Safety Insurance (SAFT) 10-K 2020 FY Annual report

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, 2020
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	13-4181699
(State or other jurisdiction of incorporation or organization)	(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	Trading Symbol	Name of each exchange on which registered
Common Shares, $0.01 par value per share	SAFT	The Nasdaq Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act: None

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	☒	Accelerated filer ☐
Non-accelerated filer	☐	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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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, 2020, was approximately $1,096,353,415.

As of February 10, 2021 there were 14,893,698 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 19, 2021, which Safety Insurance Group, Inc. (the “Company”, “we”, “our”, “us”) intends to file within 120 days after its December 31, 2020 year-end, are incorporated by reference into Part II and Part III hereof.

SAFETY INSURANCE GROUP, INC.

Table of Contents

PART I.		Page
Item 1.	Business	1
Item 1A.	Risk Factors	24
Item 1B.	Unresolved Staff Comments	31
Item 2.	Properties	31
Item 3.	Legal Proceedings	31
Item 4.	Mine Safety Disclosures	32
PART II.
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	33
Item 6.	Selected Financial Data	35
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	37
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	58
Item 8.	Financial Statements and Supplementary Data	59
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

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.

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PART I.

ITEM 1.    BUSINESS

General

We are a leading provider of private passenger automobile, commercial automobile, and homeowners insurance in Massachusetts. In addition to these coverages, we offer a portfolio of other insurance products, including 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 871 in 1,095 locations throughout these three states during 2020. We have used these relationships and, in particular, our extensive knowledge of the Massachusetts market to become the third largest private passenger automobile carrier and the second largest commercial automobile carrier in Massachusetts, capturing an approximate 8.4% and 12.8% share, respectively, of the Massachusetts private passenger and commercial automobile markets in 2020 according to statistics compiled by Commonwealth Automobile Reinsurers ("CAR"). We also are the third largest homeowners insurance carrier in Massachusetts with a 7.0% share of that market. We were ranked the 53^rd largest automobile writer in the country according to S&P Global Market Intelligence, based on 2019 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, 2020, 2019, and 2018.

	Years Ended December 31,
Direct Written Premiums	2020		2019		2018
Massachusetts	$	764,479	$	819,534	$	813,857
New Hampshire		32,334		31,676		29,159
Maine		1,899		1,194		659
Total	$	798,712	$	852,404	$	843,675

In November of 2020, we formed a fourth insurance subsidiary, Safety Northeast Insurance Company (“Safety Northeast”, which became licensed to write insurance products in Massachusetts in January of 2021.

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.

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Our Competitive Strengths

We Have Strong Relationships with Independent Agents. In 2020, independent agents accounted for approximately 58.1% of the Massachusetts automobile insurance market measured by direct written premiums as compared to approximately 30.8% 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 39 out of 40 years since our inception in 1979, we have been profitable. We have achieved our profitability, among other things, by:

● operating as the third largest private passenger auto premium insurance carrier, the second largest commercial auto insurance carrier, and third largest homeowner insurance carrier in Massachusetts. We have maintained direct written premiums in a competitive market over the last five years seeing total direct written premium of $798,712 in 2020 compared to $811,559 in 2016. During the year ended December 31, 2020, as a result of the COVID-19 pandemic, the Company instituted the Safety Personal Auto Relief Credit, a 15% policyholder credit, representing $17,711 in total premium which was applied to personal auto policies for the months of April, May and June which impacted the 2020 direct written premiums by that amount. Overall, outside of this relief credit, our direct written premium has increased over this five year period.

● 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.

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We Have an Experienced, Committed and Knowledgeable Management Team. Our senior management team has an average of over 24 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 owner, personal umbrella, dwelling fire and commercial umbrella insurance policies 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. In November 2020, we formed Safety Northeast to offer a fourth homeowners rate level for risks that satisfy stricter underwriting guidelines. We expect to begin writing policies through Safety Northeast in 2021.

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	2020				2019				2018
Private passenger automobile	$	438,824	54.9	%	$	466,697	54.8	%	$	469,340	55.6	%
Commercial automobile		118,773	14.9			147,177	17.3			139,628	16.6
Homeowners		199,482	25.0			196,764	23.0			193,482	22.9
Business owners		22,317	2.8			22,241	2.6			22,182	2.6
Personal umbrella		8,087	1.0			8,316	1.0			8,132	1.0
Dwelling fire		10,148	1.3			10,109	1.2			9,829	1.2
Commercial umbrella		1,081	0.1			1,100	0.1			1,082	0.1
Total	$	798,712	100.0	%	$	852,404	100.0	%	$	843,675	100.0	%

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Our product lines are as follows:

Private Passenger Automobile (54.9% of 2020 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 (14.9% of 2020 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 (excluding long-haul trucking), and insure individual vehicles as well as commercial fleets.

Homeowners (25.0% of 2020 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 Owner Policies (2.8% of 2020 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 2020 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 (1.3% of 2020 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 2020 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.

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The insurance industry can also be impacted by terrorism, and we have filed and received approval for a number of terrorism endorsements, which limit our liability and property exposure according to the Terrorism Risk Insurance Act of 2002, the Terrorism Risk Insurance Extension Act of 2005, the Terrorism Risk Insurance Program Reauthorization Act of 2007, the Terrorism Risk Insurance Program Reauthorization of 2015 and the Terrorism Risk Insurance Program Reauthorization Act of 2019. 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 871 and had 1,095 offices (some agencies have more than one office) and approximately 9,476 customer service representatives during 2020.

Voluntary Agents.  In 2020, we obtained approximately 96.2% 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, 2020, we had agreements with 740 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 direct written premiums. No individual agency generated more than 8.8% of our direct written premiums in 2020.

Massachusetts law guarantees that CAR provides motor vehicle insurance coverage to all eligible risks. 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 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 on January 1, 2017 for an additional five-year term.  Approximately $174,400 of ceded premium is spread equitably among the four servicing carriers.  Subject to the review of the Massachusetts Commissioner of Insurance (“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.

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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 on January 1, 2017 for an additional five-year term. Approximately $5,520 of ceded premium was spread equitably between the two servicing carriers.

We are assigned independent agents by CAR who can submit commercial business to us in the Commercial Automobile Program and the Taxi/Limo Program, and we classify those agents as Exclusive Representative Producers (“ERPs”).

The table below shows our direct written exposures in each of our product lines for the periods indicated and the change in exposures for each product line.

		Years Ended December 31,
		2020			2019			2018
Line of Business		Exposures	Change		Exposures	Change		Exposures	Change
Private passenger automobile:
	Voluntary agents	408,873	(2.4)	%	418,894	(1.6)	%	425,783	(2.0)	%
	MAIP	3,298	(42.9)		5,777	(29.1)		8,150	(17.6)
	Total private passenger automobile	412,171	(2.9)		424,671	(2.1)		433,933	(2.3)
Commercial automobile:
	Voluntary agents	63,828	(4.8)		67,074	5.4		63,652	2.0
	ERP	3,802	(50.8)		7,725	(31.1)		11,214	(9.3)
	Total commercial automobile	67,630	(9.6)		74,799	(0.1)		74,866	0.1
Other:
Homeowners		157,611	(0.8)		158,848	(0.3)		159,352	(0.6)
Business owners		8,735	(1.9)		8,903	(2.2)		9,100	(4.2)
Personal umbrella		22,124	(2.2)		22,620	(1.4)		22,934	(1.3)
Dwelling fire		6,454	(2.7)		6,632	(2.9)		6,833	(4.0)
Commercial umbrella		652	(4.7)		684	1.5		674	(0.4)
	Total other	195,576	(1.1)		197,687	(0.6)		198,893	(1.0)
	Total	675,377	(3.1)		697,157	(1.5)		707,692	(1.7)
Total voluntary agents		668,277	(2.3)		683,655	(0.7)		688,328	(1.3)

In 2020, the COVID-19 pandemic had an impact on our voluntary exposure counts as some of our independent agency partners were forced to close during the year, affecting normal new business production. In addition, the 2020 commercial automobile exposures decreased when compared to the prior year as a result of a redistribution of agents among Servicing Carriers in the CAR Commercial Auto Program as well as changes made by CAR to eligibility requirements which impacted the number of policies that we handle as a Servicing Carrier.

In 2020, 66.1% of the private passenger automobile exposures we insure had an other than private passenger policy with us, compared to 64.2% and 61.7% in 2019 and 2018, respectively. In addition, 82.8% of our homeowners’ policyholders had a matching automobile policy with us in 2020 compared to 82.5% in 2019 and 81.9% in 2018.

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;

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● 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.

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 2020, 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 20.0% for each new commercial property policy.

Further, we have a competitive agency incentive commission program under which we pay agents up to 7.5% of premiums based on the loss ratio on their business.

Service and Support. We believe that the level and quality of service and support we provide helps differentiate us from other insurers. We have made a significant investment in information technology designed to facilitate our agents' business. Our AVC website helps agents manage their work efficiently. We provide a substantial amount of information online that agents need to serve their customers, such as information about the status of new policies, bill payments and claims. Providing this type of content reduces the number of customer calls we receive and empowers the agent's customer service representatives by enabling them to respond to customers' inquiries while the customer is on the telephone. Finally, we believe that the knowledge and experience of our employees enhances the quality of support we provide.

Underwriting

Our underwriting department is responsible for a number of key decisions affecting the profitability of our business, including:

● pricing of our private passenger automobile, commercial automobile, homeowners, dwelling fire, personal umbrella, business owner, 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 four pricing segments for most products, utilizing Safety Insurance for standard rates, Safety Indemnity for preferred rates and, Safety P&C for ultra preferred rates. We expect to begin offering a fourth homeowners rate level for risks that satisfy stricter underwriting guidelines through Safety Northeast in 2021.

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

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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 which handles that business on behalf of CAR. Every Massachusetts commercial automobile insurer must bear a portion of the losses of the total commercial reinsurance pool that is serviced by the approved servicing carriers. We are one of four servicing carriers in CAR’s Commercial Automobile Program and one of two servicing carriers in CAR’s Taxi/Limo Program.

Bulk Policy Transfers and New Voluntary Agents.  From time to time, we receive proposals from an existing voluntary agent to transfer a portfolio of the agent's business from another insurer to us. Our underwriters model the profitability of these portfolios before we accept these transfers. We generally require any new voluntary agent to commit to transfer a portfolio to us consisting of at least 300 policies.

Policy Processing.  Our underwriting department assists in processing policy applications, endorsements, renewals and cancellations. Our proprietary software, Safety Express, provides our agents with new business and endorsement entry, real-time policy issuance for personal lines, immediate printing of declarations pages in agents' offices, policy downloads to most major agency management systems and data imports from Boston Software's SinglePoint (Massachusetts) and Vertafore's PL Rater (Massachusetts, 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 owner 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.

Business Intelligence.  The Business Intelligence 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;

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● 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. We are continuously investing in new technologies including areas such as robotic process automation and a new claims system which we began using for other than auto lines of business in 2020 and we plan to begin using for auto lines of business in 2021.

Innovation Lab. In 2018 we 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. During 2020, the Innovation Lab explored Omnichannel for Customer Service offerings from both InsureTech and more established companies and we will look to implement a solution in 2021. The Innovation Lab also partnered with Safety’s Product Management department to explore home sensor devices to detect both water leakage and freeze. In late December 2020 an InsureTech was selected and Safety will be performing an internal Home Sensor Proof of Concept program in 2021 including freeze and water detection sensors along with a Smartphone Mobile app allowing participants to monitor the status of their sensors remotely. Finally during 2020, the Innovation Lab partnered with the Claims department to introduce electronic appraisals program using Smartphone technology that guides a consumer through a remote, touchless appraisal process that not only speeds the claims settlement process but proved very timely during the current social distancing environment.

Internal Applications

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.

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 0.4% in 2020 compared to 0.2% in 2019.

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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 SinglePoint (Massachusetts) and Vertafore's PL Rater (Massachusetts, 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 agents’ policyholders through our public website, SafetyInsurance.com. We have also updated our telephone system to provide a voice activated phone directory, automated billing inquiry and payments, and call center screen pop-up technology.

We additionally provide policyholders mobile technology through our Safety Mobile App for iPhone and Android devices. Safety Mobile provides consumers with access to their agent information, bill pay capabilities, the ability to report an automobile or homeowners claim and access to their insurance card, among other features.

Claims

On casualty claims we utilize 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 2020. If we are unable to settle these claims within our pricing guidelines, we explore other cost-effective options including alternative dispute 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 can 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 claims department allows us to respond quickly to claimants. 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 investigation unit to investigate potential fraud in connection with claims presented. In cases where adjusters suspect fraud in connection with a claim, we deploy this special unit to conduct investigations. We deny payment in cases in which we have succeeded in accumulating sufficient evidence of fraud.

Our auto physical damage claims units handle physical damage claims arising in our private passenger and commercial automobile lines. Process automation has streamlined our claims function and in combination with established policy and procedures newly reported claims are handling in a proactive manner to ensure that coverages are

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verified, damages are appraised and claim payments are issued in a timely and efficient manner. This ensures the highest level of customer service to our insureds while reducing claim cycle times and mitigating claim handling expenses. We continue to vet and implement new methods of appraisal for vehicle damage, including vehicle photo only appraisals within the regulatory established guidelines. 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.

Our property claims division handles physical damage claims arising in our homeowners and other than auto insurance lines. Property Field Adjusters are located remotely across our service areas to handle larger more complex property losses. In 2020, we implemented a new claim handling software system that enables more efficient handling of the claim process from first notice of loss through settlement and potential subrogation. We also utilize house counsel on subrogation recoveries to reduce collection expenses and maximize damage recoveries.

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, 2020 is adequate to cover the ultimate cost of losses and claims incurred as of that date.

Management determines its loss and loss adjustment expense ("LAE") reserve 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

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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 $424,437 to a high of $478,251 as of December 31, 2020. The Company's net loss and LAE reserves, based on our actuaries' best estimate, were set at $461,270 as of December 31, 2020. The ultimate liability may be greater or less than reserves carried at the balance sheet date. Establishment of appropriate reserves is an inherently uncertain process, and there can be no certainty that currently established reserves will prove adequate in light of subsequent actual experience. To the extent that reserves are inadequate and are strengthened, the amount of such increase is treated as a charge to earnings in the period that the deficiency is recognized. To the extent that reserves are redundant and are released, the amount of the release is a credit to earnings in the period the redundancy is recognized. We do not discount any of our reserves.

The following table presents development information on changes in the reserves for losses and LAE of our Insurance Subsidiaries for each year in the three year period ended December 31, 2020, 2019 and 2018.

	Year Ended
	2020		2019			2018
Reserves for losses and LAE at beginning of year	$	610,566	$	584,719	$	574,054
Less receivable from reinsurers related to unpaid losses and LAE		(122,372)		(108,398)		(83,085)
Net reserves for losses and LAE at beginning of year		488,194		476,321		490,969
Incurred losses and LAE, related to:
Current year		459,400		551,895		542,001
Prior years		(54,844)		(42,049)		(56,488)
Total incurred losses and LAE		404,556		509,846		485,513
Paid losses and LAE related to:
Current year		277,754		333,377		340,927
Prior years		153,726		164,596		159,234
Total paid losses and LAE		431,480		497,973		500,161
Net reserves for losses and LAE at end of period		461,270		488,194		476,321
Plus receivable from reinsurers related to unpaid losses and LAE		106,311		122,372		108,398
Reserves for losses and LAE at end of period	$	567,581	$	610,566	$	584,719

The following table represents the development of reserves, net of reinsurance, for calendar years 2010 through 2020. 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, 2020.

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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,
	2020	2019	2018	2017	2016	2015	2014	2013	2012	2011	2010
Reserves for losses and
LAE originally estimated:	$ 461,270	$ 488,194	$ 476,321	$ 490,969	$ 476,597	$ 485,716	$ 420,767	$ 394,668	$ 371,657	$ 352,098	$ 351,244
Cumulative amounts paid as of:
One year later		153,727	164,595	159,234	164,466	174,506	132,364	133,288	124,855	130,204	128,854
Two years later			230,294	241,032	231,473	250,306	189,367	178,411	175,822	181,739	176,774
Three years later				282,242	283,812	290,287	223,465	207,626	199,741	211,578	205,171
Four years later					305,024	310,140	241,589	223,743	213,847	223,941	219,310
Five years later						319,817	252,714	231,346	221,363	231,433	224,354
Six years later							255,581	234,480	223,829	233,137	226,644
Seven years later								235,562	225,169	233,905	227,147
Eight years later									225,320	233,880	226,928
Nine years later										233,922	226,866
Ten years later											226,832
	As of and for the Year Ended December 31,
	2020	2019	2018	2017	2016	2015	2014	2013	2012	2011	2010
Reserves re-estimated as of:
One year later		$ 433,350	$ 434,273	$ 434,481	$ 434,813	$ 440,268	$ 390,452	$ 357,300	$ 342,767	$ 334,788	$ 314,561
Two years later			393,948	400,312	391,630	406,253	348,660	328,182	308,028	309,096	293,480
Three years later				376,584	372,379	376,201	313,100	295,788	283,592	282,441	273,332
Four years later					359,549	361,335	287,131	274,214	263,787	268,759	254,652
Five years later						353,983	276,309	255,368	250,064	255,925	245,869
Six years later							272,178	248,746	236,373	248,353	238,404
Seven years later								245,071	232,657	239,476	235,047
Eight years later									229,932	237,497	229,623
Nine years later										236,440	228,827
Ten years later											228,372
Cumulative
(redundancy) deficiency 2019		(54,844)	(82,373)	(114,385)	(117,048)	(131,733)	(148,589)	(149,597)	(141,725)	(115,658)	(122,872)
	As of and for the Year Ended December 31,
	2020	2019	2018	2017	2016	2015	2014	2013	2012	2011	2010
Gross liability-end of year	$ 567,581	$ 610,566	$ 584,719	$ 574,054	$ 560,321	$ 553,977	$ 482,012	$ 455,014	$ 423,842	$ 403,872	$ 404,391
Reinsurance recoverables	106,311	122,372	108,398	83,085	83,724	68,261	61,245	60,346	52,185	51,774	53,147
Net liability-end of year	461,270	488,194	476,321	490,969	476,597	485,716	420,767	394,668	371,657	352,098	351,244
Gross estimated liability-latest		549,626	498,879	461,338	420,833	384,625	310,851	277,445	256,778	262,400	252,849
Reinsurance recoverables-latest		116,276	104,931	84,754	61,284	30,642	38,673	32,374	26,846	25,960	24,477
Net estimated liability-latest		433,350	393,948	376,584	359,549	353,983	272,178	245,071	229,932	236,440	228,372

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 2020 estimate for a previously incurred loss was $150 and the loss was reserved at $100 in 2016, the $50 deficiency (later estimate minus original estimate) would be included in the cumulative (redundancy) deficiency in each of the years 2016-2020 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, 2020, 2019, and 2018 we decreased loss reserves related to prior years by $54,844, $42,049 and $56,488, 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.

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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.

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We reinsure with other insurance companies a portion of our potential liability under the policies we have underwritten, thereby protecting us against an unexpectedly large loss or a catastrophic occurrence that could produce large losses, primarily in our homeowners line of business. We are selective in choosing our reinsurers, seeking only those companies that we consider to be financially stable and adequately capitalized. In an effort to minimize exposure to the insolvency of a reinsurer, we continually evaluate and review the financial condition of our reinsurers. Most of our reinsurers have an A.M. Best rating of “A+” (Superior) or “A” (Excellent).

