Every year the Alexander Hamilton Awards contest draws entries describing terrific projects at some of the world's top companies. This year, Treasury & Risk presented gold, silver, and bronze Alexander Hamilton Awards in three categories: Cash Management & Liquidity Optimization, Financial Risk Management, and Operational Risk Management. The winners were those whose projects demonstrate leading practices in these specific areas. However, a few entries did not fit neatly into any of the categories. Among these, a project from Hyundai Capital America stood out, and this year's judges chose to recognize the project with an Alexander Hamilton Awards Honorable Mention.

Hyundai Capital America (HCA) is an automotive finance company that is a wholly owned subsidiary of Korean auto manufacturer Hyundai Motor Group. By 2012, the company had matured into a full-spectrum lender, offering a traditional suite of auto financing products including retail loans, lease financing, and dealer wholesale financing. The treasury function had become very proficient at managing the largely debt-financed business.

But when the company decided to expand into auto-related vehicle protection products, the team realized they needed to work from the ground up to develop a completely different approach to cash management. They needed new technology solutions, new processes, and new financial services relationships in order to optimally support the new business. Treasury & Risk sat down with Frank Boroch, director of investor relations for Hyundai Capital America; Mustally Hussain, senior director of treasury strategy and planning; and Kunal Patel, treasury analyst, to learn more about the project.

T&R:  First of all, what types of insurance products is HCA selling under the Hyundai Capital Insurance brand?

HCA:  We focus on vehicle protection products. Our primary offerings are vehicle service contracts, certified pre-owned vehicle wrap insurance, prepaid maintenance products, and gap insurance, which covers the difference between the principal on an auto loan and the insured value of the vehicle in the event of a total vehicle loss.

T&R:  How different are cash flows for this business compared with HCA's auto financing business?

HCA:  They're very different. The vehicle financing business is a net-debt business. We're borrowing money and then lending that out to vehicle buyers. And for the most part, as we collect cash from borrowers for their monthly payments, we turn around and send that cash to our lenders. So we don't have large cash investments within the traditional auto financing business.

The insurance side is the complete opposite. There's no debt, and it's a cash-rich business. We have an influx of premiums that we need to invest, and generate adequate returns on, so that we're ready for future calls on those policies. The insurance business flips the traditional auto-finance balance sheet on its head, giving treasury a different mission: stewardship of a large amount of cash.

T&R:  When you were preparing to launch the insurance business, how did you determine how the treasury function needed to change?

HCA:  We started our needs assessment with a set of rigorous roundtables in which we collaborated with multiple internal departments, including the FP&A [financial planning and analysis], sales and marketing, accounting, and legal teams. We spent a significant amount of time with FP&A to identify the breadth and depth of analytics we would need to manage the insurance business. We also worked with FP&A to determine which specific factors we would deal with in the insurance business that we didn't deal with in auto financing, such as the actuarial assumptions that underlie the specific risk characteristics of the insurance asset portfolio. And we also evaluated what level of investment returns we would need to support the business, at least in the early years before we built up a sizable asset base.

In addition to the internal roundtables, we also worked with external partners and industry-leading consultants to identify the best practices and operational issues in the space. We asked what we would need to have in place before rolling out the new business, and what we would need to do to keep the business running once it was launched.

T&R:  What needs did you identify for treasury?

HCA:  One example is that we realized we needed to expand the analytical model we use for the auto financing business. Because the leveraged business model of the auto finance captive involves minimal cash, in the past we didn't need to pay as much attention to managing actuarial assumptions, investment returns, and other aspects of cash management. Another example is that we realized we needed a financial services partner that could not only perform trust services, but also provide investment management services and offer us a very rigorous level of analytical detail.

T&R:  How did the results of the needs assessment translate into a project plan for revamping treasury?

HCA:  We distilled it down to a three-phase plan, which we implemented over about 15 months culminating in the business launch in January 2013. In phase 1 we mainly focused on building and identifying strategic knowledge related to the vehicle protection business. We highlighted the gaps where our operations and strategy, while well-suited to what we were doing in auto financing, weren't sufficient for protection products. Building on that, in phase 2 we looked at where the pain points would be if we tried to use our current tools and processes for the insurance business. Could we adapt them to meet the needs of the new business, or did the insurance business need different tools and processes than the auto financing group? Then in phase 3 we started building the tools and processes we needed.

We took a holistic approach to this entire project. As we went through each phase, we refined our assumptions and our results. It wasn't a one-shot deal, where we got the results and considered the project finished. To this day, we keep optimizing our models as the business and market environment continues to evolve.

T&R:  What tools did you build as part of phase 3?

HCA:  We had to develop a new analytics backbone. We integrated a variety of data streams through Microsoft Excel because Excel allows the flexibility to integrate forecasting data quickly, and to incorporate data streams from our external investment manager as well as internal groups.

We also built a cash flow monitoring tool. We opened a number of new bank accounts when we put the operational structure in place for Hyundai Capital Insurance [HCI]. The tool tracks all of HCI's cash throughout its operational life cycle, from a premium payment coming in from customers, to investment returns from that cash, to potential claim payouts.

T&R:  If these tools are built in Excel, what are the source systems for the data you're analyzing?

HCA:  We receive investment returns from our investment reporting tool, Clearwater Analytics; market data from Bloomberg; and internal data from internal source systems. Then we use Excel to integrate the different analytics.

