Thank you for standing by. This is the conference operator. Good morning, and welcome to Quálitas's third quarter 2023 earnings results webcast. The conference will begin now. It is my pleasure to turn the call over to Andrea González, Quálitas's IR manager.
Good morning, and thank you for joining Quálitas's third quarter and nine months twenty twenty-four earnings call. José Antonio Correa, our CEO, and Roberto Araujo, our CFO, are joining us today. As a reminder, discussions in this event may include forward-looking statements. These statements are based on management's current expectations. They 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 Correa, our CEO, for his remarks.
Thank you, Andrea, and good morning, everyone. As mentioned in prior calls, this year we are celebrating our thirty-year anniversary, of which we have been leaders for the past eighteen years by maintaining our focus, agility, and flexibility while continuing to provide the best-in-class service and actively listening to our agents and policyholders. Our company has shown exceptional resilience over the past three decades, successfully navigating a range of economic and political climates while thriving in highly competitive environments. A true example of this, our latest auto insurance industry figures, which reflect that Quálitas is not only the leader in terms of written premium market share with a record high of 33.1% participation, but also show that Quálitas represents 83% of the total underwriting industry results and 44% of the industry net result, posting the best combined ratio within the top five companies.
We still believe in the potential of more profitable growth to come. These remarkable stats reflect Quálitas's commitment to create value, and I would highlight the importance of the unique and close relationship we have with our more than 22,000 non-exclusive agents, who represent two-thirds of year-to-date written premiums. In September, Quálitas México was awarded the fifth consecutive year with the title of La Aseguradora Ideal, or the Ideal Insurance Company, by a specialized magazine where agents themselves are the voters. Honored and motivated by this distinction throughout this quarter, Quálitas C-suite, me included, held several seminars with agents across Mexico over the past several months. We covered multiple regions, including the Central Zone, the North, and the Bajío, with over 4,000 agents participating and getting important information about new tools, products, and changes in processes to become better and faster.
We are grateful to each one of them for their presence, unwavering commitment, and most of all, for their transparent feedback on opportunities where we can further develop as a company and improve our service and products. Now, let me dive into our nine months' performance, and as I mentioned, throughout this year, we see 2024 as a year of two tails. The first half that has reflected a strong momentum in terms of underwriting and a second half where we recognize we will have a more cautious consumer behavior with lower benefit from pricing. Quarterly speaking, we achieved 24% growth ahead of our expectations, taking year to date to a 30% growth.
With that in mind, the nine months of new car sales resulted in a 10.5% increase versus the same period last year, with September posting a slowdown in the pace for the first time in 28 months, with a 1.4% decrease in growth versus the same month of 2023. As of today, AMDA adjusted its annual growth estimates to around 11%. Despite these early signs of change in growth pace, which will continue to be positive, but not as steep as prior years, and with our current network of more than 578 service offices and ODQs, plus Quálitas's cost efficiency efforts, we foresee significant opportunities to keep on delivering positive margins and ROE levels within targets.
Before I hand it over to Roberto, our CFO, we communicated to the market in early August a cybersecurity incident for which we activated our information technology protocol and implemented our protection and response controls. Quálitas' operation and service to policyholders remained uninterrupted through backup procedures and maintained underwriting activity. Thanks to our preventive measures, the company avoided any material impact. Proof of that is solid quarterly results already being discussed. Recognizing this is a risk that will prevail across industries and countries, we have strengthened our team, including external advisors, and furthermore, we will continue to leverage our ability to create value, enabling us to anticipate challenges and seizing opportunities by positioning Quálitas's capabilities to deliver strong returns for our shareholders and establish a solid long-term investment opportunity.
Our enduring spirit of resilience not only shapes our history, but also empowers us to navigate the present landscape with confidence and to move toward a prosperous future, and with that, let me pass it on to... over to Roberto. Roberto, please.
... Thank you, José Antonio, and good morning, everyone. Our results continue to reflect solid top-line performance and a combined ratio within our long-term range, underscoring the company's ability to deliver results. Our primary focus remains, and will continue to be, on providing short- and long-term value. Let me provide you with more details about our performance. Written premiums were up 23.9% for the quarter and 29.6% year to date, with the traditional segment accounting for 67% of our total written premiums, growing at a rate of 23% for the quarter and 33% year to date. From this segment, our fleet business stands out with a quarterly increase of 26% and year to date of 41%.
Lastly, financial institutions, which accounted for 28% of total written premiums on a cumulative terms, portray consistent growth rates of 27% for both the quarter and for the first nine months of the year. As José Antonio alluded earlier, we have seen early signs of a turn towards an easing in top-line trend. The third quarter underwriting growth has started to decelerate versus the 28% growth experienced in previous quarter. Given the situation of slowdown from the 2023 pricing benefits, we do expect to see more deceleration in the months to come, and while we continue to adjust prices, our increases will be more in line with local and industry inflation, expected to be at mid-single digits.
