Annual Report (10-k)

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, 2018
Or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number 000‑50070

SAFETY INSURANCE GROUP, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)	13‑4181699 (I.R.S. Employer Identification No.)

20 Custom House Street, Boston, Massachusetts 02110

(Address of principal executive offices including zip code)

(617) 951‑0600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act :


Title of each class	Name of each exchange on which registered
Common Shares, $0.01 par value per share	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 ☐ No ☒

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 ☐ No ☒

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 ☒ No ☐

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 ☒ No ☐

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. ☒

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 ☒

Accelerated filer ☐

Non-accelerated filer ☐

(Do not check if smaller reporting company)

Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No ☒

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, 2018, was approximately $1,241,821,554.

As of February 15, 2019 there were 15,286,569 Common Shares with a par value of $0.01 per share outstanding.

Documents Incorporated by Reference

Portions of the registrant’s definitive proxy statement for its Annual Meeting of Shareholders to be held on May 22, 2019, which Safety Insurance Group, Inc. (the “Company”, “we”, “our”, “us”) intends to file within 120 days after its December 31, 2018 year‑end, are incorporated by reference into Part II and Part III hereof .

Table of Contents

SAFETY INSURANCE GROUP, INC.

Table of Contents


PART I.		Page
Item 1.	Business	1
Item 1A.	Risk Factors	23
Item 1B.	Unresolved Staff Comments	29
Item 2.	Properties	29
Item 3.	Legal Proceedings	29
Item 4.	Mine Safety Disclosures	29

PART II.
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	30
Item 6.	Selected Financial Data	32
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	34
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	59
Item 8.	Financial Statements and Supplementary Data	60
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	98
Item 9A.	Controls and Procedures	98
Item 9B.	Other Information	99

PART III.
Item 10.	Directors, Executive Officers and Corporate Governance	100
Item 11.	Executive Compensation	100
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related
	Stockholder Matters	100
Item 13.	Certain Relationships and Related Transactions, and Director Independence	100
Item 14.	Principal Accounting Fees and Services	100

PART IV.
Item 15.	Exhibits, Financial Statement Schedules	100
Item 16	Form 10-K Summary	112

SIGNATURES		113

Table of Contents

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.

PART I.

ITEM 1. BUSINESS

General

We are a leading provider of private passenger and commercial automobile insurance in Massachusetts. In addition to private passenger and commercial automobile insurance, we offer a portfolio of property and casualty insurance products, including 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 899 in 1,120 locations throughout these three states during 2018. We have used these relationships and, in particular, our extensive knowledge of the Massachusetts market to become the largest commercial automobile carrier, capturing an approximate 15.7% share of the Massachusetts commercial automobile insurance market, and the fourth largest private passenger automobile carrier, with a 9.0% share of the Massachusetts private passenger automobile insurance market in 2018 according to statistics compiled by Commonwealth Automobile Reinsurers ("CAR"). We also are the third largest homeowners insurance carrier in Massachusetts with a 7.2% share of that market. We were ranked the 49 th largest automobile writer in the country according to S&P Global Market Intelligence, based on 2017 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 and Maine in 2016. The table below shows the amount of direct written premiums written in each state during the years ended December 31, 2018, 2017, and 2016.


	Years Ended December 31,
Direct Written Premiums	2018		2017		2016
Massachusetts	$	813,857	$	799,427	$	785,376
New Hampshire		29,159		27,637		26,128
Maine		659		252		55
Total	$	843,675	$	827,316	$	811,559

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. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

Table of Contents

Our Competitive Strengths

We Have Strong Relationships with Independent Agents. In 2018, Independent agents accounted for approximately 60.8% of the Massachusetts automobile insurance market measured by direct written premiums as compared to approximately 30.7% nationwide, based on data made available by Independent Insurance Agents and Brokers of America, Inc. and Commonwealth Automobile Reinsurers. For that reason, our strategy is centered around, and we sell exclusively through, a network of independent agents. In order to support our independent agents and enhance our relationships with them, we:

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 37 out of 38 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:

maintaining a consistent level of private passenger automobile premiums, which totaled $469,340 in 2018 compared to $472,553 in 2014.

growing our commercial automobile premiums, which totaled $139,628 in 2018 compared to $96,268 in 2014;

growing our homeowner premiums which totaled $193,482 in 2018 compared to $161,388 in 2014;

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);

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

maintaining a high-quality investment portfolio.

We Have Developed Advanced Technology for Our Business. 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 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.

Table of Contents

We Have an Experienced, Committed and Knowledgeable Management Team. Our senior management team has an average of over 30 years of experience with Safety and a demonstrated ability to operate successfully within the property and casualty market.

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:

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.


	Years Ended December 31,
Direct Written Premiums	2018				2017				2016
Private passenger automobile	$	469,340	55.7	%	$	468,908	56.7	%	$	467,845	57.7	%
Commercial automobile		139,628	16.5			129,529	15.7			120,641	14.9
Homeowners		193,482	22.9			187,623	22.7			182,128	22.4
Business owners		22,182	2.6			22,734	2.7			22,933	2.8
Personal umbrella		8,132	1.0			7,870	0.9			7,693	1.0
Dwelling fire		9,829	1.2			9,603	1.2			9,256	1.1
Commercial umbrella		1,082	0.1			1,049	0.1			1,063	0.1
Total	$	843,675	100.0	%	$	827,316	100.0	%	$	811,559	100.0	%

Table of Contents

Our product lines are as follows:

Private Passenger Automobile (55.7% of 2018 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.

Commercial Automobile (16.5% of 2018 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.

Homeowners (22.9% of 2018 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.

Business Owners Policies (2.6% of 2018 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 2018 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 (1.2% of 2018 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 2018 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

Table of Contents

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 899 and had 1,120 offices (some agencies have more than one office) and approximately 8,878 customer service representatives during 2018.

Voluntary Agents. In 2018, 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, 2018, we had agreements with 742 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 prior year performance of our agents. 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 6.1% of our direct written premiums in 2018.

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 $171,100 of ceded premium is spread equitably among the four servicing carriers. Subject to the review of the Commissioner of the Division of Insurance of Massachusetts (“the Commissioner”), 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 $10,500 of ceded premium was spread equitably between the two servicing carriers.

Table of Contents

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.


		Years Ended December 31,
		2018			2017			2016
Line of Business		Exposures	Change		Exposures	Change		Exposures	Change
Private passenger automobile:
	Voluntary agents	425,783	(2.0)	%	434,236	(2.8)	%	446,939	(3.5)	%
	MAIP	8,150	(17.6)		9,896	(10.0)		11,000	22.1
	Total private passenger automobile	433,933	(2.3)		444,132	(3.0)		457,939	(3.0)
Commercial automobile:
	Voluntary agents	63,652	2.0		62,419	1.8		61,315	0.5
	ERP	11,214	(9.3)		12,364	24.8		9,907	30.4
	Total commercial automobile	74,866	0.1		74,783	5.0		71,222	3.8
Other:
Homeowners		159,352	(0.6)		160,313	(1.0)		161,890	(0.5)
Business owners		9,100	(4.2)		9,497	(8.6)		10,385	2.2
Personal umbrella		22,934	(1.3)		23,232	(3.0)		23,952	(0.5)
Dwelling fire		6,833	(4.0)		7,116	(2.1)		7,270	(1.5)
Commercial umbrella		674	(0.4)		677	(2.5)		694	0.6
	Total other	198,893	(1.0)		200,835	(1.6)		204,191	(0.4)
	Total	707,692	(1.7)		719,750	(1.9)		733,352	(1.6)
Total voluntary agents		688,328	(1.3)		697,490	(2.1)		712,445	(2.3)

In 2018, 61.7% of the private passenger automobile exposures we insure had an other than private passenger policy with us, compared to 60.3% and 58.4% in 2017 and 2016, respectively. In addition, 81.9% of our homeowners’ policyholders had a matching automobile policy with us in 2018 compared to 81.7% in 2017 and 81.9% in 2016.

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:

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, digital and print advertisements.

Table of Contents

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 2018, 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 20% 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 customers 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:

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. CAR establishes the rates for personal automobile policies assigned to carriers through the 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.

Table of Contents

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).

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.

Technology

The focuses of our information technology (IT) efforts are:

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;

to continuously improve the customer experience making it easier for independent agents and policyholders to transact business with us;

to enable agents to efficiently provide their clients with a high level of service; and

to maintain and support a secure computing environment.

We believe that our technology initiatives have increased revenue and decreased costs while at the same time improving the customer experience of both our agents and policyholders. 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

Table of Contents

from our internal operations to our independent agents. We also believe that these initiatives have contributed to an overall increases in productivity and customer satisfaction.

Internal Applications (Intranet)

Our employees access our proprietary and vendor supplied 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 the claims process. 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 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 $340 per windshield claim.

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 and vendor supplied 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 systems help us to limit our bad debt expense. Our bad debt expense as a percentage of direct written premiums was 0.1% in both 2018 and 2017.

Innovation Lab. In 2018 Safety Insurance established an Innovation Lab. The purpose of the Innovation Lab is to foster a culture of innovative thinking, monitor the InsureTech landscape and provide Safety and our Independent Agents with the tools and processes necessary to continuously improve the customer experiences and remain competitive in both the current and future insurance marketplace.

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.

Table of Contents

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 65% of our bodily injury claims in 2018. 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 unit has five dedicated employees including four 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.

Table of Contents

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, 2018 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 $422,423 to a high of $498,216 as of December 31, 2018. The Company's net loss and LAE reserves, based on our actuaries' best estimate, were set at $476,321 as of December 31, 2018. 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.

Table of Contents

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, 2018, 2017 and 2016.


	Years Ended December 31,
	2018		2017			2016
Reserves for losses and LAE at beginning of year	$	574,054	$	560,321	$	553,977
Less receivable from reinsurers related to unpaid losses and LAE		(83,085)		(83,724)		(68,261)
Net reserves for losses and LAE at beginning of year		490,969		476,597		485,716
Incurred losses and LAE, related to:
Current year		542,001		545,671		538,881
Prior years		(56,488)		(41,784)		(45,448)
Total incurred losses and LAE		485,513		503,887		493,433
Paid losses and LAE related to:
Current year		340,927		325,049		328,046
Prior years		159,234		164,466		174,506
Total paid losses and LAE		500,161		489,515		502,552
Net reserves for losses and LAE at end of period		476,321		490,969		476,597
Plus receivable from reinsurers related to unpaid losses and LAE		108,398		83,085		83,724
Reserves for losses and LAE at end of period	$	584,719	$	574,054	$	560,321

The following table represents the development of reserves, net of reinsurance, for calendar years 2008 through 2018. 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, 2018.

Table of Contents

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.


	As of and for the Year Ended December 31,
	2018	2017	2016	2015	2014	2013	2012	2011	2010	2009	2008
Reserves for losses and
LAE originally estimated:	$ 476,321	$ 490,969	$ 476,597	$ 485,716	$ 420,767	$ 394,668	$ 371,657	$ 352,098	$ 351,244	$ 374,832	$ 391,070
Cumulative amounts paid as of:
One year later		159,234	164,466	174,506	174,506	133,288	124,855	130,204	128,854	130,960	126,858
Two years later			231,473	250,306	189,367	178,411	175,822	181,739	176,774	183,061	189,897
Three years later				290,287	223,465	207,626	199,741	211,578	205,171	211,182	217,695
Four years later					241,589	223,743	213,847	223,941	219,310	224,831	233,160
Five years later						231,346	221,363	231,433	224,354	232,177	239,553
Six years later							223,829	233,137	226,644	233,853	241,587
Seven years later								233,905	227,147	235,158	241,999
Eight years later									226,928	235,292	242,705
Nine years later										235,343	242,793
Ten years later											242,799

	As of and for the Year Ended December 31,
	2018	2017	2016	2015	2014	2013	2012	2011	2010	2009	2008
Reserves re-estimated as of:
One year later		$ 434,481	$ 434,813	$ 440,268	$ 390,452	$ 357,300	$ 342,767	$ 334,788	$ 314,561	$ 326,676	$ 347,004
Two years later			391,630	406,253	348,660	328,182	308,028	309,096	293,480	294,696	307,918
Three years later				376,201	313,100	295,788	283,592	282,441	273,332	279,542	282,565
Four years later					287,131	274,214	263,787	268,759	254,652	264,697	271,693
Five years later						255,368	250,064	255,925	245,869	252,249	261,845
Six years later							236,373	248,353	238,404	247,023	254,308
Seven years later								239,476	235,047	242,223	250,760
Eight years later									229,623	240,150	247,037
Nine years later										237,042	245,811
Ten years later											243,719

Cumulative
(redundancy) deficiency 2018		(56,488)	(84,967)	(109,515)	(133,636)	(139,300)	(135,284)	(112,622)	(121,621)	(137,790)	(147,351)

	As of and for the Year Ended December 31,
	2018	2017	2016	2015	2014	2013	2012	2011	2010	2009	2008
Gross liability-end of year	$ 584,719	$ 574,054	$ 560,321	$ 553,977	$ 482,012	$ 455,014	$ 423,842	$ 403,872	$ 404,391	$ 439,706	$ 467,559
Reinsurance recoverables	108,398	83,085	83,724	68,261	61,245	60,346	52,185	51,774	53,147	64,874	76,489
Net liability-end of year	476,321	490,969	476,597	485,716	420,767	394,668	371,657	352,098	351,244	374,832	391,070
Gross estimated liability-latest		520,768	496,242	444,921	358,863	312,758	281,985	279,178	263,790	274,252	284,624
Reinsurance recoverables-latest		86,287	61,429	38,668	45,763	38,544	31,921	30,825	28,743	34,102	38,813
Net estimated liability-latest		434,481	434,813	406,253	313,100	274,214	250,064	248,353	235,047	240,150	245,811

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 2018 estimate for a previously incurred loss was $150 and the loss was reserved at $100 in 2014, the $50 deficiency (later estimate minus original estimate) would be included in the cumulative (redundancy) deficiency in each of the years 2014-2018 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.

The table shows that we have substantially benefited in the current and prior years from releasing redundant reserves. In the years ended December 31, 2018, 2017, and 2016 we decreased loss reserves related to prior years by $56,488, $41,784 and $45,448, 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.

Table of Contents

We maintain reinsurance coverage to help lessen the effect of losses from catastrophic events, maintaining coverage that during 2018 protected us in the event of a "137-year storm" (that is, a storm of a severity expected to occur once in a 137-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 2018, 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 50.0% of $50,000 for the 1st layer, 80.0% of $50,000 for the 2nd layer, 80.0% of $250,000 for the 3rd layer, and 80.0% of $265,000 for the 4th layer.

For 2019, 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 50.0% of $50,000 for the 1st layer, 80.0% of $50,000 for the 2nd layer, 80.0% of $250,000 for the 3rd layer and 80% of $265,000 for the 4th layer. As a result of the changes to the models, our catastrophe reinsurance in 2019 protects us in the event of a “139-year storm.”

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.

Our reinsurance program excludes coverage for acts of terrorism. 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, 2018, the FAIR Plan purchased $2,000,000 of catastrophe reinsurance for property losses with retention of $100,000.

Table of Contents

At December 31, 2018, we also had $133,751 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. 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 MAPFRE SA, Government Employees Insurance Company and Liberty Mutual Insurance Company, which held 24.7%, 11.9% and 9.1% market shares based on automobile exposures, respectively, in 2018 according to CAR.

As of November 2018 we became the largest writer of commercial automobile insurance in Massachusetts with a market share of 15.7%. Other principal competitors in the Massachusetts commercial automobile insurance market are MAPFRE SA, Arbella Mutual Insurance Company and The Travelers Indemnity Insurance Company, which held 15.5%, 10.8% and 7.3% 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 third largest writer of homeowners insurance business in Massachusetts, with a market share of 7.2% in 2017. Our principal competitors within the Massachusetts homeowners insurance market are MAPFRE SA, Liberty Mutual and Chubb, which held 13.5%, 10.7% and 6.6% market shares respectively in 2017 (according to S&P Global Market Intelligence).

Employees

At December 31, 2018, we employed 627 employees. Our employees are not covered by any collective bargaining agreement. Management considers our relationship with our employees to be good.

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, 2018, our portfolio of fixed maturity investments was comprised principally of investment grade

Table of Contents

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 15.0% of our portfolio invested in senior bank loans and high yield bonds at December 31, 2018, 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, 2018 and 2017.


		As of December 31,
		2018				2017
		Estimated		% of		Estimated		% of
		Fair Value		Portfolio		Fair Value		Portfolio
U.S. Treasury Securities		$	1,777	0.1	%	$	1,791	0.1	%
Obligations of states and political subdivisions			266,198	20.0			403,084	30.8
Residential mortgage-backed securities (1)			297,023	22.3			222,766	17.0
Commercial mortgage-backed securities			60,336	4.5			39,369	3.0
Other asset-backed securities			61,076	4.6			72,613	5.6
Corporate and other securities			475,452	35.7			432,403	33.1
	Subtotal, fixed maturity securities		1,161,862	87.2			1,172,026	89.6
Equity securities (2)			148,011	11.0			111,867	8.6
Other invested assets (3)			23,481	1.8			23,162	1.8
		$	1,333,354	100.0	%	$	1,307,055	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 common stock, preferred stock, mutual funds and 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, preferred stock, mutual funds and interests in mutual funds held to fund the executive deferred compensation plan. We continuously evaluate market conditions and

Table of Contents

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 of the three-year period ended December 31, 2018, 2017 and 2016.


	Years Ended December 31,
	2018			2017			2016
Average cash and invested securities (at cost)	$	1,317,380		$	1,268,728		$	1,231,358
Net investment income (1)	$	43,788		$	38,758		$	38,413
Net effective yield (2)		3.3	%		3.1	%		3.1	%

(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, 2018, 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 rating is presented in the following table.


	As of December 31,
		2018				2017
	Estimated					Estimated
	Fair Value		Percent			Fair Value	Percent
U.S. Treasury securities and obligations of U.S. Government agencies	$	298,800	25.7	%	$	222,766	19.0	%
Aaa/Aa		299,725	25.8			411,794	35.1
A		214,263	18.4			239,015	20.4
Baa		175,890	15.1			142,176	12.1
Ba		58,050	5.0			51,205	4.4
B		81,415	7.0			75,673	6.5
Caa/Ca		7,660	0.7			7,087	0.6
D		-	-			248	-
Not rated		26,059	2.3			22,062	1.9
Total	$	1,161,862	100.0	%	$	1,172,026	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.

