Document:

Amendment No. 1

                        Donegal Mutual Insurance Company
                              401(K) Plan ("Plan")

         In accordance with Section 8.1 of the Plan, the Plan is hereby amended
effective January 1, 2000 as follows:

         1.  Section 3.1 is deleted and the following substituted therefor:

         "3.1 Employer's Matching Contribution. The Employer shall contribute
annually on behalf of each Participant in the employ of the Employer on the
Anniversary Date an amount equal to the sum of (a) 100% of each Participant's
Elective deferrals for the Plan Year not in excess of 3% of the Participant's
Compensation for the Plan year and (b) 50% of each Participant's Elective
Deferrals in excess of 3% of the Participant's Compensation, but not in excess
of 9% of the Participant's Compensation for the Plan year ("Matching
Contribution"). The requirement that a Participant be employed by the Employer
on the Anniversary Date shall be waived if the employment of the Participant
terminated during the Plan Year because of retirement, disability or death."

         2. Paragraph (a) of Section 3.4 is deleted and the following
substituted therefor:

         "(a) Each Participant may make an Elective Contribution to the Plan and
to the extent he elects to reduce or forego an increase in his Compensation, the
amount by which his compensation is reduced shall be treated as the
Participant's Elective Contribution and be allocated to that Participant's
elective account. The amount of the Elective Contribution may not be less than
1% nor more than 15% of the Participant's Compensation as elected by the
Participant in units of one (1) percentage point on forms provided by the Plan
Committee, which may limit the amount of the

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Participant's Elective Contribution at any time if it determines that such
limitation is necessary to satisfy the requirement with IRC Section 401(k)."

         3. There is added to the Plan at the end of paragraph (b) of Section
4.5 the following:

         "Effective January 1, 2000, each Participant shall have the opportunity
to invest all or a portion of the Participant's Account in the common stock of
the Employer. The duties of the Employer and Trustees concerning such investment
and the rights of Participants concerning an investment in the stock of the
Employer are detailed in Section 4.6 below."

         4. There is added to the Plan new Section 4.6 reading as follows:

         4.6 Investment in Employer Stock.

         (a) Definitions.

               i. Employer Stock means the common stock of Donegal Group, Inc.,
          the parent company of the Employer as traded on the NASDAQ National
          Market Exchange.

               ii. Custodian means Reliance Trust Company, a Georgia
          corporation. Custodian is an "investment manager" as defined in
          Section 3(38) of ERISA with respect to Employer Stock.

               iii. Record Keeper means TransAmerica. The Record Keeper will
          maintain all record of the Participants' accounts with respect to
          investments in Employer Stock.

               iv. Investment in Employer Stock. A Participant may elect to
          invest a portion of the Participant's Elective Contributions and
          Employer Matching Contributions made on his behalf in Employer Stock.
          Such election shall be made on forms supplied by the Trustees and

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          maintained by the Record Keeper.

         (b) Purchase and Sale of Employer Stock.

               i. Notwithstanding anything to the contrary contained in this
          Plan or the Trust Agreement, the Trustees may direct the Custodian to
          purchase shares of Employer Stock upon the receipt by the Custodian of
          contributions from the Employees pursuant to a nondiscretionary
          purchasing program developed by the Custodian to effect such purchases
          in an orderly manner without disruption of the market for such stock.

               ii. If a Participant's vested interest in the Participant's
          Accounts or a portion thereof is to be distributed on account of the
          Participant's retirement, disability, death, termination of
          employment, pursuant to a hardship withdrawal, withdrawal of a
          rollover contribution or as a result of a qualified domestic relations
          order or because of the minimum distribution rules, the Trustees will
          direct the Custodian to sell the Participant's shares of Employer
          Stock or distribute such stock in kind, at the election of the
          Participant or the Participant's designated beneficiary. If the
          Participant elects to take a cash distribution, the amount of cash to
          be distributed to the Participant attributable to the Participant's
          shares of Employer Stock, will be determined on the basis of the price
          or the average of the prices realized on the disposition of such
          shares on the day or days during the calendar month as may be
          designated by the Trustees in a uniform and nondiscriminatory manner.
          Notwithstanding the foregoing, the Custodian may net out transactions
          internally (so as not to be both a buyer and a seller on the open
          market) at the then prevailing market prices as determined by the
          Custodian.

