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, 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)

 

 

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

 

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

 

 

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

 

Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ         No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o         No þ

 

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 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 the Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer þ           Accelerated filer           Non-accelerated filer

 

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

 

Aggregate market value of voting stock held by non-affiliates of the Registrant as of June 30, 2005: $1,877,389,803

 

Number of shares outstanding of each of the Registrant’s classes of common stock on March 13, 2006 was as follows:

 

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

Portions of the Registrant’s definitive proxy statement for the annual meeting of shareholders to be held May 4, 2006 are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

TABLE OF CONTENTS

 

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, 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 (1) our ability to sell our products, (2) the market value of our investments and consequently protection product and accumulation product margins and (3) the lapse rate and profitability of policies; (b) the performance of our investment portfolios which may be affected by general economic conditions, the continued credit quality of the companies whose securities we invest in and the impact of other investment transactions; (c) customer response to new products, distribution channels and marketing initiatives and increasing competition in the sale of insurance and annuities and the recruitment of sales representatives from companies that may have greater financial resources, broader arrays of products, higher ratings and stronger financial performance may impair our ability to retain existing customers, attract new customers and maintain our profitability; (d) our ratings and those of our subsidiaries by independent rating organizations which we believe are particularly important to the sale of our products; (e) mortality, morbidity, and other factors which may affect the profitability of our insurance products; (f) our ability to develop and maintain effective risk management policies and procedures and to maintain adequate reserves for future policy benefits and claims; (g) litigation or regulatory investigations or examinations; (h) regulatory changes, interpretations, initiatives or pronouncements, including those relating to the regulation of insurance companies and the regulation and sales of their products and the programs in which they are used; (i) 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; (j) the impact of changes in standards of accounting; (k) our ability to achieve anticipated levels of operational efficiencies and cost-saving initiatives and to meet cash requirements based upon projected liquidity sources; (l) our ability to integrate the business and operations of acquired entities; and (m) various other factors discussed below in “Item 1A. Risk Factors.”

 

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.

 

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 (the SEC). Our internet website address to obtain such filings is www.amerus.com.

 

Definitions

 

When used in this document, the terms “AmerUs,” “we,” “our,” “us” and “Company” 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 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 indexed life insurance policies. The primary offerings of the accumulation products segment are individual fixed annuities (comprised of traditional fixed annuities and 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 Insurance Holding Company in the United States, or MIHC, 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 MIHC 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:

 

 

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.

 

Organization as of December 31, 2005

 

 

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. 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 included therein 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 credits 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 policyowners.

 

Dispositions

 

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 $3.9 million. See further discussion in note 18 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.”

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 indexed life insurance products. Sales are presented as annualized premium which is in accordance with industry practice, and represent the amount of new business sold during the period. Sales are a performance metric which we use to measure the productivity of our distribution network and for compensation of sales and marketing employees and agents. The following table summarizes annualized premium by life insurance product (single premium sales represent 10% of the single premium received):

 

 

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

 

Interest-sensitive whole life insurance 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 2005 and 2004, as compared to each prior year, due to increasing consumer demand for indexed products and our withdrawal from certain tax-advantaged markets.

 

Term and other life insurance includes term life and whole life insurance products. Term life 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. Total traditional life insurance sales have declined to approximately 10% of our direct sales in 2005. We continue to de-emphasize our term products in response to market pricing conditions.

 

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 an 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 existing joint venture partners.

 

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 decreased in 2005 compared to 2004 due to pricing changes associated with products launched in January 2005. Pricing for the new universal life products reflect higher reinsurance costs and increased mortality expectations in the senior age markets. Sales of universal life decreased in 2004 compared to 2003 due to increased consumer demand for indexed life products. The weighted average crediting rate for universal life insurance liabilities was 4.47% for the year 2005, 4.62% for the year 2004 and 4.96% for the year 2003. The crediting rate has been lowered as a result of reduced investment yields associated with the persistently low interest rate environment. For the year ended December 31, 2005, sales of universal life insurance products represented 10% of direct sales for individual life insurance products sold. We also launched a new single premium universal life product in the fourth quarter of 2005 to address the growing wealth transfer needs of the senior market and we anticipate selling the products through traditional protection products’ and accumulation products’ distribution channels.

 

Indexed Life Products.  We also offer indexed life insurance products which are a type of universal life or interest-sensitive whole life product that allows the policyowner to elect one or more interest crediting strategies for a portion of the account value, including strategies linked to equity indices. For amounts allocated to indexed crediting strategies, interest is 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 interest credited is subject to a participation rate and an annual cap. Our gross margin on our indexed life products is similar to that of our traditional universal life and interest- sensitive whole life insurance products. However, due to the indexed crediting 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 interest we are contractually bound to credit on the 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 index declines. The structure of our product, together with the allocation of our 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. At December 31, 2005, the account value of indexed life products totaled $595.1 million of which approximately 85% is invested in indexed strategies.

 

Indexed life insurance sales increased in 2005 and 2004 due to continued growing customer demand for these products. We are a leading writer of indexed life products in the United States. Sales of the indexed life product, as a percentage of direct sales, were approximately 80% in 2005. We also launched a new single premium indexed life product in the fourth quarter of 2005 to address the growing wealth transfer needs of the senior market and we anticipate selling the products through traditional protection products’ and accumulation products’ distribution channels.

 

Collected premiums are measured in accordance with industry practice, and represent the amount of premiums received during the period. Collected premiums are a performance measure which we use to measure the productivity of our distribution network and 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:

 

 

Individual life insurance premiums collected before reinsurance increased in 2005 and 2004 as a result of increased indexed sales, which were partially offset by lower traditional and universal life collected premiums. ALIC has reinsurance arrangements that have reduced its retention to 10% of the net amount at risk on any one policy not to exceed company retention limits for the majority of policies issued from July 1, 1996 through July 31, 2004. Beginning August 1, 2004, ALIC began a program of gradually transitioning its retention on newly issued permanent policies to retain 100% of the first $0.5 million of risk and 50% of the next $1.0 million. ALIC’s retention limits on any one life vary by age and rating table and are generally between $0.15 million and $1.0 million. 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. As a result of these agreements, ceded reinsurance premium for ALIC was $94.0 million in 2005, $96.9 million in 2004 and $77.9 million in 2003.

 

ILIC has an indemnity reinsurance agreement covering 90% quota share of retained net amounts at risk for certain open block and closed block policies in force at June 30, 2002. Ceded premium from ILIC amounted to $123.9 million in 2005, $131.0 million in 2004 and $109.8 million in 2003. ILIC’s reinsurance agreements effectively reduce ILIC’s retention limit to between $0.15 million and $1.0 million.

The following table sets forth information regarding our life insurance in force for each date presented. Protection products face amounts in force is a performance measure utilized by investors, analysts and the Company to assess the Company’s position in the industry.

 

 

Distribution Systems

 

Our subsidiaries sell life insurance in 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 in 2005, are California, Florida, Illinois, Iowa, Minnesota, New York, Texas and Wisconsin. These states account for approximately 55% 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 four distribution channels. The four distribution channels and their sales percentage for 2005 amounted to: Independent Marketing Organizations (IMOs) — 38%, a Career Marketing Organization (CMO) system — 27%, a Personal Producing General Agent (PPGA) — 20% distribution system and a New York distribution system — 15%. We currently employ 19 regional vice presidents who are responsible for supervising these distribution systems within their assigned geographic regions.

 

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 110 IMOs under contract.

 

Under the CMO system, a contractual arrangement is entered into with the CMO for the sale of insurance products by the CMO’s agents. The CMO agents are primarily compensated by receiving a percentage of the first year commissions and renewal commissions on premiums subsequently collected on that business. In addition, the CMO agents receive certain retirement benefits and incentive trips. The CMO agents are independent contractors and are generally responsible for the expenses of their operations, including office and overhead expenses and the recruiting, selection, contracting, training and development of agents in their agencies. As of December 31, 2005, we had approximately 70 CMO general agents in 27 states, through which approximately 1,100 agents sell our products. While agents in the CMO system are non-exclusive, most use our products for a majority of their new 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 1,000 PPGA general agents, with approximately 4,100 agents. PPGAs are compensated by commissions on first year and renewal premiums collected on business written by themselves and the agents in their units.

