Qualitas Controladora SAB de CV

BMV:Q

Earnings Call Transcript 2019-Q2

[Operator]

Good morning and welcome to the Quálitas second quarter results webcast. Quálitas' team will review the company's corporate structure, the operational and financial performance for the quarter, provide a summary of recent events and answer any questions that you might have. If you have trouble visualizing the presentation, you can also find this document in the Quálitas IR website. If you continue with such trouble, please contact Violeta Ruiz. Her contact information is being currently displayed.

Information discussed on today's call may include forward-looking statements regarding the company's results and prospects, which is subject to risks and uncertainty. Actual results may differ materially from what is discussed here today. The company cautions not to place undue reliance on these forward-looking statements. Quálitas undertakes no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise.

I would now like to hand the call over to Jose Antonio Correa, the CEO. Please go ahead.

[Jose Correa Etchegaray, executive]

Thank you, Samantha. Good morning, everyone. Thank you for joining us today to review our second quarter results. As usual, on the screen right now, we are displaying Violeta Ruiz's contact to assist you in case you were to have any trouble. Today's session, we will be censoring our second quarter financial performance, and we will touch as well some other key topics, such as our portfolio outside the core and our sustainability efforts. Finally, we will have our usual Q&A session.

Before we move into the financials, I would like to give you a quick update on our corporate structure. During the AMJ quarter, we acquired the remaining shares of CristaFácil and Easy Car Glass, our vertical subsidiaries in charge of car windows and windshields. We strongly believe that while still relative small in size, there is a lot of upside and these businesses will continue to our strategy, not only by being accretive to our results, but also by further differentiating ourselves in our core DNA pillars, which are: one, cost. By creating scale and implementing Quálitas culture of cost control and scarcity mentality. And second, service by being faster and better on fixing or replacing car glasses as a reference, car glasses are involved in around 10% of our claims.

Regarding our international subsidiaries and as you will, last quarter, we bought a small insurance company in Peru, which is now part of our holding company. In this second quarter, we started operating under new leadership and implementation of Quálitas brand, systems and model. While this will still take a few more weeks to conclude, we are making great progress on setting the fundamentals and encouraged by how the market has received us.

In the balance of our subsidiaries, we are also posting results that reflect progress towards our goal of profitable and sustainable growth. For example, in Quálitas U.S., which represents about 3.5% of our written premiums, we are growing double digit with positive and relevant profitability. We are happy with the performance of the business and its potential, which we are investing [ whole towards ] accelerating growth.

Now moving and to our core, in Mexico, during this this quarter, we opened 5 new locations across the country for a total of 179 service offices and 235 development offices. We'll continue working hand-in-hand with the regional directors and agents, being close to them and to our policyholders is embedded in our culture and the key point in difference. I am excited to share that in this quarter we did 4 million insured units. We celebrate this milestone not only because of what it means in terms of size and scale, but the relevancy of consistency. We have grown our insurance every single year since Quálitas was founded in 1994 and we have done so by staying true to our key pillars, provide best-in-class service to our policyholders and agents, while maintaining a low cost structure to offer best value.

In addition to the 4 million insured units, we are posting a very strong second quarter, both top and bottom line, and we are very pleased with the results, especially in a tougher environment as reflected by the new car sales industry, which declined double digit versus year ago in this quarter.

Moving forward, we recognize facts of uncertainty and volatility due to Mexico's economical slowdown and international trade conflict. But as I have mentioned before, we are well positioned for them and confident of our performance in the future. We have healthy financial structure, we have solid processes, structural scale and specialization, innovation based on technology, a unique decentralized commercial model. But above that, we have the commitment of 5,000 employees across our 400 locations, working towards cost and service that have been and will continue being key competitive advantages for Quálitas.

And with that introduction, I will shift it to Bernardo, our CFO, to take you through our second quarter financial figures and highlights. Bernardo, please.

[Bernardo Salas, executive]

Thank you, Jose Antonio, and good morning, everyone. I will now cover the second quarter performance, which reflects the strength of our business and our ability to create value for our agents and shareholders consistently. Our AMJ figures are very strong, improving across key metrics versus those of same period a year ago. Starting with the top line, with top line, our written premiums grew 4.1%, regaining growth and taking our year-to-date to a minus 2%. Earned premiums grew 11.6% for the quarter for accumulative 2019 growth of 8.2%. Growth was driven by the continued momentum of our individual and fleet businesses, which grew double digit, more than offsetting the soft performance of our financial institution segment.

