Document:

exv10wff

Exhibit 10 (FF)

SURPLUS NOTE PURCHASE AGREEMENT

Between

DONEGAL MUTUAL INSURANCE COMPANY

and

SOUTHERN MUTUAL INSURANCE COMPANY

DATED AS OF SEPTEMBER 8, 2009

 

 

CONTENTS

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page
	 	 	 
	 	 	 	 	 	 
	RECITALS	 	 	1	 
	I.	 	DEFINITIONS	 	 	2	 
	 	 	1.1

	 	Definitions
	 	 	2	 
	 	 	 
	 	 	 	 	 	 
	II.	 	SALE AND PURCHASE OF SURPLUS NOTE	 	 	9	 
	 	 	2.1

	 	Sale and Purchase of Surplus Note
	 	 	9	 
	 	 	2.2

	 	Payment of Purchase Price and Delivery of Surplus Note
	 	 	9	 
	 	 	2.3

	 	Closing Date
	 	 	9	 
	 	 	 
	 	 	 	 	 	 
	III.	 	REPRESENTATIONS AND WARRANTIES OF SOUTHERN MUTUAL	 	 	10	 
	 	 	3.1

	 	Organization and Standing
	 	 	10	 
	 	 	3.2

	 	Subsidiaries
	 	 	11	 
	 	 	3.3

	 	Authority; No Violation
	 	 	11	 
	 	 	3.4

	 	Consents and Approvals of Government Entities
	 	 	12	 
	 	 	3.5

	 	Financial Statements; Examinations
	 	 	12	 
	 	 	3.6

	 	Material Changes Since December 31, 2008
	 	 	13	 
	 	 	3.7

	 	Availability of Assets and Legality of Use
	 	 	13	 
	 	 	3.8

	 	Title to Assets
	 	 	13	 
	 	 	3.9

	 	Books and Records
	 	 	13	 
	 	 	3.10

	 	Accounts Receivable
	 	 	14	 
	 	 	3.11

	 	Compliance with Legal Requirements; Governmental
Authorizations
	 	 	14	 
	 	 	3.12

	 	Real Property and Leases
	 	 	15	 
	 	 	3.13

	 	Insurance
	 	 	15	 
	 	 	3.14

	 	Conduct of Business
	 	 	16	 
	 	 	3.15

	 	No Undisclosed Material Liabilities
	 	 	17	 
	 	 	3.16

	 	No Defaults or Litigation
	 	 	17	 
	 	 	3.17

	 	Tax Liabilities
	 	 	17	 
	 	 	3.18

	 	Contracts
	 	 	17	 
	 	 	3.19

	 	Employee Agreements
	 	 	18	 
	 	 	3.20

	 	Employee Relations
	 	 	19	 
	 	 	3.21

	 	Employee Retirement Income Security Act
	 	 	19	 
	 	 	3.22

	 	Conflicts; Sensitive Payments
	 	 	20	 
	 	 	3.23

	 	Corporate Name
	 	 	20	 
	 	 	3.24

	 	Trademarks and Proprietary Rights
	 	 	20	 
	 	 	3.25

	 	Environmental Matters
	 	 	20	 
	 	 	3.26

	 	Insurance Issued by Southern Mutual
	 	 	21	 
	 	 	3.27

	 	Health and Safety Matters
	 	 	22	 
	 	 	3.28

	 	No Omissions
	 	 	23	 
	 	 	3.29

	 	Finders
	 	 	23	 

(i)

 

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page
	 	 	 
	 	 	 	 	 	 
	 	 	3.30

	 	Representations and Warranties to Be True on the Closing Date
	 	 	23	 
	 	 	 
	 	 	 	 	 	 
	IV.	 	REPRESENTATIONS AND WARRANTIES OF DONEGAL MUTUAL	 	 	23	 
	 	 	4.1

	 	Organization and Standing
	 	 	23	 
	 	 	4.2

	 	Authority; No Violation
	 	 	24	 
	 	 	4.3

	 	Consents and Approvals of Government Entities
	 	 	25	 
	 	 	4.4

	 	Transferability
	 	 	25	 
	 	 	4.5

	 	Finders
	 	 	25	 
	 	 	4.6

	 	Representations and Warranties to be True on the Closing Date
	 	 	25	 
	 	 	 
	 	 	 	 	 	 
	V.	 	CERTAIN COVENANTS	 	 	25	 
	 	 	5.1

	 	Investigation of Southern Mutual
	 	 	25	 
	 	 	5.2

	 	Confidential Nature of Information
	 	 	26	 
	 	 	5.3

	 	Preserve Accuracy of Representations and Warranties
	 	 	26	 
	 	 	5.4

	 	Maintain Southern Mutual As a Going Concern
	 	 	27	 
	 	 	5.5

	 	Make No Material Change in Southern Mutual
	 	 	27	 
	 	 	5.6

	 	No Public Announcement
	 	 	28	 
	 	 	5.7

	 	Required Filings
	 	 	28	 
	 	 	5.8

	 	No Solicitation
	 	 	28	 
	 	 	5.9

	 	Future Actions Regarding Southern Mutual
	 	 	29	 
	 	 	5.10

	 	Advisory Board
	 	 	31	 
	 	 	 
	 	 	 	 	 	 
	VI.	 	CONDITIONS	 	 	31	 
	 	 	6.1

	 	Conditions to Each Party’s Obligations
	 	 	31	 
	 	 	6.2

	 	Conditions to Obligations of Donegal Mutual
	 	 	32	 
	 	 	6.3

	 	Conditions to Obligations of Southern Mutual
	 	 	34	 
	 	 	 
	 	 	 	 	 	 
	VII.	 	TERMINATION	 	 	34	 
	 	 	7.1

	 	Termination
	 	 	34	 
	 	 	7.2

	 	Final Termination Date
	 	 	35	 
	 	 	7.3

	 	Effect of Termination
	 	 	35	 
	 	 	 
	 	 	 	 	 	 
	VIII.	 	AMENDMENT, WAIVER AND INDEMNIFICATION	 	 	36	 
	 	 	8.1

	 	Amendment
	 	 	36	 
	 	 	8.2

	 	Extension; Waiver
	 	 	36	 
	 	 	8.3

	 	Survival of Obligations
	 	 	37	 
	 	 	8.4

	 	Indemnification
	 	 	37	 
	 	 	 
	 	 	 	 	 	 
	IX.	 	MISCELLANEOUS	 	 	39	 
	 	 	9.1

	 	Notices
	 	 	39	 
	 	 	9.2

	 	Expenses
	 	 	40	 
	 	 	9.3

	 	Governing Law
	 	 	40	 
	 	 	9.4

	 	Successors and Assigns
	 	 	40	 
	 	 	9.5

	 	Partial Invalidity
	 	 	41	 
	 	 	9.6

	 	Execution in Counterparts
	 	 	41	 

(ii)

 

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page
	 	 	 
	 	 	 	 	 	 
	 	 	9.7

	 	Titles and Headings
	 	 	41	 
	 	 	9.8

	 	Entire Agreement; Statements as Representations
	 	 	41	 
	 	 	9.9

	 	Specific Performance
	 	 	41	 
	 	 	 
	 	 	 	 	 	 
	SIGNATURES	 	 	42	 

APPENDICES:

	 	 	 	 	 	 	 
	APPENDIX A

	 	—
	 	Form of Surplus Note
	 	A-1
	APPENDIX B

	 	—
	 	Form of Services and Affiliation Agreement
	 	B-1
	APPENDIX C
	 	—
	 	Form of Employment Agreement
	 	C-1
	APPENDIX D

	 	—
	 	Form of Technology License Agreement
	 	D-1
	APPENDIX E

	 	—
	 	Form of Quota Share Reinsurance Agreement
	 	E-1

SCHEDULES:

	 	 	 
	3.5(C)

	 	Southern Mutual Report of Examination by Georgia Department
	3.5(F)

	 	Southern Mutual Bank Accounts and Authorizations
	3.11

	 	Southern Mutual Insurance Licenses and Permits
	3.12

	 	Southern Mutual Real Property Leases
	3.13

	 	Southern Mutual Insurance Policies
	3.14

	 	Southern Mutual Pending Claims
	3.18

	 	Contracts
	3.19

	 	Southern Mutual Employment Agreements
	3.20

	 	Southern Mutual Compensation Schedule
	3.22

	 	Conflicts; Sensitive Payments
	3.24

	 	Southern Mutual Trademarks and Proprietary Rights
	3.25(E)

	 	Environmental Issues
	3.27

	 	Southern Mutual Health and Safety Permits and Licenses

(iii)

 

SURPLUS NOTE PURCHASE AGREEMENT

     THIS SURPLUS NOTE PURCHASE AGREEMENT (this “Agreement”) made as of this 8th day of
September, 2009 between DONEGAL MUTUAL INSURANCE COMPANY, a Pennsylvania mutual fire insurance
company (“Donegal Mutual”) and SOUTHERN MUTUAL INSURANCE COMPANY, a Georgia mutual fire insurance
company (“Southern Mutual”).

WITNESSETH:

     WHEREAS, Southern Mutual proposes to issue a surplus note (the “Surplus Note”), the repayment
of which would be subordinated to the claims of policyholders of Southern Mutual and otherwise be
in compliance with applicable provisions of the Georgia Insurance Code and the regulations of the
Commissioner of Insurance of the State of Georgia in the principal amount of Two Million Five
Hundred Thousand Dollars ($2,500,000) in substantially the form of Appendix A;

     WHEREAS, Donegal Mutual proposes to purchase the Surplus Note;

     WHEREAS, Donegal Mutual and Southern Mutual propose that Southern Mutual will (i) make certain
changes in the composition of the Board of Directors of Southern Mutual in connection with the
transactions contemplated by this Agreement, (ii) enter into employment agreements with certain of
its executive officers in substantially the form of Appendix C and (iii) reconstitute its Board of
Directors as provided in this Agreement;

     WHEREAS, Donegal Mutual and Southern Mutual propose that Donegal Mutual and Southern Mutual
enter into: (i) a Services Agreement in substantially the form of Appendix B whereby Donegal
Mutual will provide the services specified therein to Southern Mutual in accordance with the terms
of such Services Agreement, (ii) a Technology License Agreement in substantially the form of
Appendix D whereby Donegal Mutual will license certain of its computer applications and systems to
Southern Mutual in accordance with the terms of such Technology License Agreement and (iii) a Quota
Share Reinsurance Agreement in substantially the form of Appendix E, whereby Southern Mutual will
cede up to 100% of its net written premiums to Donegal Mutual in accordance with the terms of such
Quota Share Reinsurance Agreement but Southern Mutual shall retain sole responsibility for all of
its other liabilities;

     WHEREAS, the Board of Directors of Donegal Mutual has approved this Agreement, the form of
Surplus Note Donegal Mutual will purchase, the Services Agreement, the Technology License Agreement
and the Quota Share Reinsurance Agreement by resolutions duly adopted; and

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     WHEREAS, the Board of Directors of Southern Mutual has approved this Agreement, the Surplus
Note, the Services Agreement, the Employment Agreements, the Technology License Agreement and the
Quota Share Reinsurance Agreement by resolutions duly adopted;

     NOW, THEREFORE, in consideration of the mutual covenants set forth in this Agreement and the
Ancillary Agreements, and intending to be legally bound hereby, Donegal Mutual and Southern Mutual
agree as follows:

ARTICLE I

DEFINITIONS

     1.1 Definitions. When used in this Agreement, the following words or phrases have the
following meanings:

     “Advisory Board” shall have the meaning set forth in Section 5.10.

     “Affiliate” shall mean a Person that directly, or indirectly through one or more
intermediaries, controls, is controlled by or is under common control with another Person or
beneficially owns or has the power to vote or direct the vote of 10% or more of any class of voting
stock or of any form of voting equity interest of such other Person in the case of a Person that is
not a corporation. For purposes of this definition, “control”, including the terms “controlling”
and “controlled”, means the power to direct or cause the direction of the management and policies
of a Person, directly or indirectly, whether through the ownership of securities or partnership or
other ownership interests, by contract or otherwise.

     “Agreement” shall have the meaning ascribed to it in the preamble.

     “Ancillary Documents” shall mean the Surplus Note, the Services Agreement, the Employment
Agreements, the Technology License Agreement and the Quota Share Reinsurance Agreement.

     “Annual Statements” shall mean the annual statements of condition and affairs filed pursuant
to the Georgia Insurance Code.

     “Assets” shall mean all rights, titles, franchises and interests in and to every species of
property, real, personal and mixed, tangible and intangible, and things in action relating thereto,
including, without limitation, cash and cash equivalents, securities, including, without
limitation, exempted securities under the Securities Act of 1933, as amended (the “Securities
Act”), receivables, recoverables from reinsurance and otherwise, deposits and advances, loans,
agents balances, real property, together with buildings, structures and the improvements thereon,
fixtures contained therein and appurtenances thereto and easements

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and other rights relating thereto, machinery, equipment, furniture, fixtures, leasehold
improvements, vehicles and other assets or property, leases, licenses, permits, approvals,
authorizations, joint venture agreements, contracts or commitments, whether written or oral, policy
forms, training materials, underwriting manuals, lists of policyholders and agents, processes,
trade secrets, know-how, computer software, computer programs and source codes, protected formulae,
all other Intellectual Property, research, goodwill, prepaid expenses, books of account, records,
files, invoices, data, rights, claims and privileges and any other assets whatsoever.

     “Closing” and “Closing Date” shall have the respective meanings set forth in Section 2.3.

     “Code” shall mean the Internal Revenue Code of 1986, as amended.

     “Commissioner of Insurance” shall mean the Commissioner of Insurance of the State of Georgia.

     “Condition” shall mean, as to a Person, the financial condition, business, results of
operations, prospects, liabilities and/or properties or other Assets of such Person.

     “Confidentiality Agreement” shall mean the Confidentiality Agreement between Southern Mutual
and Donegal Mutual dated as of May 29, 2009.

     “Contract” shall mean a contract, indenture, bond, note, mortgage, deed of trust, lease,
agreement or commitment, whether written or oral, including, without limitation, an Insurance
Contract.

     “Disclosure Schedules” shall mean the Disclosure Schedules of Southern Mutual attached to this
Agreement.

     “Donegal Mutual” shall have the meaning ascribed to it in the preamble.

     “Employment Agreements” shall mean the Employment Agreements to be entered into between
Southern Mutual and each of Allen R. Green, W. Daniel Delamater, Martin E. Webb and Kimberly L.
McClain, in substantially the form of Appendix C.

     “Employee Welfare Plan” shall have the meaning set forth in Section 3(1) of ERISA.

     “Environmental Claim” shall mean any written notice by a Person alleging actual or potential
Liability, including, without limitation, potential Liability for any investigatory cost, cleanup
cost, governmental response cost, natural resources damage, property damage, personal injury or
penalty, arising out of, based on or resulting from (a) the presence, transport, disposal,
discharge or release, of any Hazardous Materials at any location, whether

-3-

 

or not owned by Southern Mutual, as the case may be, or (b) circumstances forming the basis of
any violation or alleged violation of any Environmental Law.

     “Environmental Law” shall mean all federal, state, local and foreign Laws relating to
pollution or protection of human health or the environment, including, without limitation, ambient
air, surface water, ground water, land surface or subsurface strata, including, without limitation,
Laws relating to emissions, discharges, releases or threatened releases, or the presence of
Hazardous Materials, or otherwise relating to the manufacture, processing, distribution, use,
existence, treatment, storage, disposal, transport, recycling, reporting or handling of Hazardous
Materials.

     “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended, and the
rules and regulations promulgated thereunder.

     “ERISA Affiliate” shall mean, with respect to Southern Mutual, any trade or business that
together with Southern Mutual would be deemed a “single employer” within the meaning of Section
4001(a)(14) of ERISA.

     “Georgia Department” shall mean the Department of Insurance of the State of Georgia.

     “Georgia Insurance Code” shall mean Title 33 of the Official Code of Georgia Annotated, as
amended, and the regulations promulgated thereunder.

     “Governmental Entity” shall mean a court, legislature, governmental agency, commission or
administrative or regulatory authority or instrumentality, domestic or foreign.

     “Hazardous Materials” shall mean any (i) “hazardous substance,” “pollutants,” or “containment”
as defined in Sections 101(14) and (33) of the United States Comprehensive Environmental Response,
Compensation and Liability Act, as amended (“CERCLA”) or the regulations issued pursuant to Section
102 of CERCLA, including any element, compound, mixture, solution or substance that is or may be
designated pursuant to Section 102 of CERCLA; (ii) substance that is or may be designated pursuant
to Section 311(b)(2)(A) of the Federal Water Pollution Control Act, as amended (“FWCPA”); (iii)
hazardous waste having the characteristics identified under or listed pursuant to Section 3001 of
the Resource Conservation and Recovery Act, as amended (“RCRA”) or having the characteristics that
may subsequently be considered under RCRA to constitute a hazardous waste; (iv) substance
containing petroleum, as that term is defined in Section 9001(8) of RCRA; (v) toxic pollutant that
is or may be listed under Section 307(a) of FWCPA; (vi) hazardous air pollutant that is or may be
listed under Section 112 of the Clean Air Act, as amended; (vii) imminently hazardous chemical
substance or mixture with respect to which action has been or may be taken pursuant to Section 7 of
the Toxic Substance Control Act, as amended; (viii) source, special nuclear or by-product material
as defined by the Atomic Energy Act of 1954, as amended; (ix) asbestos-containing material, or urea
formaldehyde or material that contains it;

-4-

 

(x) waste oil and other petroleum products and (xi) any other toxic materials, contaminants or
hazardous substances or wastes pursuant to any Environmental Law.

