<Page>
FILING PURSUANT TO RULE 424(B)(4)
REGISTRATION NO. 333-87056 AND NO. 333-101383
6,333,334 Shares
[LOGO]
Safety Insurance Group, Inc.
Common Stock
---------
Prior to this offering, there has been no public market for our common
stock. Our common stock has been approved for listing on The Nasdaq Stock
Market's National Market under the symbol "SAFT."
The underwriters have an option to purchase a maximum of 900,000 additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 13.
The following table does not include 333,334 shares being sold in this
offering to certain of our existing stockholders at a price equal to the initial
public offering price of $12.00 per share. The underwriters will not receive any
underwriting discounts or commissions on these shares, resulting in proceeds to
us of $4,000,008.
<Table>
<Caption>
Underwriting Proceeds to
Price to Discounts and Safety
Public Commissions Insurance Group
----------- -------------- ----------------
Per Share.................................. $12.00 $0.84 $11.16
Total...................................... $72,000,000 $5,040,000 $66,960,000
</Table>
Delivery of the shares of common stock will be made on or about
November 27, 2002.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse First Boston Jefferies & Company, Inc.
The date of this prospectus is November 21, 2002.
<Page>
--------------
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
SUMMARY............................. 1
THE OFFERING........................ 5
SUMMARY HISTORICAL FINANCIAL DATA... 6
RECENT DEVELOPMENTS................. 9
SUMMARY UNAUDITED PRO FORMA
FINANCIAL DATA.................... 10
RISK FACTORS........................ 13
THE ACQUISITION..................... 20
THE PREFERRED SHARE EXCHANGE........ 22
THE DIRECT SALE..................... 22
CAUTIONARY STATEMENT CONCERNING
FORWARD LOOKING STATEMENTS........ 22
USE OF PROCEEDS..................... 23
DIVIDEND POLICY..................... 24
CAPITALIZATION...................... 25
DILUTION............................ 26
SELECTED HISTORICAL FINANCIAL DATA.. 27
UNAUDITED PRO FORMA FINANCIAL
DATA.............................. 30
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS..................... 37
</Table>
<Table>
<Caption>
PAGE
----
BUSINESS............................ 54
MANAGEMENT.......................... 78
OWNERSHIP OF COMMON STOCK........... 88
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS...................... 91
COMMON STOCK ELIGIBLE FOR FUTURE
SALE.............................. 94
DESCRIPTION OF CAPITAL STOCK........ 96
FEDERAL INCOME AND ESTATE TAX
CONSIDERATIONS FOR NON-U.S.
HOLDERS OF COMMON STOCK........... 99
UNDERWRITING........................ 102
NOTICE TO CANADIAN RESIDENTS........ 105
VALIDITY OF COMMON STOCK............ 106
EXPERTS............................. 106
WHERE YOU CAN FIND MORE
INFORMATION....................... 106
INDEX TO FINANCIAL STATEMENTS....... F-1
</Table>
--------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL DECEMBER 17, 2002, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
<Page>
SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION ABOUT SAFETY INSURANCE GROUP, INC. AND
THE OFFERING. IN THIS PROSPECTUS, "SAFETY GROUP" REFERS TO SAFETY INSURANCE
GROUP, INC. AND "SAFETY," "OUR COMPANY," "WE" AND "OUR" REFER TO SAFETY
INSURANCE GROUP, INC. AND ITS CONSOLIDATED SUBSIDIARIES. BECAUSE THIS IS A
SUMMARY, IT MAY NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER BEFORE
INVESTING IN OUR COMMON STOCK. YOU SHOULD CAREFULLY READ THIS ENTIRE PROSPECTUS.
SAFETY INSURANCE GROUP, INC.
OUR BUSINESS
We are a leading provider of private passenger automobile insurance in
Massachusetts. In addition to private passenger automobile insurance (which
represented 83.1% of our direct written premiums in 2001), we offer a portfolio
of property and casualty insurance products, including commercial automobile
(9.0% of 2001 direct written premiums), homeowners (6.8% of 2001 direct written
premiums), dwelling fire, umbrella and business owner policies. Operating
exclusively in Massachusetts through our insurance company subsidiaries, Safety
Insurance Company, or Safety Insurance, and Safety Indemnity Insurance Company,
we have established strong relationships with approximately 500 independent
insurance agents in approximately 600 locations throughout Massachusetts. We
have used these relationships and our extensive knowledge of the Massachusetts
market to become the third largest private passenger insurance carrier in
Massachusetts, capturing approximately a 10.4% share of the Massachusetts
private passenger automobile insurance market in 2001, according to statistics
compiled by Commonwealth Automobile Reinsurers, or CAR, a state-established body
which runs the residual market reinsurance programs for private passenger
automobile insurance in Massachusetts. These statistics total, for each vehicle
insured, the number of months during the year insurance for that vehicle is in
effect, to arrive at an aggregate number of car-months for each insurer; this
aggregate number, divided by 12, equals the insurer's number of car-years, a
measure we refer to in this prospectus as automobile exposures.
We have been profitable in every year since our founding in 1979,
notwithstanding changing market conditions during that time. Since 1997, we have
increased our direct written premiums by 73%, from $272.5 million to
$471.9 million in 2001. We have achieved this growth by increasing our share of
the Massachusetts private passenger automobile insurance market from 7.6% to
10.4% over the same time period and by expanding our product offerings. We have
maintained our profitability during this period in part by managing our cost
structure through, for example, the use of technology. Over the same period, our
insurance subsidiaries have maintained an "A" rating from A.M. Best Company.
Although private passenger automobile insurance remains our primary product, its
overall share of our direct written premiums has declined from 88.1% in 1999 to
83.1% in 2001 while overall private passenger auto premiums increased from
$307.6 million to $392.3 million over the same period. The primary reason for
the decline in the overall share of our direct written premiums from private
passenger automobile insurance has been an increase in direct written premiums
from other products or the introduction of new products. For example, over the
same period, commercial automobile insurance has increased from 7.2% to 9.0% of
our direct written premiums, and homeowners insurance has increased from 4.4% to
6.8% of our direct written premiums.
OUR COMPETITIVE STRENGTHS
WE HAVE STRONG RELATIONSHIPS WITH INDEPENDENT AGENTS. In 2001, independent
agents accounted for approximately 77% of the Massachusetts private passenger
automobile insurance market measured by direct written premiums as compared to
only about 34% nationwide, according to A.M. Best. For that reason, our strategy
is centered around, and we sell exclusively through, a network of approximately
1
<Page>
500 independent agents in approximately 600 locations throughout Massachusetts.
In order to support our independent agents and enhance our relationships with
them we:
- Provide our agents with a portfolio of property and casualty insurance
products at competitive prices to help our agents address effectively the
insurance needs of their clients;
- Provide our agents with a variety of technological resources which enable
us to deliver superior service and support to them; and
- Offer our agents competitive commission schedules and profit sharing
programs.
Through these measures, we strive to become the preferred provider of the
independent agents in our agency network and capture a growing share of the
total insurance business written by these agents. We must compete with other
insurance carriers for the business of independent agents. Some of our
competitors offer a larger variety of products, lower prices for insurance
coverage or higher commissions. Nonetheless, we believe our mix of products,
pricing, support and commissions allows us to compete effectively for agents'
business in the current market environment.
WE HAVE AN UNINTERRUPTED RECORD OF PROFITABLE OPERATIONS. In every year
since our inception in 1979, we have been profitable and increased our direct
written premiums from the prior year. We have achieved profitable growth over
the past five years by, among other things:
- Increasing the number of private passenger automobile exposures we
underwrite from 287,000 in 1997 to 427,000 in 2001 and the average premium
we receive per automobile exposure from $748 to $918;
- Maintaining an adjusted statutory combined ratio that is consistently
below industry averages, as shown below;
- Taking advantage of the institutional knowledge our management has amassed
during our long operating history in the unique Massachusetts market;
- Introducing new lines of insurance products, such as homeowners, which
unlike personal auto do not have state-established maximum premium rates;
- Investing in technology, to simplify internal processes and enhance our
relationships with our agents; and
- Maintaining a high-quality investment portfolio.
The following table shows, on a statutory accounting basis, our loss ratio,
expense ratio and combined ratio as compared to the average for all property and
casualty insurers nationwide. The combined ratio indicates the profitability of
an insurer's underwriting. Although a combined ratio of
2
<Page>
greater than 100% indicates unprofitable underwriting, the insurer may be
profitable after including investment and fee income.
<Table>
<Caption>
SIX
MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------------------- JUNE 30,
RATIOS(1) 1997 1998 1999 2000 2001 2002
- --------- -------- -------- -------- -------- -------- --------
Safety
Loss ratio(2)................................ 74.0% 75.3% 74.9% 72.3% 78.8% 76.2%
Expense ratio................................ 30.6 29.9 29.0 28.2 26.1 23.9
----- ----- ----- ----- ----- ------
Combined ratio............................... 104.6% 105.2% 103.9% 100.5% 104.9% 100.1%
Property and casualty industry
Loss ratio................................... 73.0%(4) 76.5%(4) 78.8%(4) 81.4%(4) 89.3(4) (5)
Expense ratio(3)............................. 28.8(4) 29.5(4) 29.3(4) 28.9(4) 26.6(4) (5)
----- ----- ----- ----- ----- ------
Combined ratio............................... 101.8%(4) 106.0%(4) 108.1%(4) 110.3%(4) 115.9%(4) 105.1%(6)
</Table>
- ------------------------------
(1) The loss ratio is the ratio of losses and loss adjustment expenses to net
earned premiums. The expense ratio, when calculated on a statutory
accounting basis, is the ratio of underwriting expenses to net written
premiums. The combined ratio is the sum of the loss ratio and the expense
ratio.
(2) Our loss ratios and expense ratios for the years 1997 through 2000 have
been restated from amounts previously reported in our filings with state
regulators to conform to a change in how we began to present our residual
automobile market participation for statutory accounting purposes effective
as of January 1, 2001, as explained in footnote 1 to the table in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General--Insurance Ratios." See "Summary Historical Financial
Data" for a presentation of our ratios as originally reported. Our expense
ratios include certain compensation and interest costs charged to our
insurance subsidiaries under our prior majority owner, which are also
described in that footnote. If these costs were excluded from our expense
ratios, our adjusted expense and combined ratios, respectively, would have
been 25.8% and 99.8% for 1997, 25.6% and 100.9% for 1998, 25.4% and 100.3%
for 1999, 25.2% and 97.5% for 2000 and 24.8% and 103.6% for 2001.
(3) For property and casualty industry data, the expense ratios include
dividends to policyholders.
(4) Source: A.M. Best, AGGREGATES & AVERAGES, 2002 Edition.
(5) Property and casualty industry loss and expense ratios for the six months
ended June 30, 2002 are not yet available.
(6) Source: A.M. Best Statistical Study, September 16, 2002.
WE ARE A TECHNOLOGICAL LEADER. We have dedicated significant human and
financial resources to the development of information systems. Our technology
efforts have benefited us in two distinct ways. First, we continue to develop
technology that empowers our independent agent customers to make it easier for
them to transact business with their clients and with Safety. In our largest
business line, private passenger auto insurance, our agents now submit
approximately 92% of all applications for new policies or endorsements for
existing policies to us electronically through our proprietary information
portal, the Agents Virtual Community. Second, our investment in technology has
allowed us to re-engineer internal back office processes to provide more
efficient service at lower cost. Our adjusted statutory expense ratios have been
below the average industry statutory expense ratio in each of the last five
years, as shown above. Our systems have also improved our overall productivity,
as evidenced by our direct written premiums per employee increasing to $928,870
in 2001 from $612,348 in 1997.
WE HAVE AN EXPERIENCED, COMMITTED AND KNOWLEDGEABLE MANAGEMENT
TEAM. Following this offering, our executive management team will own
approximately 11% of our common stock on a fully diluted basis. The executive
management team, led by our Chief Executive Officer and President David F.
Brussard, has an average of over 25 years of industry experience per executive,
as well as an average of over 20 years of experience with Safety. The team has
demonstrated an ability to operate successfully within the regulated
Massachusetts private passenger automobile insurance market.
3
<Page>
OUR STRATEGY
To achieve our goal of increasing stockholder value, our strategy is to
maintain and develop strong relationships with independent agents by providing
our agents with a full package of insurance products and information technology
services. We believe this strategy will allow us to:
- Further penetrate the Massachusetts private passenger automobile insurance
market;
- Continue to selectively cross-sell homeowners, dwelling fire, personal
umbrella and business owner policies in order to capture a larger share of
selected Massachusetts property and casualty insurance business written by
each of our independent agents;
- Continue to expand our technology to enable independent agents to more
easily serve their customers and conduct business with Safety, thereby
strengthening their relationships with Safety; and
- If opportunities arise, selectively expand our business outside the
Massachusetts market into other markets with strong independent agent
distribution channels, where we can capitalize on our core strength of
serving independent agents.
CERTAIN RISKS OF OUR STRATEGY
Our ability to capitalize on our business strengths and implement our
strategies entails risks. For example, our exclusive focus on the Massachusetts
market means that, unlike most other insurers, we have no operations in other
states that could offset unfavorable changes in regulatory, economic,
demographic, competitive or other conditions in Massachusetts. Unlike in other
states, in Massachusetts the insurance commissioner sets the maximum premium
rates that insurers may charge for private passenger auto insurance. In three of
the last five years, Massachusetts has mandated a decrease, or no increase, in
average rates, and in the two other years, the permitted rate increase has been
negligible. Although in the future we may attempt to selectively expand our
business outside Massachusetts, we may not have an opportunity to do so
successfully. Despite our exclusive focus on Massachusetts, we believe our
detailed knowledge of the Massachusetts market allows us to operate effectively
within its unique regulatory framework. For further discussion of these and
other risks we face, see "Risk Factors."
RECENT HISTORY AND ACQUISITION
Safety Insurance was founded in 1979 and wrote exclusively auto insurance
until 1997. In October 2001, senior management of Safety Insurance, together
with certain investors, purchased the holding company for Safety Insurance and
its affiliates from the prior owners. This purchase, which we refer to in this
prospectus as the Acquisition, was financed with a combination of bank debt and
the issuance of senior subordinated notes, redeemable preferred stock and common
stock of Safety Group, which was formed in 2001 to make the Acquisition.
Concurrently with this offering, all of our outstanding redeemable preferred
shares will convert into shares of our common stock, valued at the initial
offering price, an event we refer to in this prospectus as the Preferred Share
Exchange. We have agreed to sell directly to Fairholme Partners, L.P., one of
our existing stockholders, on a non-underwritten basis 350,000 shares of our
common stock at the initial public offering price, a transaction which we refer
to as the Direct Sale. After the offering, the Preferred Share Exchange and the
Direct Sale, Fairholme Partners, L.P. will hold 1,238,649 shares of our common
stock, representing 8.6% of our outstanding common stock on a fully-diluted
basis. The Direct Sale will be consummated at the same time as this offering.
The consummation of the Direct Sale is not a condition to the consummation of
this offering. We will use proceeds from this offering and the Direct Sale,
together with borrowings under a new bank credit facility, to repay our existing
bank loans and thereby reduce our level of debt and to pay accrued dividends on
our preferred stock. We believe that this offering, the Direct Sale, our new
bank credit facility and the Preferred Share Exchange will improve our financial
flexibility and enhance our overall ability to grow our business. See "The
Acquisition."
------------------------
Our principal executive offices are located at 20 Custom House Street,
Boston, MA 02110. Our telephone number is (617) 951-0600.
4
<Page>
THE OFFERING(1)
<Table>
Common Shares Offered in the Offering........ 6,333,334 Shares
Common Shares Offered in the Direct Sale..... 350,000 Shares
Common Shares to be Outstanding after the
Offering and the Direct Sale(2)............ 14,359,999 Shares
NASDAQ Symbol................................ SAFT
Use of Proceeds.............................. We will receive net proceeds from the initial
public offering and the Direct Sale of
approximately $72.7 million, or
$82.7 million if the underwriters exercise in
full their option to purchase additional
shares. We intend to use the proceeds from
the offering and the Direct Sale, together
with approximately $29.9 million in
borrowings under a new bank credit facility,
assuming the underwriters do not exercise
their over-allotment option, to repay an
aggregate of $96.6 million of indebtedness
and accrued interest and pay $1.4 million in
accrued dividends on our outstanding
preferred stock (in each case, assuming the
payments occur on October 31, 2002), with
any remaining net proceeds to be used for our
general corporate purposes.
Dividend Policy.............................. Our board of directors currently intends to
declare an annual dividend on our common
stock of $0.28 per share. For more
information on dividends, including potential
limitations on our ability to pay them, see
"Dividend Policy."
</Table>
- ------------------------
(1) Prior to completing this offering, we declared a stock split in the form of
a dividend of shares of our common stock to our existing stockholders. This
prospectus presents all share and per share data for periods following the
Acquisition as if this stock dividend had already occurred.
(2) Includes 1,866,665 shares to be issued in connection with the Preferred
Share Exchange. Includes 350,000 shares to be sold in connection with the
Direct Sale upon consummation of this offering. Excludes 379,000 shares that
are subject to employee stock options to be granted effective as of the
closing of this offering, none of which may be exercised within 60 days
after the date of this offering.
5
<Page>
SUMMARY HISTORICAL FINANCIAL DATA
The following table sets forth our summary historical consolidated financial
data as of and for each of the five years ended December 31, 2001 and as of and
for the six months ended June 30, 2001 and 2002. Prior to October 16, 2001,
Thomas Black Corporation was the parent company of Safety Insurance. In the
columns below and throughout this prospectus, we refer to the period before the
Acquisition, between January 1 and October 15, 2001, as the predecessor period.
In the Acquisition, on October 16, 2001 Safety Group became the parent company
of Thomas Black Corporation. We refer to the period after the Acquisition,
between October 16 and December 31, 2001, as the successor period.
The summary historical consolidated financial data for the predecessor
period January 1, 2001 to October 15, 2001 and the successor period October 16,
2001 to December 31, 2001, and as of December 31, 2001 have been derived from
the financial statements of Safety Group and Thomas Black Corporation included
in this prospectus which have been audited by PricewaterhouseCoopers LLP,
independent accountants. The summary historical consolidated financial data for
the years ended December 31, 1999 and 2000 and as of December 31, 2000 have been
derived from Thomas Black Corporation's financial statements included in this
prospectus which have been audited by PricewaterhouseCoopers LLP. The summary
historical consolidated financial data for the years ended December 31, 1997 and
1998 and as of December 31, 1997, 1998 and 1999 have been derived from Thomas
Black Corporation's consolidated financial statements not included in this
prospectus, which have been audited by PricewaterhouseCoopers LLP. As a result
of the Acquisition, financial data for periods prior to the Acquisition may not
be comparable with financial data for periods following the Acquisition.
The summary historical consolidated income statement data for the six months
ended June 30, 2001 and 2002 and the summary historical consolidated balance
sheet data as of June 30, 2002 have been derived from our unaudited interim
condensed consolidated financial statements included in this prospectus. The
summary historical consolidated balance sheet data as of June 30, 2001 have been
derived from our unaudited interim condensed balance sheet data not included in
this prospectus.
We have prepared the summary historical consolidated financial data, other
than statutory data, in conformity with accounting principles generally accepted
in the United States of America, or GAAP. We have derived the statutory data
from the annual statements of our insurance subsidiaries filed with insurance
regulatory authorities, which were prepared in accordance with statutory
accounting practices, which vary in certain respects from GAAP.
The following is a summary and should be read in conjunction with "Selected
Historical Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and the accompanying notes included in this prospectus in order to more fully
understand our historical consolidated financial data.
6
<Page>
<Table>
<Caption>
PREDECESSOR YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1998 1999 2000
---------- ---------- ---------- ----------
($ IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
INCOME STATEMENT DATA:
Direct written premiums..... $ 272,495 $ 287,507 $ 349,206 $ 427,457
Net written premiums........ 243,688 259,153 330,961 430,030
Net earned premiums......... 242,760 246,507 300,020 381,413
Investment income........... 22,349 22,965 23,870 26,889
Net realized investment
gains (losses)............ 8,551 10,119 8,102 (1,246)
Finance and other service
income.................... 6,222 9,343 10,989 12,656
---------- ---------- ---------- ----------
Total income.............. 279,882 288,934 342,981 419,712
Losses and loss adjustment
expenses.................. 180,643 188,913 225,241 275,138
Underwriting, operating and
related expenses.......... 78,261 76,115 91,357 115,567
Transaction expenses(2)..... -- -- -- 406
Interest expense............ 2,040 1,716 1,418 1,072
---------- ---------- ---------- ----------
Total expenses............ 260,944 266,744 318,016 392,183
Income (loss) before income
taxes..................... 18,938 22,190 24,965 27,529
Income tax expense.......... 5,688 7,778 8,667 8,255
---------- ---------- ---------- ----------
Net income (loss) before
extraordinary item and
preferred stock
dividends................. 13,250 14,412 16,298 19,274
Excess of fair value of
acquired net assets over
purchase price............ -- -- -- --
---------- ---------- ---------- ----------
Net income before preferred
stock dividends........... $ 13,250 $ 14,412 $ 16,298 $ 19,274
Dividends on mandatorily
redeemable preferred
stock..................... -- -- -- --
---------- ---------- ---------- ----------
Net income available to
common stockholders....... $ 13,250 $ 14,412 $ 16,298 $ 19,274
========== ========== ========== ==========
Net income (loss) per common
share before extraordinary
item
Basic..................... $ 17.77 $ 18.47 $ 19.95 $ 22.50
========== ========== ========== ==========
Diluted................... $ 17.77 $ 18.47 $ 19.95 $ 22.50
========== ========== ========== ==========
Extraordinary item per
common share
Basic..................... $ -- $ -- $ -- $ --
========== ========== ========== ==========
Diluted................... $ -- $ -- $ -- $ --
========== ========== ========== ==========
Net income per common share
Basic..................... $ 17.77 $ 18.47 $ 19.95 $ 22.50
========== ========== ========== ==========
Diluted................... $ 17.77 $ 18.47 $ 19.95 $ 22.50
========== ========== ========== ==========
Weighted average number of
common shares outstanding
Basic..................... 745,800 780,300 816,800 856,800
========== ========== ========== ==========
Diluted................... 745,800 780,300 816,800 856,800
========== ========== ========== ==========
<Caption>
PREDECESSOR SUCCESSOR PREDECESSOR SUCCESSOR
PERIOD PERIOD ----------- ----------
----------- ------------ SIX MONTHS ENDED
JANUARY 1- OCTOBER 16- JUNE 30,
OCTOBER 15, DECEMBER 31, ------------------------
2001(1) 2001(1) 2001 2002
----------- ------------ ----------- ----------
($ IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
INCOME STATEMENT DATA:
Direct written premiums..... $ 391,628 $ 80,238 $ 259,918 $ 283,382
Net written premiums........ 382,486 82,980 256,322 285,355
Net earned premiums......... 347,098 100,175 218,013 241,420
Investment income........... 22,246 5,359 13,979 13,659
Net realized investment
gains (losses)............ (766) (4,284) (591) (2,388)
Finance and other service
income.................... 10,559 2,950 6,589 8,024
---------- ---------- ---------- ----------
Total income.............. 379,137 104,200 237,990 260,715
Losses and loss adjustment
expenses.................. 276,383 75,559 172,433 182,926
Underwriting, operating and
related expenses.......... 89,297 30,212 58,568 65,645
Transaction expenses(2)..... 5,605 3,874 109 --
Interest expense............ 550 1,823 387 4,151
---------- ---------- ---------- ----------
Total expenses............ 371,835 111,468 231,497 252,722
Income (loss) before income
taxes..................... 7,302 (7,268) 6,493 7,993
Income tax expense.......... 1,678 (1,666) 2,143 2,524
---------- ---------- ---------- ----------
Net income (loss) before
extraordinary item and
preferred stock
dividends................. 5,624 (5,602) 4,350 5,469
Excess of fair value of
acquired net assets over
purchase price............ -- 117,523 -- --
---------- ---------- ---------- ----------
Net income before preferred
stock dividends........... $ 5,624 $ 111,921 $ 4,350 $ 5,469
Dividends on mandatorily
redeemable preferred
stock..................... -- (280) -- (672)
---------- ---------- ---------- ----------
Net income available to
common stockholders....... $ 5,624 $ 111,641 $ 4,350 $ 4,797
========== ========== ========== ==========
Net income (loss) per common
share before extraordinary
item
Basic..................... $ 6.26 $ (1.07) $ 4.88 $ 0.87
========== ========== ========== ==========
Diluted................... $ 6.26 $ (1.07) $ 4.88 $ 0.83
========== ========== ========== ==========
Extraordinary item per
common share
Basic..................... $ -- $ 21.29 $ -- $ --
========== ========== ========== ==========
Diluted................... $ -- $ 21.29 $ -- $ --
========== ========== ========== ==========
Net income per common share
Basic..................... $ 6.26 $ 20.23 $ 4.88 $ 0.87
========== ========== ========== ==========
Diluted................... $ 6.26 $ 20.23 $ 4.88 $ 0.83
========== ========== ========== ==========
Weighted average number of
common shares outstanding
Basic..................... 898,300 5,519,500 891,300 5,519,500
========== ========== ========== ==========
Diluted................... 898,300 5,810,000 891,300 5,810,000
========== ========== ========== ==========
</Table>
7
<Page>
<Table>
<Caption>
SUCCESSOR
PREDECESSOR ------------- PREDECESSOR SUCCESSOR
----------------------------------------- AS OF AND FOR ------------ ------------
AS OF AND FOR THE YEAR ENDED THE YEAR AS OF AND FOR THE SIX
DECEMBER 31, ENDED MONTHS ENDED JUNE 30,
----------------------------------------- DECEMBER 31, ---------------------------
1997 1998 1999 2000 2001(1) 2001 2002
-------- -------- -------- -------- ------------- ------------ ------------
($ IN THOUSANDS, EXCEPT RATIOS)
BALANCE SHEET DATA:
Total cash & investments........ $404,702 $434,356 $447,836 $505,006 $529,286 $507,083 $516,885
Total assets.................... 717,400 734,647 770,009 833,339 859,174 836,769 920,256
Losses and loss adjustment
expenses reserves............. 319,453 311,846 315,226 302,131 302,556 302,140 309,351
Total debt...................... 27,000 22,500 18,000 13,383 99,500 7,964 98,500
Total liabilities............... 567,537 563,499 594,905 620,388 727,512 616,948 777,786
Mandatorily redeemable preferred
stock......................... -- -- -- -- 22,680 -- 23,352
Total stockholders' equity...... 149,863 171,148 175,105 212,951 108,982 219,821 119,118
STATUTORY DATA:
Policyholders' surplus (at
period end)................... $163,566 $179,926 $185,529 $192,577 $220,081 $207,370 $221,224
Loss ratio(3)................... 76.0% 77.1% 76.1% 73.5% 78.8% 79.2% 76.2%
Expense ratio(3)................ 29.9 29.1 28.6 27.3 25.0 23.6 23.9
-------- -------- -------- -------- -------- -------- --------
Combined ratio(3)............... 105.9% 106.2% 104.7% 100.8% 103.8% 102.8% 100.1%
======== ======== ======== ======== ======== ======== ========
</Table>
- ------------------------------
(1) In this financial presentation, the financial data for 2001 has been split
into a predecessor period from January 1, 2001 to October 15, 2001 and a
successor period from October 16, 2001 to December 31, 2001.
(2) Our transaction expenses reflect the costs we incurred in connection with
the Acquisition. See "The Acquisition."
(3) The loss ratio is the ratio of losses and loss adjustment expenses to net
earned premiums. The expense ratio, when calculated on a statutory
accounting basis, is the ratio of underwriting expenses to net written
premiums. The combined ratio is the sum of the loss ratio and the expense
ratio. Our expense ratios and combined ratios shown include certain
compensation and interest expenses charged to our insurance subsidiaries
under our prior majority owner which are described in footnote 1 to the
table shown under "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General--Insurance Ratios."
8
<Page>
RECENT DEVELOPMENTS
The following table sets forth certain unaudited financial data as of and
for the nine months ended September 30, 2001 and 2002.
<Table>
<Caption>
PREDECESSOR SUCCESSOR
----------- ---------
NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------------
2001 2002
----------- ---------
($ IN THOUSANDS)
INCOME STATEMENT DATA:
Direct written premiums..................................... $374,666 $409,597
Net written premiums........................................ 365,947 410,168
Net earned premiums......................................... 328,719 363,763
Investment income........................................... 21,000 19,719
Net realized investment losses.............................. (766) (968)
Finance and other service income............................ 9,982 12,012
-------- --------
Total income.............................................. 358,935 394,526
Losses and loss adjustment expenses......................... 261,320 276,761
Underwriting, operating and related expenses(1)............. 86,384 98,946
Transaction expenses(2)..................................... 850 --
Interest expense............................................ 534 6,075
-------- --------
Total expenses............................................ 349,088 381,782
Income before income taxes.................................. $ 9,847 $ 12,744
Income tax expense.......................................... 2,234 3,555
-------- --------
Net income before preferred stock dividends................. $ 7,613 $ 9,189
Dividends on mandatorily redeemable preferred stock......... -- (1,008)
-------- --------
Net income available to common stockholders................. $ 7,613 $ 8,181
======== ========
</Table>
<Table>
<Caption>
AS OF
SEPTEMBER 30,
-------------------
2001 2002
-------- --------
BALANCE SHEET DATA:
Total cash & investments.................................... $534,522 $595,463
Total assets................................................ 870,527 950,464
Losses and loss adjustment expenses reserves................ 306,277 326,608
Total debt.................................................. 7,964 96,500
Total liabilities........................................... 640,378 790,413
Mandatorily redeemable preferred stock...................... -- 23,688
Total stockholders' equity.................................. 230,149 136,363
</Table>
- ------------------------
(1) Includes $0.8 million of TJC Management fee expense and $4.5 million of put
and call options compensation expense on shares held by management for the
nine months ended September 30, 2002.
(2) Our transaction expenses reflect the costs we incurred in connection with
the Acquisition. See "The Acquisition."
9
<Page>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
We have derived the following summary unaudited pro forma financial data
from the pro forma financial data and the accompanying notes included elsewhere
in this prospectus. See "Unaudited Pro Forma Financial Data." The following data
give effect to the initial public offering, the Direct Sale and the Preferred
Share Exchange as if they had occurred as of June 30, 2002 for purposes of the
unaudited pro forma condensed consolidated balance sheet, and to the
Acquisition, the initial public offering, the Direct Sale, the replacement of
our existing credit facility with our new credit facility and the Preferred
Share Exchange as if they had occurred as of January 1, 2001 for purposes of the
unaudited pro forma condensed consolidated income statement for the year ended
December 31, 2001 and the six months ended June 30, 2002. We have prepared these
unaudited pro forma data based on the assumptions described in "Unaudited Pro
Forma Financial Data."
THE UNAUDITED PRO FORMA DATA ARE BASED ON AVAILABLE INFORMATION AND ON
ASSUMPTIONS WE BELIEVE ARE REASONABLE. THE UNAUDITED PRO FORMA DATA SHOULD NOT
BE CONSTRUED TO BE INDICATIVE OF OUR CONSOLIDATED FINANCIAL POSITION OR OUR
CONSOLIDATED RESULTS OF OPERATIONS HAD THESE TRANSACTIONS BEEN CONSUMMATED ON
THE DATES ASSUMED, AND DO NOT IN ANY WAY REPRESENT A PROJECTION OR FORECAST OF
OUR CONSOLIDATED FINANCIAL POSITION OR CONSOLIDATED RESULTS OF OPERATIONS FOR OR
AS OF ANY FUTURE PERIOD OR DATE.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2002
($ IN THOUSANDS)
<Table>
<Caption>
UNAUDITED
PRO FORMA,
AS ADJUSTED
-----------
ASSETS:
Cash and investments........................................ $521,195
Accounts receivable......................................... 133,742
Reinsurance recoverables.................................... 92,079
Deferred policy acquisition costs........................... 38,213
Deferred income taxes....................................... 15,852
Other assets................................................ 120,387
--------
Total assets.............................................. $921,468
========
LIABILITIES:
Loss and loss adjustment expense reserves................... 309,351
Unearned premium reserves................................... 286,447
Debt........................................................ 30,000
Other liabilities........................................... 83,208
--------
Total liabilities......................................... 709,006
--------
STOCKHOLDERS' EQUITY:
Common stock................................................ 144
Additional paid-in capital.................................. 101,634
Accumulated other comprehensive income, net of taxes........ 900
Promissory notes receivable from management................. (720)
Retained earnings........................................... 110,504
--------
Total stockholders' equity................................ 212,462
--------
Total liabilities and stockholders' equity.................. $921,468
========
</Table>
10
<Page>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2001
($ IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<Table>
<Caption>
UNAUDITED
PRO FORMA,
AS ADJUSTED
-----------
Net earned premiums......................................... $ 447,273
Investment income........................................... 26,302
Net realized investment losses.............................. (5,050)
Finance and other service income............................ 13,509
-----------
Total income.............................................. 482,034
-----------
Losses and loss adjustment expenses......................... 351,942
Underwriting, operating and related expenses................ 116,755
Transaction expenses........................................ 3,874
Interest expense............................................ 1,600
-----------
Total expenses............................................ 474,171
-----------
Income before income taxes.................................. 7,863
Income tax expense.......................................... 791
-----------
Net income before extraordinary item available to common
stockholders.............................................. $ 7,072
===========
Earnings per common share
Basic..................................................... $ 0.49
===========
Diluted................................................... $ 0.49
===========
Weighted average number of common shares outstanding
Basic..................................................... 14,359,999
===========
Diluted................................................... 14,359,999
===========
</Table>
11
<Page>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 2002
($ IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<Table>
<Caption>
UNAUDITED
PRO FORMA,
AS ADJUSTED
-----------
Net earned premiums......................................... $ 241,420
Investment income........................................... 13,659
Net realized investment losses.............................. (2,388)
Finance and other service income............................ 8,024
-----------
Total income.............................................. 260,715
-----------
Losses and loss adjustment expenses......................... 182,926
Underwriting, operating and related expenses................ 62,094
Interest expense............................................ 525
-----------
Total expenses............................................ 245,545
-----------
Income before income taxes.................................. 15,170
Income tax expense.......................................... 5,036
-----------
Net income available to common stockholders................. $ 10,134
===========
Earnings per common share:
Basic..................................................... $ 0.71
===========
Diluted................................................... $ 0.71
===========
Weighted average number of common shares outstanding
Basic..................................................... 14,359,999
===========
Diluted................................................... 14,359,999
===========
</Table>
12
<Page>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A NUMBER OF RISKS. YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING INFORMATION ABOUT THESE RISKS, TOGETHER WITH
THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE INVESTING IN SHARES
OF OUR COMMON STOCK. ANY OF THE RISKS DESCRIBED BELOW COULD RESULT IN A
SIGNIFICANT OR MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS OR FINANCIAL
CONDITION, AND A CORRESPONDING DECLINE IN THE MARKET PRICE OF OUR COMMON STOCK.
BECAUSE WE ARE PRIMARILY A PRIVATE PASSENGER AUTOMOBILE INSURANCE CARRIER, OUR
BUSINESS MAY BE ADVERSELY AFFECTED BY CONDITIONS IN THIS INDUSTRY.
Approximately 83% of our direct written premiums for the year ended
December 31, 2001 were generated from private passenger automobile insurance
policies. As a result of our focus on that line of business, negative
developments in the economic, competitive or regulatory conditions affecting the
private passenger automobile insurance industry could have a material adverse
effect on our results of operations and financial condition. In addition, these
developments would have a disproportionate effect on us, compared to insurers
which conduct operations in multiple business lines.
