UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

or

Commission File Number:  1-11917

FBL Financial Group, Inc.

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. x  Yes   o  No

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 27,500,230 shares of Class A common stock and 1,192,990 shares of Class B common stock as of October 28, 2004.

FBL FINANCIAL GROUP, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS

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ITEM 1. FINANCIAL STATEMENTS

FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands)

2

FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands)

See accompanying notes.

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FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data)

See accompanying notes.

4

FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
(Dollars in thousands)

Comprehensive income (loss) totaled $80.0 million in the third quarter of 2004 and ($12.2) million in the third quarter of 2003.

See accompanying notes.

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FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)

6

FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)

See accompanying notes.

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FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2004

1.          Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements of FBL Financial Group, Inc. (we or the Company) have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Our financial statements include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of our financial position and results of operations. Operating results for the three- and nine-month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. We encourage you to refer to our consolidated financial statements and notes for the year ended December 31, 2003 included in our annual report on Form 10-K for a complete description of our material accounting policies. Also included in the Form 10-K is a description of areas of judgements and estimates and other information necessary to understand our financial position and results of operations.

Accounting Changes

Effective January 1, 2004, we adopted Statement of Position (SOP) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts,” issued by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants. The SOP provides guidance on separate account presentation and valuation, the accounting for sales inducements (including premium bonuses and bonus interest) and the classification and valuation of long-duration contract liabilities. To comply with this SOP, we changed our method of computing reserves for guaranteed minimum death benefits (GMDB) and incremental death benefits (IDB) associated with our variable annuities and changed our presentation of deferred expenses relating to sales inducements.

Variable annuity and variable universal life contracts are the only contracts reported in our separate accounts. These contracts generally do not have any minimum guarantees other than minimum interest guarantees on funds deposited in our general account and GMDBs on our variable annuities. In addition, certain variable annuity contracts have an IDB rider that pays the contract holder a percentage of the gain on the contract. Information regarding our GMDBs and IDBs by type of guarantee and related separate account balance and net amount at risk (amount by which GMDB or IDB exceeds account value) is as follows:

The separate account assets are principally comprised of stock and bond mutual funds. The reserve for GMDBs and IDBs at September 30, 2004, determined using scenario-based modeling techniques and industry mortality assumptions, totaled $0.4 million and the reserve at December 31, 2003 totaled $0.8 million. The weighted average age of the contract holders with a GMDB or IDB rider was 56 years at September 30, 2004 and 55 years at December 31, 2003. Incurred benefits for GMDBs and IDBs for the third quarter totaled less than $0.1 million for 2004 and 2003 and for the nine months ended September 30 totaled ($0.2) million for 2004, excluding the impact of

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the adoption of SOP 03-1, and $0.1 million for 2003. Paid benefits for GMDBs and IDBs totaled $0.1 million for the third quarter of 2004 and the nine-month periods of 2004 and 2003. We did not pay any benefits for GMDBs or IDBs in the third quarter of 2003. The adoption of SOP 03-1 provisions relating to GMDBs and IDBs resulted in no change to net income for the third quarter of 2004 and an increase to net income of less than $0.1 million for the nine months ended September 30, 2004 (less than $0.01 per common share – basic and diluted).

Certain of our annuity contracts contain either a premium bonus credited to the contract holder’s account balance or a bonus interest crediting rate which applies to the first contract year only. These sales inducements are deferred and amortized over the expected life of the contracts based on the emergence of gross profits. Sales inducements deferred in the third quarter totaled $16.1 million in 2004 and $6.0 million in 2003 and amounts amortized totaled $1.6 million in 2004 and $1.0 million in 2003. Sales inducements deferred in the nine-month period totaled $35.7 million in 2004 and $15.6 million in 2003 and amounts amortized totaled $4.5 million in 2004 and $2.8 million in 2003. The unamortized sales inducement balance totaled $66.1 million at September 30, 2004 and $39.1 million at December 31, 2003. Beginning January 1, 2004, the deferred sales inducements are reported separately on the balance sheet and the amortization of deferred sales inducements is reported in interest sensitive and index product benefits on the consolidated statement of income. Amounts related to sales inducements in the 2003 consolidated financial statements, previously reported with deferred policy acquisition costs, have been reclassified to conform to the 2004 financial statement presentation. The adoption of SOP 03-1 provisions relating to sales inducements had no impact on net income for the third quarter or nine-month periods ended September 30, 2004.

