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Operator
Good day, everyone.
Welcome to the Selective Insurance Group third quarter earnings release conference call.
At this time for opening remarks and introductions I would like to turn the call over to the Vice President, Assistant Treasurer, Ms. Jennifer DiBerardino.
Please go ahead, ma'am.
Jennifer DiBerardino - VP of IR, Assistant Treasurer
Thank you, Felicia.
Good morning, and welcome to Selective Insurance Group's third quarter 2006 conference call.
This call is being simulcast on our website, and the replay will be available through November 30, 2006.
A supplemental investor packet, which includes GAAP reconciliation of non-GAAP financial measures referred to on this call is available on the investors page of our website at www.Selective.com.
Selective uses operating income, a non-GAAP measure, to analyze trends and operations.
Operating income is net income excluding the after-tax impact of net realized investment gains or losses, discontinued operations and the cumulative effect of change in accounting principle.
We believe that providing this non-GAAP measure makes it easier for investors to evaluate our insurance business.
As a reminder, some of the statements and projections that will be made during this call are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties.
We refer you to Selective's annual report on form 10-Q filed with the U.S.
Securities and Exchange Commission for a detailed discussion of these risks and uncertainties.
Please note that Selective undertakes no obligation to update or revise any forward-looking statement.
With us this morning are several members of Selective’s senior management team.
Greg Murphy, our Chief Executive Officer;
Jim Ochiltree, head of our insurance operations and some members of his senior leadership team, Chuck Musilli and John Marchioni;
Ron Zaleski, chief actuary and Kerry Guthrie, chief investment officer.
At this time I would like to introduce our Chief Financial Officer, Dale Thatcher, to review third quarter results.
Dale Thatcher - EVP, CFO
Thanks, Jennifer.
Good morning.
The third quarter was another solid quarter of growth and profitability for Selective despite an increasingly more competitive marketplace.
Compared with third quarter 2005 net income decreased 3% to $38.1 million or $1.25 per share.
Operating income remained essentially flat at $35.5 million but on the per-share basis increased 3% to $1.17.
Net premiums written were up 4.7% to $401 million with commercial lines growing 5.2% and personal lines up 1.8%.
Our statutory combined ratio of 94.9% increased 0.6 points and includes catastrophe losses of 1.8 points, a full 1.7 points higher than last year.
Catastrophe losses this quarter were mainly attributable to tornado activity in the Midwest, as well as modest losses from Hurricane Ernesto.
Commercial lines performance continued to be strong as we achieved our 11th consecutive quarter of underwriting profitability with a statutory combined ratio of 95.1% versus 94% for the same period last year.
This quarter's commercial lines combined ratio include 1.4 points of catastrophe losses versus only 0.1 for the third quarter last year.
Third quarter commercial lines growth was 5.2%, about twice the A.M.Best estimated commercial lines growth for 2006.
As we continue to experience above-average growth, we carefully monitor the balance between pricing and retention.
Renewal price increases were 1.7% in the quarter, including exposure growth of about 3%, indicating a pure price decline of 1.3%.
Retention remains steady at 78%.
During the first nine months of 2006 our commercial lines renewal pure price was down about 1.4%.
This is slightly better than industrywide pure pricing according to the price monitoring survey performed by Tillinghast for the first six months of 2006.
We believe the Tillinghast survey utilizes the most credible data collection methodology, representing 16% of commercial lines industry premium.
Overall 2006 results remain strong industrywide because there has been no significant hurricane activity, and some carriers are still earning in pure price increases from 2005 premiums written.
As we move into 2007, given the negative pricing trends in 2006, the growth rate in average premiums earned per policy on a pure price basis will become negative.
When renewal pure price is declining and loss costs on a pure price basis trend higher a market cycle shift occurs.
General inflation and notably medical inflation are driving loss cost up, which in turn should drive industrywide statutory combined ratios higher.
We believe that this is the point in the market cycle when it is critical to have a clearly defined plan to improve risk selection and mitigate frequency and severity.
Some of the tools we use to lower frequency and severity are safety management, managed care, knowledge management and reviewing claims over $25,000.
