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Fair Value Measurements

12 Months Ended

Mar. 31, 2023

2. Fair Value Measurements

The Company and its subsidiaries classify and prioritize inputs used in valuation techniques to measure fair value into the following three levels:


Level 1	—	Inputs of quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2	—	Inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly or indirectly.

Level 3	—	Unobservable inputs for the assets or liabilities.

The Company and its subsidiaries differentiate between those assets and liabilities required to be carried at fair value at every reporting period (“recurring”) and those assets and liabilities that are only required to be adjusted to fair value under certain circumstances (“nonrecurring”). The Company and its subsidiaries mainly measure certain loans held for sale, trading debt securities,

available-for-sale

debt securities, certain equity securities, certain investment in affiliates, derivatives, certain reinsurance recoverables, and variable annuity and variable life insurance contracts at fair value on a recurring basis.

The following tables present recorded amounts of major financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 and 2023:

March 31, 2022


	Millions of yen
	Total Carrying Value in Consolidated Balance Sheets			Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Loans held for sale*1	¥	151,601		¥	0	¥	151,601	¥	0
Trading debt securities		2,503			0		2,503		0
Available-for-sale debt securities:		2,174,891			1,095		2,032,736		141,060
Japanese and foreign government bond securities*2		832,613			1,095		831,518		0
Japanese prefectural and foreign municipal bond securities		325,604			0		322,551		3,053
Corporate debt securities*3		849,560			0		848,863		697
CMBS and RMBS in the Americas		28,732			0		28,732		0
Other asset-backed securities and debt securities		138,382			0		1,072		137,310
Equity securities45		385,271			112,200		160,099		112,972
Derivative assets:		51,366			292		46,214		4,860
Interest rate swap agreements		9,570			0		9,570		0
Options held/written and other		25,664			0		20,804		4,860
Futures, foreign exchange contracts		16,006			292		15,714		0
Foreign currency swap agreements		126			0		126		0
Netting* 7		(20,333	)		0		0		0
Net derivative assets		31,033			0		0		0
Other assets:		5,214			0		0		5,214
Reinsurance recoverables* 8		5,214			0		0		5,214

Total	¥	2,770,846		¥	113,587	¥	2,393,153	¥	264,106

Liabilities:
Derivative liabilities:	¥	105,705		¥	2,026	¥	95,047	¥	8,632
Interest rate swap agreements		8,182			0		8,182		0
Options held/written and other		21,562			0		12,930		8,632
Futures, foreign exchange contracts		71,443			2,026		69,417		0
Foreign currency swap agreements		4,518			0		4,518		0
Netting* 7		(20,333	)		0		0		0
Net derivative Liabilities		85,372			0		0		0
Policy Liabilities and Policy Account Balances:		198,905			0		0		198,905
Variable annuity and variable life insurance contracts* 9		198,905			0		0		198,905

Total	¥	304,610		¥	2,026	¥	95,047	¥	207,537

March 31, 2023


	Millions of yen
	Total Carrying Value in Consolidated Balance Sheets			Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Loans held for sale*1	¥	197,041		¥	0	¥	23,192	¥	173,849
Trading debt securities		2,179			0		2,179		0
Available-for-sale debt securities:		2,234,608			4,334		1,986,672		243,602
Japanese and foreign government bond securities*2		801,295			3,004		798,291		0
Japanese prefectural and foreign municipal bond securities		369,246			0		365,915		3,331
Corporate debt securities*3		784,388			1,330		778,321		4,737
CMBS and RMBS in the Americas		43,173			0		43,173		0
Other asset-backed securities and debt securities		236,506			0		972		235,534
Equity securities45		379,236			105,646		133,027		140,563
Certain investment in affiliates*6		2,511			0		0		2,511
Derivative assets:		72,398			203		65,377		6,818
Interest rate swap agreements		22,798			0		22,798		0
Options held/written and other		30,487			0		23,669		6,818
Futures, foreign exchange contracts		17,785			203		17,582		0
Foreign currency swap agreements		1,325			0		1,325		0
Credit derivatives held		3			0		3		0
Netting*7		(22,052	)		0		0		0
Net derivative assets		50,346			0		0		0
Other assets:		4,676			0		0		4,676
Reinsurance recoverables*8		4,676			0		0		4,676

Total	¥	2,892,649		¥	110,183	¥	2,210,447	¥	572,019

Liabilities:
Derivative liabilities:	¥	71,366		¥	1,484	¥	55,240	¥	14,642
Interest rate swap agreements		3,319			0		3,319		0
Options held/written and other		28,423			0		13,781		14,642
Futures, foreign exchange contracts		37,195			1,484		35,711		0
Foreign currency swap agreements		2,426			0		2,426		0
Credit derivatives written		3			0		3		0
Netting*7		(22,052	)		0		0		0
Net derivative Liabilities		49,314			0		0		0
Policy Liabilities and Policy Account Balances:		163,734			0		0		163,734
Variable annuity and variable life insurance contracts*9		163,734			0		0		163,734

