overview and understanding of the business through a presentation, then questions with management. Today's presentation will be led by Brad Martz, CEO, who is also joined by Lana Castle, CFO, and Alex Baty, VP of Finance and Investor Relations. If you would like to receive a copy of today's presentation, simply email me at Glenn, G-L-E-N, @bristolir.com. We will break for questions at the end answers at the end of the formal presentation. When we do break, we encourage those questions. As a reminder, we are only going to take questions through the webinar portal. If you are listening over the telephone, please access the web link that we sent earlier to ask a question. You can submit a question using the text box at any time. I will read the questions on the air for everyone to hear, and then Brad or Lana will then answer.
I am not going to reference any names, but simply read the questions asked. As we have a fairly large audience today, if I cannot get to your question online and it is not yet been addressed during the call and can be, I will come back to you by email. I will not read the forward-looking statements, but I do state that they apply and I reference them on page two of this presentation. With that said, once again, thank you for joining us. Remember, this is fairly informal, and we do encourage questions to help you better understand the business and its growth path. Now I will turn the call over to Brad to start the discussion and presentation.
Great. Thanks, Glenn. Good afternoon, everyone. I am Brad Martz, President and CEO of ACIC. Thanks for joining us today. Since we covered the forward-looking statements, let us begin on page three. We believe ACIC is very well-positioned, undervalued, and on the verge of creating and enhancing shareholder value through actions our team has taken to invest in our future. We described ACIC as a specialty insurer because of the unique features of our underwriting approach. ACIC became the number one writer of commercial residential property in Florida because we have highly technical underwriting systems, tools, processes and experienced people. Our core business is insuring condominium associations in Florida, where ACIC covers the shell or the building envelope, the common areas, and ancillary structures from physical damage. We do not cover contents or liability.
For other income-producing habitational properties like apartments and assisted living facilities, we do the same thing, but also include and price for limited business interruption protection, but also do not cover any liability or flood risk. Underwriting insurance in Florida, the peak zone in the world for hurricane risk, is hard. It is even harder to do it profitably on a consistent basis when storm losses occur. Underwriting discipline means knowing how and when to price risk based on hundreds of primary and secondary risk characteristics that drive our view of risk and what profitable business looks like. I am certain you will hear other insurance companies talk about how good their underwriting is, but I am not aware of any other insurer who can say they have earned an underwriting profit every year they have been in business in the Florida property insurance market over the last 19 years. Nobody.
Our track record and our results are among the best in the insurance industry in terms of both return on equity and profit margin, as measured by the combined ratio. While underwriting and risk selection is our primary competitive advantage, catastrophe reinsurance also plays a critical part in protecting earnings and capital from potential volatility. ACIC has a very sophisticated reinsurance program designed to mitigate risk of loss from both catastrophe and non-catastrophe events. Because our track record of discipline and profitable underwriting is so good, ACIC enjoys a very strong support from the reinsurance market, which allows us to transfer the vast majority of all the risk across our portfolio. We think of the company more like an MGA, transferring risk for the reinsurance industry, not necessarily a traditional insurance company or balance sheet underwriter that is usually retaining all the risk they write.
This catastrophe protection means we do not need to hold as much capital, which helps fuel our consistently strong return on equity. As an insider-owned firm, our interests are aligned with stockholders, and our focus is always on sustainable profitability and ROE. Our core condo business in Florida still has some upside and growth potential, but for the most part, it is a mature and stable platform. However, I believe, we all believe ACIC has a huge growth opportunity in front of us beyond our core business. Our operating model is very scalable and flexible, which means it can be applied to other territories beyond Florida, as well as other classes of commercial property insurance. We will talk more about our growth ambitions in a minute. But moving on to page four, we are introducing the various companies and brands on this page.
AmCoastal is the Florida-domiciled property and casualty company operating on an admitted basis in Florida. The admitted market is the more highly regulated market where companies must file and get approval for their rates, their underwriting rules, and their policy forms. In Florida, commercial property over $5 million of total insured value, or TIV, is exempt from following our filed rates, which gives American Coastal full unregulated flexibility over how we price our business. This is the vast majority of what we write. And this is a huge advantage over other personal lines admitted carriers who often get stuck fighting with regulators over rate levels and rate adequacy because it is the state's job to protect consumers and keep prices affordable, which conflicts with profitability. AmRisc is a managing general agency that was founded by our Executive Chairman and largest shareholder, Dan Peed.
Dan formed AmRisc with the intent of AmRisc becoming a leader in commercial property insurance in the United States. He built AmRisc into the biggest and best commercial property underwriter in the U.S. Dan's partner was BB&T, today known as Truist Financial Corporation. So in 2007, Dan convinced BB&T to capitalize American Coastal as a source of dedicated capacity for AmRisc to underwrite profitable commercial property business in Florida. And eventually, American Coastal became so big and successful that Truist decided it should not own a large cat-exposed insurance company. So Dan and the AmRisc management team ultimately swapped equity in AmRisc for ownership of AmCoastal. So I only mention this because we often get questions about the strength of this very important relationship.
