Qualitas Controladora SAB de CV

BMV:Q

Earnings Call Transcript 2020-Q2

[Operator]

Welcome to the Quálitas Second Quarter 2020 Earnings Results Webcast. [Operator Instructions] And the conference is being recorded. [Operator Instructions]

I would now like to turn the conference over to Jose Antonio Correa, Chief Executive Officer. Please go ahead.

[Jose Correa Etchegaray, executive]

Thank you, operator. Good morning, everyone, and thank you for joining us today. Before we get into the second quarter results, I would like to start by recognizing we are living in unprecedented times resulting from the COVID-19 pandemic. We express our gratitude to all those on the front lines, [ marked by ] COVID crisis here in our home market, Mexico and around the world. We also express our solidarity to those directly affected by the pandemic. Over the past 4 months, we have [ had some challenge in work ] at the beginning of the year. But for me, it has been very inspiring to see Quálitas people at their best. When it started, our first priority has been to ensure the health and safety of the [ many employees we ] work with. Second, to ensure uninterrupted services to our agents and policyholders by quickly adapting our actions to their needs, including tariffs [ on some ] products to new requirements and also to protect the health of our business. And last, but certainly not least, helping the communities that have been most affected.

When brought together, these priorities will ensure Quálitas continues to stand strong during and after this pandemic. Let me briefly let expand on these priorities. The wellbeing of our employees has been our first priority, led by the expanded IT capacity to support remote work. And for those needed to be on the road or at the office, we comply with and exceeded all health authorities' standards, including proper equipment, distance restrictions, temperature scans, shift rotations and frequent disinfection.

Perhaps most importantly, we have constantly informed our employees on the actions that the company's is taking. The expectations for each one of them and the tools offered so that our more than 5,000 employees work towards the common goal of sustaining our operations during these trying times.

Once with the right safety and security measures in place, we have -- slowly, we executed our Business Continuity Plan through which we have been able to fully shape our customers and policyholders uninterrupted, complying with our commitments to suppliers, agents and clients and quickly adjust commercially to the new market dynamics and the needs.

As an example of the latter, we boosted our [ Express Claim ] tool, which avoids the need to claim officer in person. It is all from representing less than 4% of claims during 2019 to more than 10% during the first 6 months of 2020. With still upside potential, the digital tools and processes create a better customer experience by reducing time and implications to increase people's safety and also represent lower cost.

Within this priority, we intended to secure our business momentum, and we did this by supporting our customers. Understanding the difficult situation we are going through, we implemented various actions during the situation with discounts on renewals as well as financial arrangements, such as 3, 6 and up to 12 months installments without interest. As well as some rate stable period expansions.

For large accounts, we have tailor individual plans based on the needs and situation. And when looking at the year-to-date results and while it the work to be done, I can say the effort has been awarded, and the results are very strong.

But security effective of our people, excellent service to our agents and customers and business results is simply not enough when we are facing the biggest crisis of our generation. Quálitas has to stood up to our social responsibility commitment, maintaining financial, 8 projects within 25 organizations we partner with to support our local communities. And in addition, actively supporting programs intended for the health personnel as well as those mostly affected. One example is to highlight the internal campaign to raise money to provide meals to families in need and for employee information was matched by the company. Despite challenging times, we -- efforts exceeded the goals. We are building extraordinary solidarity and strong values of our people.

In the framework of the long-standing initiatives of the sector in favor of sustainability and reaffirming our commitments towards becoming an ESG leading firm, we integrated into our management, the principles for sustainable insurance, or PSI, launched by the financial initiative of the United Nations Environment Program. We are the first private insurer in Mexico to embrace the principles that constitute a framework for the global insurance industry to address environmental, social and governance matters.

Before we look to review the numbers in more detail, let me reassure you that we are completely focused on ensuring that we take the right and timely decisions so that Quálitas continues on the winning path, overcoming the impact of COVID-19, while investing for the future in order to emerge from this crisis stronger than ever.

I am pleased with the second quarter results, but most important with our organization. Our financials and our commitments have never been stronger. Our strategy is working, and we are confident together, as we will see the end of the pandemic soon and celebrate it.

The numbers Bernardo will be sharing include record profits and ROE and are attributable to being Quálitas' key strategies of excellence in service, cost control and specialization. They are also an indication that Quálitas best years are yet to come.

And with that, I will now hand it over to Bernardo, our CFO, for him to take you through our second quarter results as well as the expectations as we move forward. Bernardo, please?

[Bernardo Salas, executive]

Thank you, Jose Antonio. As already mentioned, the past few months have been a difficulty for all businesses. And our own has been no exception. Quálitas second quarter results were affected by major things in key business variables that netted out to a very strong bottom line quarter and the top line that was down versus year ago was on the high end of our expectations. It is important to note that directionally, we are landing the quarter within the ranges we anticipated when the pandemic started. Our recent premiums decreased 14% versus same period a year ago, significantly better than the 55% drop of new car sales and reflecting our portfolio diversification.

