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Derivative Financial Instruments and Hedging

12 Months Ended

Mar. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments and Hedging

26. Derivative Financial Instruments and Hedging

Risk management policy

The Company and its subsidiaries manage interest rate risk through asset-liability management (“ALM”). The Company and its subsidiaries use derivative financial instruments to hedge interest rate risk and avoid changes in interest rates that could have a significant adverse effect on the Company’s results of operations. As a result of interest rate changes, the fair value and/or cash flow of interest sensitive assets and liabilities will fluctuate. However, such fluctuation will generally be offset by using derivative financial instruments as hedging instruments. Derivative financial instruments that the Company and its subsidiaries use as part of the interest risk management include interest rate swaps.

The Company and its subsidiaries utilize foreign currency borrowings, foreign exchange contracts and foreign currency swap agreements to hedge exchange rate risk that are associated with certain transactions and investments denominated in foreign currencies. Similarly, overseas subsidiaries generally structure their liabilities to match the currency-denomination of assets in each region. A certain subsidiary holds futures and foreign exchange contracts for the purpose of economic hedges against minimum guarantee risk of variable annuity and variable life insurance contracts.

By using derivative instruments, the Company and its subsidiaries are exposed to credit risk in the event of nonperformance by counterparties. The Company and its subsidiaries attempt to manage the credit risk by carefully evaluating the content of transactions and the quality of counterparties in advance and regularly monitoring the amount of notional principal, fair value, type of transaction and other factors pertaining to each counterparty.

The Company and its subsidiaries have no derivative instruments with credit-risk-related contingent features as of March 31, 2022 and 2023.

(a) Cash flow hedges

The Company and its subsidiaries designate interest rate swap agreements, foreign currency swap agreements and foreign exchange contracts as cash flow hedges for variability of cash flows originating from floating rate borrowings and forecasted transactions and for exchange fluctuations. Net gains (losses) before deducting applicable taxes on derivative contracts were reclassified from other comprehensive income (loss) into earnings when earnings were affected by the variability in cash flows of the designated hedged item. The amounts of these net gains (losses) after deducting applicable taxes were net losses of ¥5,779 million, ¥4,436 million and ¥1,438 million during fiscal 2021, 2022 and 2023, respectively. The amount of net derivative gains, ¥1,977 million, included in other comprehensive income (loss), net of applicable income taxes at March 31, 2023 will be reclassified into earnings within fiscal 2024.

(b) Fair value hedges

The Company and its subsidiaries use financial instruments designated as fair value hedges to hedge their exposure to interest rate risk and foreign currency exchange risk. A certain subsidiary designates foreign exchange contracts to minimize foreign currency exposures on bonds in foreign currencies in the insurance business. The subsidiary also uses interest rate swap agreements to hedge interest rate exposure of the fair values of bonds in foreign currencies in the insurance business.

The Company and its subsidiaries use foreign exchange contracts and borrowings and bonds denominated in foreign currencies to hedge the foreign currency exposure of the net investment in overseas subsidiaries and affiliates.

(d) Derivatives not designated as hedging instruments

The Company and its subsidiaries entered into interest rate swap agreements, futures and foreign exchange contracts for risk management purposes which are not qualified for hedge accounting. A certain subsidiary holds futures and foreign exchange contracts for the purpose of economic hedges against minimum guarantee risk of variable annuity and variable life insurance contracts.

The effect of derivative instruments on the consolidated statements of income,

pre-tax,

for fiscal 2021 is as follows.

