BPCE - 2020 Universal Registration Document

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RISK FACTORS & RISK MANAGEMENT

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 5 and stood at 4.17 on December 31, 2020. Exposures to Greek sovereign debt were once again nil. As part of the strategic allocation and in line with the health crisis, Coface implemented actions aimed at reducing the risk of the investment portfolio from the start of the crisis. The risk was controlled thanks to the review of all the counterparties in the portfolio, starting at the end of February, and the reduction in exposure to Italian and Spanish government debt, emerging market debt and high -end debt. yield, investment grade BBB corporate bonds and equities, in favor of money market; 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 addition, for the majority of the portfolio, which includes all of the Group’s European entities, foreign exchange risk is systematically hedged for investments in currencies that do not comply with the principle of matching. As a result, as of December 31, 2020, investments in bonds denominated in US dollars, pounds sterling, yen, Norwegian krone and Swedish krona in this portfolio were systematically hedged against euros by the managers in charge of the portfolios concerned. Foreign currency transactions carried out by the subsidiaries are Compagnie Européenne de Garanties et Cautions is the Group’s Security and Guarantee insurance platform. It is exposed to underwriting risk, market risk, reinsurer default risk and operational risk. Against an economic backdrop significantly impacted by the health crisis, home loan origination has remained very robust. In 2020 there was strong resistance to the underwriting risk, reflected by a loss ratio of 27% of earned premiums (gross reinsurance ratio). Provisions were adapted to take into account increased risk expectations and the extended duration of certain collateral. Under the Solvency II prudential regime, which came into force on January 1, 2016, CEGC uses a partial internal model approved by the ACPR. CEGC therefore meets the specific requirement applicable to mortgage loan guarantors to improve the robustness of the French banking system for home loans. CEGC

monitored by the Group in order to decide on the need to take out the associated hedges on a case-by-case basis; 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. On December 31, 2020, equities represented 5.3% of the investment portfolio, including 5% of equities listed on a market in the euro zone. These investmentswere partially hedged on the Eurostoxx 50 index. 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. On December 31, 2020, more than 95% of the bonds held by the Group had a median rating of BBB- or higher and no exposure rated CCC, attributed by at least one internationallyrecognized rating agency; liquidity risk: short-termexposure decreased slightly to 38.8% • (compared to 48% in 2019) of securities in the bond portfolio with a duration of less than three years as on December 31, 2020 and an increase in securities with a duration of duration. more than five years (39.8% compared to 31.6% in 2019) due to the increase in the duration of the bond portfolio. 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. In 2020, CEGC issued €150 million in subordinated debt, bringing the level of capital classified as Tier 2 to €400 million, to bolster eligible equity capital for the Solvency Capital Requirement (the solvency ratio in the fourth quarter of 2020 was 140%). 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 individual or corporate insured parties. These regulated commitments, provisioned under liabilities in the balance sheet, amounted to €2.52 billion on December 31, 2020 (up 16% compared to end-2019).

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UNIVERSAL REGISTRATION DOCUMENT 2020 | GROUPE BPCE

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