Good morning, and welcome to The Hanover Insurance Group 2014 Investor Day. For those of you whom I didn't get a chance to meet in person, my name is Oksana Lukasheva, Vice President of Investor Relations. We are very excited about today. We are very happy to see you here. Thank you for coming. Thank you for taking time from your busy schedule to hear the Hanover story. We have a very busy agenda today. Fred Eppinger, our President and Chief Executive Officer, will introduce the main themes of today's presentation and provide you an industry backdrop. Next, Dick Lavey, President of Field Operations and Chief Marketing Officer, will bring home one of the main ideas of today's conference, which is that our distribution strategy is our main competitive advantage.
After that, Jack Roche, President of Business Insurance, and Andrew Robinson, President of Specialty, will discuss how we live the strategy day in and day out, and how it helps them build and develop each of their businesses and drive profitable growth. Next, Bob Stuchbery, our President of International Operations, will discuss Chaucer and explain why we believe we are best positioned to compete in the current Lloyd's environment. Finally, David Greenfield will put it all together and explain what it means for our numbers, our recent performance, as well as what it means for us in future results. Please pay attention to the last slide of David's presentation. We will have a little test at the end. Seriously, we would like to take a couple of minutes of your time to fill in a quick perception survey at the end of the program. Back to the agenda.
We will have a break in between the presentations at around 10:00 A.M. Our goal is to get to Q&A at around 11:45 A.M. Our preference will be to take all of your questions at the end when the presentations are completed. We will have lunch once we are done with Q&A. We invite all of you to join our management team for lunch. Finally, the last housekeeping item on my agenda today is I need to draw your attention to the forward-looking statement on slide three, where we discuss forward-looking statements and non-GAAP financial measures that will be used in today's discussion. With that, I turn the floor over to Fred Eppinger, President and Chief Executive Officer.
Good morning. I can read that. That print was so big. As Oksana said, what I'd like to do today is introduce our meeting, give you an overview of the strategic position of the company and how we feel about the institution. Then we'll do some deep dives to give you some real texture. Dick will give you some texture about what's happening with our distribution strategy, which is quite critical for us, both for stability and profitability, but also for growth. Then we'll do a deep dive in three of our businesses to give you a sense of where we are on those businesses and why we feel we're so distinctive right now.
What I'm going to try to do is set the tone a little bit on the overarching themes, give you a sense of where we believe we are in our journey, and also I'll do a quick sometime with Personal Lines because there's a lot going on, a lot of people talking about Personal Lines, we won't do the same kind of deep dive as the other businesses, but I want to talk a little bit about the opportunity that we see in Personal Lines for the company, because it's quite significant. Let me just start with some messages.
For those of you that have followed us, you know that this journey started about 10 years ago, and it's been singularly focused on creating a franchise that could be distinctive through the cycle, that the products were distinctive enough, and the position with the distribution was stable enough and distinctive enough to sustain good margins. We've done a lot of work to try to get to that position. What I would tell you to start today is that we're very well positioned. If you look at what's happening in the market and some of the issues that are unfolding, we feel terrific about where we find ourselves, and we are very confident in our ability both to sustain those kind of target returns, but also to continue this ability to grow in a consolidating industry.
We're in a very good spot right now, and I'm going to give you some information to demonstrate the kind of momentum we have and the position we find ourselves. The second point I want to talk a little bit about is this notion of distribution, and Dick will do a lot of deep dive and try to give you some color, if you will. What's happening is there's a lot of change in our industry. There's a lot of consolidation in the distribution, and we find ourselves with a lot of great positions, really preferred shelf space, if you will, with some of the best agents in the country, which just gives us a lot of confidence in our ability to access, identify, convert the best business.
What you will see in many of these presentations is example of how we have this differentiated insight into the market, where the best business is, how to get it, how to convert it. How to work closely with some of the best agents in the country to make sure that we continue to improve and to grow. I'll talk a little bit about the components that make that real. Some of the distinctive positions we have in some of the businesses that we believe right now across the board, we think we have some very unique positions, very value-added positions, very, what I would say, defensible positions. A lot of our competitors have essentially moved toward a more commodity approach, whether they go through wholesalers or aggregators, or maybe they go all to a black box.
What we've tried to do is identify the most attractive segments and actually have built the distribution, the access, the information to get at some of the best parts of our business. It's starting to really show up in our portfolio. Finally, what I'm going to touch on a little bit, and is an important message, is that we're very confident in our ability to both continue to grow, but also to continue to enhance margins. We have a lot of transparency into all the levers. We obviously have a lot of businesses that are maturing, which gives you a lot of line of sight to how the improvement is going to happen. We feel very good about the journey continuing and to create a lot of shareholder value in the next couple of years. Those are the key messages.
Let me just start with an overview for people that don't know us that well. We have reached $5 billion this year as an institution on a gross premium basis. It's nice diversified business, nice spread of risk. It's about 29% personal lines, about 29% core commercial, 42% is specialty split between international and then domestic. It is a much different company than it was a few years ago with the breadth and the scale that we have. Another way to look at it is the notion that we are now a national company with a little bit of a global reach. We have $4 billion in the U.S. We have about 4,000 employees, a little over 4,000 employees in the U.S. Importantly, we have 41 offices with a lot of distributed employees that are almost embedded in our distribution partners.
Internationally, we're now $1.4 billion with about 800 employees in eight offices. What's interesting is if you look at the other two or three national players that are as broad as we are as far as product, two of the three have Lloyd's connections as well. We have a portfolio that is very similar to some of the best companies that we compete against. It's quite a different business than it was before. Again, the strategy, I'll start with the chart that people that have watched me over 10 years have seen many times. This strategy and this vision is very clear, right? We're trying to create a distinctive portfolio, a stable portfolio with attractive business and attractive segments that allow us to do top quartile returns, what we call 11-13 through the cycle. That took a lot of work on a number of items.
One was to build real preferred position with the best distributors in the country. The folks that are growing and investing in their business that know how to deliver value. How do we get most of our business aligned with those folks and have preferred shelf space so that they both work with us but also help us grow? Okay. That has been a big part of what we've done. We've achieved that. I'll show you that we now have $4 billion with our top 1,000 distribution partners, which really gives you comfort as far as the alignment of what we got going on. The other two pieces are just as important. We worked hard on this notion of a distinctive portfolio that could provide value. We're not a commodity player. We don't believe in kind of coming in and out of markets randomly.
This is about setting up distinctive positions in many parts of the business. We've created a tremendous portfolio that is fundamentally different than when we started, that allows us to get preferred shelf space, that allows us to get at the best business, then we surround it with the talent, the underwriting execution, the operating models that give us the flexibility to both help us execute against getting this good business in the door, but also to help the economics of agents, right? To give us an ability to help them share shifts, an ability to help them win. The combination of these things have really distinguished ourselves in the marketplace. Our strategy, while the same over the last 10 years, has fundamentally changed as we've built our capabilities.
Where you see us now is essentially we're finished, if you will, changing the reconfiguration, building these capabilities. What we've been doing is really executing against this new position, this better leverageable position to increase margins and to grow. That's really what you've seen us do in the last couple of years. If you think about the environment, why do we like our position? Our market is always interesting, right? There's a lot of things going on. There's a lot of new entrants here and there. Let me just take a step back and say, why do we like our position a lot right now? Why do we believe we can profitably grow and flourish and create shareholder value in the next five or 10 years in a market that's kind of evolving? Let's just start with carriers.
We all know how much new capacity there is in the reinsurance market and how some of the capacity, particularly in the national account market and the broker market, is coming into the business and it's easy in, easy out capacity. We also know how there's, at the bottom end of some of these segments, there's a lot of commoditization, a lot of black box, a lot of talk about just price-based competition. The other thing that's going on in this industry, which is really quite interesting, is that there is a disruption in a lot of the segments of the business because of volatility of weather, what's happened with a soft market and yields, what's happened with this notion that the small regional companies can't keep up with some of the innovation or product evolution that's occurred.
What you have is there's a lot of turn, there's a lot of underserved segments That are emerged in a big part of this business. The other thing you're seeing is some of the national players and some others are really becoming a little bit more commodity oriented. They're withdrawing from some of the local access business, they're going more to a black box, more centralized approach. Even in a period of excess capacity in some areas, there's a lot of parts of the business that are underserved, that are quite stable and quite profitable, that are embedded in the agency world. Let me talk about the agency world. What's fascinating about the agency world is while that channel is very stable, and I read a lot of things that just not correct, the agency channel is actually quite stable, even in personal lines.
If you look at the share of personal lines of the agency channel from 1995 to 2012-2013, it's flat. What you're seeing is a stable channel growing in some areas as the captives shrink in small commercial and the independent agents grow. It's a very stable business. What's interesting within the agency business is a lot of consolidation. Right? The people are talking a lot, well, you see a lot of the public companies, it's very visible, all the roll up work that's being done. What's more interesting is kind of behind the scenes, some of the private money, about 41% of the capital that's going in to consolidate the business is outside capital. You're seeing consolidation, and the winners are getting bigger. You're seeing volume consolidate around some of the better players as they consolidate the business.
Ironically, the number of agents has gone up, which if people look at, they don't understand because the captives have shed a lot of agents which become independent, or they're letting captives write business from others. You've got a lot of change and turmoil in the market. The other thing that's very interesting about the agency market is that there's this trend to value, this trend to sell industry solutions, sell packaged solutions, to really think about agent economics in a little bit more profound way. It's partly because of the professionalism of a lot of these agencies, but it's also because technology and other things are enabling that to happen. You're seeing agents really changing their economics by thinking about retention more aggressively, by having higher yield and conversion rates, by doing more around solutions. There's a lot of things going on.
Well, we believe if you put our strategy against that, it's almost perfect. We have one of the three best national distributions now. We have more knowledge, local knowledge about what's going on in the independent agency channel than any other company now. We are embedded in a lot of these local markets to have great insight about where the most profitable segments are, who is winning, who is losing. We have the ability to actually have tools to help agents win in this environment. The amount of money that we've invested to really build this distribution, to build this product portfolio, has been well timed because there is a lot of opportunity as things happen.
I'm going to show some examples of some of that in the businesses, when the businesses go through and talk about some of the examples of what's happening with various agents or various segments, you can see that time and time again, how we're able to get at very profitable pools of business, and move them to us in a very effective way, because of this development of a network and insight and data that we've built through our strategy. Again, we feel very good that we're well positioned, to continue to get better and to grow. For those of you that don't know the history, I thought I'd just take a second because it is a little bit informative about our company. We are the 38th or something oldest company on the New York Stock Exchange, we've been around a long time.
We think about the company in the last 10 years, and we call it the journey, because 10 years ago, the beginning of the 2000s, this was a company that was troubled. We were dragged down by our variable annuity business, our broker dealer, our GICs, all of those businesses were in trouble. We did sell much of that portfolio and focused on the P&C business. The P&C business was essentially a personal lines, old regional personal lines company that had been neglected and was about 70% personal lines, 30% in four states. We worked hard at the beginning to get it more profitable, get it up to speed as far as its products and its capabilities. What happened in the beginning of the crisis is that we were able to improve the financial condition of the company.
We got a number of upgrades, and at that time, we were able to go forward with our strategy to make sure we could try to improve the portfolio, really position ourselves in some more distinctive positions, create geographic spread and penetration. We did a number of transactions, and really changed the portfolio to be able to have a portfolio that could sustain good returns, that was a distinctive national franchise that the best agents wanted to be part of, that could actually do something during this consolidation. Now we're done with most of that work. Where we are now is really about leveraging that position for enhancing our margins and in growing. That's really kind of the history, if you will, of this company over that time. If you look at the numbers, obviously they changed dramatically, right?
The mix of personal lines commercial changes dramatically. We more than doubled earnings during this period. Even though we spent a lot to invest in operating models of people and businesses, we were able to go through all of that in a pretty thoughtful way, and enhance the value of the company as well as the position. Again, the company's evolved quite a bit for those that haven't been with us. As I said, I believe that most of the work is really done. There's more opportunity, tremendous amount of opportunity, but you won't see us change the mix dramatically. The geographic footprint is established. The partner, kind of the ray of partners has been established. We are now really executing and leveraging this position in the marketplace. Let me start with the value proposition and distribution that Dick will spend some time on.
Again, it's not that complicated. The notion is pretty simple. We create a value proposition for the best agents in the country that's quite unique. It starts with this notion of a distinctive product set around value added that allows agents to not only win the best business, but to retain the best business. It is a broad product portfolio around value-added segments that is relevant to them. The second part is this notion of franchise value. We have fewer appointments than the national guys in almost every MSA, and we have fewer appointments than every regional company that is their big market. Our agents have something that others don't. It is very scarce.
By the way, that limited distribution is even more limited in some of our specialty areas and in some of our industry solutions where we make sure that those people have the skills to deliver this. They have something that others don't. If you go to an MSA, a lot of our major players, there'd be hundreds of guys that have the same exact contract. We'll have 10, we'll have seven, we'll have 15. The ability to have something that's unique is very valuable to them. If you bring it to them also, the third part of this is really this unparalleled local presence of underwriting resources, tools, the ability for them to act quickly to take advantage of opportunities maybe after they buy an agency to understand what they bought and then consolidate business is unparalleled.
This value proposition around partnership is very powerful for the agents that are investing in their business and trying to build a growing profitable business. Again, we feel like this is distinctive. It is something that the best agents in the country want to be a part of. Before I go further, though, I want to talk about the agency channel, because again, I find that many people don't quite have a sense of what the business is or the market is. Let me just take a sec to go through this. Of the $500 billion market in the U.S., $300 billion goes through the agency channel. Okay? It's a very stable number. It holds its share. It has held its share for a very, very long time. If you look at the segments, they're split.
It's about 30% personal, 26% small, about 26% large, and the rest middle market. That $300 billion is distributed through 35,000 agents. Okay? Not every agent is created equal. There are a number of segments in the agency world. We've simplified it to these, but we actually have a pretty in-depth way of thinking about agency segments and who's good and bad at what they do. If you look at these 35,000 agents, they start with the top three brokers that we all know that control roughly $60 billion of the P&C business. The next seven are probably the most active. People think of them a lot right now, because they're the public companies. A lot of those are the public companies that are consolidating.
They're buying a lot, or the private companies that are consolidating a lot that we call kind of the top 200 or the super regionals. You have about 1,500 regional agents that tend to be very good in their location, very sophisticated, but limited typically in their geography in where they play. The midsize and then the small. Let me make a couple comments about this. People talk about comparative raters and commoditization and everything. What's interesting about the business is when you look at what's really happening, particularly, say, the midsize agent and the small agent, they're not all the same. Let me go to the small and talk about three types.
There are about 500 agents in the country between the fourth category and the fifth category , we call specialty agents, that'll specialize in surety or marine, or maybe they're an LPL agency, or maybe they have an industry they focus on. These are folks that are very good at something. They are typically very high margin, they have unbelievable lifetime value of their accounts, and they're very valuable. What you're seeing is they are hard to find, and once you get them, they're worth a lot. Partnering with them is quite valuable. For us, we have a number of them. What's also interesting about them is they are some of the most valuable agents to be bought by the consolidators because they're high margin.
When we talk about franchise value, what you see is part of what we're trying to set up is that a lot of our relationships have a portfolio of skills and capabilities, some of which are these specialty agents and specialty positions that they are acquiring. They're trying to get better and better margins themselves. They're trying to bypass wholesalers and do some of this themselves. Again, part of the small is that. The other part of the small, the one that we spend our legacy agents are with, is what I call community-based agents. If you look across the country, there is a number of rural areas or small cities where you have community-based agents that really are embedded in those small areas. They typically have fewer carriers. Great business because it's very stable. We have a number of these.
We probably have 500 of these agents. We'll write 40% of their business. They're very stable, they're very capable, but they are very narrow in the geography they typically are in, and they have long-standing service arrangements with the small commercial operations locally. They might joint venture with a more sophisticated agent to provide some service, but it's a very stable business. The segment that people love to talk about, though, is what I call this flow-based. What you see, particularly in suburban areas and a lot of these ex-captives, is there's a lot of agents that turn That are small, that use comparative raters and aggregators to get their capacity. They don't have a lot of direct appointments, but they'll use aggregators. A lot of the national players, this is how they get distribution.
They go to the aggregators, they get to these folks, basically they shop a lot, and they sell mostly auto, some small commercial. Again, some are good, some are not. They are in the market and very visible in the market, but they're a small share of the business. They are very visible. You've seen articles written about them because of various firms that say because they've spun out from captives, and it's an interesting topic. This world that we are in has a lot of dynamics. When people say they have 8,000 appointments, we'll say underneath those answers of what they do with the distribution is really important. We don't use wholesalers. We don't use aggregators. We have direct appointments. We have deep relationships. We have more knowledge of the folks we work with than anybody else.
That is worth a lot. People have called us the Procter & Gamble of our space, because what we've done is we've built products that were all about shelf space and insight and knowledge about the distribution and how they go to market. If you look at our distribution, what you see is we've selected a portion of each of those segments to really partner with. There's a lot of great agents that are small. There's a lot of great agents that are big. There's a lot of bad agents that are big, depending on how they go to market, how they shop, how they sell value. For us, we have covered, if you will, about $120 billion of the business. You can see the mix of our coverage from our appointments.
While we only have 2,200 agents and 2,800 locations, that's an important point, too. It's not enough to point a guy and then have a central location in N.Y. The reality is that the best agents have multiple locations and what we call planning units that are relevant to match up with and to understand and to know the business and where the good business is, the bad business is, and align with them. We have 2,200 agents, 2,800 locations, and you can see the mix of business. What we believe is we've created, for a lot of the better agents, some real franchise value locally. Something distinctive and the ability to have more stability because of it. I'll give you an example.
If we are in private schools, one of our competitors is in private schools, but because they use wholesalers, and they'll go direct, and they'll go through agents, they have 300 distribution points just in Massachusetts. We have 12. When we compete, it's professionals that know how to deliver private school services, and they compete against other professionals. They have everybody, a lot of which don't have any skills. The stability of our agent's business is greater because it's a unique package, unique coverages, but they're competing with professionals. Again, that plays through in a lot of these segments as we really create franchise value for our agents. If you look at what's happened, we've gone from a handful of $ hundreds of millions when we started 10 years ago. The best agents, we probably had $300 million with them.
We now have $4 billion. Why is that important? Because you have aligned incentives. A typical agent will make 12%-14% of their revenue from profit sharing. The best markets that are aligned, and incentives are aligned, are much better profitability-wise, growth-wise because of that alignment. When you look at this concentration we now have, we feel very good because we have alignment with many of our best partners across the system. The other part of this is that the upside is enormous. Even with 1,000 that we're so well-situated with, we probably have 4% share. The headroom we have is tremendous. We have great alignment, great headroom. Remember, a lot of our guys are also buying other agencies. That also gives us an opportunity as they think about improving their economics.
A typical acquirer, say you bought 20 agencies over the last couple of years, you might have 150 markets. That's not the way they're going to run their organization going forward. They're going to try to go from 120 markets down to 30. There's going to be tremendous opportunity as they match up with better partners on how to better serve these segments in a more efficient, effective way. This position we have, while it was expensive to build and hard to build, and the data we've created is hard to assemble, it is a wonderful asset if you can deliver great products and great underwriting. We believe we feel pretty good about where we are. The product piece is important because regional companies know in their two states or their three states, they know their agents incredibly well.
