Hi, everybody. My name is Mike Zaremski. I'm pleased to introduce Jack Roche, CEO of The Hanover Insurance Group, and Jeff Farber, Chief Financial Officer. I had the pleasure of initiating coverage on The Hanover last year. I'm telling you that because in my conversations with investors, I've sensed The Hanover has been somewhat under-covered and therefore underappreciated by certain investors. We decided it would be best for Jack and Jeff to start off today with a presentation. Then they'll tell you about their secret sauce, why their book value plus dividends have grown on average, at a CAGR of about 12% since Jack took the helm as CEO in 2017. Then we'll move into Q&A. With that, I'll turn the mic over to you two.
Thanks, Mike. Really appreciate that. We very much appreciate being part of this prestigious conference. I will spend the next 20 minutes or so providing an update on the progress that we've made elevating The Hanover to a more consistent, top-performing, and more distinctive carrier in the property and casualty sector. Then Jeff will add some thoughts regarding our financial trajectory and health, as well as our investor proposition. Then, as Mike suggested, we'll come back and take some questions. Let me just start off real quickly. As Mike alluded to, I've been CEO at the firm for the last three and a half years. I've been with the company for 15. I've been in the P&C sector for 35. I can promise you this is the most dynamic time in our industry in my three and a half decades.
I say that with enthusiasm and excitement. I believe this is an opportunity for the better companies and frankly, the better agents to increase their share and to really blossom at a time when our customers are expecting more of us. Frankly, the technology and the data and the analytics are allowing us to really transform the way we do business. I'll start off first with and reference some slides that you have here. I'll start with just a basic overview of our company. We're roughly $4.2 billion-$4.3 billion in market cap, $4.6 billion in net written premium last year. Another top quartile ROE performance in 2020, and really the best financial strength we've had as an organization with an A rating from AM Best. I'll give you a sense for the evolution of what we've done over the last 15 years since I've been here.
When I got here 15 years ago, this was a company that was pretty well respected for being a good underwriting company. It was very much a regional company and dominated in five or six states. It was personal lines and small commercial centric, not a lot of distinctive products, certainly not a lot of specialization. What you can see on the right-hand side is through a series of acquisitions and organic build-outs and some geographic expansion, we've fundamentally diversified the company and made it much more attractive in the eyes of the independent agents as well as investors. We now sit here today with roughly 40% of our business in personal lines and the 40% in our core commercial business and a little over 20% in our specialty business.
As I'll show you later on, all of our businesses are specialized in some form. I want to give you a little bit of an insight inside of each of those businesses on why we're different and why we try to avoid the commoditized sectors of our business. From a geographic standpoint, we still have a pretty good concentration in Michigan. One of the two regional companies that made this company what it is had a huge presence in Michigan, the Citizens company. We don't apologize for that concentration because frankly, we outperform the industry in Michigan consistently and generate terrific returns. We have worked diligently to diversify the firm, both from a geographic standpoint, from a sector standpoint, and from a distribution standpoint, and I'd love to share more about that.
First, let me just give you my high-level view of our investor proposition, and then Jeff will come back to that later. I do think we bring a differentiated strategy and product offering. Hopefully I make that case at a high level for you today. We believe we're well-positioned for above-industry growth. We were on that trajectory before the pandemic came across us. We intend to get back to it. We've more than doubled the firm since I've been here, and that's even after consideration for buying and selling our Lloyd's Syndicate, Chaucer, which was a great financial transaction, but it frankly wasn't where we wanted to go for the long term. If you added that in there, we have a track record of substantial growth and financial performance that we want to build on.
Last but not least, well before it became fashionable, we were delivering value to all of our stakeholders. We are a company with a terrific culture that employees are highly engaged in, that our communities are excited about our participation and support. Our focus clearly is on driving shareholder value and taking this company to the next level. We're doing that with a vision. Our vision is frankly, as ambitious as it sounds, is to be the premier P&C franchise in the independent agency channel. Given the dynamic environment and the change that is coming upon us, we want to help agents transform the way customers value and experience insurance solutions, and we have a lot of exciting things to share in that regard.
The tenets of our strategy are that we have a partnership model where we try to be the agency carrier of choice for the products and services that we build and represent. Increasingly use technology and data analytics to grow our business, also transform our business and operate it quite differently. Below that, you see some enablers. That speaks to our culture, our financial discipline, our desire to be a top performer and to execute in a way in which our agents and our customers can rely on us. We're building a brand. We think we're well down that path. We're determined to be one of the best brands in the P&C business. Let me talk about those levers at a high level, and I'll start with our unique agency distribution approach.
