Document:

Exhibit 10.20

 

INVESTMENT  ADVISORY SERVICES AGREEMENT

 

THIS
AGREEMENT (the “Agreement”) is executed as of 7-23-02 and made effective as of
the 1st day of January,  2002,
by and between ACE Capital Mortgage Reinsurance Company, a New York insurance
company (the “Client”), and ACE Asset Management Inc., a Delaware company
(“ServiceCo”).

 

W I T N E S S E T H

 

WHEREAS,
the Client and ServiceCo (together, the “Parties” and each a “Party”) are
affiliated corporations wholly-owned indirectly by ACE Limited, a Cayman
Islands limited liability company; and

 

WHEREAS,
the Client wishes to receive and ServiceCo wishes to provide certain investment
advisory services to the Client, and

 

WHEREAS,
the Client wishes to provide fair consideration for the services rendered to it
by ServiceCo;

 

NOW,
THEREFORE, in consideration of the premises and mutual covenants and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

 

ARTICLE I

SCOPE OF SERVICES

 

1.1           (i) The Parties hereby agree
that ServiceCo shall assist with the evaluation and selection of Client’s
investment advisors and monitor the performance, compliance and risk profile of
the Client’s investment portfolio.

 

(ii)
At any time and from time to time, the Client may request from ServiceCo, and
ServiceCo may elect to provide to the Client, certain additional investment
advisory services, on a consulting and/or administrative support basis.

 

All
services set forth above (the “Services”) and provided hereunder shall be
governed by and subject to such guidelines, procedures, objectives and
limitations as may be established and approved from time to time by the Board
of Directors (the “Board”) of the Client (the “Guidelines”), a copy of which
Guidelines, effective as of May 1, 2000, as may be amended from time to time,
is attached as Exhibit A hereto.

 

1

 

1.2           The Services may be changed
from time to time by an amendment, that has been approved, in writing, by the
parties to this Agreement, provided such amendment is in accordance with the
Guidelines.

 

1.3           The Client and ServiceCo
hereby acknowledge that all employees rendering Services to the Client pursuant
to this Agreement (each an “Employee”) shall remain at all times an employee of
ServiceCo.  In the performance of
Services, the Employee shall report to and be under the sole control of
ServiceCo, which shall have full authority to direct his or her activities in
the performance of the Services provided hereunder.  Client shall exercise no control over the Employee in the
performance of his or her activities or of the Services.  Subject to the Guidelines and the ultimate
authority of the Board, ServiceCo will retain final decision-making authority
in all matters in respect of which ServiceCo provides Services under this
Agreement.

 

1.4           ServiceCo shall perform the
Services as an independent contractor. 
Nothing contained herein shall be construed to create the relation of
partner, employer or employee or of principal and agent between the Client and
ServiceCo.  ServiceCo shall have no
authority to negotiate or transact business on behalf of Client without the
express written consent of Client.

 

1.5           ServiceCo represents that it
possesses and will maintain the appropriate licenses and authority to perform
any Services required and requested hereunder. 
ServiceCo shall discharge its duties hereunder at all times in good
faith and with that degree of prudence, diligence, care and skill which a
prudent person rendering services as an institutional investment adviser would
exercise under similar circumstances.

 

ARTICLE II

COMPENSATION FOR SERVICES

 

2.1           For the services rendered by
ServiceCo to Client pursuant to Section 1.1 (i) of this Agreement, Client shall
pay to ServiceCo a management fee of 1.5bps (0.015%) based on the average of
the market value of the assets under advisement as reported in the quarterly
report to the Investment Committee of the Client.  For the services rendered by ServiceCo to Client pursuant to
Section 1.1(ii) of this Agreement, the parties shall agree upon a service fee
prior to the provision of such services, which fee shall be subject to the
prior approval or non-disapproval of the New York Superintendent of Insurance
(“Superintendent”), ServiceCo will provide client with a bill for services
within thirty (30) days after the end of each three-month period.  Client will pay ServiceCo within fifteen
(15) days of receipt of the bill.

 

2.2           ServiceCo and Client
acknowledge and agree that Client shall have the right to offset any amounts
due and owing to ServiccCo from Client under this Agreement against other
amounts due and owing by Client to ServiceCo.

 

2

 

ARTICLE III

BOOKS AND RECORDS

 

3.1           The ownership of all books,
supplies, records or other materials (collectively, the “Records”) furnished by
or on behalf of the Client relating to any of the services provided to the
Client shall be vested in, and remain the property of the Client, and all shall
be delivered to the Client immediately upon the termination or cancellation of
this Agreement or at any time upon the request of the Client.  All of the Records shall be kept in
accordance with applicable laws and regulations, including, but not limited to,
New York Insurance Department Regulation 152.

 

3.2          The Client
shall have the right, from time to time, to conduct reviews, inspections and/or
audits of any or all of the Records and documents related to its business under
this Agreement, during ordinary business hours upon reasonable notice, and
ServiceCo shall cooperate and cause its employees, agents or advisors to
cooperate with the Client conducting such reviews, inspections and audits.  In addition, ServiceCo will provide any
materials, reasonably related to the investment advisory services provided
hereunder, as may be reasonably requested in writing by the directors or
officers of the Client or as may be required by any governmental agency with
jurisdiction thereunder.

 

ARTICLE IV

TERM AND TERMINATION

 

4.1           This Agreement is effective
as of the date first set forth above, and shall remain in effect up to and
including December 31, 2002 (the “Initial Term”), unless earlier terminated
pursuant to Clauses 4.2 and 4.3.  At the
end of the Initial Term, or any subsequent term thereof, this Agreement shall
automatically be renewed each year for a period of one year.

 

4.2           Either party may elect to
terminate this Agreement at any time and for any reason on sixty (60) days’ prior
written notice to the other Party.

 

4.3           Notwithstanding any other
provision of this Agreement, either Party may terminate this Agreement
immediately upon written notice to the other Party in the event that the other
Party (i) becomes insolvent or bankrupt, or admits in writing its inability to
pay its debts as they become due, or makes an assignment for the benefit of
creditors, or applies for or consents to the appointment of a trustee or
receiver for the major part of its property, (ii) becomes the subject of
bankruptcy, reorganization, rearrangement, insolvency or liquidation
proceedings, or other proceedings for relief of creditors and such proceedings
are not stayed or discharged within ninety (90) days after being commenced;
(iii) is acquired by another entity, unless such acquiring entity is wholly
owned, directly or indirectly, by ACE Limited; (iv) fails to obtain or maintain
any licenses, permits or other qualifications that are required by law to
fulfill its obligations under this Agreement and such failure remains uncured
after fifteen (15) days, or (v) commits abandonment, fraud or willful
misconduct with the provision of services under this Agreement.

