December, 2020 QUALITAS · QUALITAS has been an M&A target for many years, as it is a very valuable...

December, 2020

FINANCIALSNatalia Zamora Madrazo, CFA Anakaren Nava [email protected] [email protected]+52 (55) 5480 5714 +52 (55) 5480 5800 ext. 4720

A great company at a decent price, with attractive growth potential

QUALITASInitiating coverage

December, 2020

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.

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 and vertical subsidiaries has increased from 4% in 2014 to 8% in 9M20, and the company is striving to take it to 15% over the next five years—although this could happen even sooner. 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.

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December, 2020

00. GLOSARY 4

01. MEXICAN INSURANCE MARKET 5

02. WHAT IS QUALITAS? 112.1 History of QUALITAS 122.2 Corporate Structure 132.3 Board of Directors 142.4 Top Management 152.5 Segments 162.6 Allies 172.7 Business Model & Strategy 18

I. Service 19II. Specialization 20III. Pricing & Cost Control 21

a) Loss Ratio 22b) Acquisition Ratio 25c) Operating Ratio 26d) Combined Ratio 27

03. FINANCIALS 293.1 Premiums 30

A. Insured Units 30B. Written Premiums 31C. Earned Premiums 32

3.2 Investment Portfolio 333.3 Profitability 343.4 Technical Reserves 353.5 Solvency & Liquidity 363.6 Mexican Regulatory Indicators 37

04. RISKS & OPPORTUNITIES 384.1 Risks: Internal and External 394.2 Economic Downturn and Its Implications 404.3 Potential Opportunities 414.4 Sustainability Strategy 43

05. VALUATION 445.1 Financial Outlook 455.2 GBM Estimates 515.3 Valuation 535.4 Sensitivity Analysis 555.5 Potential M&A Target 575.6 Stock Price Performance vs. Analyst Estimates 58

TABLE OF CONTENT

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December, 2020

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.

00. GLOSSARY

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December, 2020

1.0MEXICAN INSURANCE MARKET

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December, 2020

Social Insurance

LifeInsurance

Property Insurance

Personal Insurance

Auto Insurance

Trucks

Catastrophe Insurance

Residential Cars

Fire

TouristCars

Marine Transport

Liability Insurance Others

Others

52% 10% 10% 8% 6% 14%

42% 38% 16% 5%

65% 32% 1% 2%

01. MEXICAN INSURANCE MARKETIn Mexico, according to the National Insurance and Bonding Commission (CNSF):• Life Insurance accounts for most of the total written premiums, with a 42% share, followed

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.• The most common damages covered by auto insurance policies are property and physical

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: • 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, Chubb, AXA, and HDI. Together, they account for 69.6% of the segment’s written premiums, where QUALITAS stands out with a 29.6% market share.

Total Written Premiums by Type of Insurance– P$ 582.2 billion in 2019

Property Insuranceby Product

Auto Insuranceby Type of Vehicle

Source: CNSF data *2020 data at 1H20. Source: CNSF data

*2020 data at 1H20. Source: CNSF data

5%

12%

3%

7%

1%

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

*

QUALITAS GNP ChubbAXA HDI

Total Insurance Market Share in 2020*- As percentage of written premiums

Total Insurance: Market Share Evolution–As percentage of written premiums

GNP

MetLife

BBVA

Banorte

AXA

Citibanamex

Seguros Monterrey

Inbursa

Mapfre

Zurich

Chubb

11.9%

10.7%

9.1%

7.8%

7.1%

5.4%

5.2%

5.1%

3.7%

3.5%

3.5%

3.2%

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December, 2020

01. MEXICAN INSURANCE MARKET

Auto Insurance in Mexico:

• As mentioned before, residential cars represent 65% of the auto industry’s written premiums, followed by trucks, with 32%.

• Of the ~75 insurance companies that operate in the Mexican market, 35 have auto insurance activities.

• The industry is competitive, although highly concentrated; the five larger companies hold ~70% of the segment’s written premiums.

• In 2013, the Law of Federal Roads & Bridges was amended to enact compulsory liability car insurance, which became mandatory for 2011 vehicle models and beyond and with a minimum invoice value of P$187 thousand. Those amendments established the guidelines for the gradual adoption of such insurance. Thus, as of January 2019, the civil liability car insurance became mandatory for all vehicles in Mexico.

• 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 for the latter, and also provides legal support for the policyholder.

• Authorities can request drivers to furnish the policy in cases of road accidents or infractions, and the failure to have such insurance can result in economic sanctions of 20 to 40 minimum wages (around P$2,500-5,000). Moreover, according to AMIS, death compensation could reach P$3 million.

• However, even though the civil liability car insurance is mandatory, according to Condusef (National Commission for the Defense of Financial Service Users) data, only 32% of cars in 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 issue in the country (where some police officers can be easily bribed to avoid a ticket). These are the industry's main roadblocks.

• Nevertheless, the industry’s under-penetration, coupled with the mandatory nature of auto insurance, should allow for wide growth potential in the longer term.

QUALITAS GNP Chubb* AXA HDI*

0%

5%

10%

15%

20%

25%

30%

35%

29.6%

14.3%11.2%

8.5%5.9%

2020

*

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

*2020 data at 1H20. **Chubb merged with ABA Seguros in 2018, while HDI acquired Genworth Seguros at the end of 2009.Source: CNSF data

Auto Insurance: Market Share Evolution

Mexican Auto Insurance Market Penetration

Source: INEGI and AMIS data

-

5

10

15

20

25

30

35

40

2012 2013 2014 2015 2016 2017 2018 2019

Mill

ion

Uni

ts

30% 32%33% 33% 34% 34% 33% 32%

Vehicle Traffic Auto Insurance Mkt Penetration

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December, 2020

QUALITAS GNP CHUBB AXA HDI

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020*

44.0%

10.5%8.7%8.6%4.5%

Truck Insurance: Market Share Evolution


Auto Insurance: Vehicles Sold and Written Premiums in the Last 10 Years

-

20

40

60

80

100

120

140

0.0

0.4

0.8

1.2

1.6

2011 2012 2013 2014 2015 2016 2017 2018 2019 1H19 1H20

MXN

Bill

ion

Mill

ion

Uni

ts

Vehicles Sold Total Auto Written Premiums

• Even though the sales of new vehicles in Mexico have dropped in recent years, the market’s written premiums showed a 2016-2019 CAGR of 8.1%.

• Moreover, in 1H20, written premiums amounted to P$52 billion (-9.4% YOY) despite the sharp decline (-31.9% YOY) in units sold, exacerbated by the COVID-19 crisis.

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%

Chubb 12.6% 8.7% 37.8% 0.0% 11.2%

AXA 9.0% 8.6% 1.7% 0.0% 8.5%

HDI 6.6% 4.5% 9.5% 5.1% 5.9%

Total 65.6% 76.4% 77.9% 70.3% 69.6%

*2020 data at 1H20Source: CNSF data

Source: INEGI and CNSF data

*2020 data at 1H20Source: CNSF data

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 been possible, thanks to its service, mainly. The company’s agents provide tailored service to the clients, guiding them throughout all the processes they may require during the lifetime of the contract. This is fundamental for fleets and heavy vehicles, as it saves clients time and facilitates processes.

