Thank you for standing by. This is the Conference Operator. Good morning, and welcome to Quálitas' first quarter 2023 earnings results webcast.
Good morning. Thank you for joining Quálitas' 1st quarter 2023 earnings call. I'm Santiago Monroy, Quálitas IRO. Joining us today are José Antonio Correa and Bernardo Risoul. As always, discussions in this event may include forward-looking statements. These statements are based on management's current expectations and are subject to many risks and uncertainties that could cause actual events and results to differ materially from those discussed during today's call. Let's turn it over to José Antonio, our CEO, for his remarks.
Thank you very much, Santiago, good morning, everyone, and thank you all for joining us today. During March, we celebrated Quálitas' 29th Anniversary. Throughout these years, we have had one goal in mind, to become the best auto insurance company by providing a service that exceeds expectations while creating value to all our stakeholders. By delivering on that promise, we have reached market leadership in Mexico 16 years ago, and we have maintained that position thanks to the trust of agents and policyholders. Industry figures for 2022 continue to reflect discipline and passion of Quálitas people and the relevance of the DNA focus on service and control. We closed 2022 with a strong momentum with a 32% market share and, most importantly, profitability well above industry average.
As part of this year kick-off, I have traveled around Mexico, visiting around 10 states to meet and talk with our Office Directors and over 1,500 agents. I participated in our claims officers training workshops, as well as in our annual ODTQs forum. Conversations face-to-face with all of them provided direct and unbiased sensibility of the market and actionable feedback of the things that are going well and those that we can do better and also help us identify unmet needs of the market that evolves continuously. Those ideas will continue to set our path and confirm that agents and policyholders will keep seeking best-in-class customer experience and personalized service, where technology complements but never substitute the possibility to talk to someone who is capable, willing, and empowered to understand and provide solutions. Doing so has always paid off.
What a better proof of that than this quarter results where our top line came in ahead of our expectations, growing 25% and a bottom line that is within outlined range. Managing costs in this high inflation environment continues to be work in progress. What will happen, we'll keep on taking the right actions, expecting to see an inflection point in the underwriting part of the business by the second part of the year. Nothing has been supported by the financial side, but there is no knock, obviously, but the result of the actions taken to set our portfolio in a way that will capitalize the benefit from the current high interest rates environment.
One thing that I am pleased to see, certainly had a strong top line, is new car sales performance, making sequential progress towards getting to that point in which supply meets demand and is up 24% in the quarter and just shy of 2019 volumes. There are interesting shifts in brands and car types. We are taking proactive action to set Quálitas as the insurance of choice for all brands, including hybrid and electric vehicles. While we are encouraged with the recovery we have seen, we're still cautious on stating this a step in permanent comeback, given the high interest rates that will eventually impact consumption. This quarter, insurance industry patients stood at 12%, which has a direct correlation with our total loss costs, mainly through our material damages, expenses, and labor costs, which account for more than 50% of our costs.
While we cannot fully absorb these increases and pricing is required, we are seeking efficiencies to mitigate the hit, such as technology developments and vertical integration maximization. Certainly in pricing, we have increased them 5.2% when compared to October last year, while additional increases have also taken place during April. Only net income posted a 22% growth versus same year ago and 12% more ROE stood at 11.5%. Certainly, we will continue fostering actions to recover our sustainable ranges and increase our underwriting profitability. On this matter, we remain focused on executing on our strategy. As you know, last week, we successfully concluded a major share acquisition of a technology company related to telematics, business intelligence, and IoT.
This will reinforce our commitment to further expand our competitive advantages, specifically targeting a successful and unparalleled risk prevention and data analysis focus. Before we share the financial specifics, let me remind everyone that later this week, we will be holding our general shareholders meeting, where we are proposing a MXN 5 per share dividend payment in the high- end range of our policy. This will be the eighth consecutive year that Quálitas has paid cash dividends. In addition, as part of our efforts to strengthen our corporate governance on approval, David Coppel will become an independent member of our board and investment committee. David is currently Commercial Director and member of the board in Grupo Coppel, and I'm sure that with his broad experience in financial markets, retail, and investments, will contribute towards the sustainability of our results.
Furthermore, I am glad to report that yesterday we also communicated that Bernardo Risoul has been appointed by our Board as the Deputy CEO of Quálitas Controladora as a recognition to his track record and potential. His appointment will be key to strengthen our leadership position in Mexico, as well as to support and consolidate our international auto insurance operations, the beginning of the accident insurance segment, and strengthening our vertical integration. I am pleased to have Bernardo with this new role and confident on his impact to further accelerate business development and enhancing our organization. As we continue to navigate through the industry cycle and challenges remain, all Quálitas leadership team is focused on strengthening our unique DNA while taking advantage of those challenges. Now, I will pass it to Bernardo for a deep dive in the first quarter performance. Bernardo, please go ahead.
