DGICA

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How DGICA rewrote its risk factors

10-K ITEM 1A · FY2024 → FY2025

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words, now 8,272

New in FY2025

In particular, future cost volatility for automobile replacement costs and repair parts could occur because of exposure to governmental trade policies, including tariffs, or geopolitical events.
The process of estimating reserves is inherently judgmental and can be influenced by a number of factors, including the following: • trends in claim frequency and severity; • changes in operations; • emerging economic and social trends; • economic and social inflation; • the level of insurance fraud; and • changes in the regulatory and litigation environments. -27- Index If our insurance subsidiaries determine that their reserves are insufficient to cover their ultimate liability, they will increase their reserves.
We face risks associated with technological change, including artificial intelligence, data modernization and cloud migration, and the profitability of our insurance subsidiaries could be adversely affected if their competitors deploy such technologies more effectively or at greater scale.
The insurance industry is undergoing rapid technological change, including the expanded use of artificial intelligence, machine learning, advanced analytics, process automation and GenAI.
Since 2018, Donegal Mutual has undertaken a multi-year modernization of its core systems, including replacement of legacy policy administration systems, implementation of a cloud-based data infrastructure and, beginning in 2026, migration of its Guidewire claims, billing and policy administration systems to the Guidewire cloud platform.
Donegal Mutual has also begun deploying and piloting certain GenAI-enabled solutions to provide operating efficiencies and data-driven insights.
These initiatives involve significant cost, operational complexity and reliance on third-party vendors.
They may result in implementation delays, cost overruns, data migration errors, system integration challenges, cybersecurity vulnerabilities, service disruptions or diversion of management attention.
These initiatives may not be completed as planned or achieve intended operational efficiencies or other benefits.
Any disruption or failure could adversely affect the underwriting, billing or claims operations of our insurance subsidiaries and materially adversely affect our results of operations and financial condition.
In addition, competitors, including larger insurers and technology-enabled companies, may have greater financial resources, broader data assets and more advanced analytical capabilities, enabling them to develop and scale artificial intelligence, automation and cloud-based solutions more rapidly or effectively than our insurance subsidiaries can.
If competitors more effectively utilize technology to enhance risk selection, refine pricing, reduce expenses, improve claims handling or strengthen customer and agent experience, they may achieve superior underwriting performance or market share.
More sophisticated use of data and analytics by competitors could also increase adverse selection risks for insurers with comparatively less advanced capabilities.
Our increasing reliance on third-party cloud platforms and technology providers exposes our insurance subsidiaries to vendor dependency and concentration risks.
Any service disruption, cybersecurity incident or strategic misalignment involving a key vendor could impair the operations of our insurance subsidiaries or increase their costs. -29- Index The use of artificial intelligence and GenAI presents additional operational, regulatory and reputational risks.
Artificial intelligence models may produce inaccurate or unintended results, and evolving legal and regulatory standards governing artificial intelligence, data usage and algorithmic decision-making may increase compliance costs or restrict certain practices.
Use of GenAI may also create unforeseen exposures or coverage issues under the policies our insurance subsidiaries issue or introduce new forms of claims fraud or cybercrime.
If our insurance subsidiaries are unable to adapt to technological developments or compete effectively with organizations that deploy such technologies at greater scale, their competitive position and financial performance could be materially adversely affected.
This regulatory oversight includes matters relating to: • licensing and examination; • approval of premium rates; • market conduct; • policy forms; • limitations on the nature and amount of certain investments; • claims practices; • mandated participation in involuntary markets and guaranty funds; • reserve adequacy; • insurer solvency; • transactions between affiliates; • the amount of dividends that insurers may pay; and • restrictions on underwriting standards.
