**EXHIBIT 10.3**

 

**PLEDGE ANDSECURITY AGREEMENT**

 

THIS PLEDGEAND SECURITY AGREEMENT (this “Pledge Agreement”) is dated as of August 1,2005 and made by and between KENNETT CAPITAL, INC. (the “Pledgor”) andALLSTATE LIFE INSURANCE COMPANY (the “Secured Party”).

 

W I T N E S S E T H

 

WHEREAS, theSecured Party and the Pledgor have entered into a Surplus Note PurchaseAgreement dated August 1, 2005 (the “Surplus Note Purchase Agreement”),under which the Secured Party has agreed to sell, and the Pledgor may purchasefrom the Secured Party, certain surplus notes issued by ALIC ReinsuranceCompany (the “Issuer”); and

 

WHEREAS, assecurity for the payment and performance by the Pledgor of its obligationsunder the Surplus Note Purchase Agreement, the Pledgor has agreed to grant apledge of and security interest in the Pledgor’s right, title and interest inand to the surplus notes issued by the Issuer and purchased by the Pledgor (the“Surplus Notes”);

 

NOW,THEREFORE, in consideration of the premises and of the mutual covenants hereincontained, the Pledgor and the Secured Party hereby agree as follows:

 

# ARTICLE IGRANT OF PLEDGE AND SECURITY INTEREST

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## Section 1.1                                      Grantof Security Interest.  To secure thepayment in full when due by the Pledgor to the Secured Party under the SurplusNote Purchase Agreement of all amounts (including fees, charges and expenses)which accrue and become due thereunder and the timely performance by thePledgor of each of its other obligations thereunder (collectively, the “SecuredObligations”), the Pledgor hereby pledges and grants to the Secured Party asecurity interest in all of the Pledgor’s right, title and interest in, to andunder the following (collectively, the “Collateral”): (a) the SurplusNotes and all certificates or instruments evidencing the same and all proceedsthereof, all accessions thereto and substitutions therefor; (b) allinterest, distributions and other proceeds from time to time received,receivable or otherwise distributed to Pledgor in respect of or in exchange forany or all of the Surplus Notes; and (c) all “Proceeds” (as such term isdefined in the Uniform Commercial Code as in effect in the State of Illinois orany other relevant jurisdiction (the “UCC”)) of any of the foregoing.

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## Section 1.2                                      Perfectionof Security Interest; Delivery of Collateral.

 

### (a)                                  Allcertificates, agreements or instruments representing or evidencing theCollateral, to the extent not previously delivered to the Secured Party, shallimmediately upon receipt thereof by Pledgor be delivered to and held by theSecured Party pursuant to the provisions hereof.  All Collateral shall be in suitable form fortransfer by delivery or shall be

 

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### accompanied by duly executedinstruments of transfer or assignment in blank, all in form and substance satisfactoryto the Secured Party.  The Secured Partyshall have the right, at any time upon the occurrence of an Event of Defaultand without notice to Pledgor, to endorse, assign or otherwise transfer to orto register in its own name any or all of the Collateral.  In addition, the Secured Party shall have theright at any time to exchange certificates representing or evidencingCollateral for certificates of smaller or larger denominations.

###  

### (b)                                 ThePledgor agrees to take all other actions which may be necessary under the lawsof the State of Illinois or may be requested by the Secured Party to protectand perfect the interest of the Secured Party in the Collateral created herebyand to ensure that such interest is senior in rank to the claims of any other creditorof the Pledgor claiming an interest in and to the Collateral, including thefiling of UCC-1 financing statements (including any continuation statementswith respect to such financing statements when applicable) identifying theSurplus Notes and naming the Pledgor as debtor and the Secured Party as securedparty.  The Pledgor shall deliver to theSecured Party file-stamped copies or other evidence of such filings.  Notwithstanding the agreements set forth inthis Section 1.2, the Pledgor hereby authorizes the Secured Party to take,and appoints the Secured Party as its attorney-in-fact for the purpose oftaking, any action necessary under the UCC to perfect, and to maintain theperfection and priority of, the Secured Party’s interest in the Collateral,including, without limitation, the filing of any such financing andcontinuation statements.

