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Edited Transcript of FFG earnings conference call or presentation 3-May-19 3:00pm GMT

Q1 2019 FBL Financial Group Inc Earnings Call

WEST DES MOINES May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of FBL Financial Group Inc earnings conference call or presentation Friday, May 3, 2019 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. - CFO & Treasurer

* James Patrick Brannen

FBL Financial Group, Inc. - CEO & Director

* 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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* James Inglis

Philo Smith & Co. - MD and Partner

* 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 First Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would like to now 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 First 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 first 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 first quarter 2019 net income of $1.37 per share and adjusted operating income of $1.04 per share. Don will review the financial results in detail. I'll focus my comments primarily on sales and our current initiatives.

Total premium collected for the first quarter of 2019 was $161 million, reflecting an increase in life insurance sales and a decrease in annuities. Life sales were very strong throughout all of 2018, and that momentum continued into this year. Life premium collected for the first quarter of 2019 totaled $78 million, up 2.3% for the first quarter -- from the first quarter 2018. This increase was driven by growth in universal life and term life sales.

Annuity premium collected for the first quarter totaled $70 million, a decline compared to the first quarter 2018. This was driven primarily by a decrease in index annuity sales. The annuity market is pressured by increasing competitiveness from bank CDs and strong equity market performance. Absent a change in the current investment yield environment, higher annuity sales will be a challenge as we intend to maintain our pricing discipline.

So this is a really good opportunity to remind you of the benefit of our distribution strategy. We use a multi-line exclusive agency force combined with a diverse product set. That allows agents to provide our customers with products that work in all economic environments and all stages of life. While I wish our opportunity for annuity sales was greater at the moment, I'm very happy to focus on life insurance sales, where we can layer in a nice profit stream on a long-term profit product.

Looking at our agency force. As of March 31, 2019, we had 1,830 exclusive agents and agency managers. This is a small increase compared to a year ago. I'm pleased that our agent count is relatively stable compared to the declining industry numbers for exclusive agents.

The environment remains challenging for recruiting and retaining exclusive agents. Our first year agent retention rate is high, but we have room to improve in years 2 through 4. From a geographic perspective, our agent retention is the strongest in rural markets. This is positive as we have a competitive advantage there with our Farm Bureau and rural ag connection. Agent growth and retention remain a top priority.

In March, we launched additional TV advertising and expanded its reach in our territories. The new creative messaging is memorable and connects with consumers. This is evidenced by a 15% increase in our brand awareness in Iowa, Kansas and Nebraska. I encourage you to check out our commercials at the Farm Bureau Financial Services' YouTube channel. They're both humorous and relevant.

We're focused on our core Farm Bureau niche customer. This year, we introduced new farm and ranch succession planning seminars called Changing Hands. With our regional financial consultants, we plan to hold around 120 of these seminars in 2019. To date, we've held 88 seminars across our states. The focus is to prepare prospects and client members with the plans necessary to pass their ag business onto the next generation. This seminar is a significant benefit for our clients, improves retention and allows for life and annuity sales opportunities.

Given the success of these seminars, we are developing our next seminar series called Maximizing Your Retirement. The format will be similar but we're targeting a different demographic: an age range of 45- to 60-year-olds.

Next, I'll provide an update on our wealth management initiative. In the first quarter, we received FINRA approval for our full-service broker-dealer. We also began recruiting experienced advisers in our territories. As of March 31, we have appointed 6 Farm Bureau wealth management advisers and plan to add more over the balance of the year. Our value proposition is resonating well in the various adviser channels. We offer incoming advisers the ability to partner with our existing agency force to provide local financial advisory services to our existing client members. This is a unique opportunity for an investment adviser to team up with our exclusive Farm Bureau insurance agents.

Our ideal wealth management adviser candidates are established advisers with a book of $30 million to $40 million, but we are open to considering advisers with larger and smaller book sizes. Currently, we're not accepting advisers new to the wealth management business or those without a book of business.

