Safety Insurance Group Inc. Annual Report 2016

Plain-text annual report

S A F E T Y I N S U R A N C E A U T O • H O M E • B U S I N E S S 2 0 1 6 A n n u a l R e p o r t a n d F o r m 1 0 - K auto home business 2016 ANNUAL REPORT TO OUR SHAREHOLDERS THE KEY TO OUR SUCCESS: SERVICE. THE KEY TO OUR CUSTOMERS’ SUCCESS: SAFETY. Safety Insurance was founded in 1979 with a belief that we would succeed as a company if customers were given the best possible service. As we’ve grown and expanded our product line to include a full portfolio of property and casualty insurance products, staying committed to that belief has meant even more. At Safety, we do everything possible to make it easy for our agents and policyholders to do business with us. Today, Safety is the third largest private passenger automobile carrier, the second largest commercial automobile carrier, and the fourth largest homeowners carrier in Massachusetts. We support our network of independent agents with state-of-the-art tools that make the ease and convenience of doing business with Safety second to none. Together with our agents, Safety Insurance remains a premier provider of property and casualty insurance in Massachusetts, New Hampshire, and Maine. We’ll continue this tradition into the future. DEAR FELLOW SHAREHOLDERS: CASH DIVIDENDS PAID PER COMMON SHARE (Dollars) TOTAL REVENUES (Dollars in Millions) CASH FLOWS FROM OPERATIONS (Dollars in Thousands) NET INCOME (Dollars in Thousandss) I AM PLEASED TO REPORT THAT 2016 WAS A TOTAL ASSETS (Dollars in Billions) SUCCESSFUL YEAR for Safety Insurance Group, which realized net income of $64.6 million or $4.27 earnings per $2.20 $2.40 $2.60 $2.80 $2.80 $703.87 $745.28 $778.80 $797.95 $797.95 $819.82 $104.33 $110.86 $97.57 $22.89 $98.82 $58.07 $61.35 $59.35 $(13.85) $64.59 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2016 2015 CASH DIVIDENDS PAID PER COMMON SHARE (Dollars) TOTAL REVENUES (Dollars in Millions) $2.20 $2.40 $2.60 $2.80 $2.80 $703.87 $745.28 $778.80 $797.95 $797.95 $819.82 share. We have again achieved operating profitability and have $1.57 successfully maintained our strong financial position with total $1.63 $1.70 $1.68 $1.76 shareholders’ equity increasing to $670.7 million as of December 31, 2016 compared to $644.5 million on December 31, 2015. The closing price of our stock on December 31, 2016 was $73.70 per share, resulting in 2016 total shareholder return of 35.7%. Our dividends paid to shareholders during the year were $2.80 per share. Our total revenues for 2016 were $819.8 million, a $21.8 2012 million increase over our 2015 total revenues of $798.0 million. 2014 2015 2016 2013 This growth was principally the result of an increase in net earned premiums, primarily in our commercial automobile and homeowners business lines. Our loss and expense ratios were CASH FLOWS FROM OPERATIONS 65.3% and 30.8% in 2016 compared to 83.0% and 29.0% in 2015. (Dollars in Thousands) The overall combined ratio was 96.1% in 2016 compared to NET INCOME (Dollars in Thousandss) 112.0% in 2015. Loss, expense and combined ratios for 2015 $(13.85) $104.33 were impacted by record-breaking winter snowfall totals. $110.86 $58.07 $22.89 $98.82 $61.35 $97.57 $59.35 $64.59 TOTAL ASSETS (Dollars in Billions) $1.57 $1.63 $1.68 $1.70 $1.76 To achieve our goal of increasing shareholders’ value, our long- standing strategy is to maintain and develop strong independent agent relationships. In contrast to some of our competitors, Safety distributes its products exclusively through independent agents. In 2016, we worked with 890 agents in 1,101 locations 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2016 2012 2013 2014 2015 2016 Safety Insurance Annual Report 2016 1 2015 20122013201420152016201220132014201520162012201320142015201620122013201420152016201220132014201620152012201320142015201620122013201420152016201220132014201520162012201320142015201620122013201420162015CASH DIVIDENDS PAID PER COMMON SHARE (Dollars) TOTAL REVENUES (Dollars in Millions) CASH FLOWS FROM OPERATIONS (Dollars in Thousands) NET INCOME (Dollars in Thousandss) TOTAL ASSETS (Dollars in Billions) $2.20 $2.40 $2.60 $2.80 $2.80 $703.87 $745.28 $778.80 $797.95 $797.95 $819.82 $104.33 $110.86 $97.57 $22.89 $98.82 $58.07 $61.35 $59.35 $(13.85) $64.59 $1.57 $1.63 $1.68 $1.70 $1.76 throughout Massachusetts, New Hampshire and Maine. We provide our agents with a full suite of insurance products and information technology services, which enables them to better serve their customers and more easily conduct business with us. This strategy of using agents exclusively and providing them with unparalleled service and value has enabled Safety to establish strong relationships with independent agents and to capture a 2012 2013 2014 2015 2016 CASH DIVIDENDS PAID PER COMMON SHARE (Dollars) TOTAL REVENUES (Dollars in Millions) CASH FLOWS FROM OPERATIONS (Dollars in Thousands) $2.20 $2.40 $2.60 $2.80 $2.80 $703.87 $745.28 $778.80 $797.95 $797.95 $819.82 $104.33 $110.86 $97.57 $22.89 $98.82 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2016 larger share of the total business written by each agent. We have 2015 2013 2015 2014 2016 2013 2014 2012 translated our competitive advantage with independent agents and extensive knowledge of the market to become the second largest commercial automobile carrier, the third largest private passenger automobile carrier and the fourth largest homeowners carrier in Massachusetts. NET INCOME (Dollars in Thousandss) Our investment objective continues to focus on maximizing total TOTAL ASSETS (Dollars in Billions) 2012 2013 2014 2016 2012 2013 2014 2015 2016 2015 returns while investing conservatively. Net effective annual yield $1.76 $58.07 on our investment portfolio was 3.1% for 2016 compared to 3.3% $(13.85) $64.59 $61.35 $59.35 $1.57 $1.68 $1.63 $1.70 in 2015. Our duration was 4.3 years at December 31, 2016, up from 4.1 years at December 31, 2015. We continue to believe that our current portfolio position and strong underlying operating cash flow provides sufficient liquidity to meet our needs. As of December 31, 2016, Safety held $20.1 million in cash and cash equivalents and we have no outstanding debt. Our insurance subsidiaries ‘‘A’’ (Excellent) rating was reaffirmed by A.M. Best on May 9, 2016. In reaffirming the rating, A.M. Best 2012 2016 2015 2016 2013 2014 2014 2012 2013 2015 2 Safety Insurance Annual Report 2016 20122013201420152016201220132014201520162012201320142015201620122013201420152016201220132014201620152012201320142015201620122013201420152016201220132014201520162012201320142015201620122013201420162015CASH DIVIDENDS PAID PER COMMON SHARE (Dollars) TOTAL REVENUES (Dollars in Millions) CASH FLOWS FROM OPERATIONS (Dollars in Thousands) NET INCOME (Dollars in Thousandss) TOTAL ASSETS (Dollars in Billions) $2.20 $2.40 $2.60 $2.80 $2.80 $703.87 $745.28 $778.80 $797.95 $797.95 $819.82 $104.33 $110.86 $97.57 $22.89 $98.82 $58.07 $61.35 $59.35 $(13.85) $64.59 $1.57 $1.63 $1.68 $1.70 $1.76 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2016 2012 2013 2014 2015 2016 2015 recognized our solid risk-adjusted capitalization, historically strong operating income, favorable loss reserve development, and market position as a leading personal automobile writer in Massachusetts. A.M. Best also noted our low investment leverage and disciplined underwriting approach as important strengths. On April 1, 2016, I assumed the role of President and Chief Executive Officer from our current Chairman of the Board, David F. Brussard. With the support of an experienced, knowledgeable and dedicated senior management team, we continue to achieve operational and financial excellence. The ongoing commitment and support of our employees, allows us to continually provide the best service possible to our independent agent partners and policyholders. This has resulted in a history of strong returns and enduring value for our shareholders. We appreciate your long-term participation as a shareholder of Safety Insurance Group. Sincerely, George M. Murphy President and Chief Executive Officer Safety Insurance Annual Report 2016 3 2012201320142015201620122013201420152016201220132014201520162012201320142015201620122013201420162015AUTO EXPOSURES EXPOSURES EXPOSURES 526,388 532,503 537,169 545,006 540,515 147,882 139,969 130,563 158,942 162,703 40,987 42,320 37,889 35,033 32,224 WRITTEN PREMIUMS (Dollars in Thousands) WRITTEN PREMIUMS (Dollars in Thousands) WRITTEN PREMIUMS (Dollars in Thousands) 535,534 553,434 567,951 576,200 588,486 131,247 144,925 161,388 170,410 182,128 29,439 33,321 36,346 39,120 40,945 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 PRIVATE PASSENGER AUTOMOBILE INSURANCE is our primary product representing 57.7% of our direct written premiums. We also offer insurance for commercial vehicles used for business purposes, insuring individual vehicles as well as commercial fleets, which represented 14.9% of our direct written premium in 2016. We are the third largest private passenger automobile carrier and second largest commercial automobile carrier in Massachusetts, capturing approximately 9.7% and 14.7% of the respective markets. In 2016, we experienced a 7.5% increase in our average written premium per commercial auto exposure. 4 Safety Insurance Annual Report 2016 201120122013201420112012201320142011201220132014201520152015201220132014201520162012201320142015201620122013201420152016EXPOSURES EXPOSURES EXPOSURES 526,388 532,503 537,169 545,006 540,515 147,882 139,969 130,563 158,942 162,703 40,987 42,320 37,889 35,033 32,224 HOME WRITTEN PREMIUMS (Dollars in Thousands) WRITTEN PREMIUMS (Dollars in Thousands) WRITTEN PREMIUMS (Dollars in Thousands) 535,534 553,434 567,951 576,200 588,486 131,247 144,925 161,388 170,410 182,128 29,439 33,321 36,346 39,120 40,945 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 WE WRITE POLICIES ON HOMES, CONDOMINIUMS, AND APARTMENTS and offer a broad selection of coverage forms for qualified policyholders. Over the past five years, we have focused on the growth of the homeowners business and have seen an increase in direct written premium of 38.8% from 2012 to 2016. Homeowners’ business represents 22.4% of our total direct written premium. In 2016, we experienced a 7.4% increase in our average written premium per exposure. Safety Insurance Annual Report 2016 5 201120122013201420112012201320142011201220132014201520152015201220132014201520162012201320142015201620122013201420152016EXPOSURES EXPOSURES EXPOSURES 526,388 532,503 537,169 545,006 540,515 COMMERCIAL PROPERTY PRODUCTS 32,224 130,563 35,033 158,942 162,703 147,882 139,969 40,987 42,320 37,889 WRITTEN PREMIUMS (Dollars in Thousands) WRITTEN PREMIUMS (Dollars in Thousands) WRITTEN PREMIUMS (Dollars in Thousands) 535,534 553,434 567,951 576,200 588,486 131,247 144,925 161,388 170,410 182,128 29,439 33,321 36,346 39,120 40,945 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 WE OFFER BUSINESS OWNER POLICIES providing liability and property coverage to small and medium-sized commercial accounts. For larger commercial accounts, or clients that require more specialized or tailored coverages, we offer a commercial package policy program that covers a more extensive range of business enterprises. In 2016, Commercial Property Products experienced a 4.7% increase in direct written premiums as compared to 2015. 6 Safety Insurance Annual Report 2016 201120122013201420112012201320142011201220132014201520152015201220132014201520162012201320142015201620122013201420152016f (cid:95) (cid:134) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2016 Or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 000-50070 SAFETY INSURANCE GROUP, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 13-4181699 (I.R.S. Employer Identification No.) 20 Custom House Street, Boston, Massachusetts 02110 (Address of principal executive offices including zip code) (617) 951-0600 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Shares, $0.01 par value per share Name of each exchange on which registered NASDAQ Global Select Market Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:134) No (cid:95) Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act. Yes (cid:134) No (cid:95) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:95) No (cid:134) Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (cid:95) No (cid:134) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:95) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer (cid:95) Accelerated filer (cid:134) Non-accelerated filer (cid:134) (Do not check if a smaller reporting company) Smaller reporting company (cid:134) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:134) No (cid:95) The aggregate market value of the registrant’s voting and non-voting common equity (based on the closing sales price on NASDAQ) held by non-affiliates of the registrant as of June 30, 2016, was approximately $ 874,517,991. As of February 16, 2017 there were 15,150,619 Common Shares with a par value of $0.01 per share outstanding. Portions of the registrant’s definitive proxy statement for its Annual Meeting of Shareholders to be held on May 24, 2017, which Safety Insurance Group, Inc. (the “Company”, “we”, “our”, “us”) intends to file within 120 days after its December 31, 2016 year-end, are incorporated by reference into Part II and Part III hereof. Documents Incorporated by Reference SAFETY INSURANCE GROUP, INC. Table of Contents Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services Exhibits, Financial Statement Schedules PART I. Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. PART II. Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. PART III. Item 10. Item 11. Item 12. Item 13. Item 14. PART IV. Item 15. SIGNATURES Page 1 24 30 30 30 30 31 33 35 60 61 95 95 96 97 97 97 97 97 97 106 In this Form 10-K, all dollar amounts are presented in thousands, except average premium, average claim and per claim data, share, and per share data. ITEM 1. BUSINESS PART I. General We are a leading provider of private passenger automobile insurance in Massachusetts. In addition to private passenger automobile insurance (which represented 57.7% of our direct written premiums in 2016), we offer a portfolio of property and casualty insurance products, including commercial automobile, homeowners, dwelling fire, umbrella and business owner policies. Operating exclusively in Massachusetts, New Hampshire and Maine through our insurance company subsidiaries, Safety Insurance Company ("Safety Insurance"), Safety Indemnity Insurance Company ("Safety Indemnity") and Safety Property and Casualty Insurance Company ("Safety P&C") (together referred to as the "Insurance Subsidiaries"), we have established strong relationships with independent insurance agents, who numbered 890 in 1,101 locations throughout these three states during 2016. We have used these relationships and, in particular, our extensive knowledge of the Massachusetts market to become the third largest private passenger automobile carrier, capturing an approximate 9.7% share of the Massachusetts private passenger automobile insurance market, and the second largest commercial automobile carrier, with a 14.7% share of the Massachusetts commercial automobile insurance market in 2016 according to statistics compiled by Commonwealth Automobile Reinsurers ("CAR"). We also are the fourth largest homeowners insurance carrier in Massachusetts with a 7.2% share of that market. We were ranked the 48th largest automobile writer in the country according to A.M. Best, based on 2015 direct written premiums. We were incorporated under the laws of Delaware in 2001, but through our predecessors, we have underwritten insurance in Massachusetts since 1979. Our Insurance Subsidiaries began writing insurance in New Hampshire during 2008. During the years ended December 31, 2016, 2015, and 2014, the Company wrote $26,128, $22,731, and $18,755 in direct written premiums, respectively, and approximately 26,626, 24,364 and 20,626 policies, respectively, in New Hampshire. On February 9, 2015, the Insurance Subsidiaries each received a license to begin writing our property and casualty insurance products in the state of Maine. We began writing business in Maine in 2016. Website Access to Information The Internet address for our website is www.SafetyInsurance.com. All of our press releases and United States Securities and Exchange Commission ("SEC") reports are available for viewing or download at our website. These documents are made available as soon as reasonably practicable after each press release is made and SEC report is filed with, or furnished to, the SEC. Copies of any current public information about our company is available without charge upon written, telephone, faxed or e-mailed request to the Office of Investor Relations, Safety Insurance Group, Inc., 20 Custom House Street, Boston, MA 02110, Tel: 877-951-2522, Fax: 617-603-4837, or e-mail: InvestorRelations@SafetyInsurance.com. The materials on our website are not part of this report on Form 10-K nor are they incorporated by reference into this report and the URL above is intended to be an inactive textual reference only. Our Competitive Strengths We Have Strong Relationships with Independent Agents. In 2015, Independent agents accounted for approximately 62.3% of the Massachusetts automobile insurance market measured by direct written premiums as compared to approximately 31.0% nationwide, based on data made available by A.M. Best. For that reason, our strategy is centered around, and we sell exclusively through, a network of independent agents, who numbered 890 in 1,101 1 locations throughout Massachusetts, New Hampshire and Maine during 2016. In order to support our independent agents and enhance our relationships with them, we: (cid:120) (cid:120) (cid:120) provide our agents with a portfolio of property and casualty insurance products at competitive prices to help them effectively address the insurance needs of their clients; provide our agents with a variety of technological resources which enable us to deliver superior service and support to them; and offer our agents competitive commission schedules and profit sharing programs. Through these measures, we strive to become the preferred provider of the independent agents in our agency network and capture a growing share of the total insurance business written by these agents in Massachusetts, New Hampshire and Maine. We must compete with other insurance carriers for the business of independent agents. We Have a History of Profitable Operations. In 35 out of 36 years since our inception in 1979, we have been profitable. The lone year in which we did not have profits was 2015 when we were impacted by claims related to the highest recorded snowfall totals in Massachusetts history. We have achieved our profitability, among other things, by: (cid:120) maintaining a consistent number of private passenger automobile exposures we underwrite, which totaled 457,939 in 2016 compared to 477,201 in 2012; (cid:120) (cid:120) growing our commercial automobile exposures we underwrite, which totaled 71,222 in 2016 compared to 55,302 in 2012; growing our homeowner book of business which had total exposures of 161,889 in 2016 compared to 139,969 in 2012; (cid:120) maintaining a combined ratio that is typically below industry averages (refer to Insurance Ratios under Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion on insurance ratios); (cid:120) (cid:120) (cid:120) taking advantage of the institutional knowledge our management has amassed during its long tenure in the industry; introducing new lines and forms of insurance products; investing in technology to simplify internal processes and enhance our relationships with our agents; and (cid:120) maintaining a high-quality investment portfolio. We Are a Technological Leader. We have dedicated significant human and financial resources to the development of advanced information systems. Our technology efforts have benefited us in two distinct ways. First, we continue to develop technology that empowers our independent agent customers by making it easier for them to transact business with their clients and with the Insurance Subsidiaries. In our largest business line, private passenger automobile insurance, our agents now submit approximately 99.0% of all applications for new policies or endorsements for existing policies to us electronically through our proprietary information portal, the Agents Virtual Community ("AVC"). Our agents also can submit commercial automobile and homeowners insurance policies electronically over the AVC. Second, our investment in technology has allowed us to re-engineer internal back office processes to provide more efficient service at a lower cost. We Have an Experienced, Committed and Knowledgeable Management Team. Our senior management team has an average of over 28 years of experience with Safety and a demonstrated ability to operate successfully within the property and casualty market. Our senior management team along with our Board of Directors, collectively owns approximately 5.5% of the common stock of Safety Insurance Group, Inc. on a fully diluted basis. 2 Our Strategy To achieve our goal of increasing shareholder value, our strategy is to maintain and develop strong independent agent relationships by providing our agents with a full package of insurance products and information technology services. We believe this strategy will allow us to: (cid:120) (cid:120) (cid:120) further penetrate the Massachusetts, New Hampshire and Maine markets in all lines of business; implement rates, forms and billing options that allow us to cross-sell private passenger automobile, homeowners, dwelling fire, and personal umbrella policies in the personal lines market and commercial automobile, business owner policies, commercial property package and commercial umbrella policies in the commercial lines market in order to capture a larger share of the total Massachusetts, New Hampshire and Maine property and casualty insurance business written by each of our independent agents; and continue to expand our technology to enable independent agents to more easily serve their customers and conduct business with us, thereby strengthening their relationships with us. Property and Casualty Insurance Market Introduction. We are licensed by the respective state insurance departments to transact property and casualty insurance in Massachusetts, New Hampshire, and Maine. All of our business is regulated by these departments, with the most extensive oversight from our domestic regulator, the Massachusetts Division of Insurance. Products Historically, we have focused on underwriting private passenger automobile insurance, which is written through our subsidiary, Safety Insurance. In 1989, we formed Safety Indemnity to offer commercial automobile insurance at preferred rates. Since 1997, we have expanded the breadth of our product line in order for agents to address a greater portion of their clients' insurance needs by selling multiple products. Homeowners, business owners’ policies, personal umbrella, dwelling fire and commercial umbrella insurance are written by Safety Insurance at standard rates, and written by Safety Indemnity at preferred rates. In December 2006, we formed Safety P&C to offer homeowners and commercial automobile insurance at ultra preferred rates. The table below shows our premiums in each of these product lines for the periods indicated and the portions of our total premiums each product line represented. Direct Written Premiums Private passenger automobile Commercial automobile Homeowners Business owners Personal umbrella Dwelling fire Commercial umbrella Total Our product lines are as follows: 2016 467,845 120,641 182,128 22,933 7,693 9,256 1,063 811,559 $ $ Years Ended December 31, 2015 57.7 % $ 14.9 22.4 2.8 1.0 1.1 0.1 100.0 % $ 468,187 108,013 170,410 22,223 6,925 8,920 1,052 785,730 59.6 % $ 13.8 21.7 2.8 0.9 1.1 0.1 100.0 % $ 2014 472,553 95,398 161,388 20,751 6,508 8,104 983 765,685 61.7 % 12.5 21.1 2.7 0.8 1.1 0.1 100.0 % Private Passenger Automobile (57.7% of 2016 direct written premiums). Private passenger automobile insurance is our primary product. These policies provide coverage for bodily injury and property damage to others, no- fault personal injury coverage for the insured/insured's car occupants, and physical damage coverage for an insured's own vehicle for collision or other perils. We filed and were approved for a Massachusetts private passenger automobile insurance rate increase of 5.8% effective July 15, 2016. We filed and were approved for a New Hampshire private 3 passenger automobile rate increase of 4.1%, which was effective December 1, 2016. We are writing private passenger automobile insurance policies in Maine with our initially filed rates. Commercial Automobile (14.9% of 2016 direct written premiums). Commercial automobile policies provide coverage for bodily injury and property damage to others, no-fault personal injury coverage, and physical damage coverage for an insured's own vehicle for collision or other perils resulting from the ownership or use of commercial vehicles in a business. We offer insurance for commercial vehicles used for business purposes such as private passenger-type vehicles, trucks, tractors and trailers, and insure individual vehicles as well as commercial fleets. We filed and were approved for a Massachusetts commercial automobile insurance rate increase of 5.5% effective March 15, 2016. We filed and were approved for a New Hampshire commercial automobile insurance rate increase of 7.9% effective August 1, 2015. We are writing commercial automobile insurance policies in Maine with our initially filed rates. Homeowners (22.4% of 2016 direct written premiums). We offer a broad selection of coverage forms for qualified policyholders. Homeowners policies provide coverage for losses to a dwelling and its contents from numerous perils, and coverage for liability to others arising from ownership or occupancy. We write policies on homes, condominiums, and apartments. We filed and were approved for a Massachusetts rate increase of 3.6% which was effective November 1, 2016. We filed and were approved for a New Hampshire homeowners rate increase of 4.4%, which was effective December 1, 2016. We are writing homeowners insurance policies in Maine with our initially filed rates. Business Owners Policies (2.8% of 2016 direct written premiums). We serve eligible small and medium sized commercial accounts with a program that covers apartments and residential condominiums; mercantile establishments, including limited cooking restaurants; offices, including office condominiums; processing and services businesses; special trade contractors; and wholesaling businesses. Business owner policies provide liability and property coverage for many perils, including business interruption from a covered loss. Equipment breakdown coverage is automatically included, and a wide range of additional coverage is available to qualified customers. We write policies for business owners at standard rates with qualifying risks eligible for preferred lower rates. Personal Umbrella (1.0% of 2016 direct written premiums). We offer personal excess liability coverage over and above the limits of individual automobile, watercraft, and homeowner's insurance policies to clients. We write policies at standard rates with limits of $1,000 to $5,000. Dwelling Fire (1.1% of 2016 direct written premiums). We underwrite dwelling fire insurance, which is a limited form of a homeowner's policy for non-owner occupied residences. We write all forms of dwelling fire coverage at standard rates with qualifying risks eligible for preferred lower rates. Commercial Umbrella (0.1% of 2016 direct written premiums). We offer an excess liability product to clients for whom we underwrite both commercial automobile and business owner policies. The program is directed at commercial automobile risks with private passenger-type automobiles or light and medium trucks. We write commercial umbrella policies at standard rates with limits ranging from $1,000 to $5,000. Inland Marine (Included in our Homeowners direct written premiums). We offer inland marine coverage as an endorsement for all homeowners and business owner policies, and as part of our commercial package policy. Inland marine provides additional coverage for jewelry, fine arts and other items that a homeowners or business owner policy would limit or not cover. Scheduled items valued at more than $5 must meet our underwriting guidelines and be appraised. Watercraft (Included in our Homeowners direct written premiums). We offer watercraft coverage for small and medium sized pleasure craft with maximum lengths of 32 feet, valued at less than $75 and maximum speed of 39 knots. We write this coverage as an endorsement to our homeowner's policies. 4 In the wake of the September 11, 2001 tragedies, the insurance industry also was impacted by terrorism, and we have filed and received approval for a number of terrorism endorsements, which limit our liability and property exposure according to the Terrorism Risk Insurance Act of 2002, the Terrorism Risk Insurance Extension Act of 2005, the Terrorism Risk Insurance Program Reauthorization Act of 2007 and the Terrorism Risk Insurance Program Reauthorization of 2015. See "Reinsurance," discussed below. Distribution We distribute our products exclusively through independent agents, unlike some of our competitors who use multiple distribution channels. We believe this gives us a competitive advantage with the agents. With the exception of personal automobile business assigned to us by the Massachusetts Automobile Insurance Plan (“MAIP”) or written through CAR’s commercial automobile Servicing Carrier program, we do not accept business from insurance brokers. Our voluntary agents have authority pursuant to our voluntary agency agreement to bind our Insurance Subsidiaries for any coverage that is within the scope of their authority. We reserve the ability to cancel any coverage bound, in accordance with applicable law. In total, our independent agents numbered 890 and had 1,101 offices (some agencies have more than one office) and approximately 8,456 customer service representatives during 2016. Voluntary Agents. In 2016, we obtained approximately 91.6% of our direct written premiums for automobile insurance and 100% of our direct written premiums for all of our other lines of business through our voluntary agents. As of December 31, 2016, we had agreements with 730 voluntary agents. Our voluntary agents are located in all regions of Massachusetts, New Hampshire and Maine. We look for agents with profitable portfolios of business. To become a voluntary agent for our Company, we generally require that an agency: (i) have been in business for at least five years; (ii) have exhibited a three year private passenger average ratio of losses, excluding loss adjustment expenses, to net earned premiums ("pure loss ratio") of 65.0% or less on the portion of the agent's portfolio that we would underwrite; (iii) make a commitment for us to underwrite at least 300 policies from the agency during the first twelve months after entering an agreement with us; and (iv) offer multiple product lines. Every year, we review the performance of our agents during the prior year. If an agent fails to meet our profitability standards, we try to work with the agent to improve the profitability of the business it places with us. We generally terminate contracts each year with a few agencies, which, despite our efforts, have been consistently unable to meet our standards. Although independent agents usually represent several unrelated insurers, our goal is to be one of the top two insurance companies represented in each of our agencies, as measured by premiums. No individual agency generated more than 5.0% of our direct written premiums in 2016. Massachusetts law guarantees that CAR provides motor vehicle insurance coverage to all qualified applicants. Under the MAIP, personal automobile policies are assigned to us for three years, unless the policyholder is offered a voluntary policy by another insurer. All Massachusetts agents are authorized to submit eligible business to the MAIP for random assignment to a servicing carrier such as Safety Insurance. We are allocated all private passenger residual market business through the MAIP. CAR runs a reinsurance pool for ceded commercial automobile policies through the Commercial Automobile Program (the “Commercial Automobile Program”). CAR has appointed Safety and three other servicing carriers to process ceded commercial automobile insurance. Safety was reappointed for this program beginning January 1, 2017 for an additional five-year term. Approximately $171,000 of ceded premium is spread equitably among the four servicing carriers. Subject to the Commissioner's review, CAR sets the premium rates for commercial automobile policies reinsured through CAR and this reinsurance pool can generate an underwriting result that is a profit or deficit based upon CAR's rate level. This underwriting result is allocated among every Massachusetts commercial automobile insurance company, including us, based on a company's commercial automobile voluntary market share. CAR also runs a reinsurance pool for Taxi, Limousine and Car Service risks (the "Taxi/Limo Program"). CAR reappointed Safety as one of the two servicing carriers for this program beginning January 1, 2017 for an additional five- year term. Approximately $11,300 of ceded premium was spread equitably between the two servicing carriers. 5 We are assigned independent agents by CAR who can submit commercial business to us in the Commercial Automobile Program and the Taxi/Limo Program, and we classify those agents as Exclusive Representative Producers (“ERPs”). The table below shows our direct written exposures in each of our product lines for the periods indicated and the change in exposures for each product line. Line of Business Private passenger automobile: Voluntary agents MAIP Total private passenger automobile Commercial automobile: Voluntary agents ERP Total commercial automobile Other: Homeowners Business owners Personal umbrella Dwelling fire Commercial umbrella Total other Total Total voluntary agents 2016 Years Ended December 31, 2015 2014 Exposures Change Exposures Change Exposures Change 446,939 11,000 457,939 61,315 9,907 71,222 161,890 10,385 23,952 7,270 694 204,191 733,352 712,445 (3.5)% 22.1 (3.0) 0.5 30.4 3.8 (0.5) 2.2 (0.5) (1.5) 0.6 (0.4) (1.6) (2.3) 462,917 9,007 471,924 60,995 7,596 68,591 162,703 10,166 24,083 7,381 690 205,023 745,538 728,935 (1.8)% 4.6 (1.7) 4.2 20.6 5.8 2.4 4.4 2.6 4.0 3.0 2.6 0.1 (0.2) 471,546 8,611 480,157 58,550 6,299 64,849 158,942 9,739 23,483 7,095 670 199,929 744,935 730,025 1.1 % (10.4) 0.9 6.6 (1.8) 5.7 7.5 3.8 9.0 12.6 2.8 7.6 3.0 3.3 Our total written exposures decreased by 1.6% for the year ended December 31, 2016. Our commercial automobile exposures increased by 3.8% in 2016. Our other than auto exposures slightly decreased by 0.4% in 2016 primarily as a result of our voluntary agents' efforts to sell multiple products to their clients and our pricing strategy of offering account discounts to policyholders who insure both their home and automobile with us. In 2016, 58.4% of the private passenger automobile exposures we insure had an other than private passenger policy with us, compared to 55.8% and 55.4% in 2015 and 2014, respectively. In addition, 81.9% of our homeowners’ policyholders had a matching automobile policy with us in 2016 compared to 81.8% in 2015 and 83.2% in 2014. Marketing We view the independent agent as our customer and business partner. As a result, a component of our marketing efforts focuses on developing interdependent relationships with leading Massachusetts, New Hampshire and Maine agents that write profitable business and positioning ourselves as the preferred insurance carrier of those agents, thereby receiving a larger portion of each agent's aggregate business. Our principal marketing strategies to agents are: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) to offer a range of products, which we believe enables our agents to meet the insurance needs of their clients; to price our products competitively, including offering discounts when and where appropriate for safer drivers for our personal automobile products, loss-free credits for our homeowner products and also offering account discounts for policyholders that have more than one policy with us; to design, price and market our products to our agents for their customers to place all their insurance with us; to offer agents competitive commissions, with incentives for placing their more profitable business with us; and to provide a level of support and service that enhances the agent's ability to do business with its clients and with us. 6 We have a comprehensive branding campaign using a variety of radio, television, internet and print advertisements. Commission Schedule and Profit Sharing Plan. We have several programs designed to attract profitable new business from agents by paying them competitive commissions. We recognize our top performing agents by making them members of either our Chairman's Elite, Chairman's, President's, Executive's or Preferred Agent's Club. In 2016, members of these Clubs received a commission of up to 18.0% of premiums for each new private passenger auto policy, up to 22.0% of premiums for each new homeowner policy, up to 20.0% for each new commercial auto policy and up to 22.0% for each new commercial property policy. Further, we have a competitive agency incentive commission program under which we pay agents up to 7.5% of premiums based on the loss ratio on their business. Service and Support. We believe that the level and quality of service and support we provide helps differentiate us from other insurers. We have made a significant investment in information technology designed to facilitate our agents' business. Our AVC website helps agents manage their work efficiently. We provide a substantial amount of information online that agents need to serve their customers, such as information about the status of new policies, bill payments and claims. Providing this type of content reduces the number of customer calls we receive and empowers the agent's customer service representatives by enabling them to respond to customers' inquiries while the customer is on the telephone. Finally, we believe that the knowledge and experience of our employees enhances the quality of support we provide. Underwriting Our underwriting department is responsible for a number of key decisions affecting the profitability of our business, including: (cid:120) (cid:120) (cid:120) (cid:120) pricing of our private passenger automobile, commercial automobile, homeowners, dwelling fire, personal umbrella, business owners, commercial umbrella and commercial package products; developing new products, coverages, forms and discounts, as well as expansion into new states; determining underwriting guidelines for all our products; and evaluating whether to accept transfers of a portion of an existing or potential new agent's portfolio from another insurer. Pricing. Subject to the applicable state insurance department’s review, we set rates for all of our products using our own loss experience, industry loss cost data, residual market deficits, catastrophe modeling and prices charged by our competitors. We have three pricing segments for most products, utilizing Safety Insurance for standard rate, Safety Indemnity for preferred rates and Safety P&C for ultra preferred rates. Massachusetts Residual Automobile Insurance Markets. Commonwealth Automobile Reinsurers (“CAR”) establishes the rates for personal automobile policies assigned to carriers through the Massachusetts Automobile Insurance Plan (“MAIP”). In accordance with Massachusetts law, insurers may only charge MAIP policyholders the lower of the MAIP rate or the company's competitive voluntary market rate. CAR also sets rates for commercial automobile policies, including taxi/limousine/car service policies, reinsured through the CAR residual market pool. All commercial automobile business and taxi/limousine/car service business that is not written in the voluntary market in Massachusetts is apportioned to one of these servicing carriers who handle that business on behalf of CAR. Every Massachusetts commercial automobile insurer must bear a portion of the losses of the total commercial reinsurance pool that is serviced by the approved servicing carriers. We are one of four servicing carriers in CAR’s Commercial Automobile Program and one of two servicing carriers in CAR’s Taxi/Limo Program. 