Safety Insurance (SAFT) 10-Q 2023 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

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)

Not Applicable

(Former name or former address, if changed since last report)

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

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.01 per share	SAFT	The Nasdaq Stock Market, LLC

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 the definition 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ☐  No ⌧

As of May 3, 2023 there were 14,865,525 shares of common stock with a par value of $0.01 per share outstanding.

SAFETY INSURANCE GROUP, INC.

TABLE OF CONTENTS

		Page No.
Part I. Financial Information
Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Comprehensive Income (Loss)	5
	Consolidated Statements of Changes in Shareholders’ Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Information about Market Risk	41
Item 4.	Controls and Procedures	41
Part II. Other Information
Item 1	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	43
EXHIBIT INDEX		44
SIGNATURE		45

2

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except share data)

	March 31,		December 31,
	2023		2022
	(Unaudited)
Assets
Investments:
Fixed maturities, available for sale, at fair value (amortized cost: $1,132,685 and $1,152,779, allowance for expected credit losses of $1,600 and $678)	$	1,048,449	$	1,050,155
Short term investments, at fair value (cost: $79 and $0)		79		—
Equity securities, at fair value (cost: $236,392 and $231,444)		245,872		240,155
Other invested assets		121,318		112,850
Total investments		1,415,718		1,403,160
Cash and cash equivalents		15,316		25,300
Accounts receivable, net of allowance for expected credit losses of $1,244 and $1,446		205,560		192,542
Receivable for securities sold		1,895		877
Accrued investment income		7,716		8,212
Taxes recoverable		4,835		—
Receivable from reinsurers related to paid loss and loss adjustment expenses		11,024		12,988
Receivable from reinsurers related to unpaid loss and loss adjustment expenses		95,900		93,394
Ceded unearned premiums		28,918		28,453
Deferred policy acquisition costs		76,919		75,582
Deferred income taxes		17,717		21,074
Equity and deposits in pools		34,008		33,648
Operating lease right-of-use-assets		22,214		23,336
Goodwill		17,093		17,093
Intangible assets		7,637		7,856
Other assets		27,328		29,054
Total assets	$	1,989,798	$	1,972,569
Liabilities
Loss and loss adjustment expense reserves	$	570,139	$	549,598
Unearned premium reserves		444,990		433,375
Accounts payable and accrued liabilities		53,252		73,875
Payable for securities purchased		—		1,359
Payable to reinsurers		9,895		11,444
Taxes payable		—		1,729
Debt		45,000		35,000
Operating lease liabilities		22,214		23,336
Other liabilities		41,383		30,854
Total liabilities		1,186,873		1,160,570
Commitments and contingencies (Note 8)
Shareholders’ equity
Common stock: $0.01 par value; 30,000,000 shares authorized; 17,948,889 and 17,879,095 shares issued		179		179
Additional paid-in capital		223,304		222,049
Accumulated other comprehensive (loss) income, net of taxes		(65,283)		(80,538)
Retained earnings		789,725		815,309
Treasury stock, at cost: 3,083,364 shares		(145,000)		(145,000)
Total shareholders’ equity		802,925		811,999
Total liabilities and shareholders’ equity	$	1,989,798	$	1,972,569

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

3

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended March 31,
	2023		2022
Net earned premiums	$	191,735	$	187,088
Net investment income		13,654		10,590
Earnings from partnership investments		2,166		2,832
Net realized gains on investments		733		4,210
Change in net unrealized gains on equity securities		770		(13,034)
Credit loss expense		(922)		—
Commission income		1,483		—
Finance and other service income		4,140		3,317
Total revenue		213,759		195,003
Losses and loss adjustment expenses		167,153		123,166
Underwriting, operating and related expenses		60,033		61,594
Other expense		1,670		—
Interest expense		210		129
Total expenses		229,066		184,889
(Loss) income before income taxes		(15,307)		10,114
Income tax (benefit) expense		(2,970)		2,276
Net (loss) income	$	(12,337)	$	7,838
(Loss) earnings per weighted average common share:
Basic	$	(0.84)	$	0.53
Diluted	$	(0.84)	$	0.53
Cash dividends paid per common share	$	0.90	$	0.90
Number of shares used in computing earnings per share:
Basic		14,682,507		14,627,898
Diluted		14,761,861		14,727,707

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

4

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2023		2022
Net (loss) income	$	(12,337)	$	7,838
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) during the period, net of income tax benefit of $4,209 and ($11,705).		15,834		(44,031)
Reclassification adjustment for net realized gains on investments included in net income, net of income tax benefit of ($154) and ($884).		(579)		(3,326)
Other comprehensive income (loss), net of tax:		15,255		(47,357)
Comprehensive income (loss)	$	2,918	$	(39,519)

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

5

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

(Dollars in thousands)

					Accumulated
					Other
			Additional		Comprehensive						Total
	Common		Paid-in		Income,		Retained		Treasury		Shareholders’
	Stock		Capital		Net of Taxes		Earnings		Stock		Equity
Balance at December 31, 2021	$	178	$	216,070	$	24,579	$	821,743	$	(135,397)	$	927,173
Net income, January 1 to March 31, 2022		—		—		—		7,838		—		7,838
Unrealized losses on securities available for sale, net of deferred federal income taxes		—		—		(47,357)		—		—		(47,357)
Restricted share awards issued		1		603		—		—		—		604
Recognition of employee share-based compensation, net of deferred federal income taxes		—		1,479		—		—		—		1,479
Dividends paid and accrued		—		—		—		(13,246)		—		(13,246)
Acquisition of treasury stock		—		—		—		—		(14,603)		(14,603)
Balance at March 31, 2022	$	179	$	218,152	$	(22,778)	$	816,335	$	(150,000)	$	861,888

					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, 2022	$	179	$	222,049	$	(80,538)	$	815,309	$	(145,000)	$	811,999
Net loss, January 1 to March 31, 2023		—		—		—		(12,337)		—		(12,337)
Unrealized gains on securities available for sale, net of deferred federal income taxes		—		—		15,255		—		—		15,255
Restricted share awards issued		—		522		—		—		—		522
Recognition of employee share-based compensation, net of deferred federal income taxes		—		733		—		—		—		733
Dividends paid and accrued		—		—		—		(13,247)		—		(13,247)
Balance at March 31, 2023	$	179	$	223,304	$	(65,283)	$	789,725	$	(145,000)	$	802,925

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

6

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2023		2022
Cash flows from operating activities:
Net (loss) income	$	(12,337)	$	7,838
Adjustments to reconcile net income to net cash provided by operating activities:
Investment amortization, net		(69)		412
Fixed asset depreciation, net		1,686		1,703
Stock based compensation		1,255		2,083
(Credit) provision for deferred income taxes		(697)		2,312
Net realized gains on investments		(733)		(4,210)
Credit loss (benefit) expense		922		—
Earnings from partnership investments		(2,166)		1,264
Change in net unrealized gains on equity securities		(770)		13,034
Changes in assets and liabilities:
Accounts receivable, net		(13,018)		3,857
Accrued investment income		496		(291)
Receivable from reinsurers		(542)		9,558
Ceded unearned premiums		(465)		(997)
Deferred policy acquisition costs		(1,337)		2,212
Taxes recoverable/payable		(6,564)		(3,017)
Other assets		434		(971)
Loss and loss adjustment expense reserves		20,541		(10,630)
Unearned premium reserves		11,615		(8,040)
Accounts payable and accrued liabilities		(20,123)		(25,067)
Payable to reinsurers		(1,549)		(6,449)
Other liabilities		10,529		123
Net cash used for operating activities		(12,892)		(15,276)
Cash flows from investing activities:
Fixed maturities purchased		(22,528)		(64,272)
Short term investments purchased		(79)		(5)
Equity securities purchased		(12,282)		(15,733)
Other invested assets purchased		(8,482)		(4,960)
Proceeds from sales and paydowns of fixed maturities		36,818		51,321
Proceeds from maturities, redemptions, and calls of fixed maturities		3,132		36,363
Proceed from sales of equity securities		8,310		12,868
Proceeds from other invested assets redeemed		2,301		233
Fixed assets purchased		(535)		(691)
Net cash provided by investing activities		6,655		15,124
Cash flows from financing activities:
Proceeds from FHLB loan		10,000		—
Dividends paid to shareholders		(13,747)		(13,617)
Acquisition of treasury stock		—		(14,603)
Net cash used for financing activities		(3,747)		(28,220)
Net decrease in cash and cash equivalents		(9,984)		(28,372)
Cash and cash equivalents at beginning of year		25,300		63,603
Cash and cash equivalents at end of period	$	15,316	$	35,231

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

7

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

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 Northeast Insurance Agency, Inc. (“SNIA”), and Safety Management Corporation (“SMC”), which is SNIA’s holding company. All intercompany transactions, including commission income and other expense, have been eliminated. Commission income totaled $180 for the three months ended March 31, 2023.

