March 31, 2020


	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	¥	90,893		¥	0	¥	90,893	¥	0
Trading debt securities		7,431			0		7,431		0
Available-for-sale debt securities:		1,631,185			21,490		1,521,342		88,353
Japanese and foreign government bond securities*2		653,945			3,301		650,644		0
Japanese prefectural and foreign municipal bond securities		250,355			0		247,523		2,832
Corporate debt securities*3		596,477			18,189		574,294		3,994
CMBS and RMBS in the Americas		48,672			0		48,672		0
Other asset-backed securities and debt securities		81,736			0		209		81,527
Equity securities45		375,174			58,400		232,873		83,901
Derivative assets:		39,690			202		20,258		19,230
Options held/written and other		21,346			0		2,116		19,230
Futures, foreign exchange contracts		13,265			202		13,063		0
Foreign currency swap agreements		5,079			0		5,079		0
Netting*6		(9,152	)		0		0		0
Net derivative assets		30,538			0		0		0
Other assets:		18,206			0		0		18,206
Reinsurance recoverables*7		18,206			0		0		18,206

Total	¥	2,162,579		¥	80,092	¥	1,872,797	¥	209,690

Liabilities:
Derivative liabilities:	¥	73,649		¥	2,471	¥	71,178	¥	0
Interest rate swap agreements		44,002			0		44,002		0
Options held/written and other		20,004			0		20,004		0
Futures, foreign exchange contracts		9,506			2,471		7,035		0
Foreign currency swap agreements		137			0		137		0
Netting*6		(9,152	)		0		0		0
Net derivative Liabilities		64,497			0		0		0
Policy Liabilities and Policy Account Balances:		300,739			0		0		300,739
Variable annuity and variable life insurance contracts*8		300,739			0		0		300,739

Total	¥	374,388		¥	2,471	¥	71,178	¥	300,739

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 a loss of

663 million, gains of ¥401 million and ¥5,220

million from the change in the fair value of the loans for fiscal 2018, 2019 and 2020,

respectively. No gains or losses were recognized in earnings during fiscal 2018, 2019 and 2020 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, 2019, were ¥37,865 million and ¥38,671 million, respectively, and the amount of the aggregate fair value exceeded the amount of aggregate unpaid principal balance by ¥806 million. The amounts of aggregate unpaid principal balance and aggregate fair value of the loans held for sale as of March 31, 2020, were ¥84,906 million and ¥90,893 million, respectively, and the amount of the aggregate fair value exceeded the amount of aggregate unpaid principal balance by ¥5,987 million. As of March 31, 2019 and 2020, 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 losses of ¥12 million, ¥19 million and ¥8 million from the change in the fair value of those investments for fiscal 2018, 2019 and 2020, respectively. The amounts of aggregate fair value elected the fair value option were ¥420 million and ¥780 million as of March 31, 2019 and 2020, respectively.

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 loss of ¥181 million, gains of ¥784 million and ¥210 million from the change in the fair value of those investments for fiscal 2018, 2019 and 2020, respectively. The amounts of aggregate fair value elected the fair value option were ¥21,136 million and ¥18,189 million as of March 31, 2019 and 2020, respectively.

Certain subsidiaries elected the fair value option for certain investments in investment funds included in equity securities. Included in “Gains on investment securities and dividends” in the consolidated statements of income were gains of ¥1,456 million, ¥1,141 million and ¥1,225 million from the change in the fair value of those investments for fiscal 2018, 2019 and 2020, respectively. The amounts of aggregate fair value elected the fair value option were ¥5,811 million and ¥6,326 million as of March 31, 2019 and 2020, respectively.

*5	The amounts of investment funds measured at net asset value per share which are not included in the above tables were ¥12,100 million and ¥11,631 million as of March 31, 2019 and 2020, respectively.

*6	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 ¥12,449 million and ¥18,206 million as of March 31, 2019 and 2020, respectively. For the effect of changes in the fair value of those reinsurance contracts on earnings for fiscal 2018, 2019 and 2020, see Note 26 “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 ¥360,198 million and ¥300,739 million as of March 31, 2019 and 2020, respectively. For the effect of changes in the fair value of the variable annuity and variable life insurance contracts on earnings for fiscal 2018, 2019 and 2020, see Note 26 “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 2018, 2019 and 2020:

2018


	Millions of yen
	Balance at April 1, 2017		Gains or losses (realized/unrealized)									Purchases*3		Sales			Settlements*4			Transfers in and/ or out of Level 3 (net)		Balance at March 31, 2018		Change in unrealized gains or losses included in earnings for assets and liabilities still held at March 31, 2018*1
	Balance at April 1, 2017		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, 2018

