QUALITAS Initiating coverage - A great company at a decent price, with attractive growth potential
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
December, 2020 December, 2020
QUALITAS
Initiating coverage
A great company at a decent price, with attractive growth potential
We are introducing our 2021 price target of P$115 and Market Outperformer rating.
In this comprehensive report, we are providing the full story behind QUALITAS, the leading auto
insurance company in Mexico. It is the main leader by far—it holds a 30% market share, which is
sustainable, in our view—in a highly under-penetrated business. To paint a clear picture, we are
digging deeper into the Mexican insurance industry, namely the auto insurance business (refer to
pages 5-10), where only one out of three cars is insured even though auto insurance in Mexico is
mandatory. The latter offers great opportunity for expansion provided that mandatory insurance is
enforced, as nowadays authorities can request the policy but not necessarily do so.
On the flip side, the sector poses a challenge for the long run, as self-driving cars will most
likely change the industry. We reckon Mexico has a very long way to go for this to materialize,
due to the ensuing infrastructure and expensive technology requirements. Still, growth in the
company’s main business is bounded by external factors, which has led QUALITAS to look
at alternative avenues of growth.
Excess cash and capital, and not debt, are used to invest and seek opportunities. The
company’s record solvency margin (718%, which is far higher than its internal policy of
maintaining 1.5x the regulatory capital) provides wide maneuvering room to face potential
pandemic-driven challenges and take on new opportunities.
Next stop: Healthcare. In terms of capital allocation, QUALITAS’ management has been quite
vocal about their intention to venture into the healthcare business (see page 41), where they
aim to leverage on their solid distribution network and exploit a market where only 8% of
the population has medical insurance. The approval of QUALITAS’ request to provide health
insurance services is just around the corner, and this new business line would further expand
the size of the company and diversify its operations.
FINANCIALS Operations abroad. Although the company’s foreign subsidiaries currently seem small when
compared to its Mexican business, the percentage of written premiums coming from foreign
Natalia Zamora Madrazo, CFA Anakaren Nava Ostos and vertical subsidiaries has increased from 4% in 2014 to 8% in 9M20, and the company is
nzamora@gbm.com anavao@gbm.com striving to take it to 15% over the next five years—although this could happen even sooner.
+52 (55) 5480 5714 +52 (55) 5480 5800 ext. 4720 Today, the shares of foreign operations in the holding’s written premiums are as follows: The
US (5.4%)—they found a niche market where they can be the company to provide service on
both sides of the border—, Costa Rica (1.6%), Peru (0.6%), and El Salvador (0.4%).
December, 2020
INVESTMENT THESIS
As such, we are initiating coverage on QUALITAS, which we believe is a high-quality asset:
Proven resilience. Even though new car sales in Mexico have followed a sustained downtrend since 2017, the company has managed to increase the number of insured units and its earned
premiums every year.
It stands out from its peers, thanks to 1) its focus on providing quality service to all stakeholders, paying particular attention to its agents’ needs—in the Mexican insurance industry, agents are
as relevant as customers—; 2) its specialization in the auto insurance segment, which has translated into high efficiency and robust market knowledge; 3) its cost control strategy, which has
resulted in one of the lowest loss and combined ratios among its Mexican peers, and 4) continuous innovation and in-house technological developments that should help the company achieve
greater efficiency and a closer relationship with stakeholders (see pages 17-28).
Robust profitability pillars. QUALITAS’ ROE is at record levels on account of its business expansion, its cost control strategy, and the positive results yielded by its investment portfolio thanks
to the environment of high interest rates that has prevailed in the last three years. Although current ROE levels are not sustainable in the long term, the company has developed a solid strategy
in terms of:
• Pricing discipline: They are competitive without sacrificing profitability. Sales through their webpage, apps, and offices account for 2% of the written premiums, which implies vast growth potential.
• Cost control: 4-5% of the costs are fixed while the rest are variable. Their investments in innovation have translated into lower costs and better service.
• Technology and scale: They have the technology to prevent accidents and have established partnerships that allow them to provide technology that other competitors can’t.
• Vertical integration: Helps provide service at a lower cost. There is a payout for the company, as these subsidiaries also serve the market.
What about valuation? (Pages 51-56) We are incorporating 1) a half-empty glass forecast for the country’s progress in terms of insurance penetration for the coming years; 2) a fairly reasonable
expectation for the company’s expansion of foreign operations—which we actually believe could take place at a much faster pace—, and 3) an aggressive expectation of an increase in robberies
driven by the economic downturn and heightened unemployment rates. At the same time, we are resisting to incorporate the potential of the health insurance business, as we don’t have enough
tangible information yet. Using a long-term ROE of 22.7% to better portray QUALITAS’ sustainable business, we arrived at a target price with a 17% upside potential to current market
valuations.
Moreover, we included a simplified approach in the shape of a sensitivity analysis to look at what other outcomes would look like, with variations in combined ratios and reference rate levels.
The outcome: in a far more pessimistic scenario, the resulting price target showed a small downside (-3% YOY) after the recent repricing of the stock, while in an upbeat scenario, the upside
potential reached 65%.
M&A Target. QUALITAS has been an M&A target for many years, as it is a very valuable and attractive asset to foreign insurance companies who seek to enter a profitable and under-penetrated
market. When looking at the company from an M&A target perspective and at international peers’ market valuations (page 57), the name has an 88% upside potential.
All told, we are introducing our 2021 price target of P$115 and our Market Outperformer rating on the stock, as we believe QUALITAS is an attractive asset with limited downside risks.
QUALITAS | 2
December, 2020
TABLE OF CONTENT
00. GLOSARY 4
01. MEXICAN INSURANCE MARKET 5
02. WHAT IS QUALITAS? 11
2.1 History of QUALITAS 12
2.2 Corporate Structure 13
2.3 Board of Directors 14
2.4 Top Management 15
2.5 Segments 16
2.6 Allies 17
2.7 Business Model & Strategy 18
I. Service 19
II. Specialization 20
III. Pricing & Cost Control 21
a) Loss Ratio 22
b) Acquisition Ratio 25
c) Operating Ratio 26
d) Combined Ratio 27
03. FINANCIALS 29
3.1 Premiums 30
A. Insured Units 30
B. Written Premiums 31
C. Earned Premiums 32
3.2 Investment Portfolio 33
3.3 Profitability 34
3.4 Technical Reserves 35
3.5 Solvency & Liquidity 36
3.6 Mexican Regulatory Indicators 37
04. RISKS & OPPORTUNITIES 38
4.1 Risks: Internal and External 39
4.2 Economic Downturn and Its Implications 40
4.3 Potential Opportunities 41
4.4 Sustainability Strategy 43
05. VALUATION 44
5.1 Financial Outlook 45
5.2 GBM Estimates 51
5.3 Valuation 53
5.4 Sensitivity Analysis 55
5.5 Potential M&A Target 57
5.6 Stock Price Performance vs. Analyst Estimates 58
QUALITAS | 3
December, 2020
00. GLOSSARY
Acquisition Cost: Includes commissions and fees paid to agents and financial institutions.
