Okay. Yeah, meeting has just started right now.
Welcome to our Investor Day. I'm Jeff Farber, Hanover's CFO. Thanks so much for coming. We're delighted that you could be here. In a few moments, Joe Zubretsky will join us. He's going to spend about an hour taking you through a summary of the entire strategy. After that, Jack Roche and Dick Lavey will come on up. They'll take you through the core agency business and how we feel about penetrating that business and leveraging it. After that, Joe will come back. He'll talk about the specialty business and how we're going to expand and grow that. We'll take a short break for everybody. Then John Fowle, our Chief Executive Officer of Chaucer, will come up and talk about international specialty through that lens.
Dick Lavey will come back up with his new partner, Mark Berthiaume. He'll talk about expanding premium through innovation that we have planned. I'll come on up. I'll take you through the financials associated with the strategy and the model. Give you that. Like most investor days, we'll have a lengthy Q&A session. We ask that you hold your questions until that session. We'll stay as long as you like for that. Then we'll go into lunch. We can have some more informal conversations. In the end of the deck, there's a section on forward-looking statements and non-GAAP measures. We ask at your convenience that you take a look at that. There'll be some reconciliations from the non-GAAP measures to the net income measures. With that, it's my pleasure to introduce our Chief Executive Officer, Joe Zubretsky.
Thanks, Jeff. Good morning, everybody. This morning, we're going to share with you the culmination of a rather intense, six-month-long process where me and the senior leadership team of Hanover went through a very comprehensive strategic planning exercise. We're very pleased to be here to share that with you this morning. If I were to characterize the strategy, I would call it grassroots. It's built up from the businesses. Today you're not going to hear a lot of blue sky concepts. You're not going to hear a lot of the vision thing. You're going to hear about specific areas of growth, leveraging our existing platform, expanding on under-leveraged platforms to provide top quartile returns to our investors. If I were to write the trailer for the strategy, I would say there's significant leverage from the core business.
There is value to unlock from an under-penetrated and under-leveraged specialty businesses. Third, we will partner with our distribution partners in an innovative way to create solutions that will help them keep premium that might otherwise leave the channel or get premium that would never make its way to the channel. We're going to do that with the world-class team we've assembled, and we're going to do it with a great deal of financial friction. Good strategy always starts with getting very steep in how did we get here? What are we all about? I'm not going to read back statistics that you already know, but I have been incredibly impressed with the strength of the Hanover domestic franchise. I've met with over 650 agents personally, and they don't do business with us just because we're nice guys.
This is about having access to the underwriting desk, being flexible in putting together packages for customers. This is about working on bulk solutions for blocks of policies to create optimal solutions for their customers. The franchise, the core franchise here in the U.S., the domestic franchise, is incredibly strong. Five, six years ago, the company had the foresight to invest in a global platform. Chaucer is the 11th largest Lloyd's syndicate and probably the best run. Is an incredible global franchise and one which we have yet leveraged into the U.S. and global markets. U.S. domestic, strong franchise. Chaucer, one of the leading London market franchises. Today, you're going to hear about how we're going to bring all that together into a complete mosaic to grow and provide top quartile returns.
The second thing you do in any strategic planning process is to get really steeped in how the world might change. It's not a static world. It's quite dynamic. We did that. We did that with outside data sources. We did that by intense dialogue with our distribution partners. I didn't want to filibuster 45 minutes of the meeting reading back things to you that you already know and that you've written about, but we actually do have our arms around what's going on in the industry, particularly in our world. I'll point some of those out because you'll see today how our strategy has reacted to some of these emerging phenomena. The channel. Look at the statement at the top. The independent agent channel isn't going away. It's going to change. There's no question about it, but it's not going away.
What's happening is fascinating. It's being bifurcated. At the lower end, the transactional business might never show up, and it might leave, whether it's bottom line auto and homeowners, whether it's micro commercial, they're struggling to hang on to that. At the top end, those that have the foresight that specialize in complex industries and complex coverages are enjoying the fruits of their labor in the specialty business, which then commoditizes the middle. As we look at that world, the transactional business struggling to keep it, the specialized business going to people who have invested in it, they have the risk of being commoditized in the middle, and they're struggling with that. Second risk, you know this, it's consolidating. It's consolidating rapidly.
When Jack and Dick are up here later this morning, they're going to show you that in a consolidating independent agency world, not only don't we lose, we generally win. We generally do better off as one of our independent agent partners is consolidated by an aggregator. The customers. We know the millennials may not seek advice. We know the millennials may not even value insurance the way the boomers and the echo boomers do. We know that high net worth individuals need a different level of service and have different service expectations. As we look at the customer base and the demographics that our agents are dealing with, we have to craft bespoke solutions to address all those populations. We think we're well positioned to do that. The risk pools are changing, it's not just cyber, because everybody's talking about it.
We know that's a $20 billion business 10, 12 years out. In the specialty world, as risks emerge inside the standard lines business and they become hard to deal with, they end up in the specialty market. What you'll hear today is because these risk pools are constantly changing, the risks in the world are constantly changing, we believe that synergizing Hanover and Chaucer specialty assets into a harmonized unit can address the changing world of risk pools. It's quite an exciting prospect for us. We've analyzed the competition. You know who we're competing against. The digitization of the industry, new business models as disruptors try to come in and take business away from the incumbents and the traditionalists.
All those things are occurring, at the end of the day, we believe that the independent agent channel will change and morph in some ways, but it's here to stay, and a lot of our strategy feeds off the strength of that channel still. The trends impacting the P&C industry have been well understood, well thought of, and embedded in every aspect of our strategy. We took the liberty of taking our entire strategic plan and distilling it into an investment thesis, and here it is on one page. We believe this provides a clear path to top quartile growth and returns. First, there is plenty of leverage and runway left in the core agency business.
With 2,100 employments, with 7% market share, with the robust product portfolio we have, we are perfectly positioned today with mid-range market share to grow that market share considerably over the next five years. Second, as I mentioned before, we have a very specialty-light business in the U.S. We have a highly complex specialty business with Chaucer. We are going to complete that mosaic by developing a wholesale E&S business in the U.S. that will complete the spectrum of specialty. As you know, it's high value added, it's high ROE, it's sticky, and can create significant value for the enterprise, particularly since we already have two of the distribution channels that need this product. Third, growth through innovation. This is not the money pit. This is not building technology and then trying to figure out what to do with it.
This is meeting with our distribution partners, understanding intensely what their challenges are, and developing customized solutions to help them meet those challenges. Enabled by technology, whether it's big data, digitization, or predictive analytics. We are going to execute on a capital light technology model by licensing various platforms, packaging up solutions, and helping our agents capture business that's difficult to capture today, all aimed around premium growth with our existing distribution. Fourth, rigorous financial management. I know you hear this from everybody, but you know my background, you know my heritage. We take very seriously how we approach enterprise risk. We are going to be excellent at capital creation and deployment. We are going to be laser focused as a DuPont devotee. We are going to be laser focused on book value for share growth and ROE expansion. You'll hear Jeff talk about that later this morning.
Lastly, I think we have the talent to win. We brought in some new teammates. You'll see later on that we've shuffled the lineup a little bit to align the best skills and the best resources with the task at hand. We have the talent that developed the strategy and is poised to execute. Again, this is not conceptual. This is very grassroots. Every single growth plan we have that you'll see here today, every aspect of that growth trajectory has a business plan, is resourced with a dedicated leader, with very fact specific, data supported analysis that gives us a chance to win. This is how we branded it for our employees and our agents. As you know, the distribution partners are going to be very interested in hearing what we have to say.
We just came up with a very simple way to talk about it to the external world and to brand it to our agents and to our employees. Without the hard work of 5,000 people every day executing this, it's not going to work, and we have one of the most engaged employee bases that I've ever seen, who are passionate about serving the customers the way they do. That's the branding. These are aspirational goals five years out, whether it's the CAGRs you see at the top of the page, whether it's the long-term target ROE. There's a lot of assumptions that go into this work, okay? I can't, nor can you, control the exogenous factors that we all deal with in trying to produce returns. We can control how we react to them.
This outlook has a conservative view of the forward yield curve. It assumes reasonable business expansion. It assumes a reasonable growth economy, some inflation. From a competitive perspective, it assumes that over time, the market prices to cost trend, even though some competitors may get out of whack from time to time. It also assumes that catastrophes come in at pricing, 5% of premium. We know that's a one in 250 year scenario, and we only have five to project. We know it's not coming in at 5%, but you have no basis for doing otherwise. Whether it's how the weather impacts this, whether there's a huge catastrophe event in the market that disrupts the capital flows, whether it's interest rates or growth, I can't control that.
Think of these numbers as being our response to a very stable economy, stable competitive environment, and a stable interest rate environment. Jeff will unpack these for you in his financial section to show you that there's real work behind these. These are not hopes and dreams. That our strategy, if executed properly, can actually produce results in this order of magnitude. You're going to see this repeated dozens of times today. We've taken the strategy to unpack it for you, and this is the way we've articulated it. We've articulated in the growth in premium over the five-year period, from $4.7 billion to $7 billion, roughly an 8% compounded annual growth rate. The reason this chart is important is it shows you the balance. We haven't over-relied on the core business, nor have we over-relied on significant investments in building new things. It's very well balanced.
If you look at the growth rates of each one of these components, when you look at the channel, the product, the competitive position we have, they're entirely believable. We'll take you through that all through the day. Each one of these premium growth swim lanes has six to eight very specific initiatives that's resourced, business plans built, supported by one of my ELT teammates, and will be executed on. Whether it will work or not remains to be seen, but this is very specific, very tangible. As we go through the day, each one of these will be unpacked for you so you can see what's inside it. $7 billion in premium by 2021, a 7%-9% growth rate. If we assume cost trends in mid to low single digits, this is not too hard to believe.
I learned a long time ago in insurance that you never talk about the growth rate without the companion statement about the combined ratio and profitability. Here I go. We have the ability to do this. There's enough good business out there, given our market share, that we believe that there'll be little undulations along the way, but we believe that where we are today is very competitive. We're starting with a very good price point in the market. We've shown a continued ability over a long stretch to price to a positive spread to cost trend. We've repositioned portfolios that might have moved sideways on us. Over a five-year period, went from nearly 62%-58% in our combined ratio as a consolidated enterprise. Lots of hard work went into that.
All I'm trying to demonstrate here is, I think it's believable, we believe it, that we can actually maintain our loss ratio position and produce these growth rates. Make sure you listen to this very carefully. When this one gets pressured, there's no question what you do. When this one gets pressured, the growth rate becomes a variable. That is the model. That's what we hold our leaders accountable to. We actually believe this is doable. The next thing we get out of the growth rate is expense leverage. Expense leverage is not a gravitational force. It needs to be managed. Quite frankly, it's just not been managed in the past. This company, its headline, its whole DNA was aimed at managing loss ratio, manage the underwriting and pricing discipline, and expenses kind of drifted up with premium. We're not going to let that happen.
We believe there's significant leverage in the expense ratio over a five-year period, there's 150 basis points of ROE of expense ratio expansion, and therefore, it will accrete to the benefit of ROE over time. $7 billion of revenue over the next five years, a maintenance of the current loss ratio picture, and expense leverage. You wrap all that up and you get a very attractive financial picture, one that has some execution risk, but not a lot. Next, let's go into each one of these at a very high level. We said leveraging the strength of our agency business can provide $1.5 billion of that $2.3 billion of premium growth over the next five years. How are we going to do it? Let me give you a few examples that are listed on the right side of the page.
In personal lines, we just launched a really robust product that'll appeal to the emerging affluent. The emerging affluent sits right below high net worth and right above middle market. It's pretty underserved. In our footprint alone, in our agent footprint alone, there's $6 billion to $8 billion of emerging affluent personal lines business in our footprint. We believe that with the recent launch of our Platinum platform in Pennsylvania, which will then roll out to other states, with the expanded coverages and limits it has, that we will make a significant penetration into the emerging affluent demographic of personal lines. There are some under-penetrated geographies. We're not going wide and shallow. We're going to be narrow and deep. That is our strategy, whether it's 2,100 appointments or 2,500, who knows? It's not 25,000.
There are some geographies that Jack and Dick will talk about later that are slightly under-penetrated. There's another point on here about risk appetite, and I want to be very clear on this point. Our agent partners tell us, to a one, that we're picky eaters. We've been very selective over the past five to seven years on what we will write and what we won't write, whether it's due to the size of the company, weather concentrations, whatever it was, or just the proclivity to want to do something or not do it. We have been very selective. We are not suggesting that we want to take on a risk profile that's out of market.
The agents tell us that if we conformed our risk appetite to match our best in class middle market competitors, small commercial competitors, personal lines competitors, that we would get not only more of that business, but we'd get more of the bread and butter packages. We, Jack, Dick, and the entire team are looking at ways where we can expand, widen our lens on the risks we're willing to take to not only attract that premium, but the premium that's in the package that we might not see had we taken the middle market workers' comp, the monoline auto account that maybe we wouldn't have wanted. Very responsible, very disciplined, a slightly wider lens on taking risks.
The last point I'll make on this page is one of our hallmarks, and it's not an industry secret, it's not proprietary to Hanover, but working with an agent to help them optimize solutions to benefit their customers is one of the ways to grow. You've heard the term consolidations. That's what we've called it for years. 25% of our new business is working with agents to analyze their portfolios and to craft solutions for blocks of policies and convert them. It's quite powerful. One of the reasons we're able to do that is when you have 2,100 relationships, you can be intimate with the agency's business, you can be intimate with their data, and we have tools that help them analyze their data to consolidate the bottom end of the market, to bring money in from wholesale into retail to do all those things.
While it's not a proprietary idea, we think given the relationships we have, we are better at it than most people. $1.5 billion of growth out of the core. Very specific growth initiatives that Jack and Dick will talk about a little later this morning. The reason we believe it is because of the strength of the channel, and whether it's the strength of those distribution partnerships or the robust portfolio of products we have, we're wired in this. With 7% market share, you'll see in a minute, it's not unbelievable to get to nine by doing all of these things. We can always be better. Some of our packages need to be more contemporary than they are today. We have not done a great job of packaging up specialty coverages inside the standard lines package.
There are things we can do, we're starting with an incredible position of strength, both in the channel itself and with the agency partnerships and in the products that we bring to bear in those partnerships. This is sort of the mathematical proof point, it's not just doing math to support your point. This is really important. One of the things that I think we do really well is we actually take the time to understand the business of our agent partners. When you have 25,000 relationships, you can't do that. When you have 2,100, you can. You really have to understand agency economics to understand why this is so achievable. It's an independent agent. They need multiple markets, otherwise they're not independent.