 

# ARTICLE IIREPRESENTATIONS, WARRANTIES AND COVENANTS

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## Section 2.1                                      Representations,Warranties and Covenants as to the Pledgor. The Pledgor hereby represents, warrants and covenants to the SecuredParty:

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### (a)                                  Titleto Collateral.  The Surplus Notes andall of the other Collateral in existence on the date hereof are, and allSurplus Notes and all of the other Collateral issued subsequent to the datehereof will be, owned by the Pledgor free and clear of any lien orencumbrance.  The Pledgor has not (i) filedor consented to the filing with any governmental authority of any financingstatement or analogous document under the UCC or any other applicable lawscovering any Collateral, (ii) made any assignment to any other person ofany interest in the Collateral or (iii) entered into any securityagreement or similar instrument or arrangement covering all or any part of theCollateral with any other person, which financing statement or analogousdocument, assignment, security agreement or similar instrument is still ineffect.

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### (b)                                 Organization.  The Pledgor is a corporation organized underthe laws of the State of Delaware.

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### (c)                                  PrincipalOffice.  The Pledgor maintains itschief executive office at 42 Read’s Way, Suite 124, New Castle, Delaware19720-1642.

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### (d)                                 NoLiens.  Pledgor is as of the datehereof, and at the time of any delivery of any Collateral to the Secured Partypursuant to Article I of this Pledge Agreement, Pledgor

 

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### will be, the sole legal andbeneficial owner of the Collateral.  AllCollateral is on the date hereof, and will be, so owned by Pledgor free andclear of any lien except for the lien created by this Pledge Agreement.

###  

### (e)                                  DueAuthorization.  The execution anddelivery to the Secured Party of this Pledge Agreement by the Pledgor, thedelivery to the Secured Party of the Surplus Notes together with any necessaryendorsements, and the consummation of the transactions provided for in thisPledge Agreement have been duly authorized by the Pledgor by all necessarycorporate action on its part and this Pledge Agreement constitutes a legal,valid and binding obligation of the Pledgor, enforceable against the Pledgor inaccordance with its terms, and except in each case as enforcement may belimited by bankruptcy, insolvency, examination, suspension of payments,fraudulent transfer, reorganization, moratorium and other similar laws ofgeneral applicability affecting the enforcement of creditors’ rights generally,public policy and general principles of equity (regardless of whether suchproceeding is considered in a proceeding in equity or law).

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### (f)                                    NoConflict.  The execution and deliveryof this Pledge Agreement, the delivery of the Collateral, the consummation ofthe transactions contemplated hereby and the fulfillment of the terms hereofwill not conflict with or result in the breach of any of the material terms andprovisions of, constitute (with or without notice or lapse of time or both) adefault under, or result in the creation of any lien upon any property orassets of the Pledgor pursuant to, any indenture, contract, agreement,mortgage, deed of trust or other instrument to which the Pledgor is a party orby which it or any of its properties is bound.

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### (g)                                 NoViolation.  The execution anddelivery of this Pledge Agreement, the delivery of the Collateral, theconsummation of the transactions contemplated hereby and the fulfillment of theterms hereof will not conflict with or violate any organizational or governingdocuments of the Pledgor or any law, treaty, rule or regulation, or anyjudgment, order or decree, or determination of an arbitrator or governmentalauthority applicable to or binding upon the Pledgor.

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### (h)                                 NoProceedings.  There are no actions atlaw, suits in equity or proceedings by or before any governmental commission,bureau or administrative agency pending or, to the best knowledge of thePledgor, threatened against the Pledgor or any of its assets, that wouldadversely affect the ability of the Pledgor to perform its obligations underthis Pledge Agreement.

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### (i)                                     NoAuthorization Required.  Except forsuch authorizations or approvals as shall have been obtained prior to the datehereof, no authorization or approval of any governmental agency or commissionor public or quasi-public body or authority with jurisdiction over the Pledgoror any of its assets is necessary for the due execution and delivery of thisPledge Agreement or for the validity or enforceability hereof.

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## Section 2.2                                      Deliveryof Pledged Collateral; Filings.

 

Pledgor hasdelivered, or will deliver, to the Secured Party all certificates representingthe Surplus Notes and has delivered, or will deliver, to the Secured Party an

 

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appropriate UCC-1 financing statement to be filed with the Secretary ofState of the State of Delaware, the State in which the Pledgor is located,evidencing the lien created by this Pledge Agreement, and such delivery, filingand pledge of the Collateral pursuant to this Pledge Agreement will create avalid and perfected first priority security interest in the Collateral securingthe payment of the Secured Obligations pursuant to the UCC in effect in eachapplicable jurisdiction, including, without limitation, the States of Illinoisand Delaware.