 

3

 

4.4           Termination of this
Agreement shall not relieve either Party of its obligations under this
Agreement up to the effective date of termination.  Following any termination, the Parties will cooperate with each
other to provide a smooth transition of services and to satisfy reasonable
requests for information concerning actions taken during the term.

 

ARTICLE V

INDEMNIFICATION

 

5.1           Client agrees to hold
harmless and indemnify ServiceCo and each of its officers, directors,
employees, shareholders, independent contractors and agents (collectively the
“ServiceCo Indemnitees”) from and against any and all claims, suits, causes of
action, demands, losses, damages, fines, penalties, punitive damages, costs or
expenses, including attorneys’ fees, or other liabilities of any nature
(“Damages”) based on, related to or in connection with (i) any action taken or
omitted by any of the ServiceCo Indemnitees solely at the direction of Client;
(ii) Damages incurred by the ServiceCo Indemnitees as a result solely of any
negligent, willful or intentional acts, errors or omissions of Client or its
officers, directors, employees or agents in the performance or breach of this
Agreement, and/or (iii) any litigation, arbitration or other proceeding related
to this Agreement and involving any of the ServiceCo Indemnities in which the
plaintiff, petitioner or other claimant does not allege any fault or wrongdoing
on the part of the ServiceCo Indemnities or any of them.

 

5.2           ServiceCo agrees to hold
harmless and indemnify Client and Client’s officers, directors, employees,
shareholders, independent contractors and agents (collectively the “Client
Indemnitees”) from and against any and all Damages based on, related to or in
connection with (i) any action taken or omitted by any of the Client
Indemnitees solely at the direction of ServiceCo, (ii) damages incurred by the
Client Indemnities as a result solely of any negligent, willful or intentional
acts, errors or omissions of ServiceCo or its directors, employees or agents in
the performance or breach of this Agreement; and/or (iii) any litigation,
arbitration or other proceeding relating to this Agreement and involving any of
the Client Indemnitees in which the plaintiff, petitioner or other claimant
does not allege any fault or wrongdoing on the part of the Client Indemnities
or any of them; and/or (iv) based on or related to or in connection with any
obligation to withhold and pay over any taxes based on wages, salary or other
compensation of employees of ServiceCo.

 

5.3           The terms of this Article
shall survive the termination of this Agreement.

 

ARTICLE VI

ARBITRATION

 

6.1           All disputes between the
Parties relating to or in connection with this Agreement, including but not
limited to its interpretation, performance or breach, shall be submitted to
binding arbitration as described in this Article and shall be in accordance
with the Commercial

 

4

 

Arbitration
Rules of the American Arbitration Association and the Expedited Procedures
thereof, except as expressly set forth in this Article VI.

 

6.2           The Party initiating
arbitration shall provide notice of its demand for arbitration, which shall
include appointment of an arbitrator. 
The other Party shall have thirty (30) days from receipt of such demand
for arbitration in which to appoint its arbitrator.  If the responding Party fails to appoint its arbitrator within
such thirty (30) days, the initiating Party shall be entitled to choose the
second arbitrator.  Together the two
arbitrators shall agree upon a neutral umpire. 
If no such agreement is reached within thirty (30) days of the
appointment of the second arbitrator, the umpire shall be chosen by drawing
lots.  The arbitrators and the umpire
(collectively the “Panel”) shall be active or retired insurance professionals
of disinterested insurance-related companies not under the control of either
Party or their respective parent companies.

 

6.3           Each Party shall submit its
case to the Panel 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 Panel.

 

6.4           The Panel shall make its
decision with regard to the custom and usage of the insurance business.  The Panel shall be relieved of all judicial
formalities and the strict rules of law. 
The written decision of a majority of the Panel shall be rendered within
sixty (60) days following the termination of the Panel’s hearings, unless the
Parties consent to an extension.  Such
majority decision of the Panel shall he 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 Panel in any court of proper jurisdiction.

 

6.5           Each Party shall bear the
fees and expenses of the arbitrator selected by or on its behalf, and the costs
of arbitration, including the fees of the umpire, shall be divided equally
between the two Parties.  The Panel
shall have the authority to award to the prevailing Party its costs and
attorneys’ fees.

 

6.6           Any arbitration proceeding
shall take place in New York.

 

ARTICLE VII

CONFIDENTIALITY

 

7.1           ServiccCo
agrees that, except with the consent of the Client, it will not disclose or use
for any purpose outside the scope of this Agreement proprietary or confidential
information provided to it by the Client unless and until such information (i)
becomes public knowledge other than through disclosure by ScrviceCo or (ii) is
subpoenaed or otherwise required by an authorized governmental authority.  In the event that ServiceCo, upon the advice
of counsel, determines that it is required to provide any such information, it
shall promptly provide notice to the Client.

 

5

 

7.2           ServiceCo’s obligations
under this Article shall survive the termination of this Agreement.

 

ARTICLE VIII

NOTICES

 

8.1           Any notice required or
permitted under this Agreement shall be in writing and shall be deemed to have
been given (i) when received if given in person or by courier or a courier
service, (ii) on the date of transmission if sent by telex, facsimile or other
wire transmission (receipt confirmed) or (iii) five (5) business days after
being posted by certified or registered mail, postage prepaid:

 

8.2           If to ServiceCo, addressed
as follows:

 

	
  ACE Asset Management Inc.

  
	
  Attention: General Counsel

  
	
  1325 Avenue of the
  Americas

  
	
  18th Floor

  
	
  New York, NY 10019

  
	
  Fax:  (212) 581-3268

  

 

8.3          If to Client, addressed as
follows:

 

	
  ACE Capital Mortgage
  Reinsurance Company

  
	
  Attention: Norie Bregman,
  Esq.

  
	
  1325 Avenue of the Americas

  
	
  New York, New York 10019

  
	
  Fax: (212) 581-3268

  

 

ARTICLE IX

MISCELLANEOUS PROVISIONS

 

9.1           The Parties agree that this
Agreement constitutes the entire understanding and agreement among them and
supersedes any prior or contemporaneous written or oral agreements,
undertakings, communications or representations among them concerning the
subject matter of this Agreement.

 

9.2           If any separable provision
hereof shall be held to be invalid or unenforceable, such invalidity or
unenforceability shall not affect any other provision hereof.

 

9.3           No terms, conditions, or
other provisions of this Agreement may be waived, modified, amended, or
otherwise changed except in a writing signed by the Parties which expressly
states that it is an amendment or waiver of terms of this Agreement.  Any such writing

 

6

 

must also specify with
particularity which term or terms of this Agreement are so amended or
waived.  Any such writing shall not be
construed as a general waiver, abandonment, modification or amendment of any
terms, conditions or provisions of this Agreement, but rather strictly
construed as an amendment or waiver of only those terms or conditions stated
therein.  Any such writing shall be
subject to the prior approval or non-disapproval of the Superintendent.