Underwriting results for the quarter was a standing and reached MXN 1.1 billion, which represents 3.8x of what we delivered same period year ago. These results were driven by the lowest loss ratio in the past 2 years and a consistently low operating and acquisition cost. I will expand of each of these metrics later on.

Cumulative underwriting results now stands at MXN 2.1 billion, which is MXN 1.4 billion above same period a year ago. The comprehensive financial income delivered MXN 620 million for the quarter, 2.5% higher than last year and taking our year-to-date performance to MXN 1.3 billion or 18.8% above year ago. These results reflect a high interest rate, which has been partially offset by a softer performance of our domestic equity portfolio.

The resulting net income for the quarter stands at MXN 1.3 billion, more than twice versus 2018 second quarter. Cumulative net income stands at MXN 2,500 million, more than doubling what we reported same period a year ago and slightly ahead of our 2018 annual profit. Cumulative income per share stands at MXN 5.9 that compares to MXN 2.8 of last year, reflecting the strong bottom line performance in addition to the effect of our share repurchase program. All in all, our net margin for the period was 15.1%. That compares to the 8.2% reported in second quarter 2018, resulting in extraordinary 12-month return on equity of 38.6%, well ahead of our ongoing target and the highest ROE since 2013.

I will now provide a bit more color on our top line, some key metrics and the landscape. Starting with the latter, new car sales in Mexico continued soft momentum with a weak second quarter in which sales decreased 11%, taking year-to-date decline to 6.4%. New car sales have decreased in the past 8 quarters. Despite this headwinds, and as I previously mentioned, we regained written premiums growth, closing at MXN 8.3 billion, up 4.1% or MXN 328 million versus same period a year ago, and as Jose Antonio alluded, reaching the 4 million insured united milestone by adding 139,000 units during the quarter. This is equivalent to a 3.5% growth compared to last quarter or a 4.1% year-on-year.

We hereby provide perspective by key segments, which is consistent to what we have seen on the past few quarters and to what we expected, specifically traditional segment, which is the combination of individual policies and fleets, grew 19.8% compared to the same period of last year and a 10.9% year on -- year-to-date. On the other hand, financial institutions, which correlates more to new car sales, was down 16.3%, making sequential improvement to our expectations to stabilize in the next couple of quarters. As a result of the segment sheet, we now have portfolio that is more skewed towards the annual policy duration with a mix of 81.6% annual and 18.4% multi-annual that compares to 71.7% and 28.3%, respectively for the same period a year ago. This new mix provides not only higher margin, but equally important to lower our risk by providing more flexibility to adjust tariffs, which we find it convenient during times of volatility.

We're posting another quarter where combined ratio was well below of our long-term goals, closing at 88.1%, which is 760 basis points below of what we -- of last year's and taking a community combined ratio to 87.6%. The adjusted combined ratio, which is the ratio that means international standards, ended this period in 86.6% that equals to a very strong underwriting margin of 13.4%. The positive result was mainly led by a loss ratio that closed at 59.3% for the quarter, which compares to 67.4% of last year.

Key drivers for this reduction of 800 basis points were: first, the ongoing efforts on risk prevention, supported by technology and industry expertise, mainly focused on heavy equipment. This continues to providing the effective and decreased both robberies and accidents. As a reference, during this years, robberies have decreased 16% for Quálitas, and recovery has increased 5% year-on-year. Second, our discipline on pricing accordingly, where we have increased tariffs in businesses with high historic -- with the historic high loss ratio even when this means losing some of them and decreased those that are proven to have lower risk. Net tariffs changes for the quarter were basically flat, more important changes with the portfolio segments.

Last, nonrecurring impact of a MXN 100 million due to a reduction in the capital requirements for the quarter. We expect this to partially paid out during the balance of the year.

Moving to acquisition cost. We closed the quarter at 21.6%, which is 108 basis points below the same period a year ago. Reduction is explained by segment mix, where financial institution carries a higher acquisition cost due to its nature.

Finally, on operating cost, we close at 7.1% for the quarter, which is 160 basis points higher than we reported last year. This is explained mostly by the increase on employee and profit sharing or PTU in Spanish, which will continue to increase at profit in Mexico increases. There are, as well, but to a much lower extent, increases on service office directors fees, which are variable and subject to growth.

