Qualitas Controladora SAB de CV

BMV:Q

Earnings Call Transcript 2023-Q2

[Operator]

Thank you for standing by. This is the conference operator. Good morning, and welcome to Quálitas' Second Quarter 2023 Earnings Results Webcast. The conference will begin now. It is my pleasure to turn the call over to Santiago Monroy, Quálitas' IRO.

[Santiago Monroy, executive]

Good morning, and thank you for joining Quálitas Second Quarter and First Half 2023 Earnings Call. Jose Antonio Correa, and Bernardo Risoul, our CEO and Deputy CEO, are joining us today. As a reminder, discussions in this event may include forward-looking statements. These statements are based on management's current expectations and are subject to many risks and uncertainties that could cause actual events and results to differ materially from those discussed during today's call.

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

[Jose Correa Etchegaray, executive]

Good morning, everyone. As we have been discussing for a while now, we continue to face several external factors impacting most industries worldwide, with insurance, in particular, auto insurance industry being no exception. In Quálitas, we have a clear understanding of these headwinds and their impact on our business. We have been taking actions to overcome them and return to our historical and objective margins.

Looking at our first half performance, I can say this is work in progress, but these strong results in [indiscernible] give us confidence that we are on the right track. Before diving into our financials, let me walk you through some of these factors and give you an update of the industry dynamics while providing our view on the expected evolution towards the balance of this year.

First, related to our top line growth. New car sales continued its positive trend up 22% versus the first half last year and almost closing the average of 2019 levels. Availability of new vehicles has ramped up during the year, also [indiscernible] at defying demand as several brands have between 3 and 6 months of waiting time. This, we believe are positive news, and we expect that trend to continue throughout the year. However, there are 2 factors that may have an impact on this recovery. Current high interest rate levels given that about 60% of new car [indiscernible] via credits and loans. So buying a new car is now more expensive for our consumers. Also, the congestion in many harbors and logistics issues are delaying new deliveries and [ cancel ] inventories. Still the recovery of new car sales is clear and a benefit for us as well as for the whole industry.

On the other hand, cost pressures prevail, mainly explained by industry inflation, higher frequency and spare part availability. Annualized inflation in Mexico has been stabilizing closing at around 5% in June. However, spare parts on labor inflation, we have a direct correlation on our loss costs are still around 9%, which means that while [indiscernible] versus last year, they are still high and putting pressure in our cost. Now in addition to the inflation, the auto industry is still facing challenges on spare parts availability. In many cases, it takes months to get. This shortage of supply contributes to high prices.

Now let me go back to the new auto sales that there are interesting and relevant dynamic changes to which we are quickly adjusting and striving to always be the insurer of choice. To mention a few of them, 4 new brands have entered the market in 2019, and they now represent 7% of the market. Consumers are now opting for SUVs rather than compact cars. And as a reference, SUVs and pickups now represent 54% versus 40% of sales back in 2019. Clearly, this has an impact in our average premium cost. Also, electric and hybrid units, demand continue to increase. According to the latest EMEA, the industry on sales figure sales for these type of units have increased more than 30% during the year and currently represent 5% of total new car sales. We continue in Quálitas to specialize our teams to maintain our leadership in the [ knowledge ] insurance and repair of this type of units.

All of the above impacted the entire industry and Quálitas underwriting and financial performance, in which Bernardo will provide more detail later. I am glad to share that as per as AMIS, reported figures of the first quarter 2023, Quálitas continues to lead the industry not only in premiums, but most importantly, on profitability, while only one of the other top 5 competitors posting a positive underwriting result, and this is very important. And we have a stated mandate that we will always be true to our service and cost control pillars aiming for a profitable operation while strengthening our leadership position in the market. External factors alone have created a complex environment for the entire industry for over 2 years now. We have been adjusting our prices accordingly, and we will continue to do so until we fully recover cost inflation. And it is encouraging to me to see this has been also the intention of the broad market as we have seen risen.

Before I hand it over to Bernardo, let me really touch on the other key pillars of our financials, our portfolio. Mexico Central Bank has kept the venture policy rate at 11.25%. Our portfolio is very well positioned to keep them benefit from current context. And together with the investment committee, we have increased duration of our portfolio as well as a defined new operation with this position, always seeking to maximize return on the conservative and responsible asset allocation and duration strategies.