The financial information for the three months ended March 31, 2023 and 2022 is unaudited; however, in the opinion of the Company, the information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial condition, results of operations, and cash flows for the periods. The financial information as of December 31, 2022 is derived from the audited consolidated financial statements included in the Company's 2022 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on February 28, 2023.

These unaudited interim consolidated financial statements may not be indicative of financial results for the full year and should be read in conjunction with the audited consolidated financial statements included in the Company’s 2022 Annual Report on Form 10-K filed with the SEC on February 28, 2023.

The Company is a leading provider of property and casualty insurance focused primarily on the Massachusetts market. The Company’s principal product line is automobile insurance. The Company primarily 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.

SNIA was established on December 1, 2022 when the Company acquired the assets and operations of Northeast Metrowest Insurance Agency, Inc. (“Northeast / Metrowest”), an independent insurance agency, through its wholly-owned subsidiary, SMC. SNIA provides personal and commercial property and casualty insurance products to customers on behalf of the Insurance Subsidiaries and third-party insurance carriers. The Company conducted business with Northeast / Metrowest prior to its acquisition. During the eleven months prior to December 1, 2022, all commissions paid to Northeast / Metrowest were reflected as expenses and were conducted at standard market rates. Subsequent to the acquisition date, all business conducted with SNIA was considered an intercompany transaction and have been eliminated. As of March 31, 2023, fiduciary assets held by SNIA were immaterial and less than $100.

2. Recent Accounting Pronouncements

There are no recent accounting pronouncements that are applicable to the Company.

8

3. 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.

	Three Months Ended March 31,
	2023		2022
Earnings attributable to common shareholders - basic and diluted:
Net (loss) income from continuing operations	$	(12,337)	$	7,838
Allocation of income for participating shares		—		(35)
Net (loss) income from continuing operations attributed to common shareholders	$	(12,337)	$	7,803
Earnings per share denominator - basic and diluted
Total weighted average common shares outstanding, including participating shares		14,748,357		14,693,931
Less: weighted average participating shares		(65,850)		(66,033)
Basic earnings per share denominator		14,682,507		14,627,898
Common equivalent shares- non-vested performance stock grants		79,354		99,809
Diluted earnings per share denominator		14,761,861		14,727,707
Basic earnings per share	$	(0.84)	$	0.53
Diluted earnings per share	$	(0.84)	$	0.53
Undistributed earnings attributable to common shareholders - basic and diluted:
Net income from continuing operations attributable to common shareholders -Basic	$	(0.84)	$	0.53
Dividends declared		(0.90)		(0.90)
Undistributed earnings	$	(1.74)	$	(0.37)
Net income from continuing operations attributable to common shareholders -Diluted	$	(0.84)	$	0.53
Dividends declared		(0.90)		(0.90)
Undistributed earnings	$	(1.74)	$	(0.37)

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. As a result of the net loss for the three months ended March 31, 2023, the Company was required to use basic weighted average common shares outstanding in the calculation of diluted loss per share, since the inclusion of weighted average participating shares and common equivalent shares-non-vested performance stock grants would have been antidilutive to the (loss) earnings per share calculation. There were no anti-dilutive shares related to non-vested performance stock grants for the three months ended March 31, 2023 and 2022, respectively.

4.  Share-Based Compensation

2018 Long Term Incentive Plan

On March 24, 2022, the Company’s Board of Directors adopted the Amended and Restated Safety Insurance Group, Inc. 2018 Long-Term Incentive Plan (“the Amended 2018 Plan”), which was subsequently approved by our shareholders at the 2022 Annual Meeting of Shareholders. The Amended 2018 Plan increases the share pool limit by adding 350,000 common shares to the previously adopted Safety Insurance Group, Inc. 2018 Long-Term Incentive Plan. The Amended 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 Amended 2018 Plan supersedes the Company’s 2002 Management Omnibus Incentive Plan (“the 2002 Incentive Plan”).

9

The Amended 2018 Plan establishes a pool of 700,000 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 Amended 2018 Plan in the future.

The maximum number of shares of common stock between both the Amended 2018 Plan and 2002 Incentive Plan with respect to which awards may be granted is 3,200,000. No further grants will be allowed under the 2002 Incentive Plan. At March 31, 2023, there were 374,422 shares available for future grant.

Accounting and Reporting for Stock-Based Awards

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).

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 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 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.

10

The following table summarizes restricted stock activity under the Amended 2018 Plan during the three months ended March 31, 2023 assuming a target payout for the 2023 performance-based shares.

	Shares	Weighted		Performance-based		Weighted
	Under	Average		Shares Under		Average
	Restriction	Fair Value		Restriction		Fair Value
Outstanding at beginning of year	63,413	$	83.87	75,069		$	84.46
Granted	39,101		80.24	30,693	(1)		81.81
Vested and unrestricted	(35,046)		84.23	(26,599)			90.50
Forfeited	—		—	—			—
Outstanding at end of period	67,468	$	81.58	79,163		$	81.41

(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 and granted under the Amended 2018 Plan.

As of March 31, 2023, there was $8,491 of unrecognized compensation expense related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 1.8 years.  The total fair value of the shares that were vested and unrestricted during the three months ended March 31, 2023 and 2022 was $5,359 and $5,734, respectively.  For the three months ended March 31, 2023 and 2022, the Company recorded compensation expense related to restricted stock of $991 and $1,646, net of income tax benefits of $264 and $437, respectively, within Underwriting, operating and related expenses on the Consolidated Statements of Operations.

5.  Investments

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 for the periods indicated.

	As of March 31, 2023
	Cost or		Allowance for		Gross Unrealized				Estimated
	Amortized		Expected Credit						Fair
	Cost		Losses		Gains		Losses (3)		Value
U.S. Treasury securities	$	1,825	$	—	$	—	$	(130)	$	1,695
Obligations of states and political subdivisions		48,107		—		349		(2,832)		45,624
Residential mortgage-backed securities (1)		254,043		—		690		(21,370)		233,363
Commercial mortgage-backed securities		160,015		—		124		(14,335)		145,804
Other asset-backed securities		68,729		—		—		(4,116)		64,613
Corporate and other securities		599,966		(1,600)		1,713		(42,729)		557,350
Subtotal, fixed maturity securities		1,132,685		(1,600)		2,876		(85,512)		1,048,449
Short term investments		79		—		—		—		79
Equity securities (2)		236,392		—		27,663		(18,183)		245,872
Other invested assets (4)		121,318		—		—		—		121,318
Totals	$	1,490,474	$	(1,600)	$	30,539	$	(103,695)	$	1,415,718

11

	As of December 31, 2022
	Cost or		Allowance for		Gross Unrealized				Estimated
	Amortized		Expected Credit						Fair
	Cost		Losses		Gains		Losses (3)		Value
U.S. Treasury securities	$	1,825	$	—	$	—	$	(156)	$	1,669
Obligations of states and political subdivisions		57,319		—		282		(3,532)		54,069
Residential mortgage-backed securities (1)		259,878		—		385		(25,761)		234,502
Commercial mortgage-backed securities		156,303		—		107		(16,479)		139,931
Other asset-backed securities		74,160		—		—		(5,429)		68,731
Corporate and other securities		603,294		(678)		740		(52,103)		551,253
Subtotal, fixed maturity securities		1,152,779		(678)		1,514		(103,460)		1,050,155
Equity securities (2)		231,444		—		31,857		(23,146)		240,155
Other invested assets (4)		112,850		—		—		—		112,850
Totals	$	1,497,073	$	(678)	$	33,371	$	(126,606)	$	1,403,160

(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 1,118 and 1,195 securities in an unrealized loss position at March 31, 2023 and December 31, 2022, respectively.

