Qualitas Controladra Sab

Thank you for standing by. This is the conference operator. Good morning, and welcome to Qualitas' first quarter 2023 earnings results webcast.

Good morning, and thank you for joining Qualitas' first quarter 2023 earnings call. I'm Santiago Monroy, Qualitas IRO. Joining us today are Jose Antonio Correa and Bernardo Rizul. As always, discussions in this event may include forward-looking statements. These statements are based on management's current expectations and are subject to many risks and uncertainties that could cause actual events and results to differ materially from those discussed during today's call. Let's turn it over to José Antonio, our CEO, for his remarks.

Thank you very much, Santiago, and good morning, everyone, and thank you all for joining us today. During March, we celebrated Qualitas' 29th anniversary. Throughout these years, we have had one goal in mind, to become the best auto insurance company by providing a service that exceeds expectations, while creating value to all our stakeholders. By delivering on that promise, we have reached market leadership in Mexico 16 years ago, and we have maintained that position thanks to the trust of agents and policyholders. Industry figures for 2022 continue to reflect discipline and passion of quality as people and the relevance of the DNA focus on service and control. We close 2022 with a strong momentum with a 32% market share and most importantly, profitability well above industry average. As part of this year kickoff, I have traveled around Mexico visiting around 10 states to meet and talk with our office directors, and over 1,500 agents. I participated in our claims officers training workshops, as well as in our annual ODQs forum. Conversations face-to-face with all of them provide the direct and unbiased sensibility of the market and actionable feedback of the things that are going well and those that we can do better, and also help us identify unmet needs of the market that evolves continuously. Those ideas will continue to set our path and confirm that agents and policyholders will keep seeking best-in-class customer experience and personalized service, where technology complements but never substitutes the possibility to talk to someone who is capable, willing, and empowered to understand and provide solutions. Doing so has always paid off, and what better proof of that than these quarter results where our top line came in ahead of our expectations growing 25% and a bottom line that is within outline range. Managing costs in this high inflation environment continues to be work in progress, but we have and will keep on taking the right actions, expecting to see an inflection point in the underwriting part of the business by the second part of the year. Net Ingo has been supported by the financial side, but there is no luck, obviously, but the result of the actions taken to set our portfolio in a way that will capitalize the benefit from the current high interest rates environment. One thing that I am pleased to see and certainly have a strong top line is new car sales performance, making sequential progress towards getting to that point in which supply meets demand and is up 24% in the quarter and just shy of 2019 volumes. There are interesting shifts in brands and car types, We are taking proactive action to set qualitas as the insurance of choice for all brands, including hybrid and electric vehicles. While we are encouraged with the recovery we have seen, we're still cautious on stating this as a step in permanent comeback, given the high interest rates that will eventually impact consumption. This quarter, insurance industry inflation stood at 12%, which has a direct correlation with our total lost costs. mainly through our material damage expenses and labor costs, which account for more than 50% of our costs. And while we cannot fully absorb these increases and pricing is required, we are seeking efficiencies to mitigate the heat, such as technology developments and vertical integration maximization. And certainly in pricing, we have increased them 5.2% when compared to October last year, while additional increases have also taken place during April. Net income posted a 22% growth versus a year ago, and 12% more ROEs to that 11.5%. Certainly, we will continue fostering actions to recover our sustainable ranges and increase our underwriting profitability. On this matter, we remain focused on executing on our strategy, and as you know, last week we successfully concluded a major share acquisition of a technology company related to telematics, business intelligence, and IoT. This will reinforce our commitment to further expand our competitive advantages, specifically targeting a successful and unparalleled risk prevention and data analysis focus. Before we share the financial specifics, let me remind everyone that later this week, we will be holding our general share focus meeting, where we are proposing a five-person per share dividend payment in the high-end range of our policies. This will be the eighth consecutive year that has paid cash dividends, that Polycast has paid cash dividends. In addition, as part of our efforts to strengthen our corporate governance upon approval, David Coppel will become an independent member of our board and investment committee. David is currently commercial director and member of the board in Grupo Coppel, and I'm sure that this, with his broad experience in financial markets, retail, and investments, will contribute towards the sustainability of our results. Furthermore, I am glad to report that yesterday we also communicated that Bernardo Rizult has been appointed by our board as the Deputy CEO of Qualitas Controladora, as a recognition of his track record and potential. His appointment will be key to strengthen our leadership position in Mexico, as well as to support and consolidate our international auto insurance operations in the beginning of the accident insurance segment and strengthening our vertical integration. I am pleased to have Bernardo in this new role and confident on his impact to further accelerate business developing and enhancing our organization. As we continue to navigate through the industry cycle and challenges remain, all Qualitas leadership team is focused on strengthening our unique DNA while taking advantage of those challenges. And now I will pass it to Bernardo for a deep dive in the first quarter performance. Bernardo, please go ahead.

