Qualitas Controladora SAB de CV

BMV:Q

Earnings Call Transcript 2022-Q1

[Operator]

Thank you for standing by. This is the conference operator, and we will now begin the conference.

[Santiago Monroy, executive]

Thank you, Cha. Good morning, and thank you for joining Qualitas First Quarter 2022 Earnings Call. I'm Santiago Monroy, Qualitas' IRO.

Joining us today are our CEO, Jose Antonio Correa; and our CFO and International CEO, Bernardo Risoul to talk about our quarter results and performance.

As a reminder, the information discussed in today's call may include forward-looking statements regarding Qualitas' results and prospects, which are subject to risks and uncertainties. Actual results may differ materially from what is discussed here today, and the company cautions you not to place undue reliance on these forward-looking statements. Qualitas undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise.

Let's turn it over to Jose Antonio, our CEO, for his remarks.

[Jose Correa Etchegaray, executive]

Thank you, Santiago.

Good morning, everyone, and great to be with you all again. As stated in 2021, we continue to confront the new normal and facing business challenges while serving our customers at the best-in-class level. Macroeconomic and global turmoil leading to high inflation and shortage of new cars and auto parts, along with market volatility, is affecting us all with Qualitas being no exception.

Our quarterly results are mixed and reflect this environment as well as the continued and aggressive competition and mobility trends well above pre-pandemic. While our first quarter results are slightly below consensus and our own expectations, the reasons are clear and are being addressed, but most importantly, our fundamentals are stronger than ever and our strategy, which includes international subsidiaries and new venues, is working and proving to be the right one.

Mexico car insurance market is yet to pick up with 2021 numbers showing a slight recovery versus 2020, but still down 6% versus 2019 in nominal terms. This is being affected by new car sales contraction that continues and was down 2.9% versus last year and a full 24% versus 2019. We're expecting that things should sequentially improve in the second half. And that coupled with the competition and inflation put pressure in our underwriting results, which came in the low end of our expectations.

The second piece of our business, the financial returns, which Bernardo will now elaborate, fell short of our target due to the combination of equity performance and increase in rates that are not fully reflected due to the duration of our portfolio. Importantly, this quarter's performance follows industry business cycles and should be seen as part of the expected ramp-up process after the [ atypical ] last 2 years. We have seen them before. We know what to do, and we are taking the right actions.

I want to expand on the competitive environment, which is as we have mentioned in the prior calls, has been particularly aggressive on the pricing front, sometimes to what we believe unreasonable levels seeking to regain market share by some of the participants. Our goal is and will always will be to deliver the best value proposition for agents and policyholders, which doesn't mean being the cheapest. We acknowledge pricing levels are important, but even more important is the service we provide.

During this quarter, we adjusted prices of some of our business lines, which are now up close to 10% versus the first quarter of 2021 and taking them back to pre-pandemic levels. We are adjusting once again the second quarter to partially recover industry inflation. The adjustments we are taking are supported by our technical models and when carefully [ addressed ], we recognize that this may have a fall in our premiums since we are moving ahead of the market.

This is the right action to ensure a sustainable and profitable operation. In [ February ], we are also focusing on new technological tools such as [ Quali ], our recently launched WhatsApp chatbot, the development of artificial intelligence in our call center and the strengthening of our claims teams and processes to excel in the service provided to our clients.

Let me now touch on another key pillar of our strategy, a move that not in the short term, but in a few years is expecting to be a relevant business, our new health and medical operations. Yesterday, we informed to the market that with National Insurance & Bonds Commission, a regulator will soon start a certification visit to our new Qualitas Salud subsidiary. The visit is estimated to last between 2 and 3 months. And this is important and final step forward before having from the authorities a favorable opinion for the beginning of our operations.

Also, I would like to remind you that this new subsidiary will be completely independent of our Mexican auto insurance operation to ensure not to lose focus in our core business. In other news, as part of our never-ending effort to sustainability, I'm glad to share that in January, Qualitas was included in the 2022 Bloomberg Gender-Equality Index, GEI, as one of the 10 Mexican companies and the only Mexican insurance company to join the index, proving our commitment to transparency and best practices in gender-related topics.

And before I hand it to Bernardo, let me reiterate that one of Qualitas' biggest strengths has been our agility and our capacity to adjust and adapt. We will continue to follow very closely trends and factors that while not under our control impact our business, and we will continue prioritizing a sustainable and healthy operation.

