Rating agency Demotech, Inc. has received national recognition for its abilities as a credit rating agency from the United States Securities and Exchange Commission, becoming one of just ten rating agencies to be approved as an NRSRO.
A Nationally Recognized Statistical Ratings Organization (NRSRO) is a credit rating agency that has been through a rigorous assessment by the SEC, meaning not all achieve the grade.
In fact, before Demotech joined this group there were only nine rating agencies dubbed NRSRO’s operating in the United States.
This now positions Demotech alongside all the other most recognised national financial services rating agencies that all have NRSRO recognition.
Demotech’s NRSRO recognition is specifically for the class of credit ratings of insurance companies.
Of course, we discuss Demotech’s work mostly in relation to the ratings of Florida’s property insurers, where the agencies assessment is critical to those companies.
In this work, Demotech assesses Florida carriers credit worthiness and reinsurance arrangements, as well as their operational abilities.
In assessing the reinsurance side, Demotech looks at all sources of reinsurance, including alternative capital and instruments such as catastrophe bonds.
Which means the rating agency is very familiar with the ILS market and so with this new SEC recognition as a NRSRO, perhaps Demotech will come up more frequently in relation to ratings of ILS fund manager sponsored reinsurance vehicles as well.
There is no reason Demotech couldn’t rate such vehicles and its familiarity with Florida and other catastrophe exposed regions of the United States, as well as with the insurers operating there, could stand it in good stead for rating such entities.
The SEC recognition will raise Demotech’s profile further across the insurance and reinsurance markets, perhaps even putting it into a position where it could seek to rate other structures such as insurance-linked securities (ILS) or catastrophe bonds in time.
Again, the rating agencies experience assessing reinsurance programs for Florida carriers would likely put it in a good position should it choose to pursue such opportunities.
The SEC explained that Demotech’s application satisfied its requirements under Section 15E of the Exchange Act, so allowing the company to be registered as an NRSRO.
Becoming an NRSRO means Demotech’s assessment of the creditworthiness of a firm or financial instrument has been both registered and approved by the Securities and Exchange Commission (SEC).
It will now come under the SEC’s Office of Credit Ratings oversight, which monitors NRSRO activities and examines them to assess their compliance with statutory and SEC requirements.
The SEC sees this oversight as critical to its work to protect investors, by ensuring standards and transparency requirements are met.
The SEC will also consider Demotech’s adherence to policies, procedures, and methodologies, so the rating agencies methodologies and processes will have been submitted to the significant scrutiny the SEC staff will have applied.
Becoming nationally recognised by the SEC in this way can only help the rating agency to expand its activities and ultimately usefulness to markets including reinsurance and ILS.