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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, 2003

or

o Transition Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the transition period from ____________ to


Commission File Number: 001-15166


AmerUs Group Co.

(Exact name of Registrant as specified in its charter)

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

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
Income PRIDESSM   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.     o

      Aggregate market value of voting stock held by non-affiliates of the Registrant as of March 2, 2004: $1,590,914,318

      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 2, 2004 was as follows:

     
Common Stock
  39,301,835 shares

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Registrant’s definitive proxy statement for the annual meeting of shareholders to be held May 13, 2004 are incorporated by reference into Part III of this Form 10-K.




TABLE OF CONTENTS

         
 Part I
   Business   2
 Item 2.
   Properties   18
   Legal Proceedings   18
   Submission of Matters to a Vote of Security Holders   18
 Part II
   Market for Registrant’s Common Equity and Related Stockholder Matters   18
   Selected Financial Data   22
   Management’s Discussion and Analysis of Financial Condition and Results of Operation   23
   Quantitative and Qualitative Disclosures About Market Risk   56
   Financial Statements and Supplementary Data   58
   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   59
   Controls and Procedures   59
 Part III
   Directors and Executive Officers of the Registrant   59
Item 11.
  Executive Compensation   59
Item 12.
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   59
Item 13.
  Certain Relationships and Related Transactions   59
Item 14.
  Principal Accounting Fees and Services   59
 Part IV
   Exhibits, Financial Statement Schedules, and Reports on Form 8-K   59
 Index to Exhibits   61
 Signatures   67
 Power of Attorney   67
 Index to Consolidated Financial Statements   F-1
 Index to Consolidated Financial Statement Schedules   S-1
 Credit Agreement dated 12/8/03
 2003 Stock Incentive Plan as amended
 Computation of Ratios of Earnings to Fixed Charges
 List of Subsidiaries
 Consent of Ernst & Young LLP
 Certification of Chief Executive Officer
 Certification of Chief Financial Officer
 1350 Certification of Chief Executive Officer
 1350 Certification of Chief Financial Officer


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SAFE HARBOR STATEMENT

      This Annual Report on Form 10-K, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to trends in operations and financial results and the business and the products of the Registrant and its subsidiaries, as well as other statements including words such as “anticipate”, “believe”, “plan”, “estimate”, “expect”, “intend” and other similar expressions. Forward-looking statements are made based upon management’s current expectations and beliefs concerning future developments and their potential effects on the Company. Such forward-looking statements are not guarantees of future performance. Factors that may cause our actual results to differ materially from those contemplated by these forward-looking statements include, among others, the following possibilities: (a) general economic conditions and other factors, including prevailing interest rate levels and stock and bond market performance, which may affect our ability to sell our products, the market value of our investments and the lapse rate and profitability of 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 and other federal laws, regulations and interpretations, including currently proposed federal measures that may significantly affect the insurance business including limitations on antitrust immunity, minimum solvency requirements, and changes to the tax advantages of life insurance and annuity products or programs with which they are used; (g) increasing competition in the sale of insurance and annuities and the recruitment of sales representatives; (h) regulatory changes, interpretations or pronouncements including those relating to the regulation of insurance companies and the regulation and sale of their products; (i) our ratings and those of our subsidiaries by independent rating organizations which we believe are particularly important to the sale of our products; (j) the performance of our investment portfolios; (k) the impact of changes in standards of accounting; (l) our ability to integrate the business and operations of acquired entities; (m) expected protection products and accumulation products margins; (n) the impact of anticipated investment transactions; and (o) unanticipated litigation or regulatory investigations or examinations.

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

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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 reasonably 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, annuity and insurance deposit 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 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 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 approximately $6 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 annuity and life insurance product sales.

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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. On December 31, 2002, Delta Life and Annuity Company was merged into American.

      ILICO Holdings, Inc., has one wholly-owned subsidiary, Indianapolis Life Insurance Company, or ILIC, an Indiana life insurance company. ILIC has two wholly-owned subsidiaries: Bankers Life Insurance Company of New York, or Bankers Life, a New York life insurance company; and IL Securities, Inc., an Indiana corporation. When used in this document, the term “ILICO” refers to ILICO Holdings, Inc. and its consolidated subsidiaries. IL Annuity and Insurance Company, or IL Annuity, was a wholly-owned subsidiary of ILIC which was merged into ILIC effective June 30, 2003. ILICO was owned by AmerUs Group Co. (92.2%) and ALIC (7.8%). Effective September 30, 2003, ALIC dividended its ownership interest in ILICO to AmerUs Group Co. resulting in AmerUs Group Co. owning 100% of ILICO.

Organization as of December 31, 2003

(Organizational Chart)

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 ALIC and American, its principal life insurance subsidiaries. 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 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.

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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, 2000 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 for the year ended December 31, 2002. IL Annuity was merged into ILIC effective June 30, 2003 as part of a restructuring plan. See further discussion in note 16 to the consolidated financial statements.

      In November 2003, we entered into an agreement to sell our residential financing operations. The assets, liabilities and results of operations of the residential financing operations have been classified as discontinued operations. The sale was completed in January 2004, resulting in an after-tax gain of approximately $3.9 million to be recognized in 2004. See further discussion in note 20 to the consolidated financial statements.

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 Operation.”

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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. Sales are presented as annualized premiums, which are measured in accordance with industry practice, and represent the amount of new business sold during the period. Sales are a non-GAAP financial measure for an insurance company for which there is no comparable GAAP financial measure. We use sales to measure the productivity of our distribution network and as a basis for compensation of sales and marketing employees and agents. Sales are also a leading indicator of future revenue trends. However, revenues are driven by prior period sales as well as current period sales and therefore, a reconciliation of sales to revenues would not be meaningful or determinable. The following table summarizes sales by life insurance product:

                             
Sales Activity by Product
For The Years Ended December 31,

2003 2002 2001



($ in thousands)
Traditional life insurance:
                       
 
Whole life
  $ 236     $ 4,236     $ 6,842  
 
Interest-sensitive whole life
    19,691       30,622       12,411  
 
Term life
    14,588       16,390       7,763  
Universal life
    32,476       32,570       21,794  
Equity-indexed life
    51,644       45,843       25,865  
     
     
     
 
Direct
    118,635       129,661       74,675  
Private label term life premiums
    4,206       8,970       6,637  
     
     
     
 
   
Total
  $ 122,841     $ 138,631     $ 81,312  
     
     
     
 

      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 2003 and 2002, 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. 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 cash value accumulation that is interest sensitive and responds to current interest and mortality rates. These products are used in several markets, the largest of which is the pension plan market. Lower interest-sensitive whole life sales were experienced in 2003 due to uncertainty in government tax policy and regulation. Interest-sensitive whole life insurance sales increased in 2002 due to the acquisition of ILICO in May 2001 since we owned ILICO for 12 months of 2002 as compared to just over six months in 2001.

      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 due to the acquisition of ILICO and have remained approximately 12% of our total sales in 2003.

      In prior years, ILIC had distributed term products primarily through strategic alliances with private label partners. Under private label arrangements, ILIC manufactured products that were distributed through field forces of other life insurance companies, its private label partners. Following a strategic decision to exit the private label business, ILIC reached agreement with its joint venture partners to cease new business

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processing during 2003. In keeping with contractual obligations, ILIC continues to service in-force business for existing joint venture partners.

      For the year ended December 31, 2003, sales of interest-sensitive whole life and term life insurance products represented 17% and 12%, respectively, of direct sales 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 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 were comparable between 2003 and 2002. In 2002, sales increased over 2001 primarily as a result of the acquisition of ILICO. Excluding ILICO, universal life sales decreased $1.9 million in 2002 due to the growth in sales of equity-indexed life products. The weighted average crediting rate for universal life insurance liabilities was 4.96% for the year 2003, 5.39% for the year 2002 and 5.63% for the year 2001. 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, 2003, sales of universal life insurance products represented 27% of direct sales 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 are credited based in part on increases in the appropriate indices, primarily the Standard & Poor’s 500 Composite Stock Index ® (collectively, 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 2003 and 2002 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 sales, was approximately 44% in 2003.

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      Collected premiums are measured in accordance with industry practice, and represent the amount of premiums received during the period. Collected premiums are a non-GAAP financial measure for an insurance company for which there is no comparable GAAP financial measure. We use collected premiums to measure the productivity of our distribution network and as a basis for compensation of sales and marketing employees and agents. 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,

2003 2002 2001



($ in thousands)
Individual life premiums collected:
                       
 
Traditional life:
                       
   
First year and single
  $ 116,252     $ 149,740     $ 113,126  
   
Renewal
    343,067       344,715       274,784  
     
     
     
 
     
Total
    459,319       494,455       387,910  
     
     
     
 
 
Universal life:
                       
   
First year and single
    94,158       75,761       45,597  
   
Renewal
    132,833       128,869       109,485  
     
     
     
 
     
Total
    226,991       204,630       155,082  
     
     
     
 
 
Equity-indexed life:
                       
   
First year and single
    84,478       78,797       40,504  
   
Renewal
    35,344       14,526       4,212  
     
     
     
 
     
Total
    119,822       93,323       44,716  
     
     
     
 
Total individual life
    806,132       792,408       587,708  
 
Reinsurance assumed
    49,706       48,664       30,740  
 
Reinsurance ceded
    (187,860 )     (220,589 )     (74,152 )
     
     
     
 
Total individual life, net of reinsurance
  $ 667,978     $ 620,483     $ 544,296  
     
     
     
 

      Individual life insurance premiums collected increased in 2003 as a result of increased universal life and equity-indexed sales, which were partially offset by lower traditional life collected premiums, and in 2002 due to the additional premiums from the acquisition of ILICO.

      Reinsurance assumed increased in 2002 due to the ILICO acquisition. ILIC had distributed term products and second-to-die products primarily through strategic alliances with private label partners. Following a strategic decision to exit the private label business, ILIC reached agreement with its joint venture partners to cease new business processing during 2003. In keeping with contractual obligations, ILIC continues to service in-force business for certain existing joint venture partners.

      ALIC has reinsurance arrangements that have 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 from July 1, 1996 through December 31, 1999, and for all new business commencing January 1, 2000. ALIC’s retention limits on any one life vary by age and rating table and are generally between $150,000 and $500,000. ALIC also has a reinsurance agreement covering approximately 90% of the closed block net amount at risk not previously reinsured. In addition, ALIC 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. ALIC entered into an 80% statutory modified coinsurance quota share and coinsurance agreement covering certain individual life policies of the closed block effective

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December 31, 2002. As a result of these agreements, ceded reinsurance premium for ALIC was $77.9 million in 2003, $127.3 million in 2002 and $35.2 million in 2001.

      ILIC entered into a statutory 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, which was amended by an indemnity reinsurance agreement effective July 1, 2003. Ceded premium from ILICO amounted to $109.8 million in 2003, $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.

      The following table sets forth information regarding our life insurance in force for each date presented. Protection products face amounts in force is a non-GAAP financial measure utilized by investors, analysts and the Company to assess the Company’s position in the industry. We do not believe there is a comparable GAAP financial measure.

                           
Individual Life Insurance in Force
As of December 31,

2003 2002 2001



($ in thousands)
Traditional life
                       
 
Number of policies
    446,961       451,933       405,077  
 
GAAP life reserves
  $ 3,465,853     $ 3,236,223     $ 3,101,938  
 
Face amounts
  $ 57,474,000     $ 56,883,000     $ 49,655,000  
Universal life
                       
 
Number of policies
    145,525       147,469       151,982  
 
GAAP life reserves
  $ 1,517,227     $ 1,425,746     $ 1,380,379  
 
Face amounts
  $ 20,529,000     $ 19,095,000     $ 18,792,000  
Equity-indexed life
                       
 
Number of policies
    35,133       23,679       10,591  
 
GAAP life reserves
  $ 224,874     $ 126,821     $ 51,004  
 
Face amounts
  $ 6,878,000     $ 4,574,000     $ 2,028,000  
Total life insurance
                       
 
Number of policies
    627,619       623,081       567,650  
 
GAAP life reserves
  $ 5,207,954     $ 4,788,790     $ 4,533,321  
 
Face amounts
  $ 84,881,000     $ 80,552,000     $ 70,475,000  

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, Texas and Wisconsin in 2003. These states account for approximately 51% 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 general agency system, a Personal Producing General Agent (PPGA) distribution system and through Independent Marketing Organizations (IMOs). We currently employ 20 regional vice presidents who are responsible for supervising these distribution systems within their assigned geographic regions.

      Under the Preferred Producer general agency system, a contractual arrangement is entered into with the Preferred Producer general agent for the sale of insurance products by the Preferred Producer general 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 general agents and brokers in the Preferred Producer general agent’s agency and by renewal commissions on

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premiums subsequently collected on that business. In addition, the Preferred Producers receive certain 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 general agents and brokers in their agency. As of December 31, 2003, we had 75 Preferred Producer general agents in 26 states, through which approximately 1,200 Preferred Producer general agents sell our products. While Preferred Producer general agents in the Preferred Producer general 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.

      Preferred Producer general 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 benefits and other allowances. In addition, Preferred Producer general 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 who 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 1,100 PPGAs, with approximately 3,700 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.

      No single distribution organization (Preferred Producer general agency, PPGA, or IMO) accounted for more than 6% of total direct sales.

Accumulation Products Segment

Products

      Our accumulation products segment primary offerings consist of individual fixed annuities (comprised of traditional fixed annuities and equity-indexed 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. 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.

      Deposits are presented as collected premiums, which are measured in accordance with industry practice, and represent the amount of new business sold during the period. Deposits are a non-GAAP financial measure for an insurance company for which there is no comparable GAAP financial measure. We use deposits to measure the productivity of our distribution network and as a basis for compensation of sales and marketing employees and agents. Our annuity deposits consisted of approximately 25% from traditional annuity products and approximately 75% from equity-indexed annuity products in 2003. We ceased offering variable annuity products in 2002. We still receive minimal premium additions to existing policies as shown in the table below.

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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,

2003 2002 2001



($ in thousands)
Annuities
                       
 
Deferred fixed annuities:
                       
   
Traditional annuities
  $ 443,220     $ 1,099,872     $ 1,322,725  
   
Equity-indexed annuities
    1,311,409       683,819       612,043  
 
Variable annuities
    3,254       6,230       27,483  
     
     
     
 
 
Total annuities
    1,757,883       1,789,921       1,962,251  
Funding agreements
          875,000        
     
     
     
 
   
Total
    1,757,883       2,664,921       1,962,251  
Reinsurance assumed
                194,317  
Reinsurance ceded
    (25,080 )     (60,916 )     (175,485 )
     
     
     
 
Total deposits, net of reinsurance
  $ 1,732,803     $ 2,604,005     $ 1,981,083  
     
     
     
 

      Traditional Annuity Products. We offer a variety of interest rate crediting strategies on our traditional annuity products. At December 31, 2003, the account value of traditional annuities totaled $7.0 billion of which approximately 97% have minimum guarantee rates ranging from 3% to 4%. For annuities with an account value of $5.0 billion, the credited rate was equal to the minimum guarantee rate, and as a result, the credited rate cannot be lowered. We also offer an interest rate crediting strategy that credits the policy with a return generally based upon the interest rates it earns on assets supporting the respective policies less management fees. Traditional annuities with an account value of $5.4 billion had a one-year interest guarantee period while annuities with an account value of $1.2 billion had a multi-year guarantee for which the credited rate cannot be decreased until the end of the multi-year period. At the end of the multi-year period, we will have the ability to lower the crediting rate to the minimum guaranteed rate by an average of approximately 300 basis points. The remaining multi-year period is generally either one or two years.