We maintain reinsurance coverage to help lessen the effect of losses from catastrophic events, maintaining coverage that during 2020 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 2020, 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 2021, we have purchased the same 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 2021 protects us in the event of a “135-year storm.”

We also have casualty excess of loss reinsurance for large casualty losses occurring in our automobile, homeowners, dwelling fire, business owner, 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 $20,760, 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 Program Reauthorization Act of 2019 (“TRIPRA”) was signed into law on December 20, 2019 which extended TRIA through the year 2027. 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, in part, 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, 2020, the FAIR Plan purchased $1,800,000 of catastrophe reinsurance for property losses with retention of $100,000.

At December 31, 2020, we also had $129,766 due from CAR comprising of loss and loss adjustment expense reserves, unearned premiums and reinsurance recoverables.

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On March 10, 2005, our Board of Directors (the “Board”) adopted a resolution that prohibits Safety from purchasing finite reinsurance (reinsurance that transfers only a relatively finite or limited amount of risk to the reinsurer) without approval by the Board. To date, the Company has never purchased a finite reinsurance contract.

Competition

The property and casualty insurance business is highly competitive and many of our competitors have substantially greater financial and other resources than we do. We compete with both large national writers and smaller regional companies. Our competitors include companies which, like us, serve the independent agency market, as well as companies which sell insurance directly to customers. Direct writers may have certain competitive advantages over agency writers, including increased name recognition, loyalty of the customer base to the insurer rather than to an independent agency, and potentially, lower cost structures. A material reduction in the amount of business independent agents sell would adversely affect us. Further, we and others compete on the basis of the commissions and other cash and non-cash incentives provided to agents.

Although, historically, a number of national insurers that are much larger than we are have chosen not to compete in a material way in the Massachusetts private passenger automobile market, since 2008, several new companies have entered the market. 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 22.2%, 15.5% and 8.5% market shares based on premiums, respectively, in 2020 according to CAR.

We are the second largest writer of commercial automobile insurance in Massachusetts with a market share of 12.8%. 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 15.3%, 10.9% and 7.8% market shares based on premium, 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 7.0% in 2019. Our principal competitors within the Massachusetts homeowners insurance market are MAPFRE SA, Liberty Mutual and Chubb, which held 13.1%, 9.8% and 6.3% market shares respectively in 2019 (according to S&P Global Market Intelligence).

Human Capital

At December 31, 2020, we employed 586 employees who all work in the New England region. Prior to COVID-19, approximately half of our employees particpated in a work from home program that helps contribute to a flexible work-life balance and allows the Company to minimize the real estate rented at our home office. In response to the pandemic, we quickly transitioned all other employees to a work from home environment and have the capacity for 100% of our workforce to work in a remote setting. Our employees are not covered by any collective bargaining agreement.

We create a workplace where all employees are treated with dignity and respect, and individual differences are valued, all with the goal of securing the trust and satisfaction of our employees. The Company is committed to a policy of inclusiveness and is committed to actively seeking out highly-qualified candidates with diverse gender, race, color, religion, ethnicity, age, marital status, handicap, sexual orientation, gender identity or expression, and backgrounds. 

We foster this culture through our robust learning and development program and our competitive compensation and health and benefit programs.

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Our employees give both their time and their financial resources to charities of all types, and the company promotes corporate citizenship through charitable donations and company-sponsored volunteer activities. Safety is committed to making a positive impact on the communities where our employees live and work through our matching gift program, corporate giving and employee volunteerism. We help employees amplify their community impact by providing our employees with a 1:1 match on their donations to recognized charitable organizations. The Safety Insurance Charitable Foundation was established in 2005 and has provided financial support for a wide array of charities in areas such as community service, education, job training, homelessness, arts/culture, food banks, youth programs, healthcare, medical research and disaster relief.

The reputation of the Company depends on the conduct of its Board of Directors, officers, and employees. Every employee who is associated with Safety must play a part in maintaining our corporate reputation for the highest ethical standards. Management considers our relationship with our employees to be strong.

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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, 2020, our portfolio of fixed maturity investments was comprised principally of investment grade corporate fixed maturity securities, U.S. government and agency securities, and asset-backed securities. The portion of our non-investment grade portfolio of fixed maturity investments is primarily comprised of variable rate secured and senior bank loans and high yield bonds.

According to our investment guidelines, no more than 2.0% of our portfolio may be invested in the securities of any one issuer (excluding U.S. government-backed securities). 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, 2020, 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. We utilize the services of third-party investment managers.

We believe that the incorporation of material, non-financial factors into investment selection and risk management has the potential to enhance long-term investment returns. We incorporate Environmental, Social & Governance (“ESG”) factors managed for us by third-party investment managers. We measure our exposure to ESG risks at both individual asset classes and total portfolio levels.

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The following table reflects the composition of our investment portfolio as of December 31, 2020 and 2019.

	As of December 31,
	2020				2019
	Estimated		% of		Estimated		% of
	Fair Value		Portfolio		Fair Value		Portfolio
U.S. Treasury Securities	$	1,865	0.1	%	$	1,512	0.1	%
Obligations of states and political subdivisions		222,389	14.8			251,396	17.4
Residential mortgage-backed securities (1)		241,597	16.0			307,202	21.3
Commercial mortgage-backed securities		126,035	8.4			109,738	7.6
Other asset-backed securities		73,124	4.9			36,222	2.5
Corporate and other securities		591,643	39.2			521,970	36.2
Subtotal, fixed maturity securities		1,256,653	83.4			1,228,040	85.1
Short term investments		441	0.0			-	0.0
Equity securities (2)		205,254	13.6			177,637	12.3
Other invested assets (3)		45,239	3.0			37,278	2.6
	$	1,507,587	100.0	%	$	1,442,955	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 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.

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The following table reflects our investment results for each of the three-year period ended December 31, 2020, 2019 and 2018.

	Years Ended December 31,
	2020			2019			2018
Average cash and invested securities (at cost)	$	1,401,881		$	1,365,830		$	1,317,380
Net investment income (1)	$	41,045		$	46,665		$	43,788
Net effective yield (2)		2.9	%		3.4	%		3.3	%

(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.

The decrease in yield is a result of lower floating yields on our bank loan portfolio, lower interest income on certain partnership investments and fixed maturity amortization resulting from prepayment activity on certain residential mortgage-backed securities.

As of December 31, 2020, 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,
		2020				2019
	Estimated					Estimated
	Fair Value		Percent			Fair Value	Percent
U.S. Treasury securities and obligations of U.S. Government agencies	$	256,683	20.4	%	$	308,713	25.1	%
Aaa/Aa		327,775	26.1			320,532	26.1
A		260,048	20.7			247,334	20.1
Baa		220,171	17.5			175,147	14.3
Ba		68,135	5.4			65,010	5.3
B		93,824	7.5			86,595	7.1
Caa/Ca		5,067	0.4			2,896	0.2
Not rated		24,950	2.0			21,813	1.8
Total	$	1,256,653	100.0	%	$	1,228,040	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, 2020, 68.0% of our available for sale fixed maturity investments were rated Category 1 and 17.2% were rated Category 2, the two highest ratings assigned by the SVO.

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The following table indicates the composition of our fixed income security portfolio (at carrying value) by time to maturity as of December 31, 2020.

	As of December 31, 2020
	Estimated
	Fair Value		Percent
Due in one year or less	$	108,572		8.6	%
Due after one year through five years		271,140		21.6
Due after five years through ten years		353,369		28.1
Due after ten years through twenty years		80,657		6.4
Due after twenty years		2,159		0.2
Asset-backed securities (1)		440,756		35.1
Totals	$	1,256,653		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 the Company an "A (Excellent)" rating. Our "A" rating was reaffirmed by A.M. Best on May 5, 2020. 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 (Poor)." Publications of A.M. Best indicate that the "A" rating is assigned to those companies that in A.M. Best's opinion have an excellent ability to meet their ongoing 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 the Company’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;

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● the type and size of investments we may make;

● the prescribed or permitted statutory accounting practices we must use; and

● the nature of the transactions we may engage in with our affiliates.

In addition, the Commissioner periodically conducts financial and market conduct examinations of all licensees domiciled in Massachusetts. Our most recent financial condition examination was for the five-year period ending December 31, 2018. The Division had no material findings as a result of this examination.

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, 2020, the statutory surplus of Safety Insurance was $754,066 and its net income for 2020 was $121,446. A maximum of $121,446 will be available during 2021 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

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covered claims. Subject to certain exceptions, assessments are made in the proportion that each member's net written premiums for the prior calendar year for all property and casualty lines bore to the corresponding net written premiums for Insolvency Fund members for the same period. As a matter of Massachusetts law, insurance rates and premiums include amounts to recoup any amounts paid by insurers for the costs of the Insolvency Fund. By statute, no insurer in Massachusetts may be assessed in any year an amount greater than two percent of that insurer's direct written premium for the calendar year prior to the assessment. We account for allocations from the Insolvency Fund as underwriting expenses. CAR also assesses its members as a result of insurer insolvencies. Because CAR is not able to recover an insolvent company's share of the net CAR losses from the Insolvency Fund, CAR must increase each of its member's shares of the deficit in order to compensate for the insolvent carrier's inability to pay its deficit assessment. It is anticipated that there will be future assessments from time to time relating to various insolvencies.

The Insurance Regulatory Information System. The Insurance Regulatory Information System ("IRIS") was developed to help state insurance regulators identify companies that may require special financial attention. IRIS consists of a statistical phase and an analytical phase whereby financial examiners review annual statements and financial ratios. The statistical phase consists of 13 key financial ratios based on year-end data that are generated annually from the database of the National Association of Insurance Commissioners ("NAIC"). Each ratio has an established "usual range" of results. These ratios assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies.

A ratio result falling outside the usual range of IRIS ratios is not considered a failing result; rather, unusual values are viewed as part of the regulatory early monitoring system. Furthermore, in some years, it may not be unusual for financially sound companies to have several ratios with results outside the usual ranges. Generally, an insurance company will become subject to regulatory scrutiny if it falls outside the usual ranges of four or more of the ratios. In 2020, 2019, and 2018 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.

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The formulas have not been designed to differentiate among adequately capitalized companies that operate with higher levels of capital. Therefore, it is inappropriate and ineffective to use the formulas to rate or to rank these companies. At December 31, 2020, 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 2020 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	54	President, Chief Executive Officer	32
Christopher T. Whitford	38	Vice President, Chief Financial Officer and Secretary	8
James D. Berry	61	Vice President - Underwriting	38
John P. Drago	54	Vice President - Marketing	26
Ann M. McKeown	53	Vice President - Insurance Operations	31
Paul J. Narciso	57	Vice President - Claims	30
Stephen A. Varga	53	Vice President - Management Information Systems	28
David F. Brussard	69	Chairman of the Board, Director	-
Frederic H. Lindeberg	80	Director	-
Peter J. Manning	82	Director	-
David K. McKown	83	Director	-
Thalia M. Meehan	59	Director	-
Mary C. Moran	64	Director	-
___________________
(1) As of February 16, 2021

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 32 years. Mr. Murphy is also on the Board of Trustees of the Insurance Library Association of Boston.

Christopher T. Whitford,  was appointed Chief Financial Officer, Vice President and Secretary of the Company on March 2, 2020. Mr. Whitford, a Certified Public Accountant in Massachusetts, has been employed by the Insurance Subsidiaries for over 8 years, previously serving as the Company’s Controller since 2012, and began his career at PricewaterhouseCoopers in 2005. Mr. Whitford serves on the Audit Committee of Guaranty Fund Management Services and also serves on the Audit Committee of the Massachusetts Property Insurance Underwriting Association (“ FAIR Plan”).

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 38 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.

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John P. Drago was appointed Vice President of Marketing on February 1, 2016. Mr. Drago has been employed by the Insurance Subsidiaries for over 26 years and most recently served as Director of Marketing.

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 31 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 Claims of the Company on August 5, 2013.  Mr. Narciso has held various adjusting and claims management positions with the Company since 1990.  Mr. Narciso has 34 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 6, 2014. Mr. Varga has held various information technology positions with the Company since 1992 and most recently served as Senior Director of MIS.

David F. Brussard was appointed 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. Mr. Lindeberg qualifies as an “Audit Committee Financial Expert” as defined by the U.S. Securities and Exchange Commission rules.

Peter J. Manning has served as a director of the Company since September 2003. Mr. Manning retired in 2003, as Vice Chairman Strategic Business Development of FleetBoston Financial, after 32 years with FleetBoston Financial Corporation (formerly BankBoston) where he also held the positions of Comptroller and Executive Vice President and Chief Financial Officer. Mr. Manning started his career with Coopers & Lybrand in 1962 prior to his 1972 employment with BankBoston. He is a former director of the Blue Hills Bank and a former director of Thermo Fisher Scientific and the Lahey Clinic. Mr. Manning qualifies as an “Audit Committee Financial Expert” as defined by the U.S. Securities and Exchange Commission rules.

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 and is also a former director of Newcastle Investment Corp. On February 24, 2021, Mr. McKown communicated his intention to resign at the end of his current term, which is the next annual meeting on May 19, 2021.

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, the Compensation Committee and the Nominating and Governance Committee of the Board. Ms. Meehan, a Chartered Financial Analyst, has over 30 years of experience in the

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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 Cambridge Bancorp where she is a member of the Trust and Asset and Liability Committees and also serves on the Municipal Securities Rulemaking Board, the Strategic Advisory Committee of Build America Mutual and the Board of Boston Women in Public Finance.  

Mary C. Moran was appointed Director of the Company on March 27, 2020. Ms. Moran has over 40 years of financial experience in both private industry as well as consulting. Ms. Moran began her career at KPMG, previously Peat Marwick, where she became a Senior Manager before serving as Senior Vice President of Finance and Administration for Boston Sand and Gravel Company from 1990 to 2001. Since 2002 she has served as CEO of MCM Financial Consulting, focusing on projects within in the banking, construction, higher education, manufacturing, not-for-profit and professional services industries. Ms. Moran is currently a director of Care Dimensions where she serves on the finance and audit committee and is a former director and audit committee member of Danvers Bankcorp, the College of the Holy Cross and Catholic Memorial School. Ms. Moran graduated from Northeastern University with a M.B.A. and MS in Accounting and from the College of the Holy Cross with a degree in Economics. Ms. Moran qualifies as an “Audit Committee Financial Expert” as defined by the U.S. Securities and Exchange Commission rules.

The Company has adopted a Code of Business Conduct and Ethics (“Code of Ethics”) that applies to all employees, including executive officers, and to directors. The Code of Ethics is available on the About Us, Investor Information page of the Company’s website at www.safetyinsurance.com. If the Company ever were to amend or waive any provision of its Code of Ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer or any person performing similar functions, the Company intends to satisfy its disclosure obligations, if any, with respect to any such waiver or amendment by posting such information on its website set forth above rather than by filing a Current Report on Form 8-K.

ITEM 1A.    RISK FACTORS

An investment in our common stock involves a number of risks. Any of the risks described below could result in a significant or material adverse effect on our results of operations or financial condition, and a corresponding decline in the market price of our common stock.

We operate in a heavily regulated industry and are subject to regulations and laws in various jurisdictions:

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;

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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.

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.

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

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in a potential takeover. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.

The Massachusetts insurance law prohibits any person from acquiring control of us, and thus indirect control of the Insurance Subsidiaries, without the prior approval of the Commissioner. That law presumes that control exists where any person, directly or indirectly, owns, controls, holds the power to vote or holds proxies representing 10.0% or more of our outstanding voting stock. Even persons who do not acquire beneficial ownership of more than 10.0% of the outstanding shares of our common stock may be deemed to have acquired such control if the Commissioner determines that such control exists in fact. Therefore, any person seeking to acquire a controlling interest in us would face regulatory obstacles which could delay, deter or prevent an acquisition that shareholders might consider in their best interests.

Section 203 of the General Corporation Law of Delaware, the jurisdiction in which the Company is organized, may affect the ability of an "interested stockholder" to engage in certain business combinations including mergers, consolidations or acquisitions of additional shares, for a period of three years following the time that the stockholder becomes an interested stockholder. An interested stockholder is defined to include persons owning directly or indirectly 15.0% or more of the outstanding voting stock of the corporation.

Our private passenger automobile business is concentrated in in New England:

With a concentration of private passenger automobile insurance, our business may be adversely affected by conditions in this industry.

Approximately 54.9% of our direct written premiums for the year ended December 31, 2020, 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.

As writers of property insurance, our Insurance Subsidiaries are exposed to potential losses related to severe weather:

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

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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.

We operate in the highly competitive property and casualty insurance industry:

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 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

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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.

The success of our business is subject to operational risks:

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' ability to incur indebtedness or to use the proceeds of equity offerings, will be subject to limits under our revolving credit facility.

Our failure to maintain a commercially acceptable financial strength rating would significantly and negatively affect our ability to implement our business strategy successfully.

A.M. Best has currently assigned Safety Insurance an "A (Excellent)" rating. An "A" rating is A.M. Best's third highest rating, out of 13 possible rating classifications for solvent companies. An "A" rating is assigned to insurers that in A.M. Best's opinion have an excellent 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.

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Our losses and loss adjustment expenses may exceed our reserves, which could significantly affect our business.

The reserves for losses and loss adjustment expenses that we have established are estimates of amounts needed to pay reported and unreported claims and related expenses based on facts and circumstances known to us as of the time we established the reserves. Reserves are based on historical claims information, industry statistics and other factors. The establishment of appropriate reserves is an inherently uncertain process. If our reserves are inadequate and are strengthened, we would have to treat the amount of such increase as a charge to our earnings in the period that the deficiency is recognized. As a result of these factors, there can be no assurance that our ultimate liability will not materially exceed our reserves and have a negative effect on our results of operations and financial condition.

Due to the inherent uncertainty of estimating reserves, it has been necessary, and may over time continue to be necessary, to revise estimated future liabilities as reflected in our reserves for claims and policy expenses. The historic development of reserves for losses and loss adjustment expenses may not necessarily reflect future trends in the development of these amounts. Accordingly, it is not appropriate to extrapolate redundancies or deficiencies based on historical information.

If we lose key personnel, our ability to implement our business strategy could be delayed or hindered.

The loss of key personnel could prevent us from fully implementing our business strategy and could significantly and negatively affect our financial condition and results of operations. As we continue to grow, we will need to recruit and retain additional qualified management personnel, and our ability to do so will depend upon a number of factors, such as our results of operations and prospects and the level of competition then prevailing in the market for qualified personnel.

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 48.6% 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.

We are subject to cybersecurity and privacy risks:

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

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interruption events, there is no assurance that core business operations could be performed upon the occurrence of such an event, which may result in a material adverse effect on our financial position and results of operations.

We outsource certain business and administrative functions to third parties and may do so increasingly in the future. If we fail to develop and implement our outsourcing strategies or our third-party providers fail to perform as anticipated, we may experience operational difficulties, increased costs and a loss of business that may have a material adverse effect on our results of operations or financial condition.

Our business could be materially and adversely affected by a security breach or other attack involving our computer systems or the systems of one or more of our agents and vendors.

Our highly automated and networked organization is subject to cyber-terrorism and a variety of other cyber-security threats. These threats come in a variety of forms, such as viruses and malicious software. Such threats can be difficult to prevent or detect, and if experienced, could interrupt or damage our operations, harm our reputation or have a material effect on our operations. Our technology and telecommunications systems are highly integrated and connected with other networks. Cyber-attacks involving these systems could be carried out remotely and from multiple sources and could interrupt, damage or otherwise adversely affect the operations of these critical systems. Cyber-attacks could result in the modification or theft of data, the distribution of false information or the denial of service to users. We obtain, utilize and maintain data concerning individuals and organizations with which we have a business relationship. Threats to data security can emerge from a variety of sources and change in rapid fashion, resulting in the ongoing need to expend resources to secure our data in accordance with customer expectations and statutory and regulatory requirements.