Thank you, José Antonio. Good morning, everyone. We have faced a complex environment over the past 18 months, and we continue to deliver industry-leading results. Let me provide some color on this first quarter performance. Written premiums were up 25%, with traditional and financial institution segments accounting for most of the growth being 31% and 29% above year-ago respective. In addition of having a low comparable base in first quarter of 2022, premiums growth was benefited by tariff increases last year, which accounts for around 60% of this quarter growth.
It seems you didn't follow me. Thank you, José Antonio. Let me just go back to the initial quotes. We have faced a complex environment over the past 18 months, and we continue to deliver industry-leading results. As I said, let me provide some color on this first quarter performance, starting off with the written premiums, which were up 25%, with the traditional financial institution segment accounting for most of the growth, being 31% and 29% above year-ago respective. As alluded before, in addition of having a low comparable base in the first quarter of 2022, premiums growth was benefited by tariff increases over the past year, which accounts for around 60% of this quarter growth. The balance come from organic volume, where just this quarter we added 191,000 units, taking us to reach five million insured units. Hitting this milestone is no small achievement.
There are only a few insurance companies that have done so across all the emerging markets, and also worth noting that it took us 13 years to reach our first million and only four for this last one. As you recall, we highlighted strong and aggressive pricing from competition during last year, which combined with the industry inflation, resulted in a weak underlying results for the industry as a whole during 2022. Based on AMIS figures, Quálitas México was the only top five auto insurance company to post a combined ratio well below 100%, standing 8 percentile points below the rest of our peers' average. Being true to pricing and cost control has and will continue to be fundamental for Quálitas.
We all understand we're not yet through the high inflation cycle, and therefore, we'll continue to adjust prices, always ensuring that our value equation remains attractive to customers. As José Antonio mentioned, just this April, we had one more round of increases, especially in the Car segment, where we have set an increase of around 8%. Regarding our international operation, starting with the U.S. subsidiary, where as you recall, it is on a turnaround process with a redefined strategy that seeks to go back to the cross-border segment, where we have a better right to win and where we know we can be profitable. Domestic businesses will be limited to specific niches. Written premiums of this subsidiary decreased 28% during the quarter in terms of U.S.D currencies, where cross-border premiums growth of 24% did not fully offset the decrease of 55% of our domestic business.
This is fully in line with expectations, and after our recent reviews, I can tell you that the right actions are being taken. Top decisions are being executed, including pricing and underwriting choices. The right team with the right focus is now in place, and we're regaining proximity to border agents. While never as quickly as we would like, we're confident we're on the right path. While it is hard to quantify the potential of the cross-border business behind the nearshoring momentum, we know it can be significant. During this quarter, dozens of companies announced important investment and expansions in the border states. We have 45% market share in the trucks and heavy equipment in Mexico, but less than 1/3 of the cross-border.
The opportunity is clear to be the insurer of choice, the one company that can provide one policy across both countries in each of the 50 border crossing points between Mexico and the U.S. On the international arena, now on the Latin America side, this subsidiary has kept on its positive performance in dollar terms, growing 44%, 42% average top line. We continue executing our strategy to accelerate growth and become an engine of profitability as well. Today, I would like to briefly touch on one of them, Costa Rica, where we just crossed 100,000 insured units. We entered to that market 12 years ago, being one of the first private companies to enter that was a market that was up to then state-owned.
It was a challenging start, but by truly replicating Quálitas business model and creating long-term relationship with agents and policyholders, we're currently the solid private leader, only second to the state-owned company with an 18% market share. Last year, we grew 46%, and this year we're accelerating towards a growth of over 55%. ROE now stands at 20%, and we have what it takes to continue on that path. As part of our commitment to the country's potential, we are making a real estate investment that will also be home for San José office. Project is not only financially attractive, but also in line with our sustainability commitments and aiming to become a net zero holding group. By building, we'll have a LEED Silver certificate to reduce environmental impact.
