Next Insurance receives $265 million in investment from Allstate and Allianz in a major bet on insuretech.

• Allstate and Next Insurance are forming a strategic partnership to create commercial auto policies and continue their existing reinsurance relationship with Allianz.
• The insuretech startup has received a $265 million strategic investment from insurance giants, marking the largest funding deal in its history and the largest insuretech equity round of 2023.
• The company, which is close to earning $1 billion in premium revenue but is still unprofitable, is aiming to expand its customer base among the estimated 33 million small businesses in the U.S. and a premium market worth over $140 billion.

Next Insurance, an insuretech startup targeting small businesses, has received a $265 million strategic investment from Allianz, indicating a significant commitment to the digital transformation of the commercial insurance market.

Next, which has over 500,000 customers and is close to $1 billion in premium revenue, has just completed its largest equity round ever, surpassing its previous round of $250 million. This deal is also the largest in the insuretech industry this year, as per PitchBook.

Guy Goldstein, CEO and co-founder of Next Insurance, stated that there is a significant opportunity with over 30 million small business owners in the U.S. He also emphasized the growing demand from a younger generation of entrepreneurs and those who have been in business for less than 15 years for access to digital processes.

Next Insurance ranked No. 37 on the 2022 CNBC Disruptor 50 list.

While the personal auto and home insurance markets have largely moved online for policy sales and claims, the commercial insurance market remains fragmented and heavily reliant on manual processes.

A report from William Blair in July 2022 predicts that a new generation of property and casualty insurance companies could capture up to 50% of total insurance value by 2032, which amounts to $350 billion in potential revenue over the next decade.

The percentage of e-commerce sales in the commercial market is growing at a compound annual rate of approximately 10%, with even higher growth during Covid lockdowns, according to William Blair's data. This presents a challenge for traditional insurers, who have historically lagged in digital implementation, and where customer pressure to adapt to the changing environment is increasing.

Unlike personal lines, commercial markets are more complex to transform digitally due to the involvement of various liabilities and compensation factors.

The small business market is a $140 billion market, but it is highly fragmented, with owners often lacking insurance expertise and internal finance staff to handle policy decisions.

The online platform of Next provides coverage for general liability, commercial property, and workers' compensation, which covers a broad range of risks faced by small businesses, including injuries to workers on job sites and damage to business property.

The company is the largest provider of "embedded" digital commercial insurance products in the U.S., selling through partnerships with Intuit, benefits provider Gusto, captive insurance agents of larger providers, and independent insurance agencies.

The deal with two of the largest insurers globally is crucial for both the company's strategic objectives to digitize its business and the amount of capital being invested.

Next will be developing commercial auto insurance products with Allstate, a market in the U.S. that remains highly manual today.

In the U.S., you cannot purchase a pickup truck or fleet of cars for pizza delivery online as if it were a personal line of auto, according to Goldstein.

Previously, the company had a commercial auto business but shut it down due to financial difficulties.

The insuretech funding market has seen a shift in the role of strategic investors following the 2022 startup crash and the departure of many venture capitalists from unprofitable fintechs and public insuretechs experiencing significant declines in value.

According to William Blair, the category of pre-profitability public insuretechs like and declined by 78% in 2022 and is currently down 15% in 2023.

"We must become profitable; we are not there yet," Goldstein stated. "Many companies invested heavily in fintechs, but not all of them are successful," he added.

According to Robert Le, an insuretech analyst at PitchBook, more strategic investors are appearing in recent deals. Corporate VCs, such as those within insurance giants, are less price-sensitive than VCs because they can derive value beyond a financial return. However, they may also view the current market as an opportunity to increase their investments where they see a strategic rationale.

Insuretech funding is expected to remain steady in Q3, with approximately $1.6 billion in deals, which is about half of its peak in the second quarter of 2021. Insuretech deals have exceeded $1 billion through the first three quarters of 2023. "It is likely that investments have reached their lowest point in terms of how much further they can decline," Le stated.

The number of exits through the public markets in the insurance sector has been limited due to the lingering effects of recent IPOs and SPACs.

It makes sense to prioritize strategic fits, according to Le, in both reinsurance and insuretech, where having a backstop is crucial for market confidence and access to new markets.

Despite the struggles of public companies, "the opportunity is still significant across the entire value chain," Le stated. "There are still inefficiencies in the industry, which is slow to innovate and is a unique market."

In the short-term, he stated that it would remain a difficult environment.

"We prioritize execution," Goldstein stated. "Although it was a suitable time to go public, the company must be prepared before doing so," he added.

Before deciding on its next steps related to a potential exit, he said that the company needs to get closer to profitability and predictability in growth and profit & loss metrics.