The problem is they don't have much skill. They're very narrow in what they can do. They may do a little personalized, a little small commercial, but they don't have the breadth to get to where some of these national players can get because of the skills they have. What we had to do also is create good distinctive capabilities in a broad enough array so that we could be important, relevant, get to 15% or 20% share with some of these folks. What you see is we are right now have one of the best product portfolios in the industry. We're as broad, really, if you look at the couple of really good nationals, we are like them.
When you look at specialty folks that are quite good that we compete with, the issue with the specialty folks is they're so narrow, they're not that relevant to an agent. They'll do something with them, but they're not that relevant because they only can do a couple of things. Or the regionals that don't have the sophistication to do a lot. What's happening when you get these agents that are better and more sophisticated and growing, they have fewer options if they want to consolidate and align their incentives with fewer. For us, this creates a tremendous opportunity because of our breadth. Having a lot of breadth is worth nothing if you're not distinctive.
As you know, what we've tried to do by buying some platforms and businesses, building teams, we've tried to build a distinctive position in all of our businesses that are unique, that's about value added. We tend to focus on small face value that are hard to replicate. In all our businesses, we feel very good about our position now. If you look at small commercial, and Jack's going to go talk about it, our positioning against that $70 billion market is quite unique. The way we can write the non-commodity, the non-bought business is probably the most efficient and effective in the industry now, and that's a huge business, especially for regional companies that can't apply the technology and the wherewithal we can. It's an enormous opportunity.
I mean, one of the sidelights of all what we do, $100 billion in the agency channel is with little, small regional companies that are unsophisticated. They have great access to stable good business, they're very unsophisticated in their products, their service centers, their tools are not keeping up. That's going to go somewhere, guys. Our view is that's one of the really interesting opportunities as we continue to penetrate these agents. Our small commercial business, again, has a very unique value proposition. Our middle market is now, majority of that is really industry solutions, very unique, very focused. Our specialty business, Andrew will go into, is very much about direct to retail and specialists with very distinctive capabilities in some really interesting areas, high margin areas. Of course, our international business is really about a portfolio of specialties.
First Dollar, Excess, a little bit of treaty, but it's really about very distinct positions that can sustain good profitability through the cycle. In personal lines, again, a lot of talk about personal lines. We are quite bullish on the personal lines market, and I thought I'd take a second to just kind of jump in a little bit and give you our perspective on the personal lines business, particularly the agency personal lines business, and why we're so bullish on the ability to kind of sustain a nice profit in that business and some growth as well. If you look at the personal lines agency business, it's a $90 billion business. As I said earlier, there's a little bit of a misperception because people watch auto only. The share of personal lines in the agency channel has been very stable since 1995.
What you're seeing, we're actually growing in the home and some of the ancillary lines because of disruption of the captives in coastal areas, et cetera. As the population ages as well, what you have is people that have things. You need the ancillary coverages, the umbrella, the liability coverages. It's a very robust, interesting market. We look at it, and we have multiple segments, but I've simplified it in this chart down to the two segments that kind of tie with some of our competitors who've come up with some stuff. It's interesting how much this is similar to what they were saying and actually similar to some of the work I've done over the years when I was at McKinsey and then here. About $65 billion of this $90 billion is what I would call value-added customers.
They might have split accounts, but they have needs in many different lines or they're full accounts. Right? About $25 billion is kind of minimum coverage, single line of business. It'll have the non-standard in there. There's a couple of categories. Okay? That percentage is pretty interesting because I looked at this 20 years ago, it's kind of the same. What's interesting is these customers, these high value customers, have the best lifetime value. They have very interesting characteristics that aren't going away. It's not about the internet or anything. It's literally about their needs. It's about what coverages they need and how they need them. It is, again, a very interesting opportunity for the independent agency channel because they are a good advisory channel, as are some of the captives and some of the affinity business.
The directs haven't been able to do it very well. A lot of the regionals struggle with it. It's a very effective channel to do advisory for this kind of customer. If you look at our market, our agents, there is roughly $30 billion of that business, personalized business in our agents, and $22 billion of this high-value customer. Importantly, about $10 billion of that is in our states that we're active today. Okay. It's a very interesting mix of folks that are split accounts, but they have the coverages and full accounts. It is a very interesting market. I would tell you, the agency market is both high profit. If you look at the EBITDA of a typical agent, a personal lines account is over 20% EBITDA, it's the highest profit of any segment they're in.
What's interesting is the mono line auto is one of the lowest profits because of the turn and the endorsements and the lack of premium of just a single auto. What you see is it is a segment that they serve well and they do well in some cases, but the customer is underserved. If you look at the business, the businesses in the agency channel, a lot of the $60 billion, it's with regional companies that don't have sophisticated products. They don't have a single account. They don't have same anniversary date on the bill. They don't have a lot of additional services. What we've tried to do strategically, as you've seen over the last two or three years, is change the demographics of our business, focus on full accounts, provide various services.
In the last year, we introduced Platinum, which we think is the best product and solution for this segment that exists. There's something similar in one of the captives, but it's in the independent agency channel, essentially the best product for what I would call kind of near affluent and account-oriented business. If you look at what we do, it's not just about coverages, right? It's about the ability to identify these customers. If an agent uses some form of comparative rater, it triggers it, and it pops it out and says, "This is somebody that has the attributes that would be a good account." Then it preloads their agency management system that allows an agent to sell value and talk value.
We also have created a lot of coverages and services that allow an agent to look at their installed book and say, "Who would be apt to like this kind of product that would help them?" Because what you see, if you think about whether it's the material we send out or the services we surround it with, we even have an outbound campaign we've done a lot of research on. How do you reach out to customers that affect retention the most, when, how? We do that in our center, and we help them do it themselves. If you package all of this product is, for us, a wonderful opportunity to go into the independent agent and help them better serve their best customers that they have control over, that they've had access to.
When these agents are consolidating each other, the more sophisticated agent buys a bunch of agents, we're able to go into the agent they buy and better serve those installed customers with this kind of product. Again, we get excited about a very targeted approach to personal lines around the value added, attacking one of the best segments there is, and serving it in a distinctive way. If you look at our numbers, and Platinum is young, so it's early days, but we have marched in this direction, frankly, for the last three years about really being the best market for these higher value accounts. What you've seen us do is change the demographics of our book. Our book is very heavily accounts. Virtually all our new business is accounts.
If you look at how we've reacted to the new weather environment is an example of how much value this approach has. You think about 2010, 2011, 2012, the last five, six years, you've heard us all talk about how we have to assume that the dynamics in weather have changed. You've heard us talk about how weather-related losses have gone from 17% to 20%, and we're going to price it. We have put through enormous price increases in a lot of states in our book over the last four years, as have other good companies, too, as people have adjusted to this environment, but we still retained 80% of the business. This motion towards account or better customers in a certain way is a very robust segment that we changed nicely.
Obviously, it's helped our profitability as we've attacked the weather and some other pricing, and we think the opportunity for us is significant. For us, it's just part of the portfolio, but we're quite pleased and happy and focused on, again, going after one of the segments that our partners have that we think we can serve well and serve for a long time. Okay? That's the personal lines piece. I'll jump back out and say, okay, the last piece that we built to try to be distinctive is this network. Again, Dick will talk a little bit about the kind of fabric of it. We have, of any of the national players, we have more distributed employees as a percent of our total employees. We have probably 1,800 of our 4,000 domestic employees distributed, about 300 of our specialty employees.
This is about really being close to spend the money on the automation and the efficiency of renewals and upfront so that our professionals, our front-end professionals, can be closer and more embedded in the distribution. To identify the opportunity, react quickly, be able to cherry-pick in a lot of ways the business. That has taken some time to build. There is probably two or three other national networks, but we believe ours is a little bit more nimble and a little bit more focused on the target segments. It is something, in our view, that is very hard to replicate. If somebody from Europe or somebody wants to consolidate the U.S. market, it'd be darn hard for them to just do this overnight.
That's why so many people, when they come into the country or they try to grow in our business, what they'll do is they'll go to the brokers, and they'll go to the aggregators because they can't afford the time and attention it takes to build this kind of distribution. This consolidation, if you will, that I see coming from the regional companies will be very hard for others to just do because they don't have the ability to have access to the business. Again, it's an interesting place we're in. The team, obviously very attractive. The point I want to make about this is that of the 5,000 employees we have today, 4,000 have come since the journey started. We have assembled almost an all-star team. We worked very hard about the best talent in these businesses.
We have extraordinarily talented people with fantastic experiences that are very aligned against the strategy. I challenge anybody who wants to get to know us better to walk the hallways in Worcester and ask any random person what we're trying to do with the strategy is how they fit in. It is a very aligned group of people that understand that we're trying to build a world-class institution, it's created an ability for us to have the best people want to work for us. Our ability to, when we go into a territory or a region or whatever, it's very easy for us to get the best folks to join us, which has helped us out along the way.
The last point I want to make before I give it to the folks to kind of do some deep dives is I want to talk a little bit about our commitment focus on doing this the right way. A lot of folks grow in the business but don't grow so well. What we've done is completely reconfigure the company. We've doubled the company in some ways, and if you count all the stuff we got out of, we've tripled the company over the last five, six years. We've done it very thoughtfully. If you look at what we've tried to do over this period, when we first started, we missed the hard market, right? We missed early on. We were not very good in the early 2000s. We shed a lot of business.
We did get pricing on what we kept, a lot of pricing, but we were actually shrinking. If you look at our results over the last five years, six years, seven years, we've had reserve releases, but it isn't back because we've made so much money in 2003 and 2004. It's because we've been conservative about our picks and how we've managed the business, and we've been able to be thoughtful about our growth. When we grew, what we've done is with the rights deals, book rolls, book wins from a mature business, some startups, some new geographies, but in a very, I would argue, thoughtful way through the period, which has led us to consistently have better loss ratios during this whole period than the regional companies and many of the nationals. We're not all the way where we need to be.
We've got to get to target returns. We still have more work to do. I say that we've done this the hard way. You saw it from those early stats. We took expense risk often instead of loss risk. Our expenses got high because we invested in the talent, the infrastructure. We didn't grow foolishly. The business is outstanding. The IRR on almost every initiative we had was far and away better than our target. We feel very good about what we've done. More importantly, we feel good about the progress we're going to make over the next two years to continue to improve margins as we grow. I'll make one other point about this positioning and how we're positioning the company financially. The other thing we have worked hard on is volatility.
Our history as a company was really as a property company. We were 70% personal lines, and we were 70% property. We were very concentrated geographically. As you can imagine, in the last decade, with what I call the emergence of intense kitty cats, volatility has been an issue for our property. We've worked hard to thin out. What's great about our strategy is that what has happened is as we've gotten rid of these micro concentrations with legacy agents and focused our capacity on our partner agents, which are much more spread and diverse, we've been able to improve both our profitability but also reduce our volatility.
If you look at the last three years, and we've got about probably $40 million more to get off of the rest of this year in some of the zip codes for concentration, we got off of $400 million worth of business to reduce micro concentrations. Most of that was done through we did some renewal rights deals. We did some joint ventures with other carriers to take on some of the property-only business. A lot of it was to shed some of the legacy business that we felt created, it wasn't unprofitable per se, but it was volatile because of micro concentration.
We believe that both we are set up on a lot of levers to improve profitability, but we're also in a great place because of our casualty mix, because of diversity of geography, because of this micro concentration to also reduce the volatility of the business. Finally, I want to say that if you see what we're doing this year and what we've talked about at our earnings calls, et cetera, we are very focused on all the different levers that allow us to enhance margin and profitably grow. Obviously, our mix helps us a lot. Our mix is we're growing in the highest margin businesses. We're doing a little bit more targeted underwriting in some categories, as you know. We got expense leverage from the maturing of this business.
All of that with the profitable growth we have gives us a lot of confidence in any environment over the next two, three years that you're going to see both good profitable growth and margin enhancement. Again, we are focused on our strategy, on this distinctiveness through the cycle, and we think we're in a pretty good spot. I'll close and hand it to my colleague with four points. First, for those of you who've been with us a long time, the building of this organization, the changing, the transformation is essentially complete. The spread, the product set, the alignment with the partner agents, we've made huge strides, and we feel like we are there. What we are all about now is delivering top quartile returns and profitable growth.
By leveraging this position that we now have, these opportunities that are presenting themselves to us because of that is what it's all about. We are focused, and you'll notice in all the deep dives, real examples of how that's working and how we're executing against it. We believe in any kind of environment in the next couple, three years that progress will just continue. We feel pretty good about what we're doing, our assumptions, and where we are. With that, I am finished, and I think I'm supposed to introduce Dick Lavey to do the distributions. There you go, Dick.
All right. Thank you, Fred. Okay, good morning, everybody. I'm excited to have some time with you this morning to talk to you about the details of our distribution strategy. Something that I'm very passionate about because I've been involved in it really in some shape or form for my entire 10 plus years here at The Hanover, and it's really, really exciting. I'm going to kind of take us down a couple notches and try to put some meat on the bones. Fred did a great job talking about our strategy I'll touch on some of those points, but I'm going to try to make this very real from a ground level view. I like the way Fred said that, the fabric of what we do because it really is, what I'm about to talk about is the DNA of our company.
This is who we are and how we spend our time together. It's exciting. Let me start with some core key messages that you're going to hear throughout this presentation. The first is that we really do believe this to be unique. There are no other carriers in our market that are approaching the market in the same way with this national network, very limited distribution, incredible transparency, driven and fueled by an operating model that's local adults, as we call them, at the point of sale with authority and supported by tools that really make it happen. That's unique, and we actually would say that it's becoming more unique as we see other carriers behave differently. In some ways, we're standing out from the pack a little bit more.
It's really the combination and the alignment of the components that we think make it powerful and hard to replicate. You can't just say, "Hey, I want to adopt the same strategy." There's a lot of pieces, and it's really the connectivity of all those pieces that make it difficult. At the core of it is something we can't say enough, and Fred referenced it, is this intensity of understanding and profiling of our partners, the kinds of business they have, the way we match up, taking opportunities and matching them to our capabilities. You're going to hear that in spades as you hear Jack and Andrew talk about their examples. We would say we understand our distribution better than anybody else in the industry.
We know that's a pretty bold statement, but we would challenge you to call some of our best distributors, and I think they would confirm for you, I know they would, this intensity of understanding that we have of each other. There's real evidence that this strategy is working. You look at top line and bottom line, and we see on the top line side, categories of agents that are commonly known to be the best in quality, our Assurex, the best practice agents, and we're seeing double-digit growth with those guys. Very importantly, the quality of business, the loss ratio performance, the pricing persistency, the mix of business, we look at that intensely. As you heard, we zero in on it based on this very detailed profile that we have. Then lastly, what makes it exciting is that there's tremendous upside.
We are a place that studies market share intensely, we understand our position in each business, in each agent, and we see huge upside. We've made a lot of progress with our agents. They've been experiencing it and grabbing onto it. We see a nice trajectory, but we still look at it and say, "Wow, there's a lot of headroom in the best agents in the country that we're going to penetrate." Really, this partnership strategy, I want to make sure it's really clear, it's way more than an agent relationship strategy. That's very important, and the relationships we have are intense, but it's about business economics and agency economics and a strategic commitment to each other and fueled by purposeful analytics that help us fuel this thing.
I'm going to go through this first part pretty quickly because I want to get to the heart of it, the meat of what we do and try to expose you to some of the tools that we've built and that we're using on a daily basis in our markets. I want to just ground a little bit and pick up on some of the things that Fred said. Here, Fred talked about the size of the IA channel and how we zero in on a fraction of that. I'm going to put an exclamation point on that because 2,200 agents, it's what? 6% or 7% of the market. That's compared to our competitors that are working with 30-40% of the agents. It's very tight, and as a result, we're able to really understand what their business is all about.
That's the superset of our businesses. When you peel back the onion and you look at small commercial, we might work with 1,800 agents. When you look at personal lines, which is half the country, we work with 1,500 agents. Andrew's businesses, it's even tighter. One of the powerful aspects of our model is that we do have alignment on distribution, and I'm going to show you a little bit more about that. It's not 100%, as you would expect, across businesses. We understand where we're going with each business. It's the $120 billion that Fred referenced, and we really do understand what that business looks like. Let me just talk a little bit more about that. Who are these 2,200 agents?
We talk about winning agents, and while I can't stand up here and say that 100% of our agents match 100% of this criteria, certainly the guys that we're having the most success with and the guys that we would suggest are the best agents in the industry absolutely do. Growing agents, a growth mindset. They're hiring and investing in producers. You talk to the best networks across the country, they're hyper-focused on this due to the perpetuation issues and the aging of our industry. They're acquiring agencies and consolidating. They have a real value orientation in their DNA, particularly in not only the flow businesses, but in the industry segment side of the thing, in the middle market space. They're investing in specialization. To be value-oriented, you need to show up at an industry.
When you're talking to a manufacturer, you need to show that you really understand their business and the exposures that they face. The best agents in the country are really helping their producers be those experts in those industries. Lastly, focused on the efficiency of the flow businesses. Do they really understand what's happening in their shops? You'd be amazed, several don't. They really understand how much time they're spending on accounts that don't generate a lot of revenue. The best agents out there really do focus on the efficiency and making sure that they understand that I can't touch and over-serve certain aspects of the business. I just wanted to put a little kind of texture on when we say the best agents in the country, a lot of these characteristics is what we look for and who we partner with.
This is a little bit of different view with a little more facts from the industry slide that Fred showed you. We do start with kind of a segmentation by size because we know that agents of similar size have similar operating models. They're not exactly the same. We have a more sophisticated way to segment within this, but it starts with understanding the size of the agent. The top three brokers absolutely have similar models. As you have larger agents will obviously have separate business units to drive sales in middle market, in personal lines, and small commercial. As you get down to the smaller agents. They're often the same people serving, hunting for, selling to, and serving those clients.
size is an important way, and that helps us adjust the way that we interact with and operate and think about our strategy with each of them. The important point I want to make here is that we, and Fred referenced this, we have great partners in all of these segments. We see terrific partners in the small segment where we have 30% share. We love the classic mid-size agent. I don't want to give you the impression that all we do is work with the big agents. Importantly, the opportunity is in those agents that are over the $25 million. Those sort of top three segments, the regional agents, the top 200, and sort of the portions of the top 10 brokers that we work with.
If you look at sort of the fourth column over, you see that today we work with or about 63% of our current business total and about 75% of our commercial lines business is with agents that are in those top three segments. Importantly, the opportunity, sort of the amount of business they control of that $120 billion, we have a good understanding of where it is. Over $100 billion of it is in those segments. It gives us purpose and focus as to where to drive our energy. I've also put up here some perspective on who the top carriers are in the various types of agents and just some sample names of the agents that we work with so you have a kind of flavor for what we're talking about.
