UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

AMERUS GROUP CO.

(Exact name of registrant as specified in its charter)

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

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

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

Indicate by check mark whether the registrant is 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 o		Non-accelerated filer o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock		38,806,662 shares as of May 3, 2006

Exhibit index — Page 41
Page 1 of 41

 

 

INDEX

		Page No.
PART I — FINANCIAL INFORMATION		4
Item 1. Financial Statements		4
Consolidated Balance Sheets March 31, 2006 (Unaudited) and December 31, 2005		4
Consolidated Statements of Income (Unaudited) For the Three Months Ended March 31, 2006 and 2005		6
Consolidated Statements of Comprehensive Income (Unaudited) For the Three Months Ended March 31, 2006 and 2005		7
Consolidated Statements of Stockholders’ Equity For the Three Months Ended March 31, 2006 (Unaudited) and the Year Ended December 31, 2005		8
Consolidated Statements of Cash Flows (Unaudited) For the Three Months Ended March 31, 2006 and 2005		9
Notes to Consolidated Financial Statements (Unaudited)		11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3. Quantitative and Qualitative Disclosures About Market Risk		35
Item 4. Controls and Procedures		37
PART II — OTHER INFORMATION		37
Item 1. Legal Proceedings		37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		39
Item 6. Exhibits		39
Signatures		40
Index to Exhibits		41
Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
Certification
Certification
Certification
Certification

SAFE HARBOR STATEMENT

     This Quarterly Report on Form 10-Q, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to trends in our operations and financial results and our business and products, 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 in the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the period ended December 31, 2005.

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

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

AMERUS GROUP CO.

CONSOLIDATED BALANCE SHEETS

($ in thousands)

		March 31,				December 31,
		2006				2005
		(unaudited)
Assets
Investments:
Securities available-for-sale at fair value:
Fixed maturity securities		$	16,468,471			$	16,727,933
Equity securities			74,889				75,658
Short-term investments			18,996				9,998
Securities held-for-trading purposes at fair value:
Fixed maturity securities			1,383,819				1,414,225
Equity securities			4,087				2,358
Mortgage loans			964,495				976,135
Policy loans			484,260				483,441
Other investments			374,115				347,552
Total investments			19,773,132				20,037,300
Cash and cash equivalents			529,556				600,160
Accrued investment income			241,316				237,221
Premiums, fees and other receivables			39,640				40,667
Income taxes receivable			—				9,005
Reinsurance receivables			727,852				730,532
Deferred policy acquisition costs			1,946,284				1,755,159
Deferred sales inducements			298,880				261,322
Value of business acquired			358,260				356,949
Goodwill			229,670				228,869
Property and equipment			45,539				44,467
Other assets			310,114				306,655
Separate account assets			224,530				221,694
Total assets		$	24,724,773			$	24,830,000

See accompanying notes to consolidated financial statements.

AMERUS GROUP CO.
CONSOLIDATED BALANCE SHEETS
($ in thousands)

		March 31,				December 31,
		2006				2005
		(unaudited)
Liabilities and Stockholders’ Equity
Liabilities:
Policy reserves and policyowner funds:
Future life and annuity policy benefits		$	19,620,984			$	19,486,854
Policyowner funds			1,489,572				1,483,873
			21,110,556				20,970,727
Accrued expenses and other liabilities			874,103				975,419
Dividends payable to policyowners			209,726				278,839
Policy and contract claims			67,082				66,137
Income taxes payable			100				—
Deferred income taxes			28,290				58,818
Notes payable			555,899				556,051
Separate account liabilities			224,530				221,694
Total liabilities			23,070,286				23,127,685
Stockholders’ equity:
Preferred Stock, no par value, 20,000,000 shares authorized, 6,000,000 shares issued and outstanding in 2006 and 2005			144,830				144,830
Common Stock, no par value, 230,000,000 shares authorized; 46,871,831 shares issued and 38,802,455 shares outstanding in 2006; 46,675,811 shares issued and 38,612,874 shares outstanding in 2005			46,872				46,676
Additional paid-in capital — common stock			1,238,933				1,231,533
Accumulated other comprehensive loss			(118,881	)			(3,612	)
Unearned compensation			—				(3,783	)
Retained earnings			682,943				604,747
Treasury stock, at cost (8,069,376 shares in 2006 and 8,062,937 shares in 2005)			(340,210	)			(318,076	)
Total stockholders’ equity			1,654,487				1,702,315
Total liabilities and stockholders’ equity		$	24,724,773			$	24,830,000

See accompanying notes to consolidated financial statements.