 

9.4           No Party may assign its
rights or obligations under this Agreement without the prior written consent of
the other Party.

 

9.5           The rights, duties and
obligations under this Agreement shall be binding upon inure to the benefit of
the Parties’ respective successors and assigns.

 

9.6           This Agreement shall be
governed and construed in accordance with the laws of New York without giving
effect to the principles of conflicts of laws thereof.

 

9.7           This Agreement may be
executed in counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.

 

9.8           The headings in this
Agreement are for reference purposes only, and shall not affect in any way the
meaning or interpretation of this Agreement.

 

7

 

IN
WITNESS WHEREOF, the Parties have caused this Agreement to be executed and
delivered as of the date first above written.

 

 

	
   

  	
  ACE CAPITAL MORTGAGE

  REINSURANCE COMPANY

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Norie R. Bregman

  	
   

  
	
   

  	
  Name:

  	
  Norie R. Bregman

  	
   

  
	
   

  	
  Title:

  	
  [ILLEGIBLE]

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ACE ASSET MANAGEMENT INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ [ILLEGEBLE]

  	
   

  
	
   

  	
  Name:

  	
  [ILLEGEBLE]

  	
   

  
	
   

  	
  Title:

  	
  COO

  	
   

  
							

 

8

 

Exhibit A

 

Statement of Investment Policy and Guidelines

 

9

 

	
  

  	
   

  
	
   

  
	
  ACE capital MORTGAGE reinsurance
  company

  statement
  of investment policy and guidelines

  
	
  ace financial

  services

  	
  dated
  as of september 1, 2003

  

 

I.              INVESTMENT GUIDELINES AND OBJECTIVES

 

The investment portfolio (the “Portfolio”) of ACE
Capital Mortgage Reinsurance Company (the “Company”) shall be invested based on
the following objectives and guidelines. 
The Portfolio will consist of a fixed income portfolio (the “Fixed
Income Portfolio”) and an equity portfolio (the “Equity Portfolio”).

 

The following objectives are applicable to the
entire Portfolio:

 

•      Adhere to high fiduciary standards.

•      Maximize after-tax total return while meeting GAAP revenue projections.

•      Maintain an asset mix consistent with a AA claims-paying rated
(re)insurance company.

•      Maintain liquidity and credit quality consistent with a AA claims-paying
rated (re)insurance company.

•      Maintain
sufficient liquidity to cover an unexpected stress in the liability portfolio.

•      Maintain compliance with all applicable insurance regulatory and rating
agency requirements.

•      Minimize
principal risk through risk management controls.

 

Conceptually, the Portfolio will be divided into
two segments:  a reserve segment
consisting of assets supporting unearned premium, loss and profit commission
reserves and an invested capital segment.

 

The following additional objectives are applicable
to the reserve segment of the Portfolio:

 

•      Meet asset/liability management objectives and constraints for each
risk.

•      Earn a return at or above the cost of carrying the liability.

•      Minimize currency risk and exposure.

•      Hedge
a specific liability exposure or meet the underlying needs of a(n)
(re)insurance agreement.  Under such
conditions a separately managed investment portfolio may be formed.

 

The following additional objectives are applicable
to the invested capital segment of the Portfolio:

 

•      Limited to high-quality, liquid fixed income securities.

•      Manage
to a duration that meets the Company’s overall risk/return profile and overall
asset/liability management objectives.

 

II.            AUTHORIZED INVESTMENTS – FIXED INCOME PORTFOLIO

 

Permitted fixed income investments are US Treasury
obligations, US Government agency securities, mortgage-backed securities
(including pass-through securities and collateralized mortgage obligations),
commercial mortgage-backed securities, domestic corporate obligations
(including publicly issued securities and securities offered pursuant to SEC
Rule 144A), obligations of foreign corporations and foreign governments
(including US dollar denominated yankee and eurodollar securities), asset
backed securities (including but not limited to credit card, automobile and
home equity backed securities), municipal bonds (including general obligation
bonds, revenue or special obligation bonds, industrial development bonds,
variable rate demand notes and tax anticipation notes), tax-exempt securities
such as “private activity bonds”, preferred stocks, commercial paper,
repurchase agreements, bank certificates of deposits, bankers’ acceptances,
money market funds and time deposits.

 

One of the ACE Group of Insurance & Reinsurance
Companies

 

 

III.           INVESTMENT GUIDELINE – FIXED INCOME PORTFOLIO EXPOSURE
LIMITS 

 

Taxable Securities

 

The maximum allocation to each taxable fixed Income
sector is based on the total market value of the Fixed Income Portfolio and
will be measured at the time of purchase of any security:

 

	
  •

  	
   

  	
  Securities
  issued or guaranteed by the US Government and its Agencies

  	
  100%

  
	
   

  	
   

  	
   

  	
   

  
	
  •

  	
   

  	
  Securities
  issued by corporate issuers(1)

  	
  50%

  
	
   

  	
   

  	
   

  	
   

  
	
  •

  	
   

  	
  Mortgage-Backed
  Securities (including Commercial MBS)

  	
  60%

  
	
   

  	
   

  	
   

  	
   

  
	
  •

  	
   

  	
  Non-Agency
  Mortgage Backed Securities (including Commercial MBS)

  	
  40%

  
	
   

  	
   

  	
   

  	
   

  
	
  •

  	
   

  	
  Commercial
  Mortgage Backed Securities

  	
  20%

  
	
   

  	
   

  	
   

  	
   

  
	
  •

  	
   

  	
  Asset-Backed
  Securities (other than MBS)

  	
  25%

  
	
   

  	
   

  	
   

  	
   

  
	
  •

  	
   

  	
  US
  Dollar denominated securities issued or guaranteed by the Government of
  Canada, the Government of any Canadian Province or by any Agency thereof

  	
  10%

  
	
   

  	
   

  	
   

  	
   

  
	
  •

  	
   

  	
  US
  Dollar denominated securities issued or guaranteed by a Non-Canadian Foreign
  Government

  	
  10%

  
	
   

  	
   

  	
   

  	
   

  
	
  •

  	
   

  	
  Securities
  issued by any single corporate issuer(2)

  	
  The greater

  of 3% or $1

  million

  

 

Tax-Exempt Securities

 

The target allocation to tax-exempt securities will
primarily be based on the tax position of the Company and the optimal mix of
tax and tax-exempt securities as determined by management of the Company.  The Company will notify the investment
manager in writing (e-mail will be sufficient) at least annually of the target
percentage of tax-exempt securities.  If
the Company fails to so notify the investment manager in any year, the target
percentage of tax-exempt securities for such year will remain the same as the
target percentage of tax-exempt securities for the previous year.  Tax-exempt securities issued by any single
issuer may not, at the time of purchase, exceed the greater of 3% of the total
market value of the Fixed Income Portfolio or $1 million.

