Qualitas Controladra Sab

Good morning and welcome to Qualitas' second quarter 2025 earning results webcast. The conference will begin now. It is my pleasure to turn the call over to Raquel Itoi, Qualitas' IR.

Good morning and thank you for joining Qualitas' second quarter and six months 2025 earnings call. I'm Raquel Itoi, Qualitas' IR coordinator. Our CEO and chairman of the board is joining us today, Jose Antonio Correa, as well as our CFO, Roberto Araujo. As a reminder, information discussed on today's call 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. Qualitas undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events, or otherwise. Let's give it over to José Antonio, our CEO, for his remarks.

Thank you, Raquel, and good morning, everyone. It's great to be with you once again. We are pleased to share strong second quarter and first half of the year results, setting a strong base for the remainder of the year and supporting the execution of our strategy. Top line growth was within our expectations at 12.9%, with a sustainable loss ratio resulting in 92.8% combined ratio for the quarter, right on our long-term target, and a 90.5% combined ratio when considering the first six months of the year. On the investment side, we posted a strong financial income, even as interest rates began easing at the faster than expected pace. Thus, Qualitas delivered a 36% net income growth for the first half of the year, with a 12-month ROE of 26.5% above our long-term target. Additionally, a key highlight for this quarter is that we surpassed the 6 million insured units mark. And reaching this milestone took us only half of the time it took to go from 4 to 5 million, a clear reflection of the quality of our service and our unwavering commitment to our customers. According to the latest industry AMIS figures, in terms of written premiums, Qualitas holds 31.7% of the total market, and 41.9 in the heavy equipment segment. In terms of earned premiums, we maintain a 35.8 percent market share. Additionally, our combined ratio in Mexico is 224 basis points better than the rest of the industry, excluding Qualitas, and we represent about 46 percent of the entire sector on the writing result. These indicators reaffirm our market leadership in both scale and profitability, even when facing a challenging market environment. Before Roberto dives into the financial results, I would like to address some of the current dynamics and challenges in the market, including pricing downward pressures, macroeconomic volatility, early rain seasonality, as well as regulatory changes. These factors are reshaping the industry and pushing all players to adapt. At Qualitas, we are well positioned to respond through our excellence in customer service, innovation, underwriting discipline, and a clear strategy focused on sustainable value creation to our stakeholders. Customer service remains at the heart of what we do. In the first half of the year, we received 1.6 million calls at our contact center with an average response time of five seconds, what means one second faster than the same period last year. This improvement reflects our commitment to delivering best-in-class service when it matters the most. Our satisfaction rate of 96% confirms that we are striking the right balance between speed and quality. Our business model is evolving alongside technology and customer expectations, and it is stronger than ever. Today, approximately 20% of our customer calls are handled throughout artificial intelligence, and about 40% of our clients are managed through robotic process automation. Additionally, 33% of claims are handled remotely using digital technology, reaching a satisfaction rate of 95%. These changes have led to operational efficiencies that allow us to serve more customers while optimizing costs. Looking ahead, we remain cautiously optimistic for the rest of 2025. We are conscious that Mexico's economic slowdown will continue affecting new car sales and disposable income. But we have navigated through these cycles and we know what we need to do. As we enter the second half, typically characterized by higher claims volumes, we are committed to executing our defined strategic priorities, continuing to invest in key areas, and proactively adjusting our operations to remain agile and ready to respond. Let me now get into our three pillar strategy. We continue to strive in winning in our core business, Mexico auto insurance, which continues to be the main driver of our growth, making it our foremost focus. We firmly believe that Mexico is our key growth engine, and in these volatile times, it is essential to continue strengthening our leadership position. The Mexican insurance industry is currently experiencing an intense price competition. particularly in the auto segment due to the insurers aggressively going after volume to maintain or increase market share, a strategy that is proving to be unsustainable as claims severity increases. This is driven by the country's low insurance penetration, macroeconomic pressures, and growing competition. Factors such as inflation, currency volatility, and rising repair and medical costs have squeezed profit margins. At Qualitas, we remain focused on sustainable growth and profitability without compromising competitiveness and long-term financial health. From a market standpoint, new vehicle sales, including light vehicles and heavy equipment, have declined 2.8 percent year-to-date. Notably, heavy equipment sales for vehicles over 3.5 tons dropped by 37.4%, consistent with broader economic trends and anticipated consumption slowdowns. This reflects the persistent volatility that has marked recent periods. As we turn to our subsidiaries, strong performance and progress across Latin America, including our recent entry into Colombia, has been more than offset by our U.S. business, where prior year claims development continue to impact. As Roberto will elaborate, progress made on the runoff of domestic business and in building a new book of healthier by national product is not yet seen in our financials due to litigations coming to closure at a much higher and perhaps unreasonable amounts, confirming that our exit of those businesses was the right decision. Despite this challenging environment, we remain confident in Qualitas' ability to manage these headwinds effectively while pursuing sustainable and balanced growth. We reaffirm our expectation for full-year top-line growth in the high single digits to low teens, and we expect our key performance indicators to remain within target levels. In summary, the first half of the year showed robust commercial momentum. We saw strong ingredient premiums, continued expansion in insured units, and a sustainable loss ratio still below our target range. Financial income has remained solid, and perhaps most importantly, we have achieved meaningful progress across all service metrics. Our organization is structurally prepared for a healthy growth and remains agile and resilient as we move forward. And with that, I'll pass it to Roberto for a deeper dive into our quarter and year-to-date performance. Roberto, please.