We could be subject to liability if confidential customer information is misappropriated from our technology systems. Despite the implementation of security measures, these systems may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. Any well-publicized compromise of security could deter people from entering into transactions that involve transmitting confidential information to our systems, which could have a material adverse effect on our business and reputation. We rely on services and products provided by many vendors. In the event that one or more of our vendors fails to protect personal information of our customers, claimants or employees, we may incur operational impairments, or could be exposed to litigation, compliance costs or reputational damage. 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.

The impact of COVID-19 and the related risks could have a material impact on our results of operations:

In March 2020, the World Health Organization declared a worldwide pandemic regarding the outbreak of COVID-19. The pandemic has affected the states where we operate causing significant economic effects including temporary closures of many businesses and reduced consumer activity due to shelter-in-place, stay-at-home and other governmental regulations.

Our premium revenues could be adversely impacted from the economic consequences as consumer behaviors change due to self-isolation, travel limitations and restrictions on non-essential businesses. Furthermore, these restrictions could impair our independent agents’ ability to sell our products and serve our policyholders, which could result in significant declines in premium revenues.

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The COVID-19 pandemic could also have a material impact on losses and loss adjustment expenses. Risks to our business include legislation or court decisions that extend business interruption coverage for COVID-19 when there was no direct physical damage or loss to property. These actions would extend coverage beyond the terms and conditions we intended for those policies, meaning we would be forced to pay claims when no coverage was contemplated and for which no premium was collected. These amounts could have a material, adverse impact on our business, financial condition, results of operations or cash flows. There is also the potential of significant litigation brought by policyholders, including but not limited to, class action lawsuits. As discussed in Note 8 – Commitments and Contingencies, the Company has been named in a lawsuit alleging that the Company improperly denied coverage to commercial insureds for loss of business income resulting from the COVID-19 pandemic. Frequency and severity could also increase with respect to our auto and property coverages due to, among other things, changes in business practices and individual behaviors resulting from the stay-at-home and social distancing measures.

The disruption COVID-19 pandemic has contributed to volatility in the financial markets. In the event that these conditions recur or result in a prolonged economic downturn, they could adversely impact our financial condition, results of operations or cash flows. Such adverse impacts may be material.

We invest in securities which are subject to market risk:

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, 2020, based upon fair value measurement, 83.4% of our investment portfolio was invested in fixed maturity securities, 13.6% in equity securities and 3.0% 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.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

As of the date of this report, the Company had no unresolved comments from the Commission staff regarding its periodic or current reports under the Exchange Act.

ITEM 2.    PROPERTIES

We conduct most of our operations in approximately 72 thousand square feet of leased space at 20 Custom House Street in downtown Boston, Massachusetts. Our lease will expire on December 31, 2028. This real estate space was remodeled in 2018 and included capital expenditures to update lighting as well as heating, ventilation and air condition systems with state of the art and environmentally focused technologies.

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.

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Safety Insurance has been named in a lawsuit alleging that the Company improperly denied coverage to commercial insureds for loss of business income resulting from the COVID-19 pandemic. Our business owner policies serve eligible small and medium sized commercial accounts including but not limited to apartments and condominiums; mercantile establishments; limited cooking restaurants; offices; and special trade contractors. The majority of these business owner policies do not contain a specific exclusion for viruses. However, as viruses do not produce direct physical damage or loss to property, our position is that no coverage exists for this peril. As a result, the Company accrued a reserve of $6,500 for legal defense costs during the year ended December 31, 2020.

ITEM 4.   MINE SAFETY DISCLOSURES

Not Applicable

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PART II.

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

As of February 10, 2021, there were 23 holders of record of the Company's common stock, par value $0.01 per share, and we estimate another 13,092 held in "Street Name."

The closing price of the Company's common stock on February 10, 2021 was $79.43 per share. The Company’s common stock trades on the NASDAQ stock exchange under the symbol SAFT.

During 2020 and 2019, the Company’s Board of Directors declared four quarterly cash dividends to shareholders, which were paid and accrued in the amounts of $54,735 and $52,392, respectively. On February 16, 2021, the Company's Board of Directors declared a quarterly cash dividend of $0.90 per share to shareholders of record on March 5, 2021 payable on March 15, 2021. The Company plans to continue to declare and pay quarterly cash dividends in 2021, 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 19, 2021 in Boston, MA, which the Company intends to file with the U.S. Securities and Exchange Commission within 120 days after December 31, 2020 (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 14, 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, 2015 and ending on December 31, 2020 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 the change in value of an initial one hundred dollar investment over the period indicated, assuming re-investment of all dividends.

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Comparative Cumulative Total Returns since December 31, 2015 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.

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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, 2020, 2019, 2018, 2017 and 2016.

The selected historical consolidated financial data for the years ended December 31, 2020, 2019, and 2018, and as of December 31, 2020 and 2019 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, 2017 and 2016 and as of December 31, 2018, 2017 and 2016 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,
	2020		2019			2018		2017		2016
Direct written premiums	$	798,712	$	852,404	$	843,675	$	827,316	$	811,559
Net written premiums	$	763,537	$	794,409	$	786,912	$	781,054	$	766,470
Net earned premiums	$	771,078	$	788,777	$	781,587	$	774,420	$	755,760
Net investment income		41,045		46,665		43,788		38,758		38,413
Earnings from partnership investments		6,901		1,937		6,915		2,082		3,185
Net realized gains on investments		957		2,976		3,226		6,036		5,559
Change in net unrealized gains on equity investments		10,449		21,454		(16,324)		—		—
Net impairment losses on investments		-		(889)		(228)		(256)		(798)
Credit loss expense		(1,054)		—		—		—		—
Finance and other service income		16,872		16,833		17,533		18,073		17,703
Total revenue		846,248		877,753		836,497		839,113		819,822
Losses and loss adjustment expenses		404,556		509,846		485,513		503,887		493,433
Underwriting, operating and related expenses		266,482		244,136		246,643		248,436		233,017
Interest expense		440		90		90		90		90
Total expenses		671,478		754,072		732,246		752,413		726,540
Income before income taxes		174,770		123,681		104,251		86,700		93,282
Income tax expense		36,559		24,080		21,056		24,313		28,697
Net income	$	138,211	$	99,601		83,195		62,387		64,585
Earnings per weighted average common share:
Basic	$	9.25	$	6.52	$	5.48	$	4.13	$	4.29
Diluted	$	9.18	$	6.46	$	5.43	$	4.10	$	4.27
Cash dividends paid per common share	$	3.60	$	3.40	$	3.20	$	3.00	$	2.80
Number of shares used in computing earnings per share:
Basic		15,002,755		15,201,132		15,080,269		15,010,751		14,946,453
Diluted		15,119,027		15,337,807		15,229,898		15,135,348		15,032,263

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		Years Ended December 31,
	2020			2019				2018			2017			2016
Balance Sheet Data:
Total cash and investment securities	$	1,561,356		$	1,487,362		$	1,370,936		$	1,348,763		$	1,300,558
Total assets		2,054,273			2,022,669			1,856,240			1,807,279			1,758,246
Losses and loss adjustment expense reserves		567,581			610,566			584,719			574,054			560,321
Total liabilities		1,169,594			1,214,263			1,137,596			1,106,263			1,087,520
Total shareholders' equity		884,679			808,406			718,644			701,016			670,726
GAAP Ratios:
Loss ratio (1)		52.5	%		64.6	%		62.1	%		65.1	%		65.3	%
Expense ratio (1)		34.6			31.0			31.6			32.1			30.8
Combined ratio (1)		87.1	%		95.6	%		93.7	%		97.2	%		96.1	%

(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.

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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 Northeast Insurance Company (“Safety Northeast”), Safety Asset Management Corporation (“SAMC”), and Safety Management Corporation, which is SAMC’s holding company.

We are a leading provider of private passenger automobile (54.9% of our direct written premiums in 2020), commercial automobile, (14.9% of 2020 direct written premiums), and homeowners (25.0% of 2020 direct written premiums) insurance. In addition to these coverages, we offer a portfolio of other insurance products, including dwelling fire, umbrella and business owner policies (totaling 5.2% of 2020 direct written premiums).  Operating exclusively in Massachusetts, New Hampshire and Maine through our insurance company subsidiaries, Safety Insurance, Safety Indemnity, Safety P&C, (together referred to as the “Insurance Subsidiaries”), we have established strong relationships with independent insurance agents, who numbered 871 in 1,095 locations throughout these three states during 2020. We have used these relationships and our extensive knowledge of the market to become the fourth largest private passenger automobile carrier and the second largest commercial automobile carrier in Massachusetts, capturing an approximate 8.4% and 12.8% share, respectively, of the Massachusetts private passenger and commercial automobile markets in 2020, 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 7.0% in 2019. Our principal competitors within the Massachusetts homeowners insurance market are MAPFRE SA, Liberty Mutual Insurance and Chubb, which held 13.1%, 9.8% and 6.3% market shares respectively in 2019 (according to S&P Global Market Intelligence).

Our Insurance Subsidiaries began writing insurance in New Hampshire during 2008 and Maine in 2016. In November 2020, we formed a fourth insurance subsidiary, Safety Northeast Insurance Company, which became licensed to write insurance products in Massachusetts in January of 2021. The table below shows the amount of direct written premiums in each state during the years ended December 31, 2020, 2019, and 2018.

	Years Ended December 31,
Direct Written Premiums	2020		2019		2018
Massachusetts	$	764,479	$	819,534	$	813,857
New Hampshire		32,334		31,676		29,159
Maine		1,899		1,194		659
Total	$	798,712	$	852,404	$	843,675

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Recent Trends and Events

Beginning in March 2020, the global pandemic associated with the novel coronavirus COVID-19 (“COVID-19”) and related economic conditions caused significant economic effects including temporary closures of many businesses and reduced consumer activity due to shelter-in-place, stay-at-home and other governmental actions. The Company has continued to take many actions that address the health and well-being of our employees while still serving the needs of our agents and insureds.

The pandemic has resulted in fewer cars on the road, resulting in a decrease in frequency of claims, primarily in our private passenger automobile line of business. As a result, for the year ended December 31, 2020, loss and loss adjustment expenses incurred decreased by $105,290 or 20.7%, to $404,556 from $509,846 for the comparable 2019 period.

There are many uncertainties with respect to COVID-19. For further discussion regarding the potential impacts of COVID-19 and related economic conditions on the Company, see "Part I—Item 1A—Risk Factors." These risks include legal challenges or legislative actions that extend business interruption coverage outside of our policy terms for business owner policies, which require direct physical loss or damage to property. As discussed in Note 8 – Commitments and Contingencies, the Company has been named in a lawsuit alleging that the Company improperly denied coverage to commercial insureds for loss of business income resulting from the COVID-19 pandemic. Our business owner policies serve eligible small and medium sized commercial accounts including but not limited to apartments and condominiums; mercantile establishments; limited cooking restaurants; offices; and special trade contractors. The majority of these business owner policies do not contain a specific exclusion for viruses. However, as viruses do not produce direct physical damage or loss to property, our position is that no coverage exists for this peril. As result, the Company accrued a reserve of $6,500 for legal defense costs for the year ended December 31, 2020. While we continue to evaluate each claim based on the specific facts and circumstances involved, our business owner policies do not provide coverage for business interruption claims unless there is direct physical damage or loss to property.

Direct written premiums for the year ended December 31, 2020 decreased by $53,692, or 6.3%, to $798,712 from $852,404 for the comparable 2019 period. The 2020 decrease reflects the Safety Personal Auto Relief Credit, a 15% policyholder credit, representing $17,711 in total premium which was applied to personal auto policies for the months of April, May and June, as well as changes made by CAR to eligibility requirements which impacted the number of commercial automobile policies that we handle as a Servicing Carrier to the ceded pool. This results in a commensurate decrease in ceded written premium to and assumed from these programs.

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		2020		2019		2018
Windstorms and hailstorms		$	7,291	$	5,123	$	14,426
	Total losses incurred (1)	$	7,291	$	5,123	$	14,426

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

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The following rate changes have been filed and approved by the insurance regulators of Massachusetts and New Hampshire in 2020 and 2019. Our Massachusetts private passenger automobile rates include a 13% commission rate for agents.

Line of Business	Effective Date	Rate Change
Massachusetts Private Passenger Automobile	May 1, 2020	-0.6%
New Hampshire Homeowner	December 1, 2019	3.8%
Massachusetts Homeowner	November 1, 2019	2.2%
Massachusetts Private Passenger Automobile	September 1, 2019	1.9%
Massachusetts Commercial Automobile	June 1, 2019	3.1%
New Hampshire Commercial Automobile	March 1, 2019	1.8%

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.

● 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. 

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Our GAAP insurance ratios are presented in the following table for the periods indicated.

	Years Ended December 31,
	2020		2019		2018
GAAP ratios:
Loss ratio	52.5	%	64.6	%	62.1	%
Expense ratio	34.6		31.0		31.6
Combined ratio	87.1	%	95.6	%	93.7	%

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. At December 31, 2020, there were 234,170 shares available for future grant. Grants outstanding under the Plans as of December 31, 2020, were comprised of 138,514 restricted shares.

Grants made under the Incentive Plan during the years 2018 through 2020 were as follows.

Type of		Number of		Fair
Equity		Awards		Value per
Awarded	Effective Date	Granted		Share (1)	Vesting Terms
RS - Service	February 26, 2018	34,451	$	75.05	3 years, 30%-30%-40%
RS - Performance	February 26, 2018	31,668	$	75.05	3 years, cliff vesting (3)
RS	February 26, 2018	5,000	$	75.05	No vesting period (2)
RS - Performance	August 1, 2018	164	$	92.30	No vesting period (4)
RS - Service	February 26, 2019	28,778	$	92.52	3 years, 30%-30%-40%
RS - Performance	February 26, 2019	23,191	$	92.52	3 years, cliff vesting (3)
RS	February 26, 2019	5,000	$	92.52	No vesting period (2)
RS - Performance	February 26, 2019	40,256	$	92.52	No vesting period (4)
RS - Service	February 26, 2020	28,799	$	90.50	3 years, 30%-30%-40%
RS - Performance	February 26, 2020	24,062	$	90.50	3 years, cliff vesting (3)
RS	February 26, 2020	5,000	$	90.50	No vesting period (2)
RS - Performance	February 26, 2020	12,587	$	90.50	No vesting period (4)
RS	March 27, 2020	1,000	$	76.60	No vesting period (2)

(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.

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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, 2020, 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, our catastrophe reinsurance in 2020 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).

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, 2020, the FAIR Plan purchased $2,000,000 of catastrophe reinsurance for property losses with retention of $100,000.

We also had $129,766 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 on investments, net impairment losses on investments, changes in net unrealized gains on equity investments, credit loss expense and taxes related thereto. 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 financial highlights below.

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Results of Operations

The following table shows certain of our selected financial results.

	Years Ended December 31,
	2020		2019			2018
Direct written premiums	$	798,712	$	852,404	$	843,675
Net written premiums	$	763,537	$	794,409	$	786,912
Net earned premiums	$	771,078	$	788,777	$	781,587
Net investment income		41,045		46,665		43,788
Earnings from partnership investments		6,901		1,937		6,915
Net realized gains on investments		957		2,976		3,226
Change in net unrealized gains on equity investments		10,449		21,454		(16,324)
Net impairment losses on investments		—		(889)		(228)
Credit loss expense		(1,054)		—		—
Finance and other service income		16,872		16,833		17,533
Total revenue		846,248		877,753		836,497
Loss and loss adjustment expenses		404,556		509,846		485,513
Underwriting, operating and related expenses		266,482		244,136		246,643
Interest expense		440		90		90
Total expenses		671,478		754,072		732,246
Income before income taxes		174,770		123,681		104,251
Income tax expense		36,559		24,080		21,056
Net income	$	138,211	$	99,601	$	83,195
Earnings per weighted average common share:
Basic	$	9.25	$	6.52	$	5.48
Diluted	$	9.18	$	6.46	$	5.43
Cash dividends paid per common share	$	3.60	$	3.40	$	3.20
Reconciliation of Net Income to Non-GAAP Operating Income:
Net income	$	138,211	$	99,601	$	83,195
Exclusions from net income:
Net realized gains on investments		(957)		(2,976)		(3,226)
Change in net unrealized gains on equity investments		(10,449)		(21,454)		16,324
Net impairment losses on investments		-		889		228
Credit loss expense		1,054		-		-
Income tax benefit (expense)		2,174		4,944		(2,798)
Non-GAAP Operating income	$	130,033	$	81,004	$	93,723
Net income per diluted share	$	9.18	$	6.46	$	5.43
Exclusions from net income:
Net realized gains on investments		(0.06)		(0.19)		(0.21)
Change in net unrealized gains on equity investments		(0.69)		(1.40)		1.07
Net impairment losses on investments		-		0.06		0.01
Credit loss expense		0.07		-		-
Income tax benefit (expense)		0.14		0.32		(0.18)
Non-GAAP Operating income per diluted share	$	8.64	$	5.25	$	6.12

YEAR ENDED DECEMBER 31, 2020 COMPARED TO YEAR ENDED DECEMBER 31, 2019

Direct Written Premiums.  Direct written premiums for the year ended December 31, 2020 decreased by $53,692, or 6.3%, to $798,712 from $852,404 for the comparable 2019 period. The 2020 decrease reflects the Safety Personal Auto Relief Credit, a 15% policyholder credit, representing $17,711 in total premium which was applied to personal auto policies for the months of April, May and June as well as changes made by CAR to eligibility requirements which impacted the number of commercial automobile policies that we handle as a Servicing Carrier to the ceded pool. This results in a commensurate decrease in ceded written premium to and assumed from these programs.

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Net Written Premiums.  Net written premiums for the year ended December 31, 2020 decreased by $30,872, or 3.9%, to $763,537 from $794,409 for the comparable 2019 period. The 2020 decrease was primarily due to the factors

that decreased direct written premiums.

Net Earned Premiums.  Net earned premiums for the year ended December 31, 2020 decreased by $17,699, or 2.2%, to $771,078 from $788,777 for the comparable 2019 period. The 2020 decrease was primarily due to the Safety Personal Auto Relief Credit as discussed above.

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

		Year Ended December 31,
	2020		2019
Written Premiums
Direct	$	798,712	$	852,404
Assumed		26,316		32,391
Ceded		(61,491)		(90,386)
Net written premiums	$	763,537	$	794,409
Earned Premiums
Direct	$	815,981	$	845,102
Assumed		29,365		32,853
Ceded		(74,268)		(89,178)
Net earned premiums	$	771,078	$	788,777

Net Investment Income.  Net investment income for the year ended December 31, 2020 decreased by $5,620, or 12.0%, to $41,045 from $46,665 for the comparable 2019 period. The decreases are a result of lower floating yields on our bank loan portfolio, lower interest income on certain partnership investments and fixed maturity amortization resulting from prepayment activity on certain residential mortgage-backed securities. Net effective annual yield on the investment portfolio was 2.9% for the year ended December 31, 2020 compared to 3.4% for the year ended December 31, 2019. Our duration was 3.2 years at December 31, 2020, compared to 3.3 years at December 31, 2019.

Earnings from Partnership Investments. Earnings from partnership investments were $6,901 for the year ended December 31, 2020 compared to $1,937 for the year ended December 31, 2019. The 2020 earnings reflects an increase in investment appreciation and cash proceeds received as a return on capital. Timing and generation of these returns on capital can vary based on the results and transactions of the underlying partnerships.