Effective July 1, 2003, we adopted Statement of Financial Accounting Standards (Statement) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” Statement No. 149 codifies several Derivatives Implementation Group (DIG) issues, including DIG Issue C18, “Scope Exceptions: Shortest Period Criterion for Applying the Regular-Way Security Trades Exception to When-Issued Securities or Other Securities That Do Not Yet Exist.” DIG Issue C18 clarifies the applicability of Statement No. 133 to when-issued securities by holding that the regular-way security trade exception may not be applied to securities which are not settled within the shortest period possible for that security. If settlement does not occur within the shortest period possible, there is deemed to be a forward contract for the purchase of that security which is subject to fair value accounting under Statement No. 133. We occasionally purchase asset-backed securities and agree to settle at a future date, even though the same security or an essentially similar security could be settled at an earlier date. For these securities, any changes in the market value of the security from the trade date through the settlement date are recorded as derivative income (loss) rather than as a component of accumulated other comprehensive income (loss). The adoption of Statement No. 149 resulted in no change to net income for the third quarter of 2004 and an increase to net income of less than $0.1 million for the nine months ended September 30, 2004.

Effective July 1, 2003, we also adopted Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. Upon adoption of this Statement, our company-obligated mandatorily redeemable preferred stock of subsidiary trust and Series C redeemable preferred stock were reclassified to debt on our consolidated balance sheet. There were no adjustments to the carrying values of these instruments upon reclassification. Also, in accordance with Statement No. 150, amounts previously classified as dividends on these financial instruments ($2.3 million in the third quarter and nine month period of 2003, $1.8 million in the third quarter of 2004 and $5.3 million for the nine month period of 2004) are recorded as interest expense. All changes in classifications made due to the adoption of Statement No. 150 were made on a prospective basis only as reclassification of prior period amounts was not permitted. The adoption of Statement No. 150 resulted in a $1.1 million decrease to net income in the third quarter and nine month period of 2003, $0.5 million decrease to net income for the third quarter of 2004 and a $1.6 million decrease to net income for the nine months ended September 30, 2004. The adoption of Statement No. 150 did not impact net income applicable to common stock or earnings per common share.

Effective October 1, 2003, we adopted the DIG’s Statement 133 Implementation Issue No. B36, “Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments that Incorporate Credit Risk Exposures that are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under those Instruments” (DIG B36). DIG B36 addresses whether Statement No. 133 requires bifurcation of modified coinsurance arrangements and debt instruments into a debt host contract and an embedded derivative if the coinsurance agreement or debt instrument incorporates credit risk exposures that are unrelated or only partially related to the creditworthiness of the obligor of that agreement or instrument. Under DIG B36, a modified coinsurance agreement where interest on funds withheld

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is determined by reference to a pool of fixed maturity assets is an example of an arrangement containing embedded derivatives requiring bifurcation. Embedded derivatives in these contracts are to be recorded at fair value at each balance sheet date and changes in the fair values of the derivatives are recorded as income or expense. This guidance applies to general account investments supporting our variable alliance business. The fair value of the embedded derivatives pertaining to funds withheld on variable business assumed by us totaled $0.7 million at September 30, 2004 and $0.5 million at December 31, 2003, and the fair value of the embedded derivatives pertaining to funds withheld on variable business ceded by us was less than $0.1 million at September 30, 2004 and December 31, 2003. Net income increased by less than $0.1 million for the third quarter of 2004 and nine months ended September 30, 2004 as a result of adopting DIG B36.

In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” Interpretation No. 46 establishes a variable interests model to follow when determining whether or not to consolidate an entity that is not evaluated for consolidation under the traditional voting interests model. This Interpretation generally requires that a company (investee) being evaluated under the variable interests model be consolidated if (a) the investor has decision making powers over the entity – that is, the ability to buy and sell assets or conduct operations or (b) the investor is exposed to the majority of the risks or rewards of the entity. In addition, the Interpretation requires that investments made by related parties be analyzed together in applying the variable interest model. The disclosure provisions of this Interpretation are effective for financial statements issued after January 31, 2003. The consolidation provisions are effective for new transactions entered into after January 31, 2003 and for pre-existing entities as of December 31, 2003.

