FBL Financial 10Q 2003 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2003

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

For the transition period from to

Commission File Number: 1-11917

FBL Financial Group, Inc.

(Exact name of registrant as specified in its charter)

Iowa		42-1411715
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5400 University Avenue, West Des Moines, Iowa		50266-5997
(Address of principal executive offices)		(Zip Code)

(515) 225-5400

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 ¨ No

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.¨ Yes ¨ 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: 26,927,788 shares of Class A common stock and 1,192,990 shares of Class B common stock as of October 27, 2003.

FBL FINANCIAL GROUP, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets	2
	Consolidated Statements of Income	4
	Consolidated Statements of Changes in Stockholders’ Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	31

PART II.	OTHER INFORMATION

Item 6.	Exhibits and Reports on Form 8-K	31

SIGNATURES		32

ITEM 1. FINANCIAL STATEMENTS

FBL FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands, except per share data)

	September 30, 2003		December 31, 2002
Assets
Investments:
Fixed maturities – available for sale, at market (amortized cost: 2003 - $5,076,001; 2002 - $4,417,507)	$	5,302,539	$	4,621,271
Equity securities – available for sale, at market (cost: 2003 - $21,157; 2002 - $22,196)		22,203		21,545
Mortgage loans on real estate		562,572		483,627
Investment real estate, less allowances for depreciation of $5,209 in 2003 and $4,662 in 2002		28,214		25,031
Policy loans		178,382		178,997
Other long-term investments		7,436		6,032
Short-term investments		36,434		50,866

Total investments		6,137,780		5,387,369

Cash and cash equivalents		278,268		263,011
Securities and indebtedness of related parties		62,669		48,285
Accrued investment income		55,496		53,642
Accounts and notes receivable		28		80
Amounts receivable from affiliates		8,823		3,649
Reinsurance recoverable		105,959		95,455
Deferred policy acquisition costs		545,664		468,793
Value of insurance in force acquired		47,507		48,526
Property and equipment, less allowances for depreciation of $55,690 in 2003 and $51,198 in 2002		35,467		35,115
Current income taxes recoverable		—		8,537
Goodwill		11,170		11,170
Other assets		39,713		28,100
Assets held in separate accounts		410,527		347,717

Total assets	$	7,739,071	$	6,799,449

FBL FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS (Continued)

(Dollars in thousands, except per share data)

	September 30, 2003		December 31, 2002
Liabilities and stockholders’ equity
Liabilities:
Policy liabilities and accruals:
Future policy benefits:
Interest sensitive and equity-indexed products	$	4,373,836	$	3,708,862
Traditional life insurance and accident and health products		1,125,228		1,096,995
Unearned revenue reserve		30,234		30,504
Other policy claims and benefits		20,181		19,846

		5,549,479		4,856,207

Other policyholders’ funds:
Supplementary contracts without life contingencies		343,503		321,046
Advance premiums and other deposits		148,923		125,614
Accrued dividends		12,778		15,453

		505,204		462,113

Amounts payable to affiliates		876		625
Short-term debt		44,887		40,000
Long-term debt		179,837		—
Current income taxes payable		2,539		—
Deferred income taxes		105,046		101,226
Other liabilities		211,992		147,474
Liabilities related to separate accounts		410,527		347,717

Total liabilities		7,010,387		5,955,362

Minority interest in subsidiaries:
Company-obligated mandatorily redeemable preferred stock of subsidiary trust		—		97,000
Other		109		210

Series C redeemable preferred stock, $26.8404 par and redemption value per share - authorized 3,752,100 shares, issued and outstanding 3,411,000 shares		—		85,514

Stockholders’ equity:
Preferred stock, without par value, at liquidation value – authorized 10,000,000 shares, issued and outstanding 5,000,000 Series B shares		3,000		3,000
Class A common stock, without par value – authorized 88,500,000 shares, issued and outstanding 26,895,641 shares in 2003 and 26,578,279 shares in 2002		49,484		43,993
Class B common stock, without par value – authorized 1,500,000 shares, issued and outstanding 1,192,990 shares		7,523		7,533
Accumulated other comprehensive income		119,197		95,145
Retained earnings		549,371		511,692

Total stockholders’ equity		728,575		661,363

Total liabilities and stockholders’ equity	$	7,739,071	$	6,799,449

See accompanying notes.

FBL FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except per share data)

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
Revenues:
Interest sensitive product charges	$	21,027		$	19,913		$	62,277		$	58,293
Traditional life insurance premiums		31,232			29,360			97,886			92,500
Accident and health premiums		65			43			391			313
Net investment income		98,541			88,818			296,458			251,332
Derivative income (loss)		2,078			(1,133	)		7,713			(10,570	)
Realized gains (losses) on investments		(318	)		1,683			(1,434	)		(1,894	)
Other income		3,980			4,193			12,411			12,990

Total revenues		156,605			142,877			475,702			402,964
Benefits and expenses:
Interest sensitive product benefits		61,653			54,407			187,439			145,633
Traditional life insurance and accident and health benefits		19,377			20,543			58,008			57,211
Increase in traditional life and accident and health future policy benefits		7,069			4,865			25,462			24,369
Distributions to participating policyholders		6,381			6,606			20,620			22,273
Underwriting, acquisition and insurance expenses		34,976			27,823			99,629			76,195
Interest expense		2,406			175			2,632			533
Other expenses		3,626			2,790			10,940			8,890

Total benefits and expenses		135,488			117,209			404,730			335,104

		21,117			25,668			70,972			67,860
Income taxes		(7,921	)		(8,089	)		(24,004	)		(21,210	)
Minority interest in earnings of subsidiaries:
Dividends on company-obligated mandatorily redeemable preferred stock of subsidiary trust		—			(1,213	)		(2,425	)		(3,638	)
Other		11			(22	)		22			(117	)
Equity income, net of related income taxes		1,534			1,078			3,751			42

Net income		14,741			17,422			48,316			42,937
Dividends on Series B and C preferred stock		(37	)		(1,088	)		(2,259	)		(3,239	)

Net income applicable to common stock	$	14,704		$	16,334		$	46,057		$	39,698

Earnings per common share	$	0.53		$	0.59		$	1.65		$	1.44

Earnings per common share – assuming dilution	$	0.51		$	0.58		$	1.62		$	1.41

Cash dividends per common share	$	0.10		$	0.10		$	0.30		$	0.30

See accompanying notes.

FBL FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

(Dollars in thousands)

	Series B Preferred Stock		Class A Common Stock			Class B Common Stock			Accumulated Other Comprehensive Income		Retained Earnings			Total Stockholders’ Equity
Balance at January 1, 2002	$	3,000	$	39,446		$	7,563		$	39,364	$	476,420		$	565,793
Comprehensive income:
Net income for nine months ended September 30, 2002		—		—			—			—		42,937			42,937
Change in net unrealized investment gains/losses		—		—			—			59,393		—			59,393

Total comprehensive income															102,330
Issuance of 284,190 shares of common stock under compensation and stock option plans, including related income tax benefit		—		3,689			—			—		—			3,689
Adjustment resulting from capital transactions of equity investee		—		(174	)		(30	)		—		—			(204	)
Dividends on preferred stock		—		—			—			—		(3,239	)		(3,239	)
Dividends on common stock		—		—			—			—		(8,284	)		(8,284	)

Balance at September 30, 2002	$	3,000	$	42,961		$	7,533		$	98,757	$	507,834		$	660,085

Balance at January 1, 2003	$	3,000	$	43,993		$	7,533		$	95,145	$	511,692		$	661,363
Comprehensive income:
Net income for nine months ended September 30, 2003		—		—			—			—		48,316			48,316
Change in net unrealized investment gains/losses		—		—			—			24,052		—			24,052

Total comprehensive income															72,368
Issuance of 317,362 shares of common stock under compensation and stock option plans, including related income tax benefit		—		5,558			—			—		—			5,558
Adjustment resulting from capital transactions of equity investee		—		(67	)		(10	)		—		—			(77	)
Dividends on preferred stock		—		—			—			—		(2,259	)		(2,259	)
Dividends on common stock		—		—			—			—		(8,378	)		(8,378	)

Balance at September 30, 2003	$	3,000	$	49,484		$	7,523		$	119,197	$	549,371		$	728,575

Comprehensive income (loss) totaled ($12.2) million in the third quarter of 2003 and $84.5 million in the third quarter of 2002.

See accompanying notes.

