▇▇▇▇ ▇▇▇▇▇▇ ASSOCIATES, L.P.
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT, effective as of September 1,1997, by and between Penn
America Insurance Company, and its subsidiary Penn-Star Insurance Company
(hereinafter collectively referred to as the "Client") and ▇▇▇▇ ▇▇▇▇▇▇
Associates, L.P., a Delaware Limited Partnership and registered investment
advisor under the Investment Advisors Act of 1940, as amended (the "Advisor").
WHEREAS, the Client desires to appoint and designate the Advisor to provide
investment advisory and management services for equity assets and such other
funds and/or securities as Client shall designate, any additions thereof or
changes therein (the "Account") and the Advisor agrees to so act;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
it is hereby agreed between the parties hereto as follows:
1. APPOINTMENT OF ADVISOR. The Client hereby designates and retains the
Advisor to furnish investment advisory and management services for the
Account, and the Advisor hereby accepts such appointment and agrees to
supervise the investment and reinvestment of assets of the Account in
accordance with the terms of this Agreement.
2. CUSTODY SECURITIES AND FUNDS. The Advisor shall at no time receive, retain
or physically control any cash, securities or other assets forming any part
of the Account.
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3. DISCRETION. The Advisor is hereby granted complete discretion in the
management of the investments in the Account, provided that all investment
transactions first receive approval, either written or verbal, from the
Chairman of the Investment Committee of the Client, and provided further,
however, that if the Chairman of the Investment Committee is not available
to give such approval and Advisor, in the exercise of its fiduciary
responsibility, believes the investment transaction should be executed
promptly, and the investment is within Client's Investment Objectives and
Policy Guidelines and Advisor's investment selection criteria, then Advisor
may execute the investment transaction and so advise the Chairman of the
Investment Committee as soon thereafter as possible. Subject to the
aforesaid, Advisor is authorized to invest and reinvest the assets in the
Account, the proceeds thereof and any additions thereto, to make investment
changes and to take any other lawful action with respect to the Account in
furtherance of Client's investment objectives, including, without
limitation, execution of documents, the making of investment decisions, the
placing of brokerage orders, and the rendering of decisions as to the
nature, amount and timing of transactions for the Account. Subject to the
aforesaid, Advisor shall have complete discretion to designate brokers and
to negotiate brokerage commissions and rates for transactions for the
Account, subject to the
2
requirements of applicable law. In acting as an investment advisor, the
Advisor shall use its best judgment, and shall not be liable for any losses
sustained by Client or for any error in judgment, except if Advisor fails
to exercise the degree of care, skill, prudence and diligence that a
prudent person acting in a like capacity would use, or if Advisor's conduct
constitutes bad faith or gross negligence, provided, however, that the
foregoing shall not constitute a waiver by the Client of any rights or
claims the Client may have under federal or state securities laws,
including the anti fraud provisions of those laws.
1. INVESTMENT OBJECTIVE. The Client hereby directs the Advisor to manage the
Account in furtherance of Client's investment objectives. The Client's
investment objectives are set forth in its Investment Plans, copies of
which are attached at Addendums "A" and "B" and incorporated herein as
though fully set forth at length. The Client may establish additional or
different investment objectives, or impose investment restrictions on the
Advisor with respect to the Account, by furnishing written notice to the
Advisor of such change. In furtherance of the Client's investment
objectives, the Advisor is authorized to enter into those investments set
forth in the "Investment Policy Guidelines" section of Client's Investment
Plans. See Addendums "A" and"B," pp.2-3.
3
2. COMPENSATION AND EXPENSES. Advisor shall be compensated in accordance with
Addendum C in this Agreement.