         (c) Voting of Shares. Notwithstanding anything to the contrary
contained in this Plan or the Trust Agreement, whenever any proxies or consents
are solicited from shareholders, each

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Participant (or designated beneficiary in the case of a decease Participant)
whose account contains Employer Stock will have the right to direct the
Trustees, in writing, as to the voting of such shares. The Trustees or the
Custodian will use their best efforts to distribute or cause to be distributed
in a timely manner to each Participant or designated beneficiary a copy of the
proxy solicitation material sent to shareholders, together with a form addressed
to the Trustees or the Custodian containing confidential, written instructions
as to the manner in which said shares will be voted. If the instructions are
sent to the Custodian, the Custodian must communicate the instructions to the
Trustees. Upon receipt of such instructions, the Trustees will vote said shares
as instructed. Shares of Employer Stock as to which the Trustees do not receive
instructions will be voted by the Trustees in the proportion as shares are to be
voted pursuant to the written voting instructions received from all Participants
by the Trustees. Each Participant (or designated beneficiary) will be entitled
to one vote for each full share of Employer Stock allocated to the Participant's
accounts. Fractional shares of Employer Stock will not be permitted to vote.

         (d) Valuation. Employer Stock will be valued as of any business day of
each Plan Year based on the published valuation for such stock on the NASDAQ
National Market Exchange. Any dividends received on Employer Stock will be
reinvested and become part of the Participant's Accounts. The Record Keeper will
maintain adequate records of the cost basis of Employer Stock for each
Participant's account. The Record Keeper may time to time modify its accounting
procedures to achieve equitable and nondiscriminatory allocations among
Participants" Matching Contributions Account in accordance with the provisions
of this Plan and requirements of law.

         (e) Named Fiduciary Status\Confidentiality. Each Participant or
designated beneficiary shall be deemed to be a named fiduciary within the
meaning of Section 402(a) of ERISA

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with respect to the voting of the shares of Employer Stock as to which such
Participant or designated beneficiary has the right of direction. Directions
received from Participants or designated beneficiaries by the Trustees or the
Custodian shall be held in strict confidence and shall not be divulged or
released to any person, including employees, officers or directors of the
Employer, provided, however, that to the extent necessary for the operation of
the Plan, such directions may be relayed by the Trustees to the Record Keeper or
auditor for the Plan, which Record Keeper or Auditors is not the Employer and
agrees not to divulge such directions to any other person including employees,
officers or directors of the Employer."

         5.  There is added to the Plan new ARTICLE XI reading as follows:

         "ARTICLE XI.  Money Purchase Pension Plan Account.

         Section 11.1. General. This Article applies only to those employees who
were participants in DMIC Money Purchase Pension Plan and who had accounts in
that Plan on December 31, 1999. This Articles does not apply to any other
Employee or Participant.

         Section 11.2. Money Purchase Pension Benefit. For purposes of this
Plan, the term "Money Purchase Pension Benefit" means the account balance of the
Participant in the Money Purchase Pension Plan as of December 31, 1999. As
provided by amendment to that Plan, all such accounts are fully vested in the
Participants and under no circumstances may any forfeitures arise with respect
to those accounts.

         Section 11.3. Participants' Accounts. Under all circumstances a
Participant's Account shall be treated as a segregated investment individually
directed by the Participant and shall be adjusted for only the income or loss
realized with respect to each such Account.

         Section 11.4. Determination and Distribution of Benefits. The
provisions of ARTICLES VI

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and VII of the Money Purchase Pension Plan as in effect on December 31, 1999 are
hereby incorporated by reference and for convenience set forth in full in
Appendix "A" to the Plan. The provisions of these Articles will apply to the
determination and distribution of a Participant's Money Purchase Pension
Benefit. Otherwise, the provisions of this Plan shall govern with respect to a
Participant's Money Purchase Pension Benefit.

         6.  There is added to the Plan new ARTICLE XII reading as follows:

         "ARTICLE XII.  Profit Sharing Plan.

         Section 12.1. General. This Article applies only to those employees who
were participants in the DMIC Profit Sharing Plan and who had accounts in that
Plan on December 31, 1999. This Articles does not apply to any other Employee or
Participant.

         Section 12.2. Profit Sharing Plan. For purposes of this Plan, the term
"Profit Sharing Benefit" means the account balance of the Participant in the
Profit Sharing Pension Plan as of December 31, 1999. As provided by amendment to
that Plan, all such accounts are fully vested in the Participants and under no
circumstances may any forfeitures arise with respect to those accounts.

         Section 12.3. Participants' Accounts. Under all circumstances a
Participant's Account shall be treated as a segregated investment individually
directed by the Participant and shall be adjusted for only the income or loss
realized with respect to each such Account.

