UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2006
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 Financial Group, Inc.

(Exact name of registrant as specified in 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 former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer x		Non-accelerated filer o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Title of each class		Outstanding at November 1, 2006
Class A Common Stock, without par value		28,433,189
Class B Common Stock, without par value		1,192,990

 

 

FBL FINANCIAL GROUP, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
TABLE OF CONTENTS

PART I.				FINANCIAL INFORMATION
				Cautionary Statement Regarding Forward Looking Information			2
Item 1.				Financial Statements (Unaudited)
				Consolidated Balance Sheets			3
				Consolidated Statements of Income			5
				Consolidated Statements of Changes in Stockholders’ Equity			6
				Consolidated Statements of Cash Flows			7
				Notes to Consolidated Financial Statements			9
Item 2.				Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3.				Quantitative and Qualitative Disclosures About Market Risk			43
Item 4.				Controls and Procedures			43
PART II.				OTHER INFORMATION
Item 2.				Unregistered Sales of Equity Securities and Use of Proceeds			44
Item 6.				Exhibits			45
SIGNATURES							47

Cautionary Statement Regarding Forward Looking Information

This Form 10-Q includes statements relating to anticipated financial performance, business prospects, new products, and similar matters. These statements and others, which include words such as “expect”, “anticipate”, “believe”, “intend”, and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. A variety of factors could cause our actual results and experiences to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of our business include but are not limited to the following:

	•		If we are unable to attract and retain agents and develop new distribution sources, sales of our products and services may be reduced.
	•		Changing interest rates and market volatility, and general economic conditions, affect the risks and the returns on both our products and our investment portfolio.
	•		Our investment portfolio is subject to credit quality risks which may diminish the value of our invested assets and affect our sales, profitability and reported book value per share.
	•		As a holding company, we depend on our subsidiaries for funds to meet our obligations, but our subsidiaries’ ability to make distributions to us is limited by law, and could be affected by risk based capital computations.
	•		A significant ratings downgrade may have a material adverse effect on our business.
	•		Our earnings are influenced by our claims experience, which is difficult to estimate. If our future claims experience does not match our pricing assumptions or past results, our earnings could be materially affected.
	•		Inaccuracies in assumptions regarding future persistency, mortality and interest rates used in calculating reserve and deferred policy acquisition expense and deferred sales inducement amounts could have a material impact on our net income.
	•		Changes in federal tax laws may affect sales of our products and profitability.
	•		All segments of our business are highly regulated and these regulations or changes in them could affect our profitability.
	•		We face competition from companies having greater financial resources, broader arrays of products, higher ratings and stronger financial performance, which may impair our ability to retain existing customers, attract new customers and maintain our profitability and financial strength.
	•		Our Farm Bureau Life business is highly dependent on our relationships with Farm Bureau organizations and would be adversely affected if those relationships became impaired.
	•		We assumed a significant block of business through coinsurance agreements and have only a limited ability to manage this business.
	•		Our reinsurance program involves risks because we remain liable with respect to business ceded to reinsurers if the reinsurers fail to meet the obligations assumed by them.
	•		We may experience volatility in net income due to accounting standards for derivatives.
	•		We face risks relating to litigation, including the costs of such litigation, management distraction and the potential for damage awards, which may adversely impact our business.

See Part 1A, Risk Factors, of our annual report on Form 10-K for additional information.

ITEM 1. FINANCIAL STATEMENTS

FBL FINANCIAL GROUP, INC.

		September 30,				December 31,
		2006				2005
Assets
Investments:
Fixed maturities – available for sale, at market (amortized cost: 2006 - $8,124,510; 2005 - $6,841,432)		$	8,148,838			$	6,950,251
Fixed maturities – trading, at market (cost: 2006 - $15,001; 2005 - $15,004)			14,878				14,848
Equity securities – available for sale, at market (cost: 2006 - $35,587; 2005 - $54,565)			47,884				82,497
Mortgage loans on real estate			918,240				840,482
Derivative instruments			88,860				44,124
Investment real estate, less allowances for depreciation of $2,353 in 2006 and $2,235 in 2005			8,811				9,501
Policy loans			179,914				176,872
Other long-term investments			1,300				1,300
Short-term investments			26,059				179,333
Total investments			9,434,784				8,299,208
Cash and cash equivalents			7,313				5,120
Securities and indebtedness of related parties			25,148				23,379
Accrued investment income			103,954				81,491
Amounts receivable from affiliates			3,395				12,535
Reinsurance recoverable			137,148				116,032
Deferred policy acquisition costs			800,871				695,067
Deferred sales inducements			205,734				146,978
Value of insurance in force acquired			45,816				46,566
Property and equipment, less allowances for depreciation of $71,364 in 2006 and $64,568 in 2005			47,304				46,798
Goodwill			11,170				11,170
Other assets			37,998				29,694
Assets held in separate accounts			715,376				639,895
Total assets		$	11,576,011			$	10,153,933

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

		September 30,				December 31,
		2006				2005
Liabilities and stockholders’ equity
Liabilities:
Policy liabilities and accruals:
Future policy benefits:
Interest sensitive and index products		$	7,690,617			$	6,373,099
Traditional life insurance and accident and health products			1,236,258				1,206,598
Unearned revenue reserve			28,884				29,390
Other policy claims and benefits			30,993				25,835
			8,986,752				7,634,922
Other policyholders’ funds:
Supplementary contracts without life contingencies			388,590				383,455
Advance premiums and other deposits			161,114				165,672
Accrued dividends			11,395				11,736
			561,099				560,863
Amounts payable to affiliates			3,066				13,112
Long-term debt			218,410				218,446
Current income taxes			1,934				2,318
Deferred income taxes			72,186				88,148
Other liabilities			155,802				151,834
Liabilities related to separate accounts			715,376				639,895
Total liabilities			10,714,625				9,309,538
Minority interest in subsidiaries			136				164
Stockholders’ equity:
Preferred stock, without par value, at liquidation value – authorized 10,000,000 shares, issued and outstanding 5,000,000 Series B shares			3,000				3,000
Class A common stock, without par value – authorized 88,500,000 shares, issued and outstanding 28,422,478 shares in 2006 and 27,940,341 shares in 2005			83,942				72,260
Class B common stock, without par value – authorized 1,500,000 shares, issued and outstanding 1,192,990 shares			7,524				7,524
Accumulated other comprehensive income			31,766				82,301
Retained earnings			735,018				679,146
Total stockholders’ equity			861,250				844,231
Total liabilities and stockholders’ equity		$	11,576,011			$	10,153,933

See accompanying notes.