Good morning, everyone. We have faced a complex environment over the past 18 months, and we continue to deliver industry-leading results. Now let me provide some color on this first part of the performance. Rich treatments were up 25%. The traditional and international institutional segments accounted for most of the growth, being 31% and 29% above durable respect. As alluded before, in additional factors, It seems you didn't follow me.

So thank you, Jose Antonio, and let me just go back to the initial quotes. We have faced a complex environment over the past 18 months, and we continue to deliver industry-leading results. And as I said, let me provide some color on this first quarter performance, starting off with the written premiums, which were up 25%, with the traditional financial institution segment accounting for most of the growth, being 31% and 29% above year-ago respective. As alluded before, In addition of having a low comparable base in the first quarter of 2022, premiums growth was benefited by tariff increases over the past year, which accounts for around 60% of this quarter growth. The balance comes from organic volume, where just this quarter we added 191,000 units, taking us to reach 5 million insured units. Hitting this milestone is no small achievement. there are only a few insurance companies that have done so across all the emerging markets. And also worth noting that it took us 30 years to reach our first million and only four for this last one. As you recall, we highlighted strong and aggressive pricing from competition during last year, which combined with the industry inflation resulted in a weak underlying results for the industry as a whole during 2022. Based on AMI's figures, Qualitas Mexico was the only top five auto insurance company to post a combined ratio well below 100%, standing 8% points below the rest of our peers average. Being true to pricing and cost control has and will continue to be fundamental for Qualitas. We all understand we're not yet through the high inflation cycle and therefore will continue to adjust prices, always ensuring that our value equation remains attractive to customers. As José Antonio mentioned, just this April, we had one more round of increases, especially in the car segment, where we have set an increase of around 8%. Regarding our international operation, starting with the U.S. subsidiary, where, as you recall, it is on a turnaround process with a redefined strategy that seeks to go back to the cross-border segment, where we have a better right to win and where we know we can be profitable. Domestic businesses will be limited to specific niches. Written premiums of this subsidiary decreased 28% during the quarter in terms of U.S. dollar currencies, where cross-border premiums growth of 24% did not fully offset the decrease of 55% of our domestic business. This is fully in line with expectations, and after our recent reviews, I can tell you that the right actions are being taken. Top decisions are being executed. including pricing and underwriting choices. The right team with the right focus is now in place, and we're regaining proximity to border agents. And while never as quickly as we would like, we're confident we're on the right path. While it is hard to quantify the potential of the cross-border business behind the near-shoring momentum, we know it can be significant. During this quarter, dozens of companies announced important investment and expansions in the border states. we have 45% market share in the trucks and heavy equipment in Mexico, but less than one-third of the cross-border. The opportunity is clear to be the insurer of choice, the one company that can provide one policy across both countries in each of the 50 border crossing points between Mexico and the U.S. Staying on the international arena, but now on the Latin America side, these subsidiaries kept on its positive performance in dollar terms growing 42% average stoplight. We continue executing our strategy to accelerate growth and become an engine of profitability as well. Today, I would like to briefly touch on one of them, Costa Rica, where we just crossed 100,000 insured units. We entered to that market 12 years ago, being one of the first private companies to enter a market that was up to then state-owned. It was a challenging start, but by truly replicating Qualitas' business model and creating long-term relationships with agents and policy founders, we're currently the solid private leader, only second to the state-owned company with an 18% market share. Last year, we grew 46%, and this year we're accelerating towards a growth of over 55%. ROE now stands at 20%, and we have what it takes to continue on that path. As part of our commitment to the country's potential, we are making a real estate investment that will also be home of our San Jose office. The project is not only financially attractive, but also in line with our sustainability commitments and aiming to become a net zero holding group. By building, we'll have a LEED silver certificate to reduce environmental impact. It hasn't been easy nor fast, but Costa Rica is already a successful story in our international expansion journey, creating value and also being a source of ideas for other markets. Now, moving back to our results, our earned premiums are up 20% for the quarter, standing at $11.1 billion by March end. As you recall, earned pace of growth is directly correlated with our technical research behavior, where we constituted research of around 1.1 billion pesos, which is 774 million pesos more of what was constituted on the first quarter of 2022. This behavior reflects our top-line performance in addition to a higher frequency and the continued pressure in our claim costs. Now entering our cost and ratios, as José Antonio explained, we continue to be affected by industry inflation as well as spare parts availability. especially of new brands from Asia that are becoming more relevant in the Mexico auto industry. Beyond those two, which we have been dealing for over a year, we're also seeing slight increase in frequency, which now stands at 28% for the quarter, and also an uplift in droppings. All of this resulted in a 69.4 loss ratio by the end of March, which despite being above our long-term target of 62% to 65% target range, is within our expected trend that was also shared at the beginning of this year. In addition to our constant and gradual target increase, we recently canceled 12-month interest-free installments, which was valid since 2020. This leaves only three and six months interest-free installments, which will also translate into a benefit to our underlying performance. Related to spare parts and repairment costs, despite the strong peso, as well as an ease in supply chains constraints, we have not yet seen a full stabilization of our costs. We're undergoing an assessment to try to mitigate some of the increases, as well as to find efficiencies with suppliers. While we have early signs of progress, we recognize this is not going to be needed. In this quest, our vertical integration