To wrap it up, our second quarter results show why this is a strength to continue retaining and attracting new customers, but we recognize that getting our claims cost back to the desired range is taking a bit longer than expected. Actions have been taken, and I expect that the inflection point will happen in the next 6 to 9 months as we fully materialize the benefit of the pricing and cost savings implemented so far.

In the meantime, financial input would play a bigger role in delivering our ROE, which we expect to be closer to our ongoing objective towards the end of this year. And with this background, let me pass to Bernardo for a deep dive in our quarter and year-to-date performance. Bernardo, please?

[Bernardo Salas, executive]

Thank you, Jose Antonio, and good morning, everyone. Our first half results reflect anticipated peaking claims, a strong financial income and an extraordinary top line. While not all of them are exactly where we would like them to be, they are on the right path, we're ahead of the industry, and we continue to build the long-term of the business while navigating through this cycle term.

Now let me provide more color on our performance. Written premiums are up 24% for the quarter and 25% for the year. This growth represents MXN 4.8 billion more in premiums than the first half of 2022, something unseen even on an annual basis for the past 6 years. Growth was driven by tariff increases, which are up 12% during this year that together with the increase in the sum insured and mix account for around 60% of this growth, while an increase of 385,000 units contributed to the balance of the sensational top line performance. We're just 29,000 units shy of reaching 5 million insured units in Mexico, while the total business is now at 5.2 million insured units.

While new car sales have recovered throughout the year, it is the traditional segment that has outstand being up 33%, thanks to the effort of our commercial network which has now more than 20,700 agents being served through our 548 offices. During the first 6 months of the year, 40% of our underwriting came from the traditional individual segment, 24% from fleets and 29% from financial institutions. The rest comes from our international subsidiaries. When compared to 3 years ago, our individual segment has increased 8% [indiscernible]. And it is higher -- this higher exposure, something we welcome as annual duration implies to also faster impact when adjusting prices. Regarding our international operation, quarterly written premiums are up 4.5% in local currency and down 14.5% in pesos. They are up 5.6% in local currency and down 13% year-to-date. This performance reflects the 12% pesos appreciation in the first 6 months of the year. In line with our strategy, Latin America subsidiaries are accelerating growth and are up 58% year-to-date in local currency while the U.S. subsidiary has centered on executing our previously shared strategy focused on the cross-border products. Premiums for the U.S. business are expected to be down this year as planned.

Since I am already talking about the U.S. operation, let me expand on where our 2-year turnaround processes. During the first half of 2023, our binational product, which includes and is mainly cross-border, is up 15%, while domestic product is down 57%. The personal auto program focused well on Hispanic population was recently launched and is off to a good start. We have regained traction by repositioning the benefits of Quálitas as the one company that covers both countries under one policy. The organizational structure is set to better serve this niche market, and we're encouraged by the potential we see, particularly as near-shoring is having a positive impact in Mexico.

Just during the first half of the year, 10 global companies announced investment in Mexico to better serve the U.S., which implies higher flow of trucks and the confirmation of the near-shoring effect. Having said so, we are still digesting past year claims, mostly on domestic business with some adverse development still. We are expecting to have high loss ratios for this year, leading to a bottom -- negative bottom line, although making significant progress versus last year.

Moving back to Quálitas Controladora performance. Earned premiums were up 18% for the quarter and 19% year-to-date, standing at 11.7 billion by unit [ end ]. Earned growth pace is directly correlated to reserves behavior. We constituted reserve for around MXN 300 million this quarter, that compares to a MXN 330 million released during the second quarter of last year. This MXN 600 million delta affects quarterly results but will eventually be released. During the first 6 months of the year, we have constituted over MXN 1.3 billion, reflecting the loss ratio and the [indiscernible] performance.

Now going into our cost, inflationary and availability pressures mentioned by Jose Antonio continued to impact our loss ratio, which closed at 72% for the quarter and 71% for the year. To provide a better perspective, I will break claims cost into 3 main buckets: frequency, spare parts and tests. On frequency, we have seen a slight but consistent upward trend closing first half at 14.2%, which compares to 13.5% versus same period year ago. The reasons for frequency increase are not precise, but we believe that higher number of motorcycles coupled with new distractions, such as mobile phones and shortage of truck operators are among the drivers. Not only has frequency increased, but this quarter, we are seeing higher severity with unfortunate catastrophic accidents.

During this quarter, catastrophic peak events, including draughts and hailstorms increased 87% versus same quarter a year ago. On claim cost, we're undergoing negotiations with dealers, workshop and agencies, the strong Mexican peso and commodities stabilization that has reduced some pressure but not yet fully reflected in lower prices as supply continues to be well surpassed by demand. To overcome this situation, we're taking actions among several fronts where our vertical integration becomes a more relevant pillar to get the right quality and better prices, providing us with a competitive advantage now and in the future.