Upon adoption of Interpretation No. 46, effective December 31, 2003, the subsidiary trust that issued the company-obligated mandatorily redeemable preferred stock was deconsolidated. The effect of this deconsolidation is to replace the obligations of the trust to the preferred security holders with our subordinated debt obligation to the trust and our equity investment in the trust. In addition, the dividends on the company-obligated mandatorily redeemable preferred stock of the trust are replaced in our consolidated statements of income with the interest expense on our subordinated debt obligation to the trust and the dividends we receive on our equity investment in the trust. We record our subordinated debt obligation to the trust and our equity investment in the trust, along with the related interest expense and dividend income, on a net basis due to the contractual right of setoff. The adoption of the Interpretation with respect to the subsidiary trust has no impact on net income or earnings per common share.

In March 2004, the FASB’s Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-1). EITF 03-1 provides guidance regarding the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and to equity securities accounted for under the cost method. Included in EITF 03-1 is guidance on how to account for impairments that are solely due to interest rate changes, including changes resulting from increases in sector credit spreads. This guidance was to become effective for reporting periods beginning after June 15, 2004. However, on September 30, 2004, the FASB issued a Staff Position that delays the effective date for the recognition and measurement guidance of EITF 03-1 until additional clarifying guidance is issued. This additional guidance is expected to be issued during and be effective for the fourth quarter of 2004. We are not able to assess the impact of the adoption of EITF 03-1 until final guidance is issued.

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Stock-Based Compensation

Under Statement No. 123, we use the prospective method for the expensing of stock options issued after January 1, 2003. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period.

Income Taxes

The effective tax rate for the third quarter was 34.6% in 2004 and 37.5% in 2003 and for the nine-month period was 31.6% in 2004 compared to 33.8% in 2003. The decrease in the effective tax rate for the nine-month period is primarily attributable to the reversal of a tax accrual totaling $1.6 million during the second quarter of 2004. During the second quarter of 2004, based on events and analysis performed during the quarter, we determined that a tax accrual was no longer necessary and a related benefit totaling $1.6 million was recorded.

Reclassifications

Certain amounts related to derivative instruments in the 2003 consolidated financial statements have been reclassified to conform to the 2004 financial statement presentation.

2.          Credit Arrangements

In connection with the 2001 acquisition of Kansas Farm Bureau Life Insurance Company, we issued 3,411,000 shares of Series C cumulative voting mandatorily redeemable preferred stock with an estimated fair value of $80.0 million to the Kansas Farm Bureau Federation. Each share of Series C preferred stock has a par value of $26.8404 and voting rights identical to that of Class A common stock. Dividends on the Series C preferred stock are payable quarterly at a rate equal to the regular cash dividends per share of common stock, as defined, then payable. We redeemed 1,687,000 shares, or $45.3 million, of the Series C preferred stock on January 2, 2004, in accordance with the scheduled redemption dates under the agreement. The remaining balance is scheduled to be redeemed for cash at par value, or $46.3 million, on January 3, 2006. Should we, in our sole discretion, determine that we are unable to redeem the remaining balance for cash, the redemption would be funded with shares of Class A common stock. The number of shares of Class A common stock to be issued in exchange for one share of Series C preferred stock would be the cash redemption price divided by the average daily closing price per share of Class A common stock for the ten trading days preceding the redemption. In the event of a change in the control of the Company, at the option of the holder, each share of Series C preferred stock is convertible into one share of Class A common stock or

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redeemable for cash at par. Conversion of the Series C preferred stock is not assumed for purposes of calculating earnings per share – assuming dilution because the contingencies allowing the conversion have not been met. The Series C preferred stock was issued at an $11.6 million discount to par. This discount accretes to interest expense during the life of the securities using the effective interest method.

In December 2003, we entered into a $60.0 million revolving line of credit agreement with LaSalle Bank National Association and Bankers Trust Company, N.A. This agreement is effective through October 31, 2005 and interest on any borrowings accrues at a variable rate (2.66% at September 30, 2004). Under this agreement, we are required to maintain minimum capital and surplus levels at the Life Companies and meet certain other financial covenants. We are also prohibited from incurring additional indebtedness in excess of $10.0 million while this agreement is in effect. In January 2004, we borrowed $46.0 million on this line of credit to fund the partial redemption of our Series C preferred stock discussed above.