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 devices.

Also, QUALITAS has become more efficient thanks to the analysis of the routes and hours to adjust the policy prices and deductibles applicable. The company reaches out to its clients to talk about the analysis results and sets terms that benefit both parties.

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December, 2020


Insurance Company

Float = Securities + Repos + Net Loan Portfolio

(MXN Billion)

Mexico P$25.5, Total P$31.0 P$135.2 P$10.7 P$53.9 P$5.1

Written Premiums by Type of Insurance

Written Premiums in Property Insurance by

Product

Auto Insurance Division:

Written Premiums(MXN Billion)

Acquisition Ratio(+) Loss Ratio

(+) Operating Ratio(=) Combined Ratio

4- Yr. Avg. | 2019 23% | 22% 64% | 60%

3% | 5% 90% | 87%

4- Yr. Avg. | 2019 28% | 28% 68% | 62%

5% | 4% 101% | 94%

4- Yr. Avg. | 2019 13% | 19% 70% | 69%

7% | 6% 90% | 95%

4- Yr. Avg. | 2019 23% | 21% 65% | 66%

6% | 2% 95% | 89%

4- Yr. Avg. | 2019 32% | 32% 66% | 70%

1% | 2% 99% | 104%

4- Yr. Avg. | 2019 25% | 24% 67% | 64% 5% | 4%

97% | 93%

Auto Insurance Industry

100% 100%29%

87%

42%

37% 6%14%

35%

5%6%

6%

6%

4%

73%

7%

44%

4%

7%

5%5%

9%

70%

11%

4%9%

22%

4%

50%

5%

9%

4%

5%5%

72%

100%

Life Insurance

Personal Insurance

Property Insurance

Auto Insurance

Catastrophe Insurance

Fire

Liability Insurance

Marine Transport

Others

2016

2017

2018

2019

28.732.1 32.8 34.2

6% CAGR 10% CAGR 23% CAGR 2% CAGR 19% CAGR

11.6 12.7 13.215.3

6.69.8 11.7

12.5 9.9 8.6 9.9 10.5

4.5 6.07.7 7.5

Using 2019 data to exclude the pandemic's extraordinary effects

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December, 2020


• GNP is the largest insurance company in the Mexican market, holding a 12% market share.

• GNP was created in 1972, as a result of the merger between La Nacional, a company that started operations in Life Insurance in 1901, and Seguros La Provincial, a firm created in 1936, that operated mainly in Property and Personal Insurance.

• GNP is part of Grupo Bal, one of the most relevant conglomerates in the country, composed of important companies in various sectors, such as PE&OLES, Palacio de Hierro, Profuturo, among others.

• Today, GNP’s main business lines are Life Insurance, followed by Health, Auto and Catastrophe Insurance.

• The company has a 14% share of the Mexican auto insurance market.

• In 2016, ACE Limited acquired Chubb Corporation, turning into the world’s largest public property and casualty insurer.

• Chubb was created in 1882 in New York, starting its operations with marine transport insurance.

• ACE Limited was founded in 1985 in the US. Since then and until 1990, ACE rapidly grew thanks to its product diversification and through acquisitions. In 1999, it acquired Cigna Corporation (INA), an international insurance company focused on Property and Personal Insurance, which propelled its global expansion.

• Today, Chubb has operations in 54 countries; LatAm contributes 7% to the written premiums.

• Moreover, in 2018, Chubb announced the merger with ABA Seguros, thereby reaching a 3% market share in Mexico. Its main 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 insurance companies: “Les Mutuelles Unies”.

• AXA achieved a relevant footprint worldwide through M&As.

• Currently, it has operations in 56 countries.

• AXA started operating in Mexico in 2008 through the acquisition of Seguros ING. It now holds a 7% market share in the Mexican insurance market.

• Its main products are Health and Auto Insurance, followed by Life and Catastrophe.

• AXA holds 8.5% of the Mexican auto insurance market.

• HDI is an insurance company that belongs to the Talanx Group.

• The group was founded in 1903 in Germany. It started as a pure liability insurer for the German industry.

• It has become an international insurance group with a presence in more than 150 countries.

• HDI started operations in Mexico in 2009 through the acquisition of GE/Genworth.

• HDI has a 1% share of the Mexican insurance market.

• The company sells Property Insurance products, mainly Auto and Marine Transport Insurance.

• HDI holds a 6% share of the Mexican auto insurance market.

Written Premiums

5-YR CAGR

Life 14%

Health 8%

Auto 12%

Total 11%

Written Premiums

5-YR CAGR

Health 13%

Auto 2%

Life 1%

Catastrophe 8%

Total 6%

Written Premiums

5-YR CAGR

Auto 18%

Life -6%

Liability Insurance 15%

Marine Transport 17%

Total 23%

Written Premiums

5-YR CAGR

Auto 22%

Marine Transport 36%

Total 23%

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December, 2020

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

2.0WHAT IS QUALITAS?

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December, 2020

2.1 HISTORY OF QUALITAS

1994

1996

2003

2011

2013

2017

2018

2016

First office of Q MX

Expansion of operations outside the Metropolitan area

Listing of Q MX on the Mexican Stock Exchange

Start of operations in El Salvador (Q ES)Creation of Quálitas Controladora

Start of operations in Costa Rica (Q CR) & First Development Office for regions with low car insurance penetration

Exchange of Q MX CPOs for Quálitas Controladora CPOs on the Mexican Stock Exchange

Q Financial Services acquires an insurance company in the U.S. & starts operations in that country (Q IC)

Exchange of CPOs for common shares on the Mexican Stock Exchange

Market share: 1st place in Mexico, 5th in El Salvador, and 2nd in Costa Rica. Cars sold in Mexico hit a record

Q Premier Insurance – U.S. intermediary between insurer & agents

Start of operations in Peru (Q PE) through the acquisition of HDI Peru

Foundation of developer Activos JAL – acquisition, leasing and other uses of Real Estate

Strategic partnership with financial institutions

Creation of Outlet de Refacciones (51%) – second-hand auto parts

Foundation of CristaFácil (56%) – service provider of repair or replacement of windshield glass

Creation of Easy Car Glass (51%) – wholesaler of automotive windshields

Amendments to the Law of Federal Roads & Bridges to enact compulsory civil liability car insurance

Q MX’s adoption of Solvency II (new capital requirements and risk management)

Acquisition of additional shares of Outlet de Refacciones (99.9%)

Civil liability car insurance, mandatory for all vehicles as of January Acquisition of additional shares of CristaFácil (99.9%) & Easy Car Glass (99.9%)