 

IV.           INVESTMENT GUIDELINE –
FIXED INCOME PORTFOLIO CREDIT QUALITY

 

Portfolio Credit Quality:  Overall weighted average portfolio credit quality must be rated
at a minimum in the AA category as measured by the lower rating of two
nationally recognized

 

(1)   Corporate
issuers exclude special purpose vehicles (howsoever described).

(2)   Securities
issued or guaranteed by the U.S. Government or its agencies are exempt from
this provision.

 

2

 

 

statistical rating organizations (“NRSROs”).  A minimum of 33% of the market value of the
Fixed Income Portfolio must be invested in securities rated at a minimum in the
AA category by two NRSROs.

 

Security Credit Quality: Investments in securities
rated “BBB” are limited to 5% of the market value of the Fixed Income Portfolio
at the time of purchase.  Investment in
securities rated lower than “BBB” by two NRSROs are limited to 5% of the market
value of the Fixed Income Portfolio at time of purchase.  Investments in securities rated “BBB” or
lower plus investments in equities may not in the aggregate exceed 10% of the
market value of the Portfolio.  In the
event of any downgrade below the “BB” category, the investment manager must
contact the Chief Operating Officer or other designated officer of the Company
within a reasonable time to evaluate the need to take action.

 

The Company shall determine the allocation of the
assets of the Portfolio to securities rated “BB” or lower.  The Company will notify the investment
manager in writing (e-mail will be sufficient) at least annually of the maximum
allocation to non-investment grade securities. 
If the Company fails to so notify the investment manager in any year,
the maximum allocation for such year will remain the same as the allocation for
the previous year.

 

V.            INVESTMENT GUIDELINE – FIXED INCOME PORTFOLIO DURATION

 

The management of the Company will notify the
investment manager in writing (e-mail will be sufficient) at least annually, of
the target duration(3) of the Fixed Income Portfolio.  The investment manager may shift the duration of the Fixed Income
Portfolio based on market conditions but may not exceed a variance of
plus/minus 1.00 year from the target effective duration unless otherwise
notified in writing (e-mail will be sufficient) by the Company.

 

VI.           INVESTMENT GUIDELINE – SHORT-TERM INVESTMENTS

 

Subject to the following limitations, the Fixed
Income Portfolio may be invested in cash, cash equivalents and other securities
with an effective maturity (as determined by the investment manager) of less
than one year and money market funds.

 

The Fixed Income Portfolio may be invested in
commercial paper rated at the time of investment either A-1 by S&P or P-1
by Moody’s.

 

The Fixed Income Portfolio may be invested in
short-term municipal securities rated at the time of investment either SP-1 by
S&P or MIG1 by Moody’s.

 

The Fixed Income Portfolio may be invested in
“First Tier” securities issued by money market funds that seek to maintain a
stable net asset value. “First Tier” securities are securities that are rated
(or that have been issued by an issuer that is rated with respect to a class of
short-term debt obligations, or any security within that class, comparable in
priority and quality with such securities) in the highest short-term rating
category by at least two NRSROs.  A
single fund may not comprise more than 5% of the Portfolio.

 

(3)   Calculation
of effective duration to be defined by the Investment Advisor in its  sole discretion using current industry
practices.

 

3

 

VII.         AUTHORIZED INVESTMENTS AND INVESTMENT GUIDELINES –
EQUITY PORTFOLIO

 

Permitted equity investments are common stocks,
convertible preferred stocks and convertible bonds.  All equity securities must be listed on a US stock exchange, and
shall include American Depository Receipts (ADR’s).

 

The Company shall determine the percentage of
assets of the Portfolio to be invested in equity securities and shall determine
the equity strategy to be undertaken by the investment manager.  The Company will notify the investment
manager in writing (e-mail will be sufficient) at least annually of the equity
strategy and target percentage of assets of the Portfolio to be invested in
equity securities.  If the Company fails
to so notify the investment manager in any year, the strategy and target
percentage for such year will remain the same as the strategy and target
percentage for the previous year.

 

The total market value of common stocks,
convertible preferred stocks and convertible bonds issued by any one
corporation, at the time of the investment, may not exceed 1% of the market
value of the Portfolio.

 

The maximum allocation of equity securities to any
industry group, as such groups are determined by the investment manager in its
sole discretion, at the time of investment, may not exceed 10% of the market
value of the Portfolio.

 

VIII.        INVESTMENT GUIDELINES – CAPITAL GAIN AND LOSS
CONSTRAINTS

 

No investment will be sold during a fiscal quarter
without explicit direction of the Chief Operating Officer or other designated officer
if such sale, together with all prior sales and redemptions during the same
period, produces a net capital gain or loss on the Portfolio in excess of an
amount established by the Chief Operating Officer or other designated officer
at the beginning of such fiscal quarter. 
The Company will notify the investment manager in writing (e-mail will
be sufficient) at the beginning of each fiscal quarter, of the level of capital
gain or loss that the investment manager may take without further approval from
the Company.

 

IX.           CURRENCY EXPOSURE

 

The Company shall determine the allocation of its
assets to non-United States dollar denominated securities and the appropriate
level of currency exposure.  Currency
exposure is to be limited to that exposure necessary to hedge loss reserves,
unearned premium reserves and profit commissions.  Speculation of non-US dollar denominated currencies is strictly
prohibited.  Specific allocations to sectors
and issuers must be made consistent with the diversification and credit quality
of US dollar securities.  The Company
will notify the investment manager in writing (e-mail will be sufficient) at
least annually of the currency exposure and allocations.

 

X.            PROHIBITED SECURITIES

 

Unless agreed to in advance and in writing (e-mail
will be sufficient) by the Company, the investment manager will not invest in
the following types of securities:

 

1.             Direct
investments in mortgage loans, except for mortgage backed securities issued by
an agency of the US Government or a US domiciled corporation.

 

4

 

2.             Interest
only, principal only and inverse floating rate securities.

3.             Direct
investments in real estate.

4.             Private
placement investments.  This includes
but is not limited to securities in which a liquid market is not readily
available.

 

XI.           SECURITIES LENDING

 

Securities lending is prohibited.

 

XII.         PERFORMANCE BENCHMARKS

 

A Performance Benchmark Index will be maintained
for the Fixed Income Portfolio.  The
index will be determined based upon the allowable asset classes, weightings of
selected asset classes and the targeted effective duration of the
portfolio.  The weightings of the index
will be revised from time to time to reflect changes in the targeted structure
of the Fixed Income Portfolio.

 

A Performance Benchmark Index will be maintained
for the Equity Portfolio.  The Company
will notify the investment manager in writing (e-mail will be sufficient) at
least annually of the Performance Benchmark Index for the Equity
Portfolio.  If the Company fails to so
notify the investment manager in any year, the Performance Benchmark Index for
the Equity Portfolio for such year will remain the same as the Performance
Benchmark Index for the Equity Portfolio for the previous year.