It hasn't been easy nor fast, Costa Rica is already a successful story in our international expansion journey, creating value and also being a source of ideas for other markets. Moving back to our results, our earned premiums are up 20% for the quarter, standing at MXN 11.1 billion by March end. As you recall, earned pace of growth is directly correlated with our technical reserves behavior, where we constituted reserves of around MXN 1.1 billion, which is MXN 774 million more of what was constituted on the first quarter of 2022. This behavior reflects our top line performance in addition to a higher frequency and the continued pressure in our claim costs.
Now entering our cost and ratios, as José Antonio Correa explained, we continue to be affected by industry inflation as well as spare parts availability, especially of new brands from Asia that are becoming more relevant in the Mexico auto industry. Beyond those two, which we have been dealing for over a year, we're also seeing slight increase in frequency, which now stands at 28% for the quarter, and also an uplifting properties. All of this resulted in a 69.4% loss ratio by the end of March, which despite being above our long-term target of 62%-65% target range, is within our expected trend that I was also shared at the beginning of this year. In addition to a constant and gradual total tariff increase, we recently canceled 12-month interest-free installments, which was valid since 2020.
This leaves only three and six months interest-free installments, which will also translate into a benefit over an underlying performance. Related to spare parts and repairment costs, despite the strong peso as well as an ease in supply chains constraints, we have not yet seen a full stabilization of our costs. We're undergoing an assessment to try to mitigate some of the increases, as well as to find efficiencies with suppliers. While we have early signs of progress, we recognize this is not gonna be immediate. In this quest, our vertical integration continues to become more relevant as we know we have relative advantages versus the balance of the market. That subsidiary grew 54% when excluding intercompany operations, and non-Quálitas customers now represents 25% and are growing above 50%. Another trend we've been carefully following is robbery and recovery.
Robberies increased 4% for Quálitas and the industry overall, but still 28% down versus same period 2019. Nevertheless, these quarter thefts represented 16% of Quálitas total claim cost, an increase of 2 percentile points versus same period year over. This increase was driven by the absolute car prices as the average cost of a robbed vehicle was up 35%. As new car sales availability keeps on improving, we could expect used cars prices to start decreasing as we are seeing in the U.S. and other markets. As per the recovery, Quálitas recovered 46% of its stolen units, which is 6 percentile points higher than the rest of the industry average. We're working towards increasing these recovery rates while reducing risk and frauds.
We continue to expect progress on claim costs during the next quarters and remain confident that the actions taken, coupled with an ease on inflation, will lead us to the expected inflection point towards the second half of the year. As shared previously, our expectation is that 2023 will still be above the 62%-65% range, but with improvements towards the end of the year, setting a base for 2024. Moving to other metrics, our quarterly acquisition ratios stood at 23.5%. Commissions paid to our agents and financial institutions remain unchanged. In addition, we're making sure our agents and brokers bonuses are aligned with our incentives, which includes not only premiums growth, but also claim costs ratios. Operating ratio for the quarter was 2.7%, in line with our expectations and historic average.
In this quarter, operating costs, we are including employee profit sharing as well as salary increases reflecting last year inflation and new labor regulation costs in Mexico related to vacations for employees. As a reference, we distributed 7% payroll increases based on performance, which recognize with double-digit growth those who outstand against KPIs. Meritocracy and variable compensations are two components in ensuring full alignment with company's objectives. Our employees are a key element of our organization, so we will make sure to attract, retain, and develop top talent and to continue aligning compensations to this purpose. All of the above resulted in a combined ratio of 95.7% for the quarter. In current worldwide cycle of the industry, posting a combined ratio below 100% reflects how Quálitas does not only outperform Mexican peers, but many other global players as well.
Now, on the financial side of the business, I'm happy to share that comprehensive financial income stood at MXN 990.81 million, meaning a 9.8% ROI. As a result of last year's strategy and actions, our portfolio is nicely positioned to benefit from the high interest rate cycle. Fixed income currently represents 91% of our portfolio, from which 57% is allocated in Mexican government bonds and the rest in local corporate bonds and liquid assets. Duration of our portfolio currently stands at 1.1 years. That compares with the 0.6 years by the end of last year.
This reflects the locking strategy we had anticipated and that we should expect to continue the next months as we will aim to position our portfolio on what are unseen rates in the past three decades. Yield to maturity stands at 9.8 by margins. Regarding our equity investments, they closed the quarter representing 9% of our portfolio, a low point in several years, but also consistent to shifting funds to the fixed income at a higher interest rates. During JFM, we took advantage of the Mexican stock market rally, and we sold some positions.