Kind of the same point from maybe a little bit of a lower, different angle at a business unit level, the same is true. Of that $120 billion of business that we have identified, roughly $90 billion of it is in the commercial lines side of things. Again, within the agents that are $25 million and above, about 80%-90% of that is controlled by that group. For Jack's businesses and Andrew's businesses and our field people, we know where to match up and pair up with what agents as to where the business is. Then on the right-hand side of this is an important view to give you a sense that we understand how each of these kind of business segments are distributed.
In small commercial, for instance, 38% is distributed through the national carriers, 28% regional, 15% wholesalers, and 19% sort of niche players like a Philadelphia. As you go down the stack, you see that red and blue bar grow as you'd expect. The specialty businesses would tend to be more distributed through some of the wholesalers and niche players. Again, as an industry, we take a slightly different approach. Just wanted to just kind of peel back the onion and show you the power of our analytics and how it helps us focus. How do we orient ourselves with our agents when it comes to talking about our destination? What are we trying to achieve with these best agents out there? This is really important because it's grounded in a strategic commitment to each other.
What this shows is an analytic approach to understanding when is it that we reach a critical mass with an agent, and this example is in core commercial or personal lines, I am sorry, small commercial and middle market. That is important. Critical mass to us is when you pierce that third position in the agency. We know from our analytics that being in one of those top three carriers is critical to getting the best business. There is pricing persistency. The profitability is better. You become a protected market to that agent. We are incredibly important to them, and they are incredibly important to us. It is a partnership where you protect each other. We think about that, and you see the slope of this in a small agent. Say there is $2.5 million of core commercial business.
You need about 18% to hit that critical mass level. As they get bigger, as you would expect, $20 million-$40 million of core commercial, it is about 8% or 9%. That is our destination, and we take benchmarks along the way to how are we going to get there? How are we going to become one of your top markets? The top line just represents the percentage of business that is in the top five carriers in those various size when you have various sized businesses on the x-axis. Today we are about 5.5% share in small commercial and about 3% in middle market. It obviously varies differently by agent, but that is an overall view. You take this concept of critical mass and take it up a notch when you talk about how are we performing with the agent overall, right?
You extend that critical mass concept at a business unit level to scale overall with an agent. Where do we have depth and scale with that agent? Equally important is the breadth. How many businesses are we aligned with? Are we matching up our capabilities with the opportunities that those agents have? Nirvana, in having both of them, we see better performance, 5 to 10 points better loss performance and equally better growth performance. We do this at a business unit level, but we look at overall, what is our position with our agents? It is not surprising, right? When you have depth and scale, you have profit pools. You have the ability to weather the storm, so to speak. You have the ability to build a profit pool and use some of that to actually invest in each other and do different things.
Breadth is important because you are building a portfolio. You have multiple businesses that perform at different levels at different times. That portfolio concept is important. At an individual risk level, that is also important. To be able to write the package in the marine business, in the surety business, and the E&O portion of it, that really sinks your teeth into that client. This breadth and depth concept is important. We talk about it a lot in the context of what we are trying to achieve with our agents. All right. That, again, I went through that pretty quickly, but it is a good level set, I think, for this next piece, which is about how do we do it? What is our approach? How are we spending our time locally to accomplish those goals? I break this down into three pieces.
The first is, you've heard me say it already, it begins with a strategic commitment to each other, where we explain what our model is about, our independent agents absolutely love this model. It's like, "This is the carrier I've been waiting for. You guys get our business. You put yourself in our shoes, and you think like we do." We have that discussion about, well, where do we fit? Where do we fit within the context of your overall lineup? Again, it's this open book approach, where they share information about their business, their segments, what it looks like, how they're organized. We have a lot of detailed conversation about how we match up, and they expose to us what their business looks like, and therefore, where they see us fitting better. That's a really important first step.
We use a partnership scorecard kind of approach to track our progress and to memorialize our initiatives. These are driven by the tools that we've built so that these initiatives are real, and they're grounded in some tools that I'll expose you to a little bit. This is an objective, quantitative view of how we're doing. We get into some really good discussion about how we're going to advance the partnership. Really importantly, it's all built on this foundation of an operating model that is local. It's driven by folks that understand those local territories, have authority to make decisions at the point of sale, and fueled by these tools that we give them to actually make it happen. They have real credibility. Not surprisingly, responsiveness is critical to making things happen locally.
It's strategy, initiatives, and tools, and then an execution model that we've spent years trying to get right, and we have terrific field leadership, as Fred referenced, in this industry that just really make it happen. Okay. Going down a little bit deeper, one of the really powerful aspects of our model, because we're limited in our distribution, we have real transparency and clarity on who we're working with across our businesses. This is hard to accomplish, and what challenges a lot of bigger carriers who have siloed businesses, we think about distribution across the businesses. This is a simplified view of a local territory, but we have one of these for all of our local territories.
What you see is who are the 40 to 50 most important agents or the best winning agents, back to some of my criteria, in this example, in Seattle. Agent by agent, and I've masked the names here, but which businesses have declared that agent as important to their business. That's one of the horses I'm going to ride. You can see, some of these agents are important to 10 of our businesses. Some of them are important to seven of them, some of them important to three. What's important is that we share that. We publish this internally, so our whole organization knows. That when they're transacting with that agent in their business, when a Management Liability underwriter is working with an agent on a piece of business, they know that agent is important to seven other businesses.
That's a really important thing. You're treating it the right way. You're looking at that piece of business, obviously for the merits of that business, but thinking about the broader context. We're really proud of this, and this takes a lot of effort as you would imagine, it evolves. We not only publish it, we get together once a year. We bring all the business leaders together, and we huddle in a round robin way with the core underwriting team locally, and they go through this. Say, okay, these were the 12, 15 guys that I'm really focused on. What's happening? Where aren't we making progress? What can we do better? We just sort of imagine every business having a turn to kind of refresh this. Our Regional Vice President, who's the local leader, is kind of the quarterback of this.
They're in the market every day with their underwriting teams, they're really playing the role of stitching it together, right? Making sure that we're dotting our I's and crossing our T's and not tripping over each other. Really important, and it's because we have this intense focus and limited number that we can do this. Could you imagine trying to do that with 300 agents in a local territory? It's hard. We know how hard it is for us to stay on top of it. That's very powerful. This is a partnership scorecard in kind of a simplified view, I wanted to give you some flavor for what it looks like. At the top, you see that it's in five distinct buckets. We measure our progress of this partnership. Profitability, mix, depth, growth, breadth.
Beneath these are several metrics that help us understand our position in that category or our progress with that category with our agents. There's a section, very importantly, that we are able to declare working with the agent. What are your priorities? What are you doing? Are you buying agencies? Are you hiring producers? What industry specialization are you pushing? Help us understand what you are trying to achieve so we can plug ourselves in and figure out how to help. Our partnership assessment is kind of a written assessment of the metrics. Help me pull out the ones that are really important and either off track or going really well.
Really the heart of it is this right-hand side where we land on very specific initiatives that we're going to do, we're going to focus on who's doing what by when, and we're able to track that. It's all about making progress towards that ultimate goal. We have today 500 of these in a database that is shared, again, just like our view of distribution in a SharePoint site to our whole field force. That knowledge is powerful for your field to be able to understand, well, what are we trying to accomplish with the Dick Lavey agency? What is it? What are they trying to accomplish? What are we doing? How's it going? I know I can speak from the senior management team, you grab this piece of paper before you go out and sit down and try to advance our cause.
There's nothing like it. The other really powerful aspect of it is, these 500 plans, we're able to extract out what's important to a various business and give it to them, sort of serve it up. Helen Savaiano, who runs management liability, we sifted through these 500 plans and said, "Hey, this is where people are talking about your business, and this is what they want to accomplish with your business." She can get a sense, do I have the right people? Do I have to make investments? Are there some missing? God, I thought that agent was, we were going to do more with, right? It helps us kind of formulate and sharpen our business unit strategy. Again, knowledge is powerful. Here's the I just threw up a little bit more of an example.
That was a kind of a cartoon view of it. This is real, right? You just get a sense that there's sometimes 12, 15 metrics that we're looking at in each of these buckets, and it's not that we zero in on that metric, but we kind of try to take the gestalt view of the performance. Okay. This is really important. To be credible in the field with our agents, we really try hard to put ourselves in their shoes and look at the business from their vantage point as often and as much as we can, so that we can understand how is it that an independent agent is going to improve their performance. These five buckets are kind of the major levers that an agent can pull to improve their profitability. They can grow organically, which many are hugely focused on.
How do I get more customers in the door? Agency acquisition. We buy agencies, consolidate the markets, as Fred referenced before. Another way that they can improve their economics. Enhancing value from existing clients. I'm a customer, but I only have two of those insurance lines. How do I cross-sell? Can I make that customer a bigger customer for me? Value of carrier partnerships. Have I really maximized my carrier lineup? Do I have 150 carriers where I'm not maximizing profit sharing? Am I using wholesalers where the direct commission is lower when I know that I can fit some of that into standard markets? Just being thoughtful about how they use their carrier lineup. Then expense management, right? Am I efficient in my operations management?
Thinking of these as the five big levers, we really do This is kind of what fuels our tool development. What our teams think about. Say, how can we help them? How can we plug in and help our agents improve their performance with the commitment that we're going to do this together, and as a result, we're going to skyrocket to that top three position and get the preferred business. I won't take you through all of these, but just as some examples. In the organic growth bucket, we're doing a lot to help agents and personal lines think about how do you transition to becoming a value seller. You've got to stop selling price and saving $50 to get a customer. We've created workshops, and we've hired some consultants to help us with that. Industry segmentation.
We spend a lot of time and energy trying to help agents become those experts in an industry so that they can show up at that client and be very credible. Right. Agency acquisition bucket. We've helped agents identify potential acquisitions. Then when they're happy to make the acquisition, how do we help them extract the value that's in that acquisition? Through some of the same tools I'm talking about, where we help them do carrier rationalization and other things, cross-selling opportunities. Cross-sell is a big tool that we've created to help with the expansion of the value of your existing client base. Can we help you identify those customers? Absolutely. We know what lines of business you've written with various clients. Let's put in place a campaign, help you become educated, and try to cross-sell into that customer.
Value of carrier partnerships, we spend a lot of time here. We help them think about that wholesale market utilization and other things. Then the operations management side, an example of that would be the work we do in utilizing our service center to supplement and help them become more efficient in the way that they manage their flow businesses. Then what they love that we do for them in this is that we offer benchmarks in a lot of these categories to help them understand how do they perform versus their peer group of similar size. If I'm a $50 million agent, what percentage do my peers use wholesalers? What percentage of my peers don't cross-sell? What percentage of my peers are efficient with that flow business? That's really powerful stuff.
As you can imagine, we get into this, you have real credibility, and you land on initiatives that have teeth. They're not just words on a page that you can't stand behind. This is an example of one, just very quickly. The tech industry is a really terrific segment that we've gone after and had a lot of success with, and we've built this workshop. Think of it as a two-day boot camp where we bring producers together from various agents, and it's like an immersion program where out the back end, they leave as experts in selling into the technology space. We've done this in all five of our regions. About 150 producers have gone through it. It's remarkable. Literally, we get a dozen submissions to The Hanover because they leave understanding what our appetite is the week after the boot camp is over.
I have examples of where we've written a half a million dollars in the following two weeks, the subsequent two weeks. It's really powerful. We're building out other industry segments for this, but we really do try to educate them on the industry, tear apart the form, how do you sell into that industry. Of course, how does The Hanover respond and help you be a great partner for that. That's just an example. Bringing it all together, this reinforces the point that it's this network or it's this combination of these components that really give this its punch. Fred referenced this. This is the fabric of who we are in our local field offices, where we're able to be really responsive. We have people at the point of sale who have authority to make decisions. We have a really engaged senior management team.
Everybody on the senior management team and Fred, we are in this marketplace. We are out. We have really strong relationships with our agents, and they're not just personal relationships. We're in the muck figuring out how to solve problems, how to create initiatives, how to help them, and we're very engaged, and I'd argue to say some of the most engaged in the industry. Supported by these tools, some of which I just described, and then anchored or quarterbacked by this local branch leader that we often say is the most important position in the company. We exist to support that RVP in making this happen locally. I bring back the picture of the nationwide capability because having product and competency is hugely important but executed by these tight integrated teams in every single one.
From Portland, Oregon to Portland, Maine, we've got this same model that we've been building and executing to the last several years. What we thought we would do is show you a quick five-minute video or testimonial of really some of the best agents in the country. You'll recognize some of them, I believe. These would be in the category of top 200 or top 10 in the case of Gallagher. There's some Assurex partner agents, some Marsh agency, Barney & Barney, and RJF. Really, we think hearing it directly from them, how they're experiencing this model and how they view us, I think would be really a great way to put a fine point on some of this. If we could roll the testimony, that'd be great.
Nothing but respect for what The Hanover's done. Tremendous vision by Fred and the ability to attract talent with a vision. Then the actual execution of being able to go in and literally put a dream team together from scratch to technically cross the country and handpick the best in class. My belief is that quality follows quality. If you put the quality team on the field, which is exactly what they did in our state, in the states we work in now, is they put the best people on the field, and we follow them. They've got to have products and resources to go with that. For the federal division, put the best dream team on the field and built the products around it.
The whole philosophy of The Hanover and how they believe in the agent, there's no equivocation about that
They are a partner.
When I think about the upside of Hanover in our organization, it is simply that we expect to grow, and we expect to grow organically. I think you guys have a foothold into that on the other things we've talked about, programs, small business portfolio review. We also look to grow inorganically. We do a lot of acquisitions. One of the great things for us is that when we see that a partner of ours that might be right for a merger or acquisition is a partner of Hanover's, we know they've been vetted, we know that they're understood. So we value that in a merger candidate. You put organic and inorganic together, plus the relationships that we have with Hanover, I believe that if we're not growing at 10%-15% a year, we're doing something wrong.
Quite frankly, because of Hanover, right now, we're more than doubling in the seven-year period. The outcome of that is Hanover is more than doubling with us.
A tremendous amount of foresight by the Hanover to realize that the more they understand about us and the more we understand about ourselves, the more opportunities we can find together.
As independent agents, we need to be growing. We need to be writing new business and bringing on new clients, but we need to be retaining those clients. Having that connection allows us to not only build our business through new growth, but to continue to renew those clients for years and years. That relationship allows us that retention, which makes us a lot more profitable in the long run.
One of the things that impressed me right out of the gate about The Hanover, again, we've been an independent agent for over 100 years, was the franchise value of The Hanover relationship. We've got some great national carrier partners, but nobody is as limited in terms of the distribution as Hanover. What that means to me is, what Hanover has done for us is they're absolutely invested in our mutual success. Hanover to me, just with the vision and the story they were telling us right out of the gate several years ago, was unique. They had a chance to rebuild a great brand from the ground up, really, very exciting, create a national company that was very agent-centric.
When I look at the future of our relationship with The Hanover, I still remember vividly, probably five years ago, walking away from a meeting with Hanover with our COO, and I looked at him and said, "If this isn't one of our top largest relationships in a few years, we're doing something wrong." I truly believe that, and that's because, like I said, The Hanover has the tools to, all the expertise, all the knowledge, all the intellectual capital and the products, and we've got the relationship piece.
I think about the future and where we're going with The Hanover, I think technically the opportunities are endless. I think that there's a foundation in place with the people that are here and the true partners with The Hanover that's positioned you to be the top carrier. You're actually aligning yourself with the winners in the marketplace, the people that are going to continue to drive organic growth and be sales organizations, which is what you want as a partner. You take the capabilities of what you've built and are building, and you put it together with the best distribution force, I see no end of the opportunity.
We're really proud of what some of the best agencies in the country are saying to us about us. Hopefully that gave you a flavor for we're embedded with each other. We're integrated in each other's success. That's what gives us confidence that this approach has staying power. Right? Of course, what do the results look like? Are you seeing progress? I'm just going to hit this quickly and then pass the baton. Absolutely. Right? As I mentioned earlier, lots of evidence of growth with the best categories of agents, Assurex, the Big I, best practice agents, double-digit growth, really importantly, though, on the right-hand side, the loss performance is better.
You can see our trend ultimately, underneath that is a better mix of business that we track very carefully, as you saw on the partnership scorecard and the pricing persistency. That is ultimately the success of this. I talked about breadth and depth. I just wanted to make a point that we see about 600 agents moving into those categories. Right? Either going deeper or going broader or both. Right? We look at this often, we feel good about that kind of progress. Lastly, I'll leave you with this. The opportunity is very significant, there's lots of ways that you can measure this, or you can just do a simple market share calculation. I introduced you to that critical mass concept as a way to think about it at an agency level, at a business unit level.
If you just kind of play that out and say that we were to reach a critical mass level with each of our agents in each of our business segments, we could get to a significant position. Absolutely, that's what we're working towards. It's market share gain by agency segment. This is more illustrative than anything, it kind of shows you the headroom that we have when we look at this. Hopefully that gave you a sense of what this is about. Hopefully, it puts some meat on the bones for you, how we spend our time kind of in the marketplace trying to make it happen. We do believe that this is a very powerful model, hard to replicate, that's going to sustain us kind of through the cycles. Okay, I know we're behind.
Are we going to keep going through Jack then grab a break? Jack Roche, who runs our commercial lines businesses.
All right, my goal here this morning is to build on Fred and Dick's comments and give you a little bit of insight on how our core commercial businesses fit into both our proposition and our performance as a company. As Fred highlighted earlier, really go a little bit deeper on small commercial. I think in the past, I've spoken to you folks a little bit about our middle market offering and how distinctive it is, and I'll comment a little bit on that some more today. I want to take you a little bit deeper into small commercial because I think we are uniquely qualified in a very dynamic time in the industry relative to small commercial.
The points I want to drive home this morning are that we truly have become a distinctive national player in both small commercial and middle market, aided by the OneBeacon renewal rights transaction. Clearly, we've built our franchise even throughout the West Coast, well beyond the OneBeacon transaction. The second point I want to make is that core commercial drives roughly 50%-55% of the premium that our agents write and over 80% of the accounts. Make no mistake, the core commercial and the momentum you build in that business is directly related to your ability to get to the best specialty business in the business. Andrew will talk to that later on. Within small commercial, small commercial is a particularly attractive part of the cycle, excuse me, of the market.
Only for those carriers that are really understanding the dynamics that are created over the last half a dozen years and are navigating the pricing sophistication as well as the distribution consolidation. We believe our value proposition and operating model uniquely position us to take advantage of the opportunities in that market, and that our deep understanding of our agencies that Dick just highlighted give us a clear competitive advantage. If you think of core commercial, we're talking about roughly $700 million small commercial business for The Hanover now, a little more than that in middle market. You'll see definition-wise, we generally separate that by $50,000 accounts, except for in some of the smaller geographies that tend to have smaller average premium sizes, driven by the rates in those environments.
Also in some of our niche products, where we want to make sure that the right level of expertise is being delivered in some of those more complex niches and segments. The momentum that we have in both middle market and small commercial enables us, like I said, to not only capitalize within those sectors, but all the way over into the specialty sector. The book of business that we've built across small and middle market is an impressive book of business. We have a great broad industry appetite and penetration. We've developed a nice national network, and you can see the number of locations and the premium by region here.
