May 21, 2018
Sony Life Insurance Co., Ltd.

Disclosure of Market Consistent Embedded Value as of March 31, 2018
Tokyo, May 21, 2018 – Sony Life Insurance Co., Ltd. (“Sony Life”), a wholly owned subsidiary of Sony Financial
Holdings Inc., today disclosed its Market Consistent Embedded Value (“MCEV”) as of March 31, 2018, compliant
with the European Insurance CFO Forum Market Consistent Embedded Value Principles©1 (“MCEV Principles”).
MCEV is an indicator used to support an analysis of the value of a life insurance operation.
Sony Life maintains its accounting records and prepares its financial statements in Japanese yen in accordance with
the Company Law of Japan and the Insurance Business Law of Japan and in conformity with generally accepted
accounting principles and practices in Japan (“Japanese GAAP”). Sony Financial Holdings Inc.’s parent company,
Sony Corporation, reports its financial statements in accordance with generally accepted accounting principles andpractices in the United States. The figures shown below with respect to Sony Life’s financial statements are basedon Japanese GAAP.

SummarySony Life’s MCEV as of March 31, 2018 was as follows. New business value indicates the value of new businessacquired during the fiscal year ended March 31, 2018.
(Billions of yen)
As of
As of
ChangeMarch 31, 2018
March 31, 2017
MCEV
1,633.2
1,441.1
192.1
Adjusted net worth
1,786.1
1,657.7
128.4
Value of existing business(152.9)(216.7)63.7
FY2017
New business value

For inquiries:
Investor Relations Dept.
Sony Financial Holdings Inc.
Telephone: +81-3-5290-6500
Website of Sony Financial Holdings Inc.

1

FY2016
70.4

Change29.1

E-mail: press@sonyfh.co.jp

https://www.sonyfh.co.jp/index_en.html

Copyright © Stichting CFO Forum Foundation 2008

1

41.3

Table of Contents
Summary ........................................................................................................................................................... 1
1. Introduction ................................................................................................................................................. 3
1.1 About MCEV............................................................................................................................................ 3
1.2 Covered business ...................................................................................................................................... 3
1.3 Statement of directors............................................................................................................................... 3
1.4 Opinion of outside specialist ..................................................................................................................... 4
1.5 Compliance with MCEV Principles .......................................................................................................... 4
1.6 Definition of MCEV ................................................................................................................................. 4
1.7 Use of government bond yields as risk-free rates ...................................................................................... 5
2. MCEV Results for Sony Life ...................................................................................................................... 6
2.1 MCEV results ........................................................................................................................................... 6
2.2 Adjusted net worth ................................................................................................................................... 6
2.3 Value of existing business.......................................................................................................................... 8
2.4 New business value ................................................................................................................................... 8
2.5 New business margin ................................................................................................................................ 9
2.6 Reconciliation analysis from MCEV at the end of the prior year ........................................................... 10
2.7 Sensitivity analysis .................................................................................................................................. 13
3. Assumptions ............................................................................................................................................... 17
3.1 Economic assumptions ........................................................................................................................... 17
3.2 Future asset allocation ............................................................................................................................ 23
3.3 Other assumptions .................................................................................................................................. 23
4. Calculation Method of MCEV .................................................................................................................. 26
4.1 Covered business .................................................................................................................................... 26
4.2 Treatment of subsidiaries and affiliated companies ................................................................................ 26
4.3 Treatment of reinsurance........................................................................................................................ 26
4.4 Treatment of semi-participating policies................................................................................................. 26
4.5 MCEV .................................................................................................................................................... 26
4.6 Adjusted net worth ................................................................................................................................. 27
4.7 Required capital ..................................................................................................................................... 27
4.8 Free surplus ............................................................................................................................................ 28
4.9 Value of existing business........................................................................................................................ 28
4.10 New business value ............................................................................................................................... 28
4.11 Present value of certainty-equivalent profit .......................................................................................... 29
4.12 Time value of options and guarantees ................................................................................................... 29
4.13 Frictional costs...................................................................................................................................... 30
4.14 Cost of non-hedgeable risks .................................................................................................................. 30
4.15 Cost of capital rate................................................................................................................................ 30
5. Opinion of Outside Specialist ................................................................................................................... 31
6. Glossary ...................................................................................................................................................... 33

2

1. Introduction
1.1 About MCEV
The primary purpose of this press release is to provide information regarding the economic value of our life
insurance business and movement analysis of its value.
Many companies—primarily leading life insurance firms in Europe—have disclosed European Embedded Value(“EEV”) following the publication of EEV Principles by the CFO Forum in May 2004. The CFO Forum, formedby the Chief Financial Officers (CFOs) of major European insurance companies, published the EEV Principles toaddress criticisms of Traditional Embedded Value (TEV) and to facilitate the implementation of market consistentvaluation methods. (Criticisms of TEV included concern over the valuation of the cost of options and guarantees
and concerns about the comparability of results among firms.) This led to the disclosure by many leading European
insurers of EEV using a market-consistent approach.
The EEV Principles allow various calculation methodologies, including MCEV. Recognizing that many insurancecompanies in Europe had begun to disclose MCEV as part of their financial reports and to use MCEV as aninternal management tool, the CFO Forum published the MCEV Principles in June 2008. The MCEV Principles
aim to improve the effectiveness of EV information for investors by streamlining MCEV disclosure standards forinternational use. The CFO Forum revised the MCEV Principles in May 2016 and added guidance that allows EU
Solvency II methodologies with conditions.
Sony Life has disclosed MCEV in compliance with the MCEV Principles from March 31, 2008.

1.2 Covered businessOur calculations include the business operated by Sony Life and its subsidiaries and affiliated companies. It should be
noted, however, that we have calculated the value of the subsidiaries and affiliated companies by adding thefollowing values to the calculation of adjusted net worth:・ AEGON Sony Life Insurance Co., Ltd. is valued at net asset value plus reserve for price fluctuations
and contingency reserve, minus intangible fixed assets, reinsurance credits on modified coinsurance(to be amortized in the future) and Insurance Business Law Article 113 deferred assets, plus the tax
effect equivalent on Insurance Business Law Article 113 deferred assets, multiplied by theparticipation rate.
・ Sony Life Singapore Pte. Ltd. is valued at book value under Japanese GAAP adjusted for unrealized
gains/losses due to foreign exchange rate movement (after tax).
・ Other companies are valued at book value under Japanese GAAP.

1.3 Statement of directors
The Board of Directors of Sony Life confirms that the EV presented here has been produced following themethodology set out in the MCEV Principles. Areas of material noncompliance are stated in Section 1.5

3

1.4 Opinion of outside specialist
Sony Life requested Milliman, Inc., an external actuarial consulting firm with expert knowledge in the area of
MCEV valuations, to review the methodology, assumptions and calculations and obtained an opinion from thisfirm. Please refer to Section 5 (“Opinion of Outside Specialist”) for details.

1.5 Compliance with MCEV Principles
We have calculated our MCEV in accordance with the calculation methodologies and assumptions in the MCEV
Principles. Notable points regarding compliance with the MCEV Principles are as follows:•
The reference rate used in the calculations has been defined as the government bond nominal spot rate
curve rather than the swap rate curve as stipulated in the MCEV Principles.
•
The calculated value of MCEV is the value for Sony Life only, and not the consolidated value of our parent
company, Sony Financial Holdings Inc.
•
Group MCEV, as prescribed in the MCEV Principles, is not considered in this report, as the report is forSony Life on a stand-alone basis.
•
With respect to Sony Life’s subsidiary and its equity-method affiliates, we have not evaluated their life
insurance business but reflected the following values in the calculation of adjusted net worth:
AEGON Sony Life Insurance Co., Ltd. is valued at net asset value plus reserve for price fluctuations
and contingency reserve, minus intangible fixed assets, reinsurance credits on modified coinsurance(to be amortized in the future) and Insurance Business Law Article 113 deferred assets, plus the tax
effect equivalent on Insurance Business Law Article 113 deferred assets, multiplied by theparticipation rateSony Life Singapore Pte. Ltd. is valued at book value under Japanese GAAP adjusted for unrealized
gains/losses due to foreign exchange rate movement (after tax).

