Qualitas Controladra Sab

Thank you for standing by. This is the conference operator. Good morning and welcome to Qualitas' third quarter 23 earnings results webcast. The conference will begin now. It is my pleasure to turn the call over to Andrea Gonzalez, Qualitas' IR manager.

Good morning and thank you for joining Qualitas' third quarter and nine months 2024 earnings goal. Jose Antonio Correa, our CEO, and Roberto Araujo, our CFO, are joining us today. As a reminder, discussions in this event may include forward-looking statements. These statements are based on management current expectations. They 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 Jose Antonio Correa, our CEO, for his remarks.

Thank you, Andrea, and good morning, everyone. As mentioned in prior calls, this year we are celebrating our 30-year anniversary, of which we have been leaders for the past 18 years, by maintaining our focus, agility, and flexibility, while continuing to provide the best-in-class service and actively listening to our agents and policyholders. Our company has shown exceptional resilience over the past three decades, successfully navigating the range of economic and political climates while thriving in highly competitive environments. A true example of this are latest auto insurance industry figures, which reflect that Qualitas is not only the leader in terms of written premium market share, with a record high of 33.1% participation, but also show that Qualitas represents 83% of the total undergraduate industry results and 44% of the industry net result, posting the best combined ratio within the top five companies. we still believe in the potential of more profitable growth to come. These remarkable stats reflect Qualitas' commitment to create value, and I would highlight the importance of the unique and close relationship we have with our more than 22,000 non-exclusive agents, who represent two-thirds of year-to-date written premiums. In September, Qualitas Mexico was awarded the fifth consecutive year with the title of La Aseguradora Ideal, or the Ideal Insurance Company, by a specialized magazine where agents themselves are the voters. Honored and motivated by this distinction throughout this quarter, Qualitas C-Suite, me included, held several seminars with agents across Mexico over the past several months. We cover multiple regions, including the Central Zone, the North, and the Bajio, with over 4,000 agents participating and getting important information about new tools, products, and changes in processes to become better and faster. We are grateful to each one of them for their presence, unwavering commitment, and most of all, for their transparent feedback on opportunities where we can further develop as a company and improve our service and products. Now, let me dive into our nine-month performance, and as I mentioned throughout this year, we see 2024 as a year of two tails. A first half that has reflected a strong momentum in terms of underwriting, and a second half where we recognize we will have a more cautious consumer behavior with lower benefit from pricing. Quarterly speaking, we achieved 24% growth ahead of our expectations, taking year to date to a 30% growth. With that in mind, the nine months of new car sales resulted in a 10.5% increase versus the same period last year. with September posting a slowdown in the pace for the first time in 28 months, with a 1.4% decrease in growth versus the same month of 2023. As of today, AMDA adjusted its annual growth estimates to around 11%. Despite these early signs of change in growth pace, which will continue to be positive but not as steep as prior years, and with our current network of more than 578 service offices and ODQs, plus Qualitas cost efficiency efforts, we foresee significant opportunities to keep on delivering positive margins and ROE levels within targets. Before I hand it over to Roberto, our CFO, we communicated to the market in early August a cybersecurity incident for which we activated our information technology protocol and implemented our protection and response controls. Qualitas operation and service to policyholders remain uninterrupted through backup procedures and maintain underwriting activity. Thanks to our preventive measures, the company avoided any material impact, proof of that is solid quarterly results already being discussed. Recognizing this is a risk that will prevail across industries and countries, we have strengthened our team, including external advisors. And furthermore, we will continue to leverage our ability to create value. enabling us to anticipate challenges and seizing opportunities by positioning Qualitas capabilities to deliver strong returns for our shareholders and establish a solid long-term investment opportunity. Our enduring spirit of resilience not only shapes our history, but also empowers us to navigate the present landscape with confidence and to move toward a prosperous future. And with that, let me pass it on over to Roberto. Roberto, please.

