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United Insurance Holdings Corp (NASDAQ:UIHC)
Q4 2020 Earnings Call
Feb 24, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to United Insurance Holdings Fourth Quarter and Year End Conference Call. [Operator Instructions]. A question-and-answer session will follow the formal presentation. [Operator Instructions].

I would now like to turn the conference over to your host Adam Prior of The Equity Group.

Adam Prior -- Investor Relations

Thanks, Brock. And good afternoon, everyone. Thank you for joining us. You can find copies of UPC's earnings release today at www.upcinsurance.com in the Investor Relations section. In addition, the company has made an accompanying presentation available on its website. You're also welcome to contact our office at 212-836-9606, and we'd be happy to send you a copy. In addition, UPC Insurance has made this broadcast available on its website.

Before we get started, I'd like to read the following statement on behalf of the company. Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the federal securities laws, including statements relating to trends and the company's operations and financial results and the business and the products of the company and its subsidiary. Actual results from UPC may differ materially from those results anticipated in these forward-looking statements as a result of risks and uncertainties, including those described from time to time in UPC's filings with the US Securities and Exchange Commission. UPC specifically disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.

With that, I'd now like to turn the call over to Mr. Dan Peed, UPC's Chief Executive Officer. Please go ahead, Dan.

R. Daniel Peed -- Chief Executive Officer and Chairman

Thanks, Adam. Hello, and thanks for joining our call. I'm Dan Peed, Chairman and CEO of UPC. I plan to offer an overview, and then Brad Martz will provide some more detailed numbers and then we'll take questions.

For Q4, UPC was again impacted by a high level of cat activity, including tropical storms Delta, Zeta and Eta, which combined with non-named cat drove a net cat loss of approximately $107 million and a core loss of $58 million. We watched the core income, excluding named windstorms very closely as a proxy for our underlying portfolio performance. And it was an $0.08 profit in Q4 versus a $0.34 loss last year. That makes a strong $0.42 per share improvement. This measure shows consistent quarterly year-over-year improvement, up nearly $18 million in Q4 and $60 million for full year 2020.

The gross underlying loss ratio, which excludes cat, was 21.5% versus 32.1% last year, mostly due to increasing rates and more stringent risk selection and underwriting activities. The underlying combined ratio improved to 88.5% from 103.1% last year, which shows a dramatic turnaround in our underlying portfolio performance. We expect this to continue to improve as rate increases and risk selection activities achieved in 2019 and 2020 earned their way through the portfolio. This is expected to be offset by the increased reinsurance spend on a significantly reduced cat occurrence and aggregate retention, as well as our increased quota share session in 2021. We'll talk more about that in a few minutes.

So for full year 2020 results, we were impacted by an unprecedented frequency of dozen [Indecipherable] named storms, breaking the record set over 100 years ago in 1916 of nine new storms. For UPC, as a coastal property specialist with a portfolio from Texas to Maine, even though most of the storms were lower moderate severity, the higher frequency drove an elevated level of net retentions.

For full year 2020, we had a net named storm cat loss of $208 million from the dozen named storms driving a core loss of $124 million and a net loss after tax of $96 million. For 2021, we planed to dramatically reduce our aggregate named storm retention for the pool [Phonetic] companies to approximately $25 million per occurrence, and $70 million in the aggregate being approximately one-third of the net incurred in the 2020 season. Although this will drive an increased reinsurance spend, it will reduce the volatility of our full year earnings and exposure to loss of capital. We expect this increased reinsurance spend to protect our capital, make 2021 a transition year and position us for 2022 and later with both strong underlying margin and reduced volatility.

For full year 2020, our pool company PML to premium ratio improved by 8.8%. The improvement is due to rate increases as well as exposure management technology, developed and implemented by our subsidiaries, our teams Skyway Re and our Reinsurance Technology subsidiary.

Exposure management is the application of our proprietary technology to identify and improve our non-renewal over time, the worst performing decile of exposures as well as implementation of a point-of-sale technology to decline new business that doesn't meet exposure [Indecipherable]. We implemented this technology midsummer 2020 and exceeded internal PML reduction goals even in just the first six months. We expect to continue improving our PML to premium ratio for at least 24 more months driving an increase in capital efficiency with a targeted additional 15% to 20% on top of the 8.8% achieved in 2020. The reduction in PML relieves much of the pressure on the core cat treaty renewal coming up at 6:1 [Phonetic] which I'll discuss in a moment.

