UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

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		42-1458424
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

699 Walnut Street
Des Moines, Iowa 50309-3948
(Address of principal executive offices)

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   þ     No  o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o  Yes      o  No

The number of shares outstanding of each of the Registrant’s classes of common stock on November 3, 2005 was as follows:

Common Stock           38,669,480 shares

Exhibit index — Page 42
Page 1 of 44

 

 

INDEX

				Page No.
PART I — FINANCIAL INFORMATION					4
Item 1.		Financial Statements			4
		Consolidated Balance Sheets September 30, 2005 (Unaudited) and December 31, 2004			4
		Consolidated Statements of Income (Unaudited) For the Three and Nine Months Ended September 30, 2005 and 2004			6
		Consolidated Statements of Comprehensive Income (Unaudited) For the Three and Nine Months Ended September 30, 2005 and 2004			7
		Consolidated Statements of Stockholders' Equity For the Nine Months Ended September 30, 2005 (Unaudited) and the Year Ended December 31, 2004			8
		Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 2005 and 2004			9
		Notes to Consolidated Financial Statements (Unaudited)			11
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			37
Item 4.		Controls and Procedures			38
PART II — OTHER INFORMATION					39
Item 1.		Legal Proceedings			39
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 6.		Exhibits			40
Signatures					41
Index to Exhibits					42
Amended and Restated Articles of Incorporation
Computation of Ratios of Earnings to Fixed Charges
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certification of Chief Executive Officer
Certification of Chief Financial Officer

SAFE HARBOR STATEMENT

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

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

AMERUS GROUP CO.

CONSOLIDATED BALANCE SHEETS

($ in thousands)

		September 30,				December 31,
		2005				2004
		(unaudited)
Assets
Investments:
Securities available-for-sale at fair value:
Fixed maturity securities		$	16,639,269			$	15,646,653
Equity securities			77,658				77,024
Short-term investments			—				2,979
Securities held for trading purposes at fair value:
Fixed maturity securities			1,464,793				1,718,125
Equity securities			33				15,468
Mortgage loans			968,604				865,733
Policy loans			483,115				486,071
Other investments			323,975				374,240
Total investments			19,957,447				19,186,293
Cash and cash equivalents			588,810				478,441
Accrued investment income			234,754				222,294
Premiums, fees and other receivables			41,128				39,688
Income taxes receivable			16,201				—
Reinsurance receivables			683,439				666,493
Deferred policy acquisition costs			1,617,995				1,248,009
Deferred sales inducements			226,653				137,538
Value of business acquired			357,394				374,792
Goodwill			228,869				226,291
Property and equipment			44,448				46,114
Other assets			304,088				296,409
Separate account assets			225,911				248,507
Total assets		$	24,527,137			$	23,170,869

See accompanying notes to consolidated financial statements.

AMERUS GROUP CO.

CONSOLIDATED BALANCE SHEETS
($ in thousands)

		September 30,				December 31,
		2005				2004
		(unaudited)
Liabilities and Stockholders’ Equity
Liabilities:
Policy reserves and policyowner funds:
Future life and annuity policy benefits		$	19,134,316			$	17,923,329
Policyowner funds			1,474,519				1,419,762
			20,608,835				19,343,091
Accrued expenses and other liabilities			999,399				837,514
Dividends payable to policyowners			296,237				322,037
Policy and contract claims			63,500				70,465
Income taxes payable			—				9,299
Deferred income taxes			78,847				145,332
Notes payable			556,509				571,155
Separate account liabilities			225,911				248,507
Total liabilities			22,829,238				21,547,400
Stockholders’ equity:
Preferred Stock, no par value, 20,000,000 shares authorized, 6,000,000 shares issued and outstanding in 2005			145,310				—
Common Stock, no par value, 230,000,000 shares authorized; 46,650,037 shares issued and 38,651,463 shares outstanding in 2005; 44,225,902 shares issued and 39,400,663 shares outstanding in 2004			46,650				44,226
Additional paid-in capital — common stock			1,229,181				1,198,379
Accumulated other comprehensive income			25,629				114,670
Unearned compensation			(2,089	)			(1,238	)
Retained earnings			567,585				431,911
Treasury stock, at cost (7,998,574 shares in 2005 and 4,825,239 shares in 2004)			(314,367	)			(164,479	)
Total stockholders’ equity			1,697,899				1,623,469
Total liabilities and stockholders’ equity		$	24,527,137			$	23,170,869

See accompanying notes to consolidated financial statements.

AMERUS GROUP CO.