Other companies are valued at book value under Japanese GAAP

1.6 Definition of MCEV
The MCEV Principles define MCEV as follows:
MCEV represents the present value of the current and future distributable earnings to shareholders generated fromassets allocated to the covered business after sufficient allowance for the aggregate risks in the covered business.
MCEV can be expressed as the EV evaluated by a method consistent with the calculation of prices of financial
products traded in the financial markets.
MCEV consists of adjusted net worth and the value of existing business.
Adjusted net worth is the amount of assets allocated for the covered business as of the valuation date and is
calculated as the amount of its market value in excess of statutory policy reserves and other liabilities. Adjusted net
worth can be split into required capital and free surplus.
The value of existing business consists of the present value of certainty-equivalent profit, time value of options and4

guarantees, frictional costs and the cost of non-hedgeable risks.
•The present value of certainty-equivalent profit is the present value of profit based on future cash flows
generated from the covered business.
•
Time value of options and guarantees is the stochastic valuation of the time value of options and guarantees
inherent in insurance contracts based on risk-neutral scenarios.
•
Frictional costs are the present value of investment costs and taxes on assets backing the required capital ateach point of time in the future.
•
Cost of non-hedgeable risks means the present value of costs necessary to maintain capital related to
non-hedgeable risks in the future.
These four items are all evaluated on an after-tax basis.
Please refer to Section 4 for more detailed definitions of terms.

1.7 Use of government bond yields as risk-free rates
EU Solvency II suggests the criteria the relevant risk-free rates should meet. Considering some of the criteria, as
described below, we use government bond yields instead of swap rates as a proxy for risk-free rates.
•
No credit risk
The Japanese yen is the currency whose purchasing power is regulated by the Japanese government under afloating exchange rate system, and Japanese government bonds denominated in Japanese yen can be viewed as
financial assets with the lowest credit risk. On the other hand, swap rates are reflected by credit risk with regard to
LIBOR.
•
Realism
Realism refers to whether it should be possible to earn the rates in practice without credit risk. We have been
conducting risk management based on economic values. For the purpose of interest rate risk management (ALM),
given the difficulties in utilizing swap rate transactions due to limitations under the current accounting frameworkand solvency regulations as well as the credit risk issue mentioned above, we are primarily utilizing Japanese
government bonds in practice.
•High liquidity
Japanese government bonds have high liquidity even for long maturities such as 30 or 40 years.
We also use U.S. Treasury yields for risk-free rates in U.S. dollars that were applied to U.S. dollar-denominatedproducts.
Please refer to Section 2.7 for the impact of the change in risk-free rates from government bond yields to swap
rates on MCEV as of March 31, 2018.

5

2. MCEV Results for Sony Life
2.1 MCEV resultsSony Life’s MCEV as of March 31, 2018 increased ¥192.1 billion, due to the revision of the methodologies for thequantification of insurance risk, the addition of new business and other factors. Please refer to Sections 2.6 (8) and
4.7 (2) for the revision of the methodologies for the quantification of insurance risks.
(Billions of yen)
As of
As of
ChangeMarch 31, 2018
March 31, 2017
MCEV
1,633.2
1,441.1
192.1
Adjusted net worth
1,786.1
1,657.7
128.4
Value of existing business(152.9)(216.7)
63.7

2.2 Adjusted net worth
Adjusted net worth is calculated as the market value of assets allocated for the covered business in excess ofstatutory policy reserves and other liabilities as of the valuation date. Based on Japanese GAAP, it is calculated as
the total amount of the net assets section on the balance sheets, adding reserve for price fluctuations, contingency
reserve, reserve for possible loan losses, reinsurance debit for coinsurance-type reinsurance (future profits to berecognized), unrealized gains or losses on held-to-maturity securities, unrealized gains or losses on policy reserve
matching bonds and unrealized gains or losses on land and buildings, less unfunded pension liabilities andintangible fixed assets, and adjusting for the amount of tax effect equivalent to these nine items, on which valuation
gains or losses on subsidiaries and affiliated companies are added. The adjusted net worth at the end of the current
fiscal year increased ¥128.4 billion, primarily because of the increase in unrealized gain on held-to-maturity
securities caused by a decrease in interest rates. The breakdown is shown in the table below.
(Billions of yen)
As of
As of
ChangeMarch 31, 2018
March 31, 2017
Adjusted net worth
1,786.1
1,657.7
128.4
Total net assets
492.8
473.6
19.2
Reserve for price fluctuations
47.9
46.0
1.9
Contingency reserve
89.9
82.5
7.5
Reserve for possible loan losses
0.0
0.0
(0.0)
Reinsurance debit for coinsurance-type
2.1
1.2
0.9
reinsurance
Unrealized gains or losses on
1,582.6
1,445.6
137.1
held-to-maturity securities
Unrealized gains or losses on
34.9
26.0
8.9
policy reserve matching bonds
Unrealized gains or losses on land and buildings
69.7
71.0
(1.3)
Unfunded pension liabilities
(2.4)
(3.6)
1.1
Intangible fixed assets(23.2)(19.4)(3.9)
Tax effect equivalent of above nine items(504.4)(461.8)(42.6)
Valuation gain or loss on subsidiaries and
(3.7)
(3.4)
(0.4)
affiliated companies
6We set our required capital as the larger of the amount of Japanese regulatory minimum capital requirement at thesolvency margin ratio of 200% or the amount of capital to cover risks based on an internal model based on
economic value. The required capital at the end of the current fiscal year decreased due to the revision of themethodologies for the quantification of insurance risks. Please refer to Section 4.7 for the method used to calculaterequired capital.
(Billions of yen)
As ofMarch 31, 2018
1,786.1
926.1
860.0

Adjusted net worth
Free surplus
Required capital

7

As of
March 31, 2017
1,657.7
496.1
1,161.7

Change128.4
430.0(301.6)

2.3 Value of existing business
The value of existing business is the present value of certainty-equivalent profit less the time value of options andguarantees, and frictional costs and the cost of non-hedgeable risks. The value of existing business as of March 31,2018 increased ¥63.7 billion, primarily due to a revision of the methodologies used for the quantification of
insurance risks and the addition of new business, which increased value, offset by the effect of a decrease ininterest rates, which lowered the value of existing business. The breakdown of the value of existing business isshown in the table below.
(Billions of yen)
As of
As of
ChangeMarch 31, 2018
March 31, 2017
Value of existing business(152.9)(216.7)
63.7
Present value of certainty-equivalent profit
316.7
350.0
(33.3)
Time value of options and guarantees(136.0)(145.2)
9.1
Frictional costs(22.7)(35.6)
12.9
Cost of non-hedgeable risks(310.9)(385.9)75.0

2.4 New business value
New business value represents the value at point of sale of new business acquired during the fiscal year ended
March 31, 2018, and does not include the value of new business expected to be acquired in the future.
The new business value in this fiscal year increased ¥41.3 billion, primarily because of the increase in the overalllevel of interest rates throughout the year compared with the previous fiscal year. The breakdown of new businessvalue is as follows:(Billions of yen)
As of
As of
ChangeMarch 31, 2018
March 31, 2017
Value of new business
70.4
29.1
41.3
Present value of certainty-equivalent profit
106.3
68.3
37.9
Time value of options and guarantees
(6.9)
(9.1)
2.3
Frictional costs
(0.2)
(0.1)
(0.1)
Cost of non-hedgeable risks(26.8)(29.8)
3.1
Other profits or losses
(2.0)
(0.2)
(1.9)

8

2.5 New business margin
The new business margin described below is the ratio of the value of new business to the present value of premiumincome. The present value of premium income is calculated applying the same assumptions as those for the
calculation of new business value, and is based on premiums before the deduction of reinsurance premiums. The
business margin in the fiscal year ended March 31, 2018 increased due to a change in the product mix and theincrease in the overall level of interest rates throughout the year compared with the previous fiscal year.
(Billions of yen)

Value of new business
Present value of premium income

As ofMarch 31, 2018
70.4
1,213.8

As ofMarch 31, 201729.1
1,297.4

5.8%

2.2%

New business margin

Change41.3(83.5)
3.6 points

Relationships between annualized premiums from new policies and the present value of premium income fromnew business were as follows:(Billions of yen)
As of
As of
ChangeMarch 31, 2018
March 31, 2017
New business single premium
101.5
22.6
79.0
Annualized premiums from level premium new
93.3
104.7
(11.4)
business2
Average annualization multiplier3

11.92

2

12.17

(0.25)

Annualized premiums from level premium new business are calculated by multiplying the number of payments in a year by theamount of premiums received at one time. It should be noted that the definition of annualized premiums here is different from thatused in disclosures such as financial results and annual reports.
3
The average annualization multiplier is calculated as (Present value of premium income – New business single premium) /Annualized premiums from level premium new business.

