November 28, 2008
Sony Life Insurance Co., Ltd.

Disclosure of Market Consistent Embedded Value as of March 31, 2008
Tokyo, November 28, 2008 – Sony Life Insurance Co., Ltd. (“Sony Life”), a wholly-owned subsidiary of SonyFinancial Holdings Inc., today disclosed its Market Consistent Embedded Value (“MCEV”) as of March 31, 2008.
In the past, Sony Life disclosed its Traditional Embedded Value (“TEV”) as one of the indices used to evaluate thecorporate value of Sony Life and the life insurance businesses of the Sony Financial Holdings Group.
While Sony Life has previously disclosed TEV, in Europe the disclosure of the European Embedded
Value (“EEV”) has become widely spread as an improvement to the TEV from investors’ viewpoints, resulting in a
recent increase in the number of life insurance companies employing a market-consistent approach as amethodology to evaluate EEV. In response to this situation, the CFO (Chief Financial Officer) Forum, comprisedof CFOs from major insurance companies in Europe, published the European Insurance CFO Forum Market
Consistent Embedded Value Principles©1 (“MCEV Principles”) in June 2008, establishing the standards fordisclosure regarding MCEV.
In response to these developments, Sony Life disclosed its embedded value (“EV”) as of March 31, 2008,
recalculated in compliance with MCEV Principles. Going forward, Sony Life will disclose MCEV, instead of TEV,at the end of each fiscal year.
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 withgenerally 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 and practices in the United States. The figures stated below with respect to Sony Life’s
financial statements are based on Japanese GAAP.

Summary
The MCEV of Sony Life as of March 31, 2008 was as follows:

MCEV
Adjusted net worth
Value of existing businessNew business value(Billions of yen)
As of March 31, 2008
816.5
248.5
568.0
48.2

For inquiries:
Masaaki Konoo or Kayoko Miyako
Corporate Communications & Investor Relations Dept.
Sony Financial Holdings Inc.
E-mail: press@sonyfh.co.jp
Telephone: +81-3-5785-1074
Website of Sony Financial Holdings Inc. http://www.sonyfh.co.jp/index_en.html
1

Copyright © Stichting CFO Forum Foundation 20081

Table of Contents
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 ................................................................................................................................... 3
1.5 Compliance with MCEV Principles ........................................................................................................................ 4
1.6 Definition of MCEV................................................................................................................................................ 4
2. MCEV Results for Sony Life......................................................................................................................................... 5
2.1 MCEV results .......................................................................................................................................................... 5
2.2 Adjusted net worth................................................................................................................................................... 5
2.3 Value of existing business........................................................................................................................................ 5
2.4 New business value.................................................................................................................................................. 6
2.5 New business margin............................................................................................................................................... 6
2.6 Reconciliation analysis from TEV .......................................................................................................................... 7
2.7 Sensitivity analysis .................................................................................................................................................. 9
3. Assumptions .................................................................................................................................................................12
3.1 Economic assumptions ..........................................................................................................................................12
3.2 Future asset allocation ...........................................................................................................................................14
3.3 Other assumptions .................................................................................................................................................14
4. Calculation method of MCEV.....................................................................................................................................16
4.1 Covered business ...................................................................................................................................................16
4.2 Treatment of subsidiary and affiliate companies...................................................................................................16
4.3 Treatment of reinsurance .......................................................................................................................................16
4.4 Treatment of semi-participating policies...............................................................................................................16
4.5 MCEV....................................................................................................................................................................16
4.6 Adjusted net worth.................................................................................................................................................16
4.7 Required capital .....................................................................................................................................................17
4.8 Free surplus............................................................................................................................................................17
4.9 Value of existing business......................................................................................................................................17
4.10 Present value of certainty equivalent profit.........................................................................................................17
4.11 Time value of options and guarantees .................................................................................................................18
4.12 Frictional costs.....................................................................................................................................................18
4.13 Cost of non-hedgeable risks ................................................................................................................................18
4.14 Cost of capital rate ...............................................................................................................................................19
5. Opinion of Outside Specialist......................................................................................................................................19
6. Glossary........................................................................................................................................................................21