Among several strategies, it is the enhancement of our remote and digital express adjustment tool. 28% of total claims during the first half were attended through this tool. Remote claim officers have a 3:1 productivity. So this percentage translates into a more than MXN 100 million in savings, while improving service experience. Managing costs cannot and will not come at the expense of service. And given the supply chain, this location is still causing some spare part delay, we are providing 2 claims handling options for policyholders. First, the traditional repair process through the workshop on agencies, recognizing the longer repair times in some cases or as well the option to obtain a payment for the claim cost.

On the third item affecting costs, for the first half of the year, robberies represented almost 15% of total cost in comparison to the 13% of the same period last year due to mix and increasing the value sum-insured units. The average cost per thefts is up 38%. While we continue to recover almost 6 percentage points above the rest of the industry, we're taking actions to benefit our cost such as to better leverage technological tools, strengthening efforts in preventing and avoiding thefts and improving our recovery effectiveness together with different providers and authorities.

All of these actions strive to mitigate claim cost evolution and not rely only on pricing, which is certainly carrying most of the weight. We have been adjusting our tariffs gradually but consistently over more than 2 years now and doing so more aggressively recently. Just as a reference, in late April, our auto tariffs increased high single digit. And in June, we did the same with heavy equipment. On fleets, which are applied on historic claims results, we are also taking important decisions to ensure premiums are sufficient to cover current risk and cost. Given the nature of the business, the pricing effects are gradual, and take 1 entire year for each adjustment to fully reflect on our P&L. We will continue to adjust until we reach our target claim of 62% to 65%.

Now before I move on to other ratios, let me just share one very important piece of news on the competitive landscape, which speaks to the challenging of managing heavy equipment. During the past 2 weeks -- sorry, during the past weeks, 2 insurance companies among which there is a one top 3 and another top 10 in the truck segment, stated their intention to exit that market. This represents 10% market share and close to MXN 4.3 billion of opportunities. But most importantly, it recognizes the need to be responsible on tariffs, diligent on the operation and tireless on the efforts of risk prevention, where Quálitas will double down.

Acquisition costs stood at 22.6% for the quarter and 23.1% year-to-date. The quarterly decrease of 48 basis points come behind a stronger growth in our traditional and individual segment despite new car sales performance that correlates to the financial institutions channel that have a higher acquisition cost. Now on the operating ratio, it stood at 3.3% for the quarter, 93 basis points below same period year ago. Year-to-date operating ratio closed at 3%. This ratio is within our expected and objective range benefited from the endless commitment to cost control as well as 2 other factors. One, the income that comes from the underwriting fee where we charge a fixed amount for insured premiums that, by the way, is a common practice in the industry. And second, our third-party vertical subsidiary sales reflected as an income, which is up 42% versus second quarter of last year. All of the above resulted in a combined ratio of 97.7% for the quarter and 96.8% for the first half, being north of our 90% to 94% ongoing target. I have already expanded on the actions being taken, and we're working towards making sequential improvements in the next quarter to get back on track.

Now regarding financial institution performance, second quarter delivered MXN 860 million, reaching MXN 1.8 billion during the first half of the year. This is 2.7x and 2.2x that each of the respective period a year ago. ROI for the quarter stood at 8.1% and 9% year-to-date. Although our investment strategy hasn't changed and we're still well positioned to benefit from the current environment, our portfolio performance is not static, and that explains a lower absolute amount than in the first quarter.

And let me elaborate. First, the sizable portfolio decreased around MXN 300 million versus first quarter due to the dividend payment that was done in the first half and a higher claim paid. Our portfolio is also distributed geographically to support our international operation, 13% is allocated outside Mexico with different interest rate levels and returns. Our portfolio was impacted by the appreciation of the peso, resulting in MXN 62 million impact in our P&L and MXN 191 million on our balance sheet. Important to mention is that we do not speculate in currency. Let me repeat, we do not speculate in currencies. We're basically matched to asset liability and the needs of the business. Also, as part of our fixed income strategy, we have around 1/4 of the portfolio on real rates, that our [ instruments ] linked to inflation performance that are called [Foreign Language] in Spanish. While these rates are very attractive and the highest in decades, in some cases, locking at 5.3%, when inflation is lower, such as this quarter, yield will also follow. This impacted [ 90 ] basis points over partly ROI or around MXN 70 million.

