Thank you for standing by. This is the conference operator. Good morning, and welcome to Quálitas' fourth quarter and full year 2022 earnings results webcast. The conference will now begin. It is my pleasure to turn the call over to Mr. Santiago Monroy, Quálitas' IRO. Please go ahead.
Thank you. Good morning, thank you for joining Quálitas' fourth quarter and full year 2022 earnings call. I'm Santiago Monroy, Quálitas IRO. Joining us today are our CEO, José Antonio Correa, and our CFO and International CEO, Bernardo Risoul. As a reminder, information discussed on today's call may include forward-looking statements regarding Quálitas results and prospects, which are subject to risk and uncertainty. Actual results may differ materially from what is discussed here today, the company cautions you not to place undue reliance on these forward-looking statements. Quálitas undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events, or otherwise. Let's turn it over to José Antonio, our CEO, for his remarks.
Thank you, Santiago. Good morning, everyone. Great to be with you all again, wishing you all the best for you and your families during this year. 2022 was a year of major challenges across most industries worldwide. We witnessed inflation levels unseen in decades, supply chains restrictions, geopolitical tension, financial markets corrections combined with hawkish monetary policies. Above all, we all have experienced a new normality after coming out of two years of pandemic. In the auto insurance industry, particularly in Mexico, we face, in addition, new mobility trends with changes in driving and consumption behaviors, supply chain constraints on both, new cars and spare parts technology and digitization disruptions, hybrid and electric vehicles' accelerated growth, among many others. Every year has its challenges and particularities, I must say this one was quite unique. In Quálitas, we embrace change.
We acknowledge that challenging circumstances are always an opportunity to learn and keep on growing. Auto insurance is a cyclical business. In 2022, we anticipated the cycle, taking actions early while staying agile to adjust and take advantage of the opportunities. Throughout 2022, we executed on our strategy, which enabled us to strengthen our market-leading position. Despite we will never be fully satisfied, and we will never stand still, there are many reasons to be proud of. Let me say a few of them. The number of Quálitas insured units reached a record high, ending the year at 4.8 billion, which represents more than 303,000 units during the full year. Top-line for the year came above expectations, growing 10% during 2022.
It was been reassuring that sequential growth in every single quarter for the year showed improvement, with the fourth quarter being the best in several years. Growth was driven by our unique business, where we continue highlighting our closeness and relationship with our agents, reaching 20,000 agents, up 77%, and our unique commercial footprint reaching 551 offices, representing 29 offices during the year. Quálitas Development Offices, those that reach 100,000 people localities, continue to be an engine of growth. Written premiums coming from our, what we call our ODQs, have shown a 13.5% compound annual growth rate in the past five years. If they were a standalone insurance company in Mexico, they would take the position number 14 in the insurance industry. Also, profit continues to be challenging as the combined ratio continues to increase.
Important to note, we continue to outperform our competitors by being the only one of the top five with combining below 100 in Mexico and better than many global peers. Our vertical integration continues to expand, and by doing so, strengthening competitive advantages, including cost and service. We are pleased on how our verticals this year is serving customers, consolidating themselves as an engine of profitable growth. Our digital diversification journey took important steps. 1st, geographically, where we continue to consolidate our specialized model in other countries, replicating what has made us the best auto insurance company in Mexico. Operations outside Mexico are still young, and while there are still adjustments to be made, especially in the U.S., we are encouraged by the confirmed potential.
Many opportunities have been identified in our U.S. business, we are in the midst of addressing them, as Bernardo will elaborate later on. Our expansion into health. Quálitas Salud launch sets a cornerstone becoming our first entry in non-related auto business. Health is the sector with the largest growth and potential for prevention, our excellence in service, coupled with the value proposition, will seek to satisfy an unmet need of the 90% of the Mexican population without private insurance. A reminder, we decided to enter organically to learn and adjust our model. We expect Quálitas Salud to start being relevant in three to five years and an important part of our business in 10 years. 2022 was also key year for our commitment to sustainability. As part of our ESG efforts, we've committed to a net zero emissions scheme over to 2050.
2050. That will be reached through currently analyzed measures and processes that will compose our corporate carbon portfolio. These are just some highlights. We continue to set the foundations for a bright future ending in 2023 with strong momentum and initiatives. Moving forward, we will continue executing on our three-pillar strategy. We will first continue strengthening our leadership in the Mexican insurance market. 2nd, prioritize our profitability in our international operations for them to be at and around 20% objective. 3rd, execute our corporate development plan using our strong capital position, diversification, and the right digital growth within the insurance ecosystem will be crucial for the success and big piece of our results. I want to make something very clear.
