Summary of FBL FINANCIAL GROUP INC

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

This section includes a summary of FBL Financial Group, Inc.'s consolidated results of operations, financial condition and where appropriate, factors that management believes may affect future performance. Unless noted otherwise, all references to FBL Financial Group, Inc. (we or the Company) include all of its direct and indirect subsidiaries, including its primary life insurance subsidiaries, Farm Bureau Life Insurance Company (Farm Bureau Life) and EquiTrust Life Insurance Company (EquiTrust Life) (collectively, the Life Companies). Please read this discussion in conjunction with the accompanying consolidated financial statements and related notes. In addition, we encourage you to refer to our 2008 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.

This Form 10?Q includes 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. 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. See Part 1A, Risk Factors, of our 2008 Annual Report on Form 10?K for additional information on the risks and uncertainties that may affect the operations, performance, development and results of our business.

Impact of Recent Business Environment

Financial market conditions improved substantially during the third quarter of 2009. Bond market values improved dramatically, the equity market has continued to post sizable gains and various leading economic indicators suggest that the severe recession may be over. However, the availability and cost of credit remains an issue for certain weaker issuers or sectors. Home prices are stabilizing in most markets but delinquencies and foreclosures remain an issue, particularly as rising unemployment continues to cloud the economic outlook. The stressed economic conditions in 2008 and 2009 did not negatively impact our sales. However, a lackluster economic recovery characterized by higher unemployment, lower family income, lower consumer spending, muted corporate earnings growth and lower business investment could adversely impact the demand for our products in the future. We also may experience a higher incidence of claims, lapses or surrenders of policies. We cannot predict whether or when such actions may occur, or what impact, if any, such actions could have on our business, results of operations, cash flows and financial condition.

The fixed income markets continued to improve during the third quarter, however, we believe credit downgrade and default events are expected to peak late in 2009, before declining during 2010. Certain market sectors remain dislocated and within those sectors, market valuations may not be reflective of true economic value. These events and the continuing market upheavals have had and may continue to have an adverse effect on us. These volatile market conditions have also increased the difficulty of valuing certain securities. There were certain securities that were in active markets with significant observable data that are now illiquid due to the current financial environment or market conditions. As a result, certain valuations require greater estimation and judgment as well as valuation methods which are more complex. These values may not ultimately be realizable in a market transaction, and such values may change very rapidly as market conditions change and valuation assumptions are modified.

The volatile and illiquid market conditions that persisted throughout 2009 kept the levels of credit spreads (difference between bond yields and risk-free interest rates) on fixed maturity securities very wide earlier in the year, but spreads in most corporate bond sectors tightened dramatically in the second and third quarters. The moderately wide credit spreads that remain, combined with a steeper yield curve, improve our ability to offer annuity products that are attractive to investors. These same factors can cause a reduction in the carrying value of our investments, negatively impacting our financial condition and reported book value per share. The carrying value of our investments improved during the second and third quarters, but meaningful unrealized losses remain, particularly in certain asset sectors. These conditions also caused us to hold a higher amount of cash and short-term investments in order to maintain a more liquid position during uncertain times.

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Our fixed annuity products contain features that allow contract holders to surrender a policy. To encourage persistency, we impose a surrender charge against the account balance for early termination of a contract within a specified period after its effective date. Most of the fixed annuity products sold by the EquiTrust Life independent channel offer a market value adjustment (MVA) feature which is based on U.S. Treasury rates. This feature provides us interest rate protection when U.S. Treasury interest rates are greater than the rates in effect when a contract is issued and provides a benefit to contract holders when U.S. Treasury interest rates are less than the rates in effect when a contract is issued. Late in 2008 and during the first quarter of 2009, market conditions emerged with unprecedented low U.S. Treasury yields providing an environment where contract holders were able to surrender with smaller net surrender charges, which significantly increased the level of surrender activity. Surrender activity began declining toward the end of the first quarter and continued declining through the third quarter to expected levels, primarily due to an increase in U.S. Treasury rates and various conservation strategies we implemented. We updated surrender assumptions in the models used to calculate amortization of deferred policy acquisition costs and deferred sales inducements in the fourth quarter of 2008; however, the impact of surrenders during 2009 varied from projections which resulted in additional amortization for the nine-month period ended September 30, 2009. The increased surrender activity also resulted in call option assets that no longer back an index product, which negatively impacted our spreads in 2009. We sold a portion of the excess options late in the second quarter to reduce this impact in future periods. We regularly review our excess call options and evaluate whether additional sales would be beneficial. In addition, in the third quarter of 2009 we began taking steps to modify the MVA feature for new sales, which will limit the exposure to us and policyholders of significant changes in U.S. Treasury rates.

