EXHIBIT (b)(8)(c)
MANAGEMENT AGREEMENT
AGREEMENT made as of this 30th day of August, 1991, by and between
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XXXXXXX XXXXX LIFE INSURANCE COMPANY, an Arkansas corporation (hereinafter
referred to as the "Client"), and XXXXXXX XXXXX ASSET MANAGEMENT, INC. a
Delaware corporation (hereinafter referred to as the "Manager").
W I T N E S S E T H
WHEREAS, the Client is engaged in business as an insurance company
subject to regulation under the laws of each state in which it does business;
and
WHEREAS, the Manager is engaged principally in rendering management
and investment advisory services and is registered as an investment adviser
under the Investment Advisers Act of 1940; and
WHEREAS, the Client desires to retain the Manager to provide
investment advisory services to the Client in the manner and on the terms
hereinafter set forth; and
WHEREAS, the Manager is willing to provide investment advisory
services to the Client on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Client and the Manager hereby agree as follows:
1. APPOINTMENT AND DUTIES OF MANAGER
The Client hereby appoints the Manager as investment manager of such
portion of the Client's investment portfolio as is
designated from time to time by the Client to the Manager in writing (the
"Portfolio") and to furnish, or arrange for affiliates to furnish, the
investment advisory service describe below, on the terms and conditions set
forth in this Agreement. The Manager hereby accepts such appointment and agrees
during such period, at its own expense, to render, or arrange for the rendering
of, such services and to assume the obligations herein set forth for the
compensation provided for herein. Except as limited below and in the Statement
of Investment Policy and Guidelines attached hereto, the Manager shall have full
discretion, as the Client's agent and attorney-in-fact to make purchases and
sales of investments on the Client's behalf and otherwise to act at the
Manager's discretion in the management of the Portfolio.
The Manager shall provide (or arrange for affiliates to provide) the Client
with such investment research, advice and supervision and written reports as the
latter may from time to time (but no less frequently than monthly) consider
necessary for the proper supervision of the assets of the Client, shall furnish
continuously an investment program for the Client and shall have full discretion
as the Client's agent and attorney-in-fact, to determine from time to time which
securities shall be purchased, sold, modified or exchanged and what portion of
the assets of the Client shall be held in (i) the various securities in which
the Client invests, (ii) options, (iii) futures, (iv) options on futures or (v)
cash, subject only to the restrictions of applicable law and the Client's
investment objectives, investment policies and investment restrictions as the
same are in each case
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advised in writing by the Client to the Manager. Without limiting the
foregoing, the Manager shall have authority to approve the restructuring of
investments held in the Portfolio, either through changes in the terms of the
security (including changes in voting rights, dividend rights, interest rates,
maturity, conversion rights or other rights or preferences relating to the
security) or through the substitution of new securities, having such terms and
provisions as may be deemed appropriate by the Manager in light of the
prevailing circumstances, for securities held in the Portfolio. The Manager
shall make decisions for the Client as to foreign currency matters and make
determinations as to foreign exchange contracts, foreign currency options,
foreign currency futures and related options on foreign currency futures. The
Manager shall make decisions for the Client as to the manner in which voting
rights, rights to consent to corporate action and any other rights pertaining to
the Client's Portfolio securities shall be exercised and shall have the
authority, as the Client's agent and attorney-in fact, to exercise such rights
on behalf of the Client. The Manager may temporarily invest the Client's cash in
a money market fund which employs the Manager or an affiliate as its investment
adviser.
2. PORTFOLIO TRANSACTIONS
The Client authorizes the Manager to establish accounts in the
Client's name with Brokerage Firms that are members of the National Association
of Security Dealers and/or members of the Regional or National Securities
Exchanges including the Manager's
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affiliate XXXXXXX LYNCH, PIERCE, XXXXXX & XXXXX INCORPORATED (XXXXXXX XXXXX) and
to buy, sell or otherwise effect transactions in stocks, bonds and any other
securities for the Client's accounts and in the Client's name and the Client
empowers such firms to follow the Manager's instructions.
The Client agrees that, if Xxxxxxx Xxxxx effects investment
transactions-for the Client, it may act as principal, or as agent for both sides
of a transaction, in accordance with applicable law. When Xxxxxxx Xxxxx acts as
agent for both sides of a transaction, it may be paid commissions from, and has
duties to, the opposing ideas. If Xxxxxxx Xxxxx effects transactions on the
Client's behalf on a stock exchange, it may retain the compensation it is paid
for such services, in accordance with applicable law. The Manager is required
by Section 11(a) of the Securities Exchange Act of 1934 to include the preceding
sentence in this agreement for clients who are companies, governments and other
institutions.
Investment firms, including Xxxxxxx Xxxxx, may be compensated from the
Client's Portfolio at their standard rates for effecting investment transactions
on the Client's behalf.
