Good morning. Welcome to The Hanover Insurance Group's 2011 Investor Day. For those of you whom I did not get a chance to meet in person, I'm Oksana Lukasheva, AVP Investor Relations at The Hanover. It is a pleasure to see so many familiar faces, investors, analysts, people who have supported us, followed us, and challenged us over the last several years. I'm also excited to see a number of new faces in the room. We have been very much looking forward to today so we can present to you our position in the marketplace currently and where we believe we are going in this difficult market environment. In that context, we really appreciate you being here. We know you have busy schedules. It is pretty difficult to get away from your desk at this volatile environment.
We hope you will find this event and the information that we will share with you today useful and relevant. Speaking today will be Fred Eppinger, our President and CEO; David Greenfield, our Chief Financial Officer; Marita Zuraitis, President of US P&C Businesses; Jack Roche, President of Commercial Lines; Andrew Robinson, President of Specialty Insurance. We also have the pleasure to introduce to you today Bob Stuchbery, President of International Operations, who will discuss Chaucer. In addition, not in speaking function but also in the room today are Mark DesRosiers, President of our Personal Lines, and Tripp, Chief Investment Officer, Mark Welzenbach, our Chief Claims Officer, as well as other members of our executive team.
Please feel free to seek them out during the break in between the presentations at around 10:30 A.M. Also join us all for lunch at around 12:30 P.M. after the Q&A session is completed and after the formal section of the day is done. For lunch, we will have a choice of entrees for a sit-down option. For those of you who do not have the time to stay here, we actually will have bagged lunches available as well. Before I open the podium to Fred, I'd like to read to you our safe harbor statement, a message you are probably used to hearing as often as you hear about Fred's Parthenon . Our presentation and our comments today will include forward-looking statements. We will be also referencing non-GAAP measures.
Let me draw your attention to the left side of the investor folder, where we have identified forward-looking statements and some of the risks and uncertainties related to our business. Here you can also find a reconciliation of certain non-GAAP measures to the GAAP measures, as well as some definitions that clarify the terminology that we will be using in the slides today. With that, let me hand the floor over to our President and CEO, Fred Eppinger.
Thanks, Oksana. Good morning, everybody, thank you for being here. Is there a clicker here somewhere, guys? Okay, great. I will say also, I want to say thanks for being here. This is quite an important day for us. It's a little bit of a coming out. We've been on this journey for now 7, 8 years, this is a real turning point for us. What I want to do is talk to you today about where exactly we are and what the outlook is. Our belief is pretty simple. We believe we are as well positioned as anybody that exists in the industry for the next 3 or 4 years.
We believe we built the product portfolio, the talent, the position with the best agents and the brokers that are very unique in the business, and really positions us for a lot of momentum and financial improvement over the next 2 or 3 years. I'm going to walk through why I believe that is true. Before that, let me just go through quickly who you're going to hear from today. I'm going to set the stage, go the overview of where we think we're going, and what's really our priorities. What I'd like to do is have Marita talk about how we're going to capture the opportunity in front of us in the U.S. We're going to introduce Bob to you, and he's going to talk a little bit about where we see the opportunities are for Chaucer and some of our international opportunity.
We're going to do a deep dive in a couple of the businesses. I'm going to ask Andrew Robinson to dig into our specialty businesses. We've built a really exciting broad portfolio and specialty businesses that has a ton of momentum, that we're going to show you a little bit about why we believe we're going to win and are winning. We're also going to talk a little bit about both small commercial and middle market with Jack Roche. We built a very interesting position in both those businesses. In small, we're now one of the leaders in the industry. We've doubled that business, and we have tremendous momentum, and I think in the outlook for that is outstanding. The middle market, we obviously have this industry solutions approach that has also taken off a little bit.
Again, that'll give you a good sense of the businesses and why we're confident in where we are and how we're going to improve the position going forward. David's going to come and talk about our financials. Give you a little bit of an overview, talk a little bit about the balance sheet strength, but also the outlook for 2012. We did a little bit of that in the earnings call, but we want to do a little bit more so people have a sense of where we are right now. With that, let me step back and touch on four points because we really do think it's a great period of opportunity for us. We've worked really hard to get to this spot as a company.
Over the last seven years, as people that have followed us, we've completely transformed this company. Every single dimension of this company has been changed. 80% of the people are new, the portfolio is completely different, and the positioning is completely different. We now have one of the most attractive product portfolios in the industry. It's broad-based, it's in the right kind of lines of business, the more attractive lines of business. More importantly, it has created distinctive positions in the marketplace. We have a portfolio that is very distinctive and can sustain returns. You can see from the earnings call, we talked about it, probably 90% of our business are achieving rate increases now. Very different than most people in the industry. Again, a very strong broad product portfolio.
In addition, we've created a very interesting, unique value proposition, more franchise value, more value added. We don't just go to the top of the house with the brokers. We actually have built relationships with a lot of the more distinctive regional and super-regional brokers and agents in the country, and we go direct. We don't go through wholesalers. That value proposition has allowed their economics to get better, but it also has given us tremendous shelf space and momentum. We're going to talk a little bit about that. The third point I want to make, though, is that this is a very unique time in our industry. We've all been through turns, and people are talking about this as a turn, but this is a very unique one for a lot of reasons.
It's the first time in 60 years where the turn is at the heart of a very difficult economic environment, and our business is so tied to certain aspects of our economy, like construction, et cetera. That whole dynamic is very different. We've had extraordinary weather experience over the last three years and what I'm going to call kitty cats, which has really affected the $130 billion or so that is in the regional company aspect of our industry, and probably something that's going to fundamentally change the industry forever because many of those companies are going to have to shrink to adjust. We also see, again, this whole notion, and for those of you that were economic majors, it's a very odd notion where yields are down, but our cost of capital is up because of RMS and Solvency II and a lot of other issues around capital.
This whole notion of balance sheet strain is different than just the notion that you're running out of reserve releases. It's also caused by a change of cost of capital. It's changed by a volatility profile that is different. Your marginal cost of capacity is different today than it would have been five, six years ago, particularly if you're a property-oriented company. All of that comes together and it creates turmoil and disruption. We believe that we are amazingly positioned to capitalize on that because a lot of what we do, our competition is going to have to change. It's going to have to downsize. It's going to have to change their portfolio. Our value proposition, which is geared towards improving agent economics, is more needed today than ever because all of these changes affect agent economics.
They got to consolidate the number of markets they have. They have to get more profit sharing. They have to get more revenue out of their per account, every account they have. All of that plays to our strength because of what we've built. Okay. Again, it's a very interesting situation for us. I want to step back a little bit and start kind of with the beginning of where we came from, because I think it just gives you a little bit of context of where we are and why we think we are where we are. To Oksana's point, I can't do a presentation without the Parthenon, I will start here. People think that this strategy has changed. It hasn't changed at all. It's evolved to where we are today.
From the very beginning, the core of what we tried to do is create a portfolio and a business that could achieve top quartile returns through the cycle. We had a company that wasn't able to do that because of their mix and capability. To do that, we focused on four basic things. First, creating a more distinctive portfolio that was in more attractive areas of the industry because if you recall, our business was personal lines oriented in very difficult states. The second thing was, could we create distinctive market positions that were defensible, and could we build the underwriting and risk management acumen to be differentiated from the marketplace? Third, could we build a value proposition that allowed us to get preferred shelf space with the best agents in the country?
Again, for us, we weren't with the best agents and brokers in the country. We were only in really four, five, six states, and we were within folks that were personal lines oriented. We weren't with the most vibrant folks that sold value. We weren't with the folks that were growing the most. How do you create a value proposition and a distinctiveness so that you can get best business? Because traditionally in our business, you would get a new business penalty. We have changed over, of the $2 billion we inherited, we probably changed over $1 billion of that. Most of our business is relatively new over the last six years, and we would be out of business if we had a new business penalty like the traditional approach in our business. We needed a value proposition that allowed us to get mature business.
Finally, we needed the financial flexibility to go to an agent and broker in this country and represent outside parties and say, "We deserve to get your best business." Again, those that know us know that we were very close to financial collapse in 2002. The ability to build financial strength was the fourth and probably the most important one for us to go forward. This strategy of the better agents, better business, more distinctive positions has been with us from the beginning. I think what you've seen is really good progress. Let me just go and talk a little bit about this improvement.
I want to just, again, I'm going to try to tie this into why we think top quartile is what it is, because again, it's good for us to step back because we talk about top quartile, and there's a lot of people that don't understand why we say what we say. I want to make sure I'm clear on that. We started the decade as one of the poor performers. Literally, in the first three years of this decade, we were the worst performer in the industry, the worst. Okay. We didn't come from a position where we had a portfolio that we could just hunker down and execute better. Secondly, we needed to, and what we did in the last few years, is we had to stabilize and improve our competitive position in almost every area, which is what we've done.
Obviously, this transition over the last 10 years took tremendous amount of investment and change. In the last five years, we've only achieved average returns. Not what we want, not what we will achieve. That's what we did. Because of the investments, the transition, the improvement, we're average. That's where we did the last five years. We are now positioned, given where we find ourselves with the product portfolio and the skills and the business mix and the momentum with the best agents and brokers, we are now in a position to go to that next step, which is really to reach our goals of the top quartile returns in the industry and sustain it. I tell people you can always get lucky in our business.
In 2006, 2007, the weather was good, so you could be a property centric company in three states and do okay. You can't sustain it. There's nobody in the top quartile over any period of time that looks like that. For us, we needed this business mix, and we needed this shelf space to get where we are today. Again, let me just talk about stuff you know. Again, it's worth repeating. We have a horrible industry in total. Over the last 20 years, we've returned about 7.7%. When people look at our industry, they don't understand how this much capital can go to an industry that is always under returning. There's a couple of things you guys all understand. There's a lot of mutuals that have a different cost of capital that drag this down.
There is also this notion that you don't know the cost of goods sold for three years, a lot of companies fool themselves. In essence, this is a lousy industry, and we all know it. How do you talk about top quartile in an industry like this? First of all, the public companies, as we all know, outperform the rest pretty consistently. Okay. Part of that is not true 100%, but it's pretty close to 100% true. Part of that is because there's a forcing device, and if you look at the top 40 companies from 2000, and you look at them today, about 15 of them are gone. The public companies have a forcing device that say if they don't get the adequate returns, they tend to disappear. Right. What you have is not a very good industry.
Public companies tend to be able to perform a little bit better. Most importantly, there is a group of companies that consistently outperform and do well. When you look at valuations that people put together and you look at performance, this is a 10-year period, in my view, that mark is about 12% that differentiates these folks that pretty much constantly are in the top quartile. Some move around, but not many. Again, people will say, well, it's 15, it's 16. From my economics books, being more than a couple of hundred basis points over cost of capital is pretty hard to do in any industry for a long period of time. If you look at it, 10 years, 20 years, et cetera, this line is about right. If cost of capital changes dramatically down, obviously it'll change down.
The way we think about it is that there are people that do it, there's things to learn from people that do it, and there are ways to build a capability to get there. It's just hard to do. There is, I think, only one company in the last 15 years that have gone from the bottom half to the top quartile. It is not something that's common. There is a story here around top quartile. In that mix, we were horrible. As I said, this is a 10-year average. We're at the bottom. If I had used the five-year average, we'd essentially been the worst company in the industry.
Partly because of the life company situation, partly because of underinvestment in the P&C business for a long period of time, partly because of the mix of business that the company had, this company underperformed on any dimension. What has happened in the last five years is we've moved dramatically, more than anybody else in the industry, but we're still just average. Again, the average of the industry over the last five years is about 8.5 or so. We're a tad a little bit below that. We have moved a lot, but we're average. Part of that is just the drag of all the investments that we've made, all the changes we've made, how the portfolio we've changed out, the excess expenditures we've taken on. The reality is that we're average. For us, the story is more about now.
The story is more about what kind of portfolio and what kind of opportunity do we have in front of us. That's what today is about, to give you a glimpse in what we've accomplished and what we've done. We are at, in my view, in the next page, what I try to capture is we're really at an inflection point. There's a lot of people that would say, maybe you could have done it faster, you could have done it differently. Every stage was thought through. The first stage was paying the bills to get the financial stability to be there tomorrow. We had to sell a lot of portfolio. We had to shrink a lot of the portfolio. We got rid of about 3,000 personnel because of it.
It was really about stabilizing. The next phase was really about building core competence, both in every business, both commercial and personal, but more importantly in claims and in underwriting and loss control, in every part of this business, in risk management, in capital management. We have done that, but there was a lot of work. It was building our capital base up again to get the ratings back. Then came all the upgrades, right? As you know, with all the upgrades, we felt that we could reinvest. We had the momentum to improve the portfolio in a relatively dramatic way, which is exactly what we did. We went to a more balance between property and casualty. We went to more attractive lines of business. We went to more specialty businesses.
We took the business from a core to a better broad portfolio. Again, where we find ourselves now is we're done. We have the portfolio where we love our portfolio. There's always places you can improve, but we now have the breadth, the mix, the attractiveness of one of the best. If you look at our new business, it's some of the best in the industry right now across the board. We feel very good about where we are. The question is, can we leverage this to get the kind of returns that really meet our goals? Again, I would tell you that, yeah, they're headwinds, but everybody has them. Yields have headwinds. We have yields that are tough. We have weather. We're better positioned than most anybody I see. Again, we believe that it's time for the next step.
Again, you know the facts. We've doubled the business or so, but more importantly, if you think about the $2.4 we inherited, as I said, we probably turned over somewhere around 70% of that. In essence, this whole business, our entire business portfolio is new since 2004 on every dimension, whether it's accident years. If you look at it without the weather, the underlying accident years have improved. Our book value has improved. It's about the highest it's been in 160 years. We've obviously got upgrades from everybody. We've also, on the statutory surplus, totally changed the dynamic, and we feel that our balance sheet strength is terrific and in the best position it's been, so we have lots of flexibility to do whatever we need to do to capitalize on the market. I think our bottom line improvement is significant.
Now, one other point I want to make, and this is something that people talk to me all the time about how much we give back to shareholders and in what form. What I like to believe is that we've proven that we never spend money that we don't think we can get good returns on. Our track record of saying, yep, we had some excess capital in 2005, 2006 because we sold some stuff, we were not ready to invest it. We weren't good enough, so we gave it back. We've done that every single time we have excess money. If we think we have an ability to improve the value of this company and the long-term returns, we invest it. If we don't, we give it back. That's what happened many times along this journey.
We needed some excess capital to get the upgrades, but we always stepped back. In 2006, I had all this money. We didn't go out and buy stuff. We weren't ready to buy stuff. We weren't good enough to buy stuff. We were not ready for the next step in the journey. Again, I hope for those that are new investors or those that have been here, you may disagree with some of the individual choices that we've made, but we believe that what we do is we think about creating value for this institution and investing in a way that creates the greatest value for shareholders long term. That's what our pattern is. You saw again our dividend. We've tried to take it up every year. We believe the earnings power of the company properly reflected in what we've done with the dividend policy.
David is going to talk a little bit about it. We think it's a balanced way to return money to shareholders. Again, for us, this has not been one of those situations where we grew at all costs at all. I think it's been very tempered, and we try to pick our spots and know when we can do it, when we can't. Now, let me go to this portfolio. Again, I want to spend a little time on it. Part of it is obvious that people follow the industry, but I don't think it is as obvious as maybe we think. We have created a very attractive portfolio here, it means a couple of things. It means lines of business. I'm going to talk about lines of business a little bit because it's not sufficient.
You just can't get into better lines of business and be good. There is nobody in the top quartile that has a bad mix by line of business. It's not sufficient, but it's necessary to have a better mix because we have lines of businesses in this industry that are dominated by mutuals, there are certain states that you will never earn cost of capital. If you don't fix that mix, you're never going to get a shot. You might get a shot for a year, but you're never going to get a shot for duration. Again, we needed to really attack that dimension. We also attacked this dimension of saying we just can't be a me too. We can't just be another writer of online comp or another writer of BOP.
What is the position you have that's distinctive enough to sustain renewal pricing to get the margin you need over the long haul? Okay. Second, we have created a very unique position in the industry. This whole notion of not going to wholesalers, going direct to retail agents and doing value-added things about industry solutions, about rounding out personal lines accounts. What we've tried to do is create a portfolio and a value proposition that is very unique for the best agents and brokers in the country, so that they want us to have preferred shelf space, that they give us more mature business. Marita is going to spend some time on this, but it's working. We have an enviable position. We've grown by far faster with the best agents in the country than anybody else in the last three years because of this.
Our ability to capitalize on a changing environment is unprecedented because they know us better, they like us better, they understand how we help their economics, our ability to get things in chunks and share shift in a period of turmoil is quite strong, in my belief. As a result, we have preferred shelf space and momentum. We have a combination of a good product set with some nice momentum. I think the two of those things give us some confidence that we can get better every day and move towards our financial goals. Again, I want to touch first on portfolio, because I think this portfolio point, again, is quantifiable, if you will, what we've achieved. It's not easy because it's about getting out of stuff just like it's getting into stuff.
We have re-underwritten and repositioned our portfolio constantly, every step of the way. Therefore, we don't, by the way, have a lot of disruption left where a lot of the people do. It's a big part, changing your mix from bad places to good places and good lines to good lines from bad lines. We've also established, as I said, I'll go through each business, really interesting value propositions that we can now leverage. Let me talk a little bit about our mix. You've seen this, I think, when we did the acquisition, I think I did some version of this.