Thank you, José Antonio, and good morning, everyone. Our results continue to reflect solid top-line performance and a combined ratio within our long-term range, underscoring the company's ability to deliver results. Our primary focus remains and will continue to be on providing short- and long-term value. Let me provide you with more details about our performance. Gritten premiums were up 23.9% for the quarter and 29.6 year-to-date, with the traditional segment accounting for 67% of our total gritten premiums, growing at the rate of 23% for the quarter and 33% year-to-date. From this segment, our fleet business stands out with a quarterly increase of 26% and year-to-date of 41%. Lastly, financial institutions, which accounted for 28% of total written premiums on accumulative terms, portrayed consistent growth rates of 27% for both the quarter and for the first nine months of the year. As Jose Antonio alluded earlier, we have seen early signs of a turn towards an easing in top line trend. The third quarter on the riding growth has started to deaccelerate versus the 28% growth experienced in previous quarter, given the sequential slowdown from the 2023 pricing benefits. We do expect to see more deacceleration in the months to come. And while we continue to adjust prices, our increases will be more in line with local and industry inflation, expected to be at mid-single digits. Still, the current growth trend makes us believe we will be able to reach a 20-25% growth for the full year, which is remarkable growth pace within the current macro landscape. Year-to-date, written premiums from international subsidiaries represented 5.4% of the total holding company underwriting. As reported, LATAM subsidiaries were up 25.5% and in line with our strategy, the U.S. subsidiary is focusing on reshaping the mix towards being profitable, resulting in premiums diminishing 9.3% year-to-date as well. As a reference, our international subsidiaries each quarter reach positive milestones. For example, our Peruvian subsidiary is a true craze of growth and value creation. Our written premiums grew 63% and 30% quarterly and year-to-date respectively. We inaugurated our sixth service office in Ciudad Trujillo, the third most relevant city in that country. We now have more than 700 agents working with Qualitas in the region, which is a 12% increase versus the same period of last year. Enhancing market presence and providing Qualitas has been capable of identifying areas for development and capitalizing on opportunities. Also, it is worth celebrating the credit rating improvement for both our Costa Rican and Salvador subsidiaries. In the US, our focus strategy is on track. Our portfolio composition by September end was only 6.6% domestic. Cross-border portfolio has shown a 63% increase during this third quarter compared to the same period 2023. This quarter, we made an additional reserves composition based on our external actual team recommendation. And as I mentioned before, we expect to reach a break-even performance by 2026. Having knowledge of the business profitability and the low permutation, we believe the opportunity to continue operating the cross-border niche in which we have no more than 25% of market share at the moment, and we consider it a tactical growth opportunity for our company. We're making a cross-sales effort looking to create synergies between clients we have in Mexico that may require, have or need this cross-border product and currently that are not attended by us. Knowing shifting gears will take time, but we are confident on our capacity to deliver a positive outcome from this. Including all subsidiaries, we close the quarter with almost 5.7 million insured units, which represents a new record high for the company, 366,000 additional units during the first nine months of the year. Back to our financials. Earned premiums were up 20.1% for the quarter and 25.6% in cumulative terms, reflecting a reserves constitution in line with our solid top-line growth pace. During third quarter, we constituted 814 million reserves, that represents 548 million pesos, more than the third quarter of last year, Closing the first nine months of the year, which a constitution of 3.6 billion reserves that represents 2 billion pesos more than the same period of last year. Technical reserves constitution is based on approved regulatory models and speak to the high premiums growth. They have helped our investment portfolio size and should expect to see earned premiums grow at a higher pace once the growth stabilizes. Now, moving to our costs. The claims ratio stood at 69.2% for the quarter and at 66.4% year-to-date. This quarterly ratio posted a 3.5 percentage points increase versus second quarter. This increase is aligned to our expectations considering the heavy rains seasonality and extraordinary unit gains taking place every year in Q3. which was particularly evident during last September when Mexican Coast experienced three hurricanes, for which claims attendance related to weather events increased 50% versus third quarter 2023. At this point, cumulative hurricanes represent up to 600 claims cases for the company, for which we have composed reserves accordingly, but it's important to read its magnitude. In terms of claims, they represent only 20% of hurricane OTs from last year. An additional factor is still impacting our cost costs are spare parts and repairment prices. Our average claim cost for the quarter increased 6% versus the same period of last year. And year to date, we have seen average cost of spare parts increase of 7% reflecting supply chain constraints and freight cost is still hitting prices given the supply and demand and reflecting prices to behave above inflation rate. Our Mexican subsidiary posted a quarterly 67.6% loss ratio, a 1.7 percentage point decrease versus same period a year ago, and a 64.9% year-to-date ratio, a 5 percentage point noticeable improvement versus last year, which is quite consistent to our loss ratio target range. Throughout this year, we have witnessed a 16% Mexican peso depreciation, leading to many inquiries regarding its impact on our costs. As mentioned before, FX does not immediately distress our costs. The correlation between currency depreciation and our costs is not linear. Prices for spare parts are determined by supply and demand, commodity prices, and shipping costs. Therefore, despite recognizing that from our total claims costs, 50% are related to material damages and from those, 20 to 25% are related to imports of spare parts and others, it is still too early to assess the true impact of FX volatility on our overall costs, but we remain diligent for any rate adjustments. Regarding thefts, year-to-date robberies have increased 3% for Qualitas and have remained almost neutral for