Qualitas Controladora SAB de CV

BMV:Q

Earnings Call Analysis

Qualitas Targets Growth with Strategic Initiatives

Qualitas is executing four out of ten identified growth initiatives within the insurance ecosystem, aligned with its DNA. These include the health insurance arm, Qualitas Salud, showing 100% organic growth but not expected to significantly impact profitability for 3-5 years, technology acquisition, entry into Colombia, and a strategic acquisition under negotiation. The company's strategy involves balancing dividends, which are to continue on the higher end, share buybacks, and investments in new ventures, while managing a 90% payout ratio and 4.2% dividend yield. For 2024, Qualitas anticipates a 'trifecta' with sustained top-line growth, controlled claim costs, and the financial tailwind of high-interest rates, while continuing their service excellence.

Continued Market Leadership and Robust Underwriting Business

Quálitas has not only maintained a notable presence in the market as a leader for the past 16 years but also looks forward to marking its 30th anniversary with substantive growth in its underwriting business.

Building Value Across Stakeholders

The company is enhancing its value proposition by setting record highs in insured units, reaching 5.37 million by September end, and showcasing a high Net Promoter Score indicative of exceptional service. It maintains a strong partnership with agents responsible for a significant portion of the written premiums and recognizes the value of employee wellbeing through benefits like a corporate retirement fund. Furthermore, shareholder value is elevated through consistent dividend distributions and robust stock liquidity.

Community Impact and Sustainability Efforts

Aligning with its sustainability strategy, Quálitas is engaged in community-oriented initiatives that also bolster the business, such as improving access to insurance in remote locations and promoting road safety, which have supported a 26% top line growth year-to-date.

Stabilizing Claims Costs Despite Challenges

The company is observing signs of stabilization in claims costs, an area which has been under pressure from external factors. It anticipates reaching an inflection point soon.

Impressive Growth Outstripping Expectations

Quálitas has reported a significant top line growth of 29% for the quarter, fueled by both appeal to agents and policyholders and pricing adjustments. With tariffs seeing an increase, efforts are underway to sustain growth while attaining combined ratio targets of 62% to 65%.

Strong Performance in Latin America's Subsidiaries

The subsidiaries in Latin America have played a pivotal role, with written premiums surging by 49% in local currencies. Central America has seen customer base expansion facilitated by the agility and closeness with agents, while Peru's operations are aligning with the company's growth trajectory.

Solid Earnings and Reserves Management

Earnings for the company have risen, with a 27% increase in earned premiums for the quarter and a 22% increase year-to-date. This is matched by a strategic increase in reserves in comparison to the previous year, setting the stage for continued financial robustness.

Financial Metrics: Focus on Profitability and Capital Allocation

Quálitas has demonstrated strong financial performance, yielding a 21.9% acquisition ratio for the quarter and 22.7% year-to-date. The underwriting results and combined ratio highlight an effective cost-control strategy, contributing to a net income of MXN 1 billion for the quarter and MXN 2.7 billion year-to-date. The 12-month ROE stands well positioned at 16.8%, with a proactive approach to capital allocation for dividends and planned acquisitions.

Upcoming M&A and Investment Strategies

A prudent approach is being taken towards excess cash, with potential M&As on the horizon requiring an investment of $30 million to $35 million. The company aims for a ROE of around 20% long-term, balanced between underwriting and investment portfolio contributions.

Advancing Vertical Integration and Expansion Plans

Quálitas is currently engaged in negotiations for an acquisition expected to further vertical integration and enhance service offerings in the market, with details to become clearer in the coming weeks.

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for standing by. This is the operator. Good morning, and welcome to Quálitas' Third Quarter 2023 Earnings Results Webcast. The conference will begin now.

It is my pleasure to turn the call over to Santiago Monroy, Qualitas' IRO.

[Santiago Monroy, executive]

Good morning, and thank you for joining Quálitas' Third Quarter and First 9 Months 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 Correa, our CEO, for his remarks.

[Jose Correa Etchegaray, executive]

Thank you, Santiago, and good morning, everyone. During the third quarter and throughout the year, our team and business model have shown Quálitas' capacity ambition to create value despite multiple headwinds and challenging environment. The pace of our underwriting business is remarkable, and that doesn't mean we are standing still. Next year, we will be a 30-year-old company of which we have been leaders for the past 16 years as we keep on focus on staying agile and flexible while continue to provide best-in-class service and actively listening to our agents and policy holders in this very dynamic environment.