They don't want to be so concentrated that a market controls them, and they don't want to be so fragmented that a customer service rep couldn't possibly understand all the forms, all the coverages, all the rates, and all the underwriters who are sitting on the desk. An agency loves to manage themselves by maybe having three top markets that add up to 50% or 60% market share, a nice tier in the middle. What invariably happens is they have dozens or even hundreds of relationships making up the bottom. That's just confusing to the reps. It creates for chaos and confusion. When you look at where we're positioned at 7% market share, we grew one point over this last five-year period. This strategy gets us two more points, and two over seven is a significant percentage increase.
The story here is we don't have to be number three, and maybe we won't ever be number three. Maybe we'll be number five, seven, or 10. Because we're in that middle tier now, and because agents need to cap their larger markets at a certain market share, and they need to consolidate the bottom end, we are very well positioned to be the winners of that compression. Cap at the top, compress the bottom, we win. That's sort of how we think about our agency plan and why this strategy can produce the growth that we've articulated here. Specialty. We're in the specialty business today, and you see part of it because we report Chaucer as a reportable segment, you see that. What you don't see is our U.S. footprint.
Our U.S. specialty business, for the most part, is well-performing, and it's nearly $900 million of net premium written. It serves the independent agent channel. As I mentioned previously, because the smart ones in that channel know they need to specialize, otherwise their business is going wholesale, there's room to grow in the independent agent channel, irrespective of anything else we plan to do here. I'm going to show you in a few pages, as under-penetrated as we think we are with our standard lines business in the independent agent channel, we're even more under-penetrated in our specialty lines with the same channel. There's plenty of them, two or three times under-penetrated what we should be given the size of our standard aligned business. We're going to create added footprint. Our footprint isn't big enough. We're going to develop a wholesale capability in the U.S.
Chaucer has got its own growth strategy that you hear John Fowle talk about, whether that's super-regional deployment of capital to take advantage of business that doesn't get to London, whether it's working with our new specialty leader in the United States to figure out how to capture more reverse flow business, whether it's just to grow organically through underwriter recruitment. Chaucer's got its own growth trajectories that it's managing. We have our own growth trajectory in the U.S. through the independent agent channel plan. If we can fill in the middle with a more complex portfolio of products aimed at wholesale, we've now got a specialty business portfolio that rivals some of the standalone public competitors.
I think this is a very exciting opportunity for us, this is one of the under-leveraged, under-harvested sources of value that I think our strategy unlocks in the next five years. I talked about this just shows you the profile of our U.S. specialty business. It's grown 14% compounded annual growth over the past five years. We did it by building things organically, by buying very small companies that had tens of millions of premium and tripled the size of them. We did it in a kind of inorganic, organic combination way, the portfolio performs very well.
As I said, it's aimed almost specifically and entirely at the independent agent channel. If we can expand our risk appetite, hire a world-class leader to run it that understands the wholesale world, then we believe we've completed the entire package of being in the specialty business in a very significant way. John will be up here later this morning to talk about Chaucer. When you're leading 30%-57% of the business, you're not just circling a line on a slip and allocating capital to take a flyer on someone else's underwriting capability. You're the lead underwriter. The market comes to you because you know how to write this, you know how to price it, you know when to say no, and you know when to say yes. Chaucer is a franchise. It's an underwriting franchise, and it's performed incredibly well over the past five years.
In after-tax earnings, already earned back its purchase price. The company never synergized it, and probably that was the right decision at the time. It was making close to $200 million of pre-tax earnings a year and printing combined ratios in the mid-80s. Why do anything but just enjoy the profitability it was producing? With our more holistic view of specialty, we think it's time to bring all of our specialty capabilities together and work hard at creating a synergistic view of the specialty area and making sure we're not leaving any untapped potential off the table. This is the schematic I was talking about. Hanover US Specialty aims at the independent agent channel. Chaucer aims at the London market with the alphabet house brokers.
If we could fill in that mosaic in the middle by developing a portfolio that appeals to the global wholesalers and the E&S brokers, then we've completed a very robust specialty business. We're often asked whether that creates channel conflict for the independent agents. Absolutely not. Our agents are already sending business wholesale, and they say, "If your product's on the shelf of a wholesaler, we're happy you'll get it if it goes there." Wholesale does business with 25,000 agents. We're only doing business with 2,100. By definition, we're not conflicted with the other 23,000. This is very manageable. There is no channel conflict. It's an untapped potential, and we're going after it to build on our $2 billion specialty portfolio and build it out in a very disciplined and focused way. Next, growth through innovation. This is all about insurance premium.
Those trends I was talking about at the beginning of the session, agents struggling to get millennials to seek advice and to come into the channel. Micro businesses maybe don't need advice, but a lot of these customers are going to graduate, build wealth, start businesses, and they're going to eventually need the channel. Our view is why shouldn't we create a business that helps our agents capture and keep business that is at risk of seeking their advice in some other way? They win, we win, the customer wins. This is all about insurance premium. It's all about building use cases to get the premium before $1 spent on technology, and it actions a capital light technology process and platform. We are not going to build technologies to do this.
We will architect and engineer solutions using existing technologies, but we're not going to develop technology from a greenfield approach. Business case, distribution channel, capturing premium that's at risk of disappearing, and building solutions to create another wave of growth for the enterprise. This is sort of simple models that we're not starting. Notice technology's not on the left side of the page. You don't start by building anything. You start by working with your agents to build the use case of what their issue is, what problem are you trying to solve. You design the business case, you fund it, then you license technology solutions that enable it to get it done. Then you bring that back into pilots with your agency force, then you scale it and launch it.
We're responding to the needs of our agents, I think in a very capital efficient, business focused way, and you'll see in a few minutes using executives, not that are experts at whiz-bang technology, but experts in the business of insurance in the field with distribution. That's the way we're running this model. Two examples I've used before, the millennials and the micro business. You've all seen the reports. The disruptors are trying to come in and capture that business. We believe that with $5 billion of premium, 2,100 relationships, insurance infrastructure all over the world, why would we let a disruptor come in and take that business away from our agents? There are ways we can help our agents secure that business and keep it in the channel.
When Dhifem is up here later, they're going to drill down into a couple of these examples, these are examples only, on the benefits of doing this and how much growth we can create by executing this over the next 5 years. We are not going to hire offshore teams to start coding things. It's number 1, I don't have the time to market to do that, I don't want to take the execution risk, and it's too capital intensive. I'd rather pay someone a license fee for having developed technology, and that's what we're going to do. We're going to set up some licenses, whether it's big data mining, whether it's digitization, whether it's predictive analytics. We'll assign short-term licenses that are cancelable on short-term notice in case they don't work, use that to craft solutions to serve the business needs of our partners.
Capital light licenses short-term, not developing technology, but developing business solutions to business problems. That's our innovation approach. Next. We're going to do this in a very disciplined way. As I said, you never make a statement about growth without the companion statement about financial management. It's my background, it's my heritage. We have a top-notch CFO. We have a top-notch business development executive. We are going to do this without taking our eye off of these key components. In the past, I've been known as a capital allocator. I'll continue to do that. We know how to deploy it. We know how to get it back to you in a very convenient and value creation way. We know how to allocate it to opportunities. We know how to work with our ERM system to move it in and out of businesses that have attractive returns.
We're good at doing this. As I said, we'll make sure we get it back to you with a healthy dividend over time. This projection doesn't assume any change to the market-based dividend that we have. We will manage volatility, and really look at risk hard in terms of if we're going into the specialty business, that doesn't necessarily mean you've taken on more volatility. It doesn't necessarily mean it's capital intensive. As you'll see at the end of the day, the portfolio we've created actually doesn't have any different risk profile than the enterprise we have today. Very focused on that. We need to optimize our enterprise performance. We haven't really done that. Our high-touch field model is relatively high cost, and that's not going to go away. On the other hand, we've let expenses drift with premium. We have.
Our minimum commitment here today is to fund any investments that we plan to make in the future with cost optimization by being more efficient, then holding our fixed cost steady over the period and driving down that expense ratio to leverage our fixed cost without compromising our service excellence that we get great marks for. Whether it's our customer service center, our claim service, whether it's the amount of attention and focus we get, the agents get from the underwriting desk, we can't lose that. That's the franchise. Everybody on my team believes that we can optimize performance without sacrificing any of those inculcated disciplines that are the hallmark of The Hanover. Rigorous financial management in companion with a very ambitious growth strategy. We're not going to be able to do all of this organically. It's just not possible.
I want to make sure that as you get to know me, I have a very broad definition of business development. It's not necessarily fully baked, goodwill controlled by a separate company type deal. There's lots of ways to do this. In fact, this company pulled off one of the most accretive deals I've ever seen in my 35 years when it did the OneBeacon renewal rights deal, which resulted in $300 million of small commercial and middle market premium across the portfolio. Those are great if you can find them. You only pay for what you get, after paying a minimum fee. We will look at traditional M&A from time to time. Obviously, given our size, it has to be bite-sized, it has to be reasonable, and it can't be dilutive. I'm very disciplined, and my team is on that point.
There's plenty of other ways to do this. Recruiting underwriting teams where the premium follows. If it's a very esoteric risk and you hire an underwriting team, the premium will follow, too, because they're the market leaders. Conversions of MGAs and MGUs, very common, hard to find, hard to do. If you can buy an MGA or an MGU that's got 10 markets, it's using 10 markets for its paper, and we can convert the paper to Hanover or Chaucer or any other paper that we have, that can be hugely accretive, and we look at many of those over the years. Licenses and partnerships, alternative capital structures. The point of this slide is that we think of business development with a very broad lens. It's not just about paying a control premium and full goodwill pricing for an integrated asset. I referred to this a moment ago.
After you build the strategy and say, "Here are all the really interesting things we're going to do. Here's the $7 billion of premium. Here's the double-digit ROE. Here's the EPS growth rate, and here's book value per share of what comes out to be $100." What have you created? Does that investment thesis hold that the financial metrics look pretty good, but what have you created? The great news here is we haven't created a profile at the end of the day that is substantially different than the one we have today. Whether you want to just look at the mix of the different businesses, assuming that the volatility and the capital requirements are pretty even over the years, it's a pretty good indicator that, A, we're bigger. Every business inside that portfolio is better scaled.
We have a better position from a cost of capital perspective, being able to compete for assets now that we're larger. We have a specialty platform representing 40% of our entire enterprise that I might and probably will, at some point in time, develop a management model inside the company where we re-segment our company and show that to you in its entirety. Scale, where we had little before in some lines, a risk profile that's not markedly different, a specialty business that can be packaged and showcased with attractive ROEs and growth rates. It's a pretty good profile at the end of the five years. We haven't created anything that isn't in line with or consistent with the investment thesis and the financial returns that we've articulated earlier. The team.
5,000 people every day come in and have to rally around this, as does my executive leadership team. This is the lineup as it exists today. You'll recognize many of the faces on the page. I want to spend a few moments on this because organization needs to follow strategy. You don't organize around people, you organize around markets, you organize around customers. Here's what we're going to do. The great news is the team's intact. These are incredibly capable leaders who have done a fabulous job getting us to where we are today. We've reconfigured some of these businesses and changed the roles of some of our executives. Let's start on the left side of the page. Jeff, our new CFO, and Mark Heim, our head of corporate development and strategy, are new to the company.
Jay, Christine, and Mark have been here for a number of years and do their jobs incredibly well. I look at my enterprise leadership, the people that sort of help me run the enterprise, blending the old with the new faces, we've got a really good team here that will discharge their responsibilities in a very good way to support the businesses that have to produce these results. Today or yesterday to our employees and later today in a press release, we are announcing that we're bringing our agency business together in something we're going to call Hanover Agency Markets. You go out to talk to an agent, you're talking about small commercial, you're talking about personal lines, you're talking about specialty.
The field organization faces off to them, whether you're selling them Platinum packages for high net worth individuals or whether you're selling them small commercial, it's the same relationship. We are combining our personal lines business, our commercial lines business, and our field organization under the leadership of Jack Roche. Jack is excited about this. He'll be up here in a few minutes to talk about the agency platform and the commercial lines business as you knew it previously. Those businesses will still report separately. We're not merging them, but they're all going to be under one executive leader, Jack, who's going to face off and deliver that $1.5 billion of growth, hold that loss ratio constant, leverage our fixed costs, all the things I said were going to be done out of the core. That's how we're going to do it.
It's very focused, I and our board of directors have a tremendous amount of confidence in Jack to execute well on that. Next, John Fowle. You saw that we recently named John the CEO of Chaucer. I know lots of questions have been asked, rather than wait for Q&A, I'll just address them now. There was no event or series of events that led to this change. This has been something I've been thinking about for a long time. Think about what we just said about the strategy. What we said about integrating, or at least synergizing Chaucer with a U.S. wholesale platform. When you think about what Chaucer is, it's an underwriting shop, and they do it incredibly well.
My view was I wanted to have the person that hired the underwriters, who trained them, who knows everything there is to know about that craft in the lead chair. In a way, we just de-layered the organization. Johan was doing a great job. He's going to go off to a fine career. Having the head underwriter, who still will be the head underwriter, sitting in the CEO's chair just makes a statement to the market that we know how the money is made in that business, and this is the guy who's going to help Jack and our new head of Hanover Specialty, to be named, to create that synergistic and synchronized specialty platform across all of the Hanover. We congratulate John, I said the board of directors and I have a great deal of confidence in his ability to lead that organization.
My one to-do item is I am in the market for head of U.S. Specialty. We're getting a lot of interest. Obviously, it's inappropriate to talk about who and how, but we will hopefully in the next four to six weeks, we'll be able to make an announcement. Based on the quality and the stature of the person we get, you can probably tell whether we're serious about doing that or whether the market thinks we're serious about doing it. We're in the market, we've been in since the beginning of the year, looking for a head of U.S. Specialty, and that's my last player in the lineup that I need to fill in before I say the team is complete. This is the team that's going out on the field, we're going to go. Last point, this is really important.
I've seen too many failures of innovation labs. I've seen companies try the VC route. One of it is dump money into a VC fund, invest in all these really cool companies, and when one works, we'll take it. I've seen that fail more than succeed. I've also seen the let's do it off the side of our desk to save money. Everybody goes out and does their day job, worries about the last fire to put out, the last policy to get booked, and the innovation never gets done. We're going somewhere in the middle. That is taking two proven leaders who are experts in both insurance technology and insurance business models in our agency force, having them report directly to me to do the things I spoke about a few minutes ago.
