DGICB Donegal Group Inc

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 11-K

For the fiscal year ended December 31, 2018

For the transition period from                      to                     

Commission file no.: 333-93785

Donegal Mutual Insurance Company 401(k) Plan

1195 River Road

Marietta, Pennsylvania 17547

Donegal Group Inc.

1195 River Road

Marietta, Pennsylvania 17547

DONEGAL MUTUAL INSURANCE

COMPANY 401(k) PLAN

FINANCIAL STATEMENTS WITH

SUPPLEMENTAL SCHEDULE

YEARS ENDED DECEMBER 31, 2018 AND 2017

AND

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

DONEGAL MUTUAL INSURANCE COMPANY

401(k) PLAN

TABLE OF CONTENTS

The accompanying notes are an integral

part of these financial statements.

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The accompanying notes are an integral

part of these financial statements.

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DONEGAL MUTUAL INSURANCE COMPANY

401(k) PLAN

DONEGAL MUTUAL INSURANCE COMPANY

401(k) PLAN

NOTES TO THE FINANCIAL STATEMENTS

Participant Accounts

Each participant’s account is credited with the participant’s contributions and Company matching contributions, as well as allocations of the Company’s profit sharing contribution and Plan earnings. Participant accounts are charged with an allocation of administrative expenses that are paid by the Plan. Allocations are based on participant earnings, account balances, or specific participant transactions, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account.

Participant Loans

The Plan does not currently allow participant loans.

Vesting

Participants are immediately vested in their salary deferral, rollover contributions, and all amounts that transferred into the Plan from certain predecessor company-sponsored defined contribution plans and earnings thereon. Vesting of Company contributions and earnings thereon is based on years of service. A participant is 100% vested after 2 years of credited service.

Payment of Benefits

The normal retirement date is the first of the month following attainment of age 65. Early retirement is possible at age 55. Benefits are paid in the form of a lump-sum distribution. Upon termination of service for other reasons, participants will receive a lump-sum distribution if the total of their vested balance does not exceed $1,000. If the vested balance exceeds $1,000, but is less than $5,000, the participant may elect to receive a lump-sum distribution, however, if no election is made, the Plan Committee will pay the distribution in a direct rollover to an individual retirement account designated by the Plan Committee. If the vested balance exceeds $5,000, the assets will generally be held in the Plan until the participant’s normal or early retirement date. However, participants are entitled to receive the entire balance in their employee account and employer account (if vested) as a lump-sum distribution, as soon as administratively possible. There is a provision available to allow hardship withdrawals of benefits prior to termination of employment as defined in the Plan and in compliance with the IRC.

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DONEGAL MUTUAL INSURANCE COMPANY

401(k) PLAN

NOTES TO THE FINANCIAL STATEMENTS

Forfeitures

Forfeitures arising from participants who are less than 100% vested will be used to restore any accounts of participants reemployed during the Plan year or to reduce Company contributions per guidelines established by the Plan. Forfeitures used to reduce Company contributions totaled $31,625 in 2018 and $37,682 in 2017. As of December 31, 2018 and 2017, there were $13,788 and $31,625 of unallocated forfeitures, respectively.

Basis of Accounting

The financial statements are prepared under the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of changes in net assets available for benefits during the reporting period. The most significant estimate is the determination of the fair values of the Plan’s investments. Actual results could differ from those estimates.

Investment Valuation and Income Recognition

Investments are valued at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Notes 3 and 4 for a discussion of fair value measurements.

Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Net appreciation includes the Plan’s realized gains and losses on investments bought and sold as well as net unrealized gains and losses on those held during the year.

Net investment returns reflect certain fees paid by the investment funds to their affiliated investment advisors, transfer agents, and others as further described in each fund prospectus or other published documents. These fees are deducted by the investment funds prior to allocation of the Plan’s investment earnings activity and thus are not separately identifiable as an expense.

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DONEGAL MUTUAL INSURANCE COMPANY

401(k) PLAN

NOTES TO THE FINANCIAL STATEMENTS

Payment of Benefits

Benefits are recorded when paid.

Expenses

Certain expenses of maintaining the Plan are paid by the Plan, unless otherwise paid by the Company. Expenses that are paid by the Company are excluded from these financial statements. Fees related to the administration of benefit payments to participants are charged directly to the participant’s account and are included in administrative expenses. Investment related expenses are included in net (depreciation) appreciation of fair value of investments.