         Section 12.4. Determination and Distribution of Benefits. The
provisions of ARTICLES VI and VII of the Profit Sharing Plan as in effect on
December 31, 1999 are hereby incorporated by reference and for convenience set
forth in full in Appendix "B" to the Plan. The provisions of these Articles will
apply to the determination and distribution of a Participant's Profit Sharing
Benefit. Otherwise, the provisions of this Plan shall govern with respect to a
Participant's Profit Sharing

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Benefit.

         IN WITNESS WHEREOF and as evidence of the adoption of this amendment,
Donegal Mutual Insurance Company has caused its duly authorized officers to
execute this document on its behalf and under its seal as of this 6th day
January, 2000.

                                         Donegal Mutual Insurance Company

ATTEST:

/s/ Ralph G. Spontak                     By: /s/ Donald H. Nikolaus
---------------------------                  -----------------------------
Ralph G. Spontak, Secretary                  Donald H. Nikolaus, President

      (Corporate Seal)INTEREST AND LIABILITIES CONTRACT

                                       to

                       RETROCESSIONAL REINSURANCE CONTRACT

                                     between
                       SOUTHERN HERITAGE INSURANCE COMPANY
                                 DULUTH, GEORGIA

                                       and

                        DONEGAL MUTUAL INSURANCE COMPANY

It is hereby agreed by and between Southern Heritage Insurance Company (Southern
Heritage), Duluth, Georgia, and Donegal Mutual Insurance Company (Donegal) that
Donegal will assume and retrocede a 100% share and Southern Heritage will assume
a 100% share of the retrocession of the Interests and Liabilities as set forth
in the attached Retrocessional Reinsurance Agreement effective January 1, 2000
until terminated.

This Contract made and executed in duplicate this 10th day of March, 2000

SOUTHERN HERITAGE INSURANCE COMPANY

/s/ Ralph G. Spontak
-------------------------------------------
RALPH G. SPONTAK, SECRETARY

DONEGAL MUTUAL INSURANCE COMPANY

/s/ Donald H. Nikolaus
-------------------------------------------
DONALD H. NIKOLAUS, PRESIDENT

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                     REINSURANCE AND RETROCESSION AGREEMENT

                                     between
                       SOUTHERN HERITAGE INSURANCE COMPANY
                                 DULUTH, GEORGIA

                                       and

                        DONEGAL MUTUAL INSURANCE COMPANY

Article 1  Business Covered

This Agreement, subject to the terms and conditions herein contained, is for
Donegal Mutual Insurance Company (Donegal) to indemnify Southern Heritage
Insurance Company (Southern Heritage), Duluth, Georgia, in respect of the net
liability as herein provided and specified which may accrue to Southern Heritage
as a result of any loss or losses which may occur during the term of this
Agreement under any and all binders, policies, and contracts of insurance or
reinsurance (hereinafter referred to as "policy" or "policies") heretofore or
hereafter issued or entered into by or on behalf of Southern Heritage and for
Donegal to retrocede the net liability back to Southern Heritage and Southern
Heritage to assume the net liability back from Donegal as part of the
retrocession.

Article 2  Territory

This Agreement shall cover wherever Southern Heritage's policies cover.

Article 3  Exclusions

This Agreement shall not cover:
A. Business classified by the Reinsured as:

     (1)  Overhead transmission and distribution lines and their supporting
          structures other than those on or within 150 meters (or 500 feet) of
          the insured premises. It is understood and agreed that public
          utilities extension and/or suppliers extension and/or contingent
          business interruption coverage are not subject to this exclusion
          provided that these are not part of a transmitter's or distributor's
          policy.

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     (2)  Pools, Associations, or Syndicates, including State Insurance Guaranty
          Associations. However, such operations which Southern Heritage is
          obliged to cover by reason of membership or participation in any
          Automobile Assigned Risk Pool, Plan or Facility, any FAIR Plan, or any
          Coastal Pool are not to be excluded. Furthermore, this exclusion shall
          not apply to any Inter-Company Pooling.

     (3)  Insurance on Growing and/or Standing Crops.

     (4)  Reinsurance of any kind assumed by the Reinsured, except local agency
          reinsurance accepted in the normal course of business.

     (5)  Bridges, tunnels and art collections valued at over $150,000,000.

     (6)  Aviation.

     (7)  Insolvency Funds, as per clause attached.

     (8)  Flood, when written as such.