Although it is uncertain at this time whether our initiatives will offset macro pricing and loss trends, on average we've outperformed the industry's loss and LAE ratio by 7.5 points over the past ten years.
Greg will address the initiatives we have in place to improve our risk selection process later in the call.
During the quarter we achieved profitability in almost every commercial line of business except for workers compensation.
Property, BOP and commercial auto all continue to achieve strong profitability.
We continue to execute on our multidisciplinary strategy aimed at reducing the workers compensation combined ratio 7 points by year end 2007, barring unforeseen factors.
In the quarter the workers compensation combined ratio improved 12.8 points to a 105.1% from a year ago due to a $4 million adjustment to loss and loss expense reserves.
This improvement was a result of changing medical and pharmacy managed care networks outside the state of New Jersey and recontracting our medical bill review services.
The impact on the combined ratio was about 5 points for the quarter and will generate ongoing durable savings of about $3 million per calendar year.
Workers compensation net premium written increased 8% in the quarter from the same period last year.
New business was up 10% from a year ago including an increase of 32% in voluntary business and a 77% decrease in involuntary business.
Part of our proactive workers compensation strategy is to round out our existing profitable package accounts.
The strategy targets risks in the most profitable classes, states and policy sizes while rolling out predictive modeling to write the best individual accounts.
Best is determined by over 30 factors ranging from traditional risk characteristics, such as loss history on renewal accounts, to new and proprietary risk factors that further improve the predictability of future losses.
Our best workers compensation states now represent 75% of new business an increase of 7 points from the same period last year.
While our performance in workers compensation reflects substantial progress, we do not expect that our progress towards a 7 point reduction will be as dramatic each quarter.
The personal lines statutory combined ratio (excluding flood) was 100.8% for the quarter, a 2.3. improvement over third quarter 2005.
Included in the results were about 4 points of catastrophe losses compared to essentially zero losses in third quarter 2005.
Overall the personal auto statutory combined ratio improved 3 points to 101.2%, and our New Jersey book performed at a 96.5%.
We continue to see a decline in the number of personal autos we insure in New Jersey to 80,590 from 84,000 in second quarter 2006.
The third quarter homeowner statutory combined ratio of 102.8% included 11 points of catastrophe losses, up from 98.6% including 0.8 points of catastrophe losses for the same period last year.
Our new personal lines strategy takes advantage of significant improvements in New Jersey's regulatory process that now allows us to build a weighting plan that matches price to risk and profitably compete for over 85% of the risks in an average agent's office.
One facet of the strategy was the July launch of our knowledge-based rating model, MATRIX, for New Jersey personal auto new business.
MATRIX is designed to enhance Selective's competitive position through an expanded appetite that better matches price to risk and has about one million more pricing points than the former program.
Our New Jersey agents are currently working through repricing renewal business to reflect our new pricing and tiering, which will cause a onetime dislocation in our renewal book over the first year.
It will take several quarters before this transition begins to show positive results and new business increases substantially as we are better able to focus on new opportunities.
As we continually update our rating process, we have filed new auto rates in New Jersey to make us more competitive in the most desirable segments, and we are on schedule to roll out MATRIX to the other personal lines states by year end 2006.
We expect to see positive results more quickly outside New Jersey as new business will be the primary focus.
Our personal lines strategy also includes leveraging Selective's commercial lines core competencies including excellent agency relationships, marketplace consistency, broad underwriting appetite and strong technology.
We are now in the process of rolling out our successful xSelerate agency integration system for personal lines.
As it does for commercial lines, this system allows the seamless quoting of both new and renewal business.
Our personal lines service center opened last quarter.
It has been rolled out to all New Jersey agents and is now servicing $20 million in personal lines premium with firm commitments that will bring us to $35 million in service center premium by year end.
We expect the center to be open to all personal lines agents by mid 2007 and to ultimately service about 30% of total personal lines premium.
At our diversified insurance services operation revenue grew 9% to $29 million and return on revenue was 13.5% for the quarter.
Flood premium grew 27%, bringing total flood servicing premium to $34.5 million.
Flood revenue was up 16% in the quarter while net income increased by 1.4% since our high margin plane revenue was lower this quarter.
At Selective HR Solutions, total worksite employees were up 8% year-over-year driven in part by the launch of the rebranded employer protection program which continues to resonate well with agents.