 

The New York distribution system is comprised of a combination of IMOs and PPGAs in the tri-state area, which primarily focus on the state of New York. There were approximately 6,500 agents in the New York distribution system.

 

During 2005, 2004, and 2003, no single distribution organization accounted for more than 5%, 7% or 6%, respectively, of total direct sales.

 

Accumulation Products Segment

 

Products

 

Our accumulation products segment primary offerings consist of individual fixed 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 performance metric which we use to measure the productivity of our distribution network and for compensation of sales and marketing employees and agents. Our annuity deposits consisted of approximately 9% from traditional annuity products and approximately 91% from indexed annuity products in 2005. Funding agreement deposits totaled $26.2 million in 2005 and $85 million in 2004. The following table sets forth deposits for the periods indicated:

 

 

Traditional Annuity Products.  We offer a variety of interest rate crediting strategies on our traditional annuity products. At December 31, 2005, the account value of traditional annuities totaled $5.8 billion of which approximately 92% have minimum guarantee rates ranging from 3% to 4%. For traditional annuities with an account value of $4.6 billion, the credited rate was equal to the minimum guarantee rate, and as a result, the credited rate cannot be lowered. Traditional annuities with an account value of $0.7 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 250 basis points. The remaining multi-year period is generally within one year. Due to these limitations on the ability to lower interest crediting rates and the potential for additional credit defaults and lower reinvestment rates on investments, we could experience spread compression in future periods.

 

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 the profitability of our traditional annuity products.

 

Traditional annuity deposits decreased $74.3 million and $130.6 million in 2005 and 2004, respectively, as compared to the prior year periods as we have positioned the company to meet the increasing consumer demand for indexed products.

 

Indexed Annuities.  We offer 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 indexed annuity product sales in our investment portfolio. At December 31, 2005, the GAAP reserves of indexed annuities totaled $7.5 billion which provide guaranteed rates based on a cumulative floor over the term of the product. In addition, for deposits allocated to 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 interest we are contractually bound to credit on the 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 index declines. At December 31, 2005, approximately 55% of the indexed annuities are allocated to indexed strategies with the remainder allocated to bonds or other fixed type investments. The product spread on deposits allocated to our indexed strategy is computed as:

 

The yield we earn on our investment portfolio,
Less the cost of the call options,
Plus expected credits from indexed return strategies,
Less other interest credited to policyowners,
Equals product spread.

 

The product spread is a major driver of profitability of our indexed annuity products. The structure of our product, together with the allocation of our 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.

 

Indexed annuity sales increased in 2005 and 2004 as compared to the prior year periods due to continued high customer demand. We cede annuity business primarily through a modified coinsurance reinsurance agreement which cedes 25% of certain indexed annuity products amounting to $6.8 million, $10.1 million, and $25.1 million ceded premium in 2005, 2004, and 2003, 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. Deposit amounts are from existing business as all new sales were discontinued in 2002. 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 $26.2 million and $85 million in 2005 and 2004, respectively. 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, 2005, amounted to $986.2 million compared to $960.0 million outstanding at December 31, 2004.

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

 

 

Distribution Systems

 

We sell annuities in 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 in 2005, are Arizona, California, Florida, Michigan, North Carolina, Ohio, Pennsylvania and Texas. These states account for approximately 55% of our statutory premiums.

 

We direct our marketing efforts towards the asset accumulation, conservative savings and retirement markets. We market our annuity products on a national basis primarily through networks of independent agents contracted with us through IMOs. The independent agents are supervised by regional vice presidents and regional directors or IMOs. At December 31, 2005, we had approximately 17,700 independent agents licensed to sell our annuity products. In addition, the CMO and PPGA systems discussed previously are utilized to market certain annuity products.

 

Our IMOs consist principally of fifteen contracted organizations, including four wholly-owned organizations and one organization which principally sell 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 83%, 79% and 77% of our annuity sales in 2005, 2004 and 2003, respectively. 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.

 

During 2005, 2004 and 2003, no single independent agent accounted for more than 2% of total annuity sales.

 

Ameritas Joint Venture

 

We participated in a joint venture, the Ameritas Joint Venture, with Ameritas Life Insurance Corp. (or Ameritas) through ALIC’s 34% ownership in AMAL Corporation (or AMAL). In September 2005, we restructured the joint venture and sold our joint venture interest in Ameritas Variable Life Insurance Company, (or AVLIC), to Ameritas. As part of the restructuring, we received ownership of a non-controlling interest in Ameritas Investment Corp. which is a registered broker-dealer and subsidiary of AMAL.

 

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 and stronger insurer financial strength ratings. 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 indexed life production and are the twenty-first largest fixed life company, based on new premiums written, in the United States. We also rank fourth nationally in indexed annuity sales and eleventh nationally in fixed annuity sales through independent agents. The rankings are as of September 30, 2005, and are based on industry information from Advantage Compendium and LIMRA International.

 

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 individuals.

 

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 February 24, 2006 for our major insurance subsidiaries currently writing new business:

 

 

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. Fitch’s ratings for insurance companies range from “AAA” to “D”. Fitch indicates that “A” ratings are assigned to companies that possess strong capacity to meet policyowner and contract obligations. In evaluating a company’s financial and operating performance, 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 20, 2005, A.M. Best Company re-affirmed our ratings and our stable outlook. On September 16, 2005, Standard & Poor’s re-affirmed our ratings and our stable outlook. On September 19, 2005, Moody’s Investor Services re-affirmed our ratings and the negative outlook for the Company and our insurance and other subsidiaries as a result of uncertainties in connection with a lawsuit filed by the California Attorney General. 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. On October 28, 2005, Fitch re-affirmed our ratings and stable outlook.

 

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 $0.15 million and $1.0 million on any single life depending on the respective age and rating table. We also reinsure certain annuity business primarily on a modified coinsurance basis. Beginning in the third quarter of 2004, we entered into new reinsurance agreements that for certain new universal life products, we retain the first $0.5 million, we reinsure 50% of the coverage between $0.5 million and $1.5 million, and then fully reinsure the coverage in excess of $1.5 million. We increased our retention levels as a result of our favorable mortality experience and the overall increase in prices in the reinsurance market.

 

At December 31, 2005 and 2004, we ceded life insurance with a face amount of $81.0 billion with 26 unaffiliated reinsurers and life insurance with a face amount of $77.4 billion with 31 unaffiliated reinsurers, respectively. Ceded life insurance was approximately 79% of direct and assumed life insurance in force at December 31, 2005 and 2004. The following is a summary of our principal life reinsurers (which includes the reinsurer and their affiliated subsidiaries) as of December 31, 2005:

 

At December 31, 2005 and 2004, we ceded traditional and indexed annuities having reserves of $0.9 billion and $1.0 billion, respectively. The following is a summary of our principal annuity reinsurers as of December 31, 2005:

 

 

Employees

 

As of December 31, 2005, we had 1,190 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 a variety of state and federal laws and regulations as well as oversight by regulatory bodies. We are regulated by the states in which our insurance subsidiaries are domiciled and/or transact business. State insurance and other 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, 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, 2005, 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 our business in a variety of ways. Our products and sales practices are impacted by federal laws and regulations, such as those related to taxation and securities. Current and proposed federal measures that may significantly affect the insurance business include limitations on antitrust immunity, the applicability of securities laws to insurance products, 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.

 

Regulatory bodies may periodically make inquiries and conduct examinations concerning our compliance with insurance and other laws, such as those regulating the marketing and sale of our products. We cooperate with these regulators in conducting such inquiries and examinations in the ordinary course of our business.

Executive Officers of the Company

 

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

 

 

Roger K. Brooks retired as chairman of the board of directors and chief executive officer in December 2005.

 

THOMAS C. GODLASKY — Des Moines, Iowa.

 

Chairman, president and chief executive officer of AmerUs Group Co. since December 2005, president and chief operating officer of AmerUs Group Co. from November 2003 to December 2005, 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. Mr. Godlasky has been a director of AmerUs Group Co. since November 2003. His current term expires in May 2007.