On a cumulative basis, our written premiums are almost flat with a slight increase of 0.3%. Earned premiums grew 0.7% in the quarter and are up 8.2% year-to-date, explains by the effect of multi-annual premiums. Regarding the number of insured units, we ended the quarter with 4.2 million, which represents 102,000 above June 2019 but slightly below the beginning of the year with a 0.3% decrease.

While we were able to renew a great percentage of our policies, they will not fully compensate the collapse of new car sales as well as the impact on key businesses such as tourism, daily car rentals and some line of businesses that were severely hit by the crisis and basically opted to reduce their fleet size. Underwriting results in the second quarter reached MXN 2,565 million, up 122% versus same period year ago, posting our best results ever. On a year-to-date, we're up 108%.

These results were driven by the lowest loss ratio in our history, explained by the effects of the lockdown measures, which translated into an evident reductions of cars and trucks on the road. In addition to this, we maintain a stable, below-industry-average operating and acquisition cost. I will expand on the specifics later on.

The comprehensive financial income for the quarter was $659 million, a 6.3% increase versus same period year ago. Despite the positive results for the quarter, it didn't fully offset our first quarter decline, taking our year-to-date cumulative results to $718 million, down 45% versus a year ago and representing a portfolio return of 3.1%. I would like to briefly expand on this front, considering the relevance it has on our business and evolution both on interest reference rates as well as equities.

Over the past quarters, we have accelerated the strategy that started early in 2019, which was to reduce exposure and volatility in our portfolio. As a reference, in early 2019, we had 18% of our portfolio in equities. It was 14% by the end of the year. And it now represents 10.9%. Funds have been shifted to lower risk and higher liquidity assets so as to reduce major fluctuations, especially in what is still an uncertain economic period.

As a result of this evolution in our investment strategy, together with the decrease of fixed rate, we anticipate financial income for the year will be below that of 2019. But then again, reduced exposure and large [ increase ] maintaining a positive yield. We believe this move is consistent to Quálitas' defensive approach and in line to our investors' interest. You can all be certain that under our CIO leadership, and together with investment committee, we are constantly analyzing opportunities on our portfolio, seeking to deliver a yield above annual reference rate, and we do plan to get back on the equity market and other higher risk investments down the road when we see the right conditions.

The strong underwriting performance, together with the financial returns, resulted in a net income for the quarter of MXN 2,237 million, up 72% versus same period year ago. Our year-to-date net income stands at MXN 3,677 million, up 47% or MXN 1,183 million versus first half of 2019.

While we celebrate this new quarter record profit and recognize the hard work behind it, we know these extraordinary results were affected by a situation outside of our control. Thus, likely not sustainable in the long run. I will provide perspective and expectations forward later in my remarks.

The cumulative earnings per share stands at MXN 15.8 that compares to MXN 13.2 last quarter. All in all, our net margin for the period was 31.5% for the quarter and 22% year-to-date. That compares to a 50.7% and 15%, respectively, for the same period year ago. Our 12-month return on equity stands at 46.7%, well ahead of our long-term goal and the overall market performance. Before moving into P&L specifics and considering businesses are being impacted differently based on their nature and exposure, I would like to give you some color on the landscape on how current situation has impacted our industry, and thus, our results.

Insurance services were included as an essential activity in Mexico since the beginning of the pandemic. This was true as well for in all the markets we operate. Therefore, and as Jose Antonio mentioned on his opening remarks, Quálitas adjusted its operation but continued to provide uninterrupted service to our policyholders and agents. Regarding new car sales, they were down 55% for the quarter and 32% year-to-date. While impossible to predict the Mexican Association of Automobile Distributors expect a 30% decline by the end of the year, which will represent an important headwind for the entire industry, ours included.

Now touching on another key variable fact. During the second quarter, we continue to see a positive trend, becoming the 6th consecutive quarter of improvement. While our industry reported thefts were down 19%, and they were down 23% for Quálitas. The daily reduction of thefts, which is now 32% versus 2 years ago has been a great tailwind for our combined ratio. Importantly, history shows that unemployment increases and economic conditions deteriorate, security metrics worsened, and this could result into the reverse of the trend we have had over the past quarters.

Finally, during the second quarter, Mexico Central Bank decreased 150 basis points to benchmark interest rate, closing the quarter at 5.0%. Relative to the second quarter of 2019, rate is down 325 basis points, which, as I already alluded, is expected to impact our comprehensive financial return for the balance of the year.