      We invest the deposits we receive from traditional 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 traditional annuities our product spread. The product spread is a major driver of our profitability of our traditional annuity products.

      Traditional annuity deposits decreased $656.7 million in 2003 compared to 2002 as we slowed traditional annuity sales due to the low interest rate environment and as we have focused on sales of higher margin equity-indexed products. Traditional 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.

      We previously had 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. In the fourth quarter of 2001, the agreement was cancelled and the previously ceded premiums were recaptured amounting to $194.3 million.

      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 traditional annuity products, we invest the deposits we receive from equity-indexed annuity product sales in our investment portfolio. At December 31, 2003, the GAAP reserves of equity-indexed annuities totaled $4.4 billion which provide guaranteed rates based on a cumulative floor over the term of the product. In

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

      Yield minus (cost of options and interest credited) = product spread

      The product spread 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, is intended to provide for a positive product spread in both increasing and decreasing equity markets.

      Equity-indexed annuity sales increased in 2003 and 2002 as compared to the prior year periods due to its popularity with consumers and agents. 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 $25.1 million and $56.2 million of ceded premium in 2003 and 2002, respectively.

      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 the discussion related to this joint venture in the “Ameritas Joint Venture” section. 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 insurance contracts 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. In December 2003, a $250 million funding agreement was terminated. Total funding agreements outstanding as of December 31, 2003, amounted to $875 million compared to $1.125 billion outstanding at December 31, 2002.

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

                           
Annuities in Force
As of December 31,

2003 2002 2001



($ in thousands)
Deferred fixed annuities
                       
 
Number of policies
    176,280       181,581       176,857  
 
GAAP annuity reserves
  $ 7,257,387     $ 7,579,869     $ 6,909,793  
Equity-indexed annuities
                       
 
Number of policies
    91,550       76,863       73,921  
 
GAAP annuity reserves
  $ 4,439,836     $ 3,724,598     $ 3,749,971  
Total fixed annuities
                       
 
Number of policies
    267,830       258,444       250,778  
 
GAAP annuity reserves
  $ 11,697,223     $ 11,304,467     $ 10,659,764  

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 California, Florida, Iowa, Ohio, Pennsylvania and Texas in 2003. These states account for approximately 44% of our statutory premiums.

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      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 agents. The independent agents are supervised by regional vice presidents and regional directors or IMOs. At December 31, 2003, we had approximately 16,000 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 10 contracted organizations, including five wholly-owned organizations and one organization which principally sells our proprietary products. 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 and proprietary organizations accounted for approximately 77% of our annuity sales in 2003. 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.

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 systems and one IMO, as well as through the distribution systems of Ameritas and AVLIC.

      Under the 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.

      As of December 31, 2003, AMAL Corporation had total consolidated assets of $170.1 million and total consolidated shareholder’s equity of $158.5 million on a GAAP basis. AVLIC had $3,253.0 million of insurance in force and $97 million in surplus as of December 31, 2003, on a statutory basis.

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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.

      We are the national leader in market share of equity-indexed life production and are the fifteenth largest fixed life company in the United States. We also rank second nationally in equity-indexed annuity sales and sixth nationally in fixed annuity sales through independent agents. The rankings are based on industry information from Advantage Compendium (formerly The Advantage Group) and Life Insurance Marketing Research Associates.

      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 2, 2004 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)  

      One of our insurance subsidiaries, FBL, is 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).

      Standard & Poor’s ratings for insurance companies range from “AAA” to “R”. Standard & Poor’s indicates that “A+” ratings are assigned to companies that have demonstrated strong financial security. A.M. Best’s ratings for insurance companies range from “A++” to “S”. A.M. Best indicates that an “A” rating is assigned to those companies that in A.M. Best’s opinion have achieved superior performance when compared to the norms of the life insurance industry and have demonstrated a strong ability to meet their policyowner and other contractual obligations. Moody’s ratings for insurance companies range from “Aaa” to “C”. Moody’s indicates that “A3” ratings are assigned to companies that have factors related to security of principal and interest which are considered adequate; however, elements are present which may suggest a susceptibility to impairment in the future. In evaluating a company’s financial and operating performance,

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these rating agencies review a company’s profitability, leverage and liquidity, book of business, adequacy and soundness of reinsurance, quality and estimated market value of assets, adequacy of policy reserves, experience and competency of management and other factors. Such ratings are neither a rating of securities nor a recommendation to buy, hold or sell any security, including our common stock and they may be subject to revision or withdrawal at any time by the relevant rating agency. You should evaluate each rating independently of any other rating.

      On September 6, 2002, Moody’s Investor Services changed the rating outlook for all of our insurance subsidiaries to negative from stable. Also, on May 22, 2003, A.M. Best Company changed the rating outlook for all of our insurance subsidiaries to negative from stable. The changes occurred as part of Moody’s and A.M. Best’s assessments of their current life insurers’ ratings given the current operating environment. A negative outlook indicates that if certain trends continue or worsen, the rating agencies believe the insurance subsidiaries ratings may have to be adjusted downward. There have been no further changes from either of these rating agencies.

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 continually 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. Future life and annuity policy benefits, 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.

      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 respective age and rating table. We also reinsure certain annuity business primarily on a modified coinsurance basis.

      At December 31, 2003 and 2002, we ceded life insurance with a face amount of $75.3 billion with 39 unaffiliated reinsurers and life insurance with a face amount of $71.1 billion with 47 unaffiliated reinsurers, respectively. The following is a summary of our principal life reinsurers as of December 31, 2003:

                         
% of total
Face A.M. Best face amount
Reinsurer amount ceded rating reinsured




(in billions)
RGA Reinsurance Company
  $ 19.9       A+       26 %
Swiss Re Life & Health America Inc.
    14.4       A+       19  
Transamerica Occidental Life Insurance Company
    10.4       A+       14  
Reassure America Life Insurance Company
    7.4       A-       10  
Employers Reassurance Corporation
    5.1       A+       7  
Allianz Life Insurance Company
    3.6       A+       5  
Businessmen’s Assurance Company
    2.8       A       4  

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      At December 31, 2003 and 2002, we ceded traditional and equity-indexed annuities having reserves of $1.2 billion and $1.5 billion, respectively. The following is a summary of our principal annuity reinsurers as of December 31, 2003:

                         
% of total
Face A.M. Best face amount
Reinsurer amount ceded rating reinsured




(in billions)
Transamerica Occidental Life Insurance Company
  $ 0.8       A+       62 %
RGA Reinsurance Company
    0.4       A+       33  

Employees

      As of December 31, 2003, we had 1,113 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.

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, 2003, each of our life insurance companies’ RBC levels was 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 a material 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, new savings and dividend proposals and the removal of barriers restricting banks from engaging in the insurance and mutual fund business.

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Executive Officers of the Company

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

                 
Name of Individual Age Title



Roger K. Brooks
    66     Chairman of the Board of Directors and Chief Executive Officer of AmerUs Group Co.    
Thomas C. Godlasky
    48     Director and President and Chief Operating Officer of AmerUs Group Co.    
Gregory D. Boal
    45     Executive Vice President and Chief Investment Officer of AmerUs Group Co.    
Brian J. Clark
    38     Executive Vice President and Chief Product Officer of AmerUs Group Co.    
Victor N. Daley
    60     Executive Vice President, Chief Administration and Human Resources Officer of AmerUs Group Co.    
Mark V. Heitz
    51     President and Chief Executive Officer of AmerUs Annuity Group, American Investors Life Insurance Company, and Financial Benefit Life Insurance Company    
Gary R. McPhail
    55     President and Chief Executive Officer of AmerUs Life Insurance Company and Indianapolis Life Insurance Company    
Melinda S. Urion
    50     Executive Vice President and Chief Financial Officer of AmerUs Group Co.    

ROGER K. BROOKS — Des Moines, Iowa.

      Chairman and chief executive officer of AmerUs Group Co. since May 1997, president from May 1997 to November 2003, 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.

THOMAS C. GODLASKY — Des Moines, Iowa.

      President and chief operating officer of AmerUs Group Co. since November 2003 and executive vice president and chief investment officer of AmerUs Group Co. and predecessor or affiliated companies from January 1995 to November 2003. Mr. Godlasky had also been president of AmerUs Capital Management from January 1998 to November 2003. 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 AMAL and AVLIC and AIC, wholly-owned subsidiaries of AMAL. Mr. Godlasky has been a director of AmerUs Group Co. since November 2003. His current term expires in May 2004.

GREGORY D. BOAL — Des Moines, Iowa.

      Executive vice president of AmerUs Group Co. and president and chief investment officer of AmerUs Capital Management since November 2003 and executive vice president of AmerUs Group Co. since June 2003. Prior to joining AmerUs Group Co. in June 2003, he was managing director at Deutsche Bank Asset Management in New York, New York beginning in June 2002. From January 2000 to June 2002 Mr. Boal was managing director at Zurich Scudder Investments in Chicago, Illinois (following Zurich Scudder Investments’ acquisition of ABN AMRO Asset Management (USA)). From January 1997 to January 2000 Mr. Boal was director of fixed investments at ABN AMRO Asset Management (USA).

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BRIAN J. CLARK — Des Moines, Iowa.

      Executive vice president and chief product officer of AmerUs Group Co. since November 2003 and senior vice president and chief product officer from August 2001 to November 2003. 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.

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.

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.

Code of Ethics

      We have adopted a Code of Ethics for Senior Financial Officers (Ethics Code) which summarizes long-standing principles of conduct applicable to our principal executive officer, principal financial officer, and principal accounting officer (collectively, Financial Officers), to ensure our business is conducted with integrity and in compliance with the law. A copy of our Ethics Code can be found on our website located at www.amerus.com. Any change to, or waiver of, this Ethics Code for Financial Officers must be disclosed promptly to our shareholders by a Form 8-K filing or by publishing a statement on our website.

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ITEM 2. PROPERTIES

      The following table summarizes the properties we lease and own at December 31, 2003:

                                               
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
 
  9200 Keystone,     15,000                         15,000      
  Suite 800                                            
  Indianapolis, Indiana                                            
 
  Various                 33,000             33,000     Corporate operations, records
                                            and supply storage
Properties owned:
                                           
  555 South Kansas                                            
  Avenue           60,000             45,000       105,000      
  Topeka, Kansas                                            
 
  2960 North Meridian                       14,000       267,000     Facility listed for sale or lease
  Indianapolis, Indiana                                            

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

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

      None.

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

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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



2002
                       
First Quarter
  $ 39.50     $ 34.00     $ 0.00  
Second Quarter
  $ 39.90     $ 34.45     $ 0.00  
Third Quarter
  $ 37.21     $ 28.21     $ 0.00  
Fourth Quarter
  $ 32.26     $ 25.87     $ 0.40  
2003
                       
First Quarter
  $ 30.70     $ 22.94     $ 0.00  
Second Quarter
  $ 28.41     $ 24.44     $ 0.00  
Third Quarter
  $ 35.89     $ 27.70     $ 0.00  
Fourth Quarter
  $ 38.00     $ 34.48     $ 0.40  

Holders

      As of March 2, 2004, the number of holders of record of each class of common equity was as follows:

         
Number of
Holders

Common stock
    109,904  

Equity Compensation Plan Information

      The following table sets forth information regarding our equity compensation plans as of December 31, 2003:

                         
(c) Number of securities
(a) Number of remaining available for
securities future issuance under
to be issued upon (b) Weighted average equity compensation
exercise of outstanding exercise price of plans (excluding
options, warrants and outstanding options, securities reflected in
Plan Category rights warrants and rights column(a))




Equity compensation plans approved by security holders
    4,889,392     $ 27.43       1,697,248  
Equity compensation plans not approved by security holders(1)
    584,160       29.89       386,868  
     
     
     
 
Total
    5,473,552     $ 27.57       2,084,116  
     
     
     
 


(1)  Includes stock units issued under the MIP Deferral 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. Prior to 2003, the Company’s practice under the MIP Deferral Plan has been to pay participants at the end of the deferral period relative to stock units in cash only. In 2003, the Company instituted a policy of paying stock units in Company common stock at the end of the deferral period. With respect to stock appreciation rights under the Non-Employee Stock Option Plan, the Company’s practice has been to pay such grants in cash on exercise thereof.

Equity Compensation Plans not Approved by Security Holders

      At the Company’s annual meeting, our shareholders are being asked to approve a provision in the Company’s MIP Deferral Plan pursuant to which we will issue up to 180,000 shares of our common stock for grants of Company matches made in stock during and after 2004.

      The MIP Deferral Plan, which was begun in 1998, allows management employees and officers, to elect to defer receipt of a portion of their year end cash incentive payments (Payment Amount) into stock units.

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Under the MIP Deferral Plan, each stock unit is purchased by participants at the fair market value of a share of Company common stock on the date of purchase. The Company matches a portion of participants’ deferrals (Match), up to a certain specified limit, provided the employee remains employed with the Company for a specified period. The human resources and compensation committee of the board of directors (Committee), which administers the MIP Deferral Plan, determines each year the maximum portion of the Payment Amount that can be deferred and the percentage Match of the Company. Following the end of the deferral period, participants in the MIP Deferral Plan had historically exchanged their stock units for cash. Last year, the Committee instituted a new policy under which the Company would pay Payment Amounts and Matches in Company common stock.

      For the current year, the Company matched up to 50 percent of the stock units purchased pursuant to the MIP Deferral Plan up to a total of $10,000. On the third anniversary of the employee’s deferral, the employee may elect to re-defer the Payment amount and the Match for an additional three years. If the employee elects not to re-defer, the Company then pays the employee an amount in Company common stock equal to the number of units purchased by the employee plus the number of units in the Match, provided the employee continues to be employed by the Company or one of its subsidiaries on that date. The entire Match is forfeited if the employee’s employment terminates prior to the third anniversary of the employee’s deferral.

      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, at the discretion of the Company.

Dividends

      We had declared and paid an annual dividend of $0.40 per share of common stock in 2001 through 2003. 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 $50.8 million at December 31, 2003.

      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. In connection with the OCEANs, we have agreed, with certain limited exceptions, not to declare or pay dividends on or make distributions with respect to our capital stock during any period in which we have deferred stated interest on the OCEANs.

