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Operator
Good day, everyone. Welcome to the Selective Insurance Group fourth quarter earnings release conference call. At this time, for opening remarks and introductions, I would like to turn the call over to Vice President and Assistant Treasurer, Ms. Jennifer DiBerardino.
Jennifer DiBerardino - VP & Assistant Treasurer
Good morning and, again, welcome to Selective Insurance Group's fourth quarter and year-end 2006 conference call. This call is being simulcast on our website and the replay will be available through March 1, 2007. A supplemental investor packet, which includes GAAP reconciliations 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 in 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-K 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 statements.
With us today are several members of Selective's senior management team -- Greg Murphy, our CEO, Jim Ochiltree, Head of Insurance Operations, and members of his senior leadership team, Ed Pulkstenis, Chuck Musilli, Jeff Kamrowski, and John Marchioni. We have Ron Zaleski, our Chief Actuary, and Kerry Guthrie, Chief Investment Officer.
At this time, I would like introduce our Chief Financial Officer, Dale Thatcher, to review the fourth quarter and 2006 results.
Dale Thatcher - CFO
Thanks, Jennifer. Good morning. 2006 was another record year of earnings, despite a more competitive marketplace. Our overall statutory combined ratio was 95.4%, including a more-normalized catastrophe impact for the year of 1.4 points, or $21 million. We grew net premiums written 5.2%, well in excess of estimated 2006 industry growth rates.
Operating income was $4.56 per diluted share for the year on operating income of $140.5 million. Net income was $5.30 per diluted share on net income of $163.6 million. We had a solid fourth quarter compared to a much stronger fourth quarter a year ago. Operating income decreased 2% to the $1.23 per diluted share on $37.3 million. Net income increased 10% to $1.43 per diluted share on $43.5 million.
The statutory combined ratio increased 2.5 points to 99%, including 1.5 points of catastrophe losses. Investment income after-tax increased a strong 15% to $33.9 million. Direct premiums written were up about 3% for the quarter, reflecting strong new business growth of 11% and our straight-through, one-and-done small business system. However, net premiums written in the quarter declined due to a decrease of $5.5 million in assumed premiums from certain state-mandated underwriting pools.
In the fourth quarter, we experienced favorable reserve development of $3 million, bringing total favorable reserve development to $6.9 million for the year. Overall, calendar year frequency is down 3.2% and severity is up 8.8%, while earned premium is up 1.1%. We maintain an overall strong reserve position at 7% above the midpoint of the actuarial range. Internally, we perform four full-reserve reviews per year and our external opining actuary performs three reviews.
Commercial lines performance continued to lead our 2006 results. We had our 12th consecutive quarter with the statutory combined ratio under 100%. For the quarter, the statutory combined ratio was 98.5% with 1.6 points of catastrophe losses, compared to a combined of 95.8% with 0.8 points of catastrophe losses a year ago. For the year, the commercial lines statutory combined ratio was 95%, including 1.2 points of catastrophe losses, and the net premiums written growth rate was solid at 5%.
We continue to focus on balancing price and retention in this competitive market. Renewal price increases for the year were 2.2%, including exposure growth, while pure price was down 1.7%. Retention remained steady throughout the year at 78%. Of the various commercial lines industry pricing surveys, we favor the Tillinghast CLIPS survey because of its data collection methodology. According to the CLIPS survey, through nine months of 2006, pure pricing declined about 2.3%. The third quarter was the eighth consecutive quarter of commercial lines pure price decreases, although declines have been moderate.
Our commercial auto book continued to face stiffer competition, resulting in a pure price decrease of 4.1% for the year. But profitability levels are still excellent, with an 88.1% combined ratio. BOP business continued to experience robust growth of 7.5% in the fourth quarter and 8.6% for the year. We rolled out the BOP predictive model in November 2006. Early indications demonstrate positive trends in our selection of profitable new business, which has grown 40% just two months.
In a relatively small book of business like our BOP book, profitability will have greater variability. In the fourth quarter, we experienced nine BOP losses greater than $100,000, contributing to the combined ratio of 125.8% and, in turn, reducing profitability for the year to 102.4%. The losses were on policies written or renewed prior to the pilot of the BOP predictive model. After detailed review of the losses, we do not believe there is a developing trend. As we achieve scale in our BOP book using our predictive model, the impact of large losses will decline.
