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Edited Transcript of FFG earnings conference call or presentation 2-Nov-18 3:00pm GMT

Q3 2018 FBL Financial Group Inc Earnings Call

WEST DES MOINES Nov 17, 2018 (Thomson StreetEvents) -- Edited Transcript of FBL Financial Group Inc earnings conference call or presentation Friday, November 2, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles Theodore Happel

FBL Financial Group, Inc. - CIO

* D. Scott Stice

FBL Financial Group, Inc. - CMO

* Donald Joseph Seibel

FBL Financial Group, Inc. - Treasurer & CFO

* James Patrick Brannen

FBL Financial Group, Inc. - CEO

* Kathleen Till Stange

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

* Raymond Walter Wasilewski

FBL Financial Group, Inc. - COO of Life Companies

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Conference Call Participants

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* Charles Gregory Peters

Raymond James & Associates, Inc., Research Division - Equity Analyst

* Robert Ray Glasspiegel

Janney Montgomery Scott LLC, Research Division - MD of Insurance

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the FBL Financial Group Third Quarter 2018 Earnings Conference Call. (Operator Instructions).

Please note, this event is being recorded.

At this time, I would like to turn the conference over to Kathleen Till Stange, Vice President of Corporate and Investor Relations. Please go ahead, ma'am.

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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 third quarter earnings conference call. Presenting on today's call are Jim Brannen, Chief Executive Officer; and Don Seibel, Chief Financial Officer.

Also present and available to answer your questions are Charlie Happel, Chief Investment Officer; Scott Stice, Chief Marketing Officer; and Ray Wasilewski, Chief Operating Officer.

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 third 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, Jim Brannen.

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James Patrick Brannen, FBL Financial Group, Inc. - CEO [3]

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Thanks, Kathleen. Good morning and thank you everyone on the call. I'm glad you're able to join us today. FBL Financial Group reported excellent earnings for the third quarter 2018. Net income totaled $1.24 per share and non-GAAP operating income was a record at $1.28 per share. I attribute these great results to the continued financial discipline to profitably grow our business as well as the benefit of lower taxes due to tax reform. Don will review the financial results in detail. I'll focus my comments primarily on our sales and several of our current initiatives.

Total premium collected for the third quarter of 2018 was $142 million. Annuity premium collected for the third quarter totaled $56.3 million. Index Annuity sales were up 3.8% compared to last quarter while we experienced a decline in fixed rate annuity sales. Fixed rate annuity sales were impacted by the crediting rate we were able to offer. Given the higher market interest rates at the beginning of October, we increased the rate on our multi-year guaranteed annuity by 25 basis points.

Life sales were strong again this quarter. Life premium collected for the third quarter of 2018 totaled $73.9 million, up 3.7% from the third quarter of 2017. This increase continues to be broad-based. Compared to a year ago quarter, premiums collected are up in all categories, universal life, whole life and term life insurance.

We have a variety of life insurance projects in place. In order to improve the customer experience and increase efficiencies, we are implementing additional automation and data analysis capabilities in our life underwriting area. We also continue to have positive results with our accelerated underwriting pilot. Through these projects, we're working to make life insurance sales a much better customer experience.

In October, we introduced a new increase in term life insurance product. This product allows our clients to automatically increase the face amount to provide more protection over time. Clients were able to double the face value of their policy over the first 5 years without having to go through underwriting process again. We're not aware of any other product in the industry that offers customers this option. This new product complements our full line of term, universe and whole life insurance. Also in October, we added the optional daily living benefit rider to our traditional term life products. This rider enables the insurer to accelerate debt benefit payments if they cannot accomplish 2 of the activities of daily living. This rider has been a popular option on our permanent products, adding it to the term provides additional planning flexibility for our customers and an additional source of revenue in our term portfolio.

Looking at our agency force. As of September 30, 2018, we had 1,810 exclusive agents and agency managers and very pleased that this reflects growth from our second quarter. Increasing our total agent count is crucial to our continued success.