Moving to investment portfolio. We will show in the next slide the breakdown of our investments. During this second quarter, our float assets reached MXN 30 billion, MXN 1.8 billion or 6.3% higher than last second year's quarter. Our portfolio mix continues to reflect Quálitas' strategy towards low risk investment with only 15% of our portfolio invested in variable income to generate the long-term value expectation. The 85% is invested in fixed income, taking advantage of high interest rate in Mexico where most of our portfolio is invested. Together with the investment committee, we continue to assess changes in the portfolio to better capitalize opportunities.

As I referred in previous slides, returning investment for the second quarter was 7.1%, below our quarterly objective. High fixed interest rates were partially offset by a softer performance of our domestic equity. Although we aim to generate value in the mid and long-term with this mix. Year-to-date financial income stands at MXN 1.3 billion, which is MXN 206 million or 18.8% above last year's.

Moving to our stock performance. Earnings per share stands at 8.7%, which reflect a 50% increase year-on-year and 3.5x versus 2017. As a reminder, we canceled 10 million stock during the second quarter and we'll invest between MXN 650 million and MXN 700 million in our share repurchase program.

Our earning stands at 6.2, which is low relative to the balance of the market and to our historic ratios, thus we're confident there is important upside to our stock price. Our stock has had really good performance during the year. Despite a soft Mexican IPC performance, during this second quarter, it reached a historic watermark, closing at MXN 53.89, up 13% for the quarter and 30.3% year-to-date. These results are well ahead the IPC and the financial sector peer group.

The daily trade pickup and we traded daily average of $1.7 million during the quarter. This reflects an important increase relative to our past 6 and past 12 months daily average. Finally, I would like to highlight that we move up one place standing at #44 in the marketability index, which makes us a high liquidity stock in the Mexican Stock Exchange. We will continue working toward further improving on this index.

Now we will review the capital requirements and the consolidating solvency margin. The regulatory capital requirement totals MXN 3.3 billion at the end of June, and the solvency margin was MXN 7.1 billion. That represents a percentage of solvency margin of 313%. Important to mention, we continue to receive anticipated changes by the regulatory Comisión Nacional de Seguros y Fianzas and while these results -- and while this result and -- while the results of these changes currently represents a reduction of around MXN 400 million, we're still expecting additional changes in the balance of the year, thus we cannot consider this amount final. The mentioned figures already reflect somewhat dissipated investments, including dividend payout, partial funding of the stock repurchase program and the Peru operation acquisition and setup cost. As we move to the second half of the year, we will fund balance of the approved stock repurchase program, and we'll continue investing as well and feeding some of our businesses for future growth.

With that, I will now switch it back to Jose Antonio to discussions our sustainability efforts and achievements, and we'll give you an update on our strategy for the upcoming years.

[Jose Correa Etchegaray, executive]

Thank you, Bernardo. Being a leader is not only a matter of results, it goes beyond and touches several factors, including sustainability. We take deeply into account how our daily operation impacts the environment and how we can make substantial changes to improve our community, to strive for a better world. I would like to take a minute to illustrate some of the actions we are taking. Regarding our environmental efforts, as of this quarter, we have now 141 hybrid cars, an effort we started just a few months ago and that we plan to expand to mitigate our fleet in order to reduce fuel emissions. In addition, we have our annual reforestation campaign among our employees, which has been very successful by the way, and their families, where more than 1,200 people attended, and 10,000 trees were planted.

As we have done in the past, Quálitas actively participates and supports nonprofit organizations that address social needs with focus on education, health and empowerment, in areas that are mostly needed and where we know we can make a difference. We also take care of our own with actions that contribute to the development for employees through scholarships and a unique online Quálitas University.

The sum of all made Qualitas part of the Mexican sustainable index IPC as of April 30, 2019. This index measures the leading companies in Mexico in terms of environmental, social and governance criteria and provides relevant information to investors that take this into account before investing in company. We feel good and encouraged to go continue expanding our efforts.

As shown during the presentation and the numbers reaffirm, Quálitas has consistently proven it is capability of generating value to its agents, business partners, policyholders, shareholders and employees. We acknowledge that future may be uncertain, but as I mentioned earlier today, I am convinced that by staying focused and playing to our strengths, we will be able to sustain our company's outstanding results and continue being the preferred insurance company. And with that, we conclude our remarks today, and I would like to open the line now for the Q&A session. We will begin with a telephonic questions, and then we will pass on the ones via chat.

Operator, could you please open the line now?

[Operator]

[Operator Instructions] We do have a question. The first question comes from Ernesto Gabilondo.