We acknowledge our competitive advantages and what has led us to be the best auto insurance company, and we humbly recognize that we have opportunities. Therefore, we have identified actions to further strengthen our operation, not only in Mexico, but in the rest of the countries in which we operate. All management are focusing 2023 game plan, along with the defined key KPIs. We're also working hard on our organization, especially on the development of our top employees, which will continue our most important asset. With that, let's move to the financial details and a deeper dive on the quarter and year results. Bernardo, could you please?
Good morning, everyone. As José Antonio mentioned, Quálitas has navigated a defiant year, coming out stronger by staying true to our core competitive strengths and our service commitment to policyholders and agents. We are, however, conscious that near term will not be easy as we continue to manage inflation and focus on fixing some identified opportunities. Going deep into our financials. Top line growth ahead of expectations of 17% for the quarter and 10% for the year, setting a record high. Excluding the pandemic, the highest quarterly growth in six years. When digesting growth, strong performance was seen across all Mexico sub-segments and international markets, except for the U.S., in which I will shortly expand. Important to note, around half of the growth is explained by tariff increases during last year, while the rest is organic, coming from incremental volume and mix.
Worth to highlight is our traditional segment of 18% for the year and a consistent driver of growth with a compounded annual growth rate of 7.5% over the past five years. As a reminder, new car sales are the biggest source of growth for the insurance industry and posted a 7% recovery versus 2021, but it is still 18% below 2019. The performance drove our financial institution segment up 23% in the quarter, confirming signs of recovery, but still only 2% up for the year. Our portfolio composition closed with 78% annual policies and the remaining 22% in multi-annual. For 2023, as new car sales continue to recover, we may see an increase in multi-annual policies.
Earned premium is up 17% and 11% for the quarter and the full year respectively, reflecting the company's underwriting growth rates. Reserve behavior came in line with what we have seen historically, where in the fourth quarter, we have higher reserves constitution to set the top volume, top line, volume, and mix of business. This quarter, we constituted MXN 1.6 billion of reserves, which is basically the same amount constituted in the year. Going into our international operation, we closed the year with them representing 8% for the total holding company underwriting. Let me break international into Latam and U.S., providing more visibility from now on. On the former, El Salvador, Costa Rica, Peru are doing well. We have steady growth above 20%. They're profitable and aligned and already yielding ROE in the high single digits and improving.
On the other hand, our U.S. operation has been facing challenges that, as mentioned in prior calls, have resulted in the decision to shift strategy, where we will no longer focus on accelerated growth, but rather on profitability. Since I am already on it, let me expand on our U.S. business that had large impact on this fourth quarter and in the total year results. Fixing our U.S. operations has now become a top priority for the company. As background, we launched this business back in 2014 to satisfy the unmet need of Mexican customers needing coverage in the U.S. border states and vice versa. Due to demand and opportunity, it started expanding into the Mexico market as well.
Over the past quarters, given long-tail litigation process and legal particularities, mainly in Texas, we have been impacted by some older claims up to six years that have closed at a much higher cost than initially reserved. This also forced us to relook at all historic claims reserves, adjusting them to the upside. This quarter, as anticipated, we finalized the actuarial assessment in partnership with an external firm, which confirmed the need to increase reserves. Specifically, the IBNR, which stands for Incurred But Not Reported. To comply with regulatory requirements. Total amount was $22 million during these four quarters, impacting loss cost and consequently, a direct hit to profits. Important to note, this is not yet an expense or an outflow on cash.
The amount will continue to be part of our portfolio. Hopefully we can release back some of the some of those funds as we continue to see the business turning around. We know there's a large market potential in the U.S. Incentives for near-shoring in Mexico are high for companies serving the U.S. market, and being the one insurance company that can provide unique service on both sides of the border is a competitive advantage we want to continue exploring. Our revised strategy considers four main changes. 1st and foremost, a major refocus on the cross-border business, while importantly reducing appetite for domestic trucking, where legal environment is complex, has been the largest impact for us and for the industry overall. 2nd, we have strengthened our organization. We have a new CEO in place and a stronger claim and internal actuarial team.
3rd, we have and will continue to adjust tariffs. Some businesses are up more than 50% versus 2021, and more than 150 versus pre-pandemic levels. We have also reengineered our claim processes, which will now include mandatory use of telematics, selective law firms, and specific KPIs. While it has been a negative year for the U.S. subsidiary, we reiterate there is potential and therefore we have made this a priority. Considering the nature of our business, we believe this is a two-year turnaround, which should post a significant improvement in 2023 as several of the above-mentioned changes are already in place.