The point I want to make on this slide is that while we pride ourselves in being as broad as we can with our offering, we have clearly learned, our strategy is focused on truly understanding the portfolios that will lead to target returns one geography at a time. The portfolio that we've built in Maine is not the portfolio that we've built in Texas, where you have a weather-prone geography, you have a different workers' comp environment, you have a different set of distributors focused on a different way of selling the business. It's that understanding one geography at a time with the right talent locally to pursue and have knowledge of what that portfolio is going to look like, and are we driving to it.
While we pride ourselves on being a distribution-focused company, make no mistake, we're focused on building the right portfolio first, which distributors have that portfolio, then what's the infrastructure, operating model, and talent that we need to assemble to get to those distributors to get to those portfolios. That's a big part of our focus as a company. With that, I wanted to give you a little bit of insight into how we run the core commercial operation. From a leadership perspective, what I show you here on the left side of this slide is that each business has a business unit president and has the proper level of leadership appropriate for that business. In small commercial, you got to have real embedded operational skills to be able to deal with that business, and you have to have good state management capabilities.
In middle market, you have to have industry segment leaders. You have to have people that know those industries. You can't fake industry expertise and specialization. You have to have dedicated resources. If you move to that next column over, what really is unique about us, and I think important for you to know in terms of how we approach the business, is we have shared expertise across small and middle, and in some cases, into some of the specialty areas, to make sure we have the discipline and the insight from a line of business perspective, supported by our actuarial group, that we have the right level of product development and product management resources. Of course, that extends into our technology capabilities. What this does is make sure we have some scalability in those shared resources, but also gives us a different level of objectivity.
In other words, we don't want to put everything into the business because when you put those line of business and those actuarial resources and the product resources, and you put them next to the businesses, you can have the right kind of aggressive collaboration and interaction that allow you to make sure you're focused on building the right portfolio. A quick example would be when we're really trying to build out some of the West states, and you think of California, you need to have a workers' comp expert on the team saying, "Okay, are we doing this the right way? Are we thinking about the workers' comp line the right way as we build it?" You don't want that so embedded in the business that they lose their objectivity over time on some of the line of business realities.
On the right-hand side, as Dick alluded to earlier, we have really the best field leadership team in the industry. The regional presidents and RVPs are focused on being the enterprise quarterback for our businesses. On the full right-hand side, we have very dedicated small commercial sales and underwriting professionals and middle market field underwriting professionals. I wanted to highlight on the right side that one of our secret sauce to our success, I believe, is that we have regional sales directors in small commercial and regional COOs in middle markets that are really dedicated to their regions but committed to those businesses. They have some of the toughest jobs in the company because they work for the president of those divisions, and so they have the authority and the responsibility of making sure that we're getting the business outcomes that we're seeking.
They're also working for the region so they can understand what's going on, they can understand what portfolios we're trying to build, and can be part of the team, and can really develop the momentum. We really think of this as a best of both type of approach. That we have a very strong home office that's focused on building the right portfolio, and we have a terrific field team that is focused on understanding those agents but feels very connected to the business. I'm going to work from that core commercial overall offering and capability and go a little bit deeper on small commercial this morning. I think all of you know that historically, small commercial has been a very attractive part of the sector. It's sticky. If you build it the right way, it sticks to your ribs.
In a consolidating distribution system, that's going to be even more so if you do it right. One of the implications of a consolidating distribution system is that more and more of that business is getting aggregated by the larger and mid-size agents in the country. Quite frankly, they don't have time to market 80% of their renewals. They're looking for solutions where they can write accounts with the right carriers, put it to bed, and make sure those customers are being properly serviced. You have to build your capabilities such that you're distinctive, but that your operating model, including service centers, allow it to be efficient for the agent. With what's happening in the business today and the pricing sophistication that's come into small commercial, some of that is, quite frankly, going in the wrong direction from an agent's perspective.
I'm going to talk a little bit about that. On the right-hand side of this page, I just want to show you that we've built this business pretty substantially over the last several years, both when you look at the industry class mix, you look at the line of business mix. It's a real desirable small commercial portfolio. We got great mix from both a line of business and a class standpoint, and we're distinctive in our offering. I want to talk a little bit more about the market landscape and why I think that some folks are missing a pretty important transition that's going on. If you think back to what happened in personal lines when the migration went from a fairly simplistic pricing algorithm methodology to the multivariate world that we're in today, there was a lot of mistakes made.
There was a lot of false precision. A lot of folks went too fast and too hard in building out predictive models, and some of that matured over time, obviously, but there's a real danger in going into that too quick because much of what you're doing when you go through that process is really not credible. I'm going to highlight and talk about that a little bit deeper.
This over-reliance on the black box by some of the nationals and the lack of pricing sophistication at the bottom with the regionals is creating an opportunity for somebody to come in the middle of that and say, "Hey, how would you like a carrier that can give you a point of sale offering, that can give you the ease of doing business on the BOPable accounts, but that also is available for you to work on the non-BOPable accounts, so the stuff that requires a little bit of underwriting, and can handle that full spectrum and do it in a way that doesn't create pricing volatility to your renewal book?" Because as soon as the pricing volatility starts hitting the renewal book, your operating efficiency as an agency goes to hell. That's what we have been working on.
I think we've probably been the most insightful carrier in looking at those trends within the industry and trying to position ourselves to be a better type of market for the consolidating agents. Let me go a little bit deeper on that. If you think of the market from a carrier perspective, there are certain classes of business here that you can put in BOP. The shoe store, the lessor's risk only real estate account. There's certain things that you can put the five or 10 questions in the black box, and for the most part, that will answer what an underwriter would have asked. Then you can figure out how you link your pricing to those answers so that you can give the right price to the right customer in a very efficient way.
Over the last 10 years, most of the big nationals have done that on steroids, and they've pushed most of the work that used to traditionally be done by a carrier to the agent. Said, "You do it in your shop real quickly, and we'll both win." Well, that was true when 65%, 70% of the time when somebody went into somebody's point of sale system, they got the answer they wanted. I'm going to suggest to you that over the last several years, because of this pricing, this false kind of precision around pricing, similar to what personal lines went through in the early years, is backing up on agents' economics.
We saw that in terms of what that can do to BOPable count, that if everybody wants to go there, is it possible that if you over-concentrate yourself in that sector of the small commercial market, could you actually end up with profit problems? Because in our industry, carriers are like lemons. They all want to follow to the same place, and they all want to end up in the same zone. Too many carriers, we believe, focus entirely on the accounts that could be done in an ease of doing business environment. On the package account side, that makes up over a third of the market, if you include that portion of what we put in the niches and affinities. That's what makes us distinctive.
That we can do the business that takes a little bit of underwriting, that doesn't push all the work to the agent. We've built an environment where they can go into our point of sale system, or they can come to the underwriter in an efficient way, and we can work on a broader sector of the small commercial business. On the far right-hand side, we've built some niches and some affinity programs for those agents that are a little bit more focused on industry sectors. It's the combination of all that that makes us different than almost anybody we compete with. There's folks that work on the BOP accounts. There's the Philadelphias that work on the niches. There's the regionals that work on the packages. But there's nobody that we compete against that is as broad in the overall approach that we take to the sector.
In a very simplistic way, I wanted to show you how we do it. We obviously have a local salesperson that has a certain level of underwriting authority working with that partner agent. If the agent is so inclined, they can work and transition much of their business into our service center, and we can be a highly efficient, effective partner for them. We, quite frankly, have the best service center in the business. We have worked hard at making sure that our service center is not just a scaled center, but it's a service-oriented center, and that we earn our income over time by keeping accounts longer and servicing them and being able to get a premium price because we have a single carrier solution to that customer over a period of time.
We have a very capable point of sale system that our agents work on for those BOP accounts. But as I said, we have a broader package offering than most of the market. The key here is having a local new business underwriter who is, for the most part, in the geography, sitting next to a middle market underwriter, being able to kind of trade secrets and understand exactly what they're trying to do to underwrite on some of the business that's not easily fit into a point of sale system. Focus primarily on that $10,000-$50,000 customer set that you can cost effectively get at.
The real secret to this is that you can better price that business so that as it transitions into our renewal centers, which we built a few years ago, that we can create the least amount of pricing volatility as possible. In our business, in this environment, what's happening is people are trying to price the business in a black box. They're mispricing a lot of that business because of false precision, and then they're creating a bumpy renewal experience. No matter how efficient you are at doing that, you're creating inefficiency within the distribution system.
What we've worked hard at is making sure that whether it's point of sale systems, that we use the right level of predictive modeling and multivariate, or working with our local underwriters on the more package-oriented business, that we price it closer to the right price so that we can create a more stable renewal experience. Quite frankly, because of the renewal centers and the way we built them, we have tremendous pass-through rates. When you think of that broader sector, it's probably approaching 60% pass-through rate, including the stuff that requires some underwriting. We can have underwriters in those centers that handle close to $15 million of renewals in a very efficient way and do it in a way where we get industry-leading retentions.
That's what I wanted to show you and focus with you here, is that what these charts represent is Hanover against leading nationals who segment their business in a disclosed way. Those publicly traded companies that put their segmentation called Small Commercial out, and we've captured both the renewal retention and the new business as a percentage of total written premium to reinforce the point that the world has changed in Small Commercial, and we believe we're taking advantage of it. On the left side, what you have is our renewal retention is top of the chart. That we have a good book of business. We're pricing it. We're finding the 3%-5% that we need to get rid of that no price is going to be good enough for.
We're tiering our pricing in a way where we retain a majority of that business at the right price. Some of our competitors, quite frankly, have either tried to push more price than the market would allow, and you're seeing it in their retention levels. Or they've mispriced their new business so substantially that they have to hyper-price their young renewals. Maybe their legacy book of business is doing fine, but the business they've written over the last two or three years is so mispriced that they have to get double-digit pricing in order to get it back to even, and they lose it because the market's not going to tolerate that. That point is reinforced on the right side.
Those same carriers you would see, it is counterintuitive that you would spend tens of millions of dollars to build your predictive model multivariate black box and then shrink the amount of new business that you're going to write for 17 straight quarters. The IRR on that's got to be negative something. That you would never build that platform. That platform was built to better price new business so you wouldn't have to touch it on renewal. What I'm suggesting to you is that for many of the industry leaders, it's working the opposite. Again, our perspective on that is that predictive modeling is a dangerous thing if you don't use it right. It should enable underwriting. It should not replace underwriting. These individual variables are highly predictive individually and retrospectively against your current portfolio. They are not very effective in combination and prospectively against somebody else's portfolio.
If you go too fast and hard, what you saw in personal lines and what you're seeing in small commercial is you mispriced the business worse than when you were using a less fancy set of algorithms, and you have to fix that problem quite fast, which is why you shrink the amount of new business because you go back into your black box, you change the dials, and all that does is make you write less business. I'm not suggesting to you that predictive modeling or multivariate products are evil. What I'm saying is that shouldn't be your strategy. Your strategy should be, what's the customer set you're going after? Who are the agents that you're doing it with? How can you build something that's sustainable, that gets the right level of pricing precision for the right kind of customers, for the right kind of agents?
If you do that well, this can be a terrific business. The progress that we've made, quite frankly, over the last three or four years, after taking in the $200 million of the OneBeacon Renewal Rights deal into small commercial has been phenomenal. This is a business that really has quickly become one of our best businesses. You'll see this from a distribution perspective. That in 2009, we were a $320 million small commercial offering, and less than $100 million of that, quite frankly, came through agents that we had any kind of real critical mass, as Dick defined earlier. We didn't have a lot of our business, quite frankly, as a top three carrier.
Over the last five years, we have evolved into a $700 million small commercial business that's very distinctive and that almost half of our business is with agents that we have a top three position. Quite frankly, below that, we have a lot of growth and a lot of people that are moving towards that top three position. Quite frankly, if they're not, we're moving in another direction. That if we can't visualize how we're going to be a top three player from a small commercial perspective in an agency, then we can't be their partner. It's just not going to work because that is, in fact, where the margin lives. As you can see on the right-hand side, similar to what Dick described to you on a franchise basis, we got plenty of headroom with the guys that we have.
With the distribution consolidation going on, they're bringing the business to us. The guys we're focused on have plenty of locations. They're going to buy more agents, I don't need 10,000 agents to get at the best small commercial. The distribution's kind of bringing it right to us in a very distributed way, I just have to have real partnerships and a distinctive position to be able to capitalize on that. If you look inside that distribution, I wanted to give you a sense that in our top 100 agents, we are a top one player. Across that group, we're growing 13%, and on average, we're their number one market. The next 200 down, we're well on our way. I think on average, we're about fourth on that next 200 on our way to a top three position. That's powerful.
That you can see that you're not a wannabe. You're actually there with a good subset of your agency partners, you know your proposition's resonating, you know that your pricing and underwriting position is delivering. I'm going to give you real quickly a couple of examples here of how powerful this can be. This first example is a large top 10 agency that consolidated a lot of business and bought a lot of agencies over the last several years. We have, as you can see at the bottom line here, grown nicely as a franchise. We're now over $100 million with this top 10 agency. We're their fastest-growing market, and extremely profitable.
We did this because as they got to a point of their maturity and they started to focus on how they're going to generate more organic growth, they looked at their renewal book and said, "Wow, we got to stabilize this. We got too many markets and too many markets churning, we got to find somebody that wants to really work with us to stabilize this book of business." You can see the trajectory we've had in small commercial. We've gone from $17.5 million to $25 million in the last couple of years and become one of their top three markets for small commercial. This next one is a mid-size regional type agency where, quite frankly, a couple of years ago, they weren't even in the small commercial space.
This is an agent that was focused for the most part in the middle market sector and some industry specialization. As they decided to buy some more agencies, small commercial became a bigger part of their strategy. You can't buy small agents and ignore the small business sector. They partnered with us to
Align their strategy to look at our capabilities, to leverage our service center, and to start consolidating some business as they bought these agencies. We now sit as their number one market from a small commercial perspective, it's kind of in the catbird seat. I hope that gives you a little bit of insight that the distribution power that Dick was talking about earlier and how it translates into a very important business to us, particularly in small commercial, where we can go from being a relatively irrelevant player five years ago in the small commercial space, certainly not a distinctive one, to really the fastest growing small commercial market in the agency channel. We believe that we have separated ourselves from the pack, and we're doing it in a very profitable way. We understand the marketplace well, and we know where we want to compete.
We have comprehensive and distinctive solutions to help our agents grow and to improve their economics. Make no mistake, we're focused on our economics. We're not doing this for giggles. We're doing this because we believe we found a way to bridge their needs to our capabilities in a way that we can create mutually beneficial partnerships. In closing, what I thought we'd do is we got a two-minute video that builds off of the one we showed you earlier that's more specific to our small commercial offering. Once that concludes, we'll let you get that break we promised you a while back ago. All right?
I think the small commercial commitment of The Hanover is, it starts with that relationship again, but now you have to have product efficiency, and people around it. We scrutinize it hard.
We really looked, peeled the onion back as far as we could, we don't jump in very quickly on small commercial. We want to make sure that, because when you go, you've got to go deep, and you've got to make sure that you're going to deliver at all levels. I think where Hanover small commercial stands out is, again, it starts with their people. They're doing nothing but best in class. Literally cherry-picking the country, adding the best small commercial people to it. All the way through the product line, and now probably for us, most importantly, the service center as well. By far the best service center in the industry.
I had a fellow in my agency, he said, "You guys just keep focusing on that 2% of the market. I'll take the other 98." It really got me to thinking, why can't we partner with Hanover? Let's go after maybe not 98, but let's go after 40% or 50% of that market, where between your service centers, our capabilities to be more thoughtful about how we write small business and small middle business and really do something special. I feel like we, all of a sudden, we have 10 times as many prospects as we did three or four years ago.
I worry about the industry disintermediating themselves for scale, through big data, and just putting out transactional models. We're going opposite of that. To me, it's a survival issue. I'll be curious to see how the industry evolves over the next 20 years.
I think we've got a really good partnership when it comes to small business, and that's high on my agenda. It's been nice to have a relationship that's grown quite quickly from me being back. We have a lot of small business. We like small business. We want more small business, but we certainly want to handle it effectively. Hanover is one of the very few carriers that totally understand the book of business concept. They spend time getting to know your book, the Hanover Rater. They spend time getting to know you as a business, and they want to take an overall look at the book as opposed to trying to cherry-pick out of the 40% appetite that everybody has. I appreciate that.
With that, we're going to pause for a little while, give you a break, and we'll give you about 10 minutes. Be back here at 10:55. All right, thank you very much.
Hello. I think it's time to resume our presentations, and I'm giving you Andrew Robinson, President of Specialty.
Hanover has been a terrific partner for us. We needed a carrier that was more engaged, would be more creative and just more creative, more responsive. They chose AIX, and AIX has been fabulous. The program has grown dramatically. We have three programs, and I think we're pushing $50 million now.
The specialty space. Hanover's capability on the specialty property, the tough sprinklered buildings, they bring a good expertise, they bring capacity, they understand what the issues are, and they're not just underwriting to a box. I think the middle market sector is essentially becoming specialization to some extent. Out of Marsh McLennan Agency's top 20 producers, 19 of them are specialized, which means if you want to get good at this business, do a few things well. I think that the alignment of what you're building, whether it's your healthcare sector or any vertical that you're going into, the better you can get at it and the more expertise you can bring to us, the better we're going to be at taking it to the marketplace.
I believe we have over $1 million now in management liability, and most of it's very small, private D&O, EPLI, employment practices liability. Hanover came into the market very thoughtfully, underwrote the business, and has been with us really for three or four years now, and to where the line is doing fine. The growth has been nice.
We are utilizing Hanover in every facet that we have chosen to grow our agency, be it professional, be it miscellaneous professional, be it commercial, be it personal lines, be it surety. Those are our main thrust. That's where we want to go. It's exactly where Hanover wants to go. We look at them as our long-term partner to perpetuate the agency.
Good morning, everyone. Some great comments from our distribution partners. Three things I'm going to try to do over the course of the next half hour or so. First, just level set as to what are the Hanover Specialties. Second is to talk a little bit about why they're so important to us as a company. Third, and where I'll spend most of the time in the presentation, is to give you some insights into how we're winning. With that, the presentation is organized around six main themes, and again, these are the things that really, hopefully, you'll take away from the presentation. The first is that specialties for us are really important. They're important drivers of our growth, important drivers of our earnings diversification, important drivers of our capital diversification.
Second, as we selected the specialties that we wanted to target, we targeted the specialties that by and large are some of the most profitable segments in our industry and also are segments that are highly fragmented, so create an opportunity for us to consolidate a position, but most importantly, are deeply important to our distribution partners. Third, I'll do a deep dive on Hanover Professional Portfolio just to give you a good example in some detail about how our strategy is working. I'll use a couple of examples, but I'll also talk about just within our top 25 commercial relationships, where we have a quarter billion dollar opportunity so that you can get a better, more cogent view of really what's the opportunity for us within our specialty businesses. I'll give you some examples that will include agents as well as some product launches.
