I have to admit, this ARK target report is truly a stuff of legend. Many have already commented on it, but I’ll share some highlights from Christopher Bloomstran…
Let’s go right to the insurance valuation and model update, where the analyst assumes in a BEAR case Tesla’s “Insurance Operation” is worth $23B in 2025, four short years from now. It’s clear that the author and firm have no clue how insurance works. Harsh, I know.
To begin and to be clear, Tesla has ZERO insurance underwriting operations. They are brokering auto policies in California alone for an underwriting fronting sub owned by Markel. The business written is so small to not be quantified either by Tesla or Markel in SEC reporting.
The analyst writes, “ARK believes that in the next few years Tesla could roll out its insurance offering to more states, underwriting its own insurance policies. Because its vehicles have better than average safety profiles, Tesla should be able to use real-time data to offer insurance in its vehicles, pricing it dynamically, lowering customer acquisition costs, and increasing margins. Relative to Progressive’s 13% EBIT margin in 2019, ARK estimates that Tesla could achieve margins close to 40%. If it were to sell 40% of vehicles with its own insurance offering by 2025, Tesla’s insurance revenues could approach $23 billion annually in our bear case.”
The ARK “bear case” assumes insurance revenues of $23 billion and a 40% EBIT margin in 2025 with 5 million vehicles sold, up 10x from 500k in 2020. Hold underwriting aside for a minute and think about brokerage.
Let’s give ARK credit and assume Tesla brokers the insurance on 40% of all Teslas sold over the next four years, call total sales 10 million units. At a ballpark industry average $1,600 in annual premium, total insurance policy revenue totals $16B on all Teslas sold.
Brokerages and agencies will earn on average 15% of total auto premiums as commissions, so revenues at the 2025 run rate yields $2.4B in annual commissions to TSLA. How in the world do you get to $23 billion in ARK assumed insurance revenues? Must be underwriting, correct?
Suppose instead of brokering policies for an underwriting front Tesla does get into the underwriting game. Here’s where the analyst & ARK know little or nothing of insurance. Let’s presume Tesla is admitted to underwrite auto in every state in which they sell a vehicle.
Suppose for grins Tesla writes the full forecast 40% of all policies on every Tesla sold over the next four years, say a generous 10 million vehicles (5 million in 2025). Tesla would be underwriting insurance on 4 million vehicles, its 40% share of the total. Starting NOW.
At $23B in 2025 “insurance revenue,” that’s $5,750 in annual premium/vehicle, more than $3,000/year above what the industry charges per vehicle now and in this case more than 10% of the total vehicle price (before software “upgrades”). Avg is closer to 5% with a wide range.
Let’s just say Tesla underwrites on 100% of total vehicles sold over the next four years (I’d take the under on 10 million for a whole bunch of money). At the analyst’s assumed $23B in revenues, that’s $2,300 per policy, still way higher than $PGR’s or the industry average.
Now, to underwrite insurance requires capital, yet the ARK model presumes a share count of 1B shares outstanding, well BELOW today’s fully diluted count. Tesla already has 960m shares out and 1.155 out on a fully diluted basis.
You can count on all fully diluted shares outstanding if the stock moves up to ARK’s $3,000 price target/share, a $3.47 trillion market cap, 112 times trailing 12-month revenues. Beyond asking how in the world will the company have enough capital to finance building cars at a 5-10 million annual rate with the capacity they now have and have under construction (Fremont, Shanghai, Germany and Austin) without selling new shares, where will the capital come from to underwrite $23 billion in annual premiums and expand auto production?
I wonder if ARK knows auto insurance is underwritten on an admitted basis in each state? Regulatory approval in each state will be required, as will capital - lots of it. I wonder if ARK knows admitted auto insurers can write $3 in premiums for each $1 of statutory capital?
Underwriting $23 billion in premium requires almost $8 billion in statutory surplus (equity). Progressive has about $14 billion. What will it cost Tesla to start an insurance underwriting operation on a de novo basis in each state in which it sells cars?
*It’s going to chew up a substantial portion of the $8 billion needed in surplus to underwrite $23B in business.
Here’s where the ARK report demonstrates its lack of understanding of insurance. How easy to say that Tesla will operate at a 40% EBIT margin versus $PGR’s 13%.
I’m not sure even a college junior with zero investing experience would make this Herculean leap. Tesla will, “achieve better than average margins on insurance thanks to the highly detailed driving data it collects from customer vehicles.” Wow.
First, the reason insurers don’t want to underwrite on Tesla vehicles is they are extremely expensive to repair. Their technological “advantage” against ICE vehicles means they have more technology on the vehicle - sensors, computers.
When a moron is tooling around thinking they are on FSD and rams into a semi or other vehicle, repairs are expensive, both to cars and to people. Next, the notion that Teslas are “safer” and will cost less to insure demonstrates a lack of understanding of insurance pricing.
*Beyond the notion that Teslas are safer & thus cheaper to insure, losses (claims for repairs/medical) & operating expenses (underwriting, claims paying, management, investing) combine to yield little industry profitability. It’s a regulated market with LOTS of competition. *
If an underwriter like Tesla (remember we are pretending they are one) is consistently too profitable, insurance commissioners will drive pricing down. If collisions trend toward zero (frequencies), pricing will reflect fewer claims and insurance costs will decline.
Insurance will always be required — the car accelerates into your living room on its own or the sensors miss the sinkhole in the road that just appeared and swallows the car and driver. If it made sense for incumbent insurers to write on Teslas, believe me they would do so.
Continue with profitability. I wonder if the analyst realizes that more auto insurance profitability is derived from investment income than from underwriting profit? A 40% EBIT margin on $23B in premium revenue yields a $9.2B profit before interest and tax.
PGR (Note from Julianek: Progressive Auto Insurance, the industry leader) has total investment assets of about $47B against just under $40B in premiums earned. Given Tesla will have no surplus capital and no reserving history, they will be compelled to invest most of their invested assets in fixed-income (of which they have none today).
I don’t see them earning more than $1B on a bond portfolio. Maybe the Tesla “insurance operation” will be allowed by regulators to invest solely in Bitcoin? If investments will be in fixed, the majority, maybe $8B of their EBIT profit of $9.2B, will come from underwriting.
The analyst ought to ring a few state insurance commissioners & ask, “Hey, ARK here, Tesla is going to be underwriting a ton of policies in your state over the next 4 years - we’re thinking they’ll write at a 35% pre-tax underwriting margin - you have any problems with that?”
Forget about the implausibility of a $3,000 price. Forget that the presumed $3 trillion forecast market cap doesn’t allow for new shares sold or even the vesting and exercise of more than 40 million of current option shares (there are WAY more issued but unexercised).
Forget the capital requirement to grow into 5-10 million vehicle production in 4 years (more than 5% to 10% of total vehicle global market share versus 0.5% today). The impossible assumptions regarding Tesla’s valuation just as regards insurance blasts a hole in credibility.
Ask whether a firm or analyst that presumes $23 billion in insurance revenues in four years for a yet non-existent startup insurance underwriter, even one with prospective “vertical integration,” understands enough about insurance to make the absurd claims proffered above.
When all is said and done, and the smoke screen will disappear, ARK will be remembered for what it is: a stock pumping operation toward naive retail investors. Investors who wanted to believe the hype and will be left holding the bags. But at least ARK will have made millions in management fees on its ETFs…