Total	¥	235,100		¥	1,484	¥	55,240	¥	178,376

*1	A certain subsidiary elected the fair value option on certain loans held for sale. These loans are multi-family and seniors housing loans and are sold to Federal National Mortgage Association (“Fannie Mae”), Federal

Home Loan Mortgage Corporation (“Freddie Mac”) and institutional investors. Included in “Other (income) and expense” in the consolidated statements of income were losses of ¥3,260 million, ¥2,982 million and ¥2,429 million from the change in the fair value of the loans for fiscal 2021, 2022 and 2023, respectively. No gains or losses were recognized in earnings during fiscal 2021, 2022 and 2023 attributable to changes in instrument-specific credit risk. The amounts of aggregate unpaid principal balance and aggregate fair value of the loans held for sale as of March 31, 2022, were ¥151,672 million and ¥

151,601

million, respectively, and the amount of the aggregate fair value was less than the amount of aggregate unpaid principal balance by ¥71 million. The amounts of aggregate unpaid principal balance and aggregate fair value of the loans held for sale as of March 31, 2023, were ¥199,674 million and ¥197,041 million, respectively, and the amount of the aggregate fair value was less than the amount of aggregate unpaid principal balance by ¥2,633 million. As of March 31, 2022 and 2023, there were no loans that are 90 days or more past due or, in

non-accrual

status.

A certain subsidiary elected the fair value option for investments in foreign government bond securities included in

available-for-sale

debt securities. Included in “Gains on investment securities and dividends” in the consolidated statements of income were a loss of ¥28 million, a gain of ¥51 million and a loss of ¥11 million from the change in the fair value of those investments for fiscal 2021, 2022 and 2023, respectively. There were no such investments elected the fair value option as of March 31, 2022.

The amount of aggregate fair value elected the fair value option was ¥237 million as of March 31, 2023.

A certain subsidiary elected the fair value option for investments in foreign corporate debt securities included in

available-for-sale

debt securities. Included in “Gains on investment securities and dividends” in the consolidated statements of income were a gain of ¥1,080 million and losses of ¥365 million and ¥516 million from the change in the fair value of those investments for fiscal 2021, 2022 and 2023, respectively. The amounts of aggregate fair value elected the fair value option were ¥7,644 million and ¥6,605 million as of March 31, 2022 and 2023, respectively.

Certain subsidiaries elected the fair value option for certain investments in investment funds, and others included in equity securities. Included in “Gains on investment securities and dividends” and “Life insurance premiums and related investment income” in the consolidated statements of income were gains of ¥3,187 million, ¥1,199 million and ¥1,066 million from the change in the fair value of those investments for fiscal 2021, 2022 and 2023, respectively. The amounts of aggregate fair value elected the fair value option were ¥11,709 million and ¥16,032 million as of March 31, 2022 and 2023, respectively.

*5	The amounts of investment funds measured at net asset value per share which are not included in the above tables were ¥25,999 million and ¥51,263 million as of March 31, 2022 and 2023, respectively.

A certain subsidiary elected the fair value option for certain investment in affiliates. No gains or losses were recognized in earnings from the change in the fair value of those investments for fiscal 2021, 2022 and 2023. There were no such investments elected the fair value option as of March 31, 2022. The amounts of aggregate fair value elected the fair value option were ¥2,511

million as of March 31, 2023.

*7	It represents the amount offset under counterparty netting of derivative assets and liabilities.

Certain subsidiaries elected the fair value option for certain reinsurance contracts held. The fair value of the reinsurance contracts elected for the fair value option in other assets were ¥5,214 million and ¥4,676 million as of March 31, 2022 and 2023, respectively. For the effect of changes in the fair value of those reinsurance contracts on earnings for fiscal 2021, 2022 and 2023, see Note 23 “Life Insurance Operations.”

Certain subsidiaries elected the fair value option for the entire variable annuity and variable life insurance contracts held. The fair value of the variable annuity and variable life insurance contracts elected for the fair value option in policy liabilities and policy account balances were ¥198,905 million and ¥163,734 million as of March 31, 2022 and 2023, respectively. For the effect of changes in the fair value of the variable annuity and variable life insurance contracts on earnings for fiscal 2021, 2022 and 2023, see Note 23 “Life Insurance Operations.”

