Genworth CFO: Managing Costs and Risks in a Turnaround

May 23, 2014, 2:51 AM ET

Genworth CFO: Managing Costs and Risks in a Turnaround


Senior Editor

Marty Klein is the chief financial officer of Richmond, Va.-based insurer Genworth Financial Inc.GNW +0.29% He spoke with CFO Journal about how the company has renewed its focus on metrics like cost of capital and leverage as it works to affect a post-financial crisis turnaround.

Q: A lot of businesses we talk to are focused on divestitures right now as a way to raise capital and pursue more profitable business. You’ve just priced an initial public offering of part of your Australian mortgage insurance business. How does that fit into your strategy?

A: It’s been a long-time priority for us and it’s an important part of our strategy going forward to re-balance our risk and our capital among our mortgage platform. Our strategy is to improve our operating performance in all of our businesses, take steps to simplify the company and raise capital.

The return on equity for most of our businesses in the crisis years was in the single digits, and obviously those are very sub-par returns. We wanted to have a renewed focus on getting the businesses to return to an acceptable return on equity that was ahead of their cost of capital. We had become a fairly far-flung company in a number of different businesses and a lot of different countries, so it was fairly hard for a company of our size for investors to really understand it. And frankly, in retrospect given the company’s performance, maybe we weren’t the easiest company to manage. So we’ve taken steps to simplify the business. We sold our wealth management business last year, we did this partial IPO of Australia though it’s still a core business of ours.

Q:  As CFO, how do you get involved in deciding what to simplify? How do you decide which assets are no longer core to the business?

A: The wealth management business is a good business, but for us to be able to really have grown it and have it be a meaningful part of our company, we were going to have to invest in it. We were going to have to put capital into it and maybe make some acquisitions, and frankly we didn’t have the capital available to do that. It was not really a driver of our earnings and wasn’t going to be for a long period of time, so we concluded that’s not really a business that’s core to us, and we decided to sell it.

We have another non-core business: the lifestyle protection business which mostly sells payment protection insurance in Europe. But given what’s going on in Europe we figure our best strategy is to wait for a bit of a European recovery. Presumably that will happen at some point and we’ll see the business’s prospects lift a bit. In the meantime it’s been profitable and we’ll look to sell it in a couple years.

Q: It’s interesting that you wanted to focus on cost of capital in the turnaround strategy. What drove that decision?  

A: I think it was important to get the right discipline. I joined the company three years ago and we wanted to improve our operating performance, but it’s hard to do that if you’re putting on new business that’s not priced appropriately. It’s not creating value for shareholders and clearing your cost of capital. Some businesses are riskier and have a higher cost of capital so they should be held to a higher standard.

We had not had specific cost of capital targets for each business until really a couple years ago, but it makes sense. For example, our long-term care insurance is a very long-term product that can be around for 30 or 40 years, versus mortgage insurance, which can roll off the books in five or six years. So, it’s important that cost of capital reflects that and each business prices its product to be in excess of its particular cost of capital.

We also have leverage targets for each business. That’s also a newer thing for us that we put in place a couple years ago. Our mortgage insurances businesses, for example, are more cyclical by their nature, so they tend to be able to support a lower level of leverage. At the company in aggregate, we’re at 26% leverage, but in mortgage insurance we try to keep it around 16% or 17% — maybe 18% if things are going really well. Life insurance is longer term, more steady and much less cyclical, so they can support a higher degree of leverage, typically more like 25% or 26%, or even north of that. We use the different leverage targets as well for the individual businesses when we look at pricing. If we’re mispricing our product, then the return we’re getting is not really the right return. We’re never going to really get our returns to improve over time if we’re putting on new business that isn’t profitable.

Q: Sometimes companies say it’s hard to use cost of capital right now in making business decisions, because some of the inputs that go into it are out of historical norms. For example, interest rates are so much lower than they have been historically.

A: It’s partly science, and it’s partly art. There’s some judgment involved to be sure, but at least directionally it gives you an idea. We tend not to look at where these things are right now, but over the next three-to-five years. We really update those every year and there are obviously a lot of assumptions behind it. But it doesn’t have to be so precise. If you have an 11.4% cost of capital, we’ll ballpark it at 11% to 12%. It gives you a sense of where you want to be.

Q: How did you get the staff involved and convince them to adopt this discipline in the business?

A: We talked about it with our senior leadership team a little over two years ago now. One of our major objectives was to improve our performance and it was something the company hadn’t been doing. We immediately began work with our finance and risk teams to be able to create those metrics and then evaluate the businesses and it did result in pricing changes. We clearly had products that were not priced appropriately.

I was CFO at the time, but also for a while at Genworth I was the acting CEO. It’s around that time when we started to make those changes. When you’re holding both those jobs, you have a lot of sway.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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