We continue to deliver on our multidisciplinary worker's compensation strategy implemented early in 2006 and we remain on target to reduce the combined ratio seven points by year-end 2007, barring unforeseen factors. In addition, we expect the managed care and pharmacy network changes put into place in the third quarter to generate $3 million in durable savings per year. We are generating growth in most profitable classes, policy sizes, states, and deciles identified through predictive modeling.
Workers compensation premium increased 5% for the year. New business was up 29% from a year ago, as we continue to implement our strategy to round out existing profitable accounts.
On January 1, 2007, we renewed our property catastrophe treaty and increased the amount of coverage from 95% of $250 million to 95% of $285 million. Retention increased from $20 million to $40 million. The 2007 estimated property catastrophe treaty cost is $17.6 million, up 34% over 2006. This reflects a 6% increase in exposure and higher market-driven pricing due to demand created by new modeling software, RMS 6.0, coupled with lower catastrophe supply.
Given the changes in the marketplace and improved risk modeling, the decision was made to non-renew our terrorism treaty. Since our largest modeled terrorism risks were workers compensation in nature, we placed a fifth layer to our casualty treaty that provides 75% of $40 million in excess of the current $50 million coverage limit. The coverage excludes nuclear, biological, and chemical risks.
The personal lines statutory combined ratio, excluding flood, was 106.4% for the quarter and 102.9% for the year. Included in the results were 0.9 points of catastrophe losses in the fourth quarter and 2.4 points for the year. The overall fourth quarter automobile statutory combined ratio increased 3.3 points to 108.6% from the prior year, with New Jersey auto performing at a 98% in the quarter. Net premium written growth was relatively flat for the fourth quarter versus a year ago and up 8% for the full-year 2006.
In New Jersey auto, we continue to experience a decline in the number of personal autos we insure from 80,600 last quarter to 77,000 currently. 2006 was a year of rebuilding for personal lines, which we expect to continue through the first half of 2007. New business growth declined as we rolled our new matrix pricing product for New Jersey personal auto. We made slight rate adjustments to the model to improve competitive gaps in the pricing structure for targeted business that we believe will improve production and retention going forward. We have already seen an improvement in New Jersey auto submissions in December and January.
We launched the personal lines underwriting service center in 2006 and ended the year with $30 million in premiums serviced for New Jersey agents. We will roll out the center in the rest of our states in 2007, which we expect to facilitate future personal lines growth.
Diversified Insurance Services performed at the upper range of our expectations in 2006. Our award-winning flood insurance operation had a very successful year, generating growth of 28%, which brought total flood business service to $120 million. The Big "I" has endorsed our flood product and we are now the seventh-largest flood writer in the country. Selective HR Solutions successfully launched the employer protection program, or EPP, early in 2006, which has been well-received by agents as a way to increase touch points with clients and provide a competitive advantage. Total worksite employees rose almost 27,000 and the new account pipeline activity grew as well. We look to a strong 2007 to advance the EPP to the next level.
After-tax investment income grew 15% for the quarter and 16% for the year. Growth was driven by strong operating cash flow for the year of $393.1 million, proceeds from the $100 million junior subordinated note offering increased dividend and short-term income, and excellent returns from our alternative investment portfolio, which now represents about 3% of our invested assets. Alternative investments, which have a low correlation to the S&P 500, are a key facet of our portfolio diversification strategy.
The investment portfolio increased 10% to a record $3.6 billion at year-end. We maintain a conservative bond portfolio with an average AA credit quality rating and duration of 3.9 years. To manage interest rate risk or, specifically, manage reinvestment risks, we maintain a well-laddered maturity structure of the bond portfolio. Invested assets per dollar of stockholders' equity ended the year at $3.32. When multiplied with our after-tax portfolio yield of 3.6%, the result is a 12% return on equity generated by the portfolio.
In 2006, we continued to use our share repurchase program and dividend policy to enhance shareholder returns. For the full year, we repurchase 2.1 million shares at an average price of $53.63, or 1.5 times price to book. 2.6 million shares remain available under the current repurchase authorization. In addition, we announced a 9% increase in the dividend, effective with the first dividend payment of the year on March 1, 2007, and a two-for-one stock split with a record date of February 13 and a payable date of February 20. The premium to surplus ratio at year-end was 1.5 times and book value increased 8.5% to $37.62. As we continue to generate excess capital, we will repurchase shares on an opportunistic basis.