continues to become more relevant as we know we have relative advantages versus the balance of the market. That subsidiary grew 54% when excluding intercompany operations, and non-qualitas customers now represent 25% and are growing above 50%. Another trend we've been carefully following is robbery and recovery. Robberies increased 4% for Qualitas and the industry overall, but still 28% down versus same period 2019. Nevertheless, these quarter thefts represented 16% of Qualitas total claim costs, an increase of 2% of points versus same period year-over. This increase was driven by the absolute car prices as the average cost of a robbed vehicle was up 35%. As new car sales availability keeps on improving, we could expect used car prices to start decreasing as we are seeing in the U.S. and other markets. As for the recovery, Qualitas recovered 46% of its stolen units, which is 6% of points higher than the rest of the industry average. We're working towards increasing these recovery rates while reducing risk and frauds. We continue to expect progress on claim costs during the next quarters and remain confident that the actions taken, coupled with an ease on inflation, will lead us to the expected inflection point towards the second half of the year. As shared previously, our expectation is that 2023 will still be above the 62% to 65% range, but with improvements towards the end of the year, setting a base for 2024. Moving to other metrics, our quarterly acquisition ratios stood at 23.5%. Commissions paid to our agents and financial institutions remain unchanged. In addition, we're making sure our agents and brokers' bonuses are aligned with our incentives, which includes not only premiums growth, but also claim cost ratios. Operating ratio for the quarter was 2.7%, in line with our expectations and historic average. In this quarter, operating costs, we are including employee profit sharing, as well as salary increases reflecting last year's inflation and new labor regulation costs in Mexico related to vacations for employees. As a reference, we distributed 7% payroll increases based on performance, which recognized with double-digit growth those who outstand against KPIs. meritocracy and variable compensations are two components in ensuring full alignment with company's objectives. Our employees are a key element of our organization, so we will make sure to attract, retain and develop top talent and to continue aligning compensations to this purpose. All of the above resulted in a combined ratio of 95.7% for the quarter. In current worldwide cycle of the industry, posting a combined ratio below 100%, reflects how Qualitas does not only outperform Mexican peers, but many other global players as well. Now on the financial side of the business, I'm happy to share that comprehensive financial income stood at $981 million, meaning a 9.8% ROI. As a result of last year's strategy and actions, our portfolio is nicely positioned to benefit from the high interest rate cycle Fixed income currently represents 91% of our portfolio, from which 57 is allocated in Mexico government bonds and the rest in local corporate bonds and liquid assets. Duration of our portfolio currently stands at 1.1 years. That compares with the 0.6 years by the end of last year. This reflects the locking strategy we had anticipated and that we should expect to continue in the next months as we will aim to position our portfolio on what are unseen rates in the past three decades. Yield to maturity stands at 9.8 by March. Now, regarding our equity investments, they close the quarter representing 9% of our portfolio, a low point in several years, but also consistent to shifting funds to the fixed income at a higher interest rate. During JFM, we took advantage of the Mexican stock market rally and we saw some positions. We expect, once again, to increase equity exposure during the balance of the year with an important strategic change decided by the Investment Committee, which is to move away from stock picking towards a more ETF-based strategy, in which we'll also have a higher exposure to U.S. stocks and stock market. This will be gradual. and we'll transition in the next months, but that has already started. Bottom line, we closed the quarter with 897 million net income, representing 7% of net margin and an increase of 22% versus first quarter of 2022. Tax rate for the quarter was 24%, and more in line with our historic average. In addition to what we previously shared, as part of our capital allocation strategy, we successfully We successfully concluded a majority share acquisition in a technology and software company based in the U.S. with operations in Mexico, Costa Rica, and Colombia. Valuation of the company is around $50 million. It has more than 50 years of experience focusing on telemetry for fleets, data analysis, and business intelligence. The transaction pursues an increase of telematics in the individual units, and by improving our data analysis, translating information into value creation actions and tangible results by which we will further increase Qualitas' value proposition. Lastly, additional call on the proposal to be discussed in the next General Assembly, a 600 million pesos new share buyback fund with the main objective of improving liquidity for all investors, highlighting that during the first quarter of this 2023, we traded above $7 million on average per day. This is a record high. We're not proposing any share cancellations for this year as we're carefully assessing the use of Qualitas shares on their threshold without affecting free float in the long run. All in, first quarter was in line with expectations with a strong start for Qualitas reaching record high number of insured units. Although too early to tell, actions implemented and ease in external factors impacting the industry should allow us to reach a stabilization and then inflection point in our loss ratio for our recovering the underwriting performance of the business. Financial income will continue to pay out in the next quarters, boosting our total net results. All of Qualitas' leadership team is committed and working towards unlocking a better service standard. deepen our trusted relation with agents and clients and to create stronger brand preference. We will seize opportunity to achieve growth expectations and to strengthen our business to transcend the industry with leadership position, delivering outstanding financial creation that creates significant long-term value for our stakeholders. And with that said, more than happy to address your questions. Operator, thank you.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press the raise your hand button located at the bottom of the screen. If you are connected by a telephone, please dial star nine. We remind you that all lines have been placed on mute. So when it is your turn to ask a question, you will be given permission to speak and open your mic. You may also send it through the Q&A box, which we will be reading out loud. To withdraw your question, please press the button once again.