CONSOLIDATED STATEMENTS OF INCOME

($ in thousands, except share data)

		For The Three Months Ended September 30,								For The Nine Months Ended September 30,
		2005				2004				2005				2004
						(unaudited)
Revenues:
Insurance premiums		$	54,603			$	64,582			$	178,150			$	199,110
Product charges			64,939				61,455				178,610				165,301
Net investment income			278,641				261,988				824,392				770,174
Realized/unrealized capital gains (losses)			23,362				2,513				(19,316	)			(42,122	)
Other income			11,487				11,458				35,272				35,364
			433,032				401,996				1,197,108				1,127,827
Benefits and expenses:
Policyowner benefits			211,211				225,572				624,997				632,351
Underwriting, acquisition and other expenses			40,854				39,918				119,881				111,461
Litigation following class certification, net			9,380				—				9,380				—
Amortization of deferred policy acquisition costs and value of business acquired			58,714				45,272				146,515				151,461
Dividends to policyowners			18,770				24,538				70,637				60,958
			338,929				335,300				971,410				956,231
Income from continuing operations			94,103				66,696				225,698				171,596
Interest expense			7,725				7,810				23,696				24,144
Early extinguishment of debt			19,082				—				19,082				—
Income before income tax expense			67,296				58,886				182,920				147,452
Income tax expense			28,677				16,024				47,246				26,074
Net income from continuing operations			38,619				42,862				135,674				121,378
Income from discontinued operations, net of tax			—				—				—				3,899
Net income before cumulative effect of change in accounting			38,619				42,862				135,674				125,277
Cumulative effect of change in accounting, net of tax			—				—				—				(510	)
Net income			38,619				42,862				135,674				124,767
Dividends on preferred stock			—				—				—				—
Net income available to common stockholders		$	38,619			$	42,862			$	135,674			$	124,767
Net income from continuing operations available to common stockholders per common share:
Basic		$	1.00			$	1.09			$	3.47			$	3.09
Diluted		$	0.91			$	1.04			$	3.17			$	2.97
Net income available to common stockholders per common share:
Basic		$	1.00			$	1.09			$	3.47			$	3.17
Diluted		$	0.91			$	1.04			$	3.17			$	3.06
Weighted average common shares outstanding:
Basic			38,488,294				39,237,840				39,102,190				39,307,268
Diluted			42,525,870				41,053,772				42,743,043				40,844,713

See accompanying notes to consolidated financial statements.

AMERUS GROUP CO.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in thousands)

		For The Three Months Ended September 30,								For The Nine Months Ended September 30,
		2005				2004				2005				2004
						(unaudited)
Net income		$	38,619			$	42,862			$	135,674			$	124,767
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period			(159,768	)			145,117				(140,019	)			14,369
Reclassification adjustment for (gains) losses included in net income			1,597				(5,415	)			3,032				29,519
Other comprehensive income (loss), before tax			(158,171	)			139,702				(136,987	)			43,888
Income tax (expense) benefit related to items of other comprehensive income			55,360				(48,896	)			47,946				(15,361	)
			(102,811	)			90,806				(89,041	)			28,527
Comprehensive income (loss)		$	(64,192	)		$	133,668			$	46,633			$	153,294

See accompanying notes to consolidated financial statements.

AMERUS GROUP CO.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2005 and the Year Ended December 31, 2004

($ in thousands)

										Additional				Accumulated
										Paid-In				Other																Total
		Preferred								Capital				Comprehensive				Unearned				Retained				Treasury				Stockholders’
		Stock				Common Stock				Common Stock				Income				Compensation				Earnings				Stock				Equity
Balance at December 31, 2003		$	—			$	43,836			$	1,184,237			$	84,519			$	(1,361	)		$	255,006			$	(156,426	)		$	1,409,811
2004:
Net income			—				—				—				—				—				192,642				—				192,642
Net unrealized gain on securities			—				—				—				33,959				—				—				—				33,959
Net unrealized gain on derivatives designated as cash flow hedges			—				—				—				420				—				—				—				420
Stock issued under various incentive plans, net of forfeitures			—				390				14,142				—				123				—				1,100				15,755
Purchase of treasury stock			—				—				—				—				—				—				(9,153	)			(9,153	)
Dividends declared on common stock			—				—				—				—				—				(15,737	)			—				(15,737	)
Minimum pension liability adjustment			—				—				—				(4,228	)			—				—				—				(4,228	)
Balance at December 31, 2004			—				44,226				1,198,379				114,670				(1,238	)			431,911				(164,479	)			1,623,469
2005 (unaudited):
Net income			—				—				—				—				—				135,674				—				135,674
Net unrealized loss on securities			—				—				—				(88,629	)			—				—				—				(88,629	)
Net unrealized loss on derivatives designated as cash flow hedges			—				—				—				(412	)			—				—				—				(412	)
Issuance of preferred stock			145,310				—				—				—				—				—				—				145,310
Conversion of OCEANs			—				1,675				9,069				—				—				—				—				10,744
Stock issued under various incentive plans, net of forfeitures			—				749				21,733				—				(851	)			—				840				22,471
Purchase of treasury stock			—				—				—				—				—				—				(150,728	)			(150,728	)
Balance at September 30, 2005		$	145,310			$	46,650			$	1,229,181			$	25,629			$	(2,089	)		$	567,585			$	(314,367	)		$	1,697,899

See accompanying notes to consolidated financial statements.