Selective has a favorable risk profile when compared to other P&C carriers and an excellent track record of risk management. Given our focus on small commercial lines business, the duration of our liabilities is shorter than most commercial carriers, at approximately three years. In evaluating our footprint, it is as important to note where we do not write as it is to where we do write. We do not have primary exposure to the Gulf Coast or Florida, nor do we write in states with more difficult regulatory and legislative environments. This is mainly by design.
Now I would like to turn the call over to our CEO, Greg Murphy.
Greg Murphy - CEO
Thanks, Dale, and good morning. 2006 was a highly successful year for Selective, as our results were driven by an intense focus on achieving long-term, profitable growth. The property casualty business is all about relationships and relationships are what we do best. We value the strength of our connections with a select group of independent agents. They continue to give Selective high marks for the service and support they receive from our 2000 dedicated employees, a unique field model that few carriers can match, and leading-edge technology that makes it easier for them to grow their business and serve their customers.
Our "high-touch" business approach, fueled by "high-tech," is a powerful competitive advantage that drove our success in 2006. We outpaced the industry with growth in new business, extended our underwriting profitability to 12 straight quarters, earned a 15.9% return on equity, exceeding our cost of capital by 650 basis points, and improved total return to shareholders by increasing dividends 9% as a result of our strong 2006 performance.
A.M. Best reaffirmed our financial strength rating of A+ Superior for the 45th consecutive, while agents in Goldman Sachs national survey ranked us the number one insurer for quality of service. Additionally, we attained an overall satisfaction score of 8.9 out of 10 on a recent Company survey administered by an independent survey firm. We not only had an excellent score, but strong participation from 719 agents.
Over the past several years, our dedicated and talented employees at all levels of the organization have rolled up their sleeves to implement and integrate a number of growth and profitability-focused initiatives. We believe that successful carriers, in addition to having successful relationships, must be able to grow organically and have the tools in place to price on a granular level, to maintain profitability, and to avoid adverse selection.
As the competitive headwinds intensify, managing growth and profitability will be a major focus for us in 2007. To drive profitable growth, we have already developed the tools, as follows.
1. We are expanding our appetite for existing products and creating new products in areas such as manufacturing, social services, recreation, and other areas identified through our market planning initiative that should have annual premium potential of $10 million.
2. We increase the number of classes in our One-&-Done small business system in 2006, bringing the total over 300. We are widening the pipeline in 2007 to include other successful programs such as auto services, manufacturing, and golf courses, with annual premium potential of $25 million.
3. To tie agents growth plans more closely to Selective's, in 2006 we helped agents hire 32 producers and provide sales training to over 200 producers. These programs demonstrate the partnership we have other agents and the depth of our commitment to them. Our plan for 2007 is to help agents hire 50 to 60 new producers and provide sales training to over 300 producers.
4. We currently have 782 agents with approximately 1,600 storefronts and plan to add another 90 agencies during 2007. Based on our market planning initiatives, we will provide these agents with detailed growth plans to facilitate achieving a number one or two position in their agency over three to five-year timeframe.
5. Selective was the first company to implement agency integration technology, which provides seamless direct quote capability. Since inception, we quoted $263 million of business through our xSELerate technology and we anticipate generating additional growth by expanding technology usage in 2007.
6. Our knowledge-based MATRIX pricing model for automobile, offering millions of pricing points, is the centerpiece of our personal lines growth plan. The MATRIX auto program was recently launched in seven additional states to positive agent response. Matrix for homeowners rolls out this year.
7. Later this year we will be expanding our primary 20-state footprint with the addition of Massachusetts for commercial lines.
As we balance growth with profitability, our Knowledge Management and predictive modeling initiatives will be integral to maintaining profitability. Successful carriers will be those able to implement targeted pricing tools and Selective is one of the front-runners among regional carriers with predictive modeling. We rate workers compensation business into five profitability levels, with 97% of our new business in the top three levels. 84% of that business with priced at or above the ranges indicated by the model.
In the fourth quarter, we retained about 90% of our best business and nonrenewed 33% of the worst business. We are in the process of completing and rolling out predictive models for other commercial lines. The BOP model, piloted in late 2006, was fully rolled out. The CPP model for the property in general liability lines of businesses is in the final development and the commercial automobile model will follow in 2007. We are integrating them into our underwriting process to maintain and enhance profitability as we grow.