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, 2018, 72.8% of our available for sale fixed maturity investments were rated Category 1 and 13.2% were rated Category 2, the two highest ratings assigned by the SVO.

Table of Contents

The following table indicates the composition of our fixed income security portfolio (at carrying value) by time to maturity as of December 31, 2018.


	As of December 31, 2018
	Estimated
	Fair Value		Percent
Due in one year or less	$	32,467		2.8	%
Due after one year through five years		280,060		24.1
Due after five years through ten years		287,379		24.7
Due after ten years through twenty years		140,107		12.1
Due after twenty years		3,414		0.3
Asset-backed securities (1)		418,435		36.0
Totals	$	1,161,862		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 April 18, 2018. 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. 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:

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;

Table of Contents

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, 2018, the statutory surplus of Safety Insurance was $646,820 and its net income for 2018 was $86,734. A maximum of $86,734 will be available during 2019 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

Table of Contents

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 2018, 2017, and 2016 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:

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

Table of Contents

companies. At December 31, 2018, our Insurance Subsidiaries had total adjusted capital in excess of amounts requiring company or regulatory action at any prescribed risk-based capital action level.

Own Risk Solvency Assessment. On January 11, 2017, the Division adopted the National Association of Insurance Commissioners’ Own Risk Solvency Assessment (“ORSA”) Act requiring the Company to file its assessment on an annual basis. ORSA is an internal process undertaken by an insurer or insurance group to assess the adequacy of its risk management and current and prospective solvency positions under normal and severe stress scenarios. We have completed this filing for the 2018 period.

Executive Officers and Directors

The table below sets forth certain information concerning our directors and executive officers as of the date of this annual report.


			Years
			Employed
Name	Age (1)	Position	by Safety
George M. Murphy	52	President, Chief Executive Officer	30
William J. Begley, Jr.	64	Vice President, Chief Financial Officer and Secretary	33
James D. Berry	59	Vice President - Underwriting	37
John P. Drago	52	Vice President - Marketing	24
David E. Krupa	58	Vice President - Property Claims	36
Ann M. McKeown	52	Vice President - Insurance Operations	29
Paul J. Narciso	55	Vice President - Casualty Claims	28
Stephen A. Varga	51	Vice President - Management Information Systems	26
David F. Brussard	67	Chairman of the Board, Director	-
Frederic H. Lindeberg	78	Director	-
Peter J. Manning	80	Director	-
David K. McKown	81	Director	-
Thalia M. Meehan	57	Director	-
___________________
(1) As of February 15, 2019

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 30 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. Mr. Begley has been employed by the Insurance Subsidiaries for over 33 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 2005. Mr. Berry has been employed by the Insurance Subsidiaries for over 37 years and has directed the Company's Massachusetts Private Passenger line of business since 2001. Mr. Berry is the Chairman of the Board of Directors of the FAIR Plan and previously served as the Chairman of that organizations Executive Committee. He has served on several committees of CAR including Market Review and Defaulted Brokers and also served on Computer Sciences Corporation Series II and Exceed advisory councils. He also serves on the Executive Committee of the In Control Family Foundation, and is the Chairman of that organizations Finance Committee.

John P. Drago was appointed Vice President of Marketing on February 1, 2016. Mr. Drago has been employed by the Insurance Subsidiaries for over 24 years and most recently served as Director of Marketing.

Table of Contents

David E. Krupa, CPCU, was appointed Vice President of Property Claims of the Company on March 4, 2002. Mr. Krupa has been employed by the Insurance Subsidiaries for over 36 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 29 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 2013. Mr. Narciso has held various adjusting and claims management positions with the Company since 1990. Mr. Narciso has 32 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 and the Claims Subcommittee at Commonwealth Automobile Reinsurers.

Stephen A. Varga was appointed Vice President of Management Information Systems of the Company on August 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 Chairman 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. Mr. Brussard was also appointed Chairman of the Investment Committee on February 22, 2017.

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.

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., and various privately held companies.

Thalia M. Meehan was appointed Director of the Company on July 3, 2017. Ms. Meehan has also been appointed to serve as a member of the Investment Committee of the Board. Ms. Meehan, a Chartered Financial Analyst, has over 30 years of experience in the investment sector. Ms. Meehan retired from Putnam Investments in 2016 with 27 years of experience and most recently served as a Team Leader and Portfolio Manager at Putnam Investments. Ms. Meehan currently serves on the Board of the Boston Women in Public Finance and was previously a member of the Municipal Securities Rulemaking Board Investor Advisory Group.

Table of Contents

ITEM 1 A. 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 55.7% of our direct written premiums for the year ended December 31, 2018, 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.

Table of Contents

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.

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, to increase our underwriting capacity, and mitigate the volatility of losses on our financial condition and operations, 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. 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, 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.

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'

Table of Contents

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:

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:

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;

minimum amounts of capital and surplus which must be maintained;

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.

Table of Contents

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.

O ur 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.

Table of Contents

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, 2018, based upon fair value measurement, 86.9% of our investment portfolio was invested in fixed maturity securities, 11.1% in equity securities and 2.0% 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.

Indebtedness under our revolving credit agreement has the option to bear interest based on LIBOR, which may be subject to regulatory guidance and/or reform that could impact our current or future debt agreements.

The U.K. Financial Conduct Authority, which regulates LIBOR, has announced that it intends to stop encouraging or requiring banks to submit LIBOR rates after 2021 and it is unclear if LIBOR will cease to exist or if new methods of calculating LIBOR will evolve. If LIBOR ceases to exist or if the methods of calculating LIBOR change from their current form, interest rates on future indebtedness may be adversely affected or we may need to renegotiate the terms of our credit agreement to replace LIBOR with the new standard that is established, if any, or to otherwise agree with the trustees or agents on a new means of calculating interest.

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

Table of Contents

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 56.5% 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

Table of Contents

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. 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.

We believe that we have established and implemented appropriate security measures to provide reasonable assurance that our information technology systems are secure and appropriate controls and procedures to enable us to identify and respond to unauthorized access to such systems. 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 periodically engage third parties to evaluate and test the adequacy of our security measures, controls and procedures. Despite these security measures, controls and procedures, disruptions to and breaches of our information technology systems are possible.

ITEM 1 B. 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 75 thousand square feet of leased space at 20 Custom House Street in downtown Boston, Massachusetts. Our lease was extended for an additional eleven year term starting on January 1, 2018 and will expire on December 31, 2028 .

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. On January 8, 2018, the Company received a final order from a panel of arbitrators which resulted in the reinsurer paying a $9,200 settlement for all paid and outstanding losses.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

Table of Contents

PART II.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

As of February 15, 2019, there were 25 holders of record of the Company's common stock, par value $0.01 per share, and we estimate another 9,283 held in "Street Name."


2018		High		Low
First quarter	$	80.45	$	71.35
Second quarter	$	88.85	$	74.75
Third quarter	$	98.40	$	86.40
Fourth quarter	$	89.31	$	78.42

2017		High		Low
First quarter	$	73.85	$	68.60
Second quarter	$	72.40	$	66.10
Third quarter	$	76.50	$	68.20
Fourth quarter	$	83.25	$	78.30

The closing price of the Company's common stock on February 15, 2019 was $89.93 per share. The Company’s common stock trades on the NASDAQ stock exchange under the symbol SAFT.

During 2018 and 2017, the Company’s Board of Directors declared four quarterly cash dividends to shareholders, which were paid and accrued in the amounts of $49,330 and $45,689, respectively. On February 15, 2019, the Company's Board of Directors declared a quarterly cash dividend of $0.80 per share to shareholders of record on March 1, 2019 payable on March 15, 2019. The Company plans to continue to declare and pay quarterly cash dividends in 2019, 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 22, 2019 in Boston, MA, which the Company intends to file with the U.S. Securities and Exchange Commission within 120 days after December 31, 2018 (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, 2013 and ending on December 31, 2018 with the cumulative total return of the NASDAQ Stock Market Index and a peer group comprised of five selected property & casualty insurance companies over the same period. The peer group consists of Protective Insurance Corp., Mercury General Corp., State Auto Financial Corp., Selective Insurance Group, Inc., and Donegal Group, Inc. The graph shows

Table of Contents

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, 2013 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.

Table of Contents

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, 2018, 2017, 2016, 2015 and 2014.

The selected historical consolidated financial data for the years ended December 31, 2018, 2017, and 2016, and as of December 31, 2018 and 2017 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, 2015 and 2014 and as of December 31, 2016, 2015 and 2014 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,
	2018		2017			2016		2015		2014
Direct written premiums	$	843,675	$	827,316	$	811,559	$	785,730	$	765,685
Net written premiums	$	786,912	$	781,054	$	766,470	$	746,180	$	734,914
Net earned premiums	$	781,587	$	774,420	$	755,760	$	738,164	$	716,875
Net investment income		43,788		38,758		38,413		40,534		42,303
Earnings from partnership investments		6,915		2,082		3,185		2,387		878
Net realized gains (losses) on investments		3,226		6,036		5,559		(469)		197
Change in net unrealized gains on equity investments		(16,324)		—		-		-		-
Net impairment losses on investments		(228)		(256)		(798)		(796)		-
Finance and other service income		17,533		18,073		17,703		18,133		18,544
Total revenue		836,497		839,113		819,822		797,953		778,797
Losses and loss adjustment expenses		485,513		503,887		493,433		612,569		476,366
Underwriting, operating and related expenses		246,643		248,436		233,017		213,939		219,023
Interest expense		90		90		90		90		90
Total expenses		732,246		752,413		726,540		826,598		695,479
Income (loss) before income taxes		104,251		86,700		93,282		(28,645)		83,318
Income tax expense (credit)		21,056		24,313		28,697		(14,792)		23,964
Net income (loss)	$	83,195	$	62,387		64,585		(13,853)		59,354
Earnings (loss) per weighted average common share:
Basic	$	5.48	$	4.13	$	4.29	$	(0.93)	$	3.93
Diluted	$	5.43	$	4.10	$	4.27	$	(0.93)	$	3.91
Cash dividends paid per common share	$	3.20	$	3.00	$	2.80	$	2.80	$	2.60

Number of shares used in computing earnings (loss) per share:
Basic		15,080,269		15,010,751		14,946,453		14,866,607		14,963,047
Diluted		15,229,898		15,135,348		15,032,263		14,866,607		15,052,745

Table of Contents


		Years Ended December 31,
	2018			2017				2016			2015			2014
Balance Sheet Data:
Total cash and investment securities	$	1,370,936		$	1,348,763		$	1,300,558		$	1,256,937		$	1,298,716
Total assets		1,856,240			1,807,279			1,758,246			1,703,869			1,675,719
Losses and loss adjustment expense reserves		584,719			574,054			560,321			553,977			482,012
Total liabilities		1,137,596			1,106,263			1,087,520			1,059,370			967,436
Total shareholders' equity		718,644			701,016			670,726			644,499			708,283
GAAP Ratios:
Loss ratio (1)		62.1	%		65.1	%		65.3	%		83.0	%		66.5	%
Expense ratio (1)		31.6			32.1			30.8			29.0			30.6
Combined ratio (1)		93.7	%		97.2	%		96.1	%		112.0	%		97.1	%

(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.

Table of Contents

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 and commercial automobile insurance in Massachusetts. In addition to private passenger automobile insurance (which represented 55.7% of our direct written premiums in 2018), we offer a portfolio of other insurance products, including commercial automobile (16.5% of 2018 direct written premiums), homeowners (22.9% of 2018 direct written premiums), dwelling fire, umbrella and business owner policies (totaling 4.9% of 2018 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 899 in 1,120 locations throughout these three states during 2018. We have used these relationships and our extensive knowledge of the market to become the fourth largest private passenger automobile carrier and the largest commercial automobile carrier in Massachusetts, capturing an approximate 9.0% and 15.7% share, respectively, of the Massachusetts private passenger and commercial automobile markets in 2018, according to statistics compiled by CAR based on automobile exposures. We are the third largest homeowners insurance carrier in Massachusetts, with a market share of 7.2% in 2017. Our principal competitors within the Massachusetts homeowners insurance market are MAPFRE SA, Liberty Mutual Insurance and Chubb, which held 13.5%, 10.7% and 6.6% market shares respectively in 2017 (according to S&P Global Market Intelligence).

Our Insurance Subsidiaries began writing insurance in New Hampshire during 2008 and Maine in 2016. The table below shows the amount of direct written premiums and number of policies written in each state during the years ended December 31, 2018, 2017, and 2016.


	Years Ended December 31,
Direct Written Premiums	2018		2017		2016
Massachusetts	$	813,857	$	799,427	$	785,376
New Hampshire		29,159		27,637		26,128
Maine		659		252		55
Total	$	843,675	$	827,316	$	811,559

Table of Contents

Recent Trends and Events

Losses and loss adjustment expenses incurred for the year ended December 31, 2018 decreased by $18,374, or 3.6%, to $485,513 from $503,887 for the comparable 2017 period.

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.


		Years Ended December 31,
Event		2018		2017		2016
Windstorms and hailstorms		$	14,426	$	6,700	$	-
Icestorms and snowstorms			-		-		9,495
	Total losses incurred (1)	$	14,426	$	6,700	$	9,495

(1) Total losses incurred include losses plus defense and cost containment expenses and excludes adjusting and other claims settlement expenses.

The following rate changes have been filed and approved by the insurance regulators of Massachusetts and New Hampshire in 2018 and 2017. Our Massachusetts private passenger automobile rates include a 13% commission rate for agents.


Line of Business	Effective Date	Rate Change
New Hampshire Homeowner	December 1, 2018	2.3%
New Hampshire Private Passenger Automobile	December 1, 2018	2.0%
Massachusetts Homeowner	November 1, 2018	2.6%
Massachusetts Private Passenger Automobile	September 1, 2018	2.3%
Massachusetts Commercial Automobile	June 1, 2018	3.7%
New Hampshire Commercial Automobile	March 1, 2018	4.6%
New Hampshire Homeowner	December 1, 2017	3.9%
New Hampshire Private Passenger Automobile	December 1, 2017	4.2%
Massachusetts Homeowner	November 1, 2017	3.8%
Massachusetts Private Passenger Automobile	July 15, 2017	3.6%
Massachusetts Commercial Automobile	April 1, 2017	3.8%
New Hampshire Commercial Automobile	March 1, 2017	6.1%

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:

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.

Table of Contents

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.

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.


	Years Ended December 31,
	2018		2017		2016
GAAP ratios:
Loss ratio	62.1	%	65.1	%	65.3	%
Expense ratio	31.6		32.1		30.8
Combined ratio	93.7	%	97.2	%	96.1	%

Share-Based Compensation

On April 2, 2018, the Company’s Board of Directors adopted the Safety Insurance Group, Inc. 2018 Long-Term Incentive Plan (“the 2018 Plan”), which was subsequently approved by our shareholders at the 2018 Annual Meeting of Shareholders. The 2018 Plan enables the grant of stock awards, performance shares, cash-based performance units, other stock-based awards, stock options, stock appreciation rights, and stock unit awards, each of which may be granted separately or in tandem with other awards. Eligibility to participate includes officers, directors, employees and other individuals who provide bona fide services to the Company. The 2018 Plan supersedes the Company’s 2002 Management Omnibus Incentive Plan (“the 2002 Incentive Plan”).

The 2018 Plan establishes an initial pool of 350,000 shares of common stock available for issuance to our employees and other eligible participants.

The maximum number of shares of common stock between both the 2018 Plan and 2002 Incentive Plan with respect to which awards may be granted is 2,850,000. No further grants will be allowed under the 2002 Incentive Plan and there have been no grants issued under the 2018 Plan during the current year. At December 31, 2018, there were 350,000 shares available for future grant. Grants outstanding under the Plans as of December 31, 2018, were comprised of 194,305 restricted shares.

Table of Contents

Grants made under the Incentive Plan during the years 2014 through 2018 were as follows.


Type of		Number of		Fair
Equity		Awards		Value per
Awarded	Effective Date	Granted		Share		Vesting Terms
RS - Service	March 11, 2014	24,426	$	54.35	(1)	3 years, 30%-30%-40%
RS - Performance	March 11, 2014	27,928	$	58.09	(1)	3 years, cliff vesting (3)
RS	March 11, 2014	4,000	$	54.35	(1)	No vesting period (2)
RS - Service	March 24, 2014	20,588	$	53.64	(1)	5 years, 20% annually
RS - Service	July 15, 2014	1,767	$	50.94	(1)	3 years, 30%-30%-40%
RS - Performance	July 15, 2014	1,975	$	55.70	(1)	3 years, cliff vesting (3)
RS - Service	February 24, 2015	24,076	$	61.68	(1)	3 years, 30%-30%-40%
RS - Service	February 24, 2015	17,321	$	61.68	(1)	5 years, 20% annually
RS - Performance	February 24, 2015	35,932	$	63.73	(1)	3 years, cliff vesting (3)
RS	February 24, 2015	4,000	$	61.68	(1)	No vesting period (2)
RS - Service	July 1. 2015	1,546	$	58.21	(1)	3 years, 30%-30%-40%
RS - Performance	July 1. 2015	1,790	$	61.45	(1)	3 years, cliff vesting (3)
RS - Service	February 23, 2016	24,479	$	56.07	(1)	3 years, 30%-30%-40%
RS - Service	February 23, 2016	17,077	$	56.07	(1)	5 years, 20% annually
RS - Performance	February 23, 2016	34,626	$	60.72	(1)	3 years, cliff vesting (3)
RS	February 23, 2016	4,000	$	56.07	(1)	No vesting period (2)
RS	March 31, 2016	1,000	$	57.06	(1)	No vesting period (2)
RS - Performance	April 1, 2016	10,000	$	61.38	(1)	3 years, cliff vesting (3)
RS - Service	February 22, 2017	19,120	$	73.55	(1)	3 years, 30%-30%-40%
RS - Service	February 22, 2017	16,106	$	73.55	(1)	5 years, 20% annually
RS - Performance	February 22, 2017	29,829	$	74.96	(1)	3 years, cliff vesting (3)
RS	February 22, 2017	4,000	$	73.55	(1)	No vesting period (2)
RS	July 1, 2017	1,000	$	68.30	(1)	No vesting period (2)
RS - Service	February 26, 2018	34,451	$	75.05	(1)	3 years, 30%-30%-40%
RS - Performance	February 26, 2018	31,668	$	75.05	(1)	3 years, cliff vesting (3)
RS	February 26, 2018	5,000	$	75.05	(1)	No vesting period (2)
RS - Performance	August 1, 2018	164	$	92.30	(1)	No vesting period (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) Board of Director members must maintain stock ownership equal to at least four times their annual cash retainer. This requirement must be met within five years of becoming a director.

