Fair Value Measurements

12 Months Ended

Mar. 31, 2018

Fair Value Disclosures [Abstract]

Fair Value Measurements

2. Fair Value Measurements

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

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

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

Level 3—Unobservable inputs for the assets or liabilities.

The Company and its subsidiaries differentiate between those assets and liabilities required to be carried at fair value at every reporting period (“recurring”) and those assets and liabilities that are only required to be adjusted to fair value under certain circumstances (“nonrecurring”). The Company and its subsidiaries mainly measure certain loans held for sale, trading securities, available-for-sale securities, certain investment funds, derivatives, certain reinsurance recoverables, certain contingent consideration, and variable annuity and variable life insurance contracts at fair value on a recurring basis.

The following tables present recorded amounts of major financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2017 and 2018:

March 31, 2017

	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	¥	19,232		¥	0	¥	19,232	¥	0
Trading securities		569,074			37,500		531,574		0
Available-for-sale securities:		1,165,417			93,995		946,906		124,516
Japanese and foreign government bond securities*2		345,612			2,748		342,864		0
Japanese prefectural and foreign municipal bond securities		168,822			0		168,822		0
Corporate debt securities*3		393,644			11,464		380,562		1,618
Specified bonds issued by SPEs in Japan		1,087			0		0		1,087
CMBS and RMBS in the Americas		98,501			0		40,643		57,858
Other asset-backed securities and debt securities		64,717			0		764		63,953
Equity securities*4		93,034			79,783		13,251		0
Other securities:		27,801			0		0		27,801
Investment funds*5		27,801			0		0		27,801
Derivative assets:		22,999			734		17,032		5,233
Interest rate swap agreements		304			0		304		0
Options held/written and other		5,804			0		571		5,233
Futures, foreign exchange contracts		12,346			734		11,612		0
Foreign currency swap agreements		4,545			0		4,545		0
Netting*6		(4,019	)		0		0		0
Net derivative assets		18,980			0		0		0
Other assets:		22,116			0		0		22,116
Reinsurance recoverables*7		22,116			0		0		22,116
Total	¥	1,826,639		¥	132,229	¥	1,514,744	¥	179,666
Liabilities:
Derivative liabilities:	¥	16,295		¥	165	¥	16,130	¥	0
Interest rate swap agreements		4,567			0		4,567		0
Options held/written and other		1,071			0		1,071		0
Futures, foreign exchange contracts		8,821			165		8,656		0
Foreign currency swap agreements		1,677			0		1,677		0
Credit derivatives held		159			0		159		0
Netting*6		(4,019	)		0		0		0
Net derivative Liabilities		12,276			0		0		0
Policy Liabilities and Policy Account Balances:		605,520			0		0		605,520
Variable annuity and variable life insurance contracts*8		605,520			0		0		605,520
Total	¥	621,815		¥	165	¥	16,130	¥	605,520

March 31, 2018

	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	¥	17,260		¥	0	¥	17,260	¥	0
Trading securities		422,053			35,766		386,287		0
Available-for-sale securities:		1,015,477			65,716		828,844		120,917
Japanese and foreign government bond securities*2		275,810			3,949		271,861		0
Japanese prefectural and foreign municipal bond securities		163,236			0		163,236		0
Corporate debt securities*3		366,475			8,882		354,556		3,037
Specified bonds issued by SPEs in Japan		861			0		0		861
CMBS and RMBS in the Americas		74,176			0		38,166		36,010
Other asset-backed securities and debt securities		81,321			0		312		81,009
Equity securities*4		53,598			52,885		713		0
Other securities:		37,879			0		0		37,879
Investment funds*5		37,879			0		0		37,879
Derivative assets:		21,831			507		19,033		2,291
Interest rate swap agreements		327			0		327		0
Options held/written and other		7,025			0		4,734		2,291
Futures, foreign exchange contracts		14,057			507		13,550		0
Foreign currency swap agreements		422			0		422		0
Netting*6		(2,105	)		0		0		0
Net derivative assets		19,726			0		0		0
Other assets:		15,008			0		0		15,008
Reinsurance recoverables*7		15,008			0		0		15,008
Total	¥	1,529,508		¥	101,989	¥	1,251,424	¥	176,095
Liabilities:
Derivative liabilities:	¥	12,400		¥	318	¥	12,082	¥	0
Interest rate swap agreements		4,924			0		4,924		0
Options held/written and other		701			0		701		0
Futures, foreign exchange contracts		3,447			318		3,129		0
Foreign currency swap agreements		3,220			0		3,220		0
Credit derivatives held		108			0		108		0
Netting*6		(2,105	)		0		0		0
Net derivative Liabilities		10,295			0		0		0
Policy Liabilities and Policy Account Balances:		444,010			0		0		444,010
Variable annuity and variable life insurance contracts*8		444,010			0		0		444,010
Total	¥	456,410		¥	318	¥	12,082	¥	444,010