FBL FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

	Nine months ended September 30,
	2003			2002
Operating activities
Net income	$	48,316		$	42,937
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments related to interest sensitive products:
Interest credited to account balances, excluding bonus interest		148,821			125,295
Change in fair value of embedded derivatives		9,338			(1,453	)
Charges for mortality and administration		(59,565	)		(56,215	)
Deferral of unearned revenues		1,010			1,710
Amortization of unearned revenue reserve		(1,145	)		(1,530	)
Provision for depreciation and amortization		(11,602	)		2,907
Equity income		(3,751	)		(42	)
Realized losses on investments		1,434			1,894
Increase in traditional life and accident and health benefit accruals		25,462			24,369
Policy acquisition costs deferred		(87,615	)		(116,986	)
Amortization of deferred policy acquisition costs		35,497			16,180
Provision for deferred income taxes		(9,020	)		9,907
Other		3,083			20,610

Net cash provided by operating activities		100,263			69,583

Investing activities
Sale, maturity or repayment of investments:
Fixed maturities – available for sale		1,305,958			624,256
Equity securities – available for sale		4,192			4,424
Mortgage loans on real estate		58,353			53,092
Investment real estate		419			169
Policy loans		28,465			32,397
Other long-term investments		1,002			501
Short-term investments – net		14,432			—

		1,412,821			714,839
Acquisition of investments:
Fixed maturities – available for sale		(1,871,289	)		(1,506,976	)
Equity securities – available for sale		(3,344	)		(3,052	)
Mortgage loans on real estate		(140,698	)		(94,469	)
Investment real estate		(4,586	)		(1,871	)
Policy loans		(27,850	)		(31,446	)
Other long-term investments		(525	)		(506	)
Short-term investments – net		—			(2,205	)

		(2,048,292	)		(1,640,525	)
Proceeds from disposal, repayments of advances and other distributions from equity investees		5,626			3,034
Investments in and advances to equity investees		(12,876	)		(68	)
Net purchases of property and equipment and other		(8,756	)		(3,609	)

Net cash used in investing activities		(651,477	)		(926,329	)

FBL FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in thousands)

	Nine months ended September 30,
	2003			2002
Financing activities
Receipts from interest sensitive and equity-indexed products credited to policyholder account balances	$	868,004		$	977,360
Return of policyholder account balances on interest sensitive and equity-indexed products		(294,717	)		(218,114	)
Distributions on company-obligated mandatorily redeemable preferred stock of subsidiary trust		(2,425	)		(3,638	)
Other distributions related to minority interests - net		(65	)		(126	)
Issuance of common stock		4,846			3,139
Dividends paid		(9,172	)		(9,420	)

Net cash provided by financing activities		566,471			749,201

Increase (decrease) in cash and cash equivalents		15,257			(107,545	)
Cash and cash equivalents at beginning of period		263,011			271,459

Cash and cash equivalents at end of period	$	278,268		$	163,914

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	1,890		$	536
Income taxes		23,255			18,656
Non-cash operating activity:
Deferral of bonus interest credited to account balances		15,554			14,452
Non-cash financing activity:
Refinancing of short-term debt		40,000			—

See accompanying notes.

FBL Financial Group, Inc.

September 30, 2003

FBL FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2003

1. Basis of Presentation and Accounting Changes

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, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. We encourage you to refer to our consolidated financial statements and notes for the year ended December 31, 2002 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.

In the third quarter of 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 a $0.2 million decrease to net income for the third quarter and nine months ended September 30, 2003.

In the third quarter of 2003, we 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 ($139.8 million long-term debt and $44.9 million short-term debt). 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 of 2003) are recorded as interest expense. All reclassifications made due to the adoption of Statement No. 150 were made on a prospective basis only as reclassification of prior period amounts is not permitted. The adoption of Statement No. 150 resulted in a $1.1 million decrease to net income for the third quarter and nine months ended September 30, 2003. The adoption of Statement No. 150 did not impact net income applicable to common stock or earnings per common share.

Effective January 1, 2003, we adopted Statement No. 123, “Accounting for Stock-Based Compensation” and Statement No. 148, “Accounting for Stock-Based Compensation –Transition and Disclosure.” Under Statement No. 123, compensation expense is recognized as stock options vest in an amount equal to the estimated fair value of the options on the date of grant. Statement No. 148 amends Statement No. 123 by requiring more prominent and frequent disclosures regarding the effects of stock-based compensation and provides for alternative transition methods in the adoption of Statement No. 123. Historically, we have applied Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” to stock option grants, which generally has resulted in no compensation expense being recognized. We are using the prospective method in the adoption of Statement No. 123. Under the prospective method, expense is recognized for those options granted, modified or settled after the

FBL Financial Group, Inc.

September 30, 2003

date of adoption. Net income was $0.1 million (less than $0.01 per common share) lower for the third quarter of 2003 and $0.3 million ($0.01 per common share) lower for the nine months ended September 30, 2003 as a result of expensing stock options. The impact of adoption will increase over the five year vesting period of the underlying options as options issued before the date of adopting Statement No. 123 will continue to be accounted for under APB No. 25.

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.

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
	(Dollars in thousands, except per share data)
Net income, as reported	$	14,741		$	17,422		$	48,316		$	42,937
Add: Stock-based employee and director compensation expense included in reported net income, net of related tax effects		100			—			280			—
Less: Total stock-based employee and director compensation expense determined under fair value based methods for all awards, net of related tax effects		(228	)		(130	)		(664	)		(446	)

Net income, pro forma	$	14,613		$	17,292		$	47,932		$	42,491

Earnings per common share, as reported	$	0.53		$	0.59		$	1.65		$	1.44

Earnings per common share, pro forma	$	0.52		$	0.59		$	1.64		$	1.42

Earnings per common share – assuming dilution, as reported	$	0.51		$	0.58		$	1.62		$	1.41

Earnings per common share – assuming dilution, pro forma	$	0.51		$	0.57		$	1.61		$	1.40

In April 2003, the Derivative Implementation Group issued Statement 133 Implementation Issue No. B36, “Embedded Derivatives: Bifurcation of a Debt Instrument that Incorporates Both Interest Rate Risk and Credit Rate Risk Exposures that are Unrelated or Only Partially Related to the Creditworthiness of the Issuer of that Instrument” (DIG B36). DIG B36 addresses whether Statement No. 133 requires bifurcation of a debt instrument into a debt host contract and an embedded derivative if the debt instrument incorporates both interest rate risk and credit risk exposures that are unrelated or only partially related to the creditworthiness of the issuer of that instrument. Under DIG B36 modified coinsurance agreements where interest on funds withheld 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. At September 30, 2003, funds withheld on variable business assumed by us totaled $5.8 million, and funds withheld on variable business ceded by us totaled $3.9 million. We have not quantified the impact on our financial statements if we accounted for our modified coinsurance contracts as having an embedded derivative. However, the impact is not expected to be material due to the relatively small balances of funds withheld. We plan on adopting DIG B36 when it becomes effective in the fourth quarter of 2003.

In June 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts.” The SOP provides guidance on separate account presentation and valuation, the accounting for sales inducements (bonus interest) and the classification and valuation of long-duration contract liabilities. We expect to adopt this SOP when it becomes effective in the first quarter of 2004. While we currently comply with most of the guidance presented in this SOP, we will need to change our method of computing reserves for guaranteed minimum death benefits (GMDB) associated with our variable annuities and change our presentation of deferred expenses relating to sales inducements. We have not quantified the impact of adoption on our financial statements; however, the impact is not

FBL Financial Group, Inc.

September 30, 2003

expected to be material due to our limited exposure to GMDBs. Our exposure to GMDBs (GMDB exceeds account value), net of reinsurance ceded, totaled $24.6 million at September 30, 2003. Our recorded reserves for this benefit, which take into account the probability of death before the account value increases to an amount equal to or greater than the GMDB, totaled $0.4 million at September 30, 2003. We currently include bonus interest as a component of deferred policy acquisition costs and the related amortization expense. The amount of bonus interest included as a component of deferred policy acquisition costs totaled $37.9 million at September 30, 2003 and $25.1 million at December 31, 2002.

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 interests 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. We do not expect the impact of this Interpretation to be material to our financial statements.

2. Interest Rate Swaps

During the second quarter of 2003, we entered into three interest rate swaps to manage interest rate risk associated with our flexible premium deferred annuity contracts. Under the interest rate swaps, we pay a fixed rate of interest and receive a floating rate of interest on a notional amount totaling $150.0 million. Details regarding the interest rate swaps as of September 30, 2003 are as follows:

Maturity Date	Notional Amount		Receive Rate	Pay Rate		Carrying Value			Fair Value
(Dollars in thousands)
5/1/2006	$	50,000	1 month LIBOR	2.545	%	$	(1,040	)	$	(1,040	)
7/1/2008		50,000	1 month LIBOR	2.579			960			960
7/1/2008		50,000	1 month LIBOR	2.465			1,207			1,207

	$	150,000				$	1,127		$	1,127

These interest rate swaps effectively fix the interest crediting rate on a portion of our flexible premium deferred annuity contract liabilities thereby hedging our exposure to increases in market interest rates. We formally document this hedging relationship, including identification of the interest rate swaps as the hedging instruments and interest credited to the related flexible premium deferred annuity contract liabilities as the hedged transactions. We also document our risk management objectives and strategies for undertaking these transactions. The interest rate swap agreements are accounted for as cash flow hedges.

