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Edited Transcript of FFG earnings conference call or presentation 2-Aug-19 1:00pm GMT

Q2 2019 FBL Financial Group Inc Earnings Call

WEST DES MOINES Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of FBL Financial Group Inc earnings conference call or presentation Friday, August 2, 2019 at 1:00:00pm 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. - CFO & Treasurer

* James Patrick Brannen

FBL Financial Group, Inc. - CEO & Director

* Kathleen Till Stange

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

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Conference Call Participants

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* 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 morning and welcome to the FBL Financial Group Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Kathleen Till Stange. 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 Second Quarter 2019 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 second 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 & Director [3]

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Thanks, Kathleen, and thank you to everyone on the call. I'm glad you're able to join us today. I'm pleased to report that FBL Financial Group had very strong second quarter 2019 earnings. Net income was $1.30 per share, and adjusted operating income was $1.28 per share. I'll begin by discussing sales in the low interest rate environment, our wealth management business and our recent Chief Operating Officer announcement. Then Don will review the financial results in detail.

The biggest challenge we have currently is the decline in market interest rates. After a bit of relief in 2018 with increasing rates, it appears we're back to a low-for-long environment with declining market interest rates. During the first half of 2019, the 10-year treasury yield decreased 69 basis points to 2% at June 30.

The low interest rate environment creates headwinds for us, especially with our spread-based Annuity business. Annuity premiums collected decreased 25% in the second quarter 2019 compared to the second quarter 2018. We need higher long-term market interest rates to offer products that are more attractive to our customers while also allowing enough for agent compensation and our profit component.

With respect to our in-force business, we monitor our spread position frequently. But our ability to decrease contract holder crediting rates is also limited by product guarantees and competitive pressures. Life sales, on the other hand, continue to trend upward. Life premium collected for the second quarter 2019 totaled $79 million, up 1.9% from the second quarter 2018. This growth was driven by increases in universal life and term life sales. Our Life Insurance block of business has been steadily growing with total Life Insurance in force of $65 billion as of second quarter end. Life Insurance sales provide us long-term profit stream with additional profit components that are not spread-related.

As of June 30, 2019, our agency force totaled 1,834 exclusive agents and agency managers. I'm pleased that this is an increase from the end of the first quarter as well as year-over-year increase. We're complementing our Farm Bureau agency force with new Farm Bureau wealth management advisers. We've built the infrastructure, platform and technology for our wealth management business. And now, we're recruiting for and adding experienced advisers in our territories.

As of June 30, we had 9 Farm Bureau wealth management advisers appointed. These advisers are joining us for 3 main reasons. One, they have an excellent opportunity for referrals to serve our existing client members with financial advisory services by partnering with our Farm Bureau agents. Next, they are attracted to the technology platform and tools that we have available. And finally, they welcome the level of support and independence that we provide. We handle many of the necessary administrative tasks, allowing them to focus more on clients and prospects.

We plan to continue to add Farm Bureau wealth management advisers this year and next to reach our initial target number of advisers. We're adding new advisers who fit our culture and service orientation and are a great fit with our agency force for referrals. Currently, we're not accepting advisers new to the wealth management business or those without a book of business. Since we're in the early stages of adding Farm Bureau wealth management advisers to our distribution system, the impact to our financial results is not yet insignificant. Ultimately, we expect this to add a diversified earnings stream to FBL Financial Group, given the fee-based nature of this business.

I want to mention an announcement that we made a few weeks ago. Kelli Eddy will join FBL Financial Group later this month as Chief Operating Officer, Life companies. We're excited to have her here. She has extensive operational and leadership experience, most recently serving as Senior Vice President, Life Operations for Voya Financial. Kelli will report directly to me and be part of FBL's executive management team. She'll have overall responsibility for the operations of Farm Bureau Life Insurance Company, our primary operating subsidiary.

Kelli will succeed Ray Wasilewski, who plans to retire. Ray will be with our company through year-end and will assist with the transition. I'm confident that Kelli's experience and underwriting and operations background will allow her to continue Ray's and Farm Bureau Life's impressive track record of success. I also want to thank Ray for his many years of leadership and friendship. He's contributed greatly to the success of these companies, and I wish him the very best in the next stage of life.

Before I conclude, I want to mention a couple of recent external announcements, which acknowledge our strong earnings and financial strength. In June, A.M. Best affirmed Farm Bureau Life's financial strength rating of A (Excellent). For A.M. Best, Farm Bureau Life has risk-adjusted capitalization ratios that are at A.M. Best's strongest level, a good liquidity profile and above-industry average profitability metrics with very low volatility of earnings.