3. ALLOCATION OF BROKERAGE. Where the Advisor places orders for the execution
of portfolio transactions for the Account, the Advisor may allocate such
transactions to such brokers and dealers for execution on such markets at
such prices and at such commission rates as in the good faith judgment of
the Advisor will be in the best interest of the Account, taking into
consideration in the selection of such brokers and dealers not only the
available prices and rates of brokerage commissions but also other relevant
factors such as research, execution capabilities, and other services
provided by such brokers or dealers which are expected to enhance the
general portfolio management capabilities of the Advisor and the value of
any ongoing relationship of the Advisor with such brokers and dealers.
4. SERVICE TO OTHER CLIENTS. It is understood that the Advisor performs
investment advisory and management services for various clients. Client
agrees that the Advisor may give advice and take action with respect to any
of its other clients which may differ from advice given or the timing or
nature of action taken with respect to the Account so long as it is the
Advisor's policy, to the extent practical, to allocate investment
opportunities to the Account over a period of time on a fair and equitable
basis relative to other clients. It is understood
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that the Advisor shall not have any obligation to purchase or sell, or to
recommend for purchase or sale, for the Account any security which the
Advisor, its principals, affiliates, or employees may purchase or sell for
its or their own accounts or for the account of any other client, if in the
opinion of the Advisor such transaction or investment appears unsuitable,
impractical, or undesirable for the Account, subject to Client's approval.
5. CONFIDENTIAL RELATIONSHIP. All investment information and advice furnished
by the Advisor to the Client shall be treated as confidential and shall not
be disclosed to third parties except as required by law.
6. TERMINATION, ASSIGNMENT, ASSIGNS. This Agreement shall continue until
terminated by either party hereto. This Agreement may be terminated upon
thirty (30) days written notice by either party to the other of such
termination. Fees will be prorated to the date of termination specified in
the notice of termination. The Advisor, a limited partnership, will notify
the Client within a reasonable time after any change in the members of the
partnership. No assignment, as that term is defined in the Investment
Advisors Act of 1940, of this Agreement shall be made by Advisor. Subject
to the foregoing, this Agreement shall inure to the benefit of the heirs,
administrators, personal representatives, successors, or assigns of the
parties hereto.
5
7. REPRESENTATIONS BY CLIENT. Client represents and confirms that the
employment of Advisor and the investment objectives set forth herein are
authorized by the governing documents relating to the Account and that the
terms hereof do not violate any obligation by which the Client is bound,
whether arising by contract, operation of law, or otherwise, and that (a)
this Agreement has been duly authorized by appropriate action and when
executed and delivered will be binding upon Client in accordance with its
terms, and (b) the Client will deliver to Advisor such evidence of such
authority as Advisor may reasonably require, whether by way of a certified
resolution or otherwise.
8. REPRESENTATIONS OF ADVISOR. Advisor represents that it is a registered
investment advisor under the Investment Advisors Act of 1940 as amended
and, for employee benefit accounts, acknowledges that it is a fiduciary to
the plan under Section 3 (38) of the Employee Retirement Income Security
Act of 1974 (ERISA).
9. REPORTS. The Advisor shall furnish the Client a quarterly statement of the
value of the Account and the manner by which the fee is calculated. The
Advisor shall also furnish such other reports or information as the Client
may reasonably request.
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10. CONFIMATIONS. The Client's execution of this Agreement shall constitute
authorization for the custodian of the Account to direct confirmation of
all transactions in the Account to the Advisor.
11. GENERAL.
(A) This Agreement shall be construed and enforced in accordance with the
laws of Florida.
(B) All Notices shall be in writing and shall be deemed given if delivered
or mailed, certified or registered mail postage prepaid, to the
principal office of the party hereto. The Advisor may rely upon any
Notice believed by it to be genuine and authorized.
(C) This Agreement constitutes the entire understanding of the parties and
may be amended only by written instrument executed by the parties
hereto.
(D) This Agreement supersedes any and all other agreements that may have
been entered into by and between the parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers on the dates appearing below.
▇▇▇▇ ▇▇▇▇▇▇ ASSOCIATES, L.P.
