Qualitas Controladra Sab

Thank you for standing by. This is the conference operator. Good morning, and welcome to Qualitas' second quarter 2023 earnings results webcast. The conference will begin now. It is my pleasure to turn the call over to Santiago Monroy, Qualitas' IRO.

Good morning, and thank you for joining Qualitas' second quarter and first half 2023 earnings call. José Antonio Correa and Bernardo Rizul, our CEO and Deputy CEO, are joining us today As a reminder, 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. Good morning, everyone. As we have been discussing for a while now, We continue to face several external factors impacting most industries worldwide, with insurance, in particular auto insurance industry, being no exception. In Qualitas, we have a clear understanding of these headwinds and their impact on our business. We have been taking actions to overcome them and return to our historical and objective margins. Looking at our first half performance, I can say this is still a work in progress, but these strong results in several fronts giving us confidence that we are on the right track. Before diving into our financials, let me walk you through some of these factors and give you an update of the industry dynamics while providing our view on the expected evolution towards the balance of this year. First, related to our top-line growth, new car sales continue its positive trend up 22% versus the first half last year, and almost closing the gap versus 2019 levels. Availability of new vehicles has ramped up during the year, although still not fully satisfying demand, as several brands have between three and six months of waiting time. This, we believe, are positive news, and we expect the trend to continue throughout the year. However, there are two factors that may have an impact in this recovery. Current high interest rate levels, given that about 60% of new car sales in Mexico are done via credits and loans. So buying a new car is now more expensive for our consumers. Also, congestion in many harbors and logistic issues are delaying new deliveries and gas inventories. Still, the recovery of new car sales is clear and a benefit for us, as well as for the whole industry. On the other hand, cost pressures prevail, mainly explained by industry inflation, higher frequency, and spare parts availability. Analyzed inflation in Mexico has been stabilizing, closing at around 5% in June. However, spare parts and labor inflation, we have a direct correlation on our loss cost, are still around 9%, which means that while easing versus last year, they are still high and putting pressure in our cost. Now, in addition to the inflation, the auto industry is still facing challenges on spare parts availability. In many cases, it takes months to get This shortage of supply contributes to high prices. Now, let me go back to the new auto sales. There are interesting and relevant dynamic changes to which we are quickly adjusting and striving to always be the insurer of choice. To mention a few of them, four new brands have entered the market since 2019, and they now represent 7% of the market. Consumers are now opting for SUVs rather than compact cars. And as a reference, SUVs and pickups now represent 54 versus 40% of sales back in 2019. Clearly, this has an impact in our average premium cost. Also, electric and hybrid units demand continue to increase. According to the latest AMIA, the industry of sales, figure sales for this type of units have increased more than 30% during the year and currently, represent 5% of total new car sales. We continue in Qualitas to specialize our teams to maintain our leadership in the knowledge, insurance, and repair of this type of units. All of the above impacted the entire industry and Qualitas underwriting and financial performance, in which Bernardo will provide more detail later. I am glad to share that as Per Amis reported figures of the first quarter, 2023, Qualitas continues to lead the industry, not only in premiums, but most importantly on profitability, while only one of the other top five competitors posting a positive on the writing result. And this is very important. And we have stated many times that we will always be true to our service and cost control pillars, aiming for a profitable operation while strengthening our leadership position in the market. External factors allude have created a complex environment for the entire industry for over two years now. We have been adjusting our prices accordingly, and we will continue to do so until we fully recover cost inflation. And it is encouraging to me to see this as being also the intention of the broad market as we have seen recently. Before I hand it over to Bernardo, let me really touch on the other key pillar of our financials, our portfolios. Mexico Central Bank has kept the pension policy rate at 11.25%. Our portfolio is very well positioned to keep and benefit from current context, and together with the Investment Committee, we have increased duration of our portfolio as well as a defined new approach with this position, always seeking to maximize return on the conservative and responsible asset allocation and duration strategies. To wrap it up, our second quarter results show quite a strength to continue retaining and attracting new customers, but we recognize that getting our claims cost back to the desired range is taking a bit longer than expected. Actions have been taken, and I expect that the inflection point will happen in the next six to nine months as we fully materialize the benefit of the pricing and cost saving implemented so far. In the meantime, financial income will play a bigger role in delivering an ROE, which we expect to be closer to our ongoing objective towards the end of this year. And with this background, let me pass to Bernardo for a deep dive in our quarter and year-to-date performance. Bernardo, please.