And then in July, Ward named Farm Bureau Life to the 2019 Ward's 50 group of top-performing companies. This marks the 20th time that Farm Bureau Life has been named to the Life-Health Ward's 50 List. Our managed property-casualty company was also named to the Ward's 50 for the fifth time in a row. This makes Farm Bureau Financial Services one of only 8 organizations with affiliated companies named to both lists. Ward analyzes more than 700 life insurance companies and 3,000 property and casualty insurers. So we're honored to be recognized for strong operating performance and consistent financial strength.

Again, I'm very pleased with the strong financial results for the first half of 2019, and I feel confident as we progress through the remainder of the year.

Now I'll turn the call over to Don Seibel. Don?

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

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Thanks, Jim. I also want to welcome everyone on the call. As Jim indicated, net income for the second quarter of 2019 was very strong at $1.30 per share. Adjusted operating income was also very strong at $1.28 per share for the second quarter. Results for the second quarter were above our expectations, impacted by several items. We experienced better-than-expected mortality experience in the Life Insurance segment. This was driven by fewer term claims. This was positive and is a normal quarterly fluctuation in mortality results. We also benefited from strong equity market performance again in the second quarter, resulting in lower amortization of deferred acquisition costs and related balances in the Corporate and Other segment. This decreased amortization by $600,000 or $0.02 per share after-tax. We had investment prepayment fee income of $0.05 per share after-tax, which is a couple of cents higher than our expectations. Partially offsetting these positive items was lower spread income in our Annuity segment. As Jim discussed, spread income has been pressured by the decline in investment yields.

The positive variances from our expectations relating to our mortality experience, the impact of favorable market conditions and prepayment fee income totaled approximately $0.15 per share. While we may experience favorable variances like these in future quarters, they cannot be expected to consistently reoccur on a go-forward basis. I'll review these items in more detail as I discuss our segment results.

Annuity segment results for the second quarter of 2019 declined due to lower spread income. Point-in-time spreads on our individual annuities decreased 5 basis points during the second quarter of 2019 due primarily to a decline in the investment yield from maturity of higher-yielding assets and the reinvestment of proceeds in lower-yielding assets. In addition, crediting rates increased slightly due to an increase in option costs. The Annuity segment benefited from $507,000 of investment prepayment fee income as well as a smaller-than-planned increase in our guaranteed living withdrawal benefit reserve due to positive equity market performance during the second quarter.

Life Insurance segment results for the second quarter of 2019 reflect a steadily growing book of business, investment prepayment fee income of $953,000 and better-than-expected mortality experience. Similar to Annuity spreads, point-in-time spreads on our universal life business also decreased 5 basis points. They declined due primarily to the impact of lower investment yields as well as higher option costs.

Corporate and Other segment results were solid for the quarter, benefiting from lower amortization of acquisition costs on our closed block variable business due to positive equity markets in the second quarter. Additionally, mortality experience was within our range -- expected range for variable life business. The Corporate and Other segment for the second quarter of 2019 includes an after-tax net loss of $980,000 or $0.04 per share relating to the build-out of our wealth management initiative. Our investment in the wealth management business through the first 6 months of 2019 is in line with our expectations.

The investment environment has become increasingly challenging in 2019. The tax-adjusted yield on new investment acquisitions backing our long-term business was 4.17% for the second quarter of 2019. This is 28 basis points lower than acquisitions made in the first quarter of this year and remains lower than our portfolio yield. In the second quarter, we focused on adding longer-duration investments, mostly of high-quality corporate bonds.

Next, I'll comment on our capital. We have an excellent capital position with significant financial flexibility. At June 30, 2019, our subsidiary Farm Bureau Life had an estimated company action level risk-based capital ratio of 553%. This is an increase from year-end 2018 even with $63 million of dividends paid from Farm Bureau Life to the holding company to fund the regular and special dividend we paid to shareholders this year.

In closing, I feel really good about where we're at with earnings for the first half of 2019. In the midst of declining market interest rates, we are maintaining financial discipline and growing our business. 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 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 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. Congratulations on the awards recognizing your company, and so I'll start with that. I had a couple of questions in -- I'll guess I'll start with the Annuities business and what's happening there with the spread compression. I was hoping you guys could maybe spend a minute or 2 and just talk to us about what the outlook would imply to that part of your business if rates were to stay flat where they are right now and possibly lower. And then I think you said crediting rates were up in the quarter. So I -- maybe a minute on how much you guys can adjust that and sort of manage that going forward.

