Executive Summary / Key Takeaways

• AI-Driven Transformation: Waterdrop Inc. ($WDH) is undergoing a profound AI-driven transformation, integrating large language models across its insurance and healthcare operations to significantly boost efficiency, accelerate revenue growth, and enhance profitability. This strategic pivot is the core investment thesis, positioning the company as a leader in China's evolving insurtech landscape.
• Accelerated Financial Performance: The company demonstrated robust financial acceleration in Q2 2025, with total revenue increasing by 23.9% year-over-year and operating profit surging by 85.9% year-over-year, largely attributed to AI-fueled operational efficiencies. Net profit attributable to ordinary shareholders also rose significantly by 58.7% year-over-year to RMB 140 million.
• Technological Moat and Innovation: Waterdrop is building a formidable technological moat through extensive R&D in AI, evidenced by 60 patent applications related to large language models by Q2 2025. Its proprietary AI applications, such as the Waterdrop Guardian suite and Kueyi AI, deliver quantifiable benefits like improved conversion rates, reduced costs, and enhanced service efficiency, differentiating it from competitors.
• Strategic Market Expansion and Shareholder Returns: Waterdrop is expanding its market reach by targeting underserved segments and leveraging its government-endorsed medical crowdfunding platform. Concurrently, the company is committed to shareholder returns, announcing an enhanced cash dividend of $10.9 million in Q2 2025 and continuing its share repurchase program.
• Outlook and Risks: Management forecasts annual revenue growth exceeding 20% for 2025, driven by continued AI investment, though this may temper short-term profit. Key risks include regulatory uncertainties in China and the complexities of scaling advanced AI technologies.

The AI Imperative: Reshaping China's Insurtech and Healthcare Landscape

Waterdrop Inc. ($WDH), founded in 2016 in Beijing, China, has rapidly evolved into a pivotal technology platform at the intersection of insurance and healthcare services. Operating within China's dynamic digital marketplace, Waterdrop's core business encompasses online insurance brokerage, a medical crowdfunding platform, digital clinical trial solutions, and digital omni-channel marketing. The company's overarching strategy is deeply rooted in leveraging artificial intelligence to drive efficiency, foster innovation, and extend inclusive protection across its ecosystem. This strategic direction, initiated with early AI deployments in 2019, has profoundly shaped its current market position and competitive responses.

The broader industry landscape is characterized by accelerating digital transformation in healthcare and a burgeoning AI innovation wave, particularly in China. This environment presents both immense opportunities and intense competition. Waterdrop's foundational strength lies in its early adoption of AI, proprietary platforms, and a unique community-based crowdfunding model, which collectively form the bedrock of its competitive strategy.

Technological Edge: Waterdrop's AI-Powered Moat

Waterdrop's core differentiated technology revolves around its sophisticated application of Artificial Intelligence and Large Language Models (LLMs) across its entire value chain. This isn't merely an incremental improvement; it represents a fundamental shift in how insurance and healthcare services are delivered and managed. The company's self-developed multi-agent collaboration framework, proxy reward models, and GRPO (Generalized Reinforcement Policy Optimization) algorithm are central to its AI technology stack. These innovations enable the rapid development of intelligent chatbots and allow AI agents to dynamically adapt communication strategies based on user interactions, moving beyond fixed scripts. To address latency, Waterdrop implemented a distributed key-value cache, significantly speeding up the inference of the first token in AI agent calls.

The tangible and quantifiable benefits of this technological prowess are evident across Waterdrop's operations. In Q2 2025, the integration of AI was a primary driver for an 85.9% year-over-year increase in operating profit and a 3.9 percentage point lift in the operating margin. The Waterdrop Guardian AI application suite, rolled out across customer acquisition, sales, underwriting, customer service, and quality assurance, contributed to an 80% year-over-year increase in First-Year Premium (FYP) in Q2 2025. The new AI Pro insurance model, integrated into the company's app and Mini Program, demonstrated a nearly 50% better conversion rate compared to traditional advertising slots. AI medical insurance experts assisted in achieving a 155% increase in the scale of insurance premiums in Q2 2025 compared to Q1, and in specific scenarios, lifted FYP per lead by 58% from May to June. Furthermore, AI quality control assistance boosted Q&A efficiency by an impressive 94% compared to traditional manual methods, and the AI customer service agent handled 215,000 service sessions in July alone, improving the first contact resolution rate. Online insurers now boast 100% AI coverage.