We currently have about 60 non-Florida agents closing business and about 100 submitting RFPs with the corresponding closing ratio of 37%, which is approaching our more mature Florida markets closing ratio of 39%.
For the third quarter net investment income increased to $30 million after-tax, up 18% from the same period year ago.
The increase reflects a 9.5% increase in bond income, a tripling of short-term interest income and a 142% increase in alternative investment income to $4.2 million after-tax.
The after-tax annualized portfolio yield held steady at 3.4%.
Our alternative investment portfolio representing 2.7% of our total portfolio is designed to add additional return while lowering the overall volatility of the total investment portfolio.
Alternative investments have generated a return of 5.3% and 13% for the quarter and year-to-date, respectively, about even with the S&P 500 for the quarter and exceeding it by 4.4 point year-to-date.
Since inception this portfolio is up 13.9% exceeding the S&P 500 benchmark by more than 6 points.
Continued strong operating cash flow of $135 million for the quarter and $96.8 million in proceeds from the $100 million junior subordinated note offering pushed our investment portfolio to $3.5 billion at September 30th, an increase of 14.5% from September 2005.
Invested assets per dollar of stockholders' equity reached $3.35 in the quarter.
The general drop in interest rates during the quarter lead to a $51.3 million positive swing in unrealized bond portfolio gains.
This had a $1.16 positive impact to book value per share, which was $36.56 at September 30, 2006.
The fixed-income portfolio duration was 4.2 years.
Historically, duration has ranged between 3.7 to 4.6 years.
Although we do not try to forecast interest rate moves, we do proactively manage interest rate risk through a well laddered maturity structure of the bond portfolio.
We continue to repurchase shares under our current 5 million share authorization.
In the third quarter we bought back approximately 524,000 shares at an average share price of $51.21 or 1.5 times book value.
Year to date we repurchased approximately 1.9 million shares at an average price of $53.53 or 1.5 times price to book.
We accessed the public capital markets in September with the issuance of $100 million in 7.5% junior subordinated notes due in 2066.
The proceeds are being used for general corporate purposes.
For the quarter we generated a 13.8% annualized average operating return on equity, exceeding our cost to capital by 440 basis points.
Now I would like to turn the call over to our CEO, Greg Murphy.
Greg Murphy - Chairman, President, CEO
Good morning.
As Dale said, this was a solid quarter as our growth rate continued to outpace the expected industry growth rate for the year, and we maintained our focus on balancing price and retention to achieve ongoing profitability.
Before I discuss our results further I wanted to make some general comments on our industry in the market.
As we move into the fourth quarter of 2006 and survey the landscape for 2007, we anticipate softer conditions as the market becomes more competitive with companies stretching to meet premium growth goals.
Pricing surveys indicate widespread pricing declines this year, although moderate in percentage when coupled with rising claim costs industry profitability is likely to be impacted.
We believe that investors are focused, as they should be on the relationship between renewal price increases excluding exposure or pure price and loss cost trends.
The current inflection point is a leading indicator of future results.
Industry return on equities for the past 20 years has significantly underperformed all other U.S. industries, 8.7% versus 13.1% or 4.4 point below all other U.S. industries and about 130 basis points below the current estimated industry cost of capital.
Our industry has not even managed to achieve one year in a row of ROE outperformance.
It is already pricing down again.
Over the past eight years industry ROE's have averaged just 6.3%.
In addition, industrywide excess capital is generating more aggressive premium growth strategies to increase market share.
When coupled with little or no commercial lines pricing power industry returns in the future years may go lower.
At this point one would expect to see additional industry focus on producing ROE's that exceed the cost of capital and are more in line with other industries, particularly given the macro conditions in the insurance industry.
Leading agency scrutiny is higher than ever with increased focus on understanding corporate strategy, enterprise risk management and how companies manage and measure pricing versus loss trends or cycle management.
There is more emphasis on reserve discipline.
The fact that the industry has many new, more sophisticated management teams in place because the old ones didn't maintain enough discipline through past cycles, could also play a part in moderating current and future cycles.
Our strategies are focused on outperforming the industry through any market cycle, and we have a strong financial base and competitive positioning to support that strategy.
