EXHIBIT 10.8
INVESTMENT AGREEMENT
THIS INVESTMENT AGREEMENT (this "Agreement"), dated as of January 1, 2002, is
made by and between XXXXXXX WATSA INVESTMENT COUNSEL LTD. ("HW"), FAIRFAX
FINANCIAL HOLDINGS LIMITED ("FFH") and SENECA INSURANCE COMPANY, INC. As used in
this Agreement, "we", "us" and "our" shall refer to SENECA INSURANCE COMPANY,
INC., and "you" and "your" shall refer to HW and FFH jointly.
In consideration of the mutual promised contained herein, the parties agree as
follows:
Investment Management
1. We authorize HW to manage on a continuous basis an investment account
(the "Account") on our behalf on the terms and conditions set out in
this Agreement.
2. HW shall manage the Account in accordance with the investment
objectives from time to time communicated in writing by us to HW,
subject at all times to the investment guidelines. Until mutually
agreed otherwise, the investment guidelines shall be as set out in the
investment guidelines attached hereto as Schedule A. The investment
guidelines shall at all times be in compliance with the investment
statutes of New York.
3. Subject to Section 2 above, HW shall manage the Account in our name and
HW is hereby authorized to take such action for the Account as HW, in
your sole discretion, may consider appropriate for the operation of the
Account including, without limitation, the power to buy, sell and
exchange and otherwise deal in all securities which may at any time
form part of the Account and to invest, in securities selected by HW,
all funds contained in, paid to or derived from the operation of, the
Account, except to the extent that HW otherwise instructed in writing
by us.
The services to be performed by HW shall be performed only by officers
and employees who have appropriate qualifications. HW agrees to provide
to us such information as we may reasonably request concerning the
education and experience of any individuals HW proposes to assign to
the performance of such services. Also, upon our request, HW agrees to
provide a list of individual names and a brief description of their
responsibilities. HW agrees to promptly notify us of any changes in
HW's staff involving individuals that perform material functions on our
Account.
3A. Without limiting the authority granted in Section 3, but subject to the
restrictions contained in this Section 3A, you are specifically
authorized to exchange or sell securities between affiliated companies,
even if the value of the transaction exceeds the lesser of 3% of the
admitted assets or 25% of the policyholder surplus of such companies.
Each such transaction shall comply with the following:
a. The only securities which may be exchanged or sold in these
transactions are publicly traded securities issued by
high-quality, credit worthy entities.
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b. These exchanges or sales shall be made at fair market value.
The value of the securities shall be determined on the closing
date of the transaction as follows:
i. The closing price for the security listed in
Bloomberg or on a public exchange or quotation system
for the immediately preceding trading day; or
ii. The price determined as follows:
(a) On the date of the transaction, you will
contact the original issuing broker for the
particular security.
(b) The broker will then contact their trader on
the floor at that time to provide a
real-time quote.
(c) The trader will provide a "spread quote"
(the spread quote is expressed as the number
of basis points the particular security is
trading above a comparable coupon and
maturity U.S. treasury security).
(d) All 3 steps above shall be documented via a
paper printout of a Bloomberg e-mail
exchange amongst the parties. A copy of such
documentation shall be provided to all
parties involved in the exchange or sale.
(e) You will then load the spread quote into the
Bloomberg pricing model software. The
software, in turn, will convert the spread
quote into a customary price quotation for
the security. The software mode calculation
screen shall be printed, retained in the
file, and provided to all parties involved
in the exchange or sale.
c. Expenses incurred and payment received by any of us shall be
allocated in conformity with customary insurance accounting
practices consistently applied.
d. The transactions will be reported to us in sufficient detail
that our books, accounts, and records may be so maintained as
to clearly and accurately disclose the precise nature and
details of the transactions.
e. Such transactions between affiliated companies must comply
with the prior approval or reporting requirements of Section
1505 of the New York Insurance Laws.