I'll give you some insight into the operating model and how that is so critical to our success and our strategy within the specialty businesses. Finally, I'll step back and I'll talk about the opportunity broadly for specialty, which we see as being not only a tremendous driver of revenue for us and growth in our revenue, but importantly, in terms of our margin improvement and margin expansion. Let me just start by giving you a quick introduction to our specialty businesses. There are seven major categories of specialty. First is Merit Specialty, which is our E&S business, which is for hard-to-place or unusual risk. We're focused largely on the small to medium segment. That's a relatively new business. We started that about a year ago. Second is Hanover Healthcare, and that focuses on two areas, elder services being one and allied healthcare being the second.
Third, our Specialty Industrial, which is a very specialized capability focused on industrial property that are higher in hazard, but they're protected. They have elements that require a heavy engineering expertise to be able to underwrite the business and provide insurance. Fourth is surety, and this is a full range of contract and commercial surety products targeted towards small and medium-sized businesses. Our Professional Portfolio business is made up of our executive liability business, so this is management liability for private companies and nonprofits, and a suite of E&O products that includes architects and engineers, professional liability for accountants, professional liability for lawyers, and then a broad category that we call miscellaneous.
Hanover Marine is our business that's focused on both inland and ocean marine. I've given you some examples of some particular categories where we've built very strong positions, builders risk, ocean cargo, specialty construction, high value or SPFE being another area, and communications and technology equipment. Then finally, AIX, which is our program business that provides solutions to our agents who have a specialized focus on what tend to be more defined, discrete, and frequently medium to higher hazard categories of risk. If I step back and just start with the context of why Hanover Specialty, why is this important to us? As I mentioned, we are focused on many of the most attractive segments, and it is important to us in terms of earnings and capital diversification. The segments that we tend to target are highly fragmented in nature.
There's a real opportunity for us to build a meaningful position. It's business that by and large is with the agents that we've been talking about throughout the entire day, and the agents, of course, that you've seen in these videos. Importantly, the part of the market that we focus on is the small to medium end of the market. That tends to be very operationally intensive. If you can bring a solution that has the kind of expertise of the best players in this industry and solutions that also deal with some of the operational intensiveness of dealing with these categories, you have a real chance to build a sustainable, defensible position. How do we win?
This is where I'm going to spend most of my time over the course of the next few slides, but I just wanted to give you some high level points. It starts most importantly with the insight that we have about our agents and their books of business. This for us is really our advantage, certainly within Specialty, and it drives our resource deployment. It defines where it is that we focus our product development. It is singly the most important thing in terms of how we win. We limit distribution. We've talked about this, but this is really important. There's a number of the guys that we compete against, whether it be some of the most significant nationals and/or the specialty guys. They have high capillarity in the market.
They are appointed with many retailers, in the case of the specialists, frequently with many wholesalers, which effectively makes their product available to everybody in the market. We're selecting who it is we're doing business with, the understanding, the value exchange that we have with our distributors is that we're going to give you access to our products. Our expectation is that we build the leading position with them in the categories and in the appetite that we want to write. That's the understanding that we enter into as we provide these specialties to our agents. Our portfolio is broad. That directly attacks, I think Fred talked about this at the outset. That directly attacks some of the specialists who really only can bring a small number of products, in the event that they're actually working with a retail agent or broker.
Our products and services, you've heard about that, our people. I would argue that certainly that is table stakes against the best, but it's certainly a winning formula when you compare against sort of the next tier down. Finally, our operating model. It's first and foremost focused on our economics. It's about our efficiency and our effectiveness. We did see it in Dick's presentation and certainly in Jack's presentation, our operating model is also focused on our distributors' economics and our distributors' effectiveness. The combination of those things are really things that the guys who we're doing business with, they deeply appreciate, and it's one of the reasons that we're winning.
In talking through the next few slides, what I'm going to do is I'm going to set aside two of our businesses, AIX and Merit, because those businesses tend to be a little bit different in the distribution. You tend to have big positions with a small number of guys, such as the example with Jack Galloway at Barney and Barney. Theirs is in high capillarity within our distribution. I'm going to focus on the other five. If you look at our distribution plan and you look at our in-appetite opportunity, it's $8.5 billion, and it breaks out according to the sort of the different allocations that you see, 22% in health services, 38% in professional management liability, et cetera. That's the opportunity for us. I'm going to take a number of examples, starting with health services.
If you look at that 22% in health services and you say, how does it actually get placed? Well, 33% gets placed with the national carriers, 11% with the regional carriers, 30% with the specialty carriers, 25% with the wholesalers. Today, 1% with Hanover. Obviously, this is a young business for us that we're growing. Specifically, if you look at the health services sector, specialty carriers is the competition for the business that we want to write. Why are we winning? Well, we do have market leading products and coverages. As I said, I think that there's a little bit of that that's just simply table stakes against the best in class, but certainly a winning proposition against the next tier. We write the whole account. This is critically important against the specialty carriers.
We will write the property, we will write the auto, we will write the umbrella, and in certain instances where we have an appetite, we'll write the comp. We provide best-in-class risk services. We built a team of nurse clinicians within our health services business. If you take the aging services segment as an example, we have web portals for the risk managers of these facilities. They have access to self-assessment tools for every major process within their organization. Take an admittance process or how they manage elopement. Those are examples where they have access to online facilities to benchmark their practices against the best in class. Those are very distinctive risk management capabilities that we provide. We provide turnkey solutions for our agents to be able to promote and market the products that they have access to through The Hanover.
That's also something unique and certainly something that you see none of the specialist carriers provide. Very few have access. In any given market, Fred talked about this at the outset, for this particular specialty, maybe three or four agents have access. It's the guys that we know can really do something with it. If they have access to our paper, there is a loyalty to us. They know that they have to build the position with us because there aren't too many other distributors who have access, and that's the understanding about the value exchange. That's the requirement for them, and it has to be in the areas that we have an appetite, high-quality business that we know that we can build together and will be sustainable together.
Our franchise relationship, as Dick talked about, the thing that we are doing as an organization is our conversations aren't about health services alone. They're about the health services in the context of the entire relationship, which, of course, for us against the specialty carriers, is a tremendous leverage point. Obviously, we provide profit sharing in this, which is another advantage, we do some additional things around surplus lines fee and tax servicing that many others in the market will not provide. That's the example for health services. Let me jump to professional liability. In this case, I'm going to compare what we do against the wholesalers. Again, industry-leading products and services. Our risk management is certainly one of the distinctive areas for us within professional management liability. We do small things like provide contract review to architecture and engineering firms.
We help provide services to accounting professionals around their engagement letters. These are small things from a risk management perspective that actually are quite frequently the source of future E&O. More that we can do to sort of head that off and provide some expertise, that list goes on and on. Top-notch local talent. I think you heard that through the videos. The ability to rapidly deploy a specific program or something that is a little bit of a specialty. Frequently what you will learn if you talk to our agents and brokers is that we've created maybe a very specialized endorsement pack that allows that agent to go after a niche.
That's certainly something that there are a few other competitors can do it, but it's not very present in the market, certainly getting access to that through the wholesale channel is something that's not available. Importantly, you heard from Jack, you saw in some of the videos, commentary on our service center. We believe that we are the only carrier in the market that is providing service center capabilities for small E&O. That is a real advantage because as Jack talked about, frequently, these small commercial risks have a complementary product on errors and omissions. It's odd if you can only put the P&C lines into the service center, but you can't deal with the professional liability. That's one of the key advantages that we have as a company. Against the wholesale market, there's real economic value to the agents.
They reclaim five to eight points of foregone compensation. They get access to profit sharing in this business that otherwise they wouldn't have access to. Next up, let me talk about surety. In this case, I'm going to use how we win against regional companies. It starts with the fact that we have a very broad product set, contract and commercial, account, which is larger business, transactional, smaller business. We certainly provide more capacity, so our ability to write larger risks, or as in, let's say, in the case of a contractor, as that contractor grows and develops, the ability to support a larger work program over time. Our small bond technology, transactional small bond technology is equal to the best in class, which frequently is a real advantage over the regional companies.
As we've gone through the process of getting this business back to the place where it's delivering the kind of returns that we seek as a company, through that process, we brought on what we believe is the best management team in the industry. Through that, a lot of credibility built as that management team came on starting about three years ago, but they also had a very strong following. As compared to the regional companies, that's certainly a big advantage for us. Finally, we took the decision that what we're not going to be is just a player only in sort of the major pockets of surety, but that we're going to build specialist capabilities around areas such as oil and gas and waste and so forth.
Those are areas that, by and large, are the domains of a few nationals and a few specialists. They tend to be less competitive, higher margin, and the fact that we can bring those solutions to our distribution is a real advantage as well. Finally, Specialty Industrial. In this case, I'm going to talk about how is it we attack the national carriers, which have 47% of the business with our agents within the Specialty Industrial segment. Why do we win? Well, the first thing, this is important, we've yet to see One of our national competitors who has a dedicated focus on this category. I think that you heard the commentary from JKJ about what we're doing in this area. There's certainly FM Global out there.
We operate a level down below it, but we don't see many other companies that have a dedicated focus on this area. Second, our engineering services. This is really sort of the secret sauce for our company. We have processes that we deploy pre taking on the risk and post taking on the risk. The process that we deploy pre taking on the risk is non-invasive but incredibly insightful. We're working with the ultimate customers who's basically getting value out of just the assessment services to provide insights about where there's engineering needs around these risks.
Our product is designed specifically for this type of exposure, there's a long list of things that we could talk about, but a really good example is that in the unfortunate event when a claim occurs, frequently the chemicals that are used to put out a fire in these kinds of settings create contaminated debris. We provide coverage for contaminated debris removal up to the full limit of the policy. That's really unusual. We understand it. That's an important part of a loss that has to be dealt with. Those are the kind of things that we build into our product that are really unique versus many companies are trying to address this segment with a standard product. Limited distribution.
I think above maybe any other category that we have, the guys who have access to this product know that they're going to be able to go to market with a product that's far better than anybody else's product. That's a real advantage. I mean, just that alone. It's very easy in the industry to replicate products. I mean, all you can do is just go look up the filings. Here's a case where, because of our expertise, not too many have followed on the product front, but our agents know if they have access to our HSI product set, that they're going to have an advantage in their competition. Then finally, we do a lot to write whole accounts. In this case, if you're dealing with a transportation risk, maybe it involves marine. We are able to write the auto, the umbrella.
Those are elements when you can take the expertise on the property side and start to join it up with some of the other areas that we can provide solutions for as a company. It's a real advantage, again, for our agents. That just gives you a sense of how we compete and win in aggregate. Apologies. What I want to do now is I want to step into a more focused conversation using Hanover Professional Portfolio as the exemplar for our specialty businesses. I'm going to give you a sense for the specific opportunities within our agents. I'm going to give you a couple agent examples. Before I get into it, just to give you some context, the industry is about $18 billion. We believe roughly half of that is addressable by us, is sort of within our appetite.
We exclude large risks, we exclude public company, we write very little financial services, we don't write non-standard risk. We write a little bit of healthcare, but not that much healthcare. Once you sort of take that out, it's about half the market. 50% of the market is controlled by five guys, it's reasonably fragmented. Wholesalers control 40% of the market, a good portion of the wholesalers books are the 50% controlled by the top five guys. It's a very fragmented market. It is an attractive market. Even when you incorporate the impact of the financial crisis of 2008, the results for the top players over the course of the last 10 years have been low nineties combined. This is a very attractive segment, it's a dynamic segment.
There's a lot of changes happening, whether it be the increasing importance of cyber, and it's making its way into the product set within management and professional liability, whether it be employment law changes. Certainly post-2008, we've gone through a structural change where many more people in the workforce are effectively self-employed, so those individuals have to frequently carry E&O coverage. Those are the things that we find very attractive about the segment. As you can tell by the diagram on the right-hand side, we've constructed a portfolio that is highly diversified, and we'll continue to evolve that portfolio so it's even more diversified over time, today, about $140 million business. That's the context from which we start. Let me talk a little bit about the opportunity.
If you look just at our top 25 commercial relationships, many of which who are the guys that you saw in those videos. The opportunity for us, just in Hanover Professionals alone, is a quarter billion dollars. You can see the breakout in the first column from small opportunity like accountants, where it's $5 million, to very large opportunities like directors and officers. In the second column, you can see our current share in each one of those products, so ranging from a low of 1% to a high of 7% or 8% in EPLI and fidelity and crime. Importantly, in a very short period of time, we've been in these businesses for about six years and incrementally built these businesses over the last six years. In our top 25 relationships, we're already number four on their shelf.
We're not satisfied with that, but we're number four on the shelf. 5% share, 41% year-over-year growth. It's really working. With three national competitors who have a better position or I guess, a more significant position within our in-appetite target, we've already surpassed a number of national carriers, a number of wholesale carriers. In a very short period of time, really built a very strong position. Let me talk about some case studies to give you a sense for what this really is like on the ground. In that last video, the very last clip was Todd Stein from Brunswick Insurance. Todd is a CEO of a family-owned company. They control probably about $100 million of premium between what they do on the agency side, and they also control a book of business on risk management or fee-for-service side.
Third generation, his kids are in the business, focused on construction, manufacturing, professional services, as well as real estate. Our relationship began with them. They're in Eastern Ohio. Our relationship began with them in 2008. Our relationship started with a single line of business, lawyers' professional liability. Over the course of about three years, we built a book of business that started to approach $1 million. We really started to understand a bit about Brunswick as an agency, and they started to understand us as a company. What happened from that point is really quite spectacular. As we moved from 2010 into 2011, we started to really grow our relationship, and it started to approach $2 million. We built a small position in miscellaneous professional liability, built a position in commercial surety, started to build a position in middle market.
Importantly, we identified an opportunity in an area that, right after the financial crisis, was certainly an attractive opportunity around property preservation. These are individuals who will go in on the behalf of the banks and will secure and maintain property while it's going through the foreclosure process. Over that time, started to see that there's some nice opportunities for us to jointly grow together, but also find opportunities to grow Brunswick's book of business and us also to grow with them. In 2012, the business really started taking off, and I would say the partnership emerged properly. At this point, we're starting to approach $5 million. We deployed that product and built a strong position around property preservationists. Our commercial surety relationship really started to take off as well.
2013 rolls around, this is when our partnership truly came into force, we built a position in six different areas. What was really interesting about this, it was in this year that one of the principals at Brunswick referred a management liability underwriter in the eastern part of Ohio, who they had a relationship with. One of our national competitors suggested that that individual talks to us. We talked to them, they came and they joined us, suddenly we built a position in management liability. We also built a position in healthcare. As we exited 2013, we had six different points of anchoring with Brunswick, which has been just a tremendous success story. As we look forward to 2014, we're already growing in another category, contract surety, through the first quarter of this year. We have growth in each of those six segments.
Importantly, as we look back, we're about a $7.5 million relationship right now. Remember, this is a business that is probably a $100 million business of controlled premium. A third of that came from share shift, i.e., taking business from two specific national carriers, and two-thirds were new to the agency. A win-win going both ways. Business that wasn't just about us taking an embedded portfolio that we knew was profitable, bringing it across to us, but also being able to arm the agency with something that they could grow with, which is exactly what happened. Let me give you another example, which is a slightly different twist. Instead of starting with an agent, it starts with our understanding of a market opportunity, then finding the agents that we want to work with.
This is all a byproduct of all the insights that we've developed through our planning and our profiling undertakings with our key distributors. In 2008, the financial crisis caused a major dislocation in the investment advisor, broker-dealer, E&O sector. Effectively what happened in 2008 is a lot of capacity came out, terms and conditions became very tough, deductibles became very high. Losses sort of worked their way through the system. 2011 rolls around, the market starts to revert to a more normal state. Capacity comes back in, terms and conditions improve. One thing that didn't revert back to its ordinary state is deductibles. If you know any friends who are at broker-dealer investment advisory firms, you will know that the investment advisors have very high personal deductibles, frequently $50,000 or more.
What we did is we worked with one of our agents, who's a specialist in this area, took a lot of time to understand the exposure, the risk, the loss characteristics, and we concluded that we could construct a product with them that basically attacked this gap coverage, this $50,000 deductible, targeted towards large firms where you could provide that coverage to each of the individuals, but also targeted towards individuals who could access the product through a risk purchasing group. We created it, we launched it, proved to be very successful, very profitable. We did this knowing that if we were successful, we could do something more with it. We then deployed it to seven agents who are very strong in the financial services space.
What we did is we used those agents who are already writing or already placing significant E&O coverage for the investment advisor segment with other carriers to provide them with a complementary product, that's basically this gap coverage for deductible reimbursement. What we were able to do is bring a product to them that isn't present in the industry, knowing that they'd be able to do something, whether this would be entirely complementary to what they do, it's another product to sell. Over the course of the last few years, we've been wildly successful in using the insights about our agents to get this product to market. If you step back and you sort of say, "Well, what's the key takeaway?" We have to be the kind of technical experts to be able to understand the exposure, the risk, the loss characteristics.
The most important takeaway is the fact that we started with knowledge about an opportunity that if it proved to be successful in kind of a petri situation, that we'd then be able to deploy it to a number of our partner agents, which we did successfully. Let me just spend a moment, this is the last slide on our Professional Portfolio, which is really looking at our operating model. What's unique about this is that not unlike what you heard in small commercial from Jack, our operating model starts with the insights that we have about our agents. It starts with how we're going to deploy resources, where we're going to develop product.
Once we have that, we can then put our resource alignment in accordance with where we see the opportunity. It provides us the basis for tracking our progression in terms of our position on the shelf relative to the book of business that we want to write. That's the start of our operating model. In practical terms, in the front office, what this drives is kind of a two-tier approach. For those agents that have a very dedicated focus towards professional liability, whether it be on some of the E&O lines or some of the management liability lines, we have distributed resources in our local office, again, that are equal to the best of the best in the industry.
For those franchise partners who don't have that dedicated focus, but we believe have a profitable niche that we can serve as part of our franchise relationship, we have regional centers that we use basically to be able to address that opportunity, but to do it in a cost-effective way. Both those approaches are enabled through a platform that we've developed over the course of the last five or six years, which provides rate quote bind facilities, provides the agent point of sale facilities that they would expect for the type of business that we're writing in the professional and management liability segments. Back office or mid-office, I talked a little bit about our risk management. It's a $140 million business. We have two dedicated risk managers for the business. We work with a number of third parties around specialist areas, like we have an employment practice liability hotline.
We work with a specialist firm on kidnap and ransom. The list goes on and on. I mentioned some of the things we're doing on architects and engineers, accountants. It's a very comprehensive risk management services package that we're able to provide as a complement to our product. Our claims teams for professional and management liability are not a genericized group of people. The guys who are doing E&O for lawyers are doing E&O for lawyers. The guys who are doing errors and omissions for architects and engineers are doing errors and omissions for architects and engineers.
We have real technical, deep technical capabilities that are solely dedicated to each of these categories, which is, in our case, one of the unique characteristics of our business, and we believe one of the key reasons that we're able to maintain our loss content and the loss numbers that we've been seeing in these businesses at the levels that we have. Our service center that I talked about for E&O, again, we believe that's one of a kind. We're unaware of anybody else who's providing service center solutions for errors and omissions products, particularly small errors and omissions products. Finally, internally, as an organization, as we've invested in this business, it's been very important that we have a very finite and very granular understanding of our exposure, our rate per exposure, our loss characteristics.