We know the next couple of quarters are going to be challenging as the implemented actions will take time to fully reflect. Top line will face new [ up sells ] and claim index will likely stay on the high end of our expected range. But once again, all actions are intended to continue creating value for the policyholders, agents and shareholders. We will stay focused on executing against our priorities and strategy and let me tell you, the future is bright.

And with that, I will hand it over to Bernardo to walk you through the financial details. And as I said, a deeper dive on the financial income. Bernardo, please?

[Bernardo Salas, executive]

Thank you, Jose Antonio. Good morning, everyone.

As mentioned by Jose Antonio, first quarter operating results came in at the low end of our expectations, while financial income performance was [ subpar ]. Relative to the industry, based on the 2021 overall figures that were released in early March, our performance continues to be ahead of the industry across top and bottom line. Most importantly, our value proposition continues to be privileged by the confidence of agents and policyholders, leading to record market share in Mexico and the balance of the markets where we play.

Going directly into our underwriting, top line grew 0.9% given the financial headwind. Worth highlighting is the strong performance of the individual segment in Mexico that increased 6.8% and of our international operations growing above 26% in dollars. Our international subsidiaries now represent 9.5% of the total company underwriting aligned with our strategy of boosting their potential in each of the markets where we play.

In addition to premiums, one KPI that we always look to assess business' strength and health is the number of insured units, which this quarter once again reached a record high of 4.6 million units, an increase of 284,000 units versus same period year ago on 109,000 up versus last year closing.

In our contracting market, these results are worth recognizing. Due to the financial institution business linked to new car sales, our portfolio composition reflects 78% of our policy on an annual duration and the remaining 22% are multi-annual. This, among other factors, led to a lower reserve constitution, resulting in a 7.9% increase in earned premiums.

By the end of 2021, the total used car sales made through loan or credit increased 14%. From the total car sales through financial institutions, around 17% were secondhand cars, the highest proportion in the past 8 years. Since the pandemic hit in the early 2019 -- sorry, in early 2020, the automotive trends have been changing continuously. The demand for used cars is increasing, and we are taking advantage of this through our network of 19,000 agents.

Looking forward, we continue to aim for mid-single digits in our top line towards end of the year. We recognize that the speed of recovery on the auto industry and the effects of the prices adjustments, we don't know competitive reaction may impact our growth base in the next quarters.

Moving to our cost and indexes. To better understand the loss cost ratio performance, I would like to mention how mobility trends impact our business. Mexico, which continues to be our most relevant subsidiary, COVID-19 restrictions in terms of mobility were lifted and the country is fully back to normal. When comparing mobility trends of private transportation by the end of March, this is the pre-pandemic year of 2019, we are seeing it up 48% of higher mobility. It seems everyone was desperate to get out of the house, students are back in school, people are back in the office, or at least partially, travelers are back on the road and social gatherings are now 7 days a week. That increased mobility is impacting frequency and thus the number of [indiscernible] claims, which just this quarter were up 21% versus same period a year ago.

In addition, Mexican inflation levels of 7.5% is something we had not seen in the past decade. Even more, due to the supply issues and commodity prices, auto industry inflation is a couple of points higher, reaching close to 10%. These 2 main factors, which escalated faster than we expected, mean more claims at a higher cost, hence a 65.9% loss ratio by the end of the quarter.

Total loss composition has not changed much in around 80% is related to property damages and civil liabilities, growing 29% during the quarter given the previously mentioned items and around 30% is related to theft and robbery which we have seen a slight increase during the first quarter of the year.

These impacts are broad-based and affect everyone in the car insurance business. In our case, we want to stay ahead, partially mitigating cost increases by leveraging our scale and vertical integration. Most importantly, on our risk prevention programs talked before at length that seek to reduce accidents and theft. The success of these efforts is seen and measured quarterly comparing not only our own goals but to the balance of the industry performance.

Our acquisition ratio was 23.9%, in line with the historical average, where a lower mix of financial institutions, which carry a higher application costs is opted by agent bonuses, which are paid based on collection timing. We're maintaining our commission and bonuses in line with prior years. Thus, we do not expect major variances other than the ones coming from channel and customer mix.

