BPCE_REGISTRATION_DOCUMENT_2017

RISK REPORT Non-compliance risks, security and operational risks

event risk representsthe risk of abnormallyhigh losses recordedfor ● the same debtor or group of debtors, or of an accumulation of losses for the same country. Event risk is covered by Coface Re reinsurance. In addition to weekly and monthly monitoring of each region and country, Coface has implemented a system based on: the centralizationof reservesfor claims exceedinga certainamount ● per debtor which are then analyzed ex-post to improve the information, underwriting and recovery activity’s performance; monitoringat the risk underwritinglevel, which, above a given level ● of DRA-based outstandings, generates an approval and the establishment of an overall budget by Coface’s Underwriting department; and a DRA-based risk assessment system covering all debtors. ● 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 disproportionateimpact on its overall claims expense. 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 anticipatea decreasein their solvency. Level 2 controls are set up to ensure that the Group’s credit risk standards are observed. The followingchart analyzesthe breakdownof debtors by total credit risk exposureincurred by Coface at December 31, 2017:

Cofacestill has no exposureto Portugueseand Greek sovereigndebt. The Group continuedto increase its internationaldiversificationin 2017, particularlyin the developedcountries of North America, in order to benefitfromhigherrates of returnand to accommodate the various interest rate hikes. Interest rate hedges were applied to a portionof exposureto European sovereign debt; 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 2017, 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, 2017, listed equitiesrepresented7.5%of the investment portfolio. These investments were subject to hedging for 30% of the invested portfolio through the purchase of put options on Eurostoxx indices. This hedging can be adjusted in line with investmentsand the amountof unrealizedcapital gains or losses onshares held; counterparty risk: the maximum exposure to any given ● counterparty is set at 5% of assets under management, with exceptional exemptions for short-term exposures. More than 89% of the bonds are Investment Grade and therefore have a median rating equal to at least BBB-; liquidity risk: 52% of the bond portfoliohad maturitiesof less than ● three years at December 31, 2017. The vast majorityof 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 underwritingrisk, marketrisk, reinsurerdefaultrisk and operational risk. In 2017 underwriting risk was managed effectively, reflected by a level of claims at 26% of earned premiums.New committedrisks on the balance sheet, particularly those on refinanced mortgage loans, made for agood risk profile. As part of the Solvency 2 supervisoryregime, which came into effect on January 1, 2016, CEGC submitted an application to certify its internal assessment model for underwriting risks on mortgage guarantees for retail customers. The ACPR (French Prudential SupervisoryAuthorityfor the Bankingand InsuranceSector) approved the model in March 2017. CEGC’s partial internal model therefore meets the specific requirement applicable to mortgage loan guarantorsaimed at improving the robustnessof the French banking system forhome loans. CEGC submitted the new annual quantitativestatementsrequired by Solvency 2 regulations, accompanied by the qualitative and quantitativereports intended for the supervisor (RSR) and the public (SFCR).

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€1 K - €100 K 7.7%

€101 K - €200 K 5.1%

€200 M and + 4.6%

€201 K - €400 K 7.0%

€401 K - €800 K 8.8%

€50 M - €200 M 8.2%

€801 K - €1,500 K 9.1%

€5 M - €50 M 30.4%

€1,500 K - €5 M 19.1%

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-incomeproducts,ensuringstableand recurringrevenues. The overall maximum sensitivity of the bond portfolio has been deliberatelycapped at 4 and stood at 3.6 at December 31, 2017.

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Registration document 2017