Thank you, José Antonio, and good morning, everyone. Our first half results reflect anticipated peaking claims as strong financial income and an extraordinary top line. While not all of them are exactly what we would like them to be, they are on the right path, we're headed, we're ahead of the industry, and we continue to build the long-term of the business while navigating through this cycle turmoil. Now, let me provide more color on our performance. Rhythm premiums are up 24% for the quarter and 25% for the year. This growth represents 4.8 billion more in premiums than the first half of 2022, something unseen even on an annual basis for the past six years. Growth was driven by tariff increases, which are up 12% during this year, that together with the increase in the sum insured and mixed account for around 60% of this growth, while the increase of 395,000 units contributed to the balance increase of the sensational top-line performance. We're just 29,000 units shy of reaching 5 million insured units in Mexico, while the total business is now at 5.2 million insured units. While new car sales have recovered throughout the year, it is the traditional segment that has outstanding being up 33%, thanks to the effort of our commercial network, which has now more than 20.7 thousand agents being served through our 548 offices. During the first six months of the year, 40% of our underwriting came from the traditional individual sector, 24% from fleets, and 29% from financial institutions. The rest comes from our international subsidiaries. When compared to three years ago, our individual segment has increased eight percentual points. And it is this higher exposure something we welcome as annual duration implies also faster impact when adjusting prices. Regarding our international operation, quarterly written premiums are up 4.5% in local currency and down 14.5% in pesos. They are up 5.6% in local currency and down 13% year-to-date. This performance reflects the 12% peso appreciation in the first six months of the year, In line with our strategy, Latin America subsidiaries are accelerating growth and are up 58% year-to-date in local currency, while the U.S. subsidiary has centered on executing our previously shared strategy focused on the cross-border product. Premiums for the U.S. business are expected to be down this year as planned. Since I am already talking about the U.S. operation, let me expand on where our two-year turnaround process is. During the first half of 2023, our binational product, which includes and is mainly cross-border, is up 15%, while domestic product is down 57%. The personal auto program, focused well on Hispanic population, was recently launched and is off to a good start. We have regained traction by repositioning the benefits of Qualitas as the one company that covers both countries under one policy. The organizational structure is set to better serve this niche market and we're encouraged by the potential we see, particularly as nearshoring is having a positive impact in Mexico. Just during the first half of the year, 10 global companies announced investments in Mexico to better serve the U.S., which implies higher flow of trucks and a confirmation of the nearshoring effect. Having said so, We are still digesting past year claims, mostly on domestic business, with some adverse developments still. We are expecting to have high loss ratios for this year, leading to a negative bottom line, although making significant progress versus last year. Moving back to Qualitas Controladora performance, earned premiums were up 18% for the quarter and 19% year-to-date, standing at $11.7 billion by 2010. Earned growth pace is directly correlated to reserves behavior. We constituted reserve for around 300 million this quarter. That compares to a 330 million release during the second quarter of last year. This 600 million delta affects quarterly results, but will eventually be released. During the first six months of the year, we have constituted over 1.3 billion pesos, reflecting the loss ratio and the strong top-line performance. Now, going into our cost, inflationary and availability pressures mentioned by Jose Antonio continue to impact our loss ratio, which closed at 72% for the quarter and 71% for the year. To provide a better perspective, I will break claims cost into three main buckets, frequency, spare parts, and thefts. On frequency, we have seen a slight but consistent upward trend, closing first half at 14.2, which compares to 13.5% versus the same period a year ago. The reasons for frequency increase are not precise, but we believe that higher number of motorcycles, coupled with new distractions such as mobile phones and shortage of truck operators are among the drivers. Not only has frequency increased, but this quarter we are seeing higher severity with unfortunate catastrophic accidents. During this quarter, catastrophic events, including floods and hailstorms, increased 87% versus the same quarter a year ago. On claim costs, we're undergoing negotiations with dealers, workshops, and agencies. The strong Mexican peso and commodities stabilization that has reduced some pressure, but not yet fully reflected in lower prices as supply continues to be well surpassed by demand. To overcome this situation, We're taking actions among several fronts where our vertical integration becomes a more relevant pillar to get the right quality and better prices, providing us with a competitive advantage now and in the future. Among several strategies, it is the enhancement of our remote and digital tele-express adjustment tool. 28% of total claims during the first half were attended through this tool. Remote claim officers have a 3-to-1 productivity So this percentage translates into more than 100 million pesos in savings while improving service experience. Managing costs cannot and will not come at the expense of service. And given the supply chain dislocation is still causing some spare part delay, we are providing two claims handling options for policyholders. First, the traditional repair process through the workshop and agencies, recognizing the longer repair times in some cases. or as well the option to obtain a payment for the claim cost. On the third item affecting costs for the first half of the year, robberies represented almost 15% of total cost in comparison to the 13% of the same period last year. Due to mix and increasing the value some insured units, the average cost per theft is up 38%. While we continue to recover almost 6% for points above the