(1) Cash flow hedges


	Millions of yen
	Gains (losses) recognized in other comprehensive income on derivative			Gains (losses) reclassified from other comprehensive income (loss) into income
				Interest expense		Other (income) and expense
Interest rate swap agreements	¥	5,051		¥	1,522	¥	0
Foreign exchange contracts		(45	)		827		(585	)
Foreign currency swap agreements		(6,043	)		553		5,385

(2) Fair value hedges


	Millions of yen
	Gains (losses) recognized in income on derivative and other					Gains (losses) recognized in income on hedged item
	Life insurance premiums and related investment income			Other (income) and expense		Life insurance premiums and related investment income			Other (income) and expense
Interest rate swap agreements	¥	9,533		¥	0	¥	(8,990	)	¥	0
Foreign exchange contracts		(5,032	)		438		3,591			(356	)

(3) Hedges of net investment in foreign operations


	Millions of yen
	Gains (losses) recognized in other comprehensive income on derivative and others			Gains (losses) reclassified from other comprehensive income (loss) into income
				Gains on sales of subsidiaries and affiliates and liquidation losses, net		Interest expense		Other (income) and expense
Foreign exchange contracts	¥	(27,128	)	¥	1,145	¥	3,181	¥	21
Borrowings and bonds in foreign currencies		(15,840	)		0		0		0

(4) Derivatives not designated as hedging instruments


	Millions of yen
	Gains (losses) recognized in income on derivative
	Life insurance premiums and related investment income*			Interest expense		Other (income) and expense
Interest rate swap agreements	¥	0		¥	7	¥	(13	)
Futures		(9,412	)		0		6,980
Foreign exchange contracts		(215	)		2,085		12,814
Credit derivatives held		0			0		1
Options held/written and other		(598	)		0		(2,419	)

Futures, foreign exchange contracts and options held/written and other in the above table include gains (losses) arising from futures, foreign exchange contracts and options held to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts for fiscal 2021 (see Note 23 “Life Insurance Operations”).

The effect of derivative instruments on the consolidated statements of income,

pre-tax,

for fiscal 2022 is as follows.

(1) Cash flow hedges


	Millions of yen
	Gains (losses) recognized in other comprehensive income on derivative			Gains (losses) reclassified from other comprehensive income (loss) into income
				Interest expense		Other (income) and expense
Interest rate swap agreements	¥	16,507		¥	1,615	¥	0
Foreign exchange contracts		(542	)		223		487
Foreign currency swap agreements		(2,075	)		559		3,030

(2) Fair value hedges


	Millions of yen
	Gains (losses) recognized in income on derivative and other					Gains (losses) recognized in income on hedged item
	Life insurance premiums and related investment income			Other (income) and expense		Life insurance premiums and related investment income			Other (income) and expense
Interest rate swap agreements	¥	4,142		¥	0	¥	(4,068	)	¥	0
Foreign exchange contracts		(37,997	)		5		37,659			89

(3) Hedges of net investment in foreign operations


	Millions of yen
	Gains (losses) recognized in other comprehensive income on derivative and others			Gains (losses) reclassified from other comprehensive income (loss) into income
				Gains on sales of subsidiaries and affiliates and liquidation losses, net			Interest expense		Other (income) and expense
Foreign exchange contracts	¥	(28,498	)	¥	(104	)	¥	1,673	¥	5
Borrowings and bonds in foreign currencies		(63,922	)		0			0		0

(4) Derivatives not designated as hedging instruments


	Millions of yen
	Gains (losses) recognized in income on derivative
	Life insurance premiums and related investment income*			Interest expense		Other (income) and expense
Interest rate swap agreements	¥	0		¥	6	¥	(22	)
Futures		(1,075	)		0		186
Foreign exchange contracts		20,254			1,308		38,330
Credit derivatives held		0			0		(1	)
Options held/written and other		0			0		(749	)

Futures and foreign exchange contracts in the above table include gains (losses) arising from futures and foreign exchange contracts held to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts for fiscal 2022 (see Note 23 “Life Insurance Operations”).

The effect of derivative instruments on the consolidated statements of income,

pre-tax,

for fiscal 2023 is as follows.

