Derivative Financial Instruments and Hedging

9 Months Ended

Dec. 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments and Hedging

20.	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 option agreements, 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, 2019 and December 31, 2019.

(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.

(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. The Company and its subsidiaries designate foreign exchange contracts to minimize foreign currency exposures on bonds in foreign currencies. The Company and certain overseas subsidiaries use interest rate swap agreements to hedge interest rate exposure of the fair values of National government bonds in foreign currencies.

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

(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 option agreements, 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 the nine months ended December 31, 2018 is as follows.

(1) Cash flow hedges


	Gains (losses) recognized in other comprehensive income on derivative (effective portion)			Gains (losses) reclassified from other comprehensive income (loss) into income (effective portion)				Gains (losses) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)
	Millions of yen			Consolidated statements of income location	Millions of yen			Consolidated statements of income location	Millions of yen
Interest rate swap agreements	¥	(1,529	)	Finance revenues/Interest expense	¥	141		—	¥	0

Foreign exchange contracts		252		Other (income) and expense, net		(220	)	—		0

Foreign currency swap agreements		577		Finance revenues/Interest expense/Other (income) and expense, net		(515	)	—		0

(2) Fair value hedges


	Gains (losses) recognized in income on derivative and other				Gains (losses) recognized in income on hedged item
	Millions of yen			Consolidated statements of income location	Millions of yen		Consolidated statements of income location
Interest rate swap agreements	¥	(4,553	)	Finance revenues/Interest expense	¥	4,553	Finance revenues/Interest expense

Foreign exchange contracts		(3,834	)	Other (income) and expense, net		3,711	Other (income) and expense, net

(3) Hedges of net investment in foreign operations


	Gains (losses) recognized in other comprehensive income on derivative and others (effective portion)			Gains (losses) reclassified from other comprehensive income (loss) into income (effective portion)				Gains (losses) recognized in income on derivative and others (ineffective portion and amount excluded from effectiveness testing)
	Millions of yen			Consolidated statements of income location	Millions of yen			Consolidated statements of income location	Millions of yen
Foreign exchange contracts	¥	2,500		Gains on sales of subsidiaries and affiliates and liquidation losses, net	¥	(115	)	—	¥	0
Borrowings and bonds in foreign currencies		(7,377	)	—		0		—		0

(4) Derivatives not designated as hedging instruments


	Gains (losses) recognized in income on derivative
	Millions of yen			Consolidated statements of income location
Interest rate swap agreements	¥	1,013		Other (income) and expense, net

Futures		2,573		Gains on investment securities and dividends Life insurance premiums and related investment income *

Foreign exchange contracts		(2,037	)	Gains on investment securities and dividends Life insurance premiums and related investment income * Other (income) and expense, net

Credit derivatives held		59		Other (income) and expense, net

Options held/written and other		(1,077	)	Other (income) and expense, net Life insurance premiums and related investment income *

Futures, foreign exchange contracts and options held/written and other in the above table include 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 the nine months ended December 31, 2018 (see Note 17 “Life Insurance Operations”).

The effect of derivative instruments on the consolidated statements of income,

pre-tax,

for the nine months ended December 31, 2019 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, net
Interest rate swap agreements	¥	(4,610	)	¥	584	¥	0
Foreign exchange contracts		(369	)		255		0
Foreign currency swap agreements		(461	)		260		108

(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, net		Life insurance premiums and related investment income			Other (income) and expense, net
Interest rate swap agreements	¥	(5,794	)	¥	0	¥	5,431		¥	0
Foreign exchange contracts		1,172			153		(910	)		(128	)

(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 (Millions of yen)
			Gains on sales of subsidiaries and affiliates and liquidation losses, net		Interest expense		Other (income) and expense, net
Foreign exchange contracts	¥	4,380	¥	1,594	¥	3,448	¥	21
Borrowings and bonds in foreign currencies		8,342		0		0		0

(4) Derivatives not designated as hedging instruments


	Millions of yen
	Gains (losses) recognized in income on derivative (Millions of yen)
	Life insurance premiums and related investment income *			Interest expense		Other (income) and expense, net
Interest rate swap agreements	¥	0		¥	5	¥	120
Futures		(3,292	)		0		2,367
Foreign exchange contracts		177			3,635		1,494
Credit derivatives held		0			0		(6	)
Options held/written and other		(180	)		0		1,202

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 the nine months ended December 31, 2019 (see Note 17 “Life Insurance Operations”).