The Plan invests in three common/collective trust funds, the Putnam Bond Index Fund, the Wells Fargo Stable Value Fund M Shares and the Putnam S&P 500 Index Fund. The common/collective trust funds are valued at the net asset value (“NAV”) per unit, as determined by the trustee at year-end. The NAV is used as the practical expedient to estimate fair value. The value is based upon the units of the collective trust fund held by the Plan at year end multiplied by the respective unit value. The unit value is based on the fair value of the underlying investments.

The Putnam Bond Index Fund’s investment objective is to achieve a return, before the assessment of fees, that closely approximates the return of the Barclay’s Aggregate Bond index, a common measure of U.S. investment-grade bond market performance. To achieve its investment objective, the Putnam Bond Index Fund invests a significant portion of its assets in securitized debt instruments, including mortgage-backed and asset backed investments.

The Wells Fargo Stable Value Fund M Shares’ investment objective is to seek safety of principal and consistency of returns while attempting to maintain minimal volatility. To achieve its investment objective, the Wells Fargo Stable Value Fund M Shares is primarily comprised of investment contracts including Guaranteed Investment Contracts (GICs), Separate Account GICs, and Security Backed Investment Contracts. GICs are issued by insurance companies which guarantee the return of principal and a stated rate of interest.

The Putnam S&P 500 Index Fund’s investment objective is to achieve a return, before the assessment of fees, that closely approximates the return of the Standard & Poor’s 500 Composite Stock Price Index, a common measure of U.S. market performance. To achieve its investment objective, the Putnam S&P 500 Index Fund invests primarily in the securities that constitute the Standard & Poor’s 500 Composite Stock Price Index either directly or through the purchase of shared or collective investment trusts having investment objectives similar to that of the Putnam S&P 500 Index Fund. For liquidity and hedging purposes, the Putnam S&P 500 Index Fund may invest in high-quality, money market instruments and in money market funds that invest exclusively in high-quality money market instruments. The Putnam S&P 500 Index Fund also uses stock index futures contracts in order to manage transaction costs and minimize tracking errors between the Putnam S&P 500 Index Fund and the Standard & Poor’s 500 Composite Stock Price Index.

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DONEGAL MUTUAL INSURANCE COMPANY

401(k) PLAN

NOTES TO THE FINANCIAL STATEMENTS

The Plan’s investments in the common/collective trust funds are not subject to any withdrawal restrictions and distributions may be taken at any time. The Plan has no unfunded commitments relating to the common/collective trust funds at December 31, 2018 and 2017.

The Plan accounts for financial assets and liabilities using a framework that establishes a hierarchy that ranks the quality of inputs, or assumptions, used in the determination of fair value, and the Plan classifies financial assets and liabilities carried at fair value in one of the following three categories of inputs:

Level 1 - quoted prices in active markets for identical assets and liabilities;

Level 2 - directly or indirectly observable inputs other than Level 1 quoted prices; and

Level 3 - unobservable inputs not corroborated by market data.

The fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Following is a description of the valuation methodologies used for investments measured at fair value. There have been no significant changes in the methodologies used or transfers between levels during the years ended December 31, 2018 or 2017.

The Plan values employer securities and registered investment companies based on the closing price reported on the active market on which the individual securities/funds are traded and are classified as level 1. The Plan had no investments classified as Level 2 or 3 during the years ended December 31, 2018 and 2017.

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Plan believes the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

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DONEGAL MUTUAL INSURANCE COMPANY

401(k) PLAN

NOTES TO THE FINANCIAL STATEMENTS

The Plan evaluates assets and liabilities (if any) on a recurring basis to determine the appropriate level at which to classify them for each reporting period. The following table presents the fair value measurements for the Plan’s investments by level, within the fair value hierarchy as of December 31:

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DONEGAL MUTUAL INSURANCE COMPANY

401(k) PLAN

NOTES TO THE FINANCIAL STATEMENTS

The Internal Revenue Service has determined and informed the Company by letter dated May 11, 2015 that the Plan is designed in accordance with applicable sections of the IRC. The Plan administrator has analyzed the Plan and believes the Plan was designed and is being operated in compliance with IRC. U.S. GAAP requires Plan management to evaluate tax positions taken by the Plan and recognize a tax liability if the organization has taken an uncertain position that more likely than not would not be sustained upon examination by the Internal Revenue Service. The Plan administrator has analyzed the tax positions taken by the Plan and has concluded that as of December 31, 2018, there are no uncertain positions taken, or expected to be taken, that would require recognition of a liability or disclosure in the financial statements. The Plan is subject to routine audits by taxing jurisdictions. There are currently no audits in progress for any tax periods.

