Table of Contents

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D. C. 20549**

 

**FORM10‐Q**

 
| (Mark one)  |   |                                                                                     |
|-------------|--------|------------------------------------------------------------------------------------------|
| [X]         |   | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  |
|        |   |                                                                                     |
|        |   | ****For the quarterly periodended****September 30, 2009****                         |
|        |   |                                                                                     |
| or          |
|        |   |                                                                                     |
| ****[ ]**** |   | 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 FinancialGroup, Inc.                                                          |
| (Exact name of registrant as specifiedin its charter)                             |
|                                                                              |   |                                 |
| Iowa                                                                              |   | 42‐1411715                     |
| (State of incorporation)                                                          |   | (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 formerfiscal year, if changed since last report) |
|                                                                              |   |                                 |

Indicate by check mark whether the registrant (1) has filed all reports required tobe 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 tofile such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No

 

Indicate by check mark whether theregistrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and postsuch files). [ ] Yes [ ] No

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of"large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b‐2 of the Exchange Act. (Check one):
| Large accelerated filer [ ] | Accelerated filer [X]  | Non-accelerated filer [ ] | Smaller reporting company [ ] |
|-----------------------------|-----------------------------|---------------------------|-------------------------------|

 
| Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b‐2 of the Exchange Act). [ ] Yes [X] No |
|--------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                 |
| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicabledate:           |
| Title of each class                                                                                                                  |   | Outstanding at November 2, 2009 |
| Class A Common Stock, without parvalue                                                                                               |   | 29,261,255 |
| Class B Common Stock, without par value                                                                                              |   | 1,192,990 |

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**FBL FINANCIAL GROUP, INC.**

**FORM 10‐Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER      30, 2009**

**TABLE OF CONTENTS**

 

 

 
| PART I.        | FINANCIAL INFORMATION                                                                          |   |
|----------------|------------------------------------------------------------------------------------------------|--------|
|           |                                                                                           |   |
| Item 1.        | Financial Statements (Unaudited)                                                               |   |
|           | Consolidated Balance Sheets                                                                    | 2      |
|           | Consolidated Statements of Operations                                                          | 4      |
|           | Consolidated Statements of Changes in Stockholder's          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 | 24     |
|           |                                                                                           |   |
| Item 3.        | Quantitative and Qualitative Disclosures About Market          Risk                            | 53     |
|           |                                                                                           |   |
| Item 4.        | Controls          and Procedures                                                               | 53     |
|           |                                                                                           |   |
| PART II.       | OTHER INFORMATION                                                                              |   |
|           |                                                                                           |   |
| Item 6.        | Exhibits                                                                                       | 54     |
|           |                                                                                           |   |
| SIGNATURES     |                                                                                           | 55     |
| EX‐10.31 |                                                                                           |   |
| EX‐31.1  |                                                                                           |   |
| EX‐31.2  |                                                                                           |   |
| EX‐32    |                                                                                           |   |

 

 

----

**FBL FINANCIAL GROUP, INC.**

**CONSOLIDATED BALANCE SHEETS (Unaudited)**

**(Dollarsin thousands)**

 
|                                                                                                      |   | September 30, 2009 |   |   |   | December 31, 2008 |   |
|-----------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|--------|--------|------------------------|--------|
| Assets                                                                                                    |   |                    |   |   |   |                   |   |
| Investments:                                                                                              |   |                    |   |   |   |                   |   |
| Fixed maturities - available for sale, at market (amortized cost: 2009 - $10,372,106; 2008 - $10,505,084) | $      | 9,936,347               |   |   | $      | 8,965,443              |   |
| Equity securities - available for sale, at market (cost: 2009 - $62,369; 2008- $51,958)                   |   | 58,990                  |   |   |   | 44,863                 |   |
| Mortgage loans onreal estate                                                                              |   | 1,306,678               |   |   |   | 1,381,854              |   |
| Derivative instruments                                                                                    |   | 52,089                  |   |   |   | 12,933                 |   |
| Realestate                                                                                                |   | 16,705                  |   |   |   | 2,559                  |   |
| Policy loans                                                                                              |   | 185,800                 |   |   |   | 182,421                |   |
| Other long-terminvestments                                                                                |   | 1,780                   |   |   |   | 1,527                  |   |
| Short-term investments                                                                                    |   | 325,898                 |   |   |   | 262,459                |   |
| Total investments                                                                                         |   | 11,884,287              |   |   |   | 10,854,059             |   |
|                                                                                                      |   |                    |   |   |   |                   |   |
| Cash and cash equivalents                                                                                 |   | 12,892                  |   |   |   | 37,710                 |   |
| Securitiesand indebtedness of related parties                                                             |   | 19,146                  |   |   |   | 18,921                 |   |
| Accrued investment income                                                                                 |   | 141,172                 |   |   |   | 136,893                |   |
| Amounts receivable from affiliates                                                                        |   | 13,086                  |   |   |   | 15,791                 |   |
| Reinsurance recoverable                                                                                   |   | 128,342                 |   |   |   | 107,854                |   |
| Deferredpolicy acquisition costs                                                                          |   | 1,120,121               |   |   |   | 1,365,609              |   |
| Deferred sales inducements                                                                                |   | 356,193                 |   |   |   | 420,147                |   |
| Value of insurance in force acquired                                                                      |   | 38,603                  |   |   |   | 63,121                 |   |
| Property and equipment, less allowances for depreciation of $64,360 in 2009 and $63,730 in 2008           |   | 19,486                  |   |   |   | 23,074                 |   |
| Current income taxes recoverable                                                                          |   | —                 |   |   |   | 14,389                 |   |
| Deferred income tax benefit                                                                               |   | 18,137                  |   |   |   | 305,080                |   |
| Goodwill                                                                                                  |   | 11,170                  |   |   |   | 11,170                 |   |
| Collateral held for securities lendingand other transactions                                              |   | —                 |   |   |   | 67,953                 |   |
| Other assets                                                                                              |   | 81,015                  |   |   |   | 41,623                 |   |
| Assets held in separate accounts                                                                          |   | 677,142                 |   |   |   | 577,420                |   |
|                                                                                                      |   |                    |   |   |   |                   |   |
|                                                                                                      |   |                    |   |   |   |                   |   |
|                                                                                                      |   |                    |   |   |   |                   |   |
|                                                                                                      |   |                    |   |   |   |                   |   |
|                                                                                                      |   |                    |   |   |   |                   |   |
|                                                                                                      |   |                    |   |   |   |                   |   |
|                                                                                                      |   |                    |   |   |   |                   |   |
|                                                                                                      |   |                    |   |   |   |                   |   |
|                                                                                                      |   |                    |   |   |   |                   |   |
| Total assets                                                                                              | $      | 14,520,792              |   |   | $      | 14,060,814             |   |

 

 

 

-2-

**FBL FINANCIAL GROUP,INC.**

**CONSOLIDATED BALANCE SHEETS (Continued)**

**(Dollars in thousands)**

 
|                                                                                                                                                  |   | September 30, 2009 |   |   |   | December 31, 2008 |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|--------|--------|------------------------|--------|
| Liabilities andstockholders' equity                                                                                                                   |   |                    |   |   |   |                   |   |
| Liabilities:                                                                                                                                          |   |                    |   |   |   |                   |   |
| Policy liabilities and accruals:                                                                                                                      |   |                    |   |   |   |                   |   |
| Future policy benefits:                                                                                                                               |   |                    |   |   |   |                   |   |
| Interest sensitiveand index products                                                                                                                  | $      | 10,375,382              |   |   | $      | 10,531,967             |   |
| Traditional life insurance and accident and health products                                                                                           |   | 1,360,527               |   |   |   | 1,328,506              |   |
| Unearned revenuereserve                                                                                                                               |   | 28,665                  |   |   |   | 34,663                 |   |
| Other policy claims and benefits                                                                                                                      |   | 25,867                  |   |   |   | 38,256                 |   |
|                                                                                                                                                  |   | 11,790,441              |   |   |   | 11,933,392             |   |
| Other policyholders' funds:                                                                                                                           |   |                    |   |   |   |                   |   |
| Supplementarycontracts without life contingencies                                                                                                     |   | 506,924                 |   |   |   | 504,885                |   |
| Advance premiums and other deposits                                                                                                                   |   | 179,373                 |   |   |   | 167,473                |   |
| Accrueddividends                                                                                                                                      |   | 9,803                   |   |   |   | 10,241                 |   |
|                                                                                                                                                  |   | 696,100                 |   |   |   | 682,599                |   |
|                                                                                                                                                  |   |                    |   |   |   |                   |   |
| Amounts payable to affiliates                                                                                                                         |   | 1,453                   |   |   |   | 247                    |   |
| Short-term debt                                                                                                                                       |   | —                 |   |   |   | 59,446                 |   |
| Long-term debt payable to affiliates                                                                                                                  |   | 100,000                 |   |   |   | 100,000                |   |
| Long-term debt                                                                                                                                        |   | 271,064                 |   |   |   | 271,005                |   |
| Current income taxes payable                                                                                                                          |   | 14,767                  |   |   |   | —                |   |
| Collateral payable for securities lending and other transactions                                                                                      |   | 33                      |   |   |   | 69,656                 |   |
| Otherliabilities                                                                                                                                      |   | 127,476                 |   |   |   | 108,588                |   |
| Liabilities related to separate accounts                                                                                                              |   | 677,142                 |   |   |   | 577,420                |   |
| Totalliabilities                                                                                                                                      |   | 13,678,476              |   |   |   | 13,802,353             |   |
|                                                                                                                                                  |   |                    |   |   |   |                   |   |
| Stockholders'equity:                                                                                                                                  |   |                    |   |   |   |                   |   |
| FBL FinancialGroup, Inc. stockholders' equity:                                                                                                        |   |                    |   |   |   |                   |   |
| Preferred stock, without par value, at liquidation value - authorized10,000,000 shares, issued and outstanding 5,000,000 Series B shares              |   | 3,000                   |   |   |   | 3,000                  |   |
| Class A commonStock, without par value - authorized 88,500,000 shares, issued and outstanding 29,259,033 shares in 2009 and 28,975,889 shares in 2008 |   | 108,274                 |   |   |   | 104,090                |   |
| Class B common Stock, without par value - authorized 1,500,000 shares, issuedand outstanding 1,192,990 shares                                         |   | 7,522                   |   |   |   | 7,522                  |   |
| Accumulated othercomprehensive loss                                                                                                                   |   | (116,996                | )      |   |   | (649,758               | )      |
| Retained earnings                                                                                                                                     |   | 840,410                 |   |   |   | 793,511                |   |
| Total FBL Financial Group, Inc. stockholders' equity                                                                                                  |   | 842,210                 |   |   |   | 258,365                |   |
| Noncontrolling interest                                                                                                                               |   | 106                     |   |   |   | 96                     |   |
| Total stockholder's equity                                                                                                                            |   | 842,316                 |   |   |   | 258,461                |   |
| Total liabilities and stockholders'equity                                                                                                             | $      | 14,520,792              |   |   | $      | 14,060,814             |   |

 

 

 

 

 

 

 

See accompanyingnotes.

----

**FBL FINANCIAL GROUP, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)**

**(Dollars in thousands, except per share data)**

 
|                                                        | Three months ended September 30, |    | Nine months ended September 30, |
|-------------------------------------------------------------|---------------------------------------|---------|--------------------------------------|
|                                                        |                                  | 2009    |                                 |   |   | 2008 |   |   |   | 2009 |   |   |   | 2008 |   |
| Revenues:                                                   |                                  |    |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| 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 |   |
| Net investment income                                       |                                  | 180,168 |                                 |   |   | 181,888 |   |   |   | 547,009 |   |   |   | 522,555 |   |
| Derivative income (loss)                                    |                                  | 49,426  |                                 |   |   | (40,951 | ) |   |   | 41,825 |   |   |   | (171,532 | ) |
| Net realized capital gains (losses) on sales of investments |                                  | 2,494   |                                 |   |   | (913 | ) |   |   | 37,973 |   |   |   | 3,093 |   |
|                                                        |                                  |    |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Total other-than-temporary impairment losses                |                                  | (8,581  | )                                    |   |   | (26,243 | ) |   |   | (88,432 | ) |   |   | (133,617 | ) |
| Non-credit portion in other comprehensive loss              |                                  | 6,957   |                                 |   |   | — |   |   |   | 37,780 |   |   |   | — |   |
| Net impairment loss recognized inearnings                   |                                  | (1,624  | )                                    |   |   | (26,243 | ) |   |   | (50,652 | ) |   |   | (133,617 | ) |
|                                                        |                                  |    |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Other income                                                |                                  | 4,588   |                                 |   |   | 6,545 |   |   |   | 13,835 |   |   |   | 19,365 |   |
| Total revenues                                              |                                  | 307,543 |                                 |   |   | 189,539 |   |   |   | 835,520 |   |   |   | 444,885 |   |
|                                                        |                                  |    |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Benefits andexpenses:                                       |                                  |    |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest sensitive and index product benefits               |                                  | 95,360  |                                 |   |   | 111,074 |   |   |   | 319,198 |   |   |   | 320,312 |   |
| Change in value of index product embeddedderivatives        |                                  | 96,371  |                                 |   |   | (37,529 | ) |   |   | 139,052 |   |   |   | (171,020 | ) |
| Traditional life insurance benefits                         |                                  | 23,407  |                                 |   |   | 23,353 |   |   |   | 69,964 |   |   |   | 73,207 |   |
| Increase in traditional life future policybenefits          |                                  | 9,991   |                                 |   |   | 11,084 |   |   |   | 29,819 |   |   |   | 33,511 |   |
| Distributions to participating policyholders                |                                  | 4,760   |                                 |   |   | 4,813 |   |   |   | 14,738 |   |   |   | 15,106 |   |
| Underwriting, acquisition and insuranceexpenses             |                                  | 43,891  |                                 |   |   | 50,676 |   |   |   | 172,057 |   |   |   | 144,359 |   |
| Interest expense                                            |                                  | 6,116   |                                 |   |   | 4,464 |   |   |   | 19,164 |   |   |   | 13,363 |   |
| Other expenses                                              |                                  | 4,103   |                                 |   |   | 5,585 |   |   |   | 14,583 |   |   |   | 17,677 |   |
| Total benefits and expenses                                 |                                  | 283,999 |                                 |   |   | 173,520 |   |   |   | 778,575 |   |   |   | 446,515 |   |
|                                                        |                                  | 23,544  |                                 |   |   | 16,019 |   |   |   | 56,945 |   |   |   | (1,630 | ) |
| Incometaxes                                                 |                                  | (7,802  | )                                    |   |   | (4,904 | ) |   |   | (18,528 | ) |   |   | 2,634 |   |
| Equity income, net of related income taxes                  |                                  | 140     |                                 |   |   | 86 |   |   |   | 301 |   |   |   | 44 |   |
| Net income                                                  |                                  | 15,882  |                                 |   |   | 11,201 |   |   |   | 38,718 |   |   |   | 1,048 |   |
| Net lossattributable to noncontrolling interest             |                                  | 33      |                                 |   |   | 15 |   |   |   | 125 |   |   |   | 31 |   |
| Net income attributable to FBL Financial Group, Inc.        | $                                     | 15,915  |                                 |   | $ | 11,216 |   |   | $ | 38,843 |   |   | $ | 1,079 |   |
|                                                        |                                  |    |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings percommon share                                    | $                                     | 0.53    |                                 |   | $ | 0.37 |   |   | $ | 1.29 |   |   | $ | 0.03 |   |
| Earnings per common share - assuming dilution               | $                                     | 0.53    |                                 |   | $ | 0.37 |   |   | $ | 1.29 |   |   | $ | 0.03 |   |
|                                                        |                                  |    |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash dividends per common share                             | $                                     | 0.0625  |                                 |   | $ | 0.1250 |   |   | $ | 0.2500 |   |   | $ | 0.3750 |   |

 

 

 

 

 

 

 

 

 

 

See accompanyingnotes.

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**FBL FINANCIAL GROUP,INC.**

**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)**

**(Dollars in thousands)**

 
|                                                                                              | FBL Financial Group, Inc. Stockholders' Equity |                     |   |   |   |                                 |   |   |   |
|---------------------------------------------------------------------------------------------------|------------------------------------------------|--------------------------|--------|--------|--------|--------------------------------------|--------|--------|--------|
|                                                                                              |                                           | Series B Preferred Stock |   |   |   | Class A and Class B Common Stock (a) |   |   |   | Accumulated Other Comprehensive Loss |   |   |   | RetainedEarnings |   |   |   | Non-controlling Interest |   |   |   | Total Stockholders' Equity |   |
| Balance at January 1, 2008                                                                   | $                                              | 3,000                    |   |   | $      | 108,746                              |   |   | $      | (36,345 | ) |   | $ | 827,490 |   |   | $ | 91 |   |   | $ | 902,982 |   |
| Change in measurement date of benefit plans                                                       |                                           | —                  |   |   |   | —                              |   |   |   | — |   |   |   | (770 | ) |   |   | — |   |   |   | (770 | ) |
| Comprehensive loss:                                                                               |                                           |                     |   |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income - nine monthsended September 2008                                                 |                                           | —                  |   |   |   | —                              |   |   |   | — |   |   |   | 1,079 |   |   |   | (31 | ) |   |   | 1,048 |   |
| Change in net unrealized investment gains/losses                                                  |                                           | —                  |   |   |   | —                              |   |   |   | (340,820 | ) |   |   | — |   |   |   | — |   |   |   | (340,820 | ) |
| Change in underfunded status of other postretirement benefit plans                                |                                           | —                  |   |   |   | —                              |   |   |   | 14 |   |   |   | — |   |   |   | — |   |   |   | 14 |   |
| Total comprehensive loss (b)                                                                      |                                           |                     |   |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (339,758 | ) |
| Adjustment resulting from capitaltransactions of equity investee                                  |                                           | —                  |   |   |   | (87                                  | )      |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (87 | ) |
| Stock-based compensation, including the issuance of 153,865 common shares under compensationplans |                                           | —                  |   |   |   | 4,866                                |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 4,866 |   |
| Dividends on preferred stock                                                                      |                                           | —                  |   |   |   | —                              |   |   |   | — |   |   |   | (112 | ) |   |   | — |   |   |   | (112 | ) |
| Dividendson common stock                                                                          |                                           | —                  |   |   |   | —                              |   |   |   | — |   |   |   | (11,181 | ) |   |   | — |   |   |   | (11,181 | ) |
| Receipts related to noncontrolling interest                                                       |                                           | —                  |   |   |   | —                              |   |   |   | — |   |   |   | — |   |   |   | 61 |   |   |   | 61 |   |
| Balance atSeptember 30, 2008                                                                 | $                                              | 3,000                    |   |   | $      | 113,525                              |   |   | $      | (377,151 | ) |   | $ | 816,506 |   |   | $ | 121 |   |   | $ | 556,001 |   |
|                                                                                              |                                           |                     |   |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at January 1, 2009                                                                   | $                                              | 3,000                    |   |   | $      | 111,612                              |   |   | $      | (649,758 | ) |   | $ | 793,511 |   |   | $ | 96 |   |   | $ | 258,461 |   |
| Reclassification of non-credit impairment losses from prior periods                               |                                           | —                  |   |   |   | —                              |   |   |   | (15,641 | ) |   |   | 15,641 |   |   |   | — |   |   |   | — |   |
| Comprehensive income:                                                                             |                                           |                     |   |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income - nine months ended September 30, 2009                                            |                                           | —                  |   |   |   | —                              |   |   |   | — |   |   |   | 38,843 |   |   |   | (125 | ) |   |   | 38,718 |   |
| Change in net unrealized investment gains/losses                                                  |                                           | —                  |   |   |   | —                              |   |   |   | 567,100 |   |   |   | — |   |   |   | — |   |   |   | 567,100 |   |
| Non-credit impairment losses                                                                      |                                           | —                  |   |   |   | —                              |   |   |   | (18,707 | ) |   |   | — |   |   |   | — |   |   |   | (18,707 | ) |
| Change in underfunded status of the other postretirement benefit plans                            |                                           | —                  |   |   |   | —                              |   |   |   | 10 |   |   |   | — |   |   |   | — |   |   |   | 10 |   |
| Total comprehensive income (b)                                                                    |                                           |                     |   |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 587,121 |   |
| Stock-based compensation,including the issuance of 283,144 common shares under compensation plans |                                           | —                  |   |   |   | 4,184                                |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 4,184 |   |
| Dividends on preferred stock                                                                      |                                           | —                  |   |   |   | —                              |   |   |   | — |   |   |   | (112 | ) |   |   | — |   |   |   | (112 | ) |
| Dividends on common stock                                                                         |                                           | —                  |   |   |   | —                              |   |   |   | — |   |   |   | (7,473 | ) |   |   | — |   |   |   | (7,473 | ) |
| Receipts related to noncontrolling interest                                                       |                                           | —                  |   |   |   | —                              |   |   |   | — |   |   |   | — |   |   |   | 135 |   |   |   | 135 |   |
| Balance at September 30, 2009                                                                | $                                              | 3,000                    |   |   | $      | 115,796                              |   |   | $      | (116,996 | ) |   | $ | 840,410 |   |   | $ | 106 |   |   | $ | 842,316 |   |

 
| (a)    | For2008, ($6) thousand of the adjustment resulting from capital transaction of an equity investee was allocated to Class B common stock. All other activity for theperiods shown relates to Class A Common Stock. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                              |   |   |   |
| (b)    | Detail of comprehensive income (loss) for the quarter and nine-month periods is shownbelow:                                                                                                                       |

 
|                                                                 | Three months ended September 30, |    | Nine months endedSeptember 30, |
|----------------------------------------------------------------------|---------------------------------------|---------|-------------------------------------|
|                                                                 |                                  | 2009    |                                |   |   | 2008 |   |   |   | 2009 |   |   |   | 2008 |   |
| Total comprehensive income (loss)                                    | $                                     | 248,412 |                                |   | $ | (179,185 | ) |   | $ | 587,121 |   |   | $ | (339,758 | ) |
| Comprehensive income (loss)attributable to FBL Financial Group, Inc. |                                  | 248,445 |                                |   |   | (179,170 | ) |   |   | 587,246 |   |   |   | (339,727 | ) |

 

 

See accompanying notes.

----

**FBLFINANCIAL GROUP, INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS (Unaudited)**

**(Dollars in thousands)**

 
|                                                                                     | Nine months endedSeptember 30, |
|------------------------------------------------------------------------------------------|-------------------------------------|
|                                                                                     |                                | 2009 |   |   |   | 2008 |   |
| Operating activities                                                                     |                                |   |   |   |   |   |   |
| Net income                                                                               | $                                   | 38,718 |   |   | $ | 1,048 |   |
| Adjustments to reconcile net income to net cash provided by operatingactivities:         |                                |   |   |   |   |   |   |
| Adjustments related to interest sensitive and index products:                            |                                |   |   |   |   |   |   |
| Interest credited/index credits to account balances,excluding deferred sales inducements |                                | 247,902 |   |   |   | 244,467 |   |
| Change in fair value of embeddedderivatives                                              |                                | 139,052 |   |   |   | (171,020 | ) |
| Charges for mortality,surrenders and administration                                      |                                | (125,502 | ) |   |   | (88,408 | ) |
| Deferral of unearned revenues                                                            |                                | 1,514 |   |   |   | 1,177 |   |
| Amortization ofunearned revenue reserve                                                  |                                | (1,602 | ) |   |   | (1,165 | ) |
| Provision for depreciation and amortization ofproperty and equipment                     |                                | 4,995 |   |   |   | 11,676 |   |
| Provision foraccretion and amortization of investments                                   |                                | (3,569 | ) |   |   | (4,004 | ) |
| Realized losses on investments                                                           |                                | 12,679 |   |   |   | 130,524 |   |
| Change in fairvalue of derivatives                                                       |                                | (38,428 | ) |   |   | 137,973 |   |
| Increase in traditional life and accidentand health benefit accruals                     |                                | 32,021 |   |   |   | 33,829 |   |
| Policy acquisitioncosts deferred                                                         |                                | (78,991 | ) |   |   | (127,680 | ) |
| Amortization of deferred policy acquisitioncosts                                         |                                | 99,705 |   |   |   | 74,741 |   |
| Amortization ofdeferred sales inducements                                                |                                | 38,280 |   |   |   | 39,445 |   |
| Amortization of value of insurance inforce                                               |                                | 2,178 |   |   |   | 1,979 |   |
| Change in accruedinvestment income                                                       |                                | (4,279 | ) |   |   | (26,277 | ) |
| Change in amounts receivable from/payable toaffiliates                                   |                                | 3,911 |   |   |   | 666 |   |
| Change inreinsurance recoverable                                                         |                                | (20,488 | ) |   |   | 18,046 |   |
| Change in current income taxes                                                           |                                | 29,156 |   |   |   | (14,948 | ) |
| Provision for deferredincome taxes                                                       |                                | (9,006 | ) |   |   | 8,765 |   |
| Other                                                                                    |                                | (26,506 | ) |   |   | (3,320 | ) |
| Net cash providedby operating activities                                                 |                                | 341,740 |   |   |   | 267,514 |   |
|                                                                                     |                                |   |   |   |   |   |   |
| Investing activities                                                                     |                                |   |   |   |   |   |   |
| Sale, maturity or repayment of investments:                                              |                                |   |   |   |   |   |   |
| Fixed maturities - available for sale                                                    |                                | 1,364,783 |   |   |   | 495,576 |   |
| Equity securities - available for sale                                                   |                                | 88 |   |   |   | 15,474 |   |
| Mortgage loans onreal estate                                                             |                                | 60,621 |   |   |   | 45,729 |   |
| Derivative instruments                                                                   |                                | 51,462 |   |   |   | 31,633 |   |
| Policyloans                                                                              |                                | 29,663 |   |   |   | 28,688 |   |
|                                                                                     |                                | 1,506,617 |   |   |   | 617,100 |   |
| Acquisition of investments:                                                              |                                |   |   |   |   |   |   |
| Fixed maturities - available for sale                                                    |                                | (1,208,385 | ) |   |   | (1,566,994 | ) |
| Equity securitiesavailable for sale                                                      |                                | (10,415 | ) |   |   | (223 | ) |
| Mortgage loans on real estate                                                            |                                | (511 | ) |   |   | (141,041 | ) |
| Derivativeinstruments                                                                    |                                | (50,063 | ) |   |   | (144,283 | ) |
| Policy loans                                                                             |                                | (33,042 | ) |   |   | (30,385 | ) |
| Short term investments- net                                                              |                                | (63,439 | ) |   |   | (18,089 | ) |
|                                                                                     |                                | (1,365,855 | ) |   |   | (1,901,015 | ) |

 

**-6-FBL FINANCIAL GROUP,INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)**

**(Dollars in thousands)**

 
|                                                                                                   | Nine months ended September 30, |
|--------------------------------------------------------------------------------------------------------|--------------------------------------|
|                                                                                                   |                                 | 2009 |   |   |   | 2008 |   |
| Investing activities - continued                                                                       |                                 |   |   |   |   |   |   |
| Proceeds from disposal, repayments of advances and other distributions of capital from equityinvestees | $                                    | 26 |   |   | $ | 529 |   |
| Purchases of property and equipment                                                                    |                                 | (3,975 | ) |   |   | (11,793 | ) |
| Disposal of property and equipment                                                                     |                                 | 2,633 |   |   |   | 1,816 |   |
| Net cash provided by (used in) investing activities                                                    |                                 | 139,446 |   |   |   | (1,293,363 | ) |
|                                                                                                   |                                 |   |   |   |   |   |   |
| Financing activities                                                                                   |                                 |   |   |   |   |   |   |
| Receipts from interest sensitive and index products credited to policyholder account balances          |                                 | 1,116,523 |   |   |   | 1,810,387 |   |
| Return of policyholder account balances on interest sensitive and index products                       |                                 | (1,556,889 | ) |   |   | (807,328 | ) |
| Proceeds from short-term note payable to affiliate                                                     |                                 | — |   |   |   | 20,000 |   |
| Proceeds from long-term debt                                                                           |                                 | — |   |   |   | 14,000 |   |
| Repayment of short-term debt                                                                           |                                 | (60,000 | ) |   |   | — |   |
| Receipts related to noncontrolling interests - net                                                     |                                 | 135 |   |   |   | 61 |   |
| Excess taxdeductions on stock-based compensation                                                       |                                 | 96 |   |   |   | 129 |   |
| Issuance of common stock                                                                               |                                 | 1,716 |   |   |   | 3,126 |   |
| Dividends paid                                                                                         |                                 | (7,585 | ) |   |   | (11,293 | ) |
| Net cash provided by (used in) financingactivities                                                     |                                 | (506,004 | ) |   |   | 1,029,082 |   |
| Increase (decrease) in cash and cash equivalents                                                       |                                 | (24,818 | ) |   |   | 3,233 |   |
| Cash and cash equivalents at beginning of period                                                       |                                 | 37,710 |   |   |   | 84,015 |   |
| Cash and cash equivalents at end of period                                                             | $                                    | 12,892 |   |   | $ | 87,248 |   |
|                                                                                                   |                                 |   |   |   |   |   |   |
| Supplemental disclosures of cash flow information                                                      |                                 |   |   |   |   |   |   |
| Cash paid (received) during the periodfor:                                                             |                                 |   |   |   |   |   |   |
| Interest                                                                                               | $                                    | 19,546 |   |   | $ | 13,465 |   |
| Incometaxes                                                                                            |                                 | (1,556 | ) |   |   | 3,443 |   |
| Non-cash operating activity:                                                                           |                                 |   |   |   |   |   |   |
| Deferral of sales inducements                                                                          |                                 | 27,463 |   |   |   | 46,632 |   |
| Non-cash investing activity:                                                                           |                                 |   |   |   |   |   |   |
| Foreclosure of mortgage loans to real estate                                                           |                                 | 14,173 |   |   |   | — |   |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanyingnotes.