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

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Okay. I'll start with the last part of that, and I think Don's got information on that.

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

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Yes. With respect to our business, our universal life in-force business, there's 89% of that block of business which is at guarantees. So that means 11%, and that doesn't -- that is crediting them out greater than the guarantee. And that portion of the book is crediting currently at more than 100 basis points above the guarantees. But that is business that we've recently written and has a very low guarantee, and we feel like that piece of the business is priced appropriately. So it's difficult to make crediting actions on the universal life block.

With respect to the Annuity crediting rates, 73% of that business is at guarantees, and the majority of the balance of the book is about 50 to 99 basis points above the guarantee. And there we're feeling competitive pressures to not lower rates any further. We're mindful of the need to retain that business and not have that move to alternative investments or opportunities for our clients. So that is preventing us from taking aggressive action on that portion of the book that has a crediting rate that is currently above the guarantee.

With respect to option costs or the crediting rate going up, that's a reflection of option costs increasing a bit during the quarter relative to the prior year quarter and also the fact that we have not been able to make or have not made crediting rate changes on the in-force book during the quarter.

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

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So then I'll take -- Marcos, I'll take kind of the bigger picture part of your question. So I mean we've been operating in a low interest rate environment for many, many years now. And I think what we're signaling is it's been low for so long that continued lowering isn't the same low interest rate environment, it's an even lower interest rate environment, and that does put pressure on the Annuity business.

One of the things I think you can think about from our perspective is a good loyalty customer base and good retention stats on that business. We also are a multiline business with a really good balance between Life Insurance and Annuities. And with that exclusive agency force, we've got the opportunity to kind of help direct and point to the things that are working in the marketplace, always keeping our agents with something in front of them that's working for the current environment.

And so that's why you're going to see a little bit of focus on Life Insurance. And I love that Life Insurance, how it layers in those longer-term profit streams and helps create some of that steady earnings stream that FBL is kind of known for. So we continue to pivot as environments change, and we'll certainly pivot a little that way.

In the meantime, it's the other reason that we started to build the wealth management business is it's a different earnings stream. We've got the spread earnings stream, but we'd like the advisory fee-earning stream to come in and help buoy and support, replace anything lost in that regard. And with a little bit of luck, maybe we'll get some spread widening or maybe we'll get some risk-free rate increases in the future, and we'll be back in the annuity game in a bigger, better way.

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

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Got it. I guess I'll ask a couple more on this topic. And just -- well, with these current trends, does this affect at all your -- the premium to capital ratio that you might need to hold to? What's the rule of thumb on an Annuities block or a Life block of how much you can write [to the capital] you hold? I'm just curious in the context of if your premiums were to go down, would that imply you'd be generating some excess capital you could possibly return to shareholders? How's the balance there, Jim?

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James Patrick Brannen, FBL Financial Group, Inc. - CEO & Director [7]

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Yes. So I don't know if it's materially going to impact with the change in the Annuity writings that we saw in the quarter for sure. And as you know, we've been managing with excess capital for some time and have been returning on a regular basis through strong regular dividends and special dividend in each of the last several years. So capital returning to shareholders has been strong over the past several years, and I don't really see this changing our capital plan much. I don't know, Don, if you see the difference.

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

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Yes. I would agree to that. There is capital charges around C4, which is the volume of business that you write, and we did adjust that down for the lower premiums that we're seeing in the first half of the year. But it only added a few points to our RBC ratio, so not a significant driver of excess capital in our view.

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

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Okay. And then pivoting to the wealth management business and, I guess, the agency force as well. Jim, maybe talk to us about the additions to the agency force. And then on the wealth management side, what should we be looking at for modeling as headwinds still from you guys setting up the operation this year?

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James Patrick Brannen, FBL Financial Group, Inc. - CEO & Director [10]

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Sure. I'm going to let Scott start with the field force comments and just kind of describe where we're at and where we're headed there.

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D. Scott Stice, FBL Financial Group, Inc. - CMO [11]

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So you might recall last year, we put some changes into our recruiting approach and our new agent financing approach, where we assist them for first handful of years as they get into business, and all those changes are paying very good dividends. Our 1-year retention rate and 2-year retention rates of agents are both significantly up. Year-over-year, we're sitting with right at -- I think the number's 45 agents gain year-over-year, and we expect to continue those trends.