In 2018, in order to combat higher agent attrition, we've modified certain elements of our agent recruiting and compensation plans and introduced a new agent development program. Early results are positive and new agent retention is trending higher. Recruiting and retaining agents is a continual challenge. But I feel very good with the recent progress we've made. The developmental work we're doing positions these new agents for long-term success.

In October, in honor of National Customer Service Week, we held a call blitz. Agents and employees called more than 17,000 customers to express our appreciation for their business. This call blitz aligns with the execution of our multi-year customer experience initiative. I also personally participated in calling our clients. It's fun and refreshing to speak with our customers directly to thank them for their business and learn how we and their agents can be even better partners in protecting their livelihoods and futures.

We continue to make good progress on our new wealth management initiative.

Early in 2018, we introduced a new mutual fund platform for our exclusive agents. Since that time, we've seen significant growth in new accounts opened and increased mutual fund deposits.

We recently completed training for our small number of existing investment adviser representatives. They're now able to position themselves as financial advisers and offer products and tools to deliver comprehensive financial planning services and advice as well as to offer managed account products. We anticipate fee-based production from them beginning in the fourth quarter. We're now working on our fourth and final phase of this initiative, which is to add the role of a Farm Bureau Wealth Management Adviser to our distribution system. We're currently recruiting Farm Bureau Wealth Management Advisers across our operating territory, and this onboarding will occur beginning in early 2019. Once this initiative is fully in place, it will allow our agents to add more value, positioning them as the go-to person for all of their clients' insurance and financial needs.

To conclude with the first 3 quarters of the year completed, I'm pleased with our excellent financial results to date. I look forward to the remainder of the year and successfully executing on the opportunities ahead of us.

Now I'm going to turn the call over to Don Seibel to review our financial results. Don?

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

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Thanks, Jim. I also want to welcome everybody on the call. As Jim indicated, for the third quarter of 2018, we had net income of $1.24 per share and record non-GAAP operating income of $1.28 per share. Non-GAAP operating income for the third quarter of 2018 was a little higher than our expectations. Results were positively impacted by higher equity income and a decrease in our reserves for guaranteed living withdrawal benefits. These positive items were partially offset by higher death benefits and the impact of unlocking. I'll review these items in more detail as I discuss our segment results.

During the third quarter of 2018, we voluntarily changed our accounting policy for low-income housing tax credit investments from the equity method to the proportional amortization method. We made this change because we believe the proportional amortization method better reflects the economics of an investment that is made for the tax credits and benefits. I'm sure you also appreciate that this method is consistent with the accounting method used by many others in the life insurance industry. This accounting change results in a change in the timing of the recognition of income and loss on these investments. In addition, it changes how they are reflected in the financial statements. On the balance sheet, these investments are now classified in the other asset line instead of the securities and indebtedness of related party's line.

On the income statement, income and expense from these investments is now reflected in the income taxes line instead of the equity income line. Prior period results were adjusted to reflect this change on accounting policy. For more information, please see the Form 8-K we filed on this in September.

During the third quarter, we performed a review or unlocking of the key assumptions used in the calculation of the amortization of deferred acquisition costs, unearned revenue reserves and certain reserves on interest-sensitive products. This unlocking negatively impacted earnings by $0.01 per share in total. But they were more impactful at the individual segment level. Please see Page 14 of our third quarter investor supplement, where we have included segment level detail on the impact of this unlocking on the various financial statement line items.

Looking at the investment environment, I'm pleased that we have seen market interest rates continue to increase in the third quarter. The tax-adjusted yield on new investment acquisitions backing our long-term business was 4.48% for the third quarter of 2018. This is 14 basis points higher than acquisitions made in the second quarter of 2018, but it is still less than our portfolio yield. We continue to experience spread pressure with September 30 point-in-time spreads lower than our targets.

Next, I'll review financial results for our 3 reporting segments. Annuity segment results for the third quarter of 2018 reflected growing book of business as well as several positive items. This segment had $900,000 of investment prepayment fee income and a benefit of $200,000 from unlocking. Additionally, there was a $1.1 million onetime decrease in the index annuity guaranteed living withdrawal benefits reserve due to refinements in the estimates used in the reserve calculation. Point-in-time spreads on our individual annuities decreased 2 basis points during the third quarter of 2018. This decline was due to a slight decline in the portfolio yield and a slight increase in crediting rates.

