Qualitas Controladra Sab

Good morning and welcome to Qualitas' third quarter 2022 earnings results webcast. The conference will begin now. It is my pleasure to turn the call over to Mr. Santiago Monroy, Qualitas IRO.

Thank you. Good morning and thank you for joining Qualitas' third quarter and nine months of the year earnings call. I'm Santiago Monroy, Qualitas IRO. Joining us today our CEO, José Antonio Correa, and our CFO and international CEO, Bernardo Rizul, to walk you through our quarter and year-to-date results and performance. As a reminder, information discussed on today's call may include forward-looking statements regarding qualitas, results, and prospects, which are subject to risk and uncertainty. Actual results may differ materially from what is discussed here today, and the company cautions you not to place undue reliance on these forward-looking statements. Qualicast undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events, or otherwise.

Let's turn it over to José Antonio, our CEO, for his remarks. Thank you, Santiago. Good morning, everyone. Great to be with you all. Volatility and uncertainty have been part of 2022 daily context, and third quarter has been no exception. Nevertheless, Qualitas has shown its ability to keep on growing in terms of written premiums and insured units while being profitable. We are pleased with the top-line performance of our business, but recognize profitability is not where we want it to be. To better understand these third-quarter results, we should break them into three main buckets. Mexico, auto underwriting, international subsidiaries, and financial income. where we have an important one-time impact. By going into each one of them, you will have more clarity on where we are, and most importantly, what we are doing to ensure all of them are headed to the profitable growth path. I will expand on the first one, our core, Mexico's insurance business, which makes up for 90% of our premiums while letting Bernardo walk you through the other two. In Mexico, premiums are up 15 percent, having 230,000 new vehicles quartered over quarter, and reaching a new watermark of 4.6 million Mexican insured units. This is the largest quarterly growth in the past couple of years. Equally important, despite several headwinds, we have posted resilient, underwriting results during these first nine months of the year. As all of you well know, The auto insurance industry has historically followed cyclical trends, and Qualitas has navigated the cycle during 28 years of history. This time, there are some particularities to consider. First, I would like to talk about the high inflation environment not seen in Mexico in the past two decades. It has reached 8.7%, while inflation for new cars is up 14.6%, which heavily impacted our costs. Second, supply chain constraints and shortages caused by the pandemic, and now the geopolitical conflict. Despite early signs of recovery, with year-to-date new cash sales posting a 3% growth, they are still 19% versus pre-pandemic levels, and certainly below demand needs. The signs of a future recovery are in the map, but not until mid-2023. While it is impossible to be certain, as it will also depend on the evolution of the macroeconomic variables and competition behavior, I expect that we will pick the cycle in the next three to six months with sequential recovery as we continue to adjust studies during 2023. As talked before, We have been disciplined on pricing, seeking balance between recovering inflation while staying competitive. We are also relying on our scale and innovation to mitigate some costs and relying on our endless journey for excellence in service to ensure our value propositions remain unmatched. These actions have allowed us to maintain a profitable underwriting performance. According to the latest industry figures in current environment, Qualitas Mexico had a better combined ratio than the top five companies and the industry overall, proving the health of our Mexican subsidiary and our strong fundamentals. I would also like to share that in September, we celebrated an important milestone for Qualitas Controladora's future. After several years of working on it, Our quality of health subsidiary is now a reality and has issued its first premium. With a talented team, a differentiated product, and a unique quality of DNA, I am confident this will become an important pillar in the next years, creating value and becoming an engine of growth for the long term and the sustainability of our results. We will be providing updates on the evolution of this business regularly But let me remind you that our entry into the market is gradual. This is not expected to be meaningful to the holding company performance in the short term. We are following the launch. We're going to learn. We're going to adjust and then expand the strategy, ensuring we can create value to all stakeholders. Overall, despite short-term challenges, our company is stronger than ever. The consistency of our results and the solidness of all subsidiaries that are part of the holding company was recognized by Standard & Poor's, which maintain our double B-plus rating and stable outlook. Finally, quality and sustainability commitment was reinforced by finding the SBTI initiative science-based target to establish goals and targets to reduce our greenhouse emissions looking for net zero emission schemes towards 2050. Qualitas will continue to implement measures and processes that also make sense for the business, of course, to mitigate emissions and keep with a never-ending journey towards sustainability. And before I hand it over to Bernardo, let me reiterate that our mission remains to create long-term value for all the stakeholders. Our strong balance sheet supports our leadership position and the commitment of our experienced management team lead us to navigate through this challenging environment, which is reflected in the execution of our strategy. We understand low ends of the cycle are never fun, but they bring along an opportunity for reinvention and to further stand out. I am certain of our ability to overcome the challenging environment and I'm very optimistic about the future for Qualitas AHEAD. Let's move now to review the financial details in a deeper dive on the quarterly results, and I'll ask Bernardo to please go ahead. Bernardo.