FBL FINANCIAL GROUP, INC.

		Three months ended September 30,								Nine months ended September 30,
		2006				2005				2006				2005
Revenues:
Interest sensitive and index product charges		$	26,935			$	23,834			$	78,744			$	71,895
Traditional life insurance premiums			33,355				31,649				103,516				101,897
Accident and health premiums			30				31				289				237
Net investment income			137,378				120,336				388,730				352,373
Derivative income (loss)			29,042				5,900				23,443				(6,380	)
Realized/unrealized gains (losses) on investments			(256	)			37				11,570				3,325
Other income			5,955				5,436				17,410				15,828
Total revenues			232,439				187,223				623,702				539,175
Benefits and expenses:
Interest sensitive and index product benefits			125,348				79,639				266,728				210,549
Traditional life insurance and accident and health benefits			24,323				20,714				69,574				64,651
Increase in traditional life and accident and health future policy benefits			5,911				8,244				25,222				26,902
Distributions to participating policyholders			5,493				5,393				16,984				17,235
Underwriting, acquisition and insurance expenses			32,765				40,040				121,727				115,546
Interest expense			2,954				3,427				8,793				10,097
Other expenses			5,149				5,466				16,019				15,016
Total benefits and expenses			201,943				162,923				525,047				459,996
			30,496				24,300				98,655				79,179
Income taxes			(9,807	)			(7,901	)			(32,872	)			(27,104	)
Minority interest in loss (earnings) of subsidiaries			1				(24	)			(125	)			(131	)
Equity income, net of related income taxes			16				644				484				575
Net income			20,706				17,019				66,142				52,519
Dividends on Series B preferred stock			(37	)			(37	)			(112	)			(112	)
Net income applicable to common stock		$	20,669			$	16,982			$	66,030			$	52,407
Earnings per common share		$	0.70			$	0.59			$	2.25			$	1.82
Earnings per common share – assuming dilution		$	0.69			$	0.58			$	2.21			$	1.79
Cash dividends per common share		$	0.115			$	0.105			$	0.345			$	0.315

See accompanying notes.

FBL FINANCIAL GROUP, INC.

														Accumulated
		Series B				Class A				Class B				Other								Total
		Preferred				Common				Common				Comprehensive				Retained				Stockholders’
		Stock				Stock				Stock				Income				Earnings				Equity
Balance at January 1, 2005		$	3,000			$	62,234			$	7,524			$	141,240			$	618,613			$	832,611
Comprehensive income:
Net income for nine months ended September 30, 2005			–				–				–				–				52,519				52,519
Change in net unrealized investment gains/losses			–				–				–				(37,700	)			–				(37,700	)
Total comprehensive income																							14,819
Stock based compensation, including the issuance of 377,616 common shares under compensation plans			–				8,806				–				–				–				8,806
Dividends on preferred stock			–				–				–				–				(112	)			(112	)
Dividends on common stock			–				–				–				–				(9,104	)			(9,104	)
Balance at September 30, 2005		$	3,000			$	71,040			$	7,524			$	103,540			$	661,916			$	847,020
Balance at January 1, 2006		$	3,000			$	72,260			$	7,524			$	82,301			$	679,146			$	844,231
Comprehensive income:
Net income for nine months ended September 30, 2006			–				–				–				–				66,142				66,142
Change in net unrealized investment gains/losses			–				–				–				(50,535	)			–				(50,535	)
Total comprehensive income																							15,607
Stock based compensation, including the issuance of 482,137 common shares under compensation plans			–				11,682				–				–				–				11,682
Dividends on preferred stock			–				–				–				–				(112	)			(112	)
Dividends on common stock			–				–				–				–				(10,158	)			(10,158	)
Balance at September 30, 2006		$	3,000			$	83,942			$	7,524			$	31,766			$	735,018			$	861,250

Comprehensive income (loss) totaled $150.6 million in the third quarter of 2006 and ($56.7) million in the third quarter of 2005.

See accompanying notes.

FBL FINANCIAL GROUP, INC.

		Nine months ended September 30,
		2006				2005
Operating activities
Net income		$	66,142			$	52,519
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments related to interest sensitive and index products:
Interest credited/index credits to account balances, excluding deferred sales inducements			197,723				176,868
Change in fair value of embedded derivatives			25,946				(2,025	)
Charges for mortality and administration			(72,634	)			(67,033	)
Deferral of unearned revenues			798				780
Amortization of unearned revenue reserve			(1,462	)			(963	)
Provision for depreciation and amortization of property and equipment			10,639				9,713
Provision for accretion and amortization of investments			(4,355	)			(4,830	)
Realized/unrealized gains on investments			(11,570	)			(3,325	)
Change in fair value of derivatives			(19,091	)			(1,498	)
Increase in traditional life and accident and health benefit accruals			29,660				29,239
Policy acquisition costs deferred			(140,021	)			(104,981	)
Amortization of deferred policy acquisition costs			49,523				42,542
Amortization of deferred sales inducements			13,357				7,073
Amortization of value of insurance in force			2,090				2,630
Net acquisition of fixed maturities – trading			–				(15,006	)
Change in accrued investment income			(22,463	)			(17,477	)
Change in amounts receivable from/payable to affiliates			(906	)			(2,156	)
Change in reinsurance recoverable			(21,116	)			6,802
Change in current income taxes			(384	)			(4,540	)
Provision for deferred income taxes			11,249				1,433
Other			(52,406	)			(3,265	)
Net cash provided by operating activities			60,719				102,500
Investing activities
Sale, maturity or repayment of investments:
Fixed maturities – available for sale			308,212				707,082
Equity securities – available for sale			32,725				1,261
Mortgage loans on real estate			59,706				33,571
Derivative instruments			49,682				8,864
Investment real estate			522				–
Policy loans			27,901				27,713
Short-term investments – net			153,274				–
			632,022				778,491
Acquisition of investments:
Fixed maturities – available for sale			(1,573,429	)			(1,280,320	)
Equity securities – available for sale			(256	)			(429	)
Mortgage loans on real estate			(137,397	)			(96,922	)
Derivative instruments			(52,497	)			(22,986	)
Investment real estate			–				(40	)
Policy loans			(30,943	)			(27,553	)
Short-term investments – net			–				(15,896	)
			(1,794,522	)			(1,444,146	)

