Operator: Thank you for standing by. This is the conference operator. Good morning, and welcome to Quálitas' Q3 2026 earnings results webcast. The conference will begin now. It is my pleasure to turn the call over to Jorge Pérez, Quálitas' IRO.
Jorge Pérez: Good morning, and thank you for joining Quálitas' Q3 and nine-month 2026 earnings call. I am Jorge Pérez, Quálitas IRO. Joining me today are Bernardo Risoul, our CEO, as well as our CFO, Roberto Araujo. As a reminder, please note that 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. Quálitas undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events, or otherwise. With that, I will now turn the call over to Bernardo, our CEO, for his remarks.
Bernardo Risoul: Thank you, Jorge, and good morning, everyone. It is great to be with you all again. Let me start by saying that we are very pleased with our Q3 performance. As we approach the final stretch of the year, these results reinforce our confidence in the strategy we have been executing throughout 2026, demonstrating the resilience of our business model and our ability to deliver profitable growth, even in a challenging environment. More importantly, they keep us firmly on track to achieve our full-year objectives. Turning to our performance, written premiums grew 7.7% for the first nine months of the year, in line with our expectations and ahead of the market. More importantly, this growth came with healthy underwriting profitability and a well-controlled loss ratio, reflecting the continued benefits of the initiatives we have been implementing throughout the year.
Bernardo Risoul: Equally encouraging, we reached a new all-time high in insured units, surpassing 6.2 million vehicles during the quarter. This milestone is particularly meaningful given the persistently aggressive pricing environment, market volatility, and subdued economic growth in Mexico. It demonstrates our ability to continue expanding our insured vehicle base while remaining committed to disciplined underwriting and sustainable profitability. In terms of market environment, several competitors continue to prioritize volume gains through price, even as the industry faces higher claims costs. So far, we have seen no meaningful signs of a shift in these competitive dynamics, and we expect them to remain for the balance of the year. Taking the right decisions for the long term continues to be our compass. We will continue to focus on overall value proposition and reinforcing the importance of maintaining a disciplined and selective commercial approach. When it comes to pricing, our philosophy remains unchanged.
Bernardo Risoul: We will be aggressive but not irresponsible. It is also important to remember that our industry is cyclical. We have navigated similar competitive environments in the past, and we understand that market dynamics will eventually evolve. While we cannot predict exactly when this will happen, we are taking the necessary steps today to ensure we are well-positioned when the cycle turns. This is precisely why, despite the current pressures, we have remained fully committed to investing in the capabilities that differentiate Quálitas. We continue investing in technology, talent development, training, and operational improvements to further strengthen our value proposition and customer experience. Our operational initiatives are also delivering tangible results. Despite the additional claims costs associated with the VAT regulatory change, we have maintained a well-controlled loss ratio, supported by favorable trends in claims frequency, vehicle theft, recovery rates, and our continued efforts to contain average claims costs.
Bernardo Risoul: To recognize as well that in this Q3, which historically sees the highest rainfall, we saw a milder one, an effect that while we do not control, we certainly welcome. The sum of all efforts resulted in a healthy underwriting profitability, with a combined ratio of 92.7% for the first nine months of the year, improving our cumulative performance compared to the H1 and reinforcing our confidence in achieving our full-year profitability objectives. On the financial side, our investment portfolio continues to make a strong contribution to earnings. The decisions taken over the past several quarters to selectively extend duration and lock in attractive yields continue to support our financial performance. While our predominantly fixed income allocation provides stability in a volatile market environment.
Bernardo Risoul: Together with our solid underwriting performance, this translated into an attractive return on equity of 27.5% for the period, reinforcing the strength of our business model and the consistency of our long-term investment strategy. Beyond our financial performance, our competitive position remains strong. According to the latest available AMIS figures, Quálitas continues to lead the Mexican auto insurance market with a market share of 33.3% in written premiums, 36.1% in earned premiums, and 43.8% in the heavy equipment segment. Furthermore, we accounted for 59.1% of the underwriting results generated by the total auto insurance market. These figures are particularly meaningful in the current environment, demonstrating that our leadership is supported not only by scale, but also by strong technical profitability.
Bernardo Risoul: Another important recognition of our commitment to service excellence came during the quarter, as Quálitas México was once again recognized as La Aseguradora Ideal by insurance agents in Mexico, marking our seventh consecutive year receiving this distinction. Being recognized among the 100 insurance companies that operate in Mexico is extremely meaningful to us, as it comes directly from the agents who interact with our organization and serve our policyholders every day. Turning to our strategic priorities, winning in Mexico remains our foremost objective. As the foundation of our business, we continue focusing on strengthening our competitive advantages through service excellence, operational efficiency, and disciplined execution. Along the year, we have reinforced our service monitoring capabilities, closely tracking customer satisfaction and key operational indicators along each interaction that our policyholder has with Quálitas.
