Document:

exv10w1

 

Exhibit 10.1

INVESTMENT AGREEMENT

THIS INVESTMENT AGREEMENT (this “Agreement”), dated as of January 8, 2004, is made by and
between HAMBLIN WATSA INVESTMENT COUNSEL LTD. (“HW”), FAIRFAX FINANCIAL HOLDINGS LIMITED (“FFH”)
and THE NORTH RIVER INSURANCE COMPANY. As used in this Agreement, “we”, “us” and “our” shall refer
to THE NORTH RIVER INSURANCE COMPANY, and “you” and “your” shall refer to HW and FFH jointly.

In consideration of the mutual promised contained herein, the parties agree as follows:

Investment Management

	1.  	We authorize HW to manage on a continuous basis an investment account (the “Account”) on
our behalf on the terms and conditions set out in this Agreement.
	 
	2.  	HW shall manage the Account in accordance with the investment objectives from time to time
communicated in writing by us to HW, subject at all times to the investment guidelines. Until
mutually agreed otherwise, the investment guidelines shall be as set out in the investment
guidelines attached hereto as Schedule A. The investment guidelines shall at all
times be in compliance with the investment statutes of New Jersey.
	 
	3.  	Subject to Section 2 above, HW shall manage the Account in our name and HW is hereby
authorized to take such action for the Account as HW, in your sole discretion, may consider
appropriate for the operation of the Account including, without limitation, the power to buy,
sell and exchange and otherwise deal in all securities which may at any time form part of the
Account and to invest, in securities selected by HW, all funds contained in, paid to or
derived from the operation of, the Account, except to the extent that HW otherwise instructed
in writing by us.

	   	The services to be performed by HW shall be performed only by officers and employees who have
appropriate qualifications. HW agrees to provide to us such information as we may reasonably
request concerning the education and experience of any individuals HW proposes to assign to the
performance of such services. Also, upon our request, HW agrees to provide a list of individual
names and a brief description of their responsibilities. HW agrees to promptly notify us of any
changes in HW’s staff involving individuals that perform material functions on our Account.

	4.  	The securities and funds of the Account have been deposited with and shall be held by The
Bank of New York (or with such other custodian as is chosen by you from time to time and is
approved by the New Jersey Department of Banking and Insurance (the “Custodian”) pursuant to
an agreement which we have entered into with the Custodian. We have instructed the Custodian
to promptly follow your directions at all times and to provide HW with all such information
concerning the Account as HW may from time to time require in connection with your management
of the Account, including without limitation, copies of relevant monthly statements.

 

 

	5.  	Provided HW has used reasonable care and diligence, HW shall not be liable for any damage,
loss, cost or other expense sustained in the operation of the Account or relating in any
manner to the carrying out of your duties under this Agreement. Notwithstanding the foregoing, any losses suffered as a
result of an error in implementing investment decisions caused by HW’s negligence or
dishonesty are to be fully reimbursed by HW. To the extent any errors occur in implementing
investment decisions, HW shall immediately notify us in writing of all relevant facts. HW
shall bear full responsibility for any such errors to the extent such errors result from HW’s
negligence or dishonesty and shall be liable for all financial injury to us resulting
therefrom. We agree that HW shall be entitled to assume that any information communicated by
us or the Custodian to HW is accurate and complete, and that in making investment decisions
HW shall be entitled to rely on publicly available information or on information which HW
believes to have been provided to you in good faith, in both cases barring actual knowledge
by HW to the contrary.

	6.  	HW will provide us with a monthly statement and a quarterly presentation respecting the
securities held in the Account.
	 
	7.  	HW shall deliver in writing to us, as soon as practicable after implementation of an
investment decision, HW’s confirmation of such implementation to enable us to ascertain that
such implementation has been effected pursuant to the guidelines and procedures of our Board
of Directors or a duly authorized committee thereof. Otherwise, the nature and timing of HW’s
reporting to us on the status of the Account shall be at least quarterly, within 45 days after
the end of each quarter.
	 
	8.  	We acknowledge receipt of a copy of policies that HW has established to ensure that
investment opportunities are allocated fairly among HW’s discretionary investment accounts and
we confirm that these policies, until revised by HW, will apply to the account.

Investment Administration

	9.  	We authorize FFH to provide, and by signing below FFH agrees to provide, the investment
administration services set forth in Schedule B attached hereto, on our behalf and on
the terms and conditions set out in this Agreement, subject to such guidelines, procedures and
limitations as may be duly established and approved by our Board of Directors or a duly
authorized committee of said Board.

General

	10.	You shall be entitled to such fees for the services provided hereunder as FFH may specify
from time to time. Attached hereto as Schedule C as is a copy of the current fee
schedule and FFH agrees to give us thirty (30) days prior written notice of any change in such
schedule, which change shall require the approval of New Jersey Department of Banking and
Insurance. Such fees shall be the exclusive

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	  	fees and charges payable (excluding third party disbursements reasonably incurred) for the services
provided hereunder. As regards third party services, you will charge us only the amount of
your actual disbursements paid to arm’s length third parties for such services, and HW will
select as agents, brokers or dealers executing orders or acting on the purchase or sale of
portfolio securities only agents, brokers or dealers operating in the United States. Such
disbursements to third parties shall be reported to us quarterly, provided, that we shall pay
third parties such disbursements directly if requested to do so by you. We will pay you all
fees and disbursements hereunder not later than 20 days after receiving your quarterly
report.

	   	All fees will be paid to FFH and FFH shall reimburse HW for its investment management services.
HW acknowledges that it has no right under this agreement to receive fees directly from us.

	11.	Either you or FFH and HW may terminate this Agreement without penalty by giving the other
party at least thirty (30) days advance written notice of its desire to terminate the same.
In the event that the day upon which this Agreement is so terminated is a day other than the
first day of a calendar quarter, the fees payable in accordance with paragraph 6 for such
quarter shall be pro-rated and shall be determined having regard to the market value of the
Account based upon the most recent financial report which has been delivered to you by the
Custodian. No termination or addition, other than a change to Schedule A, shall be effective
unless such termination or addition is (i) filed with the New Jersey Department of Banking and
Insurance (“NJDBI”) at least 30 days prior to the proposed effective date, (ii) not
disapproved by the NJDBI, (iii) made in writing, and (iv) signed by the parties hereto.
	 