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

		Nine months ended September 30,
		2006				2005
Investing activities – continued
Proceeds from disposal, repayments of advances and other distributions of capital from equity investees		$	640			$	1,867
Investments in and advances to equity investees			(1,200	)			–
Purchases of property and equipment			(14,585	)			(14,595	)
Disposal of property and equipment			3,440				1,612
Net cash used in investing activities			(1,174,205	)			(676,771	)
Financing activities
Receipts from interest sensitive and index products credited to policyholder account balances			1,666,761				1,023,244
Return of policyholder account balances on interest sensitive and index products			(552,341	)			(464,226	)
Distributions related to minority interests – net			(153	)			(162	)
Excess tax deductions on stock-based compensation			1,340				–
Issuance of common stock			10,342				7,385
Dividends paid			(10,270	)			(9,216	)
Net cash provided by financing activities			1,115,679				557,025
Increase (decrease) in cash and cash equivalents			2,193				(17,246	)
Cash and cash equivalents at beginning of period			5,120				27,957
Cash and cash equivalents at end of period		$	7,313			$	10,711
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	7,684			$	7,655
Income taxes			19,428				29,101
Non-cash operating activity:
Deferral of sales inducements			65,763				54,371
Non-cash financing activity:
Reclassification of short-term debt to long-term debt upon refinancing			–				46,000

See accompanying notes.

FBL Financial Group, Inc.		September 30, 2006

FBL FINANCIAL GROUP, INC.

1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements of FBL Financial Group, Inc. (we or the Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Our financial statements include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of our financial position and results of operations. Operating results for the three- and nine-month periods ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. We encourage you to refer to our consolidated financial statements and notes for the year ended December 31, 2005 included in our annual report on Form 10-K for a complete description of our material accounting policies. Also included in the Form 10-K is a description of areas of judgments and estimates and other information necessary to understand our financial position and results of operations.

Accounting Change and Stock Based Compensation

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (Statement) No. 123(R), “Share-Based Payment,” using the modified-prospective-transition method. Statement No. 123(R) is a revision of Statement No. 123, “Accounting for Stock-Based Compensation.” Using the modified-prospective-transition method, we have recognized compensation expense in 2006 for all share-based payments granted, modified or settled after the date of adoption, as well as for any awards that were granted prior to the adoption date for which the requisite service had not been provided as of the adoption date. The stock option expense is recognized over the shorter of our five-year vesting schedule or the period ending when the employee becomes eligible for retirement using the straight-line method. In addition, the impact of forfeitures is estimated and compensation expense is recognized only for those options expected to vest. Also, under Statement No. 123(R) we have reported stock option-related tax deductions in excess of recognized compensation expense as a financing cash flow.

As a result of adopting Statement No. 123(R), net income for the full year 2006 is expected to be $0.2 million lower (less than $0.01 per basic and diluted common share) than if we had continued to account for share-based compensation under Statement No. 123. This includes a cumulative effect adjustment of $0.1 million (less than $0.01 per basic and diluted common share) relating to the change in accounting for forfeitures which is recorded as a reduction to compensation expense in our 2006 consolidated income statement. For the nine months ended September 30, 2006, the impact of adopting Statement No. 123(R), including the cumulative effect adjustment, was to decrease net income by $0.2 million. Also, for the nine months ended September 30, 2006, $1.3 million of excess tax deductions are classified as financing cash inflows instead of operating cash inflows as they would have been under Statement No. 123. Results for prior periods have not been restated.

Prior to January 1, 2006, we followed the prospective method under Statement No. 123, which we adopted effective January 1, 2003. Under the prospective method, expense was recognized for those options granted, modified or settled after the date of adoption. The expense was generally recognized ratably over our five-year vesting period without regard to when an employee became eligible for retirement and immediate vesting. In addition, the impact of forfeitures was recognized when they occurred.

FBL Financial Group, Inc.		September 30, 2006

The following table illustrates the effect on net income and earnings per share if the fair value based method under Statement No. 123 had been applied to all outstanding and unvested awards.

		Three months ended				Nine months ended
		September 30,				September 30,
		2005
		(Dollars in thousands, except per share data)
Net income, as reported:		$	17,019			$	52,519
Add: Stock-based employee and director compensation expense included in reported net income, net of related tax effects			471				1,343
Less: Total stock-based employee and director compensation expense determined under fair value based methods for all awards, net of related tax effects			(564	)			(1,624	)
Net income, pro forma		$	16,926			$	52,238
Earnings per common share, as reported		$	0.59			$	1.82
Earnings per common share, pro forma		$	0.58			$	1.81
Earnings per common share – assuming dilution, as reported		$	0.58			$	1.79
Earnings per common share – assuming dilution, pro forma		$	0.57			$	1.78

We have two share-based payment arrangements under our Class A Common Stock Compensation Plan (the Plan), which are described below. Compensation expense for these arrangements for the nine months ended September 30 totaled $2.3 million for 2006 and $1.5 million for 2005. The income tax benefit recognized in the income statement for these arrangements for the nine months ended September 30 totaled $0.8 million for 2006 and $0.4 million for 2005.

Stock Option Awards

We grant stock options for Class A common stock to directors, officers and employees. For officers and employees, the options have a contractual term of 10 years and generally vest over a period up to five years, contingent upon continued employment with us. Options to directors are fully vested upon grant and have a contractual term that varies with the length of time the director remains on the Board, up to ten years. The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. We use the historical realized volatility of our stock for expected volatilities within the valuation model. For the 2006 period, the weighted-average expected term for the majority of our options is presumed to be the mid-point between the vesting date and the end of the contractual term, also known as the “shortcut method.” We assume the contractual term approximates the expected life for the remaining options. For the 2005 period, we used historical data to estimate option exercises and employee terminations to determine the expected term assumption. We use the shortcut method due to limited historical share option exercise experience. The change in this assumption did not have a material impact on the expected term of the stock options. Assumptions used in our valuation model for the 2006 and 2005 periods are as follows:

		Nine months ended September 30,
		2006				2005
Weighted average risk-free interest rate			4.33	%			4.01	%
Dividend yield			1.40	%			1.50	%
Weighted average volatility factor of the expected market price			0.24				0.32
Weighted average expected term		5.6 years				6.4 years

FBL Financial Group, Inc.		September 30, 2006

A summary of stock option activity as of September 30, 2006, and changes during the nine month period then ended is as follows:

										Weighted-
										Average
										Remaining
						Weighted-				Contractual
		Number of				Average Exercise				Term (in				Aggregate
		Shares				Price per Share				Years)				Intrinsic Value
		(Dollars in thousands, except per share data)
Shares under option at January 1, 2006			2,068,576			$	21.00
Granted			453,468				32.57
Exercised			(360,028	)			16.84
Forfeited or expired			(20,462	)			27.02
Shares under option at September 30, 2006			2,141,554			$	24.09				7.02			$	20,087
Vested at September 30, 2006 or expected to vest in the future			2,116,595			$	24.04				7.00			$	19,969
Exercisable options at September 30, 2006			1,064,977			$	21.11				5.98			$	13,167

The weighted average grant-date fair value of options granted per common share for the nine months ended September 30 was $8.64 for 2006 and $8.86 for 2005. The intrinsic value of options exercised during the nine months ended September 30 totaled $5.9 million for 2006 and $4.7 million for 2005.

