**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. andFairfax Financial Holdings Limited is effective as of January 1, 2005. 1. Capitalized terms used herein but not defined herein shall have the meanings ascribedto 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 andconditions 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 thisAmendment 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        
 

 
**SCHEDULE A****INVESTMENT GUIDELINES**FUNDAMENTAL OBJECTIVES1. Invest on a long-term basis in accordance with applicable insurance regulatory guidelines. 2. Ensure preservation of invested capital for policyholder protection, always providingsufficient liquidity for the payment of claims and other policy obligations.GUIDELINES1. Approach   All investments are to be made using the long-term value investing approach by investing inthe securities of companies and other entities at prices below their underlying long-termvalues to protect capital from loss and earn income over time and provide operating incomeas needed.   With regard to equity securities, the investment manager will attempt to identifyfinancially sound companies and other entities with good potential profitability which areselling at large discounts to their intrinsic value. Appropriate measures of low pricesmay 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. Downsideprotection is obtained by seeking a margin of safety in terms of a sound financial positionand a low price in relation to intrinsic value. Appropriate measures of financialintegrity 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 purchaseswill be made when economic and issue-specific conditions are less than ideal and sentimentis uncertain or negative. Conversely, it is expected that gains will be realized whenissue-specific factors are positive and sentiment is buoyant. The investment time horizonis 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 yieldsbetter 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 arenot regarded as an unimpeachable source for assessing credit quality any more than a broker’s recommendation on a stock is necessarilycorrect. With any form of investment research and evaluation, there is no substitute forthe 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 arepaid on a timely basis. An operating cash position is to be maintained at appropriatelevels and will be managed by the insurance company in accordance with an approved list ofliquid investments, as determined from time to time by the investment committee. Thesesecurities will be managed by the insurance company as part of the treasury function andare 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 issuersoperating 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 investmentportfolio and how a prudent person would invest another person’s money without undue riskof 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 ofthe investment manager as the investment committee of the insurance company. Theinvestment committee shall meet at least once each quarter to review the investments andloans of the insurance company.
 

 
STRATEGY1. Maintain Adequate Liquidity   A detailed review of portfolio liquidity is undertaken on a periodic basis. This liquidityanalysis determines how much of each portfolio is in cash or can be converted into cash ina given time period. The insurance company determines its near term liquidity requirements and the liquidity of the portfolio will be modified fromtime to time to match such near term requirement.2. Asset Allocation   The asset allocation will be determined by the investment manager and will includeshort-term investments that will generate appropriate cash flows and long-term investmentssuch as stocks and bonds, both domestic and foreign, that generate investment gains. Theasset allocation will be monitored from time to time in order to comply with regulatoryguidelines and meet insurance policy liabilities. 3. Foreign Exchange Risk   The investment manager shall use its discretion to hedge any foreign currency investmentsand exposures. The investment manager may use a variety of methods to reduce suchexposures, including forward foreign exchange contracts, currency options and naturalhedging with foreign pay liabilities of the insurance company. Un-hedged foreigninvestments will be limited to 15% of admitted assets at cost, subject to adjustment toconform with applicable insurance regulatory requirements. Un-hedged exposure above thisamount 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 tomaturity fixed income securities with maturities less than thirty years. Maximum fixedincome portfolio duration is limited to the equivalent of a twenty year term to maturitytreasury security.INVESTMENT CLASS EXPOSUREThe following exposure ranges established by the investment committee shall be monitored andmaintained 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 theconsolidated tax position of the insurance company and its affiliates and the relative investmentattractiveness 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 theasset exposure ranges.RETURN EXPECTATIONSThe foregoing asset class exposure is expected, on an annual basis, to result in returns betterthan the Consumer Price Index plus 3% over a ten year period before the disbursement of investmentmanagement fees. However, in any one year the annual return may be significantly above or belowthis expectation.INVESTMENT OBJECTIVES OF THE INVESTMENT MANAGERThe investment manager, subject to regulatory and insurance company imposed constraints mentionedelsewhere, expects to provide additional returns to those returns that would be earned by thealternative of passively managing a surrogate market index.Measured over four year moving periods, performance of the investment manager is expected to resultin the following returns:       All Equities S&P 500 + 1% point       Fixed Income:       Taxable Bonds Merrill Lynch Intermediate Treasury Index + 0.25%