[Ernesto María Gabilondo Márquez, analyst]

Congratulations on your results. A couple of questions from my side. So very strong results indeed. Despite it will be difficult to repeat another couple of strong quarters. I think they have settled the base for a higher sustainable ROE and a strong cash generation for the investments portfolio. So what are your thoughts on this? I know that you do not change your ROE guidance, but given your strong results, aren't you more comfortable to think on a higher sustainable ROE within the medium-term range? And on my second question is related to premiums growth. We continue to see that a strategy of reducing exposure to financial institutions continue to pay off regardless of what you mentioned a tough scenario in the automotive industry by shifting toward annual policies and significantly reducing technical research. So if we continue to see a difficult environment in the outer industry, how much room will you have to maintain lower technical reserves and to maintain a lower exposure to financial institutions?

[Bernardo Salas, executive]

Thank you, Ernesto. I'll take the first one and then I'll pass it over to Jose Antonio to address for the second question.

Related to ROE targets, and as you said, our year-to-date performance has been way above our long-term expectations. Although we've managed not only to deliver that on the first 2 quarters of the year, but we've done it consistently over the past 2 years. We do believe our ROE long-term guidance between 18% to 24% is more sustainable in the mid and long-term, especially in current times of uncertainty and volatility. Having said that, as you will mention, we do believe that we are in a solid position and we could suggest that we can perform in the mid-to-upper range of our guidance, at least in the near term.

[Jose Correa Etchegaray, executive]

Yes, I think I agree with you, Bernardo. I think that -- I mean it is a very strong ROE, and I think that being the top of the range is considered -- something that will happen.

Now let me address the second one regarding the exposure to financial institutions, Ernesto. Let me tell you that we are happy with that. We have been reducing risk, as you mention. Let me tell you that the way we manage our businesses in Mexico is that all businesses are good. The requirement is that we have the right pricing for them, okay? And as such, the fact that we have been reducing risk is first because, yes, we want to reduced risk, but also because we are not being paid for the increased risks. So that's why we have been reducing our share in the Negocios Especiales in the financial institutions. Now as I can see, we have had a significant declines in those businesses, but then I start seeing that is going to be a diminishing. In other words that we probably -- in the coming months -- for the rest of the year, we are going to be having probably not much more declines on those. And important thing is that we are -- if and when they come, we are going to price them right. So I don't think at this point in time it's going to be an issue. It has worked well for us. I am very happy with the growth that we have had in the traditional businesses, as Bernardo mentioned. We have been growing double digit there, which -- that makes -- and that really is the strength of our business. Our business is throughout Mexico and this is where it shows the strength of our brand and the strength of our service and our cost. So I am fine with the fact that we have decreased the risk on those businesses, but we will get back at the right pricing in those businesses, Ernesto.

[Operator]

[Operator Instructions]

[Bernardo Salas, executive]

So in the meantime, let me just address one question that came in through the line of Martín Lara. Congratulations for the very strong results. Are you going to increase the guidance for the year?

We will not be updating guidance and likely we'll not do so in the future. What we can tell you, and as Jose Antonio was mentioning, we do expect the second quarter -- sorry, the second half of the year to stabilize on financial institution. Thus we anticipate that we could grow our premiums in the low- to mid-single digits. And regarding our bottom line, we do believe that we will go back to our historic long-term combined index on the mid to low 90s. Okay.

[Operator]

We do have another question that has come through. Would you like to take the next question?

[Bernardo Salas, executive]

Okay. We'll take the next question that came in through the web. It's a question from Enrique Mendoza from Actinver.

During the Q2, company registered a net decrease of unearned premiums from -- of around MXN 447 million, why? And on the other hand, the press release mentions a reduction in the capital requirement, translating into nonrecurring impact of MXN 100 million.

So let me take the latter first. On this onetime or nonrecurring that of MXN 100 million, yes. And as we have mentioned our capital requirements during the first half has gone down of around MXN 400 million. Actually in the last quarter, it was MXN 800 million. This is the result of the changes on the -- from the Comisión Nacional de Seguros y Fianzas under the formulas and the ways it's calculated and specifically, it addresses that we can leverage the return on certain bonus for the next year and consider that as part of our reserves. Now we do expect and it has been mentioned that in the balance of the year, we will continue to receive certain changes to the model, and that can easily wipe out the MXN 350 million to MXN 400 million that we have seen in the second quarter. The resulting MXN 100 million is effect of that lower capital requirement into the reserve under technical reserves. So again, the changes on the norms were to fade out that MXN 300 million to MXN 400 million. That MXN 100 million would also decrease if that were to stay because we do not know which changes are going to happen, then our benefit will not be going out or will stay for the balance of the year, okay?