     “Health and Safety Requirements” shall mean all federal, state, local and foreign statutes,
regulations, ordinances and other provisions having the force and effect of Law, all judicial and
administrative orders and determinations, all contractual obligations and all common law concerning
public health and safety, worker health and safety, including without limitation those relating to
the presence, use, production, generation, handling, transportation, treatment, storage, disposal,
labeling, testing, processing, discharge, release, threatened release, control or cleanup of any
hazardous materials, substances or wastes, chemical substances or mixtures, pesticides, pollutants,
contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated
biphenyls or noise, each as amended and as now or hereafter in effect.

     “Insurance Contract” shall mean any Contract of insurance including, without limitation,
reinsurance contracts issued by Southern Mutual.

     “Insurance License” shall mean a License granted by a Governmental Entity to transact an
insurance or reinsurance business.

     “Intellectual Property” shall mean (i) all inventions whether patentable or unpatentable and
whether or not reduced to practice, all improvements thereof and all patents, applications and
patent disclosures, together with all reissuance, continuations, continuations-in-part, revisions,
extensions and reexaminations thereof; (ii) all trademarks, service marks, trade dress, logos,
trade names and corporate names, together with all translations, adaptations, derivations and
applications, registrations and renewals in connection therewith; (iii) all copyrightable works,
all copyrights and all applications, registrations and renewals in connection therewith; (iv) all
mask works and all applications, registrations and renewals thereof; (v) all trade secrets and
confidential business information including ideas, research and development, know-how, formulas,
data, designs, drawings, specifications, policy forms, training materials, underwriting manuals,
pricing and cost information and business and marketing plans and proposals; (vi) all computer
software including data and related documentation; (vii) all other proprietary rights and (viii)
all copies and tangible embodiments thereof in whatever form or medium.

     “Investment Assets” shall mean bonds, notes, debentures, mortgage loans, collateral loans and
all other instruments of indebtedness, stocks, partnership interests and other equity interests,
real estate and leasehold and other interests therein, certificates issued by or interests in
trusts, cash on hand and on deposit, personal property and interests therein and all other Assets
acquired for investment purposes.

     “IRS” shall mean the Internal Revenue Service.

-5-

 

     “Knowledge” as to Southern Mutual shall mean the knowledge of Allen R. Green, W. Daniel
Delamater, Martin E. Webb or Kimberly L. McClain after due inquiry. “Knowledge” as to Donegal
Mutual shall mean the knowledge of Donald H. Nikolaus, Jeffrey D. Miller or Daniel J. Wagner after
due inquiry.

     “Law” shall mean a law, ordinance, rule or regulation enacted or promulgated, or an Order
issued or rendered, by any Governmental Entity.

     “Liability” shall mean a liability, obligation, claim or cause of action of any kind or nature
whatsoever, whether absolute, accrued, contingent or other and whether known or unknown, including,
without limitation, any liability, obligation, claim or cause of action arising as a result of an
Insurance Contract.

     “License” shall mean a license, certificate of authority, permit or other authorization to
transact an activity or business issued or granted by a Governmental Entity.

     “Lien” shall mean a lien, mortgage, deed to secure debt, pledge, security interest, lease,
sublease, charge, levy or other encumbrance of any kind.

     “Losses” shall mean losses, claims, damages, costs, expenses, Liabilities and judgments,
including, without limitation, court costs and attorneys’ and expert witness fees.

     “Material Adverse Effect” means, with respect to Southern Mutual or Donegal Mutual, any fact,
event, circumstance, change, condition or effect that (i) has been, or could reasonably be expected
to be, material and adverse to the assets, liabilities, properties, financial position, results of
operations, cash flows or business of Southern Mutual or Donegal Mutual and its subsidiaries taken
as a whole or (ii) has materially impaired, or could reasonably be expected to impair materially,
the ability of Southern Mutual or Donegal Mutual to perform their respective obligations under this
Agreement or otherwise materially affect the consummation of the transactions this Agreement
contemplates; provided, however, that Material Adverse Effect shall not be deemed to include the
impact of (a) changes after the date of this Agreement in SAP, (b) any action or omission of
Southern Mutual or Donegal Mutual with the prior consent of the other or as otherwise contemplated
by this Agreement in connection with the consummation of the transactions this Agreement
contemplates, (c) changes after the date of this Agreement in laws, (d) changes in general economic
conditions that did not disproportionally adversely affect Southern Mutual, (e) reasonable
expenses, including the retention of legal advisors, in connection with the negotiation, execution
and delivery of this Agreement and the consummation of the transactions this Agreement contemplates
and (f) the financial condition or the results of operations of Southern Mutual for the six months
ended June 30, 2009 and the results of operations or financial condition of Southern Mutual for the
period July 1, 2009 through the Closing Date.

-6-

 

     “Member” shall mean a policyholder of Southern Mutual other than a policyholder of a
reinsurance contract.

     “Officers’ Certificate” shall mean, with respect to any Person, a certificate executed by the
Chief Executive Officer, the President or an appropriate Vice President of such Person, as attested
by the Secretary or an Assistant Secretary of such Person.

     “Ordinary Course of Business” shall mean an action taken by a Person if: (i) such action is
consistent with the past practices of such Person and is taken in the ordinary course of the normal
day-to-day operations of such Person; (ii) such action is not required to be authorized by the
board of directors of such Person or by any Person or group of Persons exercising similar authority
or by a parent company and (iii) such action is similar in nature and magnitude to actions
customarily taken, without any authorization by the board of directors or by any Person or group of
Persons exercising similar authority or by a parent company, in the ordinary course of the normal
day-to-day operations of other Persons that are in the same line of business as such Person.

     “Order” shall mean an order, writ, ruling, judgment, injunction or decree of, or any
stipulation to or agreement with, any arbitrator, mediator or Governmental Entity.

     “PBGC” shall mean the Pension Benefit Guaranty Corporation or any successor entity.

     “Permits” shall have the meaning set forth in Section 3.11(d).

     “Permitted Liens” shall mean as to Southern Mutual, (i) all Liens approved in writing by
Donegal Mutual, (ii) statutory Liens arising out of operation of Law with respect to a Liability
incurred in the Ordinary Course of Business of Southern Mutual and that is not delinquent and can
be paid without interest or penalty and (iii) such Liens and other imperfections of title that do
not materially detract from the value or impair the use of the property subject thereto.

     “Person” shall mean an individual, corporation, partnership, association, joint stock company,
Governmental Entity, business trust, unincorporated organization or other legal entity.

     “Proceedings” shall mean actions, suits, hearings, claims and other similar proceedings.

     “Quarterly Statements” shall mean the quarterly statements of condition and affairs filed
pursuant to state insurance Laws.

     “Quota Share Reinsurance Agreement” shall mean the Quota Share Reinsurance Agreement between
Donegal Mutual and Southern Mutual in substantially the form of Appendix E.

-7-

 

     “Reorganization Proposal” shall have the meaning set forth in Section 5.8.

     “Required Filings and Approvals” shall mean the filing of this Agreement with and the approval
of such by the Commissioner of Insurance, and such other applications, registrations, declarations,
filings, authorizations, Orders, consents and approvals as may be required to be made or obtained
prior to consummation of the transactions contemplated hereby under the Laws of any jurisdiction.

     “SAP” shall mean statutory accounting practices as prescribed or permitted by the Commissioner
of Insurance and the National Association of Insurance Commissioners subject, in the case of
unaudited interim financial statements, to normal year-end adjustments and the absence of
footnotes.

     “Services Agreement” shall mean the Services and Affiliation Agreement between Donegal Mutual
and Southern Mutual in substantially the form of Appendix B.

     “Southern Mutual” shall have the meaning ascribed to it in the preamble.

     “Southern Mutual Financial Statements” shall have the meaning set forth in Section 3.5.

     “Southern Mutual Property” shall mean any property on which Southern Mutual holds a Lien or
any facility that is owned by Southern Mutual or in the management of which Southern Mutual
actively participates.

     “Subsidiary” of a Person means any Person with respect to whom such specified Person, directly
or indirectly, beneficially owns 50% or more of the equity interests in, or holds the voting
control of 50% or more of the equity interests in, such Person.

     “Surplus Note” shall mean the Surplus Note to be issued by Southern Mutual to Donegal Mutual
in substantially the form of Appendix A.

     “Taxes” shall mean all income, gross income, gross receipts, premium, sales, use, transfer,
franchise, profits, withholding, payroll, employment, excise, severance, property and windfall
profits taxes, and all other taxes, assessments or similar charges of any kind whatsoever thereon
or applicable thereto, together with any interest and any penalties, additions to tax or additional
amounts, in each case imposed by any taxing authority, domestic or foreign, upon Southern Mutual,
including, without limitation, all such amounts imposed as a result of being a member of an
affiliated or combined group.

     “Tax Returns” or “Returns” shall mean all tax returns, declarations, reports, estimates,
information returns and statements required to be filed under federal, state, local or foreign
Laws.

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     “Technology License Agreement” shall mean the Technology License Agreement between Donegal
Mutual and Southern Mutual in substantially the form of Appendix D.

ARTICLE II

SALE AND PURCHASE OF SURPLUS NOTE

     2.1 Sale and Purchase of Surplus Note. Upon the terms, conditions, representations
and warranties herein set forth, Southern Mutual hereby agrees to sell the Surplus Note to Donegal
Mutual and Donegal Mutual hereby agrees to purchase the Surplus Note from Southern Mutual.

     2.2 Payment of Purchase Price and Delivery of Surplus Note. The purchase price of the
Surplus Note shall be Two Million Five Hundred Thousand Dollars ($2,500,000). Donegal Mutual will
pay the entire purchase price of the Surplus Note in cash to Southern Mutual on the Closing Date
against delivery of the executed Surplus Note by Southern Mutual to Donegal Mutual.

     2.3 Closing Date.

          (a) The transactions contemplated by this Agreement shall be consummated (the “Closing”) at
10:00 a.m. on October 31, 2009 or within five business days following the date on which the
Commissioner has approved the change of control described in Donegal Mutual’s Form A Statement if
such approval has not been received by October 31, 2009 (the “Closing Date”), provided that all of
the conditions set forth in Article VI shall have been fulfilled not later than the Closing Date.
Unless otherwise mutually agreed by Donegal Mutual and Southern Mutual, the Closing shall be held
at the offices of Duane Morris LLP, Atlantic Center Plaza, Suite 700, 1180 West Peachtree Street
NW, Atlanta, GA 30309-3448 on the Closing Date.

          (b) At the Closing, Southern Mutual shall deliver to Donegal Mutual (i) copies of each
resolution adopted by the Board of Directors of Southern Mutual approving and adopting this
Agreement, the Surplus Note, the Services Agreement, the Employment Agreements, the Technology
License Agreement and the Quota Share Reinsurance Agreement and authorizing the consummation of the
transactions contemplated hereby and thereby, certified by the Secretary of Southern Mutual that
each such resolution is then in full force and effect and without amendment; (ii) any Officers’
Certificate specified in Section 6.2 duly executed by the President of Southern Mutual; (iii) the
Services Agreement duly executed by Southern Mutual; (iv) the Technology License Agreement duly
executed by Southern Mutual; (v) the Quota Share Reinsurance Agreement duly executed by Southern
Mutual; (vi) the Surplus Note duly executed by Southern Mutual; (vii) duly executed copies of the
resignations of all but five current members of the Board of Directors of Southern

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Mutual designated by Southern Mutual and evidence of the appointment of the seven designees of
Donegal Mutual as members of a 12-member Southern Mutual Board of Directors as specified in Section
6.2(d); (viii) evidence of the termination of any severance or similar agreement required by
Section 6.2(e), (ix) duly executed copies of the Employment Agreements as specified in Section
6.2(e), (x) appointment of the Advisory Board as provided in Section 5.10 and (xi) an officer’s
certificate to the effect that the Bylaws of Southern Mutual as amended effective as of the Closing
Date remain in full force and effect without any change.

          (c) At the Closing, Donegal Mutual shall deliver to Southern Mutual (i) copies of each
resolution adopted by the Board of Directors of Donegal Mutual approving and adopting this
Agreement, the form of the Surplus Note Donegal Mutual will purchase, the Services Agreement, the
Technology License Agreement and the Quota Share Reinsurance Agreement and authorizing the
consummation of the transactions contemplated hereby and thereby, certified by the Secretary of
Donegal Mutual that each such resolution is then in full force and effect and without amendment;
(ii) the Services Agreement duly executed by Donegal Mutual; (iii) the Technology License Agreement
duly executed by Donegal Mutual; (iv) the Quota Share Reinsurance Agreement duly executed by
Donegal Mutual and (v) any Officers’ Certificate specified in Section 6.3 duly executed by Donegal
Mutual.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF SOUTHERN MUTUAL

     As an inducement to Donegal Mutual to enter into this Agreement and to consummate the
transactions contemplated herein, Southern Mutual represents and warrants to Donegal Mutual and
agrees that with the exception of the matters specifically described in the Disclosure Schedules
delivered by Southern Mutual to Donegal Mutual prior to the date of this Agreement:

     3.1 Organization and Standing.

          (a) Southern Mutual is a mutual fire insurance company duly organized, validly existing and in
good standing under the laws of the State of Georgia and has the requisite corporate power and
authority to conduct its business as it is currently being conducted. Southern Mutual is admitted
to transact an insurance business as a foreign insurance company in South Carolina, which is the
only foreign jurisdiction where Southern Mutual’s failure to be admitted would have a Southern
Mutual Material Adverse Effect.

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          (b) Southern Mutual has previously delivered accurate and complete copies of its Amended
Charter as currently in effect and its Bylaws as amended to be effective as of the Closing Date to
Donegal Mutual.

     3.2 Subsidiaries. Southern Mutual has no subsidiaries.

     3.3 Authority; No Violation.

          (a) Southern Mutual has the requisite corporate power and authority to execute and deliver
this Agreement and the Ancillary Documents and, subject to the receipt of the Required Filings and
Approvals, to consummate the transactions contemplated hereby and thereby. The execution and
delivery of this Agreement and the Ancillary Agreements have been duly approved and authorized by
the Board of Directors of Southern Mutual and the consummation of the transactions contemplated
hereby and thereby effective on the Closing Date.

          (b) Subject to receipt of the Required Filings and Approvals, no other corporate proceedings
on the part of Southern Mutual are necessary to authorize this Agreement and the Ancillary
Documents and the transactions contemplated hereby and thereby.

          (c) Subject to receipt of the Required Filings and Approvals, this Agreement and the Ancillary
Documents, when executed and delivered by Southern Mutual and assuming the due execution thereof by
the other requisite parties thereto will constitute the valid, legal and binding agreements of
Southern Mutual enforceable in accordance with their respective terms, except that (i) such
enforcement may be subject to bankruptcy, rehabilitation, liquidation, conservation, dissolution,
insolvency, reorganization, moratorium or other similar Laws now or hereafter in effect relating to
creditors’ rights generally and (ii) the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the discretion of the court
before which any Proceeding therefor may be brought.

          (d) Neither the execution, delivery and performance of this Agreement or the Ancillary
Documents nor the consummation of the transactions contemplated hereby or thereby, nor compliance
with and the fulfillment of the terms and provisions hereof and thereof, will (i) conflict with or
result in a breach of the terms, conditions or provisions of or constitute a default under Bylaws
of Southern Mutual, as amended effective as of the Closing Date, or any instrument, agreement,
mortgage, judgment, Order, award, decree or other restriction to which Southern Mutual is a party
or by which Southern Mutual is bound; (ii) give any party to or with rights under any such
instrument, agreement, mortgage, judgment, Order, award, decree or other restriction the right to
terminate, modify or otherwise change the rights or obligations of Southern Mutual under such
instrument, agreement, mortgage, judgment, Order, award, decree or other restriction or (iii)
require the approval, consent or

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authorization of or any filing with or notification to any federal, state or local court or
Governmental Entity, except (y) the Required Filings and Approvals and (z) any approval, consent or
authorization the failure of which to obtain would not, individually or in the aggregate, have a
Southern Mutual Material Adverse Effect.

     3.4 Consents and Approvals of Government Entities. Other than the Required Filings
and Approvals, no consent, approval, Order or authorization of, or registration, application,
declaration or filing with any Governmental Entity is required with respect to Southern Mutual in
connection with the execution and delivery of this Agreement and the Ancillary Documents.

     3.5 Financial Statements; Examinations.

          (a) Southern Mutual has furnished to Donegal Mutual the audited balance sheets of Southern
Mutual as of December 31, 2006, 2007 and 2008 and the related statements of operations and of
changes in financial position for the periods then ended, together with appropriate notes to such
financial statements (collectively, the “Southern Mutual Financial Statements”). The Southern
Mutual Financial Statements are accompanied by the reports thereon by Habif, Arogeti & Wynne, LLP,
independent registered public accountants. The Southern Mutual Financial Statements are correct
and complete in all material respects and fairly present the financial position of Southern Mutual
as at the respective dates thereof, the results of its operations and the changes in its financial
position for the respective periods covered thereby and have been prepared in conformity with SAP
consistently applied throughout all periods.