Such regulation and supervision are primarily for the benefit and protection of policyholders rather than stockholders. -30- Index The NAIC and state insurance regulators re-examine existing laws and regulations from time to time, specifically focusing on areas such as: • insurance company investments; • issues relating to the solvency of insurance companies; • risk-based capital guidelines; • restrictions on the terms and conditions included in insurance policies; • certain methods of accounting; • reserves for unearned premiums, losses and other purposes; • the values at which insurance companies may carry investment securities and the definition of other-than-temporary impairment of investment securities; and • interpretations of existing laws and the development of new laws.
Changes in state laws and regulations, as well as changes in the way state regulators view related-party transactions in particular, could change the operating environment of our insurance subsidiaries and have an adverse effect on their business.
Insurance companies are subject to assessments, based on their market share in a given line of business, to assist in the payment of unpaid claims and related costs of insolvent insurance companies.
Risks Relating to Our Business Our insurance subsidiaries and Donegal Mutual currently conduct business in a limited number of states, with a concentration of business in Pennsylvania, Michigan, Delaware, Maryland and Virginia.
Our insurance subsidiaries and Donegal Mutual conduct business in 21 states located primarily in the Mid-Atlantic, Midwestern, Southern and Southwestern regions of the country.
A substantial portion of their business consists of private passenger and commercial automobile, homeowners, commercial multi-peril and workers’ compensation insurance in Pennsylvania, Michigan, Delaware, Maryland and Virginia.
Common catastrophic events include hurricanes, earthquakes, tornadoes, wind and hailstorms, fires and wildfires, explosions and severe winter storms. -31- Index If the independent agents who market the products of our insurance subsidiaries and Donegal Mutual do not maintain their current levels of premium writing with us and Donegal Mutual, fail to comply with established underwriting guidelines of our insurance subsidiaries and Donegal Mutual or otherwise inappropriately market the products of our insurance subsidiaries and Donegal Mutual, the business, financial condition and results of operations of our insurance subsidiaries could be adversely affected.
Our insurance subsidiaries and Donegal Mutual market their insurance products solely through a network of approximately 2,000 independent insurance agencies.
Some of the factors that could adversely affect the ability of our insurance subsidiaries and Donegal Mutual to retain existing, and attract new, independent agents include: • the significant competition among insurance companies to attract independent agents; • the labor-intensive and time-consuming process of selecting new independent agents; • the insistence of our insurance subsidiaries and Donegal Mutual that independent agents adhere to certain standards; • the ability of our insurance subsidiaries and Donegal Mutual to pay competitive and attractive commissions, bonuses and other incentives to independent agents; and • the ongoing consolidation of independent agencies, which may result in the acquisition of independent agencies from which our insurance subsidiaries and Donegal Mutual currently receive business by larger entities with which our insurance subsidiaries and Donegal Mutual do not have business relationships.
To the extent that current and potential policyholders change their distribution channel preference, the business, financial condition and results of operations of our insurance subsidiaries may be adversely affected. -32- Index Competition within the property and casualty insurance industry may adversely impact the revenues and profit margins of our insurance subsidiaries.
The property and casualty insurance industry is intensely competitive, and the pricing of insurance products is subject to significant fluctuations and uncertainties.
Best were to downgrade the rating of Donegal Mutual or any of our insurance subsidiaries, it would adversely affect the competitive position of Donegal Mutual or that insurance subsidiary and make it more difficult for it to market its products and retain its existing policyholders. -33- Index Economic disruption related to a future pandemic may adversely affect our revenues, profitability, results of operations, cash flows, liquidity and financial condition.
Risks related to a pandemic include, but are not limited to, the following: • the business operations or a specific operational function of our insurance subsidiaries and Donegal Mutual could be disrupted by the illness of significant numbers of their employees and remedial efforts that would be required upon discovery of exposure to a communicable illness within their facilities; • the business operations of our insurance subsidiaries and Donegal Mutual are dependent upon technology systems for which regular physical access is required to maintain critical operational capabilities, and the business operations of our insurance subsidiaries and Donegal Mutual would be adversely impacted by government mandates requiring closure of facilities where those technology systems are located or restricting physical access to such facilities; • the revenues of our