BECAUSE WE WRITE INSURANCE ONLY IN MASSACHUSETTS, OUR BUSINESS MAY BE ADVERSELY
AFFECTED BY CONDITIONS IN MASSACHUSETTS.
All of our direct written premiums are generated in Massachusetts. Our
revenues and profitability are therefore subject to prevailing regulatory,
economic, demographic, competitive and other conditions in Massachusetts.
Changes in any of these conditions could make it more costly or difficult for us
to conduct our business. Adverse regulatory developments in Massachusetts, which
could include, among others, reductions in the maximum rates permitted to be
charged, inadequate rate increases or more fundamental changes in the design or
implementation of the Massachusetts automobile insurance regulatory framework,
could have a material adverse effect on our results of operations and financial
condition. In addition, these developments would have a disproportionate effect
on us, compared to insurers which conduct operations in multiple states.
WE HAVE EXPOSURE TO CLAIMS RELATED TO SEVERE WEATHER CONDITIONS, WHICH MAY
RESULT IN AN INCREASE IN CLAIMS FREQUENCY AND SEVERITY.
We are subject to claims arising out of severe weather conditions, such as
rainstorms, snowstorms and ice storms, that may have a significant effect on our
results of operations and financial condition. The incidence and severity of
weather conditions are inherently unpredictable. There is generally an increase
in claims frequency and severity under the private passenger automobile
insurance we write when severe weather occurs because a higher incidence of
vehicular accidents and other insured losses tend to occur as a result of severe
weather conditions. In addition, we have exposure to an increase in claims
frequency and severity under the homeowners and other property insurance we
write because property damage may result from severe weather conditions.
Because some of our insureds live near the Massachusetts coastline, we also
have a potential exposure to losses from hurricanes and major coastal storms
such as Nor'easters. Although we purchase catastrophe reinsurance to limit our
exposure to these types of natural catastrophes, in the event of a major
catastrophe resulting in property losses to us in excess of $100.0 million, our
losses would exceed the limits of this reinsurance.
IF WE ARE NOT ABLE TO ATTRACT AND RETAIN INDEPENDENT AGENTS, IT COULD ADVERSELY
AFFECT OUR BUSINESS.
We market our insurance solely through independent agents. We must compete
with other insurance carriers for the business of independent agents. Some of
our competitors offer a larger variety of products, lower prices for insurance
coverage or higher commissions. While we believe that the commissions and
services we provide to our agents are competitive with other insurers, changes
in commissions, services or products offered by our competitors could make it
harder for us to attract and retain independent agents to sell our insurance
products.
13
<Page>
ESTABLISHED COMPETITORS WITH GREATER RESOURCES MAY MAKE IT DIFFICULT FOR US TO
MARKET OUR PRODUCTS EFFECTIVELY AND OFFER OUR PRODUCTS AT A PROFIT.
The property and casualty insurance business is highly competitive and many
of our competitors have substantially greater financial and other resources than
us. We compete with both large national writers and smaller regional companies.
Further, our competitors include other companies which, like us, serve the
independent agency market, as well as companies which sell insurance directly to
customers. Direct writers may have certain competitive advantages over agency
writers, including increased name recognition, loyalty of the customer base to
the insurer rather than to an independent agency and, potentially, lower cost
structures. A material reduction in the amount of business independent agents
sell would directly and negatively affect our profitability and our ability to
compete with insurers that do not rely solely on the independent agency market
to sell their products. In the past, competition in the Massachusetts personal
auto insurance market has included offering significant discounts from the
maximum permitted rates, and there can be no assurance that these conditions
will not recur. Further, our Company and others compete on the basis of the
commissions and other cash and non-cash incentives provided to agents. Although
a number of national insurers that are much larger than we are do not currently
compete in a material way in the Massachusetts personal auto market, if one or
more of these companies decided to aggressively enter the market it could reduce
our share of the Massachusetts market and thereby have a material adverse effect
on us. These companies include some that would be able to sustain significant
losses in order to acquire market share, as well as others which use
distribution methods that compete with the independent agent channel.
WE ARE CONTROLLED BY PRINCIPAL STOCKHOLDERS THAT HAVE THE ABILITY TO EXERT
SIGNIFICANT INFLUENCE OVER OUR OPERATIONS, INCLUDING CONTROLLING THE ELECTION OF
DIRECTORS.
Prior to this offering, our principal stockholders were certain investors
assembled by The Jordan Company LLC, the investment firm that sponsored the
Acquisition, which beneficially owned directly or indirectly, on a fully diluted
basis, 72.2% of our common stock. This group of investors includes JZ Equity
Partners plc, a publicly-traded investment trust listed on the London Stock
Exchange with an independent board of directors whose investment advisor is
affiliated with The Jordan Company, as well as Fairholme Partners, L.P., which
will consummate a purchase of 350,000 shares of our common stock simultaneously
with this offering. See "The Direct Sale." We refer to this group of investors
in this prospectus as the Investors. See "The Acquisition." After this offering,
the Direct Sale and the Preferred Share Exchange, the Investors will
beneficially own directly or indirectly, on a fully diluted basis, approximately
47% of our common stock. In addition, after the offering, the Direct Sale and
the Preferred Share Exchange, David F. Brussard, our Chief Executive Officer and
President, and the six other members of our executive management team (including
all of the Named Executive Officers described in "Management"), will
collectively own approximately 11% of our outstanding common stock on a
fully-diluted basis. We refer to this group of seven officers in this prospectus
as our Management Team. Until such time as the Investors and our Management Team
sell or dispose of the common stock held by them, they would have the ability,
if they were to vote together, to exert significant influence over our policies
and affairs. If they were to act together, the Investors and our Management Team
would have the power to elect our board of directors, appoint new management and
approve any action requiring stockholder vote, including amendments to our
Certificate of Incorporation and approving mergers or sales of substantially all
of our assets. The interests of the Investors and our Management Team may differ
from the interests of other stockholders. See "Certain Relationships and Related
Transactions."
AS A HOLDING COMPANY, SAFETY GROUP IS DEPENDENT ON THE RESULTS OF OPERATIONS OF
SAFETY INSURANCE.
Safety Group is a company and a legal entity separate and distinct from
Safety Insurance, our principal operating subsidiary, which is directly owned by
Thomas Black Corporation, an intermediate holding company and the primary
borrower under our existing credit facility. As a holding company without
significant operations of its own, the principal sources of Safety Group's funds
are dividends
14
<Page>
and other distributions from Thomas Black Corporation. In turn, Thomas Black
Corporation's principal sources of funds are dividends and other distributions
from Safety Insurance. Our rights, and consequently your rights as stockholders,
to participate in any distribution of assets of Safety Insurance are subject to
prior claims of policyholders, creditors and preferred stockholders, if any, of
Safety Insurance and Thomas Black Corporation (except to the extent that our
rights, if any, as a creditor are recognized). Consequently, our ability to pay
debts, expenses and cash dividends to our stockholders may be limited.
The ability of Safety Insurance to pay dividends is subject to limits under
Massachusetts insurance law. Further, the ability of Thomas Black Corporation to
pay dividends, and our subsidiaries' ability to incur indebtedness or to use the
proceeds of equity offerings, will be subject to limits under our new credit
facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
WE ARE SUBJECT TO COMPREHENSIVE REGULATION BY MASSACHUSETTS AND OUR ABILITY TO
EARN PROFITS MAY BE RESTRICTED BY THESE REGULATIONS.
GENERAL REGULATION. We are subject to regulation by government agencies in
Massachusetts, and we must obtain prior approval for certain corporate actions.
We must comply with regulations involving:
- transactions between an insurance company and any of its affiliates;
- the payment of dividends;
- the acquisition of an insurance company or of any company controlling an
insurance company;
- approval or filing of premium rates and policy forms;
- solvency standards;
- minimum amounts of capital and surplus which must be maintained;
- limitations on types and amounts of investments;
- restrictions on the size of risks which may be insured by a single
company;
- limitation of the right to cancel or non-renew policies in some lines;
- regulation of the right to withdraw from markets or terminate involvement
with agencies;
- requirements to participate in residual markets;
- licensing of insurers and agents;
- deposits of securities for the benefit of policyholders; and
- reporting with respect to financial condition.
In addition, insurance department examiners from Massachusetts perform
periodic financial and market conduct examinations of insurance companies. Such
regulation is generally intended for the protection of policyholders rather than
security holders.
Massachusetts requires that all licensed property and casualty insurers bear
a portion of the losses suffered by some insureds as a result of impaired or
insolvent insurance companies. In 1999, 2000 and 2001, we were assessed $0,
$5.2 million and $1.4 million, respectively, as our portion of these losses due
to the insolvencies of The Trust Insurance Company, Reliance Insurance Company
and New England Fidelity. As of October 28, 2002, we have been assessed
$2.1 million as our portion of the losses due to some of these insolvencies, as
well as the insolvencies of other insurers. These assessments were made by the
Massachusetts Insurers Insolvency Fund to cover the cost of paying eligible
claims of policyholders of these insolvent insurers, and by CAR, to recover the
shares of net CAR losses that would have been assessed to the insolvent
companies but for their insolvencies. In addition, Massachusetts has established
an underwriting association in order to ensure that property insurance is
available for owners of high risk property who are not able to obtain insurance
from private insurers. The losses of this underwriting association are shared by
all insurers that write property and casualty
15
<Page>
insurance in Massachusetts. We are assessed from time to time to pay these
losses. The effect of these assessments could reduce our profitability in any
given period and limit our ability to grow our business.
Because we are unable to predict with certainty changes in the political,
economic or regulatory environments in Massachusetts in the future, there can be
no assurance that existing insurance-related laws and regulations will not
become more restrictive in the future or that new restrictive laws will not be
enacted and, therefore, it is not possible to predict the potential effects of
these laws and regulations on us. See "Business--Regulation."
MASSACHUSETTS PERSONAL AUTO REGULATION. We are subject to the extensive
regulation of the private passenger automobile insurance industry in
Massachusetts. Owners of registered automobiles are required to maintain minimum
automobile insurance coverages. Generally, we are required by law to issue a
policy to any applicant who seeks it. We are assigned certain agents that have
been unable to obtain a voluntary contract with another insurer, on the basis of
our market share. We call these agents Exclusive Representative Producers or
ERPs. In addition, we are required to participate in a state-mandated
reinsurance program run by CAR, to which we cede certain undesirable risks and
from which we are allocated a portion of the program's overall losses. This
program operates at an underwriting deficit and results in expense for us. Our
ability to earn profits may be restricted by these requirements.
Proposals to change certain of CAR's rules are under consideration. In a
letter to the Massachusetts Insurance Commissioner (whom we refer to as the
Commissioner) dated June 25, 2002, the Massachusetts Attorney General reported
that his office has determined that CAR's current methodology for assigning ERPs
and distributing the CAR deficit is not fair and equitable. The Attorney
General's letter describes several factors that he believes support his findings
and which he believes should be corrected in order to comply with Massachusetts
law governing CAR. The Attorney General's letter calls on the Commissioner to
work with him to address these issues. The letter has engendered discussion and
dialogue among various parties that could result in material changes to CAR's
rules. It is uncertain whether and to what extent the issues raised by the
Attorney General will be addressed by CAR. We cannot be certain whether any
changes, if adopted by CAR, would affect our profitability.
Our marketing and underwriting strategies are limited by maximum premium
rates and minimum agency commission levels for personal automobile insurance,
which are mandated by the Commissioner. The Commissioner mandated an average
8.3% decrease in personal automobile premiums for 2001, as compared to an
average rate increase of 0.7% in 2000. There is no change in personal automobile
premium rates for 2002. During the period from 1996 through 1999, average
premium rates decreased in three out of four years. Coinciding with the 2001
premium rate decrease, the Commissioner also approved an increase in the minimum
commission rate agents receive for selling private passenger automobile
insurance as a percentage of premiums, from 11.8% in 2000 to 12.3% in 2001. The
Commissioner reduced commission rates to 11.7% in 2002. Premium rates are set
following a proceeding in which the Commissioner considers historic information
relating to claims costs as well as outside factors affecting insurance costs.
If the information considered does not accurately predict the future benefit and
expense costs of insurers, or if the Commissioner otherwise sets inadequate
premium rates, our future profitability could be decreased. Future increases in
commission rates would also decrease our profitability.
WE MAY ENTER NEW MARKETS AND THERE CAN BE NO ASSURANCE THAT OUR DIVERSIFICATION
STRATEGY WILL BE EFFECTIVE.
Although we intend to concentrate on our core businesses in Massachusetts,
we also may seek to take advantage of prudent opportunities to expand our core
businesses into other states where we believe the independent agent distribution
channel is strong. As a result of a number of factors, including the
difficulties of finding appropriate expansion opportunities and the challenges
of operating
16
<Page>
in an unfamiliar market, we may not be successful in this diversification.
Additionally, in order to carry out any such strategy we would need to obtain
the appropriate licenses from the insurance regulatory authority of any such
state. Today, we do not possess any licenses outside of Massachusetts and we
could encounter unexpected regulatory obstacles that prevent us from obtaining
these licenses in a timely fashion, or at all.
OUR FAILURE TO MAINTAIN A COMMERCIALLY ACCEPTABLE FINANCIAL STRENGTH RATING
WOULD SIGNIFICANTLY AND NEGATIVELY AFFECT OUR ABILITY TO IMPLEMENT OUR BUSINESS
STRATEGY SUCCESSFULLY.
A.M. Best has currently assigned Safety Insurance an "A (Excellent)" rating.
An "A" rating is A.M. Best's third highest rating, out of 13 possible rating
classifications for solvent companies. An "A" rating is assigned to insurers
that in A.M. Best's opinion have a strong ability to meet their ongoing
obligations to policyholders. Moreover, an "A" rating is assigned to companies
that have, on balance, excellent balance sheet strength, operating performance
and business profile when compared to the standards established by A.M. Best.
A.M. Best bases its ratings on factors that concern policyholders and not upon
factors concerning investor protection. Such ratings are subject to change and
are not recommendations to buy, sell or hold securities. An important factor in
an insurer's ability to compete effectively is its A.M. Best rating. Our A.M.
Best rating is lower than those of some of our competitors. Any future decrease
in our rating could affect our competitive position. See "Business--Ratings."
OUR LOSSES AND LOSS ADJUSTMENT EXPENSES MAY EXCEED OUR RESERVES, WHICH COULD
SIGNIFICANTLY AFFECT OUR BUSINESS.
The reserves for losses and loss adjustment expenses that we have
established are estimates of amounts needed to pay reported and unreported
claims and related expenses based on facts and circumstances known to us as of
the time we established the reserves. Reserves are based on historical claims
information, industry statistics and other factors. The establishment of
appropriate reserves is an inherently uncertain process. If our reserves are
inadequate and are strengthened, we would have to treat the amount of such
increase as a charge to our earnings in the period that the deficiency is
recognized. As a result of these factors, there can be no assurance that our
ultimate liability will not materially exceed our reserves and have a negative
effect on our results of operations and financial condition.
Due to the inherent uncertainty of estimating reserves, it has been
necessary, and may over time continue to be necessary, to revise estimated
future liabilities as reflected in our reserves for claims and policy expenses.
The historic development of reserves for losses and loss adjustment expenses may
not necessarily reflect future trends in the development of these amounts.
Accordingly, it is not appropriate to extrapolate redundancies or deficiencies
based on historical information. See "Business--Reserves."
IF WE LOSE KEY PERSONNEL, OUR ABILITY TO IMPLEMENT OUR BUSINESS STRATEGY COULD
BE DELAYED OR HINDERED.
Our future success depends significantly upon the efforts of certain key
management personnel, including David F. Brussard, our Chief Executive Officer
and President. We maintain a $10.0 million key man life insurance policy on
Mr. Brussard, the proceeds of which are payable to us, but do not maintain any
key man insurance on any other executive. We have entered into employment
agreements with Messrs. Brussard, Begley, Crimmins, Kerton, Krupa, Loranger and
Patrick, the seven members of our Management Team. The loss of key personnel
could prevent us from fully implementing our business strategy and could
significantly and negatively affect our financial condition and results of
operations. As we continue to grow, we will need to recruit and retain
additional qualified management personnel, and our ability to do so will depend
upon a number of factors, such as our results of operations and prospects and
the level of competition then prevailing in the market for qualified personnel.
See "Management--Directors and Officers."
17
<Page>
MARKET FLUCTUATIONS AND CHANGES IN INTEREST RATES CAN HAVE SIGNIFICANT AND
NEGATIVE EFFECTS ON OUR INVESTMENT PORTFOLIO.
Our results of operations depend in part on the performance of our invested
assets. As of September 30, 2002, 98.2% of our investment portfolio was invested
in debt securities and 1.8% in equity securities, which did not include any
common equity securities. Certain risks are inherent in connection with debt
securities including loss upon default and price volatility in reaction to
changes in interest rates and general market factors. See
"Business--Investments."
WE MAY NOT BE ABLE TO SUCCESSFULLY ALLEVIATE RISK THROUGH REINSURANCE
ARRANGEMENTS WHICH COULD CAUSE US TO REDUCE OUR PREMIUMS WRITTEN IN CERTAIN
LINES OR COULD RESULT IN LOSSES.
In order to reduce risk and to increase our underwriting capacity, we
purchase reinsurance. The availability and the cost of reinsurance protection is
subject to market conditions, which are outside of our control. As a result, we
may not be able to successfully alleviate risk through these arrangements. For
example, if reinsurance capacity for homeowners risks were reduced as a result
of terrorist attacks or other causes, we would seek to reduce the amount of
homeowners business we write. In addition, we are subject to credit risk with
respect to our reinsurance because the ceding of risk to reinsurers does not
relieve us of our liability to our policyholders. A significant reinsurer's
insolvency or inability to make payments under the terms of a reinsurance treaty
could have a material adverse effect on our results of operations and financial
condition.
THERE ARE ANTI-TAKEOVER PROVISIONS CONTAINED IN OUR ORGANIZATIONAL DOCUMENTS AND
IN LAWS OF THE STATE OF DELAWARE AND MASSACHUSETTS THAT COULD IMPEDE AN ATTEMPT
TO REPLACE OR REMOVE OUR MANAGEMENT OR PREVENT THE SALE OF OUR COMPANY, WHICH
COULD DIMINISH THE VALUE OF OUR COMMON STOCK.
Our certificate of incorporation, bylaws and the laws of Delaware contain
provisions that may delay, deter or prevent a takeover attempt that stockholders
might consider in their best interests. For example, our organizational
documents provide for a classified board of directors with staggered terms,
prevent stockholders from taking action by written consent, prevent stockholders
from calling a special meeting of stockholders, provide for supermajority voting
requirements to amend our certificate of incorporation and certain provisions of
our bylaws and provide for the filling of vacancies on our board of directors by
the vote of a majority of the directors then in office. These provisions will
render the removal of the incumbent board of directors or management more
difficult. In addition, these provisions may prevent stockholders from receiving
the benefit of any premium over the market price of our common stock offered by
a bidder in a potential takeover. Even in the absence of a takeover attempt, the
existence of these provisions may adversely affect the prevailing market price
of our common stock if they are viewed as discouraging takeover attempts in the
future.
The Massachusetts insurance law prohibits any person from acquiring control
of us, and thus indirect control of Safety Insurance, without the prior approval
of the Commissioner. That law presumes that control exists where any person,
directly or indirectly, owns, controls, holds the power to vote or holds proxies
representing 10% or more of our outstanding voting stock. Even persons who do
not acquire beneficial ownership of more than 10% of the outstanding shares of
our common stock may be deemed to have acquired such control if the Commissioner
determines that such control exists in fact. Therefore, any person seeking to
acquire a controlling interest in us would face regulatory obstacles which could
delay, deter or prevent an acquisition that stockholders might consider in their
best interests.
Section 203 of the General Corporation Law of Delaware, the jurisdiction in
which Safety Group is organized, may affect the ability of an "interested
stockholder" to engage in certain business combinations including mergers,
consolidations or acquisitions of additional shares, for a period of three years
following the time that the stockholder becomes an interested stockholder. An
interested stockholder is defined to include persons owning directly or
indirectly 15% or more of the outstanding voting stock of the corporation.
18
<Page>
WE WILL NOT HAVE SUBSTANTIAL PROCEEDS FROM THE OFFERING, THE DIRECT SALE AND OUR
NEW CREDIT FACILITY TO EXPAND OR INVEST IN OUR BUSINESS.
Substantially all of the proceeds from the offering, the Direct Sale and our
new credit facility will be used to repay our existing indebtedness. We
therefore do not expect to have available to us significant proceeds from the
offering or the Direct Sale to expand or invest in our business. Assuming the
underwriters do not exercise their over-allotment option, we will pay
approximately 31% of the net proceeds of the offering, the Direct Sale and our
new credit facility to certain Investors in repayment of our senior subordinated
notes and payment of dividends on our preferred stock (assuming the payments
occur on October 31, 2002). These Investors are affiliates of our Company. See
"Use of Proceeds."
FUTURE SALES OF SHARES OF OUR COMMON STOCK BY OUR EXISTING STOCKHOLDERS IN THE
PUBLIC MARKET, OR THE POSSIBILITY OR PERCEPTION OF SUCH FUTURE SALES, COULD
ADVERSELY AFFECT THE MARKET PRICE OF OUR STOCK.
Our Management Team in the aggregate currently owns 27.8% of the common
stock of Safety Group. The Investors currently hold the remaining 72.2% of the
common stock of Safety Group. After the offering, the Direct Sale and the
Preferred Share Exchange, the Management Team and the Investors will hold
approximately 11% and 47%, respectively, of the common stock of Safety Group on
a fully-diluted basis, assuming the underwriters do not exercise their
over-allotment option. Furthermore, we granted the Investors and our Management
Team demand and "piggyback" registration rights with respect to our common stock
pursuant to a stockholders agreement entered in connection with the Acquisition.
Their demand registration rights allow them to require Safety Group to register
their shares for public sale, while their "piggyback" registration rights allow
them to include their shares in other registered offerings of Safety Group's
shares. No prediction can be made as to the effect, if any, that future sales of
shares by our existing stockholders, or the availability of shares for future
sale, will have on the prevailing market price of our common stock from time to
time. Sales of substantial amounts of our common stock in the public market by
our existing stockholders, or the possibility or perception that such sales
could occur, could cause the prevailing market prices for our common stock to
decrease. If such sales reduce the market price of our common stock, our ability
to raise additional capital in the equity markets may be adversely affected. As
more fully described in "Underwriting," the Management Team and the Investors
have agreed not to sell their shares or exercise any registration rights with
respect to their shares without the prior written consent of Credit Suisse First
Boston Corporation during the period of 180 days following the date of this
prospectus.
BECAUSE THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK, THERE CAN BE
NO ASSURANCE THAT A PUBLIC MARKET WILL DEVELOP.
Prior to this offering, there has been no public market for our common stock
and there can be no assurance that an active trading market will develop and
continue upon completion of this offering or that the market price for our
common stock will not decline below the initial public offering price. The
initial public offering price was determined through negotiations between us and
the underwriters. The initial public offering price of our common stock was
based on numerous factors and may not be indicative of the market price for our
common stock after the initial public offering. Factors such as variations in
our actual or anticipated operating results, changes in or failure to meet
earnings estimates of securities analysts, market conditions in the insurance
industry, regulatory actions and general economic and securities market
conditions, among other factors, could cause the market price of our common
stock to decline below the initial public offering price.
19
<Page>
THE ACQUISITION
On October 16, 2001, Safety Group acquired Thomas Black Corporation, the
holding company for our insurance and other subsidiaries, from a group of
stockholders including Thomas Black Corporation's founder and members of his
immediate family, as well as Thomas Black Corporation's employee stock ownership
plan. In order to arrange the financing of the transaction and to negotiate the
terms of the Acquisition, our Management Team obtained the assistance of The
Jordan Company LLC, a private investment firm that specializes in buying and
building companies in partnership with management. The Jordan Company assembled
a group of equity investors to complete the Acquisition, consisting of
institutional investors (including JZ Equity Partners plc), individual investors
employed by or serving as consultants to The Jordan Company and our Management
Team. JZ Equity Partners is an investment trust, the shares of which are
publicly traded on the London Stock Exchange. Its principal business is to
invest, primarily in the United States, in debt and equity securities
recommended by Jordan/Zalaznick Advisers, Inc., its sole investment adviser and
an affiliate of The Jordan Company. Additional acquisition capital consisted of
senior subordinated notes and preferred stock purchased by JZ Equity Partners
and a term loan and revolving credit facility arranged by Fleet National Bank.
The following table sets forth the aggregate sources and uses of funds for
the Acquisition.
SOURCES OF FUNDS
<Table>
<Caption>
($ IN MILLIONS)
---------------
Existing credit facility
Term loan................................................. $ 55.0
Revolving credit facility................................. 14.5
Senior subordinated notes................................... 30.0
Senior redeemable cumulative preferred stock................ 22.4
Common equity purchased by certain of the Investors......... 1.8
------
Total sources........................................... $123.7
======
</Table>
USES OF FUNDS
<Table>
<Caption>
($ IN MILLIONS)
---------------
Payment for shares.......................................... $103.1
Repayment of existing indebtedness, including interest and
prepayment penalties...................................... 8.0
Management employment obligations........................... 3.4
Fees, expenses and working capital.......................... 9.2
------
Total uses.............................................. $123.7
======
</Table>
To finance the Acquisition, we entered into our existing credit facility,
which consists of a $55 million term loan and a $20 million revolving credit
facility. At the closing of the Acquisition, the $14.5 million we borrowed under
our revolving credit facility had an interest rate of LIBOR plus 3.75% and the
$55 million we borrowed under our term loan had an interest rate of LIBOR plus
3.75%. "LIBOR" stands for London Inter-bank Offered Rate, and means the interest
rate that the largest international banks charge each other for loans. We
secured our obligations under our existing credit facility with our assets, the
assets of our non-insurance subsidiaries and the capital stock of all our
subsidiaries (except Safety Indemnity Insurance Company). The $30 million we
obtained through the issuance of our senior subordinated notes has an interest
rate of 13%. Our senior redeemable cumulative preferred stock accrues a
cumulative dividend of 6% per year. We believe that the interest rates on the
debt and the dividend rate on the preferred stock represented prevailing market
rates at
20
<Page>
the time of the Acquisition. At the closing of the Acquisition, Thomas Black
Corporation refinanced $8.0 million of indebtedness which had a weighted average
interest rate of 7.0%.
In addition, in connection with the Acquisition, Safety Group loaned our
Management Team an aggregate of $695,000 in order to purchase shares of our
common stock. These recourse loans are secured by a pledge of the shares of
common stock each executive purchased and bear interest payable semiannually at
a rate equal to 5%. The loans are due and payable on the earlier of
December 31, 2011 or 90 days after any such executive is no longer employed with
us, but may be prepaid by the executive at any time. Our Management Team used
these loans to purchase an aggregate of 27.8% of our outstanding common stock.
At the time of the Acquisition, Safety Group paid an aggregate of
$3.4 million in bonuses to the members of the Management Team and to certain of
our other employees. These bonuses were payable upon a change in control of our
Company under the employment contracts these employees had with our Company
prior to the Acquisition. The members of our Management Team also were parties
to an agreement with our Company that would have resulted in their receiving
certain other bonuses following a change of control of our Company, provided
that following the change of control they remained employed by us or left
employment for good reason. These bonuses, which would have been payable to them
in installments of 30%, 30% and 40%, respectively, on each of the first, second
and third anniversaries of the change of control, would have totaled up to
$16.0 million in the aggregate. Prior to the closing of the Acquisition, the
members of our Management Team entered into agreements with Safety Insurance
under which they agreed not to receive these bonuses. In addition, we entered
into new employment agreements with members of our Management Team and granted
certain stock appreciation rights to the members of our Management Team. See
"Management--Management Compensation" and "Certain Relationships and Related
Transactions."
Upon the closing of the Acquisition, we entered into a management consulting
agreement with TJC Management Corporation, an affiliate of The Jordan Company.
TJC Management may be considered an affiliate of our company because three of
our directors are executives of The Jordan Company, and executives of and
consultants to The Jordan Company own an aggregate of approximately 27.4% of our
common stock. Under the management consulting agreement, TJC Management renders
consulting services to us in connection with our financial and business affairs,
our relationships with lenders, stockholders and other third parties, and the
expansion of our business. Under the agreement, TJC Management is entitled to a
management fee of $1.0 million per year, as well as up to a 2.0% fee on the
closing of certain purchase or sale transactions and a 1.0% fee with respect to
certain financing transactions. We have paid TJC Management approximately
$1,032,637 under this agreement through November 21, 2002.
We have agreed with TJC Management to amend the management consulting
agreement as of the closing of this offering. Under the agreement as amended, we
will no longer be obligated to pay the $1.0 million annual management fee and
TJC Management will no longer be obligated to provide consulting services to us
other than in connection with the acquisition, sale or financing transactions
described above. In consideration for their agreement to terminate the annual
fee and their services to us under the agreement prior to the closing, we have
agreed to pay TJC Management $4.0 million upon the closing. TJC Management will
not receive any other fee upon the closing of the offering or of our new bank
credit facility or in respect of the portion of the annual management fee
accrued and unpaid through the closing.
Following the closing of the Acquisition, JZ Equity Partners sold a portion
of its notes, preferred stock and common stock to affiliates of Trust Company of
the West and of Fairholme Capital Management. Following these purchases, Safety
Group's common stock was owned by our Management Team (27.8%), executives of and
consultants to The Jordan Company (27.4%), JZ Equity Partners plc (17.9%),
affiliates of Trust Company of the West (9.7%), Leucadia Investors, Inc. (9.0%),
Fairholme
21
<Page>
Partners, L.P. (8.1%) and J/Z CBO (Delaware), LLC, a fund managed by
Jordan/Zalaznick Advisors Inc., an affiliate of The Jordan Company (0.2%). An
affiliate of Leucadia Investors, Inc. is an investor in The Jordan Company.
For further discussion of the transactions we consummated in connection with
the Acquisition, as well as a description of the management consulting
agreement, the stockholders' agreement entered into by all of our stockholders,
the registration rights of holders of our common stock and certain other
matters, see "Certain Relationships and Related Transactions."
THE PREFERRED SHARE EXCHANGE
The holders of our outstanding preferred stock have agreed to amend the
terms of the preferred stock to make it automatically convert into our common
stock upon the closing of this offering. Currently, the preferred stock is not
convertible into common stock under any circumstances. The conversion price will
be equal to the initial public offering price of our common stock in this
offering. An aggregate of 1,866,665 shares of our common stock will be issued
upon conversion. This agreement will be effected by our amended and restated
certificate of incorporation which was filed prior to this offering.
THE DIRECT SALE
We have agreed to sell, and Fairholme Partners, L.P., one of the Investors,
has agreed to purchase for investment directly from us on a non-underwritten
basis, an aggregate of 350,000 shares of our common stock. After the offering,
the Preferred Share Exchange and the Direct Sale, Fairholme Partners, L.P. will
hold 1,238,649 shares of our common stock, representing 8.6% of our outstanding
common stock on a fully-diluted basis. This purchase will be consummated
simultaneously with the consummation of this offering, at the initial public
offering price, for an aggregate price of $4.2 million. We refer to this sale in
this prospectus as the Direct Sale. The consummation of the Direct Sale is not a
condition to the consummation of this offering.
As a holder of outstanding shares of our common stock, Fairholme Partners,
L.P. has entered into the lock-up agreement described in "Underwriting" which
would apply to the shares purchased in the Direct Sale.
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS
Some of the statements under "Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus may include forward-looking
statements which reflect our current views with respect to future events and
financial performance. These statements include forward-looking statements both
with respect to us in general and the insurance sector specifically. Statements
which include the words "expect," "intend," "plan," "believe," "project,"
"anticipate," "will," and similar statements of a future or forward-looking
nature identify forward-looking statements for purposes of the federal
securities laws or otherwise.
All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, there are or will be important factors that could
cause actual results to differ materially from those indicated in these
statements. We believe that these factors include but are not limited to those
described under "Risk Factors" above. We undertake no obligation to publicly
update or review any forward-looking statement, whether as a result of new
information, future developments or otherwise.
22
<Page>
USE OF PROCEEDS
We estimate that our net proceeds from this offering and the Direct Sale
will be approximately $72.7 million, based on the initial public offering price
of $12.00 per share and after deducting estimated underwriting discounts and
estimated offering expenses we must pay. If the underwriters exercise their
over-allotment option in full, we estimate that our net proceeds from this
offering and the Direct Sale will be approximately $82.7 million. We anticipate
that, concurrently with the completion of this offering, we will enter into a
new $30.0 million revolving credit facility with Fleet National Bank to provide
additional funds to accomplish the repayments described below and to obtain
additional borrowing capacity under a revolving line of credit. We intend to
borrow the remaining amount necessary for the purposes set forth below (which
will be approximately $29.9 million) under this new credit facility at the
closing of the offering. We intend to use the net proceeds of this offering and
the Direct Sale and of our borrowings under our new credit facility for the
following purposes (in each case, assuming the payments occur on October 31,
2002):
- Approximately $66.6 million will be used to repay our existing credit
facility. This indebtedness with Fleet National Bank consists of a
$20.0 million senior secured revolving credit facility (of which
$14.5 million is outstanding as of November 21, 2002), which is due and
payable on October 16, 2006, and a $55.0 million senior secured term loan
(of which $52.0 million is outstanding as of November 21, 2002), which is
due and payable on December 31, 2007, together with accrued and unpaid
interest on the credit facility and the term loan. The current interest
rate under our existing credit facility is 5.58%. The proceeds from these
borrowings and the issuance of our senior subordinated notes were used to
fund, in part, the Acquisition, including to purchase Thomas Black
Corporation's stock, refinance Thomas Black Corporation's indebtedness,
pay existing management obligations and acquisition expenses and provide
working capital.
- Approximately $30.0 million will be used to repay $30.0 million principal
amount of 13.0% senior subordinated notes, together with accrued and
unpaid interest.
- Approximately $1.4 million will be used to pay accrued and unpaid
dividends on our 6.0% cumulative senior preferred stock.
- Any remaining net proceeds will be used for our general corporate
purposes.
Our senior subordinated notes and preferred stock are held by the following
Investors: JZ Equity Partners plc; J/Z CBO (Delaware), LLC; TCW/Crescent
Mezzanine Trust III; TCW/Crescent Mezzanine Partners III, L.P.; TCW/Crescent
Mezzanine Partners III Netherlands, L.P.; and Fairholme Partners, L.P. Assuming
the underwriters do not exercise their over-allotment option, these Investors
will receive approximately 31% of the net proceeds of the offering, the Direct
Sale and our new credit facility in repayment of our senior subordinated notes
and payment of dividends on our preferred stock. These Investors are affiliates
of our Company.
23
<Page>
DIVIDEND POLICY
Our board of directors currently intends to declare an annual dividend on
our common stock of $0.28 per share. The declaration and payment of dividends is
subject to the discretion of our board of directors, and will depend on our
financial condition, results of operations, cash requirements, future prospects,
regulatory and contractual restrictions on the payment of dividends by our
subsidiaries, and other factors deemed relevant by the board. There is no
requirement or assurance that we will declare and pay any dividends. For a
discussion of our cash resources and needs, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Safety Group is a holding company and a legal entity separate and distinct
from Safety Insurance, our principal operating subsidiary, which is directly
owned by Thomas Black Corporation, an intermediate holding company which is the
primary borrower under our existing credit facility. As a holding company
without significant operations of its own, the principal sources of Safety
Group's funds are dividends and other distributions from Thomas Black
Corporation. Thomas Black Corporation's principal sources of funds are dividends
and other distributions from Safety Insurance.