*1 A certain subsidiary elected the fair value option on the loans held for sale. These loans are multi-family and seniors housing loans and are sold to Federal National Mortgage Association (“Fannie Mae”) or institutional investors. Included in “Other (income) and expense, net” in the consolidated statements of income were a loss from the change in the fair value of the loans of ¥71 million for fiscal 2016, a gain from the change in the fair value of the loans of ¥31 million for fiscal 2017 and a loss from the change in the fair value of the loans of ¥663 million for fiscal 2018. No gains or losses were recognized in earnings for fiscal 2016, 2017 and 2018 attributable to changes in instrument-specific credit risk. The amounts of aggregate unpaid principal balance and aggregate fair value of the loan held for sale as of March 31, 2017, were ¥18,362 million and ¥19,232 million, respectively, and the amount of the aggregate fair value exceeded the amount of aggregate unpaid principal balance by ¥870 million. The amounts of aggregate unpaid principal balance and aggregate fair value as of March 31, 2018, were ¥16,873 million and ¥17,260 million, respectively, and the amount of the aggregate fair value exceeded the amount of aggregate unpaid principal balance by ¥387 million. As of March 31, 2017 and 2018, there were no loans that were 90 days or more past due, or in non-accrualstatus.

*2 A certain subsidiary elected the fair value option for investments in foreign government bond securities included in available-for-sale securities. Included in “Gains on investment securities and dividends” in the consolidated statements of income were losses of ¥12 million and ¥12 million from the change in the fair value of those investments for fiscal 2017 and 2018. The amounts of aggregate fair value elected the fair value option were ¥1,015 million and ¥719 million as of March 31, 2017 and 2018, respectively.

*3 A certain subsidiary elected the fair value option for investments in foreign corporate debt securities included in available-for-sale securities. Included in “Gains on investment securities and dividends” in the consolidated statements of income were losses of ¥31 million and ¥181 million from the change in the fair value of those investments for fiscal 2017 and 2018. The amounts of aggregate fair value elected the fair value option were ¥1,026 million and ¥8,882 million as of March 31, 2017 and 2018, respectively.

*4 A certain subsidiary elected the fair value option for investments in equity securities included in available-for-sale securities. Included in “Gains on investment securities and dividends” in the consolidated statements of income were a loss of ¥202 million, gains of ¥1,277 million and ¥961 million from the change in the fair value of those investments for fiscal 2016, 2017 and 2018. The amount of aggregate fair value elected the fair value option were ¥15,400 million and ¥22,365 million as of March 31, 2017 and 2018, respectively.

*5 Certain subsidiaries elected the fair value option for certain investments in investment funds included in other securities. Included in “Gains on investment securities and dividends” in the consolidated statements of income were a loss of ¥4 million, gains of ¥699 million and ¥1,456 million from the change in the fair value of those investments for fiscal 2016, 2017 and 2018. The amounts of aggregate fair value elected the fair value option were ¥7,453 million and ¥5,665 million as of March 31, 2017 and 2018, respectively.

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

*7 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 ¥22,116 million and ¥15,008 million as of March 31, 2017 and 2018, respectively. For the effect of changes in the fair value of those reinsurance contracts on earnings for fiscal 2017 and 2018, see Note 23 “Life Insurance Operations.”

