Qualicorp Consultoria e Corretora de Seguros SA

BOVESPA:QUAL3

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to Qualicorp webcast to discuss the results of the third quarter of 2022. Joining us today are Mr. Bruno Blatt, the company CEO; Mr. Elton Carluci, Commercial VP and Financial Director; and Mr. Franco Abelardo, Investor Relations Superintendent.

Some statements in this webcast may be projections or statements about future expectations. Such statements are subject to known and unknown risks and uncertainties, which may lead results to differ materially from those expected.

This event is also being broadcast simultaneously over the Internet and can be accessed at ri.qualicorp.com.br, where the respective presentation is also available. We would also like to inform you that this event will be recorded, and participants who listen to the webcast during the company's presentation, after which, there will be a question-and-answer session when further instructions will be given.

Now I would like to turn the floor over to Mr. Bruno Blatt, who will open the presentation. Please, Mr. Bruno, you have the floor.

[Bruno Blatt, executive]

Good morning, everyone. Good morning to our shareholders, investors, market analysts, press professionals in Qualis who always join us for our quarterly presentations. We're together today, making this call from [ Quali city ] in the downtown area of Sao Paulo to share -- our vision on the results and Quali's accomplishment in the third quarter of 2022. Moments like this for me are not only a market requirement because we are a listed company, but also essential moment for us to have an open and honest conversation, which is something we believe in and something you deserve.

The year of 2022 hasn't yet finished, and it will certainly be remembered as the most challenging year in the health care industry. And in spite of the robustness and leadership of quality in this segment, we haven't been able to not be hit by many of these challenges. In the macroeconomic environment, we have been facing high interest rates, high inflation rates and a lack of growth in yield, which has been affecting the consumption capacity and payout capacity of resilience in general. 79% of Brazilian families are in debt, and this scenario needs to change, and it will change. And in our industry, insurance companies and health care operators still have very high MLR rates caused by high medical inflation and the resumption of medical use in these factors have led to higher price readjustments than we expected for the year. This quarter, the medium percentage applied for readjustments in our portfolio was almost 23%. And year-to-date, this readjustment is above 20%.

Although we have been concentrating our efforts in customer service, technology, innovation and product diversification in order to increase retention, we have not been able to avoid a negative impact in our cancellation indexes. Price readjustments have led to a sequential increase in average ticket premiums of around 8% this quarter compared to the previous quarter, even with a high level of downgrades and even with the net adds that is still negative, we have had a quarterly growth of 4.8% in our growth revenue and in the Affinity segment, 3.7% of consolidated net income.

The total costs and SG&A has grown only 1.9%, which is below the income and our adjusted EBITDA is therefore stable quarter-over-quarter with a margin of 46.3%, which is quite healthy for our business. Our net income was almost the same as the previous quarter, even with an increase in the cost of debt. And that's because we have a team that is completely committed to the essence of our company, which is to be the best, the largest and the one that can even in times of hardship, give the best to customers.

In this context, we are proud to share that Quali continues being to be awarded by its work and for the strategic focus on growth, customer focus and governance. We have received the ANEFAC 2022 Transparency Award in October. This award recognizes good practices of corporate governance and quality of financial information, which is something really important in the current management of our company. And there were many other awards. We also won the RH Top of Mind in the category of Benefit Consultancy, we were among the Top 100 RHs that inspire the most. We got the Gupy Destaca Award and the ABT Relationship Award and many other prices.

In terms of diversity, we aim to promote an increasingly inclusive work environment. So we opened 35 spots for our young talent program with an emphasis on hiring people with disabilities and who are trying to find the first opportunity in the category of younger printers. We continue strengthening our partnerships with operator, Klini Saude, strengthening our partnership also with Unimed Serrana Shana [indiscernible] we established a partnership with NDI SUL.