T&R:  In addition to the cash flow monitoring, what information do you get out of your analytics platform?

HCA:  The platform is built to provide liquidity forecasts, income statement forecasts, and asset/liability analytics using inputs such as actuarial forecasts. We make sure that the investments we are making at Hyundai Capital Insurance are not mismatched with the liabilities that are due in the future. At a very high level, we want to make sure that the assets and liabilities have a similar duration.

T&R:  How often do you run the asset/liability analysis?

HCA:  On a quarterly basis. As the cash and income forecasts for the business change, we recalibrate what the expected life of our liability portfolio is. And then the investment manager recalibrates our asset portfolio to match the liability profile.

T&R:  Are these tools helping you maintain better control over liquidity and cash in the new insurance business?

HCA:  Definitely. In fact, just analyzing the information needs of an insurance business and thinking about how we needed to build this tool helped us view our existing cash management process in a different light. Stepping back and thinking about the differences between the leveraged, cash-light auto financing business and the cash-heavy insurance business helped us identify ways we could achieve greater efficiencies and cost-savings synergies with our existing financial services partners.

And that process has resulted in substantial cost savings on our portfolio. One example is that treasury has been able to negotiate ECRs [earnings credit rates] with our counterparties to maximize returns on any excess cash. We've used the insights from the analytics tool to allocate our banking business in a way that optimizes our banking wallet. Ultimately, the profitability of Hyundai Capital America has improved because of these efforts.

Another example was once we started using the cash flow monitoring tool, we were able to identify a significant opportunity to reduce the lag time from when we receive premium payments to when we invest them with our investment manager and start realizing returns beyond the overnight rate.

T&R:  Do these tools facilitate intercompany lending between the cash-rich insurance business and the debt-heavy auto financing business?

HCA:  Our infrastructure can support intercompany lending, but we haven't utilized it yet. What it is already allowing us to do is to assess HCI's potential liquidity and operational needs within the context of the overall consolidated Hyundai Capital America business. Would it be appropriate to invest some of the cash from the insurance business to finance Hyundai Capital America, subject to the prudent risk management guidelines of HCI? That could happen if needed.

T&R:  Did you also revisit your investment policy as part of this project?

HCA:  Actually, phase 3 involved the drafting of our first investment policy, which is part of HCA's broader suite of corporate governance policies. The auto financing business just stored liquidity in overnight funds, but the insurance business needed an investment policy that could accommodate different risks, different time horizons, HCI's operational liquidity needs, and the insurance product's contribution to the income statement. We started with extensive benchmarking of bellwether investment policies for similar businesses. We learned about best practices in building an investment policy to support an insurance business, and we took a hard look at our internal business and financial forecasts for our liability profile.

The benchmarking process also looked at different regulatory requirements. Because it's a regulated business, the insurance group faces different sets of rules than does auto financing. And we had to make sure the investment policy was calibrated to match the cash flows that we expected to be going out from the insurance business in a year, two years, three years, four years, and longer. We used our investment policy to establish a contingent liquidity reserve that would enable us to cover unexpected expenses in the early years before we've built up a very strong asset base while still reserving enough for long-term payouts.

T&R:  What would you say were the keys to this project's success?

HCA:  One of Hyundai's strengths is the ability to think critically about the business and incorporate fresh information without being constrained by the modus operandi. In this case, although it may initially have appeared easier to launch the insurance business by force-fitting it into the technology platforms we already had, the needs assessment highlighted that that wasn't the appropriate strategy. We brought in some new talent with specific skills, and the existing treasury staff rolled up our sleeves and embarked on the steep learning curve to prepare for the new business. We weren't constrained by the way we'd done things in the past.

We always kept an open mind, which is really important. Without an open mind, we probably wouldn't have been able to build up such a strong knowledge base.

T&R:  Were there any particular steps you took to secure buy-in for this project among the treasury staff?

HCA:  We highlighted the new business opportunity to the treasury team as an opportunity to upgrade their skill set. A number of team members looked at the challenge as very worthwhile. We tapped into that, and for people we thought had the aptitude to tackle this type of project, we rotated them through different areas to learn what they needed to know.

T&R:  Has this project made the treasury function at Hyundai Capital America more strategic within the company overall?

HCA:  I would say so. We were already playing a vital role at HCA, just in the course of the auto financing business. Because the business model is based on leverage, HCA wouldn't be able to operate without a sophisticated treasury operation. That said, our participation in this project really highlighted our ability to support the development of the business plan and interdepartmental tools to for the rollout of a new product line. The project really emphasizes how treasury can help drive profits instead of just supporting business operations.

There are really two views of treasury across different sectors. In businesses that are net-debt-heavy, treasury is responsible for raising debt in the capital markets and financing the loans, leases, and other transactions. In contrast, the treasury function's mandate in companies that are net-cash-heavy is more focused on investment activities than financing activities. Both are extremely valuable, but usually the net-cash treasury operations seem to get less input into the business than do the net-debt treasury groups. That's because treasury in a net-debt business has a more direct impact via interest expense on the overall profitability of the company.

That said, even in net-cash companies, treasury can find ways to help the business manage its risk better, save on costs, and immunize the balance sheet. They can implement consolidation of accounts or different types of hedging strategies. These projects may not be high-profile, but they can drive profits.

And as our story demonstrates, a treasury function can do both. It can be responsible for driving profits from both the cash and debt perspectives.