*8 Certain subsidiaries elected the fair value option for the entire variable annuity and variable life insurance contracts held in order to match the earnings recognized for the changes in the fair value of policy liabilities and policy account balances with earnings recognized for gains or losses from the investment assets managed on behalf of variable annuity and variable life policyholders, derivative contracts and the changes in the fair value of reinsurance contracts. 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 ¥605,520 million and ¥444,010 million as of March 31, 2017 and 2018, respectively. For the effect of changes in the fair value of the variable annuity and variable life insurance contracts on earnings for fiscal 2017 and 2018, see Note 23 “Life Insurance Operations.”

Changes in economic conditions or valuation methodologies may require the transfer of assets and liabilities from one fair value level to another. In such instances, the Company and its subsidiaries recognize the transfer at the beginning of the quarter during which the transfers occur. The Company and its subsidiaries evaluate the significance of transfers between levels based upon size of the transfer relative to total assets, total liabilities or total earnings. In fiscal 2017, there were no transfers between Level 1 and Level 2. In fiscal 2018, equity securities totaling ¥3,887 million were transferred from level 2 to level 1, since the inputs became available to use the quoted price in active markets.

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 2016, 2017 and 2018:

2016

	Millions of yen
																									Change in
																									unrealized
																									gains or losses
	Balance at April 1, 2015		Gains or losses (realized/unrealized)									Purchases*3		Sales			Settlements*4			Transfers in and/or out of Level 3 (net)*5			Balance at March 31, 2016		included in earnings for assets and liabilities still held at March 31, 2016*1
			Included in earnings*1			Included in other comprehensive income*2			Total
Available-for-sale securities	¥	97,051	¥	922		¥	(10,458	)	¥	(9,536	)	¥	47,886	¥	(15,632	)	¥	(19,378	)	¥	(869	)	¥	99,522	¥	(679	)
Corporate debt securities		0		1			0			1			5		(1	)		0			0			5		0
Specified bonds issued by SPEs in Japan		7,280		5			16			21			0		(1,885	)		(1,955	)		0			3,461		2
CMBS and RMBS in the Americas		22,658		424			(3,831	)		(3,407	)		26,431		(2,401	)		(4,788	)		0			38,493		(763	)
Other asset- backed securities and debt securities		66,252		492			(6,651	)		(6,159	)		21,450		(11,345	)		(12,635	)		0			57,563		82
Equity securities		861		0			8			8			0		0			0			(869	)		0		0
Other securities		8,723		1,146			(2,194	)		(1,048	)		10,933		(857	)		0			0			17,751		849
Investment funds		8,723		1,146			(2,194	)		(1,048	)		10,933		(857	)		0			0			17,751		849
Derivative assets and liabilities (net)		11,870		(4,596	)		0			(4,596	)		5,857		0			(4,923	)		0			8,208		(4,596	)
Options held/written and other		11,870		(4,596	)		0			(4,596	)		5,857		0			(4,923	)		0			8,208		(4,596	)
Other asset		36,038		(8,482	)		0			(8,482	)		10,669		0			(370	)		0			37,855		(8,482	)
Reinsurance recoverables*6		36,038		(8,482	)		0			(8,482	)		10,669		0			(370	)		0			37,855		(8,482	)
Accounts payable		5,533		3,059			0			3,059			0		0			(2,474	)		0			0		0
Contingent consideration		5,533		3,059			0			3,059			0		0			(2,474	)		0			0		0
Policy Liabilities and Policy Account Balances		1,254,483		40,751			0			40,751			0		0			(418,731	)		0			795,001		40,751
Variable annuity and variable life insurance contracts*7		1,254,483		40,751			0			40,751			0		0			(418,731	)		0			795,001		40,751