We expect once again to increase equity exposure during the balance of the year with an important strategic change decided by the investment committee, which is to move away from stock picking towards a more ETF-based strategy, in which we'll also have a higher exposure to U.S. stocks and stock market. This will be gradual and will transition in the next months, but that has already started. Bottom line, we closed the quarter with MXN 897 million net income, representing 7% of net margin and an increase of 22% versus first quarter of 2022. Tax rate for the quarter was 24% and more in line with our historic average.
In addition to what we previously shared, as part of our capital allocation strategy, we successfully concluded a majority share acquisition in a technology and software company based in the U.S. with operations in Mexico, Costa Rica, and Colombia. Valuation of the company is around $50 million. It has more than 50 years experience focusing on telemetry for fleets, data analysis, and business intelligence. The transaction pursues an increase of telematics in the individual units and by improving our data analysis, translating information into value creation actions and tangible results which, by which we will further increase Quálitas' value proposition.
Lastly, additional call on the proposal to be discussed in the next general assembly, a MXN 600 million new share buyback fund with the main objective of improving liquidity for all investors, highlighting that during the first quarter of this 2023, we traded above $7 million on average per day. This is a record high. We're not proposing any share cancellations for this year, as we're carefully assessing the use of Quálitas shares under treasure without affecting free float in the long run. All in, first quarter was in line with expectations with a strong start for Quálitas reaching record high number of insured units.
Although too early to tell, actions implemented and ease in external factors impacting the industry should allow us to reach a stabilization and then inflection point in our loss ratio for our recovering the underwriting performance of the business. Financial income will continue to pay out in the next quarters, boosting our total net results. All of Quálitas Leadership team is committed and working towards unlocking a better service standard, deepen our trusted relation with agents and clients, and to create stronger brand preference. We will seize opportunity to achieve growth expectations and to strengthen our business to transcending the industry with leadership position, delivering outstanding financial creation that creates significant long-term value for our stakeholders. With that said, more than happy to address your questions. Operator. Thank you.
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press the Raise Your Hand button located at the bottom of the screen. If you are connected via telephone, please dial star nine. We remind you that all lines have been placed on mute, so when it is your turn to ask a question, you will be given permission to speak and open your mic. You may also send it through the Q&A box, which we will be reading out loud. To withdraw your question, please press the button once again. We will pause for a moment as callers join the queue. Our first question comes from Ernesto Gabilondo. Please state your company name and then ask your question.
Hi, good morning, José Antonio , Bernardo, and Santiago. Congrats on your results and congrats, Bernardo, on your new position. I have three questions from my side. The first one is on premiums growth. We were positively surprised about the growth in the quarter. We saw an important expansion across all segments in the traditional one and in financial institutions. How do you see now competition? Are they finally increasing tariffs too? How should we think about the evolution per segment through the rest of the year? My second question is on your financial results. I think Quálitas today is well positioned to benefit from the high interest rate environment.
However, when looking to next year, that we can experience an easing cycle, how fast can you shift the position to benefit from lower rates? Do you think this takes like one quarter, two quarters? Any color on this would be very helpful. I don't know if I understood correctly. I think in part of your investments position, you were evaluating to do some investments in U.S. stocks. I don't know if you have any concerns, if at some point we have a U.S. recession. My last question will be on your ROE. It has been improving. How should we think about the ROE for the year, and how should we think about your sustainable ROE? Thank you.
Good morning, Ernesto. Thank you for being with us as in every call that we have with investors. Let me take the first one. I will let Bernardo to take the financial questions for you. Let me tell you that we are pleased with the results that we have in the top-line growth. Clearly, it was ahead of our expectations. There was a lot impact regarding the financial businesses. New car sales have also helped. Let me tell you that while we are pleased with that, we are also pleased with the fact that in the individual business, we are growing nicely. What can we expect for the total year?
It is gonna be a little bit, you know, kind of difficult to be at this stage, projecting a much higher growth for the year that we had anticipated in our previous call. What I can say is that if you remember, what we said is that we would be probably in the single-digit growth rate for the year, and probably in the double-digit, in the low end of the double-digit growth for the year. Clearly, these results make it more likely for us to be closer to the double-digit, and that's what we think probably is gonna happen, the low end of the double-digit growth for the year.
Please remember that we've had a big increases in the quarter, two and three or three and four last year in terms of premium, so the base will also change, you know. We expect that. Also we need to be cognizant that in sense of the economy in Mexico, there are still some headwinds on that one in the economy. You know that interest rates have increased loan costs for car loans, and around 70% of new car sales are done through a loan. There is the expectation that we have two forces at play here. One is the availability of inventories of cars, which is improving in the first months of the year. Still not out of the woods yet, but it is improving.