It is an exclusive relationship, and once people know AmCoastal used to be affiliated with AmRisc and was founded and controlled by Dan, it is easier to understand why the relationship is so strong and mutually beneficial. ACIC recently announced a new long-term agreement with AmRisc designed to keep our exclusive arrangement with them in Florida for condo business, more perpetual in nature versus what used to be a rolling five-year term, which was a regulatory constraint and often confused investors about the sustainability of that relationship. Our relationship has never been stronger and continues to grow, as evidenced by our announcement in March of this year for American Coastal to provide AmRisc capacity for their nationwide E&S commercial property business.
That co-participation arrangement will add roughly $70 million of new premium to ACIC in the first full year of operation, which can be scaled up or down over time, depending on the expected returns on capital from that business, as well as the capacity needs of AmRisc. Ultimately, we expect that to grow over time. The key takeaway here is that our core business with AmCoastal and AmRisc is strong and on very solid footing. That leads us to Skyway and ACES Specialty Insurance Company. ACES is just short for American Coastal E&S. These two entities are the growth engine for ACIC going forward. Skyway was formed as our wholly owned and controlled MGA platform because we did not want to be solely dependent on AmRisc long term. We were dependent on them fully until 2024.
However, today, Skyway has many of the same underwriting and claims handling capabilities as AmRisc and is now ready to achieve scale. Last year was our first full year of operation, and while we did great by working with the same national wholesale brokers AmRisc uses to produce our core condo business in Florida. Our exclusive relationship with AmRisc is limited to condos. So it is our intent to use Skyway to underwrite condominium business outside of Florida, plus all other classes of commercial property in every state, including Florida. Skyway is our operational growth engine that has the ability to underwrite for our balance sheet carriers as well as third-party carriers, which is expected to generate service fee income in addition to underwriting profits over time. This is a key differentiator for us. Most MGAs like AmRisc take no risk. They are 100% dependent on third-party carriers to take risk.
With Skyway, AmCoastal, and ACES, we can do both. We are an MGA with multiple balance sheets that can co-participate or take all the risk. That is unique. This leads us to ACES Specialty, our newly formed and licensed E&S insurance company. Excess and surplus lines, or E&S, is the unregulated insurance market in the United States, E&S carriers have full control over their rates, their rules, and forms without any regulatory interference. So E&S is typically where the more complex and more challenging risk to underwrite reside. Our condo business in Florida also does not require an AM Best rating because there is no commercial lender or institutional investor requiring one at the condominium association level. So AmCoastal has obtained ratings from KBRA and Demotech instead. However, for all other types of commercial property, the opposite is true.
We formed ACES with the intent of getting it rated by AM Best to open up the rest of the commercial property market we have previously not been able to access. In the short term, meaning the next one to two years, we intend to partner with other carriers while we work on capitalizing and rating and licensing ACES in the various states where we want to operate. We can actually grow faster than if we just used ACES alone. Long term, fronting partnerships like the one we announced in March with Fortegra and Arch will not be necessary since ACES gives us the ability to control our own destiny over time. That's the key. Moving to page five. This page highlights our key underwriting strategies.
All you really need to know here is ACIC targets what we call low-rise or garden-style buildings, which are generally three stories or less with superior risk characteristics. Our average policy typically has six buildings with total insured value of about $16 million per policy and an average policy premium of about $120,000 today. We can write properties of up to $100 million of total insured value, but that's rare. We typically then use sophisticated catastrophe models to aggregate all this exposure and estimate the losses we could expect from thousands of historical and theoretical catastrophe events. This exposure management is essentially how we optimize the risk portfolio for underwriting profitability and also determine how much reinsurance protection to buy. That segues nicely into page six, which provides an overview of our core catastrophe reinsurance program designed to protect against hurricane risk. There are two parts to our reinsurance program.
First part is our retention, think of that as our deductible, and the exhaustion point, which is either measured by an occurrence or an aggregate limit. On June 1st of 2026, for this year's hurricane season, we purchased over $1.7 billion of occurrence limit, sufficient to cover a one in 286 year first event. The key metric here is the return period. If you're not familiar with that, it's a measure of exceedance probability. For example, if you divide one by 286, that equals 0.35%. In other words, that means for every 10,000 hurricane events we model, only about 35 of them have the potential for losses in excess of the $1.7 billion of occurrence limit we bought. For comparison purposes, our rating agencies of Demotech and Kroll today really only require us to buy up to the 130-year event return period, a significantly lower standard.