Unrecognized compensation expense related to nonvested share-based compensation granted under the stock option arrangement totaled $3.6 million as of September 30, 2006. This expense is expected to be recognized over a weighted-average period of 3.0 years.

We issue new shares to satisfy stock option exercises. We do not have a policy of repurchasing shares on the open market to satisfy share-based payment arrangements. Cash received from stock options exercised totaled $5.7 million for the nine months ended September 30, 2006 and $4.8 million for the nine months ended September 30, 2005. The actual tax benefit realized from stock options exercised totaled $1.7 million for the nine months ended September 30, 2006 and $1.4 million for the nine months ended September 30, 2005.

Performance Based Restricted Stock

We also grant restricted Class A common shares to certain executives. The restrictions on this stock lapse and the stock vests if the Company meets or exceeds operating goals, such as earnings per share and return on equity targets within or during a three year period. Depending on performance, the actual amount of shares issued could range from zero to 100% of the granted amount. The value of the awards is based on the grant date fair value of the restricted stock adjusted for expected forfeitures and an estimate of the number of shares expected to vest. The estimate for the number of shares to vest is reviewed each period and the impact of any changes in the estimate on expense is recorded in the current period. These awards are charged to expense using the straight-line method over the required service period.

A summary of restricted stock activity as of September 30, 2006, and changes during the period then ended is as follows:

						Weighted-
						Average Grant-
						Date Fair Value
		Number of Shares				per Share
Restricted stock at January 1, 2006			86,256			$	26.02
Granted			133,493				33.93
Forfeited			(1,811	)			33.98
Restricted stock at September 30, 2006			217,938				30.80

FBL Financial Group, Inc.		September 30, 2006

There has been no restricted stock vested and released to employees as of September 30, 2006. Unrecognized compensation expense related to unvested share-based compensation granted under the restricted stock arrangement totaled $1.2 million as of September 30, 2006. This expense is expected to be recognized over a weighted-average period of 1.8 years.

Pending Accounting Changes

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R).” This Statement requires the recognition of an asset or liability in the consolidated balance sheet based on the funded status of a defined benefit postretirement plan and changes in the funded status of the plan are recorded as a component of comprehensive income in the year in which the changes occur. These requirements are effective for fiscal years ending after December 15, 2006. Statement No. 158 also requires measurement of a plan’s assets and benefit obligations as of the end of the employer’s fiscal year, beginning with fiscal years ending after December 15, 2008. This Statement will have no impact on our consolidated financial statements as we participate with several affiliates in various multiemployer defined benefit plans, which are exempt from this Statement.

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value and expands the required disclosures about fair value measurements. This Statement is effective for fiscal years beginning after November 15, 2007. The impact of adoption is not expected to be material to our consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” Interpretation No. 48 creates a single model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. Under the Interpretation, a tax position can be recognized in the financial statements if it is more likely than not that the position will be sustained upon examination by taxing authorities who have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. Interpretation No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Interpretation No. 48 is effective beginning in 2007. We have not yet determined the impact of adopting Interpretation No. 48 on our consolidated financial statements.

In February 2006, the FASB issued Statement No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statement No. 133 and 140.” Statement No. 155 simplifies the accounting for certain hybrid financial instruments by permitting fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation and eliminates a restriction on passive derivative instruments that a qualifying special-purpose entity may hold. Statement No. 155 is effective for all financial instruments acquired, issued, or subject to a remeasurement (new basis) event occurring in fiscal years that begin after September 15, 2006. The FASB is currently reviewing how this guidance should be applied to certain mortgage and other asset-backed securities. Due to uncertainties with how this guidance will be interpreted, we have not yet determined the impact of adopting Statement
No. 155.

In September 2005, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts.” The SOP provides guidance on the accounting for internal replacements of one insurance contract for another insurance contract. Under the SOP, an internal replacement that is determined to result in a replacement contract that is substantially changed from the replaced contract is accounted for as an extinguishment of the replaced contract. As an extinguishment, the unamortized deferred policy acquisition costs, deferred sales inducements, value of insurance in force acquired and unearned revenue reserves from the replaced contract are written off at the time of the extinguishment. An internal replacement that is determined to result in a replacement contract that is substantially unchanged from the replaced contract is accounted for as a continuation of the replaced contract. The SOP is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. Due to

FBL Financial Group, Inc.		September 30, 2006

uncertainties with how this guidance will be interpreted, we have not yet determined the impact of adopting this SOP, which we plan to implement in 2007.

Interest Sensitive and Index Product Benefits

During the third quarter of 2006, we reduced our reserves for the embedded derivative in our coinsured index annuities $7.1 million. This adjustment, which is the correction of an overstatement that started in 2001, increased third quarter net income $2.6 million ($0.09 per basic and diluted common share) after offsets for taxes and the amortization of deferred policy acquisition costs and deferred sales inducements. The impact to the financial statement line items affected by this overstatement is not material. This adjustment does not impact our segment results as the segment results are based on operating income which, as explained in Note 5, excludes the impact of changes in the valuation of derivatives. This adjustment is also not material to any prior period financial statements.

Underwriting, Acquisition and Insurance Expenses

Underwriting, acquisition and insurance expenses include a pre-tax charge of $4.9 million ($0.11 per basic and diluted common share) for the nine months ended September 30, 2006 relating to the settlement of a lawsuit with a husband and wife who had applied for life insurance policies. The settlement ends litigation regarding the process we followed in denying insurance coverage for medical reasons. The settlement, recorded in the second quarter, was entered into after adverse judicial rulings were made against us in June 2006. Prior to the issuance of the adverse judicial rulings, a material loss, net of insurance recoveries, was not deemed to be reasonably possible.

Insurance claims have been filed under our professional liability and general liability insurance policies for reimbursement of the settlement amount, but coverage has been denied, and we have filed a claim against an insurance broker for breach of contractual duties. We believe these claims are valid and have filed lawsuits against the insurer and the insurance broker to recover damages. Recoveries from third parties are required to be accounted for as gain contingencies and not recorded in our financial statements until the lawsuits are resolved. Accordingly, our financial statements for the nine months ended September 30, 2006 include the $4.9 million settlement expense, but any recoveries will be recorded in net income in the period the recovery is received.