Net Realized Gains on Investments.  Net realized gains on investments were $957 for the year ended December 31, 2020 compared to $2,976 for the comparable 2019 period.

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

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	As of December 31, 2020
	Cost or		Allowance for		Gross Unrealized				Estimated
	Amortized		Expected Credit						Fair
	Cost		Losses		Gains		Losses  (3)		Value
U.S. Treasury securities	$	1,821	$	—	$	44	$	—	$	1,865
Obligations of states and political subdivisions		214,647		—		7,745		(3)		222,389
Residential mortgage-backed securities (1)		229,910		—		11,701		(14)		241,597
Commercial mortgage-backed securities		115,575		—		10,460		—		126,035
Other asset-backed securities		72,756		—		531		(163)		73,124
Corporate and other securities		555,242		(1,054)		38,415		(960)		591,643
Subtotal, fixed maturity securities		1,189,951		(1,054)		68,896		(1,140)		1,256,653
Short term investments		441		—		—		—		441
Equity securities (2)		168,289		—		38,676		(1,711)		205,254
Other invested assets (4)		45,239		—		—		—		45,239
Totals	$	1,403,920	$	(1,054)	$	107,572	$	(2,851)	$	1,507,587

(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 270 securities in an unrealized loss position at December 31, 2020.

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

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

	As of December 31, 2020
	Estimated
	Fair Value		Percent
U.S. Treasury securities and obligations of U.S. Government agencies	$	256,683	20.4	%
Aaa/Aa		327,775	26.1
A		260,048	20.7
Baa		220,171	17.5
Ba		68,135	5.4
B		93,824	7.5
Caa/Ca		5,067	0.4
Not rated		24,950	2.0
Total	$	1,256,653	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, 2020, 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 of December 31, 2020.

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	As of December 31, 2020
	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	$	—	$	—	$	—	$	—	$	—	$	—
Obligations of states and political subdivisions		1,047		3		—		—		1,047		3
Residential mortgage-backed securities		8,569		14		9		—		8,578		14
Commercial mortgage-backed securities		—		—		—		—		—		—
Other asset-backed securities		26,959		84		9,004		79		35,963		163
Corporate and other securities		62,882		863		6,774		97		69,656		960
Subtotal, fixed maturity securities		99,457		964		15,787		176		115,244		1,140
Equity securities		10,708		986		2,293		725		13,001		1,711
Total temporarily impaired securities	$	110,165	$	1,950	$	18,080	$	901	$	128,245	$	2,851

For the year ended December 31, 2020, the Company concluded that $1,054 of unrealized losses were due to credit factors and were recorded as an allowance for expected credit losses and credit loss expense. The Company concluded that outside of the securities that were recognized as credit impaired, the unrealized losses recorded on the fixed maturity portfolio at December 31, 2020 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. Based upon the analysis performed, the Company’s decision to hold these securities, the Company’s current level of liquidity and our history of 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.

During the year ended December 31, 2019, the company recognized $889 of OTTI losses which consisted entirely of credit impairments under the previous accounting guidance in ASC 320, Investments – Debt and Equity 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, 2020 resulted from fluctuations in market interest rates and other temporary market conditions as opposed to fundamental changes in the credit quality of the issuers of such securities. Given our current level of liquidity, the fact that we do not intend to sell these securities, and that it is more likely than not that we will not be required to sell these securities prior to recovery of the cost basis of these securities, these decreases in values are viewed as being temporary.

For information regarding fair value measurements of our investment portfolio, refer to Item 8—Financial Statements and Supplementary Data, Note 16, Fair Value of Financial Instruments, of this Form 10-K.

Net Impairment Losses on Investments. Net impairment losses on investments was $889 for the year ended December 31, 2019.

Credit Loss Expense. Credit loss expense on investments was $1,054 for the year ended December 31, 2020.

Finance and Other Service Income. Finance and other service income includes revenues from premium installment charges, which we recognize when earned, and other miscellaneous income and fees. Finance and other service income increased by $39, or 0.2%, to $16,872 for the year ended December 31, 2020 from $16,833 for the comparable 2019 period.

Losses and Loss Adjustment Expenses.  Losses and loss adjustment expenses incurred for the year ended December 31, 2020 decreased by $105,290, or 20.7%, to $404,556 from $509,846 for the comparable 2019 period.

Our GAAP loss ratio for the years ended December 31, 2020 and 2019 were 52.5% and 64.6%, respectively. Our GAAP loss ratio excluding loss adjustment expenses was 43.7% and 56.1% for the years ended December 31, 2020

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and 2019, respectively. Total prior year favorable development included in the pre-tax results for the year ended December 31, 2020 was $54,844, compared to $42,049, for the comparable 2019 period.

Underwriting, Operating and Related Expenses.  Underwriting, operating and related expenses for the year ended December 31, 2020 increased by $22,346, or 9.2%, to $266,482 from $244,136 for the comparable 2019 period. Our GAAP expense ratio for the year ended December 31, 2020 increased to 34.6% from 31.0% for the comparable 2019 period. The 2020 increase is driven by an increase in contingent commission expense as well as costs associated with various system modernization in our claims, billing and underwriting areas and a reduction in certain expense allowances offered under the Servicing Carrier program that have decreased with the related written premium as noted above.

Interest Expense.  Interest expense was $440 and $90 for the years ended December 31, 2020 and 2019, respectively. The 2020 increase is due to the interest associated with the borrowing from the FHLB as noted within Item 8 – Financial Statements and Supplementary Data, Note 10, Debt, of this Form 10-K. The credit facility commitment fee included in interest expense was $75 for each of the years ended December 31, 2020 and 2019.

Income Tax Expense   Our effective tax rates were 20.9% and 19.5% for the years ended December 31, 2020 and 2019, respectively. The effective rates for the years ended December 31, 2020 and 2019 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, 2020 was $138,211 compared to a net income of $99,601 for the comparable 2019 period.

Non-GAAP Operating Income. Non-GAAP operating income as defined above was $130,033 for the year ended December 31, 2020 compared to $81,004 for the year ended December 31, 2019.

The comparison of results for the year ended December 31, 2019 compared to the year ended December 31, 2018 can be found in the Company’s 2019 Annual Report on Form 10-K filed with the SEC on February 28, 2020.

Liquidity and Capital Resources

As a holding company, Safety’s assets consist primarily of the stock of our direct and indirect subsidiaries. Our principal source of funds to meet our obligations and pay dividends to shareholders, therefore, is dividends and other permitted payments from our subsidiaries, principally Safety Insurance. Safety is the borrower under our credit facility.

Safety Insurance’s sources of funds primarily include premiums received, investment income and proceeds from sales and redemptions of investments. Safety Insurance’s principal uses of cash are the payment of claims, operating expenses and taxes, the purchase of investments and payment of dividends to Safety.

Net cash provided by operating activities was $109,460, $112,456, and $127,691 during the years ended December 31, 2020, 2019, and 2018, 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 $35,524, $52,964, and $83,004 for the years ended December 31, 2020, 2019, and 2018, 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 $64,574, $52,667, and $48,813 during the years ended December 31, 2020, 2019 and 2018, respectively. Net cash used for financing activities during the year ended December 31, 2020 is comprised of dividend payments to shareholders and share buybacks, partially offset by the proceeds from a $30,000 borrowing from the FHLB-Boston on March 17, 2020. The borrowing is for a term of five years, bearing interest at a rate of 1.42%. Interest is payable monthly, and the principal is due on the maturity date of March 17, 2025 but may be

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prepaid in whole or in part by the Company in advance. Net cash used for financing activities during the years ended December 31, 2019 and 2018 is 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 10, 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 2020, the statutory surplus of Safety Insurance was $754,066, and its net income for 2020 was $121,446. As a result, a maximum of $121,446 is available in 2020 for such dividends without prior approval of the Commissioner. As a result of this Massachusetts statute, the Insurance Subsidiaries had restricted net assets in the amount of $632,620 at December 31, 2020. During the twelve months ended December 31, 2020, Safety Insurance recorded dividends to Safety of $89,156.

The maximum dividend permitted by law is not indicative of an insurer’s actual ability to pay dividends, which may be constrained by business and regulatory considerations, such as the impact of dividends on surplus, which could affect an insurer’s ratings or competitive position, the amount of premiums that can be written and the ability to pay future dividends.

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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 2020 and 2019 were as follows:

					Total
Declaration	Record	Payment	Dividend per		Dividends Paid
Date	Date	Date	Common Share		and Accrued
February 15, 2019	March 1, 2019	March 15, 2019	$	0.80	$	12,300
May 1, 2019	June 3, 2019	June 14, 2019	$	0.80	$	12,371
July 31, 2019	September 3, 2019	September 13, 2019	$	0.90	$	13,854
October 31, 2019	December 2, 2019	December 13, 2019	$	0.90	$	13,867
February 14, 2020	March 2, 2020	March 16, 2020	$	0.90	$	13,872
May 6, 2020	June 1, 2020	June 15, 2020	$	0.90	$	13,836
August 5, 2020	September 1, 2020	September 15, 2020	$	0.90	$	13,622
November 4, 2020	December 1, 2020	December 15, 2020	$	0.90	$	13,405

On February 16, 2021, our Board approved and declared a quarterly cash dividend on our common stock of $0.90 per share to be paid on March 15, 2021 to shareholders of record on March 5, 2021. We plan to continue to declare and pay quarterly cash dividends in 2021, 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, 2020, 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, 2020, the Company had purchased 2,831,168 shares of common stock at a cost $123,834. As of December 31, 2019, the Company had purchased 2,279,570 shares at a cost of $83,835.

Management believes that the current level of cash flow from operations provides us with sufficient liquidity to meet our operating needs over the next 12 months. We expect to be able to continue to meet our operating needs after the next 12 months from internally generated funds. Since our ability to meet our obligations in the long term (beyond such twelve-month period) is dependent upon such factors as market changes, insurance regulatory changes and economic conditions, no assurance can be given that the available net cash flow will be sufficient to meet our operating needs. We expect that we would need to borrow or issue capital stock if we needed additional funds, for example, to pay for an acquisition or a significant expansion of our operations. There can be no assurance that sufficient funds for any of the foregoing purposes would be available to us at such time.

Off-Balance Sheet Arrangements

We have no material obligations under a guarantee contract meeting the characteristics identified in Accounting Standards Codification (“ASC”) 460, Guarantees.  We have no material retained or contingent interests in assets transferred to an unconsolidated entity. We have no material obligations, including contingent obligations, under contracts that would be accounted for as derivative instruments. We have no obligations, including contingent obligations, arising out of a variable interest in an unconsolidated entity held by, and material to, us, where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with us. We have no direct investments in real estate and no holdings of mortgages secured by commercial real estate. Accordingly, we have no material off-balance sheet arrangements.

Contractual Obligations

We have obligations to make future payments under contracts and credit-related financial instruments and commitments. At December 31, 2020, certain long-term aggregate contractual obligations and credit-related commitments are summarized as follows:

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			Payments Due by Period
			Within		Two to Three		Four to Five		After
			One Year		Years		Years		Five Years		Total
Loss and LAE reserves		$	278,115	$	249,736	$	34,055	$	5,676	$	567,581
Operating leases			4,953		8,373		7,736		11,572		32,634
	Total contractual obligations	$	283,068	$	258,109	$	41,791	$	17,248	$	600,215

As of December 31, 2020, the Company had loss and LAE reserves of $567,581, unpaid reinsurance recoverables of $106,311 and net loss and LAE reserves of $461,270. 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 $110,000 to investments in limited partnerships.  The Company has contributed $61,455 to these commitments as of December 31, 2020.  As of December 31, 2020, the remaining committed capital that could be called is $51,112, 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 IBNR. IBNR reserves are determined in accordance with commonly accepted actuarial reserving techniques on the basis of our historical information and experience. We review and make adjustments to incurred but not yet reported reserves quarterly. In addition, IBNR reserves can also be expressed as the total loss reserves required less the case reserves on reported claims.

When reviewing reserves, we analyze historical data and estimate the impact of various loss development factors, such as our historical loss experience and that of the industry, trends in claims frequency and severity, our mix of business, our claims processing procedures, legislative enactments, judicial decisions, legal developments in imposition of damages, and changes and trends in general economic conditions, including the effects of inflation. A change in any of these factors from the assumption implicit in our estimate can cause our actual loss experience to be better or worse

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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 $424,437 to $478,251 as of December 31, 2020 compared to a range of $450,927 to $504,753 as of December 31, 2019. In general, the low and high values of the ranges represent reasonable minimum and maximum values of the indications based on the techniques described above. Our selected point estimate of net loss and LAE reserves based upon the analysis of our actuaries was $461,270 as of December 31, 2020 compared to $488,194 as of December 31, 2019.

 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, 2020 and December 31, 2019. 

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		As of December 31, 2020
Line of Business	Low		Recorded		High
Private passenger automobile	$	167,218	$	182,494	$	184,373
Commercial automobile		93,395		102,313		104,495
Homeowners		97,063		99,724		102,356
All other		66,761		76,739		87,027
Total	$	424,437	$	461,270	$	478,251
		As of December 31, 2019
Line of Business	Low		Recorded		High
Private passenger automobile	$	201,107	$	212,521	$	216,861
Commercial automobile		98,466		108,261		109,831
Homeowners		83,795		89,360		91,426
All other		67,559		78,052		86,635
Total	$	450,927	$	488,194	$	504,753

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, 2020 and December 31, 2019.

		As of December 31, 2020
Line of Business	Case		IBNR		Total
Private passenger automobile	$	211,893	$	(29,407)	$	182,486
CAR assumed private passenger auto		1		7		8
Commercial automobile		57,008		11,559		68,567
CAR assumed commercial automobile		18,824		14,923		33,747
Homeowners		86,362		3,371		89,733
FAIR Plan assumed homeowners		3,405		6,586		9,991
All other		44,128		32,610		76,738
Total net reserves for losses and LAE	$	421,621	$	39,649	$	461,270
Line of Business	Case		IBNR		Total
Private passenger automobile	$	257,448	$	(44,934)	$	212,514
CAR assumed private passenger auto		1		6		7
Commercial automobile		58,303		12,855		71,158
CAR assumed commercial automobile		19,556		17,547		37,103
Homeowners		74,665		5,069		79,734
FAIR Plan assumed homeowners		3,622		6,004		9,626
All other		46,943		31,109		78,052
Total net reserves for losses and LAE	$	460,538	$	27,656	$	488,194

At December 31, 2020 and 2019, our total IBNR reserves for our private passenger automobile line of business were comprised of $(45,308) and $(66,422) related to estimated ultimate decreases in the case reserves, including anticipated recoveries (i.e. salvage and subrogation), and $15,901 and $21,488 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 44.2% of our total reserves for CAR assumed commercial automobile business as of December 31, 2020 due to the reporting delays in the information we receive from CAR, as described further in the section on Residual Market Loss and Loss Adjustment Expense Reserves.  Our IBNR reserves for FAIR Plan assumed homeowners are 65.9% of our total reserves for FAIR Plan assumed homeowners at December 31, 2020 due to similar reporting delays in the information we receive from FAIR Plan. 

The following tables present information by line of business for our total net reserves and the corresponding retained (i.e. direct less ceded) reserves and assumed reserves as of December 31, 2020 and 2019.

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		As of December 31, 2020
Line of Business		Retained		Assumed		Net
Private passenger automobile	$	182,486
CAR assumed private passenger automobile			$	8
Net private passenger automobile					$	182,494
Commercial automobile		68,567
CAR assumed commercial automobile				33,747
Net commercial automobile						102,314
Homeowners		89,733
FAIR Plan assumed homeowners				9,991
Net homeowners						99,724
All other		76,738		—		76,738
Total net reserves for losses and LAE	$	417,524	$	43,746	$	461,270
		As of December 31, 2019
Line of Business		Retained		Assumed		Net
Private passenger automobile	$	212,514
CAR assumed private passenger automobile			$	7
Net private passenger automobile					$	212,521
Commercial automobile		71,158
CAR assumed commercial automobile				37,103
Net commercial automobile						108,261
Homeowners		79,734
FAIR Plan assumed homeowners				9,626
Net homeowners						89,360
All other		78,052		-		78,052
Total net reserves for losses and LAE	$	441,458	$	46,736	$	488,194

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 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

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December 31, 2020, a 1 percentage-point change in the loss and LAE ratio would result in a change in reserves of $7,710. Each 1 percentage-point change in the loss and loss expense ratio would have had a $6,090 effect on net income, or $0.40 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, 2020. 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.

	-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	$	(3,650)	$	(1,825)	$	—
Estimated increase in net income		2,884		1,442		—
No Change in Severity
Estimated (decrease) increase in reserves		(1,825)		—		1,825
Estimated increase (decrease) in net income		1,442		—		(1,442)
+1 Percent Change in Severity
Estimated increase in reserves		—		1,825		3,650
Estimated decrease in net income		—		(1,442)		(2,884)
Commercial automobile retained loss and LAE reserves
-1 Percent Change in Severity
Estimated decrease in reserves		(1,371)		(686)		—
Estimated increase in net income		1,083		542		—
No Change in Severity
Estimated (decrease) increase in reserves		(686)		—		686
Estimated increase (decrease) in net income		542		—		(542)
+1 Percent Change in Severity
Estimated increase in reserves		—		686		1,371
Estimated decrease in net income		—		(542)		(1,083)
Homeowners retained loss and LAE reserves
-1 Percent Change in Severity
Estimated decrease in reserves		(1,795)		(897)		—
Estimated increase in net income		1,418		709		—
No Change in Severity
Estimated (decrease) increase in reserves		(897)		—		897
Estimated increase (decrease) in net income		709		—		(709)
+1 Percent Change in Severity
Estimated increase in reserves		—		897		1,795
Estimated decrease in net income		—		(709)		(1,418)
All other retained loss and LAE reserves
-1 Percent Change in Severity
Estimated decrease in reserves		(1,535)		(767)		—
Estimated increase in net income		1,213		606		—
No Change in Severity
Estimated (decrease) increase in reserves		(767)		—		767
Estimated increase (decrease) in net income		606		—		(606)
+1 Percent Change in Severity
Estimated increase in reserves		—		767		1,535
Estimated decrease in net income		—		(606)		(1,213)

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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, 2020. 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.

	-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		(337)		337
Estimated increase (decrease) in net income		266		(266)
FAIR Plan assumed homeowners
Estimated (decrease) increase in reserves		(100)		100
Estimated increase (decrease) in net income		79		(79)

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 $54,844, $42,049 and $56,488 during the years ended December 31, 2020, 2019, and 2018, 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, 2020, 2019 and 2018, 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.

	Year Ended December 31,
Accident Year	2020		2019		2018
2010 & prior	$	(472)	$	(1,158)	$	(5,423)
2011		(698)		(1,222)		(3,567)
2012		(1,553)		(1,359)		(4,714)
2013		(822)		(2,689)		(5,154)
2014		(452)		(4,525)		(7,123)
2015		(3,265)		(3,557)		(4,070)
2016		(5,496)		(4,531)		(13,130)
2017		(10,726)		(15,119)		(13,307)
2018		(16,697)		(7,889)		—
2019		(14,663)		—		—
All prior years	$	(54,844)	$	(42,049)	$	(56,488)

At the end of each period, the reserves were re-estimated for all prior accident years. Our prior year reserves decreased by $54,844, $42,049, and $56,488 for the years ended 2020, 2019, and 2018, respectively. The decreases in prior year reserves in 2020 resulted from re-estimations of prior year’s ultimate loss and LAE liabilities and are primarily composed of reductions of $26,902 in our retained automobile reserves and $21,717 in our retained other than auto and homeowner’s reserves. The decreases in prior year reserves in 2019 resulted from re-estimations of prior year’s ultimate loss and LAE liabilities and are primarily composed of reductions of $25,623 in our retained automobile reserves and $14,182 in our retained other than auto and homeowner reserves. The decrease in prior year reserves during 2018 is primarily composed of reductions of $36,266 in our retained automobile reserves and $18,947 in our retained

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homeowners reserves. It is not appropriate to extrapolate future favorable or unfavorable development of reserves from this past experience.

