Earnings call transcript: Qualitas Q2 2025 misses EPS forecast, stock drops

Qualitas Controladora, SAB De CV reported its second-quarter 2025 earnings, revealing a significant shortfall in earnings per share (EPS) compared to forecasts. The EPS came in at $3.54, falling short of the expected $4.78, marking a surprise of -25.94%. This miss led to an after-hours stock price decline of 8.04%, with shares dropping from $190.42 to $175.11. Revenue also fell slightly below expectations, reaching $17.41 billion against a forecast of $17.72 billion, a surprise of -1.75%. According to InvestingPro data, two analysts have recently revised their earnings expectations downward for the upcoming period, suggesting continued challenges ahead.

Key Takeaways

• Qualitas reported a 12.9% growth in written premiums for Q2 2025.
• Net income for the first half of 2025 increased by 36%.
• The company’s combined ratio improved to 92.8% in Q2.
• The stock price fell 8.04% in after-hours trading following the earnings release.

Company Performance

Qualitas demonstrated robust performance in the second quarter of 2025, with a 12.9% increase in written premiums. The company’s net income for the first half of the year surged by 36%, reflecting strong operational efficiency and strategic growth initiatives. The combined ratio, a key measure of profitability, improved to 92.8% for the quarter, indicating effective cost management. However, InvestingPro analysis reveals the company’s current ratio of 0.3 suggests potential liquidity challenges, despite maintaining dividend payments for 10 consecutive years. Subscribers to InvestingPro can access over 10 additional key insights about Qualitas’s financial health and market position.

Financial Highlights

• Revenue: $17.41 billion, slightly below the forecast of $17.72 billion.
• Earnings per share: $3.54, missing the forecast of $4.78.
• Net income for Q2: $1.4 billion.
• 12-month return on equity (ROE): 26.5%.

Earnings vs. Forecast

Qualitas missed market expectations with an EPS of $3.54, compared to the forecasted $4.78, resulting in a negative surprise of 25.94%. Revenue also fell short by 1.75%, reaching $17.41 billion against the anticipated $17.72 billion. This performance marks a notable deviation from previous quarters where the company had met or exceeded expectations.

Market Reaction

Following the earnings announcement, Qualitas’ stock experienced a significant decline, dropping 8.04% in after-hours trading. The stock price fell from $190.42 to $175.11, reflecting investor concerns over the earnings miss. This movement contrasts with the stock’s recent performance, which saw a 1.68% increase to $172.96 before the earnings release. InvestingPro data shows the stock has fallen significantly over the last three months, with a year-to-date return of -85.71%. Based on InvestingPro’s comprehensive Fair Value analysis, the stock currently appears undervalued. Get detailed valuation metrics and access to the full Pro Research Report covering Qualitas and 1,400+ other stocks on InvestingPro.

Outlook & Guidance

Looking forward, Qualitas expects full-year top-line growth in the high single digits to low teens. The company anticipates its ROE to moderate to its long-term target of 20-25%. However, management expressed caution regarding a potential macroeconomic slowdown affecting car sales and ongoing pricing pressures, particularly in the fleet segment.

Executive Commentary

CEO Jose Antonio Correa stated, "We are prepared to navigate these headwinds effectively while pursuing sustainable and balanced growth." He emphasized the company’s evolving business model and its continued strength in the core Mexico Auto Insurance market, which remains a primary growth driver.

Risks and Challenges

• Intense price competition in the Mexican auto insurance market.
• Decline in new vehicle sales, down 2.8% year-to-date.
• Significant drop in heavy equipment vehicle sales, down 37.4%.
• Potential macroeconomic slowdown impacting car sales.
• Continued pricing pressures, especially in the fleet segment.

Q&A

During the earnings call, analysts inquired about Qualitas’ pricing strategies and market competition. The company addressed its financial income and investment portfolio strategy, as well as efforts to turn around its US subsidiary. Additionally, seasonality in the claims ratio was discussed, providing insights into operational challenges and strategic priorities.

Full transcript - Qualitas Controladora, SAB De CV (Q) Qualitas Controladora, SAB De CV (Q)2 2025:

Conference Moderator: Good morning, and welcome to Qualitas’ Second Quarter twenty twenty five Earnings Results Webcast. The conference will begin now. It is my pleasure to turn the call over to Raquel Itoy, Qualitas’ IR.

Raquel Itoy, IR Coordinator, Qualitas: Good morning and thank you for joining Qualita’s Second Quarter and Six Months twenty twenty five Earnings Call. I’m Raquelitoi, Qualita’s IR Coordinator. Our CEO and Chairman of the Board is joining us today, Jose Antonio Correa as well as our CFO, Roberto Araujo. 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.

Qualitas undertakes no obligation to publicly update or revise any forward looking statements, whether because of new information, future events or otherwise. Let’s give it over to Jose Antonio, our CEO, for his remarks.

Jose Antonio Correa, CEO and Chairman of the Board, Qualitas: Thank you, Raquel, and good morning, everyone. It’s great to be with you once again. We are pleased to share strong second quarter and first half of the year results, setting a strong base for the remainder of the year and supporting the execution of our strategy. Top line growth was within our expectations at 12.9%, with a sustainable loss ratio resulting in 92.8% combined ratio for the quarter, right on our long term target and a 90.5% combined ratio when considering the first six months of the year. On the investment side, we posted a strong financial income, even as interest rates began easing at the faster than expected pace.