 

GREGORY D. BOAL — Des Moines, Iowa.

 

Executive vice president and chief investment officer of AmerUs Group Co. and president of AmerUs Capital Management since November 2003. He was executive vice president of AmerUs Capital Management from June 2003 to November 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).

 

MICHAEL D. BOLTZ — Des Moines, Iowa.

 

Executive vice president and chief information officer of AmerUs Group Co. since September 2005. Prior to joining AmerUs Group Co. in September 2005, he was an executive with Charles Schwab Corporation in San Francisco starting in September 1991, most recently as vice president of capital markets, asset management products, and service technology.

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.

 

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.

 

CHRISTOPHER J. LITTLEFIELD — Des Moines, Iowa.

 

Executive vice president and general counsel of AmerUs Group Co. since January 2006. Prior to joining AmerUs Group Co. in January 2006, he was senior vice president, general counsel and secretary of The Dial Corporation since 2000. Mr. Littlefield held various management positions at The Dial Corporation from 1998 to 2000.

 

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.

 

MELINDA S. URION — Des Moines, Iowa.

 

Executive vice president, chief financial officer and treasurer 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 (now Ameriprise Financial Inc.), Minneapolis, Minnesota, including senior vice president of finance and chief financial officer from November 1995 to November 1997.

 

Code of Ethics

 

We have adopted a Code of Business Conduct and Ethics for our employees (Business Conduct Code) and a Code of Ethics for Senior Financial Officers (Financial Ethics Code) which respectively summarizes long-standing principles of conduct applicable to our employees and to our principal executive officer, principal financial officer, and principal accounting officer, to ensure our business is conducted with integrity and in compliance with the law. Copies of our Business and Financial Ethics Codes can be found on our website located at www.amerus.com. Any change to, or waiver of, the 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.

 

Risks Relating to Our Business

 

Severe interest rate fluctuations could (i) have a negative impact on policyowner behavior, (ii) adversely affect our ability to pay policyowner benefits and other business expenses and (iii) negatively impact our financial condition and operations.

 

Severe interest rate fluctuations could adversely affect the ability of our life insurance subsidiaries to pay policyowner benefits from operating and investment cash flows, cash on hand and other cash sources. We seek to limit the impact of changes in interest rates on the profitability and surplus of our life insurance operations by managing the duration of our assets relative to the duration of our liabilities. During a period of rising interest rates, policy surrenders, withdrawals and requests for policy loans may increase as customers seek to achieve higher returns. Despite our efforts to reduce the impact of rising interest rates, we may be required to sell assets to raise the cash necessary to respond to such surrenders, withdrawals and loans, thereby realizing capital losses on the assets sold. An increase in policy surrenders and withdrawals may also require us to accelerate amortization of policy acquisition costs relating to these contracts, which would further reduce our net income.

 

During periods of declining interest rates, borrowers may prepay or redeem mortgage loans and fixed maturity securities that we own, which would force us to reinvest the proceeds at lower interest rates. Most of our insurance and annuity products provide for guaranteed minimum yields and we are unable to lower our payouts to customers below these minimums in response to the lower return we will earn on our investments. In addition, it may be more difficult for us to maintain our desired spread between the investment income that we earn and our payouts to customers during periods of declining interest rates thereby reducing our profitability. A reduction in interest rates could also depress the market for our fixed annuity products. While policyowners may pay surrender charges to terminate policies, such terminations would reduce our future income.

 

The sensitivity of our investments to interest rates and other market risks are discussed in Part II, Item 7A of this Annual Report on Form 10-K (Report).

 

Our investment portfolio is subject to risks, including market fluctuations and general economic, market and political conditions which may diminish the value of our invested assets and affect our sales and profitability.

 

The market value of our investments and our investment performance, including yields and realization of gains and losses may vary depending on economic and market conditions. Such conditions include the shape of the yield curve, the level of interest rates and recognized equity and bond indices. Investment spreads are a critical part of our net income. When spreads narrow, our operating results may be adversely affected. Rates increased in 2005 after declining in previous years. If we again experience an overall lower interest rate environment, such as that prevailing during 2003 and 2004, our net investment income could decrease. Our investment returns, and thus our profitability, may also be adversely affected from time to time by conditions affecting our specific investments and, more generally, by stock, real estate and other market fluctuations and general economic, market and political conditions. Our ability to make a profit on insurance products and annuities depends in part on the returns on investments supporting our obligations under these products and the value of specific investments may fluctuate substantially depending on the foregoing conditions.

 

We are subject to the risk that the issuers of the fixed maturity and other debt securities we own will default on principal and interest payments, particularly if a major downturn in economic activity occurs. The occurrence of a major economic downturn, acts of corporate malfeasance or other events that adversely affect the issuers of these securities could cause the value of our fixed maturities portfolio and our net earnings to decline and the default rate of the fixed maturity securities in our investment portfolio to increase. A ratings downgrade affecting particular issuers or securities could also have a similar effect.

 

We may also have difficulty selling our privately placed fixed maturity securities and mortgage loan investments because they are less liquid than our publicly traded securities. If we require significant amounts of cash on short notice, we may have difficulty selling these investments at attractive prices, in a timely manner, or both.

We use derivative instruments to hedge various risks we face in our businesses. We enter into a variety of derivative instruments, including interest rate swaps, swap options, financial futures and call options, with a number of counterparties. If, however, our counterparties fail to honor their obligations under the derivative instruments, we will have failed to hedge the related risk effectively.

 

Any of the above-described factors could diminish the value of our invested assets and adversely affect our sales, profitability. or the investment return credited to our customers.

 

The composition of the Company’s investment portfolio, including the credit quality and other characteristics of the issuers of our investments, impairments and investment strategies are discussed in the section entitled “Investment Portfolio” in Part II, Item 7 of the Report.

 

We face competition from other insurance companies, banks and non-insurance financial service companies for customers and sales agents.

 

We compete for customers and agents and other distributors of life insurance and annuity products with a large number of other insurers and non-insurance financial service companies, such as banks, broker-dealers and mutual funds. We believe that this competition is based on a number of factors, including service, product features, scale, price, commission structure, financial strength, claims-paying ratings, credit ratings, business capabilities and name recognition. Many of our competitors have greater financial resources than we do, offer a broader array of products, are regulated differently and have more competitive pricing. Many other insurers have higher claims-paying ability and financial strength ratings than we do. National banks, with their large existing customer bases, may increasingly compete with insurers as a result of court rulings allowing national banks to sell annuity or other insurance products in some circumstances, and as a result of recently enacted legislation removing restrictions on bank affiliations with insurers. Specifically, the Gramm-Leach-Bliley Act of 1999 permits mergers that combine commercial banks, insurers and securities firms under one holding company. These developments may continue to increase our competition by substantially increasing the number, size and financial strength of our potential competitors who may be able to offer more competitive pricing than we can, due to economies of scale.

 

As described in the section entitled, “Competition,” in Part I, Item 1 of the Report, we have been a market leader in equity indexed products. As more companies, including companies with higher ratings and greater resources, enter this market, our sales could decrease.

 

If we are unable to attract and retain sales representatives and develop new distribution channels, sales of our products and services may be reduced.

 

We distribute our life insurance and annuity products and services through a variety of distribution channels, including our own sales organizations, independent brokers, banks, broker-dealers and other third-party marketing organizations. We must attract and retain sales representatives to sell our life insurance and annuity products. Our distributors are generally free to sell products from whichever provider they choose. Strong competition exists among financial services companies for effective sales representatives. We compete with other financial services companies for sales representatives primarily on the basis of our financial position, support services, compensation and product features. If our products or services do not meet our distributors’ needs, we may not be able to establish and maintain satisfactory relationships with distributors of our annuity and life insurance products. We have been competitive because we have developed innovative new products and rapidly brought them to market. Our future competitiveness may depend on our ability to develop new products and bring them to market quickly. Our competitiveness for such agents also depends upon the relationships we develop with these agents. If we are unable to attract and retain sufficient sales representatives to sell our products, our ability to compete, our sales of insurance and annuity products and our revenues would suffer.