It's easy to just look at this and say, "So what?" In 2009, when I was in this venue, when we were having our investor day, I said, "By 2014, I'd like to be a third, a third, a third, personal, specialty, commercial, and about $5 billion." I said, with that kind of balance, I know that we'd be able to position ourselves well. We've done it faster than I thought, because we had some opportunities and some ways to get there. This by itself means nothing. You could have a mix like this and be terrible. My point is, we tried to create a portfolio that had more attractive lines. Let me just dig down and just show you what I mean. The best companies, the top quartile, do two things well.
They have a better mix of business, both line of business and geography. Again, not sufficient, but necessary. They have a distinctive position. There are people that are in bad lines of business that do well. The best example is obviously Chubb homeowners, high-end homeowners. Homeowners is a very difficult line. They do extremely well. I would argue it's not even the same business, what they do, but it's possible. As I said before, there isn't one top quartile company that has a mix worse than the industry. Not one. Having a better mix was quite important to our journey. Let me just give you some facts. If you look at the attractive and the unattractive businesses, there are certain lines of businesses that are very challenging. I picked five years.
These are some of the best years we've ever had. If you remember, we had great weather in a couple of these five years. Even in five of the best years we've had in the last 20, there are lines of business that almost nobody makes target returns. If I had done 10 years and 20 years, the answer on the first one would have been almost zero. Again, it is very hard to overcome something where nobody makes target returns. The opposite is true. There are certain lines of business that more people do. Again, this is in a bad five years. I picked an attractive one. It changes a little bit over 20, but it's just generally true. When you look at our mix, when we started out. Sorry, one other thing.
There are global lines that are the same thing. I picked some Lloyd's lines and some lines that I was attracted to, but I could have done the same thing for what I call global lines, marine, aviation, that are more global, not just U.S.-centric. They think about them as global markets. Same exact thing. There's good ones and bad ones. You look at them and you say, over five years, 10 years, 20 years, there's attractive and unattractive. Where we started, we had the worst mix of the top 50 companies in the industry. We had 12% of our business in the most attractive lines. By the way, we were horrible in those lines. Surety. It is so much different now. We have 40% in the attractive lines. People say, what does that mean? Is 40 good? Is it bad?
Well, the way I think about it is I think about the industry and I think about top quartile. The industry is about 18%. It's better than we were. The industry in total is about 18% in attractive lines. If you look at the top quartile companies, it's about 44. This top quartile companies is my picks. These are companies that aren't just one line of business. I picked Travelers, Berkley, and Chubb because I think over the last 25 years, those three companies that have a diverse portfolio are three of the best companies there is. If you look at them, again, it's not just what they do. I'm not just saying that's the only reason.
I'm just saying if you look at all the top quartile partners I have on that list, the bubble chart, they all have some version of this. Whether it's at the international side or it's on the domestic side, they have a little bit better book of business. Again, it's not enough. I'm not saying it's enough. What we've done to this company is we've put us in a place where you can see consistent returns because the portfolio lends itself to execution excellence. Again, we've changed the business from where we were. Again, why do regional companies, a lot of regional companies underperform? Because they are in categories that chronically underperform, and they don't care. Partly why pricing in those categories are so tough. Again, for me, this was a big point of what we did as a company. But it's not enough.
The other thing we've done ruthlessly is improve our capabilities. For the last five years, we have improved our underwriting capability and outperformed the industry on a loss pick dramatically. What is happening is we're doing it in every single line of business except for surety, where we have a runoff business, which is still not bad because surety is a better line. It was because I didn't run that off fast enough, the legacy business from Mass and Michigan. We've outperformed, gotten better, and we have an outlook for the ability to be a little bit better. Okay. Again, we're in better places. We're getting better at doing it. Probably the most important thing of all is we've created positions in these businesses that are much more distinctive than an also ran.
In each of these businesses, we've created a very thoughtful value proposition and business position that we talked to you about in pieces that allow us to get rate, have higher retention, and get more mature business from the distribution. In personal lines, which has not really been a growth model for us, it's really been a portfolio change where we've grown in better places, we've gotten rid of our concentration, we've moved to full accounts and a value-added value proposition for the best client that an independent agent has. Who is that? That's the people that are the full accounts. They're under the Chubb and the higher end, and it's kind of what we call the near affluent, and it dominates the best segment. It also is the most stable segment.
It is people that value the service, they value the whole package, they want consistency and price. We built both our product and our offering to that, and that's why we've been growing in the right places nicely, and have had great price increases and will continue to have. Clearly, we'll talk about weather in a little bit and say, what does weather bring to this? Because the weather has been so extraordinary in the last two or three years that it kind of clouds some of this. This is a great business for us right now. It is very stable, and the question is, how big can it get for us as we have really nailed this segment well? The second area is this newest area that Bob will spend a lot of time. We are thrilled about it.
It's something that we've worked at for four years to try to get access to some of these categories that are very attractive, more global markets. As I said before, a lot of that is U.S.-originated, but still, they're very attractive segments. What we believe is we have found a company and a team with a track record, consistency, and frankly, opportunity, because some of the categories they're in, we're very excited about taking them to our franchise agents over time and broadening our penetration and growth in that area. We're very excited about that, and Bob will talk about the portfolio. Again, it's a very attractive returns over the cycle and something that we think we have good leverage with. On commercial, and Jack will take you through some of this, we're very excited about it.
We believe our small commercial, we will be one of the leaders in small commercial in this industry. We've created an end-to-end value proposition, not just the Point of Sale, but the affinity, the niche, and the non-Point of Sale solution that is very attractive and is leading to some significant growth for us. I think that's a business that will continue to consolidate because of the struggles of the regional companies. We believe we're in the catbird seat for that business. On middle market, we have gone the industry solution route very aggressively, as you know, a more holistic approach to industry. There's some examples in the business that have done that. It is very distinctive, you combine that with our franchise, less appointment value proposition to agents, and it's really the hook that really attracts the best agents in the world to us.
Again, it's been a great success story for us. Now, again, we are not the biggest. Our average policy size in middle market isn't 200 like the big two or three, it's 90. We play the game right below the guys at the brokers. We play the game where it's a much higher retention game and a much more sustainable return game. Again, we feel very, very good about that position. The U.S. specialty business that Andrew will take us to is, again, very important because what has happened, this portfolio we've built that gives direct access from the specialist agents that focus in this area and the retail agents that are more franchise-oriented with us is very important because as agents improve their economics, they're building these capabilities.
The best agents are building these capabilities and taking the skill set back from the wholesaler, bringing it in-house. We're one of the few markets that can really match up with them here, and it creates a tremendous growth opportunity for us as we look forward. In each of those businesses, again, you'll hear today and you can think about it for your own, we believe that these aren't just me-toos or generic positions or something that we just bought companies. We just assembled this stuff. We believe we have now built, after seven, eight years of really hard work, a really interesting portfolio that is now complete and in place, frankly, in place in time to take advantage of what's about to happen. Let me just talk a little bit about Chaucer.
It's, to me, one of the exciting things that completed the portfolio. Obviously, we wanted these categories. We wanted something that had a track record. We wanted scale because I didn't want to do the organic thing like we did in some of the other areas. I wanted to make sure that we had a platform that we could leverage quickly. We wanted it to be accretive right away. We also picked Lloyd's. Lloyd's is a very efficient platform from a capital point of view. It's a very different place than people remember 20 years ago. I'm going to talk a little bit about that. We believe it is a very important market for some of the best carriers in the world. What you're seeing is the best carriers in the world are flocking to it in these categories.
It's a very changed environment because it is a good way to do that business. We think one of the reasons it's a good way is because the efficiency of capital in the Lloyd's model is quite good. Again, with Solvency II and all the other dynamics that are happening in our world around capital efficiency, we think it's a great place to be for these categories. We're excited about what we did. A couple things, Bob's going to go into this in detail, but one of the things people tell me, they're confused about what Lloyd's is. 25 years ago, it was considered the Wild West of insurance, a lot of what they called names or individual investors. That has completely changed. It is the place where the best and the brightest have gone.
If you look at the capacity now, it's 90%, really, corporate capacity, and it's with the right guys. It is a market where a lot of the best companies in the world, particularly the specialty-oriented companies, the specialist-oriented companies, have been attracted because of the things that I mentioned before, and again, Bob will talk about a little bit. That market also performs very well. Lloyd's performs better than the U.S. market, it performs better than the U.S. reinsurance market, it performs better than the European market, and it performs about as well as the Bermuda market with more liquidity. Again, for me, this was something we worked at for a long time. We wanted to make sure we hit it when it was ready, it completes our portfolio.
If you think about the top 1,000 or so agents in the world, particularly right underneath the top three, this capacity and this capability is very valuable. Again, we're excited about it. It wasn't that we bought anybody at Lloyd's. We were very thoughtful about why Chaucer. Again, Bob will talk about some of the details. Lloyd's, in general, is higher reinsurance market than what Chaucer is. We are not a reinsurance-oriented company. That's not what our strategy is. It's more about retail agents and primary business and specialty business. Obviously, we picked a company that was much less reinsurance, more specialty oriented. We also wanted somebody with a track record because I didn't want to fix it.
We had fixed a lot of things along the way, our view was, sure we'll do some tweaks on the portfolio to make it fit us a little bit better, we did. What we wanted was something that was ready for the turn and had a team and scale to bring to us. That's exactly what they brought. I think the returns over the cycle is between 15%-17% ROE. The areas of opportunity fit what we were looking for. There's a handful, 13 or so areas where I'm very excited about the future potential to give them to our franchise agent in various forms. Again, whether it's here or London or whatever, we think there's a lot of growth opportunity in some of these categories with people that we know well that are specializing in these areas.
Again, we like it today, we're going to like it more tomorrow. It is a very important part of our portfolio. Again, if you go back to who we think of ourselves, the best companies, this portfolio is much more similar now. Our total portfolio is much more similar to the folks that are the best companies than it's ever been, including this. Again, we're excited about that. Now, let's talk about the world. We talked about it at the earnings call, and I think it's important to talk about the earnings call. I think people have talked around it. You got to reset a little bit. Yields are going to be down. They're going to be down for a while. That's a headwind. Reinsurance costs are going to be tougher.
Cost to capacity with Solvency II and RMS and all of that takes different forms, but there's a balance sheet strain, even on the best and brightest sovereign debt with some of the European reinsurers. The world is a little tougher. If you look at the last 60 years in our industry, what happens when the world is a little tougher, particularly the last couple of years of a soft market, first couple of years of a hard market, the have and have not separate. Certain people create tremendous amounts of value. This is a time of great opportunity if you're positioned well and you're not digging out of some legacy issues. We believe we're very well positioned for that environment. We have the portfolio I keep talking about, the business mix, but we also have this momentum of the right folks.
The 1,000 or so are the best agents that they have to kind of re-underwrite their book, reposition their book, replace what's going on in places like comp. We go into that market being able to help them and their economics without legacy strains, and frankly, with a lot of financial flexibility. Our ability to kind of cherry-pick and point towards areas of opportunity is very good, and again, could create tremendous value for the company. Now let me just go through a couple things that you know. We are well into the soft market. We all talk about it all the time. We probably talk about it too much. We are at a point where most people would consider a place where it's straining a lot of companies.
I'm not one of those guys that think The market is no longer the market. There are segments of the market that have already turned. There are parts of the market that have turned two years ago, like personal lines. There are parts of the market, like in small commercial, that never got that bad. There are pockets, but I'll tell you, we are at a point where a lot of turmoil is out there, a lot of transition. Part of it is because of the reduction in the amount of reserve releases that are available for a lot of companies. Obviously, companies can get through difficult times and maybe price a little bit more aggressively than they should because they have reserve releases.
What's unique about us as a company, I just tell people, a lot of companies, good and bad, live off of right now in their earnings, the 2003, 2004 years. We were horrible in 2003 and 2004. We didn't have any reserve releases. We've had to live with the accident years and more mechanical reserve releases from the beginning. We did not have a casualty-oriented high margin book in 2003 and 2004. We didn't have any margins in 2003 and 2004. One of the things that prepares us well is we don't have a problem with reserve problems. We didn't have any business. We didn't have any business that we were living off of that now goes away. We have lived off of mechanical.
Yes, we've had a little bit reduction in reserve releases, but most of our reserve releases are short tail lines mechanical because of the way we price conservatively and put reserves up constantly. Again, this is going to affect, it's going to create some headwinds for a number of companies. There's a lot been written by some of the people in this room about this. We're right at that point. Again, there's a bigger point, which is that there's some underlying disruption underneath that is really interesting that I want you to know that we're focused on. One is when you look at the returns and the results, there's been a lot written that said, well, the results aren't quite as bad, so there's more room. It's going to hang on longer.
Maybe it will, and maybe in some of the large accounts, casualty lines maybe it will. Maybe because we're in an economic downturn that there won't be as much price increase available as there was. Maybe there'll be more re-underwriting, which I think is probably true. The overall combined ratio doesn't really tell the story. Let me talk about a couple of points. One is comp. Comp is at the worst point we've had since the last turn, but it's worse than this. This is a great time of unknown and there's so much lack of clarity around healthcare. The problem with comp is comp is converted to a healthcare line in a lot of ways.
What's happening is with the new healthcare reform and all the costs that are driving people to try to cost shift to unmanaged care or to care that's like comp or PIP creates a lot of uncertainty. The coordination of benefits alone in places like Medicare is uncertain. What's going to happen with that? You've seen there's an estimate that's $1 billion being shifted into the comp market. Again, where we are is it's bad, but it's also uncertain. That's why you've seen some major companies reduce their position dramatically. There's a couple that have reduced almost $1 billion or over $1 billion. Well, this is a big part of the industry. When you have that much business moving around, it creates a lot of turmoil. Couple of things. The carrier side, the expense reduction initiatives that you've been reading about. Why?
Because when you reduce something this significantly, it requires expense reduction. By the way, it doesn't just affect your company in comp. It creates turmoil in your other specialty lines. It creates turmoil with your personnel, creates turmoil all over. You've seen that starting as people have shrunk pretty dramatically. Second thing, for agents, again, big part of their earnings. When you're moving this much business around, when you're moving 30% of your business around because people are getting off or repricing dramatically, it ties up all your personnel. What does that do? It reduces your earnings. They're looking most agents under pressure, and they're saying, "How do I make more money without a lot of growth?" That's why you're seeing more consolidation in small commercial. That's why you're seeing this, how do I recapture the revenue from the wholesaler?
That's why you're looking to see come to people and say, how much of my business is getting profit sharing? Carriers that are well positioned have an ability to help agents through that. A lot of this is coming from this dramatic change in some of these lines. It's not just comp, it's property, too. Let's talk about property. Property, we all know from watching the newspapers that the weather has been crazy. It's going to probably be the worst weather worldwide. It's affected all the reinsurance markets worldwide. The U.S. has a little bit different dynamic, which is the growth of kitty cats. What do I mean by that? Well, in the last five years, what you've seen is a dramatic increase in these kind of more localized storms, tornadoes, hail storms. Frankly, it's not just catastrophes.
In our data, for instance, what you see in the non-cat weather in the last three years is four points worse than the previous 10, which is consistent with this kind of pattern, which is more intense weather. This has created a bunch of problems. Not only does it create more reinsurance costs at the top for a lot of the little companies, but even for the big companies where this has mostly been a primary thing, it's not really been a reinsurance thing, it creates tremendous volatility from concentration. You started hearing companies talk about their concentration risk, the 100-mile radius where they got to thin out. Now remember, we've been doing this for seven years. This was our Achilles heel, too much concentration. There's a lot of folks that didn't. What you have now is a lot of folks thinning out locations.
Now, the unique thing about that is that the marginal cost of capacity for one company is not the same as the marginal cost of capacity for another. If you're concentrated in New Jersey and another one's concentrated in Ohio, their cost of capital in the next piece of business is tremendously different. What you're seeing is people getting out, changing pricing, and the stuff is shifting and spreading in a different way. For us, why is this important? Well, $130 billion, this $450 billion market is in the 500 smallest companies that typically are in three states or less. They are in trouble. If you think about you're in Alabama and you get hit this year, what do you do? You don't have a spread of risk. What you're seeing is people shrink. Lots and lots of people are going through it.
You're going to see it 1-1 as reinsurance prices kind of influence them again, but you're seeing it everywhere. Again, do we have $150 million of this we're going to keep thinning out in some of our zip codes? Absolutely. We're growing like crazy in so many other attractive places, and it creates so much opportunity, it's a speed bump. For a lot of people, this is a big deal. This is a big deal. It's going to fundamentally change the Midwest, for instance, which is dominated by regional companies. What you're seeing is a lot of pricing is going to get to better places in these categories that are chronically underpriced, and you're going to see some shifts. Again, we look at this and say, "Yeah, it's a headwind." It's going to be a headwind for everybody, and you can't ignore it.
You could say, "Well, the last three years aren't going to happen, so let me go." No good company's going to do that. They're all going to take the same tact we're taking, which is assume the last three years are real, go. Assume higher reinsurance costs, assume more weather, price for it, and manage your marginal business more aggressively. Again, this is a little different than the last turn. It's not just based on the trends in pricing. It's based on some of these capital costs, balance sheet costs, yield-oriented issues that are going to create a movement of business. Again, a chance for some people to do very well. The strongest companies will do very well that are diversified. Again, all of these are coming together, and what we see is a picture over the next two or three years.
Again, I'm not saying that large casualty lines are going to turn as fast as they did in the late 1990s. I don't know. I'm not in that business, so I don't pay attention to it as much. What I do know is there's a lot of categories that are going through a lot of turmoil, and there's a lot of good business in those categories, and there's a lot of other business that you're going to be able to capitalize on the disruption that are going to hurt some of these companies and strain agent economics. Again, Marita's going to talk a little bit about what's happening with some of our agents and our value proposition to make this a little more real. David's going to talk a little bit about what we do with risk management, which we're very proud of.
