Management's discussion and analysis reviews our consolidated financial position at June 30, 2004, and the consolidated results of operations for the periods ended June 30, 2004 and 2003, and where appropriate, factors that may affect future financial performance. This analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q, and the audited consolidated financial statements, notes thereto and selected consolidated financial data appearing in our Annual Report on Form 10-K for the year ended December 31, 2003.

All statements, trend analyses and other information contained in this report and elsewhere (such as in filings by us with the Securities and Exchange Commission, press releases, presentations by us or our management or oral statements) relative to markets for our products and trends in our operations or financial results, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, among other things:

• general economic conditions and other factors, including prevailing interest rate levels and stock and credit market performance which may affect (among other things) our ability to sell our products, our ability to access capital resources and the costs associated therewith, the market value of our investments and the lapse rate and profitability of policies

• customer response to new products and marketing initiatives

• changes in Federal income tax laws and regulations which may affect the relative income tax advantages of our products

• increasing competition in the sale of annuities

• regulatory changes or actions, including those relating to regulation of financial services affecting (among other things) bank sales and underwriting of insurance products and regulation of the sale, underwriting and pricing of products

• the risk factors or uncertainties listed from time to time in our private placement memorandums or filings with the Securities and Exchange Commission

Results of Operations



Three and Six Months Ended June 30, 2004 and 2003



Annuity deposits by product type collected during the six months ended June 30,
2004 and 2003, were as follows:



                                        Before coinsurance        Net of coinsurance
                                       Six months ended June     Six months ended June
                                                30,                       30,
   Product Type                          2004         2003         2004         2003
                                      (Dollars in thousands)    (Dollars in thousands)

   Index Annuities:
   Index Strategies                   $  502,995   $  307,148   $  405,012   $  187,212
   Fixed Strategy                        204,619      163,813      164,759       99,846
                                         707,614      470,961      569,771      287,058
   Fixed Rate Annuities:
   Single-Year Rate Guaranteed           166,826      283,240      134,313      172,088
   Multi-Year Rate Guaranteed             13,716       33,210       13,716       33,210
                                         180,542      316,450      148,029      205,298
                                      $  888,156   $  787,411   $  717,800   $  492,356

For information related to our coinsurance agreements, see note 5 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2003.

The increase in annuity deposits during the six months ended June 30, 2004 compared to the same period in 2003 resulted from our increased marketing effort following the completion of our initial public offering ("IPO") in December of 2003. Prior to the completion of our IPO, we had taken actions during 2003 and at the end of 2002 to manage our capital position, including reductions in our interest crediting rates on both new and existing annuities, reductions in sales commissions and suspensions of sales of one of our higher commission annuity products and our most popular multi-year rate guaranteed annuity product.

Effective August 1, 2004, we suspended our coinsurance agreement with EquiTrust Life Insurance Company ("EquiTrust"), a subsidiary of FBL Financial Group. As a result of the suspension, new business will no longer be ceded to EquiTrust unless and until the parties mutually agree to resume the coinsurance of new business.

Net incomeincreased 63% to $10.4 million for the second quarter of 2004, and 92% to $20.8 million for the six months ended June 30, 2004, compared to $6.4 million and $10.9 million for the same periods in 2003. The growth in net income is due to (i) an increase in our invested assets of 26% (on an amortized cost basis) from June 30, 2003 to June 30, 2004 and (ii) a 57 basis point reduction in weighted average crediting rates. See our analysis of investment spread included in the discussion of interest credited to account balances.

Traditional life and accident and health insurance premiumsincreased 14% to $3.7 million in the second quarter of 2004 and 18% to $8.1 million for the six months ended June 30, 2004 compared to $3.3 million and $6.9 million for the same periods in 2003. These increases were due to increased sales of our group life insurance products.