DATE: 1/12/98 By: /s/ ▇▇▇▇ ▇ ▇▇▇▇▇▇
General Partner
▇▇▇▇ ▇▇▇▇▇▇, Inc.
▇▇▇▇ ▇▇▇▇▇▇, President
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DATE: 1/21/98 By: /s/ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Secretary and Treasurer
Penn-America Insurance Company
and Penn-Star Insurance Company
8
Addendum A
INVESTMENT PLAN
OF
PENN-AMERICA INSURANCE COMPANY
Investment Portfolio - Objectives and Guidelines
The Board of Directors of PENN AMERICA INSURANCE COMPANY (the "Company")
authorizes the Company's officers to engage the services of an Investment
Manager who possesses the necessary personnel and research facilities to manage
the Company's investment portfolio. The portfolio consists of common stocks,
preferred stocks and cash equivalents.
The policy guidelines for the Investment Portfolio shall be as stated
herein, and are subject to modification with Board approval from time to time by
the Company after consideration of the advice and recommendations of the
Investment Manager.
Execution of All Trades: It is hereby understood that all investment
transactions must have prior approval either written or verbal, of the Chairman
of the Investment Committee, ▇▇▇▇▇ ▇▇▇▇▇▇▇▇, prior to their initiation by the
investment manager, provided, however, that if the Chairman of the Investment
Committee is not available to give such approval and Advisor, in the exercise of
its fiduciary responsibility, believes the investment transaction should be
executed promptly, and the investment is within Client's Investment Objectives
and Policy Guidelines and Advisor's investment selection criteria, then Advisor
may execute the investment transaction and so advise the Chairman of the
Investment Committee as soon thereafter as possible.
Investment Portfolio
The Company's investment portfolio consists of funds allocated and invested
in one of two (2) basic forms of investment:
(A) Money market and analogous cash equivalent funds, awaiting permanent
investment into equities securities.
(B) Equity issues including common and preferred stocks, units of
beneficial interest, American Depository Receipts, and convertible
securities.
The Company shall establish percentage allocation ranges for each category,
which shall be monitored on a regular, periodic basis and which may be changed
from time to time.
Investment Objectives
1. The Company's investment portfolio is to be managed in a conservative,
risk adverse style with the objective of achieving long-term performance
superior to the widely followed market averages.
2. Primary investment emphasis shall be placed upon consistency of
performance, i.e., the achievement of investment objectives in such a manner as
to protect the Company's assets from excessive volatility in market value from
year to year.
3. Significant investment emphasis shall also be placed upon the
preservation of the purchasing power of the assets.
4. Sufficient liquidity shall be maintained to fund any possible corporate
outflows related to the property and casualty insurance business.
Investment Policv Guidelines
Assets are to be managed with a view toward achieving the specific
investment objectives previously described. Consistency of performance,
protection of principal as well as purchasing power and the maintenance of
sufficient liquidity, should be the overriding guidelines for the investment
portfolio.
To underscore these considerations, as well as to recognize the fiduciary
responsibilities associated with the management of the Company's assets, there
are certain characteristics which are expected to be associated with the
portfolio and which shall be viewed as guidelines in formulating investment
strategies.
A. Equity Issues
1. Allocation. The target range of investments in equity issues is up to
thirty three and 1/3 percent (33 1/3%) of the value of the Company's capital
surplus.
2. Types of Securities. Equity securities shall mean common and preferred
stocks or equivalents (e.g., units of beneficial interest, American Depository
Receipts, plus issues convertible into common stock).
2
3. Cash Equivalents. At the discretion of the Investment Manager, short
term money market funds and/or investments may represent a material portion of
the equity issues. However, if commercial paper is used, it must have a minimum
quality rating of A-2 or P-2 as established by Moody's or Standard & Poor's. In
addition, bankers' acceptances or certificates of deposit must be issued by
banks incorporated in the United States.