All in, our portfolio has a 1.5-year duration and 9.3 yield to maturity. We will continue to increase the duration of our portfolio, having said -- internally said 2 years as our sale. Altogether, we posted a MXN 746 million net income for the quarter and MXN 1.6 billion for the first half, representing a 6.2% and 6.8% net margin, respectively. The quarterly performance represents a 14% growth versus the same period last year and an 18% growth year-to-date.

Regarding our financial ratio, our 12-month ROE stands at 13.1% reflecting our strong capital position as well. 12-month earnings per share stands at MXN 6.2. Going out into our regulatory capital requirement, by June end, it stands at MXN 4.3 billion with a solvency margin of MXN 13.8 billion, equivalent to 416 solvency ratio. Capital requirement also increased during the growth, given the growing loss ratio and reflecting the mentioned challenge. Our corporate development strategy has progressed as expected, and we have one due diligence process is still under assessment.

Our excess capital remains strong. We are investing against the defined priorities while strengthening the organization in people and technology. We will continue to be disciplined and choiceful to provide sustainable results for our shareholders. In anticipation of what has been a widely asked question regarding a potential extraordinary dividend, that discussion will happen in due term. What I can say is that we acknowledge cash and excess capital belongs to our shareholders. And while we are not in a rush, we're open to assess; it.

To wrap it up, our commitment to you remains unchanged. The right actions are in place and Quálitas' DNA backs our ability to create value despite challenges and circumstances. We will continue evolving and adapting to achieve an inflection point, which is still expected during the second half whilst providing service experience to our policyholders and agents day after day, quarter after quarter for decades to come. And with that said, we are more than happy to take your questions.

[Operator]

[Operator Instructions] Our first question comes from Ernesto Gabilondo.

[Ernesto María Gabilondo Márquez, analyst]

Ernesto Gabilondo from Bank of America. My first question is on your claims costs. We have seen inflation is starting to go down. So just wondering when do you expect that would translate into lower claims costs? And how should we think about the costs in the second half of the year? We usually have seasonality and the claims costs tend to be higher during the second half of the year. But as you have mentioned, you have taken some measures. Inflation is again going down. So can we expect lower claims costs in the second half, although still above historical average? And then maybe we're going into historical levels within the next 6 to 9 months.

[Bernardo Salas, executive]

Thank you for your questions as always. I think we're all aware that inflation is releasing some of the pressure, although in the industry, the auto industry that is yet to be seen. As we referred in our opening remarks, some of them were starting to see the benefits, the appreciation of the Mexican peso considering most of the auto parts come from abroad should start releasing that pressure. Now there is an important matter here in this situation, which is availability. What we have seen is there continues to be a shortage of spare parts and that is the one factor that is mostly influenced currently the price more than inflation. We are very diligent to pricing. As I wouldn't, we have been taking sequential price increases, and most importantly, in the second quarter, we took a double-digit increase, which is yet to see the benefits.

So the combination of pricing and what we do expect to see an inflation point in cost during this second half is what will take us back to what is a 62% to 65% claim cost target and we expect to reach that during the late second half of the year, okay? That is not going to change the claim cost for the year, which we have been mentioning will be above and closer to the 68% to 70% for the year. But we are studying the basis for a very strong 2024 when it comes to claims costs. Obviously, the top line performance is coming up with a great inertia since last year, closing at 25% this year, something [indiscernible] not seen. So I do believe the combination of stronger top line and the actions on the claim cost management is setting the base for a very strong recovery for the business as we see the end of this year and beginning of '24.

[Jose Correa Etchegaray, executive]

Let me answer to what Bernardo is saying Ernesto and thank you for joining the call today. And let me tell you that the inflation has been going down, at least the reported inflation in general. However, the one that affects our cost that is higher between 2 and 4 points. So that will continue to be the case. And as Bernardo indicated, we have taken the price and the presence that we need to take and it will take between probably 3 to 6 months to start seeing the reduction of the price overall. But we are confident that we are taking the right and we're making the right moves to ensure that we see inflection in the guidance that Bernardo indicated at...

[Ernesto María Gabilondo Márquez, analyst]

Just a couple of more questions. One is on your investment portfolio. We noticed it continued to perform a yield below Cetes. And I believe this is because your new passive investment strategy has forced you to sell several equity positions. So I just wanted to understand if you have already cleaned up all the past equities portfolio, this is something that's still maybe for another quarter? And when do you expect the yield of the investment portfolio to be in line with Cetes. And then my last question is on your ROE just if you continue to see the ROE of the year between 18% to 20% and when do you see it in the long-term?