Acquisition Ratio: Acquisition Cost ÷ Net Written Premiums.
Ceded Premiums: Premiums transferred to reinsurers.
CNSF: National Insurance and Bonding Commission, the regulator of the insurance sector in Mexico.
Combined Ratio: The result of Acquisition Ratio + Operating Ratio + Loss Ratio.
Condusef: National Commission for the Defense of Financial Service Users
Float: Securities + Repos + Net Loan Portfolio
Loss Cost: Includes costs incurred in the payment of claims: third-party liability, theft, repair costs, among others.
Loss Ratio: Loss Cost ÷ Net Earned Premiums.
Net Earned Premiums: Written premiums registered as income during the life of a policy. It is the result of Written
premiums – Ceded premiums – Increase in Reserve for Unearned Premiums.
Operating Expenses: Includes expenses incurred in by the Company in its regular operations.
Operating Ratio: Operating Expenses ÷ Written Premiums
PTU: Employee profit sharing.
Q CR: Qualitas Costa Rica
Q MX: Qualitas Mexico
Q ES: Qualitas El Salvador
Q P: Qualitas Peru
QIC: Qualitas Insurance Company.
Regulatory Capital Requirement: Minimum capital level that an insurance company must maintain,
per legal requirements.
Reserves for Outstanding Obligations: Resources intended to cover the expected value of obligations once the
incident foreseen in the policy has materialized.
Solvency Margin: The result of Stockholders’ equity – Regulatory Capital Requirement.
Solvency Margin Ratio: Solvency Margin ÷ Regulatory Capital Requirement.
Technical Reserves: The result of Unearned Premiums Reserves + Reserves for Outstanding Obligations.
Unearned Premiums Reserves: Resources intended to cover any future obligation.
Written Premiums: Premiums corresponding to policies underwritten.
QUALITAS | 4
December, 2020
1.0
MEXICAN
INSURANCE
MARKET
QUALITAS | 5
December, 2020
01. MEXICAN INSURANCE MARKET
In Mexico, according to the National Insurance and Bonding Commission (CNSF): Total Written Premiums by Type of Insurance
• Life Insurance accounts for most of the total written premiums, with a 42% share, followed – P$ 582.2 billion in 2019
by Property Insurance, with 38%.
• The most popular product within the Property category is auto insurance, which represents
52% of the segment’s written premiums and 20% of the total market’s.
Life Property Personal Social
• The most common damages covered by auto insurance policies are property and physical Insurance Insurance Insurance Insurance
damage to third parties, as well as theft and material damage.
• Within Auto Insurance, residential cars represent 65% of the auto industry’s written
premiums, followed by trucks, with 32%.
Regarding market share: 42% 38% 16% 5%
• The largest insurance companies in Mexico are GNP, Metlife, BBVA, Banorte, AXA,
Citibanamex, Seguros Monterrey and QUALITAS. These eight companies together hold
62.3% of the market in Mexico.
• The main competitors in the Auto Insurance business in Mexico are QUALITAS, GNP, Property Insurance
Chubb, AXA, and HDI. Together, they account for 69.6% of the segment’s written premiums, by Product
where QUALITAS stands out with a 29.6% market share.
Total Insurance Market Share in 2020* Total Insurance: Market Share Evolution Auto Catastrophe Fire Marine Liability Others
- As percentage of written premiums –As percentage of written premiums Insurance Insurance Transport Insurance
GNP 11.9% 12%
MetLife 10.7%
52% 10% 10% 8% 6% 14%
BBVA 9.1%
Banorte 7.8%
7%
AXA 7.1% Auto Insurance
by Type of Vehicle
Citibanamex 5.4% 5%
Seguros Monterrey 5.2%
3% Residential Tourist
Trucks
5.1% Cars Cars
1%
Inbursa 3.7%
Mapfre 3.5% Others
2020*
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
65% 32% 1% 2%
Zurich 3.5%
QUALITAS GNP Chubb
Chubb 3.2% AXA HDI
*2020 data at 1H20. *2020 data at 1H20. Source: CNSF data
Source: CNSF data Source: CNSF data
QUALITAS | 6
December, 2020
01. MEXICAN INSURANCE MARKET
Auto Insurance in Mexico: Auto Insurance: Market Share Evolution
• As mentioned before, residential cars represent 65% of the auto industry’s written
premiums, followed by trucks, with 32%.
35%
• Of the ~75 insurance companies that operate in the Mexican market, 35 have auto insurance
30% 29.6%
activities.
25%
• The industry is competitive, although highly concentrated; the five larger companies hold
~70% of the segment’s written premiums. 20%
• In 2013, the Law of Federal Roads & Bridges was amended to enact compulsory liability 15% 14.3%
car insurance, which became mandatory for 2011 vehicle models and beyond and with a 11.2%
10%
minimum invoice value of P$187 thousand. Those amendments established the guidelines 8.5%
for the gradual adoption of such insurance. Thus, as of January 2019, the civil liability car 5% 5.9%
insurance became mandatory for all vehicles in Mexico.
0%
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020*
• The mandatory insurance involves only the minimum coverage (Liability Insurance),
which basically covers personal injury and material losses caused to third parties and
establishes a minimum insured value of P$100 thousand for the former and P$50 thousand QUALITAS GNP Chubb* AXA HDI*
for the latter, and also provides legal support for the policyholder. *2020 data at 1H20.
**Chubb merged with ABA Seguros in 2018, while HDI acquired Genworth Seguros at the end of 2009.
• Authorities can request drivers to furnish the policy in cases of road accidents or infractions, Source: CNSF data
and the failure to have such insurance can result in economic sanctions of 20 to 40 minimum Mexican Auto Insurance Market Penetration
wages (around P$2,500-5,000). Moreover, according to AMIS, death compensation could
reach P$3 million. 40
• However, even though the civil liability car insurance is mandatory, according to Condusef 35
(National Commission for the Defense of Financial Service Users) data, only 32% of cars in
30
Mexico are insured. This could be chiefly explained by two factors: authorities can request
the policy but not necessarily do so, and corruption unfortunately remains an important Million Units 25
issue in the country (where some police officers can be easily bribed to avoid a ticket).
20
These are the industry's main roadblocks.
15 33% 33% 34% 34% 33%
32% 32%
• Nevertheless, the industry’s under-penetration, coupled with the mandatory nature of 30%
10
auto insurance, should allow for wide growth potential in the longer term.
5
-
2012 2013 2014 2015 2016 2017 2018 2019
Vehicle Traffic Auto Insurance Mkt Penetration
Source: INEGI and AMIS data
QUALITAS | 7
December, 2020
01. MEXICAN INSURANCE MARKET
Auto Insurance: Vehicles Sold and Written Premiums in the Last 10 Years Regarding Truck Insurance, QUALITAS has outshined its competitors. Over the years, the
company has grown its market share in truck insurance, reaching 44% in 1H20. This has
140
• Even though the sales of new been possible, thanks to its service, mainly. The company’s agents provide tailored service to
1.6 the clients, guiding them throughout all the processes they may require during the lifetime
vehicles in Mexico have dropped
120
in recent years, the market’s of the contract. This is fundamental for fleets and heavy vehicles, as it saves clients time and
written premiums showed a facilitates processes.
