home Latest News ProSight Global Inc (PROS) Q3 2019 Earnings Call Transcript – Nasdaq

ProSight Global Inc (PROS) Q3 2019 Earnings Call Transcript – Nasdaq

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ProSight Global Inc (NYSE: PROS)
Q3 2019 Earnings Call
Nov 07, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the ProSight Global, Inc. third-quarter earnings call and webcast. [Operator instructions] Please be advised that today’s conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, Dean Evans, investor relations.

Thank you. Please go ahead.

Dean EvansInvestor Relations

Thank you, and good morning, everyone. Welcome to the third-quarter 2019 earnings conference call for ProSight Global, Inc. My name is Dean Evans, and I manage investor relations for ProSight. With me in the room today are Chief Executive Officer and President Larry Hannon, Chief Financial Officer Buddy Piszel and Chief Underwriting Officer Bob Bailey.

Following Larry and Buddy’s opening remarks, the call will be open for questions. Yesterday afternoon, we issued our third-quarter 2019 earnings press release, which is available on our website at investors.prosightspecialty.com. In addition, a replay of this presentation will be available on our website until November 6, 2020. Before we get started, let me remind everyone that through the course of this call, management may make comments that reflect their intentions, beliefs and expectations for the future.

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Such forward-looking statements use words such as anticipate, believe, estimate, expect, intend, plan, target, should, seek, continue and other words and terms of similar meaning. We caution you that forward-looking statements are not guarantees of future performance or outcomes and that actual performance and outcomes may differ materially from those made in or suggested by the forward-looking statements discussed on this call. For a discussion of some of the risks and important factors that could affect our future results and financial condition, see our filings with the U.S. Securities and Exchange Commission, including, but not limited to, the risks and uncertainties included under the captions Risk Factors in our quarterly report on Form 10-Q for the period ended September 30, 2019, filed yesterday afternoon.

Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Additionally, during today’s call, we will discuss certain non-GAAP measures, which we believe are useful in evaluating our performance. The presentation of such information should not be considered in isolation or as a substitute for measures prepared in accordance with U.S. GAAP.

A reconciliation of those non-GAAP measures to the most comparable GAAP measure can be found in our 10-Q and earnings release, which are available on the SEC’s website and also available on the Investor Relations section of our website. With that, I’d like to turn the presentation over to our CEO and President Larry Hannon.

Larry HannonChief Executive Officer and President

Thank you, Dean, and good morning, everyone. Before we jump into an overview of the company and a discussion on the results, I would first like to take a moment to thank all the people who helped us through our initial public offering. The hard work of our employees and advisors and the loyal support of our customers and distribution partners contributed greatly to the success of our IPO, which culminated in our first day of trading on the New York Stock Exchange on July 25. It was a great milestone, and I truly appreciate the effort of everyone involved.

When you think about ProSight, a few things should come to mind. First, we are experts that focus on and specialize in niches, which we define as refined homogeneous groups of customers with limited fragmentation. Second, we offer innovative, differentiated products, services and third-party solutions that are valued by the customers of each niche. The next thing you should think about is how we deliver our offerings, which we do through our expert, very limited distribution partners.

And finally, we take a disciplined profit-first underwriting approach to each of the niches we serve, often by writing multiple coverage lines for a particular customer. With these things in mind, we choose niches where we believe our expertise, differentiation and the value we can provide to a customer will result in sustainable profitability over the long term. We take a disciplined and opportunistic approach to our growth, choosing to enter niches where our differentiation matters to a customer. Since our inception, we have successfully grown in three ways: we grow our existing niches, we add new niches in our existing customer segments, and we establish new customer segments.

As of today, we currently have 39 niches, having added four new ones so far in 2019, and have one new customer segment under active development, which is sports. It’s also worthwhile emphasizing that we offer multiple lines of coverage to our customers in many of these niches. Profitability levels can and normally do vary by line of business within a niche. Our focus remains on ensuring profitability of the niche as a whole.