Acquisition of Autos y Salvamentos 51% – management of total losses

Civil liability car insurance becomes mandatory in Mexico

2019

2015

2005

2008

2009

2012

2014

Insured Units through the Years –Thousands

Source: Company data

4,223

1994

1996

2003

2011

2013

2017

2018

2016

2019

2015

2005

2008

2009

2012

2014

2

42

558

861

1,375

1,478

1,642

1,901

2,228

2,458

2,803

3,487

3,819

3,877

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December, 2020

1

80

102

136

159

268

379

451

1994

2001

2004

2007

2010

2013

2016

2019

38

431

1,033

1,884

2,419

3,194

4,411

5,154

1994

2001

2004

2007

2010

2013

2016

2019

Mexico

US

Costa Rica

Peru

El Salvador3.5%

1.8%

0.5%

0.4%

93.7%

2.2 CORPORATE STRUCTURE

Source: Company data Source: Company data


Quálitas Compañía de Seguros (Q MX)

99.9%

Quálitas El Salvador (Q ES)99.9%

Quálitas Insurance Company (Q IC)

100%

Quálitas Premier Insurance

100%

Wholesaler of automotive windshields. Distributes to CristaFácil and to other repair sites.Inventory value: P$18.4 million

Quálitas Costa Rica (Q CR)99.9%

Quálitas Financial Services

100%

Quálitas Peru (Q PE)99.9%

Easy Car Glass 99.9%

CristaFácil 99.9%

Outlet de Refacciones99.9%

Autos y Salvamentos54.0%

Optimización de Talento98.0%

Activos JAL 99.9%

Service provider of repair or replacement of windshield glass. Operates mainly under a franchise model.

Management of total losses.

Acquires second-hand auto parts and has its own operations to disassemble vehicles declared as total loss in claims. Sells to Q MX and to third parties.Inventory value: P$59.7 million

VE

RT

ICA

L S

YN

ER

GIE

S

Controladora

Number of Offices

Written Premiums by Subsidiary in 2019

Number of Employees

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December, 2020

2.3 BOARD OF DIRECTORS

Board’s Composition

Committees

Related Independent

73%

27%

Board Member Position

Joaquín Brockman Lozano Chairman

José Antonio Correa Etchegaray Vice President

María Pilar Moreno Alanís Related

Wilfrido Javier Castillo Miranda Olea* Independent

Juan Marco Gutiérrez Wanless Independent

Juan Orozco y Gómez Portugal Independent

Juan Enrique Murguía Pozzi Independent

Mauricio Domenge Gaudry Independent

Christian Alejandro Pedemonte del Castillo Independent

Madeleine Marthe Claude Brémond Santacruz Independent

Alonso Tomás Lebrija Guiot Independent

Joaquín Brockmann Domínguez Alternate Related

María Fernanda Castillo Olea Alternate Independent

Investments, Finance and Planning Position



Wilfrido Javier Castillo Miranda Olea Independent

Juan Marco Gutiérrez Wanless Independent

Christian Alejandro Pedemonte del Castillo Independent

Social Responsibility Position


Operations Position



María Pilar Moreno Alanís Related



Audit and Corporate Practices Position


Mauricio Domenge Gaudry Independent

Alonso Tomás Lebrija Guiot Independent

JoaquínBrockman

Lozano47%

CastilloFamily*

4%

*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 that 10%, only 4% is owned by family members that are part of the Board.

Float 49%

Ownership

*Son of Wilfrido Javier Castillo Sánchez Mejorada

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December, 2020

2.4 TOP MANAGEMENT

• CEO of Q MX from 1994 to 2016.• His father was an insurance agent.• In the early 70s, Joaquín worked in Seguros América and traveled to the US and England to specialize in reinsurance.• 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).

• More than 20 years of experience in international companies.

• Leadership roles including CFO in México, United States, Brazil, Chile, Panama, and Venezuela.

• Industrial Engineering degree from Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM) and a diploma in Corporate Finance from ITAM.

• He was the CFO of Q MX for three years.

• He was the CFO of different companies, including P&G Mexico for North America and Seguros Monterrey New York Life. Thus, he has broad experience in the industry.

• Chemical Engineering degree from Universidad Iberoamericana and a diploma in Top Management from IPADE in Mexico.

• She has 27 years of experience in the auto insurance industry in the technical area. From 1991 to 2001 worked at Seguros Monterrey New York Life. From 2002 and 2012 worked at QUALITAS, went to GNP from 2012 to 2014, when she rejoined the Company.

• Bachelor’s degree in Actuarial Science from Universidad Anáhuac and a master’s degree in Mathematical Methods from the same institution.

• Was one of QUALITAS' founding partners, Vice-chairman of the board, and Head of Investments and Investor Relations. He also acted as CFO from 1996 to July 2014.

• He previously served as CIO of Seguros Monterrey New York Life and was chair of the investment committee of the Mexican Association of Insurance Companies (AMIS) for the 2007-2011 period.

Joaquín Brockman LozanoFounding partner of QUALITAS and Chairman of the Board and CEO since 2008

Bernardo Eugenio Risoul Salas Chief Financial Officer since January 2019

José Antonio Correa EtchegarayVice Chairman of the Board and CEO since 2018

María Pilar Moreno AlanísTechnical Director of the company since 2016 and member of the Board since 2016

Wilfrido Javier CastilloSánchez Mejorada †

Alejandro DavidElizondo GonzálezNew Chief Investment Officer since April 2020

QUALITAS | 15

December, 2020

INDIVIDUALTRADITIONAL

FLEET

FINANCIAL INSTITUTIONS

• Automobiles and motorcycles by unit

• Scheme of a large number of automobiles and trucks per policy.

• 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.

• Banks, leasing entities, car assembly companies, and car retailers that sell the insurance coverage jointly with an auto loan or vehicle sale.

• Started in 2005, with the establishment of a strategic partnership. After 2007, this segment became important for the company.

• Policies under a multi-annual scheme—typically for the same term of the auto loan (from 1 to 7 years; average of 3-4 years)—, which involves more risk and exposure for QUALITAS than annual policies.

• The segment represents higher acquisition costs, due to a fee paid for the use of the institutions’ facilities.

• 68.4% of light vehicle sales came from auto loans in 2019.

• The segment benefits from better financing conditions and greater credit availability.

• This segment doesn't have renovation risk. However, it carries a higher policy mispricing risk.

• The ten most relevant financial institutions contribute with 17% of the total written premiums.

• 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.

• Through Insurance Agents: Agents get paid a commission based on sold policies’ written premiums and their portfolios’ loss ratio, plus yearly productivity bonuses. The three most relevant agents contribute 8.6%, 4.1%, and 3.1% of the total written premiums.

LTM Written Premiums by Segment

8-YR CAGR 5-YR CAGR 12.9% 24.2%

8-YR CAGR 5-YR CAGR 16.1% 18.9%

8-YR CAGR 5-YR CAGR 20.3% 14.8%

8-YR CAGR 5-YR CAGR 14.3% 10.6%

Individual

Fleets

Financial Institutions

Foreign Subsidiaries

61% of Total Written

Premiums

31%

30%

33%

6%


Note: The 8-Yr. CAGR runs from 2011 to 2019 and the 5-Yr. CAGR goes from 2014 to 2019.