AMERUS GROUP CO.

CONSOLIDATED STATEMENTS OF INCOME

($ in thousands, except share data)

		For The Three Months Ended March 31,
		2006				2005
		(unaudited)
Revenues:
Insurance premiums		$	53,498			$	62,546
Product charges			68,062				59,033
Net investment income			285,318				268,711
Realized/unrealized capital gains (losses)			50,645				(48,944	)
Other income			12,917				12,556
			470,440				353,902
Benefits and expenses:
Policyowner benefits			211,992				169,583
Underwriting, acquisition and other expenses			40,968				40,608
Amortization of deferred policy acquisition costs and value of business acquired			68,520				52,743
Dividends to policyowners			18,733				20,003
			340,213				282,937
Income from continuing operations			130,227				70,965
Interest expense			8,665				7,780
Income before income tax expense			121,562				63,185
Income tax expense			40,647				1,697
Net income			80,915				61,488
Dividends on preferred stock			2,719				—
Net income available to common stockholders		$	78,196			$	61,488
Net income available to common stockholders per common share:
Basic		$	2.02			$	1.55
Diluted		$	1.86			$	1.43
Weighted average common shares outstanding:
Basic			38,751,160				39,575,696
Diluted			41,960,970				42,930,905

See accompanying notes to consolidated financial statements.

AMERUS GROUP CO.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in thousands)

		For The Three Months Ended March 31,
		2006				2005
		(unaudited)
Net income		$	80,915			$	61,488
Other comprehensive loss, before tax:
Unrealized losses on securities:
Unrealized holding losses arising during period			(179,609	)			(123,642	)
Reclassification adjustment for (gains) losses included in net income			1,948				374
Minimum pension liability adjustment			325				—
Other comprehensive loss, before tax			(177,336	)			(123,268	)
Income tax benefit related to items of other comprehensive loss			62,067				43,144
			(115,269	)			(80,124	)
Comprehensive loss		$	(34,354	)		$	(18,636	)

See accompanying notes to consolidated financial statements.

AMERUS GROUP CO.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three Months Ended March 31, 2006 and the Year Ended December 31, 2005
($ in thousands)

										Additional				Accumulated
										Paid-In				Other																Total
		Preferred								Capital				Comprehensive				Unearned				Retained				Treasury				Stockholders’
		Stock				Common Stock				Common Stock				Income (Loss)				Compensation				Earnings				Stock				Equity
Balance at December 31, 2004		$	—			$	44,226			$	1,198,379			$	114,670			$	(1,238	)		$	431,911			$	(164,479	)		$	1,623,469
2005:
Net income			—				—				—				—				—				191,179				—				191,179
Net unrealized loss on securities			—				—				—				(118,034	)			—				—				—				(118,034	)
Net unrealized loss on derivatives designated as cash flow hedges			—				—				—				(248	)			—				—				—				(248	)
Issuance of preferred stock			144,830				—				—				—				—				—				—				144,830
Conversion of OCEANs			—				1,675				9,069				—				—				—				—				10,744
Stock issued under various incentive plans, net of forfeitures			—				775				24,085				—				(2,545	)			—				958				23,273
Purchase of treasury stock			—				—				—				—				—				—				(154,555	)			(154,555	)
Dividends declared on preferred stock			—				—				—				—				—				(2,417	)			—				(2,417	)
Dividends declared on common stock			—				—				—				—				—				(15,926	)			—				(15,926	)
Balance at December 31, 2005			144,830				46,676				1,231,533				(3,612	)			(3,783	)			604,747				(318,076	)			1,702,315
2006 (unaudited):
Net income			—				—				—				—				—				80,915				—				80,915
Net unrealized gain (loss) on securities			—				—				—				(115,438	)			—				—				—				(115,438	)
Net unrealized gain (loss) on derivatives designated as cash flow hedges			—				—				—				(42	)			—				—				—				(42	)
Stock issued under various incentive plans, net of forfeitures			—				196				11,183				—				—				—				(6,817	)			4,562
Purchase of treasury stock			—				—				—				—				—				—				(15,317	)			(15,317	)
Dividends declared on preferred stock			—				—				—				—				—				(2,719	)			—				(2,719	)
Reclassification of unearned compensation under SFAS 123R			—				—				(3,783	)			—				3,783				—				—				—
Minimum pension liability adjustment			—				—				—				211				—				—				—				211
Balance at March 31, 2006		$	144,830			$	46,872			$	1,238,933			$	(118,881	)		$	—			$	682,943			$	(340,210	)		$	1,654,487