[Bernardo Salas, executive]

I'll take the first one regarding the portfolio. I think it's not surprising to see our ROE arise still below Cetes, just because of the curve and accelerate increase of rates that happened. So we have had always a fixed amount. And even when we decreased the duration last year, we were at 0.6 year duration, we held some positions with a lower [indiscernible]. Also, I think it's a sequential progress of our portfolio, yield to maturity has consistently been increasing quarter-after-quarter. And as we said, we're now at 9.3%, lower than Cetes, but there's 2 components. One, remember that when I said, 9.3%, that is the combined of the portfolio, which includes over $300 million outside Mexico, and that is not related to Cetes. Also there's a one mix factor. Now we usually -- when you exclude and only focus on Mexico, that is closer to the 10% the automotive. So that is much more close. When we turn the corner on interest rates, so Cetes are going down. our portfolio operation will still benefit.

And also, I think it's an expected difference when we are now currently below Cetes [indiscernible] and we will continue to be what as a interest rate we will turn the corner and we see our portfolio above that interest rate. And we expect that to happen in 2024. So I think that's an important piece because as we manage the portfolio, this particular piece has nothing to do with that. Now let me allude to [indiscernible]. As you know, we went less aggressive on equities. We went down to equities positions to close below 9% last quarter. We're now retaking some equities position. It's now 9.5%.

And what's going to happen is it also going to continue to go up but in a different -- I believe last quarter, we expanded our change in strategy for portfolio investments. We're no longer going to stop peaking. We're moving into ETFs, which will provide less volatility. And we're doing that also sequentially. So it's not that we went and sold every single position that is being happened and -- that is being transitioned in last quarter. So you could expect that our equity exposure will increase in the next quarter with an endpoint between 15% and 20% of the portfolio. So with that said, I'm hoping that I addressed the investment piece, and I'll ask Jose to comment.

[Jose Correa Etchegaray, executive]

Let me just add to what Bernardo indicated a couple of comments. This quarter, we increased our position in inflation-protected instruments. It is important to note that Ernesto, as we personally believe inflation is going to take more time to really have [indiscernible]. People are very pleased with that. You know that the second part in Mexico, generally speaking inflation has to be [indiscernible] has some impact into our results for the second quarter. But I think that, that is we have cost going forward. And the second comment is regarding the ETFs. But we have to change that. It is very important to know that we are not taking any speculation on that one. And the ETF are going to take -- with that, we are having the long-term view. So the long-term view that we are having with ETFs is -- clearly our portfolio long-term. And that's why we [indiscernible].

[Bernardo Salas, executive]

On the ROE, what we see towards the end of the year will continue to be slightly lower than 20% like to ask -- I'd like to aspire the 18% to 20%. I think that's still reasonable. But what's more important is we do expand for the 20% or higher than 20% on so -- that hasn't changed and not to change in the [indiscernible]. Now just bear in mind that higher capital on the denominator has a fall between 2% and 3% on our [indiscernible].

[Operator]

Our next question comes from Rodrigo Ortega.

[D. Ortega Salazar, analyst]

Guys, this is Rodrigo from BBVA. Just a quick one, Bernardo, Jose Antonio, you mentioned that there are a couple of competitors living at the heavy equipment landscape. Are you guys planning on buying them off, buying their current operations? Or is this -- I mean, is there any strategy more specific regarding taking this opportunity to grow?

[Bernardo Salas, executive]

Thank you. Let me take this one. The agreement is very interesting to us. This is a difficult business. And for that, we need to be an expert to one of the things that we value at Quálitas, the expertise for this kind of thing. So for us, let me take that a couple of years back, we were thinking that some of our creditors and even though when we are getting [indiscernible], so we thought that this was going to happen. So this has started to happen and that simply to say, at least [indiscernible] mentioned that you need to be good and happy at this typical business which we are experts on.

Now turning to that, as you know, we have [indiscernible] in the mid-40s in terms of market share for this kind of equipment. And what we are doing now is -- the companies have announced that it's [indiscernible] portfolio. They are not spending their portfolio. They are going to be exiting at the top in the so it's going to be a gradual situation [indiscernible]. So we know and we believe that we are better we should make to exit that, but it's going to be gradual. But the good thing about this is that this will become since many to the pricing part because a lot of what comps when [indiscernible] Quálitas enter investing plus 2 to 3 years into the heavy equipment they were doing it with price and we knew that, that was starting to be good.