We will pause for a moment as callers join the queue. Our first question comes from Ernesto Labilondo. Please state your company name and then ask your question.

Hi, good morning, Jose Antonio, Bernardo, and Santiago. Congrats on your results and congrats, Bernardo, on your new position. I have three questions from my side. The first one is on premiums growth. We were positively surprised about the growth in the quarter. We saw an important expansion across all segments in the traditional one and in financial institutions. So, How do you see now competition? Are they finally increasing tariffs too? And how should we think about the evolution per segment through the rest of the year? Then my second question is on your financial results. I think Qualitas today is well positioned to benefit from the high interest rate environment. However, When looking to next year that we can experience an easing cycle, how fast can you shift the position to benefit from lower rates? Do you think this takes like one quarter, two quarters? Any color on this would be very helpful. And I don't know if I understood correctly. I think in part of your investments position, you were evaluating to do some investments in US stocks so I don't know if you have any concerns if at some point we have a US recession then and my last question will be on your ROE it has been improving so how should we think about the ROE for the year and how should we think about your sustainable ROE thank you good morning Ernesto

Thank you for being with us in every call that we have with investors. Let me take the first one, and I will let Bernardo take the financial questions for you. Let me tell you that we are pleased with the results that we have in the top nine growth. Clearly, it was ahead of our expectations. There was a lot of impact regarding the financial, financial businesses, the sales of new car sales have also helped. And let me tell you that while we are pleased with that, we are also pleased with the fact that in the individual business, we are growing nicely. Now, what can we expect for the total year? It is going to be a little bit, you know, kind of difficult to be at this stage projecting a much higher growth for the year that we had anticipated in our previous call. What I can say is that if you remember, what we said is that we would be probably in the single-digit growth rate for the year and probably in the double-digit, in the low end of the double-digit growth for the year. Now, clearly, these results make it more likely for us to be closer to the double-digit And that's what we think probably is going to happen, the low end of the double digit growth for the A. Please remember that we had a big increase in the quarter two and three, or three and four last year in terms of premium. So the pace will also change, you know? So we expect that. And also we need to be cognizant that in the sense of the economy in Mexico, there are still some headwinds on that one in the economy. You know that interest rates have increased loan costs for car loans. And around 70% of new car sales are done through a loan. So there is the expectation that we have two forces at play here. One is the availability of inventories of cars, which is improving in the first months of the year. Still not out of the woods yet, but it is improving. But certainly the fact that this increases in loans We'll take a toll, and the economy, as we can see, I'm sure you read all the forecasts of the economy for the year, for the Mexican economy. So it seems to me that it is too early to say that we are going to be much higher than what we have said in the low-end range of the double-digit growth. But we are happy as we have a growth-based growth, and we think that our business momentum is strong. And I would also say that the increases in our tariffs, in our policies that we are taking to improve profitability, we also have an impact in the growth. So, all in all, we want to have a balanced growth, both, as you know, top line and bottom line, which was indicated during the remarks in the call, that we are well ahead of of the top five on the market in terms of profitability. So when you sum up all these changes in the end, we think that being in the low five or the double digit is fair to assume. That would be that. Bernardo, what do you have for the other two questions?