On April 12, 2004, we issued $75.0 million of 5.85% Senior Notes (Senior Notes) due April 15, 2014. Interest on the Senior Notes will be paid semi-annually beginning October 15, 2004. The Senior Notes are redeemable in whole or in part at any time at our option at a “make-whole” redemption price equal to the greater of 100% of their principal amount or the sum of the present values of the remaining scheduled payments of principal and interest on the Senior Notes, discounted to the redemption date on a semiannual basis at the treasury rate plus 25 basis points.

We entered into a treasury rate lock agreement (“rate lock”) on March 18, 2004 to hedge the interest rate on a portion of the Senior Notes. The rate lock had a $50.0 million notional amount and was based on the 10-year Treasury interest rate at the contract’s inception (3.797%). We formally documented this hedging relationship, including identification of the rate lock as the hedging instrument and the 20 semi-annual interest payments on $50.0 million of the Senior Notes as the hedged transactions. We also documented our risk management objectives and strategies for undertaking this transaction. The rate lock agreement is accounted for as a cash flow hedge. The rate lock was settled on April 6, 2004 and proceeds totaling $1.5 million were deferred and are being amortized over the term of the Senior Notes, along with underwriting fees, offering expenses and original issue discount of the Senior Notes, using the effective interest method. We received net proceeds of approximately $75.5 million from the issuance of the Senior Notes after underwriting fees, offering expenses, original issue discount and the impact of the rate lock.

The Senior Note offering would have caused us to violate the covenants of our revolving line of credit agreement with LaSalle Bank National Association and Bankers Trust Company, N.A. Therefore, on April 1, 2004, this agreement was amended to allow for the Senior Note offering without violating the financial covenants of that agreement.

3.          Commitments and Contingencies

In the normal course of business, we may be involved in litigation where amounts are alleged that are substantially more than contractual policy benefits or those contained in certain other agreements. At September 30, 2004, management is not aware of any claims for which a material loss is reasonably possible.

We seek to limit our exposure to loss on any single insured or event and to recover a portion of benefits paid by ceding insurance to other insurance enterprises. Reinsurance contracts do not relieve us of our obligations to policyholders. To the extent that reinsuring companies are later unable to meet obligations under reinsurance agreements, our insurance subsidiaries would be liable for these obligations, and payment of these obligations could result in losses. To limit the possibility of such losses, we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk. No allowance for uncollectible amounts has been established against our asset for reinsurance recoverable since none of our receivables are deemed to be uncollectible.

We participate in a reinsurance pool with various unaffiliated life insurance companies to mitigate the impact of a catastrophic event on our financial position and results of operations. Members of the pool share in the eligible catastrophic losses based on their size and contribution to the pool. Under the pool arrangement, we will be able to cede approximately 60% of catastrophic losses after other reinsurance and a deductible of $0.7 million. Pool losses are capped at $7.2 million per event and the maximum loss we could incur as a result of losses assumed from other pool members is $2.7 million per event. In April 2004, we purchased additional catastrophic coverage which provides $10.0 million of coverage for losses in excess of $7.0 million per event.

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We self-insure our employee health and dental claims; however, claims in excess of self-insurance levels are fully insured. We fund insurance claims through a self-insurance trust. Deposits to the trust are made at an amount equal to our best estimate of claims incurred during the period. Accordingly, no accruals are recorded on our financial statements for unpaid claims and claims incurred but not reported. Adjustments, if any, resulting in changes in the estimate of claims incurred will be reflected in operations in the periods in which such adjustments are known.

4.          Earnings per Share

The following table sets forth the computation of earnings per common share and earnings per common share – assuming dilution.

Based upon the provisions of the underlying agreement and the application of the “two class” method to our capital structure, we have not allocated any undistributed net income to the Series C preferred stock since the Series C preferred stockholder’s participation in dividends with the common stockholders is limited to the amount of the annual regular dividend.

5.          Segment Information

Management analyzes operations by reviewing financial information regarding products that are aggregated into three product segments. The product segments are (1) traditional annuity, (2) traditional and universal life insurance and (3) variable. We also have various support operations and corporate capital that are aggregated into a corporate and other segment.