We've been after this for a long time. We think we're well positioned for a period of turmoil like this. Let me talk about agents for a second because I think there is some confusion, and as I said, Marita's going to do a little more on this. I'm using the U.S. as an example, but the segments are the same, frankly, in all the developed countries. If you look at the U.S., there is roughly 30,000 agents, and they're typically is these segments that I have up there. There's 5 segments. You've got the small agents, where the mom-and-pop, typically personal lines oriented, little bit of small commercial and habitational and categories like that, but essentially personal lines. All the action, though, in our space right now is above there because that smallest segment is slowly dying. Okay?
What you're seeing is the vibrancy is really mostly in the top three segments, the brokers, what I call super regional agencies, regional agencies. Then there's some very good and viable mid-size agencies, particularly in certain geographies like Wisconsin and Upstate New York, et cetera, where the dynamic of those local markets lend themselves to it. What you see is the concentration, for instance, like in small commercial, is dominated now by the top 2,000 agents of the country. This consolidation, and you read it every day, the roll-ups, but it's not just that. It's the quiet consolidation that occurs because these are the most sophisticated agents. They're the ones that have invested in capabilities. They've broadened more to specialty lines. They have more dedicated operating models to sell value in personal and commercial. They have separated.
When we started our journey, because we were a personal lines company, we were very skewed to the smallest type agents. Part of the project, part of the work here, along with the product capability, was to position ourselves with a position of strength with the consolidators, to be able to be getting preferred shelf space from the folks that are growing, that are really investing. The blue circle is the number of partners we have in those categories now. What's fascinating because, again, of our value proposition, where we don't appoint everybody because a lot of my competition appoints through aggregators everybody, all 30,000 or 20,000 through aggregators. What we've done is said, "No, we're going to be very selective.
We're going to give particularly our niches in specialty to a subset of you, and we're going to go directly to you." What you've seen is a tremendous change in our penetration with the most vibrant segments. This is why we have so much interesting headroom. We are probably the most successful, and Marita's going to show some statistics, that we are far and away the fastest-growing player with the best segments and the best agents in the best segments. Partly because of what we've done to help them with their economics, partly because of this broad product portfolio, which they are trying to recapture, which they are trying to bring back home so they get more earnings. They're trying to be more industry solution-oriented so they have better retention. We are playing to the trends of the best distributors.
This is really expensive to do. Most of our major competition, most of the competition that comes from Europe, most of the competition that tries to grow in the United States, they do it through the big brokers and the wholesalers because it's expensive to build relationships with 2,000 individual agents across the country. It has taken a lot of time, a lot of money, a significant distribution in the last seven years to do this. We are one of a handful of folks in the industry that have it. You just can't do this. You just can't wake up one day and say, I have direct contact interface efficiency with 2,000 of the best agents in the country. This is a very big part of a defensible strategy.
If somebody in Germany wakes up tomorrow and says, "I want to do social services," which is a very high margin business in the U.S., they either have to go through the brokers or a wholesaler or go to a handful of folks. They don't have the ability to get to the most profitable business. What do they do? They get to the large business that turns a lot. Again, our view is, yes, we all know the names of the companies that have good distribution, right? By the way, two-thirds of those guys are in the top quartile. Again, what we've built here is something that's rare. Regional companies will have it in four states, but very few people have this breadth of access established.
What we have now, again, when you look at it, you say, I got a defensible position that's expensive to get, and I have a distinctive product set. That's really what we built. When you look at the next 24, 36 months, and we look at why we're bullish on increased profitability, on reaching our goal that we set out from the beginning to be a top quartile player, really the last goal left to get that additional return into this place, we have three levers for us that are all things that we will focus on. First is this notion that's traditional. We have pricing in almost all our business right now. Because of the segments we've picked, we're not in the largest accounts, we're not in the big wholesalers, we're not in the big brokers.
We have consistent price increases against our entire portfolio. We also have a little bit of re-underwriting we can still do, particularly in concentrated areas and zip codes like in the Northeast and a little bit in the Midwest. More importantly, we have these high margin businesses that we built. We have additional headroom. We have lots of disruption in the marketplace. We see our growth coming from our higher margin niches, our specialty businesses. We look at it and say we got price and we got growth in the higher margin businesses. Finally, if you look at our returns for the last five years, they've been materially affected by eight acquisitions, thousands of hired people, lots of investments, and hundreds and hundreds of new products, building an operating model, building connections with 2,000 agents. Obviously, we don't have to keep doing that.
For us, there's tremendous leverage in growing our small commercial. We've invested. We now have a national footprint. We now have the people in place. We now have the operating model. The leverage of growing that business is much higher margin than it was yesterday. If you look at all the specialty businesses, same thing. Again, for us, there is leverage now because we built the operating model, we built the product set, and we don't have as many investments. That's why we're encouraged, even with a very difficult environment, with headwinds and all that, our ability to go up to the next step in returns, and the potential to do the top quartile in a sustainable way. With that, I'm going to introduce Marita.
Marita is going to go through the U.S. and talk a little bit about the how, and then we will, I think, do Bob, right? A break, right? Bob will talk about Chaucer and give you a little bit more in-depth overview, and then we'll take a break, and then we'll go into the deep dives. Okay? Thanks, Marita.
Thanks, Fred, and good morning. I'd like to spend some time, as Fred said, going through our U.S. P&C business and why I feel, as Fred does, that we're really well positioned to capitalize on the opportunities that this changing market is providing us. Just quickly, some takeaways that I want to leave you with this morning. First, our U.S. business is very different today, even compared to just a few years ago, and I want to demonstrate that for you. Both our personal lines and our commercial lines business is stronger, clearly more diversified and more distinctive. Our specialty businesses, which were nearly non-existent just a few years ago, have really been the primary driver of our growth, and they are clearly focused on the most profitable segments in the industry. Secondly, we've built a strong network of underwriting capabilities with a broad and distinctive product offering.
Next, that our distribution strategy with our partner agents is clearly distinctive, and I think it's part of our competitive advantage. I want to break that down for you this morning as well. We are really well-positioned with some of the best agents in this country to drive some pretty distinctive profitable growth, and that our results with the best agents in this country are really impressive and that we already have a track record with those best agents. Starting with an overview of our U.S. business, we're a vastly different company than we were seven years ago. In 2004, we were 66% personal lines, and most of our commercial lines was undifferentiated. What I want to demonstrate this morning is that today, we have a very strong personal lines account-oriented business with much greater geographic spread.
We've got a strong portfolio of commercial lines, and those commercial lines businesses are focused on a broad set of, as Fred said, account-oriented industry solutions with the development of our niches and the segmentation of our middle market business. Jack will spend a lot more time talking about that specifically. We've deployed national underwriting capabilities and talent in the market close to the Point of Sale, which we really believe is a differentiating factor for us. We've built a strong, broad set of specialty capabilities with the best partners and brokers in this country that also have that specialty expertise, so it's well-aligned. The majority of our business is with the best 1,000 agents out there. We clearly have the right agents.
I'll show you some good traction and momentum with those agents, but most importantly, we also have an awful lot of headroom with the best agents out there. Starting first with a look at personal lines. Our personal lines geographic mix has greatly improved from 2004 to where we find ourselves today. The portion of our business coming from the growth states has nearly doubled. Our big four that we've always talked about, Michigan, Massachusetts, New York, and New Jersey, is less than two-thirds of our portfolio. As you know, we exited Florida homeowners and Rhode Island completely, and we significantly reduced our Louisiana presence. That 4% that you see today, most of that is personal auto. Bottom line, our personal lines business is about the same size, but we have a significantly better mix, and that mix is still improving as we go forward.
Not only is the geographic mix much improved, but our business mix has improved, and our pricing momentum has really been consistent over an extended period of time. From the beginning of 2008 to September of 2011, we've had a 13-point increase in the percentage of our PIF that is sitting in account business. Our single-car monoline new business policies decreased from 27% at the beginning of 2008 to 20% in September of 2011. Our overall retention improved two points, and that's despite the exposure management actions I talked about in Louisiana and some other tactical reductions on some non-performing business. This better profile of business has obviously better underwriting profit, as you can see on the graph.
The account-oriented profile has allowed us to drive price not only in excess of trend, but we believe in excess of the market, and these pricing trends continue for us. This obviously drives continued improvement in our overall results. Now turning to a look on commercial lines. We've also transformed our commercial lines during this period. Jack Roche, who runs our U.S. commercial lines business, will outline this transformation in obviously more detail. But just from a high-level perspective, we've developed a suite of very distinctive products that are focused on segments of the business where not only we feel we can add value, but we can actually extract the best margins in the business, in small commercial through both segmentation and mix management, and in middle market through account-oriented industry solutions. We've gained nice geographic spread, and we've deployed top talent in local markets.
We've entered and built a Western presence that we've never had before, and I can show you those stats in a minute. We've increased the penetration in geographies outside of those big four, just like we did in personal lines. We've built a flexible and sustainable operating model, which is obviously important to both our expense ratio and our scale as a business. We've focused our distribution, again, towards those best 1,000 agents and brokers where our capabilities really match their capabilities and where that focus is particularly relevant. I wanted to spend a little bit of time talking about the OneBeacon transaction because it clearly accelerated our distinctiveness in commercial lines. I think our strategic approach to the transaction really allowed us to maximize the benefits from it. Through this transaction, we broadened our product offering, bringing 11 new segments and niches to our middle market portfolio.
We were also able to add more than 10 new affinity programs in small commercial. It also allowed us to expand our geographic diversification. We wrote $26 million of new business and $90 million of premium that we renewed in the West. It gave us a good starting point in our Western expansion. We advanced our distribution strategy. We appointed less than 300 new agents with the transaction, and we walked away from $100 million of premium that was spread across 1,200 agents, clearly demonstrating our commitment to limited distribution and sticking to our distribution strategy as a company. Our agents certainly took note of that, and it was a big part of some of the new business we were able to drive in the transaction. We increased our scale and our capability with the transaction.
We were able to renew $213 million of premium in our existing footprint, and we were able to strategically add some talent in some new geographies and some new niche and segment capability as well. We clearly improved our expense ratio by the transaction. I think our agency focus and the strategic orientation that we took to the transaction allowed us to retain 79% of the business, which is well above that which you see in historical renewal rights deals. Turning to our U.S. specialty business. Andrew will cover our specialty businesses in a lot more detail, but just high level. When we started in 2004, our specialty premium was predominantly legacy surety and legacy in the marine business. Today, we have a specialty business that's focused towards the more attractive segments. It's relevant to the most sophisticated agents and brokers in this country.
Its heavy casualty orientation certainly diversifies the property business that we currently have in both our personal lines and commercial lines portfolio. The growth has been considerable, but it's measured, driven by the fact that we've bolted on some teams and a lot of the business growth has come to us through acquisition. When you add $200 million of niche premium that's embedded within our business insurance portfolio to the $673 million, I wish it was a billion, million dollars of premium that we've built here, we have clearly $900 million of specialized premium and obviously the nice margin and earnings lift that comes with that.
As I said, many of these specialty capabilities were enhanced through very successful acquisitions. I wanted to spend some time briefly walking through a few examples of those acquisitions and the skills we have built, both in execution as well as gaining the maximum benefit out of these. We have, over the past four years, done seven acquisitions, both with and without balance sheets. We've been successful in meeting not only our business goals from those acquisitions, but also our financial objectives. Starting with HSI, our specialty industrial business, it is currently fully integrated into the Hanover platform. We grew the premium from $18 million when we acquired it to $35 million in 2011, and it is clearly delivering outstanding profitability for us as an organization.
I went through the OneBeacon Renewal Rights deal, both growth and retention exceeded our expectations clearly, and profitability across the board is either in line or ahead, quite frankly, of the expectations we had for the transaction. We're delivering tremendous momentum with both the existing partners that we had prior to the transaction, as well as the limited amount of new partners that we added as part of that transaction. Our Architects and Engineers business is fully integrated into specialty lines, and although it's a small business, it is performing well within our growth expectations for it. AIX is also an excellent example of our integration capabilities. We are doing business with some of the best partners and brokers out there. It has been central to many of our consolidation efforts with some of these best partners.
We grew that premium from $120 million at acquisition to over $250 million today, it consistently delivers strong returns for us. We've built strong acquisition skills in both the execution and in gaining the maximum strategic benefit, and quite frankly, earnings lift from the acquisitions that we've done so far. Our geographic mix, as I mentioned before, both in personal lines and in commercial lines, is far better than it was when we started this journey in 2004. In 2004, we were highly concentrated with over 70% of our written premium in just four states. Today, now it's less than 50%. We have built a western region that in its first year did over $200 million of premium. Some of that, as I mentioned, helped by the OneBeacon Renewal Rights acquisition. Today, we have over $300 million of premium in that territory.
Again, a good example of starting with the right agents and doing it right. In 2004, we had 23 agents, 230 underwriters distributed across the country, and really no product capability in the western half of the country. Today, we've got 31 offices, 450 distributed underwriters across the country, and a very broad product portfolio in the west. Bottom line here, I believe that we have really built a significant position in these U.S. businesses, and we have a very nice competitive position. In personal lines, we're delivering on the best total account solution for agents to help them not only write but protect and retain their best customers while we're driving a very profitable mix and good geographic spread. In commercial lines with Small Commercial, we've built a distinctive product offering with a flexible and responsive operating model.
In Middle Market, we've built a robust portfolio of industry solutions and significant value-added services that come with that product differentiation. From a U.S. specialty standpoint, we've built a portfolio that's focused on some of the highest margin business out there. In total, we believe that we have a portfolio that is very relevant to the best agents and brokers out there. At the end of the day, our mix clearly matches their mix. With that, I'd like to turn the discussion around some of our best partner agents and our partner agent strategy. Not only does our partner agent strategy drive value for some of the best agents in the country, it also drives clear economic value for us. When we translate our value proposition to agents, we can break down the value that we bring to those agents.
In our value proposition, our agents get direct access to a broad product offering. That clearly gives us the ability to capitalize on growing high-margin specialty business and shelf space with some of the best agents out there. Our agents get real franchise value because of the limited appointments that we have in the marketplace, and that gives us the opportunity to not only drive franchise value with the agents that are consolidating, but it gives us access to their profit pools and the higher margin mature business that those agents have in their portfolio. Agents get local expertise and national capability, and for that, we get the ability to capitalize on a changing market, and we're there when they need us when something changes quickly in the marketplace.
Our agents get product and operating model that is geared towards their economics, and we've built tools and support that allow us to access share shifts of attractive mature business with those agents. I mentioned briefly that we understand the levers that drive agent economics. What this slide attempts to do for you across the bottom of the axis is we believe these are levers that agencies can pull to drive economic value, whether it's organic growth through growing specialty, expanding their industry capabilities, getting more specific about the capabilities that they bring to certain markets, improving their sales force effectiveness. Secondly, they can do agency acquisitions by acquiring teams or acquiring agencies.
Third, they can enhance the value that they get from the current customers that they write by rounding out accounts and by doing less with wholesalers and writing more with direct markets who have that capability. They can increase the value of their carrier relationships by consolidating carriers, taking a strategic approach to the companies that they do business with, and again, reducing the amount of business they do with wholesalers. They can manage their expenses better by improving their retention, by reducing servicing costs, and by increasing the hit ratio on their existing business. If we focus on these agent economics and then build tools that help them maximize their revenue, we feel that that's a very compelling value proposition for those agents. We can assist in growth by having products and people at the Point of Sale that are good at those products.
We've built tools that allow them to consolidate and take a strategic approach to their carriers more efficiently. We've built a value-added service center that clearly helps improve their economics. Clearly, taking this approach to what they need and then allowing our process and our capabilities and aligning it well to their levers is really something that we've spent a lot of time doing. We think that that's helped build our performance with some of the best agents in this country. One of the first stats I wanted to show you is our business with the top U.S. agents in this country. It's a stat that's a little easier to get at because many of them are publicly traded. With these top 100 agents, with all of their carriers, they're shrinking at a rate of about 2%.
Our growth over a three-year period with that same group has been 49%, for a total of $830 million. A little bit harder, but trying to break down some of the other segments in not just the largest and the top agents, we looked at Reagan Consulting Best Practices agents. These are a group of agents that use Reagan Consulting that have been awarded the Best Practices certification, and those carriers are doing a little bit better than the market. Instead of shrinking at 2%, they're growing at 2%. Our growth with that group of agents has been 14% over that same time period. Lastly, we took a look at the Assurex partners. This is many of the top privately owned independent agents in the country, and they are growing at that same 2%. Many of these are also Best Practices agencies.
With that group, we have an 88% growth rate over that same time period. Again, clearly showing that we're driving some share shift with the best agents, but clearly demonstrating we're just scratching the surface because there's a significant amount of headroom with these agents as well. Not only are we becoming more relevant to the agents, but we're getting a little bit of attention. I wanted to include in here just a little bit of external validation, if you will, from a couple of our best partners. RJF Agency in Minnesota is a $130 million agency with 150 employees. I think his quote here clearly shows the value of limited distribution as well as local leadership. Heffernan is a $490 million operation with 400 employees.
Again, our ability to align our skills with their skills is really demonstrated here in what they had to say about us recently in Rough Notes. Today, we also have a larger percentage of our commercial lines premium with more relevant partners. We measure those agencies with us that do over $1 million of premium, over $300 million in premium. Combined in 2003, that group represented 52% of our premium. Today, it's 82%. We clearly, again, have the right agents. We've got good traction and momentum. The headroom is clearly significant when you look at the average share that we have with those 800 agents is only about 3%. We feel like we have an awful lot of room here. To wrap up, over the next 12-18 months, we think and know that we have the opportunity to drive significant value creation.