Thank you, José Antonio, and good morning, everyone. Our first half 2025 results reflect the strength of our strategy and our ability to deliver value considering an evolving industry landscape. We achieved solid top-line growth maintained a combined ratio within our long-term target range, and delivered a resilient investment portfolio. Starting with top-line performance, written premiums grew 12.9% in the second quarter and 12.4% for the first half of the year. In Mexico, the traditional segment accounted for approximately 65% of total written premiums, growing 5.4% in the quarter and 7.2% year-to-date. From this segment, the individual business stood out with 8.1% quarterly growth and 12.6% year-to-date, while fleet business grew 1.3% in the quarter and remained flat on a year-to-date basis. This is mostly due to the impact of the large multi-year contracts from last year, as we mentioned on our previous call, as well as the effect from adjusting pricing downwards to be more in line with our ongoing long-term profitability objectives. The financial institution segment represented around 30% of total written premiums, with significant growth of 28% in the quarter and 25% year-to-date. While this segment has traditionally been driven by new car sales, which declined 2.8% year-to-date, The growth also reflects the benefits from shifting in consumer preference toward larger vehicles, mainly SUVs, translating into higher average premium value. They increased effect from multi-annual versus annual mix, and they increased of Qualitas market share in key financial institutions. As reported, our international subsidiaries contributed 5.3% of total written premiums year-to-date. Across Latin America, subsidiaries posted excellent growth of 59.6% in the quarter and 41.3% year to date. Each quarter, we continue to achieve key milestones. Costa Rica grew nearly 60% in the quarter and 31% in the semester. During this quarter, It also paid the dividend to the parent company for the second consecutive year. From a market share perspective, the latest results have Qualitas at 22.1%. El Salvador reported 59% quarterly growth and 67.4% year-to-date, with ROE close to 30%, while Peru achieved 44.9% growth in the quarter and 42.5% year-to-date growth. reaching a market share of 7.4%. In Colombia, our newest subsidiary is performing in line with expectations. As we adapt to market's unique characteristics, we're building a solid foundation with the same excellent service DNA that defines our group. Committed to reach sustainable growth, following through the same discipline and vision that have proven our success past. While the financial contribution will be limited in the short term, we're laying the groundwork for long-term value creation. For example, we opened our 12th office, solidifying our presence in key cities, and expanded our agent network to over 550. These developments bring us closer to policyholders and mark an exciting new chapter for our regional expansion. In the U.S., our subsidiary continues realigning its portfolio and focusing on cross-border and binational products. As of June end, premiums declined 15.6% for the quarter and 20.3% year-to-date. We have redefined our value proposition, presenting ourselves as an specialized binational auto insurance company. Our organizational setup has been optimized to capture opportunities in this niche market, and we remain vigilant regarding the U.S. market opportunities. Altogether, as Jose Antonio just mentioned before, we closed the quarter with over 6 million insured units, a new all-time high for Qualitas, with over 400,000 additional units during the year, or a 7.4% unit growth. Looking at the earned premiums, we posted 10.6% growth in the quarter and 14.1% year-to-date, in line with expectations. As you know, earned growth base is directly correlated to reserves behavior. In the second quarter, we constituted $730 million in reserves, $401 million more than in the same quarter last year. For the first semester, reserve constitution totaled 2.6 billion, 7% below the same period last year. And as a reminder, the technical reserve constitution is based on approved regulatory models and speaks to the corresponding premiums growth. Now, consistent with our expectations, earned premiums are growing at a faster rate than written premiums, being able to capitalize accelerated growth from past periods as well as the benefits from lower claims costs. Now moving down to our costs. Our loss ratio stood at 63.1% in the quarter, well within our target range, and improving 2.6 percentage points versus previous year. Furthermore, on a year-to-date basis, our loss ratio closed at 61.4%, improving 3.5% percentage points compared to last year. To better understand progress and challenges, I will provide some specifics from our main markets. In Mexico, the loss ratio was 60.4% for the quarter and 59.3% for the first half, well below our desired unsustainable loss ratio target range of 62 to 65%. It is worth mentioning that frequency for the quarter was 6.9%, 40 basis points below the same period of last year. As for thefts, year-to-date decreased 7% for Qualitas versus 10% for the overall market. Remember that these stats reflect our higher units growth versus industry and the lead in market share, especially when considering insured model cycles, which have a lower insured value but high volume. Qualitas recovery rate stands at 42.5% in line with the rest of the industry. We continue enhancing our technological tools and coordination with suppliers and authorities to reduce costs and improve efficiency. So let me now move to our US business, where we continue focusing on our turnaround as a corporate priority. The journey continues to be challenging, recognizing it is not as fast, simple, nor cheap as we need to bring to closure the claims that traced back to five or even eight years ago. To illustrate progress on our exit of domestic business, at the beginning of 2023, we had close to 300 open litigations, which are now