The traditional annuity segment consists of fixed annuities, index annuities and supplementary contracts (some of which involve life contingencies). Fixed and index annuities provide for tax-deferred savings and supplementary contracts provide for the systematic repayment of funds that accumulate interest. Fixed annuities consist primarily

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of flexible premium deferred annuities, but also include single premium deferred and immediate contracts. With fixed annuities, we bear the underlying investment risk and credit interest to the contracts at rates we determine, subject to interest rate guarantees. With index annuity products, we bear the underlying investment risk and credit interest in an amount equal to the greater of a guaranteed interest rate or a percentage of the gain in a specified market index.

The traditional and universal life insurance segment consists of whole life, term life and universal life policies. These policies provide benefits upon the death of the insured and may also allow the customer to build cash value on a tax-deferred basis.

The variable segment consists of variable universal life insurance and variable annuity contracts. These products are similar to universal life insurance and traditional annuity contracts, except the contract holder has the option to direct the cash value of the contract to a wide range of investment sub-accounts, thereby passing the investment risk to the contract holder.

The corporate and other segment consists of the following corporate items and products/services that do not meet the quantitative threshold for separate segment reporting:

	•		investments and related investment income not specifically allocated to our product segments;
	•		interest expense and minority interest pertaining to distributions on trust preferred securities;
	•		accident and health insurance products, primarily a closed block of group policies;
	•		advisory services for the management of investments and other companies;
	•		marketing and distribution services for the sale of mutual funds and insurance products not issued by us; and
	•		leasing services, primarily with affiliates.

Financial information concerning our operating segments is as follows:

We analyze our segment results based on pre-tax operating income. Accordingly, income taxes are not allocated to the segments. In addition, operating results are analyzed net of any transactions between the segments.

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Our investment in equity method investees and the related equity income are attributable to the corporate and other segment. Goodwill at September 30, 2004 and December 31, 2003 is allocated among the segments as follows: traditional annuity ($3.9 million), traditional and universal life ($6.1 million) and variable ($1.2 million).

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section includes a summary of FBL Financial Group, Inc.’s consolidated results of operations, financial condition and where appropriate, factors that management believes may affect future performance. Unless noted otherwise, all references to FBL Financial Group, Inc. (we or the Company) include all of its direct and indirect subsidiaries, including its primary life insurance subsidiaries, Farm Bureau Life Insurance Company (Farm Bureau Life) and EquiTrust Life Insurance Company (EquiTrust Life) (collectively, the Life Companies). Please read this discussion in conjunction with the accompanying consolidated financial statements and related notes. In addition, we encourage you to refer to our 2003 Form 10-K for a complete description of our significant accounting policies and estimates. Familiarity with this information is important in understanding our financial position and results of operations.

Results of Operations for the Three and Nine Months Ended September 30, 2004 Compared to Three and Nine Months Ended September 30, 2003

Premiums collected is not a measure used in financial statements prepared according to accounting principles generally accepted in the United States (GAAP). There is no comparable GAAP financial measure. We use premiums collected to measure the productivity of our agency force. Direct traditional annuity premiums collected increased significantly during the 2004 periods due to the rapid expansion of our EquiTrust Life distribution channel. Reinsurance assumed and other premiums collected decreased during the 2004 periods due to the suspension of our coinsurance agreement with American Equity Investment Life Insurance Company (American Equity) effective August 1, 2004. As a result of this suspension, no transfers of new business will occur unless we

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and American Equity agree to resume the coinsurance of new business. The business assumed by us prior to the suspension will remain as part of our in force business.

Net income applicable to common stock decreased 2.0% in the third quarter of 2004 to $14.4 million and 12.0% in the nine months ended September 30, 2004 to $40.5 million. Net income applicable to common stock was reduced during the 2004 periods by decreases in equity income and spreads earned on our universal life and individual traditional annuity products and increases in operating expenses. These items were partially offset by the impact of growth in the volume of business in force, an increase in realized gains on investments and lower income taxes. Results for the 2004 periods were also favorably impacted by a reduction in the amortization of deferred policy acquisition costs as a result of changes in assumptions used to calculate amortization. Our volume of business in force increased due to strong sales from the EquiTrust Life and Farm Bureau Life distribution channels and premiums assumed under a coinsurance agreement with American Equity (the coinsurance agreement) during 2004 and 2003.