----

 

**FBL FINANCIAL GROUP,INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

**September 30, 2009**

 

**1. Significant Accounting Policies**

 

**Basis of Presentation**

 

The accompanying unaudited consolidatedfinancial statements of FBL Financial Group, Inc. (we or the Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) forinterim 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 andnotes required by GAAP for complete financial statements. Our financial statements include all adjustments (consisting of normal recurring accruals) necessary for afair presentation of our financial position and results of operations. We have evaluated our consolidated financial statements for subsequent events through November5, 2009, the date of the filing of this Form 10‐Q.

 

Operating results for the nine-monthperiod ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. We encourage you torefer to our consolidated financial statements and notes for the year ended December 31, 2008 included in our Annual Report on Form 10‐K for a completedescription of our material accounting policies. Also included in the Form 10‐K is a description of areas of judgments and estimates and other informationnecessary to understand our financial position and results of operations.

 

**Accounting Changes**

 

In July 2009, we adopted the Financial Accounting Standards Board (FASB)Accounting Standards Codification (Codification). This guidance establishes two levels of U.S. generally accepted accounting principles (GAAP) - authoritative andnonauthoritative. The FASB Codification is now the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the Securities andExchange Commission (SEC), which are sources of authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC accounting literature not included in theCodification is now nonauthoritative. As the Codification did not change or alter existing GAAP, it did not have any impact on our consolidated financial statements.

 

In June 2009, the FASB issued guidance which removes the concept of andexceptions for a qualifying special-purpose entity from GAAP. The objective of this guidance is to improve the relevance, representational faithfulness andcomparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on itsfinancial position, financial performance and cash flows; and a transferor's continuing involvement, if any, in transferred financial assets. This guidance iseffective for financial statements for periods that begin after November 15, 2009. We are currently evaluating the impact of adoption, but do not expect it to bematerial to our consolidated financial statements.

 

In June 2009, the FASB issuedguidance which seeks to improve financial reporting by enterprises involved with variable interest entities. This guidance addresses (1) the effects on certainprovisions of GAAP as a result of the elimination of the qualifying special-purpose entity concept, and (2) constituent concerns about the accounting and disclosuresthat do not always provide timely and useful information about an enterprise's involvement in a variable interest entity. This guidance is effective for financialstatements for periods that begin after November 15, 2009. We are currently evaluating the impact of adoption, but do not expect it to be material to ourconsolidated financial statements. 

 

In June 2009, we adopted guidancethat establishes general standards of accounting for and disclosing of events that occur after the balance sheet date but before financial statements are issued or areavailable to be issued. Specifically, this guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluateevents or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognizeevents or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactionsthat occurred after the balance sheet date. See the Basis of Presentation section above for this new disclosure. The adoption of this guidance did not have any impacton our consolidated financial statements. 

 

In June 2009, we adopted guidancethat expands annual disclosures about the fair value of financial instruments to interim financial statements. This guidance did not have a significant impact on our consolidated financial statements but did increase our disclosures about fair valuemeasurements.

 

 

-8-

Effective January 1, 2009, we adoptedguidance that specifies criteria for determining whether impairments in debt securities are other than temporary and requires that the non-credit portion of animpairment be recorded in accumulated other comprehensive loss rather than the statements of operations. The guidance also requires additional disclosures relating toother-than-temporary impairments and unrealized losses on investments in interim and annual financial statements. The impact of adoption increased net income by $18.7million ($0.62 per basic and diluted common share) for the nine months ended September 30, 2009 and $2.7 million ($0.09 per basic and diluted common share) forthe third quarter. In addition, the adoption resulted in a reclassification from retained earnings to accumulated other comprehensive loss of $15.6 million for thenon-credit portion of other-than-temporary impairments on securities held on January 1, 2009.

 

Effective January 1, 2009, we adoptedguidance that provides additional instruction for determining whether a market for a financial asset is not active and a transaction is distressed for fair valuemeasurement purposes as defined in GAAP. The adoption of this guidance did not have a significant impact on our consolidated financial statements but did increase ourdisclosures about fair value measurements. 

 

Effective January 1, 2009, we adoptedguidance that establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, which requires that the noncontrolling interest bereported in equity, and the related net income (loss) and comprehensive income (loss) be included in the respective lines of the consolidated financial statements. Theimpact of this adoption on our consolidated financial statements was not significant and resulted in a reclassification of the noncontrolling interest amounts for thecurrent and prior periods. 

 

Effective January 1, 2009, we adoptedguidance which requires entities that use derivative instruments to provide qualitativedisclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained withinderivatives. This guidance also requires entities to disclose additional information about the amounts and location of derivatives located within the financialstatements, how the provisions of GAAP have been applied, and the impact that hedges have on an entity's financial position, financial performance and cash flows. Theadoption of this guidance did not have any impact on our consolidated financial statements. See Note 3 fordisclosures about our derivative instruments and hedging activities.

 

Effective January 1, 2009, we adoptedguidance that establishes accounting and reporting standards for valuing equity method investees and their equity transactions. As a result of this adoption, equityadjustments resulting from capital transactions of equity investees are reported as realized gains or losses in the consolidated statements of operations rather thanthe consolidated statements of changes in stockholders' equity. Application of this guidance did not have a material impact to our financialstatements.

 

**Reclassifications**

 

Certain amounts in the 2008consolidated financial statements have been reclassified to conform to the 2009 financial statement presentation.

 

**2. Investment Operations**

 

**Fixed Maturities and Equity Securities**

 
| Available-For-Sale Fixed Maturity and Equity Securities by Investment Category |
|--------------------------------------------------------------------------------|
|                                                                           |   |
|                                                                           | September 30,2009 |
|                                                                           |   | Amortized Cost |   |   |   | Gross Unrealized Gains |   |   |   | Gross Unrealized Losses |   |   |   | Estimated Fair Value |   |
|                                                                           | (Dollars in thousands) |
| Bonds:                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Corporate securities                                                           | $ | 5,448,635 |   |   | $ | 223,459 |   |   | $ | (270,726 | ) |   | $ | 5,401,368 |   |
| Residential mortgage-backed securities                                         |   | 2,037,982 |   |   |   | 28,977 |   |   |   | (155,630 | ) |   |   | 1,911,329 |   |
| Commercial mortgage-backedsecurities                                           |   | 791,896 |   |   |   | 30,499 |   |   |   | (92,513 | ) |   |   | 729,882 |   |
| Other asset-backed securities                                                  |   | 233,549 |   |   |   | 271 |   |   |   | (106,657 | ) |   |   | 127,163 |   |
| Collateralized debt obligations                                                |   | 40,347 |   |   |   | — |   |   |   | (25,873 | ) |   |   | 14,474 |   |
| United States Government and agencies                                          |   | 139,670 |   |   |   | 14,108 |   |   |   | (136 | ) |   |   | 153,642 |   |
| State, municipal and othergovernments                                          |   | 1,675,027 |   |   |   | 26,542 |   |   |   | (107,855 | ) |   |   | 1,593,714 |   |
| Redeemable preferred stocks                                                    |   | 5,000 |   |   |   | — |   |   |   | (225 | ) |   |   | 4,775 |   |
| Total fixed maturities                                                         | $ | 10,372,106 |   |   | $ | 323,856 |   |   | $ | (759,615 | ) |   | $ | 9,936,347 |   |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity securities:                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-redeemable preferred stocks                                                | $ | 40,649 |   |   | $ | 3,504 |   |   | $ | (6,763 | ) |   | $ | 37,390 |   |
| Common stocks                                                                  |   | 21,720 |   |   |   | 40 |   |   |   | (160 | ) |   |   | 21,600 |   |
| Total equity securities                                                        | $ | 62,369 |   |   | $ | 3,544 |   |   | $ | (6,923 | ) |   | $ | 58,990 |   |

 

 

-9-

Short-term investments have beenexcluded from the above schedules as amortized cost approximates fair value for these securities. 

 
| Available-For-Sale Fixed Maturity Securities by Maturity Date |                    |           |   |   |   |                                  |   |
|---------------------------------------------------------------|-------------------------|----------------|--------|--------|--------|---------------------------------------|--------|
|                                                          |                    |           |   |   |   |                                  |   |
|                                                          | September 30, 2009 |
|                                                          |                    | Amortized Cost |   |   |   | ****Estimated****

****Fair Value**** |   |
|                                                          | (Dollars inthousands)   |
| Due in one year or less                                       | $                       | 75,577         |   |   | $      | 76,237                                |   |
| Due after one year through five years                         |                    | 1,144,021      |   |   |   | 1,151,535                             |   |
| Due after five years through ten years                        |                    | 2,799,153      |   |   |   | 2,807,193                             |   |
| Due after ten years                                           |                    | 3,284,928      |   |   |   | 3,128,233                             |   |
|                                                          |                    | 7,303,679      |   |   |   | 7,163,198                             |   |
| Residential mortgage-backed securities                        |                    | 2,037,982      |   |   |   | 1,911,329                             |   |
| Commercial mortgage-backed securities                         |                    | 791,896        |   |   |   | 729,882                               |   |
| Other asset-backed securities                                 |                    | 233,549        |   |   |   | 127,163                               |   |
| Redeemable preferred stocks                                   |                    | 5,000          |   |   |   | 4,775                                 |   |
|                                                          | $                       | 10,372,106     |   |   | $      | 9,936,347                             |   |

 

Expected maturities will differ fromcontractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 

 
| Net Unrealized Losses on Fixed Maturity and EquitySecurities              |   |                    |   |
|---------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                      |   |                    |   |
|                                                                      |   | September 30, 2009 |   |
|                                                                      |   | (Dollars in thousands)  |   |
| Unrealized depreciation on:                                               |   |                    |   |
| Fixed maturities - available for sale                                     | $      | (435,759                | )      |
| Equity securities - available for sale                                    |   | (3,379                  | )      |
| Interest rate swaps                                                       |   | (413                    | )      |
|                                                                      |   | (439,551                | )      |
| Adjustments for assumed changes inamortization pattern of:                |   |                    |   |
| Deferred policy acquisition costs                                         |   | 176,271                 |   |
| Deferred sales inducements                                                |   | 81,625                  |   |
| Value of insurance in force acquired                                      |   | 3,023                   |   |
| Unearned revenue reserve                                                  |   | (1,062                  | )      |
| Provision for deferred income taxes                                       |   | 62,898                  |   |
|                                                                      |   | (116,796                | )      |
| Proportionate share of net unrealized investmentgains of equity investees |   | 1                       |   |
| Net unrealized investment losses                                          | $      | (116,795                | )      |

 

The changes in net unrealizedinvestment gains and losses are recorded net of deferred income taxes and other adjustments for assumed changes in the amortization pattern of deferred policyacquisition costs, deferred sales inducements, value of insurance in force acquired and unearned revenue reserve totaling $577.7 million for the nine months endedSeptember 30, 2009. Subsequent changes in fair value of securities for which a previous non-credit other-than-temporary impairment loss was recognized inaccumulated other comprehensive loss are reported along with changes in fair value for which no other-than-temporary impairment losses were previouslyrecognized.

 

 

-10-

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

 
        - historical operating trends;
        - business prospects;
        - status of the industry in which the company operates;
        - a nalyst ratings on the issuer and sector;
        - q uality of management;
        - size of the unrealized loss;
        - level of current market interest rates compared to market interest rates when thesecurity was purchased;
        - length of time the security has been inan unrealized loss position; and
        - our intent to sell and whetherit is more likely than not that we would be required to sell prior to recovery.

 
| Fixed Maturity Securities with Unrealized Losses by Length of Time Unrealized |
|-------------------------------------------------------------------------------|
|                                                                          |   |   |
|                                                                          |   | September 30, 2009 |
|                                                                          |   | Less than oneyear |   | One year or more |   | Total |
| Description of Securities                                                     |   |   | Estimated Fair Value |   |   |   | Unrealized Losses |   |   |   | Estimated Fair Value |   |   |   | Unrealized Losses |   |   |   | Estimated Fair Value |   |   |   | Unrealized Losses |   |
|                                                                          |   | (Dollarsin thousands) |
| Corporate securities                                                          |   | $ | 198,393 |   |   | $ | (20,355 | ) |   | $ | 1,720,967 |   |   | $ | (250,371 | ) |   | $ | 1,919,360 |   |   | $ | (270,726 | ) |
| Residential mortgage-backed securities                                        |   |   | 14,452 |   |   |   | (1,682 | ) |   |   | 1,024,944 |   |   |   | (153,948 | ) |   |   | 1,039,396 |   |   |   | (155,630 | ) |
| Commercial mortgage-backedsecurities                                          |   |   | 600 |   |   |   | (101 | ) |   |   | 240,494 |   |   |   | (92,412 | ) |   |   | 241,094 |   |   |   | (92,513 | ) |
| Other asset-backed securities                                                 |   |   | 24,323 |   |   |   | (17,941 | ) |   |   | 96,543 |   |   |   | (88,716 | ) |   |   | 120,866 |   |   |   | (106,657 | ) |
| Collateralized debt obligations                                               |   |   | — |   |   |   | — |   |   |   | 14,136 |   |   |   | (25,873 | ) |   |   | 14,136 |   |   |   | (25,873 | ) |
| Unites States Governments & agencies                                      |   |   | — |   |   |   | — |   |   |   | 14,697 |   |   |   | (136 | ) |   |   | 14,697 |   |   |   | (136 | ) |
| State, municipal and othergovernments                                         |   |   | 141,136 |   |   |   | (6,496 | ) |   |   | 683,083 |   |   |   | (101,359 | ) |   |   | 824,219 |   |   |   | (107,855 | ) |
| Redeemable preferred stocks                                                   |   |   | 4,775 |   |   |   | (225 | ) |   |   | — |   |   |   | — |   |   |   | 4,775 |   |   |   | (225 | ) |
| Total fixed maturities                                                        |   | $ | 383,679 |   |   | $ | (46,800 | ) |   | $ | 3,794,864 |   |   | $ | (712,815 | ) |   | $ | 4,178,543 |   |   | $ | (759,615 | ) |

 

Included in the above table are 800securities from 536 issuers at September 30, 2009. The unrealized losses are primarily due to wide spreads between the risk-free and corporate and other bondyields relative to the spreads when the securities were purchased. The following summarizes the more significant unrealized losses by investment category as ofSeptember 30, 2009.

 

*Corporate securities*: The unrealized losses on corporate securities represent 35.6% of our totalunrealized losses. The largest losses were in the financial services sector ($1,055.5 million carrying value and $214.2 million unrealized loss). The largestunrealized losses in the financial services sector were in the depository institutions sector ($355.9 million carrying value and $87.5 million unrealized loss) and theholding and other investment offices sector ($456.2 million carrying value and $80.7 million unrealized loss). The unrealized losses in the depository institutionssector are primarily due to a decrease in market liquidity and concerns regarding the underlying credit quality of subprime and other assets held by foreign or largenational and regional domestic banks. The majority of unrealized losses in the holding and other investment offices sector are commercial real estate investment trustbonds. The unrealized losses in the real estate investment trust bonds are primarily due to an increase in credit spreads due to the sector's exposure to commercialreal estate and market concerns about the ability to access the capital markets. Because we do not intend to sell or believe we will be required to sell thesesecurities before their anticipated recovery of amortized cost, we do not consider these investments to be other-than-temporarily impaired at September 30, 2009.

 

 

-11-

*Residential mortgage-backed securities:*The unrealizedlosses on residential mortgage-backed securities represent 20.5% of our total unrealized losses, and were caused primarily by concerns regarding mortgage defaults onAlt-A and other risky mortgages. These concerns resulted in spread widening in the sector as liquidity decreased in the market. We purchased most of these investmentsat a discount to their face amount and the contractual cash flows of these investments are based on mortgages and other assets backing the securities. Because we donot intend to sell or believe we will be required to sell these investments before their anticipated recovery of amortized cost, we do not consider these investmentsto be other-than-temporarily impaired at September 30, 2009. 

 

*Commercial mortgage-backedsecurities:*The unrealized losses on commercial mortgage-backedsecurities represent 12.2% of our total unrealized losses, and were caused primarily by spread widening and industry concerns regarding the potential for futurecommercial mortgage defaults. There were also concerns regarding current and future downgrades by the three major rating agencies for tranches below the super seniorAAA level. The contractual cash flows of these investments are based on mortgages backing the securities. Because we do not intend to sell or believe we will berequired to sell these investments before their anticipated recovery of amortized cost, we do not consider these investments to be other-than-temporarily impaired atSeptember 30, 2009. 

 

*Other asset-backed securities:*The unrealized losses on asset-backed securities represent 14.0% ofour total unrealized losses, and were caused primarily by concerns regarding mortgage defaults on subprime and home equity loans. There were also concerns regardingpotential downgrades or defaults of monoline bond insurers providing credit protection for underlying securities. These concerns resulted in spread widening in thesector as liquidity decreased in the market. We purchased most of these investments at a discount to their face amount and the contractual cash flows of theseinvestments are based on mortgages and other assets backing the securities. Because we do not intend to sell or believe we will be required to sell these investmentsbefore their anticipated recovery of amortized cost, we do not consider these investments to be other-than-temporarily impaired at September 30, 2009.

 

*Collateralized debt obligations:*The unrealized losses on collateralized debt obligations represent 3.4% of our totalunrealized losses. Our investments in synthetic collateralized debt obligations are backed by credit default swaps with no home equity exposure. The unrealized lossesare primarily due to actual defaults in the collateral, general spread widening and market concerns of increased defaults in the future. We have stress tested all ofthese securities and determined that future principal losses are not expected based on reasonably adverse conditions. Assuming a 35% recovery, on average theseinvestments could all withstand four to ten more defaults without losing any principal. The number of defaults is an estimate based on the remaining credit enhancement(subordination) that remains in each security. Each default that occurs reduces subordination to the security, depending on the loss amount and exposure. Depending onthe investment, the synthetic collateralized debt obligations we own have exposure to approximately 120 to 150 reference names, which results in an average defaultlevel of 3.0% to 8.0% before we would lose principal. Based on long-term historical performance, we do not expect future defaults will exceed these levels and believethe existing subordination is sufficient to maintain the value of our investments. In addition, because we do not intend to sell or believe we will be required to sellthese investments before their anticipated recovery of amortized cost, we do not consider these investments to be other-than-temporarily impaired at September 30,2009. 

 

*State, municipal and other governments:*The unrealized losses on state, municipal and other governments represent 14.2% ofour total unrealized losses, and were primarily caused by general spread widening, concerns regarding the future of the monoline bond insurers and concerns regardingthe impact of the recession on municipalities. We purchased most of these investments at a discount to their face amount and the contractual cash flows of theseinvestments are based on the taxing authority of a municipality or the revenues of a municipal project. Because the decline in fair value is primarily attributable toincreased spreads and concerns regarding the stability of the monoline bond insurers, and because we do not intend to sell or believe we will be required to sell theseinvestments before their anticipated recovery of amortized cost, we do not consider these investments to be other-than-temporarily impaired at September 30, 2009.

 

 

-12-

Excludingmortgage and asset-backed securities, no securities from the same issuer had an aggregate unrealized loss in excess of $14.8 million at September 30, 2009. The$14.8 million unrealized loss is from one CCC rated collateralized debt obligation. This security has been impacted by the actual defaults in the collateral underlyingthe security. With respect to mortgage and asset-backed securities not backed by the United States Government, no securities from the same issuer had an aggregateunrealized loss in excess of $34.8 million at September 30, 2009. The $34.8 million unrealized loss from one issuer relates to ten different securities that arebacked by different pools of commercial mortgage loans. All but two of the ten securities are rated investment grade and the unrealized loss on the two non-investmentgrade securities totaled $7.7 million. The largest unrealized loss on any one security is $6.8 million at September 30, 2009. 

 

We also have $6.9 million of gross unrealized losses on equity securities with an estimated fair value of $26.4 million atSeptember 30, 2009. The majority of the unrealized losses are attributable to non-redeemable perpetual preferred securities in the financial sector. All of theunrealized losses on equity securities are greater than one year. The unrealized losses on these securities are primarily due to concerns about the quality of theassets the issuers hold and uncertainty regarding when these securities will be called. These securities are similar to fixed maturities as they provide periodic cashflows, contain call features and are similarly rated and priced like other long-term callable bonds. We do not intend to sell or believe we will be required to sellthese investments before their anticipated recovery; therefore we do not consider them to be other-than-temporarily impaired at September 30,2009.

 

Realized gains and losses on sales of investments are determined on the basis ofspecific identification. The carrying values of all our investments are reviewed on an ongoing basis for credit deterioration. If this review indicates a decline infair value is other than temporary, the carrying value of the investment is reduced to its fair value. Effective January 1, 2009, with adoption new GAAP guidance, whenour review indicates a decline in fair value is other than temporary, a specific write down is charged to earnings for the credit loss and a specific charge isrecognized in accumulated other comprehensive loss for the non-credit loss component. For fixed maturity securities, the previous amortized cost adjusted by the creditloss becomes the new cost basis for the security. For equity securities, the fair value becomes the new cost basis for the security. Prior to 2009, the full amount ofother-than-temporary impairment write downs was recognized as a realized loss on investments in the statement of operations and the fair value of fixed maturity andequity securities became the new cost basis for the security. 

 

After an other-than-temporarywrite-down of all equity securities and any fixed maturity securities with a credit only impairment, the cost basis is generally not adjusted for subsequent recoveriesin fair value. However, for fixed maturity securities for which we can reasonably estimate future cash flows after a write down, the discount or reduced premiumrecorded, based on the new cost basis, is amortized over the remaining life of the security. Amortization in this instance is computed using the prospective methodand the current estimate of the amount and timing of future cash flows. 

 

When an other-than-temporary impairmentoccurs, the amount recognized in earnings is based on our intent or requirement to sell the security and significant assumptions regarding the present value ofexpected cash flows for each security. Our assumptions for residential mortgage-backed securities, commercial mortgage-backed securities, other asset-backed securitiesand collateralized debt obligations include collateral pledged, scheduled principal and interest payments, default levels, delinquency rates and the level ofnonperforming assets for the remainder of the investments' expected term. We use a single best estimate of cash flows approach and use the effective yield prior to thedate of impairment to calculate the present value of cash flows. Our assumptions for corporate and other fixed maturity securities include scheduled principal andinterest payments and an estimated recovery value, generally based on a percentage return of the current market value.

 
|  

***Credit Loss Component of Other-Than-Temporary Impairments on Fixed MaturitySecurities*** |
|-----------------------------------------------------------------------------------------------------|
|                                                                                                |   |   |   |   |   |   |   |
|                                                                                                |   | Threemonths ended September 30, 2009 |   |   |   | Ninemonths ended September 30, 2009 |   |
|                                                                                                | (Dollars in thousands) |
| Balance at beginning of period                                                                      | $ | (121,712 | ) |   | $ | (106,421 | ) |
| Increase for which an impairment was not previouslyrecognized                                       |   | (1,614 | ) |   |   | (42,086 | ) |
| Increases to previously impairedinvestments                                                         |   | (10 | ) |   |   | (7,701 | ) |
| Reductions due toinvestments sold                                                                   |   | 14,986 |   |   |   | 47,858 |   |
| Balance at September 30,2009                                                                   | $ | (108,350 | ) |   | $ | (108,350 | ) |

-13-
| Sales, Maturities and Principal Repayments on Fixed MaturitySecurities |
|------------------------------------------------------------------------|
|                                                                   |   |
|                                                                   | Three months endedSeptember 30, 2009 |
|                                                                   |   | Amortized Cost |   |   |   | Gross Realized Gains |   |   |   | Gross Realized Losses |   |   |   | Proceeds |   |
|                                                                   | (Dollars in thousands) |
| Scheduled principal repayments and calls - available for sale          | $ | 140,848 |   |   | $ | — |   |   | $ | — |   |   | $ | 140,848 |   |
| Sales -available for sale                                              |   | 180,390 |   |   |   | 8,905 |   |   |   | (6,400 | ) |   |   | 182,895 |   |
| Total                                                                  | $ | 321,238 |   |   | $ | 8,905 |   |   | $ | (6,400 | ) |   | $ | 323,743 |   |
|                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                   | Nine months ended September 30, 2009 |
|                                                                   |   | Amortized Cost |   |   |   | Gross Realized Gains |   |   |   | Gross Realized Losses |   |   |   | Proceeds |   |
|                                                                   | (Dollars in thousands) |
| Scheduled principal repayments and calls - available for sale          | $ | 396,810 |   |   | $ | — |   |   | $ | — |   |   | $ | 396,810 |   |
| Sales - available for sale                                             |   | 932,174 |   |   |   | 45,453 |   |   |   | (9,654 | ) |   |   | 967,973 |   |
| Total                                                                  | $ | 1,328,984 |   |   | $ | 45,453 |   |   | $ | (9,654 | ) |   | $ | 1,364,783 |   |

 

Realized losses on sales were on securities that we did not intend to sell at the prior balance sheet date or on securitiesthat were impaired at the prior quarter end, but decreased in value during the quarter.

 

**Mortgage Loans on RealEstate**

 

Our mortgage loan portfolio consists principally of commercial mortgage loans that wehave originated. Our lending policies require that the loans be collateralized by the value of the related property. Our policies also establish limits on the amountthat can be loaned to one borrower and require diversification by geographic location and collateral type. 

 

We establish an allowance as needed, consisting of specific reserves, for possible losses against our mortgage loan portfolio. An allowanceis needed for loans in which we do not believe we will collect all amounts due according to the contractual terms of the respective loan agreements. AtSeptember 30, 2009, we held a valuation allowance for one impaired loan totaling $0.4 million. There was no valuation allowance for mortgage loans atDecember 31, 2008. During the third quarter of 2009, we foreclosed on three mortgage loans with a book value totaling $14.2 million and took possession of thereal estate with an appraised value totaling $16.8 million.

 

**3.Derivative Instruments**

 

We have entered into interest rateswaps to manage interest rate risk associated with a portion of our flexible premium deferred annuity contracts. Under the interest rate swaps, we pay a fixed rate ofinterest and receive a floating rate of interest on a notional amount which totaled $100.0 million at September 30, 2009 and December 31, 2008. Theseinterest rate swaps effectively fix the interest crediting rate on a portion of our flexible premium deferred annuity contract liabilities, thereby hedging ourexposure to increases in market interest rates. Losses from the interest rate settlements totaled $3.6 million during the first nine months of2009 and $2.0 million in the 2008 period. The change in unrealized loss on these swaps increased derivative income $2.3 million for the nine months endedSeptember 30, 2009 and $2.1 million in the 2008 period. 

