We're going to get started with the next presentation now. We got Fred Eppinger from Hanover. This is our third McKinsey alum today. You may get some same themes, I don't know. Very interesting that we got some top people in the industry that came out of McKinsey. Fred's been at Hanover, I think 12 years now, Fred?
Almost 12.
It's probably been the busiest 12 years of any company in history. It's been remarkable how much change has occurred at this company and frankly, what Fred and his team have built. I'm going to turn it over to Fred to walk you through the story. If you haven't heard it before, please pay attention. It's a very interesting story.
Nothing better than talking about insurance all day. What I want to do is tell the story of our company, the The Hanover Insurance Group. We're 162 years old. We're one of the oldest insurance companies on the New York Stock Exchange, interestingly enough, and I think we're the most entrepreneurial company in the space. I want to give a little bit of background of what we're doing, and what we're going to do in the next couple years. An overview of the company for those that don't know us at all. It's about $5.5 billion. Excuse me. It's about 45% specialty, half of that domestic, half of it international, and then core commercial and personal lines. In the 11.5 years, I apologize for my cold. In 11.5 years, we've doubled the company twice.
It was a personal lines company that was about 70% in four states, and an old regional company that was almost out of business because of guaranteed minimum death benefit GIC annuity problems. We've completely transformed the company into one of the fastest-growing P&C companies in the industry. If you look at our mix of business and geography, we have about $4 billion domestically and about $1.5 billion internationally. The international piece is mostly Lloyd's. About 4,300, I think, employees are domestic, and the other 800 are international. Again, a diverse spread company with a lot of capabilities. Let me leave you with four messages today. I couldn't be more excited about where we are as a company.
We started this to try to build what we call a world-class company, one that could really earn top quartile returns through the cycle and participate in the consolidation of the industry. At the beginning, we weren't that good, to be frank. Where we are right now is in a place where our portfolio is strong, and I'm going to talk about our distribution strategy, is unique in that we believe pretty strongly that we are going to continue to grow earnings at a pace much faster than the industry as well as top line over the next few years. We position ourselves in some very good sectors. We also have a very unique distribution approach and insight to the marketplace, which we're starting to leverage. You saw last year that our earnings grew at about twice what our revenue growth was.
You'll see that again this year. Again, we feel pretty good. Each of these, our strategies are embedded in each of our businesses. In each of our businesses, we have a little bit of a value-added approach to that business that both enhances our economics and the economics of the distributor. Which is, again, a little bit different than what other people do. Let me just go back to a chart that I've shown every single time for 11 years to the audiences. Our business is an interesting business, right? In the last 20 years, the P&C business has only made cost of capital twice. In total, it's a horrible business. What's interesting though about that business is the top quartile tends to always be the same people. The top quartile makes all the money in our business.
What you learn is you say, well, how the hell can we be distinctive enough to play in a business that doesn't make cost of capital in total, but you can win? We set out on this journey of doing this, and we did it through our three pillars. One is this notion of distinct product sets. We do not believe in swapping capital, large accounts, or quota share reinsurance that just participate. We focus in areas where you have to add value. We like areas that are tough to get into, that are operationally intensive and underwriting intensive. We knew we had to build a portfolio of distinctive positions, and we have.
The second thing we knew is that we needed to go and get the business and understand where to get the business and originate that business with the best agents that could sell value. We've done a lot of work on both identifying our distribution and then providing kind of a unique franchise value to that distribution. We have a narrower distribution than any player of our size. We care more about preferred shelf space than anybody else, and we care more about combined economics and improving agencies' economics than anybody else. We work hard on this notion of franchise value and partnership. This pillar of being where the best agents creating franchise value and share. Preferred shelf space with share. The third part is an operating model question.
If you're going to do value-added and you're going to go into businesses that are a little less price sensitive and more value-added, that have a small face value, you have to have an operating model to do that efficiently. We have of our 4,000 people in the U.S., we have 1,700 of them distributed and embedded close to our agents. That's a factor of three more than anybody else of our size. We built the infrastructure and efficiency with our renewal operating models, et cetera, to be able to distribute professionals To be able to react to opportunities faster, to turn the business around faster, to provide value added in a more unique way. Okay.