Good morning, everyone. Glad to be with you all again. As Jose Antonio alluded, it has not been an easy year for the auto insurance nor financial investment companies, neither in Mexico nor worldwide. As a high-level summary, this quarter top line was better than expected. Qualitas Mexico, our main subsidiary loss ratio, was in line with what we had anticipated, while financial income on Qualitas U.S. underdelivered. Going directly into our underwriting results, top line grew 14% for the quarter and is up 7% year-to-date, driven once again by the strong performance of the traditional segments, which increased 18% in the quarter and is up 13% for the year. The better-than-expected top line reflects our ability to reach more consumers through more agents. New car sales' early signs of recovery helped as well, growing quarterly but still down 5% in the year. Just as a reference, had the new car sales been at 2019 levels, our top line fair share would yield 2.5 points of additional growth. Top line was driven both by pricing and volume, On the latter, we're happy to share we reached a new record high for the holding company with 4.8 million insured units and an increase of almost 300,000 units versus year end 2022. And when compared against the same period year ago, insured units are up 6%. In terms of pricing, relative to the lowest point of 2021, our tariffs are up 14% on average. However, relative to cumulative inflation, tariffs still have some catch-up to do, being 2% or points below. Also, international operation is up 4% in the quarter and 11% year-to-date in dollars. When breaking it down, our U.S. subsidiary versus the rest of Latin markets, we see two different behaviors which we can expect to continue. On one end, our U.S. business, the largest one representing 5% of the total holding company underwriting, with over $100 million in premium. This subsidiary slows down this quarter and will stay flattish in the short term, as we are seeking to balance top and bottom line profitability. On the other hand, the rest of Latin America, constituted by El Salvador, Costa Rica, and Peru, which are growing 20% year to date, and are expected to continue fueling the growth considering they are already profitable with a large potential replicating Qualitas model with a local touch in each of the countries. Let me elaborate on the United States subsidiary, a company that started operations back in 2014 in California and Arizona, and soon expanded into Texas. This business came to life as a way to satisfy an unmet need of Mexican customers needing coverage in the U.S., and vice versa. Due to demand and opportunity, it started expanding into domestic U.S. as well. Over the past quarters, and given the long-term litigation process and legal particularities, mainly in Texas, we have been impacted by some older claims, up to six years old, that have closed at a much higher cost than initially reserved. This also forced us to re-look at all historic claims reserves, resulting in the need to increase them significantly. At this time, we're finalizing the assessment together with an external actuarial firm, and we'll share conclusions in the next quarter. We know there's a large market potential in the U.S. Incentives for nearshoring to Mexico remain for companies serving the U.S. market, And being the one insurance company that can provide unique service on both sides of the border is a competitive advantage that we want to continue exploring. Of course, we need to ensure ongoing profitability. Therefore, among several actions taken, we will slow down growth. We will refocus the cross-border business while reducing weight on the U.S. domestic. We have also been increasing prices since last year and strengthening our team, mainly on the claim management where more seasoned people have joined the organization. So now let me move back to quality of results. Earned premiums posted a 11% increase, reflecting our strong top-line growth and a mild reserve release commonly seen during the second and third quarter of every year. For reference, during the quarter we released $75 million, and for this year we have released $92 million in reserves. This relates to the duration of our portfolio, which is now composed of more annual policies, which naturally earn faster. Shifting gears into our operating performance, the quarter loss ratio was 71.4% for a cumulative of 68.5, above our desired 62 to 65% technical range. But these are already considering the part of the cycle we're in, and the changes take time to fully reflect. And let me provide a few highlights on these loss ratios. First, and as Jose Antonio mentioned, the inflationary environment has a direct impact in our clean costs related to material damages and medical expenses, which have increased around 10% versus the same quarter of last year, and around 20% versus the same period of 2019. To cope with these increases, we're not only relying on pricing, but looking at cost saving opportunities, which include our vertical integrated operation that allows for more than 10% reductions versus market prices, and is now expanding into other business lines. We have also leveraged our salvage recovery process, by which we sell vehicles declared total losses. The percentage salvage recovery is now at an all-time high of 47%, resulting from the used car crisis peak and being also able to streamline the auction process. Recognizing we do not control inflation, what we will aim is to always stay ahead of competition in terms of cost advantages. Also relevant to mention is the expected peak on mobility and the impact on frequency. Now that all COVID restrictions have been lifted, people go out more, Mobility is up from pre-pandemic levels, and this is not only affecting traffic, but also a higher number of claims. Another important component of our claims are thefts and robberies, which are now reverting its three-year downward trend and are entering into an inflection point, which could impact our costs. As Qualitas has the largest volume of the market, actions towards addressing this include a unique pricing model, which considers zip codes. and the strengthening of our theft prevention process and recovery through partnerships with third-party suppliers and in which we expect to improve our current 47% recovery rate that, despite being ahead of competition, is below our historic 52%. Finally, third quarter is a heavy rainy season for Mexico with cyclones, tropical storms, and hurricanes. As a reference, third-party claims ratio has historically been two percentual points higher than the rest of the year due to this seasonality. Companies' efforts to address