Waterdrop IPO Bankrolls Online Insurance Push Amid Crackdowns

(Bloomberg) -- Waterdrop Inc., the Chinese insurance technology company poised to list in the U.S., said it will focus on expanding its online business, seeking to bolster its share of the highly competitive market while coping with regulatory headwinds.

The company will use proceeds of an initial public offering to increase its online insurance offerings that cater to the nation’s smaller cities and young internet users, rather than prioritizing profits, Chief Executive Officer Shen Peng said in an interview on Friday.

Beijing-based Waterdrop is raising $360 million at a valuation of $4.7 billion, based on its IPO pricing of $12 a share, people familiar with the matter said. Shen declined to comment on the figures.

Waterdrop is one of the few Chinese fintech companies that pulled off an IPO this year amid policy crackdowns and industry overhauls. Investors are betting that the Tencent Holdings Ltd.-backed firm can thrive in China’s online insurance market, which may grow to as much as 2.5 trillion yuan ($387 billion) in a decade, according to China International Capital Corp.

“As the largest independent insurance tech platform in China, we are absolutely a leader” in the online space, said Shen. “The market potential for health insurance is huge in China and is fast growing.”

Shen said news that Chinese regulators were trying to block its IPO was untrue and the company is in regular contact with authorities.

Faces Challenges

Waterdrop still faces challenges on multiple fronts, from pending regulatory changes that could halt key operations to prolonged losses if it spends for expansion, according to its prospectus.

“Further development of regulations applicable to us may result in additional restrictions on our business operations,” the company said in the document.

In March, Waterdrop ceased the operation of its Waterdrop Mutual Aid business, a healthcare-coverage product that pools together small monthly fees from members to cover those stricken by diseases such as cancer. It had more than 70 million users as of 2019 and paid out almost 2 billion yuan to members.

Shen said that from a business perspective, the halting of the mutual aid unit didn’t have a significant impact because it only contributed about 4% of revenue for first-year insurance premiums.

Still, the company warned in its prospectus that the suspension could cause participants to bring complaints and lawsuits against it and damage its reputation.

The firm’s key units -- Waterdrop Insurance Marketplace and Medical Crowdfunding -- also face regulatory uncertainty.

China’s insurance watchdog has rolled out measures that could tighten its online insurance business. A draft circular in January may also potentially bar the company from selling certain insurance products if enacted.

There are no specific governing laws and regulations for Waterdrop’s medical crowdfunding business. The company helps those who face significant medical cost conduct crowdfunding campaigns. More than 340 million people donated 37 billion yuan to 1.7 million-plus patients as of the end of last year.

The company however expects to “experience strengthened regulatory environment” for this operation.

Even so, Shen insisted that the firm will be “the biggest beneficiary” of tighter rules on online insurance as the industry grows in a clearer regulatory environment.

Profit Outlook

While Waterdrop’s target users are mainly citizens in the less affluent Chinese cities and young internet users, the potential in extracting client value remains “huge,” Shen said. The company will seek to keep its products “highly cost-effective” even as some could charge more than 10,000 yuan in annual premiums, he said, adding that the platform has been able to sell more complicated long-term critical illness policies through online interactions with buyers.

On the financial front, Waterdrop warned that it “may not be able to achieve or maintain profitability or positive cash flow in the future” after incurring net losses and negative cash flow each year since its inception in 2016. It lost $101 million last year after generating operating revenue of $464 million.

The key for Waterdrop to turn profitable in the future is being able to persuade existing clients to buy more products and increase the average value per user, according to a Guotai Junan Securities Co. report last month.

Existing investor Boyu Capital’s affiliated entities plan to subscribe for $100 million of the shares, and Hopu Investments will buy at least $80 million, according to its prospectus. Waterdrop also counts Gaorong Capital, IDG Capital and Meituan as backers.

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