(3) 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

(4) The shares represent a true-up of previously awarded performance-based restricted share awards. The updated shares were calculated based on the attainment of pre-established performance objectives.

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 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, 2018, 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 50.0% of $50,000 for the 1st layer, 80.0% of $50,000 for the 2nd layer, 80.0% of $250,000 for the 3rd layer and 80.0% of $265,000 for the 4th layer. As a result of the changes to the models, and our revised reinsurance program, our catastrophe reinsurance in 2018 protects us in the event of a “137-year storm” (that is, a storm of a severity expected to occur once in a 137-year period). Most of our reinsurers have an A.M. Best rating of “A+” (Superior) or “A” (Excellent).

Table of Contents

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, 2018, the FAIR Plan purchased $2,000,000 of catastrophe reinsurance for property losses with retention of $100,000.

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 was based on our total incurred loss, was $20,918 as of December 31, 2017. On January 8, 2018 the Company received a final order from the panel of arbitrators in which the reinsurer would pay the Company $9,200 for settlement of all paid and outstanding losses. This amount has been collected. The remaining unrecovered amount of $11,718 was expensed in 2017.

We also had $133,751 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.

Non-GAAP Measures

Management has included certain non-generally accepted accounting principles (“non-GAAP”) financial measures in presenting the Company’s results. Management believes that these non-GAAP measures better explain the Company’s results of operations and allow for a more complete understanding of the underlying trends in the Company’s business. These measures should not be viewed as a substitute for those determined in accordance with generally accepted accounting principles (“GAAP”). In addition, our definitions of these items may not be comparable to the definitions used by other companies.

Non-GAAP operating income and non-GAAP operating income per diluted share consist of our GAAP net income adjusted by the net realized gains (losses), net impairment losses on investments, changes in net unrealized gains (losses) on equity securities and taxes related thereto. The adjustment for net unrealized gains and losses on equity securities is only applicable for 2018 due to the adoption of the accounting standard update referenced in Item 8 – Financial Statements and Supplemental Data, Note 2, Recent Accounting Pronouncements, of this Form 10-K. Net income and earnings per diluted share are the GAAP financial measures that are most directly comparable to non-GAAP operating income and non-GAAP operating income per diluted share, respectively. A reconciliation of the GAAP financial measures to these non-GAAP measures is included in the 2018 financial highlights below.

Table of Contents

Results of Operations

The following table shows certain of our selected financial results.


	Years Ended December 31,
	2018		2017			2016
Direct written premiums	$	843,675	$	827,316	$	811,559
Net written premiums	$	786,912	$	781,054	$	766,470
Net earned premiums	$	781,587	$	774,420	$	755,760
Net investment income		43,788		38,758		38,413
Earnings from partnership investments		6,915		2,082		3,185
Net realized gains on investments		3,226		6,036		5,559
Change in net unrealized gains on equity investments		(16,324)		—		—
Net impairment losses on investments		(228)		(256)		(798)
Finance and other service income		17,533		18,073		17,703
Total revenue		836,497		839,113		819,822
Loss and loss adjustment expenses		485,513		503,887		493,433
Underwriting, operating and related expenses		246,643		248,436		233,017
Interest expense		90		90		90
Total expenses		732,246		752,413		726,540
Income before income taxes		104,251		86,700		93,282
Income tax expense		21,056		24,313		28,697
Net income	$	83,195	$	62,387	$	64,585
Earnings per weighted average common share:
Basic	$	5.48	$	4.13	$	4.29
Diluted	$	5.43	$	4.10	$	4.27
Cash dividends paid per common share	$	3.20	$	3.00	$	2.80

Reconciliation of Net Income to Non-GAAP Operating Income:

Net income	$	83,195	$	62,387	$	64,585
Exclusions from net income:
Net realized gains on investments		(3,226)		(6,036)		(5,559)
Change in net unrealized gains on equity investments		16,324		-		-
Net impairment losses on investments		228		256		798
Income tax (expense) benefit		(2,798)		2,023		1,666
Non-GAAP Operating income	$	93,723	$	58,630	$	61,490

Net income per diluted share	$	5.43	$	4.10	$	4.27
Exclusions from net income:
Net realized gains on investments		(0.21)		(0.40)		(0.37)
Change in net unrealized gains on equity investments		1.07		-		-
Net impairment losses on investments		0.01		0.02		0.05
Income tax (expense) benefit		(0.18)		0.12		0.11
Non-GAAP Operating income per diluted share	$	6.12	$	3.84	$	4.06

YEAR ENDED DECEMBER 31, 2018 COMPARED TO YEAR ENDED DECEMBER 31, 2017

Direct Written Premiums. Direct written premiums for the year ended December 31, 2018 increased by $16,359, or 2.0%, to $843,675 from $827,316 for the comparable 2017 period. The 2018 increase occurred primarily in our commercial automobile and homeowners business lines.

Net Written Premiums. Net written premiums for the year ended December 31, 2018 increased by $5,858, or 0.8%, to $786,912 from $781,054 for the comparable 2017 period.

Net Earned Premiums. Net earned premiums for the year ended December 31, 2018 increased by $7,167, or 0.9%, to $781,587 from $774,420 for the comparable 2017 period.

Table of Contents

The effect of reinsurance on net written and net earned premiums is presented in the following table.


		Year Ended December 31,
	2018		2017
Written Premiums
Direct	$	843,675	$	827,316
Assumed		32,403		34,214
Ceded		(89,166)		(80,476)
Net written premiums	$	786,912	$	781,054

Earned Premiums
Direct	$	836,759	$	818,804
Assumed		32,196		32,502
Ceded		(87,368)		(76,886)
Net earned premiums	$	781,587	$	774,420

Net Investment Income. Net investment income for the year ended December 31, 2018 increased by $5,030, or 13.0%, to $43,788 from $38,758 for the comparable 2017 period. The increase is a result of fixed maturity amortization and an increase in the average invested asset balance compared to the prior year. Net effective annual yield on the investment portfolio was 3.3% for the year ended December 31, 2018 compare to 3.1% for the year ended December 31, 2017. Our duration was 3.6 years at December 31, 2018, compared to 3.7 years at December 31, 2017.

Earnings from Partnership Investments. Earnings from partnership investments were $6,915 for the year ended December 31, 2018 compared to $2,082 for the year ended December 31, 2017. The 2018 increase was related to investment appreciation and cash proceeds received as return on capital.

Net Realized Gains on Investments. Net realized gains on investments were $3,226 for the year ended December 31, 2018 compared to $6,036 for the comparable 2017 period.

The gross unrealized gains and losses on investments in fixed maturity securities, including redeemable preferred stocks that have characteristics of fixed maturities, equity securities, including interests in mutual funds, and other invested assets were as follows:


	As of December 31, 2018
					Gross Unrealized Losses (3)
	Cost or		Gross		Non-OTTI		OTTI		Estimated
	Amortized		Unrealized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Losses (4)		Value
U.S. Treasury securities	$	1,807	$	—	$	(30)	$	—	$	1,777
Obligations of states and political subdivisions		262,772		5,098		(1,672)		—		266,198
Residential mortgage-backed securities (1)		300,387		1,477		(4,841)		—		297,023
Commercial mortgage-backed securities		60,897		337		(898)		—		60,336
Other asset-backed securities		61,310		95		(329)		—		61,076
Corporate and other securities		488,240		1,775		(14,563)		—		475,452
Subtotal, fixed maturity securities		1,175,413		8,782		(22,333)		—		1,161,862
Equity securities (2)		142,948		15,419		(10,356)		—		148,011
Other invested assets (5)		23,481		—		—		—		23,481
Totals	$	1,341,842	$	24,201	$	(32,689)	$	—	$	1,333,354

(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 common stock, preferred stock, mutual funds and interests in mutual funds held to fund the Company’s executive deferred compensation plan.

(3) Our investment portfolio included 958 securities in an unrealized loss position at December 31, 2018.

(4) Amounts in this column represent other-than-temporary impairment (“OTTI”) recognized in accumulated other comprehensive (loss) income.

(5) Other invested assets are accounted for under the equity method which approximates fair value.

Table of Contents

The composition of our fixed income security portfolio by rating was as follows:


	As of December 31, 2018
	Estimated
	Fair Value		Percent
U.S. Treasury securities and obligations of U.S. Government agencies	$	298,800	25.7	%
Aaa/Aa		299,725	25.8
A		214,263	18.4
Baa		175,890	15.1
Ba		58,050	5.0
B		81,415	7.0
Caa/Ca		7,660	0.7
Not rated		26,059	2.3
Total	$	1,161,862	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, 2018, our portfolio of fixed maturity investments was principally comprised of investment grade corporate fixed maturity securities, U.S. government and agency securities, and asset-backed securities. The portion of our non-investment grade portfolio of fixed maturity investments is primarily comprised of variable rate secured and senior bank loans and high yield bonds.

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 presents the length of time that they have been in a continuous unrealized loss position.


	As of December 31, 2018
	Less than 12 Months				12 Months or More				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U.S. Treasury securities	$	—	$	—	$	1,777	$	30	$	1,777	$	30
Obligations of states and political subdivisions		80,856		707		16,049		965		96,905		1,672
Residential mortgage-backed securities		64,101		694		138,572		4,147		202,673		4,841
Commercial mortgage-backed securities		22,652		270		13,117		628		35,769		898
Other asset-backed securities		33,866		112		23,532		217		57,398		329
Corporate and other securities		288,786		10,149		87,546		4,414		376,332		14,563
Subtotal, fixed maturity securities		490,261		11,932		280,593		10,401		770,854		22,333
Equity securities		71,439		9,955		2,072		401		73,511		10,356
Total temporarily impaired securities	$	561,700	$	21,887	$	282,665	$	10,802	$	844,365	$	32,689

The unrealized losses in our fixed income and equity portfolio as of December 31, 2018 were reviewed for

potential other-than-temporary asset impairments. The Company held three debt securities at December 31, 2018 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 assessment. The Company recognized OTTI of $228 and $256 for the year ended December 31, 2018 and 2017, respectively, 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.

The majority of unrealized losses recorded on the investment portfolio at December 31, 2018 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.

Table of Contents

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 $228 and $256 for the year ended December 31, 2018 and December 31, 2017 .

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 $540, or 3.0%, to $17,533 for the year ended December 31, 2018 from $18,073 for the comparable 2017 period.

Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses incurred for the year ended December 31, 2018 decreased by $18,374, or 3.6%, to $485,513 from $503,887 for the comparable 2017 period.

Our GAAP loss ratio for the year ended December 31, 2018 and 2017 was 62.1% and 65.1%, respectively. Our GAAP loss ratio excluding loss adjustment expenses was 54.0% and 57.5% for the year ended December 31, 2018 and 2017, respectively. Total prior year favorable development included in the pre-tax results for the year ended December 31, 2018 was $56,488, compared to $41,784, for the comparable 2017 period.

Underwriting, Operating and Related Expenses. Underwriting, operating and related expenses for the year ended December 31, 2018 decreased by $1,793, or 0.7%, to $246,643 from $248,436 for the comparable 2017 period. Our GAAP expense ratio for the year ended December 31, 2018 decreased to 31.6% from 32.1% for the comparable 2017 period.

Interest Expenses. Interest expense was $90 for each of the years ended December 31, 2018 and 2017. The credit facility commitment fee included in interest expense was $75 for each of the years ended December 31, 2018 and 2017.

Income Tax Expense Our effective tax rates were 20.2% and 28.0% for the years ended December 31, 2018 and 2017, respectively. The U.S. Tax Cuts and Jobs Act (the “TCJA”) which became effective on December 22, 2017, reduced the corporate statutory tax rate from 35% to 21%. The effective rates for the years ended December 31, 2018 and 2017 were lower than the statutory rates primarily due to the effects of tax-exempt investment income.

Net Income. Net income for the year ended December 31, 2018 was $83,195 compared to a net income of $62,387 for the comparable 2017 period.

Non-GAAP Operating Income . Non-GAAP operating income as defined above was $93,723 for the year ended December 31, 2018 compared to $58,630 for the year ended December 31, 2017. The increase in Non-GAAP operating income was primarily the result of increases in net earned premiums, net investment income, earnings from partnership investments and benefits from lower statutory federal income tax rates.

YEAR ENDED DECEMBER 31, 2017 COMPARED TO YEAR ENDED DECEMBER 31, 2016

Direct Written Premiums. Direct written premiums for the year ended December 31, 2017 increased by $15,757, or 1.9%, to $827,316 from $811,559 for the comparable 2016 period. The 2017 increases occurred in our private passenger, commercial automobile and homeowners business lines which experienced increases of 3.3%, 2.3% and 4.0%, respectively, in average written premium per exposure. Written exposures increased by 5.0% in our commercial automobile line and decreased by 3.0% in our private passenger automobile line and 1.0% in our homeowners line, respectively.

Table of Contents

Net Written Premiums. Net written premiums for the year ended December 31, 2017 increased by $14,584 or 1.9%, to $781,054 from $766,470 for the comparable 2016 period. The 2017 increase was primarily due to the factors that increased direct written premiums.

Net Earned Premiums. Net earned premiums for the year ended December 31, 2017 increased by $18,660, or 2.5%, to $774,420 from $755,760 for the comparable 2016 period. The 2017 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.


	Years Ended December 31,
	2017		2016
Written Premiums
Direct	$	827,316	$	811,559
Assumed		34,214		30,424
Ceded		(80,476)		(75,513)
Net written premiums	$	781,054	$	766,470

Earned Premiums
Direct	$	818,804	$	796,366
Assumed		32,502		29,544
Ceded		(76,886)		(70,150)
Net earned premiums	$	774,420	$	755,760

Net Investment Income. Net investment income for the year ended December 31, 2017 increased by $345 or 0.9%, to $38,758 from $38,413 for the comparable 2016 period. Net effective annual yield on the investment portfolio was 3.1% for each of the years ended December 31, 2017 and December 31, 2016. Our duration was 3.7 years at December 31, 2017, compare to 4.3 years at December 31, 2016.

Earnings from Partnership Investments. Earnings from partnership investments were $2,082 for the year ended December 31, 2017 compared to $3,185 for the year ended December 31, 2016.

Net Realized Gains on Investments. Net realized gains on investments were $6,036 for the year ended December 31, 2017 compared to $5,559 for the comparable 2016 period.

Table of Contents

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, 2017
					Gross Unrealized Losses (3)
	Cost or		Gross		Non-OTTI		OTTI		Estimated
	Amortized		Unrealized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Losses (4)		Value
U.S. Treasury securities	$	1,809	$	—	$	(18)	$	—	$	1,791
Obligations of states and political subdivisions		391,806		12,244		(966)		—		403,084
Residential mortgage-backed securities (1)		223,257		2,352		(2,843)		—		222,766
Commercial mortgage-backed securities		39,268		415		(314)		—		39,369
Other asset-backed securities		72,665		173		(225)		—		72,613
Corporate and other securities		427,892		6,962		(2,451)		—		432,403
Subtotal, fixed maturity securities		1,156,697		22,146		(6,817)		—		1,172,026
Equity securities (2)		90,481		21,995		(609)		—		111,867
Other invested assets (5)		23,162		—		—		—		23,162
Totals	$	1,270,340	$	44,141	$	(7,426)	$	—	$	1,307,055

(2) Equity securities include common stock, preferred stock, mutual funds and interests in mutual funds held to fund the Company’s executive deferred compensation plan.

(3) Our investment portfolio included 367 securities in an unrealized loss position at December 31, 2017.

(4) Amounts in this column represent other-than-temporary impairment (“OTTI”) recognized in accumulated other comprehensive (loss) 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, 2017
	Estimated
	Fair Value		Percent
U.S. Treasury securities and obligations of U.S. Government agencies	$	222,766	19.0	%
Aaa/Aa		411,794	35.1
A		239,015	20.4
Baa		142,176	12.1
Ba		51,205	4.4
B		75,673	6.5
Caa/Ca		7,087	0.6
D		248	-
Not rated		22,062	1.9
Total	$	1,172,026	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, 2017, our portfolio of fixed maturity investments was principally comprised of investment grade corporate fixed maturity securities, U.S. government and agency securities, and asset-backed securities. The portion of our non-investment grade portfolio of fixed maturity investments is primarily comprised of variable rate secured and senior bank loans and high yield bonds.

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, 2017.

Table of Contents


	As of December 31, 2017
	Less than 12 Months				12 Months or More				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U.S. Treasury securities	$	1,791	$	18	$	—	$	—	$	1,791	$	18
Obligations of states and political subdivisions		19,603		152		30,018		814		49,621		966
Residential mortgage-backed securities		126,713		1,724		39,638		1,119		166,351		2,843
Commercial mortgage-backed securities		5,457		30		8,027		284		13,484		314
Other asset-backed securities		25,769		167		18,270		58		44,039		225
Corporate and other securities		94,863		1,189		36,440		1,262		131,303		2,451
Subtotal, fixed maturity securities		274,196		3,280		132,393		3,537		406,589		6,817
Equity securities		4,730		361		2,420		248		7,150		609
Total temporarily impaired securities	$	278,926	$	3,641	$	134,813	$	3,785	$	413,739	$	7,426

We reviewed the unrealized losses in our fixed income and equity portfolio as of December 31, 2017 for potential other-than-temporary asset impairments. The Company held two debt securities at December 31, 2017 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 $256 for the year ended December 31, 2017, 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 $7,426 gross unrealized losses as of December 31, 2017, $984 relates to obligations of U.S. Treasuries, states and political subdivisions. The remaining $6,442 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, 2017 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.

Net Impairment Losses on Investments. Net impairment losses on investments were $256 and $798 for the year ended December 31, 2017 and December 31, 2016.

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 increased by $370, or 2.1%, to $18,073 for the year ended December 31, 2017 from $17,703 for the comparable 2016 period.

Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses incurred for the year ended December 31, 2017 increased by $10,454, or 2.1%, to $503,887 from $493,433 for the comparable 2016 period.

Our GAAP loss ratio for the years ended December 31, 2017 and 2016 was 65.1% and 65.3%, respectively. Our GAAP loss ratio excluding loss adjustment expenses was 57.5% and 56.8% for the years ended December 31, 2017 and 2016, respectively. Total prior year favorable development included in the pre-tax results for the year ended December 31, 2017 was $41,784, compared to $45,448, for the comparable 2016 period.

