investment yield
    6.62 %     7.07 %     6.98 %
Average crediting rate
    4.58 %     5.07 %     4.95 %
     
     
     
 
 
Investment spread
    2.04 %     2.00 %     2.03 %
     
     
     
 

      The investment spread on deferred fixed annuities increased 4 basis points to 204 basis points in 2002 compared to 2001. The investment spread decreased 3 basis points to 200 basis points in 2001 compared to 2000. Crediting rates were lowered in the fourth quarter of 2001 and throughout 2002 to correspond with the decline in investment yields caused by lower rates on new and reinvested funds. At December 31, 2002, the account value of deferred fixed annuities totaled $7.1 billion of which $1.0 billion did not have a differential between the credited rate and minimum guarantee rate and as such could not be lowered. Additionally, deferred fixed annuities with account values totaling $1.3 billion have multi-year interest rate guarantees for which the credited rate cannot be decreased until the end of the multi-year period. At the end of the multi-year guarantee period, we will have the ability to lower the crediting rate to the minimum guaranteed rate by an average decrease of approximately 200 basis points. Also, at December 31, 2002, account values of equity-indexed annuities totaled $3.7 billion which provide guaranteed rates based on a cumulative floor over the term of the product. 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.

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      Underwriting, Acquisition and Other Expenses. Expenses decreased in 2002 compared to 2001 primarily due to goodwill no longer being amortized effective January 1, 2002 with the adoption of SFAS 142. Goodwill amortization amounted to $7.6 million in 2001 and $8.3 million in 2000. Expenses in 2001 increased as compared to 2000 primarily due to the acquisition of ILICO.

      IMO Operations. We own five IMOs which are marketing organizations with contractual arrangements to promote our insurance products to their networks of agents and brokers. Additionally, they also contract with third party insurance companies. The income from IMO operations primarily represents annuity commissions received by our IMOs from those third party insurance companies. Net IMO operating income increased $5.9 million in 2002 compared to 2001 due to our acquisition of an IMO in 2002 and increased $5.4 million in 2001 compared to 2000 due to an IMO acquired in 2001 and in mid-2000.

      Outlook. We anticipate increased product sales from our IMOs but decreased product sales from other distribution 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. In addition, we will continue to manage our spreads as we strive for our desired profitability in this economic environment.

Other

      The other segment primarily consists of holding company revenues and expenses and operations of our real estate management subsidiary. The adjusted pre-tax operating loss in 2002 as compared to the adjusted pre-tax operating income in 2001 is primarily due to real estate investment and management fee income which continue to decline as we reduce these investment holdings and a decline in investment fee income for asset management services provided to ILICO prior to the acquisition amounting to $2.8 million in 2001 and $2.6 million in 2000. After the acquisition of ILICO, such fees are eliminated with expenses in consolidation. Also, other segment income declined in 2001 compared to 2000 from the reduction in holding company cash equivalents of approximately $340 million generated primarily from the sale of discontinued operations in 1998 and distributed to our members in connection with our demutualization in October 2000.

Income Statement Reconciliation

      A reconciliation of our adjusted pre-tax operating income by segment to net income as shown in our consolidated statements of income follows:

                               
For The Years Ended December 31,

2002 2001 2000



($ in thousands)
Adjusted pre-tax operating income:
                       
 
Protection Products
  $ 129,739     $ 95,955     $ 59,071  
 
Accumulation Products
    120,655       95,912       88,212  
 
Other operations
    (6,622 )     6,138       11,982  
     
     
     
 
     
Total adjusted pre-tax operating income
    243,772       198,005       159,265  
Non-operating increases (decreases) to income:
                       
 
Realized and unrealized losses on assets and liabilities:
                       
   
Realized losses on non-core investments
    (102,310 )     (39,299 )     (11,683 )
   
Unrealized losses on non-core trading investments
    (45,209 )     (60,050 )      
   
Fair value change in option value of equity-indexed annuity products and market value adjustments on total return strategy annuities
    28,759       52,747        
   
Cash flow hedge amortization
    (4,351 )            
   
Amortization of DAC & VOBA due to non-core realized gains or losses
    15,002       2,988       8,722  

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For The Years Ended December 31,

2002 2001 2000



($ in thousands)
 
Non-recurring expenses:
                       
   
Demutualization costs
    (1,186 )     (969 )     (11,265 )
   
Restructuring costs
    (21,225 )     (8,566 )      
 
Other income from non-insurance operations
    4,865       1,820       717  
     
     
     
 
     
Income from continuing operations
    118,117       146,676       145,756  
Interest expense
    (25,487 )     (26,011 )     (29,723 )
Income tax expense
    (29,764 )     (39,522 )     (42,516 )
Minority interest
                (21,677 )
     
     
     
 
     
Net income from continuing operations
    62,866       81,143       51,840  
Cumulative effect of change in accounting for derivatives, net of tax
          (8,236 )      
     
     
     
 
     
Net income
  $ 62,866     $ 72,907     $ 51,840  
     
     
     
 

      Realized and Unrealized Losses on Assets and Liabilities. Realized losses on non-core investments in 2002 consisted primarily of realized losses and writedowns on investments related to Dynegy Holdings, Green Tree Financial, National Century, NRG Northeast Generating, Trenwick Group, United Airlines, US Air, and WorldCom Inc. The realized losses in 2001 consisted primarily of writedowns on investments mainly related to telecommunications and emerging markets investments. The level of realized gains and losses will fluctuate from period to period depending on the prevailing interest rate, the economic environment and the timing of investment sales.

      Unrealized losses on non-core investments are generated from our options and trading securities. We use options to hedge our equity-indexed products. In accordance with SFAS 133, we adjusted our options to market value, which, due to the economic environment and deteriorating stock market conditions, resulted in an unrealized loss of $40.0 million and $54.2 million in 2002 and 2001, respectively. In addition, we also have trading securities that back our total return strategy fixed annuity products. The market value adjustment on the trading securities resulted in a loss of $5.2 million and $5.9 million in 2002 and 2001, 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 of $28.8 million in 2002 and $52.7 million in 2001 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 in accordance with SFAS No. 133, which we adopted January 1, 2001. As previously discussed, these fair value changes are offset by similar adjustments to unrealized gains (losses) on investments related to the fair value changes on the options that hedge the equity-indexed products and on the trading securities that back the total return strategy products. The reduction in such contract expense is less than the decline in investment income primarily due to the inability to lower crediting rates below minimum guaranteed interest rates.

      Non-recurring Expenses. The 2000 demutualization costs consist primarily of legal, actuarial and consulting expenses associated with our demutualization that was completed in the third quarter of 2000. The 2001 demutualization costs are associated with the demutualization of ILIC, which was completed when we acquired ILICO in May 2001. As a requirement of ILIC’s demutualization, we undertook a commission-free program under which shareholders with less than one hundred shares could redeem those shares for cash or purchase additional shares, commission-free, to reach a holding of at least one hundred shares. The 2002 costs are primarily for commissions, postage and printing under this program. Since these costs are not ongoing, they have been excluded from our operating segment amounts.

      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

30


 

third quarter of 2001. The objective of the restructuring plan is to eliminate duplicative functions for all business units and to reduce on-going operating costs. Corporate administrative functions are being transitioned so they are performed primarily in Des Moines, Iowa. Protection products administration processes were previously planned to be performed in Indianapolis, Indiana; Des Moines; or Woodbury, New York; however, it has now been determined that these processes will be transitioned so they are performed in Des Moines, Woodbury, or outsourced. This will result in the elimination of additional positions in Indianapolis. Accumulation products functions are being transitioned to Topeka. Investment activities have been restructured to eliminate certain real estate management services which have been outsourced.

      The restructuring charges expensed in 2002 included pre-tax severance and termination benefits of $9.5 million related to the elimination of approximately 240 positions and other pre-tax costs of $11.7 million primarily related to systems conversion and relocation of employees. The restructuring charges expensed in 2001 included pre-tax severance and termination benefits of $6.8 million related to the elimination of approximately 80 positions and other pre-tax costs of $1.8 million. An accrual for severance and termination benefits not yet paid amounted to $6.1 million at December 31, 2002. Additional charges will be incurred for continuing restructuring activities primarily involving severance or relocation benefits for affected employees; various administrative, financial and actuarial system conversion costs; and building disposition costs. System conversion costs will be expensed as incurred and are expected to be substantially completed by the fourth quarter of 2003. A majority of the severance costs due to the transition in 2003 of the protection products processes from Indianapolis to Des Moines, Woodbury or to be outsourced were accrued in the fourth quarter of 2002.

      Minority Interest. Minority interest represents the minority stockholders’ ownership percentage share of net income of ALHI prior to our acquisition of this minority interest. The minority shareholder ownership percentage was 42% through September 20, 2000, the date at which the minority interest was acquired. As a result of our acquisition of the minority interest, there is no net income applicable to the minority interest after 2000.

      Change in Accounting. We adopted SFAS No. 133 on January 1, 2001. In accordance with the provisions of the statement, we recorded the differences between the previous carrying amounts of our derivative instruments and the fair value of our derivative instruments, as of this initial application date, as the effect of a change in accounting principle. The gross difference between carrying amounts and fair value amounts of our derivative instruments was a reduction of approximately $11.3 million. The DAC and VOBA amortization impact from the derivative adjustments was approximately $1.1 million and the income tax benefit was $4.2 million, resulting in the net cumulative effect of change in accounting for derivatives of $8.2 million.

Liquidity And Capital Resources

AmerUs Group Co.

      As a holding company, AmerUs Group Co.’s cash flows from operations consist of dividends from subsidiaries, if declared and paid, interest from income on loans and advances to subsidiaries (including a surplus note issued to us by ALIC), investment income on our assets and fees which we charge our subsidiaries, offset by the expenses incurred for debt service, salaries and other expenses.

      We intend to rely primarily on dividends and interest income from our insurance subsidiaries in order to make dividend payments to our shareholders. The payment of dividends by our insurance subsidiaries is regulated under various state laws. Generally, under the various state statutes, our insurance subsidiaries’ dividends may be paid only from the earned surplus arising from their respective businesses and must receive the prior approval of the respective state regulator to pay any dividend that would exceed certain statutory limitations. The current statutes generally limit any dividend, together with dividends paid out within the preceding 12 months, to the greater of (i) 10% of the respective company’s policyowners’ statutory surplus as of the preceding year end or (ii) the statutory net gain from operations for the previous calendar year. Generally, the various state laws give the state regulators discretion to approve or disapprove requests for dividends in excess of these limits. Based on these limitations and 2001 results, our life insurance subsidiaries

31


 

could have paid us an estimated $80.5 million in dividends in 2002 without obtaining regulatory approval. Our subsidiaries paid us $20.6 million in 2002. Based on 2002 results, our subsidiaries can pay an estimated $82.3 million in dividends without obtaining regulatory approval during 2003. We also consider risk-based capital levels, capital and liquidity operating needs, and other factors prior to paying dividends from the insurance subsidiaries.

      We generated cash flows from operating activities of $920.1 million, $97.1 million and $373.3 million for the years ended December 31, 2002, 2001, and 2000, respectively. Operating cash flows were primarily used to increase our investment portfolio.

      We have a $175 million revolving credit facility with a syndicate of lenders (which we refer to as the Revolving Credit Agreement). As of December 31, 2002, there was a $113 million 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, and (d) must cause our insurance subsidiaries to maintain certain levels of risk-based capital. We closely monitor all of these covenants to ensure continued compliance.

      On March 6, 2002, we issued and sold in a private placement $185 million aggregate original principal amount of OCEANs. The OCEANs are senior subordinated debt and were issued and sold in an original principal amount of $1,000 per OCEAN, with a principal amount at maturity of $1,270 per OCEAN. The maturity date of the OCEANs is March 6, 2032. The OCEANs will have aggregate principal amount at maturity of $235 million. The notes are convertible into shares of AmerUs Group Co.’s common stock at an initial conversion price (subject to adjustment) of $37.60 per share only if the sale price of the common stock exceeds $47.85 per share for at least 20 trading days in a 30-day trading period or in certain other limited circumstances. The OCEANs were registered on Form S-3 filed with the Securities and Exchange Commission on September 20, 2002.

      Proceeds from the OCEANs were used to repay borrowings on the Revolving Credit Agreement and to purchase approximately 1.7 million shares, amounting to $59 million, of AmerUs Group Co.’s common stock. The OCEANs are senior subordinated debt, subordinated in right of payment to all existing and future senior debt and senior to all existing and future junior subordinated debt.

      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 Revolving Credit Agreement. We repurchased shares in the first six months of 2002 under prior purchase programs. During the first six months of 2002, 2.5 million shares were repurchased and were primarily funded by approximately $59 million from the OCEANs offering and approximately $30 million from the Revolving Credit Agreement. During the last six months of 2002, approximately 0.7 million shares were repurchased and were primarily funded by approximately $23 million from the Revolving Credit Agreement.