          (b) Each of the Annual Statements of Southern Mutual for 2006, 2007 and 2008 was in compliance
in all material respects with applicable Law when filed.

          (c) The most recently completed report of examination of Southern Mutual conducted by the
Georgia Department was for the period set forth in Schedule 3.5(C), and a complete and correct copy
of such report is attached to Schedule 3.5(C).

          (d) Since the dates of all examinations referred to in Schedule 3.5(C), Southern Mutual has
not been the subject of further examination by any insurance Governmental Entity, and Southern
Mutual is not currently undergoing examination by any insurance Governmental Entity.

          (e) Southern Mutual has also furnished to Donegal Mutual its unaudited financial statements
for the six months ended June 30, 2009. Such financial statements fairly present the financial
position of Southern Mutual as of June 30, 2009 and the results of its operations for the six
months then ended and have been prepared in conformity with SAP as used in the preparation of the
Southern Mutual Financial Statements.

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          (f) Schedule 3.5(F) sets forth a correct and complete list of all (i) accounts, borrowing
resolutions and deposit boxes maintained by Southern Mutual at any bank or other financial
institution, (ii) the names of the persons authorized to sign or otherwise act for Southern Mutual
with respect thereto and (iii) powers of attorney for Southern Mutual with respect thereto.

     3.6 Material Changes Since December 31, 2008. Since December 31, 2008, Southern
Mutual has operated its business in the Ordinary Course of Business and, whether or not in the
Ordinary Course of Business of Southern Mutual, other than as disclosed in this Agreement or the
Schedules to this Agreement, there has not been, occurred or arisen (i) any material adverse change
in the Condition of Southern Mutual from that shown on the balance sheet of Southern Mutual as of
December 31, 2008 referred to in Section 3.5; (ii) any damage or destruction in the nature of a
casualty loss, whether covered by insurance or not, to any Asset that is material to the financial
condition, operations or business of Southern Mutual; (iii) any material increase in any employee
benefit plan listed in Section 3.19; (iv) any amendment or termination of any agreement, or
cancellation or reduction of any debt owing to Southern Mutual or waiver or relinquishment of any
right of material value to Southern Mutual or (v) any other event, condition or state of facts of
any character that would constitute a Southern Mutual Material Adverse Effect.

     3.7 Availability of Assets and Legality of Use. The Assets owned or leased by
Southern Mutual constitute all of the Assets that Southern Mutual is using in its business, and
such Assets, to the Knowledge of Southern Mutual, are in good and serviceable condition, normal
wear and tear excepted, and suitable and adequate for the uses for which intended and such Assets
and their uses conform in all material respects to all applicable Laws. Such Assets will be
sufficient for the continued conduct of Southern Mutual’s business immediately after the Closing in
substantially the same manner as Southern Mutual’s business was conducted immediately prior to the
Closing.

     3.8 Title to Assets. Southern Mutual has good and marketable title to all of its
Assets, including the Assets reflected on the December 31, 2008 balance sheet referred to in
Section 3.5 and all of the Assets thereafter acquired by it, except to the extent that such Assets
have thereafter been disposed of for fair value in the Ordinary Course of Business of Southern
Mutual.

     3.9 Books and Records. The books of account, minute books and other records of
Southern Mutual, all of which have been made available to Donegal Mutual, are complete and correct
and have been maintained in accordance with sound business practices and the requirements of the
Georgia Insurance Code and any other applicable Laws, including, but not limited to, the
requirements of Section 13(b)(2) of the Securities Exchange Act of 1934, as amended, to the extent
applicable to Southern Mutual, and Southern Mutual maintains an adequate system of internal
controls. Since January 1, 2004, the minute books of Southern Mutual contain accurate and complete
records of all meetings held of, and corporate action

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taken by, the policyholders, the Board of Directors and committees of the Board of Directors
of Southern Mutual, and no meeting of any such policyholders, Board of Directors or committees
thereof has been held for which minutes have not been prepared and are not contained in such minute
books. At the Closing, all of the aforementioned books and records will be in the possession of
Southern Mutual.

     3.10 Accounts Receivable. All accounts receivable reflected on the December 31, 2008
balance sheet referred to in Section 3.5 and all accounts receivable arising subsequent to such
date and prior to the date of this Agreement, not collected at the date hereof, have arisen from
bona fide transactions in the Ordinary Course of Business of Southern Mutual. To the Knowledge of
Southern Mutual, none of such receivables is subject to counterclaims or set-offs or is in dispute
and all of such accounts are good and collectible in the Ordinary Course of Business at the
aggregate recorded amounts thereof, subject in each case to the allowance for possible losses shown
on such balance sheet. All accounts receivable existing on the Closing Date will be good and
collectible in the Ordinary Course of Business at the aggregate recorded amounts thereof, net of
any applicable allowance for doubtful accounts, which allowance will be determined on a basis
consistent with the basis used in determining the allowance for doubtful accounts reflected in the
December 31, 2008 balance sheet referred to in Section 3.5.

     3.11 Compliance with Legal Requirements; Governmental Authorizations. Schedule 3.11
contains a complete and accurate list and copy of the licenses of Southern Mutual to transact
insurance in a state and each other material license, permit and other authorization held by
Southern Mutual in the operation of its business. Except as set forth in Schedule 3.10:

          (a) To the Knowledge of Southern Mutual, Southern Mutual is, and at all times since January 1,
2004 has been, in compliance in all material respects with the Georgia Insurance Code, and all
other Laws that are applicable to it or to the conduct or operation of its business or the
ownership or use of any of its Assets.

          (b) To the Knowledge of Southern Mutual, no event has occurred or circumstance exists that
with or without notice or lapse of time (i) may constitute or result in a violation by Southern
Mutual of, or a failure on the part of Southern Mutual to comply with, any Law in any material
respect or (ii) may give rise to any material obligation on the part of Southern Mutual to
undertake, or to bear all or any portion of the cost of, any remedial action of any nature.

          (c) Southern Mutual has not received, at any time since January 1, 2004, any oral or written
notice or other communication from any Governmental Entity or any other Person regarding (i) any
actual, alleged, possible or potential violation of, or failure to comply with, any Law in any
material respect or (ii) any actual, alleged, possible or potential material obligation that may
give rise on the part of Southern Mutual to undertake, or to bear all or any portion of the cost
of, any material remedial action of any nature.

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          (d) Southern Mutual possesses all material Licenses, Permits and other authorizations
necessary to own or lease and operate its properties and to conduct its business as now conducted
and, to the Knowledge of Southern Mutual, each of Southern Mutual’s agents is duly licensed as
such. All of such Licenses, Permits and authorizations of Southern Mutual and such agents’
appointments are hereinafter collectively called the “Permits.” All Permits are in full force and
effect and will continue in effect after the date hereof and the Closing Date without the consent,
approval or act of, or the making of any filing with, any Governmental Entity other than the
Required Filings and Approvals. To the Knowledge of Southern Mutual, Southern Mutual is, and at
all times since January 1, 2004 has been, in material compliance with all terms and requirements of
each Permit. Neither Southern Mutual nor, to the Knowledge of Southern Mutual, any of Southern
Mutual’s agents are in material violation of the terms of any Permit, and Southern Mutual has not
received notice of any violation or claimed violation thereunder. All applications required to
have been filed for the renewal of any and all Permits have been duly filed on a timely basis with
the appropriate Governmental Entity, and all other filings required to have been made with such
Governmental Entities with respect to the Permits have been duly made on a timely basis.

     3.12 Real Property and Leases. Southern Mutual does not own any real property except
as listed on Schedule 3.12(A), and, except as listed on Schedule 3.12(A), Southern Mutual is not a
party to any lease or agreement under which Southern Mutual is lessee or sublessee of, or holds or
operates, any real property owned by any third party. All of such leases and agreements are in
full force and effect and constitute legal, valid and binding obligations of Southern Mutual, and,
to the Knowledge of Southern Mutual, the other parties thereto. Southern Mutual is not in default
in any material respect under any such lease or agreement nor has any event occurred that, with the
passage of time or giving of notice or both would constitute such a default and Southern Mutual
will not take any action or fail to take required action between the date hereof and the Closing
Date that would permit any such default or event to occur. None of such leases and agreements
requires the consent of any party thereto in order to undertake or consummate the transactions
contemplated by this Agreement.

     3.13 Insurance. Southern Mutual maintains policies of fire and casualty, product and
other liability and other forms of insurance in such amounts and against such risks and losses as
are adequate and reasonable for its business as currently conducted and properties and are
sufficient for compliance with all Laws applicable to Southern Mutual. All such policies are
valid, duly issued and enforceable in accordance with their respective terms and conditions. The
attached Schedule 3.13 lists all policies of insurance that are or were owned, held or maintained
by or for the benefit of Southern Mutual or under which Southern Mutual is or was a named insured
from January 1, 2006 to the date hereof, including policy numbers, nature of coverage, limits,
deductibles, carriers, premiums and effective and termination dates, under which Southern Mutual
has any remaining coverage. To the Knowledge of

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Southern Mutual, Southern Mutual has complied with each of such policies and has not failed to
give any notice or present any known claim thereunder. Southern Mutual will keep such insurance in
full force and effect through the Closing Date. Southern Mutual has not received, and, to the
Knowledge of Southern Mutual, no event or omission has occurred that may cause it to receive,
notice that any such policies will be cancelled or will be reduced in amount or scope. Southern
Mutual has delivered true and complete copies of all such policies to Donegal Mutual.

     3.14 Conduct of Business.

          (a) Schedule 3.14 lists all claims arising in other than the Ordinary Course of Business of
Southern Mutual that are pending or, to the Knowledge of Southern Mutual, threatened against
Southern Mutual and correctly sets forth the data reflected therein, including the insurance
carrier to which the claim has been reported. No insurance carrier listed therein has denied
coverage of any claim listed opposite its name or accepted investigation of any such loss or
defense of any such claim under a reservation of rights.

          (b) The aggregate actuarial reserves and other actuarial amounts held in respect of
Liabilities with respect to Insurance Contracts of Southern Mutual as established or reflected in
the December 31, 2008 Annual Statement of Southern Mutual and in the Southern Mutual Financial
Statements as of December 31, 2008: (i) were determined in accordance with sound actuarial
standards consistently applied, (ii) were fairly stated in accordance with sound actuarial
principles, (iii) were based on actuarial assumptions that are in accordance with those specified
in the related Insurance Contracts, (iv) met meet the requirements of the insurance Laws of the
applicable jurisdiction in all material respects and (v) to the Knowledge of Southern Mutual, were
adequate to cover the total amount of all reasonably anticipated matured and unmatured Liabilities
of Southern Mutual under all outstanding Insurance Contracts pursuant to which Southern Mutual has
any Liability. For purposes of clause (v) above, (x) the adequacy of reserves shall be determined
only on the basis of facts and circumstances known based on procedures consistently applied by
Southern Mutual in connection with assessing the adequacy of reserves from time to time by Southern
Mutual as at the date hereof and (y) the fact that reserves covered by any such representation may
be subsequently adjusted at times and under circumstances consistent with Southern Mutual’s
ordinary practice of periodically reassessing the adequacy of its reserves shall not be used to
support any claim regarding the accuracy of such representation.

          (c) All of Southern Mutual’s outstanding insurance coverage is, to the extent required by
applicable Law, on forms and at rates approved by the insurance regulatory authority of the
jurisdiction where issued or has been filed with and not objected to by such authority within the
period provided for objection. To the Knowledge of Southern Mutual, Southern Mutual has not
exceeded any authority granted to it by any party to bind it in connection with Southern Mutual’s
business.

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     3.15 No Undisclosed Material Liabilities. Southern Mutual is not subject to any
material Liability, including, to the Knowledge of Southern Mutual, unasserted claims, absolute or
contingent, that is not shown or that is in excess of amounts shown or reserved for in the December
31, 2008 balance sheet referred to in Section 3.5, other than Liabilities of the same nature as
those set forth in such balance sheet and reasonably incurred in the Ordinary Course of Business of
Southern Mutual after December 31, 2008.

     3.16 No Defaults or Litigation. Southern Mutual is not in default in any material
respect under any Contract to which it is a party. There are no lawsuits, proceedings, claims or
governmental investigations pending or, to the Knowledge of Southern Mutual, threatened against
Southern Mutual or against the properties or business thereof that might, individually or in the
aggregate, have a Southern Mutual Material Adverse Effect and Southern Mutual has no Knowledge of
any factual basis for any such lawsuit, proceeding, claim or investigation and there is no action,
suit, proceeding or investigation pending, threatened or contemplated that questions the legality,
validity or propriety of the transactions contemplated by this Agreement.

     3.17 Tax Liabilities. The amounts reflected as liabilities for Taxes on the December
31, 2008 balance sheet referred to in Section 3.5 are sufficient for the payment of all Taxes of
Southern Mutual accrued for or applicable to the period ended on such balance sheet date and all
years and periods prior thereto. All Tax Returns that are required to be filed by or in respect of
Southern Mutual up to and including the date hereof have been filed and all Taxes, including any
interest and penalties thereon, which have become due pursuant to such Returns or pursuant to any
assessment have been paid and no extension of the time for filing of any such return is presently
in effect. All such Returns that have been filed or will be filed by or in respect of Southern
Mutual for any period ending on or before the Closing Date are or will be true and correct. There
exists no proposed assessment against Southern Mutual. No consent to the application of Section
341(f)(2) of the Code has been filed with respect to any Southern Mutual Property. Southern Mutual
has withheld and paid all Taxes required to have been withheld and paid in connection with amounts
paid or owing to any employee, independent contractor or other third party. No claim has ever been
made by a Governmental Entity in a jurisdiction where Southern Mutual does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. Southern Mutual has delivered to
Donegal Mutual correct and complete copies of all federal, state and local Tax Returns, examination
reports and statements of deficiencies assessed against or agreed to by Southern Mutual since
January 1, 2004. The federal Tax Returns for Southern Mutual have never been examined by the IRS,
and the applicable statute of limitations relating thereto has expired for the tax year ended
December 31, 2004 and all prior periods.

     3.18 Contracts. Except as disclosed on Schedule 3.18, Southern Mutual is not a party
to (i) any contract for the purchase or sale of real property to or from any third party; (ii) any
contract for the lease or sublease of personal property from or to any third party that

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provides for annual rentals in excess of $25,000, or any group of contracts for the lease or
sublease of similar kinds of personal property from or to third parties that provides in the
aggregate for annual rentals in excess of $25,000; (iii) any contract for the purchase or sale of
equipment, computer software, lists of clients, insurance carriers or agents or similar
information, commodities, merchandise, supplies, other materials or personal property or for the
furnishing or receipt of services that calls for performance over a period of more than 60 days and
involves more than the sum of $25,000; (iv) any license agreement involving the use of copyrights,
franchises, licenses, trademarks, or information owned by Southern Mutual or others; (v) any
broker’s representative, sales, agency or advertising contract that is not terminable on notice of
30 days or less; (vi) any contract involving the borrowing or lending of money or the guarantee of
the obligations of officers, directors, employees or others or (vii) any other contract, whether or
not made in the Ordinary Course of Business of Southern Mutual that is material to the business or
Assets of Southern Mutual. No outstanding purchase commitment by Southern Mutual is in excess of
its ordinary business requirements or at a price in excess of market price at the date thereof.
None of such contracts and agreements will expire or be terminated or be subject to any
modification of terms or conditions by reason of the consummation of the transactions contemplated
by this Agreement. With respect to its contracts with insurance agents, none of the agents who are
a party to any such agreement has terminated, threatened to terminate or given any notice, written
or oral, of an intention to terminate its agreement with Southern Mutual or to substantially reduce
the volume of business placed with or through Southern Mutual, and Southern Mutual has no Knowledge
of any condition or state of facts or circumstances that would cause any such termination or
reduction in the foreseeable future. Southern Mutual is not in default in any material respect
under the terms of any such contract nor is it in default in the payment of any insurance premiums
due to insurance carriers nor any principal of or interest on any indebtedness for borrowed money
nor has any event occurred that, with the passage of time or giving of notice, or both, would
constitute such a default by Southern Mutual and, to the Knowledge of Southern Mutual, no other
party to any such contract is in default in any material respect thereunder nor has any such event
occurred with respect to such party. Without the prior written consent of Donegal Mutual, Southern
Mutual will not make any changes or modifications in any of the foregoing, nor incur any further
obligations or commitments, nor make any further additions to its properties, except in each case
in the Ordinary Course of Business of Southern Mutual and as contemplated by this Agreement.

     3.19 Employee Agreements. Schedule 3.19 lists all plans, contracts and arrangements,
oral or written, including but not limited to, union contracts, employee benefit plans, deferred
compensation agreements, split dollar agreements, employment agreements, consulting agreements,
confidentiality agreements, non-competition agreements or other agreements with any of Southern
Mutual’s employees, whereunder Southern Mutual has any obligation, other than obligations to make
current wage or salary payments terminable on notice of 30 days or less, to or on behalf of its
officers, employees or their beneficiaries or whereunder any of such persons owes money to Southern
Mutual.