In early September, we held our Analyst Day where we look at our strategy and how we will ensure Quálitas continues being a winning company throughout creating value across the following stakeholders. First, I would say that we create value for our policyholders by strengthening our competitive advantages, we are able to increase and provide the best value proposition in the market. We keep reaching record highs insure units, 5.37 million by September end, while delivering excellence in service with year-to-date Net Promoter Score of 88%. Additionally, we create value for our agents, the traditional distribution channel, mostly driven by them has posted a 17.5% compounded annual growth rate from the past 5 years. This channel is supported by our more than 21,000 non-exclusive agents and represents 65% of year-to-date written premiums.

During September, Quálitas Mexico was on awarded for the 4 years in a row as La Aseguradora Ideal, our 2023 ideal insurance company by a specialized magazine where agents are the voters. Being recognized as the insurance company where our most important business partners prefer to work and make businesses with, it's not only a honorable distinctive but also motivate us to keep on building our commitment to offer a differentiated product and create long-term relationships.

Number three, we create value for our employees, by September end, we have 6,180 employees under our payroll from which 99% have a permanent labor contract. They have a career development plan to offer professional growth and we are strengthening our onboarding programs to ensure everyone at Quálitas knows, shares and lives our DNA, very important. We recently added a new corporate benefit to our many other Quálitas corporate remunerations, a retirement fund to which Quálitas as a percentage of the amount saved by the employees.

Four, we create value for our shareholders. In the past 3 years, we have consistently distribute cash dividends. We have increased the liquidity of our stock, which currently trades around $8 million, and overall, stock performance is sustained by profitable and consistent fundamentals reflected in the strong financials delivered in the past years and during this first 9 months of the year. We have reached or surpassed our ROE of 20% in many years, building a strong capital position that allow us to continue investing to fuel growth while providing returns to our investors.

And also, we create value for our community in line with our sustainability strategy. We aim to be involved with our community through initiatives and concrete actions with a positive impact not only in the society, but also in our business. Our ODQ model, for example, opens the possibility to provide access to insurers in remote locations. The 337 ODQ's have shown a 10% compounded annual growth rate in the past 5 years and year-to-date, 26% top line growth. We also have the road behavior program, Conducta Vial Qualitas looking to raise awareness of road safety issues among vehicle drivers but also for other road users such as cyclists and pedestrians. We are pleased with year-to-date top line performance of our business. And while we recognize that cost pressures prevailed, mainly explained by industry inflation and robberies, we have and will continue to take actions to have a profitable and sustainable business. We are certainly on the right path.

And with that, I will now pass it over 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 quarterly results reflect a very strong top line, a positive underwriting and a solid financial portfolio. Despite external factors continue to pressure our claims cost, we're starting to see signs that our reaching stabilization and expect to soon reach the desire inflection point. When we step back and look at the insurance auto industry in the world and in Mexico, we're pleased to see Quálitas standing out being one of the very few companies to have a combined ratio below 100% despite all headwinds. While we're happy, we're never satisfied, and we'll continue to work towards switching our long-term target in the next quarters.

Top line growth for the quarter was up 29% and 26% in cumulative terms. This unprecedented growth well ahead of our initial expectations reflect our ability to continue being attractive to agents and policyholders while it also reflects pricing efforts, which account for approximately 50% of the top line growth.

On the latter, Tariff increases on a point-to-point basis are up 24% during this year with steeper increases taking place during the past 3 months, including a double-digit increase in late September. We understand that leading the way in pricing may have an impact on our premium growth pace in the following quarters, which we will try to mitigate by strengthening Quálitas value proposition. The recent efforts on pricing should help us get to where we need to be. We will remain adjusting regularly and always by business sector subsegment towards reaching our or 62% to 65% range.

Going back to the drivers of top line growth, the balance comes from organic volume. By September, we have increased more than 550,000 insured units in the year. Just to give you some reference on what this means, we have never grown this number of units in a single year ever before. Worth to note these boosts in units is partially explained by the strong recovery in new car sales, which are up 25% year-to-date and finally surpassing prepandemic levels being 2% above 2019. There are important shifts on car sizes and brands, market dynamics and challenges to which we are actively adapting to ensure we're always the insurer of choice.

Now moving to our international underwriting. Quarterly written premiums are up 23% in local currency and up 8% year-to-date. Latin America subsidiaries are accelerating and supporting growth with written premiums up 49% in local currency for the year. Central America's customer base has grown due to the closeness and flexibility we have with our agents of the region. Premiums acceleration has come together with a solid profit and a further expansion of our agents' network. We will soon inaugurate our tenth service office in Costa Rica.