      We establish internal targeted capital and surplus levels for our insurance subsidiaries, which are in excess of regulatory requirements. As a result of high annuity product sales and related regulatory requirements on statutory capital and surplus, additional capital contributions were provided for at the end of 2002 to certain of our insurance subsidiaries to maintain these levels. Approximately $50 million was drawn on the Revolving Credit Facility to fund these capital contributions during the first quarter of 2003.

      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.

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In addition, we use reinsurance agreements, where cost-effective, to generate capital 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. We are currently exploring additional alternatives for increasing liquidity.

Insurance Subsidiaries

      The cash flows of our insurance subsidiaries consist primarily of premium income; deposits to policyowner account balances; income from investments; sales, maturities and calls of investments and repayments of investment principal. Cash outflows are primarily related to withdrawals of policyowner account balances, investment purchases, payment of policy acquisition costs, payment of policyowner benefits, payment of debt, income taxes and current operating expenses. Insurance companies generally produce a positive cash flow from operations, as measured by the amount by which cash flows are adequate to meet benefit obligations to policyowners and normal operating expenses as they are incurred. The remaining cash flow is generally used to increase the asset base to provide funds to meet the need for future policy benefit payments and for writing new business.

      Management believes that the current level of cash and available-for-sale and short-term securities, combined with expected net cash inflows from operations, maturities of fixed maturity investments, principal payments on mortgage-backed securities and its insurance products, will be adequate to meet the anticipated short-term cash obligations of the 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, maturities of fixed maturity investments and principal payments on mortgage-backed securities, are believed adequate to meet anticipated short-term and long-term benefit and expense payment obligations. There can be no assurance that future experience regarding benefits and surrenders will be similar to historic experience since withdrawal and surrender levels are influenced by such factors as the interest rate environment and general economic conditions and the claims-paying and financial strength ratings of the insurance subsidiaries.

      We take into account asset/ liability management considerations in the product development and design process. Contract terms for the interest-sensitive products include surrender and withdrawal provisions which mitigate the risk of losses due to early withdrawals. These provisions generally do one or more of the following: limit the amount of penalty-free withdrawals, limit the circumstances under which withdrawals are permitted, or assess a surrender charge or market value adjustment relating to the underlying assets. The following table summarizes statutory liabilities for interest-sensitive life products and annuities by their contractual withdrawal provisions at December 31, 2002 (including liabilities in the closed blocks and the general account):

           
($ in millions)

Not subject to discretionary withdrawal
  $ 492  
 
Subject to discretionary withdrawal with adjustments:
       
 
Specified surrender charges(A)
    7,525  
 
Market value adjustments
    3,035  
     
 
 
Subtotal
    10,560  
     
 
Subject to discretionary withdrawal without adjustments
    2,062  
     
 
Total
  $ 13,114  
     
 


(A)  Includes $1,126 million of statutory liabilities with a contractual surrender charge of less than five percent of the account balance.

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      In addition to the interest-sensitive products, an insurance subsidiary is party to a $250 million fixed rate funding agreement. Under the transaction, a five-year floating rate insurance contract was issued to a commercial paper conduit and the liability was swapped to a fixed-rate. During 2002, our insurance subsidiaries placed additional funding agreements totaling $875 million primarily in six to ten year fixed rate insurance contracts. The assets backing the funding agreements are legally segregated and are not subject to claims that arise out of any other business of the insurance subsidiaries. The funding agreements are further backed by the general account assets of the insurance subsidiaries. The segregated assets and liabilities are included with general account assets in the financial statements. The funding agreements may not be cancelled unless there is a default under the agreement, but the insurance subsidiaries may terminate the agreement at any time.

      In addition, there are 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 $235.9 million at December 31, 2002. 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 Investors Life Insurance Company, Inc. are eligible to borrow under variable-rate short term fed 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 December 31, 2002. In addition, ALIC has long-term fixed rate advances from the FHLB outstanding of $13.9 million at December 31, 2002.

      The insurance subsidiaries may also obtain liquidity through sales of investments. The investment portfolio as of December 31, 2002, had a carrying value of $16.9 billion, including closed block investments.

      The level of capital in the insurance companies is also regulated by risk-based capital formulas and is monitored by rating agencies. In order to maintain appropriate capital levels, it may be necessary from time to time for AmerUs Group Co. to provide additional capital to the insurance companies.

      In the current economic environment, including the decline in the interest rates and in the bond and equity markets, insurance regulators are closely monitoring the capital and liquidity position of insurance companies in their periodic financial examinations. One of our insurance subsidiaries which is no longer writing new business is now under its periodic financial examination and is involved in discussions with state examiners concerning its capital position. The Company believes that these discussions will be concluded without any material effect upon the Company’s consolidated financial position or results of operation, but that some contribution of capital to that subsidiary may be appropriate.

      At December 31, 2002, the statutory surplus of the insurance subsidiaries was approximately $797 million. Management believes that each 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.

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Summary of Contractual Obligations and Commitments

      Our contractual obligations primarily consist of amounts owed for notes payable and operating lease commitments. See note 8 to the consolidated financial statements for further discussion about the notes payable and note 12 for additional information regarding leases. Maturities of notes payable and lease obligations are as follows for each of the five years ending December 31, 2002:

                                                         
Obligation Total 2003 2004 2005 2006 2007 Thereafter








($ in thousands)
Optionally Convertible
                                                       
Equity-Linked
                                                       
Accreting Notes
  $ 186,233     $     $     $     $     $     $ 186,233  
Senior notes
    125,000                   125,000                    
Revolving credit agreement
    113,000             113,000                          
Surplus note
    25,000                                     25,000  
Federal Home Loan Bank advances
    13,871       532       568       606       647       690       10,828  
Capital Securities — Series A
    48,095                               48,095        
Quarterly Income Preferred Securities
    154       154                                
Operating leases
    10,855       2,872       2,886       2,093       1,502       1,502        
     
     
     
     
     
     
     
 
    $ 522,208     $ 3,558     $ 116,454     $ 127,699     $ 2,149     $ 50,287     $ 222,061  
     
     
     
     
     
     
     
 

      We have an agreement with Bank One, N.A. whereby we guarantee the payment of loans made to certain managers and executives for the purpose of purchasing common stock and ACES pursuant to the stock purchase program. Our liability in respect of the principal amount of loans is limited to $20.1 million. We have also guaranteed interest and all other fees and obligations owing on the loans. Each participant in the program has agreed to repay any amounts paid by us under the guarantee in accordance with a reimbursement agreement with the participant. This agreement was entered into in 1999, prior to the restrictions imposed by the Sarbanes-Oxley Act regarding loans with executive officers.

      We have obligations to make future capital contributions to various partnerships of up to $3.1 million and to loan funds up to $6.9 million to partnerships. In addition, at December 31, 2002, we had loan guarantees which totaled $6.1 million.

      ALIC and its joint venture partner are contingently liable in the event the joint venture, AVLIC, cannot meet its obligations. At December 31, 2002, AVLIC had statutory assets of $2,004 million, liabilities of $1,931 million and surplus of $73 million.

      We are contingently liable for the portion of the policies reinsured under existing reinsurance agreements in the event the reinsurance companies are unable to pay their portion of any reinsured claim. Management believes that any liability from this contingency is unlikely. However, to limit the possibility of such losses, we evaluate the financial condition of reinsurers and monitor concentration of credit risk.

Investment Portfolio

General

      We maintain a diversified portfolio of investments which is supervised by an experienced in-house staff of investment professionals. Sophisticated asset/liability management techniques are employed in order to achieve competitive yields, while maintaining risk at acceptable levels. The asset portfolio is segmented by liability type, with tailored investment strategies for specific product lines. Investment policies and significant individual investments are subject to approval by the Board of Directors of each of the insurance companies and are overseen by the Investment and Risk Management Committee of our Board of Directors. Management regularly monitors individual assets and asset groups, in addition to monitoring the overall asset mix. In addition, the insurance companies’ boards and the Investment and Risk Management Committee review investment guidelines and monitor internal controls.

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Investment Strategy

      Our investment philosophy is to employ an integrated asset/liability management approach with separate investment portfolios for specific product lines, such as traditional life, universal life, equity-indexed life, deferred fixed annuities, equity-indexed annuities, variable annuities and funding agreements to generate attractive risk-adjusted returns on capital. Essential to this philosophy is coordinating investments in the investment portfolio with product strategies, focusing on risk-adjusted returns and identifying and evaluating associated business risks.

      Investment policies and strategies have been established based on the specific characteristics of each product line. The portfolio investment policies and strategies establish asset duration, quality and other guidelines. Analytical systems are utilized to establish an optimal asset mix for each line of business. We seek to manage the asset/liability mismatch and the associated interest rate risk through active management of the investment portfolio. Financial, actuarial, investment, product development and product marketing professionals work together throughout the product development, introduction and management phases to jointly develop and implement product features, initial and renewal crediting strategies, and investment strategies based on extensive modeling of a variety of factors under a number of interest rate scenarios.

Invested Assets

      Our diversified portfolio of investments includes public and private fixed maturity securities and commercial mortgage loans. Our objective is to maintain a high-quality, diversified fixed maturity securities portfolio that produces a yield and total return that supports the various product line liabilities and our earnings goals.

      The following table summarizes invested assets by asset category as of December 31, 2002 and 2001:

                                     
Invested Assets
December 31,

2002 2001


Carrying % of Carrying % of
Value Total Value Total




($ in millions)
Fixed maturity securities
                               
 
Public
  $ 13,573.6       80.2 %   $ 11,790.3       78.3 %
 
Private
    1,599.2       9.4 %     1,422.2       9.4 %
     
     
     
     
 
   
Subtotal
    15,172.8       89.6 %     13,212.5       87.7 %
Equity securities
    63.3       0.4 %     23.4       0.2 %
Mortgage loans
    883.0       5.2 %     944.5       6.3 %
Policy loans
    496.8       2.9 %     506.3       3.4 %
Real estate
    0.5       0.0 %     1.4       0.0 %
Other investments
    283.8       1.7 %     345.2       2.3 %
Short-term investments
    32.3       0.2 %     19.1       0.1 %
     
     
     
     
 
   
Total invested assets
  $ 16,932.5       100.0 %   $ 15,052.4       100.0 %
     
     
     
     
 

Fixed Maturity Securities

      The fixed maturity securities portfolio consists primarily of investment grade corporate fixed maturity securities, high-quality mortgage-backed securities (or MBS) and United States government and agency obligations. As of December 31, 2002, fixed maturity securities were $15,172.8 million, or 89.6% of the carrying value of invested assets with public and private fixed maturity securities constituting $13,573.6 million, or 89.5%, and $1,599.2 million, or 10.5%, respectively, of total fixed maturity securities, respectively.

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      The following table summarizes the composition of the fixed maturity securities by category as of December 31, 2002 and 2001:

                                     
Composition of Fixed Maturity Securities
December 31,

2002 2001


Carrying % of Carrying % of
Value Total Value Total




($ in millions)
U.S. government/agencies
  $ 973.0       6.4 %   $ 773.5       5.9 %
State and political subdivisions
    50.0       0.3 %     48.3       0.4 %
Foreign government bonds
    246.9       1.6 %     134.2       1.0 %
Corporate bonds
    9,931.6       65.5 %     9,224.1       69.8 %
Redeemable preferred stocks
    120.1       0.8 %     156.6       1.2 %
Asset-backed bonds
    777.6       5.1 %     746.0       5.6 %
Collateralized mortgage-backed securities
    682.3       4.5 %     385.0       2.9 %
MBS
                               
 
U.S. government/agencies
    2,118.9       14.0 %     1,291.2       9.8 %
 
Non-government/agencies
    272.4       1.8 %     453.6       3.4 %
     
     
     
     
 
 
Subtotal-MBS
    2,391.3       15.8 %     1,744.8       13.2 %
     
     
     
     
 
   
Total
  $ 15,172.8       100.0 %   $ 13,212.5       100.0 %
     
     
     
     
 

      The following table summarizes fixed maturity securities by remaining maturity as of December 31, 2002:

Remaining Maturity of Fixed Maturity Securities

                     
Carrying %
Value of Total


($ in millions)
Due:
               
 
In one year or less (2003)
  $ 534.5       3.5 %
 
One to five years (2004-2008)
    4,281.4       28.2 %
 
Five to 10 years (2009-2013)
    4,250.2       28.0 %
 
10 to 20 years (2014-2023)
    1,499.0       9.9 %
 
Over 20 years (2024 and after)
    2,216.4       14.6 %
     
     
 
   
Subtotal
    12,781.5       84.2 %
 
MBS
    2,391.3       15.8 %
     
     
 
   
Total
  $ 15,172.8       100.0 %
     
     
 

      The portfolio of investment grade fixed maturity securities is diversified by number and type of issuer. As of December 31, 2002, investment grade fixed maturity securities included the securities of 903 issuers, with 2,761 different issues of securities. No non-government/agency issuer represents more than 1% of investment grade fixed maturity securities.