That's been the strategy built around great people, financial strength, but it's really about franchise value with fewer better agents, product innovation around value-added segments, and an operating model that can deliver that cost effectively and on a timely basis. From an investor point of view, why is this valuable? In my view, what we've tried to do is create more predictability in earnings and the ability to enhance and sustain good margins. Again, we believe very strongly that if we have distinctive positions, and more stable business, that with that lack of volatility and earnings growth, you'll be rewarded by the shareholders and the ability to continue to increase earnings. Again, that's kind of what we've been trying to get at. It was referred to our journey. It's been a hell of a journey, right.
We're a very old company, but we were a life-oriented company for a lot of the history with the old State Mutual, then it was the old All merica. When I got there, we were within 12 hours of being taken over by the state of Massachusetts because of guaranteed death benefit issue we had. We sold a lot of annuities from zero to $17 billion in the late 1990s. Of course, when the market crashed, the company failed. The P&C business had not been invested in in a long time. The first five years of the journey was selling the broken pieces, divesting of those by broker-dealer, et cetera, a number of pieces, and investing in the core capabilities of the P&C company.
At the beginning, it was really get the earnings stabilized and get the ratings up a little bit so we could survive. The second phase was really about this journey to top quartile. We were very fortunate in the financial crisis, I think we're the only financial service company to be upgraded by all three rating agencies during that period. We used that momentum to continue our diversification of product and geography. We bought about 12 companies in that period, as well as invested in hundreds of people and created this diverse portfolio. At the same time, we invested in these partnerships with these agents and tremendous data about where the business was. We have billions of dollars worth of information about where the most attractive business is at a local level through our independent agents across the country.
The last phase of this has really been leveraging these positions. What you've seen in the last two or three years is that's all come together, we've been able to leverage this investment and grow our earnings even faster than our top line. While we've been a very fast-growing company, we believe very strongly that over the next couple of years, you'll see earnings grow faster than that because of this leverage. How does this become real to people? Well, I just put some stats. We were $2.5 billion in 2004. I shed about $1 billion of that business, and we are now $5 billion, $5.5 billion in gross. You can see the earnings power change, the size and concentration of the business change. We are a much more balanced portfolio.
We're a much more distinctive portfolio, and we have a much greater earnings power in the company. At the heart and soul of it is this distribution strategy. A lot of people when I first came, they said, "Oh, this is like a regional company." You just know your agents. You go fishing with them or something. The way we think about it is we're the Procter & Gamble of this industry. What we've done is we know more information about the independent agency channel than any other company. We have more research about where the business is, who's winning, who's losing, who's growing, what's the portfolio of their businesses. What we've done is embedded ourselves through our operating model with the 2,200 agents we deal with in the 2,600 planning locations, and we know a ton, billions of dollars worth of information about the attractive segments.
We've built our business around that alignment. The value proposition to them is, instead of my colleagues, my competitors, who have 20,000 agents, I have 2,000 agents. Instead of giving everybody all your products, we match up in specialty areas and give those agents those products they're good at. Their franchise value is greater. We have local people, hundreds of people, local, that can work with them to build their business. We built more tools than anybody else to help them consolidate their business. If they buy another agency, we can profile that agency, score the business, and help them move it. This value proposition of true partnership and knowledge and understanding and insight, with your distribution, is very much like Procter & Gamble. You watch that.
What happens when you go down a shelf space, particularly into laundry detergent? They have dozens of products that are tailored to the various segments because they know the end customer very well. They win partially because they've gotten shelf space with the best distributors at the best ways so that the turn is the best. For us, it is preferred shelf space with the best players, has been a core of what we've done, and that's why our growth engine is so strong. Our ability to grow, because remember, most of these distributors are consolidating. They're buying many agents themselves. We win not because of just growth in the business, we win because they're growing, and we win because they're consolidating to fewer companies. Again, this is a really important part of who we are as a company.
That's shown up in our numbers. If you look at the best agents in the country, we have about $4 billion in our top 1,000 trading partners. That was about $400 million six years ago. Our ability with the best trading partners to share shift is tremendous. Again, these are the winners. You look at this, we have roughly, as I said, 2,200 agents with 2,800 what we call planning locations, where we plan at that level. Our share has grown dramatically with the better players. Right? That will continue to grow. By the way, as they grow, that number of planning locations will grow with us as well. The number of agencies, we probably don't have to grow it, and we could still double the business. Again, our ability to penetrate those agents is quite important.
