Exhibit 10.40
Amendment Number 1 to Investment Agreement
This Amendment Number 1 (“Amendment”) to the Investment Agreement (“Agreement”)
dated as January 8, 2004, between The North River Insurance Company and Hamblin
Watsa Investment Counsel Ltd. and Fairfax Financial Holdings Limited is
effective as of January 1, 2005.

  1.  
Capitalized terms used herein but not defined herein shall have the meanings
ascribed to them in the Agreement.
    2.  
Schedule A is hereby amended to read in its entirety as attached hereto.
    3.  
Unless specifically modified in this Amendment, all other terms and conditions
contained in the Agreement shall remain in full force and effect.

IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute this Amendment as of the date written below.

                      Hamblin Watsa Investment Counsel Ltd.       The North
River Insurance Company    
 
                   
By:
  /s/ Paul Rivett
 
      By:   /s/ Dennis J. Hammer
 
    Authorized Signature       Authorized Signature     Paul Rivett       Dennis
J. Hammer     Printed Name       Printed Name     Vice President       Senior
Vice President, Controller     Title       Title    
 
                    Fairfax Financial Holdings Limited                
 
                   
By:
  /s/ Paul Rivett
 
                Authorized Signature                 Paul Rivett                
Printed Name                 Vice President                 Title              
 

 

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SCHEDULE A
INVESTMENT GUIDELINES
FUNDAMENTAL OBJECTIVES

1.  
Invest on a long-term basis in accordance with applicable insurance regulatory
guidelines.
  2.  
Ensure preservation of invested capital for policyholder protection, always
providing sufficient liquidity for the payment of claims and other policy
obligations.

GUIDELINES

1.  
Approach
     
All investments are to be made using the long-term value investing approach by
investing in the securities of companies and other entities 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 equity securities, the investment manager will attempt to
identify financially sound companies and other entities 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 long-term value investing 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).
     
With respect to fixed income securities, the long-term value investing approach
is similar. The investment manager will attempt to purchase attractively priced
bonds offering yields better than treasury bonds with maturities of 30 years or
less that are of sound quality, i.e. whose obligations are expected to be fully
met as they come due. Rating services are not regarded as an unimpeachable
source for assessing credit quality any more than a broker’s recommendation on a
stock is necessarily correct. With any form of investment research and
evaluation, there is no substitute for the reasoned judgment of the investment
committee and the investment manager.
  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 company in
accordance with an approved list of liquid 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 are primarily restricted
to treasury and agency securities of the U.S. government.
  3.  
Regulatory
     
All applicable 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
diversify 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.
  6.  
Investment Committee
     
The board of directors of the insurance company shall appoint an investment
committee of the investment manager as the investment committee of the insurance
company. The investment committee shall meet at least once each quarter to
review the investments and loans of the insurance company.

 

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STRATEGY

1.  
Maintain Adequate Liquidity
     
A detailed review of portfolio liquidity is undertaken on a periodic basis. This
liquidity analysis determines how much of each portfolio is in cash or can be
converted into cash in a given time period. The insurance company determines its
near term liquidity requirements and the liquidity of the portfolio will be
modified from time to time to match such near term requirement.

2.  
Asset Allocation
     
The asset allocation will be determined by the investment manager and will
include short-term investments that will generate appropriate cash flows and
long-term investments such as stocks and bonds, both domestic and foreign, that
generate investment gains. The asset allocation will be monitored from time to
time in order to comply with regulatory guidelines and meet insurance policy
liabilities.
  3.  
Foreign Exchange Risk
     
The investment manager shall use its discretion to hedge any foreign currency
investments and exposures. The investment manager may use a variety of methods
to reduce such exposures, including forward foreign exchange contracts, currency
options and natural hedging with foreign pay liabilities of the insurance
company. Un-hedged foreign investments will be limited to 15% of admitted assets
at cost, subject to adjustment to conform with applicable insurance regulatory
requirements. Un-hedged 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 a variety
of term to maturity fixed income securities with maturities less than thirty
years. Maximum fixed income portfolio duration is limited to the equivalent of a
twenty year term to maturity treasury security.

INVESTMENT CLASS EXPOSURE
The following exposure ranges established by the investment committee shall be
monitored and maintained by the investment manager for the stated asset classes:

          Class   Range  
Equities
    0-25 %
Fixed Income
    0-100 %

Within the fixed income portfolio, the taxable/tax exempt mix will be determined
relative to the consolidated tax position of the insurance company and its
affiliates and the relative investment attractiveness of available tax exempt
securities.
The investment committee will monitor the total asset class exposure and, if
deemed appropriate, will provide specific direction from time to time to the
investment manager with respect to the asset exposure ranges.
RETURN EXPECTATIONS
The foregoing asset class exposure 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 INVESTMENT MANAGER
The investment manager, subject to regulatory and insurance 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.
Measured over four year moving periods, performance of the investment manager is
expected to result in the following returns:

         
 
  All Equities   S&P 500 + 1% point
 
       
 
  Fixed Income:    
 
     Taxable Bonds   Merrill Lynch Intermediate Treasury Index + 0.25%

 
     Tax-Advantaged Bonds   Lehman Brothers 3&5 Year State GO Indexes

 

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AGGREGATE INVESTMENT LIMITS, PERMITTED INVESTMENT CATEGORIES AND INDIVIDUAL
INVESTMENT LIMITS
PERMITTED INVESTMENT CATEGORIES WITHIN ASSET CLASSES
The following are some examples of permitted investments within each asset
class:

     
Equity
  Common shares, rights and warrants.
 
   
Fixed Income
  Bonds, debentures, preferred shares, including those convertible into common
shares.
 
   
Cash
  Cash on hand, demand deposits, treasury bills, short-term notes and bankers’
acceptances, term deposits and guaranteed investment certificates.

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 insurance
legislation as amended from time to time.
INDIVIDUAL INVESTMENT LIMITS
Any combination of investments in any one corporate issuer will be limited to a
maximum of 10% of admitted assets.
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 those included on the list approved by the insurance 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 Moody’s
and rated P1 or higher by Standard & Poor’s.
Investments in bonds and preferred securities will be limited by bond rating
category as follows:
LIMITS AS % OF ADMITTED ASSETS

          Bond Rating   % of Total   Min./Max.  
A or better
  50%   Min.
BBB
  50%   Max.
Less than BBB
  20%   Max.

The above limits are subject to adjustment to conform with applicable insurance
regulatory requirements.
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 which are not rated by any public rating agency must be rated by the
investment manager and included as part of the categories above for the purposes
of determining overall exposure by bond rating category.
Any exceptions to the above must be approved by the investment committee.
PROHIBITED INVESTMENTS
In addition to any applicable insurance legislation prohibitions:

(a)  
No Real Estate will be purchased without investment committee approval.

(b)  
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 applicable insurance
legislation and with the policy on foreign exchange risk outlined herein. Unless
otherwise required by applicable insurance legislation, Canadian securities
shall not be considered foreign securities and securities issued by U.S.
domestic companies or other U.S. domestic entities that are denominated in
foreign currencies shall not constitute foreign securities.
OTHER
Derivative securities may be purchased up to 7.5% of the portfolios cost at
book, subject to adjustment to conform with applicable insurance regulatory
requirements. Use of derivative investments is infrequent and primarily for
hedging purposes. The aforementioned limit on the purchase of derivative
securities shall not apply to traditional securities with limited embedded
derivative components such as convertible bonds and optional maturity date
bonds.