      Below-investment grade fixed maturity securities as of December 31, 2002, included the securities of 252 issuers representing 6.8% of total invested assets, with the largest being a $21.2 million investment.

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      As of December 31, 2002, 82.8% of total invested assets were investment grade fixed maturity securities. The following table sets forth the credit quality, by NAIC designation and Standard & Poor’s rating equivalents, of fixed maturity securities as of December 31, 2002:

Fixed Maturity Securities by NAIC Designation

December 31, 2002
                                                     
Public Private Total



NAIC Carrying % of Carrying % of Carrying % of
Designation Standard & Poor’s Equivalent Designation Value Total Value Total Value Total








(Dollars in millions)
1
  A- or higher   $ 8,809.9       64.9 %   $ 1,101.7       68.9 %   $ 9,911.6       65.3 %
2
  BBB- to BBB+     3,705.7       27.3 %     401.2       25.0 %     4,106.9       27.1 %
         
     
     
     
     
     
 
    Total investment grade     12,515.6       92.2 %     1,502.9       93.9 %     14,018.5       92.4 %
         
     
     
     
     
     
 
3
  BB to BB+     662.9       4.9 %     58.6       3.7 %     721.5       4.8 %
4
  BB to BB+     296.4       2.2 %     8.9       0.6 %     305.3       2.0 %
5 & 6
  CCC or lower     98.7       0.7 %     28.8       1.8 %     127.5       0.8 %
         
     
     
     
     
     
 
        Total below investment grade     1,058.0       7.8 %     96.3       6.1 %     1,154.3       7.6 %
     
     
     
     
     
     
 
         Total   $ 13,573.6       100.0 %   $ 1,599.2       100.0 %   $ 15,172.8       100.0 %
         
     
     
     
     
     
 

      MBS investments are mortgage-related securities including collateralized mortgage obligations (or CMOs) and pass-through mortgage securities. Asset-backed securities are both residential and non-residential including exposure to home equity loans, home improvement loans, manufactured housing loans as well as securities backed by loans on automobiles, credit cards, and other collateral or collateral bond obligations. As of December 31, 2002, asset-backed residential mortgages total $496.9 million or 2.9% of total invested assets. As of December 31, 2002, residential mortgage pass-through and CMOs total $2,391.3 million or 14.1% of total invested assets. As of December 31, 2002, $2,118.9 million or 88.6% of MBS were from government sponsored enterprises. Other MBS were $272.4 million or 11.4% of MBS as of December 31, 2002. Management believes that the quality of assets in the MBS portfolio is generally high, with 99.7% of such assets representing agency backed or “AAA” rated securities. Collateralized mortgage backed securities (or CMBS) total $682.3 million or 4.0% of total invested assets as of December 31, 2002.

      Interest rate swaps and options are used to reduce exposure to changes in interest rates and to manage duration mismatches. Call options are used to hedge equity-indexed products. Credit default swaps are coupled with a bond to synthetically create an investment cheaper than the equivalent instrument traded in the cash market. Although we are subject to the risk that counterparties will fail to perform, credit standings of counterparties are monitored regularly. We only enter into transactions with highly rated counterparties. We are also subject to the risk associated with changes in the value of contracts. However, such adverse changes in value generally are offset by changes in the value of the items being hedged. The notional principal amounts of the swaps and options, which represent the extent of our involvement in such contracts but not the risk of loss, at December 31, 2002, amounted to $2,155.7 million. The interest rate swaps had a carrying value of a net payable position of $5.6 million at December 31, 2002. The credit default swaps had a carrying value of a net payable position of $0.2 million at December 31, 2002. The carrying value of options amounted to $65.8 million at December 31, 2002. For each of these derivatives, the carrying value is equal to fair value as of December 31, 2002. The derivatives are reflected as other investments on the consolidated financial statements as of December 31, 2002. The net amount payable or receivable from interest rate and credit default swaps are accrued as an adjustment to interest income. Effective January 1, 2001, we adopted SFAS 133. See note 4 to the consolidated financial statements for further discussion of the impact of adopting SFAS 133.

Mortgage Loans

      As of December 31, 2002, mortgage loans in the investment portfolio were $883.0 million, or 5.2% of the aggregate carrying value of invested assets. As of December 31, 2002, commercial mortgage loans and residential mortgage loans comprised 99.8% and 0.2%, respectively, of total mortgage loans. Commercial

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mortgage loans consist primarily of fixed-rate mortgage loans. As of December 31, 2002, we held 710 individual commercial mortgage loans with an average balance of $1.2 million.

      As of December 31, 2002, one loan in the loan portfolio with a principal balance of $1.7 million was classified as delinquent and no loans were in foreclosure. As of the same date, only two loans aggregating $3.5 million, or 0.1%, of the loan portfolio (as measured by principal balance) were classified as restructured. During 2002, we had no foreclosures.

Other

      We held $496.8 million of policy loans on individual insurance products as of December 31, 2002. Policy loans are permitted to the extent of a policy’s contractual limits and are fully collateralized by policy cash values. As of December 31, 2002, we held equity securities of $63.3 million of which the largest holding was Federal Home Loan Bank common stock totaling $50.3 million.

      We held $283.8 million of other invested assets (including short-term investments and real estate) on December 31, 2002. Other invested assets consist primarily of our Ameritas Joint Venture investment, various other joint ventures and limited partnership investments and derivatives.

Structured Securities Arrangements

      We have utilized a limited number of structured finance arrangements. The structures primarily consist of interests in collateralized bond obligations and special-purpose entities with principal protected limited partnership interests. Neither AmerUs nor any management members have operating control or management oversight of the entities and accordingly the entities are not consolidated but rather accounted for as available for sale debt securities or equity method investments. In addition, we do not have any continued obligation or commitment to provide additional financing to the entities. At December 31, 2002 and 2001, approximately $560 million and $535 million, respectively, of such structured finance investments were included in invested assets. See additional discussion of structured securities and related accounting developments in “Emerging Accounting Matters.”

Effects Of Inflation And Interest Rate Changes

      Management does not believe that inflation has had a material effect on the consolidated results of operations.

      Interest rate changes may have temporary effects on the sale and profitability of the protection products and accumulation products offered. For example, if interest rates rise, competing investments (such as annuities or life insurance products offered by competitors, certificates of deposit, mutual funds, and similar instruments) may become more attractive to potential purchasers of our products until we increase the interest rate credited to owners of our protection products and accumulation products. In contrast, as interest rates fall, we attempt to adjust credited rates to compensate for the corresponding decline in reinvestment rates. We monitor interest rates and sell annuities and life insurance policies that permit flexibility to make interest rate changes as part of management of interest spreads. However, the profitability of our products is based upon persistency, mortality and expenses, as well as interest rate spreads.

      We manage our investment portfolio in part to reduce exposure to interest rate fluctuations. In general, the market value of our fixed maturity portfolio increases or decreases in an inverse relationship with fluctuations in interest rates, and net investment income increases or decreases in a direct relationship with interest rate changes.

      We have developed an asset/liability management approach with separate investment portfolios for major product lines such as traditional life, universal life, equity-indexed life, deferred annuities, equity-indexed annuities, variable annuities and funding agreements. Investment policies and strategies have been established based on the specific characteristics of each product line. The portfolio investment policies and strategies establish asset duration, quality and other guidelines. Analytical systems are utilized to establish an optimal asset mix for each line of business. We seek to manage the asset/liability mismatch and the associated interest

39


 

rate risk through active management of the investment portfolio. Financial, actuarial, investment, product development and product marketing professionals work together throughout the product development, introduction and management phases to jointly develop and implement product features, initial and renewal crediting strategies, and investment strategies based on extensive modeling of a variety of factors under a number of interest rate scenarios.

      In force reserves and the assets allocated to each segment are modeled on a regular basis to analyze projected cash flows under a variety of economic scenarios. The result of this modeling is used to modify asset allocation, investment portfolio duration and renewal crediting strategies. We invest in derivatives to hedge against the effects of interest rate fluctuations or to hedge growth in policyowner liabilities for certain life and annuity products and funding agreements. For a further discussion and disclosure of the nature and extent of the use of derivatives, see note 4 to the consolidated financial statements.

Federal Income Tax Matters

      AmerUs Group and our non-life subsidiaries file a consolidated federal income tax return. The life insurance subsidiaries file separate federal income tax returns, except for ILIC, Bankers Life and IL Annuity which together file a consolidated tax return beginning in 2002. The separate return method is used to compute the provision for allocating federal income taxes. Deferred income tax assets and liabilities are determined based on differences among the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws.

Critical Accounting Policies

      The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. The following are considered our critical accounting policies due to their subjective nature and significance to the financial statements.

Valuation of Financial Instruments

      A significant portion of our assets are carried at fair value, primarily securities available-for-sale, securities held for trading purposes and derivative financial instruments. Market values are based on quoted market prices where available.

      Securities in our portfolio with a carrying value of approximately $1,625 million at December 31, 2002 do not have readily determinable market prices. For these securities, we estimate their fair value by comparison to similar securities with quoted prices when possible. Otherwise, we use our most recent purchases and sales of similar unquoted securities, independent broker quotes, or internally prepared valuations (including those based on estimates of future profitability) to estimate the fair value of those securities. All such investments are classified as available for sale. Our ability to liquidate our positions in these securities will be impacted to a significant degree by the lack of an actively traded market, and we may not be able to dispose of these investments in a timely manner. Although we believe our estimates reasonably reflect the fair value of those securities, our key assumptions about the risk-free interest rates, risk premiums, performance of underlying collateral (if any), and other factors may not be realized in the event of an actual sale.

      Securities are also reviewed to identify potential impairments. In determining if and when a decline in market value below amortized cost is other-than-temporary, we evaluate the market conditions, offering prices, trends of earnings, price multiples, and other key measures for our investments in marketable equity securities and debt instruments. When such a decline in value is deemed to be other-than-temporary, we recognize an impairment loss in the current period operating results to the extent of the decline.

      Investments in mortgage loans, real estate, policy loans and other investments are monitored for possible impairment. If it is determined that collection of all amounts due under the contractual terms is doubtful or carrying values exceed the fair value of underlying collateral, such investments are considered impaired and the asset carrying value is adjusted or a valuation allowance is established.

40


 

Derivatives

      We hold derivative financial instruments to hedge growth in policyowner liabilities for certain life and annuity products, to hedge the interest variability of a floating-rate funding agreement and to hedge market risk for fixed income investments. These derivatives qualify for hedge accounting or are considered economic hedges as discussed in detail in note 4 to our consolidated financial statements.

      Hedge accounting results when we designate and document the hedging relationships involving derivative instruments. Economic hedging instruments are those instruments whose change in fair value acts as a natural hedge against the change in fair value of hedged assets or liabilities with both changes wholly or partially being offset in earnings.

      To hedge equity market risk, we primarily use S&P 500 Index call options to hedge the growth in interest credited to the customer as provided by our equity-indexed life and annuity products. We also use interest rate swaps to effectively provide for fixed interest payments of a floating rate funding agreement liability and hedge market risk from fixed income investments. Credit default swaps are coupled with a bond to synthetically create an instrument cheaper than an equivalent investment traded in the cash market.

      We have not changed our methods of calculating the fair values of derivatives or the underlying assumptions. The fair values of these derivatives will change over time as cash receipts and payments are made and as market conditions change.

      Our derivative instruments are not subject to a multiple or use of leverage on the underlying price index. We do not believe we are exposed to more than a nominal amount of credit risk in our interest rate or equity hedges as the counterparties are established, well-capitalized financial institutions. Information about the fair values, notional amounts, and contractual terms of these instruments can be found in note 4 to our consolidated financial statements and the section titled “Quantitative and Qualitative Disclosures About Market Risk.”

Amortization of DAC and VOBA

      We generally amortize DAC based on a percentage of our expected gross margins (EGMs) over the life of the policies. Our estimated EGMs are computed based on assumptions related to the underlying policies written, including the lives of the underlying policies, growth rate of the assets supporting the liabilities, and level of expenses necessary to maintain the policies over their entire life. We amortize DAC by estimating the present value of the EGMs over the lives of the insurance policies and then calculate a percentage of the policy acquisition cost deferred as compared to the present value of the EGMs. That percentage is used to amortize the DAC such that the amount amortized over the life of the policies results in a constant percentage of amortization when related to the actual and future gross margins.

      Because the EGMs are only an estimate of the profits we expect to recognize from these policies, the EGMs are adjusted at each balance sheet date to take into consideration the actual gross profits to date and any changes in the remaining expected future gross margins. When EGMs are adjusted, we also adjust the amortization of the deferred policy acquisition costs amount to maintain a constant percentage over the entire life of the policies.