2017

	Millions of yen
																								Change in
																								unrealized
																								gains or losses
			Gains or losses (realized/unrealized)									Purchases*3		Sales			Settlements*4			Transfers in and/or out of Level 3 (net)*5		Balance at March 31, 2017		included in earnings for assets and liabilities still held at March 31, 2017*1
	Balance at April 1, 2016		Included in earnings*1			Included in other comprehensive income*2			Total
Available-for-sale securities	¥	99,522	¥	287		¥	10,106		¥	10,393		¥	37,212	¥	(6,545	)	¥	(16,066	)	¥	0	¥	124,516	¥	98
Corporate debt securities		5		0			(3	)		(3	)		1,800		0			(184	)		0		1,618		0
Specified bonds issued by SPEs in Japan		3,461		1			(29	)		(28	)		0		(1,200	)		(1,146	)		0		1,087		0
CMBS and RMBS in the Americas		38,493		202			2,674			2,876			21,871		(466	)		(4,916	)		0		57,858		23
Other asset-backed securities and debt securities		57,563		84			7,464			7,548			13,541		(4,879	)		(9,820	)		0		63,953		75
Other securities		17,751		639			475			1,114			14,521		(5,585	)		0			0		27,801		581
Investment funds		17,751		639			475			1,114			14,521		(5,585	)		0			0		27,801		581
Derivative assets and liabilities (net)		8,208		(4,141	)		0			(4,141	)		2,480		0			(1,314	)		0		5,233		(4,141	)
Options held/written and other		8,208		(4,141	)		0			(4,141	)		2,480		0			(1,314	)		0		5,233		(4,141	)
Other asset		37,855		(22,398	)		0			(22,398	)		8,309		0			(1,650	)		0		22,116		(22,398	)
Reinsurance recoverables*6		37,855		(22,398	)		0			(22,398	)		8,309		0			(1,650	)		0		22,116		(22,398	)
Policy Liabilities and Policy Account Balances		795,001		3,651			0			3,651			0		0			(185,830	)		0		605,520		3,651
Variable annuity and variable life insurance contracts*7		795,001		3,651			0			3,651			0		0			(185,830	)		0		605,520		3,651

2018

	Millions of yen
																								Change in
																								unrealized
																								gains or losses
	Balance at April 1, 2017		Gains or losses (realized/unrealized)									Purchases*3		Sales			Settlements*4			Transfers in and/ or out of Level 3 (net)*5		Balance at March 31, 2018		included in earnings for assets and liabilities still held at March 31, 2018*1
			Included in earnings*1			Included in other comprehensive income*2			Total
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
Specified bonds issued by SPEs in Japan		1,087		16			(3	)		13			0		0			(239	)		0		861		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		63,953		2,010			(2,468	)		(458	)		76,017		(34,595	)		(23,908	)		0		81,009		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*6		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*7		605,520		(19,265	)		0			(19,265	)		0		0			(180,775	)		0		444,010		(19,265	)

*1 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, net” and gains and losses from accounts payable are included in “Other (income) and expense, net” respectively. Additionally, for available-for-sale securities, amortization of interest recognized in finance revenues is included in these columns.

*2 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. Due to the elapse of the computation period of the contingent consideration during fiscal 2016, the unsettled payment is included in a decrease of Accounts payable.

*5 The amount reported in “Transfers in and/or out of Level 3 (net)” is the fair value at the beginning of quarter during which the transfers occur.

*6 “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.”

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

In fiscal 2016, equity securities totaling ¥869 million were transferred from Level 3 to Level 2, since the inputs became observable.

There were no transfers in or out of Level 3 in fiscal 2017 and 2018.

The following tables present recorded amounts of assets measured at fair value on a nonrecurring basis as of March 31, 2017 and 2018. These assets are measured at fair value on a nonrecurring basis mainly to recognize impairment:

March 31, 2017

	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:
Real estate collateral-dependent loans (net of allowance for probable loan losses)	¥	12,472	¥	0	¥	0	¥	12,472
Investment in operating leases and property under facility operations		22,525		0		0		22,525
Certain investment in affiliates		15,726		0		0		15,726
	¥	50,723	¥	0	¥	0	¥	50,723

March 31, 2018

	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:
Real estate collateral-dependent loans (net of allowance for probable loan losses)	¥	7,526	¥	0	¥	0	¥	7,526
Investment in operating leases and property under facility operations		3,916		0		0		3,916
Certain investments in affiliates		11,730		0		0		11,730
	¥	23,172	¥	0	¥	0	¥	23,172