B.   Extra Contractual Obligations and Loss in Excess of Original Policy Limits
     - Extra Contractual Obligations" are defined as those liabilities not
     covered under any other provision of this Agreement and which arise from
     the handling of any claim on business covered hereunder, such liabilities
     arising because of, but not limited to, the following: failure by Southern
     Heritage to settle within the policy limit, or by reason of alleged or
     actual negligence, fraud or bad faith in rejecting an offer of settlement
     or in the 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.

     The term "Loss in Excess of Original Policy Limits" shall mean a net loss
     of Southern Heritage which is in excess of the limit of its original
     policy, such loss in excess of the limit having been incurred because of
     the following: failure by Southern Heritage to settle within the policy
     limit or by reason of alleged or actual negligence, fraud or bad faith in
     rejecting an offer or settlement or in the 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

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<PAGE>

     consequent upon such action.

C.   Fidelity, Surety, Credit, Title, Insolvency and Financial Guaranty.

D.   Loss or Liability excluded by the provisions of the Nuclear Incident
     Exclusion Clause - Physical Damage Reinsurance, as per clause attached
     hereto.

E.   War, as defined in the original policy.

F.   Ocean Marine

Article 4  Term

This Agreement shall become effective on January 1, 2000 at 12:01 A. M.
Standard Time. It is unlimited as to its duration and may be terminated by
either party upon giving ninety (90) days notice of cancellation in writing. In
the event either party terminates in accordance with the above, it is understood
that all transactions coming within the terms of this Agreement will continue in
effect within the said ninety (90) days and that losses well be included within
the contract on a cut-off basis (losses with dates of loss within the contract
period only will be included).

Article 5  Definition of Loss Occurrence

The term "Loss Occurrence" shall mean any one occurrence or series of
occurrences arising out of one event.

Article 6  Net Retained Lines

This Agreement applies only to that portion of any insurance or reinsurance
covered by this Agreement which Southern Heritage retains net for its own
account, and in calculating the amount of any loss hereunder and also in
computing the amount in excess of which this Agreement attaches, only loss or
losses in respect of that portion of any insurance or reinsurance which Southern
Heritage retains net for its own account shall be included. It being understood
and agreed that the amount of Donegal's liability hereunder in respect of any
loss or losses shall not be increased by reason of the inability of the Southern
Heritage to collect from any other reinsurers whether specific or general any
amounts which may have become due from them whether such inability arises from
the insolvency of such other reinsurer or otherwise.

Article 7  Ultimate Net Loss Incurred

The term "Ultimate Net Loss Incurred" shall be understood to

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mean the actual loss or losses incurred or to be incurred by Southern Heritage
under its policies, such loss or losses to include expenses of litigation, if
any, interest accrued where such interest is part of the judgement and all other
loss expenses of Southern Heritage including legal expenses and costs incurred
in connection with coverage and validity questions and legal actions connected
thereto which are allocable only to a specific claim or action on policies
covered hereunder less proper deductions for all recoveries (including amounts
recoverable under other reinsurance) and salvages actually made by the Southern
Heritage; provided always that nothing in this Article shall be construed to
mean that losses under this Agreement are not recoverable until Southern
Heritage's ultimate net loss has been ascertained.

All salvages, recoveries and payments recovered or received subsequent to a loss
settlement under this Agreement shall be applied as if recovered or received
prior to the said settlement and all necessary adjustments shall be made by the
parties hereto.

Article 8  Ceding and Retroceding Net Loss

A.   As of the effective date and time of this agreement Southern Heritage will
     cede and Donegal will accept 100% of Southern Heritage's Net Liability for
     losses. Net Liability for losses includes case basis reserves and reserves
     for allocated loss adjusting retained for Southern Heritage's own account
     in accordance with Article 6. Thereafter Southern Heritage will cede and
     Donegal will accept 100% of Southern Heritage's Net Losses Incurred, Net
     losses incurred include losses and allocated loss adjusting expense
     incurred in accordance with Article 6.

B.   As of the effective date and time of this agreement Donegal will retrocede
     and Southern Heritage will accept 100% of the net liability for losses
     Donegal assumed from Southern Heritage and, thereafter, Donegal will
     retrocede 100% of the Net Incurred Losses it assumed from Southern Heritage
     including allocated loss adjusting expenses incurred.

Article 9  Rate and Premium

Southern Heritage shall pay to Donegal and Donegal will retrocede to Southern
Heritage during the term of this Agreement Net Earned Premium Income of Southern
Heritage during such term in respect of business the subject matter of this
Agreement.

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The term "Net Earned Premium Income" as used herein shall be understood to mean
gross premiums earned by Southern Heritage less premiums for reinsurance which
inure to the benefit of this Agreement.

