Good morning and welcome to Qualitas quarter 2025 earnings results webcast. The conference will begin now. It is my pleasure to turn the call over to Raquel Leetoy, Qualitas.
Good.
Morning and thank you for joining Qualitas second quarter and six months 2025 earnings call. I'm Raquel Leetoy, Qualitas IR Coordinator. Our CEO and Chairman of the Board is joining us today, José Antonio Correa, as well as our CFO Roberto Araujo. As a reminder, information discussed on today's call may include forward-looking statements. These statements are based on management's current expectations and are subject to many risks and uncertainties that could cause actual events and results to differ materially from those discussed during today's call. Qualitas no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events, or otherwise. Let's give it over to José Antonio, our CEO, for his remarks.
Thank you, Raquel, and good morning, everyone. It's great to be with you. Once again, we are pleased to share strong second quarter and first half of the year results, setting a strong base for the remainder of the year and supporting the execution of our strategy. Top-line growth was within our expectations and at 12.9% with a sustainable loss ratio resulting in a 92.8% combined ratio for the quarter, right on our long-term target, and a 90.5% combined ratio when considering the first six months of the year. On the investment side, we posted a strong financial income even as interest rates began easing at a faster than expected pace. Thus, Qualitas delivered a 36% net income growth for the first half of the year with a 12-month ROE of 26.5%, above our long-term target.
Additionally, a key highlight for this quarter is that we surpassed the 6 million insured units mark, and reaching this milestone took us only half of the time it took to go from 4 to 5 million, a clear reflection of the quality of our service and our unwavering commitment to our customers. According to the latest industry AMIS figures, in terms of written premiums, Qualitas holds 31.7% of the total market and 41.9% in the heavy equipment segment. In terms of earned premiums, we maintain a 35.8% market share. Additionally, our combined ratio in Mexico is 224 basis points better than the rest of the industry excluding Qualitas, and we represent about 46% of the entire sector underwriting result. These indicators reaffirm our market leadership in both scale and profitability, even when facing a challenging market environment.
Before Roberto dives into the financial results, I would like to address some of the current dynamics and challenges in the market, including pricing, downward pressures, macroeconomic volatility, early rain seasonality, as well as regulatory changes. These factors are reshaping the industry and pushing all players to adapt. At Qualitas , we are well positioned to respond through our excellence in customer service, innovation, underwriting discipline, and a clear strategy focused on sustainable value creation to our stakeholders. Customer service remains at the heart of what we do. In the first half of the year, we received 1.6 million callers at our contact center with an average response time of 5 seconds, which means 1 second faster than the same period last year. This improvement reflects our commitment to delivering best-in-class service when it matters the most.
Our satisfaction rate of 96% confirms that we are striking the right balance between speed and quality. Our business model is evolving alongside technology and customer expectations, and it is stronger than ever. Today, approximately 20% of our customer calls are handled through artificial intelligence, and about 40% of our clients are managed through robotic process automation. Additionally, 33% of claims are handled remotely using digital technology, reaching a satisfaction rate of 95%. These changes have led to operational efficiencies that allow us to serve more customers while optimizing costs. Looking ahead, we remain cautiously optimistic for the rest of 2025. We are conscious that Mexico's economic slowdown will continue affecting new car sales and disposable income, but we have navigated through these cycles and we know what we need to do as we enter the second half, typically characterized by higher claims volumes.
We are committed to executing our defined strategic priorities, continuing to invest in key areas, and proactively adjusting our operations to remain agile and ready to respond. Let me now get into our three pillar strategy. We continue to strive in winning in our core business, Mexico auto insurance, which continues to be the main driver of our growth, making it our foremost focus. We firmly believe that Mexico is our key growth engine, and in these volatile times it is essential to continue strengthening our leadership position. The Mexican insurance industry is currently experiencing intense price competition, particularly in the auto segment, due to insurers aggressively going after volume to maintain or increase market share, a strategy that is proving to be unsustainable as claims severity increases. This is driven by the country's low insurance penetration, macroeconomic pressures, and growing competition.
Factors such as inflation, currency volatility, and rising repair and medical costs have squeezed profit margins. At Qualitas, we remain focused on sustainable growth and profitability without compromising competitiveness and long-term financial health. From a market standpoint, new vehicle sales including light vehicles and heavy equipment have declined 2.8% year- to- date. Notably, heavy equipment sales for vehicles over 3.5 tons dropped by 37.4%, consistent with broader economic trends and anticipated consumption slowdowns. This reflects the persistent volatility that has marked recent periods. As we turn to our subsidiaries, strong performance and progress across Latin America, including our recent entry into Colombia, has been more than offset by our U.S. business where prior year claims development continue to impact.