Those that follow us know that when we rebuilt this company a decade and a half ago, we started down this journey, we not only started to make it a more sophisticated and more specialized business, we targeted the best agents in the country. We did that across the different size sectors. We don't do business in any meaningful way with the top three brokers because we focus on small to mid-size accounts in the commercial line space. We're not a national account player. We're not a public directors and officers player. Because of that, our product set doesn't lend itself to playing with the global brokers.
That said, when you come one octave below that, we are a meaningful partner and market for the likes of Marsh agencies, USI, Hub International, the big national agents that have been consolidating the business over the last decade and a half. We have real sincere partnerships across the various different size sectors, our proposition is more about identifying the top quality agents that have a business fit with us, as well as a philosophical and financial fit with us, I'll come back to that in more detail. We combine that unique distribution approach with our broad and relevant product and underwriting expertise and the deep insights that we've created in our unique model, we really have a great value proposition for the best agents in the country.
Let me talk a little bit about these leading specialized capabilities, I want to talk about it broader than just our specialty business. In each of our major businesses, our mandate to the business is that they have to be different. We have to be able to answer the question, why Hanover? In our core commercial business, that means that we have a series of industry-specialized segments and offerings, both from a coverage, proprietary pricing, and service perspective, in small commercial, we have both a small account offering through our point-of-sale systems, as well as for the more complex accounts, we have a more sophisticated underwriting model, which makes us unique. Many of the large companies are predominantly a point-of-sale type offering, many of the regional carriers are a non-point of sale or package account writer.
In small commercial, we are anything but a commodity. We are a fulsome small commercial market for the best agents. In specialty, we have spent the last decade plus building this billion-dollar plus specialty business that complements our core commercial offering. Today, the returns of that business are terrific. It took a while through a series of acquisitions and business builds by hiring talent from some of the better companies to stand up a series of nine specialized businesses. Collectively, we are one of the most active specialty writers for the retail agents direct, that makes us unique. Many of our specialty brethren generate a lot of their revenue through wholesalers, which is not in of itself there's anything wrong with that.
We do some business with some wholesalers, but we're very unique in that the vast majority of our specialty business comes direct from the retailers through our operating models and our capabilities. Last but not least, our personal lines business is anything but a commodity. I'll talk about this really in more depth in a few minutes, but it's a $2 billion business for us, generating terrific returns, and it's an account strategy with the top agents that are consolidating their books of business over time, and we're very excited about the prospects in that line of business. I think what I wanted to pause and talk about beyond just the sectors and the lines of business is in our business, in my opinion, the industry has been a little bit too internal focused over the last decade.
Much of what's happened is carrier strategies have driven a fracturing of the business, a fragmentation of the business, even in small commercial. You saw it in personal lines. People got infatuated with multivariate pricing algorithms and products. Everybody was trying to out-GEICO GEICO. What we've tried to do is help agents restore their real value proposition, and that is: what is the customer looking for out of their insurance program? How do we help them get that? In personal lines, we were one of the biggest markets to reassemble accounts. 85% of our business now is an account.
We're trying to do the same thing in commercial lines, not holistically, because there is still going to be a fragmentation in some of the specialized areas, but to help agents see the value that they can provide by bringing more lines of business together with one carrier for one customer so we can be more efficient, be more focused on their needs. As the business gets more digitized, we can actually visualize how we can do that in an effective way. Really hard to create a digital experience for a customer when you have five lines of business going through three different carriers. We see this as a preface to the new way of doing business is becoming more account-oriented and driving that into the distribution.
I'm going to take a fast drive then through the rest of the slides here and tell you that we feel like we're well-positioned for growth and for continued top quartile profitability. We have transparency to how we can further penetrate our agents with our product set. We'll continue to add some agents. We'll continue to add some products. We have plenty of headroom in the products that we have today in the territories that we are. We're going to continue to expand some of the business unit capabilities. We're definitely going to continue to innovate. I'll talk about that in a minute.
Going to the next slide, we'll talk about briefly. I'm sorry, this agency growth strategy just reinforces that point, that we can get the vast majority of our growth over the next five years by penetrating our existing agents and then selectively adding some new appointments and driving ourselves, like we have over the last several years, to a much broader and deep partnership with those agents. Our commercial lines business, as I suggested, is diversified across a number of sectors. This includes our small and middle-market business.