Most carriers operating in Florida today are buying around the 150-year return period. ACIC goes well beyond that because of the stress testing we do to protect against worst case scenarios. It's impossible to eliminate 100% of the tail risk in our business, but we always strive to buy as much protection as possible while still earning an acceptable risk-adjusted return on capital. Our retention is simply a function of how much earnings we're comfortable putting at risk for each event and for multiple events in any time period. Our mantra has historically been to try and remain profitable in any one quarter after a full event retention, and also remaining profitable for the full calendar year even after incurring three full retention events. Obviously, these numbers will change over time based on the earnings power of the business, but that illustrates the point.
Moving to page seven. Here we have summarized our E&S growth story. I think this is the exciting part of today's call. Step one was the announcement of the AmRisc transaction, which immediately started generating profitable new business for ACIC. Lever two is the ACES Skyway platform, which is actually expected to commence operation in the E&S market on or about December 1st, 2026. Now that we have received our certificate of authority for ACES and are in the final stages of completing a new fronting partnership with an unaffiliated carrier that will provide Skyway with A-rated paper, which allows us to immediately access their capacity to begin building this new E&S risk portfolio. Page eight shows the premium opportunity for the classes of commercial property insurance we're targeting for ACES in both Florida, Texas and South Carolina.
We believe these are the three best states to launch our growth initiatives because of our historical experience, the size of the market opportunity, and the expected return on capital, and of course, the relative U.S. hurricane risk compared to other geographies. If you think about capturing just a 5% market share of this $3.8 billion combined opportunity, that would generate roughly $200 million of profitable new premiums for ACIC. This is how we grow top line and bottom line responsibly and thoughtfully over the next three to five years. There are obviously more opportunities beyond these three states, but we want to fully exploit these markets first before developing additional new products in other markets. With that, I'm going to now turn it over to our CFO, Lana Castle. Lana?
Thank you, Brad. I'll take over at page nine that highlights the two important measures we use to measure the success of our business. Combined ratio is the measure of our profitability in essence. If you look at any insurance company, the ratio with expenses to its premium and the remainder is what's left to make the margin for the company. Anything under 100% means that the company is profitable. We finished 2025 with a stellar result of 60.1% for combined ratio. As of Q2 2026, that is 70.3%. The increase in the combined ratio is largely the ratio of harder and softer market conditions as pricing declined in 2026. Although the insurance pricing have come down pretty much dollar for dollar, there is a portion of fixed cost that needs to be covered. As a result, the ratio did increase. However, it still is a very healthy 70.3%.
Internally, we target 75%-85%, depending on the market conditions. As of Q2 of 2026, we're below our target, which is very healthy. Core return on equity was 35.2%. It did decline to 21.7% as of Q2 2026, but still a very healthy number, and our target is 20% or higher in terms of core return on equity. Moving to slide 10, it just shows how the company has been compounding book value and return on capital to shareholders over time. Book value per share has increased from $2.45 to $7.21 from the second quarter of 2023 to the second quarter of 2026, which is a 43% growth over the three years. Owned 50% by directors and officers, which shows strong alignment with shareholders.
Being in the cat business, we think a better ultimate build of the shareholders' value is going to be through special dividends versus the quarterly dividends. We would like to see how the year develops given the catastrophe activities in our respective markets, and then decide how much of value we want to distribute. In 2024, we distributed $0.50 per share, and in 2025 it was $0.75 per share. The company currently has $150 million of senior debt maturing at the end of 2027. We target less than 25% debt to total capital. As of Q2 of 2026, the ratio is 30.5%. As the company continues to build its profitability and remain profitable, that ratio will naturally decrease. We do plan to repay a portion of our debt at the end of 2027 and refinance the rest.
Kroll, which is a very important rating agency for us, upgraded us two years in a row, in 2025 and then again in Q2 of 2026. Our current rating is A for AmCoastal, which is insurance subsidiary, and ACIC issuer to triple B, and we are currently Demotech-rated A. In terms of overall capital management strategy, when we view the stock as significantly undervalued, we will initiate the buybacks. We did a portion of authorized buybacks in 2026. We currently have additional outstanding authorization from our board of directors, and we will decide when or if we pull that trigger. Moving on to slide 11, it just shows how American Coastal compares to U.S. industry standards and our other peers in the P&C insurance market. Price to estimated earnings and price to book value, they trail both U.S. commercial P&C insurers and U.S. specialty P&C insurers.
We do think we have the niche book of business and we view ourselves as a specialty P&C insurance company. The growth initiatives are currently through ACES, are going to fully solidify the company's performance as a specialty commercial underwriter. As we have had the track record of profitability since 2007, which includes the years of catastrophe activities with high frequency as well as high-severity losses, we think it will fully position ourselves to be successful in the market and to differentiate ourselves compared to our peers and our competitors. Slide 12 shows a snapshot of our quarterly as well as six-month results just for comparison purposes. We included three as well as six months ended. Of course, you can review detailed results in our Q and K filings.