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      On May 28, 2003, we issued $125 million of PRIDESSM which were registered on Form S-3 filed with the Securities and Exchange Commission. On June 5, 2003, the underwriters exercised their over-allotment in full and the Company issued an additional $18.8 million of PRIDES. The PRIDES initially consist of a $25 senior note and a contract requiring the holder to purchase the Company’s common stock. The note has a minimum term of 4.75 years, which may be extended by the Company in certain circumstances. Under the purchase contract, holders of each contract are required to purchase the Company’s common stock on the settlement date of August 16, 2006 based on a specified settlement rate, which will vary according to the applicable market value of the Company’s common stock at the settlement date. The value of the common stock to be issued upon settlement of each purchase contract will not exceed $25, the stated value of the PRIDES, unless the applicable market value of the Company’s common stock (which is measured by the common stock price over a 20-day trading day period) increases to more than $33.80 per share. In connection with the PRIDES, we have agreed, with certain limited exceptions, not to declare or pay dividends on or make distributions with respect to our capital stock during any period in which we have deferred contract adjustment payments to holders of the PRIDES.

      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 or interest payments.

      Based on statutory insurance regulations and 2002 results, our insurance subsidiaries could have paid approximately $82 million in dividends in 2003 without obtaining regulatory approval. Our subsidiaries paid to us approximately $85 million in dividends in 2003 that included dividends for which we obtained regulatory approval. Based on 2003 results, our subsidiaries can pay an estimated $78 million in dividends in 2004 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,

2003 2002 2001 (A) 2000 1999





($ in millions, except share data)
Consolidated Income Statement Data:
                                       
 
Revenues:
                                       
   
Insurance premiums
  $ 297.2     $ 351.3     $ 305.9     $ 266.2     $ 268.6  
   
Product charges
    181.4       144.5       146.1       99.9       90.8  
   
Net investment income
    1,001.9       1,001.3       873.2       699.5       665.4  
   
Realized/unrealized gains (losses) on investment
    131.3       (149.9 )     (90.6 )     (29.0 )     (1.4 )
   
Other income
    68.3       68.5       45.7       35.0       23.7  
     
     
     
     
     
 
     
Total revenues
    1,680.1       1,415.7       1,280.3       1,071.6       1,047.1  
     
     
     
     
     
 
 
Benefits and expenses:
                                       
   
Policyowner benefits
    940.2       871.9       753.0       624.4       630.2  
   
Total insurance and other expenses
    372.1       324.3       283.1       227.5       216.0  
   
Dividends to policyowners
    98.4       104.9       98.9       74.3       70.8  
     
     
     
     
     
 
     
Total benefits and expenses
    1,410.7       1,301.1       1,135.0       926.2       917.0  
     
     
     
     
     
 
 
Income from continuing operations
    269.4       114.6       145.3       145.4       130.1  
 
Interest expense
    30.2       25.5       26.0       29.7       29.0  
     
     
     
     
     
 
 
Income before tax expense and minority interest
    239.2       89.1       119.3       115.7       101.1  
     
     
     
     
     
 
 
Income tax expense
    78.6       28.3       39.5       42.5       33.7  
 
Minority interest
                      21.7       28.1  
     
     
     
     
     
 
 
Net income from continuing
operations
    160.6       60.8       79.8       51.5       39.3  
 
Discontinued operations (net of tax):
                                       
   
Income (loss) from discontinued operations
    1.8       2.1       1.3       0.3       (0.9 )
     
     
     
     
     
 
 
Net income before cumulative effect of change in accounting
    162.4       62.9       81.1       51.8       38.4  
 
Cumulative effect of change in accounting, net of tax
    (1.3 )           (8.2 )            
     
     
     
     
     
 
 
Net income
  $ 161.1     $ 62.9     $ 72.9     $ 51.8     $ 38.4  
     
     
     
     
     
 

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As of or for the Year ended December 31,

2003 2002 2001 (A) 2000 1999





($ in millions, except share data)
 
Net income from continuing operations per share (B):
                                       
   
Basic
  $ 4.10     $ 1.52     $ 2.16     $ 2.46     $ 2.26  
   
Diluted
  $ 4.05     $ 1.50     $ 2.13     $ 2.44     $ 2.26  
 
Weighted average number of shares outstanding (in millions) (B):
                                       
   
Basic
    39.2       40.0       36.9       20.9       17.4  
   
Diluted
    39.6       40.4       37.5       21.0       17.5  
 
Dividends declared per common share (C)
  $ 0.40     $ 0.40     $ 0.40     $ 0.40     $  
Consolidated Balance Sheet Data:
                                       
 
Total invested assets
  $ 17,942.8     $ 16,932.5     $ 15,052.4     $ 9,606.8     $ 9,059.7  
 
Total assets
  $ 21,542.2     $ 20,293.7     $ 18,299.2     $ 11,471.5     $ 11,091.9  
 
Notes payable
  $ 596.1     $ 511.4     $ 384.6     $ 413.3     $ 387.9  
 
Total liabilities
  $ 20,132.4     $ 19,030.7     $ 17,060.6     $ 10,643.5     $ 10,010.8  
 
Minority interest
  $     $     $     $     $ 309.1  
 
Total stockholders’ equity
  $ 1,409.8     $ 1,262.9     $ 1,238.5     $ 828.0     $ 772.0  
Other Operating Data:
                                       
 
Ratio of earnings to fixed charges (D)
    1.40       1.19       1.33       1.28       1.21  


 
(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 1999 and 2000 presented above primarily reflects the operating income of ALHI. Therefore, 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, 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 year 1999. ALHI, our predecessor to our company did declare dividends on its common stock of $0.40 per share for the year ended December 31, 1999.
 
(D) 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 credited on annuity and universal life contracts and 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 OPERATION

      The following analysis of the consolidated financial condition and results of operation of AmerUs Group Co. should be read in conjunction with the Selected Financial Data and Consolidated Financial Statements and related notes. We are incorporating by reference “Item 1. Business” information into Management’s Discussion and Analysis of Financial Condition and Results of Operations section.

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Nature of Operations

      See “Item 1 Business” for information regarding the nature of our operations.

Financial Highlights

      Our financial highlights are as follows:

                             
For The Years Ended December 31,

2003 2002 2001



($ in thousands, except share data)
Segment pre-tax operating income:
                       
 
Protection Products
  $ 128,290     $ 129,739     $ 95,955  
 
Accumulation Products
    130,890       120,655       95,912  
 
Other operations
    (7,725 )     (6,622 )     6,138  
     
     
     
 
   
Total segment pre-tax operating income
    251,455       243,772       198,005  
Non-segment expense, net (A)
    90,308       180,906       125,098  
     
     
     
 
 
Net income
  $ 161,147     $ 62,866     $ 72,907  
     
     
     
 
Diluted earnings per share
  $ 4.07     $ 1.56     $ 1.95  
     
     
     
 
Total assets
  $ 21,542,242     $ 20,293,665     $ 18,299,152  
     
     
     
 
Stockholders’ equity
  $ 1,409,811     $ 1,262,948     $ 1,238,517  
     
     
     
 

(A)  Non-segment expense, net consists primarily of open block gains and losses, derivative related market value adjustments, non-insurance operations, reinsurance adjustments, restructuring costs, interest expense, income taxes, discontinued operations and cumulative effect of changes in accounting.

      Operating segment income decreased for the protection products segment in 2003 compared to 2002 primarily as a result of lower net investment income and the continued decrease in closed block operating income. The acquisition of ILICO, combined with a slight growth in margins, increased protection products segment operating income in 2002 compared to 2001. The increased volume of equity-indexed products and additional income from funding agreements increased accumulation products segment earnings in 2003 compared to 2002. Increased IMO operating income and the discontinuation of goodwill amortization in 2002 contributed to the growth in accumulation products segment operating income in 2002 compared to 2001.

      Net income increased in 2003 compared to 2002 primarily due to increased realized gains on open block investments and increased net unrealized gains from market value adjustments on trading securities, derivatives and equity-indexed contracts. Net income decreased in 2002 compared to 2001 primarily as a result of realized losses on investments, unrealized losses from market value adjustments on derivatives and increased restructuring charges. The 2002 reductions in net income were partially offset by the higher income of our protection and accumulation products segments.

      Total assets increased $1.2 billion during 2003 primarily as a result of additional invested assets under management resulting from additional life sales and annuity deposits. Stockholders’ equity increased $146.9 million during 2003 as a result of 2003 net income of $161.1 million and the issuance of common stock under various incentive plans of $11.1 million. The 2003 increase was partially offset by dividends declared in 2003 of $15.7 million and fees, expenses and liabilities associated with the issuance of PRIDES, which reduced equity $7.3 million.

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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 segment pre-tax operating income and net income and are as follows:

        1) Realized gains and losses on open block investments.

  2)  Market value changes and amortization of assets and liabilities associated with the accounting for derivatives, such as:

  •  Unrealized gains and losses on open block options and securities held for trading.
 
  •  Change in option value of equity-indexed products and market value adjustments on total return strategy annuities.
 
  •  Cash flow hedge amortization (amortization of a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability).

  3)  Amortization of deferred policy acquisition costs (DAC) and value of business acquired (VOBA) related to the realized gains and losses on the open block investments and the derivative adjustments.

        4) Certain reinsurance adjustments.
 
        5) Demutualization costs.
 
        6) Restructuring costs.
 
        7) Other income from non-insurance operations.
 
        8) Discontinued operations.
 
        9) Cumulative effect of changes in accounting method.

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

Protection Products

      Our protection products segment primarily consists of interest-sensitive whole life, term life, universal life and equity-indexed life insurance policies. These products are marketed on a national basis primarily through a Preferred Producer agency system, PPGA distribution system and IMOs. Included in protection products segment is the closed block of ALIC and the closed block of ILIC. Each closed block was established when the companies reorganized from mutual companies to stock companies. When protection products are sold, we invest the premiums we receive in our investment portfolio and establish a liability 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. We enter into reinsurance arrangements in order to reduce the effects of mortality risk and the statutory capital strain from writing new business. All income statement line items are presented net of reinsurance amounts. Protection products in force totaled $84.9 billion at December 31, 2003, $80.6 billion at December 31, 2002 and $70.5 billion at December 31, 2001. Protection products in force is a non-GAAP financial measure utilized by investors, analysts and the Company to assess the Company’s

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position in the industry. We do not believe there is a comparable GAAP financial measure. A summary of our protection products segment operations follows:
                             
For The Years Ended December 31,

2003 2002 2001



($ in thousands)
Revenues:
                       
 
Insurance premiums
  $ 290,707     $ 341,602     $ 300,690  
 
Product charges
    138,215       103,145       110,403  
 
Net investment income
    321,532       335,111       283,330  
 
Realized gains (losses) on closed block investments
    9,326       (2,400 )     8,720  
 
Other income
    4,224       4,026       1,947  
     
     
     
 
   
Total revenues
    764,004       781,484       705,090  
     
     
     
 
Benefits and expenses:
                       
 
Policyowner benefits
    387,068       403,293       384,159  
 
Underwriting, acquisition and other expenses
    76,042       80,319       69,035  
 
Amortization of DAC and VOBA, net of open block gain/loss adjustment
    74,211       63,267       56,996  
 
Dividends to policyowners
    98,393       104,866       98,945  
     
     
     
 
   
Total benefits and expenses
    635,714       651,745       609,135  
     
     
     
 
Pre-tax operating income — Protection Products segment
  $ 128,290     $ 129,739     $ 95,955  
     
     
     
 

      Pre-tax operating income from our protection products decreased 1% in 2003 and increased 35% in 2002 compared to the respective prior years. Higher product margins increased open block operating income $3.9 million in 2003; however, operating income of the closed block decreased $5.3 million in 2003 compared to 2002, as the closed block continues to reflect the declining closed block glide path (see Dividends to Policyowners for additional information). The increase in 2002 was due to a slight growth in product margins and the acquisition of ILICO. The key drivers of our protection products business include sales, persistency, net investment income, mortality and expenses.

      Sales, Premiums and Product Charges. Sales are a key driver of our business as they are a leading indicator of future revenue trends to emerge in segment operating income. As shown in the Sales Activity Product table presented in “Item 1 Business — Protection Products Segment,” direct sales decreased 9% in 2003 compared to 2002 and increased 74% in 2002 compared to 2001. The decrease in 2003 resulted from lower traditional and universal life insurance product sales as we re-priced our products and discontinued our par whole life product. In addition, interest-sensitive whole life sales were lower due to uncertainty in government tax policy and regulation. Interest-sensitive whole life insurance has cash value accumulation that changes with current interest and mortality rates. The lower traditional and universal sales were partially offset by increased equity-indexed life sales as we continue to focus our marketing efforts on those products. The increase in 2002 was primarily due to the acquisition of ILICO during the second quarter of 2001 and growth we experienced in almost all our protection product lines in 2002, especially in our equity-indexed life products. 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 equity-indexed life products were $51.6 million in 2003 as compared to $45.8 million in 2002 and $25.9 million in 2001. We are a leading writer of equity-indexed life products in the United States.

      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

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policy surrender. All revenue is reported net of reinsurance ceded. Insurance premium revenue was lower in 2003 compared to 2002 due to lower sales of traditional products, additional premiums ceded and a decline in closed block in force business. Product charge revenue was higher in 2003 compared to 2002 due to the growth in the equity-indexed life block of business and fluctuations in reinsurance premiums. Insurance premium revenue increased in 2002 as compared to 2001 primarily due to the acquisition of ILICO. Product charge revenue decreased in 2002 as compared to 2001 primarily due to a new reinsurance arrangement on universal life products.

      Persistency. Persistency is a key driver of our business as it refers to the policies which remain in our block of business and is measured by the lapse rate. A low lapse rate reflects higher persistency indicating more business is remaining in force to generate future revenues. Annualized lapse rates were 6.5% in 2003 compared to 7.3% in 2002 and 7.7% in 2001. Our persistency experience remained within our pricing assumptions. The lapse rate in 2001 was higher 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.

      Net Investment Income. Net investment income is a key driver of our business as it reflects earnings on our invested assets. Net investment income decreased in 2003 and increased in 2002 compared to the respective prior years. The decrease in net investment income in 2003 was due to low interest rates and increased prepayments of mortgage-backed securities. The 2002 increase in net investment income was primarily attributable to the acquisition of ILICO. The earned rate of the investment portfolio was 6.63% in 2003 compared to 7.22% in 2002 and 7.32% in 2001. The decrease in rates in 2003 and 2002 was primarily a result of the lower interest rate environment.

      Mortality and Benefit Expense. Mortality is a key driver of our business as this item reflects benefit expense. For 2003 and 2002, we experienced favorable mortality. Total benefit expense was higher in 2002 compared to 2001 due to the acquisition of ILICO. Total policyowner benefits for ILICO increased $59.5 million in 2002 compared to 2001. In addition, we had increased reinsurance recoveries in 2003 and 2002, which reduce benefit expense, as a result of additional reinsurance arrangements.

      Underwriting, Acquisition and Other Expenses. Underwriting, acquisition and other expenses are a key driver of our business as they reflect costs of our operations. Expenses decreased in 2003 compared to 2002 primarily due to increased reimbursement from reinsurers of non-deferrable commission and expense allowances, as more policies are subject to reinsurance, and expense changes resulting from the restructuring activities. Expenses increased in 2002 compared to 2001 primarily due to the acquisition of ILICO for a full year in 2002 compared to a partial year in 2001. ILICO expenses increased $10.6 million in 2002 compared to 2001.