 

AMERUS GROUP CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)

		For The Three Months Ended March 31,
		2006				2005
		(unaudited)
Cash flows from operating activities
Net income		$	80,915			$	61,488
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Product charges			(68,062	)			(59,033	)
Interest credited to policyowner account balances			131,528				128,781
Change in option value of indexed products and market value adjustments on total return strategy annuities			(11,143	)			(44,334	)
Realized/unrealized capital (gains) losses			(50,645	)			48,944
DAC and VOBA amortization			68,520				52,743
Deferred sales inducements amortization			10,795				5,218
DAC and VOBA capitalized			(115,703	)			(114,527	)
Change in:
Accrued investment income			(4,095	)			(4,888	)
Reinsurance receivables			(14,186	)			(35,861	)
Securities held-for-trading purposes:
Fixed maturities			52,810				74,126
Equity securities			(1,729	)			14,913
Liabilities for future policy benefits			(134,121	)			(44,876	)
Accrued expenses and other liabilities			(100,963	)			108,299
Policy and contract claims and other policyowner funds			6,134				21,492
Income taxes:
Current			8,143				(12,771	)
Deferred			31,509				(32,304	)
Other, net			8,756				7,414
Net cash (used in) provided by operating activities			(101,537	)			174,824
Cash flows from investing activities:
Purchase of fixed maturities available-for-sale			(918,428	)			(1,225,650	)
Proceeds from sale of fixed maturities available-for-sale			562,124				503,684
Maturities, calls and principal reductions of fixed maturities available-for-sale			233,233				322,205
Purchase of equity securities			(4,523	)			(681	)
Proceeds from sale of equity securities			5,855				880
Change in short-term investments, net			(8,242	)			982
Purchase of mortgage loans			(21,431	)			(42,365	)

AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
($ in thousands)

		For The Three Months Ended March 31,
		2006				2005
		(unaudited)
Proceeds from repayment and sale of mortgage loans			32,896				33,187
Purchase of other invested assets			(80,551	)			(25,868	)
Proceeds from sale of other invested assets			40,069				19,385
Change in policy loans, net			(819	)			(1,844	)
Other assets, net			(4,530	)			(6,075	)
Net cash used in investing activities			(164,347	)			(422,160	)
Cash flows from financing activities:
Deposits to policyowner account balances			716,433				744,034
Withdrawals from policyowner account balances			(508,487	)			(409,003	)
Change in debt, net			(152	)			230
Dividends to preferred shareholders			(2,719	)			—
Stock issued under various incentive plans, net of forfeitures			4,562				5,819
Purchase of treasury stock			(15,317	)			—
Excess tax benefits on share-based compensation			960				—
Net cash provided by financing activities			195,280				341,080
Net (decrease) increase in cash			(70,604	)			93,744
Cash and cash equivalents at beginning of period			600,160				478,441
Cash and cash equivalents at end of period		$	529,556			$	572,185
Supplemental disclosure of cash activities:
Interest paid		$	15,127			$	8,738
Income taxes (received) paid		$	(999	)		$	43,044
Supplemental disclosure of non-cash operating activities:
Capitalization of deferred sales inducements		$	24,846			$	22,418
Supplemental disclosure of non-cash operating activities:
Accrual of treasury stock purchases		$	—			$	19,578

See accompanying notes to consolidated financial statements.

AMERUS GROUP CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) CONSOLIDATION AND BASIS OF PRESENTATION

     The accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All adjustments were of a normal recurring nature, unless otherwise noted in the Notes to Consolidated Financial Statements. Operating results for the three months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. The consolidated balance sheet at December 31, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information and for capitalized terms not defined in this Form 10-Q, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

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

     Certain amounts in the 2005 financial statements have been reclassified to conform to the 2006 financial statement presentation.

(2) Stock-Based Compensation

Adoption of SFAS 123R

     The Company has various share-based compensation plans, which provide for equity awards including stock options, non-vested stock, non-vested stock units, stock appreciation rights (“SARs”), a long-term incentive plan and a management incentive payment deferral plan. In December 2004, the Financial Accounting Standards Board issued a revision to Statement of Financial Accounting Standards No. 123, “Share-Based Payment,” (SFAS 123R) which is a revision of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” (SFAS 123). The statement supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Effective on January 1, 2006, the Company adopted the modified prospective transition method provided under SFAS 123R. Compensation cost associated with share-based compensation plans recognized for the three months ended March 31, 2006 includes (1) the amortization related to the remaining unvested portion of all share-based awards granted prior to January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (2) the amortization related to all share-based awards granted on or after January 1, 2006, based on the grant date fair value estimated in accordance with SFAS 123R.