insurance subsidiaries and Donegal Mutual may decrease as a result of reduced demand for their insurance products as economic disruption adversely impacts current and potential insurance customers; • our insurance subsidiaries and Donegal Mutual may incur an increase in their losses and loss expenses in certain lines of business as a result of a pandemic and related economic disruption, and such losses and loss expenses may exceed the reserves our insurance subsidiaries and Donegal Mutual have established or may establish in the future; • our insurance subsidiaries and Donegal Mutual may incur increased costs related to legal disputes over policy coverages or exclusions and their defense against litigation related to a pandemic; • legislative, judicial and regulatory actions may expand coverage definitions, retroactively mandate coverage or otherwise require our insurance subsidiaries and Donegal Mutual to pay losses for damages that their policies explicitly excluded or did not intend to cover; • legislative, judicial and regulatory actions may require our insurance subsidiaries and Donegal Mutual to reduce or refund premiums, suspend cancellation of policies for non-payment of premiums or otherwise grant extended grace periods and time allowances for the payment of premium balances due to them; • our insurance subsidiaries and Donegal Mutual may not be able to collect premium balances due to them, resulting in reduced operating cash flows and an increase in premium write-offs that would increase their operating expenses; • our insurance subsidiaries may suffer declines in the market values of their investments as a result of financial market volatility related to pandemic concerns and related economic disruption; and • economic disruption related to a pandemic could result in significant declines in the credit quality of issuers, ratings downgrades or changes in financial market conditions and regulatory changes that might adversely impact the value of the fixed-maturity investments that our insurance subsidiaries own.
The maximum amount of ordinary dividends that our insurance subsidiaries can pay to us in 2026 without prior regulatory approval is approximately $66.4 million.
Other business and regulatory considerations, such as the impact of dividends on surplus that could affect the ratings of our insurance subsidiaries, competitive conditions, RBC requirements, the investment results of our insurance subsidiaries and the amount of premiums that our insurance subsidiaries write could also adversely impact the ability of our insurance subsidiaries to pay dividends to us. -34- Index The growth and profitability of our insurance subsidiaries depend, in part, on the effective maintenance and ongoing development of Donegal Mutual’s information technology systems, and the allocation of related costs to our insurance subsidiaries may adversely impact their profitability.
From 2020 to 2024, we implemented five major releases of new systems.
In 2025, Donegal Mutual implemented the final two major releases of new systems for the remaining lines of business the Donegal Insurance Group issues currently and for the conversion of remaining legacy renewal policies of the Donegal Insurance Group.
The conversion process will continue into 2027 as legacy policies renew on a state-by-state rollout schedule.
During 2025, Donegal Mutual also began planning for the migration of its claims, billing and policy administration application systems from on-premise versions to cloud-based versions of these applications that we expect will occur in a phased approach over the next two years.
As a result, Donegal Mutual and our insurance subsidiaries may not have the ability to grow their business and meet their profitability objectives. -35- Index While we are currently placing less emphasis on pursuing acquisitions because Donegal Mutual and we believe there are opportunities for profitable organic growth, our strategy to grow in part through acquisitions of other insurance companies exposes us to risks that could adversely affect our results of operations and financial condition.
The risks associated with these affiliations and acquisitions include: • the potential inadequacy of reserves for losses and loss expenses of the other insurer; • the need to supplement management of the other insurer with additional experienced personnel; • conditions imposed by regulatory agencies that make the realization of cost-savings through integration of the operations of the other insurer with our operations more difficult; • our management’s lack of familiarity with the geography, demographics and distribution systems in the markets the other insurer serves that cause the other insurer to fail to meet the growth and profitability objectives we anticipated at the time of the acquisition or affiliation; • potential difficulties with integration of information technology systems and other operations; • the need of the other insurer for additional capital that we did not anticipate at the time of the acquisition or affiliation; and • the use of more of our management’s time in improving the operations of the other insurer than we originally anticipated.