In Peru, we continue to be encouraged by how the business is evolving, attracting new agents and Quálitas Peru has now been considered as one of the options leading car dealership for -- as one of the options for leading car dealership brands and financial institutions. Peru has a winning team and is led by Quálitas DNA to be on the path that we wanted. We're making more investments in IT and expanding offices to ensure it continues to accelerate towards becoming the best options for the more than 5 million vehicles in the country.

Finally, on our U.S. subsidiary, we're executing the previously shared turnaround strategy and its premium has slowed the pace according to the plan. Year-to-date, we saw increasing our cross-border premiums of 21%, while we have a decrease in domestic premiums of 50% versus same period a year ago. We will continue to fund and support the business. We recognized that prior year claims will take time to close, and therefore, we expect to be profitable in the next 2 years with sequential bottom line progress over the years.

Now back to the holding company results and following the sharp topline performance, earned premiums were up 27% for the quarter and 22% year-to-date, standing at MXN 36 billion by September end. Earned growth pace is directly correlated to reserves' behavior, when we constituted reserves for MXN 266 million during the quarter, and we have constituted over MXN 1.6 billion throughout the year. This compares to a release of reserves of MXN 92 million during the same 9 months of 2022. Our reserves' constitution is explained by the strong top line momentum and the evolution in our loss ratio.

Going into our costs, our loss ratio closed at 71.6% for the quarter and 71% year-to-date. Despite not yet seeing that inflection point, we're getting there, as it is important to remember that Q3 has historically been a challenging quarter due to the rain and flood season. Thus, a direct comparison should not be taken as a conclusive. To illustrate those sides of improvement, this quarter loss ratio is slightly better than last quarter despite the mentioned seasonality in which Q3 has historically been around 4% to a point higher than the first half at least through during the past 5 years, excluding 2020 and a typical year.

Additionally, in some line of business in Mexico, we have already reached the inflection point and on a rolling 12 months, which is how we look at the actuarial trends we, have reached stabilization. I am not saying we're there, but certainly on the right path as we all need to remember that our recent pricing actions will take time to fully reflect. We will continue to assess progress and take the needed actions that will allow us to get back to our ongoing target.

Now let me give you some color on the two main topics impacting our claim costs. First, inflation and spare parts and labor in the domestic auto industry prevails. So it continues to stress our average cost per claim. Also, we have seen increases in mechanical repairments, painting and labor costs. In addition to the mentioned pricing, we will rely on our scale and competitive advantages, such as our vertical integration to release some pressures relative to the balance of the market.

Robberies, in cumulative terms, now represent 15% of our total claim costs when in the same period of last year, they represented 13%. Latest OCRA available figures show as trend continues to increase throughout the year. Robberies for Quálitas' year-to-date are up 9%, slightly higher than the industry average, given Quálitas has the largest volume of the market. Action towards addressing these include our unique pricing model and the strengthening of our theft prevention and recovery process. Our current recovery rate stands at 44% and which is almost 5% points above the rest of the industry.

Finally, the absolute incremental volume of insured units has a direct impact on our cost as well as new challenges in response times and some bottlenecks in repairment process, which we have been carefully and diligently assessing and addressing.

Acquisition ratio stood at 21.9% for the quarter and 22.7% year-to-date. In line with our historical ranges. Bonuses for agents are based on volume, but also basing the performance of their portfolio, striving to align all incentives according to our cost control strategy. Operating ratio stood at 3.5% for the quarter and 3.2% year-to-date. Despite increasing head count to support growth, we have maintained strict control policies. Thus, operating costs are growing less than premiums. Additionally, as we have mentioned before, this ratio is positively impacted by our third-party vertical subsidiary sales, reflected as an income in the operating line which is up 42% versus third quarter of a year ago and 45% in cumulative terms.

Important to mention that operating expenses include the employee profit sharing, which is directly related to the earnings of the company, which has a higher impact this quarter.

Despite the constitution of reserves throughout the year, we posted positive underwriting result of MXN 317 million for the quarter and MXN 693 million year-to-date. Quálitas underwriting performance according to AMIS continues to lead the Mexican industry. All of the previously mentioned resulted in a combined ratio of 97% for the quarter and 96.9% year-to-date, which sees a gradual improvement a second quarter of this year, although still not within our 92% to 94% ongoing target. The different initiatives we have been working on during this year make us believe we will get to the desired target towards mid-2024.

Regarding the financial income performance, the third quarter delivered MXN 1 billion, reaching MXN 2.8 billion financial income year-to-date. ROI for the quarter stood at 9.7% and 9.2%, respectively. We continue to have a high exposure to fixed income, representing 90% of our portfolio. Duration stands at 1.6 years with a 9.5% year to maturity.