These wealth management advisers are in addition to our 51 exclusive agents who are agent financial advisers. They now have the tools and products to offer fee-based financial planning and investment management services for their client members. This is a long-term initiative that allows our agents to add more value, meet all of their clients' insurance and financial needs. Ultimately, we expect this to add diversified earnings stream to FBL Financial Group given the fee-based nature of this business. As a whole, we're off to a strong start in 2019 and I have a positive outlook for the balance of the year.

Before I turn it over to Don for our financial results, I want to mention that a couple of weeks ago, we announced that Ray Wasilewski will retire at the end of the year. Ray has been with FBL for 22 years, the last 5 as Chief Operating Officer for Farm Bureau Life. With Ray's excellent leadership, we have executed several major foundational initiatives at Farm Bureau Life, and we are well positioned for continued long-term success. On behalf of everyone at FBL Financial Group, I thank Ray for his many years of dedicated service and wish him well when he departs our companies at the end of the year.

A new Chief Operating Officer will be named at a later date. Our search for Ray's replacement includes both internal as well as external candidates via national search.

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 first quarter of 2019 was strong at $1.37 per share. This includes $0.33 per share in net realized gains on investments and the change in the fair value of derivatives and equity securities. Our adjusted operating income excludes these items, resulting in adjusted operating income for the first quarter of 2019 of $1.04 per share.

Overall, I would characterize adjusted operating income as solid and in line with our expectations for the first quarter of 2019. As a reminder, we have some seasonality on our mortality experience, with death benefits on average being about 10% higher in the first quarter compared to a simple average for the full year.

Our results in the first quarter were impacted by the following items. Positively, we benefited from the strong equity market performance in the first quarter, resulting in lower amortization of deferred acquisition costs and related balances in the Corporate and Other segment. This decreased amortization by $2.2 million or $0.07 per share after tax. We also benefited from investment prepayment fee income of $0.04 per share after tax, which is in line with our expectations. Partially offsetting these items, we had lower spread income in the Annuity segment, and our equity income was less than expected. In addition, our mortality experience in our Life segment was slightly worse than the elevated level we expect in the first quarter. I'll review these items in more detail as I discuss our segment results.

Annuity segment results for the first quarter of 2019 includes $1,039,000 of investment prepayment fee income. This segment also benefited from a smaller-than-planned increase in our guaranteed living withdrawal benefit reserve due to positive equity market performance during the first quarter. Offsetting these positive items was lower spread income for this segment.

Point-in-time spreads in our individual annuities decreased 4 basis points during the first quarter of 2019 due to a decline in the investment yield from the 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.

Life Insurance segment results for the first quarter of 2019 reflect a steadily growing book of business and investment prepayment fee income of $330,000. Partially offsetting this was slightly worse than expected mortality experience. This is due to a higher average claim size than typical as many of the claims this quarter were universal life and term life claims which tend to have higher face amounts. Additionally, equity income was lower than normal this quarter given that some of our investment partnerships are reported at quarter in arrears and reflect the negative impact of fourth quarter 2018 market returns.

Similar to annuity spreads, point-in-time spreads on our universal life business also decreased. They declined 1 basis point during the first quarter due primarily to the impact of lower investment yields.

Corporate and Other segment results were strong for the quarter benefiting primarily from lower amortization of acquisition costs on our closed block variable business due to positive equity markets. This was partially offset by lower equity income in the first quarter of 2019.

As reflected by the decline in spreads, the investment environment remains challenging. The tax-adjusted yield on new investment acquisitions backing our long-term business was 4.45% for the first quarter of 2019. This is 11 basis points lower than acquisitions made in the fourth quarter of 2018 and lower than our portfolio yield. Our current preference is to stay up in quality and add longer duration investments when possible.

Next, I'll comment on our capital. We have an excellent capital position and significant financial flexibility. We are committed to returning capital to shareholders. In March, we announced a 4.3% increase in our regular quarterly dividend rate to $0.48 per share. Based on yesterday's closing stock price, this gives us an indicated dividend yield of 3.1%. On top of that, we also paid a $1.50 per share special dividend in March. We're able to pay these dividends because of our confidence in our operating results and our strong excess capital position. Taken together, the regular quarterly dividend and the special dividend result in a total indicated dividend yield of 5.5%, currently the highest in the life insurance industry.