down to 112. The fact that we have zero 18-wheeler exposure as of February 2025 would indicate that new claims should also tend to none in the next months. All of this, however, is not being enough to turn around our claims ratio. as adverse developments of historic claims and veritics have led to higher reserves constitutions. This quarter in particular, we have closed a couple of claims in the BOSS program, one that was in place for 15 months. From May 2020 to September 2021, our policy limits were up to $5 million. In addition, Due to our external audit recommendations, we continue building a DTA, Deferred Tax Asset Valuation Allowance Reserve, as a conservative and unlikely case if we were not able to turn around the business in a way that we credit these taxes. As of the end of this quarter, we have $18.9 million accumulated on this allowance. The US business turnaround is within our top corporate priorities And we will continue to assess all possible paths to ensure our business is managed at the least possible cost while maintaining cross-border products to serve our customers and where we know we can create value. The acquisition ratio stood at 24.1% in the quarter and 23.1% year-to-date, about one percentage point higher than last year. This is driven by stronger growth in the financial institution segment, which carries higher commissions. This ratio remains within our expectations and align with cost control metrics. The operating ratio was 5.6% in the quarter and 6% on a year-to-date basis, including employee profit sharing, given the positive performance of our company. We also had an increase in fixed pay to service offices and corporate bonuses. linked as well to their successful performance during the period, aligning productivity and cost control efficiencies towards positive results of the company. If we were to exclude employees' profit sharing from this provision, that by law must be incorporated into our operating expenses ratio, would have stood at 4.4% in the quarter and 4.6% for the first half. Altogether, this resulted in a combined ratio of 92.8% in the quarter and 90.5% year to date, below our ongoing target range of 92 to 94%. These figures confirm the strength of our underwriting and cost discipline. On the financial side of our business, comprehensive financial income grew 7.3% in the quarter and 25.4% year to date. Our portfolio totaled 49.5 billion pesos remains 86% in fixed income with an average duration of 2.2 years and an 8.8% yield to maturity. For the Mexican subsidiary, yields stands at 9.5%. The rest of our portfolio allocated in equities has remained resilient from the market performance during the first half of the year. For example, the S&P 500 stumbled in the first quarter of the year, still a 5.5% return was observed on a year-to-date basis, setting a relatively more confident tone as markets headed into the second half. All our investment assets are classified as available for sale, meaning their unrealized gains or losses are reflected in the balance sheet until they are realized. Our investment strategy has not had any relevant changes in 2025. We had strived to bring our fixed income duration up to two years as reference rates remain in the mid to high single digits in Mexico, following the guidelines, advisory, and strategy decided by our investment committee as part of our institutionalized corporate governance. Total comprehensive financial income was $1.2 billion in the quarter and $2.8 billion year-to-date. delivering 8.4% and 9.7% ROI, respectively. Unrealized gains for the first half of the year are in the magnitude of 400 million pesos, including FXFX. When considering all mark-to-market positions, ROI would be 11% for the quarter and 11.3% for the year. Approximately 23% of our portfolio is invested in U.S. dollars, given our international presence. For every peso that appreciates or depreciates, the estimated annual input is around 650 million pesos, serving as a natural hedge. Our effective tax rate was 31% year to date, in line with historical levels. Net income reached $1.4 billion for the quarter and $3.6 billion year-to-date, with net margins of 8.1% and 9.8%, respectively. Our 12-month ROE stands at 26.5% above our long-term target. As claims normalize and frequency increases in the second half, we expect ROE to moderate toward our long-term target of 20 to 25%. Our regulatory capital is stood at 5.7 billion, with a solvency margin of 16.2 billion pesos, equivalent to a solvency ratio of 385%. Our 12-month earned premium to capital ratio is 2.7x. We maintain a strong capital position that allow us to invest strategically to continue improving customer service and experience through innovation and technology while reinforcing our core capabilities. Our approach remains disciplined and selective, always with the goal of delivering long-term sustainable value to our shareholders. It is worth mentioning that 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 nor final resolution. Qualitas' position stands firm with the corresponding legal arguments to support the industry criteria, and thus, we trust the authorities will reach a reasonable resolution. As mentioned before, we will timely communicate any relevant progress to the market. We are proud of our solid first half performance. We delivered a strong, profitable growth, paving the way for the future, reaching key milestones despite external pressures. Our capital position is robust, and our strategy remains clearly defined. While the second half may present new challenges, We're fully prepared to navigate them and continue delivering long-term sustainable value. 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 and queue, you may press the raise your hand button on your screen and we'll open the mic for you. Or you can also send it through the chat. To withdraw your question, please press the button again. We will pause for a moment as callers join the queue. Thank you. Our first question comes from Tiago Binsfield at Goldman Sachs.