Bernardo Risoul: These efforts are delivering tangible results, with all key service and NPS indicators improving versus year ago and being at the highest in the past five years. Within many things to celebrate, I would highlight the valuation and repair process, our weakest link in the past years, affected as well by the spare part inventory shortage. During Q3, we reached a 90% NPS, an improvement of over 20 percentage points versus two years ago, led by a quicker valuation process, a closer relationship with shops, and better communication with the insurer. Furthermore, technology and artificial intelligence are becoming increasingly important components of this strategy. By combining more than 32 years of specialized data and operating experience with AI-driven tools, we are improving decision-making across underwriting, claims valuation, risk prevention, and fraud detection.
Bernardo Risoul: Moving to our second pillar, our international operations continue to make encouraging progress, particularly across Latin America, where written premiums grew 45.1% in US dollar terms during the quarter. Beyond growth, our priority remains to strengthen local capabilities and build sustainable, profitable operations. In Colombia, we now have 21 offices, and by the end of September, the operation continues to deliver over-plan performance. These milestones reflect the progress we are making in expanding our presence, strengthening our agent network, and building a solid foundation for long-term growth. In the US, our strategic repositioning continues as planned. We remain focused on managing the runoff of the domestic and cross-border commercial business while strengthening our binational personal auto proposition, prioritizing a healthier long-term risk and profitability profile.
Bernardo Risoul: Our third strategic pillar, focused on new businesses and vertical integration, continues to strengthen our operating capabilities and support greater efficiency across the claims value chain. Within this third pillar of diversification and long-term growth, I want to highlight Quálitas Salud, a business that is completing its third year and where we continue to learn and adjust our model towards one that can create value to that 90% of the Mexican population that doesn't have a private medical coverage. In this Q4, we will complement our portfolio by launching Más Salud, an important milestone by which we will enter the group health insurance arena. The product is designed for small and medium-sized businesses, combining preventive healthcare and major medical expense coverage through a closed network of hospitals with a differentiated and competitive premium offering. It will start in Mexico City, with plans to expand nationwide by 2028.
Bernardo Risoul: This launch represents an important step in the development of Quálitas Salud and reflects our commitment to creating innovative products that strengthen our value proposition and support Quálitas's long-term growth opportunities. As we approach the final quarter of the year, we are encouraged by our performance and remain confident in achieving our full-year objectives. One important thing to consider is that we anticipate a slower pace of written premium growth in Q4, reflecting the higher comparison base created by several large multi-annual policies issued in Q4 2025, which on its own represented approximately 5 percentage points of growth. Since we will continue to earn those premiums, we expect earned premiums to grow several points ahead of written premiums this next quarter.
Bernardo Risoul: These dynamics are well understood and already incorporated into our expectations of full-year written premium growth in the mid to high single digit, with combined ratio within our 92% to 94% long-term target and ROE above 20%. All this while continuing to invest in the projects that continue to seed long-term sustainability. Before closing, I would like to thank our employees, agents, service offices, and business partners for their continued commitment and dedication. Their contribution is essential to our performance and to the trust our policyholders place in Quálitas every day. With that, I will now turn the call over to Roberto for a deeper dive into our Q3 and nine-month financial results. Roberto, please.
Roberto Araujo: Thank you, Bernardo, and good morning, everyone. Our Q3 and year-to-date results reflect solid top-line growth in line with expectations, a combined ratio well within our target range, and a resilient investment portfolio. Let me walk you through the details. Going directly to our top-line performance, written premiums grew 7.7% during the quarter as well as year to date, reaching MXN 57.7 billion for the first nine months of 2026. We are pleased with this performance, particularly considering the persistently aggressive pricing environment across the industry. As Bernardo mentioned, our commercial strategy remains focused on balancing growth and profitability, allowing us to continue expanding our business while maintaining the underwriting discipline that supports value creation. In our Mexican operation, the traditional segment accounted for approximately 60% of total written premiums, growing 4.8% during the quarter, and 5.2% year to date.
Roberto Araujo: Within this segment, individual business grew 5.1% in the quarter and 3.8% year to date, while fleets increased 4.3% and 7.5% respectively. This performance reflects a positive evolution across both businesses as we continue balancing commercial competitiveness with our long-term profitability objectives. Moving to the financial institutions segment, which represented approximately 35% of total written premiums, growth reached 14.6% during the quarter and 15.1% year to date. This performance was supported by positive new vehicle sales trends, our established relationships with key financial institutions, and our broad distribution capabilities. Regarding new vehicle sales trends in Mexico, an encouraging development has been the performance of new light vehicle sales, which, according to AMDA, grew 5% during the first nine months of the year, including a 4.5% increase in Q3.