costs are broad-based and a priority for all functions. In doing so, we have also found ways to improve service, which builds on strengthening our value proposition, our ultimate goal. As an example, the remote express claims continues to increase and have now reached 26% for the quarter. That means we're serving 26% of all claims remotely. The upcoming launch of QualiBot strengthens our customer experience and has a better rate than the text message or email. We're also implementing a segmentation approach for valuations, seeking for faster and more accurate valuations and, hence, improving cost control. I would like to be very transparent regarding loss ratio. The factors before mentioned have and will continue to impact our cost during the next quarters. We have talked about pricing taking time to fully reflect, and there's still a lot of uncertainty on inflation and spare parts supply restitution. This is very dynamic. Thus, what I want to assure you is that we will continue to further accelerate on what we can control and to ensure that our value propositions remain competitive. Now, our acquisition ratio and operating ratio are in line with historical range, standing at 23% and 4% for the quarter and the year-to-date, respectively. All of the above resulted in a combined ratio of 98% for the quarter and 96% year-to-date. As we have mentioned, in a tough operating environment, these results continue to outperform Mexico peers and many of our global peers as well. Moving into other important pillars of our business, our financial income for the third quarter is stood at 52 million, which community-seeking represents an ROI of 1.6%. These results are well below our initial expectations and prior years. This is being led by two main reasons. First, a one-time impact of around 200 million in the quarter and 650 million for the year behind an important equity position in Unipin, which we still hold. As you are aware, this company is currently undergoing a restructuring process, which has eroded 95% of the stock price in the year, with an important dive in this third quarter. While we do not disclose equity specifics, this was one of our largest standalone names. And at this point, no single investment represents more than 2% of our equity position. Secondly, the overall financial behavior that has impacted capital markets with general hikes in interest rates. On the latter, our initial expectations for the Mexican reference rate was for it to be at 6.5% by year-end, and it is standing now at 9.25%, with projections to be at 10.5% or slightly above by year-end. While our portfolio is short in duration, this delta has had a negative effect on current positions. Recognizing the disappointing results on the financial income and the effects they have had in the overall performance of Qualitas, let me share that I believe our portfolio is well set to deliver good news and high returns in the next quarter. And the main reason for this is that 88% of our portfolio is invested in fixed income with a duration of 0.6 years, the lowest we have had in decades. This means that we will start benefiting from the high rate cycle as soon as of next quarter. We will also start taking longer term positions at double digit rates. And this is important to highlight that our current yields Our current yield to maturity of the fixed income portfolio stands at 7.9%. Equities represent 13% of our portfolio, and when excluding UNIFEM, they are down 14% in the year. At this point, around 90% is invested in the Mexican equity market, and the balance is in the U.S. For the short term, we do not plan to increase equity position exposure significantly. Important to highlight that most equity positions are being held at the holding company level while keeping fixed income with higher liquidity and lower risk at the insurance entities. Thus, from a solvency standpoint, we're solid and well covered. The way our $35 billion portfolio is set represents a unique opportunity in the current high interest rate market. The investment team, together with the investment committee, are close to this and will ensure the right actions are taken to capitalize the full potential. All in all, we posted a $208 million net income for the quarter, taking our cumulative profit to $1,600 million. Regarding our financial ratio, our 12-month ROE starts at 12.6, reflecting our year-to-date performance and high capital position. 12-month earnings per share starts at $6, price-to-earnings starts at 13.8, and finally, price-to-boot value at 1.8. Regulatory capital requirements stood at $3,694 million at the end of the third quarter, with a solvency margin of 15 billion pesos, equivalent to a solvency margin ratio of 498%. As alluded by Jose Antonio, this strong capital position with our value and unique DNA and business model have been recognized by trading agencies, maintaining a stable outlook for the holding company and subsidiaries. On the capital allocation front, and in addition to the start operation of Cualita Salud, which will require around $10 million for the next year, we have started a due diligence process to assess two business opportunities within the insurance ecosystem. Further to that, and just as a reminder, during November, we're going to pay 2.5 pesos cash dividend as the second exhibit of our declared 2022 dividends, which in total will be 6.5 pesos for the year, representing around 8% dividend yield. Cash returns to our investors and shareholders remain a priority. And Qualicast has had the ability to consistently deliver dividends as a signal to its durable business model that is well positioned to outperform throughout the business cycle. Although it is too early to forecast next year's dividends, we will fully comply with our dividend policy. And before opening the line for Q&A, let me once again share that while we are not satisfied with these quarterly results, we have full understanding on what led to this. We have and will continue to take actions to overcome the cycle where we're facing strong macroeconomic volatility and competitive pressure. We're encouraged to see that fundamentals in our core business are strong, that the financial income portfolio is poised for a 2023 strong delivery, and that executing against the strategy will allow for value creation to all stakeholders, which includes policy, agents, employees, and shareholders. And with that said, I now ask the operator to open up to the line for questions.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We will pause for a moment as callers join the queue. The first question comes from Ernesto Gabilondo with Bank of America. Please go ahead.

