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Paulo Santos
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I am a Portuguese independent trader, analyst and algorithmic trading expert, having worked for both sell side (brokerage) and buy side (fund management) institutions. I've been trading professionally for about 20 years and also launched in 2004. Thinkfn (Think Finance) carries... More
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  • A Feeling I Get When I Roam The Tesla Boards

    Now, I've written plenty of negative Tesla (NASDAQ:TSLA) articles in my time, mostly because I believe this company is both a bubble and extremely risky in financial terms. I don't think it will be a zero on the way down because someone (Apple? Google?) will end up buying it, but I do believe the stock will eventually collapse due to Tesla's financial realities.

    That said, in my research of Tesla I do end up roaming a lot through Tesla forums, especially the Tesla Motors Club forum. And I have to make an observation here.

    Tesla's customer base is the best and brightest that America has to offer. You can feel these are men and women which throughout their day are out there delivering value to the country and to other people. These are productive people, who have worked their asses off for the wealth they've achieved. It just permeates the place.

    These are, in a way, the embodiment of the American Dream. And for that, I salute them.

    Tags: TSLA
    Oct 02 10:58 AM | Link | 8 Comments
  • Idea Generator By Paulo Santos - Reviews

    When possible, I will be publishing some information from my Idea Generator service through Instablog posts.

    I'll start by sharing a link to the reviews the service has received from some of its subscribers.

    Aug 14 2:01 PM | Link | Comment!
  • The Long-Term Implications Of Self-Driving Cars For The Auto-Insurance Industry

    This article is borne out of a discussion in the comments of one of my Tesla articles. It's not really a thesis for the short-term, since it will require the overwhelming majority of cars in the road to be self-driven, which is not about to happen soon. Indeed, even when those cars are commercially available, it will still take perhaps as much as a decade or more for them to begin being relevant for this thesis. Anyway, it's still an interesting thesis, which might perhaps help with the understanding of some minutiae of the insurance industry to boot.

    So what will the long-term implications for the auto insurance industry be? As proxies for the insurance industry, though also including life insurance companies and other unrelated stuff, we can refer the iShares Dow Jones U.S. Insurance ETF (NYSEARCA:IAK) and the SPDR S&P Insurance ETF (NYSEARCA:KIE).

    What will self-driving cars bring?

    One thing self-driving cars will bring for certain is a reduced number of accidents. Indeed, most probably they'll bring accidents which will be up to several orders of magnitude less than the present accident rates of human-driven cars. This means that there'll be 10x-100x-1000x fewer accidents per car in the road once self-driving cars make up the overwhelming majority of cars in the road.

    This will be so both because the public wouldn't accept self-driving cars if it was otherwise (and, say, accident rates were somehow similar to today's world), and because every single accident by a self-driving car is likely to hit the news the same way a flaming Tesla did (you never saw the much more frequent regular ICE - Internal Combustion Engine - fires on the news, though).

    So this much lower accident rate is a certainty. This, in turn, will lead to much lower claims for insurance companies. Here, investors might be fooled into thinking that this is a positive. That people will still pay their premiums, but the insurance companies will then have to support much lower claims costs. Nothing could be farther from the truth.

    The truth is that insurance premiums quickly adjust to the risk borne by the insurer. If the risk turns much lower, premiums fall just as hard, to the point where it's perfectly natural for the entire insurance industry to run at what's called an underwriting loss -- where premiums don't cover claims+costs. The following table, depicting the combined ratio for the entire Property & Casualty industry segment (of which auto insurance is part) shows this in spades - a combined ratio of over 100 means premiums didn't cover all claims and costs for the entire period from 2008 to 2012 (Source: "ANNUAL REPORT ON THE INSURANCE INDUSTRY", FEDERAL INSURANCE OFFICE, U.S. DEPARTMENT OF THE TREASURY ).

    (click to enlarge)

    So, insurance is so lousy that it loses money on the aggregate year after year after year? Not necessarily. Premiums are paid up front, and claims and costs are paid over time. This means the insurance industry generates a premium float which it can then invest and reap profits from.

    Indeed, the investment of the premium float turns out to be the main source of profits for most insurance companies - though insurance companies run by Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) are quite often run at an underwriting profit.

    What this means for insurance companies in the context of lower premiums

    We can thus start to coalesce what a huge drop in premiums brought about by a huge drop in claims in the automobile insurance market would mean for auto insurers: It would be ugly, it would be an industry-changing event, and quite possibly it would lead to a much smaller auto insurance market.

    This is so because as the premiums contracted, so would the premium float. Now, not only would most insurance companies have trouble to keep up with the premium contraction, because they would already be fighting against fixed costs in their combined ratios, but in the end, even if underwriting breakeven was achieved, the premium float would be many times smaller and thus producing many times smaller return amounts in absolute dollars (as the return percentages ought to stay the same but would be applied to a much smaller amount of dollars).

    This would spell doom. With the entire industry relying on the premium float returns, this would mean that an auto insurance market with much lower premiums and much lower claims would only be able to support a much reduced number of companies. It wouldn't be surprising to see many companies leaving the market either voluntarily or in a stretcher, when this event takes place.


    The advent and spread of the self-driving car will reach a point where it will lead to the demise of most of the auto-insurance companies. This will be so because the float generated by much lower premiums due to much lower claims cannot remunerate the existence of the industry as it is today, based on much higher premiums, claims, and premium float.

    This is many years into the future, but it's something which bears understanding, as it also furthers the understanding of how insurance companies usually produce their economic returns.

    Dec 01 7:05 PM | Link | 6 Comments
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