As Roberto will elaborate, progress made on the runoff of domestic business and in building a new book of healthier binational products is not yet seen in our financials due to litigations coming to closure at the much higher and perhaps unreasonable amounts, confirming that our exit of those businesses was the right decision. Despite this challenging environment, we remain confident in Qualitas' ability to manage these headwinds effectively while pursuing sustainable and balanced growth. We reaffirmed our expectations for full year top-line growth in the high single digits to low teens and we expect our key performance indicators to remain within target levels. In summary, the first half of the year showed robust commercial momentum. We saw strong growth in written premiums, continued expansion in insured units, and a sustainable loss ratio still below our target range.
Financial income has remained solid and perhaps most importantly, we have achieved meaningful progress across all service metrics. Our organization is structurally prepared for healthy growth and remains agile and resilient as we move forward. I'll pass it to Roberto for a deeper dive into our quarter and year- to- date performance. Roberto, please.
Thank you, José Antonio, and good morning, everyone. Our first half 2025 results reflect the strength of our strategy and our ability to deliver value considering an evolving industry landscape. We achieved solid top-line growth, maintained a combined ratio within our long-term target range, and delivered a resilient investment portfolio. Starting with top-line performance, written premiums grew 12.9% in the second quarter and 12.4% for the first half of the year. In Mexico, the traditional segment accounted for approximately 65% of total written premiums, growing 5.4% in the quarter and 7.2% year- to- date. From this segment, the individual business stood out with 8.1% quarterly growth and 12.6% year- to- date, while fleet business grew 1.3% in the quarter and remained flat on a year-to-date basis.
This is mostly due to the impact of the large multi-year contracts from last year, as we mentioned on our previous call, as well as the effect from adjusting pricing downwards to be more in line with our ongoing long-term profitability objectives. The financial institutions segment represented around 30% of total written premiums, with significant growth of 28% in the quarter and 25% year- to- date. While this segment has traditionally been driven by new car sales, which declined 2.8% year -to- date, the growth also reflects the benefits from shifting in consumer preference toward larger vehicles, mainly SUVs, translating into higher average premium value, the increased effect from multiannual versus annual mix, and the increase of Qualitas' market share in key financial institutions. As reported, our international subsidiaries contributed 5.3% of total written premiums year- to- date.
Across Latin America, subsidiaries posted excellent growth, up 59.6% in the quarter and 41.3% year- to- date. Each quarter, we continue to achieve key milestones. Costa Rica grew nearly 60% in the quarter and 31% in the semester. During this quarter, it also paid the dividend to the parent company for the second consecutive year. From a market share perspective, the latest results have Qualitas at 22.1%. El Salvador reported 59% quarterly growth and 67.4% year- to- date, with ROE close to 30%, while Peru achieved 44.9% growth in the quarter and 42.5% year- to- date, growth reaching a market share of 7.4%. In Colombia, our newest subsidiary is performing in line with expectations as we adapt to the market's unique characteristics. We're building a solid foundation with the same excellent service DNA that defines our group.
Committed to rich, sustainable growth, following through the same discipline and vision that have proven our success path. While the financial contribution will be limited in the short term, we're laying the groundwork for long-term value creation. For example, we opened our 12th office, solidifying our presence in key cities and expanded our agent network to over 550. These developments bring us closer to policyholders and mark an exciting new chapter for our regional expansion. In the U.S., our subsidiary continues realigning its portfolio and focusing on cross-border and binational products. As of June end, premiums declined 15.6% for the quarter and 20.3% year- to- date. We have redefined our value proposition, presenting ourselves as a specialized binational auto insurance company. Our organizational setup has been optimized to capture opportunities in this niche market, and we remain vigilant regarding the U.S. market opportunity altogether.
As José Antonio just mentioned before, we closed the quarter with over 6 million insured units, a new all-time high for Qualitas, with over 400,000 additional units during the year or a 7.4% unit growth. Looking at the earned premiums, we posted 10.6% growth in the quarter and 14.1% year- to- date, in line with expectations. As you know, earned growth pace is directly correlated to reserve behavior. In the second quarter, we constituted $730 million in reserves, $401 million more than in the same quarter last year. For the first semester, reserve constitution totaled $2.6 billion, 7% below the same period last year. As a reminder, the technical reserve constitution is based on approved regulatory models and speaks to the corresponding premiums growth.