Annuity and single premium universal life product charges (surrender charges assessed against policy withdrawals and mortality and expense charges assessed against single premium universal life policyholder account balances) decreased 3% to $5.3 million for the second quarter of 2004, and 8% to $10.3 million for the six months ended June 30, 2004 compared to $5.5 million and $11.2 million for the same periods in 2003. These decreases were due to a reduction in surrenders of higher surrender charge products and an increase in surrenders on products with lower or no surrender charges during the six month and three month periods ended June 30, 2004 compared to the same periods in 2003.

Net investment income increased 27% to $106.6 million in the second quarter of 2004, and 18% to $205.9 million for the six months ended June 30, 2004 compared to $84.2 million and $174.9 million for the same periods in 2003. These increases are principally attributable to the growth in our annuity business and corresponding increases in our invested assets. Invested assets (amortized cost basis) increased 26% to $6.95 billion at June 30, 2004 compared to $5.50 billion at June 30, 2003, while the weighted average yield earned on average invested assets was 6.35% for the six months ended June 30, 2004 compared to 6.72% for the same period in 2003.

Realized gains on investments were immaterial in the second quarter of 2004 compared to $7.6 million for the same period in 2003. For the six months ended June 30, 2004, we had realized gains of $0.4 million compared to $7.8 million for the same period in 2003. Realized gains and losses on investments fluctuate from period to period due to changes in the interest

rate and economic environment and the timing of the sale of investments. Realized gains and losses on investments include gains and losses on the sale of securities as well as losses recognized when the fair value of a security is written down in recognition of an "other than temporary" impairment.

The components of realized gains on investments for the three months and six months ended June 30, 2004 and 2003 are set forth as follows:

                                      Three months ended         Six months ended
                                           June 30,                  June 30,
                                       2004         2003         2004         2003
                                    (Dollars in thousands)    (Dollars in thousands)
Available for sale fixed maturity
securities:
Gross realized gains                $    1,521   $   10,665   $    9,547   $   14,051
Gross realized losses                        -       (3,341 )       (136 )     (3,669 )
Writedowns (other than temporary
impairments)                            (1,530 )          -       (9,169 )     (2,903 )
                                            (9 )      7,324          242        7,479
Equity securities                           19          268          147          309
                                    $       10   $    7,592   $      389   $    7,788

See Financial Condition - Investments for additional discussion of writedowns of the fair value of securities for "other than temporary" impairments.

Change in fair value of derivatives (call options purchased to fund annual index credits on index annuities) was a decrease of $4.9 million in the second quarter of 2004, and an increase of $0.9 million for the six months ended June 30, 2004 compared to an increase of $33.1 million and an increase of $19.1 million for the same periods in 2003. The components of the change in fair value of derivatives are summarized as follows:

                                         Three months ended         Six months ended
                                              June 30,                  June 30,
                                          2004         2003         2004         2003
                                       (Dollars in thousands)    (Dollars in thousands)
Change in fair value of derivatives:
Gains received at expiration or
recognized upon early termination      $   20,508   $    9,815   $   51,158   $   14,097
Cost of money for index annuities         (13,369 )    (16,469 )    (24,270 )    (34,448 )
Change in difference between fair
value and remaining option cost at
beginning and end of period               (12,073 )     39,707      (26,007 )     39,442
                                       $   (4,934 ) $   33,053   $      881   $   19,091

The difference between the change in fair value of derivatives between the periods is primarily due to the performance of the indices upon which our options are based. A substantial portion of our options are based upon the S&P 500 Index with the remainder based upon other equity and bond market indices.

The amounts reported in the table above for gains at expiration primarily reflect the changes in the indices from the date the option was acquired to the date it expired. The range of index appreciation for options expiring in the three and six months ended June 30, 2004 and 2003 is as follows:

                                      Three Months Ended         Six Months Ended
                                           June 30,                  June 30,
                                       2004         2003         2004        2003
S&P 500 Index
Point-to-point strategy             12.2%-31.3 %          -   12.2%-40.2 %         -
Monthly average strategy             7.1%-21.1 %          -    6.8%-29.2 %         -
Lehman Brothers U.S. Aggregate

Actual amounts credited to policyholder account balances may be less than the index appreciation due to contractual features in the index annuity policies (participation rates and caps) which allow us to manage the cost of the options purchased to fund the annual index credits. Index appreciation for the S&P 500 Index was negative in the 2003 periods and accordingly, there were no index credits to policyholders selecting this index.