 

XIII.        EXCEPTIONS

 

The investment manager will not be held responsible
for any breaches of the foregoing investment guidelines to the extent such
breaches are due to conditions outside the investment manager’s control, such
as market movements or changes to the Portfolio made by the Company.  However, the investment manager must contact
the Chief Operating Officer or other designated officer of the Company within a
reasonable time after becoming aware of any breach to evaluate the need to take
action to remedy such breach.

 

5Exhibit
10.21

 

INVESTMENT
ADVISORY SERVICES AGREEMENT

 

THIS
AGREEMENT (the  “Agreement”) is
executed as of 7-23-02 and made effective as of the 1st day of
January,  2002, by and between ACE
Capital Title Reinsurance Company, a New York insurance company (the “Client”),
and ACE Asset Management Inc., a Delaware company (“ServiceCo”).

 

W I T N E S S E T H

 

WHEREAS,
the Client and ServiceCo (together, the “Parties” and each a “Party”) are
affiliated corporations wholly-owned indirectly by ACE Limited, a Cayman Islands
limited liability company; and

 

WHEREAS,
the Client wishes to receive and ServiceCo wishes to provide certain investment
advisory services to the Client, and

 

WHEREAS,
the Client wishes to provide fair consideration for the services rendered to it
by ServiceCo;

 

NOW,
THEREFORE, in consideration of the premises and mutual covenants and agreements
contained herein and other good and valuable consideration, the receipt
sufficiency of which are hereby acknowledged, the Parties hereby agree as
follows:

 

ARTICLE I

SCOPE OF SERVICES

 

1.1           (i) The Parties hereby agree that ServiceCo shall assist with the
evaluation and selection of Client’s investment advisors and monitor the
performance, compliance and risk profile of the Client’s investment portfolio.

 

(ii)
At any time and from time to time, the Client may request from ServiceCo, and
ServiceCo may elect to provide to the Client, certain additional investment
advisory services, on a consulting and/or administrative support basis.

 

All
services set forth above (the “Services”) and provided hereunder shall be
governed by and subject to such guidelines, procedures, objectives and
limitations as may be established and approved from time to time by the Board
of Directors (the “Board”) of the Client (the “Guidelines”), a copy of which
Guidelines, effective as of May 1, 2000, as may be amended from time to time,
is attached as Exhibit A hereto.

 

1

 

1.2           The Services may be changed from time to time by an amendment, that has
been approved, in writing, by the parties to this Agreement, provided such
amendment is in accordance with the Guidelines.

 

1.3           The Client and ServiceCo hereby acknowledge that all employees
rendering Services to the Client pursuant to this Agreement (each an
“Employee”) shall remain at all times an employee of ServiceCo.  In the performance of Services, the Employee
shall report to and be under the sole control of ServiceCo, which shall have
full authority to direct his or her activities in the performance of the
Services provided hereunder.  Client
shall exercise no control over the Employee in the performance of his or her
activities or of the Services.  Subject
to the Guidelines and the ultimate authority of the Board, ServiceCo will
retain final decision-making authority in all matters in respect of which
ServiceCo provides Services under this Agreement.

 

1.4           ServiceCo shall perform the Services as an independent contractor.  Nothing contained herein shall be construed
to create the relation of partner, employer or employee or of principal and
agent between the Client and ServiceCo. 
ServiceCo shall have no authority to negotiate or transact business on
behalf of Client without the express written consent of Client.

 

1.5           ServiceCo represents that it possesses and will maintain the
appropriate licenses and authority to perform any Services required and
requested hereunder.  ServiceCo shall
discharge its duties hereunder at all times in good faith and with that degree
of prudence, diligence, care and skill which a prudent person rendering
services as an institutional investment adviser would exercise under similar
circumstances.

 

ARTICLE II

COMPENSATION FOR SERVICES

 

2.1           For the services rendered by ServiceCo to Client pursuant to Section
1.1 (i) of this Agreement, Client shall pay to ServiceCo a management fee of
1.5bps (0.015%) based on the average of the market value of the assets under
advisement as reported in the quarterly report to the Investment Committee of
the Client.  For the services rendered
by ServiceCo to Client pursuant to Section l.l(ii) of this Agreement, the
parties shall agree upon a service fee prior to the provision of such services,
which fee shall be subject to the prior approval or non-disapproval of the New
York Superintendent of Insurance (“Superintendent”).  ServiceCo will provide client with a bill for services within
thirty (30) days after the end of each three-month period.  Client will pay ServiceCo within fifteen
(15) days of receipt of the bill.

 

2.2           ServiceCo and Client acknowledge and agree that Client shall have the
right to offset any amounts due and owing to ServiceCo from Client under this
Agreement against other amounts due and owing by Client to ServiceCo.

 

2

 

ARTICLE III

BOOKS AND RECORDS

 

3.1           The ownership of all books, supplies, records or other materials
(collectively, the “Records”) furnished by or on behalf of the Client relating
to any of the services provided to the Client shall be vested in, and remain
the property of the Client, and all shall be delivered to the Client
immediately upon the termination or cancellation of this Agreement or at any
time upon the request of the Client. 
All of the Records shall be kept in accordance with applicable laws and
regulations, including, but not limited to, New York Insurance Department
Regulation 152.

 

3.2           The Client shall have the right, from time to time, to conduct reviews,
inspections and/or audits of any or all of the Records and documents related to
its business under this Agreement, during ordinary business hours upon
reasonable notice, and ServiceCo shall cooperate and cause its employees,
agents or advisors to cooperate with the Client conducting such reviews,
inspections and audits.  In addition,
ServiceCo will provide any materials, reasonably related to the investment
advisory services provided hereunder, as may be reasonably requested in writing
by the directors or officers of the Client or as may be required by any
governmental agency with jurisdiction thereunder.

 

ARTICLE IV

TERM AND TERMINATION

 

4.1           This Agreement is effective as of the date first set forth above, and
shall remain in effect up to and including December 31, 2002 (the “Initial
Term”), unless earlier terminated pursuant to Clauses 4.2 and 4.3.  At the end of the Initial Term, or any
subsequent term thereof, this Agreement shall automatically be renewed each
year for a period of one year.

 

4.2           Either party may elect to terminate this Agreement at any time and for
any reason on sixty (60) days’ prior written notice to the other Party.

 

4.3           Notwithstanding any other provision of this Agreement, either Party may
terminate this Agreement immediately upon written notice to the other Party in
the event that the other Party (i) becomes insolvent or bankrupt, or admits in
writing its inability to pay its debts as they become due, or makes an
assignment for the benefit of creditors, or applies for or consents to the
appointment of a trustee or receiver for the major part of its property, (ii)
becomes the subject of bankruptcy, reorganization, rearrangement, insolvency or
liquidation proceedings, or other proceedings for relief of creditors and such
proceedings are not stayed or discharged within ninety (90) days after being
commenced; (iii) is acquired by another entity, unless such acquiring entity is
wholly owned, directly or indirectly, by ACE Limited; (iv) fails to obtain or
maintain any licenses, permits or other qualifications that are required by law
to fulfill its obligations under this Agreement and such failure remains
uncured after fifteen (15) days, or (v) commits abandonment, fraud or willful
misconduct with the provision of services under this Agreement.