      Amortization of DAC and VOBA. The amortization of DAC and VOBA are expense items which increased in 2003 and 2002 as compared to the respective prior years. DAC and VOBA are generally amortized in proportion to policy gross margins which increased in 2003, resulting in higher amortization expense. Amortization expense increased in 2002 compared to 2001 primarily due to the acquisition of ILICO.

      Dividends to Policyowners. Dividend expense decreased in 2003 compared to 2002 and increased in 2002 compared to 2001. Dividend expense includes increases or decreases to the closed block policyowner dividend obligation liability carried on the consolidated balance sheet. To the extent cumulative actual earnings of the closed block exceed the cumulative expected earnings based on the actuarial calculation at the time of formation of the closed block (which we refer to as the closed block glide path), a policyowner dividend obligation is recorded. The higher realized gains in 2003 as compared to losses in 2002 increased closed block earnings, which in turn, were added to the policyowner dividend obligation liability. Lower investment income was experienced in the closed block in 2003 which decreased dividend expense offsetting the increase for realized gains. In addition, the reinsurance adjustment related to the settlement activity of the closed block in the second quarter of 2003, caused an increase in the dividend expense and related policyowner dividend obligation liability for 2003. See the “Reinsurance Adjustments” section for additional information.

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The increased dividends in 2002 as compared to 2001 were primarily due to the acquisition of ILICO in 2001 and the dividends associated with its closed block.

      Outlook. We expect to continue to shift our sales to higher return products, in particular the equity-indexed life products. We also expect to continue to realize operating efficiencies created by the restructuring of the protection products operations and centralization of our administrative functions as discussed later in “Restructuring Costs.”

Accumulation Products

      Our accumulation products segment primary offerings consist of individual fixed annuities and funding agreements. The fixed annuities are marketed on a national basis primarily through IMOs and independent brokers. Similar to our protection products segment, we invest the premiums we receive from accumulation product deposits in our investment portfolio and establish a liability representing our commitment to our policyholder. We manage product 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 reserves totaled $11.7 billion at December 31, 2003, $11.3 billion at December 31, 2002 and $10.7 billion at December 31, 2001. A summary of our accumulation products segment operations follows:

                             
For The Years Ended December 31,

2003 2002 2001



($ in thousands)
Revenues:
                       
 
Immediate annuity and supplementary contract premiums
  $ 4,114     $ 8,702     $ 5,083  
 
Product charges
    43,139       41,349       35,652  
 
Net investment income
    672,141       660,470       577,913  
 
Other income
    11,635       11,778       8,474  
     
     
     
 
   
Total revenues
    731,029       722,299       627,122  
     
     
     
 
Benefits and expenses:
                       
Policyowner benefits
    478,256       490,401       419,132  
Underwriting, acquisition and other expenses
    29,423       34,040       41,401  
Amortization of DAC and VOBA
    102,872       91,300       78,891  
     
     
     
 
   
Total benefits and expenses
    610,551       615,741       539,424  
     
     
     
 
IMO Operations:
                       
 
Other income
    50,214       48,642       27,724  
 
Other expenses
    39,802       34,545       19,510  
     
     
     
 
   
Net IMO operating income
    10,412       14,097       8,214  
     
     
     
 
Pre-tax operating income - Accumulation Products segment
  $ 130,890     $ 120,655     $ 95,912  
     
     
     
 

      Pre-tax operating income from our accumulation products operations increased 8% in 2003 and 26% in 2002 compared to the respective prior years. The increased volume of equity-indexed annuities and additional income from funding agreements increased accumulation products earnings in 2003. The increase was partially offset by reduced product margins and lower contributions from IMO operations. The increase in 2002 was primarily due to increased IMO operating income and the discontinuation of goodwill amortization. The drivers of profitability in our accumulation products business are deposits, persistency, product spread, expenses and IMO operations.

      Deposits. Deposits are a key driver of our business as this is a measure which represents collected premiums to be deposited to policyowner accounts for which we will earn a future product spread. Deposits are presented as collected premiums, which are measured in accordance with industry practice, and represent the

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amount of new business sold during the period. Deposits are a non-GAAP financial measure for an insurance company for which there is no comparable GAAP financial measure. We use deposits to measure the productivity of our distribution network and as a basis for compensation of sales and marketing employees and agents. As shown in the Deposits by Product table presented in “Item 1 Business — Accumulation Products Segment,” total annuity deposits decreased 2% in 2003 compared to 2002 and decreased 9% in 2002 as compared to 2001. The 2003 decrease was primarily a result of our slowing of our traditional annuity sales due to the low interest rate environment as we focused sales on our higher returning equity-indexed products. The reduced traditional annuity sales offset the increase in equity-indexed products. The 2002 decrease resulted from the deployment of capital to funding agreements which provide a higher return on equity.

      We placed fixed rate funding agreements totaling $875 million in 2002. Funding agreements are insurance contracts 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. In December 2003, a $250 million funding agreement originally placed in 1999 was terminated. Total funding agreements outstanding as of December 31, 2003 amounted to $875 million compared to $1.125 billion outstanding at December 31, 2002.

      The deposits we receive on accumulation products are not recorded as revenue but instead as a policyowner liability. Surrender charges are recorded as revenue as a product charge. Product charges increased in 2003 as compared to 2002 due to the growth in business and increased in 2002 as compared to 2001 due to the acquisition of ILICO.

      Persistency. Persistency is a key driver of our business as it refers to the policies which remain in our block of business and is measured by the withdrawal rate. A low withdrawal rate reflects higher persistency indicating more business is remaining in force to generate future revenues. Withdrawals represent funds taken out of accumulation products by policyowners not including those due to the death of policyowners. Annuity withdrawal rates without internal replacements continued to improve in 2003 as compared to 2002 and 2001 and amounted to 9.5%, 10.6% and 11.4%, respectively. Annuity withdrawals without internal replacements totaled $1,196.9 million in 2003, $1,288.2 million in 2002 and $1,324.9 million in 2001.

      Our withdrawal experience remained within our pricing assumptions. Withdrawal rates declined in 2003 and 2002 as compared to the respective prior years as our annuity products provide a favorable investment return in this current low interest rate environment.

      Product Spread. Product spread is a key driver of our business as it measures the difference between the income earned on our invested assets and the rate which we credit to policyowners, the difference is reflected as segment operating income. Asset earned rates and liability crediting rates were as follows for annuity segment products:

                           
For The Years Ended December 31,

2003 2002 2001



Asset earned rate
    5.91 %     6.58 %     7.16 %
Liability credited rate
    3.79 %     4.43 %     4.85 %
     
     
     
 
 
Product spread
    2.12 %     2.15 %     2.31 %
     
     
     
 

      The product spread decreased three basis points to 212 basis points in 2003 compared to 2002. The product spread decreased 16 basis points to 215 basis points in 2002 compared to 2001. Liability crediting rates on traditional annuities 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. As described in the Traditional Annuity Products and Equity-Indexed Annuities sections presented in “Item 1 Business — Accumulation Products Segment,” the annuity products have various differentials between the credited rate and minimum guarantee rate, including some which have no differential, and as such cannot be lowered. Additionally, some traditional annuities have multi-year interest rate guarantees for which the credited rate cannot be decreased until the end of the multi-year period. Also, equity-indexed annuities provide guaranteed rates based on a cumulative floor over the term of the product. Due to these limitations on the ability to lower

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interest crediting rates and the potential for credit defaults and lower reinvestment rates on investments, we could experience additional spread compression in future periods.

      Funding agreement income increased $5.0 million in 2003 compared to 2002 and increased $4.1 million in 2002 compared to 2001. The increase was due to the $875 million of funding agreements placed throughout 2002.

      Underwriting, Acquisition and Other Expenses. Underwriting, acquisition and other expenses are a key driver of our business as they represent costs of our operations. Expenses in 2003 decreased as compared to 2002 due primarily to lower fees associated with a declining block of annuity business processed by a third party administrator. 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 and Other Intangible Assets.” Goodwill amortization amounted to $7.6 million in 2001.

      IMO Operations. IMO operations are a key driver of our business as the earnings from the IMOs are a significant component of the accumulation products segment operating income. IMOs have contractual arrangements to promote our insurance products in their networks of agents and brokers. Additionally, they also contract with third party insurance companies. We own five such IMOs. The income from IMO operations primarily represents annuity commissions received by our IMOs from those third party insurance companies. Net IMO operating income decreased $3.7 million in 2003 compared to 2002 due to increased expenses and increased $5.9 million in 2002 compared to 2001 due to our acquisition of an IMO in 2002.

      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. We will continue to manage our spreads as we strive for our desired profitability in this economic environment.

Other

      The other segment is our non-core lines of business outside of protection and accumulation products. These lines of business include holding company revenues and expenses, operations of our real estate management subsidiary, and accident and health insurance. The other segment pre-tax operating loss increased in 2003 and 2002 as compared to the respective prior years primarily due to real estate investment and management fee income which continues to decline as we reduce these investment holdings. In addition, the operating gain in 2001 included investment fee income for asset management services provided to ILICO prior to the acquisition amounting to $2.8 million. After the acquisition of ILICO, such fees are eliminated in consolidation.

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Income Statement Reconciliation

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

                               
For The Years Ended December 31,

2003 2002 2001



($ in thousands)
Segment pre-tax operating income:
                       
 
Protection Products
  $ 128,290     $ 129,739     $ 95,955  
 
Accumulation Products
    130,890       120,655       95,912  
 
Other operations
    (7,725 )     (6,622 )     6,138  
     
     
     
 
   
Total segment pre-tax operating income
    251,455       243,772       198,005  
Non-segment items — increases (decreases) to income:
                       
 
Realized and unrealized gains (losses) on assets and liabilities:
                       
   
Realized gains (losses) on open block investments
    32,196       (102,310 )     (39,299 )
   
Unrealized gains (losses) on open block options and trading investments
    89,769       (45,209 )     (60,050 )
   
Change in option value of equity-indexed products and market value adjustments on total return strategy annuities
    (65,741 )     28,759       52,747  
   
Cash flow hedge amortization
    (3,827 )     (4,351 )      
   
Amortization of DAC & VOBA due to open block realized gains and losses
    (16,257 )     15,002       2,988  
 
Reinsurance adjustments
    3,854              
 
Demutualization costs
          (1,186 )     (969 )
 
Restructuring costs
    (23,294 )     (21,225 )     (8,566 )
 
Other income from non-insurance operations
    1,237       1,392       532  
     
     
     
 
     
Income from continuing operations
    269,392       114,644       145,388  
Interest expense
    (30,154 )     (25,487 )     (26,011 )
Income tax expense
    (78,610 )     (28,375 )     (39,522 )
     
     
     
 
     
Net income from continuing operations
    160,628       60,782       79,855  
Income from discontinued operations, net of tax
    1,815       2,084       1,288  
Cumulative effect of change in accounting, net of tax
    (1,296 )           (8,236 )
     
     
     
 
     
Net income
  $ 161,147     $ 62,866     $ 72,907  
     
     
     
 

      Realized and Unrealized Gains (Losses) on Assets and Liabilities. Realized gains (losses) on open block investments will fluctuate from period to period depending on the prevailing interest rate, the economic environment, the timing of investment sales and credit events. Realized gains on open block investments in 2003 included $12.1 million of gains on sales of investments previously impaired and written-down in 2002 or 2003, primarily American Airlines, Dynegy Holdings, Intermedia Communications and NRG Northeast Generating. Realized gains (losses) on open block 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.

      Unrealized gains (losses) on open block options and trading investments also will fluctuate from period to period depending on prevailing interest rates, the economic environment, the timing of investment sales and credit events. We use options to hedge our equity-indexed products. In accounting for derivatives, we adjusted our options to market value, which, due to the economic environment and stock market conditions, resulted in

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an unrealized gain of $62.9 million in 2003 and an unrealized loss of $40.0 million in 2002 and an unrealized loss of $54.2 million in 2001. In addition, we also have trading securities that back our total return strategy traditional annuity products. The market value adjustment on the trading securities resulted in an unrealized gain of $26.8 million in 2003, a loss of $5.2 million in 2002 and a loss of $5.9 million in 2001. Most of the unrealized gains and losses on the options and trading securities are offset by similar adjustments to the option portion of the equity-indexed product reserves and to the total return strategy annuity reserves. The reserve adjustments are reflected in policyowner benefits expense in the consolidated statements of income and are included in the fair value change as additional expense of $65.7 million in 2003, reduced expense of $28.8 million in 2002 and reduced expense of $52.7 million in 2001 as 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 traditional annuity contracts are being recorded at fair value. As previously discussed, these fair value changes are offset by similar adjustments to unrealized gains (losses) on investments related to the fair value changes on the options that hedge the equity-indexed products and on the trading securities that back the total return strategy products. The reduction in such contract expense is less than the decline in investment income primarily due to the inability to lower crediting rates below minimum guaranteed interest rates.

      Reinsurance Adjustments. Reinsurance related adjustments in 2003 consist of the release of a $8.2 million liability in conjunction with the settlement and amendment of a reinsurance arrangement and a $4.3 million true-up of pre-2003 reinsurance settlements under a reinsurance arrangement between ILIC’s open block and closed block.

      Demutualization Costs. 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 segment results.

      Restructuring Costs. Restructuring costs relate to our consolidation of various functions in connection with a restructuring of our protection products and accumulation products operations and investment activities which began in the third quarter of 2001. The objective of the restructuring plan was to eliminate duplicative functions for all business units and to reduce on-going operating costs. Corporate administrative functions were transitioned so they are performed primarily in Des Moines, Iowa. Protection products administration processes were transitioned so they are performed in Des Moines; Woodbury, New York; or outsourced. Accumulation products functions were transitioned to Topeka, Kansas. Investment activities were restructured to eliminate certain real estate management services which have been outsourced.

      We listed an office building located in Indianapolis, Indiana, with a real estate broker in 2003, and we vacated the location as a result of staff reductions. In addition, those employees who are going to work in Indianapolis moved to a new location. We determined that the plan of sale criteria in SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” had been met. Accordingly, the carrying value of the building was adjusted to its fair value less costs to sell, amounting to $15.5 million, which was based upon comparable properties recently marketed in Indianapolis. The resulting $7.7 million pre-tax impairment loss was recorded as restructuring costs in the consolidated statement of income in 2003. The carrying value of the building that is held for sale is included in the other assets line item of the consolidated balance sheet.

      During 2003, we initiated and executed a restructuring plan to merge one of our subsidiaries, IL Annuity, into its parent, ILIC. The merger was effective June 30, 2003, and total restructuring costs associated with this plan amounted to $2.5 million pre-tax, which primarily consisted of legal, accounting, and printing costs and the write-off of $2.2 million of insurance licenses.

      The restructuring charges expensed in 2003 included pre-tax severance and termination benefits of $3.0 million related to the termination of approximately ten positions and for severance accrual adjustments and other pre-tax costs of $20.3 million primarily related to the impairment loss on the Indianapolis office

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building, expenses associated with the merger of IL Annuity into ILIC, and systems conversion costs. 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 $4.0 million at December 31, 2003. Charges for all restructuring activities were completed in 2003.