And Quali is what it is because of the people who work here, as I usually like to say. So I'm happy to say that we have just announced the arrival of Carlos Vasques, as our new CFO. He's experienced in major health care companies in the financial market. So I'm confident that Vasques will be a major leadership at Quali and will contribute for us to continue evolving in our financial management. Last month, we also brought a major talent, Marcia Wolff, who is going to lead our digital transformation in the areas of technology and innovation. Marcia will give continuity to our strategy of growing within a data-driven and customer-centric culture, aiming for more efficient operations.

Finally, it's important to emphasize that in spite of all of the headwinds that we have faced in the short-term, we are firm in terms of our medium and long-term views. And I would like to say that we are very hopeful for Brazil, do want things to get better in our industry, in our business and throughout the country. And we're going to continue working being realistic and optimistic. That's what's going to strengthen us to do the best and continue delivering what is right and the best to our customers.

Now I turn the floor over to Elton Carluci, our Commercial VP.

[Elton Carluci, executive]

Good morning, everyone. Thank you, Bruno, for your introduction. Bruno has already mentioned the macroeconomic environment. And I'm going to address points related to gross sales, churn, SME, and then I'll come back at the end during the question-and-answer session.

So starting with the gross sales of the segment. As we already said, this has been a very challenging year for the industry. And this quarter, we started to be impacted because of some portfolio adjustments. For those of you who have seen the latest news, people have been talking about student contracts, and many contracts have been suspended recently, which is something that is impacting our gross sale. Students have an important participation. And depending on the operators, they account from 18% to 28% of the lives. It has actually reached 30% in some operators. So we have been seeing changes in portfolio, replacement of some products with others that encourage greater co-participation, everything to try and face this challenge of the industry with increased MLR.

In the case of students, we have been seeing all of the discussion related to autism and operators are reviewing their products and rates, and we expect this to be normalized in the coming months. We are working together with our technical area to support development of specific products for students as well. So there are many ideas that are currently being discussed, and we expect the scenario to normalize soon either with the return of this type of product or with these customers joining a different type of contract, maybe as a dependent in a family product. So in the medium and long term, these things find a way to progress. So we continue confident in this.

As Bruno commented, there has been readjustment which also impacts our sales because, of course, products will have price increases. And the replacement of products and student portfolios generate a double hit, but also impacts the company's churn, and I'm going to explain this in our next slide.

So as I said, this also impacts our churn. Quali has been implementing a very successful strategy for retention. Internally, we've been able to improve our retention indicators and the historical reversion of some portfolios that had been dropping over and over again, and we were able to turn things around. But once you suspend a product for sales, we also lose this product in retention, and that generates a double hit, which has also impacted our cancellation numbers. Looking here at Q3, we had a level of 15.1%.

And of course, there are some highlights that should be mentioned. This quarter, we had a readjustment average of 23%. We started the year at around 12% to 13%, but the industry is now at the level of 23% to 25%, mostly 23%, but we have seen some other readjustments in the market above that level as well.

And for a family income, this has an impact on their pocket and that also impacts our churn. But there were also some other effects. The cancellation of 12,500 lives in specific portfolios that were canceled either by a request of the operator, no old portfolios coming from Unimed Paulistana, very specific portfolios that were canceled recently and also requests of entities to cancel a few products.

And when we add up the numbers, we have a cancellation of 12,500 lives, which leads to the indicator of 15.1%. And we also had a specific indicator in a location with readjustments of 50% in one location and 80% in another, which were 2 outliers that also exerted pressure on this indicator, leading to the 15.1% cancellation level.

Having said that, what we're seeing now are readjustments at this level, and we expect this effect to be mitigated in the coming months because the whole industry is working really hard to change the products and try and develop a product that will lead to a more rational using these specific groups that have an MLR rate above contractual limits.

So we are confident that this is a temporary transient situation, considering the macro condition of the industry. But we expect these indicators to go back to normal levels soon. And this percentage also increased the levels of delinquency, but this is still in a level that's not yet concerning. No red flags for now, and Franco will talk more about that later, but we have had changes in our delinquency levels.