The ability of Safety Insurance to pay dividends is subject to limits under
Massachusetts insurance law. Further, the ability of Thomas Black Corporation to
pay dividends, and our ability to incur indebtedness or to use the proceeds of
equity offerings, will be subject to limits under our new credit facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
24
<Page>
CAPITALIZATION
The following table sets forth, at June 30, 2002, the total capitalization
of Safety on an actual basis and as adjusted to give effect to:
- the issuance in this offering and the Direct Sale of 6,683,334 shares of
our common stock (at the initial public offering price of $12.00 per
share, after deducting estimated underwriting discounts and estimated
offering expenses we must pay and assuming that the underwriters'
over-allotment option is not exercised);
- the use of the net proceeds of the offering and the Direct Sale as set
forth in "Use of Proceeds;" and
- the issuance of 1,866,665 shares of our Common Stock in the Preferred
Share Exchange.
This table should be read in conjunction with "Unaudited Pro Forma Financial
Data" and the consolidated financial statements and the accompanying notes
appearing elsewhere in this prospectus.
<Table>
<Caption>
AS OF JUNE 30, 2002
----------------------
UNAUDITED
PRO FORMA,
ACTUAL AS ADJUSTED
-------- -----------
($ IN THOUSANDS)
DEBT:
Existing senior secured revolving credit facility......... $ 14,500 --
New revolving credit facility(1).......................... -- 30,000
Senior secured term loan.................................. 54,000 --
Senior subordinated notes................................. 30,000 --
-------- --------
Total debt.............................................. 98,500 30,000
-------- --------
MANDATORILY REDEEMABLE PREFERRED STOCK...................... 23,352 --
-------- --------
STOCKHOLDERS' EQUITY:
Common stock.............................................. 58 144
Additional paid-in capital................................ 2,442 101,634
Retained earnings......................................... 116,438 110,504
Accumulated other comprehensive income, net of taxes...... 900 900
Promissory notes receivable from management............... (720) (720)
-------- --------
Total stockholders' equity.............................. $119,118 212,462
-------- --------
TOTAL CAPITALIZATION........................................ $240,970 242,462
======== ========
</Table>
- ------------------------
(1) We anticipate that, concurrently with the completion of this offering, we
will enter into a new $30.0 million revolving credit facility.
25
<Page>
DILUTION
At June 30, 2002, our net tangible book value was $119.1 million, or $20.50
per share of common stock. As used below, our net tangible book value per share
of common stock represents stockholders' equity divided by the number of shares
of common stock outstanding. After giving effect to the issuance of 8,549,999
shares of our common stock (at the initial public offering price of $12.00 per
share of common stock, assuming the Direct Sale and the Preferred Share Exchange
are consummated simultaneously with this offering at the initial offering price,
and after deducting estimated underwriting discounts and estimated offering
expenses we must pay and assuming that the underwriters' over-allotment option
is not exercised), and the application of the estimated net proceeds therefrom,
as set forth in "Use of Proceeds," our net tangible book value as of June 30,
2002, would have been $212.5 million, or $14.80 per share of common stock. This
amount represents an immediate decrease of $5.70 per share of common stock to
the existing stockholders and an immediate accretion of $2.80 per share of
common stock issued to the new investors purchasing stock offered hereby at the
initial public offering price. The following table illustrates this per share
accretion:
<Table>
Initial public offering price per share of common stock..... $12.00
Net tangible book value per share of common stock before
the offering, the Direct Sale and Preferred Share
Exchange................................................ $20.50
Net tangible book value per share of common stock after
the offering, the Direct Sale and the Preferred Share
Exchange................................................ $14.80
Decrease attributable to the offering, the Direct Sale and
the Preferred Share Exchange.............................. $(5.70)
Accretion per share of common stock to new investors after
the offering, the Direct Sale and the Preferred Share
Exchange.................................................. $ 2.80
</Table>
The following table sets forth the number of our shares of common stock
issued, the total consideration paid and the average price per share of common
stock paid by all existing stockholders and new investors, after giving effect
to the issuance of 6,683,334 shares of common stock in the offering and the
Direct Sale at the initial public offering price of $12.00 per share (before
deducting estimated underwriting discounts and estimated offering expenses we
must pay and assuming that the underwriters' over-allotment option is not
exercised) and the occurrence of the Preferred Share Exchange.
<Table>
<Caption>
SHARES ISSUED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- -------- ------------ -------- ---------
Existing stockholders(1)................... 7,676,665 53.5% $ 24,900,000 23.7% $ 3.24
Offering................................... 6,333,334 44.1 76,000,008 72.3 12.00
Direct Sale................................ 350,000 2.4 4,200,000 4.0 12.00
---------- ---- ------------ ----
Total.................................. 14,359,999 100% $105,100,008 100% $ 7.32
========== ==== ============ ====
</Table>
- ------------------------
(1) Including shares issued in the Preferred Share Exchange.
26
<Page>
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth our selected historical consolidated
financial data as of and for each of the five years ended December 31, 2001 and
as of and for the six months ended June 30, 2001 and 2002. Prior to October 16,
2001, Thomas Black Corporation was the parent company of Safety Insurance. In
the Acquisition, on October 16, 2001, Safety Group became the parent company of
Thomas Black Corporation.
The selected historical consolidated financial data for the predecessor
period January 1, 2001 to October 15, 2001 and the successor period October 16,
2001 to December 31, 2001 and as of December 31, 2001 have been derived from the
financial statements of Safety Group and Thomas Black Corporation included in
this prospectus which have been audited by PricewaterhouseCoopers LLP,
independent accountants. The selected historical consolidated financial data for
the years ended December 31, 1999, and 2000 and as of December 31, 2000 have
been derived from Thomas Black Corporation's financial statements included in
this prospectus which have been audited by PricewaterhouseCoopers LLP. The
selected historical consolidated financial data for the years ended
December 31, 1997 and 1998 and as of December 31, 1997, 1998 and 1999 have been
derived from Thomas Black Corporation's consolidated financial statements not
included in this prospectus, which have been audited by PricewaterhouseCoopers
LLP. As a result of the Acquisition, financial data for periods prior to the
Acquisition may not be comparable with financial data for periods following the
Acquisition.
The selected historical consolidated income statement data for the six
months ended June 30, 2001 and 2002 and the selected historical consolidated
balance sheet data as of June 30, 2002 have been derived from our unaudited
interim condensed consolidated financial statements included in this prospectus.
The selected historical consolidated balance sheet data as of June 30, 2001 have
been derived from our unaudited interim condensed balance sheet data not
included in this prospectus.
We have prepared the selected historical consolidated financial data, other
than statutory data, in conformity with GAAP. We have derived the statutory data
from the annual statements of our insurance subsidiaries filed with insurance
regulatory authorities, which were prepared in accordance with statutory
accounting practices, which vary in certain respects from GAAP.
The selected financial data presented below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the accompanying notes
included in this prospectus in order to more fully understand the historical
consolidated financial data.
27
<Page>
<Table>
<Caption>
PREDECESSOR YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1997 1998 1999 2000
------------ ------------ ------------ ------------
($ IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA) (
INCOME STATEMENT DATA:
Direct written
premiums............... $ 272,495 $ 287,507 $ 349,206 $ 427,457
Net written premiums..... 243,688 259,153 330,961 430,030
Net earned premiums...... 242,760 246,507 300,020 381,413
Investment income........ 22,349 22,965 23,870 26,889
Net realized gain (loss)
on investments......... 8,551 10,119 8,102 (1,246)
Finance and other service
income................. 6,222 9,343 10,989 12,656
---------- ---------- ---------- ----------
Total income........... 279,882 288,934 342,981 419,712
Losses and loss
adjustment expenses.... 180,643 188,913 225,241 275,138
Underwriting, operating
and related expenses... 78,261 76,115 91,357 115,567
Transaction
expenses(2)............ -- -- -- 406
Interest expense......... 2,040 1,716 1,418 1,072
---------- ---------- ---------- ----------
Total expenses......... 260,944 266,744 318,016 392,183
Income (loss) before
income taxes........... 18,938 22,190 24,965 27,529
Income tax expense....... 5,688 7,778 8,667 8,255
---------- ---------- ---------- ----------
Net income (loss) before
extraordinary item and
preferred stock
dividends.............. 13,250 14,412 16,298 19,274
Excess of fair value of
acquired net assets
over purchase price.... -- -- -- --
---------- ---------- ---------- ----------
Net income before
preferred stock
dividends.............. $ 13,250 $ 14,412 $ 16,298 $ 19,274
Dividends on mandatorily
redeemable preferred
stock.................. -- -- -- --
---------- ---------- ---------- ----------
Net income available to
common stockholders.... $ 13,250 $ 14,412 $ 16,298 $ 19,274
========== ========== ========== ==========
Net income (loss) per
common share before
extraordinary item
Basic.................. $ 17.77 $ 18.47 $ 19.95 $ 22.50
========== ========== ========== ==========
Diluted................ $ 17.77 $ 18.47 $ 19.95 $ 22.50
========== ========== ========== ==========
Extraordinary item per
common share
Basic.................. $ -- $ -- $ -- $ --
========== ========== ========== ==========
Diluted................ $ -- $ -- $ -- $ --
========== ========== ========== ==========
Net income per common
share
Basic.................. $ 17.77 $ 18.47 $ 19.95 $ 22.50
========== ========== ========== ==========
Diluted................ $ 17.77 $ 18.47 $ 19.95 $ 22.50
========== ========== ========== ==========
Weighted average number
of common shares
outstanding
Basic.................. 745,800 780,300 816,800 856,800
========== ========== ========== ==========
Diluted................ 745,800 780,300 816,800 856,800
========== ========== ========== ==========
<Caption>
PREDECESSOR SUCCESSOR PREDECESSOR SUCCESSOR
PERIOD PERIOD ------------ ------------
------------ ------------ SIX MONTHS ENDED
JANUARY 1- OCTOBER 16- JUNE 30,
- OCTOBER 15, DECEMBER 31, ---------------------------
2001(1) 2001(1) 2001 2002
- ------------ ------------ ------------ ------------
($ IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
INCOME STATEMENT DATA:
Direct written
premiums............... $ 391,628 $ 80,238 $ 259,918 $ 283,382
Net written premiums..... 382,486 82,980 256,322 285,355
Net earned premiums...... 347,098 100,175 218,013 241,420
Investment income........ 22,246 5,359 13,979 13,659
Net realized gain (loss)
on investments......... (766) (4,284) (591) (2,388)
Finance and other service
income................. 10,559 2,950 6,589 8,024
---------- ---------- ---------- ----------
Total income........... 379,137 104,200 237,990 260,715
Losses and loss
adjustment expenses.... 276,383 75,559 172,433 182,926
Underwriting, operating
and related expenses... 89,297 30,212 58,568 65,645
Transaction
expenses(2)............ 5,605 3,874 109 --
Interest expense......... 550 1,823 387 4,151
---------- ---------- ---------- ----------
Total expenses......... 371,835 111,468 231,497 252,722
Income (loss) before
income taxes........... 7,302 (7,268) 6,493 7,993
Income tax expense....... 1,678 (1,666) 2,143 2,524
---------- ---------- ---------- ----------
Net income (loss) before
extraordinary item and
preferred stock
dividends.............. 5,624 (5,602) 4,350 5,469
Excess of fair value of
acquired net assets
over purchase price.... -- 117,523 -- --
---------- ---------- ---------- ----------
Net income before
preferred stock
dividends.............. $ 5,624 $ 111,921 $ 4,350 $ 5,469
Dividends on mandatorily
redeemable preferred
stock.................. -- (280) -- (672)
---------- ---------- ---------- ----------
Net income available to
common stockholders.... $ 5,624 $ 111,641 $ 4,350 $ 4,797
========== ========== ========== ==========
Net income (loss) per
common share before
extraordinary item
Basic.................. $ 6.26 $ (1.07) $ 4.88 $ 0.87
========== ========== ========== ==========
Diluted................ $ 6.26 $ (1.07) $ 4.88 $ 0.83
========== ========== ========== ==========
Extraordinary item per
common share
Basic.................. $ -- $ 21.29 $ -- $ --
========== ========== ========== ==========
Diluted................ $ -- $ 21.29 $ -- $ --
========== ========== ========== ==========
Net income per common
share
Basic.................. $ 6.26 $ 20.23 $ 4.88 $ 0.87
========== ========== ========== ==========
Diluted................ $ 6.26 $ 20.23 $ 4.88 $ 0.83
========== ========== ========== ==========
Weighted average number
of common shares
outstanding
Basic.................. 898,300 5,519,500 891,300 5,519,500
========== ========== ========== ==========
Diluted................ 898,300 5,810,000 891,300 5,810,000
========== ========== ========== ==========
</Table>
28
<Page>
<Table>
<Caption>
SUCCESSOR PREDECESSOR SUCCESSOR
------------- ----------- ---------
AS OF AND AS OF AND FOR THE
AS OF AND FOR THE FOR THE SIX MONTHS ENDED
PREDECESSOR YEAR ENDED DECEMBER 31, YEAR ENDED JUNE 30,
------------------------------------------------- DECEMBER 31, -----------------------
1997 1998 1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ------------- ----------- ---------
($ IN THOUSANDS, EXCEPT RATIOS)
BALANCE SHEET DATA:
Total cash and
investments........... $404,702 $434,356 $447,836 $505,006 $529,286 $507,083 $516,885
Total assets............ 717,400 734,647 770,009 833,339 859,174 836,769 920,256
Losses and loss
adjustment expenses
reserves.............. 319,453 311,846 315,226 302,131 302,556 302,140 309,351
Total debt.............. 27,000 22,500 18,000 13,383 99,500 7,964 98,500
Total liabilities....... 567,537 563,499 594,905 620,388 727,512 616,948 777,786
Mandatorily redeemable
preferred stock....... -- -- -- -- 22,680 -- 23,352
Total stockholders'
equity................ 149,863 171,148 175,105 212,951 108,982 219,821 119,118
STATUTORY DATA:
Policyholders' surplus
(at period end)....... $163,566 $179,926 $185,529 $192,577 $220,081 $207,370 $221,224
Loss ratio(3)........... 76.0% 77.1% 76.1% 73.5% 78.8% 79.2% 76.2%
Expense ratio(3)........ 29.9 29.1 28.6 27.3 25.0 23.6 23.9
-------- -------- -------- -------- -------- -------- --------
Combined ratio(3)....... 105.9% 106.2% 104.7% 100.8% 103.8% 102.8% 100.1%
======== ======== ======== ======== ======== ======== ========
</Table>
- --------------------------
(1) In this financial presentation, the financial data for 2001 has been split
into a predecessor period from January 1, 2001 to October 15, 2001 and a
successor period from October 16, 2001 to December 31, 2001.
(2) Our transaction expenses reflect the costs we incurred in connection with
the Acquisition. See "The Acquisition."
(3) The loss ratio is the ratio of losses and loss adjustment expenses to net
earned premiums. The expense ratio, when calculated on a statutory
accounting basis, is the ratio of underwriting expenses to net written
premiums. The combined ratio is the sum of the loss ratio and the expense
ratio. Our expense ratios and combined ratios shown include certain
compensation and interest expenses charged to our insurance subsidiaries
under our prior majority owner which are described in footnote 1 to the
table shown under "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General--Insurance Ratios."
29
<Page>
UNAUDITED PRO FORMA FINANCIAL DATA
The unaudited pro forma condensed consolidated balance sheet presented below
gives effect to:
- the sale of 6,333,334 shares of our common stock in the initial public
offering (at the initial public offering price of $12.00 per share, after
deducting estimated underwriting discounts and estimated offering expenses
payable by us and assuming that the underwriters' over-allotment option is
not exercised);
- the sale of 350,000 shares of our common stock in the Direct Sale (at the
initial public offering price of $12.00 per share);
- the Preferred Share Exchange;
- the replacement of our existing credit facility with our new credit
facility; and
- the application of the net proceeds of the initial public offering, the
Direct Sale and our new credit facility as set forth in "Use of Proceeds,"
as if they had all occurred as of June 30, 2002.
The unaudited pro forma condensed consolidated income statement presented
below gives effect to:
- the sale of 6,333,334 shares of our common stock in the initial public
offering (at the initial public offering price of $12.00 per share, after
deducting estimated underwriting discounts and estimated offering expenses
payable by us and assuming that the underwriters' over-allotment option is
not exercised);
- the sale of 350,000 shares of our common stock in the Direct Sale (at the
initial public offering price of $12.00 per share);
- the Preferred Share Exchange;
- the Acquisition;
- the replacement of our existing credit facility with our new credit
facility; and
- the application of the net proceeds of the initial public offering, the
Direct Sale and our new credit facility as set forth in "Use of Proceeds,"
as if they had all occurred as of January 1, 2001 for the year ended
December 31, 2001 and the six months ended June 30, 2002.
THE UNAUDITED PRO FORMA DATA ARE BASED ON AVAILABLE INFORMATION AND ON
ASSUMPTIONS WE BELIEVE ARE REASONABLE. THE UNAUDITED PRO FORMA DATA SHOULD NOT
BE CONSTRUED TO BE INDICATIVE OF OUR CONSOLIDATED FINANCIAL POSITION OR OUR
CONSOLIDATED RESULTS OF OPERATIONS HAD THESE TRANSACTIONS BEEN CONSUMMATED ON
THE DATES ASSUMED, AND DO NOT IN ANY WAY REPRESENT A PROJECTION OR FORECAST OF
OUR CONSOLIDATED FINANCIAL POSITION OR CONSOLIDATED RESULTS OF OPERATIONS FOR OR
AS OF ANY FUTURE PERIOD OR DATE.
You should read the unaudited pro forma data in conjunction with our
consolidated financial statements and the accompanying notes included in this
prospectus and with the other information included in this prospectus, including
the information set forth under "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
30
<Page>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2002
($ IN THOUSANDS)
<Table>
<Caption>
SAFETY INSURANCE OFFERING UNAUDITED
GROUP, INC. ADJUSTMENTS PRO FORMA
---------------- ----------- ---------
ASSETS:
Cash and investments........................................ $516,885 $ 4,310 (1) $521,195
Accounts receivable......................................... 133,742 133,742
Reinsurance recoverables.................................... 92,079 92,079
Deferred policy acquisition costs........................... 38,213 38,213
Deferred income taxes....................................... 14,811 1,041 (3) 15,852
Other assets................................................ 124,526 (4,139)(2) 120,387
-------- -------- --------
Total assets............................................ $920,256 $ 1,212 $921,468
======== ======== ========
LIABILITIES:
Loss and loss adjustment expense reserves................... $309,351 $309,351
Unearned premium reserves................................... 286,447 286,447
Debt........................................................ 98,500 (98,500)(4)
30,000 (4) 30,000
Other liabilities........................................... 83,488 4,000 (5)
(4,218)(5)
807 (5)
(1,398)(5)
529 (5) 83,208
-------- -------- --------
Total liabilities......................................... 777,786 (68,780) 709,006
-------- -------- --------
MANDATORILY REDEEMABLE PREFERRED STOCK...................... 23,352 (23,352)(6) --
-------- -------- --------
STOCKHOLDERS' EQUITY:
Common stock................................................ 58 67 (6)
19 (6) 144
Additional paid-in capital.................................. 2,442 72,593 (6)
22,381 (6)
4,218 (7) 101,634
Accumulated other comprehensive income, net of taxes........ 900 900
Promissory notes receivable from management................. (720) (720)
Retained earnings........................................... 116,438 (1,590)(8)
(4,000)(8)
(344)(8) 110,504
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY................................ 119,118 93,344 212,462
-------- -------- --------
TOTAL LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY................................ $920,256 $ 1,212 $921,468
======== ======== ========
</Table>
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
31
<Page>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2001
($ IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<Table>
<Caption>
UNAUDITED
COMBINED
UNAUDITED PRO FORMA
PREDECESSOR SUCCESSOR COMBINED YEAR,
PERIOD PERIOD YEAR AS ADJUSTED
------------- ------------- ------------- -------------
JANUARY 1 - OCTOBER 16 - JANUARY 1 - UNAUDITED UNAUDITED JANUARY 1 -
OCTOBER 15, DECEMBER 31, DECEMBER 31, ACQUISITION OFFERING DECEMBER 31,
2001 2001 2001 ADJUSTMENTS ADJUSTMENTS 2001
------------- ------------- ------------- ------------- ------------- -------------
Net earned premiums............... $ 347,098 $ 100,175 $ 447,273 $ 447,273
Investment income................. 22,246 5,359 27,605 $ (1,303)(9) 26,302
Net realized investment losses.... (766) (4,284) (5,050) (5,050)
Finance and other service
income.......................... 10,559 2,950 13,509 13,509
----------- ----------- ----------- ----------- -----------
Total income.................... 379,137 104,200 483,337 (1,303) 482,034
----------- ----------- ----------- ----------- -----------
Losses and loss adjustment
expenses(10).................... 276,383 75,559 351,942 351,942
Underwriting, operating and
related expenses................ 89,297 30,212 119,509 $ (1,000)(17) 116,755
-- -- -- 791 (11)
-- -- -- (1,304)(12) (1,241)(18)
Transaction expenses.............. 5,605 3,874 9,479 (5,605)(13) 3,874
Interest expense.................. 550 1,823 2,373 7,500 (14)
-- -- -- -- (9,323)(19)
-- -- -- -- 1,050 (19) 1,600
----------- ----------- ----------- ----------- ----------- -----------
Total expenses.................. 371,835 111,468 483,303 1,382 (10,514) 474,171
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes........................... 7,302 (7,268) 34 (2,685) 10,514 7,863
Income tax expense................ 1,678 (1,666) 12 (2,901)(15) 3,680 (15) 791
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) before
extraordinary item and preferred
stock dividend.................. 5,624 (5,602) 22 216 6,834 7,072
Dividends on mandatorily
redeemable preferred stock...... -- (280) (280) (1,064)(16) 1,344 (20) --
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) before
extraordinary item available to
common stockholders(21)......... $ 5,624 $ (5,882) $ (258) $ (848) $ 8,178 $ 7,072
=========== =========== =========== =========== =========== ===========
Earnings (loss) per common
share(21)
Basic........................... $ 6.26 $ (1.07) $ 0.49
=========== =========== ===========
Diluted......................... $ 6.26 $ (1.07) $ 0.49
=========== =========== ===========
Weighted average number of common
shares outstanding
Basic........................... 898,300 5,519,500 14,359,999
=========== =========== ===========
Diluted......................... 898,300 5,810,000 14,359,999
=========== =========== ===========
</Table>
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
32
<Page>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 2002
($ IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<Table>
<Caption>
UNAUDITED
SIX MONTHS UNAUDITED UNAUDITED
ENDED OFFERING PRO FORMA
JUNE 30, 2002 ADJUSTMENTS JUNE 30, 2002
-------------- ----------- --------------
Net earned premiums....................................... $ 241,420 $ 241,420
Investment income......................................... 13,659 13,659
Net realized investment losses............................ (2,388) (2,388)
Finance and other service income.......................... 8,024 8,024
---------- --------- -----------
Total income............................................ 260,715 -- 260,715
---------- --------- -----------
Losses and loss adjustment expenses(10)................... 182,926 182,926
Underwriting, operating and related expenses.............. 65,645 $ (573)(17)
(2,978)(18) 62,094
Interest expense.......................................... 4,151 (4,151)(19)
525 (19) 525
---------- --------- -----------
Total expenses.......................................... 252,722 (7,177) 245,545
---------- --------- -----------
Income before income taxes................................ 7,993 7,177 15,170
Income tax expense........................................ 2,524 2,512 (15) 5,036
---------- --------- -----------
Net income before preferred stock dividends............... 5,469 4,665 10,134
Dividends on mandatorily redeemable preferred stock....... (672) 672 (20) --
---------- --------- -----------
Net income available to common stockholders............... $ 4,797 $ 5,337 $ 10,134
========== ========= ===========
Earnings per common share
Basic................................................... $ 0.87 $ 0.71
========== ===========
Diluted................................................. $ 0.83 $ 0.71
========== ===========
Weighted average number of common shares outstanding
Basic................................................... 5,519,500 14,359,999
========== ===========
Diluted................................................. 5,810,000 14,359,999
========== ===========
</Table>
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
33
<Page>
- --------------------------
Unaudited Notes to Unaudited Pro Forma Financial Information
1. Represents net cash proceeds from the offering, Direct Sale and new credit
facility borrowing available for payment of other offering expenses
($2.5 million), payment of management stock appreciation rights expense
($0.5 million) and payment to TJC Management ($4.0 million) after repayment
of existing debt.
2. Represents write-down of deferred debt issuance costs of $2.4 million
related to indebtedness in connection with the Acquisition charged to
earnings and write down of deferred offering costs of $1.7 million charged
to additional paid-in capital.
3. Represents net tax benefit of write-down of deferred debt issuance costs and
stock appreciation rights compensation expense. The income tax benefit of
all deductible adjustments has been calculated at the statutory rate of 35%.
4. Represents repayment of Acquisition-related indebtedness of $98.5 million
and borrowings under our new credit facility of $30.0 million.
5. Represents accrued liabilities related to (i) $4.0 million to be paid to TJC
Management at the closing of this offering in consideration for services
rendered to us pursuant to the TJC Management Agreement and for the
termination of the annual management fee, (ii) additional transaction
expenses of $0.8 million related to the offering, (iii) compensation expense
of $0.5 million related to management stock appreciation rights which become
automatically vested and are in-the-money upon the offering and (iv)
$1.4 million to be paid for interest accrued on existing debt. In addition,
represents a reduction of accrued compensation expense of $4.2 million
related to call and put options on the shares held by management, including
the restricted stock. The call and put options terminate upon the offering
and the related liability is extinguished, increasing stockholders' equity.
6. Represents (i) issuance of 6,683,334 shares of $0.01 par value common stock
at the initial offering price of $12.00 per share for gross proceeds of
$80.2 million net of underwriting discounts and commissions of $5.0 million
and related expenses of $2.5 million in connection with the offering and
(ii) the issuance of 1,866,665 shares of common stock upon conversion of all
outstanding preferred stock in the Preferred Share Exchange. In connection
with the Preferred Share Exchange, approximately $1.0 million in accumulated
dividends on the preferred stock will be settled with cash from the proceeds
of the offering.
7. Represents impact on additional paid-in capital of the portion of the
adjustment in note 5 related to call and put options on the shares held by
management, because the call and put options terminate upon the offering.
8. Represents after tax impact on retained earnings from adjustments in notes 2
and 5 related to write-off of deferred debt issuance costs, TJC Management
fee and management stock appreciation rights.
9. Represents the net effect of amortization or accretion of purchase premium
or discount, respectively, on fixed maturities over the estimated remaining
life of the securities. Net investment income is adjusted to include the
effect of restating the historical yield on fixed maturity securities to the
estimated market yield as of the date of the Acquisition as though it had
been restated as of the beginning of the period. The change to a market
yield is estimated based on our aggregate net unrealized gain on fixed
maturities at the date of the Acquisition, amortized over the estimated
average life of the portfolio (5 years).
10. In connection with the Acquisition, an allocation of the purchase price was
made to the estimated fair value of assets acquired and liabilities assumed.
As of October 16, 2001, management
34
<Page>
determined that the estimated fair value of reserves for loss and loss
adjustment expenses approximated carrying value at that date. Accordingly,
there is no pro forma adjustment to accrete the fair value of reserves for
loss and loss adjustment expenses to the amount ultimately to be paid during
the pro forma periods presented.
11. Represents incremental management fee expense for TJC Management for the
predecessor period. Under the management agreement with TJC Management, we
are obligated to pay $1.0 million in annual management fees plus out of
pocket expenses, $209,000 of which has been recognized in the successor
period. We have agreed with TJC Management to terminate the annual
management fee at the closing of the offering.
12. Represents the elimination of depreciation expense on property, plant and
equipment. In connection with the Acquisition, property, plant and equipment
were written down to $0 under the purchase method of accounting.
13. Represents elimination of transaction expenses related to the Acquisition
incurred during predecessor period. As the pro forma presentation assumes an
Acquisition date of January 1, 2001, the predecessor transaction expenses
would have been incurred prior to January 1, 2001 and thus are eliminated
from the unaudited pro forma income statement for the combined pro forma
year ended December 31, 2001.
14. Represents estimated incremental interest expense of $7.5 million for the
predecessor period for borrowings made in connection with the Acquisition
(which includes the $55.0 million term loan, $14.5 million borrowed under
the $20.0 million revolving credit facility and the $30.0 million senior
subordinated notes). Approximately $1.8 million of interest expense related
to the borrowings made in connection with the Acquisition was expensed in
the successor period.
15. Represents the income tax expense of the above adjustments except for
certain transaction expenses, which are non-deductible for tax purposes. The
income tax benefit of all other adjustments is at 35%.
16. Represents addition of dividends on mandatorily redeemable preferred stock
for full year for the Acquisition.
17. Represents elimination of TJC Management fee and related out of pocket
expenses for the full year and six months for the offering. These fees were
paid in respect of continuing services that will no longer be provided after
this offering. We have agreed to terminate this aspect of our management
consulting agreement with TJC Management for several reasons, including the
ability of our current management to perform the equivalent functions
following the offering. We do not expect to hire additional employees or
retain a new consultant on an annual or other periodic fee basis to perform
these services following the offering. We will still be required to pay fees
to TJC Management in connection with consulting services they render on
certain purchase, sale and financing transactions.
18. Represents elimination of compensation expense related to call and put
options on the shares held by management including the restricted stock. The
call and put options terminate upon the offering and thus this expense is
eliminated in the pro forma presentation.
19. Represents (i) elimination of interest expense related to debt repaid with
proceeds of the offering of approximately $9.3 and $4.2 million and (ii)
incremental costs of $1,050,000 and $525,000 (assuming 3.5% interest)
associated with $30.0 million of borrowings under our new credit facility.
20. Represents elimination of dividends on mandatorily redeemable preferred
stock which is converted to common stock concurrently with the offering.
21. This footnote describes certain items for which no adjustment has been made
in the unaudited pro forma income statement for the year ended December 31,
2001.
35
<Page>
COMPENSATION-RELATED ITEMS
During the period from January 1 to October 15, 2001, we incurred
$2.2 million after-tax in compensation expenses related to our former
employee stock ownership plan and supplemental executive stock ownership
plan, as well as $0.4 million after-tax in interest expense related to debt
incurred in connection with those plans. In that period, we also incurred
$1.3 million after-tax in compensation expense paid to our former majority
owner. Upon the Acquisition, the employee stock ownership plan and
supplemental executive stock ownership plan were terminated. These plans
represented a much larger retirement benefit than was provided prior to
their implementation or than has been provided under our 401(k) plan since
January 1, 2002 (we estimate that, if our 401(k) plan had been in effect for
2001, we would have incurred $0.4 million in after-tax expenses under that
plan). We do not believe that expenses of a magnitude comparable to those
incurred in connection with the employee stock ownership plan and executive
stock ownership plan will be needed to attract and motivate our employees in
the future.
Further, as of the date of the Acquisition, we no longer employed the former
majority owner. Our former majority owner played a limited role in our
operations, and did not participate in day-to-day decisions, following late
1998 and the appointment of David Brussard as our Chief Executive Officer
and President in January 1999. In addition, no comparable expense has been
incurred since the Acquisition, and no need to hire an additional person to
fill this function is foreseen. However, no adjustment has been made to
eliminate (or to add, in the case of the 401(k) plan) any of the foregoing
items in the pro forma income statement for the 2001 year.
OFFERING-RELATED ITEMS
No pro forma adjustment has been made in the pro forma income statement for
2001 for certain non-recurring expenses that we will incur upon completion
of the offering. These expenses (after-tax) are:
- $1.7 million, for the write-off of deferred debt issuance costs upon
the repayment of the Acquisition-related debt;
- $4.0 million, in payment to TJC Management for termination of a portion
of their management consulting agreement with us; and
- $0.3 million of compensation expense (at the initial public offering
price of $12.00 per share) resulting from the vesting and automatic
exercise in full of the outstanding management stock appreciation
rights upon the closing of the offering.
36
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and accompanying notes which appear elsewhere in this
prospectus. It contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including
those discussed below and elsewhere in this prospectus, particularly under the
heading "Risk Factors."
GENERAL
OVERVIEW
We are a leading provider of private passenger automobile insurance in
Massachusetts. In addition to private passenger automobile insurance (which
represented 83.1% of our direct written premiums in 2001), we offer a portfolio
of insurance products, including commercial automobile (9.0% of 2001 direct
written premiums), homeowners (6.8% of 2001 direct written premiums), dwelling
fire, umbrella and business owner policies. Operating exclusively in
Massachusetts through our insurance company subsidiaries, Safety Insurance
Company, or Safety Insurance, and Safety Indemnity Insurance Company, we have
established strong relationships with approximately 500 independent insurance
agents in approximately 600 locations throughout Massachusetts. We have used
these relationships and our extensive knowledge of the Massachusetts market to
become the third largest private passenger carrier in Massachusetts, capturing
an approximately 10.4% share of the Massachusetts private passenger automobile
market in 2001 based on automobile exposures. These statistics total, for each
vehicle insured, the number of months during the year insurance for that vehicle
is in effect, to arrive at an aggregate number of car-months for each insurer;
this aggregate number, divided by 12, equals the insurer's number of car-years,
a measure we refer to in this prospectus as automobile exposures.
THE ACQUISITION
On October 16, 2001, Safety Group acquired Thomas Black Corporation, the
holding company for our insurance and other subsidiaries, from a group of
stockholders consisting primarily of Thomas Black Corporation's founder and
members of his immediate family. See "The Acquisition." We accounted for the
Acquisition using the purchase method of accounting, in accordance with the
treatment of a business combination under Statement of Financial Accounting
Standards No. 141, "Business Combinations." Under purchase accounting: (i) we
recorded the assets and liabilities of Thomas Black Corporation at their
estimated fair value at the date of Acquisition; (ii) we used the excess of
acquired net assets over the purchase price to reduce the estimated fair values
of all non-current, non-financial assets, principally equipment and leasehold
improvements; and (iii) we recorded the remaining $117.5 million excess of the
estimated fair value of net assets over purchase price as an extraordinary gain
in the consolidated statement of operations for the period October 16, 2001
through December 31, 2001 in accordance with SFAS No. 141.
The fair value of our reserves for losses and loss adjustment expenses and
related reinsurance recoverables was estimated based on the present value of the
expected underlying cash flows of the loss reserves and reinsurance
recoverables, and included a profit and risk margin. In determining the fair
value estimate, management adjusted our historical GAAP undiscounted net loss
reserves to present value assuming a 4.0% discount rate, which approximated the
U.S. Treasury rate on the date of the Acquisition. The discounting pattern was
actuarially developed from our historical loss data. A profit and risk margin of
6.0% was applied to the discounted loss reserves, to reflect management's
estimate of the cost we would incur to reinsure the full amount of our net loss
and loss adjustment expense reserves with a third party reinsurer. This margin
was based upon management's assessment of the uncertainty inherent in the net
loss reserves and their knowledge of the reinsurance marketplace.
37
<Page>
Management determined that there was no material difference between the
historical carrying basis of the reserves for losses and loss adjustment
expenses and related reinsurance recoverables at the date of Acquisition and
their fair value.
As noted above, as part of the application of purchase accounting, equipment
and leasehold improvements with a net book value of $3.3 million at October 16,
2001 were reduced to zero. In addition, the cost of all investment securities
held was increased by an aggregate of $12.7 million to adjust to fair market
value the cost basis of the investment securities. As a result, the amortization
and accretion of bond discount and premium and the realized and unrealized
gain/loss on investment securities for the successor period are different from
what they would have been on an historical accounting basis. The effect of this
increase in the cost basis of our investment securities will be amortized over
the period we hold the respective securities. In the event that we sell any of
these securities prior to maturity, the remaining amount of the premium or
discount will be recognized on the date of sale.