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.
Companies—primarily leading life insurance firms in Europe—have widely disclosed EEV since the CFO Forum,
comprised of CFOs from major insurance companies, published EEV Principles in May 2004. EEV Principles
attempt to address criticisms to TEV (such as the appropriate valuation of costs related to options and various
guarantees and improving comparability with other firms) and facilitate the implementation of market consistentvaluation methods, which led many leading insurance companies in Europe to disclose EEV based onmarket-consistent approaches.
However, EEV Principles allow various calculation methodologies, including MCEV. Many insurance companies
in Europe disclose MCEV as part of their financial reports and use it as an internal management tool, so the CFO
Forum published MCEV Principles in June 2008 in order to make EV information effective and appropriate forinvestors by streamlining MCEV disclosure standards for international use. Disclosure compliant with MCEV
Principles is expected to spread, particularly in Europe.
In step with these developments, Sonly Life has made the decision to recalculate and disclose EV as of March 31,
2008 compliant with MCEV Principles. Going forward, we will disclose MCEV, instead of TEV, at the end of eachfiscal year.

1.2 Covered businessOur calculations include the business operated by Sony Life and its subsidiary and affiliate companies. It should be
noted, however, that we have calculated the value of the subsidiary and affiliated companies by adding their bookvalues on a Japanese GAAP basis to the calculation of adjusted net worth.

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 .

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 opinion from Milliman
Inc. Please refer to Section 5 (“Opinion of Outside Specialist”) for details.

31.5 Compliance with MCEV Principles
We have calculated our MCEV in accordance with the calculation methodologies and assumptions in the MCEV
Principles. Points of notice regarding MCEV Principles compliance are as follows.
•
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.
•
With respect to Sony Life’s subsidiary, Sony Life Insurance (Philippines) Corporation and its equity
method affiliate, AEGON Sony Life Planning Co., Ltd., we have not evaluated their life insurance businessbut reflected their book values in the calculation of adjusted net worth. Values of subsidiary and affiliatedcompanies were not changed in sensitivity tests.
•
Any calculated values of MCEV are not presented separately by segment of subsidiary and affiliatedcompany.
•
We have calculated adjusted net worth based on Japanese GAAP, not on International Financial ReportingStandards (IFRS).
•
We have not conducted movement analysis from the prior period, as we did not calculate MCEV on March
31, 2007.

1.6 Definition of MCEVMCEV Principles define MCEV as follows.
MCEV represents the present value of 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 in 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 calculated
as the amount of its market value in excess of statutory policy reserve and other liabilities. Adjusted net worth canbe split to required capital and free surplus.
The value of existing business consists of the present value of certainty-equivalent profit, time value of options andguarantees, 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 on an after-tax basis.
Please refer to Section 4 (“Calculation method of MCEV”) for more detailed definitions of terms.

42. MCEV Results for Sony Life
2.1 MCEV results
MCEV of Sony Life as of March 31, 2008 is shown in the table below.

MCEV
Adjusted net worth
Value of existing businessNew business value(Billions of yen)
As of March 31, 2008
816.5
248.5
568.0
48.2

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 reserve (excluding contingency reserve) and other liabilities as of the valuation date. It is the total
amount of the net asset line on the balance sheet, adding a reserve for price fluctuations, contingency reserves,
reserve for possible loan losses, and unrealized gains and losses on land and buildings, deducting unfunded pension
liabilities and intangible fixed assets, and adjusting for the amount of tax effect equivalent to these six items (seebelow).
Adjusted net worth as of March 31, 2008, consists entirely of free surplus.

Adjusted net worth
Total net assets
Reserve for price fluctuations
Contingency reserves
Reserve for possible loan losses
Unrealized gains or losses on land and buildings
Unfunded pension liabilities
Intangible fixed assets
Tax effect equivalent of above six items(Billions of yen)
As of March 31, 2008
248.5
182.7
24.1
61.8
0.0
29.0
(3.5)
(8.1)
(37.4)

2.3 Value of existing business
The value of existing business is the present value of certainty-equivalent profit deducting the time value of options
and guarantees, and frictional costs and the cost of non-hedgeable risks, broken down as follows.