Certainly, the fact that this increases in loans will take a toll on the economy as we can see. That if you have certainly, I'm sure you read all the forecasts of the economy for the year, for the Mexican economy. It seems to me that it is too early to say that we are gonna be much higher than what we have said in the low end range of the double-digit growth. We are happy as we have a broad-based growth and we think that our business momentum is strong. I would also say that the increases in our tariffs, in our policies that we are taking to improve profitability will also have an impact in the growth.
All in all, we want to have a balanced growth, both as you know, top line and bottom line, which as was indicated during the remarks in the call, that we are well ahead of the top five on the market in profitability. When you sum up all these changes, in the end, we think that being in the low end, in the low part of the double-digits is fair to assume. That would be that. Bernardo Risoul, what do you have for this the other two questions?
Thank you, Ernesto. Let me address the financial piece with, and then the ROE. The financial portfolio, as I laid out, we're very pleased on how we manage it. Remember the duration back in the end of 2022 was 0.6 years, you know. We were waiting for the right moment to pull the trigger, and that happened during the first quarter. We moved from having 0.6 duration to 1.1 years, you know. By doing so, we locked important high nominal and real interest rates that I mentioned we hadn't seen in three decades, you know. We're pleased on how we're moving on that, and we will continue to increase the duration.
Remembering that we have a liability duration of one year, we have always tried to be within that range, you know, we are not speculating a lot. We will benefit from this high interest rate, and we have, in agreement with the investment committee, decided to extend our duration up to 18-20 months. We're on that path. We should expect to continue increasing quickly because the turning point of the interest rates is about to happen. Again, we should expect in the next quarter to reflect that increase in duration. Now, when relate to equities and our shift on strategy from moving from stock picking, mostly skewed to Mexican stock market, we have decided to move away from that strategy into more ETF-based, and within that, to increase exposure to the U.S. equity market.
This is a result of a lot of analysis and discussions in which we will seek a mid to long-term payout, but not a quarterly return. This, based on analysis, is a more cost-effective way to get exposure to a number of stocks with large capitalization. We will have higher liquidity, and we will also lock some exposure of currencies. We will do so in the next months. We have set a preliminary target of six to nine months, and we will revisit that. It's not that current exposure of 9% to equities will shift immediately, but you should expect, one, a higher increase of equity exposure in the next quarters, and by doing so, a higher exposure to the U.S. equities as well.
Now, before I reopen the question to you in case we are not fully answering it, let me touch on ROE. You know, ROE is a fundamental metric of this company. We always look at it. We always strive to be a company that delivers on the 20%-25% ROE target. We're not walking away from that 20%-25%. We acknowledge that current situation, our past, and the industry inflation will make it challenging to deliver on that target this year as well. We should be very close to it. You know, at this point, we're aiming to be in the 18%-19% ROE by year-end, which is very close to that 20% and significantly above peer group, you know.
Let's acknowledge on that target that the high capital base that we have, I'm placing the denominator, accounts for around three points of that. The excess capital accounts for three points of that. If we're delivering on the 18%-19% corridor, we would be structurally speaking in our long-term target of 20%-25%. Okay? With that said, let me make sure I we answered fully your question.
Thank you, Bernardo. A follow-up on the premiums growth, Joseph, you can break down how much was related to the increase in tariffs and if you already seen the competition increase in tariffs. A follow-up in the financial results. You mentioned a higher increase to equities exposure and especially more into ETFs. Again, if there is a concern from a potential U.S. recession, how are you expecting to manage that? Finally, on your ROE, so 18%-19% for this year, and do you continue to see on the long-term around 20%-25% ROE?
Yeah. Just let me take the ETFs, Ernesto, say that this is something that we receive for the long term. You are asking about the recession in the U.S. Clearly, there have been a lot of wide ranges about what to expect in the U.S. I guess the important thing for us to say is that in the ETFs, we want a long-term investment. We are not gonna do that in one shot or anything like that. Clearly, we know that this year is gonna be a complicated year for equities, and we are gonna be doing that. We think that to create value for our shareholders, the ETFs, if we do the right ones and we do it right, okay, we are gonna be creating more value for our shareholders longer term, you know.
Regarding premiums, I don't know if you wanna take it, Bernardo.
Yes. premiums growth was basically driven in 60% by the price increases we've taken and around 40% by the organic volume growth. You know, that's very close, you know. Related to competition, we are seeing the industry going up, you know. That happened since the beginning of the year. I think this is no surprise given the combined ratios that we saw from competition by the end of 2022. I think it's fair to say that the whole industry should continue to increase prices to offset the industry inflation, which last year was in the 10%-12% range. Thank you, Ernesto.