92.6 Reconciliation analysis from MCEV at the end of the prior year
The table below shows the reconciliation analysis of MCEV as of March 31, 2018, from MCEV as of March 31,
2017.
(Billions of yen)
Value ofFree
Requiredexisting
MCEV
surpluscapitalbusiness
Opening MCEV (MCEV as of March 31, 2017)
Opening adjustments
Adjusted opening MCEVNew business value
Expected existing business contribution (risk-free rate)
Expected existing business contribution (in excess ofrisk-free rate)
Transfers from value of existing business and required
capital to free surplus

496.1(23.1)
473.0
(3.2)
(1.4)
0.6

1,161.7－
1,161.7
1.1
(2.8)
1.2

(216.7)－(216.7)
72.5
20.5
5.1

1,441.1(23.1)
1,418.0
70.4
16.4
6.8

(8.8)

(61.6)

70.3－

Of which, on new business(66.1)－

66.1－

Experience variances
Assumption changes
Other operating variance
Operating MCEV earnings
Economic variances
Other non-operating varianceTotal MCEV earnings
Closing adjustments

119.5
9.1
373.3
489.2
(36.1)－
453.1－(114.3)(9.1)(373.3)(558.8)257.1－(301.6)
－

4.0
36.2
80.4
289.0
(225.3)
－
63.7
－

9.2
36.2
80.4
219.4
(4.2)
－
215.2
－

Closing MCEV (MCEV as of March 31, 2018)

926.1

860.0

(152.9)1,633.2(1) Opening adjustments
These adjustments reflect dividend payments to shareholders.
(2) New business value
This figure reflects increases resulting from the acquisition of new business during the fiscal year ended March 31,
2018. Please refer to Section 4.10 for information concerning the calculation method.
(3) Expected existing business contribution (risk-free rate)
This figure includes the release of the portion for the fiscal year ended March 31, 2018 of the time value of options
and guarantees and the cost of non-hedgeable risks, in addition to the unwinding of the opening MCEV at arisk-free rate.
(4) Expected existing business contribution (in excess of risk-free rate)
This figure reflects the profit expected in excess of the risk-free rate generated by holding assets such as ordinary
corporate bonds, loans, stocks and real estate. The expected yield used for the fiscal year ended March 31, 201810

was negative 0.147%, which was developed by reflecting our view of the market environment and annual
investment plans for the year against the asset balance at the end of the previous fiscal year.
(5) Transfer from value of existing business and required capital to free surplus
This figure tracks changes in free surplus that emerge over the course of a fiscal year due to transferring profit
earned during the fiscal year from existing business value to free surplus and to changes in required capital. The
transfer of profit includes both the transfer of profit that was anticipated during the current fiscal year under the
MCEV calculation performed at the prior year-end and the transfer of profit that was calculated as a component of
new business value for the current fiscal year.
The value of MCEV itself does not change as a result of this transfer as the transfer merely constitutes an internal
shift among MCEV components.
(6) Experience variances
These variances show the impact on MCEV of the actual versus assumed differences in non-economic expected
profit for the fiscal year ended March 31, 2018 under the MCEV calculation as of March 31, 2017, and of thedifferences between actual policies in force as of March 31, 2018, and those that were projected to be in force on
March 31, 2017 using persistency assumptions. The decrease in required capital by ¥114.3 billion was caused by
the risk aggregation effect when the required capital for the new business, which was measured on a stand-alone
basis, was aggregated with the required capital for existing business.
(7) Assumption changes
This figure primarily indicates the impact of changes in assumptions based on experience data for mortality andmorbidity rates, lapse and surrender rates, and operating expense rates. The value of existing business increased
primarily because of an improvement in mortality and morbidity.
(8) Other operating varianceThis represents the impact of improvements and corrections of the model used in calculating MCEV.
We revised the methodologies for the quantification of insurance risks to better reflect Sony Life’s risk profile.
Along with this revision, we also revised the cost of capital rate from 2.5% to 3.0%. Please refer to Section 4.7 (2)for the revision of insurance risk and Section 4.15 for the revision of the cost of capital rate.
In addition, we revised the shock factors on interest rates for ultra-long term durations where there is no market
data, specifically, after the 40th year for the Japanese yen rates and after the 30th year for the U.S. dollar rates thatare used for the calculation of non-hedgeable interest rate risks. This revision was made in consideration of the
discussion on Insurance Capital Standard (ICS) being developed by the International Association of Insurance
Supervisors (IAIS) for the international capital standard. This revision is reflected in this line, which decreased therequired capital by ¥58.4 billion.
We revised pricing for some of our products in February 2018 and April 2018. Renewal premium in the projection
reflects those pricing revisions.
(9) Operating MCEV earnings
This figure shows the aggregate amount of items (2) through (8).

11

(10) Economic variances
These variances show the impact of actual to assumed differences in economic assumptions, such as market
interest rates and implied volatilities that were reflected in the market environment when calculating MCEV as ofMarch 31, 2017 (for new business values, as of the date when they were calculated) on future values, and theimpact of the actual to assumed difference in expected investment income that was assumed to be realized during
the year ended March 31, 2018 under MCEV as of March 31, 2017.
The major reasons for the decrease in the value of existing business include an update of economic scenarios due tochanges in the market environment such as a decrease in interest rates, an increase in stock prices and changes in
implied volatilities, accounting for a decrease in the present value of certainty-equivalent profit of ¥225.6 billion, adecrease in the time value of options and guarantees of ¥19.8 billion, an increase in frictional costs of ¥4.5 billion
and an increase in the cost of non-hedgeable risks of ¥13.2 billion. Another factor is an increase in expenses tied to
the rise in inflation rates, accounting for a decrease in the value of existing business of ¥1.9 billion. The major
reason for the increase in the adjusted net worth was the increase in prices of government bonds caused by adecrease in interest rates. The required capital increased primarily because the amount of liabilities and risks on an
economic basis increased due to a decrease in interest rates, causing increases in frictional costs and the cost of
non-hedgeable risks.
Please note that the significant changes in adjusted net worth and value of existing business offset each other withthe effect of ALM. The total amount of changes in MCEV are disaggregated into a decrease of ¥2.3 billion as aresult of changes in the market environment such as the decrease in interest rates, and a decrease of ¥1.9 billion asa result of the increase in inflation rates.
(11) Other non-operating variance
No items were included in other non-operating variance.
(12) Closing adjustments
No items were included in closing adjustments.