Thank you, Ernesto. Let me address the financial piece and then the RA. Now, the financial portfolio, as I laid out, we're very pleased on how we manage it. remember the duration back in the end of 22 was 0.6 years. So we were waiting for the right moment to pull the trigger, and that happened during the first quarter. We moved from having 0.6 duration to 1.1 years. And by doing so, we locked important high nominal and real interest rates that I mentioned we hadn't seen in three decades, no? So we're pleased on how we're moving on that, and we will continue to increase duration. Remembering that we have a liability duration of one year, we have always tried to be within that range. So we are not speculating a lot. But we will benefit from this high interest rate, and we have, in agreement with the Investment Committee, decided to extend our duration up to 18 to 20 months. So we're on that path. We should expect to continue increasing quickly because the turning point of the interest rate is about to happen. And, again, we should expect in the next quarter to reflect that increasing equation. Now, related to equities and our shift on strategy moving from stock picking, mostly skewed to Mexican stock market, we have decided to move away from that strategy into more ETF-based and within that, to increase exposure to the U.S. equity market. This is a result of a lot of analysis and discussions in which we will see a mid to long-term payout or not a partly return. This, based on analysis, is a more cost-effective way to get exposure to a number of stocks with large capitalization. We will have higher liquidity, and we will also lock some exposure of currencies. So we will do so in the next months. We have set a preliminary target of six to nine months, and we will revisit that. So it's not that current exposure of 9% to equities will shift immediately, but you should expect, one, a higher increase of equity exposure in the next quarters, and by doing so, a higher exposure to the U.S. equities as well. And now before I reopen the question to you in case we are not fully answering it, let me touch on ROE. You know, ROE is a fundamental metric of this company. We always look at it. We always strive to be a company that delivers on the 20 to 25 ROE target. We're not walking away from that 20 to 25%. But we acknowledge that current situation, our past, and the industry inflation will make it challenging to deliver on that target this year as well. But we should be very close to it. At this point, we're aiming to be in the 18% to 19% ROE by year-end, which is very close to that 20% and significantly above peer group. Let's acknowledge on that target that the high capital base that we have and placing the denominator accounts for around three points of that. So the excess capital, accounts for three points of that, and if we're delivering on the 18 to 19% corridor, then we would be, structurally speaking, in our long-term target of 20 to 25%, okay? So with that said, let me make sure we answered fully your question.

Yes, and thank you, Bernardo. So a follow-up on the premiums growth, Joseph, you can break down how much was related to the increase in tariffs, and if you already seen the competition increase in tariffs. Then a follow-up in the financial results, you mentioned a higher increase to equities exposure and especially more into ETFs. But again, if there is a concern from a potential U.S. recession, how are you expecting to manage that? And then finally, on your ROE, so 18%, 19% for this year, and do you continue to see on the long term around 20% to 25% ROE?

Just let me take the ETFs, Ernesto, and say that this is something that we receive for the long term. And you are asking about the recession in the U.S. Clearly, there have been a lot of wide ranges about what to expect in the U.S. I guess the important thing for us to say is that in the ETFs, we want a long-term investment. We are not going to do that in one shot or anything like that. Clearly, we know that this year is going to be a complicated year for equities. And we are going to be doing that. And we think that to create value for our shareholders, the ETS, if we do the right ones and we do it right, we are going to be creating more value for our shareholders longer term. And regarding previous, I don't know if you want to take it, Bernard.