Just to highlight a few numbers here, if you look at the columns with six months, our gross premium earned was $280 million compared to $328 million as of 2025. That is a result of their decline in pricing environment. Net premium earned declined less, only 7.8%, because being an insurance market, we can structure the insurance, including their quota share, which is a portion of the insured business, in a way that even if the top line is declining, the net premium can still be declining at a slow pace or not decline at all, depending on the insurance purchase we select. We do want to be conservative and to protect policyholder surplus. As a result, we never want to put our earnings at risk. That brings total revenue to $154 million as of June 2026, so only 3% decrease from 2025.
Consolidated net income was $41 million, core income was $36 million, and book value per share is $7.21. Return on equity is 25% as of June 30th, 2026. Page 13 shows select balance sheet data. As we improve our capitalization, that will position us further to grow organically without having to borrow outside funds. Cash and investments at $650 million as of June. Total assets $1.2 billion, and our total stockholders' equity is $341 million. Page 14 shows the executive team of American Coastal. Detailed bios are available at the website shown. We have deep underwriting expertise, 50% insider-owned, and we have a proven record among everybody in the executive team of managing an insurance company through its various cycles. With that, I will turn it over to Alex Baty to conclude our presentation.
Thank you, Lana. I would just like to recap by saying that we believe that ACIC is an underappreciated story. Right now, ACIC is at an inflection point. Our mature condo business in the admitted market has been profitable every year since inception, remains well-positioned, providing us with the capital needed to execute our E&S growth initiatives outlined here today. Our reinsurance relationships and programs are strong, making an active hurricane season an earnings event, not a capital event. We encourage you to review the appendix at the back of the presentation, where you will see more detailed information about these programs. In closing, with approximately 50% inside ownership, our management team is fully aligned with shareholders and committed to American Coastal success. If you have any follow-up questions after today's webcast, please feel free to reach out to me directly. My contact information is on the last slide of this presentation.
Glenn, we are now happy to take any audience questions.
Super. Thanks, Alex, and thanks guys for the presentation. Again, to our audience, if you have a question, please use the Q&A text box within the portal to ask a question. We do have a number of questions sitting in the queue, so we will get going. First question, Brad. You describe severe hurricane years as earning events rather than capital events. Can you just clarify what that means in practice, and how does the current reinsurance structure protect the balance sheet?
Sure. Great question. Obviously, we want to set retention levels that are consistent with the earnings power of the business. For example, we provided guidance to the Street for 2026, assuming we could earn up to $100 million of pre-tax earnings this year. That was the guidance. And we obviously included some catastrophe losses in that estimate. We encourage everybody to do their own risk adjustment for catastrophes, since they're inherently unpredictable. But what we do is we lay out our various retentions for a first event, for a second event, for a third event, et cetera, so people can stress test our underlying or baseline earnings any way they want. So in this instance, if I were in your shoes, I would've taken that $100 million.
I would've added back what our estimated sort of outlook or tried to guess what was embedded in that number for net retained catastrophe losses, and then stress tested it for a variety of different scenarios, for one loss, for two losses, for three losses. It's highly unusual to have over four full retentions in a single state in a single hurricane season. That's only happened once in the last 120 years. So typically, beyond four events, we don't really worry about that. But yeah, once you get into four-plus events, then you're talking about net operating loss and getting into capital. But our retentions are set based on how much expected profitability we are going to have in any one quarter or calendar year.
Super, thank you. Can you talk about the condos and, I guess, properties you insure? How old are these average condos, and are any of them hurricane resistant?
Yeah, of course. When we talk about the risk characteristics that protections, upgrades, whether to roof, windows, doors, are all super important. So that, to me, is probably, in our view of risk, the year updated is just as important as year of construction. So if you've got a 30-year-old building that's been past recertification and been fully updated and remodeled, that's different than a 30-year-old building that hasn't. So we're obviously going to be targeting the properties that are either newer and/or have been fortified and upgraded. And it all starts with the roof. The roof condition is probably the number one element when it comes to preventing and mitigating loss severity. So we spend a lot of time focusing on that element, its geometry, its roof covering type, its shape, its age, et cetera. So we use aerial imagery to confirm a lot of this stuff.
We inspect 100% of every risk we underwrite, so there are no gaps in our data. In fact, one of the large modeling agencies, I won't name which one, that run these licensed hurricane models that all insurers and reinsurers use nationwide, came in to validate some of their assumptions about commercial property using our portfolio, knowing that 100% of the risks had been inspected as they were testing some of their assumptions. Data quality is super important. It's a data-intensive business, and not everyone approaches it that way. A lot of people are just doing pool-based underwriting and playing the odds, knowing that there's some good stuff and some junk. We go the extra mile. We think risk selection is the ultimate determinant of profit or loss in this business. You can buy all the reinsurance you want.
If the business isn't performing in line with expectations, your reinsurance support isn't going to last very long. You got to have a profitable business sort of before reinsurance on a gross basis, and then obviously that'll translate to a strong net result after risk transfer if you've done it right.