 

In 2006, we also entered into aninterest rate swap to hedge the variable component of the interest rate on our $46.0 million outstanding line of credit borrowings at that time. The terms of thisinstrument provide that we pay a fixed rate of interest and receive a floating rate of interest on a notional amount of $46.0 million. We closed the line of creditagreement in the first quarter of 2009 and began recording the change in fair value of the underlying swap and interest payments in derivative income (loss). Prior to2009, any gain or loss on the interest rate swap settlements offset any increase or decrease in the interest paid on the line of credit, effectively fixing ourinterest expense related to this portion of the line of credit. Losses from interest rate settlements on this swap totaled $1.3 million in the first nine months of2009 and were included in derivative income (loss). For the nine month period in 2008, these losses increased interest expense $0.5 million. Derivative income (loss)for the nine months ended September 30, 2009 also includes the unrealized loss on the swap at December 31, 2008 of $2.7 million, which was previouslyincluded in accumulated other comprehensive loss, partially offset by the swap's increase in fair value during the period, which totaled $0.7million.

 

-14-
| Summary of Swaps       |   |   |                     |   |   |                  |
|------------------------|--------|--------|--------------------------|--------|--------|-----------------------|
|                   |   |   |                     |   |   |                  |   |   |   |   |   | Carrying and Fair Value |
| **Maturity**

**Date** |   |   | **Notional**

**Amount** |   |   | **Receive**

**Rate** |   |   | **Pay**

**Rate** |   |   |   | September 30, 2009 |   |   |   | December 31, 2008 |   |
|                   |   |   |                     |   |   |                  |   |   |   |   |   | (Dollars in thousands) |
| 1/1/2010               |   | $      | 50,000                   |   |   | 1 month LIBOR*        |   |   | 4.858 |  % |   | $ | (593 | ) |   | $ | (1,860 | ) |
| 10/7/2010              |   |   | 46,000                   |   |   | 3 month LIBOR*        |   |   | 4.760 |  % |   |   | (1,956 | ) |   |   | (2,692 | ) |
| 6/1/2011               |   |   | 50,000                   |   |   | 1 month LIBOR*        |   |   | 5.519 |  % |   |   | (3,722 | ) |   |   | (4,905 | ) |
|                   |   |   |                     |   |   |                  |   |   |   |   |   | $ | (6,271 | ) |   | $ | (9,457 | ) |

 * LondonInterbank Offered Rate

 

When applicable, we formally documenthedging relationships, our risk management objectives and strategies for undertaking these transactions. We also test for hedge ineffectiveness at inception of thehedge and at each reporting period as needed. There were no derivative instruments designated as hedges at September 30, 2009. There was no ineffectivenessrecorded in the consolidated statements of operations during 2008 for instruments designated as hedges. 

 

We write index annuities directly and assume index annuity business under a coinsurance agreement. Index annuities guarantee the return ofprincipal to the contract holder and credit amounts based on a percentage of the gain in a specified market index. Most of the premium received is invested ininvestment grade fixed income securities and a portion of the premium received from the contract holder is used to purchase derivatives consisting of one-year ortwo-year call options on the applicable market indices to fund the index credits due to the index annuity contract holders. On the respective anniversary dates of theindex annuity contracts, the market index used to compute the index credits is reset and new call options are purchased to fund the next index credit. Although thecall options are designed to be effective hedges from an economic standpoint, they do not meet the requirements for hedge accounting treatment under GAAP. Therefore,the change in fair value of the options is recognized in earnings in the period of change. The cost of the options can be managed through the terms of the indexannuities, which permit changes to participation rates, asset fees and/or caps, subject to guaranteed minimums.

 

We held call options relating to our direct business, net of collateral received for counterparty credit risk, with a fair value of $52.1million at September 30, 2009 and $12.9 million at December 31, 2008. Our share of call options assumed, which is recorded as an embedded derivative inreinsurance recoverable, totaled $25.7 million at September 30, 2009 and $5.6 million at December 31, 2008. Derivative income (loss) includes $44.8 millionfor the first nine months of 2009 and ($169.6) million for the 2008 period relating to changes in fair value, net of call option proceeds. 

 

The reserve for index annuity contracts includes a series of embedded derivatives that represent the contract holder's right to participatein index returns over the expected lives of the applicable contracts. The reserve includes the value of the embedded forward options despite the fact that call optionsare not purchased for a period longer than the period of time to the next index reset date. The change in the value of this embedded derivative is reported on aseparate line in the consolidated statements of operations and totaled $139.1 million for the first nine months of 2009 and ($171.0) million for the 2008period.

 

We have modified coinsurance agreements where interest on funds withheld isdetermined by reference to a pool of fixed maturity securities. These arrangements contain embedded derivatives requiring bifurcation. Embedded derivatives in thesecontracts are recorded at fair value at each balance sheet date and changes in the fair values of the derivatives are recorded as derivative income or loss. The fairvalue of the embedded derivatives pertaining to funds withheld on variable business assumed by us totaled $0.7 million at September 30, 2009 and ($0.9) million atDecember 31, 2008. The fair value of the embedded derivatives pertaining to funds withheld on business ceded by us was $0.3 million at September 30, 2009 andat December 31, 2008. Derivative income from our modified coinsurance contracts totaled $1.6 million for the first nine months of 2009 and less than $0.1 millionfor the 2008 period.

 

**4. Fair Values**

 

GAAP defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. Fair valueis based on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date. GAAP also establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability usedin measuring financial instruments at fair value. Market price observability is affected by a number of factors, including the type of instrument and thecharacteristics specific to the instrument. Financial instruments with readily available active quoted prices or those for which fair value can be measured fromactively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. For someinvestments, little market activity may exist and management's determination of fair value is then based on the best information available in the circumstances, andmay incorporate management's own assumptions of what a market participant would consider for the fair value, which involves a significant degree ofjudgment.

 

 

-15-

The fixedincome markets in 2008 and early 2009 experienced a period of extreme volatility and limited market liquidity conditions, which affected a broad range of asset classesand sectors. Market conditions improved substantially during the third quarter of 2009; however, credit downgrade events and an increased probability of defaults areexpected to continue and peak late in 2009. In addition, certain market sectors remain dislocated which increased the difficulty of valuing certain instruments astrading was less frequent and/or market data was less observable. As a result, certain valuations require greater estimation and judgment as well as valuation methodswhich 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 andvaluation assumptions are modified. 

 

We use the methods and assumptionsdescribed below in estimating fair value of our financial instruments. 

 

*Fixed maturitysecurities:* Fair values of fixed maturity securities are based onquoted market prices in active markets when available. We have valued our investments using the valuation methodologies described below which have been applied on aconsistent basis. 

 

*Equity securities:* Fair values for equity securities are based on quoted market prices, whereavailable. For equity securities that are not actively traded, estimated fair values are based on values of comparable issues.

 

*Mortgage loans on real estate:*Fairvalues are estimated by discounting expected cash flows of each loan at an interest rate equal to a spread above the U.S. Treasury bond yield that corresponds to theloan's expected life. These spreads are based on overall market pricing of commercial mortgage loans at the time of valuation.

 

*Derivative instruments:*Fair valuesfor call options are based on counterparty market prices adjusted for a credit component of the counterparty, net of collateral received. Prices are verifiedinternally using analytical tools.

 

*Policy loans*: Fair values are estimated by discounting expected cash flows using a risk-freeinterest rate based on the U.S. Treasury curve.

 

*Other long-term investments, cashand short-term investments:* Amounts are reported at historical cost,adjusted for amortization of premiums, depreciation or accrual of discounts, as applicable, which approximates the fair values due to the nature of theseassets.

 

*Reinsurance recoverable:* The fair value of our portion of the call options used to fund index credits on theindex annuities assumed from a reinsurer is determined using quoted market prices, less an adjustment for credit risk. Fair values for the embedded derivatives in ourmodified coinsurance contracts under which we cede or assume business are based on the difference between the fair value and the cost basis of the underlying fixedmaturity securities. We are not required to estimate fair value for the remainder of the reinsurance recoverable balance. 

 

*Assets held in separate accounts:* Fairvalues are based on quoted net asset values of the underlying mutual funds.

 

*Future policy benefits and otherpolicyholders' funds:*Fair values of our liabilities under contracts not involving significant mortality or morbidityrisks (principally deferred annuities, deposit administration funds, funding agreements and supplementary contracts) are estimated using one of two methods. Forcontracts with known maturities (including index annuity embedded derivatives), fair value is determined using discounted cash flow valuation techniques based oncurrent interest rates adjusted to reflect our credit risk and an additional provision for adverse deviation. For deposit liabilities with no defined maturities, fairvalue is the amount payable on demand. We are not required to estimate the fair value of our liabilities under other insurance contracts.

 

*Long-term debt:* Fair values areestimated using discounted cash flow analysis based on our current incremental borrowing rate for similar types of borrowing arrangements adjusted, as needed, toreflect our credit risk. 

 

*Collateral payable for securitieslending and other transactions:* Fair values are obtained from anindependent pricing source and evaluated internally.

 

 

-16-

*Other liabilities:* Fair values for interest rate swaps are based on counterparty market prices adjustedfor a credit component of the counterparty, net of collateral paid. Prices are verified internally using analytical tools. We are not required to estimate fair valuesfor the remainder of the other liabilities balances.

 

*Liabilities related to separateaccounts:* Fair values are based on cash surrender value, the cost wewould incur to extinguish the liability. 

 
| Fair Values and CarryingValues        |                    |           |   |   |   |       |   |
|---------------------------------------|-------------------------|----------------|--------|--------|--------|------------|--------|
|                                  |                    |           |   |   |   |       |   |
|                                  | September 30, 2009 |
|                                  |                    | Carrying Value |   |   |   | Fair Value |   |
|                                  | (Dollars in thousands)  |
| Assets                                |                    |           |   |   |   |       |   |
| Fixed maturities - available for sale | $                       | 9,936,347      |   |   | $      | 9,936,347  |   |
| Equity securities - available forsale |                    | 58,990         |   |   |   | 58,990     |   |
| Mortgage loans on real estate         |                    | 1,306,678      |   |   |   | 1,251,289  |   |
| Derivative instruments                |                    | 52,089         |   |   |   | 52,089     |   |
| Policy loans                          |                    | 185,800        |   |   |   | 235,862    |   |
| Other long-term investments           |                    | 1,780          |   |   |   | 1,780      |   |
| Cash and short-term investments       |                    | 338,790        |   |   |   | 338,790    |   |
| Reinsurance recoverable               |                    | 26,665         |   |   |   | 26,665     |   |
| Assets heldin separate accounts       |                    | 677,142        |   |   |   | 677,142    |   |

 
| Liabilities                                                      |   |      |   |   |   |      |   |
|------------------------------------------------------------------|--------|-----------|--------|--------|--------|-----------|--------|
| Future policybenefits                                            | $      | 9,475,347 |   |   | $      | 8,498,278 |   |
| Other policyholders' funds                                       |   | 685,106   |   |   |   | 717,350   |   |
| Long-termdebt                                                    |   | 371,064   |   |   |   | 264,274   |   |
| Collateral payable for securities lending and other transactions |   | 33        |   |   |   | 33        |   |
| Other liabilities                                                |   | 6,271     |   |   |   | 6,271     |   |
| Liabilities related to separateaccounts                          |   | 677,142   |   |   |   | 657,062   |   |
|                                                             |   |      |   |   |   |      |   |

 

Financial instruments measured andreported at fair value are classified and disclosed in one of the following categories. 

 

Level 1 - Quoted prices are availablein active markets for identical financial instruments as of the reporting date. The types of financial instruments included in Level 1 are listed equities, mutualfunds, money market funds and non-interest bearing cash. As required by GAAP, we do not adjust the quoted price for these financial instruments, even in situationswhere we hold a large position and a sale could reasonably impact the quoted price. 

 

Level 2 - Pricing inputs are other thanquoted prices in active markets which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models orother valuation methods. Financial instruments which are generally included in this category include fixed maturity securities (including public and private bonds),less liquid and restricted equity securities and over-the-counter derivatives that are priced by third-party pricing services or internal systems using observableinputs. 

 

Fair values of all Level 2 fixed maturity public securities are obtained primarilyfrom a variety of independent pricing sources, whose results we evaluate internally. We generally obtain one or two prices per security, which are compared to relevantcredit information, perceived market movements and sector news. Market indices of similar rated asset class spreads are consulted for valuations and broker indicationsof similar securities are compared. If the issuer has had trades in similar debt outstanding but not necessarily the same rank in the capital structure, spreadinformation is used to support fair value. If discrepancies are identified, additional quotes are obtained and the quote that best reflects a fair value exit price atthe reporting date is selected. Fair value of most of our private investments are determined using matrix pricing with substantially all observable inputs, such asindustry classification, duration and rating. 

-17-

Level 3 - Pricing inputs areunobservable for the financial instrument and include situations where there is little, if any, market activity for the financial instrument. The inputs into thedetermination of fair value require significant management judgment or estimation. Financial instruments that are included in this category generally includenon-binding broker and internally priced mortgage or other asset-backed securities and other publicly traded issues, private corporate securities and index annuityembedded derivatives.

 

Fair values of private investments inLevel 3 are determined by reference to public market, private transactions or valuations for comparable companies or assets in the relevant asset class when suchamounts are available. For other securities where an exit price based on relevant observable inputs is not obtained, the fair value is determined using an enhancedmatrix calculation. The matrix pricing performed by pricing services and we include a discounted cash flow analysis using a spread, including the specific creditors'credit default swap spread (if available), over U.S. Treasury bond yields, adjusted for the maturity/average life differences. Spread adjustments are intended toreflect an illiquidity premium and take into account a variety of factors including but not limited to: senior unsecured versus secured status, par amount outstanding,number of holders, maturity, average life, composition of lending group and debt rating. These valuation methodologies involve a significant degree ofjudgment.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument'slevel within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of aparticular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. 

 
| Valuationof our Financial Instruments by Fair Value Hierarchy Levels |
|----------------------------------------------------------------------|
|                                                                 |   |
|                                                                 | September 30, 2009 |
|                                                                 |   | Quoted prices in active markets for identical assets (Level 1) |   |   |   | Significant other observable inputs (Level 2) |   |   |   | Significant unobservable inputs (Level 3) |   |   |   | Total |   |
|                                                                 | (Dollars in thousands) |
| Assets                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Corporatesecurities                                                  | $ | — |   |   | $ | 5,230,133 |   |   | $ | 171,235 |   |   | $ | 5,401,368 |   |
| Residential mortgage-backedsecurities                                |   | — |   |   |   | 1,911,329 |   |   |   | — |   |   |   | 1,911,329 |   |
| Commercialmortgage-backed securities                                 |   | — |   |   |   | 688,768 |   |   |   | 41,114 |   |   |   | 729,882 |   |
| Other asset-backed securities                                        |   | — |   |   |   | 105,232 |   |   |   | 21,931 |   |   |   | 127,163 |   |
| Collateralized debt obligations                                      |   | — |   |   |   | — |   |   |   | 14,474 |   |   |   | 14,474 |   |
| United States Government and agencies                                |   | — |   |   |   | 138,945 |   |   |   | 14,697 |   |   |   | 153,642 |   |
| State, municipal and other governments                               |   | — |   |   |   | 1,482,442 |   |   |   | 111,272 |   |   |   | 1,593,714 |   |
| Redeemable preferred stocks                                          |   | — |   |   |   | 4,775 |   |   |   | — |   |   |   | 4,775 |   |
| Non-redeemable preferred stocks                                      |   | — |   |   |   | 37,390 |   |   |   | — |   |   |   | 37,390 |   |
| Common stocks                                                        |   | 2,569 |   |   |   | 19,031 |   |   |   | — |   |   |   | 21,600 |   |
| Derivative instruments                                               |   | — |   |   |   | 52,089 |   |   |   | — |   |   |   | 52,089 |   |
| Other long-term investments                                          |   | — |   |   |   | — |   |   |   | 1,780 |   |   |   | 1,780 |   |
| Cash and short-term investments                                      |   | 338,790 |   |   |   | — |   |   |   | — |   |   |   | 338,790 |   |
| Reinsurance recoverable                                              |   | — |   |   |   | 26,665 |   |   |   | — |   |   |   | 26,665 |   |
| Assets held in separate accounts                                     |   | 677,142 |   |   |   | — |   |   |   | — |   |   |   | 677,142 |   |
|                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Future policybenefits - index annuity embedded derivatives           | $ | — |   |   | $ | — |   |   | $ | 493,630 |   |   | $ | 493,630 |   |
| Other liabilities                                                    |   | — |   |   |   | 6,271 |   |   |   | — |   |   |   | 6,271 |   |
| Collateralpayable for securities lending and other transactions      |   | — |   |   |   | 33 |   |   |   | — |   |   |   | 33 |   |

 

 

-18-

Approximately 3.8% of the total fixed maturities are included in the Level 3 group. The fair value of the assets and liabilities above include the financialinstruments' nonperformance risk. Nonperformance risk is the risk that the instrument will not be fulfilled and affects the value at which the instrument could betransferred in an orderly transaction. The nonperformance risk for our assets was valued at less than $0.4 million at September 30, 2009. The nonperformance riskfor our liabilities was valued at $123.5 million at September 30, 2009. 

 
| Level 3 Fixed Maturity Investments by Valuation Source |
|--------------------------------------------------------|
|                                                   |   |
|                                                   | September 30, 2009 |
|                                                   |   | Third-party vendors |   |   |   | Priced internally |   |   |   | Total |   |
|                                                   | (Dollars in thousands) |
| Assets                                                 |   |   |   |   |   |   |   |   |   |   |   |
| Corporatesecurities                                    | $ | 122,872 |   |   | $ | 48,363 |   |   | $ | 171,235 |   |
| Commercial mortgage-backed securities                  |   | 36,011 |   |   |   | 5,103 |   |   |   | 41,114 |   |
| Other asset-backed securities                          |   | 21,931 |   |   |   | — |   |   |   | 21,931 |   |
| Collateralized debtobligations                         |   | 14,474 |   |   |   | — |   |   |   | 14,474 |   |
| United StatesGovernment and agencies                   |   | 14,697 |   |   |   | — |   |   |   | 14,697 |   |
| State, municipal and othergovernments                  |   | 111,272 |   |   |   | — |   |   |   | 111,272 |   |
| Total                                                  | $ | 321,257 |   |   | $ | 53,466 |   |   | $ | 374,723 |   |
| Percent of total                                       |   | 85.7 |  % |   |   | 14.3 |  % |   |   | 100.0 |  % |

 
| Level 3 Financial Instruments Changes in Fair Value |                    |                            |   |   |
|-----------------------------------------------------|-------------------------|---------------------------------|--------|--------|
|                                                |                    |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                | September 30, 2009 |
|                                                |                    | Balance, December 31, 2008 |   |   |   | Purchases (disposals), net |   |   |   | Realized and unrealized gains (losses), net |   |   |   | Nettransfers in (out) of Level 3 (1) |   |   |   | Included in earnings (amort- ization) |   |   |   | Balance, September 30, 2009 |   |
|                                                | (Dollars in thousands)  |
| Assets                                              |                    |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Corporatesecurities                                 | $                       | 635,240                         |   |   | $ | (15,204 | ) |   | $ | 10,546 |   |   | $ | (459,888 | ) |   | $ | 541 |   |   | $ | 171,235 |   |
| Residential mortgage-backed securities              |                    | 70,003                          |   |   |   | — |   |   |   | — |   |   |   | (70,003 | ) |   |   | — |   |   |   | — |   |
| Commercial mortgage-backed securities               |                    | 24,122                          |   |   |   | 8,042 |   |   |   | 9,186 |   |   |   | — |   |   |   | (236 | ) |   |   | 41,114 |   |
| Other asset-backed securities                       |                    | 24,194                          |   |   |   | (1,266 | ) |   |   | (4,032 | ) |   |   | 3,001 |   |   |   | 34 |   |   |   | 21,931 |   |
| Collateralized debt obligations                     |                    | 7,414                           |   |   |   | — |   |   |   | 7,062 |   |   |   | — |   |   |   | (2 | ) |   |   | 14,474 |   |
| United States Government and agencies               |                    | 16,080                          |   |   |   | — |   |   |   | 539 |   |   |   | (1,929 | ) |   |   | 7 |   |   |   | 14,697 |   |
| State, municipal and other governments              |                    | 126,038                         |   |   |   | 9,825 |   |   |   | (4,571 | ) |   |   | (19,999 | ) |   |   | (21 | ) |   |   | 111,272 |   |
| Redeemable preferred stocks                         |                    | 4,526                           |   |   |   | — |   |   |   | — |   |   |   | (4,526 | ) |   |   | — |   |   |   | — |   |
| Other long-term investments                         |                    | 1,527                           |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,527 |   |
| Total                                               | $                       | 909,144                         |   |   | $ | 1,397 |   |   | $ | 18,730 |   |   | $ | (553,344 | ) |   | $ | 323 |   |   | $ | 376,250 |   |

 

The change inunrealized gains/losses on Level 3 investments held at September 30, 2009 was $32.4 million.

 
| (1) | Included in the net transfers in (out) line above is $560.0 million of securities thatwere priced using a broker only quote at December 31, 2008 that were transferred to a pricing service that uses observable market data in the prices and $6.7million that were transferred into Level 3 that did not have enough observable data to include in Level 2 at September 30,2009. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

-19-
| Future Policy Benefits -Index Product Embedded Derivatives                                   |   |                                              |   |
|----------------------------------------------------------------------------------------------|--------|---------------------------------------------------|--------|
|                                                                                         |   | **Nine monthsended**

**September 30, 2009** |   |
|                                                                                         |   | (Dollars in thousands)                            |   |
| Balance, December 31, 2008                                                              | $      | 523,515                                           |   |
| Premiums less benefits, net                                                                  |   | (21,850                                           | )      |
| Impact of unrealized gains (losses), net                                                     |   | (8,035                                            | )      |
| Balance, September 30, 2009                                                             | $      | 493,630                                           |   |
|                                                                                         |   |                                              |   |
| Change in unrealized gains/losses onembedded derivatives held at September 30, 2009 (2) | $      | (8,035                                            | )      |

 
| (2) | Excludes host accretion and the timing of posting index credits, which are included with the change in value ofindex product embedded derivatives in the consolidated statements of operations. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**5. Credit Agreement**

 

At December 31, 2008, we had $60.0million in borrowings on a revolving line of credit agreement with Bank of America National Association and Bankers Trust Company, N.A. During the first quarter of2009, we paid off all borrowings and closed the line of credit.

 

**6. DefinedBenefit Plan**

 

We participate with several affiliatesand an unaffiliated organization in various multiemployer defined benefit plans. Our share of net periodic pension cost for the plans recorded as expense in ourconsolidated statements of operations for the third quarter totaled $1.9 million for 2009 and $1.1 million for 2008, and for the nine months ended September 30 totaled$6.6 million for 2009 and $3.4 million for 2008. The pension cost increased in 2009 primarily due to losses on plan assets in 2008 and a settlement charge estimateaccrued in the second quarter of 2009. 

 

**Components of Net Periodic PensionCost for all Employers in the Multiemployer Plans**

 
|                                      | Three months endedSeptember 30, |    | Nine months endedSeptember 30, |
|-------------------------------------------|--------------------------------------|---------|-------------------------------------|
|                                      |                                 | 2009    |                                |   |   | 2008 |   |   |   | 2009 |   |   |   | 2008 |   |
|                                      | (Dollars in thousands)               |
| Service cost                              | $                                    | 1,861   |                                |   | $ | 1,659 |   |   | $ | 5,582 |   |   | $ | 4,977 |   |
| Interestcost                              |                                 | 3,889   |                                |   |   | 3,709 |   |   |   | 11,669 |   |   |   | 11,127 |   |
| Expected return on assets                 |                                 | (2,997  | )                                   |   |   | (3,495 | ) |   |   | (8,991 | ) |   |   | (10,485 | ) |
| Amortization of prior service cost        |                                 | 185     |                                |   |   | 196 |   |   |   | 555 |   |   |   | 588 |   |
| Amortization of actuarial loss            |                                 | 2,217   |                                |   |   | 945 |   |   |   | 6,649 |   |   |   | 2,835 |   |
| Settlementexpense                         |                                 | — |                                |   |   | — |   |   |   | 1,496 |   |   |   | — |   |
| Net periodic pension cost - all employees | $                                    | 5,155   |                                |   | $ | 3,014 |   |   | $ | 16,960 |   |   | $ | 9,042 |   |

 

**7. Commitments and Contingencies**

 

In the normal course of business, we may be involved in litigation where amounts are alleged that are substantially in excess of contractualpolicy benefits or certain other agreements. At September 30, 2009, there are two class action lawsuit claims against EquiTrust Life Insurance Company (EquiTrustLife). These lawsuits allege the use of inappropriate sales techniques and products for purchasers of EquiTrust Life deferred annuities. The plaintiffs in these casesare seeking a variety of damages including injunctive relief, rescission, compensatory damages and punitive damages. These cases are in the pre-class certificationstage and parties are conducting initial discovery and are therefore subject to many uncertainties for which the outcomes cannot be predicted. Given theseuncertainties, we are unable to assess the likelihood of an adverse ruling or estimate the loss or range of loss that may result from the pending litigation.

 

In the third quarter of 2008, the jury from a trial in Federal District Court in Utahinvolving an agency matter awarded our subsidiary, Farm Bureau Life Insurance Company (Farm Bureau Life), and an affiliate, Farm Bureau Mutual Insurance Company (FarmBureau Mutual), actual damages totaling $3.6 million and punitive damages totaling $62.7 million. Approximately 25% of the award is allocable to Farm Bureau Life withthe remaining 75% allocable to Farm Bureau Mutual. In February 2009, the court ruled on various post trial motions, upholding the actual damages, but reducing thepunitive damages to $3.6 million. The defendants have appealed this decision and Farm Bureau Life and Farm Bureau Mutual have cross-appealed. Recoveries from thirdparties are required to be accounted for as gain contingencies and not recorded in our financial statements until the lawsuit is resolved.

 

 

-20-In 2006, we incurred a pre-tax charge of $4.9 million relating to the settlement of a lawsuit with a husband and wife who had appliedfor life insurance policies. The settlement ended litigation regarding the process we followed in denying insurance coverage for medical reasons. Insurance claims havebeen filed under our professional liability and general liability insurance policies for reimbursement of the settlement amount, but coverage has been denied, and wehave made a claim against an insurance broker for breach of contractual duties. We have filed lawsuits against the insurer and the insurance broker to recover thosedamages. While we have received an adverse ruling in the case against the insurer at the district court level, the adverse ruling has been appealed and we continue tobelieve both claims are valid. Recoveries from third parties are required to be accounted for as gain contingencies and not recorded in our financial statements untilthe lawsuits are resolved. Accordingly, any recoveries will be recorded in net income in the period the recovery is received.

 

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

 

We self-insure our employee health anddental claims. However, claims in excess of our self-insurance levels are fully insured. We fund insurance claims through a self-insurance trust. Deposits to the trustare 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 unpaidclaims and claims incurred but not reported. Adjustments, if any, resulting in changes in the estimate of claims incurred will be reflected in operations in theperiods in which such adjustments are known.

