building trust. driving confidence. - icbc home · to the breakdowns within the bank of america/...

December 23, 2013

British Columbia Utilities Commission Sixth Floor 900 Howe Street Vancouver, BC V6Z 2N3

building trust. driving confidence.

CONTAINS CONFIDENTIAL MATERIAL

Attention: Ms. Erica Hamilton, Commission Secretary

Re: Confidential Responses to the Commission's Confidential Information Requests (No.2)

Dear Ms. Hamilton:

On December 2, 2013 the Commission submitted confidential information requests to ICSC relating to Appendix 5 C and to Round 1 responses to confidential information requests. Please find attached ICSe's confidential responses to these confidential information requests submitted by the Commission in IR No.2.

ICSC is able to file the responses to information requests 2013.2 RR BCUC.7.1C and 2013.2 RR BCUC. 7.2C on a non-confidential basis and has therefore included these responses with its filing of the Commission and Intervenor responses No.2.

Yours truly,

June Elder Manager, Corporate Regulatory Affairs

Cc: Geri Prior, S.Comm, FCA, Chief Financial Officer, ICBC

Attachment

151 West Esplanade I North Vancouver I British Columbia I V7M 3H9 I 604-661-2800 I [email protected]

British Columbia Utilities Commission Information Request No. 2013.2 RR BCUC.4.1C Dated 02 December 2013 Insurance Corporation of British Columbia Response Issued 23 December 2013

Page 1 of 1

30 August 2013 Insurance Corporation of British Columbia Revenue Requirements Application for the Policy Year Commencing November 1, 2013

2013.2 RR BCUC.4.1C Reference: INVESTMENTS Exhibit B-3-2, 2013.1 RR BCUC.1.1.2C; 2013.1 RR BCUC.2.1C – Attachment A; 2013.1 RR BCUC.1.4C Standard Deviation in Returns and High Yield Bond Characteristics In 2013.1 RR BCUC.1.1.2C, ICBC provides the standard deviation of historical asset class benchmark returns to measure asset class risk as follows: In 2013.1 RR BCUC.2.1C – Attachment A – ICBC Investment Portfolio Statement of Investment Policy and Procedures Asset Mix Review provides the “Risk Assumptions ICBC Portfolio” as Attachment A of the Investment Committee Meeting dated March 12, 2013. In 2013.1 RR BCUC.1.4C, ICBC provides the index characteristics of high yield bonds as of September 30, 2013 as follows: In 2013.1 RR BCUC.93.3, ICBC states “ICBC eliminated its exposure to US bonds to take advantage of the yield premium offered by Canadian bonds for the benefit of higher investment income.” Please confirm the Standard Deviation in Returns listed in the preamble is based on quarterly returns from Q3 2000 through Q2 2012. If not confirmed, please clarify. Response:

Yes, the standard deviation of returns has been calculated based on quarterly return data from

Q3 2000 through Q2 2012 and annualized.

British Columbia Utilities Commission Information Request No. 2013.2 RR BCUC.4.1.1C Dated 02 December 2013 Insurance Corporation of British Columbia Response Issued 23 December 2013

Page 1 of 2


2013.2 RR BCUC.4.1.1C Reference: INVESTMENTS Exhibit B-3-2, 2013.1 RR BCUC.1.1.2C; 2013.1 RR BCUC.2.1C – Attachment A; 2013.1 RR BCUC.1.4C Standard Deviation in Returns and High Yield Bond Characteristics In 2013.1 RR BCUC.1.1.2C, ICBC provides the standard deviation of historical asset class benchmark returns to measure asset class risk as follows:

In 2013.1 RR BCUC.2.1C – Attachment A – ICBC Investment Portfolio Statement of Investment Policy and Procedures Asset Mix Review provides the “Risk Assumptions ICBC Portfolio” as Attachment A of the Investment Committee Meeting dated March 12, 2013. In 2013.1 RR BCUC.1.4C, ICBC provides the index characteristics of high yield bonds as of September 30, 2013 as follows:

In 2013.1 RR BCUC.93.3, ICBC states “ICBC eliminated its exposure to US bonds to take advantage of the yield premium offered by Canadian bonds for the benefit of higher investment income.” Please elaborate on the data source of high yield bonds. Does the full sample reflect ICBC’s high yield bond characteristics such as geographic distribution, sector breakdown, and credit rating?