Thus, Qualitas delivered a 36% net income growth for the first half of the year with a twelve month ROE of 26.5% above our long term target. Additionally, a key highlight for this quarter is that we surpassed the 6,000,000 insured units mark. And reaching this milestone took us only half of the time it took to go from 4,000,000 to 5,000,000, a clear reflection of the quality of our service and our unwavering commitment to our customers. According to the latest industry amis figures, in terms of written premiums, Qualitas holds 31.7% of the total market and 41.9% in the Heavy Equipment segment. In terms of earned premiums, we maintained a 35.8% market share.

Additionally, our combined ratio in Mexico is two twenty four basis points better than the rest of the industry, excluding Qualitas, and we represent about 46% of the entire sector underwriting result. These indicators reaffirm our market leadership in both the scale and profitability even when facing a challenging market environment. Before Roberto dives into the financial results, I would like to address some of the current dynamics and challenges in the market, including pricing downward pressures, macroeconomic volatility, early rain seasonality as well as regulatory changes. These factors are reshaping the industry and pushing all players to adapt. At Qualitas, we are well positioned to respond through our excellence in customer service, innovation, underwriting discipline and a clear strategy focused on sustainable value creation to our stakeholders.

Customer service remains at the heart of what we do. In the first half of the year, we received 1,600,000 callers at our contact center with an average response time of five seconds, what means one second faster than the same period last year. This improvement reflects our commitment to delivering best in class service when it matters the most. Our satisfaction rate of 96% confirms that we are striking the right balance between speed and quality. Our business model is evolving alongside technology and customer expectations, and it is stronger than ever.

Today, approximately 20% of our customer calls are handled throughout artificial intelligence, and about 40% of our clients are managed through robotic process automation. Additionally, 33% of claims are handled remotely using digital technology, reaching a satisfaction rate of 95%. These changes have led to operational efficiencies that allow us to serve more customers while optimizing costs. Looking ahead, we remain cautiously optimistic for the rest of 2025. We are conscious that macroeconomic slowdown will continue affecting new car sales and disposable income.

But we have navigated through these cycles, and we know what we need to do. As we enter the second half, typically characterized by higher claims volumes, we are committed to executing our defined strategic priorities, continuing to invest in key areas and proactively adjusting our operations to remain agile and ready to respond. Let me now get into our three pillar strategy. We continue to strive in winning in our core business, Mexico Auto Insurance, which continues to be the main driver of our growth, making it our foremost focus. We firmly believe that Mexico is our key growth engine and in these volatile times, it is essential to continue strengthening our leadership position.

The Mexican insurance industry is currently experiencing an intense price competition, particularly in the auto segment due to the insurers aggressively going after volume to maintain or increase market share, a strategy that is proving to be unsustainable as claims severity increases. This is driven by the country’s low insurance penetration, macroeconomic pressures and growing competition. Factors such as inflation, currency volatility and rising repair and medical costs have squeezed profit margins. At Qualitas, we remain focused on sustainable growth and profitability without compromising competitiveness and long term financial health. From a market standpoint, new vehicle sales, including light vehicles and heavy equipment, have declined 2.8% year to date.

Notably, heavy equipment sales for vehicles over 3.5 tonnes dropped by 37.4%, consistent with broader economic trends and anticipated consumption slowdowns. This reflects the persistent volatility that has marked recent periods. As we turn to our subsidiaries, a strong performance and progress across Latin America, including our recent entry into Colombia, has been more than offset by our U. S. Business, where prior year claims development continued to impact.

As Roberto will elaborate, progress made on the runoff of domestic business and in building a new book of healthier by national product is not yet seen in our financials due to litigations coming to closure at a much higher and perhaps unreasonable amounts, confirming that our exit of those businesses was the right decision. Despite this challenging environment, we remain confident in Qualita’s ability to manage these headwinds effectively, while pursuing sustainable and balanced growth. We reaffirm our expectation for full year top line growth in the high single digits to low teens, and we expect our key performance indicators to remain within target levels. In summary, the first half of the year showed robust commercial momentum. We saw strong in written premiums, continued expansion in insured units and a sustainable loss ratio still below our target range.

Financial income has remained solid. And perhaps most importantly, we have achieved meaningful progress across all service metrics. Our organization is structurally prepared for a healthy growth and remains agile and resilient as we move forward. And with that, I’ll pass it to Roberto for a deeper dive into our quarter and year to date performance. Roberto, please.

Roberto Araujo, CFO, Qualitas: Thank you, Jose Antonio, and good morning, everyone. Our first half twenty twenty five results reflect the strength of our strategy and our ability to deliver value considering an evolving industry landscape. We achieved solid top line growth, maintain a combined ratio within our long term target range and delivered a resilient investment portfolio. Starting with top line performance. Written premiums grew 12.9% in the second quarter and 12.4% for the first half of the year.

In Mexico, the traditional segment accounted for approximately 65% of total written premiums, growing 5.4% in the quarter and 7.2% year to date. From this segment, the individual businesses stood out with 8.1% quarterly growth and 12.6% year to date, while fleet business grew 1.3% in the quarter and remained flat on a year to date basis. This is mostly due to the impact of the large multiyear contracts from last year, as we mentioned on our previous call, as well as the effect from adjusting pricing downwards to be more in line with our ongoing long term profitability objectives. The Financial Institutions segment represented around 30% of total written premiums, with significant growth of 28% in the quarter and 25% year to date. While this segment has traditionally been driven by new car sales, which declined 2.8% year to date, the growth also reflects the benefits from shifting in consumer preference toward larger vehicles, mainly SUVs, translating into higher average premium value.