Now, consistent with our expectations, earned premiums are growing at a faster rate than written premiums, being able to capitalize accelerated growth from past periods as well as the benefits from lower claims costs. Now, moving down to our costs, our loss ratio stood at 63.1% in the quarter, well within our target range and improving 2.6 percentage points versus previous year. Furthermore, on a year-to-date basis, our loss ratio closed at 61.4%, improving 3.5 percentage points compared to last year. To better understand progress and challenges, I will provide some specifics from our main markets. In Mexico, the loss ratio was 60.4% for the quarter and 59.3% for the first half, well below our desired and sustainable loss ratio target range of 62% to 65%. It is worth mentioning that frequency for the quarter was 6.9%, 40 basis points below the same period of last year.
As for thefts, year- to- date decreased 7% for Qualitas versus 10% for the overall market. Remember that these stats reflect our higher units growth versus industry and the leading market share, especially when considering insured motorcycles which have a lower insured value but high volume for Qualitas. Recovery rate stands at 42.5% in line with the rest of the industry. We continue enhancing our technological tools and coordination with suppliers and authorities to reduce costs and improve efficiency. Let me now move to our U.S. business where we continue focusing on our turnaround as a corporate priority. The journey continues to be challenging, recognizing it is not as fast, simple nor cheap as we need to bring to closure the claims that trace back to five or even eight years ago.
To illustrate progress on our exit of domestic business, at the beginning of 2023 we had close to 300 open litigations which are now down to 112. The fact that we have zero 18-wheeler exposure as of February 2025 would indicate that new claims should also tend to none in the next months. All of this, however, is not being enough to turn around our claims ratio as adverse developments of historic claims and verdicts have led to higher reserves constitution. This quarter in particular, we have closed a couple of claims in the bus program, one that was in place for 15 months from May 2020 to September 2021. Our policy limits were up to $5 million.
In addition, due to our external audit recommendations, we continue building a DTA Deferred Tax Asset Valuation Allowance reserve as a conservative and unlikely case if we were not able to turn around the business in a way that we credit these taxes. As of the end of this quarter, we have $18.9 million accumulated on this allowance. The U.S. business turnaround is within our top corporate priorities and we will continue to assess all possible paths to ensure our business is managed at the least possible cost while maintaining cross-border products to serve our customers and where we know we can create value. The acquisition ratio stood at 24.1% in the quarter and 23.1% year- to- date, about 1 percentage point higher than last year. This is driven by stronger growth in the financial institutions segment which carries higher commissions.
This ratio remains within our expectations and aligns with cost control metrics. The operating ratio was 5.6% in the quarter and 6% on a year-to-date basis including employee profit sharing. Given the positive performance of our company, we also had an increase in fee pay tool service offices and corporate bonuses linked as well to their successful performance during the period, aligning productivity and cost control efficiencies towards positive results of the company. If we were to exclude employees' profit sharing from this provision that by law must be incorporated into our operating expenses, the ratio would have stood at 4.4% in the quarter and 4.6% for the first half. Altogether, this resulted in a combined ratio of 92.8% in the quarter and 90.5% year-to-date, below our ongoing target range of 92% to 94%.
These figures confirm the strength of our underwriting and cost discipline on the financial side of our business. Comprehensive financial income grew 7.3% in the quarter and 25.4% year-to-date. Our portfolio totaling $49.5 billion pesos remains 86% in fixed income with an average duration of 2.2 years and an 8.8% yield to maturity. For the Mexican subsidiary, yield stands at 9.5%. The rest of our portfolio allocated in equities has remained resilient from the market performance during the first half of the year. For example, the S&P 500 stumbled in the first quarter of the year. Still, a 5.5% return was observed on a year-to-date basis, setting a relatively more confident tone as markets headed into the second half. All our investment assets are classified as available for sale, meaning their unrealized gains or losses are reflected in the balance sheet until they are realized.
Our investment strategy has not had any relevant changes in 2025. We had strived to bring our fixed income duration up to two years as reference rates remain in the mid to high single digits in Mexico following the guidelines, advisory, and strategy decided by our investment committee as part of our institutionalized corporate governance. Total comprehensive financial income was $1.2 billion in the quarter and $2.8 billion year-to-date, delivering 8.4% and 9.7% ROE respectively. Unrealized gains for the first half of the year are in the magnitude of $400 million pesos including FX effects. When considering all mark to market positions, ROE would be 11% for the quarter and 11.3% for the year. Approximately 23% of our portfolio is invested in US dollars given our international presence. For every peso that appreciates or depreciates, the estimated annual impact is around $650 million pesos serving as a natural hedge.