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

The amortized cost and the estimated fair value of fixed maturity securities, by maturity, are shown below for the period indicated. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	As of March 31, 2023
	Amortized		Estimated
	Cost		Fair Value
Due in one year or less	$	6,484	$	6,121
Due after one year through five years		299,298		281,818
Due after five years through ten years		304,752		280,302
Due after ten years through twenty years		37,835		35,335
Due after twenty years		1,529		1,093
Asset-backed securities		482,787		443,780
Totals	$	1,132,685	$	1,048,449

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

	Three Months Ended March 31,
	2023		2022
Gross realized gains
Fixed maturity securities	$	539	$	472
Equity securities		1,523		3,925
Gross realized losses
Fixed maturity securities		(622)		(186)
Equity securities		(707)		(1)
Net realized gains on investments	$	733	$	4,210

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.

12

The following tables as of March 31, 2023 and December 31, 2022 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 March 31, 2023
	Less than 12 Months				12 Months or More				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U.S. Treasury securities	$	—	$	—	$	1,695	$	130	$	1,695	$	130
Obligations of states and political subdivisions		14,286		203		19,232		2,629		33,518		2,832
Residential mortgage-backed securities		75,548		3,088		134,453		18,282		210,001		21,370
Commercial mortgage-backed securities		31,265		1,436		108,347		12,899		139,612		14,335
Other asset-backed securities		11,364		661		52,731		3,455		64,095		4,116
Corporate and other securities		190,320		7,150		287,799		35,579		478,119		42,729
Subtotal, fixed maturity securities		322,783		12,538		604,257		72,974		927,040		85,512
Equity securities		101,178		12,527		19,959		5,656		121,137		18,183
Total temporarily impaired securities	$	423,961	$	25,065	$	624,216	$	78,630	$	1,048,177	$	103,695

	As of December 31, 2022
	Less than 12 Months				12 Months or More				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U.S. Treasury securities	$	1,669	$	156	$	—	$	—	$	1,669	$	156
Obligations of states and political subdivisions		34,178		2,504		3,072		1,028		37,250		3,532
Residential mortgage-backed securities		140,855		12,254		70,956		13,507		211,811		25,761
Commercial mortgage-backed securities		110,073		11,632		24,653		4,847		134,726		16,479
Other asset-backed securities		41,113		2,358		27,618		3,071		68,731		5,429
Corporate and other securities		386,401		28,048		131,046		24,055		517,447		52,103
Subtotal, fixed maturity securities		714,289		56,952		257,345		46,508		971,634		103,460
Equity securities		116,881		21,198		6,209		1,948		123,090		23,146
Total temporarily impaired securities	$	831,170	$	78,150	$	263,554	$	48,456	$	1,094,724	$	126,606

At March 31, 2023, U.S. Government residential mortgage backed securities with a fair value of $62,377 are pledged as collateral for a borrowing with the Federal Home Loan Bank of Boston (“FHLB-Boston”) as described in Note 9 – Debt. These securities are included in fixed maturity securities on the Company’s Consolidated Balance Sheets.

Impairments

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 expected credit loss component of the impairment from the amount related to all other factors. The expected credit loss component is recognized as an allowance for expected credit losses. The allowance is adjusted for any additional credit losses and subsequent recoveries, which are booked in income as either credit loss expense or credit loss benefit, respectively. Upon recognizing a credit loss, the cost basis is not adjusted. The impairment related to all other factors (non-credit factors) is reported in other comprehensive income.

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.

13

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.

As of March 31, 2023 and December 31, 2022, the Company concluded that $1,600 and $678, respectively, of unrealized losses were due to credit factors and were recorded as an allowance for expected credit losses 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 March 31, 2023 and December 31, 2022 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.

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

		Three Months Ended March 31,
		2023		2022
Beginning of period	$	678	$	691
Credit losses on securities with no previously recorded credit losses		354		—
Net increases (decreases) in allowance on previously impaired securities		568		—
Reduction due to sales		—		—
Writeoffs charged against allowance		—		—
Recoveries of amounts previously written off		—		—
Ending balance of period	$	1,600	$	691

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.

Net Investment Income

The components of net investment income were as follows:

	Three Months Ended March 31,
	2023		2022
Interest on fixed maturity securities	$	11,744	$	9,105
Dividends on equity securities		1,610		1,320
Equity in earnings of other invested assets		1,086		1,016
Interest on other assets		31		7
Total investment income		14,471		11,448
Investment expenses		817		858
Net investment income	$	13,654	$	10,590

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

14

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 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 FHLB-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.

15

●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.

●Federal Home Loan Bank of Boston (“FHLB-Boston”): value is equal to the cost of the member stock purchased, which is expected to be the exit price.

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 March 31, 2023. There were no significant changes to the valuation process during the three months ended March 31, 2023. As of March 31, 2023 and December 31, 2022, no quotes or prices obtained were adjusted by management. All broker quotes obtained were non-binding.

At March 31, 2023 and December 31, 2022, investments in fixed maturities classified as available-for-sale had a fair value which equaled carrying value $1,048,449 and $1,050,155, respectively. At March 31, 2023 and December 31, 2022, the Company held $79 and $0 of short-term investments, respectively. The carrying values of cash and cash equivalents and investment income accrued approximated fair value.

16

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

	As of March 31, 2023
	Total		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
U.S. Treasury securities	$	1,695	$	—	$	1,695	$	—
Obligations of states and political subdivisions		45,624		—		45,624		—
Residential mortgage-backed securities		233,363		—		233,363		—
Commercial mortgage-backed securities		145,804		—		145,804		—
Other asset-backed securities		64,613		—		64,613		—
Corporate and other securities		557,350		—		557,350		—
Short term investments		79		—		79		—
Equity securities		207,983		205,048		—		2,935
Total investment securities	$	1,256,511	$	205,048	$	1,048,528	$	2,935

	As of December 31, 2022
	Total		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
U.S. Treasury securities	$	1,669	$	—	$	1,669	$	—
Obligations of states and political subdivisions		54,069		—		54,069		—
Residential mortgage-backed securities		234,502		—		234,502		—
Commercial mortgage-backed securities		139,931		—		139,931		—
Other asset-backed securities		68,731		—		68,731		—
Corporate and other securities		551,253		—		551,253		—
Equity securities		199,705		197,450		—		2,255
Total investment securities	$	1,249,860	$	197,450	$	1,050,155	$	2,255

As of March 31, 2023 and December 31, 2022, there were approximately $37,889 and $40,450, respectively, 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 financial statements. The Company is required to submit a request 45 days before a quarter end to dispose of the security.

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2023 and 2022.

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

	Three Months Ended March 31,
	2023		2022
	Level 3		Level 3
	Fair Value		Fair Value
	Securities		Securities
Balance at beginning of period	$	2,255	$	1,698
Net gains and losses included in earnings		—		—
Net gains included in other comprehensive income		—		—
Purchases		680		—
Sales		—		—
Transfers into Level 3		—		—
Transfers out of Level 3		—		—
Balance at end of period	$	2,935	$	1,698
Amount of total losses included in earnings attributable to the change in unrealized losses related to assets still held at end of period	$	—	$	—

Transfers in and out of Level 3 are attributable to changes in the ability to observe significant inputs in determining fair value exit pricing. As noted in the table above, no transfers were made in or out of Level 3 during the three months ended March 31, 2023 and 2022. The Company held one Level 3 security at March 31, 2023 and March 31, 2022.

17

6.  Allowance for Expected Credit Losses

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.

The following table presents the balances of premiums receivable, net of the allowance for expected credit losses and changes in the allowance for expected credit losses for the three months ended March 31, 2023 and 2022.

		At and For the				At and For the
		Three Months Ended March 31, 2023				Three Months Ended March 31, 2022
		Accounts Receivable Net of Allowance for Expected Credit Losses		Allowance for Expected Credit Losses		Accounts Receivable Net of Allowance for Expected Credit Losses		Allowance for Expected Credit Losses
Balance, beginning of period	$	192,542	$	1,446	$	170,953	$	1,808
Current period change for expected credit losses				484				401
Writeoffs of uncollectable accounts receivable				(686)				(476)
Balance, end of period	$	205,560	$	1,244	$	167,096	$	1,733

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 loss adjustment expenses (“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 losses and loss 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, which represents 94% of the total reinsurance recoverable on paid and unpaid losses at March 31, 2023 and December 31, 2022. The remaining 6% 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 March 31, 2023 and December 31, 2022, 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 no expected credit losses at March 31, 2023 or December 31, 2022.

