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Edited Transcript of FFG earnings conference call or presentation 7-Feb-20 4:00pm GMT

Q4 2019 FBL Financial Group Inc Earnings Call

WEST DES MOINES Feb 10, 2020 (Thomson StreetEvents) -- Edited Transcript of FBL Financial Group Inc earnings conference call or presentation Friday, February 7, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel David Pitcher

FBL Financial Group, Inc. - CEO & Director

* Donald Joseph Seibel

FBL Financial Group, Inc. - CFO & Treasurer

* Kathleen Till Stange

FBL Financial Group, Inc. - VP of Corporate & IR

* Kelli Ann Eddy

FBL Financial Group, Inc. - COO of Life Companies

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Conference Call Participants

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* James Inglis

Philo Smith & Co. - MD and Partner

* Louis J. Feldman

Wells Capital Management Incorporated - Senior Portfolio Analyst

* Marcos Costa Holanda

Raymond James & Associates, Inc., Research Division - Research Associate

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Presentation

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Operator [1]

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Good day, and welcome to the FBL Financial Group Inc. Fourth Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Ms. Kathleen Till Stange, Vice President, Corporate and Investor Relations. Please go ahead.

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Kathleen Till Stange, FBL Financial Group, Inc. - VP of Corporate & IR [2]

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Thank you, and welcome to FBL Financial Group's Fourth Quarter 2019 Earnings Conference Call. Presenting on today's call are Dan Pitcher, Chief Executive Officer; and Don Seibel, Chief Financial Officer. Also present and available to answer your questions are Kelli Eddy, Chief Operating Officer, Life Companies; and Mark Sandbulte, Vice President, Investment Strategy. Mark is filling in for Chief Investment Officer, Charlie Happel, who is away for today's call.

Certain statements made today may contain forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied. These risks and uncertainties are detailed in FBL's reports filed with the SEC and are based on assumptions, which FBL believes to be reasonable. However, no assurance can be given that the assumptions will prove to be correct. FBL disclaims any obligation to update forward-looking statements after this date.

Comments during this call include certain non-GAAP financial measures. Where applicable, these items are reconciled to GAAP in our fourth quarter earnings release and financial supplement both of which may be found on our website, fblfinancial.com.

Today's call is being simulcast on FBL's website. An audio replay and a transcript of the prepared comments may be found on our website shortly after the call.

With that, it is now my pleasure to turn the call over to CEO, Dan Pitcher. Dan?

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Daniel David Pitcher, FBL Financial Group, Inc. - CEO & Director [3]

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Thanks, Kathleen. Welcome to everyone on the call. I'm pleased to be with you today as part of my first earnings call as CEO.

Before we review results, I'll share a brief introduction. I joined FBL 22 years ago and have been a member of the executive management team since 2012. I joined FBL as Information Technology Director and transitioned from IT to roles in the managed Farm Bureau Property & Casualty companies. I served as Chief Operating Officer for the Property & Casualty companies for the past 8 years. My most recent experience has been on the property-casualty side, but I also have deep life insurance experience as I began my career with a life insurer.

Additionally, as a management team member for the last 8 years, I've had the opportunity to participate in various enterprise activities such as strategy, innovation, the investment committee and more. I'm honored to be leading FBL Financial Group, and I'm excited for its future. We have dedicated employees and more than 1,800 exclusive Farm Bureau agents, who are passionate about living our purpose to protect the livelihoods and futures of our client members.

Under my leadership, you should not expect a major shift in strategic direction. However, I may make some refinements as we move forward.

It's crucial to have the right team in place to execute our strategies. We have a skilled management team, and I plan to add to it soon. I expect to fill my prior role as Chief Operating Officer for the property-casualty companies as well as add to the team from a marketing and distribution perspective. Team is laser-focused on financial strength, our agency force and growing sales through our Farm Bureau niche market and new initiatives like wealth management. We're mindful of all who depend on us from client members to agents to employees. This focus allows us to continue to be positioned for long-term growth.

Now I'll turn to results for the quarter. FBL Financial Group reported net income of $1.40 per share and record adjusted operating income of $1.41 per share for the fourth quarter of 2019. Results reflect a steadily growing block of business and the benefit from an unlocking adjustment. Don will review the financial results in detail.

