Safety Insurance Group, Inc. Annual Report 2016

FY2016 Annual Report · Safety Insurance Group, Inc.

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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

$703.87

$745.28

$778.80

$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

$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

$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

$703.87

$745.28

$778.80

$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

2012

2013

2015

2 Safety Insurance Annual Report 2016

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

$703.87

$745.28

$778.80

$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

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

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)

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

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)

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

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

33
35
60
61
95
95
96

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

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)

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)

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)

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.

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)

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

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.

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.

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:

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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.

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:

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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.

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

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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;

(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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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

(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)

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.

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.

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)

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

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

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.

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.

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'

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)

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)

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)

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.

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.

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

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.

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

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

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.

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

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.

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

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

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

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)

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)

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.

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

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

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.

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.

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.

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

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

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.

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.

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

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

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

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

Baa

Caa

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.

As of December 31, 2015, our portfolio of fixed maturity investments was principally comprised of investment

Less than 12 Months

As of December 31, 2015
12 Months or More

Total

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

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.

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.

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

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.

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

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)

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.

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

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

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.

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.

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.

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

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.

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.

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.

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.

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.

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

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

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.

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.

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.

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

216

4,677
299

173

175,583

28,715

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.

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.

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.

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.

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

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.

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)

$
$

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.

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.

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

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.

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

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

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.

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

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

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:

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

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.

Employee Benefit Plan

The Company sponsors the Safety Insurance Company 401(k) qualified defined contribution retirement plan

(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.

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.

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

As of December 31, 2016, there was $6,455 of unrecognized compensation expense related to non-vested

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.

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.

Contingencies

On December 15, 2015, the Company filed for arbitration with a reinsurer in regards to the reinsurance

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.

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.

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.

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.

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.

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.

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

296,298

293,689

417

185,929

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

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

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.

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

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

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.

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

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)

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

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.

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

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.

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.

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.

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.

SAFETY INSURANCE GROUP, INC.

INDEX TO FINANCIAL STATEMENT SCHEDULES

Schedules

III

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

100

102

103

104

105

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

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

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

February 24, 2017

106

Exhibit
Number

3.1

3.2

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

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:

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

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:

I have reviewed this annual report on Form 10-K of Safety Insurance Group, Inc.;

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

/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

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.”

•

Safety Insurance Group, Inc.
20 Custom House Street
Boston, MA 02110
617-951-0600
www.SafetyInsurance.com