Going back to the financials, I will provide a few more details in our top line and key cost metrics. Regarding recent premiums, and as mentioned before, they were down 14% during the quarter. While both traditional and financial Institutions segment decline, [ performance ] ended the quarter at a minus 13.8% and down year-to-date minus 2.4%.

The traditional segment composed by individual premiums and fleet has been affected by disposable income and partial reduction of the number of units due to economic conditions. The 26% fall in underwriting through our financial institutions is explained by the contraction of new car sales referred to earlier on. Year-to-date, financial institutions are down 2.1%, and it would be fair to assume they will continue to be down for the balance of the year.

Important to mention is the monthly progression of our written premiums within the quarter. As weak as March was April and then sequentially improved with June being basically in line of last year.

As Jose Antonio mentioned, renewing our existing policyholders' [ universe ] is our top priority. We have put plans in place, and we feel very positive on the results they have had. Regarding our underwriting in geographic subsidiaries, I am happy to share that despite the complicated landscape around the globe, written premiums grew 46.5% all-in or 26.1%, excluding the exchange rate fluctuations, driven by a [ 64 and 65 top line ] increase in our United States and Costa Rica subsidiaries, respectively.

We are also encouraged by the performance in Peru that in less than a year has gone from basically no market share to 2.5% in May.

Just as one other example of the actions leading to this growth. In the United States, during the second quarter, we launched our [ cross program ], and we opened our first office in Texas. These 2 pillars have enormous potential to sustain double-digit growth in the future. We're confident that this is an important step towards strengthening our operations and presence in that country.

Regarding the mix of annual and multi-annual premiums, by the end of the quarter, our portfolio was 81% annual and 19% multi-annual policies. This portfolio mix, which relies on annual premiums more than in our historic average, increases our ability to react more quickly to market and industry changes with tariffs adjustments between 3 and 4x per year.

Moving now to costs. In the second quarter, our combined ratio was 77%, the lowest one ever. The adjusted combined ratio, which is the ratio that meets international standards, ended the quarter at 70.6%, that give us a very strong underwriting margin of 29.5%. These results were propelled by an unprecedented growth ratio of 43.4% that compares to 59.3% of last year's, and a guidance range of 62% to 64% at the beginning of the year.

As previously mentioned, this loss ratio was driven by the lockdown that were implemented in Mexico during mid-March and started to ease in late June. Obviously, it resulted in less vehicles on the street and hence fewer accidents, benefiting the entire auto industry.

During May and [ June ], we serviced 43% less accidents than compared to the same period like last -- year ago. But we're seeing claims getting back to historic average as economy reopens.

As Churchill once said, "We should never let a good crisis go to waste." And the unfortunate pandemic we're living, has also forced us to accelerate some internal processes and technological innovations to improve and become more efficient. From working remotely to expect adjustment option, as Antonio mentioned as well as improving our daily operation. For example, with total [ office ] payments in no more than 72 hours. We're also adjusting the way we interact with agents, shifting to virtual seminars with best-in-class tools to assure effective and efficient meeting.

Moving to acquisition ratio. We closed the quarter at 23.1%, slightly higher than last year for a cumulative rate of 22.7% or 79 basis points above year ago. The cumulative increase of 79 basis points is explained by the higher production policies for agents and commercial areas linked to the underwriting during the first quarter of 2020.

Finally, our operating ratio stands at 10.5% for the quarter, an increase of 332 basis points when compared to the same period a year ago. First half operating ratio stands at 7.8% or 222 basis points above year ago. The increase is mostly explained by employee profit sharing, which is linked to the business performance and had a 94% increase when compared to second quarter of 2019.

If we were to exclude it, year-to-date operating ratio would stand at 4.6%, 89 basis points above year ago, explained by the onetime benefit of MXN 185 million in our last year balance.

Geographic mix, where subsidiaries carry a higher cost and to a lower extent pandemic-related expenses, also affected operating expenses.

Quálitas cost control DNA led to a model in which most of our costs are variable and linked to business performance, mainly premium production and loss ratios. During 2019, our fixed cost spending, which includes salaries and benefits, was in the range of 4% to 6%, well below most industries. Despite this, we're not standing still, and we have implemented a cost-saving program that includes hiring freeze, elimination of annual salary increases and a reset of budget, where we are making strictly the necessary expenses.

Now moving to the capital requirements and consolidated solvency margin. The regulatory capital requirements totaled MXN 2.4 billion at the end of the second quarter, reflecting the stabilization of premium and the discussed shift of our portfolio to fixed rates. As always, we will continue to apply our internal policy of having 1.5x the regulatory capital requirement to absolve potential fluctuations.

By the end of the quarter, the solvency margin was MXN 13.8 billion. That represents a percentage of solvency margin of 667%, which is the highest ever. This solid financial position and record capital reassures all stakeholders Quálitas' capacity to comply with its obligations, invest to grow across all our businesses, continue with our share repurchase program and seize potential opportunities if they were to be in line with our strategy and value creation mindset.