Next, I'll discuss sales, our agents and wealth management advisers. Life sales continued their positive momentum. Life premium collected for the fourth quarter of 2019 totaled $78 million, up 2.7% from the fourth quarter of 2018. This growth was driven by strong increases in universal life and term life sales. UL premium collected increased 7% for the quarter, while term life premium collected increased 2.3%. Our exclusive agents develop long-term relationships with our client members and have a deep understanding of their needs. Sales often begin with the property-casualty insurance products. And over time, life insurance sales follow as we meet the needs of our client members. This approach has led to our industry-leading cross-sell rate allowing us to truly fulfill our purpose of protecting livelihoods and futures.

Annuity premiums collected for the fourth quarter of 2019 totaled $67 million. This is a 19% increase from the third quarter of 2019, when sales had stabilized after several quarters of declining. Indexed annuity sales increased, while fixed rate annuity sales declined. We continue to maintain our financial discipline as we determine appropriate crediting rates in this low interest rate environment.

As of year-end 2019, we have 1,858 exclusive Farm Bureau Financial Services agents and agency managers. This is an increase of 19 over the past year. We continue to focus on growing our total agent count, but even more important, is the productivity of each agent. Years ago, it was common to be a stand-alone agent without any staff. Today, our most successful agents have their own teams of sales and service associates to help them serve their client members and grow their business. They are truly entrepreneurial, small business owners. To enable this, we offer best-in-class distribution systems and support.

Going forward, we will work to both grow the total number of agents as well as support our current agents as they grow their businesses.

In addition to our Farm Bureau agency force, we are adding Farm Bureau wealth management advisers. As of year-end 2019, we had 23 Farm Bureau wealth manager (sic) [management] advisers appointed. We are actively recruiting and adding experienced advisers in our territory. While I'm new in the CEO role, this is a strategy that I wholeheartedly support. These wealth management advisers have the unique opportunity to partner with our Farm Bureau Financial Services agents for referrals to serve our existing client members with financial advisory services. This allows our agents to truly be the one-stop shop for their client members by offering a wide range of property-casualty insurance projects -- products, life insurance and annuity products and now mutual funds and fee-based financial planning services. This service has been needed and has been welcomed by our agents and their client members.

We are currently investing in our wealth management business, but ultimately expect it to add a diversified earnings stream to FBL Financial Group given the fee-based nature of this business.

To conclude, I'm optimistic about the future of FBL Financial Group. We are addressing the challenges of low market interest rates, investing in innovation and automation, the client member experience and our wealth management business. Coupled with our strong brand value, commitment to the Farm Bureau niche marketplace and our multiline exclusive agents, we are well positioned for the future.

Now I'll turn the call over to Don Seibel to cover our financial results. Don?

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Donald Joseph Seibel, FBL Financial Group, Inc. - CFO & Treasurer [4]

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Thanks, Dan. I also want to welcome everyone on the call. Earnings for the fourth quarter of 2019 were very strong and greater than our expectations. Net income was $1.40 per share and adjusted operating income was a record $1.41 per share. There are 4 key drivers for why our earnings differed from our expectations.

First, we performed an unlocking related to participating whole life insurance persistency. We had noticed a trend with increased persistency of this business. After an in-depth review in the fourth quarter of 2019, we extended the DAC amortization period for this block of business. This unlocking positively impacted earnings for the fourth quarter of 2019 by $0.32 per share after tax.

Second, favorable equity market performance during the fourth quarter of 2019 decreased DAC amortization on our variable business and lowered the reserve increase on our index annuity guaranteed living benefit rider. Third, certain reinsurance balances were trued up in the quarter, benefiting results $0.03 per share. And fourth, investment prepayment fee income exceeded our expectations.

Partially offsetting these positive items, we experienced worse than expected mortality results in the Corporate & Other segment. I'll review these items in more detail as I discuss our segment results.

Annuity segment results for the fourth quarter of 2019 increased compared to the fourth quarter of 2018 and the third quarter of 2019. Earnings in the historical quarters were negatively impacted by an early retirement program offered to employees in 2018 and the impact of unlocking certain actuarial assumptions in the third quarter of 2019. This block of business continues to steadily grow, but results are pressured by low market interest rates.