There are about 500 commercial lines groups rated by A.M.
Best, fewer than 8% are rated A+ or better.
We are proud of maintaining our A+ rating for 45 consecutive years, particularly given this year's heightened scrutiny of the industry.
We are also very pleased with two notable positive rating actions this year.
Standard & Poor's upgrade of Selective's financial strength rating to A+ and Moody's elevation of their outlook to us up to positive.
Equally important are among a small percentage of carriers presently using legitimate predictive modeling to analyze and price a portion of their business.
Deloitte Consulting was quoted in the July 2006 Best review as saying for commercial lines adopters of predictive modeling, "the smaller companies have been able to move faster, implement the models more effectively and bring their underwriters and agency forces on board more quickly with these new underwriting tools.
Here being smaller and more nimble has an advantage.” We believe the carriers that have these sophisticated pricing tools will outperform those that do not due to the inevitable result of adverse selection.
The business analytics of predictive modeling information we deliver to our inside underwriters' desktops and to our field underwriters assist them in making the most informed underwriting decision.
This allows us to price on a much more granular level, as well as identify irrational pricing scenarios that deliver short-term growth at the expense of long-term profitability.
Our growth strategy is just yet another important competitive factor.
Selective's 20 state footprint represents total market opportunity of over $200 billion-- $104 billion in commercial lines and $108 billion in personal lines.
Our commercial lines market planning initiative provides specific information about the size of accounts available in the targeted business segments and territories right down to the county level.
So we can take full advantage of the marketing opportunities.
We then apply what we've learned from our Knowledge Management to hone in on the most profitable business segments.
Armed with this data, we have meaningful planning meetings with our agents to develop targeted growth plans.
Market Planning also identifies areas where we may need to appoint new agents and deploy more agency management specialists or AMS's.
Selectives' overall agency count currently stands at 764, and we have focused on expanding our agency partnerships and anticipate adding 150 agents by year end 2007.
In the nine months ended September 30, 2006, 42 new agents have been appointed, 32 agencies were terminated, and 17 agents were consolidated, leaving those storefronts basically intact.
And while we are experiencing competitive markets across the board, pricing in the small to midsize commercial lines market which represents the bulk of our business, has to date held up somewhat better than pricing for accounts $100,000 and larger.
For Selective small business is less than $20,000 in premium, large account business is greater than $250,000, and middle market is everything in between.
For the nine months of 2006 our new business growth by segment was One & Done small business $32 million, up 4%;
AMS our middle market business, $144 million, up 13%; and large account or SRM business, $26 million, down 1%.
As for personal lines independent agents in our 20 state footprint control about $39 billion of the premium out of the total $108 billion.
The most recent study by independent agents and brokers association or the Big "I" shows that 78% of midsize agents, defined as those agents writing 2.5 to 5 million in annual commissions view personal lines as a very important future source of revenue.
We will seek to work with such agents as we expand our personal lines presence.
While they are not exactly counter-cyclical to commercial lines, personal lines has tended to have flatter, less severe pricing cycles.
It is well-documented that companies with a portfolio of both personal and commercial lines achieve more stable results over time.
We believe Selective is well positioned to successfully maneuver the market cycle shift.
That said, however, we are not immune from industry trends.
Clearly if loss costs and catastrophe reinsurance costs are going up and pricing is going down, it will result in combined ratio pressures that will be difficult to offset fully through our plans and strategies.
When we report fourth quarter results we will have our 2007 budget completed and be able to provide guidance for next year.
Ultimately we believe Selective is better positioned to outperform relative to other carriers.
We have the best franchise, the best management team, an excellent distribution system of select independent agents, a true field model, disciplined pricing and reserving practices and the right platform to grow profitably over the long-term.
These are the reasons why I believe we will continue to deliver on our goal of outperforming the industry.
Before we take questions I would like to walk you through our guidance for the balance of 2006.
Based on our strong results through nine months, we now expect to come in slightly better than our projected 96.5 GAAP and 96% statutory combined ratios.
We expect diluted operating earnings per share in the range of $4.45 to $4.55, up from our previous range of $4.30 to $4.50.