So our recruiting and retention efforts on the agent front have remained strong. Jim mentioned in his opening comments that we've also recruited 9 wealth management advisers year-to-date. We are continuing to learn and improve our processes there and have, in the last couple of months, seen pretty good positive momentum develop there.

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Marcos Costa Holanda, Raymond James & Associates, Inc., Research Division - Research Associate [12]

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Okay. And then as we look forward for the rest -- the balance of the rest of the year, how much should we be thinking about as the costs associated with setting up the wealth management?

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

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Yes.

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Donald Joseph Seibel, FBL Financial Group, Inc. - CFO & Treasurer [14]

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Yes. This is Don. I'll take that question. Thank you. As I said in my prepared comments, during the second quarter, we had an almost $1 million in net loss after-tax related to the buildup of the wealth management initiative. And we're going to continue to see that investment in the second half of the year. We really don't provide specific earnings guidance. So I'm not going to give you a number. But I will say that it's not going to change appreciably from the second quarter run rate.

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Marcos Costa Holanda, Raymond James & Associates, Inc., Research Division - Research Associate [15]

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Okay. I guess I just have a couple more, maybe for Charlie and maybe a broader macro picture. Just -- I guess talk to us what you're seeing in credit. I think you guys are actually one of the lowest -- have the most exposure to BBBs in some of the companies we follow. Does the lower environment change your attitude towards the credit spectrum? If you just talk -- spend a minute talking about that, Charlie, please.

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Charles Theodore Happel, FBL Financial Group, Inc. - CIO [16]

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Sure. Yes. As you noted, we've kind of dialed back a little bit on our BBB allocation because we've -- we have found other alternatives and because we've really tried to stay with our longer-duration targets. And obviously, the further out you go, the less likely you are to want to take on a lot of credit risk just to have line of sight on who the survivors are 30 years from now. So we've been more focused on 30-year A's than 30-year BBBs other than on a select basis.

You know the big-picture story just in terms of the corporate bond market, just -- is at kind of record levels relative to GDP, and the BBB component is at an all-time high and the underlying credit metrics on those BBBs, there's a substantial segment of the BBB sector that really has credit metrics aligned more like a high-yield credit. So we have some big-picture concerns. Now I don't see the catalyst right now to launch all that, but certainly, we see that as a macro-level risk.

We've had a lot of fireworks here in just the last few days and a meaningful move in risk-free rates. I guess it's too soon to tell if this is going to be accompanied by an element of risk-off and that we get some wider credit spreads. It's just -- it's increasingly hard for me to reconcile equities being where they are in a 1.85% 10 year, and it's also difficult for me to reconcile a 1.85% 10 year and credit spreads as tight as they are. So it's likely we're going to see some movement, but I guess a little difficult for me to tell you exactly where it's going to come from. But I just -- I can't see status quo being very likely over the next several months. I think we're going to continue to see some dislocations, and certainly, that will create opportunity. I guess just from where I sit right now, I'm not exactly sure where it's going to come from. We're just going to watch and wait.

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Marcos Costa Holanda, Raymond James & Associates, Inc., Research Division - Research Associate [17]

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Are you seeing any pockets where excesses might be building?

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Charles Theodore Happel, FBL Financial Group, Inc. - CIO [18]

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Across the economy or...

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Marcos Costa Holanda, Raymond James & Associates, Inc., Research Division - Research Associate [19]

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Across the corporate market.

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Charles Theodore Happel, FBL Financial Group, Inc. - CIO [20]

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Well, my biggest macro risk is just companies that are dependent on what we would call financialized demand. And if you look at maybe some of the advertising revenues that are being collected from companies that really don't earn a profit, that can evaporate pretty quickly. So we've tried hard to stay clear of that element of the market.

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Marcos Costa Holanda, Raymond James & Associates, Inc., Research Division - Research Associate [21]

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Okay. And then just finally, any reason why you guys didn't repurchase any shares this quarter?

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Donald Joseph Seibel, FBL Financial Group, Inc. - CFO & Treasurer [22]

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Yes. This is Don. We're very mindful of the public float that we have, and we don't have a strong appetite for repurchasing shares and decreasing the liquidity of our stock. Certainly, the decrease in the stock price that we have seen makes it more attractive, but not to the trigger point where we're very willing to jump into the market.

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Operator [23]

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(Operator Instructions) Seeing that there are no further questions, I would like to turn the conference back over to Ms. Stange for closing remarks.

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Kathleen Till Stange, FBL Financial Group, Inc. - VP of Corporate & IR [24]

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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 [25]

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