      We amortize the VOBA based on the incidence of the expected cash flows from insurance contracts using the interest rate credited to the underlying policies. The expected future cash flows are based on actuarially determined projections of future premium receipts, mortality, surrenders, operating expenses, changes in insurance liabilities, investment yields on the assets retained to support the policy liabilities and other factors. These projections take into account all factors known or expected by management. The actual cash flows may vary from expected levels due to differences in renewal premium, investment spread, investment gains or losses, mortality and morbidity costs and other factors.

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Purchase Accounting Valuations

      We followed the purchase method of accounting for our acquisition of ILICO in May 2001. Under the purchase method, we were required to determine the fair value of the acquired assets and liabilities. The fair value of the assets and liabilities were determined as follows:

        Investments — based on quoted market prices, or in cases where quoted market prices were not available, by using discounted cash flow or other valuation techniques.
 
        Receivables and other assets — reflected at replacement values or realizable values based on the present value of amounts to be received determined at appropriate interest rates less amounts considered uncollectible.
 
        Value of business acquired — actuarially determined future profits from in force business calculated at a 15% risk discount rate using current best estimate assumptions.
 
        Policyowner reserves and funds — established at the present value of all future benefits and expenses associated with the policies using current best estimate assumptions.
 
        Other liabilities and debt — determined as the present value of amounts to be paid using appropriate interest rates.

      The excess of the purchase price over the fair value of the net assets acquired for ILICO was recorded as goodwill amounting to $36 million.

Emerging Accounting Matters

SFAS 141 and SFAS 142

      In July 2001, the Financial Accounting Standards Board issued SFAS 141, “Business Combinations,” and SFAS 142, “Goodwill and Other Intangible Assets.” SFAS 141 requires the purchase method of accounting be used for all business combinations initiated or completed after June 30, 2001. SFAS 141 also specifies criteria intangible assets acquired in a purchase method business acquisition must meet to be recognized apart from goodwill. The adoption of SFAS 141 did not have an impact on the consolidated financial statements.

      SFAS 142 requires goodwill and intangible assets with indefinite useful lives to no longer be amortized but instead tested for impairment at least annually. The evaluation of the impairment analysis for goodwill and other intangible assets, principally VOBA, was completed in 2002 with no impairment indicated as of January 1, 2002. In addition, a reassessment was performed as of October 1, 2002 in conjunction with our annual evaluation which resulted in no indication of impairment of goodwill or other intangible assets. See note 17 to the consolidated financial statements for additional information regarding the adoption of SFAS 142.

SFAS 146

      In July 2002, the Financial Accounting Standards Board issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 provides for costs to exit an activity or dispose of long-lived assets to be recorded when they are incurred and are to be measured at fair value. Under previous accounting guidance, a liability for an exit cost was recognized at the date of the commitment to an exit plan. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002 and its adoption had no impact on net income or stockholders’ equity as of or for the year ended December 31, 2002.

SFAS 148

      In December 2002, the Financial Accounting Standards Board issued SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 requires more

42


 

prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. As of December 31, 2002, we continue to account for employee stock-based compensation using the intrinsic value method provided under SFAS 123 and SFAS 148. The disclosure requirements of both standards have been provided in note 1 to the consolidated financial statements.

FIN 45

      In November 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” or FIN 45. FIN 45 clarifies disclosure and recognition and measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December 15, 2002 and the recognition and measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. See note 12 to the consolidated financial statements for disclosures related to our guarantees.

FIN 46

      In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” an Interpretation of ARB 51, or FIN 46. FIN 46 provides guidance to identify variable interest entities, or VIEs, and their consolidation by a primary beneficiary. A VIE is defined as an entity in which either 1) the equity investors, if any, do not have a controlling financial interest, or 2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. An enterprise whose investment in a VIE absorbs the majority of the VIE’s expected losses or receives a majority of its expected residual returns is considered a primary beneficiary, although not all VIEs will have a primary beneficiary. FIN 46 requires primary beneficiaries to consolidate VIEs in their financial statements and also requires additional disclosures for enterprises which are not primary beneficiaries but which have a significant variable interest in a VIE. The provisions of FIN 46 are effective immediately for VIEs created after January 31, 2003 and is to be applied in the first interim period beginning after June 15, 2003 for interests in VIEs acquired before February 1, 2003. The additional disclosure is required for financial statements issued after January 31, 2003. At December 31, 2002, we held interests in structured securities arrangements which meet the definition of VIEs. We would be considered the primary beneficiary for several of those structured securities, which if consolidated at December 31, 2002, would result in an increase in total assets of $167 million, an increase in total liabilities of $154 million and an increase in total stockholders’ equity of $13 million. See note 3 to the consolidated financial statements for disclosures and additional information related to our VIE interests.

SFAS 133 Implementation — Embedded Derivatives

      In February 2003, the Financial Accounting Standards Board’s Derivatives Implementation Group issued SFAS 133 Implementation Issue No. B36, “Embedded Derivatives: Bifurcation of a Debt Instrument that Incorporates both Interest Rate Risk and Credit Risk Exposures that are Unrelated or Only Partially Related to the Creditworthiness of the Issuer of that Instrument,” or DIG Issue B36. DIG Issue B36 applies to modified coinsurance and coinsurance with funds withheld reinsurance agreements where interest is determined by reference to a pool of fixed maturity assets or a total return debt index. Such arrangements in which funds are withheld by the ceding insurer cause the reinsurer to recognize a receivable from the ceding insurer as well as a liability representing reserves for the insurance coverage assumed under the reinsurance arrangements. The terms of the reinsurer’s receivable provide for the future payment of principal plus a rate of return on either its general account assets or a specified block of those assets which is typically composed of fixed-rate debt securities. DIG Issue B36 considers the reinsurer’s receivable from the ceding company to contain an embedded derivative that must be bifurcated and accounted for separately under SFAS 133. DIG Issue B36 is tentatively planned to be effective for quarters beginning after June 15, 2003. Currently, we do not account for such reinsurance receivables and payables as having an embedded derivative which would be bifurcated and accounted for separately. We continue to evaluate the impacts of implementing DIG Issue B36; however, at this time, we are unable to estimate the effects on the financial statements.

43


 

 
ITEM 7A. 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 boards 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 and, to a lesser extent, 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 policyholder’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 policyholder 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 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) cost of underlying call options purchased to match the returns owed to contract holders and (2) 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-index 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.

44


 

      The table below provides information about our fixed maturity investments and mortgage loans for both our trading and other than trading portfolios at December 31, 2002. The table presents cash flows of principal amounts and related weighted average interest rates by expected maturity dates. 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.

      As of December 31, 2002

                                                                   
Expected Cash Flows
Amortized Fair
2003 2004 2005 2006 2007 Thereafter Cost Value








($ in millions)
Fixed maturity securities available-for-sale
  $ 1,759     $ 1,282     $ 1,292     $ 1,053     $ 1,184     $ 6,298     $ 12,868     $ 13,329  
Average interest rate
    6.7%       6.7%       7.1%       6.7%       6.6%       6.3%                  
Fixed maturity securities held for trading purposes
  $ 117     $ 222     $ 272     $ 139     $ 166     $ 928     $ 1,844     $ 1,844  
Average interest rate
    4.8%       2.9%       2.9%       2.9%       3.4%       4.6%                  
Mortgage loans
  $ 50     $ 63     $ 66     $ 65     $ 62     $ 577     $ 883     $ 978  
Average interest rate
    8.1%       8.1%       8.0%       8.0%       7.9%       7.8%                  
 
Total
  $ 1,926     $ 1,567     $ 1,630     $ 1,257     $ 1,412     $ 7,803     $ 15,595     $ 16,151  
     
     
     
     
     
     
     
     
 

      In accordance with our strategy of minimizing credit quality risk, we consistently invest in high quality marketable securities. Fixed maturity securities are comprised of U.S. Treasury, government agency, mortgage-backed and corporate securities. Approximately 68% of 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 8% of the bond portfolio is below investment grade. Fixed maturity securities have an average maturity of approximately 6.9 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. See note 4 of the consolidated financial statements for additional information about our derivative positions.

      Equity price risk is the potential loss arising from changes in the value of equity securities. In general, equities have more year-to-year price variability than intermediate term grade bonds. However, returns over longer time frames have been consistently higher. Our equity securities are of high quality and readily marketable.

      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.

45


 

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

      The consolidated financial statements begin on page F-1. Reference is made to the Index to Financial Statements on page F-1 herein.

      Additional financial statement schedules begin on page S-1. Reference is made to the Index to Financial Statement Schedules on page S-1 herein.

 
ITEM  9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

      KPMG LLP was the independent auditors for AmerUs Group Co. On February 19, 2001, management notified KPMG LLP that their appointment as independent auditors would be terminated effective upon issuance of KPMG LLP reports on the consolidated financial statements for the year ended December 31, 2000. Ernst & Young LLP was engaged as independent auditors effective upon KPMG LLP termination. The decision to change auditors was recommended by the audit committee of the board of directors and approved by the board of directors.

      In connection with the audit of the fiscal year ended December 31, 2000, there were no disagreements with KPMG LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with their opinion to the subject matter of the disagreement.

      The audit report of KPMG LLP on the consolidated financial statements of AmerUs Group Co. and subsidiaries as of and for the year ended December 31, 2000, did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.

PART III

      The Notice of 2003 Annual Meeting of Shareholders and Proxy Statement (the Proxy Statement), which, when filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, is incorporated by reference in this Annual Report on Form 10-K pursuant to General Instruction G(3) of Form 10-K, provides the information required under Part III (Items 11. Executive Compensation, 12. Security Ownership of Certain Beneficial Owners and Management Related Stockholder Matters and 13. Certain Relationships and Related Transactions).

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a)  Information concerning directors of AmerUs Group Co. appears in the Proxy Statement, under “Election of Directors.” This portion of the Proxy Statement is incorporated herein by reference.
 
(b)  For information with respect to Executive Officers, see Part I of this Annual Report on Form 10-K, under “Executive Officers of the Company.”
 
(c)  Information concerning Section 16(a) beneficial ownership reporting compliance appears in the Proxy Statement, under “Section 16(a) Beneficial Ownership Reporting Compliance.” This portion of the Proxy Statement is incorporated herein by reference.

ITEM 14.     CONTROLS AND PROCEDURES

(a)  Based upon their evaluation within 90 days prior to the filing date of this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures as defined in Rule 13a-14(c) 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 were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referred to above.

46


 

PART IV

 
ITEM  15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.

(a) 1.     Financial Statements. Reference is made to the Index on page F-1 of the report.

    2.     Financial Statement Schedules. Reference is made to the Index on page S-1 of the report.

    3.     Exhibits. Reference is made to the Index to Exhibits on page      of the report.

(b) The following reports on Form 8-K were filed during the quarter ended December 31, 2002:

     Form 8-K dated November 5, 2002 announcing the release of third quarter 2002 earnings. Supplemental financial information of AmerUs Group Co. was attached.
 
     Form 8-K dated November 13, 2002 providing Chief Executive Officer and Chief Financial Officer certifications pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.
 
     Form 8-K dated December 5, 2002, which included the Company’s investor presentation presented at the Company’s investor conference held on December 5, 2002, and related press release.

47


 

AMERUS GROUP CO. AND SUBSIDIARIES

 
INDEX TO EXHIBITS
         
Exhibit
No. Description


  2.1     Plan of Reorganization dated October 27, 1995, filed as Exhibit 2.1 to the Registration Statement of AmerUs Life Holdings, Inc. on Form S-1, Registration Number 333-12239, is hereby incorporated by reference.
  2.2     Amended and Restated Agreement and Plan of Merger, dated as of September 19, 1997 and as amended and restated as of October 8, 1997, by and among AmerUs Life Holdings, Inc., AFC Corp. and AmVestors Financial Corporation (“AmVestors”), filed as Exhibit 2.2 to the Registration Statement of AmerUs Life Holdings, Inc. on Form S-4, Registration Number 333-40065 is hereby incorporated by reference.
  2.3     Agreement and Plan of Merger, dated as of August 13, 1997 and as amended as of September 5, 1997, among AmerUs Life Holdings, Inc., a wholly owned subsidiary of AmerUs Life Holdings, Inc. and Delta Life Corporation, filed as Exhibit 2.2 to Form 8-K of AmerUs Life Holdings, Inc. dated October 8, 1997, is hereby incorporated by reference.
  2.4     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.
  2.5     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.
  2.6     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.
  2.7     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.
  2.8     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.
  2.9     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.
  2.10     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.
  2.11     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.
  2.12     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.
  2.13     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, files as Exhibit 2.13 on Form 10-Q dated August 12, 2002, is hereby incorporated by reference.