Our company infrastructure is set up that way around the niche, which enables us to more effectively monitor and execute to our performance expectations. While the comments I just made specific to ProSight were intended to help provide clarity to who we are and what makes us unique, we recognize that the industry is in a perpetual state of transition, where the markets are hardening or softening, loss cost trends are favorable or adverse in a certain line, interest rates are rising or falling. At ProSight, we realized that we and the industry must continue to evolve. This need for insurance to evolve was a founding principle behind ProSight, and we have constantly done so through our near decade-long history.

As we and our industry are now dealing with social inflation, I’d like to take a moment to share some examples of how our setup and our niche focus have helped us identify these issues early and how our execution since has positively impacted our results. For instance, we organize our data at the niche level and have our support structure aligned the same way, which enabled us to see unfavorable loss severity trends emerging in 2015 and certain initiatives within our transportation customer segment. And we could see that those losses were primarily in auto liability. Our structure enabled us to act very quickly.

We chose to exit several niches at that time. We recognized the adverse loss development, increased our loss ratio expectations and have since achieved significant compound rate increases for the transportation niches where we chose to stay. While our commercial auto experience was certainly disappointing at the time, we believe our structure enabled us to catch the issue early and improved our ability to take immediate action to rectify it. Since taking those actions, we’ve had positive development on the line overall and believe that our execution has positioned us correctly going forward.

As another example, like many others, we have seen the favorable development trends emerge in primary and excess workers’ compensation lines. While we expect to profitably underwrite through the cycle in primary workers’ comp, we chose to exit excess workers’ compensation in 2019, as we believe we would see increased and unpriced exposures on that business going forward. Focused expertise at the niche level in underwriting and claims enabled us to quickly identify the issues impacting this line, allowing us to make what we believe is the right underwriting call for our long-term profitability. Although these are just two examples, our execution has gone well beyond actions in auto liability and excess workers’ compensation.

We’ve constantly pruned or expanded our portfolio where and when it is appropriate to ensure it is best positioned for long-term profitability. We will continue monitoring the trends within both the industry and our own claims, taking appropriate action where necessary. Our niche focus enhances our ability to identify trends specific to a niche, which, in turn, enables us to manage our company to be nimble and execute all — across all cycles. We expect to continue to operate in that way going forward.

Along those lines, our claims department has seen certain outcomes at the individual claim level that we are watching closely, including the occasional inability to reach a favorable settlement or having an adverse jury verdict, maybe even the presence of litigation financing. We are monitoring these items as they relate to each of our niches and the offerings we provide and will likely curtail our writings in areas such as liquor liability and certain excess positions in a few niches. This is consistent with the underwriting pruning discipline that I mentioned earlier. With regards to the quarter and our year-to-date results, we are extremely pleased.

The results this quarter reflect the prime positioning of our specialty niche portfolio and its potential to generate double-digit premium growth, ROE and book value growth over the long term. As Buddy will share with you shortly, our quarter is characterized by strong top-line growth, consistent underwriting profitability, continued growth in investment income, a solid bottom-line profit and a double-digit operating ROE. To close, I’d like to make one other comment, and that’s to make certain dimension that we expect to improve our expense ratio going forward. We aim to achieve this over time through a combination of disciplined expense management, scaling our premium base and the efficiency gain through automation and digitization.

Through these efforts, we expect to achieve a two-point reduction in our expense ratio over the next three years. I will now hand the call over to Buddy, who will further discuss our results and financial position.

Buddy PiszelChief Financial Officer

All right. Thanks, Larry. For the third quarter of 2019, our adjusted operating income was $13.8 million or $0.32 per share as compared to adjusted operating income of $15.3 million or $0.39 per share for the same quarter of 2018. Third-quarter 2019 adjusted operating income excludes certain nonrecurring costs, primarily grants of restricted stock in connection with the IPO.