 

**8.Earnings Per Share**

 
| Computationof Earnings Per Common Share                                              |                                          |       |                                |   |   |       |   |   |
|--------------------------------------------------------------------------------------|-----------------------------------------------|------------|-------------------------------------|--------|--------|------------|--------|--------|
|                                                                                 | Three months endedSeptember 30,          |       | Nine months endedSeptember 30, |
|                                                                                 |                                          | 2009       |                                |   |   | 2008       |   |   |   | 2009 |   |   |   | 2008 |   |
|                                                                                 | (Dollars in thousands, except per share data) |
| Numerator:                                                                           |                                          |       |                                |   |   |       |   |   |   |   |   |   |   |   |   |
| Net income attributable to FBL Financial Group,Inc.                                  | $                                             | 15,915     |                                |   | $      | 11,216     |   |   | $ | 38,843 |   |   | $ | 1,079 |   |
| Dividends on Series B preferred stock                                                |                                          | (37        | )                                   |   |   | (37        | )      |   |   | (112 | ) |   |   | (112 | ) |
| Numerator for earnings per common share - incomeavailable to common stockholders     | $                                             | 15,878     |                                |   | $      | 11,179     |   |   | $ | 38,731 |   |   | $ | 967 |   |
|                                                                                 |                                          |       |                                |   |   |       |   |   |   |   |   |   |   |   |   |
| Denominator:                                                                         |                                          |       |                                |   |   |       |   |   |   |   |   |   |   |   |   |
| Weighted average shares                                                              |                                          | 29,934,383 |                                |   |   | 29,819,642 |   |   |   | 29,859,424 |   |   |   | 29,808,067 |   |
| Deferred common stock units relating to deferred compensation plans                  |                                          | 156,111    |                                |   |   | 80,507     |   |   |   | 136,680 |   |   |   | 75,727 |   |
| Denominator for earnings per common share - weighted average shares                  |                                          | 30,090,494 |                                |   |   | 29,900,149 |   |   |   | 29,996,104 |   |   |   | 29,883,794 |   |
| Effect of dilutive securities - stock basedcompensation                              |                                          | 120,419    |                                |   |   | 150,901    |   |   |   | 88,239 |   |   |   | 236,488 |   |
| Denominator for dilutive earnings per commonshare - adjusted weighted-average shares |                                          | 30,210,913 |                                |   |   | 30,051,050 |   |   |   | 30,084,343 |   |   |   | 30,120,282 |   |
|                                                                                 |                                          |       |                                |   |   |       |   |   |   |   |   |   |   |   |   |
| Earnings percommon share                                                             | $                                             | 0.53       |                                |   | $      | 0.37       |   |   | $ | 1.29 |   |   | $ | 0.03 |   |
| Earnings per common share - assuming dilution                                        | $                                             | 0.53       |                                |   | $      | 0.37       |   |   | $ | 1.29 |   |   | $ | 0.03 |   |

 

----

**9. Segment Information**

 

We analyze operations by reviewing financial information regarding products that are aggregated into four product segments. The productsegments are: (1) Traditional Annuity - Exclusive Distribution ("Exclusive Annuity"), (2) Traditional Annuity - Independent Distribution ("Independent Annuity"), (3)Traditional and Universal Life Insurance and (4) Variable. We also have various support operations and corporate capital that are aggregated into a Corporate and Othersegment. 

 

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 generally reported net of any transactions between the segments. Operating income(loss) for 2009 and 2008 represents net income excluding, as applicable, the impact of realized and unrealized gains and losses on investments and changes in netunrealized gains and losses on derivatives.

 

We use operating income, in addition tonet income, to measure our performance since realized and unrealized gains and losses on investments and the change in net unrealized gains and losses on derivativescan fluctuate greatly from quarter to quarter. These fluctuations make it difficult to analyze core operating trends. In addition, for derivatives not designated ashedges, there is a mismatch between the valuation of the asset and liability when deriving net income. Specifically, call options relating to our index business areone or two-year assets while the embedded derivative in the index contracts represents the rights of the contract holder to receive index credits over the entireperiod the index annuities are expected to be in force. For our other embedded derivatives in the product segments and interest rate swaps, the derivatives are markedto market, but the associated liabilities are not marked to market. A view of our operating performance without the impact of these mismatches and nonrecurring itemsenhances the analysis of our results. We use operating income for goal setting, determining company-wide short-term incentive compensation and evaluating performanceon a basis comparable to that used by many in the investment community. 

 

**Financial Information Concerning ourOperating Segments**

 
|                                                              | Three months endedSeptember 30, |    | Nine months endedSeptember 30, |
|-------------------------------------------------------------------|--------------------------------------|---------|-------------------------------------|
|                                                              | 2009                                 |    |                                |   | 2008 |   |   |   | 2009 |   |   |   | 2008 |   |
|                                                              | (Dollars in thousands)               |
| Operating revenues:                                               |                                 |    |                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Traditional Annuity - Exclusive Distribution                      | $                                    | 38,518  |                                |   | $ | 35,766 |   |   | $ | 112,698 |   |   | $ | 106,465 |   |
| Traditional Annity - Independent Disrtibution                     |                                 | 84,008  |                                |   |   | 88,498 |   |   |   | 277,308 |   |   |   | 247,834 |   |
| Traditional and Universal LifeInsurance                           |                                 | 86,334  |                                |   |   | 84,552 |   |   |   | 261,520 |   |   |   | 254,132 |   |
| Variable                                                          |                                 | 15,703  |                                |   |   | 15,786 |   |   |   | 48,194 |   |   |   | 48,282 |   |
| Corporate and Other                                               |                                 | 4,927   |                                |   |   | 8,411 |   |   |   | 15,951 |   |   |   | 25,708 |   |
|                                                              |                                 | 229,490 |                                |   |   | 233,013 |   |   |   | 715,671 |   |   |   | 682,421 |   |
| Realizedgains (losses) on investments (A)                         |                                 | 875     |                                |   |   | (27,133 | ) |   |   | (12,824 | ) |   |   | (130,694 | ) |
| Change in net unrealized gains/losses on derivatives (A)          |                                 | 77,178  |                                |   |   | (16,341 | ) |   |   | 132,673 |   |   |   | (106,842 | ) |
| Consolidated revenues                                             | $                                    | 307,543 |                                |   | $ | 189,539 |   |   | $ | 835,520 |   |   | $ | 444,885 |   |
|                                                              |                                 |    |                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Pre-tax operating income (loss):                                  |                                 |    |                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Traditional Annuity - Exclusive Distribution                      | $                                    | 12,614  |                                |   | $ | 5,865 |   |   | $ | 27,614 |   |   | $ | 20,721 |   |
| Traditional Annity - IndependentDistribution                      |                                 | 4,608   |                                |   |   | 10,539 |   |   |   | 16,595 |   |   |   | 27,229 |   |
| Traditional and Universal Life Insurance                          |                                 | 16,678  |                                |   |   | 13,640 |   |   |   | 51,006 |   |   |   | 37,468 |   |
| Variable                                                          |                                 | 6,173   |                                |   |   | (510 | ) |   |   | 8,106 |   |   |   | 2,338 |   |
| Corporate and Other                                               |                                 | (5,368  | )                                   |   |   | (1,898 | ) |   |   | (18,345 | ) |   |   | (6,536 | ) |
|                                                              |                                 | 34,705  |                                |   |   | 27,636 |   |   |   | 84,976 |   |   |   | 81,220 |   |
| Income taxes on operating income                                  |                                 | (11,697 | )                                   |   |   | (8,964 | ) |   |   | (28,295 | ) |   |   | (26,352 | ) |
| Realized gains/losses on investments (A)                          |                                 | (1,853  | )                                   |   |   | (12,726 | ) |   |   | (12,955 | ) |   |   | (67,533 | ) |
| Change in netunrealized gains/losses on derivatives (A)           |                                 | (5,240  | )                                   |   |   | 5,270 |   |   |   | (4,883 | ) |   |   | 13,744 |   |
| Consolidated net income attributable to FBL Financial Group, Inc. | $                                    | 15,915  |                                |   | $ | 11,216 |   |   | $ | 38,843 |   |   | $ | 1,079 |   |

-22-
| (A) | Amounts are net of adjustments, as applicable, toamortization of unearned revenue reserves, deferred policy acquisition costs, deferred sales inducements, value of insurance in force acquired and income taxesattributable to these items. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Our investment in equity methodinvestees, the related equity income and interest expense are attributable to the Corporate and Other segment. Expenditures for long-lived assets were not significantduring the periods presented above. Goodwill at September 30, 2009 and December 31, 2008 is allocated among the segments as follows: Exclusive Annuity ($3.9million), Traditional and Universal Life Insurance ($6.1 million) and Corporate ($1.2 million). 

 

**10. Subsequent Event**

 

Effective October 1, 2009, we enteredinto 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 in2001. 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 thistransaction. The gain is recognized immediately as we have no contingent liabilities associated with the recaptured policies. 

 

----

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

 

*This section includes a summary ofFBL Financial Group, Inc.'s consolidated results of operations, financial condition and where appropriate, factors that management believes may affect futureperformance. Unless noted otherwise, all references to FBL Financial Group, Inc. (we or the Company) include all of its direct and indirect subsidiaries, including itsprimary life insurance subsidiaries, Farm Bureau Life Insurance Company (Farm Bureau Life) and EquiTrust Life Insurance Company (EquiTrust Life) (collectively, theLife* *Companies). Please read this discussion in conjunction with the accompanyingconsolidated financial statements and related notes. In addition, we encourage you to refer to our 2008 Form 10‐K for a complete description of our significantaccounting policies and estimates. Familiarity with this information is important in understanding our financial position and results ofoperations.*

 

*This Form 10‐Q includesstatements relating to anticipated financial performance, business prospects, new products, and similar matters. These statements and others, which include words suchas "expect", "anticipate", "believe", "intend" and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Actof 1995. A variety of factors could cause our actual results and experiences to differ materially from the anticipated results or other expectations expressed in ourforward-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 mayaffect the operations, performance, development and results of our business.*

 

**Impact of Recent Business Environment**

 

Financial market conditions improvedsubstantially during the third quarter of 2009. Bond market values improved dramatically, the equity market has continued to post sizable gains and various leadingeconomic 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 economicoutlook. The stressed economic conditions in 2008 and 2009 did not negatively impact our sales. However, a lackluster economic recovery characterized by higherunemployment, lower family income, lower consumer spending, muted corporate earnings growth and lower business investment could adversely impact the demand for ourproducts 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 mayoccur, 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 toimprove during the third quarter, however, we believe credit downgrade and default events are expected to peak late in 2009, before declining during 2010. Certainmarket sectors remain dislocated and within those sectors, market valuations may not be reflective of true economic value. These events and the continuing marketupheavals 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 marketconditions. As a result, certain valuations require greater estimation and judgment as well as valuation methods which are more complex. These values may notultimately 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 thelevels 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 mostcorporate 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-terminvestments in order to maintain a more liquid position during uncertain times.

 

 

-24-

Our fixed annuity products containfeatures that allow contract holders to surrender a policy. To encourage persistency, we impose a surrender charge against the account balance for early termination ofa 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 valueadjustment (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 thanthe 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 acontract is issued. Late in 2008 and during the first quarter of 2009, market conditions emerged with unprecedented low U.S. Treasury yields providing an environmentwhere contract holders were able to surrender with smaller net surrender charges, which significantly increased the level of surrender activity. Surrender activitybegan 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. Treasuryrates and various conservation strategies we implemented. We updated surrender assumptions in the models used to calculate amortization of deferred policy acquisitioncosts and deferred sales inducements in the fourth quarter of 2008; however, the impact of surrenders during 2009 varied from projections which resulted in additionalamortization for the nine-month period ended September 30, 2009. The increased surrender activity also resulted in call option assets that no longer back an indexproduct, 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. Weregularly 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 tomodify 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 astrain on statutory capital when sold and add to capital in subsequent years. As a result of the significant growth of the EquiTrust Life independent distributionchannel 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 theincreased surrender activity and realized and unrealized losses on our investments. In the last half of 2008, we incurred additional debt to assist with our capitalrequirements and increase our financial flexibility. EquiTrust Life also became a member of the Federal Home Loan Bank in 2009, which provides a source for securitizedborrowings 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 wemodified 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 endedSeptember 30, |
|                                                |                                         | 2009    |                                |   |   | 2008    |   |   |   | 2009    |   |   |   | 2008    |   |
|                                                | (Dollars in thousands, except per sharedata) |
| 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  | )      |
| Incometaxes                                         |                                         | (7,802  | )                                   |   |   | (4,904  | )      |   |   | (18,528 | )      |   |   | 2,634   |   |
| Equityincome                                        |                                         | 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 FBLFinancial 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                                                   |   |    |   |   |   |    |   |   |   |      |    |   |   |      |    |
|--------------------------------------------------------------|--------|---------|--------|--------|--------|---------|--------|--------|--------|-----------|---------|--------|--------|-----------|---------|
| Directpremiums 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 andUniversal 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 alliancepartners. |
|-----|----------------------------------------------------------------------------------------|

 

-25-

Premiums collected is not a measureused in financial statements prepared in accordance with GAAP. There is no comparable GAAP financial measure. We use premiums collected to measure the productivity ofour exclusive and independent agents. Direct Traditional Annuity - Exclusive Distribution premiums collected segment increased for the nine-month period in 2009primarily due to lower short-term market interest rates during the first part of the year making certificates of deposits and other short-term investments lessattractive in relation to our traditional fixed annuity products. Direct premiums collected in the Traditional Annuity - Independent Distribution segment decreased in2009 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 fortraditional annuity products. Variable premiums collected tend to vary with volatility, performance of and confidence level in the equity markets as well as creditingand 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 oflow U.S. Treasury yields on the MVA feature for our direct fixed annuity products, which provided an environment where contract holders could surrender with smallernet surrender charges. Additional details on this feature are discussed above in the "Impact of Recent Business Environment" section. Surrender benefits on theEquiTrust 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 FBLFinancial 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 $38.8million 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 quarterwas primarily due to a decrease in impairment losses on investments and improved mortality experience, partially offset by the impact of the change in unrealized gainsand 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 impairmentlosses on investments and the impact of an increase in the volume of business in force in the Traditional Annuity - Exclusive Distribution and Traditional andUniversal Life Insurance segments. These items were partially offset by the impact of the change in unrealized gains and losses on derivatives and increased surrendersin the Traditional Annuity - Independent Distribution segment. The increase in volume of business in force is quantified by summarizing the face amount of insurance inforce for traditional life products or account values of contracts in force for interest sensitive products. The face amount of life insurance in force represents thegross death benefit payable to policyholders and account value represents the value of the contract to the contract holder before application of surrender charges orreduction 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 AnnuityProducts |                                 |   |    |   |   |   |    |
|---------------------------------------------------------------------|--------------------------------------|--------|---------|--------|--------|--------|---------|
|                                                                |                                 |   |    |   |   |   |    |
|                                                                | 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 andinvested assets represents the yield on cash and investments backing the universal life and individual traditional annuity products net of investment expenses. Theyield also includes gains or losses relating to our interest rate swap program for certain individual traditional annuities. With respect to our index annuities, indexcosts 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 "SegmentInformation" section that follows for a discussion of our spreads.

 

 

-26-

***Impact of Unlocking***

 

We periodically revise key assumptions used in the calculation of the amortization ofdeferred policy acquisition costs, deferred sales inducements, value of insurance in force acquired and unearned revenues for participating life insurance, variableand interest sensitive and index products, as applicable, through an "unlocking" process. Revisions are made based on historical results and our best estimate offuture experience. The impact of unlocking is recorded in the current period as an increase or decrease to amortization of the respective balances. While the unlockingprocess 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 ofunlocking 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 increasedpretax 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 modelfor 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 inamortization of:                            |                                  |    |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferredpolicy acquisition costs                     |                                  | 2,227   |                                 |   |   | (852 | ) |   |   | (8,739 | ) |   |   | (2,796 | ) |
| Deferred salesinducements                            |                                  | 5,156   |                                 |   |   | (4,620 | ) |   |   | 473 |   |   |   | (13,944 | ) |
| Value of insurance in force acquired                 |                                  | 23      |                                 |   |   | (54 | ) |   |   | 26 |   |   |   | 503 |   |
| Unearned revenuereserve                              |                                  | 5       |                                 |   |   | 23 |   |   |   | (145 | ) |   |   | (170 | ) |
| Income tax offset                                    |                                  | 3,819   |                                 |   |   | 4,015 |   |   |   | 9,605 |   |   |   | 28,964 |   |
| Net impact of operating incomeadjustments            | $                                     | (7,093  | )                                    |   | $ | (7,456 | ) |   | $ | (17,838 | ) |   | $ | (53,789 | ) |

 
|                                                              | Three months ended September 30, |   | Nine months ended September 30 |
|-------------------------------------------------------------------|---------------------------------------|--------|--------------------------------|
|                                                              |                                  | 2009   |                           |   |   | 2008 |   |   |   | 2009 |   |   |   | 2008 |   |
|                                                              | (Dollars inthousands)                 |
| Summary of adjustments noted above afteroffsets 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 netunrealized gains and losses on derivatives. Our rationale for excluding these items from operating income is also explained in Note 9 to our consolidated financialstatements. 

 

***SubsequentEvent***

 

Effective October 1, 2009, we enteredinto an agreement with EMC National Life Company (EMCNL), under which EMCNL recaptured a block of annuity and life insurance policies with reserves totaling $249.8million. 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 anddiluted 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.

 

-27-
| Changes in FBL Net Income                                                                              |                                                |        |   |   |   |        |   |
|--------------------------------------------------------------------------------------------------------|-----------------------------------------------------|-------------|--------|--------|--------|-------------|--------|
|                                                                                                   | Period ended                                        |
|                                                                                                   | September 30, 2009 vs. September 30, 2008 |
|                                                                                                   |                                                | Threemonths |   |   |   | Nine months |   |
|                                                                                                   | (Dollars inthousands)                               |
|                                                                                                   |                                                |        |   |   |   |        |   |
| Premiums and product charges                                                                           | $                                                   | 3,278       |   |   | $      | 40,509      |   |
| Net investment income                                                                                  |                                                | (1,720      | )      |   |   | 24,454      |   |
| Derivativeincome (loss)                                                                                |                                                | 90,377      |   |   |   | 213,357     |   |
| Realized gains (losses) oninvestments                                                                  |                                                | 28,026      |   |   |   | 117,845     |   |
| Other income and other expenses                                                                        |                                                | (475        | )      |   |   | (2,436      | )      |
| Interest sensitive and index productsbenefits and change in value of index product embedded derivative |                                                | (118,186    | )      |   |   | (308,958    | )      |
| Traditional lifeinsurance policy benefits                                                              |                                                | 1,092       |   |   |   | 7,303       |   |
| Underwriting, acquisition andinsurance expenses                                                        |                                                | 6,785       |   |   |   | (27,698     | )      |
| Interest expense                                                                                       |                                                | (1,652      | )      |   |   | (5,801      | )      |
| Income taxes                                                                                           |                                                | (2,898      | )      |   |   | (21,162     | )      |
| Noncontrollinginterest and equity income                                                               |                                                | 72          |   |   |   | 351         |   |
| Total change inFBL 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 endedSeptember 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 increased4.7% in the third quarter of 2009 to $72.5million and increased 19.8% to $245.5 million for the nine-month period. The increase in interest sensitive and index productcharges 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, asdiscussed 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 endedSeptember 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 premiumsincreased 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 productsby our Farm Bureau Life agency force exceeding the loss of in force amounts through deaths, lapses and surrenders. Our average aggregate traditional life insurance inforce, 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 inlife 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 lifepolicies to term policies. The premium for a term policy per $1,000 face amount is less than that for a whole life policy.

 

----

***Net Investment Income***

 

Net investment income,** **which excludes investment income on separateaccount 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. Thedecrease 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 moreliquid position for financial flexibility, partially offset by an increase in average invested assets. The increase in the nine-month period is primarily due to anincrease 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 amortizedcost) 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 2008period. The decrease in yield is primarily due to holding higher cash and short-term investment balances. In addition, short-term interest rates have declinedsignificantly. 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 $2.1million 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 inthe 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 andasset-backed securities resulting from changing prepayment speed assumptions at the end of each period.

 

| Derivative Income (Loss)                                                                             |                                  |    |                                |   |   |    |   |   |   |    |   |   |   |     |   |
|------------------------------------------------------------------------------------------------------|---------------------------------------|---------|-------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|----------|--------|
|                                                                                                 |                                  |    |                                |   |   |    |   |   |   |    |   |   |   |     |   |
|                                                                                                 | Three months ended September 30, |    | Nine months endedSeptember 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 period |                                  | 75,523  |                                |   |   | (15,458 | )      |   |   | 130,711 |   |   |   | (107,289 | )      |
| Cost of money for calloptions                                                                        |                                  | (26,464 | )                                   |   |   | (32,533 | )      |   |   | (86,789 | )      |   |   | (97,781  | )      |
|                                                                                                 |                                  | 49,408  |                                |   |   | (39,126 | )      |   |   | 44,758  |   |   |   | (169,563 | )      |
| Other                                                                                                |                                  | 18      |                                |   |   | (1,825  | )      |   |   | (2,933  | )      |   |   | (1,969   | )      |
| Total                                                                                                | $                                     | 49,426  |                                |   | $      | (40,951 | )      |   | $      | 41,825  |   |   | $      | (171,532 | )      |

 

Gains received at expiration decreased in 2009 as a result of declines in the S&P 500 Index® (upon which the majority of our options are based). These gains are used to fund index credits on index annuities, which also decreased in2009, as discussed below under "Interest Sensitive and Index Product Benefits." The change in the difference between fair value and remaining option cost at beginningand end of period increased derivative income in 2009 primarily due to the change in the S&P 500 Index compared to the strike price of the outstanding options,which generated losses for the 2008 periods. 

 

The cost of money for call optionsdecreased primarily due to a decrease in the volume of business in force and a decrease in the cost of hedging programs on our direct and assumed business, partiallyoffset by the impact of being in an overhedged position on our direct business. The average aggregate account value of index annuities in force, which has decreaseddue to increased surrender activity from the independent distribution channel and run-off of assumed business, totaled $4,461.9 million for the nine months endedSeptember 30, 2009 compared to $4,687.4 million for the respective 2008 period. The estimated cost of being in an overhedged position on our direct businesstotaled $7.2 million for the nine months in 2009. Other derivative income (loss) is comprised of income or loss from the embedded derivatives included in our modifiedcoinsurance contracts and interest rate swaps relating to certain deferred annuity contracts. In 2009, derivative income (loss) also includes unrealized losses on theinterest rate swap that previously hedged our line of credit, which totaled $2.0 million for the nine months ended September 30, 2009. Derivative income (loss)will fluctuate based on market conditions. See Note 3 to our consolidated financial statements for additional details on our derivatives.

 

----

| Realized Gains (Losses) on Investments                             |                                 |   |                                |   |   |    |   |   |   |    |   |   |   |     |   |
|--------------------------------------------------------------------|--------------------------------------|--------|-------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|----------|--------|
|                                                               |                                 |   |                                |   |   |    |   |   |   |    |   |   |   |     |   |
|                                                               | Three months endedSeptember 30, |   | Nine monthsended September 30, |
|                                                               |                                 | 2009   |                                |   |   | 2008    |   |   |   | 2009    |   |   |   | 2008     |   |
|                                                               | (Dollars inthousands)                |
| Realized gains (losses) oninvestments:                             |                                 |   |                                |   |   |    |   |   |   |    |   |   |   |     |   |
| Realized gains on sales                                            | $                                    | 8,898  |                                |   | $      | 2,211   |   |   | $      | 47,631  |   |   | $      | 6,339    |   |
| Realized losses on sales                                           |                                 | (6,404 | )                                   |   |   | (3,124  | )      |   |   | (9,658  | )      |   |   | (3,246   | )      |
| Total other-then-temporary impairmentcharges                       |                                 | (8,581 | )                                   |   |   | (26,243 | )      |   |   | (88,432 | )      |   |   | (133,617 | )      |
| Net realized investment losses                                     |                                 | (6,087 | )                                   |   |   | (27,156 | )      |   |   | (50,459 | )      |   |   | (130,524 | )      |
| Non-credit losses included in accumulated other comprehensive loss |                                 | 6,957  |                                |   |   | — |   |   |   | 37,780  |   |   |   | —  |   |
| Total reported in statements ofopertations                         | $                                    | 870    |                                |   | $      | (27,156 | )      |   | $      | (12,679 | )      |   | $      | (130,524 | )      |

 

The level of realized gains (losses) is subject to fluctuation from period to period depending on the prevailing interest rate and economicenvironment and the timing of the sale of investments. Realized losses on sales were on securities that we did not intend to sell on the prior balance sheet date or onsecurities that were impaired at prior quarter end, but decreased in value during the quarter. See "Financial Condition - Investments" for details regarding ourunrealized gains and losses on available-for-sale securities at September 30, 2009 and December 31, 2008. 

 

We monitor the financial condition and operations of the issuers of securities rated below investment grade and of the issuers of certaininvestment grade securities on which we have concerns regarding credit quality. If we determine that an unrealized loss is other than temporary, the security iswritten down to its fair value. Beginning in 2009, a portion of the write-down attributable to non-credit factors is recognized in accumulated other comprehensiveloss. See additional details regarding the non-credit portion of the write-downs and our methodology for evaluating investments for other-than-temporary impairment inNotes 1 and 2 to our consolidated financial statements. 

 
| InvestmentImpairments Recognized in FBL Net Income Individually Exceeding $0.5 Million |
|----------------------------------------------------------------------------------------|
|                                                                                   |   |
| General Description                                                                    |   |   | Impairment Loss |   |   | Circumstance |
|                                                                                   |   |   | (Dollars in thousands) |   |   |   |
| Nine months ended September 30, 2009:                                             |
|                                                                                   |   |   |   |   |   |   |
| Collateralized debt obligation                                                         |   | $ | 11,662 |   |   | Defaults of the underlying collateral supporting this issue increased resulting in possible futurelosses. |
| Major paper manufacturing company                                                      |   | $ | 6,630 |   |   | Issuer filed for bankruptcy after unsuccessful attempts to obtain financialassistance. This reduced estimates on potential recovery. |
| Real estate investment trust                                                           |   | $ | 6,299 |   |   | Issuer filed for bankruptcy after unsuccessful attempts to obtain financial assistance. This reduced estimates onpotential recovery. |
| Major printing & publishing company                                                |   | $ | 5,671 |   |   | Debt restructuring and declines in ratings and revenues which could resultin a future covenant violation reduced estimates on potential recovery. |
| Apparel and other textile company                                                      |   | $ | 4,000 |   |   | The probability of future losses increased due to declining economic conditions and increased concerns about thecompany's ability to continue as a going concern. |
| Commercial finance company                                                             |   | $ | 3,996 |   |   | Rating declines occurred due to the impact of declining economic conditionson earnings, liquidity and the company's ability to continue as a going concern. |
| Other asset-backed securities                                                          |   | $ | 3,786 |   |   | Defaults in underlying collateral supporting these issues increased. |
| Collateralized bond obligation                                                         |   | $ | 2,347 |   |   | Rating declines occurred and defaults of the underlying collateralsupporting this issue increased. |
| Collateralized bondobligation                                                          |   | $ | 1,386 |   |   | Rating declines occurred and defaults of the underlying collateral supporting this issueincreased. |

 