The interest rate swaps are carried at fair value on the consolidated balance sheet as either an other long-term investment or other liability. The effective portion of any unrealized gain or loss is recorded in accumulated other comprehensive income. If a portion of the hedges become ineffective, the ineffective portion of any unrealized gain or loss on the interest rate swap will be recorded in earnings as a component of derivative income (loss) as it occurs. The net periodic interest settlement between the interest paid and the interest received under these swaps is recorded as a component of interest sensitive product benefits. Interest sensitive product benefits increased by $0.6 million in the third quarter of 2003 and $0.7 million in the nine months ended September 30, 2003 as a result of the net interest paid on the interest rate swaps. There was no ineffectiveness recorded in the consolidated statement of income.

FBL Financial Group, Inc.

September 30, 2003

3. Debt

We have a note payable to the Federal Home Loan Bank of Des Moines (FHLB) totaling $40.0 million at September 30, 2003 and at December 31, 2002. The note was refinanced during the third quarter of 2003. The new note is due September 2006 and interest on the note is charged at a variable rate equal to the London Interbank Offered Rate plus 0.08% (1.20% at September 30, 2003). At September 30, 2003, fixed maturity securities with a carrying value of $42.6 million are on deposit with the FHLB as collateral for the note. As an investor in the FHLB, we have the ability to borrow additional amounts provided additional collateral is deposited with the FHLB and additional FHLB stock is purchased. The amount of stock required to be purchased to increase our borrowing capacity can range between 3% and 5% of additional borrowings (currently at 4.45%).

4. 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 certain other agreements. At September 30, 2003, 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.

Effective July 1, 2003, we entered into 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 $6.9 million per event.

We self-insure our employee health and welfare 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.

We have extended a line of credit in the amount of $0.5 million to Western Computer Services, Inc., an affiliate. Interest on this agreement is equal to the prime rate of a national bank and payable monthly. There was less than $0.1 million at September 30, 2003 and December 31, 2002 outstanding on this line of credit.

FBL Financial Group, Inc.

September 30, 2003

5. Earnings per Share

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

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
	(Dollars in thousands, except per share data)
Numerator:
Net income	$	14,741		$	17,422		$	48,316		$	42,937
Dividends on Series B and C preferred stock		(37	)		(1,088	)		(2,259	)		(3,239	)

Numerator for earnings per common share-income available to common stockholders	$	14,704		$	16,334		$	46,057		$	39,698

Denominator:
Weighted average shares		27,973,868			27,677,161			27,887,905			27,575,830
Deferred common stock units related to directors compensation plan		19,285			15,206			18,074			14,380

Denominator for earnings per common share – weighted-average shares		27,993,153			27,692,367			27,905,979			27,590,210
Effect of dilutive securities – employee stock options		638,588			553,452			526,080			565,645

Denominator for diluted earnings per common share – adjusted weighted-average shares		28,631,741			28,245,819			28,432,059			28,155,855

Earnings per common share	$	0.53		$	0.59		$	1.65		$	1.44

Earnings per common share – assuming dilution	$	0.51		$	0.58		$	1.62		$	1.41

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.

6. 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 is aggregated into a corporate and other segment.

The traditional annuity segment consists of traditional annuities, equity-indexed annuities and supplementary contracts (some of which involve life contingencies). Traditional and equity-indexed annuities provide for tax-deferred savings and supplementary contracts provide for the systematic repayment of funds that accumulate interest. Traditional annuities consist primarily of flexible premium deferred annuities, but also include single premium deferred and immediate contracts. With traditional annuities, we bear the underlying investment risk and credit interest to the contracts at rates we determine, subject to interest rate guarantees. With equity-indexed 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.

FBL Financial Group, Inc.

September 30, 2003

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:

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
	(Dollars in thousands)
Operating revenues:
Traditional annuity	$	62,724		$	47,500		$	186,060		$	120,599
Traditional and universal life		76,796			76,288			237,164			233,090
Variable		12,274			12,320			36,746			34,892
Corporate and other		5,136			5,056			17,148			16,243

		156,930			141,164			477,118			404,824
Realized gains (losses) on investments (A)		(325	)		1,713			(1,416	)		(1,860	)

Consolidated revenues	$	156,605		$	142,877		$	475,702		$	402,964

Pre-tax operating income (loss):
Traditional annuity	$	10,176		$	7,280		$	31,534		$	18,852
Traditional and universal life		12,707			18,689			40,366			47,062
Variable		452			(2,120	)		1,205			470
Corporate and other		297			1,118			2,902			(1,147	)

		23,632			24,967			76,007			65,237
Income taxes on operating income		(8,797	)		(8,276	)		(26,607	)		(21,607	)
Realized gains (losses) on investments, net (A)		(94	)		731			(1,084	)		(693	)

Consolidated net income	$	14,741		$	17,422		$	48,316		$	42,937

(A)	Amounts are net of adjustments, as applicable, to amortization of unearned revenue reserves, deferred policy acquisition costs, value of insurance in-force acquired and income taxes attributable to gains and losses on investments.

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.

Our investment in equity method investees and the related equity income are attributable to the corporate and other segment. Goodwill at September 30, 2003 and December 31, 2002 is allocated among the segments as follows: traditional annuity ($3.9 million), traditional and universal life ($6.1 million) and variable ($1.2 million).

FBL Financial Group, Inc.

September 30, 2003

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) (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 2002 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, 2003 Compared to Three and Nine Months Ended September 30, 2002

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
	(Dollars in thousands, except per share data)
Net income	$	14,741		$	17,422		$	48,316		$	42,937
Less dividends on Series B and C preferred stock		(37	)		(1,088	)		(2,259	)		(3,239	)

Net income applicable to common stock		14,704			16,334			46,057			39,698

Earnings per common share	$	0.53		$	0.59		$	1.65		$	1.44

Earnings per common share – assuming dilution	$	0.51		$	0.58		$	1.62		$	1.41

Net incomeapplicable to common stock decreased 10.0% in the third quarter of 2003 to $14.7 million and increased 16.0% in the nine months ended September 30, 2003 to $46.1 million. Net income for the quarter ended and the nine months ended September 30, 2003 is positively impacted by the growth in our volume of annuity business in force as well as favorable investment results. Annuity business in force increased due to strong sales from our core distribution agency force and premiums assumed from American Equity Investment Life Insurance Company (American Equity) during 2002 and the first nine months of 2003. During the 2003 periods, net investment income has benefited from an increase in fee income from bond calls and mortgage loan prepayments. In addition, discount accretion on mortgage and asset-backed securities increased for the nine months ended September 30, 2003. Results in the 2003 periods were also favorably impacted by an increase in equity income. The decrease in net income for the third quarter of 2003 is primarily attributable to an increase in the amortization of deferred policy acquisition costs and a reduction in benefit reserves in the third quarter of 2002 relating to the discontinuation of certain group life business.

We periodically revise the key assumptions used in the calculation of the amortization of deferred policy acquisition costs, value of insurance in force acquired and unearned revenues for participating life insurance and interest sensitive products, as applicable, through a process termed as “unlocking.” 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 during the third quarter.

FBL Financial Group, Inc.

September 30, 2003

The impact of unlocking during the third quarter of 2003 and 2002 is as follows:

	Three months ended September 30,
	2003			2002
	(Dollars in thousands)
Amortization of unearned revenues	$	(132	)	$	398
Amortization of deferred policy acquisition costs		(215	)		328
Amortization of value of insurance in force acquired		393			(153	)

Increase (decrease) to pre-tax income	$	46		$	573

While the impact of unlocking was not significant in total, unlocking adjustments for deferred policy acquisition costs had a more significant impact on the comparability of our results by segment. Key assumption changes impacting the results by segment include changes to the assumptions regarding persistency experience, expense levels and interest crediting rates and, for 2002, changes to assumptions regarding investment return on separate account assets. See “Segment Information” following for details regarding the impact of unlocking on our segments.

Premiums and product charges are as follows:

	Three months ended September 30,				Nine months ended September 30,
	2003		2002		2003		2002
	(Dollars in thousands)
Premiums and product charges:
Interest sensitive product charges	$	21,027	$	19,913	$	62,277	$	58,293
Traditional life insurance premiums		31,232		29,360		97,886		92,500
Accident and health premiums		65		43		391		313

Total premiums and product charges	$	52,324	$	49,316	$	160,554	$	151,106

Premiums and product charges increased 6.1% in the third quarter of 2003 to $52.3 million and 6.3% in the nine months ended September 30, 2003 to $160.6 million. Revenues assumed from American Equity include interest sensitive product charges totaling $3.7 million in the nine months ended September 30, 2003 and $0.8 million in the respective 2002 period. In addition, cost of insurance charges, which are included in interest sensitive product charges, increased as a result of an increase in the volume and age of business in force. Traditional life insurance premiums increased 5.8% in the nine months ended September 30, 2003 to $97.9 million due primarily to strong sales from our core distribution agency force during 2002.