	12.	All notices and communications to each party to this Agreement shall be in writing and shall
be deemed to have been sufficiently given if signed by or on behalf of the party giving the
notice and either delivered personally or sent by prepaid registered mail addressed to such
party at the address of such party indicated herein. Any such notice or communication shall be
deemed to have been received by any such party if delivered, on the date of delivery, or if sent
by prepaid registered mail on the fourth business day following mailing thereof to the party to
whom addressed. For such purpose, no day during which there shall be a strike or other
occurrence interfering with normal mail service shall be considered a business day.

	13.	This Agreement shall enure to the benefit of and shall be binding upon the parties hereto and
their respective successors. This Agreement may not be assigned by any party.
	 
	14.	We acknowledge that we have read and understood this Agreement and that we have received a
copy of the same. You and we each acknowledge that the terms of this Agreement are the
exclusive and conclusive terms of our mutual agreement with regard to the subject matter
hereof.

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	15.	Any dispute or difference arising with reference to the interpretation or effect of this
Agreement, or any part thereof, shall be referred to a Board of Arbitration (the “Board”) of
two (2) arbitrators and an umpire. Such dispute and the Board shall be governed by the rules of the American
Arbitration Association.

	  	The members of the Board shall be active or retired disinterested officers of insurance or
reinsurance companies.

	  	One arbitrator shall be chosen by the party initiating the arbitration and designated in the
letter requesting arbitration. The other party shall respond, within thirty (30) days,
advising of its arbitrator. The umpire shall thereafter be chosen by the two (2)
arbitrators. In the event either party fails to designate its arbitrator as indicated above,
the other party is hereby authorized and empowered to name the second arbitrator, and the
party which failed to designate its arbitrator shall be deemed to have waived its rights to
designate an arbitrator and shall not be aggrieved thereby. The two (2) arbitrators shall
then have thirty (30) days within which to choose an umpire. If they are unable to do so
within thirty (30) days following their appointment, the umpire shall be chosen by the
manager of the American Arbitration Association and such umpire shall be a person who is an
active or retired and disinterested officer of an insurance or reinsurance company. In the
event of the death, disability or incapacity of an arbitrator or the umpire, a replacement
shall be named pursuant to the process which resulted in the selection of the arbitrator or
umpire to be replaced.
	 
	  	Each party shall submit its case to the Board 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 Board.
	 
	  	Sittings of the Board shall take place in Morristown, New Jersey. The Board shall make its
decision with regard to the custom and usage of the insurance and reinsurance business. The
Board is released from all judicial formalities and may abstain from the strict rules of law.
The written decision of a majority of the Board shall be rendered within sixty (60) days
following the termination of the Board’s hearings, unless the parties consent to an
extension. Such majority decision of the Board 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 Board in any court of proper jurisdiction.
	 
	  	Each party shall bear the fees and expenses of the arbitrator selected by or on its behalf,
and the parties shall bear the fees and expenses of the umpire as determined by the party, as
above provided, the expenses of the arbitrators, the umpire and the arbitration shall be
equally divided between the two parties. The arbitrators may allocate any and all of the
costs and fees against the losing party upon a determination that the position of the losing
party was, in whole or in part, groundless, specious or otherwise without merit or asserted
primarily for the purposes of obfuscation or delay.

	16.	Additional terms and conditions applicable to this Agreement are set forth in Schedule
D. The provisions in Schedule A, Schedule B, Schedule C and
Schedule D attached hereto are hereby incorporated into, and form part of, this
Agreement.
	 
	17.	This Agreement, including the schedules attached hereto and made a part hereof, may only be
amended by written agreement signed by the parties and approved by the New Jersey Department
of Banking and Insurance; provided, however, that any amendment to Schedule A may
become effective without the prior approval of the New Jersey Department of Banking and
Insurance, provided that such amendment shall be filed with the New Jersey Department of
Banking and Insurance not later than its effective date and shall, if disapproved by the New
Jersey Department of Banking and Insurance, be void as of the date of such disapproval.

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IN WITNESS WHEREOF, this Agreement is hereby executed by duly authorized officers of the parties
hereto as of the date first written above.

	 	 	 	 	 
	 	 	THE NORTH RIVER INSURANCE COMPANY
	 
	 	 	 	 
	

	 	BY:
	 	/s/ Howard DeBare
	

	 	 	 	 
	

	 	 	 	AUTHORIZED SIGNATURE
	 
	 	 	 	 
	 
	 	 	 	 
	

	 	 	 	Howard DeBare
	

	 	 	 	 
	

	 	 	 	NAME OF AUTHORIZED SIGNATORY
	 
	 	 	 	 
	 
	 	 	 	 
	

	 	BY:
	 	/s/ Valerie J. Gasparik
	

	 	 	 	 
	

	 	 	 	AUTHORIZED SIGNATURE
	 
	 	 	 	 
	

	 	 	 	Valerie J. Gasparik
	

	 	 	 	 
	

	 	 	 	NAME OF AUTHORIZED SIGNATORY
	 
	 	 	 	 
	 
	 	 	 	 
	 	 	HAMBLIN WATSA INVESTMENT COUNSEL LTD.
	 
	 	 	 	 
	

	 	BY:
	 	/s/ F. Brian Bradstreet
	

	 	 	 	 
	

	 	 	 	AUTHORIZED SIGNATURE
	 
	 	 	 	 
	

	 	 	 	F. Brian Bradstreet
	

	 	 	 	 
	

	 	 	 	NAME OF AUTHORIZED SIGNATORY
	 
	 	 	 	 
	 
	 	 	 	 
	 	 	FAIRFAX FINANCIAL HOLDINGS LIMITED
	 
	 	 	 	 
	

	 	BY:
	 	/s/ Bradley P. Martin
	

	 	 	 	 
	

	 	 	 	AUTHORIZED SIGNATURE
	 
	 	 	 	 
	

	 	 	 	Bradley P. Martin
	

	 	 	 	 
	

	 	 	 	NAME OF AUTHORIZED SIGNATORY

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SCHEDULE A

INVESTMENT OBJECTIVES

	1.  	Invest for the long term always providing sufficient liquidity for the payment of claims and
other policy obligations.

	2.  	Ensure preservation of invested capital for policy holder protection.

	3.  	Invest in accordance with insurance regulatory guidelines.

INVESTMENT GUIDELINES

	1.  	Approach

	   	All investments are to be made using the value approach by investing in companies 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 equities, no attempt is made to forecast the economy or the stock market. The
manager will attempt to identify financially sound companies 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 bargain hunting 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).
	 