 

3

 

4.4           Termination of this Agreement shall not relieve either Party of its
obligations under this Agreement up to the effective date of termination.  Following any termination, the Parties will
cooperate with each other to provide a smooth transition of services and to
satisfy reasonable requests for information concerning actions taken during the
term.

 

ARTICLE V

INDEMNIFICATION

 

5.1           Client agrees to hold harmless and indemnify ServiceCo and each of its
officers, directors, employees, shareholders, independent contractors and
agents (collectively the “ServiceCo Indemnitees”) from and against any and all
claims, suits, causes of action, demands, losses, damages, fines, penalties,
punitive damages, costs or expenses, including attorneys’ fees, or other
liabilities of any nature (“Damages”) based on, related to or in connection
with (i) any action taken or omitted by any of the ServiceCo Indemnitees solely
at the direction of Client; (ii) Damages incurred by the ServiceCo Indemnitees
as a result solely of any negligent, willful or intentional acts, errors or
omissions of Client or its officers, directors, employees or agents in the
performance or breach of this Agreement, and/or (iii) any litigation,
arbitration or other proceeding related to this Agreement and involving any of
the ServiceCo Indemnities in which the plaintiff, petitioner or other claimant
does not allege any fault or wrongdoing on the part of the ServiceCo
Indemnities or any of them.

 

5.2           ServiceCo agrees to hold harmless and indemnify Client and Client’s
officers, directors, employees, shareholders, independent contractors and
agents (collectively the “Client Indemnitees”) from and against any and all
Damages based on, related to or in connection with (i) any action taken or
omitted by any of the Client Indemnitees solely at the direction of ServiceCo,
(ii) damages incurred by the Client Indemnities as a result solely of any
negligent, willful or intentional acts, errors or omissions of ServiceCo or its
directors, employees or agents in the performance or breach of this Agreement;
and/or (iii) any litigation, arbitration or other proceeding relating to this
Agreement and involving any of the Client Indemnitees in which the plaintiff,
petitioner or other claimant does not allege any fault or wrongdoing on the
part of the Client Indemnities or any of them; and/or (iv) based on or related
to or in connection with any obligation to withhold and pay over any taxes
based on wages, salary or other compensation of employees of ServiceCo.

 

5.3           The terms of this Article shall survive the termination of this
Agreement.

 

ARTICLE VI

ARBITRATION

 

6.1           All disputes between the Parties relating to or in connection with this
Agreement, including but not limited to its interpretation, performance or
breach, shall be submitted to binding arbitration as described in this Article
and shall be in accordance with the Commercial

 

4

 

Arbitration Rules of the
American Arbitration Association and the Expedited Procedures thereof, except
as expressly set forth in this Article VI.

 

6.2           The Party initiating arbitration shall provide notice of its demand for
arbitration, which shall include appointment of an arbitrator.  The other Party shall have thirty (30) days
from receipt of such demand for arbitration in which to appoint its arbitrator.  If the responding Party fails to appoint its
arbitrator within such thirty (30) days, the initiating Party shall he entitled
to choose the second arbitrator.  Together
the two arbitrators shall agree upon a neutral umpire.  If no such agreement is reached within
thirty (30) days of the appointment of the second arbitrator, the umpire shall
be chosen by drawing lots.  The
arbitrators and the umpire (collectively the “Panel”) shall be active or
retired insurance professionals of disinterested insurance-related companies
not under the control of either Party or their respective parent companies.

 

6.3           Each Party shall submit its case to the Panel 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 Panel.

 

6.4           The Panel shall make its decision with regard to the custom and usage
of the insurance business.  The Panel
shall be relieved of all judicial formalities and the strict rules of law.  The written decision of a majority of the
Panel shall be rendered within sixty (60) days following the termination of the
Panel’s hearings, unless the Parties consent to an extension.  Such majority decision of the Panel 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 Panel in any
court of proper jurisdiction.

 

6.5           Each Party shall bear the fees and expenses of the arbitrator selected
by or on its behalf, and the costs of arbitration, including the fees of the
umpire, shall be divided equally between the two Parties.  The Panel shall have the authority to award
to the prevailing Party its costs and attorneys’ fees.

 

6.6           Any arbitration proceeding shall take place in New York.

 

ARTICLE VII

CONFIDENTIALITY

 

7.1           ServiceCo agrees that, except with the consent of the Client, it will
not disclose or use for any purpose outside the scope of this Agreement
proprietary or confidential information provided to it by the Client unless and
until such information (i) becomes public knowledge other than through
disclosure by ServiceCo or (ii) is subpoenaed or otherwise required by an
authorized governmental authority.  In
the event that ServiceCo, upon the advice of counsel, determines that it is
required to provide any such information, it shall promptly provide notice to
the Client.

 

5

 

7.2           ServiceCo’s obligations under this Article shall survive the
termination of this Agreement.

 

ARTICLE VIII

NOTICES

 

8.1           Any notice required or permitted under this Agreement shall be in
writing and shall be deemed to have been given (i) when received if given in
person or by courier or a courier service, (ii) on the date of transmission if
sent by telex, facsimile or other wire transmission (receipt confirmed) or
(iii) five (5) business days after being posted by certified or registered
mail, postage prepaid:

 

8.2           If to ServiceCo, addressed as follows:

 

ACE
Asset Management Inc.

Attention:
General Counsel

1325
Avenue of the Americas

18th
Floor

New
York, NY 10019

Fax:  (212) 581-3268

 

8.3           If to Client, addressed as follows:

 

ACE
Capital Title Reinsurance Company

Attention:
Norie Bregman, Esq.

1325
Avenue of the Americas

New
York, New York. 10019

Fax:
(212) 581-3268

 

ARTICLE IX

MISCELLANEOUS PROVISIONS

 

9.1           The Parties agree that this Agreement constitutes the entire
understanding and agreement among them and supersedes any prior or
contemporaneous written or oral agreements, undertakings, communications or
representations among them concerning the subject matter of this Agreement.

 

9.2           If any separable provision hereof shall be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision hereof.

 

9.3           No terms, conditions, or other provisions of this Agreement may be
waived, modified, amended, or otherwise changed except in a writing signed by
the Parties which expressly states that it is an amendment or waiver of terms
of this Agreement.  Any such writing

 

6

 

must also specify with
particularity which term or terms of this Agreement are so amended or
waived.  Any such writing shall not be
construed as a general waiver, abandonment, modification or amendment of any
terms, conditions or provisions of this Agreement, but rather strictly
construed as an amendment or waiver of only those terms or conditions stated
therein.  Any such writing shall be subject
to the prior approval or non-disapproval of the Superintendent.