The following tables present the reconciliation of financial assets and liabilities (net) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) in fiscal 2021, 2022 and 2023:

2021


	Millions of yen
	Balance at April 1, 2020		Gains or losses (realized/unrealized)									Purchases*3		Sales			Settlements*4			Transfers in and/ or out of Level 3 (net)			Balance at March 31, 2021		Change in unrealized gains or losses included in earnings for assets and liabilities still held at March 31, 2021*1			Change in unrealized gains or losses included in other comprehensive income for assets and liabilities still held at March 31, 2021*2
	Balance at April 1, 2020		Included in earnings*1			Included in other comprehensive income*2			Total			Purchases*3		Sales			Settlements*4			Transfers in and/ or out of Level 3 (net)			Balance at March 31, 2021
Available-for-sale debt securities	¥	88,353	¥	(1,065	)	¥	14,870		¥	13,805		¥	51,270	¥	(12,890	)	¥	(5,187	)	¥	(1,894	)	¥	133,457	¥	(1,228	)	¥	14,729
Japanese prefectural and foreign municipal bond securities		2,832		(115	)		44			(71	)		0		0			0			0			2,761		(115	)		44
Corporate debt securities		3,994		0			1			1			0		0			(974	)		(2,000	)		1,021		0			1
Other asset-backed securities and debt securities		81,527		(950	)		14,825			13,875			51,270		(12,890	)		(4,213	)		106			129,675		(1,113	)		14,684
Equity securities		83,901		14,304			1,765			16,069			2,001		(4,718	)		(5,518	)		(325	)		91,410		14,042			1,769
Investment funds		83,901		14,304			1,765			16,069			2,001		(4,718	)		(5,518	)		(325	)		91,410		14,042			1,769
Derivative assets and liabilities (net)		19,230		(5,474	)		34			(5,440	)		0		0			0			0			13,790		(5,474	)		34
Options held/written and other		19,230		(5,474	)		34			(5,440	)		0		0			0			0			13,790		(5,474	)		34
Other asset		18,206		(14,201	)		0			(14,201	)		2,713		0			(421	)		0			6,297		(14,201	)		0
Reinsurance recoverables*5		18,206		(14,201	)		0			(14,201	)		2,713		0			(421	)		0			6,297		(14,201	)		0
Policy Liabilities and Policy Account Balances		300,739		(42,066	)		(1,248	)		(43,314	)		0		0			(77,631	)		0			266,422		(42,066	)		(1,248	)
Variable annuity and variable life insurance contracts*6		300,739		(42,066	)		(1,248	)		(43,314	)		0		0			(77,631	)		0			266,422		(42,066	)		(1,248	)

2022


	Millions of yen
	Balance at April 1, 2021		Gains or losses (realized/unrealized)									Purchases*3		Sales			Settlements*4			Transfers in and/ or out of Level 3 (net)			Balance at March 31, 2022			Change in unrealized gains or losses included in earnings for assets and liabilities still held at March 31, 2022*1			Change in unrealized gains or losses included in other comprehensive income for assets and liabilities still held at March 31, 2022*2
	Balance at April 1, 2021		Included in earnings*1			Included in other comprehensive income*2			Total			Purchases*3		Sales			Settlements*4			Transfers in and/ or out of Level 3 (net)			Balance at March 31, 2022
Available-for-sale debt securities	¥	133,457	¥	7,041		¥	6,941		¥	13,982		¥	51,644	¥	(9,465	)	¥	(48,558	)	¥	0		¥	141,060		¥	2,445		¥	7,116
Japanese prefectural and foreign municipal bond securities		2,761		0			292			292			0		0			0			0			3,053			0			291
Corporate debt securities		1,021		0			(1	)		(1	)		0		0			(323	)		0			697			0			(1	)
Other asset-backed securities and debt securities		129,675		7,041			6,650			13,691			51,644		(9,465	)		(48,235	)		0			137,310			2,445			6,826
Equity securities		91,410		16,350			8,779			25,129			24,606		(26,795	)		(768	)		(610	)		112,972			4,555			8,743
Investment funds, and others		91,410		16,350			8,779			25,129			24,606		(26,795	)		(768	)		(610	)		112,972			4,555			8,743
Derivative assets and liabilities (net)		13,790		(18,340	)		778			(17,562	)		0		0			0			0			(3,772	)		(18,340	)		778
Options held/written and other		13,790		(18,340	)		778			(17,562	)		0		0			0			0			(3,772	)		(18,340	)		778
Other asset		6,297		(2,146	)		0			(2,146	)		1,835		0			(772	)		0			5,214			(2,146	)		0
Reinsurance recoverables*5		6,297		(2,146	)		0			(2,146	)		1,835		0			(772	)		0			5,214			(2,146	)		0
Policy Liabilities and Policy Account Balances		266,422		(1,743	)		(467	)		(2,210	)		0		0			(69,727	)		0			198,905			(1,743	)		(467	)
Variable annuity and variable life insurance contracts*6		266,422		(1,743	)		(467	)		(2,210	)		0		0			(69,727	)		0			198,905			(1,743	)		(467	)