Table of Contents

Underwriting, Operating and Related Expenses. Underwriting, operating and related expenses for the year ended December 31, 2017 increased by $15,419, or 6.6%, to $248,436 from $233,017 for the comparable 2016 period. Our GAAP expense ratios for the year ended December 31, 2017 increased to 32.1% from 30.8% for the comparable 2016 period. The increase in underwriting, operating and related expense and the expense ratio is attributable to increases in contingent commissions and nonrecurring legal fees related to reinsurance arbitration.

Interest Expenses. Interest expense was $90 for each of the years ended December 31, 2017 and 2016. The credit facility commitment fee included in interest expense was $75 for each of the years ended December 31, 2017 and 2016.

Income Tax Expense (Credit). Our effective tax rates were 28.0% and 30.8% for the years ended December 31, 2017 and 2016, respectively. The effective rate in 2017 was lower than the statutory rate of 35.0% primarily due to adjustments for tax-exempt investment income and the impact of the re-measurement of the net deferred tax liability as a result of the enactment of the TCJA.

On December 22, 2017, the TCJA was enacted, which significantly amends the Internal Revenue Code of 1986. The TCJA, among other things, reduces the corporate tax rate from a statutory rate of 35% to 21%, imposes additional limitations on net operating losses and executive compensation, allows for the full expensing of certain capital expenditures, and enacts other changes impacting the insurance industry. The impact of the tax rate change has been recorded through the Statement of Operations for the year ended December 31, 2017.

Subsequent to the enactment of the TCJA, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”). SAB 118 describes three scenarios associated with a company’s status of accounting for income tax reform and provided a measurement period of one year to finalize provisional amounts. The measurement period provided in SAB 118 concluded on December 22, 2018 and accordingly the Company has finalized its accounting for the impact of the TCJA as of December 31, 2018. No material adjustments were recorded by the Company during the year ended December 31, 2018.

Net Income. Net income for the year ended December 31, 2017 was $62,387 compared to net income of $64,585 for the comparable 2016 period.

The TCJA modified the provisions applicable to the determination of the tax basis of unpaid loss reserves. These modifications impact the payment pattern and applicable interest rate. The TCJA instructed the Treasury to provide discount factors and other guidance necessary to determine the necessary transition adjustment. On December 19, 2018 the Treasury released Revenue Procedure 2019-06 which includes unpaid loss reserve discount factors for the 2018 accident year. The Revenue Procedure requires these factors to be used in the first taxable year beginning after December 31, 2017 and for use in calculating the TCJA transitional adjustment. The Company has applied Revenue Procedure 2019-06 for the year ended December 31, 2018. Because this information had not been released until December 19, 2018, we have applied the law existing prior to the enactment of the TCJA for the year ended December 31, 2017; accordingly these provisions had no effect on the net deferred tax liability as of December 31, 2017 or the total tax expense for the year ended December 31, 2017.

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.

Table of Contents

Net cash provided by operating activities was $127,691, $82,040, and $98,824 during the years ended December 31, 2018, 2017, and 2016, 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. These positive operating cash flows are expected to continue to meet our liquidity requirements.

Net cash used for investing activities was $83,004, $14,924, and $84,252 for the years ended December 31, 2018, 2017, and 2016, respectively, as purchases of fixed maturity and equity securities exceeded proceeds from the sales, paydowns, calls and maturities of fixed maturity and equity securities.

Net cash used for financing activities was $48,813, $45,460, and $42,014 during the years ended December 31, 2018, 2017 and 2016, respectively. Net cash used for financing activities is primarily comprised of dividend payments to shareholders.

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 2018, the statutory surplus of Safety Insurance was $646,820, and its net income for 2018 was $86,734. As a result, a maximum of $86,734 is available in 2019 for such dividends without prior approval of the Commissioner. Under this Massachusetts statute, the Insurance Subsidiaries has restricted net assets in the amount of $560,086 at December 31, 2018. During the twelve months ended December 31, 2018, Safety Insurance recorded dividends to Safety of $45,271.

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.

Table of Contents

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 2018 and 2017 were as follows:


					Total
Declaration	Record	Payment	Dividend per		Dividends Paid
Date	Date	Date	Common Share		and Accrued
February 15, 2017	March 1, 2017	March 15, 2017	$	0.70	$	10,674
May 3, 2017	June 1, 2017	June 15, 2017	$	0.70	$	10,665
August 2, 2017	September 1, 2017	September 15, 2017	$	0.80	$	12,183
November 1, 2017	December 1, 2017	December 15, 2017	$	0.80	$	12,167
February 15, 2018	March 1, 2018	March 15, 2018	$	0.80	$	12,326
May 2, 2018	June 1, 2018	June 15, 2018	$	0.80	$	12,295
August 1, 2018	September 4, 2018	September 14, 2018	$	0.80	$	12,312
October 31, 2018	December 3, 2018	December 14, 2018	$	0.80	$	12,397

On February 15, 2019, our Board approved and declared a quarterly cash dividend on our common stock of $0.80 per share to be paid on March 15, 2019 to shareholders of record on March 1, 2019. We plan to continue to declare and pay quarterly cash dividends in 2019, 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, 2018, 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, 2018 and December 31, 2017, 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.

Table of Contents

Contractual Obligations

We have obligations to make future payments under contracts and credit-related financial instruments and commitments. At December 31, 2018, certain long-term aggregate contractual obligations and credit-related commitments are summarized as follows:


			Payments Due by Period
			Within		Two to Three		Four to Five		After
			One Year		Years		Years		Five Years		Total
Loss and LAE reserves		$	286,512	$	257,276	$	35,083	$	5,848	$	584,719
Operating leases			4,044		8,025		7,897		20,064		40,030
	Total contractual obligations	$	290,556	$	265,301	$	42,980	$	25,912	$	624,749

As of December 31, 2018, the Company had loss and LAE reserves of $584,719, unpaid reinsurance recoverables of $108,398 and net loss and LAE reserves of $476,321. 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 $80,000 to investments in limited partnerships. The Company has contributed $34,794 to these commitments as of December 31, 2018. As of December 31, 2018, the remaining committed capital that could be called is $46,898, which includes potential recallable capital distributions.

Critical Accounting Policies and Estimates

Loss and Loss Adjustment Expense Reserves.

Significant periods of time can elapse between the occurrence of an insured loss, the reporting to us of that loss and our final payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities. Our reserves represent estimates of amounts needed to pay reported and unreported losses and the expenses of investigating and paying those losses, or loss adjustment expenses. Every quarter, we review our previously established reserves and adjust them, if necessary.

When a claim is reported, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment. The amount of the reserve is primarily based upon an evaluation of the type of claim involved, the circumstances surrounding each claim and the policy provisions relating to the loss. The estimate reflects the informed 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

Table of Contents

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:

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 $422,423 to $498,216 as of December 31, 2018 compared to a range of $440,918 to $510,166 as of December 31, 2017. 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.

Table of Contents

Our selected point estimate of net loss and LAE reserves based upon the analysis of our actuaries was $476,321 as of December 31, 2018 compared to $490,969 as of December 31, 2017.

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, 2018 and December 31, 2017.


		As of December 31, 2018
Line of Business	Low		Recorded		High
Private passenger automobile	$	195,940	$	220,913	$	224,789
Commercial automobile		87,797		96,161		99,854
Homeowners		70,788		82,215		88,210
All other		67,898		77,032		85,363
Total	$	422,423	$	476,321	$	498,216

		As of December 31, 2017
Line of Business	Low		Recorded		High
Private passenger automobile	$	215,048	$	244,057	$	246,950
Commercial automobile		82,929		90,083		93,377
Homeowners		81,395		88,954		92,894
All other		61,546		67,875		76,945
Total	$	440,918	$	490,969	$	510,166

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, 2018 and December 31, 2017.


		As of December 31, 2018
Line of Business	Case		IBNR		Total
Private passenger automobile	$	253,230	$	(32,354)	$	220,876
CAR assumed private passenger auto		8		29		37
Commercial automobile		53,541		9,507		63,048
CAR assumed commercial automobile		17,713		15,400		33,113
Homeowners		70,113		2,965		73,078
FAIR Plan assumed homeowners		3,646		5,491		9,137
All other		45,748		31,284		77,032
Total net reserves for losses and LAE	$	443,999	$	32,322	$	476,321


		As of December 31, 2017
Line of Business	Case		IBNR		Total
Private passenger automobile	$	254,804	$	(11,084)	$	243,720
CAR assumed private passenger auto		22		315		337
Commercial automobile		53,570		8,603		62,173
CAR assumed commercial automobile		14,307		13,603		27,910
Homeowners		77,834		782		78,616
FAIR Plan assumed homeowners		3,174		7,164		10,338
All other		40,604		27,271		67,875
Total net reserves for losses and LAE	$	444,315	$	46,654	$	490,969

At December 31, 2018 and 2017, our total IBNR reserves for our private passenger automobile line of business were comprised of $(53,519) and $(31,856) related to estimated ultimate decreases in the case reserves, including anticipated recoveries (i.e. salvage and subrogation), and $21,165 and $20,772 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 46.5% of our total reserves for CAR assumed commercial automobile business as of December 31, 2018 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 60.1% of our total reserves for FAIR Plan assumed homeowners at December 31, 2018 due to similar reporting delays in the information we receive from FAIR Plan.

Table of Contents

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, 2018 and 2017.


		As of December 31, 2018
Line of Business		Retained		Assumed		Net
Private passenger automobile	$	220,876
CAR assumed private passenger automobile			$	37
Net private passenger automobile					$	220,913
Commercial automobile		63,048
CAR assumed commercial automobile				33,113
Net commercial automobile						96,161
Homeowners		73,078
FAIR Plan assumed homeowners				9,137
Net homeowners						82,215
All other		77,032		—		77,032
Total net reserves for losses and LAE	$	434,034	$	42,287	$	476,321


		As of December 31, 2017
Line of Business		Retained		Assumed		Net
Private passenger automobile	$	243,720
CAR assumed private passenger automobile			$	337
Net private passenger automobile					$	244,057
Commercial automobile		62,173
CAR assumed commercial automobile				27,910
Net commercial automobile						90,083
Homeowners		78,616
FAIR Plan assumed homeowners				10,338
Net homeowners						88,954
All other		67,875		-		67,875
Total net reserves for losses and LAE	$	452,384	$	38,585	$	490,969

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.

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.

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. As a result, we have to estimate our Participation Ratio and these reserves are subject to significant judgments and estimates.

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

Table of Contents

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, 2018, a 1 percentage-point change in the loss and LAE ratio would result in a change in reserves of $7,817. Each 1 percentage-point change in the loss and loss expense ratio would have had a $6,175 effect on net income, or $0.41 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, 2018. 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.

Table of Contents


	-1 Percent		No		+1 Percent
	Change in		Change in		Change in
	Frequency		Frequency		Frequency
Private passenger automobile retained loss and LAE reserves
-1 Percent Change in Severity
Estimated decrease in reserves	$	(4,418)	$	(2,209)	$	—
Estimated increase in net income		3,490		1,745		—
No Change in Severity
Estimated (decrease) increase in reserves		(2,209)		—		2,209
Estimated increase (decrease) in net income		1,745		—		(1,745)
+1 Percent Change in Severity
Estimated increase in reserves		—		2,209		4,418
Estimated decrease in net income		—		(1,745)		(3,490)

Commercial automobile retained loss and LAE reserves
-1 Percent Change in Severity
Estimated decrease in reserves		(1,261)		(630)		—
Estimated increase in net income		996		498		—
No Change in Severity
Estimated (decrease) increase in reserves		(630)		—		630
Estimated increase (decrease) in net income		498		—		(498)
+1 Percent Change in Severity
Estimated increase in reserves		—		630		1,261
Estimated decrease in net income		—		(498)		(996)

Homeowners retained loss and LAE reserves
-1 Percent Change in Severity
Estimated decrease in reserves		(1,462)		(731)		—
Estimated increase in net income		1,155		577		—
No Change in Severity
Estimated (decrease) increase in reserves		(731)		—		731
Estimated increase (decrease) in net income		577		—		(577)
+1 Percent Change in Severity
Estimated increase in reserves		—		731		1,462
Estimated decrease in net income		—		(577)		(1,155)

All other retained loss and LAE reserves
-1 Percent Change in Severity
Estimated decrease in reserves		(1,541)		(770)		—
Estimated increase in net income		1,217		608		—
No Change in Severity
Estimated (decrease) increase in reserves		(770)		—		770
Estimated increase (decrease) in net income		608		—		(608)
+1 Percent Change in Severity
Estimated increase in reserves		—		770		1,541
Estimated decrease in net income		—		(608)		(1,217)

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, 2018. 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.

Table of Contents


	-1 Percent		+1 Percent
	Change in		Change in
	Estimation		Estimation
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		(331)		331
Estimated increase (decrease) in net income		261		(261)
FAIR Plan assumed homeowners
Estimated (decrease) increase in reserves		(91)		91
Estimated increase (decrease) in net income		72		(72)

Reserve Development Summary

The changes we have recorded in our reserves in the past illustrate the uncertainty of estimating reserves. Our prior year reserves decreased by $56,488, $41,784 and $45,448 for the years ended December 31, 2018, 2017, and 2016, 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, 2018, 2017 and 2016, 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.


	Years Ended December 31,
Accident Year	2018		2017		2016
2008 & prior	$	(2,207)	$	(957)	$	(3,714)
2009		(900)		(698)		(1,080)
2010		(2,316)		(1,583)		(2,670)
2011		(3,567)		(4,439)		(5,370)
2012		(4,714)		(6,152)		(6,970)
2013		(5,154)		(7,748)		(12,589)
2014		(7,123)		(13,989)		(9,398)
2015		(4,070)		1,548		(3,657)
2016		(13,130)		(7,766)		—
2017		(13,307)		—		—
All prior years	$	(56,488)	$	(41,784)	$	(45,448)

At the end of each period, the reserves were re-estimated for all prior accident years. Our prior year reserves decreased by $56,488, $41,784, and $45,448 for the years ended 2018, 2017, and 2016, respectively. The decreases in prior year reserves in 2018 resulted from re-estimations of prior year’s ultimate loss and LAE liabilities and are primarily composed of reductions of $36,266 in our retained automobile reserves and $18,947 in our retained other than auto and homeowner’s reserves, inclusive of the reinsurance recoverable loss. The decreases in prior year reserves in 2017 resulted from re-estimations of prior year’s ultimate loss and LAE liabilities and are primarily composed of reductions of $29,855 in our retained automobile reserves and $10,201 in our retained other than auto and homeowner reserves. The decrease in prior year reserves during 2016 is primarily composed of reductions of $25,019 in our retained automobile reserves and $11,648 in our retained homeowners reserves. It is not appropriate to extrapolate future favorable or unfavorable development of reserves from this past experience.

Table of Contents

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, 2018.


	Private Passenger		Commercial
Accident Year	Automobile		Automobile		Homeowners		All Other		Total
2008 & prior	$	(1,074)	$	(393)	$	(211)	$	(529)	$	(2,207)
2009		(408)		(58)		(145)		(289)		(900)
2010		(1,435)		(228)		(559)		(94)		(2,316)
2011		(2,107)		(89)		(908)		(463)		(3,567)
2012		(2,700)		(874)		(994)		(146)		(4,714)
2013		(2,507)		(349)		(1,865)		(433)		(5,154)
2014		(1,848)		(1,185)		(2,516)		(1,574)		(7,123)
2015		(4,816)		704		(107)		149		(4,070)
2016		(10,154)		(519)		(2,244)		(213)		(13,130)
2017		(3,946)		(2,221)		(5,611)		(1,529)		(13,307)
All prior years	$	(30,995)	$	(5,212)	$	(15,160)	$	(5,121)	$	(56,488)

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, 2018 that is, all our reserves except for business ceded or assumed from CAR and other residual markets.


		Retained		Retained
		Private Passenger		Commercial		Retained		Retained
Accident Year		Automobile		Automobile		Homeowners		All Other		Total
2008 & prior	$	(752)	$	(261)	$	(211)	$	(529)	$	(1,753)
2009		(408)		(58)		(145)		(289)		(900)
2010		(1,435)		(213)		(559)		(94)		(2,301)
2011		(2,107)		(118)		(908)		(463)		(3,596)
2012		(2,700)		(859)		(974)		(146)		(4,679)
2013		(2,507)		(416)		(1,816)		(433)		(5,172)
2014		(1,848)		(1,174)		(2,363)		(1,574)		(6,959)
2015		(4,816)		639		192		149		(3,836)
2016		(10,154)		(1,240)		(1,587)		(213)		(13,194)
2017		(3,946)		(1,893)		(5,455)		(1,529)		(12,823)
All prior years	$	(30,673)	$	(5,593)	$	(13,826)	$	(5,121)	$	(55,213)

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, 2018.


		CAR Assumed		CAR Assumed
		Private Passenger		Commercial		FAIR Plan
Accident Year		Automobile		Automobile		Homeowners		Total
2008 & prior	$	(322)	$	(132)	$	—	$	(454)
2009		—		—		—		—
2010		—		(15)		—		(15)
2011		—		29		—		29
2012		—		(15)		(20)		(35)
2013		—		67		(49)		18
2014		—		(11)		(153)		(164)
2015		—		65		(299)		(234)
2016		—		721		(657)		64
2017		—		(328)		(156)		(484)
All prior years	$	(322)	$	381	$	(1,334)	$	(1,275)

Table of Contents

The improved retained private passenger and commercial automobile 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 other than auto and homeowners line of business prior year reserves decreased, due primarily to fewer IBNR claims than previously estimated.

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 Expense s.”

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. 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 on Investments.”

Forward-Looking Statements

Forward-looking statements might include one or more of the following, among others:

Projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure or other financial items;

Descriptions of plans or objectives of management for future operations, products or services;

Forecasts of future economic performance, liquidity, need for funding and income;

Descriptions of assumptions underlying or relating to any of the foregoing; and

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

Table of Contents

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.

Table of Contents

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).


		-100 Basis				+100 Basis
		Point Change		No Change		Point Change
As of December 31, 2018
Estimated fair value	$	1,203,622	$	1,161,862	$	1,117,326
Estimated increase (decrease) in fair value	$	41,760	$	—	$	(44,536)

As of December 31, 2017
Estimated fair value	$	1,212,745	$	1,172,026	$	1,129,098
Estimated increase (decrease) in fair value	$	40,719	$	—	$	(42,928)

With respect to floating rate debt, we are exposed to the effects of changes in prevailing interest rates. At December 31, 2018, 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 2018, 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.