rest of the industry, We're taking actions to benefit our costs, such as to better leverage technological tools, strengthening efforts in preventing and avoiding theft, and improving our recovery effectiveness together with different providers and authorities. All of these actions strive to mitigate claim cost evolution and not rely only on pricing, which is certainly carrying most of the weight. We have been adjusting our tariffs gradually but consistently over more than three years now, and doing so more aggressively recently. Just as a reference, in late April, our auto tariffs increased high single digit, and in June, we did the same with heavy equipment. On fleets, which are placed on historic claim results, we are also taking important decisions to ensure premiums are sufficient to cover current risk and cost. Given the nature of the business, the pricing effects are gradual. and take one entire year for each adjustment to fully reflect our P&L. We will continue to adjust until we reach our target claim of 62% to 65%. Now, before I move on to other ratios, let me just share one very important piece of news on the competitive landscape, which sticks to the challenging of managing heavy equipment. During the past two weeks, sorry, during the past weeks, Two insurance companies, among which there is one top three and another top 10 in the truck segment, stated their intention to exit that market. This represents 10% market share and close to 4.3 billion pesos of opportunities. But most importantly, it recognizes the need to be responsible on tariffs, diligent on the operation, and tireless on the efforts of risk prevention, where qualitas will double down. Acquisition costs stood at 22.6 for the quarter and 23.1% year-to-date. The quarterly decrease of 48 basis points come behind a stronger growth in our traditional and individual segment. Despite new car sales performance that correlate to the financial institutions channel, that have a higher acquisition cost. Now, on the operating ratio, it stood at 3.3% for the quarter, 93 basis points below the same period a year ago. Year-to-date operating ratio close at 3%. This ratio is within our expected and objective range, benefited from the endless commitment to cost control, as well as two other factors. One, the income that comes from the underwriting fee, where we charge a fixed amount for insurance premiums, that, by the way, is a common practice in the industry. And second, our third-party vertical subsidiary sales, reflected as an income, which is up 42% versus second quarter of last year. All of the above resulted in a combined ratio of 97.7 for the quarter and 96.8 for the first half, being north of our 90 to 94% ongoing target. I have already expanded on the actions being taken and we're working towards making sequential improvements in the next quarter to get back on track. Now, regarding financial institution performance, second quarter delivered 860 million pesos, reaching 1.8 billion during the first half of the year. This is 2.7 times and 2.2 times that each of the respective period year ago. ROI for the quarter stood at 8.1 and 9% year to date. Although our investment strategy hasn't changed and we're still well positioned to benefit from the current environment, our portfolio performance is not static. And that explains a lower absolute amount than in the first quarter. And let me elaborate. First, the size of our portfolio decreased around 300 million versus first quarter due to the dividend payment that was done in the first half and the higher claim paid. Our portfolio is also distributed geographically to support our international operation. 13% is allocated outside Mexico with different interest rate levels and returns. Our portfolio was impacted by the appreciation of the PESO, resulting in a $62 million impact in our P&L and $191 million in our balance sheet. Important to mention is that we do not speculate in currencies. Let me repeat, we do not speculate in currencies. We're basically matched to asset liability and the needs of the business. Also, as part of our fixed income strategy, we have a roundtable. a part of the portfolio on real rates that are instruments linked to inflation performance. They're called udisados in Spanish. While these rates are very attractive and the highest in decade, in some cases locking at 5.3%, when inflation is lower, such as this quarter, yield will also follow. This impacted in 90 basis points over partly ROI or around 70 million pesos. All in, our portfolio has a 1.5-year duration and 9.3 yield to maturity. We will continue to increase the duration of our portfolio, having internally set two years as our ceiling. Altogether, we posted a $746 million net income for the quarter and $1.6 billion for the first half, representing a 6.2 and 6.8 net margin respectively. The quarterly performance represents a 14% growth, versus the same period last year, and an 18% growth year-to-date. Regarding our financial ratio, our 12-month ROE stands at 13.1%, reflecting our strong capital position as well. 12-month earnings per share stands at 6.2 pesos. Going out into our regulatory capital requirement, by June end, it stands at 4.3 billion, with a solvency margin of 13.8 billion pesos, equivalent to $460 16 solvency ratio. Capital requirement also increased during the growth, given the growing loss ratio and reflecting the mentioned challenge. Our corporate development strategy has progressed as expected, and we have one due diligence process still under assessment. Our excess capital remains strong. We are investing against the defined priorities while strengthening the organization in people and technology We will continue to be disciplined and choiceful to provide sustainable results for our shareholders. In anticipation of what has been a widely asked question regarding a potential extraordinary dividend, that discussion will happen in due time. What I can say is that we acknowledge cash and excess capital belongs to our shareholders. And while we're not in a rush, we're open to assess it. To wrap it up, our commitment to you remains unchanged. The right actions are in place and Qualitas DNA backs our ability to create value despite challenges and circumstances. We will continue evolving and adapting to achieve an inflection point, which is still expected during the second half, whilst providing service experience to our policyholders and agents day after day, quarter after quarter, for decades to come. And with that said, we are more than happy to take your questions.

