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Fair Value Measurements

6 Months Ended

Sep. 30, 2024

3.	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, derivatives, certain reinsurance recoverables, variable annuity and variable life insurance contracts, and certain accounts payable at fair value on a recurring basis.

The presentation of equity method investment has been changed since fiscal 2024. The amounts of fair value measurements in the previous years have been retrospectively reclassified for this change.

The following tables present recorded amounts of major financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2024 and September 30, 2024:

March 31, 2024


	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	¥	129,959		¥	0	¥	33,393	¥	96,566
Available-for-sale debt securities:		2,665,478			11,491		2,334,690		319,297
Japanese and foreign government bond securities*2		1,034,914			4,303		1,030,611		0
Japanese prefectural and foreign municipal bond securities		401,465			0		390,543		10,922
Corporate debt securities*3		844,579			7,188		831,805		5,586
CMBS and RMBS in the Americas		87,740			0		80,575		7,165
Other asset-backed securities and debt securities		296,780			0		1,156		295,624
Equity securities45		415,607			108,964		143,786		162,857
Derivative assets:		72,986			52		66,433		6,501
Interest rate swap agreements		18,995			0		18,995		0
Options held/written and other		15,349			0		8,848		6,501
Futures, foreign exchange contracts		38,172			52		38,120		0
Foreign currency swap agreements		470			0		470		0
Netting*6		(47,496	)		0		0		0
Net derivative assets		25,490			0		0		0
Other assets:		2,786			0		0		2,786
Reinsurance recoverables*7		2,786			0		0		2,786

Total	¥	3,286,816		¥	120,507	¥	2,578,302	¥	588,007

Liabilities:
Derivative liabilities:	¥	95,686		¥	607	¥	90,862	¥	4,217
Interest rate swap agreements		3,728			0		3,728		0
Options held/written and other		14,394			0		10,177		4,217
Futures, foreign exchange contracts		70,997			607		70,390		0
Foreign currency swap agreements		6,563			0		6,563		0
Credit derivatives written		4			0		4		0
Netting*6		(47,496	)		0		0		0
Net derivative Liabilities		48,190			0		0		0
Policy Liabilities and Policy Account Balances:		167,207			0		0		167,207
Variable annuity and variable life insurance contracts*8		167,207			0		0		167,207

Accounts Payable		14,136			0		0		14,136

Contingent Consideration		14,136			0		0		14,136

Total	¥	277,029		¥	607	¥	90,862	¥	185,560

September 30, 2024


	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	¥	130,873		¥	0	¥	47,823	¥	83,050
Available-for-sale debt securities:		2,601,080			12,328		2,352,451		236,301
Japanese and foreign government bond securities*2		1,086,796			7,862		1,078,934		0
Japanese prefectural and foreign municipal bond securities		411,845			0		401,469		10,376
Corporate debt securities*3		799,148			4,466		789,305		5,377
CMBS and RMBS in the Americas		86,466			0		79,704		6,762
Other asset-backed securities and debt securities		216,825			0		3,039		213,786
Equity securities45		399,999			105,116		129,231		165,652
Derivative assets:		63,075			78		53,432		9,565
Interest rate swap agreements		14,184			0		14,184		0
Options held/written and other		13,601			0		4,036		9,565
Futures, foreign exchange contracts		33,080			78		33,002		0
Foreign currency swap agreements		2,210			0		2,210		0
Netting*6		(29,924	)		0		0		0
Net derivative assets		33,151			0		0		0
Other assets:		2,859			0		0		2,859
Reinsurance recoverables*7		2,859			0		0		2,859

Total	¥	3,197,886		¥	117,522	¥	2,582,937	¥	497,427

Liabilities:
Derivative liabilities:	¥	85,690		¥	892	¥	83,900	¥	898
Interest rate swap agreements		3,496			0		3,496		0
Options held/written and other		14,351			0		13,453		898
Futures, foreign exchange contracts		66,432			892		65,540		0
Foreign currency swap agreements		1,407			0		1,407		0
Credit derivatives written		4			0		4		0
Netting*6		(29,924	)		0		0		0
Net derivative Liabilities		55,766			0		0		0
Policy Liabilities and Policy Account Balances:		151,331			0		0		151,331
Variable annuity and variable life insurance contracts*8		151,331			0		0		151,331
Accounts Payable		14,174			0		0		14,174
Contingent Consideration		14,174			0		0		14,174