All premiums and losses paid under this Agreement shall be made in United States
currency.

Article 10 Access to Records

Southern Heritage and Donegal, by their duly appointed representatives, shall
have the right at any reasonable time, to examine all papers in the possession
of the other referring to business effected hereunder.

Article 11 Errors and Omissions

Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission or error had not been made. Such delay, omission or error shall
be rectified immediately upon discovery.

Article 12 Rate and Premium

As a precedent to any right of action hereunder, if any dispute shall arise
between Southern Heritage and Donegal with reference to the interpretation of
this Agreement or their rights with respect to any transaction involved, whether
such dispute arises before or after termination of this Agreement, such dispute
upon the written request of either party, shall be submitted to three
arbitrators, one to be chosen by each party, and the third by the two so chosen.
If either party refuses or neglects to appoint an arbitrator within thirty days
after the receipt of written notice from the other party requesting it to do so,
the requesting party may appoint two arbitrators. If the two arbitrators fail to
agree in the selection of a third arbitrator within thirty days of their
appointment, each of them shall name two, of whom the other shall decline one
and the decision shall be made by drawing lots. All arbitrators shall be
disinterested active or retired executive officers of insurance or reinsurance
companies or Underwriters at Lloyd's, London not under the control of either
party to this Agreement.

The Arbitrators shall interpret the Agreement and make their decision with
regard to the custom and usage of the insurance and reinsurance business. They
shall issue their decision in writing based upon a hearing in which evidence may
be introduced without following strict rules of evidence, but in

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<PAGE>

which cross examination and rebuttal shall be allowed. They shall make their
award with a view to effecting the general purpose of this Agreement in a
reasonable manner rather than in accordance with a literal interpretation of the
language.

The decision in writing of any two arbitrators, when filed with the parties
hereto, shall be final and binding on both parties. Judgment may be entered upon
the final decision of the arbitrators in any court having jurisdiction. Each
party shall bear the expense of its own arbitrator and shall jointly and equally
bear with the other party the expense of the third arbitrator and of the
arbitration. Said arbitration shall take place in the state of Georgia.

Article 13 Insolvency Funds Exclusion Clause

This Agreement excludes all liability of Southern Heritage arising, by contract,
operation of law, or otherwise, from its participation or membership, whether
voluntary or involuntary, in any insolvency fund. "Insolvency fund" includes any
guaranty fund, insolvency fund, plan, pool, association, fund or other
arrangement, howsoever denominated, established or governed; which provides for
any assessment of or payment or assumption by the Company of part or all of any
claim, debt, charge, fee, or other obligation of an insurer, or its successors
or assigns, which has been declared by any competent authority to be insolvent,
or which is otherwise deemed unable to meet any claim, debt, charge, fee or
other obligation in whole or in part.

The term of this exclusion shall not operate so as to result in a diminution of
the subscribing Reinsurer's obligation to the Company under policy obligations
subject to cessions under this Agreement.

Article 14 Reporting and Settlement

Southern Heritage shall provide to the reinsurer, no less frequently than at the
end of each quarter, the necessary reports needed to document the calculation of
premiums and losses ceded under this agreement. Net amounts due under this
contract must be remitted within 15 days from the issuance of said reports.

Article 15 Insolvency

In the event of the insolvency of the Reinsured, this reinsurance shall be
payable directly to the reinsured, or to its liquidator, receiver, conservator
or statutory successor on the basis of the liability of the Reinsured without
diminution because of the insolvency of the Reinsured or because the liquidator,
receiver, conservator or statutory successor of the Reinsured has failed to pay
all or a portion of any claim. It is agreed, however that the liquidator,

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<PAGE>

receiver, conservator or statutory successor of the Reinsured shall give written
notice to the Reinsurer of the pendency of a claim against the Reinsured
indicating the policy or bond reinsured which claim would involve a possible
liability on the part of the Reinsurer within a reasonable time after such claim
is filed in the conservation or liquidation proceeding or in the receivership,
and that during the pendency of such claim, the Reinsurer may investigate such
claim and interpose, at their own expense, in the proceeding where such claim is
to be adjudicated any defense or defenses that they may deem available to the
Reinsured or its liquidator, receiver, conservator or statutory successor. The
expense thus incurred by the Reinsurer shall be chargeable subject to the
approval of the court, against the Reinsured as part of the expense of
conservation or liquidation to the extent of a pro rata share of the benefit
which may accrue to the Reinsured solely as a result of the defense undertaken
by the Reinsurer.

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