122.7 Sensitivity analysis
The impact of changing the underlying assumptions on MCEV and new business value is as follows:
Sensitivities of MCEV

Assumption
BaseInterest rates
Stock / Real estate market value
Stock / Real estate implied
volatility
Interest swaption
implied volatility
Maintenance expenses
Lapse and surrender rates

Mortality rates

Morbidity rates
Required capital
Foreign exchange rates

Change in assumption
No change
50bp decrease
50bp increase
Swap rates

MCEV
1,633.2
1,552.6
1,679.2
1,656.3
1,610.7

10% decrease(Billions of yen)
Change inRate ofamountchange－－(80.6)
(5%)
46.0
3%
23.1
1%
(22.5)(1%)

1,604.2(28.9)(2%)

25% increase

1,614.5(18.7)(1%)

10% decrease
x 0.9
Death protection products
x 0.95
Third-sector and annuity
products x 0.95
x 0.95
Regulatory minimum
10% appreciation of JPY

1,659.7
1,617.9
1,699.3

26.5(15.3)
66.1

2%
(1%)
4%

1,620.8(12.3)(1%)

1,698.6
1,652.1
1,613.5

65.5
18.9(19.7)

4%
1%(1%)

25% increase

The breakdown of the changes in MCEV into the adjusted net worth and the value of existing business are shownin the table below. Of items not specified in this table, only the value of existing business has been changed while
adjusted net worth remains the same.
(Billions of yen)
Value of
Adjusted net
Assumption
Change in assumption
MCEV
existingworthbusiness
50bp decrease(80.6)

830.8(911.4)50bp increase

46.0(718.2)764.2

Stock / Real estate market value

10% decrease(22.5)(8.4)(14.0)

Foreign exchange rates

10% appreciation of JPY(19.7)

0.1(19.8)

Interest rates

13

Sensitivity of new business value

Assumption
BaseInterest rates
Stock / Real estate market value
Stock / Real estate implied
volatility
Interest swaption
implied volatility
Maintenance expenses
Lapse and surrender rates

Mortality rates

Morbidity rates
Required capital
Foreign exchange rates(Billions of yen)
Change inRate ofamountchange
－
－
(4.8)
(7%)
3.2
5%
(7.1)
(10%)
(0.0)
(0%)

No change
50bp decrease
50bp increase
Swap rates
10% decrease

New business
value
70.4
65.6
73.6
63.4
70.4

25% increase

69.9

(0.5)

(1%)

25% increase

69.1

(1.3)

(2%)

10% decrease
x 0.9
Death protection products
x 0.95
Third-sector and annuity
products x 0.95
x 0.95
Regulatory minimum
10% appreciation of JPY

72.2
77.5

1.7
7.0

2%
10%

75.4

5.0

7%

70.1

(0.3)

(0%)

72.1
70.4
67.0

1.7
0.0
(3.4)

2%
0%
(5%)

Change in assumption(1) Interest rates
This sensitivity represents the impact of an immediate parallel shift of the Japanese and foreign government
bond yield curves as of the end of March 2018, and the impact if swap rates were used instead of government
bond yields. In each parallel shift sensitivity, adjusted net worth changes as the market value of bonds andother assets changes; this is not applicable to the case where swap rates are used. In each of the interest ratesensitivities, the value of existing business changes as interest rates, the discount rate, yields of new bonds tobe purchased in the future as existing bonds mature, and the investment returns on stocks and other assetschange.
Please note that, due to the bonds held for ALM purposes, the adjusted net worth moves in a direction to offset
a change in the value of existing business.
The sensitivities are calculated for a 50bp increase and decrease rather than a 100bp increase and decrease as
illustrated in the MCEV Principles, considering the level of interest rates in Japan. Here, the sensitivity
scenarios were made so that the parameters related to interest rate volatility were equal to those derived for thebase case. Only the parameters related to the interest rate term structure were altered when scenarios weredeveloped using the interest rate model. The ultra-long term risk-free rates were extrapolated without changing
the ultimate forward rate. In the previous year-end disclosure, the floor for downward changes in interest rates
was set at 0%, but the floor was removed from the current year-end disclosure.
The sensitivities of new business value reflect the changes in unrealized gains or losses of pre-hedge assets
included in new business value. Please refer to Section 4.10 for details on pre-hedge.

14

The rate of change narrowed in this fiscal year, due primarily to an increase in hedging of interest rate risk
through an extended scope of products subject to pre-hedge scheme and a change in the product mix.
(2) Stock and real estate market value
This sensitivity represents the impact of an immediate drop in market value of stock and real estate as of theend of March 2018. Adjusted net worth is directly affected by a change in market value of stock and real estate.
The value of existing business would also be affected by a change in the value of assets.
(3) Implied volatility of stock and real estateThis sensitivity represents the impact of an increase in the implied volatilities of stock used in calculating thetime value of options and guarantees. The value of existing business changes because changes in stock implied
volatilities change the time value of options and guarantees.
(4) Interest swaption implied volatility
This sensitivity represents the impact of a change in the implied volatility of interest swaption used in
calculating the time value of options and guarantees. The value of existing business would change as the timevalue of options and guarantees changes.
(5) Maintenance expenses
This sensitivity represents the impact of a decrease in maintenance expenses. It should be noted thatmaintenance expenses do not include sales commissions from the in-force policies payable to Sony Life’s
Lifeplanner sales employees and other sales force in future periods.
(6) Lapse and surrender rates
This sensitivity represents the impact of a decrease in lapse and surrender rates.
(7) Mortality rates
This sensitivity represents the impact of a decrease in mortality rates. We have shown the impact on “death
protection products” and the impact on “third-sector insurance and annuity products” separately, as they would
have different impacts. In the segment of “third-sector insurance and annuity products,” we include basepolicies and riders of which the principal benefits are accidental death, disability, cancer, medical and nursing
care benefits, and individual annuities. No management actions were reflected.
(8) Morbidity rates
This sensitivity represents the impact of a decrease in the morbidity rates of sickness and others in third-sector
products.
(9) Required capitalThis sensitivity represents the impact in the event that required capital is changed to the regulatory minimum
level, which is a solvency margin ratio of 200%.
(10) Foreign exchange rates
This sensitivity represents the impact of an immediate appreciation of the Japanese yen as of the end of March2018. Adjusted net worth is affected by the change in the value of assets and liabilities denominated in foreign
currency. The value of existing business would also be affected.
(11) Other
The following points should be noted regarding the sensitivities:
・ Frictional costs and the cost of non-hedgeable risks do not change in the sensitivity tests, with the
exception of frictional costs, which are changed in terms of (9) required capital.
15

・ Values of subsidiaries and affiliated companies are not changed except in the case of (2) stock and realestate market value and (10) foreign exchange rates, where the stock value of subsidiaries and affiliatedcompanies are altered.
・ The impact of changing more than one assumption at a time is not equal to the sum of the impacts for each
assumption.

16

3. Assumptions
3.1 Economic assumptions
We have made economic assumptions in our calculation of MCEV as of the end of March 2018.
(1) Risk-free rate
We have used the JGB yields and U.S. Treasury yields as of the end of March 2018 as reference rates for thecertainty-equivalent projections.
We have not added a liquidity premium on the risk-free rate as there are no products which are considered tohave reasonably predictable and illiquid cash flows and would therefore be appropriate to apply a liquidity
premium.
Regarding the extrapolation for ultra-long term risk-free rates where there is no market data, an ultimate
forward rate was applied. More specifically, the ultimate forward rate was set at 3.5% and the last liquid point
was set at 40 years (30 years for USD) and, based on Smith-Wilson methodology, forward rates on or after 41
years (31 years for USD) were extrapolated to converge to the ultimate forward rate over 20 years (30 years for
USD). These parameters were set primarily in reference to the discussion on ICS. The reasons for setting thelast liquid point at 40 years (30 years for USD) are as follows:•
Government bonds with 40-year maturity (30-year maturity for USD) have high liquidity andobservable market data.
•
Consistency in valuation between assets and liabilities as Sony Life holds a large amount ofgovernment bonds with 30- to 40-year maturity (30-year maturity for USD).
The risk-free rates used in calculation for key terms (on a par-rate basis) are as follows:Term(years)
1
5
10
20
30
40
50
60
70
80

JPY
March
2018
(0.13%)(0.11%)
0.04%
0.53%
0.74%
0.89%
1.19%
1.40%
1.53%
1.61%

USD
March
2017
(0.25%)(0.12%)
0.07%
0.64%
0.84%
0.96%
1.25%
1.45%
1.57%
1.65%

March
2018
2.09%
2.56%
2.74%
2.85%
2.97%
3.02%
3.05%
3.08%
3.09%
3.10%

March
2017
1.02%
1.92%
2.39%
2.75%
3.01%
3.04%
3.07%
3.09%
3.11%
3.12%

(Data: Ministry of Finance Japan for JGB [extrapolated] and Bloomberg for U.S. Treasury [extrapolated])