Total	¥	251,195		¥	892	¥	83,900	¥	166,403

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 gain of ¥353

million and ¥

451 million from the change in the fair value of the loans for the six months ended September 30, 2023 and 2024, respectively. No gains or losses were recognized in earnings during the six months ended September 30, 2023 and 2024 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, 2024, were ¥130,554 million and ¥129,959 million, respectively, and the amount of the aggregate fair value was less than the amount of aggregate unpaid principal balance by ¥595 million. The amounts of aggregate unpaid principal balance and aggregate fair value of the loans held for sale as of September 30, 2024, were ¥130,663 million and ¥130,873

million, respectively, and the amount of the aggregate fair value was more than the amount of aggregate unpaid principal balance by ¥

210 million. There were no loans that are 90 days or more past due or, in

non-accrual

status as of March 31, 2024. The amounts of aggregate unpaid principal balance and aggregate fair value of loans that are 90 days or more past due or, in non-accrual status as of September 30, 2024, were ¥13,151 million and ¥12,903 million, respectively, and the amount of the aggregate fair value was less than the amount of aggregate unpaid principal balance by ¥248 million.

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 ¥7

million and gains of ¥

41 million from the change in the fair value of those investments for the six months ended September 30, 2023 and 2024, respectively. The amounts of aggregate fair value elected the fair value option were ¥1,000 million and ¥6,795 million as of March 31, 2024 and September 30, 2024, 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 losses of ¥48

million and gains of ¥

415 million from the change in the fair value of those investments for the six months ended September 30, 2023 and 2024, respectively. The amounts of aggregate fair value elected the fair value option were ¥7,751 million and ¥9,996 million as of March 31, 2024 and September 30, 2024, 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” and “Life insurance premiums and related investment income” in the consolidated statements of income were gains of ¥819 million and ¥1,799 million from the change in the fair value of those investments for the six months ended September 30, 2023 and 2024, respectively. The amounts of aggregate fair value elected the fair value option were ¥26,945 million and ¥25,618 million as of March 31, 2024 and September 30, 2024, respectively.

*5	The amounts of investment funds measured at net asset value per share which are not included in the above tables were ¥85,280 million and ¥95,317 million as of March 31, 2024 and September 30, 2024, 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 ¥2,786 million and ¥2,859

million as of March 31, 2024 and September 30, 2024, respectively. For the effect of changes in the fair value of those reinsurance contracts on earnings during the six months ended September 30, 2023 and 2024, see Note 17 “Income and Expenses Relating to 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 ¥167,207 million and ¥151,331

million as of March 31, 2024 and September 30, 2024, respectively. For the effect of changes in the fair value of the variable annuity and variable life insurance contracts on earnings during the six months ended September 30, 2023 and 2024, see Note 17 “Income and Expenses Relating to 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) for the six months ended September 30, 2023 and 2024:

Six months ended September 30, 2023


	Millions of yen
	Balance at April 1, 2023			Gains or losses (realized/unrealized)									Purchases*3		Sales			Settlements*4			Transfers in and/ or out of Level 3 (net)		Balance at September 30, 2023			Change in unrealized gains or losses included in earnings for assets and liabilities still held at September 30, 2023*1			Change in unrealized gains or losses included in other comprehensive income for assets and liabilities still held at September 30, 2023*2
	Balance at April 1, 2023			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 September 30, 2023
Loans held for sale	¥	173,849		¥	339		¥	18,249		¥	18,588		¥	3,132	¥	(58,350	)	¥	(9,830	)	¥	0	¥	127,389		¥	140		¥	18,249
Available-for-sale debt securities		243,602			12,527			13,684			26,211			21,976		(3,651	)		(7,256	)		1,273		282,155			11,956			14,095
Japanese prefectural and foreign municipal bond securities		3,331			(80	)		501			421			0		0			0			1,273		5,025			(80	)		472
Corporate debt securities		4,737			719			(0	)		719			14		0			(70	)		0		5,400			539			(0	)
CMBS and RMBS in the Americas		0			0			196			196			6,879		0			0			0		7,075			0			0
Other asset-backed securities and debt securities		235,534			11,888			12,987			24,875			15,083		(3,651	)		(7,186	)		0		264,655			11,497			13,623
Equity securities		143,074			2,383			17,399			19,782			3,342		(401	)		(663	)		0		165,134			2,175			17,400
Investment funds		143,074			2,383			17,399			19,782			3,342		(401	)		(663	)		0		165,134			2,175			17,400
Derivative assets and liabilities (net)		(7,824	)		4,229			(619	)		3,610			0		0			0			0		(4,214	)		4,229			(619	)
Options held/written and other		(7,824	)		4,229			(619	)		3,610			0		0			0			0		(4,214	)		4,229			(619	)
Other asset		4,676			(1,409	)		0			(1,409	)		500		0			(97	)		0		3,670			(1,409	)		0
Reinsurance recoverables*5		4,676			(1,409	)		0			(1,409	)		500		0			(97	)		0		3,670			(1,409	)		0
Policy Liabilities and Policy Account Balances		163,734			(10,121	)		(170	)		(10,291	)		0		0			(13,848	)		0		160,177			(10,121	)		(170	)
Variable annuity and variable life insurance contracts*6		163,734			(10,121	)		(170	)		(10,291	)		0		0			(13,848	)		0		160,177			(10,121	)		(170	)