the industry. Remember that these stats reflect our higher units growth versus industry and the leading market share, especially in the heavy equipment segment where we have almost 45% market share. And they also reflect our insured motorcycles that increase number of units but have a lower insured value. Nevertheless, we are not only market leaders in terms of share, but also in terms of risk management and prevention, Qualitas Recovery Rates stands at 41.4%, outperforming the rest of the industry. Moving on to our acquisition ratio, it stands at 22.7% for the quarter and 22.3% in the cumulative terms. in line with our historical range. Commissions remained unchanged, and by September end, our portfolio composition was 81% annual and 19% multi-year policies. Then, our operating ratio for the quarter stood at 3.8% and at 4.2% in cumulative terms, year to date, employee profit sharing provision has doubled itself given the positive performance of our company. However, if we were to exclude this provision that by law must be incorporated into our operating expenses, the ratio would have stood at 3.3% for the quarter and a 3.1% in cumulative terms in line with our historical range. All of the above resulted in a combined ratio of 95.6% for the quarter and a 92.9% in cumulative terms. When incorporating this quarter's loss ratio seasonality, our year to date combined ratio is entirely within our 92 to 94% target, which speaks to the undergriding discipline and our ability to continue growing profitably. Now, moving to the financial side of our business. Investment income grew 16% for the quarter and 18% year to date. We continue to be mainly invested in fixed income representing 87% of our 49 billion pesos total portfolio with an average duration of 1.6 years and a 9.3% year to maturity. In the case of our Mexican subsidiary, the yield to maturity stands at 10.2%. we expect to close the year with a duration around 1.7 years. With the current portfolio composition, for each 25 basis points that rates decrease, the impact on our portfolio valuation is around 178 million pesos on an annual basis. The remaining of our portfolio is invested in equities, mostly placed on ETFs following the US market and other global markets. Only 3% of our equity portfolio is invested in Mexican rates, even we believe they create value through their attractive dividend distribution. All our investment assets follow accounting guidelines classified as available for sale, so their performance, whether gains or losses, is considered on our balance sheet until they are realized. We deliver an investment income of 1 billion pesos during the quarter and a 2.9 billion year-to-date, implying an 8.7% and an 8.8% quarterly and year-to-date ROI, respectively. Year to date, unrealized gains are in the magnitude of 1.3 billion pesos, including FX benefit. When considering all positions as market to market, ROI would stand at 12.6% year to date. Around 22% of our portfolio is invested in US dollars, given our international presence. For every peso that FX appreciates or depreciates, the estimated annual impact is 560 million pesos playing as a natural hedge for FX depreciation. Third quarter effective tax rate stood at 30% and 32.8% in cumulative terms, which shows more normalized levels reached throughout the year, given we're no longer experiencing inflation benefits. We should expect normal levels to be around 30%. All in all, Qualitas posted a 1.1 billion net income for the quarter and a 3.7 billion net income year-to-date, with a 7% and a 7.8% net margin respectively. Our 12-month ROE stood at 22.4%, already within our long-term target. We are proud of the performance that our team has delivered, driving industry leading profitability. We're executing against the strategy with earnings durability and capital efficiency. Qualitas is well positioned to maintain industry leadership operationally and financially. Our regulatory capital stood at 5.3 billion with a solvency margin of 15.8 billion pesos equivalent to 398% solvency ratio. Recent capital allocation determines our 12 months earned premium to capital ratio at 2.5X. Now, as an update from Qualitas Capital Allocation and Corporate Development Plan, last week we announced the acquisition of a glass spare parts and automated paint distribution company, a transaction of around 500 million pesos. This acquisition strengthens our unique vertical integration, complementing the potential of our subsidiary FLEC by expanding our national coverage network of branches with inventory and systems to provide the highest level of distribution and logistics, by increasing our e-commerce sales, by adding automated painting services to our portfolio, and by increasing our client portfolio for glass distribution and repairments. Regarding geographical expansion, Qualitas Colombia is moving in the right direction, making progress on final legal authorization with the expectation to start operations in the next 3 to 4 months. The team is currently working on many initiatives to strive assertively the Colombian market, which represents a new avenue to access more than 70 million units and a growing industry. As of 2023, the market had a notable increase of 12% year over year growth on written premiums. We believe Qualitas business models represent the perfect fit for a market such as Colombia. Now, before entering into our Q&A session, it is worth mentioning there is no news from the fiscal authority regarding the audit procedures and the VAT interpretation. This matter continues under assessment in the corresponding instances, and we have not received any conclusive or final resolution. Qualitas' position stands firm with the corresponding legal arguments to support the industry criteria, and those we trust authorities will reach a reasonable resolution. As mentioned before, we will timely communicate any relevant progress to the market. In summary, we had another record-setting quarter in many different fronts, and we're well-positioned to continue producing outstanding results going forward. Underwriting conditions overall continue to be favorable, thus we're confident in our ability to continue delivering on-target earnings through our top-line growth, underwriting margins, and investment income. I would like to conclude my remarks by recognizing the resilience and daily adaptability demonstrated by Qualitas people. It is simply outstanding. As I start my journey with Qualitas, being already three months into the role, I am proud and honored to be part of the senior leadership team that is fully committed to pursuing true value creation for the company's stakeholders, including our customers, our workforce, shareholders, and the communities we serve. And now operator, please open the line for questions. Thank you.