18

7.  Loss and Loss Adjustment Expense Reserves

The following table sets forth a reconciliation of beginning and ending reserves for losses and LAE, as shown in the Company’s consolidated financial statements for the periods indicated.

	Three Months Ended March 31,
	2023		2022
Reserves for losses and LAE at beginning of year	$	549,598	$	570,651
Less receivable from reinsurers related to unpaid losses and LAE		(93,394)		(90,667)
Net reserves for losses and LAE at beginning of year		456,204		479,984
Incurred losses and LAE, related to:
Current year		178,686		135,578
Prior years		(11,533)		(12,412)
Total incurred losses and LAE		167,153		123,166
Paid losses and LAE related to:
Current year		60,093		57,650
Prior years		89,025		76,135
Total paid losses and LAE		149,118		133,785
Net reserves for losses and LAE at end of period		474,239		469,365
Plus receivable from reinsurers related to unpaid losses and LAE		95,900		90,656
Reserves for losses and LAE at end of period	$	570,139	$	560,021

At the end of each period, the reserves were re-estimated for all prior accident years. The Company’s prior year reserves decreased by $11,533 and $12,412 for the three months ended March 31, 2023 and 2022, respectively, and resulted from re-estimations of prior years ultimate loss and LAE liabilities. The decreases in prior years reserves during the three months ended March 31, 2023 and 2022 are primarily composed of reductions in our retained automobile and retained homeowners lines reserves.

The Company's automobile lines of business reserves decreased for the three months ended March 31, 2023 and 2022, 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. 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.

8.  Commitments and Contingencies

Commitments

As part of the Company’s investment activity, we have committed $160,000 to investments in limited partnerships. The Company has contributed $122,746 to these commitments as of March 31, 2023. As of March 31, 2023, the remaining committed capital that could be called is $44,400, which includes potential recallable capital contributions.

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 had 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 position is that no coverage existed for this peril. As a result of the lawsuit, the Company accrued a reserve of $6,500 for legal defense costs included in Loss and Losses Adjustment Expenses during the year ended December 31, 2021. During the year ended December 31, 2022, the claim against the Company was closed and the accrual of $6,500 was reversed.

19

On October 19, 2021, the Supreme Judicial Court of Massachusetts (the “SJC”) unanimously ruled that property and casualty insurers must compensate third-party claimants under property damage coverage, part 4 of the standard Massachusetts automobile insurance policy, 2008 edition (standard policy), for the inherent diminished value (“IDV”) that occurs when their vehicles are damaged in a crash. This ruling overturned a previous decision by the Massachusetts Superior Court, which found that a Massachusetts auto insurance policy did not provide property damage coverage for inherent diminished value damages for third-party claimants. The SJC placed the burden of proof on the individual claimant by explicitly specifying that the claimant must establish that the vehicle has suffered IDV damages and also the amount of IDV damages at issue. The SJC further ruled that an insurer’s previous denial of coverage for such damages could not serve as the basis for a claim of unfair business practices. Based on the SJC’s rulings, at this time the Company does not expect any claims for IDV damages to be material, and therefore has not accrued for a specific loss contingency.

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 are not expected to have a material effect upon the financial position of the Company.

9.  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 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 March 31, 2023, the Company was in compliance with all covenants. In addition, the credit facility includes customary events of default, including a cross-default provision permitting the lenders to accelerate the facility if the Company (i) defaults in any payment obligation under debt having a principal amount in excess of $10,000 or (ii) fails to perform any other covenant permitting acceleration of all such debt.

The Company had no amounts outstanding on its credit facility at March 31, 2023 and December 31, 2022. 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 March 31, 2023 and 2022.

The Company is a member of the 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 March 31, 2023, the Company has the ability to borrow $193,547 using eligible invested assets that would be used as collateral.

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.

On December 29, 2022, the Company borrowed $5,000 from the FHLB-Boston for a term of one-month, bearing interest at a rate of 4.34%. The interest and principal was paid on the maturity date of January 27, 2023.

20

On March 7, 2023, the Company borrowed $15,000 from FHLB-Boston for a term of one-month, bearing an interest rate of 4.92%. The interest and principal was paid on the maturity date of April 5, 2023.

The Company estimates the fair value of the FHLB-Boston loans by discounting cash flows using the interest rate stated in the loan agreement, which is an observable input. As such, the loans are categorized as Level 2 within the fair value hierarchy. The fair value of the outstanding loans was $45,726 and $35,807 at March 31, 2023 and December 31, 2022, respectively. The loans are fully collateralized by specific U.S. Government residential mortgage-backed securities with a fair value of $62,377 and $40,195 at March 31, 2023 and December 31, 2022, respectively. The borrowing is outstanding from the FHLB-Boston at March 31, 2023 and December 31, 2022.

Interest expense on the FHLB-Boston borrowing was $155 and $107 for the three months ended March 31, 2023 and 2022, respectively.

10. Income Taxes

Federal income tax expense for the three months ended March 31, 2023 and 2022 has been computed using estimated effective tax rates.  These rates are revised, if necessary, at the end of each successive interim period to reflect the current estimates of the annual effective tax rates. The effective rate in 2023 was lower than the statutory rate primarily due to effects of the change in unrealized gains on equity securities and the impact of stock-based compensation.

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. Therefore, the Company has not recorded any liability for uncertain tax positions under ASC 740, Income Taxes.

During the three months ended March 31, 2023, 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.

All tax years prior to 2019 are closed. There are no current examinations ongoing.

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.

11. Share Repurchase Program

On February 23, 2022, the Board of Directors approved a share repurchase program of up to $50,000 of the Company’s outstanding common shares. The Board of Directors has cumulatively authorized increases to the existing share repurchase program of up to $200,000 of its outstanding common shares.  Under the program, the Company may repurchase shares of its common stock for cash in public or private transactions, in the open market or otherwise.  The timing of such repurchases and actual number of shares repurchased will depend on a variety of factors including price, market conditions and applicable regulatory and corporate requirements.  The program does not require the Company to repurchase any specific number of shares and it may be modified, suspended or terminated at any time without prior notice.

No share purchases were made by the Company under the program during the three months ended March 31, 2023. During the three months ended March 31, 2022, the Company purchased 170,904 shares at a cost of $14,603. As of March 31, 2023 and December 31, 2022, the Company had purchased 3,141,477 shares at a cost of $150,000.

21

12. 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.

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:

	Three Months Ended March 31,
		2023		2022
Operating lease cost	$	1,004	$	1,072

Other information related to leases was as follows:

	Three Months Ended March 31,
		2023		2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,111	$	1,210
Weighted average remaining lease term
Operating leases		5.53 Years		6.44 Years
Weighted average discount rate
Operating leases		2.39%		2.35%

Maturities of lease liabilities were as follows:

	Operating Leases
2023	$	3,383
2024		4,269
2025		3,867
2026		3,857
2027		3,857
Thereafter		3,859
Total lease payments		23,092
Less imputed interest		(878)
Total	$	22,214

13. Subsequent Events

The Company has evaluated subsequent events for recognition or disclosure in the consolidated financial statements filed on Form 10-Q with the SEC and no events have occurred that require recognition or disclosure.

22

Item 2.

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 Northeast Insurance Agency, Inc. (“SNIA”), and Safety Management Corporation (“SMC”), which is SNIA’s holding company.

We are a leading provider of private passenger automobile, commercial automobile, homeowners and commercial other-than-auto insurance in Massachusetts. In addition to private passenger automobile insurance (which represented 52.0% of our direct written premiums in 2022), we offer a portfolio of other insurance products, including commercial automobile (17.4% of 2022 direct written premiums), homeowners (25.3% of 2022 direct written premiums) and dwelling fire, umbrella and business owner policies (totaling 5.3% of 2022 direct written premiums).  Operating exclusively in Massachusetts, New Hampshire, and Maine through our insurance company subsidiaries, Safety Insurance, Safety Indemnity, Safety P&C, and Safety Northeast (together referred to as the “Insurance Subsidiaries”), we have established strong relationships with independent insurance agents, who numbered 843 in 1,071 locations throughout these three states at December 31, 2022. We have used these relationships and our extensive knowledge of the Massachusetts market to become the third largest private passenger automobile carrier and the second largest commercial automobile insurance carrier in Massachusetts, capturing an approximate 7.9% and 12.6% share, respectively, of the Massachusetts private passenger and commercial automobile markets in 2022 according to statistics compiled by the Commonwealth Automobile Reinsurers (“CAR”) based on automobile exposures. We are also the third largest homeowners insurance carrier in Massachusetts with a 6.5% share of the Massachusetts homeowners insurance market.