3. ADMINISTRATION
The Manager is a registered investment adviser under the Investment
Advisers Act of 1940.
The Client acknowledges that it has received the Manager's disclosure
statement. The Client represents that the person entering this agreement on the
Client's behalf has full power and authority to do so and that it is binding.
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The Client agrees to notify the Manager prior to giving any
instruction to an investment firm or custodian regarding the commitment,
withdrawal or investment of the Portfolio. The Manager is under no duty to
enter into any transaction with respect to assets which are not readily
available for delivery.
The Client will instruct any investment firm or custodian to transmit
simultaneously to the Client and to the Manager all confirmations and periodic
statements.
The Manager will send the Client current valuations of the Client's account
at least four times annually.
Employees of the Manager's affiliates may receive credits or compensation
for transactions effected on the Client's behalf.
The Client acknowledges that the Managers affiliates may have investment
banking relationships with publicly traded companies and that employees of the
Manager's affiliates may act as directors of publicly traded companies, which at
times may preclude the Manager from effecting transactions on the Client's
behalf in securities of such companies.
4. LIMITATION OF LIABILITY
The Manager will not be liable for the consequences of any investment
decision or related activities made or omitted in accordance with Section 1
hereof, except for loss incurred as a result of the Manager's gross-negligence
or willful or reckless misconduct. The Manager will not be liable for loss
incurred by any other person or as a result of any person other than the
Manager, whether or not its affiliate. These limitations of
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liability also apply to the Manager's directors, officers, employees and agents.
5. CHOICE OF LAW
THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE
INTERNAL LAWS OF THE STATE OF NEW YORK, EXCEPT AS MAY BE PREEMPTED BY FEDERAL
LAW.
6. CUSTODY
Seattle First National Bank will act as custodian of the Portfolio. The
Manager will never receive or physically control the Portfolio. The Client's
money market fund shares may be recorded in the Client's name at a transfer
agent.
The Manager will not be responsible for making any tax credit or similar
clam or any legal filing on the Client's behalf.
7. FEES
In compensation for the Manager's services hereunder, the Client shall
periodically pay to the Manager, upon demand of the Manager (but no less
frequently than annually), a fee equal to the sum of (i) the Manager's costs,
expenses and disbursements incurred during such period in connection with its
services hereunder and (ii) 10% of the amount calculated pursuant to clause (i)
hereof.
8. TERMINATION
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This agreement shall remain in force until further notice. The Client
will be entitled to terminate this agreement at any time, effective from the
time the Manager receives written notification or such other time as may be
mutually agreed upon, subject to the settlement of transactions in progress.
There will be no penalty charge on termination. This agreement will also be
terminated on the fifth day after the Manager ends the Client notice in writing
of the Manager's intent to terminate this agreement or such other time as may be
mutually agreed upon, also subject to the settlement of transactions in
progress. The Manager may not assign this agreement without the Client's prior
consent.
IN WITNESS WHEREOF, the parties hereto have executed an delivered this
Agreement as of the date first above written.
XXXXXXX XXXXX LIFE INSURANCE COMPANY
By: /s/ XXXXX X. XXXXXXXX
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Xxxxx X. Xxxxxxxx
Senior Vice President
Date of Execution: August 30, 1991
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XXXXXXX XXXXX ASSET MANAGEMENT, INC.
By: /s/
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Senior Vice President
Date of Execution: August 30, 1991
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STATEMENT OF
INVESTMENT POLICY AND GUIDELINES
FOR THE MLIG INVESTMENT PORTFOLIOS
I. Investment Goal
Xxxxxxx Xxxxx Insurance Group policy regarding investments supporting its
insurance in force is currently, and will remain, one of maximizing value
for its policyholders and equity owners, consistent with concern for the
safety of investments over the long and short term.
MLIG Investment Management group will pursue this objective by allocating
the policy premiums and the investment income among a broad array of asset
types and asset classes and by choosing appropriate investment management
corporations to manage such investments.
Assets will be segregated into individual portfolios, so that the
investments within each such portfolio are optimal to support the
individual product line, and so as to satisfy all legal and regulatory
requirements.
The MLIG Investment Management group will set portfolio policies that
govern such investments; set appropriate risk levels, normal asset mixes
and the ranges within which the portfolio managers can deviate from those
sector levels or risk measures. The MLIG Investment Management group will
take efforts to hedge away any excess risks beyond the tolerance levels, so
that the portfolios achieve the desired results, while staying within the
appropriate risk parameters.
In addition, the MLIG Investment Management group will closely monitor the
performance of the portfolio managers to ensure that there is appropriate
asset/liability match, and that the actions of the portfolio managers are
commensurate with maximizing the value of owners' equity.