Build the business cases with our agency force to drive premium growth, license the technology in a technology-light way, package it, deliver it to Jack to market and scale. That's the model. Reporting directly to me, it'll be a very disciplined process. As I mentioned before, every dollar we spend on that will be harvested from operating expense redirection in the company. There is no operating expense drag to do this. That's the lineup. All-star team, and my belief in the business units, two established leaders who are going to drive the innovative capabilities we need, and an enterprise leadership team that quite frankly, I have a lot of confidence in and get a lot of great counsel and advice from. That's the team. That's it. I think I did that in 45 minutes. Six months' worth of work in 45 minutes. Not bad.
I just want to sort of go through the themes of what you heard about today. Hopefully, you'll see it all through the day. You didn't hear a lot of the vision thing and vision statements and blue sky concepts. This is grassroots, tangible strategy backed by data, and it's fact supported, intense analysis of the competition and what we do well. Everything you've heard here is backed by a solid business plan and a solid business leader. They're going to be up here starting now to drive through the details. Thank you for listening to that, and I hope you enjoy the rest of the day. With that, I am going to turn it over to Jack Roche, the new President of Hanover Agency Markets, and Dick Lavey, our Chief Growth Innovation Officer.
Since Dick was presiding over personal lines last year and for the plan this year, he's going to come up a little later and talk about personal lines as well. Jack, it's all yours.
Good morning, everybody. Thanks for being here. I appreciate it. I am excited to help kick off our Hanover 2021 strategy and excited about the new opportunity to lead Hanover Agency Markets. I realized last night when I was preparing that the new acronym now is, I guess, HAM. I think technically I'm the chief HAM officer of Hanover. We'll see how that'll play through the organization over the next few weeks. I hope that what we can accomplish in the next 45 minutes or so is to take you through the progress that we've made with our distribution strategy and our approach, and give you some confidence that we're really just getting started, that we're building on that capability and that competitive advantage that we've been working so hard on.
I'll take you through the core commercial growth plans, the profitable growth plans that we have that add up to the numbers that Joe suggested earlier. Then Dick Lavey will come up and do the same for personal lines, and then make some closing comments. As we go forward, though, I look forward to building on the success that we've had, building on the success that Dick has led our personal lines organization through. I think many of you know what an impressive progress we've made coming from three or four years ago, where we were shrinking 2% or 3% and trying to find our way to profitability at the right level, to today, having a nice growth trajectory and one of the most impressive bottom line results in the independent agency personal lines business. We'll take that and hopefully build that up.
Again, when we think about the strength of our agency business, I think I'll remind you that we have a very targeted approach, and that targeted approach is aimed at agents that we believe will value our value proposition and that our capabilities will match up and allow us to thrive through a broad and deep partnership. Without that broad and deep partnership, we can't have mutually beneficial economics. As we've done that, many of you have been exposed to the agency analytic tools that we built, formerly known as the Optimizer, now known as Agency Insight, which is really a critical tool as part of our agency planning process that makes these partnerships come to life.
We'll talk a little bit more about that, but at the essence, what it is that insurance companies and agents have a lot of anecdotal dialogue about where they're going to go. We've progressed to the point where we have an open book test. We sit with every single one of our 2,100 partners. We talk about what their portfolio looks like. We talk about what our capabilities look like and where we might go next, and we have a much more thoughtful plan on how we're going to build those mutually beneficial partnerships. Frankly, when they don't happen, we decide to move on, and it's usually not an emotional statement. Either there's something about our value proposition that doesn't resonate, or there's something about the execution at that agency level that didn't match up to our expectations.
The strength of our partnerships are driven by the process and the commitment that we have towards that as our business model. As much progress as we've made over the last few years, there's still tons of headroom. We are, particularly with the larger agents in the country, still really just getting started with our penetration. We'll go through that in a couple of slides here. What we've tried to do is look through with the analysis we've done through that three-year planning process and envision what kind of headroom can convert into legitimate, profitable business for our firm. As Joe suggested earlier, when we look at including the participation of the specialty businesses, along with core commercial and personal lines in building those partnerships, we believe there's $1.5 billion of premium opportunity over the next five years.
In doing so, we will have relatively limited investments. We'll need to capitalize on the investments of the past, which speaks to the expense leverage that Joe mentioned earlier. Our approach is unique. We utilize analytics as well as our responsive operating model to capitalize on those opportunities. Over the next couple of years, we will carefully and thoughtfully expand our risk appetite, as Joe suggested. I'll get into that in a little bit. In certain territories, either because we're replacing some agents that didn't meet our expectations or just because we have maybe too limited of a footprint, particularly in small commercial and personal lines, we're now at the point in our progress where we can start to expand on the margin some of our agency plans, which will add to our growth opportunity.
Let me get a little deeper again into the distribution piece here. Again, we have a very targeted approach. We use our deep business insight to get inside those agencies and really understand where the opportunities are. We realize our agency partners have a lot of good business, and it's not all available to us. They have other friends. What this process has really evolved into is being really honest with data in front of yourselves on what do you have, where are you trying to build towards, and what's available for us to start working together on now so we can start to build some ballast and some ability to invest in the agency partnership? How do we start thinking about growth opportunities for both parties?
Through that process, we have got 90% of our top partners to literally exchange data and information that is unprecedented in our industry. That, to me, says a lot about the trust level and the potency of our distribution approach, but it also gives us an amazing advantage to cut through the jargon and really focus in on where the real opportunities are. In addition, as we think about where we go next, we have a microcosm of the entire industry through that aggregate view of the data, and we are using that now to understand where we go next. It's a big part of what I look forward to working with the next specialty leader to try to figure out where we take the franchise in the future.
It's all about building these partnerships, and we're either on the road to partnership or we're going in a different direction and moving on because our franchise with our partners is critical. A couple of years ago, many of you saw Dick Lavey go through just the high level segmentation of the distribution system and where do we play. If you look at our top three brokers are great, but our product set here at core has not really matched up to them. We have some commercial surety business. We might have some nifty areas that we do in certain locations where we have a really good, tight relationship with a subset of those groups. For the most part, we're not in national accounts. We're not in the upper middle market. Our relationships with the top three brokers are not our strength.
When you get below that, though, you have a lot of agents, whether they be Hub International or Wells Fargo or USI or Gallagher, where their portfolio really is more of an amalgamation of small and mid-sized business, specialized and non-specialized, that fits very nicely into our franchise. Even inside those larger agencies, though, we focus on the locations where we have the best match, both in terms of fit with our product set and with our relationships. We don't try to go everywhere just for the sake of filling out a footprint. We're very selective within each of these tiers on who really matches up with us. It's probably not lost on you that we have, over time, accumulated a lot of our business with the top 200.
That's mainly driven by their consolidation, the consolidation that's happening in the system, also because of the strength of our product set that we've been building. We're more relevant to the value-added producers who tend to be accumulating in that top 200 mid-size and large agency group. What we've tried to do, and I should point out, within that group, within this total group, even though it's a limited agency plan, we have access to 40% of the business that fits our kind of overall risk appetite, even leveraging a very targeted focus. That is particularly driven by the fact that our relationship with the top 200 agents has really prospered. As we look at the data we've accumulated, we look at the distribution lens, we come up with this concept of what's the addressable premium available to us.
Since we're not in the national accounts business, we don't count that. We're not in the public D&O business, we don't count that. We don't drill it down to just our appetite, but we look at the sectors that we play in and what percentage of the revenue have we been able to achieve, and that was the 7% market share that Joe referenced earlier. I think you'd all admit that's pretty good headroom. We're far from tapped out with our distribution. When you look at the top guys that are consolidating the business, we're at 4% share and growing, there lies an enormous opportunity for us. I'll build on that point here that five years ago, we debated amongst our senior team whether the consolidation of the distribution system was a headwind or a tailwind for our strategy.
Our product set wasn't that impressive, our talent was still building, our geographic footprint was not what many of our national competitors' was. We thought long and hard, though, about what the consolidation was going to do and why is it that we were so intriguing to a mid-size agent at that time, even when our capabilities were still building, and why wouldn't that carry forward when they get acquired by Hub or by one of the larger consolidators? Over time, what we were seeing is that those larger consolidating agents had a lot of premium, had a lot of buying power, and were increasingly frustrated with their relationships with some of our larger competitors. I'm not here to put down our competitors.
I'm just telling you that that's the experience that we saw was that, "I've got $600 million with those guys and I can't get a cup of coffee. There's something about the intimacy and the partnership that I'm creating with you that feels special." We placed a bet. We placed a bet that instead of going downstream where maybe we could control some agents, we went upstream and decided to play with the winners. I'm here to tell you that paid off very well for us. These guys have acquired over 350 agents over the last half a dozen years, and we have grown because of that.
This example that I put out here is just one example of a top 10 broker agent that we work with, where not only over the last six years did we grow with them organically, but as they acquired more agents and they acquired friends of ours, that business came along for the ride. There's small examples where things go on hold for a while or they go backwards, but for the most part, when we look across the top 15 relationships that we have, we've doubled over the last six years through their consolidation and through our growth. We look forward into the next five years as this is our opportunity. We have an outsized opportunity with the relationships that we've built to build upon this success. Another aspect of this is how do you grow profitably in our business? You guys know it's hard.
Many more examples of people growing poorly than there are of people growing well. We take that seriously, and part of the way we've done that is when we establish these partnerships, we don't say that, "Hey, we're going to burn our way in for the first three or four years and then eventually hope we get some of your best business." We pre-negotiate with small, middle, and large agencies that we want some evidence early on that we're getting our fair share of some good business. You can imagine, that open book test that we have with our Agency Insight tool makes it real, not anecdotal. It doesn't always work out perfect. Not every partnership is profitable in the early innings of the game. Over time, what we've been able to do is have more success than failures in growing those partnerships and being transparent.
making sure the partnerships are genuine, where when we do make mistakes or things don't work out, that they help us fix it, right? We're building towards something special. This chart basically says that through building a lot of our new business, about a quarter of our new business coming through either consolidations or specific account pipelining, particularly in personal lines and small commercial, we've been able to build. When we look back as this business is coded, and we can see that 15% of our portfolio today has come to us through something other than traditional flow. Partner work to bring business in that fits our appetite. That business, frankly, outproduces our slow new business by five or six points on the loss ratio.
It doesn't guarantee our success into the future, it's a pretty good early indicator that that approach is agreed. What we're anticipating is that the momentum that is going to continue to pick up on the distribution side, consolidation, is only going to make this flourish. Most of the large agents in this country, as commercial lines pricing pulls back, have no choice but to look inside their installed book of business and figure out how they can rearrange the chair. They can't be as disaggregated as they are, and they can't keep giving all their business to their top five carriers, as Joe suggested earlier. They really need another friend. Increasingly, we're more capable and more transparent about how we can help them.
This will truly be, I think, a big part of our success, where we'll be able to drive in high-quality new business in a very thoughtful and planful way and be able to lower the new business penalty significantly. Let me transition to a core commercial, which for us is our small commercial and middle market businesses. I'll tell you a little bit about how we're going to grow that business thoughtfully, consistent with our strategy. Today, roughly we have about $1.5 billion in net written premium across small and middle, pretty equally split. It's a business that we've grown significantly over the last half a dozen years. In 2010, we did the OneBeacon Renewal Rights deal.
That put $300 million into this, that put us to about $1.1 billion. We grew that from $1.1 billion to $1.5 billion over the last half dozen years. Our plan is to grow that around $700 million over the next five years, we're going to use these three major levers to get there. I'm going to go through each one of these real quickly. A big part of our growth is going to come from just deepening the partnerships that we have today, taking the business plans we have and executing, making sure that our field teams are aligned with the right agents and driving very hard. I think one of the things that's going to help is that whether it's our new geographies or our new businesses, we're just in a much more mature state.
We can get more agents, more territories to contribute to our growth than we could three or four years ago. This lift is really about getting to the next level of penetration. In addition, we're going to make some additional investments and changes in small commercial to accelerate our growth there, an incredibly profitable part of our growth. I'll talk a little bit about how we can do that by better leveraging some of the small specialty capabilities better going forward. Last but not least, we are going to have some strategic expansion of our risk appetite in middle market, we're going to go at the right pace, and we're going to be thoughtful about that because the middle market space is still the most price sensitive.
If you look at where we were in 2011, we had roughly 3% market share with our agents across those sectors. We were able to move that a full percentage point, generating half a billion dollars worth of business over the last five years. As I mentioned earlier, the growth with the top 200 was a big part of that. As we look forward into the next five years, we see a disproportion of that, and you see the lines that we're drawing there between the top 10, kind of below the big brokers at the next 200. That is going to make up a disproportionate amount of our growth. As I mentioned, when you look at some of the new territories we're in, we're very careful to not put too much growth pressure on them early on.
That was true for the growth states in personal lines a number of years back. In our business, you got to get your pricing right. You got to get the relationships in place. You got to get the good underwriters acclimated to your company. If you go too fast, bad things happen. We're at a point now we're in a more mature state, and we can truly grow another point of market share and generate another $400 million worth of business. In small commercial, we have been one of the fastest-growing small commercial franchises in the U.S. Pre-OneBeacon, we had a little over $300 million of business. Today, that business is around $800 million for us. We have improved the profitability of that business every year while growing it at a pretty substantial clip. Our distinct advantage is that we're more than just a BOP account player.
When you look across the small commercial $80 billion marketplace, you have BOP players that do a lot of point-of-sale kind of BOP pick-out work, you have a bunch of regional carriers that work on the package business. We're one of the very few that really transcend across the BOP account market and the package account market. We frankly make more money in that $10,000-$50,000 package business. We make good money on the BOP account business, we make even better money, it's because we're selectively working against a less sophisticated competitor. We've been able to build, because of that, our operating model reflects what you need to look like in order to be able to write that kind of business. It's not about putting 100 underwriters in some centralized location.
It's about putting new business underwriters a little closer to the action. They understand the geography they're underwriting in. They're able to ask the right questions of the agent. By having a little bit more interaction on that kind of non-BOP business, you can thin out the business that's overpriced in the regional carrier space and avoid the underpriced market. I think a lot of the big markets try to ignore the entire sector because they have a wide distribution, and they have a cherry-picking model. We have a distributed underwriting model that allows us to actually underwrite carefully and thoughtfully the small commercial business. Then we leverage one of the most efficient renewal centers in the industry to get our economics.
Going forward, we think we can bring that up another $150 million over the next five years, part of the success, not entirely, is this example I'm using here about looking at the agency analytics and seeing how disaggregated the small commercial world really is. About 20% of the package policyholders have specialty-oriented coverages that they already buy. 78% of them are purchasing those from other carriers and oftentimes other agents. I'm not suggesting that that's all going to go into one integrated or coordinated package, a lot of it is, and I think it's going to be driven by two major things. A, customers more and more are looking for the simplicity of a total account solution. They don't want to deal with the coverage gap and all the, quite frankly, the chaos of dealing with multiple policies.