AMERUS GROUP CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

		For The Nine Months Ended September 30,
		2005				2004
		(unaudited)
Cash flows from operating activities
Net income		$	135,674			$	124,767
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of change in accounting			—				510
Gain on sale of discontinued operations			—				(3,899	)
Early extinguishment of debt			19,082				—
Product charges			(178,610	)			(165,301	)
Interest credited to policyowner account balances			387,072				356,201
Change in option value of indexed products and market value adjustments on total return strategy annuities			(19,403	)			(5,926	)
Realized/unrealized capital losses			19,316				42,122
DAC and VOBA amortization			146,515				151,461
DAC and VOBA capitalized			(369,807	)			(276,886	)
Change in:
Accrued investment income			(12,460	)			(12,340	)
Reinsurance receivables			(86,658	)			(71,970	)
Securities held for trading purposes:
Fixed maturities			227,204				325,145
Equity securities			15,413				(8,952	)
Short-term investments			—				579
Liabilities for future policy benefits			(119,360	)			22,420
Accrued expenses and other liabilities			163,645				401,684
Policy and contract claims and other policyowner funds			45,791				112,784
Income taxes:
Current			(25,500	)			(20,740	)
Deferred			(6,735	)			19,508
Other, net			38,058				27,857
Net cash provided by operating activities			379,237				1,019,024
Cash flows from investing activities:
Purchase of fixed maturities available-for-sale			(3,981,632	)			(4,271,467	)
Proceeds from sale of fixed maturities available-for-sale			1,522,642				2,115,844
Maturities, calls and principal reductions of fixed maturities available-for-sale			1,140,514				921,812
Purchase of equity securities			(7,340	)			(43,053	)
Proceeds from sale of equity securities			6,212				42,036
Change in short-term investments, net			3,860				28,691
Purchase of mortgage loans			(181,113	)			(86,676	)

AMERUS GROUP CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
($ in thousands)

		For The Nine Months Ended September 30,
		2005				2004
		(unaudited)
Proceeds from repayment and sale of mortgage loans			77,165				214,816
Purchase of other invested assets			(104,497	)			(55,512	)
Proceeds from sale of other invested assets			153,479				104,977
Change in policy loans, net			2,956				9,131
Proceeds from sale of discontinued operations			—				15,000
Other assets, net			(9,890	)			(3,652	)
Net cash used in investing activities			(1,377,644	)			(1,008,053	)
Cash flows from financing activities:
Deposits to policyowner account balances			2,448,422				1,655,736
Withdrawals from policyowner account balances			(1,325,088	)			(1,349,432	)
Change in debt, net			587				(50,028	)
Stock issued under various incentive plans, net of forfeitures			22,471				5,429
Purchase of treasury stock			(150,728	)			(9,153	)
Proceeds from issuance of senior notes			297,522				—
Proceeds from issuance of preferred stock			145,310				—
Retirement of OCEANs			(204,720	)
Retirement of senior notes			(125,000	)			—
Net cash provided by financing activities			1,108,776				252,552
Net increase in cash			110,369				263,523
Cash and cash equivalents at beginning of period			478,441				274,150
Cash and cash equivalents at end of period		$	588,810			$	537,673
Supplemental disclosure of cash activities:
Interest paid		$	17,321			$	23,947
Income taxes paid		$	67,466			$	28,281
Supplemental disclosure of non-cash operating activities:
Capitalization of deferred sales inducements		$	87,663			$	38,130

See accompanying notes to consolidated financial statements.

AMERUS GROUP CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) CONSOLIDATION AND BASIS OF PRESENTATION

     The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All adjustments were of a normal recurring nature, unless otherwise noted in the Notes to Consolidated Financial Statements. Operating results for the nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. The consolidated balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information and for capitalized terms not defined in this Form 10-Q, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

     The accompanying consolidated financial statements include the accounts and operations of the Company and its wholly-owned subsidiaries, principally AmerUs Life Insurance Company (ALIC), AmerUs Annuity Group Co. and its subsidiaries (collectively, AAG), AmerUs Capital Management Group, Inc. (ACM), and ILICO Holdings, Inc., the holding company of Indianapolis Life Insurance Company (ILIC) and its subsidiaries (collectively, ILICO). All significant intercompany transactions and balances have been eliminated in consolidation.