The increased effect from multi annual versus annual mix and the increase of Qualitas market share in key financial institutions. As reported, our international subsidiaries contributed 5.3% of total written premiums year to date. Across Latin America, subsidiaries posted excellent growth, up 59.6 in the quarter and 41.3% year to date. Each quarter, we continue to achieve key milestones. Costa Rica grew nearly 60% in the quarter and 31% in the semester.

During this quarter, it also paid the dividend to the parent company for the second consecutive year. From a market share perspective, the latest results have qualitas at 22.1%. El Salvador reported 59% quarterly growth and 67.4% year to date, with ROE close to 30%, while Peru achieved 44.9 growth in the quarter and 42.5% year to date growth, reaching a market share of 7.4%. In Colombia, our newest subsidiary is performing in line with expectations. As we adapt to market’s unique characteristics, we’re building a solid foundation with the same excellent service DNA that defines our group, committed to reach sustainable growth following through the same discipline and vision that have proven our success path.

While the financial contribution will be limited in the short term, we’re laying the groundwork for long term value creation. For example, we opened our twelfth office, solidifying our presence in key cities and expanded our agent network to over five fifty. These developments bring us closer to policyholders and mark an exciting new chapter for our regional expansion. In The U. S, our subsidiary continues realigning its portfolio and focusing on cross border Ambien National products.

As of June, premiums declined 15.6% for the quarter and 20.3% year to date. We have redefined our value proposition presenting ourselves as a specialized B National auto insurance company. Our organizational setup has been optimized to capture opportunities in this niche market, and we remain diligent regarding The U. S. Market opportunities.

Altogether, as Jose Antonio just mentioned before, we closed the quarter with over 6,000,000 insured units, a new all time high for Qualitas with over 400,000 additional units during the year or a 7.4 unit growth. Looking at the earned premiums, we posted 10.6% growth in the quarter and 14.1% year to date in line with expectations. As you know, earned growth pace is directly correlated to reserves behavior. In the second quarter, we constituted seven thirty million dollars in reserves, $4.00 1,000,000 more than in the same quarter last year. For the first semester, reserve constitution totaled $2,600,000,000 7% below the same period last year.

And as a reminder, the technical reserves constitution is based on approved regulatory models and speaks to the corresponding premiums growth. Now, consistent with our expectations, earned premiums are growing at a faster rate than written premiums, being able to capitalize accelerated growth from past periods as well as the benefits from lower claims costs. Now moving down to our costs. Our loss ratio stood at 63.1% in the quarter, well within our target range and improving 2.6 percentage points versus previous year. Furthermore, on a year to date basis, our loss ratio closed at 61.4%, improving 3.5 percentage points compared to last year.

To better understand progress and challenges, I will provide some specifics from our main markets. In Mexico, the loss ratio was 60.4% for the quarter and 59.3% for the first half, well below our desired unsustainable loss ratio target range of 62% to 65%. It is worth mentioning that frequency for the quarter was 6.9%, 40 basis points below the same period of last year. As for tax, year to date decreased 7% for Qualitaz versus 10% for the overall market. Remember that these stats reflect our higher units growth versus industry and believe in market share, especially when considering insured motor cycles, which have a lower insured value, but high volume.

Qualitas recovery rate stands at 42.5% in line with the rest of the industry. We continue enhancing our technological tools and coordination with supplier and authorities to reduce costs and improve efficiency. So let me now move to our U. S. Business, where we continue focusing on our turnaround as a corporate priority.

The journey continues to be challenging, recognizing it is not as fast, simple nor cheap as we need to bring to closure the claims that trace back to five or even eight years ago. To illustrate progress on our exit of domestic business, at the beginning of twenty twenty three, we had close to 300 open litigations, which are now down to 112. The fact that we have 18 wheeler exposure as of February 2025 would indicate that new claims should also tend to none in the next months. All of this, however, is not being enough to turn around our claims ratio as adverse developments of historic claims and verdicts have led to higher reserves constitution. This quarter in particular, we have closed a couple of claims in the BOSS program, one that it was in place for fifteen months from May 2020 to September 2021, our policy limits were up to $5,000,000 In addition, due to our external audit recommendations, we continue building a DTA deferred tax asset valuation allowance reserve as a conservative and unlikely case if we were not able to turn around the business in a way that we credit these taxes.

Taxes. As of the end of this quarter, we have $18,900,000 accumulated on this allowance. To The U. S. Business turnaround is within our top corporate priorities and we will continue to assess all possible paths to ensure our business is managed at the least possible cost, while maintaining cross border products to serve our customers and where we know we can create value.

The acquisition ratio stood at 24.1% in the quarter and 23.1% year to date, about one percentage point higher than last year. This is driven by stronger growth in the Financial Institutions segment, which carries higher commissions. This ratio remains within our expectations and aligned with cost control metrics. The operating ratio was 5.6% in the quarter and 6% on a year to date basis, including employee profit sharing, given the positive performance of our company. We also had an increase in fixed pay to service offices and corporate bonuses linked as well to the successful performance during the period, aligning productivity and cost control efficiencies towards positive results of the company.

If we were to exclude employees’ profit sharing from this provision, that by law must be incorporated into our operating expenses ratio would have stood at 4.4% in the quarter and 4.6% for the first half. Altogether, this resulted in a combined ratio of 92.8% in the quarter and 90.5 year to date, below our ongoing target range of 92% to 94%. These figures confirm the strength of our underwriting and cost discipline. On the financial side of our business, comprehensive financial income grew 7.3% in the quarter and twenty five point four percent year to date. Our portfolio totaling Ps.