Agents' economics are going to continue to be frayed, they're not going to be able to continue to write relatively small accounts out and do the extra work to put it with separate carriers. They need to figure out, well, that's not going to naturally come together unless companies like Hanover start to build some integrated and coordinating solutions so that the small professional that can go along with the package and auto and workers' comp. When we look at the professional liability space, the professional services space, about 80% of that business is bought separately. If even 30% of that shifts towards a more integrated or coordinated solution, we can be part of that, and that can be a big part of our growth. We've seen some examples of that happening.
We've had some success in this, we're working our operating model and to some degree, our technology so that we can more smoothly bring these things together. We're already really good at small commercial, we're really good at small professional liability. Why can't we be the best at that if we pull that together and do it well? Next, I'll move on to middle market, I think most of you know that we've worked really hard over the last few years to build a more distinct industry segment-oriented middle market business. As Joe suggested earlier, if you're just hanging out writing what the regional carriers can do in the space, it's commoditized. There are too many people that can write a food wholesaler. We've tried to get into areas like human services and the technology sector and some of the subsets of manufacturing.
We've carefully built up some capability in the construction space to kind of be in the more nichey segmented part of middle market, but stay on the relatively low average account size because we knew that this phase of the cycle, the upper middle market would be over-appreciated. Our strategy to stay low and to go where your operating model and your distribution set you apart is proving some real dividends to us. That said, what we're going to do is carefully open up our appetite a little bit in some targeted areas at the right time as the market starts to respond to some of the profit issues that are out there. We're going to be careful about that.
If you look at this example, we think we can grow the middle market business carefully over the next half a dozen years, about $150 million, by moving our average account size, including more participation in the workers' comp sector, workers' comp line, but not going all the way to industry average. This is an example in the manufacturing sector that depending on how you define middle market, the average account size, all lines, is about $225,000. At Hanover, it's $90, partly because we don't write as much workers' comp, but nobody writes all of the lines for every account. Some of this is adjusted for industry mix. We think we can move up the food chain, increase our average premium size as we look at some of these sectors, and improve our expenses and build our business and our relevancy with our agency partners.
When you do that, you do move up slightly up the hazard curve. The key is not whether there's some risk volatility, it's whether you get paid for the volatility. We think we've identified sectors where we can, like we did in human services and in technology, where we can get paid handsomely for that additional volatility, and it more than offsets that volatility. Last but not least, we are the most conservative workers' comp player in the top 25 carriers. We've invested a lot of time and resources to get more capable, and as the workers' comp market flattens out here and starts to make its way back up, and it will, we are preparing ourselves to better participate in that line of business, in the right jurisdictions, in the right classes of business so we can be a better account player.
We're not in the workers' comp business to be in the workers' comp business. We're in the workers' comp business to be a good account player in the right sectors, in the right states where the characteristics allow us to make money. We're excited about this as another lever of growth. We have to get our timing right. I think we've been very disciplined, and this last slide kind of brings that home for you, that you can't talk about growth in our business unless you reflect on how you're going to do it profitably. What I'm showing you here is it's still our commitment to be more in the small commercial and the lower end of middle market. We think that's where we can create the most value.
The chart at the bottom here shows you that over the last five or six years, we have consistently improved our loss performance and grown the business pretty materially. While maybe not as much as we could have, we improved our expense profile, and we're a much healthier business because of that. The last point I would make on this is that in this business, you don't make money by just being defensive in the down cycle. You have to have a strong offense. That's why some of these areas that we've picked on, whether it be the human services or the $100 million for the technology business that we built, what's more potent in our business is having the right offense than having a good defense.
I hope we've done both, where we've taken some chips off the table in certain sectors, but we've also been very aggressive in the right sectors that has driven our mix and given us an opportunity to enhance our performance going forward. With that, it brings me to the conclusion of the core commercial lines, and now I'll turn it over to Dick to take you through Personal Lines and then make some closing comments.
Morning, everybody. Excited to spend 10, 15 minutes. I think actually we're doing pretty well on time, so spend 15 minutes talking about the Personal Lines strategy and vision for the next 5 years. Before I jump in, though, let me say a couple of framing comments about Personal Lines. The first is that we think about Personal Lines as a strategic asset to our portfolio, to our company, to our agents and distribution. Our agents want us in this space. They like us in this space. They pull for us. They believe that we can be a winner. As we move forward, we think about this as critical to us. The second thing I would say is, Jack and I look forward to partnering together as I transition to my new role and Personal Lines moves over to Hanover Agency Markets.
Jack and I have had a decade-long relationship and partnership. We think about the business the same way. We sit 50 feet from each other back in Worcester, so we'll make sure we don't skip a beat as we transition the business. Okay? As was referenced already this morning, and you know our story, we've worked really hard the last 5 years to push price and work on our aggregation in Personal Lines such that now we have a $1.5 billion book of business that is at target returns. A $1.5 billion at 95 combined ratio or better. We're thrilled about that, and it gives us a great foundation upon which to build.
You can see here what our plan is, which is to build an additional $500 million, half a billion dollars over the next five years, going from $1.5 billion to $2 billion, which is about a 6% CAGR with a higher growth rate in the outer years, 7% or 8% as we move towards the tail end of that five years. I'll just reference briefly the levers that we're going to pull to grow profitably $500 million, and then I'll go into each one of these in some more detail. The first lever, $300 million, comes from really just doing what we're doing. We have momentum in the business. It's continuing to work with the 1,300 agents that we have, the 5,000 CSRs that we work with, leveraging our Platinum launch, which has now been in the market for two and a half years.
In some ways, I don't want to say it's a layup or it's easy because it takes a lot of hard work, but it's continuing the momentum that we have in our core business. Second, emerging affluent. This has been referenced before. Joe talked about it. $125 million. Really excited about this. We're moving upstream in our appetite, and I'll explain a little bit about that. But essentially, think of it as moving into the upwards of a $2 million coverage A replacement cost area, maybe $3 million in some markets, but moving into the emerging affluent we think is and our agents are really pulling for us there. Thirdly is geographic expansion. $75 million in this planning timeframe coming from expansion in geography with Pennsylvania, our first state that we did that in just in December.
I'll explain a little bit more about that and what we think more long term. $500 million, five years at target returns. We think it's an ambitious but doable plan for us. Okay? I'm going to take a half a step back and just remind folks who we are in personal lines before I go into each of those levers. Talk about our target market. This visual, you can see, we position ourselves, we think of ourselves as a go-to market in our agencies for account business in the middle market space and now going into emerging affluent. We think the account strategy is a winning strategy. Platinum, as you know, two and a half, three years ago, we launched that. Just as a reminder, by definition, Platinum is an account. We have to write the home and auto to qualify for Platinum.
It's not a true package in the sense that it's on the same form, but it mimics a package in that it has a single bill that wraps those policies and a common effective date, which we believe is really powerful. If you have a single effective date, both policies renew on the same date. It's a single event. You can service it more efficiently. It's less of a shopping event. This, we believe, is the winning strategy. You can see, and you know us from over time, that we've evolved. In our earlier years, we had more mono line auto, mono line home business. We've evolved to now being 83% of our book is a full account. 89% of our new business coming on the books is a full account.
We work really hard to train our CSRs and the folks that work with us to know what kind of business we write, what fits with The Hanover. Our agents are really pulling for us in this emerging affluent. They see it as a need, a white space. There's not as many players. Lots of folks jumping up into the high net worth space. I'll talk in a little bit about that. We are contemplating a high net worth business plan, and we think that our Platinum chassis and our experience in the emerging affluent would actually tee us up nicely for that. That's just a little bit of a reminder who we are and the strategy that we pursue in personal lines. Let me go to the levers. The first one, the $300 million of growing the core.
Essentially we're saying we're going to do, again, what we did the last five years. You can see from the stacked bar charts that we grew a couple of percentage points of share the last five years. We're going to do it again. Moving forward, going from 12%-14% as part of this lever. As was referenced, our agency analytics give us really good insight about where we see that growth coming from. Just like what Jack referenced in small commercial and no market, we see the preponderance of the growth coming from the upper part of the stack, if you will, the top 200 agents and above, although some in the regional agents as well.
Just for reference, if you may recall from three years ago when we talked about this segmentation, a top 200 agent is about $100 million in premium and above, just to give you a sense of their relative size. We've already identified in personal lines a good 300 agents where we think are ripe for market share gain. We've identified them. We're working on plans to make that happen. Something that we've done really compelling work on this Agency Insight in personal lines, we've introduced some new analytics to our agents at a customer level. We've created two proprietary models, one that scores a customer on their lifetime value and another score on their vulnerability. We literally go through an agent's book and take each customer.
We score them on lifetime value, how much are they worth to you, and vulnerability, how likely are they to leave your agency? You do some cross-hatching, and you can showcase to an agent, hey, these are really important customers to you, but they're likely to leave you for X, Y, and Z reasons. A coverage gap. You haven't talked to them in a while. Your touches have not been as much as they should have been. It led to some great discussion and ways that we're going to drive our share with these 300 agents. The other thing on this that I'd be remiss if I didn't mention is we work really hard to build muscle memory with our CSRs. Right? Account managers have lots of choices. They like to go to the path of least resistance, the systems that they're familiar with.
We built this workshop called the Platinum Accelerator, and it's essentially a value-selling workshop where we sit with the CSRs, and we literally dissect the ACORD app as they're going through it and give them ideas on how to sell, how to sell coverages, how to talk about limits, how to be more than just a service person, but how to add value to that equation when you're bringing a new customer on the book. When we get rave reviews for these, we've touched about 1,000 CSRs as a result of it. On the back end of it, we see our increase in our submissions go up and also with our yield rate. It just give you a sense of on the two parts of it.
There's a flow part and the consolidation, a more strategic part to growth in this bucket, and we feel like we're all over both of those. Okay? Just like in Jack's last slide, you don't like to talk about growth without also reflecting on mix of business, quality, profit. This slide and my next one, I just want to showcase a bit of the quality metrics that we look at and make us feel really comfortable about the kind of growth we're talking about. As I already mentioned, the account strategy for us is at the core of what we're doing. 89% of our customers coming in are accounts. With that, 40% of the time we're selling an umbrella outside of Michigan. Michigan has that unlimited PIP, so we speak about this outside of Michigan. 40%, that's a remarkable percentage of umbrella, and that's a value indicator.
92% of our new business comes in with 100 to 300 liability limits. Again, another quality indicator. We are not in the business of selling low limits monoline auto policies. Those metrics show up, we believe, in the retention figures on the left-hand side of the page. You can see how the retention improves as you move from a monoline policy, we still have some of that on our books, to an account, to then a Platinum, which is a version of an account. We've got about 27% of our book now in the Platinum product since it's been out in the marketplace the last three years. You can see going from 75% upwards to 88%, and obviously over time as more of our book comes onto the Platinum chassis, we'll see that pay dividends.
This allows for us to point to, we believe, the sort of rationale or reasoning behind our great performance on the combined ratio and the loss ratio side. Proud of this page, where you've seen our three-year combined ratio sub 95, and how it's moved over time. Obviously, there's some good weather that's in there, but over time, our objective is to be a sub 95 combined ratio player. Down below on the loss ratio side, again, similar to the retention slide, you see how you move from monoline to account to Platinum and how the loss ratio performs not only as you move within a time period, but then as time goes on, how it improves even more so. Again, we think there's benefits coming down the road.
You combine those two things together, retention and loss ratio, we see about a 25% better lifetime value from our account Platinum strategy. The other thing to mention, we talk about this, we get this question a lot on the analyst calls, our quarterly calls, is the trends that are emerging in this industry. You can't pick up a newspaper without talking about frequency trends and severity trends, we're cautious on this point, but we've been fortunate to see a muted trend in frequency on PD and collision. We point to our mix, the quality of our business as a result of that. Again, not to say that it couldn't eventually emerge, but when we look back 12 months, it's relatively benign. We think our customer and our geographic mix is at the core of that.
The prevailing wisdom is that its frequency is really driven by the improvements in the economy. We would say, our book is less elastic to improvements in the economy. Our folks are not in and out of work perhaps as much as you may see in other books of business. We feel good about that. Okay. Second lever is our emerging affluent. As I said, it's an exciting time for us in the business to step up and into a new segment. As I said, our agents really, they like us here. They see it as a kind of a white space. Joe mentioned the $6 billion-$8 billion within our 17 state footprint currently.
I'm not going to take you through all the product features of what we're doing, but as you would expect, we thought hard about what coverages, but also services you need to kind of distinguish yourself in this marketplace. The first thing I'd mention is that it is built on the Platinum chassis. The work we did rolling out Platinum two and a half, three years ago is now leveraged for this. That gives us great ability to move up. We've also re-platformed Platinum. We've put that on a new quoting and issuing system that was rolled out in Pennsylvania in December. Why that's important is that allows us to create these trim packages, which are really collections of packages already put together for you to go to the marketplace.
We're calling it Hanover Prestige, those trim packages, Prestige Home and Prestige Auto. In home, things like water backup to coverage, a guaranteed replacement cost. Those are kind of table stakes. We believe we came up with something that's distinctive that you find more in the high net worth space, frankly, which is that we're going to build in some flexibility to buy up or down on certain coverages like contents and other structures. That is a way to set us apart. Also, frankly, we're just a strong auto market. Packaging together some other coverages, you put these two together, we think we're going to be a really strong player in the emerging affluent space. Pennsylvania went in in December. These trim packages in Pennsylvania will be available in this April. From there, we will then do a march.
We'd like to be a fast march through the rest of our states, starting with states where you would expect there to be more emerging affluent business, Connecticut, Illinois, Georgia, New Jersey as a starting point. We'll continue the rollout through the remaining 17 states. It's an exciting time for us in this space. We think that rolling this out into our current states is the better strategy than moving into a brand new state. Leveraging the muscle memory we have with our CSRs. Working where we already have momentum. We bring them this new platform, this new set of coverages for the emerging affluent. We think the opportunity for profitable growth comes quicker there than bringing it to a brand new state where we'd be establishing some new relationships. Okay?
Geographic expansion is part of our growth plan. In this time horizon, we're including about predicting $75 million or so, most of that coming from Pennsylvania. The blue states are the dark blue states, royal blue states are the states where we are currently in personal lines. We're in commercial lines in all those states as well. The green states represent other states where we are in commercial lines and not personal lines, so those would be potential future expansion states. In gray, we just identified a few that we see as rising to the top as opportunities for us, Maryland, North Carolina, and the West Coast. Looking out beyond this planning time horizon, we could see upwards of another $500 million from state expansion. It's important to mention because it's a longer-term play for us.