4. Diversification. Without prior approval of the Company, additions to a
single security may not be made once the market value of the security exceeds
five percent (5%) of the total portfolio (at market value). Other than these
constraints, there are no quantitative guidelines suggested as to insurer,
industry or individual security diversification. However, prudent
diversification standards should be developed and maintained by the Investment
Manger.
Exclusions
The following categories of securities are not permissible for investment in the
Company's portfolio without prior written approval:
(a) Unregistered or restricted stock;
(b) Commodities, including gold or currency futures;
(c) Conditional sales contracts;
(d) Options, including the purchase, sale or writing of options;
(e) Margin buying;
(f) Short selling;
(g) Leasebacks; and
(h) Fixed income securities.
3
Regulatory Considerations
* Risk Based Capital
The Company, as an insurance entity, is regulated by various state
insurance departments, NAIC and A.M. Best. One element of the regulation is risk
based capital which has a RBC component related to the investment portfolio.
There are three factors which are evaluated by RBC: quality of invested assets,
mixed of invested assets and affiliate risk. Manager should be aware of the
RBC's current factors at all times when evaluating appropriate investment
consideration and not participate in any investment decision which would be
detrimental to the client's Risk Based Capital.
4
Addendum B
INVESTMENT PLAN
OF
PENN STAR INSURANCE COMPANY
Investment Portfolio- Objectives and Guidelines
The Board of Directors of PENN-STAR INSURANCE COMPANY (the "Company")
authorizes the Company's officers to engage the services of an Investment
Manager who possesses the necessary personnel and research facilities to manage
the Company's investment portfolio. The portfolio consists of common stocks,
preferred stocks and cash equivalents.
The policy guidelines for the Investment Portfolio shall be as stated
herein, and are subject to modification with Board approval from time to time by
the Company after consideration of the advice and recommendations of the
Investment Manager.
Execution of All Trades: It is hereby understood that all investment
transactions must have prior approval either written or verbal, of the Chairman
of the Investment Committee, ▇▇▇▇▇ ▇▇▇▇▇▇▇▇, prior to their initiation by the
investment manager, provided, however, that if the Chairman of the Investment
Committee is not available to give such approval and Advisor, in the exercise of
its fiduciary responsibility, believes the investment transaction should be
executed promptly, and the investment is within Client's Investment Objectives
and Policy Guidelines and Advisor's investment selection criteria, then Advisor
may execute the investment transaction and so advise the Chairman of the
Investment Committee as soon thereafter as possible.
Investment Portfolio
The Company's investment portfolio consists of funds allocated and invested
in one of two (2) basic forms of investment:
(A) Money market and analogous cash equivalent funds, awaiting permanent
investment into equities securities.
(B) Equity issues including common and preferred stocks, units of
beneficial interest, American Depository Receipts, and convertible
securities.
The Company shall establish percentage allocation ranges for each category,
which shall be monitored on a regular, periodic basis and which may be changed
from time to time.
Investment Objectives
1. The Company's investment portfolio is to be managed in a conservative,
risk adverse style with the objective of achieving long term performance
superior to the widely followed market averages.
2. Primary investment emphasis shall be placed upon consistency of
performance, i.e., the achievement of investment objectives in such a manner as
to protect the Company's assets from excessive volatility in market value from
year to year.
3. Significant investment emphasis shall also be placed upon the
preservation of the purchasing power of the assets.
4. Sufficient liquidity shall be maintained to fund any possible corporate
outflows related to the property and casualty insurance business.
Investment Policy Guidelines
Assets are to be managed with a view toward achieving the specific
investment objectives previously described. Consistency of performance,
protection of principal as well as purchasing power and the maintenance of
sufficient liquidity, should be the overriding guidelines for the investment
portfolio.
To underscore these considerations, as well as to recognize the fiduciary
responsibilities associated with the management of the Company's assets, there
are certain characteristics which are expected to be associated with the
portfolio and which shall be viewed as guidelines in formulating investment
strategies.