Our operating ratio stood at 3.7% for the quarter, 38 basis points below the same period a year ago, mainly explained by a 68% decrease of the employee profit sharing accounts referred as PTU in Spanish and by [ our voice ] vertical integration accounting consolidation. Details are now a competitive revenue in the other income items within our operating expenses.

All of the above you're talking a combined ratio of 93.5% for the quarter. The actions mentioned include but are not limited to tariff increase intend to get -- to get this combined ratio back to the low and midpoint of the 90% to 94% range, although it will not be immediate due to the nature of our business.

Moving now to the financial income pillar. First quarter delivered MXN 348 million, representing a 3.3% ROI. This is below Mexico reference rate and our expectations. The top results are mainly explained by our 15% equity position that [indiscernible] delivered and to [ overall ] extent, the duration of our fixed income portfolio, which is 7 point -- sorry, 0.7 years, therefore, not benefiting immediately for -- for the rate hikes.

On this, it is important to note that our liabilities have a duration of 1.2 years. Thus, we're already ahead of the curve anticipating this higher interest rate environment. As you recall, at the beginning of the year, we mentioned our expectations for [ sets ] was between 6.25% and 6.5% at the year-end, which is currently where we stand.

Regarding our equity exposure, we are expecting that it recovers in the next quarters. We will continue to seek positions and investments that will allow us to close the gap versus our target, which, as you recall, is to be between 100 and 100 basis points above the average Mexican reference rate.

At this time, and considering Q1 and our portfolio position, meeting the initial target seems challenging. Altogether, we posted MXN 736 million net income for the quarter, which represents a 7.5% net margin. Important as well to note that these results include a lower effective tax rate versus our historic one, mainly driven by inflation adjustments combined with lower profitability and reduction of items, such as annual agent bonuses that were reserved last year but paid in this 2022. We do not expect this low rate to be sustainable and we're likely to be back in the 20% as an effective rate in the next quarters.

Regarding our financial ratios, our 12-month ROE stands at 17%, reflecting our strong capital position. 12-month earnings per share stands at MXN 8.5 and price to earnings stands at 13.5. And finally, price-to-book value at 2.2.

Now going to our regulatory capital requirements, they stood at MXN 3,619 million at the end of the first quarter with a solvency margin of MXN 16.4 billion, equivalent to a solvency margin of 551%. We're working on a capital allocation interdisciplinary project, seeking business continuity and diversification. We're focusing on projects within the insurance ecosystem in Mexico that contribute to the long-term sustainability of our business. We remain committed to the previously mentioned date of mid-2023 by which we will have better visibility.

Finally, and before we open up to the questions, later today, we're having our General Shareholders Meeting, where we are proposing the annual returns for our shareholders as follows: First, the cancellation of 6 million shares that were previously repurchased. With this cancellation, the number of shares representing capital stock will decline from 406 million to 400 million shares outstanding.

Second, we're also proposing a cash dividend payment of MXN 2.6 billion, equivalent to MXN 6.5 per share payable in [ two payments ]. First, MXN 4 in May and secondly MXN 2.5 in November. This will represent a 60% increase versus the cash dividend payment from last year with an approximate dividend yield of 5.7%. Third, a new share buyback fund for a total amount of MXN 1 billion, with the main objective of increasing staff liquidity, which, as you know, has improved significantly, going from $1 million traded on a daily average to over $5 million traded for which stand today. We will also continue acquiring some shares, although we're not going to cancel many of them anymore as we do not want to affect our float rate of around 40%.

To wrap it up, our commitment to you remains unchanged. We have the strength, and we're ready to serve with excellence our customers by leveraging in our largest agent network and our focus based on customer needs and in technology by capitalizing our senior management experience. We're optimistic for the future. We have built the right foundation and we're focusing on what we can control. We're confident in our ability to successfully continue leading the industry. Our ambition, our ambition is to transcend the industry and to create a significant long-term value for all our shareholders. Everything we've done put us closer in achieving that ambition.

Now operator, let's please open up the lines for questions.

[Operator]

[Operator Instructions] The first question comes from Jorge Henderson with Santander.

[Jorge Henderson Cubillas, analyst]

I have 2 questions. My first is in terms of -- and top line, I wanted to ask you about the growth within premium segment and cars against trucks and also about your expectations on new car sales in Mexico. Also I wanted to know if you have some color on energy pricing -- energy pricing?