1.2 100
2016-2019 CAGR of 8.1%.
Moreover, QUALITAS has developed technological devices to reduce accidents and thefts,
including an alert system that detects fatigue or distraction of the driver and satellite location
MXN Billion
80
• Moreover, in 1H20, written
devices.
Million Units
0.8 premiums amounted to P$52
60
billion (-9.4% YOY) despite the Also, QUALITAS has become more efficient thanks to the analysis of the routes and hours to
sharp decline (-31.9% YOY) in adjust the policy prices and deductibles applicable. The company reaches out to its clients to
40
0.4 units sold, exacerbated by the talk about the analysis results and sets terms that benefit both parties.
COVID-19 crisis.
20
0.0 -
Truck Insurance: Market Share Evolution
2011 2012 2013 2014 2015 2016 2017 2018 2019 1H19 1H20
Vehicles Sold Total Auto Written Premiums 44.0%
Source: INEGI and CNSF data
The main competitors in the Auto Insurance business in Mexico are: QUALITAS, GNP, Chubb,
AXA, and HDI. Together, they account for 69.6% of the sector’s written premiums.
Auto Insurance: 2020* Market Share Detail
Resident Cars Trucks Tourist Cars Other Total
22.2% 44.0% 19.3% 18.3% 29.6%
GNP 15.2% 10.5% 9.7% 46.8% 14.3% 10.5%
8.7%
8.6%
Chubb 12.6% 8.7% 37.8% 0.0% 11.2%
4.5%
AXA 9.0% 8.6% 1.7% 0.0% 8.5%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020*
HDI 6.6% 4.5% 9.5% 5.1% 5.9%
QUALITAS GNP CHUBB AXA HDI
Total 65.6% 76.4% 77.9% 70.3% 69.6%
*2020 data at 1H20 *2020 data at 1H20
Source: CNSF data Source: CNSF data
QUALITAS | 8December, 2020
01. MEXICAN INSURANCE MARKET
Using 2019 data to exclude the pandemic's extraordinary effects
Insurance Company
Float = Securities + Repos Mexico P$25.5,
+ Net Loan Portfolio P$135.2 P$10.7 P$53.9 P$5.1
(MXN Billion) Total P$31.0
7%
6% 14%
100% 29% 37% 100%
Life Insurance
42%
Personal
Written Premiums by Insurance
Type of Insurance
Property
Insurance
35% 87% 44%
4% Auto Insurance
100% 5% 4% 5% 4% 4% 4% 5%
6% 5% 9% 5% Catastrophe
5% Insurance
Written Premiums in 6% 7%
Property Insurance by 6% 11% 9% Fire
9%
Product Liability Insurance
Marine Transport
73% 70% 22% 50% 72% Others
Auto Insurance Division:
6% CAGR 10% CAGR 23% CAGR 2% CAGR 19% CAGR
34.2
32.1 32.8 2016
28.7
Written Premiums 2017
(MXN Billion) 15.3 2018
11.6 12.7 13.2 12.5 10.5
11.7 9.9 9.9 2019
9.8 8.6 7.7 7.5
6.6 6.0
4.5 Auto Insurance
Industry
4- Yr. Avg. | 2019 4- Yr. Avg. | 2019 4- Yr. Avg. | 2019 4- Yr. Avg. | 2019 4- Yr. Avg. | 2019 4- Yr. Avg. | 2019
Acquisition Ratio 23% | 22% 28% | 28% 13% | 19% 23% | 21% 32% | 32% 25% | 24%
(+) Loss Ratio 64% | 60% 68% | 62% 70% | 69% 65% | 66% 66% | 70% 67% | 64%
(+) Operating Ratio 3% | 5% 5% | 4% 7% | 6% 6% | 2% 1% | 2% 5% | 4%
(=) Combined Ratio 90% | 87% 101% | 94% 90% | 95% 95% | 89% 99% | 104% 97% | 93%
QUALITAS | 9December, 2020
01. MEXICAN INSURANCE MARKET
• GNP is the largest insurance company in the Mexican • In 2016, ACE Limited acquired Chubb Corporation, turning
Written 5-YR Written 5-YR
market, holding a 12% market share. into the world’s largest public property and casualty insurer.
Premiums CAGR Premiums CAGR
• GNP was created in 1972, as a result of the merger • Chubb was created in 1882 in New York, starting its operations
between La Nacional, a company that started operations Life 14% with marine transport insurance. Auto 18%
in Life Insurance in 1901, and Seguros La Provincial, a • ACE Limited was founded in 1985 in the US. Since then
firm created in 1936, that operated mainly in Property and and until 1990, ACE rapidly grew thanks to its product
Personal Insurance. Health 8% Life -6%
diversification and through acquisitions. In 1999, it acquired
• GNP is part of Grupo Bal, one of the most relevant Cigna Corporation (INA), an international insurance company Liability
conglomerates in the country, composed of important Auto 12% focused on Property and Personal Insurance, which propelled 15%
Insurance
companies in various sectors, such as PE&OLES, Palacio its global expansion.
de Hierro, Profuturo, among others. Total 11% Marine
• Today, Chubb has operations in 54 countries; LatAm 17%
Transport
• Today, GNP’s main business lines are Life Insurance, contributes 7% to the written premiums.
followed by Health, Auto and Catastrophe Insurance. • Moreover, in 2018, Chubb announced the merger with ABA Total 23%
• The company has a 14% share of the Mexican auto Seguros, thereby reaching a 3% market share in Mexico. Its main
insurance market. business lines are Auto, Life, Liability and Marine Insurance.
• Chubb has an 11% share of the Mexican auto insurance
market.
• AXA originated from several French regional mutual • HDI is an insurance company that belongs to the Talanx Group.
Written 5-YR Written 5-YR
insurance companies: “Les Mutuelles Unies”. • The group was founded in 1903 in Germany. It started as a
Premiums CAGR Premiums CAGR
• AXA achieved a relevant footprint worldwide through pure liability insurer for the German industry.
M&As. Health 13% • It has become an international insurance group with a Auto 22%
• Currently, it has operations in 56 countries. presence in more than 150 countries.
Marine
• AXA started operating in Mexico in 2008 through the Auto 2% • HDI started operations in Mexico in 2009 through the 36%
Transport
acquisition of Seguros ING. It now holds a 7% market acquisition of GE/Genworth.
share in the Mexican insurance market. • HDI has a 1% share of the Mexican insurance market. Total 23%
Life 1%
• Its main products are Health and Auto Insurance, followed • The company sells Property Insurance products, mainly Auto
by Life and Catastrophe. and Marine Transport Insurance.
Catastrophe 8%
• AXA holds 8.5% of the Mexican auto insurance market. • HDI holds a 6% share of the Mexican auto insurance market.