Specifically, there was $6.8 million of one-time IPO-related vesting expenses; $0.4 million of transition costs for our former CEO; and $0.2 million of realized investment gains during the quarter, which are excluded from adjusted operating income. Going forward, we expect the remaining approximately $15 million of unvested IPO-related costs to be expensed over the next 11 quarters. For the third quarter of 2019, our net income from continuing operations was $8.4 million or $0.19 per share as compared to $15.6 million or $0.40 per share for the same quarter in 2018. Gross written premium for the third quarter was $224.5 million for our customer segments, representing an increase of 27.1% from the third quarter of 2018.

Including other premium which excludes — which includes exited niches, total gross written premium was $227.2 million, an increase of 12.9%. Net earned premium for the quarter was $202.5 million, an increase of 8.2% compared to the third quarter of 2018. Gross written premium increased across all customer segments in the quarter and year to date. Growth in the quarter was largest in real estate and construction, where we saw increased opportunities and generally favorable market conditions.

For the new niches added in 2019 that Larry mentioned, we added $8 million of gross written premium during the third quarter and $16 million year to date. I would highlight that premium from new niches is often unpredictable and lumpy in nature. 2019’s volume has been higher than our internal expectations as we generally target all new niche added — all new niche premium added in the calendar year to contribute approximately $10 million during their first year and roughly $25 million in aggregate in their second year. Before I touch on the details of the quarterly underwriting result, let me note that the whole account quota share, which was terminated early 2018, does cause a third-quarter reclassification of 0.8 points between the loss and expense ratio, all related to prior periods.

In order to provide more meaningful insight into the comparative underwriting results, the numbers and ratios I will quote will be exclusive of the impact of the whole account quota share. The impact of the whole account quota share is fully disclosed in our press release and the 10-Q filed with the SEC. The company generated underwriting income of $3.3 million and a combined ratio of 98.3% in the third quarter of ’19, compared to $7.9 million and 95.8% in the third quarter of last year. So let’s go through the pieces.

The loss ratio for the third quarter of 2019 was 62% and included $3.9 million or 1.9 points of net adverse development. The loss ratio for the third quarter of 2018 was 59.2%, which included $1.4 million or 0.8 points of net favorable prior-period development. Adverse prior-period development for the quarter is primarily driven by general liability and the commercial auto lines and largely offset by favorable development within workers’ comp and other lines, including marine, surety and property. Roughly two-thirds of the $10 million in development and general liability is driven by niches exited several years ago.

The $7 million of prior-period development in commercial auto for the quarter was, again, largely related to exited niches. We are steadily closing claims from our terminated niches, and the development was more reflective of isolated case reserve movements in the quarter. We reported favorable development in the first half of the year for auto, so on a year-to-date basis, commercial auto reflects no meaningful prior-period development. Again, on the positive side, of the development trend, we continue to see favorable emergence in prior year’s workers’ comp reserves, both in frequency and severity.

There was no cat activity in the third quarter of either ’19 or ’18. We would normally expect cat losses of approximately 1% per quarter, but no losses met a reportable threshold during the current and comparable quarters. Next, I’ll move to the expense ratio. For the third quarter of 2019, the expense ratio was 36.3% compared to 36.6% for the third quarter of 2018.

The 0.3-point improvement was primarily driven by disciplined expense management and the benefits of scale as we grow our premium base. Our policy acquisition ratio was 23.5% for the third quarter of 2019, slightly higher than the comparable quarter in 2018. Our general and administrative expense ratio was 12.8% for the third quarter of 2019, an improvement of 0.6 points from the comparable quarter in 2018. Our investment portfolio stands at $2.1 billion and had an increase in book value of $224 million or 12% year to date.

Our net investment income for the third quarter of 2019 of $17 million increased by 20.9% over the third quarter of 2018, largely as a result — as a growth in the average assets in the investment portfolio. The duration of the portfolio is three years, and the average credit quality remains an A. The portfolio is in a net unrealized gain position at 9/30 of approximately $44 million. The third-quarter book value yield was 3.35%.

That’s down from our second quarter of 2019 yield of 3.58%. 16 basis points of that decline was due to underperformance of our limited partnerships. The remaining seven basis points was attributable to rate compression on our floating rate portfolio. We plan to update our strategic asset allocation and expect to be taking actions in the fourth quarter and, prospectively, to reallocate away from corporate credit to securitized assets and reduce our floating rate percentage of the portfolio.