When we think about state entry, of course, we start with, does the industry make money in that state, right? Is it difficult or easy to work with the insurance departments to achieve the kind of rates that you need to hit your target returns? Importantly, we look at the strength of our commercial lines relationships. That's how we would enter into these states. We're not going to just show up and appoint a whole bunch of new agents. This is going to our CL partners where we already have an established relationship. They know our analytics approach, our expectations, and we stand on their shoulders and build a business plan to pretty quickly grow the book. Look for more of that over time. Okay?
Let me wrap this whole section up on Hanover Agency Markets with some closing comments about why we think we're going to be successful. I'll start with where Jack started, really. It's about this intense agency limited distribution at the core of it. You can see that coming through on Jack's comments as well as my comments. Then you sort of take these next three and you combine them. It's the analytics, the headroom that we see, knowing who we are, right? We know who we are, what we write. We don't apologize for that. We know we're an account player in personal lines. We play at the lower end of middle market and small commercial. That helps define success for us, frankly.
Really all delivered through a local operating model that's been in place, and we've been fine-tuning it for the last 7 to 10 years, where we have distributed players in the marketplace, where they're responsive, close to the agency, they know the markets. We talked about this a lot, but it's not only each of these components, but it's the combination of them that we believe makes it so powerful. I know I speak for me and Jack when we say it's unique, it's hard to replicate. You can't just show up and say, "Hey, I want to have a local operating model." It takes a lot of time and energy and thought to establish it, set the guidelines, the authority levels, putting the right people in place. As you know, our field is a real strength of The Hanover. We're bullish.
We're bullish about the future, very bullish about personal lines and where it can go, and in the commercial lines as well. With that, I think we're actually doing pretty well on time. Next up is Joe to come back up and talk about our domestic specialty. Thank you.
We thought that since specialty was a really important part of the story, that we'd start to socialize and give you a tour through the U.S. specialty business. After the break, John Fowle is going to come up to really talk about the Chaucer franchise. You don't see it in the way we report the numbers, but it is a very strong portfolio at nearly $1 billion of premium and a 14% compounded annual growth rate over the last five years. We do believe we can grow it and grow it in a very responsible way. We're going to show you three growth levers in a minute. The one that is the most real, the most actionable, and the most tangible, and without really much of an investment, is really that under-penetration in the independent agent channel.
It's real, I'll show you some numbers in a minute. We're going to continue to hire best-in-class talent. We're in the market for a leader. We're going to pursue organic and inorganic opportunities. As I said, maybe in a year, two years from now, we'll be actually showcasing this so you can view it in its comprehensive form. This is a more granular look at the portfolio. As I said, a 14% growth rate near $1 billion in premium. You can see the many lines of coverage and business that we have. Our marine book of business at $230 million is actually one of the top performers from a combined ratio and ROE perspective in the entire company portfolio. Great representation in the financial lines and some businesses targeted at emerging industries such as technology and healthcare.
We've been thoughtful, we've been very deliberate about how to grow this. Now sort of just to recognize and acknowledge that during that period of time, perhaps that 14% growth rate was slightly more aggressive than it should have been. A couple of mistakes were made back in the 2012, 2013 timeframe, where 10 programs or so were written in our programs business and 40 accounts were written in our contract surety business that shouldn't have been written or should have been better priced. Took care of the balance sheet issues related to that. We have new discipline from an underwriting and pricing perspective in those businesses. I didn't want to allow those two sort of snafus, which are real, to sort of prejudice or taint your view of how this portfolio really performs.
It really is performing well. Now that we've got those underwriting and pricing issues boxed and contained in contract surety and programs, the rest of the portfolio is performing quite well. Here are the three growth levers. As I said, the one on the right side of the page, deepen the penetration in the independent agent channel, is the nearest term opportunity we have. We're also going to broaden our distribution reach because we have to dabble in. We're sort of dilettantes in the excess and surplus lines, and the U.S. wholesale channel. We're going to evaluate new industry sectors, new perils and new coverages, new limits, that make us look more like the fully integrated specialist that you're used to seeing and analyzing in the insurance marketplace. First is the penetration numbers.
The penetration numbers here in specialty look higher, and they are higher than what you saw previously. That's because these profit pools are smaller and there's fewer people playing in them. The market share you have with an agent tends to be higher in specialty than it is in your standard lines business. Look at where we took the business from 2011 to 2016, four points over six, and we only plan to take it three points over 10. We can do this. It's muscle memory. It's easier to go talk to an agent about bread and butter packages than it is about some complex contractor or about a financial institution or about packaging up a group of coverages into a comprehensive suite. It's just easier. We need to focus on this more with our field force.
We need to expand the capacity of our underwriting desks to handle it. Here at Q4, we have not chosen to take the expense drag of bringing in the underwriting talent to attract the business. While it's hard work, this is probably the simplest to understand and the most tangible and near-term opportunity we have in the specialty business, and that is deeper penetration with our existing independent agent channels. Second, we're not going to give you a tutorial on the arcane world of wholesale and E&S because you know it well, but it is. The people that you hire that can go out and talk to the Hubs and the USIs of the world aren't the same people who know how to go talk to the AmWINS, the CRCs, and the Ryan Specialties of the world.
The person we're trying to attract to join our company is going to be an expert on how this entire wholesale MGA/MGU channel works. Not only deliver our existing capabilities that we already write to that channel, but develop new capabilities and new products and services that aim to that channel. As I mentioned previously, our 2,100 agent partners do not consider this any form of channel conflict since many of them are placing business with wholesalers today. Second point of growth is aligning distribution with our future portfolio and aiming our product suite at U.S. wholesale, U.S. MGA, and U.S. MGU. Third, this is the where to play. This is a decision model. This is not a conclusion.
Again, the person we hire is going to be an expert on how to analyze markets, how to market time the allocation of capital, what skills and resources does Chaucer have, do we have sitting in Hanover U.S. Specialty that we can enhance, grow, make more sophisticated to run through a set of screens of profitability, growth, strength of the competition, and limits. Obviously, we don't have the limit capacity that many of our competitors do, but running it through four screens, running all of these opportunities through a series of screens to decide where to play. You can see on the left side of the page, this is the way the specialty world sort of analyzes itself. They look at what customer markets are we serving, such as energy and agriculture and transportation. What products are we selling, whether it's financial lines, property, warranty, or surety.
Of course, there's the high-end risk specialists such as Chaucer, who deal with upper limits. You look at the combination of all that, you look at the fact that we have domestic paper, we have offshore paper, and we have Chaucer paper, decide where we can play, approach it responsibly, prioritize the sectors, launch. That's the third leg of growth in our U.S. specialty business. How are we going to do it? You don't plan to do anything inorganically because actionability and the ability to execute is always suspect. The right opportunities have to be available. You start with an organic growth strategy. You hire someone who has the ability to attract talent. However, opportunistically, you look at books of business, MGU conversions. You look at how to attract talent that can bring revenue with them.
You look at all of the above, out of the gate, this has got to be an organic strategy because you can never count on an inorganic approach in order to grow. We have a great track record of having done this before. This is a really interesting one. We don't showcase this to you in any of our quarterly reports, but this is a chart of the technology business. That was started by Jack and one of our really capable operators back in 2009. It's sort of very standard coverages to the technology sector. We always think of the Ciscos and the IBMs as being the technology sector. It's a real boutique world with lots of 10 and 12 and three-person companies out there, programming and designing and doing things.
It's a small commercial world, and we've been very clever at building a business that was barely $14 million in 2009 to over $100 million today, and keeping that combined ratio completely in line. This was purely greenfield, ground up, mid-80s combined ratios, and a real success story that if you attract the right talent and tiptoe into these markets in a very responsible way, this now gives us the platform to grow bigger, to write bigger accounts, to write more complex risks, because now we're taken very seriously, and we have the gravitas with our agents in the technology sector. This is another great case study. I actually like this one the best, because anytime you can actually do a deal and not pay for the synergies, it's a home run.
This was a small company bought back in 2009 called Verlan Fire, which was complex fire risks. It barely had $20 million of revenue, and we just drove it. It's now four times the size at $80 million, and it has produced combined ratios. In that business, you need to have a combined ratio in the 60s in order to make money, since the loss control costs are so high. A great example of buying something that was big enough to be relevant, but not so big that it was a huge capital outlay, we had to pay for the synergies, brought it into the company, and by just working it over time, nearly quadrupled its size.
We have a great track record of doing this organically, the greenfield approach, small discrete acquisitions that are basically the purchases of capabilities, and then bringing the revenue synergies to it. I think we will be successful. Again, I think you can put a point on this after you hear from John, but if we can just aim our product portfolio and get more focused in the field with our independent agents, the first wave of growth, $300 million or so in the next five years, can come just from aiming our current product portfolio and profile harder and with more discipline at the independent agent channel. Of course, if we can expand our risk appetite and then create a wholesale capability, then the growth just expands from there. I think we have a very good chance of being successful here.
That's the U.S. Specialty story. After the break, John is going to come back to talk about Chaucer. Thanks for listening this morning, and we'll see you in 10 minutes.
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Going. I'm John Fowle. I want to talk to you a little bit about Chaucer's role in the Hanover story. Why do we think we're in a great position? Chaucer's a fantastic business. We're an established leader in the world's leading specialty market. Our focus is all about specialty. We have unparalleled access to the brokers that have this business, and we have the gravitational pull of the London market for the clients who have specialty risk need. We're very good at managing our business. We understand how to be capital efficient, and we can build a broad portfolio that works when you put it all together, also when you then sit that against the Hanover's balance sheet. We think we are distinct, not unique, but distinct. We are obsessive about understanding what the customer's problem actually is.
We are truly obsessive about making sure that when we've worked out those problems and come up with solutions, that we have tailored them and priced them in such a way that we can be sustainably profitable. We constantly try and apply the skills of the whole team, the underwriters, the actuaries, the capital modelers, the exposure management guys, to come up with ways of solving these problems. Also a real focus on understanding what's changing in the distribution model, what's changing amongst our brokers, what needs they have, and why they're trying to do things in a different way, and find our way of interacting with them successfully. We manage volatility. We do buy a lot of reinsurance, and we do that because we need to be able to offer our clients meaningful capacity.
We have a tremendous following with the reinsurance market that allows us to build that capacity, work with reinsurers, and put ourselves back in a position where that volatility is obtainable. What do we think the real opportunities are for us at the moment? Really expanding what we do in the emerging markets is key for us. They've been important parts of the world for us to date, and we think that we can continue to trap business in those markets. We do feel that we can continue to grow our treaty book. We have a great reputation in treaty, and we think it's actually still slightly underleveraged. We really like analytics. We really like looking at numbers, and we really like what technology can help us do around data.
We think there's real opportunity to be gained in our world, in that specialty world, from some of those facets. There's one which is a kind of simple point, but an important one to us. We buy meaningful amounts of quota share reinsurance, and that's part of our relationship with our reinsurers, but it also gives us the opportunity to restructure those relationships as and when it suits us. When opportunity does knock and when our appetite increases because we think a particular area is particularly attractive, we can flex how much of that business we keep rather than how much we pass on, which has an immediate effect on our gross premium. Where are we at now? This is our business in simple form. Nice doughnut chart there. Couple of things just to quickly point out.
One is how small our property book is as a percentage when compared to most people. That's because we focus a lot of that risk appetite. In fact, all of our risk appetite for U.S. property, we focus into treaty. This is an area that we really think there is a great opportunity coming. We've got a fantastic track record in property business. We are good property underwriters. This is still quite specialty business. We've recently enhanced the team to set us up to take advantage of what we think will be a correction at some point in the near future, because property business has been being underpriced in the London market now for a while, sustained by a lack of cat losses, effectively. The other bit to point out is that treaty part. It's a big part of our business.
We're successful treaty underwriters, this is really where we're writing the same underlying risk, but typically on an excess of loss treaty basis, which gives us access to business that if we just sat there writing direct and facultative business, we'd never be able to access. The third thing, which is a simple point about balance, is the mix between long and short tail just works as a capital model extremely successfully. On top of what we've got at the moment with Syndicate 1084, our major syndicate, and Syndicate 1176, the specialty nuclear syndicate, we're launching an enterprise in Dublin, which really just complements what we have available to us in the Lloyd's market. Really, probably the bottom point is where the key dynamic is.
We have 90 underwriters, proper underwriters in London or in our small hubs around the world, focusing on what is good risk and what is bad risk and how to price it. There's a feel for some of that experience. You'll see all those years of experience there. Some of them are notably grayer than they are in those photos. A point to make here is this is the senior underwriting team, but in the context of questions about change, I've been at Chaucer since 2002. I joined to head up the casualty book. Our chief actuary, our head of claims, and our head of reinsurance purchase all predated me. The core of the underwriting and the decision-making has been very consistent at Chaucer. Where's that got us? Well, it's delivered this strong track record. Our numbers have been good.
We have outperformed our Lloyd's peer group in terms of loss ratios, we do that by trying to take control of the risk decision. We lead a lot of our business. We focus on particular areas, then we make sure we're seen by our broker partners and our clients as one of their major leaders. When I say leader, I mean we're setting the terms. As you know, Lloyd's is still a subscription market. We want to be at the top of that slip, as we'd say, making sure that we're leading the original terms, then very importantly, we're handling the claim when it turns up. We want to build on where we've got to.
We want to continue as we always have to broaden our underwriting expertise, learn more about anything where we feel there's any gap in our knowledge, use that to really increase the influence we have with the brokers and the clients. Make sure they're always coming to us because they know they're going to be talking to an informed counterparty who understands their risk. That gives us truly influential relationships with the brokers. The brokers want to go to their client with good advocacy, they need to give good advocacy of having spoken to underwriters who know what they're talking about. Using those skills that we have developed over time, we want to enhance the products we can offer and enhance how we interact with the distribution chain.
Some of the initiatives that have come on stream over the last several years, which we'll continue to build on. We've brought in the London markets leading U.S. casualty team. They've done a great job for us. There's some interesting things we think we can do there with the model within that world. We brought in three very high-quality people from a competitor who specialize in what we call emerged market political risk, which beautifully complements what we were already doing as a leader in emerging market political risk. We were chosen by AXA to JV with them on this initiative about bringing more African specialty business again into the Lloyd's market, and that comes in through 1084, and we then share it back to AXA. They put the real powder in the gun on the production side. We've built out some impressive niche areas of the marine business.