Roberto Araujo: While the heavy vehicle segment continues to face a more challenging environment, the positive momentum in light vehicle sales provides a constructive backdrop for our industry and opportunities for new insurance production. Nevertheless, our commercial strategy goes well beyond capturing new vehicle sales. We remain equally focused on strengthening customer retention, deepening our relationships with financial institutions and agents, and continuing to differentiate Quálitas through the quality of our service. As reported, our international subsidiaries contributed approximately 5% of total written premiums year to date, with the strong performance across Latin America partially offset by the expected decline in our US operation, consistent with its ongoing strategic repositioning. Across Latin America, written premiums grew 36.5% during the quarter and 27.1% year to date in MXN terms. However, foreign exchange movements continue to influence our reported results.
Roberto Araujo: Excluding these effects, growth reached 45.1% in USD terms during the quarter and 41.7% year to date, highlighting the strong underlying momentum of our LatAm operations and the continued progress in scaling these businesses. In Colombia, we continue making encouraging progress. We now have 21 offices and work with more than 1,950 agents, reaching USD 21.3 million in written premiums year to date and having issued approximately 50,000 policies since the beginning of our operations. More importantly, we are seeing meaningful improvements in agent productivity. These developments reinforce our confidence in the progress of our commercial network and our ability to gradually build scale in this market. In the US, written premiums declined 76.1% during the quarter and 77.9% year to date.
Roberto Araujo: Consistent with our strategy to manage the runoff of the commercial businesses we decided to exit and focus our resources on personal auto and the binational opportunity. Our exit of the commercial business represents approximately 1 percentage point of total Quálitas premium growth, but is already yielding benefits on the bottom line as we make sequential progress toward being profitable in 2028. Earned premiums increased 2.2% during the quarter and 6% year to date, reflecting the dynamics of reserve movements and the evolving composition of our portfolio. As you know, earned premium growth is closely linked to the earning pattern of written premiums and the corresponding constitution or release of technical reserves. During the quarter, we constituted MXN 279 million in reserves, compared to a release of MXN 460 million in the same period last year.
Roberto Araujo: On a year to date basis, reserve constitution totaled MXN 2.8 billion, 31.4% higher than in the first 9 months of 2025. This behavior was largely driven by the evolving mix of annual and multi-annual policies, with the latter increasing to 26% of our portfolio compared to 22.5% a year ago. The higher proportion of multi-annual policies, together with the reserve movements observed during the quarter, explains why earned premiums grew at a more moderate pace than written premiums, despite the solid production performance. As a reminder, technical reserve constitution is based on approved regulatory models and reflects the corresponding premium growth and portfolio behavior. Moving down to our costs, the loss ratio stood at 63.4% for the quarter and 63.6% year to date.
Roberto Araujo: Keeping in mind that the Q3 has historically been one of the most demanding periods of the year from a claims perspective, particularly due to the rainy season and weather-related events. In addition, we continue absorbing the higher claims costs associated with the new VAT treatment, which represented approximately 320 basis points of our year-to-date loss ratio. Despite these pressures, we have maintained a well-controlled loss ratio, supported by the continued benefits of our operating initiatives as well as favorable developments in claims frequency, vehicle theft, recovery rates, and our efforts to contain average claims costs. These factors have helped us partially offset the incremental costs associated with the VAT change, keeping our quarter and year-to-date loss ratio within our sustainable target range of 62% to 65%. In Mexico, the loss ratio stood at 61.5% for the quarter and 62.2% for the first nine months of the year.
Roberto Araujo: Looking at some of the underlying claims indicators, quarterly frequency stood at 6.8%, representing a decrease of 31 basis points compared to the same period last year. Meanwhile, vehicle theft cases declined 17.1% year-to-date, despite the continued growth in insured units. Our recovery rate reached 49.9%, 610 basis points above the rest of the industry. This performance reflects years of sustained investment in technology and the continuous development of specialized tools for theft prevention and vehicle recovery. Together with closer coordination with authorities and specialized partners, these capabilities continue to improve our effectiveness in recovering stolen vehicles and mitigating claims costs. We are also seeing encouraging progress in controlling average claims costs, supported by the contribution of our vertically integrated businesses, particularly in windshields, spare parts, and other vehicle components. These capabilities are helping us improve procurement efficiencies and mitigate inflationary pressures while preserving our service standards.
Roberto Araujo: Moving to our acquisition ratio, it stood at 24.2% for the quarter and 23.9% for the first nine months of the year, reflecting the composition of our business, particularly the contribution from the financial institution segment, which typically carries higher commissions. Our operating expense ratio stood at 5.1% for the quarter and 5.3% year-to-date, including employee profit-sharing provisions, fees paid to service offices, and performance-related corporate bonuses. Excluding employee profit-sharing, which is required to be recognized under Mexican regulations, our operating expense ratio would have stood at 4.6% for the quarter and 4.5% for the first nine months of the year. Altogether, this resulted in a combined ratio of 92.7% for the quarter and 92.7% year-to-date, representing an improvement compared to the previous quarter and bringing our cumulative performance to a more favorable level, well within our full-year target range of 92% to 94%.