     The effect on pro-forma net income and earnings per share in 2005 if the Company had applied the fair value recognition provisions of SFAS 123 to share-based employee compensation would have been as follows:

		For The Three Months Ended March 31,
		2006				2005
		($ in thousands, except share data)
Net income available to common stockholders, as reported		$	78,196			$	61,488
Add: 2005 stock-based compensation expense included in reported net income, net of related tax effects			—				—
Deduct: 2005 total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			—				(659	)
2006 actual and 2005 pro forma net income available to common stockholders		$	78,196			$	60,829
Earnings per common share:
Basic — as reported		$	2.02			$	1.55
Basic — pro forma		$	2.02			$	1.54
Diluted — as reported		$	1.86			$	1.43
Diluted — pro forma		$	1.86			$	1.42

     As part of the adoption of SFAS 123R, the unrecognized compensation cost related to non-vested share-based compensation awards granted prior to January 1, 2006, previously recognized as a separate component of stockholders’ equity amounting to $3.8 million was reclassified to additional paid-in capital. In addition, prior to the adoption of SFAS 123R, the tax benefits resulting from the exercise of share-based compensation were reported as operating cash flows in the consolidated statement of cash flows. SFAS 123R requires that cash flows resulting from tax deductions in excess of cumulative compensation cost recognized for exercise be classified as financing cash flows. There was no initial change to net income or total stockholders’ equity upon adoption of SFAS 123R.

General

     Stock options, non-vested stock, non-vested stock units, non-vested stock units under the long-term incentive plan and management incentive payment deferral plan units are settled in the Company’s stock. Upon exercise of these awards, the Company issues shares from treasury or issues new shares of common stock as the awards cannot be settled for cash. The Company’s SARs are settled in cash rather than shares of stock.

     Total compensation expense for share-based awards amounted to $1.7 million ($1.1 million after-tax) and $0.9 million ($0.6 million after-tax) for the three months ended March 31, 2006 and 2005, respectively. As of March 31, 2006, there was $20.5 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to stock-based compensation. That cost is expected to be recognized over vesting periods of generally three to five years.

Stock Option Plans

     The Company has four stock incentive plans authorizing the issuance of incentive and non-qualified stock options to employees, officers and non-employee directors of the Company. The option price per share under all plans may not be less than the fair value of the Company’s common stock on the date of grant and the term of the option may not be longer than ten years. Options granted on or subsequent to January 1, 2003, have a five-year vesting schedule with one-fifth of the options granted vesting at the end of each of the five years. Generally, options granted prior to January 1, 2003, have a three-year vesting schedule with one-third of the options granted vesting at the end of each of the three years. Option expense was recorded for the first time in the three months ended March 31, 2006, which amounted to $0.8 million.

     A summary of the Company’s stock option plans follows:

		Three Months Ended March 31, 2006
						Weighted
		Number				average
		of				exercise
		shares				price
Outstanding, beginning of period			2,754,287			$	32.00
Granted at market price			315,500				59.86
Exercised			(129,141	)			25.15
Outstanding, end of period			2,940,646			$	35.29
Exercisable, end of period			2,101,582			$	30.64

     The following table summarizes information about stock options outstanding under the Company’s option plans as of March 31, 2006:

Options Outstanding
						Weighted				Weighted
Range		Remaining				average				average
of exercise		options				contractual				exercise
prices		outstanding				life in years				price
$18.30 - $24.40			428,274				3.5			$	20.90
$24.40 - $30.50			957,150				5.3				28.37
$30.50 - $36.60			251,584				4.6				34.21
$36.60 - $42.70			703,205				6.7				37.98
$42.70 - $48.80			259,933				8.8				46.07
$48.80 - $54.90			15,000				9.3				51.29
$54.90 - $61.00			325,500				9.8				59.78
			2,940,646				6.1			$	35.29

     The following table summarizes information about stock options exercisable under the Company’s option plans as of March 31, 2006:

Options Exercisable
						Weighted
Range						average
of exercise		Options				exercise
prices		exercisable				price
$18.30 - $24.40			428,274			$	20.90
$24.40 - $30.50			823,870				28.61
$30.50 - $36.60			238,915				34.19
$36.60 - $42.70			555,920				38.09
$42.70 - $48.80			54,603				46.55
$48.80 - $54.90			—				—
$54.90 - $61.00			—				—
			2,101,582			$	30.64

     The total intrinsic value of options exercised was $4.6 million for the three months ended March 31, 2006. The aggregate intrinsic value of options outstanding and options exercisable as of March 31, 2006 was $73.4 million and $62.2 million, respectively.

