EX-10.46








    Exhibit 10.46



 




    Amendment
    Number 1 to Investment Agreement



 



    This Amendment Number 1 (“Amendment”) to the
    Investment Agreement (“Agreement”) dated as
    October 1, 2002, between Seneca Insurance Company, Inc. 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.
	
 
	
    Seneca Insurance Company, Inc.

	
 
	
 
	
 

	
    By: /s/  Paul
    Rivett


    
Authorized
    Signature

    Paul Rivett

    
Printed
    Name

    Vice President & Chief Operating Officer

    
Title

	
 
	
    By: /s/  Douglas
    M. Libby


    
Authorized
    Signature

    Douglas M. Libby

    
Printed
    Name

    Chairman & Chief Operating Officer

    
Title

	
 
	
 
	
 

	

    Fairfax Financial Holdings Limited


	
 
	
 

	
 
	
 
	
 

	
    By: /s/  Paul
    Rivett


    
Authorized
    Signature

    Paul Rivett

    
Printed
    Name

    Vice President & Chief Legal Officer

    
Title

	
 
	
 



















 





 




    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 that shall consist of at least one member
    of the board of directors of the insurance company and any other
    members as the board of directors of the insurance company deems
    appropriate. The investment committee shall meet at least once
    each quarter to review the investments and loans of the
    insurance company.



 




    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











 




    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 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 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.