Qualitas Controladora SAB de CV

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Earnings Call Analysis

Quálitas Touts Growth Strategy; Eyes 20% ROE

Quálitas reported a robust growth trajectory, celebrating unprecedented top-line performance. Written premiums increased by 32% quarterly, and 28% annually. Half of this surge was due to new volume, while the rest was driven by tariff increases. As part of their diversification strategy, they marked one year since launching Quálitas Salud, their non-auto insurance product. Quálitas also integrated a technology firm specializing in telematics and IoT to enhance efficiency. Despite external pressures, they maintained operational resilience and focused on a sustainable return on equity (ROE) around 20%.

Robust Growth and Cost Control Amid Unprecedented Events

The Latin America subsidiaries of the company, including those in El Salvador, Costa Rica, and Peru, saw an impressive 41% growth in local currencies over the year. This performance is propelling them towards sustained profitability and a positive contribution to the return on equity (ROE) target of the holding company. Meanwhile, focusing on profitability has been the theme for the U.S. subsidiary, which has maintained a flat performance through the year while shifting its portfolio towards more lucrative national products. On the revenue side, cross-border premiums climbed by 22% for the year, indicating a strong market position in these areas.

Resilient Underwriting Despite Natural Disasters

The company experienced a notable increase in reserves, dedicating MXN 2.4 billion in the fourth quarter alone, which represents a considerable increase from the previous year by MXN 792 million. Over the entire year, the reserve constitution totalled MXN 4 billion, up MXN 2.5 billion versus 2022, reflecting a prudent approach to managing its balance sheet in light of higher growth. Noteworthy here is the tactful management of Hurricane Otis's impact, which resulted in claims of around MXN 290 million but was substantially mitigated through reinsurance to yield a net impact of around MXN 200 million. The company's loss ratios for Mexico are edging towards their sustainable target range, demonstrating robust underwriting practices even in the face of such extraordinary events.

Challenges in Claims Frequency and Cost

A surge in claim numbers has put pressure on service costs, with a 11% increase in the fourth quarter and 13% across the year. Further compounding the burden are rising average claim costs, which went up 9.3% relative to the previous year, driven mainly by factors such as spare parts inflation and increased incidents of vehicle theft. The company's response includes besting the industry with a vehicle recovery rate 4 percentage points higher than the industry average at 43%, demonstrating the effectiveness of their risk management strategies despite external economic pressures.

Commitment to Stakeholders and Strategic Shifts in U.S. Business

In light of a natural disaster, the company showcased its commitment to policyholders and social responsibility, notably waiving deductibles to aid those affected by Hurricane Otis in Acapulco. This act of goodwill enhanced the loyalty of agents and policyholders, reinforcing the company's brand in a challenging time. As for the U.S. operations, a strategic pivot is underway that involves focusing more on cross-border and binational products. Despite an uptick in historical claim reserve constituencies and other regulatory and audit adjustments amounting to a $20 million quarterly loss and a $30 million annual loss, the U.S. strategy remains focused on long-term profitability.

Efficiency and Profitability

The company has maintained its acquisition and operating ratios in line with historical averages and expectations, signaling cost control and efficiency in its operations. Its combined ratio close to the target range validates the strong underwriting performance and operational profitability. Moreover, the financial portfolio yielded a 9.4% annual return on investment, contributing to the financial health of the company.

Outlook and Capital Distribution Strategy

Quálitas closed the year exceeding top-line growth expectations with a net profit margin of 7% and a ROE of 18.4%, showcasing its resilience and ability to create value in challenging market conditions. Looking forward, while the company is proactive in exploring strategic growth areas and capital allocation includes the possibility of a high-range dividend as per the policy, considerations for an extraordinary dividend do not align with prudence given the anticipated volatility of 2024 and forthcoming federal elections in Mexico and the U.S.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, and welcome to Qualitas' Fourth Quarter and Full Year 2023 Earnings Results Webcast. The conference will begin now. It is my pleasure to turn the call over to Quálitas.

[Santiago Monroy, executive]

Good morning, and thank you for joining Quálitas Fourth Quarter and Full Year 2023 Earnings Call. I'm Santiago Monroy, Quálitas IRO. Joining us today are CEO and Chairman of the Board, Jose Antonio Correa, and Deputy CEO and Vice Chairman, Bernardo Risoul. As a reminder, information discussed on today's call 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. Quálitas undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise.