 

9.4           No Party may assign its rights or obligations under this Agreement
without the prior written consent of the other Patty.

 

9.5           The rights, duties and obligations under this Agreement shall be
binding upon inure to the benefit of the Parties’ respective successors and
assigns.

 

9.6           This Agreement shall be governed and construed in accordance with the
laws of New York without giving effect to the principles of conflicts of laws
thereof.

 

9.7           This Agreement may be executed in counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.

 

9.8           The headings in this Agreement are for reference purposes only, and
shall not affect in any way the meaning or interpretation of this Agreement.

 

7

 

IN
WITNESS WHEREOF, the Parties have caused this Agreement to be executed and
delivered as of the date first above written.

 

 

	
   

  	
  ACE CAPITAL TITLE REINSURANCE

  COMPANY

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Norie R. Bregman

  	
   

  
	
   

  	
  Name:

  	
  Norie R. Bregman

  	
   

  
	
   

  	
  Title:

  	
  [ILLEGIBLE]

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ACE ASSET MANAGEMENT INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ [ILLEGIBLE]

  	
   

  
	
   

  	
  Name:

  	
  [ILLEGIBLE]

  	
   

  
	
   

  	
  Title:

  	
  COO

  	
   

  
						

 

8

 

Exhibit
A

 

Statement
of Investment Policy and Guidelines

 

9

 

	
  

  	
   

  
	
   

  
	
  ACE capital title reinsurance company

  statement of investment
  policy and guidelines

  
	
  ace financial

  services

  	
  dated
  as of september 1, 2003

  

 

i.              investment
guidelines and objectives

 

The investment portfolio (the “Portfolio”) of ACE
Capital Title Reinsurance Company (the “Company”) shall be invested based on
the following objectives and guidelines. 
The Portfolio will consist of a fixed income portfolio (the “Fixed
Income Portfolio”) and an equity portfolio (the “Equity Portfolio”).

 

The following objectives are applicable to the
entire Portfolio:

 

•      Adhere to high fiduciary standards.

•      Maximize after-tax total return while
meeting GAAP revenue projections.

•      Maintain an asset mix consistent with a AA
claims-paying rated (re)insurance company.

•      Maintain liquidity and credit quality
consistent with a AA claims-paying rated (re)insurance company.

•      Maintain sufficient liquidity to cover an
unexpected stress in the liability portfolio.

•      Maintain compliance with all applicable
insurance regulatory and rating agency requirements.

•      Minimize principal risk through risk
management controls.

 

Conceptually, the Portfolio will be divided into
two segments; a reserve segment consisting of assets supporting unearned
premium, loss and profit commission reserves and an invested capital segment.

 

The following additional objectives are applicable
to the reserve segment of the Portfolio:

 

•      Meet asset/liability management objectives
and constraints for each risk.

•      Earn a return at or above the cost of
carrying the liability.

•      Minimize currency risk and exposure.

•      Hedge a specific liability exposure or meet the
underlying needs of a(n) (re)insurance agreement.  Under such conditions a separately managed investment portfolio
may be formed.

 

The following additional objectives are applicable
to the invested capital segment of the Portfolio:

 

•      Limited to high-quality, liquid fixed income
securities.

•      Manage to a duration that meets the
Company’s overall risk/return profile and overall asset/liability management
objectives.

 

II.            authorized
investments – fixed income portfolio

 

Permitted fixed income investments are US Treasury
obligations, US Government agency securities, mortgage-backed securities (including
pass-through securities and collateralized mortgage obligations), commercial
mortgage-backed securities, domestic corporate obligations (including publicly
issued securities and securities offered pursuant to SEC Rule 144A),
obligations of foreign corporations and foreign governments (including US
dollar denominated yankee and eurodollar securities), asset backed securities
(including but not limited to credit card, automobile and home equity backed
securities), municipal bonds (including general obligation bonds, revenue or
special obligation bonds, industrial development bonds, variable rate demand
notes and tax anticipation notes), tax-exempt securities such as “private
activity bonds”, preferred stocks, commercial paper, repurchase agreements, bank
certificates of deposits, bankers’ acceptances, money market funds and time
deposits.

 

One of the ACE Group of Insurance
& Reinsurance Companies

 

 

III.           investment
guideline – fixed income portfolio exposure limits

 

Taxable
Securities

 

The maximum allocation
to each taxable fixed income sector is based on the total market value of the
Fixed Income Portfolio and will be measured at the time of purchase of any
security:

 

	
  •      Securities issued or guaranteed by the US
  Government and its Agencies

  	
   

  	
  100%

  
	
   

  	
   

  	
   

  
	
  •      Securities issued by corporate issuers(1)

  	
   

  	
  50%

  
	
   

  	
   

  	
   

  
	
  •      Mortgage-Backed Securities (including
  Commercial MBS)

  	
   

  	
  60%

  
	
   

  	
   

  	
   

  
	
  •      Non-Agency
  Mortgage Backed Securities (including Commercial MBS)

  	
   

  	
  40%

  
	
   

  	
   

  	
   

  
	
  •      Commercial Mortgage Backed Securities

  	
   

  	
  20%

  
	
   

  	
   

  	
   

  
	
  •      Asset-Backed Securities (other than MBS)

  	
   

  	
  25%

  
	
   

  	
   

  	
   

  
	
  •      US Dollar denominated securities issued or
  guaranteed by the Government of Canada, the Government of any Canadian
  Province or by any Agency thereof

  	
   

  	
  10%

  
	
   

  	
   

  	
   

  
	
  •      US Dollar denominated securities issued or
  guaranteed by a Non-Canadian Foreign Government

  	
   

  	
  10%

  
	
   

  	
   

  	
   

  
	
  •      Securities issued by any single corporate
  issuer(2)

  	
   

  	
  The greater

  of 3% or $1

  million

  

 

Tax-Exempt Securities

 

The target allocation to tax-exempt securities will
primarily be based on the tax position of the Company and the optimal mix of
tax and tax-exempt securities as determined by management of the Company.  The Company will notify the investment
manager in writing (e-mail will be sufficient) at least annually of the target
percentage of tax-exempt securities.  If
the Company fails to so notify the investment manager in any year, the target
percentage of tax-exempt securities for such year will remain the same as the
target percentage of tax-exempt securities for the previous year.  Tax-exempt securities issued by any single
issuer may not, at the time of purchase, exceed the greater of 3% of the total
market value of the Fixed Income Portfolio or $1 million.

 

IV.           investment
guideline – fixed income portfolio credit quality

 

Portfolio Credit Quality:  Overall
weighted average portfolio credit quality must be rated at a minimum in the AA
category as measured by the lower rating of two nationally recognized

 

(1)   Corporate issuers exclude special purpose vehicles (howsoever
described).