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, 2020.

	Private Passenger		Commercial
Accident Year	Automobile		Automobile		Homeowners		All Other		Total
2010 & prior	$	(132)	$	(172)	$	(10)	$	(158)	$	(472)
2011		(113)		(100)		2		(487)		(698)
2012		31		(74)		(244)		(1,266)		(1,553)
2013		6		23		(9)		(842)		(822)
2014		(26)		(242)		(3)		(181)		(452)
2015		(1,927)		90		(370)		(1,058)		(3,265)
2016		(3,676)		(357)		(1,604)		141		(5,496)
2017		(4,902)		(1,988)		(2,701)		(1,135)		(10,726)
2018		(7,077)		(2,720)		(4,699)		(2,201)		(16,697)
2019		(4,713)		(4,038)		(5,184)		(728)		(14,663)
All prior years	$	(22,529)	$	(9,578)	$	(14,822)	$	(7,915)	$	(54,844)

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, 2020 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
2010 & prior	$	(132)	$	(149)	$	(10)	$	(158)	$	(449)
2011		(113)		(1)		2		(487)		(599)
2012		31		(2)		(244)		(1,266)		(1,481)
2013		6		97		(9)		(842)		(748)
2014		(26)		(173)		2		(181)		(378)
2015		(1,927)		273		(260)		(1,058)		(2,972)
2016		(3,676)		18		(1,482)		141		(4,999)
2017		(4,902)		(1,054)		(2,642)		(1,135)		(9,733)
2018		(7,077)		(1,752)		(4,492)		(2,201)		(15,522)
2019		(4,713)		(1,630)		(4,667)		(728)		(11,738)
All prior years	$	(22,529)	$	(4,373)	$	(13,802)	$	(7,915)	$	(48,619)

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, 2020.

		CAR Assumed		CAR Assumed
		Private Passenger		Commercial		FAIR Plan
Accident Year		Automobile		Automobile		Homeowners		Total
2010 & prior	$	—	$	(23)	$	—	$	(23)
2011		—		(99)		—		(99)
2012		—		(72)		—		(72)
2013		—		(74)		—		(74)
2014		—		(69)		(5)		(74)
2015		—		(183)		(110)		(293)
2016		—		(375)		(122)		(497)
2017		—		(934)		(59)		(993)
2018		—		(968)		(207)		(1,175)
2019		—		(2,408)		(517)		(2,925)
All prior years	$	—	$	(5,205)	$	(1,020)	$	(6,225)

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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 Expenses.”

Investment Impairments

The Company uses a systematic methodology to evaluate declines in fair values below cost or amortized cost of our investments. Some of the factors considered in assessing impairment of fixed maturities due to credit losses include the extent to which the fair value is less than amortized cost, the financial condition of and the near and long-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, the historical volatility of the fair value of the security and whether it is more like than not that the Company will be required to sell the investment prior to an anticipated recovery in value.  This methodology ensures that we evaluate available evidence concerning any declines in a disciplined manner.

Beginning January 1, 2020, ASC 326, Credit Losses: Measurement of Credit Losses on Financial Instruments changed the process by which AFS debt securities are evaluated for impairment, as the standard requires a new impairment model based on expected credit losses rather than incurred credit losses. Under the new guidance, an entity recognizes its estimate of expected credit losses through an allowance account.

For fixed maturities that the Company does not intend to sell or for which it is more likely than not that the Company would not be required to sell before an anticipated recovery in value, the Company separates the credit loss component of the impairment from the amount related to all other factors and reports the credit loss component as credit loss expense. The impairment related to all other factors (non-credit factors) is reported in other comprehensive income. The allowance is adjusted for any additional credit losses and subsequent recoveries. Upon recognizing a credit loss, the cost basis is not adjusted.

For further information, see “Results of Operations: Net Impairment Losses 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;

● The impact of COVID-19 and related economic conditions, including the Company's assessment of the vulnerability of certain categories of investments due to the economic disruptions associated with COVID-19;

● Legal and regulatory commentary;

● 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

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verbs such as “will,” “would,” “should,” “could,” or “may.” All statements that address expectations or projections about the future, including statements about the Company’s strategy for growth, product development, market position, expenditures and financial results, are forward-looking statements.

Forward-looking statements are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. There are a number of factors, many of which are beyond our control, that could cause actual future conditions, events, results or trends to differ significantly and/or materially from historical results or those projected in the forward-looking statements. These factors include but are not limited to:

● The competitive nature of our industry and the possible adverse effects of such competition;

● Conditions for business operations and restrictive regulations in Massachusetts;

● The possibility of losses due to claims resulting from severe weather;

● 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;

● The effects of emerging claim and coverage issues on the Company’s business are uncertain, and court decisions or legislative or regulatory changes that take place after the Company issues its policies, including those taken in response to COVID-19 (such as requiring insurers to cover business interruption claims irrespective of terms or other conditions included in the policies that would otherwise preclude coverage), can result in an unexpected increase in the number of claims and have a material adverse impact on the Company's results of operations;

● The possibility that civil litigation and/or the Commissioner may require additional premium relief payouts related to COVID-19;

● The impact of COVID-19 and related risks, including on the Company's employees, agents or other key partners, could materially affect the Company's results of operations, financial position and/or liquidity; 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.

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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, 2020
Estimated fair value	$	1,298,384	$	1,256,653	$	1,216,947
Estimated increase (decrease) in fair value	$	41,731	$	—	$	(39,706)
As of December 31, 2019
Estimated fair value	$	1,268,376	$	1,228,040	$	1,181,724
Estimated increase (decrease) in fair value	$	40,336	$	—	$	46,316

With respect to floating rate debt, we are exposed to the effects of changes in prevailing interest rates. At December 31, 2020, 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 2020, 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.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

SAFETY INSURANCE GROUP, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Consolidated Financial Statements:
Report to Independent Registered Public Accounting Firm	60
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

59

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. and its subsidiaries (the "Company") as of December 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive income, of changes in shareholders’ equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes and financial statement schedules listed in the index appearing under Item 15 (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 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, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Changes in Accounting Principles

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 appearing 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.

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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.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Valuation of Loss and Loss Adjustment Expense Reserves

As described in Notes 2 and 12 to the consolidated financial statements, the Company’s net liabilities for losses and loss adjustment expenses 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 Company’s net loss and loss adjustment expense reserve liability of approximately $461 million as of December 31, 2020 is calculated by management using various actuarial techniques which consider historical data and estimate the impact of various loss development factors, such as the Company’s historical loss experience and that of the industry, trends in claims frequency and severity, the Company’s mix of business, the Company’s claims processing procedures, legislative enhancements, judicial decisions, legal developments in imposition of damages, and changes and trends in general economic conditions, including the effects of inflation. As disclosed by management, these actuarial techniques assume that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting the Company’s ultimate losses, total reserves and resulting incurred but not reported (IBNR) reserves.

The principal considerations for our determination that performing procedures relating to the valuation of loss and loss adjustment expense reserves is a critical audit matter are the significant judgment by management when developing their estimate, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the various actuarial techniques, which included significant assumptions related to loss development factors. Also, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the Company’s valuation of loss and loss adjustment expense reserves, including controls over the various actuarial techniques and development of significant assumptions related to loss development factors. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in

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developing an independent estimate of the loss and loss adjustment expense reserves, by line of business, on a test basis, and comparison of this independent estimate to management’s actuarial determined reserves. Developing the independent estimate involved testing the completeness and accuracy of data provided by management and evaluating management’s assumptions related to loss development factors, and independently developing the loss development factors. For certain lines of business, procedures also included, among others, testing the completeness and accuracy of data provided by management and the involvement of professionals with specialized skill and knowledge to assist in evaluating the appropriateness of management’s actuarial techniques and evaluating the reasonableness of assumptions related to loss development factors used in those techniques.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

February 26, 2021

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

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Safety Insurance Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except share data)

	December 31,		December 31,
	2020		2019
Assets
Investments:
Fixed maturities, available for sale, at fair value (amortized cost: $1,189,951 and $1,192,357, allowance for expected credit losses of $1,054 at December 31, 2020)	$	1,256,653	$	1,228,040
Short term investments, at fair value (cost: $441 and $0)		441		—
Equity securities, at fair value (cost: $168,289 and $151,121)		205,254		177,637
Other invested assets		45,239		37,278
Total investments		1,507,587		1,442,955
Cash and cash equivalents		53,769		44,407
Accounts receivable, net of allowance for expected credit losses of $1,754 at December 31, 2020		179,147		193,369
Receivable for securities sold		1,311		1,784
Accrued investment income		8,045		8,404
Taxes recoverable		279		1,003
Receivable from reinsurers related to paid loss and loss adjustment expenses		13,432		11,319
Receivable from reinsurers related to unpaid loss and loss adjustment expenses		106,311		122,372
Ceded unearned premiums		22,406		35,182
Deferred policy acquisition costs		74,962		74,287
Equity and deposits in pools		30,429		29,791
Operating lease right-of-use-assets		31,000		33,998
Other assets		25,595		23,798
Total assets	$	2,054,273	$	2,022,669
Liabilities
Loss and loss adjustment expense reserves	$	567,581	$	610,566
Unearned premium reserves		421,901		442,219
Accounts payable and accrued liabilities		79,486		75,016
Payable for securities purchased		7,144		6,377
Payable to reinsurers		8,236		12,911
Deferred income taxes		17,611		5,717
Debt		30,000		—
Operating lease liabilities		31,000		33,998
Other liabilities		6,635		27,459
Total liabilities		1,169,594		1,214,263
Commitments and contingencies (Note 8)
Shareholders’ equity
Common stock: $0.01 par value; 30,000,000 shares authorized; 17,724,866 and 17,662,779 shares issued		178		177
Additional paid-in capital		209,779		202,321
Accumulated other comprehensive income, net of taxes		53,527		28,190
Retained earnings		745,029		661,553
Treasury stock, at cost: 2,831,168 and 2,279,570 shares		(123,834)		(83,835)
Total shareholders’ equity		884,679		808,406
Total liabilities and shareholders’ equity	$	2,054,273	$	2,022,669

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

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Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Operations

(Dollars in thousands, except per share data)

	Years Ended December 31,
	2020		2019		2018
Net earned premiums	$	771,078	$	788,777	$	781,587
Net investment income		41,045		46,665		43,788
Earnings from partnership investments		6,901		1,937		6,915
Net realized gains on investments		957		2,976		3,226
Change in unrealized gains on equity investments		10,449		21,454		(16,324)
Net impairment losses on investments (a)		—		(889)		(228)
Credit loss expense		(1,054)		—		—
Finance and other service income		16,872		16,833		17,533
Total revenue		846,248		877,753		836,497
Losses and loss adjustment expenses		404,556		509,846		485,513
Underwriting, operating and related expenses		266,482		244,136		246,643
Interest expense		440		90		90
Total expenses		671,478		754,072		732,246
Income before income taxes		174,770		123,681		104,251
Income tax expense		36,559		24,080		21,056
Net income	$	138,211	$	99,601	$	83,195
Earnings per weighted average common share:
Basic	$	9.25	$	6.52	$	5.48
Diluted	$	9.18	$	6.46	$	5.43
Cash dividends paid per common share	$	3.60	$	3.40	$	3.20
Number of shares used in computing earnings per share:
Basic		15,002,755		15,201,132		15,080,269
Diluted		15,119,027		15,337,807		15,229,898

(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.

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Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Dollars in thousands)

	Years Ended December 31,
	2020		2019		2018
Net income	$	138,211	$	99,601	$	83,195
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) during the period, net of income tax expense (benefit) of $6,936, $10,964, and ($5,387).		26,093		41,247		(20,267)
Reclassification adjustment for net realized gains on investments included in net income, net of income tax expense of ($201), ($625), and ($678).		(756)		(2,351)		(2,549)
Other comprehensive income (loss), net of tax:		25,337		38,896		(22,816)
Comprehensive income	$	163,548	$	138,497	$	60,379

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

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Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(Dollars in thousands)

					Accumulated
					Other
			Additional		Comprehensive						Total
	Common		Paid-in		Income (Loss),		Retained		Treasury		Shareholders’
	Stock		Capital		Net of Taxes		Earnings		Stock		Equity
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
Cumulative effect of adoption of updated accounting guidance for callable debt securities at January 1, 2019, net of taxes		—		—		—		(2,373)		—		(2,373)
Net income								99,601				99,601
Unrealized gains on securities available for sale, net of deferred federal income taxes		—		—		38,896		—		—		38,896
Restricted share awards issued		1		462		—		—		—		463
Recognition of employee share-based compensation		—		5,567		—		—		—		5,567
Dividends paid and accrued		—		—		—		(52,392)		—		(52,392)
Balance at December 31, 2019		177		202,321		28,190		661,553		(83,835)		808,406
Net income		—		—		—		138,211		—		138,211
Unrealized gains on securities available for sale, net of deferred federal income taxes		—		—		25,337		—		—		25,337
Restricted share awards issued		1		528		—		—		—		529
Recognition of employee share-based compensation		—		6,930		—		—		—		6,930
Dividends paid and accrued		—		—		—		(54,735)		—		(54,735)
Acquisition of treasury stock										(39,999)		(39,999)
Balance at December 31, 2020	$	178	$	209,779	$	53,527	$	745,029	$	(123,834)	$	884,679

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

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Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)

	Year Ended December 31,
	2020		2019			2018
Cash flows from operating activities:
Net income	$	138,211	$	99,601	$	83,195
Adjustments to reconcile net income to net cash provided by operating activities:
Investment amortization, net		6,541		4,922		5,273
Fixed Asset depreciation, net		7,527		5,485		5,467
Stock based compensation		7,459		6,030		6,579
Provision (credit) for deferred income taxes		5,159		4,757		(5,600)
Net realized gains on investments		(957)		(2,976)		(3,226)
Net impairment losses on investments		—		889		228
Credit loss expense		1,054		—		—
Earnings from partnership investments		(1,932)		(904)		(650)
Change in net unrealized gains on equity investments		(10,449)		(21,454)		16,324
Changes in assets and liabilities:
Accounts receivable		14,222		(3,307)		587
Accrued investment income		359		16		456
Receivable from reinsurers		13,948		(11,602)		(14,228)
Ceded unearned premiums		12,776		(1,208)		(1,799)
Deferred policy acquisition costs		(675)		(932)		(1,153)
Taxes recoverable		724		(1,003)		908
Other assets		(15)		(1,864)		2,565
Loss and loss adjustment expense reserves		(42,985)		25,847		10,665
Unearned premium reserves		(20,318)		6,839		7,123
Taxes payable		—		(6,090)		6,090
Accounts payable and accrued liabilities		4,310		3,395		10,678
Payable to reinsurers		(4,675)		691		(1,581)
Other liabilities		(20,824)		5,324		(210)
Net cash provided by operating activities		109,460		112,456		127,691
Cash flows from investing activities:
Fixed maturities purchased		(217,269)		(219,875)		(304,654)
Short term investments purchased		(441)		—		—
Equity securities purchased		(49,326)		(28,586)		(66,832)
Other invested assets purchased		(11,868)		(14,794)		(6,648)
Proceeds from sales and paydowns of fixed maturities		126,555		135,119		217,221
Proceeds from maturities, redemptions, and calls of fixed maturities		86,390		58,676		63,628
Proceed from sales of equity securities		34,542		23,966		18,654
Proceeds from other invested assets redeemed		5,839		2,124		6,810
Fixed assets purchased		(9,946)		(9,594)		(11,183)
Net cash used for investing activities		(35,524)		(52,964)		(83,004)
Cash flows from financing activities:
Proceeds from FHLB loan		30,000		—		—
Dividends paid to shareholders		(54,575)		(52,667)		(48,813)
Acquisition of treasury stock		(39,999)		—		—
Net cash used for financing activities		(64,574)		(52,667)		(48,813)
Net increase (decrease) in cash and cash equivalents		9,362		6,825		(4,126)
Cash and cash equivalents at beginning of year		44,407		37,582		41,708
Cash and cash equivalents at end of period	$	53,769	$	44,407	$	37,582
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal and state income taxes	$	31,080	$	26,780	$	20,115
Interest	$	388	$	75	$	75

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

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1. Basis of Presentation

The consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include Safety Insurance Group, Inc. and its subsidiaries (the “Company”). The subsidiaries consist of Safety Insurance Company, Safety Indemnity Insurance Company, Safety Property and Casualty Insurance Company, Safety Northeast 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 54.9% of its direct written premiums in 2020. The Company operates through its insurance company subsidiaries, Safety Insurance Company, Safety Indemnity Insurance Company, Safety Property and Casualty Insurance Company, and Safety Northeast 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.

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.

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. Fair values for fixed maturity securities are based on estimates obtained from independent pricing services. Unrealized gains or losses on fixed maturity securities reported at fair value are excluded from earnings and reported in a separate component of shareholder’s equity known as “accumulated other comprenehsive income., net of taxes” until realized. For fixed maturities that the Company does not intend to sell or for which it is more likely than not that the Company would not be required to sell before an anticipated recovery in value, the Company separates the credit loss component of the impairment from the amount related to all other factors and reports the credit loss component as credit loss expense. The impairment related to all other factors (non-credit factors) is reported in accumulated other comprehensive income. The allowance is adjusted for any additional credit losses and subsequent recoveries. Upon recognizing a credit loss, the cost basis is not adjusted. See Note 3 for further details of the Company’s accounting for impairments of available-for-sale investments.

Short-term investments, which consist of securities with original maturities greater than three months but less than one year, 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 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. Changes in unrealized gains or losses on equity securities are recognized in earnings.

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Other invested assets 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 these investments are 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.

Realized gains or losses on the sale or maturity of investments are determined based on the specific cost identification method.

Investment income is recognized on an accrual basis of accounting. Bonds not backed by other loans are amortized using the interest method. Loan-backed bonds and structured securities are amortized using the interest method and significant changes in estimated cash flows from the original purchase assumptions are accounted for using the retrospective method.

Cash and Cash Equivalents

Cash and cash equivalents includes money market accounts and United States (“U.S.”) Treasury bills with original maturities of three months or less from the date of purchase. U.S. Treasury bills are stated at amortized cost, which approximates fair value.

Accounts Receivable

Amounts included in accounts receivable represent premiums as well as finance charges, the majority of which are billed on a monthly installment basis. Accounts receivable are stated net of allowances for doubtful accounts. At December 31, 2020 and 2019, these allowances were $1,754 and $578, 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 policy. 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 $146,955, $147,945 and $146,601 were charged to underwriting, operating and other expenses for the years ended 2020, 2019 and 2018, 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 homeowners insurance in Massachusetts. See Note 11 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.

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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.

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 $10,441 and $14,628 at December 31, 2020 and 2019, 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 $2,311, $2,182 and $2,500 for the years ended December 31, 2020, 2019, and 2018, 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 is allocated on the basis of the members’ proportionate contribution to consolidated taxable income.

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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.