We maintain capital levels in accordance with certain statutory and rating agency requirements. Fixed annuity products generally place a strain on statutory capital when sold and add to capital in subsequent years. As a result of the significant growth of the EquiTrust Life independent distribution channel business, our need for capital has increased in recent years. In addition, our capital levels were negatively impacted during 2008 and 2009 as a result of the increased surrender activity and realized and unrealized losses on our investments. In the last half of 2008, we incurred additional debt to assist with our capital requirements and increase our financial flexibility. EquiTrust Life also became a member of the Federal Home Loan Bank in 2009, which provides a source for securitized borrowings if needed. During 2008 and 2009, we also took rate and other actions to reduce sales of new annuity contracts at EquiTrust Life. In addition, during 2009 we modified terms and conditions of many products and implemented a new commission structure to preserve our capital position. See the "Liquidity and Capital Resources" section below for additional details regarding our capital position.

Results of Operations for the Periods Ended September 30, 2009 and 2008


                  Three months ended September 30,           Nine months ended September 30,
                      2009                  2008                2009                  2008
                                 (Dollars in thousands, except per share data)
Revenues        $      307,543        $      189,539      $      835,520        $      444,885
Benefits and
expenses               283,999               173,520             778,575               446,515
                        23,544                16,019              56,945                (1,630 )
Income taxes            (7,802 )              (4,904 )           (18,528 )               2,634
Equity income              140                    86                 301                    44
Net income              15,882                11,201              38,718                 1,048
Net loss
attributable
to
noncontrolling
interest                    33                    15                 125                    31
Net income
attributable
to FBL
Financial
Group, Inc.     $       15,915        $       11,216      $       38,843        $        1,079

Earnings per
common share    $         0.53        $         0.37      $         1.29        $         0.03
Earnings per
common share -
assuming
dilution        $         0.53        $         0.37      $         1.29        $         0.03




Other data
Direct premiums
collected, net of
reinsurance ceded:
Traditional Annuity -
Exclusive Distribution  $      73,038     $      73,667     $     242,807      $     183,440
Traditional Annuity -
Independent
Distribution                   47,417           496,115           571,397          1,361,008
Traditional and
Universal Life
Insurance                      49,109            47,087           150,553            143,427
Variable Annuity and
Variable Universal Life
(1)                            26,809            30,943            76,778            111,737
Reinsurance assumed and
other                           2,947             3,116             8,999             10,508
Total                   $     199,320     $     650,928     $   1,050,534      $   1,810,120

Direct life insurance
in force, end of
quarter (in millions)                                       $      45,131      $      42,750
Life insurance lapse
rates                                                                 6.8  %             6.3  %
Withdrawal rates -
individual traditional
annuity:
Exclusive Distribution                                                4.1  %             3.2  %
Independent
Distribution                                                         17.9  %             6.7  %

(1) Amounts are net of portion ceded to and include amounts assumed from alliance partners.

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Premiums collected is not a measure used in financial statements prepared in accordance with GAAP. There is no comparable GAAP financial measure. We use premiums collected to measure the productivity of our exclusive and independent agents. Direct Traditional Annuity - Exclusive Distribution premiums collected segment increased for the nine-month period in 2009 primarily due to lower short-term market interest rates during the first part of the year making certificates of deposits and other short-term investments less attractive in relation to our traditional fixed annuity products. Direct premiums collected in the Traditional Annuity - Independent Distribution segment decreased in 2009 as a result of rate and other actions taken to preserve capital in the second half of 2008 and 2009, partially offset by a more favorable market environment for traditional annuity products. Variable premiums collected tend to vary with volatility, performance of and confidence level in the equity markets as well as crediting and interest rates on competing products, including fixed rate annuities and bank-offered certificates of deposit.

The increase in the withdrawal rate for the Traditional Annuity - Independent Distribution segment in 2009 is primarily due to the impact of low U.S. Treasury yields on the MVA feature for our direct fixed annuity products, which provided an environment where contract holders could surrender with smaller net surrender charges. Additional details on this feature are discussed above in the "Impact of Recent Business Environment" section. Surrender benefits on the EquiTrust Life direct fixed annuity contracts paid during 2009 by month were as follows:
January - $88.9 million, February - $65.7 million, March - $147.6 million, April
- $187.6 million, May - $96.0 million, June - $69.4 million, July - $43.0 million, August - $28.9 million and September - $32.5 million.

Net Income Attributable to FBL Financial Group, Inc.