Thank you. Based on your experience and current reading of the market, what is your view on the timing of the potential stabilization in the softer property market?
It's interesting. If you were to look at our last earnings presentation from August, we included a slide. It was the final slide of that presentation, I think it's slide number 17, titled Historical Pricing Environment. What I can tell you is that we are sort of in the middle of a normalized technical price level. We track our technical price levels over time. The chart goes back to our inception in 2007, and we can also compare that to rate on line indexes for the cost of reinsurance in the United States that are published by various brokers. Guy Carpenter's rate on line index is a very good one, if you haven't seen it before. Guy Carpenter is now Marsh Re, as they've rebranded under the Marsh umbrella. We're in a normalized ROE part of the cycle.
We did enter what I'd call a generational hard market, where technical pricing, we'd never seen rates that high since our inception and probably never will again. That was fueled by a series of bad years from 2017 through 2022. That also fueled just a horrendous litigation environment and climate in Florida, which was ultimately addressed by the Florida legislature, and tort reform has worked as advertised. Loss severities and frequency of litigation have come way down as a result of implementing some of these new rules that have created a much more balanced playing field for insurers. Litigation will always be a component of our business. We manage it well. We understand it. It's far less of a threat to loss development and surprises as it was previously. Now we're getting back to kind of normalized pricing levels.
For example, at June 30th, we call our technical model view as our program design. Think about 100% of technical model price as sort of being our baseline expected target loss ratio and return on capital levels. We try not to go below 100% of technical model price. Between 2023, 2024, we peaked out at about 500% of technical model price. Prior to the run-up to that historical hard market level, we've always operated between 100% and 200% of technical model price. That's where it's been. At June 30th, we were still about 250% of technical model price, and I think we'll end the year probably closer to 200%, so well within still a normal, healthy range. Will it go back down to 100%? It could. We don't know that. That's kind of what we're planning on right now.
The good news about that is, even if there is continued rate change to the negative, our reinsurance costs are changing at an even faster pace. This year, our average rate change has been essentially around 20% down year over year. Our risk-adjusted rate decrease on the reinsurance spend at June 30th was over 30% down, risk adjusted. We were still able to mostly mitigate and offset some of what we're losing on the growth side to prevent the erosion to net premiums earned after reinsurance costs. That's the important thing, is our pricing is going to move in lockstep with reinsurance costs, and it's always been that way. We can track our technical model price very closely with the cost of reinsurance capital, and it tracks perfectly. That's been the case forever. I don't expect that to ever deviate or change.
That's how we maintain a margin.
Super. Thank you. This next question probably overlaps a little bit with that last answer, but you'll probably expand on it. It's around competition. With market ebbs and flows and players getting in and getting out, what's your expertise that keeps you healthy versus the larger players?
Well, our historical track record and expertise and experience is number one, right? We've seen in Florida, there's about 17,000, 18,000 condominium associations in our addressable target market. We've had a chance to underwrite 100% of them, and we believe we've got the best of the bunch. So we're going to defend our best risks as the incumbent, and we're in a very strong position to defend it. Our account retention this year is running near 90%, and renewal business is going to be much more profitable than new business. While we want to write some new business to make up for the fact that it's basically impossible to retain 100% of your policies every year, we've got to backfill that natural attrition that does occur from competition. New business just isn't as profitable.
It's far more competitive, and with more players, you're just going to see that continue to be under pressure, as long as there's excess capacity in the market. So we're going to find different ways to compete. We're going to branch into new areas of commercial property, both in class and in geography, where it's not necessarily as crowded, and we can access our unique and super powerful distribution system to get to risks that maybe others can't access. I think that's the key, is just continuing to defend the fort we've built at the top of the hill. We'll lose a few pieces of the castle here and there, but our competitors are, if and when they win a piece of business, they're doing it at deep, deep discounts, at pricing levels that aren't sustainable and aren't profitable. Whereas we expect to remain profitable.
Perfect. Thanks. I have a couple of questions around this topic, so I'm going to combine it into a general question type discussion. As it relates to your new businesses, ACES in Texas and South Carolina, and as you've just described, a profitable Florida business, what is your, I guess, your model on when you're launching these businesses? Are they going to carry the same type of profit profile, or do you expect that some of these businesses or some of this ACES business is going to incur some loss before it gets to, I guess, some critical mass?
Great question. It will be very similar, but slightly less profitable. I would expect a combined ratio that is 5-10 points higher than our traditional Florida condominium business, just because of the additional reinsurance costs. Buying to the AM Best standard requires us to spend a little bit more money. The E&S market also doesn't get the benefit of the Florida Hurricane Catastrophe Fund in Florida, which you only get if you're writing on an admitted basis in Florida. There is no such Florida Hurricane Catastrophe Fund outside of Florida. That's just specific to Florida-admitted carriers. ACES won't have that piece. That being said, it's the same operating model. We're pricing and underwriting the business the same way. We're pricing and targeting each and every risk to a specific return on capital, utilizing our very sophisticated multi-model approach to estimate losses with precision.