In 2016, we brought in, again, a specialty A&H team, very small team, very specific in what they do. That's been a great complementary class, and we'll look to build that out, and we'll look to build that out in the regions as well. Rather than just believing me, here's some independent recognition of where our underwriters sit in the pecking order in London. The Gracechurch survey is an independent survey. 400 London market placing and producing brokers are surveyed, and I think over 150 fellow underwriters. No one else got close to this, having four people named in their two top 10 as leading underwriters of influence, and particularly the broker one.
They asked the brokers, "Which underwriters matter to you in dealing with your clients' issues?" The history of the numbers, the combined ratios. Great numbers. We're really clear on this. We know that an element of this high performance has been this benign loss activity in the market that's been around since we became part of the Hanover Group. We completely acknowledge that, and we're very focused on it. We want to be able to run our business to a 95% combined in the long run. We think that's perfectly achievable if we keep our focus on all the metrics. Part of that is making sure that we continue to understand the broadest possible scope of ERM, picking up on all the elements that can affect the performance of the business.
The point we wanted to draw out here really is that we do have greater claims volatility than the domestic business. That's really about severity. That's not about reserve volatility. We write more verticalized business. We write business that can give severity of loss. This is where our portfolio optimization work, which is very advanced really comes into play, and that in turn feeds the reinsurance purchase decisions and allows us to be very conscious of how efficacious our reinsurance really is. Bear in mind, those combined ratios have been in a period where our reinsurance hasn't really worked for us. Our reinsurance is there to take out the severity risk and make sure we're trying to bring in the range of possible net outcomes to the business. We think that's a great fit for the Hanover Group.
Our reserving approach is a pretty good track record. You guys have all seen that. We've been very consistently proven in terms of having positive reserving. Again, just reiterating that point about the ability to flex how we buy our reinsurance to really magnify any potential opportunities that we see. I wanted to focus quickly on three of the particular initiatives that we want to spend more time on and really build out over the next several years. We've developed these, talking to the other guys as part of those strategic review. We're very confident that these are things we can deliver, but also things that fit well. The first of these is really to build on what we've done already in treaty. We have built ourselves a great position in treaty. This isn't just cat business, by the way.
We're a full-blooded multi-class treaty underwriter, a leader in all of the specialty treaty classes, as well as being able to write cat business. We think we can just frankly, organically grow this book from our current position. We are seen as a leader, and we just want to leverage that leadership position with our client base and with the brokers that control this business, and that is a handful of brokers, to really do more with the same people. Pretty simple strategy that we think we can deliver on, and it will improve our results through the long term. It will, if you like, work in six out of seven years, but obviously, that we think we can make that average out very well.
We're able to do that, because when you look at it as part of the overall The Hanover balance sheet, it is an extremely manageable amount of potential volatility that we will be talking about, especially once we've Continue to play with our reinsurance the way we already do. It's really leveraging on this team, really smart bunch of individuals, which we've been enhancing over the last three or four years. Our treaty team is stronger than it ever has been, and I say that as someone who used to be in it, and now I'm not in the treaty team, and it's stronger maybe as a result. Carry on extending our underwriting capability in treaty and really leverage those capabilities and build our product. People want more competent products. They want products that answer new issues they have within their original portfolio.
Again, really take advantage of everything that enhanced analytics can give us. Secondly, this is all about that emerging market business. This is simple economics. Growing economies, investment in infrastructure, developing insurance sectors are all things that create specialty opportunities that we think we can continue to tap. At the same time, business is increasingly regionalized. The world isn't getting smaller in this sense. People want to do more business in their local markets. London still has a gravitational pull, but other local hubs have gravitational pull. We have now long-established hubs in Singapore and Miami, our Latin American hub, which we moved out of Buenos Aires into Miami, and that's working extremely well for us. We want to complement that by having a hub in Dubai. These are lean and mean hubs.
These are very focused on specific classes of business, but they give us access to this business that will otherwise get trapped and allows us to grow with these emerging markets. Really taking our underwriting intellectual capital that we have in London and exporting it more and more and allowing us to grow in the long term. As I say, we're not looking to do this with massive footprints of people. We're looking to do this in a very investment-light way. Lastly, cyber. The enigma of cyber for our industry. As Joe referred to earlier, I think we all sense how big an issue cyber risk is going to be and what that's going to mean for the insurance sector. We think there's a great opportunity for someone like us as that cyber sector truly develops. It's a worldwide demand.
The demand is coming from people who are already our clients. They're certainly already our brokers. It's the kind of complex risk that we like solving for. We can tackle it. We can do it with real discipline, and we can do it with real insight. The interesting bit is how we want to go about it. We want to take that intellectual capital we already have. We don't want to just jump on the bandwagon of the cyber market as it is now, which is pretty well developed and pretty standard product, and frankly, pretty competitive in many ways.
What we want to do is take what we already have, which is this understanding of the original client and the original risk, complement that with real subject matter expertise around the risk that is there in, if you like, the new economy or as a result of more and more cyber risk existing within original insureds. Do that either with some investment of people at Chaucer or by sourcing with the right partners. Design innovative solutions that will meet the demand that will be there for cyber coverage in one year to five years' time, let's say, not just me too, along the product design route.
When we've solved for this and we've worked out what we think is an appropriate response and we've managed that and we've designed that within our portfolio, working with our partner reinsurers and the other capital providers, we want to play that back to The Hanover on the domestic side and allow them to use that in their space. Overall, why do I think Chaucer is in such a great position to be successful through the next many years? As I say, we are a leader, and we're a leader right in the middle of that Lloyd's specialty market. Our underwriters have proven themselves to be amongst the very best in their fields. We have been good at attracting additional talent, and we've done that across a broad range of specialties. If it's a specialty, we're probably there. We probably have a view.
We have a view. We're good at bringing in new talent and embedding them within Chaucer, getting them part of the Chaucer culture, backing them up with the right tools, working with our non-underwriting colleagues on the underwriting side. Again, this proven track record financially, delivering great results, working within a proper ERM framework to make sure we understand our gross exposures, our net position, and manage those appetites accordingly. Lastly, and really excitingly, is we really do think we do far more working more closely with The Hanover on the specialty side. That specialty side is being redefined with a new leader on his way.
We think we can tag team with them to really make the best out of the U.S. specialty space, whether it's business that suits Chaucer or whether it's business that suits The Hanover. At that point, I will hand back to Dick, who's going to talk to you about innovation.
An exciting topic and an exciting time at The Hanover around this. Mark and I are really psyched to partner together and roll our sleeves up and do some real problem solving. We're excited, as you heard Joe say, that this is about growth and premium. Figuring out how we're actually going to bring some of that premium to The Hanover through our agency channel. We've just got 15 minutes or so here to maybe whet your appetite a little bit. We're not going to go deep on our initiatives. More talk about our approach and our philosophy to this. We'll sprinkle in some examples to show you some of the problems that we're trying to solve for and how we're going to get after it. Okay? I'll start.
I'm going to invite Mark up in a little bit to talk a little bit about the technology model part of it. I'll start by giving an overview and kind of showcasing some of the things that we're getting after. I don't need to tell anybody in this room, we absolutely feel an imperative here. Standing still is not an option, right? We know we have to change. The world around us is changing. Joe went through that quite a bit on his outset. Customer preferences, or I would even say expectations, are escalating, right? We know folks want things now, they want them or in the comfort of their homes. They want transparency. They want option. They want low price. That certainly changes as the demographic changes as well. You hear the word omni-channel access quite a bit.
Digitization is absolutely driving folks to want things at their fingertips. This is, as you know, kind of a low engagement product, insurance in general. In some ways, the emergence of digitization and the tools come at it, even though it's a low engagement product, they want it as simple as possible. I really don't want to deal with insurance very much. Can you make it painless and straight through processing, right? We have that headwind trend in front of us. New entrants coming at us every day. I was speaking to many of you guys at the break. Hundreds of Fintech, Insurtech companies that are emerging and trying to solve for various parts of the insurance value chain, all the way from upfront research to claims and anything in between.
It's not lost on anybody that there's a lot of capital being thrown at this. When you have $0.50 on the dollar of the insurance premium going towards administration of policy maintenance, that's a lot of money. That's ripe for disruption. That's what these disruptors see. They're like, wow, there is so much inefficiency in the system that they think they can jump in and solve for it. At the core, a lot of that is data. Access to data, access to third-party data. Can you bring in data to make the processes more efficient so that you don't have to actually ask the person for the data because you can retrieve it without having to ask the question? There's a lot out there. We'll talk a little bit about that.
Data, I think, is at the core of how folks at Insurtech and Fintech believe that they can solve things, and it'll be a big part of what we do, too. As you've heard, we're going to launch new growth solutions with our partner agents. I'm personally psyched about that. I've built some terrific relationships over the last decade that I know I can saddle up next to and try to solve some of these problems together, right? We know we're going to enlist a sort of a pilot test and learn fast fail model that I know I have lots of willing agent partners who also believe that they need to evolve and emerge and adopt some of these new approaches to the business, new business models. It's all about helping them attract new customer segments. It's an opportunity, right?
This is a revenue opportunity, we believe, for business segments, customer segments that are not coming to the channel. They're choosing to, as Joe said earlier, to purchase their insurance otherwise. Also to help preserve the value proposition that the channel has. We have 90+% retention in the agency channel, often 93%, 94%. Those customers, you could argue, are at risk if we don't adopt and bring to them some new ways of doing business, more efficient ways to do business. Our approach, as you've heard, is one which we're going to do it efficiently and smartly, I think. We're not about spending a blank check approach and spending endless capital on this. A dedicated but business connected innovation lab. It's a bit of a mouthful, but dedicated. I'm full-time, Mark's full-time. We're going to have some full-time folks.
We're not doing it off the side of our desk. Integrated into the business, connected to. We're going to be tapping resources. We're not expecting to replicate actuarial and pricing product folks. That would be an expensive proposition. We're going to work on business cases, tap into the resources that will be in the Hanover Agency Markets and in the technology world, and collaborate to get after it that way. Capital light is the other sort of adjective we use or descriptor that we use to our approach, and Mark will speak about that a little bit. He talked about it a little bit already, whereby we're going to be more licensing technology. We're not building it ourselves. We're going to leverage some of what frankly the Insurtech is already building. There's some good solutions out there that we actually can leverage.
We think it's both the speed to market and the capital cost efficiency approach. A little bit of overview. I know you've heard some of that already, but maybe a little bit more flavor to it. I'm going to go a little deeper on the imperative. No disrespect to my agent partners who might be listening today, but they're ill-equipped to frankly capture this opportunity on their own, I would say. Now some are. Some of our independent agents are large organizations that have capital, that are investing in technology, but many need partners like us to help solve this. We're going to challenge to work together on it. I see sort of a collision about to happen as you think about a couple of customer segments and their expectations and the channel's ability to match their expectations are certainly not syncing up.
I think that's where the opportunity comes from and where we think we can play a role. I won't go too deep on these, but we all know the millennial segments, right? The 20-35-somethings, the most educated demographic cohort in America, living in their parents' basement, don't like to buy things, like to rent and borrow and still on everybody's cell phone policies. An important segment. By 2021, they're going to be a third of the adult population. As Joe suggested, we either want to capture them now or certainly as they grow up and eventually move out of their parents' basement and have assets and want to buy insurance. We need to start solving for that. The micro small commercial segment, similar. It's arguably an underserved segment. 80% of small businesses are self-employed, less than five employees. The 1099 phenomenon.
There's a lot of business out there where it's a single person, one, two person, financial planner, consultant, whatever. These segments, generally, as the middle column suggests, they want online access. They want digital self-service tools. They want transparency to what kind of insurance they need, what kinds of price points are out there for a business or a person that looks like them. Digital, digital. That absolutely is the phenomenon. On the far right, it's a challenge. It's a challenge to meet those demands or expectations when you look at the way traditionally the channel has set itself up. It's a people. Independent agents are people and phones, right? If you look at their income statements, it's mostly about people serving people in the traditional way. Limited digital and technology capabilities. Obviously, as I said, some are investing, but many need to do more of that.
Very importantly, when you look at particularly the small commercial side of this, it's a small policy. A minimum BOP is $500 or so. They can't afford to serve that type of customer. If they do that the traditional way, they take one phone call, two phone calls to service this, they've lost money, right? It's a difficult segment to serve because it has a high cost associated with very little margin to it. That's, again, an opportunity to solve. Also very importantly is where do you find these? The independent agent channel today tends to be a referral base, right? It's friends of friends, and they connect folks that way through other business relationships. Marketing in a digital way, how are you going to access millennials? Where are they showing up? Where are the micro small businesses showing up?
Are they going to come to dickleeinsurance.com? Unlikely, right? We need to find ways to help them be better digital marketers and to have access. I'll speak to some of what's emerging. Just a little aside on the challenge that we face with how we're traditionally set up and what's emerging and how we're going to try to problem solve. Just a little bit more on that point. If you look at the way the channel is typically set up, it's a higher touch service model, right? Advice driven. That sets up well for high net worth customers, middle market customers, many parts of the small commercial customer segment. It is definitely a higher touch. We would submit that that needs to evolve to a digitally assisted advice-driven model for some segments. Not for all segments.
Although I think some of the tools could be extended to all segments, but they need to evolve, and we're seeing it happen. New types of digital agents are emerging. CoverHound is probably a really good example of a model or a digital agent that is having some success, and they're basically establishing themselves differently. It's not an intense people model. It's how do you connect with customers digitally, and they're really nailing the marketing access component of that by building relationships with online mortgage brokers and online real estate agencies, right? That's where referral sources are going to come from. We would submit that independent agents need to create a digitally assisted advice channel as well. We attempted to size some of what this opportunity looks like. The small commercial or micro segment, $30 billion, fast-growing.
Absolutely many of those millennials are going to become business owners, right? They're in some ways one and the same. You can put them in both buckets. The millennial bucket, we try to size it for what we think is appropriate, which is $80 billion. It's obviously a bigger market segment than that, but stick to our knitting. You heard me say earlier, an account focus We focus on not all aspects of that millennial population. In fact, in both of these, a part of our work will be to do some real customer segmentation. We want to work with and insure customers, millennials themselves, that care about insuring their assets. We're not interested in low limits model line auto that's in that group of customer base.
We're going to sub-segment to find those that fit the kind of business we like to write and the kind that would value some type of advice. The high net worth is on here because we do believe that some of those tools that we could create to serve those two market segments could also be applicable to the high net worth space. There's some innovation that needs to happen there, and as I said earlier, we're contemplating a business plan that builds that segment as well. Just a little more on how we see this evolving. What are we going to do? Give me a sense of what are you guys going to build and how you're going to get after this. I just put four examples up here. Again, that we'll do in sort of a test and learn approach. Robo-advisor.