Moving on to our stock performance. During the second quarter, we had a very good one, more than offsetting the March decline. Our stock drove the quarter at MXN 90.3 per share, an increase of 50.8% in the quarter and is up 15.7% for the year. Both during the second quarter and year-to-date, Quálitas performance is within the top 10 stocks, well ahead of the Mexican Stock Market and our financial sector peer group.

As you all know, since April 27, Quálitas is part of the Standard & Poor's IPC Index. That includes the 35 largest and most liquid stock listed in the Mexican Stock Exchange. We're really happy and proud of this achievement. I'm confident that it will help us increase our company exposure and liquidity. The daily average traded amount during the quarter was $3.9 billion, which represents 2.3x in comparison with the same period in 2019.

We managed to go up 3 positions from Position #28 to Position #25 in the Marketability Index.

During the second quarter, Quálitas was also included in 2 other key indexes. The Standard & Poor's Dividend Index and the Standard & Poor's Total Mexico ESG Index. This is an important milestone that recognizes our track record of being a company that consistently provides dividend pay out to our investors and perhaps even more important our commitment towards becoming a leader on ESG matters.

Regarding our community financial ratio, earnings per share stands at $15.8, which reflects an 82% increase year-over-year. Important to mention that this ratio already excludes the 12 million shares in the process of calculation for a total of 413 million shares outstanding. Price to earnings stands at 5.7, well below other public insurance companies and price-to-book value stands at 2.2.

Before I move to provide some color on the next quarters, we would like to thank you all who participated in the institutional investor survey. We are really pleased to be the #1 financial nonbank small trust company across all categories.

We feel honored and truly committed to continue adding value to our investors and analysts and we attracted sales on your needs and expectations.

The last time we talked, we mentioned Quálitas' strength to face another company crises. Those are still true and even more relevant. We have no liquidity issues. On the contrary, we are the highest capital service. We have no debt on our -- and our low -- and we have low risk of collections. Claim ratio going down significantly and will still take some time to go back with historic average. And perhaps above all, our sound financial results, our commercial footprint and organization are stronger than ever and ready to adjust to market need and dynamics. We also discussed the foreseen impact that included a top line contraction resulting from new car sales decline and disposable income constrain; second, an increase in spare power costs due to the valuation recalling that spare parts make up to approximately 30% of our claim; and third, a decrease in interest rates. These impacts are coming in as expected. And as Jose Antonio mentioned, the action we have triggered in terms of discounts, flexibility to renew our existing customers and a [ colorful ] investments we're working and recognize -- are working, and they are recognized by our clients and policyholders.

Moving forward, we want to stay on this path. We will ensure we take the right actions to overcome this period, but we do not lose sight where we're heading. Our strategy is working, and thus, we will double down on it. As a reminder, our strategy is threefold: first, strengthening our core, which has been and will continue to be [ the case one ] in Mexico. We will ensure we offer best-in-class service, where we leverage our expertise, technology and culture. Our tariffs will always be competitive, supported by a nimble cost structure and we will continue to expand our commercial footprint to be where they need us to be. Second, accelerate our profitable growth in subsidiaries. As mentioned today, they are growing double-digit despite headwinds. They are now profitable, and we have the right lead, and we will invest in our mission of becoming more relevant. And third, we will explore new business opportunities by expanding our service to other business lines and markets.

Despite a clear vision of where we're headed and a path together with a global evolution of COVID cases and the long list of questions without an answer, it is fair to say that next months are uncertain. In Mexico, we continue to see an increasing number of cases over the past couple of weeks with some States having to move back to lockdown. The impact of the economy is just to be seen but likely to be an unprecedented GDP contraction of around 10%, which effect on consumers will be important.

As many other companies, we see no basis to issue a revised guidance. However, we have run several scenarios, and we anticipate that for the year, our top line will likely to be down single digits, with earned premiums marginally growing but still positive. The reduction of tariffs and executed discounts, the devaluation and the progressive increase of claims, along the reduction of interest rates, is likely to lead to a second half profit below last year's. But still with the outstanding first half, our 2020 year performance will be very strong, especially on the bottom line, with our return on equity well above long-term targets.

We're working closely across all functions and making the right decisions that will allow Quálitas to continue outstanding, being a company that creates value for its employees, for policyholders and investors in a sustainable and responsible way. And with that, we will open now, the line for questions.

Operator?

[Operator]

[Operator Instructions] Our first question comes from Ernesto Gabilondo with Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

Congratulations on your results. My first question is to understand the release of technical reserves. How sustainable do you see to continue releasing technical reserves? And how should we think about the earned premiums growth in the second half? And if you can break down the growth by segment, it will be very helpful.