Our effective tax rate was 31% year- to- date in line with historical levels. Net income reached $1.4 billion for the quarter and $3.6 billion year- to- date with net margins of 8.1% and 9.8% respectively. Our 12-month ROE stands at 26.5% above our long-term target. However, as claims normalize and frequency increases in the second half, we expect ROE to moderate toward our long-term target of 20% to 25%. Our regulatory capital stood at $5.7 billion with a solvency margin of $16.2 billion pesos equivalent to a solvency ratio of 385%. Our 12-month earned premium to capital ratio is 2.7x. We maintain a strong capital position that allows us to invest strategically to continue improving customer service and experience through innovation and technology while reinforcing our core capabilities. Our approach remains disciplined and selective, always with the goal of delivering long-term sustainable value to our shareholders.
It is worth mentioning that there is no news from the fiscal authority regarding the audit procedures and the VAT interpretation. This matter continues under assessment in the corresponding instances and we have not received any conclusive nor final resolution. Qualitas' position stands firm with the corresponding legal arguments to support the industry criteria and thus we trust the authorities will reach a reasonable resolution. As mentioned before, we will timely communicate any relevant progress to the market. In closing, we are proud of our solid first half performance. We delivered strong profitable growth, paving the way for the future, reaching key milestones despite the external pressures. Our capital position is robust and our strategy remains clearly defined. While the second half may present new challenges, we're fully prepared to navigate them and continue delivering long-term sustainable value now. Operator, please open the line for questions. Thank you.
Thank you.
We will now begin the question and answer session. To join the question and queue, you may press the raise your hand button on your screen and we will open the mic for you, or you can also send it through the chat. To withdraw your question, please press the button again. We will pause for a moment as callers join the queue.
Thank you.
Our first question comes from Tiago Binsfeld at Goldman Sachs.
Hi, good morning everyone. José Antonio, Roberto , Raquel, thank you for taking my question. I see the company coming off a very strong first half of the year in terms of ROE. Like you said during the presentation, there are some risks that you see for the second half of this year. Perhaps if you could explore a little bit more the ideas that you presented on pricing pressures, the macroeconomic volatility, the rainy season, and also I think you mentioned regulatory changes. If you could put some more details on it. What makes you more concerned when you discuss those points to help us understand a little bit more the dynamics for the rest of the year. Thank you.
Good morning.
Tiago, thank you for your question. Let me thank you for your comment about our strong results. I believe that our results certainly are strong for the first half of the year and we are following our strategy. Let me tell you that certainly there is a change in cycle, I would say, in the car industry, in the insurance car industry segment here in Mexico and we have had like three and this is the starting of the fourth cycle. Once the industry was able to decrease the combined ratio and the loss ratio and as such we are seeing the pricing pressures. The important thing here is that we continue to lead the market as always, we will continue to take pricing as needed.
Now, having said that, there is some pressure more in certain, in the fleet side of the segments that we have and this is something that I continue to see in the following six months at least. Obviously, we have a good portfolio. There are leading market share. There is something that our competitors are looking into. We are defending and we are taking some price declines and we have been able to maintain our customers. Renovations are at a good level. Now, having said that, I think that as we indicated earlier that for the year we would see a top-line growth between probably the high- single digits to around 12%, which, by the way, we are very glad that we have been able to be slightly ahead of what we indicated as a range for the year. We will continue to see this pressure.
We have seen this in the past and we will continue to manage very disciplined to make sure and ensure that we continue to be profitable in those businesses. The cycle now is something that is complicated as also, as you know, the new car sales are also an issue in making. Not an issue, but it is below. In 2023, the sales of new car sales was above 20%, in 2024 it was above 10% and right now it is flatish or below depending on if you consider the Chinese car sales because some of them are not reported through the industry association. The second half will continue to be somewhat complicated, but we are prepared to continue very disciplined on handling our business as we have done in the past year.
Thank you, José Antonio. If I may just follow up on the regulatory side, anything that you expect to be meaningful for this year?
Not really in the regulatory side. There's nothing new in there. Clearly there is something related, as you know, in the financial markets in Mexico with a couple of the three financial institutions that have been named by U.S. authorities to be careful with that. We don't have issues there. Clearly I don't see from a regulatory standpoint, probably there's going to be strengthening on anti-money laundering stuff, but other than that I don't see anything in the horizon for the next six months around that.