Point-in-time spreads on our individual annuities decreased 2 basis points during the fourth quarter of 2019 primarily due to a decline in the investment yield from the maturity of higher-yielding assets and the reinvestment of proceeds in lower-yielding assets.

Life Insurance segment results for the fourth quarter of 2019 reflect a steadily growing book of business and the unlocking and reinsurance true-up benefits I mentioned. Spreads for our universal life insurance business are also pressured due to the impact of lower reinvestment yields. Point-in-time universal life spreads decreased 7 basis points during the quarter.

Corporate & Other segment results were lower during the quarter for several reasons. First, this segment experienced higher death benefits due primarily due to an increased number of life -- large claims in our closed block of variable universal life insurance business. This is a normal quarterly fluctuation in mortality results in this relatively small block of business.

Second, the Corporate & Other segment for the fourth quarter of 2019 includes an after-tax net loss totaling $1 million or $0.04 per share related to the investment in our wealth management business. These items were partially offset by the impact of the strong equity market performance in the fourth quarter on the amortization of deferred acquisition costs. This decreased amortization by $1.1 million or $0.04 per share after tax.

As we look forward in 2020, we expect the wealth management business to continue to require a net investment, as it will take some time before that business has the scale to deliver positive bottom line results. The investment environment remains challenging. The 10-year treasury rate declined 77 basis points in 2019 and has declined even further so far in 2020. We are maintaining financial discipline and are not reaching for yield with lower quality investments. We are focused on adding high quality, longer duration investments, mostly NAIC 1 and 2 corporate bonds. We're also investing in high-quality commercial mortgage loans when possible.

The tax adjusted yield on new investment acquisitions backing our long-term business was 3.57% for the fourth quarter of 2019. This is lower than our 2019 portfolio yield of 4.95%.

Before I move on to a discussion of our capital, I'd like to add some perspective regarding our fourth quarter results as they were impacted by many items that we can't expect to regularly reoccur. These items include the favorable unlocking impact, a higher-than-expected level of investment prepayment fee income, the life reinsurance true-up, the impact of favorable markets on DAC amortization and reserves, and worse than expected mortality experience. The net earnings impact of these items in the fourth quarter was a positive $0.37 per share. This, coupled with our expected investment in wealth management and headwinds with a low market interest rate environment, should be taken into account when you consider our earnings run rate for 2020.

Next, I'll comment on our capital levels. At December 31, 2019, our subsidiary, Farm Bureau Life had an estimated company action level risk-based capital ratio of 562%. This is a 10-point increase from year-end 2018, even with the significant dividends paid from Farm Bureau Life to the holding company to fund the regular and special dividends paid to shareholders during the year.

We continue to have an excellent capital position with significant financial flexibility. We have multiple options for deploying our excess capital. They include stock repurchases, our regular quarterly dividend and the payment of special dividends. Given our limited public float, we had minimal stock repurchases in the open market in 2019.

Our Board of Directors reviews the dividend rate regularly and is committed to having an attractive dividend yield given our strong and consistent operating results. We also may, on occasion, pay a special dividend as a way to distribute a portion of our excess capital. Our Board will next review the payment of dividends when it meets later this month.

In closing, 2019 was a very strong year for FBL Financial Group. We move forward in 2020 with financial discipline to continue to profitably grow our business. I'm pleased to have been able to provide these -- or share these results with you. We will now turn the call over to the operator, and open up to any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Greg Peters of Raymond James.

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Marcos Costa Holanda, Raymond James & Associates, Inc., Research Division - Research Associate [2]

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This is Marcos calling in for Greg. And Dan, congratulations on your new role. My first question, and I guess you mentioned in your opening remarks, you wouldn't change the strategic direction of the business and where you guys are heading, but you said you might make some adjustments, Dan. And I guess, this would give you the opportunity to maybe give us some more color on what those might be?