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

[Jose Correa Etchegaray, executive]

Thank you, Santiago. Good morning, everyone. Great to be with you. And let me start by wishing you all once again the very best for this year. It is likely that when we look back in a few years, 2023, will stand out as a year of remarkable performance. with top line up 28%, strong momentum of our operating subsidiaries and a notable growth in profits. The results also led us to surpass the 5 million insured units this year, reflecting the trust placed by our policy hunters and more than 22,000 agents. We have invested heavily to improve the service experience both in our offices and throughout the many technological tools we have developed for them. Our constant efforts have paid off, and I am proud that more than 70% of our processes have a satisfaction rate within our 90% objective range. There are 3 milestones of the year that I cannot miss to touch upon. Number one, Quálitas Quality has achieved an annual record high in terms of insured units, with a total of 5.3 million units across the 5 countries where we operate. This is an increase of 527,000 units throughout the year.

New car sales performance in Mexico, up 24% versus 2022 and 3% above 2019, were important drivers of volume growth. Growth makes us face an ongoing challenge of effectively deliver excellence in service and fulfill our customers' expectations. Throughout the year, we have created over 600 new positions to maintain quality standards for all our clients. Most of them are to support our call center, claims officers and operational team. The entire organization works with horizontal structure to be able to provide service to our 562 service offices and all our agents who are our top priority. We must make sure that Quálitas DNA truly prevails in new employee generations, Thus, we have strengthened onboarding programs of what we internally call the qualitization process.

Number two, we keep strengthening our organization, implementing a sound corporate governance and succession plan, has been a priority. And as such, our Board has been paying special attention when selecting its members to their experience and expertise, including their knowledge of the different regions where Quálitas is present. Some of the initiatives taken were the appointment of Bernardo as Quálitas Controladora's Deputy CEO, a new Board member addition with [indiscernible] oversight to our business strategy, reducing the average age of our members. And Board training sessions have related to sustainability topics, new regulations, among others. We are still in the recruitment process to find the best candidate for CFO position. Also, we have appointed a new CIO, which will start in mid-February and have made progress in our talent development programs by filling key positions such as innovation and special projects, prevention, office and agents development, road assistance, among many others, which are fundamental to shape our organization and integrate people and technology to successfully execute on our customer-centric objectives. On this front, there is still work to be done and will remain as a priority for me and the leadership team during the year. And number three, Quálitas corporate development plan has made progress executing in line with our 3-pillar strategy that we have deployed a couple of years ago by which we aim to further diversify our business to fuel sustainable growth in the mid, long-term. While we strive to continue winning in our core business, medical to insurance, we want to have a portfolio of businesses that share the responsibility of value creation. On that regard, I celebrate 3 main achievements. We celebrated the first anniversary of Quálitas Salud, which is our first entry in the nonrelated auto business. Health Insurance segment could be -- represent an important potential for Quálitas, where our value proposition based on prevention and excellence in service will seek to satisfy an unmet need for the 92% of Mexican population without private insurance through a compensatory [ product ] with capped risk. In line with the plan, this year has been all about learning and adjusting, which we have. Our decision to enter organically allows to better control growth and exposure, adjusting product to what proves to create value and with the expectation to make Quálitas Salud a relevant contributor to the holding company in the long run. Second, including a technology company, focus on Telematics, business intelligence and IoT to the Quálitas family, and this aims to increase our efficiency in Mexico by leveraging data analysis to increase value proposition through new products and better risk assessment.

And thirdly, we continue to make progress on our entry into Colombia. Being able to serve 50 million people market will represent a big test, one, we look forward while recognizing it will require resources, attention and Quálitas DNA. As such, we have agreed that Colombia will be our last geographic market expansion in the following years. We're pleased with this year's performance and recognize that growth comes with new challenges to overcome. While we have made progress, we still face external factors pressuring our costs. Our industry is cyclical and Quálitas has weathered through many storms, and we are certainly coming out stronger of this one, and we are ready to face whatever comes next. We are thrilled to start the new year, which brings 360 days of opportunities to service excellence and protect our policyholders who is creating value to all stakeholders.

And with that, let's move to the financial details and take a deeper dive into the quarter and year-end results. Bernardo, please.

[Bernardo Salas, executive]

Good morning, everyone. As Jose Antonio mentioned, in what is still a challenging environment, Quálitas posted very strong results during 2023, staying true to our core competitive strengths and our service commitment to policyholders and agents while adjusting to the evolution of the market dynamics and needs, including pricing and products. Going directly to our top line performance, written premiums were up 32% for the quarter and 28% for the year. Being the traditional segment, the most important driver of this growth and representing 2/3 of our quarterly growth and 74% for the total year. Top line is worth celebrating not only for being unprecedented in terms of premiums but for proving that even in a mature business and despite all headwinds, strong growth is still possible. Around half of our premium growth was driven by new volume with 527,000 additional units an 11% increase versus last year. As Jose Antonio mentioned, this organic growth was boosted by the strong year in new car sales, in addition to being able to attract new customers.

