Exhibit 10(HH)
SERVICES AND AFFILIATION AGREEMENT
     THIS SERVICES AND AFFILIATION AGREEMENT (this “Agreement”) is entered into
this 30th day of October, 2009 between SOUTHERN MUTUAL INSURANCE COMPANY, a
Georgia mutual fire insurance company (“Southern Mutual”) and DONEGAL MUTUAL
INSURANCE COMPANY, a Pennsylvania mutual fire insurance company (“Donegal
Mutual”) in accordance with the terms of a Surplus Note Purchase Agreement dated
as of September 8, 2009 (the “Note Purchase Agreement”) with Donegal Mutual. All
capitalized terms used herein but not defined herein shall have the respective
meanings assigned to them in the Note Purchase Agreement.
WITNESSETH:
     WHEREAS, Donegal Mutual purchased on the date hereof a surplus note (the
“Surplus Note”) of Southern Mutual in the principal amount of Two Million Five
Hundred Thousand Dollars ($2,500,000) pursuant to the Note Purchase Agreement;
     WHEREAS, a condition precedent in the Note Purchase Agreement to Donegal
Mutual’s purchase of the Surplus Note is that Southern Mutual and Donegal Mutual
enter into this Agreement to assist Southern Mutual in reducing its expense
ratio and to provide advice and assistance to the officers and employees of
Southern Mutual in connection with their conduct of the operations of Southern
Mutual;
     WHEREAS, Donegal Mutual and Southern Mutual are entering into a Quota Share
Reinsurance Agreement purchase to which Southern Mutual shall cede to, and
Donegal Mutual shall assume from, Southern Mutual up to 100% of the net written
premiums of Southern Mutual; and
     WHEREAS, Southern Mutual and Donegal Mutual are also entering into a
Technology License Agreement whereby Donegal Mutual will license certain of its
computer applications and systems to Southern Mutual on the terms and conditions
set forth in the Technology License Agreement;
     NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, Donegal Mutual and
Southern Mutual agree as follows:
     1. Effective Date. The effective date of this Agreement shall be the date
of the Closing under the Note Purchase Agreement. This Agreement shall continue
in effect unless and until terminated pursuant to Section 5.

 

--------------------------------------------------------------------------------

 

     2. Services To Be Rendered.
          (a) In order to achieve the objectives of Southern Mutual in entering
into this Agreement, Donegal Mutual shall have the authority, subject to the
ultimate authority of the Board of Directors of Southern Mutual, to oversee all
of Southern Mutual’s principal business activities including the following
operations:
               (i) Underwriting — the development, implementation and
administration of policies relating to underwriting and the acceptance of risks,
the maintenance of underwriting manuals and guidelines and services relating to
the development of rates, the provision of all actuarial services necessary or
appropriate for the operation of Southern Mutual’s business, the analysis of
loss trends and reserve developments and risk concentrations and the arranging
for insurance and other reasonable risk management services in the underwriting
process to protect Southern Mutual and its properties and other assets against
loss, damage and liabilities;
               (ii) Claims — the admitting, adjusting, compromising, rejection
and settlement of claims under insurance policies issued by Southern Mutual and
the collection of reinsurance and recoverables;
               (iii) Reinsurance — the review, negotiation, monitoring and
coordination of all reinsurance contracts and placements, including the
determination of the amounts, terms, types and structure of reinsurance to be
obtained and the selection of the reinsurers;
               (iv) Investments — the oversight of the investment of all
available funds in the name of and on behalf of Southern Mutual pursuant to its
investment policy;
               (v) Data Processing Analysis — analysis and consultation
regarding the advisability and potential benefits of migrating Southern Mutual’s
computer systems to Donegal Mutual’s computer systems and the adaptation of
Southern Mutual’s computer system so it can operate Donegal Mutual’s WritePro®
and WriteBiz® applications;
               (vi) Personnel and Professional Services — the appointment,
direction, removal and suspension, in the name of and on behalf of Southern
Mutual, of employees and agents, including the determination of the appropriate
levels thereof, and the ongoing review and analysis of professional services,
including the retention of counsel, accountants and other consultants and the
payment to them, from the funds of Southern Mutual, of their reasonable fees for
services and reasonable expenses incurred in connection with such services;
               (vii) Financial Reporting — the analysis and reporting of actual
performance to budgeted performance, including analysis of financial results
through the