Six months ended September 30, 2024


	Millions of yen
	Balance at April 1, 2024		Gains or losses (realized/unrealized)									Purchases*3		Sales			Settlements*4			Transfers in and/ or out of Level 3 (net)		Balance at September 30, 2024		Change in unrealized gains or losses included in earnings for assets and liabilities still held at September 30, 2024*1			Change in unrealized gains or losses included in other comprehensive income for assets and liabilities still held at September 30, 2024*2
	Balance at April 1, 2024		Included in earnings *1			Included in other comprehensive incom e*2			Total			Purchases*3		Sales			Settlements*4			Transfers in and/ or out of Level 3 (net)		Balance at September 30, 2024
Loans held for sale	¥	96,566	¥	(222	)	¥	(4,910	)	¥	(5,132	)	¥	453	¥	0		¥	(8,837	)	¥	0	¥	83,050	¥	56		¥	(4,910	)
Available-for-sale debt securities		319,297		(3,251	)		(6,019	)		(9,270	)		65,240		(50,630	)		(88,336	)		0		236,301		(3,649	)		25,351
Japanese prefectural and foreign municipal bond securities		10,922		(61	)		(476	)		(537	)		0		0			(9	)		0		10,376		(61	)		(476	)
Corporate debt securities		5,586		(124	)		(15	)		(139	)		0		0			(70	)		0		5,377		(325	)		(15	)
CMBS and RMBS in the Americas		7,165		0			(403	)		(403	)		0		0			0			0		6,762		0			(403	)
Other asset-backed securities and debt securities		295,624		(3,066	)		(5,125	)		(8,191	)		65,240		(50,630	)		(88,257	)		0		213,786		(3,263	)		26,245
Equity securities		162,857		(4,902	)		(9,831	)		(14,733	)		19,451		0			(1,923	)		0		165,652		(4,956	)		(9,834	)
Investment funds		162,857		(4,902	)		(9,831	)		(14,733	)		19,451		0			(1,923	)		0		165,652		(4,956	)		(9,834	)
Derivative assets and liabilities (net)		2,284		6,921			(538	)		6,383			0		0			0			0		8,667		6,921			(538	)
Options held/written and other		2,284		6,921			(538	)		6,383			0		0			0			0		8,667		6,921			(538	)
Other asset		2,786		(365	)		0			(365	)		476		0			(38	)		0		2,859		(365	)		0
Reinsurance recoverables*5		2,786		(365	)		0			(365	)		476		0			(38	)		0		2,859		(365	)		0
Policy Liabilities and Policy Account Balances		167,207		4,141			(104	)		4,037			0		0			(11,839	)		0		151,331		4,141			(104	)
Variable annuity and variable life insurance contracts*6		167,207		4,141			(104	)		4,037			0		0			(11,839	)		0		151,331		4,141			(104	)
Accounts Payable:		14,136		(382	)		344			(38	)		0		0			0			0		14,174		(382	)		344
Contingent Consideration		14,136		(382	)		344			(38	)		0		0			0			0		14,174		(382	)		344

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 loans held for sale are included in “Net change of foreign currency translation adjustments”, 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”, unrealized gains and losses from accounts payable are included 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. For a reconciliation of the total amount of policyholder account balances and the balances of market risk benefits related to variable annuity and variable life insurance contracts during year ended March 31, 2024 and for the six months ended September 30, 2024, see Note 18 “Long-Durations Insurance Contracts Relating to Life Insurance Operations.”