The MLIG Investment Management group will continue to play an active role
in ensuring that the risks and rewards of all available investment choices
are fully factored into the design and pricing of new MLIG products.
II. Portfolio Risk Levels
A major objective in investment management is to have necessary and
sufficient assets to satisfy insurance liabilities at all times.
The investment risks in meeting such an objective can be categorized as
either interest rate risk (duration, convexity and volatility) or credit
risk (default and yield spread risk).
Managing interest rate risk remains one of the key functions of the MLIG
Investment Management group. Significant changes in interest rates, the
shape of the yield curve or in interest rate volatility can have pronounced
impact on the assets of the insurance company. "Immunizing" the insurance
company's wealth against substantial shifts in interest rates therefore
remain a major objective.
Since MLIG insurance products are "customized" liabilities, the Investment
Management group will periodically meet with the actuaries to assess the
key risk attributes of the liabilities (i.e. duration, convexity) of the
MLIG products, the underlying cash flows of the liabilities and the
sensitivity of the liability market values to changes in interest rates
(both parallel and non-parallel yield curve shifts).
These liability risk measures will be updated monthly, reflecting the
influx of new business and the aging of old policies. Such information
will be provided to the appropriate investment managers by the MLIG
Investment Management Group on a monthly basis.
The risk parameters (i.e. duration and convexity) for the assets will be
established in accordance with the same measures for liabilities, so that
under normal conditions changes in interest rates will have offsetting
impact on the firm's assets and liabilities.
Portfolio managers, however, may be allowed to deviate from the risk
guidelines, depending on their interest rate outlook and yield curve
perspective. Deviations beyond +/-1 of the effective duration, however,
require the approval of the Investment Committee and the involvement of the
Investment Management group in adequately hedging the interest rata risk.
Credit risk is to be controlled by adhering to the sector exposure in
accordance with the guidelines established for various asset classes. The
portfolio managers, however, may deviate from those norms based on their
relative value perspective, subject to maximum limits imposed by the
following portfolio guidelines.
III. Asset Classes/Instruments
Federal, State and other local laws that govern insurance companies
stipulate "eligible investments" for insurance companies. Not withstanding
anything listed below, those laws take precedence in what may be termed as
viable investment alternatives for the insurance company assets:
In general, portfolio managers can invest in following assets subject to
limitations listed in following paragraphs:
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- Short-term instruments including Certificates of Deposits, Commercial
Paper, Bankers Acceptances, Medium-Term Notes, Euro CDs, Treasury
Bills, Repurchase and Reverse Repurchase agreements
- U.S. Treasury and Agency debt obligations
- Mortgage-backed securities (including collateralized mortgage
obligations) and Asset-Backed Securities of any federal agency or
private issuers.
- Both publicly- and privately-placed Corporate Debt Securities,
including convertible bonds, of Domestic, Euro and Foreign issuers
- Equity securities including preferred stocks, stock warrants and
equity options.
- Equity and fixed-income derivative securities, including futures,
options, options on futures, interest rate caps, floors and index-
linked securities.
- Swap agreements including interest rate, currency and derivative swap
products.
- Commercial mortgages including equity interest in real properties.
IV. Limitations of Investments
Portfolio managers will be allowed to invest in following asset classes,
subject to certain limitations as set forth below. Size limitations apply
to individual issuers in aggregate, irrespective of the differences among
individual issues of the same issuer or their seniority in claims.
A. Securities issued by the United States Treasury or an agency of the
United States Government which are backed by the full faith and credit
of the United States Government in any amount are authorized.
B. Mortgage-backed securities issued by the Federal Home Loan Mortgage
Corporation, the Federal National Mortgage Association or the
Government National Mortgage Association in any amount are authorized.
C. Mortgage-backed securities collateralized by single family residential
mortgage loans (i.e., collateralized mortgage obligations, private
participations) shall conform to the following size limits per issuer
as rated by either Moodys or Standard and Poors.
Rating Maximum per Issuer
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AAA $100 Million
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AA $ 75 Million
A $ 50 Million
BAA $ 25 Million
Federally sponsored agencies' REMIC CMOs, however, are not subject to
such size limits.
D. Interest rate sensitive derivative mortgage-backed securities such as
Interest-Only and Principal-Only securities (IO/PO) or residual CMO
tranches shall conform to a size limit per issuer of $50 million and
shall in no case exceed 5% of the book value of the portfolio.
E. Commercial mortgages may be included, not exceeding a total of $500
million. No single mortgage shall exceed $10 million without prior
authorization of the Investment Committee. Investments in undeveloped
or under-developed properties, investments where the LTV (loan-to-
value) ratio exceeds 80% or investments where the occupancy rate is
less then 75% also require the explicit prior approval of the
Investment Committee.