Yes. Previous growth was basically driven in 60% by the price increases we've taken and around 40% by the organic volume growth. Oh, that's very close. Okay. And related to competition, we are seeing the industry going up. That happened since the beginning of the year. So I think this is no surprise given the combined ratios that we saw from competition by the end of 2022. I think it's fair to say that the whole industry should continue to increase prices to offset the industry inflation, which last year was in the 10% to 12% range. Thank you, Ernesto.

Perfect. And then, Arawi?

Long-term ROE, we're sticking to the 25.

Excellent. Thank you.

I think the low 20s is more achievable, but we're not walking away on that range.

Excellent. Thank you. Congrats on your results. And, again, congrats, Bernardo, in your new position.

Awesome. I think there are no other raised hands, so we'll go with the written questions. I'll start with the first one from David Seaman. How large do you think your advantage is in claims cost versus the market, both in absolute terms and in terms of the year-on-year variation? Is your claims cost advantage widening in this inflationary environment?

So I think scale plays a role if you know how to use it. So I think the biggest competitive advantage that we have in cost relates to our vertical integration. We believe on average that accounts for two to three points of competitive advantage. It is hard to really nail it down to the sand. And let's just remind everyone that when it comes to pricing, when we call out prices, that refers to around 60% to 65% of our business. That is either on the traditional segment or financial institutions. Whereas fleets, they are priced based on historic average. based on the particularities of each account. So I think it's fair to say that on both, we have a competitive advantage on claim costs, and we use that to make sure that our value proposition continues to stand out. Also, I'm hoping that David answered your question.

David, let me add to what Bernardo just said, just to say that we continue working in projects that will provide an additional advantage in this area. in the loss ratio and in the average loss ratio. We have at least a couple of important projects that should help us to maintain this vertical integration that will allow us to keep and maintain this cost advantage at least in the foreseeable future.

Thank you. Our next question comes from Andres Soto. Please state your company name and then ask your question.

Perfect. Good morning, Jose Antonio Bernardo and team. This is Andres Soto from Santander. My first question is related to expenses. We saw a very, very good performance year in year, a 7% decline, part of that driven by vertical subsidiaries. But even if we exclude the effect of vertical subsidiaries, we see positive expense trends. So I would like to better understand that. And in that context, I see that you are now guiding for an operating ratio of 3% to 4%. If I recall correctly, in the past, you called for a 5% operating ratio. So based on this, you know, I imagine this company can aspire to a higher ROE over the medium term as loss ratio normalizes. You say you are not changing the range, the 20% to 25% ROE range. But I would like to understand if this increased efficiency is a reason to be more optimistic that you can reach the high end of this range, or on the contrary, this is an upsetting factor to potentially loss ratio being high for longer.

So, Andres, good morning. Let me take the expense piece. Yes, we're pleased with operating expenses, and I think that continues to build on a competitive advantage versus our peers. Very disciplined on making sure that we only expense what might make sense. Now, in addition to the vertical integrations, there is one other factor to consider, which relates to premium underwriting fees. So every premium that we write, and that is true for the whole Mexican market, there's a premium charge, a fee. The more vehicles we write, the more this fee translates into a benefit. So it's actually an income in the operating line, you know, and that is completely related to how many vehicles we're underwriting. Also, that's kind of the tailwind that has held specifically this quarter, and hopefully we continue to see that across the years, along the year. Now, also to consider that the underwriting expenses includes EPS, employee profit sharing, which is only true in Mexico and I believe Peru worldwide, okay? This is an item that gets reflected on the operating line. And we always set it apart because I think it's one line that we will always like to increase because the more profitable we are, the more that we will increase the EPS. So that was kind of two major things to consider when looking at the operating expenses.

The other additional thing that I would add, Andres, to the operating expense for this year is that the situation continues to be relatively high. you know, that we have our salary increases as we, and as Bernardo, I think, indicated in his remarks, that will continue having an impact. So, yes, probably being around the 4%, it would be about right. Now, you have another question, right?

Yes, thank you, Antonio. But before we go to the other question, I would like to ask again about the long-term profitability target vis-à-vis your lower operating ratio. So my question was, is this a reason for us to believe that you can be at the high end of the ROE target or – Basically, what you are seeing now is that loss ratio is going to stay high for longer, and the additional efficiency is just an upsetting factor to this.