The spreads earned on our universal life and individual traditional annuity products are as follows:

The weighted average yield on invested assets represents the yield on cash and investments backing the universal life and individual traditional annuity products net of investment expenses. The weighted average crediting rate/index cost and spread are computed including the impact of the amortization of deferred sales inducements. With respect to our index annuities, index costs represent the expenses we incur to fund the annual income credits through the purchase of options and minimum guaranteed interest credited on the index business. See the “Segment Information” section that follows for a discussion of our spreads.

We periodically revise the key assumptions used in the calculation of the amortization of deferred policy acquisition costs, deferred sales inducements, value of insurance in force acquired and unearned revenues for participating life insurance and interest sensitive products, as applicable, through an “unlocking” process. Revisions are made based on historical results and our best estimate of future experience. The impact of unlocking is recorded in the current period as an increase or decrease to amortization of the respective balances. While the unlocking process can take place at any time, as needs dictate, the process typically takes place annually with different blocks of business unlocked each quarter.

The impact of unlocking is as follows:

Key assumption changes impacting the results by segment include changes to the assumptions regarding persistency experience, expense levels, spreads and participating dividends. See “Segment Information” following for details regarding the impact of unlocking on our segments.

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     Premiums and product charges are as follows:

Premiums and product charges increased 2.8% in the third quarter of 2004 to $53.8 million and 3.9% in the nine months ended September 30, 2004 to $166.9 million. The increases in interest sensitive and index product charges are driven principally by increases in cost of insurance charges on universal life products, mortality and expense fees on variable products and surrender charges on annuity and universal life products. Cost of insurance charges increased due to aging of the business in force. Mortality and expense fees increased due to an increase in the separate account balances on which fees are based. Surrender charges increased due to an increase in the amount of surrenders. Traditional life insurance premiums increased 2.0% in the nine months ended September 30, 2004 to $99.8 million due primarily to sales of whole life products by our Farm Bureau Life agency force.

Net investment income, which excludes investment income on separate account assets relating to variable products, increased 8.4% in the third quarter of 2004 to $106.8 million and 3.1% in the nine months ended September 30, 2004 to $305.7 million due to an increase in average invested assets. Average invested assets in the nine-month period of 2004 increased 15.8% to $6,615.2 million (based on securities at amortized cost) due principally to net premium inflows from the Farm Bureau Life and EquiTrust Life distribution channels and the coinsurance agreement. The annualized yield earned on average invested assets decreased to 6.21% in the nine months ended September 30, 2004 from 6.98% in the respective 2003 period due principally to the impact of decreases in market interest rates and decreases in fee income from bond calls and mortgage loan prepayments and discount accretion on mortgage and asset-backed securities. Fee income from bond calls and mortgage loan prepayments totaled $1.6 million in the nine months ended September 30, 2004 compared to $8.4 million in the respective 2003 period. For the nine months ended September 30, net investment income includes ($0.5) million in 2004 and $3.4 million in 2003, representing acceleration (deceleration) of net discount accretion on mortgage and asset-backed securities resulting from changing prepayment speed assumptions as of the end of each respective period. See the “Financial Condition - Investments” section that follows for a description of how changes in prepayment speeds impact net investment income.

Derivative income (loss) is as follows:

The increases in gains received at expiration or termination are attributable to growth in the volume of index annuities in force and appreciation in the underlying equity market indices on which our options are based. The changes in the difference between the fair value of the call options and the remaining option costs for 2004 are caused primarily by the general change in the S&P 500 Index (upon which the majority of our options are based).