First in personal lines through mixed management, both from a geographic and quality perspective, from our property management actions as we continue to look at scale and spread, book consolidations, which we've proven that we're good at, and share shift with our best agents, and have focused on the best account-oriented profile in personal lines. In our U.S. commercial business, Jack will spend a lot more time getting detailed on this, driving mix improvement through segmentation and building our industry solutions by improved pricing environment, and we're clearly seeing that out there in the environment today, through gaining scale in our operating model and the benefits to our expense ratio that that brings us, further penetration of the most vibrant agents in this country through book consolidation, also in U.S. commercial.
In our U.S. specialty business, scale in these newer businesses as we grow into the capabilities that we've built over these last few years by penetrating some of these new segments and taking advantage of the segments that we have, like marine, and growing our AIX program business, clearly through cross-sell of both new accounts, but also the existing accounts that we have in our portfolio. Clearly a focus on and a target on the highest margin segments in the industry today. We will drive scale, we will improve our expense ratio, and we will continue to lower our loss ratio. I thank you for your time and attention this morning. With that, I'll turn it over to Bob Stuchbery, the head of our international business. Thank you.
Good morning, everybody. I'm Bob Stuchbery, and I'm the Chief Executive of the Chaucer business. Let's look first at the values that we bring to The Hanover Group. We're a strong specialty underwriting franchise. We have a capital model that's very efficient. Our capital ratio stands at 46%, which is less than the Lloyd's average, and a little bit more about that later. We've got a diversified underwriting portfolio, which is well-balanced, and that's diversified by class of business, and also by territory. We provide access to Lloyd's, and I'm going to focus a little bit on that later to give you the benefits that we get there, but Lloyd's does give you that global reach, and the rating that Lloyd's has on a combined basis. I'll also demonstrate that in 2012, we think the outlook for the business is very positive.
Starting with a little bit about the Chaucer business. It started in 1998, and that was a management buyout of three syndicates, which were managed at that time by a traditional managing agency. We've now built that to be a top 10 managing agency at Lloyd's. We currently manage four syndicates, and a little bit more detail about that later. Two of those we regard as being in-house syndicates, and two of those we manage on behalf of third-party capital. We've got our headquarters in London by the Lloyd's building, but we also have international offices, which are in Buenos Aires, Copenhagen, Singapore. We have a contact office in Houston, and we have a contact office in Oslo. The main operations for our U.K. business, which is predominantly U.K. motor, is outside of London, in Whitstable in Kent. This is the business structure.
Chaucer Syndicates is the managing agency, and Chaucer Syndicates is the FSA-regulated company. That's where we get our regulation direction, and then Lloyd's does a regulatory function as well as a subset of the FSA. Overall, funds under management or capacity, which is really a proxy for income, $1.6 billion. This is where it splits into what we regard as being third-party syndicates and in-house. Just touching on third party very quickly, we have no economic interest here. The two syndicates, 4242, is backed by a U.S. private equity. Syndicate 1301 is currently backed by Clal, the largest insurance company in Israel, and soon to be transferred over to Taurus. I'd like to focus on what we call the in-house syndicates, which is $1.4 billion. That's 1176. We break this down to our nuclear syndicate, and then our flagship Syndicate 1084.
Syndicate 1084 has a capacity, again, proxy for income about $1.4 billion. Important to note at this stage, the difference between capacity and economic interest. You'll see that on Syndicate 1176, we note here that we have a share of 56%. The remainder of that capacity is with traditional names, and that's part of our strategy to manage our own risk appetite for that class of business, is we're comfortable with that share of the overall nuclear account. On Syndicate 1084, we have a share of 84%. Again, the 84% is just a function of where we sit relative to the types of capital that we've got supporting the syndicate. The important thing again to note with some of our peer group is that we own all of our capacity.
For you guys that are new to the sort of Lloyd's market, that's probably not a significant issue, but it means that we have complete control over the growth of that business. It also means that at some size, that capacity that we've in effect rented out on a limited tenancy, could be brought back to us. Syndicate 1084, the flagship, we then break down into separate divisions. That's the energy property, marine aviation, casualty, and the U.K., which as I've said, is predominantly motor business. Looking at the team, our Chief Underwriting Officer, Bruce Bartell. Bruce is actually over here with me, and will be available for some questions later. Bruce has got extensive experience within Lloyd's and outside of Lloyd's, and it's his role to manage the capacity allocation, and look at the strategy and business planning process under the classes of business we write.
The two syndicates, again, these are Lloyd's terms, have what are called active underwriters, and these are in effect the business leaders for those syndicates. John Fowle is our business leader on Syndicate 1084. He's got a number of years insurance experience, and he's been with us for eight years, so he's a relatively new addition in terms of our class underwriters, et cetera, to Chaucer. Michael Dawson, who's the underwriter on Syndicate 1176, tons of insurance experience. He's been with us for eight years as well. More importantly, below these guys, we break these divisions down. The division heads have an average of 31 years industry experience, and 11 years experience with Chaucer. The team then grows into what we would call specific class underwriters, and that's important because every class of business that we write, we have specialist underwriters to write it.
There are 100 underwriters deployed writing over 30 subclasses of business. Each of those underwriters has extensive insurance experience. The underwriting franchise that we build, we've got underwriting strength and depth, and that's demonstrated by the team that we've just gone through. We've got a long-established book of business as well, this book of business has been distilled over really the last 10 years from the merger of around 10 syndicates. We've had a lot of opportunities to take in business accounts, keep the stuff that we like, bin the stuff that we don't like. That's a means of us distilling it down to where we are today. To where we are today is demonstrated really by our track record. Here we've taken a cycle 2003-2010, and our average combined ratio over that period was 91.3%.
Because of the capital efficiency, that's averaged an ROE of around 17%. That's inclusive within there of things like 2005 with Katrina, Wilma, Rita, et cetera. It's a performance that we can stand up and be proud of, and can evidence quite strongly. The vision of the business. It's a specialist insurer. Our vision is to be Lloyd's specialist insurer of choice, and our goal is to deliver superior return on capital and build enduring value. It's really that enduring value which we focus on, which is a return on equity that's got to be consistently at the best in the Lloyd's sector, a reliable performance, the absence of shock losses and volatility, and I'll get into some of our diversification across classes as well. Also, the fact that there's a lot of transparency about what we do.
You shouldn't be surprised about what we are involved in. We've created a very valuable Lloyd's franchise across those brands, and that's across a number of classes of business as we develop them. Looking then at the key areas of our strategic focus, and what we've done here is break it into two. Starting with what we would call the London and U.K. divisions. We have here a strategy or a strategic focus to be the top three underwriters. Now, that's not by size of account, that's not by size of line. We use as a metric here that if a broker has a piece of business in a class of business that we underwrite, we would expect to be one of the three people that has to be on his list to visit.
It's the expertise that we provide along with the line size capability and ability to write in that territory. It's not all about size, it's about the fact that we've got that expertise to underwrite it. We have a disciplined allocation of capital. Again, part of Bruce's role as Chief Underwriting Officer is to look at the accounts as we go through a year, to see those areas where we are performing in line with forecast, and adjust where we're not. Adjust where we're not, either because we're not getting the rating levels that we expected or that we're seeing some rate increases in excess of what we like. We do have within the Lloyd's structure that ability, fungibility of capital, which we can liaise back with The Hanover before we make those decisions.
We have strong broker and cover holder relationships, and yes, these two tend to be with the larger brokers. That's who've got the type of business that we want. More and more recently, we're trying to develop those relationships with the next tier of brokers, smaller brokers who've got specialties that we actually like. We put down here the strengthening position in U.K. motor. We are a very small U.K. motor writer. We have less than 1% of the market in the U.K., but we are a specialist writer, so that's a combination of private car, but specialisms within private, and also some fleet business as well. It's a very specialty portfolio, what you would regard as being more non-standard than standard business. The global energy practice for us is something that we've developed.
We've always written energy business. Over the last couple of years, we've been more and more disappointed with the offering within the Lloyd's market for energy underwriting. What we're trying to do here is to build the leading energy insurer within the Lloyd's market. That means that we have to integrate all of our capabilities that the client and the broker needs, and that's a combination of wordings expertise, pricing expertise, exposure management, and it's ultimately very important that the claims expertise that we would have. These are the areas that we're looking at from strategic focus. I'd like to now just delve a little bit into why Lloyd's. Lloyd's has a unique operating structure. It's not a single insurance company. It's a group of specialist insurance players who come under that franchise umbrella. Franchise is a term that we'll come back to.
The franchise has a role of monitoring the performance of the players within there. Fred made reference earlier to the fact that Lloyd's is a much different place than it was a number of years ago. Really, the appointment of a franchise performance director is currently Tom Bolt, and the whole department within it has done a lot to improve that overall performance of the market. They look at outliers as regards to performance, and they address those issues. It's given that credibility, and it's one of the things that really holds together the ratings that we have, which I'll talk about later. Much of the business that we write within Lloyd's is on a subscription basis. This is a function of the size of business, the complex nature of some of the business that we're writing. The subscription market has become back in vogue.
There was a trend for it to go back to more single participations, a couple of the larger corporate players supporting risks. Because of the problems that you saw with the banking crisis and that consolidation of exposure that people saw at that time, the subscription market has become more popular, and this has really brought more business to Lloyd's. Within Lloyd's, it's spread that business amongst the syndicates. That's an important part of what we're seeing in Lloyd's at the moment. Fred also mentioned the diversity of the capital that we've got now. Very few individual names are left in the market. It is now big corporate international players. As regards to capacity, the 2010 market capacity was nearly $37 billion. That's written through 85 syndicates and 52 managing agencies.
At the peak of the Lloyd's market, as regards number of syndicates, there were over 450. Again, one of the jobs that has been done really is to consolidate down into larger units, more specialist, more financially secure units within the Lloyd's market. Financial security is important. Lloyd's carries an A+ rating from Fitch and from Standard & Poor's, and an A excellent rating from Best. That's really is to demonstrate the chain of securities, we call it, within Lloyd's. That comprises that chain of security, the premiums we receive, the capital that's put up for the players that are underwriting within Lloyd's. On top of that, we have the Lloyd's Central Guarantee Fund, which is a mutualized protection for policyholders. That chain of security at the beginning of 2011 stood at $86.7 billion.
One of the important things not only is to have those ratings, is the consistency of those ratings. We've enjoyed those ratings now for a number of years. I mentioned earlier the capital efficiency of our model. Let's just look at that in a bit more detail. What we do within Chaucer is we balance that marine, aviation, energy, property, U.K. motor, which again is unusual for the Lloyd's market, and nuclear, which we are the only nuclear syndicate, and the largest writer of that class of business. That gives us a total underwriting interest of about $1.1 billion. The capital requirement, as I said earlier, is 46%. That compares with the capital requirement for the market of 59.4%. That capital ratio could really be used, and should be used, as a proxy for volatility.
It's because we've got that diversification with our account that it allows us to operate at that capital ratio. The diversity, just to demonstrate that, internally with the capital allocation, we're allocating capital to U.K. motor at around 20%. On a standalone basis, the nuclear syndicate has a capital ratio of about 400%. You can see the advantages that we get of that blend of book. The combined ratio I've mentioned earlier, 91.3%. That's over a period of time which we regard as a pretty good demonstration of a cycle. Investments, we've got good leverage on investments. We've currently a portfolio of about $2.4 billion as at the end of September. That's what really drives that return on equity that we've had of close to 17% from 2003 to 2010. It's a model that's well-tested and has proven to be successful.
A little bit more about the account and the breakdown of that account. It's diversified. I keep using that word. We start with U.K. motor, 23%, energy, 19%, property, 21%, marine and aviation, 23%, and our casualty, including our international liability, around 14%. In total, on a GWP basis in dollars, that's about $1.3 billion. Looking at these a little bit more in detail, energy, as I said, 19% of our portfolio. We look at up mid downstream energy assets, property liability. We've also included within this division the nuclear business. You'll see at the bottom here, we've got indications of what we've seen as regards the rating environment in 2011 and what we're forecasting for 2012. Across the portfolio in 2012, we're looking at about a 3% rate increase. That's really pretty steady across most classes, whether it be liability or property first party.
The property account that we've got, Fred again mentioned earlier that we're not a heavy writer of property treaty reinsurance. 21% of the portfolio is property. Again, we're seeing rate increases this year, particularly on the international side because of loss activity, and that's coming across both the facultative and the treaty excessive loss account. On the North American side, where we don't write facultative and binders, we're expecting rate increases in 2010 to be around 10%. That's really driven by the cat excess of loss rates. All of this could be influenced even more by the experience that we've seen more recently. We would say at the moment, these are probably, particularly on the international side, reasonably conservative. Looking at the marine account and marine aviation, we write all classes of marine business.
That's across the whole realm of hull, the cargo specie, PV, political risks, and some excessive loss. Rate increases this year will be about a 7% increase, and that has been driven by some of the marine XL classes. For 2012, we're actually reducing back our XL writings, and that's deflating the rate increases that we're expecting to see in 2012. Still, we expect that to be around 3% over the portfolio. So far, it's all been good news. Now we look at aviation. A little bit about what we write in aviation. We tend to be a general aviation writer, not airlines. By airlines, we're defining these as being the flag carriers. We avoid the heavy liability limits that you'd get with U.S. carriers, European carriers, Japanese carriers. It's a lot of privately owned fixed and rotary wing.
The results on this have been very, very good, but it's a tough market at the moment. You'll see that for 2011, we expect to end the year about one point down on rating. For next year, we expect that to be about two points down. It is a small part of the overall portfolio. On the casualty side, around 14% of the portfolio is casualty. Again, there's a range of classes that we write. Really in summary, if you look at the U.S. exposure that we would have, our U.S. exposure is either claims made or losses discovered, or where we do write things on a current basis, they tend to be cat driven. When you see workers' compensation down here as a class that we would write, we write that on a cat basis and not within an individual life.
It's very short tail. We have no products exposure within our casualty book, which drives that tail. 2001, we saw rate increases of about 1% reduction. In 2012, we're forecasting 6%. Standing here today, that's probably the one that I would say is the most optimistic. We expect rates to go up in this area. We think it's necessary for rates to go up in this area, and we're planning accordingly. Really, time will tell. We're looking for that across the classes. I just Looking at motor finally. As I say, that's a differentiator for us in Lloyd's. It's a chunk of our account where we're looking at personal lines. It's something that we've had a lot of rating action over the last couple of years. We're predicting those rates increases in 2012 to still be above claims inflation.
The book is now back performing very well. It's a non-standard specialist book. As I said, our market share is very, very low. In recent years, we've taken advantage of some of the aggregator as a means of producing business, and that has meant our retention ratios have increased quite considerably. You'll see some growth of that in 2012 as well. Looking forward to 2012 and the market environment that we face ourselves. The doughnut chart there shows that 93% of the classes that we underwrite, we expect to see rate increases. I've broken those down and highlighted them there on this slide. 7% we're forecasting to see a flattening of rates, particularly around the nuclear, and also on the aviation account, a slight reduction. The portfolio is going to be sensitive to this.
The property portfolio that we underwrite with the international exposure that we've got following the recent catastrophes, we're expecting to see rate increases. Energy has seen some losses, Deepwater Horizon, more recently, the Gryphon loss. We're expecting rates to go up in those areas. Again, that's an area that we're focusing upon and building a good team. U.K. motor, a lot of work's been done there. It's now back into what we would regard as healthy profits, and we're looking for rate increases just to keep ahead of claims inflation. As I said, while we're being positive about casualty, that's probably the one that we're a little bit skeptical about at this stage, and aviation market still got a long way to go.
I think the important takeaway from this is that this is a strong portfolio, it's a diverse portfolio, and 93% of that portfolio, we're expecting to see rate increases in 2012. The next area is really the opportunity that we see for distribution with The Hanover. We've got a lot of Lloyd's branded products, and we expect to make those available to a number of The Hanover Agency network. We've already looked at in 2012 for our planning process some of those areas that we can get some quick wins. We've mentioned here aviation, energy, marine, financial institutions. This is specific areas of those classes of business where we think we can do something in 2012 which will impact our 2012 planning.
More importantly, I think 2012 is going to be the opportunity for us to look at the opportunities that we've got, which will really come to fruition in 2013. That's now a key part of our strategy, is seeing that those opportunities are fulfilled. Quickly, in summary, I'm getting you back on track. It's a well-diversified portfolio. We've demonstrated it's capital efficient, and that diversification comes from product mix and also geographical mix. It's something that, because of that diversification, does act as a natural hedge against volatility. We're looking at a positive outcome in 2012, with 93% of the portfolio looking to see rate increases. The underwriting that we've got in place, the underwriters we've got in place, the team, the capital that we now have in place, is all there poised for us to take advantage of those opportunities as they occur.
We're expecting to see some of those in 2012. We've got the products. It's now a matter of us working with The Hanover to look at some of the distribution of those products back to their agency force, and that's something we're going to focus upon. Really, we do think that it's very complementary, the mix between Chaucer and The Hanover, and this should give us a very strong platform for which to see some profitable growth. There are some appendices in the handouts, which aren't in the presentation, which go into a little bit more detail, which I thought you might like on the individual classes and areas of the business that we underwrite. You can read those at your leisure. I think now, Oksana, who's at the back, we are going to have a break for coffee. Should we say 10 minutes?
Because we are running a bit late. If we meet back here in 10 minutes, Oksana, is that a good idea? We will kick off again in 10 minutes. Thank you very much for your time.