Net income attributable to FBL Financial Group, Inc. (FBL Net Income) was $15.9 million in the third quarter of 2009 compared to $11.2 million for the 2008 period and was $38.8 million for the nine-months ended September 30, 2009 compared to $1.1 million for the 2008 period. As discussed in detail below, the increase in the third quarter was primarily due to a decrease in impairment losses on investments and improved mortality experience, partially offset by the impact of the change in unrealized gains and losses on derivatives. The increase for the nine-month period was primarily due to realized capital gains on the sale of investments, a decrease in impairment losses on investments and the impact of an increase in the volume of business in force in the Traditional Annuity - Exclusive Distribution and Traditional and Universal Life Insurance segments. These items were partially offset by the impact of the change in unrealized gains and losses on derivatives and increased surrenders in the Traditional Annuity - Independent Distribution segment. The increase in volume of business in force is quantified by summarizing the face amount of insurance in force for traditional life products or account values of contracts in force for interest sensitive products. The face amount of life insurance in force represents the gross death benefit payable to policyholders and account value represents the value of the contract to the contract holder before application of surrender charges or reduction for any policy loans outstanding. The following discussion provides additional details on the items impacting FBL Net Income.

Spreads Earned on our Universal Life and
Individual Annuity Products

                                                 Nine months ended September 30,
                                                  2009                      2008
Weighted average yield on cash and
invested assets                                       6.18  %                   6.05  %
Weighted average interest crediting
rate/index cost                                       4.06                      3.87
Spread                                                2.12  %                   2.18  %

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

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Impact of Unlocking

We periodically revise key assumptions used in the calculation of the amortization of deferred policy acquisition costs, deferred sales inducements, value of insurance in force acquired and unearned revenues for participating life insurance, variable and interest sensitive and index products, as applicable, through an "unlocking" process. Revisions are made based on historical results and our best estimate of future experience. The impact of unlocking is recorded in the current period as an increase or decrease to amortization of the respective balances. While the unlocking process can take place at any time, as needs dictate, the process typically takes place annually with different blocks of business unlocked each quarter. The impact of unlocking for the quarter was to increase pre-tax income by $2.1 million in 2009 and $1.2 million in 2008. For the nine-month period, the impact of unlocking increased pretax income $0.8 million in 2009 and decreased pre-tax income $0.1 million in 2008. The impact in 2009 and 2008 was primarily due to updating the amortization model for assumptions relating to withdrawal rates, earned spreads, mortality and the current volume of business in force.

Impact of Operating Adjustments on FBL Net Income



                 Three months ended September 30,           Nine months ended September 30,
                     2009                  2008               2009                  2008
                                           (Dollars in thousands)
Realized
gains
(losses) on
investments    $          870        $      (27,156 )    $     (12,679 )      $      (130,524 )
Change in net
unrealized
gains/losses
on
derivatives           (19,193 )              21,188             (6,379 )               64,178
Change in
amortization
of:
Deferred
policy
acquisition
costs                   2,227                  (852 )           (8,739 )               (2,796 )
Deferred
sales
inducements             5,156                (4,620 )              473                (13,944 )
Value of
insurance in
force
acquired                   23                   (54 )               26                    503
Unearned
revenue
reserve                     5                    23               (145 )                 (170 )
Income tax
offset                  3,819                 4,015              9,605                 28,964
Net impact of
operating
income
adjustments    $       (7,093 )      $       (7,456 )    $     (17,838 )      $       (53,789 )




                 Three months ended September 30,           Nine months ended September 30
                    2009                  2008                 2009                  2008
                                           (Dollars in thousands)
Summary of
adjustments
noted above
after offsets
and income
taxes:
Realized
gains/losses
on
investments    $      (1,853 )      $       (12,726 )    $      (12,955 )      $      (67,533 )
Change in net
unrealized
gains/losses
on
derivatives           (5,240 )                5,270              (4,883 )              13,744
Net impact of
operating
income
adjustments    $      (7,093 )      $        (7,456 )    $      (17,838 )      $      (53,789 )
Net impact
per share -
basic          $       (0.24 )      $         (0.25 )    $        (0.59 )      $        (1.80 )
Net impact
per share -
assuming
dilution       $       (0.23 )      $         (0.25 )    $        (0.59 )      $        (1.80 )

As noted in the "Segment Information" section that follows, we use both net income and operating income to measure our operating results. Operating income for the periods covered by this report equals net income, excluding the impact of realized gains and losses on investments and the change in net unrealized gains and losses on derivatives. Our rationale for excluding these items from operating income is also explained in Note 9 to our consolidated financial statements.

Subsequent Event

Effective October 1, 2009, we entered into an agreement with EMC National Life Company (EMCNL), under which EMCNL recaptured a block of annuity and life insurance policies with reserves totaling $249.8 million. We originally assumed this business as part of a closed block transaction in 2001. An after-tax gain of approximately $9.4 million ($0.31 per basic and diluted common share) will be recorded in the fourth quarter of 2009 in connection with this transaction. The forgone after-tax earnings from this block of business, after reinvestment of proceeds, are approximately $0.7 million per quarter.