We believe this can be accomplished with some modest duration extension and credit improvement, making the portfolio more resilient to persistent low rates and credit spread conditions. We expect to provide a more detailed update on the investment portfolio positioning — repositioning on next quarter’s call. Total stockholders’ equity grew by $71.6 million, 15.6% to $530.6 million over the third quarter of 2019, driven by the proceeds from our recent IPO, which generated $51.6 million of additional capital, net income of $8.3 million, RSU grants associated with the IPO of $6.8 million and increases in OCI from appreciation in the investment portfolio of $5.1 million. Our diluted book value per share at the end of the quarter was $11.73, which was an increase of $0.10 per share for the third quarter and $1.85 per share or an increase of 18.7% from December 31, 2018.

Our diluted tangible book value per share at the end of the third quarter was $11.09, which was an increase of $0.20 per share for the third quarter and $1.95 per share or an increase of 21.3% from 12/31/2018. Our ROE for the third quarter of 2019 was 6.8% and 8.9% year to date, depressed by the nonrecurring charges I previously mentioned related to the IPO. Our adjusted operating ROE for the third quarter of 2019 was 11.2% and 12.1% year to date. And with that, I’ll turn it over to the operator to open up the line for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question comes from the line of Yaron Kinar with Goldman Sachs. Your line is open.

Yaron KinarGoldman Sachs — Analyst

Hi. Good morning, everybody. I want to start off with a question on the new niche premium. So I think $16 million of those year to date.

Are they coming from any one particular niche? Or are they really distributed across all four niches?

Larry HannonChief Executive Officer and President

Yaron, this is Larry. We’ve really gotten it from two of the four. Our parking facilities and our aquatic rec niches are the places where that $16 million has predominantly come from. Snow removal is a third that we’re doing.

We’re seeing that roll on now, which was expected, right, I’d say winter kind of an opportunity for us. And self-storage is just in the filing stages. So we have not generated any premium on that yet. So that’s pretty typical for us.

We get a new niche and then it takes a certain amount of time for us to obviously onboard that. So the $16 million and all the $8 million, obviously, in the quarter from the first two niches I mentioned.

Yaron KinarGoldman Sachs — Analyst

Got it. And I think you had mentioned that you normally expect about $10 million coming in from new niches. And I think in the past, you talked about $25 million in year two. So given that the new niches are giving you — are kind of ahead of expectations in year one, would that continue to flow into year two?

Larry HannonChief Executive Officer and President

So it’s going to be dependent on how fast we get out with the filings that we need to do on self-storage. The reason it came on this year earlier than expected was a lot of what we had already completed from a filing perspective for parking facilities and for aquatic rec existed. So we could get after those fast, and we actually closed them in the beginning of the year. The size of those niches and the potential that we see for that long term would be somewhere — the four that we’ve already done, would probably be somewhere over the long term in the $40 million to $50 million range.

It will all depend on the $25 million for next year. Completely how the filings go and how that starts to scale. So at this particular point, we would think $25 million is an appropriate number. If we started to scale, things like self-storage and snow removal faster into the beginning of next year, then yes, we could outperform the $25 million.

Yaron KinarGoldman Sachs — Analyst

Got it. That’s helpful. And then if I switch gears a second to the prior-year development. I think you mentioned most of that had come from businesses that you’ve already exited.

When does that cease to be a drag or a potential driver or a potential impact on earnings?

Buddy PiszelChief Financial Officer

Well, the — Yaron, this is Buddy. The inventory of claims is coming down. By nature, once you get to the sort of the tail end of the claims, you have a little bit more volatility. So I would expect over the next — a good example, commercial owner.

We’re down to 100 claims from the exited niches. And so over the next couple of years, that will be completely gone.

Yaron KinarGoldman Sachs — Analyst

OK. That’s helpful. And then finally, can you maybe give us a little color on the rate environment, what you’re seeing or maybe what segments or niches that are most exciting from a rate perspective?