Moving back to Quálitas Controladora performance and costs, starting with the most important one, our loss cost and ratio continues on the expected trend, given the business side, the effect of the mentioned industry inflation, mobility trends, and supply chain constraints. Loss ratio for the quarter was 76% and 20.5% for the full year. An important but expected increase versus year-over-year and above our desired technical objective of 62%-65%. For further reference, our loss ratio performance in the Mexican subsidiary stood at 70.5% for the quarter and 68.5% for the full year. To cope with cost increases trend, we have and will continue to be disciplined on both tariff increases and cost control. On the former, we have leveraged specialization to make bigger adjustments where needed every four months.
We have increased our tariffs 14% on average since its lowest point in 2020, recognizing important differences by business. We will continue adjusting, next one's happening in this first quarter, as we rather maintain smaller and constant increases than big, steep changes. Supporting our cost discipline, we continue relying on our vertically integrated structure to have advantages on spare parts and claim payments, which are part of our material damages and make up for 55% of our pay. We're also improving specialization on claims with a full and comprehensive scan of condition and professionally trained team and computerized diagnosis procedures to prevent fraud and to support our service for customers. In addition to our risk and fraud prevention, technology plays a key role in our operations.
Example of it is our already known express adjustment tool, representing better service, multi-codes at a lower cost since remote or desk claim officers has a three-to-one productivity versus a traditional claim officer. During the entire year, 25% of our claims were attended through these tools. Finally, as shown in the past year, a stable and resilient Mexico peso should also help our operation through this economic cycle. Moving to other add metrics, our quarterly and full year acquisition ratios stood at 22% and 23% respectively, in line with historic average. Commissions paid to agents remained unchanged. Bonuses are always aligned with the growth, health, and profitability levels of their portfolios. Operating ratio for the quarter was 0.8%, benefited by the strong underwriting performance, which represented higher income from underwriting fees as well as adjustment from some provisions.
Year-end ratio stood at 3.1%. In a high inflation environment, it is also important to address productivity. Our recent premium versus operational staff ratio increased 7.6% versus 2021, becoming our highest ever. Organization and payroll will grow accordingly to costs without leaving the high excellence service. Quálitas has always strived to align compensation to productivity. All of the above resulting in a combined ratio of 98.5% for the quarter, ending the year at 96.4%, being north of our 90%-94% range. In a year where global auto insurance players in the U.S., Europe, and Mexico are posting combining the well above 100%, we're proud of our ability to create value and being true to our commitment to stay profitable at an operational level, even in a deep seated complex.
Moving forward to our financial performance, we delivered MXN 794 million. Sorry, during the quarter for a cumulative financial income of MXN 1,426 million, implying a 3.1% annual ROI. As anticipated, we're starting to turn the quarter on what was an suboptimal performance of our portfolio up through the third quarter. We are very well-positioned to benefit from high interest rate environments, especially in Mexico, which currently stands at 10.5%. For reference, our ROI for the quarter was 7.7%. It was a tough year for the markets, and our annual performance reflects that. Have adjusted, we expect financial income to play a key positive role in the next years, and it will certainly be a tailwind in 2023 as we continue to navigate the inflationary environment.
Let me further give you some color on our portfolio specifics and why we're so confident in the future performance. We have 89% on fixed income and 11% in equity. This overexposure to fixed income seeks to benefit from the mentioned high interest rates, especially considering the duration of our portfolio, which now stands at 0.6 years. A great place to be, we'll start taking longer-term positions. Important to note, by December 31st, yield to maturity of our entire portfolio, including geographical distribution, stands at 8.5%, 350 basis points above year-end 2021. On the equity side, despite tough performance, we have kept most of our positions as we believe their fundamentals pose them for recovery. We have not increased exposure, nor plan to do so aggressively in the next months.
Quálitas posted MXN 607 million net income for the quarter, MXN 2,209 million for the year, representing a 5.3% net margin. Tax rate was beneficial, especially in the fourth quarter and full year as well, due to the reported loss in our U.S. subsidiary and our equity position, as well as the annual inflation adjustment. Moving forward, we could expect tax rate to be much closer to our historical average of 30%. Regarding our financial ratio, our 12-month ROE stood at 11.1%, reflecting the impact in our performance, but also our strong capital position. Price to book value stands at 1.7. Just as a reference, if we were to exclude one-timers, ROI would have been around 16%.