You've heard of that. It's made its way into, frankly, some of the financial planning sectors. Tools that you could put out there to help folks in the comfort of their own home, whether a business or a person, to understand what do they need. I don't have to call somebody to help me design my insurance program. I am Dick Lavey. This is kind of what my assets look like. Here's who I am. Hopefully pull in data from third-party sources so I'm not spending an hour trying to put a profile out there. Then spit back something that says, "Hey, people that look like you, Dick, buy this kind of insurance," or your business needs suggest that this is kind of what you should think about as an insurance program.
Calculators of sorts as a starting point, because there is real interest, as you know, to kind of get educated. 70% of folks in small businesses today do online shopping to figure out price points potentially for their insurance. Then interestingly, they find their way to a channel to actually buy the insurance. We think some kind of robo-advisor could be a hook to that customer. Online research and pricing tools, similar to that would just be the next step. Once you define what it is you're looking for, you then actually go to the next step and get a quote indication, helping you understand generally what your price point could be.
This is a frustrating thing now, because maybe some of you have done this, where you spend time online putting information in and you get a half an hour in and either a piece of data you don't know is missing or it kicks you out and then you have to call a phone number anyway. There's real frustration points with the existing processes, and trying to build a straight-through engine is the nirvana, frankly. Which is the third one. Could you get to the point where you have a touchless BOP for some classes in small commercial? Could we envision a homeowner quote going all the way through without having to call somebody to collect all the other information? It's no small feat. Anybody in this room has tried to do a homeowner quote online.
Most people don't know what replacement cost means, square footage of your roof, when were your electrical and plumbing updated, et cetera. We have long lists of requirements. We have to get creative on using proxies and using third-party data to help us with that. Both in the small commercial space, again, for certain classes, for certain types of customers, we can resolve that. Digitally assisted device, the online chat. Imagine going through that process, you're getting frustrated, just like you can do with Tiny Prints or Amazon. You have somebody help you out along the way. That is not something that we have prolific in this. That's something that certainly could make this process indeed level work stick. Just to give you a little flavor for the types of challenges we're going to dig into.
Again, when you say these things to our great agents, they love it. They want to solve the same problems. They want hooks. They want engagement. They want to find the next great customer that's graduating from not having assets to having assets. Hopefully that gives you a sense of our approach on the business side. I'll ask Mark to come up and say a little bit more about the technology approach. Yeah.
Good morning. I overheard someone say to Dick earlier, I only know you and Jack, and a lot of the faces around here are new, let me just do a second on me. I joined Hanover a little over 2 years ago. Chief Admin Officer. I run IT and shared services. Prior to coming to Hanover, I spent 14 years with Chubb Insurance. I ran their domestic commercial specialty surety IT for about 13 years, did international IT for my last year with the company. Over the last couple of years, as I came on board here, have partnered pretty tightly with Dick. You heard him talking about our Pulse personal lines platform. Did some really good work there and developed a great partnership. I couldn't be more delighted to be in this innovation group, number 1, and to be partnered with Dick, number 2.
I'm only going to take you through a couple of slides. This slide you saw earlier, it's very simple but very important. This is kind of the process and methodology that we're going to follow as we look for opportunities. If there are things going on that are core kind of capabilities, they're going to stay in the core business and core IT. If there's opportunities that don't have a way for us to serve, we need an input and intake capability to look at those. They will come into the organization and go one of two places. Think about the green box and the blue box is Dick and myself.
Designing business cases is going to be part of Dick's world to ensure that as we have services that are not being met or capabilities that are not being met, that we develop use cases and business cases for this stuff to really happen. As we develop those and get lift and see growth, we bring them into the technology realm, which was me, number three in blue. Underneath you see we put an incubate process, and that's important because I think as we develop certain kind of new capabilities, potentially new business models, we may need to do that within our innovation space to ensure that one, it has the capabilities we want, that we could potentially build it quickly, and validate it, and then as we mature it, redeploy it back to core.
It's really important as we look at innovation, that we keep ourselves available and open to taking on new capabilities, and we don't want to be operationally supporting existing capabilities because that's going to steal away some of our time. I just want to say before I go on to the next slide, two and three, I think are our secret sauce. You heard earlier that a lot of companies do innovation and do it through JVs and venture funds and putting millions of dollars into Insurtech companies. We're not following that model. This is a model where we're internally driven. We're two in a box under the umbrella of the innovation. We've got a business capability and a P&L, and we've got a technology capability. As we look around the industry, we think this is a differentiator.
If we talk about innovation, it won't be a thing hanging under IT. It won't be a thing hanging by itself, or it won't be a checkbook writing for a venture fund. This is stuff where we're working together, use case driven, business focused. We'll do some R&D because it's important to stay current. But the really important thing here in terms of what I call the secret sauce is that we drive this through a business focus. You've heard many times already capital light. I thought I would hit a few points on this slide. Just looking at this upside down triangle, these are the areas of focus that we see for the innovation area from a technology standpoint, analytics and predictive models. I will tell you as I hit each one of these, we're doing these within the core system. Our capabilities.
We're doing some of this right now, including analytics and predictive modeling. We got to take these to the next level. Growth and updated policy and core platform, same thing. As we rolled out Pulse, we did great work. We've done the same thing in specialty and other areas. We've got to take it so that we can get to market much quicker than when we get to market now. Then lastly, enhancing offerings with digital. Digital is an area where we've really got to focus on the agent. We've got to look at digitized assistance. It's an area where we probably have the least amount of core capability, but this is an area we're going to grow. We're actually, we started it as of several months ago, not even waiting for today. These are all areas that are core to our innovation technology approach.
The capital light model is we want to do this with partners. We want to do this with services and platform vendors that are really good at what they do, that help us jumpstart quickly into businesses and services that would take us a long time to get to ourselves. We put an example here on the right-hand side, Cyence. Cyence is a data and analytics startup out of Silicon Valley. They were in stealth mode in 2014 and came out in end of last year, 2016. We just signed a contract with them at the end of last month. It's a subscription service. It gets back to what you heard earlier of, we want to rent, we want to go short term. If we find opportunities that work, we keep going. If not, we have an opportunity to take a right turn.
We're on an annual subscription that allows us to renew with Cyence. Their focus is analytics, big data with a degree of specialization in cyber. We've got a couple of, again, use cases that we're already starting with them. The first one is we're looking at the correlation of our cyber and management liability books. Next use case will be around how do we capture data for small commercial. You heard from Jack earlier talking about small commercial and how we could ask fewer questions and automate the process, and we think Cyence can help us with that. Lastly, we haven't gotten there quite yet with them, but we'll be looking for them to help us with product development and underwriting.
We've got some thoughts around our cyber aggregation, and a couple of other areas, but we see Cyence as a great example of how we can bring capability to bear very quickly. It would take us years and years to build what they have done. We've got some other examples. We've signed contracts recently with IBM for some artificial intelligence and machine learning capability. Same thing as Dick was talking about robo-adviser, that's the kind of stuff where we can rely on a partner than trying to build ourselves. This kind of stuff is where we see ways to win and be successful. Dick's got a couple of others to close on.
Yeah, I'll wrap this up briefly. We think our approach is a smart one. It's an inside-out approach, business case, it's use case driven. We're connected to the business. We're really a collaborative bunch. We act like we're on the same team. We're going to solve. You throw into that mix our distribution strategy at the heart of it, which gives us kind of a great treat to test, learn, try some things, and try to build out. I'll leave it at that. We're really excited to get this going.
Okay. Yeah. Next up is Jeff.
I have really three key messages that I want to share with everybody in terms of the financial aspects. Number one, our financial targets are achievable. I want to take you through those targets in terms of book value per share, in terms of ROE and building them up, really go through each of the levers that will drive the improvement caused by our strategy. Number two key message is emphasizing value over volume. You've heard that a couple of times. We have ambitious growth plans. We feel very good about them, in no way will we be sacrificing loss ratio.
We're going to be emphasizing value over volume, we'll do that by underwriting and pricing rigor, really focusing on constantly improving our business mix, thinking about all business in terms of net present value and emphasizing account and other business that drives net present value. Finally, always have a commitment to strong balance sheet and reserving rigor. The third key message is all around financial management, a big priority. We're very focused on enhancing shareholder return. We're committed to monitoring and controlling our volatility and our overall risk. Always thinking about capital allocation, broad redeployment of capital, everything on a risk-adjusted basis. Really focused on that. Also, as mentioned earlier, DuPont model. Everything we do is about enhancing shareholder return on equity and really focused on unpacking the drivers of ROE and being vigilant toward that.
These are our aspirational goals and targets, we feel comfortable that our strategy will deliver strong financial performance. First is premium growth, compound annual growth rate of 7% to 9%. When you think about the drivers and the leverage, fixed cost leverage that I'm going to show you in a moment, NII improvement coming from the growth, drives an earnings per share increase on an annual basis, a compound rate of 11% to 13%. When you think about, importantly, returning money to shareholders through dividends, maintaining a constant payout ratio, it leaves 7% to 8% book value per share growth. Finally, in terms of a long-term target, 11% to 12% ROE is what the strategy drives. This is really our path to get to $100 per share of book value by 2021.
The way we've chosen to build this up is really to think about, we start with $67 per share all-in, book value per share, we get to $100. The way we've built this up is if we just continue with our earnings and growth trajectory, that would add $18 a share or get you to $85. The strategy goes beyond that, the incremental value of the growth, that dark blue bar, at the same combined ratio, yields about $8 a share in terms of book value. We're committed to a stable loss ratio, there's a lot of expense improvement coming from the leverage of fixed costs. I'll show you that in a minute, but that's about $7 a share improvement. We haven't assumed any change in tax rate here, so these are enacted statutory rates.
Anything improvement obviously would, if anything, would improve this. Wanted to focus on growth. My colleagues have spoken at length about commitment, passion, detailed strategy to three things, deepen the agency penetration, build out our specialty capabilities, add premium through innovation, we're committed to all three of those things. If we do those things, we add the net premium, at the same combined ratio, it falls to the book value per share increase. Stable loss ratio, absolutely committed to it 100%. You've seen some of this data before. This is on the left side of the page. It's accident year loss ratio ex cat. Over the last five or six years, we've had a consistent trend of improving the loss ratio, we feel very comfortable that we can continue it, we've increased our premiums over that same time period.
We're going to do that with a few drivers. We're going to maintain our pricing and underwriting discipline, be really rigorous. We're continuing to build out data analytics, effective tools in the claims area. Our domestic business, we feel, is less susceptible to pricing given the small size, our really high retention rates are a differentiator, which makes a more stable environment. We've talked about business mix shift, reserving rigor. We're really committed to focusing on the loss ratio, getting it right. Last area I wanted to talk about, which is a book value per share driver, is really expense ratio improvement. Walking across the page, scale is really the big driver here. When we can get increased scale, the leverage over our fixed cost is really powerful.
We start off with our 2016 expense ratio of 34.5%, the largest green bar is really the power that we get from that fixed cost benefit. Number one, I think it was mentioned a couple times earlier, we continue to want to differentiate ourselves as a high touch service carrier for agents. That's not going to change. We're not going to change our strategy, our service model. That's going to stay the same. The way we've modeled this is we've actually modeled it on 26% incremental marginal cost, if you will, on the growth in premium. The reality is, this is on written premium, it's actually 29% on earned premium. When I look at our actual expense base, I think about it, I think our marginal costs are really much lower than that.
I think we've been reasonably conservative in how we've calculated it, but that's the big driver of what gets you from 34.5%-33%, and we've built that up on a pretty conservative basis. Cost optimization, we will use the usual tools that one would. We're going to look at our end-to-end processes. We'll create the efficiencies needed. We'll create automation and robotics and the things that are efficient to do today. We'll think about outsourcing. We'll think about the optimization of the organization, whether that's spans and layers. We're very confident that we can at least fund enough to pay for the growth initiatives. Rigorous financial management. I'm not going to go through all of this, but we're really focused. This is what we're about, certainly in the finance organization and really throughout the organization.
Beginning on the upper left-hand corner, enterprise risk management is a cornerstone of an insurance company. Thinking about monitoring and controlling risk and volatility is terribly important. We're going to think about reinsurance holistically. We typically have done domestic reinsurance and Chaucer reinsurance. There are opportunities to think about it collectively and put it together. When I think about optimizing enterprise performance, you got to think about underwriting performance management, really focusing on business, thinking about how things are performing, unpacking loss ratios, looking at our expenses in the same way that we look at loss ratios. Really focusing on what value each of the expenses are bringing, unitizing our costs, and making sure we understand exactly how we're spending our money and optimizing that thoughtfully.
From an ROE perspective, again, we're going to be really DuPont focused, and we're going to be unpacking all of the value drivers of return on equity. Very focused on allocating our capital internally or externally if appropriate, and thinking about risk-adjusted returns, really focused. Opportunistically, we'll think about business development in that same way, and there'll be ways to deploy capital. This is the NII story. With premium growth, the operating cash flows increase, and the top line is our model for increased investment assets. The middle line is our yield. We've taken a look at the forward curve, and we've put a huge haircut on the forward curve. You see, we only have it going from book yield over a five-year period, 3.38%-3.5%. If we would use the actual forward curve, it'd be a lot higher.
When we get to book value in ROE, you'll see that the increase in assets is a big driver for book value per share, and the ROE gets enhanced by a modest increase in the yield. The leverage there is there's a fairly meaningful increase in NII as both the volume and rate begin to increase. No change of a meaningful nature in our asset allocation, no change in concentrations or duration risk. We're going to be conservative and thoughtful as we always have been, largely fixed income. Over time, we may move more into munis in terms of tax optimization as appropriate, but we'll always consider what's the best after-tax return for investments as we think about that. Capital management, lots of focus on capital in our organization. Again, we'll think about reinsurance, and we'll optimize that across the organization.
We'll focus on consistent leverage, debt to equity leverage ratios, and ratings. We're going to be really focused on capital allocation to different businesses, capital allocation to new initiatives on a risk-adjusted basis. Our model assumes that we will continue a constant dividend payout ratio, so continuing to return larger amounts to shareholders through dividends. As we always have been, we'll be opportunistic around stock buybacks, balancing all the other opportunities for capital management. In order to really think about 2017, you have to really get a jumping-off point for 2016. What I've tried to do here is take a look at 2016 and normalize your ROE as well as our combined ratio. I just normalized for two things, domestic development in 2016 and also cats. Cats were unusually low in 2016, so we normalize those to our average annual loss.