[Jose Correa Etchegaray, executive]

Thank you for joining us today. Let me tell you that, yes, there has been some release of technical reserves. It is important to note that we have revised the models that we have for reserving. And as a matter of fact, last -- late last year, we have submitted to the regulator a model of reserving that is better aligned with what we see in the performance of our portfolio in Mexico. Obviously, we have not reviewed any -- we have not received, because of the pandemic, any answers from the regulator yet. However, I can tell you that the way we are reserving, it is being conservative in the way in which the laws that we have approved by the regulator, we are taking on the most conservative approach so that we don't have any problems in the behavior of the reserve. So we are confident that, that is not going to be an issue. And regarding the earned premium growth that you mentioned, yes, we still see some, I guess, single-digit growth in terms of the earned premium for the second half of the year, Ernesto.

[Ernesto María Gabilondo Márquez, analyst]

And -- but when we go and see the second quarter results, we saw a release of provisions of around MXN 1.6 billion. When we go and see the first quarter, you created provisions of probably MXN 200 million. And compared to the previous year, the second quarter, you create the release provisions of around MXN 380 million. So thinking about the next quarters in the second half, how should we think about these technical reserves? Should we think it will be around MXN 250 million per quarter? Or do you expect to continue releasing technical reserves in the second half?

[Bernardo Salas, executive]

Ernesto, let me try to answer that one. Obviously, technical reserves as a result of the methodologies that are approved by the commissions. We do recognize that the second quarter was a typically. It is very related to the low claims that we reported this quarter and also due to the mix. As we see multi-annual premiums going down, there's also -- the formula requires a less construction of reserves. It would be very hard to predict what's going to happen on the -- in the next 2 quarters, as it will depend on both the mix of our premiums and also the how far, how fast we see loss ratio coming back to normal rates.

So I would say that it's hard to predict, but be certain that we're following the guidelines based on the methodologies that are approved.

[Ernesto María Gabilondo Márquez, analyst]

Okay. Perfect, Antonio. And then I have a couple of questions. One is in your claims ratio, which again came at historical lows and probably explain due to the lockdown. However, what do you think should be the normalized and the sustainable claims ratio? And then my second question is on your securities portfolio. We saw a strong rebound of the portfolio. I just want to know if it was driven by the equities performance. And how do you see the sensitivity of the portfolio from a potential reduction in interest rates of 100 basis points?

[Bernardo Salas, executive]

So on your first question, the same ratio, I would say that what we expect and we can for is consistent to the guidance we provided at the beginning of the year, which is in the range of 62% to 64%. Obviously, what we have seen in the first half is nothing close to that. But as we get back to -- economies reopen and people going back to the streets, we should be a second half that we expect to be with investments, especially toward the fourth quarter.

[Jose Correa Etchegaray, executive]

Yes. I would add to that, Ernesto, that, while we are pricing, and we are planning to be profitable, obviously, we see that the return, it seems to me that it is very difficult at this stage to see how it is going or how fast it will go back. We see that maybe it's not going to be as fast as you could expect or even as probably, as Bernardo mentioned. But that is anybody's guess at this point in time. And what I'm seeing is probably a lower return to those levels.

[Bernardo Salas, executive]

Regarding your second question on return on investment, certainly, we were glad to see portfolio going back to at least slightly above interest reference rate. As I alluded to, I think it's a mix between equities recover, which we still have 11% and then some changes on the portfolio that we're making Alejandro Elizondo, our CIO, getting fully in place. We do anticipate that reference rates from Banco de México could go down another 50 to 100 basis points, and we're incorporating these and our decisions we make.

We would like to stick to our principle of being -- or targeting to be between 100 to 200 basis points ahead of that reference rate. And also, we do need to acknowledge that relative to last year, our financial income will be below, considering that last year, during 2019, our interest rate was above 8%. So we're going to see a big headwind coming from that front.

[Operator]

Our next question comes from Carlos Gomez with HSBC New York.

[Carlos Gomez-Lopez, analyst]

Congratulations on the very, very strong results. I wanted to ask about, as you mentioned, your long-term net returns aspirations. First, can you reiterate again what you think your long-term rate of return on assets and return on equity will be? And more importantly, has that changed with pandemic, as the business...

[Jose Correa Etchegaray, executive]

So we're having some trouble lining to your question. Can you repeat it?

[Carlos Gomez-Lopez, analyst]

Yes, can you hear me now?

[Bernardo Salas, executive]

Yes, we can see you, Carlos.

[Carlos Gomez-Lopez, analyst]

All right. My question is your long-term return aspirations and whether you think that the pandemic has changed the industry for better or for worst and change what you can achieve in the long run by operating in Mexico?