Net investment income,which excludes investment income on separate account assets relating to variable products, increased 10.9% in the third quarter of 2003 to $98.5 million and 18.0% in the nine months ended September 30, 2003 to $296.5 million due primarily to an increase in average invested assets. Average invested assets in the nine-month period of 2003 increased 21.3% to $5,711.4 million (based on securities at amortized cost) due principally to net premium inflows from our American Equity coinsurance agreement and core distribution agency force. The annualized yield earned on average invested assets decreased to 6.98% in the nine months ended September 30, 2003 from 7.18% in the respective 2002 period due principally to a decrease in market interest rates. The impact of the decrease in market interest rates on yield was partially offset by the impact of an increase in fee income from bond calls and mortgage loan prepayments and an increase in discount accretion on mortgage and asset-backed securities. Fee income from bond calls and mortgage loan prepayments totaled $8.4 million in the nine months ended September 30, 2003 compared to $0.9 million in the respective 2002 period. For the nine months ended September 30, net investment income includes $3.4 million in 2003 and $1.2 million in 2002, representing an acceleration of net discount accretion on mortgage and asset-backed securities resulting from increasing 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)totaled $2.1 million in the third quarter of 2003 compared to ($1.1) million in the third quarter of 2002. For the nine months ended September 30, 2003, derivative income (loss) totaled $7.7 million compared to ($10.6) million in the 2002 period. Our derivative income (loss) primarily consists of unrealized gains and losses on the value of call options and proceeds from the exercise of call options used to fund returns on our

FBL Financial Group, Inc.

September 30, 2003

equity-indexed annuity contracts assumed from American Equity. Derivative income (loss) also includes changes in the value of the conversion feature embedded in convertible fixed maturity securities and forward commitments for the purchase of certain when-issued asset-backed securities. The increases in derivative income are due principally to gains on the various indexes supporting the equity-indexed products during 2003. Changes in the value of the call options are partially offset by corresponding changes in the value of the embedded derivatives in the underlying equity-indexed contracts. Changes in the value of these embedded derivatives are recorded as a component of interest sensitive product benefits. Derivative income (loss) will fluctuate based on market conditions.

Realized gains (losses) on investments are as follows:

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
	(Dollars in thousands)
Realized gains (losses) on investments:
Gains on sales	$	1,834		$	10,775		$	12,848		$	21,543
Losses on sales		(1	)		(4,080	)		(382	)		(4,390	)
Losses due to impairments		(2,151	)		(5,012	)		(13,900	)		(19,047	)

Total realized gains (losses)	$	(318	)	$	1,683		$	(1,434	)	$	(1,894	)

Realized gains (losses) on investments totaled ($0.3) million in the third quarter of 2003 compared to $1.7 million in the third quarter of 2002. For the nine months ended September 30, 2003, realized losses decreased 24.3% to ($1.4) million. Writedowns for other-than-temporary impairments are the result of the issuers of the securities having deteriorating operating trends, decreases in debt ratings, defaults on loan payments, unsuccessful efforts to raise capital and various other operational or economic factors that became evident in the respective periods. 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.

Other incomeand other expensesinclude 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.

Policy benefits are as follows:

	Three months ended September 30,				Nine months ended September 30,
	2003		2002		2003		2002
	(Dollars in thousands)
Policy benefits:
Interest sensitive product benefits	$	61,653	$	54,407	$	187,439	$	145,633
Traditional life insurance and accident and health benefits		19,377		20,543		58,008		57,211
Increase in traditional life and accident and health future policy benefits		7,069		4,865		25,462		24,369
Distributions to participating policyholders		6,381		6,606		20,620		22,273

Total policy benefits	$	94,480	$	86,421	$	291,529	$	249,486

Policy benefits increased 9.3% in the third quarter of 2003 to $94.5 million and 16.9% in the nine months ended September 30, 2003 to $291.5 million. These increases are due primarily to an increase in volume of annuity business in force principally as a result of our American Equity coinsurance agreement. Benefits assumed from American Equity in the nine-month period include interest sensitive product benefits totaling $51.2 million in 2003 and $15.7 million in 2002. Changes in the value of the embedded derivatives included in the equity-indexed annuity contracts resulted in an increase (decrease) in the reserve for interest sensitive products totaling $9.3 million for the nine months ended September 30, 2003 and ($1.5) million for the nine months ended September 30, 2002. In total, death benefits increased 11.3% to $60.8 million in the nine months ended September 30, 2003. Partially offsetting these changes is the impact of reductions in our dividend and interest crediting rates on many of our products throughout 2002 and into 2003. These rate decreases were made in response to a declining investment portfolio yield. Interest crediting rates were 4.35% on our primary fixed annuity product and 4.80% on our primary universal

FBL Financial Group, Inc.

September 30, 2003

life insurance product as of October 1, 2003. Policy benefits in the third quarter of 2002 were partially offset by a $1.3 million reduction in reserves relating to the discontinuation of certain group life business. Policy benefits can tend to fluctuate from period to period primarily as a result of changes in mortality experience.

Underwriting, acquisition and insurance expenses are as follows:

	Three months ended September 30,				Nine months ended September 30,
	2003		2002		2003		2002
	(Dollars in thousands)
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals	$	3,654	$	3,087	$	10,067	$	9,286
Amortization of deferred policy acquisition costs		13,098		5,777		35,497		16,180
Amortization of value of insurance in force acquired		793		1,695		2,181		1,627
Other underwriting, acquisition and insurance expenses, net of deferrals		17,431		17,264		51,884		49,102

Total	$	34,976	$	27,823	$	99,629	$	76,195

Underwriting, acquisition and insurance expenses increased 25.7% in the third quarter of 2003 to $35.0 million and 30.8% in the nine months ended September 30, 2003 to $99.6 million. Commission expense increased due to an increase in traditional life insurance premiums. Amortization of deferred policy acquisition costs increased due primarily to an increase in the volume of business in force and a shift in profitability to blocks of business that have larger acquisition costs remaining to be amortized or that have higher amortization factors. Amortization of deferred policy acquisition costs on our business assumed from American Equity totaled $16.7 million in the nine-month period of 2003 compared to $4.2 million in the respective 2002 period. Amortization of value of insurance in force acquired decreased for the third quarter and increased for the nine months due principally to the impact of realized gains and losses on investments backing the related policyholder liabilities. Other underwriting, acquisition and insurance expenses increased due primarily to increases in salaries and employee benefits and expense allowances on reinsurance assumed.

Effective January 1, 2003, we started expensing the cost of employee stock options for those options granted, modified or settled after 2002 in accordance with Statement of Financial Accounting Standards (Statement) No. 123, “Accounting for Stock-Based Compensation” and Statement No. 148, “Accounting for Stock-Based Compensation –Transition and Disclosure.” Stock compensation expense included in other underwriting expenses for the nine months ended September 30, 2003 totaled $0.4 million. Stock compensation expense will increase over the five-year vesting period of the underlying options.

Interest expense totaled $2.4 million in the third quarter of 2003 compared to $0.2 million in the third quarter of 2002. For the nine months ended September 30, 2003 interest expense totaled $2.6 million compared to $0.5 million in the 2002 period. These increases are due to the reclassification of dividends on our company-obligated mandatorily redeemable preferred stock of subsidiary trust and Series C preferred stock beginning in the third quarter of 2003 in accordance with the adoption of Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” While the adoption of Statement No. 150 causes an increase in interest expense and decreases in pre-tax income and net income, the adoption did not impact net income applicable to common stock or earnings per common share.

Income taxes decreased 2.1% in the third quarter of 2003 to $7.9 million and increased 13.2% in the nine months ended September 30, 2003 to $24.0 million. The effective tax rate for the third quarter of 2003 was 37.5% compared to 31.5% for the third quarter of 2002. The effective tax rate for the nine months ended September 30, 2003 was 33.8% compared to 31.3% for the respective 2002 period. The increases in the effective tax rates are primarily due to the decreases in pre-tax income resulting from the adoption of Statement No. 150 noted above. The effective tax rate for the third quarter of 2003 is in excess of the federal statutory rate of 35% due to the impact of state income taxes and the non-deductibility of dividends on Series C preferred stock now classified as interest expense. The effective tax rate was lower than the federal statutory rate of 35% for the third quarter of 2002 and the nine-month periods due primarily to tax-exempt interest and tax-exempt dividend income and for the portion of the year prior to July 1, 2003, the tax benefit associated with the payment of dividends on mandatorily redeemable preferred stock of subsidiary trust.

FBL Financial Group, Inc.

September 30, 2003

Equity income, net of related income taxes, increased 42.3% in the third quarter of 2003 to $1.5 million. Equity income for the nine-month periods totaled $3.8 million in 2003 and less than $0.1 million in 2002. Equity income includes our proportionate share of gains and losses attributable to our ownership interest in partnerships, joint ventures and certain companies where we exhibit some control but have a minority ownership interest. As a result of our common stock investment in American Equity Investment Life Holding Company, equity income includes $1.4 million in the third quarter of 2003 and $0.9 million in the respective 2002 period, representing our share of its net income. Our share of American Equity Investment Life Holding Company income for the nine-month periods totaled $3.1 million in 2003 and $0.8 million in 2002. Given the timing of availability of financial information from our equity investees, we will consistently use information that is as much as three months in arrears for certain of these entities. Several of these entities are investment companies whose operating results are derived primarily from unrealized and realized gains and losses generated by their investment portfolios. As is normal with these types of entities, the level of these gains and losses is subject to fluctuation from period to period depending on the prevailing economic environment, changes in prices of equity securities held by the investment partnerships, timing and success of initial public offerings and other exit strategies, and the timing of the sale of investments held by the partnerships and joint ventures. See the “Other Assets” section following for additional information regarding the composition of our equity investees.