Thank you. We will now begin the question and answer session. To join the question queue, you may press the raise your hand button in your screen and we'll be opening the mic for you. Or you can send it through the Q&A chat. To withdraw your question, please press that button once again. We will pause for a moment as callers join the queue. Our first question comes from Andres Soto. Please state your company name and then ask your question.

Good morning, Jose Antonio Roberto. Thank you so much for this presentation. I have a question related to your loss ratio or specifically your claims this quarter. If you guys can please help me break down the performance in terms of claims What is attributable to weather? What is the normal claim related to inflation pressures that you mentioned before? And how much is related to the additional reserves that you are making for your U.S. operations?

Good morning, Andrés. Thanks for the question. Certainly a loss ratio and the claims cost is a question that will come to mind to all our investors. As we have shared previously, we would have expected a Q3 with high seasonality. We know that heavy rains and hurricanes are always present in Q3. Getting to your question, I would say that one third of that impact was coming from the U.S., one-third was coming from whether it was seasonality, and one-third would come from either claim cost or spare part increases. Now, let's put it also in perspective. When we look towards the previous year decrease, we see a significant improvement versus last year. And also when we look at our Mexican subsidiary loss ratio on a year-to-date basis, we look at 64.9% within our loss ratio target. Hope that answers your question.

Absolutely, Jose Antonio. Thank you. Thank you so much. And when you look ahead, should we expect improvement at the same pace that you were delivering in the second quarter? Or you believe that the big improvement in loss ratio is already over and you are already reaching sort of normalized levels at this point?

Let me say, Andres, that we clearly, and as Roberto mentioned, this is a seasonality impact that, you know, we usually have in the third quarter, no? And, you know, Roberto addressed, you know, the causes of that. But you see, I mean, heavy rains and hurricanes. were particularly high over the past literally four weeks or so. So it has had a significant impact. Now, having said that, I do expect that they will return to lower levels as has in the past. But also as Roberto indicated, it is important to mention that we are well within the targets for the year that we have set in terms of where we would be in the combined ratio as well as in the claims ratio. So yes, more specifically, we should be declining to target levels.

And when you combine this with your market share evolution, you had said in the past, you know, you guys are not focused on market share, you are focused on profitability. If I look at the second quarter numbers and compare with those of the industry, I see that you have gained 240 basis points of market share at that point over the past year, and even on a quarterly basis, one additional percentage point. And you are mentioning that you don't expect significant price increases, but what would be the reason not to increase prices if you are capturing additional share and you are seeing other sources of pressure in terms of load ratio?

Okay, let me start addressing that, Andres, and telling you that as we have said, and this is an interesting question because we have always discussed that we are not aiming for market share. we are always said and will continue to do is to improve service in any way we can. And all our efforts are geared to make sure that the service is to the levels that our clients and customers and policy holders expect. And that will continue to be our guiding principles, so to speak. But let me tell you that because of that, you know, policyholders prefer white to some extent. So regarding the price part of your question is that we have taken significant increases over the past, now already, you know, 2018. to almost 24 months. So we should be that. And we indicated that in the past two calls and where we said that this year was gonna be a story of two years, with the first half still getting the benefit of the frankly high increases that we have late last year. But now, yeah, we see that the market is softening on that regard. And first of all, we have seen the decline in terms of the claims index. So the combined, also the combined ratio is going back to levels that we anticipate to be a target once. So we don't see the need to that. And I can tell you that I can see, you know, there has been pressure in the market. We have in the heavy equipment, we have increased very substantially pricing. obviously to recoup claims costs and in the in the in the auto business uh it has been uh the market has uh i've seen an increase in in in competition in terms of of uh pushing prices uh not uh so high so so we continue to see that that will allow us or that will make us not to uh be able to increase prices significantly but the important part in all of these uh andres is the fact that we are going to our target levels in both the claims index and combined ratio. I don't know, Roberto, do you want to expand?

Maybe just to complement, I think it's all about service. And despite the Q3 combined ratio, overall in the long term, we're delivering a Carlos Zarazaga- Profitable combined ratio within our target and actually that is helping us combined with profitable business and service is giving us more units and we're increasing our share so it's a perfect equation to to continue moving forward.