4. The securities and funds of the Account have been deposited with and
shall be held by The Bank of New York (or with such other custodian as
is chosen by you from time to time and is approved by the New York
Insurance Department (the "Custodian") pursuant to an agreement which
we have entered into with the Custodian. We have instructed the
Custodian to promptly follow your directions at all times and to
provide HW with all such information concerning the Account as HW may
from time to time require in connection with your management of the
Account, including without limitation, copies of relevant monthly
statements.
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5. Provided HW has used reasonable care and diligence, HW shall not be
liable for any damage, loss, cost or other expense sustained in the
operation of the Account or relating in any manner to the carrying out
of your duties under this Agreement. Notwithstanding the foregoing, any
losses suffered as a result of an error in implementing investment
decisions caused by HW's negligence or dishonesty are to be fully
reimbursed by HW. To the extent any errors occur in implementing
investment decisions, HW shall immediately notify us in writing of all
relevant facts. HW shall bear full responsibility for any such errors
to the extent such errors result from HW's negligence or dishonesty and
shall be liable for all financial injury to us resulting therefrom. We
agree that HW shall be entitled to assume that any information
communicated by us or the Custodian to HW is accurate and complete, and
that in making investment decisions HW shall be entitled to rely on
publicly available information or on information which HW believes to
have been provided to you in good faith, in both cases barring actual
knowledge by HW to the contrary.
6. HW will provide us with a monthly statement and a quarterly
presentation respecting the securities held in the Account.
7. HW shall deliver in writing to us, as soon as practicable after
implementation of an investment decision, HW's confirmation of such
implementation to enable us to ascertain that such implementation has
been effected pursuant to the guidelines and procedures of our Board of
Directors or a duly authorized committee thereof. Otherwise, the nature
and timing of HW's reporting to us on the status of the Account shall
be at least quarterly, within 45 days after the end of each quarter.
8. We acknowledge receipt of a copy of policies that HW has established to
ensure that investment opportunities are allocated fairly among HW's
discretionary investment accounts and we confirm that these policies,
until revised by HW, will apply to the account.
Investment Administration
9. We authorize FFH to provide, and by signing below FFH agrees to
provide, the investment administration services set forth in Schedule B
attached hereto, on our behalf and on the terms and conditions set out
in this Agreement, subject to such guidelines, procedures and
limitations as may be duly established and approved by our Board of
Directors or a duly authorized committee of said Board.
General
10. You shall be entitled to such fees for the services provided hereunder
as FFH may specify from time to time. Attached hereto as Schedule C as
is a copy of the current fee schedule and FFH agrees to give us thirty
(30) days prior written notice of any change in such schedule, which
change shall require the approval of the New York Insurance Department.
Such fees shall be the exclusive fees and charges payable (excluding
third party disbursements reasonably incurred) for the services
provided hereunder. As regards
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third party services, you will charge us only the amount of your actual
disbursements paid to arm's length third parties for such services, and
HW will select as agents, brokers or dealers executing orders or acting
on the purchase or sale of portfolio securities only agents, brokers or
dealers operating in the United States. Such disbursements to third
parties shall be reported to us quarterly, provided, that we shall pay
third parties such disbursements directly if requested to do so by you.
We will pay you all fees and disbursements hereunder not later than 20
days after receiving your quarterly report.
All fees will be paid to FFH and FFH shall reimburse HW for its
investment management services. HW acknowledges that it has no right
under this agreement to receive fees directly from us.
11. Either you or FFH and HW may terminate this Agreement without penalty
by giving the other party at least thirty (30) days advance written
notice of its desire to terminate the same. In the event that the day
upon which this Agreement is so terminated is a day other than the
first day of a calendar quarter, the fees payable in accordance with
paragraph 6 for such quarter shall be pro-rated and shall be determined
having regard to the market value of the Account based upon the most
recent financial report which has been delivered to you by the
Custodian.