 

Our accumulation segment products are, for example, distributed primarily through wholly-owned and proprietary marketing organizations. If customers become more receptive to other forms of distribution or if the performance of these organizations declines, our sales could decrease.

 

Our current distribution systems are described under the heading “Distribution Systems” in each of the descriptions of our protection and accumulation segments in Part I, Item 1 of the Report.

Future downgrades in the ratings of our life insurance subsidiaries or in our credit ratings could adversely affect sales of our life insurance and annuity products and our financial condition and results of operations.

 

Ratings with respect to claims-paying ability and financial strength are increasingly important factors in establishing the competitive position of insurance companies. Each rating agency reviews its ratings periodically and there can be no assurance that our current ratings will be maintained in the future. Maintaining our ratings depends on our results of operations and financial strength. If we fail to preserve the strength of our balance sheet and to maintain a capital structure that rating agencies deem suitable, it could result in a downgrading of our ratings. Our claims-paying and financial strength ratings are based upon factors relevant to policyowners and are not directed toward protection of investors in our securities.

 

A ratings downgrade, or the potential for a downgrade, of any of our life insurance subsidiaries could, among other things:

 

 

In addition to the financial strength ratings of our insurance subsidiaries, various rating agencies also publish credit ratings for our company. Rating agencies assign ratings based upon several factors, some of which relate to general economic conditions and circumstances outside of our control. In addition, rating agencies may employ different models and formulas to assess our financial strength, and may alter these models from time to time at their discretion. These models and formulas may include factors beyond our control such as general economic conditions. We cannot predict what actions rating agencies may take, or what actions we may be required to take in response to the actions of rating agencies, which could adversely affect our business. A downgrade in our credit ratings could increase our cost of borrowing, which could have a material adverse effect on our financial condition and results of operations.

 

For a listing of our current insurer financial strength ratings, see the section entitled, “Ratings” in Part I, Item 1 of the Report.

 

Litigation and regulatory investigations may harm our financial strength and reduce our profitability.

 

In recent years, the life insurance industry, including AmerUs Group Co. and our 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. In connection with our insurance operations, plaintiffs’ lawyers bring class actions and individual suits alleging, among other things, issues relating to sales or underwriting practices, claims payments and procedures, product design, disclosure, administration, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits and breaches of fiduciary or other duties to customers. Some of these claims and legal actions are in jurisdictions where juries are given substantial latitude in assessing damages, including punitive and exemplary damages, and the damages claimed and the amount of any probable and estimable liability, if any, may remain unknown for substantial periods of time. In addition, state and federal regulatory bodies, such as state insurance departments and attorneys general, periodically make inquiries and conduct examinations concerning our compliance with insurance and other laws. We respond to such inquiries and cooperate with regulatory examinations in the ordinary course of business. Regulatory changes, interpretations, initiatives and pronouncements related to the use of insurance products in certain tax advantaged programs and

plans could lead to additional litigation against us involving alleged misrepresentations by the selling insurance agents related to the tax benefits available pursuant to such programs or plans.

 

AmerUs Group Co. and certain of its subsidiaries are currently parties to purported class actions and other litigation described in Part I, Item 3 of the Report under the heading “Legal Proceedings.”

 

It is possible that some of the matters could require us to pay damages or make other expenditures or establish accruals in amounts that cannot be estimated as of a balance sheet date. Moreover, even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer significant reputational harm, which could have a material adverse effect on our business, financial condition and results of operations, including our ability to attract new customers, retain our current customers and recruit and retain employees as well as agents to sell our products. Additionally, regulatory inquiries may cause increased volatility in the price of stocks of companies in our industry.

 

Our sales and profitability could be adversely affected by regulatory changes applicable to our indexed products.

 

The insurance industry has treated certain indexed products as not being securities under the Securities Act of 1933. Last year, the NASD issued Notice to Members 05-50 addressing the responsibility of NASD members to supervise the sale by their associated persons of indexed annuities that are not registered under the federal securities laws and expressing concerns about the status of indexed annuities under the federal securities laws. Actions taken by the NASD members in response to the NASD’s notice could adversely impact the sale of our indexed products.

 

Treatment of our indexed products as securities would require additional registration and licensing of these products and the agents selling them, and would likely cause us to seek additional marketing relationships for these products. Registration and associated compliance could significantly increase our costs associated with selling indexed products. Since many of our producers are not currently licensed to sell securities, our sales could be adversely affected until our producers are appropriately licensed or we make other distribution arrangements for the sale of our indexed products.

 

In 2005, 80% of our direct protection product sales were indexed products and 91% of our accumulation product deposits were indexed products.

 

We may be exposed to unidentifiable or unanticipated liabilities if we cannot effectively manage our operational, legal, regulatory and other risks, which could negatively affect the amounts that our subsidiaries may distribute to us as dividends.

 

We have devoted significant resources to developing our risk management policies and procedures and we expect to continue to do so in the future. Nonetheless, these policies and procedures that identify, monitor and manage operational, legal, regulatory and other risks may not be fully effective. Many of the methods of managing risk and exposures are based upon the use of observed historical market behavior or statistics based on historical models. As a result, these methods may not accurately predict future exposures, which could be significantly greater than historical measures indicate. Other risk management methods depend upon the evaluation of information regarding markets, clients or other matters that are publicly available or otherwise accessible to us and that may not always be accurate, complete, up-to-date or properly evaluated. Management of operational, legal, regulatory and other risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events, and these policies and procedures may not be fully effective. If any of our subsidiaries are exposed to unexpected liabilities or losses due to a failure of our risk management policies or procedures, its business, financial condition and results of operations may be negatively affected, which may also reduce the amount that it can distribute to us as dividends.

 

Examples of some of our risk management policies are described in the section entitled “Critical Accounting Policies” in Part II, Item 7 and in Part II, Item 7A of the Report.

Our insurance subsidiaries are heavily regulated, and changes in insurance, securities and other regulation in the United States may reduce our profitability.

 

Our life insurance subsidiaries are subject to regulation by state regulators under the insurance laws of states in which they conduct business. ALIC’s domiciliary regulator is the Iowa Insurance Division. In addition, American’s domiciliary regulator is the Kansas Insurance Department; ILIC’s domiciliary regulator is the Indiana Insurance Department; and Bankers Life’s domiciliary regulator is the New York Insurance Department. In addition to their domiciliary regulators, these insurance subsidiaries are subject to regulation in their non-domiciliary states in which they do business by the insurance regulators of such states. State insurance regulators and the National Association of Insurance Commissioners continually reexamine existing laws and regulations, and may impose changes in the future. The purpose of such regulation is primarily to provide safeguards for policyowners rather than to protect the interests of shareholders. The insurance laws of the various states establish regulatory agencies with broad administrative powers including the authority to grant or revoke operating licenses and to regulate sales practices, investments, privacy protection, dividend-paying capacity, advertising, affiliate transactions, deposits of securities, the form and content of financial statements and insurance policies, contract forms, rates and pricing for our products, accounting practices, admittance of assets and the maintenance of specified reserves and capital.

 

Although the federal government does not directly regulate the insurance business, federal legislation and administrative policies in several areas, including pension regulation, age and sex discrimination, financial services regulation and securities regulation can significantly affect the insurance business. Certain of our protection products and accumulation products are innovative and relatively new. The regulatory framework at the state and federal level applicable to such products is evolving. The changing regulatory framework could affect the design of such products and our ability to sell certain products.

 

Our reserves established for future policy benefits and claims may prove inadequate, requiring us to increase liabilities.

 

Our earnings depend significantly upon the extent to which our actual claims experience is consistent with the assumptions used in setting prices for our products and establishing liabilities for future insurance and annuity policy benefits and claims. The liability that we have established for future policy benefits is based on assumptions concerning a number of factors, including the amount of premiums that we will receive in the future, rate of return on assets we purchase with premiums received, expected claims, expenses and persistency, which is the measurement of the percentage of insurance policies remaining in force from year to year as measured by premiums. However, due to the nature of the underlying risks and the high degree of uncertainty associated with the determination of the liabilities for unpaid policy benefits and claims, we cannot determine precisely the amounts which we will ultimately pay to settle these liabilities. As a result, we may experience volatility in the level of our reserves from period to period. To the extent that actual claims experience is less favorable than our underlying assumptions, we could be required to increase our liabilities, which may harm our financial strength and reduce our profitability.