5

Value of existing business
Present value of certainty-equivalent profit
Time value of options and guarantees
Frictional costs
Cost of non-hedgeable risks(Billions of yen)
As of March 31, 2008
568.0
810.4
(94.8)(16.3)(131.5)

2.4 New business value
Business included in the calculation of new business value is only that acquired during the fiscal year ended March
31, 2008, as disclosed in our accounting information, and does not include the value of new business expected tobe acquired in the future. The value of new business is the value as of March 31, 2008 and is calculated based on
the same assumptions used for the value of existing business on the same date. As the value of new businessincludes profits and losses from the point of sale to the end of March 2008, actual investment gains and losses
during the fiscal year ended March 31, 2008 are reflected. A breakdown of the value of new business is as follows.

Value of new business
Present value of certainty-equivalent profit
Time value of options and guarantees
Frictional costs
Cost of non-hedgeable risks(Billions of yen)
As of March 31, 2008
48.2
76.3
(13.2)(0.7)(14.2)

2.5 New business margin
The new business margin (see 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 the premium before the deduction of the reinsurance premium.
(Billions of yen)
As of March 31, 2008
48.2
863.0

Value of new business
Present value of premium income
Value of new business / Present value of premiumincome

5.6%

Relationships between the acquired annualized premiums from new policies and the present value of premiumincome from new business for the fiscal year ended March 31, 2008 are as follows.

6

Single premium from new businessAnnualized premiums from level premium new business2(Billions of yen)
As of March 31, 2008
40.3
78.4

Average annualization multiplier3

1,049％

2.6 Reconciliation analysis from TEVReconciliation analysis from TEV as of March 31, 2008 is as follows.

Amount of impact

TEV as of March 31, 2008
(1) Model revisions(2) Time value of options and guarantees(3) Frictional costs(4) Cost of non-hedgeable risks(5) Impact of investment yield and discount rate(6) Adjusted net worth
MCEV as of March 31, 2008

EV
833.8
4.9
(74.2)(0.5)(131.5)
130.3
53.7
816.5

(Billions of yen)
New Business Value
28.9
0.5
(8.3)
(0.0)
(14.2)
41.3－
48.2(1) Model revisions
Revisions primarily reflect the impact from refining the model for variable life insurance and interest
rate-sensitive whole life insurance to calculate time value of options and guarantees.
(2) Time value of options and guarantees
Primarily reflect the impact of the time value of options and guarantees for semi-participating products andinterest rate-sensitive whole life insurance.
(3) Frictional costs
Reflect the impact of changing the required capital criteria based on which frictional costs are calculated.
Specifically, the impact of considering the amount required on the fourth Quantitative Impact Study (“QIS4”4 )of the EU Solvency II in addition to the standard of a solvency margin ratio of 600%. Frictional costs are
explained in detail in section 4.12.
(4) Cost of non-hedgeable risks
The impact of reflecting non-hedgeable risks. Non-hedgeable risks are explained in section 4.13.

2

Annualized premiums from level premium new business is calculated by multiplying the number of payments in a year by theamount of premiums received at a time. It should be noted that the definition of annualized premiums here is different from that usedin disclosure materials such as financial results and annual reports.
3
The average annualization multiplier is calculated as (Present value of premium income – Single premium from new business) /Annualized premiums from level premium new business.
4
Please refer to Section 6. (“Glossary”) for the EU Solvency II and QIS4.

7

(5) Impact of investment yield and discount rate
The impact of changing assumptions for investment yield and discount rate from TEV to an MCEV basis.
TEV basis
Investment
yield

Discount rate

MCEV basis
Deterministic method(Calculation of certainty equivalent)・ Japanese yen interest rate swap rate

New money yield・ Implied forward rate of Japanese
government bonds
Investment of existing assets
・ Bonds are held to maturity except for
convertible bonds, etc.
・ Unrealized gains on convertible bonds, etc.
are reflected in adjusted net worth and theremaining amount is reinvested in Japanese
government bonds.
・ The amount of stocks and other assets at thevaluation date is kept level to the extent
they are within an internal threshold target.
・ Risk free rate (10-year Japanese
government bonds yield) + Risk premium(4.5%)

Stochastic method
・ Market consistent yield based on economic
assumptions, as described in section 3.1

Deterministic method(Calculation of certainty-equivalent)・ Japanese yen interest rate swap rate
Stochastic method
・ Interest rate of each scenario(6) Adjusted net worth
The impact of deducting intangible fixed assets, and including unrealized gains/losses on bonds other thanconvertible bonds and unrealized gains and losses on buildings.