Page 2 of 2


Response:

It is assumed that the data source being referenced is the data that was utilized in ICBC’s initial

asset mix modelling.

The original data analysis utilized the Barclay’s US Corporate High-Yield Index comprised of US

corporate borrowers. As described in Barclay’s most recently published factsheet for the index

(dated June 18, 2012), the sector breakdowns to Industrials, Financials, and Utilities are similar

to the breakdowns within the Bank of America/ Merrill Lynch BB/B High Yield Cash Pay (JOA4)

Index, ICBC’s selected high yield bond benchmark, as described in the response to information

request 2013.1 RR BCUC.1.4C. The Barclay’s US Corporate High-Yield Index has a greater

degree of credit risk with exposures to issuers with no credit rating or with ratings below B-. The

benchmark selected for the ICBC program does not contain issuers rated below B- and only

includes securities that pay principal and interest in cash. Please see Attachment A – US

Corporate High-Yield Index June 18, 2012.

ICBC’s Information Request Response

Insurance Corporation of British Columbia

December 23, 2013

2013.2 RR BCUC.4.1.1C – Attachment A – US Corporate High-Yield Index June 18, 2012

INDEX, PORTFOLIO & RISK SOLUTIONS Index Products | 18 June 2012

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 4

Sherwood Kuo, CFA [email protected] +1 212 526 2490

Nikki Stefanelli [email protected] +1 212 526 6190

Nolan Walsh [email protected] +1 212 526 54513

www.barcap.com/indices live.barcap.com (keyword: index) General Inquiries: [email protected]

U.S. Corporate High-Yield Index The U.S. Corporate High-Yield Index measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below, excluding emerging market debt. The U.S. Corporate High-Yield Index was created in 1986, with history backfilled to July 1, 1983, and rolls up into the Barclays U.S. Universal and Global High-Yield Indices.

Sector Composition (MV%) – Trailing 5 years (as of Dec 31, 2011) Quality Composition (MV%) – Trailing 5 years (as of Dec 31, 2011)

81.5 80.2 79.0 78.6 80.7

11.2 12.0 8.8 8.5 8.5

7.3 7.8 12.2 12.9 10.8

0102030405060708090

100

2007 2008 2009 2010 2011

Industrial Utility Financial

36.1 38.6 37.3 38.7 40.1

43.1 35.0 34.741.7 43.3

20.019.5 19.6

17.1 14.50.9 6.8 8.4 2.6 2.1

0102030405060708090

100

2007 2008 2009 2010 2011

Ba B Caa Ca-NR

Rules for Inclusion

Amount Outstanding

USD150mn minimum par amount outstanding.

Quality Must be rated high yield (Ba1/BB+/BB+ or below) using the middle rating of Moody’s, S&P, and Fitch after dropping the highest and lowest available ratings. When a rating from only two agencies is available, the lower (“more conservative”) is used. When a rating from only one agency is available, that is used to determine index eligibility.

Expected ratings at issuance may be used when other index-eligible bonds from the same issuer hold the same actual rating as the expected rating.

Maturity At least one year until final maturity, regardless of optionality. For securities with coupons that convert from fixed to floating rate, at least one year until the conversion date.

Fixed-to-floating perpetual securities are included in the index. These securities are included until one year before their first call date, provided that they meet all other index criteria.

Seniority of Debt Senior and subordinated issues are included. Capital securities (hybrid capital) are eligible during their fixed-rate term and exit the index one year prior to their conversion to floating-coupon securities.

Taxability Only fully taxable issues are eligible. Dividend received deduction (DRD) and qualified dividend income (QDI) eligible securities are excluded.