And that has already been the case. So the good news is that the fact that the market is becoming [indiscernible]. I am trying to correct the pricing that -- let me give you, I've seen several examples in the case of Quálitas, where even some fleets going to companies because they charge less, probably to come back to Quálitas between 2 or 3 or 4 months go back for the service that we are [indiscernible] for sure for you, yes, no, there is not going to be portfolio sale of those. So it's going to be a dagger on the situation.

[Operator]

Our next question comes from Anand Bhavnani.

[Anand Bhavnani, analyst]

Yes. Anand from White Oak. Three questions from my end. First is, if you can give us loss ratios by segment, so the retail, the trucking business and the institutional business?

[Bernardo Salas, executive]

Anand, so we don't necessarily break down the loss ratio of a segment. We obviously have it. I'll give you some color. Right now, they're all basically struggling at the same rates. I think fleet was a little bit behind and taking some action and that already turned the corner. The one that takes a little bit more time is financial segments, given that what we write there, it's for multi-years. As I alluded in my remarks, as we have higher exposure to annual treatments, the highest they've been at least in 7, 8 years. It gives us the flexibility to adjust more. So I think just we're all taking actions in the 3 fronts: fleets, individual and financial institutions for new [indiscernible]. And I think the first one to turn the corner has been fleet,which has stabilized.

[Jose Correa Etchegaray, executive]

I'll add to what Bernardo said that usually, the individual segment tend to be a better one and a more stable but there are less swings in those indexes generally speaking. So we are more in the right direction on that regard.

[Bernardo Salas, executive]

And just to wrap it up, obviously, we summarize [indiscernible] but when we come to execution and being the one specialized company in the market, we break it down by [indiscernible] and then by set and subset. And also we have motorcycle. We have pickups. We have SUVs. We have traditional car. We have buses. And so the pricing effort is a very diligent and very detailed one. And when you are stocking, we keep it on a very high level to summarize, but the pricing actions and analysis goes very to the detail as no one else is doing [indiscernible] for the same margins across all savings. So we're not expecting to subsidize one segment to the other.

[Anand Bhavnani, analyst]

Got it. Got it. You spoke about 2 players with combined market share of 10%, exiting the fleet business. So do we have time line by what time they are planning to exit and has the sale already been announced? Or is it just the intention to exit?

[Bernardo Salas, executive]

So they announced this on July 1, they did not hold public with that. They announced it to the market through their agents. So -- and that happened on July 1. And as we mentioned and Jose Antonio will expand quite a bit on that. Yes, they account for 10% market share, and we're not doing anything crazy to get to that market. It's going to be gradual. And as they renew, Quálitas will be there to offer a good value proposition although we anticipate that going to be at the same price they got it last year.

[Jose Correa Etchegaray, executive]

[indiscernible] repeat that the benefit of that is really that it will become substantial [indiscernible] in this part of the market.

[Anand Bhavnani, analyst]

Okay. If I heard correctly, this business, they are exiting by stopping issuance of policy. They are not selling this business, right?

[Bernardo Salas, executive]

They are not going to do more underwriting those and that's why they -- obviously, the portfolio that they have, probably we don't know if it's going to remain or not, but it's likely that it is gradually going to go down.

[Jose Correa Etchegaray, executive]

It's not fleet necessary. It's heavy equipment, in most of the cases, fleet related, but [indiscernible] have your equipment.

[Anand Bhavnani, analyst]

Okay. And lastly, from the perspective of our market share gains, this 10%, which is up for grabs. Should we expect over next 3, 4 years, market share to be, let's say, 34%, 35%, maybe we get 3%, 4% of this. Would that be a right expectation in 3, 4 years' time?

[Bernardo Salas, executive]

I think it's a per expectation. Obviously, we will try to be the insurer of choice for these customers that no longer have those options. Market share has never been our -- and also I think it's separate expectation that we may get some of that account. If the pricing is right and they're aiming for value, not necessarily just the cheapest. And I think we will see that in the next quarter, we started to see. But I think in 1 to 2 years, let's see how other players react as well to this. 10% market share will be up for grabs.

[Operator]

Our next question comes from Andres Soto.