In connection with the Acquisition, we incurred approximately $9.5 million
and $406,000, respectively, of transaction-related expenses for the years ended
December 31, 2001 and December 31, 2000, respectively. These expenses incurred
are non-recurring in nature and are required to be expensed under GAAP.
As a result of the Acquisition, the capital structure and basis of
accounting of our Company differ from those of Thomas Black Corporation prior to
the Acquisition. Therefore, our financial data with respect to periods prior to
the Acquisition may not be comparable to data for periods subsequent to the
Acquisition. In addition, this offering, the use of its proceeds and the
Preferred Share Exchange will alter the capital structure of our Company. See
"Use of Proceeds" and "Unaudited Pro Forma Financial Data." The results of
operation data set forth and discussed below for the year ended December 31,
2001 consist of the combined historical results of Thomas Black Corporation for
the period prior to the Acquisition and the results of operations of the Company
for the period after the Acquisition. It is generally not permissible under GAAP
to combine pre-Acquisition and post-Acquisition periods; however, for the
purpose of comparison only, the combined results will generally serve as
comparable amounts to the year ended December 31, 2000 and will be utilized for
purposes of providing discussion and analysis of results of operations.
We will incur approximately $0.5 million in compensation expense under our
outstanding stock appreciation rights agreements in the quarter in which the
offering occurs.
ADJUSTED AFTER-TAX OPERATING INCOME
In managing our business, one measure we use to evaluate our performance is
our adjusted after-tax operating income. In calculating these amounts, we
exclude realized investment gains and certain other items that we do not believe
reflect overall operating trends. The size and timing of realized investment
gains are often subject to management's discretion. The other excluded items are
related to costs incurred as a result of our prior ownership structure and
certain expenses in the successor period which will no longer be incurred after
the date of this offering. While some of these items may be significant
components of our GAAP net income, we believe that adjusted operating income is
an appropriate measure that is more reflective of the net income attributable to
the ongoing operations of the business.
Items are excluded from adjusted after-tax operating income based on
management's judgment after a thorough review of our results of operations for
the relevant period. Because discretion is exercised in compiling these amounts,
adjusted operating income is an imperfect measure of operating trends, and
inconsistencies may exist in the adjustments made by management. After-tax
adjusted operating income is not a substitute for net income determined in
accordance with GAAP, and investors should not place undue reliance on this
analysis. Our adjusted after-tax operating income may
38
<Page>
be different from similarly titled measures of other companies. The following
are the adjustments we made to GAAP net income to arrive at adjusted after-tax
operating income.
<Table>
<Caption>
PREDECESSOR PREDECESSOR SUCCESSOR
PERIOD SUCCESSOR PERIOD ----------- ---------
PREDECESSOR YEAR ENDED ------------- ---------------- SIX MONTHS ENDED
DECEMBER 31, JANUARY 1- OCTOBER 16- JUNE 30,
--------------------------- OCTOBER 15, DECEMBER 31, -----------------------
1999 2000 2001 2001 2001 2002
------------ ------------ ------------- ---------------- ----------- ---------
($ IN THOUSANDS)
Adjusted after-tax operating income
available to common
stockholders...................... $19,269 $ 29,375 $14,294 $ 1,718 $ 7,462 $ 8,658
------- -------- ------- -------- ------- -------
Adjustments
Net realized gains (losses) on
sales of investments............ 5,266 (810) (498) (2,785) (384) (1,552)
Extraordinary gain(1)............. -- -- -- 117,523 -- --
Employee stock ownership plan/
supplemental executive stock
ownership plan compensation
expenses(2)..................... (5,531) (6,371) (2,180) -- (1,393) --
Chairman salary and bonus(3)...... (1,784) (1,960) (1,300) -- (975) --
Transaction expenses(4)........... -- (264) (4,334) (3,874) (109) --
Interest expense(2)............... (922) (696) (358) -- (251) --
TJC Management fees(5)............ -- -- -- (136) -- (373)
Put and call options on shares
held by management(6)........... -- -- -- (805) -- (1,936)
------- -------- ------- -------- ------- -------
Total after-tax adjustments....... (2,971) (10,101) (8,670) 109,923 (3,112) (3,861)
------- -------- ------- -------- ------- -------
GAAP reported:
Net income available to common
stockholders.................... $16,298 $ 19,274 $ 5,624 $111,641 $ 4,350 $ 4,797
======= ======== ======= ======== ======= =======
</Table>
- ------------------------------
(1) Represents extraordinary gain related to the excess of the estimated fair
value of net assets over purchase price in connection with the Acquisition
in accordance with Statement of Financial Accounting Standards No. 141,
"Business Combinations."
(2) Represents interest and other expenses related to the elimination of
employee stock ownership plan and supplemental executive stock ownership
plan compensation expenses incurred during the predecessor period. We
established these plans in 1995 under our prior majority owner. These plans
represented a much larger retirement benefit than was provided prior to
their implementation or than has been provided under our 401(k) plan since
January 1, 2002. We do not believe that expenses of a comparable magnitude
will be needed to attract and motivate our employees in the future.
Accordingly, management believes that this adjustment is appropriate. We
estimate that our 401(k) expense will be approximately $600,000 in 2002. We
plan to take the absence of an amount equivalent to the 2002 401(k) expense
into account when comparing our 2001 and prior adjusted operating income to
our adjusted operating income for 2002 and subsequent periods.
(3) Represents salary and bonus paid to our former owner. Management believes
that this adjustment is appropriate because of the limited role our former
owner played in our operations, and the fact that he did not participate in
day-to-day decisions, following late 1998 and the appointment of David
Brussard as our President and Chief Executive Officer in January 1999. In
addition, no comparable expense has been incurred since the Acquisition, and
no need to hire an additional person to fill this function is foreseen.
(4) Represents transaction expenses incurred in connection with the
Acquisition.
(5) Represents management fees paid to TJC Management. These fees were paid in
respect of services that will no longer be provided after this offering. We
have agreed to terminate this aspect of our management consulting agreement
with TJC Management for several reasons, including the ability of our
current management to perform the equivalent functions following the
offering. We do not expect to hire additional employees or retain a new
consultant on an annual or other periodic fee basis to perform these
services following the offering. We will still be required to pay fees to
TJC Management in connection with consulting services they render on certain
purchase, sale and financing transactions.
(6) Represents elimination of compensation expenses related to put and call
options on shares held by management. These options terminate upon
completion of this offering.
39
<Page>
CRITICAL ACCOUNTING POLICIES
LOSS AND LOSS ADJUSTMENT EXPENSES RESERVES. Significant periods of time can
elapse between the occurrence of an insured loss, the reporting to us of that
loss and our final payment of that loss. To recognize liabilities for unpaid
losses, we establish reserves as balance sheet liabilities. Our reserves
represent estimates of amounts needed to pay reported and unreported losses and
the expenses of investigating and paying those losses, or loss adjustment
expenses. Every quarter, we review our previously established reserves and
adjust them, if necessary.
When a claim is reported, claims personnel establish a "case reserve" for
the estimated amount of the ultimate payment. The amount of the reserve is
primarily based upon an evaluation of the type of claim involved, the
circumstances surrounding each claim and the policy provisions relating to the
loss. The estimate reflects informed judgment of such personnel based on general
insurance reserving practices and on the experience and knowledge of the claims
person. During the loss adjustment period, these estimates are revised as deemed
necessary by our claims department based on subsequent developments and periodic
reviews of the cases.
In accordance with industry practice, we also maintain reserves for
estimated losses incurred but not yet reported. Incurred but not yet reported
reserves are determined in accordance with commonly accepted actuarial reserving
techniques on the basis of our historical information and experience. We review
and make adjustments to incurred but not yet reported reserves quarterly.
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. Establishment of
appropriate reserves is an inherently uncertain process, and currently
established reserves may not 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.
The changes we have recorded in our reserves in the past three years
illustrate the uncertainty of estimating reserves. In 1999, 2000 and 2001, our
reserve reviews indicated that our reserves established in prior years were
higher than necessary, and so in those years we released $26.1 million, $27.0
million and $7.3 million, respectively, of previously established reserves for
losses and loss adjustment expenses. We strengthened reserves for prior years by
$0.7 million in the first six months of 2002. It is not appropriate to
extrapolate future favorable or unfavorable development of reserves from this
past experience. For further information, see "Business--Reserves."
See note 3 to our consolidated financial statements for a discussion of our
other significant accounting policies.
MASSACHUSETTS AUTOMOBILE INSURANCE MARKET
We are subject to the extensive regulation of the private passenger
automobile insurance industry in Massachusetts. Owners of registered automobiles
are required to maintain minimum automobile insurance coverages. Generally, we
are required by law to issue a policy to any applicant who seeks it. Based on
our market share, we are assigned certain agents that have been unable to obtain
a voluntary
40
<Page>
contract with another insurer. We call these agents Exclusive Representative
Producers, or ERPs. In addition, we are required to participate in a
state-mandated reinsurance program run by CAR to which we cede certain
unprofitable risks and from which we are allocated a portion of the overall
losses. This program operates at an underwriting deficit. This deficit is
allocated among every Massachusetts automobile insurance company, including us,
based on a complex formula that takes into consideration a company's voluntary
market share, the rate at which it cedes business to CAR, and the company's
utilization of a credit system CAR has designed to encourage carriers to reduce
their use of CAR.
Each year, the Commissioner sets maximum premium rates that may be charged
and minimum commissions that may be paid to agents for personal automobile
insurance.
The Commissioner approved no change in personal automobile premiums for
2002, as compared to an average rate decrease of 8.3% in 2001. During the period
from 1995 through 2002 average rates decreased in five out of eight of those
years. Coinciding with the 2002 rate decision, the Commissioner also approved a
decrease in the commission rate agents receive for selling private passenger
automobile insurance, as a percentage of premiums, from 12.3% in 2001 to 11.7%
in 2002.
Although average maximum personal automobile premium rates decreased 8.3% in
2001, our average rate per automobile exposure remained unchanged. This was
primarily the result of decreases in the Safe Driver Insurance Plan discounts we
offered for Step 9 and Step 10 drivers, the two best driver Safe Driver
Insurance Plan classifications under the classification system developed by the
Commissioner. In addition, we reduced our affinity group discounts from a range
of 5-10% to 3-5%. Further, beginning in late 2000, we began a new rate pursuit
initiative that validated insured rating classifications and discount
eligibility, and which we believe contributed to our average premiums received
per automobile exposure. Our ability to maintain our average automobile exposure
was also due in part to purchases of new automobiles by our insureds. Further,
although state-mandated average maximum private passenger automobile insurance
rates did not increase in 2002, our average premium per automobile exposure in
the nine months ended September 30, 2002 increased from the nine months ended
September 30, 2001 approximately 5.5%. This increase was primarily the result of
our elimination of Safe Driver Insurance Plan discounts, reduced affinity group
discounts and purchases of new automobiles by our insureds. The table below
shows average Massachusetts-mandated personal automobile premium rate changes
and changes in our average premium per automobile exposure from 1991-2002.
MASSACHUSETTS PRIVATE PASSENGER RATE DECISIONS
<Table>
<Caption>
STATE MANDATED SAFETY CHANGE IN
AVERAGE RATE AVERAGE PREMIUM PER
YEAR CHANGE(1) AUTOMOBILE EXPOSURE
- ---- -------------- -------------------
2002.............................................. 0.0% 5.5%
2001.............................................. (8.3)% 0.0%
2000.............................................. 0.7% 7.4%
1999.............................................. 0.7% 10.9%
1998.............................................. (4.0)% 2.8%
1997.............................................. (6.2)% (5.1)%
1996.............................................. (4.5)% (7.7)%
1995.............................................. (6.1)% (3.6)%
1994.............................................. 2.9% 1.0%
1993.............................................. 5.7% 5.3%
1992.............................................. 8.0% 4.9%
1991.............................................. 6.9% 5.7%
</Table>
- --------------------------
(1) Source: Division of Insurance rate decisions for 1991 - 2002.
41
<Page>
The Commissioner will set the average rate for 2003 after a hearing in which
the Automobile Insurers Bureau, the Attorney General, and the State Rating
Bureau (which is a department within the Massachusetts Division of Insurance)
are parties. On August 16, 2002, the Automobile Insurers Bureau proposed an
average 7.0% rate increase for 2003. The Attorney General has recommended a
decrease of 5.7%, and the State Rating Bureau has proposed an increase of
slightly more than 2.0%. The Commissioner has not yet set the average premium
rate for 2003. We expect the Commissioner to make this decision by December 15,
2002.
INSURANCE RATIOS. The property and casualty insurance industry uses the
combined ratio as a measure of underwriting profitability. On a statutory
accounting basis, 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 expenses, which include acquisition costs, as a
percent of net written premiums). The combined ratio reflects only underwriting
results, and does not include income from investments or finance and other
service income. Underwriting profitability is subject to significant
fluctuations due to competition, catastrophic events, economic and social
conditions and other factors.
Our adjusted insurance ratios for the years ended December 31, 1999 through
2001 and the six months ended June 30, 2002 are outlined in the following table:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------- SIX MONTHS ENDED
1999 2000 2001 JUNE 30, 2002
--------- --------- --------- ----------------
Safety ratio(1)(2)
Loss ratio............................ 74.9% 72.3% 78.8% 76.2%
Expense ratio......................... 29.0 28.2 26.1 23.9
--------- --------- --------- ---------
Combined ratio........................ 103.9% 100.5% 104.9% 100.1%
Property and casualty industry
Combined ratio(3)..................... 108.1%(4) 110.3%(4) 115.9%(4) 105.1%(5)
</Table>
- ------------------------------
(1) The above adjusted statutory expense and combined ratios for the years 1999
through 2001 include certain expenses that management believes are not
indicative of ongoing statutory underwriting performance, as described under
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--General--Adjusted After-Tax Operating Income." These expenses
consist of compensation and interest expenses related to our employee stock
ownership plan and our supplemental executive stock ownership plan which
were terminated effective with the Acquisition and compensation expense
related to the former majority owner whom we no longer employ. If these
costs were excluded from our expense ratios, our adjusted expense and
combined ratios, respectively, would have been 25.4% and 100.3% for 1999,
25.2% and 97.5% for 2000 and 24.8% and 103.6% for 2001.
(2) The ratios shown for 1999 and 2000 have also been adjusted from amounts
previously reported to present our business assumed from CAR on a gross
basis. Each insurer writing private passenger automobile insurance in
Massachusetts must assume a share of premiums, losses, loss adjustment
expenses and underwriting expenses from a state-mandated reinsurance pool
run by CAR. Prior to 2001, we recorded our share of premiums assumed from
this pool and the related losses, loss adjustment expenses and underwriting
expenses by netting these items and reflecting the resulting net loss in
losses and loss adjustment expenses. Effective January 1, 2001, we began
recording these premiums and the related losses, loss adjustment expenses
and underwriting expenses on a gross basis in our statutory financial
statements. For a presentation of our statutory ratios as originally
reported, see "Selected Historical Financial Data."
(3) For property and casualty industry data, the combined ratios include
dividends to policyholders. Our property and casualty industry combined
ratio is based on data compiled by A.M. Best. This data aggregates the
performance of 2,455 national and regional property and casualty insurance
companies and does not include these companies' life and other non-property
and casualty insurance results. The mix of products that we offer may be
different from the mix offered by these other property and casualty
companies.
(4) Source: A.M. Best, AGGREGATES & AVERAGES, 2002 Edition.
(5) Source: A.M. Best Statistical Study, September 16, 2002.
42
<Page>
RESULTS OF OPERATIONS
The table below shows certain of our selected financial results for the
years ended December 31, 1999, 2000 and 2001 and for the six months ended
June 30, 2001 and 2002. For comparative purposes, the predecessor and successor
periods have been combined under the caption "For the Year Ended December 31,
2001."
<Table>
<Caption>
FOR THE SIX
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------ -------------------
1999 2000 2001 2001 2002
-------- -------- -------- -------- --------
($ IN THOUSANDS)
Direct written premiums................... $349,206 $427,457 $471,866 $259,918 $283,382
Net written premiums...................... 330,961 430,030 465,466 256,322 285,355
Net earned premiums....................... 300,020 381,413 447,273 218,013 241,420
Investment income......................... 23,870 26,889 27,605 13,979 13,659
Net realized investment gains (losses).... 8,102 (1,246) (5,050) (591) (2,388)
Finance and other service income.......... 10,989 12,656 13,509 6,589 8,024
-------- -------- -------- -------- --------
Total income............................ 342,981 419,712 483,337 237,990 260,715
-------- -------- -------- -------- --------
Losses and loss adjustment expenses....... 225,241 275,138 351,942 172,433 182,926
Underwriting, operating and related
expenses................................ 91,357 115,567 119,509 58,568 65,645
Transaction expenses...................... -- 406 9,479 109 --
Interest expense.......................... 1,418 1,072 2,373 387 4,151
-------- -------- -------- -------- --------
Total expenses.......................... 318,016 392,183 483,303 231,497 252,722
-------- -------- -------- -------- --------
Income before income taxes................ 24,965 27,529 34 6,493 7,993
Income tax expense........................ 8,667 8,255 12 2,143 2,524
-------- -------- -------- -------- --------
Net income before extraordinary item and
preferred stock dividends............... $ 16,298 $ 19,274 $ 22 $ 4,350 $ 5,469
======== ======== ======== ======== ========
</Table>
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
DIRECT WRITTEN PREMIUMS. Direct written premiums for the six months ended
June 30, 2002 increased by $23.5 million, or 9.0%, to $283.4 million from
$259.9 million in the comparable 2001 period. The increase was primarily due to
an approximately 5.7% increase in the average written premium per automobile
exposure on our private passenger automobile business. We also increased our
average rates on commercial automobile insurance by 7.2% effective January 1,
2002 and on homeowners insurance by 9.8% effective February 19, 2002.
NET WRITTEN PREMIUMS. Net written premiums for the six months ended
June 30, 2002 increased by $29.0 million, or 11.3%, to $285.4 million from
$256.3 million in the comparable 2001 period. The increase was primarily due to
the increase in direct written premiums and in assumed premiums from CAR.
NET EARNED PREMIUMS. Net earned premiums for the six months ended June 30,
2002 increased by $23.4 million, or 10.7%, to $241.4 million from
$218.0 million in the comparable 2001 period. The increase was primarily due to
an approximately 4.5% increase in automobile exposures for which we earned
premiums in our private passenger automobile business and the increased rates on
our private passenger automobile, commercial automobile and homeowners lines.
INVESTMENT INCOME. Investment income for the six months ended June 30, 2002
decreased by $0.3 million, or 2.1%, to $13.7 million from $14.0 million for the
comparable 2001 period. An increase in average invested assets to $522.7 million
for the first half of 2002 from $506.0 million for the comparable 2001 period
was more than offset by a decrease in annualized effective yield from 5.52% to
5.23% during the same period due to declining interest rates on our investment
portfolio.
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<Page>
NET REALIZED LOSSES. Net realized investment losses for the six months
ended June 30, 2002 and 2001 were $2.4 million and $0.6 million, respectively.
The gross unrealized appreciation (depreciation) of investments in debt
securities as of June 30, 2002, was as follows:
<Table>
<Caption>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
($ IN THOUSANDS)
U.S Treasury securities and obligations
of U.S. Government agencies(1)................. $ 117,289 $ 696 $ (1,947) $ 116,038
Obligations of states and political
subdivisions................................... 173,266 2,443 (138) 175,571
Mortgage-backed securities....................... 81,602 987 (904) 81,685
Corporate and other securities................... 106,933 1,441 (1,240) 107,134
---------- -------- --------- ----------
Total(2)......................................... $ 479,090 $ 5,567 $ (4,229) $ 480,428
========== ======== ========= ==========
</Table>
- ------------------------------
(1) Obligations of U.S. Government agencies include collateralized mortgage
obligations issued, guaranteed and/or insured by the following issuers:
Government National Mortgage Association, Federal Home Loan Mortgage
Corporation, and Federal National Mortgage Association.
(2) At June 30, 2002, we had a net receivable of $36.9 million in respect of
securities sold prior to that date for which payment was received after
that date and reinvested in debt securities.
As of June 30, 2002, our portfolio of fixed maturity investments was
comprised entirely of investment grade corporate debt securities, U.S.
government and agency securities and mortgage-backed securities, with the
exception of one security which was rated below investment grade (I.E., all our
securities received a rating from the Securities Valuation Office of the
National Association of Insurance Commissioners Category of 1 or 2, with the
exception of one security rated Category 3). In addition, all fixed maturity
securities we held were publicly traded.
In our determination of other-than-temporary impairments, we consider
several factors and circumstances including the issuer's overall financial
condition, the issuer's credit and financial strength ratings, a weakening of
the general market conditions in the industry or geographic region in which the
issuer operates, a prolonged period (typically six months or longer) in which
the fair value of an issuer's securities remains below our cost and any other
factors that may raise doubt about the issuer's ability to continue as a going
concern.
Other-than-temporary impairments are recorded as a realized loss, which
serves to reduce net income and earnings per share. Temporary losses are
recorded as unrealized losses, which do not impact net income and earnings per
share but reduce other comprehensive net income. The risks inherent in the
assessment of other-than-temporary impairments include the risk that market
factors may differ from our expectations; we may decide to subsequently sell a
security for unforeseen liquidity needs; or the credit assessment could change
in the near term, resulting in a charge to earnings.
In connection with the purchase price allocation adjustments recorded
effective with the Acquisition, we increased our net cost basis in investment
securities held by an aggregate of approximately $12.7 million to their fair
market values as of October 16, 2001. Accordingly, none of our gross unrealized
losses of $4.2 million as of June 30, 2002 has existed for a period longer than
from October 17, 2001 to June 30, 2002. As of December 31, 2001, we had gross
unrealized losses of $7.9 million, of which approximately $7.3 million related
to fixed maturity obligations of the U.S. government, states, and government
agency mortgage-backed securities, such as those issued by the Government
National Mortgage Association and the Federal Home Loan Mortgage Corporation.
The remaining $0.6 million of gross unrealized losses at that date related to
holdings of investment grade corporate debt securities in a variety of
industries and sectors, including banking, retail, finance, consumer product,
telecommunications, entertainment, utilities and aerospace.
44
<Page>
The unrealized losses recorded on the fixed maturity investment portfolio at
June 30, 2002 resulted primarily from increases in market interest rates as
opposed to fundamental changes in the credit quality of the issuers of such
securities. Therefore, these decreases in values are viewed as being temporary
as we have the intent and ability to retain such investments for a period of
time sufficient to allow for recovery in market value.
Of the approximately $4.2 million gross unrealized losses as of June 30,
2002, approximately $3.0 million relates to fixed maturity obligations of the
U.S. government, states, and government agency mortgage-backed securities. The
remaining $1.2 million of gross unrealized losses relates to holdings of
investment grade corporate debt securities in a variety of industries and
sectors, including banking, retail, finance, consumer product,
telecommunications, entertainment, utilities, and aerospace.
Gross unrealized losses decreased from $13.1 million at March 31, 2002 to
$4.2 million at June 30, 2002. However, during the second quarter of 2002, there
was a significant deterioration in the credit quality of two of our holdings in
the telecommunications sector. Accordingly, for the six months ended June 30,
2002, we recognized an after-tax realized loss of approximately $1.3 million for
one of these securities sold in June and recorded an after-tax
other-than-temporary impairment charge of approximately $0.7 million for the
other telecommunications security. For the six months ended June 30, 2001, we
did not record any other-than-temporary impairment charges relating to our
portfolio of investment securities.
FINANCE AND OTHER SERVICE INCOME. Finance and other service income includes
revenues from premium installment charges, which we recognize when assessed, and
other miscellaneous income and fees. Finance and service fee income for the six
months ended June 30, 2002 increased by $1.4 million, or 21.2%, to $8.0 million
from $6.6 million for the comparable 2001 period. The increase was primarily due
to a $0.8 million increase in premium installment billing fees due to growth in
the number of policies and the fee charged per policy, as well as a $0.5 million
increase in miscellaneous income from CAR.
LOSSES AND LOSS ADJUSTMENT EXPENSES. Losses and loss adjustment expenses
incurred for the six months ended June 30, 2002 increased $10.5 million, or
6.1%, to $182.9 million from $172.4 million for the comparable 2001 period. As a
percentage of premiums earned, losses and loss adjustment expenses incurred
during the first half of 2002 was 75.8% compared to 79.1% for the comparable
2001 period. The percentage decrease in losses and loss adjustment expenses was
the result of a $5.8 million reduction in loss adjustment expenses incurred from
the 2001 amount, due to a strengthening of loss adjustment expense reserves in
respect of prior periods that was recorded in the first half of 2001. The ratio
of net incurred losses, excluding loss adjustment expenses, to premiums earned
during the first half of 2002 was 67.7% compared to 67.5% for the comparable
2001 period. We experienced higher assumed residual market losses during the
first half of 2002 than the first half of 2001, which were the result of a
higher CAR loss ratio and strengthening of prior year CAR reserves. As of
June 30, 2002, we strengthened loss reserves related to prior years by
$0.7 million.
UNDERWRITING, OPERATING AND RELATED EXPENSES. Underwriting, operating and
related expenses for the six months ended June 30, 2002 increased by
$7.1 million, or 12.1%, to $65.6 million from $58.5 million for the comparable
2001 period. As a percentage of net written premiums, our underwriting expense
ratio for the first half of 2002 was 23.0% compared to 22.8% for the comparable
2001 period. Underwriting, operating and related expenses for the first half of
2001 included $2.1 million of expense incurred under the employee stock
ownership plan and the supplemental executive stock ownership plan, both of
which were terminated as of the Acquisition, and $1.5 million in compensation
paid to our former majority owner, while the comparable 2002 period included
$0.6 million in fees paid to TJC Management and $3.0 million in compensation
expenses related to put and call options on shares held by management.
45
<Page>
TRANSACTION EXPENSES. Transaction expenses for the six months ended
June 30, 2002 decreased to $0 from $0.1 million for the comparable 2001 period.
The transaction expenses for the first half of 2001 represent costs incurred by
the seller and paid by us in connection with the Acquisition. These costs were
non-recurring in nature and did not result from ongoing insurance operations.
Such seller costs primarily included transaction expenses in the predecessor
period related primarily to transaction bonuses to employees, fees paid to
Thomas Black Corporation's investment banker and legal fees. Stock issuance
costs of $1.7 million have been deferred and reflected in other assets as of
June 30, 2002. This asset will be written down and charged to paid-in capital
upon the closing of the offering.
INTEREST EXPENSE. Interest expenses for the six months ended June 30, 2002
increased to $4.2 million from $0.4 million for the comparable 2001 period. The
increase was due to indebtedness incurred in connection with the Acquisition,
offset by the elimination in the first half of 2002 of interest expense related
to the terminated employee stock ownership plan.
INCOME TAXES. Our effective tax rate on net income before extraordinary
item was 31.6% and 33.0% for the six months ended June 30, 2002 and 2001,
respectively. For the first half of 2002, the effective rate was lower than the
statutory rate of 35% primarily due to adjustments for tax-exempt investment
income, offset by non-deductible transaction expenses. For the first half of
2001, the effective tax rate was lower than the statutory rate of 35% primarily
due to adjustments for tax-exempt investment income, offset by non-deductible
employee stock ownership plan and supplemental executive stock ownership plan
expenses.
NET INCOME BEFORE EXTRAORDINARY ITEM AND PREFERRED DIVIDENDS. Net income
before extraordinary item and preferred dividends for the six months ended
June 30, 2002 increased to $5.5 million from $4.3 million for the six months
ended June 30, 2001 as a result of the factors previously discussed above.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
DIRECT WRITTEN PREMIUMS. Direct written premiums for the year ended
December 31, 2001 increased by $44.4 million, or 10.4%, to $471.9 million from
$427.5 million for the year ended December 31, 2000. The increase was primarily
due to policy growth, as reflected by an increase of approximately 6% for the
number of private passenger automobile policies, 20% for the number of
commercial automobile policies and 17% for the number of homeowners policies. As
described above, although the mandated average personal automobile rates
declined 8.3% in 2001 from 2000, our average premium per automobile exposure
remained flat as a result of factors including our reduced offering of
discounts, our rate pursuit initiatives and new automobile purchases by our
insureds.
NET WRITTEN PREMIUMS. Net written premiums for the year ended December 31,
2001 increased by $35.5 million, or 8.3%, to $465.5 million from $430.0 million
for the year ended December 31, 2000. The increase was due primarily to
increased policy growth on our direct business.
NET EARNED PREMIUMS. Net earned premiums for the year ended December 31,
2001 increased by $65.9 million, or 17.3%, to $447.3 million from
$381.4 million for the year ended December 31, 2000. This increase was due
primarily to increased policy growth on our direct business.
INVESTMENT INCOME. Investment income for the year ended December 31, 2001
increased by $0.7 million, or 2.6%, to $27.6 million from $26.9 million for the
year ended December 31, 2000. The increase was primarily due to an increase in
average invested assets to $517.1 million from $476.4 million for the year ended
December 31, 2000, which was offset by a decrease in effective yield on our
investment portfolio from 5.6% in 2000 to 5.3% in 2001.
FINANCE AND OTHER SERVICE INCOME. Finance and service fee income for the
year ended December 31, 2001 increased by $0.8 million, or 6.3%, to
$13.5 million from $12.7 million for the year ended December 31, 2000. The
increase was primarily due to policy growth as described above.
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NET REALIZED LOSSES. Net realized investment losses for the year ended
December 31, 2001 were $5.0 million and were $1.2 million for the year ended
December 31, 2000. The 2001 net realized losses resulted primarily from the sale
of certain securities which had significantly declined in credit quality from
the date of purchase and from sales of securities in the ordinary course
following the resetting of their carrying value under purchase accounting as of
the date of the Acquisition.
LOSSES AND LOSS ADJUSTMENT EXPENSES. Losses and loss adjustment expenses
incurred for the year ended December 31, 2001 increased $76.8 million, or 27.9%,
to $351.9 million from $275.1 million for the year ended December 31, 2000. As a
percentage of premiums earned, losses and loss adjustment expenses incurred for
2001 was 78.7% compared to 72.1% in 2000. Poor weather in the first quarter of
2001 impacted our personal and commercial automobile loss ratios, and poor
weather in the first and second quarters of 2001 impacted our homeowners loss
ratio. We ceded less business to the residual market in 2001, thereby increasing
our loss ratio, which was partially offset by a lower share of the residual
market. We experienced higher assumed residual market losses during 2001, which
were the result of a higher CAR loss ratio. Finally, in 2001 we released
$7.3 million of loss reserves related to prior years, compared to $27.0 million
in 2000. The ratio of net incurred losses, excluding loss adjustment expenses,
to premiums earned was 67.9% in 2001 compared to 60.7% in 2000.
UNDERWRITING, OPERATING AND RELATED EXPENSES. Underwriting, operating and
related expenses for the year ended December 31, 2001 increased $3.9 million, or
3.4%, to $119.5 million from $115.6 million for the year ended December 31,
2000. As a percentage of net written premiums, our underwriting expense ratio
for 2001 was 25.7% compared to 26.9% in 2000. The lower underwriting expense
ratio in 2001 resulted from lower expenses primarily due to the continued
effects of our technology program with respect to our agents, which allowed us
to achieve economies of scale, and to a lesser extent to reductions in
contingent commissions paid to our agents. Massachusetts law requires that we
participate in the Massachusetts Insurers Insolvency Fund, which pays claims up
to $300,000 of a policyholder of an insolvent insurer if the claim existed prior
to the declaration of insolvency or arose within sixty days after the
declaration of insolvency. We account for allocations from the Massachusetts
Insurers Insolvency Fund as underwriting expenses. The underwriting ratio in
2001 included a $1.4 million charge (0.3% of the underwriting expense ratio)
representing our allocation from the Massachusetts Insurers Insolvency Fund for
the insolvencies of The Trust Insurance Company and Reliance Insurance Company.
Underwriting, operating and related expenses for the year ended December 31,
2001 included $3.5 million of expense incurred under the employee stock
ownership plan and the supplemental executive stock ownership plan, both of
which were terminated as the Acquisition, $2.0 million in compensation paid to
our former majority owner, $1.2 million in compensation expense related to put
and call options on shares held by management and $0.2 million in fees paid to
TJC Management. Underwriting, operating and related expenses for the year ended
December 31, 2000 included $8.9 million of expense incurred under the employee
stock ownership plan and the supplemental executive stock ownership plan, both
of which were terminated as of the Acquisition, and $3.0 million in compensation
paid to our prior majority owner.
TRANSACTION EXPENSES. Transaction expenses increased to $9.5 million in
2001, as compared to $0.4 million in 2000. These expenses represent costs
incurred in connection with the Acquisition. These costs were non-recurring in
nature and did not result from ongoing insurance operations. Such costs
primarily included transaction bonuses earned by employees, fees paid to Thomas
Black Corporation's investment banker and legal fees.
INTEREST EXPENSE. Interest expense for the year ended December 31, 2001 was
$2.4 million compared to $1.1 million for the year ended December 31, 2000. The
increase in 2001 was the result of indebtedness incurred in connection with the
Acquisition, offset, in part, by a reduction in interest expense incurred in
connection with the employee stock ownership plan to $0.5 million in 2001 from
$1.1 million in 2000. Upon the Acquisition, our employee stock ownership plan
and supplemental executive stock ownership plan were terminated.
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INCOME TAXES. Our effective tax rate on net income before extraordinary
item was 35.3% and 30.0% for the years ended December 31, 2001 and 2000,
respectively. In 2001, the effective rate approximated the statutory rate of 35%
due to a reduction in taxable income related to tax-exempt investment income,
offset by non-deductible transaction expenses and state income tax expense. In
2000, the effective rate was lower than the statutory rate of 35% primarily due
to tax-exempt interest income and the corporate dividends received deduction
offset by non-deductible state income tax and employee stock ownership plan
expenses. See note 13 to our consolidated financial statements.
NET INCOME BEFORE EXTRAORDINARY ITEM AND PREFERRED DIVIDENDS. Net income
before extraordinary item and preferred dividends decreased $19.2 million, or
100.0%, to $0.1 million during for the year ended December 31, 2001 as compared
to $19.3 million for the year ended December 31, 2000, as a result of the
factors previously mentioned.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
DIRECT WRITTEN PREMIUMS. Direct written premiums for the year ended
December 31, 2000 increased by $78.3 million, or 22.4%, to $427.5 million from
$349.2 million for the year ended December 31, 1999. The increase was primarily
due to policy growth, as reflected by an increase of approximately 10% for the
number of private passenger automobile policies, 20% for the number of
commercial automobile policies and 71.0% for the number of homeowner policies.
NET WRITTEN PREMIUMS. Net written premiums for the year ended December 31,
2000 increased by $99.0 million, or 29.9%, to $430.0 million from
$331.0 million for the year ended December 31, 1999. The increase was due to
increased policy growth on our direct business, and a reduction in ceded
business of $14.7 million, or 23.2%, to $48.6 million from $63.3 million for the
year ended December 31, 1999.
NET EARNED PREMIUMS. Net earned premiums for the year ended December 31,
2000 increased by $81.4 million, or 27.1%, to $381.4 million from
$300.0 million for the year ended December 31, 1999. The increase was primarily
due to the factors described under "Net Written Premiums" above.