Now talking about SME. This is a portfolio that continues to grow. Quarter-on-quarter, you can see growth in this portfolio, and this is yet another quarter of constant growth in our SME portfolio. We've been capturing opportunities in-house in terms of retention and also in the market. This is a strategy that is being implemented and has been quite successful and the company will continue to focus on this market, which is a very significant market that can complement our revenue with this constant growth. This is a business model that brings great revenue, except for the CAC and this is going to flow more and more into our cash generation.

So that's all. I'll be back during the Q&A session, but now I turn the floor over to Franco, who will give you the numbers of our financial results. And I'll be back soon.

[Unknown]

Thank you, Elton and Bruno. Good morning, everyone, and thank you for joining us in this presentation. I'll give you some highlights of our results, starting on Slide 15.

As Elton already explained, the Affinity portfolio had a drop of 6% quarter-on-quarter and 8.5% year-over-year because of the downturn in sales and churn as we have just said. Net income has grown 3.7% quarter-on-quarter and the Affinity revenue actually grew more than that, almost 5% boosted by the increase in the average ticket. Our Affinity ticket has grown around 8% in Q3, boosted by the readjustments of course. Year-over-year, the revenue is dropping at around 5%, especially because of that drop in the average portfolio. Now I would like to highlight our adjusted EBITDA and net profit. They were virtually stable in Q3 compared to Q2, but they also had a drop year-over-year. EBITDA, a 13% drop and net profit, a 55% drop. In our net debt, we closed the quarter with BRL 1.560 billion in debt, which is also flat compared to the previous quarter. Our leverage was 1.6x the EBITDA in the last 12 months.

Now moving on to Slide 16, you can see our consolidated income statement. The highlights that I'd like to mention is the total of fee COGS and SG&A. We had BRL 230 million in Q3, up less than 2% quarter-on-quarter and with a drop of almost 2% year-over-year with improvements in personnel expenses, occupancy costs, and marketing. So we're making an effort to reduce costs in order to face the scenario of drop in revenues. And I'd also like to highlight that when we look at the margin pressures, the adjusted EBITDA margins has dropped 160 percentage points quarter-on-quarter and this comes from other revenues and expenses. This line was positive in Q2, and now it's negative once again.

So if you remove the effect of the other expenses, the EBITDA margins would actually have gone up. Year-over-year, we had a relevant increase in provision for losses. As Elton said, this provision is keeping up with the higher delinquency levels that we had in recent quarters. But even with this increase, we think we are at an appropriate level of provision for the non-payment level that we have been having, and we don't expect these lines to worsen in the coming quarters.

We've been working to recover losses as well. Now in terms of depreciation and amortization, we think this is natural. We continue to see an increase in the -- because of greater investments in commissions that was made last year. So there is a catch-up of amortization here to match the level of cash investment, which was around BRL 90 million in the quarter. So on this slide, in terms of financial results, we saw an increase in the cost of debt and an increase in leverage, which is pulling the profit down a little bit.

Now moving on to Slide 17, cash flow. As I said, cash commissions are a highlight, BRL 91 million in Q3, down 19% quarter-on-quarter and down 27.5% year-over-year. Of course, there is an effect of the downturn in sales, but also an important reduction in CAC per life as we were talking about the rationalization of commissioning. As a reminder, this line is not completely comparable year-over-year, because in 2022, we started to capitalize on the investments we've made in leads. So in comparable basis, we would be reducing this line even further.

Now in terms of working capital, we had a cash consumption of BRL 37 million in Q3. This consumption is due mainly to the increase in the balance to receive from operators and insurance companies. There are 2 points I'd like to highlight here. This quarter is seasonal in Q3. This is a quarter with more price readjustments and there are more difficulties, therefore, to conciliate this with the operators.

And the second point is that regardless of being something seasonal in Q3, we know there is a challenge in working capital. It's a bit worse than expected for the year. But our financial team is working really hard together with our commercial team to try and revert this trend and normalize our working capital for the coming quarters.

Our working capital should be closer to neutral when normal. So we're going to try and reach those normal levels in the coming quarters. And finally, in cash flow, we have seen an expense of BRL 444 million in Q3. We have paid out all of the loans we had opened in Q3. They matured this quarter. So now our debt is almost all composed of the new debentures that were issued in June worth BRL 2.2 billion and they have a maturity term of 5 years. So we are well covered. Our cash coverage is quite interesting right now.