The catastrophe losses in 2020 masks the significant improvement in our underlying portfolio. The underlying loss and gross expense ratios are at five-year lows, as shown in our investor supplement. For full year 2020, the core income excluding windstorm was $0.94 per share, up from $0.49 per share loss in 2019 for an improvement of $1.45 per share. The underlying loss ratio was 22.8% down from 27.7% due mostly to compounding increase in rates and risk selection activities. The underlying combined ratio was 88.9%, down from 95.4% in 2019. We expect this to continue to improve as compounding rate increases are in their way through the portfolio.

The UPC group of companies is well-positioned to expand our underwriting margin going forward. We expect the property cat market to continue hardening in '21 and '22, and even possibly into '23 for personal lines in Florida. These rate increases will be offset to some degree by possible social inflation and increased reinsurance spend.

Given planned rate filings for 2021, we will be in our third year of compounding rate increases. We've also taken numerous underwriting actions, as outlined in the investor supplement, all expected to increase efficiency and performance on top of decreasing exposure. With $1.4 billion portfolio in place, we're well positioned to take advantage of this hardening market. We began rate and reunderwriting work in earnest in 2019 and accelerated it mid-summer 2020. So we are building our several quarters, if not a year or two ahead of the market. At present, even with strong compounding rate increases, our renewal retention rates are near 90%.

To focus on our core competitive advantages and reduced leverage, effective 12/31/20, we entered into a deal to sell the renewal rights to most of our Northeast portfolio, meaning policies in New Jersey, Connecticut, Rhode Island, and Maine. These exposures represent about 9.3% of our premium and about 15.7% of our TIV exposure. In addition, as we reunderwrite the portfolio, we plan to trim 5% to 10% of our continuing PML exposure annually through exposure management mentioned before, but we expect that overall earned premium will be nearly flat due to increasing rates.

Strategically, we are increasing our focus and efficiency through our core products, as well as increasing the proportion of commercial specialty business to personal lines business. We are narrowing 61% of our personal lines products that don't meet scale or profitability hurdles, but losing only 10% of our premium. We are targeting a shift from approximately 70/30 personal lines to commercial lines, to an initial target of 50/50. We expect to be able to develop higher profit margins in the commercial specialty due to the increased specialization needed to write those portfolios.

For example, our commercial residential company, American Coastal, has the number one commercial residential market share in Florida and has made a core profit, including all cat activity, even through the last three years. And we expect to be able to increase the margins on that portfolio for 2021. We've outlined some of those results in the investor supplement.

We're also planning to add excess and surplus lines capabilities to our existing commercial specialty platform are in the process of forming Journey Specialty Insurance Company. JSIC will be a surplus lines carrier and extend our partnership with Tokio Marine Kiln. This enables high growth rates in our commercial specialty business in line with management experience and specialization, expanding our commercial residential business to the similar commercial specialty space.

Our reinsurance partnerships remained very strong and we are one of the few remaining insurers that buy the more expensive cascading limit multi-billion dollar core cat reinsurance tower, which provides us both a strong occurrence protection, as well as the capability to reduce our aggregate net retention level as previously described.

Considering multiyear participation and mid-year cat capacity, as well as our quota share partners, we have pre-agreed approximately 87.9% [Phonetic] of our immediate 2021 [Indecipherable]. As such, we anticipate a very orderly renewal of our 6:1 cat treaties.

Lastly, we are announcing the formation of Skyway Technology, a newly formed InsurTech subsidiary that is focused on developing direct-to-consumer products and building off of the investments that we've made in our technology systems over the last several years. Using nearly two dozen internet data polls, we expect to offer an ease-of-use product targeting the expanding online buyers. While '21 and '22 include continuing technology development investments in line with our '19 and '20 expense. We expect to drive down our expense ratio in 2023 and thereafter.

More importantly, we expect to use AI in data polls and the portfolio of data that we've accumulated over the past 10 years to optimize both distribution and underwriting and to deliver top-quartile underwriting performance going forward. The point-of-sale exposure management technology, which we are using on our present portfolios that I mentioned earlier, was developed by our subsidiaries Skyway Technology in combination with Skyway Re.

So, it's been an interesting and hectic six months since jumping into the CEO role here at UPC. The unprecedented cat activity presents challenges, but also puts us on the verge of one of the hardest cat markets for both cat and Florida insurers since 2006. I believe we have put together an excellent executive leadership team and taken dramatic action to reunderwrite our portfolio.

We've mapped out a plan to continue underlying margin improvement and reduce named cat retention, expand our technology capabilities and balance our personal lines and commercial specialty businesses. All of this is aimed at making UPC a top-quartile specialty cat insurer with strong and growing underlying margins and limited cat volatility over the next three years.