(1) Cash flow hedges


	Millions of yen
	Gains (losses) recognized in other comprehensive income on derivative			Gains (losses) reclassified from other comprehensive income (loss) into income
				Interest expense			Other (income) and expense
Interest rate swap agreements	¥	23,838		¥	175		¥	0
Foreign exchange contracts		(184	)		(893	)		893
Foreign currency swap agreements		(2,268	)		766			905
Options held/written and other		(48	)		0			0

(2) Fair value hedges


	Millions of yen
	Gains (losses) recognized in income on derivative and other						Gains (losses) recognized in income on hedged item
	Life insurance premiums and related investment income			Other (income) and expense			Life insurance premiums and related investment income			Other (income) and expense
Interest rate swap agreements	¥	2,633		¥	0		¥	(2,499	)	¥	0
Foreign exchange contracts		(42,947	)		(412	)		43,006			332

(3) Hedges of net investment in foreign operations


	Millions of yen
	Gains (losses) recognized in other comprehensive income on derivative and others			Gains (losses) reclassified from other comprehensive income (loss) into income
				Gains on sales of subsidiaries and affiliates and liquidation losses, net			Interest expense		Other (income) and expense
Foreign exchange contracts	¥	(21,316	)	¥	(7,874	)	¥	7,051	¥	(252	)
Borrowings and bonds in foreign currencies		(66,947	)		0			0		0

(4) Derivatives not designated as hedging instruments


	Millions of yen
	Gains (losses) recognized in income on derivative
	Life insurance premiums and related investment income*			Interest expense		Other (income) and expense
Interest rate swap agreements	¥	0		¥	5	¥	(222	)
Futures		(855	)		0		(1,300	)
Foreign exchange contracts		21,659			4,231		49,589
Credit derivatives held/written		0			0		3
Options held/written and other		0			0		1,828

The effect of the components excluded from the assessment of hedge effectiveness on the consolidated statements of income,

pre-tax,

for fiscal 2021 is as follows.

Fair value hedges


	Millions of yen
	Gains (losses) recognized in income
	Life insurance premiums and related investment income			Interest expense		Other (income) and expense
Foreign exchange contracts	¥	(1,249	)	¥	6	¥	0
Options held/written and other		0			0		32

The effect of the components excluded from the assessment of hedge effectiveness on the consolidated statements of income,

pre-tax,

for fiscal 2022 is as follows.

Fair value hedges


	Millions of yen
	Gains (losses) recognized in income
	Life insurance premiums and related investment income			Interest expense		Other (income) and expense
Foreign exchange contracts	¥	(1,233	)	¥	9	¥	0
Options held/written and other		0			0		31

The carrying amount of hedged assets and liabilities recognized in balance sheets in fair value hedges and the cumulative amount of fair value hedging adjustments included in the carrying amount (excluding the effect of changes in foreign exchange rates) at March 31, 2022 is as follows.


Assets as hedged items in fair value hedges					Liabilities as hedged items in fair value hedges
	Millions of yen						Millions of yen
Consolidated balance sheets location	Carrying amount		The cumulative amount of fair value hedging adjustments included in the carrying amount		Consolidated balance sheets location		Carrying amount		The cumulative amount of fair value hedging adjustments included in the carrying amount
Investment in Securities	¥	422,938	¥	1,147		—	¥	0	¥	0
Installment Loans		28,836		55		—		0		0

The effect of the components excluded from the assessment of hedge effectiveness on the consolidated statements of income,

pre-tax,

for fiscal 2023 is as follows.

Fair value hedges


	Millions of yen
	Gains (losses) recognized in income
	Life insurance premiums and related investment income			Interest expense		Other (income) and expense
Foreign exchange contracts	¥	(12,299	)	¥	20	¥	0
Options held/written and other		0			0		55


Assets as hedged items in fair value hedges						Liabilities as hedged items in fair value hedges
	Millions of yen							Millions of yen
Consolidated balance sheets location	Carrying amount		The cumulative amount of fair value hedging adjustments included in the carrying amount			Consolidated balance sheets location		Carrying amount		The cumulative amount of fair value hedging adjustments included in the carrying amount
Investment in Securities	¥	470,204	¥	(1,107	)		—	¥	0	¥	0
Installment Loans		13,969		(1	)		—		0		0

Notional amounts of derivative instruments and other, fair values of derivative instruments and other before offsetting at March 31, 2022 and 2023 are as follows.