12. All notices and communications to each party to this Agreement shall be
in writing and shall be deemed to have been sufficiently given if
signed by or on behalf of the party giving the notice and either
delivered personally or sent by prepaid registered mail addressed to
such party at the address of such party indicated herein. Any such
notice or communication shall be deemed to have been received by any
such party if delivered, on the date of delivery, or if sent by prepaid
registered mail on the fourth business day following mailing thereof to
the party to whom addressed. For such purpose, no day during which
there shall be a strike or other occurrence interfering with normal
mail service shall be considered a business day.
13. This Agreement shall enure to the benefit of and shall be binding upon
the parties hereto and their respective successors. This Agreement may
not be assigned by any party.
14. We acknowledge that we have read and understood this Agreement and that
we have received a copy of the same. You and we each acknowledge that
the terms of this Agreement are the exclusive and conclusive terms of
our mutual agreement with regard to the subject matter hereof.
15. Any dispute or difference arising with reference to the interpretation
or effect of this Agreement, or any part thereof, shall be referred to
a Board of Arbitration (the "Board") of two (2) arbitrators and an
umpire.
The members of the Board shall be active or retired disinterested
officers of insurance or reinsurance companies.
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One arbitrator shall be chosen by the party initiating the arbitration
and designated in the letter requesting arbitration. The other party
shall respond, within thirty (30) days, advising of its arbitrator. The
umpire shall thereafter be chosen by the two (2) arbitrators. In the
event either party fails to designate its arbitrator as indicated
above, the other party is hereby authorized and empowered to name the
second arbitrator, and the party which failed to designate its
arbitrator shall be deemed to have waived its rights to designate an
arbitrator and shall not be aggrieved thereby. The two (2) arbitrators
shall then have thirty (30) days within which to choose an umpire. If
they are unable to do so within thirty (30) days following their
appointment, the umpire shall be chosen by the manager of the American
Arbitration Association and such umpire shall be a person who is an
active or retired and disinterested officer of an insurance or
reinsurance company. In the event of the death, disability or
incapacity of an arbitrator or the umpire, a replacement shall be named
pursuant to the process which resulted in the selection of the
arbitrator or umpire to be replaced.
Each party shall submit its case to the Board within one (1) month from
the date of the appointment of the umpire, but this period of time may
be extended by unanimous written consent of the Board.
Sittings of the Board shall take place in Morristown, New Jersey. The
Board shall make its decision with regard to the custom and usage of
the insurance and reinsurance business. The Board is released from all
judicial formalities and may abstain from the strict rules of law. The
written decision of a majority of the Board shall be rendered within
sixty (60) days following the termination of the Board's hearings,
unless the parties consent to an extension. Such majority decision of
the Board shall be final and binding upon the parties both as to law
and fact, and may not be appealed to any court of any jurisdiction.
Judgment may be entered upon the final decision of the Board in any
court of proper jurisdiction.
Each party shall bear the fees and expenses of the arbitrator selected
by or on its behalf, and the parties shall bear the fees and expenses
of the umpire as determined by the party, as above provided, the
expenses of the arbitrators, the umpire and the arbitration shall be
equally divided between the two parties. The arbitrators may allocate
any and all of the costs and fees against the losing party upon a
determination that the position of the losing party was, in whole or in
part, groundless, specious or otherwise without merit or asserted
primarily for the purposes of obfuscation or delay.
16. Additional terms and conditions applicable to this Agreement are set
forth in Schedule D. The provisions in Schedule A, Schedule B, Schedule
C and Schedule D attached hereto are hereby incorporated into, and form
part of, this Agreement.
17. This Agreement, including the schedules attached hereto and made a part
hereof, may only be amended by written agreement signed by the parties
and approved by the New York Insurance Department; provided, however,
that any amendment to Schedule A may become effective without the prior
approval of the New York Insurance Department, provided that such
amendment shall be filed with the New York Insurance Department
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not later than its effective date and shall, if disapproved by the New
York Insurance Department, be void as of the date of such disapproval.