Other key assumptions for the fourth quarter include a normal level of catastrophes, $3 million after-tax or $0.10 per share; diluted weighted average shares of $30.8 million; after-tax investment income growth of 15%; and diversified insurance services revenue growth of 12%, and a return on revenue of 8%.
Now I would like to turn the call back to the operator for your questions.
Operator
(OPERATOR INSTRUCTIONS) Greg Peters, Raymond James.
Greg Peters - Analyst
Morning, everyone.
I had a couple questions for you.
First of all, as usual, Dale was going through a lot of information, and I'm not sure if he talked about reserve releases in the quarter, but if he did, could you repeat them and if he didn't, could you give them to us?
Dale Thatcher - EVP, CFO
In the course of the quarter we had $2.7 million in favorable development.
Greg Peters - Analyst
And what was the prior year?
Dale Thatcher - EVP, CFO
I just don't have that handy here.
You have that Ron?
Greg Peters - Analyst
I can circle back -- there are some other questions I have for you.
I am trying to read through your comments on pricing pressure, etc. and maybe you can provide us an idea of where you think your consolidated accident year combineds or loss picks might wind up for 2007 relative to 2006 to give us a sense of what kind of loss ratio erosion you think might materialize over the course of the next 12 months.
Greg Murphy - Chairman, President, CEO
I guess, Greg, the best way for me to characterize that, when you look at our commercial lines performance in aggregate I would say that the overall amount of net development is not that significant, which theoretically tells you that our calendar year and accident years are running fairly close.
So we don't really -- I think when you analyze it like that it basically tells you that your earned pricing relative to your claim costs are what's going to drive your 2007 ratio either up or down.
Now that is the pure just mathematics of where are your loss -- I understand that your loss costs are driven by inflation, changes in frequency, changes in severity and for us on a macro basis and commercial lines frequency has been tracking down.
Actually frequency is down around 4% and severity is going up around 7% on the total commercial lines book.
So overall net loss cost move about 3%.
So there is a lot of push and pull in there, and I think kind of what we went through in our comments is that we have a number of strategies around predictive modeling, around our workers compensation strategy, around just general knowledge management, around our safety management that will also impact our loss ratio picks for 2007 because a lot of these initiatives are either fortified or new on a year on year basis.
So you can't just necessarily make a linear progression from 2006 numbers and say, okay this is what we're going to be in 2007 because there are many new and exciting things as a company that we are doing to improve our performance.
We didn't have market planning before.
Now we are able to determine the most profitable segments.
We didn't analyze our book of business as in detail and put all the different initiatives in terms of our 80 business segments that we have that we've identified today and then the business analytics that we've got.
So it is very hard for me just to answer that question because there are just way too many moving parts to look at where accident year versus calendar year ratios are and just spot them out for 2007.
Greg Peters - Analyst
Okay.
That's a fair answer and I appreciate the color.
On the reinsurance side I am curious if the business that you've ceded to your reinsurers for 2006 has been profitable for them as a group, and if that is the case, I am wondering if your expectation on pricing on '07 is as firm or increasing relative to where it was in 2006.
Greg Murphy - Chairman, President, CEO
I'll let other folks comment on it, as well.
On a macro basis I would say that the performance of our property contract continues to be stellar.
Although I would say and even on the casualty contract its still been very positive.
But those contracts aren't going to move premium around year on year that much even if they went down or up a little bit which is really all we expect is some minor movement either directionally up or directionally down on either one of those contracts.
I think our comments are more around what's going to happen in the catastrophe arena remembering that we were in the market at January 1 for our catastrophe placement; catastrophe pricing did move substantially higher in the let's call it March/April timeframe.
And the color we're providing around that is given new RMS model, given the updates relative to our increasing TIVs as we write more business and what has gone on in that market generally, we expect property catastrophe costs year on year to be higher.
We don't expect to cede any losses to them, although no one can ever guarantee that that's going to happen, and we've never had a loss.
Since we have been in markets like Bermuda, since the mid-90s, I mean we have been in Bermuda, we were one of their first clients, a lot of these startups back in the -- that '93, '94 class -- we haven't had a loss, but yet we just expect industrywide pressure on reinsurance premiums to be there because these guys have had like six to seven years of continual poor performance.