Larry HannonChief Executive Officer and President

Sure. This is Larry. And I’ll make a brief comment on that and then turn it over to Bob for some of the specifics. I do think it’s important to remind everyone on the call that what we are going to talk to you about with rate numbers by line is still reflective of what our niche strategy is, right? We’re basically underwriting at the niche level.

Our infrastructure all is to support at the niche level. And then we distill that result back down to the line results that Bob will share with you. So we do think about it at the niche level. And it’s important to kind of think about rate in our world as it relates to that need in a particular niche.

But understanding that, obviously, we were going to talk about line a little bit. Bob, why don’t you hit some of the highlights there?

Bob BaileyChief Financial Officer Buddy Piszel and Chief Underwriting Officer

Yeah. Again, Yaron, I don’t think our collective experience differs that much from what you’ve probably heard in the marketplace. I mean, there’s certainly a favorable environment in a lot of places, not everywhere, but in a lot of places. In an aggregated basis, your longer-tail lines are the most prevalent in terms of gaining rates.

So we’re — third quarter, for example, auto liability, we achieved a 9% rate increase. General liability, we achieved 6.7% increase. So — and I think as importantly, these increases have increased quarter over quarter. So not only are they fairly substantial, but there — they seem to be gaining pace.

For example, commercial auto, first quarter was 7.3%; second quarter, 8.1%; as I mentioned, third quarter, 9%. Similar trend with general liability, 3.3%, 5.3%, 6.7%. All in, excluding workers’ comp, which I’ll talk about in a minute, because that is sort of the one sort of major exception, all in, the third quarter represented a 6.8% rate increase, and again, that sort of momentum looks like first quarter was 4.1%, second quarter was 6% and third quarter, as I said, 6.8%. Workers’ comp does — is moving in a different direction, generally, as states are mandating rate decreases and things like that.

We — I’m actually — I’ve actually been very pleased with our execution. Year to date, we’re — or, I’m sorry, quarter, work comp, we gave back 2.1 points, and that’s remained fairly stable. So far, year to date, we’ve given back 2.8 points on the line. Now we’ve stroked the line as we’ve held ground, as we’ve said no to what we believe are inadequate rates in inadequate environments.

But I think that execution is actually — while negative, is actually a very good result for the team.

Yaron KinarGoldman Sachs — Analyst

Thank you. That’s very helpful. I’ll requeue.

Operator

Your next question comes from the line of Christopher Campbell with KBW. Your line is open.

Christopher CampbellKBW — Analyst

Yes. Hi. Good morning, gentlemen. My first question is, I think, Larry, you mentioned in your opening script that you organize and manage profitability by niche.

So, I guess, how profitable are each of the niches? And are there any other niches that are currently not profitable?

Larry HannonChief Executive Officer and President

So none of our niches today, when we really think about that, we think about it on a price adequacy basis, right? So we’re looking at it from how do we want to actually price that business and consistent with what our target ROEs would be. And we believe that every niche that we are in today is at the appropriate target level that we want to get from an ROE perspective. So we don’t have any unprofitable niches today. The niches that we’re looking at today, that where we’re looking at certain things are, is there a line specific that we don’t particularly like? So for example, meaning we don’t like the trend, we don’t like where that’s going.

I had mentioned in my script, the liquor liability element of that — restaurant bars and taverns is a perfect way to view that. So we look at that, we see in the aggregate, it’s performed at an acceptable overall loss ratio. But the liquor liability, the trends we don’t particularly like, it’s a small one that hasn’t scaled, we would decide to get out of the restaurant bar and tavern business as an example. But from a niche level performance perspective, we believe all of our niches that we’re in are profitable.

Christopher CampbellKBW — Analyst

OK. Great. And then, Larry, you had also mentioned exiting some of the excess lines. Now I thought at an industry level, excess lines appear to be getting more rate.

So, I guess, could you just provide a little bit more color on what excess lines you’re looking to trim and then why?

