Published Last Week

1. Tesla Auto Insurance, Claims, & Repair Costs

2. Topicus vs TSS: Culture and Organic Growth

3. Howdens Joinery: France History & Growth Opportunity

4. O'Reilly Auto Parts: Customer Segments & Profit per Vehicle Type

5. UnitedHealth: Partner Healthcare Providers' VBC Migration Challenges

6. TechTarget & Informa: Potential Synergies & B2B Marketing

7. Dynatrace: Sales Org & GTM Strategy

8. Cogent: Sprint Wireline Network Acquisition Analysis

9. Brockhaus Technologies & Bikeleasing: Power within the Value Chain

10. Alpha Group: Incentives, Regulation & Culture

We've published research or have upcoming work on the following:

US: Heico, Transdigm, Loar Group, Danaher, Progressive, Markel, Kinsale, Brown & Brown, Spotify, Microsoft, Wayfair, Amazon, Veeva, Appfolio, Procore, Credit Acceptance, ODFL, LKQ, Carvana, ACV Auctions, Copart, Tesla, Watsco, Ferguson, Fastenal, Intuitive Surgical, CCC, Align Technology, Monro, O'Reilly

International: Constellation Software, Lumine, Diploma, Howdens Joinery, Burford Capital, Judges Scientific, Spirax Sarco, Ashtead, Fever Tree, Dino Polska, Basic Fit, Bergman & Beving, Lagercrantz, Lifco, Vitec Software, Sartorius, Eurofins, Mainfreight, D’Iteren, Halma, Rightmove

Tesla Auto Insurance, Claims, & Repair Costs

Over the last few years, TSLA has moved its auto insurance operations in-house. It aims to vertically-integrate the full car buying experience: from purchasing the car and insurance directly at Tesla.com to processing claims and fixing the car in its own repair shops.

We interviewed a Former TSLA Insurance Executive who was involved in running its internal claims and insurance business. The reported loss ratio of Tesla Insurance is around 150%:

The loss ratios were 150%. And I used to yell at Zach, "Zach, I don't care what Elon wants to do. This is rejected. You can't survive this." - Former VP, Insurance at Tesla

Although TSLA may have a relatively low expense ratio due to its low marketing costs, the combined ratio could reach up to ~180%. Last year, given such loss ratios, Munich Re and Swiss Re supposedly dropped coverage for Tesla cars. Musk now seems to be underwriting more policies on its balance sheet.

One reason for such a high loss ratio is the torque and power of Teslas relative to older ICE vehicles. This drives a 50% higher accident frequency in the first 6 months:

In the first six months of someone owning a Tesla, the frequency of them submitting a claim was higher than with a typical vehicle; roughly 50% higher. And here's the reason why. When people get into a Tesla, they don't realize they're essentially driving a Ferrari. They can accelerate quickly. And then they realize, "Oh, I can accelerate quickly, but my brakes are like what I have on my Honda Accord; they're not high performance. - Former VP, Insurance at Tesla

Also, the increased technology and sensors within the car drives higher severity which leads to a 40% total loss frequency. On average, 40% of Tesla crashes leads to a complete vehicle write-off:

We were totaling our cars at a higher rate, around 40% of the time. Again, that's why I'm paying through the nose and my loss ratio is poor…that wasn't the driving force here. This is Zach's quote to me, "You know what's important to me right now? Get people to stop calling Tesla insurance. Get them to drive it through the app. Stop with the phone calls and emails." Not, "Hey, your loss ratio sucks. Fix this now. It's terrible." No, it was about terrible customer service. "I don't want a phone call and I don't want an email. I want to do it all through my app or through my car. - Former VP, Insurance at Tesla

But it’s clear Musk doesn’t think of insurance in the traditional manner of loss and combined ratios: his aim is to reduce the total cost of ownership and increase demand for Tesla vehicles. And, most probably, to rack up more FSD miles on its trip to full autonomy. By bringing all insurance and repair operations internally, Tesla also receive more data on accidents and damages that can help improve the car and prevent the future crash frequency:

It is also giving us a good feedback loop into minimizing the cost of repair of Teslas for all Teslas worldwide, because we obviously want to minimize the cost of repairing a Tesla if it's in a collision and for Tesla Insurance. And previously, we didn't actually have good insight into that because the other insurance companies would cover the cost. And actually, the cost, in some cases, were unreasonably high. So we've actually adjusted the design of the car and made changes in the software of the car to minimize the cost of repair, obviously minimize -- first, the best repair is no repair, avoid the accident entirely, which since every Tesla comes with the most advanced active safety in the world, whether or not you buy full self-driving, you still get the intelligence of full self-driving for active safety, active collision prevention - Musk, TSLA Earnings Call, Q4 2022

In the US, Tesla Insurance is priced on the driver’s Safety Score which considers braking, steering, and other real-time driving metrics. This seems to drive more competitive pricing as an equivalent data set by a different OEM would lead to 30% lower prices with GEICO:

I'll tell you something. I work at another OEM right now. GEICO is going to be my partner. I can tell you right now, GEICO's technology is so far behind in how they determine the rate and risk. Now, I'm going to give them vehicle data from our cars. And you know what they told me? If you give me that data, I can drop my rates anywhere from 20% to 30%. That data directly from the car. - Former VP, Insurance at Tesla

The amount of data TSLA collects is incredible and potentially provides a competitive advantage pricing insurance. But if the company cannot use such data to significantly reduce crash frequencies and severity levels over time, volume growth and the right side of its balance sheet may be challenged.