Important to note that our fixed income portfolio is geographically distributed to comply with our international capital requirement, which implies different interest rates and returns. For reference, our yield to maturity for the Mexican portion of the portfolio, which accounts for 70% stands at 10.2%.

Forward-looking, as we have mentioned earlier, we will continue to increase duration to a maximum of 2 years to benefit from current high interest rate environment. Our equity portfolio continues to gradually transition from past stock picking strategy towards a new U.S. and Global ETF-based strategy as well as holding our FIBRAS in Mexico. Due to the shift in our investment strategy, seeking to maximize return under a more conservative strategy set by the Investment Committee, we have adjusted investment guidance, processes and team members' profile. As such, our CIO position is currently vacant.

Altogether, we posted a MXN 1 billion net income for the quarter and MXN 2.7 billion year-to-date, representing a 7.8% and 7.1% net margin, respectively. The quarterly performance represents more than 4x the figures reported during the third quarter of 2022, recognizing a one-off in our comparable base and MXN 1 billion in cumulative terms versus a year ago. Regarding our financial ratios, our 12-month ROE stands at 16.8%, reflecting our strong capital position as well. 12-month earnings per share stands at MXN 8.2.

Now going into our regulatory capital requirement, by September end, it stands at MXN 4.4 billion with a solvency margin of MXN 14.6 billion, equivalent to 434% solvency ratio. Our strong capital position reflects our ability to create value that Jose Antonio alluded to in his opening remarks. We've always had a diligent and prudent approach related to capital allocation, aiming to maximize issues while being prepared for any on-plan situation that could impact the industry or any opportunity that may come along for Quálitas.

Our corporate development plan is based on 3 pillars: First is strengthening our Mexican leadership; second, accelerating growth in our international and vertical subsidiaries; and third, new business opportunities. On the latter, we have identified 10 avenues of growth which we expect to materialize in the next years. All of them within the insurance ecosystem and in all cases where Quálitas unique DNA and strength would be a match to deliver profitable growth with an ROE of 20% or above.

From these 10 initiatives, 4 are already under execution. First, Quálitas Salud; second, the technology company recently acquired; third, our entry to Colombia, which we expect to materialize towards the first half of next year and last, a potential acquisition that is being currently negotiated seeking to strengthen our vertical integration.

Let me briefly touch on Quálitas Salud. Since in September, we celebrated its first year of operation. Business is progressing as expected, with 100% organic growth. We're learning, we're adjusting, and we will continue to do so to adapt our product to the needs of clients and markets. As we have always indicated, we do not expect that Quálitas Salud is going to move the needle in terms of growth or profitability for the holding company in its first 3 or 5 years, but it will certainly do so in the long term. By September end, we have 59 service offices offering our product and more than 500 train agents promoting it.

The initiatives under executions will not be capital intensive at the beginning but could be after a maturity process. We're being responsible and diligent at first but will not be shy to accelerate what we have proven the potential and our right to win. As part of our capital allocation and as Jose Antonio mentioned before, we have consistently paid cash dividends to our shareholders. In this regard, on November 9, we will be paying the second exhibit of the 2023 approved dividend of MXN 2.5 per share for a total 90% payout ratio and a 4.2% dividend yield in the year.

As we have said in the past, we want to be very transparent regarding what management considers excess cash. We follow the ratio earned premiums or investment over capital with a 3x ratio objective by year-end. This implies that around MXN 300 million are the real excess cash. We seek to have a balance between dividend payment, share buyback programs and funding the existing and new business opportunities. We will continue to pay dividends, likely on the high end of our policy for the next years, and we will assess an extraordinary dividend payment as part of this excess cash if it were to make sense, always recognizing that this is a decision to be taken at the General Assembly.

To wrap it up, as we head to the last quarter of what has been a very strong year, we will focus on executing against the priorities and setting the base to make 2024, a year in which we delivered the trifecta. Where top line momentum continues, although a more sustainable level, claim cost is back to our long-term target and financial income continues to be a tailwind behind high interest rates and the way the portfolio has been shaped. Excellence in service is an ongoing journey, a continuous process of listening to our agents and policyholders and rapidly evolving to meet and anticipate their needs. We have built a solid business and strengthening Quálitas assets over the last years, maintaining our core DNA for the company's sustainability in the upcoming years.

And with that said, we're more than happy to take your questions. Operator, please.

[Operator]

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

[Ernesto María Gabilondo Márquez, analyst]

Ernesto Gabilondo from Bank of America. Jose Antonio, Bernardo, and Santiago. Thanks for your commentary. So I have 3 questions from my side. The first 1 is on teams. So we saw the modest sequential improvement in the food cost ratio, however, to be above the historical average of 62% 65%. So when do you expect this ratio to resolve and have gone through reposition primary held. And do you think that the fourth quarter of next year. And we can claim that it will normalize again to the 65% level, we can see that no good quarter from 2024.