and 21 more.

Gone since FY2024

The process of estimating reserves is inherently judgmental and can be influenced by a number of factors, including the following: • trends in claim frequency and severity; • changes in operations; • emerging economic and social trends; • economic and social inflation; and • changes in the regulatory and litigation environments. -27- Index If our insurance subsidiaries determine that their reserves are insufficient to cover their ultimate liability, they will increase their reserves.
The pace of innovation within the insurance industry is rapidly increasing, and our insurance subsidiaries may be unable to effectively implement new technologies and anticipate changes in customer preferences and insurance needs, which could put our insurance subsidiaries at a competitive disadvantage and adversely affect their future profitability.
Innovation, recent technological developments, changing customer demographics and preferences, societal shifts and emerging technologies such as artificial intelligence are greatly impacting the insurance industry.
Our insurance subsidiaries compete with much larger insurers that are focused on implementing technology and innovative solutions to select and price risks, identify and target potential customers, enhance the experience of their customers and improve their operations.
If our insurance subsidiaries are unable to anticipate changes in customer expectations and keep pace with the technological changes their competitors implement, our insurance subsidiaries may not be able to attract and maintain quality accounts, adequately price risks or operate as efficiently as their competitors.
In addition, emerging technologies such as electric and autonomous vehicles, driver-assistance and accident avoidance features on vehicles, sensor technology and other forms of automation may reduce the future need for, or decrease the future pricing of, the insurance products our insurance subsidiaries offer.
This regulatory oversight includes matters relating to: -29- Index • licensing and examination; • approval of premium rates; • market conduct; • policy forms; • limitations on the nature and amount of certain investments; • claims practices; • mandated participation in involuntary markets and guaranty funds; • reserve adequacy; • insurer solvency; • transactions between affiliates; • the amount of dividends that insurers may pay; and • restrictions on underwriting standards.
Such regulation and supervision are primarily for the benefit and protection of policyholders rather than stockholders.
The NAIC and state insurance regulators re-examine existing laws and regulations from time to time, specifically focusing on areas such as: • insurance company investments; • issues relating to the solvency of insurance companies; • risk-based capital guidelines; • restrictions on the terms and conditions included in insurance policies; • certain methods of accounting; • reserves for unearned premiums, losses and other purposes; • the values at which insurance companies may carry investment securities and the definition of other-than-temporary impairment of investment securities; and • interpretations of existing laws and the development of new laws.
Changes in state laws and regulations, as well as changes in the way state regulators view related-party transactions in particular, could change the operating environment of our insurance subsidiaries and have an adverse effect on their business. -30- Index Insurance companies are subject to assessments, based on their market share in a given line of business, to assist in the payment of unpaid claims and related costs of insolvent insurance companies.
Risks Relating to Our Business The COVID-19 pandemic affected the business operations of our insurance subsidiaries and Donegal Mutual, and economic disruption related to a future pandemic may adversely affect our revenues, profitability, results of operations, cash flows, liquidity and financial condition.
During 2020 and 2021, the COVID-19 pandemic resulted in significant disruptions in economic activity throughout our operating regions.
Risks related to a pandemic include, but are not limited to, the following: • the business operations or a specific operational function of our insurance subsidiaries and Donegal Mutual could be disrupted by the illness of significant numbers of their employees and remedial efforts that would be required upon discovery of exposure to a communicable illness within their facilities; • the business operations of our insurance subsidiaries and Donegal Mutual are dependent upon technology systems for which regular physical access is required to maintain critical operational capabilities, and the business operations of our insurance subsidiaries and Donegal Mutual would be adversely impacted by government mandates requiring closure of facilities where those technology systems are located or restricting physical access to such facilities; • the revenues of