In the six months ended September 30, 2023, foreign municipal bond securities totaling ¥1,273 million were transferred from level 2 to level 3, since the inputs became unobservable. In the six months ended September 30, 2024, there were no transfers in or out of Level 3.

The following tables present recorded amounts of assets measured at fair value on a nonrecurring basis during year ended March 31, 2024 and the six months ended September 30, 2024. These assets are measured at fair value on a nonrecurring basis mainly to recognize impairment:

Year ended March 31, 2024


	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	¥	1,706	¥	0	¥	1,706	¥	0
Real estate collateral-dependent loans (net of allowance for credit losses)		5,535		0		261		5,274
Investment in operating leases and property under facility operations		1,205		0		0		1,205
Certain equity securities		18,484		0		18,484		0
Certain equity method investments		461		0		0		461

	¥	27,391	¥	0	¥	20,451	¥	6,940

Six months ended September 30, 2024
	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	¥	1,106	¥	0	¥	1,106	¥	0
Real estate collateral-dependent loans (net of allowance for credit losses)		2,908		0		0		2,908
Investment in operating leases and property under facility operations		169		0		0		169
Certain equity securities		11,664		0		11,664		0
Certain equity method investments		1,285		0		0		1,285

	¥	17,132	¥	0	¥	12,770	¥	4,362

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.

Real estate collateral-dependent loans owned by a certain subsidiary are classified as Level 2, because fair value measurement is based on observable market prices.

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

The Company and its subsidiaries classified CMBS and RMBS in the Americas and other asset-backed securities and debt 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 and debt 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 and debt 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 and debt securities.

Equity securities and equity method investments

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. In addition, a certain Americas subsidiary 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 equity method investments 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 discounted cash flow methodologies, discounting to net asset value based on inputs that are unobservable in the market, or broker quotes.

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.

Accounts payable (Contingent consideration)

A certain subsidiary records a part of consideration for acquiring noncontrolling interests of its subsidiary as accounts payable (contingent consideration), and it is classified as level 3 because fair value measurement is based on discounted cash flow methodologies.

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, 2024 and September 30, 2024.


	March 31, 2024
	Millions of yen
	Fair value		Valuation technique(s)	Significant unobservable inputs	Range (Weighted average)
Assets:
Loans held for sale	¥	96,566	Discounted cash flows	Discount rate	7.7% – 13.0% (10.0%)
Available-for-sale debt securities:
Japanese prefectural and foreign municipal bond securities		7,145	Discounted cash flows	Discount rate	4.9% – 10.5% (5.8%)
		3,777	Appraisals/Broker quotes	—	—
Corporate debt securities		140	Discounted cash flows	Discount rate	0.4% (0.4%)
		5,446	Appraisals/Broker quotes	—	—
CMBS and RMBS in the Americas		7,165	Appraisals/Broker quotes	—	—
Other asset-backed securities and debt securities		28,391	Discounted cash flows	Discount rate	0.3% – 51.2% (6.7%)
				Probability of default	1.9% (1.9%)
		267,233	Appraisals/Broker quotes	—	—
Equity securities:
Investment funds		131,907	Discounted cash flows	WACC	12.8% – 26.4% (17.2%)
				EV/Terminal EBITDA multiple	7.5x-12.0x (9.5x)
			Market multiples	EV/Last twelve months EBITDA multiple	8.1x-9.5x (8.8x)
				EV/Forward EBITDA multiple	6.8x-9.6x (8.2x)
				EV/Precedent transaction last twelve months EBITDA multiple	8.0x-13.0x (9.9x)
		24,668	Appraisals/Broker quotes	—	—
		6,282	Discounted cash flows	Discount rate	8.0% – 12.0% (10.3%)
Derivative assets:
Options held/written and other		6,501	Discounted cash flows	Discount rate	12.0% – 33.0% (14.6%)
Other assets:
Reinsurance recoverables		2,786	Discounted cash flows	Discount rate	(0.1)% – 1.6% (0.5%)
				Mortality rate	0.0% – 100.0% (2.9%)
				Lapse rate	1.5% – 14.0% (4.8%)
				Annuitization rate (guaranteed minimum annuity benefit)	0.0% – 100.0%
					(100.0%)