On the right side of the slide, you'll see that we do focus mostly on the small to lower end of middle market, which helps us maintain a proper level of volatility of our earnings, but also allows us to focus on operating model and really transforming those operating models and keeps us from playing in what we believe is the more commoditized portion of the business where the margins aren't as great. In our specialty business, you'll see what we've done over the last 10 years in terms of building out and penetrating these specialty areas of E&S, healthcare, surety, our specialty industrial property business, our executive protection business. This has been done, as I said earlier, through a series of small acquisitions and organic build-outs, and is really one of our biggest success over the last decade.
In our personal lines business, what you'll see as you learn more about our businesses, while we're a regional carrier in the personal lines business in 20 states, we are distinctive and we focus on the upper middle market and below the high net worth, and have delivered an account strategy that frankly puts us in a very distinctive place. 70% of the business is with regional carriers, not national carriers. We're perceived as one of the top regionals with a real distinctive capability in this business. I'll finish with just some highlights, if you will, of how we're innovating and how we're using the new technology capabilities and data analytics to transform the business over time. We think about this in the three major kind of pieces of the value chain.
There's the customer acquisition stage, where we're working with a number of insurtech firms and vendors to help agents go after programmatic type small specialty business in a more digital and seamless way. That will take time, but there's a lot of good work being done, and we're very actively involved with that, with some of the firms that we're showing on this slide. In the middle of the value chain is this whole idea of data exchange and reducing some of the rituals of our business and frankly, asking less questions because we can get the data somewhere else, or asking less questions because they weren't really that potent to the underwriting and pricing process to begin with. A lot going on in this space. Very actively involved in that transformation and finding great efficiencies and progress there.
Last but not least, on the servicing side. We had invested ahead of the pandemic, and thank God we did, because we were able to use things like camera and video apps and downloads, and other new methods to settle claims and settle them with little to no leakage, and provide customers with an experience where we didn't have to get together physically in order to help them resolve their claim issues. I'll leave you with that final thought, that while we continue to deliver great financial results and improved expense ratios, we're not doing that at the expense of the future. We're investing heavily in the right types of things to modernize the company and position us for success in the future. With that, I'm going to turn the floor over to Jeff, and he can take it from there.
Thank you, Jack. Good afternoon, everybody. I'm glad we switched the slide past my picture, because it's always unsettling to look at yourself in front of a large group of people. Great to be here. Sorry that we can't be in Key Biscayne. I think that's where we were last year, but certainly hope next year that we'll all be able to be together and spend a little time together. That was a lot of fun last year. I've been with The Hanover coming up on 5 years as the CFO, and before that, spent 30 years or so in a variety of financial services firms. The last 5 was with AIG in a number of different capacities. Delighted with where we are. On the slide in front of you, this really shows a journey that we've been on to enhance the financial performance and create consistent profitability.
2010, we were in the bottom quartile from an ROE perspective with a depressed ROE. All of the work that the team did and that Jack talked about over time to modify the portfolio, really has shown itself. By 2015, we were up in the second quartile, and as we sit 2020, it's 13.1% in the top quartile. 2020 is not an aberration. 2017, 2018, 2019, and 2020 were all relatively strong, all top quartile, all roughly 12%+ ROE. How did we do it? Well, if you look at the right side of the page, the darker orange is the loss ratio, the lighter orange is the expense ratio. 2005 is a little bit different in that we were largely a personal lines company, so the mix of spend between loss and expense is different.
If you look from 2010 forward, you'll see a steady decline in both loss ratio and expense ratio, which has really been the driver, not surprisingly, of our enhanced performance. Page 18 here is our cat performance. Again, we go back to 2005. The first 10 years or so, the darker orange, again, is Hanover and the lighter orange is the industry. If you scan from left to right, you'll see the first 10 years or so, our performance was heavier in terms of actual cat performance relative to the industry. We spent a good part of the last 10 years evaluating the risk, and managing the property aggregation really thoughtfully to address the volatility that we were seeing. If you look from 2016 to 2020, generally speaking, Hanover was represented less in cat than the industry.
In fact, I think the math shows us that we were four points below the industry in cat. I believe that is really helpful, notwithstanding our heavy property footprint, generally, relative to some. We've been able to navigate and manage that really carefully by being away from the coast, being out of certain states that are cat-prone and spreading the risk appropriately. Moving to the next slide, if we would. We've talked a lot about our aspirational goals of getting to a 13+% target operating ROE. Where we are today is somewhere in the 12+% range, and we've been consistently performing at that level, give or take, up or down, in the 12s from 2017 to 2019, and a little higher than that in 2020, aided by some frequency benefit, of course.