I think we are ready to resume our event. In a moment, you will hear from Andrew talking about our specialty business, followed by Jack Roche, who will speak about our commercial lines. David will talk about our financials. We will entertain your questions in a question-and-answer session. Andrew?
Is this on? Here we go. All right. Welcome back. Good morning, everybody. Over the course of the next 30 minutes, I am going to try to give you a broad overview of our U.S. specialty business. I will also then spend a bit of time going into detail on three of those businesses, hopefully as a means to communicate to you the many different things that we are doing and all the good work that we have put in place that positions us from this point forward. There are five things I hope to communicate and have you take away from this conversation over the next 30 minutes. The first is that we are, as an organization, deeply committed to building a U.S. specialty business that really enhances the value of The Hanover to you as shareholders and prospective shareholders, to our agents, obviously, and to our employees.
Secondly, that we are building a portfolio that we believe is good, not only in terms of just its diversification, but as Fred mentioned earlier, importantly, we have taken a good deal of time to understand where it is that we believe the greatest opportunities exist in the U.S. property and casualty market, where margin exists, where we are well-suited to go after those segments. That is really where the focus of our specialty activities are leading us. Third is that we have invested considerably in bringing in what we consider to be some of the very best leaders to run these businesses, supported by very strong people. We have invested in infrastructure and operations, market-leading product. We believe that it is those investments that have been the reason that we have been successful so far.
I'll share some of the examples and some of the results, but also really position us for the future. Fourth, even though we're relatively young in our development of specialty businesses, we believe that in each of those businesses, we've established one or more leadership positions in the places that we choose to compete. Fifth, I will cover this in the end in some detail, which is that in each of our businesses, while we're very pleased and proud of the progress we've made and the results that we've achieved, we see considerable upside. There is a lot of opportunity for improved margin, even though our margins are good, and certainly a wonderful opportunity for us to continue to grow and develop these businesses. Let me give you an overview of the business.
Our specialty portfolio consists of seven businesses, AIX, which is our specialty program business, Marine, Surety, Management Professional Liability, Healthcare, which is professional liability for health professionals, and Specialty Industrial, which is focused on property risks that are highly protected, manufacturing risks that require a good deal of engineering as part of the loss control and risk management. Together, these businesses produce around $700 million of premium. I think we're targeting about 680 for this year, which is about a 13% growth over the prior year. The key feature of these businesses, and I'll give you the examples. I'm going to focus on the three segments that are in blue, AIX, Professional Management Liability, and Surety. Key feature of these businesses is all about what we're doing from a product, from a risk control, loss control, and some of the surrounding services.
I'm going to take one example before I move on and give you the specifics around each of those three segments, and that's our Specialty Industrial business. Our Specialty Industrial business is very much focused on, as I mentioned, sort of the HPR market, but we operate far below sort of the factory mutuals and some of the larger players. A big part of that is that when there is a fire, oftentimes you're using specialized chemicals to put out the fire. The debris removal is oftentimes a challenge. You have potentially some contaminated debris that needs to be removed. Well, one example of why it is that we're winning is we've built products and services focused towards that specific exposure, which is one of the most important exposures that those kinds of manufacturers have.
What's interesting is that when we're competing against some of the incumbent markets on those kinds of business, which oftentimes are standard lines markets, which oftentimes are the E&S markets, those kinds of covers are frequently excluded. Our agents, if they find themselves in a situation where their insured, where the customer has a loss, might actually have an E&O exposure. What we find is that that's an example where we built product and loss control services that go directly to the heart of the matter. Obviously, we charge for that exposure, and that's a reason that in that particular business, that we've been very successful. Let me move on and talk about the first of the businesses I'm going to cover, which is AIX. AIX is, as I mentioned, a program business. It's about $250 million. We have about 34 programs.
Those 34 programs are through 30 different program administrators. You can do the math. Our average program is about $78 million. The typical AIX program is a program that is very seasoned, sort of a long track record. Most of these programs are programs that we would describe as historically dormant. They don't really get to market. They've been with many of our competitors for many, many years, so people oftentimes don't know about them. They tend to be substantive in terms of the hooks, whether they be loss control or whether they be certain types of hooks around the way the programs are marketed, some of the connections with associations. They tend to be casualty-focused, small face value kinds of exposures. Generally speaking, moderate hazard, certainly not on the extreme hazard end, but still in the specialty markets.
Because of that, they tend to have reinsurance followings that are in place for a long time and support those programs, even as some of those programs have moved to us. What's different? It's a $30 billion market for program business here in the U.S. Why is it that, as Marita described, we've been able to grow this business from a little over $100 million when we acquired it three years ago, to what is a $250 million business today? There's a few fundamental pillars to what we do. First is that we don't do startup businesses. We're only focusing on mature business that we can understand, business that has a track record.
Importantly, we're working with program administrators and the guys that are the prospective program administrators for these businesses to understand exposure in ways that they might not ordinarily have an opportunity to understand. It's value that we're adding to them. Frequently, you find that there's risk participation, either on the part of the insured, an association, sometimes on the part of the program administrator. Fourth is that we tend to work with program administrators who have one or more very distinctive qualities from an operating perspective, from a frontline underwriting perspective, and potentially from a risk and loss control perspective. Importantly on this is that we are different than many who operate in this space in that except for one program, which is written on a BOP or a business owner policy, every single program we retain underwriting control.
We work with the program administrator to do frontline underwriting, but we remain in control of all underwriting decisions. Again, $30 billion market. We've grown the business very considerably. Why is it that we've been successful in growing the business considerably? A big part of it is that when we acquired AIX three years ago, fundamentally, they were building a great business, a wonderful management team with lots of experience, had been able to take that experience from their 20-plus years working in the segment and be able to build a business learning from those experience. Heavy focus on technology, operations, the ability to have product in a product structure so that as new programs are added, they can easily be brought to market. They've been very successful in doing that.
Over the course of the last three-plus years, we certainly have helped and accelerated that starting point that they brought to us. Big focus towards trying to find the best of breed in terms of claims and loss control. When we're working in some of these specialized segments, the ability to bring in experts who can add value is something that we're open to doing, that many other carrier markets want to hold control of those functions despite the fact that they don't necessarily have the expertise. Importantly, we'll talk a little bit more about this, there's much that we've done in terms of creating tools that add value to our distributors. That's built on sort of an experience base with the leadership at AIX and the things that they've sort of thought about over many years that we've been able to develop.
Finally, importantly, I'll give you a couple of examples that will bring this to life. The franchise relationship has proved to be very important to our success. Many of the program administrators that we're doing business with, and most of the growth is with that top 100 that Fred talked about in the open discussion. It's with the top 100 who both have retail brokerage kinds of business, but also have focused on building a program administration business and see that as being a big part of their growth. I'm going to talk about three examples. The first is a company called Frenkel, which is the 41st largest broker in the U.S. This is a really interesting story in that Frenkel is a company that has this long-standing program in cosmetics manufacturing and distribution. In fact, they have the sponsorship of the ICMAD.
This program has been historically with two carriers, very stable, very consistent program. Through the process that we went through with OneBeacon, where we were bringing over the renewal rights, what was a relationship that we had with Frenkel became much more significant. Through that relationship, had an opportunity to bring AIX in, and it happened to be at the time that Frenkel was making a decision to take a meaningful step forward with this program. They really wanted to move it to an entirely different level and didn't feel that the existing two carriers that were supporting them on the program were able to do that. Through that process concluded that AIX, for many of the reasons I just talked about on the prior page, in fact, was well-suited to help them bring the program to another level.
I'm going to come to, after this page, just some comments that came back unsolicited from the president of the part of Frenkel that's responsible for the cosmetics program. It's very impressive. Second example, Wells Fargo. The Wells Fargo relationship is considerable for The Hanover. The program that we have with AIX is one of only two national programs for ski resorts. Very specialized class of business. Wells Fargo, in our opinion, does this and has a better understanding of this class than any other broker in the U.S. Again, here's a situation where long-standing relationship with The Hanover. AIX actually had a long-standing relationship with Wells, although not a commercial relationship.
As soon as we acquired AIX, with the financial strength, the relationship that we had built with other parts of Wells, it became an easy decision to take a program that had been very stable, sitting with an existing panel of carriers divided up by line of business for a very long time. Over the course of about 20 months, be able to move that entire program to us, again, with great success. What is interesting about this, and I think that both Bob and Bruce know this, is that there is a 30-year consistent support in London for the reinsurance on the program, which continued as the business transitioned to us. Finally, a slightly different example is a specialist called Kleinwood, whose focus is specifically on the agricultural segment.
Within the agricultural segment, they're a retail producer of that business, but they're also a program administrator effectively for a livestock program. Again, a situation where two very reputable national carriers supporting this program, Kleinwood choosing to try to take this program to an entirely different level, try to engage their existing carrier markets in supporting them in that regard, weren't satisfied with what they were hearing back. For many of the reasons, again, that I exposed to you on the prior slide, the relationship that AIX had built when the opportunity came to step in and be the carrier for that program, we were able to do so. Again, with excellent success. Long quote here, very powerful.
Probably the best advertisement I've read for us in some time, which is in preparing for this Investor Day, I asked for each of the three program administrators who I talked about on the prior slide to give us their thoughts, and if they're comfortable with us presenting. In fact, unsolicited, this is what Ken Helmuth over at Frenkel came back with. You can read most of it, I'll hit on a few parts, which is we wanted to find a true partner in a carrier that understood the program business, a partner that was committed to the industry and shared the same goals that we did, which is around continued growth and success of the program. He goes on to say that there's a number of reasons that they have gone with AIX and The Hanover.
One of those is product offering, two is the team, the financial strength of the company, our responsive service, our knowledge of the program business, our infrastructure, the list goes on and on and on. This was an unsolicited comment. It is actually this kind of reputation that has been sort of the linchpin for us being so successful and really capitalizing on what has been a relatively disruptive period over the course of the last couple of years in the program market. I'm going to transition into talking about the second of the two businesses I want to cover, our Management and Professional Liability business. The Management and Professional Liability business for The Hanover is a business that didn't exist just four years ago. Today, it's about $100 million business. I believe we have a plan for just actually about $93 million for 2011.
The management liability business consists of four components. The first is D&O and a D&O package product, which includes fiduciary, fidelity, kidnap and ransom, employment practices liability for private companies. The second is a similar kind of structure for not-for-profit, so a standalone D&O product as well as a management liability package. The third is a standalone employment practices liability product, and the fourth is a crime product. That didn't exist, and I'll sort of give you a view in a moment as to how it is we developed that as part of our overall entree into the professional liability market. On the professional liability side, it's really four areas. It's professional liability for lawyers, for accountants, for architects and engineers, and then something that we call miscellaneous, which effectively is 164 different classes of professionals that range from agricultural consultants to translators.
Very broad swath of professionals, for which there is a liability exposure, for which we're able to provide an expert solution. What happened in terms of the development of this business? This very much speaks to some of the comments that Fred made at the outset, some of the comments that Marita had made about the investments that we've made, and how well-positioned we are. In 2007, we bought a small specialist called Professionals Direct, a specialist in the lawyers' professional liability segment. It's a very successful acquisition, but it formed just the starting point for us in this segment. The next thing that we did is we hired a woman named Helen Savaiano and a small team to lead our management liability business.
We started by bringing a focus towards not-for-profits and employment practices liability, two areas that we thought we could immediately capitalize on given what we were doing in our commercial business. That brought us into management liability. Next, we hired a longstanding veteran, a gentleman named Bob Drohan, to start and oversee our miscellaneous professionals business. Again, that's the segment that's focused on those 164 different classes. We hired a gentleman named Jerry Merritt, who, prior to joining us, ran the largest lawyers and accountants' professional liability business in the U.S. Then we made a big investment in infrastructure. We built effectively what is an end-to-end, very modern technology platform called PLUS, Professional Liability Underwriting System, and we implemented it for our employment practices and not-for-profit. Then we started to build our private company management liability.
We took our LPL business and our MPL business, and we started to transition that out to our regional model. That is characteristic of much of what we do, trying to put the expertise closer to our distribution. We bought Benchmark, which again, Marita talked about when she gave an overview of some of the acquisitions. Then we built PLUS, as well as a web front end called Point of Sale for our miscellaneous professional liability, effectively being able to deliver solutions that our agents could access online for the miscellaneous professional liability business. Next, we implemented PLUS for private company and Point of Sale for EPLI and not-for-profit. Then finally, we implemented PLUS for A&E. We hired another leader from one of our competitors to run our lawyers business and to start an accountants business. All that done in four years.
What we have today is a staff of about 100 people. Majority of those people are underwriters out in the field, close to our markets. We've also, through the process, as you get a sense, built market-leading infrastructure, market-leading operations, and certainly, market-leading product. A quite significant investment in building this business effectively from 0 to about $100 million over the course of four years. What does the distribution look like? Well, we got a start by focusing on specialists who are very good at management liability and specialists who are very good in professional liability. Certainly over the course of the last 18 months, we've seen a migration where very much the franchise partners who have capabilities in these areas are now becoming a very important part of the access and distribution of this product.
The reasons that we win, I don't want to go over all of this because it is many of the reasons that Marita talked about earlier, as she was giving an overview of distribution. Very much at the heart of this is being able to give very good distributors something more to sell, and in some cases, adding to their expertise, or if they're reaching the placement of this business through wholesalers, the ability for them to claw back some of the commissions that they forego. Ultimately, if you do that with relatively limited distribution, we have found that's been a formula for success.
I imagine at this point, if you're thinking about, well, this business has been growing from 0 to $100 million or near $100 million in a relatively short period of time, over the course of four years in a relatively challenging market, what's the profit characteristics of this business? Should we be concerned? I'm listing some examples here, and apologies for those in the room, the small font, that should give you a sense that what we're not doing is we're not competing for new business in the new business market. The first example is something called NLADA, which is a program that had been with one of our competitors for many years, and dormant, stable, would never see the light of day. When we built this business, we developed a relationship through Wells with NLADA.
Over a period of a couple of years, here's a program that has some of the most wonderful profit attributes, a multimillion-dollar program that we were able to position ourselves to ultimately have moved to us, with the support of Wells as a key distribution partner. Second example, one of our very good agent relationships out of Chicago, FGMK, a company that we have a very broad relationship with from a franchise perspective, who had an association sponsorship for, believe it or not, lyricists, so like jingle writers. A program that is very profitable. They wanted to grow. Again, unsatisfied with their existing market that was supporting them. We brought Todd Rohan to meet with them, over the course of six months together, constructed an approach that would support them, both in the development of the program and moving that existing book of business.
Again, an example where we're not competing in the new business market to develop this business, but finding very attractive segments that are entirely consistent with what we're trying to build in terms of our mix and supported by our infrastructure. I'll touch on one more example, which is a wonderful distributor in Michigan called Cambridge. Cambridge just listed the comment, again, unsolicited. "We love doing business with Hanover Management Liability. We generally gravitate towards underwriters who understand ease of doing business, and our local underwriter actually walks the talk. We're coverage-focused." This is a key point. "We're a coverage-focused agency, and our local underwriter truly understands management practices coverages." I won't say what company most of this business has come from at Cambridge, but we haven't been competing in the new business market.
This has been largely a book of business move from one of the two markets that I think most people who are familiar with the industry would say are the strongest markets in the private company management liability segment. That has been an extraordinary accomplishment for us to be able to build a business and be able to achieve those kinds of results with a sophisticated distributor in such a short period of time. I'm not going to cover the last example. I'll leave that to you to read during your free time. I'm going to move on, just give you a sense for what's happening in the development of our surety business as the third area. Surety is made up of both contract surety as well as commercial surety, about two-thirds contract surety, a third commercial surety as an organization.
We have strategically been trying to rebalance that portfolio, moving it more towards a 50/50 kind of mix. We're well on our way to doing that, very confident in our progress towards that. Again, the business, about $100 million, just shy of $100 million, with a heavy emphasis towards the middle market and down. On the contract surety side, it's what you would expect. We're serving general contractors in a series of segments that are much more specialty contract focused. On the commercial surety side, you can think of the commercial surety business as having both transactional, which is very small bond needs, and more account business, larger bond needs.
We have both the technology and the operations to do the small bond needs very efficiently, a system called Bond Direct, which allows sort of a Point of Sale access to us, as well as be able to serve the account needs market as well, which is larger bond limits, and categorized around some of those segments that are listed on the page, manufacturing, service contractors, healthcare, et cetera. In terms of surety distribution, interestingly, heavily weighted, in terms of numbers, towards franchise-wide distributors who happen to have strong surety capabilities, which tends to work very well for us in so far as you take a very sound offering, a middle market focused offering with people who are local to the markets with strong knowledge, strong product, strong customer service, and then also be able to do the contract and the commercial.
Interestingly, there really isn't a lot of markets who do that set of thing as well. If you combine that with our distribution strategy, it's proved to be a very positive formula for success. Nonetheless, we are continuing to grow and invest in this business. I know that David and Fred talked a little bit on the earnings call about some of the things that we're doing. I just wanted to put a little bit more color around that. Most recently, we're very proud that we've hired 2 of the best executives that we can find in the industry to help lead our efforts. Bob Thomas, who came to us from Argo, and then prior to that, spent a large portion of his career at HCC.
Ted Martinez came in, as I mentioned, with a heavy emphasis towards us building our commercial surety business to lead that charge. I think many of you are aware that back in 2010, we acquired effectively what were the renewal rights for book of business from Insurance Company of the West, which became the platform by which we built our Western-focused surety business. We brought over a team with that and suddenly had a national business where, along with some additional hires that we've made in specific regions, has really given us the coverage and the footprint that we're looking for. Third is that with our commercial surety business, with the leadership of Ted Martinez, we are clearly moving towards expanding the breadth of the segments that we touch, focusing on, again, theme around very high margin segments.