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

	Years Ended December 31,
		2020		2019		2018
Earnings attributable to common shareholders - basic and diluted:
Net income from continuing operations	$	138,211	$	99,601	$	83,195
Allocation of income for participating shares		636		(523)		(496)
Net income from continuing operations attributed to common shareholders	$	138,847	$	99,078	$	82,699
Earnings per share denominator - basis and diluted
Total weighted average common shares outstanding, including participating shares		15,071,955		15,281,363		15,170,754
Less: weighted average participating shares		(69,200)		(80,231)		(90,485)
Basic earnings per share denominator		15,002,755		15,201,132		15,080,269
Common equivalent shares- non-vested performance stock grants		116,272		136,675		149,629
Diluted earnings per share denominator		15,119,027		15,337,807		15,229,898
Basic earnings per share	$	9.25	$	6.52	$	5.48
Diluted earnings per share	$	9.18	$	6.46	$	5.43
Undistributed earnings attributable to common shareholders - basic and diluted:
Net income from continuing operations attributable to common shareholders -Basic	$	9.25	$	6.52	$	5.48
Dividends declared		(3.60)		(3.40)		(3.20)
Undistributed earnings	$	5.65	$	3.12	$	2.28
Net income from continuing operations attributable to common shareholders -Diluted	$	9.18	$	6.46	$	5.43
Dividends declared		(3.60)		(3.40)		(3.20)
Undistributed earnings	$	5.58	$	3.06	$	2.23

Diluted EPS excludes non vested performance stock grants 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 0 anti-dilutive non-vested performance stock grants for the years ended December 31, 2020 and 2019.

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 7 for further information regarding share-based compensation.

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Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

On March 20, 2019, the SEC adopted amendments to Regulation S-K and related rules and forms to modernize and simplify certain disclosure requirements for public companies. The amendments are intended to reduce the costs and burdens of the disclosure process and while continuing to require disclosure of all material information. The amended rules generally were effective on May 2, 2019 and reduced disclosures but some provisions added new requirements. On August 26, 2020, the SEC adopted additional amendments to Regulation S-K to modernize certain disclosure requirements relating to the description of business, legal proceedings and risk factors which are required to be disclosed in the Form 10-K. The amended rules are effective for filings on or after November 9, 2020. The adoption of the new rules did not and will not have a material impact on the Company’s financial position, results of operations, cash flows, or disclosures.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which changes the fair value measurement disclosure requirements under ASC 820. The Company’s adoption of ASU 2018-13 on January 1, 2020 did not have an impact on the fair value disclosures included in Note 15 – Fair Value of Financial Instruments.

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 NaN percent and the newly enacted NaN percent corporate income tax rate. 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. The Company adopted ASU 2017-08 effective January 1, 2019 which resulted in the recognition of $2,373 of additional amortization, net of tax, as a cumulative effect adjustment which decreased retained earnings by that amount.

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. The Company adopted the updated guidance on January 1, 2020 using the modified retrospective approach. The updated guidance did not have a material impact on the opening balance of retained earnings. The Company has elected not to measure expected credit losses for accrued interest receivables related to its finance receivables and fixed maturity securities. At March 31, 2020, the Company recognized an allowance for expected credit

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losses related to its available-for-sale (“AFS”) debt securities of $2,510. The Company has not restated comparative information for 2019 and, therefore, the comparative information for 2019 is reported under the prior model and is not comparable to the information presented for 2020.

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 was effective for fiscal years beginning after December 15, 2018. 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 adopted ASU 2016-02, ASU 2018-10 and ASU 2018-11 effective January 1, 2019 (“the application date”) using the required modified retrospective transition approach. In accordance with the guidance, the Company has elected not to adjust comparative periods. As such, Accounting Standards Codification (“ASC”) 842 will be applied to each lease that had commenced as of the application date with a cumulative effect adjustment as of that date. As of January 1, 2019, a right of use asset and lease liability of $35,984 were recorded in the Consolidated Balance Sheets. All periods prior to the application date presented in the financial statements will not change and the guidance in ASC 840, Leases, will apply. There was no impact on retained earnings or other components of equity in the Consolidated Balance Sheets as of December 31, 2020 and December 31, 2019.

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 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. 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.

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. 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 1 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.

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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, 2020
		Cost or		Allowance for		Gross Unrealized				Estimated
	��	Amortized		Expected Credit						Fair
		Cost		Losses		Gains		Losses  (3)		Value
U.S. Treasury securities		$	1,821	$	—	$	44	$	—	$	1,865
Obligations of states and political subdivisions			214,647		—		7,745		(3)		222,389
Residential mortgage-backed securities (1)			229,910		—		11,701		(14)		241,597
Commercial mortgage-backed securities			115,575		—		10,460		—		126,035
Other asset-backed securities			72,756		—		531		(163)		73,124
Corporate and other securities			555,242		(1,054)		38,415		(960)		591,643
Subtotal, fixed maturity securities			1,189,951		(1,054)		68,896		(1,140)		1,256,653
Short term investments			441		—		—		—		441
Equity securities (2)			168,289		—		38,676		(1,711)		205,254
Other invested assets (4)			45,239		—		—		—		45,239
Totals		$	1,403,920	$	(1,054)	$	107,572	$	(2,851)	$	1,507,587

	As of December 31, 2019
	Cost or		Gross Unrealized				Estimated
	Amortized						Fair
	Cost		Gains		Losses  (3)		Value
U.S. Treasury securities	$	1,504	$	8	$	—	$	1,512
Obligations of states and political subdivisions		241,597		9,799		—		251,396
Residential mortgage-backed securities (1)		301,503		6,608		(909)		307,202
Commercial mortgage-backed securities		106,902		3,233		(397)		109,738
Other asset-backed securities		36,068		218		(64)		36,222
Corporate and other securities		504,783		18,455		(1,268)		521,970
Subtotal, fixed maturity securities		1,192,357		38,321		(2,638)		1,228,040
Equity securities (2)		151,121		27,879		(1,363)		177,637
Other invested assets (4)		37,278		—		—		37,278
Totals	$	1,380,756	$	66,200	$	(4,001)	$	1,442,955

(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 270 and 229 securities in an unrealized loss position at December 31, 2020 and December 31, 2019, respectively.

(4) 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.

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	As of December 31, 2020
	Amortized		Estimated
	Cost		Fair Value
Due in one year or less	$	107,247	$	108,572
Due after one year through five years		258,167		271,140
Due after five years through ten years		329,045		353,369
Due after ten years through twenty years		75,585		80,657
Due after twenty years		1,666		2,159
Asset-backed securities		418,241		440,756
Totals	$	1,189,951	$	1,256,653

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

	Years Ended December 31,
	2020		2019		2018
Gross realized gains
Fixed maturity securities	$	1,645	$	1,294	$	1,022
Equity securities		6,864		4,536		5,129
Gross realized losses
Fixed maturity securities		(2,166)		(1,805)		(1,878)
Equity securities		(5,386)		(1,049)		(1,047)
Net realized gains on investments	$	957	$	2,976	$	3,226

In the normal course of business, the Company enters into transactions involving various types of financial instruments, including investments in fixed maturities and equity securities. Investment transactions have credit exposure to the extent that a counter party may default on an obligation to the Company. Credit risk is a consequence of carrying, trading and investing in securities. To manage credit risk, the Company focuses on higher quality fixed income securities, reviews the credit strength of all companies in which it invests, limits its exposure in any one investment and monitors the portfolio quality, taking into account credit ratings assigned by recognized statistical rating organizations.

The following tables as of December 31, 2020 and 2019 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, 2020
	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	$	—	$	—	$	—	$	—	$	—	$	—
Obligations of states and political subdivisions		1,047		3		—		—		1,047		3
Residential mortgage-backed securities		8,569		14		9		—		8,578		14
Commercial mortgage-backed securities		—		—		—		—		—		—
Other asset-backed securities		26,959		84		9,004		79		35,963		163
Corporate and other securities		62,882		863		6,774		97		69,656		960
Subtotal, fixed maturity securities		99,457		964		15,787		176		115,244		1,140
Equity securities		10,708		986		2,293		725		13,001		1,711
Total temporarily impaired securities	$	110,165	$	1,950	$	18,080	$	901	$	128,245	$	2,851

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									��
	As of December 31, 2019
	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	$	—	$	—	$	—	$	—		$	—	$	—
Obligations of states and political subdivisions		—		—		—		—			—		—
Residential mortgage-backed securities		61,933		409		31,655		500			93,588		909
Commercial mortgage-backed securities		36,398		397		866		—			37,264		397
Other asset-backed securities		21,281		64		462		—			21,743		64
Corporate and other securities		26,386		481		13,718		787			40,104		1,268
Subtotal, fixed maturity securities		145,998		1,351		46,701		1,287			192,699		2,638
Equity securities		8,849		391		14,143		972			22,992		1,363
Total temporarily impaired securities	$	154,847	$	1,742	$	60,844	$	2,259		$	215,691	$	4,001

At December 31, 2020, U.S. Government residential mortgage backed securities with a fair value of $37,467 are pledged as collateral for a borrowing with the Federal Home Loan Bank of Boston (“FHLB-Boston”) as described in Note 10 – Debt. These securities are included in fixed maturity securities on the Company’s Consolidated Balance Sheets.

Impairments

Beginning January 1, 2020, ASC 326, Credit Losses: Measurement of Credit Losses on Financial Instruments changed the process by which AFS debt securities are evaluated for impairment, as the standard requires a new impairment model based on expected credit losses rather than incurred credit losses. Under the new guidance, an entity recognizes its estimate of expected credit losses through an allowance account.

For fixed maturities that the Company does not intend to sell or for which it is more likely than not that the Company would not be required to sell before an anticipated recovery in value, the Company separates the credit loss component of the impairment from the amount related to all other factors and reports the credit loss component as credit loss expense. The impairment related to all other factors (non-credit factors) is reported in other comprehensive income. The allowance is adjusted for any additional credit losses and subsequent recoveries. Upon recognizing a credit loss, the cost basis is not adjusted.

For fixed maturities where the Company records a credit loss, a determination is made as to the cause of the impairment and whether the Company expects a recovery in the value. For fixed maturities where the Company expects a recovery in value, the constant effective yield method is utilized, and the investment is amortized to par.

For fixed maturity investments the Company intends to sell or for which it is more likely than not that the Company will be required to sell before an anticipated recovery in value, the full amount of the impairment is included in credit loss expense. The new cost basis of the investment is the previous amortized cost basis less the impairment recognized in credit loss expense. The new cost basis is not adjusted for any subsequent recoveries in fair value.

The Company uses a systematic methodology to evaluate declines in fair values below cost or amortized cost of our investments. Some of the factors considered in assessing impairment of fixed maturities due to credit losses include the extent to which the fair value is less than amortized cost, the financial condition of and the near and long-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, the historical volatility of the fair value of the security and whether it is more like than not that the Company will be required to sell the investment prior to an anticipated recovery in value.

For the year ended December 31, 2020, the Company concluded that $1,054 of unrealized losses were due to credit factors and were recorded as an allowance for expected credit losses and credit loss expense. The Company concluded that outside of the securities that were recognized as credit impaired, the unrealized losses recorded on the fixed maturity portfolio at December 31, 2020 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. Based upon

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the analysis performed, the Company’s decision to hold these securities, the Company’s current level of liquidity and our history of 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.

During the year ended December 31, 2019, the company recognized $889 of other-than-temporarily-impairmnte (“OTTI”) losses which consisted entirely of credit impairments under the previous accounting guidance in ASC 320, Investments – Debt and Equity Securities.

The Company holds no subprime mortgage debt securities. All of the Company’s holdings in mortgage-backed securities are either U.S. Government or Agency guaranteed or are rated investment grade by either Moody’s or Standard & Poor’s.

The following tables represent a reconciliation of the beginning and ending balances of the allowance for expected credit losses on fixed maturities classified as available for sale.  

	Year Ended December 31, 2020
	Corporate and other
	securities
Balance January 1, 2020	$	—
Credit losses on securities with no previously recorded credit losses		1,054
Net increases (decreases) in allowance on previously impaired securities		—
Reduction due to sales		—
Writeoffs charged against allowance		—
Recoveries of amounts previously written off		—
Balance December 31, 2020	$	1,054

Net Investment Income

The components of net investment income were as follows for the periods indicated.

	Years Ended December 31,
	2020		2019		2018
Interest on fixed maturity securities	$	37,727	$	42,892	$	40,988
Dividends on equity securities		5,044		5,268		4,500
Equity in earnings of other invested assets		1,378		1,552		1,182
Interest on other assets		27		32		62
Total Investment Income		44,176		49,744		46,732
Investment expenses		3,131		3,079		2,944
Net investment income	$	41,045	$	46,665	$	43,788

4.Allowance for Expected Credit Losses

Beginning on January 1, 2020, credit losses are recognized through an allowance account. See Note 2 – Recent Accounting Pronouncements for additional information and Note 3 – Investments for information about the allowance for expected credit losses on AFS debt securities.

The Company’s financial instruments measured at amortized cost include premiums and accounts receivable, and reinsurance recoverables.

Premiums and accounts receivable are reported net of an allowance for expected credit losses. The allowance is based upon the Company’s ongoing review of amounts outstanding, historical loss data, including delinquencies and write-offs, current and forecasted economic conditions and other relevant factors. Credit risk is partially mitigated by the Company’s ability to cancel the policy if the policyholder does not pay the premium and the Company writes off premiums receivable balances that are more than 90 days overdue.

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The following tables present the balances of premiums receivable, net of the allowance for expected credit losses, at December 31, 2020 and January 1, 2020, and changes in the allowance for expected credit losses for the year ended December 31, 2020.

		At and For the
		Year Ended December 31, 2020
		Accounts Receivable Net of Allowance for Expected Credit Losses		Allowance for Expected Credit Losses
Balance, beginning of period	$	193,369	$	578
Current period change for expected credit losses				3,294
Writeoffs of uncollectable accounts receivable				(2,118)
Balance, end of period	$	179,147	$	1,754

Reinsurance recoverables include amounts due from reinsurers for both paid and unpaid losses. The Company cedes insurance to Commonwealth Automobile Reinsurers (“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. The Company reports its reinsurance recoverables net of an allowance for estimated uncollectable reinsurance. A probability-of-default methodology which reflects current and forecasted economic conditions is used to estimate the amount of uncollectible reinsurance due to credit-related factors and the estimate is reported in an allowance for estimated uncollectible reinsurance. Amounts deemed to be uncollectible, including amounts due from known insolvent reinsurers, are written off against the allowance. Changes in the allowance, as well as any subsequent collections of amounts previously written off, are reported as part of claims and claim adjustment expenses.

The majority of the Company’s reinsurance recoverable on paid and unpaid losses is a result of our participation as a servicing carrier in the CAR Commercial Automobile Program and the Taxi/Limo Program, which represents 98% of the total reinsurance recoverable on paid and unpaid losses at December 31, 2020. The remaining 2% of amounts due from reinsurers are related to our other excess of loss and quota share contracts. For amounts due under these contracts, the Company utilizes updated A.M. Best credit ratings on a quarterly basis to determine the allowance for expected credit losses. As of December 31, 2020, all reinsurers under these programs are rated “A” or better by A.M. Best. Certain of the Company's reinsurance recoverables are collateralized by letters of credit, funds held or trust agreements. The Company’s analysis concludes that there are 0 expected credit losses at December 31, 2020.

5. 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,
	2020		2019
Software	$	50,988	$	42,516
Computer equipment		13,734		12,412
Leasehold improvements		8,264		8,264
Other equipment		3,132		3,132
Furniture and fixtures		4,286		4,134
Total cost		80,404		70,458
Less accumulated depreciation and amortization		58,293		50,447
Equipment and leasehold improvements, net	$	22,111	$	20,011

Depreciation and amortization expense for the years ended December 31, 2020, 2019, and 2018 was $7,526, $5,166, and $5,464, respectively.

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6. 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 $3,388, $3,365, and $3,302 for the years ended December 31, 2020, 2019, and 2018, respectively.

7. Share-Based Compensation

2018 Long Term Incentive Plan

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 Board of Directors and the Compensation Committee intend to issue awards under the 2018 Plan in the future.

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. NaN further grants will be allowed under the 2002 Incentive Plan. At December 31, 2020, there were 234,170 shares available for future grant.

Restricted Stock

Service-based restricted stock awarded in the form of unvested shares is recorded at the market value of the Company’s common stock on the grant date and amortized ratably as compensation expense over the requisite service period. Service-based restricted stock awards generally vest over a three-year period and vest 30% on the first and second anniversaries of the grant date and 40% on the third anniversary of the grant date, except for non-executive employees’ restricted stock awards granted prior to 2018 which vest ratably over a five-year service period and independent directors’ stock awards which vest immediately. Our independent directors are subject to stock ownership guidelines, which require them to have a value equal to four times their annual cash retainer.

In addition to service-based awards, the Company grants performance-based restricted shares to certain employees.  These performance shares cliff vest after a three-year performance period provided certain performance measures are attained.  A portion of these awards, which contain a market condition, vest according to the level of total shareholder return achieved by the Company compared to its property-casualty insurance peers over a three-year period. The remainder, 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 calendar-year performance period.  Compensation

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expense for share awards with a performance condition is based on the probable number of awards expected to vest using the performance level most likely to be achieved at the end of the performance period.

Performance-based awards with market conditions are accounted for and measured differently from awards that have a performance or service condition.  The effect of a market condition is reflected in the award’s fair value on the grant date.  That fair value is recognized as compensation cost over the requisite service period regardless of whether the market-based performance objective has been satisfied.

All of the Company’s restricted stock awards are issued as incentive compensation and are equity classified.

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

	Years Ended December 31,
	2020			2019			2018
	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	78,202	$	79.09	89,135	$	68.70	93,086	$	63.13
Granted	34,799		90.10	33,778		92.52	39,451		75.05
Vested and unrestricted	(43,757)		78.10	(44,085)		68.41	(43,276)		62.46
Forfeited	(2,694)		87.70	(626)		75.50	(126)		70.63
Outstanding at end of period	66,550	$	85.16	78,202	$	79.09	89,135	$	68.70
	Years Ended December 31,
	2020			2019			2018
	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	84,105	$	79.34	105,170	$	66.79	105,660	$	62.75
Granted (1)	36,649		84.68	63,447		69.61	31,832		75.14
Vested and unrestricted	(42,123)		73.55	(84,512)		56.42	(27,801)		61.50
Forfeited	(6,667)		84.86	—		-	(4,521)		62.41
Outstanding at end of period	71,964	$	84.94	84,105	$	79.34	105,170	$	66.79

(1) Includes 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.

As of December 31, 2020, there was $6,691 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, 2020, 2019, and 2018 was $6,516, $7,784 and $4,413, respectively. For the years ended December 31, 2020, 2019, and 2018, the Company recorded compensation expense related to awards under the Incentive Plan of $5,893, $4,764, and $5,197, net of income tax benefit of $1,566, $1,266, and $1,382, respectively.

8. Commitments and Contingencies

Commitments

As part of the Company’s investment activity, we have committed $110,000 to investments in limited partnerships. The Company has contributed $61,455 to these commitments as of December 31, 2020.  As of December 31, 2020, the remaining committed capital that could be called is $51,112, which includes potential recallable capital distributions.

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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.

The Company has been named in a lawsuit alleging that the Company improperly denied coverage to commercial insureds for loss of business income resulting from the COVID-19 pandemic. Our business owner policies serve eligible small and medium sized commercial accounts including but not limited to apartments and condominiums; mercantile establishments; limited cooking restaurants; offices; and special trade contractors. The majority of these business owner policies do not contain a specific exclusion for viruses. However, as viruses do not produce direct physical damage or loss to property, our position is that no coverage exists for this peril. As a result, the Company accrued a reserve of $6,500 for legal defense costs during the year ended December 31, 2020.