Then second question is on your securities portfolio. We continue to see improvements in the reforms on both of the portfolio. However, when do you expect the yield to be close to this effort? And also related to this, can you remind us what is the impact on peso forever change of 100 basis points in the interest note.

And then for my last question is on taxes. We have seen that the government is looking to attract more resources for taxes, especially at the government, we have seen recently the tariff on the airports. So just wanted to hear from your side I believe there's a litigation process of well denoted factor between the largest insurance companies and the Ministry of Finance. I think they are arguing that in past condition with value added or spare part costs was not deductible but all of the industry weren't deductible.

So just wanted to hear from what you have leased them integration that is happening in other insurance companies. If you have received the request of this from the Ministry of Finance. I would have been in the live discussions between the government and the insurance association AMIS. Also related to the in case Quálitas was requested by the authority, I don't know if you have rotated any potential impact.

[Jose Correa Etchegaray, executive]

Good morning, Ernesto. Thank you for your questions. Those are very good questions around the 3 of them. Let me take the first 1 regarding the loss ratio, when do we expect that to go to the target levels ongoing. Well, I would like just simply to tell you that the lease ratio has the impact of inflation, as you all know, there's a very tough change on the robberies. And clearly, the average cost per ton are up this year even above the 7% year-to-date. The number of claims have also increased in the third Q versus the third Q of last year. So clearly, our loss ratio continues to be at levels that we see that we need to improve, as we have seen over the past quarter. And we are seeing, and I'm glad to see that we have early signs of recovery.

Now I am optimistic that this is something that we have the third quarter typically is a higher loss ratio due to seasonality. So we should be seeing some stabilization here. Important to note that, Ernesto, is that we have increased our pricing. Our pricing has a revenue impact to how the those ratio would behave. And considering that we have increased quite substantially our dicing and pricing over the past 6 to 9 months, I would say we should start seeing this impact. So we believe that we should be in the technical range closer to 65% by the second to mid next year, also by the second part, it should be there.

Clearly, we are at the same time as we are working and we have increased our prices. We continue to work on cost -- on the cost front, including a number of initiatives that will help us also to get back to our demand. What I am encouraged at this point in time that now we are seeing and talking that's the case, the inflection point for that to start reaching and as the pricing, as I indicated earlier, as pricing start kicking in, we should be seeing that point going up in the next quarters. Bernardo, do you want to take it?

[Bernardo Salas, executive]

Yes. I'll take your second question regarding our portfolio. And let me just mention that directionally, for every 25 basis points, we should expect that in the long run, certainly not on media effect, we could have a swing of MXN 100 million per year, okay?

Now to your question on when do we expect ROI to be above service? This is a top, while we are making important improvements this is truly seen in the results that we posted. The shift on service and ROI will depend on the big figure also in service. Today, we recognize that we are below. But eventually, centers will turn the corner and our portfolio return will be above. So I think rather than trying to anticipate when will that point happen. We will continue to increase duration. As we said, we're at 1.6%. We're making important improvements relative to where we were a year ago. And the yield maturity is also noting that, just as I referenced last quarter a year ago, our asset duration was 0.6%. We're now at 1.6%. And in past to get to 2 years and our yield to maturity, it was 7.8%, and it's now 9.5% and improvement.

So then again, I think that gives you some better perspective on what to expect. Now to the last part of your question, your third question, and perhaps I'll give you a longer answer to ensure I cover all assets of it. And first, let me start by saying that Quálitas is a company that always sees compliance as a key strength. We seek to always been and exceed standards set by the several entities that regulate us as an insurance company and as a public company.

On that regard, let me also state that we do not have any fiscal strategy. We pay our taxes as requested in time and form. And to your specific question, it has been the case in many years. We are being audited by IRS or the -- Mexico and Spanish. We currently have 3 fiscal audits in process. Now in none of these audits, we have received any conclusion for final resolution. And also, this is still in process. And therefore, anything that we said would be speculating.

[Jose Correa Etchegaray, executive]

Just let me add to that, would you say? Because as we are -- we are in this triad today, that is no different than the past. We have always been having, as you are probably aware, what we have is that the tax years that are operate 5 years. So usually, and that's the case in the past. Now we have had regular audits all the time -- every -- all the time I've been with Quálitas. I've been in -- so it's a regular thing that we are having. So these points are the same. Bernardo, please keep going.