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     3.20 Employee Relations. Southern Mutual has not engaged in any unfair labor
practice, unlawful employment practice or unlawful discriminatory practice in the conduct of its
business. To the Knowledge of Southern Mutual, Southern Mutual has complied in all material
respects with all applicable Laws relating to wages, hours and collective bargaining and has
withheld all amounts required by agreement to be withheld from the wages or salaries of employees.
The relations of Southern Mutual with its employees are satisfactory, and Southern Mutual is not a
party to or affected by or threatened with, or to the Knowledge of Southern Mutual in danger of,
being a party to or affected by, any labor dispute that materially interferes or would materially
interfere with the conduct of its business. Schedule 3.20 sets forth the name and total annual
compensation, including bonuses, payable to each of the officers, directors and employees of
Southern Mutual whose total annual compensation, including bonuses, during the year ended December
31, 2008 exceeded the sum of $75,000. Since December 31, 2008, there has been no material increase
in the compensation payable to any of such officers, directors or employees, except as set forth in
Schedule 3.20.

     3.21 Employee Retirement Income Security Act.

          (a) Schedule 3.19 contains a list of any “employee benefit plan” within the meaning of Section
3(3) of ERISA established or maintained by Southern Mutual or to which Southern Mutual has made any
contribution. Southern Mutual is not required, and was not required within the immediately
preceding five years, to make any contribution to any “multiemployer plan” within the meaning of
Section 3(37) of ERISA. Southern Mutual has no liability in respect of any employee benefit plan
established or maintained or to which contributions are or were made by it to the PBGC or to any
beneficiary of such plans. Southern Mutual has timely filed all required reports and descriptions,
including Form 5500 Annual Reports, summary annual reports, PBGC-1’s and summary plan descriptions,
and distributed such documents appropriately with respect to each such employee benefit plan.
Southern Mutual has met the requirements of COBRA with respect to each such employee benefit plan
that is an Employee Welfare Plan.

          (b) (i) No employee pension benefit plan, as defined in Section 3(2) of ERISA, maintained or
contributed to by Southern Mutual or in respect of which Southern Mutual is considered an
“employer” under Section 414 of the Code, has incurred any “accumulated funding deficiency,” as
defined in Section 412 of the Code, whether or not waived, or has incurred any liability to PBGC
and (ii) to the Knowledge of Southern Mutual, Southern Mutual has not breached any of the
responsibilities, obligations or duties imposed on it by ERISA with respect to any employee pension
benefit plan maintained by it, which breach has given rise to, or will in the future give rise to,
an obligation to pay money. To the Knowledge of Southern Mutual, neither Southern Mutual nor any
of its affiliates or, to the Knowledge of Southern Mutual, any “party in interest,” as defined in
Section 3(14) of ERISA, in respect of any such plan has engaged in any non-exempted prohibited
transaction

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described in Sections 406 and 408 of ERISA or Section 4975 of the Code. No reportable event,
as defined in Section 4043 of ERISA, has occurred with respect to any employee pension benefit plan
maintained or contributed to by Southern Mutual or in respect of which Southern Mutual is an
employer under Section 414 of the Code and none of such plans has been terminated by the plan
administrator thereof or by the PBGC. To the Knowledge of Southern Mutual, none of Southern Mutual
or its affiliates has incurred any liability for non-compliance with ERISA or any regulations
thereunder. The original or a complete and correct copy of each plan listed in Schedule 3.19 has
been delivered to Donegal Mutual.

     3.22 Conflicts; Sensitive Payments. To the Knowledge of Southern Mutual, and except
as set forth on Schedule 3.22, since January 1, 2004, there are (i) no material situations
involving the interests of Southern Mutual or, to the Knowledge of Southern Mutual, any officer or
director of Southern Mutual, that may be generally characterized as a “conflict of interest,”
including, but not limited to, the leasing of property to or from Southern Mutual or direct or
indirect interests in the business of competitors, suppliers or customers of Southern Mutual and
(ii) no situations involving illegal payments or payments of doubtful legality from corporate funds
of Southern Mutual since January 1, 2004 to governmental officials or others that may be generally
characterized as a “sensitive payment.”

     3.23 Corporate Name. Southern Mutual owns and possesses all rights to the use of the
name Southern Mutual Insurance Company in the operation of Southern Mutual’s present business or
any other business similar to or competitive with that being conducted by Southern Mutual,
including, but not limited to, the right to use such name in advertising.

     3.24 Trademarks and Proprietary Rights. All trademarks, trade names, copyrights and
applications therefor that Southern Mutual owns or that are registered in the name of or licensed
to Southern Mutual are listed and briefly described in Schedule 3.24. No proceedings have been
instituted, or are pending or threatened or, to the Knowledge of Southern Mutual, contemplated that
challenge the validity of the ownership by Southern Mutual of any of such trademarks, trade names,
copyrights or applications. Southern Mutual has not licensed anyone to use any of the foregoing or
any other technical knowhow or other proprietary rights of Southern Mutual, and Southern Mutual has
no Knowledge of the infringing use if any of such trademarks and trade names or the infringement of
any such copyrights by any Person. Southern Mutual is legally entitled to use all trademarks,
trade names, copyrights, processes and other technical know-how and other proprietary rights now
used in the conduct of its business and has not received any notice of conflict with the asserted
rights of others.

     3.25 Environmental Matters.

          (a) Southern Mutual is, and, to the Knowledge of Southern Mutual, all Southern Mutual Property
including, with respect to any Southern Mutual Property, all owners or operators thereof, are, and
at all times have been in substantial compliance with all

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applicable Environmental Laws. Southern Mutual has not received any communication, written or
oral, that alleges that Southern Mutual or any Southern Mutual Property including, with respect to
any Southern Mutual Property, any owner or operator thereof, is not in such compliance, and, to the
Knowledge of Southern Mutual, there are no circumstances that may prevent or interfere with such
compliance in the future.

          (b) No Environmental Claim pending against Southern Mutual or any Southern Mutual Property or,
to the Knowledge of Southern Mutual, threatened against Southern Mutual or any Southern Mutual
Property, or any Person whose Liability for any Environmental Claims Southern Mutual has or may
have retained or assumed either contractually or by operation of Law, except for Environmental
Claims that, individually or in the aggregate, would not have a Southern Mutual Material Adverse
Effect.

          (c) There are no past or present actions, activities, circumstances, conditions, events or
incidents, including, without limitation, the release, emission, discharge, disposal or presence of
any Hazardous Materials, that, to the Knowledge of Southern Mutual, could form the basis of any
Environmental Claim against Southern Mutual, any Southern Mutual Property or any Person whose
Liability for any Environmental Claim Southern Mutual has or may have retained or assumed either
contractually or by operation of Law.

          (d) There are no Hazardous Materials present on or in any Southern Mutual Property, including
Hazardous Materials contained in barrels, above or underground storage tanks, landfills, land
deposits, dumps, equipment, whether movable or fixed, or other containers, either temporary or
permanent, and deposited or located in land, water, sumps or any other part of Southern Mutual
Property or such adjoining property, or incorporated into any structure therein or thereon.

          (e) Without in any way limiting the generality of the foregoing, and except as set forth on
Schedule 3.25(e), to the Knowledge of Southern Mutual, (i) there are no underground storage tanks
and currently or formerly located on any Southern Mutual Property, (ii) there is no friable
asbestos contained in or forming part of any building or structure owned or leased by Southern
Mutual and (iii) no polychlorinated biphenyls are used or stored at or on any Southern Mutual
Property.

     3.26 Insurance Issued by Southern Mutual.

          (a) Southern Mutual has provided Donegal Mutual with a list of all forms of Insurance
Contracts used by Southern Mutual as of August 1, 2009, and has made available to Donegal Mutual
copies of all forms of Insurance Contracts used by Southern Mutual as of August 1, 2009 that are
not standard Insurance Services Office forms. Since August 1, 2009, no forms of Insurance
Contracts written by Southern Mutual have been amended and no sales of any new forms of Insurance
Contracts have been commenced, other than changes to forms, which changes are not, in the
aggregate, material.

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          (b) To the Knowledge of Southern Mutual, all benefits payable on or prior to the date as of
which this representation is made by Southern Mutual under Insurance Contracts have in all material
respects been paid, or provision for payment thereof has been made, in accordance with the terms of
the Insurance Contracts under which they arose, such payments were not delinquent and were paid, or
if provision has been made will be paid, without fines or penalties, except for fines or penalties
that do not exceed $10,000, individually, or $25,000, in the aggregate, and except for such
benefits for which Southern Mutual reasonably believes there is a reasonable basis to contest
payment and is taking such action.

          (c) To the Knowledge of Southern Mutual, all outstanding Insurance Contracts of Southern
Mutual were issued in conformity with underwriting standards that conform in all material respects
to industry accepted practices and, with respect to Insurance Contracts reinsured in whole or in
part, conform in all material respects to the standards required pursuant to the terms of the
related reinsurance, coinsurance or other similar Contracts.

          (d) To the Knowledge of Southern Mutual, (i) all amounts recoverable under reinsurance,
coinsurance or other similar Contracts including, without limitation, amounts based on paid and
unpaid Losses are fully collectible; (ii) each insurance agent or broker, at the time such agent or
broker wrote, sold or produced business for Southern Mutual, was duly licensed as an insurance
agent or broker for the type of business written, sold or produced by such insurance agent or
broker in the particular jurisdiction in which such agent or broker wrote, sold or produced such
business for Southern Mutual, except for such failures to be so licensed that would not, in the
aggregate, have a Southern Mutual Material Adverse Effect and (iii) no such insurance agent or
broker has violated or has taken any action that with notice or lapse of time or both, would have
violated any Law except for such violations as would not have a Southern Mutual Material Adverse
Effect.

          (e) Southern Mutual has no outstanding Liability under assumed reinsurance agreements of any
nature.

     3.27 Health and Safety Matters.

          (a) To the Knowledge of Southern Mutual, Southern Mutual has complied and is in compliance
with all Health and Safety Requirements.

          (b) Without limiting the generality of the foregoing, Southern Mutual has obtained and
complied with, and is in compliance with, all Permits, licenses and other authorizations that are
required pursuant to the Health and Safety Requirements for the occupation of its facilities and
the operation of its business, a list of all such Permits, licenses and other authorizations is
included as Schedule 3.27.

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          (c) Southern Mutual has not received any written or oral notice, report or other information
regarding any actual or alleged violation of Health and Safety Requirements, or any Liabilities or
potential Liabilities, including any investigatory, remedial or corrective obligations, relating to
Southern Mutual or its facilities arising under Health and Safety Requirements.

     3.28 No Omissions. None of the representations or warranties of Southern Mutual
contained in this Agreement, none of the information contained in the Schedules referred to in this
Article III and none of the other information or documents furnished to Donegal Mutual or its
representatives by Southern Mutual in connection with this Agreement are false or misleading in any
material respect or omit to state a fact herein or therein necessary to make the statements herein
or therein not misleading in any material respect. To the Knowledge of Southern Mutual, there is
no fact that adversely affects, or in the future is reasonably likely to affect adversely, the
business or Assets of Southern Mutual in any material respect that has not been disclosed in
writing to Donegal Mutual.

     3.29 Finders. Southern Mutual has not paid or become obligated to pay any fee or
commission to any broker, finder or intermediary in connection with the transactions contemplated
by this Agreement.

     3.30 Representations and Warranties to Be True on the Closing Date. All of the
representations and warranties of Southern Mutual set forth in this Article III shall be true and
correct on the Closing Date.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF DONEGAL MUTUAL

     Donegal Mutual represents and warrants to Southern Mutual as follows:

     4.1 Organization and Standing.

          (a) Donegal Mutual is a mutual fire insurance company duly organized, validly existing and in
good standing under the Laws of the Commonwealth of Pennsylvania and has the requisite corporate
power and authority to conduct its business as it is currently being conducted. Donegal Mutual is
duly qualified to do business and is in good standing in the respective jurisdictions where the
character of its Assets owned or leased or the nature of its business makes such qualification
necessary.

          (b) Donegal Mutual has previously delivered copies of its Articles of Agreement and its
Amended and Restated By-laws as currently in effect to Southern Mutual, and all such copies are
accurate and complete as of the date hereof.

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     4.2 Authority; No Violation.

          (a) Donegal Mutual has the requisite corporate power and authority to execute and deliver this
Agreement, the Services Agreement, the Technology License Agreement and the Quota Share Reinsurance
Agreement and to consummate the transactions contemplated hereby and thereby. The execution and
delivery of this Agreement, the Services Agreement, the Technology License Agreement and the Quota
Share Reinsurance Agreement and the consummation of the transactions contemplated hereby and
thereby have been duly approved and authorized by the Board of Directors of Donegal Mutual.

          (b) Subject to the receipt of the Required Filings and Approvals, no other corporate
proceedings on the part of Donegal Mutual are necessary to authorize this Agreement, the Services
Agreement, the Technology License Agreement and the Quota Share Reinsurance Agreement and the
transactions contemplated hereby and thereby.

          (c) Subject to the receipt of the Required Filings and Approvals, this Agreement and the
Services Agreement, the Technology License Agreement and the Quota Share Reinsurance Agreement when
executed and delivered by Donegal Mutual and, assuming the due execution thereof by Southern
Mutual, will constitute the valid, legal and binding obligations of Donegal Mutual enforceable
against Donegal Mutual in accordance with their respective terms, except that (i) such enforcement
may be subject to bankruptcy, rehabilitation, liquidation, conservation, dissolution, insolvency,
reorganization, moratorium or other similar Laws now or hereafter in effect relating to creditors’
rights generally and (ii) the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and to the discretion of the court before
which any Proceeding therefor may be brought.

          (d) Neither the execution, delivery and performance of this Agreement or the Services
Agreement, the Technology License Agreement or the Quota Share Reinsurance Agreement nor the
consummation of the transactions contemplated hereby and thereby nor compliance with and
fulfillment of the terms and provisions hereof and thereof, will (i) conflict with or result in a
breach of the terms, conditions or provisions of or constitute a default under the Articles of
Agreement or the Amended and Restated By-laws of Donegal Mutual, or any instrument, agreement,
mortgage, judgment Order, award, decree or other restriction to which Donegal Mutual is a party or
by which Donegal Mutual is bound; (ii) give any party to or with rights under any such instrument,
agreement, mortgage, judgment, Order, award, decree or other restriction the right to terminate,
modify or otherwise change the rights or obligations of Donegal Mutual under such instrument,
agreement, mortgage, judgment, Order, award, decree or other restriction or (iii) require the
approval, consent or authorization of or any filing with or notification to any federal, state or
local court or Governmental Entity, except (y) the Required Filings and Approvals and (z) any
approval, consent or authorization the failure of which to obtain would not, individually or in the
aggregate, have a Donegal Mutual Material Adverse Effect.

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     4.3 Consents and Approvals of Government Entities. Other than the Required Filings
and Approvals, no consent, approval, Order or authorization of, or registration, application,
declaration or filing with any Governmental Entity is required with respect to Donegal Mutual in
connection with the execution and delivery of this Agreement, the Services Agreement, the
Technology License Agreement and the Quota Share Reinsurance Agreement.

     4.4 Transferability. Donegal Mutual will acquire the Surplus Note for its own
account, and not with a view to, and not in connection with, a public distribution or resale
thereof. Without the prior approval of the Commissioner of Insurance and provided such transferee
has agreed to be bound by this Section 4.4 prior to such transfer, Donegal Mutual will not transfer
the Surplus Note except in a transaction registered or exempt from registration under the
Securities Act or to a non-affiliate of Donegal Mutual. Southern Mutual acknowledges that Donegal
Mutual’s investments are at all times within its control and direction.

     4.5 Finders. Donegal Mutual has not paid or become obligated to pay any fee or
commission to any broker, finder or intermediary on account of the transactions provided for in
this Agreement, except for Sanders Morris Group Inc. Donegal Mutual shall be responsible for the
payment of all fees and expenses payable for or on account of the transactions provided for in this
Agreement and other such fees based on actions taken or agreements entered into by Donegal Mutual.

     4.6 Representations and Warranties to Be True on the Closing Date. All of the
representations and warranties set forth in this Article IV shall be true and correct on the
Closing Date.

ARTICLE V

CERTAIN COVENANTS

     5.1 Investigation of Southern Mutual. Southern Mutual shall afford to the officers,
employees and authorized representatives, including, without limitation, independent registered
public accountants and attorneys, of Donegal Mutual such reasonable access upon reasonable prior
notice during normal working hours to the offices, properties, personnel, business and financial
and other records of Southern Mutual as Donegal Mutual shall deem necessary or desirable, and shall
furnish to Donegal Mutual or its authorized representatives such additional documents and financial
and operating and other data as Donegal Mutual shall reasonably require, including all such
documents, information and data as shall be necessary in order to enable Donegal Mutual or its
representatives to verify to their satisfaction the accuracy of the Southern Mutual Financial
Statements and the representations and warranties contained in Article III of this Agreement. No
investigation made by Donegal

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Mutual or its representatives shall affect the representations and warranties of Southern
Mutual hereunder or the liability of Southern Mutual with respect thereto.

     5.2 Confidential Nature of Information.

          (a) Donegal Mutual and Southern Mutual agree that, in the event that the transactions
contemplated by this Agreement shall not be consummated, each will treat in confidence all
documents, materials and other information that it shall have obtained during the course of the
negotiations leading to this Agreement, the investigation of the other party hereto and the
preparation of this Agreement and other documents relating to this Agreement with the exception of
any filings made by Donegal Mutual or Southern Mutual with the Georgia Department (collectively,
the “Confidential Information”), and shall return to the other party all copies of the Confidential
Information that have been furnished in connection therewith.