     The fair values of options granted are estimated on the date of grant using a Monte Carlo simulation pricing model for awards granted on or after January 1, 2006, and the Black-Scholes pricing model for awards granted prior to January 1, 2006. The determination of the fair value of option awards on the date of grant using an option-pricing model is affected by the stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. For the 2006 pricing model, the expected term of options granted is estimated by taking the average of the vesting term and the contractual term of the option. The volatility of the common stock is estimated by considering both historical and implied volatility in market traded options. The risk-free interest rate in the option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. The Company plans to continue paying a $0.40 per share cash dividend for the foreseeable future. The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Historical data is used to estimate pre-vesting option forfeitures and record compensation expense only for those awards that are expected to vest. All option awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. The following are the weighted average assumptions used:

		2006				2005
Expected Volatility			24.64	%			30.11	%
Risk-free Interest Rate			4.68	%			4.31	%
Dividend Yield			0.66	%			0.88	%
Weighted average fair value of options granted		$	19.44			$	20.25

Non-vested Stock

     The Company has awarded restricted stock to eligible employees and non-employee directors under two of the stock incentive plans. The awards have restriction periods of one to five years tied to employment and/or service. The awards are recorded at the market value on the date of the grant as unearned compensation, included in additional paid-in capital, since common shares were legally issued on that date. The initial values of these grants are amortized over the restriction periods, net of forfeitures. Non-vested stock and compensation expense information is as follows:

		Three Months Ended March 31, 2006
		Number				Weighted
		of				average
		shares				price
Outstanding, beginning of period			48,277			$	39.57
Granted at market price			2,745				56.61
Outstanding, end of period			51,022			$	40.48
Compensation expense ($ in thousands)						$	99

Non-vested Stock Units

     The Company awarded 57,296 non-vested common stock units to an employee under one of the stock incentive plans in 2005. The awards have restriction periods of three to four years tied to employment or service. The awards were recorded at the market value on the date of the grant as unearned compensation, included in additional paid-in capital, as shares will be issued at the end of the restriction period. The initial values of these grants are amortized over the restriction periods, net of forfeitures. Compensation expense amounted to $0.2 million for the three months ended March 31, 2006.

Stock Appreciation Rights

     The Company is authorized to grant SARs to agents under its non-employee stock option plan. Issuance of SARs is made at the sole discretion of the Company. The terms and conditions under this plan are similar to the employee stock incentive plans. The SARs are accounted for as a liability instrument since the awards are settled for cash. The liability for the awards is adjusted based on the current market value of the Company’s stock at each reporting date. The Company’s SARs are summarized as follows:

		Three Months Ended March 31, 2006
		Number				Weighted
		of				average
		shares				value
Outstanding, beginning of period			51,755			$	34.77
Granted at market price			9,500				60.09
Exercised			(3,552	)			33.39
Outstanding, end of period			57,703			$	39.02
Compensation expense ($ in thousands)						$	73

Long-term Incentive Plan

     As part of the stock incentive plans for employees and non-employees, the Human Resources and Compensation Committee of the Board of Directors is authorized to grant awards to senior officers in connection with a long-term incentive plan. The plan provides for an initial grant of units. The units are earned over a multi-year period and the number of units earned varies with the level of performance achieved over such performance period. The number of units earned range from zero to 200% of the initial units granted. Expense is determined based on the grant date fair value of the units determined by a Monte Carlo simulation model. Awards will be paid in common stock or such other consideration as the committee may determine. Awards under this plan are granted under and subject to the terms and conditions of the employee stock incentive plans. As of March 31, 2006 and December 31, 2005, there were 0.1 million units outstanding under the plan. Compensation expense for the plan amounted to $0.4 million and $0.6 million for the three months ended March 31, 2006 and 2005, respectively. The total fair value of awards granted during the three months ended March 31, 2006 and 2005 amounted to $2.3 million and $2.5 million, respectively.