48


 

         
Exhibit
No. Description


  3.1     Amended and Restated Articles of Incorporation of the Registrant filed as Exhibit 3.1 on Form 10-Q, dated November 14, 2000 is hereby incorporated by reference.
  3.2     Amended and Restated Bylaws of the Registrant, filed as Exhibit 3.2 on Form 10-K, dated March 15, 2002, is hereby incorporated by reference.
  4.1     Amended and Restated Trust Agreement dated as of February 3, 1997 among AmerUs Life Holdings, Inc., Wilmington Trust Company, as property trustee, and the administrative trustees named therein (AmerUs Capital I business trust), filed as Exhibit 3.6 to the registration statement of AmerUs Life Holdings, Inc. and AmerUs Capital I on Form S-1, Registration Number 333-13713, is hereby incorporated by reference.
  4.2     Indenture dated as of February 3, 1997 between AmerUs Life Holdings, Inc. and Wilmington Trust Company relating to the Company’s 8.85% Junior Subordinated Debentures, Series A, filed as Exhibit 4.1 to the registration statement of AmerUs Life Holdings, Inc. and AmerUs Capital I on Form S-1, Registration Number, 333-13713, is hereby incorporated by reference.
  4.3     Guaranty Agreement dated as of February 3, 1997 between AmerUs Life Holdings, Inc., as guarantor, and Wilmington Trust Company, as trustee, relating to the 8.85% Capital Securities, Series A, issued by AmerUs Capital I, filed as Exhibit 4.4 to the registration statement on Form S-1, Registration Number, 333-13713, is hereby incorporated by reference.
  4.4     Amended and Restated Declaration of Trust of AmerUs Capital II, dated as of July 27, 1998, among AmerUs Life Holdings, Inc., First Union Trust Company and the administrative trustees named therein, relating to AmerUs Life Holdings, Inc.’s 7.0% ACES Units, filed as Exhibit 4.5 on Form 10-Q, dated August 13, 1998, is hereby incorporated by reference.
  4.5     Certificate of Trust of AmerUs Capital III filed as Exhibit 4.7 to the registration statement of AmerUs Life Holdings, Inc., AmerUs Capital II and AmerUs Capital III, on Form S-3 (No. 333-50249), is hereby incorporated by reference.
  4.6     Common Trust Securities Guarantee Agreement, dated as of July 27, 1998, by AmerUs Life Holdings, Inc., relating to AmerUs Life Holdings, Inc.’s 7.0% ACES Units, filed as Exhibit 4.7 on Form 10-Q, dated August 13, 1998, is hereby incorporated by reference.
  4.7     QUIPS Guarantee Agreement, dated as of July 27, 1998, by AmerUs Life Holdings, Inc., relating to AmerUs Life Holdings, Inc.’s 7.0% ACES Units, filed as Exhibit 4.8 on Form 10-Q, dated August 13, 1998, is hereby incorporated by reference.
  4.8     Master Unit Agreement, dated as of July 27, 1998, between AmerUs Life Holdings, Inc. and First Union National Bank relating to AmerUs Life Holdings, Inc.’s 7.0% ACES Units, filed as Exhibit 4.9 on Form 10-Q, dated August 13, 1998, is hereby incorporated by reference.
  4.9     Call Option Agreement, dated as of July 27, 1998, between Goldman, Sachs & Co. and First Union National Bank relating to AmerUs Life Holdings, Inc.’s 7.0% ACES Units, filed as Exhibit 4.10 on Form 10-Q, dated August 13, 1998, is hereby incorporated by reference.
  4.10     Pledge Agreement, dated as of July 27, 1998, among AmerUs Life Holdings, Inc., Goldman, Sachs & Co. and First Union National Bank relating to AmerUs Life Holdings, Inc.’s 7.0% ACES Units, filed as Exhibit 4.11 on Form 10-Q, dated August 13, 1998, is hereby incorporated by reference.
  4.11     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.

49


 

         
Exhibit
No. Description


  4.12     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.
  4.13     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.
  4.14     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.
  4.15     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.
  4.16     First Supplement to Subordinated Indenture, dated July 27, 1998, relating to AmerUs Life Holdings, Inc.’s 6.86% Junior Subordinated Deferrable Interest Debentures, among American Mutual Holding Company, AmerUs Life Holdings, Inc. and First Union National Bank, as Indenture Trustee, dated September 20, 2000, filed as Exhibit 4.17 on Form 10-Q, dated November 14, 2000, is hereby incorporated by reference.
  4.17     First Supplement to Master Unit Agreement dated July 27, 1998, relating to AmerUs Life Holdings, Inc.’s 7.0% ACES units, between American Mutual Holding Company and First Union National Bank, as Unit Agent, dated September 20, 2000, filed as Exhibit 4.18 on Form 10-Q, dated November 14, 2000, is hereby incorporated by reference.
  4.18     Assignment and Assumption Agreement to the QUIPS Guarantee Agreement dated July 27, 1998, relating to AmerUs Life Holdings, Inc.’s 7.0% ACES units, between American Mutual Holding Company and AmerUs Life Holdings, Inc., dated September 20, 2000, filed as Exhibit 4.19 on Form 10-Q, dated November 14, 2000, is hereby incorporated by reference.
  4.19     Assignment and Assumption Agreement to the Common Trust Securities Guarantee Agreement dated July 27, 1998, relating to AmerUs Life Holdings, Inc.’s 7.0% ACES units, between American Mutual Holding Company and AmerUs Life Holdings, Inc., dated September 20, 2000, filed as Exhibit 4.20 on Form 10-Q, dated November 14, 2000, is hereby incorporated by reference.
  4.20     First Supplement to Purchase Contracts between American Mutual Holding Company and Holders, as specified, dated September 20, 2000, filed as Exhibit 4.21on Form 10-Q, dated November 14, 2000, is hereby incorporated by reference.
  4.21     First Supplement to the Pledge Agreement dated July 27, 1998, relating to AmerUs Life Holdings, Inc.’s 7.0% ACES units, among American Mutual Holding Company, Goldman Sachs & Co., as Call Option Holder, the Chase Manhattan Bank, as Collateral Agent and First Union National Bank, as Unit Agent, dated September 20, 2000, filed as Exhibit 4.22 on Form 10-Q, dated November 14, 2000, is hereby incorporated by reference.
  4.22     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.
  4.23     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.

50


 

         
Exhibit
No. Description


  4.24     Registration Rights Agreement dated as of March 6, 2002 between AmerUs Group Co. and 2002, is hereby incorporated by reference.
  10.1     Joint Venture Agreement, dated as of June 30, 1996, between American Mutual Insurance Company and Ameritas Life Insurance Corp., filed as Exhibit 10.2 on Form 10-K, dated March 25, 1998, is hereby incorporated by reference.
  10.2     Management and Administration Service Agreement, dated as of April 1, 1996, among American Mutual Life Insurance Company, Ameritas Variable Life Insurance Company and Ameritas Life Insurance Corp., filed as Exhibit 10.3 to the registration statement of AmerUs Life Holdings, Inc. on Form S-1, Registration Number 333-12239, is hereby incorporated by reference.
  10.3     AmerUs Life Holdings, Inc. Executive Stock Purchase Plan, dated November 13, 1998, filed as Exhibit 4.11 to the registration statement of AmerUs Life Holdings, Inc. on Form S-8, Registration Number 333-72237, is hereby incorporated by reference.
  10.4     AllrAmerUs Supplemental Executive Retirement Plan, effective January 1, 1996, filed as Exhibit 10.6 to the registration statement of AmerUs Life Holdings, Inc. on Form S-1, Registration Number 333-12239, is hereby incorporated by reference.
  10.5     Management Incentive Plan, filed as Exhibit 10.9 to the registration statement of AmerUs Life Holdings, Inc. on Form S-1, Registration Number 333-12239, is hereby incorporated by reference.
  10.6     AmerUs Life Insurance Company Performance Share Plan, filed as Exhibit 10.10 to the registration statement of AmerUs Life Holdings, Inc. on Form S-1, Registration Number 333-12239, is hereby incorporated by reference.
  10.7     AmerUs Life Stock Incentive Plan, filed as Exhibit 10.11 to the registration statement of AmerUs Life Holdings, Inc. on Form S-1, Registration Number 333-12239, is hereby incorporated by reference.
  10.8     AmerUs Life Non-Employee Director Stock Plan, filed as Exhibit 10.13 to the registration statement of AmerUs Life Holdings, Inc. on Form S-1, Registration Number 333-12239, is hereby incorporated by reference.
  10.9     Form of Indemnification Agreement executed with directors and certain officers, filed as Exhibit 10.33 to the registration statement of AmerUs Life Holdings, Inc. on Form S-1, Registration Number 333-12239, is hereby incorporated by reference.
  10.10     Tax Allocation Agreement dated as of November 4, 1996, filed as Exhibit 10.68 to the registration statement of AmerUs Life Holdings, Inc. on Form S-1, Registration Number 333-12239, is hereby incorporated by reference.
  10.11     AmVestors Financial Corporation 1996 Incentive Stock Option Plan, filed as Exhibit (4)(a) to Registration Statement of AmVestors Financial Corporation on Form S-8, Registration Number 333-14571 dated October 21, 1996, is hereby incorporated by reference.
  10.12     AmerUs Group Co. Amended and Restated MIP Deferral Plan dated as of May 10, 2001 filed as Exhibit 10.12 on Form 10-K dated March 15, 2002, is hereby incorporated by reference.
  10.13     Open Line of Credit Application and Terms Agreement, dated March 5, 1999, between Federal Home Loan Bank of Des Moines and AmerUs Life Insurance Company, filed as Exhibit 10.34 on Form 10-Q dated May 14, 1999, is hereby incorporated by reference.
  10.14     Facility and Guaranty Agreement, dated February 12, 1999, among The First National Bank of Chicago and AmerUs Life Holdings, Inc., filed as Exhibit 10.39 on Form 10-Q dated May 14, 1999, is hereby incorporated by reference.
  10.15     Form of Reimbursement Agreement, dated February 15, 1999, among AmerUs Life Holdings, Inc. and Roger K. Brooks, Victor N. Daley, Thomas C. Godlasky, Marcia S. Hanson, Mark V. Heitz and Gary R. McPhail, filed as Exhibit 10.40 on Form 10-Q dated May 14, 1999, is hereby incorporated by reference.

51


 

         
Exhibit
No. Description


  10.16     Amendment No. 1 to Facility Agreement, dated March 23, 1999, among The First National Bank of Chicago and AmerUs Life Holdings, Inc., filed as Exhibit 10.41 on Form 10-Q dated May 14, 1999, is hereby incorporated by reference.
  10.17     1999 Non-Employee Stock Option Plan, dated April 19, 1999, filed on Form S-3, Registration Number 333-72643, is hereby incorporated by reference.
  10.18     Amendment No. 2 to Facility Agreement, dated January 25, 2000, among The First National Bank of Chicago and the Registrant, filed as Exhibit 10.44 on Form 10-K, dated March 8, 2000, is hereby incorporated by reference.
  10.19     Amendment No. 3 to Facility Agreement dated December 12, 2001, among the First National Bank of Chicago and the Registrant filed as Exhibit 10.19 on Form 10-K dated March 15, 2002, is hereby incorporated by reference.
  10.20     Irrevocable Standby Letter of Credit Application and Terms Agreement, dated February 1, 2000, between Federal Home Loan Bank of Des Moines and AmerUs Life Insurance Company, filed as Exhibit 10.45 on Form 10-K, dated March 8, 2000, is hereby incorporated by reference.
  10.21     Investment Advisory Agreements, dated as of February 18, 2000, by and between Indianapolis Life Insurance Company, Bankers Life Insurance Company of New York, IL Annuity and Insurance Company, Western Security Life Insurance Company and AmerUs Capital Management Group, Inc. filed as Exhibits 10.1,10.3, 10.4 and 10.2, respectively, to AmerUs Life Holdings, Inc.’s report on Form 8-K/ A on March 6, 2000, are hereby incorporated by reference.
  10.22     Advance, Pledge and Security Agreement, dated April 12, 2000, by and between the Federal Home Loan Bank of Topeka and American Investors Life Insurance Company, Inc., filed as Exhibit 10.48 on Form 10-Q, dated May 15, 2000, is hereby incorporated by reference.
  10.23     Institutional Custody Agreement, dated April 12, 2000, by and between the Federal Home Loan Bank of Topeka and American Investors Life Insurance Company, Inc., filed as Exhibit 10.49 on Form 10-Q, dated May 15, 2000, is hereby incorporated by reference.
  10.24     Line of Credit Application, dated April 12, 2000, by and between the Federal Home Loan Bank of Topeka and American Investors Life Insurance Company, Inc., filed as Exhibit 10.50 on Form 10-Q, dated May 15, 2000, is hereby incorporated by reference.
  10.25     Stock Purchase Agreement, dated February 1, 2000, by and among AmVestors Financial Corporation, Creative Marketing International Corporation and the Stockholders of Creative Marketing International Corporation, filed as Exhibit 10.51 on Form 10-Q, dated May 15, 2000, is hereby incorporated by reference.
  10.26     Stock Purchase Agreement, dated February 23, 2000, by and among American Investors Sales Group, Inc., Community Bank Marketing, Inc. and Community Financial Services, Inc., filed as Exhibit 10.52 on Form 10-Q, dated May 15, 2000, is hereby incorporated by reference.
  10.27     Agreement for Advances, Pledge and Security Agreement, dated March 12, 1992, by and between Central Life Assurance Company and the Federal Home Loan Bank of Des Moines, filed as Exhibit 10.53 on Form 10-Q, dated May 15, 2000, is hereby incorporated by reference.
  10.28     Agreement for Advances, Pledge and Security Agreement, dated September 1, 1995, by and between American Vanguard Life Insurance Company and the Federal Home Loan Bank of Des Moines, filed as Exhibit 10.54 on Form 10-Q, dated May 15, 2000, is hereby incorporated by reference.
  10.29     Agreement and Plan of Merger, dated September 30, 1998, by and among AmVestors Financial Corporation, Senior Benefit Services of Kansas, Inc., Senior Benefit Services Insurance Agency, Inc., National Senior Benefit Services, Inc. and Richard McCarter, filed as Exhibit 10.55 on Form 10-Q, dated May 15, 2000, is hereby incorporated by reference.