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

Valuation process

The Company and its subsidiaries determine fair value of Level 3 assets and liabilities by using valuation techniques, such as internally developed models, or using third-party pricing information. Internally developed models include the discounted cash flow methodologies and direct capitalization methodologies. To measure the fair value of the assets and liabilities, the Company and its subsidiaries select the valuation technique which best reflects the nature, characteristics and risks of each asset and liability. The appropriateness of valuation methods and unobservable inputs is verified when measuring fair values of the assets and liabilities by using internally developed models. The Company and its subsidiaries also use third-party pricing information to measure the fair value of certain assets and liabilities. In that case, the Company and its subsidiaries verify the appropriateness of the prices by monitoring available information about the assets and liabilities, such as current conditions of the assets or liabilities, as well as surrounding market information. When these prices are determined to be able to reflect the nature, characteristics and risks of assets and liabilities reasonably, the Company and its subsidiaries use these prices as fair value of the assets and liabilities.

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, because 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.

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.

Trading securities, Available-for-sale securities and Investment in affiliates

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 including 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 bench mark 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 judged that there has been increased overall trading activity, and the Company and its subsidiaries classified these securities as Level 2 for those securities that were measured at fair value based on the observable inputs such as trading price and/or bit price. 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 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.

Investment funds

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. A certain subsidiary measures its investment held by the investment company which is owned by the subsidiary at fair value.

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.

Contingent consideration

The Company will be required to pay certain contingent consideration described in Note 3 “Acquisitions and divestitures” depending on the future performance of a certain asset management business of the acquired subsidiary, and the Company recognizes a liability for the contingent consideration at its estimated fair value. The fair value of the contingent consideration is classified as Level 3 because the Company measures its fair value using a Monte Carlo model 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 and are categorized as trading securities. 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, 2017 and 2018.

	March 31, 2017
	Millions of yen		Valuation technique(s)	Significant unobservable inputs	Range (Weighted average)
	Fair value
Assets:
Available-for-sale securities:
Corporate debt securities	¥	1,613	Discounted cash flows	Discount rate	0.5% – 1.6%
					(1.1%)
		5	Appraisals/Broker quotes	—	—
Specified bonds issued by SPEs in Japan		1,087	Appraisals/Broker quotes	—	—
CMBS and RMBS in the Americas		57,858	Discounted cash flows	Discount rate	6.4% – 22.6%
					(18.0%)
				Probability of default	0.0% – 26.4%
					(3.6%)
Other asset-backed securities and debt securities		13,890	Discounted cash flows	Discount rate	1.0% – 51.2%
					(8.9%)
				Probability of default	0.6% – 11.0%
					(0.8%)
		50,063	Appraisals/Broker quotes	—	—
Other securities:
Investment funds		11,202	Internal cash flows	Discount rate	0.0% – 40.0%
					(10.0%)
		894	Discounted cash flows	Discount rate	5.4% – 10.0%
					(8.6%)
		15,705	Appraisals/Broker quotes	—	—
Derivative assets:
Options held/written and other		3,525	Discounted cash flows	Discount rate	10.0% – 15.0%
					(11.7%)
		1,708	Appraisals/Broker quotes	—	—
Other assets:
Reinsurance recoverables		22,116	Discounted cash flows	Discount rate	(0.1)% – 0.5%
					(0.1%)
				Mortality rate	0.0% – 100.0%
					(1.0%)
				Lapse rate	1.5% – 54.0%
					(14.9%)
				Annuitization rate (guaranteed minimum annuity benefit)	0.0% – 100.0%
					(99.2%)
Total	¥	179,666
Liabilities:
Policy liabilities and Policy Account Balances:
Variable annuity and variable life insurance contracts	¥	605,520	Discounted cash flows	Discount rate	(0.1)% – 0.5%
					(0.1%)
				Mortality rate	0.0% – 100.0%
					(1.0%)
				Lapse rate	1.5% – 54.0%
					(14.7%)
				Annuitization rate (guaranteed minimum annuity benefit)	0.0% – 100.0%
					(82.7%)
Total		¥605,520

