Wal-Mart Enters Life Insurance With MetLife – Sounds Big But Impact Is Small

Wal-Mart (NYSE:WMT) recently partnered with MetLife (NYSE:MET) to sell life insurance at its stores following the footsteps of Costco (NASDAQ:COST), which started similar service with Aetna about 6 months ago. The service is in a test phase and is available in 200 Wal-Mart stores across the states of Georgia and South Carolina. ^[1]

The retailer will look to leverage its huge customer base and fairly simple policy procedure in order to generate what it hopes is a significant amount of sales. The move comes as a part of Wal-Mart’s strategy to diversify its business by expanding into financial services. However, the overall impact on the retailer will be minimal due to its huge size and the fact that policy fee, which Wal-Mart will charge, is only a fraction of the total business that life insurance customers generate in the U.S.

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Wal-Mart’s Wide Scale Reach Will Help It Tap Different Consumer Segments

According to MetLife’s management’s statement about 84% of the U.S. consumers have shopped in a Wal-Mart store over the past year. ^[1] Hence, the retailer’s reach is enviable and gives it access to customers from different socio-economic backgrounds and age groups. MetLife’s insurance offers will target almost all the consumer segments. For example, for the 18-44 age group, a one year life policy provides a death benefit of $10,000 for a policy fee of $69 and for ages 60-65, the benefits of $25,000 are provided for $429. ^[2] Furthermore, about 50% of Wal-Mart’s customers are married and are more likely to buy a life insurance. ^[3]

Easy Process Will Target Reluctant Customers

The not-so-tech-friendly consumers are less likely to log on to MetLife’s website to buy something they might not be completely familiar or comfortable with. Moreover, some consumers avoid purchasing policies through dealers due to a relatively longer process. However, they might be attracted to the direct policy sales as the procedure of buying insurance at a Wal-Mart store is fairly simple. The customers can buy the insurance straight away from the stores in form of a policy card. Following that, they will have to call MetLife and answer few questions about their health. If they are approved, the policy is activated otherwise the customers can get a full refund the next time they visit a Wal-Mart store. ^[1]

The process is quite straight forward and the payment for the policy will be same as paying for the basic groceries. Furthermore, the consumers who are unaware of the benefits of the insurance policy can be educated by this program, which in turn, will improve the sales. Even the casual customers who do not have insurance might end up buying it while shopping for other items.

However, Impact On Wal-Mart Will Be Minimal

While Wal-Mart operates around 4,000 stores in the U.S., the policy is being offered only in 200 stores. This is a pilot program and there are no immediate plans to expand this business further unless it shows promise. ^[1] Even if Wal-Mart provides the life insurance service across all its stores in the U.S., the impact on the retailer will still not be significant.

Assuming that the retailer is able to successfully establish this business across the U.S. in the next 2 years resulting in an increase of 20% in MetLife’s U.S. life insurance and non-medical health insurance revenues, we estimate that there will be just  2% upside to Wal-Mart’s stock. Wal-Mart’s insurance revenues will only be sourced from policy fees, which constitute about 12% of the total MetLife’s life insurance segment’s revenues. These revenues stood at around $280 billion in 2011 and a 20% increase will imply additional revenues of $56 billion. This further implies that policy fee revenue increment for Wal-Mart could be of the order of $7 billion. This is small in comparison to what Wal-Mart earns overall, thus leading to minimal upside.

Even though the partnership between the biggest retailer and the biggest life insurance company seems to be big news, the value addition to Wal-Mart will be small.

Our price estimate for Wal-Mart stands at $80, implying a premium of about 5% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Wal-Mart tests life insurance sales, msn Money, Oct 10 2012 [↩] [↩] [↩] [↩]
2. MetLife Joins Wal-Mart Selling Insurance in a Snoopy Box, Business week, Oct 1 2012 [↩]
3. The Demographics Of Retail, Ad Age, Mar 19 2012 [↩]