      Interest Expense. Interest expense increased in 2003 as compared to 2002 and 2001. The increase was primarily due to interest associated with the PRIDES securities of $143.8 million issued in the second quarter of 2003.

      Discontinued Operations. In November 2003, we entered into an agreement to sell our residential financing operations. The results of the residential financing operations have been classified as discontinued operations. The sale was completed in January 2004, resulting in an after-tax gain of approximately $3.9 million to be recognized in 2004.

      Change in Accounting. 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 arrangements where interest is determined by reference to a pool of fixed maturity assets or a total return debt index. 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. We adopted DIG Issue B36 on October 1, 2003, which included the reclassification of certain securities supporting the products being reinsured from available-for-sale to held for trading. The net cumulative effect of the change in accounting for DIG Issue B36 after income taxes was an expense of $1.3 million in 2003.

      We adopted SFAS 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 adjustment to the DAC and VOBA amortization related to the impact from the derivative charge was an expense of 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 expense of $8.2 million in 2001.

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.

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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 2002 results, our life insurance subsidiaries could have paid us approximately $82 million in dividends in 2003 without obtaining regulatory approval. Our subsidiaries paid us approximately $85 million in 2003 that included dividends for which we obtained regulatory approval. Based on 2003 results, our subsidiaries can pay an estimated $78 million in dividends without obtaining regulatory approval during 2004. We also consider risk-based capital levels, capital and liquidity operating needs, and other factors prior to paying dividends from the insurance subsidiaries.

      We generated cash flows from operating activities of $394.9 million, $920.1 million and $97.1 million for the years ended December 31, 2003, 2002, and 2001, respectively. Operating cash flows were primarily used to increase our investment portfolio.

      We have a $200 million revolving credit facility with a syndicate of lenders (which we refer to as the Revolving Credit Agreement). As of December 31, 2003, there was a $27.0 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, (d) must cause our insurance subsidiaries to maintain certain levels of risk-based capital, and (e) are prohibited from incurring additional indebtedness for borrowed money in excess of certain limits typical for such lines of credit. We closely monitor all of these covenants to ensure continued compliance.

      On May 28, 2003, we issued $125 million of PRIDES securities. On June 5, 2003, the underwriters exercised their over-allotment option in full and the Company issued an additional $18.8 million of PRIDES. On March 6, 2002, we issued and sold in a private placement $185 million aggregate original principal amount of OCEANs. The issuance of PRIDES and OCEANs were previously discussed in “Item 5 — Market for Registrant’s Common Equity and Related Stockholder Matters,” which portions are incorporated herein by reference.

      The Company has several options for deploying excess capital, including supporting higher sales growth, reducing debt levels, pursuing acquisitions and buying back common stock. We may resume purchasing shares of our common stock pursuant to the repurchase program previously approved by the Company’s Board of Directors. Our Board of Directors approved a stock purchase program effective August 9, 2002, under which we may purchase up to three million shares of our common stock at such times and under such conditions, as we deem advisable. The purchases may be made in the open market or by such other means as we determine to be appropriate, including privately negotiated purchases. The purchase program supercedes all prior purchase programs. We plan to fund the purchase program from a combination of our internal sources, dividends from insurance subsidiaries and the Revolving Credit Agreement. Approximately 2.3 million shares remain available for repurchase under this program. There were no significant shares purchased in 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 manage our mix of sales by focusing on the more capital-efficient products. In addition, we use reinsurance agreements, where cost-effective, to reduce capital strain in the insurance subsidiaries. We also focus on optimizing the consolidated capital structure to properly balance the levels and sources of borrowing and the issuance of equity securities.

Insurance Subsidiaries

      The cash flows of our insurance subsidiaries consist primarily of premium 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

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benefit obligations to policyowners and normal operating expenses as they are incurred. The remaining cash flow is generally used to increase the asset base to provide funds to meet the need for future policy benefit payments and for writing new business.

      Management believes that the current level of cash and available-for-sale, held for trading and short-term securities, combined with expected net cash inflows from operations, maturities of fixed maturity investments, principal payments on mortgage-backed securities and sales of its insurance products, will be adequate to meet the anticipated short-term cash obligations of the insurance subsidiaries.

      Matching the investment portfolio maturities to the cash flow demands of the type of insurance being provided is an important consideration for each type of protection product and accumulation product. We continuously monitor benefits and surrenders to provide projections of future cash requirements. As part of this monitoring process, we perform cash flow testing of assets and liabilities under various scenarios to evaluate the adequacy of reserves. In developing our investment strategy, we establish a level of cash and securities which, combined with expected net cash inflows from operations and maturities and principal payments on fixed maturity investment securities, are believed adequate to meet anticipated short-term and long-term benefit and expense payment obligations. There can be no assurance that future experience regarding benefits and surrenders will be similar to historic experience since withdrawal and surrender levels are influenced by such factors as the interest rate environment and general economic conditions and the claims-paying and financial strength ratings of the insurance subsidiaries.

      We take into account asset/liability management considerations in the product development and design process. Contract terms for the interest-sensitive products include surrender and withdrawal provisions which mitigate the risk of losses due to early withdrawals. These provisions generally do one or more of the following: limit the amount of penalty-free withdrawals, limit the circumstances under which withdrawals are permitted, or assess a surrender charge or market value adjustment relating to the underlying assets.

      In addition to the interest-sensitive products, our insurance subsidiaries placed additional funding agreements totaling $875 million primarily in six to ten year fixed rate insurance contracts during 2002. 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. During 2003, a $250 million funding agreement which was placed in 1999 was terminated. Total funding agreements of $875 million were outstanding as of December 31, 2003.

      We also have variable separate account assets and liabilities representing funds that are separately administered, principally for variable annuity contracts, and for which the contractholder bears the investment risk. Separate account assets and liabilities are reported at fair value and amounted to $261.7 million at December 31, 2003. Separate account contractholders have no claim against the assets of the general account. The operations of the separate accounts are not included in the accompanying consolidated financial statements.

      Through their respective memberships in the Federal Home Loan Banks (FHLB) of Des Moines and Topeka, ALIC and American are eligible to borrow under variable-rate short term 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 borrowings totaling $23.6 million outstanding under these arrangements at December 31, 2003. In addition, ALIC has long-term fixed rate advances from the FHLB outstanding of $13.3 million at December 31, 2003.

      The insurance subsidiaries may also obtain liquidity through sales of investments. The investment portfolio as of December 31, 2003, had a carrying value of $17.9 billion, including closed block investments.

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

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      At December 31, 2003, the statutory capital and surplus of the insurance subsidiaries was approximately $828 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.

Off-Balance Sheet Arrangements

Guarantee Obligations

      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 $3.3 million which was repaid in March 2004 by the participants. 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.

      Certain partnership investments provide for commitments of future capital, loans or guarantees. We have obligations to make future capital contributions to various partnerships of up to $1.3 million at December 31, 2003. In addition, at December 31, 2003, we had loan guarantees which totaled $1.3 million. ALIC and its joint venture partner are contingently liable in the event AVLIC cannot meet its obligations. At December 31, 2003, AVLIC had statutory assets of $2,379 million, liabilities of $2,282 million and surplus of $97 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.

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, 2003:

                                                           
Payments due by period

Obligation Total 2004 2005 2006 2007 2008 Thereafter








($ in thousands)
Notes payable
  $ 596,101     $ 24,103     $ 125,606     $ 647     $ 27,690     $ 144,487     $ 273,568  
Operating leases
    18,663       6,131       5,596       3,029       2,465       872       570  
Capital leases
                                         
Purchase obligations
                                         
Other liabilities
                                         
     
     
     
     
     
     
     
 
 
Total
  $ 614,764     $ 30,234     $ 131,202     $ 3,676     $ 30,155     $ 145,359     $ 274,138  
     
     
     
     
     
     
     
 

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 valuation of financial instruments, accounting for derivatives and amortization of DAC and VOBA are considered our critical accounting policies due to their subjective nature and significance to the financial statements.

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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 $1,605 million and $1,625 million at December 31, 2003 and 2002, respectively, do not have readily determinable market prices. Valuation techniques vary by security type and availability of market data. Fair values for securities which do not have a readily available market price are determined by: 1) a matrix process that uses a current market spread added to an applicable treasury rate to discount expected future cash flows applicable to the coupon rate, credit quality, industry sector and term of the investment; 2) independent third party sources or recent transactions in similar securities, or 3) internally prepared valuations incorporating standard valuation techniques. Certain market conditions that could impact the valuation of securities include credit ratings, business climate, economic environment, industry trends, and regulatory and legal risks/events, among others. 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. For fixed maturity securities, our intent and ability to hold securities is also considered. When such a decline in value is deemed to be other-than-temporary, we recognize an impairment loss in the current period net income to the extent of the decline. For additional information regarding our evaluation of OTTI, see the section titled “Investments — Impairment.”

      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.

Accounting for Derivatives

      We hold derivative financial instruments to hedge growth in policyowner liabilities for certain protection and accumulation products 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 products. We may also use interest rate swaps or options to manage our fixed products’ risk profile. Generally, 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

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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 annually 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 EGMs from insurance contracts using the interest rate credited to the underlying policies. The EGMs 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 gross margins may vary from expected levels due to differences in renewal premium, investment spread, investment gains or losses, mortality and morbidity costs and other factors.

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 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 Investment and Risk Management Committee review investment guidelines and monitor internal controls.

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, traditional 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 strategies have been established based on the specific characteristics of each product line. The portfolio investment 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

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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, 2003 and 2002:

                                     
Invested Assets
December 31,

2003 2002


($ in millions)
Carrying % of Carrying % of
Value Total Value Total




Fixed maturity securities
                               
 
Public
  $ 14,094.2       78.6 %   $ 13,573.6       80.2 %
 
Private
    1,940.3       10.8 %     1,599.2       9.4 %
     
     
     
     
 
   
Subtotal
    16,034.5       89.4 %     15,172.8       89.6 %
Equity securities
    76.5       0.4 %     63.3       0.4 %
Mortgage loans
    968.6       5.4 %     883.0       5.2 %
Policy loans
    494.6       2.7 %     496.8       2.9 %
Real estate
                0.5        
Other investments
    339.5       1.9 %     283.8       1.7 %
Short-term investments
    29.1       0.2 %     32.3       0.2 %
     
     
     
     
 
Total invested assets
  $ 17,942.8       100.0 %   $ 16,932.5       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, 2003, fixed maturity securities were $16,034.5 million, or 89.4% of the carrying value of invested assets with public and private fixed maturity securities constituting $14,094.2 million, or 87.9%, and $1,940.3 million, or 12.1%, 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, 2003 and 2002:

                                   
Composition of Fixed Maturity Securities
December 31,

2003 2002


Carrying % Carrying %
Value of Total Value of Total




($ in millions)
U.S. government/agencies
  $ 816.8       5.1 %   $ 973.0       6.4 %
State and political subdivisions
    67.1       0.4 %     50.0       0.3 %
Foreign government bonds
    128.5       0.8 %     246.9       1.6 %
Corporate bonds
    10,994.3       68.5 %     9,931.6       65.5 %
Redeemable preferred stocks
    173.7       1.1 %     120.1       0.8 %
Indexed debt instruments
    396.1       2.5 %            
Asset-backed bonds
    470.2       2.9 %     777.6       5.1 %
CMBS
    973.0       6.1 %     682.3       4.5 %
MBS
                               
 
U.S. government/agencies
    1,909.2       11.9 %     2,118.9       14.0 %
 
Non-government/agencies
    105.6       0.7 %     272.4       1.8 %
     
     
     
     
 
 
Subtotal-MBS
    2,014.8       12.6 %     2,391.3       15.8 %
     
     
     
     
 
 
Total
  $ 16,034.5       100.0 %   $ 15,172.8       100.0 %
     
     
     
     
 

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      The following table summarizes fixed maturity securities by remaining maturity as of December 31, 2003:

Remaining Maturity of Fixed Maturity Securities

                                     
Carrying % Unrealized %
Value of Total Loss of Total




($ in millions)
Available-for-Sale
                               
Due:
                               
 
In one year or less (2004)
  $ 375.4       2.7 %   $ 0.6       0.5 %
 
One to five years (2005-2009)
    3,637.0       26.1 %     4.5       3.8 %
 
Five to 10 years (2010-2014)
    4,824.3       34.6 %     34.1       28.7 %
 
10 to 20 years (2015-2024)
    1,636.0       11.7 %     60.1       50.7 %
 
Over 20 years (2025 and after)
    1,616.8       11.6 %     11.4       9.6 %
     
     
     
     
 
   
Subtotal
    12,089.5       86.7 %     110.7       93.3 %
 
MBS
    1,855.5       13.3 %     8.0       6.7 %
     
     
     
     
 
   
Total
  $ 13,945.0       100.0 %   $ 118.7       100.0 %
     
     
     
     
 
Held-for-Trading
                               
Due:
                               
 
In one year or less (2004)
  $ 46.3       2.2 %                
 
One to five years (2005-2009)
    453.4       21.7 %                
 
Five to 10 years (2010-2014)
    354.9       17.0 %                
 
10 to 20 years (2015-2024)
    625.2       29.9 %                
 
Over 20 years (2025 and after)
    450.5       21.6 %                
     
     
                 
   
Subtotal
    1,930.3       92.4 %                
 
MBS
    159.2       7.6 %                
     
     
                 
   
Total
  $ 2,089.5       100.0 %                
     
     
                 

      The portfolio of investment grade fixed maturity securities is diversified by number and type of issuer. As of December 31, 2003, investment grade fixed maturity securities included the securities of 878 issuers, with 2,648 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, 2003, included the securities of 280 issuers representing 6.9% of total invested assets, with the largest being a $30.5 million investment.

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      As of December 31, 2003, 82.4% 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, 2003:

Fixed Maturity Securities By NAIC Designation

                                                         
Public Private Total



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








($ in millions)
  1     A- or higher   $ 8,947.2       63.5 %   $ 975.6       50.3 %   $ 9,922.8       61.9 %
  2     BBB- to BBB+     4,015.4       28.5 %     852.3       43.9 %   $ 4,867.7       30.3 %
             
     
     
     
     
     
 
Total investment grade     12,962.6       92.0 %     1,827.9       94.2 %   $ 14,790.5       92.2 %
             
     
     
     
     
     
 
  3     BB to BB+     737.2       5.2 %     64.0       3.3 %   $ 801.2       5.0 %
  4     B to B+     361.5       2.6 %     21.7       1.1 %   $ 383.2       2.4 %
  5 & 6     CCC or lower     32.9       0.2 %     26.7       1.4 %   $ 59.6       0.4 %
             
     
     
     
     
     
 
Total below investment grade     1,131.6       8.0 %     112.4       5.8 %   $ 1,244.0       7.8 %
             
     
     
     
     
     
 
Total   $ 14,094.2       100.0 %   $ 1,940.3       100.0 %   $ 16,034.5       100.0 %
             
     
     
     
     
     
 

      The following table summarizes fixed maturity securities by Standard & Poor’s or equivalent rating, including unrealized losses, at December 31, 2003:

Fixed Maturity Securities by Standard & Poor’s or Equivalent Rating

                                   
Market % of Unrealized % of
Rating Value Total Loss Total





($ in millions)
AAA
  $ 4,454.5       27.8 %   $ 14.9       12.6 %
AA
    947.7       5.9 %     42.0       35.4 %
A
    4,531.3       28.2 %     29.9       25.2 %
BBB
    4,225.8       26.3 %     16.2       13.6 %
BB
    684.5       4.3 %     3.5       2.9 %
B and below
    345.7       2.2 %     1.5       1.3 %
     
     
     
     
 
 
Subtotal
    15,189.5       94.7 %     108.0       91.0 %
Not-rated
    845.0       5.3 %     10.7       9.0 %
     
     
     
     
 
 
Total
  $ 16,034.5       100.0 %   $ 118.7       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, 2003, asset-backed residential mortgages totaled $320.6 million or 1.8% of total invested assets. As of December 31, 2003, residential mortgage pass-through and CMOs totaled $2,014.8 million or 11.2% of total invested assets. As of December 31, 2003, $1,909.2 million or 94.8% of MBS were from government sponsored enterprises. Other MBS were $105.6 million or 5.2% of MBS as of December 31, 2003. Management believes that the quality of assets in the MBS portfolio is generally high, with 99.9% of such assets representing agency backed or “AAA” rated securities. Collateralized mortgage backed securities (or CMBS) totaled $973.0 million or 6.1% of total invested assets as of December 31, 2003.