That is part of the secret sauce and why we think we can out-select and compete both inside and outside of Florida in the E&S space.
Super. I guess as a follow-on to that last question, given that you're the dominant player in Florida in commercial property market, can you talk about who the dominant players are in those markets and why you specifically chose those markets to start with?
It's really a potpourri of different players. It's all the large guys you would expect. We can publish market share statistics in future investor presentations. I won't rattle off all the E&S carriers that are active in those markets. That being said, we have no intent to compete head-to-head with an AIG or a Liberty Mutual or someone like that. That is not our target market. Those guys write some CAT, but they write less CAT. They don't like the dependency on reinsurance. They don't like the potential volatility. We embrace and lean into the reinsurance market and use that to manage the volatility. That creates market share gaps. The big guys, whether it's personal lines or commercial, doesn't matter. It's the same philosophy.
The State Farm in all states of the world, they're going to be active in writing in Florida, but they're going to have a smaller market share in a CAT-exposed territory than they would a non-catastrophe area like Illinois or New York, right? Or areas that are less prone to catastrophes, let's put it that way. I don't know if there is a safe haven anymore given the wildfire risk and hailstorm and tornado risks, earthquake risks. Every geography's got its pros and cons, which requires carriers to be very thoughtful about the capacity they deploy to CAT-exposed businesses. That creates opportunities for quality alternatives like American Coastal.
Super. A couple of questions around this topic, I'll just sort of ask you to address it in broad strokes. AI, how are you using it? How do you expect to use it as you go forward?
AI is amazing. We licensed Copilot and Claude internally. We have been super thoughtful about how we have deployed AI. We have a partnership with a company called ResiQuant, which is an AI-native underwriting tool that's an engineering-based AI agent, essentially, that allows us to X-ray risks with a level of precision that just hasn't been available previously. Again, it's an engineering-based approach, similar to the hurricane models. Verisk tends to be more engineering based versus RMS tends to be more claims and event data-driven based. They're just different approaches, but we love that verification and accuracy and completeness because we just think it's going to lead to better decisions. If you think about use case one for AI is managing and utilizing data. ResiQuant does that perfectly. It's seamlessly integrated into our pricing and policy administration platform.
It's enhancing our analytical capabilities and just verifying accuracy and completeness of the data, which is critical to making sure we're pricing risk correctly. Secondly, I think it's helped us immensely in IT software and system and tool development. Claude Sonnet, we built several applications in-house. While we used to be dependent on third-party software and these onerous licensing agreements, today we don't have any of those other than what we pay Anthropic to license that tool, which isn't cheap, but compared to what we used to pay some of these other third-party vendors, the savings are immense. We built some internal systems that is now proprietary scalable technology that has zero ongoing sort of costs associated with premium production or licensing fees. It's super cost-effective. We've used it for audit purposes, continuous monitoring of controls.
We've used it for compliance purposes where rules-based work that used to be monitored and managed by humans and spreadsheets is now all done in systems where our claims compliance tracking system or the CCT, as we call it, for example, is a great example of that, where it's in the background doing 24/7 monitoring of claim files for compliance with all the Florida rules related to adjudication of claims. There are numerous rules. If you get out of line with those, there are serious fines and implications and of course, litigation risk associated with policyholders when you're out of compliance. We can use it for peer review, we can use it for enhancing productivity and automating workflows, and obviously speed wins. The faster we can ingest a submission from a broker, it might have 100 buildings in it.
One policy could have 100 buildings and all the buildings are different ages and different sizes. We can ingest that with super quick speed using ResiQuant or other tools to quote and price that risk and turn it around quickly for the brokers. Time is money. That's how we're using AI. Doing more with less.
Thank you. How far up the reinsurance tower have losses gone in your worst storm years, i.e., how close have you ever been to going through your reinsurance protection?
For the commercial portfolio, the worst event we've ever had was Hurricane Ian in 2022. The losses there are roughly $725 million approximately gross. The net piece is obviously tiny. In that year, I believe we bought about $1.5 billion somewhere in that neighborhood, more or less. It used roughly 50% of the reinsurance for that event. A lot of that limit was reinstated for a second event. You still had robust coverage if another Ian had come along in the same year. It's not all limit reinstates and is available for second subsequent events. In that particular case, because it was a first event, that was true. The amount of limit you have for subsequent events is always going to be dependent on the amount of loss from the first event.
We can always go back to market and buy additional limit. If we get a high-severity event early in the season, that is a potential risk to earnings. If we feel like we need to top off the reinsurance program for an early season loss that had significant erosion of limit, especially limit that wasn't reinstated for second subsequent events. That's how we manage it. There is no historical event. We've modeled every single historical event that's ever occurred in the last 120 years, and there is no event that even comes close to exhausting our reinsurance program, even on a normalized basis, inflation-adjusted basis. They're all theoretical, and there's some crazy events.