2023


	Millions of yen
	Balance at April 1, 2022			Gains or losses (realized/unrealized)									Purchases*3		Sales			Settlements*4			Transfers in and/ or out of Level 3 (net)		Balance at March 31, 2023			Change in unrealized gains or losses included in earnings for assets and liabilities still held at March 31, 2023*1			Change in unrealized gains or losses included in other comprehensive income for assets and liabilities still held at March 31, 2023*2
	Balance at April 1, 2022			Included in earnings*1			Included in other comprehensive income*2			Total			Purchases*3		Sales			Settlements*4			Transfers in and/ or out of Level 3 (net)		Balance at March 31, 2023
Loans held for sale	¥	0		¥	18		¥	1,095		¥	1,113		¥	2,457	¥	(5,776	)	¥	0		¥	176,055	¥	173,849		¥	18		¥	1,095
Available-for-sale debt securities		141,060			3,788			1,238			5,026			116,175		(9,100	)		(9,559	)		0		243,602			3,458			1,713
Japanese prefectural and foreign municipal bond securities		3,053			0			278			278			0		0			0			0		3,331			0			278
Corporate debt securities		697			89			(1	)		88			5,922		(1,554	)		(416	)		0		4,737			(16	)		(0	)
Other asset-backed securities and debt securities		137,310			3,699			961			4,660			110,253		(7,546	)		(9,143	)		0		235,534			3,474			1,435
Equity securities		112,972			22,823			9,642			32,465			4,685		(7,223	)		(2,336	)		0		140,563			22,113			9,509
Investment funds, and others		112,972			22,823			9,642			32,465			4,685		(7,223	)		(2,336	)		0		140,563			22,113			9,509
Certain investment in affiliates		0			0			5			5			2,506		0			0			0		2,511			0			5
Derivative assets and liabilities (net)		(3,772	)		(2,845	)		(1,207	)		(4,052	)		0		0			0			0		(7,824	)		(2,845	)		(1,207	)
Options held/written and other		(3,772	)		(2,845	)		(1,207	)		(4,052	)		0		0			0			0		(7,824	)		(2,845	)		(1,207	)
Other asset		5,214			(1,286	)		0			(1,286	)		1,153		0			(405	)		0		4,676			(1,286	)		0
Reinsurance recoverables*5		5,214			(1,286	)		0			(1,286	)		1,153		0			(405	)		0		4,676			(1,286	)		0
Policy Liabilities and Policy Account Balances		198,905			6,343			74			6,417			0		0			(28,754	)		0		163,734			6,343			74
Variable annuity and variable life insurance contracts*6		198,905			6,343			74			6,417			0		0			(28,754	)		0		163,734			6,343			74

Principally, gains and losses from

available-for-sale

debt securities are included in “Gains on investment securities and dividends”, “Write-downs of securities” or “Life insurance premiums and related investment income”; equity securities are included in “Gains on investment securities and dividends” and “Life insurance premiums and related investment income” and derivative assets and liabilities (net) are included in “Other (income) and expense” respectively. Additionally, for

available-for-sale

debt securities, amortization of interest recognized in finance revenues is included in these columns.

Unrealized gains and losses from

available-for-sale

debt securities are included in “Net change of unrealized gains (losses) on investment in securities” and “Net change of foreign currency translation adjustments”, unrealized gains and losses from equity securities and derivative assets and liabilities (net) are included mainly in “Net change of foreign currency translation adjustments”, unrealized gains and losses from policy liabilities and policy account balances are included in “Net change of debt valuation adjustments.”

*3	Increases resulting from an acquisition of a subsidiary and insurance contracts ceded to reinsurance companies are included.

*4	Decreases resulting from the receipts of reimbursements for benefits, and decreases resulting from insurance payouts to variable annuity and variable life policyholders due to death, surrender and maturity of the investment period are included.

*5	“Included in earnings” in the above table includes changes in the fair value of reinsurance contracts recorded in “Life insurance costs” and reinsurance premiums, net of reinsurance benefits received, recorded in “Life insurance premiums and related investment income.”

“Included in earnings” in the above table is recorded in “Life insurance costs” and includes changes in the fair value of policy liabilities and policy account balances resulting from gains or losses on the underlying investment assets managed on behalf of variable annuity and variable life policyholders, and the changes in the minimum guarantee risks relating to variable annuity and variable life insurance contracts as well as insurance costs recognized for insurance and annuity payouts as a result of insured events.

In fiscal 2021, corporate debt securities totaling ¥2,000 million and investment funds totaling ¥325 million were transferred from Level 3 to Level 2, since the inputs became observable. In addition, other asset-backed securities and debt securities totaling ¥106 million were transferred from Level 2 to Level 3, since the inputs became unobservable.