2.5 SEGMENTS

QUALITAS | 16

December, 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.

• Since 2005, QUALITAS started to sell its products through financial institutions.

• Today, it has agreements with 750+ entities.

• 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.

• Car sales with credit can include auto insurance for the same term of financing granted, typically 3-4 years on average.

• The fees paid to financial institutions for the sale of products include a fee for the use of their facilities that is recorded at acquisition cost.

• They also manage the policyholders' payments and provide legal advice, among other activities. In Mexico alone, QUALITAS has 188 service offices and over 1,000 employees.

• A small percentage of policies is sold through this channel. For example, the website Autocompara, which compares the prices offered by different insurance companies, accounts for only 2% of the sales.

In Mexico and Latin America, agents play a fundamental role in the insurance industry, as they serve as policyholder advisors, unlike developed markets, where most of the insurance policies are sold through brokers.

• The agent participates not only in the sale of the policy but also provides support to the insurer in any process they might need during the lifetime of the policy. For example, an agent can coordinate the installation of satellite devices of an entire fleet.

• Agents render a personalized service to the client, but also provide valuable information to QUALITAS about what clients are looking for, as they have a higher market sensitivity.

• Also, agents are important in LatAm, as they spread insurance awareness, which is necessary given the low auto insurance penetration and the lack of insurance culture in the region.

• Agents' commissions are linked to the policies sold and collected (around 8-12%).

• 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%).

• In Mexico, agents must be certified by the CNSF.

• QUALITAS works with more than 16 thousand agents, which represents around 26% of active agents in the Mexican Insurance Industry.

All these allies receive special training and have access to different tools and platforms to help them be more efficient and improve the company’s operating results. QUALITAS has developed different platforms and apps to improve the service rendered to its clients and simplify the processes between them and its allies.

CLIENT

Apps and Websites

Insurance Agents

Service Offices

Financial Institutions

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.

Financial Institutions: Insurance Agents:

Apps and Websites:

Service Offices:

QUALITAS | 17

December, 2020

2.7 BUSINESS MODEL & STRATEGY

Offices Evolution


The company operates through various commercialization channels to reach its clients and is highly efficient, as each office has an independent decision-making system.

ODQsService Offices

10

72

100

128

164

207

220

228

252

277

170

161

168

175

181

172

183

190

199

202

2011

2012

2013

2014

2015

2016

2017

2018

2019

9M20

In 2011, QUALITAS implemented the Development Office model (ODQs) to simplify its office model and to reach populations with lower car insurance penetration, typically far from the main cities.

Characteristics:• Places with virtually no insurance offer and low accident rates.• Unlike the Service Offices' operation, ODQ's personnel are QUALITAS' employees

(two to three per ODQ).• Represent around 3 to 5% of QUALITAS’ written premiums.• Can become Service Offices.

QUALITAS started its business model with Service Offices:

• The main objective is to have a close relationship with agents, thereby gaining knowledge and a better understanding of the clients’ needs.

• These offices are managed by independent directors with experience in the insurance sector, usually former employees of QUALITAS, who share the company's values.

• They work under a commission system linked to the written premiums generated and collected by their Service Office and to the claims associated with those premiums.

• The Service Office and its director are responsible for the sales, growth, and office expenses, all of which are independent of QUALITAS.

• QUALITAS has the authority to remove the director.• QUALITAS is in charge of all the claims support, the adjuster, and repairments. • QUALITAS also provides training, administrative, and technological support.

QUALITAS | 18

December, 2020

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 allowed for the company to stand out among industry players by selling a service rather than a product.

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.

For example:

• QMóvil: App designed to assist in case of a claim, so that policyholders can communicate directly with the Contact Center, simplifying the process of sharing the location of the 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 QUALITAS’ Express Adjustment tool without the presence of an adjuster from either party.

• QUALITAS GPS: Once a casualty occurs, the system locates and assigns the closest available claim officer to it. As such, according to data from the company, 85% of the times, 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.

Service

Call Center with 300+ executives

6,250+ average calls per day

1,200+ adjusters with an average

arrival time of 25-30minutes 85% of thetimes the adjuster

arrives beforethe competition.

The largestnetwork

of agents:16,000+ agents

QMóvil App to efficiently assist

policyholders in case of a claim

Quálitas University to render specialized

courses to service providers

The largest coverage in Mexico,

with more than450 offices and ODQs

2.7 BUSINESS MODEL & STRATEGYI. SERVICE

A. LOSS RATIO B. ACQUISITION RATIO C. OPERATING RATIO D. COMBINED RATIO

III. PRICING & COST CONTROLII. SPECIALIZATION

QUALITAS | 19

December, 2020

QUALITAS’ specialization in the auto insurance segment has translated into heightened efficiency, which has allowed the company to expand its market knowledge and constantly improve its service, thus revamping its day-to-day operations.

• Models: QUALITAS has developed advanced models through statistical analysis using historical information and is looking forward to replicating its business model for Mexico—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 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 processing around 10% of the total claims through this method by the end of the year (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 greater cost reduction.

• 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 in the last twelve months by around 9% YOY, and there is plenty of room for improvements to continue.

Devices:

Encontrack

• Device to locate the vehicle and recover a higher number of stolen units

• Reduces the deductible payment in case the car is not recovered• In 2019, QUALITAS recovered 51% of the total stolen cars of

policyholders—79% of these had Encontrack installed

Mobileye • Device to prevent accidents. Alerts the driver of a potential collision

Guardian • Alert system that detects fatigue or distraction of the driver• This device is in the testing stage

Octo Telematics • Evaluates and analyzes driving habits and the status of the vehicle• Testing stage

MDAS • Advance monitoring and driver support system to prevent collisions• Testing stage

APPS FOR POLICYHOLDERS

Accident Attention App Express Adjustment App Disposable App Q Móvil App

• Policyholders’ version • Remote attention when there are no third parties involved or damages caused to the public road.

• No waiting time • In 2019, it helped assist 3.5% of

accidents reported to the company.• Objetive: To keep servicing 10% of total

claims through this channel.

• To report accidents • Contacts claim officers• Easily shares the location of the

accident• Uses a QR code• Does not take up capacity of the

policyholder’s mobile device.• No need to enter the policyholder’s

data

• To report accidents • Contacts claim officers• Sends the location



II. SPECIALIZATION III. PRICING & COST CONTROL

QUALITAS | 20

December, 2020

Medical expenses associated with the accidents of QUALITAS’ clients are fixed for the company. Thanks to the agreements with hospitals, it has been able to reduce volatility in

this line.

QUALITAS is the lowest cost operator, and it has achieved so on the back of:


Economies of Scale

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 subsidiaries, QUALITAS has attained a competitive edge over its peers, making it cheaper for the company to service its clients. For example, in terms of pricing, the 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 track record.