Hi, good morning, everyone. Jose Antonio, Roberto, Raquel. thank you for taking my question uh i see the company coming off a very strong first half of the year before we but like you said during the presentation there are some risks that you see for the second half of this year so perhaps if you could explore a little bit more the ideas that you presented on pricing pressures the macro volatility the rainy season and also i think you mentioned regulatory changes so i mean if you could uh put some more details on it uh what makes you more concerned when you discuss uh those points to help us understand a little bit more the dynamics for the rest of the year. Thank you.

Good morning, Tiago. Thank you for your question. Let me thank you for your comment about our strong results. I believe that our strengths certainly are strong for the first half of the year, and we are following our strategy. Let me tell you that certainly there is, you know, There is a change in cycle, I would say, in the car industry, in the insurance car industry segment here in Mexico. And we have had like three, and this is starting on the fourth cycle. Once, you know, the industry was able to decrease the combined ratio and the loss ratio. And as such, we are seeing the pricing pressures. So the important thing here is that we continue to lead the market. As always, we will continue to take pricing as needed. Now, having said that, there is some pressure more in certainly the fleet side of the market. of the segments that we have. And this is something that I continue to see in the following six months at least. Obviously we have a good portfolio there. Our leading market share there is something that our competitors are looking into. So we are defending and we are taking some price declines and we have been able to maintain our customs. So renovations are at a good level. Now having said that, I think that as we indicated earlier, that for the year we would see a top line growth between probably the high single digits to around 12%, which by the way, we are very glad that we have been able to be slightly ahead of what we indicated as our range for the year. So yeah, we will continue to see this pressure. We have seen this in the past, and we will continue to manage very disciplined to make sure and ensure that we continue to be profitable in those businesses. The cycle now is something that is complicated. Also, as you know, new car sales are also an issue. Not an issue, but it is below. In 2023, the sales of new car sales was above 20%. In 2024, it was above 10%. Right now, it is flat-ish. or below depending on if you consider the Chinese car sales, because some of them are not reported through the industry association. So the second half will continue to be somewhat complicated, but we are prepared to continue very disciplined on handling our business that we have done in the past, Tiago.

Thank you, José Antonio. If I may just follow up on the regulatory side, anything that you expect to be meaningful for this year?

Not really. The regulatory side, there's nothing new in there. Clearly, there is something related, as you know, in the financial markets in Mexico with a couple of the three financial institutions that have been named by U.S. authorities to be careful with that. But we don't have issues there. uh clearly uh i don't see uh from a regulatory standpoint probably there's gonna be strengthening on on on the anti-money laundering stuff but other than that uh but i don't see anything uh in the horizon for the next six months around that okay it's clear in a second follow-up if i may uh you mentioned the top line expectation just want to confirm that if you still expect earning premiums to outpace written premiums for the rest of the year Well, as I mentioned, Tiago, clearly we said that it would be, you know, between the high single digits and low double digits. And it will be, I mean, I cannot provide a number per se, but it will be close to those ranges. Now, we have been able to exceed the ranges that we have said, and I see that we will be in the 10-ish, around the 10% growth.