Roberto Araujo: This is particularly encouraging considering the additional claims costs associated with the VAT treatment and the persistently challenging competitive environment, reinforcing our ability to maintain healthy underwriting profitability through disciplined execution and effective cost management. Now, moving to the financial side of our business, comprehensive financial income increased 15.2% during the quarter and decreased 6.2% year-to-date, reflecting the evolution of interest rates and investment market conditions relative to the same periods last year. Our investment portfolio continues to benefit from the decisions taken over the past several quarters to selectively extend duration and lock in attractive yields. Although lower benchmark interest rates have gradually moderated reinvestment yields, our proactive portfolio management has allowed us to maintain an attractive spread over reference rates while taking advantage of opportunities arising from market volatility.
Roberto Araujo: We remain predominantly invested in fixed income, which represented approximately 86% of our total MXN 54.8 billion portfolio, with an average consolidated duration of 2.7 years and a yield to maturity of 8.5%. in Mexico, our portfolio's yield to maturity stood at 9.1%, compared to a reference rate of 6.5%, representing a spread of approximately 260 basis points. With our current portfolio composition, a 25-basis-point decrease in interest rates would result in an estimated valuation benefit of approximately MXN 330 million, reflecting the positive impact of our duration strategy in a declining rate environment. At the same time, the underlying fixed income carry continues to provide an important source of recurring financial income. The rest of our portfolio allocated to equities also remained resilient during the first nine months of the year.
Roberto Araujo: For reference, the S&P 500 posted a year-to-date return of 11.8%, while continued volatility across global markets reinforced the importance of our diversified positioning and long-term investment perspective. Our investment portfolio continues to deliver solid results, supported by the attractive yields locked in over previous quarters and the consistent income generated by our predominantly fixed income allocation. Additionally, during the quarter, we strategically rebalanced and adjusted a portion of our ETF positions, allowing us to realize approximately MXN 166 million in accumulated gains. This represented 7.7% of the unrealized gains held in our ETF portfolio as of the end of September. This reflects our disciplined and proactive investment approach while maintaining our long-term strategy and risk parameters. Total comprehensive financial income reached MXN 1.3 billion during the quarter and MXN 3.6 billion year to date, delivering an ROI of 8.3% and 7.7%, respectively.
Roberto Araujo: Total remaining unrealized gains at the end of September amounted to approximately MXN 2.1 billion, including foreign exchange effects, compared with MXN 2.4 billion at the end of the previous quarter. The reduction in unrealized gains reflects the fluctuations observed during the quarter in interest rates that led to lower valuations in our fixed income assets, the realization of selected ETF positions, and the effects from FX. When considering all positions on a mark-to-market basis, ROI would have stood at 6.3% for the quarter and 8.0% year to date. Our investment strategy remains fundamentally unchanged. We continue targeting a fixed income duration of around 2.5 years as reference rates remain in the mid to high single digit in Mexico, following the guidelines and risk parameters established by our investment committee. Finally, approximately 21% of our portfolio is invested in US dollars, reflecting our international presence.
Roberto Araujo: For every peso that the exchange rate appreciates or depreciates, the estimated annual impact is approximately MXN 655 million, providing a natural hedge against foreign exchange movements. Looking ahead, we expect our investment portfolio to continue delivering solid performance, with our predominantly fixed income allocation providing stability amid market volatility. The duration strategy implemented over previous quarters allows us to continue benefiting from attractive yields while maintaining flexibility to respond to changing market conditions. Overall, we believe our portfolio remains well-positioned to support our financial results. Our effective tax rate stood at approximately 30% year to date, in line with historical levels. Net income reached MXN 1.8 billion during the quarter and MXN 4.7 billion for the first nine months of the year, with net margins of 9.5% and 8.2%, respectively. Our 12 months ROE stood at 17.2%, while ROE for the period reached 27.5%, reflecting the solid profitability generated during 2026.
Roberto Araujo: As a reminder, our 12-month ROE continues to incorporate the full-year one-time VAT impact recognized during the Q4 of last year, making even more relevant the ROE for the period when assessing our current earnings performance. Altogether, these results reinforce our confidence in the earnings-generating capacity of our business and our ability to deliver sustainable returns. We remain committed to achieving a long-term ROE on or above 20%, supported by disciplined underwriting, sound investment management, and efficient capital allocation. Our regulatory capital stood at MXN 6.9 billion with a solvency margin of MXN 17.7 billion, equivalent to a solvency ratio of 357%. In turn, our trailing 12 months earned premium to capital ratio stood at 2.8 times. Our capital position remains robust, providing us with a solid financial foundation to support our operations, absorb potential market volatility, and continue investing in our strategic priorities.
Roberto Araujo: Combined with our healthy underwriting profitability and disciplined capital management, this reinforces our ability to deliver sustainable returns while maintaining the financial strength required to support our long-term growth. In closing, we are very pleased with the performance delivered during the first nine months of the year. The strength of our technical and financial results, together with the progress made across our strategic initiatives, reinforces our confidence in the business and keeps us well-positioned to achieve our full-year objectives. The progress we have achieved while navigating one of the most significant transitions is not only a reflection of where we are today, but also of the stronger, more competitive, and more innovative company we have become. Our strategy is clearly defined. We remain focused on disciplined execution and sustainable profitability, while continuing to create long-term value for our shareholders, policyholders, agents, and employees.