Life Insurance segment results for the third quarter of 2018 reflect the negative impact of unlocking as well as higher death benefits. During the quarter, we had a higher-than-usual number of large term and universal life claims. In addition, unlocking negatively impacted this segment by $2.3 million pretax. Assumptions for mortality experience, spreads, surrenders and persistency were updated to better align our projections with future expectations.

This segment had $353,000 in investment prepayment fee income earned during the quarter. Point-in-time spreads on our universal life business decreased during the third quarter. Similar to the Annuity segment, the portfolio yield declined and crediting rates increased. Spreads on universal life are lower than annuity spreads due to additional profit components on universal life business, aside from spread income.

Corporate and Other segment results were better than our expectations for the third quarter of 2018, due primarily to a $1.8 million benefit from unlocking as we updated a variety of assumptions. We are investing in the startup of our wealth management initiative, that Jim discussed, and incurred $900,000 of related expenses in this segment during the quarter. In addition, this segment experienced higher equity income, primarily due to gains from sales of 2 real estate investment partnerships.

Next, I'd like to comment on our effective tax rate. The third quarter 2018 effective tax rate on non-GAAP operating income was 16.4%. This is lower than what we have reported in prior quarters given the accounting policy change for low-income housing tax credit investments, whereby income and related tax impacts from these investments are now reflected in income taxes instead of the equity income line.

Next, I'll comment on our capital level. At September 30, 2018, our subsidiary, Farm Bureau Life, had an estimated company action level risk-based capital ratio of 554%. This is an increase of 13 points from the end of the second quarter, reflecting an increase in capital during the quarter due to our strong earnings. As we discussed last quarter, we have already incorporated the impact of the NAIC's changes to the RBC factors to reflect the lower tax rate due to the tax act. Our capital levels remain high, and we have significant financial flexibility.

In closing, FBL had a great third quarter with solid life sales, record non-GAAP operating income and growing capital levels. I'm pleased to have been able to share these results with you.

We will now turn the call over to the operator and open it 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) And your first question will come from Greg Peters of Raymond James.

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Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [2]

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I guess I wanted to circle back to your comment about agent attrition during the year and ask you to provide a little bit more color about what's happened and how you've mitigated that trend?

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James Patrick Brannen, FBL Financial Group, Inc. - CEO [3]

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Yes. So it's a constant battle, the growth of the agency force. I think I disclosed on a couple of calls ago that we really had a hotspot, where we had competitor really infiltrate a large portion of an agency in South Dakota actually. And a lot of incentives were paid to move agents, and it appears that, that probably was the most noticeable portion of our agent attrition. You're always going to have retirements and a certain percentage go. But it was really the addition of having a hotspot compared to other years that made it stand out. I don't see a widespread issue as opposed to that hotspot. Scott, you have anything to add to that?

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D. Scott Stice, FBL Financial Group, Inc. - CMO [4]

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No, I think that's -- that covers it.

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James Patrick Brannen, FBL Financial Group, Inc. - CEO [5]

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Maybe if you want to talk a little bit more about what we're doing to combat it?

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D. Scott Stice, FBL Financial Group, Inc. - CMO [6]

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Yes. Great, this is Scott Stice. In August, we implemented a series of changes to how we onboard, compensate and develop new agents that have proven pretty attractive in the marketplace. Our new recruiting has ticked up significantly since that time. And our new agent retention rates are trending significantly higher as a result also. One of the very positive upsides that we've seen thus far is that the amount of new life insurance being written by those brand-new agents is also trending significantly higher. So when you throw all those things into the mix, it turned what had been negative net gain through Q1 and Q2 into a positive net gain in Q3. And that trend looks to be pretty solid and continuing.

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Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [7]

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Great. Perhaps another area that you could talk a little bit about would be, obviously, the market has been a little bit more volatile recently and interest rates have been ticking up. And maybe you could spend a minute talking about the outlook for investment income in the context of those 2 variables and any other issues that you're seeing in your portfolio.