Moreover, the company is developing a database for truck drivers. We should note that QUALITAS can do this thanks to its large market share in this segment (~44.0%), gained in turn through the company’s experience in the segment’s robberies and recovery, which has translated into lower claims.

Vertical Subsidiaries

QUALITAS encourages the repair of crystals over their replacementthrough its subsidiaries CristaFácil and Easy Car Glass, which implies: • Lower costs (60% lower than replacement)• Less time• Same quality and safety• No deductible payment for the policyholder

CristaFácil processes 75% of the claims related to car windshields. QUALITAS prioritizes the time of repair and the clients’ experience. Yet, there still are opportunities for further improvement, as they only replace 4% of what they could be repairing.

Also, the company has arrangements with car manufacturers and suppliers in order to reduce repair costs while maintaining quality.

Outlet Refacciones: Cars declared by QUALITAS a total loss are sent tothis unit to be sold as second-hand or by parts.

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 competitors.

Technological Innovation and Analysis

• Satellite devices to recover stolen cars

• Methods to prevent and detect fraud

• 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.

The company continuously monitors its costs and focuses on the details to find ways 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 downtrend in car theft, has translated into the company’s lowest loss ratio.

QUALITAS’ Loss Costs

63% 20% 12% 5%

Property Damage Theft Civil liability Medical Expenses

I. SERVICE


II. SPECIALIZATION III. PRICING & COST CONTROL

QUALITAS | 21

December, 2020

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.


A. LOSS RATIO B. ACQUISITION RATIO C. OPERATING RATIO

II. SPECIALIZATION

Loss Ratio of the Mexican Auto Insurance Industry

70%

60%

64%

62%

69%

76%

66%67%

70%

69%

64%

2015 2016 2017 2018 2019

QUALITAS GNP Chubb AXA HDI Auto Insurance Industry

Source: GBM with Mexican Auto Insurance data from CNSF

D. COMBINED RATIO

III. PRICING & COST CONTROL

QUALITAS | 22

December, 2020


Industry Insured Units: Theft and Recovery in Mexico

Thefts to Industry Theft to QUALITAS Industry's Recovery QUALITAS' Recovery

+14%

+28%

+7%

-1%

38%

-18%

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 9M19 9M20

-10%-5%

-10%+5%

-11%

-20%+10%+41%

+26%0%+6% -5% -6%0%

45% 50% 51%52%

44%

50% 42%38% 38%

44%

45%

37% 41% 45% 51%50% 49%40%

42%41% 51%

54%50%-20%

• 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.


I. SERVICE


II. SPECIALIZATION

D. COMBINED RATIO


QUALITAS | 23

December, 2020

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.


The loss ratio is directly linked to the combined ratio. So, the positive impact over the loss ratio due to the health crisis has 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.

However, we believe the levels achieved in 2020 are not sustainable, and we can expect both ratios to increase as the economy reopens.

Cost of Claims Loss RatioAssisted Claims Assisted Claims as % of Total Insured Units

4%

6%

8%

10%

12%

180,000

220,000

260,000

300,000

340,000

380,000

420,000

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

4Q18

1Q19

2Q19

3Q19

4Q19

1Q20

2Q20

3Q20

LockdownMeasures

70.7%

66.1%66.6%

69.5%

68.8%

61.7%

66.9%66.2%

59.3%59.90%

49.1%

2,000

6,000

10,000

14,000

18,000

22,000

2011

2012

2013

2014

2015

2016

2017

2018

2019

YTD

19

YTD

20

Target Loss Ratio

QUALITAS’ Assisted Claims QUALITAS’ Loss Ratio

Source: Company data Source: Company data

41%

48%

51%

56%

68%

64%

78%

79%

85%

107%

QUALITAS vs. Peers’ Loss Ratio in 1H20

QUALITAS vs. Peers’ Combined Ratio in 1H20


I. SERVICE


II. SPECIALIZATION

D. COMBINED RATIO


QUALITAS | 24

December, 2020


Acquisition Ratio of Mexico’s Auto Insurance Industry

QUALITAS’ Acquisition Ratio


23%22%

29% 28%

16%

19%

26%

21%

32% 32%

25%24%

2015 2016 2017 2018 2019

22.8%

24.1%

23.4%

21.8%

21.6%

21.9%

22.7%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2015 2016 2017 2018 2019 YTD19 YTD20

Acquisition Cost Acquisition Ratio

TargetAcquisitionRatio*

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 accounts for ~61% of the LTM written premiums), which has a lower acquisition cost than Financial Institutions.

• 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.

• 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.


I. SERVICE


II. SPECIALIZATION

D. COMBINED RATIO



QUALITAS | 25

December, 2020


• From 2015 to 2018, QUALITAS delivered a better operating ratio than the Mexican auto insurance industry. However, this ratio climbed from 3.5% in 2015 to 5.0% in 2019.

• 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.

• 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.

Source: GBM with Mexican Auto Insurance data from CNSF Source: Company data *Excluding employees' statutory profits sharing

Operating Ratio of Mexico’s Auto Insurance Industry


3.5%

5.0%4.7%

4.2%

9.4%

6.5%6.8%

2.1%2.4%

5.1%

4.4%

2015 2016 2017 2018 2019

QUALITAS’ Operating Ratio

Operating Expenses Operating Ratio

4.0%

2.5% 2.5%

4.5%

5.6%

5.9%

7.7%

100

400

700

1,000

1,300

1,600

1,900

2,200

2015 2016 2017 2018 2019 YTD19 YTD20

TargetOperatingRatio*

I. SERVICE


II. SPECIALIZATION

D. COMBINED RATIO


QUALITAS | 26

December, 2020


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.

Source: Company data Source: GBM with Mexican Auto Insurance data from CNSF

QUALITAS’ Combined Ratio Operating Ratio of Mexico’s Auto Insurance Industry

Loss Ratio Acquisition Ratio Operating Ratio

Target CombinedRatio

95.6% 92.5%

86.5%88.4%

92.8%

2015 2016 2017 2018 2019

96%

87%

97%

94%

95%

109%

89%

102%

104%

99%

93%

2015 2016 2017 2018 2019


I. SERVICE


II. SPECIALIZATION

D. COMBINED RATIO


QUALITAS | 27

December, 2020


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.

Average policy price for the ten best-selling cars in 2019 -MXN Thousand

Prices of Auto Insurance Policies in Mexico

8.6

9.7

11.6

13.1

14.9

10.3Industry's Average*

*Includes the prices of AXXA, ANA, INBURSA, ATLAS, AIG, ZURICH, GNP, MAPFRE, CHUBB, and HDI. Source: GBM with INEGI and Autocompara Data

I. SERVICE


II. SPECIALIZATION

D. COMBINED RATIO

-MXN Thousand

Industry

Versa 9 9 10 6 10 10 7 8 7 8 8 8

Aveo 10 9 12 7 10 8 N.A. 7 7 7 8 8

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

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

KIA Río Sedan 10 9 13 8 16 9 8 10 7 7 9 9

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

Jetta 10 11 13 7 10 10 15 N.A. 7 8 8 10

Average 12 10 15 9 13 10 13 9 8 8 8 10

Lower than P$10 thousand Between P$10-12 thousand Higher than P$12 thousand


QUALITAS | 28

December, 2020

3.1 Premiums

A. Insured Units

B. Written Premiums

C. Earned Premiums

3.2 Investment Portfolio

3.3 Profitability

3.4 Technical Reserves

3.5 Solvency & Liquidity

3.6 Mexican Regulatory Indicators

3.0FINANCIALS

QUALITAS | 29

December, 2020

3.1 PREMIUMS

• Despite the new car sales in Mexico have sustained a downward trend since 2017, as seen in the Mexican Insurance Market section, QUALITAS has managed to increase the number of insured units every year—although this will most likely not be the case in 2020, given the pandemic.