7 Bulk Policy Transfers and New Voluntary Agents. From time to time, we receive proposals from an existing voluntary agent to transfer a portfolio of the agent's business from another insurer to us. Our underwriters model the profitability of these portfolios before we accept these transfers. We generally require any new voluntary agent to commit to transfer a portfolio to us consisting of at least 300 policies. Policy Processing. Our underwriting department assists in processing policy applications, endorsements, renewals and cancellations. Our proprietary software, Safety Express, provides our agents with new business and endorsement entry, real-time policy issuance for personal lines, immediate printing of declarations pages in agents' offices, policy downloads to most major agency management systems and data imports from Boston Software's WinRater (Massachusetts) and Vertafore's PL Rater (New Hampshire and Maine). In personal lines, our agents now submit approximately 99% of all applications for new policies or endorsements for existing policies through Safety Express. Rate Pursuit. We aggressively monitor all insurance transactions to make sure we receive the correct premium for the risk insured. We accomplish this by verifying pricing criteria. For automobile policies, we verify proper classification of drivers, the make, model, and age of insured vehicles, and the availability of discounts. We also verify that operators are properly listed and classified, assignment of operators to vehicles, and vehicle garaging. In our homeowners and dwelling fire lines, we use third party software to evaluate property characteristics and we conduct property inspections. We have a premium audit program in our business owners program, as well as other loss control reviews for additional commercial lines of business. Product Management. The Product Management department is responsible for the overall review and updating of our products. The department maintains an annual schedule where each line of business is reviewed and benchmarked with our major competitors. Product offerings, discounts, rate levels and underwriting guidelines are reviewed and updates are performed as required. The department also is responsible for updating producer materials such as rate and rule manuals, and underwriting guidelines as well as promotional materials. In conjunction with the underwriting operations area, the department works with third party vendors that assist with risk information gathering and rate pursuit for in force policies. The department also provides product training and general marketplace education for the organization. Legal and Regulatory Compliance. The Legal and Regulatory Compliance department provides legal and compliance support to all business units within the company. The department serves as the primary liaison with regulators, government, industry trade associations and residual market mechanisms. The department also provides legal support to all areas of the company, including general corporate matters and vendor contracting. The department monitors legal and regulatory changes affecting the enterprise and provides guidance on how to comply with those changes. The department additionally reviews business unit operations to identify and address compliance vulnerabilities. Data Governance. The Data Governance department uses Safety’s data assets to support decision-making in areas including underwriting, pricing, claims, reserving, reinsurance and assessing catastrophe risks. Data analytics are used to analyze and estimate exposures, loss trends and other risks, and are leveraged to improve company business performance and customer satisfaction. The focuses of our information technology (IT) efforts are: Technology (cid:120) (cid:120) to support the strategic goals, objectives and business needs of the Company by aligning our IT annual goals with those of the business assuring that IT resources are being utilized efficiently; to constantly re-engineer internal processes to allow more efficient operations, resulting in lower operating costs; 8 (cid:120) (cid:120) to make it easier for independent agents to transact business with us; and to enable agents to efficiently provide their clients with a high level of service. We believe that our technology initiatives have increased revenue and decreased costs. For example, these initiatives have allowed us to reduce the number of call-center transactions which we perform, and to transfer many manual processing functions from our internal operations to our independent agents. We also believe that these initiatives have contributed to overall increases in productivity. Internal Applications (Intranet) Our employees access our proprietary applications through our corporate intranet. Our intranet applications streamline internal processes and improve overall operational efficiencies in areas including: Claims. Our claims workload management application allows our claims and subrogation adjusters to better manage injury claims. Subrogation refers to the process by which we are reimbursed by other insurers for claims costs we incur due to the fault of their insureds. The use of this application has reduced the time it takes for us to respond to and settle casualty claims, which we believe helps reduce the total amount of our claims expense. The automated adjuster assignment system categorizes our new claims by severity and assigns them to the appropriate adjuster responsible for investigation. Once assigned, the integrated workload management tools facilitate the work of promptly assigning appraisers, investigating liability, issuing checks and receiving subrogation receipts. The RadicalGlass.com application allows our claims department to contain glass costs by increasing the windshield repair to replacement ratio. For every windshield that is repaired rather than replaced there is an average savings of approximately $315 per windshield claim. Our first VIP Claims Center was introduced during 2006 to provide increased service levels to our independent insurance agents and their clients. We currently operate three VIP Claims Centers which use a network of rental car centers and auto body repair shops to provide a higher level of service to the clients of the independent insurance agents while reducing costs, such as rental expense, through reduced cycle times. Billing. Proprietary billing systems, integrated with the systems of our print and lock-box vendors, expedite the processing and collection of premium receipts and finance charges from agents and policyholders. We believe the sophistication of our direct bill system helps us to limit our bad debt expense. Our bad debt expense as a percentage of direct written premiums was 0.1% in both 2016 and 2015. External Applications Our Agent Technology offerings are centralized within our agency portal and feature PowerDesk and Safety Express. PowerDesk is a web based application that allows for billing inquiry, agent payments on behalf of their policyholders, policy inquiry and claims inquiry. Safety Express provides agents with new business and endorsement entry, real time policy issuance for personal lines, immediate printing of declarations pages in agents' offices, policy downloads to most major agency management systems and data imports from Boston Software's WinRater (Massachusetts) and Vertafore's PL Rater (New Hampshire and Maine). In addition, we provide our agents with commission and claims download for all lines of business, Transformation Station and Transact Now Inquires, e-Claims online claims reporting, e-View daily transaction reports and e-Docs online electronic document file cabinet. We also provide electronic billing (eBill), online bill pay (including credit and debit cards), online declarations pages, billing inquiry, claims inquiry, auto and homeowners claims first notice of loss, online auto insurance cards, and bill pay reminder alerts to our agent's policyholders through our public website, SafetyInsurance.com. We have also updated our telephone system to provide a voice activated phone directory, automated billing inquiry and payments, and call center screen pop-up technology. 9 We additionally provide policyholders mobile technology through our Safety Mobile App for iPhone and Android devices. Safety Mobile provides consumers with access to their agent information, bill pay capabilities, the ability to report an automobile or homeowners claim and access to their insurance card, among other features. Claims Because of the unique differences between the management of casualty claims and property claims, we use separate departments for each of these types of claims. Casualty Claims We have adopted stringent claims settlement procedures, which include guidelines that establish settlement ranges for soft tissue injuries, which constituted approximately 66% of our bodily injury claims in 2016. If we are unable to settle these claims within our pricing guidelines, we explore other cost effective options including alternative disputes resolutions and/or litigation. We believe that these procedures result in providing our adjusting staff with a uniform approach to negotiation. We believe an important component of handling claims efficiently is prompt investigation and settlement. We find that faster claims settlements often result in less expensive claims settlements. Our E-Claim reporting system is an online product that reduces the time it takes for agents to notify our adjusters about claims, thereby enabling us to contact third-party claimants and other witnesses quickly. Our insureds are able to report claims directly by phone, web or mobile application. In addition, we utilize an after- hours reporting vendor to ensure that new claims can be reported 24 hours per day and 365 days per year. We believe that early notification results in our adjusters conducting prompt investigations of claims and compiling more accurate information about those claims. Our claims workload management software also assists our adjusters in handling claims quickly. We believe the structure of our casualty claims unit allows us to respond quickly to claimants. Comprising 120 people, the department is organized into distinct claim units that contain loss costs on injury claims. Field adjusters are located geographically for prompt response to claims, with our litigation unit focused on managing loss costs and litigation expenses for serious injury claims. Additionally, we utilize a special unit to investigate fraud in connection with casualty claims. This special unit has seven dedicated employees including five field investigators. In cases where adjusters suspect fraud in connection with a claim, we deploy this special unit to conduct investigations. We deny payment to claimants in cases in which we have succeeded in accumulating sufficient evidence of fraud. Property Claims Our property claims unit handles property claims arising in our private passenger and commercial automobile, homeowners and other insurance lines. Process automation has streamlined our property claims function. Many of our property claims are now handled by our agents through AVC using our Power Desk software application. As agents receive calls from claimants, Power Desk permits the agent to immediately send information related to the claim directly to us and to an independent appraiser selected by the agent to value the claim. Once we receive this information, an automated system redirects the claim to the appropriate internal adjuster responsible for investigating the claim to determine liability. Upon determination of liability, the system automatically begins the process of seeking a subrogation recovery from another insurer, if liable. We believe this process results in a shorter time period from when the claimant first contacts the agent to when the claimant receives a claim payment, while enabling our agents to build credibility with their clients by responding to claims in a timely and efficient manner. We benefit from decreased labor expenses from the need for fewer employees to handle the reduced property claims call volume. 10 Another important factor in keeping our overall property claims costs low is collecting subrogation recoveries. We track the amounts we pay out in claims costs and identify cases in which we believe we can reclaim some or all of those costs through the use of our automated workload management tools. Reserves Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the loss to the insurer and the insurer's payment of that loss. To recognize liabilities for unpaid losses, insurers establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the expenses associated with investigating and paying the losses, or loss adjustment expenses. Every quarter, we review and establish our reserves. Regulations promulgated by the Commissioner require us to annually obtain a certification from either a qualified actuary or an approved loss reserve specialist who may be one of our employees that our loss and loss adjustment expenses reserves are reasonable. When a claim is reported, claims personnel establish a "case reserve" for the estimated amount of the ultimate payment. The amount of the reserve is primarily based upon an evaluation of the type of claim involved, the circumstances surrounding each claim and the policy provisions relating to the loss. The estimate reflects informed judgment of such personnel based on general insurance reserving practices and on the experience and knowledge of the claims person. During the loss adjustment period, these estimates are revised as deemed necessary by our claims department based on subsequent developments and periodic reviews of the cases. In accordance with industry practice, we also maintain reserves for estimated losses incurred but not yet reported. Incurred but not yet reported reserves are determined in accordance with commonly accepted actuarial reserving techniques on the basis of our historical information and experience. We make adjustments to incurred but not yet reported reserves quarterly to take into account changes in the volume of business written, claims frequency and severity, our mix of business, claims processing and other items that can be expected to affect our liability for losses and loss adjustment expenses over time. When reviewing reserves, we analyze historical data and estimate the impact of various loss development factors, such as our historical loss experience and that of the industry, legislative enactments, judicial decisions, legal developments in imposition of damages, and changes and trends in general economic conditions, including the effects of inflation. There is no precise method, however, for evaluating the impact of any specific factor on the adequacy of reserves, because the eventual development of reserves is affected by many factors. After taking into account all relevant factors, management believes that our provision for unpaid losses and loss adjustment expenses at December 31, 2016 is adequate to cover the ultimate net cost of losses and claims incurred as of that date. Management determines its loss and loss adjustment expense ("LAE") reserves estimates based upon the analysis of the Company's actuaries. Management has established a process for the Company's actuaries to follow in establishing reasonable reserves. The process consists of meeting with our claims department, establishing ultimate incurred losses by using development models accepted by the actuarial community, and reviewing the analysis with management. The Company's estimate for loss and LAE reserves, net of the effect of ceded reinsurance, ranges from a low of $436,208 to a high of $493,754 as of December 31, 2016. The Company's net loss and LAE reserves, based on our actuaries' best estimate, were set at $476,597 as of December 31, 2016. The ultimate liability may be greater or less than reserves carried at the balance sheet date. Establishment of appropriate reserves is an inherently uncertain process, and there can be no certainty that currently established reserves will prove adequate in light of subsequent actual experience. To the extent that reserves are inadequate and are strengthened, the amount of such increase is treated as a charge to earnings in the period that the deficiency is recognized. To the extent that reserves are redundant and are released, the amount of the release is a credit to earnings in the period the redundancy is recognized. We do not discount any of our reserves. 11 The following table presents development information on changes in the reserves for losses and LAE of our Insurance Subsidiaries for each year in the three year period ended December 31, 2016. Reserves for losses and LAE at beginning of year Less receivable from reinsurers related to unpaid losses and LAE Net reserves for losses and LAE at beginning of year Incurred losses and LAE, related to: Current year Prior years Total incurred losses and LAE Paid losses and LAE related to: Current year Prior years Total paid losses and LAE Net reserves for losses and LAE at end of period Plus receivable from reinsurers related to unpaid losses and LAE Reserves for losses and LAE at end of period Year Ended December 31, 2016 2015 2014 $ $ 553,977 (68,261) 485,716 538,881 (45,448) 493,433 328,046 174,506 502,552 476,597 83,724 560,321 $ $ 482,012 (61,245) 420,767 642,882 (30,313) 612,569 415,256 132,364 547,620 485,716 68,261 553,977 $ $ 455,014 (60,346) 394,668 513,734 (37,368) 476,366 316,979 133,288 450,267 420,767 61,245 482,012 At the end of each period, the reserves were re-estimated for all prior accident years. Our prior year reserves decreased by $45,448, $30,313, and $37,368 for the years ended 2016, 2015, and 2014, respectively. The decreases in prior year reserves in 2016 resulted from re-estimations of prior year’s ultimate loss and LAE liabilities and are primarily composed of reductions of $25,019 in our retained automobile reserves and $11,648 in our retained homeowner’s reserves. The decreases in prior year reserves in 2015 resulted from re-estimations of prior year’s ultimate loss and LAE liabilities and are primarily composed of reductions of $18,644 in our retained automobile reserves and $7,964 in our retained homeowner reserves. The decrease in prior year reserves during 2014 is primarily composed of reductions of $23,272 in our retained automobile reserves and $8,804 in our retained homeowners reserves. It is not appropriate to extrapolate future favorable or unfavorable development of reserves from this past experience. Our private passenger automobile line of business prior year reserves decreased by $18,553 for the year ended December 31, 2016, primarily due to improved retained private passenger results of $16,229 for the accident years 2010 through 2015. Our private passenger automobile line of business prior year reserves decreased by $14,411 for the year ended December 31, 2015, primarily due to improved retained private passenger results of $12,716 for accident years 2009 through 2012. Our private passenger automobile line of business reserves decreased by $20,815 for the year ended December 31, 2014, primarily due to improved retained private passenger results of $17,789 for accident years 2007 through 2012. The improved retained private passenger results were primarily due to fewer incurred but not yet reported claims than previously estimated and better than previously estimated severity on the Company’s established bodily injury and property damage case reserves. Our homeowners line of business prior year reserves decreased by $12,899 for the year ended December 31, 2016, primarily due to improved retained homeowner results of $7,354 for the years 2010 through 2013. The following table represents the development of reserves, net of reinsurance, for calendar years 2006 through 2016. The top line of the table shows the reserves at the balance sheet date for each of the indicated years. This represents the estimated amounts of losses and loss adjustment expenses for claims arising in all years that were unpaid at the balance sheet date, including losses that had been incurred but not yet reported to us. The upper portion of the table shows the cumulative amounts paid as of the end of each successive year with respect to those claims. The lower portion of the table shows the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year, including cumulative payments made since the end of the respective year. The estimate changes as more information becomes known about the payments, frequency and severity of claims for individual years. Favorable loss development, shown as a cumulative redundancy in the table, exists when the original reserve estimate is greater than the re-estimated reserves at December 31, 2016. 12 Information with respect to the cumulative development of gross reserves (that is, without deduction for reinsurance ceded) also appears at the bottom portion of the table. 2016 2015 2014 2013 As of and for the Year Ended December 31, 2011 2010 2012 2009 2008 2007 2006 Reserves for losses and LAE originally estimated: Cumulative amounts paid as of: One year later Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Ten years later Reserves re-estimated as of: One year later Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Ten years later Cumulative (redundancy) deficiency 2016 Gross liability-end of year Reinsurance recoverables Net liability-end of year Gross estimated liability-latest Reinsurance recoverables-latest Net estimated liability-latest $ 476,597 $ 485,716 $ 420,767 $ 394,668 $ 371,657 $ 352,098 $ 351,244 $ 374,832 $ 391,070 $ 393,430 $ 370,980 174,505 132,364 189,367 133,288 178,411 207,626 124,855 175,822 199,741 213,847 130,204 181,739 211,578 223,941 231,433 128,854 176,774 205,171 219,310 224,354 226,644 130,960 183,061 211,182 224,831 232,177 233,853 235,158 126,858 189,897 217,695 233,160 239,553 241,587 241,999 242,705 142,259 195,798 234,359 248,560 254,915 257,362 257,889 258,173 258,786 122,806 183,457 212,331 233,438 240,275 242,298 243,120 243,270 243,505 243,477 2016 2015 2014 2013 As of and for the Year Ended December 31, 2011 2010 2012 2009 2008 2007 2006 $ 440,268 $ 390,452 348,660 $ 357,300 328,182 295,788 $ 342,767 308,028 283,592 263,787 $ 334,788 309,096 282,441 268,759 255,925 $ 314,561 293,480 273,332 254,652 245,869 238,404 $ 326,676 294,696 279,542 264,697 252,249 247,023 242,223 $ 347,004 307,918 282,565 271,693 261,845 254,308 250,760 247,037 $ 357,492 325,317 297,224 281,068 274,179 268,596 263,797 261,319 259,489 $ 340,189 311,972 287,875 269,446 258,506 253,919 251,304 248,031 246,317 245,071 (45,448) (72,107) (98,880) (107,870) (96,173) (112,840) (132,609) (144,033) (133,941) (125,909) 2016 $ 560,321 83,724 476,597 2015 $ 553,977 68,261 485,716 507,399 67,131 440,268 2014 $ 482,012 61,245 420,767 402,393 53,733 348,660 2013 $ 455,014 60,346 394,668 342,411 46,623 295,788 As of and for the Year Ended December 31, 2011 $ 403,872 51,774 352,098 293,284 37,359 255,925 2010 $ 404,391 53,147 351,244 274,021 35,617 238,404 2012 $ 423,842 52,185 371,657 303,272 39,485 263,787 2009 $ 439,706 64,874 374,832 282,823 40,600 242,223 2008 $ 467,559 76,489 391,070 291,895 44,858 247,037 2007 $ 477,720 84,290 393,430 308,892 49,403 259,489 2006 $ 449,444 78,464 370,980 291,941 46,870 245,071 In evaluating the information in the table, it should be noted that each amount entered incorporates the effects of all changes in amounts entered for prior periods. Thus, if the 2013 estimate for a previously incurred loss was $150 and the loss was reserved at $100 in 2009, the $50 deficiency (later estimate minus original estimate) would be included in the cumulative (redundancy) deficiency in each of the years 2009-2013 shown in the table. It should further be noted that the table does not present accident or policy year development data. In addition, conditions and trends that have affected the development of liability in the past may not necessarily recur in the future. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies from the table. As the table shows, our net reserves grew at a faster rate than our gross reserves over the ten-year period. As we have grown, we have been able to retain a greater percentage of our direct business. Additionally, in the past we conducted substantial business as a servicing carrier for other insurers, in which we would service the residual market automobile insurance business assigned to other carriers for a fee. All business generated through this program was ceded to the other carriers. As we reduced the amount of our servicing carrier business, our proportion of reinsurance ceded diminished. The table also shows that we have substantially benefited in the current and prior years from releasing redundant reserves. In the years ended December 31, 2016, 2015, and 2014 we decreased loss reserves related to prior years by $45,448, $30,313 and $37,368, respectively. Reserves and development are discussed further in Item 7— Management's Discussion and Analysis of Financial Condition and Results of Operations, Executive Summary and Overview. As a result of our focus on core business lines since our founding in 1979, we believe we have no specific exposure to asbestos or environmental pollution liabilities. 13 Reinsurance Reinsurance involves an insurance company transferring (ceding) a portion of its exposure on insurance underwritten by it to another insurer (reinsurer). The reinsurer assumes a portion of the exposure in return for a share of the premium. Reinsurance does not legally discharge an insurance company from its primary liability for the full amount of the policies, but it does make the reinsurer liable to the company for the reinsured portion of any loss realized. We reinsure with other insurance companies a portion of our potential liability under the policies we have underwritten, thereby protecting us against an unexpectedly large loss or a catastrophic occurrence that could produce large losses, primarily in our homeowners line of business. We are selective in choosing our reinsurers, seeking only those companies that we consider to be financially stable and adequately capitalized. In an effort to minimize exposure to the insolvency of a reinsurer, we continually evaluate and review the financial condition of our reinsurers. Swiss Re, our primary reinsurer, maintains an A.M. Best rating of "A+" (Superior). Most of our other reinsurers have an A.M. Best rating of “A+” (Superior) or “A” (Excellent). We maintain reinsurance coverage to help lessen the effect of losses from catastrophic events, maintaining coverage that during 2016 protected us in the event of a "130-year storm" (that is, a storm of a severity expected to occur once in a 130-year period). We use various software products to measure our exposure to catastrophe losses and the probable maximum loss to us for catastrophe losses such as hurricanes. The models include estimates for our share of the catastrophe losses generated in the residual market for property insurance by the Massachusetts Property Insurance Underwriting Association ("FAIR Plan"). In 2016, we purchased four layers of excess catastrophe reinsurance providing $615,000 of coverage for property losses in excess of $50,000 up to a maximum of $665,000. Our reinsurers’ co- participation is 65.0% of $100,000 for the 1st layer, 80.0% of $280,000 for the 2nd layer, 80.0% of $135,000 for the 3rd layer, and 80.0% of $100,000 for the 4th layer. For 2017, we have purchased four layers of excess catastrophe reinsurance providing $615,000 of coverage for property losses in excess of $50,000 up to a maximum of $665,000. Our reinsurers’ co-participation is 65.0% of $100,000 for the 1st layer, 80.0% of $280,000 for the 2nd layer, 80.0% of $135,000 for the 3rd layer and 80% of $100,000 for the 4th layer. As a result of the changes to the models, and our revised reinsurance program, our catastrophe reinsurance in 2017 protects us in the event of a “130-year storm” (that is, a storm of a severity expected to occur once in a 130-year period). We also have casualty excess of loss reinsurance for large casualty losses occurring in our automobile, homeowners, dwelling fire, business owners, and commercial package lines of business in excess of $2,000 up to a maximum of $10,000. We have property excess of loss reinsurance coverage for large property losses, with coverage in excess of $2,000 up to a maximum of $20,000, for our homeowners, business owners, and commercial package policies. In addition, we have liability excess of loss reinsurance for umbrella large losses in excess of $1,000 up to a maximum of $10,000. We also have various reinsurance agreements with Hartford Steam Boiler Inspection and Insurance Company, of which the primary contract is a quota share agreement under which we cede 100% of the premiums and losses for the equipment breakdown coverage under our business owner policies and commercial package policies. In the wake of the September 11, 2001 tragedies, reinsurers began to exclude coverage for claims in connection with any act of terrorism. Our reinsurance program excludes coverage for acts of terrorism, except for fire or collapse losses as a result of terrorism, under homeowners, dwelling fire, private passenger automobile and commercial automobile policies. The Terrorism Risk Insurance Act of 2002 ("TRIA") was signed into law on November 26, 2002, and expired December 31, 2005. The Terrorism Risk Insurance Extension Act of 2005 was signed into law on December 22, 2005, and expired December 31, 2007. The Terrorism Risk Insurance Extension Act of 2007 ("TRIEA") was signed into law on December 26, 2007 which reauthorized TRIA for seven years, expanded the definition of an "Act of Terrorism" while expanding the private sector role and reducing the federal share of compensation for insured losses under the program. 14 TRIA expired on December 31, 2014, but on January 12, 2015 Congress reauthorized TRIA retroactive to January 1, 2015 with the program now lasting through 2020. The intent of this legislation is to provide federal assistance to the insurance industry for the needs of commercial insurance policyholders with the potential exposure for losses due to acts of terrorism. The TRIEA provides reinsurance for certified acts of terrorism. In addition to the above mentioned reinsurance programs and as described in more detail above under The Massachusetts Property and Casualty Insurance Market, we are a participant in CAR, a state-established body that runs the residual market reinsurance programs for commercial automobile insurance in Massachusetts under which premiums, expenses, losses and loss adjustment expenses on ceded business are shared by all insurers writing automobile insurance in Massachusetts. We also participate in the FAIR Plan in which premiums, expenses, losses and loss adjustment expenses on homeowners business that cannot be placed in the voluntary market are shared by all insurers writing homeowners insurance in Massachusetts. The FAIR Plan’s exposure to catastrophe losses increased and as a result, the FAIR Plan decided to buy reinsurance to reduce their exposure to catastrophe losses. On July 1, 2016, the FAIR Plan purchased $1,600,000 of catastrophe reinsurance for property losses with retention of $100,000. For the years ended December 31, 2016 and December 31, 2015, our total expected reinsurance recovery from reinsurers under our catastrophe reinsurance program related to the 2015 snow event (as discussed in the Recent Trends and Events section) is $67,934. Amounts recoverable from reinsurers are billed to the reinsurer as claims are paid by the Company. At December 31, 2016 and December 31, 2015, the reinsurance recoverable on paid and unpaid loss and loss adjustment expenses related to the 2015 snow event is $31,701 and $39,553, respectively. On December 15, 2015, the Company filed for arbitration with a reinsurer in regards to the reinsurance recoverable resulting from the 2015 winter storm losses that are admissible under our contract. The total amount of recoverable in dispute, which is based on our total incurred loss, is $22,838. No provision for collectability has been recorded in the financial statements as we believe the recoverable is valid and will be recovered. At December 31, 2016, we also had $86,889 due from CAR comprising of loss and loss adjustment expense reserves, unearned premiums and reinsurance recoverables. On March 10, 2005, our Board of Directors (the “Board”) adopted a resolution that prohibits Safety from purchasing finite reinsurance (reinsurance that transfers only a relatively finite or limited amount of risk to the reinsurer) without approval by the Board. To date, the Company has never purchased a finite reinsurance contract. Competition The property and casualty insurance business is highly competitive and many of our competitors have substantially greater financial and other resources than we do. We compete with both large national writers and smaller regional companies. Our competitors include companies which, like us, serve the independent agency market, as well as companies which sell insurance directly to customers. Direct writers may have certain competitive advantages over agency writers, including increased name recognition, loyalty of the customer base to the insurer rather than to an independent agency and potentially, lower cost structures. A material reduction in the amount of business independent agents sell would adversely affect us. Further, we and others compete on the basis of the commissions and other cash and non-cash incentives provided to agents. Although historically, a number of national insurers that are much larger than we are have chosen not to compete in a material way in the Massachusetts private passenger automobile market, since 2008, several new companies have entered the market, including Progressive Insurance Company, Peerless and Safeco (subsidiaries of Liberty Mutual), AIG, Vermont Mutual, Preferred Mutual, IDS, Occidental, GEICO, Harleysville, Foremost and Allstate (including their subsidiary Esurance). These companies include some that would be able to sustain significant losses in order to acquire market share, as well as others which use distribution methods that compete with the independent agent channel. There can be no assurance that we will be able to compete effectively against these companies in the future. 15 Our principal competitors within the Massachusetts private passenger automobile insurance market are Commerce Insurance Company, Liberty Mutual (including Peerless) and Arbella Insurance Group, which held 25.7%, 11.0% and 9.1% market shares based on automobile exposures, respectively, in 2016 according to CAR. As of November 2016, we are the second largest writer of commercial automobile insurance in Massachusetts, with a market share of 14.7%. Our principal competitors in the Massachusetts commercial automobile insurance market are Commerce Insurance Company, The Travelers Indemnity Insurance Company and Arbella Mutual Insurance Company, which held 14.9%, 13.0% and 11.5% market shares based on automobile exposures, respectively, according to CAR. This includes our share of residual market business as one of four servicing carriers in CAR’s Commercial Automobile Program and one of two servicing carriers in CAR’s Taxi/Limo Program. We are the fourth largest writer of homeowners insurance business in Massachusetts, with a market share of 7.2% in 2015. Our principal competitors within the Massachusetts homeowners insurance market are MAPFRE SA, Liberty Mutual and Arbella Mutual Insurance Company, which held 13.3%, 11.1% and 7.4% market shares respectively in 2015. At December 31, 2016, we employed 643 employees. Our employees are not covered by any collective bargaining agreement. Management considers our relationship with our employees to be good. Employees Investments Investment income is an important source of revenue for us and the return on our investment portfolio has a material effect on our net earnings. Our investment objective is to focus on maximizing total returns while investing conservatively. We maintain a high-quality investment portfolio consistent with our established investment policy. As of December 31, 2016, our portfolio of fixed maturity investments was comprised principally of investment grade corporate fixed maturity securities, U.S. government and agency securities, and asset-backed securities. The portion of our non-investment grade portfolio of fixed maturity investments is primarily comprised of variable rate secured and senior bank loans and high yield bonds. According to our investment guidelines, no more than 2.0% of our portfolio may be invested in the securities of any one issuer (excluding U.S. government-backed securities). This one issuer must be rated "A" or above by Moody's. In addition, no more than 0.5% of our portfolio may be invested in securities of any one issuer rated "Baa," or the lowest investment grade assigned by Moody's. Of the less than 10.0% of our portfolio invested in senior bank loans and high yield bonds at December 31, 2016, no more than 5.0% may be invested in the securities of any one issuer, no more than 10.0% may be invested in any issuers total outstanding debt issue, and a maximum of 10.0% may be invested in securities unrated or rated "B-" or below by Moody's. We continually monitor the mix of taxable and tax-exempt securities in an attempt to maximize our total after-tax return. Since 1986, we have utilized the services of a third-party investment manager. 16 The following table reflects the composition of our investment portfolio as of December 31, 2016 and 2015. U.S. Treasury Securities Obligations of states and political subdivisions Residential mortgage-backed securities (1) Commercial mortgage-backed securities Other asset-backed securities Corporate and other securities Subtotal, fixed maturity securities Equity securities (2) Other invested assets (3) As of December 31, 2016 Estimated Fair Value % of Portfolio 2015 Estimated Fair Value $ $ 302 390,433 252,631 35,454 70,410 405,039 1,154,269 105,095 21,142 1,280,506 0.0 % 30.5 19.7 2.8 5.5 31.6 90.1 8.2 1.7 100.0 % $ $ 1,801 397,922 241,456 28,663 23,931 387,864 1,081,637 110,204 17,602 1,209,443 % of Portfolio 0.2 % 32.9 20.0 2.4 2.0 31.9 89.4 9.1 1.5 100.0 % (1) Residential mortgage-backed securities consists primarily of obligations of U.S. Government agencies including collateralized mortgage obligations and mortgage-backed securities guaranteed and/or insured by the following issuers: Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) and the Federal Home Loan Bank (FHLB). (2) Equity securities include interests in mutual funds held to fund the Company's executive deferred compensation plan. (3) Other invested assets are accounted for under the equity method which approximates fair value. The principal risks inherent in holding mortgage-backed securities and other pass-through securities are prepayment and extension risks, which affect the timing of when cash flows will be received. When interest rates decline, mortgages underlying mortgage-backed securities tend to be prepaid more rapidly than anticipated, causing early repayments. When interest rates rise, the underlying mortgages tend to be prepaid at a slower rate than anticipated, causing the principal repayments to be extended. Although early prepayments may result in acceleration of income from recognition of any unamortized discount, the proceeds typically are reinvested at a lower current yield, resulting in a net reduction of future investment income. In addition, in the current market environment, such investments can also contain liquidity risks. The Company invests in bank loans which are primarily investments in senior secured floating rate loans that banks have made to corporations. The loans are generally priced at an interest rate spread over the floating rate feature; this asset class provides protection against rising interest rates. However, this asset class is subject to default risk since these investments are typically below investment grade. Equity risk is the risk that we will incur economic losses due to adverse changes in equity prices. Our exposure to changes in equity prices results from our holdings of common stock and mutual funds held to fund the executive deferred compensation plan. We continuously evaluate market conditions and we expect in the future to purchase additional equity securities. We principally manage equity price risk through industry and issuer diversification and asset allocation techniques. The following table reflects our investment results for each year in the three-year period ended December 31, 2016. Average cash and invested securities (at cost) Net investment income (1) Net effective yield (2) $ $ 2016 1,231,358 38,413 3.1 % Years Ended December 31, 2015 1,213,718 40,534 $ $ $ $ 3.3 % 2014 1,220,033 42,303 3.5 % (1) After investment expenses, excluding realized investment gains or losses. (2) Net investment income for the period divided by average invested securities and cash for the same period. 17 As of December 31, 2016, our portfolio of fixed maturity investments was comprised principally of investment grade corporate fixed maturity securities, U.S. government and agency securities, and asset-backed securities. The portion of our non-investment grade portfolio of fixed maturity investments is primarily comprised of variable rate secured, senior bank loans and high yield bonds. The composition of our fixed income security portfolio by Moody's rating is presented in the following table. As of December 31, 2016 Estimated Fair Value Percent 2015 Estimated Fair Value Percent U.S. Treasury securities and obligations of U.S. Government agencies Aaa/Aa A Baa Ba B Caa C D $ 252,989 390,432 237,787 124,340 40,667 68,449 11,072 416 355 22.0 % $ 33.8 20.6 10.8 3.5 5.9 1.0 - - 243,562 391,839 219,580 110,386 39,835 61,189 10,252 21 303 Not rated Total 27,762 1,154,269 $ 2.4 100.0 % $ 4,670 1,081,637 22.5 % 36.2 20.3 10.2 3.7 5.7 1.0 - - 0.4 100.0 % Ratings are generally assigned upon the issuance of the securities and are subject to revision on the basis of ongoing evaluations. Ratings in the table are as of the date indicated. Moody's rating system utilizes nine symbols to indicate the relative investment quality of a rated bond. “Aaa” rated bonds are judged to be of the best quality and are considered to carry the smallest degree of investment risk. “Aa” rated bonds are also judged to be of high quality by all standards. Together with “Aaa” bonds, these bonds comprise what are generally known as high grade bonds. Bonds rated “A” possess many favorable investment attributes and are considered to be upper medium grade obligations. “Baa” rated bonds are considered as medium grade obligations; they are neither highly protected nor poorly secured. Bonds rated “Ba” or lower (those rated “B”, “Caa”, “C” and “D”) are considered to be too speculative to be of investment quality. The Securities Valuation Office of the National Association of Insurance Commissioners (the "SVO") evaluates all public and private bonds purchased as investments by insurance companies. The SVO assigns one of six investment categories to each security it reviews. Category 1 is the highest quality rating and Category 6 is the lowest. Categories 1 and 2 are the equivalent of investment grade debt as defined by rating agencies such as Standard & Poor's Ratings Services and Moody's, while Categories 3-6 are the equivalent of below investment grade securities. SVO ratings are reviewed at least annually. At December 31, 2016, 76.3% of our available for sale fixed maturity investments were rated Category 1 and 10.8% were rated Category 2, the two highest ratings assigned by the SVO. The following table indicates the composition of our fixed income security portfolio (at carrying value) by time to maturity as of December 31, 2016. Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years through twenty years Due after twenty years Asset-backed securities (1) Totals As of December 31, 2016 Estimated Fair Value 44,539 440,328 300,043 7,529 3,335 358,495 1,154,269 $ $ Percent 3.9 38.1 26.0 0.7 0.3 31.0 100.0 % % 18 (1) Actual maturities of asset-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Prepayment rates are influenced by a number of factors that cannot be predicted with certainty, including: the relative sensitivity of the underlying mortgages or other collateral to changes in interest rates; a variety of economic, geographic and other factors; and the repayment priority of the securities in the overall securitization structures. Ratings A.M. Best, which rates insurance companies based on factors of concern to policyholders, currently assigns Safety Insurance an "A (Excellent)" rating. Our "A" rating was reaffirmed by A.M. Best on May 9, 2016. Such rating is the third highest rating of 13 ratings that A.M. Best assigns to solvent insurance companies, which currently range from "A++ (Superior)" to "D (Very Vulnerable)." Publications of A.M. Best indicate that the "A" rating is assigned to those companies that in A.M. Best's opinion have a strong ability to meet their obligations to policyholders over a long period of time. In evaluating a company's financial and operating performance, A.M. Best reviews the Company's profitability, leverage and liquidity, as well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated fair value of its assets, the adequacy of its loss reserves, the adequacy of its surplus, its capital structure, the experience and competence of its management and its market presence. A.M. Best's ratings reflect its opinion of an insurance company's financial strength, operating performance and ability to meet its obligations to policyholders and are not evaluations directed to purchasers of an insurance company's securities. In assigning Safety Insurance's rating, A.M. Best recognized its solid risk-adjusted capitalization, conservative operating strategy, and long-standing agency relationships. A.M. Best also noted among our positive attributes our favorable investment leverage, our disciplined underwriting approach, and our expertise in the closely managed Massachusetts automobile insurance market, where rates, until recently, were historically established by the Commissioner. A.M. Best cited other factors that partially offset these positive attributes, including our concentration of business in the Massachusetts private passenger automobile market which exposes our business to regulatory actions. Supervision and Regulation Introduction. Our principal operations are conducted through the Insurance Subsidiaries which are subject to comprehensive regulation by state insurance departments, primarily through our domestic regulator, the Massachusetts Division of Insurance, of which the Commissioner is the senior official. The Commissioner is appointed by the Governor. We are subject to the authority of the Commissioner in many areas of our business under Massachusetts law, including: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) our licenses to transact insurance; the rates and policy forms we may use; our financial condition including the adequacy of our reserves and provisions for unearned premium; the solvency standards that we must maintain; the type and size of investments we may make; the prescribed or permitted statutory accounting practices we must use; and the nature of the transactions we may engage in with our affiliates. In addition, the Commissioner periodically conducts financial and market conduct examinations of all licensees domiciled in Massachusetts. Our most recent financial and market conduct examinations were for the five-year period ending December 31, 2013. The Division had no material findings as a result of these examinations. We are also required to be licensed by the insurance department in each state in which we do business, as well as to comply with the various laws and regulations of those jurisdictions, including those governing our use of rates and policy forms in those states. 