Roberto Araujo: We enter the final months of the year energized, focused, and excited about the opportunities ahead, confident that the foundations we are building today will create sustainable value for years to come. Thank you for your continued support and confidence in Quálitas. Operator, please open the line for questions. Thank you.
Operator: Thank you. We will now begin the question and answer session. To join the question queue, you may press the raising hand button on your screen, and we will open the mic, or 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. The first question comes from Pablo Ordóñez.
Pablo Ordóñez: Yes. Hi, Bernardo, Roberto, Jorge. Thank you for taking my question. Congratulations on the result. A very nice surprise from top to bottom. Bernardo, Roberto, can you give us an update on the competitive environment, particularly on the fleet business line and on the financial institutions? You mentioned in your remarks that you continue to see aggressive pricing. Is this mainly in the fleet segment? What has been the impact from the macro? Are you seeing that the macro is also helping this acceleration and renewed momentum that you are reporting in the Q3 written premium? Thank you.
Bernardo Risoul: Good morning, Pablo, and thank you for your question. As we expected, we continue to see competition quite aggressive, and I would say even irrational across all segments, so mainly evident in fleets. Within that, we are committed to stay competitive. We are willing to be aggressive, but as I said, always disciplined and never irresponsible. We are seeking to strengthen our value proposition by a fair pricing, but always combined with service commitments that eventually also represent cost. Just to illustrate and give you some examples, a well-managed legal case can represent significant less amount of expenses. A repair cost due to our favorable contracts on the scale we have can result in lower claim overall on an annual basis.
Bernardo Risoul: Even at the speed at which we can pay a total loss and get that customer its money back represents elements that we are seeking to incorporate more and more, not only on the premiums rates, but as customers make their final decisions. We are continuing to make all decisions considering what is right for the long term of the business. That is our north, and will continue to be our compass. In that sense, in some cases, we are willing to see some accounts go. Industry reports for the H1 already show that inflation pressure and substandard underwriting at below what is a right premium level has resulted into a few players posting combined ratios above 100%. That said, we are expecting this aggressive competitive landscape to remain at least in the balance of the year and likely as we start 2027.
Bernardo Risoul: But I think Q3 results show that our strategy is working, that we are able to sustain and even slightly grow units at a healthy underwriting and premium level. So I am hoping that covers the competitive landscape question.
Pablo Ordóñez: Thank you, Bernardo. On the financial institutions line, it has been volatile. You were mentioning at the beginning of the year that you expected more like a normalization in the growth in this line. This quarter, we see an acceleration back to almost 15%. Where should we expect this line to grow? If you can give some more color, you also mentioned a competitive environment, tough in Q2. Is this acceleration driven by pricing or volume? Any color on this would also be very helpful. Thank you.
Bernardo Risoul: Yeah, Pablo. New car sales have been a pleasant surprise for the year. At the beginning of the year, our stated expectation between 0% and 2%, those numbers are now more in the 5% to 6%. So in a year where overall Mexico consumption has been soft, not to say weak, the new car sales are outliers. We believe this is a combination of factors, the aggressiveness of certain brands entering the market, including Chinese brands that now represent close to 12% of new car sales, but also the increase on financial percentages. Historically, financed car sales were in the 50% to 60%. We are now seeing a ramp-up of the percentage of new car sales sold under a loan of close to 70%. That also incorporates an increase on the duration of the financing, moving from more 36 months to 48 or 60 months.
Bernardo Risoul: I think the market is really actively seeking to create new customers. We are expecting that to ease up somewhere in 2027, but we are yet to see that. As Roberto alluded in his remarks, that is not necessarily the case when it comes to heavy equipment, a sector that is more correlated with industry performance. In those cases, we continue to see a decline in new bus, trucks, and heavy equipment vehicles relative to last year, which was already a soft year. As you recall, 2025 posted a decrease of over 40% in heavy equipment, and this year we are still looking at a decline. That specific segment is expected to bounce back in the next months as we see the economy also recovering. Again, to your point, this is a surprise that has helped financial institutions not only Quálitas but overall insurance segment.
Bernardo Risoul: We are expecting that to ease up in the next months, as we also expect heavy equipment to start recovering from very harsh and disappointing results in the past two years.
Pablo Ordóñez: Thank you, Bernardo.
Operator: The next question comes from Guilherme Grespan.