IN WITNESS WHEREOF, this Agreement is hereby executed by duly authorized
officers of the parties hereto as of the date first written above.
SENECA INSURANCE COMPANY, INC.
BY: /s/ XXXXXXX X. XXXXX
____________________________________
AUTHORIZED SIGNATURE
XXXXXXX X. XXXXX
____________________________________
NAME OF AUTHORIZED SIGNATORY
XXXXXXX WATSA INVESTMENT COUNSEL LTD.
BY: /s/ F. XXXXX XXXXXXXXXX
____________________________________
AUTHORIZED SIGNATURE
F. XXXXX XXXXXXXXXX
____________________________________
NAME OF AUTHORIZED SIGNATORY
FAIRFAX FINANCIAL HOLDINGS LIMITED
BY: /s/ XXXXXXX X. XXXXXX
___________________________________
AUTHORIZED SIGNATURE
XXXXXXX X. XXXXXX
____________________________________
NAME OF AUTHORIZED SIGNATORY
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SCHEDULE B
SERVICES
Investment Administration to be performed are:
MONTHLY
- daily processing of securities
- portfolio accounting functions including posting of all trades,
monitoring investment income, corporate actions, open payables and
receivables
- computation of all regulatory figures
- analysis and reconciliation of portfolios
- yield review
- computation of market decline tests
- computation of liquidity analysis
- analysis of book values, e.g. bond amortizations and investment
provisions
- analysis of gross gain and loss positions
- cash flow obligations
- investment review meeting
- NAIC and SVO filings
- custodial relationships
- broker relationships
PERIODIC
- review and analysis of foreign exchange position
- placement of foreign exchange contracts, where appropriate
- discussions with regulators regarding portfolio (positions)
- reporting to the investment committee
- reporting to the audit committee
- general assistance with accounting issues
- maintaining contact with external auditors
- such other administrative services as the parties shall mutually agree
from time to time
- 5900 report on investment controls
- performance reporting
- software provider (including e-Xxx) - functioning and testing
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SCHEDULE C
FEE SCHEDULE
Investment fees are comprised of two parts:
(A). The Base Fee Amount
and
(B). The Incentive Fee Amount
(A) The Base Fee Amount
1) Fees will be payable quarterly. Interim invoices may be issued
based on our estimates of the final fees payable.
2) After the end of each calendar quarter, FFH shall submit its investment
management charges in accordance with the schedule below.
3) The charges are on a calendar year basis. They will be calculated
at the end of each calendar quarter based upon the average of the
market value of the funds at the close of business for the three
(3) preceding months.
4) MARKET VALUE CHARGE
On Total Market Value .30%
(B) The Incentive Fee Amount
The incentive fee amount relates to the investment management of equity
securities only.
Annual Base Fee: a) If performance equals or exceeds benchmark,
base fee is unchanged from current fee.
b) If performance is less than benchmark, base fee
is 90% of current fee.
Maximum Fee: 1.75% (including base).
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Benchmark: S&P 500 + 200 basis points.
Incentive Fee: Continuous rate of 10 basis point for every
100 basis points of outperforming the benchmark.
(Incentive fee is in addition to base fee).
Basis of Calculation: Payable annually based on calendar year results.
Not earned or paid unless results since inception
(net of all fees) exceed benchmark return.
Inception Date: January 1, 2002
(C) Maximum Investment Management Fee
Notwithstanding the foregoing, the maximum investment management fee
payable in any calendar year will be .40% of the Total Market Value (as
calculated in (A) 4) above); provided that any investment management fee
not payable in any calendar year as a result of the restriction in the
preceding sentence will be carried over to a succeeding calendar year, but
the total investment management fee payable in any such calendar year,
including any carry-over payment, shall be limited as provided by the
preceding sentence.