19 Insurance Holding Company Regulation. Our principal operating subsidiaries are insurance companies, and therefore we are subject to certain laws in Massachusetts regulating insurance holding company systems. These laws require that we file a registration statement with the Commissioner that discloses the identity, financial condition, capital structure and ownership of each entity within our corporate structure and any transactions among the members of our holding company system. In some instances, we must provide prior notice to the Commissioner for material transactions between our insurance company subsidiaries and other affiliates in our holding company system. These holding company statutes also require, among other things, prior approval of the payment of extraordinary dividends or distributions and any acquisition of a domestic insurer and that we file an annual Enterprise Risk Management report with the Commissioner. Insurance Regulation Concerning Dividends. We rely on dividends from the Insurance Subsidiaries for our cash requirements. The insurance holding company law of Massachusetts requires notice to the Commissioner of any dividend to the shareholders of an insurance company. The Insurance Subsidiaries may not make an "extraordinary dividend" until thirty days after the Commissioner has received notice of the intended dividend and has not objected in such time. As historically administered by the Commissioner, this provision requires the prior approval by the Commissioner of an extraordinary dividend. An extraordinary dividend is defined as any dividend or distribution that, together with other distributions made within the preceding twelve months exceeds the greater of 10.0% of the insurer's surplus as of the preceding December 31, or the insurer's net income for the twelve-month period ending the preceding December 31, in each case determined in accordance with statutory accounting practices. Under Massachusetts law, an insurer may pay cash dividends only from its unassigned funds, also known as its earned surplus, and the insurer's remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. At December 31, 2016, the statutory surplus of Safety Insurance was $604,813 and its net income for 2016 was $57,202. A maximum of $60,481 will be available during 2017 for such dividends without prior approval of the Commissioner. Acquisition of Control of a Massachusetts Domiciled Insurance Company. Massachusetts law requires advance approval by the Commissioner of any change in control of an insurance company that is domiciled in Massachusetts. That law presumes that control exists where any person, directly or indirectly, owns, controls, holds the power to vote or holds proxies representing 10.0% or more of our outstanding voting stock. Even persons who do not acquire beneficial ownership of more than 10.0% of the outstanding shares of our common stock may be deemed to have acquired control if the Commissioner determines that control exists in fact. Any purchaser of shares of common stock representing 10.0% or more of the voting power of our capital stock will be presumed to have acquired control of the Insurance Subsidiaries unless, following application by that purchaser the Commissioner determines that the acquisition does not constitute a change of control or is otherwise not subject to regulatory review. These requirements may deter, delay or prevent transactions affecting the control of or the ownership of our common stock, including transactions that could be advantageous to our stockholders. Protection Against Insurer Insolvency. Massachusetts law requires that insurers licensed to do business in Massachusetts participate in the Massachusetts Insurers Insolvency Fund ("Insolvency Fund"). The Insolvency Fund must pay any claim up to $300 of a policyholder of an insolvent insurer if the claim existed prior to the declaration of insolvency or arose within sixty days after the declaration of insolvency. Members of the Insolvency Fund are assessed the amount the Insolvency Fund deems necessary to pay its obligations and expenses in connection with handling covered claims. Subject to certain exceptions, assessments are made in the proportion that each member's net written premiums for the prior calendar year for all property and casualty lines bore to the corresponding net written premiums for Insolvency Fund members for the same period. As a matter of Massachusetts law, insurance rates and premiums include amounts to recoup any amounts paid by insurers for the costs of the Insolvency Fund. By statute, no insurer in Massachusetts may be assessed in any year an amount greater than two percent of that insurer's direct written premium for the calendar year prior to the assessment. We account for allocations from the Insolvency Fund as underwriting expenses. CAR also assesses its members as a result of insurer insolvencies. Because CAR is not able to recover an insolvent company's share of the net CAR losses from the Insolvency Fund, CAR must increase each of its member's shares of the deficit in order to compensate for the insolvent carrier's inability to pay its deficit assessment. It is anticipated that there will be future assessments from time to time relating to various insolvencies. 20 The Insurance Regulatory Information System. The Insurance Regulatory Information System ("IRIS") was developed to help state insurance regulators identify companies that may require special financial attention. IRIS consists of a statistical phase and an analytical phase whereby financial examiners review annual statements and financial ratios. The statistical phase consists of 13 key financial ratios based on year-end data that are generated annually from the database of the National Association of Insurance Commissioners ("NAIC"). Each ratio has an established "usual range" of results. These ratios assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies. A ratio result falling outside the usual range of IRIS ratios is not considered a failing result; rather, unusual values are viewed as part of the regulatory early monitoring system. Furthermore, in some years, it may not be unusual for financially sound companies to have several ratios with results outside the usual ranges. Generally, an insurance company will become subject to regulatory scrutiny if it falls outside the usual ranges of four or more of the ratios. In 2016, 2015, and 2014 all our ratios for all our Insurance Subsidiaries were within the normal range. Risk-Based Capital Requirements. The NAIC has adopted a formula and model law to implement risk-based capital requirements for most property and casualty insurance companies, which are designed to determine minimum capital requirements and to raise the level of protection that statutory surplus provides for policyholder obligations. The risk-based capital formula for property and casualty insurance companies measures three major areas of risk facing property and casualty insurers: (cid:120) (cid:120) (cid:120) underwriting, which encompasses the risk of adverse loss developments and inadequate pricing; declines in asset values arising from market and/or credit risk; and off-balance sheet risk arising from adverse experience from non-controlled assets, guarantees for affiliates or other contingent liabilities and reserve and premium growth. Under Massachusetts law, insurers having less total adjusted capital than that required by the risk-based capital calculation will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The risk-based capital law provides for four levels of regulatory action. The extent of regulatory intervention and action increases as the level of total adjusted capital to risk-based capital falls. The first level, the company action level, as defined by the NAIC, requires an insurer to submit a plan of corrective actions to the Commissioner if total adjusted capital falls below 200% of the risk-based capital amount. The regulatory action level, as defined by the NAIC requires an insurer to submit a plan containing corrective actions and requires the Commissioner to perform an examination or other analysis and issue a corrective order if total adjusted capital falls below 150.0% of the risk-based capital amount. The authorized control level, as defined by the NAIC, authorizes the Commissioner to take whatever regulatory actions he or she considers necessary to protect the best interest of the policyholders and creditors of the insurer which may include the actions necessary to cause the insurer to be placed under regulatory control, i.e., rehabilitation or liquidation, if total adjusted capital falls below 100.0% of the risk-based capital amount. The fourth action level is the mandatory control level, as defined by the NAIC, which requires the Commissioner to place the insurer under regulatory control if total adjusted capital falls below 70.0% of the risk-based capital amount. The formulas have not been designed to differentiate among adequately capitalized companies that operate with higher levels of capital. Therefore, it is inappropriate and ineffective to use the formulas to rate or to rank these companies. At December 31, 2016, our Insurance Subsidiaries had total adjusted capital in excess of amounts requiring company or regulatory action at any prescribed risk-based capital action level. Executive Officers and Directors David F. Brussard, former President and Chief Executive Officer of Safety Insurance retired effective March 31, 2016. The Board of Directors appointed George M. Murphy, former Vice President of Marketing, as the new President and CEO, effective April 1, 2016. Mr. Brussard remains as Non-Executive Chairman of the Board of Directors 21 of Safety Insurance Group, Inc. On February 23, 2016, Mr. Murphy was appointed to the Company’s Board of Directors and to the Investment Committee of the Board of Directors, effective April 1, 2016. Additionally, John P. Drago, was appointed the Company’s Vice President of Marketing effective April 1, 2016. The table below sets forth certain information concerning our directors and executive officers as of the date of this annual report. Name George M. Murphy William J. Begley, Jr. James D. Berry John P. Drago David E. Krupa Ann M. McKeown Paul J. Narciso Stephen A. Varga David F. Brussard A. Richard Caputo, Jr. (2) Frederic H. Lindeberg Peter J. Manning David K. McKown ___________________ (1) As of February 16, 2017 (2) Mr. Caputo resigned as director on February 22, 2017. Age (1) 50 62 57 50 56 50 53 49 65 51 76 78 79 Position President, Chief Executive Officer Vice President, Chief Financial Officer and Secretary Vice President - Underwriting Vice President - Marketing Vice President - Property Claims Vice President - Insurance Operations Vice President - Casualty Claims Vice President - Management Information Systems Chairman of the Board, Director Director Director Director Director Years Employed by Safety 28 31 35 22 34 27 26 24 - - - - - George M. Murphy, CPCU, was appointed President and Chief Executive Officer of the Company effective April 1, 2016. He previously was the Vice President of Marketing since October 1, 2005. Mr. Murphy was appointed to the Board of Directors and to the Investment Committee in February 2016. Mr. Murphy has been employed by the Insurance Subsidiaries for over 28 years. Mr. Murphy is also on the Board of Trustees of the Insurance Library Association of Boston. William J. Begley, Jr. was appointed Chief Financial Officer, Vice President and Secretary of the Company on March 4, 2002. Since January 1999, Mr. Begley has been the Chief Financial Officer and Treasurer of the Insurance Subsidiaries. Previously, Mr. Begley served as Assistant Controller of the Insurance Subsidiaries from 1985 to 1987, as Controller from 1987 to 1990 and as Assistant Vice President/Controller from 1990 to 1999. Mr. Begley has been employed by the Insurance Subsidiaries for over 31 years. Mr. Begley also serves on the Audit Committee and Investment Committee of Guaranty Fund Management Services, and is a member of the Board of Directors of the Massachusetts Insurers Insolvency Fund. James D. Berry, CPCU, was appointed Vice President of Underwriting of the Company in July 2015, and was named as Secretary of the Insurance Subsidiaries at that time. Prior to that, he served as the Vice President of Insurance Operations since October 1, 2005. Mr. Berry has been employed by the Insurance Subsidiaries for over 35 years and has directed the Company's Massachusetts Private Passenger line of business since 2001. Mr. Berry is on the Board of Directors of the Massachusetts Property Insurance Underwriting Association (FAIR Plan). He has served on several committees of Commonwealth Auto Reinsurers (“CAR”) including Market Review and Defaulted Brokers, Mr. Berry has represented Safety on the Computer Sciences Corporation Series II and Exceed advisory councils. John P. Drago was appointed Vice President of Marketing on February 1, 2016. Mr. Drago has been employed by the Insurance Subsidiaries for over 22 years and most recently served as Director of Marketing. David E. Krupa, CPCU, was appointed Vice President of Property Claims of the Company on March 4, 2002. Mr. Krupa has served as Vice President of Claims of the Insurance Subsidiaries since July 1990 and has been employed by the Insurance Subsidiaries for over 34 years. Mr. Krupa was first employed by the Company in 1982 and held a 22 series of management positions in the Claims Department before being appointed Vice President in 1990. Mr. Krupa has served on the Auto Damage Appraisers Licensing Board of Massachusetts and on several claims committees both at the Automobile Insurers Bureau of Massachusetts and CAR. Ann M. McKeown was appointed Vice President of Insurance Operations of the Company on July 1, 2015. Ms. McKeown has been employed by the Insurance Subsidiaries for over 27 years wherein she has held management positions in the Underwriting, Information Technology, and Insurance Operations departments. Ms. McKeown has served on the MAIP Steering and Operations Committees of CAR. Paul J. Narciso was appointed Vice President of Casualty Claims of the Company on August 5, 2013. Mr. Narciso has held various adjusting and claims management positions with the Company since 1990. Mr. Narciso has 26 years of claim experience having worked at two national carriers prior to joining Safety. He currently serves on the Governing Board of the Massachusetts Insurance Fraud Bureau. Stephen A. Varga was appointed Vice President of Management Information Systems of the Company on August 6, 2014. Mr. Varga has held various information technology positions with the Company since 1992 and most recently served as Senior Director of MIS. David F. Brussard was appointed Chariman of the Board in March 2004 and has served as a director of the Company since October 2001. Mr. Brussard served as President and Chief Executive Officer of the Company from June 2001 until March 31, 2016. Also, from January 1999 to March 31, 2016, Mr. Brussard served as the CEO and President of the Insurance Subsidiaries. Previously, Mr. Brussard served as Executive Vice President of the Insurance Subsidiaries from 1985 to 1999 and as Chief Financial Officer and Treasurer of the Insurance Subsidiaries from 1979 to 1999. Mr. Brussard was also appointed Chairman of the Investment Committee on February 22, 2017. A. Richard Caputo, Jr. has served as a director of the Company since June 2001. Mr. Caputo is a Managing Parner of The Jordan Company, a private investment firm, which he has been associated with since 1990. Mr. Caputo is also a director of various privately held companies. On February 22, 2017, Mr.Caputo resigned his position as a member of the Company’s Board of Directors, effective immediately. Frederic H. Lindeberg has served as a director of the Company since August 2004. Mr. Lindeberg has had a consulting practice providing taxation, management and investment counsel since 1991, focusing on finance, real estate, manufacturing and retail industries. Mr. Lindeberg retired in 1991 as Partner-In-Charge of various KPMG tax offices, after 24 years of service where he provided both accounting and tax counsel to various clients. Mr. Lindeberg is an attorney and certified public accountant. Mr. Lindeberg was formerly a director of Provident Senior Living Trust (PSLT) and TAL International (TAL) and formerly an adjunct professor at Penn State Graduate School of Business. Peter J. Manning has served as a director of the Company since September 2003. Mr. Manning retired in 2003, as Vice Chairman Strategic Business Development of FleetBoston Financial, after 32 years with FleetBoston Financial Corporation (formerly BankBoston) where he also held the positions of Comptroller and Executive Vice President and Chief Financial Officer. Mr. Manning started his career with Coopers & Lybrand in 1962 prior to his 1972 employment with BankBoston. He currently is a director of the Blue Hills Bank. David K. McKown has served as director of the Company since November 2002. Mr. McKown has been a Senior Advisor to Eaton Vance Management since 2000, focusing on business origination in real estate and asset-based loans. Mr. McKown retired in March 2000 having served as a Group Executive with BankBoston since 1993, where he focused on acquisitions and high-yield bank debt financings. Mr. McKown has been in the banking industry for 52 years, worked for BankBoston for over 32 years and had previously been the head of BankBoston's real estate department, corporate finance department, and a managing director of BankBoston's private equity unit. Mr. McKown is currently a director of Global Partners L.P., Newcastle Investment Corp., and various privately held companies. 23 ITEM 1A. RISK FACTORS An investment in our common stock involves a number of risks. Any of the risks described below could result in a significant or material adverse effect on our results of operations or financial condition, and a corresponding decline in the market price of our common stock. Because we are primarily a private passenger automobile insurance carrier, our business may be adversely affected by conditions in this industry. Approximately 57.7% of our direct written premiums for the year ended December 31, 2016, were generated from private passenger automobile insurance policies. As a result of our focus on that line of business, negative developments in the economic, competitive or regulatory conditions affecting the private passenger automobile insurance industry could have a material adverse effect on our results of operations and financial condition. In addition, these developments would have a disproportionate effect on us, compared to insurers which conduct operations in multiple business lines. Because we write insurance principally in Massachusetts, our business may be adversely affected by conditions in Massachusetts, including the impact of additional competitors. Almost all of our direct written premiums are currently generated in Massachusetts. Our revenues and profitability are therefore subject to prevailing regulatory, economic, demographic, competitive and other conditions in Massachusetts. Changes in any of these conditions could make it more costly or difficult for us to conduct our business. The Massachusetts market has seen an increased level of competition, particularly in the private passenger automobile insurance line, due to prior changes in regulatory conditions. To date, we have not had a significant decrease in our private passenger automobile insurance business. However, further competition and adverse results could include loss of market share, decreased revenue, and/or increased costs. We have exposure to claims related to severe weather conditions, which may result in an increase in claims frequency and severity. We are subject to claims arising out of severe weather conditions, such as rainstorms, snowstorms and icestorms, that may have a significant effect on our results of operations and financial condition. The incidence and severity of weather conditions are inherently unpredictable. There is generally an increase in claims frequency and severity under the private passenger automobile insurance we write when severe weather occurs because a higher incidence of vehicular accidents and other insured losses tend to occur as a result of severe weather conditions. In addition, we have exposure to an increase in claims frequency and severity under the homeowners and other property insurance we write because property damage may result from severe weather conditions. Because some of our insureds live near the Massachusetts coastline, we also have a potential exposure to losses from hurricanes and major coastal storms such as Nor'easters. Although we purchase catastrophe reinsurance to limit our exposure to natural catastrophes, in the event of a major catastrophe resulting in property losses to us in excess of $665,000 our losses would exceed the limits of this reinsurance in addition to losses from our co-participation retention of a portion of the risk up to $665,000. Climate change may adversely impact our results of operations. There are concerns that the increase in weather-related catastrophes and other losses incurred by the industry in recent years may be indicative of changing weather patterns. This change in weather patterns could lead to higher overall losses which we may not be able to recover, particularly in light of the current competitive environment, and higher reinsurance costs. Climate change could also have an impact on issuers of securities in which we invest, resulting in realized and unrealized losses in future periods which could have a material adverse impact on our results of operations and/or financial position. 24 There is uncertainty involved in the availability of reinsurance and the collectability of reinsurance recoverable. The Company reinsures a portion of its potential losses on the policies it issues to mitigate the volatility of the losses on its financial condition and results of operations. The availability and cost of reinsurance is subject to market conditions, which are outside of the Company’s control. From time to time, market conditions have limited, and in some cases, prevented insurers from obtaining the types and amounts of reinsurance that they consider adequate for their business needs. As a result, the Company may not be able to successfully purchase reinsurance and transfer a portion of the Company’s risk through reinsurance arrangements. In addition, as is customary, the Company initially pays all claims and seeks to recover the reinsured losses from its reinsurers. Although the Company reports as assets the amount of claims paid which the Company expects to recover from reinsurers, no assurance can be given that the Company will be able to collect from its reinsurers. If the amounts actually recoverable under the Company’s reinsurance treaties are ultimately determined to be less than the amount it has reported as recoverable, the Company may incur a loss during the period in which that determination is made. If we are not able to attract and retain independent agents, it could adversely affect our business. We market our insurance solely through independent agents. We must compete with other insurance carriers for the business of independent agents. Some of our competitors offer a larger variety of products, lower prices for insurance coverage or higher commissions. While we believe that the commissions and services we provide to our agents are competitive with other insurers, changes in commissions, services or products offered by our competitors could make it harder for us to attract and retain independent agents to sell our insurance products. Established competitors with greater resources may make it difficult for us to market our products effectively and offer our products at a profit. The property and casualty insurance business is highly competitive and many of our competitors have substantially greater financial and other resources than we do. We compete with both large national writers and smaller regional companies. Further, our competitors include other companies which, like us, serve the independent agency market, as well as companies which sell insurance directly to customers. Direct writers may have certain competitive advantages over agency writers, including increased name recognition, loyalty of the customer base to the insurer rather than to an independent agency and, potentially, lower cost structures. A material reduction in the amount of business independent agents sell would directly and negatively affect our profitability and our ability to compete with insurers that do not rely solely on the independent agency market to sell their products. Further, our Company and others compete on the basis of the commissions and other cash and non-cash incentives provided to agents. Although a number of national insurers that are much larger than we are do not currently compete in a material way in the Massachusetts personal auto market, if one or more of these companies decided to aggressively enter the market it could reduce our share of the Massachusetts market and thereby have a material adverse effect on us. These companies include some that would be able to sustain significant losses in order to acquire market share, as well as others which use distribution methods that compete with the independent agent channel. Progressive Corporation, GEICO and Allstate, large insurers that market directly to policyholders rather than through agents, along with other carriers have entered the Massachusetts private passenger automobile insurance market. As a holding company, Safety Insurance Group, Inc. is dependent on the results of operations of the Safety Insurance Company. Safety Insurance Group, Inc. is a company and a legal entity separate and distinct from Safety Insurance Company, our principal operating subsidiary. As a holding company without significant operations of its own, the principal sources of Safety Insurance Group, Inc.'s funds are dividends and other distributions from Safety Insurance Company. Our rights to participate in any distribution of assets of Safety Insurance Company are subject to prior claims of policyholders, creditors and preferred shareholders, if any, of Safety Insurance Company (except to the extent that our rights, if any, as a creditor are recognized). Consequently, our ability to pay debts, expenses and cash dividends to our shareholders may be limited. The ability of Safety Insurance Company to pay dividends is subject to limits under Massachusetts insurance law. Further, the ability of Safety Insurance Group, Inc. to pay dividends, and our subsidiaries' 25 ability to incur indebtedness or to use the proceeds of equity offerings, will be subject to limits under our revolving credit facility. We are subject to comprehensive government regulation and our ability to earn profits may be restricted by these regulations. General Regulation. We are subject to regulation by the state insurance department of each state in which we do business. In each jurisdiction, we must comply with various laws and regulations, including those involving: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) approval or filing of premium rates and policy forms; limitation of the right to cancel or non-renew policies in some lines; requirements to participate in residual markets; licensing of insurers and agents; and regulation of the right to withdraw from markets or terminate involvement with agencies; We also are subject to enhanced regulation by our domestic regulator, the Massachusetts Division of Insurance, from which we must obtain prior approval for certain corporate actions. Among other things, we must comply with laws and regulations governing: (cid:120) (cid:120) (cid:120) (cid:120) transactions between an insurance company and any of its affiliates; the payment of dividends; the acquisition of an insurance company or of any company controlling an insurance company; solvency standards; (cid:120) minimum amounts of capital and surplus which must be maintained; (cid:120) (cid:120) (cid:120) (cid:120) limitations on types and amounts of investments; restrictions on the size of risks which may be insured by a single company; deposits of securities for the benefit of policyholders; and reporting with respect to financial condition. In addition, insurance department examiners from Massachusetts perform periodic financial and market conduct examinations of insurance companies. Such regulation is generally intended for the protection of policyholders rather than security holders. Massachusetts, New Hampshire and Maine require that all licensed property and casualty insurers bear a portion of the losses suffered by some insureds as a result of impaired or insolvent insurance companies by participating in each state’s insolvency fund. Members of the state’s insolvency fund are assessed a proportionate share of the obligations and expenses of the fund in connection with an insolvent insurer. These assessments are made by the fund to cover the cost of paying eligible claims of policyholders of these insolvent insurers. Similarly, assessments are made by each state’s commercial automobile insurance residual market mechanism to recover the shares of net losses that would have been assessed to the insolvent companies but for their insolvencies. In addition, Massachusetts has established an underwriting association in order to ensure that property insurance is available for owners of high risk property who are not able to obtain insurance from private insurers. The losses of this underwriting association, the Massachusetts Property Insurance Underwriting Association, are shared by all insurers that write property and casualty insurance in Massachusetts. We are assessed from time to time to pay these losses. The effect of these assessments could reduce our profitability in any given period and limit our ability to grow our business. 26 Because we are unable to predict with certainty changes in the political, economic or regulatory environments of the states in which we operate in the future, there can be no assurance that existing insurance-related laws and regulations will not become more restrictive in the future or that new restrictive laws will not be enacted and, therefore, it is not possible to predict the potential effects of these laws and regulations on us. We may enter new markets and there can be no assurance that our diversification strategy will be effective. Although we intend to concentrate on our core businesses in Massachusetts, New Hampshire, and Maine, we also may seek to take advantage of prudent opportunities to expand our core businesses into other states where we believe the independent agent distribution channel is strong. As a result of a number of factors, including the difficulties of finding appropriate expansion opportunities and the challenges of operating in an unfamiliar market, we may not be successful in this diversification. Additionally, in order to carry out any such strategy we would need to obtain the appropriate licenses from the insurance regulatory authority of any such state. Our failure to maintain a commercially acceptable financial strength rating would significantly and negatively affect our ability to implement our business strategy successfully. A.M. Best has currently assigned Safety Insurance an "A (Excellent)" rating. An "A" rating is A.M. Best's third highest rating, out of 13 possible rating classifications for solvent companies. An "A" rating is assigned to insurers that in A.M. Best's opinion have a strong ability to meet their ongoing obligations to policyholders. Moreover, an "A" rating is assigned to companies that have, on balance, excellent balance sheet strength, operating performance and business profile when compared to the standards established by A.M. Best. A.M. Best bases its ratings on factors that concern policyholders and not upon factors concerning investor protection. Such ratings are subject to change and are not recommendations to buy, sell, or hold securities. An important factor in an insurer's ability to compete effectively is its A.M. Best rating. Our A.M. Best rating is lower than those of some of our competitors. Any future decrease in our rating could affect our competitive position. Our losses and loss adjustment expenses may exceed our reserves, which could significantly affect our business. The reserves for losses and loss adjustment expenses that we have established are estimates of amounts needed to pay reported and unreported claims and related expenses based on facts and circumstances known to us as of the time we established the reserves. Reserves are based on historical claims information, industry statistics and other factors. The establishment of appropriate reserves is an inherently uncertain process. If our reserves are inadequate and are strengthened, we would have to treat the amount of such increase as a charge to our earnings in the period that the deficiency is recognized. As a result of these factors, there can be no assurance that our ultimate liability will not materially exceed our reserves and have a negative effect on our results of operations and financial condition. Due to the inherent uncertainty of estimating reserves, it has been necessary, and may over time continue to be necessary, to revise estimated future liabilities as reflected in our reserves for claims and policy expenses. The historic development of reserves for losses and loss adjustment expenses may not necessarily reflect future trends in the development of these amounts. Accordingly, it is not appropriate to extrapolate redundancies or deficiencies based on historical information. 27 If we lose key personnel, our ability to implement our business strategy could be delayed or hindered. The loss of key personnel could prevent us from fully implementing our business strategy and could significantly and negatively affect our financial condition and results of operations. As we continue to grow, we will need to recruit and retain additional qualified management personnel, and our ability to do so will depend upon a number of factors, such as our results of operations and prospects and the level of competition then prevailing in the market for qualified personnel. Market fluctuations and changes in interest rates can have significant and negative effects on our investment portfolio. Our results of operations depend in part on the performance of our invested assets. As of December 31, 2016, based upon fair value measurement, 90.1% of our investment portfolio was invested in fixed maturity securities, 8.2% in common equity securities and 1.7% in other invested assets. Certain risks are inherent in connection with debt securities including loss upon default and price volatility in reaction to changes in interest rates and general market factors. We have a significant investment portfolio and adverse capital market conditions, including but not limited to volatility and credit spread changes, will impact the liquidity and value of our investments, potentially resulting in higher realized or unrealized losses. Values of our investments can also be impacted by reductions in price transparency and changes in investor confidence and preferences, potentially resulting in higher realized or unrealized losses. If the carrying value of our investments exceeds the fair value, and the decline in fair value is deemed to be other-than- temporary, we will be required to write down the value of our investments, which could materially harm our results of operations and financial condition. Developments in the global financial markets may adversely affect our investment portfolio and overall performance. Global financial markets have recently experienced unprecedented and challenging conditions. If conditions further deteriorate, our business could be affected in different ways. Continued turbulence in the U.S. economy and contraction in the credit markets could adversely affect our profitability, demand for our products or our ability to raise rates, and could also result in declines in market value and future impairments of our investment assets. We may not be able to successfully alleviate risk through reinsurance arrangements which could cause us to reduce our premiums written in certain lines or could result in losses. In order to reduce risk and to increase our underwriting capacity, we purchase reinsurance. The availability and the cost of reinsurance protection are subject to market conditions, which are outside of our control. As a result, we may not be able to successfully alleviate risk through these arrangements. For example, if reinsurance capacity for homeowner's risks were reduced as a result of terrorist attacks, climate change or other causes, we might seek to reduce the amount of homeowners business we write. In addition, we are subject to credit risk with respect to our reinsurance because the ceding of risk to reinsurers does not relieve us of our liability to our policyholders. A significant reinsurer's insolvency or inability to make payments under the terms of a reinsurance treaty could have a material adverse effect on our results of operations and financial condition. There are anti-takeover provisions contained in our organizational documents and in laws of the State of Delaware and the Commonwealth of Massachusetts that could impede an attempt to replace or remove our management or prevent the sale of our company, which could diminish the value of our common stock. Our certificate of incorporation, bylaws and the laws of Delaware contain provisions that may delay, deter or prevent a takeover attempt that shareholders might consider in their best interests. For example, our organizational documents provide for a classified board of directors with staggered terms, prevent shareholders from taking action by written consent, prevent shareholders from calling a special meeting of shareholders, provide for supermajority voting requirements to amend our certificate of incorporation and certain provisions of our bylaws and provide for the filling of vacancies on our board of directors by the vote of a majority of the directors then in office. These provisions will render 28 the removal of the incumbent board of directors or management more difficult. In addition, these provisions may prevent shareholders from receiving the benefit of any premium over the market price of our common stock offered by a bidder in a potential takeover. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future. The Massachusetts insurance law prohibits any person from acquiring control of us, and thus indirect control of the Insurance Subsidiaries., without the prior approval of the Commissioner. That law presumes that control exists where any person, directly or indirectly, owns, controls, holds the power to vote or holds proxies representing 10.0% or more of our outstanding voting stock. Even persons who do not acquire beneficial ownership of more than 10.0% of the outstanding shares of our common stock may be deemed to have acquired such control if the Commissioner determines that such control exists in fact. Therefore, any person seeking to acquire a controlling interest in us would face regulatory obstacles which could delay, deter or prevent an acquisition that shareholders might consider in their best interests. Section 203 of the General Corporation Law of Delaware, the jurisdiction in which the Company is organized, may affect the ability of an "interested stockholder" to engage in certain business combinations including mergers, consolidations or acquisitions of additional shares, for a period of three years following the time that the stockholder becomes an interested stockholder. An interested stockholder is defined to include persons owning directly or indirectly 15.0% or more of the outstanding voting stock of the corporation. Future sales of shares of our common stock by our existing shareholders in the public market, or the possibility or perception of such future sales, could adversely affect the market price of our stock. Investors currently known to be the beneficial owners of greater than 5.0% of our outstanding common stock hold approximately 44.4% of the common stock of Safety Insurance Group, Inc. on a fully diluted basis. No prediction can be made as to the effect, if any, that future sales of shares by our existing shareholders, or the availability of shares for future sale, will have on the prevailing market price of our common stock from time to time. Sales of substantial amounts of our common stock in the public market by our existing shareholders, or the possibility or perception that such sales could occur, could cause the prevailing market prices for our common stock to decrease. If such sales reduce the market price of our common stock, our ability to raise additional capital in the equity markets may be adversely affected. Our business depends on the uninterrupted operation of our systems and business functions, including our information technology, telecommunications and other business systems. Our business continuity and disaster recovery plans may not sufficiently address all contingencies. Our business is highly dependent upon our ability to execute, in an efficient and uninterrupted fashion, necessary business functions, such as processing new and renewal business, providing customer service, and processing and paying claims. A shut-down of or inability to access our facility, a power outage, or a failure of one or more of our information technology, telecommunications or other systems could significantly impair our ability to perform such functions on a timely basis. If sustained or repeated, such a business interruption, systems failure or service denial could result in a deterioration in the level of service we provide to our agents and policyholders. We have established a business continuity plan in an effort to ensure the continuation of core business operations in the event that normal business operations could not be performed due to a catastrophic event. While we continue to test and assess our business continuity plan to ensure it meets the needs of our core business operations and addresses multiple business interruption events, there is no assurance that core business operations could be performed upon the occurrence of such an event, which may result in a material adverse effect on our financial position and results of operations. We outsource certain business and administrative functions to third parties and may do so increasingly in the future. If we fail to develop and implement our outsourcing strategies or our third-party providers fail to perform as anticipated, we may experience operational difficulties, increased costs and a loss of business that may have a material adverse effect on our results of operations or financial condition. 