In fiscal 2022, investment funds, and others totaling ¥610 million were transferred from Level 3 to Level 1, since the inputs became observable.

In fiscal 2023, loans held for sale totaling ¥176,055

million were transferred from Level 2 to Level 3, since the inputs became unobservable.

The following tables present recorded amounts of assets measured at fair value on a nonrecurring basis during fiscal 2022 and 2023. These assets are measured at fair value on a nonrecurring basis mainly to recognize impairment:

2022


	Millions of yen
	Total Carrying Value in Consolidated Balance Sheets		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Loans held for sale	¥	235	¥	0	¥	235	¥	0
Real estate collateral-dependent loans (net of allowance for credit losses)		6,972		0		0		6,972
Investment in operating leases, property under facility operations, office facilities and other assets		59,847		0		262		59,585
Certain equity securities		9,451		0		9,451		0
Certain investment in affiliates		2,846		0		0		2,846
Certain reporting units including goodwill		192		0		0		192
Certain intangible assets acquired in business combinations		98,014		0		0		98,014

	¥	177,557	¥	0	¥	9,948	¥	167,609

2023


	Millions of yen
	Total Carrying Value in Consolidated Balance Sheets		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Loans held for sale	¥	1,139	¥	0	¥	1,139	¥	0
Real estate collateral-dependent loans (net of allowance for credit losses)		5,970		0		0		5,970
Investment in operating leases, property under facility operations, office facilities and other assets		4,568		0		31		4,537
Certain equity securities		11,794		0		11,794		0
Certain investment in affiliates		4,013		3,587		0		426

	¥	27,484	¥	3,587	¥	12,964	¥	10,933

The following is a description of the main valuation methodologies used for assets and liabilities measured at fair

value

Loans held for sale

Certain loans, which the Company and its subsidiaries have the intent and ability to sell to outside parties in the foreseeable future, are considered

held-for-sale.

The loans held for sale in the Americas are classified as Level 2, if the Company and its subsidiaries measure their fair value based on a market approach using inputs other than quoted prices that are observable for the assets such as treasury rate, swap rate and market spread. The loans held for sale in the Americas are classified as Level 3, if the Company and its subsidiaries measure their fair value based on discounted cash flow methodologies using inputs that are unobservable in the market.

Real estate collateral-dependent loans

The allowance for credit losses for large balance

non-homogeneous

loans is individually evaluated based on the present value of expected future cash flows, the loan’s observable market price or the fair value of the collateral securing the loans if the loans are collateral-dependent. According to ASC 820 (“Fair Value Measurement”), measurement for loans with deterioration in credit quality determined using a present value technique is not considered a fair value measurement. However, measurement for loans with deterioration in credit quality determined using the loan’s observable market price or the fair value of the collateral securing the collateral-dependent loans are fair value measurements and are subject to the disclosure requirements for nonrecurring fair value measurements.

The Company and its subsidiaries determine the fair value of the real estate collateral of real estate collateral-dependent loans using appraisals prepared by independent third party appraisers or our own staff of qualified appraisers based on recent transactions involving sales of similar assets or other valuation techniques such as discounted cash flows methodologies using future cash flows estimated to be generated from operation of the existing assets or completion of development projects, as appropriate. The Company and its subsidiaries generally obtain a new appraisal once a fiscal year. In addition, the Company and its subsidiaries periodically monitor circumstances of the real estate collateral and then obtain a new appraisal in situations involving a significant change in economic and/or physical conditions, which may materially affect the fair value of the collateral. Real estate collateral-dependent loans whose fair values are estimated using appraisals of the underlying collateral based on these valuation techniques are classified as Level 3 because such appraisals involve unobservable inputs. These unobservable inputs contain discount rates and cap rates as well as future cash flows estimated to be generated from real estate collateral. An increase (decrease) in the discount rate or cap rate and a decrease (increase) in the estimated future cash flows would result in a decrease (increase) in the fair value of real estate collateral-dependent loans.

Investment in operating leases, property under facility operations, office facilities and other assets, and land and buildings undeveloped or under construction

Investment in operating leases measured at fair value is mostly real estate. The Company and its subsidiaries determine the fair value of investment in operating leases, property under facility operations, office facilities and other assets, and land and buildings undeveloped or under construction using appraisals prepared by independent third party appraisers or the Company’s own staff of qualified appraisers, and others based on recent transactions involving sales of similar assets or other valuation techniques such as discounted cash flow methodologies using future cash flows estimated to be generated from operation of the existing assets or completion of development projects, as appropriate. The Company and its subsidiaries classified these assets as Level 3 because such

appraisals involve unobservable inputs. These unobservable inputs contain discount rates as well as future cash flows estimated to be generated from the assets or projects. An increase (decrease) in the discount rate and a decrease (increase) in the estimated future cash flows would result in a decrease (increase) in the fair value of investment in operating leases and property under facility operations and land and buildings undeveloped or under construction.