So, with that, I'll turn it over to Brad Martz.

Bennett Bradford Martz -- President and Chief Financial Officer

Thank you, Dan, and hello. This is Brad Martz, the President and CFO of UPC Insurance. I'm pleased to review UPC's financial results, but also encourage everyone to review our press release, investor presentation and Form 10-K for more information regarding the company's performance.

For the quarter ending December 31, 2020, the company reported a GAAP net loss of $33.9 million or $0.79 a share versus a loss of $8.2 million or $0.19 a share last year, a core loss of $58.1 million or $1.35 a share versus a loss of $15.2 million or $0.36 a share in Q4 of 2019. Again, the core losses included $107.6 million or $1.98 a share of current year cat losses, which were higher than our pre-announcement on December 15th, because that review only included estimated cat losses through November 30th.

The current quarter cat losses consisted of three new named windstorm events, totaling $77.7 million, approximately $1.43 a share and All Other Peril or AOP cat losses of just under $30 million or approximately $0.55 a share consisting of five new PCS events and reserve reestimation on events from earlier in 2020.

In the earnings release and on page five of our investor presentation, we continue to emphasize the non-GAAP measure for underlying performance, which simply takes our core earnings and adds back cat losses from the named windstorms net of tax to demonstrate the earnings available to absorb hurricane losses in each period. For the quarter, UIHC produced core income, excluding named storms of $3.3 million or $0.08 a share compared to a loss of $14.5 million or $0.34 a share last year, which is approximately an $18 million improvement in our underlying results.

Page six of our investor presentation paints a nice picture of how underlying earnings had improved year-over-year throughout 2020. And on page seven of our investor presentation shows the same measure for the full year as core income excluding named windstorms was $40.4 million compared to a loss of $20.8 million in 2019, which is an improvement of over $61 million year-over-year.

Gross premiums written for the quarter increased $21.4 million or 7.3% from a year ago, driven mostly by higher rates in both personal and commercial lines leading to a $17.2 million or 5% increase in gross premiums earned.

Ceded earned premiums were $164.4 million, an increase of $5.7 million or 3.6% year-over-year, but declined as a percentage of gross premiums earned to 45.1% compared to $45.7% last year due to our improving rate adequacy in earned premium growth in personal and commercial lines.

Other items included in total revenues during the fourth quarter included realized gains of $41.7 million, stemming from the sale of fixed income and equity securities, which was partially offset by unrealized losses from equities of $10.1 million for a net investment gain of $31.6 million in the current period compared to $10.3 million a year ago. Investment income of $5.3 million declined $2.2 million or 29% from the prior year due to lower yields and investment sales exceeding purchases.

UPC's fourth quarter net loss and loss adjustment expense was $185.1 million, an increase of $54.6 million or 41.8% year-over-year. Net retained cat added nearly 54 points to our net loss and combined ratios, which was partially offset by $621,000 of favorable reserve development, marking the fifth consecutive quarter of favorable reserve development for the company. Excluding these two items, the underlying loss and loss adjustment expense was $78.1 million, down $33.3 million or 30% year-over-year. This produced a remarkable underlying gross loss ratio of 21.5%, which improved over 10 points compared to 32.1% a year ago, and an underlying net loss ratio of 39.1%, which improved 20 points from 59.1% in the fourth quarter of last year.

UPC's operating expenses were $98.9 million, an increase of $16.2 million year-over-year or 19.5%. However, our gross expense ratio for the year was 25.7%, which was nearly 0.5 point better than 2019 and represented the fourth consecutive year of improvement in the gross expense ratio. The components of this positive trend are shown on page eight of the investor presentation.

Combined ratio was 142.1% for the quarter, up nearly 29 points year-over-year, and was 126.5% for the full year, which was up almost 14 points year-over-year due to our catastrophe losses. Excluding noise of cat and prior year development, our underlying combined ratio improved about 15 points to 88.5% for the quarter, improved approximately 7 points to 88.9% for the full year.

Page nine of our investor presentation is very interesting as it shows several key ratios like our underlying loss ratio, prior year development and gross expense ratios were all at five-year lows during 2020. Page 11 of the investor presentation highlights some of the action taken and plans to improve the underlying earnings power of our business even further. In short, our plan is to continue taking rate while reducing exposures in personal lines and growing our specialty commercial property business. As Dan mentioned, probably the biggest change we expect to make this year is related to our retention of potential cat risk.