A.M. Best, which rates insurance companies based on factors of concern to policyholders, currently assigns Safety Insurance an "A (Excellent)" rating. Our "A" rating was reaffirmed by A.M. Best on May 26, 2022.

23

Our Insurance Subsidiaries began writing insurance in New Hampshire during 2008 and in Maine in 2016. In November 2020, we formed a fourth insurance subsidiary, Safety Northeast, which became licensed to write insurance products in Massachusetts. The table below shows the amount of direct written premiums written in each state during the three months ended March 31, 2023 and 2022.

	Three Months Ended March 31,
Direct Written Premiums	2023		2022
Massachusetts	$	207,952	$	181,091
New Hampshire		8,612		7,640
Maine		1,288		762
Total	$	217,852	$	189,493

Recent Trends and Events

Beginning on February 2, 2023 and through February 5, 2023, the Northeast region experienced a severe winter weather event (“February Winter Freeze”) over a thirty-six hour period, whereby temperatures reached lows of negative 40 degrees Fahrenheit, including windchill. As a result of the February Winter Freeze, the Company received 783 claims totaling $32,100 of losses and loss adjustment expenses as of the quarter ended March 31, 2023.

Losses and Loss Adjustment Expenses.  Losses and loss adjustment expenses incurred for the three months ended March 31, 2023 increased by $43,987, or 35.7%, to $167,153 from $123,166 for the comparable period. The increase in losses is due to the February Winter Freeze, as well as current market conditions, specifically inflation.

Direct and Net Written Premiums. For the quarter ended March 31, 2023, the Company achieved its second consecutive quarter of double-digit growth in direct and net written premiums. For the three months ended March 31, 2023, direct written premium growth and net written premium growth were 15.0% and 13.9%, respectively. The increase in premium is driven by new business production, specifically in the private passenger auto line, improved retention, and rate increases.

Non-generally accepted accounting principles (“non-GAAP”) operating loss, as defined below, was $12,796 for the three months ended March 31, 2023, compared to non-GAAP operating income of $14,809 for the comparable 2022 period. The decrease in Non-GAAP operating income was primarily the result of an increase in loss and loss adjustment expenses compared to the prior period. Non-GAAP operating loss for the quarter ended March 31, 2023 was $0.87 per diluted share, compared to non-GAAP operating income of $0.99 per diluted share for the comparable 2022 period.

The following rate changes have been filed and approved by the insurance regulators of Massachusetts and New Hampshire in 2023 and 2022. Our Massachusetts private passenger automobile rates include a 13% commission rate for agents.

Line of Business	Effective Date	Rate Change
Massachusetts Homeowners	August 1, 2023	3.9%
Massachusetts Private Passenger Automobile	July 1, 2023	4.3%
Massachusetts Commercial Automobile	May 1, 2023	4.0%
Massachusetts Private Passenger Automobile	December 1, 2022	3.5%
New Hampshire Commercial Automobile	September 1, 2022	5.8%
New Hampshire Homeowners	September 1, 2022	3.5%
New Hampshire Private Passenger Automobile	September 1, 2022	2.8%
Massachusetts Homeowners	July 1, 2022	2.6%
Massachusetts Commercial Automobile	May 1, 2022	3.1%
Massachusetts Private Passenger Automobile	April 1, 2022	-2.3%

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 Generally Accepted Accounting Principles (“GAAP”) basis).  The combined ratio reflects only

24

underwriting results and does not include income from investments or finance and other service income.  Underwriting profitability is subject to significant fluctuations due to competition, catastrophic events, weather, economic and social conditions, and other factors.

Our GAAP insurance ratios are outlined in the following table.

	Three Months Ended March 31,
	2023		2022
GAAP ratios:
Loss ratio	87.2	%	65.8	%
Expense ratio	31.3		32.9
Combined ratio	118.5	%	98.7	%

Share-Based Compensation

On March 24, 2022, the Company’s Board of Directors adopted the Amended and Restated Safety Insurance Group, Inc. 2018 Long-Term Incentive Plan (the “Amended 2018 Plan”), which was subsequently approved by our shareholders at the 2022 Annual Meeting of Shareholders. The Amended 2018 Plan increases the share pool limit by adding 350,000 common shares to the previously adopted Safety Insurance Group, Inc. 2018 Long-Term Incentive Plan. The Amended 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 Amended 2018 Plan supersedes the Company’s 2002 Management Omnibus Incentive Plan (“the 2002 Incentive Plan”).

The Amended 2018 Plan establishes a pool of 700,000 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 Amended 2018 Plan in the future.

The maximum number of shares of common stock between both the Amended 2018 Plan and 2002 Incentive Plan with respect to which awards may be granted is 3,200,000. No further grants will be allowed under the 2002 Incentive Plan. At March 31, 2023, there were 374,422 shares available for future grant.

A summary of share based awards granted under the Incentive Plan during the three months ended March 31, 2023 is as follows:

Type of		Number of		Fair
Equity		Awards		Value per
Awarded	Effective Date	Granted		Share (1)	Vesting Terms
RS - Service	February 23, 2023	33,101	$	80.24	3 years, 30%-30%-40%
RS - Performance	February 23, 2023	25,990	$	80.24	3 years, cliff vesting (3)
RS - Performance	February 23, 2023	4,703	$	80.24	3 years, cliff vesting (4)
RS	February 23, 2023	6,000	$	80.24	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 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 and granted under the Amended 2018 Plan.

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

25

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 other reinsurers have an A.M. Best rating of “A+” (Superior) or “A” (Excellent).

We maintain reinsurance coverage to help lessen the effect of losses from catastrophic events, maintaining coverage during 2023 that protects us in the event of a "129-year storm" (that is, a storm of a severity expected to occur once in a 129-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").

For 2023, we have purchased three layers of excess catastrophe reinsurance providing $590,000 of coverage for property losses in excess of $75,000 up to a maximum of $665,000. Our reinsurers’ co-participation is 75.0% of $75,000 for the 1st layer, 75.0% of $250,000 for the 2nd layer and 75.0% of $265,000 for the 3rd layer.

We also have casualty excess of loss reinsurance for large casualty losses occurring in our automobile, homeowners, dwelling fire, and business owner 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 $2,500 up to a maximum of $20,000, for our homeowners, and business owners. 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.

We are a participant in CAR, a state-established body that runs the residual market reinsurance programs for commercial automobile insurance in Massachusetts under which premiums, expenses, losses and loss adjustment expenses on ceded business are shared by all insurers writing automobile insurance in Massachusetts. We also participate in the FAIR Plan in which premiums, expenses, losses and loss adjustment expenses on homeowners business that cannot be placed in the voluntary market are shared by all insurers writing homeowners insurance in Massachusetts. As a response to the exposure to catastrophe losses, on July 1, 2022, the FAIR Plan purchased $1,800,000 of catastrophe reinsurance for property losses with retention of $100,000.

At March 31, 2023, we had $118,065 recoverable from CAR comprising of loss adjustment expense reserves, unearned premiums and reinsurance recoverable.

Non-GAAP Measures

Management has included certain 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 GAAP. In addition, our definitions of these items may not be comparable to the definitions used by other companies.

Non-GAAP operating income and non-GAAP operating income per diluted share consist of our GAAP net income adjusted by the net realized gains (losses) on investments, changes in net unrealized gains on equity securities, credit loss benefit (expense) and taxes related thereto. Net income (loss) and earnings (loss) 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.

26

Results of Operations

Three Months Ended March 31, 2023 compared to Three Months Ended March 31, 2022

The following table shows certain of our selected financial results.