Total 6%
QUALITAS | 10December, 2020
2.0
WHAT IS
QUALITAS?
2.1 History of QUALITAS
2.2 Corporate Structure
2.3 Board of Directors
2.4 Top Management
2.5 Segments
2.6 Allies
2.7 Business Model & Strategy
I. Service
II. Specialization
III. Pricing & Cost Control
a) Loss Ratio
b) Acquisition Ratio
c) Operating Ratio
d) Combined Ratio
QUALITAS | 11December, 2020
2.1 HISTORY OF QUALITAS Insured Units through the Years
–Thousands
First office of Q MX
1994 1994 2
1996 1996 42
Expansion of operations outside the Metropolitan area
Foundation of developer Activos JAL – acquisition,
2003 2003 558
leasing and other uses of Real Estate
Strategic partnership with financial
Listing of Q MX on the Mexican Stock Exchange 2005 institutions
2005 861
Start of operations in El Salvador (Q ES) Creation of Outlet de Refacciones (51%) –
Creation of Quálitas Controladora
2008
second-hand auto parts
2008 1,375
Foundation of CristaFácil (56%) – service provider of
2009 repair or replacement of windshield glass 2009 1,478
Start of operations in Costa Rica (Q CR) & First Development
Office for regions with low car insurance penetration 2011 2011 1,642
Exchange of Q MX CPOs for Quálitas Controladora Creation of Easy Car Glass (51%) – wholesaler
CPOs on the Mexican Stock Exchange 2012 of automotive windshields 2012 1,901
Amendments to the Law of Federal Roads & Bridges
2013 to enact compulsory civil liability car insurance 2013 2,228
Q Financial Services acquires an insurance company in
the U.S. & starts operations in that country (Q IC)
2014 Civil liability car insurance becomes mandatory in Mexico 2014 2,458
Exchange of CPOs for common shares Acquisition of Autos y Salvamentos 51% –
on the Mexican Stock Exchange 2015 management of total losses 2015 2,803
Market share: 1st place in Mexico, 5th in El Salvador, Q MX’s adoption of Solvency II
and 2nd in Costa Rica. Cars sold in Mexico hit a record
2016 (new capital requirements and risk management)
2016 3,487
Q Premier Insurance – U.S. intermediary
between insurer & agents 2017 2017 3,819
Acquisition of additional shares
2018 of Outlet de Refacciones (99.9%) 2018 3,877
Civil liability car insurance, mandatory for all vehicles as of January
Start of operations in Peru (Q PE)
2019 Acquisition of additional shares of CristaFácil (99.9%) & Easy Car 2019 4,223
through the acquisition of HDI Peru Glass (99.9%)
Source: Company data QUALITAS | 12December, 2020
2.2 CORPORATE STRUCTURE
Quálitas Compañía Quálitas El Salvador
Written Premiums by Subsidiary in 2019
de Seguros (Q MX) (Q ES)
99.9% 99.9%
Quálitas Costa Rica
(Q CR)
99.9% Quálitas Insurance Mexico
Company (Q IC) 0.4%
US
Quálitas Financial 100% 0.5%
Services Costa Rica
100% 1.8%
Quálitas Premier Peru
3.5%
Insurance El Salvador
Quálitas Peru 100%
(Q PE)
99.9%
Wholesaler of automotive windshields.
Distributes to CristaFácil and to other 93.7%
Easy Car Glass repair sites.
99.9% Inventory value: P$18.4 million
VERTICAL SYNERGIES
Controladora Service provider of repair or
CristaFácil
replacement of windshield glass.
99.9%
Operates mainly under a franchise model. Number of Offices Number of Employees
Outlet de Refacciones 2019 451 2019 5,154
Acquires second-hand auto parts and
99.9% has its own operations to disassemble 2016 379 2016 4,411
vehicles declared as total loss in claims.
Sells to Q MX and to third parties. 2013 268 2013 3,194
Autos y Salvamentos Inventory value: P$59.7 million
2010 159 2010 2,419
54.0%
2007 136 2007 1,884
Management of total losses.
2004 102 2004 1,033
Optimización de Talento
2001 80 2001 431
98.0%
1994 1 1994 38
Source: Company data Source: Company data
Activos JAL
99.9%
Source: Company data
QUALITAS | 13December, 2020
2.3 BOARD OF DIRECTORS
Board’s Composition
Board Member Position
Joaquín Brockman Lozano Chairman
José Antonio Correa Etchegaray Vice President
María Pilar Moreno Alanís Related 27%
Ownership
Wilfrido Javier Castillo Miranda Olea* Independent
Juan Marco Gutiérrez Wanless Independent Joaquín
Castillo Float
Juan Orozco y Gómez Portugal Independent 73% Brockman
Family* 49%
Lozano
4%
Juan Enrique Murguía Pozzi Independent 47%
Mauricio Domenge Gaudry Independent *According to the company, Wilfrido Javier Castillo Sánchez Mejorada held a 10%
stake, which was transferred to his family when he passed away in March 2020. Of
Christian Alejandro Pedemonte del Castillo Independent that 10%, only 4% is owned by family members that are part of the Board.
Madeleine Marthe Claude Brémond Santacruz Independent
Alonso Tomás Lebrija Guiot Independent Related Independent
Joaquín Brockmann Domínguez Alternate Related
María Fernanda Castillo Olea Alternate Independent
*Son of Wilfrido Javier Castillo Sánchez Mejorada
Committees
Investments, Finance and Planning Position Operations Position
Joaquín Brockman Lozano Chairman Joaquín Brockman Lozano Chairman
José Antonio Correa Etchegaray Vice President José Antonio Correa Etchegaray Vice President
Wilfrido Javier Castillo Miranda Olea Independent María Pilar Moreno Alanís Related
Juan Marco Gutiérrez Wanless Independent Juan Orozco y Gómez Portugal Independent
Christian Alejandro Pedemonte del Castillo Independent Juan Enrique Murguía Pozzi Independent
Social Responsibility Position Audit and Corporate Practices Position
Juan Orozco y Gómez Portugal Independent Juan Enrique Murguía Pozzi Independent
Mauricio Domenge Gaudry Independent
Alonso Tomás Lebrija Guiot Independent
QUALITAS | 14December, 2020
2.4 TOP MANAGEMENT
Joaquín Brockman Lozano
Founding partner of QUALITAS and Chairman of the Board and CEO Wilfrido Javier Castillo
since 2008 Sánchez Mejorada †
• CEO of Q MX from 1994 to 2016. • Was one of QUALITAS' founding partners, Vice-chairman of
• His father was an insurance agent. the board, and Head of Investments and Investor Relations.
• In the early 70s, Joaquín worked in Seguros América and traveled to the US and England to specialize in reinsurance. He also acted as CFO from 1996 to July 2014.
• From 1974 to 1991, he worked at Brockmann & Schuh, the largest insurance broker at the time, which was headed by
Joaquín's father since its inception in 1960. In 1982, Joaquín got appointed Chairman of the company.