March 31, 2022


			Derivative assets				Derivative liabilities
	Notional amount		Fair value		Consolidated balance sheets location		Fair value		Consolidated balance sheets location
	Millions of yen		Millions of yen		Consolidated balance sheets location		Millions of yen		Consolidated balance sheets location
Derivatives designated as hedging instruments and other:
Interest rate swap agreements	¥	511,224	¥	9,570		Other Assets	¥	8,170		Other Liabilities
Options held/written and other		847		11		Other Assets		0		—
Futures, foreign exchange contracts		944,282		445		Other Assets		51,953		Other Liabilities
Foreign currency swap agreements		78,445		126		Other Assets		4,518		Other Liabilities
Foreign currency long-term debt		690,381		0		—		0		—
Derivatives not designated as hedging instruments:
Interest rate swap agreements	¥	432	¥	0		—	¥	12		Other Liabilities
Options held/written and other		794,774		25,653		Other Assets		21,562		Other Liabilities
Futures, foreign exchange contracts*		725,685		15,561		Other Assets		19,490		Other Liabilities

The notional amounts of futures and foreign exchange contracts in the above table include futures contracts of ¥15,088 million and foreign exchange contracts of ¥7,415 million to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts at March 31, 2022, respectively. Derivative assets in the above table include fair value of the futures and foreign exchange contracts before offsetting of ¥79 million and ¥57 million and derivative liabilities include fair value of the futures and foreign exchange contracts before offsetting of ¥1,325 million and ¥378 million at March 31, 2022, respectively.

March 31, 2023


			Derivative assets				Derivative liabilities
	Notional amount		Fair value		Consolidated balance sheets location		Fair value		Consolidated balance sheets location
	Millions of yen		Millions of yen		Consolidated balance sheets location		Millions of yen		Consolidated balance sheets location
Derivatives designated as hedging instruments and other:
Interest rate swap agreements	¥	568,864	¥	22,798		Other Assets	¥	3,311		Other Liabilities
Options held/written and other		9,486		52		Other Assets		88		Other Liabilities
Futures, foreign exchange contracts		933,988		2,735		Other Assets		26,217		Other Liabilities
Foreign currency swap agreements		99,878		1,325		Other Assets		2,426		Other Liabilities
Foreign currency long-term debt		748,396		0		—		0		—
Derivatives not designated as hedging instruments:
Interest rate swap agreements	¥	464	¥	0		—	¥	8		Other Liabilities
Options held/written and other		632,211		30,435		Other Assets		28,335		Other Liabilities
Futures, foreign exchange contracts*		788,361		15,050		Other Assets		10,978		Other Liabilities
Credit derivatives held/written		1,098		3		Other Assets		3		Other Liabilities

The notional amounts of futures and foreign exchange contracts in the above table include futures contracts of ¥14,758 million and foreign exchange contracts of ¥5,554 million to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts at March 31, 2023, respectively. Derivative assets in the above table include fair value of the futures and foreign exchange contracts before offsetting of ¥52 million and ¥12 million and derivative liabilities include fair value of the futures and foreign exchange contracts before offsetting of ¥200 million and ¥179 million at March 31, 2023, respectively.

The Company and its subsidiaries have contracted credit derivatives for the purpose of trading. Details of credit derivatives written as of March 31, 2023 are as follows and there are no credit derivatives written as of March 31, 2022.

Types of derivatives

The events or circumstances
that would require the seller
to perform under the credit
derivative

Maximum potential
amount of future
payment under the
credit derivative

Approximate
remaining term
of the credit
derivative

Fair value of the
credit derivative

Millions of yen

Credit default swap

In case of credit event (bankruptcy, failure to pay, restructuring) occurring in underlying refence company*

1,000

Less than five years

)

*	Underlying reference company’s credit ratings are A1 or better rated by rating agencies as of March 31, 2023.