Still, the current growth trend makes us believe we will be able to reach a 20%-25% growth for the full year, which is remarkable growth pace within the current macro landscape. Year to date, written premiums from international subsidiaries represented 5.4% of the total holding company underwriting. As reported, LatAm subsidiaries were up 25.5%, and in line with our strategy, the US subsidiary is focusing on reshaping the mix towards being profitable, resulting in premiums diminishing 9.3% year to date as well. As a reference, our international subsidiaries each quarter reach positive milestones. For example, our Peruvian subsidiary is a true case of growth and value creation. Our written premiums grew 63% and 30% quarterly and year to date, respectively.
We inaugurated our sixth service office in Ciudad Trujillo, the third most relevant city in that country. We now have more than 700 agents working with Quálitas in the region, which is a 12% increase versus the same period of last year. Enhancing market presence and providing Quálitas has been capable of identifying areas for development and capitalizing on opportunities. Also, it is worth celebrating the credit rating improvement for both our Costa Rican and Salvador subsidiaries. In the U.S., our focus strategy is on track. Our portfolio composition by September end was only 6.6% domestic. Cross-border portfolio has shown a 63% increase during this third quarter compared to the same period, 2023. This quarter, we made an additional reserves composition based on our external actuarial team recommendation. And as I mentioned before, we expect to reach a break-even performance by 2026.
Having knowledge of the business profitability and the low penetration, we believe the opportunity to continue operating the cross-border niche, in which we have no more than 25% of market share at the moment, and we consider it a tactical growth opportunity for our company. We're making a cross-selling effort, looking to create synergies between clients we have in Mexico that may require, have, or need this cross-border product, and currently that are not attended by us. Knowing shifting gears will take time, but we are confident on our capacity to deliver a positive outcome from this. Including all subsidiaries, we closed the quarter with almost 5.7 million insured units, which represents a new record high for the company, 366,000 additional units during the first nine months of the year. Back to our financials.
Earned premiums were up 20.1% for the quarter and 25.6% in cumulative terms, reflecting our reserve constitution in line with our solid top-line growth pace. During third quarter, we constituted MXN 814 million reserves that represent MXN 548 million, more than the third quarter of last year, closing the first nine months of the year with a constitution of MXN 3.6 billion reserves that represents MXN 2 billion more than the same period of last year. Technical reserves constitution is based on approved regulatory models and speak to the high premiums growth. They have helped our investment portfolio size and should expect to see earned premiums grow at a higher pace once the growth stabilizes. Now, moving to our costs.
The claims ratio stood at 69.2% for the quarter and at 66.4% year to date. This quarterly ratio posted a 3.5 percentage points increase versus second quarter. This increase is aligned to our expectations, considering the heavy rains seasonality and extraordinary hurricanes taking place every year in Q3, which was particularly evident during last September, when Mexican coast experienced three hurricanes, for which claims attendance related to weather events increased 50% versus third quarter 2023. At this point, cumulative hurricanes represent up to 600 claims cases for the company, for which we have composed reserves accordingly, but it's important to read its magnitude in terms of claims. They represent only 20% of Hurricane Otis from last year. An additional factor is still impacting our loss costs: spare parts and repair prices.
Our average claim cost for the quarter increased 6% versus same period of last year. And year to date, we have seen average cost of the spare parts increase of 7%, reflecting supply chain constraints and freight costs still hitting prices, given the supply and demand, and reflecting prices to behave above inflation rate. Our Mexican subsidiary posted a quarterly 67.6% loss ratio, a 1.7 percentage point decrease versus same period a year ago, and a 64.9% year-to-date ratio, a 5 percentage point noticeable improvement versus last year, which is quite consistent to our loss ratio target range. Throughout this year, we have witnessed a 16% Mexican peso depreciation, leading to many inquiries regarding its impact on our costs. As mentioned before, FX does not immediately distress our costs.
The correlation between currency depreciation and our costs is not linear. Prices for spare parts are determined by supply and demand, commodity prices, and shipping costs. Therefore, despite recognizing that from our total claims costs, 50% are related to material damages, and from those, 20%-25% are related to imports of spare parts and others, it is still too early to assess the true impact of FX volatility on our overall costs, but we remain diligent for any rate adjustments. Regarding thefts, year-to-date robberies have increased 3% for Quálitas and have remained almost neutral for the industry. Remember that these stats reflect our higher units growth versus industry and the leading market share, especially in the heavy equipment segment, where we have almost 45% market share, and they also reflect our insured motorcycles that increase number of units but have a lower insured value.
