1
EXHIBIT (8)(h)
MANAGEMENT AGREEMENT
AGREEMENT made as of this 30th day of August, 1991, by and between
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:
2
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 services described
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
- 2 -
3
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
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
- 3 -
4
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 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.
- 4 -
5
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.
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
- 5 -
6
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 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.
- 6 -
7
The Manager will not be responsible for making any tax credit or
similar claim 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
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.
- 7 -
8
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
---------------------------------------
Xxxxx X. Xxxxxxxx
Senior Vice President
Date of Execution: 8/30/91
--------------------
XXXXXXX XXXXX ASSET MANAGEMENT, INC.
By: /s/ N. XXXX XXXXXX
---------------------------------------
N. Xxxx Xxxxxx
Senior Vice President
Date of Execution: August 30, 1991
--------------------
- 8 -
9
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.
10
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 rate risk.
The 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.
- 2 -
11
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:
- 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
- 3 -
12
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 Moody's or
Standard and Poors.
Rating Maximum per Issuer
------ ------------------
AAA $100 Million
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:
- 4 -
13
Rating Maximum per Issuer
------ ------------------
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
------ ------------------
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.
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 Federal, State and other legal
regulations.
- 5 -
14
V. Operating Guidelines
In order to comply with the Portfolio Guidelines and to achieve
efficiencies in controlling the investment function, the following
operating guidelines 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
ratings 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.
F. All portfolios will be managed with the objective of
maintaining 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.
- 6 -
15
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
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, transactions and portfolio performance.
- 7 -
16
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.
- 8 -
