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Up 3-Fold In 2019, Next Insurance Vies With Berkshire Hathaway’s biBERK In $140 Billion Market

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Warren Buffett is not quaking in his boots because a Silicon Valley insurance startup is growing so much faster than Berkshire Hathaway.

Yet I think Palo Alto, Calif.-based Next Insurance — which provides small business insurance sold online — could teach a thing or two to the Berkshire subsidiary that competes with Next.

Founded in 2017, Next’s gross written premium — roughly, the premiums that customers contract to pay before commissions and ceded reinsurance — popped three-fold in 2019.

And by January 2020, its GWP was growing at “a $100 million annual run rate,” according to my February 21 interview with Next’s chief operating officer Sofya Pogreb. (Next declined to provide details on its net written premium — the amount it receives after commissions and ceded reinsurance).

In 2016, Berkshire — with 2019 revenue of $327 billion up 45% from 2018 — opened up biBERK, a subsidiary providing online small business insurance in 2016. The idea — brainchild of Berkshire Vice Chairman of Insurance Operations Ajit Jain — was to offer small business owners “a hassle-free way to bypass insurance agents, often getting quotes within five minutes after completing short questionnaires,” according to Reuters.

In 2018 (the most recent year for which I found data) biBERK was tiny but growing rapidly. According to Insurance Thought Leadership, in the quarter ending in September 2018, biBERK generated $3.6 million in direct written premium (e.g., premiums received before reinsurance) — a whopping 326% more than the year before and 31% more than the second quarter 2018.

(Disclosure: I pitched unsuccessfully an online insurance startup to Bain Capital in 1995 and have no financial interest in the securities mentioned in this post).

Next provides insurance to small businesses — a $140 billion market which lacks a clear leader — the largest competitors control on about 6% to 7% of the market. Roughly 40% of small businesses are uninsured which creates an opportunity for vendors who can convince them that insurance is worth the money.

Next — with over 70,000 active customers — offers four lines of insurance to 1,300 different kinds of small businesses in 28 states. It started by offering general liability and commercial auto insurance and in 2019 added professional liability and workers’ compensation. Next now operates in 50 states and the District of Columbia — a big increase from where it started 2019 with operations in only 15 (insurance companies must obtain approval to operate from state regulators).

Next tailors policies to “over 1,300 different types of business –- 30-fold increase from 2018 -- including general contractors, fitness professionals, cleaners, entertainers, teachers, and beauty professionals,” says Pogreb.

Next started off selling insurance directly to customers and has broadened its business by partnering with insurance agents.

In December 2019 Next Insurance launched “a one-stop-shop portal where customers can buy and manage various policies under one roof,” according to Pogreb. Moreover, Next brought claims processing in-house — “with most decisions being made within 48 hours.”

Why is Next Growing So Fast?

Next is growing rapidly because it provides customers with a relatively easy and simple process for purchasing insurance. As Pogreb said, “The traditional process of buying insurance is time-consuming for the customer. They have to take time off to go to the agent’s office, fill out paper forms, and wait two weeks to obtain a price quote.”

Next streamlines this process. “We make it as easy as ordering toilet paper from Amazon. We enable customers to get the chore done in five to seven minutes. We help customers pick the relevant product, the price is competitive, and customers trust us. 15% of them call in after visiting our site to talk to someone to make sure we are real,” she said.

Next generates most leads via search engine marketing. As she explained, “60% of what we do to acquire leads is around search engine marketing. We are piloting TV and have formed partnerships with fitness professionals — such as personal trainers and yoga instructors — and with certified contractors at Home Depot.”

It strikes me as natural for a potential customer to wonder whether a three year old startup will be around should they file a claim. Next’s significant capital resources may help alleviate such fears. As she said, “our total capital is $381 million — including a $250 million capital infusion from MunichRe” received in October 2019 which valued the company at over $1 billion, according to TechCrunch.

MunichRe invested in Next to expand its presence in the U.S. market for small business insurance. According to Joachim Wenning, chairman of the Board of Management at Munich Re, “Next Insurance will benefit from our expertise in primary insurance and reinsurance. This investment emphasizes Munich Re’s commitment to be the leading provider of digital insurance solutions.”

Next’s Fellow Travelers

Next is in competition with other insurance startups which appear to be further along — based on their higher valuations — yet are targeting different market segments.

Auto policy provider Root Insurance was valued at $3.65 billion when it raised $100 million in 2018, and property insurance company Lemonade Insurance raised $300 million in April 2019 at a valuation of more than $2 billion, according to the Wall Street Journal.

Next is eager to catch up with these rivals. Last August, the company was collecting premium payments from customers at an annual run rate of $77 million, CEO Guy Goldstein, told the Journal, which was more than double its 2018 annual run rate of $28 million.

Goldstein wants Next to become the Geico of small business. To that end, last October it planned to use the $250 million in fresh capital to add to its 200 employees, develop new products, and market through television, radio and other campaigns.

Exit Options

It is possible that Next, Root or Leomonade could go public some day. If not, there is always the option of selling out to an incumbent. For example, last November, Aon acquired small business insurance startup Cover Wallet. In 2017, Travelers paid $490 million for Simply Business, a UK small business insurance broker, according to the Wall Street Journal.

I would not be surprised if MunichRe buys Next.

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