• President of the Mexican Association of Insurance Agents (AMASFAC) from 1989-1991.
• Advisor of Grupo Financiero Aserta, Servicios Financieros Comunitarios (Fincomún), and Grupo Beta San Miguel.
• Business Administration degree from Universidad Anáhuac.
• Diploma in Senior Executive Management from IPADE and a diploma in Risk Insurance from the College of Insurance in
New York City.
• He is the largest stockholder of the company, as he owns 46.6% of the shares (April 2020).
José Antonio Correa Bernardo Eugenio Risoul María Pilar Moreno Alanís Alejandro David
Etchegaray Salas Technical Director of the Elizondo González
Vice Chairman of the Chief Financial Officer company since 2016 and New Chief Investment
Board and CEO since 2018 since January 2019 member of the Board since
Officer since April 2020
2016
• He was the CFO of Q MX for three • More than 20 years of experience in • She has 27 years of experience in the auto • He previously served as CIO of Seguros
years. international companies. insurance industry in the technical area. Monterrey New York Life and was
• He was the CFO of different companies, • Leadership roles including CFO in From 1991 to 2001 worked at Seguros chair of the investment committee of
including P&G Mexico for North México, United States, Brazil, Chile, Monterrey New York Life. From 2002 and the Mexican Association of Insurance
America and Seguros Monterrey Panama, and Venezuela. 2012 worked at QUALITAS, went to GNP Companies (AMIS) for the 2007-2011
New York Life. Thus, he has broad • Industrial Engineering degree from from 2012 to 2014, when she rejoined the period.
experience in the industry. Instituto Tecnológico y de Estudios Company.
• Chemical Engineering degree from Superiores de Monterrey (ITESM) and • Bachelor’s degree in Actuarial Science from
Universidad Iberoamericana and a a diploma in Corporate Finance from Universidad Anáhuac and a master’s degree
diploma in Top Management from ITAM. in Mathematical Methods from the same
IPADE in Mexico. institution.
QUALITAS | 15December, 2020
2.5 SEGMENTS
8-YR CAGR 5-YR CAGR
TRADITIONAL 16.1% 18.9%
8-YR CAGR 5-YR CAGR
INDIVIDUAL
12.9% 24.2%
• Automobiles and motorcycles by unit
• Lower acquisition cost than Financial Institutions
• Mostly annual policies—tariffs can be adjusted 3 to 4 times a year, which provides
flexibility amid a volatile and uncertain environment.
8-YR CAGR 5-YR CAGR
FLEET 20.3% 14.8% • Through Insurance Agents: Agents get paid a commission based on sold policies’
written premiums and their portfolios’ loss ratio, plus yearly productivity bonuses.
• Scheme of a large number of automobiles and trucks per policy. The three most relevant agents contribute 8.6%, 4.1%, and 3.1% of the total written
premiums.
• Widely diversified: The largest client and the 10 largest clients accounted for 0.9
and 3.8%, respectively, of the total written premiums in 2019.
• In this segment, QUALITAS' service stands out as a competitive advantage, which
ultimately translates into better margins.
8-YR CAGR 5-YR CAGR
FINANCIAL INSTITUTIONS 14.3% 10.6% LTM Written Premiums by Segment
• Banks, leasing entities, car assembly companies, and car retailers that sell the
insurance coverage jointly with an auto loan or vehicle sale. 6%
• Started in 2005, with the establishment of a strategic partnership. After 2007, this
segment became important for the company.
Individual
• Policies under a multi-annual scheme—typically for the same term of the auto loan 31% 61%
(from 1 to 7 years; average of 3-4 years)—, which involves more risk and exposure Fleets of Total Written
for QUALITAS than annual policies. 33%
Premiums
• The segment represents higher acquisition costs, due to a fee paid for the use of the Financial Institutions
institutions’ facilities.
Foreign Subsidiaries
• 68.4% of light vehicle sales came from auto loans in 2019.
• The segment benefits from better financing conditions and greater credit availability. 30%
• This segment doesn't have renovation risk. However, it carries a higher policy
mispricing risk. Source: Company data
• The ten most relevant financial institutions contribute with 17% of the total written Note: The 8-Yr. CAGR runs from 2011 to 2019 and the 5-Yr. CAGR goes from 2014 to 2019.
premiums.
QUALITAS | 16December, 2020
2.6 ALLIES
In Mexico, a person can contract an auto insurance policy with QUALITAS through different channels, such as: agents, websites, offices, and financial institutions.
Insurance Agents: Financial Institutions:
In Mexico and Latin America, agents play a fundamental role in • Since 2005, QUALITAS started to sell its products through financial institutions.
the insurance industry, as they serve as policyholder advisors, • Today, it has agreements with 750+ entities.
unlike developed markets, where most of the insurance policies
are sold through brokers. • There is a positive correlation between the auto loans granted by financial institutions and car sales. Therefore, there is a
direct effect on the auto insurance policies sold through financial institutions.
• The agent participates not only in the sale of the policy but
also provides support to the insurer in any process they • Car sales with credit can include auto insurance for the same term of financing granted, typically 3-4 years on average.
might need during the lifetime of the policy. For example, an • The fees paid to financial institutions for the sale of products include a fee for the use of their facilities that is recorded at
agent can coordinate the installation of satellite devices of an acquisition cost.
entire fleet.
Financial
• Agents render a personalized service to the client, but also Institutions
provide valuable information to QUALITAS about what clients
are looking for, as they have a higher market sensitivity. Service Offices:
• Also, agents are important in LatAm, as they spread
insurance awareness, which is necessary given the low auto Insurance Service
Agents Offices • They also manage the policyholders' payments and
insurance penetration and the lack of insurance culture in CLIENT provide legal advice, among other activities. In Mexico
the region.
alone, QUALITAS has 188 service offices and over 1,000
• Agents' commissions are linked to the policies sold and employees.
Apps and
collected (around 8-12%). Websites
• To align the agents’ incentives with the cost control strategy
of the company, they have annual bonuses depending on
their portfolio claim ratios (around 1-6%). All these allies receive special training and have access
Apps and Websites: to different tools and platforms to help them be more
• In Mexico, agents must be certified by the CNSF. efficient and improve the company’s operating results.
• QUALITAS works with more than 16 thousand agents, which • A small percentage of policies is sold through this channel. QUALITAS has developed different platforms and apps to
represents around 26% of active agents in the Mexican For example, the website Autocompara, which compares improve the service rendered to its clients and simplify
Insurance Industry. the prices offered by different insurance companies, the processes between them and its allies.
accounts for only 2% of the sales.
QUALITAS has other relevant allies such as:
• Claim Officers: In Mexico, there is still a long way to go in terms of the rule of law and the insurance culture. As such, the support of a claim officer in an accident is fundamental because
they are the ones who deliver a solution and provide assistance. In contrast, in the United States, the police act as judges, and there is no such figure as a claim officer.
• Suppliers: The company has a relationship with 5,076 suppliers for medical services, repairs, auto parts, and crystals.
