Document:

Exhibit 10.5

 

THIRD AMENDMENT TO
INVESTMENT MANAGEMENT AGREEMENT

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

“21.  Withdrawals
by the Client

 

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

 

III.                                 Schedule A is hereby amended as follows:

 

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

 

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

 

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

 

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

 

 

IV.                                 Schedule B is hereby amended as follows:

 

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

 

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

 

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

 

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

 

V.                                     Schedule B shall be further amended as follows:

 

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

 

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

 

 

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

 

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

 

 

	
  ADVISER:

  	
   

  	
  CLIENT:

  
	
   

  	
   

  	
   

  
	
  KVO CAPITAL MANAGEMENT, LLC

  	
   

  	
  MONTPELIER REINSURANCE LTD.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ KERNAN V. OBERTING

  	
   

  	
  By:

  	
  /s/ CHRISTOPHER L. HARRIS

  
	
  Name: Kernan V. Oberting

  	
   

  	
  Name: Christopher L. Harris

  
	
  Title: Managing Member

  	
   

  	
  Title: Chief Executive Officer

  
	
  Date: July 29, 2010

  	
   

  	
  Date: July 29, 2010Exhibit 10.6

 

July 28, 2010

 

Montpelier Reinsurance Ltd.

Montpelier House

94 Pitts Bay Road

P.O. Box HM 2079

Hamilton HR HX, Bermuda

 

Re:          Investment
in KVO Capital Offshore Fund, Ltd. by Montpelier Reinsurance Ltd.

 

This letter agreement is written in connection with
the investment by Montpelier Reinsurance Ltd. (the “Investor”) in KVO
Capital Offshore Fund, Ltd., a Cayman Islands exempted company (the “Fund”),
pursuant to (i) the Fund’s Confidential Private Placement Memorandum dated
January 1, 2010 (the “Memorandum”) and (ii) the subscription
agreement executed by the Investor (the “Subscription Agreement”).  Capitalized terms used herein and not
otherwise defined shall have the meanings given to them in the Memorandum.  The Investor is currently a party to an
Investment Management Agreement with KVO Capital Management, LLC (the “Management
Company”) pursuant to which the Management Company manages the KVO Equity
Portfolio Account.

 

This letter agreement shall evidence our understanding
as follows:

 

1.             Investment
in the Fund.  The Investor shall
invest $25 million by way of cash and net securities from the KVO Equity
Portfolio Account into the Fund (the “Investment”) on August 1, 2010.  The Investment will be evidenced by a
Subscription Agreement for Tranche C Shares executed concurrently with this
letter agreement.

 

2.             Terms
of Investment in the Fund.  The
Investment shall be subject to the following provisions, which shall be
disclosed in an amendment to the Memorandum:

 

(a)           $12.5
million shall be allocated to Tranche C Shares of the Fund.  Tranche C Shares are subject to a three-year
lockup; however the Directors will cause the Fund to waive any redemption fee
with respect to these Shares after the first year.

 

(b)           $12.5
million shall be allocated to Tranche C Shares of the Fund and such allocation
will be subject to a three-year lock-up period.

 

(c)           The
Tranche C Shares shall be charged a Management Fee of 1.5% annually and a
Performance Allocation of 15% annually. 
The Management Company will rebate 33.33% of the Management Fee directly
to the Investor after the fee has been paid to and received by the Management
Company, resulting in an annual Management Fee of approximately 1%.  The terms of the rebate shall be incorporated
into the amended Confidential Private Placement Memorandum 

 

 

such that the arrangement is fully disclosed to
existing and new investors in the Fund.

 

(d)           The
Management Company shall have sole discretion to select the specific assets to
be transferred by the Investor to the Fund. 
In no event and under no circumstances shall the Management Company or
its affiliates incur any individual liability or responsibility for any
determination made or other action taken or omitted by them in good faith
provided such determinations are made in observation of the investment
guidelines set forth in any agreements between the Management Company and the
Investor.

 

(e)           Notwithstanding
the terms outlined for Investor’s participation in Tranche C Shares, the
Investor may redeem its Tranche C Shares on a Quarterly Valuation Date with 60
days’ notice before the applicable Quarterly Valuation Date, subject to a
Redemption Fee equal to 5% of the amount redeemed, as provided in the
Memorandum; provided, however, that the Redemption Fee shall not apply to the
Tranche C Shares described in paragraph 2(a) of this Letter Agreement
following the waiver of the Redemption Fee provided for in paragraph 2(a).

 

3.             Governing
Law.  This letter agreement shall be
governed by and construed in accordance with the laws of the State of Delaware.

 

4.             Counterparts.  This letter agreement may be executed in
counterparts, each of which shall be deemed to be an original but all of which
when taken together shall constitute one and the same instrument.  An executed counterpart of this letter
agreement delivered by fax or other means of electronic transmission shall be
deemed to be an original and shall be as effective for all purposes as delivery
of a manually executed counterpart.

 

5.             Conflicts.  Except as expressly set forth herein, nothing
in this letter agreement shall affect any rights that the Investor otherwise
may have under the Memorandum, the Subscription Agreement, the Memorandum of
Association, the Articles, or under any other agreement or instrument between
or among the parties hereto.  In the
event of any inconsistency between the terms and provisions of this letter
agreement and the terms and provisions of any other agreement between or among
the parties hereto, the terms and provisions of this letter agreement shall govern.

 

[Remainder of page intentionally left blank]

 

2

 

If the foregoing is acceptable to you, please signify
your agreement by executing the space indicated below.

 

KVO Capital Offshore Fund, Ltd.,

KVO Capital Management, LLC

 

 

	
  By:

  	
  /s/ KERNAN V. OBERTING

  	
   

  
	
  Name: Kernan V. Oberting

  	
   

  
	
  Title: Managing Member

  	
   

  
	
  Date: July 29, 2010

  	
   

  

 

 

Agreed and accepted on the date first written above:

 

 

Montpelier Reinsurance Ltd.

 

 

	
  By:

  	
  /s/ CHRISTOPHER L. HARRIS

  	
   

  
	
  Name: Christopher L.
  Harris

  	
   

  
	
  Title: Chief Executive
  Officer

  	
   

  
	
  Date: July 29, 2010

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