          (b) In the event that a party hereto becomes legally compelled to disclose any of the
Confidential Information, it shall provide the other party with reasonable notice so that it may
seek a protective order or other appropriate remedy or waive compliance with the provisions of this
Section 5.2. In the event that such protective order or other remedy is not obtained or that the
other party waives compliance with the provisions of this Section 5.2, the first party will furnish
only that portion of the Confidential Information that it is advised by opinion of counsel, which
counsel shall be reasonably acceptable to the other party, is legally required and will endeavor to
obtain assurance that confidential treatment will be accorded the Confidential Information so
furnished.

          (c) Donegal Mutual and Southern Mutual agree and acknowledge that a breach of the provisions
of this Section 5.2 may cause the other party to suffer irreparable damage that could not be
adequately remedied by an action at law. Accordingly, each party agrees that the other party shall
have the right to seek specific performance of the provisions of this Section 5.2 to enjoin a
breach or attempted breach of the provisions of this Section 5.2, such right being in addition to
all other rights and remedies that are available to each party at law, in equity or otherwise. The
foregoing shall be in addition to the rights and obligations under the Confidentiality Agreement.

     5.3 Preserve Accuracy of Representations and Warranties.

          (a) Southern Mutual shall refrain from taking any action that would render any representation
or warranty contained in Article III of this Agreement inaccurate as of the Closing Date. Southern
Mutual will promptly notify Donegal Mutual of any lawsuits, claims, proceedings or investigations
that, to the Knowledge of Southern Mutual, may be threatened, brought, asserted or commenced
against Southern Mutual, its officers or its directors (i) involving in any way the transactions
this Agreement contemplates or (ii) that would, if determined adversely, have a Southern Mutual
Material Adverse Effect.

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          (b) Donegal Mutual shall refrain from taking any action that would render any representation
or warranty contained in Article IV of this Agreement inaccurate as of the Closing Date. Donegal
Mutual shall promptly notify Southern Mutual of any lawsuits, claims, proceedings or investigations
that, to the Knowledge of Donegal Mutual, may be threatened, brought, asserted or commenced against
Donegal Mutual, its officers or directors (i) involving in any way the transactions this Agreement
contemplates or (ii) that would, if determined adversely, have a Donegal Mutual Material Adverse
Effect .

     5.4 Maintain Southern Mutual As a Going Concern. Except as otherwise specifically
provided in this Agreement, Southern Mutual shall conduct its business in accordance with past
practices and use its best efforts to maintain its business organization intact, keep available the
services of Southern Mutual’s officers, employees and agents and preserve the good will of its
insurance underwriters, employees, clients and others having business relations with it. Southern
Mutual shall provide Donegal Mutual promptly with interim monthly financial information and any
other management reports, as and when they shall become available, confer with Donegal Mutual
concerning operational matters of a material nature and otherwise report periodically to Donegal
Mutual concerning the status of the business, operations and financial condition of Southern
Mutual.

     5.5 Make No Material Change in Southern Mutual. Prior to the Closing Date, Southern
Mutual shall not, without the prior written approval of Donegal Mutual, (i) make any material
change in the business or operations of Southern Mutual except as set forth in this Agreement; (ii)
make any material change in the accounting policies applied in the preparation of the financial
statements referred to in Section 3.5; (iii) make any material change in the compensation of the
officers, directors or key employees of Southern Mutual other than in the Ordinary Course of
Business of Southern Mutual; (iv) enter into any contract, license, franchise or commitment other
than in the Ordinary Course of Business of Southern Mutual or waive any rights of substantial
value; (v) make any donation to any charitable, civic, educational or other eleemosynary
institution in excess of donations made in comparable past periods, (vi) make any reduction in any
loss expense reserve or incurred but not reported reserve prior to the Closing Date; (vii) make any
change in the levels, procedures or methods employed in the setting or changing of case basis loss
reserves; (viii) make any reduction in net case basis loss reserves not consistent with the levels,
procedures or methods employed by Southern Mutual in the setting or changing of case basis loss
reserves as in effect on the date of this Agreement and, in any event, within 10 days following any
reduction in Southern Mutual’s net case basis loss reserve in any one claim file in excess of
$25,000, except for a reduction occurring because a payment has been made on the reserve or because
the claim has been settled and the case closed, and, in any case, Southern Mutual shall provide
Donegal Mutual with a written explanation of such reduction in reasonable detail certified by
Southern Mutual’s President or (ix) enter into any other transaction affecting in any material
respect the business of Southern Mutual other than in the Ordinary

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Course of Business of Southern Mutual and in conformity with the past practices of Southern
Mutual or as contemplated by this Agreement.

     5.6 No Public Announcement. Neither Southern Mutual nor Donegal Mutual shall, without
the approval of the other, make any press release or other public announcement or filing concerning
the transactions this Agreement contemplates, except as and to the extent that any such party shall
so determine is required by law, in which case the other party shall be advised thereof and given a
reasonable opportunity to comment thereon.

     5.7 Required Filings. As promptly as practical after the date of this Agreement,
Southern Mutual and Donegal Mutual shall promptly commence and make all Required Filings with the
appropriate Governmental Entity required by Law to be made by any of them in order to consummate
the transactions contemplated by this Agreement. Between the date of this Agreement and the
Closing Date, Southern Mutual shall cooperate with Donegal Mutual with respect to all Required
Filings that Donegal Mutual elects to make or is required by law to make in connection with the
transactions this Agreement contemplates.

     5.8 No Solicitation. Southern Mutual shall not, nor shall it authorize or permit any
of its officers, directors or employees or any investment banker, financial advisor, attorney,
accountant, actuary or other Person retained by it or on its behalf to: (a) solicit or encourage,
including, without limitation, by way of furnishing information, or take any action to facilitate
or pursue, any inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, any Reorganization Proposal or (b) agree to, approve or endorse any
Reorganization Proposal; provided, however, that nothing contained in this Section 5.8 shall
prohibit the Board of Directors of Southern Mutual from furnishing information to, or entering into
discussions or negotiations with, any person or entity that made an unsolicited bona fide proposal
to acquire Southern Mutual pursuant to a Reorganization Proposal if and only to the extent that,
(i) the Board of Directors of Southern Mutual determines in good faith that such action is required
to comply with its fiduciary duties to its Members imposed by Law, (ii) prior to furnishing such
information to, or entering into discussions or negotiations with, such person or entity, Southern
Mutual provides written notice to Donegal Mutual to the effect that it is furnishing information
to, or entering into discussions or negotiations with, such person or entity and (iii) Southern
Mutual continues to keep Donegal Mutual informed of the status of any such discussions or
negotiations. Nothing in this Section 5.8 shall (x) permit Southern Mutual to terminate this
Agreement, except as specifically provided in Article VII, (y) permit Southern Mutual to enter into
any agreement with respect to a Reorganization Proposal during the term of this Agreement or (z)
affect any other obligation of Southern Mutual under this Agreement. Southern Mutual shall
promptly advise Donegal Mutual orally and in writing of any such inquiries or proposals however
preliminary and whether written or oral, and shall communicate the full and complete details of any
such inquiry or proposal including, without limitation, the identity of all Persons involved. As
used in this Agreement,

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“Reorganization Proposal” shall mean any proposal for, or to discuss, a merger, consolidation,
sale of all or substantially all of the Assets, demutualization, quota share, assumption or other
assumption reinsurance arrangement or other reorganization, arrangement or business combination
involving Southern Mutual or any proposal or offer for, or to discuss, the acquisition in any
manner of control of a substantial portion of the Assets of or business conducted by Southern
Mutual other than the transactions this Agreement contemplates.

     5.9 Future Actions Regarding Southern Mutual. Donegal Mutual and Southern Mutual
agree that the following undertakings with respect to certain future action relating to Southern
Mutual were important inducements to the decision of Southern Mutual and Donegal Mutual to enter
into this Agreement unless at least three of the Southern Mutual designees then serving on the
Board of Directors of Southern Mutual vote to approve such action.

          (a) Donegal Mutual agrees that it shall not, and shall use commercially reasonable efforts to
ensure that its director designees do not, take any act that would have the effect of changing the
status of Southern Mutual as a Georgia-domiciled mutual insurance company or change the name of
Southern Mutual, demutualize Southern Mutual, redomesticate Southern Mutual or enter into a bulk
reinsurance or bulk reinsurance assumption agreement or transfer all or part of Southern Mutual’s
business to a non-affiliate of Donegal Mutual. This covenant shall not preclude Donegal Mutual’s
assumption of Southern Mutual’s insurance policies with and into another insurance company through
one or more reinsurance agreements or Donegal Mutual’s inclusion of such business in its pooling
agreement with Atlantic States Insurance Company.

          (b) Donegal Mutual and Southern Mutual have agreed that until the later to occur of (i)
repayment of the principal amount and all accrued but unpaid interest on the Surplus Note, (ii) the
termination of the Technology License Agreement in accordance with its terms and (iii) the
termination of the Quota Share Reinsurance Agreement in accordance with its terms, Southern Mutual
shall use its best efforts to assure that for a period of seven years from the Closing Date the
Board of Directors of Southern Mutual shall consist of 12 members, five of whom shall be designees
of Southern Mutual and seven of whom shall be designees of Donegal Mutual. Donegal Mutual further
agrees, for a period of not less than seven years from the Closing Date, to cause its designees on
the Southern Mutual’s Board of Directors to nominate the initial Southern Mutual designees for
election as successors to such designees upon the expiration of their respective terms. In the
event a Southern Mutual designee is no longer able to serve as a director, Donegal Mutual agrees to
cause its designees on the Southern Mutual Board to nominate for election by Southern Mutual’s
members or appoint as a successor director to fill a vacancy on the Board of Directors, as the case
may be, a person who is recommended by the remaining Southern Mutual designees on the Board.

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After seven years from the Closing Date, Donegal Mutual agrees to maintain an appropriate
Georgia presence on the Board of Directors of Southern Mutual.

          (c) For a period of seven years from the Closing Date, Donegal Mutual will not take any action
to relocate or close the existing facilities of Southern Mutual in Athens, Georgia.

          (d) Donegal Mutual agrees to use commercially reasonable efforts to maintain continued
employment of underwriting, claims and marketing personnel at Southern Mutual’s home office, with
the levels of employment commensurate with the premium volume of Southern Mutual.

          (e) Donegal Mutual and Southern Mutual agree to establish, within 30 days from the date of the
Closing, a technology team consisting of employees of Donegal Mutual and employees of Southern
Mutual. The technology team shall analyze the existing Southern Mutual computer system and
determine if it would be beneficial to Southern Mutual to migrate Southern Mutual’s computer system
over time to Donegal Mutual’s computer system. The technology team shall also analyze the
adaptation of Southern Mutual’s current computer system so that Southern Mutual’s computer system
could operate Donegal Mutual’s WritePro and WriteBiz applications, all subject to the terms of the
Technology License Agreement.

          (f) Donegal Mutual shall develop in coordination with Southern Mutual a business plan to
expand the volume of premium Donegal Mutual and Southern Mutual write in Georgia and South
Carolina. The business plan shall provide that Southern Mutual will continue to be a viable and
competitive market for preferred and standard personal lines and other products with an expanding
agency distribution system.

          (g) Southern Mutual shall preserve and keep in full force and effect its existence as a mutual
fire insurance company authorized under the Laws of the State of Georgia to write the lines of
business Southern Mutual is authorized to conduct on the date of this Agreement and its admission
to transact an insurance business in Georgia and South Carolina;

          (h) Donegal Mutual, pursuant to the Services Agreement, shall provide Southern Mutual with
support and assistance in its principal business areas, including underwriting, accounting and
finance, reinsurance, actuarial, claims, investments and technology;

          (i) At any reasonable time and from time to time, Southern Mutual agrees to permit Donegal
Mutual or any agents or representatives thereof to examine and make copies of and take abstracts
from the records and books of account of, and visit the properties of, Southern Mutual during
regular business hours and upon five days prior notice to

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Southern Mutual, and to discuss the affairs, finances and accounts of Southern Mutual with
Southern Mutual’s officers;

          (j) For a period of seven years from the Closing Date, all meetings of the Boards of Directors
and the Advisory Board of Directors of Southern Mutual shall be held at the home office of Southern
Mutual in Athens, Clarke County, Georgia, it being understood, however, that Article 3, Section 20,
of Southern Mutual’s Amended Bylaws permits directors to participate in a board meeting by
conference telephone or other form of communication by means of which all persons participating in
the meeting can hear each other and that such participation shall constitute presence in person at
such meeting;

          (k) Southern Mutual shall have filed the August 31, 2009 amendments to its Bylaws with the
Department which amended Bylaws shall become effective as of the Closing Date; and

          (l) Donegal Mutual and Southern Mutual shall not amend, repeal, change, or modify this
Agreement or the Surplus Note after the Closing Date without the approval of three of the Southern
mutual designees.

     5.10 Advisory Board. Effective as of the Closing Date and for a period of seven years
following the Closing Date, Donegal Mutual and Southern Mutual shall take all necessary action to
establish an Advisory Board of Directors and appoint to the Advisory Board of Directors each
current director of Southern Mutual who will not continue as a director of Southern Mutual after
the Closing Date. For two years following the Closing Date, members of the Advisory Board of
Directors shall be paid the same compensation as members of the Board of Directors of Southern
Mutual. Thereafter, the Board of Directors of Southern Mutual shall annually establish the
compensation of the members of its Advisory Board of Directors.

ARTICLE VI

CONDITIONS

     6.1 Conditions to Each Party’s Obligations. The respective obligations of each party
to effect the purchase and sale of the Surplus Note and their other respective obligations under
this Agreement shall be subject to the fulfillment at the Closing Date of the following conditions:

          (a) All Required Filings and Approvals required to be obtained prior to the Closing Date
solely for this Agreement, the Ancillary Documents and the Amended Bylaws that will become
effective as of the Closing Date and the election of designees of Donegal Mutual as a majority of
the members of the Board of Directors of Southern Mutual shall have been obtained and not rescinded
or adversely modified or limited as set forth in the proviso

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below or, if merely required to be filed, such filings shall have been made and accepted, and
all waiting periods prescribed by applicable Law shall have expired or been terminated in
accordance with applicable Law; provided that such approvals shall not contain any conditions or
limitations that compel or seek to compel Southern Mutual to dispose of all or any portion of the
business or Assets of Southern Mutual or impose or seek to impose any limitation on the ability of
Southern Mutual to conduct its business or own its Assets after the Closing Date in substantially
the same manner as Southern Mutual presently conducts its business and owns its Assets;

          (b) No Order entered or Law promulgated or enacted by any Governmental Entity shall be in
effect that would prevent the consummation of the purchase or sale of the Surplus Note or the other
transactions contemplated hereby and no Proceeding brought by a Governmental Entity shall have been
commenced and be pending that seeks to restrain, prevent or materially delay or restructure the
transactions contemplated hereby or that otherwise questions the validity or legality of any such
transaction; and

          (c) There shall be no pending or threatened litigation initiated by a private party seeking to
restrain, prevent, rescind or change the terms of this Agreement or the sale of the Surplus Note or
to obtain damages in connection with this Agreement or the consummation thereof or with the sale of
the Surplus Note that, in the reasonable opinion of Southern Mutual or Donegal Mutual, makes it
inadvisable to proceed with this Agreement or with the sale of the Surplus Note.

     6.2 Conditions to Obligations of Donegal Mutual. The obligation of Donegal Mutual to
purchase and pay for the Surplus Note and to perform its other obligations under this Agreement to
be performed on the Closing Date shall, at the option of Donegal Mutual, be subject to the
satisfaction on or prior to the Closing Date, of the following conditions:

          (a) Southern Mutual shall have performed or complied in all material respects with all
obligations and agreements required to be performed and complied with by it under this Agreement,
including the deliveries required by Section 2.3(b), at or prior to the Closing Date, and Donegal
Mutual shall have received an Officer’s Certificate to that effect, dated as of the Closing Date,
and signed on behalf of Southern Mutual.

