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excluding the impact of foreign currency effect,
and the achievement of risk-based capital ratios
as determined on a statutory accounting basis.
We define operating earnings per diluted share
to be the profits derived from operations,
inclusive of interest cash flows associated with
notes payable, before realized investment gains
and losses from securities transactions,
impairments, and derivative and hedging
activities, as well as other and nonrecurring
items, divided by the weighted-average number
of shares outstanding for the period plus a
number of weighted-average shares to
compensate for the dilutive effect of share-
based awards. Because foreign exchange
rates are outside of management’s control,
operating earnings per diluted share growth is
computed using the average yen/dollar
exchange rate for the prior year, which
eliminates fluctuations from currency rates that
can magnify or suppress reported results in
dollar terms. If the operating earnings per
diluted share target was not achieved, there
would not be any 2014 payout for this metric.
The RBC ratio quantifies insurance risk,
business risk, asset risk and interest rate risk by
weighing the types and mixtures of risks
inherent in the Company’s operations
collectively in the United States and Japan, due
to Aflac Japan’s legal status as a branch
operation. Aflac’s RBC ratio remains high at
945% and reflects a very strong capital and
surplus position.
The Japan “Solvency Margin Ratio” (SMR),
associated with our regulatory reporting to the
Financial Services Agency in Japan, was
applicable to 2014 MIP determinations. SMR
measures an insurance company’s ability to
satisfy policy obligations. A strong SMR serves
to protect our policyholders’ interests, while also
improving our flexibility to invest in additional
asset classes with the objective of enhancing
our risk-adjusted investment returns
and
returning capital to our shareholders through
share repurchases and cash dividends. By
adding the SMR metric, we have included both
the U.S. and Japan regulatory capital metrics
as performance targets. The SMR is an
important financial indicator and key benchmark
for industry regulators. We have viewed
maintaining a strong capital position as an
important priority for years. Aflac’s SMR ratio
also remains high and was 857% at the end of
2014.
We also added net investment income as a
corporate metric. This emphasizes that our
investment objective to maximize the
Company’s risk-adjusted performance subject
to our liability profile and capital requirements is
a key responsibility of each NEO.
For both the U.S. and Japanese segment, we
use an industry measure referred to as the
increase in total new annualized premiums on
policies sold and incremental annual premiums
on policies converted during the reporting
period. For Aflac U.S., we use the percentage
increase in premium income minus the
percentage increase in controllable expenses.
For both segments we use the percentage
increase in pretax operating earnings. We
define pretax operating earnings on a segment
basis to be the operating profit derived from
operations before realized investment gains
and losses from securities transactions,
impairments, and derivative and hedging
activities as well as nonrecurring items. The
percentage increase in pretax operating
earnings for the Japan segment is also
measured before expenses allocated from the
U.S. and excluding foreign currency effect.
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