New York [email protected] +1 212 526 7400

London [email protected] +44 (0)20 7773 3744

Singapore [email protected] +65 6308 2225

Tokyo [email protected] +81 3 4530 1760

mailto:New�

mailto:[email protected]�



mailto:Tokyo�


Barclays | U.S. Corporate High-Yield Index

18 June 2012 2

Rules for Inclusion (continued)

Coupon Must be fixed-rate. Step-up coupons and those that change according to a predetermined schedule are also included. Capital securities with coupons that convert from fixed to floating rate are index eligible if they are currently fixed rate;

the maturity date then equals the conversion date. Fixed-to-floating rate perpetual capital securities that do not have coupon rate step-ups on their first call date will remain index eligible for their fixed-rate term, provided that they meet all other inclusion rules and exit the index one year prior to their conversion to floating-coupon securities.

Currency Principal and coupons must be USD denominated.

Market of Issue SEC-registered securities and SEC Rule 144A securities with or without registration rights are index eligible. A security with both SEC Regulation S (Reg-S) and SEC Rule 144A tranches is treated as one security in par value to prevent double counting. The 144A tranche is used to represent the issue and comprises the combined amount outstanding of the 144A andReg-S tranches.

Security Types Included Corporate bonds Fixed-rate bullet, putable, and callable bonds SEC Rule 144A securities Original issue zeros Pay-in-kind (PIK) bonds Fixed-rate and fixed-to-floating capital

securities

Excluded Non-corporate bonds Bonds with equity-type features (e.g., warrants, convertibles,

contingent capital securities) Eurobonds Private placements Floating-rate issues Defaulted bonds Emerging market bonds (sovereign rating of Baa1/BBB+/BBB+ and

below using the middle of Moody’s, S&P, and Fitch)

Issuer-Capped Indices

Barclays provides a rules-based methodology for limiting issuer exposure to specific maximum levels in which excess market value is redistributed either index-wide on a prorated basis or according to a sector-neutral basis. 1%, 2%, 3%, and 4% capped versions using the index-wide distribution method have been published for the U.S. HY, U.S. HY Ba, U.S. HY Ba/B, and U.S. HY B Indices.

Historical Annual Returns, 1984-2011 (%)

9.7

25.617.4

5.012.5

.8

-9.6

46.2

15.717.1

-1.0

19.211.412.8

1.9 2.4

-5.9

5.3

-1.4

29.0

11.12.7

11.81.9

-26.2

58.2

15.15.0

-40-30-20-10

010203040506070

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Source: Barclays Research Index History

October 1, 2009 Pay-in-kind (PIK) securities added.

November 1, 2008 Index rebranded as Barclays U.S. Corporate High-Yield Index.

January 1, 2008 Fixed-to-floating rate perpetual securities that do not have coupon rate step-ups on their first call date became index eligible.

July 1, 2005 Fitch ratings added to Moody’s and S&P to determine index eligibility.

October 1, 2003 Started using the most conservative rating of Moody’s and S&P to determine index eligibility instead of Moody’s only for split-rated securities.

July 1, 2000 Liquidity constraint raised to USD150mn from USD100mn. Defaulted securities removed.

January 1, 1998 SEC Rule 144A securities added.

January 1, 1983 Inception date of the U.S. Corporate High-Yield Index.


18 June 2012 3

Rebalancing Rules

Frequency The composition of the Returns Universe is rebalanced at each month-end and represents the fixed set of bonds on which index returns are calculated for the ensuing month. The Statistics Universe is a forward-looking version that changes daily to reflect issues dropping out and entering the index, but is not used for return calculation. On the last business day of the month (the rebalancing date), the composition of the latest Statistics Universe becomes the Returns Universe for the following month.

Index Changes During the month, indicative changes to securities (credit rating change, sector reclassification, amount outstandingchanges, corporate actions, ticker changes) are reflected in both the Statistics and Returns Universe of the index on a daily basis. These changes may cause bonds to enter or fall out of the Statistics Universe of the index on a daily basis, but will affect the composition of the Returns Universe only at month-end, when the index is rebalanced.

