In weak insurance market, Waterdrop finds solace in benevolence crowdfunding

The insurance broker’s net profit rose about 150% year-on-year in the third quarter, on the back of the strong performance for its crowdfunding business

Key Takeaways:

• Waterdrop’s revenue increased just 2.6% year-on-year in the third quarter as the contribution from its main insurance business shrank
• Revenue from the company’s crowdfunding business increased substantially, boosting its profitability and fueling a big profit jump

By Warren Yang

Benevolence certainly makes the world a better place. For online insurance broker Waterdrop Inc. (WDH.US), it’s also translating into a thriving business that can reignite growth in the face of sluggishness in its core insurance business.

The company’s latest quarterly results, released last Wednesday, showed that ongoing shift in its business mix, underscoring difficulties insurance brokers in general are having amid combined headwinds from China’s economic slowdown and regulatory curveballs that have become a key source of uncertainty for the financial sector.

Waterdrop’s revenue increased just 2.6% year-on-year to 704 million yuan ($100 million) in the third quarter as the contribution from its main insurance business shrank 3%. But the company still managed to avoid overall revenue contraction as its crowdfunding business grew to account for more than 9% of its total, nearly double its 5% contribution a year earlier.

More importantly, the profitability of that fast-rising business seems to have improved substantially. The business’ operating loss narrowed more than 70% to about 18 million yuan, helping Waterdrop swing to an overall operating profit in the third quarter from a loss a year earlier. And with further help from a foreign-exchange gain, the company’s net profit jumped more than 150%, which it prominently highlighted in its earnings release, perhaps trying to mask its mediocre revenue growth.

“We are delighted to announce another quarter of robust profitability, with net profit attributable to ordinary shareholders reaching 2.5 times that of the third quarter last year,” CEO Shen Peng said in the company’s third-quarter report.

Waterdrop’s crowdfunding business earns money through fees from users of a platform that helps patients pay their medical bills with donations from strangers with “caring hearts,” as the company describes them. Its services include the provision of technical support, the management of crowdfunding campaigns, anti-fraud measures and the collection of funds.

Waterdrop started offering medical crowdfunding services as early as 2016, shortly after commencing its operations earlier that year, and even before it became an insurance broker the next year. But the company didn’t begin monetizing its crowdfunding offerings until early 2022.

That’s around the same time that headwinds for Waterdrop’s main insurance business started becoming evident. Its revenue dropped for two years in a row from 2022 as insurance demand took a hit from China’s economic downturn. The company also struggled to keep up with a steady stream of unexpected rule changes from the industry regulator – a frequent occurrence in China’s various financial sectors.

In 2020, the China Banking and Insurance Regulatory Commission (CBIRC) implemented measures specifically targeting online insurance brokers, including requirements for personnel management, customer information protection and internal controls.

Then, the following year, the authority started requiring online life insurance companies to make their customers pay premiums for some short-term products in equal installments. That led to administrative penalties for Waterdrop for previously allowing its insurance buyers to reduce their first-month bills. Also, in 2021, the CBIRC imposed a cap on fee rates for some insurance products.

Most recently, the regulator last year limited fees for policies sold through banks, or so-called bancassurance channels, to ensure they reflected risk assessments more accurately, dealing a blow to brokers that have distribution deals with banks.

Medical crowdfunding

With all those steps making life harder for insurance brokers, Waterdrop is looking to popular medical crowdfunding to pick up the slack and return it to a sustainable growth track. Medical crowdfunding platforms have become popular in China, as users pay fees that can be as low as less than 100 yuan per year but can raise hefty sums if they get severely sick.

Essentially, medical crowdfunding is akin to traditional insurance in that both are intended to provide some protection against future misfortune. But buying insurance can be costly, especially for low-income families, and crowdfunding can be an attractive alternative. From its inception through the end of this September, Waterdrop’s crowdfunding platform attracted donations totaling more than 66 billion yuan from 466 million people for 3.3 million patients.

Not surprisingly, the growth of medical crowdfunding has prompted Chinese authorities to step in to regulate this new quasi-financial product. In September, the Ministry of Civil Affairs and other government departments established a legal framework for medical crowdfunding, with specific regulations for fee structures, management of funds and anti-fraud measures.

“This quarter marks a significant milestone for our medical crowdfunding business and the industry as a whole,” Jasmine Li, secretary of Waterdrop’s board, said on the company’s conference call to discuss the third-quarter results.

While that move is probably good for the emerging sector, bringing structure and order to the industry, the increased government supervision means that regulatory risks for the crowdfunding business are also likely to rise. That, in turn, is likely to create similar headaches for Waterdrop like it’s currently seeing in its insurance operations.

High regulatory risks are a common challenge for businesses in China, especially for those in the financial services sector, and have even driven at least one major insurance broker, AIX Inc. (AIFU.US), formerly known as Fanhua, to essentially exit the business.

Meanwhile, Waterdrop has also been working to capitalize on artificial intelligence (AI). The company has developed a conversational AI agent powered by a large language model (LLM), and that can now generate 1 million yuan in monthly premiums by handling user inquires. Waterdrop has also launched its “AI Top Sales Platform 3.0,” which customizes AI sales agents for other businesses, and has initiated pilots with insurers and companies outside the sector.

Despite the big jump in its third-quarter profit, Waterdrop’s shares slid steadily after the release of its earnings report, suggesting investors are more focused on the weakness of its main insurance business. While Waterdrop stock is still up 9.6% this year, it trades at a price-to-sales (P/S) ratio of just 1.1. Shares of online insurer ZhongAn (6060.HK) are even worse off with a P/S ratio of about 0.5, showing investors clearly aren’t so enthusiastic about insurance in China in general.

Three analysts polled by Yahoo Finance expect Waterdrop’s revenue to keep growing next year, though still by a single-digit amount. While that’s certainly better than slipping back into contraction, Waterdrop will need to show its crowdfunding business can not only grow quickly but also operate profitably if it hopes to win over investors.

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