[Andres Soto, analyst]

This is Andres Soto from Santander. My first question is regarding competitive dynamics. It is clear that your competitors are struggling. It's quite impressive the number that you shared regarding the underwriting result being positive just for one of them. But when I look at your market share, I see that your market share this quarter was at 30%. You had reported 32% last year. I'm not sure if that 32% referred to the end of last year or an average for last year. So that will be probably the first question. And understand within your segments where you see the more aggressive competition? And if you expect this to change anytime soon?

[Jose Correa Etchegaray, executive]

Thank you, Andres Soto, for joining the conference today. Let me tell you that there is some cyclicity or some seasonality on this thing on the market share. But as Bernardo indicated just a few minutes ago, we are not targeting market share, and it is very, very important for all of you to understand. We have always stated that we are going to have service in -- the excellence in service that it is our key pillar in Quálitas. As long as we do that, we will see the market share moving. We are not targeting for market share, and that's very important.

The dynamics between sectors, I mean, it depends, I mean that sales of new cars increased 22% for the first half of the year, and it will depend on that. So we are -- we continue to be in the low 40s, mid-40s in terms of the heavy equipment. And the most important one are really fleets, the ones that are moving more because in fleet, there was a huge competition in the last 2 or 3 years because some of the entrants wanted to drive a share of the market. Now they are exiting simply because it is not a specific business to do. So the dynamics are that, but we are not targeting for share. And we are targeting for growth and profitable growth, which is why we have one of the best financial performances in the industry in Mexico.

[Andres Soto, analyst]

Understood. My second question is related to the health insurance business. We saw some reserves being built already in your balance sheet. So I would like to understand how the business is progressing in terms of underwriting and what are the -- any preliminary results that you can share with us?

[Bernardo Salas, executive]

Andres, just on your first question, I think our share target for this year will be the same as last year and the same of next year, which is as high as it can be as long as it's [indiscernible]. So we have never had a number, and I don't think that we will ever set a number as [indiscernible]. Now just on the second question on [ health ]. I think as we said, it is an entry to a new market. Our intention of the first year was to learn and adjust. And we're doing our product, [indiscernible] is not only product that is different, but it's also different to the ones that the market is different to what our agents have done in the past. So there's a learning process. And through this learning, we also have recognized that having collected also, for companies, was something that they wanted. So that's something that we have assessed. We have adjusted. We're now offering this. And I would say things are working as we planned them. There is not a major neither highlight neither on positive, nor on the negative, it's an ongoing process.

[Jose Correa Etchegaray, executive]

It is a very small business. And it is a very small business now. We had anticipated that over the next 2 or 3 years, it's going to be small as we are not experts in that segment, we are learning. We are making sure that we have the right product. We are focusing on them on level [indiscernible] for the population. So this will take some time. And so far, it does not have a significant nor it will have in the next couple of years for Quálitas overall results.

[Andres Soto, analyst]

Perfect. And finally, if I may, can you please repeat what are your expectations for loss ratio and ROE for the full year 2023, the line was breaking up when you were making that comment.

[Bernardo Salas, executive]

We did not disclose a specific number. What we said and that has been consistent in the past is we will be ahead of the 62% to 65% range for the year. We're expecting more to be in the 68% to 70%, but the last quarter should yield some good reference of an indicator on what we will see in 2024, and that should be closer to the high end of our ongoing 62% to 65% range. And for ROE, we remained on the slightly lower than the 20%, likely in this 18% to 20% for the end of year.

[Operator]

Our next question -- actually, that hand was dropped. So I'm going to pass the mic over to Santiago Monroy. We'll be taking the Q&A box questions as follows.

[Santiago Monroy, executive]

Thank you, We'll start with the questions. The first one comes from [ Javier Elosua ] from [indiscernible]. How much more will you need to raise prices to recover previous profitability levels? And when do you feel this could take place?

[Jose Correa Etchegaray, executive]

Thank you, Javier. Let me tell you that this is a dynamic process that we weren't having clearly. And this is related to the cycle of the industry. If you look back to the last 14 years or so, there have been a couple of cycles. The third one in which they claims level and the combined index is at the height. So it is a matter of the [indiscernible]. Having said that, we have already priced what we believe it's going to be the one that is okay. So it's not -- it is something that [indiscernible] earlier, we have in many, many categories to [indiscernible] and we have been doing that over the past -- over the last year, that's not much. So we will see the benefits of the latest increases in the next 3 to 6 months, and we are -- we expect that we are going to be seeing that. So I believe also Bernardo mentioned that we are going to be at the beginning of -- by the end of this year and the beginning of 2024 we're going to be in what we expect to be, as you said, to recover [indiscernible] from the operating side.