In this case, we're looking at energy, we're looking at waste management, a number of others as well. Expect to see developments around those areas over the course of 2012. Importantly, as I mentioned, Fred, I think, touched upon this a little bit during the most recent earnings call, which is that we have made considerable investments in building the analytics tools, support, and operations on our contract surety business. We've meaningfully upgraded our credit and risk management that supports that through that process. We obviously are very conscious of the tough economic backdrop, so we're being more diligent about any of the contract surety business that we feel is not creditworthy to move off that business, put it in a runoff, and reserve accordingly. Some of which certainly came through in our most recent quarter. To finish, let me just touch on a few things.
We're very, very proud of the success that we've had. Very proud. Our specialty businesses are great contributors to our results, great contributors to our growth. There still is a meaningful level of upside that we see both in the near term and the medium term. For AIX, I'd point to a couple of things. The first is that we have very, very strong positions with 30 program administrators who are very, very good at what they do. Examples like Frenkel & Co., examples like Wells Fargo. What we see is we see with those program administrators, second and third program opportunities that are with other carrier markets. Now that we've established ourselves, we're just going to continue to move horizontally.
In fact, I believe that what you'll see over the course of the coming 12 months is that much of our growth coming from AIX will in fact be that. We'll be moving to second and third programs with the guys that we already do business. Secondly, we've made very considerable investment in building the infrastructure at AIX, and that investment, while valuable to this point, is all about the potential for us to improve our financial return from this point forward. Very low marginal cost for us to be able to grow that business. It's a theme that I think you'll see a couple of times here. Management Professional Liability, again, proud of the results, but a lot of opportunity, a lot of momentum in that business.
The most obvious thing is just simply cross-selling products like miscellaneous professional liability and our Management Liability to both what we're doing on new business in commercial lines as well as our renewal book. That's an initiative and focus that certainly has been underway where we're gaining a lot of traction. We see a great deal of upside. Not unlike Aix, big investment, as you saw, with the developments over the course of four years in Management Professional Liability. We see a tremendous opportunity to leverage the investments that we've made to date and fully expect to see improved returns in those businesses simply because of the expense leverage that we'll get as that business grows.
Surety, focus on rebalancing our portfolio as we have been doing towards that 50/50 mix of commercial and contract, being very aware of the financial backdrop and continuing to manage our existing contract portfolio and paying extra diligent attention to the sort of the credit worthiness of any new business that we're bringing onto the books as part of our portfolio management process. Marine, I think probably more than any other segment in the market, we're seeing just a tremendous amount of disruption now in marine. With that, we see tremendous opportunity, not just on rate, but also our ability to be able to improve our mix.
We see that both with our adjacencies, things that we're attacking, such as fine arts and collectibles, which are natural places for us to go, but also just even within our existing books opportunity to continue to improve our mix and improve rate on the book. HSI, I can say that there really isn't anything we want to change. We are so proud of the progress that we've made. Marita talked about this. This effectively has been a grand success where we just simply want to do more of what we're doing. It's a segment of the business, short tail, you get to see the results very quickly. It's been one of our strongest profit contributors, and it's also been one of the strongest growing segments. We just simply want to continue to do what we're doing.
With a lot of the disruption happening in property classes, we see more considerable upside even for 2012. Finally on healthcare, which if time were allowing, I'd love to have spent more time covering, but we've made considerable investment in home healthcare and durable medical equipment, in diagnostics, in podiatrists, in elder care. For us, 2012 is very much a period in which we're going to leverage those investments. Those are very specialist areas. We have tremendous access through our distribution to that business, and we really just need to capitalize on that. Similarly, Jack actually will cover an example in the human services segment in the next presentation, but there is a considerable opportunity, considerable synergy that exists between our healthcare business and some of the professional liability exposure that we can address that corresponds very well with what we're doing in human services.
I'm going to wrap up with a repeat of the five net takes that I opened with, which is first and foremost, we really are genuinely committed to building the very finest specialty businesses. As part of The Hanover, we believe it's a tremendous opportunity for us to add value. We're focusing on those segments that we believe have the greatest profit opportunity, the greatest margin opportunity for us, and quite honestly, in the broader P&C, the U.S. P&C market. You can see from the examples, we've invested heavily. We're proud of that investment. We think it was the right investment. It positions us well. It'll accelerate our success, our growth in earnings. We've established positions. These are not businesses that have not made their mark. Competitors and certainly our agents and the insureds are taking note.
Finally, as I hopefully conveyed here just in the last slide, we see considerable opportunity financially. We believe that it's a wonderful time for our specialty businesses, and we fully expect to see the improving contribution from those businesses to the overall Hanover franchise. With that, I'll stop. I'll introduce Jack Roche, who will take us through the next presentation.
Thanks, Andrew. I'm going to try to follow down the path that Andrew just took us with specialty and just give you a deeper dive into our small commercial and middle market businesses and tell you why we think that we are poised for improved performance and further distinction in those marketplaces, in those businesses. The key messages I want to convey today are that we have, over the last several years, built some strong capabilities and deep relationships with our best agents, and we believe that positions us for tremendous opportunity, particularly as the market cycle starts to turn here. In our small commercial business, we're delivering improved performance today through our business mix improvement, our improved scale that was greatly enhanced by the OneBeacon transaction, and also a flexible and differentiated operating model that Marita highlighted earlier.
In middle market, we are swiftly moving towards a real distinctive portfolio of industry solutions, including some neat service venues that I'll describe to you, positioning ourselves in that first and second-tier middle market space as really the go-to market for many of the best agents in the country. So we believe that you will see from us increased momentum and improved financial results based on the key levers that I'll get into in more detail. First, just a quick snapshot of where we are with each of these businesses at a high level. Our small commercial business is roughly a $620 million business for us today. That is basically comprised of about $530 million of business in the current definition that we use for small commercial, $1 to $25,000.
As the footnote says at the bottom, as part of our new operating model, we are taking the lower end of middle market and moving it into a new operating model in that $25,000 to $50,000 sector, particularly in the larger states. We believe that we can underwrite and position that business more cost effectively by transitioning it into our small commercial business. With about $90 million of that middle market business transitioning to small, we have a pretty substantial scale in that business. In our middle market business, that leaves us with about $580 million of business, a pretty distinctive portfolio. Average account size, as Fred highlighted earlier, is around $90,000, which means we're playing in that first-tier middle market business predominantly that we think gives us a better opportunity for profit over time.
As most of you know, we've made significant investments over the last three years in this business and the platform, certainly in the investment we made to bring in the OneBeacon business, which all in, including the new business, brought about a little over $350 million worth of business into small and middle market. We launched a number of new programs, industry segments, and niches that I'll talk about and created, I think, a really exciting operating model going forward. Before I dive into those businesses a little bit deeper, though, I wanted to highlight what we talked about before in terms of how this relates to our distribution strategy. What this chart basically depicts is that two-thirds of our small commercial new business and over 80% of our middle market new business today is coming through the top 1,000 agents in the country.
As Fred highlighted, more and more of the business is aggregating, if you will, in the midsize and larger agents as the agency side of the business consolidates. From our perspective, because that's where agents are starting to really push on the specialization, our value proposition resonates the most. If you think about how this business goes from 50,000 or 60,000 agents just five or six years ago, to 35,000 agents, to probably on their way to 20,000 agents over the next five years, right? Agents are not doing business at the Rotary Club anymore. They each have to develop their own value proposition. They have to figure out what it is that they're going to do to differentiate themselves in front of the customer base. In the commercial line space, that's about industry specialization.
You won't see them all go to extremes, but you will see over the next decade an increased march towards specializing and offering customer solutions that relate specific to their industry and ultimately to their individual businesses. We think in that regard, as we anticipate that continuing specialization trend, we have positioned ourselves perfectly for that to come through. When you add our limited distribution approach to that, it makes what we've built, we think, very potent. Let me go a little bit deeper into the Small Commercial business and why we think we're a unique offering. As the market has been difficult over the last several years, we've had to work hard to make sure we're positioned not only for improved performance today, but well-positioned for the future. We've seen a number of carriers, quite frankly, go down a very different path.
Some of the industry leaders have gravitated towards an approach that's quite different than ours, I'm going to highlight that a little bit, particularly in our operating model, also in our underwriting focus. We really truly believe we have a distinctive offering, that our operating model is superior to those that we're competing against, that we are an underwriting company first, that we have not lost sight of the fact that a black box cannot do the underwriting that a human being can. We use the science and the various operating model tools that we've built to aid in our underwriting, not to replace it.
Ultimately, our franchise value is a big part of our performance improvement, because at the end of the day, if you have a top 3 position with agents in this business, they will protect you and they will bring you the right opportunities. Our payback for that value proposition, if you will, is that we expect and seek premium pricing in this space because of the portfolio we're building. Above-average retentions, which helps on all levels, not only your pricing level but your operating efficiency. We expect improved operating efficiency driven by our newfound scale and our operating model that I'll talk a little bit more. I think we've gotten quite good over the last 5 or 6 years at improving our mix management and not over-relying on the market cycles to drive margin improvement.
When you look at Small Commercial, this is, I think, a really important for those of you that are following the sector, is that over the last several years, we think that some of the industry leaders are following too dramatic of an approach towards allowing the black box to kind of dictate where they go in this space. If you look at the chart on the left, Small Commercial in our mind is made up of Point of Sale or BOP accounts that can be easily done by the agent through a portal in their shop. If you look at the green box, non-Point of Sale accounts, which don't fit great into a slot rating, slot underwriting approach.
You actually have to have a human being actually ask a few questions to the agent, and we call that non-Point of Sale because we generally work on that account as opposed to an agent doing it within their shop. We've developed a set of industry niches that I'll talk about in more detail that are quite distinctive. On the far right, some affinity programs, which is just another way to get at industry segmentation in the Small Commercial space. Contrast this to many of our competitors have really tried to migrate to this blue box. There's two fundamental problems from my perspective over time by over-betting on that blue box. A. If you paid attention to the personal lines business, over-relying on science, particularly on new business pricing, hasn't been particularly fruitful.
What you find is that in order to be able to underwrite in that Point of Sale environment and let the agent do most of the work, is that you have to narrow your focus and appetite over time, and you have to really rely or over-rely on some of the predictive modeling and multivariate pricing. What we're doing in this space is using some of those tools to supplement and aid our underwriting, not replace our underwriting and pricing.
You will see, I think, over time, similar to what you saw in the early migration of personal lines into the multivariate pricing, is you will see a lot of pricing volatility on young renewals in the Small Commercial space, that companies are writing that business at a cheaper rate than they have in the past because they're relying on that multivariate pricing, and then they have to hit that renewal book pretty fast, early in its cycle in order to get it to profitability. We think this diversity is going to be our strength in terms of how we approach the Small Commercial business. Let's talk a little bit also about what we've done over the last several years to improve our profitability and our position. We've been working on our mix for several years in 3 major categories.
We've improved our geography by reducing our concentration in the Big Four in a similar manner to the personal lines, although our situation was not quite as dramatic. We have really now today less than 40% of our business in those Big Four states. We've done that not only by our Western expansion, but by penetrating some of the other territories in the Southeast and South Central to diversify our book of business. From a class of business standpoint, we've taken what I thought was already a very disciplined approach towards industries like construction and real estate, where we knew the economy was not going to treat those sectors well. We not only remain disciplined in those areas, but we further reduced our concentration in some of the most volatile classes in a bad economy.
At the same time, we increased our penetration in some of the classes like the service business, which tend to be a little bit more casualty oriented and actually thrive a little bit in this type of an economy. Last but not least, from a line of business standpoint, we have reduced our concentration both from an overall perspective in property but also in terms of its concentration across the country. We've been doing that through a variety of different levers to make sure that the last three years of weather doesn't dictate our future in terms of future profitability. I think we're quite proud of the positioning that we've done in small commercial on the existing book of business. Let me talk in conjunction with repositioning our portfolio and what we've built.
Let me talk a little bit more in depth about the operating model that we think is part of our success going forward. When we brought in OneBeacon, they did some things differently that really gave us a fresh look to how we would do business. The fundamental thing that we decided to do with regard to small commercial is to separate out kind of a new business platform from the renewal platform. This is directly related to the chart I talked to you about the breadth of the appetite that we have. By going to a more distributed underwriting approach in small commercial from a new business perspective, we can underwrite that business more local, we can understand it better. The effectiveness in new business is more about getting the right business at the right price than it is about handling it cost effectively.
The cost efficiency in small commercial is primarily in how you handle the renewal book of business and the subsequent transactions like endorsements and servicing that business. What we've done is repositioned ourselves not only from a portfolio standpoint, but also from an operating model that in most states, we have a local new business underwriter working with our sales force, deciding on the right business in a very disciplined way. Then backing that up with three renewal centers that have made tremendous strides in terms of renewal bypass and straight-through advances, but not at the cost of underwriting business properly.
We have also looked at, because our renewal book is performing quite well, we've looked at the pricing elasticity and made sure that we get the levers right on how we price that business, because what we see in the industry is too many competitors trying to introduce too much pricing volatility, and all that does is back up on your operational efficiency, and you end up spending $2 to make $1. Ultimately, we do have different tracks for the real small business at $0 to $25,000 versus the $25 to $50 that allow us to make sure we don't miss the real underwriting attributes in that next tier of small commercial. Last but not least, we have the best customer service center in the business.
If an agent wants to improve their economics by moving small commercial into our center, bar none, we have the best commercial service center in the small commercial business. Ultimately, what we've been able to do is, on an ex-cat basis, improve our accident year loss ratios quite dramatically in this business. We think we are incredibly well-poised to use this at this stage of the cycle to our advantage. We've improved our retentions. You'll see here that the only difference in the 2011 estimate of our small commercial business is really the difference between that $90 million of business that we're migrating in from our middle market business, which, quite frankly, performs at an equally impressive rate from a profitability perspective. Again, that gives us tremendous scale, good positioning for a firming market.
Let me spend a few minutes now taking you through why we're so excited about the middle market space. Again, we think we have a distinctive offering for the best agents in this country. We've built real industry niches that combine some complex underwriting characteristics into a neat, integrated offering. We have kind of de-commoditized the commodity in some of the general classes with some industry segmentation. We've built some appropriate value-added services and, again, continue to leverage a very tight distribution to make that distinctive in the marketplace. Our payback for that strategy is that we believe that we will continue to see significant pricing improvement, above-average retentions, improved operating efficiencies, and we'll continue to leverage our ability to mix manage to improve our loss ratios. Let me similarly to what I did with you in small commercial, let me take you through kind of the space.
If you look at the dark blue and the light blue sectors here, what we've done in some of the more general classes of business is we've built industry segmentation. In the light blue section, we go a step further in some of those industries that require a little bit more underwriting expertise, a little bit more dedicated approach, a little bit more loss control and claim coordination, we call those industry niches. Andrew already talked about how we've significantly improved our specialty offering. I talked a little bit about small commercial. I think most of you know, really the only large accounts we do are house accounts with our partner agents, and we do that well, but we're not enamored with the profit potential in that business long term, we only do that very selectively for the right agents.
The way we differentiate, quite frankly, the niches from our industry segments is really those classes of business, those industry sectors that require an integrated, multiple, complex product and underwriting competencies. We'll take you through, if you look back on the last slide, you think of things like educational institutions that have educators legal and have some professional liability along with the package. Human services, which I'll go into in more detail, has a similar complexion. Limousines and moving and storage is just kind of a unique auto offering that you really have to know what you're doing to play in those spaces. Manufacturing, housing, and sports and rec, and technology. All of these share a common characteristic in that it's not just package underwriting.
You have to know the professional liability associated with that, and it's bringing that together in an integrated way for the first and second-tier middle market that makes us distinctive. Much of that market comes to the distribution through either a wholesale opportunity or through a disaggregated kind of disintegrated way, and the agent has to pull that together and make that look seamless for the customer. Industry segmentation is just a lesser degree of that, but we also look at what we've done in the middle market space to build that industry segmentation, that product offering, those underwriting tracks, those service capabilities as a potential incubator for the next set of niches. We look at it that way as we're building those through. Last but not least, we don't dislike general accounts.
We just rely on them less, and we know that that is really over time, if you're not segmenting the middle market space, you're left to a lot of what we think is more ignorant underwriting that happens with a wider community of carriers. On the right-hand side here, all we're showing you is that over the last several years, we have progressed quite nicely into further segmenting our book, and our expectation is that next year, we'll get that business quite close to our goal of having our middle market book 80% segmented and away from kind of a general business platform. Let me just go a little bit step further with the niches because I want to give you a flavor of, okay, that's interesting, but let me touch it a little bit. Let me see exactly what you guys are trying to do to differentiate yourself.
In the industry niches that I showed you, those industry sectors that we're focused on, we do have a more dedicated underwriting model. Similar to the way Andrew described specialties, we always bring somebody in that has expertise in that industry. We do not try to have amateur hour at the improv. Those are classes of business that really require expertise. We set up a suitable infrastructure that brings dedicated expertise, but ultimately, we try to bring it to our middle market underwriters, and we've done a certification process to try to get our middle market underwriters onboarded into that and maintain that expertise. We really only work with partner agents that have expertise in those areas. We don't try to bring specialization to a generalist. We've built out our loss control claims expertise, we don't leave that behind.