QUALITAS | 17December, 2020
2.7 BUSINESS MODEL & STRATEGY
The company operates through various commercialization channels to reach its clients and is highly efficient, as each office has an independent decision-making system.
Offices Evolution
Service Offices ODQs
9M20 202 277
2019 199 252
2018 190 228
2017 183 220
2016 172 207
2015 181 164
2014 175 128
2013 168 100
2012 161 72
2011 170 10
QUALITAS started its business model with Service Offices:
In 2011, QUALITAS implemented the Development Office model (ODQs) to simplify its
• The main objective is to have a close relationship with agents, thereby gaining
office model and to reach populations with lower car insurance penetration, typically far
knowledge and a better understanding of the clients’ needs.
from the main cities.
• These offices are managed by independent directors with experience in the insurance
sector, usually former employees of QUALITAS, who share the company's values.
Characteristics:
• They work under a commission system linked to the written premiums generated and
• Places with virtually no insurance offer and low accident rates.
collected by their Service Office and to the claims associated with those premiums.
• Unlike the Service Offices' operation, ODQ's personnel are QUALITAS' employees
• The Service Office and its director are responsible for the sales, growth, and office
(two to three per ODQ).
expenses, all of which are independent of QUALITAS.
• Represent around 3 to 5% of QUALITAS’ written premiums.
• QUALITAS has the authority to remove the director.
• Can become Service Offices.
• QUALITAS is in charge of all the claims support, the adjuster, and repairments.
• QUALITAS also provides training, administrative, and technological support.
Source: Company data
QUALITAS | 18December, 2020
2.7 BUSINESS MODEL & STRATEGY
I. SERVICE II. SPECIALIZATION III. PRICING & COST CONTROL
A. LOSS RATIO B. ACQUISITION RATIO C. OPERATING RATIO D. COMBINED RATIO
One of the key factors behind QUALITAS’ success has been its focus on service quality for
the sake of all stakeholders. It has paid particular attention to its agents’ needs, which has Call Center with
allowed for the company to stand out among industry players by selling a service rather than 300+ executives
a product. 6,250+ average calls
per day
QUALITAS seeks to provide an enhanced service experience for its policyholders. Thus, it has
developed different tools to improve efficiency and offer a better service to its clients, mainly
through the use of technology. 1,200+ adjusters
Quálitas University with an average
arrival time of 25-30
For example: to render specialized
courses to service minutes 85% of the
providers times the adjuster
• QMóvil: App designed to assist in case of a claim, so that policyholders can communicate arrives before
directly with the Contact Center, simplifying the process of sharing the location of the the competition.
accident and contacting the closer adjuster.
• Express Adjustment: It is a way to provide remote attention, as policyholders don’t require
the presence of an adjuster officer. QUALITAS aims to increase the number of claims
assisted through this platform. Moreover, the company has reached agreements with four
of its competitors, whereby in case of an accident, both companies’ clients can benefit from Service
QUALITAS’ Express Adjustment tool without the presence of an adjuster from either party.
QMóvil App The largest
to efficiently assist network
• QUALITAS GPS: Once a casualty occurs, the system locates and assigns the closest
policyholders in of agents:
available claim officer to it. As such, according to data from the company, 85% of the times,
case of a claim 16,000+ agents
QUALITAS' claim officers arrive at the accident location before the competition. The average
arrival time is between 25-30 minutes.
• Universidad Quálitas: Digital platform with specialized courses for agents, adjusters, and
other service providers, with the purpose of improving service efficiency. The largest
coverage in Mexico,
with more than
450 offices and ODQs
QUALITAS | 19December, 2020
2.7 BUSINESS MODEL & STRATEGY
I. SERVICE II. SPECIALIZATION III. PRICING & COST CONTROL
A. LOSS RATIO B. ACQUISITION RATIO C. OPERATING RATIO D. COMBINED RATIO
Devices:
QUALITAS’ specialization in the auto insurance segment has translated into heightened
efficiency, which has allowed the company to expand its market knowledge and constantly • Device to locate the vehicle and recover a higher number of stolen
improve its service, thus revamping its day-to-day operations. units
Encontrack • Reduces the deductible payment in case the car is not recovered
• Models: QUALITAS has developed advanced models through statistical analysis using • In 2019, QUALITAS recovered 51% of the total stolen cars of
historical information and is looking forward to replicating its business model for Mexico— policyholders—79% of these had Encontrack installed
which has led the company to outshine its peers—to the other countries where it operates.
• Market intelligence has helped the company adapt to changes in legislation and market Mobileye • Device to prevent accidents. Alerts the driver of a potential collision
trends. For example, Express Adjustment has increased the number of claims processed
during the pandemic and the company expects to keep capitalizing on this trend and • Alert system that detects fatigue or distraction of the driver
Guardian
processing around 10% of the total claims through this method by the end of the year • This device is in the testing stage
(from the 3.5% pre-pandemic level). Moreover, Express Adjustment improves the client's
experience and reduces the numbers of calls to the Contact Center, which translates into
• Evaluates and analyzes driving habits and the status of the vehicle
greater cost reduction. Octo Telematics
• Testing stage
• Innovation: The company has internally developed different devices to reduce accidents and
theft. Indeed, QUALITAS has managed to decrease the number of assisted claims reported • Advance monitoring and driver support system to prevent collisions
in the last twelve months by around 9% YOY, and there is plenty of room for improvements MDAS
• Testing stage
to continue.
APPS FOR POLICYHOLDERS
Accident Attention App Express Adjustment App Disposable App Q Móvil App
• Policyholders’ version • Remote attention when there are no • To report accidents • To report accidents
third parties involved or damages • Contacts claim officers • Contacts claim officers
caused to the public road. • Easily shares the location of the • Sends the location
• No waiting time accident
• In 2019, it helped assist 3.5% of • Uses a QR code
accidents reported to the company. • Does not take up capacity of the
• Objetive: To keep servicing 10% of total policyholder’s mobile device.
claims through this channel. • No need to enter the policyholder’s
data
QUALITAS | 20December, 2020
2.7 BUSINESS MODEL & STRATEGY
I. SERVICE II. SPECIALIZATION III. PRICING & COST CONTROL Vertical Subsidiaries
A. LOSS RATIO B. ACQUISITION RATIO C. OPERATING RATIO D. COMBINED RATIO
QUALITAS encourages the repair of crystals over their replacement
through its subsidiaries CristaFácil and Easy Car Glass, which implies:
QUALITAS is the lowest cost operator, and it has achieved so on the back of: • Lower costs (60% lower than replacement)
• Less time
Economies of Scale • Same quality and safety
• No deductible payment for the policyholder
Through the continuous enhancement and monitoring of its business model and the
specialization in the auto insurance industry, coupled with the operation of its vertical CristaFácil processes 75% of the claims related to car windshields. QUALITAS prioritizes
subsidiaries, QUALITAS has attained a competitive edge over its peers, making it the time of repair and the clients’ experience. Yet, there still are opportunities for further
cheaper for the company to service its clients. For example, in terms of pricing, the improvement, as they only replace 4% of what they could be repairing.
company sets the policies’ prices by reverse-engineering their 90-93% target combined
ratio. For the larger clients’ accounts, pricing depends on the latter’s historic data and Also, the company has arrangements with car manufacturers and suppliers in order to
track record. reduce repair costs while maintaining quality.
