Derivative Financial Instruments and Hedging

12 Months Ended

Mar. 31, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments and Hedging

27. 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 appropriately manage exchange rate risk by using means such as foreign currency-denominated loans, foreign exchange contracts and currency swaps to hedge exchange rate volatility in our business transactions in foreign currencies and overseas investments. 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, 2023 and 2024.

(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 ¥4,436 million, ¥1,438 million and

net

gain of ¥2,947 million during fiscal 2022, 2023 and 2024, respectively. The amount of net derivative losses, ¥3,815 million, included in other comprehensive income (loss), net of applicable income taxes at March 31, 2024 will be reclassified into earnings within fiscal 2025.

(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 equity method investments.

(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 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 equity method investments 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 “Income and Expenses Relating to 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 equity method investments 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

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 2023 (see Note 23 “Income and Expenses Relating to Life Insurance Operations”).

The effect of derivative instruments on the consolidated statements of income, pre-tax, for fiscal 2024 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
				Life insurance premiums and related investment income			Interest expense			Other (income) and expense
Interest rate swap agreements	¥	(5,090	)	¥	0		¥	(114	)	¥	0
Foreign exchange contracts		(57	)		0			0			0
Foreign currency swap agreements		2,733			0			2,521			(6,299	)
Options held/written and other		(1,092	)		(0	)		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	¥	(216	)	¥	0		¥	335	¥	0
Foreign exchange contracts		(61,917	)		(130	)		62,028		42

(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 equity method investments and liquidation losses, net			Interest expense
Foreign exchange contracts	¥	(41,341	)	¥	(87	)	¥	14,865
Borrowings and bonds in foreign currencies		(97,221	)		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		¥	4	¥	92
Futures		(3,046	)		0		1,073
Foreign exchange contracts		40,127			2,980		16,152
Credit derivatives held/written		0			0		(27	)
Options held/written and other		0			0		750

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 2024 (see Note 23 “Income and Expenses Relating to Life Insurance Operations”).

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 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

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, 2023 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	¥	470,204	¥	(1,107	)		—	¥	0	¥	0
Installment Loans		13,969		(1	)		—		0		0

The effect of the components excluded from the assessment of hedge effectiveness on the consolidated statements of income, pre-tax, for fiscal 2024 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	¥	(25,208	)	¥	31	¥	0
Options held/written and other		0			0		57


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	¥	489,908	¥	(1,088	)		—	¥	0	¥	0
Installment Loans		15,882		0			—		0		0

Notional amounts of derivative instruments and other, fair values of derivative instruments and other before offsetting at March 31, 2023 and 2024 are as follows.

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.

March 31, 2024


			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	¥	518,990	¥	18,889		Other Assets	¥	3,722		Other Liabilities
Options held/written and other		44,774		40		Other Assets		1,039		Other Liabilities
Futures, foreign exchange contracts		958,260		2,841		Other Assets		63,703		Other Liabilities
Foreign currency swap agreements		113,962		470		Other Assets		6,563		Other Liabilities
Foreign currency long-term debt		849,630		0		—		0		—
Derivatives not designated as hedging instruments:
Interest rate swap agreements	¥	1,930	¥	106		Other Assets	¥	6		Other Liabilities
Options held/written and other		468,422		15,309		Other Assets		13,355		Other Liabilities
Futures, foreign exchange contracts *		646,085		35,331		Other Assets		7,294		Other Liabilities
Credit derivatives written		1,000		0		—		4		Other Liabilities

The notional amounts of futures and foreign exchange contracts in the above table include futures contracts of ¥4,863 million and foreign exchange contracts of ¥524 million to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts at March 31, 2024, respectively. Derivative assets in the above table include fair value of the futures and foreign exchange contracts before offsetting of ¥0 million and ¥9 million and derivative liabilities include fair value of the futures and foreign exchange contracts before offsetting of ¥170 million and ¥94 million at March 31, 2024, 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 and 2024 are as follows.

March 31, 2023

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 reference 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.

March 31, 2024

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 reference company*

1,000

Less than

four years

)

*	Underlying reference company’s credit ratings are A1 or better rated by rating agencies as of March 31, 2024.