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James Patrick Brannen, FBL Financial Group, Inc. - CEO [8]

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Perfect. We have Charlie Happel.

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Charles Theodore Happel, FBL Financial Group, Inc. - CIO [9]

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Yes, it's Charlie Happel. Yes, we've tactically tilted a little bit. We kind of had -- over the last year had pulled back a little bit on the credit risk front. And I'd really emphasized NAIC 1 paper and probably, what I would call, long intermediates just because of the shape of the curve. Obviously, we're still dealing with the flat curve with the long end at 7-, 8-year highs, we're taking it as a little bit more of an opportunity to add some duration to the portfolio, which we can always use. And still tilted towards high grades, but we like the opportunity to bring in some A-rated 30 year, some good convexity to the portfolio. Again, with the shape of the curve, you're not -- you don't pick up a ton going out to 30 versus the intermediate structured product, but it seems like a good moment. We're still a little bit skeptical that we have a huge run in rates over the next couple of years. And we're still hopeful that we get a little upside in yield. But we're going ahead and putting some money to work at this point.

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Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [10]

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That's good color. And just as a follow up, can you talk about where the new money yields of where you're putting this money to work are compared with what the current yield is on the portfolio? And then secondly, can you spend a minute and just talk to us about your perspective around credit exposure?

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James Patrick Brannen, FBL Financial Group, Inc. - CEO [11]

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Yes, I can touch on new money yields relative to the portfolio yields. In my prepared comments, I believe, the acquisitions in the third quarter was 4.88% for money not backing our very short Federal Home Loan Bank arrangements. And that is still less than our portfolio yield, which on a year-to-date basis through September, if you exclude prepayment fee income, the 5.03%. So closer to where that overall portfolio yield is, but not quite there and as a result continuing to see spread pressure. With respect to credit exposure, I'll throw it back to Charlie.

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Charles Theodore Happel, FBL Financial Group, Inc. - CIO [12]

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Yes. I mean, we are concerned about what has happened in the credit markets over the last few years. I mean, obviously, the BBB space is where everybody's looking. It's now grown to half of the investment-grade universe. And if you look at corporate debt overall relative to GDP, it looks similar to previous cycle peaks. The degradation in just underlying leverage in that universe is noteworthy. So that is why we really over the last year have pulled back from credit. We didn't feel like we're getting paid for it anyway. And so we've tilted towards high-grade structure for the most part up until recently. And now we're staying -- we're buying some corporate bonds, but we're staying up in the A-rated space, which, of course, is not as big a universe. But we still own a lot of BBB paper. It's hard to be an insurance company and not, but we've done a lot of work on what we do own and made sure we're happy with it. And again, over the last year or so we've pulled back. So our allocation to NAIC 2s has actually ticked down in recent quarters.

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James Patrick Brannen, FBL Financial Group, Inc. - CEO [13]

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Just, excuse me, like one clarifying statement. I had indicated the third quarter yield was 4.88%. It's actually 4.48% relative to the 5.03% portfolio yield. I just wanted to clarify.

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Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [14]

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And I missed the comment in your opening remarks obviously, so I appreciate you reiterating that. I know a couple of the other companies have talked about increasing exposures to CLOs in an effort to boost yield. Do you have any exposure to that area of the market? And what's your perspective there?

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Charles Theodore Happel, FBL Financial Group, Inc. - CIO [15]

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Yes. We've been largely focused on fixed-rate CLOs. And we have -- we try to stay an A or better credit quality. I don't have that exact allocation right in front of me here but that -- over the last several years, we have added a modest amount to that space. And again, those held up relatively well going through the financial crisis. But it's another space that we're watching pretty closely. And we are not comfortable moving down to the BBB bucket by and large.

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Operator [16]

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(Operator Instructions) Your next questions will come from Bob Glasspiegel of Janney Montgomery Scott.

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Robert Ray Glasspiegel, Janney Montgomery Scott LLC, Research Division - MD of Insurance [17]

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Question on the -- being able to double your face coverage without underwriting. What protections are there from a terminally ill person that gets through the underwriting screens without any tests increasing their coverage?