Donegal Group Inc. is a regional insurance holding company that was formed by the Company in 1986. The Plan held 457,555 shares of Class A and 52,360 shares of Class B Donegal Group Inc. common stock with fair values of $6,243,338 and $617,843, respectively, as of December 31, 2018. The Plan held 440,885 shares of Class A and 54,135 shares of Class B Donegal Group Inc. common stock with fair values of $7,627,303 and $757,889, respectively, as of December 31, 2017. The net realized/unrealized depreciation in fair value of Donegal Group Inc. common stock (including Class A and Class B) during 2018 and 2017 was ($1,745,471) and ($166,624), respectively. Dividends received from Donegal Group Inc. in 2018 and 2017 were $280,615 and $273,073, respectively. During 2018, the Plan purchased (excluding reinvested dividends) 5,483 shares of Donegal Group Inc. Class A common stock at an aggregate cost of $166,301 and sold 9,335 shares of Donegal Group Inc. Class A common stock for total proceeds of $155,228. During 2017, the Plan purchased (excluding reinvested dividends) 5,483 shares of Donegal Group Inc. Class A common stock at an aggregate cost of $166,301 and sold 9,335 shares of Donegal Group Inc. Class A common stock for total proceeds of $155,228.

The Plan’s assets were administered under a contract with Mercer Trust Company (Mercer) from January 1, 2017 to May 31, 2017 and are administered under a contract with Transamerica Retirement Solutions, LLC (Transamerica), as of December 31, 2018 and for the period from June 1, 2017 to December 31, 2018, respectively, as trustee for the Plan. The trustee invest funds received from contributions, investment sales, interest, and dividend income and makes distribution payments to participants. In connection with the transition from Mercer to Transamercia as trustee and recordkeeper, Plan assets were transferred from Mercer, custodian of the Plan from January 1, 2017 to May 31, 2017, to State Street Corporation (State Street), who was the custodian for the Plan as of December 31, 2017 and for the period from June 1, 2017 to December 31, 2018. No assets were sold in connection with the change in custodian. Funds previously held by Mercer were re-registered under State Street.

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DONEGAL MUTUAL INSURANCE COMPANY

401(k) PLAN

NOTES TO THE FINANCIAL STATEMENTS

Certain administrative functions are performed by officers or employees of the Plan’s sponsor. No such officer or employee receives compensation from the Plan.

Although it has not expressed an intention to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, participants will become 100% vested in their accounts.

The Plan invests in various investment securities. Investment securities are exposed to various risks, such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the statements of net assets available for benefits.

During 2018, the Company failed to remit participant contributions in a timely manner. The Company identified two instances in the total amount of $386,138 in which participant contributions were remitted to the Plan in violation of Department of Labor regulations. The Company will calculate the lost earnings on the late remittances and will make a corrective contribution to the Plan in 2019.

The Company and Plan have evaluated subsequent events for potential recognition and/or disclosure through the date these financial statements were issued.

On January 1, 2019, the net assets and related participant accounts of the Mountain States Insurance Group 401(k) Plan (Mountain States Plan) were merged into the Plan.

Effective January 1, 2019, the Plan was amended to transition to a new Transamerica Preapproved Plan Document, and to merge the Mountain States Plan into the Plan. The new Plan Document will allow for the Plan to accept Roth after-tax contributions, among numerous additional provisions.

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SUPPLEMENTAL SCHEDULES

Schedule H - Financial Information (Form 5500)

Schedule H - Line 4i - Schedule of Assets (Held at End of Year)

Name of Plan Sponsor: Donegal Mutual Insurance Company

Name of Plan: Donegal Mutual Insurance Company 401(k) Plan

Employer Identification Number: 23-1336198

Three Digit Plan Number: 003

December 31, 2018

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DONEGAL MUTUAL INSURANCE COMPANY

401(k) PLAN

DONEGAL MUTUAL INSURANCE COMPANY

401(k) PLAN