GROUPAMA / 2018 Registration document

RISK FACTORS AND RISK MANAGEMENT RISK FACTORS

secondly, through investment assets held by its subsidiaries in ❯ the eurozone, such as mutual funds or securities denominated in foreign currencies or euro-denominated mutual funds or securities tied to a foreign currency – mainly the U.S. dollar, the Hungarianforint and the pound sterling. Changes in the value of these currencies against the euro have an impact on the Group’s net incomeand financial position. Although Groupama seeks to control its exposure to currency fluctuations via hedging,movementsin exchangerates may have a significant impact on its net income, solvency margin and financial position. Similarly, the currency hedges that Groupama uses to manage foreign exchange risk may significantly affect its profits and the amounts available for the distribution of dividends by the subsidiaries, insofar as the unrealised foreign exchange gains or losses on these derivative instruments are recognised in Groupama’s income statement (see Analysis of exchange rate sensitivity presented in§ 4.2.3.3– Foreign exchangerisk). Inflation rate fluctuations 5.1.2.9 Inflation is an ongoing risk that weighs on the markets on which Groupama operates. For the eurozone, the annual inflation rate was 1.6% in December 2018, comparedwith 1.4% inDecember 2017. In addition, in certain countries where Groupama operates, social and political uncertainties and volatile commodity and currency prices are signsof tension. An increase in inflation rates or the failure to accurately anticipate higher inflation could have multiple impacts on the Group, mainly through the following consequences: an increase in the market interest rate that could reduce the ❯ levels of unrealised capital gains on some fixed-income securities, reduce the attractivenessof some of the Group’s life insurance and savings products, especially those with a fixed interest rate, and increase the cost of financing the Group’s future borrowing; impairment of equity securities and sluggish performance by ❯ equity markets in general. Such a weakening of the equity markets could lead to lower levels of unrealisedcapital gains on securitiesheld by the Group, reduce the performanceand future sales of unit-linked products with underlying securities, and affect the competitivenessand the results of the Group’s asset management company; a deterioration in non-life insurance businesses over long ❯ periods, such as constructionand third-party liabilities (“long-tail risks”), including in particular an underestimationof reserves at the time the latter are created and an increase in the amounts ultimately paidto settle claims; a systematic under-pricing of products. ❯

These factors, which are a direct result of an increase in the inflation rate, are likely to have a negative impact on Groupama’s business,net income,solvency margin andfinancial position. Conversely, the persistence of zero inflation or disinflation and, in the extreme case, deflation is an obstacle to economic development and therefore insurance businesses (no growth in insurance capacity) and increases the repayment constraints for the most indebted issuers and therefore the probability of default for the most vulnerable issuers, which would affect the net income if it occurs.

5.1.3

GROUPAMA’S INTERNAL

RISK FACTORS

The dependency of Groupama 5.1.3.1

Assurances Mutuelles, the holding company, on its subsidiaries for covering its expenses and payment of dividends

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Although Groupama Assurances Mutuelles operates its own reinsurance business via the contractual mechanism of Internal Reinsurance, which binds the regional mutuals to Groupama AssurancesMutuelles,most of the Group’s insuranceand financial service operationsare run by the direct and indirect subsidiariesof the Group holding company, Groupama Assurances Mutuelles. A significant share of the financial resources of Groupama Assurances Mutuelles consists of dividends paid by these subsidiariesand funds that may be raised by issuing subordinated debt or bonds, orthrough bank borrowings. Groupama Assurances Mutuelles expects that dividends received from its subsidiaries and other sources of funding will continue to cover the expenses it faces as a separate holding company of the Group, including interest payments on current financing arrangements (see dividends received by Groupama Assurances Mutuelles presented in Note 27 – Information about subsidiaries and equity intereststo the annual financial statements). Legal and regulatory restrictions may also limit the ability of Groupama Assurances Mutuelles to transfer funds freely either to or from all of its subsidiaries. Some insurance subsidiaries may also be subject to regulatory restrictions in respect of the amount of dividends and debt repayments that can be paid to Groupama AssurancesMutuellesand other entities of theGroup. In view of the above points, Groupama Assurances Mutuelles could receive a reduced (or no) dividend from some of its subsidiaries or be required to provide significant funding to some of them through loans or capital injections, which could significantly impactits cash situation.

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REGISTRATION DOCUMENT 2018 - GROUPAMA ASSURANCES MUTUELLES

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