17

For the swap rates used for sensitivity in Section 2.7 (1), the last liquid point and convergence period were set
the same as the base case. The swap rates used for the sensitivity result (on a par-rate basis) are as follows:
JPY
USD
Term
(years)March 2018
March 2018
1
0.03%
2.42%
5
0.11%
2.71%
10
0.26%
2.78%
20
0.62%
2.85%
30
0.78%
2.82%
40
0.87%
2.86%
50
1.16%
2.91%
60
1.38%
2.95%
70
1.52%
2.97%
80
1.60%
2.99%
(Data: Bloomberg [extrapolated])18

(2) Interest-rate model
We have calibrated the interest rate model to the market as of the end of March 2018. We have estimatedparameters for the interest rate model from the yield curve and the implied volatilities of interest swaptions
with different terms. We have used 1,000 scenarios generated by Milliman, Inc. in calculating the time value of
options and guarantees under the stochastic method.
The implied volatilities of the interest swaption used in our estimation are presented below.
As of the end of March 2018
Term of swap
Term of option(in years)(in years)
1
1
10
1
10
10
10
20
20
1
20
10
20
20

As of the end of March 2017
Term of swap
Term of option(in years)(in years)
1
1
10
1
10
10
10
20
20
1
20
10
20
20

(bp)
Japanese
yen
8.7
17.6
29.6
33.6
22.0
31.5
35.9

U.S. dollarEuro

UK pound

52.4
68.6
64.4
50.3
65.8
57.7
46.8

20.6
45.7
61.1
52.3
45.5
53.6
45.3

41.3
65.4
65.8
57.1
63.5
61.2
51.9
(Data: Markit)(bp)Japanese
yen
11.9
21.4
34.6
38.9
32.6
38.2
40.6

U.S. dollarEuro

UK pound

50.7
76.1
71.9
55.0
72.3
63.8
51.0

28.8
61.2
68.2
56.8
65.5
59.5
46.9

37.4
73.9
69.5
57.9
73.8
64.8
53.0
(Data: Markit)(3) Implied volatilities of foreign exchange rates and stocks
We have obtained spot implied volatilities from options with different terms. All implied volatilities are those
for at-the-money options.
We have assumed that forward implied volatilities in the 11th year and beyond are equal to those in the 10thyear for both foreign exchange rates and the stock price index as these derivatives have low liquidities for theperiod over 10 years.

19Implied volatilities used for the estimation are as follows:
As of the end of March 2018
Foreign exchange
StocksU.S.
UKEuro /
Term
dollar /pound /
Japan
U.S.
Euro
UK
Japanese(in years)
JapaneseJapanese
TOPIX
S&P
SX5E
FTSE
yen
yen
yen
1
8.7%
9.1%
10.6%
17.5%
17.9%
15.3%
13.8%
5
9.2%
10.2%
12.0%
17.0%
19.6%
16.6%
15.8%
10
10.7%
11.8%
13.0%
17.3%
23.7%
17.9%
18.4%
(Data: Bloomberg for foreign exchange and Markit for stocks)
As of the end of March 2017
Foreign exchange
StocksU.S.
UKEuro /
Term
dollar /pound /
Japan
U.S.
Euro
UK
Japanese(in years)
TOPIX
S&P
SX5E
FTSE
JapaneseJapanese
yen
yen
yen
1
9.5%
10.4%
11.1%
17.4%
13.7%
16.7%
13.5%
5
9.9%
11.2%
12.3%
18.3%
19.4%
19.4%
17.8%
10
12.3%
13.0%
11.7%
18.6%
25.0%
20.8%
20.6%
(Data: Bloomberg for foreign exchange and Markit for stocks)

20

(4) Correlation factors
We have calculated correlation factors from the monthly return of each index for a period of five years from
April 2013 to the end of March 2018 as there is no market-consistent data for correlation factors.
As of the end of March 2018
Japanese

U.S.

yen

dollar

Euro

UK

U.S.

pound

dollar /Euro /

pound /

Interest
Interest

Interest

Japanese
Interest

Japanese

rate 1Yrate 1Yrate 1Y

1.00

0.13

0.13

UK
TOPIX

S&P

SX5E

FTSE

Japaneseyenrate 1Y

yen

0.16

0.24

0.36

0.37

0.44

0.37

0.12

0.26

(0.06)

1.00

0.20

0.14

0.18

0.18

0.27

0.19

0.08

0.08

(0.15)

0.16

0.20

1.00

0.12

0.03

0.31

0.23

0.08

0.05

(0.03)(0.14)

0.24

0.14

0.12

1.00

0.08

0.09

0.24

0.16

0.02

0.19

(0.16)

0.36

0.18

0.03

0.08

1.00

0.71

0.76

0.61

0.20

0.37

0.07

0.37

0.18

0.31

0.09

0.71

1.00

0.77

0.51

0.31

0.17

0.03

0.44

0.27

0.23

0.24

0.76

0.77

1.00

0.70

0.39

0.40

(0.05)

TOPIX

0.37

0.19

0.08

0.16

0.61

0.51

0.70

1.00

0.58

0.63

0.27

S&P

0.12

0.08

0.05

0.02

0.20

0.31

0.39

0.58

1.00

0.66

0.59

SX5E

0.26

0.08

(0.03)

0.19

0.37

0.17

0.40

0.63

0.66

1.00

0.64

FTSE

(0.06)(0.15)(0.14)(0.16)

0.07

0.03(0.05)

0.27

0.59

0.64

1.00

yen

JapaneseyenInterest
rate 1Y
U.S. dollar
Interest
rate 1Y
Euro
Interest
rate 1Y
UK poundInterest
rate 1Y
U.S. dollar/ JapaneseyenEuro /
Japaneseyen
UK pound/ Japaneseyen(Data: Ministry of Finance Japan for JPY interest rate and Bloomberg for others)21

As of the end of March 2017
Japanese

U.S.

yen

dollarInterest

Interest

rate 1Yrate 1Y

1.00

0.11

0.11

UK

U.S.

pound

dollar /Interest

Japanese

rate 1Y

yen

0.04

0.26

0.37

0.25

1.00

0.12

(0.01)

0.24

0.04

0.12

1.00

0.20

0.26

(0.01)

0.20

0.37

0.24

0.25

UK

Euro
Interest

Euro /
Japanesepound /

TOPIX

S&P

SX5E

FTSE

0.40

0.32

0.10

0.27

(0.08)

0.15

0.26

0.17

0.05

0.15

(0.12)

0.14

0.37

0.23

0.16

0.07

0.09

(0.00)

1.00

0.20

0.30

0.34

0.28

0.15

0.34

0.07

0.14

0.20

1.00

0.76

0.79

0.67

0.27

0.40

0.14

0.15

0.37

0.30

0.76

1.00

0.79

0.61

0.38

0.30

0.20

0.40

0.26

0.23

0.34

0.79

0.79

1.00

0.71

0.43

0.43

0.09

TOPIX

0.32

0.17

0.16

0.28

0.67

0.61

0.71

1.00

0.62

0.63

0.39

S&P

0.10

0.05

0.07

0.15

0.27

0.38

0.43

0.62

1.00

0.67

0.71

SX5E

0.27

0.15

0.09

0.34

0.40

0.30

0.43

0.63

0.67

1.00

0.70

FTSE

(0.08)(0.12)(0.00)

0.07

0.14

0.20

0.09

0.39

0.71

0.70

1.00

rate 1YJapaneseyenyenJapaneseyenInterest
rate 1Y
U.S. dollar
Interest
rate 1Y
Euro
Interest
rate 1Y
UK poundInterest
rate 1Y
U.S. dollar/ JapaneseyenEuro /
Japaneseyen
UK pound/ Japaneseyen(Data: Ministry of Finance Japan for JPY interest rate and Bloomberg for others)22(5) Foreign exchange
Assets denominated in foreign currencies and the value of U.S. dollar-denominated products are converted toJapanese yen using the TTM (telegraphic transfer middle exchange rate) as of the end of March 2018.
The table below shows foreign exchange rates of major currencies.