In doing that, it moves the ROE to a comfortable normalized level of 10% for 2016. Our combined ratio on a normalized basis is 95.9%. When you do that, for those that are ROE focused versus book value per share focused, we start with our 10%, and the ROE drivers are really expense benefit from leveraging our fixed costs, and to a much smaller degree, the yield improvement on NII. The bigger driver is really the value of moving a point and a half on the expense ratio on the scalable premium. Once again, stable loss ratio, committed to it, big driver, and we'll get that done. As we start to use more DuPont nomenclature internally and externally, this is the way we think about breaking down the elements of ROE. On the left side of the page, you see our underwriting ROE.
From 2016 normalized to 2021, the meaningful improvement in the underwriting ROE is really driven by the improvement in the expense ratio. The small improvement in investment ROE, that's really driven by the increase in yield. Because pre-tax return on equity goes up meaningfully, the way we build this, the tax ROE or the tax on our ROE goes up proportionally. We've assumed the same tax rate, no changes in tax rate, and operating ROE moves from 10% to 12% under our model. We've waited for about three hours, and we're finally going to give you the 2017 outlook.
We mentioned in our earnings call that we're not going to be giving EPS guidance every year or every quarter, but we will always share certainly once a year how we feel about the major elements of the business, and I think you can pretty well squeeze the operating results out of here. On the top line, written premiums. We're looking at personal lines and commercial lines, mid-single digits growth. Chaucer will really depend on the market. At the moment, we think it's slightly positive, but we're going to be opportunistic, and overall, Hanover will be low to mid-single digits. I think it's much closer to mid when I recently looked at the model. Expense ratio, flat across the board to 2016. Accident year loss ratio excluding cats, important, excluding cats, comes down a little bit. Overall combined ratio, we're looking at around a 95% combined ratio for 2017.
Catastrophe losses on all premium globally, we expect to run around 5%, so that's our AAL, our average annual loss, about 5% of total premium. Net investment income is relatively flat. It just takes a period of time for the yields and for the portfolio to turn over. Our tax rate is 33%. That's where we think it'll be on an operating basis. With that, we'll open it up for Q&A. Joe, if you will join me. We'll be happy to take questions for as long as anybody would like. I think we have a mic that's available. Hillary, can you bring Larry the mic?
Thank you. Jeff, in your ROE normalization process, there was no adjustment for Chaucer reserve development. Should we assume that is a normal level in your view? Is that what's embedded in the 95% expectation for 2017 combined ratio?
Yes, I think that is a good assumption. The model for Chaucer is different, the reserving model is different, and we didn't change the way we reserved in 2016, and we expect that to continue in 2016. That's a fair assumption.
Chuck?
Chuck Sobeski at BMO. I guess the question I have is on the E&S growth plan, specialty growth plan, and Chaucer integration. I'm trying to understand how much of that growth is Chaucer build-out in the U.S., because I think that Chaucer's risk profile, product profile, different than your core U.S. customer, be that in standard lines or what was likely to be E&S lines. I'm trying to just bridge that gap.
Sure. I'm going to kick it to John Fowle to comment on the Chaucer synergies. In that specialty model, the first and the most tangible area of growth is just continued penetration in independent agents. We don't have to do anything different except to change the muscle memory of our reps in the field to have it be a more prominent part of the dialogue. Second, we will develop a broader and more robust wholesale capability in the U.S. It's just a gap in the portfolio, and if you're going to have a fully integrated specialty business, we think it's a gap without any conflict. The agents don't care if we do it. In fact, they want us to do it. If we're able to do it's just growth that we can enjoy without disrupting any of the other flows in the business.
The Chaucer bit gets a little more complicated. John and I, and Jack over the last month have had many conversations, and I'll let John describe what some of those synergies might look like.
Yeah, I think the interesting bit is all about in that gap and working at a really strategic level to look at what we can do either together or how we can help The Hanover build out product and go upscale a little bit, go into that wholesale space. You say what we do is already quite well determined. We have a place in the world, but we know an awful lot around specialty product, and we can really work with our Hanover colleagues increasingly to define these areas. Where we've probably been up to now is with this gap between the two of us. They do their thing down here. We do our thing there. We both sort of ignore the middle. I think if we think about the middle together, there's some really good stuff in there.
Meyer.
Thanks. Two questions. One to follow on Larry's. If we adjust the reserve ratio by 5%, does that indicate that sort of normalizes 2% favorable overall? Is that the right way of thinking about how your reserves are pegged following the fourth quarter?
Yes. Chaucer reserves will move around a little bit. I wouldn't want to say, in any given year it will be exactly that amount. There's been a consistent pattern of favorable development since we've owned Chaucer, and we haven't changed the way that we reserved coming out of 2016. We feel that's the right way to look at it. That's an ongoing business model.
Agreed.
Okay. Sort of a bigger picture. Obviously, this is a phenomenally thoughtful presentation. I guess there was less contribution to the growth strategy from simply growing your agency plan from 2,100 to 2,500, 3,000, which is something that I would have expected. Can you talk about why I was wrong?
It's in there. There's some expansion of the agency plan. As I said, 2,100 isn't exactly the right number. If Jack can get a microphone in a second here, it's probably going to be higher than that. There are some underserved geographies. I think the broader message isn't whether it's 27, 25, or 21. It's we think the targeted and deep strategy is the right one for us and gives us the opportunity to be intimate with the agents, do the consolidation work that's now representing projected 30% of the portfolio. That's the real powerful message here. There are some gaps that Jack and the team are going to fill.
I think two aspects of this. First is that we in personal lines and small commercial, even if we don't think about growth states, probably have projections in the neighborhood of 300 to 500 agents that we would like to pursue. Maybe a little bit of a claw back, like I said in the presentation around some folks that don't work out in our current 2,100. Whatever you want to net that out as, there'll be some meaningful expansion in the right geographies where we purposely started very tight. When you get down to personal lines and small commercial, not only do the agents not get worried about the franchise value, we need some diversification in our geographic footprint to avoid developing the next set of geographic concentrations. The second piece that is embedded in that 2,100 is that they're going to continue to acquire.
If we didn't hire another agent, we'd probably have 300 or 400 join the top 200 as they have over the last half a dozen years. Every day we wake up, we've got larger distribution, but it's not about a bunch of disaggregated agents. It's about agents that are increasingly coordinated under the top 200.
I need the mic because my voice is soft. The capital model, what capital model are you using and how do you think about the allocation? You talked about needing a better capital model. Is it by product, is it by segment, is it by count? Then relatedly, I'd like to know what your thoughts are in terms of operating leverage perspectively. Should we see higher premiums than surplus? Should it be pretty stable? How do you think about total operating leverage perspective?
In terms of the capital model, we have an internal economic capital model. We've actually got a couple of them, but we're moving them together. It looks at the risk of individual businesses, it looks at the risk of individual lines, and it allocates capital based on the underlying risk and economics. Everywhere I've ever been, every firm, the economic capital model is always an evolving, improving process and ours will as well. We allocate capital at a very granular level, and we will continue to do that and really focus on it. You want me to touch leverage or-
Please.
Yeah. Our business will evolve over time. As we've modeled out a 5-year strategy, the underwriter leverage doesn't actually change all that much. There are changes in the mix of business, but given the capital and the risks and the leverage, we're very comfortable with that. The growth in the business doesn't oversize property. There are opportunities when you look at across the whole business, thinking about diversification and capital. Some of the increases in business actually end up using capital a little more efficiently.
Jay.
Jay Cohen at B of A Merrill. On the specialty side, part of the growth, not a big part of it, but part of it was the wholesale channel going through MGAs and MGUs. How do you feel about potentially giving up your pen, relying on someone else to underwrite the business? If the answer is, yeah, we can do that, what kind of controls would you have over that process?
Yeah. We haven't decided to do that yet or at all. We do some of that in our programs business today, but it's with a limited number of very trusted partners. That's really the answer to the question. Whether we hand the full pen or half the pen, that's not been decided yet. The program business taught us a very important lesson. That at the end of the day, if you can only look at one piece of information to write a program, I'd look at the quality of the distribution partner. We have 10 or 12 on the shelf right now that deliver year in and year out for us. If we went the MGA and MGU route, we'd do exactly the same thing. Chuck's got another question.
Thanks. I guess the second question I have here now is on the risk up. There's a couple of times and you discussed increasing risk appetite.
Yeah.
I guess at this point in the market cycle, thinking about the business being priced negatively in general, there's probably some that would be concerned that a risk up strategy in a softening pricing environment-
Yeah
coming off of a fourth quarter charge is the kind of thing that maybe get people uneasy. I guess, how you would think about that or give people comfort that a risk on strategy at this point is the right strategy.
I'm going to start my answer by being very semantical with you because the words we actually put on the page were conforming our risk appetite to some of the middle market and small commercial. I'm not being cute, actually, it's true. We have been incredibly selective, and people ask me, what did you learn when you came in here? Over a period of seven to 10 years, this company picked its spots and it didn't deviate from those. Whether it's we're not going to write mining in Colorado, or we're not going to write construction in Texas, or we're not going to write North Texas property, it stuck to its knitting. I'm not saying we're going to unpack all that, but the lens with which we need to look needs to be wider because the agents are telling us.
The workers' comp example that Jack used is a real one. It's not a bad line of business, but if you don't write it in middle market and someone else will write the package and the comp, they will get the entire thing. My attitude is, if you wrote comp at 99 or 100, but the package delivers 92, why wouldn't you do that? We're not talking about becoming some far-flung specialist writer and writing high excess layers. We're talking about conforming our appetite to some of the markets that we're battling for day in, day out for that package business.
Greg Peters with Raymond James.
Hi.
Two questions. First of all, I know you spoke about some of the reinsurance exposures you have through Chaucer, but can you talk to us more broadly about your approach to reinsurance? There's one avenue of growth would be to increase your retention, and that would drive some net premium written growth. Secondly, on the catastrophe loss
Can you provide some color around how catastrophe losses affect each segment in the context of your guidance of, I think, by lines?
Sure. I'll answer the question conceptually and kick it to Jeff for the details. We are undertaking a very comprehensive review of our reinsurance program domestically. My view is it's very traditional. It's right down the middle. It focuses on managing earnings volatility. It certainly protects the balance sheet from the risk of ruin, all the things you would expect it to do. We're taking a hard look at it. We're taking a look at whether the limits are right, whether the retentions are right. Part of this growth strategy might be to use quota share reinsurance in the U.S. more often than we do now, the way Chaucer does, to light up a new piece of business. Earnings volatility, capital preservation, all of those things go into our thought process, and we're undertaking a significant review right now.
This model that you see in the financial model didn't contemplate any major changes to the reinsurance program going forward. You want to talk about cats and the annual average loss and how the portfolios respond to it?
We model out what we think in a 1 in 250 scenario, cats might look like, and then we also look at our historical level of cats and come up with a plan for cats across the organization. Obviously, specialty has lower cats generally than personal lines and commercial lines, and Chaucer has yet a different mix of cats than the domestic business. I don't happen to have at my fingertips the details of it. In total, it's 5%. It moves a little bit, half a percent or so across the different pieces. I guess we can get back to the team over time, if appropriate, to give more detail.
Thank you. Just wondering if John could give us a little bit of an overview on market conditions at Lloyd's right now. We hear incredible war stories that make what we hear about the U.S. marketplace sound tame. Maybe you can just walk us through what the environment is really like there.
Yeah. Lloyd's underwriters thrive on war stories, they tend to be the outliers, the exception rather than the rule, occasionally you do see some crazy stuff being done. The real point is that that's typically not being done by the better underwriters. If you look at on average, rates are down, and rates have been down on average year-over-year now. I'm talking, add all the classes up in aggregate, we've had a deteriorating rate environment. That is squeezing the underwriting margin, which I think means that those business models in Lloyd's which are focused on maintaining a sustainable margin, having their reinsurance in a way that protects against the potential downside are in a better position than those who, for one reason or another, are being forced to chase a growth agenda for the sake of it.
Be that through buying less reinsurance, which I think if you look through a five-year lens at the moment, buying less reinsurance looks like good economics. I would expect any real underwriter to question whether that's actually appropriate when you look at it over the full range of possible outcomes. Market conditions are tough. There's just too much capacity out there. There's too much capital, there's too much supply. You are getting a split, I believe, between the top performing businesses who have real areas of specialization, real leadership capability, strong relationships, and those who are just trying to make their numbers add up, maybe don't have the same focus on the core values within their business. Does that answer your question well enough?
Yeah, that's helpful. Would you venture to guess whether attritional losses are getting to a point where this environment will turn at some point? We all prognosticate here in the U.S. about the U.S. market. Just curious on your thoughts on that.
Yeah, I think there's been some good analysis recently talking about the combination of how reserve adequacy might be drying up, where that's sustained the industry actually, but that would be true in certain areas of Lloyd's. Casualty, depending on the line, has been stagnant to down pricing-wise for a long time. There are some people who I think might have ridden themselves into a potentially difficult spot. As we know with casualty, when it kicks back on you, it tends to kick back for four or five years worth of business. We think there are some classes where either they're in a little period of denial in some of the casualty areas, and they don't necessarily realize that they probably are underpricing the business.
There's also the property lines, the biggest line, and always will be, where there has been this absence of loss, and there are definitely some books of business out there that are only clearing an acceptable number because of that absence of loss. If they're not truly baking in their real annual average loss number, and they're not truly allowing for the skew that has in one direction typically, then that's going to hurt as soon as losses normalize. This year was more normal, but if we have a run of years that are normal/maybe adverse in terms of property loss, we think that will have to correct.
Pardon me. Joe, you mentioned a couple of times that as the domestic specialty strategy develops, you would consider breaking that out explicitly. Why not do that now?
Sorry, didn't hear the end of that.
I'm sorry, the domestic specialty, why not provide the sort of current performance so we can track that?
I think the first thing I want to do is get a leader of the business, while I showed you the plan to develop a strategy, we haven't decided how fast we can go to wholesale, how fast we can expand these new classes of business. Give us time to form the strategy, give us time for that leader to work with John on figuring out how big the Chaucer synergies are, then when we're very comfortable that we've got the full range of a very comprehensive portfolio, it's a synergistic business, we'll make that internal change that's required in order to report it separately. We're not ready right now, I don't think it's many years out. Any other questions? No? Thanks for coming today.
The Hanover management team did a really thorough job in developing this strategy that we've unveiled for you here today. As I said at the top of the program, this wasn't the vision thing. This is a very grassroots strategy, deeply rooted in the essence of our business and the platforms that we enjoy today, with very tangible and actionable business plans to deliver top quartile shareholder returns, we have every plan and every ability to do just that. Again, thanks for coming today. Thanks for listening, maybe we'll continue our chat over a lunch break. Thank you very much.