Our net retained exposure to all cat events, other than named windstorm and earthquake was already reduced effective January 1st. But our core catastrophe reinsurance program renewing on June 1, 2021 is where and when we expect to mitigate the risk of named windstorm frequency, that stung results in 2020. The core catastrophe reinsurance renewals have not been completed yet, but we do look forward to announcing the details once terms are finalized. Some of the exposure reduction initiatives already taken are summarized on page 12 of the investor presentation and are expected to reduce operating leverage and improve underwriting profitability over time.

On our balance sheet, UPC's assets totaled $2.8 billion, including cash and investments of approximately $1.3 billion. The modified duration of our fixed income holdings increased to 4.1 years with an overall composite rating of A+ at December 31st.

GAAP equity attributable to UIHC's stockholders declined approximately 21% from year-end to $396 million with a book value per share of $9.19. Our unrestricted liquidity at the holding company was approximately $36 million at year-end and our Group's statutory surplus was approximately $373 million and all five of our property and casualty carriers had a risk-based capital greater than 300% as of December 31st.

Lastly, the company has included some additional information beginning on Page 13 of our investor presentation to share how we are thinking about strategies for 2021 and beyond. We've outlined three primary strategic focus areas, which are focused underwriting, derisking and simplifying operations, and leveraging technology. And two future growth initiatives, Skyway Technology and Journey Specialty Insurance Company that our executive leadership team is very excited about.

That concludes our prepared remarks, and we are now happy to take any questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question today comes from Greg Peters of Raymond James. Please proceed with your question.

Greg Peters -- Raymond James -- Analyst

Good afternoon. I guess to start things off, probably be appropriate and I recognize it's really early. But it would be appropriate for you guys to sort of comment on how you're thinking about what's unfolding in Texas and where the company's exposure might land?

Bennett Bradford Martz -- President and Chief Financial Officer

Good afternoon, Greg. Thanks for your question. Sure. First our hearts go out to our friends and family in Texas. It's a terrible situation and that's what we're here for, that's why UPC exists. So, UPC's exposure to winter storm Uri is primarily in the Tier 1 and Tier 2 counties in Texas. So, market share analysis may be difficult. It may not be useful as it relates to our losses. We do have claims reported and do expect to incur losses, but it's far too early, really to comment on our potential ultimate gross or our net retained losses at this time.

We do have appropriate reinsurance protections in place. Our AOP cat reinsurance program that we announced back in January, lays out the terms, so that's the protection. There's a $15 million retention, and then there's also quota share protection that would reduce our retention further to approximately $10.4 million for that event.

So, it's likely we'll preannounce our estimated cat losses for the first quarter near the end of March or beginning of April. But our focus right now is taking care of our policyholders, our agents, and our associates in their time of need.

Greg Peters -- Raymond James -- Analyst

Got it. Thanks for the answer. I wanted to go back to two things. First of all, Dan, during your comments, I think you were talking about how much of the reinsurance has been renewed for the expected June renewal, but there was a siren in the background, so it was hard to hear your comments. I was wondering if you could reread that. And then also, I think, Dan, you said that your target is when we think about named events at $25 million per occurrence, $70 million aggregate for the upcoming storm year, is that correct?

R. Daniel Peed -- Chief Executive Officer and Chairman

Yes. So, to answer your question, as opposed to rereading it, I'd just say that we have quota share protections. We have January 1st portion of our renewal as well as some multiyear portions, and then, of course, the FHCF. But -- so we have -- currently I'll use the word pre-agreed, I mean, the contracts aren't signed, but they are agreed for 87.5% of our limit for 6:1 that we feel like we'll need, is already done. So that puts us in a really good position as we work toward finalizing that treaty.

The second part of the equation is, specifically, we plan to reduce our named storm retention to the $25 million and $70 million in the aggregate. Because we have a cascading tower, we've worked with our reinsurers to actually cap our aggregate, or it's not exactly there. We will be close to there with a very minor aggregate, so that if we were to go through 2020 again, we would have a $70 million in the pool companies. We have a couple of little ancillary retentions on the non-pool companies, but that's the main -- that's the bulk of it.

Greg Peters -- Raymond James -- Analyst

Thanks. And then I -- the last question. I know there's -- I have a lot of others, but the last question I'll ask is, so as you worked through this major change, one of the statistics you report is your ceding ratio. And I think your ceding ratio was 45.1% in 2020 versus 45.7% in 2019. How do you expect that ceding ratio to look in 2021, given you're talking about buying a lot of extra -- well relatively speaking, buy more reinsurance protection?