8

2.7 Sensitivity analysis
The impact of changing the underlying assumptions of MCEV is as follows.
Sensitivities(Billions of yen)
Assumption
BaseInterest rates
Equity/property market value
Equity/property
Implied volatility
Interest swaption
Implied volatility
Maintenance expenses
Lapse and surrender rates

Mortality rates

Morbidity rates
Required capital

Change inAssumption
No change
100bp decrease
100bp increase
10% decrease
10% increase
25% increase
25% decrease

Change inAmountMCEVRate of Change

816.5
526.9
949.3
786.4
847.0
815.1
819.1

－
(289.6)132.8(30.2)
30.5
(1.4)
2.5

－
(35%)
16%
(4%)
4%
(0%)
0%

25% increase

795.6(20.9)(3%)

10% decrease
x 0.9
Death protection
products x 0.95
Third-sector andannuity products
x 0.95x 0.95
Statutory required
minimum level

825.8
835.0

9.3
18.5

1%
2%

852.3

35.7

4%

815.0

(1.5)

(0%)

839.1

22.6

3%

831.5

15.0

2%

9

Sensitivity of new business value(Billions of yen)
Assumption
BaseInterest rates
Equity/property market
value
Equity/property
Implied volatility
Interest swaption
Implied volatility
Maintenance expenses
Lapse and surrender rates

Mortality rates

Morbidity rates
Required capital

Change inAssumption
No change
100bp decrease
100bp increase
10% decrease
10% increase
25% increase
25% decrease

New Business
Value
48.2
21.1
58.7
48.4
48.0
46.7
49.6

25% increase
10% decrease
x 0.9
Death protection
products x 0.95
Third sector andannuity products
x 0.95x 0.95
Statutory required
minimum level

Change inAmountRate of Change－(27.2)
10.5
0.2
(0.3)
(1.5)
1.3

－
(56%)
22%
0%
(1%)
(3%)
3%

46.1

(2.2)

(4%)

49.3
51.0

1.1
2.8

2%
6%

50.9

2.7

6%

48.2

0.0

0%

50.8

2.6

5%

48.9

0.6

1%

(1) Interest rates
This sensitivity represents the impact of an immediate parallel shift of the swap curve as of March 31, 2008.
Adjusted net worth would change as the market value of bonds and other assets held were to change. At thesame time, the value of in-force business would also change as the discount rate and the investment return on
equity, real estate, and etc. were changed. Here, downward change in interest rates is floored at 0%.
(2) Equity and property market value
This sensitivity represents the impact of immediate changes in market values of equity and property as ofMarch 31, 2008. Adjusted net worth would change as the market value of equity and property were to change.
At the same time, the value of in-force business would change as the asset mix was changed(3) Implied volatility of equity and property
This sensitivity represents the impact of an increase in the implied volatilities of equity and property used in
calculating the time value of options and guarantees. The value of convertible bonds would also change. If
equity implied volatilities were changed, the value of convertible bonds would change and thus adjusted net
worth would change. At the same time, the value of in-force business would also change as the time value of
options and guarantees was affected.

10(4) Interest swaption implied volatility
This sensitivity represents the impact of an increase in the implied volatility of interest swaption used in
calculating the time value of options and guarantees. The value of in-force business would change as the timevalue of options and guarantees were changed.
(5) Maintenance expenses
This sensitivity represents the impact of an increase in maintenance expenses. It should be noted thatmaintenance expenses do not include sales commissions from the in-force policies payable to Lifeplanner sales
employees of Sony Life 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 the 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. We have covered base policies and riders of which the principal benefits are accidental
death, disability, cancer, medical and nursing benefits, and individual annuities with respect to the third-sector
insurance and annuity product segment.
(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 was changed to the statutory minimum
level, a solvency margin ratio of 200%.
(10) Other
The following points should be noted regarding sensitivity.
・ 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.
・ Values of subsidiary and affiliated companies are not changed.
・ The impact of changing more than one assumption at a time is not congruent with the sum of impacts foreach assumption.