And I would assume that their CEOs are under pressure to generate adequate returns and so just because you have one light cat season are they just going to be dropping pricing wholesale;
I don't believe that in fact will be the case.
That is just our macro view of it.
Greg Peters - Analyst
Maybe just touching on your appetite for increased retentions, one of the things that some of the Bermudas were talking about in their conference calls have been the increased appetite of the primaries to retain more of their risk as a rationale for why their top lines are flat or going down in the coming quarters.
Where do you stand on that?
Jim Ochiltree - SEVP, Insurance Operations
Basically that is something that we evaluate every year as we look at the reinsurance program, we look at the amount of coverage that we want to buy.
We look at the pricing that is available out there and we actuarially price each reinsurance contract internally, and we make that call based on all of the economics of the overall transaction.
So that is something that we will evaluate as we progress through the renewal season.
Greg Peters - Analyst
Okay, fair enough.
Thank you for your answers.
Operator
Michael Grasher, Piper Jaffray.
Michael Grasher - Analyst
Good morning.
A question around the commercial auto segment or that line of business, premiums down year-over-year yet we had a spike in the combined ratio I think up about 10 points.
A little more detail around that and the weakness in any particular state or region?
Greg Murphy - Chairman, President, CEO
I will just go on a macro basis, what has happened in that line?
That is our most profitable line in terms of our overall commercial lines business.
And the premium is when you sit there and go through it premium did go down by 1% for the year.
Our combined ratio although for the year to date basis is only 86.4 relative to 82.9.
I mean, I would focus I think when you look at that 79.4 that is just a real tough comp out there.
I guess I look more on lines like that and liability on an annual basis, not necessarily relative choppiness on a quarter to quarter.
But that is a line where from a pricing standpoint we have been reducing pricing in that line in an effort to grow it.
It has been extremely profitable for us.
It is running in the mid-80s on an overall basis, and I would say that from a pricing standpoint it’s the one line that we have had to move pricing lower in order to write it, and it is part of the overall profitable account in total.
Just to give you an idea, in commercial auto on a year to date basis, renewal price increases which include exposure -- is just the way we quote it on an overall basis -- in total for commercial lines is up about 2.5% and for commercial auto was down 1% in the quarter.
So that is part of the overall account process.
Jim Ochiltree - SEVP, Insurance Operations
I would also point out that automobile policy counts grew by 5.3% in the third quarter.
Michael Grasher - Analyst
Okay.
Greg Murphy - Chairman, President, CEO
So we are growing the line still; it has got some of the ramifications of lowering price to grow the line and then in terms of profitability it still fits in there, 86% year-to-date combined ratio commercial auto is a stellar result in my opinion.
Michael Grasher - Analyst
Okay, and I think in Dale's remarks obviously the workers comp was ahead of expectation in terms of the ultimate reduction.
What was the $4 million adjustment?
Could you go over that again?
Dale Thatcher - EVP, CFO
Basically what happened was we entered into new contracts on the managed care side of things outside of the state of New Jersey, which enabled us to reduce our cost of providing the claims losses.
And that is something that will factor into the settlement of all the open claims outside of New Jersey on a go forward basis.
So there was a onetime benefit to factor those lower managed care costs into the overall reserve position, and that was $4 million.
In addition to that those reduced contract payments in the future will provide a $3 million annual benefit to the workers comp line.
So that is one of the pieces of our overall strategy in terms of reducing the managed care costs to deliver lower claim costs for that line.
Michael Grasher - Analyst
Thanks for that.
Congratulations on the quarter.
Operator
(OPERATOR INSTRUCTIONS) Scott Heleniak, Ferris Baker Watts.
Scott Heleniak - Analyst
Good morning.
You guys talked a lot in the past about your AMS program.
Just kind of wondering where you sort of see that going by the end of 2007.
I'm sure you're going to probably continue to ramp that up but I don't know if you can give any numbers.
Chuck Musilli - SVP, Chief Field Ops, Marketing
We continue to add apprentices into our program.
I believe right now we have -- I don't have an exact number but it is around 15 apprentices corporate wide, and I think this year we've deployed three or four of them into spots in the field.