 

If reinsurance becomes unavailable or more costly, our profitability could suffer.

 

As part of our risk management and capacity strategy, our insurance subsidiaries cede insurance to other insurance companies through reinsurance. However, we remain liable with respect to ceded insurance should any reinsurer fail to meet the obligations assumed by it. Additionally, we assume policies of other insurers. The cost of reinsurance is, in some cases, reflected in the premium rates charged by us. Under certain reinsurance agreements, the reinsurer may increase the rate it charges us for the reinsurance. Therefore, if the cost of reinsurance were to increase or if reinsurance were to become unavailable, we could be adversely affected.

 

Any regulatory or other adverse development affecting the ceding insurer could also have an adverse effect on us. Market conditions beyond our control influence the availability and cost of the reinsurance protection we purchase. Any decrease in the amount of our reinsurance will increase our risk of loss and any increase in the cost of our reinsurance will, absent a decrease in the amount of reinsurance, reduce our earnings. Accordingly, we may be forced to incur additional expenses for reinsurance or may not be able to obtain sufficient reinsurance on acceptable

terms, which could adversely affect our ability to write future business or result in our assuming more risk with respect to those policies we issue.

 

As a result of consolidation of the life reinsurance market and other market factors, capacity in the life reinsurance market has decreased. Further, life reinsurance is currently available at higher prices and on less favorable terms than those prevailing between 1997 and 2003. It is likely that this trend will continue, although we cannot predict to what extent. Further consolidation, regulatory developments, catastrophic events or other significant developments affecting the pricing and availability of reinsurance could materially harm the reinsurance market and our ability to enter into reinsurance contracts.

 

The Company’s current reinsurance practices and reinsurers (including their A.M. Best ratings) are described in the section entitled, “Reinsurance,” in Part I, Item 1 of the Report.

 

Payment of dividends by our life insurance subsidiaries to us is regulated by state insurance laws.

 

Payment of dividends by our life insurance subsidiaries to us is regulated by the state insurance laws of their respective jurisdictions of incorporation. Our significant life insurance subsidiaries are domiciled in Iowa, Kansas and Indiana. State insurance laws of each of these jurisdictions generally impose limitations on the ability of each of these subsidiaries to pay dividends to us. If any proposed dividend payment exceeds stated statutory limitations, our subsidiary must obtain the prior approval of the insurance commissioner of that state to pay that dividend amount. In addition, the amount of dividends that we actually receive from our subsidiaries depends upon their respective business and financial performance and may be less than the maximum amounts permitted under statutory limitations. If any of our life insurance subsidiaries cannot pay dividends or interest to us in the future, our ability to pay interest and dividends would be significantly reduced, which may adversely affect the trading prices of our common stock and our ability to service interest payments on our indebtedness.

 

For descriptions of applicable state law restrictions and our dividend capacity, see the section entitled, “Liquidity and Capital Resources,” in Part II, Item 7 of the Report.

 

We may experience volatility in net income due to 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. 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 the S& P 500 Index call options to hedge the growth in interest credited to the customer as provided by our 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.

 

The change in fair value for derivative financial instruments may not equal changes in values of underlying hedged assets or liabilities resulting in potential volatility in net income.

 

The Company’s derivatives portfolio is described under the section entitled “Investment Portfolio” in Part II, Item 7 and in notes 1 and 4 of our consolidated financial statements.

 

Changes in tax laws or their interpretation could make some of our products less attractive to consumers.

 

Changes in tax laws or their interpretation could make some of our products less attractive to consumers. For example, reductions in the federal income tax that investors are required to pay on long-term capital gains or dividends may provide an incentive for some of our customers and potential customers to shift assets into mutual funds and away from products, including life insurance and annuities, designed to defer taxes payable on investment returns. Because the income taxes payable on long-term capital gains and some dividends paid on stock have been reduced, investors may decide that the tax-deferral benefits of annuity contracts are less advantageous than the

potential after-tax income benefits of mutual funds or other investment products that provide dividends and long-term capital gains. A shift away from life insurance and annuity contracts and other tax-deferred products would reduce our income from sales of these products, as well as the assets upon which we earn investment income.

 

Additionally, the President’s Advisory Panel on Federal Tax Reform is currently considering wholesale changes to our tax system. Some alternatives under debate include the use of a consumption-based tax system, which might negatively impact the attractiveness of annuities and life insurance products. Estate tax reform continues to remain on Congress’s agenda. Elimination or significant reduction of the estate tax could also negatively affect sales of life insurance products.

 

We cannot predict whether any legislation will be enacted, what the specific terms of any such legislation would be or whether any such legislation would have a material adverse effect on our sales, financial condition, and results of operations.

 

We may need to fund deficiencies in our closed blocks; assets allocated to the closed blocks benefit only the holders of closed block policies.

 

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 included therein 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 credits 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. Any excess of cumulative favorable experience for closed block policies over unfavorable experience will be available for distribution over time to the closed block policyowners and will not be available to us.

 

AmerUs will continue to pay guaranteed benefits under the policies included in the closed block in accordance with their terms. Assets included in our closed block, cash flows generated by these assets and anticipated revenues from policies included in the closed block may not be sufficient to provide for the benefits guaranteed under these policies. If they are not sufficient, AmerUs must fund the shortfall from its general funds. Even if they are sufficient, we may choose for business reasons to support dividend payments on policies in either of the closed block with our general account funds.

 

Assets included in each closed block, cash flows generated by such assets and anticipated revenues from policies in each closed block will benefit only the holders of those policies. Unless the relevant state Insurance Commissioner consents to an earlier termination, each closed block will continue to be in effect until the date on which none of the policies in that closed block remain in force. We bear the costs of operating and managing the closed block and, accordingly, such costs were not funded as part of the assets allocated to the closed block. Any increase in such costs in the future would be borne by us.

 

The continued threat of terrorism and military actions may adversely affect our investment portfolio.

 

The continued threat of terrorism within the United States and abroad, and the military action and heightened security measures in response to that threat, may cause additional disruptions to commerce, reduced economic activity and continued volatility in markets throughout the world, which may decrease our net income, revenue and assets under management. Some of the assets in our investment portfolio, such as airline and leisure industry securities, have been adversely affected by the declines in the securities markets and economic activity caused by the terrorist attacks and the military action and heightened security measures. The effect of these events on the valuation of these investments is uncertain and there may be additional impairments.

 

Moreover, the cost and possibly the availability, in the future, of reinsurance covering terrorist attacks for our individual life, accidental death and dismemberment and disability insurance operations are uncertain. Although our ratings have not been affected by the terrorist attacks on the United States and remain stable, over time the rating

agencies could re-examine the ratings affecting the insurance industry generally, including the ratings of our life insurance subsidiaries. In addition, declines in the securities markets and reduced commercial and economic activity may impact our assumptions in assessing the value of intangibles from prior acquisitions and the amortization patterns for deferred policy acquisition costs. In the event there is a need to change our assumptions, this may lead to a material impairment of these assets.

 

The occurrence of events unanticipated in our disaster recovery systems and management continuity planning could impair our ability to conduct business effectively.

 

In the event of a disaster such as a natural catastrophe, an industrial accident, a blackout, a computer virus, a terrorist attack or war, unanticipated problems with our disaster recovery systems could have a material adverse impact on our ability to conduct business and on our results of operations and financial condition, particularly if those problems affect our computer-based data processing, transmission, storage and retrieval systems and destroy valuable data. Despite our implementation of network security measures, our servers could be subject to physical and electronic break-ins, and similar disruptions from unauthorized tampering with our computer systems. In addition, in the event that a significant number of our managers were unavailable in the event of a disaster, our ability to effectively conduct our business could be severely compromised.