Thank you. We will now begin the question and answer session. To join this question queue, you may press the raise your hand button located on your screen, and we'll open the mic for you, or you can send it through the chat. 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 . Please state your company name and then ask your question.

Hi, good morning. Ernesto Gabilondo from Bank of America. Good morning, Jose Antonio and Bernardo, and thanks for taking my call. My first question is on your claims costs. We have seen inflation is starting to go down. So just wondering when do you expect that will translate to lower claims costs? And how should we think about the costs in the second half of the year? We usually have seasonality and the claims costs tend to be higher during the second half of the year. But as you have mentioned, you have taken some measures. Inflation is again going down. So can we expect lower claims costs in the second half, although still above historical average? And then maybe, well, going into historical levels within the next six to nine months. Thank you.

Rezo, good morning, and thank you for your question, as always. I think we're all aware that inflation is releasing some of the pressure, although in the industry, the auto industry, that is yet to be seen. As we referred to in our opening remarks, Some of them were starting to see the benefits, the appreciation of the Mexican peso, considering most of the oil ports come from abroad, should start releasing that pressure. Now, there is an important matter here in this equation, which is availability. What we have seen is there continues to be a shortage of spare parts, and that is the one factor that is mostly influenced currently the price of oil and inflation. We are very diligent to pricing. As I alluded, we have been taking sequential price increases. And most important, in the second quarter, we took a double-digit increase, which is yet to see the benefits. So the combination of pricing and what we do expect to see an inflation point in cost during this second half is what will take us back to what is a 60 to 65 claim cost target. And we expect to reach that during the late second half of the year. That is not going to change the clean cost for the year, which we have been mentioning will be above and closer to the 68% to 70% for the year. But we are setting the basis for a very strong 2024 when it comes to clean cost. Obviously, the top-line performance is coming up with a great inertia since last year. closing at 25% this year, something that I said I've seen. So I do believe the combination of stronger top line and the actions on the claim cost management is setting the base for a very strong recovery for the business as we see the end of this year and beginning of 2024.

Let me ask you what Bernardo is saying, Ernesto, and thank you for having me on the call today. And let me tell you that the inflation has been going down, at least reported. in general. However, the one that affects our costs is higher between two and four points. So that will continue to be the case. And as Bernardo indicated, we have taken the prices that we need to take. And it will take between probably three to six months to start seeing the reduction of the prices. But we are confident that we are taking the right and we're making the right moves to ensure that we see the infection point in the times that Bernardo indicated.