Available-for-sale securities	¥	124,516	¥	3,690		¥	(5,717	)	¥	(2,027	)	¥	79,925	¥	(37,942	)	¥	(43,555	)	¥	0	¥	120,917	¥	(35	)
Corporate debt securities		1,618		0			2			2			2,050		0			(633	)		0		3,037		0
CMBS and RMBS in the Americas		57,858		1,664			(3,248	)		(1,584	)		1,858		(3,347	)		(18,775	)		0		36,010		(97	)
Other asset-backed securities and debt securities		65,040		2,026			(2,471	)		(445	)		76,017		(34,595	)		(24,147	)		0		81,870		62
Other securities		27,801		4,169			(1,976	)		2,193			26,991		(19,106	)		0			0		37,879		4,274
Investment funds		27,801		4,169			(1,976	)		2,193			26,991		(19,106	)		0			0		37,879		4,274
Derivative assets and liabilities (net)		5,233		(3,356	)		0			(3,356	)		2,024		0			(1,610	)		0		2,291		(3,356	)
Options held/written and other		5,233		(3,356	)		0			(3,356	)		2,024		0			(1,610	)		0		2,291		(3,356	)
Other asset		22,116		(11,191	)		0			(11,191	)		5,385		0			(1,302	)		0		15,008		(11,191	)
Reinsurance recoverables*5		22,116		(11,191	)		0			(11,191	)		5,385		0			(1,302	)		0		15,008		(11,191	)
Policy Liabilities and Policy Account Balances		605,520		(19,265	)		0			(19,265	)		0		0			(180,775	)		0		444,010		(19,265	)
Variable annuity and variable life insurance contracts*6		605,520		(19,265	)		0			(19,265	)		0		0			(180,775	)		0		444,010		(19,265	)

Principally, gains and losses from available-for-sale securities are included in “Gains on investment securities and dividends”, “Write-downs of securities” or “Life insurance premiums and related investment income”; other securities are included in “Gains on investment securities and dividends” and derivative assets and liabilities (net) are included in “Other (income) and expense” respectively. Additionally, for available-for-sale securities, amortization of interest recognized in finance revenues is included in these columns.

Unrealized gains and losses from available-for-sale securities are included in “Net change of unrealized gains (losses) on investment in securities” and “Net change of foreign currency translation adjustments.” Additionally, unrealized gains and losses from other securities are included mainly in “Net change of foreign currency translation 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.


	Millions of yen
	Balance at April 1, 2018		Gains or losses (realized/unrealized)								Purchases*3		Sales			Settlements*4			Transfers in and/ or out of Level 3 (net)			Balance at March 31, 2019		Change in unrealized gains or losses included in earnings for assets and liabilities still held at March 31, 2019*1
	Balance at April 1, 2018		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, 2019

Available-for-sale debt securities	¥	120,917	¥	1,912		¥	2,020	¥	3,932		¥	44,163	¥	(23,241	)	¥	(27,221	)	¥	(18,103	)	¥	100,447	¥	268
Japanese prefectural and foreign municipal bond securities		0		(553	)		136		(417	)		0		0			0			3,305			2,888		0
Corporate debt securities		3,037		0			4		4			3,100		0			(981	)		1,998			7,158		0
CMBS and RMBS in the Americas		36,010		1,034			546		1,580			1,304		(6,711	)		(8,777	)		(23,406	)		0		0
Other asset-backed securities and debt securities		81,870		1,431			1,334		2,765			39,759		(16,530	)		(17,463	)		0			90,401		268
Equity securities		37,879		4,443			578		5,021			37,871		(1,080	)		(18,498	)		0			61,193		4,192
Investment funds		37,879		4,443			578		5,021			37,871		(1,080	)		(18,498	)		0			61,193		4,192
Derivative assets and liabilities (net)		2,291		2,981			0		2,981			0		0			0			0			5,272		2,981
Options held/written and other		2,291		2,981			0		2,981			0		0			0			0			5,272		2,981
Other asset		15,008		(5,483	)		0		(5,483	)		3,572		0			(648	)		0			12,449		(5,483	)
Reinsurance recoverables*5		15,008		(5,483	)		0		(5,483	)		3,572		0			(648	)		0			12,449		(5,483	)
Policy Liabilities and Policy Account Balances		444,010		7,874			321		8,195			0		0			(75,617	)		0			360,198		7,874
Variable annuity and variable life insurance contracts*6		444,010		7,874			321		8,195			0		0			(75,617	)		0			360,198		7,874