Management Incentive Payment Deferral Plan

     The Company has a management incentive payment deferral plan under which eligible employees can elect to defer their annual cash bonuses. The Human Resources and Compensation Committee of the Board of Directors determines each year the maximum amount of deferral and percentage of match by the Company. Employees can defer up to 100% of bonuses received. Participant deferrals are 50% matched by the Company up to a maximum match of $10,000. The total deferrals, including participant deferrals

and Company match, have a restriction period of three years during which the deferrals cannot be paid out except for certain specified events. Deferrals and match amounts are used to purchase units equal in value to a share of the Company’s common stock on the date of deferral. Shares of common stock are distributed at the end of the restriction period. At March 31, 2006 and December 31, 2005, there were 0.2 million and 0.3 million units outstanding with the value of the vested and partially vested units outstanding amounting to $0.9 million and $0.6 million, respectively, which is included as unearned compensation in additional paid-in capital in stockholders’ equity of the consolidated balance sheet. The total fair value of deferrals and match awards granted during the three months ended March 31, 2006 and 2005 amounted to $2.5 million and $2.6 million, respectively. Compensation expense associated with the match portion of the plan amounted to $0.1 million and $0.2 million for the three months ended March 31, 2006 and 2005, respectively.

(3) EARNINGS PER SHARE

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

     Diluted earnings per share applicable to the Company’s PRIDES securities are determined using the treasury stock method as it is currently anticipated that holders of the PRIDES are more likely to tender cash in the future for the securities’ forward contract. The PRIDES added 2,454,233 and 1,502,762 shares to the diluted earnings per share calculation for the three months ended March 31, 2006 and 2005, respectively.

     As of September 13, 2005, all of the Company’s OCEANs were converted with settlement in cash and common stock. Diluted earnings per share applicable to the OCEANs were determined using the guidance of the Financial Accounting Standards Board’s Emerging Issues Task Force Issue 04-8 (EITF 04-8), “The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” which was effective for periods ending after December 15, 2004. EITF 04-8 requires diluted earnings per share to be computed following the guidance of EITF 90-19, “Convertible Bonds with Issuer Option to Settle for Cash upon Conversion,” for securities such as the OCEANs which are considered to be “Instrument C” securities. The conversion spread portion of an Instrument C security should be included in diluted earnings per share based on the number of shares that would be required to be delivered if the instrument had been converted at the end of the period. The OCEANs added 990,066 shares to the diluted earnings per share calculation for the three months ended March 31, 2005.

		For The Three Months Ended March 31,
		2006												2005
						Number of				Per Share								Number of				Per Share
		Net Income				Shares				Amount				Net Income				Shares				Amount
		($ in thousands, except share data)
Basic EPS
Net income available to common stockholders from continuing operations		$	78,196				38,751			$	2.02			$	61,488				39,576			$	1.55
Effect of dilutive securities
Equity compensation			—				756				(0.04	)			—				862				(0.03	)
PRIDES			—				2,454				(0.12	)			—				1,503				(0.05	)
OCEANs			—				—				—				—				990				(0.04	)
Diluted EPS		$	78,196				41,961			$	1.86			$	61,488				42,931			$	1.43

(4) CLOSED BLOCK

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

     Summarized financial information of the Closed Block as of March 31, 2006 and December 31, 2005 and for the three months ended March 31, 2006 and 2005 are as follows:

		March 31,				December 31,
		2006				2005
		($ in thousands)
Liabilities:
Future life and annuity policy benefits		$	2,750,868			$	2,765,095
Policyowner funds			7,740				7,835
Accrued expenses and other liabilities			6,693				6,420
Dividends payable to policyowners			154,219				154,793
Policy and contract claims			20,014				17,986
Policyowner dividend obligation			48,308				116,684
Total Liabilities			2,987,842				3,068,813
Assets:
Fixed maturity securities available-for-sale at fair value			1,911,320				1,916,052
Mortgage loans			58,988				60,541
Policy loans			331,377				331,561
Cash and cash equivalents			3,264				63,506
Accrued investment income			31,500				32,972
Premiums and fees receivable			53,536				58,778
Total Assets			2,389,985				2,463,410
Maximum future earnings to be recognized from assets and liabilities of the Closed Block		$	597,857			$	605,403

		For The Three Months Ended March 31,
		2006				2005
		($ in thousands)
Operations:
Insurance premiums		$	37,349			$	41,887
Product charges			1,610				1,701
Net investment income			35,603				34,419
Realized gains (losses) on investments			(1,062	)			130
Policyowner benefits			(46,026	)			(50,121	)
Underwriting, acquisition and other expenses			(1,495	)			(557	)
Dividends to policyowners			(16,876	)			(18,168	)
Contribution from the Closed Block before income taxes		$	9,103			$	9,291

