Accounting decision making in organizational contexts

¶ … financial position of Aflac Inc. And its competitor MetLife Inc. Aflac, http://www.aflac.com/, is a Fortune 500 company founded by John, Paul and Bill Amos in 1955. Aflac insures more than 50 million people worldwide. At year end 2010, Aflac had assets totaling more than $101 billion with annual revenues of more than $20.7 billion (Aflac Inc., 2012). I chose to write about Aflac for this assignment because of my interest in the insurance industry and my desire to learn more about it. This analysis of Aflac has helped me to gain familiarity with and a deeper understanding of insurance company financial operations.

This report analyzed financial statements for the year ending December 31, 2010 for both Aflac and MetLife. Financial statement data was taken from Aflac's "Year in Review" published by Thomson Reuters, http://thomson.mobular.net/thomson/7/3187/4452/document_0/YIR_2010.pdf as well as Aflac's cash flow statement by MarketWatch, http://www.marketwatch.com/investing/stock/afl/financials/cash-flow. MetLife financial data was taken from the company's "Annual Report," http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDE5MDc1fENoaWxkSUQ9NDMyMjQzfFR5cGU9MQ==&t=1.

This report reviewed Aflac's return on assets (ROA), a measurement used to determine how much profit a company generated for each dollar in assets. ROA measures a company's earnings in relation to all the resources at the company's disposal, including shareholders' capital along with short- and long-term borrowed funds. ROA is therefore a stringent test of return to shareholders. ROA also provides an indication of how asset intensive a business is; in this case the insurance industry is asset-light. A comparison of Aflac's ROA of 2.5% shows that it is above the industry average of .4% (CNN Money, 2012) and also above its competitor MetLife, whose ROA is .43%.

Aflac's profit margin for the 2010 fiscal year was 11.3%, which was well above the industry average of 4.7% (Yahoo! Finance, 2012). The net profit margin looks at how much of a company's revenues are kept as net income and shows how effectively managers run a business. Higher profit margins provide an indication of more profitable companies, those with better control over costs compared to competitors. Aflac's profit margin is higher than MetLife's at 5.28%, indicating that Aflac is the more profitable company even though it is significantly smaller than MetLife in terms of revenues and market capitalization ($23.3 billion versus $39.8 billion).

Aflac's asset utilization rate is 22.4%, while MetLife's is 8.3%. This ratio indicates a company's efficiency in using its assets, showing management's ability to make the best use of its assets to generate revenue. In comparison with the accident and health insurance industry, Aflac ranks in the 44th percentile; in the financial sector Aflac ranks in the 77th percentile (YCharts, 2012). Overall, Aflac's competitive financial position is better than the average company in the insurance industry.

Forbes' analysts make a similar assessment, with 12 of 18 analysts giving Aflac a strong or moderate buy recommendation. Forbes cites Aflac's strong fundamentals and shareholder value as positive arguments for investing in Aflac. On the other hand, Forbes cites strong competition, industry risks and cash flow sensitivity as negative arguments for the investor to consider (Forbes.com, 2012).

Aflac's free cash flow (FCF) for the year ended 2010 amounted to $6.99 billion. The company's free cash flow has consistently increased over the past three years from $4.23 billion in 2008 to $6.161 billion in 2009 to 2010 levels. FCF indicates a company's ability to pay debt, pay dividends, buy back stock and facilitate business growth.