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Raymond Walter Wasilewski, FBL Financial Group, Inc. - COO of Life Companies [18]

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This is Ray Wasilewski, Bob. I'll take that. So when we -- when they apply and we underwrite them, we are at that point -- for that product underwriting them for double the face amount. So it -- we're underwriting with the expectation that they will execute on their ability to increase their face amount. Those would generally -- I mean, I can't say never, but generally not be ones that would fall into our accelerated underwriting bucket and would not get any tests. I mean, it's possible if it's a very young person doing this. And they have all the right things going for them. That would be the case. But the other protection we've put in ourselves there is if you ever decide to skip a increase, you can do that once. But if you want to skip a second one, then no future increases are allowed. And that's specifically to cover those situations where somebody decided to skip. They find out they're sick, they want to start increasing again. And we don't allow that.

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Robert Ray Glasspiegel, Janney Montgomery Scott LLC, Research Division - MD of Insurance [19]

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Just seems like you could be subject to adverse selection of who would trigger that, but...

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James Patrick Brannen, FBL Financial Group, Inc. - CEO [20]

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So, in our mind -- yes. If somebody was looking to do that, they would just buy the initial face amount that they could qualify for immediately. If they knew that they were sick and they thought they could qualify for the insurance, why take the risk on...

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Robert Ray Glasspiegel, Janney Montgomery Scott LLC, Research Division - MD of Insurance [21]

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No. The -- maybe I misstated the question. I was describing someone who was clean, wasn't terminally ill, gets the product and then finds out a year or 2 later that they are terminally ill, it seems like that would be an no-brainer for them to trigger it if there were no restrictions on that?

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James Patrick Brannen, FBL Financial Group, Inc. - CEO [22]

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Yes. And they should, that's right. And we price those products with that -- those possibilities in mind. So there is -- the actuaries will look at mortality through this. And when they're pricing that, they will assume in those models that there is some adverse mortality that occurs.

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Robert Ray Glasspiegel, Janney Montgomery Scott LLC, Research Division - MD of Insurance [23]

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You guys are a lot smarter about this than I am. So I'm sure my worries are unfounded. On corporate, as I look at a pre-equity, it bounced up like $5 million, sequentially. I understand the DAC unlocking you identified. What is the run rate for that line roughly -- ballpark, recognizing all the volatility that some of the components might represent?

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Donald Joseph Seibel, FBL Financial Group, Inc. - Treasurer & CFO [24]

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Yes, that's a tough question, because there are a lot of moving pieces and parts. This particular quarter, equity income is significantly higher because of the sale of some real estate properties that I had mentioned. And you have that unlocking that took place, that was $1.8 million. We also had a favorable impact on DAC from separate account performance, because the equity markets did very well in the third quarter. And if you were to boil all that down, something probably in the $5 million range as supposed to the $8 million range would be more of a run rate.

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Robert Ray Glasspiegel, Janney Montgomery Scott LLC, Research Division - MD of Insurance [25]

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Cool. And is your tax rate guidance for the year now with -- on the new basis because it was low for the quarter, which I assume had catch-up for year-to-date maybe?

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Donald Joseph Seibel, FBL Financial Group, Inc. - Treasurer & CFO [26]

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Our tax rate guidance still has a bit of a sizable range to it because there are some unknown doubt there. And I would say 15% to 17% would be the range, and we fell in at 16.4%. You have to remember that the entire benefit from the low-income housing tax partnerships fall into the tax line now. And I don't necessarily care for that geography. And that's one of the reasons we didn't switch when it first came out as an option. But it doesn't make sense the way the income flows.

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Robert Ray Glasspiegel, Janney Montgomery Scott LLC, Research Division - MD of Insurance [27]

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I spec out equity income net of tax from my pretax model, so I mean I get a lower rate than what you're saying operating wise, but I got you.

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Operator [28]

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And ladies and gentlemen, this will conclude the question-and-answer session. I would like to turn the conference back over to Kathleen Till Stange for her closing remarks.

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Kathleen Till Stange, FBL Financial Group, Inc. - VP of Corporate & IR [29]

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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 [30]

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Thank you. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.