Guilherme Grespan: Hi. Good morning, Bernardo, Roberto. Thank you for the presentation, and congratulations on the print as well. My question is on the loss ratio side and kind of attached to the competition, but just to recall your message, I remember in the beginning of the year, I think the message was, look, we have a target range of 62% to 65%. We are going to continue to fight for this target. But if I am not mistaken, you used to mention that you could fall on the top end of the range given the VAT pressure. But actually 9 months now forward, you are already in the middle of the range, and Q4 historically is not a pressure quarter for claim costs. So my question to you is, there is any reason we should think that Q4 is going to bring this loss ratio up from this 9-month average?
Guilherme Grespan: If you are seeing any difference on whether rainfall is increasing or not, or if there is anything happening in Q4 that could add pressure, or if it is fair to say that this middle of the range or eventually even moving down from here, it is a fair assumption for the next months in terms of loss ratio. Thank you.
Roberto Araujo: Good morning, Guilherme, and thanks for joining us. I think you touch a very important point. When we go back to Q1 or even Q4 2025, we talked about loss ratio as being a high risk or an area that we will have to put a special focus. We did highlight the VAT regulation impact, and therefore, we are seeing that higher claims. In fact, within that 63.6% on a year-to-date basis of loss ratio, we have embedded already 320 basis points of an impact of the VAT. It is a reality that it has been impacted. Back then, we also, as we mentioned, we put an action plan immediately on different fronts. There is a mixed bag of things that have been helping us to have a well-controlled loss ratio.
Roberto Araujo: Some of things are within our control, and some of things are also welcome, such as the one that Bernardo mentioned, is just the milder weather-related rain season. Reality is that frequency has been stable. When we look at Q1 of 6.3%, increasing from 6.3% to 6.6% and 6.8% in Q3, we see that our frequency has been increasing, but compared to last year, it has been favorable. Not only the frequency is certainly helping on the loss ratio, we also looked at vehicle theft. As I alluded, we see a decline not only for the industry but as Quálitas as a whole of 17.1%. That certainly has helped also to have our loss ratio within our control. Also years of experience and investing in technology has helped us on making the recovery of our rates to even be 610 basis points better than the industry.
Roberto Araujo: Our recovery rate stands currently at 49.9%. When you add all these pieces into the bag, it really helps us on having this well controlled. It also impacts on our average claim costs, which we also have taken immediate actions on looking at efficiencies, whether it is taking advantage of our vertically integrated portion of our companies. Certainly, there is having a great set of efforts to have that loss ratio within our controls. Can you hear us okay, Guilherme?
Guilherme Grespan: Yes.
Roberto Araujo: Okay, excellent. I was just saying that there are multiple effects that are helping us on the loss ratio. It is great news. We have it within our target. To your question, is there any expectation on Q4 that this will continue to move up? I think Q3, it was an important task because certainly on our seasonality, Q3 is normally one of the highest in the second quarter. We do not expect to have a big surprise on loss ratio on Q4. Again, all these actions have taken immediate plans, and that has helped us. I would expect to continue on this range for the remaining of the year. Bernardo, you want to comment?
Bernardo Risoul: Yeah. Hi, Guilherme. Among several things we do not control is weather. While it was a positive and welcome less seasonal quarter, we acknowledge that global warming and changes are happening. One thing that we are very close to is Peru with El Niño. Its effect is expected to come more in Q4 and Q1 of next year. While probably on the financial piece for Quálitas will not represent a major impact, I think it is fair to recognize that the world is changing, and weather events can also shift from month to month. We want to be very prudent on stating that Q4 is not expected, or it has historically been a tough quarter, a second quarter or third, but we want to be also cautious on how things evolve as we see weather.
Bernardo Risoul: You may be closer to this, but the Pacific Ocean has increased in temperature in 3 degrees Celsius, unprecedented, so effects are yet to be seen on how that evolves.
Guilherme Grespan: That is super clear. Thank you so much.
Operator: The next question comes from Armand Chidas.
[Analyst 1]: Hi, all. Good morning. Thanks for the opportunity of making questions, and congrats on the strong results. I have two questions here. The first one is an aftermath from the VAT. It was announced October last year. It's been running for the past 10 months already. The impact has been in line, better or worse than expectations? My second question is mainly related to the result of Q2 compared to Q3. After the difficult moment in result, what did you do in terms of efficiencies and changes in pricing to support this better momentum in Q3? Thank you all, and congrats again.
Roberto Araujo: On your first question, good morning, Armand, on what has been better, yes, it has been better than what we anticipated. As I pointed out in my remarks, VAT has certainly been a challenge, but there are a lot of efficiencies that have played in our favor. Compared to what we had expected, yes, we feel much better than what we have been looking. The momentum on Q3, for example, the growth in premiums, I think it's related by each of the segments, as Bernardo has been stating. I think competition has been there for the first nine months of the year. It's been intense and has been driving prices down. But each of the segments have their own complexities. In the case of financial institutions, we have seen benefit from the momentum on the new vehicle sale trends.
Roberto Araujo: Individual business is also keeping a good momentum, particularly in Q3, and fleet is much more aggressive. Overall, I would say that there is a momentum, and the results are better than we have anticipated, particularly on the loss ratio.