Now I would like to turn the floor over to the operator who will give the instructions about our question-and-answer Session, and Bruno, Elton and I will be around to answer all of your questions.

[Operator]

[Operator Instructions] Our first question is by [ Ian Seskin ] with BTG Pactual.

[Unknown Analyst]

I have 2 questions. The first question is about your gross sales projections from now on. You talked about the impact in the suspension of sales of health care plan for students. But in the short-term, are you considering a possibility to resume gross sales at around 120,000 or 130,000 lives per quarter as you stated last year. Are you considering this for the short-term? And do you see any indications or signs of improving churn for Q4 '22 or Q1 '23, going beyond the seasonality effect that you saw this quarter.

[Elton Carluci, executive]

I will start and then the team can add to my answer later. Now about your first question about our gross sales projections, what are we seeing now? Throughout Q3, we were facing product adjustments and product suspensions and that would impact Q4 even harder than Q3. And our commercial team is working to revert this together with our technical area. We are discussing products with our partners, but all of the product adjustments are things that take more than 30 days to take effect. So in order to go back to the levels expected of 120,000, 130,000 million, which is indeed our target, this is what we have mapped as an addressable market opportunity. And these are the numbers we want to achieve. But we're working to achieve this scenario in the beginning of 2023 and not in Q4 '22.

Now the improvement of churn, this is seasonal. Q3 is usually impacted and things look like that, but we already see the numbers improving, and we expect to keep the historical curves. That's the expectation with just some small changes in [ PDD ], but still very mild. The numbers that we're seeing now do not indicate that we're going to have a debit cancellation rate increasing. So we're working with a cancellation curve that is very similar to last year's curve with a churn normalization in Q4. So that's what we have for the short-term. And in the medium and long-term, we expect things to stabilize. This is a macro issue of the industry. So this is going to be adjusted and things will go back to normal soon we expect.

[Operator]

Our next question is by Mauricio Cepeda from Credit Suisse.

[Mauricio Cepeda, analyst]

So I understand that you expect to stabilize across gross adds at around 120,000 to 130,000 lives, as you said. But I also see that in the recent history, you have adjusted the commission levels in order to keep that higher level of gross adds. So in order to achieve that balance in gross adds, how far are you from a balance in the commission levels? Do you expect to increase or decrease commission levels?

Now my second question is about SMEs. We see that there is a downturn in there as well. What are your projections? Are you going to manage churn or are you going to work proactively to focus on that market?

[Elton Carluci, executive]

Let's talk about the commission levels and the gross adds. We have had a reduction in CAC, as you have all seen, CAC reduction. So we always look at the market, and we are not planning to increase CAC. What we have been discussing is we have a segmentation program and we have a confirmation of 85% of the sales. And then we talk to the base and say, well, do you want to anticipate your flow based on confirmation, then you need to go into the ranking. And in order to go into the ranking, you have to sell more and cancel less. So that's our focus rather than changing the absolute commission value. We do believe -- although you didn't ask this, it's always good to mention that these adjustments have -- you think these adjustments have impacted in sales, but we don't believe that's true. We think that what has impacted our sales, our product restrictions and product suspensions. The adjustment impact is very mild, and it's offset by the reduction in early cancellations. Even if I have lost 1,000 lives, my early cancellation has also improved. So that was offset. We don't think that this is really impactful, therefore.

[Bruno Blatt, executive]

In terms of SME, last quarter, we saw a reduction in leads with indeed a reduction in leads and the team who is in charge of this strategy, our CMO. I mean this is also related to the election period. There has been a decrease in the number of searches of health care plans on Google, and there was a reduction in leads. So it didn't make sense for us to focus on that, but we expect this to be normalized soon. So there was a mild reduction because of that. But we always look at the LTV CAC ratio for SME, and we thought it wouldn't make sense to increase CPA costs, considering that this was a period that would go back to normal in Q4 and our vision for SME hasn't changed. We still see this as a great opportunity, and we continue to invest in this. This is a new addressable market in which we started to invest. So our medium-term and long-term ambition is to be a leader in SME distribution within the short-term strategy that Elton commented.