Okay, perfect. Thank you so much.

Thank you. Our next question comes from Ernesto Gavirondo at Bank of America.

Thank you. Hi, good morning, Jose Antonio and Roberto, and thanks for the opportunity to ask questions. My first question will also be a follow-up on premiums. Last quarter we noted stronger data from competition. So can you elaborate in which indicators you are noting that stronger data? And also related to premiums, how much have you reduced prices in this first half? And how much do you expect to reduce in the second half? And can you remind us how much of the premium growth of the last couple of years was related to pricing? And then I have a second question related to the financial results. For this, I would like to know where do you see the interest rates by year end and how you are seeing them by the end of next year? And Today, we noted that you are doing around 1.2 billion pesos in the financial results per quarter. But in the scenario of repricing the portfolio in two years under lower rates, what should be the financial result per quarter that we should be expecting? And also, when do you expect to start materializing these unrealized gains of 400 million pesos that you have in your stockholders' equity position. Thank you.

That was a number of questions. Let me see if I remember all your questions. Ernesto, good to have you with us. Well, let me tell you about the premiums versus competition. Let me tell you that we have reduced prices a bit. I mean, actually, as you know, and you will know, we manage this by zip code. So we do some increases and some decreases based on the risk that we take. Now, it is important to know that in average, we have taken small decreases. You know, it is, you know, in the realm between probably, a couple of two percentage or something like that. So it has not been big. Where we have been seeing more competition is in the fleet segment. And in the fleet segment, we have had to, we need to make sure that we have good financial results there. I mean, the combined index is, It's reasonably good. So we have had, in some instances, to reduce a little bit more than that, the amounts for fleets. And that's related for the premiums. Now, I don't know if... It's an important thing because in the top line, I'm going to let... Roberto to answer a bit of that because we have a mixed situation there. Obviously, we have had a good top-line growth in the financial institutions. And it is kind of a mixed situation there, which is favoring our position and our leader position in the market. But Roberto, can you please elaborate on that one?

Yes, Jose Antonio. Thanks, Ernesto. Good morning. So let me address the premiums questions, because I think when you look at the 12.9% on Q2, there is a mixed bag of things happening at the pricing level, right? So when we looked at the presentation, we talked a little bit about how, for example, the traditional business was experiencing much more pricing competition, and it was actually either flattish, or depending if you look at the last year's multi-annual contracts, it was getting to single digits growth. That's what we're seeing a little bit more of what José Antonio is alluding to. In general terms, I would say that out of that 12%, I would say that 60% is still pricing on total carryover from either 2024 or what is experiencing in the mix of the different channels. And let's also think about the financial institutions. As I put in my remarks, There's a strong growth in the financial institutions, and it's counterintuitive what we're seeing, right? So on one end, we're seeing the new vehicle going down on a year-to-date basis, minus 2.8%. But on the other, we're seeing a double-digit growth in the financial institutions. And we see three main drivers for this. This is on a rise. The first one is the rise on average premiums rather than volume. This is the result of several factors. What we're seeing is a shift in the insured vehicle mix coming from smaller units to larger vehicles. As I mentioned in my remarks, the SUVs, pickup trucks, which carry significantly higher premiums, so that will drive to a higher average premium. And the second one is the rapid expansion of shipping this composition of our portfolio to multi-annual policies. And we'll talk, I'm sure, about that in a few more questions later on, on the mixed annual versus multi-annual. And then the third one is we are increasing the market share in some key financial institutions. So what I'm trying to say is that depending on the different segments, we're seeing a different price volume ratio. And we are experiencing particularly on the traditional much more price effectiveness. And again, it goes back to our consistent message of reaching the long-term target of 92%. to 94 in each of these segments. And when you think about individual, it's actually growing units and price at the same time. So the combination of those are actually going through. So it really depends by segment, Ernesto. So looking now to your second portion of your question, on financial results. You were asking how much we see more on the interest rates in terms of the Bank of Mexico and what we see particularly on Mexico. We see a continuous decline on the interest rates down to probably 7.5%. on 2025 and perhaps to 7% on 2026. Still, I mean, there's a debate whether it's going to be 50 basis points or 25 and so on. So we'll have to wait and see. And I think there was another portion of your question related to the financial income. The 1.2 billion that we saw back in Q2, and then the link to the 1.5 billion that we saw in Q1, linked to how much of that is going to be realized versus the unrealized and the 400 million that we have in our balance. We're certainly going to see more of that excess cash, depending on how the ETF or our variable portfolio plays out. We'll have to see whether there is a, how do we start realizing in the next coming quarters? There is no commitment on when and how we're going to start realizing those. but probably we'll see a portion of that in the coming future. Again, it gets back to that 400 million. When you look at our ROI, it was 8.4. I'm sure you're wondering if you were to include everything to mark to market, we'll get up to 11%. So when will we start kicking those into the P&L? Again, it's a matter of how this starts playing out. And as interest rates will go down, as we've been discussing in previous calls, every 25 basis points, we'll expect to see a valuation benefit of 250 million pesos. So in our balance sheet. So we will have to see how those plays out, Ernesto. I hope that I address most of your questions.

