Yuanbao Drives Business With Technology-Driven Insurance Services In Tough Market

Key Takeaways:

• Yuanbao has filed for an IPO in New York, reportedly seeking to raise a relatively modest $50 million in a deal that could value it at more than $400 million
• Despite a difficult Chinese insurance market, the company’s platform that uses big data to match potential buyers with the most suitable products is booming

By Warren Yang

Insurance is often a tough sell, even in the best of times. So, life would be much easier for insurers if potential customers came to them first to shop, rather than the usual way where salesmen solicit new buyers.

That’s the nice scenario that Yuanbao Inc. – which calls itself an insurance distributor that offers “the seamless integration of insurance with cutting-edge technologies” – is striving to sell to customers through its online marketing platform. It appears to be succeeding at that mission, at least based on its booming business, which could help it convince investors to give it a look as it seeks to go public.

Last week, Yuanbao, a young company founded just five years ago, filed for an IPO in the U.S., with big guns Goldman Sachs, Citigroup and CICC as the lead underwriters, according to a prospectus filed with the Securities and Exchange Commission. Such big-name underwriters would usually imply a relatively large offering, though one media report indicated the target is a relatively modest $50 million.

Essentially, Yuanbao is an insurance broker that offers highly targeted online services for insurers through its “engine” using big data. To help its insurance partners find new buyers, it deploys computer models to popular sites like social media to gather data on consumer traits and behavior. Its engine then generates initial predictions on potential buyers’ demands and, based on them, produces tailored advertising content for each individual.

When potential buyers come to Yuanbao’s platform, it collects and analyzes more data about them and matches them with the most suitable products. The company also provides post-sales services. It generates revenue both by collecting payments for its services from insurers, and also from collecting commissions on sales it facilitates.

This data-driven marketing and sales system is more efficient than traditional ways of selling insurance, which often involve lots of human effort to convince people they need such products. Such products are not so easy to sell in China due to their relative newness with the country’s move to a more market-oriented economy over the last three decades where people are responsible for paying their own costs for things like medical care.

An equally positive thing about Yuanbao’s business model is that its database expands as it gains new buyers, allowing it to more accurately predict what products consumers will want and make better recommendations. That creates a nice virtuous cycle for the company by improving its conversion rates for new customers.

Like traditional insurance brokers, one of Yuanbao’s main revenue sources is commissions it receives from insurers when their policies are sold on its platform, with its cut ranging from 10% to 30%. Its focuses on personal life insurance, and accident and health protection, a segment where it’s the largest independent distributor in China in terms of first-year premiums, according to its prospectus, which cited third-party research data.

Impressive Growth

Yuanbao is growing fast, which is no easy feat in the current environment where consumers are reining in their spending as China’s economy slows after years of rapid growth. Its revenue jumped more than 140% to about 2 billion yuan ($284 million) last year from 2022 and then grew about 59% year-on-year in the first half of this year to 1.53 billion yuan.

Yuanbao is also profitable, which also isn’t an easy thing to achieve for Chinese companies these days. Last year, it made a net profit of 203 million yuan, more than 10 times what it earned in 2022. That said, the company was in the red last year after factoring in the accounting treatment of the redemption value of preferred shares issued at a discount. But even on that basis, Yuanbao returned to the black in the first half of this year.

A price-to-sales (P/S) ratio of around 1, which is what rival insurance broker Waterdrop WDH commands, would value Yuanbao at about $425 billion yuan, based on expected revenue of about 3 billion yuan this year if its first-half growth continues for the full year.

Economic conditions in China aren’t really favorable for the insurance industry at the moment as consumers aren’t so keen to spend money on non-essential items like health protection that don’t offer immediate benefits.

There’s also a risk stemming from China’s high degree of regulation over its financial sectors, including the constant possibility for changes. For the insurance industry, for example, Chinese regulators have recently capped fees for policies sold through banks, or so-called bancassurance channels, to ensure they reflect risk assessments more accurately. That has dealt a blow to brokers that have distribution deals with banks. Such brokers include Fanhua FANH, whose revenue fell more than 40% year-on-year in the first half of 2024, partly as a result of the policy shift.

Yet Yuanbao seems insulated from these risks for now, at least based on its latest financial performance, suggesting that it’s not heavily, if at all, involved in distributing bancassurance products.

The company plans to use most of the proceeds from its IPO for investment in growth. It has raised $153 million privately by issuing preferred shares since 2020. It held about $123 million in cash and cash equivalents at the end of last year, showing it’s in decent financial position as it seeks its U.S. listing.

Yuanbao is one of just a few relatively large Chinese companies looking to test the U.S. equity market amid Beijing’s heightened scrutiny of overseas listings since 2021. Electric vehicle maker Zeekr’s ZK IPO in New York this year was one of the first big listings by a Chinese company in the market since ride-hailing app operator Didi Global delisted its shares in late 2021 amid Chinese authorities’ concerns about data security.

For sure, potential Yuanbao investors could be concerned about challenges that current economic conditions in China pose for insurers. But that may be precisely why the country’s insurers need services from companies like Yuanbao.

And no matter how bad the economy is, at least some people will probably be open to buying insurance but aren’t motivated enough to actively seek out such policies. Yuanbao’s ability to find such consumers could help its business continue to expand, making its service attractive to insurers as their own business slows.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.