our insurance subsidiaries and Donegal Mutual may decrease as a result of reduced demand for their insurance products as economic disruption adversely impacts current and potential insurance customers; • our insurance subsidiaries and Donegal Mutual may incur an increase in their losses and loss expenses in certain lines of business as a result of a pandemic and related economic disruption, and such losses and loss expenses may exceed the reserves our insurance subsidiaries and Donegal Mutual have established or may establish in the future; • our insurance subsidiaries and Donegal Mutual may incur increased costs related to legal disputes over policy coverages or exclusions and their defense against litigation related to a pandemic; • legislative, judicial and regulatory actions may expand coverage definitions, retroactively mandate coverage or otherwise require our insurance subsidiaries and Donegal Mutual to pay losses for damages that their policies explicitly excluded or did not intend to cover; • legislative, judicial and regulatory actions may require our insurance subsidiaries and Donegal Mutual to reduce or refund premiums, suspend cancellation of policies for non-payment of premiums or otherwise grant extended grace periods and time allowances for the payment of premium balances due to them; • our insurance subsidiaries and Donegal Mutual may not be able to collect premium balances due to them, resulting in reduced operating cash flows and an increase in premium write-offs that would increase their operating expenses; -31- Index • our insurance subsidiaries may suffer declines in the market values of their investments as a result of financial market volatility related to pandemic concerns and related economic disruption; and • economic disruption related to a pandemic could result in significant declines in the credit quality of issuers, ratings downgrades or changes in financial market conditions and regulatory changes that might adversely impact the value of the fixed-maturity investments that our insurance subsidiaries own.
Our insurance subsidiaries and Donegal Mutual currently conduct business in a limited number of states, with a concentration of business in Pennsylvania, Michigan, Maryland, Delaware and Virginia.
Our insurance subsidiaries and Donegal Mutual conduct business in 21 states located primarily in the Mid-Atlantic, Midwestern, Southern and Southwestern states.
A substantial portion of their business consists of private passenger and commercial automobile, homeowners, commercial multi-peril and workers’ compensation insurance in Pennsylvania, Michigan, Maryland, Delaware and Virginia.
Common catastrophic events include hurricanes, earthquakes, tornadoes, wind and hailstorms, fires and wildfires, explosions and severe winter storms.
If the independent agents who market the products of our insurance subsidiaries and Donegal Mutual do not maintain their current levels of premium writing with us and Donegal Mutual, fail to comply with established underwriting guidelines of our insurance subsidiaries and Donegal Mutual or otherwise inappropriately market the products of our insurance subsidiaries and Donegal Mutual, the business, financial condition and results of operations of our insurance subsidiaries could be adversely affected.
Our insurance subsidiaries and Donegal Mutual market their insurance products solely through a network of approximately 2,100 independent insurance agencies.
Some of the factors that could adversely affect the ability of our insurance subsidiaries and Donegal Mutual to retain existing, and attract new, independent agents include: -32- Index • the significant competition among insurance companies to attract independent agents; • the labor-intensive and time-consuming process of selecting new independent agents; • the insistence of our insurance subsidiaries and Donegal Mutual that independent agents adhere to certain standards; • the ability of our insurance subsidiaries and Donegal Mutual to pay competitive and attractive commissions, bonuses and other incentives to independent agents; and • the ongoing consolidation of independent agencies, which may result in the acquisition of independent agencies from which our insurance subsidiaries and Donegal Mutual currently receive business by larger entities with which our insurance subsidiaries and Donegal Mutual do not have business relationships.
To the extent that current and potential policyholders change their distribution channel preference, the business, financial condition and results of operations of our insurance subsidiaries may be adversely affected.
The maximum amount of ordinary dividends that our insurance subsidiaries can pay to us in 2025 without prior regulatory approval is approximately $53.3 million.
Other business and regulatory considerations, such as the impact of dividends on surplus that could affect the ratings of our insurance subsidiaries, competitive conditions, RBC requirements, the investment results of our insurance subsidiaries and the amount of premiums that our insurance subsidiaries write could also adversely impact the ability of our insurance subsidiaries to pay dividends to us.