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Changes in FBL Net Income
                                                        Period ended
                                         September 30, 2009 vs. September 30, 2008
                                           Three months                Nine months
                                                   (Dollars in thousands)

Premiums and product charges          $              3,278        $            40,509
Net investment income                               (1,720 )                   24,454
Derivative income (loss)                            90,377                    213,357
Realized gains (losses) on
investments                                         28,026                    117,845
Other income and other expenses                       (475 )                   (2,436 )
Interest sensitive and index
products benefits and change in
value of index product embedded
derivative                                        (118,186 )                 (308,958 )
Traditional life insurance policy
benefits                                             1,092                      7,303
Underwriting, acquisition and
insurance expenses                                   6,785                    (27,698 )
Interest expense                                    (1,652 )                   (5,801 )
Income taxes                                        (2,898 )                  (21,162 )
Noncontrolling interest and equity
income                                                  72                        351
Total change in FBL Net Income        $              4,699        $            37,764

A detailed discussion of changes in FBL Net Income follows.

Premiums and Product Charges



                 Three months ended September 30,           Nine months ended September 30,
                     2009                  2008                2009                  2008
                                           (Dollars in thousands)
Premiums and
product
charges:
Interest
sensitive and
index product
charges        $       34,915        $       32,931      $      129,046        $       93,837
Traditional
life
insurance
premiums               37,576                36,282             116,484               111,184
Total          $       72,491        $       69,213      $      245,530        $      205,021

Premiums and product charges increased 4.7% in the third quarter of 2009 to $72.5 million and increased 19.8% to $245.5 million for the nine-month period. The increase in interest sensitive and index product charges is principally driven by surrender charges on annuity products.

Surrender charges totaled $11.2 million for the third quarter of 2009 and $59.0 million for the nine months ended September 30, 2009 compared to $9.4 million and $23.9 million in the 2008 periods. Surrender charges increased due to the impact of MVAs on certain products sold by our EquiTrust Life independent distribution, as discussed in the "Impact of Recent Business Environment" section above.

EquiTrust Life Direct Surrender Charges on Fixed Annuity Contract

                 Three months ended September 30,            Nine months ended September 30,
                     2009                   2008                2009                  2008
                                           (Dollars in thousands)
Surrender
charges:
Gross
surrender
charges        $       13,435          $       9,218      $       142,077        $      21,057
Market
value
adjustments            (4,690 )               (2,793 )            (91,332 )             (5,657 )
Net
surrender
charges        $        8,745          $       6,425      $        50,745        $      15,400

Traditional life insurance premiums increased due to an increase in the volume of business in force. The increase in the business in force is primarily attributable to sales of traditional life products by our Farm Bureau Life agency force exceeding the loss of in force amounts through deaths, lapses and surrenders. Our average aggregate traditional life insurance in force, net of reinsurance ceded, totaled $23,734.5 million for the nine-month period in 2009 and $21,776.2 million for the nine-month period in 2008. The change in life insurance in force is not proportional to the change in premium income due to a shift in the composition of our traditional life block of business from whole life policies to term policies. The premium for a term policy per $1,000 face amount is less than that for a whole life policy.

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Net Investment Income

Net investment income, which excludes investment income on separate account assets relating to variable products, decreased 0.9% in the third quarter of 2009 to $180.2 million and increased 4.7% to $547.0 million for the nine-month period. The decrease for the quarter is primarily due to the decrease in short-term rates and holding higher cash and short-term investment balances in order to maintain a more liquid position for financial flexibility, partially offset by an increase in average invested assets. The increase in the nine-month period is primarily due to an increase in average invested assets. Average invested assets in the nine-month period of 2009 increased 5.6% to $12,347.8 million (based on securities at amortized cost) from $11,688.8 million in the 2008 period, principally due to net premium inflows from the Life Companies during the twelve-month period ended September 30, 2009. The annualized yield earned on average invested assets decreased to 6.09% in the nine months ended September 30, 2009 from 6.11% in the respective 2008 period. The decrease in yield is primarily due to holding higher cash and short-term investment balances. In addition, short-term interest rates have declined significantly. The yield on our primary short-term investment account was less than 0.1% at September 30, 2009 compared to 1.9% at September 30, 2008.

Fee income from bond calls, tender offers and mortgage loan prepayments totaled $2.1 million in the nine months ended September 30, 2009 compared to $1.7 million in the respective 2008 period. Net investment income also includes $1.8 million in the nine months ended September 30, 2009 compared to ($0.3) million in the 2008 respective period from the change in net discount accretion on mortgage and asset-backed securities resulting from changing prepayment speed assumptions at the end of each period.

Derivative
Income (Loss)

                 Three months ended September 30,           Nine months ended September 30,
                     2009                  2008               2009                  2008
                                           (Dollars in thousands)
Derivative
income
(loss):
Components of
derivative
income (loss)
from call
options:
Gains
received at
expiration     $          349        $        8,865      $         836        $        35,507
Change in the
difference
between fair
value and
remaining
option cost
at beginning
and end of
. . .