 

We may experience volatility in net income due to recent changes in accounting for share-based payments.

 

In December 2004, the Financial Accounting Standards Board issued a revision to Statements of Financial Accounting Standards No. 123, “Share-Based Payment,” (SFAS 123R) which is a revision of Statements of Financial Accounting Standards No. 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 and will be effective for the fiscal year beginning after June 15, 2005. Net income will be reduced as a result of expensing such share-based payments upon adoption of SFAS 123R. The pro forma impacts of recognizing fair value, as permitted by SFAS 123, are disclosed in note 1 to the consolidated financial statements. That disclosure reflects our estimate of 2005 additional expense for share-based payments of approximately $2.6 million (after-tax). The implementation of more sophisticated modeling techniques may affect this expense amount.

 

We are exposed to potential risks from legislation requiring companies to evaluate their internal controls over financial reporting.

 

Under Section 404 of the Sarbanes-Oxley Act of 2002, effective as of year-end 2004, our auditors are required to attest to certain matters relating to our control environment. We believe that our control environment is effective; however, it is possible that adverse attestations with respect to either us or other companies in the industry, or in business in general could result in a loss of investor confidence and/or impact us or the environment in which we operate.

 

Future acquisitions that we make may result in certain risks for our business and operations.

 

We have made a number of significant acquisitions in the past and we may make additional acquisitions in the future. Acquisitions involve a number of risks, including the diversion of our management’s attention and other resources, the incurrence of unexpected liabilities and the loss of key personnel and clients of acquired companies. Any intangible assets that we acquire may have a negative impact on our financial statements. In addition, the success of our future acquisitions will depend in part on our ability to combine operations, integrate departments, systems and procedures and obtain cost savings and other efficiencies from the acquisitions. We may incur significant additional indebtedness, including assuming an acquired company’s debt, in connection with a future acquisition, which may have an adverse effect on our financial ratings and results. If we finance an acquisition through the issuance of our common stock, there may be a dilution of the ownership interests represented by our common stock. Failure to effectively consummate or manage our future acquisitions may adversely affect our existing businesses and harm our operational results.

Applicable laws and our Amended and Restated Articles of Incorporation and Amended and Restated By-laws may discourage takeovers and business combinations that our stockholders and other security holders might consider in their best interests.

 

State laws and our Amended and Restated Articles of Incorporation and Amended and Restated By-laws may delay, defer, prevent, or render more difficult a takeover attempt that our stockholders and other security holders might consider to be in their best interests. For instance, they may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future. State laws and our Amended and Restated Articles of Incorporation and Amended and Restated By-laws may also make it difficult for our stockholders to replace or remove our management, which may also delay, defer or prevent a change in our control, which may not be in the best interests of our stockholders.

 

Laws of the various states where each of our significant life insurance subsidiaries is located require the prior approval of the relevant state insurance commissioner for any change of control in AmerUs and/or that subsidiary as specified under such state laws.

 

Provisions in our Amended and Restated Articles of Incorporation and Amended and Restated By-laws may delay, defer or prevent a takeover attempt, including provisions:

 

 

We file various reports under the Securities Exchange Act of 1934 (the Exchange Act) which provide required business, market, financial and other information on a quarterly and annual basis. These reports are subject to review and comment by the SEC’s staff. We respond to and resolve any such comments in a timely manner. There currently are no unresolved comments on our Exchange Act filings which have been outstanding for more than 180 days at December 31, 2005.

 

We own or lease approximately 360,000 square feet of office space. We lease approximately 260,000 square fee of space for our executive offices, corporate operations and protection products segment operations in Des Moines, Iowa; Woodbury, New York; and Indianapolis, Indiana. We own approximately 100,000 square feet of office space in Topeka, Kansas where our accumulation products operations are conducted. Approximately 45,000 square feet of our owned office space is leased to third parties.

 

AmerUs is routinely involved in litigation and other proceedings, including class actions, reinsurance claims and regulatory proceedings arising in the ordinary course of its business. In recent years, the life insurance industry, including AmerUs Group Co. and its subsidiaries, has been subject to an increase in litigation pursued on behalf of both individual and purported classes of insurance purchasers, questioning the conduct of insurers and their agents in the marketing of their products. AmerUs’ pending lawsuits raise difficult and complicated factual and legal issues and are subject to many uncertainties and complexities, including, but not limited to, the underlying facts of each matter, novel legal issues, variations between jurisdictions in which matters are being litigated, differences in applicable laws and judicial interpretations, the length of time before many of these matters might be resolved by settlement or through litigation and, in some cases, the fact that many of these matters are putative class actions in which a class has not been certified and in which the purported class may not be clearly defined, the fact that many

of these matters involve multi-state class actions in which the applicable law(s) for the claims at issue is in dispute and therefore unclear, and the current challenging legal environment faced by large corporations and insurance companies. In addition, state and federal regulatory bodies, such as state insurance departments and attorneys general, periodically make inquiries and conduct examinations concerning compliance by AmerUs and others with applicable insurance and other laws. AmerUs responds to such inquiries and cooperates with regulatory examinations in the ordinary course of business.

 

During 2005 nationwide class actions were filed on April 7, 2005 (United States District Court for the Central District of California), April 25, 2005 (United States District Court for the District of Kansas), May 19, 2005 (United States District Court for Eastern District of Pennsylvania), August 29, 2005 (United States District Court for the Middle District of Florida), November 8, 2005 (United States District Court for the Eastern District of Pennsylvania) and December 8, 2005 (United States District Court for the Eastern District of Pennsylvania) on behalf of certain purchasers of our products against AmerUs Group Co. and/or certain of its subsidiaries (including American and ALIC). On July 7, 2005 a statewide class action was also filed on behalf of certain purchasers of our products in the United States District Court for the Middle District of Florida against many of these same AmerUs entities. The aforementioned lawsuits relate to the use of purportedly inappropriate sales practices and products in the senior citizen market. The complaints allege, among other things, the unauthorized practice of law involving the marketing of estate or financial planning services, the lack of suitability of the products, the improper manner in which they were sold, including pretext sales and non-disclosure of surrender charges, as well as other violations of the state consumer and insurance laws. The plaintiffs in the lawsuits seek compensatory damages, rescission, injunctive relief, treble and/or punitive damages, attorneys fees and other relief and damages. In November 2005, each of the aforementioned lawsuits as well as certain other statewide class actions and individual lawsuits were assigned to the United States District Court for the Eastern District of Pennsylvania for coordinated and consolidated pretrial proceedings.

 

On February 10, 2005, the California Attorney General and the Insurance Commissioner of the State of California filed suit in the California Superior Court for the County of Los Angeles against American and certain other subsidiaries of AmerUs Group Co. alleging the unauthorized practice of law, claims related to the suitability of the products for, and the manner in which they were sold to, the senior citizen market, including violations of California’s insurance code and unfair competition laws. The plaintiffs seek civil penalties, restitution, injunctive relief and other relief and damages.

 

AmerUs Group Co. and certain of its subsidiaries are among the defendants in a lawsuit by the Attorney General of Pennsylvania on behalf of certain Pennsylvania residents, some of whom were purchasers of our products alleging, in part, claims related to the marketing of our products to senior citizens and violations of consumer protection laws. The plaintiffs seek fines, restitution, injunctive and other relief.

 

In November 2005, the Superior Court of the State of California for the County of San Luis Obispo approved a settlement of a statewide class of annuity holders and purchasers of estate planning services, Cheves v American Investors Life Insurance Company, Family First Estate Planning and Family First Insurance Services, et al. The allegations in this case involved claims of breach of contract, misrepresentation, unfair competition and deceptive trade practices. Given the charges previously taken regarding this matter, AmerUs does not anticipate that any additional charges will be required as a result of this settlement.

 

In these matters, plaintiffs seek a variety of remedies including equitable relief in the form of injunctive and other remedies and monetary relief in the form of contractual and extra-contractual damages. Some of these claims and legal actions are in jurisdictions where juries are given substantial latitude in assessing damages, including punitive and exemplary damages. Often more specific information beyond the type of relief sought is not available because plaintiffs have not requested more specific relief in their court pleadings. In our experience, monetary demands in plaintiffs’ court pleadings bear little relation to the ultimate loss, if any, to AmerUs. Estimates of possible losses or ranges of losses for particular matters cannot in the ordinary course be made with a reasonable degree of certainty. It is possible that AmerUs’ 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.