Let me go back to the other components of this top quartile stability of earnings and growth. One is just diversification, good, solid diversification. What you've seen in our business, because of weather volatility and a lot of other kind of things, is that it's very important now to have multiple positions and a spread of risk so that you can manage through the fundamental risk in our business. That helps immensely. Some of the top two or three players in our industry are those that can manage that diversity well. What we've done, and this is just in the geography example, is we've changed our portfolio dramatically. Both, again, property casualty split, geography split, line of business split, so we have lots of good opportunities. That also allows us to write 20% of our partner agents' business easily because we have a breadth of capability.
That diversity has come along and done nicely for us. More importantly, what I think is that we also, at each of the businesses we're in, go back to the four core businesses we're in. We have a value proposition and a distinct position in that market that delivers value, that accesses the best segments that are the least price sensitive, if you will, and have the best stability. If I went through each of these, and I'll take a second with each of these, what we've tried to do is position ourselves as a value-added provider in some attractive segments through this distribution strategy. Let me just go through a couple. Business insurance, which is our small and middle. Again, there's a lot of people in small commercial. A lot of them try to go through the commodity automated approach.
Ours is a little different. Most people consider small commercial 50,000 premium and down. What we do in that space is we have all the automation and the straight-through processing, but we also were the only company in the industry that has distributed underwriters. Why do we do that? Because some of the best business in small commercial needs a little bit of underwriting. Needs eight minutes, not eight days. We've created a system by which we can handle under 50,000, both the straight through, but also those things that you have to tailor. Our renewal process is efficient enough to handle the economics. That small commercial business in the last three years has grown from $200 million to $700 million. Why? Because that's the way to do that business.
That business today is done a lot by regional companies that aren't very sophisticated. As we built out our mall and efficiency for our independent agents, that business, that small commercial business, is well served by us. It's bringing sophistication and tailoring. Okay? In middle, same kind of story. Think of us as, there's a couple of people in the industry that do this, but we are industry oriented. We do industry solutions. 80% of our business in middle market is solutions around tech companies, manufacturing companies, not-for-profit companies. We're not a generic writer in middle market. We also tend to go and do what I call schmiddle, which is the low end of middle market. Why is that important? Why? Because they're stickier. The longevity of those accounts is more important, the aligned incentives between us and the agent is better.
They want to retain it as well as we do. It's very important for us to have a portfolio that is more stable that we can add value and think about lifetime value of that account, not just an annual thing. In both cases, what you've seen us do, you can see the pricing. If you look at us compared to some others, you've seen that we've had. We're not immune to the business, to the pricing cycle, but we've been a little better. It's partly because of our mix. Right? It's smaller face value, more value added, more stability. That's the reason why we're able to kind of be able to sustain some of our margins in our business and grow them. U.S. specialty, another thing that we did.
What we knew is that as we got to know our target agents, a big portion of their profit pool is in these specialty businesses. Many times, they have to go through wholesalers to get to it. More as they became more sophisticated, a lot of our retail agents wanted to build the scale and skill themselves to retain specialty business because of the margin. What we've done is built an $800 million business. We started with $30 million in this business seven, eight years ago. We've built a business of expertise and a number of specialties, which we deliver directly to specialist agents and agents that have built specialty positions within their operation. Again, direct connection, operating model that fits directly to them, bypass the wholesaler, which has created better economics for us and for them.
Again, it's been a nice business that grew about 16% last year for us. Again, as we get to know our agents better and we get to penetrate them better, we believe this is, over time, a tremendous opportunity for us to continue to grow. Same thing here. We tend to like small face value. We like things that are operationally intensive, things that are difficult for somebody else to enter into, and there's a commonality among all of those. Our professional lines are all very small. Lawyers, small accountants. Again, it is really about combined economics. We also put most of this business in our own servicing center. I think we're the only player that does specialty business in our own servicing center. Again, it's this notion of combined economics and attractiveness of this business for our agent partners.
In personal lines, again, a lot of people talk about monoline auto and commoditization, again, we think the opposite in the segment we participate in. The personal lines business in the agency channel is a $90 billion business. Research tells us that $76 billion of that $90 billion is account-oriented business that really has multiple policies, but more importantly, needs an umbrella coverage, needs a liability casualty coverage. Okay? What we've done is spent a lot of money to build a middle-market offering and a solution for people that need coverage. It's not about minimum coverage in auto, it's about account. The other thing we know is $60 billion of that $90 billion is today in the hands of regional companies that don't have sophistication. They don't have technology that provides self-service.