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Derivatives

      Interest rate swaps and options are primarily used to reduce exposure to changes in interest rates and to manage duration mismatches. Call options are primarily 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, 2003, amounted to $2,603.3 million. The interest rate swaps had a carrying value of a net receivable position of $3.2 million at December 31, 2003. The credit default swaps had a carrying value of a net receivable position of $0.6 million at December 31, 2003. The carrying value of options amounted to $134.9 million at December 31, 2003. For each of these derivatives, the carrying value is equal to fair value as of December 31, 2003. The derivatives are reflected as other investments on the consolidated financial statements. The net amount payable or receivable from interest rate and credit default swaps are accrued as an adjustment to interest income. Effective October 1, 2003, we adopted DIG Issue B36 and effective January 1, 2001, we adopted SFAS 133. See note 4 to the consolidated financial statements for further discussion of the impact of adopting both accounting pronouncements.

Mortgage Loans

      As of December 31, 2003, mortgage loans in the investment portfolio were $968.6 million, or 5.4% of the aggregate carrying value of invested assets. As of December 31, 2003, commercial mortgage loans and residential mortgage loans comprised 87.4% and 12.6%, respectively, of total mortgage loans. Commercial mortgage loans consist primarily of fixed-rate mortgage loans. As of December 31, 2003, we held 686 individual commercial mortgage loans with an average balance of $1.2 million.

      As of December 31, 2003, four loans in the loan portfolio with a carrying value of $5.5 million were classified as delinquent and no loans were in foreclosure. As of the same date, only two loans with a carrying value aggregating $1.2 million were classified as restructured. During 2003, we had one foreclosure.

Other

      We participate in a securities lending program whereby certain fixed maturity securities from the investment portfolio are loaned to other institutions for a short period of time. We receive a fee in exchange for the loan of securities and require initial collateral equal to 102 percent of the market value of the loaned securities to be separately maintained. Securities with a market value of $154.6 million were on loan under the program and the Company has cash collateral under its control of $158.8 million at December 31, 2003. There were no securities on loan at December 31, 2002. We also may enter into securities borrowing arrangements from time to time. At December 31, 2003 and 2002, there were no securities borrowed.

      We held $494.6 million of policy loans on individual insurance products as of December 31, 2003. 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, 2003, we held equity securities of $76.5 million of which the largest holding was Federal Home Loan Bank common stock totaling $58.1 million.

      We held $368.6 million of other invested assets (including short-term investments and real estate) on December 31, 2003. 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 consisted of interests in collateralized bond obligations and special-purpose entities with principal protected limited partnership interests. Neither AmerUs nor any management members had operating control or management

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oversight of the entities and accordingly the entities were not consolidated but rather accounted for as available for sale debt securities or equity method investments. In addition, we did not have any continued obligation or commitment to provide additional financing to the entities. At December 31, 2002, approximately $560 million of such structured finance investments were included in invested assets. These structured securities were liquidated during 2003.

      We hold investments in indexed debt instruments (IDIs) in which the principal is initially partially defeased by an obligation of a third party financial institution (institution) collateralized by U.S. Treasuries which will accrete to 50% of the original principal amount of the IDIs at maturity. The balance of the principal amount due at maturity is subject to a dynamic defeasance mechanism, which should provide a return of the initial investment. The instruments issued by the institutions are linked to the performance of a hedge fund or fund of funds. The annual income on these investments will be equal to the quarterly distribution of the hedge fund or fund of funds plus the change in the present value of anticipated distributions to be received at maturity and will be included in net investment income. Over the life of the IDIs, the income will be a function of the cumulative performance of the linked hedge fund or fund of funds and the return on any defeased portion of the investment. The quarterly distribution paid, if any, reduces the amount of future participation in the performance of the linked hedge fund or fund of funds. At maturity, the Company will take delivery of the referenced hedge fund interests and cash or U.S. Treasuries equal to the portion of the instruments that have been defeased, the total of which should equal or exceed the instruments’ principal amount. The investment purpose of these instruments is to enable the Company to obtain the return as if they had invested in hedge funds or fund of funds with dynamic principal protection. The instruments as of December 31, 2003 carried an A rating or better by Fitch. The carrying value of IDIs was $396.1 million at December 31, 2003.

Impairments

      Our evaluation of other-than-temporary impairment (OTTI) for fixed income securities follows a three-step process of 1) screen and identify; 2) assess and document; 3) recommend and approve. In identifying potential OTTI’s, we screen for all securities that have a fair value less than 80% of amortized cost. In addition, we monitor securities for general credit issues that have been identified and included on a watch list which may result in the potential impairment list including other securities that have a fair value at or greater than 80% of amortized cost. For asset backed securities, the guidance of EITF 99-20 is followed which requires an impairment loss if the fair value of the security is less than amortized costs and there is an adverse change in estimated cash flows from the cash flows previously projected.

      The list of securities identified is subject to a formal assessment to determine if an impairment is other than temporary. Management makes certain assumptions or judgments in its assessment of potentially impaired securities including but not limited to:

  •  Industry characteristics and trends, company to industry profile, quality of management
 
  •  Financial conditions and trends including strength of balance sheet and financial liquidity
 
  •  Significant events affecting the company and/or industry
 
  •  Viability of the business model incorporating an evaluation of default probability and associated recoverable value
 
  •  Length of time the fair value was below 80% of amortized cost
 
  •  Ability and intent to retain the investment to maturity or for a sufficient period of time for it to recover

      If the determination is that the security is OTTI, it is written down to fair value. This is reviewed and approved by senior management. The difference between amortized cost and fair value is charged to net income.

      When actively traded market prices are not available, fair values are determined using present value or other standard valuation techniques such as earnings multiples and asset valuations. The fair value

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determinations are made at a specific point in time based on then available market information and judgments about the financial instruments. Factors considered in determining fair value include: coupon rate, term, collateral (if any), industry sector outlook, credit rating, expectations regarding going concern status, timing and amounts of expected future cash flows among other factors.

      There are risks and uncertainties inherent in the process of monitoring impairments and determining if an impairment is OTTI. Risks may include 1) the credit characteristics change affecting the creditor’s ability to meet all of its contractual obligations; 2) the economic outlook may be worse than expected or impact the credit more than anticipated; 3) accuracy of information provided by issuers could affect valuations; and 4) new information may change our intent to hold the security to maturity. Any of these items could result in a charge to net income in the future.

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      The following table lists material investment impairments in 2003 and 2002. The writedowns occurred due to creditor and/or issue specific circumstances.

Material Impairments

                 
Impairment Loss Impact on Other
General Description ($ in millions) Circumstances Material Investments




2003
               
Major United States airline
  $ 11.6     High probability of restructuring and threat of bankruptcy   Negative industry trends with analysis done on an issue-by-issue basis concluding no impact on other material investments other than those written down
Merchant Energy Generator
    3.6     High probability of restructuring and threat of bankruptcy   Negative industry trends with analysis done on an issue-by-issue basis concluding no impact on other material investments other than those written down
2002
               
Large telecommunication company
    17.7     Materially inaccurate financial statements and imminent default or bankruptcy   Credit specific issues with no impact on other material investments
Securitized medical receivables
    14.5     Materially inaccurate financial statements and default event   Alleged credit specific fraud and default issues with no impact on other material investments
Merchant energy generator and distributor
    11.3     Significant off-balance sheet liabilities and high probability of a restructuring   Negative industry trends with analysis done on an issue-by-issue basis concluding no impact on other material investments other than those written down
Collateralized debt obligation
    8.0     Adverse change in cash flows on underlying portfolios   Specific collateral and structure issues with no impact on other material investments
Property and casualty insurance company
    7.7     Rating downgrade and announced suspension of interest payments   Credit specific issues with no impact on other material investments
Merchant energy generator
    7.4     Default on interest payment   Negative industry trends with analysis done on an issue-by-issue basis concluding no impact on other material investments other than those written down
Securitized manufactured housing loans
    7.2     Suspension of guarantee payments related to manufactured housing   Credit specific issues with no impact on other material investments
Major United States airline
    5.7     Bankruptcy and lease rejection   Negative industry trends with analysis done on an issue-by-issue basis concluding no impact on other material investments other than those written down
Northeast electric energy generator
    3.4     Default on interest payment   Negative industry trends with analysis done on an issue-by-issue basis concluding no impact on other material investments other than those written down

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      The following tables present unrealized losses for fixed maturity securities at December 31, 2003 and 2002 by investment category and industry sector:

Composition of Fixed Maturity Securities by Type

                                   
December 31, 2003

Carrying Unrealized
Value % Total Losses % Total




($ in millions)
U.S. government/agencies
    816.8       5.1 %     1.7       1.4 %
State and political subdivisions
    67.1       0.4 %     1.4       1.2 %
Foreign governments
    128.5       0.8 %     0.3       0.2 %
Corporate
    10,994.3       68.5 %     57.8       48.7 %
Redeemable preferred stocks
    173.7       1.1 %     37.1       31.3 %
Indexed debt instruments
    396.1       2.5 %     8.3       7.0 %
Asset-backed bonds
    470.2       2.9 %     1.5       1.2 %
CMBS
    973.0       6.1 %     2.7       2.3 %
MBS:
                               
 
U.S. government/agencies
    1,909.2       11.9 %     7.9       6.7 %
 
Non-government
    105.6       0.7 %     0.0       0.0 %
     
     
     
     
 
 
Subtotal-MBS
    2,014.8       12.6 %     7.9       6.7 %
     
     
     
     
 
Total
    16,034.5       100.0 %     118.7       100.0 %
     
     
     
     
 
                                   
December 31, 2002

Carrying Unrealized
Value % Total Losses % Total




($ in millions)
U.S. government/agencies
    973.0       6.4 %     0.4       0.2 %
State and political subdivisions
    50.0       0.3 %            
Foreign governments
    246.9       1.6 %     3.1       1.4 %
Corporate
    9,931.6       65.5 %     133.5       60.2 %
Redeemable preferred stocks
    120.1       0.8 %     40.2       18.1 %
Indexed debt instruments
                       
Asset-backed bonds
    777.6       5.1 %     44.0       19.8 %
CMBS
    682.3       4.5 %     0.3       0.2 %
MBS:
                               
 
U.S. government/agencies
    2,118.9       14.0 %     0.1        
 
Non-government
    272.4       1.8 %     0.2       0.1 %
     
     
     
     
 
 
Subtotal-MBS
    2,391.3       15.8 %     0.3       0.1 %
     
     
     
     
 
Total
    15,172.8       100.0 %     221.9       100.0 %
     
     
     
     
 

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Composition of Fixed Maturity Securities by Industry

                                   
December 31, 2003

Market Unrealized
Value % Total Loss % Total




($ in millions)
Basic industry
  $ 756.0       4.7 %   $ 5.6       4.7 %
Capital goods
    865.0       5.4 %     4.0       3.4 %
Communications
    1,124.7       7.0 %     8.6       7.2 %
Consumer cyclical
    981.5       6.1 %     2.3       1.9 %
Consumer non-cyclical
    1,701.8       10.6 %     7.5       6.3 %
Energy
    965.5       6.0 %     2.3       1.9 %
Technology
    245.7       1.5 %     0.6       0.5 %
Transportation
    462.7       2.9 %     5.9       5.0 %
Industrial other
    154.5       1.0 %     0.4       0.3 %
Utilities
    1,548.0       9.7 %     12.0       10.1 %
Financial institutions
    2,427.9       15.2 %     52.0       43.9 %
     
     
     
     
 
 
Subtotal
    11,233.3       70.1 %     101.2       85.2 %
Other
    4,801.2       29.9 %     17.5       14.8 %
     
     
     
     
 
 
Total
  $ 16,034.5       100.0 %   $ 118.7       100.0 %
     
     
     
     
 
                                   
December 31, 2002

Market Unrealized
Value % Total Loss % Total




($ in millions)
Basic industry
  $ 533.3       3.5 %   $ 5.0       2.2 %
Capital goods
    671.9       4.4 %     1.5       0.7 %
Communications
    878.4       5.8 %     23.9       10.8 %
Consumer cyclical
    845.1       5.6 %     7.8       3.5 %
Consumer non-cyclical
    1,562.6       10.3 %     16.2       7.3 %
Energy
    957.8       6.3 %     5.7       2.6 %
Technology
    267.8       1.8 %     0.4       0.2 %
Transportation
    469.1       3.1 %     24.2       10.9 %
Industrial other
    92.8       0.6 %     1.0       0.4 %
Utilities
    1,235.2       8.1 %     37.2       16.8 %
Financial institutions
    1,864.5       12.3 %     45.6       20.5 %
     
     
     
     
 
 
Subtotal
    9,378.5       61.8 %     168.5       75.9 %
Other
    5,794.3       38.2 %     53.4       24.1 %
     
     
     
     
 
 
Total
  $ 15,172.8       100.0 %   $ 221.9       100.0 %
     
     
     
     
 

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      The following table provides a summary of unrealized losses for fixed maturity securities which identifies the length of time the securities have continually been in an unrealized loss position as of December 31, 2003 and 2002:

Unrealized Loss as a Percentage of Market Value

                                                                 
December 31, 2003

($ in millions)
More than 12
Less than 7 months 7-12 months months Total




Gross Gross Gross Gross
Fair unrealized Fair unrealized Fair unrealized Fair unrealized
value loss value loss value loss value loss








Total Temporarily Impaired Securities:
                                                               