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SCHEDULE D
1. Notices
Unless otherwise specified herein, all notices, instructions,
advices or other matters covered or contemplated by this Agreement, shall be
deemed duly given when received in writing (including by fax) by you or us, as
applicable, at the address or fax number set forth below or such other address
or fax number as shall be specified in a notice similarly given:
If to us:
SENECA INSURANCE COMPANY, INC.
000 Xxxxx Xxxxxx, 00xx xxxxx
Xxx Xxxx, Xxx Xxxx 00000
Fax No. (000) 000-0000
If to you:
XXXXXXX WATSA INVESTMENT COUNSEL LTD.
00 Xxxxxxxxxx Xxxxxx Xxxx
Xxxxx 000
Xxxxxxx, Xxxxxxx
X0X 0X0
Fax No.: (000) 000-0000
and
FAIRFAX FINANCIAL HOLDINGS LIMITED
00 Xxxxxxxxxx Xxxxxx Xxxx
Xxxxx 000
Xxxxxxx XX X0X 0X0
Fax No.: (000) 000-0000
2. Governing Laws; Jurisdiction; Service of Process
This Agreement shall be governed and construed in accordance
with the laws of the State of New York our state of domicile. Each of the
parties thereto submits to the jurisdiction of the state and federal courts of
the State of New York, in any action or proceeding arising out of or relating to
this Agreement and all claims in respect of any such action or proceeding may be
heard or determined in any such court; and service of process, notices and
demands of such courts may be made upon you by personal service to the person
and at the address contained in Section 1 above as such person or address may be
changed from time to time.
3. Insurance Department Approval
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This Agreement may be subject to the non-disapproval or approval
of the New York Insurance Department, and such terms and conditions hereof as
may be required by the New York Insurance Department to be altered or amended
shall be deemed acceptable to the parties hereto, to the extent same shall not
change the substance and intent of this Agreement.
4. Inspection of Records
You and we and the duly authorized representatives of each of us
shall, at all reasonable times, each be permitted access to all relevant books
and records of the other pertaining to this Agreement. You and your duly
authorized representatives shall provide to the New York Insurance Department,
within fifteen (15) days of any request from the New York Insurance Department
therefor, copies of all your books and records as they pertain to us (or any
portion thereof as may be specifically requested).
5. Headings
The inclusion of headings in this Agreement is for convenience
of reference only and shall not affect the construction or interpretation
hereof.
6. Severability
Each of the provisions contained in this Agreement is distinct
and severable and a declaration of invalidity or unenforceability of any such
provision or part thereof by a court of competent jurisdiction shall not affect
the validity or enforceability of any other provision hereof.
7. Entire Agreement
This Agreement and the documents to be delivered pursuant hereto
constitute the entire agreement between the parties pertaining to the subject
matter of this Agreement.
8. Control
Notwithstanding any other provision of this Agreement, it is
understood and agreed that we shall at all times retain the ultimate control of
the investment of our investable funds and we reserve the right, upon written
notice by us to you, to direct, approve, or disapprove any investment made by
you hereunder or any action taken by you with respect to any such investment.
Furthermore, it is understood and agreed that we shall at all times own and have
custody of our general corporate accounts and records.
9. Confidential Relationship
The parties hereto will treat as confidential all information
that is not publicly available received from the other party.
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SCHEDULE A
------------
INVESTMENT OBJECTIVES
1. Investment for the long term always providing sufficient liquidity for the
payment of claims and other policy obligations.
2. Ensure preservation of invested capital for policyholder protection.
3. Invest in accordance with insurance regulatory guidelines.
INVESTMENT GUIDELINES
1. Approach
All investments are to be made using the value approach by investing in
companies at prices below their underlying long term values to protect
capital from loss and earn income over time and provide operating income as
needed.