29 Our business could be materially and adversely affected by a security breach or other attack involving our computer systems or the systems of one or more of our agents and vendors. Our highly automated and networked organization is subject to cyber-terrorism and a variety of other cyber- security threats. These threats come in a variety of forms, such as viruses and malicious software. Such threats can be difficult to prevent or detect, and if experienced, could interrupt or damage our operations, harm our reputation or have a material effect on our operations. Our technology and telecommunications systems are highly integrated and connected with other networks. Cyber-attacks involving these systems could be carried out remotely and from multiple sources and could interrupt, damage or otherwise adversely affect the operations of these critical systems. Cyber-attacks could result in the modification or theft of data, the distribution of false information or the denial of service to users. We obtain, utilize and maintain data concerning individuals and organizations with which we have a business relationship. Threats to data security can emerge from a variety of sources and change in rapid fashion, resulting in the ongoing need to expend resources to secure our data in accordance with customer expectations and statutory and regulatory requirements. We could be subject to liability if confidential customer information is misappropriated from our technology systems. Despite the implementation of security measures, these systems may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. Any well-publicized compromise of security could deter people from entering into transactions that involve transmitting confidential information to our systems, which could have a material adverse effect on our business and reputation. We rely on services and products provided by many vendors. In the event that one or more of our vendors fails to protect personal information of our customers, claimants or employees, we may incur operational impairments, or could be exposed to litigation, compliance costs or reputational damage. While we have not experienced material cyber-incidents to date, the occurrence and effects of cyber-incidents may remain undetected for an extended period. We maintain cyber-liability insurance coverage to offset certain potential losses, subject to policy limits, such as liability to others, costs of related crisis management, data extortion, applicable forensics and certain regulatory defense costs, fines and penalties. ITEM 1B. UNRESOLVED STAFF COMMENTS As of the date of this report, the Company had no unresolved comments from the Commission staff regarding its periodic or current reports under the Exchange Act. ITEM 2. PROPERTIES We conduct most of our operations in approximately 104 thousand square feet of leased space at 20 Custom House Street in downtown Boston, Massachusetts. Our lease expires in December 2018. ITEM 3. LEGAL PROCEEDINGS Our Insurance Subsidiaries are parties to a number of lawsuits arising in the ordinary course of their insurance business. We believe that the ultimate resolution of these lawsuits will not, individually or in the aggregate, have a material adverse effect on our financial condition. On December 15, 2015, the Company filed for arbitration with a reinsurer in regards to the reinsurance recoverable resulting from the 2015 winter storm losses that are admissible under our contract. ITEM 4. MINE SAFETY DISCLOSURES Not Applicable 30 PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES As of February 16, 2017, there were 24 holders of record of the Company's common stock, par value $0.01 per share, and we estimate another 11,000 held in "Street Name." 2016 First quarter Second quarter Third quarter Fourth quarter 2015 First quarter Second quarter Third quarter Fourth quarter $ $ $ $ $ $ $ $ High 57.51 62.49 68.50 74.70 High 65.66 61.32 59.57 59.53 $ $ $ $ $ $ $ $ Low 53.36 54.63 61.14 65.60 Low 57.96 54.99 50.98 51.14 The closing price of the Company's common stock on February 16, 2017 was $73.25 per share. During 2016 and 2015, the Company’s Board of Directors declared four quarterly cash dividends to shareholders, which were paid and accrued in the amounts of $42,390 and $41,994, respectively. On February 15, 2017, the Company's Board of Directors declared a quarterly cash dividend of $.70 per share to shareholders of record on March 1, 2017 payable on March 15, 2017. The Company plans to continue to declare and pay quarterly cash dividends in 2017, depending on the Company's financial position and the regularity of its cash flows. The Company relies on dividends from its Insurance Subsidiaries for a portion of its cash requirements. The payment by the Company of any cash dividends to the holders of common stock therefore depends on the receipt of dividend payments from its Insurance Subsidiaries. The payment of dividends by the Insurance Subsidiaries is subject to limitations imposed by Massachusetts law, as discussed in Item 1—Business, Supervision and Regulation, Insurance Regulation Concerning Dividends, and also in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources. The information called for by Item 201 (d) of Regulation S-K regarding securities authorized for issuance under equity compensation plans will be contained in the Company's Proxy Statement for its Annual Meeting of Shareholders, to be held on May 24, 2017 in Boston, MA, which the Company intends to file with the U.S. Securities and Exchange Commission within 120 days after December 31, 2016 (the Company's fiscal year end), and such information is incorporated herein by reference. For information regarding our share repurchase program, refer to Item 8—Financial Statements and Supplementary Data, Note 12, Share Repurchase Program, of this Form 10-K. COMMON STOCK PERFORMANCE GRAPH Set forth below is a line graph comparing the dollar change in the cumulative total shareholder return on the Company's Common Stock, for the period beginning on December 31, 2011 and ending on December 31, 2016 with the cumulative total return of the NASDAQ Stock Market Index and a peer group comprised of six selected property & casualty insurance companies over the same period. The peer group consists of Baldwin & Lyons, Inc., Infinity Property & Casualty Corp., Mercury General Corp., State Auto Financial Corp., Selective Insurance Group, Inc., and Donegal 31 Group, Inc. The graph shows the change in value of an initial one hundred dollar investment over the period indicated, assuming re-investment of all dividends. Comparative Cumulative Total Returns since December 31, 2011 Among Safety Insurance Group, Inc., Property & Casualty Insurance Peer Group and the NASDAQ Stock Market Index The foregoing performance graph and data shall not be deemed "filed" as part of this Form 10-K for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section and should not be deemed incorporated by reference into any other filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates it by reference into such filing. 32 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth our selected historical consolidated financial data as of and for each of the five years ended December 31, 2016, 2015, 2014, 2013 and 2012. The selected historical consolidated financial data for the years ended December 31, 2016, 2015, and 2014, and as of December 31, 2016 and 2015, have been derived from the financial statements of Safety Insurance Group, Inc. included in this annual report which have been audited. The selected historical consolidated financial data for the years ended December 31, 2013 and 2012 and as of December 31, 2014, 2013, and 2012 has been derived from Safety Insurance Group, Inc.'s consolidated financial statements not included in this annual report, which have been audited. We have prepared the selected historical consolidated financial data in conformity with U. S. generally accepted accounting principles. The selected financial data presented below should be read in conjunction with Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and the accompanying notes included in this Form 10-K in order to more fully understand the historical consolidated financial data. Years Ended December 31, 2016 2015 Direct written premiums Net written premiums Net earned premiums Net investment income Earnings from partnership investments Net realized gains (losses) on investments Net impairment losses on investments Finance and other service income Total revenue Losses and loss adjustment expenses Underwriting, operating and related expenses Interest expense Total expenses Income (loss) before income taxes Income tax expense (credit) Net income (loss) Earnings (loss) per weighted average common share: Basic Diluted Cash dividends paid per common share Number of shares used in computing earnings (loss) per share: Basic Diluted $ $ $ $ $ $ $ 811,559 766,470 755,760 38,413 3,185 5,559 (798) 17,703 819,822 493,433 233,017 90 726,540 93,282 28,697 64,585 4.29 4.27 2.80 $ $ $ $ $ $ $ $ $ $ 785,730 746,180 738,164 40,534 2,387 (469) (796) 18,133 797,953 612,569 213,939 90 826,598 (28,645) (14,792) (13,853) $ $ $ 2014 765,685 734,914 716,875 42,303 878 197 — 18,544 778,797 476,366 219,023 90 695,479 83,318 23,964 59,354 $ $ $ 2013 731,680 697,450 681,870 43,054 - 1,677 — 18,683 745,284 447,749 209,758 89 657,596 87,688 26,337 61,351 2012 696,220 663,942 642,469 40,870 - 1,975 — 18,553 703,867 422,217 200,138 88 622,443 81,424 23,354 58,070 (0.93) $ (0.93) $ $ 2.80 3.93 3.91 2.60 $ $ $ 3.99 3.98 2.40 $ $ $ 3.80 3.80 2.20 14,946,453 15,032,263 14,866,607 14,866,607 14,963,047 15,052,745 15,167,052 15,212,385 15,288,346 15,295,452 33 Balance Sheet Data: Total cash and investment securities Total assets Losses and loss adjustment expense reserves Total liabilities Total shareholders' equity GAAP Ratios: Loss ratio (1) Expense ratio (1) Combined ratio (1) 2016 2015 Years Ended December 31, 2014 2013 2012 $ 1,300,558 1,758,246 $ 1,256,937 1,703,869 $ 1,298,716 1,675,719 $ 1,258,453 1,625,457 $ 1,223,736 1,574,346 560,321 1,087,520 670,726 553,977 1,059,370 644,499 65.3 % 30.8 96.1 % 83.0 % 29.0 112.0 % 482,012 967,436 708,283 66.5 % 30.6 97.1 % 455,014 930,270 695,187 65.7 % 30.8 96.5 % 423,842 879,987 694,359 65.7 % 31.2 96.9 % (1) The loss ratio is the ratio of losses and loss adjustment expenses to net earned premiums. The expense ratio, when calculated on a GAAP basis, is the ratio of underwriting expense to net earned premiums. The combined ratio is the sum of the loss ratio and the expense ratio. Please refer to Insurance Ratios under Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion on our GAAP ratios. 34 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our accompanying consolidated financial statements and notes thereto, which appear elsewhere in this document. In this discussion, all dollar amounts are presented in thousands, except share and per share data. The following discussion contains forward-looking statements. We intend statements which are not historical in nature to be, and are hereby identified as “forward-looking statements” to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, the Company’s senior management may make forward- looking statements orally to analysts, investors, the media and others. This safe harbor requires that we specify important factors that could cause actual results to differ materially from those contained in forward-looking statements made by or on behalf of us. We cannot promise that our expectations in such forward-looking statements will turn out to be correct. Our actual results could be materially different from and worse than our expectations. See “Forward- Looking Statements” below for specific important factors that could cause actual results to differ materially from those contained in forward-looking statements. Executive Summary and Overview In this discussion, “Safety” refers to Safety Insurance Group, Inc. and “our Company,” “we,” “us” and “our” refer to Safety Insurance Group, Inc. and its consolidated subsidiaries. Our subsidiaries consist of Safety Insurance Company (“Safety Insurance”), Safety Indemnity Insurance Company (“Safety Indemnity”), Safety Property and Casualty Insurance Company (“Safety P&C”), Safety Asset Management Corporation (“SAMC”), and Safety Management Corporation, which is SAMC’s holding company. We are a leading provider of private passenger automobile insurance in Massachusetts. In addition to private passenger automobile insurance (which represented 57.7% of our direct written premiums in 2016), we offer a portfolio of other insurance products, including commercial automobile (14.9% of 2016 direct written premiums), homeowners (22.4% of 2016 direct written premiums), dwelling fire, umbrella and business owner policies (totaling 5.0% of 2016 direct written premiums). Operating exclusively in Massachusetts, New Hampshire and Maine through our insurance company subsidiaries, Safety Insurance, Safety Indemnity, and Safety P&C (together referred to as the “Insurance Subsidiaries”), we have established strong relationships with independent insurance agents, who numbered 890 in 1,101 locations throughout these three states during 2016. We have used these relationships and our extensive knowledge of the Massachusetts market to become the third largest private passenger automobile and the second largest commercial automobile insurance carrier in Massachusetts, capturing an approximate 9.7% and 14.7% share, respectively, of the Massachusetts private passenger and commercial automobile markets in 2016, according to statistics compiled by CAR based on automobile exposures. We also are the fourth largest homeowners insurance carrier in Massachusetts with a 7.2% share of that market. We were ranked the 48th largest automobile writer in the country according to A.M. Best, based on 2015 direct written premiums. We were incorporated under the laws of Delaware in 2001, but through our predecessors, we have underwritten insurance in Massachusetts since 1979. The Insurance Subsidiaries began writing private passenger automobile and homeowners insurance in New Hampshire during 2008. During the years ended December 31, 2016, 2015, and 2014, we wrote $26,128, $22,731, and $18,755 in direct written premiums, respectively, and approximately 26,626, 24,364, and 20,626 policies, respectively, in New Hampshire. On February 9, 2015, the Insurance Subsidiaries each received a license to begin writing our property and casualty insurance products in the state of Maine. We began writing business in Maine in 2016. Recent Trends and Events Losses and loss adjustment expenses incurred for the year ended December 31, 2016 decreased by $119,136, or 19.4%, to $493,433 from $612,569 for the comparable 2015. The decrease is due to losses related to the highest recorded snowfall totals in Massachusetts history in 2015, which produced elevated catastrophe and non-catastrophe 35 claims activity throughout our personal and commercial property lines. An unprecedented level of snow, specifically 9 feet in various Massachusetts communities and 95 inches in the Boston area alone, was received during a 30 day period in the first quarter of 2015. We define a “catastrophe” as an event that produces pre-tax losses before reinsurance in excess of $1,000 and involves multiple first-party policyholders, or an event that produces a number of claims in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time following the event. Catastrophes are caused by various natural events including high winds, winter storms, tornadoes, hailstorms, and hurricanes. The nature and level of catastrophes in any period cannot be reliably predicted. Catastrophe losses incurred by the type of event are shown in the following table. Event Windstorms and hailstorms Tornado and windstorms Rainstorms Floods Icestorms and snowstorms Hurricane and tropical storms Total losses incurred (1) Years Ended December 31, 2016 2015 2014 - - - - 8,854 - 8,854 $ $ 13,569 - - - 167,367 - 180,936 $ $ 1,969 - - - 6,223 - 8,192 $ $ (1) Total losses incurred include losses plus defense and cost containment expenses and excludes adjusting and other claims settlement expenses. For the year ended December 31, 2016, our total expected reinsurance recovery from reinsurers under our catastrophe program related to the 2015 snow event is $67,934. Amounts recoverable from reinsurers are billed to the reinsurer as claims are paid by the Company. At December 31, 2016, the reinsurance recoverable on paid and unpaid loss and loss adjustment expense related to the 2015 snow event is $31,701. We did not have any recoveries from our primary catastrophe reinsurance treaties during the year ended December 31, 2014. On December 15, 2015, the Company filed for arbitration with a reinsurer in regards to the reinsurance recoverable resulting from the 2015 winter storm losses that are admissible under our contract. The total amount of recoverable in dispute, which is based on our total incurred loss, is $22,838. No provision for collectability has been recorded in the financial statements as we believe the recoverable is valid and will be recovered. The following rate changes have been filed and approved by the insurance regulators of Massachusetts and New Hampshire in 2016 and 2015. Our Massachusetts private passenger automobile rates include a 13% commission rate for agents. Line of Business New Hampshire Homeowner New Hampshire Private Passenger Automobile Massachusetts Homeowner Massachusetts Private Passenger Automobile Massachusetts Commercial Automobile Massachusetts Homeowner New Hampshire Private Passenger Automobile New Hampshire Homeowner New Hampshire Commercial Auto Massachusetts Private Passenger Automobile Massachusetts Commercial Automobile Rate Change 4.4% 4.1% 3.6% 5.8% 5.5% 9.1% 5.0% 7.9% 7.9% 3.8% 3.5% Effective Date December 1, 2016 December 1, 2016 November 1, 2016 July 15, 2016 March 15, 2016 November 1, 2015 November 1, 2015 November 1, 2015 August 1, 2015 June 1, 2015 February 1, 2015 36 Statutory Accounting Principles Our results are reported in accordance with GAAP, which differ from amounts reported in accordance with statutory accounting principles ("SAP") as prescribed by insurance regulatory authorities, which in general reflect a liquidating, rather than going concern concept of accounting. Specifically, under GAAP: (cid:120) (cid:120) Policy acquisition costs such as commissions, premium taxes and other variable costs incurred which are directly related to the successful acquisition of a new or renewal insurance contract are capitalized and amortized on a pro rata basis over the period in which the related premiums are earned, rather than expensed as incurred, as required by SAP. Certain assets are included in the consolidated balance sheets whereas, under SAP, such assets are designated as "nonadmitted assets," and charged directly against statutory surplus. These assets consist primarily of premium receivables that are outstanding over ninety days, federal deferred tax assets in excess of statutory limitations, furniture, equipment, leasehold improvements and prepaid expenses. (cid:120) Amounts related to ceded reinsurance are shown gross of ceded unearned premiums and reinsurance recoverables, rather than netted against unearned premium reserves and loss and loss adjustment expense reserves, respectively, as required by SAP. (cid:120) (cid:120) Fixed maturities securities, which are classified as available-for-sale, are reported at current fair values, rather than at amortized cost, or the lower of amortized cost or market, depending on the specific type of security, as required by SAP. The differing treatment of income and expense items results in a corresponding difference in federal income tax expense. Changes in deferred income taxes are reflected as an item of income tax benefit or expense, rather than recorded directly to surplus as regards policyholders, as required by SAP. Admittance testing may result in a charge to unassigned surplus for non-admitted portions of deferred tax assets. Under GAAP reporting, a valuation allowance may be recorded against the deferred tax asset and reflected as an expense. Insurance Ratios The property and casualty insurance industry uses the combined ratio as a measure of underwriting profitability. The combined ratio is the sum of the loss ratio (losses and loss adjustment expenses incurred as a percent of net earned premiums) plus the expense ratio (underwriting and other expenses as a percent of net earned premiums, calculated on a GAAP basis). The combined ratio reflects only underwriting results and does not include income from investments or finance and other service income. Underwriting profitability is subject to significant fluctuations due to competition, catastrophic events, weather, economic and social conditions, and other factors. Our GAAP insurance ratios are presented in the following table for the periods indicated. GAAP ratios: Loss ratio Expense ratio Combined ratio Share-Based Compensation Year Ended December 31, 2016 2015 2014 65.3 % 30.8 96.1 % 83.0 % 29.0 112.0 % 66.5 % 30.6 97.1 % On June 25, 2002, the Board of Directors of the Company (the "Board") adopted the 2002 Management Omnibus Incentive Plan (the "Incentive Plan"). The Incentive Plan provides for a variety of awards, including nonqualified stock options ("NQSOs"), stock appreciation rights and restricted stock ("RS") awards. 37 On March 10, 2006, the Board approved amendments to the Incentive Plan, subject to shareholder approval, to (i) increase the number of shares of common stock available for issuance by 1,250,000 shares, (ii) remove obsolete provisions, and (iii) make other non-material changes. A total of 1,250,000 shares of common stock had previously been authorized for issuance under the Incentive Plan. The Incentive Plan, as amended, was approved by the shareholders at the 2006 Annual Meeting of Shareholders which was held on May 19, 2006. Under the Incentive Plan, as amended, the maximum number of shares of common stock with respect to which awards may be granted is 2,500,000. As of December 31, 2016, there were 279,142 shares available for future grant. The Board and the Compensation Committee intend to issue more awards under the Incentive Plan in the future. Grants outstanding under the Incentive Plan as of December 31, 2016, were comprised of 190,103 restricted shares. Grants made under the Incentive Plan during the years 2012 through 2016 were as follows. Type of Equity Awarded RS - Service RS RS - Service RS - Service RS RS - Performance RS - Service RS - Service RS - Service RS - Performance RS - Service RS RS - Performance RS - Service RS - Service RS - Performance RS - Service RS RS - Performance RS - Service RS - Service RS - Performance RS RS RS - Service RS - Service RS - Performance RS - Performance Effective Date March 8, 2012 March 8, 2012 March 21, 2012 March 11, 2013 March 11, 2013 March 11, 2013 March 27, 2013 July 8, 2013 August 5, 2013 August 5, 2013 March 11, 2014 March 11, 2014 March 11, 2014 March 24, 2014 July 15, 2014 July 15, 2014 February 24, 2015 February 24, 2015 February 24, 2015 February 24, 2015 July 1. 2015 July 1. 2015 February 23, 2016 March 31, 2016 February 23, 2016 February 23, 2016 February 23, 2016 April 1, 2016 Number of Awards Granted Fair Value per Share 77,844 4,000 20,912 28,988 4,000 35,429 22,485 500 1,659 2,027 24,426 4,000 27,928 20,588 1,767 1,975 24,076 4,000 35,932 17,321 1,546 1,790 4,000 1,000 24,479 17,077 34,626 10,000 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 41.75 (1) 41.75 (1) 41.96 (1) 46.96 (1) 46.96 (1) 43.90 (2) 48.65 (1) 51.63 (1) 54.26 (1) 48.27 (2) 54.35 (1) 54.35 (1) 58.09 (2) 53.64 (1) 50.94 (1) 55.70 (2) 61.68 (1) 61.68 (1) 63.73 (2) 61.68 (1) 58.21 (1) 61.45 (2) 56.07 (1) 57.06 (1) 56.07 (1) 56.07 (1) 60.72 (2) 61.38 (2) Vesting Terms 3 years, 30%-30%-40% No vesting period (3) 5 years, 20% annually (5) 3 years, 30%-30%-40% No vesting period (3) 3 years, cliff vesting (4) 5 years, 20% annually (5) 5 years, 20% annually (5) 3 years, 30%-30%-40% 3 years, cliff vesting (4) 3 years, 30%-30%-40% No vesting period (3) 3 years, cliff vesting (4) 5 years, 20% annually (5) 3 years, 30%-30%-40% 3 years, cliff vesting (4) 3 years, 30%-30%-40% No vesting period (3) 3 years, cliff vesting (4) 5 years, 20% annually (5) 3 years, 30%-30%-40% 3 years, cliff vesting (4) No vesting period (3) No vesting period (3) 3 years, 30%-30%-40% 5 years, 20% annually (5) 3 years, cliff vesting (4) 3 years, cliff vesting (4) (1) The fair value per share of the restricted stock grant is equal to the closing price of our common stock on the grant date. (2) The fair value per share of the restricted stock grant is equal to the performance-based restricted stock award calculation. (3) Board of Director members must maintain stock ownership equal to at least four times their annual retainer. This requirement must be met within five years of becoming a director. (4) The shares represent performance-based restricted shares award. Vesting of these shares is dependent upon the attainment of pre-established performance objectives, and any difference between shares granted and shares earned at the end of the performance period will be reported at the conclusion of the performance period. (5) The shares represent awards granted to non-executive employees and vest ratable over a five-year service period. Reinsurance We reinsure with other insurance companies a portion of our potential liability under the policies we have underwritten, thereby protecting us against an unexpectedly large loss or a catastrophic occurrence that could produce 38 large losses, primarily in our homeowners line of business. We use various software products to measure our exposure to catastrophe losses and the probable maximum loss to us for catastrophe losses such as hurricanes. The models include estimates for our share of the catastrophe losses generated in the residual market for property insurance by the Massachusetts Property Insurance Underwriting Association (“FAIR Plan”). The reinsurance market has seen from the various software modelers, increases in the estimate of damage from hurricanes in the southern and northeast portions of the United States due to revised estimations of increased hurricane activity and increases in the estimation of demand surge in the periods following a significant event. We continue to manage and model our exposure and adjust our reinsurance programs as a result of the changes to the models. As of January 1, 2017, we have purchased four layers of excess catastrophe reinsurance providing $615,000 of coverage for property losses in excess of $50,000 up to a maximum of $665,000. Our reinsurers’ co-participation is 65.0% of $100,000 for the 1st layer, 80.0% of $280,000 for the 2nd layer, 80.0% of $135,000 for the 3rd layer and 80.0% of $100,000 for the 4th layer. As a result of the changes to the models, and our revised reinsurance program, our catastrophe reinsurance in 2017 protects us in the event of a “130- year storm” (that is, a storm of a severity expected to occur once in a 130-year period). Swiss Re, our primary reinsurer, maintains an A.M. Best rating of “A+” (Superior). Most of our other reinsurers have an A.M. Best rating of “A+” (Superior) or “A” (Excellent). We are a participant in CAR, a state-established body that runs the residual market reinsurance programs for commercial automobile insurance in Massachusetts under which premiums, expenses, losses and loss adjustment expenses on ceded business are shared by all insurers writing commercial automobile insurance in Massachusetts. We also participate in the FAIR Plan in which premiums, expenses, losses and loss adjustment expenses on homeowners business that cannot be placed in the voluntary market are shared by all insurers writing homeowners insurance in Massachusetts. The FAIR Plan buys reinsurance to reduce their exposure to catastrophe losses. On July 1, 2016, the FAIR Plan purchased $1,600,000 of catastrophe reinsurance for property losses with retention of $100,000. At December 31, 2016, our total expected reinsurance recovery from reinsurers under our catastrophe reinsurance program related to the 2015 snow event (as discussed in the Recent Trends and Events section) is $67,934. Amounts recoverable from reinsurers are billed to the reinsurer as claims are paid by the Company. At December 31, 2016, the reinsurance recoverable on paid and unpaid loss and loss adjustment expense related to the 2015 snow event is $31,701. On December 15, 2015, the Company filed for arbitration with a reinsurer in regards to the reinsurance recoverable resulting from the 2015 winter storm losses that are admissible under our contract. The total amount of recoverable in dispute, which is based on our total incurred loss, is $22,838. No provision for collectability has been recorded in the financial statements as we believe the recoverable is valid and will be recovered. We also had $86,889 due from CAR comprising of loss and loss adjustment expense reserves, unearned premiums and reinsurance recoverables Effects of Inflation We do not believe that inflation has had a material effect on our consolidated results of operations, except insofar as inflation may affect interest rates. 39 The following table shows certain of our selected financial results. Results of Operations Direct written premiums Net written premiums Net earned premiums Net investment income Earnings from partnership investments Net realized gains (losses) on investments Net impairment losses on investments Finance and other service income Total revenue Loss and loss adjustment expenses Underwriting, operating and related expenses Interest expense Total expenses Income (loss) before income taxes Income tax expense (credit) Net income (loss) Earnings (loss) per weighted average common share: Basic Diluted Cash dividends paid per common share Years Ended December 31, 2016 2015 2014 $ $ $ $ $ $ $ 811,559 766,470 755,760 38,413 3,185 5,559 (798) 17,703 819,822 493,433 233,017 90 726,540 93,282 28,697 64,585 4.29 4.27 2.80 $ $ $ $ $ $ $ 785,730 746,180 738,164 40,534 2,387 (469) (796) 18,133 797,953 612,569 213,939 90 826,598 (28,645) (14,792) (13,853) (0.93) (0.93) 2.80 $ $ $ $ $ $ $ 765,685 734,914 716,875 42,303 878 197 — 18,544 778,797 476,366 219,023 90 695,479 83,318 23,964 59,354 3.93 3.91 2.60 YEAR ENDED DECEMBER 31, 2016 COMPARED TO YEAR ENDED 2015 Direct Written Premiums. Direct written premiums for the year ended December 31, 2016 increased by $25,829, or 3.3%, to $811,559 from $785,730 for the comparable 2015 period. The 2016 increases occurred primarily in our commercial automobile and homeowners business lines which experienced increases of 7.5% and 7.4% respectively, in average written premium per exposure. Written exposures increased by 3.8% and decreased by 0.5% in our commercial automobile and homeowners lines, respectively. Our private passenger line also experienced an increase of 3.1% in average written premium per exposure. Net Written Premiums. Net written premiums for the year ended December 31, 2016 increased by $20,290, or 2.7%, to $766,470 from $746,180 for the comparable 2015 period. The 2016 increase was primarily due to the factors that increased direct written premiums. Net Earned Premiums. Net earned premiums for the year ended December 31, 2016 increased by $17,596, or 2.4%, to $755,760 from $738,164 for the comparable 2015 period. The 2016 increase was primarily due to the factors that increased direct written premiums. 40 The effect of reinsurance on net written and net earned premiums is presented in the following table. Written Premiums Direct Assumed Ceded Net written premiums Earned Premiums Direct Assumed Ceded Net earned premiums Year Ended December 31, 2016 2015 $ $ $ $ 811,559 30,424 (75,513) 766,470 796,366 29,544 (70,150) 755,760 $ $ $ $ 785,730 28,322 (67,872) 746,180 776,633 25,819 (64,288) 738,164 Net Investment Income. Net investment income for the year ended December 31, 2016 decreased by $2,121, or 5.2%, to $38,413 from $40,534 for the comparable 2015 period. The decrease is a result of changes in the average invested asset balance as a result of investment proceeds used in the payment of claims resulting from the 2015 winter events and increases in fixed maturity amortization. Net effective annual yield on the investment portfolio was 3.1 % for the year ended December 31, 2016 compared to 3.3 % for the year ended December 31, 2015. Our duration was 4.3 years at December 31, 2016, up from 4.1 years at December 31, 2015. Earnings from Partnership Investments. Earnings from partnership investments were $3,185 for the year ended December 31, 2016 compared to $2,387 for the year ended December 31, 2015. Realized Gains (Losses) on Investments. Net realized gains on investments were $5,559 for the year ended December 31, 2016 compared to net realized losses on investments $469 for the comparable 2015 period. The increase is a result of sales of equity securities during 2016. The gross unrealized gains and losses on investments in fixed maturity securities, equity securities, including interests in mutual funds, and other invested assets were as follows: As of December 31, 2016 Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses (3) OTTI Non-OTTI Unrealized Unrealized Losses (4) Losses Estimated Fair Value U.S. Treasury securities Obligations of states and political subdivisions Residential mortgage-backed securities (1) Commercial mortgage-backed securities Other asset-backed securities Corporate and other securities Subtotal, fixed maturity securities Equity securities (2) Other invested assets (5) Totals $ $ 302 382,811 252,031 35,695 70,411 401,413 1,142,663 92,326 21,142 1,256,131 $ $ — $ — $ 11,534 3,256 191 89 7,070 22,140 15,504 — 37,644 $ (3,912) (2,656) (432) (90) (3,444) (10,534) (2,735) — (13,269) $ — $ — — — — — — — — — $ 302 390,433 252,631 35,454 70,410 405,039 1,154,269 105,095 21,142 1,280,506 (1) Residential mortgage-backed securities consists of obligations of U.S. Government agencies including collateralized mortgage obligations issued, guaranteed and/or insured by the following issuers: Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) and the Federal Home Loan Bank (FHLB). (2) Equity securities include interests in mutual funds held to fund the Company’s executive deferred compensation plan. (3) Our investment portfolio included 343 securities in an unrealized loss position at December 31, 2016. (4) Amounts in this column represent other-than-temporary impairment (“OTTI”) recognized in accumulated other comprehensive income. (5) Other invested assets are accounted for under the equity method which approximates fair value. 41 The composition of our fixed income security portfolio by Moody’s rating was as follows: U.S. Treasury securities and obligations of U.S. Government agencies Aaa/Aa A Baa Ba B Caa CA D Not rated Total As of December 31, 2016 Estimated Fair Value Percent $ $ 252,989 390,432 237,787 124,340 40,667 68,449 11,072 416 355 27,762 1,154,269 22.0 % 33.8 20.6 10.8 3.5 5.9 1.0 - - 2.4 100.0 % Ratings are generally assigned upon the issuance of the securities and are subject to revision on the basis of ongoing evaluations. Ratings in the table are as of the date indicated. As of December 31, 2016, our portfolio of fixed maturity investments was principally comprised of investment grade corporate fixed maturity securities, U.S. government and agency securities, and asset-backed securities. The portion of our non-investment grade portfolio of fixed maturity investments is primarily comprised of variable rate secured and senior bank loans and high yield bonds. We have no exposure to European sovereign debt. The following table illustrates the gross unrealized losses included in our investment portfolio and the fair value of those securities, aggregated by investment category. The table also illustrates the length of time that they have been in a continuous unrealized loss position as of December 31, 2016. Less than 12 Months As of December 31, 2016 12 Months or More Total U.S. Treasury securities Obligations of states and political subdivisions Residential mortgage-backed securities Commercial mortgage-backed securities Other asset-backed securities Corporate and other securities Subtotal, fixed maturity securities Equity securities Total temporarily impaired securities Estimated Fair Value 301 79,960 182,265 15,521 31,869 118,625 428,541 6,364 434,905 $ $ $ — $ 3,912 2,476 432 90 2,044 8,954 315 9,269 $ $ — $ — 4,595 — — 17,531 22,126 14,841 36,967 $ Unrealized Estimated Unrealized Fair Value Losses Losses Estimated Fair Value 301 79,960 186,860 15,521 31,869 136,156 450,667 21,205 471,872 — $ — 180 — — 1,400 1,580 2,420 4,000 $ Unrealized Losses $ $ — 3,912 2,656 432 90 3,444 10,534 2,735 13,269 As of December 31, 2016, we held insured investment securities of approximately $4,578, which represented approximately 0.4% of our total investments. Approximately $232 of these securities are pre-refunded, meaning that funds have been set aside in escrow to satisfy the future interest and principal obligations of the bond. The following table shows our insured investment securities that are backed by financial guarantors including pre-refunded securities as of December 31, 2016. We do not have any direct investment holdings in a financial guarantee insurance company. 42 Municipal bonds Ambac Assurance Corporation Financial Guaranty Insurance Company Assured Guaranty Municipal Corporation National Public Finance Guaranty Corporation Total As of December 31, 2016 Total Pre-refunded Securities Exposure Net of Pre-refunded Securities $ $ - 232 - 4,346 4,578 $ $ - 232 - - 232 $ $ - - - 4,346 4,346 The Moody's ratings of our insured investments held at December 31, 2016 are essentially the same with or the without the investment guarantees. We reviewed the unrealized losses in our fixed income and equity portfolio as of December 31, 2016 for potential other-than-temporary asset impairments. The Company held five debt securities at December 31, 2016 with a material (20% or greater) unrealized loss for four or more consecutive quarters that additionally had certain qualitative factors that led to an impairment charge. As a result of our analysis, the Company recognized OTTI of $798 for the year ended December 31, 2016, which consisted entirely of credit losses related to fixed maturity securities. Specific qualitative analysis was also performed for securities appearing on our “Watch List,” if any. Qualitative analysis considered such factors as the financial condition and the near term prospects of the issuer, whether the debtor is current on its contractually obligated interest and principal payments, changes to the rating of the security by a rating agency and the historical volatility of the fair value of the security. Of the $13,269 gross unrealized losses as of December 31, 2016, $3,912 relates to obligations of U.S. Treasuries, states and political subdivisions. The remaining $9,357 of gross unrealized losses relates primarily to holdings of investment grade asset-backed, corporate, other fixed maturity and equity securities. The majority of unrealized losses recorded on the investment portfolio at December 31, 2016 resulted from fluctuations in market interest rates and other temporary market conditions as opposed to fundamental changes in the credit quality of the issuers of such securities. Given our current level of liquidity, the fact that we do not intend to sell these securities, and that it is more likely than not that we will not be required to sell these securities prior to recovery of the cost basis of these securities, these decreases in values are viewed as being temporary. For information regarding fair value measurements of our investment portfolio, refer to Item 8—Financial Statements and Supplementary Data, Note 14, Fair Value of Financial Instruments, of this Form 10-K. Net Impairment Losses on Investments. Net impairment losses on investments were $798 and $796 for the year ended December 31, 2016 and December 31, 2015. Finance and Other Service Income. Finance and other service income include revenues from premium installment charges, which we recognize when earned, and other miscellaneous income and fees. Finance and other service income decreased by $430, or 2.4%, to $17,703 for the year ended December 31, 2016 from $18,133 for the comparable 2015 period. Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses incurred for the year ended December 31, 2016 decreased by $119,136, or 19.4%, to $493,433 from $612,569 for the comparable 2015 period due primarily to the winter snowfall catastrophe in 2015. Our GAAP loss ratio for the year ended December 31, 2016 and 2015 was 65.3% and 83.0%, respectively. Our GAAP loss ratio excluding loss adjustment expenses was 56.8% and 72.9% for the year ended December 31, 2016 and 2015, respectively. Total prior year favorable development included in the pre-tax results for the year ended December 31, 2016 was $45,448, compared to $30,313, for the comparable 2015 period. 