Although we continue to experience competition, it is most pronounced in the accounts greater than 100,000. In 2006, pricing in the small-to-mid market segments, which represents the bulk of our business, was down slightly. For 2006, our new business growth by account size is as follows -- One-&-Done small business, $43 million, up 6%; AMS, or middle-market business, $184 million, up 9%; SRM, or large account, $30 million, down 3%. Small business continues to grow in 2006, as we expanded the pipeline for new classes of business in our automated underwriting environment.
Our 2006 average premium per business day were up 5% to $172,000. The relationships our Agency Management Specialists, or AMSs, have appears with their agents and their producers are what drive agency penetration and middle-market new business growth. Each AMS generates an average of $2.3 million in new business per year. We analyze our new business in 80 segments, of which, in 2006, 90% of those were profitable and 70% of our agencies were profitable. Lower levels of new business in Selective Risk Managers, SRM large account business, reflects the intense competition. We were comfortable with the business we are writing in this segment. Pricing discipline on new business is paramount in this segment, as we have a staff of pricing actuaries dedicated to SRM.
Retention on existing business exceeded expectations for the year at a very strong 90% due to the excellent customer service in claims handling and safety management services. We attribute our overall success to the ability to leverage our competitive advantages. Financial strength, an unparalleled field model, superior technology, outstanding relationships with a select group of independent agents, and 2000 dedicated employees, passionate in their desire to exceed agent and customer expectations. Taken together, we believe competitive advantages set us apart from the majority of property casualty carriers and provide investors with a solid investment opportunity over the long-term.
In 2007, we expect the current level of competition to continue. There are several forecasts for the industry being circulated that indicate flat or low-single digit net premium written growth and increasing combined ratios. Our 2007 guidance reflects an integral planning process led by our actuarial group. This process includes a deep dive into market conditions, pricing and growth opportunities by region, strategic business unit, line of business, AMS, and agent, including an analysis of on-level trended loss ratios.
Based on this analysis, our assumptions are as follows and do not reflect the announced two-for-one stock split. For 2007, we anticipate operating earnings in the range of $4.40 to $4.70 on a combined ratio of less than 98.5 on a GAAP basis and less than 97 a statutory basis. We are forecasting net premium written growth in the middle-single digit range much higher than industry estimates. Other assumptions for the year include commercial lines renewal price increases, including exposure of 1.4 points; normalized level of catastrophe losses, $14.7 million after-tax, or $0.49 per share; after-tax investment income growth of 10%; Diversified Insurance Services revenue growth of 12% and return on revenue of 10%; diluted weighted average shares of 30 million.
Finally, as we announced in our press release yesterday, Jim Ochiltree has decided to retire in March 2008. Over the past twelve years, Jim has been driving force in the establishment of our field and agency relationships model and led our expansion from small regional carrier in nine states to a 20-state super-regional company. To ensure a seamless transition, the talented leadership group Jim has assembled will assume new and expanded responsibilities over the coming year. We will miss Jim's wisdom and guidance, but wish him all the best in the next chapter of his life.
Now, I'll turn the call back to the operator for your questions.
Operator
(OPERATOR INSTRUCTIONS) Greg Peters, Raymond James.
Greg Peters - Analyst
Dale, in your opening comments, you talked about how the service center roll out will facilitate growth in your personal lines business going forward, and I am just curious how the squares with what looks to be above a 100 combined ratio in your auto business.
Greg Murphy - CEO
Greg, you're breaking up. Can you repeat that question? I think what I got out of it is you are questioning the growth strategy in the service center, relative to the combined ratio (multiple speakers) in personal auto. That's what I thought you were saying.
Greg Peters - Analyst
Exactly.
Dale Thatcher - CFO
Basically, I guess that I will infer from that question is why do you want to grow business that is running at that kind of a combined ratio? Really, that combined ratio, I think, is reflective of the changes that we are undergoing right now within our personal lines operation. We are introducing MATRIX across our states, which provides predictive modeling in much more detailed price points that will enable us to write business on a profitable level. So really, the combined ratio is more reflective of history than what our expectations are in the future. I will give it to John Marchioni to see if he has got a couple of items he would like to add to that.