• During 9M20, the units sold in Mexico plunged by 30.5% YOY, further affected by the COVID-19 crisis. However, the company showed some resilience in the number of insured units, which declined by only 0.5% both YOY and when compared to YE2019.


Insured Units –Thousands

Insured Units by Country

A. INSURED UNITS C. EARNED PREMIUMSB. WRITTEN PREMIUMS

Mexico 97%

Mexico Trucks

El Salvador 0.4%

Costa Rica 1.4%

66.1%

25.3%

2.3%3.3%

0.5%

Mexico Automobiles

Mexico TouristsMexico Motorcycles

US 0.4%

Peru 0.7%

4,223Insured Units

2019

1,642

1,901

2,228

2,458

2,803

3,487

3,819

3,877

4,223

2011

2012

2013

2014

2015

2016

2017

2018

2019

CAGR

:12.

5%

QUALITAS | 30

December, 2020

3.1 PREMIUMS


Written premiums have consistently shown a robust performance, with both 8- and 5-year CAGRs at 16%.

• The traditional segment, which accounts for 61% of the consolidated written premiums, is more profitable due to a lower acquisition cost and is primarily composed of annual premiums, which allows the company to adjust tariffs throughout the year and widens its maneuvering room in complex scenarios.

• Financial institutions represented 33% of the total written premiums in 2019 (vs. a 10-year average above 40%). The recent years’ declines in this business are chiefly attributed to the fact that it is the most affected by lower new car sales—accordingly, it benefited the most from the jump in new car sales in 2015 and 2016.

• Strategy: The company is focusing on the traditional segment by increasing the number of policies under the individuals and fleets schemes, while continuing to consolidate its foreign subsidiaries.

Written premiums stayed flat in 9M20, affected by a contraction in both the traditional and financial institutions segments, as the pandemic took its toll on the clients’ disposable income and car sales. On the bright side, the foreign subsidiaries kept up with their strong performance.

Written Premiums by Segment

Individual OtherFinancial InstitutionsFleets Foreign Subsidiaries

0

6,000

12,000

18,000

24,000

30,000

36,000

2011 2012 2013 2014 2015 2016 2017 2018 2019

5%

33%

31%

30%

CAGR 8-YR 5-YR 3-YR

Total Written Premiums 16% 16% 6%

Traditional 16% 19% 20%

Individual 13% 24% 21%

Fleets 20% 15% 19%

Financial Institutions 14% 11% -8%

Foreign Subsidiaries 44% 52% 11%

QUALITAS | 31

December, 2020

The company focuses on managing the duration of its policy portfolio to mitigate risk.

• Annual policies provide the flexibility to adjust tariffs three to four times during the year.

• Annual policies could thus bring maneuvering room to better adapt to periods of high volatility and uncertainty, such as the current crisis.

• Multi-annual policies are usually linked to auto loans that have a duration of 1 to 7 years (average of 3-4 years); so, these policies take longer to be registered as earned.

• Multi-annual policies are riskier than annual policies. Hence, the corresponding reserves are released at slower rates.

Due to QUALITAS’ solid financial position position (718% solvency margin at 3Q20), the premiums transferred to reinsurers represent around 1% of the total written premiums, given the requirement established for certain fleets.

The higher share of annual policies within the portfolio, combined with the portfolio expansion, explains the growth of premiums earned over the last years—the 2015-2019 CAGR of net earned premiums stood at 19.6%.

In 9M20, written premiums were affected by the pandemic. However, earned premiums’ performance surpassed written premiums’, mainly on account of the multiannual premiums issued in previous years and the reserves released. For further details on the technical reserves, please refer to page 36 of this document.

QUALITAS’ Portfolio Composition Average Policy Duration–Years

Previous Years’ Composition of Written Premiums 2019 Earned Premiums


Annual Policies Multiannual Policies

80%

80%

74%

68%

57%

20%

21%

26%

32%

43%

9M20

2019

2018

2017

2016 2.5

3.0

3.0

1.9

2.2

Earned Premiums Premiums Reserve Ceded

17,065 23,824

28,668 31,810

34,899 2,787

6,262

4,936 2,373

1,093

4

103

216 312 205

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2015 2016 2017 2018 2019

36,196

-205 -1,093

WrittenPremiums

Ceded PremiumsReserve

EarnedPremiums

34,899

3.1 PREMIUMS


QUALITAS | 32

December, 2020

3.2 INVESTMENT PORTFOLIO

• After several years of outperformance, QUALITAS has struggled to beat the average reference rate in the last four years.

• QUALITAS follows a conservative strategy when it comes to the investment portfolio. Currently, 89% of the invested assets (float) are in fixed income instruments, while the remaining 11% is in equities (maximum of 35%, by law).

• The main investments are government, which represents 59% of the total investment portfolio with no exposure to Pemex, followed by private debt, which represents 20%.

• Recently, the company added ESG criteria to its investment policy.

• In 2019, the portfolio returns were above the average reference rate.

• In 9M20, the return on investments was 3.9%.

Mexico

Holding

US

Costa Rica

Others

73%

16%

8%

2%1%

Return on Investments Average Reference Rate

6.2%

3.3%

6.7%

4.7%

8.2%

3.0%

4.2%

6.7%

7.6% 8.0%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

Comprehensive Financial Income

2015 2016 2017 2018 2019

Government 63%

Private 18% Equities 11%

Cash &Equivalents2%

ForeignBonds2%

InternationalFinancial Org.3%

QuasiGovernment1%

Investment Portfolio by Subsidiary

P$33.7 Billion

Investment Returns

Portfolio Composition: 89% Fixed Income




QUALITAS | 33

December, 2020

3.3 PROFITABILITY

QUALITAS’ profitability has significantly improved, as last year’s ROE scored its best result yet, thanks to the business expansion and the company's cost-control strategy, which has translated into consistent improvements in the combined ratio.

The company has reached its lowest historical loss ratio levels, leading profitability at 3Q20 to boast a 43.3% ROAE level. However, we don't expect this to be sustainable, due to the ratio’s high dependence on several external factors and has even benefited from the recent lockdown measures. Still, we do believe the company will focus on preserving its cost efficiencies to maintain attractive profitability levels.

