Expanding the Yield Frontier with Trade Receivable Financing

General insurers are increasingly seeking additional sources of return beyond traditional equities and fixed income, while maintaining a disciplined focus on liquidity, capital efficiency, and balance-sheet resilience. Although base rates have normalised, public credit spreads remain compressed, correlations have risen, and traditional assets offer limited scope for incremental income without introducing volatility or structural risk.

For P&C insurers in particular—whose liabilities are short-dated, uncertain, and often lumpy—this environment presents a distinct challenge. Investment strategies must be calibrated not only to market conditions, but to underwriting risk, claims volatility, and regulatory capital treatment across jurisdictions.

Many insurers were early adopters of private credit and now evaluate alternative income strategies through a three-dimensional lens: return, volatility, and liquidity. While private credit has delivered attractive returns, it has increasingly done so through longer tenors, closed-ended structures, and greater exposure to refinancing and macro risk.

Trade receivable financing, accessed through institutional asset-based finance (ABF) strategies, may offer a differentiated alternative. It aims to delivers steady, high-quality income, low economic volatility driven by short-cycle cashflows, and structural liquidity through evergreen fund formats, while also benefiting from strong capital efficiency under standard-model treatment.

This article examines trade receivables through the lens of P&C insurer CIO decision-making, incorporating practitioner insights to show how trade receivable financing can complement existing allocations as a satellite source of uncorrelated income, expanding the yield frontier without compromising liquidity or balance-sheet discipline.

Risk considerations: No structure removes risk entirely. Trade receivable financing still depends on borrowers paying on time and on the effectiveness of the origination and servicing chain. Cash-flow timing can be affected by defaults, disputes, dilution or set-off, fraud and documentation or enforceability issues—particularly across jurisdictions. Diversification can reduce single-name concentration, but it cannot eliminate losses, and relationships with public markets can change in stressed periods. Valuations also move as assumptions around defaults, recoveries, extensions and discount rates evolve, while liquidity ultimately reflects fund terms and the pace of underlying repayments. Currency and regulatory factors can also influence outcomes.

Operating at the Yield Frontier

Insurance investment portfolios are increasingly operating at the “yield frontier”—the point at which incremental income can no longer be extracted from traditional assets without materially altering the risk profile of the balance sheet.

Although policy rates have risen, credit markets have not repriced proportionately. Investment-grade spreads remain tight, the opportunity set in high-quality credit is narrowing, and correlations between bonds and equities have increased. As a result, the traditional levers for enhancing income—extending duration, increasing credit risk, or adding leverage—are increasingly misaligned with insurer objectives.

This dynamic is particularly acute for general insurers. P&C liabilities are typically shorter-dated (often around three years) and can be highly variable. Claims patterns are uncertain, and catastrophe exposures—such as hurricane risk—can create sudden and material liquidity demands. In this context, investment portfolios must remain highly liquid and operationally flexible.

As one P&C CIO put it, the primary role of the investment function is not to maximise total return, but to generate an incremental return relative to the future discount rate of liabilities. For insurers pricing liabilities in USD, this means thinking explicitly in terms of USD returns over the risk-free rate, with liabilities—not market indices—serving as the true benchmark.

Against this backdrop, insurers are increasingly focused on how yield is generated, not simply where it comes from. The emphasis has shifted toward income streams that are structurally differentiated, resilient across market environments, and compatible with both liquidity needs and regulatory capital frameworks. Trade receivable financing sits naturally within this reassessment.

"Our benchmark isn’t an index. It’s our liabilities—how they’re priced, when they fall due, and how volatile claims can be."

- Anonymised insight from a P&C insurance CIO

Yield Compression and the Search for Additional Return

A dominant theme in insurer investment discussions is that headline yields no longer equate to adequate compensation for risk. Investment-grade credit offers limited spread, while high-yield markets provide diminishing incremental return once default risk, downgrade risk, and capital charges are taken into account. Several CIOs now observe that the investment-grade credit market itself is structurally shrinking, both in terms of issuance quality and depth. This further constrains insurers’ ability to extract incremental income from traditional fixed income without moving into less liquid or more volatile assets.

For P&C insurers, the challenge is compounded by liability uncertainty. Extending duration or adding credit beta may improve yield optics, but it also introduces volatility that can conflict with claims-driven balance sheets—particularly in stress scenarios where underwriting losses and market dislocations may occur simultaneously.

"The problem isn’t that yield is unavailable—it’s that the volatility and liquidity trade-offs required to access it are increasingly unattractive for P&C balance sheets"

- Anonymised insight from an insurance CIO

How Trade Receivables Address the Return Dimension

Trade receivable financing aims to offer a genuinely differentiated source of return, independent of traditional equity and fixed-income markets. Income is generated by providing short-term liquidity to operating businesses, secured against underlying commercial receivables, rather than through exposure to interest-rate movements or credit spread compression.

Returns are typically steady and repeatable, reflecting transaction economics rather than market cycles. This may mean that trade receivables can be considered as an additional return source, complementing rather than replacing existing credit allocations.

In this sense, trade receivables expand the opportunity set without requiring insurers to take on incremental duration or market beta.