U.S. dollar / Japanese yen
Euro / Japanese yen
UK pound / Japanese yen

As of the end of
March 2018¥106.24¥130.52¥148.84

As of the end of
March 2017¥112.19¥119.79¥140.08

3.2 Future asset allocation(1) Asset allocation in the general accountSegment accounting is conducted for individual life insurance and individual annuity based on theclassifications of the non-participating product segment, the semi-participating product segment, the interest
rate-sensitive whole life insurance segment and the foreign-currency-denominated product segment. Asset
allocation in the general account under the stochastic method was determined based on the actual asset
allocation in each segment as of the end of March 2018 with an assumption of no changes in asset allocation
thereafter.
(2) Asset allocation in the separate account
There are eight funds established in the separate account. The asset allocation for each fund at the beginning of
the projection is determined based on the actual fund allocation as of the end of March 2018 and no rebalancing
adjustments are applied to maintain the initial fund allocation thereafter.

3.3 Other assumptions
Assumptions including mortality and morbidity rates, lapse and surrender rates, and operating expense rates weredeveloped based on best estimates by product as of the end of March 2018. Best-estimate assumptions aredeveloped to reflect past and current experiences as well as expected experiences in the future. Expected futurechanges in assumptions should be reflected only when they are supported by sufficient reasons. Except for adeteriorating trend in morbidity rates, no other expected future changes are assumed in the best-estimate
assumptions applied. Assumptions were developed as follows:(1) Mortality and morbidity rates
Developed based on experiences over the past three years. Deteriorating trends in morbidity rates are taken into
account for those accidental and health (A&H) products for which deteriorating trends were observed when theexperience data were analyzed in conducting the statutory stress test.
(2) Lapse and surrender rates
23

Lapse and surrender rates for the base case were developed based on experience over the past three years. We
have also developed dynamic assumptions in accordance with the level of interest rate or investment
performance. The dynamic assumptions are made for the following products:
・ Variable life insurance
・ Interest rate sensitive whole life insurance
・ Semi-participating products
・ Non-participating whole life insurance (including U.S. dollar-denominated insurance)
・ Non-participating endowment insurance (including U.S. dollar-denominated insurance)
・ Non-participating educational endowment insurance
Since we have not identified explicit correlations that relate interest rates or the level of account value against
minimum guarantee amount to lapse and surrender rates for policies other than variable insurance, we havedeveloped dynamic surrender rates by examining experience on similar products, and taking into accountcurrent domestic and overseas practice. Going forward, we will strive to improve our approach to dynamic
surrender assumptions for the relevant products by carefully monitoring experience data and referring toexperience with similar products and trends of practice in Japan and other countries.
(3) Flexible premiums
There are no flexible premium products and thus no assumptions were developed.
(4) Renewal rates
Developed based on past experiences. Deterioration in mortality and morbidity rates after renewal due toanti-selection is also reflected.
(5) Operating expense rates
We have developed unit costs of the expenses incurred for maintenance and administration of policies andpayments of claims based on the actual operating expenses in the past fiscal year and the depreciation costs
over the past three years. For expected system-related expenses in the future, the unit costs reflect the averageof depreciation costs over the past three years excluding one-off expenses that are not expected to recur in the
future. The one-off expenses excluded from the depreciation costs are ¥1.5 billion (FY2017 base), which arefor system revisions.
MCEV Principles require that, where costs of managing the covered business are incurred within groupcompanies, profit or losses to those companies are to be valued on a “look-through” basis. In relation to theparent company, Sony Financial Holdings Inc., unit cost includes management administration charges payable
to the parent company. In relation to subsidiaries and affiliated companies, unit cost includes the cost incurredat Sony Life to manage those companies. Other look-through effects are not considered.
(6) Effective tax rate
The effective tax rate is set at 28.00%.
(7) Consumption tax rate
The consumption tax rate is set at 8% in and before September 2019 and at 10% in and after October 2019 toreflect the increase in expenses due to the increase of the consumption tax rate.

24

(8) Inflation rate
Inflation rates for the first 40 years were set at 0.426% by referring to a 10-year inflation swap rate andremoving the effect of the consumption tax increase. For the 41st year and later, to assure consistency with theextrapolation of ultra-long term risk-free rates, inflation rates were assumed to gradually increase to 2.0% in the
60th year, which is the inflation rate assumed for the ultimate forward rate.

25

4. Calculation Method of MCEV
4.1 Covered business
The covered business is the business operated by Sony Life, its subsidiaries and its affiliated companies.

4.2 Treatment of subsidiaries and affiliated companies
Our calculations include the following values regarding subsidiaries and affiliated companies in the calculation ofadjusted net worth:・ AEGON Sony Life Insurance Co., Ltd. is valued at ¥3.8 billion, which is equal to net asset value plus
reserve for price fluctuations and contingency reserve, minus intangible fixed assets, reinsurance credits on
modified coinsurance (to be amortized in the future) and Insurance Business Law Article 113 deferredassets, plus the tax effect equivalent on Insurance Business Law Article 113 deferred assets, multiplied by
the participation rate.
・ Sony Life Singapore Pte. Ltd. is valued at book value under Japanese GAAP adjusted for unrealized
gains/losses due to foreign exchange rate movement (after tax), which is ¥0.3 billion.
・ Other companies are valued at book value under Japanese GAAP, which is ¥8.0 billion.
There are no other values reflected in the values of subsidiaries and affiliated companies except for the above, andall other results solely reflect Sony Life (on a non-consolidated basis).

4.3 Treatment of reinsurance
As we utilize reinsurance for some in-force business, we reflect reinsurance premiums as expenses and reinsurance
benefits and reinsurance commissions as income in the projections. Because part of the reinsurance commissions
received on coinsurance-type reinsurance are recognized as a reinsurance debit to defer the recognition of revenue
in Japanese GAAP, the reinsurance debit for coinsurance-type reinsurance is added to the adjusted net worth.

4.4 Treatment of semi-participating policies
We have calculated dividends in accordance with the level of future investment returns, based on the same method
used to determine the dividend rate for the accounting closure of March 31, 2018, reflecting the present value ofcertainty-equivalent profit and the time value of options and guarantees.

4.5 MCEVMCEV is defined as the expected present value of distributable earnings to shareholders generated from assets
allocated to the covered business after making appropriate allowance for aggregate risks in the covered business.
MCEV is presented as the sum of adjusted net worth and value of existing business.

26

4.6 Adjusted net worth
Adjusted net worth is calculated as the market value of assets allocated for the covered business in excess ofstatutory policy reserves and other liabilities as of the valuation date. Based on Japanese GAAP, it is calculated as
the total amount of the net assets section on the balance sheets, adding reserve for price fluctuations, contingency
reserve, reserve for possible loan losses, reinsurance debit for coinsurance-type reinsurance (future profits to berecognized), unrealized gains or losses on held-to-maturity securities, unrealized gains or losses on policy reserve
matching bonds and unrealized gains or losses on land and buildings, less unfunded pension liabilities andintangible fixed assets, and adjusting for the amount of tax effect equivalent to these nine items, on which valuation
gains or losses on subsidiaries and affiliated companies are added. Adjusted net worth can be split into required
capital and free surplus.