So, Andres, as much as I would like to say, yes, you can expect a 25% plus ROE, no. I think just nailing that target is challenging, and managing the operating expenses within that range will be quite an uphill task. considering the inflation and the labor cost in Mexico. So I think at this point, we would not aim to be higher than the rate I just pulled out and making sure that our operating expenses contributes to that. But even if we're at the lower end of our operating expenses, I don't think it's at this point would be a direct correlation to being above our risk.

The other thing, Andres, is that at this point in time, we have not reached yet reach as an industry, as a quantity in particular, the inflection point of the combined index or the loss ratio. As you can see, I mean, we have seen that there is a cycle in how it works for the total industry, how is the loss ratio and the combined ratio, and it mostly cycles about six to eight years, no? We are now, if we take 2009 as the base, we are now in the third cycle that we are beginning, and it continues to rise. So I can expect that the industry will continue to rise the combined index. And until the inflection point really takes hold, and we are working hard to make sure that in value test, we continue to be profitable from an operating standpoint, we are not going to be seeing a higher ROE and the ranges that Bernardo mentioned seem to be adequate at this stage.

Understood. My second set of questions is regarding your M&A strategy. You mentioned this telematics acquisition. I would like to understand where in the P&L are we going to see the effect of this acquisition? Is it going to be on the loss ratio as you are going to improve recovery, or is it operating expenses as you are going to sell some of the services of this company to third parties.

Yes, Andres. So what we're going to see is two poles. First and foremost, it should contribute to decreasing our loss ratio. The more we can use and leverage telematics, as we've seen in other companies worldwide, the more we're going to be able to prevent and eventually also price adequately to specific risks. And also, in the mid to long term, we're expecting these to contribute to the loss claim ratio for the company. Now, we will also see a benefit on profitability as we consolidate what is already a profitable company, and we expect to even make it more profitable, more relevant. So it's going to be twofold. One, at a current level company, by increasing profitability on the consolidation, and two, which, by the way, shouldn't be something that moves the needle radically, but it's going to be accretive. And secondly, and most important, as we seek for new ways to differentiate ourselves in creating new competitive advantage in the claim cost. No one is doing so in Mexico, and we will be the leading company to do so.

Perfect. Thank you. And still on your MIS strategy, you had mentioned before you had two acquisitions on the pipeline. What is the remaining acquisition? When do you expect to have additional details on this one?

It's still on the final stages of the due diligence. We're feeling confident. You should hear more about it in the next earnings poll. Hopefully things work out nicely. We will close it. And that will be something that expands our vertical integration strength. So it's not something related to insurance, but rather a strengthening or a vertical integration company.

Understood. Perfect. Thank you both for your responses. Thank you. Our next question comes from Rajeev Dandara Singh from HSBC. You may now open your mic. Hello. Hello.

We can hear you, Jitendra. Thank you.

Yes. So my question is on Qualitas Salute. So you expanded in health insurance business last year. So I just want to understand how has been the progress so far, and when do you think it will become relevant for Qualitas earnings? And can you discuss about what are the targets there?

For your question, Jitendra, let me take the Qualitas Salute part. We It's important to remind everyone that the Quality Salute is a project that we undertake, and it's a line of business that we undertook as a means to see that in a really long-term scenario, in 10 to 15 years, the auto business insurance probably is going to stall and probably even to reduce. So we are betting on... one of the big megatrends that are worldwide, which is the health area, and that we expect WG growth for many, many, many years. Having said that, since we do not have experience in quality of health, what we have said is that it's going to take two to three years. In the first two or three years, it's going to be non-relevant. We are going to be really learning. We are going to be testing our products and testing our models to serve our policyholders. So at this stage, it is very early on. Remind you also that we started only in Mexico City. I mean, we are not in the full country. And we expect to expand this year to two or three regions, additional and big cities, Guadalajara, Monterrey, et cetera, and doing that. But since we are doing very, you know, low growth and we are having a slow growth in that one, we do not expect that to be relevant this year or next. It's important also to note that in Qualitas, what we want to do is to have excellent service and to provide the benefits for our policyholders. So we are more focused in making sure that we have all the capabilities to do just that. And we are investing our our nets and everything. And once that's ready, then we are going to be seeing the growth. But we are very confident that we have a strong distribution network throughout the country, that once all the elements are fully fine-tuned, we are going to be starting seeing the growth. So that's what I would answer regarding quality of health.

Thank you.

Now I'll go with another written question from Derkiran. What percentage of investment portfolio would be invested in U.S. ETFs? Why have you decided to invest equivalent to individual stock picking only in U.S. and not global equity ETFs?