Although at this point, we have no hard data, we would like to think there could be a slight increase in car insurance penetration. The balance of our growth was driven by tariff increases which on a compounded average were up 24% during last year. The highly competitive environment we have been facing over the past 2 years has not made it easy, but we have stayed the course to COVID claim cost increases and car prices.

In some cases, these increases have led us to be ahead of the market and while you closely monitor price competitiveness, we're committed to restoring the 5% to 7% target in operating margin. At this point, we expect that most of our pricing catch-up has already been made and will materialize and lock the year. 2024 pricing will incorporate a couple of points that are yet pending as well as the evolution of industry costs. The combination of volume and pricing resulted in a stronger leadership position in Mexico.

By the end of the third quarter, which are the latest industry figures, Quálitas helped 31.9% written premium market share, up 120 basis points versus same period a year ago. In the heavy equipment segment, the market share is now 43.7%, [indiscernible] 5% last year, reflecting Quálitas rational verification and a more competitive segment. Market share is always a good thermometer but in the case of Quálitas, it's a KPI that is not linked to anyone's performance. Top line growth was across all businesses with our international subsidiaries, representing 6% of the total holding company underwriting by the year-end. When breaking it down by market, Mexico grew 30% in the year with an extraordinary fourth quarter performance, up 32% and surpassing MXN 6 billion in a month for the first [ time ].

Latin America subsidiaries, which included Salvador, Costa Rica, and Peru, grew 41% in local currencies for the year and they are on the right path to maintain profitability and become accretive to the holding company ROE objective. Finally, in line with our strategy, the U.S. subsidiary had a flat performance during the full year 2023 to mainly focus on restoring profitability and shift the portfolio to buy national products. Our cross-border premiums increased 22% in the year. Earned premium for the holding company were up 31% and 24% for the quarter and full year, respectively. High growth led to high reserve constitution. This fourth quarter, we constituted MXN 2.4 billion of reserves, MXN 792 million more than last year fourth quarter. On an annual basis, we constituted MXN 4 billion, a MXN 2.5 billion increase versus 2022.

Moving now to our cost. The loss ratio for the quarter stood at 70.7% and 70.9% for the full year. To better understand progress and challenges, I will provide specifics on our 2 main markets. First, in Mexico, the loss ratio stood at 67.5% for the quarter and 69.2% for the full year, confirming we have reached inflection point and sequentially moving towards the desired and sustainable range of 62% to 65%. Fourth quarter results include a hurricane Otis impact of around MXN 290 million, which was partially offset by our $5 million catastrophic reinsurance policy for a net impact of around MXN 200 million.

Service and costs continue to be stressed by the increasing number of claims that were up 11% in the fourth quarter and 13% annually. Frequency is also trending slightly up, closing the year at 28.4% versus 27.9% in 2022. Average claim cost was up 9.3% versus last year, biggest call out come from spare parts inflation and robberies. Even though official statistics shows impact of inflation easening versus last year, internally, we have not seen yet happen. New brands arriving to the Mexican market without enough inventory have been pressuring even more the costs.

Regarding robberies and in line with the performance close to Federal Elections in Mexico, they have increased 10% for Quálitas and 4% for the industry. Quálitas recovery rate stands at 43%, outperforming the rest of the industry average by 4% points. Mix and still a high value of vehicles also play an important role when calculating their impact as a percentage of our total cost.

Before I move to the U.S. business, there is 1 item related to Otis I would like to touch on. As I believe it helps understand Quálitas DNA in terms of its commitment to policyholders, our agility on decision-making as well as our social responsibility. Back on October 25, we noticed a Level 5 hurricane impacted the Mexican Pacific Coast directly hitting Acapulco.

We quickly knew that was likely going to become the most expensive single event Quálitas has faced, and it did. But it was also a situation where we needed to be our best, and we also did. Just 48 hours after impact, we announced that we were not only ready to help our clients, but we also waived all individual deductibles up to MXN 20,000 as a mean to support those that had lost everything. Moreover, a crew of 22 people move to Acapulco as soon as the road open to install temporary service centers to support, manage and pay claims. When we think about our purpose of ensuring cars and protecting people and how we're embracing ESG, this is it. I feel proud to be part of a company that goes over and beyond our obligations when people need it, and while doing so, we increased loyalty of agents and policyholders. So now let me move to our U.S. business, where we continue to execute our strategy of executing the domestic market to focus on the cross-border and by national products. The journey continues to be bumpy, recognizing that it's not fast, simple, not cheap as we need to bring to closure the claims that traces back to 5 or even 7 years ago. These quarterly financials were impacted by the update materiality analysis in which adverse developments of historic claims [ updates ] led to higher reserves constitution.