     The Company has certain stock-based employee compensation plans which are accounted for under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The majority of the plans are stock option plans for which no stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. There is also a long-term incentive plan that provides for payment in the Company’s common stock. Stock-based employee compensation expense for this plan is reflected in net income using variable accounting under APB Opinion No. 25. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation:

		For The Three Months Ended September 30,								For The Nine Months Ended September 30,
		2005				2004				2005				2004
		($ in thousands, except share data)
Net income available to common stockholders, as reported		$	38,619			$	42,862			$	135,674			$	124,767
Add: Stock-based compensation expense included in reported net income, net of related tax effects			1,439				—			$	2,185				—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(1,027	)			(926	)			(2,780	)			(3,007	)
Pro forma net income available to common stockholders		$	39,031			$	41,936			$	135,079			$	121,760
Earnings per common share:
Basic — as reported		$	1.00			$	1.09			$	3.47			$	3.17
Basic — pro forma		$	1.01			$	1.07			$	3.45			$	3.10
Diluted — as reported		$	0.91			$	1.04			$	3.17			$	3.06
Diluted — pro forma		$	0.92			$	1.02			$	3.16			$	2.98

     Certain amounts in the 2004 financial statements have been reclassified to conform to the 2005 financial statement presentation.

(2) EARNINGS PER SHARE

     Basic earnings per share of common stock are computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share assumes the issuance of common shares applicable to stock options, PRIDES^SM and the Company’s Optionally Convertible Equity-Linked Accreting Notes (OCEANs^SM) and is calculated using the treasury stock method.

     Diluted earnings per share applicable to the Company’s PRIDES securities are determined using the treasury stock method as it is currently anticipated that holders of the PRIDES are more likely to tender cash in the future for the securities’ forward contract. The PRIDES added 1,969,535 and 1,683,794 shares to the diluted earnings per share calculation for the three and nine months ended September 30, 2005, respectively, and 859,038 and 720,035 shares for the three and nine months ended September 30, 2004, respectively.

     Diluted earnings per share applicable to the Company’s OCEANs are determined using the guidance of the Financial Accounting Standards Board’s Emerging Issues Task Force Issue 04-8 (EITF 04-8), “The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” which was effective for periods ending after December 15, 2004. EITF 04-8 requires diluted earnings per share to be computed following the guidance of EITF 90-19, “Convertible Bonds with Issuer Option to Settle for Cash upon Conversion,” for securities such as the OCEANs which are considered to be “Instrument C” securities. The conversion spread portion of an Instrument C security should be included in diluted earnings per share based on the number of shares that would be required to be delivered if the instrument had been converted at the end of the period. The OCEANs added 1,119,235 and 1,061,545 shares for the diluted earnings per share calculation for the three and nine months ended September 30, 2005, respectively, and 284,879 shares and 177,647 shares for the three and nine months ended September 30, 2004, respectively. As of September 13, 2005, all of the OCEANs were converted with settlement in cash and common stock.

		For The Three Months Ended September 30,
		2005												2004
						Number of				Per Share								Number of				Per Share
		Net Income				Shares				Amount				Net Income				Shares				Amount
										($ in thousands, except share data)
Basic earnings per common share
Net Income from continuing operations available to common stockholders		$	38,619				38,488			$	1.00			$	42,862				39,238			$	1.09
Effect of dilutive securities
Options and other stock based compensation							949				(0.02	)							672				(0.02	)
PRIDES							1,970				(0.05	)							859				(0.02	)
OCEANs							1,119				(0.02	)							285				(0.01	)
Diluted earnings per common share		$	38,619				42,526			$	0.91			$	42,862				41,054			$	1.04

		For The Nine Months Ended September 30,
		2005												2004
						Number of				Per Share								Number of				Per Share
		Net Income				Shares				Amount				Net Income				Shares				Amount
										($ in thousands, except share data)
Basic earnings per common share
Net Income from continuing operations available to common stockholders		$	135,674				39,102			$	3.47			$	121,378				39,307			$	3.09
Effect of dilutive securities
Options and other stock based compensation							895				(0.07	)							640				(0.05	)
PRIDES							1,684				(0.14	)							720				(0.06	)
OCEANs							1,062				(0.09	)							178				(0.01	)
Diluted earnings per common share		$	135,674				42,743			$	3.17			$	121,378				40,845			$	2.97

(3) CLOSED BLOCK

     The Company has established two closed blocks, which we refer to collectively as the Closed Block. The first was established on June 30, 1996 in connection with the reorganization of ALIC from a mutual company to a stock company. The second was established as of March 31, 2000 in connection with the reorganization of ILIC from a mutual company to a stock company. Insurance policies which had a dividend scale in effect as of each Closed Block establishment date were included in the Closed Block. The Closed Block was designed to provide reasonable assurance to owners of insurance policies included therein that, after the reorganization of ALIC and ILIC, assets would be available to maintain the dividend scales and interest credits in effect prior to the reorganization if the experience underlying such scales and credits continues.