          (b) There shall have been no material breach by Southern Mutual in the performance of any of
its covenants and agreements in this Agreement, each of the representations and warranties of
Southern Mutual contained in this Agreement that is qualified by materiality shall be true and
correct on the Closing Date as though made on the Closing Date and each of the representations and
warranties of Southern Mutual that is not so qualified shall be true and correct in all material
respects on the Closing Date as though made on the Closing Date, other than representations and
warranties that address matters only as of a certain date, which shall be true and correct in all
material respects as of such certain date, and the information concerning Southern Mutual contained
in its Annual

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Statements for the years ended December 31, 2006, 2007 and 2008 shall be true and correct in
all material respects as of the last day of each such year, and Southern Mutual shall deliver to
Donegal Mutual on the Closing Date an Officer’s Certificate or Certificates to that effect dated as
of the Closing Date, and signed on behalf of Southern Mutual;

          (c) Except as set forth in the Disclosure Schedules, there shall have been, between the date
hereof and the Closing Date, (i) no Southern Mutual Material Adverse Effect, (ii) no adverse
federal, state or local legislative or regulatory change affecting in any material respect the
services or business of Southern Mutual, (iii) no material damage to any Southern Mutual Property
or Assets of Southern Mutual by fire, flood, casualty, act of God or the public enemy or other
cause, regardless of insurance coverage for such damage, so as to impair in any material respect
the ability of Southern Mutual to render services or continue operations and (iv) no material and
adverse development or proceeding affecting Southern Mutual’s Insurance Licenses in Georgia and
South Carolina. Southern Mutual shall deliver to Donegal Mutual on the Closing Date an Officer’s
Certificate, dated as of the Closing Date, and signed on behalf of Southern Mutual by its President
to the effect that (a) between the date of this Agreement and the Closing Date there has been no
such Southern Mutual Material Adverse Effect as stated in clause (i), (b) no such material damage
as stated in clause (iii), (c) no adverse licensing development as stated in clause (iv) and (d)
further stating that nothing has come to the signer’s attention, in the course of his activities on
behalf of Southern Mutual, that causes him to believe that during such period there occurred any
adverse federal, state or local legislative or regulatory change affecting in any material respect
the services or business of Southern Mutual;

          (d) Southern Mutual shall have increased the membership of its Board of Directors to 12
persons and Southern Mutual shall have received the resignations of five directors of Southern
Mutual, other than Allen R. Green, on or prior to the Closing Date and Southern Mutual’s Board of
Directors shall have appointed as directors of Southern Mutual effective as of the Closing Date,
with the prior approval of the Commissioner of Insurance, seven persons designated by Donegal
Mutual from among the current directors of Donegal Mutual;

          (e) Not later than the Closing Date, each of Allen R. Green, W. Daniel Delamater, Martin E.
Webb and Kimberly L. McClain shall have entered into an Employment Agreement with Southern Mutual
in substantially the form of Appendix D and, except as provided in such Employment Agreements,
Southern Mutual shall have no other obligation to any of such persons in respect of his or her
employment by Southern Mutual or the termination of such employment;

          (f) The policyholders surplus of Southern Mutual, determined in accordance with SAP, shall be
not less than $6.0 million as of the last day of the month immediately preceding the month in which
the Closing occurs; and

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          (g) Southern Mutual shall not have made any material expenditures through the Closing Date,
except in accordance with its current Board-approved budget.

     6.3 Conditions to Obligations of Southern Mutual. The obligation of Southern Mutual
to sell the Surplus Note and to perform its other obligations under this Agreement to be performed
on the Closing Date shall, at the option of Southern Mutual, be subject to the satisfaction on or
prior to the Closing Date, of the following conditions:

          (a) Donegal Mutual shall have performed or complied in all material respects with all
obligations and agreements required to be performed and complied with by it under this Agreement,
including the deliveries required by Section 2.3(c), at or prior to the Closing Date and Southern
Mutual shall have received an Officers’ Certificate from Donegal Mutual as to the satisfaction of
this condition;

          (b) There shall have been no material breach by Donegal Mutual in the performance of any of
its covenants and agreements in this Agreement, each of the representations and warranties of
Donegal Mutual contained in this Agreement that is qualified by materiality shall be true and
correct on the Closing Date as though made on the Closing Date and each of the representations and
warranties of Donegal Mutual that is not so qualified shall be true and correct in all material
respects on the Closing Date as though made on the Closing Date, other than representations and
warranties that address matters only as of a certain date and which shall be true and correct in
all material respects as of such certain date, and Donegal Mutual shall deliver to Southern Mutual
on the Closing Date an Officer’s Certificate or Certificates to that effect, dated as of the
Closing Date, and signed on behalf of Donegal Mutual;

          (c) At Closing, Donegal Mutual shall have tendered to Southern Mutual payment of the purchase
price of the Surplus Note as specified in Section 2.2.

ARTICLE VII

TERMINATION

     7.1 Termination. This Agreement may be terminated and the purchase and sale of the
Surplus Note and the other transactions contemplated by this Agreement may be abandoned at any time
prior to the Closing Date:

          (a) by mutual consent of Southern Mutual and Donegal Mutual;

          (b) subject to Section 7.2, by either Southern Mutual or Donegal Mutual by one day’s written
notice to Donegal Mutual or Southern Mutual, as the case may be, if the Closing shall not have been
consummated on the date determined pursuant to Section 7.2, provided that the right to terminate
this Agreement under this Section 7.1(b) shall not be

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available to any party whose failure to fulfill any obligation under this Agreement has been
the cause of, or resulted in, the failure of the purchase and sale of the Surplus Note to have been
consummated on or before such date;

          (c) by either Donegal Mutual or Southern Mutual by one day’s written notice to Southern Mutual
or Donegal Mutual, as the case may be, if any of the conditions to such party’s obligations to
consummate the transactions contemplated by this Agreement shall have become impossible to satisfy;
or

          (d) by Donegal Mutual if (i) Southern Mutual is in breach at any time prior to the Closing
Date of any of the representations and warranties made by Southern Mutual as though made on and as
of such date, unless the breach (without giving effect to any materiality or material adverse
effect qualifications or materiality exceptions contained therein) in such representations and
warranties, individually or in the aggregate, have not had and would not reasonably be expected to
result in a Material Adverse Effect as to Southern Mutual or (ii) Southern Mutual shall not have
performed and complied in all material respects with all covenants required by this Agreement to be
performed or complied with by it on and as of such date, which breach cannot be or has not been
cured, in all material respects within 15 days after the giving of written notice thereof by
Donegal Mutual to Southern Mutual.

          (e) by Southern Mutual if (i) Donegal Mutual is in breach at any time prior to the Closing
Date of any of the representations and warranties made by Donegal Mutual as though made on and as
of such date, unless the breach (without giving effect to any materiality or material adverse
effect qualifications or materiality exceptions contained therein) in such representations and
warranties, individually or in the aggregate, have not had and would not reasonably be expected to
result in a Material Adverse Effect as to Donegal Mutual or (ii) Donegal Mutual shall not have
performed and complied in all material respects, with all covenants required by this Agreement to
be performed or complied with by it on and as of such date, which breach cannot be or has not been
cured, in all material respects, within 15 days after the giving of written notice thereof by
Southern Mutual to Donegal Mutual.

     7.2 Final Termination Date. Southern Mutual or Donegal Mutual may terminate this
Agreement on one day’s notice to Donegal Mutual or Southern Mutual, as the case may be, on the
date, if any, on which the Commissioner disapproves the change of control of Southern Mutual
described in Donegal Mutual’s Form A Statement or on December 31, 2009, whichever shall first
occur.

     7.3 Effect of Termination. In the event of the termination of this Agreement by
either Southern Mutual or Donegal Mutual, as provided in Section 7.1, this Agreement shall
thereafter become void, each party shall bear all expenses it incurred, including professional
fees, in connection with the transactions contemplated by this Agreement and there shall be

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no Liability on the part of any party hereto against any other party hereto, or their
respective directors, officers, policyholders or agents, except that (i) any such termination shall
be without prejudice to the rights of any party hereto arising out of the willful breach by any
other party of any covenant or agreement contained in this Agreement, (ii) Section 5.2 and Article
IX shall continue in full force and effect notwithstanding such termination and (iii) each of the
parties hereto shall provide the other party hereto with a copy of any proposed public announcement
regarding the occurrence of such termination and an opportunity to comment thereon prior to its
dissemination.

ARTICLE VIII

AMENDMENT, WAIVER AND INDEMNIFICATION

     8.1 Amendment. This Agreement may be amended or modified in whole or in part at any
time by an agreement in writing executed in the same manner as this Agreement, provided, however,
that no amendment shall be made that changes the terms of this Agreement in any material respect or
that requires the further approval or proceedings of any insurance Governmental Entity without such
approval having first been obtained or such proceedings having been first completed.

     8.2 Extension; Waiver. At any time prior to the Closing Date, either party hereto
may:

          (a) extend the time for the performance of any of the obligations or other acts of the other
party hereto,

          (b) waive any inaccuracies in the representations and warranties contained in this Agreement
or in any document delivered pursuant to this Agreement, and

          (c) waive compliance with any of the agreements or conditions contained herein.

Any agreement on the part of a party to any such extension or waiver shall be valid only if set
forth in an instrument in writing signed on behalf of such party by its President. The failure of
any party hereto to enforce at any time any provision of this Agreement shall not be construed to
be a waiver of such provision, nor in any way to affect the validity of this Agreement or any part
hereof or the right of such party hereafter to enforce each and every such provision. No waiver of
any breach of this Agreement shall be held to constitute a waiver of any other or subsequent
breach.

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     8.3 Survival of Obligations.

          (a) The covenants and agreements of Donegal Mutual and Southern Mutual set forth in Section
5.9 of this Agreement shall survive the Closing of the transactions this Agreement contemplates and
shall remain in full force and effect until such covenants expire in accordance with the terms
thereof.

          (b) All certifications, representations and warranties made herein by Southern Mutual and
Donegal Mutual and their obligations to be performed pursuant to the terms hereof, shall survive
the Closing Date hereunder, notwithstanding any notice of any inaccuracy, breach or failure to
perform not waived in writing and notwithstanding the consummation of the transactions contemplated
herein with knowledge of such inaccuracy, breach or failure. All representations and warranties
contained herein shall terminate upon the earlier of (i) repayment in full of the principal amount
of the Surplus Note and all accrued but unpaid interest thereon or (ii) 90 days after Donegal
Mutual shall have received the audited financial statements of Southern Mutual for the year ending
December 31, 2010; provided that (i) the representations and warranties contained in Section 3.16
shall expire two years after the Closing Date or, with respect to each claim under Section 3.16
arising before or during such two-year period, upon the earlier to occur of (x) such claim’s final
judicial determination or settlement and satisfaction of any judgment or full payment of any
settlement, as the case may be or (y) such time, if any, as the claim shall be barred by the
applicable statute of limitations or (z) the payment in full of the Surplus Note and (ii) the
representations and warranties contained in Section 3.17 shall expire four years after the Closing
Date or with respect to any dispute with the IRS upon the earlier to occur of (x) such dispute’s
final resolution and the payment of all taxes, interests and penalties arising therefrom and (y)
the expiration of the applicable statute of limitations.

     8.4 Indemnification.

          (a) From and after the Closing Date, Southern Mutual agrees to indemnify and hold harmless
Donegal Mutual and its subsidiaries, affiliates, partners, successors and assigns (collectively,
the “Indemnified Persons”) from and against any and all (x) Liabilities, losses, costs,
deficiencies or damages (“Loss”) and (y) reasonable attorneys’ and accountants’ fees and expenses,
court costs and all other reasonable out-of-pocket expenses (“Expense”) incurred by any Indemnified
Person, in each case net of any insurance proceeds received and retained by such Indemnified
Person, in connection with or arising from (i) any breach by Southern Mutual of any of its
covenants in, or any failure of Southern Mutual to perform any of its obligations under, this
Agreement or (ii) any material breach of any warranty or the material inaccuracy of any
representation of Southern Mutual contained or referred to in this Agreement or in any Officer’s
Certificate delivered by or on behalf of Southern Mutual pursuant to this Agreement provided that
the liability of Southern Mutual shall be limited (the “Liability Limit”) to an aggregate of Two
Million Five Hundred Thousand Dollars ($2,500,000).

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          (b) If any Indemnified Person has suffered or incurred any Loss or incurred any Expense, it
shall so notify Southern Mutual promptly in writing describing such Loss or Expense, the amount
thereof, if known, and the method of computation of such Loss or Expense, all with reasonable
particularity and containing a reference to the provision of this Agreement or any Officer’s
Certificate delivered pursuant hereto in respect of which such Loss or Expense shall have occurred.
If any action at law or suit in equity is instituted by or against a third party with respect to
which any Indemnified Person intends to claim any liability or expense as Loss or Expense under
this Section 8.4, such Indemnified Person shall promptly notify Southern Mutual of such action or
suit. The failure of an Indemnified Person to notify Southern Mutual promptly of a claim as
contemplated by the preceding sentence shall not relieve Southern Mutual of its obligations under
this Section 8.4 except to the extent that Southern Mutual is prejudiced in its defense of such
claim as a result of such failure to give prompt notice.

          (c) Subject to paragraph (d) of this Section 8.4, the Indemnified Persons shall have the right
to conduct and control, through counsel of their choosing, any third party claim, action or suit
and may compromise or settle the same, provided that any of the Indemnified Persons shall give
Southern Mutual advance notice of any proposed compromise or settlement. The Indemnified Persons
shall permit Southern Mutual to participate in the defense of any such action or suit through
counsel chosen by it, provided that the fees and expenses of such counsel shall be borne by
Southern Mutual. Any compromise or settlement with respect to a claim for money damages effected
after Southern Mutual, by notice to the Indemnified Persons, shall have disapproved such compromise
or settlement, shall discharge Southern Mutual from liability with respect to the subject matter
thereof, and no amount in respect thereof shall be claimed as Loss or Expense under this Section
8.4; provided that if Southern Mutual shall disapprove of a proposed compromise or settlement of a
claim the acceptance of which is recommended by counsel conducting the defense of such claim and
the amount of such settlement would exceed an applicable Liability Limit, Southern Mutual shall,
notwithstanding such Liability Limit, be liable for the full amount of any judgment entered in
respect of, or later compromise or settlement approved by Southern Mutual of, such claim less the
amount by which the proposed compromise or settlement disapproved by Southern Mutual exceeded such
Liability Limit.

          (d) If the remedy sought in any action or suit referred to in paragraph (c) of this Section
8.4 is solely money damages and the sum of (i) the amount claimed in such action or suit, (ii) all
amounts previously paid by Southern Mutual pursuant to this Section 8.4 and (iii) all amounts
claimed in all pending claims for indemnity under this Section 8.4 does not exceed the aggregate
liability of Southern Mutual under this Section 8.4, Southern Mutual shall have 15 business days
after receipt of the notice referred to in the last sentence of paragraph (b) of this Section 8.4
to notify the Indemnified Persons that it elects to conduct and control such action or suit. If
Southern Mutual does not give the foregoing notice, the Indemnified Persons shall have the right to
defend, contest, settle or compromise such action

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or suit in the exercise of their exclusive discretion and Southern Mutual shall, upon request
from any of the Indemnified Persons, promptly pay to such Indemnified Persons in accordance with
the other terms of this Section 8.4 the amount of any Loss resulting from its liability to the
third party claimant and all related Expense. If Southern Mutual gives the foregoing notice,
Southern Mutual shall have the right to undertake, conduct and control, through counsel of its own
choosing and at its sole expense, the conduct and settlement of such action or suit, and the
Indemnified Persons shall cooperate with Southern Mutual in connection therewith; provided that (x)
Southern Mutual shall not thereby permit to exist any Lien upon any Asset of any Indemnified
Person, (y) Southern Mutual shall permit the Indemnified Persons to participate in such conduct or
settlement through counsel chosen by the Indemnified Persons, but the fees and expenses of such
counsel shall be borne by the Indemnified Persons, except as provided in clause (z) hereof and (z)
Southern Mutual shall agree to reimburse promptly to the extent required under this Section 8.4 the
Indemnified Persons for the full amount of any Loss resulting from such action or suit and all
related Expense incurred by the Indemnified Persons, except fees and expenses of counsel for the
Indemnified Persons incurred after the assumption of the conduct and control of such action or suit
by Southern Mutual. So long as Southern Mutual is contesting any such action or suit in good
faith, the Indemnified Persons shall not pay or settle any such action or suit. Notwithstanding
the foregoing, the Indemnified Persons shall have the right to pay or settle any such action or
suit, provided that in such event the Indemnified Persons shall waive any right to indemnity
therefor by Southern Mutual and no amount in respect thereof shall be claimed as Loss or Expense
under this Section 8.4.

ARTICLE IX

MISCELLANEOUS

     9.1 Notices. All notices or other communications required or permitted hereunder
shall be in writing and shall be given by confirmed facsimile or registered mail, postage prepaid,
addressed as follows:

     if to Donegal Mutual, to:

Donegal Mutual Insurance Company

1195 River Road, P.O. Box 302

Marietta, Pennsylvania 17547

Attention: Donald H. Nikolaus, President

Facsimile: 717-426-7009

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     with a copy to:

Duane Morris LLP

30 South 17th Street

Philadelphia, Pennsylvania 19103-4196

Attention: Frederick W. Dreher, Esq.

Facsimile: 215-979-1213

     if to Southern Mutual, to:

Southern Mutual Insurance Company

360 Alps Road

Athens, Georgia 30606

Attention: Allen R. Green, President

Facsimile: 706-549-7855

     with a copy to:

Constantine & Associates

2900 Paces Ferry Rd., Ste. C-2000

Atlanta, Georgia 30339

Attention: Robert P. Constantine, Jr., Esq.

Facsimile: 404-223-6833

or to such other address or facsimile number as the Person to whom notice is given may have
previously furnished to the other party in writing in accordance herewith.

     9.2 Expenses. Except as otherwise provided herein, each party hereto shall pay its
own expenses including, without limitation, legal and accounting fees and expenses incident to its
negotiation and preparation of this Agreement and to its performance and compliance with the
provisions contained herein.

     9.3 Governing Law. This Agreement and the Ancillary Documents shall be governed by
and construed in accordance with the laws of the State of Georgia without regard to its rules on
conflicts of law.

     9.4 Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns, provided that the rights
of Southern Mutual herein may not be assigned and the rights of Donegal Mutual may be assigned only
(a) to such other business organization that shall succeed to substantially all the assets,
liabilities and business of Donegal Mutual or (b) to a wholly owned subsidiary of Donegal Mutual,
in which event such assignment shall not relieve Donegal Mutual of any of Donegal Mutual’s
obligations to Southern Mutual under this Agreement. Nothing in this

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Agreement, expressed or implied, is intended to confer upon any other Person any rights or
remedies of any nature under or by reason of this Agreement.