In addition, there were 2 other decisions impacting results. First, we have agreed with the California Department of Insurance to no longer operate on the low-end of our reserves range but to move to the midpoint in a 4-year plan, this meant a $7 million increase in 2023. And second, due to our external audit recommendation, we will start building DTA reserves as a conservative and unlikely case if we're not able to turn around the business in a way we credit these taxes. All in, U.S. business posted a loss of close to $20 million in the quarter and $30 million for the year, part of which relates to reserves and provisions that we could recover when shifting the business.

Moving further down the P&L, our acquisition ratio stood at 21.4% and 22.3% for the quarter and the year, respectively, in line with our historical average and expectations. We're benefiting from a strong performance in the traditional segment, which carry a lower commission rate. We feel comfortable with our neutral portfolio composition between annual and multi-annual year policies, which is now at 81.2% and 18.8%. Operating ratio for the quarter was 2.3%, benefited by the strong underwriting performance, which represents higher income from underwriting fees. Year-end ratio stood at 2.9%, the operating ratio is also benefited from our third-party vertical subsidiary sales reflected as an income in the operating line. As a reminder, within our operating expenses is EPS, employee profit sharing which for the year represents 80 basis points of the total operating cost. Quálitas continues to outstand for its commitment to cost control, not only staying within the desired target or below the industry average, which is around 4.5%.

All of the above resulted in a combined ratio of 94% for the quarter, ending the year at 96% and being close to our 90% to 94% target. We feel proud of the ability to create value and being true to our commitment to stay profitable at operational level, even in the already mentioned challenging dynamics.

Now shifting gears and moving to our financial performance. Our portfolio was successfully set up to benefit throughout the year from current interest rate levels. 89% of our total portfolio is invested in fixed income positions with a duration of 1.5 years and a 9.6% yield to maturity by year-end. In the case of our Mexico business, the yield maturity is 10.4%. The balance of our portfolio is mostly allocated in equity in Mexico FIBRAs, in U.S. and global ETFs. We have already migrated more than half of our ETFs target allocation, and we will continue to do so in a gradual pace, taking advantage of the current FX levels. Our investment strategy does not foresee relevant changes, aiming to bring fixed income duration as close as it can get to 2 years before the reference rate cuts in Mexico. Our portfolio follows the guidelines advisory and strategy decided by our investment committee as part of our institutionalized corporate governance. We delivered a financial income of MXN 1 billion during the quarter and MXN 4 billion annually, implying a 9.4% annual ROI. Important to highlight that 15% of our portfolio is allocated outside Mexico, mostly in U.S. dollars, which implied a different reference rate.

All in, Quálitas posted a $1.1 billion net profit for the quarter and MXN 3.8 billion for the year, representing an annual 7% in margin. This represents 72% or MXN 1.5 billion, more than in 2022. Our 12-month ROE stood at 18.4%, reflecting bottom line growth and performance, but also our capital position. Structurally, if we were to exclude around MXN 300 million of the excess cash we consciously have, our ROE would stand at [ 21% ].

Next, we closed the year with a higher-than-expected top line growth and strong momentum. We delivered positive underwriting profit that outstands in the industry and a very well-positioned financial portfolio that benefited our financial performance. Once again, we confirm Quálitas resilience and capability to create value.

Let me touch on regulatory capital. By the year-end, it stood at MXN 4.6 billion with a solvency margin of MXN 14.7 billion, equivalent to 420 solvency ratio. Capital allocation will continue to follow our corporate development strategy, which identified avenues of future growth all within the insurance ecosystem. Three of them are now under execution, and we are assessing 2 due diligent process to strengthen our vertical operation and noninsurance business. Dividend distribution will continue to be part of our capital allocation. And although the decision relies on our AGM from a management standpoint, we believe upcoming dividend may once again be at the high end of our policy range, which is 40% to 90%.

Anticipating the questions that I have been receiving quite frequently regard a potential extraordinary dividend, as mentioned, we're open to assess it, although given the expected volatility in 2024 and with the upcoming of federal elections in Mexico and the U.S., we do not consider prudent to appraise it in this year. Before moving to the Q&A session, let me provide you some color on what we could expect for this year's performance. Reminding you that since a few years back, we do not disclose our formal guidance or targets but rather some overall expectations. Top line growth momentum is expected to continue at a slower pace with an estimate to be in the mid- to high teens. Premium growth is expected to be mostly driven by tariffs carryover and new pricing, while the number of units should reach the ongoing targets of low to mid-single digit behind new car sales expectations and competitive pressure.