John Marchioni - SVP Personal Lines Underwriting
I would just reiterate what Dale said. He indicated in his comments that the MATRIX auto pricing methodology only rolled out on a country-wide basis at year-end. So we're just now starting to put new business in all of our states through that pricing model and absolutely have confidence in the profitability of that new business we are writing. We are also managing through the renewal inventory, as we have talked about in prior quarters, in New Jersey quite aggressively. So that will start to materialize in the profitability-side going forward.
Greg Murphy - CEO
Greg, let me to just add to that, from an agency standpoint, I see more and more agents trying to gravitate into the personal lines space and use that as leverage to increasing the number of, really, the number of SKUs they sell as a salesperson. I think that effective agents view that if they can go out and write the business and seamlessly move it into a service center, that that can be a great source of profit over the long-term, from an agency standpoint. So holistically, we're hearing from our agents that they want a more seamless capability to process that business and I believe we provide them that capability.
Greg Peters - Analyst
Okay, I am sorry about the distortion. I do not have you on speakerphone. I wanted to follow up with another comment regarding the changes of the reinsurance beginning in 2007. And I hope you can understand me. But simply, you talked about the cancellation of your terrorism coverage and I am wondering if there was any benefit in terms of cost, relative to the increases that you talked about with respect to your property cat cover.
Greg Murphy - CEO
Yes, I would say those two decisions were made independently and part of -- obviously, let's talk about the terrorism situation first. I think as the modeling has gotten better and our ability to determine what kind of events we would -- what kind of made-man events we would be exposed to. We really viewed the five-ton truck bomb as one. We have done a multiple scenario analysis as a result of that and our biggest exposure is the worker's compensation. We have been able to add a 75% for $40 million program, or effectively $30 million of coverage, for about a three online. The terrorism contract was a 10 online, so we were able to leverage that down and feel that it fits better with our overall risk exposure.
With respects to the increases in the property cat, obviously we increased retention as a result of the increases of the rates online on the lower tiers and felt that we delivered an integrated catastrophe program at a 650 rate online and feel very confident that covers one in approximately 107-year event on the five-year stochastic analysis. And then on the longer-term 100-year analysis on a historical basis, it is around the 220-year range, approximately. So --
Greg Peters - Analyst
That seems pretty strong.
Greg Murphy - CEO
Yes, it is.
Greg Peters - Analyst
How many times have you hit your property cat reinsurers for losses, say, in last ten years?
Dale Thatcher - CFO
None. The last time we hit was Hurricane Hugo that I am aware of. 1989.
Greg Peters - Analyst
Did it hit it substantially or was it just --
Greg Murphy - CEO
No, it ran through a fair part of it. I can't recollect.
Dale Thatcher - CFO
That was $25 million losses from Hurricane Hugo.
Greg Peters - Analyst
Gross?
Dale Thatcher - CFO
Yes, so it is not --
Greg Peters - Analyst
Remind me, your net retention on the property cat moves up to 40?
Dale Thatcher - CFO
Yes, that is correct.
Greg Peters - Analyst
Okay, thanks for your answers.
Operator
(OPERATOR INSTRUCTIONS) Doug Mewhirter, Ferris Baker Watts.
Doug Mewhirter - Analyst
I just had two questions. The first, there seems to be quite an echo in the line. I'm not sure where it is coming from.
Greg Murphy - CEO
Don't know.
Doug Mewhirter - Analyst
The frequency and severity trends, could you review those again? I think you mentioned them on the beginning part of the call.
Dale Thatcher - CFO
Right, these were overall frequency and severity trends. We had, for our calendar year basis, the frequency was down 3.2% and severity was up 8.8%. That is an earned premium trend of up 1.1%
Doug Mewhirter - Analyst
Okay, also could you review the positive and negative development (technical difficulty) company had? Just split it between commercial and personal.
Dale Thatcher - CFO
You know, I don't have that broken out right in front of me. I just got a total favorable reserve development of $6.9 million for the year, so that is on the $2 billion reserve position. It was $3 million experienced in the quarter. Ron Zaleski, do you have a breakout handy?
Ron Zaleski - Chief Actuary
Yes, for the year, the total development was $7 million favorable. It was over $8 million favorable on the personal lines side and about $1 million unfavorable on the commercial lines side. That is for the entire year.