What I'm going to kind of take you to a brief drill down on is what we've done in developing some industry portals, which we think will further catapult us into a really distinctive position in some of these industry niches. The payback for us in going into this more dedicated approach in the middle market space is improved loss ratios, above-average retention, quite frankly, leverage for other business. When we go out to the distribution, one of the most distinctive things that we bring is these industry niches, by further limiting that distribution, we create a lot of leverage for personal lines, for small commercial, and for even some of the specialty businesses based on bringing that unique capability to a small subset of even our existing agents. From an agent's perspective, they get a distinctive product offering that has limited distribution.
In most states, in many of these products, there's only six or seven or eight agents that get this offering, as opposed to the hundreds that get that product offering from other companies. They get higher client retention and clearly get substantial referral opportunities when we do this well. Let me take a couple of minutes to just highlight what we're doing in these industry portals because I think it is going to be the next wave of true specialization that we'll bring to the marketplace.
What we did, starting about a year ago, is we started with our human service niche, we started to say, "Wow, what's happening in each one of these industries that affects the way in which these clients are buying their insurance and the way in which agents are trying to serve them?" What we saw very clearly is that, especially if you stay in that first and second tier of the middle market and you don't go up to the high end, is that they need risk management solutions that can be brought to them more efficiently than sending out Hector the inspector and asking them 65 questions at their place of business.
We immediately saw the opportunity to start leveraging some of the new technology and really start to bring these risk management tools to them in a much more cost-effective way and a much more effective way for the small and mid-size customers. What we started to do is to take some of the training and the curriculum that we built, not only for our own folks, but for the work that we were doing with customers, and starting to build those into a portal, not just in terms of loss control and claims best practices, but also some of the things that were starting to affect the industry in total.
If you think of the human services industry, this is a great example because what's happening in this human services sector is that the lack of public funding for many of these human services agencies is creating a need to shift their focus towards more private sourcing of their funding. That's putting a lot of strain on relatively small agencies that don't have the resources to get the grant writing done properly to get to that private sources or even to meet some of the new regulatory and certification demands that are coming on them for their employees in order to be eligible for this new funding.
What we've been doing is building out these portals in a way that not only covers their risk management needs but also starts to address some of their broader business needs in a cost-effective way and allows them to go into these portals and leverage that for even something beyond their insurance needs. You can imagine, if you're an independent agent trying to really go after this sector, working with a carrier that is willing to go to this level of detail to understand the industry and to provide service and coverage to that industry and limit the distribution to only a subset of the agents in the country, this is what we think makes us a very unique proposition. It also sets up a platform, quite frankly, that we can start to build that out for the rest of our industries quite easily.
What's the payback and what's the experience that we're delivering in the niche world? We've built this business from virtually nothing to about $200 million over the last several years, one product at a time. Similar timeline approach that Andrew introduced with the specialty. Very thoughtfully bringing in the right level of expertise, building the right product, aligning the right distribution, and building those businesses from the ground up. We have already experienced tremendous operating efficiency by doing this. Our hit ratios in the niche business are 47% versus 29% for the general business, which is kind of an industry average of that 30%. Our retentions are already starting to reflect not only that distinctiveness but the approach that we've had with our agents that causes them to want to keep that business with us longer.
In summary, I think I hope I've conveyed to you just that deeper dive on why we positioned ourselves in the Small and Middle Market business to be not only an improved performer, but also somebody to watch going forward. During this really important time in our cycle, we believe these strong capabilities and our partnership strategy provide us tremendous upside. In Small Commercial, you can expect improved performance coming from our accelerated penetration with our partner agents based on the products and the model we've built, our continued business mix and pricing improvement that is really starting to evidence itself in the marketplace, increased scale and operating efficiency with that already good size $600 million Small Commercial business.
In Middle Market, our performance improvements can be driven by the robust portfolio of industry solutions we've built and our agents to be able to sell value at a critical time in the cycle, the above-average retentions and pricing that's clearly going to be assisted and is already starting to show up in the marketplace now, and then the improved operating efficiencies that also leverages the improved operating model we have in Middle Market. Last but not least, we think that what we've built in Business Insurance in Small and Middle Market, as I said before, serves as a substantial catalyst for us to get additional momentum in the other areas of our business, including Specialty Commercial and Personal Lines. With that, I appreciate your time this morning. I'm going to turn it over to David Greenfield, our CFO.
Thank you. Thank you, Jack, and good morning, everyone. You've heard quite a bit now already about what we've been doing the last few years, and I want to try to bring that together in terms of how we've built this strong platform and how that has expanded our capabilities and translated to overall financial performance. In particular, I want to cover how our strategy is delivering on improved operating performance. I want to focus on the capital strength and the flexibility that we have in our financials and our balance sheet, and also including talking a little bit about the quality of the overall investment portfolio and a moment on reserving practices and philosophy to help you with that.
Finally, I'll spend some time on the levers we have, the very strong levers we have in improving our ROE and how we see those things building on what you've heard already in terms of the businesses and the expansion that we've talked about. At the conclusion, it should be very clear that we're well-positioned to continue delivering improved financial performance and well delivering on the promises we have in terms of our strategic progress. I'll start off with a few points on improved operating performance. Many of you may remember the business mix we had about six, seven years ago, and a couple of the speakers have already commented on that. We were predominantly a personal lines company with a very regional focus.
During these past six years, we worked very hard to diversify our capabilities and our footprint by expanding nationally and dramatically improving the business mix, which is a key driver here. You've heard quite a lot about this in Jack's presentation. You've heard about it in Andrew's presentation, as well as Marita's, and earlier when Fred opened the session today. You can now see here on the upper left-hand chart the growth in our specialty lines and the OneBeacon renewal rights drove very good growth over the past few years. This allowed us to further expand our footprint into the West, and over the period, we maintained a very strong focus on a limited number of very strong partners that you heard Marita refer to earlier. The mix improvement has been an important element in our improved operating performance.
In 2011, Chaucer also added to our growth and geographic diversification, and this will continue through the first half of 2012. We just reported the first quarter results with Chaucer, and you can already see the positive contributions that they make to our overall business profile. It's clear that our expanded product capabilities and portfolio expansion will enable us to focus very much on the higher margin opportunities and continue to manage our portfolio in a very productive way by increasing margins. Moving on to a couple of charts on segment income. Looking at our performance over the past few years on an ex-cat basis, you can see how the product and geographic diversity is helping us delivering increased earnings power. However, the results have been impacted by investments we chose to make building out our platform following those rating agency upgrades in the midst of the financial crisis.
At the same time, you've also seen pressure on the results of the unprecedented active weather events over the past three years. You've heard Fred talk about that earlier today, how we've been impacted by weather. It's just hard to ignore going forward. As a consequence, we're building a higher level of weather activity into our 2012 plans. I'll cover that in a few minutes. I'd like to move on to our strong capital position and the flexibility we have in pursuing the best opportunities. You'll see in these next series of charts a very compelling story. You'll see we've set out to optimize our capital structure over the past few years. We've enhanced our flexibility and our overall liquidity. At the end of this past September, we had over $3.3 billion in total capital.
We increased our debt leverage this year, mainly to raise funds to close the Chaucer acquisition, but also to establish a strong position in the debt capital markets for future needs. Despite the challenging market conditions in June, we had an excellent response from investors to the $300 million of debt that we raised. We subsequently used those proceeds to close Chaucer in early July. We also continued to lower our cost of debt. Over the past three years, we lowered the cost of debt by nearly 150 basis points to 6.6%, mainly through retiring higher coupon debt. Through Chaucer, we also now have access to a very flexible and capital-efficient market at Lloyd's, from which we can also grow our business. Finally, we also put in place in July a new $200 million credit facility that's also available for liquidity needs or opportunities as they may arise.
One of the most important measures of our success is book value growth. As you can see here, we've continued to drive our book value per share up in light of the business investments we've made and the growth that we've undertaken. In addition to improving on the ex-cat operating performance, we've also been mindful of capital management through our dividend policy and through returning capital in share repurchases. In fact, over the past seven years, we've returned over $750 million to shareholders through an increasing annual dividend and opportunistic share repurchases. We continue to have a thoughtful approach to our capital based on our business opportunities we see available, as well as being mindful of the rating agency requirements and regulatory requirements.
Fred already mentioned dividend policy earlier. I just want to comment that earlier this week, our board of directors raised the quarterly dividend to $0.30 per share, which is further support to our strength of our earnings power and the growth in our business. Beyond just looking at overall metrics, it's important to understand that our risk management capabilities have also been improving. Over time, we focused attention on building our capabilities so that we can refine our approach to allocating capital to the best opportunities. Our sophistication has improved over the past seven years quite dramatically. It's triggered decisions to withdraw capacity from certain underperforming markets or products, and allowed us to more quickly reassess opportunities to deploy the next dollar of capital for the best returns overall.
For example, you can see on this chart, we took actions over the last several years to reposition capacity away from coastal markets. We'll also use our tools to further refine our capital resources and make them more efficient. We're continuously improving our capital and risk management tools, and it's always gratifying to be recognized as one of the leading organizations in the industry on this front. I'd like to now turn attention to a couple of balance sheet and related performance areas. First, we'll take a look at the investment portfolio and then loss reserves. Our investment portfolio has always been of high quality and well-diversified. This past quarter, we added over $2 billion of assets to the portfolio related to Chaucer, and now we have more than $7.5 billion in cash and invested assets available to us.
Our portfolio delivers a stable source of income. As you can see in the net investment income chart, we've had a very level income over the last four years. I would add that in times of stressed financial markets, such as the recent financial crisis, the portfolio has also continued to serve us well and continue to deliver very stable, high-quality returns. Prior to the acquisition, the Chaucer portfolio had a much shorter duration than Hanover's portfolio. Consequently, we were active this past quarter in repositioning Chaucer's portfolio to extend the duration and increase its underlying yields. The information on this chart shows you how the overall quality of our portfolio changed with the addition of the Chaucer assets.
For example, the average rating on our corporate bonds increased from a notch from BBB+ to A-. You can also see that there's a slight uptick in the investment-grade corporate category. Overall, the portfolio duration is now shorter by about a half a year. We're continuing to reposition the Chaucer assets to optimize returns against our overall objectives. I wouldn't expect any significant changes in overall portfolio composition, but you may see some marginal changes in allocation in the coming quarters. Just looking at our fixed income portfolio breakdown, you can see a couple of points here. I just want to mention that we have the high-quality nature of the fixed income portfolio. It's about 95% investment grade, and it's worth noting, just in terms of industry dynamics, the percentage of our assets in tax-exempt muni securities is underweight.
The reason for that is some prior tax losses that we're still working through that make those investments a little bit less attractive to us at this time. More than half the portfolio is allocated to corporate bonds. This has been a consistent strategy for the company for quite some time. Again, it served us very well in terms of delivering performance and returns on the portfolio. In our quarterly release, we provided some specific details on our exposure to European issuers. We have limited exposure to parts of Europe that have been in the news recently, such as Greece, Italy, and a few others. By far, the largest portion of our direct sovereign debt exposure is U.K.-based at $126 million, or about 1.7% of the portfolio.
Most of our European exposure comes out of the Chaucer portfolio, and we're closely managing this in light of developments in our overall investment philosophy. You can certainly find more information about these exposures in our third-quarter materials, which we released about two weeks ago. Before I turn onto loss reserves, I just want to spend a minute on our forecasted portfolio returns and our focus for 2012. We managed the portfolio to minimize turnover and to maintain the highest returns possible. In The Hanover portfolio, we expect only about 10% of the fixed maturity portfolio will turn over each year over the next few years, which will cause downward pressure on net investment income. About 30 basis points in the yield calculation each year.
This will be somewhat offset by growth in the assets from Chaucer as we continue to reposition their portfolio and extend their duration in line with our risk appetite and the overall liability duration. We'll also consider modest diversification away from fixed income in anticipation of a rising rate environment that we expect to begin to see sometime in 2013. Just moving on to loss reserves. I'm only going to spend a couple of minutes on this topic today, but we have a very detailed approach to reserving that incorporates best practices in the industry, such as quarterly full actuarial reserve work and quarterly reporting to our board of directors. We react very quickly to emerging negative trends in our data, and we cautiously react to positive trends.
We've had a pattern of favorable reserve development over time that supports this approach, and you can see from the table on this current slide that our initial loss ratios have trended positively over the past 10 years when compared to our current loss ratios for each of their respective accident years. I would just add for Chaucer, their loss reserve approach is quite similar to The Hanover's, and as we begin to bring these practices together, as we're now doing, you'll continue to see strong reserving practices from both parts of our business. Okay, moving on to my final topic. Strong levers which improve our profitability and return on equity. You've heard quite a lot today about The Hanover and The Hanover we've built over the last several years. It's a strong platform, and it's built to deliver top quartile performance.
However, there are challenging tasks ahead, particularly under the current market conditions. We have a number of levers that are available to us that we believe will help us achieve our objectives. As you've heard today, we've assembled a portfolio of products and capabilities that allow us to take advantage of the best market opportunities. Our business mix is continuing to improve, and with our strong risk management practices, we'll continue to refine our mix to focus on the best diversifying returns. We'll pare back underperforming businesses, geographies, or products as appropriate. Our risk management approach has resulted in a greater focus on exposure thinning in our most concentrated and affected areas. We are actively reducing monoline property exposure that translates into higher tail risks for us. This business obviously requires a higher cost of capital, and our actions will continue to support our improved results.
There are headwinds that we're also facing along with the industry. The two most significant items are the highest incidents of weather, cat, and non-cat activity that has caused us to adjust to a higher cat expectation in 2012. We're adjusting our pricing models, and we'll factor this into our overall portfolio management going forward. It will take a while for pricing actions to earn into our results, but we're confident that this will drive improved performance in time. You should see improvement in 2012, but perhaps even more improvement as we get into 2013. On the investments fronts, although we're managing for a persistently low interest rate environment by maintaining an appropriate duration and minimal underlying portfolio trading, we are also considering modest moves into diversifying assets, such as the high dividend yielding equity securities.
Offsetting this, the size of our portfolio will drive a higher earnings power for the company. As rates do stabilize, we will begin to see increasing investment income. Despite all of the headwinds, we believe our mix improvement and pricing expectations should deliver improved returns in 2012 and beyond. Finally, during our earnings call two weeks ago, we provided you some high-level metrics on our expectations for 2012. In particular, we're estimating segment income of $3.85-$4.15 per share. You can see on this current slide some additional factors that support the expectations that we provided for 2012. You've heard a lot about our business today and our growth aspects and our business mix changes.
I won't go through everything on this slide, but on an overall basis, we expect modest growth next year, and you can see some of the overall assumptions that form the guidance we provided. This should be helpful to you as you consider what we've talked about today and how to think about our performance going forward. Just to wrap up, we are aggressively driving our business forward to be a top quartile performer. We have most importantly improved our underlying operating performance over the past few years through mix shift and portfolio management, although there is more to be done and there are strong industry headwinds to battle. Our capital position is strong, and we've built in flexibility to meet opportunities as they arise. Our balance sheet is strong, including a high-quality investment portfolio and very strong reserving practices.
Finally, we have a number of levers that are available to us to continue to improve our ROE and to drive improving operating performance for 2012 and beyond. With that, I'd like to turn the floor back to Fred.
Thanks, David. Thanks everybody. I just want to quickly summarize today. I know it's a lot of material. I apologize for those that know us really well and maybe some of it's redundant, but I actually think it's quite valuable to get some texture for all that we've done. Our basic belief is very simple. The market is difficult. There's no question about it. There's some trends that are very difficult. This is the time when the have and have not separate. This is when shares shifted. This is when the better companies actually make hay. We believe we've repositioned ourselves to really take advantage of this and do some interesting things over the next couple, three years. Again, it's interesting to us that we've kind of got to this inflection point.
We worked hard over the last seven years to get to this point before some of this turmoil occurred, we think we made it. We think our portfolio is stable. We think we've made a significant amount of investments, we're kind of done the big, heavy lifting as far as investments, we're ready to capitalize. David had this slide. We believe that when you look at this, what's interesting about our returns next year, we gave you guidance and say that's an 8% return. Eight isn't the 12 that we want. It's not exactly where we're going to be in the future, we're not satisfied that's an ending point. If you look at what others is going to happen in this industry, others are coming down. They're running out of reserve releases. They got the headwinds of weather.
We've decided to be, in a prudent way, very aggressive about our assumption about weather and cats and reinsurance costs. Even with all of that, because of our mix management, our ability to get pricing across our portfolio, the ability to have retention. If you look at our retention, how it's continuing to increase even though we're getting pricing leverage because we're better, we're more distinctive, we're the right folks. We have preferred platforms. In addition, you've seen us take growth down a little bit. Why? Because we feel that it's appropriate for us to do a little bit more thinning. We've done thinning every year, and we'll do a little bit more thinning this year, maybe $150 million, $200 million of targeted business.
Of this change in the dynamic of cost of capital, we believe that with yields down and what's happened with RMS and these other models, that our marginal cost of capacity in some ZIP codes is so high that we can't get the kind of target returns, top quartile returns we want. We're going to do a little bit of thinning. Even with all of that, we believe we're going to have growth. We believe our margins are going to be as good as some of the best companies in the industry next year, our average returns are going to be right there with the best because we don't see the industry getting to that level that the top quartile we're talking about either. We think 2013 is set up beautifully.
We think the value creation opportunity is real here if we stay focused on the basics and do what we've been doing and executing against what we're doing. I showed this chart in 2009. The reason I bring this back is that we believe this. We believe that our goal is very simple, to build a world-class top quartile performing company. We needed to enhance our product portfolio and our position with agents dramatically. What I try to do today is give you some reality of all the things we did. Does it sound like a lot? Yes, it's been a lot. Yes, it's been a lot. We now have almost 6,000 people. We've hired most of these people in the last seven years. We have a different portfolio. We have a strong position.