11

3. Assumptions
3.1 Economic assumptions
We have made economic assumptions in our calculation of MCEV as of March 31, 2008.
(1) Risk free rate
We have used the interest swap rate of Japanese yen as of March 31, 2008 as a risk free rate for the certainty
equivalent projections. As there are no data available beyond 50 years, we assumed that forward rates in the
51st year and beyond were equal to those in the 50th year. We have used Bloomberg’s interest swap rate as ourdata source.
The spot yields of the swap rate for key terms are as follows:
Term
Yield
1 year
0.92%
5 year
1.03%
10 year1.45%
20 year
2.04%
30 year2.26%
40 year2.34%
50 year
2.41%(2) Interest-rate model
We have calibrated the interest rate model to the market as of March 31, 2008. We have estimated parameters
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 andguarantees under the stochastic method.
The implied volatilities of the interest swaption used in our estimation are as follows.
Term of swap
Term ofJapanese
US dollarEuro
UK pound(in years)
optionyen(in years)
1
1
39.2%
49.1%
19.6%
24.3%
5
1
41.8%
35.7%
17.5%
16.5%
5
5
26.1%
20.3%
12.8%
12.2%
5
7
21.3%
17.6%
11.6%
11.5%
5
10
18.5%
15.1%
10.8%
10.9%
10
1
27.9%
28.3%
14.6%
13.9%
10
5
20.0%
18.7%
11.8%
11.2%
10
7
17.5%
16.7%
11.2%
10.7%
10
10
15.6%
14.6%
10.7%
10.4%
15
1
22.1%
24.7%
13.5%
12.8%
15
5
17.4%
16.7%
11.5%
10.5%
15
7
15.7%
15.1%
11.0%
10.3%
15
10
14.5%
12.9%
10.5%
10.3%

12

(3) Implied volatility of foreign exchange rates and equity
We have obtained spot implied volatilities from options with different terms. Implied volatilities are all those
for at-the-money options. Bloomberg is the source of data for foreign exchange and averages of the implied
volatilities provided by securities firms for the equity price index. We have assumed that forward implied
volatilities in the 11th year and beyond are equal to those in the 10th year for both foreign exchange rates and theequity price index as these derivatives have low liquidities.
Implied volatilities used for the estimation are as follows:

Term

Foreign Exchange
USD/JPY
EUR/JPY
GBP/JPY

1
5
10

12.1%
10.7%
13.1%

12.1%
11.4%
13.0%

13.7%
12.9%
12.9%

Equity
Japan
TOPIX
22.9%
21.7%
22.6%

U.S.A.
S&P
24.1%
25.9%
28.0%

EURO
SX5E
23.4%
26.3%
28.0%

U.K.
FTSE
23.7%
25.8%
27.6%

(4) Correlation factor
We have calculated correlation factors from the monthly return of each index for a period of five years from
April 2003 and to the end of March 2008 as there is no market-consistent data for correlation factors.
JPY
1Y

USD
1Y

EUR
1Y

GBP
1Y

USD/
JPY

EUR/
JPY

GBP/
JPY

TOPIX

SPX

SX5E

FTSE

JPY
1Y

1.00

0.21

0.20

0.10

(0.05)(0.07)(0.07)(0.00)(0.09)

0.00(0.02)

USD
1Y

0.21

1.00

0.60

0.41

0.52

0.28

0.40

0.39

0.38

0.57

0.54

EUR
1Y

0.20

0.60

1.00

0.54

0.37

0.18

0.13

0.08

0.24

0.39

0.31

GBP
1Y

0.10

0.41

0.54

1.00

0.12

(0.07)

0.23

0.15

0.19

0.21

0.11

USD/
JPY

(0.05)

0.52

0.37

0.12

1.00

0.53

0.60

0.31

0.24

0.47

0.47

EUR/
JPY

(0.07)

0.28

0.18(0.07)

0.53

1.00

0.77

0.12

0.42

0.32

0.46

GBP/
JPY

(0.07)

0.40

0.13

0.23

0.60

0.77

1.00

0.23

0.38

0.35

0.37

TOPIX

(0.00)

0.39

0.08

0.15

0.31

0.12

0.23

1.00

0.42

0.48

0.53

SPX

(0.09)