	Three Months Ended March 31,
	2023		2022
Direct written premiums	$	217,852	$	189,493
Net written premiums	$	202,884	$	178,052
Net earned premiums	$	191,735	$	187,088
Net investment income		13,654		10,590
Earnings from partnership investments		2,166		2,832
Net realized gains on investments		733		4,210
Change in net unrealized gains on equity securities		770		(13,034)
Credit loss expense		(922)		—
Commission income		1,483		—
Finance and other service income		4,140		3,317
Total revenue		213,759		195,003
Losses and loss adjustment expenses		167,153		123,166
Underwriting, operating and related expenses		60,033		61,594
Other expense		1,670		—
Interest expense		210		129
Total expenses		229,066		184,889
(Loss) income before income taxes		(15,307)		10,114
Income tax (benefit) expense		(2,970)		2,276
Net (loss) income	$	(12,337)	$	7,838
(Loss) earnings per weighted average common share:
Basic	$	(0.84)	$	0.53
Diluted	$	(0.84)	$	0.53
Cash dividends paid per common share	$	0.90	$	0.90
Reconciliation of Net (Loss) Income to Non-GAAP Operating (Loss) Income
Net (loss) income	$	(12,337)	$	7,838
Exclusions from net (loss) income:
Net realized gains on investments		(733)		(4,210)
Change in net unrealized gains on equity securities		(770)		13,034
Credit loss expense		922		-
Income tax benefit (expense) on exclusions from net (loss) income		122		(1,853)
Non-GAAP Operating (loss) income	$	(12,796)	$	14,809
Net (loss) income per diluted share	$	(0.84)	$	0.53
Exclusions from net (loss) income:
Net realized gains on investments		(0.05)		(0.29)
Change in net unrealized (gains) on equity securities		(0.05)		0.88
Credit loss expense		0.06		-
Income tax benefit (expense) on exclusions from net (loss) income		0.01		(0.13)
Non-GAAP Operating (loss) income per diluted share	$	(0.87)	$	0.99

Direct Written Premiums. Direct written premiums for the three months ended March 31, 2023 increased by $28,359, or 15.0%, to $217,852 from $189,493 for the comparable 2022 period. The increase in direct written premium is the result of new business production, improved retention, and rate increases.

Net Written Premiums. Net written premiums for the three months ended March 31, 2023 increased by $24,832, or 13.9%, to $202,884 from $178,052 for the comparable 2022 period. The increase was primarily due to the factors that increased direct written premiums.

Net Earned Premiums.  Net earned premiums for the three months ended March 31, 2023 increased by $4,647, or 2.5%, to $191,735 from $187,088 for the comparable 2022 period.

27

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

	Three Months Ended March 31,
	2023		2022
Written Premiums
Direct	$	217,852	$	189,493
Assumed		7,230		6,741
Ceded		(22,198)		(18,182)
Net written premiums	$	202,884	$	178,052
Earned Premiums
Direct	$	205,555	$	196,519
Assumed		7,913		7,754
Ceded		(21,733)		(17,185)
Net earned premiums	$	191,735	$	187,088

Net Investment Income.  Net investment income for the three months ended March 31, 2023 increased by $3,064, or 28.9%, to $13,654 from $10,590 for the comparable 2022 period. The increase is a result of higher yields of 3.8% for the three months ended March 31, 2023 compared to 2.9% for the three months ended March 31, 2022. The investment portfolio’s duration was 3.8 years at March 31, 2023 and December 31, 2022, respectively,

Earnings from Partnership Investments. Earnings from partnership investments was $2,166 for the three months ended March 31, 2023 compared to $2,832 for the comparable 2022 period. 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 was $733 for the three months ended March 31, 2023 compared to $4,210 for the comparable 2022 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 for the periods indicated:

	As of March 31, 2023
	Cost or		Allowance for		Gross Unrealized				Estimated
	Amortized		Expected Credit						Fair
	Cost		Losses		Gains		Losses (3)		Value
U.S. Treasury securities	$	1,825	$	—	$	—	$	(130)	$	1,695
Obligations of states and political subdivisions		48,107		—		349		(2,832)		45,624
Residential mortgage-backed securities (1)		254,043		—		690		(21,370)		233,363
Commercial mortgage-backed securities		160,015		—		124		(14,335)		145,804
Other asset-backed securities		68,729		—		—		(4,116)		64,613
Corporate and other securities		599,966		(1,600)		1,713		(42,729)		557,350
Subtotal, fixed maturity securities		1,132,685		(1,600)		2,876		(85,512)		1,048,449
Short term investments		79		—		—		—		79
Equity securities (2)		236,392		—		27,663		(18,183)		245,872
Other invested assets (4)		121,318		—		—		—		121,318
Totals	$	1,490,474	$	(1,600)	$	30,539	$	(103,695)	$	1,415,718

(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)Our investment portfolio included 1,118 securities in an unrealized loss position at March 31, 2023.

(4)Other invested asset accounted for under the equity method which approximated fair value.

28

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

	As of March 31, 2023
		Estimated
		Fair Value	Percent
U.S. Treasury securities and obligations of U.S. Government agencies	$	233,363	22.3	%
Aaa/Aa		229,887	21.9
A		210,444	20.1
Baa		209,397	20.0
Ba		62,177	5.9
B		86,585	8.3
Caa/Ca		4,376	0.4
Not rated		12,220	1.1
Total	$	1,048,449	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 March 31, 2023, 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.

The following table illustrates the gross unrealized losses included in our investment portfolio and the fair value of those securities, aggregated by investment category. The table also illustrates the length of time that they have been in a continuous unrealized loss position as of March 31, 2023.

	As of March 31, 2023
	Less than 12 Months				12 Months or More				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U.S. Treasury securities	$	—	$	—	$	1,695	$	130	$	1,695	$	130
Obligations of states and political subdivisions		14,286		203		19,232		2,629		33,518		2,832
Residential mortgage-backed securities		75,548		3,088		134,453		18,282		210,001		21,370
Commercial mortgage-backed securities		31,265		1,436		108,347		12,899		139,612		14,335
Other asset-backed securities		11,364		661		52,731		3,455		64,095		4,116
Corporate and other securities		190,320		7,150		287,799		35,579		478,119		42,729
Subtotal, fixed maturity securities		322,783		12,538		604,257		72,974		927,040		85,512
Equity securities		101,178		12,527		19,959		5,656		121,137		18,183
Total temporarily impaired securities	$	423,961	$	25,065	$	624,216	$	78,630	$	1,048,177	$	103,695

As of March 31, 2023 and December 31, 2022, the Company concluded that $1,600 and $678, respectively, of unrealized losses were due to credit factors and were recorded as an allowance for expected credit losses 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 March 31, 2023 and December 31, 2022 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.

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.

For information regarding fair value measurements of our investment portfolio, refer to Item 1-Financial Statements, Note 5, Investments, of this Form 10-Q.

29

Commission Income: Commission income includes revenues from new and renewal commissions paid by insurance carriers, which we recognize when earned. Commission income for the three months ended March 31, 2023 was $1,483.

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 for the three months ended March 31, 2023 increased by $823, or 24.8%, to $4,140 from $3,317 for the comparable 2022 period. The increase is primarily driven by the increase in written premium and changes to our fee assessment policies.

Losses and Loss Adjustment Expenses.  Loss and loss adjustment expenses incurred for the three months ended March 31, 2023 increased by $43,987, or 35.7%, to $167,153 from $123,166 for the comparable 2022 period. The increase in losses is due to the February Winter Freeze, as well as current market conditions including inflation.

Our GAAP loss ratio for the three months ended March 31, 2023 increased to 87.2% from 65.8% for the comparable 2022 period. Our GAAP loss ratio excluding loss adjustment expenses for the three months ended March 31, 2023 was 76.2% compared to 55.2% for the comparable 2022 period. Total prior year favorable development included in the pre-tax results for the three months ended March 31, 2023 was $11,533 compared to $12,412 for the comparable 2022 period.

Underwriting, Operating and Related Expenses.  Underwriting, operating and related expenses for the three months ended March 31, 2023 decreased by $1,561, or 2.5%, to $60,033 from $61,594 for the comparable 2022 period. Our GAAP expense ratio for the three months ended March 31, 2023 decreased to 31.3% from 32.9% for the comparable 2022 period. The decrease is driven by a decrease in contingent commission expenses.