43 Underwriting, Operating and Related Expenses. Underwriting, operating and related expenses for the year ended December 31, 2016 increased by $19,078, or 8.9%, to $233,017 from $213,939 for the comparable 2015 period. Our GAAP expense ratio for the year ended December 31, 2016 increased to 30.8% from 29.0% for the comparable 2015 period. The increase in underwriting, operating and related expenses and the expense ratio is attributable to increases in contingent commissions and bonus compensation. Interest Expenses. Interest expense was $90 for each of the years ended December 31, 2016 and 2015. The credit facility commitment fee included in interest expense was $75 for each of the years ended December 31, 2016 and 2015. Income Tax Expense (Credit). Our effective tax rates were 30.8% and 51.6% for the years ended December 31, 2016 and 2015, respectively. The effective rate in 2016 was lower than the statutory rate of 35.0% primarily due to adjustments for tax-exempt investment income. The effective rate in 2015 is the result of the net loss of the Company, which is increased by the adjustments for tax-exempt interest income. Net Income (Loss). Net income for the year ended December 31, 2016 was $64,585 compared to a net loss of $13,853 for the comparable 2015 period. YEAR ENDED DECEMBER 31, 2015 COMPARED TO YEAR ENDED 2014 Direct Written Premiums. Direct written premiums for the year ended December 31, 2015 increased by $20,045, or 2.6%, to $785,730 from $765,685 for the comparable 2014 period. The 2015 increases occurred primarily in our homeowners and personal automobile business lines which experienced increases of 6.1% and 3.2%, respectively, in average written premium per exposure. Written exposures increased by 5.8% and 2.4% in our commercial automobile and homeowners lines, respectively. The increase in homeowners exposures is primarily the result of our pricing strategy of offering account discounts to policyholders who insure both an automobile and home with us. Net Written Premiums. Net written premiums for the year ended December 31, 2015 increased by $11,266, or 1.5%, to $746,180 from $734,914 for the comparable 2014 period. The 2015 increase was primarily due to the factors that increased direct written premiums. Net Earned Premiums. Net earned premiums for the year ended December 31, 2015 increased by $21,289, or 3.0%, to $738,164 from $716,875 for the comparable 2014 period. The 2015 increase was primarily due to the factors that increased direct written premiums. The effect of reinsurance on net written and net earned premiums is presented in the following table. Written Premiums Direct Assumed Ceded Net written premiums Earned Premiums Direct Assumed Ceded Net earned premiums Years Ended December 31, 2015 2014 $ $ $ $ 785,730 28,322 (67,872) 746,180 776,633 25,819 (64,288) 738,164 $ $ $ $ 765,685 25,602 (56,373) 734,914 747,786 23,724 (54,635) 716,875 Net Investment Income. Net investment income for the year ended December 31, 2015 decreased by $1,769, or 4.2%, to $40,534 from $42,303 for the comparable 2014 period. Net effective annual yield on the investment portfolio 44 was 3.3% for the year ended December 31, 2015 compared to 3.5% for the year ended December 31, 2014. Our duration was 4.1 years at December 31, 2015 up from 3.8 years at December 31, 2014. Earnings from Partnership Investments. Earnings from partnership investments were $2,387 for the year ended December 31, 2015 compared to $878 for the year ended December 31, 2014. Investment activity in this partnership commenced in the fourth quarter of 2014. Net Realized (Losses) Gains on Investments. Net realized losses on investments were $469 for the year ended December 31, 2015 compared to net realized gains on investments of $197 for the comparable 2014 period. The gross unrealized gains and losses on investments in fixed maturity securities, equity securities, including interests in mutual funds, and other invested assets were as follows: As of December 31, 2015 Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses (3) OTTI Non-OTTI Unrealized Unrealized Losses (4) Losses Estimated Fair Value U.S. Treasury securities Obligations of states and political subdivisions Residential mortgage-backed securities (1) Commercial mortgage-backed securities Other asset-backed securities Corporate and other securities Subtotal, fixed maturity securities Equity securities (2) Other invested assets (5) Totals $ $ 1,805 377,188 237,896 28,851 24,037 394,194 1,063,971 102,541 17,602 1,184,114 $ $ — $ 21,160 5,188 30 39 4,191 30,608 13,498 — 44,106 $ (4) (426) (1,628) (218) (145) (10,521) (12,942) (5,835) — (18,777) $ $ — $ — — — — — — — — — $ 1,801 397,922 241,456 28,663 23,931 387,864 1,081,637 110,204 17,602 1,209,443 (1) Residential mortgage-backed securities consists of obligations of U.S. Government agencies including collateralized mortgage obligations issued, guaranteed and/or insured by the following issuers: Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) and the Federal Home Loan Bank (FHLB). (2) Equity securities include interests in mutual funds held to fund the Company’s executive deferred compensation plan. (3) Our investment portfolio included 514 securities in an unrealized loss position at December 31, 2015. (4) Amounts in this column represent other-than-temporary impairment (“OTTI”) recognized in accumulated other comprehensive income. (5) Other invested assets are accounted for under the equity method which is used as a proxy for fair value. The composition of our fixed income security portfolio by Moody’s rating was as follows: As of December 31, 2015 U.S. Treasury securities and obligations of U.S. Government agencies $ Estimated Fair Value 243,562 391,839 219,580 110,386 39,835 61,189 10,252 21 303 4,670 $ 1,081,637 Percent 22.5 % 36.2 20.3 10.2 3.7 5.7 1.0 - - 0.4 100.0 % Aaa/Aa A Baa Ba B Caa C D Not rated Total Ratings are generally assigned upon the issuance of the securities and are subject to revision on the basis of ongoing evaluations. Ratings in the table are as of the date indicated. 45 As of December 31, 2015, our portfolio of fixed maturity investments was principally comprised of investment grade corporate fixed maturity securities, U.S. government and agency securities, and asset-backed securities. The portion of our non-investment grade portfolio of fixed maturity investments is primarily comprised of variable rate secured and senior bank loans and high yield bonds. We have no exposure to European sovereign debt. The following table illustrates the gross unrealized losses included in our investment portfolio and the fair value of those securities, aggregated by investment category. The table also illustrates the length of time that they have been in a continuous unrealized loss position as of December 31, 2015. Less than 12 Months As of December 31, 2015 12 Months or More Total U.S. Treasury securities Obligations of states and political subdivisions Residential mortgage-backed securities Commercial mortgage-backed securities Other asset-backed securities Corporate and other securities Subtotal, fixed maturity securities Equity securities Total temporarily impaired securities Estimated Fair Value 1,801 34,837 85,561 26,113 14,454 173,493 336,259 19,409 355,668 $ $ Unrealized Estimated Unrealized Fair Value $ — $ Losses Losses $ 4 342 860 218 145 5,528 7,097 1,739 8,836 4,777 32,845 — — 33,522 71,144 12,054 83,198 $ $ $ Estimated Fair Value 1,801 39,614 118,406 26,113 14,454 207,015 407,403 31,463 438,866 Unrealized Losses $ $ 4 426 1,628 218 145 10,521 12,942 5,835 18,777 — $ 84 768 — — 4,993 5,845 4,096 9,941 $ As of December 31, 2015, we held insured investment securities of approximately $27,399, which represented approximately 2.3% of our total investments. Approximately $20,743 of these securities are pre-refunded, meaning that funds have been set aside in escrow to satisfy the future interest and principal obligations of the bond. The following table shows our insured investment securities that are backed by financial guarantors including pre-refunded securities as of December 31, 2015. We do not have any direct investment holdings in a financial guarantee insurance company. Municipal bonds Ambac Assurance Corporation Financial Guaranty Insurance Company Assured Guaranty Municipal Corporation National Public Finance Guaranty Corporation Total As of December 31, 2015 Total Pre-refunded Securities Exposure Net of Pre-refunded Securities $ $ - 245 9,128 18,026 27,399 $ $ - 245 9,128 11,370 20,743 $ $ - - - 6,656 6,656 The Moody's ratings of our insured investments held at December 31, 2015 are essentially the same with or without the investment guarantees. We reviewed the unrealized losses in our fixed income and equity portfolio as of December 31, 2015 for potential other-than-temporary asset impairments. The Company held five securities at December 31, 2015 with a material (20.0% or greater) unrealized loss for four or more consecutive quarters that additionally had certain qualitative factors that led to an impairment charge. As a result of our analysis, the Company recognized OTTI of $796 for the year ended December 31, 2015, which consisted entirely of credit losses related to fixed maturity securities. Specific qualitative analysis was performed for securities appearing on our “Watch List,” if any. Qualitative analysis considered such factors as the financial condition and the near term prospects of the issuer, whether the debtor is current on its contractually obligated interest and principal payments, changes to the rating of the security by a rating agency and the historical volatility of the fair value of the security. 46 Of the $18,777 gross unrealized losses as of December 31, 2015, $430 relates to obligations of U.S. Treasuries, states and political subdivisions. The remaining $18,347 of gross unrealized losses relates primarily to holdings of investment grade asset-backed, corporate, other fixed maturity and equity securities. The majority of the unrealized losses recorded on the investment portfolio at December 31, 2015 resulted from fluctuations in market interest rates and other temporary market conditions as opposed to fundamental changes in the credit quality of the issuers of such securities. Given our current level of liquidity, the fact that we do not intend to sell these securities, and that it is more likely than not that we will not be required to sell these securities prior to recovery of the cost basis of these securities, these decreases in values are viewed as being temporary. For information regarding fair value measurements of our investment portfolio, refer to Item 8—Financial Statements and Supplementary Data, Note 14, Fair Value of Financial Instruments, of this Form 10-K. Net Impairment Losses on Investments. Net impairment losses on investments were $796 for the year ended December 31, 2015. There were no impairment losses on investments for the year ended December 31, 2014. Finance and Other Service Income. Finance and other service income include revenues from premium installment charges, which we recognize when earned, and other miscellaneous income and fees. Finance and other service income decreased by $411, or 2.2%, to $18,133 for the year ended December 31, 2015 from $18,544 for the comparable 2014 period. Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses incurred for the year ended December 31, 2015 increased by $136,203, or 28.6%, to $612,569 from $476,366 for the comparable 2014 period due to the winter snowfall catastrophe in 2015. Our GAAP loss ratio for the years ended December 31, 2015 and 2014 was 83.0% and 66.5%, respectively. Our GAAP loss ratio excluding loss adjustment expenses was 72.9% and 57.8% for the years ended December 31, 2015 and 2014, respectively. Total prior year favorable development included in the pre-tax results for the year ended December 31, 2015 was $30,313, compared to $37,368, for the comparable 2014 period. Underwriting, Operating and Related Expenses. Underwriting, operating and related expenses for the year ended December 31, 2015 decreased by $5,084, or 2.3%, to $213,939 from $219,023 for the comparable 2014 period, primarily due to a decrease in commissions paid to agents. Our GAAP expense ratios for the year ended December 31, 2015 decreased to 29.0% from 30.6% for the comparable 2014 period. The decrease in underwriting, operating and related expense and the expense ratio is attributable to decreases in contingent commissions and bonus compensation. Interest Expenses. Interest expense was $90 for each of the years ended December 31, 2015 and 2014. The credit facility commitment fee included in interest expense was $75 for each of the years ended December 31, 2015 and 2014. Income Tax (Credit) Expense. Our effective tax rates were 51.6% and 28.8% for the years ended December 31, 2015 and 2014, respectively. The effective rate in 2015 is the result of the net loss of the Company, which is increased by the adjustments for tax-exempt interest income. The effective rate in 2014 was lower than the statutory rate of 35.0% primarily due to adjustments for tax-exempt investment income. Net (Loss) Income. Net loss for the year ended December 31, 2015 was $13,853 compared to net income of $59,354 for the comparable 2014 period. 47 Liquidity and Capital Resources As a holding company, Safety’s assets consist primarily of the stock of our direct and indirect subsidiaries. Our principal source of funds to meet our obligations and pay dividends to shareholders, therefore, is dividends and other permitted payments from our subsidiaries, principally Safety Insurance. Safety is the borrower under our credit facility. Safety Insurance’s sources of funds primarily include premiums received, investment income and proceeds from sales and redemptions of investments. Safety Insurance’s principal uses of cash are the payment of claims, operating expenses and taxes, the purchase of investments and payment of dividends to Safety. Net cash provided by operating activities was $98,824, $22,891, and $97,569 during the years ended December 31, 2016, 2015, and 2014, respectively. Our operations typically generate positive cash flows from operations as most premiums are received in advance of the time when claim and benefit payments are required. Cash flows from operations in the year ended 2015 were lower than the years ended 2016 and 2014 due to the increased claims activity resulting from the 2015 winter. These positive operating cash flows are expected to continue to meet our liquidity requirements. Net cash used for investing activities was $84,252 and $48,522 for the years ended December 31, 2016 and December 31, 2014, respectively, as purchases of fixed maturity and equity securities exceeded sales, paydowns, calls and maturities of fixed maturity and equity securities. Net cash provided by investing activities was $23,845 during the year ended December 31, 2015, as sales, paydowns, calls and maturities of fixed maturities and equity securities exceeded purchases of fixed maturity and equity securities due to the payment of claims resulting from the 2015 winter events. Net cash used for financing activities was $42,014, $41,697, and $62,469 during the years ended December 31, 2016, 2015 and 2014, respectively. Net cash used for financing activities is primarily comprised of dividend payments to shareholders and the acquisition of treasury stock. The Insurance Subsidiaries maintain a high degree of liquidity within their respective investment portfolios in fixed maturity and short-term investments. We do not anticipate the need to sell these securities to meet the Insurance Subsidiaries cash requirements. We expect the Insurance Subsidiaries to generate sufficient operating cash to meet all short-term and long-term cash requirements. However, there can be no assurance that unforeseen business needs or other items will not occur causing us to have to sell securities before their values fully recover; thereby causing us to recognize additional impairment charges in that time period. Credit Facility For information regarding our Credit Facility, please refer to Item 8—Financial Statements and Supplementary Data, Note 8, Debt, of this Form 10-K. Recent Accounting Pronouncements For information regarding Recent Accounting Pronouncements, please refer to Item 8—Financial Statements and Supplementary Data, Note 2, Summary of Significant Accounting Policies, of this Form 10-K. Regulatory Matters Our insurance company’s subsidiaries are subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid to their parent without prior approval of the Commissioner. The Massachusetts statute limits the dividends an insurer may pay in any twelve-month period, without the prior permission of the Commissioner, to the greater of (i) 10% of the insurer’s surplus as of the preceding December 31 or (ii) the insurer’s net income for the twelve-month period ending the preceding December 31, in each case determined in accordance with 48 statutory accounting practices. Our Insurance Subsidiaries may not declare an “extraordinary dividend” (defined as any dividend or distribution that, together with other distributions made within the preceding twelve months, exceeds the limits established by Massachusetts statute) until thirty days after the Commissioner has received notice of the intended dividend and has not objected. As historically administered by the Commissioner, this provision requires the Commissioner’s prior approval of an extraordinary dividend. Under Massachusetts law, an insurer may pay cash dividends only from its unassigned funds, also known as earned surplus, and the insurer’s remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. At year-end 2016, the statutory surplus of Safety Insurance was $604,813, and its net income for 2016 was $57,202. As a result, a maximum of $60,481 is available in 2017 for such dividends without prior approval of the Commissioner. Under this Massachusetts statute, the Insurance Subsidiaries has restricted net assets in the amount of $544,332 at December 31, 2016. During the twelve months ended December 31, 2016, Safety Insurance recorded dividends to Safety of $39,156 The maximum dividend permitted by law is not indicative of an insurer’s actual ability to pay dividends, which may be constrained by business and regulatory considerations, such as the impact of dividends on surplus, which could affect an insurer’s ratings or competitive position, the amount of premiums that can be written and the ability to pay future dividends. Since the initial public offering of its common stock in November 2002, the Company has paid regular quarterly dividends to shareholders of its common stock. Quarterly dividends paid during 2016 and 2015 were as follows: Declaration Date February 17, 2015 May 5, 2015 August 6, 2015 November 3, 2015 February 16, 2016 May 3, 2016 August 3, 2016 November 1, 2016 Record Date March 2, 2015 June 1, 2015 September 1, 2015 December 1, 2015 March 1, 2016 June 1, 2016 September 1, 2016 December 1, 2016 Payment Date March 13, 2015 June 15, 2015 September 15, 2015 December 12, 2015 March 15, 2016 June 15, 2016 September 15, 2016 December 15, 2016 Dividend per Common Share Total Dividends Paid and Accrued $ $ $ $ $ $ $ $ 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 $ $ $ $ $ $ $ $ 10,468 10,524 10,548 10,454 10,554 10,610 10,611 10,615 On February 15, 2017, our Board approved and declared a quarterly cash dividend on our common stock of $0.70 per share to be paid on March 15, 2017 to shareholders of record on March 1, 2017. We plan to continue to declare and pay quarterly cash dividends in 2017, depending on our financial position and the regularity of our cash flows. On August 3, 2007, the Board of Directors approved a share repurchase program of up to $30,000 of the Company’s outstanding common shares. As of December 31, 2016, the Board of Directors had cumulatively authorized increases to the existing share repurchase program of up to $150,000 of its outstanding common shares. Under the program, the Company may repurchase shares of its common stock for cash in public or private transactions, in the open market or otherwise. The timing of such repurchases and actual number of shares repurchased will depend on a variety of factors including price, market conditions and applicable regulatory and corporate requirements. The program does not require us to repurchase any specific number of shares and may be modified, suspended or terminated at any time without prior notice. At December 31, 2016 and December 31, 2015, the Company had purchased 2,279,570 shares at a cost of $83,835. Management believes that the current level of cash flow from operations provides us with sufficient liquidity to meet our operating needs over the next 12 months. We expect to be able to continue to meet our operating needs after the next 12 months from internally generated funds. Since our ability to meet our obligations in the long term (beyond such twelve-month period) is dependent upon such factors as market changes, insurance regulatory changes and economic conditions, no assurance can be given that the available net cash flow will be sufficient to meet our operating needs. We expect that we would need to borrow or issue capital stock if we needed additional funds, for example, to pay for an acquisition or a significant expansion of our operations. There can be no assurance that sufficient funds for any of the foregoing purposes would be available to us at such time. 49 Off-Balance Sheet Arrangements We have no material obligations under a guarantee contract meeting the characteristics identified in Accounting Standards Codification (“ASC”) 460, Guarantees. We have no material retained or contingent interests in assets transferred to an unconsolidated entity. We have no material obligations, including contingent obligations, under contracts that would be accounted for as derivative instruments. We have no obligations, including contingent obligations, arising out of a variable interest in an unconsolidated entity held by, and material to, us, where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with us. We have no direct investments in real estate and no holdings of mortgages secured by commercial real estate. Accordingly, we have no material off-balance sheet arrangements. Contractual Obligations We have obligations to make future payments under contracts and credit-related financial instruments and commitments. At December 31, 2016, certain long-term aggregate contractual obligations and credit-related commitments are summarized as follows: Loss and LAE reserves Operating leases Total contractual obligations Within One Year 274,558 3,990 278,548 $ $ $ $ Payments Due by Period Two to Three Years Four to Five Years 246,541 4,155 250,696 $ $ 33,619 - 33,619 $ $ After Five Years 5,603 - 5,603 $ $ Total 560,321 8,145 568,466 As of December 31, 2016, the Company had loss and LAE reserves of $560,321, unpaid reinsurance recoverables of $83,724 and net loss and LAE reserves of $476,597. Our loss and LAE reserves are estimates as described in more detail under Critical Accounting Policies and Estimates. The specific amounts and timing of obligations related to case reserves, IBNR reserves and related LAE reserves are not set contractually, and the amounts and timing of these obligations are unknown. Nonetheless, based upon our cumulative claims paid over the last ten years, the Company estimates that its loss and LAE reserves will be paid in the period shown above. While management believes that historical performance of loss payment patterns is a reasonable source for projecting future claims payments, there is inherent uncertainty in this estimated projected settlement of loss and LAE reserves, and as a result these estimates will differ, perhaps significantly, from actual future payments. Our operations typically generate substantial positive cash flows from operations as most premiums are received in advance of the time when claim and benefit payments are required. These positive operating cash flows are expected to continue to meet our liquidity requirements, including any unexpected variations in the timing of claim settlements. As part of the Company’s investment activity, we have committed $40,000 to investments in limited partnerships. The Company has contributed $19,757 to these commitments as of December 31, 2016. As of December 31, 2016, the remaining committed capital due to be called is $20,243. Loss and Loss Adjustment Expense Reserves. Critical Accounting Policies and Estimates Significant periods of time can elapse between the occurrence of an insured loss, the reporting to us of that loss and our final payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities. Our reserves represent estimates of amounts needed to pay reported and unreported losses and the expenses of investigating and paying those losses, or loss adjustment expenses. Every quarter, we review our previously established reserves and adjust them, if necessary. When a claim is reported, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment. The amount of the reserve is primarily based upon an evaluation of the type of claim involved, the circumstances surrounding each claim and the policy provisions relating to the loss. The estimate reflects the informed 50 judgment of such personnel based on general insurance reserving practices and on the experience and knowledge of the claims person. During the loss adjustment period, these estimates are revised as deemed necessary by our claims department based on subsequent developments and periodic reviews of the cases. When a claim is closed with or without a payment, the difference between the case reserve and the settlement amount creates a reserve deficiency if the payment exceeds the case reserve or a reserve redundancy if the payment is less than the case reserve. In accordance with industry practice, we also maintain reserves for estimated losses incurred but not yet reported (“IBNR”). IBNR reserves are determined in accordance with commonly accepted actuarial reserving techniques on the basis of our historical information and experience. We review and make adjustments to incurred but not yet reported reserves quarterly. In addition, IBNR reserves can also be expressed as the total loss reserves required less the case reserves on reported claims. When reviewing reserves, we analyze historical data and estimate the impact of various loss development factors, such as our historical loss experience and that of the industry, trends in claims frequency and severity, our mix of business, our claims processing procedures, legislative enactments, judicial decisions, legal developments in imposition of damages, and changes and trends in general economic conditions, including the effects of inflation. A change in any of these factors from the assumption implicit in our estimate can cause our actual loss experience to be better or worse than our reserves, and the difference can be material. There is no precise method, however, for evaluating the impact of any specific factor on the adequacy of reserves, because the eventual development of reserves is affected by many factors. In estimating all our loss reserves, we follow the guidance prescribed by Accounting Standards Codification (“ASC”) 944, Financial Services – Insurance. Management determines our loss and LAE reserves estimate based upon the analysis of our actuaries. A reasonable estimate is derived by selecting a point estimate within a range of indications as calculated by our actuaries using generally accepted actuarial techniques. The key assumption in most actuarial analysis is that past patterns of frequency and severity will repeat in the future, unless a significant change in the factors described above takes place. Our key factors and resulting assumptions are the ultimate frequency and severity of claims, based upon the most recent ten years of claims reported to the Company, and the data CAR reports to us to calculate our share of the residual market, as of the date of the applicable balance sheet. For each accident year and each coverage within a line of business our actuaries calculate the ultimate losses incurred. Our total reserves are the difference between the ultimate losses incurred and the cumulative loss and loss adjustment payments made to date. Our IBNR reserves are calculated as the difference between our total reserves and the outstanding case reserves at the end of the accounting period. To determine ultimate losses, our actuaries calculate a range of indications and select a point estimation using such actuarial techniques as: (cid:120) (cid:120) (cid:120) (cid:120) Paid Loss Indications: This method projects ultimate loss estimates based upon extrapolations of historic paid loss trends. This method tends to be used on short tail lines such as automobile physical damage. Incurred Loss Indications: This method projects ultimate loss estimates based upon extrapolations of historic incurred loss trends. This method tends to be used on long tail lines of business such as automobile liability and homeowner’s liability. Bornhuetter-Ferguson Indications: This method projects ultimate loss estimates based upon extrapolations of an expected amount of IBNR, which is added to current incurred losses or paid losses. This method tends to be used on small, immature, or volatile lines of business, such as our BOP and umbrella lines of business. Bodily Injury Code Indications: This method projects ultimate loss estimates for our private passenger and commercial automobile bodily injury coverage based upon extrapolations of the historic number of accidents and the historic number of bodily injury claims per accident. Projected ultimate bodily injury claims are then segregated into expected claims by type of injury (e.g. soft tissue injury vs. hard tissue injury) based on past experience. An ultimate severity, or average paid loss amounts, is estimated based upon extrapolating historic trends. Projected ultimate loss estimates using this method are the aggregate of estimated losses by injury type. 51 Such techniques assume that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting our ultimate losses, total reserves and resulting IBNR reserves. It is possible that the final outcome may fall above or below these amounts as a result of a number of factors, including immature data, sparse data, or significant growth in a line of business. Using these methodologies our actuaries established a range of reasonably possible estimations for net reserves of approximately $436,208 to $493,754 as of December 31, 2016 compared to a range of $446,368 to $495,541 as of December 31, 2015. In general, the low and high values of the ranges represent reasonable minimum and maximum values of the indications based on the techniques described above. Our selected point estimate of net loss and LAE reserves based upon the analysis of our actuaries was $476,597 as of December 31, 2016 compared to $485,716 as of December 31, 2015. The following tables present the point estimation of the recorded reserves and the range of estimations by line of business for net loss and LAE reserves as of December 31, 2016 and December 31, 2015. Line of Business Private passenger automobile Commercial automobile Homeowners All other Total Line of Business Private passenger automobile Commercial automobile Homeowners All other Total As of December 31, 2016 Low Recorded High 227,646 72,785 72,939 62,838 436,208 $ $ 246,918 79,115 80,594 69,970 476,597 $ $ 247,782 81,562 87,105 77,305 493,754 Low As of December 31, 2015 Recorded High 225,126 64,647 91,348 65,247 446,368 $ $ 241,767 71,499 100,987 71,463 485,716 $ $ 243,276 72,092 104,525 75,648 495,541 $ $ $ $ The following table presents our total net reserves and the corresponding case reserves and IBNR reserves for each line of business as of December 31, 2016 and December 31, 2015. Line of Business Private passenger automobile CAR assumed private passenger auto Commercial automobile CAR assumed commercial automobile Homeowners FAIR Plan assumed homeowners All other Total net reserves for losses and LAE Line of Business Private passenger automobile CAR assumed private passenger auto Commercial automobile CAR assumed commercial automobile Homeowners FAIR Plan assumed homeowners All other Total net reserves for losses and LAE As of December 31, 2016 Case IBNR Total 261,387 65 50,155 11,133 68,781 3,654 38,562 433,737 $ $ (14,827) 293 7,863 9,964 2,138 6,021 31,408 42,860 $ $ 246,560 358 58,018 21,097 70,919 9,675 69,970 476,597 As of December 31, 2015 Case IBNR Total 254,778 143 43,709 8,091 72,704 4,200 37,935 421,560 $ $ (13,403) 249 10,545 9,154 18,706 5,377 33,528 64,156 $ $ 241,375 392 54,254 17,245 91,410 9,577 71,463 485,716 $ $ $ $ At December 31, 2016 and 2015, our total IBNR reserves for our private passenger automobile line of business were comprised of $(36,629) and $(34,929) related to estimated ultimate decreases in the case reserves, including anticipated recoveries (i.e. salvage and subrogation), and $21,802 and $21,526 related to our estimation for not yet reported losses, respectively. 52 Our IBNR reserves consist of our estimate of the total loss reserves required less our case reserves. The IBNR reserves for CAR assumed commercial automobile business are 47.2% of our total reserves for CAR assumed commercial automobile business as of December 31, 2016 due to the reporting delays in the information we receive from CAR, as described further in the section on CAR Loss and Loss Adjustment Expense Reserves. Our IBNR reserves for FAIR Plan assumed homeowners are 62.2% of our total reserves for FAIR Plan assumed homeowners at December 31, 2016 due to similar reporting delays in the information we receive from FAIR Plan. The following tables present information by line of business for our total net reserves and the corresponding retained (i.e. direct less ceded) reserves and assumed reserves as of December 31, 2016 and 2015. Line of Business Private passenger automobile CAR assumed private passenger automobile Net private passenger automobile Commercial automobile CAR assumed commercial automobile Net commercial automobile Homeowners FAIR Plan assumed homeowners Net homeowners All other Total net reserves for losses and LAE Line of Business Private passenger automobile CAR assumed private passenger automobile Net private passenger automobile Commercial automobile CAR assumed commercial automobile Net commercial automobile Homeowners FAIR Plan assumed homeowners Net homeowners All other Total net reserves for losses and LAE Retained $ 246,560 As of December 31, 2016 Assumed Net $ 358 $ 246,918 58,018 70,919 21,097 9,675 69,970 445,467 $ - 31,130 $ 79,115 80,594 69,970 476,597 Retained 241,375 54,254 91,410 As of December 31, 2015 Assumed Net $ 392 $ 241,767 17,245 9,577 71,499 100,987 71,463 485,716 71,463 458,502 $ - 27,214 $ $ $ $ Residual Market Loss and Loss Adjustment Expense Reserves We are a participant in CAR, the FAIR Plan and other various residual markets and assume a portion of losses and LAE on business ceded by the industry participants to the residual markets. We estimate reserves for assumed losses and LAE that have not yet been reported to us by the residual markets. Our estimations are based upon the same factors we use for our own reserves, plus additional factors due to the nature of and the information we receive. Residual market deficits consist of premium ceded to the various residual markets less losses and LAE and is allocated among insurance companies based on a various formulas (the “Participation Ratio”) that take into consideration a company’s voluntary market share. Although we rely to a significant extent in setting our reserves on the information the various residual markets provide, we are cautious in our use of that information, because of the delays in receiving data from the various residual markets. Because of the lag in the various residual market estimations, and in order to try to validate to the extent possible the information provided, we estimate the effects of the actions of our competitors in order to establish our Participation Ratio. 53 Sensitivity Analysis Establishment of appropriate reserves is an inherently uncertain process. There can be no certainty that currently established reserves based on our key assumptions regarding frequency and severity in our lines of business, or our assumptions regarding our share of the CAR loss will prove adequate in light of subsequent actual experience. To the extent that reserves are inadequate and are strengthened, the amount of such increase is treated as a charge to earnings in the period that the deficiency is recognized. To the extent that reserves are redundant and are released, the amount of the release is a credit to earnings in the period the redundancy is recognized. For the twelve months ended December 31, 2016, a 1 percentage-point change in the loss and LAE ratio would result in a change in reserves of $7,560. Each 1 percentage-point change in the loss and loss expense ratio would have had a $4,914 effect on net income, or $0.33 per diluted share. Our assumptions consider that past experience, adjusted for the effects of current developments and anticipated trends, are an appropriate basis for establishing our reserves. Our individual key assumptions could each have a reasonable possible range of plus or minus 5 percentage-points for each estimation, although there is no guarantee that our assumptions will not have more than a 5 percentage point variation. The following sensitivity tables present information for each of our primary lines of business on the effect each 1 percentage-point change in each of our key assumptions on unpaid frequency and severity could have on our retained (i.e., direct minus ceded) loss and LAE reserves and net income for the twelve months ended December 31, 2016. In evaluating the information in the table, it should be noted that a 1 percentage-point change in a single assumption would change estimated reserves by 1 percentage-point. A 1 percentage-point change in both our key assumptions would change estimated reserves within a range of plus or minus 2 percentage-points. 54 Private passenger automobile retained loss and LAE reserves -1 Percent Change in Severity Estimated decrease in reserves Estimated increase in net income No Change in Severity Estimated (decrease) increase in reserves Estimated increase (decrease) in net income +1 Percent Change in Severity Estimated increase in reserves Estimated decrease in net income Commercial automobile retained loss and LAE reserves -1 Percent Change in Severity Estimated decrease in reserves Estimated increase in net income No Change in Severity Estimated (decrease) increase in reserves Estimated increase (decrease) in net income +1 Percent Change in Severity Estimated increase in reserves Estimated decrease in net income Homeowners retained loss and LAE reserves -1 Percent Change in Severity Estimated decrease in reserves Estimated increase in net income No Change in Severity Estimated (decrease) increase in reserves Estimated increase (decrease) in net income +1 Percent Change in Severity Estimated increase in reserves Estimated decrease in net income All other retained loss and LAE reserves -1 Percent Change in Severity Estimated decrease in reserves Estimated increase in net income No Change in Severity Estimated (decrease) increase in reserves Estimated increase (decrease) in net income +1 Percent Change in Severity Estimated increase in reserves Estimated decrease in net income -1 Percent Change in Frequency No Change in Frequency +1 Percent Change in Frequency $ (4,931) $ 3,205 (2,466) $ 1,603 (2,466) 1,603 — — (1,160) 754 (580) 377 — — (1,418) 922 (709) 461 — — (1,399) 909 (700) 455 — — — — 2,466 (1,603) (580) 377 — — 580 (377) (709) 461 — — 709 (461) (700) 455 — — 700 (455) — — 2,466 (1,603) 4,931 (3,205) — — 580 (377) 1,160 (754) — — 709 (461) 1,418 (922) — — 700 (455) 1,399 (909) Our estimated share of CAR loss and LAE reserves is based on assumptions about our Participation Ratio, the size of CAR, and the resulting deficit (similar assumptions apply with respect to the FAIR Plan). Our assumptions consider that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for establishing our CAR reserves. Each of our assumptions could have a reasonably possible range of plus or minus 5 percentage-points for each estimation. The following sensitivity table presents information of the effect each 1 percentage-point change in our assumptions on our share of reserves for CAR and other residual markets could have on our assumed loss and LAE 55 reserves and net income for the year ended December 31, 2016. In evaluating the information in the table, it should be noted that a 1 percentage-point change in our assumptions would change estimated reserves by 1 percentage-point. CAR assumed private passenger automobile Estimated (decrease) increase in reserves Estimated increase (decrease) in net income CAR assumed commercial automobile Estimated (decrease) increase in reserves Estimated increase (decrease) in net income FAIR Plan assumed homeowners Estimated (decrease) increase in reserves Estimated increase (decrease) in net income Reserve Development Summary -1 Percent Change in Estimation +1 Percent Change in Estimation $ (4) 3 (211) 137 (97) 63 $ 4 (3) 211 (137) 97 (63) The changes we have recorded in our reserves in the past illustrate the uncertainty of estimating reserves. Our prior year reserves decreased by $45,448, $30,313 and $37,368 for the years ended December 31, 2016, 2015, and 2014, respectively. The following table presents a comparison of prior year development of our net reserves for losses and LAE for the years ended December 31, 2016, 2015 and 2014, respectively. Each accident year represents all claims for an annual accounting period in which loss events occurred, regardless of when the losses are actually reported, booked or paid. Our financial statements reflect the aggregate results of the current and all prior accident years. Accident Year 2006 & prior 2007 2008 2009 2010 2011 2012 2013 2014 2015 All prior years 2016 Year Ended December 31, 2015 2014 $ $ (1,251) (583) (1,880) (1,080) (2,670) (5,370) (6,970) (12,589) (9,398) (3,657) (45,448) $ $ (1,713) (763) (1,071) (1,678) (3,559) (4,898) (10,754) (4,683) (1,194) — (30,313) $ $ (3,036) (1,526) (2,738) (4,812) (6,573) (7,975) (8,085) (2,623) — — (37,368) The decreases in prior years reserves during the years ended December 31, 2016, 2015 and 2014 resulted from re-estimations of prior year ultimate loss and LAE liabilities. The 2016 decrease is primarily composed of reductions of $25,019, in our retained automobile reserves and $11,648 in our retained homeowners reserves. The 2015 decrease is primarily composed of reductions of $18,644 in our retained automobile reserves and $7,964 in our retained homeowners reserves. The 2014 decrease is primarily composed of reductions of $23,272 in our retained automobile reserves and $8,804 in our retained homeowners reserves. 56 The following table presents information by line of business for prior year development of our net reserves for losses and LAE for the year ended December 31, 2016. Accident Year 2006 & prior 2007 2008 2009 2010 2011 2012 2013 2014 2015 All prior years Private Passenger Automobile Commercial Automobile $ $ (262) $ (193) (1,189) (680) (1,563) (1,208) (2,977) (3,757) (3,347) (3,377) (18,553) $ (59) (101) (365) (106) (295) (772) (288) (2,235) (2,246) (602) (7,069) $ Homeowners $ (38) (188) (185) (94) (525) (1,696) (2,488) (5,001) (2,289) (395) (12,899) All Other Total $ $ (891) (101) (142) (200) (287) (1,694) (1,217) (1,596) (1,516) 717 (6,927) $ $ (1,250) (583) (1,881) (1,080) (2,670) (5,370) (6,970) (12,589) (9,398) (3,657) (45,448) To further clarify the effects of changes in our reserve estimates for CAR and other residual markets, the next two tables break out the information in the table above by source of the business (i.e., non-residual market vs. residual market). The following table presents information by line of business for prior year development of retained reserves for losses and LAE for the year ended December 31, 2016 that is, all our reserves except for business ceded or assumed from CAR and other residual markets. Accident Year 2006 & prior 2007 2008 2009 2010 2011 2012 2013 2014 2015 All prior years Retained Private Passenger Automobile Retained Commercial Automobile Retained Homeowners Retained All Other Total $ $ (262) $ (193) (1,189) (680) (1,563) (1,208) (2,977) (3,757) (3,347) (3,377) (18,553) $ (60) $ (101) (386) (108) (268) (669) (137) (2,249) (2,288) (200) (6,466) $ (38) $ (188) (185) (94) (518) (1,612) (2,315) (4,712) (2,065) 79 (11,648) $ (891) $ (101) (142) (200) (287) (1,694) (1,217) (1,596) (1,516) 717 (6,927) $ (1,251) (583) (1,902) (1,082) (2,636) (5,183) (6,646) (12,314) (9,216) (2,781) (43,594) The following table presents information by line of business for prior year development of reserves assumed from residual markets for losses and LAE for the year ended December 31, 2016. Accident Year 2006 & prior 2007 2008 2009 2010 2011 2012 2013 2014 2015 All prior years CAR Assumed Private Passenger Automobile CAR Assumed Commercial Automobile FAIR Plan Homeowners Total $ $ — $ — — — — — — — — — — $ — $ — 22 2 (27) (103) (151) 14 42 (402) (603) $ — $ — — — (7) (84) (173) (289) (224) (474) (1,251) $ — — 22 2 (34) (187) (324) (275) (182) (876) (1,854) Our private passenger automobile line of business prior year reserves decreased by $18,553 for the year ended December 31, 2016. The decrease was primarily due to improved retained private passenger results of $16,229 for the accident years 2010 through 2015. 