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NAIC Panel to Consider Working Capital Finance Note Proposal

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The Valuation of Securities Task Force is looking at the idea of insurers joining banks in the working capital finance note business.

The task force, an arm of the Financial Condition Committee at the National Association of Insurance Commissioners (NAIC), Kansas City, Mo., helps state insurance regulators deal with insurance investment issues.

Insurers have been having trouble getting good invest returns in recent years, because Moneythey want safe, highly liquid investments, and interest rates on ordinary short-term bonds are near record lows.

Pacific Life Insurance Company, Newport Beach, Calif., asked the Nebraska Department of Insurance whether it could address the need for safe, liquid but higher-yielding investments by participating in working capital finance note programs, task force staff members say in a working capital finance note proposal.

The Nebraska department asked the NAIC about the note programs.

The task force plans to consider the proposal Sunday during a session at the NAIC’s upcoming spring meeting in Austin, Texas.

A working capital finance note program is a program that a large company may set up to help vendors cope with gap between when the company acknowledges that it must pay an invoice and when it actually pays.

The large company gets control over its accounts payable, and the vendors get

quick access to cash, task force staff members say in the proposal.

The major risks that the supplier of the notes faces is the risk that the large company will default; the risk that the large company will decide there is a problem with a bill; and the risk that something will go wrong with business operations.

In exchange, the supplier of the note may get a return that is considerably higher than the rate the same large company pays on short-term debt securities, according to a background presentation written by working capital note program advocates that accompanies the NAIC staff proposal.

One large retailer is paying a spread of just 0.03 percentage points over the London Interbank Offered Rate (LIBOR) benchmark for 180-day commercial paper but a 1.75 percentage point spread over LIBOR for working capital finance notes, note program advocates say.

Banks have dominated the working capital note program for a decade. Insurers now have an opportunity to get into the business because of the regulatory pressure banks have faced to deleverage and reduce the size of their balance sheets, note program advocates say.

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