Reclassifications

Certain amounts in the 2005 consolidated statement of cash flows have been reclassified to conform to the 2006 financial statement presentation.

2. Defined Benefit Plans

We participate with several affiliates in various multiemployer defined benefit plans. Our share of net periodic pension cost for the plans recorded in our consolidated income statements for the third quarter totaled $1.6 million for 2006 and $1.5 million for 2005 and for the nine months ended September 30 totaled $4.8 million for 2006 and $4.6 million for 2005. Components of net periodic pension cost for all employers in the multiemployer plans are as follows:

		Three months ended September 30,								Nine months ended September 30,
		2006				2005				2006				2005
		(Dollars in thousands)
Service cost		$	2,396			$	2,162			$	7,188			$	6,485
Interest cost			3,428				3,408				10,284				10,226
Expected return on assets			(2,746	)			(2,712	)			(8,238	)			(8,136	)
Amortization of prior service cost			201				396				603				1,187
Amortization of actuarial loss			1,398				1,046				4,194				3,139
Net periodic pension cost – all employers		$	4,677			$	4,300			$	14,031			$	12,901

FBL Financial Group, Inc.		September 30, 2006

3. Commitments and Contingencies

In the normal course of business, we may be involved in litigation where amounts are alleged that are substantially more than contractual policy benefits or those contained in certain other agreements. At September 30, 2006, management is not aware of any claims for which a material loss is reasonably possible. See Note 1, “Significant Accounting Policies – Underwriting, Acquisition and Insurance Expenses” for disclosure of a gain contingency relating to a lawsuit settlement.

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

We participate in a reinsurance pool with various unaffiliated life insurance companies to mitigate the impact of a catastrophic event on our financial position and results of operations. Members of the pool share in the eligible catastrophic losses based on their size and contribution to the pool. Under the pool arrangement, we will be able to cede approximately 60% of catastrophic losses after other reinsurance and a deductible of $0.8 million. Pool losses are capped at $11.7 million per event and the maximum loss we could incur as a result of losses assumed from other pool members is $4.2 million per event.

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

FBL Financial Group, Inc.		September 30, 2006

4. Earnings Per Share

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

		Three months ended September 30,								Nine months ended September 30,
		2006				2005				2006				2005
		(Dollars in thousands, except per share data)
Numerator:
Net income		$	20,706			$	17,019			$	66,142			$	52,519
Dividends on Series B preferred stock			(37	)			(37	)			(112	)			(112	)
Numerator for earnings per common share-income available to common stockholders		$	20,669			$	16,982			$	66,030			$	52,407
Denominator:
Weighted average shares			29,385,046				28,923,152				29,303,253				28,826,035
Deferred common stock units relating to deferred compensation plans			48,530				31,486				45,220				29,124
Denominator for earnings per common share – weighted-average shares			29,433,576				28,954,638				29,348,473				28,855,159
Effect of dilutive securities – stock based compensation			452,974				514,135				487,887				501,919
Denominator for diluted earnings per common share – adjusted weighted-average shares			29,886,550				29,468,773				29,836,360				29,357,078
Earnings per common share		$	0.70			$	0.59			$	2.25			$	1.82
Earnings per common share – assuming dilution		$	0.69			$	0.58			$	2.21			$	1.79

Based upon the provisions of the underlying agreement and the application of the “two class” method to our capital structure, we have not allocated undistributed net income to the unvested Class A restricted stock as those instruments possess certain characteristics, such as vesting, that differ from instruments defined as participating securities under current accounting guidance. Also, for the three and nine months ended September 30, 2005, we did not allocate any undistributed net income to the Series C preferred stock since the Series C preferred stockholder’s participation in dividends with the common stockholders was limited to the amount of the quarterly regular dividend.

5. Segment Information

We analyze operations by reviewing financial 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. We also have various support operations and corporate capital that are aggregated into a Corporate and Other segment.

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) represents net income excluding the impact, net of tax, of (1) realized and unrealized gains and losses on investments, (2) changes in net unrealized gains and losses on derivatives and (3) for 2006, a lawsuit settlement.

FBL Financial Group, Inc.		September 30, 2006

We use operating income, in addition to net income, to measure our performance since realized and unrealized gains and losses on investments and the change in net unrealized gains and losses on derivatives can fluctuate greatly from quarter to quarter, and the lawsuit settlement in the nine month period of 2006 is a nonrecurring item. These fluctuations make it difficult to analyze core operating trends. In addition, for derivatives not designated as hedges, there is a mismatch between the valuation of the asset and liability when deriving net income. Specifically, call options relating to our index business are one 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 entire period the index annuities are expected to be in force. For our other embedded derivatives in the product segments, the embedded derivatives are marked to market, but the associated insurance liabilities are not marked to market. A view of our operating performance without the impact of these mismatches and nonrecurring item enhances the analysis of our results. We use operating income for goal setting, determining company-wide bonuses and evaluating performance on a basis comparable to that used by many in the investment community.

Financial information concerning our operating segments is as follows:

		Three months ended September 30,								Nine months ended September 30,
		2006				2005				2006				2005
					(Dollars in thousands)
Operating revenues:
Traditional Annuity – Exclusive Distribution		$	37,510			$	37,510			$	109,563			$	110,797
Traditional Annuity – Independent Distribution			60,300				54,119				163,050				126,606
Traditional and Universal Life Insurance			79,970				77,587				243,368				240,908
Variable			14,725				14,187				43,919				42,124
Corporate and Other			7,459				8,084				22,397				23,316
			199,964				191,487				582,297				543,751
Realized/unrealized gains (losses) on investments (A)			(258	)			37				11,569				3,324
Change in net unrealized gains/losses on derivatives (A)			32,733				(4,301	)			29,836				(7,900	)
Consolidated revenues		$	232,439			$	187,223			$	623,702			$	539,175
Pre-tax operating income (loss):
Traditional Annuity – Exclusive Distribution		$	10,331			$	6,938			$	26,961			$	25,248
Traditional Annuity – Independent Distribution			8,453				5,634				21,396				16,623
Traditional and Universal Life Insurance			16,790				13,884				43,413				41,535
Variable			(995	)			573				2,275				290
Corporate and Other			(1,109	)			(521	)			(3,420	)			(3,000	)
			33,470				26,508				90,625				80,696
Income taxes on operating income			(10,848	)			(8,683	)			(30,106	)			(27,681	)
Realized/unrealized gains (losses) on investments (A)			(52	)			(6	)			7,729				1,795
Change in net unrealized gains/losses on derivatives (A)			(1,864	)			(800	)			1,066				(2,291	)
Lawsuit settlement (A)			–				–				(3,172	)			–
Consolidated net income		$	20,706			$	17,019			$	66,142			$	52,519

(A)

Amounts are net of adjustments, as applicable, to amortization of unearned revenue reserves, deferred policy acquisition costs, deferred sales inducements, value of insurance in force acquired and income taxes attributable to these items.