Okay, that's clear. A second follow up, if I may. You mentioned the top-line expectation. Just want to confirm that if you still expect earned premiums to outpace written premiums for the rest of the year.
As I mentioned, Tiago, clearly we said that it would be between the high single digits and low double digits, and it will be, I mean I cannot provide a number per se, but it will be close to those ranges. We have been able to exceed the ranges that we have said, and I see that we will be in the 10%ish, around the 10% growth.
Okay, perfect. Thank you so much.
Thank you.
Our next question comes from Ernesto Gabilondo at Bank of America.
Thank you. Hi, good morning. José Antonio and Roberto, and thanks for the opportunity to ask questions. My first question will also be a follow-up on premiums. Last quarter we noted stronger data from competition. Can you elaborate in which indicators you are noting that stronger data, and also related to premiums, how much have you reduced prices in this first half and how much do you expect to reduce in the second half? Can you remind us how much of the premium growth of the last couple of years was related to pricing? I have a second question related to the financial results. For this, I would like to know where do you see the interest rates by year end and how you are seeing them by the end of next year.
Today we noted that you are doing around $1.2 billion pesos in the financial results per quarter. In the scenario of repricing the portfolio in two years under lower rates, what should be the financial result per quarter that we should be expecting? Also, when do you expect to start materializing these unrealized gains of $400 million pesos that you have in your stockholders' equity position? Thank you.
That was a number of questions. Let me see if I remember all your questions. Ernesto, good to have you with us.
Let me tell you.
Thank you.
About the premiums versus competition.
Let me tell you that.
We have reduced prices a bit. As you know, we manage this by zip code, so we do some increases and some decreases based on the risk that we take. Now it is important to note that on average we have taken small decreases. It is in the realm between probably a couple of 2% or something like that.
It has not been big.
Where we have been seeing more competition.
Is in the fleet segment.
In the fleet segment, we have had to make sure that we have good financial results there. I mean, the combined ratio is reasonably good. We have had, in some instances, to reduce a little bit more than that the amounts for fleets, and that's related to the premiums. Now, I don't know if it's an.
Important thing because in the top line.
In the top line, I'm going to let Roberto answer a bit of that because we have a mixed situation there. Obviously, we have had a good.
Top.
Line growth in the financial institutions, and it is a kind of a mix situation there which is favoring our position and our leader position in the market. Roberto, can you please elaborate on that one?
Yes.
Thanks, Ernesto. Good morning. Let me address the premiums questions.
Because I think when you look at it.
The 12.9% on Q2, there is a mixed bag of things happening at the pricing level. When we looked at the presentation, we talked a little bit about how, for example, the traditional business was experiencing much more pricing competition and it was actually either flattish or depending. If you look at last year's multiannual contracts, it was getting to single digits growth. That's where we're seeing a little bit more of what José Antonio is alluding to in general terms. I would say that out of that 12%, I would say that 60% is still pricing on total carryover from either 2024 or what is experiencing in the mix of the different channels. Let's also think about the financial institutions. As I put in my remarks, there's a strong growth in the financial institutions and it's counterintuitive.
What we're seeing on one end, we're seeing the new vehicle going down on a year- to- date basis, minus 2.8%. On the other, we're seeing a double digit in the financial institutions. We see three main drivers for this. This is on a rise. The first one is the rise on average premiums rather than volume. This is the result of several factors. What we're seeing is a shift in the insured vehicle mix coming from smaller units to larger vehicles. As I mentioned in my remarks, the SUVs, pickup trucks, which carry significantly higher premiums, that will drive to a average premium. The second one is the rapid expansion of shipping, this composition of our portfolio to multiannual policies. We'll talk, I'm sure, about that in a few more questions later on, the mixed annual versus multiannual.
The third one is we are increasing the market share in some key financial institutions. What I'm trying to say is that depending on the different segments, we are seeing a different price volume ratio. We are experiencing, particularly on the traditional, much more price aggressiveness. It goes back to our consistent message of reaching the long- term target of 92% to 94% in each of these segments. When you think about individual, it is actually growing units and price at the same time. The combination of those are actually going through. It really depends on by segment, Ernesto. Looking now to your second portion of your question on financial results. You were asking how much do we see more on the interest rates in terms of the Banco de México?
