NATIXIS_REGISTRATION_DOCUMENT_2017

RISKS AND CAPITAL ADEQUACY Other risks

frequency risk represents the risk of a sudden material a increase in delinquency by a high number of debtors. This risk is measured for each region and country by monitoring the instantaneous loss ratio (1)  and the monthly indicator that breaks down the changes in domestic/export credit by DRA (2) and business sector, by acceptance rate on the DRA scale, or by product line (deposit, single risks). As regards exposure and portfolio monitoring, the Group has set up a refined management of its risks based on a sector/country breakdown. Missed payments are thus analyzed weekly by the Group Management Board and monthly by Coface’s Underwriting Committee. This risk is mitigated by Coface Re reinsurance. Loss ratios for the different underwriting regions are also monitored at the consolidated Coface level; event risk represents the risk of abnormally high losses a recorded for the same debtor or group of debtors, or of an accumulation of losses for the same country. Even 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 centralization of claims reserves exceeding a certain a amount per debtor which are then analyzed ex-post to improve the information, underwriting and recovery activity’s performance; monitoring at the risk underwriting level, which, above a given a 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. a 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 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 anticipate a decrease in their solvency. Second-level 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, 2017:

8.8% €401 - 800 K 9.1% €801 - 1,500 K 7.0% €201 - 400 K 5.1% €101 - 200 K

4.6% ≥ €200m 7.7% €1 - 100K

8.2% €50m - €200m

3

30.4% €5m - €50m

19.1% €1,500 K - €5m

Financial risk Coface has implemented an investment policy that incorporates the management of financial risk through the definition of its strategic allocation, as well as 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 constantly reviewed: interest rate risk and credit risk: The majority of Coface's a allocations are in fixed-income products, ensuring stable and recurring revenues. The overall maximum sensitivity of the bond portfolio has been deliberately capped at 4 and stood at 3.6 at December 31, 2017. Coface still has no exposure to Portuguese and Greek sovereign debt. The Group continued to increase its international diversification in 2017, particularly in the developed countries of North America, in order to benefit from higher rates of return and to follow the various interest rate hikes. Interest rate hedges were applied to a portion of exposure to European sovereign debt; foreign exchange risk: the majority of Coface’s investment a instruments are denominated in euros. Subsidiaries and branches using other currencies must observe the same principles of congruence. In 2017 systematic hedging operations against the euro were arranged in the portfolio containing all of Coface’s European entities, to hedge bond investments denominated in dollar, British pound and Australian dollar; equity risk: exposure is capped at less than 10% of the a portfolio and is concentrated in the euro zone, in connection with its core business. At December 31, 2017, listed equities represented 7.5% 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 investments and the amount of unrealized capital gains or losses on shares held;

The instantaneous loss ratio is a weekly indicator that reproduces the change in the loss ratio. It is monitored for each region and each country and (1) is reported weekly by Coface, particularly so that underwriters can monitor the change in their portfolio and detect any deterioration in order to introduce corrective actions as early as possible. Debtor Risk Assessment: Assessment of debtors using a Group-wide grid. (2)

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Natixis Registration Document 2017