As we're building this business, our aim is to construct our portfolio in a way that is continuously getting better every day. Big investment for us in information has been critical to us being able to grow this business, to grow it profitably, and to know that we are increasingly focused on the parts of the market that present the greatest opportunities for us to over-earn. I want to step back now as a final slide and just kind of summarize the opportunity. Again, I'm going to set aside AIX and Merit for a moment, but talk about the other five businesses. In 2013, our written premium was about $520 million. You can see the positions that we have in aggregate across our agency plan.
A small position, for example, in healthcare, 1%, very early in its development, to 11% of marine, which of course is a far more mature business for us as a company. In aggregate, about 5% penetration across our agency plan in these specialties. If we think about the opportunity, a 1% increase is obviously about $100 million, which in itself is certainly important and attractive. What's more attractive and more important for us is that these businesses present a significant opportunity for us to expand our margins. The more we are able to grow these businesses, which present four points better operating margin than the rest of our businesses, certainly that is going to have an impact on our results.
It is one of the key levers that Fred, David, and the rest of us on the management team talk about as we think about the growth and development of these businesses. In addition to that four points, most of these businesses are relatively immature. We have invested very heavily in front of the revenue. In some of these businesses, our expense ratios are as much as 10 points higher than where they should be. As we grow and scale these businesses, there is additional value to be realized, further margin expansion just associated with the expense leverage. On top of that, when you start to incorporate the growth and margin opportunity of Merit and AIX into these numbers, it is a further opportunity over and above that. That is it. I will stop there. I will be available at the end of the program for comments.
With that, I am going to hand it over to Bob. Thank you.
Literally hand it over. Good morning, everybody. Now we will turn to international operations and away from the domestic operations. I would like to really leave you with two key messages today. The first one is that Chaucer has an exceptionally strong underwriting franchise, the emphasis there is on underwriting franchise. Not only that, although we are in a difficult and challenging market at the moment, we are in a great position to navigate that market because of the component parts that we have got. That is the expertise and the highly regarded underwriting team, a diversified portfolio across a number of classes of business, that allows us to also develop some of those businesses in these market conditions. We take an influential market position. We are a leader in the classes of business that we select to participate in.
The opportunities that we see over the period of time coming up now is really because of the development that we've got in some of our broker relationships, also our international offices overseas, and the relationship that we have with Hanover and trying to use some of our products and distribute them back through their distribution and their agency network. Let's start with a bit of background information about Chaucer. We're headquartered in London. London and Lloyd's is still a very big and successful global hub for insurance business. We've got 111 underwriters which we deploy around the world. In 2013, we were writing $1.4 billion of premium income. We operate within the Lloyd's market through two principal sources, two syndicates. Syndicate 1084, which is our flagship syndicate, composite syndicate, and that's the ninth-largest syndicate within the Lloyd's marketplace.
We also have a separate Syndicate 1176, which is the market leader in nuclear business. Across both of those syndicates, they perform very well with our competition. We're top quartile, second quartile in most of the classes of business that we choose to underwrite in. Looking at that performance, we've delivered a healthy combined ratio over time. Referenced here the period 2004 to 2013, where our cross-cycle average combined ratio was 94%. Since we've been a member of the Hanover family, Q3 2011, we've given a consistent quarterly performance to the Hanover, and that's both including and excluding cat activity. This returns a very strong return on equity, just because of the capital efficiency of operating within the Lloyd's marketplace. Over that period of 2004 to 2013, we delivered an ROE of 14%. Let's look a little bit at Lloyd's.
For those of you who don't know, specialist market, leading specialist insurance market in the world. It's not an insurance company. It's a collection of syndicates like ours that operate within that franchise. We've got access to over 200 countries and territories around the world, and that's an expensive barrier for someone to try and compete with us. It's a barrier to entry, the fact that over those years, we've got that fantastic trading advantage of worldwide licenses. Very capital-efficient model. We'll talk about this a bit later. That distinguishes us from the U.S. and Bermuda. We operate at a much lower capital ratio than our competitors. Anyone operating within that Lloyd's franchise gets the benefit of the collective Lloyd security ratings. Currently A rated from AM Best, A+ from Standard & Poor's, and just upgraded to AA- by Fitch this week.
If you look at the Lloyd's market compared to its peers, it performs very well. The peer group that we've got here that's been selected by Lloyd's covers both domestic and international companies that are writing insurance and reinsurance, and they're sourced at the bottom there. You can see in that period between 2009 and 2013, with a slight blip in 2011, we've outperformed that peer group as a Lloyd's market. We are facing quite challenging times at the moment. It's a combination of really benign cat experience, a number of years without major losses, but we're seeing pressure on rates, and still seeing capital coming into this business. The one light that we see at the moment is on U.K. motor. I'll dwell on that a little bit later.
Most of the lines that we underwrite within the specialty insurance sector are under pressure, with the exception of casualty. The rating index that I've given you here is the internal Chaucer rating index. Base date for here is 2005, and you'll see we're peaking at 2012. We've seen some movement back from that peak over the last couple of years, and that is continuing into 2014. The index that we use here isn't just a premium index. We don't just reflect on premium. It takes into account coverage changes. It takes into account deductible changes. It's a risk-adjusted rating index, which is very valuable for us to see where we are in that cycle. It's a challenging market. Against those challenges, we're really in a very good position, and there are still some growth opportunities, but they're very limited.
I'd really sum up the position we're trading in at the moment as being defensive. We do have the capability still to develop the business. It's our track record. It's the team of people that we've got, the highly experienced underwriting team, the diversification of our portfolio, and the fact that we're a leader. The fact that we're significant within the marketplace is important, and I'll dwell upon a little bit later. The other thing is that we've got the international reach, not just through the Lloyd's platform, but also because we have overseas offices, and that allows us to access that good business around the world. Looking at the underwriting team, Bruce Bartell is with us today. Headed on the underwriting side by Bruce, 41 years experience in the industry and 26 years with Chaucer.
I mentioned that we break the business down into the two syndicates, Syndicate 1084 and Syndicate 1176. John Fowle that runs Syndicate 1084, has been with us nine years. We've got 22 years of industry experience. Michael's been around for what seems like ever, and he's been with us for eight years, and he's really regarded as an expert in that sector. Michael's just taken over the running of our energy sector as well, which we announced within the last couple of weeks. We've got very experienced top-end people. More importantly below that, we've got very experienced divisional heads. Each of our divisions has its separate underwriting head, an average industry experience of 25 years, and been with Chaucer for 11 years. Then the underwriters, not so long, obviously, they're more junior, but an average industry experience of 15 years.
Not just the fact that these people have been around for a long time, but the fact that these people have been with us for a long time is a very important part of our business model. They've worked together, they've experienced soft markets before, and this is no surprise to them what we're encountering at the moment. We talked about diversification within the portfolio. We write marine, and we write aviation, we write energy, we've got property business, we write casualty business. The two extremes, really, the extent is one is U.K. motor, and then we also do the higher extreme nuclear risk. All of that diversification within our portfolio, within the Lloyd's business, gives us a very efficient solvency capital ratio, which equates to the fact that we're writing about 2 to 1 when it comes to premium relative to capital.
Being in a number of classes of business, and within those classes, each subsector there at different points in their underwriting cycle, it still does just give us this opportunity to grow some of these areas and develop some of these areas, be it in specialty or in the U.K. motor. You can see the breakdown on the doughnut chart there, just of that $1.4 billion of income, with U.K. motor being 23%, property 19%, energy 17%, casualty 16%, and our marine aviation being around 25%. It is that balance of the specialty business that we've got with the motor business, which gives us that capital efficiency. I talked about being relevant in the marketplace, and that's very important, that you've got to have a distinctive underwriting offering.
We're a market leader in those areas of the business that we choose to specialize in, and that's vitally important at the moment, particularly where we are in the market cycle. We've got influence in that business, and you get that influence in that business by leading the business. By lead here, I mean that definition of someone who sets the terms, meets with the broker, discusses these terms with the client. Any new capacity coming into the marketplace is just, in many instances, benign capacity. They don't have that expertise that it takes to lead business in our sector, and that's very important. We're continuing to add to that. Even though we've got that expertise at the top end and demonstrating good results over a number of years, we're adding teams of people, we're adding subspecialties within those classes, which allows us to develop.
The other areas that are important for us and makes us more distinctive is the fact that we do cross-class coverage. We're combining property with casualty, property with accident and health. We've got the ability to have a more general, wider relationship with a client and with our brokers, which allows that business to be a little bit more sticky to us. That is complementary to what we're looking at for The Hanover as well. I've listed down here some of those classes where we would regard ourselves as being experts, where we would look to add value in that marketplace, and you can see the percentage of that business that we actually lead at Chaucer. As I said, this is about the rating, the coverage, the interactions with both the brokers and the buyers.
Very important to add something in that marketplace and not just be a follower. Just a quick look at the U.K. motor business. U.K. motor's done a lot of press recently. It had massive rate increases until two years ago. We've seen a decline since then. Even over a very long period of time, Chaucer's managed to outperform the sector by around 10 points. We've done that really by maintaining a very low market share. We know what we want, we know what we don't want, and market share is much bigger in those areas like specialists or specialty business, where we are very precise about the business we want. We work with our brokers in order to get that through different distribution channels. U.K. motor, albeit it has been challenging, some of the signs we're seeing at the moment are actually quite positive.
I'd now like to focus on a couple of classes of business where we do have specialism, where we are regarded as market leader. That's the coverage for political risk, trade credit, and political violence. Three different segments of business where we're targeting slightly different clients, and we have a market share of about 8% for these classes, so we are a market leader. The protection that we're giving here, political risk against government action, trade credit against commercial default, and political violence is around terrorism. Lloyd's has been really the developing market for these classes of business since the 1970s. They do require expert knowledge, very detailed expert knowledge by the region that you're trading in. There's not a generalism here. You're talking about very specific specialists per region. It's a growing area.
The international expansion, globalization of businesses, and also the increase in terrorist threats, has meant that this business has been in demand, and we are seeing it grow. London is still regarded for these classes as being the center of excellence. In 2013, Lloyd's itself wrote over $1 billion of premium for these classes. Our own portfolio, we have 11 underwriters underwriting these classes, mainly based in London, but we also have them deployed in New York, Copenhagen, Singapore, to get various regions. We've seen very good growth, annual growth, 25% growth since 2006. Not only just with the growth, we've also seen very good performance over that period as well. Our incurred ratio for 2003 to 2012, around 64% for our political risk account and 36% for political violence.
You can see on the chart that we've got there on the left-hand side, how we've diversified that portfolio away. If you go back to 2006, it was a political risk account. We've added trade credit, we've added the political violence account, and now we're sitting at a portfolio of around $120 million, which is pretty well diversified territorial as well. You'll not see us writing business here in the U.K., in the U.S. This is the areas where you'd expect to see the exposure. Asia, Africa, South America, Eastern Europe. Leaders in all of those areas with expertise in those particular sectors. Looking at global reach. Lloyd's is fantastic. A lot of business comes to Lloyd's. It's the center of excellence for business. More and more you're seeing local areas developing, local areas getting stronger.
Some of the business that we'd like to underwrite stay in those local areas. Singapore being a classic example where within that region, Singapore has become a hub for certain classes of business. In order for us to continue to write that business, we have to go where it is. This is where business is staying local, we have to be local as well. We're making a slight tactical move around our South American strategy. We have an office in Buenos Aires at the moment. We've decided to move that office to Miami to be our center hub for that region within Miami. We'll see over a period of time that develop to add certain classes of business to it. This isn't us putting a flag in various territories just for the sake of being diversified territorially.
This is where we have business that we want to write, main sectors of our specialization, where in order to get the right business, the profitable business that we need, we need to go and open these offices. You'll see more development coming from those over a period of time. The other area that we need to focus on, is really our relationship with brokers, and the influence that we've got over distribution. Lloyd's is a subscription market, it's a specialist insurance market, and the business that comes from Lloyd's is dominated by the big three brokers. We've got a strategy that means that we're going to continue to develop that business with those three brokers. More and more now we're looking at the next 10, that second tier of brokers, regional specialist brokers.
Our overseas offices, which I've mentioned, and also the fact that we can start using the Hanover connection to distribute some of our products back through to their agents to give them a wider band of offering. That's an important area of focus that we're going to see over the coming years. In summary, it is a very difficult position that we're in at the moment. One would say that it's a challenging market. I think we're in a great position to respond to this market and to cope with this market. We've got strong underwriting experience. We've got scale. We've got focus. We specialize in certain areas of business. We've got the ability to flex our portfolio.
Because of that diversification in the number of classes of business that we're involved in, we're very conscious of where every class of business is in their particular mini cycle. We can respond and grow and contract as appropriate without overall upsetting that balance. We've also got the capital efficiency that comes with that diversification of the portfolio. There are still opportunities, so it's not all bad news. I think the stronger relationships that we're building with our target brokers, our international network, and as I said, the fact that we're making small steps but valuable steps now in the distribution model through Hanover agents in the U.S., is going to put us in a great position against our competition. With that, David, I'll hand you over to the financial overview.
Okay. I'm still able to say good morning, everyone. We got five minutes. I know we're a little bit behind the original scheduled agenda, but I think we're going to finish with a strong section, and we'll get to the Q&A and lunch. I'd like to start first with all due respect to my fellow presenters, I want to say unequivocally, we've saved the best for last. I'm going to try to go and put all the pieces together of what you heard this morning, how that comes to fit into our financial plans. Let me start with the three points I want to cover in this section. First is we have a solid franchise that we've built, and hopefully, you've seen that in the presentations this morning, and you've seen that in the things we've said and done over the months and years over the last several years.
I want to comment on the strong track record. We have a financial performance. I think when you look at numbers quarter to quarter to quarter, sometimes there's a fog of what's really happening below the numbers, there's a few things I want to show you that I think demonstrate the real value and growth in our earnings that are going to be important to focus on. We've done a lot of work in aggregation and risk management and exposure management, there's a couple of comments I want to make on how that's helping us from a volatility standpoint. I want to address some of the commentary around our reserve positions, so I have a couple pages on that that we can look at, then talk about our growth.
You've heard a lot about that from the earlier presenters about our growth in the mature business that we're driving our scale and operating efficiencies with. I'll make some comments on the investment portfolio as well, I will close with some comments about our capital structure and our targets for financial performance. Let me start with the financial performance point, which is really the bedrock of the comments I'm going to make. From our perspective, the item that drives our financial performance forward is absolutely underwriting improvement, underwriting margin improvement, you heard that time and again in each of the presentations this morning. Each of our business leaders are focused on financial performance, growing their business profitably and smartly, we're making great progress with that.
What you can see here is when we look at the levers of our business, Fred commented on the levers from an underwriting perspective, clearly underwriting improvement drives our ROE forward. We've seen good progress in that so far through 2013. Our plan and guidance for 2014 shows additional performance improvement, you'll see, as I talk about targets at the end, that we'll have additional performance improvement in our underwriting focus as well. Two things on this chart that I think are really important to focus on. If you look at our performance from a growth standpoint over the last 10 years, to punctuate the point that our growth has been very strong and has really driven our earnings improvement, on the left-hand side of this chart, you can see we well outpace the industry for growth. We've done it smartly. We've done it well.
I'll show you a slide a little later on in terms of some of the things we've done from acquisitions and divestitures that have driven our performance forward from a growth standpoint. All the things that Dick and Jack and Andrew talked about on a day-to-day basis in driving growth in our business is also showing up in these numbers. On the right-hand side of the chart comes to how are we doing from an earnings standpoint. When you look at our earnings dollars, earnings power, in each of the last five years, you can see a nice growth in the underlying earnings power of the company. You can see even in the last two years, you can see that has accelerated between 2012 to 2013, as well as what we have in our guidance for 2014.
I think it's a very important point of the underlying story here, which is that our business, when you look at it on an underlying basis, is actually improving quite dramatically. We talked earlier a little bit about pricing. Pricing has been an important part of the business. We built this business to be able to maintain pricing persistency. You can see in both these charts, the personal lines on the left, we've had very good price increases over the last several years while not sacrificing retention. The same on the commercial side that Jack and Andrew talked about earlier, where we're seeing very good pricing in the market and maintaining strong retention levels, which is helping our financial performance. Exposure management is another area we've spent a tremendous amount of time.
Fred mentioned earlier in the day, we shed something like $400 million of business over the last several years, some of it which was profitable, but because of aggregation and exposure issues, we determined that it was worth pulling back in those particular areas. This chart is really meant to just show you illustratively what recent events have looked like for us and what they would look like today on a model basis, you can see a dramatic improvement. Now, I'd like to be able to predict that every time there's a storm, it doesn't hit any of our insureds, but that's not really what the point is about this chart. The point is to show you that the things we've done from an exposure management or risk aggregation standpoint have been very helpful to us, and we believe it'll drive our volatility down in the future.
Let me make a couple points about our reserve balances. What I wanted to describe here is on the top-end chart, you can see our reserve accounts for the last five years. When we brought Chaucer into the portfolio, obviously we brought along about a billion five, about a third of the reserve balance. I meant to spike that out for you separately. We have insignificant exposures to what I would call the industry legacy issues. It's been obviously an important part of the company to drive our business forward. Over the last 10 years, as we've remade the portfolio, obviously we've been careful to drive our business forward in a very constructive way.
Our reserve duration is much shorter than the industry average. Therefore, when you see things that are going on, we react to them very quickly because it's important for us to do that from a conservative standpoint, but also from the standpoint that it emerges very quickly for us, and we like to address it in a quick way. We're very disciplined in terms of our reserving approach. Each quarter and annually, we do a lot of work on the reserve balance to get it as accurate as one can. I wanted to demonstrate on this chart on the bottom left-hand side, which is a look in domestically. You can see that we're building an additional level of conservatism in our reserves by, as you notice, the IBNR to ultimate average is going up over the last several years.
That's driven both by mix as well as a little bit extra measure of conservatism that we're using in our loss picks, which I've talked about previously. On the income statement side, from a reserve release standpoint, we have a very good, strong track record of reserve releases going all the way back to 2003. We've had favorable reserves releases in every year. You can see one year where it's a little bit shorter than most, and you're probably well aware of some of the reserve adjustments we made in 2012. I feel confident that those matters have been addressed, that those issues have been dealt with. As you can see, in 2013, the blue bar has come back up to some extent.
I think we've addressed the fact that there were some reserve industry issues that were occurring, some issues in our book in terms of loss ratios. Now I think you can see that reserve releases are still an important part of our method of reserving, which is conservative reserving. On the bottom, I just wanted to highlight as well that when you look at the last couple of years because of that movement in 2012, we've kind of tailed off a little bit from a cumulative perspective when you compare us to the industry. That does have a particular drag on our ROE, and I think that headwind, so to speak, from my perspective, is behind us as well. The other area I wanted to cover in terms of underwriting performance is expense levels, expense ratio.