49,500,000,000.0 remains 86% in fixed income with an average duration of two point two years and an 8.8% yield to maturity. For the Mexican subsidiary, yield stands at 9.5. The rest of our portfolio allocated in equities has remained resilient from the market performance during the first half of the year. For example, the S and P 500 stumbled in the first quarter of the year, still a 5.5% return was observed on a year to date basis, setting a relatively more confident tone as markets headed into the second half. All our investments assets are classified as available for sale, meaning their unrealized gains or losses are reflected in the balance sheet until they are realized.

Our investment strategy has not had any relevant changes in 2025. We had strived to bring our fixed income duration up to two years as reference rates remain in the mid to high single digits in Mexico, following the guidelines, advisory and strategy decided by our investment committee as part of our institutionalized corporate governance. Total comprehensive financial income was $1,200,000,000 in the quarter and $2,800,000,000 year to date, delivering 8.49.7% ROI respectively. Unrealized gains for the first half of the year are in the magnitude of MXN 400,000,000, including FX effects. When considering all mark to market positions, ROI would be 11% for the quarter and 11.3% for the year.

Approximately 23% of our portfolio is invested in U. S. Dollars, given our international presence. Presence. For every peso that appreciates or depreciates, the estimated annual input is around MXN $650,000,000 serving as a natural hedge.

Our effective tax rate was 31% year to date, in line with historical levels. Net income reached $1,400,000,000 for the quarter and $3,600,000,000 year to date with net margins of 8.19.8%, respectively. Our twelve month ROE stands at 26.5% above our long term target. However, as claims normalize and frequency increases in the second half, we expect ROE to moderate toward our long term target of 20% to 25%. Our regulatory capital stood at MXN 5,700,000,000.0 with a solvency margin of MXN 16,200,000,000.0, equivalent to a solvency ratio of 385%.

Our twelve month earned premium to capital ratio is 2.7x. We maintain a strong capital position that allow us to invest strategically to continue improving customer service and experience through innovation and technology, while reinforcing our core capabilities. Our approach remains disciplined and selective, always with the goal of delivering long term sustainable value to our shareholders. It is worth mentioning that there is no news from the fiscal authority regarding the audit procedures and the VAT interpretation. This matter continues under assessment in the corresponding instances and we have not received any conclusive nor final resolution.

Qualita’s position stands firm with the corresponding legal arguments to support the industry criteria and thus, we trust the authorities will reach a reasonable resolution. As mentioned before, we will timely communicate any relevant progress to the market. In closing, we are proud of our solid first half performance. We delivered a strong profitable growth, paving the way for the future, reaching key milestones despite external pressures. Our capital position is robust and our strategy remains clearly defined.

While the second half may present new challenges, we’re fully prepared to navigate them and continue delivering long term sustainable value. Now operator, please open the line for questions. Thank you.

Conference Moderator: Thank you. We will now begin the question and answer session. To join the question in queue, you may press the raise your hand button on your screen and we’ll open the mic for you. Or you can also send it through the chat. To withdraw your question, please press the button again.

We will pause for a moment as callers join the queue. Thank you. Our first question comes from Thiago Binsfield at Goldman Sachs.

Thiago Binsfield, Analyst, Goldman Sachs: Hi. Good morning, everyone. Jose Antonio, Roberto, Raquel. Thank you for taking my question. I see the company coming off a very strong first half of the year in terms of ROE.

But like you said during the presentation, there are some risks that you see for the second half of this year. So perhaps if you could explore a little bit more the ideas that you presented on pricing pressures, the macro volatility, the rainy season, and also, I think you mentioned regulatory changes. So, I mean, if you could put some more details on it, what makes you more concerned when you discuss those points to help us understand a little bit more the dynamics for the rest of the year? Thank you.

Jose Antonio Correa, CEO and Chairman of the Board, Qualitas: Good morning, Camilo. Thank you for your question. Let me, thank you for your comment about our strong results. I believe that our strong certainly are strong for the first half of the year, and we are following our strategy. Let me tell you that, certainly, there is a, you know, there is a change in cycle, I would say, in the in the car industry, in the insurance car industry segment here in Mexico.

And we have had, like, three, and this is starting on the fourth cycle once, you know, the industry was able to decrease the the combined ratio and the the loss ratio. As such, we are seeing the pricing pressures. So so the important thing here is that we continue to lead the market. As always, we will continue to take pricing as as needed. Now having said that, there is there is there is some pressure more in certain in the fleet side of the of the the segments that we have, and this is something that I continue to see in the in the following six months at least.

No? Obviously, we have a good portfolio there. Leading market share there is something that our competitors are looking into. So we are defending, and we are taking some surprise declines, and we have been able to maintain our customs. So renovations are at a good level.

Now having said that, I think that as we indicated earlier that for the year, we would see a top line growth between probably the high single digits to to around to 12%, which, by the way, we are very glad that we have been able to be slightly ahead of what we indicated as our range for the year. So, yeah, we will continue to see this pressure. We have seen this in the past, and we will continue to manage very discipline to make sure and ensure that we continue to be profitable in in those businesses. No? So so the cycle now is is something that, that is that is complicated.

As also, as you know, know, the new car sales are also an issue in not an issue, but it is below. I mean, you know what? In 2023, the the sales of new car sales was above 20%. In in 2024, it was above 10%. And right now, it is flattish or below depending on if you consider the Chinese car sales because some of them are not reported through the industry association.

So so the the the second half will continue to be somewhat complicated, but we are prepared to continue very disciplined on handling our business as we have done in the past, Thiago.

Thiago Binsfield, Analyst, Goldman Sachs: Thank you, Jose Antonio. If I may just follow-up on the regulatory side, anything that you expect to be meaningful for this year?