[Jose Correa Etchegaray, executive]

Well, I mean we can answer in that in several ways, Carlos, I would say. But if you see that throughout the world, there has been a decline in Central Bank's interest rates across the world. Clearly, I guess, the aspirations for long-term should be lower, generally speaking, all industries. However, we are maintaining our ROE long-term targets that we have, and Bernardo indicated, around the 20% to 25%. We acknowledged that we are well ahead now of those levels. So we anticipate that return to be very gradual, obviously, but we maintain our 20% to 25% long-term aspirations in terms of return on equity.

[Bernardo Salas, executive]

And regarding industry changes, Carlos, I would say, we're yet to see not only on this insurance sector changes across every industry. So right now, what we have knowledge is that some of the things that have increased significantly. So the Express adjustment -- Express claims that we basically did not have back in 2018, and now it now represents over 6% or 8% of the claims. It's certainly going to be a change in the model we approach. And also, we plan to stick to that one. We plan to continue. I think it's proving to be very effective in terms of service, customer experience and certainly lower costs. The fact that we no longer need a claim officer to go back -- to go to the accident or to open a claim. It is certainly a problem [ breaker ] here in Mexico, and we are learning as we go by, but it's certainly been a nice collateral benefit of this unfortunate pandemic.

[Operator]

Our next question comes from Piedad Alessandri with Credicorp Capital.

[Piedad Cuevas, analyst]

Congratulations on the results. I wanted to ask regarding your operating expenses. You mentioned some in the in the report that some part of it was due to the performance bonus, but some part was due to technological investments regarding the digital operating of the company and the home office initiative. Can you give us a bit more details regarding the IT investments and how the operating expenses should move going forward?

[Bernardo Salas, executive]

Sure. Thank you for your questions. So operating expenses, just to make sure we get it the overall operating expenses, is basically explained the increase because of a onetimer that we had in our first quarter of 2019 of 185. If we take that out, we're basically at par. IT expenses have been and will continue to be a key piece of -- all the investments we do at Quálitas. We like to stay ahead, and we certainly see IT as an investment and not an expense. We accelerated some investments, some basic things, such as the migration from desktop to laptops to be able to work remotely. We're investing a significant way to be able to migrate the call center from being physically -- a physical location to also being able to work remotely. And we're making some important changes as well as the platforms we have for agents. It is the blood -- the lightfoot of our business to have agents that are being able to work with Quálitas and to be able to have a great service. So the platforms that we work for and we have able for the agents are something that we are constantly improving.

It would be hard to quantify the investment that we do on IT. I can tell you that we're not cutting major expenses on IT. It is around $20 million per year.

[Jose Correa Etchegaray, executive]

Let me add to that one because in terms of IT, one of the things that we want to do is -- that's an area in which we really do not withhold investments. Actually, we do invest in IT whatever the business needs. Now it's important to say that because of cybersecurity and the number of things, during the quarter, we have done major changes to our installations in that regard. And certainly, the amount that we spent in U.S. dollars is higher than we spent last year, and we are not holding any of those investments for IT. So we have always been Quálitas being ahead of the market in terms of innovation certainty. And this will -- we know that these will drive us further down the load. So we will continue to do those investments.

[Piedad Cuevas, analyst]

You mentioned this year, it should be higher. So it should be around USD 20 million or above that amount you previously mentioned?

[Jose Correa Etchegaray, executive]

Above that amount. For reference, last year, it was below that amount.

[Operator]

Our next question comes from Gilberto Garcia with Barclays.

[Gilberto Garcia, analyst]

I had a question on your pricing strategy for the next few months. You plan to continue offering this 10% discounts on renewals, and would you be more aggressive in trying to gain market share during the current levels of claims cost? And separately, you have been talking about the potential entry into new businesses. How would you -- what would be your expectations for your returns entering a new business, would you be willing to have a lower return burn as you enter and gain more experience and scale?

[Bernardo Salas, executive]

We couldn't understand the last part of your question, Gilberto.

[Gilberto Garcia, analyst]

Yes. On the potential entry into new businesses, would you be willing to have a lower return than in your core business, during the initial phase, while you gain scale and gain experience?

[Jose Correa Etchegaray, executive]

Okay. Let me take the first part of your question or the first question that you have regarding the commercial programs that we have for the pandemic. Let me tell you there that we have been very responsive to the market needs. And we really reacted very, very fast in implementing things to benefit our customers, our policyholders and our big fleets. Certainly, we are running that by the year to understand what the market really needs. We started by announcing mid-March, when the thing started in Mexico, we started to announce a number of discounts for policyholders and for renewals. And initially, we did that being for the period until June 30. As we learn more about the situation in the market, we later expanded as a result of really having a lower expense regarding in claims. So we expanded it through August, by the end of August. So we are covered in a way that we will do whatever the market requires to remain competitive. We are not buying share by any means. That's not what we intend. We are always looking for profitability, and we are looking to retain customers, certainly. But that's something that we will reevaluate. But yes, at some point in time next month to see how we go about that. Let me reassure you that we will continue to be leading in terms of pricing in Mexico, as we review, as Bernardo indicated earlier, 3 or 4 times a year. And certainly, we are -- as we are playing by the year and being very, very, very close to the market on potential changes to make sure that we charge the right amounts to make our business profitable. Bernardo, can you take the second one, please?