4.7 Required capital
The MCEV Principles define required capital as the amount of assets that should be held in addition to the assets
corresponding to the statutory liability to fulfill in-force policy obligations, which by nature is restricted from
distribution to shareholders. The level of required capital should be the larger of the solvency capital to meet theregulatory minimum level or the capital required to meet the internal objectives in terms of marketing or risk
management purposes, or to achieve the company’s targeted credit rating.
We set our required capital as the larger of the amount of capital required for Japanese regulatory minimum at thesolvency margin ratio of 200% or the amount of capital to cover risks based on the internal model on an economic
value basis. The latter is larger as of the end of March 2018.
We define the amount of capital to cover risks based on the internal model as the total amount of technicalprovision and solvency risk capital on an economic value basis in excess of statutory policy reserves (excluding
contingency reserves). The solvency risk capital on an economic value basis is calibrated at VaR (99.5%) over one
year and based on the internal model, which was revised to better reflect Sony Life’s risk profile in reference to EU
Solvency II and the discussion on economic value-based solvency regulation in Japan.
The solvency risk capital on an economic value basis as of the end of March 2018 was ¥729.7 billion (after tax).
The effective tax rate used to adjust to the after-tax basis is 28.00%. The required capital is ¥860.0 billion, which is2500.8% of the regulatory minimum capital requirement.
We will consider revising the internal model as appropriate when necessary, taking into account domestic andoverseas conditions, including developments in international accounting standards, valuation methods of insurance
liability on an economic value basis and solvency margin standard trends, as well as the analysis of our internalmortality and morbidity rates data.
The methodologies for the quantification of major risks in the internal model are as follows:(1) Market risk
We modified risk factors specified in the EU Solvency II standard method to make them more suitable in light of27

the market risk attributes to which we are exposed, where risk factors specified in the EU Solvency II method or
our previous risk measure is considered unable to reflect enough of the risk amount at a 99.5% confidence level.
For interest rate risk in Japanese yen, principal component analysis is employed, where yield curve changes are
disaggregated into three components—parallel shift, twist and butterfly—and the yield curve is shocked by eachcomponent, to capture the risk of yield curve changes more precisely.
(2) Insurance risk
Insurance risks are quantified as changes in the value of insurance liabilities on an economic value basis due tochanges in insurance assumptions such as improvement or deterioration of mortality, deterioration of morbidity andfluctuations in surrender rate. Until the end of the previous fiscal year, methodologies that followed the EU
Solvency II standard method were adopted from the view point of transparency and comparability. From the end of
this fiscal year, because discussions on risk quantification and an internal model have progressed in the insurance
industry, because we have accumulated our own experience data for insurance risk and because we have gained
experience deploying our internal model using these data, we revised our internal model to better reflect Sony
Life’s risk profile. This revision decreased the solvency risk capital on an economic value basis (after tax) by¥275.3 billion from ¥1,005.0 billion to ¥729.7 billion as of the end of this fiscal year. This revision caused adecrease in the cost of non-hedgeable risks of ¥138.3 billion, an increase in the value of existing business of ¥149.6
billion and also a decrease in the required capital of ¥413.6 billion.
(3) Operational risk
The EU Solvency II standard method is followed.

4.8 Free surplus
Free surplus is the amount of adjusted net worth other than that for required capital.

4.9 Value of existing business
The value of existing business is calculated as the present value of certainty-equivalent profit less the time value of
options and guarantees, the frictional costs and the cost of non-hedgeable risks.

4.10 New business value
New business value represents the value at point of sale of new business acquired during the fiscal year ended
March 31, 2018. The definition of new business is consistent with the financial information we have disclosed.
New business value does not include the value of new business expected to be acquired in the future. As with thevalue of in-force business, new business value is calculated as the present value of certainty-equivalent profit lessthe time value of options and guarantees, frictional costs and the cost of non-hedgeable risks. In addition, otherprofits and losses reflected unrealized gains or losses in assets purchased prior to acquisition of new business tohedge interest rate risk on new business (pre-hedge gains or losses).

28

The assumptions used in calculation, other than surrender and lapse rates, economic assumptions and inflation rates,
are the same as those used to value in-force business as of the end of the previous fiscal year. The impact ofchanging these assumptions to those used to value in-force business as of the end of this fiscal year is included in
the line item described in Section 2.6 (7).
The assumption for lapse and surrender rates is that as of the end of the previous quarter. The impact of changing
this assumption to that used to value in-force business as of the end of this fiscal year is included in the line items
described in Section 2.6 (7).
Economic assumptions and inflation rates are set as those as of the end of each month. The impact of changing
these assumptions to those used to value in-force business as of the end of this fiscal year is included in the line
item described in Section 2.6 (10). The revision of the methodologies for the quantification of insurance risks thattook effect at the end of this fiscal year was not reflected in the new business value. The impact of applying thisrevision to the value of new business is included in the line item described in Section 2.6 (8).

4.11 Present value of certainty-equivalent profit
The present value of certainty-equivalent profit is the present value of profit based on the future cash flows
generated from the covered business. The risk-free rate is used as the assumed investment return on all assets andthe discount rate.
The present value of certainty-equivalent profit reflects the intrinsic value of options and guarantees.

4.12 Time value of options and guarantees
We have calculated the time value of options and guarantees using the stochastic method with risk-neutral
scenarios. The time value of options and guarantees is calculated as the difference between the present value ofcertainty-equivalent profit and the present value of stochastic future profits.
The time value of options and guarantees considers the following items:
・ Minimum guarantees of variable life insurance
The excess of account value over the scheduled policy reserves is attributed to policyholders. However, when
the account value is less than the scheduled policy reserves, the cost incurred from executing guaranteed
minimum death benefits for variable life insurance is attributed to shareholders.
・ Minimum interest rate guarantee for interest rate sensitive whole life insurance
When the investment return exceeds the assumed interest rate, the outperforming portion is credited topolicyholder account value. However, when the investment return underperforms the assumed interest rate, thecost for the difference is attributed to shareholders, as the assumed interest rate is guaranteed.
・ Interest dividend for semi-participating products
When the investment return exceeds the assumed interest rate, the outperforming portion is credited to thefund for policyholder dividends and paid to policyholders every five years as interest dividends. Accordingly,
none of such interest gains would be attributed to shareholders, while interest losses would be attributed toshareholders.
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・ Surrender options
Policyholders have various options in insurance contracts. Reflected among them are the costs ofpolicyholders exercising the right of surrender in the event of increased interest rates. Since we have not
identified explicit correlations that relate interest rates or the level of account value against the minimum
guarantee amount to lapse and surrender rates for policies other than variable insurance, we have developed
dynamic surrender rates by examining experience on similar products, and taking into account current
domestic and overseas practices. Going forward, we will strive to improve our approach to dynamic surrenderassumptions for the relevant products by carefully monitoring experience data and referring to experience withsimilar products and trends of practice in Japan and other countries.

4.13 Frictional costs
We have calculated frictional costs as the present value of investment costs and taxes on assets backing the required
capital at each point of time in the future.

4.14 Cost of non-hedgeable risks
As risks regarding the asymmetric nature of cash flows not reflected in the present value of certainty-equivalentprofit are fully reflected in the time value of options and guarantees, we have reflected an allowance for theuncertainty of non-economic assumptions and the portion of economic assumptions considered non-hedgeablewith respect to the cost of non-hedgeable risks.
Specifically, we have assumed a risk margin based on the internal model as the cost of non-hedgeable risks andcalculated it using the cost of capital approach.

4.15 Cost of capital rate
EU Solvency II has set the cost of capital rate at 6%, which is used for the cost of capital calculation. On the other
hand, the CRO (Chief Risk Officer) Forum, comprising CROs from leading insurance companies in Europe,
proposed that 2.5% to 4.5% would be the appropriate level based on several trial calculations. Following thephilosophy of the CRO Forum’s approach, we have decided to use a cost of capital rate of 3.0% consistent with the
MCEV framework, considering Japanese long-term equity risk premiums, the beta of Sony Financial Holdings Inc.,and the anticipated impact of Sony Life’s equity risk exposure on the beta of Sony Financial Holdings Inc., which
is a hedgeable risk. The cost of capital rate increased by 0.5 percentage points compared to the end of the previous
fiscal year. This revision increased the cost of non-hedgeable risks by ¥51.8 billion, decreased the value of existing
business by ¥53.0 billion and increased the required capital by ¥51.8 billion. We may revise the method of setting
the cost of capital rate in the future, as an industry standard has not yet been established.