57 The improved retained private passenger results were primarily due to fewer IBNR claims than previously estimated and better than previously estimated severity on our established bodily injury and property damage case reserves. Our retained commercial automobile line of business prior year reserves decreased by $6,466 for the year ended December 31, 2016 due primarily to fewer IBNR claims than previously estimated. Our retained homeowners line of business prior year reserves decreased by $11,648 for the year ended December 31, 2016 due primarily to re-estimation of catastrophe losses for 2011 through 2014. In estimating all our loss reserves, including CAR, we follow the guidance prescribed by ASC 944, Financial Services-Insurance. For further information, see “Results of Operations: Losses and Loss Adjustment Expenses.” Other-Than-Temporary Impairments. We use a systematic methodology to evaluate declines in fair values below cost or amortized cost of our investments. This methodology ensures that we evaluate available evidence concerning any declines in a disciplined manner. In our determination of whether a decline in fair value below amortized cost is an other-than-temporary impairment (“OTTI”), we consider and evaluate several factors and circumstances including the issuer’s overall financial condition, the issuer’s credit and financial strength ratings, a weakening of the general market conditions in the industry or geographic region in which the issuer operates, a prolonged period (typically six months or longer) in which the fair value of an issuer’s securities remains below our amortized cost, and any other factors that may raise doubt about the issuer’s ability to continue as a going concern. ASC 320, Investments — Debt and Equity Securities requires entities to separate an OTTI of a debt security into two components when there are credit related losses associated with the impaired debt security for which the Company asserts that it does not have the intent to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. Under ASC 320, the amount of the OTTI related to a credit loss is recognized in earnings, and the amount of the OTTI related to other factors is recorded as a component of other comprehensive income (loss). In instances where no credit loss exists but it is more likely than not that the Company will have to sell the debt security prior to the anticipated recovery, the decline in market value below amortized cost is recognized as an OTTI in earnings. In periods after the recognition of an OTTI on debt securities, the Company accounts for such securities as if they had been purchased on the measurement date of the OTTI at an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. For debt securities for which OTTI was recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected will be accreted or amortized into net investment income. For further information, see “Results of Operations: Net Realized Gains (Losses) on Investments.” Forward-looking statements might include one or more of the following, among others: Forward-Looking Statements (cid:120) Projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure or other financial items; Forecasts of future economic performance, liquidity, need for funding and income; (cid:120) Descriptions of plans or objectives of management for future operations, products or services; (cid:120) (cid:120) Descriptions of assumptions underlying or relating to any of the foregoing; and (cid:120) Future performance of credit markets. 58 Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “aim,” “projects,” or words of similar meaning and expressions that indicate future events and trends, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” All statements that address expectations or projections about the future, including statements about the Company’s strategy for growth, product development, market position, expenditures and financial results, are forward-looking statements. Forward-looking statements are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. There are a number of factors, many of which are beyond our control, that could cause actual future conditions, events, results or trends to differ significantly and/or materially from historical results or those projected in the forward-looking statements. These factors include but are not limited to the competitive nature of our industry and the possible adverse effects of such competition. Although a number of national insurers that are much larger than we are do not currently compete in a material way in the Massachusetts private passenger automobile market, if one or more of these companies decided to aggressively enter the market it could have a material adverse effect on us. Other significant factors include conditions for business operations and restrictive regulations in Massachusetts, the possibility of losses due to claims resulting from severe weather, the possibility that we may be unable to collect from reinsurers, the possibility that the Commissioner may approve future Rule changes that change the operation of the residual market, the possibility that existing insurance-related laws and regulations will become further restrictive in the future, our possible need for and availability of additional financing, and our dependence on strategic relationships, among others, and other risks and factors identified from time to time in our reports filed with the SEC. Refer to Part I, Item 1A — Risk Factors. Some other factors, such as market, operational, liquidity, interest rate, equity and other risks, are described elsewhere in this Annual Report on Form 10-K. Factors relating to the regulation and supervision of our Company are also described or incorporated in this report. There are other factors besides those described or incorporated in this report that could cause actual conditions, events or results to differ from those in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We do not undertake any obligation to update publicly or revise any forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. 59 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk. Market risk is the risk that we will incur losses due to adverse changes in market rates and prices. We have exposure to market risk through our investment activities and our financing activities. Our primary market risk exposure is to changes in interest rates. We use both fixed and variable rate debt as sources of financing. We have not entered, and do not plan to enter, into any derivative financial instruments for trading or speculative purposes. Interest Rate Risk. Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. Our exposure to interest rate changes primarily results from our significant holdings of fixed rate investments and from our financing activities. Our fixed maturity investments include U.S. and foreign government bonds, securities issued by government agencies, obligations of state and local governments and governmental authorities, corporate bonds and asset-backed securities, most of which are exposed to changes in prevailing interest rates. We manage our exposure to risks associated with interest rate fluctuations through active review of our investment portfolio by our management and Board and consultation with third-party financial advisors. As a general matter, we do not attempt to match the durations of our assets with the durations of our liabilities, and the majority of our liabilities are “short tail.” Our goal is to maximize the total after-tax return on all of our investments. An important strategy that we employ to achieve this goal is to try to hold enough in cash and short-term investments in order to avoid liquidating longer-term investments to pay claims. Based upon the results of interest rate sensitivity analysis, the following table shows the interest rate risk of our investments in fixed maturities, measured in terms of fair value (which is equal to the carrying value for all our fixed maturity securities). As of December 31, 2016 Estimated fair value Estimated increase (decrease) in fair value As of December 31, 2015 Estimated fair value Estimated increase (decrease) in fair value -100 Basis Point Change No Change +100 Basis Point Change $ $ $ $ 1,197,319 43,050 1,118,743 37,106 $ $ $ $ 1,154,269 $ — $ 1,107,500 (46,769) 1,081,637 $ — $ 1,039,997 (41,640) With respect to floating rate debt, we are exposed to the effects of changes in prevailing interest rates. At December 31, 2016, we had no debt outstanding under our credit facility. Assuming the full utilization of our current available credit facility, a 2.0% increase in the prevailing interest rate on our variable rate debt would result in interest expense increasing approximately $600 for 2016, assuming that all of such debt is outstanding for the entire year. In addition, in the current market environment, our investments can also contain liquidity risks. Equity Risk. Equity risk is the risk that we will incur economic losses due to adverse changes in equity prices. Our exposure to changes in equity prices results from our holdings of common stock and mutual funds held to fund the executive deferred compensation plan. We continuously evaluate market conditions and we expect in the future to purchase additional equity securities. We principally manage equity price risk through industry and issuer diversification and asset allocation techniques. 60 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA SAFETY INSURANCE GROUP, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Consolidated Financial Statements: Report to Independent Registered Public Accounting Firm Balance Sheets Statements of Operations Statements of Comprehensive Income Statements of Changes in Shareholders’ Equity Statements of Cash Flows Notes to Consolidated Financial Statements Page 62 63 64 65 66 67 68 61 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Safety Insurance Group, Inc.: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Safety Insurance Group, Inc. at December 31, 2016 and December 31, 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, appearing on Management's Report on Internal Control over Financial Reporting under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts February 24, 2017 62 Safety Insurance Group, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in thousands, except share data) Assets Investments: Securities available for sale: Fixed maturities, at fair value (amortized cost: $1,142,663 and $1,063,971) Equity securities, at fair value (cost: $92,326 and $102,541) Other invested assets Total investments Cash and cash equivalents Accounts receivable, net of allowance for doubtful accounts Receivable for securities sold Accrued investment income Taxes recoverable Receivable from reinsurers related to paid loss and loss adjustment expenses Receivable from reinsurers related to unpaid loss and loss adjustment expenses Ceded unearned premiums Deferred policy acquisition costs Deferred income taxes Equity and deposits in pools Other assets Total assets Liabilities Loss and loss adjustment expense reserves Unearned premium reserves Accounts payable and accrued liabilities Payable for securities purchased Payable to reinsurers Taxes payable Other liabilities Total liabilities Commitments and contingencies (Note 7) Shareholders’ equity Common stock: $0.01 par value; 30,000,000 shares authorized; 17,430,189 and 17,373,643 shares issued Additional paid-in capital Accumulated other comprehensive income, net of taxes Retained earnings Treasury stock, at cost: 2,279,570 shares Total shareholders’ equity Total liabilities and shareholders’ equity December 31, 2016 December 31, 2015 $ $ $ $ 1,154,269 105,095 21,142 1,280,506 20,052 187,696 7,098 8,858 — 29,504 83,724 28,585 70,996 3,083 24,675 13,469 1,758,246 560,321 418,033 66,805 5,564 13,502 1,110 22,185 1,087,520 174 184,549 15,843 553,995 (83,835) 670,726 1,758,246 $ $ $ $ 1,081,637 110,204 17,602 1,209,443 47,494 178,567 260 8,922 15,497 40,972 68,261 23,222 68,937 4,430 23,558 14,306 1,703,869 553,977 401,961 53,722 8,607 11,547 — 29,556 1,059,370 174 179,896 16,464 531,800 (83,835) 644,499 1,703,869 The accompanying notes are an integral part of these financial statements. 63 Safety Insurance Group, Inc. and Subsidiaries Consolidated Statements of Operations (Dollars in thousands, except per share data) Net earned premiums Net investment income Earnings from partnership investments Net realized gains (losses) on investments Net impairment losses on investments (a) Finance and other service income Total revenue Losses and loss adjustment expenses Underwriting, operating and related expenses Interest expense Total expenses Income (loss) before income taxes Income tax expense (credit) Net income (loss) Earnings (loss) per weighted average common share: Basic Diluted Cash dividends paid per common share 2016 Year Ended December 31, 2015 2014 $ $ $ $ $ 755,760 38,413 3,185 5,559 (798) 17,703 819,822 493,433 233,017 90 726,540 93,282 28,697 64,585 4.29 4.27 2.80 $ $ $ $ $ $ 738,164 40,534 2,387 (469) (796) 18,133 797,953 612,569 213,939 90 826,598 (28,645) (14,792) (13,853) $ (0.93) $ (0.93) $ 2.80 $ 716,875 42,303 878 197 — 18,544 778,797 476,366 219,023 90 695,479 83,318 23,964 59,354 3.93 3.91 2.60 Number of shares used in computing earnings (loss) per share: Basic Diluted 14,946,453 15,032,263 14,866,607 14,866,607 14,963,047 15,052,745 (a) No portion of the other-than-temporary impairments recognized in the period indicated were included in comprehensive income. The accompanying notes are an integral part of these financial statements. 64 Safety Insurance Group, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Dollars in thousands) Net income (loss) Other comprehensive income (loss), net of tax: Unrealized holding gains or (losses) during the period, net of income tax expense (benefit) of $1,611 , ($6,761), and $6,269. Reclassification adjustment for (losses) or gains included in net income, net of income tax (expense) benefit of ($1,945), $164 , and ($69). Unrealized (losses) or gains on securities available for sale Year Ended December 31, 2016 2015 2014 $ 64,585 $ (13,853) $ 59,354 2,992 (3,613) (621) (12,556) 305 (12,251) 11,643 (128) 11,515 Comprehensive income (loss) $ 63,964 $ (26,104) $ 70,869 The accompanying notes are an integral part of these financial statements. 65 Safety Insurance Group, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders’ Equity (Dollars in thousands) Balance at December 31, 2013 Net income Unrealized gains on securities available for sale, net of deferred federal income taxes Restricted share awards issued Recognition of employee share-based compensation, net of deferred federal income taxes Exercise of options, net of federal income taxes Dividends paid and accrued Acquisition of treasury stock Balance at December 31, 2014 Net loss Unrealized losses on securities available for sale, net of deferred federal income taxes Restricted share awards issued Recognition of employee share-based compensation, net of deferred federal income taxes Exercise of options, net of federal income taxes Dividends paid and accrued Balance at December 31, 2015 Net income Unrealized losses on securities available for sale, net of deferred federal income taxes Restricted share awards issued Recognition of employee share-based compensation, net of deferred federal income taxes Exercise of options, net of federal income taxes Dividends paid and accrued Balance at December 31, 2016 Treasury Stock Total Shareholders’ Equity $ (60,368) $ Accumulated Other Comprehensive Income, Net of Taxes 17,200 $ 11,515 Retained Earnings $ 567,792 59,354 Common Stock 172 $ Additional Paid-in Capital $ 170,391 1 216 4,677 299 173 175,583 28,715 1 246 (12,251) (39,499) 587,647 (13,853) (23,467) (83,835) 3,787 280 174 179,896 16,464 (41,994) 531,800 64,585 (83,835) (621) 280 4,122 251 $ 174 $ 184,549 $ 15,843 $ (42,390) 553,995 $ (83,835) $ 695,187 59,354 11,515 217 4,677 299 (39,499) (23,467) 708,283 (13,853) (12,251) 247 3,787 280 (41,994) 644,499 64,585 (621) 280 4,122 251 (42,390) 670,726 The accompanying notes are an integral part of these financial statements. 66 Safety Insurance Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Dollars in thousands) Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: 2016 Year Ended December 31, 2015 2014 $ 64,585 $ (13,853) $ 59,354 Depreciation and amortization, net Provision (credit) for deferred income taxes Net realized (gains) losses on investments Net impairment losses on investments Earnings from partnership investments Changes in assets and liabilities: Accounts receivable Accrued investment income Receivable from reinsurers Ceded unearned premiums Deferred policy acquisition costs Taxes recoverable Other assets Loss and loss adjustment expense reserves Unearned premium reserves Accounts payable and accrued liabilities Payable to reinsurers Other liabilities Net cash provided by operating activities Cash flows from investing activities: Fixed maturities purchased Equity securities purchased Other invested assets purchased Proceeds from sales and paydowns of fixed maturities Proceeds from maturities, redemptions, and calls of fixed maturities Proceed from sales of equity securities Proceeds from other invested assets redeemed Fixed assets purchased Net cash (used for) provided by investing activities Cash flows from financing activities: Proceeds from stock options exercised Excess tax (expense) benefit from stock options exercised Dividends paid to shareholders Acquisition of treasury stock Net cash used for financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosure of cash flow information: Cash paid during the year for: Federal and state income taxes Interest $ $ $ 14,073 1,681 (5,559) 798 (3,185) (9,129) 64 (3,995) (5,363) (2,059) 15,497 348 6,344 16,072 14,068 1,955 (7,371) 98,824 (295,211) (30,060) (5,248) 99,682 99,883 46,620 4,992 (4,910) (84,252) 257 (6) (42,265) — (42,014) (27,442) 47,494 20,052 9,826 75 $ $ $ 12,597 552 469 796 (2,387) (3,035) 1,373 (41,721) (3,584) (1,608) (15,497) (726) 71,965 11,600 (12,423) 3,894 14,479 22,891 (227,328) (26,658) (4,824) 150,932 110,189 24,380 1,195 (4,041) 23,845 278 1 (41,976) — (41,697) 5,039 42,455 47,494 89 75 $ $ $ 13,123 (602) (197) — (878) (6,228) 34 (2,578) (1,738) (3,941) — (2,871) 26,998 19,778 (577) 559 (2,667) 97,569 (234,172) (27,665) (4,976) 153,701 52,253 14,097 — (1,760) (48,522) 297 3 (39,302) (23,467) (62,469) (13,422) 55,877 42,455 23,720 75 The accompanying notes are an integral part of these financial statements. 67 1. Basis of Presentation The consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include Safety Insurance Group, Inc. and its subsidiaries (the “Company”). The subsidiaries consist of Safety Insurance Company, Safety Indemnity Insurance Company, Safety Property and Casualty Insurance Company, Safety Asset Management Corporation (“SAMC”), and Safety Management Corporation, which is SAMC’s holding company. All intercompany transactions have been eliminated. The Company was incorporated on June 25, 2001 in the State of Delaware. On October 16, 2001, the Company acquired all of the issued and outstanding common stock of Thomas Black Corporation (“TBC”) and its property and casualty subsidiaries. TBC subsequently merged with and into Safety Insurance Group, Inc. with Safety Insurance Group, Inc. being the corporation surviving the merger. The Company is a leading provider of property and casualty insurance focused primarily on the Massachusetts market. The Company’s principal product line is private passenger automobile insurance, which accounted for 57.7% of its direct written premiums in 2016. The Company operates through its insurance company subsidiaries, Safety Insurance Company, Safety Indemnity Insurance Company, and Safety Property and Casualty Insurance Company (together referred to as the “Insurance Subsidiaries”). The Insurance Subsidiaries began writing private passenger automobile and homeowners insurance in New Hampshire during 2008, personal umbrella insurance in New Hampshire during 2009, and commercial automobile insurance in New Hampshire during 2011. The Insurance Subsidiaries began writing all of these lines of business in Maine during 2016. 2. Summary of Significant Accounting Policies Investments Investments in fixed maturities available-for-sale, which include taxable and non-taxable bonds and redeemable preferred stocks, are reported at fair value. Investments in equity securities available-for-sale, which include interests in common stocks, mutual funds and a real estate investment trust (“REIT”), are reported at fair value. Fair values for fixed maturity securities are based on estimates obtained from independent pricing services. Fair values for equity securities are derived from external market quotations, with the exception of the REIT whose fair value was determined using the trust’s net asset value obtained from its audited financial statements. Short-term investments, which consist of U.S. Treasury securities, are reported at amortized cost, which approximates fair value. Other long-term investments consist of investments in limited partnerships. The partnership interest is accounted for using the equity method of accounting and recorded in earnings from partnership investments. The carrying value of this investment is written down, or impaired, to fair value when a decline in value is considered to be other-than-temporary. In applying the equity method (including assessment for other-than-temporary impairment), the Company uses financial information provided by the investee, generally on a three month lag. Unrealized gains or losses on fixed maturity and equity securities reported at fair value are excluded from earnings and reported in a separate component of shareholders’ equity, known as “Accumulated other comprehensive income, net of taxes,” until realized. Realized gains or losses on the sale or maturity of investments are determined based on the specific cost identification method. Fixed maturities and equity securities that experience declines in value that are other-than-temporary are written down to fair value with a corresponding charge to net impairment losses on investments. Investment income is recognized on an accrual basis of accounting. Bonds not backed by other loans are amortized using the interest method. Loan-backed bonds and structured securities are amortized using the interest method and significant changes in estimated cash flows from the original purchase assumptions are accounted for using the retrospective method. 68 Cash and Cash Equivalents Cash and cash equivalents includes money market accounts and United States (“U.S.”) Treasury bills with original maturities of three months or less from the date of purchase. U.S. Treasury bills are stated at amortized cost, which approximates fair value. Accounts Receivable Amounts included in accounts receivable represent premiums as well as finance charges, the majority of which are both billed on a monthly installment basis. Accounts receivable are stated net of allowances for doubtful accounts. At December 31, 2016 and 2015, these allowances were $435 and $425, respectively. Uncollected premium balances over ninety days past due are written off. Deferred Policy Acquisition Costs Amounts that vary with and are primarily related to the successful acquisition of a new or renewal insurance contract, principally commissions and premium taxes, are deferred and amortized ratably over the effective period of the policies. All other acquisition expenses are expensed as incurred. Deferred policy acquisition costs are reviewed to determine if they are recoverable from future income, and if not, are charged to expense. Future investment income attributable to related premiums is not taken into account in measuring the recoverability of the carrying value of this asset. Amortization of acquisition costs in the amount of $141,540, $138,239, and $132,526 was charged to underwriting, operating and other expenses for the years ended 2016, 2015 and 2014, respectively. Equity and Deposits in Pools Equity and deposits in pools represents the net receivable amounts from the residual market mechanisms, Commonwealth Automobile Reinsurers (“CAR”) for automobile and Massachusetts Property Insurance Underwriting Association (“FAIR Plan”) for homeowner insurance in Massachusetts. See Note 9 for a discussion of the Company’s accounting for amounts assumed from residual markets. Equipment and Leasehold Improvements Property, equipment, leasehold improvements, and software which are included in other assets are carried at cost less accumulated depreciation. Depreciation is provided using the straight- line or accelerated method over the estimated useful lives of the related assets, which range from 3 to 10 years. Amortization of leasehold improvements is provided using the straight-line method over the term of the lease. The costs of computer software developed or obtained for internal use are capitalized and amortized over the estimated life of the business system, beginning when the software is ready for its intended use. Maintenance and repairs are charged to expense as incurred. Losses and Loss Adjustment Expenses Liabilities for losses and loss adjustment expenses (“LAE”) include case basis estimates for open claims reported prior to year-end and estimates of unreported claims and claim adjustment expenses, net of salvage and subrogation. The estimates are continually reviewed and modified to reflect current conditions, and any resulting adjustments are reflected in current operating results. Adjustments for anticipated salvage and subrogation are recorded on incurred and reported and incurred but not reported losses. The Company determines its loss and LAE reserves estimate based upon the analysis of our actuaries. A reasonable estimate is derived by selecting a point estimate within a range of indications as calculated by our actuaries using generally accepted actuarial techniques. The key assumption in most actuarial analysis is that past patterns of frequency and severity will repeat in the future, unless a significant change in the factors described above takes place. Our key factors and resulting assumptions are the ultimate frequency and severity of claims, based upon the most recent ten years of claims reported to the Company, and the data reported to us to calculate our share of the residual market. For each accident year and each coverage within a line of business our actuaries calculate the ultimate losses incurred. 69 Premiums and Unearned Premiums Premiums are earned over the terms of the respective policies, which are generally one year. Unearned premiums represent the portion of premiums written applicable to the unexpired terms of the policies. Ceded premiums are charged to income over the terms of the respective policies and the applicable term of the reinsurance contracts with third-party reinsurers. Ceded unearned premiums represent the unexpired portion of premiums ceded to CAR and other reinsurers. Premiums received in advance of the policy effective date are recorded as a liability and not recognized as income until earned. Such amounts are included in accounts payable and accrued liabilities and totaled $14,643 and $14,712 at December 31, 2016 and 2015, respectively. Reinsurance Liabilities for unearned premiums and unpaid losses are stated before deductions for ceded reinsurance. The ceded amounts are carried as receivables. Earned premiums are stated net of deductions for ceded reinsurance. The Company, as primary insurer, will be required to pay losses in their entirety in the event that the reinsurers are unable to discharge their obligations under the reinsurance agreements. Advertising Costs Advertising costs are charged to expense when they are incurred. Total advertising costs were $2,063, $1,906 and $2,108 for the years ended December 31, 2016, 2015, and 2014, respectively. Finance and Other Service Income Finance and other service income primarily include revenues from premium installment charges, which are recognized when earned. Income Taxes The Company and its subsidiaries file a consolidated U.S. federal income tax return. The method of allocation among members of the consolidated group is subject to a written agreement approved by the Board of Directors (the “Board”). The consolidated tax liability (benefit) is allocated on the basis of the members’ proportionate contribution to consolidated taxable income (loss). Deferred income taxes are generally recognized when assets and liabilities have different values for financial statement and tax reporting purposes, and for other temporary taxable and deductible differences as defined by Accounting Standards Codification (“ASC”) 740, Income Taxes. A valuation allowance is established where management has assessed that it is more likely than not that the Company will not be able to utilize the full deferred tax asset. Earnings per Weighted Average Common share Basic earnings (loss) per weighted average common share (“EPS”) are calculated by dividing net income (loss) by the weighted average number of basic common shares outstanding during the period. Diluted earnings (loss) per share amounts are based on the weighted average number of common shares including non-vested performance stock grants and the net effect of potentially dilutive common stock options. 70 The following table sets forth the computation of basic and diluted EPS for the periods indicated. Year Ended December 31, 2016 2015 2014 Earnings attributable to common shareholders - basic and diluted): Net income (loss) from continuing operations Allocation of income for participating shares Net income (loss) from continuing operations attributed to common shareholders Earnings per share denominator - basis and diluted Total weighted average common shares outstanding, including participating shares Less: weighted average participating shares Basic earnings per share denominator Common equivalent shares- stock options Common equivalent shares- non-vested performance stock grants Diluted earnings per share denominator Basic earnings (loss) per share Diluted earnings (loss) per share Undistributed (loss) earnings attributable to common shareholders - basic and diluted: Net income (loss) from continuing operations attributable to common shareholders -Basic Dividends declared Undistributed earnings (loss) Net income (loss) from continuing operations attributable to common shareholders -Diluted Dividends declared Undistributed earnings (loss) $ $ $ $ $ $ $ $ 64,585 (436) 64,149 $ $ 15,048,048 (101,595) 14,946,453 134 85,676 15,032,263 4.29 4.27 4.29 (2.80) 1.49 4.27 (2.80) 1.47 $ $ $ $ $ $ (13,853) — (13,853) 14,985,475 (118,868) 14,866,607 — (2) — (3) 14,866,607 (0.93) (0.93) (0.93) (2.80) (3.73) (0.93) (2.80) (3.73) $ $ $ $ $ $ $ $ 59,354 (567)(1) 58,787 (1) 15,107,339 (144,292) 14,963,047 (1) 2,391 87,307 15,052,745 (1) 3.93 3.91 3.93 (2.60) 1.33 3.91 (2.60) 1.31 (1) The 2014 basic and diluted earnings per share denominator was revised to correct the allocation of net income to participating securities under the two-class method. The revision did not yield in a change to basic or diluted earnings per share. The Company evaluated the materiality of these revisions in accordance with SEC Staff Accounting Bulletin No. 99, Materiality, and SEC Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements, and concluded that these revisions, individually and in the aggregate, were immaterial to all prior periods. The 2014 basic earnings per share denominator as originally reported was 15,107,339 and the 2014 diluted earnings per share denominator as originally reported was 15,197,036. (2) Excludes 1,587 of common equivalent shares related to stock options because their inclusion would be anti-dilutive due to the net loss of the Company. (3) Excludes 46,805 of common equivalent shares related to non-vested performance shares because their inclusion would be anti-dilutive due to the net loss of the Company. Diluted EPS excludes stock options with exercise prices and exercise tax benefits greater than the average market price of the Company’s common stock during the period because their inclusion would be anti-dilutive. There were no anti-dilutive stock options or non-vested performance stock grants for the years ended December 31, 2016 and 2014. Share-Based Compensation Accounting Standards Codification (“ASC”) 718, Compensation —Stock Compensation requires the Company to measure and recognize the cost of employee services received in exchange for an award of equity instruments. Under the provisions of ASC 718, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). See Note 6 for further information regarding share-based compensation. 71 Use of Estimates The preparation of financial statements in conformity with 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 reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recent Accounting Pronouncements In December 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-19 - Technical Corrections and Improvements, which covers a wide range of Topics in the Accounting Standards Codification (ASC). The amendments in this Update represent changes to clarify, correct errors, or make minor improvements to the ASC, making it easier to understand and apply by eliminating inconsistencies and providing clarifications. The amendments generally fall into one of the following categories: amendments related to differences between original guidance and the ASC, guidance clarification and reference corrections, simplification, or minor improvements. Most of the amendments in ASU 2016-19 do not require transition guidance and are effective upon issuance of ASU 2016-19. In October 2016, the FASB issued ASU 2016-17 - Consolidation (Topic 810): Interests Held through Related Parties that are Under Common Control, which amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The Update requires the reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include its indirect variable interests in a VIE held through related parties that are under common control on a proportionate basis as opposed to in their entirety. The amendments in this Update will be applied retrospectively and are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The adoption of ASU 2016-17 will not have a material impact on the Company’s financial position, results of operations, or cash flows. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 reduces diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in ASU 2016-15 provide guidance on specific cash flow issues including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method investees. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. The impact of the adoption of ASU 2016-15 to the Company’s financial position and results of operations is currently being evaluated. In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements, which amends the guidance for the impairment of financial instruments and is expected to result in more timely recognition of impairment losses. The update introduces an impairment model referred to as the current expected credit loss (CECL) model. The impairment model is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The ASU is also intended to reduce the complexity of the current guidance by decreasing the number of credit impairment models that entities use to account for debt instruments. For public business entities that are SEC filers, the amendments in ASU No. 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Entities may adopt the amendments in this update earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is evaluating the impact of ASU 2016-13 on it’s financial position and results of operations with regards to potential credit losses on its Available For Sale investment portfolio. The extent of the increase of credit losses is under evaluation, but will depend upon the nature and characteristics of the Company’s portfolio at the adoption date, and the macroeconomic conditions and forecasts at the date. 72 In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASC update requires all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement, and be treated as discreet items in the reporting period in which they occur. Additionally, excess tax benefits will be classified with other income tax cash flows as an operating activity and cash paid by an employer when directly withholding shares for tax withholding purposes will be classified as a financing activity. Awards that are used to settle employee tax liabilities will be allowed to qualify for equity classification for withholdings up to the maximum statutory tax rates in applicable jurisdictions. Regarding forfeitures, a company can make an entity-wide accounting policy election to either continue estimating the number of awards that are expected to vest or account for forfeitures when they occur. The updated guidance is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. The impact of the adoption of ASU 2016-09 to the Company’s financial position and results of operations is currently being evaluated. In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of ASU 2016-02 by reviewing its existing lease contracts. The company expects a gross-up of its Consolidated Balance Sheets as a result of recognizing lease liabilities and right of use assets. The extent of such gross- up is under evaluation. The Company does not expect material changes to the Consolidated Statements of Operations. In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASC update address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01: (1) requires equity investments (except those accounted for under the equity method or those that result in the consolidation of the investee) to be measured at fair value with changes in the fair value recognized in net income; (2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (3) requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and (4) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the notes to the financial statements. These amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The impact of the adoption of ASU 2016-01 to the Company’s financial position and results of operations is currently being evaluated. In May 2015, the FASB issued ASU 2015-09, Disclosures about Short-Duration Contracts. ASU 2015-09 requires companies that issue short duration contracts to disclose additional information, including: (i) incurred and paid claims development tables; (ii) frequency and severity of claims; and (iii) information about material changes in judgments made in calculating the liability for unpaid claim adjustment expenses, including reasons for the change and the effects on the financial statements. ASU 2015-09 is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. The amendments in ASU 2015-09 should be applied retrospectively by providing comparative disclosures for each period presented, except for those requirements that apply only to the current period. The adoption of ASU 2015-09 is disclosure only and has been reflected in the Loss and Loss Adjustment Expense footnote. In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The reporting entity should continue to disclose information on investments for which fair value is measured at net asset value (or its equivalent) as a practical expedient to help users understand the nature and risks of the investments and whether the investments, if sold, are probable of being sold at amounts different from net asset value. ASU 2015-07 is effective for fiscal years beginning after December 31, 2015. The Company adopted the updated accounting guidance 73 retrospectively. The Company adjusted its previously reported financial information included herein to reflect the change in accounting guidance for assets measured using the net asset value. The impact of adopting the new accounting standard resulted in excluding a real estate investment trust of $19,961 and $19,097, respectively from the fair value level disclosures as of December 31, 2016 and December 31, 2015. In April 2015, the FASB issued ASU 2015-03, Imputation of Interest. ASU 2015-03 simplifies the presentation of debt issuance costs as the amendments in this update require that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. ASU 2015-03 is effective for annual and interim reporting periods beginning after December 15, 2015. The standard requires a retrospective approach where the balance sheet of each individual period presented should be adjusted to reflect the period- specific effects of applying the new guidance. The standard also requires compliance with applicable disclosures for a change in an accounting principle. The Company’s adoption of ASU 2015-03 had no impact on the Company’s financial position, results of operations or cash flows. In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosures of Uncertainties about an Entity’s Ability as a Going Concern” (“ASU 2014-15”). ASU 2014-15 provides guidance on determining when and how to disclose going concern uncertainties in the financial statements, and requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter. Management has assessed and concluded that there were no conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements were issued. In June 2014, the FASB issued ASU 2014-12, "Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period", which revises the accounting treatment for stock compensation tied to performance targets. ASU 2014-12 is effective for calendar years beginning after December 15, 2015. The impact of adoption was not material to the Company’s financial position, results of operations or cash flows. In May 2014, the FASB issued as final, ASU 2014-09, “Revenue from Contracts with Customers (Topic 606), which supersedes virtually all existing revenue recognition guidance under GAAP. The update's core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017 and allows early adoption. ASU 2014-09 allows for the use of either the retrospective or modified retrospective approach of adoption. The Company does not expect the adoption of ASU 2014-09 to have a material impact on its financial position, results of operations, or cash flows. Segments The Company comprises one business segment: property and casualty insurance operations. Management organizes the business around private passenger automobile insurance in Massachusetts sold exclusively through independent agents and offers other personal and commercial insurance as complementary products. In accordance with ASC 280, Segment Reporting, the financial information of the segment is presented consistent with the way results are regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance. 74 3. Investments The gross unrealized gains and losses on investments in fixed maturity securities, including redeemable preferred stocks that have characteristics of fixed maturities, and equity securities, including interests in mutual funds, and other invested assets, were as follows for the periods indicated. As of December 31, 2016 Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses (3) OTTI Non-OTTI Unrealized Unrealized Losses (4) Losses Estimated Fair Value U.S. Treasury securities Obligations of states and political subdivisions Residential mortgage-backed securities (1) Commercial mortgage-backed securities Other asset-backed securities Corporate and other securities Subtotal, fixed maturity securities Equity securities (2) Other invested assets (5) Totals $ $ 302 382,811 252,031 35,695 70,411 401,413 1,142,663 92,326 21,142 1,256,131 $ $ — $ — $ 11,534 3,256 191 89 7,070 22,140 15,504 — 37,644 $ (3,912) (2,656) (432) (90) (3,444) (10,534) (2,735) — (13,269) $ — $ — — — — — — — — — $ 302 390,433 252,631 35,454 70,410 405,039 1,154,269 105,095 21,142 1,280,506 As of December 31, 2015 Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses (3) OTTI Non-OTTI Unrealized Unrealized Losses (4) Losses Estimated Fair Value U.S. Treasury securities Obligations of states and political subdivisions Residential mortgage-backed securities (1) Commercial mortgage-backed securities Other asset-backed securities Corporate and other securities Subtotal, fixed maturity securities Equity securities (2) Other invested assets (5) Totals $ $ 1,805 377,188 237,896 28,851 24,037 394,194 1,063,971 102,541 17,602 1,184,114 $ — $ 21,160 5,188 30 39 4,191 30,608 13,498 — 44,106 $ $ (4) (426) (1,628) (218) (145) (10,521) (12,942) (5,835) — (18,777) $ $ — $ — — — — — — — — — $ 1,801 397,922 241,456 28,663 23,931 387,864 1,081,637 110,204 17,602 1,209,443 (1) (2) (3) (4) (5) Residential mortgage-backed securities consists primarily of obligations of U.S. Government agencies including collateralized mortgage obligations issued, guaranteed and/or insured by the following issuers: Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) and the Federal Home Loan Bank (FHLB). Equity securities include interests in mutual funds held to fund the Company’s executive deferred compensation plan. The Company’s investment portfolio included 343 and 514 securities in an unrealized loss position at December 31, 2016 and December 31, 2015, respectively. Amounts in this column represent other-than-temporary impairment (“OTTI”) recognized in accumulated other comprehensive income. Other invested assets are accounted for under the equity method which approximates fair value. The amortized cost and the estimated fair value of fixed maturity securities, by maturity, are shown below for the period indicated. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 75 Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years through twenty years Due after twenty years Asset-backed securities Totals As of December 31, 2016 Amortized Cost Estimated Fair Value 44,289 429,323 301,211 6,677 3,025 358,138 1,142,663 $ $ 44,539 440,328 300,043 7,529 3,335 358,495 1,154,269 $ $ The gross realized gains and losses on sales of investments were as follows for the periods indicated. Gross realized gains Fixed maturity securities Equity securities Gross realized losses Fixed maturity securities Equity securities Net realized gains (losses) on investments Year Ended December 31, 2016 2015 2014 $ $ 803 6,946 (1,242) (948) 5,559 $ $ 496 2,727 (3,315) (377) (469) $ $ 644 1,534 (1,651) (330) 197 In the normal course of business, the Company enters into transactions involving various types of financial instruments, including investments in fixed maturities and equity securities. Investment transactions have credit exposure to the extent that a counter party may default on an obligation to the Company. Credit risk is a consequence of carrying, trading and investing in securities. To manage credit risk, the Company focuses on higher quality fixed income securities, reviews the credit strength of all companies in which it invests, limits its exposure in any one investment and monitors the portfolio quality, taking into account credit ratings assigned by recognized statistical rating organizations. The following tables as of December 31, 2016 and 2015 present the gross unrealized losses included in the Company’s investment portfolio and the fair value of those securities aggregated by investment category. The tables also present the length of time that they have been in a continuous unrealized loss position. Less than 12 Months As of December 31, 2016 12 Months or More Estimated Unrealized Fair Value Losses Unrealized Losses $ — $ 3,912 2,476 432 90 2,044 8,954 315 9,269 $ $ — $ — 4,595 — — 17,531 22,126 14,841 36,967 $ Total Estimated Fair Value 301 79,960 186,860 15,521 31,869 136,156 450,667 21,205 471,872 — $ — 180 — — 1,400 1,580 2,420 4,000 $ Unrealized Losses $ $ — 3,912 2,656 432 90 3,444 10,534 2,735 13,269 U.S. Treasury securities Obligations of states and political subdivisions Residential mortgage-backed securities Commercial mortgage-backed securities Other asset-backed securities Corporate and other securities Subtotal, fixed maturity securities Equity securities Total temporarily impaired securities Estimated Fair Value 301 79,960 182,265 15,521 31,869 118,625 428,541 6,364 434,905 $ $ 76 U.S. Treasury securities Obligations of states and political subdivisions Residential mortgage-backed securities Commercial mortgage-backed securities Other asset-backed securities Corporate and other securities Subtotal, fixed maturity securities Equity securities Total temporarily impaired securities Other-Than-Temporary Impairments Less than 12 Months Estimated Fair Value 1,801 34,837 85,561 26,113 14,454 173,493 336,259 19,409 355,668 $ $ Unrealized Losses $ $ 4 342 860 218 145 5,528 7,097 1,739 8,836 As of December 31, 2015 12 Months or More Estimated Unrealized Fair Value $ — $ Losses 4,777 32,845 — — 33,522 71,144 12,054 83,198 $ $ Total Estimated Fair Value 1,801 39,614 118,406 26,113 14,454 207,015 407,403 31,463 438,866 Unrealized Losses $ $ 4 426 1,628 218 145 10,521 12,942 5,835 18,777 — $ 84 768 — — 4,993 5,845 4,096 9,941 $ ASC 320, Investments—Debt and Equity Securities requires entities to separate an OTTI of a debt security into two components when there are credit related losses associated with the impaired debt security for which the Company asserts that it does not have the intent to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. Under ASC 320, the amount of the OTTI related to a credit loss is recognized in earnings, and the amount of the OTTI related to other factors is recorded as a component of other comprehensive income (loss). In instances where no credit loss exists but it is more likely than not that the Company will have to sell the debt security prior to the anticipated recovery, the decline in market value below amortized cost is recognized as an OTTI in earnings. In periods after the recognition of an OTTI on debt securities, the Company accounts for such securities as if they had been purchased on the measurement date of the OTTI at an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. For debt securities for which OTTI was recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected will be accreted or amortized into net investment income. The Company holds no subprime mortgage debt securities. All of the Company’s holdings in mortgage-backed securities are either U.S. Government or Agency guaranteed or are rated investment grade by either Moody’s or Standard & Poor’s. The unrealized losses in the Company’s fixed income and equity portfolio as of December 31, 2016 were reviewed for potential other-than-temporary asset impairments. The Company held five debt securities at December 31, 2016 with a material (20% or greater) unrealized loss for four or more consecutive quarters that additionally had certain qualitative factors that led to an impairment charge. As a result of our analysis, during the year ended December 31, 2016, the Company recognized OTTI of $798 which consisted entirely of credit losses related to fixed maturity securities. During the year ended December 31, 2015, the Company recognized $796 which consisted entirely of credit losses related to fixed maturity securities. Specific qualitative analysis was also performed for any additional securities appearing on the Company’s “Watch List,” if any. Qualitative analysis considered such factors as the financial condition and the near term prospects of the issuer, whether the debtor is current on its contractually obligated interest and principal payments, changes to the rating of the security by a rating agency and the historical volatility of the fair value of the security. The qualitative analysis performed by the Company concluded that outside of the securities that were recognized through OTTI, the unrealized losses recorded on the investment portfolio at December 31, 2016 resulted from fluctuations in market interest rates and other temporary market conditions as opposed to fundamental changes in the credit quality of the issuers of such securities. Therefore, decreases in fair values of the Company’s securities are viewed as being temporary. The following table summarizes the credit loss recognized in earnings related to fixed maturity securities: 77 Credit losses on fixed maturity securities, beginning of period Add: credit losses on OTTI not previously recognized Less: credit losses on securities sold Less: credit losses on securities impaired due to intent to sell Add: credit losses on previously impaired securities Less: increases in cash flows expected on previously impaired securities Credit losses on fixed maturity securities, end of period Year Ended December 31, 2016 2015 $ $ 796 798 (500) - - - 1,094 $ $ - 796 - - - - 796 At December 31, 2016 and December 31, 2015, there were no amounts included in accumulated other comprehensive income related to securities which were considered by the Company to be other-than-temporarily impaired. Based upon the qualitative analysis performed, the Company’s decision to hold these securities, the Company’s current level of liquidity and its positive operating cash flows, management believes it is more likely than not that it will not be required to sell any of its securities before the anticipated recovery in the fair value to its amortized cost basis. Net Investment Income The components of net investment income were as follows for the periods indicated. Interest on fixed maturity securities Dividends on equity securities Equity in earnings of other invested assets Interest on other assets Interest on cash and cash equivalents Total Investment Income Investment expenses Net investment income Year Ended December 31, 2016 2015 2014 36,961 3,401 949 64 43 41,418 3,005 38,413 $ $ 38,794 3,362 918 74 11 43,159 2,625 40,534 $ $ 40,717 3,428 685 79 10 44,919 2,616 42,303 $ $ 4. Equipment and Leasehold Improvements The carrying value of equipment and leasehold improvements by classification was as follows for the periods indicated. Software Computer equipment Leasehold improvements Other equipment Furniture and fixtures Total cost Less accumulated depreciation and amortization Equipment and leasehold improvements, net As of December 31, 2016 2015 $ $ 29,167 8,218 2,524 2,499 1,338 43,746 34,800 8,946 $ $ 25,292 7,260 2,524 2,428 1,331 38,835 30,417 8,418 Depreciation and amortization expense for the years ended December 31, 2016, 2015, and 2014 was $4,382, $3,907, and $4,133, respectively. 5. Employee Benefit Plan The Company sponsors the Safety Insurance Company 401(k) qualified defined contribution retirement plan 78 (the “Retirement Plan”). The Retirement Plan is available to all eligible employees of the Company. An employee must be 21 years of age to be eligible to participate in the Retirement Plan and is allowed to contribute on a pre-tax basis up to the maximum allowed under federal law. The Retirement Plan is administered by the Company and is subject to the provisions of the Employee Retirement Income Security Act of 1974. At the close of each Retirement Plan year, the Company makes a matching contribution equal to 100% of the amount each participant contributed during the plan year from their total pay, up to a maximum amount of 8% of the participant’s base salary, to those participants who have contributed to the Retirement Plan and were employed on the last day of the Retirement Plan year. Compensation expense related to the Retirement Plan was $3,018, $3,019, and $2,775 for the years ended December 31, 2016, 2015, and 2014, respectively. 6. Share-Based Compensation Management Omnibus Incentive Plan Long-term incentive compensation is provided under the Company’s 2002 Management Omnibus Incentive Plan (“the Incentive Plan”) which provides for a variety of share-based compensation awards, including nonqualified stock options, incentive stock options, stock appreciation rights and restricted stock (“RS”) awards. The maximum number of shares of common stock with respect to which awards may be granted is 2,500,000. The Incentive Plan was amended in March of 2013 to remove "share recycling" plan provisions. Hence, shares of stock covered by an award under the Incentive Plan that are forfeited are no longer available for issuance in connection with 2013 and future grants of awards. At December 31, 2016, there were 279,142 shares available for future grant. The Board of Directors and the Compensation Committee intend to issue more awards under the Incentive Plan in the future. For the years ended December 31, 2016, 2015, and 2014, the Company recorded compensation expense related to awards under the Incentive Plan of $2,797, $2,423, and $2,981, net of income tax benefit of $1,506, $1,304, and $1,605, respectively. Stock Options The following table summarizes stock option activity under the Incentive Plan. 2016 Years Ended December 31, 2015 Outstanding at beginning of year Exercised Forfeited Outstanding at end of period Exercisable at end of period $ $ Weighted Average Shares Under Option Exercise Price 42.85 $ 6,200 42.85 (6,000) 42.85 (200) — — — $ — $ $ Weighted Average Shares Under Option Exercise Price 42.85 $ 12,700 42.85 (6,500) — — 42.85 6,200 42.85 $ 6,200 $ $ Shares Under Option 20,200 (7,500) — 12,700 12,700 2014 Weighted Average Exercise Price 41.64 $ 39.60 — 42.85 42.85 $ As of December 31, 2016, all stock option awards have expired and all compensation expense related to stock option awards has been recognized. At December 31, 2015, and 2014, the aggregate intrinsic value of outstanding shares under option was $84, and $269 with a weighted average remaining contractual term of 0.2 and 1.2 years, respectively. Aggregate intrinsic value represents the total pretax intrinsic value, which is the difference between the fair value based upon the Company’s closing year- end stock price at December 31, 2015, and 2014 and the exercise price which would have been received by the option holders had all option holders exercised their options as of those dates. The exercise price on stock options outstanding under the Incentive Plan was $42.85 at December 31, 2016, December 31, 2015 and December 31, 2014. The total intrinsic value of options exercised during the years ended December 31, 2016, 2015, and 2014, was $85, $138, and $183, respectively. 79 Restricted Stock Service-based restricted stock awarded in the form of unvested shares is recorded at the market value of the Company’s common stock on the grant date and amortized ratably as compensation expense over the requisite service period. Service-based restricted stock awards generally vest over a three-year period and vest 30% on the first and second anniversaries of the grant date and 40% on the third anniversary of the grant date, except for non-executive employees’ restricted stock awards which vest ratably over a five-year service period and independent directors’ stock awards which vest immediately. Our independent directors are subject to stock ownership guidelines, which require them to have a value equal to four times their annual cash retainer. In addition to service-based awards, the Company grants performance-based restricted shares to certain employees. These performance shares cliff vest after a three-year performance period provided certain performance measures are attained. A portion of these awards, which contain a market condition, vest according to the level of total shareholder return achieved by the Company compared to its property-casualty insurance peers over a three-year period. The remainders, which contain a performance condition, vest according to the level of Company’s combined ratio results compared to a target based on its property-casualty insurance peers. Actual payouts can range from 0% to 200% of target shares awarded depending upon the level of achievement of the respective market and performance conditions during a three fiscal-year performance period. Compensation expense for share awards with a performance condition is based on the probable number of awards expected to vest using the performance level most likely to be achieved at the end of the performance period. Performance-based awards with market conditions are accounted for and measured differently from awards that have a performance or service condition. The effect of a market condition is reflected in the award’s fair value on the grant date. That fair value is recognized as compensation cost over the requisite service period regardless of whether the market-based performance objective has been satisfied. All of the Company’s restricted stock awards are issued as incentive compensation and are equity classified. The following table summarizes restricted stock activity under the Incentive Plan assuming a target payout for the performance-based shares. 2016 Shares Under Restriction Years Ended December 31, 2015 2014 Weighted Average Fair Value Shares Under Restriction Weighted Average Fair Value Shares Under Restriction Weighted Average Fair Value 112,024 46,556 (56,279) (6,808) 95,493 $ $ 54.44 56.09 53.43 50.02 55.86 176,116 46,943 (108,130) (2,905) 112,024 $ $ 46.38 61.57 44.51 49.94 54.44 211,234 50,781 (81,149) (4,750) 176,116 $ $ 43.51 53.94 43.80 44.46 46.38 2016 Performance-based Weighted Average Fair Value Shares Under Restriction Years Ended December 31, 2015 Performance-based Weighted Average Fair Value Shares Under Restriction 2014 Performance-based Weighted Average Fair Value Shares Under Restriction 99,101 44,626 (15,289) (33,828) 94,610 $ $ 55.55 61.07 47.42 52.07 57.60 64,724 37,722 — (3,345) 99,101 $ $ 50.40 63.62 — 46.91 55.55 37,456 29,903 — (2,635) 64,724 $ $ 44.13 57.94 — 46.96 50.40 Outstanding at beginning of year Granted Vested and unrestricted Forfeited Outstanding at end of period Outstanding at beginning of year Granted Vested and unrestricted Forfeited Outstanding at end of period As of December 31, 2016, there was $6,455 of unrecognized compensation expense related to non-vested 80 restricted stock awards that is expected to be recognized over a weighted average period of 1.8 years. The total fair value of the shares that were vested and unrestricted during the years ended December 31, 2016, 2015, and 2014 was $3,732, $2,897, and $3,554, respectively. 7. Commitments and Contingencies Lease Commitments The Company has various non-cancelable long-term operating leases. The approximate minimum annual rental payments due under these lease agreements as of December 31, 2016 are presented in the following table. 2017 2018 2019 Total minimum lease payments $ $ 3,990 3,963 192 8,145 Certain lease agreements contain renewal options and, in addition to the minimum annual rentals, generally provide for payment of a share of the real estate taxes and operating expenses in excess of a base amount. Rental expense was $4,242, $4,293, and $4,236 for the years ended December 31, 2016, 2015, and 2014, respectively. All leases expire prior to 2020. The Company expects that in the normal course of business, leases that expire will be renewed. An eighth amendment to a lease agreement for the lease of office space was executed on April 5, 2007. Under the provisions of this amendment, additional space was occupied and the lease term was extended an additional ten years commencing on January 1, 2009, with an option to renew for one additional five-year term. As part of the Company’s investment activity, we have committed $40,000 to investments in limited partnerships. The Company has contributed $19,757 to these commitments as of December 31, 2016. As of December 31, 2016, the remaining committed capital due to be called is $20,243. Contingencies On December 15, 2015, the Company filed for arbitration with a reinsurer in regards to the reinsurance recoverable resulting from the 2015 winter storm losses that are admissible under our contract. The total amount of recoverable in dispute, which is based on our total incurred loss, is $22,838. No provision for collectability has been recorded in the financial statements as we believe the recoverable is valid and will be recovered. Various claims, generally incidental to the conduct of normal business, are pending or alleged against the Company from time to time. In the opinion of management, based in part on the advice of legal counsel, the ultimate resolution of such claims will not have a material adverse effect on the Company’s consolidated financial statements. However, if estimates of the ultimate resolutions of those proceedings are revised, liabilities related to those proceedings could be adjusted in the near term. Massachusetts law requires that insurers licensed to do business in Massachusetts participate in the Massachusetts Insurers Insolvency Fund (“Insolvency Fund”). Members of the Insolvency Fund are assessed a proportionate share of the obligations and expenses of the Insolvency Fund in connection with an insolvent insurer. It is anticipated that there will be additional assessments from time to time relating to various insolvencies. Although the timing and amounts of any future assessments are not known, based upon existing knowledge, management’s opinion is that such future assessments will not have a material effect upon the financial position of the Company. 81 8. Debt The Company has a Revolving Credit Agreement (the “Credit Agreement”) with Citizens Bank, NA ((formerly known as RBS Citizens, N.A. (“Citizens Bank”)). The Credit Agreement provides a $30,000 revolving credit facility with an accordion feature allowing for future expansion of the committed amount up to $50,000. Loans under the credit facility bear interest at the Company’s option at either (i) the LIBOR rate plus 1.25% per annum or (ii) the higher of Citizens Bank prime rate or 0.5% above the federal funds rate plus 1.25% per annum. Interest only is payable prior to maturity. The Credit Agreement has a maturity date of August 14, 2018. The Company’s obligations under the credit facility are secured by pledges of its assets and the capital stock of its operating subsidiaries. The credit facility is guaranteed by the Company’s non-insurance company subsidiaries. The credit facility contains covenants including requirements to maintain minimum risk-based capital ratios and statutory surplus of Safety Insurance Company as well as limitations or restrictions on indebtedness, liens, and other matters. As of December 31, 2016, the Company was in compliance with all covenants. In addition, the credit facility includes customary events of default, including a cross-default provision permitting the lenders to accelerate the facility if the Company (i) defaults in any payment obligation under debt having a principal amount in excess of $10,000 or (ii) fails to perform any other covenant permitting acceleration of all such debt. The Company had no amounts outstanding on its credit facility at December 31, 2016 or 2015. The credit facility commitment fee included in interest expense was computed at a rate of 0.25% per annum on the $30,000 commitment at December 31, 2016 and 2015. The Company became a member of the Federal Home Loan Bank of Boston (“FHLB-Boston”) during the quarter ended September 30, 2014. Membership in the FHLB-Boston allows the Company to borrow money at competitive interest rates provided the loan is collateralized by specific U.S Government residential mortgage backed securities. At December 31, 2016, the Company has the ability to borrow approximately $180,699 using eligible invested assets that would be used as collateral. The Company has no amounts outstanding from the FHLB-Boston at December 31, 2016. 9. Reinsurance The Company cedes insurance to CAR and to other reinsurers. The Company has a property catastrophe excess of loss agreement and a casualty excess of loss agreement that qualify as reinsurance treaties and are designed to protect against large or unusual loss and LAE activity. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. At December 31, 2016, our total expected reinsurance recovery from reinsurers under our catastrophe reinsurance program related to the 2015 snow is $67,934. Amounts recoverable from reinsurers are billed to the reinsurer as claims are paid by the Company. The current reinsurance recoverable related to the 2015 snow event is $31,701. The Company is subject to concentration of credit risk with respect to reinsurance ceded. At December 31, 2016, reinsurance receivables on paid and unpaid loss and LAE with a carrying value of $70,623 and ceded unearned premiums of $26,964 were associated with CAR. At December 31, 2015, reinsurance receivables on paid and unpaid loss and LAE with a carrying value of $57,833 and ceded unearned premiums of $21,594 were associated with CAR. The Company assumes a proportionate share of the obligations from CAR. The Company makes an estimate of its share of assumed activity from the most recent quarter reported by CAR and records adjustments to the reported activity to reflect its anticipated final assumed obligations. The Company’s participation in CAR resulted in assumed net losses of $2,341, $365 and $1,278 for the years ended December 31, 2016, 2015 and 2014, respectively. 82 CAR has been, with few exceptions, required by law to issue a policy to any applicant who seeks it. As a servicing carrier of CAR, this requirement has applied to the Company. The effect of assumed and ceded premiums on net written and earned premiums and losses and LAE incurred is as follows. Written Premiums Direct Assumed Ceded Net written premiums Earned Premiums Direct Assumed Ceded Net earned premiums Loss and LAE Direct Assumed Ceded Net loss and LAE 2016 Years Ended December 31, 2015 2014 $ $ $ $ $ $ 811,559 30,424 (75,513) 766,470 796,366 29,544 (70,150) 755,760 515,506 23,343 (45,416) 493,433 $ $ $ $ $ $ 785,730 28,322 (67,872) 746,180 776,633 25,819 (64,288) 738,164 688,793 22,306 (98,530) 612,569 $ $ $ $ $ $ 765,685 25,602 (56,373) 734,914 747,786 23,724 (54,635) 716,875 486,649 18,144 (28,427) 476,366 10. Loss and Loss Adjustment Expense Reserves The following table sets forth a reconciliation of beginning and ending reserves for losses and loss adjustment expenses (“LAE”), as shown in the Company’s consolidated financial statements for the periods indicated. Reserves for losses and LAE at beginning of year Less receivable from reinsurers related to unpaid losses and LAE Net reserves for losses and LAE at beginning of year Incurred losses and LAE, related to: Current year Prior years Total incurred losses and LAE Paid losses and LAE related to: Current year Prior years Total paid losses and LAE Net reserves for losses and LAE at end of period Plus receivable from reinsurers related to unpaid losses and LAE Reserves for losses and LAE at end of period Year Ended December 31, 2016 2015 2014 553,977 (68,261) 485,716 538,881 (45,448) 493,433 328,046 174,506 502,552 476,597 83,724 560,321 $ $ $ 482,012 (61,245) 420,767 642,882 (30,313) 612,569 415,256 132,364 547,620 485,716 68,261 553,977 $ 455,014 (60,346) 394,668 513,734 (37,368) 476,366 316,979 133,288 450,267 420,767 61,245 482,012 $ $ At the end of each period, the reserves were re-estimated for all prior accident years. The Company’s prior year reserves decreased by $45,448, $30,313, and $37,368 for the years ended 2016, 2015, and 2014, respectively, and resulted from re-estimations of prior years’ ultimate loss and LAE liabilities. The decrease in prior year reserves during 2016 was primarily composed of reductions of $25,019 in the Company’s retained automobile and $11,648 in the Company’s retained homeowners reserves. The decrease in prior year reserves during 2015 was primarily composed of reductions of $18,644 in the Company’s retained automobile and $7,964 in the Company’s retained homeowners reserves. The decrease in prior year reserves during 2014 was primarily composed of reductions of $23,272 in the Company’s retained automobile and $8,804 in the Company’s retained homeowners reserves. 83 The Company’s private passenger automobile line of business prior year reserves decreased during the years ended December 31, 2016, 2015 and 2014 primarily due to improved retained private passenger results. The improved retained private passenger results were primarily due to fewer incurred but not yet reported claims than previously estimated and better than previously estimated severity on the Company’s established bodily injury and property damage case reserves. The following is information about incurred and paid claims development as of December 31, 2016, net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the net incurred claims amounts for our three largest lines of business. The cumulative number of reported claims include claims closed with payment, claims closed without payment and all open claims. It does not include anticipated IBNR claims. For the Private Passenger Automobile and Commercial Automobile lines of business, claim count is defined on a claimant basis where several claim counts may arise from a single auto accident. For Homeowners and all other lines of business, claim count is defined on an accident basis. The information about incurred claims and allocated claim adjustment expense, net or reserves and paid ultimate claims development for the years ended December 31, 2007 to 2015 is presented as unaudited supplementary information. 84 Private Passenger Automobile Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Accident Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 For the Years Ended December 31, (Unaudited) As of December 31, 2016 Total of Incurred-but- Not-Reported Liabilities Plus Expected Development of Reported Claims Cumulative Number of Reported Claims 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 $ 294,489 $ 289,704 $ 284,723 $ 278,633 $ 275,325 $ 273,637 $ 271,787 $ 270,545 $ 269,978 $ 269,785 $ 452 192,735 286,394 278,148 271,319 265,634 262,316 258,705 256,806 256,574 255,248 270,462 266,660 262,056 260,136 256,653 253,865 252,710 252,035 270,882 271,021 268,620 266,574 262,580 261,089 259,531 294,858 294,857 291,934 289,030 286,722 285,526 283,638 283,101 279,249 274,058 270,406 546 608 1,595 1,329 1,441 186,654 182,449 183,182 196,629 176,903 297,756 297,756 296,298 293,689 417 185,929 310,726 310,726 309,208 (7,991) 187,685 330,255 326,897 (9,447) 196,780 322,440 (20,475) 169,056 Total $ 2,844,765 Private Passenger Automobile Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Accident Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 For the Years Ended December 31, 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (Unaudited) $ 172,883 $ 229,767 $ 248,726 $ 258,968 $ 264,471 $ 267,215 $ 268,418 $ 268,684 $ 268,701 $ 269,135 171,445 218,935 236,531 244,427 250,785 253,410 254,436 254,558 254,585 170,304 216,220 232,704 241,923 246,805 249,832 250,466 250,709 175,356 225,179 239,275 249,852 254,256 256,527 257,184 202,663 247,170 260,983 272,713 278,132 280,924 186,234 233,570 248,468 256,655 261,016 199,892 250,935 265,366 275,856 209,883 262,848 279,361 220,466 275,015 212,392 Total $ 2,616,177 All outstanding liabilities before 2007, net of reinsurance 755 Liabilities for claims and claim adjustment expenses, net of reinsurance $ 229,343 85 As of December 31, 2016 Total of Incurred-but- Not-Reported Liabilities Plus Expected Development of Reported Claims Cumulative Number of Reported Claims $ 23 (47) 362 (102) 1 634 1,703 1,777 (677) 6,844 19,013 17,787 16,348 15,085 16,446 14,478 18,076 19,621 22,606 18,273 Commercial Automobile Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Accident Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 For the Years Ended December 31, $ 38,425 $ 37,651 38,389 $ 37,553 38,309 34,078 $ 36,753 37,017 32,744 30,198 (Unaudited) $ 36,250 36,511 32,320 29,885 35,169 $ 36,289 36,854 31,949 29,386 35,449 34,086 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 $ 35,578 36,404 31,851 29,468 35,191 34,829 42,841 $ 35,572 36,212 31,655 29,840 35,147 34,993 43,108 51,543 $ 35,568 35,724 31,545 29,240 34,601 34,972 41,675 51,030 55,594 Total $ 35,467 35,486 31,442 28,950 33,843 35,822 40,044 49,831 55,197 58,170 $ 404,252 Commercial Automobile Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Accident Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 For the Years Ended December 31, $ 17,654 $ 25,876 17,710 $ 29,165 25,518 16,518 $ 32,598 28,949 22,958 15,864 (Unaudited) $ 33,828 31,822 25,275 21,739 18,312 $ 34,887 34,100 27,241 23,869 25,382 16,210 $ 35,091 35,151 29,038 25,860 28,899 23,027 21,167 $ 35,170 35,495 30,624 27,379 30,843 25,887 30,457 24,803 $ 35,197 35,464 31,022 27,917 31,996 28,046 32,739 33,715 28,968 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total All outstanding liabilities before 2007, net of reinsurance Liabilities for claims and claim adjustment expenses, net of reinsurance $ 35,401 35,498 31,060 28,140 32,966 29,115 34,203 37,392 40,610 27,219 $ 331,604 401 $ 73,049 86 As of December 31, 2016 Total of Incurred-but- Not-Reported Liabilities Plus Expected Development of Reported Claims Cumulative Number of Reported Claims $ 65 184 265 425 1,184 2,016 3,998 5,652 (13,963) 3,076 2,923 4,540 3,851 6,902 15,335 6,240 5,908 6,339 20,176 5,348 Homeowners Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Accident Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 For the Years Ended December 31, $ 22,219 $ 21,903 29,643 $ 20,995 28,702 32,120 $ 19,585 27,854 31,661 50,933 (Unaudited) $ 18,795 26,951 31,870 49,972 101,846 $ 18,528 26,319 30,925 48,443 105,665 57,865 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 $ 18,338 26,264 29,700 45,756 105,215 57,425 66,066 $ 18,330 25,842 29,049 44,639 102,188 54,906 65,967 70,654 $ 18,229 25,750 28,982 43,756 100,837 50,844 65,059 71,707 165,551 Total $ 18,040 25,567 28,888 43,236 99,203 48,401 60,042 69,489 164,604 77,710 $ 635,180 Homeowners Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Accident Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 For the Years Ended December 31, $ 9,386 $ 14,056 12,084 $ 14,409 20,661 16,682 $ 17,238 22,808 23,717 26,724 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (Unaudited) $ 17,547 24,954 27,904 38,867 71,767 $ 17,787 25,089 28,324 41,474 91,711 32,190 $ 17,846 25,200 28,518 42,000 95,643 42,744 39,188 $ 17,848 25,245 28,608 42,359 96,798 44,268 50,793 40,749 $ 17,849 25,260 28,621 42,628 96,941 44,468 52,782 53,995 112,991 Total All outstanding liabilities before 2007, net of reinsurance $ 17,849 25,279 28,620 42,707 96,869 44,811 53,105 57,300 148,656 44,750 $ 559,946 221 Liabilities for claims and claim adjustment expenses, net of reinsurance $ 75,455 The following is unaudited supplementary information about average historical claims duration as of December 31, 2016. Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (Unaudited) Years Private Passenger Automobile 1 68.0% 2 18.0% 3 6.0% 4 4.0% 5 2.0% 6 1.0% 7 0.0% 8 0.0% 9 0.0% 10 0.0% Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (Unaudited) Years Commercial Automobile 1 51.0% 2 21.0% 3 8.0% 4 7.0% 5 5.0% 6 3.0% 7 1.0% 8 0.0% 9 0.0% 10 1.0% Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (Unaudited) Years Homeowners 1 64.0% 2 22.0% 3 5.0% 4 2.0% 5 1.0% 6 0.0% 7 0.0% 8 0.0% 9 0.0% 10 0.0% The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the consolidated balance sheets is as follows. 87 Reconciliation of the Disclosure of Incurred and Paid Claims Development to the Liability for Unpaid claims and Claim Adjustment Expenses December 31, 2016 Net outstanding liabilities Private Passenger Automobile Commercial Automobile Homeowners Other Short-Duration Insurance Lines Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance Reinsurance recoverable on unpaid claims Private Passenger Automobile Commercial Automobile Homeowners Other Short-Duration Insurance Lines Total reinsurance recoverable on unpaid claims Unallocated claims adjustment expenses Total gross liability for unpaid claims and claim adjustment expenses $ 229,343 73,049 75,455 67,405 445,252 1,815 60,852 10,379 10,678 83,724 31,345 $ 560,321 Due to the nature of the risks that the Company underwrites and has historically underwritten, management does not believe that it has an exposure to asbestos or environmental pollution liabilities. 11. Income Taxes A summary of the income tax expense (benefit) in the Consolidated Statements of Operations is shown below. Current Income Taxes: Federal State Deferred Income Taxes: Federal State Total income tax expense (benefit) 2016 Years Ended December 31, 2015 2014 $ $ 26,927 89 27,016 1,681 — 1,681 28,697 $ $ (15,384) 40 (15,344) 552 — 552 (14,792) $ $ 24,389 177 24,566 (602) — (602) 23,964 The income tax (benefit) expense attributable to the consolidated results of operations is different from the amounts determined by multiplying income before federal income taxes by the statutory federal income tax rate. The sources of the difference and the tax effects of each were as follows for the periods indicated. Federal income tax expense (benefit), at statutory rate Tax(cid:827)exempt investment income, net State taxes, net Nondeductible expenses Other, net Total income tax expense (benefit) 2016 Years Ended December 31, 2015 2014 32,649 (4,194) 58 202 (18) 28,697 $ $ (10,025) (4,889) 26 233 (137) (14,792) $ $ 29,162 (5,429) 115 222 (106) 23,964 $ $ 88 The deferred income tax asset (liability) represents the tax effects of temporary differences attributable to the Company’s consolidated federal tax return group. Its components were as shown in the following table for the periods indicated. Deferred tax assets: Discounting of loss reserves Discounting of unearned premium reserve Bad debt allowance Employee benefits Rent incentive Depreciation Other Total deferred tax assets before valuation allowance Valuation allowance for deferred tax assets Total deferred tax assets Deferred tax liabilities: Deferred acquisition costs Investments Net unrealized gains on investments Software development costs Premium acquisition expenses Other Total deferred tax liabilities Net deferred tax asset (liability) Years Ended December 31, 2016 2015 $ $ 5,984 28,286 502 7,995 238 255 — 43,260 — 43,260 (24,848) (3,469) (8,531) (2,479) (850) — (40,177) 3,083 $ $ 6,668 27,542 509 7,922 371 152 — 43,164 — 43,164 (24,128) (2,540) (8,865) (2,342) (856) (3) (38,734) 4,430 The Company believes, based upon consideration of objective and verifiable evidence, including its historical positive earnings and its future expectations, that the Company’s taxable income in future years will be sufficient to realize all federal deferred tax assets. The Company believes that the positions taken on its income tax returns for open tax years will be sustained upon examination by the Internal Revenue Service (“IRS”). Therefore, the Company has not recorded any liability for uncertain tax positions under ASC 740, Income Taxes. During the years ended December 31, 2016 and December 31, 2015 there were no material changes to the amount of the Company’s unrecognized tax benefits or to any assumptions regarding the amount of its ASC 740 liability. As of December 31, 2016 and December 31, 2015, the Company had no unrecognized tax benefits, and none which if recognized would affect the effective tax rate. The Company does not currently anticipate significant changes in the amount of unrecognized income tax benefits during the next twelve months. The Company records interest and penalties associated with audits as a component of income before income taxes. Penalties are recorded in underwriting, operating and other expenses, and interest expense is recorded in interest expenses in the Consolidated Statements of Operations. The Company had no interest and penalties related to income taxes accrued as of December 31, 2016 and 2015. The Company’s U.S. federal tax return for the years ended December 31, 2015, 2014 and 2013 respectively, are currently being examined by the IRS. This examination relates to the refund claim for the 2015 Net Operating Loss that was carried back to prior years, which triggered a review by the Joint Committee on Taxation. In the Company’s opinion, adequate tax liabilities have been established for all open years. However, the amount of these tax liabilities could be revised in the near term if estimates of the Company’s ultimate liability are revised. The Company’s U.S. federal tax return for the year ended December 31, 2011 was examined by the IRS. The 89 examination was completed during the quarter ending September 30, 2014 with no findings. Tax years prior to 2013 are closed. 12. Share Repurchase Program On August 3, 2007, the Board of Directors approved a share repurchase program of up to $30,000 of the Company’s outstanding common shares. As of December 31, 2016, the Board of Directors had cumulatively authorized increases to the existing share repurchase program of up to $150,000 of its outstanding common shares. Under the program, the Company may repurchase shares of its common stock for cash in public or private transactions, in the open market or otherwise. The timing of such repurchases and actual number of shares repurchased will depend on a variety of factors including price, market conditions and applicable regulatory and corporate requirements. The program does not require the Company to repurchase any specific number of shares and it may be modified, suspended or terminated at any time without prior notice. No purchases were made by the Company under the program during the years ended December 31, 2016 and December 31, 2015. As of December 31, 2016, the Company had purchased 2,279,570 shares on the open market at a cost of $83,835. 13. Statutory Net Income and Surplus Statutory Accounting Practices The Company’s insurance company subsidiaries, domiciled in the Commonwealth of Massachusetts, prepare statutory financial statements in accordance with the accounting practices prescribed or permitted by the Division. Prescribed statutory accounting practices are those practices that are incorporated directly or by reference in state laws, regulations, and general administrative rules applicable to all insurance enterprises domiciled in a particular state. Permitted statutory accounting practices include practices not prescribed by the Division, but allowed by the Division. Statutory net income was $57,202, and $55,330 for the years ended December 31, 2016, and 2014 respectively. Statutory net loss of the Company’s insurance company subsidiaries was $12,209 for the year ended December 31, 2015. Statutory capital and surplus of the Company’s insurance subsidiaries was $604,813, and $571,038 at December 31, 2016 and 2015, respectively. Dividends The Insurance Subsidiaries are subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid to their parent without prior approval of the Commonwealth of Massachusetts Commissioner of Insurance (the “Commissioner”). Massachusetts statute limits the dividends an insurer may pay in any twelve month period, without the prior permission of the Commissioner, to the greater of (i) 10% of the insurer’s surplus as of the preceding December 31 or (ii) the insurer’s net income for the twelve- month period ending the preceding December 31, in each case determined in accordance with statutory accounting practices. Our insurance company subsidiaries may not declare an “extraordinary dividend” (defined as any dividend or distribution that, together with other distributions made within the preceding twelve months, exceeds the limits established by Massachusetts statute) until thirty days after the Commissioner has received notice of the intended dividend and has not objected. As historically administered by the Commissioner, this provision requires the Commissioner’s prior approval of an extraordinary dividend. Under Massachusetts law, an insurer may pay cash dividends only from its unassigned funds, also known as earned surplus, and the insurer’s remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. At December 31, 2016, the statutory capital and surplus of Safety Insurance was $604,813 and its net income for 2016 was $57,202. As a result, a maximum of $60,481 is available in 2017 for such dividends without prior approval of the Commissioner. During the year ended December 31, 2016, Safety Insurance recorded dividends of $39,156. As result of this Massachusetts statute, the Insurance Subsidiaries had restricted net assets in the amount of $544,332 at December 31, 2016. 