Doug Mewhirter - Analyst
Okay, thanks. That's all my questions.
Operator
Michael Grasher, Piper Jaffray.
Michael Grasher - Analyst
Congratulations on 2006. Looking ahead to 2007, the workers comp business, would you (technical difficulty) part is over in terms of improvements to that combined ratio. And from here on out, it will be more of blocking and tackling in order to maintain the improvements that we've seen already?
Greg Murphy - CEO
Unfortunately, the line is very fouled up and we apologize for that, but I think I got the essence of your question. I will repeat it just in case there is any issue. The question is the amount of work that we've done so far, we now moving into a transition mode into more blocking and tackling and we will not see as much improvement as we move forward? Let me just give you -- I think we have done a tremendous amount of work. I do not think you've started to see all the fruits of the heavy lifting that we've done, even in the existing renewal inventory. That will still continue to drive improvements. On the managed care side, you're going to see a lot of improvements on the area that I still believe will generate future improvements.
Then the ability to better select and write the new business, which you heard me talk in the call about how much business we wrote in the best classes. We are now not only writing in the best classes, but we are pricing it clearly at or above where the model is indicating it and 84% of the time. So when you start writing like 97% of your business in the best classes, our ability to grow and be profitable, to even improve the book and better round out accounts, I think we have just as much capability going forward or maybe even more so than we've demonstrated in this past year.
Michael Grasher - Analyst
Okay, then to follow up on your guidance for '07, you mentioned I am assuming a 98 combined. Can you give us more details behind your assumptions on that 98 combined? Are you seeing increases in frequency severity or background you can provide?
Dale Thatcher - CFO
We do not usually expand a lot on frequency severity as far as disaggregation, but I just want to make sure on a statutory basis we said a combined ratio up to 97. On a GAAP basis, we set up to 98.5. I just want to make sure that that came across clear on the call.
What we do have in our model is ongoing pricing, a slight pricing deterioration on a pure-price basis. I think that is clear from the indications of the fact that our renewal price increases for 2007 are only forecasted at 1.4%, and that includes exposure that generally runs at the 3% level. So that kind of answers your question relative to our expectation on pricing.
On a loss cost trend that our actuaries do all of our methodologies on an on level basis, they go back four years and then they trend increases in frequency and severity. Loss trends, Ron, I don't know if you have any general overall.
Ron Zaleski - Chief Actuary
For 2007, our expectation is approximately 3% of loss trends.
Dale Thatcher - CFO
So 3% trend in losses. I have to tell you, it is a very comprehensive process that we go through when we put together our budgets.
Ron Zaleski - Chief Actuary
What you have to understand, you just can't apply those numbers to 2006, because we base our budget on four-year history on-level and trended.
Michael Grasher - Analyst
Absolutely, thanks very much.
Operator
Lara Devieux, Wachovia Securities.
Lara Devieux - Analyst
Can you just provide us with some color on market conditions in commercial lines? What happened in the fourth quarter that led to the lower premiums? Given that you expect premium growth to be in the mid single-digit range in '07, do you feel the fourth quarter as an aberration?
Then separate subject, given that some of your larger competitors are not paying contingents going forward, are you looking to follow suit or change your compensation model? How do you think that changing compensation practices in the industry will play out in your agency offices?
Greg Murphy - CEO
Let me start with part of it, in terms of general market conditions. Right now, I would tell you with respect to the fourth quarter, I would not draw any conclusions other than the fact that a lot of that was down because of the assumed premium volume. Our direct premium still continued at a 3% growth rate, and understand that the end of the year is our smallest premium volume quarter. So I would sit there and say on a normal basis, the difference between 3 and 5% on those amount of dollars is not many dollars to push that thing around a couple percent.
So we actually view the reduction in our assumed business as a positive from a profitability standpoint, because those mandated pools generally run at substantially higher combined ratios than our other business, for instance both NCCI on the comp side and Cape on the commercial automobile side. Those run well in excess of 100, more in the 125 to maybe 140 range in terms of level of profitability. So you should actually perceive that as a positive in terms of run rate.
In terms of general market conditions, I'm going to let the other guys just comment on that in a second. I do want to talk to you about the supplemental commission issue. We have a plan that we perceive, from our standpoint, clearly rewards our best-performing agents. Our agents want a plan that rewards them. I think some of the issues in the marketplace today about the new prospective plans, there's a lot of uncertainties from agents. They don't know how the plans are going to work. They don't know the level of information they're going to receive about plans work.