 

None.

 

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

 

 

Holders

 

As of March 13, 2006, the number of holders of record of each class of common equity was as follows:

 

 

Issuer Purchases of Equity Securities

 

The following table sets forth information regarding purchases of equity securities for the fourth quarter of 2005:

 

 

 

Equity Compensation Plan Information

 

The following table sets forth information regarding our equity compensation plans as of December 31, 2005:

 

 

 

 

Equity Compensation Plans not Approved by Security Holders

 

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 have declared and paid an annual dividend of $0.40 per share of common stock in 2003 through 2005. 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, 2005.

 

On May 28, 2003, we issued $125 million of PRIDES^SM. 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.

 

We have declared and paid a quarterly dividend of $0.40278 per share of Series A Non-Cumulative Perpetual Preferred Stock (“the “Preferred Stock”) in December 2005. The declaration and payment of quarterly 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. During any dividend period, if we have not declared and paid full dividends for the latest completed dividend period on the Preferred Stock, we may not declare or pay dividends on our common stock.

 

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 2004 results, our insurance subsidiaries could have paid approximately $186 million in dividends in 2005 without obtaining regulatory approval. Our insurance subsidiaries paid to us approximately $62 million in dividends in 2005. Based on 2005 results, our insurance subsidiaries can pay an estimated $143 million in dividends in 2006 without obtaining regulatory approval. See further discussion about the limitation of our insurance subsidiaries’ ability to pay dividends in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

 

 

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

 

 

 

 

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.

 

Nature of Operations

 

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

 

Financial Highlights

 

Our financial highlights are as follows:

 

 

 

 

Operating segment income increased for the protection products segment in 2005 compared to 2004 primarily due to the growth in the indexed life business and higher open block margins. Operating segment income increased for the protection products segment in 2004 compared to 2003 primarily as a result of increased open block margins and lower operating expenses. The growth in assets under management and a continued improvement in product margins from our indexed annuities increased accumulation products segment earnings in 2005 and 2004 compared to the respective prior years. The increased operating segment income in 2005 and 2004 for the protection products and accumulation products segments was partially reduced by higher other operations’ losses resulting primarily from lower net investment income and additional holding company expenses.

 

Net income decreased in 2005 compared to 2004. Although operating segment results increased between years, net litigation costs following class certification, early extinguishment of debt costs and a higher effective income tax rate offset the growth. Net income increased in 2004 compared to 2003 primarily as a result of higher operating segment income, reductions in income tax accruals and deferred income tax asset valuation allowances, and the gain on the sale of our residential financing subsidiary. The increase was partially offset by realized and unrealized losses on assets.

Total assets increased $1.7 billion in 2005 primarily as a result of net cash received from collected premiums and deposits and positive cash flows from operating activities. Liabilities increased $1.6 billion primarily due to policy reserves and policyowner funds which rose due to the higher volume of insurance policies in force and increased annuity sales. Stockholders’ equity increased $78.8 million during 2005 primarily as a result of 2005 net income of $191.2 million, the issuance of preferred stock which resulted in net proceeds of $144.8 million, stock issued under incentive plans amounting to $23.3 million, and the conversion of OCEANs amounting to $10.7 million. The additions to equity were reduced by treasury stock purchases which decreased equity $154.6 million, unrealized gains on available-for-sale investments which declined $118.2 million, and dividends declared on common and preferred stock in the fourth quarter of 2005 which decreased equity $18.3 million. The unrealized gains included in accumulated other comprehensive income are presented after related adjustments to DAC, VOBA, capitalized bonus interest, closed block policyowner dividend obligation, unearned revenue reserves and deferred income taxes.

 

Segment Income

 

We have two operating segments: Protection Products and Accumulation Products. 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 as follows:

 

 

 

 

 4) Restructuring costs.

 

 5) Certain reinsurance adjustments.

 

 6) Other income from non-insurance operations.

 

 7) Litigation accruals following class certification, net of insurance recoveries.

 

 8) Interest expense.

 

 9) Early extinguishment of debt.

 

10) Income tax expense.

 

11) Income from discontinued operations.

 

12) 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 our operating segments.

 

Protection Products

 

Our protection products segment reflects the operating results primarily from our interest-sensitive whole life, term life, universal life and indexed life insurance policies. These products are marketed on a national basis

primarily through IMOs, CMOs, a PPGA distribution system and a New York distribution system. When protection products are sold, we invest the premiums we receive in our investment portfolio and establish a liability representing our commitment to the policyowner. We manage investment spread by seeking to maximize the return on these invested assets, consistent with our asset/liability and credit quality policies. 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. In addition, the protection products segment includes the results of the closed block. Protection products in force totaled $102.5 billion at December 31, 2005, $97.5 billion at December 31, 2004 and $98.6 billion at December 31, 2003. Protection products in force is a performance measure utilized by investors, analysts and the Company to assess the Company’s position in the industry. A summary of our protection products segment operations follows:

 

 

Pre-tax operating income from our protection products increased 18% in 2005 and 9% in 2004 compared to the respective prior years. The increase in 2005 was primarily due to the growth in the indexed life business and higher open block product margins. The increase in 2004 was primarily due to higher open block product margins and lower operating expenses. 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 by Product table presented in “Item 1. Business — Protection Products Segment,” direct first year annualized premiums decreased 5% in 2005 compared to 2004 and increased 5% in 2004 compared to 2003. The decrease in 2005 sales resulted from lower interest-sensitive whole life product sales due to our withdrawal from certain tax-advantaged markets and lower universal life product sales due to pricing changes associated with products launched in January 2005. These lower sales were partially offset by higher indexed life product sales as consumer demand for such indexed products continued to increase. The indexed life product allows the policyowner to elect an interest crediting strategy for a portion of the account value whereby interest is credited based in part on increases in the applicable indices, primarily the S&P 500 Index, excluding dividends. The interest credited is subject to a participation rate and an annual cap. Sales of indexed life products were $94.1 million in 2005 as compared to $74.6 million in 2004 and $51.6 million in 2003. We are the leading writer of indexed life products in the United States. The increase in 2004 sales resulted from higher indexed life product sales partially offset by decreased traditional and universal life insurance product sales. This change in sales mix reflects continued customer demand for indexed products and the uncertainty in government tax policy and regulation.

We recognize premiums on traditional life insurance policies as revenues when the premiums are due. Amounts received as payments for universal life and indexed life insurance policies are not recorded as premium revenue, but are instead recorded as a policyowner liability. Revenues from the universal life and indexed life policies consist of charges for the cost of insurance, policy administration and policy surrender and are shown as product charges. All revenue is reported net of reinsurance ceded.

 

Insurance premium revenue in 2005 and 2004 was lower than the respective prior years primarily due to lower sales of traditional products and a decline in closed block in force business. Product charge revenue in 2005 and 2004 was higher than the respective prior years primarily due to the growth in the indexed life block of business.

 

Persistency.  Persistency, which we measure in terms of a lapse rate, is a key driver of our business as it refers to the policies which remain in our block of business. A low lapse rate means higher persistency indicating more business is remaining in force to generate future revenues. Annualized lapse rates were 6.2% in 2005 compared to 6.7% in 2004 and 6.5% in 2003. Our persistency experience remained within our pricing assumptions.

 

Net Investment Income.  Net investment income is a key driver of our business as it reflects earnings on our invested assets. Net investment income increased in 2005 and 2004 compared to the respective prior years. The increase in 2005 and 2004 was primarily due to growth in average protection products assets which were approximately $278 and $318 million higher than the respective prior years. The earned rate of the investment portfolio was 6.57% in 2005 compared to 6.44% in 2004 and 6.63% in 2003. Rates increased in 2005 following the prior years’ declining rates associated with the overall lower interest rate environment in 2004 and 2003.