0.38

0.24

0.19

0.24

0.42

0.38

0.42

1.00

0.82

0.76

SX5E

0.00

0.57

0.39

0.21

0.47

0.32

0.35

0.48

0.82

1.00

0.87

FTSE

(0.02)

0.54

0.31

0.11

0.47

0.46

0.37

0.53

0.76

0.87

1.00

13

(5) Foreign exchange
Assets denominated in foreign currencies are converted to Japanese yen using the TTM (telegraphic transfer
middle exchange rate) as of March 31, 2008.
Dollar / Yen
100.19Euro / Yen
158.19UK pound / Yen
200.11

3.2 Future asset allocation(1) Asset allocation in the general accountSegment accounting is conducted for individual insurance and individual annuity with the classifications of
non-participating product segment, semi-participating product segment and interest rate-sensitive whole life
insurance segment. Asset allocation in the general account under the stochastic method was determined basedon the actual asset allocation in each segment as of March 31, 2008 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 March 31, 2008 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 product best estimates as of March 31, 2008. Best-estimate assumptions are developed toreflect past and current experiences as well as expected experiences in the future. Expected future changes are notreflected in the best estimate assumptions, as expected future changes in assumptions should be reflected only
when they are supported by sufficient reasons. Assumptions were developed as follows.
(1) Mortality and morbidity rates
Developed based on experiences over the three most recent years.
(2) Lapse and surrender rates
Lapse and surrender rates for the base case were developed based on experiences over the three most recent
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
・ Non-participating endowment insurance14

(3) Flexible premiums
There are no flexible premium products and thus no assumptions were developed.
(4) Renewal rates
Because there is very little renewable business and it does not have a significant impact on results, policy
renewal was reflected in a simplified manner.
(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 most recent year. Within the actual operating
expenses, exceptional one-time expenses incurred during the fiscal year ended March 31, 2008, and therefore
excluded from the unit cost, accounted for 1% of the total operating expenses, comprised primarily of thefollowing.
・ Incurred expenses relating to preparing the establishment of AEGON Sony Life Planning Co., Ltd., anaffiliated company of Sony Life.
・ Incurred expenses relating to investigation into the status of claims and other payments, which was
exceptionally implemented in the fiscal year ended March 31, 2008.
Unit costs include management administration charges payable to the parent company, Sony Financial
Holdings Inc. The look-through effect has not been considered with regards to Sony Financial Holdings Inc.
(6) Tax rate
Based on the most recent effective tax rate.
(7) Inflation
Set inflation to 0% reflecting the break-even inflation rate derived from 10-year Consumer Price Index(CPI)-indexed Japanese government bonds.

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4. Calculation method of MCEV
4.1 Covered business
The covered business is the business operated by Sony Life, its subsidiary and its affiliate companies.

4.2 Treatment of subsidiary and affiliate companies
With respect to subsidiary, Sony Life Insurance (Philippines) Corporation, and its equity method affiliate, AEGONSony Life Planning Co., Ltd., book values reflect the calculation of adjusted net worth based on Japanese GAAP.
Amounts reflecting adjusted net worth are ¥6.5 billion and ¥1.0 billion, respectively. These are the only values
reflecting the results of these companies; all other results solely reflect Sony Life itself.

4.3 Treatment of reinsurance
We have designated reinsurance premiums as expenses and reinsurance benefits as income in our projections, as
we consider the mortality risks as part of the death protection insurance products.

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, 2008, reflecting the present value ofcertainty-equivalent profit and the time value of options and guarantees.

4.5 MCEVMCEV is defined as the present value of distributable earnings to shareholders generated from assets allocated tothe covered business after sufficient allowance for the aggregate risks in the covered business and consists ofadjusted net worth and the value of existing business.

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. Specifically, it equals to the total amount of
the net asset section on the balance sheet, adding reserve for price fluctuations, contingency reserves, reserve forpossible loan losses, and unrealized gains and losses on land and buildings, deducting unfunded pension liabilities
and intangible fixed assets, and adjusting for the amount of tax effect equivalent of these six items. Adjusted net
worth can be split into required capital and free surplus.