Compared to other public financial companies, QUALITAS has the highest ROE and is trading close to its 5-year P/BV average despite the profitability improvements.

In our view, the COVID-19 crisis has brought some additional challenges for the company, as the global and national economic downturn could affect the company's written premiums. Besides, the Mexican peso depreciation could increase the cost of claims, while the market volatility and lower reference rates could impact the portfolio returns. However, we believe the company has a solid position and maneuvering room to face these pressures.

0%

3%

6%

9%

0%

15%

30%

45%

2015 2016 2017 2018 2019

Qualitas' ROE Qualitas' ROI

ROE P/BV

0%

10%

20%

30%

40%

50%

1.5x

1.7x

1.9x

2.1x

2.3x

2.5x

2.7x

2.9x

3.1x

Dec-

15

Dec-

16

Dec-

17

Dec-

18

Dec-

19

Dec-

20

Adjusted ROE

0%

5%

10%

15%

20%

25%

20%

Jun-

15

Dec

-15

Jun-

16

Dec

-16

Jun-

17

Dec

-17

Jun-

18

Dec

-18

Jun-

19

Dec

-19

Jun-

20

Dec

-20

-10%

0%

10%

20%

30%

40%

50%

5-YR Average ROE Current ROE 12M ROE

QUALITAS’ Profitability Advances

Valuation vs. Profitability Adjusted ROE: ROE ÷ P/BV ROE of Public Financial Institutions*

Source: GBM with Bloomberg data Source: GBM with Bloomberg data

Source: Companies’ data


*QUALITAS is intrinsically more profitable than banks, and the pandemic-driven lockdowns have further propelled its profitability. As such, we are using data until 2019 to calculate the 5-Yr. Average ROE.

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December, 2020

3.4 TECHNICAL RESERVES

Technical Reserves’ Evolution by Type2019 Breakdown

Unearned Premiums ReservesReserves for Outstanding Obligations

Policies expired and claimsoccurred pending paymentOccurred but not reported andadjustment cost assigned to claimsDeposit premiums

73.9%

23.7%

1.9%0.5%

Property and casualtyinsurance

1,000

7,000

13,000

19,000

25,000

31,000

37,000

2011

2012

2013

2014

2015

2016

2017

2018

2019

Technical reserves have increased over the years as the company’s operations have expanded. QUALITAS creates technical reserves in line with the requirements of the CNSF to meet the company's obligations related to claims, acquisition costs and operating expenses.

These reserves can be classified into two categories:

• Unearned Premiums Reserves are intended to cover any future obligation. These include the property and casualty insurance, which at the end of 3Q20 represented 73.1% of the total technical reserves.

• Reserves for Outstanding Obligations to cover the expected value of obligations once the incident foreseen in the policy has occurred. These reserves accounted for 26.9% of the total in 3Q20.

According to the Mexican Law for Insurance Institutions (LISF), the technical reserves should be created based on actuarial models, which must take into account the present value of expected future obligations, the obligations pending completion, and a risk margin. As a best practice of the Mexican insurance industry, most companies, including QUALITAS, use the average quarterly information of the last six years to build those actuarial models and create the corresponding technical reserves.

Moreover, when it comes to investments, the law establishes a maximum percentage of the total investment base that can be invested in each type of instrument or by economic activity. For example, insurance companies can not invest more than 50% in equity stocks issued on the Mexican Stock Exchange (vs. QUALITAS’ internal limit of 35%), no more than 30% in repo operations and no more than 25% in the same economic activity (like mining, construction, trade, transport, among others).

Source: Company data Regulatory Limit by Type of Investments

Investments Limit

Equity Mexican Stock Exchange 50%

Repo Operations 30%

By Economic Activity 25%

Real Estate 25%

Structured Instruments & REITS 20%

Foreign Debt & Equity 20%

Same Institution or Group 10%

Secured Loans and Mortgages 10%

Related Businesses 5%

Private Equity Funds 5%

Trusts 5%

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December, 2020

3.5 SOLVENCY & LIQUIDITY

QUALITAS has a solid solvency position:

Solvency Margin Breakdown

Solvency Over the Years

9%

91%

P$10.1Billion

138% 136%

172%

206%226%

487%

-

2

4

6

8

10

12

14

2014 2015 2016 2017 2018 2019Regulatory Capital Requirement Solvency Margin Solvency Margin %

Company’sCapital Taget

Excess

MXN

Bill

ion

• The solvency margin is much larger than its internal policy, which seeks to maintain 1.5x the regulatory capital.

• The company has the capability to distribute dividends to its shareholders without compromising the capital and still have a robust position.

• In 3Q20, the company reached the highest solvency margin percentage in its history (718%). In our opinion, this places the company in a privileged position with wide maneuvering room to cope with the crisis.


Regarding liquidity, the company has more than enough resources to cover the cost of claims and operating expenses. QUALITAS’ liquidity sources are fully internal, as it has no credit lines with any financial institution or other kinds of debt. It finances its operations through policy collection and investment returns.

QUALITAS | 36

December, 2020

Source: CNSF data

QUALITAS’ Mexican subsidiary has increased its Solvency Capital Requirement Coverage Ratio (SCRC) over the past years. The company has maintained the necessary resources to support its capital requirements after successfully covering entirely its technical reserves. These resources include its investment portfolio, which is composed of high-quality assets.

At the end of 2Q20, the Solvency Capital Requirement Coverage Ratio landed at 4.2x. This means the Mexican insurance subsidiary had a 3.2x excess of resources to face the regulatory capital requirements, which reflects its robust capital position. Also, in 2Q20, it attained a better solvency position than its Mexican peers.

It is important to mention that the investments used in this calculation to cover obligations and capital requirements must meet the applicable security, profitability and liquidity regulations. As such, this calculation encompasses the most liquid assets and those with higher quality to cover for its technical reserves first. Then, it uses the excess amount or solvency margin, together with the less liquid assets, to cover the capital requirements.

In detail, the numerator to arrive at the 4.2x ratio in 2Q20 was composed as follows: more than 90% were securities investments and the rest were other types of assets.

The regulatory solvency capital requirement—the denominator—is computed through a VAR model, using a 99.5% confidence level and running around 100k scenarios to determine the impact on the company’s capital when changing different variables, such as interest rates and portfolio composition, to then establish the minimum level required to face the harshest scenario.

4.2

3.3

2.5

4.0

1.8

0.5

2.5

4.5

6.5

8.5

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20

SCRC Ratio =Excess of high-quality assets (mainly investments) after fully supporting

the technical reserves

Solvency Capital Requirement

Solvency Capital Requirement Coverage Ratio

≥1.05

December, 2020

4.1 Risks: Internal and External

4.2 Economic Downturn and Its Implications

4.3 Potential Opportunities

4.4 Sustainability Strategy

4.0RISKS & OPPORTUNITIES

QUALITAS | 38

December, 2020

Dependence on Key Top Managers:

The success of the business can be mostly attributed to the expertise of founding partners and the incumbent management. Even though QUALITAS is today a more institutionalized company, it still depends on its key top management.