Jose Antonio Correa, CEO and Chairman of the Board, Qualitas: Not really. In the the regulatory side, there there’s nothing new in there. Clearly, there is something related, as you know, in the financial markets in Mexico with a couple of the the three financial institutions that have been named by by US authorities to be careful with that, but we don’t have issues there. And clearly, I don’t see from a regulatory standpoint, probably there’s gonna be strengthening on on on on the anti money laundering stuff. But other than that, I don’t see anything in the horizon for the next six months around that.

Thiago Binsfield, Analyst, Goldman Sachs: Okay. That’s clear. And and a second follow-up, if I may. You mentioned the top line expectation. Just wanted to confirm that if you still expect earnings premiums to outpace written premiums for the rest of the year.

Jose Antonio Correa, CEO and Chairman of the Board, Qualitas: Well, as I mentioned, Thiago, clearly clearly, we said that it would be, you know, between the high single digits and and and low double digits. And it will be I mean, I cannot provide a number per se as as as but it will be close to those ranges. No? We have been able to exceed the ranges that we have said, and I see that we will be in the 10 ish around the 10% growth.

Thiago Binsfield, Analyst, Goldman Sachs: Okay. Perfect. Thank you so much.

Conference Moderator: Thank you. Our next question comes from Ernesto Rabilondo at Bank of America.

Ernesto Rabilondo, Analyst, Bank of America: Thank you. Hi, good morning, Jose Antonio and Roberto, and thanks for the opportunity to ask questions. My first question will also be a follow-up on premiums. Last quarter, we noted stronger data from competition. So can you elaborate in which indicators you are noting that stronger data?

And also related to premiums, how much have you reduced prices in this first half? And how much do you expect to reduce in the second half? And can you remind us how much of the premium growth of the last couple of years was related to pricing? And then I have a second question related to the financial results. For this, I would like to know where do you see the interest rates by year end and how you are seeing them by the end of next year?

And today, we noted that you are doing around 1,200,000,000.0 in the financial results per quarter. But in the scenario of repricing the portfolio in two years under lower rates, what should be the financial result per quarter that we should be expecting? And also, when do you expect to start materializing these unrealized gains of MXN 400,000,000 that you have in your stockholders’ equity position? Thank you.

Jose Antonio Correa, CEO and Chairman of the Board, Qualitas: That was a number of questions. Let me see if I remember all your questions, Ernesto. Good to have you with us. Let me tell you Let about the premiums versus me tell you that we we have we have reduced prices a bit. I mean, actually, as you know, and you will know, we we manage this by ZIP code.

No? So we do some increases and some decreases based on the risk that we take. Now it is important to know that in average, we have taken small decreases. You know, it is, you know, in the round, but between probably a couple of two percentage or something like that. So it has not been big.

Where we have been seeing more competition is in the fleet segment. And in the fleet segment, we have we have we have had to we need we need to make sure that we have good financial results there. I mean, the combined index is is is reasonably good. So we have had, in some instances, to reduce a little bit more than that, the amounts for for heavy is there for for fleets. No?

And that’s that’s related for the for the the premiums. Now I don’t know if if it’s an important thing because we the top line in the top line, I’m I’m gonna let Roberto to to answer a bit of that because we have a mixed situation there. Obviously, we have had a good top line growth in the financial institutions, and it is a kind of a mixed situation there, which is favoring our position and our leaders leader position in the market. But, Roberto, can you please elaborate on that one?

Roberto Araujo, CFO, Qualitas: Yes, Jose Antonio. Thanks, Ernesto. Good morning. So let me let me address the the premiums questions because I think when you look at the the 12.9% on on q two, there is a mixed bag of things happening at the pricing level. Right?

So when we looked at the presentation, we talked a little bit about how, for example, the traditional business was experiencing much more pricing competition, and it was actually either flattish or depending if you look at the last year’s multi annual contracts, it was getting to single digits growth. That’s what we’re seeing a little bit more of what Jose Antonio is alluding to. In general terms, I would say that out of that 12%, I would say that 60% is still pricing on total carryover from either 2024 or what is experiencing in in the mix of the different channels. And let’s also think about the financial institutions. As I as I put in my remarks, there’s a strong growth in the financial institutions, and it’s counterintuitive what we’re seeing.

Right? So on one end, we’re seeing the the new vehicle going down on a year to date basis, minus 2.8%. But on the other, we’re seeing a double digit growth in in the financial institutions, and we see three main drivers for this. This is on a rise. The first one is the rise on on average premiums rather than volume.

This is the result of of several factors. What we’re seeing is a a shift in the insured vehicle mix coming from smaller units to larger vehicles. As I mentioned in my remarks, the SUVs, pickup trucks, which carry significantly higher premiums, so that will drive to a higher average premium. The second one is the the rapid expansion of shipping this composition of our portfolio to multi annual policies, and we’ll talk, I’m sure, about that in in a few more questions later on on on the mix annual versus multi annual. And then the the the third one is we are increasing the the market share in some key financial institutions.

So what I’m trying to say is that depending on the different segments, we’re seeing a different price volume ratio. And we are experiencing particularly on on the traditional much more price aggressiveness. And, again, it goes back to our consistent message of reaching the long term target of 92 to 94 in each of these segments. And when you think about individual, it’s actually growing units and and and price at the same time. I see.

So the combination of those are actually going through. So it really depends by by segment, Ernesto. So we’re looking now to to your second portion of your your question on on financial results. You were asking how much do we see more on the interest rates in in in terms of the Bank of Mexico and what we see particularly on on Mexico, we see a a continuous decline on on the interest rates down to probably 7.5 on on 2025 and perhaps to to 7% on 2026. But still, I mean, there’s a debate whether it’s gonna be 50 basis points or 25 and so on.