Just to add here to what Elton and Franco said, when we started to pay in 1, 3 and 6, and we started to work with CAC, regional competitors that wanted to keep a high CAC and pay upfront, they will have to find a way to adjust -- to keep-up with the market. So we did that initial move, there is a certain inertia in local competitors, but at a certain point in time, they won't be able to keep that up and they will have to adjust and do the same as Quali is doing.

[Operator]

Our next question is by Vinicius Figueiredo from Itau BBA.

[Vinicius Figueiredo, analyst]

I think I'm going to be a bit repetitive, but I want to ask about new sales. You said that commission levels are not such a strong factor for this, but the greatest impact came from the suspension of sales for students, but have you seen an impact of the macro environment, especially revenue on your sales. And I would also like to go back to the issue of churn. We talked to many operators, and they say we'll have to go through a new cycle of readjustments, heavy readjustments in 2023 to recompose the profitability of operators. So knowing about that, what can you do to increase retention and try and mitigate cancellation impacts?

[Elton Carluci, executive]

Let me start with your first question, new sales. The macro environment, of course, is taken into account, and we see a gap between employment and revenue. Employment indicators have improved, but not revenue indicators. And health care plans use a significant amount of the family income. So we have seen an impact in this. The Affinity market, of course, we are aware of ANS' numbers, and we see that the market continues to be relatively stable year-over-year with changes more affordable products, growing more than other products. So of course, the income factor has an impact and it will also impact the average ticket of products. So a downgrade is usually at around 30% of the premium. And in the past, it was more around 20% to 22%. So if you downgrade to a plant that has 30% lower premium against 20% a few years ago, this is all because of the income pressure. So this is how we analyze the numbers in-house.

Churn is one of the main challenges and possibly the main challenge. But the issue of readjustments is also something that we project for next year. We are always a month ahead. So in December, we already start discussing January readjustments and so on and so forth. So we already have some discussions going on defining levels of 22% to 25%. I'm not saying this is going to be the rate. We still have a month to discuss readjustments until this can be defined, but we are already discussing that all because of the ANS list and other uncertainties in terms of the structural changes and what is only a situation that is transient and will go back to normal soon and what are the new price levels.

But of course, we continue to assess if we have a gap in terms of products, and we always talk to our partners to see if we can create a different product, change the product structure a bit to make it more affordable or discussing exclusive retention products. So this is an ongoing discussion at the company right now in order to face the scenario of higher readjustments for 2023 as well. So this is what we expect at least for the beginning of the year. But as I was saying, we started the year with readjustments at around 12% to 13%, and we're closing the year at around 25%. That doesn't mean that we will not start 2023 with 25% and close the year with 12%. That can happen. Things are very dynamic. The numbers of the year showed us. And this is what we expect to start next year with a higher rate, but then have this rate reduced throughout the year.

[Operator]

Our next question is by Leandro Bastos with Citibank.

[Leandro Bastos, analyst]

I have a question about working capital. You talked about this during your presentation, but I just want to have a better understanding of this. We have seen a negative variation in recent quarters, and you said this shouldn't have happened. So do you have any specific offenders. And what are the levers that you're going to use to improve this trend from now on?

[Unknown]

I think I talked about that already. But indeed, working capital in Q3, the main offender was the balance to be received from operators and insurance companies. There is a seasonal effect in Q3. Whenever we apply readjustments, the conciliation or reconciliation takes longer because there is more work to be done. But regardless of that, yes, we saw a worsening throughout the year and we're already working on that. We have a task force that we have put together with the financial team and the commercial team because that also affects the commercial relationship we have with the operators. And our goal is to either revert or at least reduce significantly the working capital consumption in Q4 and start 2023 at normal levels. It's not normal to see Qualicorp having this high need for working capital.