Nevertheless, we are not only market leaders in terms of share, but also in terms of risk management and prevention. Quálitas recovery rate stands at 41.4%, outperforming the rest of the industry. Moving on to our acquisition ratio. It stands at 22.7% for the quarter and 22.3% in the cumulative terms, in line with our historical range. Commissions remain unchanged, and by September end, our portfolio composition was 81% annual and 19% multi-year policies. Our operating ratio for the quarter is stood at 3.8% and at 4.2% in cumulative terms. Year to date, employee profit-sharing provision has doubled itself, given the positive performance of our company.
However, if we were to exclude this provision, that by law must be incorporated into our operating expenses, the ratio would have stood at 3.3% for the quarter and at 3.1% in cumulative terms, in line with our historical range. All of the above resulted in a combined ratio of 95.6% for the quarter and a 92.9% in cumulative terms. When incorporating this quarter's loss ratio seasonality, our year-to-date combined ratio is entirely within our 92%-94% target, which speaks to the underwriting discipline and our ability to continue growing profitably. Now, moving to the financial side of our business. Investment income grew 16% for the quarter and 18% year to date.
We continue to be mainly invested in fixed income, representing 87% of our 49 billion MXN total portfolio, with an average duration of 1.6 years and a 9.3% yield to maturity. In the case of our Mexican subsidiary, the yield to maturity stands at 10.2%. We expect to close the year with a duration around 1.7 years. With the current portfolio composition, for each 25 basis points that rates decrease, the impact on our portfolio valuation is around 178 million MXN on an annual basis. The remaining of our portfolio is invested in equities, mostly placed on ETF, following the U.S. market and other global markets. Only 3% of our equity portfolio is invested in Mexican rates, given we believe they create value through their attractive dividend distribution.
All our investment assets follow accounting guidelines classified as available for sale, so their performance, whether gains or losses, is considered on our balance sheet until they are realized. We delivered an investment income of MXN 1 billion during the quarter and MXN 2.9 billion year to date, implying an 8.7% and an 8.8% quarterly and year-to-date ROI, respectively. Year to date, unrealized gains are in the magnitude of MXN 1.3 billion, including FX benefit. When considering all positions as mark-to-market, ROI would stand at 12.6% year to date. Around 22% of our portfolio is invested in U.S. dollars, given our international presence. For every peso that FX appreciates or depreciates, the estimated annual impact is MXN 560 million, playing as a natural hedge for FX depreciation.
Third quarter effective tax rate stood at 30% and 32.8% in cumulative terms, which shows more normalized levels reached throughout the year, given we're no longer experiencing inflation benefits. We should expect normal levels to be around 30%. All in all, Quálitas posted a MXN 1.1 billion net income for the quarter and a MXN 3.7 billion net income year to date, with a 7% and a 7.8% net margin, respectively. Our twelve-month ROE stood at 22.4%, already within our long-term target. We are proud of the performance that our team has delivered, driving industry-leading profitability. We're executing against the strategy with earnings durability and capital efficiency. Quálitas is well positioned to maintain industry leadership operationally and financially.
Our regulatory capital stood at MXN 5.3 billion, with a solvency margin of MXN 15.8 billion, equivalent to 398% solvency ratio. Recent capital allocation determines our twelve months earned premium to capital ratio at 2.5x. Now, as an update from Quálitas' capital allocation and corporate development plan, last week we announced the acquisition of a glass, spare parts, and automated paint distribution company, a transaction of around MXN 500 million. This acquisition strengthens our unique vertical integration, complementing the potential of our subsidiary, FLEC, by expanding our national coverage network of branches with inventory and systems to provide the highest level of distribution and logistics, by increasing our e-commerce sales, by adding automated painting services to our portfolio, and by increasing our client portfolio for glass distribution and repairs.
Regarding geographical expansion, Quálitas Colombia is moving in the right direction, making progress on final legal authorization, with the expectation to start operations in the next 3-4 months. The team is currently working on many initiatives to strive assertively the Colombian market, which represents a new avenue to access more than 70 million units and a growing industry. As of 2023, the market had a notable increase of 12% year-over-year growth on written premiums. We believe Quálitas' business models represent the perfect fit for a market such as Colombia. Now, before entering into our Q&A session, it is worth mentioning there is no news from the fiscal authority regarding the audit procedures and the VAT interpretation. This matter continues under assessment in the corresponding instances, and we have not received any conclusive or final resolution.
Quálitas' position stands firm, with the corresponding legal arguments to support the industry criteria, and thus we trust authorities will reach a reasonable resolution. As mentioned before, we will timely communicate any relevant progress to the market. In summary, we had another record-setting quarter in many different fronts, and we're well positioned to continue producing outstanding results going forward. Underwriting conditions overall continue to be favorable, thus we're confident in our ability to continue delivering on-target earnings through our top-line growth, underwriting margins, and investment income. I would like to conclude my remarks by recognizing the resilience and daily adaptability demonstrated by Quálitas people. It is simply outstanding.