Perfect. ROE? Long- term ROE?
Long-term ROE, we're sticking to the 20%-25%.
Excellent. Thank you.
I think in the low 20s is more achievable. We're not walking away on that range.
Excellent. Thank you. Congrats on your results. Again, congrats, Bernardo, in your new position.
Awesome.
I think there are no any other raised hands, we will go with the written questions. I'll start with the first one from David Seaman. How large do you think your advantage is in claims cost versus the market, both in absolute terms and in terms of the year-on-year variation? Is your claims cost advantage widening in this inflationary environment?
I think scale plays a role if you know how to use it. You know? I think the biggest competitive advantage that we have in cost relates to our vertical integration. We believe on average that accounts for two to three points of competitive advantage. You know? It is hard to really nail it down to the cent. Let's just remind everyone that when it comes to pricing, when we call out prices, that refers to around 60% to 65% of our business. That is either on the traditional segment or financial institutions. Whereas fleets, they are priced based on historic average, based on the particularities of each account.
I think it's fair to say that on both, we have a competitive advantage on claim cost, and we use that to make sure that our value proposition continues to stand out. You know? I'm hoping that, David, answers your question.
David, let me add to what Bernardo just said, just to say that we continue working in projects that will provide an additional advantage in this area, in the loss ratio and in the average loss ratio. We have at least a couple of important projects that should help us to maintain this vertical integration that will allow us to keep and maintain this cost advantage at least in the foreseeable future.
Thank you. Our next question comes from Andrés Soto. Please state your company name and then ask your question.
Perfect. Good morning, José Antonio, Bernardo, and team. This is Andrés Soto from Santander. My first question is related to expenses. We saw a very good performance year-over-year at 7% decline, part of that driven by vertical subsidiaries. Even if we exclude the effect of vertical subsidiaries, we see positive expense trends. I would like to better understand that. In that context, I see that you are now guiding for a next operating ratio of 3%-4%. If I recall correctly, in the past, you called for a 5% operating ratio. Based on this, you know, I imagine this company can aspire to a higher ROE over the medium term as loss ratio normalizes.
You say you are not changing the range, the 20%-25% ROE range. I would like to understand if this increased efficiency is a reason to be more optimistic that you can reach the high end of this range or, on the contrary, this is an upsetting factor to potentially loss ratio being high for longer.
Andrés, good morning. Let me take the expense piece. You know. Yes, we're pleased with the operating expenses, and I think that continues to build on a competitive advantage on, versus our peers. You know. Very disciplined on making sure that we only expense what might make sense. Now, in addition to the vertical integrations, there is one other factor to consider which relates to premium underwriting fees. Every premium that we write, and that is true for the whole Mexican market, there is a premium charge, you know, a fee. The more vehicles we write, the more this fee translates into a benefit. It's actually an income in the operating line, you know. That is completely related to how many vehicles we're underwriting, you know.
That's kind of the tailwind that has helped specifically this quarter, and hopefully we continue to see that across the years, along the year. Also to consider that the underwriting expenses includes EPS, employee profit sharing, which is only true in Mexico and I believe Peru worldwide. This is an item that gets reflected on the operating line. We always set it apart because I think it's one line that we will always like to increase, because the more profitable we are, the more that we will increase the EPS line. You know? That was kind of the two major things to consider when looking at the operating expenses.
The only thing, the other additional thing that I would add, Andrés, to the operating expense for this year is that, as inflation continues to be relatively high, you know that we have our salary increases as we and as Bernardo, I think, indicated in his remarks, that will continue having an impact. You know? Yes, probably being around the 4%, the 4%, it would be, it would be about right. You have another question, right?
Yes. Thank you, José Antonio. No, before we go to the other question, I would like to ask again about the long-term profitability target vis-a-vis your lower operating ratio. My question was, is this a reason for us to believe that you can be at the high end of the ROE target? Basically what you are seeing now is that loss ratio is going to stay high for longer and the additional efficiency is just an upsetting factor to this?
Andrés, as much as I would like to say yes, you can expect a 25% plus ROE, no. I think just nailing that target is challenging, and managing the operating expenses within that range will be quite an uphill considering the inflation and the labor cost in Mexico. I think at this point, we will not aim to be higher than the rate I just pulled out and making sure that our operating expenses contributes to that. Even if we're at the lower end of our operating expenses, I don't think it's, at this point, would be a direct correlation to being above ROE.
