Exhibit 10.5

 

THIRD AMENDMENT TO INVESTMENT MANAGEMENT AGREEMENT

 

WHEREAS, an Investment Management Agreement dated April 1, 2008 was entered into
by and between Montpelier Reinsurance Ltd., a Bermuda corporation, located at
Montpelier House, 94 Pitts Bay Road, P.O. Box HM2079, Hamilton HR HX, Bermuda
(the “Client”), and KVO Capital Management, LLC, a Delaware limited liability
company, located at 33 S. Main Street, Suite 3, Hanover, NH 03755 (the
“Adviser”); and

 

WHEREAS, the Client and the Adviser amended the Investment Management Agreement,
effective as of March 10, 2009 to reflect the addition of a separate account
runoff portfolio; and

 

WHEREAS, the Client and the Adviser amended the Investment Management Agreement,
effective as of March 11, 2010 to reflect the addition of separate account
runoff portfolios (the Investment Management Agreement, previously amended, the
“Agreement”);

 

WHEREAS, the Client and the Adviser now wish to amend the Agreement, effective
as of July 28, 2010 to reflect a reduction in assets in the KVO Equity Portfolio
and a change in fee structure (the “Third Amendment”).

 

NOW, THEREFORE, pursuant to Section 15 of the Agreement, the Client and the
Adviser hereby amend the Agreement as follows:

 

I.                                         Section I of the Agreement shall be
amended as follows:

 

A new paragraph is hereby added to the end of Section 1 which reads as follows:

 

“The Adviser will distribute a minimum of $40 million of the net assets of the
KVO Equity Portfolio Account to the Client by July 31, 2010.  The Client and the
Adviser agree that whether more than $40 million of the net assets of the KVO
Equity Portfolio Account are distributed to the Client by July 31, 2010 is in
the sole and absolute discretion of the Adviser.  In addition, $25 million of
net value will be moved from the KVO Equity Portfolio Account and invested in
KVO Capital Offshore Fund, Ltd. (the “Fund”) on August 1, 2010 pursuant to a
Subscription Agreement for Shares of the Fund executed by the Client
concurrently with this Third Amendment and a side letter between the Fund and
the Client executed concurrently with this Third Amendment.  The $25 million
capital contribution to the Fund may be in cash or securities or some
combination of both.  The proportions of cash and securities to be contributed
to the Fund, and the selection of the specific securities (if any) to be
contributed to the Fund, will be at the sole and absolute discretion of the
Adviser.  The Adviser shall provide an estimate of the cash and securities to be
contributed to the Fund to the Client on or before July 28, 2010.  The Client
acknowledges that the Adviser will not finally determine the actual cash and
securities to be contributed to the Fund until July 31, 2010, and that the
actual cash and securities contributed to the Fund may vary from the estimate. 
Should the Adviser determine that the variance is material, the Advisor will
notify the Client on or before the transfer of assets to the Fund.  The Adviser
shall make additional distributions to the Client from the KVO Equity Portfolio
Account to reduce the net assets in the KVO Equity Portfolio Account to a
maximum of $75 million by December 31, 2010.  The Client and the Adviser agree
that whether the net assets in the KVO Equity Portfolio Account are reduced
below $75 million by December 31, 2010 is in the sole and absolute discretion

 

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of the Adviser.  The Adviser agrees to use best efforts (consistent with prudent
investment practices) to reduce the holdings of the KVO Equity Portfolio Account
to no more than $10 million by March 31, 2011.  The Client will have the sole
discretion to determine whether any portion of the KVO Equity Portfolio Account
shall survive beyond June 30, 2011, and the Client shall notify the Adviser of
its determination no later than June 24, 2011.  The Client may place additional
assets in the KVO Equity Portfolio Account after the date of this Third
Amendment only with the prior written approval of the Adviser.”

 

II.                                     The following Section shall be added to
the end of the Agreement, immediately following Section 20. Counterparties:

 

“21.  Withdrawals by the Client

 

Notwithstanding anything to the contrary in the Agreement, the Client may not
make any withdrawal from the KVO Equity Portfolio Account that would reduce the
net assets in that account to less than $75 million before December 31, 2010, or
to less than $10 million after December 31, 2010 and before March 31, 2011. 
Notwithstanding anything to the contrary in the Agreement, the Client may not
make any withdrawal from the KVO Equity Portfolio Account after March 31, 2011
and before June 30, 2011.  The Advisor and Client may mutually agree to make
exceptions to these withdrawal limitations”

 

III.                                 Schedule A is hereby amended as follows:

 

These amendments shall be to the “Investment Guidelines With Respect To The KVO
Equity Portfolio”

 

Section C, Item 1 Portfolio Constraints.  “1. Exposure to non-U.S. dollar assets
will not exceed 20% of the portfolio” shall be deleted and replaced with:
“Exposure to non-U.S. dollar assets will not exceed the greater of (i) $15
million and (ii) 20% of the investment portfolio.”

 

Section F, Part c.  Leverage and the short selling of securities, “c. The
maximum aggregate net short exposure of the account is 30% of the account’s net
asset value” shall be deleted and replaced with: “c. The maximum aggregate net
short exposure of the account is 50% of the account’s net asset value.”