Subsequent Event - Extension of American Equity Coinsurance Relationship

We have reached an agreement in principle with American Equity to continue our coinsurance relationship. Effective January 1, 2004, we expect to assume 20% of selected fixed and equity-indexed annuities with a limit, or cap, on annual premiums assumed. The cap will become effective at the end of any quarter in which the annual premiums assumed for the year exceed $500.0 million. The agreement is expected to renew automatically every 2 years unless either party gives written notification to terminate the agreement. We expect details of this agreement will be finalized during the fourth quarter of 2003. Our existing reinsurance agreement with American Equity to assume a portion of fixed and equity-indexed annuity contracts expires effective December 31, 2003.

Pending Accounting Changes

FBL Financial Group, Inc.

September 30, 2003

benefit, which take into account the probability of death before the account value increases to an amount equal to or greater than the GMDB, totaled $0.4 million at September 30, 2003. We currently include bonus interest as a component of deferred policy acquisition costs and the related amortization expense. The amount of bonus interest included as a component of deferred policy acquisition costs totaled $37.9 million at September 30, 2003 and $25.1 million at December 31, 2002.

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 interests 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. We do not expect the impact of this Interpretation to be material to our financial statements.

Segment Information

Management analyzes financial information regarding products that are aggregated into three product segments. These segments are (1) traditional annuity, (2) traditional and universal life insurance and (3) variable. We also have various support operations and corporate capital that is aggregated into a corporate and other segment. See Note 6 of the notes to consolidated financial statements for additional information regarding segment information.

We analyze our segment results based on pre-tax operating income (loss). Accordingly, income taxes are not allocated to the segments. In addition, operating results are analyzed net of any transactions between the segments. Operating income (loss) represents net income excluding the impact of realized gains and losses on investments. The impact of realized gains and losses on investments includes adjustments for income taxes and that portion of amortization of deferred policy acquisition costs, unearned revenue reserve and value of insurance in force acquired attributable to such gains or losses. A reconciliation of net income to pre-tax operating income (loss) and summary of pre-tax operating income (loss) by segment follows.

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
	(Dollars in thousands)
Net income	$	14,741		$	17,422		$	48,316		$	42,937

Realized losses (gains) on investments		318			(1,683	)		1,434			1,894
Change in amortization of:
Deferred policy acquisition costs		(229	)		(9	)		241			(225	)
Value of insurance in force acquired		48			597			11			(568	)
Unearned revenue reserve		7			(30	)		(18	)		(34	)
Income tax offset		(50	)		394			(584	)		(374	)

Realized losses (gains), net of offsets		94			(731	)		1,084			693

Income taxes on operating income		8,797			8,276			26,607			21,607

Pre-tax operating income	$	23,632		$	24,967		$	76,007		$	65,237

Pre-tax operating income (loss) by segment:
Traditional annuity	$	10,176		$	7,280		$	31,534		$	18,852
Traditional and universal life		12,707			18,689			40,366			47,062
Variable		452			(2,120	)		1,205			470
Corporate and other		297			1,118			2,902			(1,147	)

	$	23,632		$	24,967		$	76,007		$	65,237

FBL Financial Group, Inc.

September 30, 2003

A discussion of our operating results, by segment, follows.

Traditional Annuity Segment

	Three months ended September 30,					Nine months ended September 30,
	2003		2002			2003		2002
	(Dollars in thousands)
Pre-tax operating income
Operating revenues:
Interest sensitive product charges	$	1,438	$	170		$	4,137	$	588
Net investment income		59,736		48,104			174,699		129,991
Derivative income (loss)		1,550		(774	)		7,224		(9,980	)

		62,724		47,500			186,060		120,599
Benefits and expenses		52,548		40,220			154,526		101,747

Pre-tax operating income	$	10,176	$	7,280		$	31,534	$	18,852

Other data
Annuity premiums collected, net of reinsurance	$	265,313	$	281,814		$	687,552	$	807,318
Policy liabilities and accruals, end of period							3,762,597		2,878,897

Pre-tax operating income for the traditional annuity segment increased 39.8% in the third quarter of 2003 to $10.2 million and 67.3% in the nine months ended September 30, 2003 to $31.5 million. Revenues, benefits, expenses and the volume of business in force increased primarily due to growth of the American Equity business and increases in sales from our core distribution agency force. Premiums collected assumed from American Equity totaled $507.3 million in the nine months ended September 30, 2003 compared to $657.0 million in the respective 2002 period. Direct premiums collected increased 20.7% in the nine months ended September 30, 2003 to $177.0 million. Net investment income includes $7.4 million in the nine months ended September 30, 2003 compared to $1.1 million in 2002 in fee income from bond calls and mortgage loan prepayments and the acceleration of net discount accretion on mortgage and asset-backed securities noted in the investment income discussion above. The increases in derivative income are due to gains on the various indexes supporting the equity-indexed annuity products during 2003. Amortization of deferred policy acquisition costs for the third quarter increased $1.2 million in 2003 compared to an increase of $0.1 million in 2002 due to changes in assumptions used to calculate deferred policy acquisition costs. See “Net Income” for a discussion of these changes.

Traditional and Universal Life Insurance Segment

	Three months ended September 30,					Nine months ended September 30,
	2003		2002			2003		2002
	(Dollars in thousands)
Pre-tax operating income
Operating revenues:
Interest sensitive product charges	$	10,861	$	10,688		$	32,149	$	32,077
Traditional life insurance premiums and other income		31,232		29,360			97,886		92,500
Net investment income		34,462		36,596			106,955		108,987
Derivative income (loss)		241		(356	)		174		(474	)

		76,796		76,288			237,164		233,090
Benefits and expenses		64,089		57,599			196,798		186,028

Pre-tax operating income	$	12,707	$	18,689		$	40,366	$	47,062

Other data
Life premiums collected, net of reinsurance	$	43,371	$	41,610		$	136,571	$	131,427
Policy liabilities and accruals, end of period							2,010,547		1,930,882

Pre-tax operating income for the traditional and universal life insurance segment decreased 32.0% in the third quarter of 2003 to $12.7 million and 14.2% in the nine months ended September 30, 2003 to $40.4 million. The decrease for the nine-month period is due primarily to an increase in traditional life and universal life insurance death benefits and the impact of changes in the assumptions used to calculate deferred policy acquisition costs as discussed under “Net Income.” In total, death benefits increased $3.9 million, or 8.0%, in the nine-month period of

FBL Financial Group, Inc.

September 30, 2003

2003 to $52.5 million. Amortization of deferred policy acquisition costs was reduced $0.4 million in 2003 and $4.2 million in 2002 due to unlocking. Net investment income includes $2.4 million in the nine months ended September 30, 2003 compared to $1.0 million in 2002 in fee income from bond calls and mortgage loan prepayments and the acceleration of net discount accretion on mortgage and asset-backed securities. As noted in the discussion of policy benefits above, benefits for the third quarter of 2002 includes a $1.3 million reserve reduction relating to group life business. Life premiums collected increased 3.9% to $136.6 million in the nine-month period of 2003.

Variable Segment

	Three months ended September 30,					Nine months ended September 30,
	2003		2002			2003		2002
	(Dollars in thousands)
Pre-tax operating income (loss)
Operating revenues:
Interest sensitive product charges	$	8,735	$	9,025		$	25,973	$	25,594
Net investment income		3,368		3,103			10,159		8,687
Other income		171		192			614		611

		12,274		12,320			36,746		34,892
Benefits and expenses		11,822		14,440			35,541		34,422

Pre-tax operating income (loss)	$	452	$	(2,120	)	$	1,205	$	470

Other data
Variable premiums collected, net of reinsurance and internal rollovers	$	27,111	$	28,808		$	85,505	$	100,974
Policy liabilities and accruals, end of period							219,034		181,827
Separate account assets, end of period							410,527		323,686

Pre-tax operating income (loss) for the variable segment increased to $0.5 million in the third quarter of 2003 from ($2.1) million in 2002 and increased to $1.2 million in the nine months ended September 30, 2003 compared to $0.5 million in 2002. Revenues increased 5.3% to $36.7 million in the nine-month period of 2003 due to an increase in the volume of business in force. Revenues decreased in the third quarter due primarily to a reduction in surrender charge income. Benefits and expenses decreased 18.1% to $11.8 million in the third quarter of 2003 due to the impact of changes in the assumptions used to calculate deferred policy acquisition costs as discussed under “Net Income.” Amortization of deferred policy acquisition costs was reduced $0.5 million in 2003 and increased $3.7 million in 2002 as a result of unlocking. Death benefits in excess of related account values on variable universal life policies increased to $2.1 million in the third quarter of 2003 from $1.7 million in the 2002 period. Variable premiums collected decreased 15.3% to $85.5 million in the nine-month period of 2003 due to the uncertain economic and equity market environment.