(2)   Securities issued or guaranteed by the U.S. Government or its  agencies are exempt from this provision.

 

2

 

statistical
rating organizations (“NRSROs”).  A
minimum of 33% of the market value of the Fixed Income Portfolio must be
invested in securities rated at a minimum in the AA category by two NRSROs.

 

Security
Credit Quality: Investments in securities rated “BBB” are limited to 5% of the
market value of the Fixed Income Portfolio at the time of purchase.  Investment in securities rated lower than
“BBB” by two NRSROs are limited to 5% of the market value of the Fixed Income
Portfolio at time of purchase. 
Investments in securities rated “BBB” or lower plus investments in
equities may not in the aggregate exceed 10% of the market value of the
Portfolio.  In the event of any
downgrade below the “BB” category, the investment manager must contact the
Chief Operating Officer or other designated officer of the Company within a
reasonable time to evaluate the need to take action.

 

The
Company shall determine the allocation of the assets of the Portfolio to
securities rated “BB” or lower.  The
Company will notify the investment manager in writing (e-mail will be
sufficient) at least annually of the maximum allocation to non-investment grade
securities.  If the Company fails to so
notify the investment manager in any year, the maximum allocation for such year
will remain the same as the allocation for the previous year.

 

V.            investment guideline – fixed income portfolio
duration

 

The
management of the Company will notify the investment manager in writing (e-mail
will be sufficient) at least annually, of the target duration(3) of the Fixed
Income Portfolio.  The investment
manager may shift the duration of the Fixed Income Portfolio based on market
conditions but may not exceed a variance of plus/minus 1.00 year from the
target effective duration unless otherwise notified in writing (e-mail will be
sufficient) by the Company.

 

VI.           investment
guideline  – short-term investments

 

Subject to the following limitations, the Fixed
Income Portfolio may be invested in cash, cash equivalents and other securities
with an effective maturity (as determined by the investment manager) of less
than one year and money market funds.

 

The
Fixed Income Portfolio may be invested in commercial paper rated at the time of
investment either A-1 by S&P or P-1 by Moody’s.

 

The
Fixed Income Portfolio may be invested in short-term municipal securities rated
at the time of investment either SP-1 by S&P or MIG1 by Moody’s.

 

The
Fixed Income Portfolio may be invested in “First Tier” securities issued by
money market funds that seek to maintain a stable net asset value. “First Tier”
securities are securities that are rated (or that have been issued by an issuer
that is rated with respect to a class of short-term debt obligations, or any
security within that class, comparable in priority and quality with such
securities) in the highest short-term rating category by at least two
NRSROs.  A single fund may not comprise
more than 5% of the Portfolio.

 

(3)   Calculation of effective
duration to be defined by the Investment Advisor in its sole discretion using
current industry practices.

 

3

 

VII.         authorized
investments and investment guidelines – equity portfolio

 

Permitted equity investments are common stocks,
convertible preferred stocks and convertible bonds.  All equity securities must be listed on a US stock exchange, and
shall include American Depository Receipts (ADR’s).

 

The Company shall determine the percentage of
assets of the Portfolio to be invested in equity securities and shall determine
the equity strategy to be undertaken by the investment manager.  The Company will notify the investment
manager in writing (e-mail will be sufficient) at least annually of the equity
strategy and target percentage of assets of the Portfolio to be invested in
equity securities.  If the Company fails
to so notify the investment manager in any year, the strategy and target
percentage for such year will remain the same as the strategy and target
percentage for the previous year.

 

The total market value of common stocks,
convertible preferred stocks and convertible bonds issued by any one
corporation, at the time of the investment, may not exceed 1% of the market
value of the Portfolio.

 

The maximum allocation of equity securities to any
industry group, as such groups are determined by the investment manager in its
sole discretion, at the time of investment, may not exceed 10% of the market
value of the Portfolio.

 

VIII.        investment guidelines – capital gain and LOSS
constraints

 

No investment will be sold during a fiscal quarter
without explicit direction of the Chief Operating Officer or other designated
officer if such sale, together with all prior sales and redemptions during the
same period, produces a net capital gain or loss on the Portfolio in excess of
an amount established by the Chief Operating Officer or other designated
officer at the beginning of such fiscal quarter.  The Company will notify the investment manager in writing (e-mail
will be sufficient) at the beginning of each fiscal quarter, of the level of
capital gain or loss that the investment manager may take without further
approval from the Company.

 

IX.           currency
exposure

 

The Company shall determine the allocation of its
assets to non-United States dollar denominated securities and the appropriate
level of currency exposure.  Currency
exposure is to be limited to that exposure necessary to hedge loss reserves,
unearned premium reserves and profit commissions.  Speculation of non-US dollar denominated currencies is strictly
prohibited.  Specific allocations to
sectors and issuers must be made consistent with the diversification and credit
quality of US dollar securities.  The Company
will notify the investment manager in writing (e-mail will be sufficient) at
least annually of the currency exposure and allocations.

 

X.            prohibited
securities

 

Unless agreed to in advance and in writing (e-mail
will be sufficient) by the Company, the investment manager will not invest in
the following types of securities:

 

1.             Direct investments
in mortgage loans, except for mortgage backed securities issued by an agency of
the US Government or a US domiciled corporation.

 

4

 

2.             Interest only, principal only and inverse
floating rate securities.

3.             Direct investments in real estate.

4.             Private placement
investments.  This includes but is not
limited to securities in which a liquid market is not readily available.

 

XI.           securities
lending

 

Securities lending is prohibited.

 

XII.         performance
benchmarks

 

A Performance Benchmark Index will be maintained
for the Fixed Income Portfolio.  The
index will be determined based upon the allowable asset classes, weightings of
selected asset classes and the targeted effective duration of the
portfolio.  The weightings of the index
will be revised from time to time to reflect changes in the targeted structure
of the Fixed Income Portfolio.

 

A Performance Benchmark Index will be maintained
for the Equity Portfolio.  The Company
will notify the investment manager in writing (e-mail will be sufficient) at
least annually of the Performance Benchmark Index for the Equity Portfolio.  If the Company fails to so notify the
investment manager in any year, the Performance Benchmark Index for the Equity
Portfolio for such year will remain the same as the Performance Benchmark Index
for the Equity Portfolio for the previous year.

 

XIII.        EXCEPTIONS

 

The investment manager will not be held responsible
for any breaches of the foregoing investment guidelines to the extent such
breaches are due to conditions outside the investment manager’s control, such
as market movements or changes to the Portfolio made by the Company.  However, the investment manager must contact
the Chief Operating Officer or other designated officer of the Company within a
reasonable time after becoming aware of any breach to evaluate the need to take
action to remedy such breach.

 

5

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