52


 

         
Exhibit
No. Description


  10.30     Affirmation Agreement to Facility and Guaranty Agreement dated February 12, 1999 by American Mutual Holding Company, survivor of a merger with AmerUs Life Holdings, Inc. in favor of the Agent and the Lenders, dated September 20, 2000, filed as Exhibit 10.58 on Form 10-Q, dated November 14, 2000, is hereby incorporated by reference.
  10.31     Amendment to Facility and Guaranty Agreement dated February 12, 1999 among The First National Bank of Chicago and AmerUs Group Co., dated September 20, 2000, filed as Exhibit 10.59 on Form 10-Q, dated November 14, 2000, is hereby incorporated by reference.
  10.32     AmerUs Group Co. 2000 Stock Incentive Plan, dated November 15, 2000, filed as Exhibit 99.9 to the registration statement of AmerUs Group Co. on Form S-8, Registration Number 333-50030, is hereby incorporated by reference.
  10.33     Employment Agreement between Indianapolis Life Insurance Company and Larry R. Prible dated May 11, 2000, filed as Exhibit 10.44 on Form 10-Q, dated November 13, 2001, is hereby incorporated by reference.
  10.34     Credit Agreement dated December 12, 2001, among AmerUs Group Co., Various Lending Institutions, the Bank of New York, Mellon Bank N.A., and Fleet National Bank as Co-Arranters and J P Morgan Chase Bank as Administrative Agent and Co-Arranger filed as Exhibit 10.35 on Form 10-K dated March 15, 2002, is hereby incorporated by reference.
  10.35     First Amendment to Credit Agreement dated as of February 22, 2002, among AmerUs Group Co., the lending institutions party hereto, The Bank of New York, Mellon Bank N.A. and Fleet National Bank as Co-Arrangers and JPMorgan Chase Bank as Administrative Agent and Co-Arranger, files as Exhibit 10.35 on Form 10-Q dated May 14, 2002, is hereby incorporated by reference.
  10.36     Consent dated as of March 15, 2002, among AmerUs Group Co., the lending institutions party hereto, The Bank of New York, Mellon Bank N.A. and Fleet National Bank as Co-Arrangers and JPMorgan Chase Bank as Administrative Agent and Co-Arranger, filed as Exhibit 10.36 on Form 10-Q dated May 14, 2002, is hereby incorporated by reference.
  10.37     Amendment No. 1 to Joint Venture Agreement, dated April 1, 2002, by and between Ameritas Life Insurance Corp. and AmerUs Life Insurance Company filed as Exhibit 10.37 on Form 10-Q dated August 12, 2002 is hereby incorporated by reference.
  10.38     Distribution Commitment Agreement for Variable Business, dated April 1, 2002, by and between AmerUs Group Co. and Ameritas Variable Life Insurance Company filed as Exhibit 10.38 on Form 10-Q dated August 12, 2002 is hereby incorporated by reference.
  10.39     Amendment No. 4 to Facility Agreement dated February 12, 1999 by and among AmerUs Group Co. and Bank One, NA (f/k/a The First National Bank of Chicago), dated June 30, 2002 filed as Exhibit 10.39 on Form 10-Q dated August 12, 2002 is hereby incorporated by reference.
  10.40     Supplemental Benefit Agreement among AmerUs Group Co. and Melinda S. Urion dated March 4, 2002 filed as Exhibit 10.1 on Form 10-Q dated November 13, 2002 is hereby incorporated by reference.
  10.41     Retirement Agreement, dated March 14, 2000, by and between Victor N. Daley and AmerUs Life Holdings, Inc., filed as Exhibit 99.8 on Form 10-Q, dated May 15, 2000, is hereby incorporated by reference.
  10.42     First Amendment to Employment Agreement, dated as of April 15, 1999, to the Employment Agreement dated as of September 19, 1997, among Mark V. Heitz, AmVestors Financial Corporation, American Investors Life Insurance Company, Inc., AmVestors Investment Group, Inc., American Investors Sales Group, Inc., and AmerUs Life Holdings, Inc., filed as Exhibit 99.4 on Form 10-Q dated August 13, 1999, is hereby incorporated by reference.

53


 

         
Exhibit
No. Description


  10.43     Supplemental Benefit Agreement, dated as of April 15, 1999, among Roger K. Brooks and AmerUs Life Holdings, Inc., filed as Exhibit 99.5 on 10-Q dated August 13, 1999, is hereby incorporated by reference.
  10.44     Form of Supplemental Benefit Agreement, dated as of April 15, 1999, among AmerUs Life Holdings, Inc. and Victor N. Daley, Thomas C. Godlasky and Gary R. McPhail, filed as Exhibit 99.6 on Form 10-Q dated August 13, 1999, is hereby incorporated by reference.
  10.45     Form of Supplemental Benefit Agreement, dated as of February 7, 2000, among AmerUs Life Holdings, Inc. and Victor N. Daley, Thomas C. Godlasky and Gary R. McPhail, filed as Exhibit 99.7 on Form 10-K, dated March 8, 2000 is hereby incorporated by reference.
  10.46     AllrAmerUs Supplemental Executive Retirement Plan filed as Exhibit 4.3 to the registration statement on Form S-8, Registration Number 333-101961, is hereby incorporated by reference.
  12*     Computation of Ratios of Earnings to Fixed Charges.
  16.1     Letter re Change in Certifying Accountant, filed as Exhibit 16.1 on Form 10-K dated March 9, 2001, is hereby incorporated by reference.
  21.1*     List of Subsidiaries of the Registrant.
  23.1*     Consent of Ernst & Young LLP.
  23.2*     Consent of KPMG LLP.

included herein

54


 

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) 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.

  AMERUS GROUP CO.
 
  /s/ ROGER K. BROOKS
 
  Roger K. Brooks
  Chairman, President and Chief Executive Officer

Date: March 14, 2003

POWER OF ATTORNEY

      We, the undersigned officers and directors of AmerUs Group Co., hereby severally and individually constitute and appoint Melinda S. Urion, Brenda J. Cushing and James A. Smallenberger, and each of them, the true and lawful attorneys and agents of each of us to execute in the name, place and stead of each of us (individually and in any capacity stated below) any and all amendments to this Annual Report on Form 10-K and all instruments necessary or advisable in connection therewith and to file the same with the Securities and Exchange Commission, each of said attorneys and agents to have the power to act with or without the others and to have full power and authority to do and perform in the name and on behalf of each of the undersigned every act whatsoever necessary or advisable to be done on the premises as fully and to all intents and purposes as any of the undersigned might or could do in person, and we hereby ratify and confirm our signatures as they may be signed by or said attorneys and agents or each of them to any and all such amendments and instruments.

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated.

     
/s/ ROGER K. BROOKS

Roger K. Brooks
  Chairman, President and Chief Executive Officer (principal executive officer) and Director
/s/ MELINDA S. URION

Melinda S. Urion
  Executive Vice President and Chief Financial Officer (principal financial officer)
/s/ BRENDA J. CUSHING

Brenda J. Cushing
  Senior Vice President and Controller (principal accounting officer)
/s/ JOHN R. ALBERS

John R. Albers
  Director
/s/ DAVID A. ARLEDGE

David A. Arledge
  Director
/s/ MALCOLM CANDLISH

Malcolm Candlish
  Director
/s/ ALECIA A. DECOUDREAUX

Alecia A. DeCoudreaux
  Director

55


 

     
/s/ THOMAS F. GAFFNEY

Thomas F. Gaffney
  Director
/s/ JOHN W. NORRIS, JR.

John W. Norris, Jr.
  Director
/s/ ANDREW J. PAINE, JR.

Andrew J. Paine, Jr.
  Director
/s/ JACK C. PESTER

Jack C. Pester
  Director
/s/ JOHN A. WING

John A. Wing
  Director
/s/ F. A. WITTERN, JR.

F. A. Wittern, Jr.
  Director

56


 

CERTIFICATIONS

I, Roger K. Brooks, Chairman, President and Chief Executive Officer of AmerUs Group Co., certify that:

  1.  I have reviewed this annual report on Form 10-K of AmerUs Group Co;
 
  2.  Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
 
  3.  Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
 
  4.  The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

  a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
  b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
 
  c)  presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

  5.  The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

  a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
  b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

  6.  The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Dated: March 14, 2003

By  /s/ ROGER K. BROOKS  

 
Roger K. Brooks  
Chairman, President and Chief Executive Officer AmerUs Group Co.  

57


 

I, Melinda S. Urion, Chief Financial Officer of AmerUs Group Co., certify that:

  1.  I have reviewed this annual report on Form 10-K of AmerUs Group Co;
 
  2.  Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
 
  3.  Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
 
  4.  The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

  a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
  b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
 
  c)  presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

  5.  The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

  a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
  b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

  6.  The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Dated: March 14, 2003

By  /s/ MELINDA S. URION  

 
Melinda S. Urion  
Chief Financial Officer AmerUs Group Co.  

58


 

AMERUS GROUP CO.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     
Independent Auditors’ Reports
  F-2 through F-3
Consolidated Balance Sheets as of December 31, 2002 and 2001
  F-4 through F-5
Consolidated Statements of Income for the Years Ended December 31, 2002, 2001 and 2000
  F-6
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2002, 2001 and 2000
  F-7
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2002, 2001 and 2000
  F-8
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000
  F-9 through F-11
Notes to Consolidated Financial Statements
  F-12 through F-57

      Separate financial statements of subsidiaries not consolidated and 50% or less owned persons accounted for by the equity method have been omitted because they do not individually constitute a significant subsidiary.

F-1


 

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders

  AmerUs Group Co.

      We have audited the accompanying consolidated balance sheets of AmerUs Group Co. as of December 31, 2002 and 2001, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the two years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated statements of income, comprehensive income, stockholders’ equity and cash flows of AmerUs Group Co. for the year ended December 31, 2000, were audited by other auditors whose report dated February 5, 2001, expressed an unqualified opinion on those statements.

      We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the 2002 and 2001 financial statements referred to above present fairly, in all material respects, the consolidated financial position of AmerUs Group Co. as of December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.

      As discussed in note 1 to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangibles and in 2001 the Company changed its method of accounting for derivative instruments and its method of accounting for its closed block of business.

  (ERNST & YOUNG LLP SIG)

Des Moines, Iowa

February 5, 2003

F-2


 

REPORT OF KPMG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders

  AmerUs Group Co.:

      We have audited the accompanying consolidated statements of income, comprehensive income, stockholders’ equity and cash flows of AmerUs Group Co. and subsidiaries for the year ended December 31, 2000. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

      We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of AmerUs Group Co. and subsidiaries for the year ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.

  (KPMG LLP)

Des Moines, Iowa

February 5, 2001

F-3


 

AMERUS GROUP CO.