As I start my journey with Quálitas, being already three months into the role, I am proud and honored to be part of the senior leadership team that is fully committed to pursuing true value creation for the company's stakeholders, including our customers, our workforce, shareholders, and the communities we serve. And now, operator, please open the line for questions. Thank you.
Thank you. We will now begin the question and answer session. To join the question queue, you may press the Raise Your Hand button in your screen, and we'll be opening the mic for you, or you can send it through the Q&A chat. To withdraw your question, please press that button once again. We will pause for a moment as callers join the queue. Our first question comes from Andrés Soto . Please state your company name and then ask your question.
Good morning, José Antonio, Roberto. Thank you so much for this presentation. I have a question related to your loss ratio, or specifically your claims this quarter. If you guys can please help me break down the performance in terms of claims, what is attributable to weather? What is the normal claim related to inflation pressures that you mentioned before? And how much is related to the additional reserves that you are making for your U.S. operation?
Good morning, Andres. Thanks for the question. Certainly, a loss ratio and the claims cost is a question that will come to mind to all our investors. As we have shared previously, we would have expected a Q3 with high seasonality. We know that heavy rains and hurricanes are always present in Q3. Getting to your question, I would say that one third of that impact was coming from the US, one third was coming from whether it was seasonality, and one third would come from either claim cost or spare part increases. Now, let's put it also in perspective. When we look towards the previous year decrease, we see a significant improvement versus last year.
Also, when we look at our Mexican subsidiary loss ratio on a year-to-date basis, we look at 64.9% within our loss ratio target. Hope that answers your question.
Absolutely, José Antonio, thank you. Thank you so much. And when you look ahead, should we expect improvement at the same pace that you were delivering in the second quarter? Or you believe that the big improvement in loss ratio is already over, and you are already reaching sort of normalized levels at this point?
Let me say, Andres, that we clearly, and as Roberto mentioned, this is a seasonality impact that, you know, we usually have in the third quarter, no? And, you know, Roberto addressed, you know, the causes of that. But you see that, I mean, heavy rains and hurricanes were particularly high in the over the past literally four weeks or so, no? So it has had a significant impact. Now, having said that, I do expect that they will return to lower levels, as has in the past.
But also, as Roberto indicated, it is important to mention that we are well within the targets for the year that we had set in terms of where we would be in the combined ratio, as well as in the claims ratio. So, yes, answer more specifically, we should decline to target levels.
When you combine this with your market share evolution, you had said in the past, you know, you guys are not focused on market share, you are focused on profitability. If I look at the second quarter numbers and compare with those of the industry, I see that you have gained two hundred and forty basis points of market share at that point over the past year, and even on a quarterly basis, one additional percentage point. And yet you are mentioning, you know, that you don't expect significant price increases, but what will be the reason not to increase prices if you are capturing additional share and you are seeing other sources of pressure in terms of loss ratio?
Okay, let me start addressing that, Andres, and telling you that as we have said, and this is an interesting question because we have always discussed that we are not aiming for market share. We have always said, and we'll continue to do, is to improve service in any way we can. And all our efforts are geared to make sure that the service is to the levels that our clients and customers and policyholders expect, and that will continue to be our guiding principles, so to speak. But let me tell you that because of that, you know, policyholders prefer Quálitas to some extent.
Regarding the price part of your question, we have taken significant increases over the past, now already, you know, twenty eighteen to almost twenty-four months. So we should be that, and we indicated that in the past two calls and where we said that this year was gonna be, you know, a story of two years, with the first half still getting the benefit of the, frankly, high increases that we had late last year. But now, yeah, we see that the market is softening on that regard.
First of all, we have seen the decline in terms of the claims index, so the combined, also the combined ratio is going back to levels that we anticipate to be a target once, so we don't see the need to that. I can tell you that I can see, you know, there has been pressure in the market. We have in the heavy equipment, we have increased very substantially pricing, obviously, to recoup claims costs. In the auto business, it has been the market has, I've seen an increase in competition in terms of pushing prices not so high. We continue to see that. That will allow us or that will make us not to be able to increase prices significantly.
But the important part in all of this, Andres, is the fact that we are going to our target levels in both the claims index and
Combined
... combined ratio. I don't know, Roberto, you want to expand?
No, just maybe just to complement. I think it's all about service, and despite the Q3 combined ratio, overall, in the long term, we're delivering a profitable combined ratio within our target. And actually, that is helping us, combined with profitable business and service, is giving us more units, and we're increasing our share. So it's a perfect equation to continue in the... moving forward.
Understood. Thank you. Thank you so much for the answers.