-30-
| General Description                                   |   |   | Impairment Loss        |   |   | Circumstance                                                                                                                                                                                                                                                                                                                      |
|-------------------------------------------------------|--------|--------|------------------------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                  |   |   | (Dollars in thousands) |   |   |                                                                                                                                                                                                                                                                                                                              |
| Ninemonths ended September 30, 2009 (continued): |
|                                                  |   |   |                   |   |   |                                                                                                                                                                                                                                                                                                                              |
| Otherasset-backed securities                          |   | $      | 1,348                  |   |   | Rating declines occurred on the monoline insurer supporting these issues. Financial recoveries are fully dependenton the insurer.                                                                                                                                                                                                 |
| Residential mortgage-backed security                  |   | $      | 1,025                  |   |   | Rating declines occurred and defaults of the underlying collateralsupporting this issue increased.                                                                                                                                                                                                                                |
| Reinsurance carrier                                   |   | $      | 586                    |   |   | Rating declines occurred and near term solvency became a concern. (A)                                                                                                                                                                                                                                                             |
| Other asset-backed securities                         |   | $      | 530                    |   |   | Rating declines occurred and defaults of the underlying collateral supporting this issue increased.                                                                                                                                                                                                                               |
|                                                  |   |   |                   |   |   |                                                                                                                                                                                                                                                                                                                              |
| Nine months ended September 30, 2008:            |
|                                                  |   |   |                   |   |   |                                                                                                                                                                                                                                                                                                                              |
| Other asset-backed securities                         |   | $      | 67,349                 |   |   | Losses on 13 securities increased due to increasing delinquencies by homeowners. In addition, underlying insurancethat was expected to absorb losses was deemed to be less valuable due to the monoline insurer being downgraded during the quarter. Collateral is second lien homeequity loans with minimal recoveries expected. |
| Depositoryinstitution                                 |   | $      | 10,945                 |   |   | Issuer filed for bankruptcy after unsuccessful attempts to obtain financial assistance. This reduced estimates on potentialrecovery.                                                                                                                                                                                              |
| Collateralized debtobligation                         |   | $      | 9,800                  |   |   | Rating declines occurred and the value of collateral supporting this issuedecreased, which triggered an event whereby we did not receive interest on our investment.                                                                                                                                                              |
| Commercial mortgage-backed security                   |   | $      | 9,639                  |   |   | Ratingdeclines occurred and the probability of future losses increased due to declining economic conditions and a reduction in the debt available to absorb losses prior toour ownership class.                                                                                                                                   |
| Other asset-backedsecurity                            |   | $      | 9,114                  |   |   | Rating declines occurred and losses from the underlying home equity loans toAlt-A borrowers increased.                                                                                                                                                                                                                            |
| Reinsurance carrier                                   |   | $      | 7,299                  |   |   | Rating declines occurred and the fair value decreased significantly due to subprime and Alt-A exposure and the parent's potentialreorganization, which reduced estimates on potential recovery.                                                                                                                                   |
| Securities & commodities broker                   |   | $      | 5,980                  |   |   | Issuer filed forbankruptcy after unsuccessful attempts to obtain financial assistance. This reduced estimates on potential recovery.                                                                                                                                                                                              |
| Foreign depository institution                        |   | $      | 5,718                  |   |   | Theprobability of future losses increased due to declining economic conditions. In addition, the board of directors resigned and subsequent to the third quarter, aforeign government seized control of the entire banking system due to financial turmoil, further reducing estimates on potential recovery.                     |
| Major printing & publishing company               |   | $      | 2,761                  |   |   | Issuer filed for bankruptcy after unsuccessful attempts to obtain financialassistance. This reduced estimates on potential recovery.                                                                                                                                                                                              |
| Major printing& publishing company                |   | $      | 2,283                  |   |   | Rating declines occurred and other adverse details regarding the financialstatus of the company became available.                                                                                                                                                                                                                 |
| Structured investment vehicle                         |   | $      | 1,469                  |   |   | Rating declines occurred and the issuer was served a notice of default. Thisreduced estimates on potential recovery. Subsequent to the third quarter the company also went into receivership. This issue is held as collateral for securitieslending.                                                                             |
| Major retail company                                  |   | $      | 861                    |   |   | The company reported negative earnings results and the probability of future losses increased due to declining economic conditions, whichincreased the probability of a future restructuring or bankruptcy filing.                                                                                                                |

 
| Negative trends in the industry were considered in our analysis, which is done on an issue-by-issue basis. No additional write-downs weredeemed necessary as of September 30, 2009 for other material investments in this industry. |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

***Other Income and Other Expenses***

 

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

----

| ***Interest Sensitive and Index Product Benefits and Change in Value of Index Product Embedded Derivatives**** * |
|-----------------------------------------------------------------------------------------------------------------------|
|                                                                                                                  |   |   |   |
|                                                                                                                  | Three months ended September 30, |   | Nine months ended September 30, |
|                                                                                                                  |   | 2009 |   |   |   | 2008 |   |   |   | 2009 |   |   |   | 2008 |   |
|                                                                                                                  | (Dollars in thousands) |
| Interest sensitive and index product benefits:                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest credited                                                                                                     | $ | 82,655 |   |   | $ | 76,007 |   |   | $ | 243,370 |   |   | $ | 211,255 |   |
| Index credits                                                                                                         |   | 1,578 |   |   |   | 8,154 |   |   |   | 4,790 |   |   |   | 33,536 |   |
| Amortization of deferred salesinducements                                                                             |   | 3,544 |   |   |   | 13,705 |   |   |   | 38,114 |   |   |   | 39,362 |   |
| Interest sensitive death benefits                                                                                     |   | 7,583 |   |   |   | 13,208 |   |   |   | 32,924 |   |   |   | 36,159 |   |
|                                                                                                                  |   | 95,360 |   |   |   | 111,074 |   |   |   | 319,198 |   |   |   | 320,312 |   |
| Change in value of index product embedded derivatives                                                                 |   | 96,371 |   |   |   | (37,529 | ) |   |   | 139,052 |   |   |   | (171,020 | ) |
| Total                                                                                                                 | $ | 191,731 |   |   | $ | 73,545 |   |   | $ | 458,250 |   |   | $ | 149,292 |   |

 

Interest sensitive and index productbenefits and change in value of index product embedded derivatives increased 160.7% in the third quarter of 2009 to $191.7 million and 206.9% to $458.3 million for the nine-month period, primarily due to the impact of the change in value of index productembedded derivatives and an increase in the volume of business in force. Interest sensitive and index product benefits tend to fluctuate from period to periodprimarily as a result of changes in mortality experience and the impact of changes in the equity markets on index credits, amortization of deferred sales inducementsand the value of the embedded derivatives in our index annuities. 

 

The average aggregate account value ofannuity contracts in force, which increased due to net premium inflows from the Life Companies during the twelve-month period ended September 30, 2009 totaled$9,314.4 million for the 2009 period and $8,806.0 million for the 2008 period. These accountvalues include values relating to index contracts totaling $4,461.9 million for 2009 and $4,687.4 million for 2008. 

 

The weighted average interest crediting rate/index cost for universal life and individual traditional annuity products, excluding the impactof the amortization of deferred sales inducements, was 4.06% for the nine-month period in 2009 period and 3.87% for the 2008 period. See the "Segment Information"section that follows for additional details on our spreads.

 

As discussed above under "DerivativeIncome (Loss)," the change in the amount of index credits is impacted by the volume of index annuities in force and the amount of appreciation/depreciation in theunderlying market indices on which our options are based. The change in the value of the embedded derivatives is impacted by the change in expected index credits onthe next policy anniversary dates, which is related to the change in the fair value of the options acquired to fund these index credits. The value of the embeddedderivatives is also impacted by the timing of the posting of index credits and changes in reserve discount rates and assumptions used in estimating future call optioncosts. In addition, embedded derivatives in the index annuity reserves decreased $26.7 million in nine-month period in 2008 due to the adoption of GAAP guidancerelated to fair value measurements.

 

The decrease in amortization ofdeferred sales inducements is primarily due to the impact of unrealized gains/losses on derivatives, partially offset by the impact of increased surrender activityfrom the EquiTrust Life independent distribution channel in the nine month period of 2009. Deferred sales inducements on interest sensitive and index products,excluding the impact of unrealized gains/losses on investments, totaled $276.5 million at September 30, 2009 and $298.1 million at September 30, 2008.

 

***Traditional Life Insurance Policy Benefits***

 
|                                               | Three months ended September 30, |   | Nine months ended September 30, |
|----------------------------------------------------|---------------------------------------|--------|--------------------------------------|
|                                               |                                  | 2009   |                                 |   |   | 2008 |   |   |   | 2009 |   |   |   | 2008 |   |
|                                               | (Dollars in thousands)                |
| Traditional life insurance policy benefits:        |                                  |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Traditional life insurance benefits                | $                                     | 23,407 |                                 |   | $ | 23,353 |   |   | $ | 69,964 |   |   | $ | 73,207 |   |
| Increase in traditional life future policybenefits |                                  | 9,991  |                                 |   |   | 11,084 |   |   |   | 29,819 |   |   |   | 33,511 |   |
| Distributions to participating policyholders       |                                  | 4,760  |                                 |   |   | 4,813 |   |   |   | 14,738 |   |   |   | 15,106 |   |
| Total                                              | $                                     | 38,158 |                                 |   | $ | 39,250 |   |   | $ | 114,521 |   |   | $ | 121,824 |   |

 

Traditional life insurance benefits decreased 2.8% in the third quarter of 2009 to $38.2 million and 6.0% to $114.5 million for the nine-month period. The decreases in 2009 are primarily due to a smallerincrease in reserves and a decrease in term life death benefits. Term life reserves increased less in the nine-month period of 2009 due to reserve adjustments of $1.6million in the first quarter of 2008. In addition, an increase in permanent life death benefits contributed to the smaller reserve change in the third quarter of2009. The change in traditional life future policy benefits may not be proportional to thechange in traditional premiums and benefits as reserves on term policies are generally less than reserves on whole life policies. Traditional life insurance benefitscan fluctuate from period to period primarily as a result of changes in mortality experience.

 

----

***Underwriting, Acquisition and Insurance Expenses***

 
|                                                                     | Three months ended September 30, |   | Nine months ended September 30, |
|--------------------------------------------------------------------------|---------------------------------------|--------|--------------------------------------|
|                                                                     |                                  | 2009   |                                 |   |   | 2008 |   |   |   | 2009 |   |   |   | 2008 |   |
|                                                                     | (Dollars inthousands)                 |
| Underwriting, acquisition and insuranceexpenses:                         |                                  |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Commission expense, net of deferrals                                     | $                                     | 3,708  |                                 |   | $ | 3,280 |   |   | $ | 10,901 |   |   | $ | 9,849 |   |
| Amortization of deferred policy acquisition costs                        |                                  | 18,452 |                                 |   |   | 27,556 |   |   |   | 99,705 |   |   |   | 74,741 |   |
| Amortization of value of insurance in forceacquired                      |                                  | 785    |                                 |   |   | 912 |   |   |   | 2,178 |   |   |   | 1,979 |   |
| Other underwriting, acquisition and insurance expenses, net of deferrals |                                  | 20,946 |                                 |   |   | 18,928 |   |   |   | 59,273 |   |   |   | 57,790 |   |
| Total                                                                    | $                                     | 43,891 |                                 |   | $ | 50,676 |   |   | $ | 172,057 |   |   | $ | 144,359 |   |

 

Underwriting, acquisition and insuranceexpenses decreased 13.4% in the third quarter of 2009 to $43.9 million and increased 19.2% in the nine-month period to $172.1 million. Amortization of deferred policy acquisition costs in the third quarter decreased primarily due to the improved market performance in separateaccounts and the net impact of operating adjustments as detailed under "Impact of Operating Adjustments on FBL Net Income." Amortization of deferred policy acquisitioncosts for the nine-month period increased primarily due to increased surrender activity from the EquiTrust Life independent distribution channel and the net impact ofoperating adjustments. Amortization of deferred policy acquisition costs on our EquiTrust Life distribution channel, excluding the impact of operating adjustments,totaled $10.6 million in the third quarter and $50.1 million for the nine-month period of 2009, compared to $10.7 million in the third quarter and $30.5 million for the nine-month period of 2008.

 

Other underwriting, acquisition and insurance expenses increased for the 2009 periods, primarily due to an increase in salaries and benefits, and, for thenine-month period one-time charges associated with the implementation of cost-saving measures announced in the first quarter of 2009. During the nine-month period of2009, we incurred $1.7 million of these one-time charges. We anticipate these cost-saving measures willreduce annual expenses approximately $7.0 million, however they may be partially offset by increased expenses associated with the general operations of our companies.

 

***Interest Expense***

 

Interest expense increased 37.0% to $6.1 million in the third quarter of 2009 andincreased 43.4% to $19.2 million for the nine months endedSeptember 30, 2009, primarily due to an increase in our debt outstanding. The average debt outstanding increased to $386.0 million for the nine months endedSeptember 30, 2009 from $317.4 million for the 2008 period due to the issuance of Senior Notes in November 2008, partially offset by the pay-off of our lineof credit borrowings in February 2009. The average interest rate on our debt increased due to the new Senior Notes having a higher coupon rate than the effectiverates on our existing debt and line of credit.

 

***IncomeTaxes***

 

Income taxes totaled $7.8 million in the third quarter of 2009 and $18.5million for the nine months ended September 30, 2009. The effectivetax rate was 33.1% for the third quarter of 2009 and 30.6% for the 2008 period. The effective tax rate was 32.5% for the nine months ended September 30, 2009, and161.6% for the 2008 period. The effective tax rates differ from the federal statutory rateof 35% primarily due to the impact of tax-exempt interest and tax-exempt dividend income. The permanent differences between book and tax income increase the effectiverate when there is a net loss and decrease the effective rate when there is a net gain. Permanent differences had a greater impact on the effective rates in 2008 dueto realized losses on investments reducing the size of the income or loss for the period relative to the size of the permanent differences.

 

***Equity Income, Net of Related Income Taxes***

 

Equity income, net of related income taxes, totaled $0.3million for the nine months ended September 30, 2009 and less than$0.1 million for the 2008 period. Equity income includes our proportionate share of gains and losses attributable to our ownership interest in partnerships, jointventures and certain companies where we exhibit some control but have a minority ownership interest. 

 

**Segment Information**

 

We analyze operations by reviewingfinancial information regarding products that are aggregated into four product segments. The product segments are: (1) Traditional Annuity - Exclusive Distribution("Exclusive Annuity"), (2) Traditional Annuity - Independent Distribution ("Independent Annuity"), (3) Traditional and Universal Life Insurance and (4) Variable. Wealso have various support operations and corporate capital that are aggregated into a Corporate and Other segment. 

-33-

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 generally reported net of any transactions between the segments. Operating income(loss) for the periods ended September 30, 2009 and 2008 represents net income excluding the impact of realized gains and losses on investments and changes in netunrealized gains and losses on derivatives. 

 

The impact of realized gains and losseson investments and unrealized gains and losses on derivatives also includes adjustments for taxes and that portion of amortization of deferred policy acquisitioncosts, deferred sales inducements, unearned revenue reserve and value of insurance in force acquired attributable to such gains or losses. Our rationale for usingoperating income, in addition to net income, to measure our performance is summarized in Note 9 to the consolidated financial statements.

 

***Reconciliation of Net Income to Pre-tax Operating Income***

 
|                                                 | Three months ended September 30, |   | Nine months endedSeptember 30, |
|------------------------------------------------------|---------------------------------------|--------|-------------------------------------|
|                                                 |                                  | 2009   |                                |   |   | 2008 |   |   |   | 2009 |   |   |   | 2008 |   |
|                                                 | (Dollars in thousands)                |
| Net income attributable to FBL Financial Group, Inc. | $                                     | 15,915 |                                |   | $ | 11,216 |   |   | $ | 38,843 |   |   | $ | 1,079 |   |
| Net impact of operating income adjustments (1)       |                                  | 7,093  |                                |   |   | 7,456 |   |   |   | 17,838 |   |   |   | 53,789 |   |
| Income taxes on operating income                     |                                  | 11,697 |                                |   |   | 8,964 |   |   |   | 28,295 |   |   |   | 26,352 |   |
| Pre-taxoperating income                              | $                                     | 34,705 |                                |   | $ | 27,636 |   |   | $ | 84,976 |   |   | $ | 81,220 |   |
|                                                 |                                  |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Pre-taxoperating income (loss) by segment:           |                                  |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Traditional Annuity - Exclusive Distribution         | $                                     | 12,614 |                                |   | $ | 5,865 |   |   | $ | 27,614 |   |   | $ | 20,721 |   |
| Traditional Annuity - IndependentDistribution        |                                  | 4,608  |                                |   |   | 10,539 |   |   |   | 16,595 |   |   |   | 27,229 |   |
| Traditional and Universal Life Insurance             |                                  | 16,678 |                                |   |   | 13,640 |   |   |   | 51,006 |   |   |   | 37,468 |   |
| Variable                                             |                                  | 6,173  |                                |   |   | (510 | ) |   |   | 8,106 |   |   |   | 2,338 |   |
| Corporate andOther                                   |                                  | (5,368 | )                                   |   |   | (1,898 | ) |   |   | (18,345 | ) |   |   | (6,536 | ) |
|                                                 | $                                     | 34,705 |                                |   | $ | 27,636 |   |   | $ | 84,976 |   |   | $ | 81,220 |   |

 
| (1) | See "Net Income Attributable to FBL FinancialGroup, Inc." above for additional details on our operating income adjustments. |
|-----|-----------------------------------------------------------------------------------------------------------------------------|

 

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

 

***Traditional Annuity - Exclusive Distribution Segment***

 
|                                                   | Three months ended September 30, |   | Nine months ended September 30, |
|--------------------------------------------------------|---------------------------------------|--------|--------------------------------------|
|                                                   |                                  | 2009   |                                 |   |   | 2008 |   |   |   | 2009 |   |   |   | 2008 |   |
|                                                   | (Dollars inthousands)                 |
| Pre-tax operatingincome                                |                                  |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Operatingrevenues:                                     |                                  |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest sensitive and index product charges and other | $                                     | 210    |                                 |   | $ | 213 |   |   | $ | 704 |   |   | $ | 819 |   |
| Net investment income                                  |                                  | 39,610 |                                 |   |   | 36,634 |   |   |   | 115,822 |   |   |   | 107,842 |   |
| Derivativeloss                                         |                                  | (1,302 | )                                    |   |   | (1,081 | ) |   |   | (3,828 | ) |   |   | (2,196 | ) |
|                                                   |                                  | 38,518 |                                 |   |   | 35,766 |   |   |   | 112,698 |   |   |   | 106,465 |   |
| Benefits and expenses                                  |                                  | 25,904 |                                 |   |   | 29,901 |   |   |   | 85,084 |   |   |   | 85,744 |   |
| Pre-tax operating income                               | $                                     | 12,614 |                                 |   | $ | 5,865 |   |   | $ | 27,614 |   |   | $ | 20,721 |   |
|                                                   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Other data                                             |                                  |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Annuity premiums collected,direct                      | $                                     | 73,038 |                                 |   | $ | 73,667 |   |   | $ | 242,807 |   |   | $ | 183,440 |   |
| Policyliabilities and accruals, end of period          |                                  |   |                                 |   |   |   |   |   |   | 2,496,366 |   |   |   | 2,330,364 |   |

 
| Individual deferred annuity spread:                  |   |   |   |   |   |   |    |   |   |   |    |
|------------------------------------------------------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|---------|
| Weighted average yield on cash and invested assets   |   |   |   |   |   | 6.18   |  % |   |   | 6.06   |  % |
| Weighted average interest crediting rate/index costs |   |   |   |   |   | 3.96   |  % |   |   | 4.09   |  % |
| Spread                                               |   |   |   |   |   | 2.22   |  % |   |   | 1.97   |  % |
|                                                 |   |   |   |   |   |   |    |   |   |   |    |
| Individual traditional annuity withdrawal rate       |   |   |   |   |   | 4.1    |  % |   |   | 3.2    |  % |

 

 

-34-Pre-tax operating income for the Exclusive Annuity segment increased115.1% in the third quarter of 2009 to $12.6 million and 33.3% in the nine months ended September 30, 2009 to $27.6 million primarily due to the impact of unlocking deferred policy acquisition costs and an increase in spreads and the volume of business in force.Unlocking decreased amortization by $3.5 million in the third quarter of 2009 compared to an increase in amortization of $0.6 million in the third quarter of 2008. Forthe nine month period, the impact of unlocking is partially offset by a $2.6 million increase in amortization of deferred policy acquisition costs primarily due tochanges in expected profits on the underlying business.

 

The change in the weighted average yield on cash and invested assets is primarilyattributable to an increase in yields on new investments and a $0.9 million increase in fees from bond calls, tender offers and mortgage loan prepayments and thechange of net discount accretion on mortgage and asset-backed securities. These increases were partially offset by the cost of our interest rate swap programwhich totaled $3.6 million for the nine-months in 2009 compared to $2.0million for the 2008 period. See Note 3 to our consolidated financial statements for additional details on our interest rate swaps. The weighted average interestcrediting rate decreased due to decreases in the interest crediting rates on a significant portion of ourannuity portfolio during 2009 and the last part of 2008. Contributing to the decrease in the weighted average crediting rate is a shift of business to a new moneyproduct that has a short guaranteed interest period and a lower crediting rate.

 

Premiums collected increased 32.4% inthe nine months ended September 30, 2009 to $242.8million. The amount of traditional annuity premiums collected is highlydependent upon the relationship between the current crediting rates on our products and the crediting rates available on competing products, including bank-offeredcertificates of deposit. We believe the increase in annuity premiums for the nine-month period is due to lower short-term market interest rates making certificates ofdeposit and other short-term investments less attractive in relation to our traditional annuities during the first six months of 2009. 

 

***Traditional Annuity - Independent Distribution Segment***

 
|                                           | Three months ended September 30, |    | Nine months endedSeptember 30, |
|------------------------------------------------|---------------------------------------|---------|-------------------------------------|
|                                           |                                  | 2009    |                                |   |   | 2008 |   |   |   | 2009 |   |   |   | 2008 |   |
|                                           | (Dollars in thousands)                |
| Pre-tax operating income                       |                                  |    |                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Operatingrevenues:                             |                                  |    |                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest sensitive and index product charges   | $                                     | 10,444  |                                |   | $ | 8,754 |   |   | $ | 56,301 |   |   | $ | 21,684 |   |
| Net investment income                          |                                  | 99,600  |                                |   |   | 103,273 |   |   |   | 306,752 |   |   |   | 288,644 |   |
| Derivative loss                                |                                  | (26,036 | )                                   |   |   | (23,529 | ) |   |   | (85,745 | ) |   |   | (62,494 | ) |
|                                           |                                  | 84,008  |                                |   |   | 88,498 |   |   |   | 277,308 |   |   |   | 247,834 |   |
| Benefits and expenses                          |                                  | 79,400  |                                |   |   | 77,959 |   |   |   | 260,713 |   |   |   | 220,605 |   |
| Pre-tax operating income                       | $                                     | 4,608   |                                |   | $ | 10,539 |   |   | $ | 16,595 |   |   | $ | 27,229 |   |
|                                           |                                  |    |                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Other data                                     |                                  |    |                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Annuitypremiums collected, independent channel |                                  |    |                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate annuities                           | $                                     | 16,021  |                                |   | $ | 348,886 |   |   | $ | 329,135 |   |   | $ | 848,023 |   |
| Index annuities                                |                                  | 31,396  |                                |   |   | 147,229 |   |   |   | 242,262 |   |   |   | 512,985 |   |
| Annuity premiums collected, assumed            |                                  | 284     |                                |   |   | 397 |   |   |   | 1,155 |   |   |   | 2,171 |   |
| Policy liabilities and accruals, end of period |                                  |    |                                |   |   |   |   |   |   | 7,408,226 |   |   |   | 7,729,036 |   |

 
| Individualdeferred annuity spread:                 |   |   |   |   |   |   |    |   |   |   |    |
|----------------------------------------------------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|---------|
| Weighted average yield on cash and invested assets |   |   |   |   |   | 6.05   |  % |   |   | 5.96   |  % |
| Weighted average interest crediting rate/indexcost |   |   |   |   |   | 4.06   |  % |   |   | 3.77   |  % |
| Spread                                             |   |   |   |   |   | 1.99   |  % |   |   | 2.19   |  % |
|                                               |   |   |   |   |   |   |    |   |   |   |    |
| Individual traditional annuity withdrawal rate     |   |   |   |   |   | 17.9   |  % |   |   | 6.7    |  % |

 

Pre-tax operating income for theIndependent Annuity segment decreased 56.3% in the third quarter of 2009 to $4.6 million and decreased 39.1% in the nine months ended September 30, 2009 to $16.6 million. The decrease for the third quarter is primarily due to a decrease in spreads earned and increasedexpenses. The decrease for the nine-month period is also driven by the impact of increased surrender activity from the EquiTrust Life independent distribution channel,partially offset by an increase in the average volume of business in force. The volume of business in force increased primarily due to sales of our EquiTrust Lifeindependent distribution business during 2008. The average aggregate account value for annuity contracts in force in the Independent Annuity segment totaled $7,427.4million for the nine months ended September 30, 2009 and $7,173.3 million for the 2008 period.

 

 

-35-The increases in interest sensitive and index product charges is due to an increase in surrender charges due to the impact of MVAs onour direct fixed annuity products. In 2009, gross surrender charges were partially offset by the impact of the MVA feature. This activity caused increased withdrawalrates. See additional details on the impact of the MVA under "Impact of Recent Business Environment" and "Premiums and Product Charges"above.

 

The decrease in net investment incomefor the third quarter of 2009 is attributable to a decrease in average invested assets due to the increased surrender activity. Net investment income for thenine-month period increased due to growth in invested assets from net premium inflows and a $2.6 million increase in fee income from bond calls, tender offers andmortgage loan prepayments and the change of net discount accretion on mortgage and asset-backed securities. The increase in derivative loss is primarily due to adecrease in proceeds from call option settlements. Call option settlements totaled $0.8 million for the nine-month period in 2009 and $34.9 million for the 2008period. The increased proceeds in derivative loss was partially offset by a $10.9 million decrease in option amortization costs due to a decrease in the averageaccount value of index annuities in force as described under "Derivative Income (Loss)" above. 

 

Benefits and expenses for thenine-month period increased due to growth in the volume of business in force and an increase in amortization of deferred policy acquisition costs, partially offset bya reduction in index credits. Amortization of deferred policy acquisition costs and deferred sales inducements increased as a result of the increased surrenderactivity. Index credits totaled $4.8 million for the nine month period in 2009, compared to $33.5 million in the 2008 period due to less appreciation in the underlyingmarket indices. 

 

The weighted average yield increasedprimarily due to the increase in fee income described above. The decrease in spread is primarily due to a shift in business to ourmulti-year guaranteed annuity which has a lower spread target than other products in our portfolio. In addition, we retained higher amounts of liquid assets andincurred additional costs from being in an overhedged position due to the increase in surrender activity, which further reduced our spreads.

 

***Traditional and Universal Life Insurance Segment***

 
|                                                       | Three months ended September 30, |   | Nine months ended September 30, |
|------------------------------------------------------------|---------------------------------------|--------|--------------------------------------|
|                                                       |                                  | 2009   |                                 |   |   | 2008 |   |   |   | 2009 |   |   |   | 2008 |   |
|                                                       | (Dollars in thousands)                |
| Pre-tax operating income                                   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Operatingrevenues:                                         |                                  |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest sensitive product charges                         | $                                     | 12,943 |                                 |   | $ | 12,229 |   |   | $ | 37,553 |   |   | $ | 35,431 |   |
| Traditional life insurance premiums and other income       |                                  | 37,849 |                                 |   |   | 36,263 |   |   |   | 116,805 |   |   |   | 111,172 |   |
| Net investmentincome                                       |                                  | 35,542 |                                 |   |   | 36,060 |   |   |   | 107,162 |   |   |   | 107,529 |   |
|                                                       |                                  | 86,334 |                                 |   |   | 84,552 |   |   |   | 261,520 |   |   |   | 254,132 |   |
| Benefits andexpenses                                       |                                  | 69,656 |                                 |   |   | 70,912 |   |   |   | 210,514 |   |   |   | 216,664 |   |
| Pre-tax operating income                                   | $                                     | 16,678 |                                 |   | $ | 13,640 |   |   | $ | 51,006 |   |   | $ | 37,468 |   |
|                                                       |                                  |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Other data                                                 |                                  |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Life premiums collected, net of reinsurance                | $                                     | 51,742 |                                 |   | $ | 49,779 |   |   | $ | 158,258 |   |   | $ | 151,644 |   |
| Policy liabilities and accruals, end of period             |                                  |   |                                 |   |   |   |   |   |   | 2,258,344 |   |   |   | 2,213,136 |   |
| Direct life insurance in force, end ofperiod (in millions) |                                  |   |                                 |   |   |   |   |   |   | 37,704 |   |   |   | 34,994 |   |

 
| Interestsensitive life insurance spread:           |   |   |   |   |   |   |    |   |   |   |    |
|----------------------------------------------------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|---------|
| Weighted average yield on cash and invested assets |   |   |   |   |   | 6.67   |  % |   |   | 6.63   |  % |
| Weighted average interest crediting rate           |   |   |   |   |   | 4.37   |  % |   |   | 4.44   |  % |
| Spread                                             |   |   |   |   |   | 2.30   |  % |   |   | 2.19   |  % |

 

Pre-tax operating income for the Traditional and Universal Life Insurance segment increased 22.3% in the third quarter of 2009 to $16.7million and 36.1% in the nine months ended September 30, 2009 to $51.0 million. These increases are primarily due to anincrease in the volume of business in force and a decrease in death benefits. 

 

Traditional life insurance premiums increased primarily due to sales of life products by our Farm Bureau Life agency force. Death benefitsdecreased $2.8 million in the third quarter of 2009 and $5.8 million for the nine-month period. In addition, changes in reserve estimates in 2008 decreased term life reserves $1.6 million for the nine-month period. 

 

The change in spreads is primarily due to a decrease in weighted average interestcrediting rate due to rate changes made in the first quarter of 2009 and increased sales of our universal life secondary guarantee product, which has a lower creditingrate and higher spread than the traditional universal life products. 