 

Mortality and Benefit Expense.  Mortality is a key driver of our business as it impacts the amount of our benefit expense. We utilize reinsurance to reduce the effects of mortality risk. Benefit expense was lower in 2005 as compared to 2004 due to favorable mortality in the open block and due to the decline in the in force closed block business. Although we experienced unfavorable mortality in 2004 as compared to 2003, our experience remained within our pricing assumptions. In addition, we had increased reinsurance recoveries in 2004 and 2003, 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 are costs of our operations. Expenses increased in 2005 compared to 2004 primarily due to increased state taxes, higher employee benefit costs and additional expenses of moving ILIC post issue policy service and data center activities from Woodbury, New York to Des Moines, Iowa. Expenses decreased in 2004 compared to 2003 primarily due to lower operating expenses resulting from the restructuring activities to integrate the ILICO life operations and also due to increased reimbursement from reinsurers of non-deferrable commission and expense allowances, as more policies were subject to reinsurance.

 

Amortization of DAC and VOBA.  The amortization of DAC and VOBA are expense items which increased in 2005 and 2004 as compared to the respective prior years. DAC and VOBA are generally amortized in proportion to policy gross margins which increased in both years, resulting in higher amortization expense.

 

Dividends to Policyowners.  In addition to basic policyowner dividends, dividend expense includes increases or decreases to the closed block policyowner dividend obligation liability carried on the consolidated balance sheet. The actual results of the closed block are adjusted to equal the expected earnings based on the actuarial calculation at the time of formation of the closed block (which we refer to as the closed block glide path). The adjustment to have the closed block operating results equal the closed block glide path is made to dividend expense. If the actual results for the period exceed the closed block glide path, increased dividend expense is recorded as a policyowner dividend obligation to reduce the actual closed block results. For actual results less than the closed block glide path, dividend expense is reduced to increase the actual closed block results. As a result of this accounting treatment, operating earnings from the closed block only include the predetermined closed block glide path.

 

Dividend expense increased for 2005 compared to 2004 due to increased closed block earnings, resulting from favorable closed block surrender activity and lower closed block basic policyowner dividends. Dividend expense decreased for 2004 compared to 2003 primarily due to reduced closed block earnings, resulting from lower closed block revenues and net investment income as the closed block in force business continues to decline.

Outlook.  We expect to continue to develop and sell indexed life products to meet the increasing consumer demand which we expect will favorably impact our product margins. We also expect to realize operating efficiencies as we continue to centralize our administrative functions.

 

Accumulation Products

 

Our accumulation products segment reflects the operating results primarily from our 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 the policyowner. We manage product spread by seeking to maximize the return on our invested assets consistent with our asset/liability management and credit quality policies. When appropriate, we periodically reset the interest rates credited to our policyowner liability. Accumulation products reserves totaled $13.5 billion at December 31, 2005, $12.3 billion at December 31, 2004 and $11.7 billion at December 31, 2003. A summary of our accumulation products segment operations follows:

 

 

Pre-tax operating income from our accumulation products operations increased 12% in 2005 and 25% in 2004 compared to the respective prior years. The 2005 increase was primarily due to higher assets under management. A decline in product spreads partially offset the increase in earnings from asset growth. The 2004 increase was primarily due to higher assets under management and improved product spreads. The 2004 increase was partially offset by lower contributions from IMO operations. 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 amount of new business sold during the period. Deposits are a performance metric which we use to measure the productivity of our distribution network and for compensation of sales and marketing employees and agents. As shown in the Deposits by Product table presented in “Item 1. Business — Accumulation Products Segment,” total annuity deposits

increased 43% in 2005 and 5% in 2004 as compared to the respective prior years. The increases in 2005 and 2004 were driven by continued consumer demand for indexed products.

 

We placed fixed rate funding agreements totaling $26.2 million in 2005 and $85.0 million in 2004. 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. Total funding agreements outstanding as of December 31, 2005 amounted to $986.2 million compared to $960.0 million outstanding at December 31, 2004.

 

The deposits we receive on accumulation products are not recorded as revenue but instead as a policyowner liability. Surrender charges collected on accumulation products are recorded as revenue and shown as a product charge. Product charges increased in 2005 and 2004 as compared to the respective prior years due to the growth in the business.

 

Persistency.  Persistency, which we measure in terms of a withdrawal rate, is a key driver of our business as it refers to the policies which remain in our block of business. 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 2005 as compared to 2004 and 2003 and amounted to 8.3%, 8.5% and 9.5%, respectively. Annuity withdrawals without internal replacements totaled $1,200.4 million in 2005, $1,118.1 million in 2004 and $1,196.9 million in 2003. Our withdrawal experience remained within our pricing assumptions.

 

Product Spread.  Product spread is a key driver of our business as it measures the difference between the income earned on our invested assets and the rate which we credit to policyowners, with the difference reflected as segment operating income. We actively manage product spreads in response to changes in our investment portfolio yields by adjusting liability crediting rates while considering our competitive strategies. Asset earned rates and liability crediting rates were as follows for our annuity products:

 

 

The product spread decreased twelve basis points to 211 basis points in 2005 compared to 2004 and increased 25 basis points to 223 basis points in 2004 compared to 2003. Liability crediting rates on traditional annuities were increased in 2005 following the decreases in 2003 and 2004 which were necessary 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 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. Due to these limitations on the ability to lower interest crediting rates and the potential for credit defaults and lower reinvestment rates on investments, we could experience spread compression in future periods.

 

We also earn a spread on our funding agreements. Funding agreement income less associated interest expense totaled $6.2 million in 2005, $6.8 million in 2004, and $11.1 million in 2003. The 2004 decrease was due to the termination of a $250 million funding agreement during the fourth quarter of 2003.

 

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 2005 increased compared to 2004 due primarily to increased costs associated with administering the larger volume of business in force and higher legal and regulatory costs. Expenses in 2004 decreased compared to 2003 due primarily to continued process improvements to enhance operating efficiencies and lower fees associated with a declining block of annuity business processed by a third party administrator.

Amortization of DAC and VOBA.  The amortization of DAC and VOBA are expense items which decreased in 2005 and increased in 2004 as compared to the respective prior years. DAC and VOBA are generally amortized in proportion to policy gross margins which have increased each year. In addition, during the third quarter of 2004, projected persistency and future margin items for DAC and VOBA amortization were updated with current estimates which resulted in additional amortization expense on our traditional fixed annuity products in 2004. This 2004 increase was partially offset by decreased amortization resulting from updated current estimates of margins for indexed annuity products. As a result, DAC and VOBA amortization was lower in 2005 compared to 2004. Amortization expense increased in 2004 compared to 2003 as a result of higher product margins and the updated projected margins in 2004.

 

IMO Operations.  IMO operations are a key driver of our business as the earnings from the IMOs can be 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 four such IMOs. The income from IMO operations primarily represents annuity commissions received by our IMOs from those third party insurance companies. Net IMO operations increased $1.1 million in 2005 compared to 2004 primarily due to lower operating expenses in 2005 as 2004 included higher litigation costs. Net IMO operating income decreased $6.2 million in 2004 compared to 2003 due to changes in distribution strategies and higher operating expenses, including litigation costs in 2004.

 

Outlook.  We anticipate increased product sales from our owned and proprietary distribution organizations but decreased product sales from other distribution channels as we manage our sales in this current low interest rate environment. We also expect to continue to position the company to meet increasing consumer demand for indexed annuity products and to actively manage surrenders. We will continue to manage our spreads as we strive for our desired profitability in this economic environment.

 

Other

 

The other operations consist of our non-core lines of business outside of protection and accumulation products. These lines of business include holding company revenues and expenses, operations of our real estate management subsidiary, and accident and health insurance. The pre-tax operating loss of our other operations increased in 2005 compared to 2004 primarily due to lower net investment income as a result of lower yielding investments and higher investment expenses. The pre-tax operating loss of our other operations increased in 2004 compared to 2003 primarily due to increased holding company expenses, such as Sarbanes-Oxley internal control regulations, the OCEANs exchange and succession activities in 2004, and lower investment income from our real estate management subsidiary.

Income Statement Reconciliation

 

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