Top line will continue to be fueled by Mexico and Latin American markets as they continue to grow in a consistent pace, while the U.S. is expected to decline or be flat at best. Regarding our loss ratio, one of our core priorities, we expect to continue making progress to our technical range objective of 62% to 65%. For the total year, we should expect to be close to our targets and certainly better than the past 3 years. Acquisition ratio and operating ratio should continue within historical levels with no major changes. The above metric should lead us to be in a combined ratio that could be closed or within our objective range between 92% and 94%. Finally, our financial performance would be similar to results posted in 2023, keeping our fixed income duration strategy with an ROI of around 10%.

As we head into a year of macroeconomic and political volatility, we will double down on our strategy. We will address opportunities to outstand our service throughout the entire customer experience. And perhaps most importantly, we will remain agile to quickly adjust as needed. We like how Quálitas is set to start the year, and we foresee a scenario in which we could see a [ nicer ] effect with continued strong top line momentum, a recovery in the underwriting part of the business and a well-positioned financial portfolio to maximize return. All of that will continue working on projects that will allow Quálitas to keep on creating value for years to come. We are truly excited, we are truly excited about the future.

And now, operator, please open up the line for questions. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Jorge Henderson.

[Jorge Henderson Cubillas, analyst]

This is Jorge Henderson, I'm from Santander. My question is regarding your guidance. You talked about mid- to high teens premiums growth. Just wanted to check -- you mentioned right now that you expect low to mid-single digit growth in volumes, right? So what should we expect, like in terms of price and volumes like behind this guidance, like what are the underlying assumptions behind this? I'm just trying to understand, for example, we were -- this year auto car sales were 24% year-over-year. That was the growth. So I'm just trying to understand if that would work as a proxy, what can we use as a proxy for -- to measure how volumes of Quálitas are evolving. This year, you were around 12%, I believe, around 10%, 12% you're at the -- number of insured units under Quálitas. So just trying to understand what to expect that like in more precise terms, that will be my first question.

[Bernardo Salas, executive]

Indeed, we are building our expectations of premium growth with 2 considerations. First, unit growth, and given the lack of certainty, we are going after what the AMDA stated as the target for the industry. In this case, for 2024, it's expected to grow between 5% and 7%. So there is a significant slowdown versus the 24% that the industry grew this year and this was somehow expected. The 5% to 7% would be on the historical average. And that is our base for unit growth assumption, this would imply somewhere in the 250,000 to 300,000 units. Now the balance of that pro to get us to the mid teens to high teens would imply the carryover on the pricing that we took, especially towards the second half of 2023, and we are considering to continue making the right adjustments as needed both to cover up for what is pending. We estimate there's a couple of points yet to compensate from high -- from historic industry inflation past years and what we are expecting to be the industry inflation for 2024. So it is the balance of both organic volume growth and the pricing carryover in addition to new pricing.

[Jorge Henderson Cubillas, analyst]

Okay. Just to clarify, has that 5% to 7%, that's on auto car sales, right?

[Bernardo Salas, executive]

Yes. Auto car sales.

[Unknown Executive]

Yes, that is correct, Jorge. And let's remember that last year, the end also has about same now, and it was a surprise for everyone, as much as the behavior of the economy by the way you make it go up. So at this point, I wouldn't know it's going to be a difficult year as Bernardo indicated, and there's a political change in terms of elections and all that. And we don't know if it is a conservative estimate for AMDA, but the year or [indiscernible] I'd be cautious on the estimates going forward.

[Bernardo Salas, executive]

And just to wrap it up, I think it's important to consider that there's big changes in the auto industry dynamic, 5% of the new car sales in 2023 were of electric and hybrid cars. So that's new things that we need to incorporate in our service structure. Moreover, 30% of new car sales come from Asian brands, mostly Asian brands that did not exist there prepandemic. So I think it's important to incorporate those dynamic -- new dynamics in the industry as we set up our service structure to always be able to serve our customers.

[Jorge Henderson Cubillas, analyst]

That's very helpful. Just another question, if I may. It's about your OpEx growth. I was looking at your results yesterday, and I noticed that you are now including Quálitas Salud in your vertical subsidiaries line. So that's just a question like, I don't know if you can maybe disclose what was the amount that you -- of revenues that you have in Quálitas Salud in the quarter?

[Bernardo Salas, executive]

Jorge, at this point, Quálitas Salud is still not meaningful. No. We are now opening up the details for you to have some perspective as we continue to evolve in what is meant to be big drivers of growth in the next 10 years, not necessarily in the next 2 to 3 years. I think that would be revenue. And by the way, what you would see and Quálitas Salud also incorporates the company policy. At this point, all Quálitas employees are now being served and protected by Quálitas Salud, and that is helping us to continue to learn and test as we have now the most demanding consumers, which is up [ constant ] at 40% pace.