[Bernardo Salas, executive]

Yes. No. And I was just complementing that we are aware that this situation is affecting the whole industry. We're managing the matter as a sector and therefore, through our association, which is the AMIS we remain confident that the matter will be properly managed and resolved by the authorities and the legal and indices. It is evident that the interpretation for the VAT accreditation in case of spare parts and also medical would have a significant impact on solvency margin for the whole industry. But as it continues to be as speculative an open matter, we see no value on stating any figures.

[Operator]

Our next question comes from Jitendra Singh from HSBC.

[Jitendra Singh, analyst]

This is Jiten from HSBC. Congrats on the results. I have 2 very quick questions. One on your premium growth. So around 50% of the top line growth is driven by the tariff increase. Now given that inflation has continued to come down although automotive inflation has remained high. So I just want to understand, so what will be the magnitude of impact on your tariff going forward? How do you expect premium growth for next year in terms of pricing and new sales growth?

Second, I just wanted to understand the impact of currency on your business. If you could please quantify the impact of currency appreciation on your business, maybe in terms of cost or premium or maybe, I mean, during the quarter, what was the percentage of costs related to claims were dollarized?

[Jose Correa Etchegaray, executive]

Thank you, Jitendra. Let me take the first one, the top line growth and the pricing part. Clearly, we are related by the fact that we have brought this quarter and for the year. I remind you that a lot of it is coming from the increase in the car sales increases for this calendar year. Clearly, we -- I would like to go back one step back to understand that we have increased -- that we decreased our pricing back in 2020 when the pandemic hit. So it has taken some time to recover. That's why there are -- you could say, substantial price and tariff increase. Also, it is important to note that cars have increased their value. So the insure amounts are also high. That's why we have been doing that.

Now going forward, that is what we can expect. I mean it will depend on how costs are. We have early indications that they are going to be in the probably mid-teens, when it's going to be in the mid-single digit -- in the same for the year. certainly, I expect to see a better forecast by the industry in the next couple of months. So it will depend on that. And regarding pricing, clearly, we will continue being clear to increase our prices to be able to recoup prices and inflation, and we're doing that in a very I would say stock, but in a planned manner, so we do not exacerbate our current base of customers.

So all that said, it will depend on how inflation hits. And as I mentioned in my previous intervention is we are also taking steps to reduce costs in several fronts in the company. So that's what we are going to have. So next, I think regarding pricing, and we will continue to take us require because we need to go back to the levels of 70% -- well, the 62% to 65% in terms of claims index, and that's what we are going to be doing. You will hear from most of that work once we know what happens in the industry as well as with the inflation figures.

[Bernardo Salas, executive]

Just to add to your second question regarding currency appreciation. Year-to-date, we have been impacted just because of the restrengthening of the peso in around $80 million for our P&L. There's also around MXN 160 million in the balance sheet, reverted in the capital. But in the P&L, it's MXN 8 million. We don't speculate on currency. We recognize that a lot of the spare parts are pricing dollars while we paid them in peso their index. However, that wasn't the case when we saw the peso transition.

In all cases, we see spare parts going down in pricing. And therefore, we believe that even if the peso loses some ground and gets back to MXN 18.50 or MXN 19 we shouldn't expect that to immediately impact the cost. Now, we have always priced based on claim cost index, that's what we see. And eventually, if that were to be the case that we see once again impact behind currency fluctuations, we will adjust according. But just to make sure I'm 100% clear, we do not hedge. We don't speculate, and therefore, we adjust according to reality and not on the forecast. Thank you.

[Operator]

Our next question comes from Andres Soto from Santander.

[Andres Soto, analyst]

Congratulations on the results. And I have 3 questions. Let me ask first 1 and then I will get back and ask #2 and #3, which are more related. So the first question that I have is, there is an interesting comment that you guys made regarding the U.S. subsidiary. You mentioned an increase of 20% in the cross-border business year-over-year. When I look at the crossing of trucks between the U.S. and Mexico, the numbers are staggering. Just for the month of August, we see double the number of trucks crossing the border. Obviously, this doesn't mean that they are double the number of trucks, but definitely, this is -- this should be a tailwind for the business that you conduct. Can you please comment on what are the dynamics that you are seeing and specifically in terms of competition? And if you see this as one area of growth as the near shoring team is taking shape in Mexico?

[Bernardo Salas, executive]

Andres, thank you for your question. Let me take the U.S. subsidiary first, no. Yes, we've seen an increasing number of trucks. It is estimated that there is some uncertainty, but we estimate that on a daily basis, there are 20,000 trucks crossing the U.S. and Mexico border. So the potential is out. Now based on the market share numbers that we have in AMIS, we have in Mexico around 43% of the trucks for heavy equipment market. However, when they cross the border, we have less than 30%. Actually, we believe more is in the 20% to 25%.