Perfect. Now, thank you very much. Just a couple of more questions. One is on your investment portfolio. We know this continues to perform a yield below CETES, and I believe this is because your new passive investment strategy has forced you to sell several equity positions. So I just wanted to understand if you have already cleaned up all the past equities portfolio, this is something that's still maybe for another quarter. And when do you expect the yield of the investment portfolio to be in line with CETES? And then my last question is on your ROE, just if you continue to see the ROE of the year between 18 to 20, and when do you see it in the long term? Thank you.

I'll take the first one regarding the portfolio. I think it's not surprising to see our ROE arrive still below centers just because of the curve and accelerated increase of rates that happened north. So we have had always a fixed amount. And even when we decreased the duration last year, we were at 0.6 year duration, we held some positions with a lower fixed. Also, I think it's a sequential progress of our portfolio. Yield to maturity has consistently been increasing quarter after quarter. Now, as we said, we're now at 9.3, lower than set this, but there's two components to this. One, remember that when I said 9.3, that is the combined of the portfolio, which includes over $300 million outside Mexico, and that is not related to CETES. Also, there's one mixed factor. Now, when you exclude and only focus on Mexico, that is closer to the 10% of the automobility. So that is much more close. When we turn the corner on interest rates, so CETES is going down, our portfolio duration will still benefit. So I think it's an expected difference when we are now currently below CETES, and we will continue to be, but as the interest rate evolves, we will turn that corner and we see our portfolio above that interest rate. And we expect that to happen in 2021. So I think that's an important piece because as we manage the portfolio, this particular piece has nothing to do with EFTS. Now, let me add to EFTS. As you know, We went less aggressive on equities. We went down to equities positions to close below 9% last quarter. We're now retaking some equities position. It's now 9.5%. And what's going to happen is it's also going to continue to go up, but in a different way. I believe last quarter we expanded our changing strategy for portfolio investments. We're no longer going to stop picking. We're moving into ETFs, which will provide less volatility. And we're doing that also sequentially. So it's not that we went and sold every single position that is being happening, that is being transitioned since the last quarter. So you could expect that our equity exposure will increase in the next quarter with an end point between 15% and 20% of the portfolio.

So with that said, I'm hoping that I addressed the investment piece, and I'll ask- Let me just add to what Bernardo indicated, a couple of comments. This quarter, we increased our position in inflation-protected instruments. It's important to note that, Ernesto, as we believe, the person on the beginning of the session is going to take more time to really go People are very optimistic about that. You know that the second part, the next part, during speaking, infection has the behavior that gas has, and it has some impact into our results for the second part. But I think that that is what will help us moving forward. And the second comment is regarding the EPS. I'm going to have to change that. It is very important that we are not taking any speculation on that one. And the EPS are going to take, with that, we are having a long-term view. So the long-term view that we are having with EPS is going to help clear your portfolio long-term. And that's why we are doing that.

So that's the other question. On the ROE? What we see towards the end of the year will continue to be slightly lower than 20%. I'd like to aspire to 18% to 20%. I think that's still reasonable. But what's more important is we do stand for the 20% or higher than 20% in the long term. So that hasn't changed. It's not affected the change in the ministry. Now, just bear in mind, that a higher capital on the denominator has the toll of between 2% and 3% on average. Okay?

Perfect. Thank you very much.

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

Hello, guys. This is Rodrigo Ortega from VUE. Thank you for taking my question. Just a quick one, Bernardo, Jose Antonio. You mentioned that there are a couple of competitors living out the heavy equipment landscape. Are you guys planning on buying them off, buying their current operations, or is there any strategy more specific regarding taking this opportunity to grow?