Reinvestment of Cash Flows

Intra-month cash flows from interest and principal payments contribute to monthly index returns, but are not reinvested at any short-term reinvestment rate between rebalance dates to earn an incremental return. However, after the rebalancing, cash is effectively reinvested into the returns universe for the following month so that index results over two or more months reflect monthly compounding.

New Issues Qualifying securities issued but not necessarily settled on or before the month-end rebalancing date qualify for inclusion in the following month’s index if required security reference information and pricing are readily available.

Barclays Indices are also available from licensed third-party distributors and analytical platforms. A list of approved vendors is available upon request.

Pricing and Related Issues

Sources & Frequency All index-eligible bonds are priced on a daily basis by either Barclays traders or FT Interactive Data (IDC). Pricing Quotes Bonds can be quoted in a variety of ways, including nominal spreads over benchmark securities/Treasuries, spreads

over swap curves, or direct price quotes as a percentage of par. In most instances, the quote type used is a spread measure that results in daily security price changes from the movement of the underlying curve (swap or Treasury) and/or changes in the quoted spread.

Timing 3pm (New York time) each day. On early market closes, prices will be taken as of 1pm unless otherwise noted. If the last business day of the month is a public holiday in the U.S., prices from the previous business day are used.

Bid or Offer Side Bonds in the index are priced on the bid side, including new corporate issues entering the index.

Settlement Assumptions T+1 calendar day settlement basis On month-end, settlement is assumed to be the first day of the following month, even if the last business day is

not the last day of the month, to allow one full month of accrued interest to be calculated.

Verification Multi-contributor verification: The primary price for each security is analyzed and compared with other third-party pricing sources through statistical routines and scrutiny by the research staff. Significant discrepancies are researched and corrected, as necessary.

Calendar The index follows the U.S. bond market holiday schedule.

Accessing Index Data

Barclays Live live.barcap.com (keyword: index)

Barclays POINT®

Long Name: US HY Bloomberg® LEHM and BCIX pages/Index Tickers

Daily index returns and statistics Historical index time series downloadable

into Excel Standardized market structure reports Fully customizable views Index primers and shelf reference

documents Latest Index, Portfolio and Risk Solutions

(IPRS) research publications

Index level returns and statistics Historical index constituents Fully customizable market structure

reports Index dynamics and turnover reports Portfolio upload/analysis Multi-factor Global Risk Model Portfolio performance attribution Portfolio optimization capabilities Automated batch processing

Current Month Returns & Statistics Previous Month Returns & Statistics Index Tickers:

- LF98TRUU: Total Return Index Value

- LF98YW: Yield To Worst

- LF98OAS: OAS


18 June 2012 4

Bloomberg Total Return Index Value Tickers for U.S. Corporate High-Yield and Related Indices

Ticker (USD Unhedged) Index Ticker (USD Unhedged) Index

LF98TRUU U.S. Corporate High-Yield LHVLTRUU U.S. High-Yield Very Liquid (VLI)

LF89TRUU U.S. Corporate HY – 2% Issuer Capped LBBATRUU U.S. High-Yield Ba/B

LF90 TRUU U.S. Corporate HY – 3% Issuer Capped LBICTRUU U.S. High-Yield Ba/B - 2% Issuer Capped

Total Return Index Values are available in other currencies and on a hedged basis. Other attributes, such as yield and duration, are also tickerized on Bloomberg using the first four characters of each ticker listed in the above table. For a full list of tickerized attributes for each index, type ALLX <Ticker>. Please refer to Historical Analysis Using Bloomberg Tickers for a full list of tickers.1

Index Licensing

Barclays requires index data licenses for services and products linked to the Indices Index or Constituent-Level Redistribution Bond Pricing Service Exchange Traded Funds (ETFs)

Exchange Traded Notes (ETNs) Index-Linked Insurance Products Mutual Funds

OTC Derivative Products Custom Index Solutions

For information on licensing opportunities and questions on data usage and redistribution of Barclays Indices, please contact your regional index group or email [email protected].

1 Please refer to Historical Analysis Using Bloomberg Tickers for a full list of tickerized indices.

Analyst Certification(s) I, Nikki Stefanelli, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to the specificrecommendations or views expressed in this research report. Important Disclosures Barclays Research is a part of the Corporate and Investment Banking division of Barclays Bank PLC and its affiliates (collectively and each individually,"Barclays"). For current important disclosures regarding companies that are the subject of this research report, please send a written request to: BarclaysResearch Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to http://publicresearch.barcap.com or call 212-526-1072. Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should beaware that Barclays may have a conflict of interest that could affect the objectivity of this report. Barclays Capital Inc. and/or one of its affiliates regularly trades, generally deals as principal and generally provides liquidity (as market maker or otherwise) in the debt securities that are the subject of this researchreport (and related derivatives thereof). Barclays trading desks may have either a long and / or short position in such securities and / or derivativeinstruments, which may pose a conflict with the interests of investing customers. Where permitted and subject to appropriate information barrier restrictions, Barclays fixed income research analyst(s) regularly interact with its trading desk personnel to determine current prices of fixed income securities. Barclaysfixed income research analyst(s) receive compensation based on various factors including, but not limited to, the quality of their work, the overall performance of the firm (including the profitability of the investment banking department), the profitability and revenues of the Fixed Income, Currencies &Commodities Division ("FICC") and the outstanding principal amount and trading value of, the profitability of, and the potential interest of the firms investingclients in research with respect to, the asset class covered by the analyst. To the extent that any historical pricing information was obtained from Barclays trading desks, the firm makes no representation that it is accurate or complete. All levels, prices and spreads are historical and do not represent currentmarket levels, prices or spreads, some or all of which may have changed since the publication of this document. The Corporate and Investment Bankingdivision of Barclays produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of researchproducts, whether as a result of differing time horizons, methodologies, or otherwise. In order to access Barclays Statement regarding Research Dissemination Policies and Procedures, please refer to https://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-research-dissemination.html.

Disclaimer This publication has been prepared by the Corporate and Investment Banking division of Barclays Bank PLC and/or one or more of its affiliates (collectivelyand each individually, "Barclays"). It has been issued by one or more Barclays legal entities within its Corporate and Investment Banking division as providedbelow. It is provided to our clients for information purposes only, and Barclays makes no express or implied warranties, and expressly disclaims all warrantiesof merchantability or fitness for a particular purpose or use with respect to any data included in this publication. Barclays will not treat unauthorized recipients of this report as its clients. Prices shown are indicative and Barclays is not offering to buy or sell or soliciting offers to buy or sell any financial instrument. 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US21783


Page 1 of 2


2013.2 RR BCUC.4.2C Reference: INVESTMENTS Exhibit B-3-2, 2013.1 RR BCUC.1.1.2C; 2013.1 RR BCUC.2.1C – Attachment A; 2013.1 RR BCUC.1.4C Standard Deviation in Returns and High Yield Bond Characteristics In 2013.1 RR BCUC.1.1.2C, ICBC provides the standard deviation of historical asset class benchmark returns to measure asset class risk as follows:


In 2013.1 RR BCUC.93.3, ICBC states “ICBC eliminated its exposure to US bonds to take advantage of the yield premium offered by Canadian bonds for the benefit of higher investment income.” If possible, please update the Standard Deviation of Returns using the most recent information available.