So at this point it is very much a wait-and-see and we are in close contact with the only our agents, but also the Big "I" about changing development in the marketplace. Right now our position is we're staying with our supplemental commission and right now our agents very much appreciate the fact that we reward them for the best performance. In terms of market conditions, I will turn it over to Jim and Chuck.
Chuck Musilli - SVP, Chief Field Operations & Marketing Officer
I think I just support what Greg was talking about in the conference call. I think that the annual trends for 2006 probably bled through into the fourth quarter as well. We saw very good growth in the small business segment. Our AMS group, the middle-market segment, there is strong growth there. We saw a lot of increased pressure in the accounts over $100,000. I think that is going to continue into this year.
The confidence that we have going into this year from a growth standpoint would be our ability to know more about the risks that we are pricing through the modeling that we're doing, both on new business and renewal business. And that should put us in a better competitive position, but that does not negate the ability of that competitor to go out there and price a piece of business in a manner that we feel is illogical. It is our responsibility to walk away at those points.
Jim Ochiltree - Head of Insurance Operations
This is Jim. I would just add that I think the majority of the pressure is at the top end of the market, certainly above $100,000 in premium is where we've seen a great deal of pricing pressure. Our renewal policy count retention is quite good and firm and has held steady. I think that -- but when you get into our Selective risk managers business, which is $250,000 and above, we see very strong retention there. But we did not see as much new business there, because simply we refused to chase that stuff down to the levels that some of the larger accounts are going today. We are very sophisticated and disciplined in how we price that business, and we do not intend to write it at a loss.
Greg Murphy - CEO
So, really, when you kind of listen to the holistic discussion in terms of what both Chuck and Jim just articulated, what is the difference going into 2007 is we have got our market planning information fully embedded. We have got a lot of source of information we can provide to agents. We have scoring capability now to possibly prescore accounts. We've got agents hiring more producers. We are going to bring more agents online and we are providing them with a lot more information about the type of business and a lot more specificity about the price that we want to go out at to write the best business.
So I think that what you'll see from Selective is the capability for us to increase our hit ratio on the business quoted, but yet like Jim mentioned to you, what happens in the larger account area, and that is where we want to be very careful. We want to grow that business, but we have a group of three'ish actuaries basically embedded in that SRM unit pricing that business. So we are not going to write an account that we should not be on.
The profitability of that $160 million of business that we do write is in like the 89, somewhere in the 88, 89 range. So it is performing very well. We are able to retain it because we have the best claim and best safety management services, but we are not going to go out and chase an account at below pure premium levels just to grow the top line. That's the difference between Selective and a lot of other carriers.
Lara Devieux - Analyst
Okay, then just as a follow-up, is competition still mostly in the form of pricing pressure or are you starting to see any changes in terms and conditions?
Greg Murphy - CEO
Chuck will answer that.
Chuck Musilli - SVP, Chief Field Operations & Marketing Officer
From our standpoint, it is mostly pricing pressure. There is very little difference in the terms and conditions at this point of price.
Lara Devieux - Analyst
Okay, thank you for your answers.
Operator
(OPERATOR INSTRUCTIONS) Daniel Baransky, Fox-Pitt Kelton.
Daniel Baransky - Analyst
I had some questions here. I was wondering on the competitive front if you could give maybe a little more color on where you are seeing that competition coming from. Is it large nationals or other regionals or sort of disbursed across both flows?
Chuck Musilli - SVP, Chief Field Operations & Marketing Officer
It is all over.
Greg Murphy - CEO
It really depends on the size and segment of business, the geography. In this stage, everybody is looking to grow their top line, and we are seeing pressure from all fronts.
Daniel Baransky - Analyst
Okay. Do you have the LP income impact in this quarter versus the year-ago quarter?
Greg Murphy - CEO
Sure. Dale is getting that right now, but we'll have it for you in a second.
Daniel Baransky - Analyst
I guess while he is looking for that, can you give us any sense sort of if we think about where you could grow in 2007, do you have a sense of sort of your core space of your 20-state footprint in sort of the states where you do not have as large a presence? How is the growth going in the states where you do not have as big a presence, and how much headway do you think you can make there?