-2-

--------------------------------------------------------------------------------

 

budgeted period and the preparation of all statements and reports necessary or
appropriate for Southern Mutual’s business, including reports to insurance
regulatory authorities.
               (viii) Tax Administration — the ordinary and necessary tax
administration services for income taxes, premium taxes, sales and use taxes,
franchise and similar taxes and any other taxes incurred;
               (ix) Accounting Services — the providing of routine accounting
and bookkeeping services relating to cash, cash equivalents, receivables,
supplies and other inventory items, fixed assets and other asset accounting,
accounts payable, notes payable, other trade payables, payroll and payroll
taxes, other general ledger items, accounting services relating to investments
and the reconciliation of all bank accounts; and
               (x) Policyholder Services — the maintenance of policyholders’
customer relation services and the maintenance of policyholder information,
including names, addresses, policy anniversary dates and premiums due.
          (b) Donegal Mutual shall use its commercially reasonable efforts to
provide the services described above and such other or additional services as
Southern Mutual’s Board of Directors may from time to time request pursuant to
this Agreement in such manner as Southern Mutual’s Board of Directors, in its
business judgment, exercised in accordance with applicable law, deems necessary
or appropriate. Notwithstanding the foregoing, Southern Mutual agrees that
Donegal Mutual shall have no obligation to provide services to Southern Mutual
of a quality greater than the quality of such services that Donegal Mutual
maintains for its own operations. All byproducts from the services provided by
Donegal Mutual pursuant to this Agreement shall be the property of Southern
Mutual except whereby expressly provided to the contrary in this Agreement or in
the Technology License Agreement. Donegal Mutual shall cause the services to be
rendered by it to Southern Mutual pursuant to this Agreement to be covered by
Donegal Mutual’s disaster recovery plans.
          (c) Nothing in this Agreement shall constitute or be construed to be
or create a partnership or joint venture relationship between Southern Mutual
and Donegal Mutual. In connection with the performance of services under this
Agreement, neither Southern Mutual nor Donegal Mutual shall make any statement
or take any action that is inconsistent with the provisions of this
Section 2(c).
     3. Payment for Services.
          (a) Donegal Mutual agrees to bear the costs of the services Donegal
Mutual provides pursuant to this Services Agreement in consideration of the
Quota Share Reinsurance Agreement between Donegal Mutual and Southern Mutual.
Southern Mutual shall pay from its own funds all of its own operating costs and
expenses in accordance with the Ordinary Course of Southern Mutual’s business.

-3-

--------------------------------------------------------------------------------

 

          (b) Southern Mutual shall be solely responsible for, and shall hold
harmless and indemnify Donegal Mutual, including its successors, officers,
directors, employees, agents and affiliates, from and against all losses,
claims, damages, liabilities and expenses, including any and all reasonable
expenses and attorneys’ fees and disbursements incurred in investigating,
preparing or defending against any litigation or proceeding, whether commenced
or threatened, or any other claim whatsoever, whether or not resulting in any
liability, suffered, incurred, made, brought or asserted by any person not a
party to this Agreement in connection with Donegal Mutual’s provision of
services to Southern Mutual, unless such loss, claim, damage, liability or
expense results from the negligence, willful misconduct or fraud of Donegal
Mutual or its officers, directors, employees, agents or affiliates or any other
person engaged by Donegal Mutual to provide services to Southern Mutual.
          (c) Donegal Mutual shall be solely responsible for, and shall hold
harmless and indemnify Southern Mutual, including its successors, officers,
directors, employees, agents and affiliates, from and against all losses,
claims, damages, liabilities and expenses, including any and all reasonable
expenses and attorneys’ fees and disbursements incurred in investigating,
preparing or defending against any litigation or proceeding, whether commenced
or threatened, or any other claim whatsoever, whether or not resulting in any
liability, suffered, incurred, made, brought or asserted by any person not a
party to this Agreement resulting from the negligence, willful misconduct or
fraud of Donegal Mutual or its officers, directors, employees, agents or
affiliates or any other person engaged by Donegal Mutual to provide services to
Southern Mutual.
     4. Approval by Commissioner. Donegal Mutual and Southern Mutual agree to
submit this Agreement and any other required information and filings to the
Commissioner of Insurance of the State of Georgia (the “Commissioner”) for his
review and approval in accordance with the Georgia Insurance Code.
     5. Termination; Extension.
          (a) This Agreement shall terminate on December 31, 2014, except if
extended by Southern Mutual as provided in Section 5(b); and further provided,
however, that this Agreement may be terminated at any time prior to such date in
any of the following events:
               (i) By Donegal Mutual, upon written notice to Southern Mutual, if
Southern Mutual shall become insolvent or shall become subject to any voluntary
or involuntary conservatorship, rehabilitation, receivership, reorganization,
liquidation or bankruptcy case or proceeding or the surplus of Southern Mutual
is less than the minimum amount of surplus required by the laws of the State of
Georgia for the classes of insurance Southern Mutual is then transacting;

