Beating a retreat

Waterdrop IPO underperforms as tighter insurtech rules loom

Shen Peng, founder and CEO of Waterdrop Inc, poses for pictures during an interview with Reuters in Beijing

Waterdrop’s founder Shen Peng

When 34 year-old Shen Peng founded Waterdrop Inc in 2016, he was setting his sights on building China’s answer to UnitedHealth Group, a $383 billion healthcare and insurance behemoth. But with private health insurance a relatively newer concept in the country, Shen began with a mutual aid scheme. It allowed participants to chip in as little as Rmb20 a year to help others diagnosed with critical illnesses and in return receive payouts when they themselves need treatment. Alongside this he also built a medical crowdfunding platform, where patients or their friends and relatives could seek donations by highlighting their healthcare needs on his social network.

Within four years Waterdrop’s number of users crossed 340 million, of which many became policy holders of mainstream health insurance making repeated purchases on its online marketplace. Last year it generated more than Rmb14 billion ($2.16 billion) in first-year premiums for 62 insurers, pocketing handsome brokerage fees that helped lift its revenues to Rmb3 billion, or a nearly 13-time jump compared to 2018.

All was looking well until its $360 million debut on the New York Stock Exchange last Friday. Priced at the top end of its offering range at $12 apiece, Waterdrop’s shares tumbled 19.2% to $9.7 on their trading debut. They have dropped another 28% since then, crimping the market capitalisation of the Beijing-based company to $2.19 billion, not much different to its valuation last August after raising $230 million in a financing round backed by tech major Tencent and reinsurer Swiss Re. Its other investors include Meituan, the food delivery giant that Shen helped establish.

Local press generally attributed the sell-off to an impending step-up in regulatory oversight of China’s insurtech sector. In fact, a day before Waterdrop started trading, the Wall Street Journal reported that Xianghubao, a mutual aid platform operated by Ant Group, was in the process of being revamped. “Xianghubao is likely to be turned into a commercial product that falls under the purview of the country’s banking and insurance regulator,” said the US newspaper, noting that one option for Ant is to work with a licenced insurer to convert the online service into a regulated insurance plan.

As a part of the ongoing process to overhaul Ant’s sprawling business and to defuse risks of broader financial contagion from across the fintech sector (see WiC536), the intervention also came at a time when public confidence in mutual aid products was on the wane. At the beginning of the year Xianghubao boasted 101 million users, but that number had dropped to 92.6 million by the end of April, meaning more than 8.3 million subscribers had pulled out in the period.

A common complaint among users was the apparent difficulty of making successful claims. There were cases where patients suffering from heart disease failed to obtain payouts from Xianghubao but received due compensation from other insurers. Xianghubao’s sudden decision in December 2019 to extend the waiting period for cancer policies and to withdraw benefits for people with mild thyroid and prostate cancers also left many uncovered in times of need. With fewer participants, existing subscribers are forced to fork out higher fees to maintain the same coverage, fuelling a vicious cycle that is driving more users away. (The annual fees for a cancer policy targeting the elderly, for instance, jumped from Rmb32 per person in 2019 to Rmb414 the following year.)

In the past year the Chinese authorities have flagged the risks linked with mutual aid programmes. Three months after publishing a white paper criticising the “wild growth” of the online mutual aid sector, the China Banking and Insurance Regulatory Commission (CBIRC) announced a new directive in December to plug a loophole that had hitherto enabled internet companies to provide quasi-insurance activities without being regulated. “Charity is charity. Offering financial and insurance services under the banner of mutual assistance is a deviation from the stated purpose, hence needs rectification,” Xiao Yuanqi, the CBIRC vice chairman, told reporters last month.

The new rules, which will inevitably increase compliance costs, have already prompted a flurry of exits from the sector, including mutual aid platforms run by Baidu and Meituan.

Xianghubao’s financial numbers did not look that healthy even prior to the regulatory change. It spent 40% of its income – totalling Rmb729 million in 2020 – on claims investigations. With an 8% membership fee as its main revenue source, Xianghubao is yet to turn a profit after two years of operation. The Wall Street Journal says the entity is unlikely to be shut down, however, as regulators are wary of provoking social unrest, given that millions of citizens have funded Xianghubao and rely on it for life-saving payouts for cripplingly expensive medical treatments.

For Waterdrop, the closure in March of its mutual aid business is believed to have had a negative impact on its bottom line. It generated little direct income, but was a significant traffic driver that fuelled its policy distribution business. The change will force Waterdrop to rely more on third-party channels for customer acquisition, which means higher marketing fees.

Shen said Waterdrop will remain lossmaking for the foreseeable future as it prioritises growth and deeper penetration in less affluent cities across China. It plans to use half of the IPO proceeds to expand its healthcare and insurance offerings, with 30% to be spent on research and development. To become a better service partner for insurers, Waterdrop is also boosting its data analysis capabilities. It has been building user profiles with 2,464 algorithm labels, which is meant to help assess users’ needs and detect fraudulent claims.

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