Thank you, Rodrigo. Let me take this one. The heavy equipment is very interesting, Rodrigo. This is a difficult business. And for that, you need to be an expert through that. One of the things that we value is the expertise for this type of thing. So for us, let me tell you that a couple of years back, we were thinking that some of our competitors didn't know what they were getting into. So we thought that this was going to happen. So this has started to happen, and that simply is a confirmation that you need to be good at having this typical business, which we are experts on. Now, having said that, as you know, we have around the mid-40s in terms of market share for this type of equipment. And what we are doing now is that the companies that have announced that, it's not, they are not selling their portfolio. They are going to be exiting and they are stopping the writing. So it's going to be a gradual situation that is going to happen. So we know and we believe that we are better positioned to take the exit that, but it's going to be gradual. Now, the good thing about this is that this will become a sincerity into the present market Because a lot of what happened when the competitors entered in the past two to three years into the heavy equipment, they were doing it with price. And we knew that that was not going to be good. And that has already been the case. So the good news is that the fact that the market is becoming too sunny will also help to to improve, actually to correct the pricing. Let me tell you, I've seen several examples in the case of Qualitas, where even some fleets go to competitors because they charge less, only to come back to Qualitas within two, three, or four months, go back for the service that we are giving. So the short answer for you is no. there's not going to be a portfolio sell of those, and it's going to be a drag-and-drop situation.

Thank you very much. That was very clear.

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

Yeah, Anand from White Oak. Thank you for the opportunity. Three questions from my end. First is, if you can give us loss ratios by segment. So, the retail, the trucking business and the institutional business.

Anand, good morning. So, we don't necessarily break down the loss ratio by segment. We obviously have it, you know. I'll give you some color. Right now, they're all basically struggling at the same rates. I think FLEETS was a little bit behind and taking some action, and that already turned the corner. The one that takes a little more time is financial segments, given that what we write there is for multi-years. And as I alluded in my remarks earlier, As we have higher exposure to animal produce, the highest they've been at least in 70 years, it gives us the flexibility to adjust. So I think just we're all taking actions in three fronts, fleets, individual, and financial institutions or new powers. And I think the first one to turn the corner has been fleets, which has destabilized.

I think that's what Bernardo said, that usually in the individual segment tend to be a better one and a more stable one. There are less swings in those indexes, generally speaking. So we are more in the right direction on that.

And just to wrap it up, obviously we summarize at a very big height. But when we come to execution and being the one specialized company, in the market, we break it down by zip code and then by second subset. And also we have motorcycle, we have pickups, we have SUVs, we have a traditional car, we have buses. And so the pricing effort is a very diligent and very detailed one. And when you hear us talking, we keep it at a very high level, summarized, but the pricing actions and analysis goes very to the detail as no one else is doing anything. By the way, we're going for the same margins across all segments. So we're not expecting to subsidize once that's done.

Got it. Got it. You spoke about two players with combined market share of 10% exiting the fleet business. So do we have timeline by what time they are planning to exit and has the sale already been announced or is it just the intention to exit?

So, they announced this on July 1st. They did not hold it with them. They announced it to the market through their agents. So, and that happened on July 1st, both of them. And as we mentioned, and also Tony expanded quite a bit on that, yes, they have come to 10% market share and we're not doing anything crazy to get to that market. It's going to be gradual, and as they renew, Qualitas will be there to offer a good value proposition, although we anticipate it's not going to be at the same price they got it last year.

But let me repeat that the benefit of that is really that it will become some sanity to the times in this part of the market.

Okay. If I heard correctly, this business, they are exiting by stopping issuance of policy. They are not selling this business, right?

Yeah. They are not going to do more underwriting those, and that's why the way they are. Obviously, the portfolio that they have, probably, we don't know if it's going to remain or not, but it's likely that it is gradually going to go down.

And it's not necessarily is heavy equipment.

most of the cases be related nobody's heavy equipment okay and lastly from the perspective of our market share gains this 10 which is up for grabs should we expect our next three four years our market share to be, let's say, 34%, 35%, maybe we get 3%, 4% of this. So, would that be a right expectation in three, four years' time?

I think it's a fair expectation. Obviously, we will try to be the insurer of choice for these customers that no longer have those options. Market share has never been our goal. So, I think it's a fair expectation that we may get some of that account if The pricing is right, and they're aiming for value, not necessarily just the cheapest. And I think we will see that in the next quarter. But I think in one to two years, let's see how other players react as well to this 10% market share, which will be up for grabs, as you said.