Greg Murphy - CEO
We can harvest a tremendous amount of premium growth in almost every state that we are in. I would say areas that we feel that we are well represented and our market share -- it would be, New Jersey, for instance a 4 share. And the next state that I would kind of put on that same level would be Rhode Island where we haven't been in Rhode Island for all that long, but yet we write about a 3 plus share in that marketplace with an absolute excellent growth rate in agents, and we did that all greenfield in Rhode Island.
So our opportunity to grow in Pennsylvania, certain parts of the Carolinas we want to be, in Georgia, out in the Midwest, there are tremendous growth opportunities for us where we are maybe a 1, 1.5 share and we've got the ability to take that higher. What I hope comes across is that agents want to have a relationship with a regional carrier. They want us to be a top player in their office. They want to have somebody that they can talk to. That is what we provide by having a field underwriter that not only is there, can make decisions, can provide them with guidance about what we're doing as an organization. They are like an entrepreneur in their little territory.
So we have about 80, 82 of those AMS's. We're going to continue to grow that, and every one of those folks show up there, and they're going to be driving production, driving their territory, increasing their market share. Because we can deliver to our agents and to our AMS's our penetration in 80 different commercial business segments and we can break that down on accounting basis, on a superregional basis, and we can take it and show them the amount of profitability that we have. And then we are also tying that now to how much business opportunity there is in that territory.
We are combining all of that information now with the agents and dialing it into their sales process, dialing it into new producers that they're hiring, and giving them a track to really run on. No one else out there is doing that like we are.
Dale Thatcher - CFO
The alternative investment income on a pre-tax basis for the quarter was $2.7 million in 2006 versus $2.2 million in 2005. For the full year, it was $12.2 million in 2006 and $8.2 million in 2005.
Daniel Baransky - Analyst
Great. The expense ratio, if I'm correct, ticked up in the quarter. Is that mostly profit accruals or is there something else behind that?
Greg Murphy - CEO
No, I think that is just a reflection of all -- when you sit here and go through the many initiatives we have going on, I believe that that has been more of the reason that you have seen some of that uptick. And what the goal is in 2007 is now that we have spent a lot of the intellectual time and the dollars in the modeling and the market planning and hiring producers and doing more training and putting in a leadership program in the organization, now we will start to drive the execution of much of that in 2007 and beyond.
So there will always be an element of investment, but I think we've gotten to the point now where we can drive a lot more scale with a much higher degree of confidence in terms of what we're doing and what we're monitoring and how we are growing.
Dale Thatcher - CFO
I would add that that is the answer for the full year. The fourth quarter, keep in mind, always has a much higher expense ratio just because it is our lowest premium quarter, so that is more of a mathematical aberration.
Daniel Baransky - Analyst
Okay, Lastly many of your peers and I guess the industry as a whole has been pretty -- I wouldn't say aggressive, but they've been releasing reserves and getting a lot greater benefit from that than you have. I'm just curious what you're seeing maybe perhaps on your prior years that is maybe preventing you from releasing more reserves on that business or what you're seeing today that maybe you're not doing as much as some of the other companies in your space.
Dale Thatcher - CFO
We just have a very disciplined reserve process. Our release, as Ron mentioned to you earlier, was about $6 million in aggregate, and right now we are 57% in the range. We feel very confident about our overall reserve position, and that is as an organization where you need to be.
Daniel Baransky - Analyst
Are you seeing anything I guess on the prior years? Are you seeing anything that would maybe augur for more activity moving forward as far as how case reserves are developing or loss trends are developing on business you wrote over the past two or three years?
Greg Murphy - CEO
In the back years, obviously, you see some pressure on the workers' compensation and to some extent in the general liability, but then you also have favorable -- the same kind of favorable trends in the commercial automobile line and to a large extent on New Jersey personal automobile. So we see things push around a little bit, but I would have to tell you that in 2006, it was a very quiet year in totality, including the workers' compensation. So I think that there is nothing that really changed during 2006 that we saw that was significant.
Daniel Baransky - Analyst
Okay. All right, great. I'll let other people ask questions.
Operator
(OPERATOR INSTRUCTIONS) It appears that we have no further questions at this time.
Greg Murphy - CEO
All right, thank you very much. Thank you. That concludes our call.
Operator
Once again, that does conclude today's conference. Thank you all for your participation and have a great day.