Thread by @wintonARK

@ChrisBloomstran Happy to receive feedback on the way we’ve modeled the insurance business.

I’ll walk through the mechanics of it in a bit and you can let me know how you would amend.

But first I’d like to level set and clear up a few misperceptions.

@ChrisBloomstran 1)
As described in the blog, the “bear case” as we’ve defined it is the 25th percentile outcome.

It is not the *worst* outcome (which, as with all equities, is bankruptcy.)

The case detailed in the blog is one of many possible ways that outcome could occur.

@ChrisBloomstran Because we have tried to distill the model into independent inputs the 25th percentile outcome is not the downside case for each of those inputs.

The bear case of 3 coinflips is not 3 tails, but 1 heads and 2 tails.

@ChrisBloomstran Similarly a bear case will have some things that go better but more things that go worse.

@ChrisBloomstran 2) You don’t like the way we have modeled the insurance business; very clear!

And perhaps you don’t believe that Tesla enjoys any durable competitive advantage along that line.

That’s why we provided the model!

0 it out; there isn’t a material impact on expected value.

@ChrisBloomstran We think it has strategic value to Tesla and will contribute to customer retention and satisfaction, but as we currently have it modeled it is not a material driver.

But since we’ve caught your attention, and I’d love to understand it better, I’ll walk you through our thinking.

@ChrisBloomstran We believe Tesla will enjoy competitive advantage on vertical integration through insurance along 3 vectors.

1) Advantaged customer acquisition cost (due to their direct to consumer model and the digital interface in their vehicle.)

@ChrisBloomstran 2) Integrated telematics and data, inclusive of interior and exterior vehicle cameras, radar, and driver profiles.

(This should yield better underwriting and could be used to positively influence driver behavior.)

@ChrisBloomstran 3) Vehicles that will get safer over time with software upgrades via autopilot and full-self-driving advances.

The company will have a real-time understanding of these improvements and depending upon pricing-strategy may result in underwritten policies that grow more profitable.

@ChrisBloomstran Note, of those 3 advantages, they are only realizing the first at this point. They are not underwriting as you point out, but instead on-selling customers.

We model them as continuing to operate under that model (albeit on an increasing share of incremental new sales) until 2023

@ChrisBloomstran Mechanically they collect ~12% (varies) of commissions through 2023 at which point we assume that they begin to underwrite.

At that point they begin underwriting their own insurance at a ~70% loss ratio.

@ChrisBloomstran We then assume that they hold that per-mile pricing as the vehicle-safety improves by ~5% (varies) per year.

That vehicle safety improvement flows through to the bottom line in a lower realized loss ratio.

@ChrisBloomstran The number of new vehicle sales they tie to their insurance increases (as they open up more geographies), but we don’t assume that they go back and recapture customers that they didn’t sign on initial sale.

@ChrisBloomstran We also assume that they win insurance against all vertically integrated ride-hail (non robotaxi) miles at a per-mile premium to non-ride-hail vehicles; this becomes an important driver of insurance premiums in the non-robotaxi cases.

@ChrisBloomstran One last addition to the structural advantage discussion:
Tesla’s vertical integration through service should also offer them better cost-control on their underwriting.

@ChrisBloomstran Tldr:
not material to our modeled outcome;
Clear to us that they enjoy structural advantage in this space (contingent upon execution);
and we think we have modeled it appropriately.

Curious to hear your thoughts.