In a typical 10,000-event simulation, there are some crazy category five-type events that scrape the entire eastern seaboard and do loop-de-loops and hit the state multiple times, do all these kinds of crazy things. Remember my statistic, 35 out of 10,000. I like those odds.
Thank you. Sort of staying with this theme, your ceded premiums are still about 50% of your gross premiums earned. Now that you're back to very healthy capital levels and potentially even over-capitalized, why don't you retain more of the risk yourself rather than cede it to the reinsurers and increase the earnings potential of the business?
It's a great question. We ask ourselves this every year, and we often get tempted to take more risk, and we actually did that this year originally. Originally at six-one, at June 1st, we said we were going to increase our retention from essentially $30 million up to almost $50 million for a first event. That was a decision based on the expected return on capital in that layer. What I mean by layer is that gap between the $30 million and the $50 million, there's a cost associated with transferring that risk, and there's an expected return on capital to do so. I'll give you the numbers. The price and the expected return on capital was about 55 rate on line.
So $0.55 for every dollar limit you are spending, which would have generated or expect a return on capital of over 50% in that layer at June 1st. We decided to retain the risk and increase the retention. It made economic sense because we had the earnings power and the capital base to do it. That being said, we want to minimize volatility as well and continue to try and achieve our mantra of remaining profitable in each and every quarter and obviously for a full calendar year. Based on where earnings were headed, earnings are obviously under pressure year-over-year coming down, and pricing continued to decline throughout hurricane season.
We got to August 1st, we repriced that layer, and we were shocked to learn that the price of that to buy down our retention from $50 million all the way down to $23.5 million, essentially, the price had come from $0.55 down to about $0.33, producing an expected return on capital to that layer of in the teens, which at that point, we are a buyer not a seller. So we bought down the retention, knowing that even though it was the super El Niño year, Hurricane Andrew and Hurricane Katrina, the two of the most costly Category five hurricanes to ever hit the United States, both occurred in El Niño years. We just felt like that was the right economic decision. That is kind of how we think about it. It is all return on capital based. It is not about rolling the dice, per se.
Yeah, some of our peers are making big bets, and they may win big this year on those bets, but we do not think that is a sustainable strategy. You can get yourself into trouble. If you run into a series of bad years where you are incurring several large retentions, you can see your capital and earnings and reinsurance support erode very quickly. That is just not our strategy.
Great. Thank you. Next question is, how do you think about the cash and investments on your balance sheet? It seems like the returns have not been all that great. Is that by design or risk, I guess, management?
I'll comment and let Lana add her two cents because this is really one of her areas of expertise. We've had a capital preservation strategy. We take a lot of underwriting risks. We don't want a lot of asset risk in our business. We were getting fairly good returns on cash over the past year. We hoarded a lot of cash, kept our duration risk very, very short, 100% investment grade in the bond portfolio. It's typically 90% fixed income, 10% equity, with the equity just being S&P 500 sort of passive low-cost strategy, which has worked great too. In the fixed income piece, we have been wary of higher rates for years. Now all that's coming home to roost, and we're super well-positioned to start deploying capital on the asset side of the balance sheet into higher yielding security.
Lana, do you want to expand on our investment approach today?
Yes, sure, Brad. Earlier this year, we met with our investment committee, and we did make a decision that it was prudent, given where our capital was positioned to start slowly increasing the duration and the yield of our investment portfolio. Historically, we used two outside asset managers to manage our portfolio. Earlier this year, we shifted our strategy to have one outside asset manager and also recruit an in-house expert who is a fixed income expert and has been very successful during his career of managing fixed income portfolio. We developed a strategy how to slowly increase the duration and the yield. It's going to take us some time, given where we're coming from, to see significant results. We do think investing in corporates, ABS and MBS longer term, looking for high quality credit type of opportunities will increase our investment return over time.
As our assets under management grow, you will see that investment income is becoming a more material number out of our overall investment income.
Yeah. It's a great question. The float's very important. We understand that. We have expectations to improve return on assets over the next several years.
Okay, super. On the same theme now, can you please talk about the opportunity for excess capital generation? What is your ROE target, and how much capital should be required for growth? This is a continuous question. How much should be left over, and what proportion of that excess should go to buybacks, understanding they'll be influenced by weather?
Buybacks are. We've got an authorization to do more buybacks from the board. We want to be thoughtful about how we deploy that capital. Right now, our desire is to take some of this excess capital invested in the E&S growth platform. We feel like there are returns on capital north of 20%. That's kind of the baseline target for what we're trying to do with ACES and Skyway. That does require capital, as does reducing our long-term debt, which matures next year. We've previously stated we wanted to cut that in half. Cutting it from $150 million to $75 million is the goal, especially in light of higher interest rates. That'll bring down debt to cap, in line with our targets as well. Excess capital is something we're super mindful of.