The interview goes on to explore how Tesla has structured its repair shops, prices insurance vs PGR / GEICO, and the challenges in minimising severity. We also explore the salvage returns TSLA earns through Copart and IAA.

Topicus vs TSS: Culture and Organic Growth

This interview is the first in a series of internal research to understand how and why Topicus seems to drive the highest organic growth within Constellation Software operating groups. We aim to explore organic growth techniques, how to handicap attractive R&D projects, and other tools including value-based pricing and .

A common critique of CSI is that it's a ‘graveyard for software companies’. It harvests VMS FCF and, rather than reinvest in new product development, reinvests the cash flow into M&A. CSI would argue most of R&D is wasted and it’s easy to fool oneself into thinking you can build new products to drive profitable growth. As always, there is a balance.

The combination of Topicus and TSS was a mix of two very different cultures: Topicus focused on organic growth whereas TSS is more similar to CSIs heritage. This interview with a Former Topicus Executive, who ran operating businesses within its Education Segment, focuses on the difference in culture and philosophy to building software.

Topicus owns Dutch primary and secondary school student information systems (SIS) that own 95% and ~50% market share, respectively.

For primary education, you have ParnasSys, which is a student information system with approximately a market share of 95%. You also have Parro. It has a market share of about 80% of the total available market. - Former Executive at Topicus

Many of CSI and TOI assets have a regulatory lock-in that drives high market share and NRR. Although both primary and secondary SISs are used to track student results throughout school, the data collected is critical for the school to comply with state regulation and receive the correct government funding:

They hold a legal position within primary and secondary education because schools are obligated to administrate the results, the problems the students have, but also to manage the entire curriculum. When you look at ParnasSys, it's a vast vault of student information, including backgrounds of parents, their history, their nationality, and where they come from. Are they native Dutch or not? If they aren't native Dutch, there's a direct link with DUO, a Dutch administrative organization that provides schools with funding per student. They receive about €5,000 a year. However, if the parents aren't native, you get an additional thousand euros for language education. - Former Executive at Topicus

However, strict regulation also makes it difficult to drive annual price increases beyond CPI. This interview goes on to discuss value-based pricing techniques, how Topicus drives new product development, and how TSS vs Topicus cultural differences create a slight tension within the group:

When I started at Topicus in 2018, I asked the director, what are my KPI's to create a new business plan? And the answer was, €100,000 per FTE. So if you create recurring revenue of about €100,000, we can afford another person to work on the project. So if you need five persons annually, you need to get €500,000 from the market. Nowadays, if you look into investments at Topicus, we are working with a business opportunity chart. We are validating the total available market and the serviceable available market. We are working with the First Chicago method. We are using all different kinds of metrics, like the internal rate of revenue and the business quality ratio…But the difficulty arises when we see no-brainers and we want to make a lot of speed to launch a new project within six months or nine months because we know the market is ready and there's a lot to do. Then, there is a backlash from CSI and TSS because we have to get our metrics right upfront, even if it's a no-brainer, even if it's a small investment. And that's the big struggle, and that's the fight we were fighting last year and the year before. - Former Executive at Topicus

Howdens Joinery: France History & Growth Opportunity

In Q1 24, HWDN changed its management team for its French division which has significantly underperformed expectations. This interview with a Former Manager of HWDN France unpacks the French Kitchen market structure, HWDNs positioning, and its historical challenges.

Last year, in 2023, the year I left, they aimed to open 30 stores but succeeded in opening only three, which is 10% of the target. This was due to cash flow issues, market crashes, and the annual cost of opening a store, which requires significant sales. The price level for Howdens is quite high compared to the French market. Howdens is positioned between the premium kitchen specialist, known as the cuisiniste, and large retail stores where a kitchen can be purchased for around €1,000. We refer to it as a kitchen under €2,000 because, typically, 67% of sales in France are for kitchens costing less than €2,000. Howdens' average price point in France is between €5,000 and €6,000. - Former Manager at Howdens France

O'Reilly Auto Parts: Customer Segments & Profit per Vehicle Type

This interview is part of our ongoing coverage of O'Reilly and how electric vehicles are changing the auto aftermarket. We plan to cover Belron and Monro later this quarter. This interview walks through the sales process of a leading Store Sales Manager including the incentive structure, order flow, and drivers of organic growth:

As an ISS, building a relationship with the customer was crucial. Through conversations and getting to know them, you would discover what they preferred, whether it was the cheapest option or a higher quality product that would last longer and only need to be fixed once. For example, if you called me needing a ball joint for your car, I would have two options. I've got the house brand, which is your economy. Yes, it's cheaper. It's not made of a high quality product; it's made of a lower inferior product. It's going to get your car back on the road, but it's not going to last that long. Or I have that premium product; I've got the Select or the MOOG or the OEM, and that's going to last longer. It's a better quality product, but it's going to come with a higher cost. So by me knowing you, through talking to you for months or years or whichever, I know exactly what you're looking for. I know if you're looking for the cheapest thing possible, because I know you don't care and you just want to take and turn the car as quick as possible. Or I know that you care about your customers and you want to do a quality repair that's going to last a long time. So it's really based on knowing people. - Former Sales Manager at O'Reilly

UnitedHealth: Partner Healthcare Providers' VBC Migration Challenges

One potential challenge UnitedHealthcare faces is integrating its targets' products and systems post-acquisition. This seems to lead to a poor experience for their partner healthcare providers, which ultimately ends up challenging their successful migration towards value-based care.

There are studies indicating that the more Optum products a provider uses, the less satisfied they are with the company. Ideally, you would want deep penetration with your customers and high satisfaction, which would make it difficult for them to separate from you because you are true business partners. - Former VP of Value-Based Care & Network Strategy at UnitedHealthcare

In this interview, a Former VP of Value-Based Care & Network Strategy at UnitedHealthcare sheds light on the evolving dynamics between payors and healthcare providers as well as the challenges they face in their journey toward value-based care.

TechTarget & Informa: Potential Synergies & B2B Marketing

In Q1 24, Informa agreed to merge its Tech division with TechTarget to form a a leading digital platform in B2B data and Market Access. In this interview with a Former TechTarget VP discusses the strength of TechTarget's content generation and lead qualification model along with emerging competitive threats.

One of the central pieces of value that TechTarget provides is that it's built up these websites with content that is on the topics or in the areas that drive demand for vendors' products. Right. And they have been doing that for 20 years and are regularly looking for areas in core infrastructure IT that are relevant and building up content that is going to attract people who have the responsibility or have a project in the area... The competitive set now starts with companies that are adopting a higher volume model, similar to the review-based model of G2. These companies are engaging vendors and users to contribute software reviews and are capturing very good intent. - Former VP, TechTarget

Dynatrace: Sales Org & GTM Strategy

Dynatrace is a $13 billion observability software provider. A Former Dynatrace Sales Executive describes the company's focus on enterprise customers, its relationship with partners, and further growth opportunities:

If you are looking for leads, you won't get them from the hyperscalers, at least in my experience, even at EMC, which had many high-level C-suite relationships. Goldman is a great example. Goldman was one of EMC's biggest customers, yet the hyperscalers and the GSIs aren't bringing you leads. If they see you building relationships with people they already know and becoming relevant, then they'll work with you. They're not going to give you a lead. The only space where there's lead generation capability is with the VARs. - Former Sales Executive, Dynatrace

Cogent: Sprint Wireline Network Acquisition Analysis

Network acquisitions have been a key part of top-tier internet service providers’ growth strategies. This being said, making sure the acquired networks are contiguous is paramount to ensure optimal customer service. In this interview, a Former Strategic Capture at Lumen Technologies’ Hyper-scaler Division, sheds light on the impact different M&A approaches could have on the network performance of internet service providers.

If you look at the history of Zayo and their acquisitions, they bought a lot of really small regional fiber providers. There's not a lot of big nationwide fiber plant behind them. Whereas Lumen picked up the CenturyLink dark fiber, the Level 3 dark fiber, and even the legacy Global Crossing dark fiber. They're a lot more contiguous. The fiber runs are more seamless, meaning you don't jump from one legacy fiber type to another, unlike with Zayo. And that's definitely something that if Cogent has one contiguous fiber plant, they can use to their advantage. - Former Strategic Capture at Lumen Technologies’ Hyper-Scaler Division

Brockhaus Technologies & Bikeleasing: Power within the Value Chain

In last month's interview on the German bike leasing market component supplier side concentration seemed to be driving high prices. Another factor causing elevated pricing is the aversion of bike dealers to dealing with brands they are not familiar with. The interview goes on to shed light on the power dynamics within the EU bike leasing value chain.

The biggest barrier is probably dealer acceptance. Many dealers exclusively support Bosch. If you bring them a different brand, they might refuse to service it. We are somewhat innovative; we have three. We have FAZUA; we also work with MAHLE, another significant player from Stuttgart known for their e-bike drive systems. Even for me, if I think about bringing in a new brand, my workshop leader will fight it. - Former BD Manager, Würth Leasing

Alpha Group: Incentives, Regulation & Culture

This interview with Alpha Group's former CFO explores how the company's unique culture and ability to attract and retain top talent emerged as a critical factor behind its success:

The key differentiator for Alpha is the culture. That's why Alpha has been so successful. The staff turnover is extremely low. People don't leave Alpha because they love the culture that's been created there... It's a high-performance environment, which means finding the right people is a challenge, and not everyone makes it. Even in the back office, only about 80% of people make it through their first year. However, the rewards are good for those who do make it. The focus is always on driving the culture, so everyone is in it together. It's that team ethos that has been a key part of what Alpha has achieved. - Former CFO, Alpha Group