We've currently got 82 AMS's out in the field, and we are going to continue to opportunistically put them out based on our market planning information and agency positions as to where we need them.
But that apprentice program is key to our future success because we find that we are more successful growing these folks internally than going outside and hiring them.
Scott Heleniak - Analyst
In the general liability line that you're still getting good growth there are you seeing any more softening in pricing versus of your other categories?
And can you talk about which categories within general liability are outperforming, doing the best there?
Greg Murphy - Chairman, President, CEO
I can talk a little bit about the commercial, the general liability pricing wise.
It is pretty much at about our average, so it has hung in pretty much at the average renewal price increase level.
So I would say that there hasn't been any softening in there relative to the proportion of the book.
And I would say just another Jim and Chuck comment on it -- this was just, what we are growing in there as part of our overall package business that we write as a generalist, it is not specific in any one territory or any one market.
I think it is part of our overall growth strategies.
Jim Ochiltree - SEVP, Insurance Operations
I guess I would say that overall it seems that the competition is more around property once you get away from the coast, and automobile.
Although all lines are facing it but are two of the areas where we notice most of the competition-- at least on an anecdotal basis.
Scott Heleniak - Analyst
Okay, so it hasn't changed much, then.
All right.
And the other expense line has increased pretty big this year.
Where do you see that heading in 2007?
Is it going to kind of stay at this level or increase more?
I don't know if you can talk about that a little bit.
Dale Thatcher - EVP, CFO
What is included in the other expense line is the effects of FAS 123(R), which is some of the methodologies for expensing our restricted stock component and the fact that you have to front load some of that for people that are retirement eligible.
So you do have a little bit higher expense there in the current year.
And although that level is slightly higher than I would expect on a run rate, it is still going to be definitely higher than it has been in the past as a result of new accounting pronouncements.
Scott Heleniak - Analyst
That's all I had.
Thanks.
Operator
(OPERATOR INSTRUCTIONS)
Greg Murphy - Chairman, President, CEO
Operator, you're very choppy from our end.
I don't know how it is for the rest of the folks.
Operator
Dan Baransky, Fox-Pitt, Kelton.
Dan Baransky - Analyst
I had a few questions here.
How much of your book of business is New Jersey personal auto now on a written basis?
Greg Murphy - Chairman, President, CEO
About 6%.
Dan Baransky - Analyst
6%, and are you still -- How do you feel -- I remember I guess earlier this year you had thought that that would run close to 100 combined.
It seems like you had a 96.5 in the quarter.
You feel better about that business than you might have before, or are you sort of still going by that same guidance as before?
Greg Murphy - Chairman, President, CEO
John will answer that.
John Marchioni - SVP, Personal Lines Underwriting
I don't think the guidance will change at this point.
What we will say there is we had certain expectations and took a pretty, what we thought was a, solid approach to reacting to the verbal threshold Supreme Court decision last year, and what we are seeing there is a little bit favorable but it is still really early.
That line is going to take a while to develop as those cases make their way through the judicial system.
And that has some benefit in the near-term.
But I think it is too early for us to say that that is going to be a continuation going forward.
Dan Baransky - Analyst
So we can think of this as still seeing the decline?
John Marchioni - SVP, Personal Lines Underwriting
I'm sorry, you were breaking up when you asked that question.
Dan Baransky - Analyst
My connection maybe.
John Marchioni - SVP, Personal Lines Underwriting
Just say that one more time.
Dan Baransky - Analyst
Do you still think that its a line you are kind of going to start to continue to deemphasize mostly the auto comps come down, do you feel better about it now, it just might stabilize or?
John Marchioni - SVP, Personal Lines Underwriting
I think our overall pricing strategy, and Dale talked at that at some length about our Matrix product puts us in a pretty solid position in that marketplace.
And clearly when the law changed, there was a quick reaction by the marketplace from a competitive standpoint, and that has started to cool off a little bit.
We are going through this correction right now, dealing with that renewal inventory of about $100 million, which is going to have some dislocation on our renewal book.
But I think we do feel positive about this and positive that these changes that have taken place in the regulatory environment have some staying power.
There are some consumer benefits out there; the politics of the system have really quieted down.