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Daniel David Pitcher, FBL Financial Group, Inc. - CEO & Director [3]

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Yes. I think it would be some refinements to the current strategy, Marcos. And I can't say at this point in time that I have a clear view into what that may be. Obviously, the interest rate environment is a headwind for the companies. And so looking for opportunities to maintain our performance in that environment will definitely be high on the list of refinements that we would look for.

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Marcos Costa Holanda, Raymond James & Associates, Inc., Research Division - Research Associate [4]

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Got it. And I guess, as my second question, if I got it right, the portfolio yield went down 120 basis points this year. And that's just seems like if you look out, I think, what the market might be even pricing, is it an additional 2 cuts this year. So I'm just trying to understand how much lower can crediting rates go? How is the strategy might be changing in the context of rates possibly going even much lower than they are today?

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Donald Joseph Seibel, FBL Financial Group, Inc. - CFO & Treasurer [5]

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Yes, Marcos, I'll take that question. Regarding the decrease in our investment portfolio yield, as I said in the call today, our portfolio yield for all of 2019 was 4.95%, and believe our portfolio yield for all of 2018 was 5.13%. So it didn't go down as much as you had indicated, but it did still go down. It did go down year-over-year. And we do take a look at our crediting rates that we have in our portfolio of products and we actually did make a 15 basis point crediting rate decrease on our portfolio products effective January 1, but that's subject to contracts with guarantees. So the overall impact on the total portfolio was 1 to 2 basis points. So we really are limited with respect to the portfolio of products.

With respect to new sales of our index products, we are taking a look at those cap rates and setting those such that we hit our pricing targets on the new business.

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Marcos Costa Holanda, Raymond James & Associates, Inc., Research Division - Research Associate [6]

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That was a big difference. And I guess, dovetailing you on that and the 15 basis points cut you had Jan 1, maybe talk to us about -- I mean how does that impacting sales? And how, I guess, maybe give us an update on the competitive sales environment, especially for annuities.

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Daniel David Pitcher, FBL Financial Group, Inc. - CEO & Director [7]

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Yes. I can talk a bit about annuities. I mean the environment, I think is similar now as it was in the latter half of 2019. And we expect continued headwinds in -- with annuity sales, Marcos, as we move forward.

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Donald Joseph Seibel, FBL Financial Group, Inc. - CFO & Treasurer [8]

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And with respect to the competition, there are some competitors out there that are offering more attractive rates. Certainly, there's those that are willing to go down lower in the quality spectrum to be able to do that. We are looking to -- looking for the long-term and maintaining our investment quality. And then another competing product out there is just mutual fund investments with equity exposure and people are purchasing the stock market, when it's at a very high level, and that's certainly impacting our sales.

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Marcos Costa Holanda, Raymond James & Associates, Inc., Research Division - Research Associate [9]

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Is there any particular channel that might be more challenging or that exceeded your expectations last year?

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Donald Joseph Seibel, FBL Financial Group, Inc. - CFO & Treasurer [10]

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Could you clarify your question a bit?

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Marcos Costa Holanda, Raymond James & Associates, Inc., Research Division - Research Associate [11]

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If -- just so you go on the landscape, if there's any particular distribution channel or method that you think exceeded your expectations or where you see more product where competition is more robust?

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Donald Joseph Seibel, FBL Financial Group, Inc. - CFO & Treasurer [12]

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Well, with respect to our products that are more attractive in the market is clearly our index products, our index annuity as well as our index universal life, which are our top-selling products. And in this interest rate environment, they'll probably continue to be as well.

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Marcos Costa Holanda, Raymond James & Associates, Inc., Research Division - Research Associate [13]

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Okay. Great. I guess just my last question. And as I'm thinking about 2020 and in the confidence of a lower rate environment and the competition. I'm just -- maybe just give us a sense how do you expect to grow earnings for the company. I know you can do some buyback. The limited float might not -- might limit those. There's also the wealth management business. What's the earnings generation capacity from that this year? Is this year flat earnings growth here? Just give us some more perspective of how you think about it and for 2020?

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Daniel David Pitcher, FBL Financial Group, Inc. - CEO & Director [14]

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Well. As I was highlighting in my conference call comments, clearly, the bottom line earnings that we recorded in the fourth quarter this year are in excess of a run rate that we have. So it's going to be very tough to grow earnings in 2020 because of those items that really benefited our bottom line throughout the year.

