# EDGAR Filing Document

**Accession Number:** 0001962109
**File Stem:** 0001962109-23-000001
**Filing Date:** 2023-1
**Character Count:** 134492
**Document Hash:** 588cac1b90ef4b7e6c9c3fad2f053425
**Contains OCR:** False
**Source Format:** 

## Filing Content

## Filing Summary
**0001962109-23-000001.hdr.sgml**: 20230131

**ACCESSION NUMBER**: 0001962109-23-000001

**CONFORMED SUBMISSION TYPE**: NRSRO-UPD

**PUBLIC DOCUMENT COUNT**: 5

**FILED AS OF DATE**: 20230131

**DATE AS OF CHANGE**: 20230131

**FILER**: 

**COMPANY DATA:**
- **COMPANY CONFORMED NAME:** Demotech, Inc.
- **CENTRAL INDEX KEY:** 0001962109
- **IRS NUMBER:** 311157875
- **STATE OF INCORPORATION:** OH
- **FISCAL YEAR END:** 1231

**FILING VALUES:**
- **FORM TYPE:** NRSRO-UPD
- **SEC ACT:** 1934 Act
- **SEC FILE NUMBER:** 110-00200
- **FILM NUMBER:** 23572357

**BUSINESS ADDRESS:**
- **STREET 1:** 2715 TULLER PARKWAY
- **CITY:** DUBLIN
- **STATE:** OH
- **ZIP:** 43017
- **BUSINESS PHONE:** 614-761-8602

**MAIL ADDRESS:**
- **STREET 1:** 2715 TULLER PARKWAY
- **CITY:** DUBLIN
- **STATE:** OH
- **ZIP:** 43017

### Attached PDF Documents

**Attachment 1:** `FormNRSROupd.pdf`

FORM NRSRO

OMB APPROVAL

OMB Number: 3235-0625

Expires: Dec. 31, 2023

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# APPLICATION FOR REGISTRATION AS A NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO)

SEC 1541 (1-15)

Persons who respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.

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# APPLICATION FOR REGISTRATION AS A
NATIONALLY RECOGNIZED
STATISTICAL RATING ORGANIZATION (NRSRO)

☐ INITIAL APPLICATION
☐ APPLICATION TO ADD CLASS
OF CREDIT RATINGS
☐ APPLICATION SUPPLEMENT
Items and/or Exhibits Supplemented:
☐ ANNUAL CERTIFICATION
☑ UPDATE OF REGISTRATION
Items and/or Exhibits Amended:
Exhibits 2, 3, 5, 7
☐ WITHDRAWAL FROM REGISTRATION

Important: Refer to Form NRSRO Instructions for General Instructions, Item-by-Item Instructions, an Explanation of Terms, and the Disclosure Reporting Page (NRSRO). "You" and "your" mean the person filing or furnishing, as applicable, this Form NRSRO. "Applicant" and "NRSRO" mean the person filing or furnishing, as applicable, this Form NRSRO and any credit rating affiliate identified in Item 3.

1. A. Your full name:

Demotech, Inc.

B. (i) Name under which your credit rating business is primarily conducted, if different from Item 1A:

N/A

(ii) Any other name under which your credit rating business is conducted and where it is used (other than the name of a credit rating affiliate identified in Item 3):

N/A

C. Address of your principal office (do not use a P.O. Box):

| 2715 Tuller Parkway | Dublin | OH/USA | 43017 |
| --- | --- | --- | --- |
| (Number and Street) | (City) | (State/Country) | (Zip/Postal Code) |

D. Mailing address, if different:

N/A

| (Number and Street) | (City) | (State/Country) | (Zip/Postal Code) |
| --- | --- | --- | --- |

E. Contact person (See Instructions):

W. Burke Coleman Regulatory & Compliance Counsel

(Name and Title)

| 2715 Tuller Parkway | Dublin | OH/USA | 43017 |
| --- | --- | --- | --- |
| (Number and Street) | (City) | (State/Country) | (Zip/Postal Code) |

CERTIFICATION:

The undersigned has executed this Form NRSRO on behalf of, and on the authority of, the Applicant/NRSRO. The undersigned, on behalf of the Applicant/NRSRO, represents that the information and statements contained in this Form, including Exhibits and attachments, all of which are part of this Form, are accurate in all significant respects. If

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this is an ANNUAL CERTIFICATION, the undersigned, on behalf of the NRSRO, represents that the NRSRO's application on Form NRSRO, as amended, is accurate in all significant respects.

1/31/2023

Demotech, Inc.

(Date)

(Name of the Applicant/NRSRO)

By: /s/ Joseph L. Petrelli

Joseph L. Petrelli, President

(Signature)

(Print Name and Title)

2. A. Your legal status:

☑ Corporation ☐ Limited Liability Company ☐ Partnership ☐ Other (specify) _________

B. Month and day of your fiscal year end: 12/31

C. Place and date of your formation (i.e., state or country where you were incorporated, where your partnership agreement was filed, or where you otherwise were formed):

State/Country of formation: OH/USA Date of formation: 9/9/85

3. Your credit rating affiliates (See Instructions):

N/A

(Name)

(Address)

(Name)

(Address)

(Name)

(Address)

(Name)

(Address)

(Name)

(Address)

4. The designated compliance officer of the Applicant/NRSRO (See Instructions):

W. Burke Coleman

Regulatory & Compliance Counsel

(Name and Title)

2715 Tuller Parkway

Dublin

OH/USA

43017

(Number and Street)

(City)

(State/Country)

(Postal Code)

5. Describe in detail how this Form NRSRO and Exhibits 1 through 9 to this Form NRSRO will be made publicly and freely available on an easily accessible portion of the corporate Internet website of the Applicant/NRSRO (See Instructions):

Form NRSRO and Exhibits 1 through 9 are made publicly and freely available at Demotech's website, www.demotech.com.

6. COMPLETE ITEM 6 ONLY IF THIS IS AN INITIAL APPLICATION, APPLICATION SUPPLEMENT, OR APPLICATION TO ADD A CLASS OF CREDIT RATINGS.

A. Indicate below the classes of credit ratings for which the Applicant/NRSRO is applying to be registered. For each class, indicate the approximate number of obligors, securities, and money market instruments in that class as of the date of this application for which the Applicant/NRSRO has an outstanding credit rating and the approximate date the Applicant/NRSRO began issuing credit ratings as a "credit rating agency" in that class on a continuous basis through the present (See Instructions):

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| Class of credit ratings | Applying for registration | Approximate number currently outstanding | Approximate date issuance commenced |
| --- | --- | --- | --- |
| financial institutions as that term is defined in section 3(a)(46) of the Exchange Act (15 U.S.C. 78c(a)(46)), brokers as that term is defined in section 3(a)(4) of the Exchange Act (15 U.S.C. 78c(a)(4)), and dealers as that term is defined in section 3(a)(5) of the Exchange Act (15 U.S.C. 78c(a)(5)) | ☐ |  |  |
| insurance companies as that term is defined in section 3(a)(19) of the Exchange Act (15 U.S.C. 78c(a)(19)) | ☐ |  |  |
| corporate issuers | ☐ |  |  |
| issuers of asset-backed securities as that term is defined in 17 CFR 229.1101(c) | ☐ |  |  |
| issuers of government securities as that term is defined in section 3(a)(42) of the Exchange Act (15 U.S.C. 78c(a)(42)), municipal securities as that term is defined in section 3(a)(29) of the Exchange Act (15 U.S.C. 78c(a)(29)), and foreign government securities | ☐ |  |  |

B. Briefly describe how the Applicant/NRSRO makes the credit ratings in the classes indicated in Item 6A readily accessible for free or for a reasonable fee (See Instructions):

C. Check the applicable box and attach certifications from qualified institutional buyers, if required (See Instructions):

☐ The Applicant/NRSRO is attaching _______ certifications from qualified institutional buyers to this application. Each is marked "Certification from Qualified Institutional Buyer."
☐ The Applicant/NRSRO is exempt from the requirement to file certifications from qualified institutional buyers pursuant to section 15E(a)(1)(D) of the Exchange Act.

Note: You are not required to make a Certification from a Qualified Institutional Buyer filed with this Form NRSRO publicly available on your corporate Internet website pursuant to Exchange Act Rule 17g-1(i). You may request that the Commission keep these certifications confidential by marking each page "Confidential Treatment" and complying with Commission rules governing confidential treatment. The Commission will keep the certifications confidential upon request to the extent permitted by law.

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# **7. DO NOT COMPLETE ITEM 7 IF THIS IS AN INITIAL APPLICATION.**

**A.** Indicate below the classes of credit ratings for which the NRSRO is currently registered. For each class, indicate the approximate number of obligors, securities, and money market instruments in that class for which the NRSRO had an outstanding credit rating as of the most recent calendar year end and the approximate date the NRSRO began issuing credit ratings as a 'credit rating agency' in that class on a continuous basis through the present (See Instructions):

| Class of credit rating | Currently registered | Approximate number outstanding as of the most recent calendar year end | Approximate date issuance commenced |
| --- | --- | --- | --- |
| financial institutions as that term is defined in section 3(a)(46) of the Exchange Act (15 U.S.C. 78c(a)(46)), brokers as that term is defined in section 3(a)(4) of the Exchange Act (15 U.S.C. 78c(a)(4)), and dealers as that term is defined in section 3(a)(5) of the Exchange Act (15 U.S.C. 78c(a)(5)) | ☐ |  |  |
| insurance companies as that term is defined in section 3(a)(19) of the Exchange Act (15 U.S.C. 78c(a)(19)) | ☑ | 435 | 1989 |
| corporate issuers | ☐ |  |  |
| issuers of asset-backed securities as that term is defined in 17 CFR 229.1101(c) | ☐ |  |  |
| issuers of government securities as that term is defined in section 3(a)(42) of the Act (15 U.S.C. 78c(a)(42)), municipal securities as that term is defined in section 3(a)(29) of the Exchange Act (15 U.S.C. 78c(a)(29)), and foreign government securities | ☐ |  |  |

**B.** Briefly describe how the NRSRO makes the credit ratings in the classes indicated in Item 7A readily accessible for free or for a reasonable fee (See Instructions):

The credit ratings assigned to insurance companies by Demotech are readily accessible for free on Demotech's website, www.demotech.com

**8. Answer each question.** Provide information that relates to a 'Yes' answer on a Disclosure Reporting Page (NRSRO) and submit the Disclosure Reporting Page with this Form NRSRO (See Instructions). You are not required to make any disclosure reporting pages submitted with this Form publicly available on your corporate Internet website pursuant to Exchange Act Rule 17g-1(i). You may request that the Commission keep any disclosure reporting pages confidential by marking each page 'Confidential Treatment' and complying with Commission rules governing confidential treatment. The Commission will keep the disclosure reporting pages confidential upon request to the extent permitted by law.

5

|  | YES | NO |
| --- | --- | --- |
| A. Has the Applicant/NRSRO or any person within the Applicant/NRSRO committed or omitted any act, or been subject to an order or finding, enumerated in subparagraphs (A), (D), (E), (G), or (H) of section 15(b)(4) of the Securities Exchange Act of 1934, been convicted of any offense specified in section 15(b)(4)(B) of the Securities Exchange Act of 1934, or been enjoined from any action, conduct, or practice specified in section 15(b)(4)(C) of the Securities Exchange Act of 1934 in the ten years preceding the date of the initial application of the Applicant/NRSRO for registration as an NRSRO or at any time thereafter? | ☐ | ☑ |
| B. Has the Applicant/NRSRO or any person within the Applicant/NRSRO been convicted of any crime that is punishable by imprisonment for 1 or more years, and that is not described in section 15(b)(4) of the Securities Exchange Act of 1934, or been convicted of a substantially equivalent crime by a foreign court of competent jurisdiction in the ten years preceding the date of the initial application of the Applicant/NRSRO for registration as an NRSRO or at any time thereafter? | ☐ | ☑ |
| C. Is any person within the Applicant/NRSRO subject to any order of the Commission barring or suspending the right of the person to be associated with an NRSRO? | ☐ | ☑ |

### 9. Exhibits (See Instructions).

| Exhibit 1. Credit ratings performance measurement statistics. ☐ Exhibit 1 is attached and made a part of this Form NRSRO. |
| --- |
| Exhibit 2. A description of the procedures and methodologies used in determining credit ratings. ☑ Exhibit 2 is attached and made a part of Form NRSRO. |
| Exhibit 3. Policies or procedures adopted and implemented to prevent the misuse of material, nonpublic information. ☑ Exhibit 3 is attached and made a part of this Form NRSRO. |
| Exhibit 4. Organizational structure. ☐ Exhibit 4 is attached to and made a part of this Form NRSRO. |
| Exhibit 5. The code of ethics or a statement of the reasons why a code of ethics is not in effect. ☑ Exhibit 5 is attached to and made a part of this Form NRSRO. |
| Exhibit 6. Identification of conflicts of interests relating to the issuance of credit ratings. ☐ Exhibit 6 is attached to and made a part of this Form NRSRO. |
| Exhibit 7. Policies and procedures to address and manage conflicts of interest. ☑ Exhibit 7 is attached to and made a part of this Form NRSRO. |

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**Exhibit 8.** Certain information regarding the credit rating agency's credit analysts and credit analyst supervisors.

Exhibit 8 is attached to and made a part of this Form NRSRO.

**Exhibit 9.** Certain information regarding the credit rating agency's designated compliance officer.

Exhibit 9 is attached to and made a part of this Form NRSRO.

**Exhibit 10.** A list of the largest users of credit rating services by the amount of net revenue earned from the user during the fiscal year ending immediately before the date of the initial application.

Exhibit 10 is attached to and made a part of this Form NRSRO.

**Note:** You are not required to make this Exhibit publicly available on your corporate Internet website pursuant to Exchange Act Rule 17g-1(i). You may request that the Commission keep this Exhibit confidential by marking each page 'Confidential Treatment' and complying with Commission rules governing confidential treatment. The Commission will keep the information and documents in the Exhibit confidential upon request to the extent permitted by law.

**Exhibit 11.** Audited financial statements for each of the three fiscal or calendar years ending immediately before the date of the initial application.

Exhibit 11 is attached to and made a part of this Form NRSRO.

**Note:** You are not required to make this Exhibit publicly available on your corporate Internet website pursuant to Exchange Act Rule 17g-1(i). You may request that the Commission keep this Exhibit confidential by marking each page 'Confidential Treatment' and complying with Commission rules governing confidential treatment. The Commission will keep the information and documents in the Exhibit confidential upon request to the extent permitted by law.

**Exhibit 12.** Information regarding revenues for the fiscal or calendar year ending immediately before the date of the initial application.

Exhibit 12 is attached to and made a part of this Form NRSRO.

**Note:** You are not required to make this Exhibit publicly available on your corporate Internet website pursuant to Exchange Act Rule 17g-1(i). You may request that the Commission keep this Exhibit confidential by marking each page 'Confidential Treatment' and complying with Commission rules governing confidential treatment. The Commission will keep the information and documents in the Exhibit confidential upon request to the extent permitted by law.

**Exhibit 13.** The total and median annual compensation of credit analysts.

Exhibit 13 is attached and made a part of this Form NRSRO.

**Note:** You are not required to make this Exhibit publicly available on your corporate Internet website pursuant to Exchange Act Rule 17g-1(i). You may request that the Commission keep this Exhibit confidential by marking each page 'Confidential Treatment' and complying with Commission rules governing confidential treatment. The Commission will keep the information and documents in the Exhibit confidential upon request to the extent permitted by law.

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**Attachment 2:** `Exhibit_2.pdf`

Demotech, Inc.

# Demotech, Inc.

## Exhibit 2

### Procedures and Methodologies Used to Determine Credit Ratings

2715 Tuller Parkway Dublin, Ohio 43017-2310
Tel: 614 761-8602 800 354-7207 Fax: 614 761-0906
www.demotech.com

Demotech, Inc.

## Rating Procedures & Methodologies

The following document provides a general description of the procedures and methodologies used by Demotech to determine ratings. The procedures and methodologies discussed in this document are intended to provide users of Demotech’s ratings with a general understanding of how Demotech determines and assigns ratings. The most current versions of Demotech’s procedures and methodologies for determining ratings are provided to the Securities and Exchange Commission with Form NRSRO on an annual basis and are available on Demotech’s website, www.demotech.com.

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# Demotech's Philosophy

Demotech's rating process provides an objective baseline for assessing solvency based upon changes in financial stability, as manifested over time in an entity's balance sheet, income statement, and other financial statements. While Financial Stability Ratings® (FSRs) are predominantly based upon a series of quantitative ratios, certain qualitative factors are also considered in the analysis. An FSR summarizes Demotech's opinion as to an insurer's ability to insulate itself from the business cycle that exists in the general economy as well as the underwriting cycle that exists in the insurance industry in the jurisdictions where the entity operates. Thus, an FSR summarizes Demotech's opinion as to the relative ability of an insurer to honor meritorious claims during a downturn in general economic conditions as well as a downturn in the underwriting cycle.

Demotech's focus on determining ratings is unique. While Demotech acknowledges and recognizes the importance of the profitability of the entity assigned a rating, we believe that balance sheet strength and financial integrity are the ultimate determinants of the long term financial stability required to effectively implement the entity's business model and thereby honor meritorious claims. Accordingly, while operating profit remains an important element and consideration of FSRs, the ability of an insurer to remain financially stable under a variety of economic scenarios requires a focus on balance sheet integrity, including a review of the quality and quantity of reinsurance protection as well as the relative adequacy of loss and loss adjustment expense reserves.

Demotech believes that financial stability can be independent of size. We believe well-managed, properly reinsured, regional and specialty insurers can be as financially stable as larger insurers.

FSRs present Demotech's opinion of the ability of the insurer to meet its insurance-related obligations based upon our assessment and interpretation of financial information and other information requested by and presented to us. FSRs are not an endorsement of any particular insurer or its products. Insureds, producers, and third parties need to independently evaluate their relationship with a particular insurer as well as the applicability of that insurer's products to their needs.

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# Demotech’s Rating Procedures

## Initiation of the rating process

Ratings from Demotech are typically solicited by the entity seeking the rating. Demotech requires the participation of the rated entity to complete its review and assign a final rating. Demotech does not publish unsolicited ratings for particular entities and does not publish ratings unless an entity agrees to finalize a rating assignment. When an entity agrees to participate in the rating process, Demotech will review certain publicly available information and request that the entity submit such additional information as may be required by Demotech for a full review of the entity. Demotech accepts rating assignments only if it determines it has the necessary information, resources, and expertise to review the entity and assign an informed rating. All engagements are subject to Demotech’s Code of Conduct and other policies. Finalized rating assignments and subsequent monitoring generally occur only for entities who have engaged Demotech for its rating services.

## Public and non-public sources of information used in determining credit ratings

Demotech will issue a rating only after it has received and reviewed all financial data and qualitative information that it deems relevant and that would be required to apply an analysis process consistent with the risks that the entity appears to present. This information includes publicly available information (which includes annual and quarterly financial statements, and which may also consist of statements of actuarial opinion, management discussion and analysis, regulatory filings, including rate, rule, and form filings, and other information), nonpublic information obtained from the entity (which may include but is not necessarily limited to information related to reinsurance programs, business plans, financial projections, risk management procedures, or financial statements and other information related to a parent, subsidiary or affiliated entity), and other information provided by agents or third-party vendors of the entity, such as auditors, actuaries, reinsurers, third party administrators, managing general agencies, and other vendors or service providers.

Demotech obtains information from sources considered reliable. Demotech reviews the data and information it receives for reasonableness and consistency, but does not independently audit the data it receives and assumes no responsibility for data provided by rated entities or prepared by third parties.

If Demotech concludes that it does not possess the information that it requires or sufficient analysts necessary to issue an informed credit rating, Demotech will not issue a rating to an entity.

## Quantitative and qualitative models and metrics used to determine credit ratings

Demotech ratings are determined using quantitative and qualitative considerations.

For reviewing established entities with representative operating histories, the quantitative considerations are of primary importance. Demotech’s Financial Stability Analysis Model is a component of the rating assignment process and includes a review as well as computation and analysis of critical financial ratios to determine the current and anticipated financial stability of the entity being reviewed.

For reviewing new entities or those without representative operating history, the quantitative considerations include a review of the pro forma financial information, critical assumptions, business plan, and qualifications and experience of management or its anticipated vendors and service providers.

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Demotech’s review and analysis process also includes certain qualitative factors such as operating environments, business models and operating plans, enterprise risk management, corporate governance, ownership and management, and access to capital. Business models and specific business risks provide context for our quantitative review, inform other aspects of our review, and may be considered in determining a rating.

Additional information about the metrics and criteria considered in Demotech’s review process is included with a description of Demotech’s Financial Stability Rating® Methodology.

#### **4 Procedures for interacting with the management of a rated obligor or issuer**

Demotech requires access to an authorized representative of a rated entity. Each rated entity must designate a contact person at the entity prior to Demotech finalizing a rating. As the extent and nature of Demotech’s interactions with representatives of the rated obligor are dependent upon the complexity of the rated obligor and our understanding of its business model, interactions with management or other authorized representatives of the rated entity occur on an as-needed basis. When it is deemed necessary, our analysts may communicate with the representative of the rated entity that has been designated as the contact person for rating purposes in order to gain additional information or for clarification about information obtained. When our analysts deem it necessary to do so, they may require a meeting with managers or division heads in other critical functional areas of the entity, such as sales, marketing, underwriting, investment, claims, actuarial, accounting, or reinsurance. Demotech may also request permission to communicate with third party vendors to gain additional information about the entity.

#### **5 Process for reviewing and approving credit ratings**

When an entity engages Demotech for a rating, an analyst or team of analysts is assigned to review the entity and monitor the entity after the assignment of a rating. Demotech obtains all necessary information to complete its review. Once a thorough analysis of the entity to be rated has been completed by the assigned analyst, the analyst will determine a recommended preliminary rating (in the case of the initial assignment of a rating) or a recommended rating action (in the case of monitoring a previously assigned rating). The recommendation and supporting analysis is submitted to the Chief Ratings Officer, or, when necessary, another senior analyst for review and approval. The Chief Ratings Officer, or another senior analyst as the case may be, may approve the recommended rating, request additional information or analysis, or recommend a different rating based on the review and analysis. If there is disagreement between the lead analyst and approving analyst as to the rating action, a third analyst will participate in the review to determine the rating action.

Once a rating assignment is approved, the rating will be communicated to the rated entity. If the entity agrees to finalize the rating, then the rating information disclosure form required by SEC Rule 17g-7 will be finalized and attested to by the Chief Ratings Officer or another senior analyst who participated in the approval of the rating. If the rated entity disagrees with the rating assignment, it has the opportunity to provide additional information, or clarification related to factual errors, omissions, or misperceptions that would have a material effect on the rating. In the case of monitoring an assigned rating, where feasible, a downgrade or withdrawal of the rating will be communicated to the rated entity with an opportunity for the entity to appeal the rating action and provide additional information, or clarification related to factual errors, omissions, or misperceptions that would have a material effect on the downgrade or withdrawal. All appeals will be handled as described in this document and in accordance with Demotech’s policies.

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#### **4 Procedures for informing rated obligors about credit rating decisions and for appeals of final or pending credit rating decisions**

For initial rating assignments, after a review and analysis of relevant information, Demotech informs entities of the preliminary rating assignment. Ratings are generally not finalized and published unless the subject entity agrees to engage in the rating process and consents to finalization. For subsequent rating actions resulting from ongoing monitoring of a rating assignment, Demotech will inform the rated entity of the action prior to the action being taken, where feasible. Demotech will reference specific metrics and factors that impacted the analysis and opinion, and will enumerate the major critical issues that will be the focus of Demotech’s ongoing reviews.

In situations where the entity believes an inappropriate credit rating was arrived at due to factual errors, omissions, or misperceptions that would have a material effect on the rating, the entity will be afforded an opportunity to clarify such errors, omissions, or misperceptions, or provide additional information for Demotech’s consideration. Upon receipt and review of any clarification or additional information, Demotech will determine if any modification to the rating assignment is warranted, subject to the review and approval process described in this document.

A rated entity may choose to withdraw its rating at any time. Although Demotech generally requires the consent of the entity prior to finalizing a rating assignment, ratings can be assigned, withdrawn, or revised by Demotech at any time in its sole discretion.

#### **4 Procedures for monitoring, reviewing, and updating credit ratings**

Demotech monitors all rated entities on an ongoing basis and takes such rating actions as may be necessary. Reviews are completed regularly on an annual and quarterly basis and are based primarily on annual and quarterly financial statements and other critical reports. Significant changes in an entity’s financial or operating situation may also prompt a review. The review process focuses on material changes in the financial or operating condition of the entity. Not all criteria considered for an initial rating assignment are necessarily reviewed on a quarterly basis. Consistent, positive developments may warrant a rating upgrade; whereas, material adverse developments may result in the downgrade or withdrawal of a rating. All rating actions are made in the sole discretion of Demotech, subject to the review and approval process described in this document, and the appeal process described in this document. Changes made to Demotech’s models and criteria for determining ratings are generally not applied retroactively to existing ratings; however, material changes to Demotech’s methodology impacting an assigned rating will be applied in the course of ongoing monitoring and regular reviews. All rating actions are accompanied by a rating information disclosure form identifying the applicable methodology.

#### **4 Procedures to withdraw a credit rating**

When there are material quantitative or qualitative changes in the financial condition, operating condition, or operating environment of the entity, or when the ability of the entity to execute its business model comes into question, Demotech may determine that its rating assignment is no longer supported and should be withdrawn. As with all rating actions, the decision to withdraw a rating is subject to Demotech’s review and approval procedures.

In Demotech’s sole discretion, it may withdraw a rating at any time; however, in most instances, Demotech will notify the affected entity prior to the rating action and may request additional information. If feasible, Demotech may afford the affected entity a reasonable time to respond to the notification of Demotech’s intent to withdraw and Demotech may consider any new information provided by the entity, including but not limited to a revision to the entity’s business plan or access to additional capital. Demotech will then

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make a final determination about revising or withdrawing a rating or taking such other rating action as it sees fit according to Demotech’s policies, procedures, and methodologies.

Rating engagements are renewed on an annual basis. Should an entity decide not to renew its rating or otherwise not comply with the terms and conditions for maintaining a rating, Demotech may withdraw a rating. In such cases of an entity’s voluntary withdrawal from the rating process, non-renewal of the rating services engagement, or breach of Demotech’s terms and conditions, the reason for the withdrawal will be documented and the required disclosures for all rating actions will be made.

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# Financial Stability Rating® Methodology

The Financial Stability Rating® methodology applies to Demotech's ratings of all insurance companies, including Property and Casualty insurers; Title underwriters; Life, Health, Dental and Vision plans; and other risk bearing entities.

Demotech does not mandate specific financial benchmarks, acceptable ranges, or minimums for admitted assets, surplus, capital adequacy, leverage ratios, reinsurance programs, or other financial, operational, or capital adequacy performance measures. The initial assignment of a Financial Stability Rating® (FSR) and subsequent rating actions are based upon our interpretation of the overall financial stability of an insurer. Demotech believes management's ability to consistently report acceptable operating results is the culmination of sound management practices that have been implemented and monitored.

The assignment and monitoring of an FSR is based on a review of the entity and the analytical expertise and judgment of the rating analysts in the application of Demotech's rating methodology. The review and analysis process for determining a rating assignment includes both quantitative and qualitative considerations; however, the interpretation of certain quantitative factors and the consideration of additional qualitative factors necessarily require some subjective analysis from rating analysts.

## Review and Analysis Process

Demotech generally follows the process outlined below for determining and assigning ratings. The rating process is interactive and may include questions for an entity's management and additional data requests throughout the review.

![img-0.jpeg](img-0.jpeg)

## Business Model Review

In reviewing an insurer, Demotech considers the business model and operating profile of the insurer. An initial understanding of an insurer's business model underlies all other aspects of the review. This initial step in the review seeks to understand an insurer's line(s) of business, geographic profile, operating environment, and other operational aspects of the insurer. Demotech has found that size, product line diversity, or geographic diversity have had a limited impact on the financial success of insurers. Adequate premiums, liquid investments, adequate loss and loss adjustment expense reserves, and the quality and quantity of reinsurance have proven to be critical to the ability to honor meritorious claims. Demotech recognizes that coverage specialists (insurers with more than 90% of their direct written premium in one line of business) focused on a particular niche can be financially stable and, in many cases, are in the best position to understand their business sectors, maintain consistent underwriting discipline, and maintain consistent relationships with agents and their core customers. While Demotech's evaluation concentrates on an insurer's area of focus and execution of their business model, an overall understanding of an insurer's market position, distribution channels, lines of business, and geographic exposure may be reviewed by Demotech and can impact our overall assessment of a company.

Rating Procedures & Methodologies
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## Business Risk Review

Demotech also reviews the specific risks associated with an insurer’s business, including those related to line of business, geographic profile, catastrophe exposure, operating environment, and enterprise risk management, among others. An overall understanding of an insurer’s business risk comprises an initial step in our review and informs other aspects of the review.

### Line of Business, Geography, Catastrophe Exposure

A review of an insurer’s lines of business, geographic areas of operation, and catastrophe exposure informs the specific risks for the insurer and provides perspective on the financial results of the company. Such specific risks may provide context for the quantitative aspects of Demotech’s review process and may determine the nature and extent of our review of certain qualitative factors.

### Legislative, Regulatory, and Judicial Environment

In some cases, the legislative, regulatory, and judicial environment may be considered in Demotech’s review where legislation, regulations, or judicial decisions could materially impact an insurer’s financial position or its ability to operate consistently given the market conditions of a particular jurisdiction. Regulatory practices or regulatory actions may affect the operating environment of insurance companies positively or negatively. Such actions may relate to product regulation, financial regulation, or market regulation. In some instances, legislation or judicial decisions may also alter the operating environment or risk exposure of certain insurers by altering, positively or negatively, the policyholder claims and litigation environment, the financial environment, or the insurance regulatory environment.

### Enterprise Risk Management

Demotech may consider an insurer’s enterprise risk management processes and capabilities. Depending on the nature of the insurer’s business and its geographic profile, Demotech may obtain additional information from insurers, including the following:

#### *Catastrophe Response Plan and Disaster Recovery Plan*

Demotech requires property insurers writing significant business in catastrophe prone areas to submit a catastrophe response plan (CAT Response Plan) and disaster recovery plan, or business continuity plan, in addition to their reinsurance program information. Demotech may undertake a formal data call requiring subject insurers to provide the following information:

- Claims organization chart - in-house claims adjusting resources;
- Claims adjuster count - in-house claims adjusters;
- Qualifications of adjusters - experience and qualifications of in-house adjusters;
- Reporting protocol - claims reporting process;
- Responsible personnel - personnel responsible for assessing, monitoring, and responding to a catastrophe event;
- Third party administrator - third party service providers, affiliated and non-affiliated, that provide services and support for adjustment of catastrophe claims;
- Independent adjuster count - number of independent adjusters contracted with company;
- Management narrative - explanation, commentary, and description of overall CAT Response Plan;
- Disaster recovery plan - formal disaster recovery/business continuity plan.

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### *Title Agent Appointment and Defalcation Prevention Process*

Demotech requires most Title underwriters to provide information pertaining to their agent review and appointment process and defalcation prevention procedures. This information typically includes procedures and practices regarding how Title agents are vetted prior to their appointment by the Title underwriter, how the Title underwriter monitors agency activity including escrow reconciliation, audits, monitoring software, and other reviews, as well as protections in place to prevent escrow theft. This information may be considered in the assignment of a rating.

## **Financial Statement Analysis and Metrics Review**

The primary focus of Demotech's rating process is a review and analysis of financial statements and the calculation of financial ratios and metrics. This review is based upon publicly available financial information, focuses on insurance fundamentals, and consists of an analysis of an insurer's balance sheet, income statement, loss and loss adjustment expense reserves, and other metrics.

### **Financial Stability Analysis Model**

For entities with sufficient representative operating history, the application of Demotech's Financial Stability Analysis Model is a component of the rating process and involves a review of financial statements in addition to computation and analysis of critical financial ratios and metrics. The Financial Stability Analysis Model is a proprietary model that analyzes financial statement calculations and relationships. The model takes into account such things as operating performance, leverage, capital adequacy, liability mix, and loss and loss adjustment expense reserve development.

The model's output provides an objective indication of a rating assignment but is not determinative of a final rating or rating action. The Financial Stability Analysis Model is generally applied for initial rating assignments and is typically not applied to subsequent monitoring of assigned ratings. Monitoring of rating assignments focuses on material changes in the reported financial condition or operating situation of an entity.

### **Pro Forma/Projection Review**

For entities without sufficient representative operating history, including startup entities and entities implementing new business models, a tactile review of pro forma financials is undertaken along with a review of the insurer's business model, business plan, critical assumptions, and the experience and qualifications of management or its anticipated vendors and service providers. Where applicable, the pro forma financial information may be compared to actual operating results of similar entities to determine the reasonableness of the entity's anticipated operating results.

### **Selected Metrics**

Demotech's review of financial information may include the following balance sheet and income statement ratios, among others:

#### *Capital Adequacy*

Although Demotech does not establish internal minimums or publish our proprietary benchmarks, objective measures of capital are available. Sources include the statutes of various jurisdictions and the level of Risk-Based Capital, as determined by the National Association of Insurance Commissioners (NAIC) and reported in the statutory annual statement. Similarly, the consequences associated with the relative levels

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of Risk-Based Capital are well-known to insurers. Accordingly, when an insurer calculates and reports total adjusted risk-based capital that does not exceed the Authorized Control Level Risk-Based Capital by a 3:1 ratio, it is reasonable to assume that management is developing an action plan to improve capital adequacy.

In addition, rote acceptance of the reported surplus level of an insurer does not necessarily provide an appropriate evaluation of the actual level of the reported surplus. Demotech considers other components of the balance sheet, statement of income, and statement of cash flow as significant keys to understanding and evaluating the reported surplus as an accurate estimate of available surplus. Our review and analysis process respects insurers that maintain surplus at a level that can absorb operating losses, including their retentions of losses and loss adjustment expenses related to their net retentions of potential catastrophe events, market fluctuations that impact investment income and the values of investments, and other factors that have a negative impact on surplus without the need to receive a capital contribution to remain financially stable. It has been our practice to expand our quarterly review process whenever an insurer reports an overall decrease to surplus that is greater than 10 percent of the surplus reported at the prior year-end. In our opinion, although the ability to obtain capital infusions to supplement or offset operating results is a valid consideration in the assignment of an FSR, it is not equivalent to intrinsic balance sheet integrity.

### *Liabilities to Surplus Leverage*

A key leverage ratio in our analysis is total liabilities to surplus. Our preference is to see companies report a total liabilities to surplus ratio of less than 3:1. The lower the ratio, the greater the financial flexibility of the company. A ratio greater than 3:1 may subject the company to additional review and analysis.

For new companies and those companies experiencing significant premium growth, unearned premiums can represent a significant portion of total liabilities. If the company is posting underwriting losses while continuing to grow, the negative future impact to surplus may be compounded. In these situations, we need to understand the rationale and business and operating plan for attempting to outgrow poor underwriting results. Adequate pricing at the policy level, reinsurance costs, and loss and loss adjustment expense reserve development are important components of our evaluation.

### *Liquidity*

Available cash and invested assets provide insight into the liquidity of admitted assets as well as the flexibility and capacity of an insurer’s claims paying ability. A liquidity ratio, defined as cash and invested assets to total liabilities, of 1:1 or greater is our preference. While a lower result in and of itself is not necessarily cause for concern, an insurer with a liquidity ratio below 1:1 is likely to be scrutinized more than a carrier with a liquidity ratio of 1:1 or greater. Our review includes an evaluation of the carrier’s liquidity position and the quality of the underlying assets. We view supplemental measures that companies have taken to ensure adequate liquidity, including securing letters of credit, formal lending agreements with affiliates, and other resources, as a positive reflection of management’s ability to access additional cash flow if needed.

### *Loss and Loss Adjustment Expense Reserves*

A key indicator of management’s commitment to financial stability, solvency, and capital adequacy is their desire and ability to record adequate loss and loss adjustment expense reserves (loss reserves) on a consistent basis. Adequate loss reserves meet a higher standard than reasonable loss reserves. We view adverse loss reserve development as an impediment to the acceptance of the reported value of current, and future, surplus, as well as current and future reported earnings. From our perspective, any amount of adverse loss reserve development on a consistent basis may be indicative of management’s inability or unwillingness to properly estimate ultimate incurred losses.

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## *SPEQUELLAE®*

SPEQUELLAE is a metric we developed to quantify, based upon self-reported public information, the quality of an insurer’s pretax statutory earnings, as reported by carrier management. SPEQUELLAE is Demotech’s acronym for: **S**tatutory **P**retax **E**arnings **Q**uality **U**sing **E**merging **L**oss and **L**oss **A**djustment **E**xpense **E**stimates.

SPEQUELLAE (unadjusted) measures the unadjusted impact of the adverse or favorable loss and LAE development, as reported by management, on initial reports of the statutory pretax earnings for previous calendar years. A SPEQUELLAE (unadjusted) index of 100 or higher indicates that management has historically issued reported pretax statutory earnings that withstood the test of time and had integrity. This situation exists because future loss and LAE development affirms the integrity of management’s initial report of its statutory pretax income.

The calculation of an annual SPEQUELLAE (unadjusted) index for an under reserved company is:

$$100 * \frac{(1 - \frac{|L\&LAE \text{ Reserve Development Reported One-Year Later}|}{|\text{Statutory Pretax Earnings Year X}|}}{\text{ }})$$

The calculation of an annual SPEQUELLAE (unadjusted) index for an over reserved company is:

$$100 * \frac{(1 + \frac{|L\&LAE \text{ Reserve Development Reported One-Year Later}|}{|\text{Statutory Pretax Earnings Year X}|}}{\text{ }})$$

|| denotes absolute values

The power and objectivity of our index, SPEQUELLAE, is that it is simple to calculate, objective, and utilizes publicly available data. However, we note that SPEQUELLAE is “unadjusted,” as company specific situations might impact or skew the calculation underlying the index.

### *Premium to Surplus Leverage*

The NAIC’s published Insurance Regulatory Information System (IRIS) ratios provide insurers, consumers, and other third parties with direction on acceptable ranges of gross premium written (GPW) and net premium written (NPW) to surplus ratios. For example, to avoid an exceptional regulatory ratio, the GPW to surplus ratio should be less than 9:1, with the NPW to surplus ratio less than 3:1. Although our preferred metrics may not be identical to these, premium to surplus leverage ratios are a component of our overall evaluation.

In our opinion, a GPW to surplus ratio in excess of 6:1 could subject the company to greater scrutiny during the review process. Likewise, a NPW to surplus ratio greater than 3:1 could also subject the company to greater scrutiny. We may be comfortable with higher ratios when the insurer can demonstrate that a contributing factor to the higher ratio is relative improvement in rate adequacy.

### *Underwriting Results*

Although Demotech does not expect a company to record and report an underwriting gain in each quarterly reporting period, a component of our review process is the evaluation of underwriting results. Any company recording an underwriting loss greater than 10 percent of prior year surplus may be subject to a detailed review of current operating results. Chronic underwriting losses may prompt a request for information

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regarding rate making, policy limits, exposure information, reinsurance programs, or other information relative to the current and future operating results.

When an insurer has selected a business model that reflects significant administrative fees, commissions, or fees to affiliated or non-affiliated managing general agencies or third party administrative firms, the insurer will need to provide insight on how these relationships impact its operating results as well as its business model. Since this business model diverts revenue streams from the insurer to other entities, this structure might hamper the ability of the insurer to grow surplus through profitable operations, i.e., organically.

## Quality and Quantity of ReinsuranceTM Review

Reinsurance is often a critical component of an insurer's risk management program and business model. An appropriate level of reinsurance may help facilitate an insurer's ability to meet its policyholder obligations and protect the insurer's financial stability. As part of the rating process, Demotech reviews the appropriateness of an insurer's reinsurance program. The appropriate levels and structure of an insurance company's reinsurance program depend on a number of factors, including the level of surplus, structure of the risk bearing entity, the insurer's business model, the nature of the risk exposure, and the results of third party or internal catastrophe models. For insurers with limited loss exposure related to their policies or operating under certain business models, reinsurance protection may not be necessary.

For insurers with significant exposure to catastrophe risk, the Quality and Quantity of ReinsuranceTM review is a substantial aspect of the overall review process and Demotech requires additional information from the insurer related to its catastrophe reinsurance program. In such cases, a company with a net catastrophe retention greater than 15% of prior year surplus (first event, pre-tax) may trigger a more detailed review regarding its relative surplus position and catastrophe reinsurance program.

Demotech reviews the reinsurance programs in place, in conjunction with third party catastrophe modeling based on the insurer's portfolio of policies. Unless a significant change in an entity's circumstances warrants a more frequent review, the Quality and Quantity of ReinsuranceTM review is generally undertaken on an annual basis, as reinsurance programs are typically in place for one year terms.

The critical components of a catastrophe reinsurance program include, but are not limited to, the insurer's selected parameters used in modeling its probable maximum loss, net catastrophe retentions for specified event return times, and its vertical and horizontal reinsurance capabilities.

When carriers purchase private sector reinsurance from financially stable reinsurers, there is an expectation that the meritorious demands of the cedents will be honored in a timely manner, in the normal course of business. However, Demotech may consider additional factors in its review, including the source and operation of the reinsurance program. Such additional information may include:

- Information on any structured quota share reinsurance agreements as applicable;
- Participation in pools or other corporate structures impacting the company's catastrophe reinsurance program;
- For Florida property insurers, participation in a Citizens depopulation program and information explaining the specifics of how the company will address any short-fall or timing issues relative to the liquidity of the Florida Hurricane Catastrophe Fund (FHCF), if applicable.

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## Additional Considerations

The review and rating process is primarily focused on quantitative criteria and insurance fundamentals. There is, necessarily, a subjective aspect to the review of the insurer’s business model, business risks, and financial criteria outlined above that requires the expertise and judgment of Demotech’s analysts. In addition, certain qualitative considerations could potentially impact a rating assignment or action.

### Group Structure, Holding Company, and Ownership

Demotech may review and assess considerations relating to an insurer’s owners, parent company, holding company, or affiliated companies. Demotech may review the financial information related to such entities, material risks, and other information about the relationship between the insurer and the owner/parent/holding/affiliate company. Such considerations may impact a rating favorably where the owner/parent/holding/affiliate company is in a position to provide or raise capital, or otherwise positively impact the financial position of the insurance entity, including through the implementation of a revised business plan; or may impact a rating negatively where the financial condition, operations, or risks related to the owner/parent/holding/affiliate company may affect the insurer.

### Management

Demotech generally evaluates the quality of management only insofar as it is reflected in the operating results of an entity or the quantitative aspects of Demotech’s review, i.e., in the effective execution of the company’s business model. However, in some instances Demotech’s confidence in management may impact its determination regarding a particular rating action, especially with regard to management’s ability to successfully execute business plans, prepare and report accurate financial statements, or evaluate and implement necessary corrective actions. Changes in key management positions may prompt additional inquiries and review.

### Future Plans and Anticipated Changes

When management knows and communicates information regarding future plans or anticipated changes to the entity’s operations, Demotech may use this information to place historical results in context and as a way to understand potential future financial results. Demotech may consider the anticipated effects of an insurer’s future plans and anticipated or recently implemented changes in its review.

## Monitoring: Affirmations, Upgrades, and Downgrades

Demotech monitors rating assignments on an ongoing basis. Demotech’s monitoring typically consists of quarterly and annual reviews; however, specific events may warrant additional reviews as necessary. Demotech may take any rating action it deems appropriate at any time based on its monitoring of an entity.

Monitoring generally focuses on a review of several key metrics, with rating actions based on positive operating performance results or material adverse changes to an insurer’s financial stability. The monitoring review generally focuses on the following key metrics: policyholder’s surplus, liquidity, leverage, loss reserve development, underwriting results, and capital adequacy. When significant changes in an insurer’s business model, internal operations, or operating environment are identified, or if we identified particular areas of concern in previous reviews, Demotech will focus on those areas of concern and the relative performance of plans or changes implemented by the company to address those concerns. Additionally, Demotech may consider other criteria outlined in this methodology where such criteria could reasonably be expected to impact the insurer’s financial situation.

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Demotech recognizes that the business plans of insurers may not go as planned for a variety of reasons, including, but not limited to, economic shock created by:

- Natural catastrophes including hurricanes, tornadoes, floods, and wildfires;
- A “black swan” event, e.g., economic or financial crises, or a pandemic, which can have implications for an economy and investing markets;
- Judicial decisions, legislative enactments, or regulatory changes that could result in changes to claims procedures, practices, and protocols; and
- Other events, such as war, nuclear contamination, or climate change.

Demotech recognizes that certain internal actions undertaken by insurance companies, including such things as changes in business plans, implementation of rate adjustments, and changes in an insurer’s book of business, as well as external factors, including changes to the legislative, judicial, or regulatory environment or changes to certain markets, may take several quarters or even years to fully reveal themselves. Consistent with our belief that the primary responsibility of insurers is the ability to respond to meritorious claims, Demotech is unlikely to penalize an insurer for what may be a temporary disruption of the execution of their business plan (i.e., quarterly losses or catastrophe events), a change in judicial precedent that impacts historically acceptable claims processing, a strengthening of loss and loss adjustment expense reserves, or the manifestation of a risk or event outside the normal course of events, etc.

Demotech’s monitoring and decision to take action related to rating assignments may factor in an insurer’s incremental improvements, expected turnaround times for implemented plans or changes, past operating performance, and the overall trajectory of the company. In some cases, immediate action may be appropriate and necessary; however, it is atypical for the performance of an insurer over a single quarter to result in an upgrade or a downgrade. For the reasons described above, rating actions are typically based on at least several quarters of reviews. Consequently, where an insurer’s current operating results may not otherwise meet Demotech’s preferred metrics, Demotech may sustain a rating assignment if the insurer has articulated a reasonable and acceptable improvement plan or modified business model, and demonstrates anticipated, incremental improvement over a realistic time period. In addition, Demotech will review the carrier’s (or its affiliates’, holding company’s, or parent company’s) ability to infuse sufficient cash or other liquid admitted assets as may be necessary to restore financial metrics to a level acceptable and consistent with the assigned rating. Continuous monitoring will evaluate the successful execution of the business model and the overall financial stability of the company. Rating actions will be taken as necessary based on Demotech’s overall assessment of the company.

## Additional Information Regarding the Methodology and Rating Actions

Criteria outlined in this methodology are not a safe harbor or bright-line indicator for acceptable financial performance or a financially stable insurer. Demotech reviews and assesses quantitative factors and qualitative considerations for each company we review and rate. A Financial Stability Rating® reflects Demotech’s opinion of the overall financial stability of an insurer. Demotech does not make recommendations to the entities it reviews and rates. Demotech may, however, engage in dialogue with, and provide feedback to, rated entities regarding Demotech’s review process, assumptions, and criteria. Insurers should not assume that any particular results reported to Demotech or course of action undertaken by an insurer will result in a particular rating. Demotech reviews the overall condition of a company, including any applicable external factors such as jurisdictional risk and market conditions that may impact a rating assignment. Deficiencies in certain metrics may be addressed and compensated by strengths in others. It is also important to note that publicly available statutory financial statements are snapshots of insurers at a particular point in time and may not fully capture certain dynamic aspects of an insurer’s financial condition or other pertinent non-public information. Demotech applies its methodology objectively and consistently, and strives to be transparent in its rating process for the benefit of rated entities

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and users of ratings. Although two insurers may report comparable financial statements at a given point in time, differences in operating history, access to capital, ownership, management, business plans, reinsurance arrangements, other non-public information shared by management, and other factors that may not be apparent in publicly reported financial statements or other public information may result in different rating assignments.

## Notice

© Copyright 2022, Demotech, Inc. All rights reserved. All information contained herein is proprietary to Demotech and protected by copyright and other intellectual property law. Financial Stability Rating® is a registered certification mark of Demotech, Inc. Financial Stability Ratings® (FSRs) and the FSR seal image may not be used or reproduced without the express written approval of Demotech. No information contained herein may be reproduced, redistributed, or resold, in whole or in part, without the express written consent of Demotech. FSRs represent Demotech’s opinion of the ability of an insurer to meet its insurance related obligations based upon our assessment of financial information and other information. Demotech obtains information from sources considered reliable. Demotech reviews the data and information it receives for reasonableness and consistency, but does not independently audit the data it receives and assumes no responsibility for data provided by rated entities or prepared by third parties. FSRs do not constitute a warranty of a company’s ability to meet its contractual or legal obligations; are not recommendations to buy, sell or hold any securities, or to make any investment decisions related to the rated entity; and are not an endorsement of any particular insurer or its products. Insureds, agents, and third parties need to independently evaluate any relationship with a particular insurer as well as the applicability of an insurer’s products to the needs of the insured or agent. Demotech generally presents only current FSRs, as historical ratings information may not reflect a current, accurate assessment of an insurer. Historical ratings information is indicative only of Demotech’s review and opinion of the insurer at the date of the respective previous rating assignments. Only the most current FSR assigned to an insurer represents Demotech’s existing assessment and opinion of the insurer. The most current Financial Stability Rating® must be verified by visiting www.demotech.com.

Effective Date: 07/11/2022

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**Attachment 3:** `Exhibit_3.pdf`

Demotech, Inc.

# Demotech, Inc.

## Exhibit 3

### Policies and Procedures to Prevent the Misuse of Material, Nonpublic Information

2715 Tuller Parkway Dublin, Ohio 43017-2310
Tel: 614 761-8602 800 354-7207 Fax: 614 761-0906
www.demotech.com

Demotech, Inc.

# Policy for the Treatment of Confidential Information

# 1. Introduction and Purpose

During the course of its review and rating process, Demotech and its employees may receive or have access to confidential information, including material, nonpublic information. Demotech has adopted this policy in order to uphold its standards of integrity and responsibility, and to prevent the misuse of material, nonpublic information.

# 2. Definitions

(a) The term “Confidential Information,” as used within this policy, means all information possessed by Demotech that is not generally available to the public, and includes nonpublic information provided by an issuer or obligor in relation to Demotech’s rating services, information that has not been authorized for public release, information about a pending rating action, and nonpublic information about Demotech’s rating procedures and methodologies. Confidential Information includes “material, nonpublic information” which means information not known to the public that might have an effect on the market for a security or that might affect the decision of a reasonable investor. Confidential Information is not limited to information that is marked “confidential” or “proprietary.”

(b) Confidential Information does not include information that was known by or generally available to the public at the time it was received, was disclosed to Demotech as public information, has become generally available to the public other than by an unauthorized action of Demotech, is authorized for disclosure by the disclosing party, or is required to be disclosed by law.

(c) Should a Demotech employee have any doubt as to whether information should be treated as Confidential Information, that employee should presume that such information is Confidential Information and seek guidance on the nature of the information from a supervisor or the Designated Compliance Officer.

(d) “Authorized persons” shall mean Demotech’s officers, directors, and employees, who have a need to know the Confidential Information in order to perform their work duties.

# 3. Protection and Use of Confidential Information

(a) Demotech and its employees shall not disclose or otherwise make available Confidential Information to any unauthorized persons, except as may otherwise be permitted by the party disclosing the Confidential Information, or as required by applicable law.

(b) Demotech and its employees shall use Confidential Information only for purposes related to Demotech’s rating activities or otherwise in accordance with any agreement between Demotech and the disclosing party. Confidential Information may be disclosed to, or accessed by, only those Demotech employees who have a need to know such information to perform their work duties.

(c) Demotech and its employees shall take all reasonable measures to safeguard the confidential and nonpublic nature of Confidential Information and to protect Confidential Information from fraud, theft, misuse, or inadvertent disclosure. The following guidelines should be considered when handling Confidential Information:

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- (i) Documents, records and other items containing Confidential Information should not be left unattended where an unauthorized person may have access to them, and should be stored so as to prevent unauthorized access;
- (ii) Documents, records, and other items containing Confidential Information must not be provided to unauthorized persons. Employees should understand the nature of the information they are providing and the status of the person to whom they are providing such information;
- (iii) When participating in calls or meetings, employees should understand the nature of any information being discussed, what information is Confidential Information, and which parties are privy to such Confidential Information. Employees should not disclose information if they are unsure of the nature of the information or the status of the party with whom they are interacting;
- (iv) Employees should use only their Demotech email addresses for communications with rated entities or their representatives. Confidential Information must be maintained on Demotech information technology systems, must not be communicated to or from a Demotech employee's personal email address, and may be disclosed only to authorized persons;
- (v) Confidential Information may be accessed, stored or transmitted only on Demotech devices, and must not be accessed, stored, or transmitted on personal devices, except to the extent that an employee is using a personal device to connect to a Demotech system remotely through a Demotech-approved remote connection system, software or technology. Confidential Information stored on an external storage device must be password protected and the employee must use reasonable care to safeguard the device;
- (vi) When outside the office, employees should exercise due care so as not to disseminate Confidential Information to unauthorized persons.(d) Employees shall not purchase, sell, or otherwise benefit from any transaction in securities or money market instruments when the employee is aware of Confidential Information obtained in connection with Demotech's rating activities that affects the securities or money market instruments. Employees shall not share Confidential Information to advantage another person in trading securities or for any other purpose except the conduct of Demotech's business activities.(e) Employees shall not disseminate any Confidential Information about specific rating opinions or possible future rating actions of Demotech prior to Demotech's public issuance of the rating, except to the issuer or obligor, their designated agents, or as may be required by applicable law.(f) Unless otherwise prohibited by an agreement or understanding with a disclosing party, Demotech may disclose aggregated data or summarized information consolidated from multiple sources that may otherwise contain Confidential Information as long as the identity or Confidential Information of particular disclosing parties cannot be ascertained from such aggregations or summarizations. Demotech may disclose general trends or outlooks regarding future rating actions for certain classes of insurers or geographic locations, as long as it does not disclose Confidential Information pertaining to any particular rated entity.(g) Employees who are not authorized to possess, access, or otherwise receive Confidential Information shall not attempt to obtain such information from another employee and shall not knowingly access files, documents, or other items containing Confidential Information.(h) Employees who violate this policy or misuse of Confidential Information may be subject to disciplinary action by Demotech.(i) This policy shall also apply to members of Demotech's board of directors.

Effective Date: 07/06/2022

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**Attachment 4:** `Exhibit_5.pdf`

Demotech, Inc.

# Demotech, Inc.

## Exhibit 5

### Code of Ethics

2715 Tuller Parkway Dublin, Ohio 43017-2310
Tel: 614 761-8602 800 354-7207 Fax: 614 761-0906
www.demotech.com

Demotech, Inc.

# Code of Conduct

## Introduction

Demotech’s objective is to provide informed and current ratings to rated entities and interested parties. Demotech regularly evaluates its criteria, financial models, and procedures in an effort to determine ways to improve its practices and processes. Demotech strives to keep its rating and monitoring processes independent of conflicts of interest and has adopted the following Code of Conduct, in addition to other policies and procedures, to ensure the quality and integrity of the rating process, the independence of its analysts, and the transparency of its practices.

Demotech’s Code of Conduct has been developed in accordance with the principles outlined by the International Organization of Securities Commissions (“IOSCO”) in its Code of Conduct Fundamentals for Credit Rating Agencies (the “IOSCO Code”), initially published in 2004 and most recently amended in 2015. This Code of Conduct has been designed to achieve the objectives articulated by IOSCO and to ensure the highest standards of ethics, integrity, and professional responsibility. Demotech has substantially adopted the provisions set forth in the IOSCO Code and has deviated from IOSCO recommendations only where necessary to accommodate the unique nature of Demotech’s business operations and to maintain consistency with the requirements of applicable laws and regulations. Such deviations do not compromise the fundamental principles of integrity, transparency, and responsibility to which the IOSCO Code aspires.

## Implementation, Enforcement & Effect

All employees of Demotech are expected to comply with this Code of Conduct. In addition, every Demotech employee is expected to use common sense and to act ethically in all dealings with fellow employees, clients, third parties, and the public. Demotech’s Designated Compliance Officer is primarily responsible for implementing and enforcing this Code of Conduct. Demotech’s senior management and board of directors oversee all Demotech policies. Any questions relating to the Code of Conduct should be directed to the Designated Compliance Officer.

Demotech has produced this Code of Conduct to set forth certain internal standards and to provide guidance to its employees. Demotech does not assume any responsibility or liability to third parties arising out of or relating to this Code of Conduct and it does not create any legal obligations or rights. Demotech may amend this Code of Conduct at any time in its sole discretion.

## Statement about Deviations from the IOSCO Code

Demotech has made the following modifications to provisions in the IOSCO Code: Section 1.13 was revised to remove the reference to structured finance products as Demotech does not currently issue ratings for this asset class; Section 1.14 was modified to remove the example included in the IOSCO Code related to analytic teams including analysts with different areas of analytic responsibility as Demotech currently focuses on a single class of credit ratings; Section 2.4 was modified to reflect the nature of Demotech’s interactions with affiliated entities; Section 2.5 was modified to remove the reference to explanatory disclosures as conflicts of interest will be disclosed by Demotech, as required by applicable laws, to achieve the principles and objectives of the IOSCO Code in promoting transparency; Section 2.6(d) was modified for clarity and consistency with applicable law, as the issuance of preliminary ratings by itself does not present a conflict of interest, and to the extent it could pose a conflict of interest, such conflicts are adequately addressed elsewhere in the Code and by applicable law; Section 2.8(a) was modified to reflect applicable rules and regulations requiring a rating agency to disclose the potential conflict of interest that it was paid by a rated entity for services unrelated to credit ratings; Sections 2.9, 3.7, and 3.15, as numbered within the IOSCO Code, were deleted as Demotech does not currently rate structured finance products;

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Section 2.11 was deleted as it does not apply to Demotech’s rating activities; Section 3.17 was modified to reflect Demotech’s practices for disclosing information related to rating withdrawals; Section 4.2 has been modified to remove the requirement that the risk management function be separate from the internal audit function as permitted by the language included in this section in the IOSCO Code; references to originators, underwriters, and arrangers have been removed throughout the Code of Conduct for clarity, as Demotech currently issues ratings only in the class of ratings for insurance companies

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## 1. Quality and Integrity of the Rating Process

### A. Quality of the Credit Rating Process

1. 1.1 Demotech will establish, maintain, document, and enforce a credit rating methodology for each class of entity or obligation for which Demotech issues credit ratings. The credit rating methodology will be rigorous, capable of being applied consistently, and, where possible, result in credit ratings that can be subjected to some form of objective validation based on historical experience.
2. 1.2 Credit ratings will reflect all information known and believed to be relevant to Demotech, consistent with the applicable credit rating methodology that is in effect. Demotech will establish, maintain, document, and enforce policies, procedures, and controls to ensure that the credit ratings and related reports it disseminates are based on a thorough analysis of all such information.
3. 1.3 Demotech will adopt reasonable measures designed to ensure that it has the appropriate knowledge and expertise, and that the information it uses in determining credit ratings is of sufficient quality and obtained from reliable sources to support an informed credit rating.
4. 1.4 Demotech will avoid issuing credit ratings for entities or obligations for which it does not have appropriate information, knowledge, and expertise. For example, where the complexity of a security or the structure of a type of security, or the lack of robust data about the assets underlying the security raise serious questions as to whether Demotech can determine an informed credit rating for the security, Demotech will refrain from issuing a credit rating.
5. 1.5 In assessing creditworthiness, analysts involved in the credit rating action should use the credit rating methodology established by Demotech for the type of entity or obligation that is subject to the credit rating action. The credit rating methodology will be applied in a manner that is consistent across all entities or obligations for which that methodology is used.
6. 1.6 Demotech will define the meaning of each category in its rating scales and apply those categories consistently across all classes of rated entities and obligations to which a given rating scale applies.
7. 1.7 Credit ratings will be assigned by Demotech as an entity (not by an analyst or other employee of Demotech).
8. 1.8 Demotech will assign analysts who, individually or collectively, have appropriate knowledge and experience for assessing the creditworthiness of the type of entity or obligation being rated.
9. 1.9 Demotech will maintain internal records that are accurate and sufficiently detailed and comprehensive to reconstruct the credit rating process for a given credit rating action. The records shall be retained for as long as necessary to promote the integrity of Demotech's credit rating process, including to permit internal audit, compliance, and quality control functions to review past credit rating actions in order to carry out the responsibilities of those functions. Further, Demotech will establish, maintain, document, and enforce

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policies, procedures, and controls designed to ensure that its employees comply with Demotech's internal record maintenance, retention, and disposition requirements and with applicable laws and regulations governing the maintenance, retention, and disposition of records.

1.10 Demotech will establish, maintain, document, and enforce policies, procedures, and controls designed to avoid knowingly issuing credit ratings, analyses, or reports that contain misrepresentations or are otherwise misleading as to the general creditworthiness of a rated entity or obligation.

1.11 Demotech will ensure that it has and devotes sufficient resources to carry out and maintain informed credit ratings. When deciding whether to issue a credit rating for an entity or obligation, Demotech will assess whether it is able to devote a sufficient number of analysts with the skill sets to determine informed credit ratings, and whether the analysts will have access to sufficient information in order to determine an informed credit rating.

1.12 When necessary, Demotech's management will review the feasibility of providing a credit rating for a type of entity or obligation that is materially different from the entities or obligations that Demotech currently rates.

1.13 Demotech will establish and maintain a review function made up of one or more senior managers responsible for conducting a rigorous, formal, and periodic review, on a regular basis pursuant to an established timeframe, of all aspects of its credit rating methodologies (including models and key assumptions) and significant changes to the credit rating methodologies. Where feasible and appropriate for the size and scope of its credit rating business, this function will be independent of the employees who are principally responsible for determining credit ratings.

1.14 Demotech will assign analysts and structure its rating process to promote continuity but also to avoid bias in the credit rating process.

1.15 Demotech will ensure that sufficient employees and financial resources are allocated to monitoring and updating all its credit ratings. Except for a credit rating that clearly indicates it does not entail ongoing surveillance, once a credit rating is published, Demotech will monitor the credit rating on an ongoing basis by:

a. Reviewing the creditworthiness of the rated entity or obligation regularly;

b. Initiating a review of the status of the credit rating upon becoming aware of any information that might reasonably be expected to result in a credit rating action (including withdrawal of a credit rating), consistent with the applicable credit rating methodology;

c. Reviewing the impact of and applying a change in the credit rating methodologies, models or key rating assumptions on the relevant credit ratings within a reasonable period of time;

d. Updating on a timely basis the credit rating, as appropriate, based on the results of such review; and

e. Incorporating all cumulative experience obtained.

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1.16 Demotech's analytical teams for determining initial credit ratings and for subsequent monitoring of existing credit ratings will have the requisite level of expertise and resources to perform their respective functions in a timely manner.

1.17 Demotech will establish, maintain, document, and enforce policies and procedures that clearly set forth guidelines for disseminating credit ratings that are the result or subject of credit rating actions and the related reports, and for when a credit rating will be withdrawn.

**B. Integrity of the Credit Rating Process**

1.18 Demotech and its employees will deal fairly and honestly with rated entities, obligors, and users of credit ratings.

1.19 Demotech's employees will be held to the highest standards of integrity and ethical behavior, and Demotech will have policies and procedures in place that are designed to ensure that individuals with demonstrably compromised integrity are not employed.

1.20 Demotech and its employees will not implicitly or explicitly give any assurance or guarantee to an entity subject to a rating action, obligor, or user of Demotech's ratings about the outcome of a particular rating action. This does not preclude Demotech from issuing preliminary ratings or explaining preliminary rating analyses and results.

1.21 Demotech and its employees will not make promises or threats about potential credit rating actions to influence rated entities, obligors, or users of the ratings to pay for credit ratings or other services.

1.22 Demotech and its employees will not make recommendations regarding the activities of rated entities or obligors that could impact a credit rating of the rated entity or obligation, including recommendations about the corporate or legal structure, assets, liabilities, or activities of the rated entity or obligor.

1.23 Demotech will establish, maintain, document, and enforce policies, procedures and controls designed to ensure that Demotech and its employees comply with this Code of Conduct and applicable laws and regulations.

a. Demotech will establish a compliance function responsible for monitoring and reviewing the compliance of Demotech and its employees with the provisions of this Code and with applicable laws and regulations;

b. The compliance function will be responsible for reviewing the adequacy of Demotech's policies, procedures, and controls designed to ensure compliance with this Code and applicable laws and regulations;

c. Demotech will assign a senior level employee with the requisite skill set to serve as its Designated Compliance Officer. The Designated Compliance Officer's reporting lines and compensation will be independent of Demotech's credit rating operations.

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1.24 Upon becoming aware that another employee or an affiliate of Demotech is or has engaged in conduct that is illegal, unethical, or contrary to this Code of Conduct, the Demotech employee should report such information immediately to the Designated Compliance Officer or another officer of Demotech, as appropriate, so proper action may be taken. Demotech employees are not necessarily expected to be experts in the law. Nonetheless, Demotech employees are expected to report activities that a reasonable person would question. Upon receiving such a report from an employee, Demotech will take appropriate action, as determined by the laws and regulations of the jurisdiction and the policies, procedures, and controls established, maintained, documented, and enforced by Demotech. Neither Demotech nor its employees shall retaliate against any employees who, in good faith, make such reports.

## 2. Independence and Avoidance of Conflicts of Interest

### A. General

1. 2.1 Demotech will not delay or refrain from taking a rating action based on the potential effect (economic, political, or otherwise) of the action on Demotech, a rated entity, obligor, originator, underwriter, arranger, investor, or other market participant.
2. 2.2 Demotech and its employees will use care and professional judgment to maintain both the substance and appearance of independence and objectivity.
3. 2.3 The determination of a rating will be influenced only by factors relevant to the rating assessment.
4. 2.4 The particular rating assigned to an entity or obligation will not be affected by whether there is an existing or potential business relationship between Demotech (or its affiliates) and the rated entity, obligor (or any of their affiliates), or any other party; however, this section will not prohibit Demotech from considering the impact of an affiliate of a rated entity on the financial condition or operating condition of the rated entity in determining a rating. In addition, an existing relationship between Demotech and rated entities that are affiliated may be considered by Demotech in determining the nature, scope, and extent of information requested from such entities in order to determine a rating.
5. 2.5 To the extent necessary, Demotech will operationally, legally, and, if practicable, physically separate its credit rating business and its analysts from other business activities that may present a conflict of interest. For other businesses that do not necessarily present a conflict of interest, Demotech will establish, maintain, document, and enforce policies, procedures, and controls to minimize the likelihood that conflicts of interest will arise.

### B. Policies, Procedures, Controls and Disclosures

2.6 Demotech will establish, maintain, document, and enforce policies, procedures and controls to identify and eliminate, or manage and disclose, as appropriate, any actual or potential conflicts of interest that may influence credit rating methodologies, credit rating actions, or analyses of Demotech or the judgment and analyses of its analysts who have an influence on ratings decisions. Among other things, these policies, procedures and controls will address the following potential conflicts of interest to the extent they may be applicable to Demotech:

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a. Being paid to issue a credit rating by the rated entity or by the obligor;

b. Being paid by subscribers with a financial interest that could be affected by a credit rating action of Demotech;

c. Being paid by rated entities, obligors, or subscribers for services other than issuing credit ratings or providing access to Demotech's credit ratings;

d. Conditioning or threatening to condition the issuance of a credit rating on the purchase by an obligor or issuer, or an affiliate of the obligor or issuer, of any other services or products, including pre-credit rating assessment products;

e. Having a direct or indirect ownership interest in a rated entity or obligor, or having a rated entity or obligor have a direct or indirect ownership interest in Demotech.

2.7 Demotech will disclose actual and potential conflicts of interest (including, but not limited to, those conflicts of interest identified in Section 2.6 above) in a complete, timely, clear, concise, specific, and prominent manner. When the actual or potential conflict of interest is unique or specific to a credit rating action with respect to a particular rated entity, obligor, or obligation, such conflict of interest will be disclosed in the same form and through the same means as the relevant credit rating action.

2.8 Demotech will disclose the general nature of its compensation arrangements with rated entities or obligors.

a. When Demotech receives from a rated entity or obligor, compensation unrelated to its credit rating services, Demotech will disclose that it was paid for other services by such rated entity or obligor in the relevant credit rating report or elsewhere, as appropriate.

b. Demotech will disclose in the relevant credit rating report or elsewhere, as appropriate, if it receives 10 percent or more of its annual revenue from a single rated entity, obligor, or subscriber or any of their affiliates.

2.9 [This section intentionally left blank]

2.10 Demotech will not hold or transact in trading instruments presenting a conflict of interest with Demotech's credit rating activities.

2.11 [This section intentionally left blank]

### C. Employee Independence

2.12 Reporting lines for Demotech employees and their compensation arrangements will be structured to eliminate or effectively manage actual and potential conflicts of interest.

a. An employee who participates in or who might otherwise have an effect on a credit rating action with respect to an entity or obligation will not be compensated or evaluated on the basis of the amount of revenue that Demotech derives from that entity or obligor.

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- b. Demotech will conduct formal and periodic reviews of its compensation policies, procedures, and practices for its employees who participate in or who might otherwise have an effect on a credit rating action to ensure that these policies, procedures, and practices have not compromised and do not compromise the objectivity of Demotech's credit rating process.2.13 Demotech employees who participate in or who might otherwise have an effect on a credit rating action with respect to a rated entity, obligor, or subscriber will not negotiate, discuss, or arrange the fees or payments charged to such rated entity, obligor, or subscriber.2.14 Demotech employees will not participate in or otherwise influence a credit rating action with respect to an entity or obligation if the employee, an immediate family member of the employee (e.g., spouse, domestic partner, or dependent), or an entity managed by the employee (e.g., a trust):- a. Holds or transacts in a trading instrument issued by the rated entity or obligor;
- b. Holds or transacts in a trading instrument (other than a diversified collective investment scheme) that itself owns an interest in the rated entity or obligor, or is a derivative based on a trading instrument issued by the rated entity or obligor;
- c. Holds or transacts in a trading instrument issued by an affiliate of the rated entity or obligor, the ownership of which may cause or may be perceived as causing a conflict of interest with respect to the employee or Demotech;
- d. Holds or transacts in a trading instrument issued by a lead underwriter or arranger of the rated obligation, the ownership of which may cause or may be perceived as causing a conflict of interest with respect to the employee or Demotech;
- e. Is currently employed by, or had a recent employment or other significant business relationship with the rated entity or obligor that may cause or may be perceived as causing a conflict of interest;
- f. Is a director of the rated entity or obligor; or
- g. Has, or had, another relationship with or interest in the rated entity or obligor (or any of their affiliates) that may cause or may be perceived as causing a conflict of interest.2.15 A Demotech analyst will not hold or transact in a trading instrument issued by a rated entity or obligor in the analyst's area of primary analytical responsibility. This does not preclude an analyst from holding or trading a diversified collective investment scheme that owns a trading instrument issued by a rated entity or obligor in the analyst's area of primary analytical responsibility.2.16 Demotech employees may not solicit money, gifts, or favors from anyone with whom Demotech does ratings-related business and may not accept gifts offered in the form of cash or cash equivalents or any gifts exceeding a minimal monetary value other than incidentals of nominal value provided as part of a meeting.

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2.17 A Demotech employee who becomes involved in a personal relationship (including, for example, a personal relationship with an employee of a rated entity or obligor,) that creates an actual or potential conflict of interest must disclose the relationship to the Designated Compliance Officer or another officer of Demotech, as appropriate.

2.18 Demotech will establish, maintain, document, and enforce policies, procedures, and controls for reviewing without unnecessary delay the past work of an analyst who leaves the employ of Demotech and joins an entity that the employee participated in rating, an obligor whose obligation the employee participated in rating, or any of their affiliates.

### **3 Responsibilities to the Public, Rated Entities, and Obligors**

#### **A. Transparency and Timeliness of Credit Ratings Disclosure**

3.1 Demotech will assist users of credit ratings in developing a greater understanding of its ratings by disclosing in plain language the nature and limitations of credit ratings. To the extent that Demotech is subject to registration and oversight by a regulatory authority, Demotech will not represent or imply that such regulatory authority endorses its credit ratings or use its registration status to advertise the quality of its credit ratings.

3.2 Demotech will disclose sufficient information about its credit rating process and its credit rating methodologies so that users of credit ratings can understand the manner in which a credit rating was determined.

3.3 Demotech will disclose a material modification to its credit rating methodology and will do so prior to the modification taking effect, unless doing so would negatively impact the integrity of a credit rating by unduly delaying the taking of a credit rating action.

3.4 Demotech will disclose its policies and procedures that address the issuance of unsolicited credit ratings.

3.5 Demotech will disclose its policies and procedures for distributing credit ratings and reports, and for when a credit rating will be withdrawn.

3.6 Demotech will disclose clear definitions of the meaning of each category in its rating scales, including the definition of default or impairment.

3.7 [This section intentionally left blank]

3.8 Demotech will be transparent with investors, rated entities and obligors, about how the relevant entity or obligation is rated.

3.9 Where feasible and appropriate, Demotech will inform the rated entity, or the obligor, about the critical information and principal considerations upon which a credit rating will be based prior to disseminating a credit rating that is the result or subject of the credit rating action and afford such rated entity or obligor, an adequate opportunity to clarify any factual errors, factual omissions, or factual misperceptions that would have a material effect on the credit rating. Demotech will duly evaluate any response from such rated entity or obligor. Where in particular circumstances Demotech has not informed such rated entity or obligor prior to disseminating a credit rating action, Demotech will inform such rated entity or obligor, as soon as practical thereafter and, generally, will explain why Demotech did not

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inform such rated entity or obligor prior to disseminating the credit rating action.

3.10 When Demotech publicly discloses a credit rating that is the result or subject of the credit rating action, it will do so as soon as practicable after taking such action.

3.11 When Demotech publicly discloses a credit rating that is the result or subject of a credit rating action, it will do so on a non-selective basis.

3.12 Demotech will disclose with a credit rating that is the result or subject of a credit rating action whether the rated entity or obligor participated in the credit rating process. Each credit rating not initiated at the request of the rated entity or obligor will be identified as such.

3.13 Demotech will clearly indicate the attributes and limitations of each credit rating, and the extent to which it verifies information provided to it by the rated entity or obligor. For example, if the credit rating involves a type of entity or obligation for which there is limited historical data, Demotech will disclose this fact and how it may limit the credit rating.

3.14 Demotech will indicate in the announcement of a credit rating that is the result or the subject of a credit rating action when the credit rating was last updated or reviewed. The credit rating announcement will indicate the principal credit rating methodology or methodology version that was used in determining the credit rating and where a description of that credit rating methodology can be found. Where the credit rating is based on more than one credit rating methodology, or where a review of only the principal credit rating methodology might cause investors and other users of credit ratings to overlook important aspects of the credit rating, Demotech will explain this fact in the credit rating announcement, and indicate where to find a discussion of how the different credit rating methodologies and other important aspects factored into the credit rating decision.

3.15 [This section intentionally left blank]

3.16 When issuing or revising a credit rating, Demotech will explain in its announcement and/or report the key assumptions and data underlying the credit rating, including financial statement adjustments that deviate materially from those contained in the published financial statements of the relevant rated entity or obligor.

3.17 If Demotech withdraws a credit rating for a rated entity or obligation it will disclose such withdrawal to the public as soon as practicable. A publication by Demotech of a credit rating that has been withdrawn will indicate that the rating has been withdrawn and the date of the withdrawal.

3.18 To promote transparency and to enable investors and other users of credit ratings to compare the performance of different credit rating agencies, Demotech will disclose sufficient information about the historical transition and default rates of its credit rating categories with respect to the classes of entities and obligations it rates. This information will include verifiable, quantifiable historical information, organized over a period of time, and, where possible, standardized in such a way to assist investors and other users of credit ratings in comparing different credit rating agencies. If the nature of the rated entity or obligation or other circumstances make such historical transition or default rates inappropriate, statistically invalid, or otherwise likely to mislead investors or other users of credit ratings, Demotech will disclose why this is the case.

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## **B. The Treatment of Confidential Information**

3.19 Demotech will establish, maintain, document, and enforce policies, procedures and controls to protect confidential and material non-public information including confidential information received from a rated entity or obligor, , and non-public information about a credit rating action (e.g., information about a credit rating action before the credit rating is publicly disclosed or disseminated to subscribers).1. a. The policies, procedures, and controls will prohibit Demotech and its employees from using or disclosing confidential or material non-public information for any purpose unrelated to Demotech's credit rating activities, including disclosing such information to other employees where the disclosure is not necessary in connection with Demotech's credit rating activities, unless disclosure is required by applicable law or regulation.
2. b. The policies, procedures, and controls will require Demotech and its employees to take reasonable steps to protect confidential and material non-public information from fraud, theft, misuse, or inadvertent disclosure.
3. c. With respect to confidential information received from a rated entity or obligor, the policies, procedures, and controls will prohibit Demotech and its employees from using or disclosing such information in violation of the terms of any applicable agreement or mutual understanding that Demotech will keep the information confidential, unless disclosure is required by applicable law or regulation.
4. d. With respect to a pending credit rating action, the policies, procedures, and controls will prohibit Demotech and its employees from selectively disclosing information about the pending credit rating action, except to the rated entity or obligor, or their designated agents, or as required by applicable law or regulation.3.20 Demotech will establish, maintain, document, and enforce written policies, procedures and controls designed to prevent violations of applicable laws and regulations governing the treatment and use of confidential and material non-public information.3.21 Demotech will establish, maintain, document, and enforce policies, procedures and controls that prohibit employees that possess confidential or material non-public information concerning a trading instrument from engaging in a transaction in the trading instrument or using the information to advise or otherwise advantage another person in transacting in the trading instrument.

## **4. Governance, Risk Management, and Employee Training**

4.1 Demotech’s board, or similar body as may be applicable, will have ultimate responsibility for ensuring that Demotech establishes, maintains, documents, and enforces a code of conduct that gives full effect to the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies.

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4.2 Demotech will establish a risk management function made up of one or more senior managers or employees with the appropriate level of experience responsible for identifying, assessing, monitoring, and reporting the risks arising from its activities, including, but not limited to legal risk, reputational risk, operational risk, and strategic risk. The function will make periodic reports to the board (or similar body) and senior management to assist them in assessing the adequacy of the policies, procedures, and controls Demotech establishes, maintains, documents, and enforces to manage risk, including the policies, procedures, and controls specified in the code of conduct.

4.3 Demotech will establish, maintain, document, and enforce policies, procedures, and controls requiring employees to undergo formal ongoing training at reasonably regular time intervals. The subject matter covered by the training will be relevant to the employee's responsibilities and will cover, as applicable, Demotech's Code of Conduct, Demotech's credit rating methodologies, the laws governing Demotech's credit rating activities, Demotech's policies, procedures, and controls for managing conflicts of interest and governing the holding and transacting in trading instruments, and Demotech's policies and procedures for handling confidential information and material non-public information. The policies, procedures, and controls will include measures designed to verify that employees undergo required training.

5. Disclosure and Communication with Market Participants

5.1 Demotech's disclosures, including those specified in the provisions of this Code of Conduct will be complete, fair, accurate, timely, and understandable to investors and other users of credit ratings.

5.2 Demotech will disclose with its Code of Conduct a description of how the provisions of its Code of Conduct fully implement the provisions of the IOSCO Statement of Principles Regarding the Activities of Credit Rating Agencies and the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies (collectively, the "IOSCO provisions"). If Demotech's Code of Conduct deviates from an IOSCO provision, Demotech will identify the relevant IOSCO provision, explain the reason for the deviation, and explain how the deviation nonetheless achieves the objectives contained in the IOSCO provisions. Demotech will describe how it implements and enforces its Code of Conduct. Demotech will disclose as soon as practicable any changes to its Code of Conduct or changes to how it is being implemented or enforced.

5.3 Demotech will establish and maintain a function within its organization charged with receiving, retaining, and handling complaints from market participants and the public. The function will establish, maintain, document, and enforce policies, procedures, and controls for receiving, retaining, and handling complaints, including those that are provided on a confidential basis. The policies, procedures, and controls will specify the circumstances under which a complaint must be reported to senior management or the board (or similar body).

5.4 Demotech will publicly and prominently disclose free of charge on its primary website:

a. Demotech's code of conduct;

b. A description of Demotech's credit rating methodologies;

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c. Information about Demotech's historic performance data; and
d. Any other disclosures specified in this Code of Conduct.

Effective Date: 07/11/2022; Revised: 12/22/2022

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**Attachment 5:** `Exhibit_7.pdf`

Demotech, Inc.

# Demotech, Inc.

## Exhibit 7

### Policies and Procedures to Address and Manage Conflicts of Interest

2715 Tuller Parkway Dublin, Ohio 43017-2310
Tel: 614 761-8602 800 354-7207 Fax: 614 761-0906
www.demotech.com

Demotech, Inc.

# Policy for the Management of Conflicts of Interest

# 1. Introduction and Purpose

Demotech's ability to eliminate prohibited conflicts of interest, manage permissible and potential conflicts of interest, and avoid the appearance of impropriety is essential to maintaining the independence of its employees, the value of its ratings, and its credibility in the market. Demotech has adopted this policy to address and manage conflicts of interest, protect the quality and integrity of the rating process, and to maintain the independence and objectivity of its employees. As used within this policy, an "analyst" means any employee of Demotech who participates in determining a rating; and references to "participating in determining a rating" mean determining, monitoring, or approving a rating.

# 2. Identifying and Disclosing Actual and Potential Conflicts of Interest

(a) Directors and employees of Demotech shall report any actual or potential conflict of interest to senior management or the Designated Compliance Officer when such conflict arises or when the employee or director reasonably expects that a conflict may exist or could potentially exist. If an individual has any question as to whether his or her conduct, position, or status has created or could potentially create a conflict of interest, that individual must seek guidance from the Designated Compliance Officer.

(b) At the time of hire as an employee, or appointment as a director, annually thereafter, and as may otherwise be required by Demotech, each employee and director shall complete a disclosure form provided by Demotech, or otherwise disclose in writing, all actual or potential conflicts of interest that may impact the individual's independence relative to Demotech, an existing entity rated by Demotech, or an entity that is reasonably expected to become rated by Demotech. Such disclosures include, but are not necessarily limited to, conflicts of interest related to prior employment, outside activities, securities ownership and trading, and relationships with entities rated by Demotech. All information disclosed to Demotech under this policy shall be used solely for the purpose of monitoring and enforcing compliance with Demotech's internal policies and applicable laws.

(c) The Designated Compliance Officer will review all disclosures made by employees and directors, and evaluate all actual and potential conflicts of interest to determine if a conflict is prohibited by Demotech's Code of Conduct, internal policies, or applicable law, or must otherwise be addressed. If a conflict of interest is prohibited, Demotech shall act to address and eliminate that conflict. If a conflict of interest is not expressly prohibited, Demotech shall address and manage the conflict as appropriate according to Demotech's Code of Conduct, internal policies, and applicable law. Demotech may either eliminate or manage conflicts of interest that are not prohibited. The Designated Compliance Officer will take such actions or make such recommendations to senior management or the board of directors as may be necessary to ensure compliance with this policy and applicable laws and regulations. Decisions made and actions taken relating to conflicts of interest will be documented and maintained by Demotech.

(d) Demotech will disclose conflicts of interest or types of conflicts of interest to the extent and in the manner required by applicable laws, rules, and regulations.

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### 3. Ratings Actions

- (a) Demotech shall not delay or refrain from taking a rating action based on the potential effect (economic, political, or otherwise) of the action on Demotech, a person associated with Demotech, a rated entity, obligor, originator, underwriter, arranger, investor, or other market participant.
- (b) Demotech and its analysts shall use care and professional judgment to maintain both the substance and appearance of independence and objectivity.
- (c) Analysts shall rely on the methodologies, practices, and procedures utilized by Demotech to determine ratings and shall not be influenced by any factor that is not relevant to the rating process. Analysts will document the steps taken in determining an initial rating or monitoring an existing rating with sufficient detail to permit an after-the-fact review or internal audit of the rating file to assess whether the analyst adhered to the applicable procedures and methodologies for determining the rating assignment or rating action.
- (d) Demotech shall assign ratings honestly, objectively, and in accordance with its methodologies, practices, and procedures. The particular rating assigned to an entity or obligation will not be affected by whether there is an existing or potential business relationship between Demotech (or its affiliates) and the rated entity, obligor, originator, underwriter, or arranger (or any of their affiliates), or any other party.
- (e) Demotech and its employees shall not make recommendations regarding the activities of rated entities or obligors that could impact a rating of the rated entity or obligation, including recommendations about the corporate or legal structure, assets, liabilities, or activities of the rated entity or obligor. This shall not prevent Demotech or its employees from having iterative dialogue with the rated entity or any related parties to explain the rating process, the assumptions and the rationales used by Demotech to arrive at its rating decision, and how they apply to a given rating transaction.
- (f) Analysts who participate in determining ratings shall not be compensated on the basis of the amount of revenue that Demotech derives from the clients the analyst rates or with which the analyst regularly interacts. Compensation will be based on a variety of factors including, but not limited to experience, education, effort, performance, and other qualifications. Demotech will periodically review its compensation practices to ensure that they do not compromise the objectivity of the credit rating process.
- (g) No employee shall participate in the determination of a rating if that employee was employed by the rated entity within the previous 36 months. If an employee directly involved in determining ratings has or previously had any relationship with a rated entity, other than an employment relationship in and of itself as described in the preceding sentence, that may cause or be perceived to cause a present conflict of interest, then that employee shall not participate in the determination of the rating of the entity presenting the actual or perceived conflict of interest until the Designated Compliance Officer determines that the conflict or perceived conflict no longer exists or has been appropriately addressed. This includes having an immediate relation who currently works for the rated entity.
- (h) Demotech shall not issue or maintain a rating with respect to an obligor or security where an analyst who participated in the rating or who is responsible for approving the rating is an officer or director of the person that is subject to the rating.

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(i) No person within Demotech may have a business relationship with a rated entity that is more than an arms-length ordinary course of business relationship. A person within Demotech who had or has a professional or personal relationship with a rated entity or a person associated with a rated entity that creates an actual or potential conflict of interest must disclose that relationship to the Designated Compliance Officer or the management of Demotech, and Demotech will determine the appropriate action necessary to eliminate or manage such actual or potential conflict of interest.

(j) Demotech will assign analysts to participate in determining ratings for particular entities as appropriate to avoid any conflicts of interest. The Designated Compliance Officer will review and monitor disclosures pursuant to this policy and advise management regarding the nature of any conflicts of interest or potential conflicts of interest and the recommended actions to eliminate or address the conflicts of interest, including the appropriate assignment of analysts and employee access to certain types of information. Demotech will keep records identifying the analysts who participated in determining each rating for each rated entity.

(k) The Designated Compliance Officer will conduct a periodic review of a sampling of rating files and employee communications to assess and enforce compliance with this policy. Whenever necessary based on Demotech's belief that an actual or potential conflict of interest may exist, the Designated Compliance Officer will review specific files or communications that may relate to such conflict of interest to assess and enforce compliance with this policy. These reviews will be documented and retained by Demotech. The Designated Compliance Officer will make recommendations, as may be necessary, to senior management or the board of directors as appropriate to address conflicts of interest.

#### **4. Sales, Marketing, and Fee Discussions, and Separation of Business Activities**

(a) Discussions with any rated entity relating to fees shall be conducted only by employees who do not participate in determining a rating.

(b) Analysts and other employees who are directly involved in determining a rating shall not initiate, discuss, negotiate, or arrange rating fees, and shall not have access to fee information for any particular rated entity; however, a person responsible for negotiating or determining fees for a rated entity may consult a rating analyst regarding the time, complexity, resources, and internal costs related to determining a particular rating or type of rating, as long as the rating analyst is not exposed to such fee discussions or arrangements with any specific entity and does not otherwise participate in recommending or determining a fee for an entity.

(c) The sales and marketing functions for Demotech's rating activities shall be separated from the determination of ratings. Employees who participate directly in the sale or marketing of Demotech's rating services shall not also participate in the determination of a rating or the development or approval of methodologies or procedures used for determining ratings. Nothing in this policy shall prevent an analyst or employee who participates in determining ratings or in developing methodologies used to determine ratings from participating in or contributing to presentations or publications of Demotech, except that those employees must not allow such activities to improperly influence their rating activities, and such activities must not include the sale or marketing of Demotech ratings.

(d) If an analyst receives information related to fees for a rated entity, the analyst must immediately report the information to the Designated Compliance Officer. The Designated Compliance Officer will review the nature and content of the communication and determine the appropriate action to

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be taken, which may include removing the analyst from participating in determining or approving a rating for the entity for a requisite period of time.

- (e) Demotech will notify entities who have engaged or intend to engage in Demotech's rating process of the need to communicate information related to fee arrangements separately and only with the appropriate personnel at Demotech.
- (f) To the extent practicable, work spaces for analysts shall remain physically separated from work spaces of employees engaged in sales, marketing, or fee discussions.
- (g) To the extent that members of the board of directors participate in approving rating methodologies, such members shall not participate in fee arrangements or fee discussions with rated entities, or the sale or marketing of Demotech rating services, and they shall not be influenced by sales or marketing considerations when undertaking board activities related to approving methodologies, policies, or procedures for determining ratings. When undertaking such board activities related to approving methodologies, policies, or procedures for determining ratings, each director should confirm that they have not participated in sales or marketing activities for Demotech's rating services, have not been influenced by sales or marketing considerations, and have no other applicable conflicts of interest.
- (h) Demotech shall not provide consulting services directly to entities it reviews and rates.
- (i) Analysts involved in determining ratings or developing rating processes or methodologies are permitted to participate in other business activities of Demotech that do not present a conflict of interest with rating activities and do not otherwise violate this policy.
- (j) Confidential information shall be protected in accordance with Demotech's Policy for the Treatment of Confidential Information and shared only with those employees or other persons associated with Demotech with a need to know. Rating analysts shall not discuss any deliberations relating to individual ratings or any anticipated rating actions with any employee not directly involved in determining a rating.
- (k) Demotech shall structure its electronic files and databases in a manner that prevents employees involved in determining ratings from accessing information related to fees for rated entities; and to prevent employees who are not involved in determining ratings from accessing confidential information related to rating activities. Demotech's management and the Designated Compliance Officer will work with the information technology department to determine which electronic files need to be segregated and which employees should have access to each segregated file, folder or system. File segregation and access controls will be maintained by Demotech's information technology department and reviewed periodically by the Designated Compliance Officer to ensure compliance with this policy and applicable laws.
- (l) If an employee who is not authorized to access or receive Confidential Information, or who otherwise does not have a need to know Confidential Information, receives or is exposed to Confidential Information, the employee must immediately report the receipt of or exposure to such information to the Designated Compliance Officer. The Designated Compliance Officer will review the nature of the information and the employee's receipt or exposure, and will determine the appropriate action to be taken to ensure that no conflict of interest exists or that any such conflict is effectively managed.

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## 5. Securities Ownership and Trading

- (a) Neither Demotech nor its employees, directors, or officers, or their immediate family members shall engage in any insider trading, as discussed in Demotech's Policy for the Treatment of Confidential Information, or any securities or derivatives trading presenting a conflict of interest with Demotech's rating activities. For purposes of this section, 'immediate family members' shall mean a spouse, domestic partner, and minor dependent.
- (b) Employees who are involved in determining ratings or who otherwise have access to material nonpublic information, and such employees' immediate family members, shall not directly own or trade any stocks, bonds, notes, or other similar securities issued by a rated entity ('Restricted Securities'). Restricted Securities shall not include mutual funds, exchange traded funds or other diversified collective investment schemes over which the individual associated with Demotech exercises no investment discretion.
- (c) Employees who are involved in determining ratings or who otherwise have access to material nonpublic information, who own, or whose immediate family members own, Restricted Securities or have otherwise engaged in transactions in Restricted Securities shall be prohibited from participating in the rating process for the rated entity to which those Restricted Securities relate until a conflict of interest no longer exists. Such employees shall divest all Restricted Securities as soon as reasonably practicable. Demotech will review the securities disclosures of such employees, assess their activities to determine if an actual or potential conflict exists, and monitor or adjust the rating of the entity to which those Restricted Securities relate as appropriate.
- (d) Employees who are involved in determining ratings or who otherwise have access to material nonpublic information, and who own, or whose immediate family members own, Restricted Securities in pensions, retirement plans, or other similar accounts that are sponsored by an employee's former employer, or their family member's current or former employer, and cannot be traded or liquidated without penalty, may maintain such securities, but such employees shall not participate in determining the rating for the rated entity to which those Restricted Securities relate for as long as they maintain such ownership and a conflict of interest exists. Such employees should divest Restricted Securities when practicable without penalty.
- (e) In accordance with this policy, at the time of hire, annually thereafter, and as otherwise may be required by Demotech, each employee who is involved in determining ratings or who otherwise has access to material nonpublic information shall disclose to Demotech his or her ownership of Restricted Securities, if any, and certify that they have made a full and accurate disclosure in accordance with this policy. In addition to these regular disclosures, such employees must immediately disclose to Demotech any new ownership, acquisition, or trading activity related to a Restricted Security of which the employee or an immediate family member is a beneficial owner. Upon the request of Demotech, employees must provide information for all brokerage accounts and securities holdings of which the employee or an immediate family member is a beneficial owner. All information disclosed to Demotech shall be used solely for the purpose of monitoring and enforcing compliance with Demotech's internal policies and applicable laws. The Designated Compliance Officer will review all such disclosures to determine if any conflict of interest exists and will take, or recommend to management, actions necessary to address the conflict of interest.
- (f) Employees subject to the securities trading and ownership restrictions and requirements of this policy may request a waiver of the trading or ownership restrictions, or the reporting requirements, set forth in this section. All requests for a waiver must be made in writing to the Designated Compliance Officer and must include the reason for the request and all pertinent facts. The

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Designated Compliance Officer will review the request, determine if a waiver is appropriate, and, if a waiver is granted, document the waiver and take such additional actions as may be necessary to address any actual or potential conflict of interest presented by the waiver.

(g) Any questions regarding the ownership or trading of securities should be directed to the Designated Compliance Officer.

(h) The provisions of this section shall also apply to members of the board of directors to the extent that any such member becomes aware of material nonpublic information for a rated entity or participates in determining ratings.

# 6. Employee Transition and Look-Back Policy

(a) In the event that an employee of Demotech leaves his or her employment, either voluntarily or involuntarily, and Demotech knows or reasonably should know that the employee becomes employed at an entity that is rated by Demotech, Demotech shall take the following actions:

i. Conduct a review to determine if the departing employee participated in any capacity in determining a rating for the entity (including supervising employees doing the same);
ii. If the departing employee participated in determining a rating for the entity during the one-year period preceding the date any action was taken with respect to the rating, the Designated Compliance Officer shall conduct a further review to determine whether any conflicts of interest of the departing employee influenced the rating; and
iii. If any potential conflict of interest of the departing employee may have influenced the rating, the Designated Compliance Officer shall notify senior management. Demotech shall promptly take action to revise or affirm the rating as appropriate.

(b) Upon the departure of an employee who participated in determining ratings, Demotech shall use reasonable efforts to ascertain the employee's employment for a five year period following his or her separation from Demotech. Demotech shall document, and report as may be required by applicable law, any case it knows or can reasonably be expected to know where a person associated with Demotech within the previous five years obtains employment with any entity that has been rated by Demotech during the twelve-month period prior to that employee gaining employment with the rated entity, if such employee:

i. Was a senior officer with Demotech;
ii. Participated in any capacity in determining a rating for the rated entity; or
iii. Supervised an employee who participated in any capacity in determining a rating for the rated entity.

# 7. Outside Activities

(a) Employees and directors of Demotech shall not engage in any outside activity that creates an actual or apparent conflict of interest with their employment with or responsibilities to Demotech.

(b) Employees and directors shall disclose their engagement in outside activities to Demotech. Such disclosures shall occur at the time of hire, as may be required by Demotech thereafter, or when an employee or director intends to engage in a new outside activity. Outside activities include both compensated and uncompensated activities; however, employees and directors generally do not need to disclose activities such as participation with local religious, educational, or charitable organizations. If an employee or director has a reasonable belief that an outside activity may

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present an actual or potential conflict of interest, they must disclose the activity to the Designated Compliance Officer or senior management.

(c) Employees may hold employment outside of Demotech only if such employment does not create any actual or apparent conflict of interest with their employment with Demotech, is conducted strictly on the employee's personal time, and does not interfere with the employee's responsibilities to Demotech. Prior to accepting any outside employment, employees must obtain express permission from the Designated Compliance Officer or senior management to engage in the outside employment.

(d) Under no circumstance shall an employee or director receive income or other gain from individuals outside of Demotech for materials produced or services rendered through the course of the employee's employment or directorship with Demotech.

(e) Demotech shall maintain a record of all outside activity disclosures. The Designated Compliance Officer will assess such disclosures for actual or potential conflicts of interest, and take such actions as may be appropriate or make recommendations to senior management or the board of directors about appropriate actions to address any conflicts of interest.

# 8. Gifts and Favors

(a) No employee of Demotech shall solicit money, gifts, or favors from anyone with whom Demotech does business.

(b) No analyst shall accept any gifts or favors, including entertainment, from a rated entity or person affiliated with a rated entity, except if such gifts are provided in the context of normal business activities such as meetings and have an aggregate value of no more than $25. If an analyst receives any gift, they must report the gift, including the actual or estimated value, to the Designated Compliance Officer.

(c) Employees not responsible for determining ratings may accept gifts and favors in the normal course of business if such gifts or favors are a customary part of participating in ordinary business activities and if the gifts or favors are appropriate and reasonable. Such employees who receive any gift from entities rated by Demotech must report the gift, including the actual or estimated value, to the Designated Compliance Officer.

(d) Any questions regarding the propriety of any gifts, favors, or other benefits should be directed to the Designated Compliance Officer. If any employee has concerns about the propriety of a gift or proposed gift, they must consult the Designated Compliance Officer to determine the appropriate course of action.

(e) Demotech will maintain a record of all reported gifts. If the Designated Compliance Officer determines that any gifts do not comply with this policy or applicable law, or otherwise create an actual or apparent conflict of interest, he or she will take appropriate action to address the conflict of interest and document any action taken.

# 9. Percentage of Net Revenue

(a) In accordance with Securities and Exchange Commission Rule 17g-5(c)(1), Demotech shall not issue or maintain a rating solicited by a person or entity who in the most recently ended fiscal year provided Demotech with net revenue that equaled or exceeded ten percent of Demotech's total net revenue for the year.

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(b) Persons within Demotech responsible for Demotech's internal accounting shall monitor net revenues and notify the Designated Compliance Officer regarding any actual or anticipated violations of this rule. Employees responsible for sales, marketing, or business development, shall notify the accounting department or the Designated Compliance Officer if they reasonably believe that a person or entity will exceed ten percent of net revenue. Demotech will take appropriate action if it appears a person or entity will exceed ten percent of net revenue.

(c) Demotech may seek an exemption from this rule from the Securities and Exchange Commission, in which case it shall abide by the conditions of the exemption.

# **10. Compliance**

Employees or directors who fail to comply with this policy may be subject to disciplinary action including termination.

Effective Date: 07/06/2022

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