We close the year with a higher-than-expected top-line growth and a great momentum. We delivered positive operational profit that outstands in the industry and an investment portfolio that while under delivery in 2022, is well poised for the future. All this confirms Quálitas' resilience and efficient adapting capacity. With that said, let me now shift gears and talk about 2023, a year in which we expect to keep navigating complex dynamics. As anticipated by José Antonio, we will continue executing against our three-pillar strategy, and all actions will intend to deliver sustainable value creation to stakeholders. Considering the uncertainties and variables, we believe best not to share a quantitative detailed guidance, but rather give you some color on expectations for this new year. Starting with the top line, we will aim high single to low double-digit growth and a recovery in new car sales.
We expect pricing competition to continue, we will continue to adjust tariffs, ensuring our value equation supported by excellence in service remains unmatched. In line with strategy, top line will be led by LatAm markets, including Mexico, as they continue with a consistent growth pace, while the U.S. is expected to decline. Moving to our loss ratio, as inflation continues to pressure costs, we first need to see industry inflation stabilize. Spare part supply and industry evolution on robberies will be important factors. Robberies for Quálitas continue to be 21% below 2019 levels. At this point, our base assumption would lead to another year above our long-term target of 62%-65%, with this equation progress along the year and a better performance than this 2022.
As we continue to experience improvement in financial institutions' underwriting, acquisition costs should increase accordingly on the high end of our historical range, given they imply a higher acquisition cost. As mentioned, financial performance for the year should have a significant recovery, mainly driven by the rate environment. We should expect an annual 20 ROI to be in line or slightly ahead to average reference rates. All in all, 2023 will bring a significant recovery, returning to steady growth top and bottom line, with an ROE much closer to our long-term objective of 20%. As we start 2023, let me also give you some perspective on capital allocation. At the end of the year, regulatory capital for the holding company stood at MXN 4,040 million, with a solvency margin of MXN 14 billion, equivalent to 446% solvency ratio.
We're also incorporating another metric for capital, broadly used in the industry, which relates to the earned premiums divided by equity ratio. Currently, it stands at 2.05 versus what we consider a normal ratio of 3. Either way we look at it, our discipline and performance allow us to be in a strong capital position, ready for future projects of growth while providing value to shareholders. As José Antonio Correa mentioned, we have a defined corporate strategy, a clear path from which we, from a sustainable growth where the current company will come from. All of them within the insurance ecosystem and where there is an opportunity to replicate our unique business model and create value. As anticipated in our last earnings call, we currently have two open due diligence process.
One to strengthen our data analysis and our risk and fraud prevention competitive advantage in Mexico, and another to strengthen our vertical integration of operation. If both projects are approved according to Quálitas terms and conditions, first half of 2023 would be a conclusive date for them. Both M&As will represent no more than $50 million combined, and in both of them, we truly believe that our DNA and business model will provide significant upside. Additionally, and related to our geographical expansion, have their eyes on the fourth largest economy in Latin, with 51 million people and vehicle fleet of around 70 million units. I'm talking about Colombia, a country without any specialized automobile insurance company and neither a risk prevention-focused one.
The size of the market and insurance penetration of only 40%, including the obligatory insurance, would enable to replicate Quálitas business model and closes with future agents in that country. As always, we're planning for an organic entry in a slow and gradual pace. We're starting the approval and legal process with the local authorities, and we would like to start operations by the end of this year. Although we will provide more details, we have more perspective given some items are outside our control. Finally, we have consistently, we have proved that we have a consistent policy and appetite for cash dividend payment, as we have done so over the past seven years. We will continue to comply with our revised dividend policy that establishes a dividend payment between 40% and 90% of the previous year's net profit.
Although it's still early and to say, and there's a process to follow, we expect to be on the high end of stated range. On top of that, we have an active share buyback fund with the main objective on improving liquidity. As of December 2022, we have kept position 16 in the Mexican marketability index, trading above $5 million on average per day. It's a record high and well above other relevant public companies in Mexico. By year-end, we have 6 million shares in treasury, so we will assess the application of another share cancellation to create value without affecting the long-term fleet. Quálitas continues to provide best-in-class service to our policyholders and agents and a solid performance in a dynamic environment.
Positive outcome of 22 is backed by the dedication, professionalism, and hard work of Quálitas' more than 5,000 employees, as well as the seniority of our board of directors and experienced management team. Quálitas people continue to lead the way. Our well-defined 2023 game plan to robust top and bottom-line growth reaffirms our commitment to create and increase long-term value for all stakeholders. I am confident and excited for the future ahead. With that said, I will be more than happy to address your questions. Operator, can you please open the line for Q&A?
Thank you. We will begin the question-and-answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. Our first question comes from Ernesto Gabilondo of Bank of America. Please go ahead.