What we see particularly in Mexico, we see a continuous decline in the interest rates down to probably 7.5% in 2025 and perhaps to 7% in 2026. There is still a debate whether it's going to be 50 basis points or 25 and so on. We will have to wait and see. I think there was another portion of your question related to the financial income. The $1.2 billion that we saw back in Q2 and then the link to the $1.5 billion that we saw in Q1 linked to how much of that is going to be realized versus the unrealized. The $400 million that we have in our balance, we're certainly going to see more of that excess cash depending on how the ETFs or our variable portfolio plays out. We will have to see how we start realizing in the next coming quarters.
There is no commitment on when or how we're going to start realizing those, but probably we'll see a portion of that in the coming future. Again, it gets back to that $400 million when you look at our ROE was 8.4%. I'm sure you're wondering if you were to include everything to mark to market, we were getting up to 11%. When would we start kicking those into the P&L? Again, it's a matter of how this starts playing out. As interest rates go down, as we've been discussing in previous calls, every 25 basis points we expect to see a valuation benefit of $250 million pesos in our balance sheet. We will have to see how those play out. Ernesto, I hope that I address most of your questions.
Just let me adjust because Ernesto, you were asking also for 2026. Let me tell you, as also we have included in previous calls, that we have increased the duration of our portfolio and we have been able, as you might recall, probably 18 months ago, probably 24 months ago, our duration was very low, was less than half a year, and now we have in excess of two years and that should carry us well into 2026. Also, with the good rates that we were able to have in addition to what Roberto indicated,
and that's.
Actually a very good point, José Antonio, thanks for pointing it out. The duration is going to give us some stability on our 86% fixed income portfolio. That is going to help us to start not seeing so much volatility in the coming quarters, and certainly we'll see the remaining portion on the capitals that we realized in our P&L. Hope that answers your question.
Yes, thank you very much. Because José Antonio and Roberto, just on this financial result, once the fixed income portfolio matures in two years and you have to substitute those securities with new ones, those ones should be on the lower rate. How should be the impact or how should we be expecting that line to behave? Today you are doing between $1.2 billion, $1.5 billion per quarter. If we go after the two years that you have to substitute it with new securities, how should we think about this line?
I think that's a good question.
Thank you, Ernesto. I think we should expect to continue to see that going down. The good news is that for at least 2025 or 2026, we'll see a little bit of that step more stable. As interest rates will continue to go down to certain levels, we'll continue to expect that will go down in the same magnitude, let's say 25 basis points, 50 basis points, and so on to match the market consensus. That would be something to keep an eye on, how we are renewing those investments. Now keep in mind that our duration has a multiple phasing of all our, let's say, on multiple durations. It would not be eventually in two years and all will go out at the same time. They will obviously go out and we renew, and depending on when we renew, we will get a particular interest rate for those.
We will continue to make the strategy to make it as swift as possible. Remember, we're not trying to play, we're being conservative around our portfolio and most of it is on fixed income. Jose, you want to add.
Yes, yes, I would like just to add that clearly we do not have a crystal ball for that. Ernesto, we know that the world in general and Mexico in particular has some challenges regarding the tariffs and all that stuff. At this point in time it would be kind of complicated to foresee a couple of years from now what is going to be the situation. The important thing is that we will maintain an agile. We have obviously we work with our investment committee and we will take advantages of the situations as they come by, as we have done over the past two or three years, so we will remain obviously very.
Close to this one.
There might be a renegotiation of the free trade agreement with the U.S. next year. There are a number of things that might change a little bit of what we see just in terms of declining the interest rates Banco de México. I guess at this point in time, nobody can tell us what they would be considering the uncertainties in the macroeconomic level.
Perfect. Thank you very much.
Our next question comes from Carlos Gomez Lopez at HSBC.
Hello. Thank you for taking my question. You have addressed this partially, but if you could please clarify the difference between the first and the second quarter, and the specific reasons why the claims ratio was so low in the first quarter relative to the second quarter. Is this type of seasonality something that is specific to this year or should we expect it in the coming years as well? Thank you.
Let me just start.
Carlos, thank you for being here today. Let me tell you that obviously we have been going in a long-term curve of declining combined ratio and loss ratio, and that's something that we have been working on since the end of the pandemic. As you know, these things take a long time to surface, and we have been doing that for the last probably 12 months at least, seeing this very positive behavior. Having said that, I can tell you that we are below our long-term targets on those, and we are happy about that. Considering how the cycle works now, that's why we see this price competition, because it happens every time that profitability returns to the sector. Obviously, we never lost it, but some of the sector did. Now, there's going to be the price competition, but this is important.
We expect at some point in time, because of the pricing pressures, etc., that we will be back to within our range. Now, I don't know if you want to elaborate, Roberto.