	Millions of yen
																								Change in unrealized gains or losses included in earnings for assets and liabilities still held at March 31, 2020*1
	Balance at April 1, 2019		Gains or losses (realized/unrealized)								Purchases*3		Sales			Settlements*4			Transfers in and/ or out of Level 3 (net)			Balance at March 31, 2020
	Balance at April 1, 2019		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, 2020
Available-for-sale debt securities	¥	100,447	¥	1,291	¥	(13,721	)	¥	(12,430	)	¥	41,270	¥	(3,925	)	¥	(34,018	)	¥	(2,991	)	¥	88,353	¥	131
Japanese prefectural and foreign municipal bond securities		2,888		0		(56	)		(56	)		0		0			0			0			2,832		0
Corporate debt securities		7,158		0		(8	)		(8	)		900		0			(1,065	)		(2,991	)		3,994		0
Other asset-backed securities and debt securities		90,401		1,291		(13,657	)		(12,366	)		40,370		(3,925	)		(32,953	)		0			81,527		131
Equity securities		61,193		8,197		(1,641	)		6,556			31,725		(10,108	)		(5,465	)		0			83,901		8,033
Investment funds		61,193		8,197		(1,641	)		6,556			31,725		(10,108	)		(5,465	)		0			83,901		8,033
Derivative assets and liabilities (net)		5,272		10,402		(192	)		10,210			3,748		0			0			0			19,230		10,402
Options held/written and other		5,272		10,402		(192	)		10,210			3,748		0			0			0			19,230		10,402
Other asset		12,449		2,937		0			2,937			3,053		0			(233	)		0			18,206		2,937
Reinsurance recoverables*5		12,449		2,937		0			2,937			3,053		0			(233	)		0			18,206		2,937
Policy Liabilities and Policy Account Balances		360,198		4,802		1,215			6,017			0		0			(53,442	)		0			300,739		4,802
Variable annuity and variable life insurance contracts*6		360,198		4,802		1,215			6,017			0		0			(53,442	)		0			300,739		4,802

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 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.”

There were no transfers in or out of Level 3 in fiscal 2018.

In fiscal 2019, Japanese prefectural and foreign municipal bond securities totaling ¥3,305 million were transferred from Level 2 to Level 3, since the valuation techniques to measure fair value of a certain foreign municipal bond security has been changed to discounted cash flows methodologies using unobservable inputs. The change of the valuation techniques is due to judgement that the Company and its subsidiaries cannot rely on price quotations from independent pricing service vendors and brokers considering deterioration of estimated cash flows from the security. In addition, CMBS and RMBS in Americas totaling ¥23,406 million were transferred from Level 3 to Level 2, since the inputs such as trading price and/or bid price became observable due to the market returning to active. In fiscal 2020, corporate debt securities totaling ¥2,991 million were transferred from Level 3 to Level 2, since the inputs became observable.

The following tables present recorded amounts of assets measured at fair value on a nonrecurring basis during

cal

2019 and 2020. These assets are measured at fair value on a nonrecurring basis mainly to recognize impairment:

2019


	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	¥	3,839	¥	0	¥	3,839	¥	0
Real estate collateral-dependent loans (net of allowance for probable loan losses)		6,630		0		0		6,630
Investment in operating leases and property under facility operations		12,901		0		0		12,901
Certain investments in affiliates		2,897		0		0		2,897

	¥	26,267	¥	0	¥	3,839	¥	22,428

2020
	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	¥	4,823	¥	0	¥	0	¥	4,823
Real estate collateral-dependent loans (net of allowance for probable loan losses)		12,557		0		0		12,557
Investment in operating leases and property under facility operations		5,731		0		1,193		4,538
Certain investments in affiliates		11,213		8,741		0		2,472

	¥	34,324	¥	8,741	¥	1,193	¥	24,390

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 valuation allowance 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 impaired loans determined using a present value technique is not considered a fair value measurement. However, measurement for impaired loans 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 and property under facility operations 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 and property under facility operations 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 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 the 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

measurement is based on the combination of discounted cash flow methodologies and market multiple valuation methods, and 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.

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.

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, 2019 and 2020.

March 31, 2019

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

2,888

Discounted cash flows

Discount rate

8.5%

(8.5%)

Corporate debt securities

2,162

Discounted cash flows

Discount rate

0.1% – 1.3%

(0.8%)

4,996

Appraisals/Broker quotes

—

Other asset-backed securities and debt securities

23,651

Discounted cash flows

Discount rate

0.2% – 51.2%

(8.3%)

Probability of default

0.6% – 1.6%

(0.8%)

66,750

Appraisals/Broker quotes

—

Equity securities:

Investment funds

6,012

Internal cash flows

Discount rate

0.0% – 65.0%

(11.3%)

32,702

Discounted cash flows

Discount rate

3.8% – 17.0%

(14.1%)

22,479

Appraisals/Broker quotes

—

Derivative assets:

Options held/written and other

5,005

Discounted cash flows

Discount rate

0.0% – 15.0%

(8.6%)