90 Risk-Based Capital Requirements The NAIC has adopted a formula and model law to implement risk-based capital requirements for most property and casualty insurance companies, which are designed to determine minimum capital requirements and to raise the level of protection that statutory surplus provides for policyholder obligations. Under Massachusetts law, insurers having less total adjusted capital than that required by the risk-based capital calculation will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The risk-based capital law provides for four levels of regulatory action. The extent of regulatory intervention and action increases as the level of total adjusted capital to risk-based capital falls. As of December 31, 2016, the Insurance Subsidiaries had total adjusted capital of $604,813, which is in excess of amounts requiring company or regulatory action at any prescribed risk-based capital action level. Minimum statutory capital and surplus, or company action level risk-based capital, was $107,664 at December 31, 2016. 14. Fair Value of Financial Instruments ASC 820, Fair Value Measurements and Disclosure provides a revised definition of fair value, establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value information. Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an exit price). ASC 820 establishes a fair value hierarchy that distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). The fair value hierarchy in ASC 820 prioritizes fair value measurements into three levels based on the nature of the inputs as follows: Level 1 — Valuations based on quoted prices in active markets for identical assets and liabilities; Level 2 — Valuations based on observable inputs that do not meet the criteria for Level 1, including quoted prices in inactive markets and quoted prices in active markets for similar, but not identical instruments; and Level 3 — Valuations based on unobservable inputs. Fair values for the Company’s fixed maturity securities are based on prices provided by its custodian bank and its investment managers. Both the Company’s custodian bank and investment managers use a variety of independent, nationally recognized pricing services to determine market valuations. If the pricing service cannot provide fair value determinations, the Company obtains non-binding price quotes from broker-dealers. A minimum of two quoted prices is obtained for the majority of the Company’s available-for-sale fixed maturity securities in its investment portfolio. The Company’s custodian bank is its primary provider of quoted prices from third-party pricing services and broker- dealers. To provide reasonable assurance of the validity of each price or quote, a secondary third-party pricing service or broker-dealer quote is obtained from the Company’s investment managers. An examination of the pricing data is then performed for each security. If the variance between the primary and secondary price quotes for a security is within an accepted tolerance level, the quoted price obtained from the Company’s custodian bank is used in the financial statements for the security. If the variance between the primary and secondary price quotes exceeds an accepted tolerance level, the Company obtains a quote from an alternative source, if possible, and documents and resolves any differences between the pricing sources. In addition, the Company may request that its investment managers and its traders provide input as to which vendor is providing prices that its traders believe are reflective of fair value for the security. Following this process, the Company may decide to value the security in its financial statements using the secondary or alternative source if it believes that pricing is more reflective of the security’s value than the primary pricing provided by its custodian bank. The Company analyzes market valuations received to verify reasonableness, to understand the key assumptions used and their sources, and to determine an appropriate ASC 820 fair value hierarchy level based upon trading activity and the observability of market inputs. Based on this evaluation and investment class analysis, each price is classified into Level 1, 2 or 3. Fair values of instruments are based on (i) quoted prices in active markets for identical assets (Level 1), (ii) quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets 91 that are not active and model-derived valuations in which all significant inputs are observable in active markets (Level 2) or (iii) valuations derived from valuation techniques in which one or more significant inputs are unobservable in the marketplace (Level 3). The Company’s Level 1 securities consist of equity securities whose values are based on quoted prices in active markets for identical assets. The Company’s Level 2 securities are comprised of available-for-sale fixed maturity securities whose fair value was determined using observable market inputs. The Company’s Level 3 security consists of an investment in the Federal Home Loan Bank of Boston related to Safety Insurance Company’s membership stock, which is not redeemable in a short-term time frame. Fair values for securities for which quoted market prices were unavailable were estimated based upon reference to observable inputs such as benchmark interest rates, market comparables, and other relevant inputs. Investments valued using these inputs include U.S. Treasury securities, obligations of states and political subdivisions, corporate and other securities, commercial and residential mortgage- backed securities, and other asset-backed securities. Inputs into the fair value application that are utilized by asset class include but are not limited to: (cid:120) Obligations of states and political subdivisions: overall credit quality, including assessments of market sectors and the level and variability of sources of payment such as general obligation, revenue or lease; credit support such as insurance, state or local economic and political base, prefunded and escrowed to maturity covenants. (cid:120) (cid:120) (cid:120) Corporate and fixed maturities: overall credit quality, the establishment of a risk adjusted credit spread over the applicable risk-free yield curve for discounted cash flow valuations; assessments of the level of industry economic sensitivity, company financial policies, indenture restrictive covenants, and/or security and collateral. Residential mortgage-backed securities: U.S. agency pass-throughs, collateralized mortgage obligations (“CMOs”), non U.S. agency CMOs: estimates of prepayment speeds based upon historical prepayment rate trends, underlying collateral interest rates, original weighted average maturity, vintage year, borrower credit quality characteristics, interest rate and yield curve forecasts, U.S. government support programs, tax policies, and delinquency/default trends. Commercial mortgage-backed securities: overall credit quality, including assessments of the level and variability of credit support and collateral type such as office, retail, or lodging, predictability of cash flows for the deal structure, prevailing economic market conditions. (cid:120) Other asset-backed securities: overall credit quality, estimates of prepayment speeds based upon historical trends and characteristics of underlying loans, including assessments of the level and variability of collateral, revenue generating agreements, area licenses agreements, product sourcing agreements and equipment and property leases. (cid:120) FHLB-Boston: value is equal to the cost of the member stock purchased. In order to ensure the fair value determination is representative of an exit price (consistent with ASC 820), the Company’s procedures for validating quotes or prices obtained from third parties include, but are not limited to, obtaining a minimum of two price quotes for each fixed maturity security if possible, as discussed above, the periodic testing of sales activity to determine if there are any significant differences between the market price used to value the security as of the balance sheet date and the sales price of the security for sales that occurred around the balance sheet date, and the periodic review of reports provided by its investment manager regarding those securities with ratings changes and securities placed on its “Watch List.” In addition, valuation techniques utilized by pricing services and prices obtained from external sources are reviewed by the Company and its external investment manager, whose investment professionals are familiar with the securities being priced and the markets in which they trade, to ensure the fair value determination is representative of an exit price (consistent with ASC 820). All unadjusted estimates of fair value for our fixed maturities priced by the pricing services as described above are included in the amounts disclosed in Level 2. With the exception of the FHLB-Boston security, which is categorized 92 as a Level 3 security, the Company’s entire available-for-sale portfolio was priced based upon quoted market prices or other observable inputs as of December 31, 2016. There were no significant changes to the valuation process during the year ended December 31, 2016. As of December 31, 2016 and December 31, 2015, no quotes or prices obtained were adjusted by management. All broker quotes obtained were non-binding. At December 31, 2016 and December 31, 2015, investments in fixed maturities and equity securities classified as available-for-sale had a fair value which equaled carrying value of $1,259,364 and $1,191,841, respectively. At December 31, 2016 and December 31, 2015, we held no short-term investments. The carrying values of cash and cash equivalents and investment income accrued approximated fair value. The following tables summarize the Company’s total fair value measurements for available-for-sale investments for the periods indicated. U.S. Treasury securities Obligations of states and political subdivisions Residential mortgage-backed securities Commercial mortgage-backed securities Other asset-backed securities Corporate and other securities Equity securities Total investment securities U.S. Treasury securities Obligations of states and political subdivisions Residential mortgage-backed securities Commercial mortgage-backed securities Other asset-backed securities Corporate and other securities Equity securities Total investment securities Total Level 1 Inputs As of December 31, 2016 $ $ $ $ 302 390,433 252,631 35,454 70,410 405,039 85,134 1,239,403 Total 1,801 397,922 241,456 28,663 23,931 387,864 91,107 1,172,744 $ $ $ $ — $ — — — — — 84,456 84,456 $ Level 2 Inputs 302 390,433 252,631 35,454 70,410 405,039 — 1,154,269 As of December 31, 2015 Level 1 Inputs — $ — — — — — 90,560 90,560 $ Level 2 Inputs 1,801 397,922 241,456 28,663 23,931 387,864 — 1,081,637 Level 3 Inputs — — — — — — 678 678 Level 3 Inputs — — — — — — 547 547 $ $ $ $ There were no transfers between Level 1 and Level 2 during the years ended December 31, 2016 or 2015. The following tables summarize the changes in the Company’s Level 3 fair value securities for the periods indicated. Balance at beginning of period Net gains and losses included in earnings Net gains included in other comprehensive income Purchases Sales Transfers into Level 3 Transfers out of Level 3 Balance at end of period Year Ended December 31, 2016 2015 2014 547 — — 131 — — — 678 $ $ 505 — — 42 — — — 547 $ $ — — — 505 — — — 505 $ $ Transfers in and out of Level 3 are attributable to changes in the ability to observe significant inputs in determining fair value exit pricing. As noted in the table above, no transfers were made in or out of Level 3 during 2016, 2015 and 2014. The Company held one Level 3 securities at December 31, 2016. As of December 31, 2016 and December 31, 2015, there were approximately $19,961 and $19,097 in a real estate investment trust (“REIT”). The REIT is excluded from the fair value hierarchy because the fair value is recorded using the net asset value per share practical expedient. The net asset value per share of this REIT is derived from member ownership in the capital venture to which a proportionate share of independently appraised net assets is 93 attributed. The fair value was determined using the trust’s net asset value obtained from its audited financial statements. The Company is required to submit a request to the REIT 45 days before a quarter end to dispose of the security. 15. Quarterly Results of Operations (Unaudited) An unaudited summary of the Company’s 2016 and 2015 quarterly performance, and audited annual performance, is as follows. Total revenue Net income Earnings per weighted average common share: Basic Diluted Cash dividends paid per common share Total revenue Net (loss) income Earnings per weighted average common share: Basic Diluted Cash dividends paid per common share 16. Related Party Transactions First Quarter $ 199,829 12,670 0.84 0.84 0.70 First Quarter 198,039 (35,071) $ (2.37) (2.37) 0.70 Year ended December 31, 2016 Third Quarter Fourth Quarter Second Quarter $ 202,950 21,365 $ 210,085 18,597 $ 206,958 11,953 $ 1.42 1.41 0.70 1.24 1.23 0.70 0.79 0.79 0.70 Year ended December 31, 2015 Third Quarter Fourth Quarter Second Quarter $ 197,602 (1,053) $ 201,270 11,981 $ 201,042 10,290 $ (0.07) (0.07) 0.70 0.80 0.80 0.70 0.69 0.69 0.70 Total Year 819,822 64,585 4.29 4.27 2.80 Total Year 797,953 (13,853) (0.93) (0.93) 2.80 Mr. A. Richard Caputo, Jr., a member of the Company’s Board of Directors and Chairman of its Investment Committee, until his resignation in February 2017, is a principal of The Jordan Company, LP (“Jordan”). In 2012, the Company participated as a lender in two loans made by syndicates of lenders to a portfolio company in which funds managed by Jordan are controlling or a significant investor. The first loan, made to Vantage Specialties, Inc.,was disposed of in 2016. The second loan, made to ARCAS Automotive (formerly known as Sequa Auto), was disposed of in 2015. The Company made the loans on the same terms as the other lenders participating in the syndicate. The loans were subject to the approval of the Company’s full Investment Committee. 17. Subsequent Events The Company has evaluated subsequent events for recognition or disclosure in the consolidated financial statements on Form 10-K filed herewith and no events have occurred that require recognition or disclosure. 94 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended [the "Exchange Act"]) as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures are adequate and effective and ensure that all information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and that information required to be disclosed in such reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Management's Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2016. PricewaterhouseCoopers LLP, the Company's independent registered public accounting firm, has audited the effectiveness of Safety Insurance Group, Inc.'s internal control over financial reporting as of December 31, 2016, as stated in their report which is included herein. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rules 13a-15 and 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting. 95 ITEM 9B. OTHER INFORMATION The following disclosures relate to actions taken by the Board of Directors of the Company (the "Board"), the Compensation Committee of the Board and the Board of Directors of Safety Insurance Company and would otherwise have been filed during the first fiscal quarter of 2017 on a Form 8-K. (cid:120) On February 22, 2017, the Compensation Committee of the Board approved the 2016 annual executive cash bonus pool in the total amount of $2,303 pursuant to the Annual Performance Incentive Plan. Of the total pool, the following amounts were allocated to the Company's CEO and Named Executive Officers: George M. Murphy, $620; William J. Begley, Jr., $369; James D. Berry, $292; David E, Krupa, $227; and Paul J. Narciso, $227. (cid:120) On February 22, 2017, the Compensation Committee of the Board approved executive long-term incentive awards to certain members of senior management pursuant to our 2002 Management Omnibus Incentive Plan, as Amended. The long-term incentive awards were granted in a total amount of $3,125 in the form of restricted stock, to be effective on and given a fair value of the closing price of our common stock on February 22, 2017. Of the total award, 45% vests in three annual installments of 30% on February 22, 2018, 30% on February 22, 2019, and 40% on February 22, 2020 and were allocated to the Company's Named Executive Officers as follows: George M. Murphy $360 worth of restricted stock; William J. Begley, Jr., $203 worth of restricted stock; James D. Berry, $180 worth of restricted stock; David E Krupa, $113 worth of restricted stock; and Paul J. Narciso, $158 worth of restricted stock. The form of restricted stock agreement with service vesting that will be entered into is incorporated by reference as Exhibit 10.19. Of the total award, 55% vests over a three-year performance period commencing on January 1, 2017 and ending on December 31, 2019. Vesting of these shares is dependent upon the attainment of pre-established performance objectives and were allocated to the Named Executive Officers as follows: George M. Murphy $440 worth of restricted stock; William J. Begley, Jr., $247 worth of restricted stock; James D. Berry, $220 worth of restricted stock; David E Krupa, $137 worth of restricted stock; and Paul J. Narciso, $192 worth of restricted stock. The form of restricted stock agreement with performance vesting that will be entered into is incorporated by reference as Exhibit 10.65. (cid:120) Upon recommendation from the Compensation Committee, on February 22, 2017, the Board approved executive deferred compensation awards pursuant to the Executive Incentive Compensation Plan in the total amount of $1,130. Of the total award, the following amounts were allocated to the Company's CEO and Named Executive Officers: George M. Murphy, $258; William J. Begley, Jr., $221; James D. Berry, $180; David E, Krupa, $123; and Paul J. Narciso, $123. 96 ITEMS 10-14. PART III Within 120 days after the close of its fiscal year, the Company intends to file with the Securities and Exchange Commission a definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 as amended, which will include the matters required by these items. PART IV. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (a) The following documents are filed as a part of this report: 1. Financial Statements: The Consolidated Financial Statements for the year ended December 31, 2016 are contained herein as listed in the Index to Consolidated Financial Statements. 2. Financial Statement Schedules: The Financial Statement Schedules are contained herein as listed in the Index to Financial Statement Schedules. 3. Exhibits: The exhibits are contained herein as listed in the Index to Exhibits. 97 SAFETY INSURANCE GROUP, INC. INDEX TO FINANCIAL STATEMENT SCHEDULES Schedules I II III IV V VI Summary of Investments – Other than Investments in Related Parties Condensed Financial Information of the Registrant Supplementary Insurance Information Reinsurance Valuation and Qualifying Accounts Supplemental Information Concerning Property and Casualty Insurance Operations Page 99 100 102 103 104 105 98 Safety Insurance Group, Inc. Summary of Investments—Other than Investments in Related Parties Schedule I At December 31, 2016 (Dollars in thousands) Fixed maturities: U.S. government and government agencies and authorities Obligations of states and political subdivisions Corporate and other securities Total fixed maturities Equity securities: Common stocks: Industrial, miscellaneous and all other Total equity securities Other invested assets Total investments Cost or Amortized Cost Estimated Fair Value $ $ 252,333 382,811 507,519 1,142,663 92,326 92,326 21,142 1,256,131 $ $ 252,933 390,433 510,903 1,154,269 105,095 105,095 21,142 1,280,506 $ $ Amount at which shown in the Balance Sheet 252,933 390,433 510,903 1,154,269 105,095 105,095 21,142 1,280,506 99 Safety Insurance Group, Inc. Condensed Financial Information of the Registrant Condensed Balance Sheets Schedule II (Dollars in thousands) Assets Investments in consolidated affiliates Other Total assets Liabilities Accounts payable and other liabilities Total liabilities Shareholders’ equity Total liabilities and shareholders’ equity Years Ended December 31, 2016 2015 672,102 24 672,126 1,400 1,400 670,726 672,126 $ $ $ $ 645,701 87 645,788 1,289 1,289 644,499 645,788 $ $ $ $ Safety Insurance Group, Inc. Condensed Financial Information of the Registrant Condensed Statements of Operations and Comprehensive Income Schedule II (Dollars in thousands) Revenues Expenses Net loss Earnings from consolidated subsidiaries Net income (loss) Other net comprehensive income, net of taxes Comprehensive net income (loss) 2016 Years Ended December 31, 2015 2014 — 1,406 (1,406) 65,991 64,585 (621) 63,964 $ $ — 1,230 (1,230) (12,623) (13,853) (12,251) (26,104) $ $ — 1,264 (1,264) 60,618 59,354 11,515 70,869 $ $ 100 Safety Insurance Group, Inc. Condensed Financial Information of the Registrant Condensed Statements of Cash Flows Schedule II (Dollars in thousands) Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: (Earnings) loss from consolidated subsidiaries Dividends received from consolidated subsidiaries(1) Amortization of restricted stock expense Changes in assets and liabilities: Other assets Accounts payable and accrued liabilities Net cash provided by operating activities Proceeds from exercise of stock options Excess tax benefit from stock options exercised Dividends paid Acquisition of treasury stock Net cash used for financing activities Net increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Years Ended December 31, 2016 2015 2014 $ 64,585 $ (13,853) $ 59,354 (65,991) 39,156 4,312 63 (111) 42,014 257 (6) (42,265) — (42,014) — — — 12,623 39,440 3,515 (33) 5 41,697 278 1 (41,976) — (41,697) — — — $ (60,618) 59,186 4,315 15 217 62,469 297 3 (39,302) (23,467) (62,469) — — — $ $ (1) No portion of the dividends received from operating subsidiaries during 2016, 2015 or 2014 represent returns of capital and therefore no portion is presented as an investing activity. 101 Safety Insurance Group, Inc. Supplementary Insurance Information Schedule III (Dollars in thousands) Segment Property and Casualty Insurance 2016 2015 2014 Deferred Policy Acquisition Costs As of December 31, Future Policy Benefits, Losses, Claims and Loss Expenses Unearned Premiums $ $ 70,996 68,937 67,329 $ 560,321 553,977 482,012 418,033 401,961 390,361 Years Ended December 31, Premium Revenue Net Investment Income Benefits, Claims, Losses, and Settlement Expenses Other Operating Expenses Premiums Written Amortization of Deferred Policy Acquisition Costs $ 755,760 738,164 716,875 $ 38,413 40,534 42,303 $ 493,433 612,569 476,366 $ 91,477 75,700 86,497 $ 766,470 746,180 734,914 $ 141,540 138,239 132,526 Segment Property and Casualty Insurance 2016 2015 2014 102 Safety Insurance Group, Inc. Reinsurance Schedule IV (Dollars in thousands) Property and Casualty Insurance Earned Premiums Years ended December 31, 2016 2015 2014 Gross Amount Ceded to Other Companies Assumed from Other Companies Net Amount Percent of Amount Assumed to Net $ $ 796,366 776,633 747,786 $ 70,150 64,288 54,635 $ 29,544 25,819 23,724 755,760 738,164 716,875 3.9% 3.5% 3.3% 103 Safety Insurance Group, Inc. Valuation and Qualifying Accounts Schedule V (Dollars in thousands) Additions Balance at Beginning of Period Charged to Costs and Expenses Charged to Other Accounts Deductions(1) Balance at End of Period Allowance for doubtful accounts Years Ended December 31, 2016 2015 2014 $ $ 425 462 456 $ 1,162 1,008 1,131 $ — — — $ 1,152 1,045 1,125 435 425 462 (1) Deductions represent write-offs of accounts determined to be uncollectible. 104 Safety Insurance Group, Inc. Supplemental Information Concerning Property and Casualty Insurance Operations Schedule VI (Dollars in thousands) As of December 31, Reserves for Unpaid Claims and Claims Adjustment Expenses Deferred Policy Acquisition Costs Years Ended December 31, Unearned Premiums Earned Premiums Net Investment Income $ $ 70,996 68,937 67,329 $ 560,321 553,977 482,012 418,033 401,961 390,361 $ 755,760 738,164 716,875 $ 38,413 40,534 42,303 Years Ended December 31, Claims and Claims Adjustment Expenses Incurred Related to Current Year Prior Year Amortization of Deferred Policy Acquisition Costs Paid Claims and Claims Adjustment Expenses Premiums Written $ $ 538,881 642,882 513,734 $ (45,448) (30,313) (37,368) $ 141,540 138,239 132,526 $ 502,552 547,620 450,267 766,470 746,180 734,914 Affiliation With Registrant Consolidated Property & Casualty Subsidiaries 2016 2015 2014 Affiliation With Registrant Consolidated Property & Casualty Subsidiaries 2016 2015 2014 105 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 24, 2017 SIGNATURES Safety Insurance Group, Inc. By: /s/ George M. Murphy George M. Murphy, President, Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints George M. Murphy and William J. Begley, Jr., and each of them individually, his true and lawful attorney-in- fact and agent with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each such attorney-in-fact and agent, or his substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, to all intents and purposes and as fully as he might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed by the following persons in the capacities and on the date indicated: Signature Title Date /s/ George M. Murphy George M. Murphy President, Chief Executive Officer February 24, 2017 /s/ William J. Begley, Jr. William J. Begley, Jr. Vice President, Chief Financial Officer, Secretary, and Principal Accounting Officer /s/ David F. Brussard David F. Brussard /s/ Frederic H. Lindeberg Frederic H. Lindeberg /s/ Peter J. Manning Peter J. Manning /s/ David K. McKown David K. McKown Director Director Director Director February 24, 2017 February 24, 2017 February 24, 2017 February 24, 2017 February 24, 2017 106 Exhibit Number 3.1 3.2 4 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 SAFETY INSURANCE GROUP, INC. INDEX TO EXHIBITS Description Form of Amended and Restated Certificate of Incorporation of Safety Insurance Group, Inc.(1) Form of Amended and Restated Bylaws of Safety Insurance Group, Inc.(1) Form of Stock Certificate for the Common Stock (1) Lease Agreement between Thomas Black Corporation and Aman, Inc. for the lease of office space located on the 1st through 6th, 11th and 12th floors of 20 Custom House Street, Boston, Massachusetts, dated June 11, 1987, and as amended on October 11, 1988, September 14, 1989, September 19, 1990, February 23, 1994, December 20, 1996, June 24, 2002, July 26, 2004 and April 5, 2007 (2) Tax Indemnity Agreement by and among Safety Holdings, Inc. and the Management Team, dated October 16, 2001(1) 2001 Restricted Stock Plan (1)(4) Executive Incentive Compensation Plan (1)(4) 2002 Management Omnibus Incentive Plan, as Amended (7) Reinsurance Terms Sheet between Safety Insurance Company and Swiss Re America Corporation, effective January 1, 2002(1) Excess Catastrophe Reinsurance Program Terms Sheet between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Blanch Inc., effective January 1, 2002(1) Property Risk Excess of Loss Reinsurance Program Terms Sheet between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Blanch Inc., effective January 1, 2002(1) Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and the Hartford Steam Boiler Inspection and Insurance Company, effective July 1, 2003(1) Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and David F. Brussard, as of December 31, 2008(3)(4)(11) Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and William J. Begley, Jr., as of December 31, 2008(3)(4)(11) Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and Edward N. Patrick, Jr., as of December 31, 2008(3)(4)(11) Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and Daniel D. Loranger, as of December 31, 2008(3)(4)(11) Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and Robert J. Kerton, as of December 31, 2008(3)(4)(13) Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and David E. Krupa, as of December 31, 2008(3)(4)(11) Safety Insurance Company Executive Incentive Compensation Plan—Basic Document(4)(5)(12) Safety Insurance Company Executive Incentive Compensation Plan—Adoption Agreement(4)(5)(12) Safety Insurance Company Executive Incentive Compensation Plan—Rabbi Trust Agreement(4)(5)(12) Form of Restricted Stock Notice and Agreement (with vesting) under the 2002 Management Omnibus Incentive Plan(4)(5) 107 10.20 10.21 10.22 10.23 10.24 10.25 10.26 10.27 10.28 10.29 10.30 10.31 10.32 10.33 10.34 10.35 10.36 10.37 10.38 Form of Restricted Stock Notice and Agreement (without vesting) under the 2002 Management Omnibus Incentive Plan(4)(5) Form of Nonqualified Stock Option Notice and Agreement under the 2002 Management Omnibus Incentive Plan(4)(5) Form of Incentive Stock Option Notice and Agreement under the 2002 Management Omnibus Incentive Plan(4)(5) Form of Stock Appreciation Right Notice and Agreement under the 2002 Management Omnibus Incentive Plan(4)(5) Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and James D. Berry, as of December 31, 2008(4)(6)(13) Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and George M. Murphy, as of December 31, 2008(4)(6)(13) Excess Catastrophe Reinsurance Contract between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Blanch Inc., effective January 1, 2006(7) Property Excess of Loss Reinsurance Contract between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Blanch Inc., effective January 1, 2006(7) Casualty Excess of Loss Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Re America Corporation, effective January 1, 2006(7) Addendum No. 1 to Casualty Excess of Loss Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Re America Corporation, effective January 1, 2006(7) Property Catastrophe Excess of Loss Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Re America Corporation, effective January 1, 2006(7) Umbrella Liability Quota Share Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Re America Corporation, effective January 1, 2006(7) Addendum No. 1 to Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and the Hartford Steam Boiler Inspection and Insurance Company, effective April 1, 2006(7) Annual Performance Incentive Plan(4)(7) Excess Catastrophe Reinsurance Contract between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Inc., effective January 1, 2007(8) Addendum No.1 to Excess Catastrophe Reinsurance Contract between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Inc., adding Safety Property and Casualty Insurance Company as a named reinsured company, effective January 1, 2007(8) Property Excess of Loss Reinsurance Contract between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Inc., effective January 1, 2007(8) Addendum No. 1 to Property Excess of Loss Reinsurance Contract between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Inc., adding Safety Property and Casualty Insurance Company as a named reinsured company, effective January 1, 2007(8) Property Catastrophe Excess of Loss Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Reinsurance America Corporation, effective January 1, 2007(8) 108 10.39 10.40 10.41 10.42 10.43 10.44 10.45 10.46 10.47 10.48 10.49 10.50 10.51 10.52 10.53 10.54 10.55 10.56 Addendum No. 2 to Casualty Excess of Loss Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Reinsurance America Corporation, effective January 1, 2007(8) Addendum No. 2 to Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and The Hartford Steam Boiler Inspection and Insurance Company, effective January 1, 2007(8) Addendum No. 1 to Umbrella Liability Quota Share Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Re America Corporation, adding Safety Property and Casualty Insurance Company as a named reinsured company, effective September 1, 2007(9) Addendum No. 3 to Casualty Excess of Loss Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Re America Corporation, adding Safety Property and Casualty Insurance Company as a named reinsured company, effective September 1, 2007(9) Amendment to Annual Performance Incentive Plan(4)(11) Amendment to Management Omnibus Incentive Plan dated December 31, 2008(4)(11) Service Line for Homeowners Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company, and Safety Property and Casualty Insurance Company and The Hartford Steam Boiler Inspection and Insurance Company, effective August 1, 2010 (14) Equipment Breakdown for Homeowners Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company, and Safety Property and Casualty Insurance Company and the Hartford Steam Boiler Inspection and Insurance Company, effective August 1, 2010(14) Amendment to Management Omnibus Incentive Plan dated August 4, 2010 (4)(15) Umbrella Liability Excess of Loss Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Safety Property and Casualty Insurance Company and Swiss Reinsurance America Corporation Effective January 1, 2011(16) Property Catastrophe Excess of Loss Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Safety Property and Casualty Insurance Company and Swiss Reinsurance America Corporation Effective January 1, 2011(16) Excess Catastrophe Reinsurance Contract between Safety Insurance Company, Safety Indemnity Insurance Company and Safety Property and Casualty Insurance Company and AON Benfield Effective January 1, 2011(16) Amendment No. 1 to the Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and David F. Brussard, as of December 17, 2012(4)(17) Amendment No. 1 to the Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and William J. Begley, Jr., as of December 17, 2012(4) (17) Amendment No. 1 to the Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and Daniel D. Loranger, as of December 17, 2012(4) (17) Amendment No. 1 to the Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and Edward N. Patrick, Jr., as of December 17, 2012(4) (17) Amendment No. 1 to the Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and David E. Krupa, as of December 17, 2012(4) (17) Amendment No. 1 to the Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and Robert J. Kerton, as of December 17, 2012(4) (17) 109 10.57 10.58 10.59 10.60 10.61 10.62 10.63 10.64 10.65 10.66 10.67 10.68 10.69 21 23 24 31.1 31.2 32.1 32.2 Amendment No. 1 to the Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and James D. Berry, as of December 17, 2012(4) (17) Amendment No. 1 to the Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and George M. Murphy, as of December 17, 2012(4) (17) Amendment to Management Omnibus Incentive Plan, as Amended dated March 11, 2013(4)(18) Form of Restricted Stock Notice and Agreement (with performance-based vesting) under the 2002 Management Omnibus Plan, as Amended(4)(18) Amended and Restated Revolving Credit Agreement with RBS Citizens(19) Form of Restricted Stock Notice and Agreement (with performance-based vesting) under the 2002 Management Omnibus Plan, As Amended(4) (20) Employment Agreement by and between Safety Insurance Group, Inc. and Paul J. Narciso, as of August 5, 2013(4) (20) Employment Agreement by and between Safety Insurance Group, Inc. and Stephen A. Varga, as of August 6, 2014(4) (21) Form of Restricted Stock Notice and Agreement (with performance-based vesting) under the 2002 Management Omnibus Plan, As Amended(4) (22) Form of Restricted Stock Notice and Agreement under the 2002 Management Omnibus Plan, As Amended(4) (22) Employment Agreement by and between Safety Insurance Group, Inc. and Ann M. McKeown, as of August 5, 2015(4)(23) Employment Agreement by and between Safety Insurance Group, Inc. and John P. Drago as of April 1, 2016(4)(24) Employment Agreement by and between Safety Insurance Group, Inc. and George M. Murphy as of April 1, 2016(4)(24) Subsidiaries of Safety Insurance Group, Inc. (9) Consent of PricewaterhouseCoopers LLP (25) Power of Attorney(1) CEO Certification Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(25) CFO Certification Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(25) CEO Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(25) CFO Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(25) 101.INS XBRL Instance Document (25) 101.SCH XBRL Taxonomy Extension Schema (25) 101.CAL XBRL Taxonomy Extension Calculation Linkbase (25) 101.DEF XBRL Taxonomy Extension Definition Linkbase (25) 101.LAB XBRL Taxonomy Extension Label Linkbase (25) 101.PRE XBRL Taxonomy Extension Presentation Linkbase (25) 110 (1) (2) (3) (4) (5) (6) (7) (8) (9) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) (21) (22) (23) (24) (25) Incorporated herein by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-87056) filed April 26, 2002, and as amended on Form S-8 (Reg. No. 333-110676) filed on November 21, 2003 and as amended on Form S-8 (Reg. No. 333-140423) filed on February 2, 2007. Incorporated herein by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-87056) filed April 26, 2002, and as amended on Form S-8 (Reg. No. 333-110676) filed on November 21, 2003 and as amended on Form S-8 (Reg. No. 333-140423) filed on February 2, 2007, and as incorporated herein by reference on Form 10-Q for the quarterly period ended June 30, 2007, as filed on August 9, 2007. Incorporated herein by reference to the Registrant's Form 10-Q for the quarterly period ended September 30, 2004 filed on November 9, 2004. Denotes management contract or compensation plan or arrangement. Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2004 filed on March 16, 2005. Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2005 filed on March 16, 2006. Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2006 filed on March 1, 2007. Incorporated herein by reference to the Registrant’s Form 10-Q for the quarter ended September 30, 2007 filed on November 9, 2007. Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2007 filed on March 14, 2008. Incorporated herein by reference to the Registrant’s Form 8-K filed on December 31, 2008. Incorporated herein by reference to the Registrant’s Form 10-Q for the quarter ended September 30, 2008, as filed on November 7, 2008. Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2008 filed on March 13, 2009. Incorporated herein by reference to the Registrant’s Form 10-Q for the quarter ended June 30, 2010, as filed on August 6, 2010. Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2010 filed on March 14, 2011. Incorporated herein by reference to the Registrant’s Form 10-Q for the quarter ended September 30, 2011, as filed on November 8, 2011. Incorporated herein by reference to the Registrant’s Form 8-K filed on December 20, 2012. Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2012 filed on March 18, 2013 Incorporated herein by reference to the Registrant’s Form 8-K filed on August 26, 2013. Incorporated herein by reference to the Registrant’s Form 10-Q for the quarter ended September 30, 2013, as filed on November 8, 2013. Incorporated herein by reference to the Registrant’s Form 10-Q for the quarter ended September 30, 2014, as filed on November 7, 2014. Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2014 filed on March 2, 2015 Incorporated herein by reference to the Registrant’s Form 10-Q for the quarter ended June 30, 2015, filed on August 7, 2015. Incorporated herein by reference to the Registrant’s Form 10-Q for the quarter ended June 30, 2016, as filed on August 5, 2016. Included herein. 111 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333- 110676 and 333-140423) of Safety Insurance Group, Inc. of our report dated February 24, 2017 relating to the financial statements, financial statement schedules, and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. Exhibit 23 /s/ PricewaterhouseCoopers LLP Boston, Massachusetts February 24, 2017 CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 31.1 I, George M. Murphy, Chief Executive Officer of Safety Insurance Group, Inc. certify that: 1. 2. 3. 4. I have reviewed this annual report on Form 10-K of Safety Insurance Group, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. /s/ GEORGE M. MURPHY George M. Murphy President and Chief Executive Officer February 24, 2017 CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 31.2 I, William J. Begley Jr., Chief Financial Officer of Safety Insurance Group, Inc. certify that: 1. 2. 3. 4. I have reviewed this annual report on Form 10-K of Safety Insurance Group, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. /s/ WILLIAM J. BEGLEY, JR William J. Begley, Jr. Vice President, Chief Financial Officer, and Secretary February 24, 2017 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with this annual report of Safety Insurance Group, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2016 as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”), I, George M. Murphy, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: • The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and • The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Report. /s/ GEORGE M. MURPHY George M. Murphy President and Chief Executive Officer February 24, 2017 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with this annual report of Safety Insurance Group, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2016 as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”), I, William J. Begley, Jr., Vice President, Chief Financial Officer and Secretary of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: • The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and • The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Report. /s/ WILLIAM J. BEGLEY, JR. William J. Begley, Jr. Vice President, Chief Financial Officer, and Secretary February 24, 2017 CORPORATE INFORMATION EXECUTIVE OFFICERS BOARD OF DIRECTORS GEORGE M. MURPHY, CPCU President and Chief Executive Officer DAVID F. BRUSSARD (3C) Chairman WILLIAM J. BEGLEY, JR. Vice President, Chief Financial Officer and Secretary FREDERIC H. LINDEBERG (1)(2)(4C) JAMES D. BERRY, CPCU Vice President—Underwriting JOHN P. DRAGO Vice President—Marketing DAVID E. KRUPA, CPCU Vice President—Claims Operations ANN M. MCKEOWN Vice President—Insurance Operations PAUL J. NARCISO Vice President—Claims STEPHEN A. VARGA Vice President—Management Information Systems PETER J. MANNING (1C)(2)(4) DAVID K. MCKOWN (1)(2C)(4) GEORGE M. MURPHY (3) (1) Member of the Audit Committee (2) Member of the Compensation Committee (3) Member of the Investment Committee (4) Member of the Nominating and Governance Committee (C) Chairman of the committee referenced SHAREHOLDER INFORMATION TRANSFER AGENT Computershare Trust Company, N.A. P.O. Box 30170 College Station, TX 77842-3170 Shareholder inquiries: 781-575-2879 http://www.computershare.com/investor INDEPENDENT AUDITORS PricewaterhouseCoopers LLP Boston, MA CORPORATE COUNSEL DLA Piper Boston, MA EXECUTIVE OFFICES 20 Custom House Street Boston, MA 02110 617-951-0600 http://www.SafetyInsurance.com STOCK LISTING We are listed on the NASDAQ Global Select Market under the symbol “SAFT.” OFFICE OF INVESTOR RELATIONS 20 Custom House Street Boston, MA 02110 Tel: 877-951-2522 Fax: 617-603-4837 e-Mail: InvestorRelations@SafetyInsurance.com ANNUAL MEETING OF SHAREHOLDERS Wednesday, May 24, 2017 at 10:00 A.M. EDT 20 Custom House Street, Boston, MA 02110 ANNUAL REPORT TO SHAREHOLDERS Anyone interested in a copy of our Annual Report on Form 10-K, or any of our other public information, including press releases, Section 16 reports and other SEC filings, may obtain a copy without charge by either contacting the Office of Investor Relations listed above or by viewing and downloading from our Web site: www.SafetyInsurance.com, under “About Safety,” “Investor Information.” S A F E T Y I N S U R A N C E A U T O • H O M E • B U S I N E S S 2 0 1 6 A n n u a l R e p o r t a n d F o r m 1 0 - K Safety Insurance Group, Inc. 20 Custom House Street Boston, MA 02110 617-951-0600 www.SafetyInsurance.com

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