Carlos Zarazaga- Thank you, thank you so much for the answers.

Our next question comes from Tiago Bauda. Please state your company name and then ask your question.

Hi, Andrea. Thanks for the opportunity. Hi, Jose. Hi, Roberto. Glad to talk to you again. I have two questions from my side, if I may. The first one is still on the loss ratio theme here. I understand we saw a spike in claims due to the weather seasonality in Mexico this quarter. But if we take a look only at the contribution to the loss ratio from outside of Mexico, it has also increased sequentially. You mentioned a higher contribution from provisions from the US subsidiary. So I just want to further understand if this additional provision is some kind of trend, or if you should expect a deceleration on that front as well, driving to a faster decline in the loss ratio in the short term. And the second question is related to top line growth. In Q2, Jose Antonio mentioned that Qualitas should land a year in the low to mid 20s growth. as we should see a slowdown in the second half of the year. And in fact, Q3 decelerated a lot versus the first half of the year, but it was still strong, 24% year-over-year growth and ahead of our expectations, as you mentioned. So just double checking here if the outlook remains the same, because it would suggest a big deceleration in the last quarter of the year and what to expect for the year to come for 2025. Thanks.

Let me take the second one first. Tiago, thanks for joining us in the conference. And right here, the top-line growth, let me tell you that we have been somewhat surprised in the growth that we have, both in 2023, which was a significant growth, to recoup, obviously, claims costs. In 2024, there was some impact regarding the momentum that we have in pricing. But let me tell you that, yeah, the third quarter was a little bit of a nice surprise in terms that our business continues to go strong. And I still see that what I said earlier, I mean, in prior calls, that we are going to be in the low 20s and then the low 20s. Still, I think that this quarter, we should also be showing decent growth rates. And I would expect that for 2025, mostly, we should return to levels more in the low 10s, as has been historically. Historically, we have grown Pablo De Leon- Around the you know, a Danish in the past in the in the past years, but I believe that these these increase in terms of the cost increases of cars. Pablo De Leon- The cost increase of trucks, etc, which has got because of technology, they have increased significantly over the past 24 months. it's now leveling off. So we should be having this top line growth also going to levels closer to the low tens. Now, well, that's what I would say in terms of the top line growth. Additionally, usually important to note also is the economy. Typically in our business, we grow around three times the GDP of the economy. And as you all know, the Mexican economy is softening. This year is expected to be around 1.5, the growth of GDP growth. And for next year, it's even expected to go a little bit lower, like 1.2, around the 1.2, 1.4. depending who you ask. So yes, all these elements make that, you know, we will return to, let's call it historical levels in terms of the growth for the top line growth in 2025. Having said that, we will continue to manage our business to having the targets that we have set for both claims ratio and combined ratio. But very importantly, Thiago, is that we are committed to our ROE. As you can see, the ROE that we have for the reported results, it's about the 20%, and it is very well within what we have anticipated, which is our long-term target. So that's the way I would answer the part of the top line. I don't know, Roberto, you want to take the loss ratio?

Yes, absolutely. Thanks, Thiago, for the question. And going to your claims ratio, I think you're referring mostly on the international or the Latin American subsidiaries, including the U.S. And a big portion of that delta comes from the U.S., as I alluded earlier. So one point percentage point of that comes from making the reserves from our actual recommendation, from actual team recommendation. And what we've seen is certainly the cross-border beach of our business is certainly growing. despite that we still have opportunities on our domestic business. Just to give you a reference of what has been decreasing in our domestic business, by September end, in 2023, we had a 35% composition of our business for domestic and 6.6% of our portfolio is currently domestic. are reserving for those legal cases that are still in provisions and that we have a liability. And therefore, to your questions on moving forward, what should we expect on our international subsidiaries in the US? We should expect continuous reserves adjustments depending on how the trials and the liabilities come in as well. But when we look at Mexico loss ratio, we sincerely as already Jose Antonio alluded earlier, we should expect to see a improvement in Q4. given the seasonality. And remember, in the US, it's something that it should not be a surprise. This is something that we're turning around. We are seeing a improvement, but still we have work to do and we'll see losses in 2024, 2025, and we'll be back on track and break even in 2026.

So something to just- Just let me add what Roberto indicated because it is important and I'm glad that he mentioned the 2026 because as we have discussed over the past four or more quarters, The US strategy has been to refocus on the cross-border business, and we are, as Roberto indicated, we're moving very well into that direction. Also, we have indicated that the strategy calls, in addition for the cross-border business which we are executing, we have a stringent organization, and remember that we had a new CEO last year, and we have teams in claims, etc., And we will continue to adjust tariffs. So let me tell you that we are on track for the strategy that we have set for the U.S. over the past year and a half or so.