     Summarized financial information of the Closed Block as of September 30, 2005 and December 31, 2004 and for the three and nine months ended September 30, 2005 and 2004 are as follows:

		September 30,				December 31,
		2005				2004
		($ in thousands)
Liabilities:
Future life and annuity policy benefits		$	2,769,012			$	2,804,222
Policyowner funds			7,904				8,096
Accrued expenses and other liabilities			9,649				32,140
Dividends payable to policyowners			156,034				161,475
Policy and contract claims			12,737				14,705
Policyowner dividend obligation			132,843				152,975
Total Liabilities			3,088,179				3,173,613
Assets:
Fixed maturity securities available-for-sale at fair value			1,950,984				2,028,790
Mortgage loans			62,660				70,686
Policy loans			330,852				335,573
Other investments			—				34
Cash and cash equivalents			44,016				8,473
Accrued investment income			30,929				32,637
Premiums and fees receivable			47,604				59,369
Other assets			—				17
Total Assets			2,467,045				2,535,579
Maximum future earnings to be recognized from assets and liabilities of the Closed Block		$	621,134			$	638,034

		For The Three Months Ended September 30,
		2005				2004
		($ in thousands)
Operations:
Insurance premiums		$	37,582			$	45,859
Product charges			1,472				1,966
Net investment income			35,393				36,974
Realized gains (losses) on investments			(650	)			1,910
Policyowner benefits			(47,174	)			(54,314	)
Underwriting, acquisition and other expenses			(785	)			(678	)
Dividends to policyowners			(17,066	)			(22,651	)
Contribution from the Closed Block before income taxes		$	8,772			$	9,066

		For The Nine Months Ended September 30,
		2005				2004
		($ in thousands)
Operations:
Insurance premiums		$	122,467			$	143,138
Product charges			4,618				3,368
Net investment income			110,173				108,943
Realized losses on investments			(560	)			(1,732	)
Policyowner benefits			(142,577	)			(167,981	)
Underwriting, acquisition and other expenses			(1,973	)			(2,684	)
Dividends to policyowners			(65,057	)			(55,069	)
Contribution from the Closed Block before income taxes		$	27,091			$	27,983

(4) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

     The Company accounts for derivatives, including certain derivative instruments embedded in other contracts, at fair value. Accounting for gains and losses resulting from changes in the values of derivatives is dependent upon the use of the derivative and its qualification for special hedge accounting. In addition, we also have trading securities that back our total return strategy traditional annuity products. During the first nine months of 2005 and 2004, an unrealized loss has been recognized amounting to $14.9 million and $4.9 million, respectively, primarily from the change in fair value on the trading securities backing the total return strategy products. Additionally, realized/unrealized gains (losses) on investments included an unrealized loss of $1.7 million and an unrealized loss of $5.3 million for the first nine months of 2005 and 2004, respectively, primarily from the change in fair value on call options used as a natural hedge of embedded options within indexed products. Policyowner benefits included an offsetting adjustment to contract liabilities for fair value changes in options embedded within the indexed products and fair value changes on total return strategy annuity contracts. The total adjustment to policyowner benefits amounted to a decrease in expense of $19.4 million and $5.9 million for the first nine months of 2005 and 2004, respectively.

     The following table summarizes the income (loss) impact of the market value adjustments on trading securities and derivatives for the nine months ended September 30, 2005 and 2004:

		Nine Months Ended September 30, 2005
		Total Return				Indexed
		Products				Products				Other				Total
						($ in thousands)
Fixed maturity securities held for trading		$	(11,842	)		$	—			$	(3,077	)		$	(14,919	)
Options			—				(1,723	)			18				(1,705	)
Market value adjustment to liabilities			2,912				13,535				2,956				19,403
Cash flow hedge amortization			—				—				112				112
DAC amortization impact of net adjustments above			824				(5,531	)			—				(4,707	)
Pre-tax total			(8,106	)			6,281				9				(1,816	)
Income taxes			2,837				(2,198	)			(3	)			636
After-tax total		$	(5,269	)		$	4,083			$	6			$	(1,180	)

		Nine Months Ended September 30, 2004
		Total Return				Indexed
		Products				Products				Other				Total
						($ in thousands)
Fixed maturity securities held for trading		$	(4,511	)		$	—			$	(419	)		$	(4,930	)
Options			—				(2,606	)			(2,717	)			(5,323	)
Market value adjustment to liabilities			(2,480	)			7,400				1,006				5,926
Cash flow hedge amortization			—				—				(953	)			(953	)
DAC amortization impact of net adjustments above			—				(2,199	)			—				(2,199	)
Pre-tax total			(6,991	)			2,595				(3,083	)			(7,479	)
Income taxes			2,447				(908	)			1,079				2,618
After-tax total		$	(4,544	)		$	1,687			$	(2,004	)		$	(4,861	)