The model to get another % or so to get us well above 13 is targeted profitable growth in mid-single digits. Consistently, we'll do that. Either a stable or improving loss ratio. If you think about it, the original model was stable loss ratio, benefit from expense management, and an ordinary, if you will, or consistent environment for NII based on an interest rate environment. As the interest rate environment has been more challenging and interest rates have fallen, notwithstanding the last month or so, not surprisingly and consistently, the margin of rate above loss trend has improved. One way or the other, either, in my opinion, we will have improved margin on the commercial lines loss ratio, or the interest rate environment will improve.
We're very comfortable with being able to manage the concept of underwriting margin and NII as a unit. Finally, the expense benefits we get from the growth are quite substantial. We have fixed expenses and we have marginal or variable expenses. As we grow, we can easily achieve 20 basis points expense improvement on our expense ratio from growing in mid-single digits. When you do that, the 20 basis points converts to almost 30 basis points of ROE. Over a three-year period, you basically pick up a point of ROE just from the growth and the leverage we get in expenses. Finally, because we're focused on both the numerator and the denominator of the ROE quotient, thoughtful and attentive capital management and capital allocation will be a major part of this. Next slide, please. How do we do all this?
We have always been, or at least since 2016, a financially disciplined and focused firm around rigor, around the financial discipline and rigor. Our investment portfolio, which I'll show you in a couple of minutes, is a very conservative portfolio, largely focused on fixed income. No plans to change that, but that provides the ballast for the results of the firm. We have been very disciplined with our loss picks and our reserves and our balance sheet, and we leave 2020 with as strong a balance sheet as we've ever had. The prudent financial leverage that we exercise is maintaining a very strong balance sheet while being thoughtfully focused on the amount of capital that we need and the amount of capital that we return to shareholders, given the ROE desires that we have.
Finally, when we think about reinsurance, we focus on protecting the balance sheet and the capital of the firm, maintaining limited volatility in the earnings, and then also opportunistically taking advantage of pricing arbitrages when they show themselves from time to time. As you think about the investment portfolio, we have a $9 billion portfolio at the end of December. It's really constructed in two main components. The first is the fixed income portfolio, about $7.5 billion. The remainder are cash, equities, mortgage loans, limited partnerships, et cetera, for about $1.5 billion. Given that we have about $3 billion of equity or a little bit more, you have in the high 40% range of the equity is risk assets. The fixed income portfolio is 96% investment grade, has a weighted average rating of A+, and a duration of almost five years.
The risk portfolio is still a relatively conservative portfolio in that it has a manageable level of limited partnerships, which tend to be mezzanine type partnerships. We have some marketable securities and some exchange traded funds, and then we have commercial mortgage loans, which have a low loan-to-value ratio. The portfolio is constructed very conservatively and has performed very well over time. Next slide, please. As we think about capital, we're very thoughtful capital allocators, where we feed businesses that we think have attractive opportunities, and we will scarcely give capital or starve businesses that are struggling to allocate the capital where it can be best used. As we think about any excess capital we have, we first want to bolster up our balance sheet, make sure it's quite strong. Secondly, we use it for organic growth.
We have a strong track record of returning capital to shareholders over time through both dividends and share repurchases. The chart on the right shows the dark orange are the dividends, the lighter orange are the repurchases. I would share with you this entire chart excludes $850 million of capital returned to shareholders in 2018 and 2019 combined, which consisted of about 60% stock buyback and about 40% special dividends. That's excluded from this chart. If you look at this, we've done fairly active both dividends and we've had a good track record of growing that dividend and maintaining a roughly 30% payout ratio and finding opportune times to buy back our stock and we will continue to do that. Next slide, please.
We have a long track record of being very focused on ESG and probably the early days for a very long period of time governance has always been a focus and our board is very diverse. We happen to at the moment have a chair, a board chair that happens to be female and we have best in class, best in practice, pay practices and very strong governance. On the environmental side, both attention to climate change and focus and also sustainability have been important hallmarks of how we try to drive the firm. Finally, social. For all the time that I've been at the firm, we've been a very inclusive firm, very focused on inclusion and also diversity.
Again, we have a diverse senior management team, a diverse board and have been focused on business resource groups and a variety of things and certainly that hasn't slowed down in the last year. If anything, we have ramped up our attention to diversity and inclusion and feel very good about that as we go forward. Next slide, please. As we think about valuation, I think most in the industry have been a little disappointed that the P&C companies have not performed as well as others in financial services. I think the banks in the last month or two have recovered nicely. I think we're making a slower recovery. It's perhaps the BI issue may be providing a little bit of an overhang in that. As I think about Hanover, we're trading really at a discount.