INVESTMENT INCOME. Investment income for the year ended December 31, 2000
increased by $3.0 million, or 12.6%, to $26.9 million from $23.9 million for the
year ended December 31, 1999. The increase was primarily due to an increase in
average invested assets to $476.4 million from $441.1 million for the year ended
December 31, 1999 and an increase in the effective yield on our investment
portfolio from 5.4% in 1999 to 5.6% in 2000.
FINANCE AND SERVICE INCOME. Finance and service fee income for the year
ended December 31, 2000 increased by $1.7 million, or 15.5%, to $12.7 million
from $11.0 million for the year ended December 31, 1999. The increase was
primarily due to policy growth as described above.
NET REALIZED GAINS (LOSSES). Net realized investment losses for the year
ended December 31, 2000 were $1.2 million compared to net realized gains of
$8.1 million for the year ended December 31, 1999. During 1999, we chose to
moderate investment risk by reducing our equity exposure to approximately 17% of
surplus from approximately 39% of statutory surplus for the year ended
December 31, 1999. To reduce equity exposure, we sold equity positions and
recognized capital gains of $11.0 million in 1999, which were offset by realized
capital losses in the bond portfolio.
LOSSES AND LOSS ADJUSTMENT EXPENSES. Losses and loss adjustment expenses
incurred for the year ended December 31, 2000 increased $49.9 million, or 22.2%,
to $275.1 million from $225.2 million for the year ended December 31, 1999. As a
percentage of premiums earned, losses and loss adjustment expenses incurred for
2000 were 72.1% compared to 75.1% in 1999. We experienced lower assumed residual
market losses during 2000 as a percentage of earned premiums due to ceding less
business to CAR than in 1999. In 2000, the loss ratio was adversely impacted by
approximately $3.0 million of
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expense (0.8% of the loss ratio) attributable to The Trust Insurance Company and
New England Fidelity insolvencies, offset by an increase in redundancies arising
from prior accident years. This expense results from assessments made by CAR to
recover the share of net CAR losses that would have been assessed to the
insolvent companies but for their insolvencies. The ratio of net incurred
losses, excluding loss adjustment expenses, to premiums earned was 60.7% in 2000
compared to 63.3% in 1999.
UNDERWRITING, OPERATING AND RELATED EXPENSES. Underwriting, operating and
related expenses for the year ended December 31, 2000 increased $24.2 million,
or 26.5%, to $115.6 million from $91.4 million for the year ended December 31,
1999. As a percentage of net written premiums, our underwriting expense ratio
for 2000 was 26.9% compared to 27.6% in 1999. The decrease in the underwriting
expense ratio for 2000 resulted primarily from lower direct automobile
commissions associated with a decrease in the state mandated minimum commissions
and lower expenses due to the continued effects of our technology program with
respect to our agents, which allowed us to achieve economies of scale, partially
offset by The Trust Insurance Company and New England Fidelity insolvency
assessments. The underwriting expense ratio for 2000 includes a $2.2 million
charge (0.5% of the underwriting expense ratio) representing our allocation from
the Massachusetts Insurers Insolvency Fund for these insolvencies. Underwriting,
operating and related expenses for the year ended December 31, 1999 included
$7.7 million of expense incurred under the employee stock ownership plan and the
supplemental executive stock ownership plan, both of which were terminated as of
the Acquisition, and $2.7 million in compensation paid to our prior majority
owner.
TRANSACTION EXPENSES. Transaction expenses were $0.4 million in 2000 as
compared to $0 in 1999.
INTEREST EXPENSE. Interest expense decreased from $1.4 million for the year
ended December 31, 1999 to $1.1 million for the year ended December 31, 2000.
The decrease was due to principal payments made on the employee stock ownership
plan loan which reduced the outstanding debt from $18.0 million as of December
31, 1999 to $13.4 million as of December 31, 2000.
INCOME TAXES. Our effective tax rate on net income before extraordinary
item was 30.0% and 34.7% for the years ended December 31, 2000 and 1999,
respectively. In both years the effective rate was lower than the statutory rate
of 35% primarily due to tax-exempt interest income and the corporate dividends
received deduction, offset by non-deductible state income tax and employee stock
ownership plan expenses. See note 13 to our consolidated financial statements.
NET INCOME. Net income increased $3.0 million, or 18.4%, to $19.3 million
for the year ended December 31, 2000 as compared to $16.3 million for the year
ended December 31, 1999, as a result of the factors previously mentioned.
LIQUIDITY AND CAPITAL RESOURCES
As a holding company, Safety Group's assets consist primarily of the stock
of direct and indirect subsidiaries. Safety Group's principal source of funds to
meet our obligations and pay dividends to stockholders, therefore, are dividends
and other permitted payments from our subsidiaries, principally our indirect
subsidiary, Safety Insurance. Safety Group's direct subsidiary, Thomas Black
Corporation, directly owns Safety Insurance. Thomas Black Corporation is the
borrower under our existing credit facility. As a holding company, its principal
source of cash to pay amounts under the credit facility and its other
obligations and dividends to us are dividends and other permitted payments from
Safety Insurance.
Safety Insurance's sources of funds primarily include premiums received,
investment income and proceeds from sales and redemptions of investments. Its
principal uses of cash are the payment of claims, operating expenses and taxes,
the purchase of investments and payment of dividends to Thomas Black
Corporation.
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For the six months ended June 30, 2002 and June 30, 2001 and for the years
ended December 31, 2001, 2000 and 1999, our consolidated cash flow provided by
operations was $42.8 million, $10.6 million, $30.1 million, $47.8 million and
$41.1 million, respectively. The $32.2 million increase between the six months
ended June 30, 2002 and June 30, 2001 was primarily a result of cash flow from
growth in written premium. The $17.7 million decrease between 2001 and 2000 was
the result of a decrease in net income.
For the six months ended June 30, 2002 and June 30, 2001 and for the years
ended December 31, 2001, 2000 and 1999, our consolidated cash flow used for
investing activities was $27.5 million, $3.8 million, $150.9 million,
$33.0 million and $34.8 million, respectively. The $23.7 million increase
between the six months ended June 30, 2002 and June 30, 2001 was primarily
attributable to a receivable from securities sold in 2002. The $117.9 million
increase between 2001 and 2000 was primarily attributable to the Acquisition,
which resulted in a $121.1 million use of cash and a $38.8 million increase in
net bond investments, offset by a $40.5 million increase in net stock proceeds
and a $1.5 million decrease in purchases of fixed assets.
Financing activities have also been a source of liquidity for us. We
obtained cash to pay for the Acquisition and related expenses principally from
borrowings under our existing credit facility and the issuance of our notes and
preferred stock, each of which are described below. We also received cash for
the Acquisition from issuing our common stock.
EXISTING CREDIT FACILITY. In connection with the Acquisition, Thomas Black
Corporation borrowed a total of $69.5 million under our existing credit
facility. Fleet National Bank is the arranger under this facility, which
consists of a $55 million term loan and a $20.0 million revolving credit
facility. We borrowed the entire amount of the term loan and $14.5 million under
the revolving credit facility to fund the Acquisition. Loans under the existing
credit facility bear interest at our option at either (i) the LIBOR rate plus an
applicable margin or (ii) the higher of Fleet National Bank's prime rate or
1/2% above the federal funds rate, in either case plus an applicable margin. The
applicable margin for any period is based on the ratio of our consolidated debt
to the combined statutory surplus of our insurance subsidiaries. The current
interest rate under our existing credit facility is 5.58%. The term loan is
repayable in 24 increasing quarterly payments, the first three of which were
due, and were paid, on April 1, 2002, July 1, 2002 and October 1, 2002,
respectively. The revolving credit facility is repayable in full at maturity. We
secured our obligations under our existing credit facility with our assets, the
assets of our non-insurance subsidiaries and the capital stock of all our
subsidiaries (except Safety Indemnity Insurance Company). The existing credit
facility contains covenants including requirements to maintain certain financial
and operating ratios as well as restrictions on incurring debt or liens, paying
dividends and other restricted payments and other matters.
NEW CREDIT FACILITY. In connection with the offering, we will repay our
existing credit facility. Thomas Black Corporation at that time will obtain a
new $30.0 million revolving credit facility. Fleet National Bank will be the
lender under this new credit facility. Thomas Black Corporation intends to
borrow approximately $29.9 million under this new credit facility at the closing
of the offering. Loans under the new credit facility will bear interest at our
option at either (i) the LIBOR rate plus 1.50% per annum or (ii) the higher of
Fleet National Bank's prime rate or 1/2% above the federal funds rate plus 1.50%
per annum. The new credit facility is due and payable at maturity, which is
three years from the closing of the offering. Interest only is payable prior to
maturity. The obligations of Thomas Black Corporation under the new credit
facility will be secured by pledges of the assets of Thomas Black Corporation
and the capital stock of Thomas Black Corporation's operating subsidiaries. The
new credit facility will be guaranteed by the non-insurance company subsidiaries
of Thomas Black Corporation. The new credit facility will contain covenants
including requirements to maintain minimum risk based capital ratios and
statutory surplus of Safety Insurance as well as limitations or restrictions on
indebtedness, liens, dividends, and other matters.
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SENIOR SUBORDINATED NOTES. Safety Group also issued $30 million principal
amount of its 13.0% senior subordinated notes to obtain funds for the
Acquisition. Interest is payable semiannually on each April 30 and October 31.
The senior subordinated notes mature December 31, 2011. The notes may be
redeemed at our option prior to maturity with no redemption premium or penalty.
The notes also contain specified financial and operating covenants.
SENIOR REDEEMABLE PREFERRED STOCK. Safety Group issued $22.4 million of its
senior redeemable cumulative preferred stock in connection with the Acquisition.
This preferred stock is entitled to cumulative dividends at a rate of 6% per
year, a liquidation preference of $22.4 million and must be redeemed on the
earlier of October 16, 2012 or the date of a change in control of our Company.
As of June 30, 2002, we had accrued $1.0 million for unpaid dividends on our
preferred stock.
We will use proceeds from the offering, the Direct Sale and our new credit
facility to repay in full all outstanding principal and interest on the senior
subordinated notes. We estimate that the amount we will be required to pay
holders of the notes will be approximately $30.0 million, assuming redemption on
October 31, 2002. We will also use proceeds from the offering, the Direct Sale
and our new credit facility to repay all principal and accrued interest
outstanding under our existing credit facility.
Further, we plan to complete the Preferred Share Exchange at the closing of
the offering. In the Preferred Share Exchange, all of our outstanding preferred
stock will be converted into shares of our common stock, valued at the offering
price. We have negotiated the terms of the Preferred Share Exchange with the
holders of the preferred stock. Based on the initial public offering price of
$12.00 per share, we will issue an aggregate of 1,866,665 shares of common stock
in the Preferred Share Exchange. We will use proceeds from this offering to pay
accrued dividends of approximately $1.4 million on the preferred shares,
assuming the payment occurs on October 31, 2002.
The insurance holding company laws of Massachusetts regulate the
distribution of dividends and other payments by our insurance subsidiaries. Our
insurance company subsidiaries may not declare an "extraordinary dividend" 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. An extraordinary dividend is defined as any dividend or distribution
that, together with other distributions made within the preceding twelve months,
exceeds the greater of (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. Under Massachusetts law an insurer may pay cash dividends
only from its unassigned funds, also known as earned surplus, and the insurer's
remaining surplus must be both reasonable in relation to its outstanding
liabilities and adequate to its financial needs. At year-end 2001, the statutory
surplus of Safety Insurance totaled $220.1 million, and its statutory net income
for 2001 was $9.6 million.
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.
We currently intend to pay an annual dividend on our common stock of $0.28
per share, or an aggregate, based on 14,359,999 shares outstanding immediately
following the offering, of $4.0 million annually. See "Dividend Policy."
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 12-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
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for an acquisition or a significant expansion of our operations, either inside
or outside Massachusetts. There can be no assurance that sufficient funds for
any of the foregoing purposes would be available to us at such time.
QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT 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 mortgage-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 of
directors 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 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.
The tables below show the interest rate sensitivity of our fixed income
financial instruments measured in terms of fair value (which is equal to the
book value for all our securities) for the periods indicated.
<Table>
<Caption>
AS OF DECEMBER 31, 2000
FAIR VALUE
($ IN THOUSANDS)
----------------------------------------
-100 BASIS AS OF +100 BASIS
POINT CHANGE 12/31/2000 POINT CHANGE
------------ ---------- ------------
Bonds and preferred stocks................................ $489,113 $463,206 $437,702
Cash and cash equivalents................................. 13,676 13,676 13,676
-------- -------- --------
Total................................................... $502,789 $476,882 $451,378
</Table>
<Table>
<Caption>
AS OF DECEMBER 31, 2001
FAIR VALUE
($ IN THOUSANDS)
----------------------------------------
-100 BASIS AS OF +100 BASIS
POINT CHANGE 12/31/2001 POINT CHANGE
------------ ---------- ------------
Bonds and preferred stocks................................ $543,296 $517,008 $491,080
Cash and cash equivalents................................. 12,278 12,278 12,278
-------- -------- --------
Total................................................... $555,574 $529,286 $503,358
</Table>
<Table>
<Caption>
AS OF JUNE 30, 2002
FAIR VALUE
($ IN THOUSANDS)
--------------------------------------
-100 BASIS AS OF +100 BASIS
POINT CHANGE 6/30/02 POINT CHANGE
------------ -------- ------------
Bonds and preferred stocks................................ $518,976 $490,324 $464,450
Cash and cash equivalents................................. 26,561 26,561 26,561
-------- -------- --------
Total................................................... $545,537 $516,885 $491,011
</Table>
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An important market risk for all of our outstanding long-term debt is
interest rate risk at the time of refinancing. We expect to enter into a new
credit facility with Fleet National Bank as arranger concurrently with this
offering. We intend to use the proceeds from the new credit facility and from
the offering to pay down our existing credit facility, redeem our outstanding
senior subordinated notes and pay accrued and unpaid dividends on our preferred
stock. We will continue to monitor the interest rate environment and to evaluate
refinancing opportunities as maturity dates approach. With respect to floating
rate debt, we are also exposed to the effects of changes in prevailing interest
rates. At December 31, 2001, we had approximately $69.5 million principal amount
of debt outstanding at a variable rate of approximately 6.125%. A 2.0% change in
the prevailing interest rate on our variable rate debt would have resulted in
interest expense fluctuating approximately $1.4 million for 2001, assuming that
all of such debt had been outstanding for the entire year.
EQUITY RISK. Equity risk is the risk that we will incur economic losses due
to adverse changes in equity prices. In the past, our exposure to changes in
equity prices primarily resulted from our holdings of common stocks, mutual
funds and other equities. While we have in the past held common equity
securities in our investment portfolio, presently we hold none. We continuously
evaluate market conditions and we expect in the future to purchase equity
securities. We principally managed equity price risk through industry and issuer
diversification and asset allocation techniques.
EFFECTS OF INFLATION
We do not believe that inflation has had a material effect on our
consolidated results of operations, except insofar as inflation may affect
interest rates. See "Risk Factors--Market fluctuation and changes in interest
rates can have significant and negative effects on our investment portfolio."
CHANGES IN ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations." SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. With respect to deferred credits (i.e. negative
goodwill), SFAS No. 141 calls for the recognition of all existing deferred
credits arising from business combinations for which the acquisition date was
after June 30, 2001 to be recognized through the income statement as an
extraordinary gain. Effective with the Acquisition, we adopted SFAS No. 141 and
accounted for the Acquisition under the purchase method. We recognized the
resultant deferred credit of $117.5 million through earnings as an extraordinary
gain in the successor period of 2001.
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BUSINESS
GENERAL
We are a leading provider of private passenger automobile insurance in
Massachusetts. In addition to private passenger automobile insurance (which
represented 83.1% of our direct written premiums in 2001), we offer a portfolio
of property and casualty insurance products, including commercial automobile,
homeowners, dwelling fire, umbrella and business owner policies. Operating
exclusively in Massachusetts through our insurance subsidiaries, Safety
Insurance and Safety Indemnity Insurance Company, we have established strong
relationships with approximately 500 independent insurance agents in
approximately 600 locations throughout Massachusetts. We have used these
relationships and our extensive knowledge of the Massachusetts market to become
the third largest private passenger carrier, capturing a 10.4% share of the
Massachusetts private passenger automobile insurance market in 2001, according
to statistics compiled by CAR.
Our share of the Massachusetts private passenger automobile insurance market
has grown from 7.6% in 1997 to 10.4% in 2001. As a result of this increased
market share and expanding our product offerings, our direct written premiums
have increased by 73% between 1997 and 2001, from $272.5 million to
$471.9 million. We have also maintained profitability in part by managing our
cost structure through, for example, the use of technology.
OUR COMPETITIVE STRENGTHS
WE HAVE STRONG RELATIONSHIPS WITH INDEPENDENT AGENTS. In 2001, independent
agents accounted for approximately 77% of the Massachusetts private passenger
automobile insurance market measured by direct written premiums as compared to
only about 34% nationwide, according to A.M. Best. For that reason, our strategy
is centered around, and we sell exclusively through, a network of approximately
500 independent agents in approximately 600 locations throughout Massachusetts.
In order to support our independent agents and enhance our relationships with
them we:
- Provide our agents with a portfolio of property and casualty insurance
products at competitive prices to help our agents address effectively the
insurance needs of their clients;
- Provide our agents with a variety of technological resources which enable
us to deliver superior service and support to them; and
- Offer our agents competitive commission schedules and profit sharing
programs.
Through these measures, we strive to become the preferred provider of the
independent agents in our agency network and capture a growing share of the
total insurance business written by these agents. We must compete with other
insurance carriers for the business of independent agents.
WE HAVE AN UNINTERRUPTED RECORD OF PROFITABLE OPERATIONS. In every year
since our inception in 1979, we have been profitable and increased our direct
written premiums from the prior year. We have achieved profitable growth over
the past five years by, among other things:
- Increasing the number of private passenger automobile exposures we
underwrite from 287,000 in 1997 to 427,000 in 2001 and the average premium
we receive per automobile exposure from $748 to $918;
- Maintaining an adjusted statutory combined ratio that is consistently
below industry averages;
- Taking advantage of the institutional knowledge our management has amassed
during our long operating history in the unique Massachusetts market;
- Introducing new lines of insurance products, such as homeowners, which
unlike personal auto do not have state-established maximum premium rates;
- Investing in technology, to simplify internal processes and enhance our
relationships with our agents; and
- Maintaining a high-quality investment portfolio.
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WE ARE A TECHNOLOGICAL LEADER. We have dedicated significant human and
financial resources to the development of advanced information systems. Our
technology efforts have benefited us in two distinct ways. First, we continue to
develop technology that empowers our independent agent customers to make it
easier for them to transact business with their clients and with Safety. In our
largest business line, private passenger auto insurance, our agents now submit
approximately 92% of all applications for new policies or endorsements for
existing policies to us electronically through our proprietary information
portal, the Agents Virtual Community. Second, our investment in technology has
allowed us to re-engineer internal back office processes to provide more
efficient service at lower cost. Our adjusted statutory expense ratios have been
below the average industry statutory expense ratio in each of the past five
years. Our systems have also improved our overall productivity, as evidenced by
our direct written premiums per employee increasing to $928,870 in 2001 from
$612,348 in 1997.
WE HAVE AN EXPERIENCED, COMMITTED AND KNOWLEDGEABLE MANAGEMENT
TEAM. Following this offering, our Management Team will own approximately 11%
of the common stock of Safety on a fully diluted basis. Our Management Team, led
by our Chief Executive Officer and President David F. Brussard, has an average
of over 25 years of industry experience per executive, as well as an average of
over 20 years of experience with Safety. The team has demonstrated an ability to
operate successfully within the regulated Massachusetts private passenger
automobile insurance market.
OUR STRATEGY
To achieve our goal of increasing stockholder value, our strategy is to
maintain and develop strong independent agent relationships by providing our
agents with a full package of insurance products and information technology
services. We believe this strategy will allow us to:
- Further penetrate the Massachusetts private passenger automobile insurance
market;
- Continue to selectively cross-sell homeowners, dwelling fire, personal
umbrella and business owner policies in order to capture a larger share of
the total Massachusetts property and casualty insurance business written
by each of our independent agents;
- Continue to expand our technology to enable independent agents to more
easily serve their customers and conduct business with Safety, thereby
strengthening their relationships with Safety; and
- If opportunities arise, selectively expand our business outside the
Massachusetts market into other markets with strong independent agent
distribution channels where we can capitalize on our core strength of
serving independent agents.
DESCRIPTION OF THE MASSACHUSETTS PROPERTY AND CASUALTY INSURANCE MARKET
INTRODUCTION. We are licensed by the Commissioner to transact property and
casualty insurance in Massachusetts. All of our business is extensively
regulated by the Commissioner, as described elsewhere in this prospectus.
THE MASSACHUSETTS MARKET FOR PRIVATE PASSENGER AUTOMOBILE
INSURANCE. Private passenger automobile insurance is heavily regulated in
Massachusetts. In many respects, the private passenger automobile insurance
market in Massachusetts is unique, in comparison to other states. This is due to
a number of factors, including unusual regulatory conditions, the market
dominance of domestic companies, the relative absence of large national
companies, and the heavy reliance on independent insurance agents as the
market's principal distribution channel. For many insurance companies, these
factors present substantial challenges, but we believe they provide us a
competitive advantage, because, as our financial history shows, we have a
thorough understanding of this market.
The principal factors that generally distinguish the Massachusetts private
passenger automobile insurance market from that market in other states are as
follows:
- COMPULSORY INSURANCE. Massachusetts motorists must obtain automobile
insurance prior to registering a vehicle with the Registry of Motor
Vehicles. Insurers are required to notify the
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Registry of Motor Vehicles when coverage is cancelled and the Registry of
Motor Vehicles is authorized to seize the license plates of uninsured
motor vehicles.
- "TAKE ALL COMERS." With very few exceptions, insurers may not refuse to
cover an applicant. Insurers may not refuse to issue a policy to an
applicant based on the applicant's driving record or other underwriting
criteria commonly used by insurers in other states to decide whether to
insure a motorist.
- STANDARD POLICY FORM. The policy form that is used by all auto insurers is
developed by the Commissioner and must be used by all companies. The
policy consists of several mandatory coverages: no fault coverage (I.E.,
"personal injury protection"); minimum limits of bodily injury and
property damage liability coverage; and coverage for accidents caused by
uninsured or hit-and-run motorists. In addition to these standard
mandatory coverages, several additional optional coverages (such as higher
bodily injury and property damage coverages, and collision and
comprehensive coverages) must be offered. No carrier may offer any other
type of coverage or deductible or use any form of policy endorsement
without the prior approval of the Commissioner, which can be granted only
after a formal hearing.
- PREMIUM RATES ARE "FIXED AND ESTABLISHED" BY THE COMMISSIONER. In
Massachusetts, automobile insurance companies are obligated to use premium
rates that are determined on an annual basis by the Commissioner. As a
matter of law, the Commissioner's rate must be adequate, which the
Massachusetts courts have ruled requires that the rate be sufficient to
allow insurers the opportunity to earn a reasonable rate of return. The
rate setting process involves a lengthy and complex administrative
proceeding in which the Commissioner considers historic information
related to claim costs as well as outside factors affecting insurance
costs. Different data is presented for the Commissioner's consideration by
the Automobile Insurers Bureau (on behalf of the insurance industry), the
Division of Insurance, and the Massachusetts Attorney General. At the
close of this proceeding, the Commissioner sets a premium rate for each of
several classes of drivers, many different types of vehicles, and
twenty-seven different geographic territories within Massachusetts. The
Commissioner usually sets the rate during the last quarter of the year. In
addition, the Commissioner annually establishes the minimum commission
rate that insurers must pay their private passenger auto insurance agents.
The Commissioner mandated an average 8.3% decrease in personal automobile
premiums for 2001, as compared to an average rate increase of 0.7% in
2000. For 2002, the Commissioner's decision was that there would be no
rate change. The Commissioner will set the average rate for 2003 after a
hearing in which the Automobile Insurers Bureau, the Attorney General, and
the State Rating Bureau (which is a department within the Massachusetts
Division of Insurance) are parties. On August 16, 2002, the Automobile
Insurers Bureau proposed an average 7.0% rate increase for 2003. The
Attorney General has recommended a decrease of 5.7%, and the State Rating
Bureau has proposed an increase of slightly more than 2.0%. The
Commissioner has not yet set the average premium rate for 2003. We expect
the Commissioner to make this decision by December 15, 2002.
- PRICE COMPETITION IS LIMITED. An insurer may charge less than the
Commissioner's fixed and established premium rates by offering discounts
to all members of a particular class of motorists but only if the discount
is approved by the Commissioner after a public hearing. During the years
1996 to 2001, most insurance companies offered rate discounts for drivers
with the best driving records. Only five companies are offering such
discounts in 2002. We offered competitively priced discounts during the
1996 to 2001 time period, but like most of our competitors, we have
discontinued using discounts for 2002.
- AFFINITY GROUP MARKETING. In addition to the use of class discounts,
insurers can charge lower rates than the Commissioner's fixed rate by
providing discounts to all members of an affinity group. An affinity group
consists of all of the employees of a particular employer or the members
of a trade union, association or other organization. These discounts must
be filed with
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the Commissioner and are subject to the Commissioner's disapproval. We
currently offer discounts to 261 groups representing approximately 12.9%
of the private passenger policies we issue, with discounts ranging from 3%
to 5%.
- SAFE DRIVER INSURANCE PLAN. In other states, insurance companies are free
to design their own systems for rewarding drivers with superior driving
records by providing lower prices to such drivers and charging higher
prices for drivers who have caused claims or who have poor driving
records. In Massachusetts, all companies must use the system the
Commissioner has developed. Known as the Safe Driver Insurance Plan, the
system consists of a series of steps, ranging from Step 9 to Step 35, with
each step above or below Step 15 granting premium credits to motorists in
lower steps (Steps 9 to 14) or imposing surcharges on motorists in higher
steps (Steps 16 to 35). Each driver is assigned a step classification by
the state. The Safe Driver Insurance Plan system is revenue neutral, which
means that the aggregate cost of the discounts must be funded by the
aggregate income of the surcharges. The effect of this system is that bad
drivers actually pay less than the actuarially correct premium and are
subsidized by better drivers, who pay more than the actuarially correct
premium. At Safety, we have a number of strategies which we use to
maximize the number of credit eligible drivers that we insure.
- EXCLUSIVE REPRESENTATIVE PRODUCERS. As noted above, the Commissioner sets
a different rate for each of twenty-seven territories in Massachusetts.
The methodology the Commissioner uses to adjust the rates among each
territory results in the reduction of rates in high cost urban communities
from the actuarially appropriate rate while increasing rates in suburban
and rural parts of Massachusetts. As a result, in the aggregate, rates in
urban communities are considered inadequate by most insurers. In order to
ensure that motorists living in such communities have access to automobile
insurance, licensed insurance brokers located in such areas who have not
been appointed as a voluntary agent of a company may apply to CAR, to be
appointed as an involuntary agent of an insurer selected by CAR. ERPs are
randomly assigned to all insurers writing personal auto insurance in
Massachusetts. ERP assignments are intended to be based upon an insurer's
market share. We have developed certain strategies to avoid being
oversubscribed with ERPs. See "--Distribution."
- COMMONWEALTH AUTOMOBILE REINSURERS. In order to protect insurers from the
potential adverse effect of the Commonwealth's take-all-comers law and the
random assignment of ERPs, the Massachusetts Legislature created CAR,
which runs a reinsurance pool. CAR is governed by a committee that is
appointed by the Commissioner, but its rules and decisions are subject to
the review and approval of the Commissioner. Companies may cede to the
reinsurance pool policies that they determine are not likely to be
profitable. As a result, CAR operates at an underwriting deficit. This
deficit is allocated among every automobile insurance company based on a
complex formula that takes into consideration a company's voluntary market
share, the amount of business it cedes to CAR and credits the company
earns under a system CAR has designed to encourage carriers not to cede
their worst risks to CAR. Proposals to change certain of CAR's rules are
under consideration. We have developed underwriting and actuarial analysis
systems to evaluate the profitability of ceding a risk to CAR or writing
it voluntarily.
- DOMINANCE OF DOMESTIC COMPANIES. Many large national private passenger
automobile insurance writers, such as State Farm, Allstate, Nationwide,
and Farmers, write very little or no personal automobile insurance
business in Massachusetts. We actively participate in major industry
policy making organizations in Massachusetts, such as the Automobile
Insurers Bureau and CAR, where our employees serve on a number of
committees.
- PROMINENCE OF INDEPENDENT INSURANCE AGENTS. Finally, and perhaps most
importantly to our Company's success, approximately 77% of the direct
written premiums in the Massachusetts private passenger automobile
insurance market were placed by independent agents in 2001, according to
A.M. Best. Nationally, independent agents wrote only about 34% of the
private passenger automobile insurance market in 2001, according to A.M.
Best. Accordingly, to be
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successful, a company must have a strategy designed to encourage the best
agents to place their best business with that company. At Safety, we have
designed a system of agent commissions, profit sharing, bonuses and other
strategies (such as our information technology capabilities) that we
believe favorably distinguishes our company among agents. We aggressively
market our company among the independent agents in attempting to get the
best agents and the best business.
PRODUCTS
Historically, we have focused on underwriting private passenger automobile
insurance. Since 1997, we have expanded the breadth of our product line in order
for agents to address a greater portion of their clients' insurance needs
through selling multiple Safety products. The table below shows our premiums in
each of these product lines for the periods indicated and the portions of our
total premiums each product line represented.
<Table>
<Caption>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------------------------------- -----------------------------------------
DIRECT WRITTEN PREMIUMS 1999 2000 2001 2001 2002
- ----------------------- ------------------- ------------------- ------------------- ------------------- -------------------
($ IN THOUSANDS)
Private passenger
auto................. $307,597 88.1% $365,651 85.6% $392,334 83.1% $218,003 83.9% $233,984 82.6%
Commercial auto........ 25,196 7.2 31,614 7.4 42,591 9.0 24,386 9.4 28,170 9.9
Homeowners............. 15,264 4.4 26,522 6.2 31,863 6.8 15,033 5.8 17,905 6.3
Business owners........ 0 0.0 1,396 0.3 2,251 0.5 1,141 0.4 1,642 0.6
Personal umbrella...... 748 0.2 1,252 0.3 1,469 0.3 742 0.3 791 0.3
Dwelling fire.......... 401 0.1 959 0.2 1,263 0.3 568 0.2 802 0.3
Commercial umbrella.... 0 0.0 63 0.0 95 0.0 45 0.0 88 0.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
TOTAL................ $349,206 100% $427,457 100% $471,866 100% $259,918 100% $283,382 100%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</Table>
Our product lines are as follows:
PRIVATE PASSENGER AUTOMOBILE (83.1% OF 2001 DIRECT WRITTEN
PREMIUMS). Private passenger automobile insurance is our primary product, and
we support all Massachusetts policy forms and limits of coverage. Private
passenger automobile policies provide coverage for bodily injury and property
damage to others, no-fault personal injury coverage for the insured/insured's
car occupants, and physical damage coverage for an insured's own vehicle for
collision or other perils. We have priced our private passenger coverage
competitively by offering group discounts since 1995 and Safe Driver Insurance
Plan rate deviations since 1996. For policy year 2001, our only Safe Driver
Insurance Plan deviation was a 2.0% discount for step 9 drivers. In 2002, we did
not file for any Safe Driver Insurance Plan deviation. We currently offer
approximately 261 affinity group discount programs ranging from 3.0% to 5.0%
discounts.
COMMERCIAL AUTOMOBILE (9.0% OF 2001 DIRECT WRITTEN PREMIUMS). Our
commercial automobile program supports all Massachusetts policy forms and limits
of coverage including endorsements that broaden coverage over and above that
offered on the standard Massachusetts policy forms. Commercial automobile
policies provide coverage for bodily injury and property damage to others,
no-fault personal injury coverage, and physical damage coverage for an insured's
own vehicle for collision or other perils resulting from the ownership or use of
commercial vehicles in a business. We offer insurance for commercial vehicles
used for business purposes such as private passenger-type vehicles, trucks,
tractors and trailers, and insure individual vehicles as well as commercial
fleets. Commercial automobile policies are written at a standard rate with
qualifying risks eligible for preferred lower rates. We received approval for a
rate increase of 7.2% for our commercial automobile line effective January 1,
2002.
HOMEOWNERS (6.8% OF 2001 DIRECT WRITTEN PREMIUMS). We offer a broad
selection of coverage forms for qualified policyholders. Homeowners policies
provide coverage for losses to a dwelling and its contents from numerous perils,
and coverage for liability to others arising from ownership or occupancy. We
write policies on homes, condominiums, and apartments. We offer loss-free
credits of up to 16% for eight years of loss free experience, along with a
discount of 10.0% when a home is
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written together with an automobile. All forms of homeowners coverage are
written at a standard rate with qualifying risks eligible for preferred lower
rates. We received approval for a rate increase of 9.8% effective February 19,
2002.
BUSINESS OWNER (LESS THAN 1.0% OF 2001 DIRECT WRITTEN PREMIUMS). We serve
eligible small and medium sized commercial accounts with a program that covers
apartments and residential condominiums; mercantile establishments, including
limited cooking restaurants; offices, including office condominiums; processing
and services businesses; special trade contractors; and wholesaling businesses.
Business owner policies provide liability and property coverage for many perils,
including business interruption from a covered loss. Equipment breakdown
coverage is automatically included, and a wide range of additional coverage is
available to qualified customers. We write policies for business owners at
standard rates with qualifying risks eligible for preferred lower rates.
COMMERCIAL PACKAGE POLICIES (LESS THAN 1.0% OF 2001 DIRECT WRITTEN
PREMIUMS). For larger commercial accounts, or those clients that require more
specialized or tailored coverages, we offer a commercial package policy program
that covers a more extensive range of business enterprises. Commercial package
policies provide any combination of property, general liability, crime and
inland marine insurance. Property automatically includes equipment breakdown
coverage, and a wide range of additional coverage is available to qualified
customers. We write commercial package policies at standard rates with
qualifying risks eligible for preferred lower rates.
PERSONAL UMBRELLA (LESS THAN 1.0% OF 2001 DIRECT WRITTEN PREMIUMS). We
offer personal excess liability coverage over and above the limits of individual
automobile, watercraft, and homeowners insurance policies to clients. We offer a
discount of 10% when an umbrella policy is written together with an automobile
insurance policy. We write policies at standard rates with limits of
$1.0 million to $5.0 million.
DWELLING FIRE (LESS THAN 1.0% OF 2001 DIRECT WRITTEN PREMIUMS). We
underwrite dwelling fire insurance, which is a limited form of a homeowners
policy for non-owner occupied residences. We offer superior construction and
protective device credits, with a discount of 5.0% when a dwelling fire policy
is issued along with an automobile policy. We write all forms of dwelling fire
coverage at standard rates with qualifying risks eligible for preferred lower
rates.
COMMERCIAL UMBRELLA (LESS THAN 1.0% OF 2001 DIRECT WRITTEN PREMIUMS). We
offer an excess liability product to clients for whom we underwrite both
commercial automobile and business owner policies. The program is directed at
commercial automobile risks with private passenger-type automobiles or light and
medium trucks. We write commercial umbrella policies at standard rates with
limits ranging from $1.0 million to $5.0 million.
INLAND MARINE (LESS THAN 1.0% OF 2001 DIRECT WRITTEN PREMIUMS). We offer
inland marine coverage as an endorsement for all homeowners and business owner
policies, and as part of our commercial package policy. Inland marine provides
additional coverage for jewelry, fine arts and other items that a homeowners or
business owner policy would limit or not cover. Scheduled items valued at more
than $5,000 must meet our underwriting guidelines and be appraised.