Bennett Bradford Martz -- President and Chief Financial Officer

Greg, this is Brad. I'll take that one. We do expect it to increase, but really primarily driven by quota share. Now, that we've really expanded our quota share program at December 31st, adding American Coastal to the mix and increasing the percentage ceded for the United Property & Casualty and Family Security Insurance company, so that's going to drive a pretty big change in ceded premiums earned year-over-year. But there is a corresponding benefit to ceded losses and lower acquisition costs through ceding commission income. So some of the components of the P&L are definitely changing and the ceded premium earned is going to increase the ceding rate.

Greg Peters -- Raymond James -- Analyst

All right. And then just, I guess, one small detail. On page 14 of your slide deck, you say, as of December 31st, the premiums in-force were $1.39 billion, but then in the language, the left, you say $900 million of premium in-force. I assume the $900 million of premium in-force is sort of like the pro forma number after the renewal rights and all the changes. Is that how I should be thinking about it?

Bennett Bradford Martz -- President and Chief Financial Officer

That's correct. You got to add the $350 million of premium in-force for commercial lines in that middle paragraph, and then the $900 million of premium in-force as footnoted down below exclude -- we're excluding the discontinued products and the territories where the -- where renewable rights is unsold.

Greg Peters -- Raymond James -- Analyst

Got it. Thank you.

Bennett Bradford Martz -- President and Chief Financial Officer

You're welcome.

Operator

The next question comes from Elyse Greenspan of Wells Fargo. Please proceed with your question.

Elyse Greenspan -- Wells Fargo -- Analyst

Hi, thanks. Good evening. My first question a follow-up. I just want to make sure on the Texas storm. I appreciate that it's an ongoing event on the color you gave in response to Greg's question. So, I guess, your understanding, whatever you're thinking too, is that it will be one event? I guess, when you think about the reinsurance protections. I think it is maybe potentially multiple events with PCS, but it sounds like it will be one event that could help on your net retention to $10.4 million.

Bennett Bradford Martz -- President and Chief Financial Officer

Yes. Hi, Elyse. This is Brad. I believe that will be the case. We can't confirm that for sure at this time. It's still too early, but I believe the bulk of the loss will be contained into a single event.

Elyse Greenspan -- Wells Fargo -- Analyst

And away from -- obviously, Texas is a pretty big ongoing event, but away from that, it does seem that most other losses probably were pretty light so far in the first quarter away from Texas?

Bennett Bradford Martz -- President and Chief Financial Officer

January was a quiet month on the cat front. Thank goodness.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. That's helpful. And then, so a couple of -- a few other questions. In your prepared remarks, I think it was you Dan, you mentioned flat earned premium after you were going through some of the moving components in terms of rate increases, and then the extra reinsurance that you guys are buying, is that a net -- that's a net earned premium comment, or was that on a gross basis?

Bennett Bradford Martz -- President and Chief Financial Officer

That was more on a gross basis and general from the perspective of we're decreasing exposure, but we're increasing rates. So that yield -- and again, that was -- so after the renewal rights was out on the remainder of the portfolio, we were expecting the increasing rates to kind of offset the decreasing exposure.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. And then, in the slide deck and in the prepared remarks, you guys talked to right just kind of 50/50 split between personal and commercial. Is there a -- it sounds like you were laying out some of these goals kind of for the next two years. Is there a timeframe when you ultimately want to get the business mix split in line with those parameters?

R. Daniel Peed -- Chief Executive Officer and Chairman

No. I mean, you're right. It does -- eventual target. I would say that it's kind of more -- it's not really in the long-term, but it's probably more in the mid-term, I'd say -- I'd put that in kind of the three to five-year would be our goal.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. That's helpful. And then, obviously, I think you guys mentioned right 2021 being a bit of a transition year, just given a lot of the moving parts. And then looking kind of to -- it sounds like rate would return to showing some growth and improvement beyond that time period. Are there kind of return targets, like how you see from an ROE perspective 2021, and then some of the out years going forward coming in kind of in line with some of -- kind of the business plans that you laid out within the slide deck?

Bennett Bradford Martz -- President and Chief Financial Officer

We have those targets. And in the short-term and in the long-term, and I would -- I wouldn't say in the long-term, which I think is more appropriate is, we're still targeting a 15% return on equity, inclusive of our net retained average annual loss for hurricane. I mean, that is the long-term goal. That is where we're marching toward in pricing and underwriting, and managing our exposure base. But in the short-term, as you mentioned, it'll be somewhere between recent results and our target.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. That's helpful. One last one. You guys had to kind of work on this reinsurance kind of -- and the changing plan, I'm assuming you guys have been in discussions with Demotech. Can you just kind of -- any color that you can provide in reference to kind of your discussions in terms of these initiatives?