The other thing, Andrés, is that at this point in time, we have not yet reached as an industry, as Quálitas in particular, the inflection point of the combined index or the loss ratio. As you can see, I mean, we have seen that there is a cycle in how it works for the total industry. How is the loss ratio and the combined ratio, and it moves in cycles about six to eight years, no? We are now, if we take 2009 as the base, probably we are now in the third cycle that we are beginning, and it continues to rise.
I can expect that the industry will continue to rise, the combined index and until the inflection point really takes hold, and we are working hard to make sure that in Quálitas, we continue to be profitable from an operating standpoint. We are not gonna be seeing a higher, and, you know, higher ROE, and the ranges that Bernardo mentioned seem to be adequate at this stage.
Understood. My second set of questions is regarding your M&A strategy. You mentioned this telematics acquisition. I would like to understand where in the P&L are we going to see the effect of this acquisition? Is it going to be on the loss ratio as you are going to improve recovery? Or is it as operating expenses as you are going to sell some of the services of this company to third parties?
Yes, Andres. What we're gonna see is two folds. First and most foremost, it should contribute to decreasing our loss ratio. You know, the more we can use and leverage telematics, as we've seen in other companies worldwide, the more we're gonna be able to prevent and eventually also price adequately to specific risks. Also, in the mid to long term, we're expecting this to contribute to the loss and claim ratio for the company. We will also should see a benefit on profitability as we consolidate what is already a profitable company, and we expect to even make it more profitable, more relevant. It's gonna be two folds.
One, at a parent level company by increasing profitability on the consolidation and, which by the way shouldn't be something that moves the needle radically, you know, but it's gonna be accretive. Secondly, and most important, as we seek for new ways to differentiate ourselves in a competitive, creating new competitive advantage in the claim cost. No one is doing so in Mexico, and we will be the leading company to do so.
Perfect. Thank you. Still on your M&A strategy. You had mentioned before you had two acquisitions on the pipeline. What is the remaining acquisition? When do you expect to have additional details on this one?
It's still on the final stages of the due diligence. We're feeling confident. You should hear more about it in the next earnings call. Hopefully, if things work out nicely, we will close it, and that will be something that expands our vertical integration strength. No? It's not something related to insurance, but rather, strengthening our vertical integration company.
Understood. Perfect. Thank you both for your responses.
Thank you. Our next question comes from Jitendra Singh from HSBC. You may now open your mic.
Hello? Hello.
We can hear you, Jitendra. Thank you.
Yes. My question is on Quálitas Salud. You expanded in health insurance business last year. I just want to understand how has been the progress so far, and when do you think it will become relevant for Quálitas earnings? Can you discuss about what are the targets there?
For your question, Jitendra, let me take the Quálitas Salud part. It's important to remind everyone that Quálitas Salud is a project that we undertake, and it's a line of business that we undertook as a means to see that in a really long-term scenario, in 10 -1 5 years, the auto business insurance probably is going to stall and probably even to reduce. We are betting on one of the big mega trends that are worldwide, which is the health area, and that we expect, you know, double-digit growth for many years. Having said that, since we do not have experience in Quálitas Salud, what we have said is that it's gonna take two to three years.
In the first two or three years, it's gonna be non-relevant. We are gonna be really learning. We are gonna be testing our products and testing our models to to serve our policyholders. At this stage, it is very early on. Remind you also that w e started only in Mexico City. I mean, we are not in full in the full country. We expect to expand this year to two or three regions additional and big cities, Guadalajara, Monterrey, et cetera, and doing that.
Since we are doing a very, as you know, low growth, and we are having a slow growth in that one, we do not expect that to be relevant this year or next. It's important also to note that in Quálitas what we want to do is to have excellent service and to provide the benefits for our policyholders. We are more focused in making sure that we have all the capabilities to do just that, and we are investing our nets on everything.
Once that's ready, then we are gonna be seeing the growth. We are very confident that we have a strong distribution network throughout the country, that once all the elements are fully fine-tuned, we are gonna be starting seeing the growth. That's what I would answer regarding Quálitas Salud , Jitendra .
Thank you.
Now I'll go with another written question from Tejkiran . What percentage of investment portfolio would be invested in U.S. ETF? Why have you decided to invest equivalent to individual stock picking only in U.S. and not global equity ETFs?