Hi, good morning, José Antonio, Bernardo, and Santiago. Thank you for the opportunity to take questions. My first question is on premiums growth. I would appreciate if you can elaborate what will be the expectations per segment, how much growth do you expect in the traditional business, in financial institutions? What will be the growth in each of the subsidiaries? You mentioned that probably U.S. could be contracting, but what about Mexico, Central America, Peru, and potentially Colombia? Also, how should we think about the growth of the medical product? Well related to the same topic, how much do you expect subsidiaries and the medical products to represent of total premiums in 2023? A lot of questions, better related into my first one.
The second one is on your claims cost ratio. I don't know if you can break down the ratio on how much is related to weather impact, how much is related to inflation, how much related to FX, and how much to accidents? When do you think that the claims ratio could be normalizing to the historical average of 62%-65%? My last question is in the respected ROE for this year, I don't know if it would be reasonable to expect a 90% dividend payout ratio this year, a solvency ratio of 400%. I don't know if that sits at 18% ROE. Just wanted to hear if that sounds reasonable? Thank you.
Good morning. Good morning, Ernesto. Glad that you joined us for this morning's session.
Well, let me take the first one. Let me try to see. No, we usually are not, we do not show too much detail on premium growth going forward. Having said that, let me tell you that my view is that it will depend a lot on how the economy goes too, you know? Because as you know, the expectation for... in our biggest business, which is in one, the GDP growth is expected to cool off a little bit to around 1%. Now, the next thing is that in the insurance businesses are a bit countercyclical, and that should be helping us.
To give you an answer on this sort of question that you have, I think that we are having a good day because we have been very disciplined to increase our tariffs according to the cost that we have been seeing, the inflation that we have seen in spare parts, et cetera. No? I can say that I expect that we have some I should say tail, headwind, tailwind in helping us be in the high single digits growth. It is not unlikely that we will see around 10%, sorry, about in terms of growth.
I am very pleased, I was discussing this with my team earlier this week, in terms of how we have seen the behavior for the quarters, for each of the out of the four quarters that we had in 2022, and have the strong momentum. I see that there is a likelihood, a strong likelihood that we will be double digits in that one in the terms of the Mexican subsidiary. Fortunately, in the LatAm, we are also double digits. I mean, we have a very good result for 2022. This has been something that we, as we discussed with our teams in LatAm, that continues to be the case for 2023.
Now, if we move to the U.S. subsidiary, as Bernardo indicated during his words to the analysts, what we have seen in the U.S. is that we are reshaping strategy, making sure that we go back to basics and go back to where we started. We see that we are not envisioning growth in the U.S. Rather, the U.S. we want really to improve profitability big way and go back to the core products that we believe are the right thing to do and that will help us get back on track in that region.
Overall, I would say that our premium growth, I think it's gonna be, we have a good chance that ABA could improve both in our major markets in Mexico and also in Latin America. As it relates to by business line, it is kind of difficult, but we still need to see how the insurance, I mean, sorry, the auto insurance, the auto business are gonna go, the new auto sales will be. I've been talking to some of the largest manufacturers in Mexico, and they are all a little bit optimistic on that one. We should be seeing the middle single digits growth in the industry. There are some that are even anticipate closer to 8% to 10%. That, it will depend on that.
We will be focusing a lot on the one that we really want. We will continue focusing on the fleet. Fleet is gonna be a little bit more complicated because there has been some big competitive pressure in there. I believe that our competitors are gonna be getting now, we are gonna be getting the impact of having low rates in the fleet segment. Now, and the individual one, this will perform well, and we will see that double-digit growth in there. That will give you somewhat of the color I expect for the premium growth going forward. Bernardo, do you want to-
Let me, Ernesto Gabilondo, good morning. Let me address your second and third question. First on claim costs. As we discussed today, loss ratio is the biggest concern at this point. Why is that? The auto industry. Most of the cost increases come from the auto spare parts. We've seen them increase 10%, so that's a couple above inflation this year. We're expecting to, we're starting to see some signs of stabilization. So we're hoping that peaks somewhere in the first half. Related to frequency, because you well mentioned there's two elements. You know, you can have the cost increases, but you can also have a frequency increase. We did see frequency going up. Frequency was 26.1% this year. That compares to 24% last.
There are indeed no, not only more expensive claims, but also more claims for sets of vehicles out there. Traffic is certainly higher as we see the opening of business and schools and vacations. And we're hoping that frequency remains stable in the future. Biggest challenge for frequency remains some trucks, which are heavier accidents, more expensive accidents. And that's where our prevention program comes into play, and we're expecting that to help stabilize. There are no FX impact this year. No, we've seen unfortunately, there's no benefit. Even if we saw the peso appreciate it, we're not seeing prices going down in that timeline, no. At least that hasn't been. We're not expecting that to become an impact in the next.
