On March 27, 2011, at the Spring National Meeting of the National Association of Insurance Commissioners (“NAIC”), the Valuation of Securities (E) Task Force (“VOS Task Force”) evaluated a proposal to allow insurance companies to treat Working Capital Finance Notes as invested assets. The proposal was a joint effort of the NAIC’s Securities Valuation Office (“SVO”), Pacific Life, and the Nebraska Department of Insurance. The VOS Task Force has exposed the report for a 45-day comment period, which will end on May 13, 2011.

Working Capital Finance Notes are an attractive investment opportunity for insurance companies because they offer higher yields than traditional short-term instruments such as commercial paper, yet retain the low risk of a high-quality short-term instrument. Working Capital Finance Notes are created when a seller of goods delivers goods to a buyer, the buyer accepts the goods, and an invoice is issued that creates a binding obligation on the buyer to make payment. The buyer must confirm that the invoice is for the correct amount, and also that the buyer has no defenses to payment of the invoice amount. The invoice, also referred to as a payable, is then offered to an agent at a discounted rate, often bundled with other similar payables. The agent can then offer the payable to an investor, and the investor can either accept or reject the offer to buy the payable. The original issuer of the invoice, the seller of goods, receives cash for the sale of the payable. The invoice payable is held until it becomes due, and the investor will be credited with the entire amount due on the invoice from the original buyer of goods when payment is made.

Working Capital Finance Note Programs, which have until now been developed by banks but not yet by insurance companies, allow buyers and sellers to use and sell Working Capital Finance Notes on a regular rolling basis. Working Capital Finance Note Programs issue short-term obligations with maturities ranging from 30 to 360 days but usually between 60 to 180 days. The obligations are issued at a discount, mature at par, and are pari-passu with other senior unsecured obligations. Through a Working Capital Finance Note Program, a buyer of goods has access to short-term financing for its purchases, the seller of goods receives the proceeds from a sale faster than waiting for the invoice to be paid allowing for greater liquidity and lower cost of funds, and the investor in the Working Capital Finance Note Program gets a higher return than an investment in traditional commercial paper while still maintaining a similar risk profile as if investing in other short-term instruments. In this fashion, the investor can receive a continuous stream of payments from one particular high-credit source.

The SVO proposal is to amend the Purposes and Procedures Manual of the NAIC Securities Valuation Office to include Working Capital Finance Notes as invested assets eligible for purchase by insurers. Previously, the Nebraska Department of Insurance had asked the SVO to evaluate the risks of Working Capital Finance Notes and to make recommendations as to whether they qualify as invested assets after Pacific Life had sought clarification under the insurance investment laws in Nebraska. The SVO developed a process for modifying the existing NAIC procedures used to assess risks in bonds so it could be used to evaluate the credit risk of a Working Capital Finance Note Program and enable the SVP to assign a designation. The SVO would employ a two step process consisting of (1) an identification of the obligor’s Acceptable Ratings Organizations (“ARO”) credit rating and NAIC designation of the obligor, the bank, agent, and any other key parties, and (2) an assessment of the transaction’s structure, agreements, and any special attributes. An obligor must have an ARO rating designated NAIC 2 or better in order to be eligible to be part of the Working Capital Finance Note Program.

Letters supporting the treatment of Working Capital Finance Notes as invested assets were submitted to the VOS Task Force by the UNIFI Companies (Ameritas Life Insurance Corp., First Ameritas Life Insurance Corp., Acacia Life Insurance Company, and The Union Central Life Insurance Company) and Mutual of Omaha. The VOS Task Force voted to receive the report from the SVO and expose the report for a 45-day comment period. If the amendments to the Purposes and Procedures Manual of the NAIC Securities Valuation Office are accepted, the NAIC will then need to create a regulatory framework to include investment in Working Capital Finance Notes as invested assets.