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.

9. Leases

The Company has various non-cancelable, long-term operating leases, the largest of which are for office space including the corporate headquarters, VIP claims centers and law offices. Other operating leases consist of auto leases and various office equipment. The Company has no finance leases. Our leases have remaining lease terms of one year to eight years, some of which include options to extend the leases for up to five years.

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 for our office space, law offices and VIP claims centers was $3,477, $4,573 and $3,531 for the years ended December 31, 2020, 2019, and 2018, respectively. All leases expire prior to 2029. The Company expects that in the normal course of business, leases that expire will be renewed.

The Company adopted ASU 2016-02, ASU 2018-10 and ASU 2018-11 effective January 1, 2019 (“the application date”) using the required modified retrospective transition approach. In accordance with the guidance, the Company has elected not to adjust comparative periods. As such ASC 842 will be applied to each lease that had commenced as of the application date with a cumulative effect adjustment as of that date. All periods before the application date presented in the financial statements will not change and the guidance in ASC 840 will apply. The Company has elected to apply the package of practical expedients provided in ASC 842 to all leases. In addition, the Company has elected not to apply the hindsight practical expedient or the land easement practical expedient.

In calculating lease liabilities the Company uses its incremental borrowing rate as of the application date based on original lease terms. The components of lease expense were as follows:

	Year Ended December 31,
		2020	2019
Operating lease cost	$	4,591	4,645

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Other information related to leases was as follows:

	Year Ended December 31,
		2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	5,073	$	5,082
Weighted average remaining lease term
Operating leases		7.57 Years		8.42 Years
Weighted average discount rate
Operating leases		2.33%		2.39%

Maturities of lease liabilities were as follows:

	Operating Leases
2021	$	4,953
2022		4,401
2023		3,972
2024		3,901
2025		3,835
Thereafter		11,572
Total lease payments		32,634
Less imputed interest		(1,634)
Total	$	31,000

10. 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, 2020, 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 0 amounts outstanding on its credit facility at December 31, 2020 or 2019. 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, 2020 and 2019.

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, 2020, the Company has the ability to borrow approximately $235,436 using eligible invested assets that would be used as collateral.

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On March 17, 2020, the Company borrowed $30,000 from the FHLB-Boston for a term of five-years, bearing interest at a rate of 1.42%. Interest is payable monthly and the principal is due on the maturity date of March 17, 2025 but may be prepaid in whole or in part by the Company in advance with a minor penalty for prepayment. The loan is fully collateralized by specific U.S. Government residential mortgage backed securities with a fair value of $37,467. The Company had 0 amounts outstanding from the FHLB-Boston at December 31, 2019.

Interest expense on the FHLB-Boston borrowing was $439 for the year ended December 31, 2020. There was 0 interest expense for the year ended December 31, 2019.

11. Reinsurance

The Company cedes insurance to CAR and to other reinsurers. The Company has various excess of loss and quota share agreements 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.

The Company is subject to concentration of credit risk with respect to reinsurance ceded. At December 31, 2020, reinsurance receivables on paid and unpaid loss and LAE with a carrying value of $117,681 and ceded unearned premiums of $20,589 were associated with CAR. At December 31, 2019, reinsurance receivables on paid and unpaid loss and LAE with a carrying value of $130,005 and ceded unearned premiums of $33,587 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 $3,480, $3,595 and $5,362 for the years ended December 31, 2020, 2019 and 2018, 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,
	2020		2019		2018
Written Premiums
Direct	$	798,712	$	852,404	$	843,675
Assumed		26,316		32,391		32,403
Ceded		(61,491)		(90,386)		(89,166)
Net written premiums	$	763,537	$	794,409	$	786,912
Earned Premiums
Direct	$	815,981	$	845,102	$	836,759
Assumed		29,365		32,853		32,196
Ceded		(74,268)		(89,178)		(87,368)
Net earned premiums	$	771,078	$	788,777	$	781,587
Loss and LAE
Direct	$	428,018	$	562,192	$	538,569
Assumed		18,595		28,529		28,815
Ceded		(42,057)		(80,875)		(81,871)
Net loss and LAE	$	404,556	$	509,846	$	485,513

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12. 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.

	Year Ended December 31,
	2020		2019			2018
Reserves for losses and LAE at beginning of year	$	610,566	$	584,719	$	574,054
Less receivable from reinsurers related to unpaid losses and LAE		(122,372)		(108,398)		(83,085)
Net reserves for losses and LAE at beginning of year		488,194		476,321		490,969
Incurred losses and LAE, related to:
Current year		459,400		551,895		542,001
Prior years		(54,844)		(42,049)		(56,488)
Total incurred losses and LAE		404,556		509,846		485,513
Paid losses and LAE related to:
Current year		277,754		333,377		340,927
Prior years		153,726		164,596		159,234
Total paid losses and LAE		431,480		497,973		500,161
Net reserves for losses and LAE at end of period		461,270		488,194		476,321
Plus receivable from reinsurers related to unpaid losses and LAE		106,311		122,372		108,398
Reserves for losses and LAE at end of period	$	567,581	$	610,566	$	584,719

At the end of each period, the reserves were re-estimated for all prior accident years. The Company’s prior year reserves decreased by $54,844, $42,049, and $56,488, for the years ended December 31, 2020, 2019, and 2018, respectively, and resulted from re-estimations of prior years’ ultimate loss and LAE liabilities. The decrease in prior year reserves during 2020 was primarily composed of reductions of $26,902 in the Company’s retained automobile and $21,717 in the Company’s retained other than auto and homeowners reserves. The decrease in prior year reserves during 2019 was primarily composed of reductions of $25,623 in the Company’s retained automobile and $14,182 in the Company’s retained other than auto and homeowners reserves. 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 homeowners reserves.

The Company’s private passenger automobile line of business prior year reserves decreased during the years ended December 31, 2020, 2019 and 2018 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, 2020, 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 of reserves and paid ultimate claims development for the years ended December 31, 2011 to 2019 is presented as required supplementary information.

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Private Passenger Automobile Liability
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											As of December 31, 2020
		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	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020
	(Unaudited)
2011	$ 176,727	$ 176,906	$ 176,906	$ 175,209	$ 172,957	$ 171,852	$ 170,732	$ 168,671	$ 168,625	$ 168,545	$ -	56,124
2012		175,262	175,189	174,856	170,379	167,831	166,008	163,350	162,448	162,520	(7)	53,273
2013			183,367	183,517	183,264	181,492	179,167	176,713	175,684	175,718	(194)	54,248
2014				187,305	187,104	186,798	183,119	181,312	179,251	179,267	(1,388)	52,787
2015					190,036	190,236	188,317	184,477	181,299	179,451	(698)	52,978
2016						192,912	192,318	185,009	180,486	177,009	(2,481)	49,380
2017							185,673	184,429	182,068	177,941	(4,569)	46,237
2018								176,411	175,222	170,447	(10,576)	42,997
2019									176,171	174,439	(8,860)	40,287
2020										130,335	3,290	24,467
									Total	$ 1,695,672

Private Passenger Automobile Liability
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
		For the Years Ended December 31,
Accident Year	2011	2012	2013	2014		2015	2016	2017	2018	2019	2020
	(Unaudited)
2011	$ 76,467	$ 130,018	$ 146,532	$ 158,904		$ 164,413	$ 167,251	$ 168,025	$ 168,585	$ 168,593	$ 168,527
2012		74,306	126,553	144,157		152,991	157,443	160,416	161,749	162,014	162,121
2013			79,049	135,031		152,472	163,694	169,634	172,736	173,890	174,574
2014				79,151		136,434	156,693	166,815	173,163	176,616	177,360
2015						76,934	138,255	156,483	168,641	173,816	176,652
2016							78,862	137,917	154,964	167,458	171,865
2017								77,519	133,037	153,675	164,467
2018									72,895	126,456	143,656
2019										72,219	127,910
2020											52,962
										Total	$ 1,520,094
					All outstanding liabilities before 2011, net of reinsurance						411
			Liabilities for claims and claim adjustment expenses, net of reinsurance								$ 175,989

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Private Passenger Automobile Physical Damage
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											As of December 31, 2020
		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	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020
	(Unaudited)
2011	$ 118,131	$ 117,951	$ 115,028	$ 113,821	$ 113,765	$ 113,674	$ 113,677	$ 113,640	$ 113,630	$ 113,597	$ -	140,509
2012		108,376	107,912	104,393	103,679	103,575	103,547	103,510	103,491	103,453	-	123,639
2013			114,389	114,239	113,034	112,197	112,096	112,060	112,029	112,003	-	131,703
2014				123,421	123,622	122,410	122,327	122,341	122,213	122,188	(28)	135,006
2015					140,219	136,661	134,101	133,737	133,581	133,530	(66)	144,274
2016						129,528	124,922	122,116	121,717	121,543	(117)	126,083
2017							128,340	126,304	124,128	123,715	(161)	124,009
2018								129,450	130,145	128,426	(312)	119,716
2019									128,698	126,648	(2,104)	116,872
2020										98,546	(13,912)	79,899
									Total	$ 1,183,649

Private Passenger Automobile Physical Damage
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
		For the Years Ended December 31,
Accident Year	2011	2012	2013	2014		2015	2016	2017	2018	2019	2020
	(Unaudited)
2011	$ 126,196	$ 117,152	$ 114,451	$ 113,809		$ 113,719	$ 113,673	$ 113,669	$ 113,640	$ 113,630	$ 113,597
2012		111,928	107,017	104,311		103,664	103,573	103,537	103,510	103,491	103,452
2013			120,843	115,904		112,894	112,162	112,085	112,060	112,029	112,003
2014				130,732		126,414	122,668	122,402	122,350	122,251	122,216
2015						143,532	136,760	134,066	133,701	133,639	133,596
2016							133,530	124,298	122,023	121,795	121,660
2017								132,409	126,822	124,286	123,844
2018									138,036	132,591	128,624
2019										134,429	128,173
2020											102,764
										Total	$ 1,189,929
					All outstanding liabilities before 2011, net of reinsurance						-
			Liabilities for claims and claim adjustment expenses, net of reinsurance								($ 6,282)

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Commercial Automobile Liability
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											As of December 31, 2020
		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	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020
	(Unaudited)
2011	$ 23,658	$ 24,298	$ 24,160	$ 24,187	$ 23,649	$ 22,933	$ 22,817	$ 22,759	$ 22,488	$ 22,485	$ 22	4,958
2012		23,704	24,447	24,662	24,723	24,572	23,819	22,859	22,476	22,292	150	4,566
2013			29,175	29,541	28,377	26,864	26,310	25,986	25,443	25,353	167	5,784
2014				34,117	34,105	34,376	33,914	32,948	32,438	32,200	(68)	6,085
2015					35,371	36,150	36,610	37,730	38,015	38,257	(58)	7,212
2016						37,954	39,416	40,947	40,916	40,679	(718)	6,455
2017							42,865	41,373	41,055	39,369	575	6,129
2018								41,347	40,115	38,589	1,333	5,740
2019									51,679	49,163	2,099	5,635
2020										35,010	13,235	3,011
									Total	$ 343,397

Commercial Automobile Liability
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
		For the Years Ended December 31,
Accident Year	2011	2012	2013	2014		2015	2016	2017	2018	2019	2020
	(Unaudited)
2011	$ 7,306	$ 14,263	$ 17,807	$ 19,783		$ 20,941	$ 21,913	$ 22,043	$ 22,445	$ 22,463	$ 22,463
2012		6,503	12,474	15,617		17,804	18,876	20,601	21,021	22,086	22,121
2013			8,502	17,079		19,625	21,129	22,434	23,867	24,507	24,732
2014				9,426		17,853	21,968	25,253	27,886	30,420	31,298
2015						11,181	21,700	26,018	29,804	31,537	33,416
2016							9,991	19,902	25,711	32,274	36,237
2017								10,407	20,106	24,409	28,721
2018									9,704	18,499	23,544
2019										12,113	22,480
2020											7,025
										Total	$ 252,037
					All outstanding liabilities before 2011, net of reinsurance						89
			Liabilities for claims and claim adjustment expenses, net of reinsurance								$ 91,449

87

Commercial Automobile Physical Damage
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											As of December 31, 2020
		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	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020
	(Unaudited)
2011	$ 11,511	$ 11,151	$ 11,031	$ 10,960	$ 10,952	$ 10,910	$ 10,952	$ 11,024	$ 11,048	$ 11,048	$ -	11,488
2012		10,382	10,382	10,331	10,249	10,250	10,208	10,209	10,226	10,224	-	9,913
2013			13,666	13,567	13,298	13,180	13,057	13,047	13,071	13,057	-	12,298
2014				17,426	16,925	15,455	15,419	15,353	15,381	15,373	0	13,545
2015					20,223	19,047	19,021	18,974	18,641	18,535	5	15,468
2016						20,216	18,506	17,909	17,808	17,725	16	13,593
2017							19,691	19,200	19,021	18,834	26	13,113
2018								21,230	19,937	19,270	35	12,905
2019									20,039	19,652	483	12,736
2020										16,507	(127)	9,052
									Total	$ 160,225

Commercial Automobile Physical Damage
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
		For the Years Ended December 31,
Accident Year	2011	2012	2013	2014		2015	2016	2017	2018	2019	2020
	(Unaudited)
2011	$ 11,006	$ 11,119	$ 11,092	$ 11,060		$ 11,055	$ 11,053	$ 11,050	$ 11,049	$ 11,048	$ 11,048
2012		9,707	10,553	10,270		10,242	10,239	10,235	10,228	10,226	10,224
2013			12,665	13,378		13,114	13,074	13,065	13,060	13,066	13,057
2014				15,377		15,862	15,424	15,388	15,381	15,376	15,373
2015						17,787	18,910	18,667	18,549	18,541	18,530
2016							17,228	18,143	17,763	17,712	17,709
2017								17,957	19,336	18,915	18,787
2018									18,842	19,842	19,236
2019										18,128	19,161
2020											15,550
										Total	$ 158,675
					All outstanding liabilities before 2011, net of reinsurance						-
			Liabilities for claims and claim adjustment expenses, net of reinsurance								$ 1,551

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Homeowners Liability
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											As of December 31, 2020
		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	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020
	(Unaudited)
2011	$ 6,260	$ 7,644	$ 7,644	$ 7,531	$ 6,923	$ 6,017	$ 5,546	$ 4,845	$ 4,845	$ 4,846	$ -	304
2012		7,514	7,514	7,514	6,464	5,304	4,331	3,824	3,889	3,646	-	249
2013			9,768	9,768	9,337	7,578	5,978	5,312	5,147	5,147	7	264
2014				11,494	11,494	9,738	7,388	7,120	6,984	6,984	118	261
2015					12,965	12,555	9,908	9,201	9,201	9,201	(77)	288
2016						10,594	10,594	10,594	9,847	9,491	53	275
2017							11,276	10,058	9,328	8,585	90	267
2018								9,951	9,951	9,951	(1,733)	250
2019									14,130	13,848	2,186	246
2020										14,664	6,531	171
									Total	$ 86,363

Homeowners Liability
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
		For the Years Ended December 31,
Accident Year	2011	2012	2013	2014		2015	2016	2017	2018	2019	2020
	(Unaudited)
2011	$ 235	$ 1,969	$ 3,459	$ 4,336		$ 4,497	$ 4,536	$ 4,758	$ 4,769	$ 4,769	$ 4,770
2012		1,389	2,063	2,308		2,731	3,029	3,600	3,606	3,646	3,646
2013			527	2,337		3,080	3,493	3,829	4,038	4,209	4,247
2014				340		1,834	3,212	4,200	4,828	6,315	6,368
2015						428	3,319	4,267	5,205	6,445	7,022
2016							647	2,669	4,257	5,387	6,300
2017								305	1,676	2,913	3,593
2018									551	2,039	3,972
2019										1,634	3,343
2020											220
										Total	$ 43,481
					All outstanding liabilities before 2011, net of reinsurance						0
			Liabilities for claims and claim adjustment expenses, net of reinsurance								$ 42,882

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Homeowners Property Damage
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											As of December 31, 2020
		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	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020
	(Unaudited)
2011	$ 95,586	$ 98,021	$ 97,571	$ 94,657	$ 93,914	$ 93,186	$ 92,595	$ 92,388	$ 92,387	$ 92,385	$ 204	15,116
2012		50,351	49,911	47,392	44,380	43,097	42,382	41,895	41,887	41,887	148	6,051
2013			56,298	56,199	55,722	52,464	51,077	49,973	49,463	49,456	126	5,698
2014				59,160	60,213	59,751	57,331	55,127	54,607	54,602	268	6,077
2015					152,586	152,049	162,377	162,788	162,722	162,354	334	20,075
2016						67,116	66,442	64,208	61,262	60,019	393	5,421
2017							80,736	76,560	70,689	68,737	1,202	6,010
2018								83,443	82,581	77,970	2,970	8,236
2019									77,976	73,697	(4,695)	5,431
2020										80,093	(3,791)	5,865
									Total	$ 761,200

Homeowners Property Damage
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
		For the Years Ended December 31,
Accident Year	2011	2012	2013	2014		2015	2016	2017	2018	2019	2020
	(Unaudited)
2011	$ 71,532	$ 89,742	$ 92,184	$ 92,462		$ 92,444	$ 92,333	$ 92,182	$ 92,182	$ 92,182	$ 92,180
2012		30,801	40,681	41,960		41,737	41,782	41,789	41,736	41,736	41,737
2013			38,661	48,456		49,702	49,612	49,653	49,620	49,328	49,327
2014				40,409		52,161	54,088	54,224	54,262	54,274	54,306
2015						112,563	145,337	160,572	161,745	161,773	161,850
2016							44,103	57,238	59,155	59,449	59,403
2017								46,366	64,401	66,181	66,892
2018									57,704	70,959	72,078
2019										49,121	61,905
2020											50,304
										Total	$ 709,982
					All outstanding liabilities before 2011, net of reinsurance						89
			Liabilities for claims and claim adjustment expenses, net of reinsurance								$ 51,307

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The following is unaudited supplementary information about average historical claims duration as of December 31, 2020.

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	43.7%	32.2%	10.4%	6.4%	3.1%	1.8%	0.6%	0.3%	0.0%	0.0%
Private Passenger Automobile Physical Damage	107.7%	(5.2)%	(2.5)%	(0.4)%	(0.1)%	0.0%	0.0%	0.0%	0.0%	0.0%
Commercial Automobile Liability	26.8%	25.7%	12.7%	10.7%	6.6%	6.1%	2.0%	2.4%	0.1%	0.0%
Commercial Automobile Physical Damage	96.3%	5.3%	(2.2)%	(0.4)%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%
Homeowners Liability	7.3%	21.2%	16.5%	11.4%	9.1%	9.7%	2.2%	0.7%	0.0%	0.0%
Homeowners Property Damage	71.2%	20.5%	4.4%	0.4%	0.0%	0.0%	(0.2)%	0.0%	0.0%	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, 2020
Net outstanding liabilities
Private Passenger Automobile Liability	$	175,989
Private Passenger Automobile Physical Damage		(6,282)
Commercial Automobile Liability		91,449
Commercial Automobile Physical Damage		1,551
Homeowners Liability		42,882
Homeowners Property Damage		51,307
Other Short-Duration Insurance Lines		74,781
Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance	$	431,677
Reinsurance recoverable on unpaid claims
Private Passenger Automobile Liability	$	131
Private Passenger Automobile Physical Damage		-
Commercial Automobile Liability		104,222
Commercial Automobile Physical Damage		1,301
Homeowners Liability		-
Homeowners Property Damage		-
Other Short-Duration Insurance Lines		657
Total reinsurance recoverable on unpaid claims	$	106,311
Unallocated claims adjustment expenses		29,593
Total gross liability for unpaid claims and claim adjustment expenses	$	567,581

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.