Just let me add just because, Ernesto, you were asking also for 2026. Let me tell you, as also we have included in previous calls, that we have increased the duration of our portfolio. And we have been able, as you might recall, like, you know, probably 18 months ago, probably 24 months ago, our duration was very low. It was, you know, less than half a year. And now we have in excess of two years. And that should carry us well into 2026 also for the good rates that we were able to have in addition to what Roberto indicated.

And that's actually a very good point, Antonio. Thanks for pointing it out. The duration is going to give us some stability on our 86% fixed income portfolio. So that is going to help us to start not seeing so much volatility in the coming quarters. And certainly we'll see the remaining portion on the capitals that we realized in our P&L. I hope that answers your question.

Yes. Thank you very much, Antonio and Roberto. On this financial result, once the fixed income portfolio matures in two years and you have to substitute those securities with new ones, those ones should be on the lower rate. So how should be the impact or how should we be expecting that line to behave? Today you are doing between 1.2, 1.5 billion per quarter, but if we go After the two years that you have to substitute it with new securities, how should we think about this line?

I think that's a good question. Thank you, Ernest. So I think we should expect to continue to see that going down, right? So the good news is that for at least 2025 or 2026, we'll see a little bit of that more stable. But as interest rates will continue to go down to certain levels, we will continue to expect that that will go down in the same magnitude. Let's say 25 basis points, 50 basis points, and so on to match the market consensus. So that would be something to keep an eye on how we are renewing those investments. Now, keep in mind that our duration has a multiple facing of all our, let's say, on multiple durations. So it would not be eventually in two years and all will go out at the same time. There will obviously be we'll go out and we renew, and depending on when we renew, we will get a particular interest rate for those, and we will continue to make the strategy, to make it as swift as possible. Remember, we're not trying to play, we're being conservative around our portfolio and most of it is on fixed income. Jose Antonio, you want to add?

Yes, I would like just to add that clearly we do not have a crystal ball for that, Ernesto. We know that The world in general, and Mexico in particular, has some challenges regarding the tariffs and all that stuff. So at this point in time, it would be kind of complicated to foresee a couple of years from now what is going to be the situation. The important thing is that we will maintain an agile We have, obviously, we work with our investment committee, and we will take advantage of the situations as they come by, as we have done over the past two or three years. So we will remain, obviously, very close to this one, but there might be a renegotiation of the free trade agreement with the U.S. next year. So there are a number of things that might happen. might change a little bit of what we see just in terms of declining the interest rates from Banco de Mexico. And I guess at this point in time, nobody can tell us what they would be considering the uncertainties in the macroeconomic level.

Perfect. No, thank you very much.

Our next question comes from Carlos Gomez Lopez at HSBC.

Hello, thank you for taking my question. You have addressed this partially, but if you could please clarify the difference between the first and the second quarter and the specific reasons why the claims ratio was so low in the first quarter relative to the second quarter. And is this type of seasonality something that is specific to this year or we should expect it in the coming years as well? Thank you.

Let me just start, Carlos. Thank you for being here today. Let me tell you that obviously we have been going in a long-term curve of declining combined ratio and loss ratio. And that's something that we have been working on since the end of the pandemic. So as you know, these things take a long time to And we have been doing that for the last probably 12 months, at least seeing this very positive behavior. So having said that, I can tell you that we are below our long-term targets on those, and we are happy about that. But considering that how the cycle works now, and that's why we see this price competition, because it happens every time that profitability returns to the sector. Obviously, we never lost it, but some of the sector, they did. Now there's going to be the price competition. But this is important. So we expect at some point in time, because of the pricing pressures, et cetera, that we will be back to within our range. But now I don't know if you want to elaborate, Roberto.