Table of Contents

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

SAFETY INSURANCE GROUP, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENT S


	Page
Consolidated Financial Statements:

Report to Independent Registered Public Accounting Firm	61

Balance Sheets	63

Statements of Operations	64

Statements of Comprehensive Income	65

Statements of Changes in Shareholders’ Equity	66

Statements of Cash Flows	67

Notes to Consolidated Financial Statements	68

Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Safety Insurance Group, Inc.:

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Safety Insurance Group, Inc. ( the “Company”) as of December 31, 2018 and December 31, 2017, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedules listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and December 31, 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for equity investments in 2018.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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.

Table of Contents

Definition and Limitations of Internal Control over Financial Reporting

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 27, 2019

We have served as the Company’s auditor since 1983.

Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Balance Sheet s

(Dollars in thousands, except share data)


	December 31,		December 31,
	2018		2017

Assets
Investments:
Securities available for sale:
Fixed maturities, available for sale, at fair value (amortized cost: $1,175,413 and $1,156,697)	$	1,161,862	$	1,172,026
Equity securities, at fair value (cost: $142,948 and $90,481)		148,011		111,867
Other invested assets		23,481		23,162
Total investments		1,333,354		1,307,055
Cash and cash equivalents		37,582		41,708
Accounts receivable, net of allowance for doubtful accounts		190,062		190,649
Receivable for securities sold		1,039		1,380
Accrued investment income		8,420		8,876
Taxes recoverable		—		908
Receivable from reinsurers related to paid loss and loss adjustment expenses		13,691		24,776
Receivable from reinsurers related to unpaid loss and loss adjustment expenses		108,398		83,085
Ceded unearned premiums		33,974		32,175
Deferred policy acquisition costs		73,355		72,202
Deferred income taxes		8,749		—
Equity and deposits in pools		28,094		28,246
Other assets		19,522		16,219
Total assets	$	1,856,240	$	1,807,279

Liabilities
Loss and loss adjustment expense reserves	$	584,719	$	574,054
Unearned premium reserves		435,380		428,257
Accounts payable and accrued liabilities		71,896		60,701
Payable for securities purchased		5,156		4,188
Payable to reinsurers		12,220		13,801
Deferred income taxes		—		2,917
Taxes payable		6,090		—
Other liabilities		22,135		22,345
Total liabilities		1,137,596		1,106,263

Commitments and contingencies (Note 7)

Shareholders’ equity
Common stock: $0.01 par value; 30,000,000 shares authorized; 17,566,180 and 17,499,544 shares issued		176		175
Additional paid-in capital		196,292		189,714
Accumulated other comprehensive (loss) income, net of taxes		(10,706)		24,269
Retained earnings		616,717		570,693
Treasury stock, at cost: 2,279,570 shares		(83,835)		(83,835)
Total shareholders’ equity		718,644		701,016
Total liabilities and shareholders’ equity	$	1,856,240	$	1,807,279

The accompanying notes are an integral part of these financial statements.

Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Operation s

(Dollars in thousands, except per share data)


	Years Ended December 31,
	2018		2017		2016

Net earned premiums	$	781,587	$	774,420	$	755,760
Net investment income		43,788		38,758		38,413
Earnings from partnership investments		6,915		2,082		3,185
Net realized gains on investments		3,226		6,036		5,559
Change in unrealized gains on equity investments		(16,324)		—		—
Net impairment losses on investments (a)		(228)		(256)		(798)
Finance and other service income		17,533		18,073		17,703
Total revenue		836,497		839,113		819,822

Losses and loss adjustment expenses		485,513		503,887		493,433
Underwriting, operating and related expenses		246,643		248,436		233,017
Interest expense		90		90		90
Total expenses		732,246		752,413		726,540

Income before income taxes		104,251		86,700		93,282
Income tax expense		21,056		24,313		28,697
Net income	$	83,195	$	62,387	$	64,585

Earnings per weighted average common share:
Basic	$	5.48	$	4.13	$	4.29
Diluted	$	5.43	$	4.10	$	4.27

Cash dividends paid per common share	$	3.20	$	3.00	$	2.80

Number of shares used in computing earnings per share:
Basic		15,080,269		15,010,751		14,946,453
Diluted		15,229,898		15,135,348		15,032,263

(a)

No portion of the other-than-temporary impairments recognized in the period indicated were included in Other Comprehensive Income.

The accompanying notes are an integral part of these financial statements.

Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Incom e

(Dollars in thousands)


	Years Ended December 31,
	2018		2017		2016
Net income	$	83,195	$	62,387	$	64,585

Other comprehensive (loss) income, net of tax:
Unrealized holding (losses) gains during the period, net of income tax (benefit) expense of ($5,387), $6,027, and $1,611.		(20,267)		12,349		2,992
Reclassification adjustment for net realized gains on investments included in net income, net of income tax expense of ($678), ($2,112), and ($1,945).		(2,549)		(3,923)		(3,613)
Other comprehensive (loss) income, net of tax:		(22,816)		8,426		(621)

Comprehensive income	$	60,379	$	70,813	$	63,964

The accompanying notes are an integral part of these financial statements.

Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equit y

(Dollars in thousands)


					Accumulated
					Other
			Additional		Comprehensive						Total
	Common		Paid-in		(Loss) Income,		Retained		Treasury		Shareholders’
	Stock		Capital		Net of Taxes		Earnings		Stock		Equity
Balance at December 31, 2015	$	174		179,896		16,464		531,800		(83,835)	$	644,499
Net income		—		—		—		64,585		—		64,585
Unrealized losses on securities available for sale, net of deferred federal income taxes		—		—		(621)		—		—		(621)
Restricted share awards issued		—		280		—		—		—		280
Recognition of employee share-based compensation, net of deferred federal income taxes		—		4,122		—		—		—		4,122
Exercise of options, net of federal income taxes		—		251		—		—		—		251
Dividends paid and accrued		—		—		—		(42,390)		—		(42,390)
Balance at December 31, 2016		174		184,549		15,843		553,995		(83,835)		670,726
Net income								62,387				62,387
Unrealized gains on securities available for sale, net of deferred federal income taxes		—		—		8,426		—		—		8,426
Restricted share awards issued		1		362		—		—		—		363
Recognition of employee share-based compensation		—		4,803		—		—		—		4,803
Dividends paid and accrued		—		—		—		(45,689)		—		(45,689)
Balance at December 31, 2017		175		189,714		24,269		570,693		(83,835)		701,016
Cumulative effect of adoption of updated accounting guidance for equity financial instruments at January 1, 2018.		—		—		(16,895)		16,895		—		—
Reclassification of certain tax effects from accumulated other comprehensive (loss) income at January 1, 2018.		—		—		4,736		(4,736)		—		—
Net income								83,195				83,195
Unrealized losses on securities available for sale, net of deferred federal income taxes		—		—		(22,816)		—		—		(22,816)
Restricted share awards issued		1		375		—		—		—		376
Recognition of employee share-based compensation		—		6,203		—		—		—		6,203
Dividends paid and accrued		—		—		—		(49,330)		—		(49,330)
Balance at December 31, 2018	$	176	$	196,292	$	(10,706)	$	616,717	$	(83,835)	$	718,644

The accompanying notes are an integral part of these financial statements.

Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flow s

(Dollars in thousands)


	Year Ended December 31,
	2018		2017			2016
Cash flows from operating activities:
Net income	$	83,195	$	62,387	$	64,585
Adjustments to reconcile net income to net cash provided by operating activities:
Investment amortization, net		5,273		6,962		5,388
Fixed Asset depreciation, net		5,467		5,037		4,382
Stock based compensation		6,579		5,166		4,303
(Credit) provision for deferred income taxes		(5,600)		2,085		1,681
Net realized gains on investments		(3,226)		(6,036)		(5,559)
Net impairment losses on investments		228		256		798
Earnings from partnership investments		(650)		(2,082)		(3,185)
Change in net unrealized gains on equity investments		16,324		—
Changes in assets and liabilities:
Accounts receivable		587		(2,953)		(9,129)
Accrued investment income		456		(18)		64
Receivable from reinsurers		(14,228)		5,367		(3,995)
Ceded unearned premiums		(1,799)		(3,590)		(5,363)
Deferred policy acquisition costs		(1,153)		(1,206)		(2,059)
Taxes recoverable		908		(908)		15,497
Other assets		2,565		(5,400)		348
Loss and loss adjustment expense reserves		10,665		13,733		6,344
Unearned premium reserves		7,123		10,224		16,072
Taxes payable		6,090		(1,110)		—
Accounts payable and accrued liabilities		10,678		(6,333)		14,068
Payable to reinsurers		(1,581)		299		1,955
Other liabilities		(210)		160		(7,371)
Net cash provided by operating activities		127,691		82,040		98,824

Cash flows from investing activities:
Fixed maturities purchased		(304,654)		(205,226)		(295,211)
Equity securities purchased		(66,832)		(27,440)		(30,060)
Other invested assets purchased		(6,648)		(7,492)		(5,248)
Proceeds from sales and paydowns of fixed maturities		217,221		151,071		99,682
Proceeds from maturities, redemptions, and calls of fixed maturities		63,628		37,868		99,883
Proceed from sales of equity securities		18,654		34,664		46,620
Proceeds from other invested assets redeemed		6,810		7,589		4,992
Fixed assets purchased		(11,183)		(5,958)		(4,910)
Net cash used for investing activities		(83,004)		(14,924)		(84,252)

Cash flows from financing activities:
Proceeds from stock options exercised		—		—		257
Excess tax expense from stock options exercised		—		—		(6)
Dividends paid to shareholders		(48,813)		(45,460)		(42,265)
Net cash used for financing activities		(48,813)		(45,460)		(42,014)

Net (decrease) increase in cash and cash equivalents		(4,126)		21,656		(27,442)
Cash and cash equivalents at beginning of year		41,708		20,052		47,494
Cash and cash equivalents at end of period	$	37,582	$	41,708	$	20,052

Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal and state income taxes	$	20,115	$	23,721	$	9,826
Interest	$	75	$	75	$	75

The accompanying notes are an integral part of these financial statements.

Table of Contents

1. Basis of Presentatio n

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 55.7% of its direct written premiums in 2018. The Company operates through its insurance company subsidiaries, Safety Insurance Company, Safety Indemnity Insurance Company, and Safety Property and Casualty Insurance Company (together referred to as the “Insurance Subsidiaries”).

The Insurance Subsidiaries began writing private passenger automobile and homeowners insurance in New Hampshire during 2008, personal umbrella insurance in New Hampshire during 2009, and commercial automobile insurance in New Hampshire during 2011. The Insurance Subsidiaries began writing all of these lines of business in Maine during 2016.

2. Summary of Significant Accounting Policies

Investments

Investments in fixed maturities, which include taxable and non‑taxable bonds and redeemable preferred stocks, are reported at fair value. Investments in equity securities, 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 securities reported at fair value are excluded from earnings and reported in a separate component of shareholders’ equity, known as “Accumulated other comprehensive (loss) 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.

Table of Contents

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, 2018 and 2017, these allowances were $482 and $414, 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 $146,601, $144,703, and $141,540 was charged to underwriting, operating and other expenses for the years ended 2018, 2017 and 2016, respectively.

Equity and Deposits in Pools

Equity and deposits in pools represents the net receivable amounts from the residual market mechanisms, Commonwealth Automobile Reinsurers (“CAR”) for automobile and Massachusetts Property Insurance Underwriting Association (“FAIR Plan”) for homeowner insurance in Massachusetts. See Note 9 for a discussion of the Company’s accounting for amounts assumed from residual markets.

Equipment and Leasehold Improvements

Property, equipment, leasehold improvements, and software which are included in other assets are carried at cost less accumulated depreciation. Depreciation is provided using the straight‑ line or accelerated method over the estimated useful lives of the related assets, which range from 3 to 10 years. Amortization of leasehold improvements is provided using the straight‑line method over the term of the lease. The costs of computer software developed or obtained for internal use are capitalized and amortized over the estimated life of the business system, beginning when the software is ready for its intended use. Maintenance and repairs are charged to expense as incurred.

Losses and Loss Adjustment Expenses

Liabilities for losses and loss adjustment expenses (“LAE”) include case basis estimates for open claims reported prior to year‑end and estimates of unreported claims and claim adjustment expenses, net of salvage and subrogation. The estimates are continually reviewed and modified to reflect current conditions, and any resulting adjustments are reflected in current operating results. Adjustments for anticipated salvage and subrogation are recorded on incurred and reported and incurred but not reported losses.

The Company determines its loss and LAE reserves estimate based upon the analysis of our actuaries. A reasonable estimate is derived by selecting a point estimate within a range of indications as calculated by our actuaries using generally accepted actuarial techniques. The key assumption in most actuarial analysis is that past patterns of frequency and severity will repeat in the future, unless a significant change in the factors described above takes place. Our key factors and resulting assumptions are the ultimate frequency and severity of claims, based upon the most recent ten years of claims reported to the Company, and the data reported to us to calculate our share of the residual market. For each accident year and each coverage within a line of business our actuaries calculate the ultimate losses incurred.

Table of Contents

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 $14,649 and $14,371 at December 31, 2018 and 2017, 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 $2,500, $2,216 and $2,063 for the years ended December 31, 2018, 2017, and 2016, 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 per weighted average common share (“EPS”) are calculated by dividing net income by the weighted average number of basic common shares outstanding during the period. Diluted earnings per share amounts are based on the weighted average number of common shares including non-vested performance stock grants and the net

Table of Contents

effect of potentially dilutive common stock options.

The following table sets forth the computation of basic and diluted EPS for the periods indicated.


				Years Ended December 31,
		2018		2017		2016
Earnings attributable to common shareholders - basic and diluted):
Net income from continuing operations	$	83,195	$	62,387	$	64,585
Allocation of income for participating shares		(496)		(392)		(436)
Net income from continuing operations attributed to common shareholders	$	82,699	$	61,995	$	64,149
Earnings per share denominator - basis and diluted
Total weighted average common shares outstanding, including participating shares		15,170,754		15,105,558		15,048,048
Less: weighted average participating shares		(90,485)		(94,807)		(101,595)
Basic earnings per share denominator		15,080,269		15,010,751		14,946,453
Common equivalent shares- stock options		—		—		134
Common equivalent shares- non-vested performance stock grants		149,629		124,597		85,676
Diluted earnings per share denominator		15,229,898		15,135,348		15,032,263

Basic earnings per share	$	5.48	$	4.13	$	4.29
Diluted earnings per share	$	5.43	$	4.10	$	4.27

Undistributed earnings attributable to common shareholders - basic and diluted:
Net income from continuing operations attributable to common shareholders -Basic	$	5.48	$	4.13	$	4.29
Dividends declared		(3.20)		(3.00)		(2.80)
Undistributed earnings	$	2.28	$	1.13	$	1.49

Net income from continuing operations attributable to common shareholders -Diluted	$	5.43	$	4.10	$	4.27
Dividends declared		(3.20)		(3.00)		(2.80)
Undistributed earnings	$	2.23	$	1.10	$	1.47

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, 2018 and 2017.

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.

Table of Contents

Recent Accounting Pronouncements

On August 17, 2018, the SEC adopted amendments to eliminate, integrate, update or modify certain of its disclosure requirements. The amendments which are focused on disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, are intended to facilitate the disclosure of information to investors and simplify compliance without significantly altering the total mix of information provided to investors. The amended rules generally reduce disclosures but some provisions added new disclosure requirements. The amendment is effective November 5, 2018 and the Company has elected to early adopt the amendment in this filing. The adoption of the new rules did not have a material impact on the Company’s financial position, results of operations, cash flows, or disclosures.

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income . The ASU permits a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate as a result of the 2017 Tax Cuts and Jobs Act (“TCJA”). The amount of the reclassification is the difference between the historical corporate income tax rate of thirty-five percent and the newly enacted twenty-one percent corporate income tax rate. The ASU is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company adopted the updated guidance effective January 1, 2018 and elected to reclassify the income tax effects of the TCJA from accumulated other comprehensive income (“AOCI”) to retained earnings at the beginning of the period of adoption. This reclassification resulted in a decrease of $4,736 in retained earnings as of January 1, 2018 and an increase in AOCI by the same amount.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities , which requires certain premiums on callable debt securities to be amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount will not be impacted. For public business entities with calendar year ends, the amendments in ASU No. 2017-08 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If early adopted in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. The Company is evaluating the impact of ASU 2017-08 on its financial position and results of operations. The extent of the impact will depend upon the nature and characteristics of the Company’s portfolio at the adoption date.

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 was not material to the Company’s Consolidated Statements of Cash Flows.

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 its financial position and results of operations with regards to potential credit losses on its Available For Sale

Table of Contents

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 discrete 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 was effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The impact of the adoption of ASU 2016-09 was not material to the Company’s financial position, results of operations or cash flows.

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. In 2018, the FASB issued two additional updates, ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842): Targeted Improvements, both of which have the same effective date and transition requirements as ASU 2016-02. ASU 2018-10 makes sixteen technical corrections to alleviate unintended consequences from applying the new standard and does not make any substantive changes to the core provisions or principals of the new standard. ASU 2019-11 creates an additional transition method which allows companies to elect to not adjust their comparative period financial information and disclosures for the effects of the new lease standard and also creates a practical expedient for lessors to not separate lease and non-lease components. The Company is currently evaluating the impact of ASU 2016-02, ASU 2018-10 and ASU 2018-11 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 gross-up related to lease liabilities is approximately $35,000 which primarily reflects the liability associated with our leased office space. 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 were effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted the updated guidance effective January 1, 2018 which resulted in the recognition of $16,895 of net after-tax unrealized gains on equity investments as a cumulative effect adjustment that increased retained earnings as of January 1, 2018 and decreased AOCI by the same amount. At December 31, 2017, equity investments were classified as available-for-sale on the Company’s Consolidated Balance Sheets; however, upon adoption, the updated guidance eliminated the available-for-sale balance sheet classification for equity investments

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 provides guidance on determining when and how to disclose going concern uncertainties in the financial statements, and requires

Table of Contents

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 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 was 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 adopted the updated guidance effective January 1, 2018 using the modified retrospective approach. The adoption of ASU 2014-09 did not have a material impact on the Company’s financial position, results of operations, cash flows, or disclosures.