CONSOLIDATED BALANCE SHEETS

($ in thousands)
                       
December 31,

2002 2001


Assets
               
Investments:
               
 
Securities available-for-sale at fair value:
               
   
Fixed maturity securities
  $ 13,328,902     $ 11,037,425  
   
Equity securities
    63,345       11,362  
   
Short-term investments
    32,318       14,881  
 
Securities held for trading purposes at fair value:
               
   
Fixed maturity securities
    1,843,868       2,175,106  
   
Equity securities
          12,013  
   
Short-term investments
          4,212  
 
Mortgage loans
    883,034       944,532  
 
Real estate
    476       1,405  
 
Policy loans
    496,753       506,318  
 
Other investments
    283,794       345,179  
     
     
 
     
Total investments
    16,932,490       15,052,433  
Cash and cash equivalents
    102,612       179,376  
Accrued investment income
    185,660       174,238  
Premiums, fees and other receivables
    13,082       9,920  
Reinsurance receivables
    865,930       732,030  
Deferred policy acquisition costs
    884,239       642,680  
Value of business acquired
    454,159       583,829  
Goodwill
    218,995       195,484  
Property and equipment
    74,188       83,221  
Deferred income taxes
          12,140  
Other assets
    326,397       305,416  
Separate account assets
    235,913       328,385  
     
     
 
     
Total assets
  $ 20,293,665     $ 18,299,152  
     
     
 

See accompanying notes to consolidated financial statements.

F-4


 

AMERUS GROUP CO.

 
CONSOLIDATED BALANCE SHEETS
($ in thousands)
                       
December 31,

2002 2001


Liabilities and Stockholders’ Equity
               
Liabilities:
               
 
Policy reserves and policyowner funds:
               
   
Future life and annuity policy benefits
  $ 16,244,016     $ 15,102,001  
   
Policyowner funds
    1,335,144       432,941  
     
     
 
      17,579,160       15,534,942  
 
Accrued expenses and other liabilities
    283,836       512,500  
 
Dividends payable to policyowners
    303,062       221,224  
 
Policy and contract claims
    39,569       33,147  
 
Income taxes payable
    61,325       45,809  
 
Deferred income taxes
    16,499        
 
Notes payable
    511,353       384,628  
 
Separate account liabilities
    235,913       328,385  
     
     
 
     
Total liabilities
    19,030,717       17,060,635  
Stockholders’ equity:
               
 
Preferred Stock, no par value, 20,000,000 shares authorized, none issued
           
 
Common Stock, no par value, 230,000,000 shares authorized; 43,656,280 shares issued and 39,011,578 shares outstanding in 2002; 43,505,998 shares issued and 41,759,450 shares outstanding in 2001
    43,656       43,506  
 
Additional paid-in capital
    1,179,646       1,177,688  
 
Accumulated other comprehensive income (loss)
    88,522       12,669  
 
Unearned compensation
    (458 )     (727 )
 
Unallocated ESOP shares
    (1,443 )     (224 )
 
Retained earnings
    109,517       62,187  
 
Treasury stock, at cost (4,644,702 shares in 2002 and 1,746,548 shares in 2001)
    (156,492 )     (56,582 )
     
     
 
     
Total stockholders’ equity
    1,262,948       1,238,517  
     
     
 
     
Total liabilities and stockholders’ equity
  $ 20,293,665     $ 18,299,152  
     
     
 

See accompanying notes to consolidated financial statements.

F-5


 

AMERUS GROUP CO.

 
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except share data)
                           
For The Years Ended December 31,

2002 2001 2000



Revenues:
                       
 
Insurance premiums
  $ 350,812     $ 305,905     $ 266,155  
 
Universal life and annuity product charges
    161,510       146,055       99,940  
 
Net investment income
    994,007       873,174       699,525  
 
Realized/unrealized gains (losses) on investments
    (149,919 )     (90,629 )     (28,975 )
 
Other income
    71,986       47,024       35,292  
     
     
     
 
      1,428,396       1,281,529       1,071,937  
     
     
     
 
Benefits and expenses:
                       
 
Policyowner benefits
    890,688       753,003       624,361  
 
Underwriting, acquisition and other expenses
    152,749       140,471       123,467  
 
Demutualization costs
    1,186       969       11,265  
 
Restructuring costs
    21,225       8,566        
 
Amortization of deferred policy acquisition costs and value of business acquired
    139,565       132,899       92,750  
 
Dividends to policyowners
    104,866       98,945       74,338  
     
     
     
 
      1,310,279       1,134,853       926,181  
     
     
     
 
Income from continuing operations
    118,117       146,676       145,756  
Interest expense
    25,487       26,011       29,723  
     
     
     
 
Income before income tax expense and minority interest
    92,630       120,665       116,033  
Income tax expense
    29,764       39,522       42,516  
Minority interest
                21,677  
     
     
     
 
Net income from continuing operations
    62,866       81,143       51,840  
Cumulative effect of change in accounting for derivatives, net of tax
          (8,236 )      
     
     
     
 
Net income
  $ 62,866     $ 72,907     $ 51,840  
     
     
     
 
Net income from continuing operations per common share:
                       
 
Basic
  $ 1.57     $ 2.20     $ 2.48  
     
     
     
 
 
Diluted
  $ 1.56     $ 2.17     $ 2.46  
     
     
     
 
Net income per common share:
                       
 
Basic
  $ 1.57     $ 1.97     $ 2.48  
     
     
     
 
 
Diluted
  $ 1.56     $ 1.95     $ 2.46  
     
     
     
 
Weighted average common shares outstanding:
                       
 
Basic
    39,972,328       36,949,198       20,922,371  
     
     
     
 
 
Diluted
    40,398,378       37,453,428       21,035,518  
     
     
     
 

See accompanying notes to consolidated financial statements.

F-6


 

AMERUS GROUP CO.

 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
                             
For The Years Ended December 31,

2002 2001 2000



Net income
  $ 62,866     $ 72,907     $ 51,840  
Other comprehensive income (loss), before tax:
                       
 
Unrealized gains (losses) on securities:
                       
   
Transfer related to unrealized gain on available-for-sale securities reclassified to trading
          (662 )      
   
Unrealized holding gains (losses) arising during period
    17,324       31,298       92,221  
   
Less: Reclassification adjustment for gains (losses) included in net income
    (101,261 )     (14,792 )     (15,994 )
   
Minimum pension liability adjustment
    (1,888 )     (3,587 )      
     
     
     
 
 
Other comprehensive income (loss), before tax
    116,697       41,841       108,215  
 
Income tax (expense) benefit related to items of other comprehensive income
    (40,844 )     (14,645 )     (37,875 )
     
     
     
 
      75,853       27,196       70,340  
 
Amounts attributable to:
                       
   
Minority interest
                (19,580 )
   
Change in accounting for derivatives
          2,661        
     
     
     
 
 
Other comprehensive income (loss), net of taxes
    75,853       29,857       50,760  
     
     
     
 
Comprehensive income (loss)
  $ 138,719     $ 102,764     $ 102,600  
     
     
     
 

See accompanying notes to consolidated financial statements.

F-7


 

AMERUS GROUP CO.

 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2002, 2001 and 2000
($ in thousands)
                                                                         
Accumulated
Additional Other Unallocated Total
Common Paid-In Comprehensive Unearned ESOP Unassigned Retained Treasury Stockholders’
Stock Capital Income (Loss) Compensation Shares Surplus Earnings Stock Equity









Balance at December 31, 1999
  $     $     $ (67,948 )   $ (187 )   $ (797 )   $ 840,962     $     $     $ 772,030  
2000:
                                                                       
Net income
                                            33,801       18,039               51,840  
Net unrealized gain (loss) on securities
                    50,937                                               50,937  
Stock issued under various incentive plans, net of forfeitures
    6       169             105             273                   553  
Dividends declared on common stock
                                        (11,972 )           (11,972 )
Allocation of shares in leveraged ESOP
          600                   695                         1,295  
Minority interest ownership changes
                (177 )           (2 )     94                   (85 )
Acquisition of minority interest
    12,615       285,405                                           298,020  
Demutualization of AmerUs Group
    17,390       518,535             (64 )     (579 )     (875,130 )                 (339,848 )
Other
          5,185                                           5,185  
     
     
     
     
     
     
     
     
     
 
Balance at December 31, 2000
    30,011       809,894       (17,188 )     (146 )     (683 )           6,067             827,955  
2001:
                                                                       
Net income
                                        72,907             72,907  
Change in accounting for derivatives
                2,661                                     2,661  
Transfer related to unrealized gain (loss) on available-for-sale securities reclassified to trading
                (430 )                                   (430 )
Net unrealized gain (loss) on securities
                35,891                                     35,891  
Net unrealized gain (loss) on derivatives designated as cash flow hedges
                (5,933 )                                   (5,933 )
Stock issued under various incentive plans, net of forfeitures
    206       5,861             (581 )                       108       5,594  
Stock issued under exercise of warrants
          (1,383 )                                   4,468       3,085  
Dividends declared on common stock
                                        (16,787 )           (16,787 )
Purchase of treasury stock
                                              (44,985 )     (44,985 )
Acquisition of IL Holdings
    9,047       223,358                                           232,405  
Conversion of company-obligated mandatorily redeemable preferred capital securities
    4,242       139,478                                     (16,173 )     127,547  
Allocation of shares in leveraged ESOP
          480                   459                         939  
Minimum pension liability adjustment
                (2,332 )                                   (2,332 )
     
     
     
     
     
     
     
     
     
 
Balance at December 31, 2001
    43,506       1,177,688       12,669       (727 )     (224 )           62,187       (56,582 )     1,238,517  
2002:
                                                                       
Net income
                                        62,866             62,866  
Net unrealized gain (loss) on securities
                73,646                                     73,646  
Net unrealized gain (loss) on derivatives designated as cash flow hedges
                3,434                                     3,434  
Stock issued under various incentive plans, net of forfeitures
    150       5,730             269                         1       6,150  
Stock issued under exercise of warrants
          (3,802 )                                   12,205       8,403  
Purchase of ESOP shares and treasury stock
                            (2,522 )                 (112,116 )     (114,638 )
Dividends declared on common stock
                                        (15,536 )           (15,536 )
Allocation of shares in leveraged ESOP
          30                   1,303                         1,333  
Minimum pension liability adjustment
                (1,227 )                                   (1,227 )
     
     
     
     
     
     
     
     
     
 
Balance at December 31, 2002
  $ 43,656     $ 1,179,646     $ 88,522     $ (458 )   $ (1,443 )   $     $ 109,517     $ (156,492 )   $ 1,262,948  
     
     
     
     
     
     
     
     
     
 

See accompanying notes to consolidated financial statements.

F-8


 

AMERUS GROUP CO.

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
                               
For The Years Ended December 31,

2002 2001 2000



Cash flows from operating activities
                       
Net income
  $ 62,866     $ 72,907     $ 51,840  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
 
Cumulative effect of change in accounting for derivatives
          8,236        
 
Product charges on universal life and annuity products
    (129,387 )     (121,547 )     (72,952 )
 
Interest credited to policyowner account balances
    437,557       392,663       310,175  
 
Change in option value of equity-indexed products and market value adjustments on total return strategy annuities
    (28,759 )     (52,747 )      
 
Realized/unrealized (gains) losses on investments
    149,919       90,629       28,975  
 
Goodwill amortization
          8,324       8,259  
 
DAC and VOBA amortization
    139,565       132,899       92,750  
 
Minority interest
                21,677  
 
Change in:
                       
   
Accrued investment income
    (11,422 )     (6,891 )     (6,889 )
   
Reinsurance receivables
    (129,638 )     (123,569 )     (3,929 )
   
Securities held for trading purposes:
                       
     
Fixed maturities
    321,836       49,329        
     
Equity securities
    12,013       (11,342 )      
     
Short-term investments
    4,221       (4,186 )      
   
DAC and VOBA
    (405,493 )     (318,653 )     (193,073 )
   
Liabilities for future policy benefits
    525,538       54,746       133,371  
   
Accrued expenses and other liabilities
    (40,684 )     (64,984 )     10,919  
   
Policy and contract claims and other policyowner funds
    30,769       (48,423 )     (5,500 )
   
Income taxes:
                       
     
Current
    14,837       39,092       (12,563 )
     
Deferred
    (24,363 )     (7,914 )     20,691  
 
Other, net
    (9,321 )     8,545       (10,500 )
     
     
     
 
 
Net cash provided by operating activities
    920,054       97,114       373,251  
     
     
     
 
Cash flows from investing activities:
                       
Purchase of fixed maturities available-for-sale
    (8,269,367 )     (4,673,375 )     (1,954,326 )
Proceeds from sale of fixed maturities available-for-sale
    5,736,480       2,745,381       949,325  
Maturities, calls and principal reductions of fixed maturities available-for-sale
    959,293       1,006,631       690,060  
Purchase of equity securities
    (66,408 )     (51,190 )     (141,532 )
Proceeds from sale of equity securities
    771       57,013       30,933  
Change in short-term investments, net
    (17,216 )     5,656       (22,353 )
Purchase of mortgage loans
    (64,416 )     (150,143 )     (90,964 )

F-9


 

AMERUS GROUP CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

($ in thousands)
                             