[Jorge Henderson Cubillas, analyst]

Okay. Just a question, a follow-up. Do you mean that top line growth of mid- to high teens digit growth, is that related to premium just related to premium growth right now to written premium segment.

[Bernardo Salas, executive]

Yes, premium growth.

[Jorge Henderson Cubillas, analyst]

Written premium.

[Bernardo Salas, executive]

Yes. Written Premium.

[Operator]

Our next question comes Jorge Echevarria.

[Jorge Echevarria Gonzalez, analyst]

Jorge Echevarria from Morgan Stanley. Jose Antonio and Bernardo. So very quickly, I just want to ask about the costs per employee. So your employee base grew 13% year-on-year this quarter, you added almost 10% of employees in the last 2 quarters. And when I look at the average cost per employee, it went up a lot this quarter. I know there's some seasonality, the PTU, but what I really want to understand here is, in the past, you have build up provisions for the PTU in the -- early in the year. So are you catching up with the new hires, the growth in the workforce in the second quarter? Is that what's happening? Or are you investing on the future growth for 2024, 2025, and this should normalize next year. If you can grill down in the dynamics of costs, that would be great.

[Bernardo Salas, executive]

Okay. Thanks for your question. And yes, when we understand cost or operating cost, I think it's important to isolate what is the EPS or employee profit sharing than the balance of controllers. In an idea where we will continue to grow operating cost behind that employee profit sharing, I don't know. When we look at just the PTU or employee profit sharing, the stream in the fourth quarter is significant. There's MXN 16 millio swing because fourth quarter of last year, we had a release of MXN 90 million.

Now we had a disappointing fourth quarter last year on [ lower mix ]. And then this year, we're certainly catching up, and we built a reserve of MXN 125 million -- so the swing on a fourth quarter versus fourth quarter this year, last year is significant -- is actually explaining 90% of the growth in operating expenses. If we were to just look at the controllable piece, I think those are quite under control. We continue to be benefited by the higher growth and as a percentage of the premium growth, our employee cost continues to go down. Now having said that, you would expect, as we have seen in the past 6 months, attach, we increased our head count close to 600 employees. Part of most of that on the operating and service areas because we need to cope with the increase of unit. But I don't expect to be that a significant change moving forward. We are, as always, a very diligent company in terms of looking for productivity efforts and making sure our cost remains better than the industry had mentioned -- so I hope that explains what again, 90% of the operating cost increased quarter versus quarter is explained by earning employee profit share.

[Operator]

Our next question comes from Thiago Paura.

[Thiago Paura Mascarenhas, analyst]

Thiago Paura here with BTG Pactual. I have a question here that's probably a follow-up on the first question. Just trying to get a bit more details on the dynamics of the top line for the short to medium term, Bernardo and Jose Antonio mentioned. And we saw that Quálitas and also the whole industry implemented a big price adjustment during 2023. However, now there is some kind of an imminent expectation that at some point in time, there will be a slowdown and possibly even competitive pressure for price reductions. for production.

How do perceive this dynamic? I mean, how easy -- not easy but -- Yes, how easy it would be to implement these price increases that you mentioned during 2024 without seeing a major shift on churn, for example, are you already seeing any pressure from competitors to lower prices over there in Mexico. That's it.

[Jose Correa Etchegaray, executive]

This is Jose Antonio. Let me tell you that the dynamics really the way we work in terms of pricing [indiscernible]. In this case of Quálitas, we grow, but we need to make sure that we have a profitable business to begin with. Now having said that, let me tell you that I've seen that most competitors recently in the last quarter or so we have really made some catch-up in terms of pricing. There are some of the biggest that are still competing on price, and that would be always the same. And I want you to remind you that in the past, for instance, we knew that in the competition of heavy equipment, for instance. After the pandemic, we saw a number of competitors taking prices down significantly. We were able to maintain our customers via service in granting -- in great far. But at the time, I saw that they were doing, let me call it, [ dumb ] face. And at that time, I knew that it was not sustainable. So these things will continue to happen every now and then that will happen. And as you know, last year, a couple of competitors drop out of the heavy equipment.

So the dynamic is changing, typically pricing and the growth in the top line for auto is about 2, 3x the growth of the economy. So while we don't know what is going to happen in 2024, what I see is a bit more compulsory, if you will, but it will depend also on how the performance of the economy, particularly in the second part of this year. So at this point in time, I do not expect any particular problems, so to speak, and we will continue pricing to make sure that we have a profitable business for us and have the right pricing pattern as -- recently, I had a chance to talk with one of the big current factories, the financing of the manufacturers that they didn't want to increase our prices, and we said some of you guys, we are increasing, and we are declining our share there, which is not important. It's not relevant, by the way. But the important thing is that we are doing the right things in terms of pricing to maintain a healthy both top and bottom line growth, yes.