Hi, good morning. Hi, good morning, Jose Antonio, Bernardo, and Santiago, and good morning, everybody. Thank you for your presentation. I have three questions from my side. The first one is on your claims cost ratio. Just wondering if you can break down how much is related to inflation and how much to the weather impacts. And also related to this, what do you see the inflation for the end of the year and next year, and what could be the implications to the claims cost? And also, well, when do you see the inflection point on the claims costs on a yearly basis? So that's my first question. Then on my second question is on your financial results. I just wanted to hear if you have cleaned up all your position in UNIFIN or if you have already considered most of the impact or do you still have some position that could be at risk if the stock goes below the two pesos? And then my final question is on your expected ROE for the year. Where do you see it after the results this year, and how should we think about it next year? Thank you.

Thank you, Ernesto. So I'll take the first one, and then... Antonio and I, we can just file in on the second one. Flame costs. Most of it is related to inflation and frequency. As we said, local inflation in Mexico, 8.7%, well above what we expected at the beginning of the year, but industry inflation is more in the 10 to 12%, because it also considers the shortage of auto parts and the car inflation as well. Most of the claim costs would be related to inflation. But I also mentioned frequency. Frequency is now 7.4%. That is very close to the peak we've seen. So there are indeed, for many unknown and known reasons, people are having more claims than the historic average. We are not seeing, from a weather standpoint, a harder or tougher weather seasonality. So as I mentioned, Usually, third quarter results is impacted in around 2% of points because of that weather seasonality. But these years, we have not seen a particularity or something that would be outstanding relative to prior years. Now, the second part of this first question related to inflation and whether we see it peaking, it is a tough one because I think there's at this point still a lot of macroeconomic uncertainty globally. we're certainly not seeing that peak point in the next quarter. So we might expect that still in the next two to three quarters, we're going to see that high inflation. And until we see it stabilizing, will we know when are we going to be able to see that peak point on claim costs? Remember, this is a long process when we increment prices until we see it fully reflected. So, at this point, we're still paying claims at a higher cost, which were priced with lower expectations. So, that's just part of the cycle that José Antonio and myself mentioned during the course.