Waterdrop's commitment to R&D is robust, with 60 patent applications related to large language models submitted by June 30, 2025, including nine international filings. The company's AI-driven business innovation has even garnered recognition from Harvard Business School, being included in its case collection. New technological developments like Kueyi AI, an insurance-focused deep seat launched in August 2025, aim to deliver expert underwriting answers with industry-leading accuracy, with plans to open the platform to partners. The Life Planner Co-Pilot, an AI-powered knowledge-based query tool, contains information on approximately 7,000 insurance products and has handled 300,000 product-related consultations. An AI super pre-sales assistant on Wecom provides 24/7 customer consultation, product matching, and appointment scheduling, proving more efficient than human counterparts.

For investors, this technological differentiation translates into a significant competitive moat. The ability to automate complex processes, personalize customer interactions, and enhance risk control through AI directly contributes to higher operational efficiency, lower costs, and improved customer satisfaction. This, in turn, supports higher average selling prices (ASPs) for certain products, better margins, and a stronger market position as an insurtech leader, underpinning Waterdrop's long-term growth strategy. The company's vertical AI models, which deliver definite answers to users, stand in contrast to general-purpose AI's struggles with "hallucination," providing a critical advantage in reliability.

Competitive Dynamics and Strategic Positioning

Waterdrop operates in a competitive landscape alongside established players and agile insurtech firms. Key direct competitors include ZhongAn Online (6060.HK), Ping An Good Doctor (1833.HK), and Huize Holding (HUIZ).

Waterdrop's unique value proposition, particularly its integration of insurance brokerage with a community-based medical crowdfunding platform, provides a distinct competitive edge. This model fosters deeper customer loyalty and addresses a critical need for financial assistance in healthcare, differentiating it from rivals. While ZhongAn Online boasts a broader product range and strong technological capabilities in AI-driven personalization, Waterdrop's platform emphasizes user accessibility and efficiency in insurance matching. Waterdrop's crowdfunding platform, which has facilitated RMB 70 billion in cumulative donations for 3.54 million patients by June 2025, enhances customer retention and engagement, potentially leading to increased market share in health-related segments.

Against Ping An Good Doctor, which offers a comprehensive health ecosystem backed by the Ping An Group, Waterdrop's streamlined focus on insurance brokerage and crowdfunding may offer a simpler user experience and lower entry barriers. While Ping An's integrated health data analytics can drive innovation in personalized services, Waterdrop's specialized approach allows for operational flexibility. Waterdrop's abnormal behavior recognition model, which shows top industry accuracy in detecting malicious crowdfunding campaigns, highlights its robust risk control capabilities, a critical differentiator in a trust-based service.

Compared to Huize Holding, another insurtech firm focused on online distribution, Waterdrop's crowdfunding platform provides a notably greater user engagement in health services. Waterdrop's emphasis on a seamless digital experience and community-driven services could lead to better customer loyalty and potentially improved financial outcomes, though Huize's broader distribution partnerships might enable faster market penetration in certain areas.

Waterdrop's competitive advantages are further solidified by its proprietary online platform, which enables efficient data processing and faster claim handling, contributing to capital efficiency. The company's ability to enable AI agents to independently close deals in complex scenarios positions it as a pioneer in insurtech. However, vulnerabilities exist, including potential dependence on regulatory approvals and a narrower product range compared to some larger, more diversified rivals. Regulatory uncertainty in China, Cayman Islands governance issues, and potential conflicts of interest with Tencent (TCEHY) are also pertinent risks. Waterdrop actively mitigates crowdfunding risks through advanced AI models that identify high-risk scenarios, monitor fund security, and detect malicious activities in real-time.