Good morning. I'll take that. So let me just give you an overall picture. Equities is to a low point of 9% of all portfolio. that's quite low relative to where we want to be ongoing, which is in the 15% to 20%. Now, that's what we believe makes sense. Obviously, the current cycle of the economy and the high inflation rates that we're seeing in Mexico made us shift that to a low. Now, as we transition back to that 15% to 20% corridor, I would say that up to 90% of our equity position will eventually be invested. in U.S. equities and ETFs. We did measure, or we did compare global equities versus U.S. equities. If you look at 15, 20 years trace back, they do correlate. And the global equity index, the AMWI, is quite close to the U.S. And we believe, given our exposure, given our interest, and given the historic performance, At this point, it makes sense to be more in the U.S. equity CTFs. Now, obviously, these are ranges. These are ranges that are reassessed on a quarterly basis with the investment committee, and we should expect them to be dynamic. I think it's fair to say we're still dealing with a volatile economy, and we will adjust accordingly. And so far, I think it has made sense the way we played it out, and we will yet to see how the equities evolve. This is not going to be an immediate change. immediate shift.

This is going to be a transition in the next, I would say, six to 12 months. Thank you. So, Kieran, we see that you actually have a raised hand. So, do you have any follow-up questions you would like to ask on your mic? You may now. Thank you. Thank you.

A couple of questions. One is in the opening remarks, there was a comment that we get a fee for underwriting policy anywhere in Mexico. And this is an income. So is this fee for a specified period? I mean, are you expected to continually get this over the next five, 10 years, or is it just a current incentive by government or some agency? So if you can give us more sense of this fee that you spoke about with lower overall cost of operations.

No, it is not a one-time one. It is every time we issue a policy, that's the fee that we charge. Clearly, that's something that actually helps our expenses. And that's something that we have been doing for many, many, many years as a practice in the industry. So this is not a one time for sure. It is an ongoing practice for every policy that we issue and that we subscribe. And that's the way it works.

Okay. So can you give us a sense of as a percentage of premium, how much is this policy fee?

So not sure if you address, if you want a specific number, because it is not a percentage of the premium value. It's a fixed cost depending on the channel. So this is a fixed amount independently if you're insuring a vehicle for $200 or for $2,000. It would be the same amount.

Okay. And what is this fixed amount per policy?

I know, but let me say in the individual segment, it's close to $25. Yeah, $20 to $25. Okay.

Okay. And do we get this fee for each policy or is it only selected class of vehicles or selected channels, whether it's financial channel or agent channel? Is there any distinction?

Yeah.

Yeah, this is by policy, as we said, across all segments. And we can explain a little bit more on that specifically because, as Jose Antonio alluded, it is an industry practice. It has always been there. And the only thing that stands out is the important increase on units translated into a higher number of these increases. And also, as you can see, we can follow up on that separately and expand us.

Sure. Second question was from the comment you made that recovery-wise in the lost vehicle segments, our recovery rate is 6% better than the industry. So can you tell us how much our loss ratio is better due to that 6% So in terms of loss ratio, what percentage point advantage do we get?

So I don't have the exact number. It certainly contributes to being better than the industry. I think if you look at last year's numbers, one of the things that stands out is the delta on claims and operating expenses. These matters contribute. So we can run that math, and the team can get back to this question to you.

Got it. Thanks for the opportunity.

Thank you. We will now go with the final question, the last one that comes from Carlos Gomez from HSBC. In the long run, do you have a target as to what percentage of your business you would like to have outside Mexico? Is there a budget for your expansion abroad?

That's an interesting question and I'm going to let Bernardo to answer it, but the We have done this for five years, and we should at some point in time, our outside business should be around, I don't know, probably 30%. Actually, it's not necessarily outside of Mexico, but it is a combination of Mexico and the vertical subsidiaries. You know, 70-30, 70 Mexico, 30% outside. In five years, it would be something that we could consider on that regard right now?

I think that's completely in line with what we have been saying. And the one piece that I would add, because a few of you have asked what's our appetite to further accelerate or to enter new markets, I would say at this point we want to make sure we turn around the U.S., we capitalize the potential of the markets that we're already playing, and we enter Colombia. Other from that, and at least in the next three to five years, we're not and we should not expect new market entries.

Carlos, we can see that you have your hand up.

So do you have a follow-up on that or have we answered your question today?

You have answered my question. Thank you very much for your help.

Perfect. That concludes today's call. Thank you all for participating and have a great day.