If you look on an earnings basis relative to our peers, and we have national peers, regional peers, specialty peers, median peers, our earnings just continue to deliver, and our valuation has lagged behind. In terms of annualized total return over a 5-year period, the stock has performed very nicely. Over a 3-year period, the stock has performed nicely. The last year has lagged a little bit, and we're looking to restore ourselves to outsized performance relative to our peer set. The reason I think it's so important, and the reason it's demonstrated is if you look at value creation, which is the bottom of the chart, and again, the darker orange is Hanover and the peer median is the lighter orange.
Whether you want to look at a 5-year, a 3, or a 1-year basis, value creation we've defined as book value per share growth plus dividends in the period. The value creation for shareholders has been very strong. Sooner or later, the actual valuation of the stock will follow the valuation creation, I believe. To finish, Jack mentioned the investor value proposition in his opening remarks. We are truly a differentiated strategy and product offered company. The combination of how we face off with the independent agent channel and the products we offer and the locations we offer them, very differentiated. We are well-positioned with that offering to have above-industry growth, and we expect to get back to that in 2021, as we've guided to, and to consistently have top-quartile profitability.
Doing those things will deliver value to our stakeholders, shareholders, and then other stakeholders as well. We feel terrific about the company. With that, we'll pass it back to you, Mike, and we're all yours to field some questions.
That was a very thoughtful and thorough presentation. I need to pick and choose now because we only have about five minutes left. Let's move to something that I sense differentiates The Hanover. I think you, Jack, you touched on it in some of the slides. You mentioned the word partnership model. Data analytics is a sexy word, by the way, a lot of people use. You have this agency insights platform. Maybe you can kind of talk about whether it really is a differentiator or is this something that a lot of fast followers and other people can mimic? What is it helping you do in terms of your strategy?
Sure. I'll be as brief as I can, given the time we have. The short answer is it's very distinctive. There is no other company in the property casualty sector that has built trust and a capability where agents, big and small, have shared their customer data for us to give them a consultative package about how they can transform their portfolios, how they can better serve their customers over time. The agency management systems are built for transactional excellence. They do not give agency principals the ability to look at their portfolios like an investor would want to do on their portfolio.
The short answer is, if you talk to the largest agents in the land all the way down to the small agents in the land, they would tell you that not only are we the only company that has this consultative capability, but also we are, because of what we do, are actively involved in helping them consolidate business and to transform the way they market their business and even where they go for from a new business standpoint. Last but not least, we have over $80 billion worth of customer-level data that helps us inform our strategic direction. It's a very distinctive capability. It helps us kind of be the company we are, and it shows the authenticity, frankly, of our partnership strategy.
I think this will be the last question, but it's one that a number of investors have asked. Growth is something that investors seem to care about more so now than ever. If there was a small knock on your excellent 4Q results, it was that growth was a little bit lower than expectations. Maybe you can kind of talk through whether there's some actions that were taken, maybe tough comps, and why you feel good about growth getting back to pre-pandemic levels.
Sure. That's the way to say it, Mike, is that we were on that trajectory. In third and fourth quarter of last year, we clearly were on a great path. We did make some decisions in 2020 that curbed our growth, and we think we'll benefit in the long run by making sure that our profit was on the right path. The short answer is, we definitely anticipate a good bounce back in exposures, particularly in commercial lines. The rate environment in commercial lines is going to continue to help us. The market consolidation work we did shows us that we have growth in the making. Finished up in December, got out of the gate swell this year.
Last but not least, we did change the dials in personal lines a bit so that we could get our retention levels back to eventually the mid-80s, and that's a meaningful delta in terms of our ability to grow in 2021.
Can you expand on that last comment, Jack, in terms of turning the dials to help with retention in personal lines?
Yeah. I think when we look back at 2020, we don't have a lot of regrets financially because we still generated four points a rate and got an 80% retention on a high-quality book of business generating top-quartile returns. We don't want to lose our place. We don't want to give up our share of high-quality business. By being a little bit more sensitive to the short-term trends and getting our retention back, 82, 83, on our way to 85, we won't have to compete as much for new business. We believe that by the second half of next year, some of the new business pricing that we saw in 2020 will abate, and we will be on a better trajectory but not have compromised the margins in the business. Frankly, we are already starting to see that head in the right direction.
Great. Well, we're excited to continue following The Hanover story. Jeff and Jack, I appreciate your insights and thank you everyone for tuning in, and have a good remainder of your day. Be well, be safe.
Thanks so much, Mike.
Thank you.
Thank you.