José Antonio Sánchez- Yeah, good morning, Ernesto. Let me briefly talk a little bit about during imposition and what is what we could expect. It's important for all to know that we have held a unique position since 2020. And the decision to have it has to do, obviously, with the fundamentals and the financials of the company, which we did. But it is also very important, and I would like to stress that, that we are in the business hour, and it is our core business to ensure our business. So we have had, and we continue to have, a strong and profitable commercial relationship for them for many, many years. So it made a lot of sense for us to go with them and support them, as we have, by the way, since the beginning, since they started the company 20-something years ago. So that's something that has been done in the past. Obviously, the position that we had represent about 1% of the total holding company investment. So it's obviously now, as of September, the latest event that really represented very, very low of our portfolio due to the around 90% to 95% fall in its stride. It is also very important to say that we have been close to anything management to understand the business. We have, and we know that they have now, they have been in a quiet period obviously because of the restructuring that they are having, but they are having a scheduled meeting for shareholders next week, and obviously we will get more information regarding the restructure process. At this point in time we don't see, you know, we have lost almost all the value and all the potential, probably the potential is successful reorganization and restructuring. would provide an upside potential for our hobby. So to your question, we still hold the position that we have on Unity, and simply we are going to hope for future recovery, which there is some likelihood of it.

And just to complement and for full transparency purposes, the full position is reflected in the financials, with 70% reflected in the P&L. It is considered mark-to-market. and 30 percent is classified as available for sale, and the impact remains on the balance and capital position. And just before we move to the next, on your third question, the expected ROE for the year, well, we're not walking away from the mid- to long-term target of 20 percent. That's something that we stated. We clearly will not have that range in every single year. Over the past four years, we were well above that, This year, we can expect that we will not meet that 20% target. I think it would be fair to assume that we would be in a similar position than we are today. Now, what we can expect is 2023 will be a sequential progress to ramp it up and getting back to that 20% ROE, which hopefully we can achieve by 2024. That would be kind of what we believe, but it also depends on how we see things evolving, as we have mentioned. there's still a lot of uncertainty on the macroeconomics and the specifics of the auto insurance.

This is very helpful. Thank you very much, Jose Antonio and Bernardo.

The next question comes from Jorge Henderson with Santander. Please go ahead.