Just to wrap up the second question, when are we expecting to be back in the 62%-65% range? It's unlikely it's gonna be in 2023. We are expecting to be slightly above, certainly below in, than in 2022. The most important piece would be how we close the 2023 year. Q4 of 2023, that's where we're expecting to stabilize the business, and we see it closer to that 65%, which will give us a good indicator on 2024. In that regard, and my final comment would be, we're expecting that Q1 and Q2 will still be challenging from a claims standpoint. We're expecting that first half to be the peak of claim costs.
Moving to the third question on dividend yield, let me just reiterate, want to confirm and reiterate our commitment to pay dividends. We've done so for the past years, and we'd like our shareholders to continue getting that dividend. I think it would be fair to expect dividend on the high end of that 40%-90% range. I wouldn't commit to a 90%, but it's always an option, you know. I think we'll have more as we approach the general assembly, which is the official time which we'll decree dividends.
Perfect. Thank you very much, José Antonio, Bernardo. Just a follow-up in the last point. And anything related to the solvency ratio, would it be reasonable to have a level of 400% in 2023?
We do not have a target of solvency ratio. We do so for the insurance, each of the insurance company. We always want to make sure Quálitas stands out as a company that is solvent. The excess capital will remain at the controladora level. On that, we will be funding and fueling the growth in line with our strategy and the projects that we laid out. We do not have, at this point, any indications for a extraordinary dividend payment. As we said, no, that's always something that we have in the table. Once we lock a structure plan for ongoing growth, we can always put that again for discussion with both the board and the general assembly.
Perfect. Thank you very much. Just on Colombia, I know that you are entering the business and likely to initiate operation by the end of the year. Any color on how much did it take to enter that country? Because I think the first time that you were had to mention this. Any color on that would be very helpful.
Yeah. We wanted to start giving more transparency on Colombia, the one market and only market where we're looking for geographic expansion. The size of Colombia, the conversations that we have with agents there have indicated that there is a space for a company with Quálitas DNA to come and create value. We're not banking for any growth happening in 2023, although we're aiming to issue our first policy late in the year. Regarding capital, we believe we have somewhere in the $5 million-$10 million, that would include the capital that we are required to have as part of the consolidation of the insurance company.
Let me tell you just a little bit on the Colombian part, too, Ernesto. You know, after all you know about the market in Colombia, it is similar in Mexico in terms of that the top five companies hold almost 70% of the insurance market, no? It is important for us to know that we have some risk management practices in Mexico that we haven't seen in Colombia, and we have some advantages that we believe we can put in there. That's why we are targeting that market. Well, the numbers that Bernardo said in terms of the capital, you already heard it, mm-hmm.
Perfect. Thank you very much again.
Our next question comes from Juan Ponce of Bradesco. Please go ahead.
Hi. Good morning, everyone. Thank you for taking my question. My question is more on the labor cost side, especially in Mexico, given the impact on minimum wage hikes, 20% this year, more vacation days, and the gradual increase of employer pension contributions. What are your expectations on these pressures this year? I mean, you mentioned in your initial remarks that you will be increasing prices, but do you think this will be enough to offset this part, or is this just to catch up with the higher costs on the auto parts side? Thanks.
Excuse me, Juan. Can you please ask just the second part of your question to be clear?
Yeah. The second part would be, how will you be able to mitigate these cost pressures if you see any?
Let me take just some of it. Clearly inflation is a hot topic, I would say, you know, because I personally, I've lived through high inflation periods in Mexico, and I know that one inflation strike is difficult to absorb. That's something that is of some concern clearly for me. In terms of generally speaking, for insurance companies, as long as rates are high as we have in Mexico, that is not that bad now. Going back to your question in terms of patients and salary, you know, minimum wage increases, et cetera, clearly we have a general impact on inflation. In the specific case of Quálitas, what I can say is that our operating costs are very well under control. We have the lowest as percent of premiums in of the industry.
I do expect them to have some impact. We are factoring that in our calculation 24 months. It will be of some impact, but not very major. We are considering in the impact. I don't know if Bernardo, you have anything to say about that.
No. Only that, on year one, we never rely only on pricing to adjust for or compensate for cost increases. We always look at productivity, we look at automatization. Things that will help us compensate. It is not a straightforward link between cost increases and inflation with tariff increases.
Let me add just to that we have a significant investment in systems, we have done over the past years, and 2023 will be no different. A number of those things are gonna be geared to productivity improvements as well.
Okay. It's safe to say that there is basically no. Not much of an impact from these labor cost pressures in 2023.