(5) NOTES PAYABLE

     The following table summarizes notes payable at September 30, 2005 and December 31, 2004:

		September 30,				December 31,
		2005				2004
		($ in thousands)
OCEANs converted in September 2005		$	—			$	189,212
PRIDES notes which settle on August 16, 2006			143,750				143,750
Senior notes bearing interest at 5.95% due August 2015			300,000				—
Senior notes bearing interest at 6.95% due June 2005			—				125,000
AmerUs Capital I 8.85 % Capital Securities Series A due February 1, 2027			50,755				50,755
Surplus notes bearing interest at 8.66% due on April 11, 2011			25,000				25,000
Federal Home Loan Bank community investment long-term and short-term advances with a weighted average interest rate of 6.37% at September 30, 2005 and 6.38% at December 31, 2004, maturing at various dates through June 12, 2012			12,154				12,588
Other notes bearing interest at rates ranging from 3.00% to 8.75% due from 2012 to 2028			24,850				24,850
		$	556,509			$	571,155

     The Company repaid the $125.0 million senior notes in June 2005 with a borrowing on its revolving credit agreement. On August 5, 2005, the Company issued $300.0 million of senior notes under its shelf registration filed with the Securities and Exchange Commission. The senior notes bear interest at 5.95% per year payable semi-annually on February 15 and August 15 of each year commencing on February 15, 2006. The senior notes mature on August 15, 2015 and may be redeemed at the Company’s option at any time, in whole or in part, subject to payment of a redemption premium. The net proceeds from the issuance were used to repay the revolving credit agreement borrowing, repurchase common stock and convert the $185.0 million OCEANs securities.

     In September 2005, holders of the $185.0 million aggregate original principal amount of OCEANs exercised their conversion rights which resulted in the Company’s issuance of 1.7 million shares of common stock and a cash payment of $203 million, including a $12.7 million prepayment premium. The prepayment premium and a write-off of $6.4 million of remaining unamortized debt issuance costs have been reported as early extinguishment of debt expense in the consolidated statement of income. In addition, the conversion resulted in the reclassification of an associated deferred tax liability of $10.7 million to additional paid-in capital on common stock.

(6) EQUITY TRANSACTIONS

     On September 26, 2005, the Company issued 6.0 million shares of Series A Non-Cumulative Perpetual Preferred Stock under its shelf registration with the Securities and Exchange Commission. Net proceeds amounted to $145.3 million after the related underwriting discount and other costs. Dividends on the preferred stock are non-cumulative and are payable quarterly, when, as and if declared by the board of directors, in whole or in part out of legally available funds. Dividends on the preferred stock accrued from September 26, 2005 with the first dividend payable on December 15, 2005 at a fixed rate of 7.25% per annum of the liquidation preference of $25 per share. Subject to certain restrictions, the Company may redeem the preferred stock at any time in whole, prior to September 15, 2010, at a cash redemption price equal to the greater of $25 per share or the sum of the present values of $25 per share plus any declared and unpaid dividends to the redemption date, without accumulation of any undeclared dividends, and any undeclared dividends for the dividend periods from the redemption date to and including the dividend payment date on September 15, 2010. On or after the dividend payment date in September 2010, the shares may be redeemed in whole or in part at a price of $25 per share or $150.0 million in the aggregate plus declared and unpaid dividends to the redemption date without accumulation of any undeclared dividends. The preferred stock has no stated maturity and is not convertible into any other security.

     The Company purchased 2.2 million common shares under an accelerated stock repurchase agreement effective August 18, 2005. The initial purchase price of the shares including commission amounted to $114.5 million. The repurchase program allows the Company to purchase the shares immediately, with the counterparty purchasing the shares in the open market. The initial purchase price was $51.32 per share, including commission, and is subject to a market price adjustment feature, which can be net-share settled, based on the actual cost of the shares purchased.

(7) FEDERAL INCOME TAXES

     The effective income tax rate for the nine months ended September 30, 2005 and the three and nine months ended September 30, 2004 varied from the prevailing corporate rate primarily as a result of tax exempt interest, dividends received deductions, a reduction in the income tax accrual and a reduction in the deferred tax valuation allowance. The accrual reduction was for the release of provisions originally established for potential tax adjustments which have been settled or eliminated and for overpayment of tax in prior years for which a refund is expected. The accrual was reduced $0.3 million and $13.4 million for the third quarter and first nine months of 2005, respectively. The accrual was reduced $3.7 million and $11.6 million, for the third quarter and first nine months of 2004, respectively. In addition, during the second quarter of 2004, a deferred tax valuation allowance was reduced $10.4 million as a result of the

realization of capital loss carry forwards. The effective income tax rate for the third quarter of 2005 varied from the prevailing corporate rate primarily due to additional income tax expense of $6.6 million incurred in the restructuring of the Company’s joint venture with Ameritas Life Insurance Corp. in which the Company’s interest in Ameritas Variable Life Insurance Company was sold to Ameritas Life Insurance Corp. The additional tax expense related to the reversal of taxable temporary differences during the quarter without the benefit of previously anticipated dividends received deductions. The effective income tax rate excluding the accrual changes, the additional tax on the joint venture sale and the valuation allowance reduction was 33.14% and 32.58% for the nine months ended September 30, 2005 and 2004, respectively.