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5. Opinion of Outside Specialist
Sony Life requested Milliman, Inc., an external actuarial consulting firm with expert knowledge in the area of
MCEV valuations, to review the methodology, assumptions and calculations. The opinion obtained from Milliman,
Inc. is as follows:
Milliman, Inc. (“Milliman”) has been engaged to review the methodology, assumptions and calculations used bySony Life Insurance Co., Ltd. (“Sony Life”) to determine the Market Consistent Embedded Value (“MCEV”) as ofMarch 31, 2018. Specifically, the scope of our review included the embedded value as of March 31, 2018, thesensitivities, the new business value and the movement analysis from MCEV as of March 31, 2017.
The Board of Directors made a statement in its News Release Form dated May 21, 2018 that the methodology,
assumptions and calculations have been made in accordance with the European Insurance CFO Forum Market
Consistent Embedded Value Principles©1, with the following exceptions:•
The reference rate used in the calculations has been defined as the government bond nominal spot rate
curve rather than the swap rate curve as stipulated in the MCEV Principles.
•
The calculated value of MCEV is the value for the life insurance business of Sony Life only and not theconsolidated value of Sony Life’s parent company, Sony Financial Holdings Inc.
•
Group MCEV, as prescribed in the MCEV Principles, is not considered in this report, as the report is forSony Life on a stand-alone basis.
•
With respect to Sony Life’s subsidiaries and its equity-method affiliates, Sony Life has not evaluated theirlife insurance business but reflected the following values in the calculation of adjusted net worth:・ AEGON Sony Life Insurance Co., Ltd. is valued at net asset value plus reserve for price fluctuations
and contingency reserve, minus intangible fixed assets, reinsurance credits on modified coinsurance(to be amortized in the future) and Insurance Business Law Article 113 deferred assets, plus the tax
effect equivalent on Insurance Business Law Article 113 deferred assets, multiplied by theparticipation rate
・ Sony Life Singapore Pte. Ltd. is valued at book value under Japanese GAAP adjusted for unrealized
gains/losses due to foreign exchange rate movement (after tax)
・ Other companies are valued at book value under Japanese GAAP
Milliman has concluded that the methodology and assumptions used comply with the MCEV Principles except forthe points described in the above paragraph. In particular• The non-economic assumptions have been set with regard to past, current and expected future experience;• The economic assumptions used in the calculations are internally consistent and consistent withobservable market data as per the valuation date;• The methodology makes an allowance for all the aggregate risks in the covered business. The primarymethodologies employed are:・ a stochastic allowance for the cost of financial options and guarantees
・ a deduction for the cost of non-hedgeable risks
・ a deduction for the frictional costs of the required capital• For participating insurance contracts, the assumptions and scenarios used in the projections are consistent
with actual practice regarding the allocation of profits between policyholders and shareholders, the settingof policyholder dividend rates, and other management actions.
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Copyright © Stichting CFO Forum Foundation 200831

Milliman has reviewed the MCEV methodology, assumptions, calculations and analysis prepared by Sony Life, but
this does not mean that Milliman has conducted a detailed review in all aspects. During its review Milliman
identified and discussed various MCEV calculation and definition issues with Sony Life staff. Based upon those
discussions and follow-up actions, Milliman is not aware of any issues that would materially impact the disclosed
market consistent embedded values, new business values, sensitivities or movement analysis from the prior period.
In arriving at this conclusion, Milliman has relied on data and information provided by Sony Life.
The calculation of MCEV is based on numerous assumptions with respect to economic conditions, operating
conditions, taxes and other matters, many of which are beyond the control of Sony Life. Although the methodology
and assumptions used comply with the MCEV Principles, deviations between projection assumptions and actual
experience in the future are to be expected. Such deviations may materially impact the value calculated.
This opinion is made solely to Sony Life in accordance with the engagement letter between Sony Life andMilliman. Milliman does not accept or assume any responsibility, duty of care or liability to anyone other thanSony Life for or in connection with its review work, the opinion Milliman has formed or for any statements set
forth in this opinion, to the fullest extent permitted by applicable law.

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6. Glossary
TermA
Appraisal value

Asymmetric risk

B
CBest-estimate
assumption
Calibration
Cost of capital
approach
Cost ofnon-hedgeable risk

E

EU Solvency II

FFree surplus
Frictional costs

I

L

Implied volatility
ICS (Insurance
Capital Standard)
Look throughN

Non-financial risk
Non-hedgeable
non-financial risk
Non-hedgeable risk

O

Options andguarantees

Definition
Corporate value based on projected cash flows receivable for shareholders fromexisting business and future new business. It is defined as the current MCEV plus
new business value acquired in the future.
The risk where symmetric upward and downward changes on assumptions do not
result in symmetric changes in cash flow. Such risk includes minimum guarantee ofvariable life insurance and policyholder dividend payment. These risks areevaluated with a stochastic method and presented as a time value of options andguarantees.
The assumption that is most likely to occur in the future.
To set various stochastic model parameters in a market-consistent manner.
One approach to calculating the risk margin. The cost of risk is determined as thepresent value of the cost to hold capital required in the future.
The present value of the cost to hold required capital to cover future non-hedgeable
risks. As risks regarding the asymmetric nature of cash flows not reflected in thepresent value of certainty-equivalent profit are fully reflected in the time value of
options and guarantees, we have reflected the following in this cost: allowance for
uncertainty of non-economic assumptions and the portion of economic assumptions
considered non-hedgeable with respect to the cost of non-hedgeable risks.
Insurance regulation (economic value-based solvency regulation) that was
introduced to the European Union in January 2016.
The portion of adjusted net worth other than the required capital.
The present value of investment costs and taxes on assets backing the required
capital at each point in the future.
The expected rate of future variability embedded in current market option prices
The capital standard for internationally active insurance groups (IAIGs) being
developed by the International Association of Insurance Supervisors (IAIS).
To measure the impact of an action on an entire business group rather than only ona particular part of the group.
Examples are mortality risk, longevity risk, disability risk, operating expense risk,surrender risk and operational risk.
A non-financial risk such that deep and liquid capital markets do not exist to hedge
such risk.
Non-hedgeable risk is composed of non-hedgeable financial risk andnon-hedgeable non-financial risk.
The following are some features of options and guarantees:
・ Policy cash flow would be changed by exercising options granted to thepolicyholder. An example of such features is the exercise of the surrender
option.
・ It includes guarantee of benefits or policyholder values. An example isguaranteed minimum death benefits for variable life insurance.

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Term
P
Present value ofcertainty-equivalentprofitR
Required capital

Risk-free rate
Risk marginRisk-neutral
probability

TU

Risk-neutral scenario
Time value andintrinsic value

Ultimate forward
rate

Definition
Present value of certainty-equivalent profit is the present value of profit based on
the future cash flows generated from the covered business.
The MCEV Principles define required capital as the capital that is needed in excess
of statutory policy reserves (excluding contingency reserves). It is determined as
the larger of the solvency capital to meet the statutory required minimum level orthe capital necessary to meet internal objectives or to achieve the company’s
targeted credit rating.
The required capital of Sony Life is set as the larger of the amount of capitalcorresponding to the solvency margin ratio of 200% or the amount of capital tocover risks based on the internal model on an economic value basis.
The reference rate defined in the MCEV Principles. The MCEV Principles state thatit should be the swap rate of the currency of cash flows.
The cost to hold capital to cover non-hedgeable risks reflected in evaluating theinsurance liability on an economic value basis.
A pseudo probability derived so that the present value of future expected values
under multiple scenarios discounted with current risk-free rates is equal to thecurrent value.
An interest rate scenario generated under risk-neutral probabilities.
An option value that has two elements: time value and intrinsic value. Intrinsic
value is the option value under certainty-equivalent conditions. Time value is thevalue of options other than intrinsic value, which is calculated as the difference
between the present value of certainty-equivalent profit and the present value ofstochastic future profit.
The level of forward rate to which future forward rates are assumed to ultimately
converge. It is generally determined in a macro-economic approach.

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