 

----

***Variable Segment***

 
|                                                       | Three months ended September 30, |   | Nine months endedSeptember 30, |
|------------------------------------------------------------|---------------------------------------|--------|-------------------------------------|
|                                                       |                                  | 2009   |                                |   |   | 2008 |   |   |   | 2009 |   |   |   | 2008 |   |
|                                                       | (Dollars in thousands)                |
| Pre-tax operating income (loss)                            |                                  |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Operatingrevenues:                                         |                                  |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest sensitive product charges                         | $                                     | 11,313 |                                |   | $ | 11,735 |   |   | $ | 34,713 |   |   | $ | 36,236 |   |
| Net investment income                                      |                                  | 3,924  |                                |   |   | 3,565 |   |   |   | 11,900 |   |   |   | 10,544 |   |
| Other income                                               |                                  | 466    |                                |   |   | 486 |   |   |   | 1,581 |   |   |   | 1,502 |   |
|                                                       |                                  | 15,703 |                                |   |   | 15,786 |   |   |   | 48,194 |   |   |   | 48,282 |   |
| Benefits and expenses                                      |                                  | 9,530  |                                |   |   | 16,296 |   |   |   | 40,088 |   |   |   | 45,944 |   |
| Pre-tax operating income (loss)                            | $                                     | 6,173  |                                |   | $ | (510 | ) |   | $ | 8,106 |   |   | $ | 2,338 |   |
|                                                       |                                  |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Other data                                                 |                                  |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Variable premiums collected, net of reinsurance            | $                                     | 26,809 |                                |   | $ | 30,943 |   |   | $ | 76,778 |   |   | $ | 111,737 |   |
| Policyliabilities and accruals, end of period              |                                  |   |                                |   |   |   |   |   |   | 259,638 |   |   |   | 249,338 |   |
| Separate account assets, end of period                     |                                  |   |                                |   |   |   |   |   |   | 677,142 |   |   |   | 718,501 |   |
| Direct lifeinsurance in force, end of period (in millions) |                                  |   |                                |   |   |   |   |   |   | 7,427 |   |   |   | 7,756 |   |

 

Pre-tax operating income for theVariable segment increased to $6.2 million in the third quarter of 2009 and $8.1million in the nine months ended September 30, 2009. Theseincreases are primarily due to the impact of market performance on amortization of deferred acquisition cost and improved mortality experience. 

 

Benefits and expenses decreased 41.5% to $9.5 million in the third quarter of 2009 due to a $3.4 million decrease in deferred policyacquisition cost amortization primarily resulting from the impact of positive separate account performance and a $3.0 million decrease in death benefits due to fewerclaims. For the nine-months ended September 30, 2009, benefits and expenses decreased 12.7% to $40.1 million due to a $4.1 million decrease in amortization ofdeferred policy acquisition costs and a $1.8 million decrease in death benefits.

 

Variable premiums tend to vary with thevolatility, performance of and confidence level in the equity markets as well as crediting and interest rates on competing products, including fixed rate annuities andbank-offered certificates of deposit. 

 

***Corporate and Other Segment***

 
|                       | Three months ended September 30, |   | Nine months endedSeptember 30, |
|----------------------------|---------------------------------------|--------|-------------------------------------|
|                       |                                  | 2009   |                                |   |   | 2008 |   |   |   | 2009 |   |   |   | 2008 |   |
|                       | (Dollars in thousands)                |
| Pre-tax operating loss     |                                  |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Operatingrevenues:         |                                  |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Net investment income      | $                                     | 1,492  |                                |   | $ | 2,356 |   |   | $ | 5,373 |   |   | $ | 7,996 |   |
| Derivative loss            |                                  | (414   | )                                   |   |   | — |   |   |   | (1,275 | ) |   |   | — |   |
| Otherincome                |                                  | 3,849  |                                |   |   | 6,055 |   |   |   | 11,853 |   |   |   | 17,712 |   |
|                       |                                  | 4,927  |                                |   |   | 8,411 |   |   |   | 15,951 |   |   |   | 25,708 |   |
| Interest expense           |                                  | 6,116  |                                |   |   | 4,464 |   |   |   | 19,164 |   |   |   | 13,363 |   |
| Benefits andother expenses |                                  | 4,428  |                                |   |   | 5,992 |   |   |   | 15,720 |   |   |   | 18,979 |   |
|                       |                                  | (5,617 | )                                   |   |   | (2,045 | ) |   |   | (18,933 | ) |   |   | (6,634 | ) |
| Minorityinterest           |                                  | 33     |                                |   |   | 15 |   |   |   | 125 |   |   |   | 31 |   |
| Equity income, before tax  |                                  | 216    |                                |   |   | 132 |   |   |   | 463 |   |   |   | 67 |   |
| Pre-tax operating loss     | $                                     | (5,368 | )                                   |   | $ | (1,898 | ) |   | $ | (18,345 | ) |   | $ | (6,536 | ) |

 

Pre-tax operating lossincreased 182.8% to $5.4 million for the third quarter of 2009 and180.7% to $18.3 million for the nine-month period primarilydue to an increase in interest expense, lower net investment income and a decrease in operating results of our non-insurance subsidiaries. Interest expense increasedin the 2009 periods due to an increase in our average debt outstanding resulting from additional borrowings. Net investment income decreased primarily due to adecrease in short-term interest rates and our desire to maintain a more liquid portfolio in 2009. Derivative loss consists of net interestexpense on an interest rate swap purchased to hedge our previously outstanding line of credit. See Note 3 to our consolidated financial statements for additionalinformation on this interest rate swap. Other income and other expense primarily relate to operating results of our non-insurance subsidiaries, and the reduction in2009 is primarily due to a decrease in leasing activities.

 

----

**FinancialCondition**

 

**Investments**

 

Our total investment portfolio increased 9.5% to $11,884.3 million at September 30, 2009 compared to $10,854.1 million at December 31, 2008. This increase isprimarily the result of a $1,103.9 million decrease in the net unrealized depreciation of fixed maturity securities during 2009 to a net unrealized loss of $435.8million at September 30, 2009. This decrease is principally due to the credit spreads tightening and overall market improvements during the second and thirdquarters, partially offset by the adoption of a new accounting rule in 2009, which required that non-credit impairments be recorded in accumulated other comprehensiveloss. The impact of this adoption increased unrealized losses $27.6 million in 2009. Volatile and illiquid market conditions in 2008 and early 2009 led to wide creditspreads and resulted in significant unrealized losses for our portfolio. As discussed in the "Impact of Recent Business Environment" section above, financial marketconditions and our unrealized loss position improved in the second and third quarters of 2009. However, credit defaults and downgrades, moderately wide credit spreadsand certain volatile market sectors continue to impact our investment portfolio. Details regarding the investment impairments are discussed above in the "RealizedLosses on Investments" section under "Results of Operations." Additional details regarding securities in an unrealized loss position at September 30, 2009 areincluded in the discussion that follows and in Note 2 to our consolidated financial statements.

 

We manage our investment portfolio witha strategy designed to achieve superior risk-adjusted returns consistent with the investment philosophy of maintaining a largely investment grade portfolio andproviding adequate liquidity for obligations to policyholders and other requirements.

 

***Investment PortfolioSummary**** *

 
|                                        | September 30, 2009 |           | December 31, 2008 |
|---------------------------------------------|-------------------------|----------------|------------------------|
|                                        |                    | Carrying Value |                   |   |   | Percent |   |   |   | Carrying Value |   |   |   | Percent |   |
|                                        | (Dollars in thousands)  |
| Fixed maturities - available for sale:      |                    |           |                   |   |   |   |   |   |   |   |   |   |   |   |   |
| Public                                      | $                       | 8,162,460      |                   |   |   | 68.7 |  % |   | $ | 7,406,964 |   |   |   | 68.3 |  % |
| 144A privateplacement                       |                    | 1,312,987      |                   |   |   | 11.0 |   |   |   | 1,164,417 |   |   |   | 10.7 |   |
| Private placement                           |                    | 460,900        |                   |   |   | 3.9 |   |   |   | 394,062 |   |   |   | 3.6 |   |
| Total fixed maturities - available for sale |                    | 9,936,347      |                   |   |   | 83.6 |   |   |   | 8,965,443 |   |   |   | 82.6 |   |
| Equity securities                           |                    | 58,990         |                   |   |   | 0.5 |   |   |   | 44,863 |   |   |   | 0.4 |   |
| Mortgage loans on real estate               |                    | 1,306,678      |                   |   |   | 11.0 |   |   |   | 1,381,854 |   |   |   | 12.8 |   |
| Derivative instruments                      |                    | 52,089         |                   |   |   | 0.4 |   |   |   | 12,933 |   |   |   | 0.1 |   |
| Investment real estate                      |                    | 16,705         |                   |   |   | 0.2 |   |   |   | 2,559 |   |   |   | — |   |
| Policy loans                                |                    | 185,800        |                   |   |   | 1.6 |   |   |   | 182,421 |   |   |   | 1.7 |   |
| Other long-term investments                 |                    | 1,780          |                   |   |   | — |   |   |   | 1,527 |   |   |   | — |   |
| Short-term investments                      |                    | 325,898        |                   |   |   | 2.7 |   |   |   | 262,459 |   |   |   | 2.4 |   |
| Total investments                           | $                       | 11,884,287     |                   |   |   | 100.0 |  % |   | $ | 10,854,059 |   |   |   | 100.0 |  % |

 

As of September 30, 2009, 93.2% (based on carrying value) of the available-for-sale fixed maturity securities were investment gradedebt securities, defined as being in the highest two National Association of Insurance Commissioners (NAIC) designations. Non-investment grade debt securitiesgenerally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and morevulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than forinvestment grade debt securities. We regularly review the percentage of our portfolio that is invested in non-investment grade debt securities (NAIC designations 3through 6). As of September 30, 2009, the investment in non-investment grade debt was 6.8% of available-for-sale fixed maturity securities. At that time, nosingle non-investment grade holding exceeded 0.2% of total investments. 

-38-
| Credit Quality by NAIC Designation and Standard & Poor's (S&P) RatingEquivalents |
|------------------------------------------------------------------------------------------|
|                                                                                     |   |   |   |   |   |   |
|                                                                                     |   |   |   | September 30, 2009 |   | December 31, 2008 |
| NAIC Designation                                                                         |   | Equivalent S&PRatings (1) |   |   | Carrying Value |   |   |   | Percent |   |   |   | Carrying Value |   |   |   | Percent |   |
|                                                                                     |   |   |   | (Dollars in thousands) |
| 1                                                                                        |   | AAA, AA, A |   | $ | 5,643,346 |   |   |   | 56.8 |  % |   | $ | 5,382,110 |   |   |   | 60.0 |  % |
| 2                                                                                        |   | BBB |   |   | 3,611,395 |   |   |   | 36.4 |   |   |   | 3,243,034 |   |   |   | 36.2 |   |
|                                                                                     |   | Total investment grade |   |   | 9,254,741 |   |   |   | 93.2 |   |   |   | 8,625,144 |   |   |   | 96.2 |   |
| 3                                                                                        |   | BB |   |   | 431,365 |   |   |   | 4.3 |   |   |   | 244,814 |   |   |   | 2.7 |   |
| 4                                                                                        |   | B |   |   | 118,074 |   |   |   | 1.2 |   |   |   | 40,565 |   |   |   | 0.5 |   |
| 5                                                                                        |   | CCC |   |   | 89,360 |   |   |   | 0.9 |   |   |   | 43,064 |   |   |   | 0.5 |   |
| 6                                                                                        |   | In or neardefault |   |   | 42,807 |   |   |   | 0.4 |   |   |   | 11,856 |   |   |   | 0.1 |   |
|                                                                                     |   | Total below investment grade |   |   | 681,606 |   |   |   | 6.8 |   |   |   | 340,299 |   |   |   | 3.8 |   |
|                                                                                     |   | Total fixed maturities - available for sale |   | $ | 9,936,347 |   |   |   | 100.0 |  % |   | $ | 8,965,443 |   |   |   | 100.0 |  % |

 
| (1) | The Securities Valuation Office of the NAIC generally rates private placement securities. Comparisons betweenNAIC designations and S&P ratings are published by the NAIC. S&P has not rated some of the fixed maturities in ourportfolio. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The percentage of securities classifiedas investment grade decreased during 2009 due to the downgrade of ratings by the rating agencies. During 2009, investment grade fixed maturity securities with acarrying value totaling $529.2 million were downgraded to non-investment grade primarily due to deteriorating financial conditions of the underlying issuers orcollateral. During the third quarter we began taking steps to reduce the credit risk and portfolio capital charges through selective sales of lower rated securities.This process considers current capital charges for a security, potential capital gain or loss on sale, probability of default, estimated future work-out value of thesecurity and current market yield relative to reinvestment in higher rated securities.

 
| Gross Unrealized Gains and Gross Unrealized Losses by Internal IndustryClassification |
|---------------------------------------------------------------------------------------|
|                                                                                  |   |
|                                                                                  | September 30,2009 |
|                                                                                  |   | Total Carrying Value |   |   |   | Carrying Value of Securities with Gross Unrealized Gains |   |   |   | Gross Unrealized Gains |   |   |   | ****Carrying Value ofSecurities****

****with Gross UnrealizedLosses**** |   |   |   | GrossUnrealized Losses |   |
|                                                                                  | (Dollars in thousands) |
| Corporate securities:                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Financial services                                                                    | $ | 1,450,982 |   |   | $ | 395,457 |   |   | $ | 15,539 |   |   | $ | 1,055,525 |   |   | $ | (214,170 | ) |
| Manufacturing                                                                         |   | 1,292,124 |   |   |   | 979,862 |   |   |   | 62,973 |   |   |   | 312,262 |   |   |   | (38,411 | ) |
| Mining                                                                                |   | 549,730 |   |   |   | 431,770 |   |   |   | 29,766 |   |   |   | 117,960 |   |   |   | (6,910 | ) |
| Retail trade                                                                          |   | 106,145 |   |   |   | 55,522 |   |   |   | 3,662 |   |   |   | 50,623 |   |   |   | (8,514 | ) |
| Services                                                                              |   | 208,119 |   |   |   | 164,808 |   |   |   | 11,705 |   |   |   | 43,311 |   |   |   | (4,696 | ) |
| Transportation                                                                        |   | 194,284 |   |   |   | 126,318 |   |   |   | 8,760 |   |   |   | 67,966 |   |   |   | (5,373 | ) |
| Utilities                                                                             |   | 1,427,446 |   |   |   | 1,176,408 |   |   |   | 82,087 |   |   |   | 251,038 |   |   |   | (16,065 | ) |
| Other                                                                                 |   | 191,787 |   |   |   | 152,201 |   |   |   | 8,967 |   |   |   | 39,586 |   |   |   | (2,685 | ) |
| Total corporate securities                                                            |   | 5,420,617 |   |   |   | 3,482,346 |   |   |   | 223,459 |   |   |   | 1,938,271 |   |   |   | (296,824 | ) |
| Mortgage and asset-backed securities                                                  |   | 2,768,374 |   |   |   | 1,367,018 |   |   |   | 59,747 |   |   |   | 1,401,356 |   |   |   | (354,800 | ) |
| United States Government and agencies                                                 |   | 153,642 |   |   |   | 138,945 |   |   |   | 14,108 |   |   |   | 14,697 |   |   |   | (136 | ) |
| State, municipal and other governments                                                |   | 1,593,714 |   |   |   | 769,495 |   |   |   | 26,542 |   |   |   | 824,219 |   |   |   | (107,855 | ) |
| Total                                                                                 | $ | 9,936,347 |   |   | $ | 5,757,804 |   |   | $ | 323,856 |   |   | $ | 4,178,543 |   |   | $ | (759,615 | ) |

 

-39-

 
|                                   | December 31, 2008 |
|----------------------------------------|------------------------|
|                                   |                   | Total Carrying Value |   |   |   | Carrying Value of Securities with Gross Unrealized Gains |   |   |   | Gross Unrealized Gains |   |   |   | ****Carrying Value ofSecurities****

****with Gross UnrealizedLosses**** |   |   |   | GrossUnrealized Losses |   |
|                                   | (Dollars inthousands)  |
| Corporate securities:                  |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Financial services                     | $                      | 1,246,895 |   |   | $ | 114,067 |   |   | $ | 4,806 |   |   | $ | 1,132,828 |   |   | $ | (547,594 | ) |
| Manufacturing                          |                   | 1,211,102 |   |   |   | 289,093 |   |   |   | 11,187 |   |   |   | 922,009 |   |   |   | (183,439 | ) |
| Mining                                 |                   | 469,935 |   |   |   | 24,521 |   |   |   | 1,770 |   |   |   | 445,414 |   |   |   | (73,562 | ) |
| Retail trade                           |                   | 104,379 |   |   |   | 24,170 |   |   |   | 569 |   |   |   | 80,209 |   |   |   | (16,819 | ) |
| Services                               |                   | 184,528 |   |   |   | 42,850 |   |   |   | 1,164 |   |   |   | 141,678 |   |   |   | (28,796 | ) |
| Transportation                         |                   | 177,844 |   |   |   | 52,034 |   |   |   | 6,849 |   |   |   | 125,810 |   |   |   | (20,253 | ) |
| Utilities                              |                   | 1,279,641 |   |   |   | 299,537 |   |   |   | 16,623 |   |   |   | 980,104 |   |   |   | (135,654 | ) |
| Other                                  |                   | 159,831 |   |   |   | 52,252 |   |   |   | 3,209 |   |   |   | 107,579 |   |   |   | (21,275 | ) |
| Total corporate securities             |                   | 4,834,155 |   |   |   | 898,524 |   |   |   | 46,177 |   |   |   | 3,935,631 |   |   |   | (1,027,392 | ) |
| Mortgage and asset-backed securities   |                   | 2,569,769 |   |   |   | 975,193 |   |   |   | 46,573 |   |   |   | 1,594,576 |   |   |   | (478,994 | ) |
| United States Government and agencies  |                   | 250,893 |   |   |   | 217,379 |   |   |   | 12,891 |   |   |   | 33,514 |   |   |   | (4,031 | ) |
| State, municipal and other governments |                   | 1,310,626 |   |   |   | 142,107 |   |   |   | 4,565 |   |   |   | 1,168,519 |   |   |   | (139,430 | ) |
| Total                                  | $                      | 8,965,443 |   |   | $ | 2,233,203 |   |   | $ | 110,206 |   |   | $ | 6,732,240 |   |   | $ | (1,649,847 | ) |

 

***Credit Quality of Available-for-Sale Fixed Maturity Securities with Unrealized Losses***

 
|             |   |                         |   | September 30, 2009 |
|------------------|--------|------------------------------|--------|-------------------------|
| NAIC Designation |   | Equivalent S&PRatings    |   |                    | Carrying Value of Securities with Gross Unrealized Losses |   |   |   | Percent of Total |   |   |   | Gross UnrealizedLosses |   |   |   | Percent of Total |   |
|             |   |                         |   | (Dollars in thousands)  |
| 1                |   | AAA, AA, A              |   | $                       | 2,192,938 |   |   |   | 52.5 |  % |   | $ | (299,810 | ) |   |   | 39.5 |  % |
| 2                |   | BBB                          |   |                    | 1,374,623 |   |   |   | 32.9 |   |   |   | (169,887 | ) |   |   | 22.3 |   |
|             |   | Totalinvestment grade        |   |                    | 3,567,561 |   |   |   | 85.4 |   |   |   | (469,697 | ) |   |   | 61.8 |   |
| 3                |   | BB                           |   |                    | 369,535 |   |   |   | 8.8 |   |   |   | (68,818 | ) |   |   | 9.1 |   |
| 4                |   | B                            |   |                    | 114,898 |   |   |   | 2.7 |   |   |   | (85,473 | ) |   |   | 11.3 |   |
| 5                |   | CCC                          |   |                    | 86,845 |   |   |   | 2.1 |   |   |   | (84,357 | ) |   |   | 11.1 |   |
| 6                |   | In or near default           |   |                    | 39,704 |   |   |   | 1.0 |   |   |   | (51,270 | ) |   |   | 6.7 |   |
|             |   | Total below investment grade |   |                    | 610,982 |   |   |   | 14.6 |   |   |   | (289,918 | ) |   |   | 38.2 |   |
|             |   | Total                        |   | $                       | 4,178,543 |   |   |   | 100.0 |  % |   | $ | (759,615 | ) |   |   | 100.0 |  % |

 
|             |   |                         |   | December 31, 2008 |
|------------------|--------|------------------------------|--------|------------------------|
| NAIC Designation |   | Equivalent S&PRatings    |   |                   | Carrying Value of Securities with Gross Unrealized Losses |   |   |   | Percent of Total |   |   |   | GrossUnrealized Losses |   |   |   | Percentof Total |   |
|             |   |                         |   | (Dollars in thousands) |
| 1                |   | AAA, AA, A              |   | $                      | 3,545,103 |   |   |   | 52.7 |  % |   | $ | (740,675 | ) |   |   | 44.9 |  % |
| 2                |   | BBB                          |   |                   | 2,890,656 |   |   |   | 42.9 |   |   |   | (738,512 | ) |   |   | 44.8 |   |
|             |   | Totalinvestment grade        |   |                   | 6,435,759 |   |   |   | 95.6 |   |   |   | (1,479,187 | ) |   |   | 89.7 |   |
| 3                |   | BB                           |   |                   | 212,438 |   |   |   | 3.1 |   |   |   | (70,545 | ) |   |   | 4.3 |   |
| 4                |   | B                            |   |                   | 37,399 |   |   |   | 0.6 |   |   |   | (45,228 | ) |   |   | 2.7 |   |
| 5                |   | CCC                          |   |                   | 40,308 |   |   |   | 0.6 |   |   |   | (47,615 | ) |   |   | 2.9 |   |
| 6                |   | In or neardefault            |   |                   | 6,336 |   |   |   | 0.1 |   |   |   | (7,272 | ) |   |   | 0.4 |   |
|             |   | Total below investment grade |   |                   | 296,481 |   |   |   | 4.4 |   |   |   | (170,660 | ) |   |   | 10.3 |   |
|             |   | Total                        |   | $                      | 6,732,240 |   |   |   | 100.0 |  % |   | $ | (1,649,847 | ) |   |   | 100.0 |  % |

 

-40-

 
| Available-For-Sale Fixed Maturity Securities with Unrealized Losses by Length ofTime |
|--------------------------------------------------------------------------------------|
|                                                                                 |   |   |   |
|                                                                                 |   |   | September 30, 2009 |
|                                                                                 |   |   | Amortized Cost |   | Gross Unrealized Losses |
|                                                                                 | **Number**

**ofIssuers** |   |   | **MarketValue**

**is Less than 75% of Cost** |   |   |   | Market Value is75% or Greater than Cost |   |   |   | Market Value is Less than 75% of Cost |   |   |   | Market Value is 75% or Greater than Cost |   |
| Three months or less                                                                 | 9 |   | $ | 43 |   |   | $ | 40,296 |   |   | $ | (18 | ) |   | $ | (366 | ) |
| Greater than three months to six months                                              | 15 |   |   | 23,112 |   |   |   | 41,494 |   |   |   | (13,686 | ) |   |   | (3,101 | ) |
| Greater than six months to nine months                                               | 16 |   |   | 20,168 |   |   |   | 36,129 |   |   |   | (8,970 | ) |   |   | (2,144 | ) |
| Greater than nine months to twelve months                                            | 51 |   |   | 14,399 |   |   |   | 254,838 |   |   |   | (4,095 | ) |   |   | (14,420 | ) |
| Greater than twelve months                                                           | 467 |   |   | 1,035,681 |   |   |   | 3,471,998 |   |   |   | (421,079 | ) |   |   | (291,736 | ) |
| Total                                                                                |   |   | $ | 1,093,403 |   |   | $ | 3,844,755 |   |   | $ | (447,848 | ) |   | $ | (311,767 | ) |

 
|                                      |                       |   | December 31, 2008 |
|-------------------------------------------|----------------------------|--------|------------------------|
|                                      |                       |   | AmortizedCost          |   | Gross UnrealizedLosses |
|                                      | **Number**

**of Issuers** |   |                   | **MarketValue**

**is Less than 75% of Cost** |   |   |   | Market Value is75% or Greater than Cost |   |   |   | Market Value is Less than 75% of Cost |   |   |   | Market Value is 75% or Greater than Cost |   |
| Three months or less                      | 170                        |   | $                      | 31,774 |   |   | $ | 784,689 |   |   | $ | (12,658 | ) |   | $ | (51,824 | ) |
| Greater than three months to six months   | 193                        |   |                   | 75,356 |   |   |   | 1,024,158 |   |   |   | (28,791 | ) |   |   | (82,320 | ) |
| Greater than six months to ninemonths     | 262                        |   |                   | 182,184 |   |   |   | 1,140,978 |   |   |   | (56,719 | ) |   |   | (111,013 | ) |
| Greater than nine months to twelve months | 143                        |   |                   | 288,140 |   |   |   | 780,947 |   |   |   | (103,539 | ) |   |   | (97,928 | ) |
| Greater than twelve months                | 455                        |   |                   | 1,733,949 |   |   |   | 2,339,912 |   |   |   | (785,180 | ) |   |   | (319,875 | ) |
| Total                                     |                       |   | $                      | 2,311,403 |   |   | $ | 6,070,684 |   |   | $ | (986,887 | ) |   | $ | (662,960 | ) |

 

***Available-For-Sale Fixed MaturitySecurities with Unrealized Losses by Maturity Date***

 
|                                   | September 30, 2009 |                                                      | December 31, 2008 |
|----------------------------------------|-------------------------|-----------------------------------------------------------|------------------------|
|                                   |                    | Carrying Value of Securities with Gross Unrealized Losses |                   |   |   | ****Gross****

****Unrealized****

****Losses**** |   |   |   | Carrying Value of Securities with GrossUnrealized Losses |   |   |   | ****Gross****

****Unrealized****

****Losses**** |   |
|                                   | (Dollars in thousands)  |
| Due in one year or less                | $                       | 9,801                                                     |                   |   | $ | (267 | ) |   | $ | 43,483 |   |   | $ | (4,985 | ) |
| Due after one year through five years  |                    | 283,893                                                   |                   |   |   | (38,344 | ) |   |   | 791,636 |   |   |   | (143,559 | ) |
| Due after five years through ten years |                    | 923,153                                                   |                   |   |   | (117,410 | ) |   |   | 2,037,451 |   |   |   | (514,869 | ) |
| Due after tenyears                     |                    | 1,555,565                                                 |                   |   |   | (248,569 | ) |   |   | 2,260,568 |   |   |   | (506,966 | ) |
|                                   |                    | 2,772,412                                                 |                   |   |   | (404,590 | ) |   |   | 5,133,138 |   |   |   | (1,170,379 | ) |
| Mortgage and asset-backed securities   |                    | 1,401,356                                                 |                   |   |   | (354,800 | ) |   |   | 1,594,576 |   |   |   | (478,994 | ) |
| Redeemable preferred stock             |                    | 4,775                                                     |                   |   |   | (225 | ) |   |   | 4,526 |   |   |   | (474 | ) |
| Total                                  | $                       | 4,178,543                                                 |                   |   | $ | (759,615 | ) |   | $ | 6,732,240 |   |   | $ | (1,649,847 | ) |

 

At September 30, 2009, unrealizedlosses on available-for-sale fixed maturity securities totaled $759.6million primarily due to $354.8 million in unrealized losses on mortgageand asset-backed securities. The unrealized losses on mortgage and asset-backed securities were primarily due to an increase in credit spreads and decrease in marketliquidity resulting from concerns about mortgage defaults on subprime and other risky mortgages, and potential downgrades or defaults of monoline bond insurers. Inaddition, the unrealized losses on corporate securities totaling $296.8 million were primarily due to a decrease in market liquidity and credit quality concerns ofassets held by banking institutions and an increase in credit spreads on commercial real estate investment trust bonds, due to the underlying real estate exposure andmarket concerns about the ability to access capital markets. We do not intend to sell or believe we will be required to sell these investments before their anticipatedrecovery of amortized cost, therefore we do not consider these investments to be other-than-temporarily impaired at September 30, 2009. See Note 2 to ourconsolidated financial statements for additional analysis of these unrealized losses.