Super clear, José Antonio. Roberto, thanks very much.

Thank you. Our next question comes from Jitendra Singh from HSBC. Hi.

Hello, can you hear me?

Yes, we can hear you.

Okay. Hi, everyone. Thank you for taking my question. So I have two quick questions. One on your operating cost ratio. So it has been higher in nine months, around 4%. And we know this is mostly due to profit sharing. Do you think this is the level we should expect in coming quarters or next year? Because I think the historical level has been slightly lower. And second question is on your recent acquisition. I mean, how this new acquisition will complement PLEC, and are there concerns about overlapping services or competition between the two subsidiaries? Thank you.

Thank you, Chitra. Great question. So let me address the first one on operating ratio. As you pointed out, our operation ratio for the quarter is still at 3.8% on a quarterly basis and 4.2 on a year-to-date basis. A portion of that is related to profit sharing, as we've been sharing. As we are more profitable in our business, we give that back as part of our regulatory requirements as a profit sharing bonus to the employees. So to your question of how should we move this forward? As long as we keep within our range of 92 to 94%, we'll continue to see significant provisions on profit sharing. Let's also keep in mind that if you exclude these profit sharing impacts, From a 3.8 on the quarter, it would be 3.3, as I explained before. And also from a 4.2%, we'll be dropping almost a point of to 3.1. So that should be, Also related to operating expenses, there is the service office professional fees that also impacts our operating ratio. And it also is linked to our profitability. So the more profitable we are, we will be also accruing for those and we will pay those for our service offices. So the equation should be the more profitable we'll see the operating ratio on a variable will continue to be reflected in our income statements. Hope that answers your question.

Let me add to Roberto's comment on that one. Clearly, we have increased a certain level of cost in terms of the operating ratio in order to keep and to maintain a good level of service. The important part here is that the way we internally measure the operating expense is more between the 3% and 4% that we always indicate to you as a target without the profit sharing. Because the profit sharing, I mean, you could argue that the best the company does, that is going to increase, which is nice to have problems, so to speak. But to me, the important thing is that we are targeting between the three and 4%. And over the past 18 months, I would say we have increased some, we have strengthened in some areas in the company to maintain a good level of service. And we will continue to do so. So going forward and excluding the Profit sharing, which should be, again, as we have said, between the 3% and 4%, and that is the way we will be moving in that range. Now, you asked a second question, which I couldn't understand very well. Can you repeat? And it's related to the acquisition, I believe. Can you explain?

Yes, so I think my question was related to this, like how this complements FLEC and are there concerns about overlapping services or maybe the competition between these two, FLEC and the new acquisition?

No, well, let me tell you that. First of all, we inquired as we're very pleased about having completed this acquisition. And that's part of our vertical integration. And we're very pleased with that because something that I didn't mention is that clearly we have mentioned before, but not in this call is the fact that we continue to be very cost-conscious and we will continue to execute being that part. So that gets into the strategy of making sure that we remain very competitive cost-wise, no? So let me tell you that I'm very happy about this. It took a little bit longer time than we wanted, but this is a company that has a lot of experience. It's a lot of experience and has a strong market presence across all Mexico. They have more than probably in a hundred locations, et cetera. And it adds a number of things that we can do. So that it should help us into, into several things, you know, including generic equipment and some other repair stuff. So I think that they established pretty, pretty, pretty well within the FLEC strategy and that to service both, you know, quality service as other insurance companies. and it will continue to provide service the way they have been doing it. And we will obviously gradually incorporate the learners that we have within Qualitas to be able to have better costs for all the companies that use the FLEC services.

Okay, thank you.

Thank you. Our next question comes from Tiago Binsfield. State your company name and then ask your question.

Hi, good morning. Jose Antonio, Roberto, Andrea. Thank you for the call and take care of questions. We have two questions from our side. The first one on financial results. Can you discuss a little bit what drove the increase in the investment portfolio balance from the second quarter to the third quarter? and also how you're thinking in terms of asset allocation mix. And if you could also remind us your expectation for interest rates this year and also for 2025. And then I can ask my second question later. Thank you.