[Thiago Paura Mascarenhas, analyst]

Just a follow-up on the impact of the hurricane, if I may. Just you check if there is any residual amount from Otis yet to be booked in early 2024? Or if the total amount have already been booked in the fourth quarter?

[Jose Correa Etchegaray, executive]

So Thiago, what we know about Otis is, I would say, basically everything happening already in the [indiscernible] and is protected on the fourth quarter. There was a significant impact as we said, the net already considering the reinsurance, the $5 billion reinsurance policy that we have, it's around MXN 200 million. And if we were twice only, the claim cost for the quarter will drop from 70.7% that we have to 69.2%. Now also, that's a onetime impact that we have from Otis, and I believe that's worth to consider. But net-net, we wouldn't expect any major new impacts from Otis in 2024.

[Unknown Executive]

As we see the behavior on a day-by-day basis and the Otis started, we have seen that it is was big. It's ending for us not that part, we don't expect, as Bernardo said, ending else for the rest of 2024.

[Operator]

Our next question comes from Erenesto Gabilondo.

[Ernesto María Gabilondo Márquez, analyst]

Ernesto Gabilondo from Bank of America. Jose Antonio and Bernardo. My first question will be on Peru. Just wondering if you're expecting any potential impact from El Niño in your business. So far, we have seen it has been a moderate El Niño, but we have seen some floods in the country. Then my second question will be on your investment portfolio or what will be Quálitas sensitivity to a reduction of 100 basis points to the interest rate, maybe you can provide us an amount in pesos will be very helpful. And for my last question, where are you seeing your ROE in 2024 after what you mentioned in your guidance? And also where are you seeing Quálitas sustainable ROE in the long term...

[Jose Correa Etchegaray, executive]

Erenesto, I'll take the first one and start off with the Peru. El Niño phenomenon is, we know it's going to cold but it's mainly going to impact the north of Peru. Now relative to a few months back expectations, the good news is that we're expecting now a milder and softer El Niño. So cities such as [ Surquillo ], Chiclayo, Piura. By the way, in [indiscernible] we have now an office operating there, those, that's the biggest one in terms of relevancy. We would expect certain impact, but nothing that would be significantly moving the needle for the current company. So we're hoping for the best. And again, we expect that the local forecast continues to be right, and we are now expecting a much milder than was expected and hopefully no impact.

[Unknown Executive]

Let me take Bernardo in the second and third question. Let me tell you that the sensitivity of the interest rates is important for us, too. And we have -- we know that around every 25 basis points, the change has an annual impact of around MXN 130 million. so -- but it's important to know that here that we have positioned our portfolio in a very good manner as we have discussed in the past with you guys with the core community in terms of increasing the duration that we hit a lot on where the rates are going, probably you know better than us, there is, but there are a number of expectations where it is going to turn out for the rest of the year, particularly in the case of Mexico. And as for the sustainable ROE I would simply say that we should be around as we -- our target -- our sustainable ROE as our target is around the 20% around the 20%, but here we are close this year on that one, by the way.

We are moving up after, but we had in the last couple of quarters, and we are starting with a good momentum going forward. And as you also know, it will also be dependent on the excess capital that we have. But that for the -- Bernardo made remarks that we will be dealing with that. And we are going to -- that's where we're going to be played by the year in terms of what the situation evolve in Mexico in general. But our sustainable, medium, long term is 20-ish around the 20%.

[Ernesto María Gabilondo Márquez, analyst]

Jose Antonio, Bernardo. Just to follow up on the sustainable ROE. I believe our numbers and market numbers are already assuming sustainable ROEs between 27%, 28%. So just wanted to have your opinion if it's kind of high? Or do you think it's achievable? Any color on that will be helpful.

[Bernardo Salas, executive]

Yes. I think Jose Antonio [indiscernible] on -- I think, 20%. It's what we're now looking at. There's always scenarios, and there is indeed a scenario in [indiscernible] we could be on the high end of the 20% to 25% that we have consistently mentioned. If you look at the history, there's been years that we way surpassed has that 25%. We always try for that. I would like to commit to a 26%, 27% because I think it would be responsible considering there are so many factors, macroeconomically, politically and even in the industry that are yet to be seen to stabilize. And also I think that would be kind of what we will ask and enforce our investors to consider that 20% to 25% corridor will continue to be true for the mid- to long term.