The change in fair value of derivatives is also influenced by the aggregate cost of the options purchased which is related to the amount of policyholder funds allocated to the various indices. The aggregate cost of option purchases has been declining since the second quarter of 2003 when we refined our hedging process to purchase options that were out of the money to the extent of anticipated minimum guaranteed interest on the index policies. Prior to that, all options were purchased at the money at a higher cost. See Critical Accounting Policies - Derivative Instruments - Index Products included in Management's Discussion and Analysis included in our Annual Report on Form 10-K for the year ended December 31, 2003.

Policy benefits and change in future policy benefits increased 15% to $3.8 million in the second quarter of 2004 and 37% to $7.6 million for the six months ended June 30, 2004 compared to $3.3 million and $5.6 million for the same periods in 2003. These increases were principally attributable to increased benefits paid on group life insurance of $1.0 million in the second quarter of 2004 and $1.6 million for the six months ended June 30, 2004.

Interest credited to account balances increased 30% to $75.3 million in the second quarter of 2004, and 42% to $159.6 million for the six months ended June 30, 2004 compared to $57.7 million and $112.5 for the same periods in 2003. These increases were principally attributable to index credits on index policies which increased to $35.0 million and $71.6 million during the three and six month periods ended June 30, 2004, respectively, from $6.0 million and $9.8 million during the same periods in 2003 as a result of increases in the underlying indices (see discussion above under change in fair value of derivatives). The increase was also attributable to the increase in the average amount of annuity liabilities outstanding (net of annuity liabilities ceded under coinsurance agreements) during the six months ended June 30, 2004 of 18% to $6.61 billion from $5.62 billion during the same period in 2003 and an increase in amortization of deferred sales inducements. Amortization of deferred sales inducements was $2.1 million for the second quarter of 2004 and $4.1 million for the six months ended June 30, 2004 compared to $1.6 million and $2.7 million for the same periods in 2003. These increases were offset in part by a decrease in weighted average crediting rates, which we implemented in connection with our spread management process, of 57 basis points from June 30, 2003 to June 30, 2004.

Our investment spread is summarized as follows:

                                                            Six Months Ended June
                                                                     30,
                                                             2004          2003
Weighted average yield on invested assets                       6.35 %        6.72 %
Weighted average net index costs for index annuities            3.46 %        3.94 %
Weighted average crediting rate for fixed rate
annuities:
Annually adjustable                                             3.43 %        4.18 %
Multi-year rate guaranteed                                      5.54 %        5.74 %

Investment spread:
Index annuities                                                 2.89 %        2.78 %
Fixed rate annuities:
Annually adjustable                                             2.92 %        2.54 %
Multi-year rate guaranteed                                      0.81 %        0.98 %

The weighted average crediting rate and investment spread are computed without the impact of amortization of deferred sales inducements. With respect to our index annuities, index costs represent the expenses we incur to fund the annual income credits and minimum guaranteed interest credited on the index business. Gains realized on such options are recorded as part of the change in fair value of derivatives, and are largely offset by an expense for interest credited to annuity policyholder account balances. See Critical Accounting Policies - Derivative Instruments - Index Products and note 1 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2003.

Change in fair value of embedded derivatives was a decrease of $11.0 million in the second quarter of 2004 and a decrease of $27.3 million for the six months ended June 30, 2004 compared to increases of $39.3 million and $41.2 million for the same periods in 2003. The liabilities on our index annuities are treated as a "series of embedded derivatives" over the life of the applicable contracts. We are required to estimate the fair value of the future index reserve liabilities by valuing the "host" (or guaranteed) component of the liabilities and projecting (i) the expected index credits on the next policy

anniversary dates and (ii) the net cost of annual options we will purchase in the future to fund index credits. The change in the amount of expense recognized during the three and six months ended June 30, 2004 and 2003 primarily resulted from the increase or decrease in expected index credits on the next policy anniversary dates, which are related to the change in the fair value of the options acquired to fund these index credits discussed above in the "Change in fair value of derivatives". In addition, the host value of the index reserve liabilities increased primarily as a result of increases in index annuity premium deposits. See Critical Accounting Policies - Derivative Instruments - Index Products and note 1 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2003.