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.

3. Investments

The gross unrealized gains and losses on investments in fixed maturity securities, including redeemable preferred stocks that have characteristics of fixed maturities, and equity securities, including interests in mutual funds, and other invested assets, were as follows for the periods indicated.


	As of December 31, 2018
					Gross Unrealized Losses (3)
	Cost or		Gross		Non-OTTI		OTTI		Estimated
	Amortized		Unrealized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Losses (4)		Value
U.S. Treasury securities	$	1,807	$	—	$	(30)	$	—	$	1,777
Obligations of states and political subdivisions		262,772		5,098		(1,672)		—		266,198
Residential mortgage-backed securities (1)		300,387		1,477		(4,841)		—		297,023
Commercial mortgage-backed securities		60,897		337		(898)		—		60,336
Other asset-backed securities		61,310		95		(329)		—		61,076
Corporate and other securities		488,240		1,775		(14,563)		—		475,452
Subtotal, fixed maturity securities		1,175,413		8,782		(22,333)		—		1,161,862
Equity securities (2)		142,948		15,419		(10,356)		—		148,011
Other invested assets (5)		23,481		—		—		—		23,481
Totals	$	1,341,842	$	24,201	$	(32,689)	$	—	$	1,333,354

Table of Contents



	As of December 31, 2017
					Gross Unrealized Losses (3)
	Cost or		Gross		Non-OTTI		OTTI		Estimated
	Amortized		Unrealized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Losses (4)		Value
U.S. Treasury securities	$	1,809	$	—	$	(18)	$	—	$	1,791
Obligations of states and political subdivisions		391,806		12,244		(966)		—		403,084
Residential mortgage-backed securities (1)		223,257		2,352		(2,843)		—		222,766
Commercial mortgage-backed securities		39,268		415		(314)		—		39,369
Other asset-backed securities		72,665		173		(225)		—		72,613
Corporate and other securities		427,892		6,962		(2,451)		—		432,403
Subtotal, fixed maturity securities		1,156,697		22,146		(6,817)		—		1,172,026
Equity securities (2)		90,481		21,995		(609)		—		111,867
Other invested assets (5)		23,162		—		—		—		23,162
Totals	$	1,270,340	$	44,141	$	(7,426)	$	—	$	1,307,055

(1)

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).

(2)

Equity securities include common stock, preferred stock, mutual funds and interests in mutual funds held to fund the Company’s executive deferred compensation plan.

(3)

The Company’s investment portfolio included 958 and 367 securities in an unrealized loss position at December 31, 2018 and December 31, 2017, respectively.

(4)

Amounts in this column represent other‑than‑temporary impairment (“OTTI”) recognized in accumulated other comprehensive (loss) income.

(5)

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.


	As of December 31, 2018
	Amortized		Estimated
	Cost		Fair Value
Due in one year or less	$	32,505	$	32,467
Due after one year through five years		281,428		280,060
Due after five years through ten years		295,645		287,379
Due after ten years through twenty years		139,596		140,107
Due after twenty years		3,645		3,414
Asset-backed securities		422,594		418,435
Totals	$	1,175,413	$	1,161,862

The gross realized gains and losses on sales of investments were as follows for the periods indicated.


	Years Ended December 31,
	2018		2017		2016
Gross realized gains
Fixed maturity securities	$	1,022	$	1,468	$	803
Equity securities		5,129		5,244		6,946
Gross realized losses
Fixed maturity securities		(1,878)		(504)		(1,242)
Equity securities		(1,047)		(172)		(948)
Net realized gains on investments	$	3,226	$	6,036	$	5,559

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

Table of Contents

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, 2018 and 2017 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.


	As of December 31, 2018
	Less than 12 Months				12 Months or More				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U.S. Treasury securities	$	—	$	—	$	1,777	$	30	$	1,777	$	30
Obligations of states and political subdivisions		80,856		707		16,049		965		96,905		1,672
Residential mortgage-backed securities		64,101		694		138,572		4,147		202,673		4,841
Commercial mortgage-backed securities		22,652		270		13,117		628		35,769		898
Other asset-backed securities		33,866		112		23,532		217		57,398		329
Corporate and other securities		288,786		10,149		87,546		4,414		376,332		14,563
Subtotal, fixed maturity securities		490,261		11,932		280,593		10,401		770,854		22,333
Equity securities		71,439		9,955		2,072		401		73,511		10,356
Total temporarily impaired securities	$	561,700	$	21,887	$	282,665	$	10,802	$	844,365	$	32,689


	As of December 31, 2017
	Less than 12 Months				12 Months or More				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U.S. Treasury securities	$	1,791	$	18	$	—	$	—	$	1,791	$	18
Obligations of states and political subdivisions		19,603		152		30,018		814		49,621		966
Residential mortgage-backed securities		126,713		1,724		39,638		1,119		166,351		2,843
Commercial mortgage-backed securities		5,457		30		8,027		284		13,484		314
Other asset-backed securities		25,769		167		18,270		58		44,039		225
Corporate and other securities		94,863		1,189		36,440		1,262		131,303		2,451
Subtotal, fixed maturity securities		274,196		3,280		132,393		3,537		406,589		6,817
Equity securities		4,730		361		2,420		248		7,150		609
Total temporarily impaired securities	$	278,926	$	3,641	$	134,813	$	3,785	$	413,739	$	7,426

Other‑Than‑Temporary Impairments

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. 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.

Table of Contents

The unrealized losses in the Company’s fixed income and equity portfolio as of December 31, 2018 were reviewed for potential other-than-temporary asset impairments. The Company held three debt securities at December 31, 2018 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, 2018, the Company recognized $228 of OTTI losses which consisted entirely of credit losses related to fixed maturity securities. During the year ended December 31, 2017, the Company recognized $256 of OTTI losses 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, 2018 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:


		Years Ended December 31,
		2018		2017			2016
Credit losses on fixed maturity securities, beginning of period		$	892	$	1,094	$	796
	Add: credit losses on OTTI not previously recognized		228		256		798
	Less: credit losses on securities sold		(276)		(458)		(500)
	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		$	844	$	892	$	1,094

At December 31, 2018 and December 31, 2017, there were no amounts included in accumulated other comprehensive (loss) 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.


	Years Ended December 31,
	2018		2017		2016
Interest on fixed maturity securities	$	40,988	$	37,246	$	36,961
Dividends on equity securities		4,500		3,093		3,401
Equity in earnings of other invested assets		1,182		1,016		949
Interest on other assets		62		89		64
Interest on cash and cash equivalents		—		—		43
Total Investment Income		46,732		41,444		41,418
Investment expenses		2,944		2,686		3,005
Net investment income	$	43,788	$	38,758	$	38,413

Table of Contents

4. Equipment and Leasehold Improvements

The carrying value of equipment and leasehold improvements by classification was as follows for the periods indicated.


	As of December 31,
	2018		2017
Software	$	36,161	$	34,252
Computer equipment		9,195		8,820
Leasehold improvements		8,264		2,524
Other equipment		3,116		2,770
Furniture and fixtures		4,129		1,338
Total cost		60,865		49,704
Less accumulated depreciation and amortization		45,281		39,837
Equipment and leasehold improvements, net	$	15,584	$	9,867

Depreciation and amortization expense for the years ended December 31, 2018, 2017, and 2016 was $5,464, $5,037, and $4,382, respectively.

5. 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 $3,302, $3,164, and $3,018 for the years ended December 31, 2018, 2017, and 2016, respectively.

6. Share‑Based Compensation

2018 Long Term Incentive Plan

The 2018 Plan establishes an initial pool of 350,000 shares of common stock available for issuance to our employees and other eligible participants. The Board of Directors and the Compensation Committee intend to issue awards under the 2018 Plan in the future.

Table of Contents

Stock Options

The following table summarizes stock option activity under the Incentive Plan.


		Years Ended December 31,
		2018				2017				2016
		Shares	Weighted			Shares	Weighted			Shares	Weighted
		Under	Average			Under	Average			Under	Average
		Option	Exercise Price			Option	Exercise Price			Option	Exercise Price
Outstanding at beginning of year	$	—	$	—	$	—	$	—	$	6,200	$	42.85
Exercised		—		—		—		—		(6,000)		42.85
Forfeited		—		—		—		—		(200)		42.85
Outstanding at end of period		—		—		—		—		—		—
Exercisable at end of period	$	—	$	—	$	—	$	—	$	—	$	—

As of December 31, 2016, all stock option awards have expired and all compensation expense related to stock option awards has been recognized.

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, 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.

Table of Contents

The following table summarizes restricted stock activity under the previously existing Incentive Plan assuming a target payout for the performance-based shares.


	Years Ended December 31,
	2018			2017			2016
	Shares	Weighted		Shares	Weighted		Shares	Weighted
	Under	Average		Under	Average		Under	Average
	Restriction	Fair Value		Restriction	Fair Value		Restriction	Fair Value
Outstanding at beginning of year	93,086	$	63.13	95,493	$	55.86	112,024	$	54.44
Granted	39,451		75.05	40,226		73.42	46,556		56.09
Vested and unrestricted	(43,276)		62.46	(42,453)		56.56	(56,279)		53.43
Forfeited	(126)		70.63	(180)		63.87	(6,808)		50.02
Outstanding at end of period	89,135	$	68.70	93,086	$	63.13	95,493	$	55.86

	Years Ended December 31,
	2018			2017			2016
	Performance-based	Weighted		Performance-based	Weighted		Performance-based	Weighted
	Shares Under	Average		Shares Under	Average		Shares Under	Average
	Restriction	Fair Value		Restriction	Fair Value		Restriction	Fair Value
Outstanding at beginning of year	105,660	$	62.75	94,610	$	57.60	99,101	$	55.55
Granted	31,832		75.14	29,829		74.96	44,626		61.07
Vested and unrestricted	(27,801)		61.50	(18,259)		53.99	(15,289)		47.42
Forfeited	(4,521)		62.41	(520)		53.99	(33,828)		52.07
Outstanding at end of period	105,170	$	66.79	105,660	$	62.75	94,610	$	57.60

As of December 31, 2018, there was $6,376 of unrecognized compensation expense related to non‑vested restricted stock awards that is expected to be recognized over a weighted average period of 1.5 years. The total fair value of the shares that were vested and unrestricted during the years ended December 31, 2018, 2017, and 2016 was $4,413, $3,387 and $3,732, respectively. For the years ended December 31, 2018, 2017, and 2016, the Company recorded compensation expense related to awards under the Incentive Plan of $5,197, $3,358, and $2,797, net of income tax benefit of $1,382, $1,808, and $1,506, respectively.

7. Commitments and Contingencies

Lease Commitments

The Company has various non‑cancelable long‑term operating leases. The approximate minimum annual rental payments due under these lease agreements as of December 31, 2018 are presented in the following table.


2019	$	4,044
2020		4,037
2021		3,988
2022		4,005
2023		3,892
2024 and after		20,064
Total minimum lease payments	$	40,030

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 $3,531, $4,557 and $4,242 for the years ended December 31, 2018, 2017, and 2016, respectively. All leases expire prior to 2029. The Company expects that in the normal course of business, leases that expire will be renewed.

Table of Contents

A ninth amendment to a lease agreement for the lease of office space was executed on November 7, 2017. Under the provisions of this amendment, the lease term was extended an additional eleven years commencing on January 1, 2018, with an option to renew for two additional five‑year terms.

Contingencies

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.

8. Debt

On August 10, 2018, the Company extended its Revolving Credit Agreement (the “Credit Agreement”) with Citizens Bank, N.A. (formerly known as RBS Citizens, N.A. (“Citizens Bank”)) to a maturity date of August 10, 2023. 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 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, 2018, 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, 2018 or 2017. 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, 2018 and 2017.

The Company is a member of the Federal Home Loan Bank of Boston (“FHLB-Boston”). 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, 2018, the Company has the ability to borrow approximately $284,369 using eligible invested assets that would be used as collateral. The Company has no amounts outstanding from the FHLB-Boston at December 31, 2018.

Table of Contents

9. Reinsurance

The Company cedes insurance to CAR and to other reinsurers. The Company has a property catastrophe excess of loss agreement and a casualty excess of loss agreement that qualify as reinsurance treaties and are designed to protect against large or unusual loss and LAE activity. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.

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 was based on our total incurred loss, was $20,918 as of December 31, 2017. On January 8, 2018 the Company received a final order from the panel of arbitrators in which the reinsurer would pay the Company $9,200 for settlement of all paid and outstanding losses. This amount has been collected. The remaining unrecovered amount of $11,718 was expensed in 2017.

The Company is subject to concentration of credit risk with respect to reinsurance ceded. At December 31, 2018, reinsurance receivables on paid and unpaid loss and LAE with a carrying value of $113,544 and ceded unearned premiums of $32,447 were associated with CAR. At December 31, 2017, reinsurance receivables on paid and unpaid loss and LAE with a carrying value of $86,291 and ceded unearned premiums of $30,706 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 $5,362, $5,444 and $2,341 for the years ended December 31, 2018, 2017 and 2016, 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.


	Years Ended December 31,
	2018		2017		2016
Written Premiums
Direct	$	843,675	$	827,316	$	811,559
Assumed		32,403		34,214		30,424
Ceded		(89,166)		(80,476)		(75,513)
Net written premiums	$	786,912	$	781,054	$	766,470

Earned Premiums
Direct	$	836,759	$	818,804	$	796,366
Assumed		32,196		32,502		29,544
Ceded		(87,368)		(76,886)		(70,150)
Net earned premiums	$	781,587	$	774,420	$	755,760

Loss and LAE
Direct	$	538,569	$	517,146	$	515,506
Assumed		28,815		28,003		23,343
Ceded		(81,871)		(41,262)		(45,416)
Net loss and LAE	$	485,513	$	503,887	$	493,433

Table of Contents

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.


	Years Ended December 31,
	2018		2017			2016
Reserves for losses and LAE at beginning of year	$	574,054	$	560,321	$	553,977
Less receivable from reinsurers related to unpaid losses and LAE		(83,085)		(83,724)		(68,261)
Net reserves for losses and LAE at beginning of year		490,969		476,597		485,716
Incurred losses and LAE, related to:
Current year		542,001		545,671		538,881
Prior years		(56,488)		(41,784)		(45,448)
Total incurred losses and LAE		485,513		503,887		493,433
Paid losses and LAE related to:
Current year		340,927		325,049		328,046
Prior years		159,234		164,466		174,506
Total paid losses and LAE		500,161		489,515		502,552
Net reserves for losses and LAE at end of period		476,321		490,969		476,597
Plus receivable from reinsurers related to unpaid losses and LAE		108,398		83,085		83,724
Reserves for losses and LAE at end of period	$	584,719	$	574,054	$	560,321

At the end of each period, the reserves were re‑estimated for all prior accident years. The Company’s prior year reserves decreased by $56,488, $41,784, and $45,448 for the years ended 2018, 2017, and 2016, respectively, and resulted from re‑estimations of prior years’ ultimate loss and LAE liabilities. The decrease in prior year reserves during 2018 was primarily composed of reductions of $36,266 in the Company’s retained automobile and $18,947 in the Company’s retained other than auto and homeowners reserves. The decrease in prior year reserves during 2017 was primarily composed of reductions of $29,855 in the Company’s retained automobile and $10,201 in the Company’s retained other than auto and homeowners reserves. 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 Company’s private passenger automobile line of business prior year reserves decreased during the years ended December 31, 2018, 2017 and 2016 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, 2018 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, 2009 to 2017 is presented as unaudited supplementary information.

Table of Contents


Private Passenger Automobile Liability
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											As of December 31, 2018
		For the Years Ended December 31,									Total of Incurred-but-Not-Reported Liabilities Plus Expected Development of Reported Claims	Cumulative Number of Reported Claims
Accident Year	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
	(Unaudited)
2009	$ 174,243	$ 172,667	$ 168,900	$ 167,078	$ 163,593	$ 160,844	$ 159,674	$ 159,021	$ 158,433	$ 157,996	$ -	55,015
2010		169,426	172,558	171,978	170,089	166,195	164,723	163,206	162,679	161,236	1	54,930
2011			176,727	176,906	176,906	175,209	172,957	171,852	170,732	168,671	-	56,124
2012				175,262	175,189	174,856	170,379	167,831	166,008	163,350	-	53,273
2013					183,367	183,517	183,264	181,492	179,167	176,713	(131)	54,246
2014						187,305	187,104	186,798	183,119	181,312	(1,108)	52,784
2015							190,036	190,236	188,317	184,477	(903)	52,966
2016								192,912	192,318	185,009	(7,391)	49,294
2017									185,673	184,429	(11,567)	45,879
2018										176,411	(2,785)	39,846
									Total	$ 1,739,604


Private Passenger Automobile Liability
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance

		For the Years Ended December 31,
Accident Year	2009	2010	2011	2012		2013	2014	2015	2016	2017	2018
	(Unaudited)
2009	$ 73,808	$ 121,962	$ 139,517	$ 148,807		$ 153,756	$ 156,808	$ 157,440	$ 157,697	$ 157,710	$ 157,718
2010		73,721	126,734	142,688		153,408	157,887	160,192	160,859	161,080	161,114
2011			76,467	130,018		146,532	158,904	164,413	167,251	168,025	168,585
2012				74,306		126,553	144,157	152,991	157,443	160,416	161,749
2013						79,049	135,031	152,472	163,694	169,634	172,736
2014							79,151	136,434	156,693	166,815	173,163
2015								76,934	138,255	156,483	168,641
2016									78,862	137,917	154,964
2017										77,519	133,037
2018											72,895
										Total	$ 1,524,602
					All outstanding liabilities before 2009, net of reinsurance						138
			Liabilities for claims and claim adjustment expenses, net of reinsurance								$ 215,140

Table of Contents


Private Passenger Automobile Physical Damage
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											As of December 31, 2018
		For the Years Ended December 31,									Total of Incurred-but-Not-Reported Liabilities Plus Expected Development of Reported Claims	Cumulative Number of Reported Claims
Accident Year	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
	(Unaudited)
2009	$ 96,219	$ 93,993	$ 93,156	$ 93,058	$ 93,060	$ 93,021	$ 93,036	$ 93,014	$ 93,002	$ 92,992	$ -	127,434
2010		101,456	98,463	96,642	96,485	96,385	96,366	96,325	96,323	96,335	-	128,201
2011			118,131	117,951	115,028	113,821	113,765	113,674	113,677	113,640	-	140,509
2012				108,376	107,912	104,393	103,679	103,575	103,547	103,510	-	123,639
2013					114,389	114,239	113,034	112,197	112,096	112,060	-	131,704
2014						123,421	123,622	122,410	122,327	122,341	(9)	135,002
2015							140,219	136,661	134,101	133,737	31	144,263
2016								129,528	124,922	122,116	68	126,059
2017									128,340	126,304	(801)	123,902
2018										129,450	(22,380)	116,887
									Total	$ 1,152,485