The variable segment does not currently contribute significantly to our net income due to the fee income structure of these products and the significant administrative costs associated with the sale and processing of this business. Profitability of this line of business is expected to increase as the volume of business grows and the significant fixed costs of administering the business are spread over a larger block of policies.

FBL Financial Group, Inc.

September 30, 2003

Corporate and Other Segment

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
	(Dollars in thousands)
Pre-tax operating income (loss)
Operating revenues:
Accident and health insurance premiums	$	65		$	43		$	391		$	313
Net investment income		975			1,015			4,645			3,667
Derivative income (loss)		287			(3	)		315			(116	)
Other income		3,809			4,001			11,797			12,379

		5,136			5,056			17,148			16,243
Benefits and expenses		7,210			4,361			17,613			13,700

		(2,074	)		695			(465	)		2,543
Minority interest		11			(1,235	)		(2,403	)		(3,755	)
Equity income, before tax		2,360			1,658			5,770			65

Pre-tax operating income (loss)	$	297		$	1,118		$	2,902		$	(1,147	)

Pre-tax operating income totaled $0.3 million in the third quarter of 2003 compared to $1.1 million in 2002. Pre-tax operating income (loss) totaled $2.9 million in the nine months ended September 30, 2003 and ($1.1) million in the respective 2002 period. The increase in pre-tax operating income in the nine-month period of 2003 is primarily due to mortgage prepayment fee income totaling $2.0 million earned in the second quarter of 2003 and fluctuations in equity income as described above. The increase in benefits and expenses and decrease in pre-tax operating income for the third quarter is due primarily to the reclassification of certain dividends to interest expense in connection with the adoption of Statement No. 150. See “Interest expense” for additional details regarding this reclassification.

Financial Condition

Investments

Our total investment portfolio increased 13.9% to $6,137.8 million at September 30, 2003 compared to $5,387.4 million at December 31, 2002. This increase is primarily the result of net cash received from interest sensitive and equity-indexed products and positive cash flow provided by operating activities. In addition, net unrealized appreciation on fixed maturity securities classified as available for sale increased $22.8 million in the first nine months of 2003 to $226.5 million at September 30, 2003 due principally to a decline in market interest rates.

Internal investment professionals manage our investment portfolio. The investment strategy is designed to achieve superior risk-adjusted returns consistent with the investment philosophy of maintaining a largely investment grade portfolio and providing adequate liquidity for obligations to policyholders and other requirements. We continually review the returns on invested assets and change the mix of invested assets as deemed prudent under the current market environment to help maximize current income.

FBL Financial Group, Inc.

September 30, 2003

Our investment portfolio is summarized in the table below:

	September 30, 2003				December 31, 2002
	Carrying Value		Percent		Carrying Value		Percent
	(Dollars in thousands)
Fixed maturities:
Public	$	4,402,050	71.7	%	$	3,801,914	70.6	%
144A private placement		619,678	10.1			556,102	10.3
Private placement		280,811	4.6			263,255	4.9

Total fixed maturities		5,302,539	86.4			4,621,271	85.8
Equity securities		22,203	0.3			21,545	0.4
Mortgage loans on real estate		562,572	9.2			483,627	9.0
Investment real estate:
Acquired for debt		1,587	0.1			2,131	0.1
Investment		26,627	0.4			22,900	0.4
Policy loans		178,382	2.9			178,997	3.3
Other long-term investments		7,436	0.1			6,032	0.1
Short-term investments		36,434	0.6			50,866	0.9

Total investments	$	6,137,780	100.0	%	$	5,387,369	100.0	%

As of September 30, 2003, 93.5% (based on carrying value) of the fixed maturity securities were investment grade debt securities, defined as being in the highest two National Association of Insurance Commissioners (NAIC) designations. Non-investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than for investment grade debt securities. We regularly review the percentage of our portfolio that is invested in non-investment grade debt securities (NAIC designations 3 through 6). As of September 30, 2003, the investment in non-investment grade debt was 6.5% of fixed maturity securities. At that time no single non-investment grade holding exceeded 0.4% of total investments. A summary of the gross unrealized gains and gross unrealized losses on our fixed maturity securities, by internal industry classification, as of September 30, 2003 is as follows:

FBL Financial Group, Inc.

September 30, 2003

	Total Carrying Value		Carrying Value of Securities with Gross Unrealized Gains		Gross Unrealized Gains		Carrying Value of Securities with Gross Unrealized Losses		Gross Unrealized Losses
	(Dollars in thousands)
Corporate securities:
Banking	$	632,010	$	617,988	$	67,522	$	14,022	$	(760	)
Manufacturing		432,809		388,961		35,718		43,848		(4,921	)
Mining		147,168		130,887		13,282		16,281		(495	)
Retail trade		86,138		60,338		7,403		25,800		(2,428	)
Services		65,321		50,383		2,146		14,938		(718	)
Transportation		75,593		46,732		6,429		28,861		(4,423	)
Public utilities		173,539		137,677		9,823		35,862		(2,165	)
Private utilities and other		292,549		249,491		21,772		43,058		(1,293	)
Other		82,087		82,087		7,283		—		—

Total corporate securities		1,987,214		1,764,544		171,378		222,670		(17,203	)
Mortgage and asset-backed securities		2,897,098		2,460,124		79,658		436,974		(11,262	)
United States Government and agencies		267,177		111,660		8,414		155,517		(9,262	)
State, municipal and other governments		151,050		109,085		6,598		41,965		(1,783	)

Total	$	5,302,539	$	4,445,413	$	266,048	$	857,126	$	(39,510	)

The following table sets forth the credit quality, by NAIC designation and Standard & Poor’s (S & P) rating equivalents, of fixed maturity securities.

		September 30, 2003
NAIC Designation	Equivalent S&P Ratings (1)	Carrying Value		Percent
		(Dollars in thousands)
1	AAA, AA, A	$	3,887,264	73.3	%
2	BBB		1,072,255	20.2

	Total investment grade		4,959,519	93.5
3	BB		236,215	4.5
4	B		70,603	1.3
5	CCC, CC, C		23,789	0.5
6	In or near default		12,413	0.2

	Total below investment grade		343,020	6.5

	Total fixed maturities	$	5,302,539	100.0	%

(1)	The Securities Valuation Office of the NAIC generally rates private placement securities. Comparisons between NAIC designations and S & P ratings are published by the NAIC. S & P has not rated some of the fixed maturity securities in our portfolio.

FBL Financial Group, Inc.

September 30, 2003

The following table sets forth the composition by credit quality of the fixed maturity securities with gross unrealized losses as of September 30, 2003.

NAIC Designation	Equivalent S&P Ratings	Carrying Value of Securities with Gross Unrealized Losses		Percent of Total		Gross Unrealized Losses			Percent of Total
		(Dollars in thousands)
1	AAA, AA, A	$	626,389	73.1	%	$	(21,569	)	54.6	%
2	BBB		110,728	12.9			(7,345	)	18.6

	Total investment grade		737,117	86.0			(28,914	)	73.2
3	BB		45,464	5.3			(2,388	)	6.1
4	B		48,690	5.7			(6,920	)	17.5
5	CCC, CC, C		18,753	2.2			(993	)	2.5
6	In or near default		7,102	0.8			(295	)	0.7

	Total below investment grade		120,009	14.0			(10,596	)	26.8

	Total	$	857,126	100.0	%	$	(39,510	)	100.0	%

As of September 30, 2003, $28.9 million, or 73.2%, of the gross unrealized losses on our fixed maturity securities are related to securities rated investment grade. Unrealized losses on investment grade securities principally relate to changes in market interest rates or changes in credit spreads since the securities were acquired. We have the ability and intent to hold these securities until they recover in value or mature. If our intention changes, realized losses may be recognized when we decide to sell the securities.

As of September 30, 2003, $10.6 million, or 26.8%, of the gross unrealized losses on our fixed maturity securities are related to securities rated below investment grade. We believe the issuers of these securities will continue to make payments as scheduled, and we have the ability and intent to hold these securities until they recover in value or mature.

The carrying value and estimated market value of our portfolio of fixed maturity securities at September 30, 2003, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Estimated Market Value
	(Dollars in thousands)
Due in one year or less	$	62,684	$	64,071
Due after one year through five years		410,165		440,222
Due after five years through ten years		518,907		568,471
Due after ten years		1,197,940		1,268,585

		2,189,696		2,341,349
Mortgage and asset-backed securities		2,828,702		2,897,098
Redeemable preferred stocks		57,603		64,092

	$	5,076,001	$	5,302,539

FBL Financial Group, Inc.

September 30, 2003

The scheduled maturity dates for securities in an unrealized loss position at September 30, 2003 are as follows:

	Carrying Value of Securities with Gross Unrealized Losses		Gross Unrealized Losses
	(Dollars in thousands)
Due in one year or less	$	1,508	$	(3	)
Due after one year through five years		34,402		(3,904	)
Due after five years through ten years		49,509		(4,665	)
Due after ten years		334,733		(19,676	)

		420,152		(28,248	)
Mortgage and asset-backed securities		436,974		(11,262	)

Total	$	857,126	$	(39,510	)

At September 30, 2003, no securities from the same issuer had an aggregate unrealized loss in excess of $9.3 million.