We obviously have a desire to return capital via special dividends as well, especially when we have a good year and storm losses have been minimal. We think sharing those results based on the actual profitability of the company is an important part of our strategy. We like the Progressive model. It works for them, and we're just copying genius there, I guess. Buybacks, we'll be more opportunistic. I would say that's third on our priority list behind investing and positioning the company properly for future growth and special dividends. We're mindful of holding too much excess capital. Obviously, the ROE is going to be dependent on the earnings are one component, but the amount of capital we're holding is the other, and we will be thoughtful about making sure we're managing that effectively to continue to drive the ROE to an acceptable level.
Okay, super. Thank you. I know it's a very recent event, but we do have quite a few questions about, I guess, Hurricane Idaias. Whatever commentary you could provide on that in terms of its impact, I guess, would be helpful.
Yeah. I'm mindful of selective disclosure here since we haven't done any public announcement regarding estimated losses for Isaias. It's obviously a relatively small event. It didn't hit a highly populated area. It fizzled upon arrival. We'll have some losses, but they'll be rather small. It's too early to comment on the exact number, but I'm sure on our upcoming earnings call at the end of this month, we'll have a better update for everybody.
Okay, super. Thank you. Just doing a time check. We've got time for a couple more questions and then some closing remarks. Can you just comment on the current pricing in the market compared to other peak periods?
I thought I'd covered that earlier.
You possibly did.
About 250% of technical model are the historically between 2007 and 2022, the business ran between 100% and 200% of our technical model price. By year-end, we'll probably be at the top of that range. In 2027, I would expect it to potentially continue to be under pressure, maybe moving to the middle of that historical range. But at that level, there's still opportunity to earn an acceptable return on capital. It's when the technical model pricing falls below 100%, then we'd have to take a different stance on new business, and obviously be even more selective on what renewal business we want to retain because what looks like a profitable piece of business one year might not be the next year depending on how it reprices.
We're mindful of it, but right now, and for 2027 and even 2028, we don't see it getting to a point where we'd have to change our strategy.
Super. Thank you. We do have quite a few questions in the queue, but I think a lot of them, similar to the last one, have already been addressed. One question that I think we can answer is, are there any material changes to the terms of the economics with the new AmRisc perpetual relationship?
There is a slightly higher acquisition cost, but that really had nothing to do with the change in the term. My goal was, first and foremost, address the term. Historically, since 2007, we would get to the 2.5-year or 3-year mark of the 5-year term, which was, again, the regulators in Florida would not allow us to do an agreement with any vendor with a term of longer than five years. It just became one of those headaches where people would get nervous about whether or not we were going to re-up, and it was some kind of sustainable approach. We devised this solution that both parties loved, that was making it sort of an evergreen, automatic, one-year renewable term. Then if either party decides to terminate, there is a four-year notice provision, essentially.
We would have four years to deal with it and plan for it and make sure the company had a sustainable business continuity plan in the event that that were to happen. I think it is highly unlikely. That being said, we are in a better position than we have essentially really ever been, to be honest. But yeah, the pricing, the commission or fee we pay to AmRisc is going to go up and down over time. Right now, as pricing comes down, brokers and producers need higher commission rates to sustain their revenue. That is just how the cycle works. I do not think it-- yes, there are higher policy acquisition costs. Again, I am not in a position to disclose all those details. But we can talk more about that. But that is just part and parcel to the insurance cycle.
Commission rates go up when pricing comes down to maintain revenue levels, and the opposite is true. When pricing goes up, commission rates come down, so brokers are not unjustly enriched by rate increases. That has more to do with the economics of the business than the renewal of the agreement.
Perfect. Thanks, Brad. We will end the Q&A session here. I will ask you for some closing remarks, and then we will end the webinar.
Really nothing prepared as far as closing remarks. We just want to thank everybody for your interest in the company. We think it's a super interesting story. We've been successful. We know we're capable of doing more. It's taken us some time to put these building blocks in place, but now that they're there, we're ready to execute, and we'll be mindful and thoughtful. It's less about charging into a softening market, writing a bunch of business than it is getting the company properly positioned for the next hard market where we will be fully prepared to participate. That wasn't true in 2023 when the market turned and we had limited capabilities to capitalize on the hard market.
We did our best, but I think next time around, we're going to be much, much better positioned to earn super strong returns, and that'll be the wild card in terms of how quickly we can grow this new E&S risk portfolio. But five years from now, I see much better balance across our portfolio. Obviously, if the market terms and conditions improve, that'll just accelerate the process and reduce the amount of time it takes to get to our target.
Super. Thanks, Brad. Thanks to our audience. If you do still have a question that has not been addressed, simply email Alex directly at ACIC, or you could email myself, and I'll get that answered for you. Again, thank you, everybody. Thanks, Brad. Thanks, Lana. Thanks, Alex. This concludes the webinar.