	   	As regards bonds, the approach is similar. No attempt is made to forecast the economy or
interest rates. The manager will attempt to purchase attractively priced bonds offering
yields better than Treasury bonds with maturities of 10 years or less that are of sound
quality, i.e. whose obligations are expected to be fully met as they come due. We do not
regard rating services as being/and unimpeachable source for assessing credit quality any
more than we would regard a broker’s recommendation on a stock as being necessarily correct.
In any form of investment research and evaluation, there is no substitute for the reasoned
judgment of the investment committee and its managers.

	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 operating company in accordance with the approved list
for investments as determined from time to time by the Investment Committee. These
securities will be managed by the Insurance 

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	   	Company as part of the Treasury function and
currently are restricted primarily to Treasury and Agency securities of the U.S. government.

	3.  	Regulatory

	   	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 minimize 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.

STRATEGY

	1.  	Maintain Adequate Liquidity

	   	A detailed review of portfolio liquidity is undertaken on a monthly basis. This liquidity
analysis determines how much of each portfolio can be converted to cash in a given time
period. Each company determines its liquidity requirements and the liquidity of the
portfolio must match the requirement.

	2.  	Asset Allocation

	   	The asset allocation will be determined by the Portfolio Manager and will include short term
investments that will generate appropriate cash flows and long term investments in stocks,
bonds, debentures and money market investments, both domestic and foreign. The allocation
will be in compliance with regulatory guidelines and should meet policy liabilities.

	3.  	Foreign Exchange Risk

	   	Any foreign currency investments and exposures would normally be hedged via the use of
forward foreign exchange contracts and/or currency options or preferably by a natural hedge
with foreign pay liabilities of the Insurance Company. Unhedged foreign investments will be
limited to 10% of invested assets at cost. Unhedged 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 faxed income securities
with maturities less than ten years. While there are no specific duration/maturity limits
for convertible securities, these issues are included in the total fixed income duration/term
measure. Maximum fixed income portfolio duration is limited to the equivalent of a ten year
term to maturity Treasury security.

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INVESTMENT POLICY MIX

The Investment Committee has established the following exposure ranges for various asset mix
classes:

	 	 	 	 	 	 
	 	 	Range
	 
	Equities
	 	 	0-25%	 	 
	Fixed Income
	 	 	0-100%	 	 
	Cash
	 	 	Residual	 	 
	Total
	 	 	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 the relative investment attractiveness of
available tax exempt securities.

The Investment Committee will control the total asset mix and will give performance objectives to
the Investment Manager regarding the assets managed.

RETURN EXPECTATIONS

Total asset mix policy 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 FUND MANAGER

The Manager, subject to regulatory and 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.

Performance of the Fund 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

Measured over four (4) year moving periods.

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AGGREGATE INVESTMENT LIMITS, PERMITTED INVESTMENT CATEGORIES AND INDIVIDUAL INVESTMENT LIMITS

PERMITTED INVESTMENT CATEGORIES WITHIN ASSET CLASSES

	 	 	 
	Cash:

	 	Cash on hand, demand deposits, treasury bills, short-term notes and bankers’ acceptances, term deposits and
guaranteed investment certificates.
	 
	Equity:

	 	Common shares, rights and warrants.
	 
	Fixed Income:

	 	Bonds, debentures, preferred shares, including those convertible into common shares.

All of the above may be either U.S. domestic, Canadian, or other foreign investments.

Convertible preferred securities will be classified as equities if the preferred dividend is not
being paid.

Private placement issues in public companies are allowed.

INVESTMENT CONSTRAINTS

All investments will be made in accordance with all applicable legislation.

INDIVIDUAL INVESTMENT LIMITS

Any combination of investments in any one corporate issuer will be limited to a maximum of 5% of
admitted assets. Exposure beyond 5% will require approval of the Investment Committee.

QUALITY CONSTRAINTS

The Investment Manager may invest in the permitted investment categories listed in the Investment
Objectives and Policy Statement 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 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 preferreds will be limited by quality tier as follows:

	 	(c)	LIMITS AS A % OF THE FIXED INCOME PORTFOLIO

	 	 	 	 	 	 	 	 	 
	Bond Rating	 	% of Total	 	Min./Max.	 
	A or better
	 	 	65%	 	 	Min.
	BBB
	 	 	35%	 	 	Max.
	BB,B
	 	 	10%	 	 	Max.
	C,D
	 	 	0%	 	 	 	 	 

	   	The above limits are subject to adjustment to conform with the regulatory requirements of
Chapter 24 of Title 17 of the New Jersey Statutes.
	 
	   	Limits are determined on a cost basis and include convertible securities.

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	   	Downgrades will be taken into account when making new investments but will not necessarily
result in the sale of existing positions.
	 
	   	Securities un-rated by the public rating agencies must be rated by the Investment Manager and
included as part of the categories above for the purposes of determining overall exposure by
quality tier.
	 
	   	Any exceptions to the above must be approved by the Investment Committee.

PROHIBITED INVESTMENTS

No loans will be made in any of the investment portfolios.

No Real Estate will be purchased without Investment Committee approval.

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 established regulatory guidelines and with
the policy on foreign exchange risk outlined herein.

Foreign investments must be in the same kinds of securities and investments as the Insurance
Company is normally allowed.

OTHER

Derivative securities may be purchased up to 2% of the portfolios cost at book. Use of derivative
investments is infrequent and only for hedging purposes. Derivative investments will be justified
to and approved by the Investment Committee prior to use of derivative instruments will at all
times be in compliance with NAIC guidelines regarding derivative investments.

