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Introduction

The report involves a thorough analysis of the financial statements of two major insurance companies in the world. What follows is an in-depth evaluation of financial performance of the US based publicly traded insurance giants, Metropolitan Life Insurance (MetLife) and American International Group (AIG), for the last three years. The evaluation will be done on the basis of financial information obtained from annual reports of company as well as from analyst’s reports. The report also seeks to explain the accounting policies adopted by the two corporations and identify the similarities and differences in the policies. 

Reporting to shareholders

Both AIG and MetLife follow a conventional approach towards reporting its shareholders. The managers of both these companies provide a complete disclosure of the accounting policies that has been followed while preparing the annual reports. This makes it easier for the shareholders to have a good understanding of the information that is shared within the report. All the business operations of both the companies including the ones conducted by the subsidiaries are also provided in details within the reports. MetLife and AIG both follow a line of business segment reporting format which provides intricate details regarding the business generated by individual business segments of the respective companies. Financial information according to geographic region is also reported in the statements of both the companies. This allows shareholders to comprehend the performance of the respective companies in the global insurance industry.

The managers of both the companies emphasize a lot on sharing their risk exposures to the best of their knowledge in order to allow the shareholders to make an informed judgement regarding future investments. The dividends paid in the past as well as the expected dividends for the next quarter are also reported within the annual reports as a means to inform shareholders regarding the profit that is being distributed and the part that is being retained for future investments. With regards to the fact that has been mentioned in this section, it can be said that both the companies provide an absolute reflection of their financial position to their shareholders. Such an enhanced disclosure is stimulated by a robust governance framework implemented in both these companies.

One striking difference that was noted in the annual reports of AIG and MetLife is that the former is more inclined towards conveying what the company aims to in the following years. Besides providing a detailed explanation of the company’s financial position in the current year, managers of AIG also emphasize on explaining the company’s goals and strategies for growth in the future. However, MetLife sticks to presentation of the company’s current financial position without much focus on the long term strategies to be adopted. This is one particular aspect where AIG stays ahead of MetLife as the former is able to relate to the objective of its shareholders (which is to generate greater return) by conveying that this very goal of the shareholder is completely aligned with that of the company’s.

Ratio analysis

3.1. Profitability ratio

Gross margin: Given the fact that both MetLife and AIG are insurance companies, no cost of goods sold is reported within the company’s annual reports. The entire revenue is considered as the gross profit and therefore the gross margin for both the companies have been 100% for the last three years (AIG, 2013; MetLife, 2013a). Although there is nothing to infer from such information but a break down analysis of the gross profit or total revenue provides an idea about the premiums generated by the two corporations in the last three years.

Figure 1: AIG and MetLife Premiums
(Source: AIG, 2013; MetLife, 2013a)

AIG’s premium collections have declined gradually since 2011 to reach a record low of $37.3 billion in the year 2013 (AIG, 2013). The underlying reason behind such steady fall is the decreasing premium amount generated by AIG’s subsidiaries SunAmerica life and Chartis property-casualty (Tracer, 2012). These two subsidiaries contributed greatly towards this slip that AIG has been experiencing over the past three years.

On the other hand, MetLife’s premium revenues have rather follwed an abrupt pattern, increasing from $36.3 billion in 2011 to $37.9 billion in 2012 and then dipping again to $37.6 billion in 2013 (MetLife, 2013a). The decrease in premium value between 2012 and 2013 can be attributed to a sudden dip in the number of insurance customers for MetLife.

Operating Margin: Figure 2 given below depicts that the AIG reported a negative operating margin (1.38%) in the year 2011 (AIG, 2013). Thereafter, the company’s operating margin increased steadily to 4.07% and 13.64% in 2012 and 2013 respectively (AIG, 2013). Alternatively MetLife’s performance in terms of its operating margin has oscillated significantly in the last three years. AIG’s negative operating margin and MetLife’s decreasing operating margin from 2011 through to 2012 was recorded mainly because both these companies had to pay off a significant amount of policy claims it benefits to the policy holders. This amount paid to the policy holders was considerably large when compared to the revenue that was generated from the premiums from those policies. Moreover, supplementary operating expenses incurred by both these companies also contributed to such decrease in the operating margin. However, the year 2013 saw a massive increase in the operating margin of both the companies largely because of the fact that the respective managers were able to reduce the operating expenses with respect to the premium revenues that was generated. The comparative analysis indicates that AIG’s performance has been relatively better over the past three years and this fact can be justified by the year on year growth attained by the organization in terms of its operating margin.

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