Best were to downgrade the rating of Donegal Mutual or any of our insurance subsidiaries, it would adversely affect the competitive position of Donegal Mutual or that insurance subsidiary and make it more difficult for it to market its products and retain its existing policyholders. -33- Index The growth and profitability of our insurance subsidiaries depend, in part, on the effective maintenance and ongoing development of Donegal Mutual’s information technology systems, and the allocation of related costs to our insurance subsidiaries may adversely impact their profitability.
Since 2020, we have implemented five major releases of new systems.
In 2025, Donegal Mutual expects to implement new systems for the remaining lines of business the Donegal Insurance Group issues currently and for the conversion of remaining legacy renewal policies of the Donegal Insurance Group.
The conversion process will continue into 2026 as legacy policies renew on a state-by-state rollout schedule.
As a result, Donegal Mutual and our insurance subsidiaries may not have the ability to grow their business and meet their profitability objectives.
While we are currently placing less emphasis on pursuing acquisitions because Donegal Mutual and we believe there are significant opportunities for profitable organic growth, our strategy to grow in part through acquisitions of other insurance companies exposes us to risks that could adversely affect our results of operations and financial condition.
The risks associated with these affiliations and acquisitions include: • the potential inadequacy of reserves for losses and loss expenses of the other insurer; • the need to supplement management of the other insurer with additional experienced personnel; • conditions imposed by regulatory agencies that make the realization of cost-savings through integration of the operations of the other insurer with our operations more difficult; • our management’s lack of familiarity with the geography, demographics and distribution systems in the markets the other insurer serves that cause the other insurer to fail to meet the growth and profitability objectives we anticipated at the time of the acquisition or affiliation; • potential difficulties with integration of information technology systems and other operations; • the need of the other insurer for additional capital that we did not anticipate at the time of the acquisition or affiliation; and • the use of more of our management’s time in improving the operations of the other insurer than we originally anticipated. -34- Index If we cannot obtain sufficient capital to fund the organic growth of our insurance subsidiaries and to make acquisitions, we may not be able to expand our business.
In addition, any equity capital we obtain in the future could be dilutive to our existing stockholders.
Competition within the property and casualty insurance industry may adversely impact the revenues and profit margins of our insurance subsidiaries.
The property and casualty insurance industry is intensely competitive.
Best ratings. -35- Index The investment portfolios of our insurance subsidiaries consist primarily of fixed-income securities; therefore, the investment income and the fair value of the investment portfolios of our insurance subsidiaries could decrease as a result of a number of factors.
Changes in interest rates may reduce both the profitability and the return on the invested capital of our insurance subsidiaries.
We and our insurance subsidiaries depend on key personnel.
At December 31, 2024, our insurance subsidiaries had approximately $99.7 million of reinsurance receivables from third-party reinsurers relating to paid and unpaid losses.
Any insolvency or inability of these reinsurers to make timely payments to our insurance subsidiaries under the terms of their reinsurance agreements would adversely affect the results of operations of our insurance subsidiaries. -36- Index Michigan law requires MICO to provide certain medical benefits under the personal injury protection, or PIP, coverage of the personal automobile and commercial automobile policies it writes in the state of Michigan.
Michigan law also requires MICO to be a member of the Michigan Catastrophic Claims Association, or MCCA, in order to write automobile insurance.
The MCCA receives funding through assessments that its members collect from policyholders in the state and provides reinsurance for PIP claims that exceed a set retention.

and 15 more.

Sentence-level comparison of Item 1A in the two most recent 10-Ks (FY2024 ↗, FY2025 ↗). A reworded sentence counts as one dropped and one added, so heavy edits read as low “kept”. Headings and page furniture are stripped; nothing is summarised by a model.

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