We're going to continue to maintain our discipline on the expense front, maintain our discipline on the pricing front with respect to wealth management. Our net investment in that business in 2019 was $0.16 per share. I'm not going to give earnings guidance on how that number is going to move, but we are going to end up investing in that business on a net basis throughout 2020 as well.

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Operator [15]

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(Operator Instructions) The next question today comes from Jamie Inglis of Philo Smith.

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James Inglis, Philo Smith & Co. - MD and Partner [16]

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A couple of questions. Two sort of high level, and then one in the numbers. If you think about -- you pointed out that your agency count is 1,158 (sic) [1,858], up 19 for the year. How do you think about that in terms of -- is that better than you hoped, and not as good as you hoped? And what do you think might happen going forward in sort of this environment we had, sort of full economic, full employment? It would seem to be a relatively difficult time to be building your sales force?

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Daniel David Pitcher, FBL Financial Group, Inc. - CEO & Director [17]

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Yes. This is Dan. So that number was -- I mean we were, obviously, would want to grow it more, but felt pretty good about that number. And yes, the current strength of the economy and the unemployment level does pose some challenges. But as I mentioned in my comments, we are also really focused on growing the agents we have in place. And we have programs in place to motivate, assist them in expanding their business. And we do expect a bit of lift out of that. And at a time when there is low employment, there may not be as many potential applicants to join our distribution force. We do have that option to shift incentives and to motivate the current agents to grow their businesses.

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James Inglis, Philo Smith & Co. - MD and Partner [18]

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Right, right. And I guess, it's a balance because if the economy is going well, sales should be better-than-average anyway, but so I got that. And then sort of segue into the next question, when you think about the wealth adviser that you've hired. I think you said they were 23. How do you measure their success or their impact on the company sort of generally? And then how do you measure their success sort of individually, specifically by adviser?

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Donald Joseph Seibel, FBL Financial Group, Inc. - CFO & Treasurer [19]

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Yes, Jamie, this is Don. I'll take that question. So when we recruit a wealth management adviser, we're looking for an adviser with certain book size. So the first success measure is what's the success rate in converting that book over to us. And then ongoing, certainly, we'll have goals per adviser for growth in terms of new clients and new deposits going forward.

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James Inglis, Philo Smith & Co. - MD and Partner [20]

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When you say convert to FBL, how does that occur? What products do you sort of go for, for a second, third, I mean how does that work?

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Donald Joseph Seibel, FBL Financial Group, Inc. - CFO & Treasurer [21]

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Well, experienced advisers that come in have a book of business that they've been servicing over time. And we offer a similar set of products through our affiliation with RBC, full suite of mutual fund. We have a full-service broker-dealer. So we can provide all of those services and be the provider for the wealth management adviser.

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James Inglis, Philo Smith & Co. - MD and Partner [22]

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Okay. So can I say that you mean that, in a way, it's up to the new adviser, what they think they can move and where they think they can move it is?

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Daniel David Pitcher, FBL Financial Group, Inc. - CEO & Director [23]

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Yes. And history shows that there's a relationship there, and clients will go where the adviser goes.

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James Inglis, Philo Smith & Co. - MD and Partner [24]

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Right. Right. Okay. And finally, Don, probably for you. You mentioned that I think the -- you quoted there were $0.37 of benefit from the various unusual items in the fourth quarter. Was there -- can you give me sort of a comparable impact on the fourth quarter over a year ago as to unusual items then and same for the year? What's the apples-to-apples here?

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Donald Joseph Seibel, FBL Financial Group, Inc. - CFO & Treasurer [25]

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Jamie, I'll have to admit, I didn't prepare for that question. Trying to think back to fourth quarter last year, we had a couple of transactions that really depressed earnings. One was we had an adjustment to a -- old product that was sold years and years ago, intersensitive, whole life, and we had a $5.5 million negative adjustment to earnings related to that, that's on a pretax basis. And then in the fourth quarter last year, we offered our early retirement window, and we had an upfront cost related to that, which I don't recall the specific amount, but I think it was close to -- I better not say.