 

## Section 2.3                                      Distributions;etc.  So long as no Event of Defaultshall have occurred, Pledgor shall be entitled to receive and retain, and toutilize free and clear of the lien of this Pledge Agreement and alldistributions of interest or other funds in respect of the Surplus Notes to theextent made in accordance with the provisions of the Surplus Note PurchaseAgreement; provided, however, that any and all such distributionsconsisting of rights or interests in the form of securities shall be, and shallbe forthwith delivered to the Secured Party to hold as additional Collateraland shall, if received by Pledgor, be received in trust for the benefit of theSecured Party, be segregated from the other property or funds of Pledgor, andshall be forthwith delivered to the Secured Party as Collateral in the sameform as so received (with any necessary endorsement).

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## Section 2.4                                      Transfersand Other Liens.  Pledgor shall not (i) sell,convey, assign or otherwise dispose of, or grant any option or right withrespect to, any of the Collateral except as permitted by the Surplus NotePurchase Agreement or (ii) create or permit to exist any lien orencumbrance upon or with respect to any Collateral, other than the lien andsecurity interest granted to the Secured Party pursuant to this PledgeAgreement.

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# ARTICLE IIIEVENTS OF DEFAULT; REMEDIES

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## Section 3.1                                      Eventsof Default.  Each of the followingevents shall constitute an event of default (each, an “Event of Default”)under this Pledge Agreement: (i) any material breach by the Pledgor of anyterm, provision or covenant of the Surplus Note Purchase Agreement; (ii) anymaterial breach by the Pledgor of any term, provision or covenant of thisPledge Agreement; (iii) the Secured Party ceases to have a perfected firstpriority lien on, and security interest in, the Collateral; or (iv) thePledgor becomes subject to bankruptcy, insolvency, reorganization, liquidation,conservation, rehabilitation or other similar proceedings.

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## Section 3.2                                      RemediesUpon Default.

 

### (a)                                  Uponthe occurrence of an Event of Default, all rights of Pledgor to receivedistributions which it would otherwise be authorized to receive and retainpursuant to Section 2.3 hereof shall cease and all such rights shallthereupon become vested in the Secured Party, which shall thereupon have thesole right to receive and hold as Collateral such distributions.

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### (b)                                 Alldistributions which are received by Pledgor contrary to the provisions ofparagraph (a) of this Section 3.2 shall be received in trust for thebenefit of the Secured Party,

 

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### shall be segregated from otherfunds of Pledgor and shall immediately be paid over to the Secured Party asCollateral in the same form as so received (with any necessary endorsement).

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### (c)                                  Ifan Event of Default shall have occurred, Secured Party shall have the right, inaddition to the other rights and remedies provided for herein or otherwiseavailable to it to be exercised from time to time, (i) to retain and applythe distributions to the Secured Obligations, and (ii) to exercise all therights and remedies of a secured party on default under the UCC in effect inthe State of Illinois at that time, and the Secured Party may also in its solediscretion, without notice except as specified below, sell the Collateral orany part thereof (including, without limitation, any partial interest in theSurplus Notes) in one or more parcels at public or private sale, at anyexchange, broker’s board or at any of the Secured Party’s offices or elsewhere,at such price or prices and upon such other terms as the Secured Party may deemcommercially reasonable.  Secured Partymay be the purchaser of any or all of the Collateral at any such sale and shallbe entitled, for the purpose of bidding and making settlement or payment of thepurchase price for all or any portion of the Collateral sold at such sale, touse and apply any of the Secured Obligations owed to it as a credit on accountof the purchase price of any Collateral payable by it at such sale.  Each purchaser at any such sale shall acquirethe property sold absolutely free from any claim or right on the part ofPledgor, and Pledgor hereby waives, to the fullest extent permitted by law, allrights of redemption, stay and/or appraisal which it now has, or may at anytime in the future have, under any rule of law or statute now existing orhereafter enacted.  Pledgor acknowledgesand agrees that five days’ notice to Pledgor of the time and place of anypublic sale or the time after which any private sale or other intendeddisposition is to take place shall constitute reasonable notification of suchmatters.  No notification need be givento Pledgor if it has signed, after the occurrence of an Event of Default, astatement renouncing or modifying any right to notification of sale or otherintended disposition.  The Secured Partyshall not be obligated to make any sale of Collateral regardless of notice ofsale having been given.  The SecuredParty may adjourn any public or private sale from time to time by announcementat the time and place fixed therefore, and such sale may, without furthernotice, be made at the time and place to which it was so adjourned.  Pledgor hereby waives, to the fullest extentpermitted by law, any claims against the Secured Party arising by reason of thefact that the price at which any Collateral may have been sold at such aprivate sale was less than the price which might have been obtained at a publicsale, even if the Secured Party accepts the first offer received and does notoffer such Collateral to more than one offeree. The Secured Party shall not be liable for any incorrect or improperpayment made pursuant to this Section in the absence of gross negligenceor willful misconduct.