So there's a lot of obstacles. Now there are 3 companies, 1 of them being Quálitas, who serve the cross-border. For many years, we did not serve this market properly. So it's going to be a journey. It will take us some time to get those customers back to Quálitas'. So the growth that we're seeing is in the right direction, but we believe there's a lot of upside as we, again, we get back to those customers, we offer a value proposition that is attractive to them, and we regain their trust. And also we're encouraged what we get, we see that the upside is far from where we are today.

[Andres Soto, analyst]

Perfect. My second question is regarding the 10 strategic initiatives. You already have 4 clearly identified. Can you give us some color about what are the other 6 initiatives that you are considering for quite as growth?

[Bernardo Salas, executive]

Yes. And we have the business sectors. There is not an M&A process or a due diligence currently. This is more a 5-year out and the whole corporate development program was developed together with some board members with management, and it's something that we get us line of segment opportunities come. And what we also want to make sure with this is that the investor community knows that there's still a pipeline already identified that we'll continue to build Quálitas growth potential always seeking to build on our strengths and always seeking to have ROI of 20%. So at this point, I'd rather not share those details in this period of make it sure we continue to be focused on the 4 already executed, and we share details on the other as they come to life.

[Jose Correa Etchegaray, executive]

Let me add to what Bernardo said is that when we develop this plan, Andres, what we wanted it was to increase that we are seeing or having ways really to be able to have a continuous growth around the 20 -- I mean, around the 10% growth in terms of the top line growth. That was very important for us when we decided to do this plan back 2 or 3 years ago. So we are in no rush, we need to do that. The execution that we're having, I believe, is strong. We are executing on that. And we are try in the process of having some even some companies. So that's something that we will continue to do with no rushes to make sure that we maintain our long-term growth for the company in the future.

[Andres Soto, analyst]

Perfect. And related to that point, you also made an interesting comment regarding capital allocation. You mentioned some of the strategic initiatives that you have in mind will not require capital in the first stage, but as they progress and you identify the potential, probably that's when you are going to do some capital allocation there.

So my question is regarding this $300 million that you have identified as the excess capital besides the 4 initiatives that already have a very specific capital requirement in the next couple of years. Do you think Quálitas should keep sort of rainy day fund or some capital set aside for the additional initiatives that may come down the road? Or on the contrary, you believe that the profitability outlook for the company allows you to very quickly replenish this base and have the excess capital required for any additional commitments that the other initiatives may require.

[Bernardo Salas, executive]

So this is always a good topic, no capital allocation. We've been talking in the past. We will always be very diligent and nimble on making the decisions that are right for the business. We do not have exact line of sight when our -- these projects such as Quálitas Salud and Quálitas Colombia, we'll get to that tipping point in which we will require to invest more aggressively to be able to capitalize the momentum. So I think that is something that we're expecting to see in the next 3 to 5 years. And we should, therefore, be ready to have those funds to address. Now just to make sure that I also touched on the one is that it is currently named in M&A process, that will require somewhere in the $30 million to $35 million. So that will come below the -- as a use of those $300 million.

[Jose Correa Etchegaray, executive]

We have talked in the past that we would see around USD 50 million. And clearly, we are less resetting all these situations. We have a past a couple of potential acquisitions that by some reason, some related pricing that in the end we didn't bridge price. So we are very, very careful with how we deal with our excess cash. And certainly, we will consider in the future return investment. We need to discuss with the Board and the general assembly going forward. But it's too early to tell, but we will be very, very responsible in the use of the excess cash to ensure our long term growth targets.

[Bernardo Salas, executive]

And also as we have been vesting, we like to be in a company that pays dividends that have liquidity on our share, that is moving in the right path. And therefore, we will continue to fund the share repurchase program. Now moving forward, as I alluded in my remarks, we should expect dividends to continue being something that you see coming through, largely on the high end of the dividend policy, which is 40% to 90%, so likely on the high end. And to the question that you have also mentioned several times, will an extraordinary we do it makes sense. I think, we will be a resident management likely in the next 18 to 24 months. And if it makes sense, we're more than happy to give that money back to our shareholders, knowing that we will have also a sufficient capital to fund business.

[Operator]

We have a follow-up question from Jitendra Singh.

[Jitendra Singh, analyst]

Sorry. Sorry, no, I don't have any questions.

[Operator]

Okay. We'll lower your hand then. [Operator Instructions] Our next question comes from Anand Bhavnani.