Recently, one of the founding partners of QUALITAS, Wilfrido Javier Castillo Sánchez Mejorada, passed away. He was the CIO and Investor Relations Director and played a key role in the evolution of the company.

Mexican and Global Economic Slowdown:

A weakened global and domestic economy has a direct impact on the production and sale of vehicles, which could in turn affect the underwriting of insurance policies (particularly in the segment of Financial Institutions), as an economic downturn has the potential to undermine customers' purchasing power.

Moreover, higher unemployment rates could aggravate insecurity levels and increase the number of car thefts. Thus, a weak economic recovery could hamper both top line and cost of claims for the auto insurance industry.

FX Exposure:

Large fluctuations in the Mexican peso and the US dollar exchange rate could increase the loss cost, as 30% of these costs are dollarized.

Low Interest Rates & Investment Discipline

Additional slashes to the Central Bank’s interest rate could push investment portfolio returns lower, as 89% of the company's investments are in fixed income.

Trend Changes: Self-driving cars: Although Mexico has a long way to adopt these types of vehicles, they pose a long-term threat. We should remark that the increase in testing, production, and sale of these autonomous vehicles could affect the car insurance industry. Since these vehicles could make driving safer, car insurance could become less necessary.

On the bright side, QUALITAS is continuously analyzing industry trends and the habits of the population, which could help the company react swiftly to any potential changes.

Capital Allocation: Health Insurance

The company will invest US$10-20 million (3 to 6% of its 12M earnings) to start operations in the health insurance business. QUALITAS will create a new company focused on health insurance to keep its specialization in auto insurance apart, as each company will have its own metrics. QUALITAS plans to expand regionally first, and then across Mexico. However, even though it plans to start small, there are many challenges related to making a foray into a new market and the company may require additional capital going forward. Hence, it could take some time to become efficient and profitable in this new business.

4.1 RISKS: INTERNAL AND EXTERNAL

QUALITAS | 39

December, 2020

4.2. ECONOMIC DOWNTURN AND ITS IMPLICATIONS

Macro Implications and Expectations

• Economic downturn: GDP could contract by 9.5% in 2020.

• Key interest rate cuts: GBM expects the reference rate to stay at 4.25% during the rest of the year.

• Mexican peso depreciation: GBM has a $21.7 estimate for YE2020.

• There could be additional sovereign downgrades down the line, but we expect the investment grade to be maintained.

• Higher unemployment rates.• Market volatility could persist in the coming months.

QUALITAS’ Strengths

• Zero debt.• Excess of capital and liquidity.• The company works under a defined payment term or

the policy gets cancelled.• Lower loss cost. With the lockdown, claims have

reduced by 40-60%. • Conservative investment portfolio, with only 11% in

equities.• This is how QUALITAS currently stands. Time will tell

whether this is enough to face the economic slowdown.

Effect on the Company

• Mexico's economic slowdown could hamper vehicle sales and would have a direct impact on the underwriting of policies (mainly in the Financial Institutions segment), as it would undermine customers' purchasing power.

• FX exposure could have a negative impact on the loss costs, as 30% of these are dollarized.

• Rate movements affect the performance of the investment portfolio, as 89% are fixed-income investments.

• Higher unemployment rates could potentially increase car robberies.

• The lockdown and social distancing measures can curb the company’s growth.

Company’s Actions

• QUALITAS has implemented a Business Continuity Plan to continue with the operations.

• It has aimed to support to clients by offering a 10% discount on policy renewals

• It has granted additional extensions and payment flexibility measures to policyholders.

• It is striving to keep its operating expenses under control.

• It is constantly analyzing attractive business opportunities.

QUALITAS | 40

December, 2020

4.3 POTENTIAL OPPORTUNITIES

New Business Opportunities: Healthcare Insurance

• QUALITAS could leverage from its network and experience to identify new opportunities in other business lines.

• In 2019, the company requested regulatory approval to include a healthcare insurance policy in its portfolio; they are waiting for the resolution.

• QUALITAS plans to replicate its successful business model in a different insurance segment and render a distinctive service to potential clients in this segment, aiming to differentiate from other insurance companies.

• The company seeks to enter the healthcare insurance business in a controlled manner, testing the waters with a US$10-20 million investment (3 to 6% of its 12M earnings).

• QUALITAS has had close contact with this business through its agreements with hospitals, as medical expenses currently represent around 5% of the company’s cost of claims.

• According to the CNSF, Personal Insurance accounts for 17% of total written premiums and this segment is led by GNP, with a 24% market share, followed by AXA (18%), MetLife (16%), Seguros Monterrey New York Life (10%), and Seguros Atlas (4%).

• According to AMIS, only 8% of the population in Mexico has medical insurance. Thus, the segment appears to have wide growth potential.

• This new business line could expand the size of the company and diversify its operations.

Auto Insurance Subsidiaries in Other Countries:

• They will continue to replicate the business model that has yielded positive results in Mexico in the rest of the countries where they operate.

• The company has stated that its goal for the next five years is that 15% of the written premiums come from the subsidiaries.

Use of Technology:

• QUALITAS is constantly innovating to become more efficient.

• The company will keep developing new devices and applications to better serve its clients.

M&A Target:

• QUALITAS has been an M&A target for many years, as it is a very valuable asset to foreign insurance companies who seek to enter a profitable and under-penetrated market. For further details, please refer to page 57 of this document.

Insurance Penetration in Mexico as % of GDP

Personal Insurance: Market Share Evolution –As percentage of written premiums

*2020 using LTM data availableSource: GBM with INEGI and CNSF data

* 2020 data at 1H20Source: CNSF data

2%

4%

6%

8%

10%

12%

14%

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

*

Personal Written Premiums to GDP (Health)

13%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020*GNP AXAMetLife Seguros Monterrey New York LifeSeguros Atlas

24%

18%16%

10%

4%

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December, 2020

Mexico:• 188 offices & 266 OQs

Costa Rica:• 4 offices• Insurance for private cars,

trucks, public service vehicles, motorcycles and rentals

United States:• 4 offices• Insurance for individual cars in Texas,

cars, and vans with Californian plates, and Mexican trucks with cross-border operations

El Salvador:• 4 offices & 1 ODQ• Insurance for trucks, private cars,

and public service vehicles

Peru:• 1 office• Insurance for trucks, private cars

and public service vehicles

7%

5%5%

68%

20%

United States

El Salvador

Vertical Subsidiaries

CostaRica

Perú

Market Shareby Country

29.7%

8.4%

9.3%

2.8%

4%8%

15%

Foreign & Other

5-yr Target2014 9M20

ORGANIC GROWTH POTENTIAL

The company focuses on cities with long-term expected growth and low car accident and robbery rates.

There is still growth opportunity in Mexico as the car insurance penetration in the country is at 30% but has become mandatory in all states. QUALITAS, leveraging on its broad experience in the i

December, 2020 QUALITAS · QUALITAS has been an M&A target for many years, as it is a very valuable...

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