 

Section F, Part d.  Leverage and the short selling of securities, “d. The
maximum aggregate gross short positions may be in an amount equal to the net
asset value of the account, provided that the aggregate value of “naked” short
positions on equity securities and call options (other than index based futures
and ETF’s) shall not exceed 15% of the account’s net asset value” shall be
deleted and replaced with: “d. The maximum aggregate gross short positions may
be in an amount equal to 125% of the net asset value of the account, provided
that the aggregate value of “naked” short positions on equity securities and
call options (other than index based futures and ETF’s) shall not exceed the
greater of (i) 15% of the account’s net asset value and (ii) $15 million.”

 

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IV.                                 Schedule B is hereby amended as follows:

 

The Section entitled “The Fee charged on the Prospector Run-Off Portfolio will
be as follows:” is hereby deleted.

 

Paragraph 1 of the Section entitled “The Fee charged on the KVO Equity Portfolio
will be as follows:” is hereby deleted and replaced with the following:

 

“The Management Fee charged on the KVO Equity Portfolio will be as follows:

 

From the date of the Third Amendment through December 31, 2010, the monthly
Management Fee for the KVO Equity Portfolio Account will be 1/12 x 1% of the net
assets in the KVO Equity Portfolio Account.  This Management Fee shall be
calculated as if there had been no distributions to the Client or withdrawals by
the Client from the KVO Equity Portfolio Account in 2010 other than the $25
million transfer to the Fund when that occurs.  For the period beginning
January 1, 2011 until the termination of this Agreement, no monthly Management
Fee will be payable to the Adviser with respect to the KVO Equity Portfolio
Account.”

 

V.                                     Schedule B shall be further amended as
follows:

 

A new paragraph is hereby added to the end of Paragraph 2 of the
Section entitled “The Fee charged on the KVO Equity Portfolio will be as
follows:” which reads as follows:

 

“The Incentive Fee for the KVO Equity Portfolio Account shall continue to be
paid in accordance with this Paragraph 2, and in accordance with Section 8(b) of
this Agreement, will be paid by January 10, 2011 in respect to 2010 performance
unless another date is mutually agreed upon between the Adviser and the Client. 
Half of any such Incentive Fee with respect to 2010 shall be held in escrow by
the Client, and is subject to claw-back based on 2011 performance as follows. 
Once the net asset value of the KVO Equity Portfolio Account value falls below
$10 million in 2011, the Client will pay to the Adviser half of the amount held
in escrow; provided, however, that should the calculation of “Net Profits” on
the date the KVO Equity Portfolio Account falls below $10 million reflect a net
loss, the amount of the net loss shall be multiplied by 15%.  If the amount of
the escrow exceeds the result of that calculation, then the Client shall
promptly pay the Adviser the excess, up to one-half of the amount of the escrow;
if the amount of the escrow is less than the result of that calculation, the
Client shall not at that time release any portion of the escrow to the Adviser. 
On June 30, 2011 or the termination of this Agreement, whichever occurs first,
the Client will pay the 2011 Incentive Fee to the Adviser together with any
remaining portion of the escrow; provided, however, that should the calculation
of “Net Profits” on June 30, 2011 or the termination of this Agreement,
whichever occurs first, reflect a net loss for 2011, the amount of the net loss
shall be multiplied by 15%.  If the amount of the escrow exceeds the result of
that calculation, then the Client shall promptly pay the Adviser the excess; if
the amount of the escrow is less than the result of that calculation, the Client
shall not release any portion of the escrow to the Adviser other than the return
that has accrued on the escrowed funds, as described in the following sentence. 
While the Client is holding the escrowed funds, they will accrue an annualized
rate of return equal to 5.32 percent.  The Client will pay the Adviser the
return that has accrued on the escrowed funds on June 30, 2011 or the
termination of this Agreement, whichever occurs first.  For the avoidance of
doubt, following the adoption of the Third

 

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Amendment, the Incentive Fee shall continue to be calculated in accordance with
this Paragraph 2, including, but not limited to, the application of any Loss
Carryforward in regard to the calculation of any Incentive Fee for Net Profits
in 2010 or 2011.  “Loss Carryforward” is defined as the cumulative net operating
losses, if any, incurred in the KVO Equity Portfolio for calendar years prior to
the current calendar year and not offset by subsequent Net Profits; provided,
however, that the Loss Carryforward shall be reduced proportionately for
withdrawals.”

 

IN WITNESS WHEREOF, the Client and the Adviser have caused this Third Amendment
to Investment Management Agreement to be duly executed on the dates indicated
below.

 

 

ADVISER:

 

CLIENT:

 

 

 

KVO CAPITAL MANAGEMENT, LLC

 

MONTPELIER REINSURANCE LTD.

 

 

 

 

 

 

By:

/s/ KERNAN V. OBERTING

 

By:

/s/ CHRISTOPHER L. HARRIS

Name: Kernan V. Oberting

 

Name: Christopher L. Harris

Title: Managing Member

 

Title: Chief Executive Officer

Date: July 29, 2010

 

Date: July 29, 2010

 

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