Thank you José Antonio and thanks Carlos.
for joining us this morning. Let me double click a little bit on your question. On one end, yes, we saw a Q1 59.7% loss ratio in Q1, and your point is, hey, we're seeing a Q2 of 63.1%.
The first point is back to Jose .
Antonio's message is well within our target range and it's between the 62 and 65. The question is okay, why is it the increase? Let's keep in mind that in Q1 when we saw the 59.7, it's part of the natural seasonality of the year, right. We normally see a lower seasonality. We didn't have any meteorological events. What we're seeing in Q2, there are multiple factors. The first one I want to double click is on Qualitas México. When you look at Qualitas México, actually it increased from 58.2 to 60.4. We're already starting some of that seasonality kicked in. We are seeing the early beginning of the rainy season and we are seeing.
Already a little bit more of the.
Frequency that we would have expected. In Q1 we had a 6.4% frequency. Now in Q2 we had a 6.9% frequency. That's just part of the natural play that will get into our loss ratio for Mexico. Still very stable, very positive. The delta primarily in Q2 has to do with the U.S. subsidiary. As I made my remarks, we're still going through that strategic priority and we are firmly committed to turn it around. On the claim side, what we're seeing.
Is the weight of the legacy litigation.
The long-tail exposures are continually impacting us and we're making tangible progress. As I mentioned also in my remarks, the litigation cases have been dropped 63% compared to what we saw in 2023. It's important to understand that there is an impact from the U.S. subsidiary on the reserves, but that we're making progress and that we're seeing a substantial acceleration on the domestic new claims.
We need to also keep.
in mind that even combining both the Mexico loss ratio performance, even with the impact that we're seeing from the U.S., we are still within our target between 60 to 65%. Just comparing Q2 versus last year, we see 260 basis points better than last year. Even in the first half, we see a loss ratio of 61.4%. Even with what I just explained, 350 basis points better than last year. I hope that helps on putting a little bit more color behind the loss ratio.
Carlos.
It helps. I have to say again, my question is actually more historical and forensic. It's not the second quarter which looks strange. It looks perfectly normal. We are trying to understand why the first quarter looked so good, especially about the first quarter that perhaps we did not get. Perhaps that's why the consensus was much higher for the second quarter than it probably should have been. Were there any special items or just the absence of U.S. reserve creation that made the first quarter. It's also Mexico. You said Mexico was 50%. We want to understand what it was in the first quarter that was particularly good and probably not replicable.
No, it's nothing special, Carlos. Regarding that, it is the different factors that we built during the past probably 18 months in terms of, you know, cost controls and price and pricing increases to get back to the original cycle. Clearly, this is something that goes like that. To get specific to your question, there is nothing in particular that helped the first quarter other than the momentum that we carried back then. You know, that's why it is going to be turning around. In addition, the momentum came in at the time when, as you know, the first semester is from a seasonality standpoint also good. When you have the momentum to the seasonality, that's what we have now. The cycle begins to turn and we are prepared to take it.
I know that probably it's difficult to give you this view, but there's nothing in particular other than the momentum that we carry out of the good actions that we were taking over the past 18 months or so.
Okay, Carlos, to complement a little bit.
On what is ahead, I think we should expect, regardless of what we saw in Q1 and Q2, we should, as we're being very vocal about, the second semester normally has a much higher claims ratio due to the rainy season and the meteorological event. Please do consider that in your models as we move forward, since that is going to play out and we're already seeing it in May and June.
Okay. If I can have you short time on the U.S. I understand this is a long tail and it's judicial and it's unpredictable, but what is a reasonable expectation for you to clear up these remaining cases? Are we talking about a few more quarters, a few more years? Will the order of magnitude be as high as we have seen in this quarter?
I think it's hard to tell, Carlos, because what we are seeing is that we are closing long-tail cases, as I mentioned, in cases like five or eight years ago. It really depends on how that litigation in place is closed. I would emphasize that the trend obviously will go down versus what we're seeing, and it will depend on a case-by-case basis.
Just let me add to Roberto, because it is important to say that clearly we have dropped the number of cases, and let me go back to 2023 when we decided to change the strategy. It is important to stress the fact that we made the decision back in early 2023. We are executing against that strategy, and we are with a clear focus on the cross-border and binational, eliminating the domestic one. To your question, I think it is going to be at least it will take probably 12 to probably 18 months more, and we are going to be dealing with that going forward. Other than that, litigation cases have dropped more than 60% from where we were in 2023, which is the important thing that we are managing that part.