Larry HannonChief Executive Officer and President

Sure. So it’s really a relative impact on what the customer values and what ultimately we believe we can drive. So we’re looking at it when we’re the primary GL, and we’ve got an excess position, and let’s say, for argument’s sake, we’ve got a $50 million niche, which generates $2 million worth of umbrella premium or excess premium, with the ability to actually reduce our limits as exposed to that particular niche, the customer’s valuing us as handling claims on the GL as an example. And does it have the same value as that would extend limits into the excess of the umbrella world, we would obviously decide where it’s not material, where it’s not affecting that customer relationship, that we might pair that.

So that will be the kind of example that I would give you. OK. Go ahead, Bob.

Bob BaileyChief Financial Officer Buddy Piszel and Chief Underwriting Officer

Yeah. I think as Larry mentioned, certainly, a lot of excess layers tend to be very commoditized lines. So a value-added differentiated approach doesn’t really excite people, and that’s in a commoditized line. Additionally, there’s — at least from our perspective, there’s a lot of uncertainty in terms of price adequacy, long-term price adequacy in those lines, too.

So while, yes, they may be seeing heavier rate increases, I would argue, that’s where the bulk of your uncertainty is.

Larry HannonChief Executive Officer and President

And I think the limits management there is important when you think about that, Chris, right? Because you’re in a situation, for example, extending umbrella over your primary auto limits and pricing in umbrella, even if you’re going to get significant rate increases, isn’t pricing at like the primary auto should be. And the things that were — used to be $1 million limits are now $2 million, $3 million, $5 million limits, and it’s got to be priced as if it were primary — in our opinion, to be priced correctly. So it will be those kind of places. We are still in the excess and umbrella market, we still think it’s valuable on certain niches where it makes sense, where we still think it’s an appropriate — appropriately priced line, but that’s the example of kind of the pruning that we would do in an excess line.

Christopher CampbellKBW — Analyst

Great. That’s very helpful. And then just thinking about, like, how you guys are obviously exposed to New York. I mean, are there any concerns in terms of the reserves that you guys have out of the reviver statutes or anything like that out there that we should be thinking about?

Larry HannonChief Executive Officer and President

No, we don’t believe so.

Christopher CampbellKBW — Analyst

OK. Great. Well, thanks for all the answers. Best of luck in the fourth quarter.

Larry HannonChief Executive Officer and President

Absolutely. Thanks.

Buddy PiszelChief Financial Officer

Thank you.

Operator

Your next question comes from the line of Mark Hughes with SunTrust. Your line is open.

Mike RamirezSunTrust Robinson Humphrey — Analyst

This is Mike Ramirez on for Mark. Thanks for taking our questions this morning. So first, can you please talk more about how commissions and pricing trended in recent months and possibly an early look into the fourth quarter?

Larry HannonChief Executive Officer and President

So from a commission perspective, it’s consistent with prior years. The only reason why it ticked up a little bit in the third quarter is mix. So when you really look at — for example, I think Bob mentioned the fact that our work comp line, which would be a lower commission line, has been reduced because we’re not underpricing the business. If you look at the niches that are predominantly comp-driven, those would be the ones that haven’t grown this year.

That mix shift is the only reason. Nothing has changed fundamentally around the way we’re paying our distribution partners or anything around the new niche acquisition at a different [Inaudible] than what we’ve consistently done. So that’s all the same. What kind of more clarity would you want on the rate side?

Mike RamirezSunTrust Robinson Humphrey — Analyst

Maybe if you could talk about maybe what kind of price changes you’re seeing and what niches are better or worse.

Larry HannonChief Executive Officer and President

Sure. Bob and I will kind of tag team that one a little bit. So at the niche level, the things that are going to be driven predominantly, as we talked about it per line, right? So when we said the auto liability line came in and was at 9% for the quarter, you’re seeing that driven through our predominantly auto liability-oriented niches. We write multiple lines on things like school buses and charter buses and our oilfield contractors and the things that are going to have that.