(5) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

     The Company accounts for derivatives, including certain derivative instruments embedded in other contracts, at fair value. Accounting for gains and losses resulting from changes in the values of derivatives is dependent upon the use of the derivative and its qualification for special hedge accounting. In addition, we also have trading securities that back our total return strategy traditional annuity products. During the first three months of 2006 and 2005, an unrealized gain has been recognized amounting to $6.0 million and an unrealized loss of $21.7 million, respectively, primarily from the change in fair value on the trading securities backing the total return strategy products. Additionally, realized/unrealized gains (losses) on investments included an unrealized gain of $45.8 million and an unrealized loss of $27.6 million for the first three months of 2006 and 2005, respectively, primarily from the change in fair value on call options used as a natural hedge of embedded options within indexed products. Policyowner benefits included an adjustment to contract liabilities for fair value changes in options embedded within the indexed products and fair value changes on total return strategy annuity contracts. The total adjustment to policyowner benefits amounted to a decrease in expense of $11.1 million and $44.3 million for the first three months of 2006 and 2005, respectively.

     The following table summarizes the income (loss) impact of the market value adjustments on trading securities and derivatives for the three months ended March 31, 2006 and 2005:

		Three Months Ended March 31, 2006
		Total Return				Indexed
		Products				Products				Other				Total
		($ in thousands)
Fixed maturity securities held-for-trading		$	6,497			$	—			$	(456	)		$	6,041
Options			—				45,838				(3	)			45,835
Market value adjustment to liabilities			(5,382	)			13,627				2,898				11,143
Cash flow hedge amortization			—				—				28				28
DAC and deferred sales inducements amortization impact of net adjustments above			(1,517	)			(20,519	)			—				(22,036	)
Pre-tax total			(402	)			38,946				2,467				41,011
Income taxes			141				(13,631	)			(864	)			(14,354	)
After-tax total		$	(261	)		$	25,315			$	1,603			$	26,657
		Three Months Ended March 31, 2005
		Total Return				Indexed
		Products				Products				Other				Total
		($ in thousands)
Fixed maturity securities held-for-trading		$	(18,374	)		$	—			$	(3,294	)		$	(21,668	)
Options			—				(26,895	)			(688	)			(27,583	)
Market value adjustment to liabilities			9,392				32,478				2,464				44,334
Cash flow hedge amortization			—				—				39				39
DAC and deferred sales inducements amortization impact of net adjustments above			1,237				(4,361	)			—				(3,124	)
Pre-tax total			(7,745	)			1,222				(1,479	)			(8,002	)
Income taxes			2,711				(428	)			518				2,801
After-tax total		$	(5,034	)		$	794			$	(961	)		$	(5,201	)

(6) FEDERAL INCOME TAXES

     The effective income tax rate varied from the prevailing corporate rate primarily as a result of tax exempt income and a reduction in the income tax accrual for the three months ended March 31, 2006 and 2005. The accrual reductions for the release of provisions originally established for potential tax adjustments related to open Internal Revenue Service exam years from 1997 through 2003 which were settled or eliminated during 2006 and 2005. The accrual was reduced $0.6 million and $19.9 million in the first three months of 2006 and 2005, respectively. The 2005 accrual reduction was primarily related

to the settlement of the tax treatment of a leveraged lease investment and the determination of taxable income of some partnership investments. The effective income tax rate excluding the accrual reductions was 33.9% and 34.2% for the three months ended March 31, 2006 and 2005, respectively.

(7) COMMITMENTS AND CONTINGENCIES

     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 individuals 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 currently 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.

(8) EMPLOYEE BENEFIT PLANS

     The Company has a frozen defined benefit pension plan and also has defined benefit plans which provide supplemental retirement benefits to certain agents and executives. In addition to pension benefits, the Company also provides certain health care and life insurance benefits for retired employees. The following is a summary of net periodic benefit cost for these plans for the three months ended March 31, 2006 and 2005:

		Three Months Ended March 31,
		2006				2005
		($ in thousands)
Components of net periodic benefit cost:
Service cost		$	266			$	79
Interest cost			1,533				1,472
Expected return on plan assets			(1,219	)			(1,216	)
Amortization of prior service cost			(34	)			22
Amortizaton of actuarial loss			169				178
Total expense		$	715			$	535

(10) OPERATING SEGMENTS

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

     Protection Products. The primary product offerings consist of term life, universal life and indexed life insurance policies. Indexed life is a type of universal life or interest-sensitive whole life product. These products are marketed on a national basis primarily through Independent Marketing

Organizations (IMOs), a Career Marketing Organization (CMO) system, a Personal Producing General Agent (PPGA) system, and a New York distribution system.