So we’ll we’ll we’ll have to wait and see. And I think there was another portion of your question related to to the financial income. The 1,200,000,000.0 that we saw back in in in q two and then the link to the 1,500,000,000.0 that we saw in q one linked to how much of that is gonna be realized versus the unrealized and the 400,000,000 that we have in our balance. We’re certainly gonna see more of that excess cash depending on how the ETF or our variable portfolio plays out. We’ll have to see whether there is a a how do we start realizing in the next coming quarters.

There is no commitment on when or how we’re gonna when I start realizing those, but probably we’ll see a portion of that in the in the in the coming future. Again, it gets back to that 400,000,000. When you look at our ROI, it was 8.4. I’m sure you’re wondering if you were to include everything to mark to market, we will get in up to 11%. So when will we be start kicking those into the p and l?

Again, it’s it’s a matter of how this starts playing out. And as interest rates will go down, as we’ve been discussing in previous calls, every every 25 basis points, we’ll expect to see a valuation benefit of 250,000,000 pesos. So we will in in our balance sheet. So we we’ll have to see how those plays out, Ernesto. I hope that I address most of your questions.

Jose Antonio Correa, CEO and Chairman of the Board, Qualitas: Just let me let’s let let me adjust because, Ernesto, you were asking also for 2026. Let me tell you as also we have included in previous calls that we have increased the duration of our portfolio. And and we have been able, as you might recall, like, you know, probably eighteen months ago, probably twenty four months ago, our our duration was very low. It was, you know, less than half a year. And now we have, in excess of two years.

And that should carry us, well, into 2026 also, for with the good rates that we were able to to have in addition to what, Roberto indicated.

Roberto Araujo, CFO, Qualitas: And that’s actually a very good point, Jose Antonio. Thanks for pointing it out. The duration is gonna give us some stability on our 86% fixed income portfolio. So that is gonna help us to start not seeing so much volatility in the coming quarters. And certainly, we’ll see the remaining portion on on the capitals that we realized in in our p and l.

I hope that answers your questions.

Ernesto Rabilondo, Analyst, Bank of America: Yes. Thank you very much, Jose Antonio and Roberto. Just on this financial result, once the fixed income portfolio matures in two years and you have to substitute those securities with new ones, those ones should be on the lower rate. So how should be the impact? Or how should we be expecting that line to behave?

Today, you are doing between 1,200,000,000.0, 1,500,000,000.0 per quarter. But if we go after the two years that you have to substitute it with new securities, how should we think about this line?

Roberto Araujo, CFO, Qualitas: I think that’s a a a good question. Thank you, Ernest. So I think I think we should expect to continue to see that going down. Right? So the the good news is that for at least 2025 or 2016, we’ll see a little bit of that step more stable.

But as as interest rates will continue to go down to certain levels, we’ll continue to expect that that will go down in the same magnitude, let’s say, 25 basis points, 50 basis points and so on to match the the market consensus. So that that would be something to to keep on keeping an eye on how how we are renewing those investments. Now keep in mind that our duration has a a multiple phasing of all our, let’s say, on multiple durations. So it would not be eventually in twenty in in two years and all will go out at the same time. They will obviously, we’ll go out and we renew.

And depending on when we renew, we will get particular interest rate for those, and and we will continue to to make the strategy to make it as swift as possible. Remember, we we’re not trying to to to play we’re we’re being being conservative around our our portfolio, and and and most of it is on on fixed income. Jose Antonio, you wanna add?

Jose Antonio Correa, CEO and Chairman of the Board, Qualitas: Yes. Yes. I would like just to add that, clearly, we do not have a crystal ball for that, Ernesto. We know that the world in general and Mexico in particular has some challenges regarding the tariffs and all that stuff. So at this point in time, it would be kind of complicated to to foresee, you know, a couple of years from now what is gonna be the situation.

The important thing is that we will maintain an agile. We have obviously, we work with our investment committee, and we will take advantages of the situation as they come back as we have done over the past two or three years in in. So so so so we will remain obviously very close to this one, but there’s might be a renegotiation of the free trade agreement with The US next year. So so there are a number of things that might might might change a little bit of what we see just in in terms of declining the interest rates from from Banco and Mexico. And I guess at this point in time, nobody can tell us what they would be considering the uncertainties in the macro I mean, the macroeconomic level.

No?

Ernesto Rabilondo, Analyst, Bank of America: Perfect. No. Thank you very much.

Conference Moderator: Our next question comes from Carlos Gomez Lopez at HSBC.

Carlos Gomez Lopez, Analyst, HSBC: Hello. Thank you for taking my question. You have addressed this partially, but if you could please clarify the difference between the first and the second quarter and the specific reasons why the claims ratio was so low in the first quarter relative to the second quarter. And is this type of seasonality something that is specific to this year or we should expect it in the coming years as well? Thank you.

Jose Antonio Correa, CEO and Chairman of the Board, Qualitas: Let me just start, Carlos. Thank you for being here today. Let me tell you that obviously, we have been going in a long term curve of declining combined ratio and loss ratio. And that’s something that we have been working on since the end of the pandemic. No?

So, as you know, these things take a long time to, to surface, and we have been doing that for the last probably twelve months at least seeing this very positive, behavior. No? So so, having said that, I can tell you that, we are below our long term targets on those, and we are happy about that. But considering that, how how the cycle works now and that’s why we see this this price competition because it it happens every time that profitability returns to the sector. Obviously, we never lost it, but some of the sector, they did.