Moreover, the company is developing a database for truck drivers. We should note that Outlet Refacciones: Cars declared by QUALITAS a total loss are sent to
QUALITAS can do this thanks to its large market share in this segment (~44.0%), gained this unit to be sold as second-hand or by parts.
in turn through the company’s experience in the segment’s robberies and recovery,
which has translated into lower claims. Since 2019, QUALITAS decided to fully implement a vertical integration strategy, as it
is a key element for profitability. It is not that common in Mexico, as a strong foothold
in the country is a must to achieve efficiency. Today, QUALITAS is the main client of
its subsidiaries. However, going forward, they will seek to work with more of their
Technological Innovation and Analysis
competitors.
• Satellite devices to recover stolen cars
• Methods to prevent and detect fraud QUALITAS’ Loss Costs
• Claim studies considering different routes, hours, and days of the week
• The application of double deductible for riskier cases
• Express Adjustment: Policyholders don’t require the presence of an adjuster officer.
QUALITAS aims to increase the number of claims assisted through this platform. 63% 20% 12% 5%
The company continuously monitors its costs and focuses on the details to find ways Property Damage Theft Civil liability Medical Expenses
to improve its acquisition, loss, and operating ratios. This, coupled with the pandemic-
related lockdown measures leading to fewer vehicles on the and the still positive Medical expenses associated with the accidents of QUALITAS’ clients are fixed for the
downtrend in car theft, has translated into the company’s lowest loss ratio. company. Thanks to the agreements with hospitals, it has been able to reduce volatility in
this line.
QUALITAS | 21December, 2020
2.7 BUSINESS MODEL & STRATEGY
I. SERVICE II. SPECIALIZATION III. PRICING & COST CONTROL
A. LOSS RATIO B. ACQUISITION RATIO C. OPERATING RATIO D. COMBINED RATIO
QUALITAS' loss ratio has been improving over the last years, as it decreased from 70% in 2015 to 60% in 2019. When compared to the Mexican auto insurance industry, the company posted
better figures in those years, except for 2018. What is more, QUALITAS reached the lowest loss ratio among its peers in 2019.
QUALITAS’ improved loss ratio is the result of various factor, such as:
• Becoming more efficient thanks to claim studies (considering routes, hours and days) and the application of double deductible for riskier cases.
• The company has benefited from lower car theft, and higher recovery rates driven by its efforts to reduce fraud.
Loss Ratio of the Mexican Auto Insurance Industry
76%
70% 70%
69% 69%
67% 66%
64%
64%
62%
60%
2015 2016 2017 2018 2019
QUALITAS GNP Chubb AXA HDI Auto Insurance Industry
Source: GBM with Mexican Auto Insurance data from CNSF
QUALITAS | 22December, 2020
2.7 BUSINESS MODEL & STRATEGY
I. SERVICE II. SPECIALIZATION III. PRICING & COST CONTROL
A. LOSS RATIO B. ACQUISITION RATIO C. OPERATING RATIO D. COMBINED RATIO
Industry Insured Units: Theft and Recovery in Mexico
100,000
+7%
-11%
90,000
+5% -10%
80,000 +28%
-5%
70,000 -10% +14%
-1%
60,000
50,000
-18%
40,000
45% 50% 38% 44%
51% 38%
30,000 52%
38% 50% 42%
+10% -20%
20,000 +41%
44%
+6% -5% 0% -6% 0% +26% 41%
45%
10,000 40% 51%
45% 50% 42% -20%
37% 41% 51% 49% 54%
50%
-
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 9M19 9M20
Thefts to Industry Theft to QUALITAS Industry's Recovery QUALITAS' Recovery
Source: Company data
• From 2011 to 2015, the car robberies in Mexico followed a declining trend. In those years, the industry recovered, on average, 48% of the insured units stolen each year.
• As such, in the case of QUALITAS, thefts followed a similar behavior. QUALITAS' annual recovery rate stood at 46%, on average, from 2011 to 2015.
• Later, from 2016 to 2018, both the industry and QUALITAS faced an important increase in the robbery of insured vehicles. Hence, we saw a slight deterioration in the company’s loss ratio,
mainly in 2017 and 2018, because of this effect. However, QUALITAS managed to outpace the industry’s recovery rates.
• In 2019, robberies of cars insured by QUALITAS decreased by 19.5%, vs. an 11.0% YOY decline in the entire industry. The company recovered 51% of the units stolen vs. the industry’s 44%.
• For the 9M20, the robberies of units insured by the company shrunk by 20% relative to the same period in 2019, vs. a 18% decline for the industry.
• QUALITAS’ recovery rate stood at 54% in 9M20, above the industry's 45%.
QUALITAS has improved these figures thanks to its focus on technological innovation, as it has become more efficient with the implementation of satellite devices to recover stolen cars
and stricter methods to prevent and detect fraud.
QUALITAS | 23December, 2020
2.7 BUSINESS MODEL & STRATEGY
I. SERVICE II. SPECIALIZATION III. PRICING & COST CONTROL
A. LOSS RATIO B. ACQUISITION RATIO C. OPERATING RATIO D. COMBINED RATIO
The social distancing measures derived from the pandemic have benefited QUALITAS’ loss ratio. Today, the company has reached its lowest historical level, as the number of claims assisted
in the first 9 months of 2020 dropped by 23.5% YOY.
However, the number of claims is expected to normalize once the lockdown measures are over, which should bring higher loss ratios in the future. Moreover, a strong economic downturn in
the country could lead to higher insecurity levels, which would play against the positive declining trend in robberies.
QUALITAS vs. Peers’ Loss Ratio in 1H20
QUALITAS’ Assisted Claims QUALITAS’ Loss Ratio
Lockdown
Measures 41%
22,000
420,000 12% 70.7% 69.5%
68.8% 66.9% 48%
380,000 66.6% 66.2%
18,000 66.1%
10% Target Loss Ratio 51%
61.7%
340,000
59.90%
14,000
59.3% 56%
300,000 8%
10,000 68%
260,000
6% 49.1% QUALITAS vs. Peers’ Combined Ratio in 1H20
6,000
220,000
64%
180,000 4% 2,000
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
4Q19
1Q20
2Q20
3Q20
YTD19
YTD20
2011
2012
2013
2014
2015
2016
2017
2018
2019
78%
Assisted Claims Assisted Claims as % of Total Insured Units Cost of Claims Loss Ratio
79%
Source: Company data Source: Company data
The loss ratio is directly linked to the combined ratio. So, the positive impact over the loss ratio due to the health crisis has 85%
also translated into a lower combined ratio. As such, QUALITAS boasted one of the lowest loss and combined ratios among its
Mexican peers in 1H20.