Amortization of deferred policy acquisition costs increased 8% to $14.9 million in the second quarter of 2004, and 23% to $29.9 million for the six months ended June 30, 2004 compared to $13.8 million and $24.2 million for the same periods in 2003. These increases are primarily due to additional annuity deposits as discussed above. Additional amortization associated with realized gains on investments sold during the second quarter of 2003 was $3.7 million. The application of SFAS No. 133 resulted in a $0.3 million decrease in amortization in the second quarter of 2004 and an increase of $0.8 million for the six months ended June 30, 2004 compared to an increase of $0.4 million and a reduction of $0.2 million for the same periods in 2003. See notes 1 and 4 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2003.

Other operating costs and expenses increased 16% to $7.7 million in the second quarter of 2004 and 27%% to $16.2 million for the six months ended June 30, 2004 compared to $6.6 million and $12.8 million for the same periods in 2003. The increase in the second quarter of 2004 compared to the same period in 2003 was principally attributable to an increase of $0.3 million in marketing expenses, $0.2 million in salaries and related costs of employment due to growth in our annuity business and $0.3 million in risk charges related to the reinsurance agreements entered into with Hannover Life Reassurance Company of America ("Hannover"). The increase for the six months ended June 30, 2004 compared to the same period in 2003 was principally attributable to an increase of $1.3 million in marketing expenses, $0.9 million in salaries and related costs of employment due to growth in our annuity business and $0.6 million in risk charges related to the reinsurance agreements with Hannover. The reinsurance agreements with Hannover are more fully described in note 5 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2003.

Financial Condition

Investments

Our investment strategy is to maintain a predominantly investment grade fixed income portfolio, provide adequate liquidity to meet our cash obligations to policyholders and others and maximize current income and total investment return through active investment management. Consistent with this strategy, our investments principally consist of fixed maturity securities and short-term investments. We also had approximately 1.5% and 1.9% of our invested assets at June 30, 2004 and December 31, 2003 in derivative instruments (primarily equity market index call options) purchased in connection with the issuance of index annuities.

Insurance statutes regulate the type of investments that our life subsidiaries are permitted to make and limit the amount of funds that may be used for any one type of investments. In light of these statutes and regulations and our business and investment strategy, we generally seek to invest in United States government and government-agency securities and corporate securities rated investment grade by established nationally recognized rating organizations or in securities of comparable investment quality, if not rated.

We have classified approximately 40% of our fixed maturity investments as available for sale. Available for sale securities are reported at market value and unrealized gains and losses, if any, on these securities (net of income taxes and certain adjustments for changes in amortization of deferred policy acquisition costs and deferred sales inducements) are included directly in a separate component of stockholders' equity, thereby exposing stockholders' equity to volatility due to changes in market interest rates and the accompanying changes in the reported value of securities classified as available for sale, with stockholders' equity increasing as interest rates decline and, conversely, decreasing as interest rates rise.

Cash and investments increased to $6.95 billion at June 30, 2004 compared to $6.23 billion at December 31, 2003 as a result of the growth in our annuity business discussed above. At June 30, 2004, the fair value of our available for sale fixed maturity and equity securities was $135.5 million less than the amortized cost of those investments, compared to $86.1 million at December 31, 2003. At June 30, 2004, the amortized cost of our fixed maturity securities held for investment exceeded the market value by $194.5 million, compared to $110.1 million at December 31, 2003. The decrease in the net unrealized investment losses at June 30, 2004 compared to December 31, 2003 is related to an increase in market interest rates.