Interest Expense.  Interest expense was $210 and $129 for the three months ended March 31, 2023 and 2022, respectively. The credit facility commitment fee included in interest expense was $19 for the three months ended March 31, 2023 and 2022.

Income Tax Expense.  Our effective tax rate was 19.4% and 22.5% for the quarters ended March 31, 2023 and 2022, respectively. The effective tax rate for the quarter ended March 31, 2023 was lower than the statutory rate primarily due to the effects of the change in unrealized gains on equity securities. The effective tax rate for the quarter ended March 31, 2022 was higher than the statutory rate primarily due to the effects of the change in unrealized gains on equity securities and the impact of stock-based compensation.

Net (Loss) Income.   Net loss for the three months ended March 31, 2023 was $12,337 compared to net income of $7,838 for the comparable 2022 period.

Non-GAAP Operating Income. Non-GAAP operating loss as defined above was $12,796 for the three months ended March 31, 2023 compared to non-GAAP operating income of $14,809 for the comparable 2022 period. The decrease in Non-GAAP operating income was primarily the result of an increase in loss and loss adjustment expenses compared to the prior period.

Liquidity and Capital Resources

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

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

30

Net cash used for operating activities was $12,892 and $15,276 during the three months ended March 31, 2023 and 2022, 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. Net cash used for operating activities during the three months ended March 31, 2023 was the result of the timing of expense and February Winter Freeze payments. Positive operating cash flows are expected in the future to meet our liquidity requirements.

Net cash provided by investing activities was $6,655 and $15,124 during the three months ended March 31, 2023 and 2022, respectively. Fixed maturities, equity securities, and other invested assets purchased were $43,292 for the three months ended March 31, 2023 compared to $84,965 for the comparable prior year period. Proceeds from maturities, redemptions, calls and sales, of securities were $50,561 during the three months ended March 31, 2023 compared to $100,785 for the comparable prior year period.

Net cash used for financing activities was $3,747 and $28,220 during the three months ended March 31, 2023 2022 period. The net cash used for financing activities during the three months ended March 31, 2023 consisted of dividend payments to shareholders offset by borrowings from the FHLB-Boston.

The Insurance Subsidiaries maintain a high degree of liquidity within their respective investment portfolios in fixed maturity and equity securities. 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 1- Financial Statements, Note 9, Debt, of this Form 10-Q.

Recent Accounting Pronouncements

There are no recent accounting pronouncements that are applicable to the Company.

Regulatory Matters

Our 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 Commissioner of the Division of Insurance of Massachusetts (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 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, 2022, the statutory surplus of Safety Insurance was $782,200, and its statutory net income for 2022 was $66,197. As a result, a maximum of $78,220 is available in 2023 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 $703,980 at December 31, 2022. During the three months ended March 31, 2023, Safety Insurance paid dividends to Safety of $8,056.

31

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

Since the initial public offering of its common stock in November 2002, the Company has paid regular quarterly dividends to shareholders of its common stock. Quarterly dividends paid during 2023 were as follows:

					Total
Declaration	Record	Payment	Dividend per		Dividends Paid
Date	Date	Date	Common Share		and Accrued
February 15, 2023	March 1, 2023	March 15, 2023	$	0.90	$	13,247

On May 3, 2023, our Board approved and declared a quarterly cash dividend of $0.90 per share which will be paid on June 15, 2023 to shareholders of record on June 1, 2023. We plan to continue to declare and pay quarterly cash dividends in 2023, depending on our financial position and the regularity of our cash flows.

On February 23, 2022, the Board of Directors approved a share repurchase program of up to $50,000 of the Company’s outstanding common shares.  As of March 31, 2023, the Board of Directors has cumulatively authorized increases to the existing share repurchase program of up to $200,000 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. No share purchases were made by the Company under the program during the three months ended March 31, 2023. As of March 31, 2023 and December 31, 2022, the Company had purchased 3,141,477 shares of common stock at a cost of $150,000.

Under the program, Safety may repurchase shares of its common stock for cash in public or private transactions, in the open market or otherwise, at management’s discretion. 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 Safety to repurchase any specific number of shares and may be modified, suspended or terminated at any time without prior notices.

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.

Risk-Based Capital Requirements

The NAIC has adopted a formula and model law to implement risk-based capital requirements for most property and casualty insurance companies, which are designed to determine minimum capital requirements and to raise the level of protection that statutory surplus provides for policyholder obligations. Under Massachusetts law, insurers having less total adjusted capital than that required by the risk-based capital calculation will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The risk-based capital law provides for four levels of regulatory action. The extent of regulatory intervention and action increases as the level of total adjusted capital to risk-based capital falls. As of December 31, 2022, the Insurance Subsidiaries had total capital of $782,200, 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 $200,196 at December 31, 2022.

32

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.

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 estimated losses incurred but not yet reported (“IBNR”) 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 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 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

33

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 $443,086 to $496,959 as of March 31, 2023. 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 $474,239 as of March 31, 2023.

The following table presents the point estimation of the recorded reserves and the range of estimations by line of business for net loss and LAE reserves as of March 31, 2023.

		As of March 31, 2023
Line of Business	Low		Recorded		High
Private passenger automobile	$	172,673	$	181,497	$	191,753
Commercial automobile		95,526		103,334		106,960
Homeowners		99,238		104,784		107,952
All other		75,649		84,624		90,294
Total	$	443,086	$	474,239	$	496,959

34

The following table presents our total net reserves and the corresponding case reserves and IBNR reserves for each line of business as of March 31, 2023.

		As of March 31, 2023
Line of Business	Case		IBNR		Total
Private passenger automobile	$	229,821	$	(48,333)	$	181,488
CAR assumed private passenger auto		1		8		9
Commercial automobile		63,145		9,966		73,111
CAR assumed commercial automobile		18,332		11,891		30,223
Homeowners		95,953		(1,621)		94,332
FAIR Plan assumed homeowners		4,002		6,450		10,452
All other		45,675		38,949		84,624
Total net reserves for losses and LAE	$	456,929	$	17,310	$	474,239

At March 31, 2023, our total IBNR reserves for our private passenger automobile line of business was comprised of ($73,731) related to estimated ultimate decreases in the case reserves, including anticipated recoveries (i.e. salvage and subrogation), and $25,398 related to our estimation for not yet reported losses.

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 39.3% of our total reserves for CAR assumed commercial automobile business as of March 31, 2023, 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 61.7% of our total reserves for FAIR Plan assumed homeowners at March 31, 2023, due to similar reporting delays in the information we receive from FAIR Plan.

The following table presents 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 March 31, 2023.

		As of March 31, 2023
Line of Business		Retained		Assumed		Net
Private passenger automobile	$	181,488
CAR assumed private passenger automobile			$	9
Net private passenger automobile					$	181,497
Commercial automobile		73,111
CAR assumed commercial automobile				30,223
Net commercial automobile						103,334
Homeowners		94,332
FAIR Plan assumed homeowners				10,452
Net homeowners						104,784
All other		84,624		—		84,624
Total net reserves for losses and LAE	$	433,555	$	40,684	$	474,239

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, consists 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 takes 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 must try to estimate the effects of the actions of our competitors in order to establish our Participation Ratio.

35

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 three months ended March 31, 2023, a 1 percentage-point change in the loss and LAE ratio would result in a change in reserves of $1,916. Each 1 percentage-point change in the loss and loss expense ratio would have had a $1,514 effect on net income, or $0.10 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 three months ended March 31, 2023. 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.