We work with short terms of payment from customers and operators. But when we talk about Quali's working capital, we're operating at a magnitude of BRL 11 billion a year because we're talking about premium. We get paid for the premium and then we pass this to the operator. But we are aware that with hiking interest rates, we should focus on this, and that's the cost we have at our company, but this is being addressed in-house, and we hope to have positive news about that soon. In Q3, we already saw some improvements. We have had a working capital consumption related to taxes in previous quarters that we were able to revert in Q3, but the balance with insurance companies is something we're working on to revert for Q4.

[Leandro Bastos, analyst]

So the idea is that next year, we will be at more normal levels?

[Unknown]

Exactly. This should be closer to a neutral working capital level. That's what we expect.

[Operator]

Our next question is by Gustavo Tiseo with Bank of America.

[Gustavo Tiseo, analyst]

I also have 2 questions. First, I'd like you to explore the growth of the company. What can we expect from now on? Elton talked about the growth of the industry in all of the short-term difficulties you're facing. But what can we expect in 2 years, you had a very large growth in the industry? And then more recently, you've been losing lives. So I want to better understand what the triggers are, and for the medium and long terms, we might go into a period of larger growth for the segment.

And now also about costs and expenses. Is there a gap or anything you can improve? I think you have been making significant changes in your headquarters. Is there anything else that you can cut in order to achieve operational improvement?

[Elton Carluci, executive]

Let me start with your first question. The industry grew, and we can see that the collective groups have boosted this growth because the employment levels improved. And we have Affinity and even SME with 2 to 3 lives or even one live. There are operators that have SME products for one individual, which is like an out-of-pocket payment. And this market is relatively stable. When we look at the variation, it is just a matter of a few base points and we firmly believe in the revenue improvement in all of the macro issues in the country. We expect this to impact revenues or family incomes soon and then more people would go into this market or those who are already in the market would make an upsell if their income increases. That's our expectation. But our core business is very sensitive to income, but we're confident that this is going to recover soon and the indicators of sales and cancellation will also improve as a consequence.

Now about costs and SG&A, I think that we have a great opportunity to explore reductions in service and processing costs. We have had major deliveries recently, in terms of app, the app, [ polybot ] and the website, they're fully integrated now, and we're working on engagement. We still spend certain dozens thousands of Brazilian reals a year with telephone service. So we need to work on engagement. That's one of the missions that Marcia has together with the CX team to work on the customer journey from end to end from the lead acquisition to demand with services that are available in the app and in all of our digital channels and oftentimes, customers still use the telephone service, which doesn't make much sense.

So we don't want to have anything disruptive and say that we no longer have the phone service available and that customers can only have access to the digital channel. We think that doesn't make sense for now, but these are things that we have been discussing. We're looking at those issues because there's money on the table here with the digital strategy that was only one example, but there are other examples going from the journey of sales acquisition. And yes, we think that there is an opportunity for savings there. And that's part of our budget and the targets we've been establishing for 2023. So that's a living agenda today at the company, how we can improve our operational leverage.

[Gustavo Tiseo, analyst]

Just a quick follow-up about income. You have brought many low-ticket products in-house to try and avoid losing the members so that you would have product to offer for downgrading. So the low-ticket product, is it an option for members that are leaving the medium and high segments. What is the logic or the rationale for the product expansion? And what can we expect from now on?

[Elton Carluci, executive]

Well, when we look at the products, yes, of course, we have expanded the product offer based on the macro scenario. We had to have that type of cost. Our company has always worked more concentrated in the mid and high markets. And then we accelerated the portfolio expansion in lower ticket products during the pandemic. When you look at the products that were added, either organically or through M&A, I mean, we have always had a challenge in acquisition. You always have to look at the LTV CAC ratio because when we look at those products, the low market is like 200 and the high market is like 1,000.

So when we look at this LTV PAC ratio, the take rate is very close, but the duration is different. So there is a limit here of to what point we can go to acquire those products because, of course, there are many competitors focusing on this market as well. And in-house, of course, when a customer calls me, I have something to offer. But it's good to remind you that we always have a churn challenge. Maybe customers Google something and then the competitor comes and offers or a broker offers our own product, and we don't want to compete with them because it's our own product.