Thank you, José Antonio. And thanks, Carlos, for joining us this morning. Let me double click a little bit on your question. So on one end, yes, we saw a Q1 59.7% loss ratio on Q1. And your point is, hey, we're seeing a Q2 of 63.1. The first point is back to José Antonio's message is, It's well within our target range, and it's between the 62 and 65. The question is, okay, why is it the increase? Let's keep in mind that in Q1, when we saw the 59.7, it's part of the natural seasonality of the year, right? So we normally see a lower seasonality. We didn't have any meteorological changes. events. And what we're seeing in Q2, there are multiple factors. The first one I want to double click is on Qualitas Mexico, right? So when you look at Qualitas Mexico, actually it increased from 50%. to 60.4. So we're already starting some of that seasonality kicked in. We are seeing the early beginning of the rainy season. And we are seeing already a little bit more of the frequency that we would have expect, right? So in Q1, we had a 6.4 Now in Q2, we had a 6.9% frequency. So that's just part of the natural play that will get into our loss ratio. For Mexico, still very stable, very positive. Now the delta, primarily in Q2, it has to do with the U.S. subsidiary. And as I made my remarks, we're still going through that strategic priority and that we're firmly committed to turn it around. On the claim side, what we're seeing is the weight of the legacy litigation and the long tail exposures are continuing impacting us. And we're making tangible progress. As I mentioned also in my remarks, the litigation cases have been dropped 63% where we saw in compared to what we saw in 2023. So it's important to understand that there is a impact from the US subsidiary on the reserves. but that we're making progress and that we're seeing a substantial disacceleration on the domestic new claims. But also, we need to also keep in mind that even combining both the Mexico loss ratio performance, even with the impact that we're seeing from the U.S., we are still within our target between 62 to 65%. And that just comparing a Q2 versus last year, we see 260 basis points better than last year. And even in the first half, we see a loss ratio of 61.4, even with what I just explained, 350 basis points better than last year. I hope that helps on putting a little bit more color behind the loss ratio, Carlos.

It helps, although I have to say, again, my question is actually more historical and forensic. So it's not the second quarter, which looks strange. It looks perfectly normal. We're trying to understand why the first quarter looked so good. What was special about the first quarter that perhaps, you know, we did not understand? perhaps that's why the consensus was much higher for the second quarter than it probably should have been. Were there any special items or just the absence of U.S. reserve creation that made the first quarter? But no, it's also Mexico. Mexico was 50%. So we want to understand what it was in the first quarter that was particularly good and probably not replicable.

no no it's not it's nothing special carlos uh regarding that it is the the different factors that uh we built uh during the past probably 18 months in terms of uh you know cost controls and price and price increases to to to get back to the original cycle and uh and clearly this is something that that goes like that so So to be specific to your question, there is nothing in particular that helped the first quarter other than the momentum that we carried back then. And, you know, now that's why it is going to be turning around. In addition, that the momentum came in at the time when, you know, as you know, the first semester is from a seasonality standpoint also good. So when you have the momentum to the seasonality, that's what we have. Now, you know, the cycle begins to turn and we are prepared to take it. I know that probably it's difficult to give you this view, but there's nothing in particular other than the momentum that we carry out of the good actions that we were taking over the past 18 months or so.

Carlos, to complement a little bit on what is ahead, I think we should expect, regardless of what we saw in Q1 and Q2, we should, as we've been very vocal about, the second semester is normally have a much higher claims ratio due to the rainy season and the meteorological event. So please do consider that in your models as we move forward, since that is going to play out and we're already seeing it in May and June.

Okay. And if I can abuse your time, on the U.S., and I understand this is a long tale and it's judicial and it's unpredictable, but what is a reasonable expectation for you to clear up these remaining cases? Are we talking about a few more quarters, a few more years? And will the order of magnitude be as high as we have seen in this quarter?

So I think it's hard to tell, Carlos, because what we are seeing is that we are closing long-tail cases, as I mentioned, in cases like five or eight years ago. And it really depends on how that litigation and the case is closed. But I would emphasize that the trend obviously will go down versus what we're seeing, and it will depend on a case-by-case basis.

But just let me add to it, Roberto, because it is important to say that clearly we have dropped the number of cases. And let me go back to 2023 when we decided to change the strategy. So it is clear, it is important to stress the fact that we made the decision back in the early 2023. We are executing against that strategy. And we are, you know, with a clear focus on the cross-border and binational, eliminating the domestic one. So to your question, I think it is going to be at least, you know, it will take probably, you know, 12 to probably 18 months more. And we are going to be dealing with that going forward. But other than that, you know, litigation cases have dropped more than 60% from where we were in 2023, which is the important thing that we are managing that part.