A. Equity Issues
1. Allocation. The target range of investments in equity issues is up to
thirty three and 1/3 percent (33 1/3%) of the value of the Company's capital
surplus.
2. Types of Securities. Equity securities shall mean common and preferred
stocks or equivalents (e.g., units of beneficial interest, American Depository
Receipts, plus issues convertible into common stock).
2
3. Cash Equivalents. At the discretion of the Investment Manager, short
term money market funds and/or investments may represent a material portion of
the equity issues. However, if commercial paper is used, it must have a minimum
quality rating of A-2 or P-2 as established by Moody's or Standard & Poor's. In
addition, bankers' acceptances or certificates of deposit must be issued by
banks incorporated in the United States.
4. Diversification. Without prior approval of the Company, additions to a
single security may not be made once the market value of the security exceeds
five percent (5%) of the total portfolio (at market value). Other than these
constraints, there are no quantitative guidelines suggested as to insurer,
industry or individual security diversification. However, prudent
diversification standards should be developed and maintained by the Investment
Manger.
Exclusions
The following categories of securities are not permissible for investment
in the Company's portfolio without prior written approval:
(a) Unregistered or restricted stock;
(b) Commodities, including gold or currency futures;
(c) Conditional sales contracts;
(d) Options, including the purchase, sale or writing of options;
(e) Margin buying;
(f) Short selling;
(g) Leasebacks; and
(h) Fixed income securities.
3
Regulatory Considerations
* Risk-Based Capital
The Company, as an insurance entity, is regulated by various state
insurance departments, NAIC and A.M. Best. One element of the regulation is risk
based capital which has a RBC component related to the investment portfolio.
There are three factors which are evaluated by RBC: quality of invested assets,
mixed of invested assets and affiliate risk. Manager should be aware of the
RBC's current factors at all times when evaluating appropriate investment
considerations and not participate in any investment decision which would be
detrimental to the client's overall Risk-Based Capital.
4
ADDENDUM C
COMPENSATION AND EXPENSES The Client shall compensate the Advisor for its
services by the payment of an annual fee, calculated monthly, billed and payable
quarterly in arrears, based on the market value of the Account, including cash
or its equivalents, at the following rates.
Balanced Assets Annual Rate
First $ 1,000,000 .75%
Next $ 2,000,000 .563%
Up to $50,000,000 .375%
Over $50,000,000 *
* To be negotiated on a case by case basis.
/s/ RF initial as acknowledgement of fee schedule
The Advisor's fee shall be computed by applying 1/12th of the annual
percentage rate to the market value of the account computed on the last day of
each month. In computing the value of the assets in the Account, securities
listed on any national securities exchange shall be valued at the last quoted
sale price on the principal exchange in which the security is traded on the
valuation date. Any other asset shall be valued in a manner determined in good
faith by or as directed by the Advisor to reflect its fair market value. Advisor
shall exclude from the calculation of its fee any securities placed in the
account by Client which Advisor does not supervise and regarding which advisor
exercises no investment discretion and assumes no liability. Client shall inform
Advisor, in writing, when Client places any such securities in the Account.
The Client's execution of this Agreement shall constitute authorization by
the Client to the Independent Custodian of Client's funds to deduct the
Management Fee from the Client's Account when due, in accordance with the
following procedures:
1. Client provides authorization permitting Advisor's fees to be
paid directly from Client's account held by an independent
custodian,
2. Advisor sends Client and custodian, at least seven days prior to
the request for payment, a ▇▇▇▇ showing the amount of fee, the
value of Client's assets on which it was based, and the specific
manner in which Advisor's fee was calculated,
3. Custodian sends Client a statement, at least quarterly,
indicating all amounts disbursed from the account, including the
amount of the advisory fees paid directly to Advisor.
4. This billing arrangement may be terminated at any time by written
notice from Client to Advisor and custodian.