[Anand Bhavnani, analyst]

Yes. Anand from White Oak Capital. Two questions, but before that congratulations on the strong growth and good ROE. My two questions are, first is on acquisition. So you have indicated that we have done an acquisition. Can you give us how much did we spend on this acquisition in U.S. million dollars and what is the current revenue and profitability of the company.

[Santiago Monroy, executive]

Anand, I apologize to interrupt you're breaking up. So we do not understand your question. Maybe if you can write it on the chat, I will read it and then answer to you, because you're breaking out. Thank you, Anand.

[Anand Bhavnani, analyst]

Hello?

[Operator]

You can try to speak again, Anand, or you can leave us your question on the Q&A box. Thank you all for being connected today. We will hold on for a couple of minutes to see if we can get those questions through the Q&A. Otherwise, we can conclude the question-and-answer session.

[Anand Bhavnani, analyst]

Am I audible?

[Operator]

All right, Anand. We're not getting through. So our next question comes from Tejkiran Kannaluri. Please state your company name and then ask your question.

[Tejkiran Kannaluri, analyst]

This is Tejkiran from White Oak Capital. I have 2 questions. One is around the interplay between the investment income and our combined ratios. So the 62% to 65% loss ratio of 92% 94% combined ratio target I think we've been holding on for some time when the outlook for investment income was different. Is there any chance that in a higher for longer environment when we expect investment income to be higher that we adjust the combined ratio targets a little higher, the more of the profits might come through from the investment income? That's question number one. Question number two, I'll repeat...

[Operator]

All right. Tejkiran. We lost your audio.

[Tejkiran Kannaluri, analyst]

Okay. So should I repeat my question?

[Santiago Monroy, executive]

Yes.

[Operator]

I think we got most of it.

[Santiago Monroy, executive]

Yes. Yes, please.

[Tejkiran Kannaluri, analyst]

Okay. Sure. My question is around the interplay between combined ratio and investment income. To be brief, is there any chance that in a higher for longer environment? Because the outlook for investment income is higher the combined ratio target of 92% to 94% could be revised up to it because we might get more income from investments. So is there any chance of this target in the long term being revised in a higher for longer environment. And number two, I got Anand's question, so I can repeat that. So -- but maybe I can do that after the first question.

[Bernardo Salas, executive]

All right. So in Quálitas, we've always seen ROE on the 20% as something that pulls the underwriting and the investment portfolio should contribute to. I would tell you in an ideal world, it should be half on half. We know it always take turns. If you look at the past 5 years, it was the underwriting, the one that really pushed and deliver the ROE, if you look at this year, it has been the investment income playing a bigger role in ROEs.

Now even if we see investment income continue to contribute, and we get as we will get to the combined ratio of 92% to 95% target, we will not mix. No, I think that has been something that has worked in favor on the long-term profitability of the company. And I've been talking to some of you saying that 99.9% of everyone who works at Quálitas will only be rewarded based on underwriting profitability. Therefore, we always strive to minimize costs, to improve value creation and premiums, but not at the expense of looking at the financial income. So I think that was something important to highlight as we will continue to expect that financial income plays a big role and a tailwind in the next 2 years.

[Tejkiran Kannaluri, analyst]

That's very helpful. So here, I'm repeating my colleague, Anand's question. So the acquisition that you had mentioned that was done this quarter, could you provide us more details around that? Could you help us understand the size of this acquisition in dollar terms and would you be able to give us some metrics on what size the company is, in terms of revenue profits? And could you help us with some numbers around that position?

[Bernardo Salas, executive]

Since it is an open negotiation. I would just keep it -- sharing that this is a vertical integration play or something that will strengthen our ability to continue to provide Quálitas and the market better cost and service. And in terms of size, I would say it's below $50 million, and we expect to have and give you better visibility in the next 3 weeks.

[Operator]

We have no more questions. So that concludes our question-and-answer session. If you do have -- sorry, hang on, we're getting a question through the Q&A now. Santiago please do let me know if you want me to read it out or you guys can handle it as well.

[Santiago Monroy, executive]

Thank you. Congrats to your third quarter results. Here my question given your guidance on looking for an earned premiums over equity ratio of 3%. What should we expect in terms of your dividend policy for next year?

I think it was already addressed by Jose Antonio as well.

[Bernardo Salas, executive]

And just to clarify, it's not 3% in just 3x.

[Jose Correa Etchegaray, executive]

So I think I will add that -- we will comply with our investment policy as we had in the recent past, we will continue to abide platforms.

[Operator]

Thank you so much. At this time, we don't have time for any further questions. But if you do have a question, feel free to reach out to the IR department from Quálitas. They will gladly discuss it with you at a further time.

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