Thank you so much.

Thank you. Our next question comes from Pablo Ordonez at JVM.

Yes. Hi. Good morning. Congratulations on the results. Very sound in the quarter. And my question is related to the dynamics that we should expect between the traditional business and the financial institutions, because one of the changes that caught our attention in the quarter was the higher acquisition ratio. As you mentioned, it's still within your range, but higher relative to the historical standards at 24%. So my question is, looking into the second half of the year, you mentioned that you expect a top line growth of 10 to mid-teens level, to low-teens level. What is the dynamic and the split between the traditional and the financial institution business? And also thinking already in 2026, which is the run rate for these two businesses? Should we expect an acceleration in the traditional business next year? And what is driving this very sound performance of the financial institution? That's my first question. Thank you.

Thank you, Pablo. And again, thank you for joining us today. Let me tell you that on that one, as Roberto indicated, we had a very good growth in the financial institution. And I would say, as he indicated in his remarks, and this is very important to know, that we see that the international segment is helping us somehow, even though it is really still a very small part of the total business. But we are happy in the sense that in the individual business, we are within the range that we are saying. It is what we consider healthy. The financial institutions, because of the mixed effects on the pricing and the type of vehicles that we insure and considering that we are the leaders in the industry, We will continue to see as we see, you know, there will continue to be pressures there going forward in terms of the financial institutions because of the market. And now it is the sales of new vehicles. And I'm sure that there's going to be some pressure there. from car manufacturers. So we see that the individual and financial institutions will continue to be outpacing individual, but individual is healthy. And the thing is going to be in the fleets one. The fleets one are going to be somehow flat, flattish. because of price competition. So that would be more, I don't know if that answers your question. I can also have Roberto to provide his view. But I think that that is what will allow us to really be in the guidance and the growth that we have indicated, Roberto.

Just to complement, I will continue to see some of that growth in the financial institutions, as we have explained. And then traditionally, I will continue to play important role as how do we compete. And individual, which is still playing and is quite profitable, we will continue to be on the single low teams. So we'll continue on track of what we're committed and moving forward.

Thank you for that, Roberto. And with this, what level of acquisition ratio should we expect for the second half of this year? And do you think that when the fleet's business starts to pick up again, thinking of more medium-term dynamics, should this acquisition ratio come back to 23%? Or do you think that this will continue and we should expect this 24% to... Yeah, I'll have Roberto to answer that one.

But let me tell you that we have not changed any of the... of the standard commissions that we pay for our businesses. So most of them are really more of a mixed one, but Roberto.

Yeah, to your point, Pablo, for example, Q1, our acquisition ratio was 22.2 and we still saw a significant growth in financial institution. The thing here in Q2 is that it actually outgrow individual and the fleet business and that's what drove the mix on the 24.1. So as long as we continue on not having so much of that split, the ratio will continue to be on our guidelines. On a cumulative basis, we're at 23.1. If we continue on this journey and we continue, remember that traditionally, We had a base on larger multi-annual contracts that is hurting us on the growth on the fleet segment, but we will continue to see that moving forward. So we're expecting to hit still our ranges in terms of acquisition ratio. Pablo.

Thank you. And a final question, if I may, on a different topic. Your taxes were also higher than usual this quarter. So what level of effective tax rates should we expect for the year? What's the normal run rate and what explains these higher taxes in this quarter?

Yes, Pablo. So you clearly did your homework. When we saw the 36% tax rate, and it's mainly driven, I mean, when you look at Mexico, it's actually close to 30, 31%. The delta from the 31 to 36% is linked again to the US subsidiary. When we were making my remarks, I highlighted the losses from the US and that from a regulatory standpoint, from an auditor's recommendation, they're asking us to to continue building on the DTA allowance and that hits primarily in our tax effective rate. What we would expect is to continue on online to 30 to 31% over time to hit that at the year end. So this is more like a timing of Q2, depending on how that evolves and the US operation continues to present whether it's losses or it started getting a little bit more stable, Pablo. Perfect. Thank you very much.

Thank you. We have time for one more quick question. We will be taking it on. Actually, that hand has dropped at this point. So that concludes today's question and answer session since we are out of time. We will send over some closing remarks.

Thank you very much for attending to this conference call. We're happy. The results for the first half of the year were very good. And we will continue to do our best to maintain our leadership position in the industry in a healthy and profitable way. Thank you, all of you. Thank you.

That concludes today's conference call. Thank you for participating and have a pleasant day.