R. Daniel Peed -- Chief Executive Officer and Chairman

Yeah. I think so far the discussions we've had with A.M. Best related to our plans to expand Journey and getting into writings in ENS [Phonetic] specialty commercial property on a direct basis with our new carrier Boom Capital has been very favorable. We've got lots of -- that's an under-levered part of our organization, prime and well position for growth. Demotech is very comfortable with the pooling arrangement we have with our pooled group. The risk based capital is very good. And we didn't have to use any company liquidity to prop up surplus at year-end, where we feel like we still got tremendous financial flexibility on that front.

So the reinsurance transactions we did certainly helped. And as we've reduced the direct writings, over time we'll be able to step down the quota share over time. The quota share is definitely a part of our approach to buying catastrophe reinsurance. We appreciate quota share with -- got cat in it and real risk transfer in it. So I don't know if that will change long-term. But certainly as it relates to managing leverage, we'd like to bring down the direct writings and reduce the quota share in step over time. So you don't -- so we'll see some slight growth in net premiums earned, but the component -- the direct and the ceded numbers are what are going to change over the next few years.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay, that's helpful. Thanks for all the color.

Operator

[Operator Instructions] Our next question comes from Ron Bobman of Capital Returns. Please proceed with your question.

Ron Bobman -- Capital Returns -- Analyst

Hi. Thanks a lot. Good evening. I had a couple of questions. You provide a lot of good, important detail, Brad, the $10 million that you mentioned, and Dan, the 89%. Brad, when you were describing the $10 million as it relates to Texas, it was a little bit over $10 million, you mentioned AOP -- I think you said AOP treaty, which I think is All Other Perils treaty. I got confused because I think of this Texas event as a main storm, this Uri. Did I mishear you, or do I not sort of understand the point you were trying to make?

Bennett Bradford Martz -- President and Chief Financial Officer

When we refer to named windstorms, we're talking about storms that are named or numbered by the National Hurricane Center. So, we really are referring to hurricane and earthquake, tropical cyclone that type of thing when we're talking about named windstorms. So All Other Peril cat would be winter storms and Uri is a winter storm, your tornadoes, your hail.

Ron Bobman -- Capital Returns -- Analyst

Okay. Now I understand. And thus a different treaty applies. I got you.

Bennett Bradford Martz -- President and Chief Financial Officer

Yes, we separate this, too. And I do think that gives us a competitive advantage because a lot of people lump all perils into one treaty, and it becomes difficult to manage all that exposure, but we're bifurcating it.

Ron Bobman -- Capital Returns -- Analyst

Okay. Got you. When you -- and you -- in essence, box to sort of put a ceiling as to what Texas could mean on a net loss basis, which is really, obviously, in some respects, the most important thing for you -- for the company. But there has been all sorts of market estimates, single-digit billions up to $20-plus billion. When you look at the claim flow you've received so far, and I know it's only a handful of days since the darkest days in Texas, and you compare it to maybe something like your experience with Harvey or some other experience that, Dan, you or the company have seen in the past. What's your early estimate as far as the market loss from this event as compared to a Harvey or independent of Harvey. Any wisdom you could share?

R. Daniel Peed -- Chief Executive Officer and Chairman

This is Dan. From the standpoint of the market loss, we've seen the estimates, obviously, the Karen Clark, $18 billion was more than half of that commercial. We do not have a lot of commercial exposure in Texas. Our exposure is mostly personal lines. We have seen the claims, they're dropping off already. But the claims count has been within our expectations. And I guess, from the standpoint of the overall industry loss, I wouldn't know any more than they do other than Karen Clark has been right a lot. So...

Ron Bobman -- Capital Returns -- Analyst

How about relative to your Harvey numbers, do you think it will be -- your gross number will be less, equal to, more than your Harvey numbers?

R. Daniel Peed -- Chief Executive Officer and Chairman

We had a lot of claims in Harvey, although a lot of them were flood claims, which actually we didn't cover. So they were closing out payment. The average claim probably will be a little bit higher but the number of claims probably lower.