Mortgage and other asset-backed securities constitute a significant portion of our portfolio of securities. These securities are purchased when we believe these types of investments provide superior risk-adjusted returns compared to returns of more conventional investments such as corporate bonds and mortgage loans. These securities are diversified as to collateral types, cash flow characteristics and maturity.

The repayment pattern on mortgage and other asset-backed securities is more variable than that of more traditional fixed maturity securities because the repayment terms are tied to underlying debt obligations that are subject to prepayments. The prepayment speeds (e.g., the rate of individuals refinancing their home mortgages) can vary based on a number of economic factors that cannot be predicted with certainty. These factors include the prevailing interest rate environment and general status of the economy.

At each balance sheet date, we review and update our expectation of future prepayment speeds and the book value of the mortgage and other asset-backed securities purchased at a premium or discount is reset, if needed, to result in a constant effective yield over the life of the security. This effective yield is computed using historical principal payments and expected future principal payment patterns. Any adjustments to book value to derive the constant effective yield, which may include the reversal of premium or discount amounts previously amortized or accrued, are recorded in the current period as a component of net investment income. Accordingly, deviations in actual prepayment speeds from that originally expected or changes in expected prepayment speeds can cause a change in the yield earned on mortgage and asset-backed securities purchased at a premium or discount and may result in adjustments that have a material positive or negative impact on quarterly reported results. Increases in prepayment speeds, which typically occur in a decreasing interest rate environment, generally increase the rate at which discount is accrued and premium is amortized into income. Decreases in prepayment speeds, which typically occur in an increasing interest rate environment, generally slow down the rate these amounts are recorded into income.

The mortgage-backed portfolio includes pass-through and collateralized mortgage obligation (CMO) securities. With a pass-through security, we receive a pro rata share of principal payments as payments are made on the underlying mortgage loans. CMOs consist of pools of mortgages divided into sections or “tranches” which provide sequential retirement of the bonds. We invest in sequential tranches which provide cash flow stability in that principal payments do not occur until the previous tranches are paid off. In addition, to provide call protection and more stable average lives, we invest in CMOs such as planned amortization class (PAC) and targeted amortization class (TAC) securities. CMOs of these types provide more predictable cash flows within a range of prepayment speeds by shifting the prepayment risks to support tranches. We will also purchase interest only and Z securities to increase the duration of the CMO portfolio when deemed necessary to better match the duration of our liabilities. Interest only and Z securities generally tend to have more duration risk (risk the security’s price will change significantly with a given change in market interest rates) than the other types of mortgage-backed securities in our portfolio. We generally do not purchase certain types of CMOs that we believe would subject the investment portfolio to greater than average risk. These include, but are not limited to, principal only, floater, inverse floater, PAC II and support tranches.

FBL Financial Group, Inc.

September 30, 2003

The following table sets forth the amortized cost, par value and carrying value of our mortgage and asset-backed securities at September 30, 2003, summarized by type of security.

	Amortized Cost		Par Value		Carrying Value		Percent of Fixed Maturities
	(Dollars in thousands)
Residential mortgage-backed securities:
Sequential	$	1,589,831	$	1,602,709	$	1,625,218	30.7	%
Pass through		217,307		216,580		222,512	4.2
Planned and targeted amortization class		325,687		327,135		330,715	6.2
Other		358,676		360,467		360,313	6.8

Total residential mortgage-backed securities		2,491,501		2,506,891		2,538,758	47.9
Commercial mortgage-backed securities		212,411		209,198		230,920	4.3
Other asset-backed securities		124,790		127,565		127,420	2.4

Total mortgage and asset-backed securities	$	2,828,702	$	2,843,654	$	2,897,098	54.6	%

The commercial and other asset-backed securities are primarily sequential securities. Commercial mortgage-backed securities typically have cash flows that are less sensitive to interest rate changes than residential securities of similar types due principally to prepayment restrictions on many of the underlying commercial mortgage loans. Other asset-backed securities are principally mortgage related (manufactured housing and home equity loans) which historically have also demonstrated relatively less cash flow volatility than residential securities of similar types.

At September 30, 2003, we held $22.2 million or 0.3% of invested assets in equity securities. At September 30, 2003, gross unrealized gains totaled $1.2 million and gross unrealized losses totaled $0.2 million on these securities.

At September 30, 2003, we held $562.6 million or 9.2% of invested assets in mortgage loans. These mortgage loans are diversified as to property type, location and loan size, and are collateralized by the related properties. At September 30, 2003, mortgages more than 60 days delinquent accounted for less than 1.0% of the carrying value of the mortgage portfolio. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. Regions with the largest concentration of our mortgage loan portfolio at September 30, 2003 include: Pacific (25.5%), which includes California and Hawaii; and East North Central (17.0%), which includes Illinois, Indiana, Michigan, Ohio and Wisconsin. Mortgage loans on real estate are also diversified by collateral type with office buildings (41.1%), retail facilities (30.4%) and industrial facilities (27.0%) representing the largest holdings at September 30, 2003.

Our asset-liability management program includes (i) designing and developing products that encourage persistency and, as a result, create a stable liability structure, and (ii) structuring the investment portfolio with duration and cash flow characteristics consistent with the duration and cash flow characteristics of our insurance liabilities. At September 30, 2003, the weighted average life of the fixed maturity portfolio, based on market values and excluding convertible bonds, was approximately 6.4 years. Based on calculations utilizing our fixed income analytical system, including our mortgage backed prepayment assumptions, the effective duration of the fixed income portfolio was 5.1 as of September 30, 2003.

Other Assets

Cash and cash equivalents totaled $278.3 million at September 30, 2003 and $263.0 million at December 31, 2002. The amount of cash and cash equivalents will fluctuate from period to period depending on many different factors, but is primarily caused by the timing of the settlement of security purchases and sales. Deferred policy acquisition costs increased 16.4% to $545.7 million at September 30, 2003 due to the capitalization of costs incurred with new sales, principally from the American Equity coinsurance agreement. Assets held in separate accounts increased 18.1% to $410.5 million at September 30, 2003 due primarily to appreciation in the value of investments and the transfer of net premiums to the separate accounts. At September 30, 2003, we had total assets of $7,739.1 million, a 13.8% increase from total assets at December 31, 2002.

FBL Financial Group, Inc.

September 30, 2003

The securities and indebtedness of related parties line on the consolidated balance sheet, which includes the investments that generate our equity income, is comprised of the following:

	September 30, 2003			December 31, 2002
	(Dollars in thousands)
American Equity Investment Life Holding Company, common and preferred stock	$	36,322		$	31,667
Berthel Fisher and Company and affiliates		4,059			4,059
Investment partnerships (6 in 2003 and 8 in 2002)		8,475			2,340
Real estate investment partnerships (4 in 2003 and 5 in 2002)		11,085			8,268
Mortgage loans and other		5,984			6,047

		65,925			52,381
Proportionate share of net unrealized investment losses of equity investees		(3,256	)		(4,096	)

Securities and indebtedness of related parties	$	62,669		$	48,285

Securities and indebtedness of related parties increased 29.8% to $62.7 million due primarily to additional investments in investment partnerships and an increase in the value of our investment in American Equity Investment Life Holding Company.

Liabilities and Redeemable Preferred Stock

Policy liabilities and accruals and other policyholders’ funds increased 13.8% to $6,054.7 million at September 30, 2003 primarily due to the growth of the American Equity business and increase in the volume of business in force from our core distribution agency force. Other liabilities increased 43.7% to $212.0 million at September 30, 2003 due primarily to an increase in payables for security purchases. At September 30, 2003, we had total liabilities of $7,010.4 million, a 17.7% increase from total liabilities at December 31, 2002.

In the third quarter of 2003, our company-obligated mandatorily redeemable preferred stock of subsidiary trust and Series C preferred stock was reclassified to debt ($139.8 million long-term debt and $44.9 million short-term debt) in connection with the adoption of Statement No. 150. In addition, during the third quarter of 2003 our $40.0 million short-term note payable at December 31, 2002 was refinanced with the Federal Home Loan Bank to a $40.0 million long-term note payable due September 2006.

Stockholders’ Equity

Stockholders’ equity increased 10.2%, to $728.6 million at September 30, 2003, compared to $661.4 million at December 31, 2002. This increase is principally attributable to net income for the nine-month period and the change in unrealized appreciation/depreciation on fixed maturity and equity securities, partially offset by dividends paid.

At September 30, 2003, common stockholders’ equity was $725.6 million, or $25.83 per share, compared to $658.4 million, or $23.71 per share at December 31, 2002. Included in stockholders’ equity per common share is $4.24 at September 30, 2003 and $3.43 at December 31, 2002 attributable to net unrealized investment gains resulting from marking our fixed maturity and equity securities classified as available for sale and interest rate swaps to market value. The change in unrealized appreciation of these securities increased stockholders’ equity $24.1 million during the nine months ended September 30, 2003, after related adjustments to deferred policy acquisition costs, value of insurance in force acquired, unearned revenue reserve and deferred income taxes.