Our investment in equity method investees, the related equity income and interest expense are attributable to the Corporate and Other segment. Goodwill at September 30, 2006 and December 31, 2005 is allocated among the

segments as follows: Exclusive Annuity ($3.9 million), Traditional and Universal Life Insurance ($6.1 million) and Variable ($1.2 million).

FBL Financial Group, Inc.		September 30, 2006

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

This section includes a summary of FBL Financial Group, Inc.’s consolidated results of operations, financial condition and where appropriate, factors that management believes may affect future performance. Unless noted otherwise, all references to FBL Financial Group, Inc. (we or the Company) include all of its direct and indirect subsidiaries, including its primary life insurance subsidiaries, Farm Bureau Life Insurance Company (Farm Bureau Life) and EquiTrust Life Insurance Company (EquiTrust Life) (collectively, the Life Companies). Please read this discussion in conjunction with the accompanying consolidated financial statements and related notes. In addition, we encourage you to refer to our 2005 Form 10-K for a complete description of our significant accounting policies and estimates. Familiarity with this information is important in understanding our financial position and results of operations.

Results of Operations for the Three and Nine Months Ended September 30, 2006 Compared to Three and Nine Months Ended September 30, 2005

		Three months ended September 30,								Nine months ended September 30,
		2006				2005				2006				2005
		(Dollars in thousands, except per share data)
Revenues		$	232,439			$	187,223			$	623,702			$	539,175
Benefits and expenses			201,943				162,923				525,047				459,996
			30,496				24,300				98,655				79,179
Income taxes			(9,807	)			(7,901	)			(32,872	)			(27,104	)
Minority interest and equity income			17				620				359				444
Net income			20,706				17,019				66,142				52,519
Less dividends on Series B preferred stock			(37	)			(37	)			(112	)			(112	)
Net income applicable to common stock		$	20,669			$	16,982			$	66,030			$	52,407
Earnings per common share		$	0.70			$	0.59			$	2.25			$	1.82
Earnings per common share – assuming dilution		$	0.69			$	0.58			$	2.21			$	1.79
Other data
Direct premiums collected, net of reinsurance ceded:
Traditional Annuity – Exclusive Distribution		$	28,106			$	41,004			$	107,418			$	140,830
Traditional Annuity – Independent Distribution			635,048				243,191				1,353,964				661,656
Traditional and Universal Life Insurance			41,928				39,893				131,501				129,278
Variable Annuity and Variable Universal Life (1)			32,818				40,002				117,835				125,261
Reinsurance assumed and other			3,826				4,213				12,967				15,637
Total		$	741,726			$	368,303			$	1,723,685			$	1,072,662
Direct life insurance in force, end of quarter (in millions)										$	37,817			$	35,367
Life insurance lapse rates											6.6	%			7.1	%
Withdrawal rates – individual traditional annuity:
Exclusive Distribution											5.4	%			3.2	%
Independent Distribution											5.0	%			5.1	%

(1)

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

FBL Financial Group, Inc.		September 30, 2006

Premiums collected is not a measure used in financial statements prepared according to U.S. generally accepted accounting principles (GAAP). There is no comparable GAAP financial measure. We use premiums collected to measure the productivity of our exclusive and independent agents. Direct Traditional Annuity – Independent Distribution premiums collected increased significantly in the nine months ended September 30, 2006 compared to the 2005 period due to continued growth of our EquiTrust Life independent distribution channel. This is driven largely by an increase in the number of licensed independent agents to 17,402 at September 30, 2006, from 8,720 at September 30, 2005.

Net income applicable to common stock increased 21.7% in the third quarter of 2006 to $20.7 million and 26.0% in the nine months ended September 30, 2006 to $66.0 million. As discussed in detail below, net income applicable to common stock for the 2006 periods was positively impacted by growth in the volume of business in force and an adjustment to a reserve for an embedded derivative. These items were partially offset by an increase in death and surrender benefits. The third quarter also benefited from a decrease in underwriting, acquisition and insurance expenses. The nine-month period of 2006 also benefited from an increase in realized gains on investments, partially offset by an increase in expenses resulting from a lawsuit settlement in the second quarter of 2006 totaling $4.9 million ($0.11 per basic and diluted common share, after taxes).

During the third quarter of 2006, we reduced our reserves for the embedded derivative in our coinsured index annuities $7.1 million. This adjustment, which is the correction of an overstatement that started in 2001, increased third quarter net income $2.6 million ($0.09 per basic and diluted common share) after offsets for taxes and the amortization of deferred policy acquisition costs and deferred sales inducements. The impact to the financial statement line items affected by this overstatement is not material. This adjustment does not impact our segment results as the segment results are based on operating income which, as explained in the section entitled “Segment Information”, excludes the impact of changes in the valuation of derivatives. This adjustment is also not material to any prior period financial statements.

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

		Nine months ended September 30,
		2006				2005
Weighted average yield on cash and invested assets			6.01	%			6.22	%
Weighted average interest crediting rate/index cost			3.51				3.69
Spread			2.50	%			2.53	%

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

Premiums and product charges are as follows:

		Three months ended September 30,								Nine months ended September 30,
		2006				2005				2006				2005
						(Dollars in thousands)
Premiums and product charges:
Interest sensitive and index product charges		$	26,935			$	23,834			$	78,744			$	71,895
Traditional life insurance premiums			33,355				31,649				103,516				101,897
Accident and health premiums			30				31				289				237
Total		$	60,320			$	55,514			$	182,549			$	174,029

Premiums and product charges increased 8.7% in the third quarter of 2006 to $60.3 million and 4.9% in the nine months ended September 30, 2006 to $182.5 million. The increases in interest sensitive and index product charges

FBL Financial Group, Inc.		September 30, 2006

are driven principally by surrender charges on annuity and universal life products, cost of insurance charges on variable universal life and universal life products and mortality and expense fees on variable products.