Page 2 of 2


Response:

The standard deviation of returns has been updated with most recent information in the table

below:

For the period Q3 2000 to Q3 2013:

Asset Class Standard

Deviation in Returns

Bonds 2.41%

Mortgages 2.40%

Equity

Canada

US

Europe, Asia, Far East

16.46%

13.90%

16.19%

High Yield Bonds 9.07%

Real Estate 4.85%


Page 1 of 2


2013.2 RR BCUC.4.2.1C Reference: INVESTMENTS Exhibit B-3-2, 2013.1 RR BCUC.1.1.2C; 2013.1 RR BCUC.2.1C – Attachment A; 2013.1 RR BCUC.1.4C Standard Deviation in Returns and High Yield Bond Characteristics In 2013.1 RR BCUC.1.1.2C, ICBC provides the standard deviation of historical asset class benchmark returns to measure asset class risk as follows:


In 2013.1 RR BCUC.93.3, ICBC states “ICBC eliminated its exposure to US bonds to take advantage of the yield premium offered by Canadian bonds for the benefit of higher investment income.” Please comment on any material differences in results between the updated results and the original results of Q3 2000 through Q2 2012.


Page 2 of 2


Response:

There is no material difference between the updated results and the original results of Q3 2000

through Q2 2012. The slight decline in the updated standard deviation of returns suggests that

volatility has declined in more recent quarters.


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In 2013.1 RR BCUC.93.3, ICBC states “ICBC eliminated its exposure to US bonds to take advantage of the yield premium offered by Canadian bonds for the benefit of higher investment income.” Is ICBC intending to invest in high yield bonds with “BB” and “B” credit ratings only? Please explain the rationale of not investing in lower than “B” rated bonds.


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Response:

Yes, ICBC is intending to buy all high yield investments in BB and B rated securities. The

reason for not focussing on “sub B-” rated securities is that the default probabilities as reported

by Standard & Poor’s for this rating class are substantially higher. As a result, the higher yields

associated with these securities is offset by the expected losses from the higher number of

expected defaults, leading to expected returns not substantially different than would be

achievable in the higher rated BB and B segment of the market.


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In 2013.1 RR BCUC.93.3, ICBC states “ICBC eliminated its exposure to US bonds to take advantage of the yield premium offered by Canadian bonds for the benefit of higher investment income.” 4.4 According to the geographic distribution, ICBC will invest 85% in US high yield bonds. Please explain why ICBC believes investing in US high yield bonds are appropriate but eliminates other US bond holdings.


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4.4.1 Did ICBC compare Canadian vs. US high yield bonds? Why did ICBC not include any Canadian high yield bonds? 4.4.2 Please confirm that the current Statement of Investment Policy and Procedures dated April 15, 2013 allows for the situation where ICBC will not be investing in US bonds, with the exception of US high yield bonds. Response:

4.4 ICBC has chosen a global high yield bond benchmark in order to maximize the universe of

possible high yield bond investment choices. However, the selected benchmark reflects the

degree to which US companies dominate the high yield bond marketplace when compared to

other jurisdictions that focus more on banking relationships for their corporate funding needs.

The choice of using a US dollar denominated benchmark was based on the breadth and depth

of the US dollar marketplace for high yield securities and the enhanced liquidity that this would

provide ICBC in managing its assets and liquidity needs, and not to demonstrate a preference

for US high yield companies.

The previously held US bond index was eliminated based solely on the yield characteristics of

the portfolio at the time. A diversified portfolio of US government and investment grade

corporate bonds yielded less than a portfolio of Canadian federal government bonds with zero

credit risk exposure, and this continues to be the case. The high yield mandate is not intended

to be an alternative to either Canadian or US investment grade bonds. Instead, the allocation is

intended to be an alternative to US and Europe, Asia, Far East (EAFE) equities. 4.4.1 ICBC did look at the Canadian high yield bond marketplace and found it to be very small and

illiquid with limited diversification opportunities. ICBC does not intend to preclude the use of

Canadian high yield issuers in either the Canadian or US marketplace as long as these issuers

meet the risk return parameters associated with maintaining a diversified investment portfolio.


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4.4.2 The current Statement of Investment Policy and Procedures dated April 15, 2013 does not have

an allocation for US bonds. The US high yield bond mandate is intended as an alternative to

the US and EAFE equity portfolios.