At March 31, 2019, our subsidiary Farm Bureau Life had an estimated company-action-level risk-based capital ratio of 517%. This is a decline from year-end 2018 when the ratio was 552%. A decline in the ratio was expected due primarily to a $50 million in dividends paid from Farm Bureau Life to the holding company to fund the regular and special shareholder dividends paid in the first quarter.

In closing, we are off to a positive start in 2019 with a solid first quarter earnings results. While we would benefit from increased investment yields, we've been able to maintain our financial discipline and grow 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 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) The first question today comes from Marcos Holanda with Raymond James.

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

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I wanted to start off with the annuity sales. And Jim, you were talking about the dynamics there, and I was just curious what pockets of your customers are you seeing the decrease there? Is the core Farm Bureau customers shifting to CDs and to equities as you were mentioning?

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

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Yes. So I think when you think about our core customer, the competition comes from almost more from -- in the rural areas, from bank CDs. That's another trusted outlet for folks in midsized and rural communities. And it seems like in the past whenever we get anywhere near 100 basis points to a bank CD, they're a pretty good competitor to our annuity products. And they may or may not be as inclined to do the index annuity products, which are a little harder to compare to bank CDs, but we do sell them in those markets as well. But the index annuity is off as well, and so that could be probably what I would consider some of the rest of our territory for the most part.

So it's just an environment, honestly, where we're seeing folks stretch a little bit on credit quality and stretch on profit compression in order to get the annuities moved. And my comments were really around the fact that we're a very diversified product set. And while I would prefer to be able to continue to sell more annuities, we're going to probably stick pretty close to our discipline and continue to have our efforts get pushed more towards the life insurance sales right now, again, which from a long-term perspective is really, really beneficial for a lot of reasons, whether it's cash flow, testing, liquidity, stable earnings streams, things like that. So at times when it's this tough, we just double down and focus hard on life insurance.

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

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Okay. And Jim, is there any sort of scenario in which -- I mean, I guess, let's say, if yields continue to get lower and CDs or not as attractive that annuity sales could rebound, I guess? And what type of scenario would have your sales pick back up or just sort of continue to trend where it has been over the last couple of years?

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

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I think we're kind of on a precipice. When the risk-free rates were just a little bit higher earlier in the year, we were humming along a little better and down here to 10 year and 2.40% is not quite as attractive. I think if there's any events where credit spreads start to widen out, that would be one catalyst. I think, on the index side if we can get cost of funds as it relates to options, at better rates, we could probably offer more as well. But it seems like we're just kind of on the bubble here. And if we're getting a little lift either on the risk-free side or on the credit spread side, we'd probably see a tick up again. You've got anything to add to that, Ray?

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Raymond Walter Wasilewski, FBL Financial Group, Inc. - COO of Life Companies [6]

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Marcos, this is Ray. I'd add, too, that volatility in the equity market sometimes can help on that index annuity side too as people get a little risk off there and look for some of the safeties on the downside of that index annuity. We can see some inflows there if that starts happening.

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Marcos Costa Holanda, Raymond James & Associates, Inc., Research Division - Research Associate [7]

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Yes. Got it. And then on the asset -- on the wealth management business, Jim, you said you guys are only taking in an adviser with a book of business, and you have I think 6 of them now. How big is the consolidated book currently?

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

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Yes. So Scott, I don't know if you're with that information -- have that available or Don has that available in terms of what the book is on wealth management right now.

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D. Scott Stice, FBL Financial Group, Inc. - CMO [9]

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This is Scott Stice, Chief Marketing Officer. Can you give me a little clarity on what you're asking for in book size? Are you asking for the book size of the advisers we've recruited so far or just our total broker-dealer operations?

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Marcos Costa Holanda, Raymond James & Associates, Inc., Research Division - Research Associate [10]

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Yes, just the AUM so far.

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

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Yes. So we currently have right at $1.3 billion of AUM. Most of that is in straight mutual funds. Only in the last -- really since the end of February have we started the fee-based business. And our fee-based business is currently -- well, through the end of March, right around $20 million.

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James Patrick Brannen, FBL Financial Group, Inc. - CEO & Director [12]

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So remember, we just got service broker-dealer during the quarter. This is the first quarter where we have really begun in earnest, Marcos, to start adding those folks.