Ron Bobman -- Capital Returns -- Analyst

Okay. Thanks. Appreciate the little help. Dan, when you mentioned in your remarks, your prepared remarks about the renewal deal, and I'm sure you disclosed this, I'm sorry. You did not mention Massachusetts. But I thought that the company has a decent size or a good-sized footprint in Massachusetts. Did I miss -- did you not mention Massachusetts? Was it explicitly excluded from the renewal rates? And how big is that book?

R. Daniel Peed -- Chief Executive Officer and Chairman

Thanks for catching me. I think I said Maine, but I meant Massachusetts.

Ron Bobman -- Capital Returns -- Analyst

Yes, you said Maine. Okay. Right.

R. Daniel Peed -- Chief Executive Officer and Chairman

Yes. So I misspoke, it's Massachusetts. The total premium that was involved in the renewal rights was about $130 million in those four states.

Ron Bobman -- Capital Returns -- Analyst

Okay. And then my last question was sort of a follow-up to Elyse's question about sort of the longer-term return profile. Brad, you mentioned a mid -- I think you said 15 or whatever, a mid-teens ROE, assuming an average annual loss load. So maybe the most direct question is, what is the average annual loss estimated to be once you get through the '21 transition year and you're in '22, and/or how many retentions is that?

Bennett Bradford Martz -- President and Chief Financial Officer

Right now, we're estimating for 2021 that to be around $40 million, and our goal will be to try and drive that lower. And it depends on what we do at 6:1. That was an initial estimate. But obviously, retention of risk is an annual decision. That's kind of the beauty of our business. And we're not locked in any kind of specific risk profile. If we want to drive that lower, we can certainly buy down our retention lower. And right now, it's all about ensuring the marginal change in rates that we're getting through our rate and underwriting actions exceeds the marginal change in reinsurance costs and loss costs. And we're seeing that happen, and that's why we're seeing improvement in the underlying results.

Ron Bobman -- Capital Returns -- Analyst

Okay. I'm just sort of wondering when you get to 2022, and if you have the $25 million event retention, $70 million aggregate retention, if you were to sort of exhaust those nearly three retentions or the one aggregate retention, what's the return profile? What's the ROE profile in that sort of scenario? If the -- if your policy retention stays at 90% and if your rate trajectory as far as invoiced rate continues on the glide path that you've been getting and hope to, I guess, continue to get and reinsurance costs continue to go. I assume you're profitable, but I don't know if that plays out to a double-digit or -- I guess, that's what I'm sort of trying to get to. Any help?

Bennett Bradford Martz -- President and Chief Financial Officer

Yes, it's a good question, but I don't know if I can add anything further to what we've already commented on. Our long-term target is how we've modeled it. We do believe it's achievable. And it really depends on a lot of variables like the retention rate on our renewal book, and what our average annual rate increase ultimately comes through at, and how low we buy our retention, depending on what's going on with reinsurance costs and structures. So there are a lot of moving parts to that number. But we set targets and we massage those variables to the best of our ability. But yes, it is definitely something we see that's achievable over the next couple of years.

Ron Bobman -- Capital Returns -- Analyst

Okay. Last question. How is the Florida department's response and tolerance for rate increases requested of late been to the Florida companies that have been seeking rate increases. Have they been sort of particularly cooperative, or not so or middling? Any -- what do you see there or hear?

Bennett Bradford Martz -- President and Chief Financial Officer

I can't really speak for the other companies. But as far as our interactions, regulatory relations have been outstanding. We applaud the Florida office for supporting our need for additional rate, and part of our desire to buy down retentions and lock some of those reinsurance costs into our rate filings and be intellectually honest with loss reserves is to get those costs into our rates as fast as possible. And we're getting ready to make another filing here before the end of the month, seeking another 14.7% here in Florida. We've moved from an annual cycle to a biannual cycle rate change in Florida. And it so far has not been a problem. We'll just have to monitor that carefully going forward.

Ron Bobman -- Capital Returns -- Analyst

Okay, thanks a lot. Be well. I hope the weather is more favorable for everybody.

Bennett Bradford Martz -- President and Chief Financial Officer

Thanks for your questions. Thank you.

Operator

The next question is from Bill Broomall of Dowling & Partners. Please proceed with your question.

Bill Broomall -- Dowling & Partners -- Analyst

Great, thank you. If I could just maybe continue on Ron's question about Texas. Is there any thoughts you might have on what a typical claim, like a burst pipe, what does that typically cost in your experience in the past? And then two, is there any thoughts that you might have on demand surge with everything going on, what that might look like in Texas?