Now there there’s gonna be the price competition. No? But this this is important. So we we expect at some point in time because of the pricing pressures, etcetera, that we will we will be back to within our range. But now I don’t know if you want to elaborate, Roberto.

Roberto Araujo, CFO, Qualitas: Thank you, Jose Antonio, and thanks, Carlos, for joining us this morning. So let me double click a little bit on on on on your question. So on one end, yes, we saw a q one 59.7% loss ratio in q one. And your point is, hey. We’re seeing a q two of sixty three point one.

The first point is back to Jose Antonio’s message is is well within our target range, and it’s between the sixty two and sixty five. The question is, okay, why is it the the increase? Let’s keep in mind that in ’59 in in q one when we saw the fifty nine point seven, it’s part of the natural seasonality of the year. Right? So we normally see a lower seasonality.

We had an an and we didn’t have any meteorological events. And what we’re seeing in in q two, there there are multiple factors. The the first one I wanna double click is on Qualitas, Mexico. Right? So when you look at Qualitas, Mexico, actually, it increased from 58.2 to 60.4.

So we’re already starting to see some of that seasonality kicked in. We are seeing the early beginning of the rainy season, and we are seeing already a little bit more of the frequency that we would have expect. Right? So in in q one, we had a 6.4% frequency. Now in q two, we had a 6.9% frequency.

So that’s just part of the natural play. That that would get into into our loss ratio. For Mexico, still very stable, very positive. Now the delta, primarily in q two, it has to do with the US subsidiary. And as I I I made in my remarks, we’re still going through that strategic priority and that we’re firmly committed to turn it around.

On on the claims side, what we’re seeing is the weight of the legacy litigation and the long tail exposures are continually impacting us, And and we’re making time to progress. As as I mentioned also in my remarks, the the litigation cases have been dropped 63% where we saw in in in compared to what we saw in 2023. So it’s it’s important to to understand that there is a a a impact from the US subsidiary on the reserves, but that we’re making progress and that we’re seeing a substantial dis deceleration on the domestic new claims. But, also, we need to also keep in mind that even combining both the the the Mexico loss ratio performance, even with the the the impact that we’re seeing from The US, we are still within our target between 62% to 65%. And that just comparing the Q2 versus last year, we see two sixty basis points better than last year.

And even in the first half, we see a a a loss ratio of 61.4 even with what I just explained, 350 basis points better than last year. I hope that helps on putting a little bit more color behind the loss ratio, Carlos.

Carlos Gomez Lopez, Analyst, HSBC: It helps. Although I have to say, again, my question is is actually more historical and and forensic. So so it’s not the second quarter which looks strange. It looks perfectly normal. Is we are trying to understand why the first quarter looked so good.

What was especially about the first quarter that perhaps, you know, we did not get in. Perhaps that’s why the the consensus was much higher for the second quarter than than it probably should have been. Were there any special items or or just the absence of US reserve creation that that made the first quarter? But but, no, it’s also Mexico. You said Mexico was was 50%.

What so we we want to understand what what it was in the first quarter that was particularly good and probably not replicable.

Jose Antonio Correa, CEO and Chairman of the Board, Qualitas: No. No. It’s not it it’s nothing special, Carlos, regarding that. It is the the the different factors that we built during the past probably eighteen months in terms of, you know, cost controls and price and pricing increases to to to get back to the original cycle. And and, clearly, this is something that that goes like that.

So so so to to get specific to your question is not there is nothing in particular that helped the first quarter other than the momentum that we carried back then. And, you know, now that’s why it gonna be turning around. In addition, that the momentum came in at the time when, you know, as you know, the first semester is from a seasonality standpoint also good. So when you carry the momentum to the seasonality, that’s what we have. Now, you know, the cycle begins to turn, and and and and and we are prepared to take it.

I I I know that probably it’s difficult to to give you this this this view, but there’s nothing in particular other than the momentum that we carry out of the good actions that we were taking over the past eighteen months or

Carlos Gomez Lopez, Analyst, HSBC: so. Okay.

Roberto Araujo, CFO, Qualitas: Then Carlos, to complement a little bit on on what is ahead, I think it we we should expect regardless of what we saw in q one and q two, we should, we’re being very vocal about the second semester is normally have a a much higher claims ratio due to the rainy season and the meteorical event. So please do do consider that in your models as we move forward since that is gonna play out, and we’re already seeing it in in May and June.

Carlos Gomez Lopez, Analyst, HSBC: Okay. And if I can use your time on The US, and I understand this is a long tail and it’s judicial and it’s unpredictable, but what is a reasonable expectation for you to clear up these remaining cases? Are we talking about a few more quarters, a few more years? And will the order of magnitude be as high as we have seen this quarter?

Roberto Araujo, CFO, Qualitas: So I think it’s hard to to tell, Carlos, because what we are seeing is that we are closing long tail cases, as I mentioned, in cases, like, five or eight years ago, and it really depends on how that litigation and the case is closed. But I would would emphasize that the the trend will obviously will go down versus what we’re seeing, and it will depend on a case by case basis.

Jose Antonio Correa, CEO and Chairman of the Board, Qualitas: But just let just let me add to it, Roberto, because it is important to say that, clearly, we have dropped the number of cases. And let me go back to 2023 when we decided to change the strategy. So it is clear it it is important, to to to stress the fact that, we made the decision back in the early twenty twenty three. We are executing against that strategy, and and we are, you know, with a clear focus on the cross border and by and by national eliminating the domestic one. So, to your question, I think it is gonna be at least you know, it will take probably, you know, twelve to eight to eight twelve to probably eighteen months more, and and and we are gonna be dealing with that going forward.