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### (d)                                 Pledgorrecognizes that, by reason of certain prohibitions contained in the SecuritiesAct of 1933, as amended (the “Securities Act”), and applicable state securitieslaw, the Secured Party may be compelled, with respect to any sale of all or anypart of the Collateral, to limit purchasers to persons who will agree, amongother things, to acquire the Collateral for their own account, for investmentand not with a view to the distribution or resale thereof.  Pledgor acknowledges that any such privatesales may be at prices and on terms less favorable to the Secured Party thanthose obtainable through a public sale without such restrictions (including,without limitation, a public offering made pursuant to a registration statementunder the Securities Act), and, notwithstanding such circumstances, agrees thatany such private sale shall be deemed to have been made in a commerciallyreasonable manner and that the Secured Party shall have no obligation to engagein public sales and no obligation to delay the sale of any

 

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### Collateral for the period oftime necessary to permit the issuer thereof to register it for a form of publicsale requiring registration under the Securities Act or under applicable statesecurities laws, even if such issuer would agree to do so.

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## Section 3.3                                      Applicationof Proceeds.  All distributions heldfrom time to time by the Secured Party and all proceeds received by the SecuredParty in respect of any sale of, collection from, or other realization upon allor any part of the Collateral pursuant to the exercise by the Secured Party ofits remedies as a secured creditor as provided herein shall be applied,together with any other sums then held by the Secured Party pursuant to thisPledge Agreement, promptly by the Secured Party as follows:

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## First,to the payment of all costs and expenses, fees, commissions and taxes of suchsale, collection or other realization, including, without limitation,compensation to the Secured Party and its agents and counsel, and all expenses,liabilities and advances made or incurred by the Secured Party in connectiontherewith, together with interest on each such amount at the highest rate thenin effect under the Surplus Note Purchase Agreement from and after the datesuch amount is due, owing or unpaid until paid in full;

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## Second,without duplication of amounts applied pursuant to clause First above, to theindefeasible payment in full in cash of the Secured Obligations in accordancewith the terms of the Surplus Note Purchase Agreement; and

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## Third,the balance, if any, to the persons lawfully entitled thereto (includingPledgor or its successors or assigns).

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## Section 3.4                                      Expenses.  Pledgor will upon demand pay to the SecuredParty the amount of any and all expenses, including the fees and expenses ofits counsel and the fees and expenses of any experts and agents, which theSecured Party may incur in connection with (i) the collection of the SecuredObligations, (ii) the enforcement and administration of this PledgeAgreement, (iii) the custody or preservation of, or the sale of,collection from, or other realization upon, any of the Collateral, (iv) theexercise or enforcement of any of the rights of the Secured Party hereunder or (v) thefailure by Pledgor to perform or observe any of the provisions hereof.  All amounts payable by Pledgor under this Section 3.4shall be due upon demand and shall be part of the Secured Obligations.  Pledgor’s obligations under this Section 3.4shall survive the termination of this Pledge Agreement and the discharge ofPledgor’s other obligations hereunder.

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# ARTICLE IV

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# MISCELLANEOUS

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## Section 4.1                                      Notices.  All demands, notices, instructions andcommunications hereunder shall be in writing and shall be deemed to have beenduly given when received.  All notices orcommunications under this Pledge Agreement shall be addressed as follows:

 

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**Notices to Secured Party:**

 

Allstate Life Insurance Company3100 Sanders RoadNorthbrook, Illinois  60062Attention:  Allstate Financial – ChiefFinancial OfficerFacsimile:  847-326-5052

 

**Notices to Pledgor:**

 

Kennett Capital, Inc.42 Read’s Way, Suite 124New Castle Corporate CommonsNew Castle, Delaware  19720-1642Attention:  Executive Vice PresidentFacsimile:  302-324-5253