Bennett Bradford Martz -- President and Chief Financial Officer

Thanks for your question, Bill. This is Brad. As far as average severity of pipe burst, I think that is all over the road. I don't know if I'm comfortable giving you an exact answer there on pipe burst specifically. I would just tell you. And as far as demand surge goes, obviously, we look at the models, we try and estimate the model expected loss. And the 500-year return period for winter storm in our portfolio is a $90 million gross loss. So that would be well within the reinsurance, the AOP reinsurance program.

Bill Broomall -- Dowling & Partners -- Analyst

Got it. Okay, perfect. Thank you. And I was just wondering on this Skyway Technologies, I'm assuming that's personal residential. But can you just maybe talk about what states you're going to be operating in and timing on that, please?

R. Daniel Peed -- Chief Executive Officer and Chairman

Yes. So it's Dan. We're going to start off with Florida only and it would be in personal lines. We actually -- as you know, we have American Coastal, which is the number one market share in commercial residential condominium associations. And we also sell an HO6 product, which is the condominium unit owner product that is well suited to a direct-to-consumer type of fit. So those are the areas that we're starting in, and we'll develop it as we move up from there.

Bill Broomall -- Dowling & Partners -- Analyst

Got it.

R. Daniel Peed -- Chief Executive Officer and Chairman

We have a target of being active with this by the end of the year, although that's a -- that's subject to completion.

Bennett Bradford Martz -- President and Chief Financial Officer

Yes, I would just obviously, the technological capabilities are there, the investments have been made. We're excited about leveraging all the fantastic underwriting that's been done on the commercial residential portfolio that we already insured those, the shell and structures for now moving direct to those consumers with all that -- those primary and secondary characteristics already in hand will allow us to develop a very slick offering for those unit owners in Florida. So that's where we're going to start. And HO3 is a natural evolution, and obviously, beyond Florida over time.

Bill Broomall -- Dowling & Partners -- Analyst

Perfect. Thank you. And just a point of clarification. I don't remember who said it, Dan or Brad here. But you talked about trimming your five to 10 of the PML annually. Can you just maybe say that again or explain that a little bit? I Kind of missed the details.

R. Daniel Peed -- Chief Executive Officer and Chairman

Well, this is Dan. That was me. Again, I was trying to kind of verbalize that we expect to be trimming our PML exposure and our TIV exposure while at the same time, we're achieving the rate increases, which makes kind of our top line mostly flat. So they were very general comments.

Bennett Bradford Martz -- President and Chief Financial Officer

Yes. And page 20 of the investor presentation shows a couple of graphs that they kind of illustrate that point a little bit. One chart is showing the change in premium on top relative to the change in TIV, premiums up significantly more than exposures. And then the -- our pooled group's 100-year PML moving down almost 9% over the last 12 months is really the best evidence that we can provide people that if we can maintain premium levels flat, as Dan said through rate change, while the exposure base is shrinking, that's a recipe for margin improvement, because remember it's that exposure base that's driving reinsurance costs and loss cost. So that's going down while premium -- while we're able to maintain premiums through increases in average premiums, you're going to see improvement in our results.

Bill Broomall -- Dowling & Partners -- Analyst

You're welcome.

Bennett Bradford Martz -- President and Chief Financial Officer

You're welcome.

Operator

The next question is from Ron Bobman of Capital Returns. Please proceed with your question.

Ron Bobman -- Capital Returns -- Analyst

Thanks. Brad, did you say that the one in 500-year return period modeled loss for the portfolio is $90 million or $900 million gross?

Bennett Bradford Martz -- President and Chief Financial Officer

9-0 for the winter storm peril.

Ron Bobman -- Capital Returns -- Analyst

Okay. All right, thanks for that. I was thinking about that number as contrasted to the $40 average annual adjusting. Okay. Thanks a lot. That explains it.

Operator

There are no additional questions at this time. I would like to turn the call back to management for closing remarks.

R. Daniel Peed -- Chief Executive Officer and Chairman

Okay. This is Dan. Thanks. With that, we'll wrap up the call for today. I want to thank our investors, but also thank our entire team here, including our executive leadership team and especially our claims department for all their efforts and perseverance as we worked through the 2020 unprecedented hurricane season. But thanks to all.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Adam Prior -- Investor Relations

R. Daniel Peed -- Chief Executive Officer and Chairman

Bennett Bradford Martz -- President and Chief Financial Officer

Greg Peters -- Raymond James -- Analyst

Elyse Greenspan -- Wells Fargo -- Analyst

Ron Bobman -- Capital Returns -- Analyst

Bill Broomall -- Dowling & Partners -- Analyst

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