So we have to be predictive to reach these customers first with the right offer. This has already improved, but all of the predictive modeling that we are doing has been evolving. And we think there is room to work harder on that in 2023 because oftentimes, when the customer calls us, they have already hired our own product or a product that we have inside from a competitor. And it doesn't make sense for us to give any financial investments with this customer because we would have to have them stay for 12 to 14 months for the incentives to pay out.

So that's the dilemma also of looking at this cost of retention. And what is the incentive that I can give when someone else is making an offer to that customer. And it's all about a data challenge. I have to get there first with my offer, so that it's feasible with a retention that generates value and doesn't destroy margins from that point on. So that's a challenge we're working on.

[Operator]

Our next question is by Estela Strano from JPMorgan.

[Estela Strano, analyst]

My question is related to the gross adds dynamic. Considering that the SME has a lower economics compared to the Affinity segment, but it's gaining relevance throughout the quarters, so have you been discussing any type of initiative with health care plans to make the economics of SME more attractive? And if your answer is yes, how are the discussions progressing?

[Elton Carluci, executive]

SMEs, I mean this is a shelf-ready product. It's the same product for everyone. And this is the historical condition. It's always been like that. And we have some SME administrative SME contracts that have a different condition with a compensation that is a bit closer with incentives for recurring more than 1 time. But of course, there's always a limit. It's a bit more similar to Affinity, but these are specific cases. Now the traditional product that we have is off-the-shelf. This is what we see in the market. And in terms of isonomy, that's actually very similar to everyone. We usually work with a target. And if you reach the target, you are compensated. That's the general rule of the market. And here, I think that this dynamic is harder to change in the short-term. But yes, we've been discussing special projects with differentiated compensation, but that's more isolate, not a market rule. In most of the sales that we do, we do follow market rules, though.

[Operator]

Our next question is by Vinicius Ribeiro from UBS.

[Vinicius Ribeiro, analyst]

So my question is more about the industry structure. The growth has been more concentrated in corporate and SMEs in recent years, right? And historically, SMEs cannibalizes Affinity product, especially for the smaller products that Elton was just talking about. Do you see the possibility of risk or risk of any economic adjustment for the Affinity because of the commercial segment that has a similar product or you think that the recovery in income levels is enough for us to see growth in the Affinity segment once again?

[Bruno Blatt, executive]

We talk about that in all of our earnings conference calls and also the results meetings we have internally here. We look at that at least once a month, twice a week, we discuss sales strategy, SME, but we see the Affinity market and it's there relatively stable. And when we look at the numbers, we see that we have had a decrease in 20% to 30% of this market. And of course, for this to happen, all of the individuals in Brazil would have to have a company, to open a company. But when we look at the economics, which is what you asked about, the Affinity segment has a specific characteristics. We work with individuals and delinquency levels. We compensate the distribution channel.

So there are many different attributes of a benefits administrator that should be taken into account for all of this to happen. And when we look at the BRL 12 billion that Qualicorp transacts with the acquired companies and look at the bottom line, we see that at the end, after everything, this is 4.8% or 5% of the total amount that is circulating. That's the bottom line for us to do all of these activities. And it doesn't make much sense to have a dynamic here because if economics drops by half, then no one will be interested in the Affinity because that wouldn't make sense from the economic perspective.

So we are always taking a look at these dynamics because the market can have some type of incentive to make individuals use a legal entity to buy a product that should be Affinity because that is an individual, and it wouldn't make sense for this person to have a legal entity. Let's say, they are changing jobs and they had a health care plan in the previous job, and they want to keep that health care plan now that they're leaving the job because they have some kind of chronic illness. So we're always looking at these issues to see if there are things we need to be able to anticipate. This is how we look at these 2 markets to try and understand individuals and how individual choose the mechanisms through which they will buy a health care plan.

[Operator]

This concludes the question-and-answer session. Thank you all for joining Quali's third quarter 2022 earnings conference call. This concludes our session. Thank you, and have a great day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]