WATERCRAFT (LESS THAN 1.0% OF 2001 DIRECT WRITTEN PREMIUMS). We offer
watercraft coverage for small and medium sized pleasure craft with maximum
lengths of 32 feet, values less than $75,000, and maximum speeds of 39 knots. We
write this coverage as an endorsement to our homeowners policies.
An emerging issue in the insurance industry is mold liability and property
coverage under homeowners and similar property-related policies. Property damage
as a result of mold is uncommon in Massachusetts, unlike in the southern
sections of the United States, most notably Texas. Generally, insurance policies
exclude mold coverage unless it is the result of a covered loss. In the prior
two years, we are aware of 18 claims under our policies, totaling less than
$100,000, which involve mold liability as a result of a covered loss. However,
as a result of the increased public perception that mold liability is a concern
for insurers, we have filed and received approval for a number of mold
endorsements from
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the Division of Insurance which limit our mold property exposure to $10,000 on
each of our homeowners and dwelling fire policies and limit our liability
exposure to $50,000 on these policies. On business owner and commercial package
policies, the property coverage is limited to $15,000 per policy and liability
coverage is eliminated. We have eliminated mold coverage on our personal
umbrella and commercial umbrella polices. These endorsements cover all new and
renewal policies in these lines effective on or after September 1, 2002.
DISTRIBUTION
We distribute our products exclusively through independent agents, unlike
some of our competitors which use multiple distribution channels. We believe
this gives us a competitive advantage with the agents. We have two types of
independent agents, those with which we have voluntarily entered into an
agreement, which we refer to as voluntary agents, and those which CAR has
assigned to us as ERPs. Our voluntary agents have authority pursuant to our
voluntary agency agreement to bind Safety Insurance for any coverage that is
within the scope of their authority. We reserve the ability under Massachusetts
law to cancel any coverage, other than private passenger automobile insurance,
within the first 30 days after it is bound. In total, our independent agents
have approximately 600 offices (some agencies have more than one office) and
approximately 3,000 customer service representatives.
VOLUNTARY AGENTS. In 2001, we obtained approximately 75% of our direct
written premiums for automobile insurance and 100% of our direct written
premiums for all of our other lines of business through our voluntary agents. As
of October 31, 2002, we had agreements with approximately 400 voluntary agents.
Our voluntary agents are located in all regions of Massachusetts.
We look for agents with profitable portfolios of business. To become a
voluntary agent for our Company, we generally require that an agency: (i) have
been in business for at least five years; (ii) have exhibited a three-year
average loss ratio (excluding loss adjustment expenses) of 64.0% or less on the
portion of the agent's portfolio that we would underwrite; (iii) currently write
policies for a minimum of two automobile carriers; (iv) make a commitment for us
to underwrite at least 500 policies from the agency during the first twelve
months after entering an agreement with us; and (v) offer multiple product
lines. Every year, we review the performance of our agents during the prior
year. If an agent fails to meet our profitability standards, we try to work with
the agent to improve the profitability of the business it places with us. We
generally terminate contracts each year with a few agencies which, despite our
efforts, have been consistently unable to meet our standards. Although
independent agents usually represent several unrelated insurers, our goal is to
be one of the top two insurance companies represented in each of our agencies,
as measured by premiums. No individual agency generated more than 3% of our
direct written premiums in 2001 or the nine months ended September 30, 2002.
EXCLUSIVE REPRESENTATIVE PRODUCERS. In 2001, our ERPs generated
approximately 25% of our direct written premiums for automobile insurance. As of
October 31, 2002, we had 76 private passenger automobile ERPs. CAR defines ERPs
as licensed dwelling fire or casualty insurance agents or brokers who have a
place of business in Massachusetts, but have no existing voluntary independent
agency relationship with an auto insurer conducting business in Massachusetts.
An ERP's policy portfolio typically includes a significant percentage of what
are considered to be under-priced policies.
Massachusetts law guarantees the provision of motor vehicle insurance
coverage to all qualified applicants. To facilitate this system, any independent
agent that is unable to obtain a voluntary relationship with an insurer becomes
an ERP and is assigned to an insurer, which is then required to write that
agent's policies. The number of mandated ERP policies assigned to a
Massachusetts insurance carrier is intended to be proportionate to its voluntary
market share. However, because no insurer can control the relative volumes of
voluntary and ERP business with certainty, carriers are usually either
relatively oversubscribed or undersubscribed with ERP policies. Periodically,
CAR assigns or re-assigns an ERP to the most undersubscribed insurer.
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We continuously monitor our ERP subscription level to attempt to reduce our
exposure to becoming oversubscribed with ERP business. By properly managing our
ERP subscription levels, we reduce the probability that we will be forced to
write excessive levels of ERP business, which is usually unprofitable. Our goal
is to be undersubscribed, but not undersubscribed at a level which would result
in being assigned new ERPs. We have succeeded in achieving this goal, having
been undersubscribed on 26 of the last 31 CAR subscription reports. According to
the October 2002 CAR Private Passenger Subscription Report, as of August 30,
2002, our ERP policies totaled 106,137, or approximately 96.1% of our market
share percentage of ERP policies, making us the second most undersubscribed
carrier as of that date.
From time to time, as our market share grows, however, we are required to
add a new ERP. We regularly monitor the oversubscribed carriers and evaluate
which of their ERPs are less undesirable than others. When we need to add an
ERP, we prefer to negotiate an agreement to obtain one we select from an
oversubscribed carrier rather than have CAR assign one to us.
MARKETING
We view the independent agent as our customer and business partner. As a
result, our marketing efforts focus on developing interdependent relationships
with leading Massachusetts agents that write profitable business and positioning
ourselves as the preferred insurance carrier of those agents, thereby receiving
a larger portion of each agent's aggregate business. We generally do not market
ourselves to potential policyholders.
Our principal marketing strategies are:
- To offer a range of products, which we believe enables our agents to meet
the insurance needs of their clients, and overcomes agents' resistance to
placing their clients' auto insurance and other coverages with different
insurers;
- To price our products competitively, including offering discounts when and
where appropriate for safer drivers and for affinity groups;
- To offer agents competitive commissions, with incentives for placing their
more profitable business with us; and
- To provide a level of support and service that enhances the agent's
ability to do business with its clients and with us.
COMMISSION SCHEDULE AND PROFIT SHARING PLAN. We have several programs
designed to attract profitable new personal auto business from agents by paying
them more than the minimum commission the law requires (which is 11.7% of
premiums for 2002). We recognize our top performing agents by making them
members of our President's Club or Executive Club. In 2002, President's Club
members receive a commission equal to 15.0% of premiums for each new policy with
a driver in Safe Driver Insurance Plan step 9 or 10, while Executive Club
members receive a commission equal to 13% of premiums for such policies.
President's Club members can earn an additional bonus of 5% of premiums, and
Executive Club members can earn an additional bonus of up to 3% of premiums, on
all new step 9 and 10 business, in each case if the average of the Safe Driver
Insurance Plan steps of all new business based on automobile exposures they
submit during the year is 11.5 or less. In part as a result of these programs,
in the first six months of 2001 70.6% of our drivers were in Safe Driver
Insurance Plan steps 9 or 10, as compared to 69.4% for the Massachusetts
personal auto industry as a whole, based on the number of drivers per month in
each step according to the Automobile Insurers Bureau.
Further, we have a competitive profit sharing program under which we pay
agents up to 50% of the underwriting profits on their business, depending on the
total volume and loss ratio of all business the agents submit.
SERVICE AND SUPPORT. We believe that the level and quality of service and
support we provide helps differentiate us from other insurers. We have made a
significant investment in information technology
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designed to facilitate our agents' business. This investment includes providing
each of our agents with high-speed access to the internet through a network
which we own. In addition, our Agents Virtual Community website helps agents
manage their work efficiently. We provide a substantial amount of information
online that agents need to serve their customers, such as information about the
status of new policies, bill payments and claims. Providing this type of content
reduces the number of customer calls we receive and empowers the agency's
customer service representatives by enabling them to respond to customers'
inquiries while the customer is on the telephone. Finally, we believe that the
knowledge and experience of our employees enhance the quality of support we
provide.
UNDERWRITING
Our underwriting department is responsible for a number of key decisions
affecting the profitability of our business, including:
- Pricing of discounts offered on our policies;
- Determining which policies to cede to CAR's reinsurance pool and which to
retain; and
- Evaluating whether to accept transfers of a portion of an existing or
potential new agent's portfolio from another insurer.
In addition to our private passenger auto underwriting unit, our underwriting
department includes a separate unit of underwriters for homeowners, dwelling
fire, personal umbrella and inland marine coverages, as well as a separate unit
for commercial coverages, including commercial auto, business owner, commercial
umbrella and commercial package policies.
PRICING. Our pricing strategy for personal auto insurance primarily depends
on the maximum permitted premium rates and minimum permitted commission levels
mandated by the Division of Insurance. For several years prior to 2002, we
offered discounts off the state-mandated rates to drivers in the lower Safe
Driver Insurance Plan steps, as did a number of other insurers. However,
starting in 1998, we began to reduce the discounts we offered, in light of the
reductions or minimal increases in average rates the Commissioner has required
in each year since 1998. We currently do not offer any Safe Driver Insurance
Plan step-based discounts. As a result primarily of reducing discounts and of
our insureds purchasing new cars (for which we are permitted to charge higher
premiums), our average premium received per policy increased 10.9% and 7.4% in
1999 and 2000, respectively, and did not change in 2001.
In addition to Safe Driver Insurance Plan discounts, we also offer group
discounts to members of 261 affinity groups, including the Boston College Alumni
Association, the Massachusetts Bar Association and the Massachusetts Medical
Society. In general, we target affinity groups with a mature and stable
membership base along with favorable driving records, offering between a 3% and
5% discount (with 4% being the average discount offered). Approximately 12.9% of
the private passenger policies we issue receive an affinity group discount.
CAR and the Division of Insurance set the premium rates for commercial
automobile policies reinsured through CAR. Subject to Division of Insurance
review, we set rates for commercial automobile policies that are not reinsured
through CAR, and for all other insurance lines we offer, including homeowners,
dwelling fire, personal umbrella, commercial umbrella, commercial package
policies and business owner policies. We base our rates on industry loss cost
data, our own loss experience, catastrophe modeling and prices charged by our
competitors in the Massachusetts market. We received approval for a rate
increase of 7.2% for our commercial automobile line effective January 1, 2002,
and also received approval for a rate increase of 9.8% for our homeowners line
effective February 19, 2002.
CEDE/RETAIN DECISIONS. Under CAR's rules, we must decide, within 23 days
after the effective date of a new policy or before renewing an existing policy,
whether to cede it to CAR's reinsurance pool. Each Massachusetts auto insurer
must bear a portion of the losses of the reinsurance pool. Under CAR's rules, we
are able to reduce our total allocated share of the losses of the reinsurance
pool by
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ceding less business to the pool than our proportionate share. As a result, in
determining whether to cede an underpriced policy to CAR's personal auto
reinsurance pool, we attempt to evaluate whether we are likely to incur greater
total losses by ceding it to the pool or by retaining it. In 2001, we ceded
approximately 5% of our personal auto business, based on automobile exposures,
to the pool, compared to an average of 7.7% for the rest of the industry
according to CAR. According to the October 23, 2002 CAR Cession Volume
Analysis--Private Passenger Report, as of August 31, 2002, we have ceded 6.6% of
our personal auto business to the pool, compared to an average of 7.3% for the
industry. Our goal is still to cede less than the industry average to the pool.
CAR also runs a reinsurance pool for commercial auto policies. We analyze
whether to cede or retain our business in that line in a similar fashion.
BULK POLICY TRANSFERS AND NEW VOLUNTARY AGENTS. From time to time, we
receive proposals from existing voluntary agents to transfer a portfolio of the
agent's business from another insurer to us. Our underwriters model the
profitability of these portfolios before we accept these transfers. Among other
things, we usually require that the portfolio have a pure loss ratio (which
refers to the ratio of losses, excluding loss adjustment expenses, to net earned
premiums) of not more than approximately 64%. In addition, we require any new
voluntary agent to commit to transfer a portfolio to us consisting of at least
500 policies. In 2001, we issued approximately 17,800 policies that came to us
through portfolio transfers. In the same year, we lost approximately 950
policies through portfolio transfers to other carriers.
POLICY PROCESSING AND RATE PURSUIT. Our underwriting department assists in
processing policy applications, endorsements, renewals and cancellations. In the
past three years, we have introduced new proprietary software that enables
agents to connect to our network and enter policy and endorsement applications
for personal auto insurance from their office computers. In our personal
automobile insurance line, our agents now submit approximately 92% of all
applications for new policies or endorsements for existing policies through our
proprietary information portal, the Agents Virtual Community.
Our rate pursuit team aggressively monitors all insurance transactions to
make sure we receive the correct premium for the risk insured. We accomplish
this by verifying Massachusetts pricing criteria, such as proper classification
of drivers, the make, model and age of insured vehicles and the availability of
discounts. We verify that operators are properly listed and classified,
assignment of operators to vehicles, vehicle garaging, vehicle preinspection
requirements and in some cases the validity of discounts. In our homeowners and
dwelling fire lines, our team is currently undertaking a project to update the
replacement costs for each dwelling. We are using newly acquired third-party
software to assist in this appraisal effort.
TECHNOLOGY
The focus of our information technology effort is:
- constant reengineering of internal processes to allow more efficient
operations, resulting in lower operating costs;
- making it easier for independent agents to transact business with us; and
- enabling agents to efficiently provide their clients with a high level of
service.
We believe that our technology initiatives have increased revenue and
decreased cost. For example, these initiatives have allowed us to reduce the
number of call-center transactions which we perform and to transfer many manual
processing functions from our internal operations to our independent agents. We
also believe that these initiatives have contributed to our overall increases in
productivity. In 1990, we had 399 employees and $155.0 million in direct written
premiums. In 2001, we had 508 employees and $471.9 million in direct written
premiums, which represents an increase from $388,464 direct written premiums per
employee in 1990 to $928,870 direct written premiums per employee in 2001.
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INTERNAL APPLICATIONS (INTRANET). Our employees access our proprietary
applications through our corporate intranet. Our intranet applications
streamline internal processes and improve overall operational efficiencies in
areas including:
CLAIMS. Our claims workload management application allows our claims
and subrogation adjusters to better manage injury claims. Subrogation refers
to the process by which we are reimbursed by other insurers for claims costs
we incur due to the fault of their insureds. The use of this application has
reduced the time it takes for us to respond to and settle casualty claims,
which we believe helps reduce the total amount of our claims expense.
The automated adjuster assignment system categorizes our new claims by
severity and assigns them to the appropriate adjuster responsible for
investigation. Once assigned, the integrated workload management tools
facilitate the work of promptly assigning appraisers, investigating
liability, issuing checks and receiving subrogation receipts.
FINANCE. Proprietary billing systems, integrated with the systems of
our print and lock-box vendors, expedite the processing and collection of
premium receipts and finance charges from agents and policyholders. We
believe the sophistication of our direct bill system helps us to limit our
bad debt expense. In 2001, our bad debt expense as a percentage of direct
written premiums was 0.2%.
EXTERNAL APPLICATIONS. Agency employees can securely access business
critical applications through our corporate extranet which we call Agents
Virtual Community. Agents Virtual Community includes Web-enabled applications,
advanced security and an internet-enabled communications network, which we
believe constitutes many of our agents' only high-speed internet connection. We
believe that Agents Virtual Community is unique to the Massachusetts private
passenger automobile insurance industry because using Agents Virtual Community
allows an agent to access a variety of vendors and other carriers over the
internet through a single portal. We currently have a patent application pending
on Agents Virtual Community. The patent application pertains to the method and
system by which Agents Virtual Community delivers customer services to
independent insurance agents. The capability for agency personnel to schedule
online appointments with third-party vendors (such as glass repair retailers and
rental car agencies) for their clients is also available. We designed Agents
Virtual Community to be scalable so that these types of vendors and potentially,
other insurers, can link to the network and create a "once and done" environment
for the independent agent.
Listed below are examples of the business critical applications agents may
access through Agents Virtual Community.
NEW BUSINESS AND ENDORSEMENT PROCESSING. Agents can perform new business
and endorsement processing with our point of sale application. Agents can upload
policy data to our system directly from their agency system or rate quote
software in Agents Virtual Community's secure Web environment without having to
re-enter policy information.
INQUIRY ACCESS. Inquiry Access is a customer service application designed
to provide agency customer service representatives with real-time access to our
database of insured information. This application allows agents to view the
status of claims, billing and policy detail.
POLICYHOLDER INQUIRY. Policyholder Inquiry provides 24 hours a day, 7 days
a week self-service account information to our policyholders through our website
or through their independent agent's website. This application provides
policyholders with round-the-clock access to billing and claims information.
OTHER TOOLS AND SERVICES. Agents Virtual Community gives agents access to
electronic versions of underwriting manuals, which include updated guidelines
for acceptable risks, commission levels and product pricing. Further, we have
recently launched a new initiative to have our agents use third-party software
(the XNET Cost Estimator from Marshall Swift/Boeck) which we make available
through Agents Virtual Community to help assess home replacement costs. This
initiative helps ensure that we
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receive the correct premium with respect to homeowners policies and provide the
correct level of coverage against home loss. Finally, we provide agents a daily
report of all their insurance transactions processed through Agents Virtual
Community. This report allows our agents to monitor their performance and review
profitability goals.
CLAIMS
Because of the unique differences between the management of casualty claims
and property claims, we use separate departments for each of these types of
claims.
CASUALTY CLAIMS
We have a proven record of settling casualty claims below the industry
average in Massachusetts. According to the Automobile Insurers Bureau, our
average casualty claim settlement during the period from January 1994 through
December 31, 2001 was $5,200, approximately 8% lower than the Massachusetts
industry average of $5,660.
We have adopted stringent claims settlement procedures, which include
guidelines that establish maximum settlement offers for soft tissue injuries,
which constituted approximately 80% of our third-party bodily injury claims in
2001. If we are unable to settle these claims within our guidelines, we
generally take the claim to litigation. We believe that these procedures result
in providing our adjusters with a uniform approach to negotiation.
We believe an important component of handling claims efficiently is prompt
investigation and settlement. We find that faster claims settlements often
result in less expensive claims settlements. Our Bodily Injury Hotline is a
telephone and fax system that reduces the time it takes for agents to notify our
adjusters about claims, thereby enabling us to contact third-party claimants and
other witnesses quickly. After business hours during the week and on Saturdays,
we outsource claims adjustment support to an independent firm whose employees
contact third-party claimants and other witnesses. We believe that early
notification results in our adjusters conducting prompt investigations of claims
and compiling more accurate information about those claims. Our claims workload
management software also assists our adjusters in handling claims quickly.
We believe the structure of our casualty claims unit allows us to respond
quickly to claimants anywhere in the Commonwealth. Comprising 117 people, the
department is organized geographically by territories, each with a territorial
claims unit located at our headquarters in Boston and a claims adjuster in the
field. Our casualty claims unit makes limited use of independent adjusters.
Additionally, we utilize a special unit to investigate fraud in connection
with casualty claims. This special unit has one manager and seven employees. In
cases where adjusters suspect fraud in connection with a claim, we deploy this
special unit to conduct investigations. We deny payment to claimants in cases in
which we have succeeded in accumulating sufficient evidence of fraud.
PROPERTY CLAIMS
Our property claims unit handles property claims arising in our personal and
commercial auto, homeowners and other insurance lines. Process automation has
streamlined our property claims function. Many of our property claims are now
handled by the agents through Agents Virtual Community using our Power Desk
software application. As agents receive calls from claimants, Power Desk permits
the agent to immediately send information related to the claim directly to us
and to an independent appraiser selected by the agent to value the claim. Once
we receive this information, an automated system redirects the claim to the
appropriate internal adjuster responsible for investigating the claim to
determine liability. Upon determination of liability, the system automatically
begins the process of seeking a subrogation recovery from another insurer, if
liable. Our agents also have the authority to order auto glass or body repair or
reserve a rental car for our insureds without getting pre-approval from us. We
believe this process results in a shorter time period from when the claimant
first contacts the agent to when the claimant receives a claim payment, while
enabling the agents to build credibility with their clients by responding to
claims in a timely and efficient manner. We benefit
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from decreased labor expenses from the need for fewer employees to handle the
reduced property claims call volume.
Another important factor in keeping our overall property claims costs low is
collecting subrogation recoveries. Subrogation refers to the process by which we
are reimbursed by other insurers for claims costs we incur due to the fault of
their insureds. We track the amounts we pay out in claims costs and identify
cases in which we believe we can reclaim some or all of those costs through the
use of our automated workload management tools.
RESERVES
Significant periods of time can elapse between the occurrence of an insured
loss, the reporting of the loss to the insurer and the insurer's payment of that
loss. To recognize liabilities for unpaid losses, insurers establish reserves as
balance sheet liabilities representing estimates of amounts needed to pay
reported and unreported losses and the expenses associated with investigating
and paying the losses, or loss adjustment expenses. Every quarter, we review our
reserves internally. Regulations of the Division of Insurance require us to
annually obtain a certification from either a qualified actuary or an approved
loss reserve specialist that our loss and loss adjustment expenses reserves are
reasonable.
When a claim is reported, claims personnel establish a "case reserve" for
the estimated amount of the ultimate payment. The amount of the reserve is
primarily based upon an evaluation of the type of claim involved, the
circumstances surrounding each claim and the policy provisions relating to the
loss. The estimate reflects informed judgment of such personnel based on general
insurance reserving practices and on the experience and knowledge of the claims
person. During the loss adjustment period, these estimates are revised as deemed
necessary by our claims department based on subsequent developments and periodic
reviews of the cases.
In accordance with industry practice, we also maintain reserves for
estimated losses incurred but not yet reported. Incurred but not yet reported
reserves are determined in accordance with commonly accepted actuarial reserving
techniques on the basis of our historical information and experience. We make
adjustments to incurred but not yet reported reserves quarterly to take into
account changes in the volume of business written, claims frequency and
severity, our mix of business, claims processing and other items that can be
expected to affect our liability for losses and loss adjustment expenses over
time.
When reviewing reserves, we analyze historical data and estimate the impact
of various loss development factors, such as our historical loss experience and
that of the industry, legislative enactments, judicial decisions, legal
developments in imposition of damages, and changes and trends in general
economic conditions, including the effects of inflation. There is no precise
method, however, for evaluating the impact of any specific factor on the
adequacy of reserves, because the eventual development of reserves is affected
by many factors. After taking into account all relevant factors, management
believes that our provision for unpaid losses and loss adjustment expenses at
December 31, 2001 is adequate to cover the ultimate net cost of losses and
claims incurred as of that date. The ultimate liability may be greater or less
than reserves. Establishment of appropriate reserves is an inherently uncertain
process, and there can be no certainty that currently established reserves will
prove adequate in light of subsequent actual experience. To the extent that
reserves are inadequate and are strengthened, the amount of such increase is
treated as a charge to earnings in the period that the deficiency is recognized.
Under purchase accounting, the fair value of our reserves for losses and
loss adjustment expenses and related reinsurance recoverables was estimated as
of the date of the Acquisition based on the present value of the expected
underlying cash flows of the loss reserves and reinsurance recoverables, and
included a profit and risk margin. In determining the fair value estimate,
management adjusted our historical GAAP undiscounted net loss reserves to
present value assuming a 4.0% discount rate, which approximated the U.S.
Treasury rate on the date of the Acquisition. The discounting pattern was
actuarially developed from our historical loss data. A profit and risk margin of
6.0% was applied to the
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discounted loss reserves, to reflect management's estimate of the cost we would
incur to reinsure the full amount of our net loss and loss adjustment expense
reserves with a third party reinsurer. This margin was based upon management's
assessment of the uncertainty inherent in the net loss reserves and their
knowledge of the reinsurance marketplace. Management determined that there was
no material difference between the historical carrying basis of the reserves for
losses and loss adjustment expenses and related reinsurance recoverables at the
date of Acquisition and their fair value. Accordingly, loss and loss adjustment
expense reserves and related reinsurance recoverables on unpaid losses as of
October 16, 2001 are recorded at estimated fair value as at October 16, 2001,
which approximated carrying value at that date.
The following table presents development information on changes in the
reserve for losses and loss adjustment expenses of our insurance subsidiaries
for the three years ended December 31, 2001 and the six months ended June 30,
2002.
<Table>
<Caption>
PREDECESSOR SUCCESSOR
PREDECESSOR YEAR ENDED JANUARY 1, OCTOBER 16,
DECEMBER 31, 2001 THROUGH 2001 THROUGH SUCCESSOR SIX
----------------------- OCTOBER 15, DECEMBER MONTHS ENDED
1999 2000 2001 31, 2001 JUNE 30, 2002
---------- ---------- ------------ ------------ -------------
($ IN THOUSANDS)
Reserves for losses and loss adjustment
expenses, beginning year............. $311,846 $315,226 $302,131 $307,655 $302,556
Less reinsurance recoverable on unpaid
losses and loss adjustment
expenses............................. (115,856) (108,613) (90,297) (83,501) (75,179)
-------- -------- -------- -------- --------
Net reserves for losses and loss
adjustment expenses, beginning of
year................................. 195,990 206,613 211,834 224,154 227,377
-------- -------- -------- -------- --------
Incurred losses and loss adjustment
expenses, related to:
Current year......................... 251,291 302,102 282,983 76,262 182,209
Prior years.......................... (26,050) (26,963) (6,600) (703) 717
-------- -------- -------- -------- --------
Total incurred losses and loss
adjustment expenses.................. 225,241 275,139 276,383 75,559 182,926
-------- -------- -------- -------- --------
Paid losses and loss adjustment
expenses related to:
Current year......................... 121,827 161,981 164,215 58,168 95,060
Prior year........................... 92,791 107,937 99,848 14,168 78,567
-------- -------- -------- -------- --------
Total paid losses and loss adjustment
expenses............................. 214,618 269,918 264,063 72,336 173,627
-------- -------- -------- -------- --------
Net reserves for losses and loss
adjustment expenses, end of year..... 206,613 211,834 224,154 227,377 236,676
Plus reinsurance recoverables on unpaid
losses and loss adjustment
expenses............................. 108,613 90,297 83,501 75,179 72,675
-------- -------- -------- -------- --------
Reserves for losses and loss adjustment
expenses, end of year................ $315,226 $302,131 $307,655 $302,556 $309,351
======== ======== ======== ======== ========
</Table>
The following table represents the development of reserves, net of
reinsurance, for calendar years 1991 through 2001. The top line of the table
shows the reserves at the balance sheet date for each of the indicated years.
This represents the estimated amounts of losses and loss adjustment expenses for
claims arising in all years that were unpaid at the balance sheet date,
including losses that had been incurred but not yet reported to us. The upper
portion of the table shows the cumulative amounts paid as of the end of each
successive year with respect to those claims. The lower portion of the table
shows the re-estimated amount of the previously recorded reserves based on
experience as of the end of each succeeding year, including cumulative payments
made since the end of the respective year. The estimate changes as more
information becomes known about the payments, frequency and severity of claims
for individual years. Favorable loss development, shown as a cumulative
redundancy in the table, exists when the original reserve estimate is greater
than the re-estimated reserves at December 31, 2001.
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Information with respect to the cumulative development of gross reserves
(that is, without deduction for reinsurance ceded) also appears at the bottom
portion of the table.
In evaluating the information in the table, it should be noted that each
amount entered incorporates the effects of all changes in amounts entered for
prior periods. Thus, if the 1998 estimate for a previously incurred loss was
$150,000 and the loss was reserved at $100,000 in 1994, the $50,000 deficiency
(later estimate minus original estimate) would be included in the cumulative
redundancy (deficiency) in each of the years 1995-1998 shown in the table. It
should further be noted that the table does not present accident or policy year
development data. In addition, conditions and trends that have affected the
development of liability in the past may not necessarily recur in the future.
Accordingly, it is not appropriate to extrapolate future redundancies or
deficiencies from the table.
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
($ IN THOUSANDS)
<Table>
<Caption>
1991 1992 1993 1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- -------- -------- -------- --------
RESERVES FOR LOSSES AND LOSS
ADJUSTMENT EXPENSE
ORIGINALLY ESTIMATED...... $ 51,223 $ 87,100 $123,720 $149,197 $175,125 $189,420 $195,145 $195,990 $206,613
CUMULATIVE AMOUNTS PAID AS
OF:
One year later............ 21,248 27,648 38,238 45,098 56,912 68,246 75,233 92,791 107,937
Two years later........... 28,954 38,319 55,639 66,041 82,299 96,219 105,046 113,323 133,414
Three years later......... 32,433 45,722 65,354 78,052 93,866 111,706 125,574 135,024
Four years later.......... 34,330 49,411 70,713 82,918 99,854 121,100 136,730
Five years later.......... 35,299 51,428 73,212 84,597 103,384 126,924
Six years later........... 35,933 52,033 73,678 85,201 105,284
Seven years later......... 36,087 52,172 73,917 85,678
Eight years later......... 36,098 52,256 73,928
Nine years later.......... 36,115 52,269
Ten years later........... 36,115
<Caption>
2000 2001
-------- --------
RESERVES FOR LOSSES AND LOSS
ADJUSTMENT EXPENSE
ORIGINALLY ESTIMATED...... $211,834 $227,377
CUMULATIVE AMOUNTS PAID AS
OF:
One year later............ 114,016
Two years later...........
Three years later.........
Four years later..........
Five years later..........
Six years later...........
Seven years later.........
Eight years later.........
Nine years later..........
Ten years later...........
</Table>
<Table>
<Caption>
1991 1992 1993 1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- -------- -------- -------- --------
RESERVES RE-ESTIMATED AS OF:
One year later............ $ 47,103 $ 74,245 $103,866 $128,012 $140,728 $161,083 $171,803 $169,940 $179,650
Two years later........... 42,342 63,939 96,002 108,979 125,496 144,727 153,846 156,590 176,008
Three years later......... 39,294 60,831 85,774 99,167 114,597 134,721 147,455 154,867
Four years later.......... 38,261 57,204 80,193 91,086 108,705 131,694 146,059
Five years later.......... 37,424 55,432 76,885 87,335 106,763 131,051
Six years later........... 36,949 53,823 74,571 86,352 106,578
Seven years later......... 36,848 52,443 74,072 86,429
Eight years later......... 36,154 52,288 74,158
Nine years later.......... 36,128 52,377
Ten years later........... 36,129
CUMULATIVE DEFICIENCY/
(REDUNDANCY).............. (15,094) (34,723) (49,562) (62,768) (68,547) (58,369) (49,086) (41,123) (30,605)
<Caption>
2000 2001
-------- --------
RESERVES RE-ESTIMATED AS OF:
One year later............ $204,531
Two years later...........
Three years later.........
Four years later..........
Five years later..........
Six years later...........
Seven years later.........
Eight years later.........
Nine years later..........
Ten years later...........
CUMULATIVE DEFICIENCY/
(REDUNDANCY).............. (7,303)
</Table>
<Table>
<Caption>
1991 1992 1993 1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross liability--end of
year...................... $171,660 $203,731 $243,402 $276,835 $303,330 $326,802 $319,453 $311,846 $315,226
Reinsurance recoverables.... 120,437 116,631 119,682 127,638 128,205 137,382 124,308 115,856 108,613
Net liability--end of
year...................... 51,223 87,100 123,720 149,197 175,125 189,420 195,145 195,990 206,613
Gross estimated liability--
latest.................... 119,816 128,255 143,006 158,361 181,951 212,243 223,630 229,684 249,125
Reinsurance recoverables--
latest.................... 83,687 75,878 68,848 71,932 75,373 81,192 77,571 74,817 73,117
Net estimated
liability--latest......... 36,129 52,377 74,158 86,429 106,578 131,051 146,059 154,867 176,008
Gross cumulative deficiency/
(redundancy).............. (51,844) (75,476) (100,396) (118,474) (121,379) (114,559) (95,823) (82,162) (66,101)
<Caption>
2000 2001
-------- --------
Gross liability--end of
year...................... $302,131 $302,556
Reinsurance recoverables.... 90,297 75,179
Net liability--end of
year...................... 211,834 227,377
Gross estimated liability--
latest.................... 279,942
Reinsurance recoverables--
latest.................... 75,411
Net estimated
liability--latest......... 204,531
Gross cumulative deficiency/
(redundancy).............. (22,189)
</Table>
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As the table shows, our net reserves grew at a faster rate than our gross
reserves over the ten year period. As we have grown, we have been able to retain
a greater percentage of our direct business. Additionally, we used to conduct
substantial business as a servicing carrier for other insurers, in which we
would service the residual market personal automobile insurance business
assigned to other carriers for a fee. All business generated through this
program was ceded to the other carriers. As we reduced the amount of our
servicing carrier business, our proportion of reinsurance ceded diminished.
The table also shows that we have substantially benefited in prior years
from releasing redundant reserves. Massachusetts private passenger automobile
insurance pricing was very favorable in the early to mid-1990s and the reserves
we established for business written during that period developed favorably,
allowing us to release substantial reserves in following years. As maximum
permitted rates declined in the latter part of the 1990s through 2001, and the
redundancies resulting from favorable development of earlier years were
released, our redundancies in subsequent years began to diminish. In the year
ended December 31, 2000 we released $27.0 million in reserves relating to prior
years, compared to $7.3 million in 2001. For the first six months of 2002, we
strengthened loss reserves related to prior years by $0.7 million.
As a result of our focus on core business lines since our founding in 1979,
we believe we have no exposure to asbestos or environmental pollution
liabilities.
REINSURANCE
We reinsure with other insurance companies a portion of our potential
liability under the policies we have underwritten, thereby protecting us against
an unexpectedly large loss or a catastrophic occurrence that could produce large
losses. Reinsurance involves an insurance company transferring (ceding) a
portion of its exposure on insurance underwritten by it to another insurer
(reinsurer). The reinsurer assumes a portion of the exposure in return for a
share of the premium. Reinsurance does not legally discharge an insurance
company from its primary liability for the full amount of the policies, but it
does make the reinsurer liable to the company for the reinsured portion of any
loss realized.
We are very 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
continuously evaluate and review the financial condition of our reinsurers. All
of our reinsurers have an A.M. Best rating of "A" or better, except for Lloyd's
of London and Folksamerica Reinsurance Company which are both rated "A-." Swiss
Re, our primary reinsurer, maintains an A.M. Best rating of "A++" (Superior).
We maintain reinsurance coverage to help lessen the effect of losses from
catastrophic events, maintaining coverage that protects us in the event of a
100-year storm (that is, a storm of a severity expected to occur once in a
100 year period). We use Catalyst software provided under license by our
reinsurance broker Benfield Blanch to model the probable maximum loss to us for
catastrophe losses such as hurricanes. At present, we have excess catastrophe
reinsurance contracts for 95.0% of catastrophic property losses in excess of
$5.0 million up to a maximum of $100.0 million.
We also have a casualty excess of loss reinsurance contract for large
casualty losses occurring in our automobile, homeowners, dwelling fire, business
owners policies, commercial package policies, personal umbrella and commercial
umbrella lines of business in excess of $1.0 million up to a maximum of
$5.0 million, with an annual aggregate deductible of $0.5 million. In addition,
we have a quota share reinsurance agreement under which we cede 90.0% of the
premiums and losses under our personal and commercial umbrella policies. We also
have a reinsurance agreement with Hartford Steam Boiler Inspection and Insurance
Company, which 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 have property excess of loss
reinsurance coverage for
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large property losses, with coverage in excess of $1.0 million up to a maximum
of $10.0 million, for our homeowners, business owner, and commercial package
policies.
