Qualitas Earnings Call: Strong Core, VAT-Driven Turbulence

Qualitas Controladora SAB de CV Class I ((MX:Q)) has held its Q4 earnings call. Read on for the main highlights of the call.

Qualitas Balances Strong 2025 Results With VAT Hit and Tougher Competition

Overall, the earnings call from Quálitas Controladora SAB de CV Class I mixed confidence with caution. Management highlighted record premiums, robust profitability, strong capital and clear market leadership, supported by operational gains and international growth. Yet the tone turned more guarded around a one-time VAT impact that pushed the fourth quarter into loss, intensifying earnings volatility and pressuring capital metrics. Executives framed 2026 as a transition year, with pricing actions and cost discipline aimed at normalizing profitability in a still-competitive market.

Market Leadership Consolidated in Mexican Auto Insurance

Quálitas underscored its dominant position in the Mexican auto insurance market, citing AMIS data showing a 32.7% share in written premiums and 35.9% in earned premiums. The company generated 45.9% of the industry’s total operating income and delivered the best combined ratio among the top five players, signaling both scale and underwriting discipline. This leadership position, management argued, provides a strategic advantage for navigating rising competition and regulatory changes while defending profitability.

Record Written Premiums and Solid Top-Line Growth

The company delivered record annual written premiums of MXN 75.8 billion in 2025, with growth of 6.4% in the fourth quarter and 9.4% for the full year despite pricing pressure in several segments. This performance reflects resilient demand and continued expansion of its insured base, even as Quálitas made deliberate pricing adjustments and faced more aggressive offers from competitors, particularly in fleets and traditional auto policies.

Profitability and Capital Remain Strong Despite Headwinds

For full-year 2025, Quálitas reported net income of MXN 5.1 billion and a 12‑month return on equity of 20.2%, squarely within its long-term target. Regulatory capital stood at MXN 6.1 billion, with a solvency margin of MXN 16.1 billion and a solvency ratio of 362%, well above requirements. The 12‑month earned-premium-to-capital ratio of 2.7x reflects a balanced risk profile. Management emphasized that even with VAT-related impacts, the company enters 2026 with a solid capital buffer to support growth and shareholder returns.

Normalized Combined and Loss Ratios Show Underlying Health

Headline underwriting metrics were distorted by the new VAT rules, but normalized data point to solid fundamentals. The reported combined ratio for 2025 was 94.1%, while the normalized combined ratio excluding the VAT impact was a more attractive 90.6% for the year and 89.3% in the quarter. The full-year loss ratio was 65.7%, an improvement of 40 basis points year-on-year; excluding VAT, it would have been 62.2%, comfortably within the company’s technical range and highlighting continued underwriting discipline.

Operational and Service Metrics Continue to Improve

Beyond the financials, Quálitas highlighted continuous operational improvement and service quality. The call center handled 3.3 million calls with average response time reduced from six to five seconds, supporting rapid claims attention. Customer satisfaction reached 95%, and net promoter scores were the highest since tracking began. On the risk side, claims frequency improved to 27.4%, an 80-basis-point year-on-year improvement, theft cases fell 11%, and the recovery rate rose to 43.6%, outperforming the industry by 100 basis points and helping to contain loss costs.

Investment Portfolio Proves Resilient and Diversified

Quálitas’ investment portfolio of MXN 53.2 billion remains a key earnings pillar. About 86.5% is allocated to fixed income, with an average duration of 2.3 years and a yield to maturity of 8.4% (9% in the Mexican subsidiary). Total comprehensive financial income reached MXN 5.1 billion in 2025, implying an 8.7% return on investments, supported by roughly MXN 2 billion in unrealized gains. With 22% of assets in U.S. dollars, the portfolio offers a natural hedge, and management estimates a roughly MXN 675 million annual sensitivity per peso move, giving investors exposure to currency dynamics.

International Expansion Gains Traction in Latin America

International operations, though still modest in scale, are becoming more meaningful. Subsidiaries outside Mexico contributed about 5% of written premiums, with Latin America growing 31.2% in 2025. Peru stood out, with written premiums up 34.1% and market share reaching 7.5%. Colombia, a newer operation, outperformed initial goals, ending the year with around 1,200 agents, more than 9,500 insured units and 15 offices. Management framed these markets as long-term growth platforms that diversify revenue away from Mexico.

Scaling the Franchise Through Unit Growth

Quálitas passed 6.1 million insured units, adding more than 335,000 units in 2025, a 5.8% year-on-year increase. Over the past five years, the company achieved a roughly 10% compound annual growth rate in insured units, effectively doubling the size of the business in four years. This expansion underscores the strength of its distribution network and relationships with agents and institutional partners, as well as the stickiness of its client base.