Again, you heard a lot about how we're building and growing our business and the investments we're making in our business. When you look at where we were in 2010, you can see that those expense investments were showing up in our ratios, both in the core area as well as in the specialty area. You can see we've done a nice amount of work over the last three, four years to drive the expense ratio down, both from the standpoint of leverage and scale in the business, but also from the standpoint of being very focused on our expense investments, if you will. There's still a little bit of room to go here. We will continue to drive down both the ratios for core commercial as well as specialty.
I would estimate at least another point or two over time in both of those coming mostly from scale, but also from internal investment decisions. I want to make this point that when you look at our expense ratio in total, as you can see even on this chart, the total expense ratio doesn't move much, that's really because it's important to also look at the mix of business between lines of business that have low expense ratio or leverage, if you will, like personal lines against other businesses that have higher ratios like Chaucer or international specialty as well as the domestic specialty. On the loss ratio performance, we're performing very well. Both these charts, I think, really show the point that our performance in our book is playing in line very nicely with the national specialties and the best companies in the industry.
Clearly, we're outpacing where regional companies are as we've talked about our move to be a national player. It's very strong. When you look at what our 2013 results are and compare them to some of the peers, national specialties and regionals, you can see again, we're performing very well on a one-year basis, and we see no reason why we won't be in line with the best companies in the industry in short order. Just a couple of points on the investment portfolio before I move on to capital. We have a very conservative investment portfolio. We are more focused in the credit space, as you can tell. We very much focus our returns on a yield basis in maintaining net investment income. The duration of the portfolio is about four years.
We ladder the portfolio to maintain liquidity in a very strong way. We keep our quality very high. As I move over, as you know, interest rates are the indicator in the industry that are the most difficult for insurance companies, being that they've been so low, and they've been low for so long. The chart on the right just shows you the trend on the bottom line where the 10-year rate has been over the last five years. You can see that nice dip in 2012, which was well lower than anybody would have imagined. I think it's a very long-term low for the sector. We expected rates to come back this year, as most did. They've maintained a very low level a little longer than most have thought.
We are starting to see the rate move back up a little bit, and we still have an expectation that we'll see the 10-year rate come back up by the end of the year. We've maintained our yield in the top line, you can see, very effectively over the period. One of the things that drove this ratio down a couple of years ago is that when we brought on Chaucer and its portion of its portfolio, roughly $2 billion of assets, we had to reinvest those assets at one of the worst points on that chart, if you will, from the standpoint of interest rate. We did a nice job of increasing the yield on the assets in the Chaucer portfolio. As those are on a shorter duration, we'll reinvest those as rates continue to go up.
We've done a really nice job, I think, keeping the investment income to a nice stable level of earnings for us. Again, this is one of the main reasons why underwriting is so important to us. As interest rates come back, we'll start to see, I think, an acceleration of increase in that investment income as well. On capital, we have a very strong and flexible capital position. We do focus our capital on our growth opportunities, of which we think we have many. The first thing for us is to redeploy the capital that we generate into and against the growth of our business. When we have the opportunity to, we then deploy our capital to other areas such as, obviously, our dividend policy as well as our share repurchase policy, which I'll cover in just a moment.
Our capital levels today are at or above levels that are important for us from a rating agency standpoint. We have a very strong capital position. We maintain our leverage in the mid-20s level, which I think is fine for the business that we're in, and it's well within industry averages. We try to maintain liquidity at the holding company level to meet all the commitments we have, both from a shareholder return perspective as well as other internal risk factors. I think the comment made earlier Bob made, which is that Lloyd's provides us a very efficient capital platform from which to grow that business, which is very important to us as well. On the right-hand side of the chart, I would just mention, we went into the market last year. We did a very nice hybrid instrument, which was very well received for us.
We did a 40-year instrument, which we use as capital credit internally in our models as well as with rating agency models. It was a very opportunistic point. The reason I raise this up is as an organization, we have very good access to the capital markets, which I'm very proud of, any time that we can or will, we'll use the capital markets to continue to optimize our capital structure. I wanted to show you this chart to encapsulate a couple of comments that were made earlier in the presentations and with Fred. We've been very careful and thoughtful to deploy our capital against opportunities over the last 10 years. This chart just summarizes the most significant items. On the left-hand side, you can see some of the dispositions of businesses, the life business, and some non-core businesses.
You also notice here the exposure and risk management efforts we did, the $400 million of business we shed. Fred said it earlier, I would repeat it. I mean, that's not an insignificant amount of business which we have shed over the last several years. From that, you can look again at our growth as being almost triple where we were if you go back about 10 years' time. On the right-hand side, a number of acquisitions that we've pursued and brought into the company that have helped build some of the platforms that you've heard about, whether it's the small commercial platform that Jack was talking about or the businesses that Andrew was talking about. These have all been very helpful to building out our product capability and our portfolio. We'll continue to do this as we go forward.
We're very mindful to look at things that are helpful to advancing our business. In terms of creating shareholder value, I think we have a very strong track record here. There's a couple of points I'd mention. You can see on the left-hand side, the shares outstanding have come down dramatically since 2005. Below that, you can notice that both through our dividend policy as well as our share repurchase policy, we're active when it's appropriate for us to be and when we have the capital to deploy in share repurchases, we will. That's, you can see what we did in 2013. On the right-hand side, you'll notice our dividend policy is such that we try to maintain a strong dividend policy to pay out somewhere in the 25%-35% of earnings a year.
We've been able to do that successfully for the last many years. I got a couple more points to make, then we can move on to the Q&A. I wanted to bring this chart out. This is really more in your purview when you look at valuations and the like, but I thought it was important to point that from my perspective, there's a number of attributes of what we've been doing and accomplishing over the last five years to 10 years that I don't think are really well recognized in our share price today. What I tried to do here was list what some of those items are. In particular, I think the growth that we've driven through the company has been very mature business. It's been smart and thoughtful, and we've had no real issues or backup from that.
I think hopefully you see the point of that discussion today that going forward, that'll only continue to add to our earnings power and performance. The scale and operating efficiencies in our platform are great, and they continue, and we'll see a further improvement in our underlying performance from that, and we're very confident in being able to do that. The risk aggregation exposure management actions that we've undertaken, particularly over the last several years, are going to also perform very well for us or show very good performance for us. We've noticed that even in some of the more recent activities and storms that have occurred, and we've seen good results from that. I believe the reserve position we have today is strong and improved from where we were and will only get stronger from this point forward.
The franchise that Bob talked about in terms of our Lloyd's position is a very strong position and has performed very well as we've been together. Lastly, I wanted to comment on targets because we get this question quite often. In our guidance for 2014, we have about two points of improvement, roughly estimated in the guidance that we've provided. What I'm showing you here on this chart, two points of improvement in the combined ratio. What I'm showing you here on this chart is that we believe we need about three to four more points of performance improvement to get to our ultimate financial targets. Two points of those are already anticipated in our 2014 guidance, and we see real good, clear line of sight for that to continue into 2015.
We think those three to four points of combined ratio improvement will come roughly about two-thirds from the loss ratio, one-third from expense ratio, and that'll all depend on the ultimate mix of business and the growth in the individual businesses. We clearly believe we'll see this improvement over the next several years. We're going to continue to drive, obviously, the above-average industry growth that we've been driving through our businesses to date. I also want to just comment on the 2014 guidance. We did talk about this in the last earnings call. We're effectively holding the guidance as we discussed, that we still believe we're going to have an earnings range of $4.80-$5.20 for the year.
Given some of the first quarter activities we've talked about, it's more likely to be at the lower end of the range if the weather conditions come through as we plan for the rest of the year. We still believe we'll be in that range for the year. Our assumed cat loss ratio remains at 5%, and our net investment income will decline slightly as estimated, based on yields and rates in the market. Growth for the year will also continue to be about the mid-single digits level. I'll just reiterate, we're intensely focused on our financial performance in driving ourselves to the target returns that we've established. With that, it's been a very positive morning. I hope you've got a lot out of the discussions and the presentations that we've had.
I'll just reiterate, we're building a world-class company that will be able to deliver the returns that we've established, top quartile returns. We have a unique distribution strategy that we think is very effective for us in being able to do that. We have a very broad and relevant product set that I hope you've got a good feel for based on the presentations you've heard this morning. Our operating model is flexible to drive ourselves to where the opportunities are, and the talent and capabilities we have are the best in the industry. Finally, the last point, we have multiple levers. Our view is we have multiple levers in which we're able to drive our financial performance forward, which is why we have so much confidence in our ability to achieve those. With that, I'm not going to read the footnotes.
I'm going to ask Fred to join me, and we'll be happy to take your questions. We have also the other presenters and management members up front that are available as well.
Is this on? Dave, just quick questions about the guidance. The 4.80 to 5.20, does that contemplate any favorable development? If so, how much?
I'm sorry, couldn't hear you.
Does that contemplate any favorable development in reserves? If so, how much?
The only favorable development contemplated, I mentioned this, I think, in February, was a couple of points, roughly, we build in for Chaucer, but none domestically. We don't estimate favorable development in domestic reserves.
Okay, I might be missing it here, but the growth change from 2013 just is on target. What's your target?
The growth for the company for the year is mid-single digits.
Mid-single digits. Okay.
Yes.
Bijan Moazami, Guggenheim. Fred, you mentioned that your agents' distribution is consolidating. Is there any kind of pressure for the agents to get a higher commission rate? If they do, can you pass that on back to the consumer? I have a follow-up.
Yeah, we have not. Obviously, there's been some talk at the brokerage level with the programs like GRIP, et cetera, that people talk about. We don't really participate a lot of our business at that level. In our business, there actually hasn't been that much of a trend. What there has been a trend is for agents to be more thoughtful about getting more profit sharing. The average agent would be kind of low teens profit sharing as % of their revenue. There's a lot of folks that are below that because they have a lot of non-partner agents and a lot of their business that isn't aligned to the profit sharing. What you are seeing is a lot more thoughtfulness about agents consolidating their business and getting more of their business with folks where they have a profit-sharing plan that's in alignment.
Part of this, remember, it's consolidating, but it is incredibly fragmented. Compared to any other industry, we're talking thousands of distribution points. What's fascinating is, yes, it's concentrated, but it is underneath the brokerage business, the top three, the business is quite distributed, and we have yet to really feel the pressure that some of the folks talk about at the top.
On your strategy of being local in terms of having people and underwriters all over the place as compared to a company like Cincinnati that tries to concentrate almost everything in the headquarters.
Again, one of the interesting things about us, and again, some of the regional companies essentially have folks that go into each agent's office every week, right? One of the companies you mentioned actually does that. They're quite local on their underwriting. They just have the method of some of these regional companies, though, is what they have local is two underwriters. That's all they have. Essentially, what many of the regional companies do is they literally underwrite the agent. What that means is that they rely on the concentration and the profit sharing to do a lot of the underwriting. They are not the most sophisticated players, many of them, about the engineering we talk about or the insight that you got as far as product or whatever.
For us to deliver the complexity of the products that we have, you have to be a little bit more distributed, whether it's claim support, whether it's underwriting support, whether it's some of the engineering support that we have in some of the businesses, to be able to have the insight and deliver our products. We also have, you saw up on that chart, lots of very efficient centers. A lot of what we're talking about in small commercial is while we have a small commercial underwriter and an SESM that is local, our renewals are done through the centers. There's a lot of efficiency that we do, both in the servicing around claims, the servicing just in general, if you will, at renewals or policy process. We do have the efficiency of centers.
We just believe that there's a lot of value, particularly from our underwriters being close to the action and responses. It's paid off really nicely for us. One of the things we also do is we think about lifetime value of policies a little bit more thoughtfully than some. While a CPP policy would be a little bit of underwriting, as Jack said, maybe it's seven minutes or seven hours instead of seven weeks, but it takes some expertise locally. When you look at the lifetime value of that, once we assemble, we get it, we have more insight, we price it a little bit better because we have more insight, and then you have more efficient renewal. The lifetime efficiency pays for itself very easily.
It's a thoughtful model, I don't want to overstate the difference because I would tell you a lot of these regional guys, because they're only in two states, are typically very local because they're only in those two states. It's just that they're central in those two states that they're in. It's actually not that different in some ways.
Thank you. Chuck Sebaski at BMO. I guess I'm curious if there's any synergies or advantages gained on a global basis because it seems there's a U.S. small business strategy and then there's Chaucer, I don't know if you get anything or they're just two disparate businesses that are owned by-
That's a great question. If you look at what we built on our specialty side, most of the North American specialty companies now of any significance have a Chaucer piece. Frankly, the two big significant national players have a Chaucer piece, Lloyd's piece, excuse me, in their portfolio. Let me just talk about the reason being for this. As we think about some of our agent partners, we think of Chaucer first as a great underwriting company, gives us diversification, gives us a great track record for our overall business. As I said when we did at the beginning, my view is that the businesses they're in, aviation, energy, some of the marine businesses, are very relevant to a number of our partners. If you look at that top 10, one of our fastest-growing partners, both with Lloyd's and North America, is Gallagher.
What's happening in the consolidation of some of these partners of ours is that some of these categories are really global categories where Lloyd's is the best market. There is, in our view, some connection and opportunity. Let me go a step further. While I don't think it's going to be the majority of the business, if you look at the political risk, for instance, that a lot of our folks are placing or a part of, a lot of their business, the middle market business, has aspects of that that needs those coverages. We put people in New York, we're putting people in Miami that are tied to some of our partners here, we will access some of that business. We've done some business.
We probably have, I would say, $70 million or $80 million so far of business that originates from our partner agents, whether it's marine business, et cetera. I don't think of it as an overwhelming thing at all. Again, as I look at some of the segments of our partners and how they place risk and the type of risk it's placing, some of these specialty areas very much will be relevant to some of our partners. I like that because some of that is quite sticky. It's the business that's got some real kind of staying power with it. Again, I don't think of it as overwhelming.
As I said, when we first did it, people said, "Well, it's unusual," but I said, "Well, go look at every single significant specialty company in the U.S. now." Almost every single one has done something into Lloyd's because I do think that some of these lines, like marine, is a global marine, that those kind of frameworks to actually share risk the way Lloyd's does it in an efficient way is very relevant. Again, I don't think of it as huge, but I think of it as of growing importance for a lot of our partners.
Dan Farrell, Sterne Agee. Fred, I think you used the term bullish to talk about your outlook for personal lines, which I was a little surprised.
Yep.
If we took a look at the macro backdrop, it seems like there's some signs of competition. You've got some larger carriers pivoting to growth. There's increasing use of comparative raters. I'm guessing your comment is more specific to you guys because you're nearing the end of exposure management and there's opportunities. I was wondering if you could talk about your overall macro outlook for personal lines.
Yeah. No, no. Again, what's interesting about personal lines is that if you look at what some of the major players are doing that are direct, is they're trying to get at the segment that is owned by the advisory groups. The advisory group segments, the accounts and the split accounts that can be bundled are still the most attractive segment, and they're dominated by the captives and the agents and a couple of affinities. That's where they preside, that's where they're better served, that's where the opportunity and the margin is. A lot of people are talking about, and some of the captives are actually doing multiple channel to get at it. When I look at our channel, I actually think the agency channel serves those segments very well.
I'm not sure every agent does, and I'm not sure every carrier has the product capabilities to serve it. There's nothing in the data that tells me that the captive, the account-oriented market can't be well served by effective agents. Nothing. What also tells me is that a lot of that is underserved today in the agency channel by regional companies that don't have the products and services to do it. When I get excited about us, we're a little company. We have $1.5 billion in personal lines. The ability for us to double that business profitably is right there. Because whether it's $60 billion of this kind of business in the agency channel or it's $40 billion, it's a big portion of this business that needs to be served.
The other thing I would tell you is if you look at the direct business, the direct business that is mostly auto, has had a heck of a time selling umbrella, selling property, selling, outside of motorcycles, toys. This account-oriented business has been better served by the captives and the independent agents. That's why I say, and again, are we going to become a personal lines company? No, overnight. That's not what I'm saying. What I'm saying is in our partners and in our channel, when we look at the data, when we look at our products, when we look at the opportunity, we're pretty bullish on our ability to profitably grow that business. Again, it's a segment. It's very targeted at what we do. You're not going to see us do a lot of monoline stuff. That's not our play.
I think it's a pretty stable and interesting opportunity for us. The other thing I would say that's fascinating is that some of the big guys, people think they have an impression, if you look at the top 200 agents, that they're all commercial. There are a handful of those guys that are world-class at personal lines. The largest personal lines writers in the world is one of the top 10 players. The reality is both the Chubb segment and below the Chubb segment, there are some people that are very good at accessing that market and delivering at that market. We believe that that's something that we will continue to focus on as part of our portfolio.
Thanks, sir.
Hi, good afternoon. Vincent D'Agostino with KBW. Just for Fred and David, looking at the 3 to 4 points baked into the combined ratio goal, I'm curious if you could maybe break that down or talk about how much of that would come from rate versus non-rate in the mix shift. In addition, if we should think about, to David's point on taking a more conservative stance on reserves, if we should think about maybe an additional 1 to 2 points potential on top of that on the x CAT combined ratio.
I'm not going to go further.
Thank you.
Look, I won't give you the calculated computer backroom calculations, but a lot of the improvement comes from mix and operating efficiency. Pricing certainly plays a part of that. The majority of it comes from the mix and the operating leverage.
Yeah. Again, one of the nice things about our business, and you can imagine people that have followed us, we still have a little bit of targeted underwriting we're doing. You could look at the exposure management stuff we're doing. You could look at what we're doing with the auto that we've been talking about for the last few quarters. That's working its way in. We've got rate above inflation virtually in every business. We've also got, in essence, this mix that David talks about. Our growth are coming from our higher margin businesses, in the better jurisdictions and in the better areas. You can also look at the maturity of our business. Just a simple maturity. We have many markets in small commercial where we're subscale still. You have economic leverage from that.
We have some of these specialty businesses where we've invested a lot, that we have lots of leverage from that. While we don't parse it all out, guys, but there's a lot of leverage here, just with this mid-single digit growth that you can see us get to the margins. We tried to be thoughtful about this as we built our business and be conservative. Even the way we think about reinsurance and things like that. As we continue to grow and these businesses mature, we are confident that over the next couple of years, we can still continue to improve. The thing I worry about when I talk about volatility, by the way, which is we care deeply about it, this whole concentration, because a lot of the business we're shedding is actually have marginal contribution. It's not terrible business.
It has marginal contribution, we believe our marginal cost of capital is very high when we have that much concentration because of the volatility. It's hard for us to say, well, is our CAT ratio going to change or whatever. I don't think it would, per se. I wouldn't guarantee that lever. Over time, we are going to be a lot less volatile. Over time, that's going to also contribute to our margin. It's just hard to anticipate that, because as you know, many of these kitty cats are very much specific. It's where you get hit and not get hit. We heard that we felt that the wrong way in 2011 when we had two, 2011 and 2012, we had Northeast hurricanes plus tornadoes in the Massachusetts and another thing. These are a little bit random.
Over time, this work is going to have a hell of a lot of impact, both on our margin and cost of capital because of a lot of volatility.
Just one quick follow-up on Chaucer. You said that the long-term ROE was 14%, I was just hoping we might be able to get some color on 13%, or at least since Chaucer's been part of the Hanover family. Thank you.