And the first part of the question was unearned premium reserves decrease. Yes, this is the results between unearned and earned mix and also the way the technical reserves are considered. So we can take it offline and I can go into the details, but I don't believe -- first of all, it's a result of the balance and the mix of the businesses, especially between the annual and multi-annual policies.

[Jose Correa Etchegaray, executive]

And it is also the result of a reduction of reduction in claims. It is important to mention that we have had this reduction generally in the number of claims in total and -- in claims and that generated those changes. I believe Bernardo mentioned that robberies have reduced in -- for Qualitas around 16%. I mean the whole industry has received a reduction also in robberies, and we are well ahead in those reductions, by the way that. We mentioned that the robberies, as an industry in Mexico, have declined around 5% to 7% for the year and we are well ahead of that. And that all impacts into the combination of those reserves.

[Bernardo Salas, executive]

We have more questions on the line?

[Operator]

We do have a question from Gilberto Garcia.

[Gilberto Garcia, analyst]

You mentioned quite a few factor that contributed to the very positive result in terms of claims ratio. Could you give us an idea or some color on just how sustainable those gains could be in the medium to long term, thinking beyond this year, which probably should be a very significant benefit to the bottom line. But how should we think about the claims ratio in the next 3 to 4 years?

[Jose Correa Etchegaray, executive]

Thank you. Let me answer that one. Clearly, we are in an environment which -- as you are all familiar with insurance industry, we cannot have combined ratios very low. I mean, competition is -- doesn't really allow unless you are really well below in terms of costs, et cetera. We have had a very low claims ratio and a very low combined ratio. We know that probably that's not going to be sustainable long term. However, in the relatively short term, I think that we will continue to see relatively below what would we be the standard, let me call it, combined ratio. One thing that give us some important confidence on results going forward relates to the fact that usually when you are in situation like this, you see some pricing pressure. That's something that we have not seen. I mean, I travel around the country, and I've been in many, many places within Mexico, and I have not heard any type of complaints, so to speak, regarding that our prices are high. So even though we have a relatively low claims ratio right now and combined ratio, I do not foresee this pricing pressure in the short term. Longer term, obviously, the market will allow us or not allow us to be that but the key thing here is that as long as we continue to be having the excellence in service and that we have a structural cost advantage, we will continue to be -- to do well, no? I hope that answers your question.

[Bernardo Salas, executive]

I'll take the next question that comes in from Enrique Mendoza from Actinver. Regarding stolen cars, do you expect a sustained improvement for the next quarter?

So I wish I knew. What I can tell you is the industry has seen for the first time in 3 years the decline on cars and robbers. That decline, and as Jose Antonio mentioned, is around 6%. For Quálitas, that decline has been 16%. So we actually see the Delta due to our efforts on risk prevention, both prevention working hand-in-hand with the customers and also leveraging technology and innovation. So what I can tell you is that we do expect to always be ahead on having lower robberies than the average in the industry. So we're confident that this decrease will continue through the next month because we were at a very high base on robberies, especially if you look back at 2017 and '18. That's something that we do not control entirely, we can, and I said, we will continue to leverage in our efforts on risk prevention.

[Jose Correa Etchegaray, executive]

Yes, as Bernardo said, I wish we knew about that. But as I can see, I mean, there is some, I hope, I don't know, but I hope the trend somehow maintain. Obviously, as we said, we will maintain the flexibility that we have, which in any environment we are going to be more flexible than generally the rest of the market.

[Bernardo Salas, executive]

Are there any telephonic questions?

[Operator]

[Operator Instructions]

[Jose Correa Etchegaray, executive]

Well, if there is no more questions in the line -- sorry, operator?

[Operator]

We have no further questions.

[Jose Correa Etchegaray, executive]

No further questions. Well, let me tell you that we are very pleased with the results that we have seen for the first 6 months of the year. We will continue to show the key elements that Quálitas have had for the past 25 years. And as I mentioned to you before, as long as we are true to those values and to those key elements of our business model, we will continue to be successful. I thank you, everyone, for joining us today and wish you a nice day today. Thank you very much.

[Operator]

Thank you, Jose Antonio Correa. Ladies and gentlemen, that concludes the conference call for today. You may now disconnect. Thank you for joining, and have a good day.