(8) COMMITMENTS AND CONTINGENCIES

     In recent years, the life insurance industry, including the Company and its subsidiaries, has 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 and exemplary damages. In addition, regulatory bodies, such as state insurance departments and attorneys general, periodically make inquiries and conduct examinations concerning the Company’s compliance with insurance and other laws. The Company responds to such inquiries and cooperates with regulatory examinations in the ordinary course of business.

     On September 23, 2005, the general terms of a settlement of a statewide class action, Cheves v. American Investors Life Insurance Company, Family First Advanced Estate Planning and Family First Insurance Services et al., discussed in the Company’s Report on Form 10-Q for the Quarterly Period ended June 30, 2005, were preliminarily approved by the trial court and a hearing on the final approval is scheduled in November of 2005. A charge was taken with respect to this pending settlement during the three months ended September 30, 2005.

     On August 29, 2005, a nationwide class action lawsuit was filed against the Company and certain of its subsidiaries in the United States District Court for the Middle District of Florida on behalf of certain purchasers of insurance products who were over the age of 65 at the time of purchase. The plaintiffs allege that the defendants used improper practices in selling annuities to senior citizens because annuity payments allegedly begin only after the annuitant’s actuarial life expectancy and the plaintiffs seek class certification, injunctive and equitable relief, a variety of damages, including punitive damages, and attorneys fees. This case and other lawsuits discussed in the Company’s Annual Report on Form 10-K for the period ended December 31, 2004 and/or Quarterly Reports on Form 10-Q for the periods ended March 31, 2005 and June 30, 2005 have been consolidated and transferred to the United States District Court for the Eastern District of Pennsylvania.

     The Company’s pending litigation is subject to many uncertainties, and given its complexity and scope, the outcomes cannot be predicted. Given these uncertainties, the Company is unable to estimate the possible loss or range of loss that may result from all of the Company’s pending litigation. It is possible that the Company’s results of operations or cash flow in a particular quarterly or annual period could be materially affected by an ultimate unfavorable resolution of pending litigation and regulatory matters depending, in part, upon the results of operations or cash flow for such period. 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 the Company’s pending claims and legal actions, would have no material effect on its operations and financial position.

(9) EMPLOYEE BENEFIT PLANS

     The Company has a frozen defined benefit pension plan and also has defined benefit plans which provide supplemental retirement benefits to certain agents and executives. In addition to pension benefits, the Company also provides certain health care and life insurance benefits for retired employees. The following is a summary of net periodic benefit cost for these plans for the nine months ended September 30, 2005 and 2004:

		Nine Months Ended September 30,
		2005				2004
		($ in thousands)
Components of net periodic benefit cost:
Service cost		$	235			$	200
Interest cost			4,416				4,595
Expected return on plan assets			(3,647	)			(3,642	)
Amortization of prior service cost			66				66
Amortization of actuarial loss			535				191
Net periodic benefit cost			1,605				1,410
Curtailment			—				(951	)
Total expense		$	1,605			$	459

(10) ACCOUNTING DEVELOPMENTS

     In December 2004, the FASB issued SFAS 123 (revised 2004), “Share-Based Payment,” (SFAS 123R) which is a revision of SFAS 123, “Accounting for Stock-Based Compensation,” (SFAS 123). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on fair values. Pro forma disclosure of fair value information is no longer an alternative. The implementation date of the statement has been delayed to be effective for the fiscal year beginning after June 15, 2005. Adoption is to be made using either the modified prospective method or the modified retrospective method. The modified prospective method recognizes cost based on the requirements for all share-based payments granted after the effective date and for awards granted prior to the effective date that remain unvested prior to the effective date. The modified retrospective method includes the requirements of the modified prospective method but also permits restatement of financial statements based on pro forma amounts previously recognized under SFAS 123. Restatement can either be for all prior periods presented or prior interim periods of the year of adoption. Early adoption is permitted. The Company plans to adopt SFAS 123R effective January 1, 2006 using the modified prospective method. The pro forma impacts of recognizing fair value as permitted by SFAS 123 are disclosed in note 1 to the consolidated financial statements.