-4-

--------------------------------------------------------------------------------

 

               (ii) By Donegal Mutual, upon written notice to Southern Mutual,
if the designees of Donegal Mutual shall cease to constitute a majority of the
members of the Board of Directors of Southern Mutual;
               (iii) By Southern Mutual, upon written notice to Donegal Mutual,
if Donegal Mutual shall become insolvent or shall become subject to any
voluntary or involuntary conservatorship, receivership, reorganization,
liquidation or bankruptcy case or proceeding; or
               (iv) By Southern Mutual, upon written notice to Donegal Mutual,
subsequent to payment in full of the Surplus Note.
          (b) Subject to subsection (a) of this Section 5, Southern Mutual shall
have the option to extend the term of this Agreement for one additional year
upon delivery of a written notice of extension to Donegal Mutual not later than
90 days prior to the expiration of the then current term. Southern Mutual shall
have the right to exercise the extension option for five successive years
commencing with an option to extend the scheduled termination date of
December 31, 2014 to December 31, 2015 and ending with an option to extend the
termination date to December 31, 2019.
          (c) Any termination of this Agreement by Donegal Mutual pursuant to
Sections 5(a)(i) or 5(a)(ii) of this Agreement shall only become effective
(i) 18 months after the date on which written notice of termination is given to
Southern Mutual by Donegal Mutual and (ii) subject to the receipt of any
necessary insurance regulatory approvals.
     6. Confidentiality. Donegal Mutual agrees during the term of this Agreement
and subsequent to the termination of this Agreement to hold in confidence all
documents, materials and other information that Donegal Mutual shall have
obtained about Southern Mutual during the term of this Agreement (the
“Confidential Information”).
     7. Miscellaneous.
          (a) All notices or other communications required or permitted under
this Agreement shall be in writing and shall be given by confirmed facsimile or
registered mail, postage prepaid, addressed as follows:
     if to Southern Mutual, to:
Southern Mutual Insurance Company
360 Alps Road
Athens, Georgia 30606
Attention: Allen R. Green, President
Facsimile: 706-549-7855

-5-

--------------------------------------------------------------------------------

 

     if to Donegal Mutual, to:
Donegal Mutual Insurance Company
1195 River Road
Marietta, Pennsylvania 17547
Attention: Donald H. Nikolaus, President
Facsimile: 717-426-7009
Such notice shall be given at such other address or to such other representative
as a party to this Agreement may furnish pursuant to this Section 7(a) to the
other party to this Agreement.
          (b) No assignment, transfer or delegation, whether by merger or other
operation of law or otherwise, of any rights or obligations under this Agreement
shall be made by a party to this Agreement without the prior written consent of
the other party to this Agreement and, if required by applicable law, the
Commissioner and any other insurance regulatory authority having jurisdiction
over this Agreement. This Agreement shall be binding upon the parties hereto and
their respective permitted successors and assigns.
          (c) This Agreement constitutes the entire agreement of the parties to
this Agreement with respect to its subject matter, supersedes all prior
agreements, if any, of the parties to this Agreement with respect to its subject
matter and may not be amended except in writing signed by the party to this
Agreement against whom the change is asserted. The failure of any party to this
Agreement at any time or times to require the performance of any provision of
this Agreement shall in no manner affect the right to enforce the same and no
waiver by any party to this Agreement of any provision or breach of any
provision of this Agreement in any one or more instances shall be deemed or
construed either as a further or continuing waiver of any such provision or
breach or as a waiver of any other provision or breach of any other provision of
this Agreement.
          (d) In case any one or more of the provisions contained herein shall,
for any reason, be held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provision of this Agreement, but this Agreement shall be construed as if such
invalid, illegal or unenforceable provision or provisions had never been
contained herein unless the deletion of such provision or provisions would
result in such a material change as to cause continued performance of this
Agreement as contemplated herein to be unreasonable or materially and adversely
frustrate the objectives of the parties as expressed in this Agreement.
          (e) This Agreement shall be governed by and construed in accordance
with the laws of the State of Georgia.

-6-

--------------------------------------------------------------------------------

 

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day
and year first above written.

            SOUTHERN MUTUAL INSURANCE COMPANY
      By:   /s/ Allen R. Green         Allen R. Green, President               
DONEGAL MUTUAL INSURANCE COMPANY
      By:   /s/ Donald H. Nikolaus         Donald H. Nikolaus, President       
     

-7-