Regarding your first question, thank you, Thiago. Good morning. What we saw is, as I alluded in my remarks, we saw a double-digit growth in our investment income. at a 16% versus their previous quarter and also in an 80% year to date. We remember we have 87% of our portfolio is on a fixed out of our 49 billion pesos total portfolio with a duration of 1.6 and a 9.3 yield to maturity. We believe that what is reflected in our income statement is only on the market and it's available for sale, a portfolio on our equities. Let's keep in mind that also a portion of that When we look at our market to market, we would be seeing a much higher return on our investments. actually would have been at a 12.6% on a year-to-date basis. That in our balance sheet is reflecting a 1.3 billion pesos, including our FX benefit. Going to the second part of your question is getting to how do we see our overall rate for the following year? Given that we have a 1.6, 1.7, currently 1.6 for our target is to land at 1.7, year's duration by the end of the year, we would continue to see a good return on our investments in 2025. And we're probably going to see a decline in 2026. But again, it's depending on how the interest rates will play out. Also, part of our comments were, if we were to, for every 25 basis points that the interest rate will decline, will be having an impact in our fixed portfolio of 178 million pesos moving forward. So we'll have to see how that rates adjust over time, but certainly we'll continue to see at least in 2025, a good investment income resulting from our portfolio.

Let me add to Roberto that as we, over the past three years or so, the strategy was to have a very short duration back in 2021, and we started changing that in 2022 and 2023. At the time, you know, the rates that we were having were around 5% or so. And now we move to around the 10%. And the important thing is that as we move over the past, let's call it the past 12 months or 18 months, we are closer to the 10th. And the duration, as Roberto indicated, is that we are, let's call it, quote, unquote, covered for 2025.

Thank you. This is clear. And if I may, a second question as well. We saw the acquisition ratio picking up a bit. So can you detail a little bit more? I mean, I think you mentioned in the release there were no changes in the commission space. So is this mostly a reflection of mix? And how do you expect this to evolve in the coming quarters? Thank you.

That is mostly a reflection of mix. We have not changed any of our commissions in the company. We maintain that this is something that we continue to debate with customers, but we are very clear that we cannot go that route. So it is mostly a mix situation that we have. Yeah.

OK, understood. Thank you so much.

Thank you. We only have time for one last question today. For Ernesto Gabilondo, please state your company name and then ask your question.

Thank you, Ernesto Gabilondo from Bank of America. Hi, good morning, Jose Antonio and Roberto. So my first question will be a follow up on your loss ratio. As you mentioned in your press release, deaths in autos increased during the quarter because of elections. So how much do you think is related to the depreciation of the peso against the dollar? I remember in the past, deaths were stealing the cars and then selling the auto parts in the black market. So is this the same trend that you saw this quarter? And on the other hand, how much of your loss ratio is related to spare part costs or auto parts? I think I heard Roberto saying around 25%, so I just wanted to double check. And I remember that the auto part prices are not in dollars, but they move similar to the changes in the dollar. Do you have a sensitivity analysis of what could be the impact if we have a sustained depreciation of the dollar in 12 months in your loss ratio? Anything that you can share from what happened in other periods, like when the peso depreciated last time, I think would be very helpful. And then I have a question on your capital allocation. So you are returning buybacks, dividends, but at the same time, you're expanding into new regions, doing M&A activity, the recent acquisition. And then at some point you will have the impact of lower rates in your capital. As you mentioned, now you have all the securities are classified as available for sale. So can you elaborate on how should we think about the distribution of your capital? Meaning, for example, your dividend policy, if we should think about mid-range, buyback, what could be the size, how much extra do you have for M&A, how much are you allocating for the health product or for new products? Anything on that I think will be helpful. And then lastly, on the litigation process on the VAT. So as you mentioned, there are no any additional comments, but Just wanted to hear if your external auditors continuing to recommend not to provision anything. And also, if you have some visibility, if there could be a potential first resolution against any other auto insurance company that could be taken as a reference for Qualitas and for the sector. So any timeline on that? will also be very helpful. So thank you again. And just because of timing, I prefer to do all the questions at the same time.

Yes. Yes. Yes. Thank you. Thank you, Ernesto. And good to have you with us. Let me take the last two questions. The other ones were somehow discussed, and Roberto will talk about them. But let me talk about the capital allocation. I would say that in terms of dividend, clearly, you know that we have the policy of 9% of the profits and I expect that to be the case for the results of this year, no? Now, regarding the acquisitions and the capital that we have used for some of the acquisitions that we have been doing, what we have been doing with the latest acquisition in Qualitas Salud and now Qualitas Colombia, I would say that in terms of acquisitions, we are pretty much what we have on our plate. we don't foresee anything further. Obviously, we are going to be ready for opportunities, but at this point in time, I think that we have our plate pretty full on making sure that what we have works well. Now, in terms of using capital, yeah, it is within, you know, vote for Colombia, stand for quality of the salute. It is along the levels that we have been using over the past 24 months or so, I don't see any particular thing. Now, to me, the important thing in this part of the capital of our potential, you know, special dividend, it is too early to tell in the sense that GVP is slowing in Mexico. We have some items related to the elections that just happened in Mexico in June. And we are waiting to see what happens with elections in the US. There has been some discussions about the free trade agreement, et cetera. So we want to be very cautious on the capital, on distributing additional areas. But for the policy that we have, we would surely recommend to the general assembly to go with that, obviously to the board to do that. So that should be the way in which we would deal with capital allocation short term. Now, regarding value-added tax, let me tell you that there are no new news in this one. We are not providing for any provision, neither Qualitas nor any of the insurance companies that have been audited by the tax authorities. And in terms of, you ask about potential first resolution, we don't know anything about a potential resolution, but let me tell you that I am personally very involved with industry and with the sector to make sure that you know, the new government is aware of the situation of that and how what we see in terms of the legal way, which has been actually worked in the past. So I am very close to that. And we will continue working with industry to make sure that this is done right. And now we are confident that our authorities will be listening somehow. And it's simply, we need to wait for a resolution. But let me tell you that we are very much on top of this situation. And certainly I do not expect anything in the short term to impact our results. And Roberto, do you want to take the other ones?