----

***Mortgage and Asset-Backed Securities***

 

Mortgage and other asset-backedsecurities comprised 27.9% at September 30, 2009 and 28.7% at December 31, 2008 of our total available-for-sale fixed maturity securities. These securities are purchased when we believe these typesof investments provide superior risk-adjusted returns compared to returns of more conventional investments such as corporate bonds and mortgage loans. These securitiesare diversified as to collateral types, cash flow characteristics and maturity. 

 

The repayment pattern on mortgage andother asset-backed securities is more variable than that of more traditional fixed maturity securities because the repayment terms are tied to underlying debtobligations that are subject to prepayments. The prepayment speeds (e.g., the rate of individuals refinancing their home mortgages) can vary based on a number ofeconomic 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 prepaymentspeeds 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 effectiveyield over the life of the security. This effective yield is computed using historical principal payments and expected future principal payment patterns. Anyadjustments to book value to derive the constant effective yield, which may include the reversal of premium or discount amounts previously amortized or accrued, arerecorded in the current period as a component of net investment income. Accordingly, deviations in actual prepayment speeds from that originally expected or changes inexpected 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 inadjustments that have a material positive or negative impact on quarterly reported results. Increases in prepayment speeds, which typically occur in a decreasinginterest rate environment, generally increase the rate at which discount is accrued and premium is amortized into income. Decreases in prepayment speeds, whichtypically occur in an increasing interest rate environment, generally slow down the rate these amounts are recorded into income.

 
| Mortgage and Asset-Backed Securities by Type |
|----------------------------------------------|
|                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                         | September 30, 2009 |
|                                         |   | Amortized Cost |   |   |   | Par Value |   |   |   | CarryingValue |   |   |   | Percent of Fixed Maturities |   |
|                                         | (Dollars in thousands) |
| Residential mortgage-backed securities:      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sequential                                   | $ | 1,254,594 |   |   | $ | 1,271,112 |   |   | $ | 1,156,494 |   |   |   | 11.6 |  % |
| Pass-through                                 |   | 285,119 |   |   |   | 277,084 |   |   |   | 291,194 |   |   |   | 2.9 |   |
| Planned and targeted amortization class      |   | 458,627 |   |   |   | 461,873 |   |   |   | 429,837 |   |   |   | 4.3 |   |
| Other                                        |   | 39,642 |   |   |   | 39,739 |   |   |   | 33,804 |   |   |   | 0.4 |   |
| Total residential mortgage-backed securities |   | 2,037,982 |   |   |   | 2,049,808 |   |   |   | 1,911,329 |   |   |   | 19.2 |   |
| Commercial mortgage-backedsecurities         |   | 791,896 |   |   |   | 816,924 |   |   |   | 729,882 |   |   |   | 7.4 |   |
| Other asset-backed securities                |   | 233,549 |   |   |   | 288,420 |   |   |   | 127,163 |   |   |   | 1.3 |   |
| Total mortgage and asset-backed securities   | $ | 3,063,427 |   |   | $ | 3,155,152 |   |   | $ | 2,768,374 |   |   |   | 27.9 |  % |

 
|                                         | December 31, 2008 |
|----------------------------------------------|------------------------|
|                                         |                   | AmortizedCost |   |   |   | Par Value |   |   |   | Carrying Value |   |   |   | Percent of Fixed Maturities |   |
|                                         | (Dollars inthousands)  |
| Residential mortgage-backedsecurities:       |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sequential                                   | $                      | 1,237,035 |   |   | $ | 1,264,691 |   |   | $ | 1,068,869 |   |   |   | 11.9 |  % |
| Pass-through                                 |                   | 219,447 |   |   |   | 219,855 |   |   |   | 225,513 |   |   |   | 2.5 |   |
| Planned and targeted amortization class      |                   | 508,133 |   |   |   | 513,373 |   |   |   | 464,296 |   |   |   | 5.2 |   |
| Other                                        |                   | 40,086 |   |   |   | 40,184 |   |   |   | 31,011 |   |   |   | 0.4 |   |
| Total residential mortgage-backed securities |                   | 2,004,701 |   |   |   | 2,038,103 |   |   |   | 1,789,689 |   |   |   | 20.0 |   |
| Commercial mortgage-backedsecurities         |                   | 799,546 |   |   |   | 819,030 |   |   |   | 640,236 |   |   |   | 7.1 |   |
| Other asset-backed securities                |                   | 197,943 |   |   |   | 265,435 |   |   |   | 139,844 |   |   |   | 1.6 |   |
| Total mortgage and asset-backed securities   | $                      | 3,002,190 |   |   | $ | 3,122,568 |   |   | $ | 2,569,769 |   |   |   | 28.7 |  % |

-42-

 

The residential mortgage-backedportfolio includes pass-through and collateralized mortgage obligation (CMO) securities. With a pass-through security, we receive a pro rata share of principalpayments as payments are made on the underlying mortgage loans. CMOs consist of pools of mortgages divided into sections or "tranches" which provide sequentialretirement of the bonds. We invest in sequential tranches which provide cash flow stability in that principal payments do not occur until the previous tranches arepaid off. In addition, to provide call protection and more stable average lives, we invest in CMOs such as planned amortization class (PAC) and targeted amortizationclass (TAC) securities. CMOs of these types provide more predictable cash flows within a range of prepayment speeds by shifting the prepayment risks to supporttranches. We generally do not purchase certain types of CMOs that we believe would subject the investment portfolio to greater than average risk. These include, butare not limited to, principal only, floater, inverse floater, PAC II and support tranches.

 

The commercial and other asset-backedsecurities are primarily sequential securities. Commercial mortgage-backed securities typically have cash flows that are less sensitive to interest rate changes thanresidential securities of similar types due principally to prepayment restrictions on many of the underlying commercial mortgage loans. The other asset-backedsecurities, whose collateral is primarily second lien, fixed rate home-equity loans, are also less sensitive to interest rate changes due to the borrowers typicallyhaving less ability to refinance as compared to homeowners with a first lien mortgage only. 

 

Our direct exposure to the Alt-A homeequity and subprime first-lien loan sectors is limited to investments in structured securities collateralized by senior tranches of residential mortgage loans withthis exposure. We do not own any direct investments in subprime lenders or adjustable rate mortgages. 

 
| Mortgage and Asset-Backed Securities by Collateral Type |
|---------------------------------------------------------|
|                                                    |   |
|                                                    | September 30, 2009 |   | December 31, 2008 |
|                                                    |   | Amortized Cost |   |   |   | Carrying Value |   |   |   | ****Percent****

****of Fixed Maturities**** |   |   |   | AmortizedCost |   |   |   | Carrying Value |   |   |   | ****Percent****

****of FixedMaturities**** |   |
|                                                    | (Dollars in thousands) |   | (Dollars in thousands) |
| Government agency                                       | $ | 709,516 |   |   | $ | 735,687 |   |   |   | 7.4 |  % |   | $ | 557,311 |   |   | $ | 579,489 |   |   |   | 6.5 |  % |
| Prime                                                   |   | 957,939 |   |   |   | 875,517 |   |   |   | 8.8 |   |   |   | 1,068,716 |   |   |   | 913,772 |   |   |   | 10.2 |   |
| Alt-A                                                   |   | 530,414 |   |   |   | 387,041 |   |   |   | 3.9 |   |   |   | 524,264 |   |   |   | 397,556 |   |   |   | 4.5 |   |
| Subprime                                                |   | 30,123 |   |   |   | 19,675 |   |   |   | 0.2 |   |   |   | 30,133 |   |   |   | 20,311 |   |   |   | 0.2 |   |
| Commercial mortgage                                     |   | 791,896 |   |   |   | 729,882 |   |   |   | 7.4 |   |   |   | 799,546 |   |   |   | 640,236 |   |   |   | 7.1 |   |
| Non-mortgage                                            |   | 43,539 |   |   |   | 20,572 |   |   |   | 0.2 |   |   |   | 22,220 |   |   |   | 18,405 |   |   |   | 0.2 |   |
| Total                                                   | $ | 3,063,427 |   |   | $ | 2,768,374 |   |   |   | 27.9 |  % |   | $ | 3,002,190 |   |   | $ | 2,569,769 |   |   |   | 28.7 |  % |

 

The mortgage and asset-backedsecurities can be summarized into three broad categories: residential, commercial and other asset-backed securities.

 
| Residential Mortgage-Backed Securities by Collateral Type and OriginationYear |                    |               |   |   |
|-------------------------------------------------------------------------------|-------------------------|--------------------|--------|--------|
|                                                                          |                    |
|                                                                          | September 30, 2009 |
|                                                                          | Government & Prime  |               | Alt-A  |   | Total |
|                                                                          |                    | Amortized Cost (1) |   |   |   | CarryingValue |   |   |   | Amortized Cost (1) |   |   |   | Carrying Value |   |   |   | Amortized Cost |   |   |   | Carrying Value |   |
|                                                                          | (Dollars inthousands)   |
| 2009                                                                          | $                       | 203,826            |   |   | $ | 205,853 |   |   | $ | — |   |   | $ | — |   |   | $ | 203,826 |   |   | $ | 205,853 |   |
| 2008                                                                          |                    | 131,113            |   |   |   | 137,390 |   |   |   | — |   |   |   | — |   |   |   | 131,113 |   |   |   | 137,390 |   |
| 2007                                                                          |                    | 71,648             |   |   |   | 67,731 |   |   |   | 59,000 |   |   |   | 33,802 |   |   |   | 130,648 |   |   |   | 101,533 |   |
| 2006                                                                          |                    | 85,332             |   |   |   | 71,334 |   |   |   | 22,444 |   |   |   | 12,218 |   |   |   | 107,776 |   |   |   | 83,552 |   |
| 2005                                                                          |                    | 61,395             |   |   |   | 61,639 |   |   |   | — |   |   |   | — |   |   |   | 61,395 |   |   |   | 61,639 |   |
| 2004 and prior                                                                |                    | 1,091,558          |   |   |   | 1,058,648 |   |   |   | 311,666 |   |   |   | 262,714 |   |   |   | 1,403,224 |   |   |   | 1,321,362 |   |
| Total                                                                         | $                       | 1,644,872          |   |   | $ | 1,602,595 |   |   | $ | 393,110 |   |   | $ | 308,734 |   |   | $ | 2,037,982 |   |   | $ | 1,911,329 |   |

-43-
|           | December 31, 2008 |
|----------------|------------------------|
|           | Government & Prime |   | Alt-A |   | Total |
|           |                   | ****Amortized****

****Cost (1)**** |   |   |   | Carrying Value |   |   |   | ****Amortized****

****Cost (1)**** |   |   |   | Carrying Value |   |   |   | Amortized Cost |   |   |   | Carrying Value |   |
|           | (Dollars inthousands)  |
| 2008           | $                      | 63,195 |   |   | $ | 67,391 |   |   | $ | — |   |   | $ | — |   |   | $ | 63,195 |   |   | $ | 67,391 |   |
| 2007           |                   | 120,089 |   |   |   | 117,851 |   |   |   | 60,265 |   |   |   | 32,723 |   |   |   | 180,354 |   |   |   | 150,574 |   |
| 2006           |                   | 117,671 |   |   |   | 106,016 |   |   |   | 22,436 |   |   |   | 11,099 |   |   |   | 140,107 |   |   |   | 117,115 |   |
| 2005           |                   | 28,517 |   |   |   | 27,581 |   |   |   | — |   |   |   | — |   |   |   | 28,517 |   |   |   | 27,581 |   |
| 2004 and prior |                   | 1,273,488 |   |   |   | 1,162,275 |   |   |   | 319,040 |   |   |   | 264,753 |   |   |   | 1,592,528 |   |   |   | 1,427,028 |   |
| Total          | $                      | 1,602,960 |   |   | $ | 1,481,114 |   |   | $ | 401,741 |   |   | $ | 308,575 |   |   | $ | 2,004,701 |   |   | $ | 1,789,689 |   |

 
| (1) | Insurance on 2006 Alt-A issues is provided byMBIA Insurance Corporation (78% in 2009 and 2008). Insurance on 2007 Alt-A issues is provided by Assured Guaranty Ltd. (33% in 2009 and 32% in 2008) and MBIA InsuranceCorporation (26% in 2009 and 25% in 2008). There is no insurance coverage on Government & Prime investments or Alt-A investments with collateral originating priorto 2006. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| Residential Mortgage-Backed Securities by Rating |
|--------------------------------------------------|
|                                             | September 30, 2009 |   | December 31, 2008 |
|                                             |   | Carrying Value |   |   |   | Percent ofTotal |   |   |   | Carrying Value |   |   |   | Percent ofTotal |   |
|                                             | (Dollars inthousands) |
| AAA                                              | $ | 1,679,075 |   |   |   | 87.8 |  % |   | $ | 1,721,046 |   |   |   | 96.2 |  % |
| AA                                               |   | 84,857 |   |   |   | 4.5 |   |   |   | 3,462 |   |   |   | 0.2 |   |
| A                                                |   | 55,005 |   |   |   | 2.9 |   |   |   | 24,121 |   |   |   | 1.3 |   |
| BBB                                              |   | 15,260 |   |   |   | 0.8 |   |   |   | 7,281 |   |   |   | 0.4 |   |
| BB                                               |   | — |   |   |   | — |   |   |   | 17,326 |   |   |   | 1.0 |   |
| B                                                |   | 29,431 |   |   |   | 1.5 |   |   |   | 16,453 |   |   |   | 0.9 |   |
| CCC                                              |   | 22,068 |   |   |   | 1.2 |   |   |   | — |   |   |   | — |   |
| CC                                               |   | 25,633 |   |   |   | 1.3 |   |   |   | — |   |   |   | — |   |
| Total                                            | $ | 1,911,329 |   |   |   | 100.0 |  % |   | $ | 1,789,689 |   |   |   | 100.0 |  % |

 
| CommercialMortgage-Backed Securities by Origination Year |
|----------------------------------------------------------|
|                                                     | September 30, 2009 |   | December 31, 2008 |
|                                                     |   | AmortizedCost |   |   |   | Carrying Value |   |   |   | Amortized Cost |   |   |   | Carrying Value |   |
|                                                     | (Dollars inthousands) |
| 2008                                                     | $ | 222,851 |   |   | $ | 235,964 |   |   | $ | 197,725 |   |   | $ | 196,908 |   |
| 2007                                                     |   | 184,682 |   |   |   | 143,525 |   |   |   | 194,169 |   |   |   | 114,816 |   |
| 2006                                                     |   | 144,057 |   |   |   | 119,436 |   |   |   | 170,452 |   |   |   | 117,606 |   |
| 2005                                                     |   | 74,633 |   |   |   | 66,942 |   |   |   | 56,220 |   |   |   | 41,877 |   |
| 2004 and prior                                           |   | 165,673 |   |   |   | 164,015 |   |   |   | 180,980 |   |   |   | 169,029 |   |
| Total                                                    | $ | 791,896 |   |   | $ | 729,882 |   |   | $ | 799,546 |   |   | $ | 640,236 |   |

-44-
| Commercial Mortgage-Backed Securities by Rating |
|-------------------------------------------------|
|                                            |   |   |   |
|                                            | September 30, 2009 |   | December 31, 2008 |
|                                            |   | CarryingValue |   |   |   | Percent of Total |   |   |   | CarryingValue |   |   |   | Percent of Total |   |
|                                            | (Dollars in thousands) |
| GNMA                                            | $ | 351,094 |   |   |   | 48.1 |  % |   | $ | 386,634 |   |   |   | 60.4 |  % |
| FNMA                                            |   | 15,785 |   |   |   | 2.2 |   |   |   | 15,611 |   |   |   | 2.4 |   |
| AAA                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Generic AAA                                     |   | 61,897 |   |   |   | 8.5 |   |   |   | 1,174 |   |   |   | 0.2 |   |
| Super Senior AAA                                |   | 167,680 |   |   |   | 23.0 |   |   |   | 103,951 |   |   |   | 16.2 |   |
| Mezzanine AAA                                   |   | 19,756 |   |   |   | 2.7 |   |   |   | 62,823 |   |   |   | 9.8 |   |
| Junior AAA                                      |   | 11,929 |   |   |   | 1.6 |   |   |   | 41,662 |   |   |   | 6.5 |   |
| Total AAA                                       |   | 261,262 |   |   |   | 35.8 |   |   |   | 209,610 |   |   |   | 32.7 |   |
| AA                                              |   | 38,563 |   |   |   | 5.3 |   |   |   | 14,682 |   |   |   | 2.3 |   |
| A                                               |   | 17,377 |   |   |   | 2.4 |   |   |   | 3,870 |   |   |   | 0.6 |   |
| BBB                                             |   | 33,499 |   |   |   | 4.6 |   |   |   | 9,349 |   |   |   | 1.5 |   |
| BB                                              |   | 4,266 |   |   |   | 0.6 |   |   |   | — |   |   |   | — |   |
| B                                               |   | 7,436 |   |   |   | 1.0 |   |   |   | — |   |   |   | — |   |
| CCC                                             |   | — |   |   |   | — |   |   |   | 480 |   |   |   | 0.1 |   |
| CC                                              |   | 600 |   |   |   | — |   |   |   | — |   |   |   | — |   |
| Total                                           | $ | 729,882 |   |   |   | 100.0 |  % |   | $ | 640,236 |   |   |   | 100.0 |  % |

 

Government National MortgageAssociation (GNMA or Ginnie Mae) guarantees principal and interest on mortgage backed securities. The guarantee is backed by the full faith and credit of the UnitedStates Government. The Federal National Mortgage Association (FNMA or Fannie Mae) and the Federal Home Loan Mortgage Association (FHLMC or Freddie Mac) aregovernment-sponsored enterprises (GSEs) that were chartered by Congress to reduce borrowing costs for certain multifamily projects and nursing homes. GSEs have carriedan implicit backing of the U.S. Government but do not have explicit guarantees like GNMA. The Housing and Economic Recovery act of 2008 allows the government to expandits line of credit to Fannie Mae and Freddie Mac and gives the U.S. Treasury the power to purchase an equity stake in the firms through the end of 2009.

 

The AAA rated commercial mortgage-backed securities are broken down into categoriesbased on subordination levels. Rating agencies disclose subordination levels, which measure the amount of credit support that the bonds (or tranches) have fromsubordinated bonds (or tranches). Generic AAA is a term used for securities issued prior to 2005. The super senior securities have subordination levels greater than27%, the mezzanine securities have subordination levels in the 17‐27% range and the junior securities have subordination levels in the 9‐16%range.

 
| **Other Asset-Backed Securities by CollateralType and Origination Year***** *** |
|--------------------------------------------------------------------------------------|
|                                                                                 |   |
|                                                                                 | **September 30, 2009** |
|                                                                                 | Government & Prime |   | Alt-A |   | Subprime |   | Non-Mortgage |   | Total |
|                                                                                 |   | Amortized Cost (1) |   |   | Carrying Value |   |   |   | Amortized Cost (1) |   |   | Carrying Value |   |   |   | Amortized Cost (1) |   |   | Carrying Value |   |   |   | Amortized Cost |   |   | Carrying Value |   |   |   | AmortizedCost |   |   | Carrying Value |   |
|                                                                                 | (Dollars inthousands) |
| 2007                                                                                 | $ | 9,983 |   | $ | 1,858 |   |   | $ | 18,929 |   | $ | 7,815 |   |   | $ | — |   | $ | — |   |   | $ | 7,071 |   | $ | 5,740 |   |   | $ | 35,983 |   | $ | 15,413 |   |
| 2006                                                                                 |   | 9,742 |   |   | 3,821 |   |   |   | 81,944 |   |   | 42,908 |   |   |   | — |   |   | — |   |   |   | — |   |   | — |   |   |   | 91,686 |   |   | 46,729 |   |
| 2005                                                                                 |   | — |   |   | — |   |   |   | 25,080 |   |   | 20,787 |   |   |   | 30,123 |   |   | 19,675 |   |   |   | 8,702 |   |   | 200 |   |   |   | 63,905 |   |   | 40,662 |   |
| 2004 and prior                                                                       |   | 2,858 |   |   | 2,930 |   |   |   | 11,351 |   |   | 6,797 |   |   |   | — |   |   | — |   |   |   | 27,766 |   |   | 14,632 |   |   |   | 41,975 |   |   | 24,359 |   |
| Total                                                                                | $ | 22,583 |   | $ | 8,609 |   |   | $ | 137,304 |   | $ | 78,307 |   |   | $ | 30,123 |   | $ | 19,675 |   |   | $ | 43,539 |   | $ | 20,572 |   |   | $ | 233,549 |   | $ | 127,163 |   |

-45-
|           | December 31, 2008 |
|----------------|------------------------|
|           | Government & Prime |   | Alt-A |   | Subprime |   | Non-Mortgage |   | Total |
|           |                   | Amortized Cost (1) |   |   | Carrying Value |   |   |   | Amortized Cost (1) |   |   | Carrying Value |   |   |   | Amortized Cost (1) |   |   | Carrying Value |   |   |   | Amortized Cost |   |   | Carrying Value |   |   |   | AmortizedCost |   |   | Carrying Value |   |
|           | (Dollars inthousands)  |
| 2007           | $                      | 9,989 |   | $ | 2,820 |   |   | $ | 17,442 |   | $ | 9,140 |   |   | $ | — |   | $ | — |   |   | $ | 7,091 |   | $ | 4,465 |   |   | $ | 34,522 |   | $ | 16,425 |   |
| 2006           |                   | 9,726 |   |   | 5,966 |   |   |   | 66,826 |   |   | 45,740 |   |   |   | — |   |   | — |   |   |   | — |   |   | — |   |   |   | 76,552 |   |   | 51,706 |   |
| 2005           |                   | — |   |   | — |   |   |   | 26,653 |   |   | 25,068 |   |   |   | 30,133 |   |   | 20,311 |   |   |   | — |   |   | — |   |   |   | 56,786 |   |   | 45,379 |   |
| 2004 and prior |                   | 3,352 |   |   | 3,361 |   |   |   | 11,602 |   |   | 9,033 |   |   |   | — |   |   | — |   |   |   | 15,129 |   |   | 13,940 |   |   |   | 30,083 |   |   | 26,334 |   |
| Total          | $                      | 23,067 |   | $ | 12,147 |   |   | $ | 122,523 |   | $ | 88,981 |   |   | $ | 30,133 |   | $ | 20,311 |   |   | $ | 22,220 |   | $ | 18,405 |   |   | $ | 197,943 |   | $ | 139,844 |   |

 
| (1) | Insurance on 2006 Alt-A issues is provided by Financial Guaranty Insurance Co. (47% in 2009 and 38% in 2008) andAMBAC Assurance Corporation (28% in 2009 and 34% in 2008). Insurance on 2007 Alt-A issues is provided by AMBAC Assurance Corporation (53% in 2009 and 57% in 2008),MBIA Insurance Corporation (26% in 2009 and 29% in 2008) and Financial Guaranty Insurance Co. (21% in 2009 and 14% in 2008). The 2006 and 2007 Government & Primeissues are 100% insured by AMBAC Assurance Corporation (2006 issues) and MBIA Insurance Corporation (2007 issues). There is no insurance coverage on other asset-backedsecurities with non-mortgage collateral or collateral originating prior to 2006. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| Other Asset-Backed Securities by Rating |
|-----------------------------------------|
|                                    |   |   |   |
|                                    | September 30, 2009 |   | December 31, 2008 |
|                                    |   | CarryingValue |   |   |   | Percent of Total |   |   |   | CarryingValue |   |   |   | Percent of Total |   |
|                                    | (Dollars in thousands) |
| AAA                                     | $ | 44,448 |   |   |   | 35.0 |  % |   | $ | 59,900 |   |   |   | 42.8 |  % |
| AA                                      |   | 836 |   |   |   | 0.6 |   |   |   | 18,852 |   |   |   | 13.5 |   |
| A                                       |   | 16,237 |   |   |   | 12.8 |   |   |   | 3,015 |   |   |   | 2.2 |   |
| BBB                                     |   | 12,651 |   |   |   | 9.9 |   |   |   | 36,337 |   |   |   | 26.0 |   |
| BB                                      |   | 19,345 |   |   |   | 15.2 |   |   |   | 11,666 |   |   |   | 8.3 |   |
| B                                       |   | 7,730 |   |   |   | 6.1 |   |   |   | 2,615 |   |   |   | 1.9 |   |
| CCC                                     |   | 19,453 |   |   |   | 15.3 |   |   |   | 4,894 |   |   |   | 3.5 |   |
| CC                                      |   | 2,634 |   |   |   | 2.1 |   |   |   | 2,565 |   |   |   | 1.8 |   |
| C                                       |   | 3,829 |   |   |   | 3.0 |   |   |   | — |   |   |   | — |   |
| Total                                   | $ | 127,163 |   |   |   | 100.0 |  % |   | $ | 139,844 |   |   |   | 100.0 |  % |
|                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

The mortgage and asset-backed portfolios include securities wrapped by monoline bond insurers to provide additional credit enhancement forthe investment. We believe these securities were underwritten at investment grade levels excluding any credit enhancing protection. At September 30, 2009, thefair value of our insured mortgage and asset-backed holdings totaled $75.4 million, or 2.7% of our mortgage and asset-backed portfolios and 0.8% of our total fixedincome portfolio. 

 

During 2009 and 2008, FinancialGuarantee Insurance Co. (FGIC) was downgraded by rating agencies and concerns about the insurer's ability to provide protection increased. Securities with existing orexpected cash flow concerns that are wrapped by FGIC have been other-than-temporarily impaired. We do not consider the investments wrapped by other monoline bondinsurers to be other-than-temporarily impaired at September 30, 2009 because we do not have reason to believe that those guarantees, if needed, will not behonored. We do not directly own any fixed income or equity investments in monoline bond insurers. 

-46-

 
| Residential Mortgage-Backed Securities and Other Asset-Backed Securities byInsurance |
|--------------------------------------------------------------------------------------|
|                                                                                 |   |   |   |   |
|                                                                                 |   | September 30, 2009 |   | December 31,2008 |
|                                                                                 | ****Insurers'****

****S&P****

****Rating(1)**** |   | Residential Mortgage- Backed |   |   |   | Other Asset- Backed |   |   |   | Total Carrying Value |   |   |   | Residential Mortgage- Backed |   |   |   | OtherAsset- Backed |   |   |   | TotalCarrying Value |   |
|                                                                                 |   | (Dollars in thousands) |
| Insured:                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| AMBAC Assurance Corporation                                                          | CC | $ | — |   |   | $ | 16,576 |   |   | $ | 16,576 |   |   | $ | — |   |   | $ | 18,380 |   |   | $ | 18,380 |   |
| Assured Guaranty Ltd.                                                                | AAA |   | 9,977 |   |   |   | — |   |   |   | 9,977 |   |   |   | 11,608 |   |   |   | — |   |   |   | 11,608 |   |
| Financial Guaranty Insurance Co.                                                     | NR |   | — |   |   |   | 23,770 |   |   |   | 23,770 |   |   |   | — |   |   |   | 27,239 |   |   |   | 27,239 |   |
| MBIA Insurance Corporation                                                           | BB+ |   | 14,769 |   |   |   | 10,262 |   |   |   | 25,031 |   |   |   | 15,762 |   |   |   | 10,558 |   |   |   | 26,320 |   |
| Total with insurance                                                                 |   |   | 24,746 |   |   |   | 50,608 |   |   |   | 75,354 |   |   |   | 27,370 |   |   |   | 56,177 |   |   |   | 83,547 |   |
| Uninsured:                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| GNMA                                                                                 |   |   | 335,630 |   |   |   | — |   |   |   | 335,630 |   |   |   | 187,682 |   |   |   | — |   |   |   | 187,682 |   |
| FHLMC                                                                                |   |   | 254,637 |   |   |   | 2,885 |   |   |   | 257,522 |   |   |   | 257,810 |   |   |   | 3,226 |   |   |   | 261,036 |   |
| FNMA                                                                                 |   |   | 142,471 |   |   |   | 45 |   |   |   | 142,516 |   |   |   | 130,613 |   |   |   | 135 |   |   |   | 130,748 |   |
| Other                                                                                |   |   | 1,153,845 |   |   |   | 73,625 |   |   |   | 1,227,470 |   |   |   | 1,186,215 |   |   |   | 80,306 |   |   |   | 1,266,521 |   |
| Total                                                                                |   | $ | 1,911,329 |   |   | $ | 127,163 |   |   | $ | 2,038,492 |   |   | $ | 1,789,690 |   |   | $ | 139,844 |   |   | $ | 1,929,534 |   |

 
| (1) | Rating in effect as of September 30, 2009. |
|-----|-------------------------------------------------|

 

***Collateralized Debt Obligations***

 

Collateralized debtobligation* *investments are included in the corporate securities portfolio. Our investments incollateralized debt obligations are backed by credit default swaps with no home equity exposure. These securities had a carrying value of $14.5 million and unrealized loss of $25.9 million at September 30, 2009 and a carrying value of $7.4 million and unrealized loss of $44.6million at December 31, 2008. The unrealized loss decreased in 2009 primarily due to recording an other-than-temporary impairment on one security. We have stresstested all of these securities and determined that future principal losses are not expected on the remaining securities based on reasonably adverse conditions. SeeNote 2 to our consolidated financial statements for additional details on this testing. 