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SCHEDULE B

SERVICES

Investment Administration to be performed are:

Monthly

	 	–  	daily processing of securities
	 	–  	portfolio accounting functions including posting of all trades, monitoring investment
income, corporate actions, open payables and receivables
	 	–  	computation of all regulatory figures
	 	–  	analysis and reconciliation of portfolios
	 	–  	yield review
	 	–  	computation of market decline tests
	 	–  	computation of liquidity analysis
	 	–  	analysis of book values, e.g. bond amortizations and investment provisions
	 	–  	analysis of gross gain and loss positions
	 	–  	cash flow obligations
	 	–  	investment review meeting
	 	–  	NAIC and SVO filings
	 	–  	custodial relationships
	 	–  	broker relationships

Periodic

	 	–  	review and analysis of foreign exchange position
	 	–  	placement of foreign exchange contracts, where appropriate
	 	–  	discussions with regulators regarding portfolio (positions)
	 	–  	reporting to the Board of Directors of The North River Insurance Company
	 	–  	reporting to the investment committee
	 	–  	reporting to the audit committee
	 	–  	general assistance with accounting issues
	 	–  	maintaining contact with external auditors
	 	–  	such other administrative services as the parties shall mutually agree from time to time
	 	–  	5900 report on investment controls
	 	–  	performance reporting
	 	–  	software provider (including e-Pam) – functioning and testing

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SCHEDULE C

FEE SCHEDULE

Investment fees are comprised of two parts:

	 	(A).  	The Base Fee Amount
	 
	 	   	          and
	 
	 	(B).  	The Incentive Fee Amount

	(A)  	The Base Fee Amount

	 	1)  	Fees will be payable quarterly. Interim invoices may be issued based
on our estimates of the final fees payable.
	 
	 	2)  	After the end of each calendar quarter, FFH shall submit its
investment management charges in accordance with the schedule below.
	 
	 	3)  	The charges are on a calendar year basis. They will be calculated at
the end of each calendar quarter based upon the average of the market value
of the funds at the close of business for the three (3) preceding months.

	 	 	 	 	 	 	 	 	 
	4)	MARKET VALUE        	CHARGE	 
	 	On Total Market Value
	    .30%	 

	(B)  	The Incentive Fee Amount
	 
	   	The incentive fee amount relates to the investment management of equity securities
only.

	 	 	 
	Annual Base Fee:
	 	
a) If performance equals or exceeds benchmark,
base fee is unchanged from current fee.
	 	 	
b) If performance is less than benchmark, base
fee is 90% of current fee.
	Maximum Fee:	 	
1.75% (including base).
	Benchmark:	 	
S&P 500 + 200 basis points.
	Incentive Fee:	 	
Continuous rate of 10 basis point for every 100
basis points of outperforming the benchmark.  (Incentive fee
is in addition to base fee).

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	Basis of Calculation:	 	Payable annually based on calendar year
results. Not earned or paid unless results since inception
(net of all fees) exceed benchmark return.
	 
	Inception Date:	 	January 1, 2002

	(C)  	Maximum Investment Management Fee
	 
	   	Notwithstanding the foregoing, the maximum investment management fee payable in any calendar
year will be .40% of the Total Market Value (as calculated in (A) 4) above); provided that
any investment management fee not payable in any calendar year as a result of the restriction
in the preceding sentence will be carried over to a succeeding calendar year, but the total
investment management fee payable in any such calendar year, including any carry-over
payment, shall be limited as provided by the preceding sentence.

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SCHEDULE D

	1.  	Notices

Unless otherwise specified herein, all notices, instructions, advices or other matters covered
or contemplated by this Agreement, shall be deemed duly given when received in writing (including
by fax) by you or us, as applicable, at the address or fax number set forth below or such other
address or fax number as shall be specified in a notice similarly given:

	   	If to us:
	 
	   	THE NORTH RIVER INSURANCE COMPANY

305 Madison Avenue

Morristown, New Jersey 07962

Fax No. (973) 490-6612
	 
	   	If to you:
	 
	   	HAMBLIN WATSA INVESTMENT COUNSEL LTD.

95 Wellington Street West

Suite 802

Toronto, Ontario

M5J 2N7

Fax No.: (416) 366-3993
	 
	   	and
	 
	   	FAIRFAX FINANCIAL HOLDINGS LIMITED

95 Wellington Street West

Suite 800

Toronto ON M5J 2N7

Fax No.: (416) 367-2201
	 
	2.  	Governing Laws; Jurisdiction; Service of Process

This Agreement shall be governed and construed in accordance with the laws of the State of New
Jersey our state of domicile. Each of the parties thereto submits to the jurisdiction of the state
and federal courts of the State of New Jersey, in any action or proceeding arising out of or
relating to this Agreement and all claims in respect of any such action or proceeding may be heard
or determined in any such court; and service of process, notices and demands of such courts may be
made upon you by personal service to the person and at the address contained in Section 1 above as
such person or address may be changed from time to time.

	3.  	Insurance Department Approval

This Agreement shall be subject to the non-disapproval or approval of the New Jersey
Department of Banking and Insurance, and such terms and conditions hereof as may be required by the
New Jersey Department of Banking and Insurance to be altered or amended shall be deemed acceptable
to the parties hereto, to the extent same shall not change the substance and intent of this
Agreement. No amendment or modification of this Agreement shall be effective unless such amendment
or modification is (i) filed with the New Jersey Department of Banking and Insurance at least thirty (30) days prior to the proposed effective
dated, (ii) not disapproved by the New Jersey Department of Banking and Insurance, (iii) made in
writing, and (iv) signed by the parties hereto.

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	4.  	Inspection of Records

You and we and the duly authorized representatives of each of us shall, at all reasonable
times, each be permitted access to all relevant books and records of the other pertaining to this
Agreement. You and your duly authorized representatives shall provide to the New Jersey Department
of Banking and Insurance, within fifteen (15) days of any request from the New Jersey Department of
Banking and Insurance therefor, copies of all your books and records as they pertain to us (or any
portion thereof as may be specifically requested).

	5.  	Headings

The inclusion of headings in this Agreement is for convenience of reference only and shall not
affect the construction or interpretation hereof.

	6.  	Severability

Each of the provisions contained in this Agreement is distinct and severable and a declaration
of invalidity or unenforceability of any such provision or part thereof by a court of competent
jurisdiction shall not affect the validity or enforceability of any other provision hereof.

	7.  	Entire Agreement

This Agreement and the documents to be delivered pursuant hereto constitute the entire
agreement between the parties pertaining to the subject matter of this Agreement.

	8.  	Control

Notwithstanding any other provision of this Agreement, it is understood and agreed that we
shall at all times retain the ultimate control of the investment of our investable funds and we
reserve the right, upon written notice by us to you, to direct, approve, or disapprove any
investment made by you hereunder or any action taken by you with respect to any such investment.
Furthermore, it is understood and agreed that we shall at all times own and have custody of our
general corporate accounts and records.

	9.  	Confidential Relationship

The parties hereto will treat as confidential all information that is not publicly available
received from the other party.