Good morning. I'll take that, Tejkiran . Let me just give you an overall picture. Equities is to a low point of 9% of our portfolio. That's quite low relative to where we want to be ongoing, which is in the 15%-20%. That's what we believe makes sense. Obviously, the current cycle of the economy and the high inflation rates that we're seeing in Mexico made us shift that to a low point. As we transition back to that 15%, 15%-20% corridor, I would say that up to 90% of our equity position will eventually be invested in U.S. equities, you know, in ETFs. We did measure or we did compare global equities versus U.S. equities.
If you look at 15, 20 years trace back, they do correlate, you know. The global equity index, the AQWI, is quite close to the U.S., you know. We believe given our exposure, given our interest, and given the historic performance, at this point it makes sense to be more in the U.S. equity ETFs. Obviously, these are ranges. These are ranges that are reassessed on a quarterly basis with the investment committee, and we should expect them to be dynamic.
You know, I think it's fair to say we're still dealing with a volatile economy, and we will adjust accordingly. So far, I think it has made sense the way we played it out, and we will yet to see how the equities evolve. This is not gonna be an immediate shift. This is gonna be a transition in the next, I would say six to 12 months.
Thank you. Tejkiran , we see that you actually have a raised hand. Do you have any follow-up questions you would like to ask on your mic? You may now.
Yes. Thank you. Thank you. Couple of questions. One is, in the opening remarks, there was a comment that we get a fee for underwriting policy anywhere in Mexico. This is an income. Is this fee for a specified period? I mean, are you expected to continually get this fee over the next five to 10 years, or is it just a current incentive by government or some agency? If you can give us more sense of this fee that you spoke about, which lowers our overall cost of operations.
No, it is not a one-time one. It is every time we issue a policy, that's the fee that we charge. Clearly, that's something that actually helps our expenses. That's something that we have been doing for many years as a practice in the industry. You know? This is not a one time for sure. It is an ongoing practice for every policy that we issue and that we subscribe, and that's the way it works.
Okay. Can you give us a sense of, as a percentage of premium, what, how much is this policy fee?
Not sure if you address, if you want a specific number because it is not a percentage of the premium value. It's a fixed cost depending on the channel. You know? This is a fixed amount independently if you're insuring a vehicle for $200 or for $2,000. You know, it would be the same amount.
Okay. What is this fixed amount per policy?
I know, but let me say in the individual segment, it's close to...
$25.
Yeah. $20-$25.
Okay. Okay. Do we get this fee for each policy or is it only selected class of vehicles or selected channels, whether it's financial channel or agent channel? Is there any distinction?
Yeah. Oh, is it? This is by policy, as you said, across all segments. We can explain a little bit more on that specifically because as José Antonio alluded, it is an industry practice. It has always been there. The only thing that stands out is the important increase on units translated into a higher number of this increase. Also, just gonna we count, Tejkiran , we can follow up on that separately and expand as much as we can.
Sure. Sure. Second question was from the comment you made that recovery-wise, in the lost vehicle segments, our recovery rate is 6% better than the industry. Can you tell us how much our loss ratio is better due to that 6% better recovery? In terms of loss ratio, what percentage point advantage do we get?
I don't have the exact number. It certainly contributes to being better than the industry. I think if you look at last year's numbers, one of the things that stands out is the delta on claims and operating expenses. These matters contribute. We can run that math, and the team can get back to this question to you.
Got it. Thanks. Thanks for the opportunity.
Thank you. Thank you, Tejkiran. We will now go with the final written question, the last one, that comes from Carlos Gomez-Lopez from HSBC. In the long run, do you have a target as to what percentage of your business you would like to have outside Mexico? Is there a budget for your expansion abroad? Well, that's an interesting question, and I'm gonna let Bernardo to answer it. We have done this for five years, and we should, at some point in time, our outside business should be around, I don't know, probably 30%. Actually, it's not necessarily outside of Mexico, but it is a combination of Mexico and the vertical subsidiaries. You know, 70/30. 70 Mexico, 30% outside. In five years it would be something that we could consider on that regard. Bernardo.
No, I think that's completely in line with what we have been saying. The one piece that I would add, because a few of you have asked, what's our appetite to further accelerate or to enter new markets. I would say at this point, we want to make sure we turn around the U.S., we capitalize the potential of the markets that we're already playing, and we enter Colombia. Other from that, and at least in the next three to five years, we're not and we should not expect new market entries. No.
Carlos, we can see that you have your hand up. Do you have a follow-up on that, or have we answered your question today?
You have answered my question. Thank you very much for your help.
Perfect. That concludes today's call. Thank you all for participating, and have a great day.