BPCE - 2018 Risk report / Pillar III

NON-COMPLIANCE, SECURITY AND OPERATIONAL RISKS Technical Insurance risks

The followingchart analyzesthe breakdownof debtors by total credit risk exposureincurred by Coface at December 31, 2018:

investments in Portugal during the year. The Group expanded its international diversificationin 2018, particularlyin 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 Europeansovereign 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 congruence. In 2018, Coface systematicallyset up hedges against the euro in the portfoliocombiningits Europeanentities,to protect investments in bonds denominated in dollars, Pound sterling, Canadian dollarsand Australian dollars; equity risk: exposure is capped at less than 10% of the portfolio ● and is concentratedin 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 unrealizedcapital gainsor losses on equity holdings; counterpartyrisk: maximumexposure to any given counterpartyis ● 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 portfoliohad maturitiesof 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.

€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 implementedan investment policy that incorporates the management of financial risk through the definition of its strategic allocation, regulations governing Insurance companies and constraintsrelated to the managementof its liabilities.Management of financial risks is thus based on a rigorous system of standardsand controls whichis regularly reviewed: interestrate risk and credit risk: the majorityof Coface’sallocations ● 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 sovereigndebt, but did make CEGC Compagnie Européenne de Garanties et Cautions is the Group’s multiple business line security and guarantee platform. It is exposed to underwritingrisk, marketrisk, reinsurerdefaultrisk and operational risk. In 2018 underwritingrisk was managedeffectively,reflectedby a loss ratio of 21% of earned premiums. The loss ratio on individual loan guarantees wasparticularly low this year. Under the Solvency II supervisoryregime, which came into effect on January 1, 2016, CEGC uses a partial internal model. The ACPR (French Prudential Supervisory Authority for the Banking and InsuranceSector) approvedthe 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 Directorsand validated inNovember2018.

Prices on individual loan guaranteeswere raised and implementedin April 2018.

UNDERWRITING RISK Underwritingrisk is the main risk incurred by CEGC. It is essentiallya counterpartyrisk, as the commitmentsgiven by CEGC to beneficiaries of guarantees result in direct exposure to underwriters. These regulatedcommitmentsrecordedon the liabilitiesside 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 mortgageguaranteesfor individualcustomers.

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Risk Report Pillar III 2018