15exv10w3

 

Exhibit 10.3

INVESTMENT AGREEMENT

THIS INVESTMENT AGREEMENT (this “Agreement”), dated as of January 1, 2002, is made by and
between HAMBLIN WATSA INVESTMENT COUNSEL LTD. (“HW”), FAIRFAX FINANCIAL HOLDINGS LIMITED (“FFH”)
and SENECA SPECIALTY INSURANCE COMPANY. As used in this Agreement, “we”, “us” and “our” shall
refer to SENECA SPECIALTY INSURANCE COMPANY, and “you” and “your” shall refer to HW and FFH
jointly.

In consideration of the mutual promised contained herein, the parties agree as follows:

Investment Management

	1. 	We authorize HW to manage on a continuous basis an investment account (the “Account”) on
our behalf on the terms and conditions set out in this Agreement.
	 
	2. 	HW shall manage the Account in accordance with the investment objectives from time to time
communicated in writing by us to HW, subject at all times to the investment guidelines. Until
mutually agreed otherwise, the investment guidelines shall be as set out in the investment
guidelines attached hereto as Schedule A. The investment guidelines shall at all
times be in compliance with the investment statutes of Arizona.
	 
	3. 	Subject to Section 2 above, HW shall manage the Account in our name and HW is hereby
authorized to take such action for the Account as HW, in your sole discretion, may consider
appropriate for the operation of the Account including, without limitation, the power to buy,
sell and exchange and otherwise deal in all securities which may at any time form part of the
Account and to invest, in securities selected by HW, all funds contained in, paid to or
derived from the operation of, the Account, except to the extent that HW otherwise instructed
in writing by us.
	 
	 	The services to be performed by HW shall be performed only by officers and employees who have
appropriate qualifications. HW agrees to provide to us such information as we may reasonably
request concerning the education and experience of any individuals HW proposes to assign to the
performance of such services. Also, upon our request, HW agrees to provide a list of individual
names and a brief description of their responsibilities. HW agrees to promptly notify us of any
changes in HW’s staff involving individuals that perform material functions on our Account.
	 

 

	3A.	Without limiting the authority granted in Section 3, but subject to the restrictions
contained in this Section 3A, you are specifically authorized to exchange or sell securities
between affiliated companies, even if the value of the transaction exceeds the lesser of 3% of the admitted assets or 25% of the policyholder surplus of such
companies. Each such transaction shall comply with the following:

	 	a. 	The only securities which may be exchanged or sold in these transactions are publicly
traded securities issued by high-quality, credit worthy entities.
	 
	 	b. 	These exchanges or sales shall be made at fair market value. The value of the
securities shall be determined on the closing date of the transaction as follows:

	 	i. 	The closing price for the security listed in Bloomberg or on a
public exchange or quotation system for the immediately preceding trading day; or
	 
	 	ii.	The price determined as follows:

	 	(a)	On the date of the transaction, you will contact the
original issuing broker for the particular security.
	 
	 	(b)	The broker will then contact their trader on the
floor at that time to provide a real-time quote.
	 
	 	(c)	The trader will provide a “spread quote” (the spread
quote is expressed as the number of basis points the particular security
is trading above a comparable coupon and maturity U.S. treasury security).
	 
	 	(d)	All 3 steps above shall be documented via a paper
printout of a Bloomberg e-mail exchange amongst the parties. A copy of
such documentation shall be provided to all parties involved in the
exchange or sale.
	 
	 	(e)	You will then load the spread quote into the
Bloomberg pricing model software. The software, in turn, will convert the
spread quote into a customary price quotation for the security. The
software mode calculation screen shall be printed, retained in the file,
and provided to all parties involved in the exchange or sale.

	 	c.	Expenses incurred and payment received by any of us shall be allocated in
conformity with customary insurance accounting practices consistently applied.
	 
	 	d.	The transactions will be reported to us in sufficient detail that our books,
accounts, and records may be so maintained as to clearly and accurately disclose the
precise nature and details of the transactions.

	4. 	The securities and funds of the Account have been deposited with and shall be held by The
Bank of New York (or with such other custodian as is chosen by you from time to time and is
approved by the Arizona Department of Insurance (the “Custodian”) pursuant to an agreement
which we have entered into with the Custodian. We have instructed the Custodian to promptly
follow your directions at all times and to provide HW with all such information concerning the
Account as HW may from time to time require in connection with your management of the Account,
including without limitation, copies of relevant monthly statements.
	 
	5. 	Provided HW has used reasonable care and diligence, HW shall not be liable for any damage,
loss, cost or other expense sustained in the operation of the Account or relating in any
manner to the carrying out of your duties under this Agreement. Notwithstanding the foregoing,
any losses suffered as a result of an error in implementing investment decisions caused by
HW’s negligence or dishonesty are to be fully reimbursed by HW. To the extent any errors occur
in implementing investment decisions, HW shall immediately notify us in writing of all
relevant facts. HW shall bear full responsibility for any such errors to the extent such
errors result from HW’s negligence or dishonesty and shall be liable for all financial injury
to us resulting therefrom. We agree that HW shall be entitled to assume that any information

2

 

	   	communicated by us or the Custodian to HW is accurate and
complete, and that in making investment decisions HW shall be entitled to rely on publicly available information or on
information which HW believes to have been provided to you in good faith, in both cases
barring actual knowledge by HW to the contrary.
	 
	6. 	HW will provide us with a monthly statement and a quarterly presentation respecting the
securities held in the Account.
	 
	7. 	HW shall deliver in writing to us, as soon as practicable after implementation of an
investment decision, HW’s confirmation of such implementation to enable us to ascertain that
such implementation has been effected pursuant to the guidelines and procedures of our Board
of Directors or a duly authorized committee thereof. Otherwise, the nature and timing of HW’s
reporting to us on the status of the Account shall be at least quarterly, within 45 days after
the end of each quarter.
	 
	8. 	We acknowledge receipt of a copy of policies that HW has established to ensure that
investment opportunities are allocated fairly among HW’s discretionary investment accounts and
we confirm that these policies, until revised by HW, will apply to the account.

Investment Administration

	9. 	We authorize FFH to provide, and by signing below FFH agrees to provide, the investment
administration services set forth in Schedule B attached hereto, on our behalf and on
the terms and conditions set out in this Agreement, subject to such guidelines, procedures and
limitations as may be duly established and approved by our Board of Directors or a duly
authorized committee of said Board.