They don't have the ability to have billing systems that bring the anniversary dates together or provide 24-hour coverage for service needs. We've been able to create an offering for the best business for the independent agent in personal lines. What you're seeing is that we are growing that business pretty nicely now that we've shed some of our legacy business that we had originally that was part of the old regional company that was monoline. Again, the pricing umbrella, again, I ask you to look at that right side. Our view is that we have the demographics. We have almost 80% accounts now. Our ability to get inflation consistently out of this business is there. Our ability to over-serve is there. Our ability to consolidate other people's business that they don't serve as well is there.
We believe that this also allows us to grow. Our agency plan, our 2,200 agents represent about $122 billion of business. Okay? Of the $90 billion, they represent about $65 billion. If you think about the value-added part of that $65 billion that they control of our distribution channel is probably $50 billion. The upside of our ability to serve that well over time is real, as long as we keep executing against it. Finally, our Lloyd's position, again, we did this. People were giving me a hard time. We did this before it was fashionable. We believe very strongly that part of being a value-added player for the best agents in the country is having a broad set of specialty capabilities. People confuse Lloyd's with Bermuda. Lloyd's is not about quota share reinsurance. Lloyd's has a lot of entities about expertise in specialty business.
What we've done is we believe we got the best franchise. We'd spent a lot of time really assessing where we wanted to go, and we got a wonderful franchise in Chaucer. It is a portfolio of specialty businesses that are syndicated. We lead a lot of that business. In other words, we are the expert in the industry on most of that business. We believe that that brings a lot to us. Interesting enough, about 50% of our business is dollar-denominated. What does that mean? It means a lot of that Lloyd's business originates in the same distribution partners I have in the U.S. That's why you see we have $4.3 billion or whatever, around $5 billion in the same partners. This gives us breadth of capability to provide to our growing partners.
Some of the biggest consolidators you've noticed in the broker side, I know some of them spoke here today, have buying London-based brokers. What's happening is our partners are actually buying and allowing us to do more with them out of London as well as here. We're thrilled about this. You can see the earnings profile. This has been a home run for us. The interesting thing that's happening at Lloyd's, like in a lot of places, is consolidation. Because of Solvency II and other things, we're one of the 10 largest syndicates, and we've grown tremendously by taking people from smaller syndicates have moved to us, because it is a game of expertise and consolidation, and we feel very good about where we find ourselves in that business.
Finally, a couple of points I want to make and then wrap it up for you. We have been able to change our portfolio, and grow our business, while we didn't blow anything up. In our business, as you all know, growing is often connected with bad. We try to be very thoughtful. We take expense risk, not loss risk. We hire the talent ahead of the premium. We take very low exposure limits in most of our businesses so that we can manage, and we compete a lot on operations and execution. We've been very fortunate. We've been able to grow, and our earnings power has been able to grow, too. It's not always easy. We've made some mistakes along the way.
I feel very good about our ability to continue to increase our earnings even more than our top line, and I think that'll continue for the next couple of years as we leverage the investments we've made. You've seen it in the numbers the last couple of years how that leverage has played out for us. We still have more to go. We still need to do more to be one of the better companies. I feel very good about the leverage and the ability to get there. You saw our guidance. This year is another 13% increase in earnings with a mid-single-digit growth. Our ability to leverage these earnings and get where we need to go is continuing, and I feel good about it.
As far as our investment portfolio, I won't spend a lot of time here, but given our journey, and the operating risk we took to change the business, we were actually dummied down our portfolio a little bit. We had a portfolio that was actually even more conservative than our industry for a long time, almost exclusively investment-grade debt. The other thing about us is that we had so many loss carryforwards that I always tell people we worked really hard to earn all those losses. We did more taxable than others because of that cover. What's happening now is we're getting a little bit normal. We're still very conservative, but we're getting a tad bit normal. You've seen our investment equities go up a little bit.
We'll always be a little bit more conservative than others on this because our leverage is a little bit different, because our tail is a little bit shorter, and the predictability is important to us. Again, a very conservative portfolio, and we'll continue to be there. I feel good about our capital. I'm very proud we got another upgrade from S&P last week. We're working hard on some more. We're weighted very nicely with a lot of great companies. If you're going to ask the best agents in the world for their best business, you want to make sure that you have a pristine financial position. This, and continued improvement, is important and to make sure that our capital base is really pristine in its makeup. Our shareholders. This has been quite a journey. We are very pleased.