FBL Financial Group, Inc.

September 30, 2003

Liquidity

FBL Financial Group, Inc.

Parent company cash inflows from operations consist primarily of (i) dividends from subsidiaries, if declared and paid, (ii) fees that it charges the various subsidiaries and affiliates for management of their operations, (iii) expense reimbursements from subsidiaries and affiliates and (iv) tax settlements between the parent company and its subsidiaries. Cash outflows are principally for salaries and other expenses related to providing these management services, dividends on outstanding stock and interest on parent company debt issued to a subsidiary. In addition, the parent company will on occasion enter into capital transactions such as the acquisition of our common stock.

We paid cash dividends on our common and preferred stock during the nine months ended September 30, totaling $9.5 million in 2003 and $9.4 million in 2002. Interest payments on the parent company’s 5% Subordinated Deferrable Interest Notes (the Notes), relating to the company-obligated mandatorily redeemable preferred stock of subsidiary trust, totaled $3.8 million in the nine months ended September 30, 2003 and 2002. It is anticipated quarterly cash dividend requirements for the remainder of 2003 will be $0.10 per common and Series C redeemable preferred share and $0.0075 per Series B redeemable preferred share or approximately $3.2 million. In addition, interest payments on the Notes are estimated to be $1.3 million for the remainder of 2003.

We have agreed that we will not declare or pay dividends on any class or series of stock except for regular cash dividends as long as any Series C redeemable preferred stock is outstanding. Regular cash dividends are defined as regular, fixed, quarterly or other periodic cash dividends as declared by our Board of Directors as part of the stated cash dividend policy and do not include any other dividends or distributions, such as extraordinary, special or otherwise non-recurring dividends.

FBL Financial Group, Inc. expects to rely on available cash resources and dividends from Farm Bureau Life to make any dividend payments to its stockholders and interest payments on its Notes. In addition, we expect to use these sources and additional borrowings to fund the redemption of the Series C redeemable preferred stock in 2004 ($45.3 million) and 2006 ($46.3 million).

The ability of Farm Bureau Life to pay dividends to FBL Financial Group, Inc. is limited by law to earned profits (statutory unassigned surplus) as of the date the dividend is paid, as determined in accordance with accounting practices prescribed by insurance regulatory authorities of the State of Iowa. In addition, under the Iowa Insurance Holding Company Act, Farm Bureau Life may not pay an “extraordinary” dividend without prior notice to and approval by the Iowa insurance commissioner. An “extraordinary” dividend is defined under the Iowa Insurance Holding Company Act as any dividend or distribution of cash or other property whose fair market value, together with that of other dividends or distributions made within the preceding 12 months, exceeds the greater of (i) 10% of policyholders’ surplus (total statutory capital stock and statutory surplus) as of December 31 of the preceding year, or (ii) the statutory net gain from operations of the insurer for the 12-month period ending December 31 of the preceding year. During the remainder of 2003, the maximum amount legally available for distribution to FBL Financial Group, Inc. without further regulatory approval is approximately $24.2 million.

We may from time to time review potential acquisition opportunities. It is anticipated that funding for any such acquisition would be provided from available cash resources, debt or equity financing. As of September 30, 2003, we had no material commitments for capital expenditures. The parent company had available cash and investments totaling $35.1 million at September 30, 2003.

Insurance Operations

The Life Companies’ cash inflows consist primarily of premium income, deposits to policyholder account balances, income from investments, sales, maturities and calls of investments and repayments of investment principal. The Life Companies’ cash outflows are primarily related to withdrawals of policyholder account balances, investment purchases, payment of policy acquisition costs, policyholder benefits, income taxes, dividends and current operating expenses. Life insurance companies generally produce a positive cash flow which may be measured by the degree to which cash inflows are adequate to meet benefit obligations to policyholders and normal operating expenses as they are incurred. The remaining cash flow is generally used to increase the asset base to provide funds to meet the need for future policy benefit payments and for writing new business. The Life Companies’ liquidity positions continued to be favorable in the three- and nine-month periods ended September 30, 2003, with cash inflows at levels sufficient to provide the funds necessary to meet their obligations.

FBL Financial Group, Inc.

September 30, 2003

For the life insurance operations, cash outflow requirements for operations are typically met from normal premium and deposit cash inflows. This has been the case for all reported periods as the Life Companies’ continuing operations and financing activities relating to interest sensitive products provided funds amounting to $668.1 million in the nine months ended September 30, 2003 and $820.2 million in the nine months ended September 30, 2002. Positive cash flow from operations is generally used to increase the insurance companies’ fixed maturity securities and other investment portfolios. In developing their investment strategy, the Life Companies establish a level of cash and securities which, combined with expected net cash inflows from operations, maturities of fixed maturity investments and principal payments on mortgage and asset-backed securities and mortgage loans, are believed adequate to meet anticipated short-term and long-term benefit and expense payment obligations.

Through its membership in the Federal Home Loan Bank of Des Moines (FHLB), Farm Bureau Life is eligible to borrow funds to provide additional liquidity. The amount is based on the amount of stock of the FHLB owned by Farm Bureau Life, which supported a borrowing capacity of $40.0 million as of September 30, 2003. At September 30, 2003, we had outstanding borrowings of $40.0 million under this arrangement leaving no additional borrowing capacity. Additional borrowings could be obtained provided additional collateral is deposited with the FHLB and additional FHLB stock is purchased. The amount of stock required to be purchased can range between 3% and 5% of additional borrowings (currently at 4.45%). Fixed maturity securities with a carrying value of $42.6 million are on deposit with the FHLB as collateral for the outstanding note.

In the normal course of business, we enter into financing transactions, lease agreements, or other commitments which are necessary or beneficial to our operations. These commitments may obligate us to certain cash flows during future periods. As of December 31, 2002, we had contractual obligations totaling $211.5 million with payments due as follows: less than one year - $96.4 million, one-to-three years - $52.5 million, four-to-five years - $51.3 million and after five years – $11.3 million. Our total contractual obligations have not materially changed since December 31, 2002. However, due to refinancing the FHLB debt as described under “Financial Condition - Liabilities and Redeemable Preferred Stock,” approximately $40.0 million of debt due in less than one year has moved to the category “due in one-to-three years.”

We anticipate that funds to meet our short-term and long-term capital expenditures, cash dividends to stockholders and operating cash needs will come from existing capital and internally generated funds. We believe that the current level of cash and available-for-sale and short-term securities, combined with expected net cash inflows from operations, maturities of fixed maturity investments, principal payments on mortgage and asset-backed securities, mortgage loans and its insurance products, are adequate to meet our anticipated cash obligations for the foreseeable future. Our investment portfolio at September 30, 2003, included $36.4 million of short-term investments, $278.3 million of cash (consisting primarily of securities purchased with a maturity of three months or less) and $869.7 million in carrying value of U.S. Government and U.S. Government agency backed securities that could be readily converted to cash at or near carrying value.

Cautionary Statement Regarding Forward Looking Information

From time to time, we may publish statements relating to anticipated financial performance, business prospects, new products, and similar matters. These statements and others, which include words such as “expect”, “anticipate”, “believe”, “intend”, and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for these types of statements. In order to comply with the terms of the safe harbor, please note that a variety of factors could cause our actual results and experiences to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of our business include but are not limited to the following:

•

Changes to interest rate levels and stock market performance may impact our lapse rates, market value of our investment portfolio and our ability to sell life insurance products, notwithstanding product features to mitigate the financial impact of such changes.

•

The degree to which customers and agents (including the agents of our alliance partners) accept our products will influence our future growth rate.

FBL Financial Group, Inc.

September 30, 2003

•

Extraordinary acts of nature or man may result in higher than expected claim activity.

•

Changes in federal and state income tax laws and regulations may affect the relative tax advantage of our products.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the market risks of our financial instruments since December 31, 2002.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities and Exchange Act of 1934 are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of this examination.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)	Exhibits:

	10.19(a)	Master Transaction Agreement between Federal Home Loan Bank of Des Moines and Farm Bureau Life Insurance Company dated July 9, 2003

	10.19(b)	Advance Agreement between Federal Home Loan Bank of Des Moines and Farm Bureau Life Insurance Company dated September 17, 2003

	31.1	Certification Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2	Certification Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)	Reports on Form 8-K filed during the quarter ended September 30, 2003:

On July 30, 2003, a Form 8-K was filed in connection with a news release reporting the Company’s financial results for the three and six months ended June 30, 2003. A copy of the news release was furnished with the Form 8-K.

FBL Financial Group, Inc.

September 30, 2003

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: October 29, 2003

FBL FINANCIAL GROUP, INC.

By		/s/ William J. Oddy
William J. Oddy
Chief Executive Officer (Principal Executive Officer)

By		/s/ James W. Noyce
James W. Noyce
Chief Financial Officer (Principal Financial and Accounting Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

FBL Financial (FFG) 10-Q2003 Q3 Quarterly report

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