General

	10.	You shall be entitled to such fees for the services provided hereunder as FFH may specify
from time to time. Attached hereto as Schedule C as is a copy of the current fee
schedule and FFH agrees to give us thirty (30) days prior written notice of any change in such
schedule, which change shall require the approval of the Arizona Department of Insurance.
Such fees shall be the exclusive fees and charges payable (excluding third party disbursements
reasonably incurred) for the services provided hereunder. As regards third party services,
you will charge us only the amount of your actual disbursements paid to arm’s length third
parties for such services, and HW will select as agents, brokers or dealers executing orders
or acting on the purchase or sale of portfolio securities only agents, brokers or dealers

3

 

	  	operating in the United States. Such disbursements to third parties shall be reported to us
quarterly, provided, that we shall pay third parties such disbursements directly if requested
to do so by you. We will pay you all fees and disbursements hereunder not later than 20 days
after receiving your quarterly report.
	 
	  	All fees will be paid to FFH and FFH shall reimburse HW for its investment management services.
HW acknowledges that it has no right under this agreement to receive fees directly from us.
	 
	11.	Either you or FFH and HW may terminate this Agreement without penalty by giving the other
party at least thirty (30) days advance written notice of its desire to terminate the same.
In the event that the day upon which this Agreement is so terminated is a day other than the
first day of a calendar quarter, the fees payable in accordance with paragraph 6 for such
quarter shall be pro-rated and shall be determined having regard to the market value of the
Account based upon the most recent financial report which has been delivered to you by the
Custodian.
	 
	12.	All notices and communications to each party to this Agreement shall be in writing and shall
be deemed to have been sufficiently given if signed by or on behalf of the party giving the
notice and either delivered personally or sent by prepaid registered mail addressed to such
party at the address of such party indicated herein. Any such notice or communication shall be
deemed to have been received by any such party if delivered, on the date of delivery, or if sent
by prepaid registered mail on the fourth business day following mailing thereof to the party to
whom addressed. For such purpose, no day during which there shall be a strike or other
occurrence interfering with normal mail service shall be considered a business day.
	 
	13.	This Agreement shall enure to the benefit of and shall be binding upon the parties hereto and
their respective successors. This Agreement may not be assigned by any party.
	 
	14.	We acknowledge that we have read and understood this Agreement and that we have received a
copy of the same. You and we each acknowledge that the terms of this Agreement are the
exclusive and conclusive terms of our mutual agreement with regard to the subject matter
hereof.
	 
	15.	Any dispute or difference arising with reference to the interpretation or effect of this
Agreement, or any part thereof, shall be referred to a Board of Arbitration (the “Board”) of
two (2) arbitrators and an umpire.
	 
	  	The members of the Board shall be active or retired disinterested officers of insurance or
reinsurance companies.
	 
	  	One arbitrator shall be chosen by the party initiating the arbitration and designated in the
letter requesting arbitration. The other party shall respond, within thirty (30) days,
advising of its arbitrator. The umpire shall thereafter be chosen by the two (2)
arbitrators. In the event either party fails to designate its arbitrator as indicated above,
the other party is hereby authorized and empowered to name the second

4

 

	  	arbitrator, and the
party which failed to designate its arbitrator shall be deemed to
have waived its rights to
designate an arbitrator and shall not be aggrieved thereby. The two (2) arbitrators shall
then have thirty (30) days within which to choose an umpire. If they are unable to do so
within
thirty (30) days following their appointment, the umpire shall be chosen by the manager of
the American Arbitration Association and such umpire shall be a person who is an active or
retired and disinterested officer of an insurance or reinsurance company. In the event of
the death, disability or incapacity of an arbitrator or the umpire, a replacement shall be
named pursuant to the process which resulted in the selection of the arbitrator or umpire to
be replaced.
	 
	  	Each party shall submit its case to the Board 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 Board.
	 
	  	Sittings of the Board shall take place in Morristown, New Jersey. The Board shall make its
decision with regard to the custom and usage of the insurance and reinsurance business. The
Board is released from all judicial formalities and may abstain from the strict rules of law.
The written decision of a majority of the Board shall be rendered within sixty (60) days
following the termination of the Board’s hearings, unless the parties consent to an
extension. Such majority decision of the Board 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 Board in any court of proper jurisdiction.
	 
	  	Each party shall bear the fees and expenses of the arbitrator selected by or on its behalf,
and the parties shall bear the fees and expenses of the umpire as determined by the party, as
above provided, the expenses of the arbitrators, the umpire and the arbitration shall be
equally divided between the two parties. The arbitrators may allocate any and all of the
costs and fees against the losing party upon a determination that the position of the losing
party was, in whole or in part, groundless, specious or otherwise without merit or asserted
primarily for the purposes of obfuscation or delay.
	 
	16.	Additional terms and conditions applicable to this Agreement are set forth in Schedule
D. The provisions in Schedule A, Schedule B, Schedule C and
Schedule D attached hereto are hereby incorporated into, and form part of, this
Agreement.
	 
	17.	This Agreement, including the schedules attached hereto and made a part hereof, may
only be amended by written agreement signed by the parties and approved by the New York
Insurance Department; provided, however, that any amendment to Schedule A may
become effective without the prior approval of the Arizona Department of Insurance,
provided that such amendment shall be filed with the Arizona Department of Insurance not
later than its effective date and shall, if disapproved by the Arizona Department of
Insurance, be void as of the date of such disapproval.

IN WITNESS WHEREOF, this Agreement is hereby executed by duly authorized officers of the parties
hereto as of the date first written above.

	 	 	 	 	 	 	 
	 	 	SENECA SPECIALTY INSURANCE COMPANY	 	 
	 	 	BY:	 	/s/ Dennis J. Hammer

	 	 	 	 	AUTHORIZED SIGNATURE
	 	 
	 	 	 	 	Dennis J. Hammer	 	 
	 	 	 	 	NAME OF AUTHORIZED SIGNATORY	 	 

5

 

	 	 	 	 	 	 	 
	 	 	HAMBLIN WATSA INVESTMENT COUNSEL LTD.
	 	 