Volatility Management and Balance-Sheet Stability

As insurers have diversified into private markets, volatility management has become a first-order concern—not because private assets exhibit higher day-to-day price volatility, but because risk is often revealed through liquidity events, refinancing points, or delayed valuation adjustments.

Many alternative credit strategies are exposed to macro conditions and refinancing risk in ways that may not be immediately visible through reported valuations, but can become pronounced during periods of market stress.

For general insurers, this distinction matters. Portfolio volatility does not arise solely from mark-to-market movements, but from how assets behave when liquidity is required or capital buffers are tested. Assets that introduce hidden or event-driven volatility can undermine earnings stability—particularly during catastrophe events, when liquidity and capital flexibility are most critical.

How Trade Receivables Address the Volatility Dimension

Trade receivables are inherently short-dated, with typical maturities of 60–90 days. This short tenor materially limits exposure to interest-rate movements and reduces sensitivity to broader credit cycles.

Because cashflows are realised through contractual invoice settlement rather than asset sales or refinancing, valuation volatility is limited. Returns are driven by diversified pools of underlying transactions, resulting in low economic volatility relative to traditional credit strategies.

This profile aligns closely with the lower-volatility, income-focused investment approach increasingly adopted by P&C insurers.

"Short-cycle assets that generate income without meaningful mark-to-market swings are especially valuable when underwriting risk is volatile"

- Anonymised insight from a P&C insurance CIO

Liquidity, Capital Efficiency, and Jurisdictional Reality

Liquidity is a defining constraint for P&C insurers. Much of the private credit universe is structured around closed-ended, long-tenure vehicles, which can be poorly suited to balance sheets exposed to claims volatility and catastrophe risk.

Capital treatment adds further complexity. Regulatory capital requirements vary materially by jurisdiction. For insurers operating across London and Bermuda, asset structure and domicile can significantly influence capital efficiency—particularly for unrated exposures such as trade receivables.

Bermudian rules are generally more penal than UK rules on unrated assets, but allow greater flexibility for longer-dated investments where insurers can demonstrate resilience to a 1-in-200-year shock. This has been one factor behind the heavier allocation to long-dated private credit among Bermudian reinsurers.

As a result, some insurers effectively operate two implementation models for a single strategic asset allocation, reflecting different regulatory treatments and capital constraints.

How Trade Receivables Address Liquidity and Capital Efficiency

Trade receivable strategies accessed through evergreen fund structures offer a distinct liquidity profile. From a capital perspective, trade receivables can be efficient under the standard model, as the underlying exposures are typically treated as unrated. Combined with short tenor, predictable cashflows, and strong structural protections, this supports favourable outcomes under Pillar 2 assessments focused on stability and resilience.

“From a standard-model perspective, the capital efficiency of short-dated, unrated assets with stable cashflows is very compelling.”

- Anonymised insight from a P&C insurance CIO

Portfolio Construction: Where Trade Receivables Fit

In practice, most P&C insurers operate a barbell portfolio structure. The majority of assets—often around 90%—are allocated to high-quality, highly liquid fixed income portfolios, typically managed by a small number of large asset managers. Alongside this core allocation sits a 10% “risk” or satellite bucket, diversified across a broader range of specialist managers, where insurers can take more idiosyncratic views and access differentiated sources of return.

Trade receivable financing can sit naturally within a satellite allocation. It remains niche and typically less liquid than public markets and its short-dated structure can offer a different exposure profile to many traditional credit assets. In that sense, it is often discussed as a complement to core fixed income rather than a substitute.

Positioned in this way, trade receivables can potentially enhance portfolio income and diversification without compromising overall liquidity or capital discipline.

Conclusion: Expanding the Yield Frontier for P&C Insurers

For general insurers, the challenge is no longer simply finding yield, but finding yield that aligns with liabilities, liquidity needs, and capital frameworks. Trade receivable financing offers a differentiated response. It seeks to generate contractual cash flows through short-dated, self-liquidating, asset-backed transactions and can broaden the opportunity set, while aiming to manage volatility and structural risks.

For P&C insurers, trade receivables can sit within a satellite sleeve alongside core fixed income, with a focus on structure, granularity and maturity profile—while remaining mindful of claims volatility, liquidity needs and regulatory capital.

In a world of compressed spreads and shrinking traditional opportunity sets, trade receivables may offer a practical way to add yield without losing control of the balance sheet.

---

Disclaimer

This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell, or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investors or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with their financial professionals. The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance does not predict or guarantee future results. Investing involves risk; principal loss is possible. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. Fasanara Capital Ltd, is authorised and regulated by the Financial Conduct Authority (“FCA”).

Important information on risk

Investing involves risk. The value of any investment and the income from such can go down as well as up, and you may not get back the full amount invested. Changes in the rate of exchange may also cause the value of overseas investments to go up or down. This information represents the views of Fasanara Capital Ltd and its investment specialists. It is not intended to be a forecast of future events and/or guarantee of any future result. Information was obtained from third party sources which we believe to be reliable but are not guaranteed as to their accuracy or completeness. There is no assurance that an investment will provide positive performance over any period of time. This information does not constitute investment research as defined under MiFID.