[Bernardo Salas, executive]

Gilberto, related to your second question, expanding to new lines is something that we continue to explore. We have been talking about it for a while. Unfortunately, we're still in the process of getting all licenses and approvals. It has taken much us more time due to Government changes and right now Government focus and priority in [ sales ]. We do not have the specifics in terms of return. But what I can tell you is we're still working on refining the best way to enter in this new sector with products that will satisfy unmet needs and a proposition that will create value towards stakeholders. We will start small. As we said, we will not jeopardize, no risk, a huge amount of capital nor we will risk losing our specialization in the transportation segment. I think it would be fair to say that we're making sure that whatever we launch and whenever we launch it, we have a right to win. We will trade through our strength, and we will find a unique business model as we have done that in the other segments.

[Operator]

[Operator Instructions]

[Jose Correa Etchegaray, executive]

We got another question from Martin Lara. It is, do you think that Mexico will bounce back during the second half of the year in the financial institutions and fee segments. That's question number one. Well, let's go one by one because there are several questions.

That's a good question, Martin, but I guess that question has -- it's all over the place in Mexico. I don't know. I don't think anyone knows about that. Let me tell you that it is encouraging to see that the decrease in sales of new cars that remain in April. We had expected that to be the lower, in other words, to increase the decrease in the following months, May and June, and it didn't happen. So that's some positive bit.

So the premiums will bounce back, it will depend on that. Certainly, we are well positioned, we are well positioned with major manufacturers in their major financial institutions servicing those customers. And we will follow whatever the market goes. My personal expectation is that, yes, probably they will probably bounce back a bit. But to what extent, it's anybody's guess at this point in time.

We have another question. The other one is what is your expectation there on claims ratio during the second half of the year? I think we have...

[Bernardo Salas, executive]

We talked about that. We see it sequentially going back to normal levels or the expected levels. It will depend on how fast business reopen, things such as people working remotely or continue working remotely, how fast students get back to schools or they will have a second half of the year still on remote classes. So what we -- what I can tell you is, right now, we're working on an expectation that during the second half, we could see an average of around 63% to 64% which is in line with the model we started the year. So -- and I think that I also talked about your guidance for the year. We will not issue a revised guidance. I think we've given you some color. Just to get a sense on the many scenarios we have run and the outcome of those. Slower second half, but still 2020 will be a great year for Quálitas.

[Jose Correa Etchegaray, executive]

There's another one to take, Martin, of your question, so as we expected the operating ratio, including product trends, which was about 10% in the second Q. Do you believe it should continue at the same level than second half?

Well, certainly not. Certainly, not. Let me tell you that this is a kind of paradoxical because the better we do, the what we do in this is this ratio, the way it is measured by the lot of regulators. But that would be -- it's not be a good use rather. But now that we have exceptionally done that let me tell you that with the salary increase -- I mean, the salary increase that we had in Quálitas, the salary increase that we have, you have to spend [ those ]. There are a number of things that will help us certainly to have a good operating ratio, which traditional impacts that have been below the industry.

So we are -- I wouldn't get too much concerned about that.

And then there's another one, but your question, from the business opportunities that we mentioned in the presentation, what are the business lines that we prefer.

Well, that's easy. Certainly, we are a car company, and we did prefer that, and we have been, as you know, we have been -- we have been good at the developing strength in the management of the car company. We are expanding that outside of Mexico. As you know, we have -- and Bernardo referred to very good results to our businesses in the U.S. and now that in Peru, that is a slightly over a year. We are being very well in that with that. So that's still what we prefer. Certainly, longer term, I mean a slow burn approach, we are going to be also looking in to the hub that Bernardo also mentioned, too. But certainly, we are an expert car company. We want to remain specialized in that one. And we will translate the strength of that business into the health as leader and that as -- and when -- if and when we get into that segment.

[Operator]

We have one more questioner in queue, Oliver Leyland with Fiera Capital.

[Oliver Leyland;Fiera Capital;Analyst, analyst]

Two quick questions. One, just a follow-up on pricing environment. How our competitors responding to the crisis? What are the pricing dynamics you're seeing in the market? And secondly, on dividends, what can we expect now that you've got this pile of excess solvency? Obviously, you've got the plans to enter into other businesses, but perhaps looking into 2021, when things get back to normal whatever that is, how should we think about the dividend?

