Last Updated 8/24/2023
Issue: Working capital finance investments (WCFI) are confirmed short-term (not exceeding one year) obligations, to pay a specified amount owed by one party (the obligor, i.e. a buyer of goods) to another (typically a supplier of goods), generated as a part of a working capital finance investment program. A working capital finance (WCF) program transfers the right to payment held by the supplier of goods to an investor and is created for the benefit of a commercial investment-grade obligor and its suppliers of goods or services, and facilitated by a finance agent (usually a bank). Under the program, an investor may purchase interests in unaffiliated commercial non-insurance receivables. To qualify as an admitted invested asset for insurance companies, a WCFI should be part of a WCF program currently designated as NAIC-1 or NAIC-2 by the NAIC Securities Valuation Office (SVO).
In simple terms, the WCFI results from a supplier’s decision to sell the receivable before the buyer of the goods is required or obligated to pay it. The supplier can do this because a receivable is an asset (i.e., a form of personal property). By selling the receivable, the supplier is transferring this asset (and its right to receive payment) to an investor in exchange for the payment of an agreed upon amount of cash today. The financial agent advancing the money today in exchange for the right to receive repayment from the obligor in the future will seek appropriate compensation, typically in the form of a discount to the full amount of the receivable. A WCFI program is then an open account/evergreen financing facility created by a bank for a single obligor and its suppliers. The bank then can offer supplier receivables it does not want to purchase itself to one or more investors that have previously been added to the obligor’s program for that purpose.
Similar to other investments, an investor in a WCFI program is exposed to the obligor’s credit risk. Credit risk is the ability of the obligor to pay its obligation on time and in full. The WCFI program requires the obligor to acknowledge in writing the receivable payment amount and date. The obligor is also required to acknowledge that the payment, with respect to the receivable, is a binding payment obligation and that the obligor has no legal defense to payment of the specified amount.
Status: After significant input from the state insurance departments, NAIC staff, industry representatives and other participants, WCFIs were approved as admitted assets for reporting entities with an effective date of January 1, 2014, during the 2013 Fall National Meeting. The Statutory Accounting Principles (E) Working Group adopted Statement of Statutory Accounting Principles (SSAP) No. 105—Working Capital Finance Investments and the Valuation of Securities (E) Task Force followed by adopting instructions for the Purposes and Procedures Manual of the NAIC Securities Valuation Office (SVO). In 2019, the Valuation of Securities (E) Task Force forwarded industry recommended changes to the program requirements in SSAP No. 104 for evaluation by the Statutory Accounting Principles (E) Working Group. And at the NAIC National Meeting Spring 2023, revisions were exposed for SSAP No. 104R—Share-Based Payments and SSAP No. 95—Nonmonetary Transactions, to adopt with modification ASU 2019-08.
Committees Related to This Topic
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Charles Therriault, CFA
Director, Securities Valuation Office
Credit Analyst Supervisor, Securities Valuation Office
Director, Structured Securities Group