Private Passenger Automobile Physical Damage
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance

		For the Years Ended December 31,
Accident Year	2009	2010	2011	2012		2013	2014	2015	2016	2017	2018
	(Unaudited)
2009	$ 96,496	$ 94,258	$ 93,187	$ 93,116		$ 93,049	$ 93,024	$ 93,026	$ 93,012	$ 92,998	$ 92,991
2010		101,635	98,445	96,587		96,444	96,369	96,335	96,325	96,317	96,306
2011			126,196	117,152		114,451	113,809	113,719	113,673	113,669	113,640
2012				111,928		107,017	104,311	103,664	103,573	103,537	103,510
2013						120,843	115,904	112,894	112,162	112,085	112,060
2014							130,732	126,414	122,668	122,402	122,350
2015								143,532	136,760	134,066	133,701
2016									133,530	124,298	122,023
2017										132,409	126,822
2018											138,036
										Total	$ 1,161,439
					All outstanding liabilities before 2009, net of reinsurance						-
			Liabilities for claims and claim adjustment expenses, net of reinsurance								$ (8,954)

Table of Contents


Commercial Automobile Liability
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											As of December 31, 2018
		For the Years Ended December 31,									Total of Incurred-but-Not-Reported Liabilities Plus Expected Development of Reported Claims	Cumulative Number of Reported Claims
Accident Year	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
	(Unaudited)
2009	$ 23,292	$ 22,757	$ 22,416	$ 21,968	$ 21,938	$ 21,720	$ 21,564	$ 21,461	$ 21,193	$ 21,048	$ 10	4,755
2010		20,150	19,922	19,493	19,576	19,763	19,285	19,034	18,725	18,495	(34)	4,531
2011			23,658	24,298	24,160	24,187	23,649	22,933	22,817	22,759	3	4,958
2012				23,704	24,447	24,662	24,723	24,572	23,819	22,859	610	4,566
2013					29,175	29,541	28,377	26,864	26,310	25,986	659	5,783
2014						34,117	34,105	34,376	33,914	32,948	100	6,084
2015							35,371	36,150	36,610	37,730	(770)	7,207
2016								37,954	39,416	40,947	(1,655)	6,444
2017									42,865	41,373	2,777	6,091
2018										41,347	14,106	4,965
									Total	$ 305,492


Commercial Automobile Liability
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance

		For the Years Ended December 31,
Accident Year	2009	2010	2011	2012		2013	2014	2015	2016	2017	2018
	(Unaudited)
2009	$ 6,811	$ 12,705	$ 15,196	$ 17,237		$ 19,004	$ 20,589	$ 20,988	$ 21,026	$ 21,026	$ 21,026
2010		6,466	11,520	13,816		15,821	17,351	17,892	18,113	18,269	18,280
2011			7,306	14,263		17,807	19,783	20,941	21,913	22,043	22,445
2012				6,503		12,474	15,617	17,804	18,876	20,601	21,021
2013						8,502	17,079	19,625	21,129	22,434	23,867
2014							9,426	17,853	21,968	25,253	27,886
2015								11,181	21,700	26,018	29,804
2016									9,991	19,902	25,711
2017										10,407	20,106
2018											9,704
										Total	$ 219,850
					All outstanding liabilities before 2009, net of reinsurance						(54)
			Liabilities for claims and claim adjustment expenses, net of reinsurance								$ 85,588

Table of Contents


Commercial Automobile Physical Damage
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											As of December 31, 2018
		For the Years Ended December 31,									Total of Incurred-but-Not-Reported Liabilities Plus Expected Development of Reported Claims	Cumulative Number of Reported Claims
Accident Year	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
	(Unaudited)
2009	$ 10,786	$ 9,987	$ 9,904	$ 9,981	$ 9,913	$ 9,935	$ 9,981	$ 9,981	$ 10,002	$ 10,020	$ (12)	11,593
2010		10,048	9,963	9,893	9,892	10,077	9,955	9,916	9,990	9,990	(36)	10,555
2011			11,511	11,151	11,031	10,960	10,952	10,910	10,952	11,024	(25)	11,488
2012				10,382	10,382	10,331	10,249	10,250	10,208	10,209	(19)	9,913
2013					13,666	13,567	13,298	13,180	13,057	13,047	(13)	12,298
2014						17,426	16,925	15,455	15,419	15,353	(27)	13,545
2015							20,223	19,047	19,021	18,974	425	15,468
2016								20,216	18,506	17,909	146	13,590
2017									19,691	19,200	(154)	13,097
2018										21,230	1,042	12,196
									Total	$ 146,956


Commercial Automobile Physical Damage
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance

		For the Years Ended December 31,
Accident Year	2009	2010	2011	2012		2013	2014	2015	2016	2017	2018
	(Unaudited)
2009	$ 9,707	$ 10,253	$ 10,079	$ 10,004		$ 10,034	$ 10,035	$ 10,034	$ 10,034	$ 10,032	$ 10,033
2010		9,398	10,219	10,053		10,039	10,028	10,025	10,027	10,026	10,026
2011			11,006	11,119		11,092	11,060	11,055	11,053	11,050	11,049
2012				9,707		10,553	10,270	10,242	10,239	10,235	10,228
2013						12,665	13,378	13,114	13,074	13,065	13,060
2014							15,377	15,862	15,424	15,388	15,381
2015								17,787	18,910	18,667	18,549
2016									17,228	18,143	17,763
2017										17,957	19,336
2018											18,842
										Total	$ 144,267
					All outstanding liabilities before 2009, net of reinsurance						-
			Liabilities for claims and claim adjustment expenses, net of reinsurance								$ 2,689

Table of Contents


Homeowners Liability
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											As of December 31, 2018
		For the Years Ended December 31,									Total of Incurred-but-Not-Reported Liabilities Plus Expected Development of Reported Claims	Cumulative Number of Reported Claims
Accident Year	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
	(Unaudited)
2009	$ 4,637	$ 4,637	$ 4,637	$ 4,012	$ 3,456	$ 3,072	$ 3,015	$ 2,966	$ 2,966	$ 2,867	$ -	200
2010		5,591	5,422	5,422	4,888	4,717	4,098	3,735	3,612	3,457	-	217
2011			6,260	7,644	7,644	7,531	6,923	6,017	5,546	4,845	-	304
2012				7,514	7,514	7,514	6,464	5,304	4,331	3,824	-	249
2013					9,768	9,768	9,337	7,578	5,978	5,312	118	262
2014						11,494	11,494	9,738	7,388	7,120	391	261
2015							12,965	12,555	9,908	9,201	(148)	285
2016								10,594	10,594	10,594	428	263
2017									11,276	10,058	1,794	253
2018										9,951	2,181	201
									Total	$ 67,229


Homeowners Liability
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance

		For the Years Ended December 31,
Accident Year	2009	2010	2011	2012		2013	2014	2015	2016	2017	2018
	(Unaudited)
2009	$ 535	$ 1,411	$ 2,092	$ 2,607		$ 2,813	$ 2,867	$ 2,867	$ 2,867	$ 2,867	$ 2,867
2010		963	1,420	2,684		2,890	3,214	3,425	3,472	3,457	3,457
2011			235	1,969		3,459	4,336	4,497	4,536	4,758	4,769
2012				1,389		2,063	2,308	2,731	3,029	3,600	3,606
2013						527	2,337	3,080	3,493	3,829	4,038
2014							340	1,834	3,212	4,200	4,828
2015								428	3,319	4,267	5,205
2016									647	2,669	4,257
2017										305	1,676
2018											551
										Total	$ 35,254
					All outstanding liabilities before 2009, net of reinsurance						101
			Liabilities for claims and claim adjustment expenses, net of reinsurance								$ 32,076

Table of Contents


Homeowners Property Damage
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											As of December 31, 2018
		For the Years Ended December 31,									Total of Incurred-but-Not-Reported Liabilities Plus Expected Development of Reported Claims	Cumulative Number of Reported Claims
Accident Year	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
	(Unaudited)
2009	$ 27,483	$ 27,024	$ 27,233	$ 26,913	$ 26,244	$ 25,977	$ 25,967	$ 25,922	$ 25,922	$ 25,877	$ 123	3,651
2010		45,342	44,550	43,021	40,868	39,921	39,658	39,501	39,501	39,097	173	6,685
2011			95,586	98,021	97,571	94,657	93,914	93,186	92,595	92,388	204	15,116
2012				50,351	49,911	47,392	44,380	43,097	42,382	41,895	84	6,051
2013					56,298	56,199	55,722	52,464	51,077	49,973	235	5,697
2014						59,160	60,213	59,751	57,331	55,127	751	6,076
2015							152,586	152,049	162,377	162,788	(122)	20,074
2016								67,116	66,442	64,208	1,694	5,417
2017									80,736	76,560	(2,049)	5,987
2018										83,443	(1,667)	7,961
									Total	$ 691,356


Homeowners Property Damage
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance

		For the Years Ended December 31,
Accident Year	2009	2010	2011	2012		2013	2014	2015	2016	2017	2018
	(Unaudited)
2009	$ 16,147	$ 22,305	$ 25,812	$ 25,718		$ 25,705	$ 25,741	$ 25,754	$ 25,753	$ 25,753	$ 25,752
2010		25,761	37,447	38,790		39,110	39,145	39,203	39,235	39,235	38,923
2011			71,532	89,741		92,184	92,462	92,444	92,333	92,182	92,182
2012				30,801		40,681	41,960	41,737	41,782	41,789	41,736
2013						38,661	48,456	49,702	49,612	49,653	49,620
2014							40,409	52,161	54,088	54,224	54,262
2015								112,563	145,337	160,572	161,745
2016									44,103	57,238	59,155
2017										46,366	64,401
2018											57,704
										Total	$ 645,480
					All outstanding liabilities before 2009, net of reinsurance						378
			Liabilities for claims and claim adjustment expenses, net of reinsurance								$ 46,254

Table of Contents

The following is unaudited supplementary information about average historical claims duration as of December 31, 2018.


Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (Unaudited)

Years	1	2	3	4	5	6	7	8	9	10
Private Passenger Automobile Liability	43.8%	31.7%	10.2%	6.3%	3.1%	1.7%	0.5%	0.2%	0.0%	0.0%
Private Passenger Automobile Physical Damage	107.2%	-4.9%	-2.2%	-0.4%	-0.1%	0.0%	0.0%	0.0%	0.0%	0.0%
Commercial Automobile Liability	28.2%	26.9%	12.7%	9.2%	6.6%	5.6%	1.4%	1.0%	0.0%	0.0%
Commercial Automobile Physical Damage	95.0%	5.5%	-1.9%	-0.4%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%
Homeowners Liability	8.8%	23.3%	17.7%	11.9%	7.1%	5.3%	1.8%	0.0%	0.0%	0.0%
Homeowners Property Damage	70.0%	21.6%	5.4%	0.3%	0.0%	0.0%	-0.1%	0.0%	-0.5%	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, 2018
Net outstanding liabilities
Private Passenger Automobile Liability	$	215,140
Private Passenger Automobile Physical Damage		(8,954)
Commercial Automobile Liability		85,588
Commercial Automobile Physical Damage		2,689
Homeowners Liability		32,076
Homeowners Property Damage		46,254
Other Short-Duration Insurance Lines		74,356
Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance	$	447,149

Reinsurance recoverable on unpaid claims
Private Passenger Automobile Liability	$	318
Private Passenger Automobile Physical Damage		-
Commercial Automobile Liability		97,727
Commercial Automobile Physical Damage		2,564
Homeowners Liability		-
Homeowners Property Damage		653
Other Short-Duration Insurance Lines		7,136
Total reinsurance recoverable on unpaid claims	$	108,398

Unallocated claims adjustment expenses		29,172

Total gross liability for unpaid claims and claim adjustment expenses	$	584,719

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.

Table of Contents

11. Income Taxes

A summary of the income tax expense in the Consolidated Statements of Operations is shown below.


	Years Ended December 31,
	2018		2017		2016
Current Income Taxes:
Federal	$	26,548	$	22,198	$	26,927
State		108		30		89
		26,656		22,228		27,016
Deferred Income Taxes:
Federal		(5,600)		2,085		1,681
State		—		—		—
		(5,600)		2,085		1,681
Total income tax expense	$	21,056	$	24,313	$	28,697

The income tax 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.


	Years Ended December 31,
	2018		2017		2016
Federal income tax expense at statutory rate	$	21,893	$	30,345	$	32,649
Tax exempt investment income, net		(1,862)		(4,123)		(4,194)
State taxes, net		85		19		58
Nondeductible expenses		494		237		202
Remeasurement of deferred tax liability upon enactment of the TCJA		—		(1,540)		—
Tax windfall related to share-based stock compensation		(79)		(333)		—
Other, net		525		(292)		(18)
Total income tax expense	$	21,056	$	24,313	$	28,697

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.


	Years Ended December 31,
	2018		2017
Deferred tax assets:
Discounting of loss reserves	$	5,688	$	3,361
Discounting of unearned premium reserve		17,475		17,239
Investments		327		—
Bad debt allowance		274		289
Employee benefits		4,159		3,499
Rent incentive		1,181		64
Depreciation		—		75
Total deferred tax assets before valuation allowance		29,104		24,527
Valuation allowance for deferred tax assets		—		—
Total deferred tax assets		29,104		24,527
Deferred tax liabilities:
Deferred acquisition costs		(15,405)		(15,163)
Investments		—		(2,421)
Net unrealized gains on investments		—		(7,710)
Loss reserve transition adjustment		(2,229)		—
Software development costs		(1,268)		(1,648)
Premium acquisition expenses		(512)		(502)
Depreciation		(941)		—
Total deferred tax liabilities		(20,355)		(27,444)
Net deferred tax asset (liability)	$	8,749	$	(2,917)

Table of Contents

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, 2018 and December 31, 2017 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, 2018 and December 31, 2017, 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, 2018 and 2017.

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. All tax years prior to 2015 are closed.

On December 22, 2017, the TCJA was enacted, which significantly amended the Internal Revenue Code of 1986. The TCJA, among other things, reduced the corporate tax rate from a statutory rate of 35% to 21%, imposed additional limitations on net operating losses and executive compensation, allowed for the full expensing of certain capital expenditures and enacted other changes impacting the insurance industry. Tax related changes are recorded through the Statement of Operations for the year ended December 31, 2017. The December 31, 2018 net deferred tax asset and the December 31, 2017 net deferred tax liability have been measured at the 21% tax rate.

The TCJA also modified the provisions applicable to the determination of the tax basis of unpaid loss reserves. These modifications impact the payment pattern and applicable interest rate. The Company has applied Revenue Procedure 2019-06 for the year ended December 31, 2018. Because this information had not been released until December 19, 2018, we have applied the law existing prior to the enactment of the TCJA for the year ended December 31, 2017. These provisions had no effect on the net deferred tax liability as of December 31, 2017 or the total tax expense for the year ended December 31, 2017.

Subsequent to the enactment of the TCJA, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (which we refer to as SAB 118). SAB 118 provided a measurement period of one year to finalize provisional amounts. The measurement period provided in SAB 118 concluded on December 22, 2018 and accordingly, the Company has finalized its accounting for the impact of the TCJA as of December 31, 2018.

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, 2018, 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 share purchases were made by the Company under the program during the years ended December 31, 2018

Table of Contents

and December 31, 2017. As of December 31, 2018, 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 $86,734, $57,982, and $57,202 for the years ended December 31, 2018, 2017, and 2016, respectively. Statutory capital and surplus of the Company’s insurance subsidiaries was $646,820, and $617,577 at December 31, 2018 and 2017, 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, 2018, the statutory capital and surplus of Safety Insurance was $646,820 and its net income for 2018 was $86,734. As a result, a maximum of $86,734 is available in 2018 for such dividends without prior approval of the Commissioner. During the year ended December 31, 2018, Safety Insurance recorded dividends of $45,271. As result of this Massachusetts statute, the Insurance Subsidiaries had restricted net assets in the amount of $560,086 at December 31, 2018.

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, 2018, the Insurance Subsidiaries had total adjusted capital of $646,820, 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 $180,582 at December 31, 2018.

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

Table of Contents

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 uses a third-party pricing as its primary provider of quoted pries 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 custodian or 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 primary source 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. 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

Table of Contents

include but are not limited to:

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.

Corporate and other securities : 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.

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.

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 portfolio was priced based upon quoted market prices or other observable inputs as of December 31, 2018. There were no significant changes to the valuation process during the year ended December 31, 2018. As of December 31, 2018 and December 31, 2017, no quotes or prices obtained were adjusted by management. All broker quotes obtained were non-binding.

At December 31, 2018 and December 31, 2017, investments in fixed maturities classified as available-for-sale had a fair value which equaled carrying value of $1,161,862 and $1,172,026, respectively. At December 31, 2018 and December 31, 2017, we held no short-term investments. The carrying values of cash and cash equivalents and investment income accrued approximated fair value.

Table of Contents

The following tables summarize the Company’s total fair value measurements for investments for the periods indicated.


	As of December 31, 2018
	Total		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
U.S. Treasury securities	$	1,777	$	—	$	1,777	$	—
Obligations of states and political subdivisions		266,198		—		266,198		—
Residential mortgage-backed securities		297,023		—		297,023		—
Commercial mortgage-backed securities		60,336		—		60,336		—
Other asset-backed securities		61,076		—		61,076		—
Corporate and other securities		475,452		—		475,452		—
Equity securities		116,173		115,493		—		680
Total investment securities	$	1,278,035	$	115,493	$	1,161,862	$	680


	As of December 31, 2017
	Total		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
U.S. Treasury securities	$	1,791	$	—	$	1,791	$	—
Obligations of states and political subdivisions		403,084		—		403,084		—
Residential mortgage-backed securities		222,766		—		222,766		—
Commercial mortgage-backed securities		39,369		—		39,369		—
Other asset-backed securities		72,613		—		72,613		—
Corporate and other securities		432,403		—		432,403		—
Equity securities		87,737		87,057		—		680
Total investment securities	$	1,259,763	$	87,057	$	1,172,026	$	680

There were no transfers between Level 1 and Level 2 during the years ended December 31, 2018 or 2017.