With regard to equities, no attempt is made to forecast the economy or the
stock market. The manager will attempt to identify financially sound
companies with good potential profitability which are selling at large
discounts to their intrinsic value. Appropriate measures of low prices may
consist of some or all of the following characteristics: low price earnings
ratios, high dividend yields, significant discounts to book value, and free
cash flow. Downside protection is obtained by seeking a margin of safety in
terms of a sound financial position and a low price in relation to
intrinsic value. Appropriate measures of financial integrity which are
regularly monitored, include debt/equity ratios, financial leverage, asset
turnover, profit margin, return on equity, and interest coverage.
As a result of this bargain hunting approach, it is anticipated that
purchases will be made when economic and issue-specific conditions are less
than ideal and sentiment is uncertain or negative. Conversely, it is
expected that gains will be realized when issue-specific factors are
positive and sentiment is buoyant. The investment time horizon is one
business cycle (approximately 3-5 years).
As regards bonds, the approach is similar. No attempt is made to forecast
the economy or interest rates. The manager will attempt to purchase
attractively priced bonds offering yields better than Treasury bonds with
maturities of 10 years or less that are of sound quality i.e. whose
obligations are expected to be fully met as they come due. We do not regard
rating services as being an unimpeachable source for assessing credit
quality any more than we would regard a broker's recommendation on a stock
as being necessarily correct. In any form of investment research and
evaluation, there is no substitute for the reasoned judgement of the
investment committee and its managers.
2. Liquidity
An adequate cash flow should be maintained to ensure that claims and
operating expenses are paid on a timely basis. An operating cash position
is to be maintained at appropriate levels and will be managed by the
insurance operating company in accordance with the approved list for
investments as determined from time to time by the Investment Committee.
These securities will be managed by the Insurance Company as part of the
Treasury function and currently are restricted primarily to Treasury and
Agency securities of the U.S. government.
3. Regulatory
All services shall be complied with, specifically Article 14 of the State
of New York Insurance Law.
4. Diversification
The portfolio is to be invested in a wide range of securities of different
issuers operating in different industries and jurisdictions in order to
minimize risk.
5. Prudent Person Rule
Prudent investment standards are considered in the overall context of an
investment portfolio and how a prudent person would invest another person's
money without undue risk of loss or impairment and with a reasonable
expectation of fair return.
STRATEGY
1. Maintain Adequate Liquidity
A review of the portfolio liquidity is undertaken on a monthly basis. The
liquidity analysis determines how much of each portfolio can be converted
to cash in a given time period. Each company determines its liquidity
requirements and the liquidity of the portfolio must match the requirement.
2. Asset Allocation
The asset allocation will be determined by the Portfolio Manager and will
include short term investments that will generate appropriate cash flows
and long term investments in stocks, bonds, debentures and money market
investments, both domestic and foreign. The allocation will be in
compliance with regulatory guidelines and should meet policy liabilities.
3. Foreign Exchange Risk
Any foreign currency investments and exposures would normally be hedged via
the use of forward foreign exchange contracts and/or currency options or
preferably by a natural hedge with foreign pay liabilities of the Insurance
Company. Unhedged foreign investments will be limited to 10% of invested
assets at cost if judged appropriate. Unhedged exposure above this amount
must be approved by the Investment Committee.
4. Interest Rate Risk
Interest rate risk will be minimized primarily through investment in fixed
income securities with maturities less than ten years. While there are no
specific duration/maturity limits for convertible securities, these issues
are included in the total fixed income duration/term measure. Maximum fixed
income portfolio duration is limited to the equivalent of a ten year term
to maturity Treasury security.
INVESTMENT POLICY MIX
The Investment Committee has established the following exposure ranges for
various asset mix classes:
Range
-----
Equities 0-25%
Fixed Income 0-100%
Cash Residual
Total 100%
Within the Fixed Income portfolio the Taxable/Tax Exempt mix will be determined
relative to the consolidated tax position of the Insurance Company and the
relative investment attractiveness of available tax exempt securities.
The Investment Committee will control the total asset mix and will give
performance objectives to the Investment Manager regarding the assets managed.