Total	¥	588,007

Liabilities:
Derivative liabilities:
Options held/written and other	¥	4,198	Discounted cash flows	Discount rate	12.0% – 33.0% (14.6%)
		19	Appraisals/Broker quotes	—	—
Policy liabilities and Policy Account Balances:
Variable annuity and variable life insurance contracts		167,207	Discounted cash flows	Discount rate	(0.1)% – 1.6% (0.5%)
				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% (66.7%)
Accounts Payable:
Contingent Consideration		14,136	Discounted cash flows	EV/Terminal EBITDA multiple	15.0x
					( 15.0x )

Total	¥	185,560


	September 30, 2024
	Millions of yen
	Fair value		Valuation technique(s)	Significant unobservable inputs	Range (Weighted average)
Assets:
Loans held for sale	¥	83,050	Discounted cash flows	Discount rate	6.6% – 11.4% (8.7%)
Available-for-sale debt securities:
Japanese prefectural and foreign municipal bond securities		6,816	Discounted cash flows	Discount rate	4.4% – 9.8% (8.0%)
		3,560	Appraisals/Broker quotes	—	—
Corporate debt securities		70	Discounted cash flows	Discount rate	0.6% (0.6%)
		5,307	Appraisals/Broker quotes	—	—
CMBS and RMBS in the Americas		6,762	Appraisals/Broker quotes	—	—
Other asset-backed securities and debt securities		34,420	Discounted cash flows	Discount rate	0.4% – 51.2% (5.3%)
				Probability of default	0.3% (0.3%)
		179,366	Appraisals/Broker quotes	—	—
Equity securities:
Investment funds		118,652	Discounted cash flows	WACC	13.3% – 23.7% (17.4%)
				EV/Terminal EBITDA multiple	7.5x-12x (9.1 x )
			Market multiples	EV/Last twelve months EBITDA multiple	8x-10.8x (9.1 x )
				EV/Forward EBITDA multiple	7.1x-10.8x (8.8 x )
				EV/Precedent transaction last twelve months EBITDA multiple	8x-11.4x (9.4 x )
		40,766	Appraisals/Broker quotes	—	—
		6,234	Discounted cash flows	Discount rate	8.0% – 12.0% (11.8%)
Derivative assets:
Options held/written and other		9,565	Discounted cash flows	Discount rate	12.0% –33.0% (14.7%)
Other assets:
Reinsurance recoverables		2,859	Discounted cash flows	Discount rate	0.0% –1.6% (0.7%)
				Mortality rate	0.0% –100.0% (2.9%)
				Lapse rate	1.5% – 14.0% (4.8%)
				Annuitization rate (guaranteed minimum annuity benefit)	0.0% –100.0% (100.0%)

Total	¥	497,427

Liabilities:
Derivative liabilities:
Options held/written and other	¥	898	Discounted cash flows	Discount rate	12.0% –33.0% (14.7%)
Policy liabilities and Policy Account Balances:
Variable annuity and variable life insurance contracts		151,331	Discounted cash flows	Discount rate	0.0% –1.6% (0.7%)
				Mortality rate	0.0% –100.0% (2.3%)
				Lapse rate	1.5% – 30.0% (5.8%)
				Annuitization rate (guaranteed minimum annuity benefit)	0.0% –100.0% (67.0%)
Accounts Payable:
Contingent Consideration		14,174	Discounted cash flows	EV/Terminal EBITDA multiple	15.0x (15.0x)

Total	¥	166,403

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 year ended March 31, 2024 and the six months ended September 30, 2024.



	Year ended March 31, 2024
	Millions of yen
	Fair value		Valuation technique(s)	Significant unobservable inputs	Range (Weighted average)
Assets:
Real estate collateral-dependent loans (net of allowance for credit losses)	¥	892	Direct capitalization	Capitalization rate	4.6% – 6.3% (5.3%)
		4,382	Appraisals	—	—
Investment in operating leases and property under facility operations		337	Discounted cash flows	Discount rate	0.0% – 13.0% (3.6%)
		868	Appraisals	—	—
Certain equity method investments		461	Market multiples	EV/EBITDA multiple	3x-6x ( 4.5x )

	¥	6,940



	Six months ended September 30, 2024
	Millions of yen
	Fair value		Valuation technique(s)	Significant unobservable inputs	Range (Weighted average)
Assets:
Real estate collateral-dependent loans (net of allowance for credit losses)	¥	1,064	Direct capitalization	Capitalization rate	4.6% – 6.5% (5.2%)
		1,844	Appraisals	—	—
Investment in operating leases and property under facility operations		169	Appraisals
Certain equity method investments		1,285	Appraisals	—	—

	¥	4,362

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.