Surrender charges totaled $13.9 million in the nine-month period ended September 30, 2006 compared to $10.0 million in the 2005 period. Surrender charges increased due primarily to an increase in surrenders relating to growth in the volume and aging of business in force. The average aggregate account value for annuity and universal life insurance in force, which increased due to an increase in premiums collected as summarized in the “Other data” table above, totaled $6,647.8 million for the nine-month period in 2006 and $5,403.8 million for the nine-month period in 2005. We believe aging of the business in force is driving a portion of the increase in surrender charges relating to the annuity business assumed under the coinsurance agreement with American Equity Investment Life Insurance Company (the coinsurance agreement) and business written directly through the EquiTrust Life independent agents as the surrender charge rate decreases with the passage of time (at a rate generally equal to 1.0% per year). This makes a surrender later in the contract period less onerous on the contract holder. We started assuming business under the coinsurance agreement in 2001 and started selling annuities directly through EquiTrust Life independent agents in the fourth quarter of 2003. Surrender charges on this coinsurance and direct business totaled $11.8 million for the nine months ended September 30, 2006 and $7.9 million for the 2005 period.

Cost of insurance charges totaled $47.7 million in the nine months ended September 30, 2006 and $46.2 million in the 2005 period. Cost of insurance charges increased due primarily to aging of the business in force as the cost of insurance charge rate per each $1,000 in force increases with the age of the insured. The average age of our universal life and variable universal life policyholders was 45.0 years at September 30, 2006 and 44.5 years at September 30, 2005.

Mortality and expense fees totaled $5.9 million in the nine-month period ended September 30, 2006 and $5.1 million in the 2005 period. Mortality and expense fees increased due to an increase in the separate account balances on which fees are based. The average separate account balance increased to $680.9 million for the nine-month period in 2006, from $575.1 million for the nine-month period in 2005 due to the impact of new sales and favorable investment results. Transfers of premiums to the separate accounts totaled $93.6 million for the nine months ended September 30, 2006 and $88.5 million for the 2005 period. Net investment income and net realized and unrealized gains on separate account assets totaled $39.8 million in the nine-month period of 2006 compared to $26.3 million in the 2005 period.

Traditional premiums increased due to an increase in the volume of business in force in the 2006 periods partially offset by an increase in reinsurance ceded. The increase in the business in force is attributable primarily to sales of traditional life products by our Farm Bureau Life agency force exceeding the loss of in force amounts through deaths, lapses and surrenders. Our average aggregate traditional life insurance in force, net of reinsurance ceded, totaled $18,196 million for the nine-month period in 2006 and $16,976 million for the nine-month period in 2005. The change in life insurance in force is not proportional to the change in premium income due to the change in reinsurance premium ceded and to a shift in the composition of our traditional life block of business from whole life policies to term policies. The premium for a term policy per $1,000 face amount is less than that for a whole life policy.

Net investment income, which excludes investment income on separate account assets relating to variable products, increased 14.2% in the third quarter of 2006 to $137.4 million and 10.3% in the nine months ended September 30, 2006 to $388.7 million due primarily to an increase in average invested assets, partially offset by a decrease in the annualized yield earned on those assets. Average invested assets in the nine-month period of 2006 increased 14.3% to $8,603.4 million (based on securities at amortized cost) from $7,529.0 million in the 2005 period, due principally to net premium inflows from the Life Companies. The annualized yield earned on average invested assets decreased to 6.07% in the nine months ended September 30 2006 from 6.29% in the respective 2005 period. Market conditions in the first nine months of 2006 and the full year of 2005 impacted our investment portfolio yield as market investment rates were, in general, lower than our portfolio yield or yield on investments maturing or being paid down. The average yields on fixed maturities purchased were 5.97% for the nine-month period of 2006 and 5.44% for the year ended December 31, 2005. The average yields on fixed maturity securities maturing or being paid down were 6.52% for the nine-month period of 2006 and 6.10% for the year ended December 31, 2005. Fee income from bond calls, tender offers and mortgage loan prepayments totaled $4.9 million in the nine months ended

FBL Financial Group, Inc.		September 30, 2006

September 30, 2006 compared to $6.2 million in the respective 2005 period. In addition, during the first nine months we recorded $0.1 million in 2006 and $0.9 million in 2005 of net investment income representing past due income that had not been accrued, relating to the redemption of fixed maturity securities that had been impaired in a prior period. For the nine months ended September 30, net investment income includes less than $0.1 million in 2006 and ($0.5) million in 2005, representing the acceleration (reversal) of net discount accretion on mortgage and asset-backed securities resulting from changing prepayment speed assumptions as of the end of each respective period. See the “Financial Condition – Investments” section that follows for a description of how changes in prepayment speeds impact net investment income.

Derivative income (loss) is as follows:

		Three months ended September 30,								Nine months ended September 30,
		2006				2005				2006				2005
						(Dollars in thousands)
Derivative income (loss):
Components of derivative income (loss) from call options:
Gains received at expiration		$	15,544			$	21,693			$	44,699			$	32,294
Change in the difference between fair value and remaining option cost at beginning and end of period			32,748				(3,971	)			30,324				(7,413	)
Cost of money for call options			(19,401	)			(11,628	)			(51,436	)			(31,040	)
			28,891				6,094				23,587				(6,159	)
Other			151				(194	)			(144	)			(221	)
Total		$	29,042			$	5,900			$	23,443			$	(6,380	)

Gains received at expiration in the 2006 periods were positively impacted by growth in the volume of index annuities in force, but decreased in the third quarter and increased in the nine month period of 2006 as a result of changes in the amount of appreciation in the market indices on which our options are based. The average aggregate account value of index annuities in force, which has increased due to new sales, totaled $3,078.2 million for the nine months ended September 30, 2006 compared to $2,195.1 million for the respective 2005 period. The changes in the difference between the fair value of the call options and the remaining option costs for 2006 are caused primarily by the change in the S&P 500 Index (upon which the majority of our options are based). For the third quarter of 2006, the S&P 500 Index increased on a point-to-point basis by 5.2%, compared to a point-to-point increase of 3.1% for the 2005 period. For the nine months ended September 30, 2006, the S&P 500 Index increased on a point-to-point basis by 7.0%, compared to a point-to-point increase of 1.4% for the 2005 period. While the difference between the fair value of the call options and the remaining option costs generally corresponds to the point-to-point change in the S&P 500 Index, the change in fair value is also impacted by options based on daily or monthly S&P 500 Index averages and options which are based on other underlying indices. Furthermore, the timing of option settlements also impacts the change in fair value. The cost of money for call options increased due primarily to the impact of growth in the volume of index annuities in force. Other derivative income (loss) is comprised of changes in the value of the conversion feature embedded in convertible fixed maturity securities and the embedded derivative included in our modified coinsurance contracts. Derivative income (loss) will fluctuate based on market conditions.