But other than that, you know, litigation cases have dropped more than 60% from where we were in 2023, which is the important thing, and then we are managing that part. Thank

Carlos Gomez Lopez, Analyst, HSBC: you so much.

Conference Moderator: Thank you. Our next question comes from Pablo Arvones at GBM.

Pablo Arvones, Analyst, GBM: Yes. Hi, good morning. This is Antonio, Roberto, Michele. Congratulations on the results. Very sound growth in the quarter.

And my question is related to the dynamics that we should expect between the traditional business and the financial institutions because one of the changes that caught our attention in the quarter was the higher acquisition ratio. As you mentioned, it’s still within your range, but higher relative to the historical standards at at 24%. So my question is, looking into the second half of the year, you mentioned that you expect, top line growth of tenth to to mid teens level to low teens level. What should how what is the dynamic and the split between the traditional and institutional, financial institution business? And also thinking already in 2026, which is the run rate for these two businesses?

Should we expect an acceleration in the the traditional business next year? And and what is driving this very sound performance of the financial institution? That’s my first question. Thank you.

Jose Antonio Correa, CEO and Chairman of the Board, Qualitas: Thank you, Pablo. And and and, again, thank you for joining us today. Let me tell you that on that one, as as Roberto indicated, we had a very good, growth in the financial institution. And I would say as as as he as he indicated during his remarks, and this is very important to know that we see that, you know, the international segment is helping us, somehow even though it it is really still a very small part of the total of the total business. But we are happy in the sense that in the individual business, we are within the ranges that we are saying, which it is what we consider healthy.

The financial institutions because of the mix effects and the pricing and the type of vehicles that we insure and considering that we are the leaders in the industry, we will continue to see as we see. There will continue to be pressures there going forward in terms of the financial institutions because of the market. And now it is the the the the sales of new vehicles, and I’m sure that there there’s gonna be some some pressure there from from car manufacturers. No? So so we see that the individual and financial institutions financial institutions will continue to be outpacing individual, but individual is is healthy.

And the thing is gonna be in the fleets one. The fleets one are gonna be somehow flat, flattish because of of price competition. No? So so so that that that would be more I don’t know if that answered your question. I I I can also have Roberto to to provide his view.

But I think that that is what will allow us to really be in the in the guidance and the growth that we we have indicated, Roberto.

Roberto Araujo, CFO, Qualitas: Just just to complement, I will continue to see some of that growth in the financial institutions as we have explained, and then traditional will continue to play an important role as how do how do we compete. An individual, which is still playing and is quite profitable, we will continue to to to be on on the single low teens. So we’ll we’ll continue on track of what we’re committed moving forward.

Pablo Arvones, Analyst, GBM: Thank you, Fostadio and Alberto. And with this, what level of acquisition ratio should we expect for the second half of this year? And do you think that when the fleets business starts to pick up again, thinking on more more medium term dynamics, should this acquisition ratio come back to 2%, 23%? Or do you think that this mix will continue and we should expect this 24% to to

Jose Antonio Correa, CEO and Chairman of the Board, Qualitas: Yeah. Let let me I’ll have Roberto to to answer that one. But let me tell

Roberto Araujo, CFO, Qualitas: you that we have not changed any of the of of the the standard commissions that we pay for for for our businesses. So so most of them are are are really more of a mixed one. But, Roberto Yeah. To your point, Pablo, for example, q one, our acquisition ratio was 22.2, and we still saw a significant growth on financial institution. The the the the thing here in q two is that it actually outgrow individual and the and the and the fleet business, and that’s what drove the mix on on on the twenty four point one.

So as as long as we continue on not having so much of that split, the the ratio will continue to be on our guidelines. On on on a cumulative basis, we’re at 23.1. If we if we continue on this journey and we continue remember that traditional, we we had a a base on on on larger multi annual contracts that is hurting us on on on the growth on on on the fleet segment, but we will continue to see that moving forward. So we’re expecting to hit still our our ranges in terms of acquisition ratio, Pablo.

Pablo Arvones, Analyst, GBM: Thank you. And a final question, if I may, on on a different topic. Your your taxes your taxes were also higher than usual this quarter. So what level of effective tax rates you should expect for the year? What’s the the normal run rate?

And what explains these higher taxes in this quarter?

Roberto Araujo, CFO, Qualitas: Yes, Pablo. So you you clearly did your homework. When we saw the the 36% tax rate, and and it’s mainly driven I mean, when you look at Mexico, it’s actually close to thirty, thirty one percentage. The delta from the 31 to 36% is linked again to the US subsidiary. When we were making my remarks, I I I highlighted the losses from The US and that from a regulatory standpoint, from a auditor’s recommendation, they’re asking us to to to continue building on the DTA allowance, and that hits very primarily in in our tax effective rate.

What we would expect is to continue on online to 30 to 31% over time to hit the at the year end. So this is this is more like a timing of q two depending on how that evolves and The US operation continues to to present whether it’s losses or start getting a little bit more stable, Pablo.

Pablo Arvones, Analyst, GBM: Perfect. Thank you very much.

Conference Moderator: Thank you. We have time for one more quick question. We will be taking it oh, no. Actually, that hand has dropped at this point. So that concludes today’s question and answer session since we are out of time.

We will send over some closing remarks.

Jose Antonio Correa, CEO and Chairman of the Board, Qualitas: Thank you very much for attending to this conference call. We are happy. The results for the first half of the year were very good, and we will continue to do our best to maintain our leadership position in the in the industry in a healthy and profitable way. Thank you, all of you. Thank you.

Conference Moderator: That concludes today’s conference call. Thank you for participating, and have a pleasant

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