	 	 	
BY:
	 	/s/ R. D. Lace	 	 
	 	 	 	 	AUTHORIZED SIGNATURE	 	 
	 	 	 	 	R. D. Lace	 	 
	 	 	 	 	NAME OF AUTHORIZED SIGNATORY	 	 
	 	 	FAIRFAX FINANCIAL HOLDINGS LIMITED	 	 
	 	 	BY:	 	/s/ Bradley P. Martin	 	 
	 	 	 	 	AUTHORIZED SIGNATURE	 	 
	 	 	 	 	Bradley P. Martin	 	 
	 	 	 	 	NAME OF AUTHORIZED SIGNATORY	 	 

6

 

SCHEDULE A

INVESTMENT OBJECTIVES

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

INVESTMENT GUIDELINES

	1. 	Approach
	 
	  	All investments are to be made using the value approach by investing in companies 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 equities, no attempt is made to forecast the economy or the stock market. The
manager will attempt to identify financially sound companies 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 bargain hunting 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).
	 
	  	As regards bonds, the approach is similar. No attempt is made to forecast the economy or
interest rates. The manager will attempt to purchase attractively priced bonds offering
yields better than Treasury bonds with maturities of 10 years or less that are of sound
quality, i.e. whose obligations are expected to be fully met as they come due. We do not
regard rating services as being an unimpeachable source for assessing credit quality any more
than we would regard a broker’s recommendation on a stock as being necessarily correct. In
any form of investment research and evaluation, there is no substitute for the reasoned
judgement of the investment committee and its managers.
	 
	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 operating company in accordance with the approved list
for 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
currently are restricted primarily to Treasury and Agency securities of the U.S. government.

7

 

	3. 	Regulatory
	 
	  	All services shall be performed in accordance with the relevant provisions of the Arizona
Insurance Law.
	 
	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 minimize 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.

STRATEGY

	1. 	Maintain Adequate Liquidity
	 
	   	A review of portfolio liquidity is undertaken on a monthly basis. The liquidity analysis
determines how much of each portfolio can be converted to cash in a given time period. Each
company determines its liquidity requirements and the liquidity of the portfolio must match
the requirement.
	 
	2. 	Asset Allocation
	 
	  	The asset allocation will be determined by the Portfolio Manager and will include short term
investments that will generate appropriate cash flows and long term investments in stocks,
bonds, debentures and money market investments, both domestic and foreign. The allocation
will be in compliance with regulatory guidelines and should meet policy liabilities.
	 
	3. 	Foreign Exchange Risk
	 
	  	Any foreign currency investments and exposures would normally be hedged via the use of
forward foreign exchange contracts and/or currency options or preferably by a natural hedge
with foreign pay liabilities of the Insurance Company. Unhedged foreign investments will be
limited to 10% of invested assets at cost if judged appropriate. Unhedged 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 fixed income securities
with maturities less than ten years. While there are no specific duration/maturity limits
for convertible securities, these issues are included in the total fixed income duration/term
measure. Maximum fixed income portfolio duration is limited to the equivalent of a ten year
term to maturity Treasury security.

8

 

INVESTMENT POLICY MIX

The Investment Committee has established the following exposure ranges for various asset mix
classes:

	 	 	 	 	 	 	 	 	 
	 	 	 	Range	 	 	 	 	 
	Equities
	 	 	0-25%	 	 	 	 	 
	Fixed Income
	 	 	0-100%	 	 	 	 	 
	Cash
	 	 	Residual	 	 	 	 	 
	Total
	 	 	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 the relative investment attractiveness of
available tax exempt securities.

The Investment Committee will control the total asset mix and will give performance objectives to
the Investment Manager regarding the assets managed.

RETURN EXPECTATIONS

Total asset mix policy 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 FUND MANAGER

The Manager, subject to regulatory and 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.

Performance of the Fund 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	 	 	 	 

Measured over four (4) year moving periods.

9

 

AGGREGATE INVESTMENT LIMITS, PERMITTED INVESTMENT CATEGORIES AND INDIVIDUAL INVESTMENT
LIMITS

PERMITTED INVESTMENT CATEGORIES WITHIN ASSET CLASSES

	 	 	 
	Cash:

	 	Cash on hand, demand deposits, treasury bills, short-term notes and bankers’ acceptances,

term deposits and guaranteed investment certificates.
	Equity:

	 	Common shares, rights and warrants.
	Fixed Income:

	 	Bonds, debentures, preferred shares, including those convertible into common shares.

All of the above may be either U.S. domestic, Canadian, or other foreign investments.

Convertible preferred securities will be classified as equities if the preferred dividend is not
being paid.

Private placement issues in public companies are allowed.

INVESTMENT CONSTRAINTS

All investments will be made in accordance with all applicable legislation.

INDIVIDUAL INVESTMENT LIMITS

Any combination of investments in any one corporate issuer will be limited to a maximum of 5% of
admitted assets. Exposure beyond 5% will require approval of the Investment Committee.

QUALITY CONSTRAINTS

The Investment Manager may invest in the permitted investment categories subject to the following
quality constraints:

	   	Investments in money market instruments (less than or equal to 1 year term) will be limited
to the approved list. 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 preferreds will be limited by quality tier as follows:
	 
	   	LIMITS AS A % OF THE FIXED INCOME PORTFOLIO

	 	 	 	 	 	 
	 	Bond Rating	% of Total	 	Min./Max.	 
	 	A or better

	65%	 	Min.	 
	 	BBB

	35%	 	Max.	 
	 	BB,B

	10%	 	Max.	 
	 	C,D

	0%	 	 	 

10

 

	   	The above limits are subject to adjustment to conform with the regulatory requirements of the
Arizona Insurance Law.
	 
	   	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 un-rated by the public rating agencies must be rated by the Investment Manager and
included as part of the categories above for the purposes of determining overall exposure by
quality tier.
	 
	   	Any exceptions to the above must be approved by the Investment Committee.

PROHIBITED INVESTMENTS

No loans will be made in any of the investment portfolios.

No Real Estate will be purchased without Investment Committee approval.

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 established regulatory guidelines and with
the policy on foreign exchange risk outlined herein.

Foreign investments must be in the same kinds of securities and investments as the Insurance
Company is normally allowed.

OTHER

Derivative securities may be purchased up to 2% of the portfolios cost at book. Use of derivative
investments is infrequent and for hedging purposes. Derivative investments will be justified to
the Investment Committee prior to use.