Bernardo Risoul: Yeah, Armand, let me just complement Roberto on two fronts. First and foremost, we will and we have continued to take all decisions based on what makes sense for the long run. We have never managed this company, and we will never do so on a quarter-by-quarter basis, and that's important when we consider decisions that are taken on a daily basis. Having said that, some of the projects that we started back last year and early in this year are now yielding benefits that go beyond our expectations, and we're starting to translate that into prices and tariffs. Just as an example, for individual segment, which is a core business, since Q2, we started to say renewals will have 0% increase in most of the cases, and that has helped the individual businesses. This last quarter, we also reduced our tariffs on individual in approximately 2%.
Bernardo Risoul: We are starting to translate and consistent to our strategy as we see claim costs being slightly below our long-term targets. We are starting to put that back into prices so we can be more competitive, but as it says, it is more a disciplined approach than an emotional decision.
[Analyst 1]: Great. Thank you, guys.
Operator: The next question is from Eduardo Resende.
[Analyst 2]: Hi, everyone. Good morning, and thanks for taking my questions. I have two on my side. The first one is a quick follow-up on the competitive matters. I just would like to understand if you are seeing, in addition to competitors being more aggressive on pricing, if you are seeing any pressure on commissioning rates as well, for example, some competitors being able to better remunerate the brokers and possibly financial institutions as well. Any color on that would be quite helpful. The second one is regarding the new healthcare products that you said you are expect to launch. I just would like to understand if you have any internal studies on how relevant this new segment could become on Quálitas' portfolio. Any color on that would be quite helpful as well. Thank you.
Bernardo Risoul: Eduardo, let me take those questions. First, on the competitive pressure, I think it is fair to say that while competition always or mostly focuses on pricing as a means to gain volume, they also approach agents with more attractive or aggressive bonuses. We have maintained our strategy. We are not entering these conventions or I will take you to this trip, or I will give you a couple more bonuses. I think, from a transparency and consistency, the Quálitas model has always worked. We are giving agents more tools, more products for them to enrich their portfolio, and that, I think, is highly appreciated by the agents. As a proof of that, is the reward that we were granted during this quarter, where Quálitas was once again selected as their most favorite company to work for. I think it is part of the game.
Bernardo Risoul: We have maintained our acquisition costs on proposals similar to the past, and we do not believe that is a sustainable approach when they open up that attractive short-term bonuses. Now, to your second question, and I appreciate that. As we approach our fourth year operations on Quálitas Salud, we are excited to continue expanding our portfolio. As you recall, as a background, we started up with a compensatory or fixed indemnity program. Then we included personal accidents, and based on market demand and the potential that we saw, that is still an unmet need.
Bernardo Risoul: We are launching a new product that is not only the traditional health insurance product, but also something that has preventing, so it goes beyond. Premium size is still not relevant for the overall portfolio when it comes to Quálitas Salud. But as you recall, this was never the intent to move the needle in the short term.
Bernardo Risoul: It is a long-term play where we need to ensure our products have the right to win with the policyholders, agents, and certainly the investors. So when you think about the potential, let us say in 10, 20 years, we do believe Quálitas Salud could be as large as Quálitas Auto. Again, many things need to happen, but the potential is out there. The market size is out there. And the fact that 90% of the Mexican population does not have any sort of medical coverage is one that supports that thought. So I will pause here.
[Analyst 2]: Great. Thank you, and congrats on the results.
Operator: The next question comes from Carlos Gómez-López.
Carlos Gómez-López: Hello. As always, in this case, very deserved congratulations. This was an extraordinarily unexpected and very good result. To identify where it comes from, it seems that the investment result was particularly good. You mentioned a realization in the ETF portfolio, if I understood correctly, of MXN 166 million. Should we understand that this is extraordinary, and if so, why did you decide to do it now? I say that because the operating result was good. It is not that you needed it or anything. We want to understand what moves you to make the decision to crystallize this gain. Also, thank you very much for the chart in which you show the unrealized gain in the portfolio. That is very useful. Thank you so much.
Bernardo Risoul: Great. Thank you, Carlos. Good morning. Thanks for joining us. On the investment portfolio, I think you touched a very important point. The unrealized gains that moved from MXN 2.4 billion to MXN 2.1 billion, that is a reduction of MXN 200 billion. A portion of that is related also to the MXN 166 million on the realization. Just to give that context, if you take that MXN 166 million out of the portfolio line, you will see it is flattish versus the previous quarter. That incremental, that certainly helped. The fact is that we saw the need of rebalancing a particular ETF within our investment committee, and that represented 7 percentage points of the entire ETF portfolio to be realized. We saw an opportunity. We decided as a committee that we had to rebalance it for the benefit of the portfolio.