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

Good morning, Jose Antonio and Bernardo. Thank you for the presentation. This is Andres Soto from Santander. My first question is regarding competitive dynamics. It is clear that your competitors are struggling. It's quite impressive the number that you share regarding the underwriting result being positive just for one of them. But when I look at your market share, I see that your market share this quarter was at 30%. You had reported 32% last year. I'm not sure if that 32% referred to the end of last year or an average for last year. So that will probably be the first question. And understand within your segments where you see the more aggressive competition and if you expect this to change anytime soon.

Thank you, Andres, for joining the conference today. Let me tell you that there is some cyclicity or some seasonality on this thing on the market share. But as Bernardo indicated just a few minutes ago, we are not targeting market share. And it is very, very important for all of you to understand. We have always said that we are going to have service and the excellence in service that it is our key pillar in equality. As long as we do that, we will see the market share moving. We are not targeting for market share, and that's very important. The dynamics between sectors, I mean, it varies. I mean, it depends. I mean, you know that with the sales of new cars increased 22%. for the first half of the year, and it would depend on that. So we continue to be in the low 40s and mid 40s in terms of the heavy equipment. And the most important one are really fleets, the ones that are moving more. Because in fleets there was a huge competition in the last two or three years because some of the entrants wanted to grab a share of the market. Now they are exiting simply because it is not a city business to do. So the dynamics are that, but we are not targeting for share, and we are targeting for growth and profitable growth, which is why we have one of the best financial performances in the industry in Mexico.

Understood. My second question is related to the health insurance business. We saw some reserves being built already in your balance sheet, so I would like to understand how the business is progressing in terms of underwriting and any preliminary results that you can share with us.

Andres, just your first question. I think our share target for this year will be the same as last year and the same of next year, which is as high as it can be as long as it's profitable. So we have never had a number, and I don't think that we will ever set a number as profitable. Now, just on the second question on health, I think, as we said, it's an entry into a new market. Our intention over the first year was to learn how to trust, and we're doing so. Our product, Coupon Tivo, it's not only a product that is different, but it's also different to the ones that the market's different to what our agents have had in the past. So there's a learning process. And through this learning, we also have recognized that having collective, so for companies, was something that they wanted. So that's something that we have assessed, we have adjusted, we're now offering this. And I would say things are working as we planned them. There's not a major neither highlight to be shared on positive nor on the negative.

It's an ongoing process. It is a very small business. It is a very small business now. We had anticipated that over the next two or three years it's going to be small as we are not experts in that segment. We are learning. We are making sure that we can the right product. We are focusing on the, you know, the level CC plus for the population. So, this will take some time, and so far it does not have a significant in the next couple of years for overall results.

Perfect. Thank you. And finally, if I may, can you please repeat what are your expectations for a loss ratio and ROE for the full year 2023? The line was breaking up when you were making that comment.

Well, we did not disclose a specific number, but we said that has been consistent to the past is we will be ahead of the 62 to 65% range for the year. We're expecting more to be in the 68 to 70. But the last quarter, should yield some good reference of an indicator on what we will see in 2024, and that should be closer to the high end of our 1.62 to 65%. And for ROE, we remain on the slightly lower than 20%, likely this 18 to 20% for the end of the year.

Perfect. Thank you, Leonardo.

Thank you. Our next question, oh, actually, that hand was dropped, so I'm going to pass the mic over to Santiago Monroy. We'll be taking the Q&A box questions.

Thank you, Daniela. We'll start with the written questions. The first one comes from Javier Lozúa from Busa Fiction. Hi, thanks for taking my question. How much more will you need to raise prices to recover previous profitability levels, and when do you feel this could take place? Muchas gracias. Thank you, Javier. Let me tell you that... This is a dynamic process that we are having, clearly. And this is related to the cycle of the industry. If you look back to the last 14 years or so, there have been a couple of cycles. This is the third one in which the claims level and the combined index is at the highest. So it is a matter of time. Having said that, we have already priced to what we believe it's going to be the one that is okay. So it's not, it is something that as Bernard indicated earlier, we have many, many categories to include. And we have been doing that over the past, over the last year, last month at least. So we will see the benefits of the latest increases in the next three to six months. And we are we expect that we are going to be seeing that very soon. So I believe also Bernardo mentioned that we are going to be at the beginning of next year, by the end of this year, at the beginning of 2024, we are going to be in what we expect to be, as you said, to recover our profitability from the operating side. It was Antonio Hugo with the second question from David Seaman. Could you please discuss your view of the direct-to-consumer channel? What do you think needs to happen for this to become a more compelling channel for the individual segment in Mexico, and how might Qualitas position here to align the organization? Thanks.