[Jose Correa Etchegaray, executive]

Sure, Oliver. Thank you for your questions. Let me take the first one, which is a competitive one. Certainly in a declining economy, and the companies fighting for somehow survival, we see the competitive landscape, yes, accelerated. We have seen that. Certainly, we have always said that we like competition. And we have been very responsive to that one.

So from a competition standpoint, we see that it's going to remain very, very competitive. We have seen that more into the heavy equipment in which we do a lot over the past several years. And we have seen a number of insurers that really want to get a part of that one. We have been very responsive. We have been close to our customers, which is the thing that has helped us a lot.

On that regard, that's competitive. Now we are relatively confident that we will somehow prevail because we see that we have a very strong distribution that no other insurer can match in Mexico. We have the individual business is strong. So in that regard, I feel even though our competition has accelerated. I feel good about where we stand in terms of the different actions that we have taken throughout our portfolio and throughout Mexico to keep a good business going forward.

Bernardo, can you take the second one?

[Bernardo Salas, executive]

Regarding your dividend question, it is certainly an excess surplus that poses the question. And let me tell you that we're being very cautious on how we're managing the excess is cash. At the moment, we're not planning on paying any extraordinary dividends. Our excess cash position will be used to fund subsidiaries growth as well as our expansion plans. We're not actively pursuing any major or meaningful M&A, although we know opportunities may come. Every year, dividend distribution will be discussed at the Shareholder General Assembly that happens early next year.

[Jose Correa Etchegaray, executive]

I think we can make one last question coming in from [ Ben ].

So what do you attribute your outperformance in robberies relative to competition during this downturn?

As we explained, the decrease in theft has been something we have seen over the past quarters. It has certainly been a tailwind for us. I think we've talked about in prior quarters that what explains the difference between the market and Quálitas, where Quálitas has consistently been between 4 and 5 points, even below the average of the industry, it's our efforts on theft prevention and recovery. We leverage technology and as Jose Antonio mentioned big investments on IT. We like to have exclusive rights for certain best-in-class technology worldwide. So not only do we prevent theft, but also we have higher recovery rates and we partner with major fleets and customers to ensure we address historic data on theft, how can we prevent them, and then ultimately, how can we quickly react to them.

Okay. I think the other piece on this theft or decrease in robberies is that we have been very, very intentional on inspecting all units as a need to prevent fraud. This has historically been a reason that we saw some frauds happening. And I believe over the past 2 years, our efforts have paid out and also, we're seeing less of that robbery.

Okay. We have another question. And I think we're out of time now for the conference, but we will take -- and I don't know how many more questions, you let me know. But let me take [ Luis Ulpico, Luis Ulpico from Musa Hecion ].

Says, Congratulations. Just a quick question. If I may on [ that evolution ] year-on-year, the figure increased by some MXN 2.2 billion in premiums, better from [ 19.8 ]. Is there any specific item that is making this year going up. Just wondering.

Well, no, certainly, there is nothing to worry about there. Clearly, we have held some customers during this time of the pandemic. We have been very responsive to that. And frankly, what we are doing is we're passing them -- we are passing them part of the savings that we get in the reduced loss ratio that we are seeing, the less claims that we are seeing. In addition, we have increased also one program that is called, in Mexico, [Foreign Language], which is installment without interest, usually you charge interest on that one. But again, that is also to pass on some of the savings that we have seen in the lower claims to our customers. And that's -- but that's nothing to worry about regarding that point.

[Bernardo Salas, executive]

We'll take one more coming in from [ Musa Hecion, Luis Ulpico ]. Can you update us on the buyback program already implemented in the AGM. Any likelihood that the increased amount of buyback on the back of the funding results connected to solvency?

I think we're we are ready then to use that program. I think we've been transparent on to the first -- the end of the first quarter, we had around 1 million shares under the buyback. We will continue to execute, and we do not plan to increase them out. I believe the share buyback program is well funded to service to intent, which is, one, to increase liquidity for the stock, which has been working and is doing great. And second is, as a mean to pay back dividend, another way to pay dividends to our shareholders. I think the amount will be what was approved, no changes.

[Jose Correa Etchegaray, executive]

Let me just add one to that one. You know there's economic situation across the Mexico and across the world is very complicated. And I have received a letter from the regulators to be very careful with dividends at this point in time. So we will continue to see very likely in the future going back. But for the time being, we need to be careful. And we need to see that the financial sector in Mexico once really both banks and insurance companies to remain strong throughout the crisis.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to the presenters for any closing remarks.

[Jose Correa Etchegaray, executive]

Well, thank you very much, again. Thanks for your interest, your support. And stay safe today. Talk to you next quarter. Thank you all. Bye now.

[Operator]

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