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2013.2 RR BCUC.5.1C Reference: INVESTMENTS Exhibit B-3-2, 2013.1 RR BCUC.1.1.3C; 2013.1 RR BCUC.2.1.1C Net Cost Benefits In 2013.1 RR BCUC.1.1.3C, ICBC states “Three additional FTEs are required to support the transition to the new strategic asset mix. Three confidential Investment Analysts were hired at a total cost of $320,000 per year.” In 2013.1 RR BCUC.2.1C, ICBC provides the net cost benefits anticipated with the implementation of the April 2013 strategic asset mix.

Please provide a breakdown of cost savings that make up the Year 1 reduction in equity management fees of $1,273,675 and subsequent Year 2 and Year 3 reductions of $241,800. Response:

Since filing the response to information request 2013.1 RR BCUC.2.1C there have been

departures of key ICBC investment staff and ICBC will now need to outsource the high yield

bond mandate to an external manager for an estimated two years. Consequently, there is a

change to the initial cost saving estimates. The cost associated with outsourcing the high yield

bond mandate is estimated at approximately 40 basis points (or $2.6 million) for each of year

one and year two. ICBC estimates that at the end of year two, current employees will be

adequately trained to manage the high yield bond portfolio in-house and will recognize cost

savings in year three. The tables below detail the revised cost estimates associated with the

implementation of the April 2013 strategic asset mix.


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Year 1

Reduction in equity management fees

US equity management fees ($65,000)

EAFE equity management fees ($966,875)

Canadian equity management fees ($241,800)

Subtotal ($1,273,675)

High yield bond management fees $2,600,000

Staffing costs associated with 3 additional FTEs $320,000

Net Cost in Year 1 $1,646,325

Year 2





Subtotal ($1,515,475)

High yield bond management fees $2,600,000


Net Cost in Year 2 $1,404,525

Year 3





Subtotal ($1,757,275)

Costs associated with internal management of high yield bond portfolio

$100,000


Net (Benefit) in Year 3 ($1,337,275)


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When and how did ICBC recognize the permanent reduction in equity management fees? Response:

ICBC will recognize its reduction in equity management fees as the portfolio is transitioned to its

new strategic asset mix. ICBC accounts for management fees as a net against investment

income in the period management fees are incurred.


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Since the additional staffing costs associated with three additional FTEs are $320,000 per year, would it be fair to say that there is a net cost of $78,200 ($241,800 less $320,000) starting in Year 2 and onward? Response:

Please see the response to information request 2013.2 RR BCUC.5.1.C regarding costs

associated with implementing the new strategic asset mix.


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2013.2 RR BCUC.6.1C Reference: INVESTMENTS Exhibit B-3, 2013.1 RR BCUC.91.1-4; Exhibit, B-3-2, 2013.1 RR BCUC.1.6C Transition in 2014 In 2013.1 RR BCUC.91.1-4, ICBC states: “The confidential information in the SIPP dated April 15, 2013 is confidential only during the transition period into early 2014.” In 2013.1 RR BCUC.1.6C, ICBC states: “Guidelines pertaining to the investment in high yield bonds are in the process of being developed and will be presented for approval to the Investment Committee of the ICBC Board of Directors at a meeting in December, with ultimate approval by the Board of Directors anticipated early in 2014. No investment will be made in high yield bonds until the mandate guidelines are defined in the Statement of Investment Policy and Procedures.” In 2013.1 RR BCUC.1.3C, ICBC also states: “ICBC is concerned that if the portfolio profile, size, and transition timing is disclosed prior to establishing the high yield bond allocation, there may be pricing distortions at the time of implementation which may be to the detriment of portfolio return.” Please clarify the two statements regarding the 2014 transition period. Is ICBC saying that the 2014 investment strategies should be confidential at this time until actual investments are being transacted, after which the information would then be non-confidential? Response:

Yes, ICBC is saying that the 2014 high yield bond investment strategy should be confidential at

this time until actual investments are transacted, after which the strategy information would be

non-confidential.

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