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13. Income Taxes

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

	Years Ended December 31,
	2020		2019		2018
Current Income Taxes:
Federal	$	31,133	$	19,280	$	26,548
State		267		43		108
		31,400		19,323		26,656
Deferred Income Taxes:
Federal		5,159		4,757		(5,600)
State		—		—		—
		5,159		4,757		(5,600)
Total income tax expense	$	36,559	$	24,080	$	21,056

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,
	2020		2019		2018
Federal income tax expense at statutory rate	$	36,702	$	25,973	$	21,893
Investment income, net		(1,394)		(1,626)		(1,862)
State taxes, net		211		34		85
Nondeductible expenses		697		488		494
Tax windfall related to share-based stock compensation		(298)		(1,003)		(79)
Other, net		641		214		525
Total income tax expense	$	36,559	$	24,080	$	21,056

The deferred income tax (liability) asset 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,
	2020		2019
Deferred tax assets:
Discounting of loss reserves	$	5,421	$	5,642
Discounting of unearned premium reserve		17,217		17,710
Bad debt allowance		433		274
Employee benefits		3,609		4,340
Rent incentive		912		1,063
Total deferred tax assets before valuation allowance		27,592		29,029
Valuation allowance for deferred tax assets		—		—
Total deferred tax assets		27,592		29,029
Deferred tax liabilities:
Deferred acquisition costs		(15,742)		(15,600)
Investments		(4,349)		(1,744)
Net unrealized gains on investments		(18,720)		(11,985)
Loss reserve transition adjustment		(1,385)		(1,662)
Software development costs		(3,053)		(2,109)
Premium acquisition expenses		(379)		(509)
Depreciation		(1,575)		(1,137)
Total deferred tax liabilities		(45,203)		(34,746)
Net deferred tax liability	$	(17,611)	$	(5,717)

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.

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During the years ended December 31, 2020 and December 31, 2019 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, 2020 and December 31, 2019, the Company had 0 unrecognized tax benefits, and NaN 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 0 interest and penalties related to income taxes accrued as of December 31, 2020 and 2019.

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 2017 are closed.

14. 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, 2020, 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.

During the year ended December 31, 2020, the Company purchased 551,598 shares, on the open market under the program at a cost of $39,999. NaN share purchases were made by the Company under the program during the years ended December 31, 2019 or 2018. As of December 31, 2020, the Company had purchased 2,831,168 shares at cost of $123,834. As of December 31, 2019 and 2018, the Company had purchased 2,279,570 shares on the open market at a cost of $83,835.

15. 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 $121,446, $75,469, and $86,734 for the years ended December 31, 2020, 2019, and 2018, respectively. Statutory capital and surplus of the Company’s insurance subsidiaries was $754,066, and $704,177 at December 31, 2020 and 2019, 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

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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, 2020, the statutory capital and surplus of Safety Insurance was $754,066 and its net income for 2020 was $121,446. As a result, a maximum of $121,446 is available in 2021 for such dividends without prior approval of the Commissioner. During the year ended December 31, 2020, Safety Insurance recorded dividends of $89,156. As result of this Massachusetts statute, the Insurance Subsidiaries had restricted net assets in the amount of $632,620 at December 31, 2020.

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 4 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, 2020, the Insurance Subsidiaries had total adjusted capital of $754,066, 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 $197,193 at December 31, 2020.

16. Fair Value of Financial Instruments

ASC 820, Fair Value Measurements and Disclosure provides a revised definition of fair value, establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value information.  Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an exit price).  ASC 820 establishes a fair value hierarchy that distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”).  The fair value hierarchy in ASC 820 prioritizes fair value measurements into three levels based on the nature of the inputs as follows:

Level 1 — Valuations based on quoted prices in active markets for identical assets and liabilities;

Level 2 — Valuations based on observable inputs that do not meet the criteria for Level 1, including quoted prices in inactive markets and quoted prices in active markets for similar, but not identical instruments; and

Level 3 — Valuations based on unobservable inputs.

Fair values for the Company’s fixed maturity securities are based on prices provided by its custodian bank and its investment managers.  Both the Company’s custodian bank and investment managers use a variety of independent, nationally recognized pricing services to determine market valuations.  If the pricing service cannot provide fair value determinations, the Company obtains non-binding price quotes from broker-dealers.  A minimum of two quoted prices is obtained for the majority of the Company’s available-for-sale fixed maturity securities in its investment portfolio.  The Company uses a third-party pricing service as its primary provider of quoted prices from third-party pricing services and broker-dealers.  To provide reasonable assurance of the validity of each price or quote, a secondary third-party pricing service or broker-dealer quote is obtained from the Company’s 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

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a security is within an accepted tolerance level, the quoted price obtained from the Company’s primary source is used for the security.  If the variance between the primary and secondary price quotes exceeds an accepted tolerance level, the Company obtains a quote from an alternative source, if possible, and documents and resolves any differences between the pricing sources.  In addition, the Company may request that its investment managers and its traders provide input as to which vendor is providing prices that its traders believe are reflective of fair value for the security.  Following this process, the Company may decide to value the security in its financial statements using the secondary or alternative source if it believes that pricing is more reflective of the security’s value than the primary pricing provided by its custodian bank.  The Company analyzes market valuations received to verify reasonableness, to understand the key assumptions used and their sources, and to determine an appropriate ASC 820 fair value hierarchy level based upon trading activity and the observability of market inputs.  Based on this evaluation and investment class analysis, each price is classified into Level 1, 2 or 3.

Fair values of instruments are based on (i) quoted prices in active markets for identical assets (Level 1), (ii) quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs are observable in active markets (Level 2) or (iii) valuations derived from valuation techniques in which one or more significant inputs are unobservable in the marketplace (Level 3).

The Company’s Level 1 securities consist of equity securities whose values are based on quoted prices in active markets for identical assets.  The Company’s Level 2 securities are comprised of available-for-sale fixed maturity securities whose fair value was determined using observable market inputs.  The Company’s Level 3 security consists of an investment in the Federal Home Loan Bank of Boston related to Safety Insurance Company’s membership stock, which is not redeemable in a short-term time frame.  Fair values for securities for which quoted market prices were unavailable were estimated based upon reference to observable inputs such as benchmark interest rates, market comparables, and other relevant inputs.  Investments valued using these inputs include U.S. Treasury securities, obligations of states and political subdivisions, corporate and other securities, commercial and residential mortgage-backed securities, and other asset-backed securities.  Inputs into the fair value application that are utilized by asset class include but are not limited to:

● 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.

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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 external 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’s 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, 2020. There were no significant changes to the valuation process during the year ended December 31, 2020. As of December 31, 2020 and December 31, 2019, no quotes or prices obtained were adjusted by management. All broker quotes obtained were non-binding.

At December 31, 2020 and December 31, 2019, investments in fixed maturities classified as available-for-sale had a fair value which equaled carrying value of $1,256,653 and $1,228,040, respectively. At December 31, 2020, the Company’s held $441 of short-term investments. As of December 31, 2019, we held 0 short-term investments. The carrying values of cash and cash equivalents and investment income accrued approximated fair value.

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

	As of December 31, 2020
	Total		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
U.S. Treasury securities	$	1,865	$	—	$	1,865	$	—
Obligations of states and political subdivisions		222,389		—		222,389		—
Residential mortgage-backed securities		241,597		—		241,597		—
Commercial mortgage-backed securities		126,035		—		126,035		—
Other asset-backed securities		73,124		—		73,124		—
Corporate and other securities		591,643		—		591,643		—
Short term investments		441		—		441		—
Equity securities		173,096		171,398		—		1,698
Total investment securities	$	1,430,190	$	171,398	$	1,257,094	$	1,698

	As of December 31, 2019
	Total		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
U.S. Treasury securities	$	1,512	$	—	$	1,512	$	—
Obligations of states and political subdivisions		251,396		—		251,396		—
Residential mortgage-backed securities		307,202		—		307,202		—
Commercial mortgage-backed securities		109,738		—		109,738		—
Other asset-backed securities		36,222		—		36,222		—
Corporate and other securities		521,970		—		521,970		—
Equity securities		144,877		144,361		—		516
Total investment securities	$	1,372,917	$	144,361	$	1,228,040	$	516

There were 0 transfers between Level 1 and Level 2 during the years ended December 31, 2020 or 2019.

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

	Years Ended December 31,
	2020		2019		2018
Balance at beginning of period	$	516	$	680	$	680
Net gains and losses included in earnings		—		—		—
Net gains included in other comprehensive income		—		—		—
Purchases		1,182		133		—
Sales		—		(297)		—
Transfers into Level 3		—		—		—
Transfers out of Level 3		—		—		—
Balance at end of period	$	1,698	$	516	$	680

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, 0 transfers were made in or out of Level 3 during 2020, 2019 and 2018. The Company held one Level 3 security at December 31, 2020.

As of December 31, 2020 and December 31, 2019, there were approximately $32,158 and $32,760 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.

17. Quarterly Results of Operations (Unaudited)

An unaudited summary of the Company’s 2020 and 2019 quarterly performance, and audited annual performance, is as follows.

	Year ended December 31, 2020
	First		Second		Third		Fourth		Total
	Quarter		Quarter		Quarter		Quarter		Year
Total revenue	$	181,044	$	207,770	$	222,400	$	235,034	$	846,248
Net (loss) income		(1,990)		42,494		44,742		52,965		138,211
(Loss) earnings per weighted average common share:
Basic		(0.13)		2.80		2.99		3.57		9.25
Diluted		(0.13)		2.78		2.96		3.55		9.18
Cash dividends paid per common share		0.90		0.90		0.90		0.90		3.60

	Year ended December 31, 2019
	First		Second		Third		Fourth		Total
	Quarter		Quarter		Quarter		Quarter		Year
Total revenue	$	222,579	$	216,002	$	215,273	$	223,899	$	877,753
Net income		29,946		25,934		15,619		28,102		99,601
Earnings per weighted average common share:
Basic		1.97		1.70		1.02		1.84		6.52
Diluted		1.95		1.68		1.01		1.82		6.46
Cash dividends paid per common share		0.80		0.80		0.90		0.90		3.40

18. 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.

97

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 ITEM 9A.    CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer (“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, 2020.

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, 2020, 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.

98

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 2021 on a Form 8-K.

● On February 24, 2021, the Compensation Committee of the Board approved the 2020 annual executive cash bonus pool in the total amount of $2,486 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, $948; Christopher T. Whitford, $248; James D. Berry, $342; Stephen A. Varga, $259; and Paul J. Narciso, $249.

● On February 24, 2021, 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 $2,950 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 24, 2021. Of the total award, 45% vests in three annual installments of 30% on February 24, 2022, 30% on February 24, 2023, and 40% on February 24, 2024 and were allocated to the Company's Named Executive Officers as follows: George M. Murphy, $360 worth of restricted stock; Christopher T. Whitford, $169 worth of restricted stock; James D. Berry, $158 worth of restricted stock; Stephen A. Varga, $180 worth of restricted stock; and Paul J. Narciso, $180 worth of restricted stock. Of the total award, 55% vests over a three-year performance period commencing on January 1, 2021 and ending on December 31, 2023.  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; Christopher T. Whitford, $206 worth of restricted stock; James D. Berry, $193 worth of restricted stock; Stephen A. Varga, $220 worth of restricted stock; and Paul J. Narciso, $220 worth of restricted stock.

● Upon recommendation from the Compensation Committee, on February 24, 2021, the Board approved executive deferred compensation awards pursuant to the Executive Incentive Compensation Plan in the total amount of $2,050. Of the total award, the following amounts were allocated to the Company's CEO and Named Executive Officers: George M. Murphy, $753; Christopher T. Whitford, $115; James D. Berry, $313; Stephen A. Varga, $237; and Paul J. Narciso, $228.

99

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, 2020 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

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, 2020	102
II	Condensed Financial Information of the Registrant at December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018	103
III	Supplementary Insurance Information at December 31, 2020, 2019 and 2018 and for the years ended December 31, 2020, 2019 and 2018	105
IV	Reinsurance for the years ended December 31, 2020, 2019 and 2018	106
V	Valuation and Qualifying Accounts at December 31, 2020, 2019 and 2018 and for the years ended December 31, 2020, 2019 and 2018	107
VI	Supplemental Information Concerning Property and Casualty Insurance Operations at December 31, 2020, 2019 and 2018 and for the years ended December 31, 2020, 2019 and 2018	108

101

Safety Insurance Group, Inc.

Summary of Investments—Other than Investments in Related Parties

Schedule I

At December 31, 2020

(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	$	231,731	$	243,462	$	243,462
Obligations of states and political subdivisions		214,647		222,389		222,389
Corporate and other securities		743,573		790,802		790,802
Total fixed maturities		1,189,951		1,256,653		1,256,653
Short term securities
Corporate and other securities		441		441		441
Total short term investments		441		441		441
Equity securities:
Common stocks:
Industrial, miscellaneous and all other		168,289		205,254		205,254
Total equity securities		168,289		205,254		205,254
Other invested assets		45,239		45,239		45,239
Total investments	$	1,403,920	$	1,507,587	$	1,507,587

102

Safety Insurance Group, Inc.

Condensed Financial Information of the Registrant

Condensed Balance Sheets

Schedule II

(Dollars in thousands)

	Years Ended December 31,
	2020		2019
Assets
Investments in consolidated affiliates	$	886,662	$	810,251
Other		39		54
Total assets	$	886,701	$	810,305
Liabilities
Accounts payable and other liabilities	$	2,022	$	1,899
Total liabilities		2,022		1,899
Shareholders’ equity		884,679		808,406
Total liabilities and shareholders’ equity	$	886,701	$	810,305

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,
	2020		2019		2018
Revenues	$	—	$	—	$	—
Expenses		1,833		1,694		1,695
Net loss		(1,833)		(1,694)		(1,695)
Earnings from consolidated subsidiaries		140,044		101,295		84,890
Net income		138,211		99,601		83,195
Other comprehensive income (loss), net of tax		25,337		38,896		(22,816)
Comprehensive income	$	163,548	$	138,497	$	60,379

103

Safety Insurance Group, Inc.

Condensed Financial Information of the Registrant

Condensed Statements of Cash Flows

Schedule II

(Dollars in thousands)

	Years Ended December 31,
	2020		2019		2018
Net income	$	138,211	$	99,601	$	83,195
Adjustments to reconcile net income to net cash provided by operating activities:
Earnings from consolidated subsidiaries		(140,044)		(101,295)		(84,890)
Dividends received from consolidated subsidiaries(1)		89,156		47,585		45,271
Amortization of restricted stock expense		7,359		6,514		5,789
Changes in assets and liabilities:
Other assets		15		15		(60)
Accounts payable and accrued liabilities		(123)		247		(492)
Net cash provided by operating activities		94,574		52,667		48,813
Proceeds from exercise of stock options		—		—		—
Excess tax benefit from stock options exercised		—		—		—
Dividends paid		(54,575)		(52,667)		(48,813)
Acquisition of treasury stock		(39,999)		—		—
Net cash used for financing activities		(94,574)		(52,667)		(48,813)
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 2020, 2019 or 2018 represent returns of capital and therefore no portion is presented as an investing activity.

104

Safety Insurance Group, Inc.

Supplementary Insurance Information

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
2020	$	74,962	$	567,581	$	421,901	$	771,078	$	41,045
2019		74,287		610,566		442,219		788,777		46,665
2018		73,355		584,719		435,380		781,587		43,788

	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
2020	$	771,078	$	41,045	$	404,556	$	146,955	$	119,527	$	763,537
2019		788,777		46,665		509,846		147,945		96,191		794,409
2018		781,587		43,788		485,513		146,601		100,042		786,912

105

Safety Insurance Group, Inc.

Reinsurance

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,
2020	$	815,981	$	74,268	$	29,365	$	771,078		3.8%
2019		845,102		89,178		32,853		788,777		4.2%
2018		836,759		87,368		32,196		781,587		4.1%

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Safety Insurance Group, Inc.

Valuation and Qualifying Accounts

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,
2020	$	578	$	3,294	$	—	$	2,118	$	1,754
2019		482		1,358		—		1,262		578
2018		414		1,338		—		1,270		482

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

107

Safety Insurance Group, Inc.

Supplemental Information Concerning Property and Casualty Insurance Operations

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
2020	$	74,962	$	567,581	$	421,901	$	771,078	$	41,045
2019		74,287		610,566		442,219		788,777		46,665
2018		73,355		584,719		435,380		781,587		43,788

	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
2020	$	459,400	$	(54,844)	$	146,955	$	431,480	$	763,537
2019		551,895		(42,049)		147,945		497,973		794,409
2018		542,001		(56,488)		146,601		500,161		786,912

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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)
4.1	Description of Safety Insurance Group, Inc. Capital Stock (19)
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)

109

10.21	Form of Restricted Stock Notice and Agreement (with performance-based vesting) under the 2002 Management Omnibus Plan, As Amended(3) (12)
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, 2021. (3) (20)
10.27	2018 Long-Term Incentive Plan (16)
10.28	Employment Agreement by and between Safety Insurance Group, Inc. and Christopher T. Whitford as of March 2, 2020. (3) (18)
10.29	Employment Agreement by and between Safety Insurance Group, Inc. and Glenn R. Hiltpold as of March 1, 2021. (3) (20)
21	Subsidiaries of Safety Insurance Group, Inc. (20)
23	Consent of PricewaterhouseCoopers LLP (20)
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 (20)
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(20)
32.1	CEO Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (20)
32.2	CFO Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (20)
101.INS	Inline XBRL Instance Document (20)
101.SCH	Inline XBRL Taxonomy Extension Schema (20)
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase (20)
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase (20)
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase (20)
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase (20)
104	Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101) (20)

(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, as amended on Form S-8 (Reg. No. 333-140423) filed on February 2, 2007, and as amended on Form S-8 (Reg. No. 333-226690) filed on August 8, 2018.

110

(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, as amended on Form S-8 (Reg. No. 333-140423) filed on February 2, 2007, and as amended on Form S-8 (Reg. No. 333-226690) filed on August 8, 2018 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.

(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 Form 10-K for the year ended December 31, 2017, as filed on February 28, 2018.

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

(17) Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2018, as filed on February 28, 2019.

(18) Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2019, as filed on February 28, 2020.

(19) Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2020, as filed on February 26, 2021.

(20) Included herein.

111

ITEM 16. FORM 10-K SUMMARY

None

112

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 26, 2021

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

113

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints George M. Murphy and Christopher T. Whitford, 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 26, 2021
George M. Murphy
/s/ Christopher T. Whitford	Vice President, Chief Financial Officer,	February 26, 2021
Christoper T. Whitford	Secretary, and Principal Accounting Officer
/s/ David F. Brussard	Director	February 26, 2021
David F. Brussard
/s/ Frederic H. Lindeberg	Director	February 26, 2021
Frederic H. Lindeberg
/s/ Peter J. Manning	Director	February 26, 2021
Peter J. Manning
/s/ David K. McKown	Director	February 26, 2021
David K. McKown
/s/ Thalia M. Meehan	Director	February 26, 2021
Thalia M. Meehan
/s/ Mary C. Moran	Director	February 26, 2021
Mary C. Moran

114