[Jose Correa Etchegaray, executive]

It's important. And let me add to what Bernardo said that. I remember in prepandemic days Ernesto, our ROE well -- was well above not well, it was about 40%. And I recall that at the time, I talk with the community -- investors community, I can say that, that was not sustained. Now -- but in the end, this was not sustainable was the pandemic. And the pandemic change everything, the dynamics change everything and competition and price reductions and then [indiscernible] it was a complete change in dynamics. So we just had a time we said that it was not going to be sustainable. I think that what Bernardo was saying and I'm saying at around the 20% continues to be a good assumption for investors to know.

[Operator]

Our next question from comes Jitendra Singh from HSBC.

[Jitendra Singh, analyst]

Jose Antonio, Bernardo, Congrats on the results. So my question is on your financial income. So your strategy for investment portfolio has been clear. You have been increasing duration for your fixed income portfolio and moving towards ETFs for equities. So I just wanted to understand what do you expect the normalize level of ROI could be especially from year 2025 when interest rates in Mexico will come down to mid-single digits and lower rates in the U.S. So maybe expectations on a normalized level of ROE. So that will be my first. Second, I just wanted to understand on effective tax rate, it was lower during the could you provide some color on that? And what do you expect effective tax rate to be for this year? And last, if I may, just follow-up. As you stated that some part of unit sale in Mexico is coming from the Asian brands now. So I just wanted to understand, has there been any kind of supply chain constraints or issues that can happen back on your claim ratio target?

[Bernardo Salas, executive]

Jitendra. I'll take the first question, the financial income ongoing rates. I think as Jose Antonio mentioned, we are nicely set to know that 2024 will provide a return on our investment, that would be close to what you saw this year, potentially slightly higher. Now the ongoing rate would be a hard one to answer because it will depend on the reference rate. If you go back a few years ago, what we said, we wanted to be between 100 to 150 basis points above reference rate. Obviously, the reference rate is lower, we're able to get to that higher end of the reach. Our appetite for risk and volatility has decreased, and that is in line with our corporate governance and independent board members direction. But I would say that ongoing, we could see back to say, sustaining to be 100 to 150 basis points above reference rate. Now the near-term, that means next 12 to 18 months, we should be looking more in the 9% to 10% ROE, given where we stand today in our portfolio, to mention.

Now your second question regarding tax rate. Yes, let me remind everyone, our tax rate for the year was 22.4%, but we did see a lower rate in the fourth quarter of 15.3%. Now what is behind that? First, let me just clarify, there's absolutely no tax planning. We're fully compliant with regulation. We did see some impacts at the year-end because we look at accounting adjustment for all [indiscernible], including inflationary adjustments. And last quarter, we do some balance for the year. So we did see a lower-than-expected fourth quarter effective tax rate. But on an annual basis, we are a couple of points longer than what we should expect. Even if you see the corporate rate of 22.4%, that includes certain countries or markets such as the U.S. that posted a negative result and that decreases. If you see on stand-alone Mexico, we're more in the 23.4% on average, and that is slightly more in tune with the ongoing rate. Now what can we expect moving forward? I would say, a per assumption to be in the 25% to 27% effective tax rate, which has historically been where we stand.

[Jose Correa Etchegaray, executive]

And whether -- let me take the third one Bernando, in terms of supply constraints. It is difficult to say, Jitendra, but we have seen an improvement over the past year in terms of this weekday. In our repair shops, we have some issues. Now obviously, it has not gone away, but it has improved. And it varies also by brand and so we have some unforeseen events that we don't know what's going to happen. As you have seen, the Red Sea attacks carried by the Houthis, and also the Panama Canal, having some problems in that. We don't know how that's going to play out. But generally speaking, has improved. We are not to the levels we were prior to the pandemic. And there are particularly some Asian brands that continue to have some issues regarding availability of spare price. But we don't foresee as we see today, any major problems that we had in the past.

[Unknown Executive]

I think we can go now with written questions. We have one written question from Javier Rosa. And please, could you remind the dividend and buyback figures for 2023? And would you do further of this in 2024?

[Bernardo Salas, executive]

So the dividend policy continues to be that we will distribute 40% to 90% of our net profit of the prior year. This is a decision that needs to be taken by the General Assembly. And as we have been saying, given our capital position, it will be fair to assume that we could once again recommend something on the high end of that range. As a reminder on 2023, we distributed to MXN 2 billion on 2 exhibitions, first being paid in May and the 2 of November, each one of them was for MXN 2.5, for a total of MXN 5, for the first half during 2023, okay?

Now our share buyback program. We have been having that cease for a couple of years. We like how it has been operating, I think proof of that is our liquidity. We're now trading close to $8 million per day, something that was unexpected considering that we traded around $1 million 5 years ago. So I think there has been several efforts to drive that, one of which is our share repurchase program on one that you can continue to expect towards 2024 and beyond.

[Unknown Executive]

I think we have no more questions. So thank you for joining the call.

[Operator]

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