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

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

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

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

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

	3)		Amortization of deferred policy acquisition costs (DAC) and value of business acquired (VOBA) related to the unrealized and realized gains and losses on the open block investments and the derivative adjustments.
	4)		Amortization of deferred sales inducements related to the unrealized and realized gains and losses on the open block investments and the derivative adjustments.
	5)		Other income from non-insurance operations.
	6)		Interest expense.
	7)		Income tax expense.

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

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

     Assets are segmented based on policy liabilities directly attributable to each segment. There are no significant intersegment transactions. Depreciation and amortization, excluding amortization of DAC, deferred sales inducements, and VOBA as previously discussed, are not significant. There have been no material changes in segment assets since December 31, 2005.

Operating Segment Income
($ in thousands)

		Three Months Ended March 31, 2006
		Protection				Accumulation								Total
		Products				Products				All Other				Consolidated
Revenues:
Insurance premiums		$	52,644			$	942			$	(88	)		$	53,498
Product charges			55,119				12,943				—				68,062
Net investment income			88,306				196,657				355				285,318
Realized/unrealized losses on closed block investments			(1,062	)			—				—				(1,062	)
Other income:
Income from Independent Marketing Organizations			—				8,599				—				8,599
Other			871				2,620				827				4,318
			195,878				221,761				1,094				418,733
Benefits and expenses:
Policyowner benefits			90,412				127,675				(323	)			217,764
Underwriting, acquisition, and other expenses:
Operating expenses			17,151				9,424				7,505				34,080
Expenses from Independent Marketing Organizations			—				6,888				—				6,888
Amortization of DAC and VOBA			30,360				21,701				—				52,061
Dividends to policyowners			18,733				—				—				18,733
			156,656				165,688				7,182				329,526
Segment pre-tax operating income		$	39,222			$	56,073			$	(6,088	)			89,207
Realized/unrealized losses on open block assets															(169	)
Unrealized gains on open block options and trading investments															51,876
Change in option value of indexed products and market value adjustments on total return strategy annuities															11,143
Cash flow hedge amortization															28
Amortization of DAC and VOBA due to open block gains and losses and market value adjustments															(16,459	)
Amortization of deferred sales inducements due to open block gains and losses and market value adjustments															(5,399	)
Income from continuing operations															130,227
Interest (expense)															(8,665	)
Income tax (expense)															(40,647	)
Net income															80,915
Dividends on preferred stock															(2,719	)
Net income available to common stockholders														$	78,196

Operating Segment Income
($ in thousands)

		Three Months Ended March 31, 2005
		Protection				Accumulation								Total
		Products				Products				All Other				Consolidated
Revenues:
Insurance premiums		$	61,483			$	480			$	583			$	62,546
Product charges			47,077				11,956				—				59,033
Net investment income			86,886				181,646				179				268,711
Realized/unrealized gains on closed block investments			130				—				—				130
Other income:
Income from Independent Marketing Organizations			—				9,011				—				9,011
Other			861				2,541				520				3,922
			196,437				205,634				1,282				403,353
Benefits and expenses:
Policyowner benefits			89,201				124,728				27				213,956
Underwriting, acquisition, and other expenses:
Operating expenses			18,393				7,260				7,024				32,677
Expenses from Independent Marketing Organizations			—				7,931				—				7,931
Amortization of DAC and VOBA, net of			24,871				25,047				—				49,918
Dividends to policyowners			20,002				1				—				20,003
			152,467				164,967				7,051				324,485
Segment pre-tax operating income		$	43,970			$	40,667			$	(5,769	)			78,868
Realized/unrealized gains on open block assets															177
Unrealized losses on open block options and trading investments															(49,251	)
Change in option value of indexed products and market value adjustments on total return strategy annuities															44,334
Cash flow hedge amortization															39
Amortization of DAC and VOBA due to open block gains and losses and market value adjustments															(2,825	)
Other income from non-insurance operations															(377	)
Income from continuing operations															70,965
Interest (expense)															(7,780	)
Income tax (expense)															(1,697	)
Net income															61,488
Dividends on preferred stock															—
Net income available to common stockholders														$	61,488