The effect of derivative instruments on the consolidated statements of income,

pre-tax,

for the three months ended December 31, 2018 is as follows.

(1) Cash flow hedges


	Gains (losses) recognized in other comprehensive income on derivative (effective portion)			Gains (losses) reclassified from other comprehensive income (loss) into income (effective portion)				Gains (losses) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)
	Millions of yen			Consolidated statements of income location	Millions of yen			Consolidated statements of income location	Millions of yen
Interest rate swap agreements	¥	(2,252	)	Finance revenues/Interest expense	¥	4		—	¥	0

Foreign exchange contracts		9		Other (income) and expense, net		(230	)	—		0

Foreign currency swap agreements		1,544		Finance revenues/Interest expense /Other (income) and expense, net		579		—		0

(2) Fair value hedges

Gains (losses) recognized in income on derivative and other

Gains (losses) recognized in income on hedged item

Millions

of yen

Consolidated statements

of income location

Millions

of yen

Consolidated statements

of income location

Interest rate swap agreements

(5,781

)

Finance revenues/Interest expense

5,781

Finance revenues/Interest expense

Foreign exchange contracts

830

Other (income) and expense, net

(953

)

Other (income) and expense, net

(3) Hedges of net investment in foreign operations


	Gains (losses) recognized in other comprehensive income on derivative and others (effective portion)		Gains (losses) reclassified from other comprehensive income (loss) into income (effective portion)			Gains (losses) recognized in income on derivative and others (ineffective portion and amount excluded from effectiveness testing)
	Millions of yen		Consolidated statements of income location	Millions of yen		Consolidated statements of income location	Millions of yen
Foreign exchange contracts	¥	4,234	—	¥	0	—	¥	0
Borrowings and bonds in foreign currencies		14,711	—		0	—		0

(4) Derivatives not designated as hedging instruments


	Gains (losses) recognized in income on derivative
	Millions of yen			Consolidated statements of income location
Interest rate swap agreements	¥	(134	)	Other (income) and expense, net

Futures		5,257		Gains on investment securities and dividends Life insurance premiums and related investment income *

Foreign exchange contracts		5,819		Gains on investment securities and dividends Life insurance premiums and related investment income * Other (income) and expense, net

Credit derivatives held		40		Other (income) and expense, net

Options held/written and other		(1,350	)	Other (income) and expense, net Life insurance premiums and related investment income *

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 the three months ended December 31, 2018 (see Note 17 “Life Insurance Operations”).

The effect of derivative instruments on the consolidated statements of income,

pre-tax,

for the three months ended December 31, 2019 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, net
Interest rate swap agreements	¥	2,481		¥	218		¥	0
Foreign exchange contracts		(255	)		107			0
Foreign currency swap agreements		235			(25	)		100

(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, net		Life insurance premiums and related investment income			Other (income) and expense, net
Interest rate swap agreements	¥	3,346		¥	0	¥	(3,299	)	¥	0
Foreign exchange contracts		(934	)		127		1,370			(98	)

(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 (Millions of yen)
				Gains on sales of subsidiaries and affiliates and liquidation losses, net		Interest expense		Other (income) and expense, net
Foreign exchange contracts	¥	(12,324	)	¥	1,594	¥	1,194	¥	7
Borrowings and bonds in foreign currencies		(10,477	)		0		0		0
(4) Derivatives not designated as hedging instruments


	Millions of yen
	Gains (losses) recognized in income on derivative (Millions of yen)
	Life insurance premiums and related investment income*			Interest expense		Other (income) and expense, net
Interest rate swap agreements	¥	0		¥	2	¥	(12	)
Futures		(2,284	)		0		1,760
Foreign exchange contracts		(337	)		1,119		6,017
Credit derivatives held		0			0		10
Options held/written and other		(85	)		0		1,328

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 the three months ended December 31, 2019 (see Note 17 “Life Insurance Operations”).