Financial Performance and Liquidity: A Trajectory of Growth

Waterdrop has demonstrated a strong trajectory of financial growth and improving profitability, particularly driven by its strategic investments in AI. In Q2 2025, the company reported total revenue of RMB million, marking a 23.9% year-over-year increase. This acceleration was accompanied by a significant 85.9% year-over-year surge in operating profit, with the operating margin improving by 3.9 percentage points. Net profit attributable to ordinary shareholders reached RMB 140 million, up 58.7% year-over-year.

The insurance business, a cornerstone of Waterdrop's operations, contributed RMB million in revenue in Q2 2025, a 28.7% year-over-year increase. First-Year Premium (FYP) for the insurance segment reached RMB billion, growing 80.2% year-over-year. Short-term products saw FYP increase by 95% year-over-year, while long-term FYP rose by 45.4% year-over-year to RMB 770 million. Products tailored for pre-existing conditions contributed RMB million in quarterly premium, a 146.6% year-on-year increase. The digital clinical trial solutions business also showed robust growth, with revenue increasing by 34.2% year-over-year to RMB 27.7 million in Q2 2025.

Cost management has been a key focus, with total operating costs and expenses increasing by 18.7% year-over-year in Q2 2025, a rate lower than revenue growth, indicating enhanced operational efficiency. While sales and marketing expenses increased by 26.3% year-over-year due to strategic customer acquisition efforts, general and administrative expenses decreased by 21.9% year-over-year, reflecting tightened operational control and reduced allowance for credit losses. R&D expenses remained stable in Q2 2025, with a commitment to allocating more resources to AI capabilities.

The company maintains a strong liquidity position, holding billions in cash reserves as of June 30, 2025, with consistent positive operating cash flow. This provides a solid foundation for continued growth and strategic investments.

Waterdrop has also prioritized shareholder returns, approving an enhanced cash dividend of $10.9 million in Q2 2025, representing a 50% increase over the previous dividend, and authorizing an annual share repurchase plan. Since 2021, the company has repurchased approximately 55.7 million ADS for $109 million as of August 31, 2025.

Outlook and Strategic Trajectory

Waterdrop's management maintains an optimistic outlook, anticipating annual revenue growth of over 20% year-over-year for 2025. This guidance is underpinned by the continued and expanding integration of AI across its business segments. The company intends to increase its investment in driving business growth, particularly in the second half of 2025, which may have a short-term negative impact on annual profit but is viewed as a strategic trade-off for long-term value creation.

The technological roadmap remains central to this outlook. Waterdrop expects its AI health insurance agent to generate tens of millions in monthly premiums by year-end. Furthermore, the AI service assistant is projected to reduce case transfer rates by 50% and improve efficiency by 50% compared to human agents by 2025. These specific targets highlight the expected quantifiable impact of AI on operational efficiency and revenue generation. The company's long-term vision, as articulated by management, is to further consolidate its leading position in the insurtech industry over the next three to five years, leveraging its deep industry know-how and advanced AI applications.

Conclusion

Waterdrop Inc. is charting a compelling course in China's insurtech and healthcare sectors, driven by a relentless focus on AI-powered innovation and operational excellence. The company's strategic integration of large language models across its insurance brokerage, medical crowdfunding, and healthcare solutions is not merely a technological upgrade but a fundamental redefinition of its business model. This AI-first approach has already translated into accelerated revenue growth, significantly improved profitability, and a robust competitive moat built on efficiency, personalized service, and enhanced risk control.

While the path forward includes navigating regulatory complexities and managing the scalability of advanced AI, Waterdrop's strong financial health, consistent shareholder returns, and clear strategic vision position it for sustained growth. The company's ability to deliver quantifiable benefits from its AI investments, coupled with its unique market positioning through the medical crowdfunding platform, underscores a powerful investment thesis. As Waterdrop continues to expand its AI capabilities and deepen its market penetration, it stands poised to unlock substantial long-term value for its stakeholders in the evolving digital economy.