Thank you. Our next question comes from Thiago Paura. Please state your company name and then ask your question.
Hi, Andrea. Thanks. Thanks for the opportunity. Hi, José. Hi, Roberto. Glad to talk to you again. I have two questions from my side, if I may. The first one is still on the loss ratio theme here. I understand we saw a spike in claims due to the weather seasonality in Mexico this quarter, but if we take a look only at the contribution to the loss ratio from outside of Mexico, it has also increased sequentially.
You mentioned a higher contribution from provisions from the US subsidiary, so I just want to further understand if this additional provision is some kind of trend, or if we should expect a deceleration on that front as well, driving to a faster decline in the loss ratio in the short term? And the second question is related to top line growth. In Q2, José Antonio mentioned that Quálitas should land the year in the low to mid-twenties growth, as we should see a slowdown in the second half of the year. And in fact, Q3 decelerated a lot versus the first half of the year, but it was still strong, 24% year-over-year growth and ahead of our expectations, as you mentioned.
So, just double checking here, if the outlook remains the same, because it would suggest a big deceleration in the last quarter of the year, and what to expect for the year to come for twenty twenty-five. Thanks.
Let me take the second one first, Thiago. Thanks for joining us in the conference. Yeah, the top line growth, let me tell you that we have been somewhat surprised in the growth that we have, both in 2023, which was a significant growth to recoup, obviously, claims costs. In 2024, there was some impact regarding the momentum that we have on pricing, no? Let me tell you that, yeah, the third quarter was a little bit of a nice surprise in terms that it continues to... Our business continues to go strong. I still see that what I said earlier, I mean, in prior calls, that we are gonna be in the low twenties and in the low twenties.
I mean, still I think that this quarter we should also be showing decent, decent growth rates. And I would expect that for twenty twenty-five, mostly, we should return to levels more in the low tens, as has been historically. Historically, we have grown around, you know, a ten-ish in the past years. But I believe that this increase in terms of the cost increases of cars, the cost increase of trucks, et cetera, which has happened because of technology, they have increased significantly over the past twenty-four months. It's now leveling off. So we should be having this top line growth also going to levels closer to, you know, the low tens.
Now, well, that's what I would say in terms of the top line growth. Additionally, usually important to note also is the economy. Typically, in our business, we grow around three times the GDP of the economy. As you well know, the Mexican economy is softening, and this year is expected to be around 1.5% GDP growth. For next year, it is even expected to go a little bit lower, like 1.2, around the 1.2-1.4%, depending who you ask.
So yes, all these elements make that, you know, we will return to the, let's call it, historical levels in terms of the growth for the top line, growth in 2025. Having said that, we will continue to manage our business to having the targets that we have set for both, claims ratio and combined ratio. But very importantly, Thiago, is that, we are committed to our ROE. As you can see, on the ROE that we have for the reported results, so it's about the 20%, and it is very well within what we have anticipated, which is our long-term target. So that's the way I would answer the part of the top line. I don't know, Roberto, you want to take the loss ratio?
Yes, absolutely. Thanks, Thiago, for the question. Going to your claims ratio, I think you're referring mostly to our international or the Latin American subsidiaries, including in the US. A big portion of that delta comes from the US, as I alluded earlier. So one percentage point of that comes from making the reserves from our actual recommendation, from actual team recommendation. What we see is certainly the cross-border reach of our business is certainly growing, despite that we still have opportunities on our domestic business. Just to give you a reference of what has been decreasing in our domestic business, we. By the end of September, in 2023, we had a 35% composition of our business for domestic, and 6.6% of our portfolio is currently domestic.
We still are reserving for those legal cases that are still in provisions and that we have a liability. And therefore, to your questions on moving forward, what to expect on our international subsidiaries in the U.S., we should expect continuous reserves adjustments, depending on how the trials and the liabilities coming, as well. But when we look at Mexico, our loss ratio, we sincerely, as already José Antonio alluded earlier, we should expect to see an improvement in Q4, given the seasonality.
... and remember, in the US, it's something that it should not be a surprise. This is something that we're turning around. We are seeing an improvement, but still we have work to do, and we'll see losses in 2024, 2025, and we'll be back on track and break even in 2026. So something to just-
Just let me add what Roberto indicated, because it is important, and I'm glad that he mentioned the 2026, because as we have discussed over the past four or more quarters, the US strategy has been to refocus on the cross-border business, and we are, as Roberto indicated, we're moving very well into that direction, no? As also we have indicated that the strategy calls in addition for the cross-border business, which we are executing, we have a stronger organization. And you know, remember that we had a new CEO last year, and you know, we have the teams in claims, et cetera. And we will continue to adjust tariffs.
So let me tell you that we are right on track for the strategy that we have set for the U.S. for over the past year and a half or so.
Super clear, José Antonio, Roberto. Thanks. Thanks very much.