Obviously, there's been bumps along the way. Our shareholders that have been with us for the last 10 years have been well-rewarded versus the industry. I think we're third in the whole industry in the timeframe of this journey on shareholder value creation. Somebody asked me, "How do you do that? How do you create shareholder value?" I always say, "You start really low." We weren't the best at the beginning, so that helps a lot. I do believe that what we try to be all during this investment, and we've done 17 transactions, five divestitures, 12 acquisitions. We've been thoughtful with our capital. We have given a lot back. We've given back over $1 billion since 2005, which was about two-thirds of our market cap at the time.
We are thoughtful about giving back, both increasing our dividend and share buybacks, while we at the same token being thoughtful about investing in our business. When we think it makes more sense long-term shareholder value, we keep investing in our business. It's not like we haven't been balanced. I like this chart because I think over time, we've done the right thing. We've been lucky. The last three years, obviously, our shareholders have been very well rewarded. This has been a long journey with a lot of investment, and a lot of investment that really needed to take two or three years to pay off. We're pleased with where we are today.
The themes for me and kind of the future is that I think for our investors, we have a very bright future for the next three or four years. I think we've built a good portfolio that's distinctive. I think our distribution gives us the ability to leverage, and really gain share and shift share in some very interesting categories that are very operationally intensive and not easily duplicated by our competition. As I look forward, I do think those categories of the product set, the distribution, the notion that we have a lot of data and insight about the under-$150,000 business, if you will, in the U.S. is great. I would also say our team is wonderful. We've been very fortunate to attract quite talented people that are very entrepreneurial by their nature. We feel like we're in a good place.
Again, I think as an investor, I think for the next two, three, four years, regardless of the cycle, our ability to both increase our margin and our top line is in front of us if we execute. That's all I had. Thank you.
One question for me, Fred, was on the growth. Is part of the growth here growing the number of agents? You're obviously quite selective in the agents that you do use.
Yeah.
Is there an opportunity to expand that plan?
Right now, as I said, we have 22 agents and 2,800 locations. What we're fortunate about is the vast majority of agents are buying other agents. What you will see is our number of locations go up, right? A lot of the folks that are the biggest growers of small commercial are the Hubs and the Gallaghers that are participating in the consolidation. As we can work with them well and they grow, our footprint grows. That $120 billion that I talk about for coverage out of the 300 is likely to grow when they grow. The need to grow additional agents, I'm not sure that's that great. The other category we think about is specialist agents that are specialty in some categories. In those cases, we believe that in a number of cases, there's some coverage issues, I don't know, marine, surety.
There'll be here and there fill-ins, I'm not sure we need a lot more than we have now.
The other question I have is in personal lines.
Yeah
where you're not trying to compete with GEICO and Progressive.
No, not at all.
Not your population, so to speak. They would like your business, I think.
Totally.
Certainly Progressive.
Totally
has said, "We want that kind of business." Is that a potential threat to you? You got $0.27 a share.
Again, I think it's a great question. What's happened, in my view, is that a lot of the work would say the lifetime value of an account is fundamentally different. If you go to the captives, they make a lot more money on their accounts as well. If you look at the aging population, people have stuff. This isn't about technology and not technology. This is about covering casualty exposures and umbrella and bringing together the gaps in your coverage in an efficient way. As data allows you to do that efficiently, it's a better market. A lot of those guys are going to go after it. What they don't do, though, is it's hard to go from a minimum coverage, minimum limits to say, "I want everything," right? That is hard. If you look at the best direct companies, they're outstanding.
They're fantastic at what they do. They have struggled with selling umbrella and home in an enormous way because it's a different market, and it's a different approach. Will they try? You bet. I think they'll do it through lifetime. They'll say, "I get you when you're young, and when you accumulate asset, I'll convert you." I think a company like Amica has had some success, but most companies have failed at that ability to retain you because it's a different offering. It's a different product. It's a different value proposition. It'll be interesting, though. It's one of the most talked about things as people are getting into more homeowners, et cetera, to try to get at the account.
Great stuff. Please join me in thanking Fred