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Warren Buffett thoroughly explains why Elon Musk's foray into insurance will fail

JP Mangalindan
Chief Tech Correspondent

Berkshire Hathaway Chairman and CEO Warren Buffett expressed skepticism this weekend over Tesla’s (TSLA) forthcoming foray into auto insurance.

In late April, Tesla CEO Elon Musk told analysts during Tesla’s first-quarter 2019 earnings call the electric car company could launch a new insurance product as soon as this month, with pricing based on driving data captured by Tesla cars. However, during the 2019 Berkshire Hathaway shareholders meeting in Omaha, Nebraska, on Saturday, Buffett thoroughly explained why Musk’s latest effort could fail.

“General Motors had a company for a long time called Motors Insurance Company,” Buffett said on Saturday. “And various companies have tried it. I would say that the success of the insurance company — of the auto companies getting into the insurance business — are probably about as likely as the success of the insurance companies getting into the auto business.”

Buffett would certainly know. Nearly one-third of Berkshire Hathaway’s (BRK-ABRK-B) business is related to insurance, including GEICO, which Buffett effectively bought by purchasing the auto insurance company’s outstanding stock in 1996.

If anything, Buffett said he’s more concerned about auto insurance provider Progressive (PGR), which reported stronger-than-expected first-quarter 2019 earnings this April that beat Wall Street analysts’ expectations, driven by an increase in premiums. Progressive Corporation’s stock is up 25% year-to-date.

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“I worry much more about Progressive than all of the auto company possibilities that I could see in terms of getting [into] the insurance business,” Buffett said, adding that it’s not an easy business. “And I would bet against any company in the auto business being any kind of a — of an unusual success. The idea of using telematics in terms of studying people … And it is an important — it is important to have data on how people drive, how hard they brake, how much they swerve, all kinds of things. So I don't doubt the value of the data. But I don't think the auto companies will have any advantage to that. I don't think they'll make money in the insurance business.”

Musk, for his part, showed a sense of humor regarding Buffett on Saturday evening in a series of tweets discussing Model 3 pricing versus several models of the Honda Accord.

Source: Twitter

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