The reason we do it is that we believe the best companies can't just execute better. You got to have a better portfolio and a better position. Somebody said to me that this game is execution, and it is. It's a game of inches. I said, "Guys, I can go to the Houston Astros and I can tell them to work really, really hard. If they don't build their minor league system and they don't get better players in any 10-game series, they're going to lose to the Yankees 100% of the time." What we've done over the last seven years is build our minor league system. We put great talent on the field and created a situation where as good as anybody there is on the segments we're in. Now, are we at the returns yet? No.
We have more line of sight to the levers than most companies because we're not living on reserve releases. We're leveraging our investments, we're seeing price increases, we're seeing mix improvement across the board. Our feeling is that this is still right. I said that we'd be at $5 billion by 2014. I'm a little ahead. We're going to get there faster, we're probably going to get to the returns faster than 2014. We still believe that this was important to say and to move in that direction and make the investments we made. My view is that we are one of the most interesting investments in our space. One of the reasons we're one of the most investment space investment is because our price is low. That most people have not yet recognized the leverage we have.
A lot of the best players in the industry have already priced in all the price increases, even though it's not clear they'll get them all. For us, we've done all these things, we have a very differentiated position with improving retention, improving pricing, improving mix, and improving expenses. We can see improvement over the next 24 months. Again, we believe for the right investor, this is a good investment. That our value proposition to folks that hold us for the next two or three years are going to be rewarded, just like folks that invested in us seven years ago have been rewarded. For me, when I look at us, again, there are four things I think about. One, our new business is very attractive. What we're bringing in is very attractive business at the right price.
We are earning in some of the weather things. We have decided in weather non-cat, we're baking in on property lines and in cases that are relevant, three more points of non-cat weather. We're baking in much higher cat estimates that we've given you. It's going to take us a while to get that rate. What you're seeing is we're earning that rate in and we're holding our retention because of our distinctiveness. The second thing is that we don't have a lot of stressed line of business. We don't have any mono-line comp that's mid-market above. I'm not going to have to re-underwrite a bunch of the business. There isn't a lot of legacy issues that are dogging us. This is really about earning and rate. This is really about getting the leverage on our infrastructure.
Yes, there is some thinning out I'd like to do, but it's marginal. The last couple of points is this notion of legacy issues. A lot of our competitors live off. The problem with this cycle is when you price, and you get pricing, that's great, but if you have headwinds because you're having reduced reserve releases or it goes the other way, you have a problem. You can look at our balance sheet, mostly short-tail lines. We don't really have that many of those legacies. We'll be able to have more transparency in the improvement in performance. Finally, and really importantly, I believe that it'd be very hard for somebody to duplicate, except for the very best that are in our space, the one or two that I think about, to build the kind of network we've built.
When Andrew talked about our ability to get chunks of attractive business about every time we invest in something or we get a little bit better, we get not only preferred shelf space, we get last look, we get a lot of their best business, we get a lot of their mature business. When they think about improving their economics, they talk to us first, when they're thinking about consolidating markets. All of that, as the price points get better, lead to a situation where we will get both scale and margin improvement over the next couple of years. Again, our view is that it's not easy, that I wish the weather was better, I wish the yields were better. I believe we're going to go from that first chart I showed you. We are average.
We don't want to be average, but we are a lot better than we've been over the last five years. If we've been average in the last five years, if you think about what we got for ammunition now, the next five years, our ability to get much better returns than the average industry player is right in front of us, and we just have to execute. Okay. With that, I'd love to answer any questions. I have the whole team here. We're going to have some time here together to answer questions. Obviously, we have the group together for afterwards as well. We can do both.
Thank you. Just in terms of your catastrophe assumptions and non-cat weather, obviously that's had to go up. When you talk about addressing that, you're obviously talking about getting more rate. Is there another component longer term, how you're thinking about managing cat, either through better risk selection-
Yeah. Nope
or something along those lines? It's not like you haven't sat still. You've done a lot with coastal stuff. We just haven't had a lot of coastal stuff.
No. I think that's right. Let's talk about that. I think that's a big point. That's why I go back to this $150 million or $200 million of shrinkage. The way I feel about it is that in most cases, the non-cat weather, that extra 3 points or so, property will get it. I look at it, and I look at it broadly, and I say the regional guys are in more deep trouble than we are. Partly because, remember, they haven't taken rate increases. We've had constant rate increases for the last three years. What happens is they get behind, so they have to get 14 if we have to get 7. Their turn is going to be greater. We're going to get away with doing a price increase and improve retention. Plus, we have more count profile than many of the national players.
I'm not too worried about that, getting that. Even on the reinsurance stuff, because we're not in a lot of volatile areas, I'm not that worried about capturing. The place that I think your point is dead on is that if you think about what's happened with cost of capital, there's two sides of it. There's the cat side of it, which is the tail. Right. There's the volatility of concentration. What we have, in my view, is we have geographic zip codes. Say we have 30 zip codes across our network, where we have so much concentration that the volatility of that weather makes our marginal cost of capacity higher than the average competitor. I'm never going to get enough price because someone's going to be able to price less for that next dollar of capacity.
What we've done is we've done the science of saying, here's 30 zip codes where that's true, and we're thinning it out so that our marginal cost of capacity is less. What's nice about us and our partner strategy is it's easier for us to do it than anybody else. We don't have 20,000 agents. What we're going to do is get rid of some of the marginal legacy agents in these territories and give our capacity to our partners. What you will see us do in some of these zip codes is shrink. Again, if that's not true in a lot of places where we can get the pricing, we'll get the pricing.
Again, my view is when you do the science on the volatility at the bottom, because if you had non-cat and cat weather, that volatility is severe, and what it's doing is it's creating people to think about spread of risk differently. The folks that are the regional companies in two states, they can't do much about it. They're not going to be able to afford all the reinsurance they'd have to buy, so they'll shrink. The bigger guys, what you're going to see is the better, bigger guys, is they're going to change their spread. They're going to thin out in some places and grow in others. What's good about that, by the way, is that we're not overly concentrated in a lot of territories where some of my bigger competitors are.
There's going to be plenty of margin to be able to rebalance. It's a great point because, again, I talked about it in the analyst meet in our quarterly call. I think it's good hygiene for almost every company to step back now and say, what's really my cost to capital, I mean, marginal cost to capital? A lot of stuff's happening. A lot of stuff's happening on these models. A lot of stuff's happening in the weather. Let's talk about the non-cat weather just for a second. This is a function of the last three years out of the 10. We have decided to just assume it, right. There's a lot of our competitors that could say, "Ah, come on. These three is not going to repeat this way. It's basically where your geography is." Let's get half of it.
We decided not to. Could that make us uncompetitive in some markets? Fine. We're all ready. If you look at where we are in a place like Michigan, we outperform everybody 7 points. Part of that is because of our strategy, we're able to hold retention and get a higher price, and we've been more constant in our price increases. I'm not worried about our disruption. We're going to track it like crazy to see if the disruption increases. Our assumption is with a little less growth, because we're sending out, we'll be able to hold onto the good business, get the pricing, and earn it in. You're dead straight. Again, I do think everybody should be thinking about this question of re-underwriting and the marginal cost. One last point, more than you'd care to know about insurance.
In property, there's inside property and outside property. Some people's pricing models are not fine enough to pick that up. Jack talked about service businesses. Part of the reason service businesses are better, doctor's office, they have more inside property than just flat roofs, right? Also, I think what's happening is the science, and we've worked on this hard. The science of pricing property is not just about geography. It's type of product, it's what class of product. Again, we've rebalanced our entire portfolio in the last three years with this notion that property is becoming more dear. Go ahead. All right.
Can you just talk about your expectation of modest premium growth for Chaucer-
Yeah
in 2012 in the context of-
Yeah
90% plus of the business getting higher prices?
Sure. Again, Chaucer's a little bit unfolding on us because of the dynamics of the worldwide pricing environment that Bob talked about. Our view was when we purchased it, and the way we think about it this year, is modest price because we're tweaking the portfolio. We're trying to take some of the volatility out of the portfolio. We're trying to take some of the mix that was more reinsurance-oriented out of the portfolio. Offsetting that is this pricing, right? As Bob said, we're a little bit suspicious about casualty and some of these other categories that we're being timid about growth. If the pricing environment changed dramatically, could that change? Yes. I would say that's still fair. The way we're thinking about it is Chaucer, their contribution to us would be modest growth and about the same kind of contribution you saw last quarter.
You'd see a pretty steady diet of that quarter-over-quarter because they're not as seasonal as us. What I'd like to see is a steady diet about that. Bob, is there anything else that we should add on that?
Spot on. We're always conscious of the overall portfolio mix that we've got, we wouldn't like one area to get ahead of ourselves. Some of the opportunities we might see on international property. Yep.
Put it closer to your mouth, you're saying. Talk louder.
Some of the opportunities we see in international property, for example, we necessarily wouldn't dive into that because it would unbalance the portfolio. I take Britt's point. There's some tweaking to be done within the account, and that's probably going to suppress us taking full advantage of those opportunities as they're presented.
For us, what's nice about it, Bob mentioned something else. If you think about 2013, the way I feel about it is I want to make sure that we deliver good earnings improvement for you to see what the mix does. What's interesting, though, there is for 2013, a couple of really interesting value levers, right? If pricing and margin gets very strong, we now use outside capital for part of those earnings stream, which we could bring back in if we were comfortable with it. As well as the synergy in our franchise agents that we see that we're going to go slow. We're going to do it carefully, we're going to do it in a targeted way, but also in 2013, we see that as an opportunity.
I think it's appropriate for us to really, in all our businesses, manage this year for profitability and profitability improvement because we're in this uncertain time and this changing time, and so we're going to be quite careful to do it. I think that's the way it's going to be for our whole portfolio.
If I could just take one more. You're suggesting a five-point cat load for the company for next year.
Yeah
Which in the context of your comments on weather.
Yeah
You've bumped it up a bit.
A lot, actually, yeah.
Would that kind of suppose that Chaucer's cat load is about consistent with-
Okay
with Hanover?
We took the whole company up to, I think we're $225 million now in total for cat load. Here, we went from a little under four to a little under five in North America. Chaucer is about a half a point to three-quarters of a point more than that. Okay? We took them up as well. The weighted average is that it's like 5.2 or 5.1 or something, that 225. What I did is I took up both. The reason why it's more increased than you think it is because our mix has gone to casualty like crazy. What's happening is if you look at the underlying mix, what we've done is we've looked at the real experience of cat.
Even though our casualty business has grown, we believe that the volatility in the marketplace around cats has gone up a little bit, and so we made the higher estimate. We think it's appropriate to do. Who the heck knows? If you look at it, this has been driven by three big-- You see, what's fascinating about the cat market, right? Unlike the non-cat weather, which has been that steady increase. The cat market, a lot of this has been primary, what I call kitty cats. It's hit us, but it's not blown through the top, right? It's this constant diet of these cat storms that are right below the limit.
When you look at that, we look at over 10 years, we look at weighted average over the last 7, we just thought it was prudent to take it to what it was and be explicit about it, that that's the way we're managing it. The other thing it does, by the way, is it makes it less seasonal, right? Because some of this is, instead of a third quarter phenomenon, some of these are spring because they're hail storms or whatever. You see a balancing in our timing of that % as it works through the system too.
On the cat topic, I wanted to ask Bob about what are the major property exposures that Chaucer currently has? I believe in Japan, it was a $100 million loss last spring. Is that what you consider a high water mark, or what are your other large geographic exposures?
We are a diversified portfolio. We would say from an RDS point of view, this is where Lloyd's sets realistic disaster scenarios. The scenarios that we run, which are probably the higher are U.S.-based, either being Gulf exposed or Californian earthquake. We have an international exposure, and we do model against those RDSs, that's where we're trying to limit our underwriters' growth in any of those territories. That was indicative of that type of return period event. We publish those RDSs so they can be seen.
The other question to follow up on, different topic, is just in terms of your growth in the U.S. and combining with Hanover and cross-selling the product into the distribution channel. Could you quantify at all what you think that potential opportunity is, and is it a matter of selling a new product through these agents, or is it replacing their current Lloyd's providers?
We've said we're going to go it slow, but you could imagine, right? Think about who does the energy aviation risk. This is all in the top 200 folks. About half of Lloyd's business is kind of U.S.-based, those top 200 folks. Again, a lot of the top 200 folks have a lot of energy exposure. They have a lot of marine. They have a lot of the aviation business. For the most part, it is using those skills and those capabilities to go to the next tier with our capabilities versus them going to somebody else, just like we've done in a lot of these other specialty businesses. There is some cases, though, where it would be a different product. What do I mean by this? Bob mentioned fine arts, right? We do a lot of marine in the United States.
We have six partners that have a lot of it. They have an international network. They have some other skills, they tend to do excess. Our ability to put our skills together to go after the fine arts market is slightly a different. It's an evolution of those skills into a targeted solution. For the most part, it would be just based on their capabilities. Again, I don't think of it as this overwhelming % that we're going to change their products. It's just that it's easy to assume in those categories, $200 million, $300 million of opportunity over the next two, three years because of our distribution and our position with some of the folks that do a lot of this business. Again, I think that will evolve as we're thoughtful about these.
As I said, when we bought them, one of the things we did good is we looked at these categories of opportunity, that we profiled our agents and said, "Who writes these kind of things?" There was a portfolio of really interesting opportunities. Again, for me, it's more of a 2013 opportunity as we think about this together. The other thing to understand is in the top 1,000 guys, a lot of these guys also have Lloyd's brokerage. It also makes us more important to a number of these guys in their whole footprint as well. Again, we feel pretty good about kind of the overlap and what kind of leverage we get. It is something we're a little bit more cautious about how quickly we do it and where we do it and how we do it.
Again, Bob, is there anything else that I should?
That's the way we're looking at it, really. It's more of a 2013 than 2012.
You talked a fair amount about the, I guess, loss ratio and expense ratio benefits of moving to a smaller group of bigger agents.
Yeah.
If I'm translating that correctly. I'm just wondering, inherent in that, you're giving the agents a little bit more leverage with regard to you, both on the loss ratio and the expense ratio side, and I was hoping you could talk about that a little.
Yeah. That's great. Again, you're talking about the reason why Our industry, one of the most interesting dynamics in our industry right now is the power of the big three in certain categories, right? You will hear that time and time. Part of the reason we don't like large accounts, particularly in certain categories, is that the power has gravitated to the top two or top three, and it's become more commoditized and more brokered. When we talk about it, we're talking about the top 2,000 agents. I showed you those first three categories, which are the most sophisticated. Now, these guys are still, when you get out of that top 10, right? Their size drops, right? The revenue base, yes, I have, say, Leavitt, who has almost $2 billion of premium. That's a $200 billion company, right? That's their revenue base.
We'll have 150 markets, etc. What we think about when you get down into that category, and frankly, our bread and butter, which is that kind of $250 million of premium, $25 million of revenue agent. We have a matrix that we watch, which is, are we important to them and are they important to us? Because that's the sweet spot, right? That's why you never want to be number 10 with one of these guys. You want to be one of the top three in whatever you focus, and you want to be big enough to matter to their economics, so that the balance is there. To your point, you don't want them to control the entire market. This is why we spent so much money on these 2,000 agents, with which we have about 1,000 of them.
What you look at is that's where you have, in my view, sophistication, professionalism, the ability to sell value, you have a balance of power where we can align incentives. That doesn't mean that we can't do business with the top 10. If we're distinctive, if we have an area where we're very good and we can add value, we do very well. The notion of doing with some of the brokers, just being broker there on large accounts, your point is dead straight on, which is there has to be a balance. That's why we don't like the large account. We don't like just the big broker. We don't like the wholesaler, where the power shifts completely there. We like value-added.
We like stuff where retention is more important than new business, because that's where when you start doing profit sharing, their incentive is to hold it, not to trade it, right? The biggest issue about when you get down to smaller accounts is all of a sudden, your incentives are completely aligned. If they traded a $90,000 account every year, they'd make no money. If you can do value-added, it aligns incentives. That's why almost everything we do is geared to those kind of agents. I'd say there's also a qualitative thing. We have fired a lot of folks in that top 2,000 that we call turn and burn shops, because our strategy doesn't work if you turn the business too much.
You can't do the value-added stuff Jack's talking about if they don't hold the accounts with us, if we don't go into it to try to keep every single account. What we've been able to do is select folks who have operating models that support us. That's why, to me, our economics build so much, because we can almost look at our retention and pretty much project it in every business we go into. Your point is really important, and I would say the difference between people say you can't grow in our business, and a lot of Europeans and other folks, smaller companies that have grown the business, say they go to LPL. Typically, what people do is they go to 12 wholesalers and three big guys. They go to the large lawyers because it goes faster. The issue is you have no power. You're not distinctive.
You're just one of 25, the chance of making money is very small. We do all those things the opposite. We go to the next tier down. We go where the operating model matters. We go to the average policy size that's different. We build an operating model through expense that makes their economics better, and we put it to bed. That's almost what we do everywhere. In some of the specialty places, though, if you're really distinctive, that's fine. If it's an oligopoly, if you will, which is some of the global things that Bob does, where we're one of three guys that really is good at this, then the balance of power is different.
We work hard at this because, again, the history of our industry is full of folks that grew too fast in places where they had no power distinction, it just comes back and hits them. Again, I would tell you, as you read people, if you watch some of the best companies in our industry, when I look at the three or four guys that I truly respect, they avoid all commodity business too, because it's really hard to go to the highest markets and just be one of 20. Okay. Thank you so much for your time and attention. I really appreciate it, there is lunch here for everybody. Thank you very much.