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4.7 Required capital
MCEV Principles define required capital as the capital necessary to hold an excess of statutory policy reserves, andit should be the larger of the solvency capital to meet the statutory required minimum level and the capital required
to meet the internal objectives or to achieve the company’s targeted credit rating.
We set our required capital as the larger of the amount of capital corresponding to a solvency margin ratio of 600%
and the amount of capital to cover risks based on the internal model.
We have defined the amount of capital to cover risks based on the internal model as the total amount of technicalprovision and solvency risk capital stipulated by QIS4 of the EU Solvency II held in excess of statutory policy
reserves (excluding contingency reserves). It should be noted that we have used a different cost of capital rate incalculating risk margin included in the technical provision than the one stipulated by the QIS4. Please refer tosection 4.14 for the specific cost of capital rate.
Although the Japanese statutory required minimum levels is a solvency margin ratio of 200%, we set our level forthe targeted solvency margin ratio to 600% in calculating MCEV as of March 31, 2008, as there are arguments thata level of 200% would not necessarily be sufficient to present the soundness of an insurance company. As a result,
this criterion is currently under revision to improve the credibility of the solvency margin ratio, and Sony Life has
used the solvency margin ratio of 600% as a basis to calculate the cost of capital for TEV. It is expected that thesolvency margin ratio will be revised and that the risk calibration will become stricter in the future, therefore weplan to change the targeted solvency capital level to that required by the statutory minimum criteria.
We will consider improving the internal model, taking into account the domestic and overseas situations, including
movements of 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 internal mortality and morbidity rates data.

4.8 Free surplus
Free surplus is the amount of adjusted net worth other than that for required capital. Adjusted net worth as ofMarch 31, 2008 consisted entirely of free surplus.

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

4.10 Present value of certainty equivalent profit
Present value of certainty equivalent profit is the present value of profit based on the future cash flows generated
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from the covered business. Investment return on all assets and the discount rate are set to the risk free rate.
The present value of certainty equivalent profit reflects the intrinsic value of options and guarantees.

4.11 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.
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, thecost of guaranteed minimum death benefits for variable life insurance incurred when account value is less than
the scheduled policy reserve 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,
any of such interest gains would not be attributed to shareholders, while interest losses would be attributed toshareholders.
・ Surrender options
Policyholders have various options in insurance contracts. Reflected among them are the cost of policyholders’exercising the right of surrender in the event of increased interest rates.

4.12 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.

4.13 Cost of non-hedgeable risks
As risks5 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 method prescribed in QIS4 of the EU Solvency II
framework as the cost of non-hedgeable risks and calculated it with the cost of capital approach. It should be notedthat the following points are different from the method prescribed in QIS4:
5

Please refer to “Asymmetric risk” in the Section 6. (“Glossary”) for the risks regarding the asymmetric nature of the cash flows.

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・ With respect to non-hedgeable risk, the uncertainty of the risk-free rates beyond the 50th year has been
considered as an interest risk, in addition to life insurance underwriting risks and operational risks.
・ Counterparty default risk has not been reflected in the non-hedgeable risks as its impact is limited.
・ We have used risk amounts quantified after taking into consideration the risk mitigation effect throughpolicyholder dividends without any adjustments.
・ We have used the cost of capital rate described in section 4.14.

4.14 Cost of capital rate
QIS4 of the EU Solvency II has set a 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 comprised of 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
the philosophy of the CRO Forum’s approach, we have decided to use 2.5% for the cost of capital rate consistent
with the MCEV framework considering Japanese long-term equity risk premiums, the beta of Sony Financial
Holdings Inc. and the anticipated impact of the equity risk exposure of Sony Life on the beta of Sony Financial
Holdings Inc., which is a hedgeable risk. However, we may revise the cost of capital rate in the future, as anindustry development standard has not yet been established.