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For the third quarter of 2004, the S&P 500 Index decreased on a point-to-point basis by 2.3%, compared to a point-to-point increase of 2.2% for the 2003 period. For the nine months ended September 30, 2004, the S&P 500 Index increased on a point-to-point basis by 0.2%, compared to a point-to-point increase of 13.2% for the 2003 period. While the difference between the fair value of the call options and the remaining option costs generally corresponds to the point-to-point change in the S&P 500 Index, the change in fair value is also impacted by options based on daily or monthly S&P 500 averages and options which are based on other underlying indices. Furthermore, the timing of option settlements also impacts the change in fair value. The cost of money for call options increased due to the impact of growth in the volume of index annuities in force and an increase in the market price of the options purchased. Other derivative income (loss) is comprised of changes in the value of (i) the conversion feature embedded in convertible fixed maturity securities, (ii) the embedded derivative included in our modified coinsurance contracts and (iii) the forward commitments for the purchase of certain when-issued securities. Derivative income (loss) will fluctuate based on market conditions.

Realized gains (losses) on investments are as follows:

The level of realized gains (losses) is subject to fluctuation from period to period depending on the prevailing interest rate and economic environment and the timing of the sale of investments. See “Financial Condition – Investments” for details regarding our unrealized losses at September 30, 2004 and December 31, 2003.

We monitor the financial condition and operations of the issuers of securities rated below investment grade and of the issuers of certain investment grade securities on which we have concerns regarding credit quality. In determining whether or not an unrealized loss is other than temporary, we review factors such as:

•

historical operating trends;

•

business prospects;

•

status of the industry in which the company operates;

•

analyst ratings on the issuer and sector;

•

quality of management;

•

size of the unrealized loss;

•

length of time the security has been in an unrealized loss position; and

•

our intent and ability to hold the security.

If we determine that an unrealized loss is other than temporary, the security is written down to its fair value at the time of impairment, with the difference between amortized cost and fair value recognized as a realized loss. Details regarding our significant investment impairments for the nine months ended September 30, 2004 and 2003, including the circumstances requiring the write downs, are summarized in the following table:

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20

September 30, 2004

Other income and other expenses include revenues and expenses, respectively, relating primarily to our non-insurance operations. These operations include management, advisory, marketing and distribution services and leasing activities. Fluctuations in these financial statement line items are generally attributable to fluctuations in the level of these services provided during the periods.

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Interest sensitive and index product benefits are as follows:

Interest sensitive and index product benefits decreased 7.8% in the third quarter of 2004 to $57.8 million and 3.3% in the nine months ended September 30, 2004 to $184.0 million. These decreases are due to decreases in interest crediting rates on many of our products throughout 2003 and into 2004, decreases in the reserve for the embedded derivatives included in index annuities and decreases in interest sensitive death benefits. These decreases were partially offset by an increase in index credits to index annuity contract holders and the impact of an increase in the volume of business in force. The decreases in interest crediting rates were made in response to a declining investment portfolio yield. The increases in index credits are attributable to growth in the volume of index annuities in force and appreciation in the underlying equity market indices on which our options are based. The decreases in the value of the embedded derivatives included in the index annuities are due to changes in the underlying equity market indices on which the options supporting these liabilities are based as discussed in “Derivative income (loss)”. In addition, the timing of the posting of index credits impacts the changes in the value of the embedded derivative. Interest sensitive and index product benefits also includes $4.5 million of amortization of deferred sales inducements for the nine months ended September 30, 2004 and $2.8 million in the 2003 period in accordance with the adoption of Statement of Position (SOP) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts.” Amortization of deferred sales inducements was previously included in underwriting, acquisition and insurance expenses as a component of amortization of deferred policy acquisition costs. Interest sensitive death benefits decreased 9.5% to $25.8 million for the nine months ended September 30, 2004. Interest sensitive and index product benefits can tend to fluctuate from period to period primarily as a result of changes in mortality experience and the impact of changes in the equity markets on index credits and the value of the embedded derivatives for our index annuities.

Traditional life insurance and accident and health policy benefits are as follows:

Traditional life insurance and accident and health policy benefits increased 6.4% in the third quarter of 2004 to $34.9 million and increased 3.9% in the nine months ended September 30, 2004 to $108.2 million primarily due to increased traditional death benefits. Traditional death benefits increased 8.8% to $11.7 million in the third quarter of 2004 and 10.8% in the nine months ended September 30, 2004 to $35.7 million. Distributions to participating policyholders decreased due to reductions in our dividend crediting rates in response to a declining investment portfolio yield. Traditional life insurance and accident and health benefits can fluctuate from period to period primarily as a result of changes in mortality experience.

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Underwriting, acquisition and insurance expenses are as follows: