Insurers now free to invest in Trade Finance Receivables David Gustin - January 30, 2014 6:55 AM | Categories: Accounting Treatment, Legal & Regulatory, Specialized Purpose Vehicles | Tags: NAIC, Working Capital Finance Notes There are literally trillions of dollars of assets managed by Pension Funds, Insurers, Endowment Funds and Hedge Funds to meet their respective missions. Many just assume these funds can buy anything they want. This is not true. There are restrictions set by their various Governance bodies. In the case of insurers, up until recently, trade receivables were considered a non admitted asset under statutory accounting. Non admitted assets require significant capital. An insurance company would need to have private equity or mezzanine level returns (ie, 12, 14, 16%) to afford the capital charge. You are not going to put your capital in 90 day receivable at Libor+200bp. This has all changed. In August 2012, the Valuation of Securities Task Force (“VOSTF”) of the National Association of Insurance Commissioners (NAIC) met to approve a draft by the New York Department of Insurance after significant input from other state departments of insurance, industry representatives, and other participants, for the qualification and recommendation of Working Capital Finance Notes as a permitted asset. Working Capital Finance Investment programs are private placements of pools of commercial trade receivables that offer higher yields than other short duration investment options of similar quality. These high-quality floating-rate investments offer a hedge against rising interest rates. In essence, think of working capital notes as part of an Approved Buyer Invoice program stemming from Wal-Mart or Mars, or Nestle. Nestle approves the invoice to pay, and a bank or non bank offer the supplier Libor based financing based off of Home Depot risk. These programs can be huge. Nestles buys $70bn worth of stuff each year, so putting some of that on this type of program means the banks need help to finance it. These are attractive short term fixed income investments for any Insurers Portfolio. Often yielding Libor + 100 to 500 bps depending on the quality of the Buyer for 90 or 120 Receivables, these investments have a significant yield gap over US Treasuries or Bank CDs. This space just got a lot more interesting. Related Articles Discuss this: Cancel reply Your email address will not be published. Required fields are marked *Comment Name * Email * Website Notify me of new posts by email.