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 assisted Sony Life Insurance Co., Ltd. (“Sony Life”) in developing the methodology
and has been engaged to review Sony Life’s assumptions and calculations used to determine the 2008 Market
Consistent Embedded Value (“MCEV”) as of March 31, 2008. Specifically, the scope of our review included theembedded value as of 31 March 2008, the sensitivities, and the new business value.
The board of directors made a statement in its News Release Form dated November 28, 2008 that the methodology,
assumptions, and calculations have been made in accordance with the MCEV Principles©6 , with the following
exceptions:•
The calculated value of MCEV here is not the value of Sony Life’s parent company, Sony Financial
Holdings, Inc., on consolidated basis but the calculated value for Sony Life only.
•
With respect to Sony Life’s subsidiary, Sony Life Insurance (Philippines) Corporation, and its equity
method affiliate, AEGON Sony Life Planning Co., Ltd., Sony Life has not evaluated their life insurance
business but reflected their book values to the calculation of adjusted net worth. Values of subsidiaries andaffiliated companies are not changed in sensitivity tests.
•
Any calculated values of MCEV are not presented separately by the segment of subsidiaries and affiliated6

European Insurance CFO Forum Market Consistent Embedded Value Principles © (Copyright © Stichting CFO Forum Foundation
2008)

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•
•

companies.
Sony Life has calculated adjusted net worth based on generally accepted accounting principles andpractices in Japan and not based on the International Financial Reporting Standards (IFRS).
Sony Life has not conducted movement analysis from the prior period, as Sony Life has not calculated
MCEV at the end of March 2007.

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 in accordance with regard to past, current and expected future
experience,• The economic assumptions used in the calculations are internally consistent and consistent with observable
market data as per the valuation date;• The methodology makes allowance for the aggregate risks in the covered business through Sony Life’s
market consistent embedded value methodology, which includes•
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 on the required capital• for participating insurance contracts, the assumed policyholders’ dividend rates, allocation of dividends
between policyholders and shareholders, and other management actions, are consistent with the assumptions
and scenarios used in the projections and where applicable local market practice.
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, deviation from projection assumptions to actual
experiences in the future are to be expected. Such deviation may materially impact the value calculated.
Milliman reviewed the MCEV methodology, assumptions, calculations and analysis prepared by Sony Life.
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 or sensitivities. In arriving
at this conclusion, Milliman has relied on data and information provided by Sony Life.
This opinion is made solely to Sony Life in accordance with the engagement letter between Sony Life and Milliman.
Milliman does not accept or assume any responsibility, duty of care or liability to anyone else than Sony Life for or inconnection with its review work, the opinion Milliman has formed or for any statements sets forth in this opinion, tothe 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

F

Free surplus
Frictional costs

I

Implied volatility

L

Look throughN

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

O

Options andguarantees

Definition
A 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 time value of options andguarantees.
The assumption that is most expected to occur in the future.
To set various stochastic model parameters in a market consistent manner.
One of the approaches to calculate risk margin. The cost of risk is determined bytaking the present value of the cost to hold capital required in the future periods.
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 to the time value of
options and guarantees, We have reflected allowance for uncertainty of non
economic assumptions and the portion of economic assumptions considered
non-hedgeable of economic assumptions with respect to the cost of non-hedgeable
risks in this cost.
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 of time in the future.
The expected rate of future variability embedded in current option prices, andrepresents the expected value of the market against the price fluctuation.
To measure the impact of an action on an entire business group,
rather than only on a 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, which may or may not be exercisable at the discretion of thepolicyholder. An example of such features is the exercise of surrender option.
・ It includes guarantee of benefits or policyholder values. An example is aminimum death benefit guarantee for variable life insurance.

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Term
P
Present value ofcertainty equivalentprofitQ
QIS4R

Required capital

Risk free rate
Risk margin
Risk neutral
probability

T

Risk neutral scenario
Technical provision
Time value andintrinsic value

Definition
Present value of certainty equivalent profit is the present value of profit based on
the future cash flows generated from the covered business.
Quantitative Impact Study. Conducted prior to implementation of the EU Solvency
II. The 4th study was conducted in May 2008 and is referred as QIS4.
MCEV Principles define required capital as the capital necessary to hold in excess
of statutory policy reserve (excluding contingency reserve), and the larger of thesolvency capital to meet the statutory required minimum level and the capitalnecessary to meet the internal objectives or to achieve the company’s targeted
credit rating.
Required capital of Sony Life is set as the larger of the amount of capitalcorresponding to the solvency margin ratio of 600% and the amount of capital tocover risks based on the internal model.
The reference rate defined in MCEV Principles. MCEV Principles states that itshould be the swap rate to the currency of the 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.
The value of liability on an economic value basis, which equals to the present valueof best estimate cash flows plus Risk Margin.
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.

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