Thank you. Our next question comes from Jitendra Singh from HSBC.
Hi. Hello, can you hear me?
Yes, we can hear you well. We can hear you, Jitendra.
Hi, everyone, thank you for taking my question. So I have two quick questions. One on your operating cost ratio. So it has been higher in nine months, around 4%, and we know this is mostly due to you know, profit sharing. Do you think this is the level we should expect in coming quarters or next year? Because I think the historical level has been slightly lower. And second question is on your recent acquisition. I mean, how this new acquisition will complement Flekk, and are there concerns about overlapping services or competition between the two subsidiaries? Thank you.
Thank you, Jitendra. Great question. So let me address the first one on operating ratio. As you pointed out, our operating ratio for the quarter is 23.8%, on a quarterly basis, and 4.2% on a year-to-date basis. A portion of that is related to profit sharing, as we've been sharing. As we are more profitable in our business, we give that back as part of our regulatory requirements as a profit sharing bonus to the employees. So to your question of how should we move this forward? As long as we keep within our range of 92%-94%, we'll continue to see significant provisions on profit sharing.
Let's also keep in mind that if you exclude these profit-sharing impact from 3.8 on the quarter, it would be 3.3, as I explained before, and also from 4.2%, we'll be dropping almost a point of to 3.1. So that should be also related to operating expenses. There is the service office professional fees that also impacts our operating ratio, and it also is linked to our profitability. So the more profitable we are, we will be also accruing for those, and we will paying those for our service offices. So the equation should be, the more profitable we'll see the operating ratio on a variable will continue to be reflected in our income statements. Hope that answers your question.
Let me add to Roberto's comment on that one. Clearly, we have increased a certain level of cost in terms of the operating ratio, in order to keep and to maintain a good level of service. The important part here is that the way we internally measure the operating expense is more between 3% and 4% that we always indicate to you as a target without the profit sharing. Because the profit sharing, I mean, you could argue that the best the company does, you know, that is going to increase, which is a nice to have problem, so to speak, no?
But to me, the important thing is that we are targeting between 3% and 4%, and over the past eighteen months, I would say, we have strengthened some areas in the company to maintain a good level of service, and we will continue to do so. So going forward and excluding the profit sharing, we should be, again, as we have said, between 3% and 4%, and that is the way we will be moving in that range. Now, you asked a second question, which I couldn't understand very well. Can you repeat? And it's related to the acquisition, I believe, but can you explain?
Yes. So I think my question was related to this, like, how this complements Flekk, and are there concerns about overlapping services or maybe the competition between these two, Flekk and the new acquisition?
No. Well, let me tell you that, first of all, we in Quálitas, we're very pleased about, having completed this acquisition, and that's part of our vertical integration. And we are very pleased with that because, something that I didn't mention is that clearly we have mentioned before, but not in this call, is the fact that we continue to be very cost conscious, and, we will continue to execute being that part. So that gets into the strategy of making sure that we remain very competitive cost-wise, no? So let me tell you that I'm very happy about this. It took a little bit longer time than we wanted, but this is a company that has a lot of experience.
It's a lot of experience and has a strong market presence across all Mexico. They have, you know, more probably than 100 locations, et cetera. And it adds a number of things that we can do. So that it should help us into several things, you know, including heavy equipment and some other repair stuff. So I think that established pretty well within the Flekk strategy, and that to service both, you know, Quálitas as other insurance companies. And it will continue to provide service the way they have been doing it.
And we will obviously gradually incorporate the learnings that we have within Quálitas to be able to have better costs for all the companies that use the Flekk services.
Okay, thank you.
Thank you. Our next question comes from Thiago Binsfeld. Please state your company name and then ask your question.
Hi, good morning, José Antonio, Roberto, Andrea. Thank you for the call and take our questions. We have two questions from our side. The first one on financial results, can you discuss a little bit what drove the increase in the investment portfolio balance from the second quarter to the third quarter? And also how you're thinking in terms of asset allocation mix. And if you could also remind us your expectation for interest rates this year and also for twenty twenty-five. Then I can ask my second question later. Thank you.
Regarding your first question, thank you, Thiago. Good morning. What we saw is, as I alluded in my remarks, we saw a double-digit growth in our investment income at 16% versus the previous quarter, and also in an 18% year to date. We remember, we have 87% of our portfolio is in fixed income, out of our MXN 49 billion total portfolio, with a duration of 1.6 and a 9.3% yield to maturity. We believe that, what is reflected in our income statement is only the mark-to-market on available for sale, our portfolio and our equities.