[Bernardo Salas, executive]

Thank you, Jorge, for joining us today. Let me tell you that we continue to see, particularly in the fleet segment, a lot of competition. We know that many of our competitors are really pushing. And I mean sometimes they are going below [ something ] that we believe to be reasonable, meaning that they are even quoting for these businesses below -- below the loss ratio, which is obviously -- it's not going to be something that we want to do you know.

During the first quarter, we have price increases that -- versus the past quarter in 2021 were close to 10%. I want to say that we have done that as a leader of the industry and as a responsible from a profit standpoint that we have to do. We are always assessing this very, very carefully. But we know that considering the growth that we had [ being ] the loss ratio in the last probably, I would say, 8 quarters or so, we know that that -- there's also the inflation.

We need to recognize that there has been a lot of inflation on this one, and it should help. So to answer specifically your question, I think that it's going to be in the mid-single digits in general. But that's probably going to be growing more in the individual part of our business, not in the financial institutions -- that will continue to grow below last year, and that's because of the sales of cars.

As I have been talking to some of the key manufacturers -- of car manufacturers in Mexico, I can tell you that all of them -- and most of them are expecting that the first semester is soft and it will continue to be soft because of the logistics and the thing that we all know in terms of what is going in the industry worldwide. But all of them somehow expect that the second semester it's going to be better.

And I would like just to say that we are seeing -- there is some inflation in car prices. We know that interestingly enough, it's around 9%, slightly below 9%, that's according to the NCI, what has been inflation on new cars, even though they are not necessarily available. But interestingly enough there's also increases in the used car segment. And that is somewhat surprising, and it is the [ first ] for many, many years in Mexico.

So all in all, we expect to be growing in the mid-single digits, and which is what we expect for the year.

[Jose Correa Etchegaray, executive]

And let me add 2 relevant things on the top line. First, on new car sales and the financial institution segment, we need to dimensionalize the size of the impact, given the slowdown on the car industry. And to do so, we are now comparing just as a reference, what would have been the increase on our top line if we have seen new car sales at the 2019 level.

And it is a $300 million in premium. That is just the first share. So in other words, there's 3 percentile points on written premiums impact had we seen the 2019 new car sales amount, okay and the second, because Antonio already alluded to the -- benefit and the good performance of the individual sector. But I don't want to be shy about the relevance it had. The individual sector -- segment is up 10%, but it's not only 10% this quarter.

It's up 30% or more or close to $1 billion in premium relative to 2019. That means that in a contracting market where new car sales have not increased, Qualitas continues to be able to capture new cars either because they did not have an insurance or else we're bringing them from competition and that is due by playing to our strength, the fact that we just opened up new offices in the first quarter, 7 of them.

The fact was we have increased up to 19,000 of agents our network speaks to our ability to be able to reach and capture those individual customers, which actually have a higher loyalty and they also have better profitability. And those 2 items, I think are relevant to consider when seeing a top line that just like a number may seem that is shy at 1%, but that is foundational, very strong when you look at those 2 details.

[Jorge Henderson Cubillas, analyst]

Thanks a lot Bernardo and Jose Antonio, all very useful. And we have a follow-up question. It's on your guidance. I don't know if you have the same guidance that you gave on last call that it was and the loss ratio between 63% and 65%, the combined ratio between 90% and 94%, ROI between 100 and 150 basis points over the reference rate and ROE low end of 25%, is that still the case or changing some of the provisions?

[Bernardo Salas, executive]

Sure, Jorge let's start with the indexes. Yes, we are slightly ahead of our target in terms of 65.7%. But it is important to note that the fact is that probably, as we stated in the earlier remarks, is that -- the mobility and the loss ratio increased a little bit faster than we had anticipated, and that's why we are taking the right actions regarding our pricing on that one.

But it continues to be within our -- it's in the top side of our range. And for the combined index, it continues to be in our long-term -- within our long-term target. Obviously, we have had a very good result back in 2020 as a result of the pandemic. But considering where we are now, we believe that we will be within those levels. Now do you want to take the...

[Jose Correa Etchegaray, executive]

Yes, the financials, let me expand Jorge on the financial income because -- this was something that -- well I have alluded to in my initial remarks, but it's important to consider. Our financial income for the quarter had 2 main impacts, one on the equity position, as I mentioned and the other one on how were time -- on our portfolio in terms of duration versus the increase on reference rates.