In the wake of the September 11, 2001 tragedies, reinsurers have begun to
exclude coverage for claims in connection with any act of terrorism. Our
reinsurance program for 2002 excludes coverage for acts of terrorism, except for
fire or collapse losses as a result of terrorism, under homeowners, dwelling
fire, private passenger automobile and commercial automobile policies. For
business owner policies and commercial package policies, terrorism is excluded
if the total insured value is greater than $20.0 million. We have received
approval from the Division of Insurance effective January 1, 2002 to exclude
terrorism coverage for our business owner, commercial umbrella and commercial
package policies.
As of October 31, 2002, we had no amounts recoverable from any reinsurer,
excluding the residual markets described below.
In addition to the above mentioned reinsurance programs, we are a
participant in CAR, the Massachusetts mandated residual market 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 Massachusetts Property Insurance Underwriting Association in
which premiums, expenses, losses and loss adjustment expenses on homeowners
business that cannot be placed in the voluntary market are shared by insurers
writing homeowners insurance in Massachusetts.
INVESTMENTS
Investment income is an important source of revenue for us and the return on
our investment portfolio has a material effect on our net earnings. Our
investment objective is to focus on maximizing total returns while investing
conservatively. We maintain a high quality investment portfolio consistent with
our established investment policy. As of June 30, 2002, there was only one
telecommunications sector security below investment grade (rated Category 3 by
the Securities Valuation Office of the National Association of Insurance
Commissioners) in our fixed income securities portfolio for which we recorded an
after-tax other-than-temporary impairment charge of approximately $0.7 million
for the six months ended June 30, 2002. According to our investment guidelines,
no more than 1% of our portfolio may be invested in the securities of any one
issuer, and no more than 0.5% of our portfolio may be invested in securities
rated "BBB," or the lowest investment grade assigned by Moody's. We continually
monitor the mix of taxable and tax-exempt securities, in an attempt to maximize
our total after-tax return. Since 1986, our investment manager has been Deutsche
Asset Management, formerly known as Scudder Investments.
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The following table reflects the composition of our investment portfolio at
December 31, 1999, 2000 and 2001 and June 30, 2002.
<Table>
<Caption>
AT DECEMBER 31,
---------------------------------------------------------------------------------
1999 2000 2001
------------------------- ------------------------- -------------------------
AMOUNT % OF PORTFOLIO AMOUNT % OF PORTFOLIO AMOUNT % OF PORTFOLIO
-------- -------------- -------- -------------- -------- --------------
($ IN THOUSANDS)
DEBT SECURITIES:
U.S. Treasury securities and
obligations of U.S.
Government agencies(1)...... $191,331 43.0% $194,851 39.6% $176,370 34.1%
Obligations of states and
political subdivisions...... 73,640 16.7 127,527 26.0 127,797 24.7
Mortgage-backed securities.... 45,890 10.3 42,287 8.6 78,723 15.2
Corporate and other
securities.................. 102,908 23.1 85,420 17.4 124,402 24.1
-------- ---- -------- ---- -------- ----
Total debt securities....... 413,769 93.1 450,085 91.6 507,292 98.1
EQUITY SECURITIES:
Preferred stocks.............. -- -- 13,121 2.7 9,716 1.9
Common stocks................. 30,880 6.9 28,124 5.7 -- --
-------- ---- -------- ---- -------- ----
Total equity securities..... 30,880 6.9 41,245 8.4 9,716 1.9
-------- ---- -------- ---- -------- ----
TOTAL INVESTMENTS............. $444,649 100% $491,330 100% $517,008 100%
======== ==== ======== ==== ======== ====
<Caption>
AT JUNE 30, 2002
-------------------------
AMOUNT % OF PORTFOLIO
-------- --------------
($ IN THOUSANDS)
DEBT SECURITIES:
U.S. Treasury securities and
obligations of U.S.
Government agencies(1)...... $116,038 23.7%
Obligations of states and
political subdivisions...... 175,572 35.8
Mortgage-backed securities.... 81,685 16.7
Corporate and other
securities.................. 107,133 21.8
-------- ----
Total debt securities....... 480,428 98.0
EQUITY SECURITIES:
Preferred stocks.............. 9,896 2.0
Common stocks................. -- --
-------- ----
Total equity securities..... 9,896 2.0
-------- ----
TOTAL INVESTMENTS............. $490,324 100%
======== ====
</Table>
- ------------------------------
(1) Obligations of U.S. Government agencies include collateralized mortgage
obligations issued, guaranteed and/or insured by the following issuers:
Government National Mortgage Association, Federal Home Loan Mortgage
Corporation, and Federal National Mortgage Association. The total of these
debt securities was $125.2 million, $124.1 million, $117.6 million and
$64.9 million at December 31, 1999, December 31, 2000, December 31, 2001 and
June 30, 2002, respectively.
While we have held common equity securities in our investment portfolio in
the past, as of December 31, 2001 we held no common equity securities in our
investment portfolio. We made the decision to divest common equity securities in
order to maximize the current investment income earned by our portfolio and to
reduce our overall investment risk. We continuously evaluate market conditions
and we expect in the future to purchase common equity securities.
The principal risks inherent in holding mortgage-backed securities and other
pass-through securities are prepayment and extension risks, which affect the
timing of when cash flows will be received. When interest rates decline,
mortgages underlying mortgage-backed securities tend to be prepaid more rapidly
than anticipated, causing early repayments. When interest rates rise, the
underlying mortgages tend to be prepaid at a slower rate than anticipated,
causing the principal repayments to be extended. Although early prepayments may
result in acceleration of income from recognition of any unamortized discount,
the proceeds typically are reinvested at a lower current yield, resulting in a
net reduction of future investment income.
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<Page>
The following table reflects our investment results for each year in the
three-year period ended December 31, 2001 and for the six months ended June 30,
2002:
INVESTMENT RESULTS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------ SIX MONTHS ENDED
1999 2000 2001 JUNE 30, 2002
-------- -------- -------- ----------------
($ IN THOUSANDS)
Average invested assets.............. $441,096 $476,421 $517,146 $523,083
Net investment income(1)............. $ 23,870 $ 26,889 $ 27,605 $ 13,659
Net effective yield(2)............... 5.41% 5.64% 5.34% 5.23%(4)
Net realized capital gains
(losses)........................... $ 8,102 $ (1,246) $ (5,050) $ (2,388)
Effective yield including realized
capital gains (losses)(3).......... 7.25% 5.38% 4.36% 4.31%(4)
</Table>
- ------------------------
(1) After investment expenses, excluding realized investment gains (losses).
(2) Net investment income for the period divided by average invested assets for
the same period.
(3) Net investment income plus realized capital gains (losses) for the period
divided by average invested assets for the same period.
(4) Represents annualized effective yield.
The following table indicates the composition of our fixed income security
portfolio (at carrying value) by rating, as of June 30, 2002:
COMPOSITION OF FIXED INCOME SECURITY PORTFOLIO
BY RATING(1)
<Table>
<Caption>
JUNE 30, 2002
-------------------
AMOUNT PERCENT
-------- --------
($ IN THOUSANDS)
U.S. Government and Government Agency Fixed Income
Securities.............................................. $116,038 24.2%
Aaa/Aa.................................................... 260,094 54.1
A......................................................... 67,800 14.1
Baa....................................................... 35,259 7.3
Ba........................................................ 1,237 0.3
-------- ----
Total................................................. $480,428 100%
======== ====
</Table>
- ------------------------
(1) Rating as assigned by Moody's Investors Services, Inc., or Moody's. Such
ratings are generally assigned upon the issuance of the securities and
are subject to revision on the basis of ongoing evaluations. Ratings in the
table are as of the date indicated.
Moody's rating system utilizes nine symbols to indicate the relative
investment quality of a rated bond. Aaa rated bonds are judged to be of the best
quality and are considered to carry the smallest degree of investment risk. Aa
rated bonds are also judged to be of high quality by all standards. Together
with Aaa bonds, these bonds comprise what are generally known as high grade
bonds. Bonds rated A possess many favorable investment attributes and are
considered to be upper medium grade obligations. Baa rated bonds are considered
as medium grade obligations; they are neither highly protected nor poorly
secured. Bonds rated Ba or lower (those rated B, Caa, Ca and C) are considered
to be too speculative to be of investment quality.
The Securities Valuation Office of the National Association of Insurance
Commissioners evaluates all public and private bonds purchased as investments by
insurance companies. The Securities Valuation Office assigns one of six
investment categories to each security it reviews. Category 1 is the highest
quality rating and Category 6 is the lowest. Categories 1 and 2 are the
equivalent of investment grade
72
<Page>
debt as defined by rating agencies such as Standard & Poor's Ratings Services
and Moody's, while Categories 3-6 are the equivalent of below investment grade
securities. Securities Valuation Office ratings are reviewed at least annually.
At June 30, 2002, approximately 91.7% of our fixed maturity investments were
rated Category 1, and 8.0% of our fixed maturity investments were rated
Category 2, the two highest ratings assigned by the Securities Valuation Office
and approximately 0.3% of our fixed maturity investments were rated Category 3
by the Securities Valuation Office.
The following table indicates the composition of our fixed income security
portfolio (at carrying value) by time to maturity as of June 30, 2002.
COMPOSITION OF FIXED INCOME SECURITY PORTFOLIO
BY MATURITY
<Table>
<Caption>
JUNE 30, 2002
-------------------
AMOUNT PERCENT
-------- --------
($ IN THOUSANDS)
1 year or less.............................................. $ -- --%
Over 1 year through 5 years................................. 90,021 18.7
Over 5 years through 10 years............................... 114,715 23.9
Over 10 years through 20 years.............................. 63,721 13.3
Over 20 years............................................... 65,354 13.6
Asset-backed securities(1).................................. 146,617 30.5
-------- ------
Total..................................................... $480,428 100.0%
======== ======
</Table>
- ------------------------
(1) Actual maturities of asset-backed securities differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Prepayment rates
are influenced by a number of factors that cannot be predicted with
certainty, including: the relative sensitivity of the underlying mortgages
or other collateral to changes in interest rates; a variety of economic,
geographic and other factors; and the repayment priority of the securities
in the overall securitization structures.
COMPETITION
The property and casualty insurance business is highly competitive and many
of our competitors have substantially greater financial and other resources than
us. We compete with both large national writers and smaller regional companies.
In Massachusetts in 2000, we competed across all our lines of business,
according to A.M. Best, with 274 other property and casualty insurers. According
to A.M. Best, of these 274 insurers, 20 are national companies which use
independent agents to sell their products, 165 are regional or
Massachusetts-only companies which use independent agents to sell their products
(including us), and 90 are national and Massachusetts-only companies which sell
their products directly to policyholders. Further, our competitors include other
companies which, like us, serve the independent agency market, as well as
companies which sell insurance directly to customers. Direct writers may have
certain competitive advantages over agency writers, including increased name
recognition, loyalty of the customer base to the insurer rather than to an
independent agency and, potentially, lower cost structures. A material reduction
in the amount of business independent agents sell would adversely affect us. In
the past, competition in the Massachusetts personal auto market has included
offering significant discounts from the maximum permitted rates, and there can
be no assurance that these conditions will not recur. Further, we and others
compete on the basis of the commissions and other cash and non-cash incentives
provided to agents. Although a number of national insurers that are much larger
than we are do not currently compete in a material way in the Massachusetts
personal auto market, if one or more of these companies decided to aggressively
enter the market it could have a material adverse effect on us. These companies
include some that would be able to sustain significant losses in order to
acquire market share, as well as others which use distribution methods that
compete with the independent agent channel. There can be no assurance that we
will be able to compete effectively against these companies in the future.
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<Page>
In Massachusetts in 2001, 28 insurers wrote private passenger auto
insurance, according to CAR. Of these 28 insurers, 6 are national companies
which use independent agents to sell their products, 11 are regional or
Massachusetts-only companies which use independent agents to sell their products
(including us) and 11 are national, regional or Massachusetts-only companies
which sell their products directly to policyholders. Our principal competitors
within the Massachusetts private passenger automobile insurance industry are
Commerce Group, Inc. and Arbella Mutual Insurance Company which held 23.3% and
10.8% market shares based on automobile exposures, respectively, in 2001
according to CAR.
RATINGS
A.M. Best, which rates insurance companies based on factors of concern to
policyholders, currently assigns Safety Insurance an "A (Excellent)" rating. Our
"A" rating was reaffirmed by A.M. Best in November 2001. Such rating is the
third highest rating of 13 ratings that A.M. Best assigns to solvent insurance
companies, which currently range from "A++ (Superior)" to "D (Very Vulnerable)."
Publications of A.M. Best indicate that the "A" rating is assigned to those
companies that in A.M. Best's opinion have a strong ability to meet their
obligations to policyholders over a long period of time. In evaluating a
company's financial and operating performance, A.M. Best reviews the company's
profitability, leverage and liquidity, as well as its book of business, the
adequacy and soundness of its reinsurance, the quality and estimated market
value of its assets, the adequacy of its loss reserves, the adequacy of its
surplus, its capital structure, the experience and competence of its management
and its market presence. A.M. Best's ratings reflect its opinion of an
insurance company's financial strength, operating performance and ability to
meet its obligations to policyholders and are not evaluations directed to
purchasers of an insurance company's securities.
In reaffirming Safety Insurance's rating, A.M. Best recognized the
occurrence of the Acquisition and noted certain of our positive attributes,
including our conservative reserving philosophy, our strict underwriting
discipline, our favorable market position as the third largest automobile writer
in Massachusetts, our efforts at product diversification, our long-term
commitment to the independent agency force, our proven track record of dealing
successfully with the changes in the Massachusetts automobile insurance market
and our substantial reinsurance protection. A.M. Best cited certain factors
that partially offset these attributes, including our geographic concentration
in Massachusetts and our focus in the private passenger automobile market. We
are subject to the competitive and highly regulated Massachusetts personal
automobile market, which has been characterized by aggressive discount programs
and mandated rate reductions by the Division of Insurance.
PROPERTIES
We conduct our operations in approximately 86,930 square feet of leased
space at 20 Custom House Street in downtown Boston, Massachusetts. Our lease
expires in December 2008.
EMPLOYEES
At October 31, 2002, we employed 521 employees. Our employees are not
covered by any collective bargaining agreement. Management considers our
relationship with our employees to be good.
LEGAL PROCEEDINGS
Our insurance subsidiaries are parties to a number of lawsuits arising in
the ordinary course of their insurance business. We believe that the ultimate
resolution of these lawsuits will not, individually or in the aggregate, have a
material adverse effect on our financial condition. Other than these lawsuits,
we are not involved in any legal proceedings.
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<Page>
SUPERVISION AND REGULATION
INTRODUCTION. Our principal operating subsidiaries, Safety Insurance and
Safety Indemnity, are subject to comprehensive regulation by the Division of
Insurance, of which the Commissioner is the senior official. The Commissioner is
appointed by the Governor and serves at the pleasure of the Governor. We are
subject to the authority of the Commissioner in many areas of our business under
Massachusetts law, including:
- our licenses to transact insurance;
- the premium rates and policy forms we may use;
- our financial condition including the adequacy of our reserves and
provisions for unearned premium;
- the solvency standards that we must maintain;
- the type and size of investments we may make;
- the type of accounting we must use; and
- the nature of the transactions we may engage in with our affiliates.
In addition, the Commissioner periodically examines licensees. We were most
recently examined for the five-year period ending December 31, 1998. The
Commissioner made no material findings as a result of this examination.
INSURANCE HOLDING COMPANY REGULATION. Our principal operating subsidiaries
are insurance companies, and therefore we are subject to certain laws in
Massachusetts regulating insurance holding company systems. These laws require
that we file a registration statement with the Commissioner that discloses the
identity, financial condition, capital structure and ownership of each entity
within our corporate structure and any transactions among the members of our
holding company system. In some instances, we must obtain the prior approval of
the Commissioner for material transactions between our insurance company
subsidiaries and other affiliates in our holding company system. These holding
company statutes also require, among other things, prior approval of the payment
of extraordinary dividends or distributions and any acquisition of a domestic
insurer.
INSURANCE REGULATION CONCERNING DIVIDENDS. We rely on dividends from our
insurance company subsidiaries for our cash requirements. The insurance holding
company law of Massachusetts requires notice to the Commissioner of any dividend
to the stockholders of an insurance company. Our insurance company subsidiaries
may not make an "extraordinary dividend" until thirty days after the
Commissioner has received notice of the intended dividend and has not objected
in such time. As historically administered by the Commissioner, this provision
requires the prior approval by the Commissioner of an extraordinary dividend. An
extraordinary dividend is defined as any dividend or distribution that, together
with other distributions made within the preceding twelve months exceeds the
greater of 10% of the insurer's surplus as of the preceding December 31, or the
insurer's net income for the twelve-month period ending the preceding
December 31, in each case determined in accordance with statutory accounting
practices. Under Massachusetts law, an insurer may pay cash dividends only from
its unassigned funds, also known as its earned surplus, and the insurer's
remaining surplus must be both reasonable in relation to its outstanding
liabilities and adequate to its financial needs.
ACQUISITION OF CONTROL OF A MASSACHUSETTS DOMICILED INSURANCE
COMPANY. Massachusetts law requires advance approval by the Commissioner of any
change in control of an insurance company that is domiciled in Massachusetts.
That law presumes that control exists where any person, directly or indirectly,
owns, controls, holds the power to vote or holds proxies representing 10% or
more of our outstanding voting stock. Even persons who do not acquire beneficial
ownership of more than 10% of the outstanding shares of our common stock may be
deemed to have acquired control if the
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<Page>
Commissioner determines that control exists in fact. Any purchaser of shares of
common stock representing 10% or more of the voting power of our capital stock
will be presumed to have acquired control of our Massachusetts insurance
subsidiaries unless, following application by that purchaser the Commissioner
determines that the acquisition does not constitute a change of control or is
otherwise not subject to regulatory review. These requirements may deter, delay
or prevent transactions affecting the control of or the ownership of our common
stock, including transactions that could be advantageous to our stockholders.
PROTECTION AGAINST INSURER INSOLVENCY. Massachusetts law requires that
insurers licensed to do business in Massachusetts participate in the
Massachusetts Insurers Insolvency Fund. The Massachusetts Insurers Insolvency
Fund must pay any claim up to $300,000 of a policyholder of an insolvent insurer
if the claim existed prior to the declaration of insolvency or arose within
sixty days after the declaration of insolvency. Members of the Massachusetts
Insurers Insolvency Fund are assessed the amount the Massachusetts Insurers
Insolvency Fund deems necessary to pay its obligations and its expenses in
connection with handling covered claims. Subject to certain exceptions,
assessments are made in the proportion that each member's net written premiums
for the prior calendar year for all property and casualty lines bore to the
corresponding net written premiums for Massachusetts Insurers Insolvency Fund
members for the same period. As a matter of Massachusetts law, insurance rates
and premiums include amounts to recoup any amounts paid by insurers for the
costs of the Massachusetts Insurers Insolvency Fund. With respect to private
passenger auto insurance rates and premiums, the Commissioner has historically
made an adjustment in his or her annual rate decision reflecting any
Massachusetts Insurers Insolvency Fund-related costs reported by the industry in
its rate filing. By statute, no insurer in Massachusetts may be assessed in any
year an amount greater than two percent of that insurer's direct written premium
for the calendar year prior to the assessment. In 2001, we were assessed
$1.4 million, primarily as the result of the insolvencies of The Trust Insurance
Company and Reliance Insurance Company. As of October 28, 2002, we have been
assessed $2.1 million as our portion of the losses due to some of these
insolvencies, as well as the insolvencies of other insurers. CAR also assesses
its members as a result of insurer insolvencies. Because CAR is not able to
recover an insolvent company's share of the net CAR losses from the
Massachusetts Insurers Insolvency Fund, CAR must increase each of its member's
share of the deficit in order to compensate for the insolvent carrier's
inability to pay its deficit assessment. It is anticipated that there will be
additional assessments from time to time relating to various insolvencies.
THE INSURANCE REGULATORY INFORMATION SYSTEM. The Insurance Regulatory
Information System was developed to help state regulators identify companies
that may require special financial attention. The Insurance Regulatory
Information System consists of a statistical phase and an analytical phase
whereby financial examiners review annual statements and financial ratios. The
statistical phase consists of 12 key financial ratios based on year-end data
that are generated from the National Association of Insurance Commissioners'
database annually; each ratio has an established "usual range" of results. These
ratios assist state insurance departments in executing their statutory mandate
to oversee the financial condition of insurance companies.
A ratio result falling outside the usual range of Insurance Regulatory
Information System ratios is not considered a failing result; rather, unusual
values are viewed as part of the regulatory early monitoring system.
Furthermore, in some years, it may not be unusual for financially sound
companies to have several ratios with results outside the usual ranges.
Generally, an insurance company will become subject to regulatory scrutiny if it
falls outside the usual ranges of four or more of the ratios. For 2001, our
subsidiaries had one ratio falling outside the normal range. The test that
measures estimated current reserve deficiency to surplus generated a value of
30.3% for Safety Insurance and 27.6% for Safety Indemnity Insurance Company,
each exceeding the normal value of 25%. The value is partially a result of our
adoption of statutory accounting principles promulgated by the National
Association of Insurance Commissioners in 2001. In particular, our treatment for
assumed obligations for underwriting pool business from CAR and the
Massachusetts Property Insurance Underwriting
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Association plan changed from "netting" (recording the combined obligation from
premiums, expenses and losses) to "straight" (recording separate amounts for
premiums, expenses and losses, which resulted in reporting a net loss). The
level of premiums earned for 2001 is thereby increased relative to the levels
reported during 1999 and 2000, influencing the results of this ratio.
RISK BASED CAPITAL REQUIREMENTS. The National Association of Insurance
Commissioners has adopted a formula and model law to implement risk based
capital requirements for most property and casualty insurance companies, which
are designed to determine minimum capital requirements and to raise the level of
protection that statutory surplus provides for policyholder obligations. The
risk based capital formula for property and casualty insurance companies
measures three major areas of risk facing property and casualty insurers:
- underwriting, which encompasses the risk of adverse loss developments and
inadequate pricing;
- declines in asset values arising from market and/or credit risk; and
- off-balance sheet risk arising from adverse experience from non-controlled
assets, guarantees for affiliates or other contingent liabilities and
reserve and premium growth.
Under Massachusetts law, insurers having less total adjusted capital than
that required by the risk based capital calculation will be subject to varying
degrees of regulatory action, depending on the level of capital inadequacy.
The risk based capital law provides for four levels of regulatory action.
The extent of regulatory intervention and action increases as the level of total
adjusted capital to risk based capital falls. The first level, the company
action level as defined by the National Association of Insurance Commissioners,
requires an insurer to submit a plan of corrective actions to the Commissioner
if total adjusted capital falls below 200% of the risk based capital amount. The
regulatory action level as defined by the National Association of Insurance
Commissioners requires an insurer to submit a plan containing corrective actions
and requires the Commissioner to perform an examination or other analysis and
issue a corrective order if total adjusted capital falls below 150% of the risk
based capital amount. The authorized control level, as defined by the National
Association of Insurance Commissioners, authorizes the Commissioner to take
whatever regulatory actions he or she considers necessary to protect the best
interest of the policyholders and creditors of the insurer which may include the
actions necessary to cause the insurer to be placed under regulatory control,
i.e., rehabilitation or liquidation, if total adjusted capital falls below 100%
of the risk based capital amount. The fourth action level is the mandatory
control level as defined by the National Association of Insurance Commissioners,
which requires the Commissioner to place the insurer under regulatory control if
total adjusted capital falls below 70% of the risk based capital amount.
The formulas have not been designed to differentiate among adequately
capitalized companies that operate with higher levels of capital. Therefore, it
is inappropriate and ineffective to use the formulas to rate or to rank these
companies. At December 31, 2001, our insurance subsidiaries had total adjusted
capital in excess of amounts requiring company or regulatory action at any
prescribed risk based capital action level.
REGULATION OF PRIVATE PASSENGER AUTOMOBILE INSURANCE IN MASSACHUSETTS. Our
principal line of business is Massachusetts private passenger automobile
insurance. As described in more detail elsewhere in this prospectus, regulation
of private passenger automobile insurance in Massachusetts differs significantly
from how this line of insurance is regulated in other states. These differences
include the requirements that we not deny coverage to any applicant; that the
premium rate we and all insurers must charge is fixed and established by the
Commissioner; that our ability and that of our competitors to deviate from the
rate set by the Commissioner is restricted, and that some of our insurance
producers are assigned to us as a matter of law. See "--Description of the
Massachusetts Property and Casualty Insurance Market."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth certain information concerning our directors and
executive officers as of the date of this prospectus.
<Table>
<Caption>
YEARS
EMPLOYED
NAME AGE POSITION BY SAFETY
- --------------------------- -------- ----------------------------------------------------- ---------
David F. Brussard.......... 50 Chief Executive Officer and President, Director 27
William J. Begley, Jr...... 48 Chief Financial Officer, Vice President and Secretary 17
Daniel F. Crimmins......... 64 Vice President--Marketing 17
Robert J. Kerton........... 56 Vice President--Casualty Claims 16
David E. Krupa............. 42 Vice President--Property Claims 20
Daniel D. Loranger......... 63 Vice President--Management Information Systems 22
Edward N. Patrick, Jr...... 54 Vice President--Underwriting 29
A. Richard Caputo, Jr...... 36 Director --
John W. Jordan II.......... 55 Director --
David W. Zalaznick......... 48 Director --
Bruce R. Berkowitz......... 44 Nominee for Director --
David K. McKown............ 64 Nominee for Director --
</Table>
DAVID F. BRUSSARD was appointed President and Chief Executive Officer in
June 2001 and has served as a director of Safety Group since October 2001. Since
January 1999, Mr. Brussard has been the Chief Executive Officer and President of
Safety Insurance. Previously, Mr. Brussard served as Executive Vice President of
Safety Insurance from 1985 to 1999 and as Chief Financial Officer and Treasurer
of Safety Insurance from 1979 to 1999. Mr. Brussard is also a member of the
governing committee, budget committee, executive committee and nominating
committee of the Automobile Insurers Bureau and is a member of the governing,
actuarial and defaulted broker committees of CAR. Mr. Brussard is also on the
Board of Trustees of the Insurance Library Association of Boston.
WILLIAM J. BEGLEY, JR. was appointed Chief Financial Officer, Vice President
and Secretary of Safety Group on March 4, 2002. Since January 1999, Mr. Begley
has been the Chief Financial Officer and Treasurer of Safety Insurance.
Previously, Mr. Begley served as Assistant Controller of Safety Insurance from
1985 to 1987, as Controller of Safety Insurance from 1987 to 1990 and as
Assistant Vice President/Controller of Safety Insurance from 1990 to 1999.
Mr. Begley also serves on the audit committee of CAR.
DANIEL F. CRIMMINS was appointed Vice President of Marketing of Safety Group
on March 4, 2002. Mr. Crimmins has been employed by Safety for over 17 years and
has served as Vice President of Marketing of Safety Insurance since 1985.
Mr. Crimmins has over 40 years of experience in the insurance industry.
Mr. Crimmins is a member of the market review committee of CAR and the Insurance
Managers Association.
ROBERT J. KERTON was appointed Vice President of Casualty Claims of Safety
Group on March 4, 2002. Mr. Kerton has been employed by Safety for over
16 years and has served as Vice President of Casualty Claims of Safety Insurance
since 1986. Mr. Kerton previously served 18 years with Allstate Insurance
Company in various Massachusetts claim management assignments. Mr. Kerton serves
as Chairman of the Automobile Insurers Bureau claims committee, vice chairman of
the CAR claims committee and on the governing board of the Massachusetts
Insurance Fraud Bureau.
DAVID E. KRUPA was appointed Vice President of Property Claims of Safety
Group on March 4, 2002. Mr. Krupa has been employed by Safety Insurance for over
20 years and has served as Vice President of Property Claims of Safety Insurance
since July 1990. Mr. Krupa was first employed by
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Safety Insurance in 1982 and held a series of management positions in the Claims
Department of Safety Insurance before being appointed Vice President of Safety
Insurance in 1990. In addition, Mr. Krupa has been a member of several claims
committees both at the Automobile Insurers Bureau and CAR.
DANIEL D. LORANGER was appointed Vice President of Management Information
Systems of Safety Group on March 4, 2002. Mr. Loranger has been employed by
Safety Insurance for over 22 years and has served as Vice President of
Management Information Systems and Chief Information Officer of Safety Insurance
since 1980. Mr. Loranger began his data processing career with Raytheon
Manufacturing in 1960. BEYOND COMPUTING MAGAZINE awarded Mr. Loranger the first
place 2000 Partnership Award for the strategic alliance of technology with
Safety's business objectives and for development of internal software for
Safety.
EDWARD N. PATRICK, JR. was appointed Vice President of Underwriting of
Safety Group on March 4, 2002. Mr. Patrick has been employed by Safety Insurance
for over 28 years and has served as Vice President of Underwriting of Safety
Insurance since July 1977 and as Secretary of Safety Insurance since 1999.
Mr. Patrick has served on several committees of CAR, including the market
review, servicing carrier, statistical, automation and reinsurance operations
committees. Mr. Patrick has also served on the CAR operations committee since
1984 and has served as its chairman since 1998.
A. RICHARD CAPUTO, JR. has served as a director of Safety Group since
June 2001. Mr. Caputo has been a partner of The Jordan Company LLC, a private
merchant banking firm, since 1990. Mr. Caputo is also a director of
AmeriKing, Inc., GSFI, Inc., Jackson Products, Inc., and Universal Technical
Institute, Inc., as well as other privately held companies.
JOHN W. JORDAN II has served as a director of Safety Group since
October 2001. Mr. Jordan has been a managing partner of The Jordan Company LLC
since 1982. Mr. Jordan is also a director of AmeriKing, Inc., Carmike
Cinemas, Inc., GSFI, Inc., Jackson Products, Inc., Jordan Industries, Inc., and
Kinetek, Inc. (formerly known as Motors and Gears, Inc.), as well as other
privately held companies.
DAVID W. ZALAZNICK has served as a director of Safety Group since
October 2001. Mr. Zalaznick has been a managing partner of The Jordan Company
LLC since 1982. Mr. Zalaznick is also a director of AmeriKing, Carmike
Cinemas, Inc., GFSI, Inc., Jackson Products, Inc., Jordan Industries, Inc.,
Marisa Christina, Inc., and Kinetek, Inc. (formerly Motors and Gears, Inc.), as
well as other privately held companies.
BRUCE R. BERKOWITZ is a nominee for director of Safety Group and will become
a director concurrently with the closing of the offering. In December 2001, Mr.
Berkowitz became a Deputy Chairman and a director of Olympus Re Holdings, Ltd.
Mr. Berkowitz has been a member of the board of trustees of First Union Real
Estate and Mortgage Investments since 2000, President and a director of
Fairholme Funds, Inc. since 1999, and managing member of Fairholme Capital
Management, L.L.C. since 1997.
DAVID K. MCKOWN is a nominee for director of Safety Group and will become a
director concurrently with the closing of the offering. Mr. McKown served as a
Senior Advisor to Eaton Vance Management from 2000 to 2002, focusing on business
origination in real estate and asset-based loans. Mr. McKown retired in
March 2000 having served as a Group Executive with BankBoston since 1993, where
he focused on acquisitions and high-yield bank debt financings. Mr. McKown
worked for BankBoston for over 40 years and had previously been the head of
BankBoston's real estate department, corporate finance department and a director
of BankBoston's private equity unit. Mr. McKown is currently a director of
Equity Office Properties Trust, as well as other privately held companies.
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Messrs. Brussard, Caputo, Jordan and Zalaznick are currently serving as
directors pursuant to rights granted to the Investors and the Management Team
under a stockholders agreement. These provisions of the stockholders agreement
will terminate upon completion of the offering. See "Certain Relationship and
Related Transactions--Agreements Related to the Acquisition."
BOARD OF DIRECTORS
Safety Group's directors are divided into three classes of approximately
equal size and serve for staggered three-year terms. Our initial class 1
directors, whose terms expire in 2003, are Messrs. Jordan and McKown. Our
initial class 2 directors, whose terms expire in 2004, are Messrs. Berkowitz and
Zalaznick. Our initial class 3 directors, whose terms expire in 2005, are
Messrs. Brussard and Caputo.
BOARD COMMITTEES
Prior to the completion of the offering, Safety Group's board of directors
intends to appoint an audit committee and a compensation committee. The audit
committee will make recommendations to the board of directors regarding the
selection of independent accountants, will review the results and scope of the
independent accountants' audit and the services provided by them and will review
and evaluate our audit and control functions. The compensation committee will
administer our stock plans and make recommendations concerning salaries and
incentive compensation for our employees.
DIRECTOR COMPENSATION
Safety Group's bylaws provide that at the discretion of the board of
directors, the directors may be paid their expenses, if any, at each meeting of
the board of directors and may be paid a fixed sum for attendance at each
meeting of the board of directors or a stated salary as a director. At the
discretion of the board, members of special or standing committees may be
allowed like compensation for attending committee meetings. Since our
incorporation in June 2001, none of our directors has received compensation for
his services as a board or committee member. It is anticipated that after the
initial public offering, directors who are employees of Safety will not receive
any compensation for serving as directors and that those directors who are not
employees of Safety will receive an annual retainer of $20,000 per year. In
addition, in consideration for serving as a director, Mr. McKown will receive a
grant of options to purchase 10,000 shares of our common stock, as described
below.
MANAGEMENT COMPENSATION
EXECUTIVE COMPENSATION
Safety Group's bylaws provide that the board of directors will fix the
salaries of all officers of Safety Group. Since Safety Group's formation in
June 2001, none of Safety Group's officers have received compensation in their
capacity as Safety Group's officers. All compensation has been paid to Safety
Group's officers in their capacities as officers of one of Safety Group's
subsidiaries. We expect that after the initial public offering, most of Safety
Group's employees will continue to be paid only by Safety Group's subsidiaries
with an allocation or charge to be made for services rendered to Safety Group.
The following table sets forth information with respect to compensation
earned by our Chief Executive Officer and President and by our four other most
highly compensated executive officers for the fiscal year ended December 31,
2001. In this prospectus, we refer to these individuals as our Named Executive
Officers.
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<Page>
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG TERM COMPENSATION
-------------------------
ANNUAL COMPENSATION AWARDS
------------------- ------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS STOCK APPRECIATION RIGHTS COMPENSATION(1)
- --------------------------- -------- -------- ------------------------- ---------------
David F. Brussard.................... $500,460 $758,750 36,463 $1,062,477
President and Chief
Executive Officer
Daniel F. Crimmins................... 162,756 -- 9,902 361,737
Vice President
Robert J. Kerton..................... 181,656 -- 9,548 316,089
Vice President
Daniel D. Loranger................... 236,256 151,750 18,222 543,005
Vice President
Edward N. Patrick, Jr................ 225,756 151,750 14,146 533,889
Vice President
</Table>
- ------------------------
(1) Includes (A) a change-in-control bonus paid in October 2001 upon the
Acquisition pursuant to employment contracts with Safety Insurance's prior
owners (Mr. Brussard--$430,154; Mr. Crimmins--$214,796;
Mr. Kerton--$183,138; Mr. Loranger--$324,034; and Mr. Patrick--$324,034);
(B) a transaction bonus earned in 2001 for achieving certain operating
results of the business of Safety up to the closing of the Acquisition
payable by Safety Group in March 2002 in the following amounts:
Mr. Brussard--$217,863 (additional $200,000 in March 2003),
Mr. Crimmins--$53,699, Mr. Kerton--$45,785, Mr. Loranger--$80,634, and
Mr. Patrick--$80,634; (C) term life insurance premiums
(Mr. Brussard--$2,659, Mr. Crimmins--$5,635, Mr. Kerton--$3,536,
Mr. Loranger--$8,483, and Mr. Patrick--$1,555); (D) contributions to Safety
Insurance's former employee stock ownership plan ($35,000 worth of Thomas
Black Corporation stock for each Named Executive Officer); and
(E) contributions to Safety Insurance's former supplemental executive stock
ownership plan (Mr. Brussard--$176,801, Mr. Crimmins--$52,607, Mr. Kerton--
$48,630, Mr. Loranger--$94,854, and Mr. Patrick--$92,666). Both the employee
stock ownership plan and the supplemental executive stock ownership plan
were terminated in connection with the Acquisition; therefore, no additional
contributions were made to any Named Executive Officer under these two plans
following October 16, 2001. For a description of the rights granted to the
Management Team, including the Named Executive Officers, upon the closing of
the Acquisition, see "Certain Relationships and Related Transactions."