Bernardo Risoul: In fact, at the end of the quarter, we ended up even with more favorable unrealized gains in the particular equity portion of our portfolio. The reduction really came from the fluctuation on the interest rates on our fixed income assets. When we saw that, the rebalancing need for particular ETFs, that is how we made that decision. I hope that helps on your question. Carlos, let me add that we should expect realization of gains to be something that we do on a quarterly or semestral or annual basis. No decision is taken solely with Roberto or myself deciding to do so. All decisions together with the corporate governance DNA that has stand out in Quálitas, those decisions are made together with the investment committee, always seeking to do what is best for the portfolio health and keeping in mind also the investors' expectations.
Carlos Gómez-López: Well, it seems this one works very well. For us on this 166, this is a realized gain? This is a taxable. Even that, therefore, your net gain will be two-thirds of 70% of that, right?
Bernardo Risoul: Yes, indeed. Yes, Carlos.
Carlos Gómez-López: Perfect. Thank you so much.
Operator: The next question comes from Desh Kiran KM.
[Analyst 3]: Hello. Thank you for the opportunity. I wanted to ask, when the new car sales strength, as you pointed out, were strong, what is the reason that our insured units have been broadly flat or growing at 1% YOY or QOQ when we look at it? Do you see the volumes through insured units going up in the future quarters?
Bernardo Risoul: Yeah. Desh Kiran, how are you? Good morning. Thanks for the question. In terms of insured units, it has been flattish, but I could consider this a nice outcome of what has been a very strong competitive environment. When you see the insured units, we are up close to 100,000 units relative to last year, but that includes a drop of close to 70,000 units in motorcycles, which when it comes to premium, is never as relevant as an auto or a heavy equipment. I would say it is a nice thermometer to continue looking at insured units so we do not lose traction, but it is also fair to say that our growth of 1% to 2% in insured units in the current environment is something to really highlight as a positive.
Bernardo Risoul: Now, your expectations, and I appreciate that question because we have been mentioning what to expect at least in Q4. When it comes to premiums, our base of last year had a peak of multi-annual fleets, that represents close to 5%. Those are mostly up for renewal in 2027 and a couple of them in 2028. Those premiums will continue to be earned, but will naturally have an impact when looking at the written premiums of this year. This has nothing to do with competition, with market softness, or even our ability to attract customers. It is just simply business behavior. We decided to highlight this during the call to ensure expectations are set accordingly. While written premiums in the next quarter are expected to be flattish, earned premiums should be in the mid-single digits, leading the year to the mentioned mid to high single digits.
Bernardo Risoul: Now, beyond just the top line, our combined indices will continue to be in the expected 92% to 94% range, driving ROE above 20%. On top of that, we continue to invest in key projects such as the Colombia launch, Quálitas Salud. In a year of unique challenges such as VAT, such as macroeconomic softness and high competition, I do see these results as extraordinary.
[Analyst 3]: Thank you very much. That is really helpful. I have one more question, and that would be on the chart you have given in your quarterly material, where we can see that both thefts and recoveries are behaving better over the last few periods for both Quálitas and the industry. I want to check, is there any new development regarding how the thefts are monitored, or is there any development across the industry that is leading to such outcomes, or is it just cyclical?
Bernardo Risoul: Thanks, Desh, for the question. I think you brought out a very important point, and as I mentioned earlier, I think recovery rate makes a big difference in our loss ratio. The fact that we are seeing in that chart a much better recovery rate versus the industry, that puts us in a very strong position. Meaning it is not a matter of luck, it is about investing in technology and our risk prevention programs. We have been investing this for a number of years. We actually do not disclose all the details behind it, just for confidentiality purposes. But it is reality that we have been taking a very important step moving that needle, and we have been gaining those benefits in our P&L.
Bernardo Risoul: Yes, fairly, the industry has been kept at 41, 43 percentage points while we are closer to the 50%, and we expect to continue on that journey moving forward.
[Analyst 3]: Thank you very much. That is helpful. Well, I appreciate your efforts in saying about the industry in the recovery rate. Over the last three years, even the industry and Quálitas have seen consistent improvement in the recovery rate. I was just wondering if you have an insight as to the sources of this improvement, even for the entire industry, in addition to Quálitas.
Bernardo Risoul: Yes, and I think all the industry is moving in the same direction, just in different paces. Technology is out there for everyone, and having either GPS or technology to help on the recovery front, that helps. Yes, I think over time, the industry as a whole, we are moving in the same direction. I think the key question is should we be one step further and we take advantage with our technology and our data to be able to implement better prevention programs.
[Analyst 3]: Yes, sir. Thank you very much.
Operator: We have a written question from Daniel Glavis, who asks, "A higher yield on the bond portfolio is a good thing, but does this also come with higher credit risk?
Bernardo Risoul: I think it was Daniel. We like to keep all bonds AAA. We have taken a very conservative approach. When it comes to beyond government bonds, we have invested in some, but those are very high-rated and low-risk bonds. I do not believe that in the current portfolio, there is major risk to be concerned about.
Operator: This concludes today's conference call. Thank you for participating, and have a pleasant day.