(11) OPERATING SEGMENTS

     The Company has two operating segments: Protection Products and Accumulation Products. Products generally distinguish a segment. A brief description of each segment follows:

     Protection Products. The primary product offerings consist of interest-sensitive whole life, term life, universal life and indexed life insurance policies. Indexed life is a type of universal life or interest-sensitive whole life product. These products are marketed on a national basis primarily through a Career Marketing Organization (CMO) system, a Personal Producing General Agent (PPGA) system, Independent Marketing Organizations (IMOs) and a New York distribution system.

     Accumulation Products. The primary product offerings consist of individual fixed annuities (comprised of traditional fixed annuities and indexed annuities), marketed on a national basis primarily through IMOs and independent brokers, and insurance contracts issued through funding agreements.

     The product offerings within each segment are of a very similar nature. Insurance premiums of the protection products segment are primarily from term life products. Product charges of the protection products segment are from interest-sensitive whole life, universal life and indexed life insurance products. Product charges of the accumulation products segment are from traditional fixed and indexed annuities. Due to the similarity of products within each segment, premiums and product charges are shown by segment and not by specific product type.

     The Company uses the same accounting policies and procedures to measure operating segment income and assets as it uses to measure its consolidated income from operations and assets with the exception of the elimination of certain items which management believes are not necessarily indicative of overall operating trends. These items are shown between segment pre-tax operating income and net income on the following operating segment tables and are as follows:

	1)		Realized/unrealized gains and losses on open block assets.
	2)		Market value changes and amortization of assets and liabilities associated with the accounting for derivatives, such as:

	•		Unrealized gains and losses on open block options and securities held for trading.
	•		Change in option value of indexed products and market value adjustments on total return strategy annuities.
	•		Cash flow hedge amortization.

	3)		Amortization of deferred policy acquisition costs (DAC) and value of business acquired (VOBA) related to the unrealized and realized gains and losses on the open block investments and the derivative adjustments.
	4)		Other income from non-insurance operations.
	5)		Litigation accruals following class certification, net of insurance recoveries.
	6)		Interest expense.
	7)		Early extinguishment of debt.
	8)		Income tax expense.
	9)		Income from discontinued operations.
	10)		Cumulative effect of changes in accounting.

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

     Premiums; product charges; policyowner benefits; insurance expenses; amortization of DAC, deferred sales inducements and VOBA; and dividends to policyowners are attributed directly to each operating segment. Net investment income and closed block realized capital gains and losses are allocated based on directly-related assets required for transacting the business of that segment. Other revenues and benefits and expenses which are deemed not to be associated with any specific segment are grouped together in the All Other category. These items primarily consist of holding company revenues and expenses, operations of the Company’s real estate management subsidiary, and accident and health insurance.

     Assets are segmented based on policy liabilities directly attributable to each segment. There are no significant intersegment transactions. Depreciation and amortization, excluding amortization of DAC, deferred sales inducements, and VOBA as previously discussed, are not significant. There have been no material changes in segment assets since December 31, 2004.

Operating Segment Income
($ in thousands)

		Three Months Ended September 30, 2005
		Protection				Accumulation								Total
		Products				Products				All Other				Consolidated
Revenues:
Insurance premiums		$	53,535			$	727			$	341			$	54,603
Product charges			51,350				13,589				—				64,939
Net investment income			88,930				189,332				379				278,641
Realized/unrealized losses on closed block investments			(650	)			—				—				(650	)
Other income:
Income from Independent Marketing Organizations			—				7,331				—				7,331
Other			879				2,551				566				3,996
			194,044				213,530				1,286				408,860
Benefits and expenses:
Policyowner benefits			87,918				130,529				(387	)			218,060
Underwriting, acquisition, and other expenses:
Operating expenses			19,473				7,230				8,278				34,981
Expenses from Independent Marketing Organizations			—				5,873				—				5,873
Amortization of DAC and VOBA, net of open block gain adjustment of $9,086			27,598				22,030				—				49,628
Dividends to policyowners			18,769				1				—				18,770
			153,758				165,663				7,891				327,312
Segment pre-tax operating income		$	40,286			$	47,867			$	(6,605	)			81,548
Realized/unrealized losses on open block assets															(793	)
Unrealized gains on open block options and trading investments															24,805
Change in option value of indexed products and market value adjustments on total return strategy annuities															6,814
Cash flow hedge amortization															35
Amortization of DAC and VOBA due to open block gains and losses															(9,086	)
Litigation following class certification, net															(9,380	)
Other income from non-insurance operations															160
Income from continuing operations															94,103
Interest (expense)															(7,725	)
Early extinguishment of debt															(19,082	)
Income tax (expense)															(28,677	)
Net income															38,619
Dividends on preferred stock															—
Net income available to common stockholders														$	38,619