 

## Section 4.2                                      Termination;Release.  When all the SecuredObligations have been paid in full, this Pledge Agreement shall terminate.  Upon termination of this Pledge Agreement,the Secured Party shall, upon the request and at the sole cost and expense ofPledgor, forthwith assign, transfer and deliver to Pledgor, against receipt andwithout recourse to or warranty by the Secured Party, such of the Collateral tobe released (in the case of a release) as may be in the possession of theSecured Party and as shall not have been sold or otherwise applied pursuant tothe terms hereof, and, with respect to any other Collateral, proper instruments(including UCC termination statements on Form UCC-3) acknowledging thetermination of this Pledge Agreement or the release of such pledged Collateral,as the case may be.

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## Section 4.3                                      ContinuingSecurity Interest; Assignment.  ThisPledge Agreement shall create a continuing security interest in the Collateraland shall (i) be binding upon Pledgor, its successors and assigns and (ii) inure,together with the rights and remedies of the Secured Party hereunder, to thebenefit of the Secured Party and each of its successors, transferees andassigns; no other persons (including, without limitation, any other creditor ofPledgor) shall have any interest herein or any right or benefit with respecthereto.

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## Section 4.4                                      Severabilityof Provisions.  If any one or more ofthe covenants, agreements, provisions or terms of this Pledge Agreement shallfor any reason whatsoever be held invalid, then such covenants, agreements,provisions or terms shall be deemed severable from the remaining covenants,agreements, provisions or terms of this Pledge Agreement and shall in no wayaffect the validity or enforceability of the other provisions of this PledgeAgreement.

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## Section 4.5                                      FurtherAssurances.  The Pledgor agrees to doand perform, from time to time, any and all acts and to execute any and all furtherinstruments required or reasonably requested by the Secured Party to maintainthe perfection and the priority of the Secured Party’s interest and to effectmore fully the purposes of this Pledge Agreement.

 

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## Section 4.6                                      NoWaiver; Cumulative Remedies.  Nofailure to exercise and no delay in exercising, on the part of the SecuredParty, any right, remedy, power or privilege hereunder, shall operate as awaiver thereof; nor shall any single or partial exercise of any right, remedy,power or privilege hereunder preclude any other or further exercise thereof orthe exercise of any other right, remedy, power or privilege.  The rights, remedies, powers and privilegesherein provided are cumulative and not exhaustive of any rights, remedies,powers and privileges provided by law.

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## Section 4.7                                      Amendment.  This Pledge Agreement may not be modified,amended, waived or supplemented except by a writing signed by each of theparties hereto.

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## Section 4.8                                      Headings.  The headings herein are for purposes ofreference only and shall not otherwise affect the meaning or interpretation ofany provision hereof.

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## Section 4.9                                      **GOVERNING LAW.  THIS PLEDGE AGREEMENT SHALL BE GOVERNED BYAND CONSTRUED IN ACCORDANCE WITH THE LOCAL LAWS OF THE STATE OF ILLINOIS,WITHOUT REGARD TO ITS PRINCIPLES OF CHOICE OF LAW.**

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## Section 4.10                                Submissionto Jurisdiction.  Pledgor herebyirrevocably submits to the jurisdiction of the federal and state courts ofcompetent jurisdiction in the State of Illinois in any suit or proceedingarising out of this Pledge Agreement or the transactions contemplated herebyand agrees to be bound by any judgment rendered by such courts in connectionwith this Pledge Agreement and waives any and all objections to jurisdictionthat it may have under the laws of Illinois or any other jurisdiction.

 

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IN WITNESSWHEREOF, the undersigned have caused this Pledge Agreement to be duly executedand delivered by their respective duly authorized officers as of the day andyear first above written.

 
|   | KENNETT  CAPITAL, INC.                                   |
|--------|----------------------------------------------------------|
|   |                                                     |
|   |                                                     |
|   | By:                                                      | /s/ Steven  C. Verney |
|   | Name: Steven  C. Verney                                  |
|   | Title:  Treasurer                                        |
|   |                                                     |
|   |                                                     |
|   | ALLSTATE  LIFE INSURANCE COMPANY                         |
|   |                                                     |
|   |                                                     |
|   | By:                                                      | /s/ Barry S.  Paul |
|   | Name: Barry  S. Paul                                     |
|   | Title:  Assistant Vice President and Assistant Treasurer |
|        |                                                          |  |  |

 

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