Movable properties owned by a certain subsidiary are classified as Level 2, because fair value measurement is based on observable inputs other than quoted prices included within Level 1, such as prices for similar assets.

Trading debt securities and

available-for-sale

debt securities

If active market prices are available, fair value measurement is based on quoted active market prices and, accordingly, these securities are classified as Level 1. If active market prices are not available, fair value measurement is based on observable inputs other than quoted prices included within Level 1, such as prices for similar assets and accordingly these securities are classified as Level 2. If market prices are not available and there are no observable inputs, then fair value is estimated by using valuation models such as discounted cash flow methodologies and broker quotes. Such securities are classified as Level 3, as the valuation models and broker quotes are based on inputs that are unobservable in the market. If fair value is based on broker quotes, the Company and its subsidiaries check the validity of received prices based on comparison to prices of other similar assets and market data such as relevant benchmark indices.

The Company and its subsidiaries classified CMBS and RMBS in the Americas and other asset-backed securities as Level 2 if the inputs such as trading price and/or bid price are observable. The Company and its subsidiaries classified CMBS and RMBS in the Americas and other asset-backed securities as Level 3 if the Company and subsidiaries evaluate the fair value based on the unobservable inputs. In determining whether the inputs are observable or unobservable, the Company and its subsidiaries evaluate various factors such as the lack of recent transactions, price quotations that are not based on current information or vary substantially over time or among market makers, a significant increase in implied risk premium, a wide

bid-ask

spread, significant decline in new issuances, little or no public information (e.g. a

principal-to-principal

market) and other factors. With respect to certain CMBS and RMBS in the Americas and other asset-backed securities, the Company and its subsidiaries classified these securities that were measured at fair value based on the observable inputs such as trading price and/or bit price as Level 2. But for those securities that lacked observable trades because they are older vintage or below investment grade securities, the Company and its subsidiaries limit the reliance on independent pricing service vendors and brokers. As a result, the Company and its subsidiaries established internally developed pricing models using valuation techniques such as discounted cash flow model using Level 3 inputs in order to estimate fair value of these debt securities and classified them as Level 3. Under the models, the Company and its subsidiaries use anticipated cash flows of the security discounted at a risk-adjusted discount rate that incorporates our estimate of credit risk and liquidity risk that a market participant would consider. The cash flows are estimated based on a number of assumptions such as default rate and prepayment speed, as well as seniority of the security. An increase (decrease) in the discount rate or default rate would result in a decrease (increase) in the fair value of CMBS and RMBS in the Americas and other asset-backed securities.

Equity securities and investment in affiliates

measures its investments held by the investment companies which are owned by the subsidiary at fair value. These investment funds, certain equity securities and certain investment in affiliates are classified as Level 3, because fair value measurement is based on the combination of discounted cash flow methodologies and market multiple valuation methods, or broker quotes. Discounted cash flow methodologies use future cash flows to be generated from investees, weighted average cost of capital (WACC) and others. Market multiple valuation methods use earnings before interest, taxes, depreciation and amortization (EBITDA) multiples based on actual and projected cash flows, comparable peer companies, and comparable precedent transactions and others. Furthermore, certain subsidiaries elected the fair value option for investments in some funds. These investment funds for which the fair value option is elected are classified as level 3, because the subsidiaries measure their fair value using discounting to net asset value based on inputs that are unobservable in the market, or broker quotes. A certain subsidiary elected the fair value option for certain investment in affiliates. These investment in affiliates are classified as Level 3, because fair value measurement is based on discounted cash flow methodologies.

Derivatives

For exchange-traded derivatives, fair value is based on quoted market prices, and accordingly, classified as Level 1. For

non-exchange

traded derivatives, fair value is based on commonly used models and discounted cash flow methodologies. If the inputs used for these measurements including yield curves and volatilities, are observable, the Company and its subsidiaries classify it as Level 2. If the inputs are not observable, the Company and its subsidiaries classify it as Level 3. These unobservable inputs contain discount rates. An increase (decrease) in the discount rate would result in a decrease (increase) in the fair value of derivatives.

Reinsurance recoverables

Certain subsidiaries have elected the fair value option for certain reinsurance contracts related to variable annuity and variable life insurance contracts to partially offset the changes in fair value recognized in earnings of the policy liabilities and policy account balances attributable to the changes in the minimum guarantee risks of the variable annuity and variable life insurance contracts. These reinsurance contracts for which the fair value option is elected are classified as Level 3 because the subsidiaries measure their fair value using discounted cash flow methodologies based on inputs that are unobservable in the market.