We are increasing the reference rate expectations from the previously expected 6% to 6.5%, which, by the way, was the consensus at the beginning of the year to now [ 8% to 8.5% ]. The fact that only a portion of our portfolio, around 60% captures immediately the benefit on rate increases or decreases means that we will not be able to fully capture that upside in the interest rate this or fully this year.

And therefore, delivering between 100 to 150 basis points ahead of reference, looks a bit more challenging. That also considers the fact that we are behind the curve on the first quarter results. But we're taking the right actions without jeopardizing or taking unnecessary risk and always in compliance with our investment guidance to maximize the portfolio. But as I said, it's looking very challenging to be where we wanted to be between 100 to 150 basis points ahead of reference.

[Jorge Henderson Cubillas, analyst]

Okay. That was very clear. I mean only to get that clear so you -- you mentioned you're still expecting to post an ROE between 20% and 25% or in the low end of this range, right?

[Bernardo Salas, executive]

Our long-term commitment remains unchanged between 20% and 25%. But as we overdeliver a few years back, we have consequently overdelivered in the past 4, there might be some bounce we may be falling short in the next quarter. This quarter was at 17%. And this is only not -- this is not only based on business performance no, and the profitability quarter-by-quarter, but also recognizing so we have set about our capital and equity basis.

The denominator is now at a high end of -- actually, it's a new water mark above $20 billion. And that trades against us when we're looking at ROE. We're taking the right measures. We are increasing dividend payouts and giving back to shareholders, and we're also increasing on the projects that will provide the sustainable growth and profitability for the long-term of the business. So net, we should expect that next quarters, we may still be down of the 20%, but that doesn't mean we're shifting our long-term commitment of that range.

[Jose Correa Etchegaray, executive]

I would add to what Bernardo said, Jorge, that our business and our industry is cyclical to some extent. So we are now in the low end of the cycle, but we had like 7 or 8 years to go. So this is no different than that, but we expect that at some point in time, there is some -- the market recover some sense and we go back to that. But as Bernardo indicated, we continue to be -- with those targets in mind in the medium and long-term, for sure.

[Jorge Henderson Cubillas, analyst]

Great. Okay so again, thanks a lot for the color and your time Antonio and Bernardo.

[Operator]

The next question comes from Carlos Legarreta with GBM.

[Carlos de Legarreta Diaz, analyst]

Just in terms of the policy, let's say, the prices for the policy it's according to [ analyst ] data, those have been increasing by around 1 point below the CPI overall increase. Is that -- this is for 2022. Is that something that makes sense to you given the data that you've seen for you guys and in the market or...

[Bernardo Salas, executive]

Well, let me tell you, Carlos, and thank you for staying with us today. Let me tell you that the [ analysts ] are very general numbers. I mean I have asked the technical people here to find what the analyst says, -- and I found that it is very general. And it is important to note that we have very specific in terms of pricing in our different business lines. So it is very difficult to say that -- but it's because they usually -- they consider that in terms of new car pricing only.

And we take everything, we take fleets, we take financial institutions. We take individual, we take everything. Yes, yes and it is -- as I mentioned earlier, the inflation in car prices, in new car prices was slightly below 9%. And -- but we have seen also that in the used cars, we have increasing more than that. So we take and we price according to ZIP code. We price by risk -- taking risk. So it is very difficult to compare vis-a-vis [ the making ]. So -- because what we are trying to do is to right price on the risk to make sure that we have a profitable business in that we underwrite, yes.

[Carlos de Legarreta Diaz, analyst]

That's what I had in mind. Just wanted to confirm that.

[Operator]

The next question comes from Carlos Gomez with HSBC.

[Carlos Gomez-Lopez, analyst]

Yes, I would like to go back to the growth that you expect for the coming years, as you said you have higher inflation today. How much do you expect your units to grow for the next 2 or 3 years? And do you think part of the current inflation, especially in the used cars might be reversed, how would that affect your business?

[Bernardo Salas, executive]

So well we don't have a magic ball here, but what we could go back to is we want to grow ahead of the industry and that is an ongoing expectation. We understand that the actions that we are taking that are ahead of the market. And as I mentioned, may have an impact in the short-term in the next few quarters. What we have forecasted for the Mexican operation, ongoing is around mid-single digits, so anywhere between 4% and 6%.