RETURN EXPECTATIONS
Total asset mix policy is expected on an annual basis to result in returns
better than the Consumer Price Index plus 3% over a ten year period before the
disbursement of investment management fees. However, in any one year the annual
return may be significantly above or below this expectation.
INVESTMENT OBJECTIVE OF THE FUND MANAGER
The Manager, subject to regulatory and company imposed constraints mentioned
elsewhere, expects to provide additional returns to those returns that would be
earned by the alternative of passively managing a surrogate market index.
Performance of the Fund Manager is expected to result in the following returns:
All Equities S&P 500 + 1% point
Fixed Income:
Taxable Xxxxx Xxxxxxx Xxxxx Intermediate Treasury
Index + 0.25%
Tax-Advantaged Bonds Xxxxxx Brothers 3&5 Year State
GO Indexes
Measured over four (4) year moving periods.
AGGREGATE INVESTMENT LIMITS, PERMITTED INVESTMENT CATEGORIES AND INDIVIDUAL
INVESTMENT LIMITS
PERMITTED INVESTMENT CATEGORIES WITHIN ASSET CLASSES
Cash: Cash on hand, demand deposits, treasury bills, short-term
notes and bankers' acceptances, term deposits and
guaranteed investment certificates
Equity: Common shares, rights and warrants.
Fixed Income: Bonds, debentures, preferred shares, including those
convertible into common shares.
All of the above may be either U.S. domestic, Canadian, or other foreign
investments.
Convertible preferred securities will be classified as equities if the preferred
dividend is not being paid.
Private placement issues in public companies are allowed.
INVESTMENT CONSTRAINTS
All investments will be made in accordance with all applicable legislation.
INDIVIDUAL INVESTMENT LIMITS
Any combination of investments in any one corporate issuer will be limited to a
maximum of 5% of admitted assets. Exposure beyond 5% will require approval of
the Investment Committee.
QUALITY CONSTRAINTS
The Investment Manager may invest in the permitted investment categories subject
to the following quality constraints:
Investments in money market instruments (less than or equal to 1 year term)
will be limited to the approved list. This list will include money market
instruments of the U.S. Treasury, agencies of the U.S. government, and as a
minimum commercial paper rated A1 or higher by Xxxxx'x and rated P1 or
higher by Standard & Poor's.
Investments in bonds and preferreds will be limited to quality tier as
follows:
LIMITS AS A % OF THE FIXED INCOME PORTFOLIO
Bond Rating % of Total Min./Max.
----------- ---------- ---------
A or better 65% Min.
BBB 35% Max.
BB,B 10% Max.
C,D 0%
The above limits are subject to adjustment to conform with the regulatory
requirements of Article 14 of the New York State Insurance Law.
Limits are determined on a cost basis and include convertible securities.
Downgrades will be taken into account when making new investments but will
not necessarily result in the sale of existing positions.
Securities un-rated by the public rating agencies must be rated by the
Investment Manager and included as part of the categories above for the
purposes of determining overall exposure by quality tier.
Any exceptions to the above must be approved by the Investment Committee.
PROHIBITED INVESTMENTS
No loans will be made in any of the investment portfolios.
No Real Estate will be purchased without Investment Committee approval.
No Mortgages on real estate will be purchased without Investment Committee
approval. The exceptions to this are obligations issued by an agency of the U.S.
Government, or by U.S. domiciled corporations that are issued as part of a
registered public offering that also meet the minimum quality tier requirements.
FOREIGN INVESTMENT LIMITS
Foreign Securities may be purchased in compliance with established regulatory
guidelines and with the policy on foreign exchange risk outlined herein.
Foreign investments must by in the same kinds of securities and investments as
the Insurance Company is normally allowed.
OTHER
Derivative securities may be purchased up to 2% of the portfolios cost at book.
Use of derivative investments is infrequent and for hedging purposes. Derivative
investments will be justified to the Investment Committee prior to use.