Hi, thank you. Good morning, Jose Antonio and Bernardo. Thanks for the space for questions and thanks for the presentation. And I have a couple of questions. First is on the written premiums. We saw market share gain this quarter. My question is, does this imply that competitors are price hikes? I don't know if you have any data on what is the industry price inflation for car auto insurance policies and if this is part of your quality. And also my second question is also in the loss ratio. I mean, you said that there's some personality that explains why you had a 71% loss ratio this quarter. But my question is, what level should we expect to be a normalized level for loss ratio? And also, how quickly should we get there? How much more should we expect the this inflation to hit Ukraine's costs? And when do you expect this to normalize? That's it, thanks.

Thank you, Jorge. Let me take the first one, you know, the pricing and the written premiums of inflation. Let me tell you that we are the leaders of the market in our business. We have taken the lead, I would say, after the COVID, obviously in 2021, when we saw the comeback of the claims index significantly and the claims cost significantly. And clearly, you know, competition were not really falling much, particularly in the fleet business. We have increased prices in specific segments and we have been, in general, I could say that we have around a 14% increase in tariffs and in pricing from the lowest point of 2021, I would say. Clearly, we are very careful in taking our pricing. We adjust according to risk, and zip code, that is one of the main factors that we use to include how we price it, you know, the historical loss ratio, et cetera. And also the exchange rate, which, by the way, has been holding, no? We always are ahead of the market, as we should. Obviously, we do not want to depress the market. Actually, our targets have been always to be profitable. So we still need to recognize, we see some early indications that some companies that they are willing also to increase price, particularly in some segments. One segment that was heavily impacted was the fleet that I said earlier. And in this one, we can see that some of our competitors are already seeing the fact that also they are seeing an increase in the claims cost, and they are taking action on doing that. So I would say that out of these increases that we have, we will continue to have this challenging environment of pricing. We are happy, by the way, obviously, on the growth that we have for the quarter and for the year in terms of the premiums that we have had. And inflation will continue. We will see how the industry reacts. We will continue, as I said, taking the lead on this one. So that's, I don't know, Bernardo, you have something else to say? Yeah, on that one.

Jorge, good morning. On your second question regarding loss ratio and seasonality, as we alluded, loss ratio for the quarter was 71%. We looked at the past five years. There's still one data point, third quarter of 2019, which was slightly above that 71%. And I think to better understand it, we need to just break it down by operation. Because our main subsidiary in Mexico, it was 69.8%. So there's a couple of points for the tolling company that comes mainly because of the U.S. subsidiary. So seeing it stabilized will still take some time. I think it would be fair that we can assume that the next quarter and probably in the next two quarters, we see it at current levels with slight improvements. So our... that we can start seeing it stabilizing and then sequentially improving. And I think it's going to take us probably until late next year to see it going back to that 62% to 65% range. But it will also depend, again, as I mentioned, on inflation. That's something that entails power control. But that's what we are expecting at this point and with what we know.

Okay, thank you all for the answer.

Once again, if you have a question, please press star, then one. The next question comes from Juan Ponce with Prodesco. Please go ahead.

Hi, good morning, everyone. I just have one question on supply chains, particularly the auto parts. What are you guys seeing on the ground? I mean, you talked a little bit about auto sales recovering, I believe you said, until mid-2023. But are supply chains for auto parts actually improving on the margin? Where do you see challenges? Yeah, that would be my question.

Thank you, Juan. Let me tell you that now we continue to see in the industry, and particularly we as Qualitas, we continue to see issues in the parts supply. We have seen that this is one of the main problems that we have. That's why, I guess as an industry, but in the case of Qualitas, we have now offered our customers the possibility to pay damage payments rather than repairing the unit because it's taking longer and it has been a difficult time for us. And customers complain about the industry as a whole about this, but that's something that we do not have control of. Particularly, I would say that we have seen that some of the latest entries in the market, some of them have had successful entries, but they are still lagging behind the potential for having the right capabilities to sustain. So to answer very specifically your question, we continue to see a lot of backorders. Actually, usually when you have a backorder for parts, you say it will take, I don't know, 30, 60, 90 days or whatever. And a couple of weeks ago, I was seeing that one manufacturer said that The backorder was without giving a time. So that continues to be. We see, and we see through the auto industry association, we see and they say that by early next year and mid next year, they expect to see a significant change on that. But so far, we have not seen that improvement.

