Sony 2008 Annual Report Download - page 79

77
strengthened its regulatory supervision relating to non-payment
of insurance claims. The FSA requires all life and non-life
insurance companies to perform and report on the results of a
systematic review of non-payment of insurance claims. Based
on the results of such review, the FSA has issued business
improvement orders and other administrative sanctions to
non-life insurance companies, and it is considering issuing
certain administrative sanctions to life insurance companies.
Compliance with multiple regulatory regimes is challenging and,
due to our common branding strategy, compliance failures in
any of our businesses within our Financial Services segment
could have a negative impact on the overall business reputation
of the Financial Services segment.
Declines in the value of equity securities could have a
material adverse impact on the financial results of Sony’s
Financial Services segment.
In the Financial Services segment, Sony Life holds both convert-
ible bonds and equity securities. The convertible bonds are
required to be marked to market at the end of each accounting
period on the income statement under U.S. generally accepted
accounting principles. Declines in equity prices, such as those
due to recent problems in the United States residential mortgage
market that have resulted in large fluctuations in global equity
prices, may result in valuation losses on the convertible bonds
as well as impairment losses on the equity securities held by
Sony Life.
Changes in interest rates may significantly affect Sony’s
Financial Services segment’s financial condition and results.
We engage in ALM in an effort to manage the investment
assets within the Financial Services segment in a manner
appropriate to our liabilities, which arise from both the insur-
ance policies we underwrite in both our life insurance and
non-life insurance businesses and the deposits, borrowings
and other liabilities in our banking business. ALM considers
the long-term balance between assets and liabilities in an
effort to ensure stable returns. Any failure to appropriately
conduct our ALM activities, or any significant changes in
market conditions beyond what our ALM could reasonably
address, could have a material adverse effect on the financial
condition and results of operations of our Financial Services
segment. In particular, because Sony Life’s liabilities to
policyholders generally have longer durations than its invest-
ment assets, lower interest rates tend to reduce yields on
Sony Life’s investment portfolio while premiums remain
generally unchanged on outstanding policies. As a result,
Sony Life’s profitability and long-term ability to meet policy
commitments could be materially and adversely affected.
The investment portfolio within Sony’s Financial Services
segment exposes Sony to a number of additional risks other
than the risks related to declines in the value of equity
securities and changes in interest rates.
In Sony’s Financial Services segment, generating stable invest-
ment income is important to our operations and we invest in a
variety of asset classes, including Japanese government and
corporate bonds, foreign government and corporate bonds,
Japanese stocks, loans and real estate. In addition to risks
related to changes in interest rates and the value of equity
securities, the Financial Services segment’s investment portfolio
exposes Sony to a variety of other risks, including foreign
exchange risk, credit risk and real estate investment risk, any or
all of which may have an adverse effect on the financial condi-
tion and results of operations of our Financial Services segment.
Differences between actual and assumed policy benefits
and claims may require Sony’s Financial Services segment
to increase policy reserves in the future.
Sony’s life insurance and non-life insurance businesses establish
policy reserves for future benefits and claims based on regula-
tory guidelines and estimates of future payment obligations
made by qualified actuaries. These reserves are calculated
based on many assumptions and estimates, including the
frequency and timing of the event covered by the policy, the
amount of benefits or claims to be paid and the investment
returns on the assets these businesses purchase with the
premiums received. These assumptions and estimates are
inherently uncertain, and we cannot determine with precision the
ultimate amounts that we will be required to pay for, or the
timing of payment of, actual benefits and claims or whether the
assets supporting the policy liabilities will grow at the level we
assume prior to the payment of benefits or claims. The fre-
quency and timing of the event covered by the policy and the
amount of benefits or claims to be paid are subject to a number
of risks and uncertainties, many of which are outside of our
control, including:
• changesintrendsunderlyingourassumptionsandestimates,
such as mortality and morbidity rates;
• theavailabilityofsufcientreliabledataandourabilityto
correctly analyze the data;
• ourselectionandapplicationofappropriatepricingandrating
techniques; and
• changesinlegalstandards,claimsettlementpracticesand
medical care expenses.
If the actual experience of our insurance businesses is less
favorable than our assumptions or estimates, our policy reserves