For The Years Ended December 31,

2002 2001 2000



Proceeds from repayment and sale of mortgage loans
    130,855       118,479       202,270  
Purchase of real estate and other invested assets
    (28,872 )     (104,438 )     (104,284 )
Proceeds from sale of real estate and other invested assets
    61,661       48,417       122,113  
Change in policy loans, net
    9,565       3,883       (14,763 )
Other assets, net
    4,684       (75,997 )     (104,999 )
Acquisitions, net of cash acquired
          156,925        
Purchase of minority interest
                (969 )
     
     
     
 
   
Net cash used in investing activities
    (1,542,970 )     (912,758 )     (439,489 )
     
     
     
 
Cash flows from financing activities:
                       
Deposits to policyowner account balances
    2,180,925       2,137,698       1,567,284  
Withdrawals from policyowner account balances
    (1,630,869 )     (1,231,109 )     (1,435,150 )
Change in debt, net
    (38,703 )     74,947       19,364  
Dividends to shareholders
    (15,536 )     (16,787 )     (13,240 )
Stock issued under various incentive plans, net of forfeitures
    14,553       8,678        
Purchase of treasury stock
    (114,638 )     (44,985 )      
Proceeds from issuance of OCEANs
    179,593              
Purchase of company-obligated mandatorily redeemable capital securities
    (20,805 )            
Conversion of company-obligated mandatorily redeemable capital securities
          154        
Adoption and allocation of shares in leveraged ESOP
    1,333       939       1,295  
Cash paid for demutualization distribution
                (306,168 )
Transfer of pension obligation to trustee
    (9,481 )            
Other, net
    (220 )           640  
     
     
     
 
   
Net cash provided by (used in) financing activities
    546,152       929,535       (165,975 )
     
     
     
 
   
Net increase (decrease) in cash
    (76,764 )     113,891       (232,213 )
Cash and cash equivalents at beginning of period
    179,376       65,485       297,698  
     
     
     
 
Cash and cash equivalents at end of period
  $ 102,612     $ 179,376     $ 65,485  
     
     
     
 
Supplemental disclosure of cash activities:
                       
 
Interest paid
  $ 25,408     $ 29,325     $ 39,415  
     
     
     
 
 
Income taxes paid
  $ 22,351     $ 1,914     $ 4,043  
     
     
     
 

F-10


 

AMERUS GROUP CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

($ in thousands)
                           
For The Years Ended December 31,

2002 2001 2000



Details of acquisitions:
                       
 
Fair value of assets acquired
  $     $ 5,676,350     $  
 
Liabilities assumed
          5,349,908        
     
     
     
 
 
Carrying value of acquisitions
          326,442        
 
Common stock issued
          (232,405 )      
 
Accrual of cash payout component of purchase price
          (9,000 )      
 
Preliminary investment in ILGC
          (77,200 )      
 
Acquisition costs previously paid
          (2,857 )      
     
     
     
 
 
Cash paid
          4,980        
 
Less: Cash acquired
          161,905        
     
     
     
 
 
Net cash (received in) acquisitions
  $     $ (156,925 )   $  
     
     
     
 
Details of acquisition of minority interest:
                       
 
Minority interest ownership in assets acquired
  $     $     $ 4,750,145  
 
Minority interest ownership of liabilities assumed
                4,499,238  
     
     
     
 
 
Fair value of minority interest acquired
                250,907  
 
Allocation of excess costs of acquiring the minority interest over the fair value of identifiable assets less liabilities
                47,113  
     
     
     
 
 
Value of common stock issued to acquire minority interest
  $     $     $ 298,020  
     
     
     
 

See accompanying notes to consolidated financial statements.

F-11


 

AMERUS GROUP CO.

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

      AmerUs Group Co. (Company) is a holding company whose subsidiaries are primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life insurance, annuity and insurance deposit products to individuals and businesses in all 50 states, the District of Columbia and the U.S. Virgin Islands. The Company has two reportable operating segments: protection products and accumulation products. The protection products segment was formerly known as the life insurance segment and the accumulation products segments was formerly known as the annuity segment. The primary offerings of the protection products segments are whole life, interest-sensitive whole life, term life, universal life and equity-indexed life insurance policies. The primary offerings of the accumulation products segment are individual deferred fixed annuities, equity-indexed annuities and funding agreements.

Demutualization

      The Company was formerly known as American Mutual Holding Company (AMHC) and was a mutual insurance holding company whose principal asset was a 58% interest in AmerUs Life Holdings, Inc. (ALHI). Public stockholders owned the remaining 42% interest in ALHI (Minority Interest). ALHI was a holding company which directly or indirectly owned three principal life insurance subsidiaries: AmerUs Life Insurance Company (ALIC), American Investors Life Insurance Company, Inc. (American) and Delta Life and Annuity Company (Delta). On September 20, 2000, AMHC converted to stock form, changed its name to AmerUs Group Co. and acquired the Minority Interest of ALHI by issuing AmerUs Group Co. common stock in exchange for the outstanding shares of ALHI held by the public. The value of the stock exchange was approximately $298 million and ALHI merged into the Company simultaneously with the stock exchange.

      Prior to the conversion of the Company to a stock form, the Company was owned by individuals and entities who held insurance policies or annuity contracts issued by ALIC (Members). In the conversion, which is referred to as a demutualization, the Company distributed cash, policy credits and its newly issued common stock to its Members in exchange for their membership interests. The value of the distribution totaled approximately $792 million.

      The acquisition of the ALHI Minority Interest by the Company was accounted for as a purchase and accordingly 42% of the book value of the assets and liabilities of ALHI were adjusted to market value as of the acquisition date. Approximately 42% of the ALHI earnings for the reporting periods up to the acquisition date are reduced from the Company’s results of operations on the line titled minority interest in the Company’s consolidated statements of income. From the acquisition date forward, the Company’s results of operations include 100% of these earnings.

Consolidation and Basis of Presentation

      The accompanying consolidated financial statements of the Company and its wholly-owned subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States (GAAP) which, as to the insurance company subsidiaries, differ from statutory accounting practices prescribed or permitted by regulatory authorities.

      The accompanying consolidated financial statements include the accounts and operations of the Company and its wholly-owned subsidiaries, principally, ALIC, AmerUs Annuity Group Co. (AAG, formerly AmVestors Financial Corporation (AmVestors)), AmerUs Capital Management Group, Inc. (ACM), and ILICO Holdings, Inc., the holding company of Indianapolis Life Insurance Company (ILIC) and its subsidiaries (ILICO). As discussed in note 15, ILICO was acquired in May 2001. All significant intercompany transactions and balances have been eliminated in consolidation.

F-12


 

AMERUS GROUP CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Effective on March 29, 2002, Western Security Life Insurance Company, a subsidiary of ILIC, was sold. The insurance business of Western Security Life Insurance Company was transferred to ILIC prior to the sale. The sale of the corporate organization and insurance licenses resulted in a gain of approximately $1.9 million which is included in realized gains.

      The residential financing and property operations were previously for sale and were carried as discontinued operations in the consolidated financial statements. During 2002, it was determined the sale would not be completed. As a result, the consolidated financial statements for prior periods have been restated to reclassify the assets, liabilities, and income of the discontinued operations to the respective financial statement line items. There was no adjustment to the carrying value of the net assets of these operations, and accordingly, there was no effect on stockholders’ equity or net income for the restatement.

      Certain amounts in the 2001 and 2000 financial statements have been reclassified to conform to the 2002 financial statement presentation.

      The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The valuation of financial instruments, derivatives, amortization of deferred policy acquisition costs and value of business acquired, and purchase accounting valuations are areas which involve a high degree of estimation to determine their reported amounts. These areas are described in more detail in the following policies.

Cash and Cash Equivalents

      For purposes of reporting cash flows, the Company includes cash and amounts due from other financial institutions and interest-bearing deposits in other financial institutions purchased with original maturities of three months or less in cash and cash equivalents. Amounts of interest-bearing deposits included as cash equivalents at December 31, 2002 and 2001 were $99.1 million and $186.4 million, respectively.

Closed Block

      The Company has established two Closed Blocks of policies: (a) the first on June 30, 1996 in connection with the reorganization of ALIC from a mutual company to a stock company, and (b) the second on March 31, 2001 in connection with the reorganization of ILIC from a mutual company to a stock company (collectively, the Closed Block). 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 give reasonable assurance to owners of insurance policies 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 crediting continues. The assets, including revenue therefrom, allocated to the Closed Block will accrue solely to the benefit of the owners of policies included in the Closed Block until the Closed Block no longer exists. The Company will continue to pay guaranteed benefits under all policies, including policies included in the Closed Block, in accordance with their terms. In the event that the Closed Block’s assets were insufficient to meet the benefits of the Closed Block’s guaranteed benefits, general assets would be utilized to meet the contractual benefits of the Closed Block’s policyholders.

      A policyholder dividend obligation is required to be established for earnings in the Closed Block that are not available to shareholders. A model of the Closed Block was established to produce the pattern of expected earnings in the Closed Block. If actual cumulative earnings of the Closed Block are greater than the expected cumulative earnings of the Closed Block, only the expected cumulative earnings will be recognized in income with the excess recorded as a policyholder dividend obligation. This policyholder dividend obligation represents undistributed accumulated earnings that will be paid to Closed Block policyholders as additional

F-13


 

AMERUS GROUP CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

policyholder dividends unless offset by future performance of the Closed Block that is less favorable than originally expected. If actual cumulative performance is less favorable than expected, only actual earnings will be recognized in income.

      Effective January 1, 2001, the Company adopted the Accounting Standards Executive Committee’s Statement of Position 00-3 “Accounting by Insurance Enterprises for Demutualizations and Formations of Mutual Insurance Holding Companies and for Long-Duration Participating Contracts” (SOP 00-3). The provisions of SOP 00-3 required the Company to modify its presentation of the Closed Block in its consolidated financial statements to no longer show the operations of the Closed Block and the assets and liabilities of the Closed Block as single line items. In addition, SOP 00-3 required the Company to report unrealized gains and losses on the Closed Block’s investments as a component of the Closed Block’s policyholder dividend obligation rather than accumulated other comprehensive income (AOCI). As a result, unrealized gains net of deferred taxes amounting to $6.0 million at December 31, 2000 were reclassified from accumulated other comprehensive income to dividends payable to policyowners. There was no net income effect of adopting SOP 00-3.

Investments

      Investments in fixed maturity securities, equity securities and short-term investments that are to be held for indefinite periods of time are reported as securities available-for-sale and are reported in the accompanying consolidated financial statements at fair value. Any valuation changes resulting from changes in the fair value of these securities are reflected as a component of stockholders’ equity, except for certain policies which have specific investments identified and for which valuation changes and related unrealized gains and losses are included in future life and annuity policy benefits. These unrealized gains or losses in stockholders’ equity are reported net of taxes and adjustments to deferred policy acquisition costs (DAC), value of business acquired (VOBA) and policy reserves. Fixed maturity and equity securities that are bought and held principally to back our total return strategy fixed annuity products are reported as trading securities and are carried at fair value with unrealized gains or losses reported in operations. Premiums and discounts on fixed maturity securities are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. The accreted carrying value of investments in structured securities that can be contractually prepaid or settled in a way that substantially all of an investment may not be recovered is determined by updating the estimate for the amount and timing of cash flows with resulting adjustments in the accretable yield accounted for prospectively. Should this estimate of cash flows reflect an adverse change from an immediately preceding estimate, an other-than-temporary impairment is deemed to have occurred and, accordingly, the structured security is written down to fair value with the change reflected in income. For loan-backed and structured securities included in fixed maturity securities, income is recognized using a constant effective yield based on currently anticipated cash flows.

      Investments are considered impaired when the Company determines that collection of principal or interest is doubtful and adjusts such investments to fair value when it is determined an impairment is other than temporary.

      Market values of fixed maturity securities are reported based on quoted market prices, where available. Market values of fixed maturity securities not actively traded in a liquid market are estimated by comparison to similar securities with quoted prices when possible. Otherwise, the most recent purchases and sales of similar unquoted securities, independent broker quotes or internally prepared valuations are used to estimate fair value. Internally prepared valuations use a matrix calculation assuming a spread (based on interest rates and a risk assessment of the bonds) over U.S. Treasury bonds. Market values of the conversion features embedded in convertible fixed maturity securities are estimated using an option-pricing model. Market values of redeemable preferred stocks and equity securities are based on the latest quoted market prices, or for those not readily marketable, generally at values which are representative of the market values of comparable issues.

F-14


 

AMERUS GROUP CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Loans and other long-term investments are stated at cost less amortized discounts and allowances for possible losses. Policy loans are stated at their aggregate unpaid balances. Investments in loans and real estate are considered impaired when the Company determines that collection of all amounts due under the contractual terms is doubtful or carrying values exceed the fair value of underlying collateral. The Company adjusts such assets to their estimated net realizable value at the point at which it determines an impairment is other than temporary. Interest income on impaired mortgage loans is recognized when cash is received. In addition, the Company has established a valuation allowance for loans, real estate, and other invested asset