Realized/unrealized gains (losses) on investments are as follows:

		Three months ended September 30,								Nine months ended September 30,
		2006				2005				2006				2005
						(Dollars in thousands)
Realized/unrealized gains (losses) on investments:
Realized gains on sales		$	264			$	683			$	14,491			$	7,604
Realized losses on sales			(603	)			(6	)			(614	)			(1,903	)
Realized losses due to impairments			–				(517	)			(2,340	)			(2,249	)
Unrealized gains (losses) on trading securities			83				(123	)			33				(127	)
Total		$	(256	)		$	37			$	11,570			$	3,325

FBL Financial Group, Inc.		September 30, 2006

The level of realized/unrealized gains (losses) is subject to fluctuation from period to period depending on the prevailing interest rate and economic environment and the timing of the sale of investments. See “Financial Condition – Investments” for details regarding our unrealized gains and losses on available-for-sale securities at September 30, 2006 and December 31, 2005. Gains on sales in the nine-month period of 2006 period include $13.5 million related to the sale of 2,500,000 shares of our investment in American Equity Investment Life Holding Company (AEL) common stock.

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

	•		historical operating trends;
	•		business prospects;
	•		status of the industry in which the company operates;
	•		analyst ratings on the issuer and sector;
	•		quality of management;
	•		size of the unrealized loss;
	•		length of time the security has been in an unrealized loss position; and
	•		our intent and ability to hold the security.

If we determine that an unrealized loss is other than temporary, the security is written down to its fair value with the difference between amortized cost and fair value recognized as a realized loss. Details regarding our significant investment impairments for the nine months ended September 30, 2006 and 2005, including the circumstances requiring the write downs, are summarized in the following table:

		Impairment
General Description		Loss				Circumstance
		(Dollars in
		thousands)
Nine months ended September 30, 2006:
Major United States credit company		$	986			Valuation of this security is tied to the strength of its parent. During the first quarter, continued rating declines and other adverse details regarding the financial status of the parent company became available. (A)
Major United States automaker		$	648			During the first quarter, continued rating declines and other adverse details regarding the financial status of the company became available. In addition, the company faces labor strikes and restated its financial statements during the quarter. (A)
Major United States automaker		$	643			During the first quarter, continued rating declines and other adverse details regarding the financial status of the company became available. (A)
Nine months ended September 30, 2005:
Major United States airline		$	435			During the third quarter, adverse details regarding the financial status of the company became available and the company filed for bankruptcy protection. We wrote this previously impaired issue down to the current market value on the bankruptcy date. (A)
Major United States automaker		$	1,295			During the second quarter, adverse details regarding the financial status of the company became available. (A)

FBL Financial Group, Inc.		September 30, 2006

(A)

Negative trends in this segment of the industry were considered in our analysis, which is done on an issue-by-issue basis. We concluded that there is no impact on other material investments in addition to amounts already written down.

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

Interest sensitive and index product benefits are as follows:

		Three months ended September 30,								Nine months ended September 30,
		2006				2005				2006				2005
						(Dollars in thousands)
Interest sensitive and index product benefits:
Interest credited		$	53,051			$	48,261			$	149,069			$	143,307
Index credits			15,848				21,436				46,342				33,494
Change in value of embedded derivative			43,453				(5,037	)			25,946				(2,025	)
Amortization of deferred sales inducements			525				4,088				13,300				6,935
Interest sensitive death benefits			12,471				10,891				32,071				28,838
Total		$	125,348			$	79,639			$	266,728			$	210,549

Interest sensitive and index product benefits increased 57.4% in the third quarter of 2006 to $125.3 million and 26.7% in the nine months ended September 30, 2006 to $266.7 million. The 2006 periods were impacted by an increase in market appreciation on the indices backing the index annuities, the impact of an increase in the volume of annuity business in force and an increase in interest sensitive death benefits. Interest sensitive and index product benefits tend to fluctuate from period to period primarily as a result of changes in mortality experience and the impact of changes in the equity markets on index credits, the value of the embedded derivatives in our index annuities and amortization of deferred sales inducements.

The average aggregate account value of annuity contracts in force, which increased due to an increase in premiums collected as summarized in the “Other data” table above, totaled $5,756.5 million for the nine-month period in 2006 and $4,518.6 million for the 2005 period. These account values include values relating to index contracts in the nine-month period totaling $3,078.2 million for 2006 and $2,195.1 million for 2005.

The weighted average interest crediting rate/index cost for universal life and individual traditional annuity products, excluding the impact of the amortization of deferred sales inducements, was 3.51% for the nine-month period of 2006 and 3.69% for the respective 2005 period.

The change in the amount of index credits is impacted by growth in the volume of index annuities in force and the amount of appreciation/depreciation in the underlying equity market indices on which our options are based as discussed above under “Derivative income (loss).” The change in the value of the embedded derivative is impacted by the change in expected index credits on the next policy anniversary dates, which is related to the change in the fair value of the options acquired to fund these index credits as discussed above under “Derivative income (loss).” The value of the embedded derivative 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 option costs. In addition, the change in the value of the embedded derivative was reduced $7.1 million in the third quarter of 2006 as described in the “Net income applicable to common stock” section above.

The change in amortization of deferred sales inducements for the nine month period of 2006 increased due to additional capitalization of costs incurred with new sales and profitability in the underlying business. For the third quarter, the impact of these items was offset by the impact of the change in unrealized gains and losses on derivatives. Deferred sales inducements on interest sensitive and index products totaled $204.3 million at September 30, 2006 and $127.8 million at September 30, 2005. Amortization of deferred sales inducements in 2006

FBL Financial Group, Inc.		September 30, 2006

decreased $5.1 million in the third quarter and increased $1.8 million for the nine-month period due to the impact of realized/unrealized gains and losses on investments and the change in unrealized gains and losses on derivatives.

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

		Three months ended September 30,								Nine months ended September 30,
		2006				2005				2006				2005
						(Dollars in thousands)
Traditional life insurance and accident and health policy benefits:
Traditional life insurance and accident and health benefits		$	24,323			$	20,714			$	69,574			$	64,651
Increase in traditional life and accident and health future policy benefits			5,911				8,244				25,222				26,902
Distributions to participating policyholders			5,493				5,393				16,984				17,235
Total		$	35,727			$	34,351			$	111,780			$	108,788