11

 

SCHEDULE B

SERVICES

Investment Administration to be performed are:

Monthly

	 	–  	daily processing of securities
	 	–  	portfolio accounting functions including posting of all trades, monitoring investment
income, corporate actions, open payables and receivables
	 	–  	computation of all regulatory figures
	 	–  	analysis and reconciliation of portfolios
	 	–  	yield review
	 	–  	computation of market decline tests
	 	–  	computation of liquidity analysis
	 	–  	analysis of book values, e.g. bond amortizations and investment provisions
	 	–  	analysis of gross gain and loss positions
	 	–  	cash flow obligations
	 	–  	investment review meeting
	 	–  	NAIC and SVO filings
	 	–  	custodial relationships
	 	–  	broker relationships

Periodic

	 	–  	review and analysis of foreign exchange position
	 	–  	placement of foreign exchange contracts, where appropriate
	 	–  	discussions with regulators regarding portfolio (positions)
	 	–  	reporting to the investment committee
	 	–  	reporting to the audit committee
	 	–  	general assistance with accounting issues
	 	–  	maintaining contact with external auditors
	 	–  	such other administrative services as the parties shall mutually agree from time to time
	 	–  	5900 report on investment controls
	 	–  	performance reporting
	 	–  	software provider (including e-Pam) – functioning and testing

12

 

	 	 	SCHEDULE C        

FEE SCHEDULE

Investment fees are comprised of two parts:

	 	(A). The Base Fee Amount

	 	(B). The Incentive Fee Amount

	(A)	The Base Fee Amount

	 	1)  	Fees will be payable quarterly. Interim invoices may be issued based
on our estimates of the final fees payable.
	 
	 	2)  	After the end of each calendar quarter, FFH shall submit its
investment management charges in accordance with the schedule below.
	 
	 	3)	The charges are on a calendar year basis. They will be calculated at
the end of each calendar quarter based upon the average of the market value
of the funds at the close of business for the three (3) preceding months.

	 	 	 	 	 	 	 	 	 
	4)	 	MARKET VALUE	 	CHARGE	 
	 
	 	On Total Market Value	 	 	.30%     	 

	(B)  	The Incentive Fee Amount
	 
	   	The incentive fee amount relates to the investment management of equity securities
only.

	 	 	 
	Annual Base Fee:

	 	a) If performance equals or exceeds benchmark,
base fee is unchanged from current fee.
	 
	

	 	b) If performance is less than benchmark, base
fee is 90% of current fee.
	 
	Maximum Fee:

	 	1.75% (including base).
	 
	Benchmark:

	 	S&P 500 + 200 basis points.
	 
	Incentive Fee:

	 	Continuous rate of 10 basis point for every 100
basis points of outperforming the benchmark. (Incentive fee
is in addition to base fee).

13

 

	 	 	 
	Basis of Calculation:

	 	Payable annually based on calendar year
results. Not earned or paid unless results since inception

(net of all fees) exceed benchmark return.
	 
	Inception Date:

	 	January 1, 2002

	(C)  	Maximum Investment Management Fee
	 
	   	Notwithstanding the foregoing, the maximum investment management fee payable in any calendar
year will be .40% of the Total Market Value (as calculated in (A) 4) above); provided that
any investment management fee not payable in any calendar year as a result of the restriction
in the preceding sentence will be carried over to a succeeding calendar year, but the total
investment management fee payable in any such calendar year, including any carry-over
payment, shall be limited as provided by the preceding sentence.

14

 

SCHEDULE D

	1.  	Notices

Unless otherwise specified herein, all notices, instructions, advices or other matters covered
or contemplated by this Agreement, shall be deemed duly given when received in writing (including
by fax) by you or us, as applicable, at the address or fax number set forth below or such other
address or fax number as shall be specified in a notice similarly given:

	 	 	 
	If to us:
	 
	SENECA SPECIALTY INSURANCE COMPANY

160 Water Street, 16th floor

New York, New York 10038

Fax No. (212) 344-4567
	 
	If to you:
	 
	HAMBLIN WATSA INVESTMENT COUNSEL LTD.

95 Wellington Street West

Suite 802

Toronto, Ontario

M5J 2N7

Fax No.: (416) 366-3993
	and
	 
	FAIRFAX FINANCIAL HOLDINGS LIMITED

95 Wellington Street West

Suite 800

Toronto ON M5J 2N7

Fax No.: (416) 367-2201

	2.  	Governing Laws; Jurisdiction; Service of Process

This Agreement shall be governed and construed in accordance with the laws of the State of
Arizona our state of domicile. Each of the parties thereto submits to the jurisdiction of the
state and federal courts of the State of Arizona, in any action or proceeding arising out of or
relating to this Agreement and all claims in respect of any such action or proceeding may be heard
or determined in any such court; and service of process, notices and demands of such courts may be
made upon you by personal service to the person and at the address contained in Section 1 above as
such person or address may be changed from time to time.

	3.  	Insurance Department Approval

This Agreement may be subject to the non-disapproval or approval of the Arizona Department of
Insurance, and such terms and conditions hereof as may be required by the Arizona Department of
Insurance to be altered or amended shall be deemed acceptable to the parties hereto, to the extent same shall
not change the substance and intent of this Agreement.

15

 

	4.  	Inspection of Records

You and we and the duly authorized representatives of each of us shall, at all reasonable
times, each be permitted access to all relevant books and records of the other pertaining to this
Agreement. You and your duly authorized representatives shall provide to the Arizona Department of
Insurance, within fifteen (15) days of any request from the Arizona Department of Insurance
therefor, copies of all your books and records as they pertain to us (or any portion thereof as may
be specifically requested).

	5.  	Headings

The inclusion of headings in this Agreement is for convenience of reference only and shall not
affect the construction or interpretation hereof.

	6.  	Severability

Each of the provisions contained in this Agreement is distinct and severable and a declaration
of invalidity or unenforceability of any such provision or part thereof by a court of competent
jurisdiction shall not affect the validity or enforceability of any other provision hereof.

	7.  	Entire Agreement

This Agreement and the documents to be delivered pursuant hereto constitute the entire
agreement between the parties pertaining to the subject matter of this Agreement.

	8.  	Control

Notwithstanding any other provision of this Agreement, it is understood and agreed that we
shall at all times retain the ultimate control of the investment of our investable funds and we
reserve the right, upon written notice by us to you, to direct, approve, or disapprove any
investment made by you hereunder or any action taken by you with respect to any such investment.
Furthermore, it is understood and agreed that we shall at all times own and have custody of our
general corporate accounts and records.

	9.  	Confidential Relationship

The parties hereto will treat as confidential all information that is not publicly available
received from the other party.

16

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