Yes, that would be fair to say that even with those impacts, we will re-keep with an operating target between 3% and 4%.
Perfect. Thank you so much.
Our next question comes from Gilberto García of Barclays. Please go ahead.
Hi, good morning. Thank you for the call. I had a couple of specific questions and then a more general one. Firstly, on the financial income, did you recognize any impact from your Unifin stake in the fourth quarter? Can you provide the current book value that you carry on that?
Hi, Gil. Good morning. Most of the Unifin impact was already reflected on Q3. Actually, I doubt there is any impact on anything since the equity has been on hold. That was something that we discussed at length on Q3. What we still have remains mostly on the P&L, you know, which is around MXN 35 million valuation. We still have, like, MXN 90 million at the balance sheet, you know, the way they're structured. At this point, if it were to go to zero, the value, the impact would be around MXN 120 million. On the other side, we believe there's still upside and recovery. We're not banking on that.
Our financial income does not consider it, but I think there's still a dialogue that could put Unifin back on the table, and hopefully, that could be a nicer price on 2023.
Okay. That's very clear. Thank you. Then second on operating costs. They have been rather stable throughout the year at around MXN 400 million per quarter. This quarter, it was substantially lower, similar to the fourth quarter of last year or 2021 rather. You know, we don't really see that seasonality in previous years. You mentioned that there were some provision releases that helped that line this quarter. I guess what should be the... I guess, and you mentioned 3%-4% in the previous question, is that the run rate? I guess what I'm trying to ask is the extent of the one-off that benefited the operating expenses line this quarter.
Gil, let me just provide. On the fourth quarter, we usually do see a lower operating cost. If you look at last year, it was 0.9%. This year is 0.8%. There's one main factor that benefits the operating cost, which relates to premium writes. Every premium we write, there's an extra charge that is intended at that market practice that is intended to cover part of the cost. As we see more number of premiums being written, we will see a higher benefit, and it reflects on the operating expenses. That's one of the things that benefits on, especially on fourth quarter, that we have a higher number of premiums. Also, those are the seasonality. The other thing, the ongoing range, it is 3%-4%.
We were at 3.1%. That's on the low end of that range. A lot of that has to do with the participation or employee profit sharing. For regulatory reasons, we reflect that expense not on taxes, but a part of the cost. This year, we adjusted because we recognized that it wasn't gonna be as high, that's just a percentage of the projections. That was the adjustment that we did. There's also some minor reserves related to compensation. As the year did not turn out to be as good as we all had hoped for, we also adjusted, and that adjustment always happened on the fourth quarter.
Just let me add on that, Gilberto, and I'm glad that you are with us today. Let me tell you that, obviously, as we expect, our profit to pick up in 2023, obviously we will be seeing part of the,
No.
The share, apart of that would increase and probably move it closer to 3.5 or 3.5 or 4. We are also get the benefit of the improvement that we see in the premiums, in the premiums that we will be running in 2023. We are confident that we will remain within those, ranges that Bernardo mentioned.
Okay. Very clear. Thank you. A final one, on the increase in the frequency. I don't know if you could provide more color on what the, you know, potential reasons for that is, you know, in addition, obviously, to there being more traffic. I guess the question is this increase in frequency structural or more temporary in your view at this point? Thank you.
No, that's something that is happening, Gilberto. Obviously there has been an increase in frequency versus 2021 and 2020. However, the frequency that we have goes back to the frequencies that we have seen in past in 2018 and 2019. There's no worry in that part, and it's more of the sustainable level of the frequency. The change versus the 2021 is something that obviously goes back to explaining the results.
Okay. Thank you very much again.
Our next question comes from Andres Soto of Santander. Please go ahead.
Good morning, José Antonio, Bernardo, and team. Thank you for the presentations, and congratulations on the recovery this quarter. I have a few questions. The first is related to the U.S. operations. I would like to understand at this point, how much of that is onshore business versus the cross-border business, and to what extent we can expect additional reserves being created this year? If you are planning to reflect those reserves directly as loss ratio as it happened in the fourth quarter, or is part of the reserves in the top line, and this is going to be another detractor from your top line improvement this year.
Andre, good morning. Let me take that first question, and then we'll go on with any remaining ones that you have. The U.S. operation, tough year for it. Yet overall, we lost $35 million in the year. Part of that comes from the mentioned IBNR increase of $22 million this quarter. A lot of the impact, both in PNR and case cost, would come from claims that trace back to prior years. You know, 2021 and before even to 2016. This is not a one-year effect. We're reflecting it, but it comes from the operation that has been in place for several years. The domestic market, which is the one that we started accelerating back four years ago, came up to represent 70% of the operation.