Variable annuity and variable life insurance contracts

A certain subsidiary has elected the fair value option for the entire variable annuity and variable life insurance contracts held in order to match earnings recognized for changes in fair value of policy liabilities and policy account balances with the earnings recognized for gains or losses from the investment assets managed on behalf of variable annuity and variable life policyholders, derivative contracts and changes in fair value of reinsurance contracts. The changes in fair value of the variable annuity and variable life insurance contracts are linked to the fair value of the investment in securities managed on behalf of variable annuity and variable life policyholders. These securities consist mainly of equity securities traded in the market. In addition, variable annuity and variable life insurance contracts are exposed to the minimum guarantee risk, and the subsidiary adjusts the fair value of the underlying investments by incorporating changes in fair value of the minimum guarantee risk in the evaluation of the fair value of the entire variable annuity and variable life insurance contracts. The variable annuity and variable life insurance contracts for which the fair value option is elected are classified as Level 3 because the subsidiary measures the fair value using discounted cash flow methodologies based on inputs that are unobservable in the market.

Reporting units including goodwill

Certain reporting units including goodwill are classified as level 3, because fair value measurement is based on discounted cash flow methodologies and business enterprise value multiples methodologies using inputs that are unobservable in the market. Discounted cash flow methodologies use future cash flows to be generated, weighted average cost of capital (WACC) and others. Business enterprise value multiples methodologies use earnings before interest, taxes, depreciation and amortization (EBITDA) multiples based on comparable peer companies, comparable precedent transactions and others.

Intangible assets acquired in business combinations

Certain intangible assets acquired in business combinations are classified as level 3, because fair value measurement is based on discounted cash flow methodologies using inputs that are unobservable in the market. Discounted cash flow methodologies use future cash flows, weighted average cost

of capital (WACC) and others.

Information about Level 3 Fair Value Measurements

The following tables provide information about the valuation techniques and significant unobservable inputs used in the valuation of Level 3 assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 and 2023.

March 31, 2022

Millions of
yen

Valuation technique(s)

Significant

unobservable inputs

Range

(Weighted average)

Fair value

Assets:

Available-for-sale

debt securities:

Japanese prefectural and foreign municipal bond securities

3,053

Appraisals/Broker quotes

—

Corporate debt securities

697

Discounted cash flows

Discount rate

0.4

% –

0.7

(

0.5%)

Other asset-backed securities and debt securities

25,666

Discounted cash flows

Discount rate

0.1

% –

51.2

(

10.6

Probability of default

1.9

(

1.9

111,644

Appraisals/Broker quotes

—

Equity securities:

Investment funds, and others

86,903

Discounted cash flows

WACC

11.9

% –

18.6

(

16.3

EV/Terminal EBITDA multiple

8.3x-

12.0

(

9.9

Market multiples

EV/Last twelve months EBITDA multiple

6.4

x –

12.6

(

9.5

EV/Forward EBITDA multiple

5.7

x –

12.5

(

9.4

EV/Precedent transaction last twelve months EBITDA multiple

7.6x-

14.5

(

10.3

26,069

Appraisals/Broker quotes

—

Derivative assets:

Options held/written and other

4,792

Discounted cash flows

Discount rate

12.0

% –

34.0

(

14.9

Appraisals/Broker quotes

—

Other assets:

Reinsurance recoverables

5,214

Discounted cash flows

Discount rate

(0.2)% –

0.7

(0.2

Mortality rate

0.0% –

100.0

(2.1

Lapse rate

1.5% –

14.0

(5.5

Annuitization

rate

(guaranteed minimum annuity benefit)

0.0% –

100.0

(100.0

Total

264,106

Liabilities:

Derivative liabilities:

Options held/written and other

8,600

Discounted cash flows

Discount rate

12.0% –

34.0

(14.9

Appraisals/Broker quotes

—

Policy liabilities and Policy Account Balances:

Variable annuity and variable life insurance contracts

198,905

Discounted cash flows

Discount rate

(0.2)% –

0.7

(0.2

Mortality rate

0.0% –

100.0

(1.9

Lapse rate

1.5% –

30.0

(6.2

Annuitization rate

(guaranteed

minimum

annuity benefit)

0.0% –

100.0

(71.8

Total

207,537

March 31, 2023

Millions of
yen

Valuation technique(s)

Significant

unobservable inputs

Range

(Weighted average)

Fair value

Assets:

Loans held for sale

173,849

Discounted cash flows

Discount rate

8.0% –

10.0

(9.0

Available-for-sale

debt securities:

Japanese prefectural and foreign municipal bond securities

3,331

Appraisals/Broker quotes

—

Corporate debt securities

280

Discounted cash flows

Discount rate

0.4

(0.4

4,457

Appraisals/Broker quotes

—

Other asset-backed securities and debt securities

29,165

Discounted cash flows

Discount rate

0.2% –

51.2

(8.9

Probability of default

1.9

(1.9

206,369

Appraisals/Broker quotes

—

Equity securities:

Investment funds

120,744

Discounted cash flows

WACC

11.9% –

26.4

(17.2

EV/Terminal EBITDA multiple

7.5x-

12.0

(9.5

Market multiples

EV/Last twelve months EBITDA multiple

5.5x-

8.7

(7.9

EV/Forward EBITDA multiple

4.9x-

8.9

(7.6

EV/Precedent transaction last twelve months EBITDA multiple

7.5x-

14.5

(10.0

19,819

Appraisals/Broker quotes

—

Certain investment in affiliates

2,511

Discounted cash flows

Discount rate

8.0% –

12.0

(10.0

Derivative assets:

Options held/written and other

6,818

Discounted cash flows

Discount rate

12.0% –

32.0

(14.4

Other assets:

Reinsurance recoverables

4,676

Discounted cash flows

Discount rate

(0.4)% –

1.5

(0.4

Mortality rate

0.0% –

100.0

(2.6

Lapse rate

1.5% –

14.0

(5.0

Annuitization rate

(guaranteed minimum annuity benefit)

0.0% –

100.0

(100.0

Total

572,019

Liabilities:

Derivative liabilities:

Options held/written and other

14,603

Discounted cash flows

Discount rate

12.0% –

32.0

(14.4

Appraisals/Broker quotes

—

Policy liabilities and Policy Account Balances:

Variable annuity and variable life insurance contracts

163,734

Discounted cash flows

Discount rate

(0.4)% –

1.5

(0.4

Mortality rate

0.0% –

100.0

(2.1

Lapse rate

1.5% –

30.0

(5.9

Annuitization rate

(guaranteed minimum annuity benefit)

0.0% –

100.0

(68.8

Total

178,376

The following tables provide information about the valuation techniques and significant unobservable inputs used in the valuation of Level 3

assets measured at fair value on a nonrecurring basis during fiscal 2022 and 2023.


	2022
	Millions of yen		Valuation technique(s)	Significant unobservable inputs	Range (Weighted average)
	Fair value		Valuation technique(s)	Significant unobservable inputs	Range (Weighted average)
Assets:
Real estate collateral-dependent loans (net of allowance for credit losses)	¥	1,511	Direct capitalization	Capitalization rate	5.0% – 8.5%
					(6.1%)
		5,461	Appraisals	—	—
Investment in operating leases, property under facility operations, office facilities and other assets		32,328	Discounted cash flows	Discount rate	5.2%
					(5.2%)
		27,257	Appraisals	—	—
Certain investment in affiliates		2,846	Appraisals	—	—
Certain reporting units including goodwill		192	Discounted cash flows	Discount rate	10.7%
					(10.7%)
Certain intangible assets acquired in business combinations		98,014	Discounted cash flows	Discount rate	10.9%
					(10.9%)

	¥	167,609


	2023
	Millions of yen		Valuation technique(s)	Significant unobservable inputs	Range (Weighted average)
	Fair value		Valuation technique(s)	Significant unobservable inputs	Range (Weighted average)
Assets:
Real estate collateral-dependent loans (net of allowance for credit losses)	¥	1,351	Direct capitalization	Capitalization rate	4.7% – 6.6%
					(5.5%)
		4,619	Appraisals	—	—
Investment in operating leases, property under facility operations, office facilities and other assets		3,257	Discounted cash flows	Discount rate	0.5% – 5.8%
					(4.9%)
		1,280	Appraisals	—	—
Certain investment in affiliates		23	Discounted cash flows	Discount rate	3.7%
					(3.7%)
		403	Appraisals	—	—

	¥	10,933

The Company and its subsidiaries generally use discounted cash flow methodologies or similar internally developed models to determine the fair value of Level 3 assets and liabilities. Use of these techniques requires determination of relevant inputs and assumptions, some of which represent significant unobservable inputs as indicated in the preceding table. Accordingly, changes in these unobservable inputs may have a significant impact on the fair value.

Certain of these unobservable inputs will have a directionally consistent impact on the fair value of the asset or liability for a given change in that input. Alternatively, the fair value of the asset or liability may move in an opposite direction for a given change in another input. Where multiple inputs are used within the valuation technique of an asset or liability, a change in one input in a certain direction may be offset by an opposite change in another input having a potentially muted impact to the overall fair value of that particular asset or liability. Additionally, a change in one unobservable input may result in a change to another unobservable input (that is, changes in certain inputs are interrelated to one another), which may counteract or magnify the fair value impact.

Unobservable inputs are weighted by the relative fair value of the asset or liability.

For more analysis of the uncertainty of each input, see the description of the main valuation methodologies used for assets and liabilities measured at fair value.