Corporate bonds
  $ 1,618.3     $ 31.3     $ 275.5     $ 15.8     $ 118.0     $ 10.6     $ 2,011.8     $ 57.7  
U.S. government bonds
    156.5       1.7       0.4                         156.9       1.7  
State and political subdivisions
    18.8       1.4                               18.8       1.4  
Foreign government bonds
    51.2       0.3                   1.3             52.5       0.3  
Asset-backed bonds
    74.1       0.5       4.6             18.5       1.0       97.2       1.5  
CMBS
    227.9       2.7                               227.9       2.7  
Mortgage-backed bonds
    598.1       5.2       135.8       2.7       0.2             734.1       7.9  
Indexed debt instruments
    240.9       3.7       157.6       4.6                   398.5       8.3  
Redeemable preferred stock
                            104.6       37.1       104.6       37.1  
Equity securities AFS
                0.8       0.2       0.3       0.2       1.1       0.4  
Short-term investments AFS
    3.7                                     3.7        
     
     
     
     
     
     
     
     
 
Total
  $ 2,989.5     $ 46.8     $ 574.7     $ 23.3     $ 242.9     $ 48.9     $ 3,807.1     $ 119.0  
     
     
     
     
     
     
     
     
 
                                                                 
More than 12
Less than 7 months 7-12 months months Total




Gross Gross Gross Gross
Fair unrealized Fair unrealized Fair unrealized Fair unrealized
value loss value loss value loss value loss








Less Than 20% Underwater:
                                                               
Corporate bonds
  $ 1,618.3     $ 31.3     $ 275.5     $ 15.8     $ 109.8     $ 8.2     $ 2,003.6     $ 55.3  
U.S. government bonds
    156.5       1.7       0.4                         156.9       1.7  
State and political subdivisions
    18.8       1.4                               18.8       1.4  
Foreign government bonds
    51.2       0.3                   1.3             52.5       0.3  
Asset-backed bonds
    74.1       0.5       4.6             18.5       1.0       97.2       1.5  
CMBS
    227.9       2.7                               227.9       2.7  
Mortgage-backed bonds
    598.1       5.2       135.8       2.7       0.2             734.1       7.9  
Indexed debt instruments
    240.9       3.7       157.6       4.6                   398.5       8.3  
Equity securities AFS
                0.8       0.2                   0.8       0.2  
Short-term investments AFS
    3.7                                     3.7        
     
     
     
     
     
     
     
     
 
Total
  $ 2,989.5     $ 46.8     $ 574.7     $ 23.3     $ 129.8     $ 9.2     $ 3,694.0     $ 79.3  
     
     
     
     
     
     
     
     
 

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Unrealized Loss as a Percentage of Market Value

                                                                 
December 31, 2003

($ in millions)
Less than 7
months 7-12 months More than 12 months Total




Gross Gross Gross Gross
Fair unrealized Fair unrealized Fair unrealized Fair unrealized
value loss value loss value loss value loss








20%-50% Underwater:
                                                               
Corporate bonds
  $     $     $     $     $ 8.2     $ 2.4     $ 8.2     $ 2.4  
U.S. government bonds
                                               
State and political subdivisions
                                               
Foreign government bonds
                                               
Asset-backed bonds
                                               
CMBS
                                               
Mortgage-backed bonds
                                               
Indexed Debt Instruments
                                               
Redeemable preferred stock
                            104.6       37.1       104.6       37.1  
Equity securities AFS
                            0.3       0.2       0.3       0.2  
Short-term investments AFS
                                               
     
     
     
     
     
     
     
     
 
Total
  $     $     $     $     $ 113.1     $ 39.7     $ 113.1     $ 39.7  
     
     
     
     
     
     
     
     
 

      There are no securities that were more than 50% underwater at December 31, 2003.

Unrealized Loss as a Percentage of Market Value

                                                                 
December 31, 2002

($ in millions)
More than 12
Less than 7 months 7-12 months months Total




Gross Gross Gross Gross
Fair unrealized Fair unrealized Fair unrealized Fair unrealized
value loss value loss value loss value loss








Total Temporarily Impaired Securities:
                                                               
Corporate bonds
  $ 988.2     $ 33.9     $ 351.9     $ 27.3     $ 288.3     $ 72.3     $ 1,628.4     $ 133.5  
U.S. government bonds
    170.1       0.4                               170.1       0.4  
Foreign government bonds
    13.0       0.3       30.1       2.0       5.8       0.9       48.9       3.2  
Asset-backed bonds
    116.7       10.3       6.5       2.8       101.3       30.9       224.5       44.0  
CMBS
    4.8                         10.7       0.3       15.5       0.3  
Mortgage-backed bonds
    83.8       0.3                   0.4             84.2       0.3  
Redeemable preferred stock
    4.8                         95.1       40.2       99.9       40.2  
Equity securities AFS
    1.3       0.2                   0.4       0.2       1.7       0.4  
Short-term investments AFS
    9.9                                     9.9        
     
     
     
     
     
     
     
     
 
Total
  $ 1,392.6     $ 45.4     $ 388.5     $ 32.1     $ 502.0     $ 144.8     $ 2,283.1     $ 222.3  
     
     
     
     
     
     
     
     
 

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Less than More than
7 months 7-12 months 12 months Total




Gross Gross Gross Gross
Fair unrealized Fair unrealized Fair unrealized Fair unrealized
value loss value loss value loss value loss








Less Than 20% Underwater:
                                                               
Corporate bonds
  $ 962.1     $ 21.9     $ 326.1     $ 14.9     $ 211.0     $ 22.3     $ 1,499.2     $ 59.1  
U.S. government bonds
    170.1       0.4                               170.1       0.4  
Foreign government bonds
    13.0       0.3       27.5       1.3       5.3       0.5       45.8       2.1  
Asset-backed bonds
    107.5       3.6       3.4             40.7       4.5       151.6       8.1  
CMBS
    4.8                         10.7       0.3       15.5       0.3  
Mortgage-backed bonds
    83.8       0.3                   0.4             84.2       0.3  
Redeemable preferred stock
    4.8                                     4.8        
Equity securities AFS
    1.0                         0.1             1.1        
Short-term investments AFS
    9.9                                     9.9        
     
     
     
     
     
     
     
     
 
Total
  $ 1,357.0     $ 26.5     $ 357.0     $ 16.2     $ 268.2     $ 27.6     $ 1,982.2     $ 70.3  
     
     
     
     
     
     
     
     
 

Unrealized Loss at a % of Market Value

                                                                 
December 31, 2002

($ in millions)
Less than 7 months 7-12 months More than 12 months Total




Gross Gross Gross Gross
Fair unrealized Fair unrealized Fair unrealized Fair unrealized
value loss value loss value loss value loss








20%-50% Underwater:
                                                               
Corporate bonds
  $ 26.0     $ 11.7     $ 24.7     $ 11.0     $ 63.9     $ 30.8     $ 114.6     $ 53.5  
Foreign government bonds
                2.6       0.7       0.5       0.4       3.1       1.1  
Asset-backed bonds
    9.2       6.7       3.1       2.8       54.3       17.3       66.6       26.8  
Redeemable preferred stock
                            95.1       40.2       95.1       40.2  
Equity securities AFS
    0.3       0.2                   0.2       0.1       0.5       0.3  
     
     
     
     
     
     
     
     
 
Total
  $ 35.5     $ 18.6     $ 30.4     $ 14.5     $ 214.0     $ 88.8     $ 279.9     $ 121.9  
     
     
     
     
     
     
     
     
 
                                                                 
Less than More than
7 months 7-12 months 12 months Total




Gross Gross Gross Gross
Fair unrealized Fair unrealized Fair unrealized Fair unrealized
value loss value loss value loss value loss








More Than 50% Underwater:
                                                               
Corporate bonds
  $ 0.1     $ 0.3     $ 1.1     $ 1.4     $ 13.4     $ 19.2     $ 14.6     $ 20.9  
Asset-backed bonds
                            6.3       9.1       6.3       9.1  
Equity securities AFS
                            0.1       0.1       0.1       0.1  
     
     
     
     
     
     
     
     
 
Total
  $ 0.1     $ 0.3     $ 1.1     $ 1.4     $ 19.8     $ 28.4     $ 21.0     $ 30.1  
     
     
     
     
     
     
     
     
 

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     The following table identifies the type, carrying value and unrealized loss of individual material securities with unrealized losses at December 31, 2003 and 2002, exceeding $3 million:

Material Unrealized Losses

                 
Year Ended
December 31, 2003

Market Unrealized
General Description Value Loss



($ in millions)
Government sponsored entity
  $ 313.0     $ 3.5  
Government sponsored entity
    355.0       3.5  
                 
Year Ended
December 31, 2002

Market Unrealized
General Description Value Loss



($ in millions)
Collateralized debt obligation
  $ 6.3     $ 9.1  
Securitized manufactured housing loans
    8.3       7.5  
Major United States airline
    7.1       7.2  
Merchant energy generator
    3.5       6.4  
Pharmaceutical company
    4.5       4.5  
Large telecommunications company
    7.7       4.3  
Major United States airline
    8.9       4.0  
Independent power producer
    2.9       3.8  
Foreign utility
    11.3       3.6  
Telecommunications equipment provider
    12.3       3.6  
Foreign oil receivables
    21.2       3.2  
Major United States airline
    19.1       3.1  

      In addition to the above listing, at December 31, 2003 and 2002, securities with a market value of $500.7 million and $149.4 million and unrealized loss position of $45.4 million and $57.4 million, respectively, were principal protected. These securities included underlying holdings that provided for a return of principal through maturity of zero coupon bonds from a highly rated issuer or a principal guarantee from a highly rated company. These securities along with the securities in the above listing of unrealized losses did not meet the criteria as described in our other-than-temporary process for impairment determination. As a result, there was no realized loss for these securities. Unrealized gains or losses may not represent future gains or losses that will be realized. These unrealized gains or losses are subject to fluctuation, reflective of such things as volatile financial markets, interest rate movements, credit spread changes and sale decisions.

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      The following table presents, for securities sold during 2003 and 2002, the amount of material losses recorded and the fair value at the sales date:

Material Realized Losses

                         
Year Ended December 31, 2003

Proceeds/ Realized Time in Time in
Market Loss Months Below Months  <80%
General Description Value on Sale Book of Book





US Treasury
  $ 1,082.6     $ 9.9     6 months or less   6 months or less
Securitized manufactured housing loans
    31.8       6.3     Over 12 months   7 to 12 months
Collateralized debt obligation
    136.3       5.7     Over 12 months   6 months or less
Government sponsored entity
    860.7       5.5     6 months or less   6 months or less
Foreign oil revenue financing entity
    49.4       4.4     7 to 12 months   6 months or less
Major United States airline
    49.4       4.2     Over 12 months   6 months or less
Collateralized debt obligation
    31.7       4.1     6 months or less   6 months or less
Aircraft securitization
    25.7       4.0     Over 12 months   7 to 12 months
Electric generator
    20.3       4.0     7 to 12 months   6 months or less
Natural gas supplier
    42.3       3.9     7 to 12 months   6 months or less
Healthcare service provider
    20.3       3.8     7 to 12 months   6 months or less
Major United States airline
    21.5       3.7     Over 12 months   6 months or less
Major United States airline
    17.0       3.4     Over 12 months   7 to 12 months
Government sponsored entity
    493.3       3.3     6 months or less   6 months or less
                         
Year Ended December 31, 2003

Proceeds/ Realized Time in Time in
Market Loss Months Below Months  <80%
General Description Value on Sale Book of Book





($ in millions)
Large telecommunications company
  $ 2.6     $ 17.8     6 months or less   6 months or less
Securities manufactured housing loans
    2.5       9.6     Over 12 months   6 months or less
Multinational energy transmissions distributor
    4.6       7.4     Over 12 months   7 to 12 months
Media conglomerate
    24.4       6.6     7 to 12 months   6 months or less
US Treasury
    619.3       6.3     6 months or less   6 months or less
Independent power producer
    4.0       6.0     Over 12 months   7 to 12 months
Large telecommunications company
    28.0       5.4     Over 12 months   7 to 12 months
Canadian telecommunications company
    18.1       5.2     7 to 12 months   6 months or less
Telecommunications company
    0.9       4.1     Over 12 months   7 to 12 months
Energy pipeline company
    8.4       3.9     7 to 12 months   6 months or less
Energy pipeline company
    12.4       3.7     6 months or less   6 months or less
Merchant energy generator/distributor
    6.4       3.5     7 to 12 month   6 months or less
Energy pipeline company
    6.9       3.1     6 months or less   6 months or less

      We may decide to sell certain securities within the overall context of our portfolio management strategies. This may include required exposure reductions due to internal credit limits, total rate of return strategies, capital reserve objectives, asset allocation decisions and hedging activities.

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

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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, traditional annuities, equity-indexed annuities, variable annuities and funding agreements. Investment strategies have been established based on the specific characteristics of each product line. The portfolio investment 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.

      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

      Generally, 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 and Bankers Life 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.

Emerging Accounting Matters

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 years ended December 31, 2003 and 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-

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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 prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. As of December 31, 2003, 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.

SFAS 149

      In April 2003, the Financial Accounting Standards Board issued SFAS 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS 149 is intended to provide more consistent reporting of contracts as either freestanding derivative instruments subject to SFAS 133 in its entirety, or as hybrid instruments with debt host contracts and embedded derivative features. SFAS 149 incorporates decisions previously made by the Derivatives Implementation Group, changes in financial instruments resulting from other projects, and deliberations in connection with issues raised in the application of the definition of a derivative and it does not amend the definition of a derivative. The provisions of SFAS 149 are effective for contracts entered into or modified after June 30, 2003, except for the codification of previous derivative decisions which were already effective and continue to be applied in accordance with their respective effective dates. SFAS 149 had no impact on net income or stockholders’ equity as of or for the year ended December 31, 2003.

SFAS 150

      In May 2003, the Financial Accounting Standards Board issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS 150 establishes standards for how an issuer classifies and measures freestanding financial instruments as liabilities or equity and was generally effective at the beginning of the first interim period after June 30, 2003. A Financial Accounting Standards Board Staff Position has deferred the application of various provisions of SFAS 150 for specified mandatorily redeemable non-controlling interests in consolidated limited life entities. The AmerUs Capital I 8.85% Capital Securities were issued through a wholly-owned subsidiary trust and are mandatorily redeemable securities which are carried as notes payable on the consolidated balance sheet with interest expense recorded in the consolidated statement of income. The adoption of SFAS 150 did not have any effect on 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. Adoption of FIN 45 in 2003 did not have an effect on net income or stockholders’ equity. 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

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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 met the definition of VIEs; however, most of the interests were sold prior to June 30, 2003. We would have been considered the primary beneficiary for several of those structured securities, which if consolidated at December 31, 2002, would have resulted 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. At December 31, 2003, an investment in a limited partnership, for which we provide indirect management functions, has been consolidated rather than carried as an equity method investment, as provided by FIN 46, resulting in an increase in total assets and total liabilities of $21.1 million and no change in stockholders’ equity or net income. In addition, AmerUs Capital I, a previously consolidated subsidiary which has issued trust preferred securities, was deconsolidated in 2003 as AmerUs Group Co. is not considered the primary beneficiary under FIN 46. Deconsolidation of AmerUs Capital I resulted in an increase of other assets and notes payable of $2.7 million and no change in stockholders’ equity or net income. See notes 3 and 8 to the consolidated financial statements for disclosures and additional information related to our VIE interests.

