Tesla should stick to selling cars and not insurance, RBC says

Tesla Inc. would do well to stick to making and selling cars rather than offering insurance on its vehicles, analysts at RBC said in a note Monday.

Chief Executive Elon Musk said last week that Tesla TSLA, +1.77%  is creating an insurance product and hopes to offer it in about a month. A Tesla insurance offering would be “much more compelling than everything else out there,” Musk said on a call with analysts on Wednesday after Tesla’s quarterly results.

It would take into account the vehicles’ enhanced safety features and Tesla’s Autopilot, its suite of advanced driver-assistance systems, as well as information that Tesla could gather about a driver’s risk profile.

Related: Tesla misses first-quarter earnings estimates, but Wall Street focuses on hopes of profit

“The barrier is really how much infrastructure would a company like Tesla want to take on,” said the RBC analysts, led by Mark Dwelle. “In any event a lot of added challenge running an insurance company for an organization that seems to be somewhat challenged in delivering its core business of building cars.”

Tesla last week reported a much larger-than-expected first-quarter loss, and the stock fell to two-year lows. Tesla’s chief financial officer said the company would go back to profits in the third quarter after focusing on cost efficiencies.

Tesla would have three ways to go about offering insurance, but the real answer might be none of the above, the RBC analysts said.

It could co-brand with an existing insurance company, establish an insurance entity and establish a fronting company to do the underwriting, or establish a fully capitalized insurance company and underwrite its own paper.

See also: Ford passes Tesla as No. 2 U.S. car maker as stock goes on a tear

Co-branding is the speedier and least capital-intensive track, but also the one least likely to bring any serious profit. “The trick is really finding an insurer that wants to underwrite the product Tesla wants to sell,” RBC said.

The second option, forming an entity and using a fronting company, would be more capital-intensive. Tesla would need to take on or outsource underwriting and claims management, RBC said. On the plus side, if Tesla could really count on having “a better class of drivers (and price for that) they could enjoy some of the underwriting profits,” even as it shares that profit with the fronting company, RBC said.

Read more: Musk: Model Y production site ‘tough call’ between California, Nevada

Establishing a full-fledged insurance company approved and licensed in all 50 states would be the trickiest and most expensive way, but also the most profitable.

“Looking at the company’s last filed organization structure (as per S&P Global market intelligence) there is no evidence that the company has any insurance company at this time (some auto makers do have one which they use for warranty claims). If this is the option the company is pursuing, it will certainly take more than a month to be up and running,” the analysts said.

It’s unclear whether Tesla sales agents would need to get insurance-broker licenses. Tesla could bundle any coverage into its cars’ monthly payments.

Challenges include the fact that lots of people, especially people who can afford Tesla vehicles, like to bundle home and auto insurance, since bundling usually means discounts.

People also bundle all of their cars into one policy, so no one would insure their Tesla and “the ’Family Truckster’ under another—they like to just pay one bill and we wouldn’t think Tesla has any interest in underwriting anything other than Teslas, so that is something of a barrier unless they can bundle the cost into the auto purchase price somehow,” the analysts said.

“We’ll leave it to the rocket scientists at SpaceX to figure out which of these formats would work best for Tesla, our guess is that ‘none of the above’ is really worth the effort compared to selling more cars more cheaply, but hey, we’re just insurance geeks,” they said.

Shares of Tesla have lost 18% in the last 12 months, versus gains of around 10% for the S&P 500 index. SPX, +0.31%  

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