The effect of the components excluded from the assessment of hedge effectiveness on the consolidated statements of income,

pre-tax,

for the nine months ended December 31, 2019 is as follows.

Fair value hedges


	Millions of yen
	Gains (losses) reclassified from other comprehensive income (loss) into income
	Life insurance premiums and related investment income
Foreign exchange contracts	¥	(1,324	)

The effect of the components excluded from the assessment of hedge effectiveness on the consolidated statements of income,

pre-tax,

for the three months ended December 31, 2019 is as follows.

Fair value hedges


	Millions of yen
	Gains (losses) reclassified from other comprehensive income (loss) into income
	Life insurance premiums and related investment income
Foreign exchange contracts	¥	(904	)

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 December 31, 2019 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 *	¥	318,697	¥	13,213	—	¥	0	¥	0

*	Accumulated fair value hedge adjustments of ¥(1,921) million are included for hedged items for which hedge accounting has been discontinued.

Notional amounts of derivative instruments and other, fair values of derivative instruments and other before offsetting at March 31, 2019 and December 31, 2019 are as follows.

March 31, 2019


			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	¥	498,874	¥	11	Other Assets	¥	17,320	Other Liabilities

Futures, foreign exchange contracts		505,909		1,888	Other Assets		3,177	Other Liabilities

Foreign currency swap agreements		65,575		1,203	Other Assets		364	Other Liabilities

Foreign currency long-term debt		641,127		0	—		0	—

Derivatives not designated as hedging instruments:

Interest rate swap agreements	¥	60,657	¥	127	Other Assets	¥	119	Other Liabilities

Options held/written and other *		556,668		11,140	Other Assets		2,809	Other Liabilities

Futures, foreign exchange contracts *		320,710		1,119	Other Assets		2,159	Other Liabilities

Credit derivatives held		262		7	Other Assets		10	Other Liabilities

The notional amounts of options held/written and other and futures, foreign exchange contracts in the above table include options held of ¥34,701 million, futures contracts of ¥37,359 million and foreign exchange contracts of ¥13,171 million to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts at March 31, 2019, respectively. Derivative assets in the above table include fair value of the options held, futures contracts and foreign exchange contracts before offsetting of ¥206 million, ¥248 million and ¥30 million and derivative liabilities include fair value of the futures and foreign exchange contracts before offsetting of ¥258 million and ¥173 million at March 31, 2019, respectively.

December 31, 2019


			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	¥	504,636	¥	158	Other Assets	¥	24,703	Other Liabilities

Options held/written and other		949		5	Other Assets		0	—

Futures, foreign exchange contracts		509,650		25	Other Assets		9,753	Other Liabilities

Foreign currency swap agreements		66,422		1,421	Other Assets		965	Other Liabilities

Foreign currency long-term debt		618,412		0	—		0	—

Derivatives not designated as hedging instruments:

Interest rate swap agreements	¥	7,183	¥	9	Other Assets	¥	65	Other Liabilities

Options held/written and other *		490,428		13,687	Other Assets		10,960	Other Liabilities

Futures, foreign exchange contracts *		323,990		378	Other Assets		4,742	Other Liabilities

The notional amounts of options held/written and other and futures, foreign exchange contracts in the above table include options held of ¥25,225 million, futures contracts of ¥30,042 million and foreign exchange contracts of ¥9,716 million to economically hedge the minimum guarantee risk of variable annuity and variable life insurance contracts at December 31, 2019, respectively. Derivative assets in the above table include fair value of the options held, futures contracts and foreign exchange contracts before offsetting of ¥16 million, ¥0 million and ¥6 million and derivative liabilities include fair value of the futures and foreign exchange contracts before offsetting of ¥34 million and ¥114 million at December 31, 2019, respectively.