The following tables summarize the changes in the Company’s Level 3 fair value securities for the periods indicated.


	Years Ended December 31,
	2018		2017		2016
Balance at beginning of period	$	680	$	678	$	547
Net gains and losses included in earnings		—		—		—
Net gains included in other comprehensive income		—		—		—
Purchases		—		2		131
Sales		—		—		—
Transfers into Level 3		—		—		—
Transfers out of Level 3		—		—		—
Balance at end of period	$	680	$	680	$	678

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 2018, 2017 and 2016. The Company held one Level 3 security at December 31, 2018.

As of December 31, 2018 and December 31, 2017, there were approximately $31,838 and $24,130 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 45 days before a quarter end to dispose of the security.

Table of Contents

15. Quarterly Results of Operations (Unaudited)

An unaudited summary of the Company’s 2018 and 2017 quarterly performance, and audited annual performance, is as follows.


	Year ended December 31, 2018
	First		Second		Third		Fourth		Total
	Quarter		Quarter		Quarter		Quarter		Year
Total revenue	$	209,719	$	207,970	$	215,907	$	202,901	$	836,497
Net income		9,125		26,816		28,908		18,346		83,195
Earnings per weighted average common share:
Basic		0.60		1.77		1.90		1.21		5.48
Diluted		0.60		1.75		1.88		1.19		5.43
Cash dividends paid per common share		0.80		0.80		0.80		0.80		3.20


	Year ended December 31, 2017
	First		Second		Third		Fourth		Total
	Quarter		Quarter		Quarter		Quarter		Year
Total revenue	$	204,770	$	208,249	$	212,529	$	213,565	$	839,113
Net income		12,019		21,105		17,954		11,309		62,387
Earnings per weighted average common share:
Basic		0.80		1.40		1.19		0.73		4.13
Diluted		0.79		1.39		1.18		0.72		4.10
Cash dividends paid per common share		0.70		0.70		0.80		0.80		3.00

16. Related Party Transactions

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.

Table of Contents

ITEM 9. CHANGES IN AND DISAGREEMENT S 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 (“CEO”) and Chief Financial Officer (“CFO”), 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 by us in the reports that we file or submit under the Exchange Act 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 CEO and CFO, as appropriate, 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, 2018 .

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, 2018 , 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.

Table of Contents

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 2019 on a Form 8-K.

On February 26, 2019, the Compensation Committee of the Board approved the 2018 annual executive cash bonus pool in the total amount of $2,778 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, $900; William J. Begley, Jr., $417; James D. Berry, $324; Stephen A. Varga, $245; and Paul J. Narciso, $236.

On February 26, 2019, the Compensation Committee of the Board approved executive long-term incentive awards to certain members of senior management pursuant to our 2018 Long-Term Incentive Plan. The long-term incentive awards were granted in a total amount of $3,150 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 26, 2019. Of the total award, 45% vests in three annual installments of 30% on February 26, 2020, 30% on February 26, 2021, and 40% on February 26, 2022 and were allocated to the Company's Named Executive Officers as follows: George M. Murphy $360 worth of restricted stock; William J. Begley, Jr., $135 worth of restricted stock; James D. Berry, $180 worth of restricted stock; Stephen A. Varga, $169 worth of restricted stock; and Paul J. Narciso, $169 worth of restricted stock. Of the total award, 55% vests over a three-year performance period commencing on January 1, 2019 and ending on December 31, 2021. 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., $165 worth of restricted stock; James D. Berry, $220 worth of restricted stock; Stephen A. Varga, $206 worth of restricted stock; and Paul J. Narciso, $206 worth of restricted stock.

Upon recommendation from the Compensation Committee, on February 26, 2019, the Board approved executive deferred compensation awards pursuant to the Executive Incentive Compensation Plan in the total amount of $1,740. Of the total award, the following amounts were allocated to the Company's CEO and Named Executive Officers: George M. Murphy, $508; William J. Begley, Jr., $276; James D. Berry, $214; Stephen A. Varga, $162; and Paul J. Narciso, $156.

Table of Contents

PART III

ITEMS 10-14.

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, 2018 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.

100

Table of Contents

SAFETY INSURANCE GROUP, INC.

INDEX TO FINANCIAL STATEMENT SCHEDULES


Schedules		Page

I	Summary of Investments – Other than Investments in Related Parties as of December 31, 2018	102

II	Condensed Financial Information of the Registrant at December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016	103

III	Supplementary Insurance Information at December 31, 2018, 2017 and 2016 and for the years ended December 31, 2018, 2017 and 2016	105

IV	Reinsurance for the years ended December 31, 2018, 2017 and 2016	106

V	Valuation and Qualifying Accounts at December 31, 2018, 2017 and 2016 and for the years ended December 31, 2018, 2017 and 2016	107

VI	Supplemental Information Concerning Property and Casualty Insurance Operations at December 31, 2018, 2017 and 2016 and for the years ended December 31, 2018, 2017 and 201 6	108

101

Table of Contents

Safety Insurance Group, Inc.

Summary of Investment s—Other than Investments in Related Parties

Schedule I

At December 31, 2018

(Dollars in thousands)


					Amount at
					which shown
	Cost or		Estimated		in the Balance
	Amortized Cost		Fair Value		Sheet
Fixed maturities:
U.S. government and government agencies and authorities	$	302,194	$	298,800	$	298,800
Obligations of states and political subdivisions		262,772		266,198		266,198
Corporate and other securities		610,447		596,864		596,864
Total fixed maturities		1,175,413		1,161,862		1,161,862
Equity securities:
Common stocks:
Industrial, miscellaneous and all other		142,948		148,011		148,011
Total equity securities		142,948		148,011		148,011
Other invested assets		23,481		23,481		23,481
Total investments	$	1,341,842	$	1,333,354	$	1,333,354

102

Table of Contents

Safety Insurance Group, Inc.

Condensed Financial Information of the Registran t

Condensed Balance Sheets

Schedule II

(Dollars in thousands)


	Years Ended December 31,
	2018		2017
Assets
Investments in consolidated affiliates	$	720,721	$	702,661
Other		69		9
Total assets	$	720,790	$	702,670
Liabilities
Accounts payable and other liabilities	$	2,146	$	1,654
Total liabilities		2,146		1,654
Shareholders’ equity		718,644		701,016
Total liabilities and shareholders’ equity	$	720,790	$	702,670

Safety Insurance Group, Inc.

Condensed Financial Information of the Registrant

Condensed Statements of Operations and Comprehensive Income

Schedule II

(Dollars in thousands)


	Years Ended December 31,
	2018		2017		2016
Revenues	$	—	$	—	$	—
Expenses		1,695		1,494		1,406
Net loss		(1,695)		(1,494)		(1,406)
Earnings from consolidated subsidiaries		84,890		63,881		65,991
Net income		83,195		62,387		64,585
Other comprehensive (loss) income, net of tax		(22,816)		8,426		(621)
Comprehensive income	$	60,379	$	70,813	$	63,964

103

Table of Contents

Safety Insurance Group, Inc.

Condensed Financial Information of the Registrant

Condensed Statements of Cash Flows

Schedule II

(Dollars in thousands)


	Years Ended December 31,
	2018		2017		2016
Net income	$	83,195	$	62,387	$	64,585
Adjustments to reconcile net income to net cash provided by operating activities:
Earnings from consolidated subsidiaries		(84,890)		(63,881)		(65,991)
Dividends received from consolidated subsidiaries(1)		45,271		41,826		39,156
Amortization of restricted stock expense		5,789		5,367		4,312
Changes in assets and liabilities:
Other assets		(60)		15		63
Accounts payable and accrued liabilities		(492)		(254)		(111)
Net cash provided by operating activities		48,813		45,460		42,014
Proceeds from exercise of stock options		—		—		257
Excess tax benefit from stock options exercised		—		—		(6)
Dividends paid		(48,813)		(45,460)		(42,265)
Acquisition of treasury stock		—		—		—
Net cash used for financing activities		(48,813)		(45,460)		(42,014)
Net increase in cash and cash equivalents		—		—		—
Cash and cash equivalents, beginning of year		—		—		—
Cash and cash equivalents, end of year	$	—	$	—	$	—

(1) No portion of the dividends received from operating subsidiaries during 2018, 2017 or 2016 represent returns of capital and therefore no portion is presented as an investing activity.

104

Table of Contents

Safety Insurance Group, Inc.

Supplementary Insurance Informatio n

Schedule III

(Dollars in thousands)



	As of December 31,							Years Ended December 31,
			Future Policy
	Deferred		Benefits,
	Policy		Losses,							Net
	Acquisition		Claims and Loss		Unearned			Earned		Investment
Segment	Costs		Expenses		Premiums			Premiums		Income
Property and Casualty Insurance
2018	$	73,355	$	584,719	$	435,380	$	781,587	$	43,788
2017		72,202		574,054		428,257		774,420		38,758
2016		70,996		560,321		418,033		755,760		38,413


	Years Ended December 31,
					Benefits,		Amortization of
					Claims,		Deferred
			Net		Losses, and		Policy			Other
	Premium		Investment		Settlement		Acquisition			Operating	Premiums
Segment	Revenue		Income		Expenses		Costs			Expenses	Written
Property and Casualty Insurance
2018	$	781,587	$	43,788	$	485,513	$	146,601	$	100,042	$	786,912
2017		774,420		38,758		503,887		144,703		103,733		781,054
2016		755,760		38,413		493,433		141,540		91,477		766,470

105

Table of Contents

Safety Insurance Group, Inc.

Reinsuranc e

Schedule IV

(Dollars in thousands)


									Percent of
										Amount
Property and Casualty	Gross		Ceded to Other		Assumed from		Net			Assumed
Insurance Earned Premiums	Amount		Companies		Other Companies		Amount			to Net
Years ended December 31,
2018	$	836,759	$	87,368	$	32,196	$	781,587		4.1%
2017		818,804		76,886		32,502		774,420		4.2%
2016		796,366		70,150		29,544		755,760		3.9%

106

Table of Contents

Safety Insurance Group, Inc.

Valuation and Qualifying Account s

Schedule V

(Dollars in thousands)


			Additions
	Balance at		Charged to		Charged to				Balance at
	Beginning		Costs and		Other				End of
	of Period		Expenses		Accounts		Deductions(1)		Period
Allowance for doubtful accounts Years Ended December 31,
2018	$	414	$	1,338	$	—	$	1,270	$	482
2017		435		1,203		—		1,224		414
2016		425		1,162		—		1,152		435

(1) Deductions represent write‑offs of accounts determined to be uncollectible.

107

Table of Contents

Safety Insurance Group, Inc.

Supplemental Information Concerning Property and Casualty Insurance Operation s

Schedule VI

(Dollars in thousands)


	As of December 31,						Years Ended December 31,
			Reserves for
	Deferred		Unpaid Claims
	Policy		and Claims						Net
	Acquisition		Adjustment		Unearned		Earned		Investment
Affiliation With Registrant	Costs		Expenses		Premiums		Premiums		Income
Consolidated Property & Casualty Subsidiaries
2018	$	73,355	$	584,719	$	435,380	$	781,587	$	43,788
2017		72,202		574,054		428,257		774,420		38,758
2016		70,996		560,321		418,033		755,760		38,413


	Years Ended December 31,
	Claims and Claims					Amortization
	Adjustment Expenses					of Deferred		Paid Claims
	Incurred Related to					Policy		and Claims
	Current		Prior			Acquisition		Adjustment	Premiums
Affiliation With Registrant	Year		Year			Costs		Expenses	Written
Consolidated Property & Casualty Subsidiaries
2018	$	542,001	$	(56,488)	$	146,601	$	500,161	$	786,912
2017		545,671		(41,784)		144,703		489,515		781,054
2016		538,881		(45,448)		141,540		502,552		766,470

108

Table of Contents

SAFETY INSURANCE GROUP, INC.

INDEX TO EXHIBITS


Exhibit Number	Description
3.1	Form of Amended and Restated Certificate of Incorporation of Safety Insurance Group, Inc. (1)
3.2	Form of Amended and Restated Bylaws of Safety Insurance Group, Inc. (1)
4	Form of Stock Certificate for the Common Stock (1)
10.1	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, November 7, 2017 (2) (15)
10.2	Tax Indemnity Agreement by and among Safety Holdings, Inc. and the Management Team, dated October 16, 2001 (1)
10.3	2001 Restricted Stock Plan (1)(3)
10.4	Executive Incentive Compensation Plan (1)(3)
10.5	2002 Management Omnibus Incentive Plan, as Amended (5)
10.6	Safety Insurance Company Executive Incentive Compensation Plan—Basic Document (3)(4)(8)
10.7	Safety Insurance Company Executive Incentive Compensation Plan—Adoption Agreement (3)(4)(8)
10.8	Safety Insurance Company Executive Incentive Compensation Plan—Rabbi Trust Agreement (3)(4)(8)
10.9	Form of Restricted Stock Notice and Agreement (with vesting) under the 2002 Management Omnibus Incentive Plan (3)(4)
10.10	Form of Restricted Stock Notice and Agreement (without vesting) under the 2002 Management Omnibus Incentive Plan (3)(4)
10.11	Form of Nonqualified Stock Option Notice and Agreement under the 2002 Management Omnibus Incentive Plan (3)(4)
10.12	Form of Incentive Stock Option Notice and Agreement under the 2002 Management Omnibus Incentive Plan (3)(4)
10.13	Form of Stock Appreciation Right Notice and Agreement under the 2002 Management Omnibus Incentive Plan (3)(4)
10.14	Annual Performance Incentive Plan (3)(5)
10.15	Amendment to Annual Performance Incentive Plan (3)(7)
10.16	Amendment to Management Omnibus Incentive Plan dated December 31, 2008 (3)(7)
10.17	Amendment to Management Omnibus Incentive Plan dated August 4, 2010 (3)(9)
10.18	Amendment to Management Omnibus Incentive Plan, as Amended dated March 11, 2013 (3)(10)
10.19	Form of Restricted Stock Notice and Agreement (with performance-based vesting) under the 2002 Management Omnibus Plan, as Amended (3)(10)
10.20	Amended and Restated Revolving Credit Agreement with RBS Citizens (11)
10.21	Form of Restricted Stock Notice and Agreement (with performance-based vesting) under the 2002 Management Omnibus Plan, As Amended (3) (12)

109

Table of Contents

10.22	Form of Restricted Stock Notice and Agreement (with performance-based vesting) under the 2002 Management Omnibus Plan, As Amended (3) (13)
10.23	Form of Restricted Stock Notice and Agreement under the 2002 Management Omnibus Plan, As Amended (3) (13)
10.24	Employment Agreement by and between Safety Insurance Group, Inc. and John Drago as of April 1, 2016 (3)(14)
10.25	Employment Agreement by and between Safety Insurance Group, Inc. and George M. Murphy as of April 1, 2016 (3)(14)
10.26	Employment Agreement by and between Safety Insurance Group, Inc. and individual executive member as of January 1, 2018. (3) (16)
10.27	2018 Long-Term Incentive Plan (15)
21 23	Subsidiaries of Safety Insurance Group, Inc. (6) Consent of PricewaterhouseCoopers LLP (17)
24	Power of Attorney (contained on the signature page herein)
31.1	CEO Certification Pursuant to Rule 13a‑14(a)/15d‑14(a), as Adopted Pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002 (1 7 )
31.2	CFO Certification Pursuant to Rule 13a‑14(a)/15d‑14(a), as Adopted Pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002 (1 7 )
32.1	CEO Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002 (1 7 )
32.2	CFO Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002 (1 7 )
101.INS	XBRL Instance Document (1 7 )
101.SCH	XBRL Taxonomy Extension Schema (1 7 )
101.CAL	XBRL Taxonomy Extension Calculation Linkbase (1 7 )
101.DEF	XBRL Taxonomy Extension Definition Linkbase (1 7)
101.LAB	XBRL Taxonomy Extension Label Linkbase (1 7 )
101.PRE	XBRL Taxonomy Extension Presentation Linkbase (1 7 )

(1) 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.

(2) 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 March 31, 2007, as filed on May 5, 2007, and as incorporated by reference to the Registrant’s Form 10-K for the year ended December 31, 2017, as filed on February 28, 2018.

(3) Denotes management contract or compensation plan or arrangement.

(4) Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2004 filed on March 16, 2005.

(5) Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2006 filed on March 1, 2007.

110

Table of Contents

(6) Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2007 filed on March 14, 2008.

(7) Incorporated herein by reference to the Registrant’s Form 8-K filed on December 31, 2008.

(8) Incorporated herein by reference to the Registrant’s Form 10-Q for the quarter ended September 30, 2008, as filed on November 7, 2008.

(9) Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2010 filed on March 14, 2011.

(10) Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2012 filed on March 18, 2013

(11) Incorporated herein by reference to the Registrant’s Form 8-K filed on August 27, 2013.

(12) Incorporated herein by reference to the Registrant’s Form 10-Q for the quarter ended June 30, 2013, as filed on August 9, 2013.

(13) Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2014 filed on March 2, 2015

(14) Incorporated herein by reference to the Registrant’s Form 10-Q for the quarter ended June 30, 2016, as filed on August 5, 2016.

(15) Incorporated herein by reference to the Registrant’s Definitive Proxy Statement filed on April 11, 2018.

(16) Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2017, as filed on February 28, 2018.

(17) Included herein.

111

Table of Contents

ITEM 16. FORM 10-K SUMMARY

None

112

Table of Contents

SIGNATURES

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 27, 2019


Safety Insurance Group, Inc.
By:	/s/ George M. Murphy
	George M. Murphy,
	President, Chief Executive Officer

113

Table of Contents

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	President, Chief Executive Officer	February 27, 2019
George M. Murphy

/s/ William J. Begley, Jr.	Vice President, Chief Financial Officer,	February 27, 2019
William J. Begley, Jr.	Secretary, and Principal Accounting Officer

/s/ David F. Brussard	Director	February 27, 2019
David F. Brussard

/s/ Frederic H. Lindeberg	Director	February 27, 2019
Frederic H. Lindeberg

/s/ Peter J. Manning	Director	February 27, 2019
Peter J. Manning

/s/ David K. McKown	Director	February 27, 2019
David K. McKown

/s/ Thalia M. Meehan	Director	February 27, 2019
Thalia M. Meehan

114