So our view on that marketplace is different; we just need to get through this correction to deal with that residual book of business that was built in a very difficult regulatory environment historically.
Dale Thatcher - EVP, CFO
And just, Dan, to add a little bit more color on the dislocation.
The details of the Matrix rating plan are that we have a plus 20 and minus 20% caps on our charged rate.
So as we go through the renewal book and as those individual policyholders get price changes, obviously the ones that are getting plus 20 are going to have less retention on those policies.
So over the next year as we roll out the Matrix product through the New Jersey book you're going to see that dislocation there.
So you will see some falloff; obviously the retention is going to be a lot better in the ones that are getting the minus 20 but that is just a little more color on the dislocation that we expect.
Greg Murphy - Chairman, President, CEO
That ties in just so we connect all the dots for you -- that ties into a comment that I made earlier about the models and adverse selection.
So business that we're putting larger increases on obviously we are putting them on based on our modeling, and obviously those are going to someone else that is offering a lower price for that same consumer, and then you have to really question where is that business ending up, and why, and how is it being priced?
So this just gets to the chasm that will be created out there in the marketplace, and this is on the personal lines side.
And it will be even more so on the commercial lines side as we move forward because these are truly not a lot of companies out there in the commercial line side that have legitimate models that I would call are industrial strength.
Some may tell you they have that model but it could be on three to five factors.
Our model in commercial lines for workers comp operates on over 30 different indicators.
Dan Baransky - Analyst
Thanks for the color.
The other quick question I had or maybe not so quick is what are you seeing in the loss trends department?
I know you indicated in commercial lines frequency down 4, and severity up 7.
Has there been any sort of acceleration in those trends at all, or maybe where they stood at the beginning of the year versus now and where you see them heading?
And has there been any sort of uptick in large loss experience and my question is sort of predicated on what a few other companies in your space have said this week in their announcements.
Greg Murphy - Chairman, President, CEO
Ron Zaleski, our chief actuary, will answer that question.
Ron Zaleski - EVP, Chief Actuary
We've seen continued reductions in frequency and we have seen increases in severity.
However, as far as just large losses in general we have really not seen that.
Over the course of the last four years we have actually seen a reduction in very large claims, those over $100,000, and we've been holding pretty steady since.
Greg Murphy - Chairman, President, CEO
Yes I would say that on the large claims, too.
I mean if you are hearing that from other companies in the marketplace, that would be kind of a little bit disturbing because that may be some indication as to what some market shift out there, some people trying to grab to write business.
We see it really on the larger end of the spectrum where -- we always hear the stories and they seem to take over the entire industry, but on the larger end of the market there are accounts that are being written at substantially below technical premium levels.
And at some point that has to come back to affect some carriers in the marketplace.
Dan Baransky - Analyst
Great.
Do you have any sense of -- I guess if we look at this frequency down 4 severity up 7, maybe what you would have said that was if maybe the fourth quarter conference call earlier this year?
Greg Murphy - Chairman, President, CEO
You know, not off the top of my head, but I think it is like Ron mentioned, we've seen this ongoing drop in frequency severity bounces around, particularly in a line like workers compensation where we've done a lot of different initiatives.
So there are a lot of things that you can push and pull and your severity aspect, and we have a tendency we analyze those on a fiscal year basis to kind of bring, smooth some of the quarter to quarter movement out.
But we haven't seen anything to a large degree one way or another.
Dan Baransky - Analyst
Can I just clarify one last thing?
On your guidance you gave besides the combined ratio guidance, was that all fourth quarter numbers or was that full-year numbers?
Greg Murphy - Chairman, President, CEO
That is full year number.
Dan Baransky - Analyst
Okay.
Greg Murphy - Chairman, President, CEO
That was for the full year.
Dan Baransky - Analyst
Thanks.
I'll let someone else ask some questions.
Operator
At this time there are no further questions;
I would like to turn the call back to Mr. Greg Murphy for any additional or closing remarks.
Greg Murphy - Chairman, President, CEO
Thank you all very much, and Dale and Jennifer will be available after the call if you have any follow-up issues.
Thank you very much.
Operator
This concludes today's call.
Thank you for your participation, and have a wonderful day.