267

Appraisals/Broker quotes

—

Other assets:

Reinsurance recoverables

12,449

Discounted cash flows

Discount rate

(0.1)% – 0.4%

(0.1%)

Mortality rate

0.0% – 100.0%

(1.3%)

Lapse rate

1.5% – 24.0%

(16.2%)

Annuitization rate

(guaranteed minimum annuity benefit)

0.0% – 100.0%

(99.9%)

Total

179,361

Liabilities:

Policy liabilities and Policy Account Balances:

Variable annuity and variable life insurance contracts

360,198

Discounted cash flows

Discount rate

(0.1)% – 0.4%

(0.1%)

Mortality rate

0.0% – 100.0%

(1.3%)

Lapse rate

1.5% – 54.0%

(16.0%)

Annuitization rate

(guaranteed minimum annuity benefit)

0.0% – 100.0%

(80.3%)

Total

360,198

March 31, 2020

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

2,832

Discounted cash flows

Discount rate

8.5%

(8.5%)

Corporate debt securities

1,995

Discounted cash flows

Discount rate

0.4% – 2.5%

(0.8%)

1,999

Appraisals/Broker quotes

—

Other asset-backed securities and debt securities

20,582

Discounted cash flows

Discount rate

1.0% – 51.2%

(12.1%)

Probability of default

1.9%

(1.9%)

60,945

Appraisals/Broker quotes

—

Equity securities:

Investment funds

5,714

Internal cash flows

Discount rate

0.0%

(0.0%)

54,898

Discounted cash flows

WACC

7.6% – 19.1%

(16.5%)

EV/Terminal EBITDA multiple

7.0x – 11.9x

(

9.3x

)

Market multiples

EV/Last twelve months EBITDA

multiple

7.5x – 11.8x

(

9.4x

)

EV/Forward EBITDA

multiple

6.5x – 10.3x

(8.4x)

EV/Precedent transaction last twelve months EBITDA multiple

7.5x – 12.1x

(9.5x)

23,289

Appraisals/Broker quotes

—

Derivative assets:

Options held/written and other

19,170

Discounted cash flows

Discount rate

12.0% – 33.0%

(14.4%)

Appraisals/Broker quotes

—

Other assets:

Reinsurance recoverables

18,206

Discounted cash flows

Discount rate

(0.2)% – 0.6%

(0.2%)

Mortality rate

0.0% – 100.0%

(1.4%)

Lapse rate

1.5% – 14.0%

(7.1%)

Annuitization rate

(guaranteed minimum annuity benefit)

0.0% – 100.0%

(100.0%)

Total

209,690

Liabilities:

Policy liabilities and Policy Account Balances:

Variable annuity and variable life insurance contracts

300,739

Discounted cash flows

Discount rate

(0.2)% – 0.6%

(0.2%)

Mortality rate

0.0% – 100.0%

(1.3%)

Lapse rate

1.5% – 30.0%

(6.9%)

Annuitization rate

(guaranteed minimum annuity benefit)

0.0% – 100.0%

(80.9%)

Total

¥300,739

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 2019 and 2020.


	2019
	Millions of yen				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 probable loan losses)	¥	6,630		Direct capitalization		Capitalization rate		5.8% – 8.2%
								((6.3%)
				Appraisals		—		—
Investment in operating leases and property under facility operations		2,345		Discounted cash flows		Discount rate		7.3%
								((7.3%)
		10,556		Appraisals		—		—
Certain investments in affiliates		334		Business enterprise value multiples		—		—
				Discounted cash flows		Discount rate		14.0%
								((14.0%)
		2,563		Appraisals		—		—

	¥	22,428


	2020
	Millions of yen				Significant unobservable inputs		Range (Weighted average)
	Fair value		Valuation technique(s)		Significant unobservable inputs		Range (Weighted average)
Assets:
Loans held for sale	¥	4,823		Discounted cash flows		Discount rate		5.7% – 7.7%
								(6.8)%
Real estate collateral-dependent loans (net of allowance for probable loan losses)		12,557		Direct capitalization		Capitalization rate		5.6% – 7.0%
								((6.0%)
				Appraisals		—		—
Investment in operating leases and property under facility operations		302		Direct capitalization		Capitalization rate		4.3%
								(4.3)%
				Discounted cash flows		Discount rate		4.1%
								(4.1)%
		4,236		Appraisals		—		—
Certain investments in affiliates		359		Discounted cash flows		WACC		14.0%
								(14.0%)
				Market multiples		EV/Precedent transaction last twelve months EBITDA multiple		7.0x (7.0x)
						EV/Precedent transaction three year average EBITDA multiple		7.0x (7.0x)
		2,113		Appraisals		—		—

	¥	24,390

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.

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