F. Securities collateralized by other assets (credit cards, auto loans,
mobile homes, and other loans or receivables) may be purchased only if
investment grade. Per issuer maximums shall conform to those in place
for investment grade securities.
G. Investment grade corporate bond size limits per issuer are as follows:
Rating Maximum per Issuer
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AAA $100 Million
AA $ 75 Million
A $ 50 Million
BAA $ 25 Million
H. Non-investment grade bond size limits are as follows:
Rating Maximum per Issuer
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BB $ 8 Million
B and lower $ 5 Million
The percentage of bonds below investment grade should be targeted to
be maintained at a level below 10% of the book value of the portfolio.
I. Private placements may be included, not exceeding a total of $2
billion. Per-issuer maximums shall conform to those in place for
investment grade and non-investment grade holdings.
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J. Investments in Convertible bonds or other forms of equity
participation are allowed subject to a maximum of $100 million.
Individual investments in excess of $5 million require prior approval
of the Investment Committee.
K. Investments in International bonds, Currencies or Swaps are allowed
subject a maximum of $250 million. Individual investments in excess
of $10 million require prior approval of the Investment Committee.
L. Investments in Financial Futures, Options, Options on Futures,
Interest rate Caps or Floors are allowed for hedging purposes only,
subject to guidelines approved by the Investment Committee.
M. Investments with durations longer than 10 years, or those whose
durations change by more than 50% for 200 basis point change in
interest rates in either direction require notification to the
Investment Committee.
N. Notwithstanding the above guidelines, all investments will comply with
the appropriate State and other legal regulations.
V. Operating Guidelines
In order to comply with the Portfolio Guidelines and to achieve
efficiencies in controlling the investment function, the following
operating guideline will apply to all portfolio managers.
A. Available funds must be promptly invested. This normally means two
weeks, with the exceptions of situations where securities are
purchased with advance settlement dates.
B. Trades must be reported to MLIG no later than the next business day
following the day the trade is made.
C. Mortgage security purchases shall in all aspects qualify as good
delivery under Public Security Association standards.
D. The investment managers will notify MLIG of any changes in rating of
MLIG holdings by established rating agencies, on a monthly basis.
E. Quarterly review shall be conducted by investment managers
investigating all Watch List issues for continued credit worthiness.
All other credit positions shall be reviewed manually or as
circumstances dictate.
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F. All portfolios will be managed with the objective of asset/liability
duration and convexity within previously agreed upon bounds.
VI. Hedging interest rate risks
In addition to interest rate risks of the asset portfolios, certain MLIG
products may have embedded options (such as guaranteed renewal rates) that
may expose MLIG to significant changes interest rates.
To hedge the risks of the overall asset portfolio and those inherent in
MLIG products, the MLIG Investment Management group will, from time to
time, be involved in hedging programs using both exchange-traded and over-
the-counter options, futures, options on futures, interest rate caps or
floors in sizes approved by the Investment Committee.
The xxxxxx will be reviewed by the Investment Committee periodically for
its intended purpose and its cost effectiveness.
VII. Performance Measurement
The true gauge of the performance of the insurance portfolios should be its
periodic total return, that implicitly and fairly accounts for all the
risks assumed by the portfolio managers. (While yield enhancement is an
important component of successful portfolio management, it is not a true
measure of investment performance.)
Total returns will be measured on a time weighted basis (since portfolio
managers have no control over the timing of cash inflows and outflows) and
will include capital appreciation, paydown return and income return for the
period.
All portfolios will be marked-to-market at the end of each month, and total
returns will be computed for the month. (Monthly returns will be "chain-
linked" to calculate quarterly and annual total return performance)
The total return performance of the asset portfolios will then be measured
against a benchmark index, which would reflect the risk and return
characteristics of the liabilities.
The benchmark index will be created by the Investment Management group with
the help of MLIG actuaries and the investment managers, and will be
reviewed monthly to ensure that it continues to reflect the risk and return
characteristics of the firm's liabilities.
VIII. Reporting
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Detailed analysis of the periodic total returns and risk attributes (i.e.
duration, convexity etc.) of each portfolio and the overall insurance
investment portfolio will be made available through a performance
attribution report for management reporting by the MLIG Investment Group
each month.
In addition, the following periodic meetings will be scheduled to monitor
investment activities of the investment managers.
A. Quarterly Portfolio Status Update
Four conferences per year will be held to review portfolio structure
(interest rate risk, sector diversification etc.), investment
strategy, transaction and portfolio performance.
B. Quarterly Credit Status Update
Four conferences per year will be held to review appropriate financial
and operating data on each credit Watch List issue.
C. Other Reporting as Required
Brief summaries stating opinion about continued credit worthiness and
outlook for an issuer, whenever holding a position in this company
becomes questionable.
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