Great. Very clear. Thank you very much.

The next question comes from Gilberto Garcia with Barclays. Please go ahead.

Hi, good morning. Thank you for the call. Could you please repeat the breakdown of the result you recognize for the UNIFEM position in the quarter?

Yeah, I'll break it down as clear as we can. Beginning of the year position, it was around 700 million position. That was well above the acquisition cost. So we enter around 18 pesos per share. Then it peaked at the beginning of the year, and that's our initial position. From there on, we're taking a P&L year-to-date impact of around $450 million. So that is mark-to-market. Sorry, pesos, 450 million pesos. And the balance, which is around $200 million it's impacted on the balance sheet through the capital. So, therefore, there's still around $40 to $50 million in terms of our P&L valuation of the unique position. Now, for the quarter, the impact that we took was around $200 million. So, hopefully, that clarifies here.

Thank you. And, I mean, I know it's... challenging to give guidance for the claims ratio for next year at this point, but can you tell us what sort of improvement you would expect relative to this year, again, with the visibility that you have at this point?

Yeah, I guess, Gilberto, what we have, we are going to be getting the benefit of the interest rate changes and the length of our portfolio, which is very, very low, 0.6 years. It's positioned very, very, very well, and I would like to stress that part, which we will be getting the benefit for 2023. We are still discussing with the investment committee when we should take longer positions. Probably we are close to do that in the next probably three or four months. It will depend on what are the decisions that the Fed takes and obviously Banco de Mexico. But in the end, our portfolio has increased more than 430 basis points versus a year ago. So we are in a good position to take a little bit longer term according to our duration of our liabilities. And we expect that to help us with good results for 2023 on this one. Bernardo, I don't know if you can.

Just to emphasize, the yield to maturity for our current portfolio is 7.8%. That is the highest we've seen. Just as a reference, last year we were standing at 4.5%. And that is expected to continue ramping up. We expect that by year end we could be at yield to maturity of close to 9%. That's how we're going.

Okay, but you're talking about the investment income, right? I meant improvement on the claims ratio that as you have discussed, is well above your target range, is it would be reasonable to expect that range to be reached next year or given the ongoing supply chain issues in the auto industry and a little high inflation, Is there any sort of color you can give us at this point about the possibility of getting to that range at some point next year?

Yeah. So, Gilberto, that's the golden question. No, because there are things that we cannot control. And as I was mentioning to Jorge, what we can expect is that we probably see a peak in the next two quarters stabilizing gradually. and then hoping to make its way back to that 60%, which is the high end of our range, by 2023. I don't think at this point we can assure anything. That's what we're working against. But let me just reemphasize that the pricing and discipline, the cost control, should allow us to always be headed in that direction and always ahead of the peer group, which will yield for higher pressure for tariffs on their end.

I would add simply that the thing is that our business is very cyclical on this one. This is now in the difficult part of the cycle, but as Bernardo indicated, we see that by mid-next year, we should be seeing that going down. I would emphasize also the fact that we have a lot of initiatives internally. to make sure that we have a good control on our costs, and particularly on those related to the claims costs.

Verity, and a last question, if I may. You mentioned that you're looking at some acquisition opportunities. Can you give us a rough estimate of what size, how, are we talking... or medium-sized, or I guess not transformational, right?

Exactly. They will not be transformational. What we estimate would be that if both of them were to materialize, we're talking about $50 million investment. Certainly not something that would put or jeopardize the capital position.

No, we have always said that we are very, very, very careful with that. And we are not going to be doing dumb things in that regard. We are going to be doing things that are accretive and things that help build our vertical integration, et cetera. So that's the side that Bernardo mentioned. Very clear. Thank you very much.