We're now pulling back with that. It represents around 30%-35% in very niche categories or accounts customers that have been consistently proving to be good and healthy customers. On the opposite, our cross-border, which again, the niche where we have a right to win and where we believe have more control and better chance of being profitable, that is yet to become the main part of our business, hoping to reach between 60% and 65% each year. That is an important shift that speaks for the strategy change we have alluded broadly in the conversation. Not sure if with that we covered what you wanted to...
Thank you, Bernardo. Just a follow-up on that point. This $22 million adjustment that you made this quarter, should we anticipate more of this in 2023?
We believe we have reflected what we needed, and it's not what we believe, it's what the technical models show. We're at the low end of the technical range of reserve. We're hoping that there's no adverse development. We could expect some, but it's certainly gonna be at a much, much lower level than we had in 2022. This is, as I mentioned, a three-year turnaround, and we're happy to provide priority updates on the U.S. business since again, this is one of the top priorities for the company.
Got it. You're saying three years from now, you basically will be focused basically on the cross-border business rather than the onshore one?
Yes, totally. It's a cross-border and borderless business focus.
Perfect. My second question is regarding capital, your capital position. You mentioned, the other was really bad, so I didn't fully get it. You are mentioning that a new metric of earned premiums to equity, I believe. What is the target that you look for this new metric and based on this, what is your assessment of the excess capital of Quálitas at this point?
Again, we come back and look whether being 50% above the capital requirement was the single measure that we needed to address or that was just another one. In the auto insurance, there's another one that relates to the investment and the capital or earned premiums and capital ratio. On that one, it took earned premiums divided by capital ratio. What the market, the industry expects is to be healthy, is to be around 3 times. We're now at 2 times. That means that the excess cash is not as much as the $600 million that you will see laid out. It would be more in the $320 million. We will be talking out both metrics.
We're considering that is not that we are walking away from or that we're solely looking at one. We wanted to be transparent saying actually it comes from some analysts and investors that have called out the opportunity to use this metric as well for capital, excess capital or capital.
Understood. You say the excess capital actually is MXN 320. Did I get it right?
Yes. We believe that at MXN 320 or so it's a better and more educated, reasonable number of excess capital that we would totally look at the MXN 600 million. Yes.
Got it. From that you are earmarking MXN 60 million for the acquisitions and transit to new markets.
Yeah. Both of the due diligence that we have in progress, we total 50, that's 50 at the moment.
Plus the MXN 10 million that you are going to allocate to Colombia, right?
Yeah.
Perfect. My final question is very specific on taxes. We saw very low tax rate. I would like to better understand what is driving your tax burden and how we should think about this looking in 2023?
Yes. Let me take it again. Let me just state that there are absolutely no planning strategies as part of this low tax. I think this is not only an internal commitment, but it also gets audited by internally and our external auditors. The reason to see such a low effective tax rate in the fourth quarter relates to the losses that we report in the U.S. operations, the losses that we also reflect in our equity investment portfolio, and the inflationary adjustment, which is a tax-deductible item for every company in Mexico. As we see higher inflation, we're also able to deduct at a higher percentage. Total year tax rate was also lower than the average. I think, as I mentioned, our tax rate to be considered moving forward should be more closer to the 30% as we have historically had.
Perfect. Those were my questions. Thanks again, and congratulations.
For the sake of time, I think we have some written questions, but we're not going to be able to address all of them, so I will just pick one. We have one from Thiago Paura from BTG that says, "Congrats on the results. Just one question from my side on the financial results. Does that previous guidance of 150 basis points over the Mexican rate should now be understood as zero basis points over the Mexican reference rate for 2023? I mean, just in line with the average rate of the year, is it fair to assume? Thanks.
Thank you very much, Thiago. Let me tell you that with the financial markets in turmoil as we have had in 2022, now the beginning of 2023, with inflation, impacts across the world and some undefined things in terms of the growth of the economy, for us, yes, the guidance is gonna be closer to the reference, to the reference rate. At this point in time, as you know, the Mexican rate is around 10.5%, which is good. We are in short-term position. We are really getting ourselves in a way that we can somehow capitalize that part. We are gonna start moving over this rate. We are still expecting, you know that the Mexican rate has been following the Fed increases.
We don't know what's gonna happen with the Fed. There is still a number of analysts that say that the Fed will continue increasing. You know, the headline inflation in Mexico recently went a little bit up versus the prior latest numbers. Chances are that we will continue with that. It is fair to assume that we will be closer to the reference rate in the case of Mexico for 2023.
I think we're already at 10. Thank you everyone for joining.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.