One-Time VAT Hit Distorts Q4 and Capital Metrics

A major theme of the call was the new VAT legislation that created an industry-wide impact on profitability. Quálitas chose to recognize the entire 2025 VAT effect in the fourth quarter, materially pressuring results and leading to a quarterly net loss of MXN 190 million. Management explained that this accounting decision also weighed on solvency metrics, contributing to the decline in the solvency ratio to 362%, although capital remains comfortably above regulatory minimums. The company presented this as a one-off adjustment rather than a reflection of operational deterioration.

Q4 Earnings Pressure and Outlier Combined Ratio

The VAT recognition pushed fourth-quarter technical indicators well above normal levels. The combined ratio spiked to 102.6% while the loss ratio jumped to 77.0%, both described as outliers relative to the underlying trend for the year. Management stressed that these quarterly figures should be viewed in the context of the full-year normalized ratios, which remain consistent with Quálitas’ historical performance and long-term targets.

2026 as a Transition Year With Profitability Headwinds

Executives characterized 2026 as a transition year, with multiple headwinds weighing on near-term profitability. Top-line growth is expected to slow compared with recent years, even as the company works to reprice risks and adjust to the VAT environment. Loss ratios in the first half of 2026 are expected to remain elevated because claims related to 2025 policies will still be paid under the new tax regime. Management also warned that lower interest rates will likely reduce absolute financial returns, adding another constraint to earnings growth.

Intensifying Pricing Pressure and Competitive Dynamics

Competition intensified in 2025, particularly in traditional auto and fleet segments, where pricing became more aggressive. The traditional segment saw premiums decline about 3.7% in the fourth quarter, while fleet premiums fell 7.2% in the quarter and 3.2% for the full year, reflecting both price reductions and competitive offers. Quálitas acknowledged that defending market share while maintaining underwriting discipline remains a delicate balance, especially as competitors undercut prices in key niches.

Reshaping the U.S. Business Through Exits and Partnerships

The U.S. operation continued to contract as Quálitas executed strategic exits from certain lines and moved toward a partnership-based model for cross-border commercial business. U.S. premiums fell 15.2% in 2025, and management described the business as being in runoff and resizing mode. While this reduces near-term contribution from the U.S. segment, the company aims to preserve profitability and focus on more capital-efficient, partnership-driven growth rather than direct expansion.

Higher Acquisition and Operating Costs Reflect Business Mix

Acquisition and operating costs ticked higher during the year, partly due to a shift in business mix. The acquisition ratio rose to 22.0% in the quarter and 23.1% for the full year, increases of about 70 and 120 basis points respectively, driven mainly by greater exposure to financial institution channels where commissions are structurally higher. The operating ratio for 2025 was 5.3% including profit sharing; excluding statutory profit sharing, it would have been 4.4%. Management framed these levels as manageable and in line with growth through bancassurance and other intermediaries.

Investment Income Volatility and Rate-Driven Pressure

While the investment portfolio remains a strength, quarterly volatility was evident. Comprehensive financial income declined 21.3% in the fourth quarter, and management cautioned that absolute investment returns in 2026 are likely to be lower as interest rates decline, even if returns remain above reference benchmarks. The company reiterated its commitment to a conservative, duration-managed fixed-income strategy with selective equity exposure, rather than chasing higher-yield but riskier assets.

Capital and Solvency Impacted but Still Robust

The new VAT regime and its recognition in Q4 also affected solvency and capital metrics. The solvency ratio ended at 362%, lower than previous levels but still reflecting a comfortable cushion versus regulatory requirements. Management noted that future dividend decisions and 2026 results will be important variables for capital ratios, but stressed that the current position provides flexibility to support growth, absorb volatility and continue remunerating shareholders within its established policy range.

Forward-Looking Guidance Points to Measured Growth and Stable Returns

Management outlined directional expectations for 2026 rather than formal guidance. Written premiums are expected to grow in the high-single to low-double digits, outpacing modest new-vehicle growth in Mexico, with earned premiums a few points higher than written levels. Pricing actions aim for gross rate hikes of roughly 6–8%, translating into net renewals around 3–5%. The loss ratio is projected to sit at the high end or slightly above the 62–65% technical range, with the combined ratio at the upper end or just above the 92–94% target, especially in the first half as VAT-related carry-over still bites. Acquisition and operating ratios are expected to stay within historical ranges. Financial income should broadly mirror 2025 trends but likely decline in absolute terms as rates fall, although returns should remain above benchmarks given the portfolio’s yield and structure. With capital metrics still strong and a targeted ROE around 20%, management expects to keep its dividend payout policy broadly in the current 40–90% band.

In closing, the call painted a picture of a company with clear market leadership, solid underlying profitability and strong capital, but facing near-term turbulence from regulatory changes, competitive pricing and softer investment yields. For investors, Quálitas offers a mix of defensive characteristics—scale, underwriting discipline, and a resilient balance sheet—against a backdrop of earnings noise in 2026. How effectively management executes on pricing, cost controls and international expansion will be key to sustaining its ROE target and supporting shareholder returns in the coming years.