Thank you so much.
Thank you.
Our next question comes from Pablo Nunez at GBM.
Yes.
Hi, good morning.
José Antonio, Roberto , Raquel, congratulations on the results. Very sound growth in the quarter. My question is related to the dynamics that we should expect between the traditional business and the financial institutions because one of the changes that caught our attention in the quarter was the higher acquisition ratio as you mentioned, still within your range, but higher relative to the historical standards at 24%. My question is looking into the second half of the year, you mentioned that you expect top-line growth of 10% to mid-teens level to low-teens level. What is the dynamic and the split between the traditional and institutional financial institution business and also thinking already on 2026, which is the run rate for these two businesses, should we expect an acceleration in the traditional business next year and what is driving this very sound performance of the financial institution? That's my first question.
Thank you.
Thank you, Pablo. Thank you for joining us today.
Let me tell you that.
One, as Roberto Araujo indicated, we had a.
Very good.
Growth in the financial institution. As he indicated during his remarks, this is very important to know that we see that the international segment is helping us somehow, even though it is really still a very small part of the total business.
We are happy in the sense.
In the individual business we are within the ranges that we are saying. It is what we consider healthy. The financial institutions, because of the mix effects and the pricing and the type of vehicles that we insure, and considering that we are the leaders in the industry, we will continue to see as we see.
There will continue.
will be pressures there going forward in terms of the financial institutions because of the market and now it is the sales of new vehicles. I'm sure that there's going to be some pressure there from car manufacturers. We see that the individual and financial institutions, financial institutions will continue to be outpacing individual, but individual is healthy. The thing is going to be in the fleets one, the fleets one are going to be somehow flat, flattish because of price competition. That would be more. I don't know if that answers your question. I can also have Roberto to provide.
His view, I think that.
Is what will allow us to really be in the guidance and the growth that we have indicated.
Roberto,
just to complement, I will continue to see some of that growth in the financial institutions as we have explained. Traditionally, we'll continue to play an important role as how do we compete in individual, which is still playing and is quite profitable. We will continue to be on the single low teens. We'll continue on track of what we're committed moving forward.
José Antonio. Roberto , with this, what level of acquisition ratio should we expect for the second half of this year? Do you think that when the fleet insurance business starts to pick up again, thinking of more medium-term dynamics, should this acquisition ratio come back to 22% or 23%, or do you think that this mix will continue and we should expect this 24% too?
I'll have Roberto answer that one. Let me tell you that we have not changed any of the standard commissions that we pay for our businesses. Most of them are really more of a mixed one. Roberto.
Yeah, to your point, Pablo, for example, Q1, our acquisition ratio was 22.2% and we still saw a significant growth on financial institution. The thing here in Q2 is that it actually outgrew individual and the fleet business. That's what drove the mix on the 24.1%. As long as we continue on not having so much of that split, the ratio will continue to be on our guidelines. On a cumulative basis we're at 23.1%. If we continue on this journey and we continue, remember that traditionally we had a base on larger multiannual contracts that is hurting us on the growth on the fleet segment. We will continue to see that moving forward. We're expecting to hit still our ranges in terms of acquisition ratio.
Thank you.
A final question, if I may, on a different topic. Your taxes were also higher than usual this quarter. What level of effective tax rates should we expect for the year? What's the normal run rate? What explains these higher taxes in this quarter?
Yes, Pablo, you clearly did your homework. When we saw the 36% tax rate, and it's mainly driven when you look at Mexico, it's actually close to 30%, 31%. The delta from the 31% to 36% is linked again to the U.S. subsidiary. When we were making my remarks, I highlighted the losses from the U.S. and that from a regulatory standpoint, from an auditor's recommendation, they're asking us to continue building on the DTA allowance and that keeps primarily in our tax effective rate. What we would expect is to continue online to 30% to 31% over time to hit at the year end. This is more like a timing of Q2, depending on how that evolves and the U.S. operation continues to present whether it's losses or start getting a little bit more stable.
Pablo.
Perfect.
Thank you very much.
Thank you.
We have time for one more quick question. We will be taking it.
Oh, no.
Actually, that hand has dropped at this point. That concludes today's question and answer session, since we are out of time.
We.
Will send over some closing remarks.
Thank you very much for attending this conference call.
We are happy. The results for the first half of the year were very good, and we will continue to do our best to maintain our leadership position in the industry in a healthy and profitable way. Thank you, all of you. Thank you.
That concludes today's call. Thank you for participating and have a pleasant day.