     9.5 Partial Invalidity. 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,
and 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 completion of the transactions contemplated
herein to be unreasonable or materially and adversely frustrate the objectives of the parties as
expressed in this Agreement.

     9.6 Execution in Counterparts. This Agreement may be executed in two counterparts,
both of which shall be considered one and the same agreement, and shall become a binding agreement
when one or more counterparts have been signed by each of the parties and delivered to the other
party.

     9.7 Titles and Headings. Titles and headings to Articles and Sections herein are
inserted for convenience of reference only and are not intended to be a part of or to affect the
meaning or interpretation of this Agreement.

     9.8 Entire Agreement; Statements as Representations. This Agreement, together with
the Surplus Note, the Services Agreement, the Employment Agreements, the Technology License
Agreement, the Quota Share Reinsurance Agreement, the Disclosure Schedules, the Confidentiality
Agreement and any documents delivered pursuant to Articles II and VI, contain the entire
understanding of Southern Mutual and Donegal Mutual with regard to the subject matter of this
Agreement. All statements contained in this Agreement or in any schedule, exhibit, certificate,
list or other document delivered pursuant to this Agreement shall be deemed representations and
warranties as such terms are used in this Agreement.

     9.9 Specific Performance. Each of Southern Mutual and Donegal Mutual acknowledges and
agrees that the other would be irreparably damaged in the event any of the provisions of this
Agreement were not performed in accordance with their specific terms or were otherwise breached.
Accordingly, each of Southern Mutual and Donegal Mutual agrees that they each shall be entitled to
an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action instituted in any
court of the United States or any state thereof having subject matter jurisdiction, in addition to
any other remedy to which Southern Mutual or Donegal Mutual may be entitled at law or in equity.

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     IN WITNESS WHEREOF, each party hereto has caused this Agreement to be executed on its behalf
as of the date first above written.

	 	 	 	 	 
	 	DONEGAL MUTUAL INSURANCE COMPANY

 	 
	 	By:  	/s/ Donald H. Nikolaus
 	 
	 	 	Donald H. Nikolaus, President 	 
	 
	 	SOUTHERN MUTUAL INSURANCE COMPANY

 	 
	 	By:  	/s/ Allen R. Green
 	 
	 	 	Allen R. Green, President 	 
	 

-42-exv10wgg

Exhibit 10(GG)

QUOTA SHARE REINSURANCE AGREEMENT

     THIS QUOTA SHARE REINSURANCE AGREEMENT (this “Agreement”) is made this 30th day of
October, 2009 but effective as of 11:59 p.m. on October 31, 2009 (the “Effective Date”) between
SOUTHERN MUTUAL INSURANCE COMPANY, a Georgia mutual insurance company with its principal office in
Athens, Georgia (“Southern Mutual”), and DONEGAL MUTUAL INSURANCE COMPANY, a Pennsylvania mutual
fire insurance company with its principal office in Marietta, Pennsylvania (“Donegal Mutual”).

WITNESSETH:

     WHEREAS, Donegal Mutual has offered to provide reinsurance to Southern Mutual to the extent
and on the terms and conditions set forth in this Agreement and nothing stated in this Agreement
shall in any manner create any obligations or establish any rights against Donegal Mutual in favor
of any person not a party to this Agreement; and

     WHEREAS, Southern Mutual has agreed to place such reinsurance with Donegal Mutual to the
extent and on the terms and conditions set forth in this Agreement;

     NOW, THEREFORE, in consideration of the mutual covenants set forth in this Agreement, and
intending to be legally bound hereby, Donegal Mutual and Southern Mutual agree as follows:

ARTICLE 1

DEFINITIONS

     1.1 Definitions. As used in this Agreement:

     “Actual Effective Date Reserves” shall have the meaning set forth in Section 6.1(a)(ii) of
this Agreement.

     “Allocated Loss Adjustment Expenses” shall mean all court costs, interest upon judgments and
mitigation, investigation, adjustment and legal expenses chargeable to or incurred in (i) the
mitigation, investigation, negotiation, settlement of or defense against a Loss under a Covered
Policy, (ii) loss prevention mitigation or investigation in respect of any Covered Policy as to
which Southern Mutual has posted a loss reserve, (iii) the investigation, prevention and workout of
a potential Loss under a Covered Policy, (iv) the protection, perfection and exercise of any
subrogation or salvage or rights of reimbursement with respect to any Covered Policy or (v) any
deficiency resulting from the loss settlement or the workout of a potential Loss under a Covered
Policy. Allocated Loss Adjustment Expenses shall

 

 

exclude all office expenses and salaries of officers and employees of Southern Mutual. All
loss adjustment expenses that are not Allocated Loss Adjustment Expenses shall constitute
Unallocated Loss Adjustment Expenses.

     “Ceding Commission” shall have the meaning set forth in Section 6.1(b).

     “Covered Policies” shall mean an insurance policy first issued by Southern Mutual on or after
12:01 a.m. on January 1, 1976. Donegal Mutual is not assuming any liability from any insurance
policy Southern Mutual first issued on or before 12:01 a.m. on January 1, 1976.

     “Donegal Mutual” shall have the meaning set forth in the introductory paragraph of this
Agreement.

     “Effective Date” shall have the meaning set forth in the introductory paragraph of this
Agreement.

     “Estimated Effective Date Reserves” shall have the meaning set forth in Section 6.1(a)(ii) of
this Agreement.

     “Extra Contractual Obligations” shall mean all liabilities (i) for compensatory,
consequential, exemplary, punitive or similar damages which directly relate to any alleged or
actual act, error, omission, fraud or misrepresentation by any Person, any of its affiliates or any
of its or its affiliates’ officers or employees, whether intentional or otherwise, in connection
with the Covered Policies or (ii) from any alleged or actual reckless conduct or bad faith by any
Person, any of its affiliates or any of its or its affiliates’ officers or employees in connection
with such Person’s handling of any claim under any of the Covered Policies, including the
settlement, defense of or appeal of any claim or in connection with the issuance, offer, sale,
delivery, cancellation or administration by any Person or any of its affiliates or any of its or
its affiliates’ officers or employees under any of the Covered Policies.

     “Loss” shall mean (i) amounts incurred by Southern Mutual in settlement or satisfaction of
claims under or in respect of the Covered Policies, (ii) any and all Allocated Loss Adjustment
Expenses Southern Mutual incurs under or in respect of the Covered Policies, (iii) amounts payable
to reinsurers other than Donegal Mutual under or with respect to the Covered Policies and (iv)
Extra Contractual Obligations arising after the Effective Date from the acts of Donegal Mutual, in
each case net of amounts actually collected by Donegal Mutual or Southern Mutual under Third Party
Reinsurance Agreements.

     “Occurrence” shall be the definition of said term as set forth in Southern Mutual’s Covered
Policies, provided, however, in the event “Occurrence” is not defined in any Covered Policy that is
reinsured pursuant to this Agreement, then, as to such policy, the term “each Occurrence” shall
mean each accident or Occurrence or series of accidents or Occurrences arising out of one event,
and shall include aggregate limits of liability for a period not exceeding 12 months when a Covered
Policy applies in excess of aggregate limits.

-2-

 

If Southern Mutual and Donegal Mutual cannot specifically determine the date of any Loss,
accident, casualty or loss Occurrence, the date of such Loss, accident, casualty or loss Occurrence
shall be the inception date of the original Covered Policy reinsured pursuant to this Agreement,
provided that such policy period shall be deemed not to exceed 12 calendar months.

     “Person” shall mean any individual, corporation, limited liability company, association,
joint-stock company, business trust or other similar organization, partnership, joint venture,
trust, unincorporated association or government or any agency, instrumentality or political
subdivision of a government.

     “Quota Share” shall mean 100%.

     “Recovery” shall mean any amount actually received by Southern Mutual in respect of any Loss
covered by Donegal Mutual under this Agreement, whether by subrogation, salvage, reimbursement or
other recovery.

     “Recovery Expenses” shall mean any expense, including court costs and legal expenses Southern
Mutual incurs for purposes of obtaining a Recovery with respect to Losses, but excluding the
expenses and salaries of the officers and employees of Southern Mutual or its affiliates or normal
overhead expenses of Southern Mutual and its affiliates and excluding any expense that would
constitute an Allocated Loss Adjustment Expense.

     “Southern Mutual” shall have the meaning set forth in the introductory paragraph of this
Agreement.

     “Termination Date” shall have the meaning assigned to it in Section 17.1.

     “Third-Party Reinsurance Agreements” shall mean, to the extent such treaties or agreements
relate to Covered Policies, (i) all reinsurance treaties and agreements under which Southern Mutual
is a ceding party that were in force on the date of this Agreement, and (ii) any such treaty or
agreement that is terminated or expired but under which Southern Mutual may continue to receive
reinsurance coverage.

     “Unallocated Loss Adjustment Expenses” shall have the meaning set forth in the definition of
Allocated Loss Adjustment Expenses.

     “Ultimate Net Loss” as used in this Agreement means the actual loss Southern Mutual pays or
that Southern Mutual becomes liable to pay under the Covered Policies reinsured pursuant to this
Agreement, including all loss adjustment expense, 100% of any Extra Contractual Obligations and
100% of any Loss in Excess of Policy Limits as defined in Sections 12.1 and 12.2 of this Agreement.
“Ultimate Net Loss” shall include any expenses of litigation, accrued interest where such accrued
interest is a part of any judgment, and all other loss expenses of Southern Mutual including legal
expenses and costs incurred in

-3-

 

connection with coverage and validity issues and any legal proceedings with respect thereto
that are allocable to a Covered Policy.

ARTICLE 2

APPLICATION OF AGREEMENT

     2.1 Business Covered. This Agreement applies to all insurance policies Southern
Mutual issued that are in effect as of the Effective Date and all policies that Southern Mutual
issues after the Effective Date and which Southern Mutual issues during the term of this Agreement
until 11:59 p.m. on the Termination Date.

ARTICLE 3

COVER

     3.1 Quota Share Reinsurance. Subject to the terms and conditions of this Agreement,
Southern Mutual hereby cedes to Donegal Mutual, and Donegal Mutual hereby accepts and reinsures
from Southern Mutual, the Quota Share of any Losses, including loss development on all Covered
Policies issued prior to the Effective Date, under the Covered Policies. Such Losses and all
other liabilities of Southern Mutual with respect to the Covered Policies are sometimes
collectively referred to in this Agreement as the “Reinsured Liabilities.” Such cession by
Southern Mutual and acceptance and reinsurance by Donegal Mutual shall, in the sole discretion of
Donegal Mutual, be gross or net of any losses covered by the Third-Party Reinsurance Agreements of
Southern Mutual. To the extent Donegal Mutual elects to accept and reinsure such cession net of
any losses covered by Third Party Reinsurance Agreements of Southern Mutual, Donegal Mutual hereby
guarantees Southern Mutual from and against any uncollectible third-party reinsurance recoverables.
Donegal Mutual is not assuming under this Agreement any liabilities of Southern Mutual that do not
constitute Reinsured Liabilities and any liabilities of Southern Mutual that are not Reinsured
Liabilities shall remain the liabilities of Southern Mutual.

ARTICLE 4

REINSURANCE FOLLOWS ORIGINAL POLICIES

     4.1 Follow the Fortunes. Except to the extent specifically otherwise provided in this
Agreement or as Southern Mutual and Donegal Mutual may agree in writing, all reinsurance under this
Agreement shall be subject in all respects to the same rates, terms, conditions, waivers and
interpretations, and to the same modifications, cancellations and alterations as the Covered
Policies, the true intent of this Agreement being that Donegal Mutual shall, in every case to which
this Agreement applies, follow the fortunes of Southern Mutual; provided, however, that the
Agreement shall not be construed to expand the liability

-4-

 

of Donegal Mutual beyond the liabilities Donegal Mutual has specifically assumed pursuant to
this Agreement.

     4.2 Third-Party Rights. Except as set forth in Sections 7.1 or 13.1, nothing in this
Agreement shall in any manner create any obligations or establish any rights against Donegal Mutual
in favor of any Person not a party to this Agreement.

ARTICLE 5

CHANGE IN POLICY FORMS

     5.1 Policy Forms. Southern Mutual and Donegal Mutual have agreed on the forms of
Covered Policies that Southern Mutual will issue and that Donegal Mutual will reinsure pursuant to
this Agreement. Southern Mutual shall advise Donegal Mutual of any change in any form of any
Covered Policy no less than 90 days prior to the implementation of any such change, and such change
shall not be implemented unless Donegal Mutual shall have approved such change in writing within 30
days after receipt of such notice from Southern Mutual, such approval not to be unreasonably
withheld by Donegal Mutual.

ARTICLE 6

PREMIUMS AND COMMISSIONS

     6.1 Premiums and Commissions. In consideration of the respective obligations of
Southern Mutual and Donegal Mutual under this Agreement, Donegal Mutual and Southern Mutual shall
make the following respective payments:

          (a) On the Effective Date, Southern Mutual shall pay to Donegal Mutual an amount equal to the
Effective Date Reserves (as defined below) as follows:

               (i) On the Effective Date, Southern Mutual shall pay to Donegal Mutual an amount equal to the
Estimated Effective Date Reserves to this Agreement net of the Estimated Effective Date Ceding
Commission. The payment this Section 6.1(a)(i) requires shall be made by Southern Mutual’s
delivery to Donegal Mutual of cash or securities whose value Donegal Mutual shall have approved no
earlier than the third business day preceding the Effective Date having a fair market value as of
the market close on the business day immediately preceding the Effective Date equal to the amount
payable pursuant to this Section 6.1(a)(i).

               (ii) Promptly following the Effective Date, Southern Mutual and Donegal Mutual agree to
determine the Actual Effective Date Reserves on a definitive basis. Not later than 60 days after
the Effective Date, Southern Mutual shall deliver a statement to Donegal Mutual that sets forth
Southern Mutual’s determination of the Actual Effective Date Reserves. If Donegal Mutual does not
provide an objection notice to such statement, such

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Southern Mutual statement shall be deemed to have been accepted in the form in which it was
delivered to Donegal Mutual and shall be final and binding upon the parties in the absence of fraud
or manifest error. If Donegal Mutual shall object to such Southern Mutual statement or if Southern
Mutual shall object to any response to such statement by Donegal Mutual, the objecting party shall
give the other party written notice of such objection within 30 days of the objecting party’s
receipt of such statement or response. Such notice of objection shall set forth in reasonable
detail the elements and amounts to which the objecting party objects and the basis for such
objections. If either party provides an objection notice, the other party, within 15 days after
its receipt of the objection notice, shall seek to resolve the objection. In the event Southern
Mutual and Donegal Mutual are unable to resolve the objection within 15 days thereafter, the
parties shall submit the matter to KPMG LLP (“KPMG”) for final resolution of the matter. Within 30
days of the submission of the matter to KPMG, KPMG shall deliver its resolution of the matter to
Southern Mutual and Donegal Mutual. KPMG’s resolution of the matter shall be binding on Southern
Mutual and Donegal Mutual. Southern Mutual and Donegal Mutual shall bear equally the costs of KPMG
in determining such resolution.

               (iii) To the extent the amount of the Actual Effective Date Reserves as so determined was less
than the Estimated Effective Date Reserves, Donegal Mutual shall forthwith remit to Southern Mutual
the amount by which the Estimated Effective Date Reserves exceeded the Actual Effective Date
Reserves.

               (iv) To the extent the amount of the Actual Effective Date Reserves as so determined was
greater than the Estimated Effective Date Reserves, Southern Mutual shall forthwith remit to
Donegal Mutual the amount by which the Actual Effective Date Reserves exceeded the Estimated
Effective Date Reserves.

          (b) On the Effective Date, Donegal Mutual shall pay to Southern Mutual a Ceding Commission
equal to 36% of the amount of Southern Mutual’s unearned premium reserves included in the Estimated
Effective Date Reserves as follows:

               (i) On the Effective Date, Donegal Mutual shall be deemed to have paid to Southern Mutual an
Estimated Ceding Commission equal to 36% of the Estimated Effective Date Reserves (the “Estimated
Effective Date Ceding Commission”) upon Southern Mutual’s netting the amount of the amount of the
Estimated Effective Date Ceding Commission against the amount of the Estimated Effective Date
Reserves.

               (ii) Promptly following the Closing Date, Southern Mutual and Donegal Mutual agree to
determine the Actual Effective Date Ceding Commission on a definitive basis according to the
determination of the Actual Effective Date Reserves. Not later than 60 days after the Effective
Date, Donegal Mutual shall deliver a statement to Southern Mutual that sets forth the amount of the
Actual Effective Date Ceding Commission.

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               (iii) To the extent that the amount of the Actual Effective Date Ceding Commission as so
determined exceeds the amount of the Estimated Effective Date Ceding Commission, Donegal Mutual
shall forthwith remit to Southern Mutual the amount by which the Actual Effective Date Ceding
Commission exceeds the Estimated Effective Date Ceding Commission.

               (iv) To the extent that the amount of the Estimated Effective Date Ceding Commission as so
determined was greater than the amount of the Actual Effective Date Ceding Commission, Southern
Mutual shall forthwith remit to Donegal Mutual the amount by which the Estimated Effective Date
Ceding Commission exceeded the Actual Effective Date Ceding Commission.