Let's keep in mind that also a portion of that, when we look at our market to market, we would be seeing a much higher return on our investments. Actually would have been at a 12.6% on a year-to-date basis. That, in our balance sheet, is reflecting a MXN 1.3 billion, including our FX benefit. Going to the second part of your question, is getting to how do we see our overall rate for the following year? Given that we have a 1.6-1.7. Currently, 1.6, for our target is to land at 1.7 year duration by the end of the year.
We will continue to see a good return on our investments in 2025, and we're probably gonna see a decline in 2026. But again, it's depending on how the interest rates will play out. Also, part of our comments were if, for every 25 basis points that the interest rate will decline, we'll be having an impact in our fixed portfolio of MXN 178 million going forward. So we'll have to see how the rates adjust over time. But certainly we'll continue to see, at least in 2025, a good investment income resulting from our portfolio.
Let me add to Roberto that as we over the past three years or so, the strategy was to have a very short duration back in 2021, and we started changing that in 2022 and 2023. At the time, you know, the rates that we were having were around 5% or so, and now we moved to around the 10%. And the important thing is that as we move over the past, let's call it the past 12 months or 18 months, we are closer to the 10%, and the duration, as Roberto indicated, is that we are, let's call it, quote unquote, "covered for 2025.
Thank you. This is clear. And if I may, a second question as well. We saw the acquisition ratio picking up a bit. So can you detail a little bit more? I mean, I think you mentioned in the release there were no changes in the commission structure, so is this mostly a reflection of mix? And how do you expect this to evolve in the coming quarters? Thank you.
That is mostly a reflection of mix. We have not changed any of our commissions in the company. We maintain that. This is something that we continue to debate with customers, but we are very clear that we cannot go that route. So it is mostly a mixed situation that one we have. Yeah. Okay, understood. Thank you so much.
Thank you. We only have time for one last question today, for Ernesto Gabilondo. Please state your company name and then ask your question.
Thank you. Ernesto Gabilondo from Bank of America. Hi, good morning, José Antonio and Roberto. So my first question will be a follow-up on your loss ratio. As you mentioned in your press release, thefts in autos increased during the quarter because of elections. So how much do you think is related to the depreciation of the peso against the dollar? I remember in the past, thefts were stealing the cars and then selling the auto parts in the black market. So is this the same trend that you saw this quarter? And on the other hand, how much of your loss ratio is related to spare part costs or auto parts? I think I heard Roberto saying around 25%, so just wanted to double-check.
And I remember that the auto part prices are not in dollars, but they move similar to the changes in the dollar. So do you have a sensitivity analysis of what could be the impact if we have a sustained depreciation of the dollar in 12 months in your loss ratio? Anything that you can share from what happened in other periods, like when the peso depreciated last time, I think, would be very helpful. And then I have a question on your capital allocation. So you are returning buybacks, dividends, but at the same time, you're expanding into new regions, doing M&A activity, the recent acquisition. And then at some point, you will have the impact of lower rates in your capital.
As you mentioned, now you have all the securities are classified as available for sale. So, can you elaborate on how should we think about the distribution of your capital? Meaning, for example, your dividend pay policy, if we should think about mid-range buyback, what could be the size? How much extra do you have for M&A? How much are you allocating for the health product or for new products? Anything on that, I think will be helpful. And then lastly, on the litigation process on the BIT. So as you mentioned, there are no any additional comments, but, just wanted to hear if your external auditors continuing to recommend not to provision anything.
Also, if you have some visibility if there could be a potential first resolution against any other auto insurance company that could be taken as a reference for Quálitas and for the sector. Any timeline on that will also be very helpful. Thank you again, and just because of timing, I prefer to do all the questions at the same time.
Yes, yes. Thank you. Thank you, Ernesto, and good to have you with us. Let me take you to the last two questions, since the other ones were somehow discussed, and Roberto will talk about them, but let me talk about the capital allocation. I would say that in terms of dividend, clearly, you know, that we have the policy of 9% of the profits, and that I expect that to be the case for the results of this year, no?
Now, regarding, the acquisitions and the capital that we have used for, for some of the acquisitions that we have been doing, with the latest, acquisition in Quálitas Salud and now Quálitas Colombia, I would say that in terms of acquisitions, we are pretty much, what we have, on our plate, and we don't foresee anything further. Obviously, we are gonna be ready for opportunities, but, at this point in time, I think that we have our plate, pretty full on making sure that what we have, works well. Now, in terms of, using capital, yeah, it is within, you know, both for Colombia, and for Quálitas Salud.
It is along the levels that we have been using over the past twenty-four months, so I don't see any particular thing. Now, to me, the important thing in this part of the capital of a potential, you know, special dividend, it is too early to tell in the sense that GDP is slowing in Mexico. We have some items related to the elections that just happened in Mexico in June, and we are waiting to see what happens with elections in the U.S. There has been some, you know, discussions about the free trade agreement, et cetera.