This will always be affected by new car sales and how the recovery goes. And on top of that, we expect that the international subsidiaries contribute to around 2 points on both growth and then the new venues are expected to contribute between 1 and 2 point additional. So we do have a line of sight that -- as a foreign company, we want to grow between 8% and 10%. But again, that is broken down differently by business units and to the most relevant of our business. I would say that mid-single-digit growth is what we have in the base model forecast.

[Carlos Gomez-Lopez, analyst]

Sorry and that's for the year or for the coming 2 or 3 years?

[Bernardo Salas, executive]

That's for the coming 2 and 3 years and I would say that the year expectations still in the mid-single-digit growth is certainly going to be an uphill next 2 quarters, but anywhere between low and mid-single digit would be still fair to see. Carlos, one more thing you also mentioned a number of units. I think that's a tougher one, because when I mentioned growth in terms of premiums, that incorporates some pricing.

The number of insured units, we've grown over the past 5 years our compounded annual growth rate is 4.5%, I think it would be fair to assume. But as I said, the strength of our business is evidence when we look at growing 100,000 units in just 1 quarter or over 350,000 units in a year in a declining and contracting market. Also, I think that will continue to be our priority to go out there and capture as many units that -- do not have an insurance or that may be positive to our business.

[Jose Correa Etchegaray, executive]

And I would add, Carlos, I would add that -- if we look at how is the breakdown by all of our business lines in Mexico and the different countries, all of them, and I repeat, all of them are growing in the number of units of [ insured again ].

[Carlos Gomez-Lopez, analyst]

And about the price for the cars, in particular the used cars, how is that positive or negative for your business?

[Bernardo Salas, executive]

Actually there is no -- there is an increase in used cars. So it's actually, what we have been doing is the insured amounts we are increasing. And it is surprising because we started seeing this at the beginning of the year and in which we are seeing the market value of used cars has increased. So actually, that is increasing the way the total amount insured. And obviously, our premiums reflect those increases for our customers, for sure.

[Carlos Gomez-Lopez, analyst]

And isn't that what we should expect what is happening in the U.S., which is the reference market. And my question is more what happens when rate -- when the price is reversed. I mean would that be very negative for you or that's the normal ebb and flow in your business?

[Bernardo Salas, executive]

So I think there's 2 folds. One, in terms of cost of premiums, we follow the dynamics. So when we see those prices going back, we will adjust accordingly. Now there's a different angle to this that is having a benefit actually by having used car sales going up, which is our salvage and recovery. As you know, Qualitas as a market leader generates around 2,000 total losses per month.

And those total losses are sold through an auction and we recover a good percentage of the cost. Now that percentage has also been following the trend of used cars -- we're now recovering close to 50% of the value that we pay to those, and that compares around the 30% to 35% historic percentages recovery. And therefore, when you look at claim costs, all of that is helping mitigate the claim cost average increase.

And it's all part of the question and we consider it as such. When we see that turning point, which we know will happen eventually, we will also see that percentage of recovery going back down, and therefore, we'll have to see and adjust through other items...

[Jose Correa Etchegaray, executive]

But -- and the claims -- also the claims will go down so that's not going to be an issue.

[Operator]

[Operator Instructions]

[Santiago Monroy, executive]

I think we'll now go with the written ones. So we'll start with [ Javier Lessua ] from [indiscernible]. Good afternoon. In addition to the 10% price increase implemented in first quarter 2022, what level of price increase should we expect in the following quarters?

[Bernardo Salas, executive]

Well, let me take that, Javier, and let me tell you that really the 10% increase -- it's considering versus last year. Therefore we have been done since the second half of 2021. Now we have implemented -- again we implement this by -- our breakdown of the type of equipment that we have is quite substantial. So we analyze that very carefully in order to take the price increase.

Now -- but to answer your question, very simple is that we -- in the second quarter, we should be taking around 5% in terms of price increases that actually we are in the implementation phase as we speak. So that should help us. And then the key here is to be able to make sure that we stay within our targets in terms of the loss ratio as we have anticipated. So that would be the short answer.

[Jose Correa Etchegaray, executive]

Historically we have gone through both technical assessments of pricing every 4 months. And therefore, in the next 4 months or sooner as needed, we will look again at the trends and the prices and the cost increases and adjust as needed.

[Bernardo Salas, executive]

And the competition because we cannot -- we need to make sure that at some point in time, as you know, and it is public information, some of our top competitors are with a combined ratio in excess of 100%. So hopefully, they will have some incentive to increase prices, and it will depend also on that part.