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

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Got it. And just my last question. And on the investment portfolio, if you guys could maybe spend a minute and just talk about the allocation and if you guys continue to increase the CLO part of it? I guess just any comments there.

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Charles Theodore Happel, FBL Financial Group, Inc. - CIO [14]

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Hi, this is Charlie Happel, Chief Investment Officer. We have ticked up -- I guess I would characterize it as kind of onesie, twosie on -- really on all the asset categories right now. We were up in quality last year, tilted towards high quality structure, which included some A and above CLOs. We have done a little of that this year, but probably that has slowed down as well and we're doing a few more corporates honestly right now than we are structured just because that stuff has become a food fight. We did a lot of Ginnie Mae project loans last year, and that's in some of the 2.0 RMBS. And they're just -- frankly just tougher to buy right now. So we have backfilled a little bit more fully with high-grade corporates.

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

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So is there some sort of scarcity right now on high-grade CLOs there in the market?

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

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Yes, I think, well, I would say that the deal flow we're seeing on -- because we like the fixed-rate deals, which is lesser -- just a smaller part of the market, kind of -- those kind of trade by appointment. And so we've done a few. We did a, I think, a CBO recently. It was a high-quality deal, but we have not seen the kind of flow in any of the structured product that we saw last year.

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Operator [17]

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(Operator Instructions) Our next question comes from Jamie Inglis with Philo Smith.

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

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I'm trying to get a sense of -- and work with me on trying to -- I'm going to try to phrase the question properly. My recollection is you guys had some -- recruited some what we would call sort of life-only agents that -- whose goal was to work with your sort of traditional multiline agents that were predominantly property casualty oriented. And now you have these other advisers, these wealth management fee-based advisers. What I'm trying to get a sense of is, how do you measure the opportunity in those 2 different buckets, if you will, versus the cost of recruiting expense, et cetera? I mean how do you measure that? And how do you decide where to push and where to recruit?

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James Patrick Brannen, FBL Financial Group, Inc. - CEO & Director [19]

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Yes. So I'll start and then I'll turn it over to Scott for color. But -- so the first position you talked about is what we call regional financial consultants. And really, those folks get paid by splitting commissions with the agents that they work with. And they have become extremely productive engines for our life production and have really -- each year, more and more of our core agents are working with them on large case, complicated case, et cetera, and that has very much taken off. And I think that clears the path a little bit for a wealth management adviser, where if there had been hesitation to work with someone else on their own customer base in the past. So many of them have done it with the regional financial consultant. So I think the path will be pretty easy. In terms of cost and deciding where to recruit, et cetera, Scott, I'll ask you for some color.

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D. Scott Stice, FBL Financial Group, Inc. - CMO [20]

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Sure. Let's start with where to recruit, and I'll address both of the RFCs and the WMAs. With respect to the RFCs, we are now at 18 spread across our kind of 15 states where we do business. It's really a question of demand. So as we place an RFC, they establish relationships with the agency force. They fairly quickly can reach a point where they just don't have additional capacity. And when we have additional agents who are open and willing to participating in that team-based selling approach, we will add a new adviser -- a new RFC. We measure their effectiveness based on the amount of new production that they do. They're employees and so they're salary-based with the commission on top. And we establish their production goals so that they return a profit to us very quickly.

On the wealth management adviser side, we are just beginning. We've only started recruiting in January. The concept is generally the same as with the RFCs, although over time, we will probably have many more than we do RFCs because we're recruiting these folks with book. And we've designed our go-to-market strategy and our recruiting strategy with that book size in mind, with the goal of bringing on enough assets under management, converting it to our block that they do become profitable for us within the first couple of years.

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James Inglis, Philo Smith & Co. - MD and Partner [21]

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So I guess the long and short of it is that the decision as to recruit a Regional Financial Consultant has got nothing to do with the wealth management adviser. It's where the action is (multiple speakers)

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D. Scott Stice, FBL Financial Group, Inc. - CMO [22]

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That's correct. That's correct. That's correct.

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Operator [23]

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This concludes our question-and-answer session. I would like to turn the conference back over to Kathleen Till Stange for any 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.