We'll now go with the written questions. The first question is from Eduardo Caballero from Signum Research. You previously stated that profitability was priority over market share. What explains the increases in written premiums and acquisition costs? Good morning, Eduardo. First of all, let me just, as a reminder, no one in Qualitas, not any function gets rewarded by market share. We always look at it. I think it's a thermometer and something that allows us to understand where we stand. First half market share positions, we actually dropped. Our first six months of 2021, we held 32% on written premiums market share. This year, we're down to 30%. That's just a reflection on certain accounts and the way we do business. For the quarter, we're all pleasantly surprised on the 14% recent premiums increase. I think that comes from a lot of hard work on individual segments. We've increased the number of agents. We've increased the number of offices that we now play in Mexico and across Latin America. So I think that is just maintaining the business model of quality. We're not jeopardizing profitability at the expense of protecting premiums. We can share that we've let some key accounts go just because it didn't make sense to hold at a certain pricing. A few of them have come back because of service. So I think the key component of this is that our value equation needs to be the best. That doesn't necessarily mean that we'll price below peers. So hopefully that is just a longer response to your question. And just on acquisition, we're not changing commissions. This is just mixed. And at this quarter, we saw new car sales going up and financial institutions have been growing. That implies a higher commission just by default and by design of the channel. We will now go with the questions from Javier Lozua, who has a couple of ones. I'll start with the first one. How could you lose $700 million in a single position if no position is bigger than 2% of the portfolio? As I was mentioning to Gilberto, that was the beginning of the year. It wasn't intended to grow up to that 2%. It started being less than 1%, and then it grew up. Now, the equity position that we have today, there is no single name that will represent that 2%. And as I mentioned during my remarks, Unifin was one of the largest single positions that we had, and it clearly did not evolve the way we wanted it to see. The second question from Javier Lozúa as well would be, how is it possible that the portfolio return has been negative in the quarter? Set is already at 8% and 9%, and your exposure to equities is very limited. I think we've talked about that. The particularities of third quarter include the impact for this quarter, as well as some other market losses, which have been in a way similar to the overall financial market. We also have the component on rate increase. That is not something that we will capitalize immediately. As we have mentioned, the duration of our portfolio is now in the lowest standpoint And therefore, from now on, we should start seeing that uplift. And I did mention that in the prior question, our yield to maturity, which is something that is a good indicator on the future, is standing at 7.8%. And the last question would be from Javier. It would be, you mentioned on the call that pricing needs to catch up with cost inflation, still 2% below. How is it possible? I would expect a wider gap given the increase in combined ratio. Well, let me just go back to pre-pandemic, 2019. Let's assume we say our pricing was 100. Then came COVID. We decreased that pricing 10% on average. And from that low point today, that's 14% increase. Now, when I mention inflation, that means we still have around two points to catch up with this year's inflation, but that doesn't necessarily mean that everything in our written premiums have reflected that price increase. It takes time. That's a point-to-point comparison, but from the total premiums, just a very small percentage of that has fully reflected the price increase. So it takes up to a year to materialize just because of the nature of our premiums and business line. And the last question is from Daniel Gladys from the Lava Fund. When will you start reporting the health insurance separately as a separate business line, please?

Hi, Daniel. I simply would like to remind you that in Quality of Salud, we just started. We just started in September. And we said that we were going to start small. We have a lot to learn in this new segment that we are. So quantities of significant size, which I don't expect that to happen certainly this year. And we are encouraging at this point in time, as probably some of you know, that we are launching this only in the metropolitan area, and we are taking a limited time. a limited approach to this one. And it would take a couple of years before it becomes something that we can report. So whenever it becomes more representative of what's going on in the market, clearly we are going to be reporting. So far we are happy with the early indications that we have from agents. And clearly, we have a lot to learn. But it is really, at this point, it is very early in the start of this new line. So we'll keep you posted.

So that was our last question. So thank you, everyone, for joining. That would be all from us.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.