36

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	$	(3,630)	$	(1,815)	$	—
Estimated increase in net income		2,868		1,434		—
No Change in Severity
Estimated (decrease) increase in reserves		(1,815)		—		1,815
Estimated increase (decrease) in net income		1,434		—		(1,434)
+1 Percent Change in Severity
Estimated increase in reserves		—		1,815		3,630
Estimated decrease in net income		—		(1,434)		(2,868)
Commercial automobile retained loss and LAE reserves
-1 Percent Change in Severity
Estimated decrease in reserves		(1,462)		(731)		—
Estimated increase in net income		1,155		578		—
No Change in Severity
Estimated (decrease) increase in reserves		(731)		—		731
Estimated increase (decrease) in net income		578		—		(578)
+1 Percent Change in Severity
Estimated increase in reserves		—		731		1,462
Estimated decrease in net income		—		(578)		(1,155)
Homeowners retained loss and LAE reserves
-1 Percent Change in Severity
Estimated decrease in reserves		(1,887)		(943)		—
Estimated increase in net income		1,490		745		—
No Change in Severity
Estimated (decrease) increase in reserves		(943)		—		943
Estimated increase (decrease) in net income		745		—		(745)
+1 Percent Change in Severity
Estimated increase in reserves		—		943		1,887
Estimated decrease in net income		—		(745)		(1,490)
All other retained loss and LAE reserves
-1 Percent Change in Severity
Estimated decrease in reserves		(1,692)		(846)		—
Estimated increase in net income		1,337		669		—
No Change in Severity
Estimated (decrease) increase in reserves		(846)		—		846
Estimated increase (decrease) in net income		669		—		(669)
+1 Percent Change in Severity
Estimated increase in reserves		—		846		1,692
Estimated decrease in net income		—		(669)		(1,337)

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

37

reserves and net income for the three months ended March 31, 2023. 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 commercial automobile
Estimated (decrease) increase in reserves	$	(302)	$	302
Estimated increase (decrease) in net income		239		(239)
FAIR Plan assumed homeowners
Estimated (decrease) increase in reserves		(105)		105
Estimated increase (decrease) in net income		83		(83)

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 $11,533 and $12,412 during the three months ended March 31, 2023 and 2022, respectively.

The following table presents a comparison of prior year development of our net reserves for losses and LAE for the three months ended March 31, 2023 and 2022. 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.

	Three Months Ended March 31,
Accident Year	2023		2022
2013 & prior	$	(116)	$	(177)
2014		(228)		(269)
2015		(662)		(297)
2016		(302)		(746)
2017		(1,117)		(989)
2018		(766)		(2,410)
2019		(2,143)		(2,643)
2020		(3,575)		(3,737)
2021		(1,198)		(1,144)
2022		(1,426)		—
All prior years	$	(11,533)	$	(12,412)

The decreases in prior years’ reserves during the three months ended March 31, 2023 and 2022 resulted from re-estimations of prior year ultimate loss and LAE liabilities. The 2023 decrease is composed of reductions of $3,207 in our retained private passenger automobile reserves, $2,286 in our retained commercial automobile reserves, $2,570 in our retained homeowners reserves and $3,470 our retained other lines reserves. The 2022 decrease is primarily composed of reductions of $3,580 in our retained private passenger automobile reserves, $1,175 in our retained commercial automobile reserves, $3,570 in our retained homeowners reserves and $2,581 in our retained other lines reserves.

38

The following table presents information by line of business for prior year development of our net reserves for losses March 31, 2023.

	Private Passenger		Commercial
Accident Year	Automobile		Automobile		Homeowners		All Other		Total
2013 & prior	$	(30)	$	1	$	—	$	(87)	$	(116)
2014		(28)		(22)		—		(178)		(228)
2015		(28)		(21)		(134)		(479)		(662)
2016		(6)		(83)		(236)		23		(302)
2017		(239)		(399)		(229)		(250)		(1,117)
2018		(123)		(485)		(134)		(24)		(766)
2019		(615)		(632)		(440)		(456)		(2,143)
2020		(1,898)		(178)		(1,174)		(325)		(3,575)
2021		(142)		(230)		(91)		(735)		(1,198)
2022		(98)		(237)		(132)		(959)		(1,426)
All prior years	$	(3,207)	$	(2,286)	$	(2,570)	$	(3,470)	$	(11,533)

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

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.

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 expected credit loss component of the impairment from the amount related to all other factors. The expected credit loss component is recognized as an allowance for expected credit losses. The allowance is adjusted for any additional credit losses and subsequent recoveries, which are booked in income as either credit loss expense or credit loss benefit, respectively. Upon recognizing a credit loss, the cost basis is not adjusted. The impairment related to all other factors (non-credit factors) is reported in other comprehensive income.

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;

● Legal and regulatory commentary

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

● Future performance of credit markets.

39

Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “aim,” “projects,” or words of similar meaning and expressions that indicate future events and trends, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” All statements that address expectations or projections about the future, including statements about the Company’s strategy for growth, product development, market position, expenditures and financial results, are forward-looking statements.

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

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

● Conditions for business operations and restrictive regulations in Massachusetts;

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

● The impact of inflation and supply chain delays on loss severity;

● 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;

● Other risks and factors identified from time to time in our reports filed with the SEC.  Refer to Part I, Item 1A — Risk Factors of our 2022 Annual Report on Form 10-K for the year ended December 31, 2022.

Some other factors, such as market, operational, liquidity, interest rate, equity and other risks, are described elsewhere in this Quarterly Report on Form 10-Q. 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.

40

Item 3.     Quantitative and Qualitative Information about Market Risk (Dollars in thousands)

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 March 31, 2023
Estimated fair value	$	1,089,304	$	1,048,449	$	1,007,108
Estimated increase (decrease) in fair value	$	40,855	$	—	$	(41,341)

With respect to floating rate debt, we are exposed to the effects of changes in prevailing interest rates. At March 31, 2023, 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 2023, assuming that all of such debt is outstanding for the entire year.

In addition, in the current market environment, our investments can also contain liquidity risks.

Equity Risk. Equity risk is the risk that we will incur economic losses due to adverse changes in equity prices. Our exposure to changes in equity prices results from our holdings of common stock and mutual funds held to fund the executive deferred compensation plan. We continuously evaluate market conditions and we expect in the future to purchase additional equity securities. We principally manage equity price risk through industry and issuer diversification and asset allocation techniques.

Item 4.     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

41

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.

Changes in Internal Control over Financial Reporting

In accordance with guidance issued by the Securities and Exchange Commission, the Company may exclude acquisitions from management’s assessment of the effectiveness of internal control over financial reporting for the first year in which the acquisition occurred. The Company’s management has excluded the assessment of internal controls of SNIA, which was acquired on December 1, 2022, and further discussed in Note 1, Basis of Presentation. As of March 31, 2023, SNIA accounted for an immaterial amount of consolidated assets and revenue.

Other than the matter described above, there have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

42

Part II. OTHER INFORMATION

Item 1.     Legal Proceedings - Please see “Item 1 — Financial Statements - Note 8, Commitments and Contingencies.”

Item 1A.  Risk Factors

There have been no subsequent material changes from the risk factors previously disclosed in the Company’s 2022 Annual Report on Form 10-K.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds (Dollars in thousands)

On February 23, 2022, the Board of Directors approved an additional share repurchase of up to $50,000 of the Company’s outstanding common shares.  The Board of Directors has cumulatively authorized increases to the existing share repurchase program of up to $200,000 of its outstanding common shares.  Under the program, the Company may repurchase shares of its common stock for cash in public or private transactions, in the open market or otherwise.  The timing of such repurchases and actual number of shares repurchased will depend on a variety of factors including price, market conditions and applicable regulatory and corporate requirements.  The program does not require the Company to repurchase any specific number of shares and it may be modified, suspended or terminated at any time without prior notice. No share repurchases were made by the Company during the three months ended March 31, 2023.

Item 3.   Defaults upon Senior Securities - None.

Item 4.   Mine Safety Disclosures — None.

Item 5.  Other Information - None.

Item 6.  Exhibits - The exhibits are contained herein as listed in the Exhibit Index.

43

SAFETY INSURANCE GROUP, INC.

EXHIBIT INDEX

Exhibit
Number	Description
11.0	Statement re: Computation of Per Share Earnings (1)
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(2)
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(2)
32.1	CEO Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002(2)
32.2	CFO Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002(2)
101.INS	Inline XBRL Instance Document(2)
101.SCH	Inline XBRL Taxonomy Extension Schema(2)
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase(2)
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase(2)
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase(2)
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase(2)
104	The cover page from this Current Report on form 10-Q, formatted in Inline XBRL(2)

(1) Not included herein as the information is included as part of this Form 10-Q, Item 1 - Financial Statements, Note 3, Earnings per Weighted Average Common Share.

(2) Included herein.

44

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

May 5, 2023	SAFETY INSURANCE GROUP, INC.  (Registrant)
	By:	/s/ CHRISTOPHER T. WHITFORD
		Christopher T. Whitford
		Vice President, Chief Financial Officer, Secretary and Principal Accounting Officer

45