Color on their ROE?
Well, it's obviously been a lot better than we've.
Anticipated.
Yeah, the two quarters before we had them, there were some losses, and then they stopped having losses since we acquired them. Our returns, obviously, since we've had them, you know what the combined ratios have been, have outstripped the 14% over the cycle.
Yes.
We keep saying, though, it will go back to its. We don't plan it that way. It will be at its target over the long period, and we talk about that mid-90s.
Yeah. I think it's important when you look at our combined ratio, we put Chaucer back to a long-term average that's higher than the performance that they've had over the last couple of years. Certainly, we'd appreciate if they continue to perform that at those levels, it's prudent for us not to plan it that way. While we're improving a lot in some of those domestic businesses, which we've spent a lot of time talking about today, Chaucer is still a very solid franchise, even at our long-term average, which is around the 95 combined average ratio.
Larry Greenberg from Janney. A couple of things from Dick's comments. Talked about, I can't remember what he called it, but kind of the open book with the intermediaries. I guess my question is, how challenging is it to go into an agent's office and get them to open their book to you and really work together from that perspective? Secondly, the effort to have the agents kind of shift away from wholesalers and give more business to you with a full array of product offerings. It's always been my understanding that it's important to the agent to have that wholesale relationship to show to some of their larger customers.
No. Let me start with that second one, because that's a very important point. Wholesalers will always have an important role in our business, right? There are parts of the skill set that a retail agent doesn't have and will access the wholesale market to complement their skill set. It will always exist. What you've seen them do is narrow the set of wholesalers they're working with, create more strategic alignment in some cases. We're not saying that's going to happen. What we're saying is that what's happening to a lot of professional agents is that what they're trying to do is decide what to have their own skills around. Where do they focus? What industries do they focus? Where can they bring those skills in-house?
They won't bring all of them in, but over time, whether they want to focus on lawyers or they want to focus on ML or some other categories where that's important to their business. What we're saying is as they bring those skills in-house, we match up with them to be able to enable them to do that business more direct. Right? It never will be 100%, and it shouldn't be. But there's this very significant trend of them to want to be able to have core and distinctive skills and deliver the full package in some areas. For us, these specialty business are complementary. A lot of the folks we deal with, we call specialist agents that have these skills in a small way, or they're part of the big guys that have broader skills.
I don't want anybody to think that we think the whole world's going to bypass the wholesaler. That's not really what we're doing. What we're trying to do is capitalize on a real trend, which is people are trying to assemble skills so they can do more of it themselves and be distinctive and retain the business. We're matching up with that by having these specialty capabilities that we can give to them directly. The first question, tell me again.
You want to take that?
Just the open book.
Okay. Yeah, before you go. Again, anybody that's been around this business for a long time, knows that agency planning historically, and for a lot of companies, is nothing but spend a day with them and say, "Can you get me 10% growth?" "No, I can get you 8%." "Okay. It's 8% growth, you leave." "What are your top three carriers?" You write it on a piece of paper. It's been very rudimentary historically, and many companies have withdrawn from even trying to do it. There are some that are quite good at it, and some of them are the regional companies and some of the specialty companies. It's never easy to, the first time you meet somebody, say, open up.
What happens is people, as they see and understand our strategy, and as people as credible as you guys saw on that video, talk about the-- these are the leaders in the industry. These are the biggest consolidators there is. These are the folks that have the greatest value creation in the agency channel. As they talk about their success of working with us in a fair way, where they talk about their business in an open way, and we profile their business and think about where the business is and where it's going, and it helps them. We can use it to actually grow together, but also help them, it becomes easier. This is something that takes senior time And it's why we have RPs and RVPs.
This isn't something that a junior person can just come in and say, "Tell me all about your business," and somebody opens it up. This is about really working with them to build the data and build the information we need on a local level to actually be successful together. It's one of our unique things. I would argue that I don't know of any other company that has success like we do on this. I'm sure there's some regional companies that do. I just don't know of them. It's been hard work. I don't know, Dick, if there's something else we would.
Well said. I would say it's not mechanically challenging or difficult, the point that Fred just made, which is it's more the challenge is the strategic commitment part of it, and having that dialogue with those business leaders at those agencies to feel that level of trust and commitment to say, "Yes, I'm thinking of you as an important carrier in my lineup, and let's do it." Mechanically, honestly, it's not that difficult. We have some tools, as Fred said, we pull all the data together.
One of the little things we do that's different, MarshBerry, Reagan, these are names. These are consultants that are very embedded in the agency. We do more research with those two firms than anybody else. I end up speaking almost every year at their events. These are folks that do all the acquisition work in the space. They're the folks that do all the sales force effectiveness work in the space. They're the folks that do the best practice work in the space, we do a lot of research with them. We tend to be a little bit more insightful about how the economics of small commercial works, how consolidation economics work. We believe that's helpful when you build this insight. The reality is, guys, there's $500 billion right now business.
There's $300 billion in the agency channel, there's a lot of good business out there that's very stable. You got to go get it, though. You got to find it, you got to get it, you've got to get it in a way that keeps it stable so that it doesn't become turn all the time. What we've tried to do is build the capability to identify it, to find it, efficiently go get it, so that it's mutually beneficial between us and the agent to do it, which goes all the way back to this commission point. Historically, the companies that are not very good or the companies that don't know how to do marketing and sales, the way they get business is they pay lots of commission. That is completely unsustainable, right?
Our business doesn't have all this excess margin that over time you can do that. People that have done that historically can't sustain the advantage because there's not enough margin to do that. This notion of combined economics and thinking about it a little bit more cleverly, to help success is a much better, in my view, more sustainable way to think about growing the business.
To that point, I think the last thing you said, the partner scorecard that Dick displayed was a direct result of many of our top partners saying, "Hey, we want more transparency to where our partnership is today." That aspect of our tool set was a derivative of partners getting to a certain level and saying, "I think we need to have a better way to communicate how we're meeting your expectations and how you're meeting ours." To me, there's the profiling to figure out how we match up and where we're going to partner, which we've just got increasingly better at, and we're focused on it. The partner scorecard and the real momentum that we have of doing these mutually beneficial partnerships is that we're not having happy talk anymore, right?
It's almost impossible to overrepresent the partnership when you have data that says we're not doing the right things together. It's in your face, you got to talk about it, and it's not anecdotal. It's financial. I think the most important thing that's evolved for us is that these partnerships have asked for it as opposed to us using it as a way to lever them in some way. That shows we've built a different level of trust than anybody we compete with.
Hi, Sarah DeWitt from Barclays. First, could you just talk about on the 11%-13% ROE, what's the timing on that and the message that you think you can achieve it in 2015 or 2016? Secondly, could you just talk about your appetite for M&A? Are there any geographies or lines that you'd like to expand in, and could you envision any more transformational deals similar to Chaucer? Thank you.
I'll start with the first one. I think the chart that I showed you, the 3-4 points on the combined ratio are within sight. All of our businesses are performing well and performing better than they have. Each year, they've improved. We see great, tremendous leverage in our business to improve the ROE, to improve to meet our target returns. As I said, of the 4 points, the 3-4 points, two of those are already baked into the guidance for 2014, and I think the remainder we'll achieve in 2015 or by the end of 2015.
Yeah. On acquisitions, one of the things I would say about acquisitions, guys, we did mostly small ones. We did a couple of sizable, one renewal rights and obviously Chaucer. A lot of that was to get the portfolio diversified and balanced. In my view, we needed to do some organic, but some inorganic, to be able to get to the portfolio that we are in. The way I would look at us now is that I believe we have plenty of organic opportunities. Acquisitions to me are not really as necessary to build the portfolio or fill in or build skill. That said, if we thought there was an opportunity that was financially very attractive, that somehow enhanced our position somewhere, we'd look at it or we'd consider it.
We're in a very different place than we were before in that I think now what we're doing more is fill in. What you saw in the last two years is Chaucer has been able to bring in some teams
To complement. We've done the same thing in some of our skill categories. We brought in a small team to enhance some of the specialty capabilities. I don't think it's nearly as important or as part of the strategy going forward, but I don't want to say, well, we'd never do it, because obviously what happens now is there's a lot of very good companies that are smaller that are maybe thinking about strategic alternatives that tend to call us, particularly if they have a philosophy which is similar to ours. We'll get looks, but again, it's not a big part of our strategy going forward. I don't think it's necessary for us to have the profitable growth and the target returns we're talking about.
I wonder if you could go back and expand on the combined ratio comments. It sounds like 3 to 4 points through next year, two thirds loss ratio, one third expense ratio. In response to Vincent's question, it sounded like you were referring more to operating efficiencies and expense ratio. I was wondering if you could kind of go back and maybe expand on.
Yeah. Again, the expense ratio comes from three things, right? Expense ratio comes from leverage of all the infrastructure investments we've made, which are a lot, right? What you've seen in Jack's businesses over the last couple of years, you can see the leverage that's increased. It comes from operational efficiency, right? Again, we have a lot of operating models that aren't that old. The centralized renewals, et cetera, are all getting grooved, if you will. Right? That centralized renewal system has been only in place three years as we bought OneBeacon and we centralized it all. What you're seeing is, in my view, efficiency enhancement. Then third, it's all the creative things we're doing with automation and other parts of our business to just be a lot more efficient and cost conscious, et cetera.
All three parts come into the expense ratio. The point that David was making, and I think it's that when you look at the, whatever, the 3 to 4 points, three quarters of that is going to be loss ratio for all the reasons that I talked about, the maturity of the business, the pricing, the underwriting, et cetera. There will be a quarter of that will be, or a third, will be expense probably. The problem with our business, guys, is when you look at it in total, it has everything to do with how the mix changes. The ratios could all. You could have zero expense ratio improvement in total.
Right.
Every business can improve their expense ratio because we're growing the specialty businesses much faster than we are personal lines. That's why sometimes when people ask the question, we try to make sure they understand the components. I think it's fair what David said, that the ratios we're talking about is how you think about it.
Yes.
That combined ratio improvement does lead to this 11 to 13. I mean, that improvement, you do the math, it does. Just to make it even more complex, clearly we're simplifying it, right? The capital allocation that we do to the various businesses have everything to do with the profile of the business, the risk profile. The combined ratio can also move a little bit by business. To be truthful or kind of in total, that would get us there perfectly fine. As you know, we're a little bit more scientific than everybody has the same target, collaboration target.
Right.
There's a capital allocation to each of these businesses and a target return to each of these businesses. I think it's the easiest way, if you think about modeling, to model our business and say that's how it's going to turn into the 11 to 13.
Could you expand a little bit on the maybe X mix, the accident year loss ratio, X CAT, X development, some of the drivers of further improvement from year 2014 to 2015?
I think it's two things. I think mix is a broad word. I think as we grow and expand our business, the mix improvement geographically, the mix improvement in terms of the underlying exposure, the risks, and the spread of that risk all works in our favor to improve our accident year returns. When we move out of concentrated areas into other parts of the country, Jack's business expanding in the west or Andrew's business expanding away from property type exposures, all of those things will play to improving the loss ratio. Pricing also helps, the market pricing has been strong over the last few years, and that plays a role in that as well. It's really those two points together, those two things together that are going to continue to drive our accident year loss ratios down.
I think also the thing that gets lost in that when you're talking about pricing is that people talk about renewal pricing. If you remember, even if you're flat, right, you've got 20% of your business going out and 20% coming in. The pricing levels that we've experienced on the new business side over the last couple of years are a lot better than they were a couple of years ago. When you work through that, your math, right? We talk about pricing in terms of renewal pricing, and people try to do price over loss trends and do some calculus. The reality is one of the things that can move the needle most for you is if you're writing better new business at higher quality, right?
Particularly higher quality than you've historically been writing in new business or what's going out the back door, your loss ratios can improve quite rapidly. It's really hard to put it on a waterfall chart for you, right? It's just about are you a good underwriter?
I would also add every one of our businesses, each one of us in each segment has a number of things that we're trying to improve in mix. I'll just give you a couple examples. Within professional lines, if we can drive our miscellaneous growth disproportionate to
Lawyers, for example, that's going to improve the loss ratio of our business because we are dramatically outperforming in that segment. Another example, employment practices liability. We, and probably quite a few other of the more sophisticated players, are looking at the places where if we can increase deductibles or increase retentions, we might give up a tad bit of rate, but that exposure reduction's dramatic, and the loss cost reduction would be dramatic. Those are the kind of mix improvements. Each of us, we're operating at a level where you're not talking about it in the macro business perspective. We're down at the line of business, sometimes at the coverage level, frequently at a jurisdictional level, trying to figure out the specific underwriting actions.
I don't want to speak for Jack, but probably across his businesses and across my business, we have 20-some odd actions going on at any given point in time that if we execute on a large portion of those, that's a material improvement in our loss performance in our business. That's why I think going back to David's point, you have to sort of step back and you have to say, what are all the levers that you're trying to pull, and why are you so confident? Well, we'll need to execute on 100% of these things to get to those kind of outcomes. We just need to execute effectively on some number of what we're already looking at.
Bill Wilt.
Bill Wilt from Assured Research. I had two questions, but in light of the timing, I'll cut it down to one.
Go ahead.
For Fred. When you think about organic growth, do you think about the industries to grow in first as they evolve and change, and then think about what insurance needs they need and how that matches up with you? Or do you think about the insurance products that you're particularly good at and then look to the industries in general?
Yeah. Again, to me, it's all about capabilities. This industry is littered with people that try to grow in places they didn't understand. Everything is about where you have the capabilities and the insights to be able to grow. Again, because we're a smaller margin player and we have access and insight to where the profit pools are in our partner agents, to me, it's pretty direct, right? We try to build on the areas that we're very good at, that we have the capabilities to do what we're doing. Now, it's a little iterative in that we've tried to build capabilities that fit these opportunities. That's why we bought certain pieces. That's why we built the technology skill set we needed for the tech business. That's why we went into the healthcare business.
That's why we invested in the skill sets we wanted in marine and some of those areas. It's very much based on what you're good at and what you can write. It's why we will never write national accounts. It's not something I think we'd ever be good at. We don't think that it's too price sensitive a business. We try to build it on what we believe we can write and write well. Again, what we try to build the company around is a bunch of things are relevant to our target market and where those profit pools are and what's stable and what has less price sensitivity to it, and what's got entry costs that are really high.
One of the interesting things in our business, and Andrew said it earlier, if all you do is hire three guys and go to brokers and wholesalers and say you're great underwriters, you're dead. Everybody can copy you. There's excess capacity. Sooner or later, it's going to gravitate to lower returns. The industry does not make cost of capital in total. All the money is made by about 25% of the companies. Those companies that make above cost of capital tend to be distinctive at things, and they're in categories that are more stable and hard to get in and out of. What we try to do is both build a portfolio in the more attractive areas and also get in businesses that are stickier, that are harder, that are more oligopolies, and then get access to those businesses through our agents. That's what we do, right?
It's not easy in our business. It's not like the industry earns these huge returns. It doesn't. The industry over any long period of time does not earn cost of capital in total. The people that do it well do it well consistently, right? We all know the names, and you can create a lot of value. A lot of the public companies are the better companies because they're more disciplined, they're more focused, and a lot of the regionals and mutuals are the least successful because they're not. Don't make any bones about it. This is about capabilities. This is about insight. This is about being good at something. We just tend to like to be places that are harder to get in and out, a little less crowded, and a little bit harder to replicate, right?
Again, it doesn't mean that there aren't good people in these other categories. There is. Obviously, there is. For us, we pick the things that fit our skills but are harder for somebody to just come in in an afternoon and do the same thing. Okay.
From MKM Partners. Fred and David, I'm intrigued with Fred's chart, page 25 on volatility. A number of companies that I talk to seem to be focusing more of their attention on addressing this volatility issue.
Yeah.
How much have you done? What else are you looking at? The chart that you show highlights a combined ratio range of about 90%-110% based on your last five years or so. Where are you today with that volatility range, and where do you intend to go?
Yeah. Again, for me, one of the interesting things about the reason I talk about volatility, this is the thing that's going to drive some of the consolidation in the industry.
The weather pattern just didn't happen in the last decade. This happened over the last 30 years. The percentage of weather as a % of loss cost has tripled from the 1970s, and it's jumped up again in the last decade. The problem with it is that you don't know where it's going to be. It isn't just in Kansas. It isn't just in the Tornado Alley. It's in many places. What happens is you can have real outside losses to your scale of your balance sheet if you have micro concentration. The opportunity of that chart is that that's death for a regional company, right? There's 500 regional companies that are under $1 billion in the U.S. that have 80+% of their business in two states or less. People live in cities.
If you look at the micro concentrations of a lot of regional companies, they're very high. That volatility, if you get hit, is problematic, right? If you look at some of the farm bureaus, et cetera, they've been consolidating, a lot of the mutuals have consolidated, because what that chart says is that you need to have spread of risk. You have to have capital and spread of risk. I would argue over time, that'll continue to happen, that you'll have bigger, better companies that have spread of risk. To me, what we're trying to do, is to make sure that we have appropriate spread of risk. We obviously have some scale and size and spread, and obviously we have line of business diversification with casualty, et cetera.
We, in my view, had some zip codes and some micro concentrations that were outsized for what the cost of capital of being in those territories were, and we needed to do the spread of risk. That particular chart, there's an analyst that does that all the time, that talks about it's the amount of volatility around an earning over a five or 10-year period. There's no real magic way to measure it. The way I think about it is that I would like that our earnings are much more predictable around that 5% on cat and frankly, the non-cat as well. I think we've made great progress. I feel like we're essentially, once we get rid of this last $40 or so million, I feel very good about the portfolio.
That does not mean that you're not going to have a year where you have 15 things in a row that hit you where you are. It says that over a long period of time, that spread of risk will take your standard deviation, which is the way that chart does it, around your earnings in any given year will be a lot smaller. I think we're well on our way. One of the big ingredients of that for us was the property casualty mix because we, as David showed, we have less float than most companies because we have shorter tail lines, and we have less casualty. As our mix has changed, our investment portfolio will grow as a percentage of our earnings, and that'll also give you some stability over time. That's why that mix is also helpful.
Again, there's no magic to that chart. Again, when you look at some of the folks that we compete with and some of the specialty people we compete with, the people that have the best ROEs have the most predictable earnings, so they can leverage their capital the most. We all know the number one example of that happens to be an auto company. Stability of earnings and predictability of earnings allows for, in any risk management situation, a better leverage of capital. I think we're well on the way, and I think it's an important thing for us to continue to focus on.
All right. We don't have any more questions, and I think we'll conclude the program for today. Thank you very much for coming. Really appreciate your interest, appreciate your patience. Hopefully, you learned something new about us today, and not just us, but also the industry. There are a couple of things that we want to make sure you remember. One is that our distribution strategy is our main competitive advantage. It should help us drive to target returns. We have a lot of levers to achieve our target returns. Hopefully, through all of the presentations and the Q&A, you got a sense of the depth and strength of the management team. With that, we would like to invite you to join us for lunch.
When you get the chance, just finish the surveys, and there will be a place at the exit to put them in. Thank you very much.
Thank you very much, everybody.