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Kelli Ann Eddy, FBL Financial Group, Inc. - COO of Life Companies [26]

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Last year, the early retirement program was a negative impact of $0.24 per share in the fourth quarter.

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Donald Joseph Seibel, FBL Financial Group, Inc. - CFO & Treasurer [27]

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So that was $0.24. If you add those 2 together, those were the big drivers of the lower results in the fourth quarter last year. And with respect to the full year, I would -- I'd say that one of the things that benefited the full year in addition to the fourth quarter, just the performance of the equity markets. And how that impacts our variable business and as well as the reserves on our guaranteed living benefits. Investment fee income was pretty much as expected for the full year, but for the outperformance that we had in the fourth quarter. Mortality results for the full year were maybe $0.09, $0.10 worse than expected for the full year. We had a onetime tax benefit for the full year of $2.5 million that we recorded in the third quarter, that would be another item that wouldn't be recurring.

Sorry, I didn't -- I wasn't prepared to have that kind of summarized, but those are some of the key drivers.

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Operator [28]

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The next question today comes from Louis Feldman of Wells Fargo (sic) [Wells Capital Management].

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Louis J. Feldman, Wells Capital Management Incorporated - Senior Portfolio Analyst [29]

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Don, could you repeat that wealth management number, was that $0.16 positive to earnings or $0.16 in costs to earnings for the year?

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Donald Joseph Seibel, FBL Financial Group, Inc. - CFO & Treasurer [30]

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That was in net costs.

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Louis J. Feldman, Wells Capital Management Incorporated - Senior Portfolio Analyst [31]

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Net cost, okay.

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Donald Joseph Seibel, FBL Financial Group, Inc. - CFO & Treasurer [32]

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So when we bring a wealth management adviser on, we're early in that process. We've established our infrastructure for recruiting and onboarding, getting the systems up to speed, which we're amortizing. So it's a net cost in the start-up phase.

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Louis J. Feldman, Wells Capital Management Incorporated - Senior Portfolio Analyst [33]

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Okay. And then for both the wealth management and for general agents, are there geographic areas that you're more interested in than not? Or is that something that's going to give something to a competitor who might be listening?

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Daniel David Pitcher, FBL Financial Group, Inc. - CEO & Director [34]

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I can talk at a high level around the agents. So I mean a couple of things. Of course, we have retirements or agents that leave the company. And so we have blocks of business that we want to service and grow, and so we would target in those areas. And then otherwise, we -- as you know, our market is a more suburban rural target than the major urban metro areas. And that's where we'll continue to focus.

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Louis J. Feldman, Wells Capital Management Incorporated - Senior Portfolio Analyst [35]

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So I mean -- as I think I was looking more towards states -- at the state level as opposed to rural versus suburban, Western, Eastern, Northern or Southern areas?

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Daniel David Pitcher, FBL Financial Group, Inc. - CEO & Director [36]

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We don't really have a state. I mean we have plans at the state level, but I would not say that we're over-weighting our investments in any given geographic territory other than -- it does somewhat map to the scale of business that we already have in existing geographies.

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Louis J. Feldman, Wells Capital Management Incorporated - Senior Portfolio Analyst [37]

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Okay. But your statements in terms of looking to replace retiring agents. That would just simply be a ZPG situation, zero population growth, so to speak, because you're replacing an agent that's retiring. It's not acquiring a new agent to further the sales. Or is your inference that someone who's younger will push harder as opposed to be satisfied with his sales level, someone who's close to retirement being satisfied with their sales levels?

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Daniel David Pitcher, FBL Financial Group, Inc. - CEO & Director [38]

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Yes. I mean it's a -- they are motivated through our commission and compensation structure to continue to grow blocks of business and drive new sales. And we would expect that. As far as the agent head count, you're correct. It's a 0 net growth. But I mean, that's just 1 of the 2 components as we target adding agents.

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Operator [39]

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This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Kathleen Till Stange for any closing remarks.

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Kathleen Till Stange, FBL Financial Group, Inc. - VP of Corporate & IR [40]

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Thank you to everyone who joined us on the call today. Please feel free to give us a call if you have any follow-up questions. Thanks, and have a good day.

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Operator [41]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.