          (c) As additional consideration in connection with the reinsurance this Agreement establishes,
Donegal Mutual shall be entitled to the Quota Share of any premium, fee and other amounts actually
collected, with the exception of service charges, on or after the Effective Date by Southern Mutual
with respect to the Covered Policies and Donegal Mutual shall be responsible for all Losses,
including loss development, on Covered Policies after the Effective Date. Southern Mutual shall
promptly remit to Donegal Mutual any such amounts that Southern Mutual receives net of any
reinsurance reinstatement premiums paid.

          (d) If, after the Effective Date, either Southern Mutual or Donegal Mutual discovers an error
or omission in the calculation of any amount under this Section 6.1, Southern Mutual and Donegal
Mutual shall rectify such error or omission as promptly as practicable after the discovery of the
error or omission. Without limiting the foregoing, after the Effective Date, Donegal Mutual will
promptly pay to Southern Mutual, upon notice from Southern Mutual, without interest, any amount
Southern Mutual paid to Donegal Mutual pursuant to this Agreement, net of Ceding Commissions
without interest, with respect to any insurance policy that Southern Mutual or Donegal Mutual
determines was not a Covered Policy as of the Effective Date. In addition, in the event that after
the Effective Date, Southern Mutual or Donegal Mutual discover that Southern Mutual has made
payments to Donegal Mutual pursuant to this Section 6.1 with respect to premiums that have been
refunded in whole or in part, Donegal Mutual will promptly upon notice from Southern Mutual return
to Southern Mutual, without interest, all of the amount Southern Mutual paid to Donegal Mutual
pursuant to this Section 6.1 in respect of such insurance policy to the extent necessary to put
Southern Mutual in the same position it would have been in had Southern Mutual been aware of the
return of premium prior to the Effective Date net of Ceding Commissions.

ARTICLE 7

LOSSES AND LOSS ADJUSTMENT EXPENSES

     7.1 Payment to Southern Mutual for Ultimate Net Losses. Donegal Mutual shall pay to
Southern Mutual the Quota Share of sums actually paid by Southern Mutual in

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settlement of the Ultimate Net Losses under the Covered Policies, on and after the Effective
Date; provided, however, that in the event of the insolvency of Southern Mutual, Donegal Mutual
shall pay such amount to the liquidator, receiver or statutory successor of Southern Mutual in
accordance with the provisions of Article 13 of this Agreement.

     7.2 Expenses to be Borne by Donegal Mutual. Donegal Mutual shall bear its Quota Share
of all external loss adjustment expenses Southern Mutual incurs in the investigation, adjustment
and litigation of all claims under the Covered Policies.

     7.3 Salvage. Donegal Mutual shall receive its Quota Share of all salvage, recoveries
and payments received subsequent to a Loss settlement under this Agreement whether received before
or after the final adjudication of any claim under the Covered Policies.

     7.4 Loss Development. Southern Mutual shall advise Donegal Mutual promptly of all
claims and any subsequent loss reserve developments pertaining to the Covered Policies reinsured
pursuant to this Agreement.

     7.5 Defense of Claims. Southern Mutual shall investigate and, to the extent that may
be required by the Covered Policies reinsured under this Agreement, defend any claim affecting the
reinsurance provided by this Agreement and pursue such claim to final determination.

     7.6 Donegal Mutual Participation. Southern Mutual agrees, upon the request of Donegal
Mutual, that when so requested, Southern Mutual will afford Donegal Mutual an opportunity to
participate with Southern Mutual, at the expense of Donegal Mutual, in the defense or control of
any claim, suit or proceeding involving the reinsurance provided pursuant to this Agreement; and
Southern Mutual and Donegal Mutual shall cooperate in all material respects in the defense of such
suit, claim or proceeding.

ARTICLE 8

PREMIUM

     8.1 Payment of Direct Written Premium. During the term of this Agreement, Donegal
Mutual shall assume from Southern Mutual 100% of Southern Mutual’s net written premiums applicable
to its liability under the Covered Policies for the reinsurance provided pursuant to this
Agreement. Southern Mutual shall pay such premiums, net of any premiums for third-party
reinsurance.

     8.2 Summary Statements. As soon as possible after the end of each month, Southern
Mutual shall submit to Donegal Mutual a statement that summarizes the net premiums ceded, return
premiums and conversions on Southern’s net written business, the actual premiums due, net of
commission, and Southern Mutual shall pay to Donegal Mutual any amount due within 15 days of
Southern Mutual’s delivery of such statement to Donegal

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Mutual. Southern Mutual shall furnish quarterly to Donegal Mutual, Southern Mutual’s unearned
premium reserve on the Covered Policies. Southern Mutual shall compute its unearned premium
reserve on the daily pro rata basis.

     8.3 Payment of Losses. Donegal Mutual shall pay its proportion of Loss and loss
expenses paid by Southern Mutual to Southern Mutual within 15 days after Southern Mutual renders a
monthly account summarizing the Losses and loss expenses. Donegal Mutual shall have the right, at
its option, to offset the amount of such Loss or loss expense as provided in Article 14.

ARTICLE 9

CEDING COMMISSION

     9.1 Payment of Ceding Commission. Donegal Mutual shall pay a ceding commission as
provided in Article 6 to Southern Mutual on the net written premiums Southern Mutual cedes to
Donegal Mutual under this Agreement. On all return premiums, Southern Mutual shall promptly return
to Donegal Mutual the Ceding Commission applicable to such returned premium.

     9.2 Statement of Ceding Commission. As soon as possible after the end of each month,
Donegal Mutual shall submit to Southern Mutual a statement that sets forth the Ceding Commission
fees, and Donegal Mutual shall pay any amount due within fifteen (15) days of Donegal Mutual’s
receipt of the monthly statements required by Section 8.2.

     9.3 Taxes. The Ceding Commission allowance that Donegal Mutual pays to Southern
Mutual on the Covered Policies reinsured pursuant to this Agreement includes provision for all
premium taxes, licenses and fees with the exception of service charges, assessments and any other
expenses whatsoever, except external loss adjustment expenses.

ARTICLE 10

INSPECTION

     10.1 Right of Inspection. Southern Mutual shall place at the disposal of Donegal
Mutual and Donegal Mutual shall have the right to inspect, through its authorized representatives,
at all reasonable times during the term of this Agreement and thereafter, the books, records and
papers of Southern Mutual pertaining to the reinsurance provided pursuant to this Agreement and all
claims made in connection therewith.

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ARTICLE 11

RESERVES AND TAXES

     11.1 Maintenance of Reserves. Donegal Mutual shall maintain legal reserves with
respect to the unearned premiums and claims it assumes pursuant to this Agreement.

     11.2 Premium Taxes. Southern Mutual shall be liable for all taxes on premiums
reported to Donegal Mutual under this Agreement and Southern Mutual shall reimburse Donegal Mutual
for such taxes where Donegal Mutual is required to pay the same.

ARTICLE 12

EXTRA CONTRACTUAL OBLIGATIONS/EXCESS OF POLICY LIMITS

     12.1 Extra Contractual Obligations. The obligations reinsured pursuant to this
Agreement shall include Extra Contractual Obligations under the Covered Policies.

     12.2 Losses In Excess of Policy Limits. The obligations reinsured pursuant to this
Agreement shall include Loss in Excess of Policy Limits with respect to any Covered Policy. “Loss
in Excess of Policy Limits” shall mean losses in excess of the policy limit, having been incurred
because of, but not limited to, failure by Southern Mutual to settle within the Covered Policy
limit or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of
settlement or in preparation of the defense or in the trial of any action against its insured or
reinsured or in the preparation or prosecution of an appeal consequent upon such action.

     12.3 Date of Occurrence. An Extra Contractual Obligation and Loss in Excess of Policy
Limits shall be deemed to have occurred on the same date as the Loss covered under a Covered
Policy, and shall constitute part of the original Loss.

     12.4 Meaning of Loss. For the purposes of the Loss in Excess of Policy Limits
coverage under this Agreement, the word “Loss” shall mean any amount for which Southern Mutual
would have been contractually liable to pay had it not been for the limit of the Covered Policy.

     12.5 Loss Adjustment Expense. Loss adjustment expense in respect of Extra Contractual
Obligations and Loss in Excess of Policy Limits shall be covered under this Agreement in the same
manner as other loss adjustment expense.

     12.6 Georgia Law. In no event shall Donegal Mutual provide reinsurance to Southern
Mutual to the extent not permitted under the laws of Georgia.

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ARTICLE 13

INSOLVENCY CLAUSE

     13.1 Insolvency. In the event of the insolvency and the appointment of a conservator,
rehabilitator, liquidator or statutory successor of Southern Mutual,

          (a) the reinsurance provided by this Agreement and each and every reinsurance agreement
heretofore or hereafter entered into between Donegal Mutual and Southern Mutual shall be payable,
subject to Section 13.1(b) by Donegal Mutual directly to Southern Mutual or to its conservator,
rehabilitator, liquidator, receiver or statutory successor on the basis of the liability of
Southern Mutual under the Covered Policies without diminution because of the insolvency of Southern
Mutual or because the conservator, rehabilitator, liquidator, receiver, or statutory successor has
failed to pay all or any portion of any claims.

          (b) Donegal Mutual shall make the payments as set forth above directly to Southern Mutual or
to its conservator, rehabilitator, liquidator, receiver or statutory successor. If an insured
under a Covered Policy submits a claim to Southern Mutual’s conservator, rehabilitator, liquidator,
receiver or statutory successor, Donegal Mutual shall have the right, in lieu of making a payment
to such conservator, rehabilitator, liquidator, receiver or statutory successor, to make a payment
on the claim directly to the insured. Any such payment by Donegal Mutual shall discharge Donegal
Mutual from its related payment obligation under such Covered Policy.

ARTICLE 14

OFFSET CLAUSE

     14.1 Offset. Except for payments to be made pursuant to Section 6.1, which may only
be offset against each other, Donegal Mutual and Southern Mutual shall each have, and may exercise
at any time and from time to time, the right to offset any balance or amount, whether on account of
premiums, premium adjustments, commissions, claims, Losses, Recoveries or otherwise, due from such
party to the other party hereto under this Agreement. The party asserting the right of offset
shall have and may exercise such right at any time whether the balance or balances due or to become
due to such party from the other are on account of premiums or on account of Losses or otherwise.
If Donegal Mutual is required to make a payment directly to an insured under a Covered Policy, no
offset shall be allowed between Donegal Mutual and the insured under a Covered Policy, provided,
however, that Donegal Mutual shall continue to maintain its offset rights against Southern Mutual
pursuant to this Agreement.

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ARTICLE 15

ARBITRATION

     15.1 Arbitration. Should an irreconcilable difference of opinion arise between
Southern Mutual and Donegal Mutual as to the interpretation of this Agreement or the transactions
this Agreement contemplates, as a condition precedent to any right of action under this Agreement,
such difference shall be submitted to arbitration to the decision of a board of arbitration
composed of two arbitrators and an umpire, meeting in Atlanta, Georgia under the rules of the
American Arbitration Association.

     15.2 Identity of Arbitrators. The members of the board of arbitration shall be active
or retired disinterested executive officers of insurance or reinsurance companies. Each party
shall appoint one arbitrator and the two arbitrators shall choose an umpire before they enter into
arbitration. If either party fails to appoint its arbitrator within four weeks after being
requested to do so, the other party shall also appoint the second arbitrator. If the two
arbitrators fail to agree upon the appointment of an umpire within four weeks after their
nominations, each of them shall name three nominees for umpire, of whom each arbitrator shall
decline two nominees and the decision among the two remaining nominees shall be made by the
claimant party drawing lots.

     15.3 Default Selection. In the event that either party shall fail to choose an
arbitrator within four weeks following a request by Donegal Mutual or Southern Mutual for
arbitration, the requesting party shall choose two arbitrators who shall choose the umpire.

     15.4 Submission of Initial Brief. The claimant shall submit its initial brief within
20 days from appointment of the umpire. The respondent shall submit its brief within 20 days after
receipt of the claimant’s brief and the claimant may submit a reply brief within 10 days after
receipt of the respondent’s brief.

     15.5 Arbitrator Decision. The board of arbitration shall make its decision with
regard to the custom and usage of the insurance and reinsurance business. The board of arbitration
shall issue its decision in writing based upon a hearing in which evidence may be introduced
without following strict rules of evidence but in which cross examination and rebuttal shall be
allowed. The board of arbitration shall make its decision within 60 days following the conclusion
of the hearings unless the parties consent to an extension. The majority decision of the board of
arbitration shall be final and binding upon all parties to the proceeding. Judgment may be
entered upon the award of the board of arbitration in any court having jurisdiction thereof.

     15.6 Multiple Reinsurers. If more than one reinsurer is involved in the same dispute,
all such reinsurers shall constitute and act as one party for purposes of this clause and
communications shall be made by Southern Mutual to each of the reinsurers constituting

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the one party, provided, however, that nothing therein shall impair the rights of such
reinsurers to assert several, rather than joint defenses or claims, nor be construed as changing
the liability of the reinsurers under the terms of this Agreement from several to joint.

     15.7 Arbitration Expenses. Each party shall bear the expense of its own arbitrator
and shall jointly and equally bear with the other party the expense of the umpire. The remaining
costs of the arbitration proceedings shall be allocated by the board of arbitration.

ARTICLE 16

GOVERNING LAW

     16.1 Governing Law. This Agreement shall be interpreted under and pursuant to the
laws of the State of Georgia in all respects.

ARTICLE 17

COMMENCEMENT AND TERMINATION

     17.1 Effective Time. This Agreement shall take effect as of 12:01 A.M. on the
Effective Date and is entered into for an unlimited term, but either party may terminate the term
of this Agreement at any time by giving not less than 12 months notice in writing to the other
party of a date of termination of this Agreement (the “Termination Date”).

     17.2 Participation Until Termination. Donegal Mutual shall participate in business
coming within the terms of this Agreement until the date of termination of this Agreement.

     17.3 Run-Off. In the event either party terminates this Agreement the reinsurance
pursuant to this Agreement shall be provided on a “run-off” basis for all Covered Policies under
this Agreement written prior to the Termination Date until all liabilities under the Covered
Policies have been satisfied in full.

ARTICLE 18

CURRENCY OF PAYMENT

     18.1 Currency of Payment. All payments under this Agreement shall be made in the
currency of the United States of America.

ARTICLE 19

ACCESS TO RECORDS

     19.1 Access to Records. Donegal Mutual, by its duly appointed representatives, shall
have the right at any reasonable time, to examine all papers in the possession of

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Southern Mutual that relate to the Covered Policies that Donegal Mutual has reinsured pursuant
to this Agreement.

ARTICLE 20

STATISTICS

     20.1 Statistics. Southern Mutual shall furnish Donegal Mutual such statistics as may
be necessary to comply with statutory requirements and in such form as Donegal Mutual may
reasonably request from Southern Mutual.

ARTICLE 21

ERRORS AND OMISSIONS

     21.1 Errors and Omissions. Any inadvertent delay, omission or error by either party
shall not relieve the other party from any liability that would have attached under this Agreement,
provided that such delay, omission or error shall not impose any greater liability on Donegal
Mutual than would have attached under this Agreement if such act, delay, omission or error had not
occurred, and such act, delay, omission or error is promptly and reasonably rectified upon
discovery by the responsible party.

ARTICLE 22

MISCELLANEOUS

     22.1 Notices. All reports, remittances, notices, letters, financial statements or any
other communications between the parties to this Agreement shall be addressed as follows:

     To Donegal Mutual:

Donegal Mutual Insurance Company

1195 River Road

Marietta, Pennsylvania 17547

Attention: President

Facsimile: (717) 426-7009

     To Southern Mutual:

Southern Mutual Insurance Company

360 Alps Road

Athens, Georgia 30606

Attention: President

Facsimile: (706) 549-7855

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     22.2 Assignment. Neither this Agreement nor any rights or obligations under this
Agreement may be assigned or otherwise transferred by any party to this Agreement, including by
operation of law, without the consent of the other party to this Agreement and the prior approval
of the Commissioner of Insurance of the State of Georgia; provided, however, that Donegal Mutual
may assign its rights or obligations under this Agreement to any entity that has a current A.M.
Best rating equal to or greater than A.

     22.3 Severability. If any provision of this Agreement shall 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 and this Agreement shall be construed as if such
invalid, illegal or unenforceable provision had never been part of this Agreement unless the
deletion of such provision would result in such a material change as to cause completion or
continuation of the transactions contemplated by this Agreement to be unreasonable or materially
frustrate the objectives of Southern Mutual and Donegal Mutual as expressed in this Agreement.

     22.4 Counterparts. This Agreement may be executed in any number of counterparts, each
of which shall be an original, but such counterparts together shall constitute one and the same
agreement.

     IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed in duplicate
and delivered as of the day and year first above written.

	 	 	 	 	 
	 	DONEGAL MUTUAL INSURANCE COMPANY

 	 
	 	By:  	/s/ Donald H. Nikolaus
 	 
	 	 	Donald H. Nikolaus, President 	 
	 	 	 	 
	 
	 	SOUTHERN MUTUAL INSURANCE COMPANY

 	 
	 	By:  	/s/ Allen R. Green
 	 
	 	 	Allen R. Green, President 	 
	 	 	 	 
	 

-15-

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