107%
However, we believe the levels achieved in 2020 are not sustainable, and we can expect both ratios to increase as the economy
reopens. Source: GBM with Mexican Auto Insurance data from CNSF
QUALITAS | 24December, 2020
2.7 BUSINESS MODEL & STRATEGY
I. SERVICE II. SPECIALIZATION III. PRICING & COST CONTROL
A. LOSS RATIO B. ACQUISITION RATIO C. OPERATING RATIO D. COMBINED RATIO
QUALITAS’ Acquisition Ratio
Acquisition Ratio of Mexico’s Auto Insurance Industry 8,000
24.1%
32% 32% 7,000
29%
28%
26% 23.4%
25% 6,000
24%
23% 22.8%
22% 22.7%
21% 5,000
19%
16% Target
4,000 21.8% 21.9% Acquisition
Ratio*
21.6%
3,000
2015 2016 2017 2018 2019
QUALITAS GNP Chubb AXA HDI Auto Insurance Industry 2,000
Source: GBM with Mexican Auto Insurance data from CNSF
1,000
QUALITAS has managed to improve its acquisition ratio from 23% in 2015 to 22% in 2019.
• Over the same period, it has remained below the industry’s acquisition ratio.
-
• These efficiencies have been achieved through the company’s strategy to focus on the traditional segment (this segment 2015 2016 2017 2018 2019 YTD19 YTD20
accounts for ~61% of the LTM written premiums), which has a lower acquisition cost than Financial Institutions.
Acquisition Cost Acquisition Ratio
• The hike in the acquisition cost in 2020 is explained by an increase in production bonuses to agents and a larger contribution
of the foreign subsidiaries to written premiums, as they bear a higher acquisition cost than the Mexican business. Source: Company data
• It is worth mentioning that the acquisition cost includes the commissions and bonuses granted to agents on account of the
performance of sales and portfolio claims, which can range between 8-12% and 1-6%, respectively.
QUALITAS | 25December, 2020
2.7 BUSINESS MODEL & STRATEGY
I. SERVICE II. SPECIALIZATION III. PRICING & COST CONTROL
A. LOSS RATIO B. ACQUISITION RATIO C. OPERATING RATIO D. COMBINED RATIO
QUALITAS’ Operating Ratio
• From 2015 to 2018, QUALITAS delivered a better operating ratio than the Mexican auto insurance industry. However, this 2,200
ratio climbed from 3.5% in 2015 to 5.0% in 2019. 7.7%
• The increase is associated with a hike in the operating expenses, as the Mexican companies’ employee profit-sharing
provision (PTU) is directly linked to their earnings. 1,900
• In 2020, we have also seen a hike in operating expenses, also related to PTU and the actions taken to deal with the
operational challenges derived from the health crisis.
1,600 5.9%
Operating Ratio of Mexico’s Auto Insurance Industry 5.6%
9.4% 1,300
4.5%
6.8% 1,000 4.0%
6.5%
Target
5.1% Operating
5.0%
4.7% 4.4% Ratio*
4.2% 700
3.5%
2.5% 2.5%
2.4%
2.1%
400
100
2015 2016 2017 2018 2019 YTD19 YTD20
2015 2016 2017 2018 2019
QUALITAS GNP Chubb AXA HDI Auto Insurance Industry Operating Expenses Operating Ratio
Source: GBM with Mexican Auto Insurance data from CNSF Source: Company data
*Excluding employees' statutory profits sharing
QUALITAS | 26December, 2020
2.7 BUSINESS MODEL & STRATEGY
I. SERVICE II. SPECIALIZATION III. PRICING & COST CONTROL
A. LOSS RATIO B. ACQUISITION RATIO C. OPERATING RATIO D. COMBINED RATIO
The combined ratio has decreased over the last years, chiefly due to a lower loss ratio—which reached its lowest quarterly level in the company's history in 2Q20, benefited by the lockdown
measures—, coupled with the last years’ lower acquisition ratio, as a result of the company’s strategy to focus on the traditional segment.
One of QUALITAS’ main competitive advantages is its cost control. Particularly in Mexico, the company has improved its cost efficiencies, thus reaching one of the lowest combined ratio
among its Mexican peers in 2019.
QUALITAS’ Combined Ratio Operating Ratio of Mexico’s Auto Insurance Industry
109%
95.6% 92.8% 92.5%
Target
88.4% Combined
86.5%
Ratio
104%
102%
99%
97%
96%
95%
94%
93%
89%
87%
2015 2016 2017 2018 2019
2015 2016 2017 2018 2019
Loss Ratio Acquisition Ratio Operating Ratio QUALITAS GNP Chubb AXA HDI Auto Insurance Industry
Source: Company data Source: GBM with Mexican Auto Insurance data from CNSF
QUALITAS | 27December, 2020
2.7 BUSINESS MODEL & STRATEGY
I. SERVICE II. SPECIALIZATION III. PRICING & COST CONTROL
A. LOSS RATIO B. ACQUISITION RATIO C. OPERATING RATIO D. COMBINED RATIO
As a result, thanks to its cost control strategy, the company can use reverse-engineering to set policy prices, focusing on a 90-93% target combined ratio. As such, the company’s strategy
in recent years has resulted in competitive policy prices.
As an example, we used Price Comparison Website (PCW) Autocompara—which accounts for ~2% of QUALITAS' written premiums—to compare policy prices among the Mexican auto insurance
industry. Using an average of the ten best-selling cars in 2019, we see that QUALITAS stands 12.6% above the industry's price. However, in some cases, it offers lower prices than some of its
main competitors.
Prices of Auto Insurance Policies in Mexico
Average policy price for the ten best-selling cars in 2019
-MXN -MXN Thousand
Industry
Thousand
Versa 9 9 10 6 10 10 7 8 7 8 8 8 Industry's Average* 10.3
Aveo 10 9 12 7 10 8 N.A. 7 7 7 8 8
14.9
NP300 28 18 43 24 26 17 35 23 24 14 16 24
March 9 8 12 8 10 11 9 8 6 8 7 9
13.1
Vento 11 10 11 7 16 8 10 10 8 11 8 10
Beat 4 Doors 9 8 N.A. 6 N.A. 7 8 4 6 6 7 7 11.6
KIA Río
10 9 13 8 16 9 8 10 7 7 9 9
Sedan
9.7
Beat 9 8 9 7 11 7 8 8 7 6 7 8
Sentra 10 8 9 5 10 11 N.A. 8 7 8 8 8
8.6
Jetta 10 11 13 7 10 10 15 N.A. 7 8 8 10
*Includes the prices of AXXA, ANA, INBURSA, ATLAS, AIG, ZURICH, GNP,
Average 12 10 15 9 13 10 13 9 8 8 8 10 MAPFRE, CHUBB, and HDI.
Source: GBM with INEGI and Autocompara Data
Lower than P$10 thousand Between P$10-12 thousand Higher than P$12 thousand QUALITAS | 28You can also read