	March 31, 2018
	Millions of yen		Valuation technique(s)	Significant unobservable inputs	Range (Weighted average)
	Fair value
Assets:
Available-for-sale securities:
Corporate debt securities	¥	3,037	Discounted cash flows	Discount rate	0.2% – 1.7%
					(0.9%)
Specified bonds issued by SPEs in Japan		861	Appraisals/Broker quotes	—	—
CMBS and RMBS in the Americas		36,010	Discounted cash flows	Discount rate	6.4% – 20.0%
					(17.6%)
				Probability of default	0.0% – 24.7%
					(3.2%)
Other asset-backed securities and debt securities		18,146	Discounted cash flows	Discount rate	1.0% – 51.2%
					(10.0%)
				Probability of default	0.6% – 1.6%
					(1.0%)
		62,863	Appraisals/Broker quotes	—	—
Other securities:
Investment funds		5,665	Internal cash flows	Discount rate	0.0% – 40.0%
					(9.9%)
		25,246	Discounted cash flows	Discount rate	3.8% – 11.6%
					(8.3%)
		6,968	Appraisals/Broker quotes	—	—
Derivative assets:
Options held/written and other		1,447	Discounted cash flows	Discount rate	0.0% – 15.0%
					(8.0%)
		844	Appraisals/Broker quotes	—	—
Other assets:
Reinsurance recoverables		15,008	Discounted cash flows	Discount rate	(0.1)% – 0.4%
					(0.1%)
				Mortality rate	0.0% – 100.0%
					(1.1%)
				Lapse rate	1.5% – 30.0%
					(17.5%)
				Annuitization rate (guaranteed minimum annuity benefit)	0.0% – 100.0%
					(99.1%)
Total	¥	176,095
Liabilities:
Policy liabilities and Policy Account Balances:
Variable annuity and variable life insurance contracts	¥	444,010	Discounted cash flows	Discount rate	(0.1)% – 0.4%
					(0.1%)
				Mortality rate	0.0% – 100.0%
					(1.2%)
				Lapse rate	1.5% – 54.0%
					(17.1%)
				Annuitization rate (guaranteed minimum annuity benefit)	0.0% – 100.0%
					(79.4%)
Total	¥	444,010

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 as of March 31, 2017 and 2018.

	March 31, 2017
	Millions of yen				Significant unobservable inputs		Range (Weighted average)
	Fair value		Valuation technique(s)
Assets:
Real estate collateral-dependent loans (net of allowance for probable loan losses)	¥	12,472		Discounted cash flows		Discount rate		10.0% – 10.7%
								(10.5%)
				Direct capitalization		Capitalization rate		10.3% – 11.2%
								(10.9%)
Investment in operating leases and property under facility operations		204		Direct capitalization		Capitalization rate		8.5% – 10.0%
								(8.7%)
		1,381		Discounted cash flows		Discount rate		6.8% – 10.2%
								(9.0%)
		20,940		Appraisals		—		—
Certain investment in affiliates		15,726		Market price method		—		—
				Business enterprise value multiples		—		—
	¥	50,723
	March 31, 2018
	Millions of yen				Significant unobservable inputs		Range (Weighted average)
	Fair value		Valuation technique(s)
Assets:
Real estate collateral-dependent loans (net of allowance for probable loan losses)	¥	7,526		Discounted cash flows		Discount rate		10.7%
								(10.7%)
				Direct capitalization		Capitalization rate		11.2%
								(11.2%)
Investment in operating leases and property under facility operations		27		Discounted cash flows		Discount rate		8.0% (8.0%)
		3,889		Appraisals		—		—
Certain investments in affiliates		11,730		Market price method		—		—
				Business enterprise value multiples		—		—
				Discounted cash flows		Discount rate		9.3% – 10.3%
								(9.8%)
	¥	23,172

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 valuation process and the main valuation methodologies used for assets and liabilities measured at fair value.