BPCE - 2018 Registration document

6 RISK REPORT

Non-compliance, security and operational risks

Diversification of the credit risk portfolio Coface maintains a diversified credit risk portfolio, in order to minimize the risk of debtor default, a slowdown in a given business sector, or an adverse event in a given country having a disproportionate impact on its overall loss ratio. The Insurance policies also contain clauses allowing credit limits to be changed mid-contract. Furthermore, the fact that the great majority of Coface’s risks are short-term (95% of total outstandings) allows it to reduce the risk covered for a debtor or a group of debtors relatively quickly and to anticipate a decrease in their solvency. Level 2 controls are set up to ensure that the Group’s credit risk standards are observed. The following chart analyzes the breakdown of debtors by total credit risk exposure incurred by Coface at December 31, 2018:

congruence. In 2018, Coface systematically set up hedges against the euro in the portfolio combining its European entities, to protect investments in bonds denominated in dollars, Pound sterling, Canadian dollars and Australian dollars; equity risk: exposure is capped at less than 10% of the portfolio ● and is concentrated in the euro zone, in connection with its core business. At December 31, 2018, exchange-traded equities represented 6% of the investment portfolio. 30% of the portfolio was hedged through the purchase of Eurostoxx 50 put options. These hedges can be adjusted in line with investments and the amount of unrealized capital gains or losses on equity holdings; counterparty risk: maximum exposure to any given counterparty is ● set at 5% of assets under management, with exceptional exemptions for short-term exposures. More than 90% of bond holdings are Investment Grade and therefore have a median rating equal to at least BBB-; liquidity risk: 51% of the bond portfolio had maturities of less than ● 3 years at December 31, 2018. The vast majority of the portfolio is listed on OECD markets and carries a liquidity risk that is currently considered as low. Level 2 controls on compliance with Coface’s investment policy are also carried out. CEGC Compagnie Européenne de Garanties et Cautions is the Group’s multiple business line security and guarantee platform. It is exposed to underwriting risk, market risk, reinsurer default risk and operational risk. In 2018 underwriting risk was managed effectively, reflected by a loss ratio of 21% of earned premiums. The loss ratio on individual loan guarantees was particularly low this year. Under the Solvency II supervisory regime, which came into effect on January 1, 2016, CEGC uses a partial internal model. The ACPR (French Prudential Supervisory Authority for the Banking and Insurance Sector) approved the model in March 2017. CEGC therefore meets the specific requirement applicable to mortgage loan guarantors to improve the robustness of the French banking system for home loans. Major changes to the model were submitted to the Board of Directors and validated in November 2018. Prices on individual loan guarantees were raised and implemented in April 2018. Underwriting risk Underwriting risk is the main risk incurred by CEGC. It is essentially a counterparty risk, as the commitments given by CEGC to beneficiaries of guarantees result in direct exposure to underwriters. These regulated commitments recorded on the liabilities side of the balance sheet amounted to € 2.01 billion at December 31, 2018 (up 8.7% year-on-year). This increase was in line with fiscal year 2017, driven mainly by mortgage guarantees for individual customers.

€200M and + 5.0% €1K - €100K 7.2% €50M - €200M 8.8%

€101K - €200K 4.9%

€201K - €400K 6.7%

€401K - €800K 8.5%

€801K - €1,500K 8.8%

€5M - €50M 31.2%

€1,500K - €5M 18.9%

Financial risk Coface has implemented an investment policy that incorporates the management of financial risk through the definition of its strategic allocation, regulations governing Insurance companies and constraints related to the management of its liabilities. Management of financial risks is thus based on a rigorous system of standards and controls which is regularly reviewed: interest rate risk and credit risk: the majority of Coface’s allocations ● are in fixed-income products, ensuring stable and recurring revenues. The modified duration of the bond portfolio has been deliberately capped at 4 and stood at 3.5 at December 31, 2018. Coface still has no exposure to Greek sovereign debt, but did make investments in Portugal during the year. The Group expanded its international diversification in 2018, particularly in Asian developed countries, in order to capture higher rates of return and to accommodate the various interest rate hikes or reduce currency hedging costs. Interest rate hedges were applied to a portion of European sovereign debt exposure; foreign exchange risk: the majority of Coface’s investment ● instruments are denominated in euros. Subsidiaries and branches using other currencies must observe the same principles of

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Registration document 2018