EXHIBIT 10.4
INVESTMENT MANAGEMENT AGREEMENT
THIS INVESTMENT MANAGEMENT AGREEMENT (this "Agreement"), dated as of August
13, 1998, is made by and between XXXXXXX WATSA INVESTMENT COUNSEL LTD. and THE
NORTH RIVER INSURANCE COMPANY. As used in this Agreement, "we", "us" and "our"
shall refer to THE NORTH RIVER INSURANCE COMPANY, and "you" and "your" shall
refer to XXXXXXX WATSA INVESTMENT COUNSEL LTD.
In consideration of the mutual promised contained herein, the parties agree
as follows:
1. We authorize you 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. You shall manage the Account in accordance with the investment
objectives from time to time communicated in writing by us to you,
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 Jersey.
3. Subject to Section 2 above, you shall manage the Account in our name
and you are hereby authorized to take such action for the Account as
you, 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 you, all funds contained in, paid to or derived from the
operation of, the Account, except to the extent that you are
otherwise instructed in writing by us.
The services to be performed by you shall be performed only by officers
and employees who have appropriate qualifications. You agree to provide
to us such information as we may reasonably request concerning the
education and experience of any individuals you propose to assign to the
performance of such services. Also, upon our request, you agree to
provide a list of individual names and a brief description of their
responsibilities. You agree to promptly notify us of any changes in your
staff involving individuals that perform material functions on our
Account.
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
Jersey Department of Banking and Insurance) (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 you with all such information
concerning the Account as you may from time to time require in
connection with your management of the Account, including without
limitation, copies of relevant monthly statements.
5. Provided you have used reasonable care and diligence, you 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 your negligence or
dishonesty are to be fully reimbursed by you. To the extent any
errors occur in implementing investment decisions, you shall
immediately notify us in writing of all relevant facts. You shall
bear full responsibility for any such errors to the extent such
errors result from your negligence or dishonesty and shall be liable
for all financial injury to the Company resulting therefrom. We agree
that you shall be entitled to assume that any information
communicated by us or the Custodian to you is accurate and complete,
and that in making investment decisions you shall be entitled to rely
on publicly available information or on information which you believe
to have been provided to you in good faith, in both cases barring
actual knowledge by you to the contrary.
6. You shall be entitled to such fees, payable quarterly in arrears, for
your management of the Account as you may specify from time to time.
Attached hereto as Schedule B is a copy of your current fee schedule
and you agree to give us thirty (30) days prior written notice of any
change in such schedule, which change shall require the approval of
the New Jersey Department of Banking and Insurance. Such fees shall
be the exclusive fees and charges payable (excluding third party
disbursements reasonably incurred) for your management of the
Account. As regards 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 you 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. You will provide
us with a monthly statement and a quarterly presentation respecting
the securities held in the Account. We will pay you all fees and
disbursements hereunder not later than 20 days after receiving your
quarterly report.
7. You shall deliver in writing to us, as soon as practicable after
implementation of an investment decision, your 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 your 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 you have
established to ensure that investment opportunities are allocated
fairly among your discretionary investment accounts and we confirm
that these policies, until revised by you, will apply to the account.
9. Either party hereto 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.
10. All notices and communications to either 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.
11. 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 either party.
12. 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.
13. 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.
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 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.
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.
14. Additional terms and conditions applicable to this Agreement are set
forth in Schedule C. The provisions in Schedule A, Schedule B and
Schedule C attached hereto are hereby incorporated into, and form
part of, this Agreement.
15. 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 Jersey Department of Banking and
Insurance (the "Department"), provided, however, that any amendment
to Schedule A may become effective without the prior approval of the
Department, provided that such amendment shall be filed with the
Department not later than its effective date and shall, if
disapproved by the 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.
THE NORTH RIVER INSURANCE COMPANY
By: /s/ XXXXXXX XXXXXXXX
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Authorized Signature
Xxxxxxx Xxxxxxxx
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Name of Authorized Signatory
By: /s/ XXXXXXX X. XXXXXXXX
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Authorized Signature
Xxxxxxx X. Xxxxxxxx, Secretary
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Name of Authorized Signatory
XXXXXXX WATSA INVESTMENT COUNSEL LTD.
By: /s/ F. XXXXX XXXXXXXXXX
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Authorized Signature
F. Xxxxx Xxxxxxxxxx, Vice President
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Name of Authorized Signatory
SCHEDULE A
INVESTMENT OBJECTIVES
1. Invest for the long term always providing sufficient liquidity for the
payment of claims and other policy obligations.
2. Ensure preservation of invested capital for policy holder 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/and 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 shall 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
Insurance regulations will be complied with.
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 detailed review of portfolio liquidity is undertaken on a monthly basis.
This 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. 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 faxed
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 OBJECTIVES 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 Bonds.................................. 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
listed in the Investment Objectives and Policy Statement subject to the
following quality constraints:
Investments in money market instruments (less than or equal to 1 year term)
will be limited to those included on the list approved by the Company. 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 by 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 Chapter 24 of Title 17 of the New Jersey Statutes.
Limits are determined n 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 be 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 only for hedging purposes.
Derivative investments will be justified to the Investment Committee prior to
use of derivative instruments will at all times be in compliance with NAIC
guidelines regarding derivative investments.
SCHEDULE B
INVESTMENT MANAGEMENT
FEE SCHEDULE
Investment management fees are comprised of two parts:
(A) The Base Fee Amount
and
(B) The Incentive Fee Amount
(A) THE BASE FEE AMOUNT
1) As described in Part 6 on the
Investment Management Agreement, fees
will be payable quarterly in arrears.
2) After the end of each calendar quarter, Xxxxxxx Watsa Investment
Counsel Ltd. 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.
CHARGE
4) MARKET VALUE ------
On Total Market Value............................. .10%
(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).
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: August 13, 1998
(C) MAXIMUM INVESTMENT MANAGEMENT FEE
Notwithstanding the foregoing, the maximum investment management fee
payable in any calendar year will be .25% 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.
SCHEDULE C
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:
THE NORTH RIVER INSURANCE COMPANY
000 Xxxxxxx Xxxxxx
Xxxxxxxxxx, Xxx Xxxxxx 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
2. GOVERNING LAWS; JURISDICTION; SERVICE OF PROCESS
This Agreement shall be governed and construed in accordance with the laws
of the State of New Jersey, our state of domicile. Each of the parties thereto
submits to the jurisdiction of the state and federal courts of the State of New
Jersey, 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 Shearman & Sterling, 000
Xxxxxxxxx Xxxxxx, Xxx Xxxx, Xxx Xxxx 00000 or by mailing copies of such process,
notices and demands by certified or registered mail to such address (such
address being automatically changed to the principal office from time to time of
Shearman & Sterling in
New York,
New York).
3. INSURANCE DEPARTMENT APPROVAL
This Agreement may be subject to the non-disapproval or approval of the
Department, and such terms and conditions hereof as may be required by the
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 Department, within fifteen (15) days of any
request from the 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.