[Santiago Monroy, executive]

Antonio, We will roll to the second question from [ David Simon ]. Could you please discuss your view of the direct-to-consumer channel? What do you think needs to happen for this to become a more compelling channels for the individual segment in Mexico and how Quálitas is positioned here to align the organization?

[Bernardo Salas, executive]

Thank you, David. I think we alluded Quálitas' omnichannel. We certainly prefer our agent channel, which has been the one reason where Quálitas has found a more -- a better way to reach consumers. Now we have offered for many years direct channel that it currently represents around 3% of the business. And we believe this is not something related to Quálitas for reinsurance actions to be difficult, more in the embedded tradition in the way Latin America and including Mexico, has picked its insurance. We look at agents as a way to provide advice and also as a reference. So we are fall in to the trap of pricing. So I think it's change in behaviors, may take takings and approval of that is over the past 5 years that we have had this direct-to-consumer channel. It still represents a very marginal piece of our business.

[Jose Correa Etchegaray, executive]

Let me add to that one that we at Quálitas, we are not selecting the way which we distribute the [indiscernible]. We offer all channels to make sure that our consumers pick the one that best business suits their needs. But as Bernardo said, this is more of a idiosyncratic if you will in which the market works. But again, we offer all possibilities to our potential customers. So we are not forcing anything on to them.

[Santiago Monroy, executive]

We'll go with the next question from [indiscernible] from Jefferies. How do you see your operating margin to finance operating profit to earn premiums over the next 12 months?

[Bernardo Salas, executive]

it's still going to be low. I think it's in the low single digits. It will sequentially continues to improve. I think we currently stand at [ 2.5% ]. We do expect that to partially increase in the next quarter, but it's not going to be above that mid-single-digit.

[Santiago Monroy, executive]

I think we have time for one more question. It's anonymous. 2 questions that I would like to be thankful for to be addressed within P&A. If negotiations with suppliers have been already taken place, will it could be fair to expect this to have a positive effect on the performance of plant cost? Could you please develop further about performance within the [indiscernible] U.S. divisions? And how a larger share of electric vehicles within units could affect the operation of the business and characteristics of insurance terms and conditions?

[Jose Correa Etchegaray, executive]

Okay. Let me take the first one about a positive effect of suppliers. This is really something that we have been working on. Clearly, we work with all manufacturers, all car manufacturers or all of them, and they have different ways to manage. Clearly, what we have been doing is we are closer as the largest car insurer in Mexico. We are -- they listen, so to speak. And they -- this year, they have increased costs despite the fact that the dollar or the peso has appreciated. So we talk to them and they tell us that they do that for the whole country. But because of our size and the way we manage, we are able to get better conditions for them. So it is difficult to say as we have dozens and dozens of manufacturers we work with, but with the largest one, we are having a good progress on this. And obviously, the effect on claims cost will be gradual as I have indicated currently.

[Bernardo Salas, executive]

I'll take the next 2 questions. First, on the international perspective, as I mentioned, what is Latin America countries and [indiscernible] Costa Rica, they're doing very well. Now they grew over 50% in local currency. We're gaining share. We're making the business profitable, just as I referenced, Costa Rica for the first time reached 15% market share and all of them are growing insured units over 25%. So I think it's -- they're in good shape. They're extended ready, and we're very happy with the product. Now in the U.S., it's a turnaround slope, they're down 22% for the quarter.

And when you think -- see the mix. It's exactly as we hope or plan. The domestic products are down 57%. So we're selling less than half of what we used to have, while the cross-border is up 15%. So I think that is the way we expect the business to continue evolving as we speak for going back to goods having a cross-border or by national point of difference, and that's where we have a right to win and have a competitive advantage.

And just very quickly on the last point, how would a larger share of electric vehicles with the insurance units could have effect operation? I think it's a reality that we will continue to see hybrid and electric vehicles taking a bigger percentage of the new car sales. We are learning. We are positioning Quálitas to be the insurer of choice, and we do not have a different goal in terms of profitability for electric vehicles that we will have for the balance. So as I said, it's a learning process. Even our auto shops and dealers are learning how to read any damage for the car. But I think Quálitas will once again prove that we have the scale and the right...

[Operator]

Thank you. That's all the time we have for questions today. However, if we couldn't get around to answering your question at this time, please contact Quálitas' IR department, who will gladly discuss these with you. This concludes today's conference call. Thank you for participating, and have a pleasant day.