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ACLI: Working Capital Notes Similar to Commercial Paper

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The American Council of Life Insurers (ACLI) says insurance regulators should evaluate insurer investments in working capital finance notes using the same rules that apply to commonly used short-term investments.

Michael Monahan, accounting policy director at the ACLI, Washington, has discussed the working capital notes in a comment letter sent to the Statutory Accounting Principles Working Group on the Valuation of Securities Task Force at the National Association of Insurance Commissioners (NAIC), Kansas City, Mo.

A working capital finance note helps a large vendor cope with the gap between when a company acknowledges that it must pay an invoice and when it actually pays the invoice.

Banks once dominated the sector, but insurers now have a chance to participate because of banks’ efforts to reduce the size of their balance sheets, note marketers say.

Insurers have asked the NAIC what it thinks about the working capital note programs.

Note marketers say the notes give insurers relatively high investment returns in exchange for risk levels that are comparable to the risk levels insurers would face if they invested in the program sponsors’ short-term corporate bonds.

NAIC staff members have suggested the program investors may face default risk and billing problem risk.

In some ways, the ACLI believes working capital finance note is similar to structured securities backed by credit card and auto loan receivables, Monahan says.

“These structured securities have historically been recognized as admitted assets,” Monahan says.

A working capital note is somewhat different, because, rather than depending on thousands of “obligor,” or borrowers to pay their bills, the program is depending on one creditworthy obligor to make payments, Monahan says.

A working capital note is also somewhat different from commercial paper because, rather than being traded over an exchange, it involves a transaction similar to a private placement of securities, Monahan says.

The ACLI is suggesting that “Statement of Statutory Accounting Principles (SSAP) Number 2 – Cash, Drafts and Short-Term Investments” is the policy that fits the notes best.

SSAP Number 2 provides a broad, flexible definition of “short-term investments” that clearly includes the working capital finance notes, Monahan says.

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