But where there is a significant piece of that niche that’s all liability-driven, those would be the niches that would be getting the highest rate increases, of course. Things where we’re obviously going to be on the work comp side would be where you’d have the most — where that would be a predominant like things like POs, things like social services. Those niches would be the ones that, obviously, were going to be on the weaker side of the pricing. So it is — ultimately, the way we’re viewing the performance of a particular niche, where there is a dominant line, and there are some of those that I just gave examples, that’s where you’d see rate that would be consistent with what we talked about in the aggregate.

A standard multiline niche of hours where there’s a relatively even distribution of the line, that would be a mix across the board, depending on what the need of that particular niche is and what our opportunity to execute in the market would be. Bob, would you add anything to that?

Bob BaileyChief Financial Officer Buddy Piszel and Chief Underwriting Officer

Yeah. Again, without getting on an open-channel to niche-specific execution, it — to Larry’s point, it operates within a fairly broad range. I’m just looking at the list here. We’re — probably our highest achieved, for example, and these are year-to-date numbers, so not quarter, I apologize, but year-to-date range for anywhere from a 20.8 to minus 3.

So again, there’s a fairly wide range of execution predicated on the need. These aren’t just sort of random targets that we’re pursuing.

Mike RamirezSunTrust Robinson Humphrey — Analyst

That is helpful. I appreciate it. Maybe one more from us. Could you better help us understand what is driving the high growth in your real estate line? Thanks.

Larry HannonChief Executive Officer and President

The real estate line, really, is just a function of the way that we reported third quarter last year and this year, with some movement on the anniversary date. We are absolutely seeing success in what we do in our metro builders area. We are absolutely seeing success on our New York real estate portfolio from an acquisition of new. And you see kind of a flight to quality in some of those things.

But some of it, too, is reflected. And if you look at what we would have reported in the first and second quarter, that would have been much more muted. It really is kind of a change in the way that the [Inaudible] work from the second versus the third quarter, more than anything else, specific to real estate. So there is legitimate growth there, but it’s not quite as high as it comes and looks across just based on the way it was booked in 2019 versus 2018.

Mike RamirezSunTrust Robinson Humphrey — Analyst

OK. Great. Thanks for taking our questions.

Larry HannonChief Executive Officer and President

Sure.

Operator

[Operator instructions] Your next question comes from the line of Yaron Kinar with Goldman Sachs. Your line is open.

Yaron KinarGoldman Sachs — Analyst

Hi. Just a couple of quick follow-ups. One, as you’re getting rate in these niches, realizing maybe the uncertainty around loss cost is increasing as well, how confident are you that you’re getting rate in excess of loss cost? And if you are confident, that would you expect the underlying margin to — or the underlying loss ratio to improve into next year?

Larry HannonChief Executive Officer and President

So Yaron, that’s — it’s a great question. And if we had the next seven or eight hours to go through the detail of that, I think it would be a great discussion.

Yaron KinarGoldman Sachs — Analyst

I’m not going anywhere.

Larry HannonChief Executive Officer and President

The reason why I say it that way is each niche is very different, right? They’re different in their evolution, where they’re scaled, how compared to what the expense loads are appropriate to that, how that’s been allocated, right? There’s just a lot of variables that go into the way that we think about covering those loss costs that you’re talking about. Some of them were in very different ages, too, right? So we’re seeing our own data on certain niches for the first real time, right, because it’s three years old or four years old. We’ve been using industry curves up to that point. And that’s very different than one of our niches where we’ve got eight or nine years of our own data, and we’re seeing the pattern that’s developed from that.

So we believe that we are appropriately priced, and we’re thinking about it that way for that kind of low-60s loss ratio that we’ve shared with you before. We believe there’s some uncertainty, obviously, as that goes, that would probably be incorporated within that number, not a lot of uncertainty, but some. And yet we don’t feel completely ready to say we’ve got it perfectly nailed for every single niche because each line will adjust, right? We take that multiline, niche-oriented approach, each line will adjust based on when we’re seeing our own data. So we believe, in the aggregate, we feel good, but on a per line and where that uncertainty would come, I think that’s reflected in how we’re thinking about our low-60 loss ratio.

