After several years of deliberation among various NAIC committees and working groups, working capital finance investments (WCFIs) were approved as admitted assets for insurance companies effective January 1, 2014. In conjunction with such approval, Statement of Statutory Accounting Principles No. 105 (SSAP 105) was issued to set forth the accounting and financial reporting for WCFIs, also with an effective date of January 1, 2014. WCFIs represent short-term obligations transferred by an entity entitled to receive payment (typically a goods supplier) to a third party investor (in this case the insurance company). The transactions underlying a WCFI are recurring financial exchanges as part of a working capital finance program whereby buyers purchase goods from suppliers, creating a short-term receivable on the books of the suppliers. The working capital finance program is an evergreen or open account financing facility in which investors may purchase an interest. The program is facilitated by a finance agent (typically a bank).
A WCFI is considered an admitted asset if it meets requirements set forth in SSAP 105. Those requirements include the following:
- Annual audit of the consolidated financial statements of the finance agent, with an unqualified report with regard to servicing
- Either an SSAE No. 16 report on service organization controls or an annual audit of the internal controls of the consolidated group of which the finance agent is a part, which does not note any material weaknesses
- Insurance company investors must monitor the obligor’s credit worthiness and must be able to provide such information as requested by the domiciliary state regulator
- The credit rating of the working capital financing program and the obligor must be maintained at NAIC designation 1 or 2
- Eligible supplier receivables must have a maturity date of one year or less from the date of the supplier’s invoice underlying the receivable
In addition, the obligor or the finance agent must confirm to the insurance company investor, prior to the insurer’s purchase of a WCFI, the amounts, payment dates and related invoice numbers and specific dates of the underlying receivables. The obligor or finance agent must also confirm that it has waived all defenses to payment of the obligation supported by the receivable.
In accordance with SSAP 105, WCFIs are recorded on the trade date at acquisition cost and amortized to maturity. Any related fees and costs, including brokerage fees, origination fees and commitment fees are expensed as incurred. WCFIs are reported as other invested assets in the financial statements. Disclosure of the book value of WCFIs by NAIC credit rating designation and by maturity categories is also required.
WCFIs and similar receivable financing types of investments have been in existence for years. After much deliberation, effective January 1, 2014, the NAIC approved WCFIs as admitted assets for insurance companies subject to the requirements of SSAP 105. This is a new asset class for insurers that could enhance the overall yield of the short-term investment portfolios of many insurance companies that choose to invest in WCFIs.
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