Latin American Expansion And Telematics Investments Will Support Durable Insurance Earnings Quality

Catalysts

About Quálitas Controladora. de

Quálitas Controladora de provides auto insurance solutions across Mexico and selected international markets, focusing on disciplined underwriting and service-driven distribution.

What are the underlying business or industry changes driving this perspective?

• Continued shift in auto demand toward higher ticket SUVs and pickups, combined with growing multi annual policies sold through financial institutions, may sustain written premium growth and support higher average premiums, potentially lifting revenue and stabilizing net margins.
• Ongoing expansion in Latin America, particularly in Peru and the early scale up of Colombia with a growing agent base, is building a diversified earnings base that can compound written premiums faster than the domestic market and enhance long term ROE.
• Investments in technology, telematics and data driven risk prevention that are already visible in lower thefts, higher recovery rates and reduced frequency are structurally improving claim costs, which may help protect the loss ratio and combined ratio even if pricing competition remains intense.
• Proactive cost discipline and use of vertical integrations and supplier coordination to offset the noncreditable VAT on claims, together with targeted pricing adjustments, may mitigate regulatory headwinds and help preserve profitability, limiting pressure on net income in 2026 and beyond.
• Maintaining a sizable, well diversified investment portfolio with meaningful exposure to fixed income as interest rates ease is creating embedded mark to market gains that can bolster financial income, support earnings growth and sustain a high double digit ROE.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Quálitas Controladora. de's revenue will grow by 7.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.1% today to 8.3% in 3 years time.
• Analysts expect earnings to reach MX$7.4 billion (and earnings per share of MX$18.63) by about December 2028, up from MX$6.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as MX$6.4 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 14.8x on those 2028 earnings, up from 10.6x today. This future PE is greater than the current PE for the MX Insurance industry at 6.5x.
• Analysts expect the number of shares outstanding to grow by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.27%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The change in VAT treatment on claims from 2025 onward is expected to create a one off hit of around MXN 2 billion to MXN 2.3 billion in 2025 and will structurally raise ongoing claim costs from 2026. If Quálitas cannot fully offset this with pricing or cost savings, profitability could reset lower and compress net margins and earnings growth.
• Auto sales in Mexico are already flat to slightly negative after strong years in 2023 and 2024, and management expects this subdued environment to persist. A prolonged stagnation or further decline in new vehicle sales would constrain insured unit growth and slow premium expansion, pressuring revenue and limiting operating leverage on earnings.
• Competitive pricing pressure in key segments such as fleets and heavy equipment has already driven targeted price reductions. If the broader industry keeps cutting prices while claim costs and taxes rise, Quálitas may have to sacrifice margin to defend market share, undermining its ability to sustain a combined ratio below its long term target and eroding net margins.
• The investment portfolio is heavily weighted to fixed income, with gains currently supported by easing interest rates and strong equity markets. A reversal in rates or market performance could reduce mark to market gains and lower comprehensive financial income, weakening an important cushion that currently supports earnings and return on equity.
• International expansion in markets like Colombia and Peru, while promising, is still in early stages and may not scale as planned or could require more capital and operating expense than anticipated. This would dilute short to medium term profitability and weigh on both net margins and earnings if these operations underperform expectations.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of MX$185.0 for Quálitas Controladora. de based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MX$212.0, and the most bearish reporting a price target of just MX$156.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be MX$89.4 billion, earnings will come to MX$7.4 billion, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 14.3%.
  
• Given the current share price of MX$178.06, the analyst price target of MX$185.0 is 3.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.