Sure. So thank you, Ernesto. Let me go on your second question with just a clarifying. It's one-third on the same seasonality, one-third on spare parts, and one-third of the impact on the U.S. Going to robberies, what we've seen is, yes, quality has seen an increase versus in the Q and in the year-to-date. However, let's keep in mind our recovery rate, which is much improvement from the industry. And overall, the robberies have been decreasing over time. Just to give you a sense, in the whole industry, when we compare third quarter 2023 to 2019, overall, ochre figures have decreased 30%, while we have been able to decrease, but also increase our recovery rate. And what was the third question related to?

Depreciation.

Depreciation, yes. F. Ponta and Apurva P. The depreciation of PESO has been a constant question since we've seen a depreciation of 16% on a year to date basis now just keep in mind that in claims we get. F. Ponta and Apurva P. 50% of our claims cost is related to material damages. And out of that 50%, between 20 to 25% are related to imports. So there is an impact, but it's still not an immediate impact that we'll see in our P&L. What is gonna happen is there is inventory in the market and depending on how that place, that portion of the spare parts are reflected into the market and inflation starts coming in, we're certainly gonna see prices slightly going up and also we will be adjusting prices or rates accordingly. So it's still open for debate as to how that is going to play out. Remember, when we were last year at the 16 pesos per dollar, we didn't really see so much of that inflation going down or prices going down. Still, there is some margin that the spare parts distribution companies will still have in play. Hope that answered your question, Ernesto.

No, yes, very helpful. Thank you very much, Roberto and José Antonio.

Thank you, guys. We're going to try to take one last follow-up question, we believe, from Andrés Soto.

Thanks for the opportunity again. Very quickly, we saw significant increase in reserve constitution this quarter. You mentioned seasonal factor, but even if I compare on a year-over-year basis, this is three times as big as you had last year. So I would like to understand if this is related to a change in the duration of your policies. For multi-annual policies, you will need to make additional reserves? And if that's the case, versus the structure that you have now in terms of single year and multi-annual, what is your target in terms of the duration of your policy portfolio?

So thanks, Andreas, for the question. Actually, this is explained by our strong growth, our double-digit growth, creating premiums over time. Remember, we've been growing at the 36%, 28%, and 24% every quarter. And that is mostly aligned to our growth in our end premium. We constituted, to your point, 830 million pesos for reserves. That compares to 266 million pesos during the last quarter. And we have constituted 3.6 billion in reserves, almost 2 billion pesos more than the same period last year. In terms of our composition of annual multiannual, we remain constant, 80-20. 80 being annual and multi-annual being close to 20 as we presented earlier. So we don't see a major mix in that regards.

There is a seasonality effect, obviously, out of the hurricanes and the claims that we have for a period that also plays in how we build the reserves. But the actuaries are doing that. But as Roberto indicated, there are no changes in the way we manage the reserves generally speaking.

That is very helpful, José Antonio. So just to be clear, part of the impact in terms of reserves is related to the impact of hurricanes. And if, you know, that normalizes, you will reach another normalized level of reserve constitution.

No, Andrés, it's related to our growth. As we continue to grow, we will be in accumulative terms constituting reserves.

Absolutely, but that was the case also for the second quarter and the reserve was not that high.

Right, and we continue on that growing Spain. As we will see a little bit more stabilization on that, we will continue to see more of our earned premium going up and the reserve constitution will start going down.

Right, because I remember at the beginning of the year, we were expecting the earned premium line to exceed the written premium line by the second half of the year. And that clearly didn't happen in third quarter.

Yes, and the good news is that the growth continue has been accelerating. So moving forward, we'll continue to see as it's sterilized a much less reserved constitution address.

Perfect. Thank you so much, guys.

Thank you all. This concludes today's conference call.