Thank you, David. I think we alluded that Qualitas is an omni-channel. No, we certainly prefer our aging channel, which has been the one reason where Qualitas has found a better way to reach consumers. Now, we have offered for many years direct channel that currently represents around 3% of the business, and we believe this is not something related to Qualitas or insurance actions, but more in the It's an embedded tradition and the way Latin America and including Mexico has seek its insurance. We look at agents as a way to provide advice and also as a reference so we don't fall into the trap of price. So I think changing behaviors may take decades. And as a proof of that is over the past five years that we have had this direct consumer channel it still represents a very marginal piece of our business.

Let me add to that one that we are not selecting a way in which we distribute the products. We offer all channels to make sure that our consumers pick the one that best suits their needs. But as Bernardo said, this is more of an idiosyncratic, if you will, way in which we the market works. But again, we offer all possibilities to our potential customers, so we are not forcing anything onto them. We'll go with the next question from Inigo Vega from Jefferies. How do you see your operating margin to finance operating profit to earn premiums over the next 12 months? Thank you.

It's still going to be low. I think it's in the low single digits. It will sequentially continue to improve. I think we currently stand at 2.5%. We do expect that to partially increase in the next quarter, but it's not going to be above that mid-single digit.

Thank you very much. I think we have time. for one extra, one more question. It's anonymous. With more than a few questions that I would like to, I would like to like and be thankful for a quick address within P&A. If negotiations with suppliers have been already taking place, when it could be fair to expect this to have a positive effect on the performance of plane costs? Could you please develop further about performance within Peru and São Paulo and the U.S. divisions? And how a larger share of electric vehicles within insured units could affect the operation of the business and characteristics of insurance terms and conditions? Okay. Let me say the first one about the positive effect of suppliers. This is really something that we have been working on. Clearly, we work with all manufacturers, all car manufacturers. of all of them. And they have different ways to manage. Clearly, what we have been doing is we are closer as the largest car insurer in Mexico. They listen, so to speak. And this year, they have increased costs despite the fact that the dollar or the peso has appreciated, not So we talked to them and they told us that they do that for the whole country. But because of our size and the way we manage, we are able to get very better conditions for that. So it is difficult to say as we have, you know, dozens and dozens of manufacturers we work with, but with the largest ones, we are having a good progress on this. And obviously, the effect on claims cost will be gradual, as I have indicated earlier.

I'll take the next two questions. First, on the international perspective, as I mentioned, what is Latin American countries, El Salvador, Costa Rica, and Peru, they're doing very well. They grew over 50% in local currency. We're gaining share. We're making the business profitable, just as I referenced. reference Costa Rica for the first time, which 15% market share, and all of them are growing units over 25%. So I think they're in good shape, they're accelerating, and we're very happy with the products. Now in the US, it's a turnaround story. They're down 22% for the quarter. And when you see the mix, it's exactly as we would have hoped, or planned. The domestic products are down 57%, so we're selling less than half of what it used to have, while the cross-border is up 15%. So I think that is the way we expect the business to continue evolving as we seek for going back to roots, having a cross-border or binational point of difference, and that's where we have a right to win and a competitor. And just very quickly on the last point, how would a larger share of electric vehicles with the insuring units could affect the operation? I think it's a reality that we will continue to see hybrid and electric vehicles taking a bigger percentage of the new car sales. We are learning. We are positioning Qualitas to be the insurer of choice. And we do not have a different goal in terms of profitability for electric vehicles than we have for the bankers. So as I said, it's a learning process. Even our auto shops and dealers are learning how to beat any damage for the car. But I think quality does once again prove that we have this scale on the right.

Thank you. That's all the time we have for questions today. However, if we couldn't get around to answering your question at this time, please contact Juanita's IR department, who will gladly discuss these with you. This concludes today's conference call. Thank you for participating, and have a pleasant day.