Yaron KinarGoldman Sachs — Analyst

OK. That’s helpful. And then finally, can you remind us what your alternative — or your limited partnership return expectations are and maybe what drove the weakness this particular quarter?

Buddy PiszelChief Financial Officer

Sure, Yaron. We have limited partnership. The invested balance is around $60 million, and we target a 6% return. These are — there’s two funds, one’s opportunistic credit, the other one is special situations.

In the quarter, they generated — instead of a 6% return, it was more like 3%. The reason for the shortcoming, a little bit exposed to oil price declines, but it was really situational assets in each of the portfolios. So nothing that would imply, going forward, we couldn’t rebound. If you looked at the specific funds, they target well in excess of a 6% return.

So we think we’re fairly conservative as the way that we approach that, and we’ll see how they perform in the fourth quarter. On a year-to-date basis, even with the decline in the third quarter, they’re still, in total, in excess of the 6% target.

Yaron KinarGoldman Sachs — Analyst

Understood. Thanks for all your answers and good luck in the coming quarter.

Larry HannonChief Executive Officer and President

Thanks, Yaron.

Operator

Your next question comes from the line of John Collins with Dowling & Partners. Your line is open.

John HeagneyDowling and Partners — Analyst

Hey, it’s actually John Heagney. Just one question for me. Have you had any updated conversations with AM Best now that you’re public about the A- rating and the path forward to getting the A rating back?

Buddy PiszelChief Financial Officer

Yeah. So we have recently had a series of meetings, and we’re going through a ratings committee. Right now, we would expect something before the end of the month to actually come out. When AM Best downgraded us from A to — A stable to A- stable, their biggest point was organic surplus growth from the ’15 and ’16 years.

We made a strong case that we’ve had nine consecutive quarters of organic surplus growth. We’ve got now access to the public markets. And so we think that there is a strong case for the company related to ratings, and you have to wait and see with them. So we’ve made our pitch.

They’re going to committee, and we’ll learn shortly where that comes out.

John HeagneyDowling and Partners — Analyst

Great. Thank you.

Operator

Your next question comes from Christopher Campbell with KBW. Your line is open.

Christopher CampbellKBW — Analyst

Hi. Just one quick follow-up one. I think you had mentioned $7 million of adverse development in commercial auto. What were the other reserve movements to kind of net the total?

Buddy PiszelChief Financial Officer

Yes. So comp was favorable in the quarter by $4 million. You have to look at the whole account quota share, $1.6 million. The impact, that’s all — that all goes to the prior-period development.

And there’s a combination of smaller movements between marine, surety and some others that add up to about $7 million. So the aggregate is $3.9 million, but there’s a good deal of favorable against the GL and the auto.

Christopher CampbellKBW — Analyst

OK. Oh, I’m sorry, what was the GL? What was the GL development?

Buddy PiszelChief Financial Officer

GL was negative 10%. Auto was negative 7%. Comp, positive — for whole account quota share, positive 2. And then marine, surety and property, favorable, 7.

Christopher CampbellKBW — Analyst

OK. Perfect. Thanks for the additional color.

Buddy PiszelChief Financial Officer

Great.

Operator

I’m showing no further questions. I will now turn the call back over to the presenters.

Dean EvansInvestor Relations

OK. Thank you very much. And thanks, everyone, for joining us today and for your interest in ProSight. We’re going to have a very active Investor Relations calendar coming up.

So we look forward to meeting with many of you at the conference and other events in the near future and look forward to having an open dialogue with all of our investors. Thanks for joining us today.

Operator

[Operator signoff]

Duration: 43 minutes

Call participants:

Dean EvansInvestor Relations

Larry HannonChief Executive Officer and President

Buddy PiszelChief Financial Officer

Yaron KinarGoldman Sachs — Analyst

Bob BaileyChief Financial Officer Buddy Piszel and Chief Underwriting Officer

Christopher CampbellKBW — Analyst

Mike RamirezSunTrust Robinson Humphrey — Analyst

John HeagneyDowling and Partners — Analyst

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