So we want to be very cautious on the capital on distributing additional dividends, but for the policy that we have, we will surely recommend to the General Assembly to go with that, obviously to the board, to do that. So that should be the way in which we would deal with capital allocation short term. Now, regarding value-added tax, let me tell you that there are no new news, and that there are no news in this one. We are not providing for any provision, neither Quálitas nor any of the insurance companies that have been audited by the tax authorities.
In terms of you ask about potential first resolution, we don't know anything about a potential, you know, resolution, but let me tell you that I am personally very involved with the industry and with the sector to make sure that, you know, the new government is aware of the situation of that, and how what we see in terms of the legal way, which it has been actually worked in the past, so I am very close to that, and we will continue working with the industry to make sure that this is done right, and now we are confident that our authorities will be listening somehow, and it's simply we need to wait for a resolution.
But let me tell you that we are very much on top of this situation, and certainly I do not expect anything in the short term to impact our results. No? And Roberto, do you want to take the other one?
Sure. So, thank you, Ernesto. Let me go on your second question with just a clarifying. It's one-third on the seasonality, one-third on the spare parts, and one-third of the impact on the U.S. Going to robberies, what we've seen is, yes, Quálitas have seen an increase versus in the Q and in the year to date. However, let's keep in mind our recovery rate, which is much improvement from the industry. And overall, the robberies have been decreasing over time. Just to give you a sense, in the whole industry, when we compare third quarter 2023 to 2019, overall, all our figures have decreased 30%, while we have been able to decrease but also increase our recovery rate. And what was the third question related to?
Depreciation.
Depreciation. Yes. So the depreciation of peso has been a constant question since we've seen a depreciation of 16% on a year-to-date basis. Now, just keep in mind that in claims, we get 50% of our claims cost is related to material damages, and out of that 50%, between 20%-25% are related to imports. So there is an impact, but it's still not an immediate impact that we'll see in our P&L. What is gonna happen is there is inventory in the market, and depending on how that plays, that portion of the spare parts are reflected into the market and inflation starts coming in, we're certainly gonna see prices slightly going up, and also we will be adjusting prices or rates accordingly.
So it's still open for debate as to how that is gonna play out. Remember, when we were last year at the 16 pesos per dollar, we didn't really see so much of that, inflation or going down or prices going down. Still, there is some margin that the spare parts distribution companies will still have in play. Hope that answered your question, Ernesto.
Oh, yes, very helpful. Thank you very much, Roberto and José Antonio.
Thank you, guys. We're gonna try to take one last follow-up question, we believe from Andrés Soto .
Thanks for the opportunity again. Very quickly, we saw significant increase in reserve constitution this quarter. You mentioned seasonal factor, but even if I compare on a year-over-year basis, this is three times as big as you had last year. So I would like to understand if this is related to a change in the duration of your policies. For multi-annual policies, you will need to make additional reserves, and if that's the case, versus the structure that you have now in terms of single year and multi-annual, what is your target in terms of the duration of your policy portfolio?
Thanks, Andres, for the question. Actually, this is explained by our strong growth, our double-digit growth written premiums over time. Remember, we've been growing at the 36%, 28%, and 24% every quarter, and that is mostly aligned to our growth in our earned premium. We constituted, to your point, MXN 130 million for reserves. That compares to MXN 266 million during the last quarter, and we have constituted MXN 3.6 billion in reserves, almost MXN 2 billion more than the same period last year. In terms of our composition of annual, multi-annual, we remain constant, 80-20. 80 being annual and multi-annual being close to 20, as we presented earlier, so we don't see a major mix in that regards.
There is a seasonality effect, obviously, out of the hurricanes and the claims that we have for the period. That also plays in how we build the reserves, but you know, the actuaries are doing that. But as to... As Roberto indicated, there are no changes in the way we manage the reserves, generally speaking.
That is very helpful, José Antonio. So just to be clear, part of the impact in terms of reserves is related to the impact of hurricanes, and if you know that normalizes, you will reach another normalized level of reserve constitution. Is that the-
It's mostly-
... interpretation?
No, Andres, it's related to our growth. As we continue to grow, we will be in cumulative terms reconstituting reserves.
Absolutely, but that was the case also for the second quarter, and the reserves were not that high.
Right, and we continue on that growing span. As we will see a little bit more stabilization on that, we will continue to see more of our earned premium going up, and the reserve constitution will start going down.
Right. Because I remember at the beginning of the year, we were expecting, you know, the earned premium line to exceed the written premium line by the second half of the year, and that's, that clearly didn't happen in third quarter.
Yes, it did.
Yes, and the good news is that the growth continue has been accelerating. So, moving forward, we would continue to see, as it stabilize, a much less reserves constitution, Andres.
Perfect. Thank you so much, guys.
Thank you, all. This concludes today's conference call.