[Santiago Monroy, executive]

We will now go with [ Carlos Ropelo ] from [ Lumier ]. To what extent do you expect ROE levels to recover to historic levels above the 20% range, what would drive the recovery?

[Bernardo Salas, executive]

Carlos, I think the recovery will be led by twofolds. One is the business. We want to continue delivering strong underwriting results and strong financial results. We acknowledge that this quarter, we fell short on financials. But moving forward, we should expect that part of the recovery is by retaining the strong top and bottom line in the operation [ fees ] and a strong financial income in line with our target.

The second piece on the ROE recovery would be just to reduce our capital to sustainable levels. And that is going to happen by the actions that we've mentioned, both maintaining our dividend policy and consistency as we have done so in the past in compliance with a revised dividend policy that was issued last year; and second, by making sure we put that business to work -- that put money into new venues that probably not in the immediate or short term, but in the middle and long-term, and we are treated to that 20% to 25%.

That is one of the things that we're highly considering when we're assessing new potential avenues. And to be fair, if we were not to come up with many of them, then the money belongs to shareholders, and we would give it back for them in the right [ time ].

[Santiago Monroy, executive]

We will now go with Gilberto Garcia from Barclays question. Hello good morning, can you comment on the strong performance from international operations? Where do you see sustainable premium growth?

[Jose Correa Etchegaray, executive]

Certainly, certainly. Bernardo, will you take that one?

[Bernardo Salas, executive]

Correct, we're very encouraged with the international subsidiary performance. They're growing broad-based in terms of the insured units. We're gaining new agents on a monthly basis. We are opening new offices following the Mexico successful model. Just over the past months, we've opened up in Peru, for example, a second office in Lima, a new office in Arequipa, a new office in [ Piura ] and there's line of sight for 2 more cities to be opened in the next month.

So I think -- we've taken some time. The international expansion is probably 10 years ago, but we're putting our foot on the gas pedal, and we're pushing further because I believe we now have what is a model that is relevant for the local market, in which agents are seeing Qualitas the company they can trust, and we are creating value for our stakeholders. It is important to note that different businesses are in different levels of maturity.

For example, in Costa Rica, we -- this first quarter, we crossed a milestone of 10 million premiums in written premiums and a 13% market share. Both of them record numbers. El Salvador is up to a nice recovery and Peru and as I mentioned last year, it's looking very strong, and we believe that we have what it takes to continue that 20% growth momentum. Now just to wrap it up, in the U.S., we know there's a huge potential out there.

I mean the U.S. just crossed last year the 100 million premium milestone. But that can be a business of $200 million to $300 million or up to $400 million in premium. What we need to pay is we need to acknowledge that it requires a lot of capital. It needs a different model there in the U.S. And also, we want to balance top line and -- bottom line momentum because profitability it's a different story as well in the U.S., considering long litigation cost and timing, especially in the Texas space.

[Santiago Monroy, executive]

We'll go with now another question from Carlos Ropelo. What is the potential for increased penetration of our insurance coverage in Mexico? And what is the current level of noncompliance with mandatory coverage and is there any impetus to improve compliance?

[Bernardo Salas, executive]

That's a good question, Carlos. The potential is very substantial. Having said that, it's not going to happen anytime soon. And the reason being more than anything, we are around 31% in terms of penetration of car insurance in Mexico. So let me tell you that as long as the economy is soft, and it continues to be soft after the pandemic, we need to remind everyone that -- in 2022, we have not yet recovered the economy, the Mexican economy to the levels prior to the pandemic.

And that's important because in order to improve penetration, it is important that the economy behaves in a healthy way, something that is not happening. Now having said that, and considering the other part of your compliance with the [ commentary ] announced mandatory -- with the mandatory insurance with the mandatory insurance -- that's something we are working with the industry to make sure that -- there is a big chance of that.

But let me tell you that the mandatory insurance in the case of Qualitas -- it's not moving the needle. I mean we would like that to be better. Certainly, we will continue working through the industry. But really, it is very, very, very low the impact in Mexico. And we are the leading third company in [ electric ] car insurance company in Mexico. It is amazing that there's such a low level of insurance being mandatory insurance.

[Santiago Monroy, executive]

I think we do not have any other questions. So if there is no other phone ones, then I think we could cut it off.

[Operator]

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