SFAS 133 Implementation — Embedded Derivatives

      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 36 applies to modified coinsurance and coinsurance with funds withheld arrangements 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. We adopted DIG Issue B36 on October 1, 2003, which included the reclassification of certain securities supporting the products being reinsured from available for sale to trading. The net cumulative effect of the change in accounting for DIG Issue B36 was a charge to net income of $1.3 million after income taxes and a reduction in accumulated other comprehensive income for the reclassification of securities from available-for-sale to held for trading amounting to $5.2 million after income taxes.

SOP 03-1

      In July 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Non-Traditional Long-Duration Insurance Contracts and for Separate Accounts.” SOP 03-1 provides interpretive guidance on separate account presentation and valuation, accounting recognition for sales inducements, and classification and valuation of long-duration contract liabilities. The provisions of SOP 03-1 are effective for financial statements for fiscal years beginning after December 15, 2003. The adoption of SOP 03-1 will not have a material effect on net income or stockholders’ equity in 2004.

 
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

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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, credit quality and prepayment variation. Analytical tools and monitoring systems are in place to assess each of these elements of market risk.

      Interest rate risk is the price sensitivity of a fixed income security to changes in interest rates. Management views these potential changes in price within the overall context of asset and liability management. Actuarial professionals estimate the payout pattern of our liabilities, primarily lapses, to determine duration, which is the present value of the fixed income investment portfolios after consideration of the duration of these liabilities and other factors, which management believes mitigates the overall effect of interest rate risk.

      For variable and equity-indexed products, profitability on the portion of the policyowner’s account balance invested in the fixed general account option, if any, is also affected by the spreads between interest yields on investments and rates credited to the policies. For the variable products, the 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 primarily call options that are designed to match the return owed to contract holders who elect to participate in one or more market indices. Profitability on the portion of the equity-indexed products tied to market indices is significantly impacted by the spread on interest earned on investments and the sum of (1) the cost of underlying call options purchased to match the returns owed to contract holders and (2) the minimum interest guarantees owed to the contract holder, if any. Profitability on the equity-indexed products is also impacted by changes in the fair value of the embedded option which provides the contract holder the right to participate in market index returns after the next anniversary date of the contract. This impacts profitability as we primarily purchase one-year call options to fund the returns owed to the contract holders at the inception of each contract year. This practice matches with the contract holders’ rights to switch to different indices on each anniversary date. The value of the forward starting options embedded in the equity-indexed products can fluctuate with changes in assumptions as to future volatility of the market indices, risk free interest rates, market returns and the lives of the contracts.

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      The following table provides information about our fixed maturity investments and mortgage loans for both our trading and other than trading portfolios at December 31, 2003. The table presents amortized cost and related weighted average interest rates by expected maturity dates. The amortized cost approximates the cash flows of principal amounts in each of the periods. The cash flows are based on the earlier of the call date or the maturity date or, for mortgage-backed securities, expected payment patterns. Actual cash flows could differ from the expected amounts.

Expected Cash Flows

                                                                   
Expected
Cash Fair
2004 2005 2006 2007 2008 Thereafter Flows Value








($ in millions)
Fixed maturity securities available-for-sale
  $ 1,106     $ 1,128     $ 940     $ 1,092     $ 1,213     $ 7,996     $ 13,475     $ 13,945  
Average interest rate
    7.1%       6.3%       7.5%       6.8%       5.2%       5.3%                  
Fixed maturity securities held for trading purposes
  $ 226     $ 292     $ 238     $ 195     $ 289     $ 850     $ 2,090     $ 2,090  
Average interest rate
    2.6%       2.3%       2.4%       3.3%       2.8%       4.4%                  
Mortgage loans
  $ 64     $ 67     $ 65     $ 64     $ 73     $ 636     $ 969     $ 1,034  
Average interest rate
    7.3%       7.7%       7.7%       7.6%       7.6%       7.5%                  
     
     
     
     
     
     
     
     
 
 
Total
  $ 1,396     $ 1,487     $ 1,243     $ 1,351     $ 1,575     $ 9,482     $ 16,534     $ 17,069  
     
     
     
     
     
     
     
     
 

      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 64% 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 7.6 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 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.

      All of the above risks are monitored on an ongoing basis. A combination of in-house systems and proprietary models and externally licensed software are used to analyze individual securities as well as each portfolio. These tools provide the portfolio managers with information to assist them in the evaluation of the market risks of the portfolio.

 
ITEM 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.

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      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

      None.

ITEM 9A.  CONTROLS AND PROCEDURES

(a)  Based upon their evaluation as of the period covered by 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-15(e) under the Securities Exchange Act of 1934, as amended, are effective for recording, processing, summarizing and reporting the information we are required to disclose in our reports filed under such act.
 
(b)  There was no change in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART III

      The Notice of 2004 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, 13. Certain Relationships and Related Transactions and 14. Principal Accounting Fees and Services).

 
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.
 
(d)  Information concerning the identification of the audit committee and the audit committee financial expert appears in the Proxy Statement, under “Board and Corporate Governance Matters.” This portion of the Proxy Statement is incorporated herein by reference.
 
(e)  Information describing any material changes to the procedures by which security holders may recommend nominees to the board of directors appears in the Proxy Statement, under “Board and Corporate Governance Matters.” This portion of the Proxy Statement is incorporated herein by reference.

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.

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  3.  Exhibits. Reference is made to the Index to Exhibits on page 61 of the report.

(b)  The following reports on Form 8-K were filed during the quarter ended December 31, 2003:

  Form 8-K dated October 2, 2003 furnishing the presentation on equity index annuities and equity index life insurance made by webcast on September 30, 2003.
 
  Form 8-K dated November 5, 2003 furnishing certain third quarter 2003 financial information.
 
  Form 8-K dated November 7, 2003 announcing the appointments of personnel and action of the board of directors declaring the 2003 annual dividend.

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AMERUS GROUP CO. AND SUBSIDIARIES

INDEX TO EXHIBITS

         
Exhibit
No. Description


  2.1     Combination and Investment Agreement, dated February 18, 2000, among American Mutual Holding Company, AmerUs Life Holdings, Inc., Indianapolis Life Insurance Company and The Indianapolis Life Group of Companies, Inc., filed as Exhibit 2.1 to AmerUs Life Holdings, Inc.’s report on Form 8-K/ A on March 6, 2000, is hereby incorporated by reference.
 
  2.2     Purchase Agreement, dated as of February 18, 2000, by and between American Mutual Holding Company and AmerUs Life Holdings, Inc., filed as Exhibit 2.5 on Form 10-K, dated March 8, 2000, is hereby incorporated by reference.
 
  2.3     Agreement and Plan of Merger, dated December 17, 1999, by and between American Mutual Holding Company and AmerUs Life Holdings, Inc., filed as Exhibit 2.6 on Form 10-K, dated March 8, 2000, is hereby incorporated by reference.
 
  2.4     Amendment No. 1 to Agreement and Plan of Merger, dated February 18, 2000, by and between American Mutual Holding Company and AmerUs Life Holdings, Inc., filed as Exhibit 2.7 on Form 10-K, dated March 8, 2000, is hereby incorporated by reference.
 
  2.5     Letter Agreement, dated December 17, 1999, by and between American Mutual Holding Company and AmerUs Life Holdings, Inc., filed as Exhibit 2.8 on Form 10-K, dated March 8, 2000, is hereby incorporated by reference.
 
  2.6     Notification Agreement, dated as of February 18, 2000, by and among American Mutual Holding Company, AmerUs Life Holdings, Inc. and Bankers Trust Company, filed as Exhibit 2.9 on Form 10-K, dated March 8, 2000, is hereby incorporated by reference.
 
  2.7     Amendment No. 2 to Agreement and Plan of Merger, dated April 3, 2000, by and between American Mutual Holding Company and AmerUs Life Holdings, Inc., filed as Exhibit 2.10 on Form 10-Q, dated May 15, 2000, is hereby incorporated by reference.
 
  2.8     Amendment No. 1 to the Purchase Agreement, dated April 3, 2000, by and between American Mutual Holding Company and AmerUs Life Holdings, Inc., filed as Exhibit 2.11 on Form 10-Q, dated May 15, 2000, is hereby incorporated by reference.
 
  2.9     Amendment to Combination and Investment Agreement dated February 18, 2000 among American Mutual Holding Company, AmerUs Life Holdings, Inc., Indianapolis Life Insurance Company and The Indianapolis Life Group of Companies, Inc., dated September 18, 2000, filed as Exhibit 2.2 to Form 8-K12G3 of the Registrant dated September 21, 2000, is hereby incorporated by reference.
 
  2.10     Stock Purchase Agreement, dated January 1, 2002, by and among AmerUs Annuity Group Co., and the Stockholders of Family First Advanced Estate Planning and Family First Insurance Services, files as Exhibit 2.13 on Form 10-Q dated August 12, 2002, is hereby incorporated by reference.
 
  3.1     Amended and Restated Articles of Incorporation of the Registrant filed as Exhibit 3.1 on Form 10-Q, dated November 14, 2000 is hereby incorporated by reference.
 
  3.2     Amended and Restated Bylaws of the Registrant, filed as Exhibit 4.2 on Form S-8, dated June 13, 2003, 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.

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  4.2     Indenture dated as of February 3, 1997 between AmerUs Life Holdings, Inc. and Wilmington Trust Company relating to the Company’s 8.85% Junior Subordinated Debentures, Series A, filed as Exhibit 4.1 to the registration statement of AmerUs Life Holdings, Inc. and AmerUs Capital I on Form S-1, Registration Number, 333-13713, is hereby incorporated by reference.
 
  4.3     Guaranty Agreement dated as of February 3, 1997 between AmerUs Life Holdings, Inc., as guarantor, and Wilmington Trust Company, as trustee, relating to the 8.85% Capital Securities, Series A, issued by AmerUs Capital I, filed as Exhibit 4.4 to the registration statement on Form S-1, Registration Number, 333-13713, is hereby incorporated by reference.
  4.4     Certificate of Trust of AmerUs Capital III filed as Exhibit 4.7 to the registration statement of AmerUs Life Holdings, Inc., AmerUs Capital II and AmerUs Capital III, on Form S-3 (No. 333-50249), is hereby incorporated by reference.
 
  4.5     Senior Indenture, dated as of June 16, 1998, by and between AmerUs Life Holdings, Inc. and First Union National Bank, as Indenture Trustee, relating to the AmerUs Life Holdings, Inc.’s 6.95% Senior Notes, filed as Exhibit 4.14 on Form 10-Q, dated August 13, 1998, is hereby incorporated by reference.
 
  4.6     Subordinated Indenture, dated as of July 27, 1998, by and between AmerUs Life Holdings, Inc. and First Union National Bank, as Indenture Trustee, relating to AmerUs Life Holdings, Inc.’s 6.86% Junior Subordinated Deferrable Interest Debentures, filed as Exhibit 4.15 on Form 10-Q, dated August 13, 1998, is hereby incorporated by reference.
 
  4.7     First Supplement to Indenture dated February 3, 1997 among American Mutual Holding Company, AmerUs Life Holdings, Inc. and Wilmington Trust Company as Trustee, relating to the Company’s 8.85% Junior Subordinated Debentures, Series A, dated September 20, 2000, filed as Exhibit 4.14 on Form 10-Q dated November 14, 2000, is hereby incorporated by reference.
 
  4.8     Assignment and Assumption Agreement to Amended and Restated Trust Agreement, dated February 3, 1997 between American Mutual Holding Company and AmerUs Life Holdings, Inc., dated September 20, 2000, filed as Exhibit 4.15 on Form 10-Q dated November 14, 2000, is hereby incorporated by reference.
 
  4.9     Assignment and Assumption to Guaranty Agreement, dated February 3, 1997 between American Mutual Holding Company and AmerUs Life Holdings, Inc., dated September 20, 2000, filed as Exhibit 4.16 on Form 10-Q, dated November 14, 2000, is hereby incorporated by reference.
 
  4.10     First Supplement to 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.
 
  4.11     First Supplement to Purchase Contracts between American Mutual Holding Company and Holders, as specified, dated September 20, 2000, filed as Exhibit 4.21 on Form 10-Q, dated November 14, 2000, is hereby incorporated by reference.
 
  4.12     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.
 
  4.13     Indenture dated as of March 6, 2002 between AmerUs Group Co. and BNY Midwest Trust Company, as Trustee, filed as Exhibit 4.1 on form 8-K/ A, dated February 28, 2002, is hereby incorporated by reference.
 
  4.14     Registration Rights Agreement dated as of March 6, 2002 between AmerUs Group Co. and 2002, is hereby incorporated by reference.

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  4.15     Form of Purchase Contract Agreement between AmerUs Group Co. and Wachovia Bank, National Association (formerly known as First Union National Bank), as Purchase Contract Agent, filed as Exhibit 4.1 on Form 8-A12B, dated May 22, 2003, is hereby incorporated by reference.
 
  4.16     Form of Pledge Agreement among AmerUs Group Co., BNY Midwest Trust Company, as Collateral Agent, Custodial Agent and Securities Intermediary and Wachovia Bank, National Association (formerly known as First union National Bank), as Purchase Contract Agent, filed as Exhibit 4.2 on Form 8-A12B dated May 22, 2003, is hereby incorporated by reference.
 
  4.17     Form of Remarketing Agreement among AmerUs Group Co., Wachovia Bank, National Association (formerly known as First Union National Bank), as Purchase Contract Agent, and the Remarketing Agent named therein, filed as Exhibit 4.3 on Form 8-A12B dated May 22, 2003, is hereby incorporated by reference.
 
  4.18     Form of Income PRIDES (included in Exhibit 4.1 as Exhibit A thereto), filed as Exhibit 4.1 on Form 8-A12B, dated May 22, 2003, is hereby incorporated by reference.
 
  4.19     Officer’s Certificate attaching form of Senior Notes initially due 2008, filed as Exhibit 4.7 on Form 8-A12B, dated May 22, 2003, is hereby incorporated by reference.
 
  4.20     Form of Purchase Agreement between AmerUs Group Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, filed as Exhibit 1.1 on For 8-K, dated as of May 28, 2003, is hereby incorporated by reference.
 
  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.

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  10.10     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.
 
  10.11     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.
 
  10.12     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.
 
  10.13     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.
 
  10.14     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.
 
  10.15     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.
 
  10.16     1999 Non-Employee Stock Option Plan, dated April 19, 1999, filed on Form S-3, Registration Number 333-72643, is hereby incorporated by reference.
 
  10.17     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.
 
  10.18     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.
 
  10.19     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.
 
  10.20     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 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.
 
  10.21     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.
 
  10.22     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.
 
  10.23     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.
 
  10.24     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.

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  10.25     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.
 
  10.26     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.
 
  10.27     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.
 
  10.28     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.
 
  10.29*     Credit Agreement dated December 8, 2003, among AmerUs Group Co., Various Lending Institutions, the Bank of New York, Bank One, NA, Fleet National Bank and Mellon Bank, N.A. as Co-Syndication Agents and J P Morgan Chase Bank as Administrative Agent.
 
  10.30     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.
 
  10.31     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.
 
  10.32     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.
 
  10.33     Amendment No. 4 to Facility Agreement dated February 12, 1999