 

***State, Municipal and OtherGovernment Securities*** 

 

State, municipal and other government securities include investments in general obligation, revenue, military housing and municipal housingbonds. Our investment strategy is to utilize municipal bonds in addition to corporate bonds, as we believe they provide additional diversification and havehistorically low default rates compared with similarly rated corporate bonds. We evaluate the credit strength of the underlying issues on both a quantitative andqualitative basis, excluding insurance, prior to acquisition. The majority of the municipal bonds we hold are investment grade credits without consideration ofinsurance. The insolvency of one or more of the credit enhancing entities would be a meaningful short-term market liquidity event, but would not dramatically increaseour investment portfolio's risk profile. 

 

 

-47-

**State, Municipal and OtherGovernment Holdings by Insurance and Rating**

 
|    | September 30, 2009 |
|---------|-------------------------|
|    |                    |   |   |   |   |   |   | Insured Bonds |   | Total Bonds |   |   |   |   |   |   |   |
|    |                    |   |   |   |   |   |   | By Underlying |   | By Underlying |   | Insured Bonds by |
|    | Uninsured Bonds         |   | Issue Rating |   | Issue Rating |   | Insurer Rating |
| Rating  |                    | Carrying Value |   |   | % of Total |   |   |   | CarryingValue |   |   | % of Total |   |   |   | Carrying Value |   |   | % of Total |   |   |   | Carrying Value |   |   | % of Total |   |
|    | (Dollarsin thousands)   |
| AAA (1) | $                       | 145,867 |   |   | 26.5 |  % |   | $ | — |   |   | 0.0 |  % |   | $ | 145,867 |   |   | 9.1 |  % |   | $ | 178,978 |   |   | 17.1 |  % |
| AA      |                    | 313,618 |   |   | 57.1 |   |   |   | 373,452 |   |   | 35.7 |   |   |   | 687,070 |   |   | 43.1 |   |   |   | 392,101 |   |   | 37.6 |   |
| A       |                    | 70,265 |   |   | 12.8 |   |   |   | 426,689 |   |   | 40.9 |   |   |   | 496,954 |   |   | 31.2 |   |   |   | 334,540 |   |   | 32.1 |   |
| BBB     |                    | 19,967 |   |   | 3.6 |   |   |   | 62,395 |   |   | 6.0 |   |   |   | 82,362 |   |   | 5.2 |   |   |   | 25,420 |   |   | 2.4 |   |
| NR (2)  |                    | — |   |   | — |   |   |   | 181,461 |   |   | 17.4 |   |   |   | 181,461 |   |   | 11.4 |   |   |   | 112,958 |   |   | 10.8 |   |
|    | $                       | 549,717 |   |   | 100.0 |  % |   | $ | 1,043,997 |   |   | 100.0 |  % |   | $ | 1,593,714 |   |   | 100.0 |  % |   | $ | 1,043,997 |   |   | 100.0 |  % |

 
|    | December 31, 2008 |
|---------|------------------------|
|    |                   |   |   |   |   |   |   | Insured Bonds |   | Total Bonds |   |   |   |   |   |   |   |
|    |                   |   |   |   |   |   |   | By Underlying |   | By Underlying |   | Insured Bonds by |
|    | Uninsured Bonds        |   | Issue Rating |   | Issue Rating |   | Insurer Rating |
| Rating  |                   | Carrying Value |   |   | % of Total |   |   |   | CarryingValue |   |   | % of Total |   |   |   | Carrying Value |   |   | % of Total |   |   |   | Carrying Value |   |   | % of Total |   |
|    | (Dollarsin thousands)  |
| AAA (1) | $                      | 166,829 |   |   | 48.7 |  % |   | $ | 4,850 |   |   | 0.5 |  % |   | $ | 171,679 |   |   | 13.1 |  % |   | $ | 198,432 |   |   | 20.5 |  % |
| AA      |                   | 119,324 |   |   | 34.8 |   |   |   | 319,786 |   |   | 33.0 |   |   |   | 439,110 |   |   | 33.5 |   |   |   | 454,193 |   |   | 46.9 |   |
| A       |                   | 29,505 |   |   | 8.6 |   |   |   | 361,165 |   |   | 37.4 |   |   |   | 390,670 |   |   | 29.8 |   |   |   | 310,695 |   |   | 32.1 |   |
| BBB     |                   | 27,039 |   |   | 7.9 |   |   |   | 42,630 |   |   | 4.4 |   |   |   | 69,669 |   |   | 5.3 |   |   |   | 4,609 |   |   | 0.5 |   |
| NR (2)  |                   | — |   |   | — |   |   |   | 239,498 |   |   | 24.7 |   |   |   | 239,498 |   |   | 18.3 |   |   |   | — |   |   | — |   |
|    | $                      | 342,697 |   |   | 100.0 |  % |   | $ | 967,929 |   |   | 100.0 |  % |   | $ | 1,310,626 |   |   | 100.0 |  % |   | $ | 967,929 |   |   | 100.0 |  % |

 
| (1) | AAA uninsured bonds includes $47.1 million in 2009 and $57.7 million in 2008 of bonds with GNMA and/or FNMAcollateral.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | No formal public rating issued. Approximately 49% in 2009 and 58% in 2008 of the non-rated securities relate tomilitary housing bonds, which we believe have a "BBB" or above shadow rating; approximately 34% in 2009 and 29% in 2008 are revenue obligation bonds, and approximately17% in 2009 and 13% in 2008 are general obligation bonds. Insurance on these bonds is provided by AMBAC Assurance Corporation (NR) (62% in 2009 and 61% in 2008), Financial Security Assurance, Inc. (AA) (21% in 2009 and 16% in 2008), National Insurance Corporation (A) (formerly MBIA InsuranceCorporation) (10% in 2009 and 17% in 2008), and Financial Guaranty Insurance Co. (A) (Reinsured by National Insurance Corporation) (7% in 2009 and 5% in2008). |

 

***Equity Securities*** 

 

Equity securities totaled $59.0 million at September 30, 2009 and $44.9million at December 31, 2008. Gross unrealized gains totaled $3.5million and gross unrealized losses totaled $6.9 million at September 30, 2009. At December 31, 2008, gross unrealized gains totaled $4.2 million and grossunrealized losses totaled $11.3 million on these securities. The unrealized losses in 2009 are primarily attributable to non-redeemable perpetual preferred securitiesfrom issuers in the financial sector. We believe these losses are due to concerns regarding the quality of the assets the issuers hold and uncertainty regarding whenthese securities will be called. These securities are similar to fixed maturities as they provide periodic cash flows, contain call features and are similarly ratedand priced like long-term callable bonds. We do not intend to sell or believe we will be required to sell these securities before their anticipated recovery;therefore, we do not consider them to be other-than-temporarily impaired at September 30, 2009. 

 

***Mortgage Loans*** 

 

Mortgage loans totaled $1,306.7 million at September 30, 2009 and $1,381.9million at December 31, 2008. Our mortgage loans are diversified asto property type, location and loan size, and are collateralized by the related properties. There were no mortgages more than 60 days delinquent as ofSeptember 30, 2009. The total number of commercial mortgage loans outstanding was 333 at September 30, 2009 and 352 at December 31, 2008. We did notissue any new loans in 2009. In 2008, new loans were generally $5.0 million to $15.0 million in size, with an average loan size of $5.5 million and an average loanterm of 12 years. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and require diversification by geographic locationand collateral type. The majority of our mortgage loans amortize principal, with 7.3% that are interest only loans at September 30, 2009. At September 30,2009, the average loan-to-value of the current outstanding principal balance to the appraised value at origination was 57.6% and the weighted average debt servicecoverage ratio was 1.53. 

-48-

 

**Mortgage Loans by Collateral Type**

 
|           | September 30, 2009 |           | December 31, 2008 |
|----------------|-------------------------|----------------|------------------------|
| CollateralType |                    | Carrying Value |                   |   |   | Percent ofTotal |   |   |   | Carrying Value |   |   |   | Percent ofTotal |   |
|           | (Dollars inthousands)   |
| Retail         | $                       | 453,123        |                   |   |   | 34.7 |  % |   | $ | 467,942 |   |   |   | 33.8 |  % |
| Industrial     |                    | 418,480        |                   |   |   | 32.0 |   |   |   | 418,050 |   |   |   | 30.3 |   |
| Office         |                    | 403,037        |                   |   |   | 30.8 |   |   |   | 466,068 |   |   |   | 33.7 |   |
| Other          |                    | 32,038         |                   |   |   | 2.5 |   |   |   | 29,794 |   |   |   | 2.2 |   |
| Total          | $                       | 1,306,678      |                   |   |   | 100.0 |  % |   | $ | 1,381,854 |   |   |   | 100.0 |  % |

 

**Mortgage Loans by GeographicLocation within the United States**

 
|                       | September 30, 2009 |           | December 31, 2008 |
|----------------------------|-------------------------|----------------|------------------------|
| Region of theUnited States |                    | Carrying Value |                   |   |   | Percent ofTotal |   |   |   | Carrying Value |   |   |   | Percent ofTotal |   |
|                       | (Dollars inthousands)   |
| South Atlantic             | $                       | 334,185        |                   |   |   | 25.6 |  % |   | $ | 341,728 |   |   |   | 24.8 |  % |
| East North Central         |                    | 250,161        |                   |   |   | 19.1 |   |   |   | 269,876 |   |   |   | 19.5 |   |
| Pacific                    |                    | 245,949        |                   |   |   | 18.8 |   |   |   | 261,581 |   |   |   | 18.9 |   |
| West North Central         |                    | 167,529        |                   |   |   | 12.8 |   |   |   | 172,283 |   |   |   | 12.5 |   |
| Mountain                   |                    | 118,593        |                   |   |   | 9.1 |   |   |   | 132,649 |   |   |   | 9.6 |   |
| West South Central         |                    | 66,205         |                   |   |   | 5.1 |   |   |   | 69,582 |   |   |   | 5.0 |   |
| Other                      |                    | 124,056        |                   |   |   | 9.5 |   |   |   | 134,155 |   |   |   | 9.7 |   |
| Total                      | $                       | 1,306,678      |                   |   |   | 100.0 |  % |   | $ | 1,381,854 |   |   |   | 100.0 |  % |

 

**Mortgage Loans by Loan-to-ValueRatio (1)**

 
|       | September 30, 2009 |                                  | December 31, 2008 |
|------------|-------------------------|---------------------------------------|------------------------|
|       |                    | ****Gross****

****Carrying Value**** |                   |   |   | Percent of Total |   |   |   | ****Gross****

****CarryingValue**** |   |   |   | Percent of Total |   |
|       | (Dollars in thousands)  |
| 0% - 50%   | $                       | 374,661                               |                   |   |   | 28.7 |  % |   | $ | 330,144 |   |   |   | 23.9 |  % |
| 50%- 60%   |                    | 290,876                               |                   |   |   | 22.3 |   |   |   | 269,816 |   |   |   | 19.6 |   |
| 60% - 70%  |                    | 472,874                               |                   |   |   | 36.2 |   |   |   | 474,436 |   |   |   | 34.3 |   |
| 70% - 80%  |                    | 137,976                               |                   |   |   | 10.6 |   |   |   | 267,159 |   |   |   | 19.3 |   |
| 80% - 90%  |                    | 25,016                                |                   |   |   | 1.9 |   |   |   | 34,904 |   |   |   | 2.5 |   |
| 90% - 100% |                    | 5,275                                 |                   |   |   | 0.3 |   |   |   | 5,395 |   |   |   | 0.4 |   |
| Total      | $                       | 1,306,678                             |                   |   |   | 100.0 |  % |   | $ | 1,381,854 |   |   |   | 100.0 |  % |

 
| (1) | Loan-to-Value Ratio at origination |
|-----|------------------------------------|

 

*** ***

***-49-***

**Mortgage Loans by Year of Origination**

 
|           | September 30, 2009 |                                  | December 31, 2008 |
|----------------|-------------------------|---------------------------------------|------------------------|
|           |                    | ****Gross****

****Carrying Value**** |                   |   |   | Percent of Total |   |   |   | ****Gross****

****CarryingValue**** |   |   |   | Percent of Total |   |
|           | (Dollars in thousands)  |
| 2008           | $                       | 202,822                               |                   |   |   | 15.5 |  % |   | $ | 205,925 |   |   |   | 14.9 |  % |
| 2007           |                    | 286,666                               |                   |   |   | 21.9 |   |   |   | 291,261 |   |   |   | 21.1 |   |
| 2006           |                    | 189,322                               |                   |   |   | 14.5 |   |   |   | 197,153 |   |   |   | 14.2 |   |
| 2005           |                    | 132,960                               |                   |   |   | 10.2 |   |   |   | 136,753 |   |   |   | 9.9 |   |
| 2004 and prior |                    | 494,908                               |                   |   |   | 37.9 |   |   |   | 550,762 |   |   |   | 39.9 |   |
| Total          | $                       | 1,306,678                             |                   |   |   | 100.0 |  % |   | $ | 1,381,854 |   |   |   | 100.0 |  % |

 

Mortgage loans are considered impairedwhen, based on current information and events, it is probable that we will be unable to collect all amounts due according to contractual terms of the loan agreement.At September 30, 2009, we held a valuation allowance for one impaired loan totaling $0.4 million. There was no valuation allowance for mortgage loans atDecember 31, 2008. During the third quarter of 2009, we foreclosed on three mortgage loans with a book value totaling $14.2 million and took possession of thereal estate with an appraised value totaling $16.8 million. 

 

***DerivativeInstruments***

 

Derivative instruments consistprimarily of call options supporting our index annuity business net of collateral received from counterparties totaling $52.1 million at September 30, 2009 and $12.9 million at December 31, 2008.

 

**Asset-Liability Management**

 

Our asset-liability management programincludes (i) designing and developing products that encourage persistency and help ensure targeted spreads are earned and, as a result, create a stable liabilitystructure, and (ii) structuring the investment portfolio with duration and cash flow characteristics consistent with the duration and cash flow characteristics of ourinsurance liabilities. The weighted average life of the fixed maturity and mortgage loan portfolio based on market values and excluding convertible bonds, wasapproximately 8.7 years at September 30, 2009 and 8.9 years at December 31, 2008. The effective duration of the fixed maturity and mortgage loan portfoliosbacking our annuity products was 6.2 at September 30, 2009. The effective duration of our annuity liabilities was approximately 6.8 at September 30, 2009.The effective durations at September 30, 2009 were calculated by discounting expected cash flows using a corporate yield curve. The 2008 effective liabilityduration was calculated using a U.S. Treasury yield curve. We believe the use of a corporate yield curve provides a more accurate view of the expected change in fairvalue given a change in market interest rates. 

 

**CollateralRelated to Securities Lending and Other Transactions**

 

We previously participated in asecurities lending program whereby certain fixed maturity securities from our investment portfolio were loaned to other institutions for a short period of time. Werequired collateral equal to or greater than 102% of the fair value of the loaned securities and at least 100% collateral be maintained through the period thesecurities were on loan. The collateral was invested by the lending agent, in accordance with our guidelines, generating fee income that was recognized as netinvestment income over the period the securities were on loan. The collateral was accounted for as a secured borrowing and was recorded as an asset on our consolidatedbalance sheets, with a corresponding liability reflecting our obligation to return this collateral upon the return of the loaned securities. Securities recorded on ourconsolidated balance sheets with a fair value of $66.4 million at December 31, 2008 were on loan under the program, and we were liable for cash collateral underour control totaling $69.6 million at December 31, 2008. During 2008, we discontinued entering into any new securities lending agreements and we terminated theprogram in the second quarter of 2009. 

 

**OtherAssets**

 

Deferred policy acquisition costs decreased 18.0% to $1,120.1 million and deferred sales inducements decreased 15.2% to $356.2 million at September 30, 2009 primarily due to the impact of the change in unrealizedappreciation/depreciation on fixed maturity securities. The impact of unrealized appreciation/depreciation on fixed maturity securities increased deferred policyacquisition costs $176.3 million at September 30, 2009 and $398.2 million at December 31, 2008, and increased deferred sales inducements $81.6 million atSeptember 30, 2009 and $134.2 million at December 31, 2008. The change in unrealized appreciation/depreciation on fixed maturity securities also caused adecrease in our deferred income tax benefit. Other assets increased 94.6% to $81.0 million primarily due to increases in receivables for securities sold. Assets heldin separate accounts increased 17.3% to $677.1 million primarily due to a decrease in unrealized losses on the underlying investment portfolios. 

 

----

**Liabilities**

 

Policy liabilities and accruals decreased 1.2% to $11,790.4 million at September 30, 2009 primarily due to decreases in interest sensitive and index product reserves as a result of the increasedsurrenders of the EquiTrust Life independent distribution business, partially offset by an increase in the volume of Farm Bureau Life's business in force. We paid offour $60.0 million line of credit borrowings in the first quarter of 2009, which reduced our short-term debt. Other liabilities increased 17.4% to $127.5 million primarily due to increases in payables for securities purchased. 

* *

**Stockholders' Equity**

 

FBL Financial Group, Inc. stockholders'equity increased 226.0% to $842.2 million at September 30, 2009,compared to $258.4 million at December 31, 2008. This increase is attributable to the change in theunrealized appreciation/depreciation on fixed maturity securities and net income, partially offset by non-credit impairment losses.

 

At September 30, 2009,FBL's common stockholders' equity was $839.2 million, or $27.56 per share, compared to $255.4 million or $8.46 per share at December 31, 2008. Included instockholders' equity per common share is $3.84 at September 30, 2009 and $21.54 at December 31, 2008 attributable to accumulated other comprehensive loss.

 

**Liquidity and Capital Resources**

 

***Cash Flows***

 

During 2009, our operating activities generated cash flows totaling $341.7 million. This is primarily due to netincome of $38.7 million adjusted for non-cash operating revenues and expenses netting to $303.0 million. We generated cash of $139.4 million from our investing activities during the 2009 period. The primary sources were from $1,506.6 million in sales, maturities or the repayment of investments, partially offset by $1,365.9 million of investment acquisitions. Our financingactivities used cash of $506.0 million during the 2009 period. The primary uses were $1,556.9 million for return ofpolicyholder account balances on interest sensitive and index products and repayment of the $60.0 million line of credit borrowings, partially offset by sources of$1,116.5 million from receipts from interest sensitive and index products credited to policyholderaccount balances. 

 

***Sources and Uses of Capital Resources***

 

Parent company cash inflows from operations consists primarily of (i) dividends from subsidiaries, if declared and paid, (ii) fees that itcharges the various subsidiaries and affiliates for management of their operations, (iii) expense reimbursements from subsidiaries and affiliates, (iv) proceeds fromthe exercise of employee stock options, (v) proceeds from borrowings, (vi) tax settlements between the parent company and its subsidiaries and (vii) investment income.Revenue sources for the parent company during the nine months ended September 30, 2009 included management fees from subsidiaries and affiliates of $6.0 million.Cash outflows are principally for salaries, taxes and other expenses related to providing these management services, dividends on outstanding stock, interest andprincipal repayments on our parent company debt and capital contributions to subsidiaries.

 

The Life Companies' cash inflowsconsist primarily of premium income, deposits to policyholder account balances, income from investments, sales, maturities and calls of investments, repayments ofinvestment principal and proceeds from call option exercises. In addition, EquiTrust Life historically had received capital contributions from FBL Financial Group,Inc. to help fund its growth or replenish capital. The Life Companies' cash outflows are primarily related to withdrawals of policyholder account balances, investmentpurchases, payment of policy acquisition costs, policyholder benefits, income taxes, dividends and current operating expenses. Life insurance companies generallyproduce 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 operatingexpenses 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 benefitpayments and for writing new business. The Life Companies' continuing operations and financing activities relating to interest sensitive and index products used fundstotaling $85.2 million for the nine months ended September 30, 2009 and provided funds totaling $1,261.5 million for the 2008 period. 

 

 

-51-

EquiTrustLife had net cash outflows from operations and financing activities totaling $266.6 million for the nine months ended September 30, 2009, primarily due toincreased surrender activity resulting from the impact of the MVA feature on certain contracts as outlined in the "Impact of Recent Business Environment" sectionabove. U.S. Treasury rates increased throughout 2009 from unprecedentedlows reached at the beginning of the year and surrenders declinedsteadily returning to expected levels by the end of the third quarter. At September 30, 2009, EquiTrust Life direct annuity contracts with a reserve totaling$1,249.4 million had a gross surrender charge in excess of 5.0%, but a net surrender charge after the MVA of less than 5.0%. The anticipated surrenders, combined withthe reduction in sales to preserve capital, may cause cash outflows in 2009 to continue exceeding cash inflows. Any net cash outflow is expected to be funded by cashon hand and to the extent necessary, proceeds from investment sales of fixed maturity securities in an unrealized gain position to meet these needs. AtSeptember 30, 2009, EquiTrust Life had cash and short-term investments on hand totaling $221.2 million and fixed maturity securities in an unrealized gainposition totaling $3,246.2 million. See the "Market Risks of Financial Instruments" section in our 2008 Annual Report on Form 10‐K for additional discussion onthe calculation and impact of MVAs on surrender activity and liquidity.

 

In the first quarter of 2009, we repaidthe outstanding borrowings on our line of credit and terminated the agreement. See Note 5 to our consolidated financial statements for additional details regardingthis agreement.

 

Interest payments on our debt totaled$19.5 million for the nine months ended September 30, 2009 and $13.5 million for the 2008 period. Interest payments on our debt outstanding at September 30,2009 are estimated to be $5.6 million for the remainder of 2009. We paid cash dividends on our common and preferred stock during the nine-month period totaling $7.6million in 2009 and $11.3 million in 2008. It is anticipated that quarterly cash dividend requirements for the fourth quarter of 2009 will be $0.0075 per Series Bredeemable preferred share and $0.0625 per common share. The level of common stock dividends will be analyzed quarterly and will be dependent upon our capital andliquidity positions. Assuming a dividend rate of $0.0625 per common share, the common and preferred dividends would total approximately $1.9 million during theremainder of 2009. The Company is licensed by the Iowa Farm Bureau Federation (IFBF), our majority shareholder, to use the "Farm Bureau" and "FB" designations and paysroyalty fees to the IFBF as a result of this royalty agreement. The royalty agreement provides an option for the IFBF to terminate the agreement when FBL's quarterlycommon stock dividend is less than $0.10 per share. Assuming no further reduction in the quarterly dividend, the IFBF has agreed to temporarily forgo its right oftermination through February 28, 2010 and we anticipate they will continue to forgo such right thereafter.

 

The ability of the Life Companies to pay dividends to FBL Financial Group, Inc. is limited by law to earned profits (statutory unassignedsurplus) as of the date the dividend is paid, as determined in accordance with accounting practices prescribed by insurance regulatory authorities of the State ofIowa. During the remainder of 2009, the maximum amount legally available for distribution to FBL Financial Group, Inc., without further regulatory approval, from FarmBureau Life is $28.2 million. EquiTrust Life cannot pay a dividend without regulatory approval in 2009 due to its unassigned surplus position at December 31,2008. 

 

We manage the amount of our capital to be consistent with statutory and rating agencyrequirements. As of September 30, 2009, we estimate that we have sufficient capital in the life insurance subsidiaries, combined with capital at the holdingcompany, to meet our rating objectives. However, this capital may not be sufficient if significant future losses are incurred and, given the current market conditions,access to additional capital could be limited. To improve our capital position, we entered into an agreement with EMCNL under which they recaptured a block of life andannuity policies with reserves totaling $249.8 million. This transaction increased the statutory risk based capital at EquiTrust Life by approximately 20 percentagepoints. See Note 10 to the consolidated financial statements for additional details regarding this transaction.

 

FBL Financial Group, Inc. expects to rely on available cash resources and dividends from Farm Bureau Life to make dividend payments to itsstockholders and interest payments on its debt. The parent company had available cash and investments totaling $10.9 million at September 30, 2009. We anticipatethat FBL Financial Group, Inc. will receive dividends totaling $5.0 million from Farm Bureau Life and $2.4 million from other non-life insurance subsidiaries duringthe remainder of 2009. 

 

As of September 30, 2009, we hadno material commitments for capital expenditures. 

 

 

-52-

On a consolidated basis, we anticipatethat funds to meet our short-term and long-term capital expenditures, cash dividends to stockholders and operating cash needs will come from existing capital andinternally generated funds. However, there can be no assurance that future experience regarding benefits and surrenders will be similar to historic experience sincebenefits and surrender levels are influenced by such factors as the interest rate environment, our financial strength ratings, the economy and other factors thatimpact policyholder behavior. Our investment portfolio at September 30, 2009, included $325.9 million of short-term investments, $12.9 million of cash and$1,256.2 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.In addition, Farm Bureau Life and EquiTrust Life are members of the Federal Home Loan Bank (FHLB), which provides a source for additional liquidity if needed. Thismembership allows the companies to utilize fixed or floating rate advances offered by the FHLB and secured by qualifying collateral. Our total capacity to utilize suchadvances is impacted by multiple factors including total market value of eligible collateral, current market value of the par value of admitted assets less legalreserve requirements, and our willingness or capacity to hold activity-based FHLB common stock. 

 

**Contractual Obligations**

 

In the normal course of business, weenter into insurance contracts, financing transactions, lease agreements or other commitments which are necessary or beneficial to our operations. These commitmentsmay obligate us to certain cash flows during future periods. Other than the repayment of the line of credit discussed above, there have been no material changes to ourtotal contractual obligations since December 31, 2008.

 

**RecentlyAdopted Accounting Changes**

 

As discussed in Note 1 to ourconsolidated financial statements, we adopted several accounting pronouncements during the nine months ended September 30, 2009. 

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

There have been no material changes in the market risks of our financial instrumentssince December 31, 2008.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our ChiefExecutive 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 theSecurities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rulesand forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by anissuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its Chief Executive Officer andChief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Our internal control over financialreporting changes from time-to-time as we modify and enhance our systems and processes to meet our dynamic needs. Changes are also made as we strive to be moreefficient in how we conduct our business. Any significant changes in controls are evaluated prior to implementation to help ensure the continued effectiveness of ourinternal controls and internal control environment. While changes have taken place in our internal controls during the quarter ended September 30, 2009, therehave been no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

 

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**PART II. OTHER INFORMATION** 

 

 

**ITEM 6. EXHIBITS**

 

(a) Exhibits:

 
| 10.31  |   | Termination Agreement and Release of All Claims, by and between John M. Pauleand FBL Financial Group, Inc., effective October 2, 2009 *           |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                              |
| 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 toSection 906 of the Sarbanes-Oxley Act of 2002                             |
|   |   |                                                                                                                                              |
|   |   |                                                                                                                                              |
|   |   | * exhibit relates to a compensatory plan for management ordirectors                                                                               |

 

 

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**SIGNATURES**

 

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

 

 

Date: November 5, 2009    

 

 
|   | FBL FINANCIAL GROUP, INC. |
|--------|---------------------------|
|   |                      |   |
|   | By                   | /s/ James E. Hohmann |
|   |                      | James E. Hohmann |
|   |                      | Chief Executive Officer (Principal Executive Officer) |
|   |                      |   |
|   | By                   | /s/ James P. Brannen |
|   |                      | James P. Brannen |
|   |                      | Chief Financial Officer (Principal Financial and AccountingOfficer) |

 

 

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