Derivative Financial Instruments and Hedging

12 Months Ended

Mar. 31, 2022

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

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

The Company and its subsidiaries have no derivative instruments with credit-risk-related contingent features as of March 31, 2021 and 2022.

(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 gains of ¥2,171 million, losses of ¥5,779 million and losses of ¥4,436 million during fiscal 2020, 2021 and 2022, respectively. The amount of net derivative losses, ¥137 million, included in other comprehensive income (loss), net of applicable income taxes at March 31, 2022 will be reclassified into earnings within fiscal 2023.

(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.

(c) Hedges of net investment in foreign operations

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

(d) Derivatives not designated as hedging instruments

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

The effect of derivative instruments on the consolidated statements of income, pre-tax, for fiscal 2020 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	¥	(11,506	)	¥	775		¥	0
Foreign exchange contracts		(241	)		(119	)		457
Foreign currency swap agreements		3,851			413			(4,349	)

(2) Fair value hedges

	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	¥	(19,805	)	¥	0		¥	18,955		¥	0
Foreign exchange contracts		3,656			(187	)		(3,294	)		244

(3) Hedges of net investment in foreign operations

	Millions of yen
	Gains (losses) recognized in other comprehensive income on derivative and others		Gains (losses) reclassified from other comprehensive income (loss) into income
			Gains on sales of subsidiaries and affiliates and liquidation losses, net		Interest expense		Write-downs of securities
Foreign exchange contracts	¥	15,273	¥	1,594	¥	4,595	¥	2,759
Borrowings and bonds in foreign currencies		13,489		0		0		0

(4) Derivatives not designated as hedging instruments

	Millions of yen
	Gains (losses) recognized in income on derivative
	Life insurance premiums and related investment income*		Interest expense		Other (income) and expense
Interest rate swap agreements	¥	0	¥	7	¥	159
Futures		1,257		0		(1,843	)
Foreign exchange contracts		204		4,803		(1,840	)
Credit derivatives held		0		0		(6	)
Options held/written and other		402		0		4,481

* Futures, foreign exchange contracts and options held/written and other in the above table include gains (losses) arising from futures, foreign exchange contracts and options held to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts for fiscal 2020 (see Note 24 “Life Insurance Operations”).

The effect of derivative instruments on the consolidated statements of income, pre-tax, for fiscal 2021 is as follows.

(1) Cash flow hedges

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

(2) Fair value hedges

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

(3) Hedges of net investment in foreign operations

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

(4) Derivatives not designated as hedging instruments

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

* Futures, foreign exchange contracts and options held/written and other in the above table include gains (losses) arising from futures, foreign exchange contracts and options held to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts for fiscal 2021 (see Note 24 “Life Insurance Operations”).

The effect of derivative instruments on the consolidated statements of income, pre-tax, for fiscal 2022 is as follows.

(1) Cash flow hedges

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

(2) Fair value hedges

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

(3) Hedges of net investment in foreign operations

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

(4) Derivatives not designated as hedging instruments

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

* Futures and foreign exchange contracts in the above table include gains (losses) arising from futures and foreign exchange contracts held to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts for fiscal 2022 (see Note 24 “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 2020 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) andexpense
Foreign exchange contracts	¥	(3,020	)	¥	3	¥	0
Options held/written and other		0			0		29

The effect of the components excluded from the assessment of hedge effectiveness on the consolidated statements of income, pre-tax, for fiscal 2021 is as follows.

Fair value hedges

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

The 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 at March 31, 2021 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	¥	314,248	¥	12,764		—	¥	0	¥	0
Installment Loans		17,942		43		—		0		0

The effect of the components excluded from the assessment of hedge effectiveness on the consolidated statements of income, pre-tax, for fiscal 2022 is as follows.

Fair value hedges

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

The carrying amount of hedged assets and liabilities recognized in balance sheets in fair value hedges and the cumulative amount of fair value hedging adjustments included in the carrying amount at March 31, 2022 is as follows.

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

Notional amounts of derivative instruments and other, fair values of derivative instruments and other before offsetting at March 31, 2021 and 2022 are as follows.

March 31, 2021

			Derivative assets				Derivative liabilities
	Notional amount		Fair value		Consolidated balance sheets location		Fair value		Consolidated balance sheets location
	Millions of yen		Millions of yen				Millions of yen
Derivatives designated as hedging instruments and other:
Interest rate swap agreements	¥	531,971	¥	1,867		Other Assets	¥	23,751		Other Liabilities
Options held/written and other		840		26		Other Assets		0		—
Futures, foreign exchange contracts		657,411		437		Other Assets		18,941		Other Liabilities
Foreign currency swap agreements		76,023		146		Other Assets		4,459		Other Liabilities
Foreign currency long-term debt		582,174		0		—		0		—
Derivatives not designated as hedging instruments:
Interest rate swap agreements	¥	6,409	¥	0		—	¥	67		Other Liabilities
Options held/written and other		746,058		19,478		Other Assets		17,009		Other Liabilities
Futures, foreign exchange contracts*		320,908		742		Other Assets		6,798		Other Liabilities
Credit derivatives held		171		0		—		9		Other Liabilities

* The notional amounts of futures and foreign exchange contracts in the above table include futures contracts of ¥19,127 million and foreign exchange contracts of ¥7,245 million to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts at March 31, 2021, respectively. Derivative assets in the above table include fair value of the futures and foreign exchange contracts before offsetting of ¥41 million and ¥24 million and derivative liabilities include fair value of the futures and foreign exchange contracts before offsetting of ¥438 million and ¥302 million at March 31, 2021, respectively.

March 31, 2022

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

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