STOCK APPRECIATION RIGHTS
The following table sets forth the stock appreciation rights granted during
the fiscal year ended December 31, 2001 to each of our Named Executive Officers.
The assumed rates of appreciation of 5% and 10% compounded annually are mandated
by the rules of the Securities and Exchange Commission and do not represent our
estimate of future stock price performance. Since all outstanding stock
appreciation rights will be automatically exercised at the offering price upon
the closing of this offering, the actual gains on the grant of stock
appreciation rights shown below depend on the price to the public in this
offering.
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<Page>
STOCK APPRECIATION RIGHTS GRANTED IN LAST FISCAL YEAR
<Table>
<Caption>
INDIVIDUAL GRANTS
- ------------------------------------------------------------------------------------------ POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL STOCK ANNUAL RATES OF STOCK
APPRECIATION RIGHTS PRICE APPRECIATION FOR
NUMBER OF STOCK GRANTED TO A FIVE-YEAR TERM(3)
APPRECIATION RIGHTS EMPLOYEES IN EXERCISE EXPIRATION -----------------------
NAME GRANTED(1) FISCAL YEAR PRICE DATE(2) 5% 10%
- ---- ------------------- ------------------- -------- ---------- -------- --------
David F. Brussard...... 36,463 35.2% $ 6.88 $ 0 $ 0
Daniel F. Crimmins..... 9,902 9.6% $ 6.88 $ 0 $ 0
Robert J. Kerton....... 9,548 9.2% $ 6.88 $ 0 $ 0
Daniel D. Loranger..... 18,222 17.6% $ 6.88 $ 0 $ 0
Edward N. Patrick,
Jr................... 14,146 13.7% $ 6.88 $ 0 $ 0
</Table>
- ------------------------
(1) Upon the date of this offering, all stock appreciation rights awarded to
our Management Team, including to the Named Executive Officers, will become
fully vested and exercised. When the stock appreciation rights are fully
vested and exercised at the closing of the offering, Messrs. Brussard,
Crimmins, Kerton, Loranger and Patrick will receive $186,518, $50,652,
$48,843, $93,211 and $72,360, respectively, based upon the initial public
offering price of $12.00.
(2) The stock appreciation rights have no expiration date. If the employment of
a Named Executive Officer is terminated before this offering for material
breach, cause, or voluntary termination, all of the officer's stock
appreciation rights are forfeited. If the employment of a Named Executive
Officer is terminated for any other reason, all of the officers' nonvested
stock appreciation rights are forfeited and all of the officer's vested
stock appreciation rights are subject to repurchase by Safety Group.
(3) Because the expiration date of the stock appreciation rights is not
certain, we have chosen to set forth in this column the potential
realizable value of each grant of stock appreciation rights, assuming that
the market price of the underlying security appreciates in value from the
date of the grant of the stock appreciation rights, October 16, 2001, for a
five-year term, at the annual compounded rates of 5% and 10%, respectively.
The appreciation amounts shown assume that the market price of the
underlying securities on the date of grant was $0.43.
The following table provides information with respect to each Named
Executive Officer, concerning the number of unexercised stock appreciation
rights held as of December 31, 2001 and the value of unexercised in-the-money
stock appreciation rights held as of December 31, 2001.
FISCAL YEAR-END STOCK APPRECIATION RIGHTS VALUES
<Table>
<Caption>
NUMBER OF STOCK VALUE OF UNEXERCISED
APPRECIATION RIGHTS IN-THE-MONEY STOCK
AT FISCAL APPRECIATION RIGHTS
YEAR-END AT FISCAL YEAR-END
NAME UNEXERCISABLE(1) UNEXERCISABLE(1)
- ---- ------------------- --------------------
David F. Brussard................................. 36,463 $ 0
Daniel F. Crimmins................................ 9,902 $ 0
Robert J. Kerton.................................. 9,548 $ 0
Daniel D. Loranger................................ 18,222 $ 0
Edward N. Patrick, Jr............................. 14,146 $ 0
</Table>
- ------------------------
(1) There were no stock appreciation rights exercisable as of December 31,
2001.
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<Page>
EMPLOYMENT-RELATED AGREEMENTS
Safety Insurance has entered into certain agreements with the Named
Executive Officers and with a number of our other key executives.
DAVID F. BRUSSARD. Under his employment agreement with Safety Insurance,
Mr. Brussard has agreed to serve as Chief Executive Officer and President of
Safety Insurance for an initial term ending December 31, 2006 and automatically
renewing for successive one-year terms thereafter, subject to at least
180 days' advance notice by either party of a decision not to renew the
employment agreement. Under the terms of the employment agreement, Mr. Brussard
is entitled to receive a minimum annual salary of $500,460, as increased on an
annual basis to reflect increases in the cost of living index specified therein.
As determined in the sole discretion of the board of directors, Mr. Brussard
will also be paid an annual bonus of not less than 35% of the total amount of
bonuses paid in such year to persons that were high-ranking officers of Safety
Insurance on October 16, 2001. In addition, Mr. Brussard was paid a transaction
bonus of $217,863 on March 31, 2002 and will be paid a transaction bonus of
$200,000 on March 31, 2003, respectively, as a result of the consummation of the
Acquisition. Mr. Brussard is also entitled to certain perquisites, including
reimbursement of expenses, paid vacations, health, life and other similar
insurance benefits and a car, all as determined by the board of directors of
Safety Insurance.
OTHER NAMED EXECUTIVE OFFICERS. On October 16, 2001, Safety Insurance
entered into employment contracts with each of Mr. Crimmins, Mr. Kerton,
Mr. Loranger and Mr. Patrick. Each of these employment agreements has an initial
term ending December 31, 2004 and automatically renews for successive one-year
terms unless either party provides written notice not to renew at least
180 days prior to the scheduled expiration date.
Under their respective employment agreements, Messrs. Crimmins, Kerton,
Loranger and Patrick are paid annual salaries of $162,756, $181,656, $236,256
and $225,756, respectively, as increased on an annual basis to reflect increases
in the cost of living index specified therein. As determined in the sole
discretion of the board of directors of Safety Insurance, Messrs. Crimmins,
Kerton, Loranger and Patrick are paid an annual bonus based on their
performance. In addition, Messrs. Crimmins, Kerton, Loranger and Patrick were
paid transaction bonuses of $53,699, $45,785, $80,634 and $80,634, respectively,
on March 31, 2002 as a result of the consummation of the Acquisition, and are
also entitled to certain perquisites, including reimbursement of expenses, paid
vacations, health, life and other similar insurance benefits. Mr. Crimmins will
also be provided the use of a car of such make and model and upon such terms and
conditions as the board of directors of Safety Insurance shall determine.
PROVISIONS COMMON TO EACH NAMED EXECUTIVE OFFICER'S EMPLOYMENT
AGREEMENT. Certain provisions are common to each of the Named Executive
Officers' employment agreements. These common provisions include, among other
things, the following:
- if the executive's employment is terminated by us for a reason other than
cause, death, disability or continuous poor performance, or is terminated
by the executive for good reason or as a result of Safety Insurance's
willful and material violation of the Named Executive Officer's employment
agreement or certain other agreements between the executive and the
Company, then Safety Insurance will pay the executive his full annual
salary and provide other customary benefits through the remaining portion
of the term of his employment agreement;
- each executive has agreed not to disclose confidential information of
Safety Insurance; and
- each executive has agreed not to compete against Safety Insurance during
any period in which he is being paid pursuant to the terms of his
employment agreement.
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<Page>
EXECUTIVE INCENTIVE COMPENSATION PLAN
Safety Insurance established its Executive Incentive Compensation Plan so
that it and related companies may provide executive and management employees
selected by Safety Insurance's board of directors, including the Named Executive
Officers, with an opportunity to build additional financial security, thereby
attracting and retaining key employees. All of our Named Executive Officers are
eligible for this plan. Under the plan, an annual allocation amount is made to a
bonus pool as of the last day of each calendar year, beginning with calendar
year 2002 and ending with the calendar year before the calendar year in which a
change of control occurs. The annual allocation amount for each year is based on
a percentage of Safety Insurance's and Safety Indemnity's combined statutory net
income.
At the end of each calendar year, the board of Safety Insurance reviews the
performance of eligible individuals, and in its sole discretion, allocates the
entire amount in the bonus pool among such eligible individuals. The portion of
the bonus pool allocated to an eligible individual is credited to an account
established for the individual. Amounts credited to individual accounts do not
accrue interest or earn income of any kind. The balance of an individual's
account is distributed in a lump sum as soon as practicable after the first day
on which the individual is no longer employed by Safety Insurance or any related
company, regardless of the reason for termination of employment. The plan may be
amended or terminated by the board of Safety Insurance at any time, provided
that no amendment or termination may materially adversely affect the rights of
any participant with respect to the calendar years ended prior to the date on
which such amendment or termination is adopted by the board of Safety Insurance.
STOCK APPRECIATION RIGHT AGREEMENTS WITH OUR NAMED EXECUTIVE OFFICERS
We entered into stock appreciation rights agreements with our Named
Executive Officers and a limited number of other employees of Safety on
October 16, 2001. The agreements designate the number of "covered shares" for
each Named Executive Officer. The number of covered shares granted to the Named
Executive Officers is 36,463 for Mr. Brussard, 9,902 for Mr. Crimmins, 9,548 for
Mr. Kerton, 18,222 for Mr. Loranger and 14,146 for Mr. Patrick. The exercise
price for each stock appreciation right is $6.88 per share. The number of
covered shares and the exercise price of such shares is subject to adjustment to
reflect stock splits, stock dividends, and other changes in Safety Group's
capital structure. The stock appreciation rights do not entitle their holders to
acquire actual shares of common stock, but instead only to receive payments
based on any appreciation of our share price.
The stock appreciation rights will become fully vested and will be exercised
upon the date of this offering. As soon as practicable after the exercise of the
stock appreciation rights with respect to a share of our common stock, the
participant will receive a cash payment from us equal to the public offering
price over the exercise price per share.
2001 RESTRICTED STOCK PLAN
On October 16, 2001, we adopted the 2001 Restricted Stock Plan for select
employees of Safety Group and any related company. The purpose of the plan is to
promote our success and to attract and retain valuable employees by linking the
personal interests of such persons to those of our stockholders. The maximum
number of shares of common stock with respect to which awards may be granted or
sold under the plan is 290,500; provided, however, that this limitation is
subject to adjustment to reflect stock splits, stock dividends, and other
changes in Safety Group's capital structure.
Our board of directors has the authority to determine the persons to whom
restricted shares are granted or sold, the times when such shares will be
granted or sold, the number of shares to be granted or sold and the terms and
conditions of each award, including, without limitation, those related to
dividends. Participants may vote the restricted shares granted or sold under the
plan. Restricted share
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<Page>
awards will vest according to the terms established by the board of directors at
the time restricted shares are granted or sold. Vesting, however, is contingent
upon continuous employment. Unless otherwise determined by our board, upon a
participant's termination of employment, all of the participant's restricted
shares not yet vested will be forfeited. Our board of directors has the right to
amend or terminate this plan at any time, subject to certain limitations, but no
amendment or termination may alter the rights of a participant under any awards
previously granted or sold.
On October 16, 2001, we entered into restricted stock agreements with
Mr. Brussard and Mr. Loranger. Under our Restricted Stock Plan and these
restricted stock agreements, 232,400 and 58,100 shares are subject to restricted
stock agreements between us and Messrs. Brussard and Loranger, respectively. The
restricted shares will vest in full upon the earlier of the consummation of a
change of control, a public offering or according to the schedule contained in
the 2001 Restricted Stock Plan. See "Certain Relationships and Related
Transactions."
2002 MANAGEMENT OMNIBUS INCENTIVE PLAN
Our board of directors has adopted the 2002 Management Omnibus Incentive
Plan to attract, retain and motivate selected officers, key employees, directors
and consultants of Safety through the granting of stock-based compensation
awards. The plan provides for a variety of awards, including nonqualified stock
options, incentive stock options (within the meaning of Section 422 of the
Internal Revenue Code), stock appreciation rights and restricted stock awards.
The maximum number of shares of common stock with respect to which awards may be
granted under the plan is 1,250,000 after adjustment for the stock dividend
declared in connection with this offering. This share limitation and the
per-share price of such shares is subject to adjustment to reflect stock splits,
stock dividends and changes in Safety Group's capital structure. Shares of stock
covered by an award under the plan that are forfeited will again be available
for issuance in connection with future grants of awards under the plan.
The compensation committee of our board of directors will have broad
authority to administer the plan, including the authority to select plan
participants, determine when awards will be made, determine the type and amount
of awards, determine the exercise price of options and stock appreciation
rights, determine any limitations, restrictions or conditions applicable to each
award, determine the terms of any instrument that evidences an award, determine
the manner in which awards may be exercised and interpret the plan's provisions.
Awards under the plan are generally granted for a ten-year term, but may
terminate earlier if the participant's employment terminates before the end of
such term. The exercise price for each option granted under the plan will be the
fair market value of a share of common stock on the date of grant. The exercise
price of options granted under the plan may be paid (i) in cash, (ii) by
delivery of previously-acquired shares of our common stock, (iii) by any
combination of (i) and (ii), (iv) pursuant to a cashless exercise program
through an independent broker (as permitted by applicable law), or (v) by any
other means the committee approves, in its discretion.
If, while any award granted under the plan remains outstanding, a change of
control of Safety Group occurs, then all stock options and stock appreciation
rights outstanding at the time of the change of control will become exercisable
in full immediately prior to the change of control and all restrictions with
respect to restricted stock awards settled by a payment in cash or shares (at
the committee's discretion) to each holder.
The plan may be suspended, amended or terminated at any time by the board,
including amending any form of award agreement or instrument to be executed
pursuant to the plan. However, no amendment or termination of the plan may,
without the affected individual's consent, alter or impair any rights or
obligations under any award previously granted under the plan.
A compensation committee of our board of directors administers the stock
plans and determines the terms of awards granted, including the exercise price,
the number of shares subject to individual awards and the vesting period of
awards. In the case of options intended to qualify as "performance-
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<Page>
based compensation" within the meaning of Section 162(m) of the Internal Revenue
Code granted under the 2002 Management Omnibus Incentive Plan, the compensation
committee will consist of two or more "outside directors" within the meaning of
Section 162(m). In addition, before such performance-based compensation is paid,
the material terms of our stock plans will be presented to and approved by a
majority vote of our stockholders. The compensation committee determines the
exercise price of options granted under the 2002 Management Omnibus Incentive
Plan.
Our board of directors approved the grant of options to purchase
379,000 shares of our common stock upon the consummation of this offering with
an exercise price equal to the initial public offering price of our common
stock. The grants will be made to seven members of our Management Team and one
nominee for director, including all of the Named Executive Officers, in the
amounts shown in the schedule below.
<Table>
<Caption>
SHARES OF COMMON STOCK
NAME UNDERLYING OPTIONS GRANTED
- ---- --------------------------
David F. Brussard.................................... 166,050
Daniel F. Crimmins................................... 29,520
Robert J. Kerton..................................... 22,140
Daniel D. Loranger................................... 55,350
Edward N. Patrick, Jr................................ 36,900
William J. Begley, Jr................................ 36,900
David E. Krupa....................................... 22,140
David K. McKown...................................... 10,000
</Table>
These options will have a term of ten years and will vest in five equal
annual installments beginning on the first anniversary of the date of grant.
SAFETY INSURANCE 401(K) RETIREMENT PLAN
Prior to the adoption of our employee stock ownership plan, our subsidiary,
Thomas Black Insurance Agency, which is the employer of all our employees,
adopted the Thomas Black Insurance Agency, Inc. and Affiliates Profit Sharing
Retirement Plan. After the adoption of our employee stock ownership plan, none
of the Named Executive Officers received any contributions under this profit-
sharing retirement plan. On January 1, 2002, we amended and restated this plan
to be a 401(k) retirement plan only and renamed it the Safety Insurance 401(k)
Retirement Plan. This new plan provides that participants may elect to defer up
to 15% of their compensation for investment in various accounts designated by
the participant. All employees over age 21 are participants in the plan,
although each participant elects whether to defer salary under the plan. Safety
Insurance makes matching contributions on behalf of participants employed by
Safety on the last day of the year in an amount equal to 50% of the first 8% of
the participant's compensation contributed to the plan. Matching contributions
vest ratably over a five-year period. Contributions by participants or by us to
the plan, and income earned on contributions, are generally not taxable until
withdrawn from the plan.
SECTION 162(M)
Section 162(m) of the Internal Revenue Code limits publicly-held companies
to an annual deduction for federal income tax purposes of $1.0 million for
compensation paid to their chief executive officer and the four highest
compensated executive officers (other than the chief executive officer)
determined at the end of each year. Under a special rule that applies to
corporations that become public through an initial public offering, this
limitation in Section 162(m) generally will not apply to compensation that is
paid under our Executive Incentive Compensation Plan, 2001 Restricted
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<Page>
Stock Plan and 2002 Management Omnibus Incentive Plan before the first meeting
of our stockholders in 2006 at which directors will be elected.
Performance-based compensation that meets certain requirements, including
stockholder approval, is excluded from this limitation under Section 162(m). In
general, compensation qualifies as performance-based compensation under
Section 162(m) if (1) it is conditioned on the achievement of one or more
pre-established, objective performance goals, (2) such goal or goals are
established by a committee of the board of directors consisting solely of two or
more outside directors and (3) material terms of the performance goals under
which the compensation is payable are disclosed to, and subsequently approved
by, the corporation's stockholders prior to payment. Although awards granted
under the 2002 Management Omnibus Incentive Plan are temporarily exempt from the
limitations of Section 162(m), the plan is designed to permit the compensation
committee to grant awards that qualify as performance-based compensation for
purposes of satisfying the conditions of Section 162(m) once the exemption
expires. The compensation committee will consist of two or more "outside
directors" within the meaning of Section 162(m) and before such
performance-based compensation is paid, the material terms of our stock plans
will be presented to and approved by a majority vote of our stockholders.
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<Page>
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of the date hereof and as of the date of the
initial public offering (assuming the occurrence of the Direct Sale and the
Preferred Share Exchange at the initial public offering price of $12.00 per
share) by:
- each person that owns beneficially more than 5% of the outstanding shares
of our common stock;
- each director, director nominee and executive officer; and
- all of our directors, director nominees and executive officers as a group.
Except as stated below, each holder listed below has sole investment and
voting power with respect to the shares of common stock beneficially owned by
the holder. As of October 31, 2002, there were 23 holders of shares of our
common stock. Fairholme Partners, L.P., one of the Investors described below,
has agreed to purchase 350,000 shares of our common stock in the Direct Sale.
<Table>
<Caption>
NUMBER OF SHARES PERCENT PRIOR NUMBER OF SHARES PERCENT AFTER
NAME BEFORE OFFERING TO OFFERING AFTER OFFERING OFFERING
- ---- ---------------- ------------- ---------------- -------------
David F. Brussard,...................... 569,090 9.8% 569,090 4.0%
Chief Executive Officer,
President and Director
William J. Begley, Jr.,................. 104,871 1.8 104,871 0.7
Chief Financial Officer and Secretary
A. Richard Caputo, Jr.,................. 260,361 4.5 302,028 2.1
Director(1)
Daniel F. Crimmins,..................... 154,546 2.7 154,546 1.1
Vice President--Marketing
John W. Jordan II,...................... 275,982 4.8 320,149 2.2
Director(2)
Robert J. Kerton,....................... 149,027 2.6 149,027 1.0
Vice President--Casualty Claims
David E. Krupa,......................... 132,468 2.3 132,468 1.0
Vice President--Property Claims
Daniel D. Loranger,..................... 284,400 4.9 284,400 2.0
Vice President--Management
Information Systems
Edward N. Patrick, Jr................... 220,780 3.8 220,780 1.5
Vice President--Underwriting
David W. Zalaznick,..................... 275,982 4.8 320,149 2.2
Director(1)
Bruce R. Berkowitz,..................... 468,649 8.1 1,238,649 8.6
Nominee for Director(3)(4)
David K. McKown,........................ 0 0 0 0
Nominee for Director
TOTAL
Directors, Director Nominees and
Officers as a group................... 2,896,156 49.8% 3,796,157 26.4%
---------- ---- --------- ----
</Table>
88
<Page>
<Table>
<Caption>
NUMBER OF SHARES PERCENT PRIOR NUMBER OF SHARES PERCENT AFTER
NAME BEFORE OFFERING TO OFFERING AFTER OFFERING OFFERING
- ---- ---------------- ------------- ---------------- -------------
Jonathan F. Boucher(1).................. 374,919 6.5% 434,919 3.0%
c/o The Jordan Company LLC
767 Fifth Avenue
48th Floor
New York, NY 10153
Fairholme Partners, L.P.(4)............. 468,649 8.1 1,238,649 8.6
51 JFK Parkway
Short Hills, NJ 07078
JZ Equity Partners plc(5)............... 1,041,338 17.9 1,984,004 13.8
17a Curzon Street
London, W1J 5HS England
Leucadia Investors, Inc.(6)............. 520,721 9.0 604,054 4.2
315 Park Avenue South
New York, NY 10010
TCW/Crescent Mezzanine Partners III, 469,962 8.1 891,137 6.2
L.P.(7)...............................
11100 Santa Monica Blvd.
Suite 2000
Los Angeles, CA 90025
TOTAL
Five Percent and Greater 2,875,589 49.5% 5,152,763 35.9%
Stockholders........................
---------- ---- --------- ----
</Table>
- ------------------------
(1) Mr. Caputo is a partner, Mr. Zalaznick is a managing partner and
Mr. Boucher is a partner of The Jordan Company LLC, the private merchant
banking firm that sponsored the Acquisition.
(2) Mr. Jordan is a managing partner of The Jordan Company LLC, the private
merchant banking firm that sponsored the Acquisition. The John W. Jordan,
II Rev. Trust, a revocable trust of which Mr. Jordan is the trustee, is the
record owner of these shares of our common stock. Mr. Jordan has the power
to direct the voting of these shares.
(3) Mr. Berkowitz is the managing member of the managing general partner of
Fairholme Partners, L.P., and as such Mr. Berkowitz has investment and
voting power with respect to the shares owned by Fairholme Partners, L.P.
and may be deemed a beneficial owner of our shares of common stock owned by
Fairholme Partners, L.P. Mr. Berkowitz's address is c/o Fairholme Capital
Management L.L.C., 51 JFK Parkway, Short Hills, NJ 07078.
(4) Number of shares after offering includes 350,000 shares that Fairholme
Partners, L.P. has agreed to purchase directly from us simultaneously with
the offering. See "The Direct Sale." The managing general partner of
Fairholme Partners, L.P. is Fairholme Capital Management L.L.C., which may
be deemed a beneficial owner of our shares of common stock owned by
Fairholme Partners, L.P. Fairholme Capital Management L.L.C.'s address is 51
JFK Parkway, Short Hills, NJ 07078.
(5) JZ Equity Partners plc is an investment trust listed on the London Stock
Exchange. Its business is to invest, primarily in the United States, in
debt and equity securities recommended by Jordan/ Zalanick Advisors, Inc., a
Delaware corporation, based in New York, that is its sole investment
advisor. The Jordan Company LLC is an affiliate of Jordan/Zalanick
Advisors, Inc. JZ Equity Partners plc is governed by a board of independent
directors.
(6) Leucadia Investors, Inc. is an indirect subsidiary of Leucadia National
Corporation, which may be deemed a beneficial owner of our shares of common
stock owned by Leucadia Investors, Inc. An affiliate of Leucadia National
Corporation is a minority investor in The Jordan Company LLC. Leucadia
National Corporation's address is 315 Park Avenue South, New York, NY 10010.
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(7) TCW/Crescent Mezzanine Partners III, L.P., of which TCW/Crescent Mezzanine
III, LLC is the general partner and TCW/Crescent Mezzanine Management III,
LLC is the investment advisor, is the record owner of 469,962 shares of our
common stock; TCW/Crescent Mezzanine Trust III, a trust of which Wilmington
Trust Company is the Trustee, TCW/Crescent Mezzanine III, LLC is the
managing owner and TCW/Crescent Mezzanine Management III, LLC is the
investment advisor, is the record owner of 73,216 shares of our common
stock; and TCW/Crescent Mezzanine Partners III Netherlands, L.P., of which
TCW/Crescent Mezzanine III, LLC is the general partner and TCW/Crescent
Mezzanine Management III, LLC is the investment advisor, is the record owner
of 19,201 shares of our common stock. TCW/Crescent Mezzanine Partners III,
L.P. is a voting member of TCW/Crescent Mezzanine III, LLC. TCW Asset
Management Company is a member of and a sub-adviser to TCW/Crescent
Mezzanine Management III, LLC and has investment and voting power with
respect to each of TCW/Crescent Mezzanine Partners III, L.P., TCW/Crescent
Mezzanine Trust III and TCW/Crescent Mezzanine Partners III Netherlands,
L.P. TCW Asset Management Company is a wholly-owned subsidiary of The TCW
Group, Inc. Voting control over The TCW Group, Inc. and approximately 52% of
the equity of The TCW Group, Inc. are held by Societe Generale Asset
Management, S.A. Societe Generale Asset Management, S.A. is a wholly owned
subsidiary of Societe Generale, S.A. Societe Generale, S.A., a corporation
organized under the laws of France, may be deemed under the securities laws
to be a beneficial owner of the shares of common stock owned by TCW/Crescent
Mezzanine Partners III, L.P., TCW/Crescent Mezzanine Trust III and
TCW/Crescent Mezzanine Partners III Netherlands, L.P. Societe Generale,
S.A.'s address is 2 place de la Coupole, 92078 Paris-La Defense Cedex,
France.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our Management Team and the Investors consummated the Acquisition of Thomas
Black Corporation in October 2001. See "The Acquisition." The following
discussion summarizes material agreements we entered into in connection with the
Acquisition.
We entered into a subscription agreement with members of our Management
Team. Under the subscription agreement, the members of the team purchased an
aggregate of 1,615,180 shares of our common stock, representing 27.8% of our
outstanding common stock as of the closing of the Acquisition. The aggregate
cash consideration for the shares purchased was $695,000, which we loaned to
them pursuant to the arrangements described below. Of these 1,615,180 shares,
232,400 shares are subject to a restricted stock agreement between us and
Mr. Brussard and 58,100 shares are subject to a restricted stock agreement
between us and Mr. Loranger. These agreements provide that the restricted stock
is forfeited unless the holders of the restricted stock remain employed with us.
If any portion of the restricted stock is forfeited, these officers will still
be obligated to pay that portion of the loan relating to such forfeited stock.
Under these restricted stock agreements, the restricted shares will vest upon
the consummation of the offering.
Each member of our Management Team issued a recourse promissory note to, and
entered into a pledge agreement with, us. Pursuant to the notes, we loaned these
officers an aggregate of $695,000 in order to purchase our common stock in
connection with the Acquisition. Pursuant to the pledge agreements, the
Management Team members pledged our common stock to us as security for the loans
made under the notes. Each note bears interest at a rate of 5% annually and is
due and payable on the earlier of December 31, 2011 or 90 days after the
Management Team member ceases to be our employee. Each employee may prepay his
note at any time without penalty. At October 31, 2002, there was $731,200,
including accrued interest, outstanding under these loans.
Further, at the time of the closing of the Acquisition, each member of our
Management Team entered into an agreement under which he agreed not to receive
certain bonuses to which he would have been entitled following the closing.
These bonuses, which would have been payable over the three years following the
closing assuming the members of our Management Team remained employed by us or
left employment for good reason, would have totaled $16 million in the
aggregate.
The subscription agreement we entered into with our Management Team provides
that if the employment by us of a member of our Management Team is terminated,
we may repurchase from the terminated manager, or the terminated manager may
cause us to repurchase, the manager's common stock for a minimum price per share
as specified in the subscription agreement. Depending upon the reason for and
date of a manager's termination, the aggregate purchase price for the common
stock held by our Management Team, for purposes of this provision, ranges from
$695,000 to $10.2 million. These repurchase provisions in the subscription
agreement will terminate automatically upon the closing of this offering.
In connection with the Acquisition, we entered into an agreement with
members of our Management Team to indemnify them for any tax loss they may incur
in connection with the purchase of our common stock at the time that Safety
Group acquired Thomas Black Corporation, due to a determination by the Internal
Revenue Service that the value of such stock was higher than the purchase price
agreed upon by Safety Group and our Management Team. The agreement provides that
in such case we would pay the executives an amount such that, after payment of
taxes on the payment, they would retain an amount equal to (i) the excess value
of the common stock multiplied by a percentage equal to the difference between
the combined U.S. federal, state and local tax rate on ordinary income and the
combined U.S. federal, state and local tax rate on long-term capital gains, plus
(ii) related interest, penalties or additions, and the executive's portion of
applicable payroll taxes, if any. Under the agreement, we would also loan to
members of our Management Team an amount equal to the excess value of the common
stock (as determined by the Internal Revenue Service) multiplied by
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the applicable capital gains tax rate, which loan would be secured by the common
stock owned by such executive.
We also entered into a subscription agreement with certain of our other
stockholders in connection with the Acquisition. The parties included, among
others, Leucadia Investors, Inc., and Messrs. Jordan, Zalaznick and Caputo, who
are directors of our Company. Under these agreements, these stockholders
purchased an aggregate of 2,111,935 shares of our common stock for an aggregate
purchase price of $0.9 million. We also entered into a purchase agreement with
JZ Equity Partners plc, an investment trust listed on the London Stock Exchange
which is advised by an affiliate of The Jordan Company. Under this agreement, JZ
Equity Partners purchased 2,082,885 shares of our common stock for an aggregate
purchase price of $0.9 million, 22,400 shares of our preferred stock for a
purchase price of $22.4 million, and $30 million aggregate principal amount of
our senior subordinated notes for $30 million. JZ Equity Partners subsequently
sold a portion of the common stock, preferred stock and subordinated notes it
purchased to other third parties. Concurrently with the offering, we will enter
into the Preferred Share Exchange with all the holders of our preferred stock.
Further, the senior subordinated notes will be repaid in full with a portion of
the net proceeds of the offering. See "Use of Proceeds."
At the closing of the Acquisition, we entered into a stockholders agreement
with our Management Team and the Investors. Under the stockholders agreement,
the parties agreed to vote for the board of directors nominated in the
agreement. The stockholders agreement restricts each stockholder's ability to
transfer or otherwise dispose of shares of our common stock, except to certain
of their affiliates, charitable organizations or us, or pursuant to a public
offering or a Rule 144 sale under the Securities Act of 1933. The stockholders
agreement entitles the parties to certain other rights in connection with the
shares of common stock, including rights of first refusal and rights to
participate in sales made by other stockholders. Further, the stockholders
agreement provides that a change of control of the Company requires the consent
of our Management Team's representative on the board of directors. In the event
such consent has not been obtained, we may repurchase the common stock held by
our Management Team for an aggregate price of $10.2 million. The stockholders
agreement also entitles the parties to rights to register their common stock in
specified circumstances. See "Common Stock Eligible For Future Sale." All the
foregoing provisions of the stockholders agreement will terminate upon the
offering, other than the registration rights.
In consideration for services The Jordan Company rendered in connection with
the Acquisition and related financings, we paid TJC Management a $2.5 million
fee and entered into a management consulting agreement to pay TJC Management a
management fee in installments of $1.0 million per year for ten years. TJC
Management Corporation is an affiliate of The Jordan Company. TJC Management may
be considered an affiliate of our Company because three of our directors are
executives of The Jordan Company, and executives of and consultants to The
Jordan Company own an aggregate of approximately 27.4% of our common stock.
Under the management consulting agreement, TJC Management renders consulting
services to us in connection with our financial and business affairs, our
relationships with lenders, stockholders and other third parties, and the
expansion of our business. The management consulting agreement continues until
December 31, 2011, after which it renews automatically for successive one-year
terms unless terminated pursuant to its provisions. We have agreed with TJC
Management to amend the management consulting agreement as of the closing of the
offering. Under the agreement as amended, we will no longer be obligated to pay
the $1.0 million annual management fee and TJC Management will no longer be
obligated to provide consulting services to us other than in connection with the
acquisition, sale or financing transactions described below. In consideration
for its agreement to terminate the annual fee and its services to us under the
agreement prior to the closing of the offering, we have agreed to pay TJC
Management $4.0 million upon the closing. TJC Management will not receive any
other fee upon the closing of the offering or of
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our new bank credit facility or in respect of the portion of the annual
management fee accrued and unpaid through the closing.
Under the amended agreement, TJC Management will be entitled to a $4.0
million termination fee upon closing as well as:
- an investment banking and sponsorship fee of up to 2% of the aggregate
consideration (i) paid by us in connection with any acquisition by us of
all or substantially all the outstanding capital stock, warrants or
options or substantially all the business or assets of another individual
or business entity, or (ii) paid to us in connection with any sale by us
of all or substantially all of our stock, warrants, options, business or
assets or the stock, warrants, options, business or assets of any of our
subsidiaries;
- a financial consulting fee of up to 1% of the amount obtained or made
available to us pursuant to any debt, equity or other financing by us with
the assistance of TJC Management; and
- an amount equal to TJC Management's out-of-pocket expenses, including an
allocable amount of TJC Management's overhead expenses, attributable to
services provided to us.
Since the inception of the management consulting agreement in October 2001,
the services that TJC Management has rendered have included, among others,
(i) working with the lenders under our existing credit facility in connection
with the lenders' reviews of compliance with its terms, (ii) assisting in
negotiating the terms of our new credit facility, (iii) advising on our
executive incentive compensation and management omnibus incentive plans,
(iv) reviewing and advising us on our investment portfolio and strategy and
(v) working with our management and outside auditors to prepare historical and
pro forma financial statements. Since October 16, 2001, we have paid TJC
Management approximately $1,032,637 through November 21, 2002 under the
management consulting agreement.
Certain of our existing stockholders who are, with one exception,
individuals who work for The Jordan Company, will purchase 333,334 shares of our
common stock in this offering at the initial public offering price of $12.00 per
share. These shares will be subject to the lock-up agreement described in
"Underwriting."
Fairholme Partners, L.P., one of the Investors, has agreed to purchase
350,000 shares of our common stock directly from us at the initial offering
price in the Direct Sale. See "The Direct Sale."
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COMMON STOCK ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Direct Sale and the Preferred Share
Exchange, we will have a total of 14,359,999 common shares outstanding. All of
the 6,333,334 shares (7,233,334 shares if the underwriters exercise the
over-allotment option in full) sold in the offering will be freely tradeable
without restriction or further registration under the Securities Act by persons
other than our "affiliates." All of the common shares sold in the Direct Sale
are "restricted securities" as defined in Rule 144 under the Securities Act and
may not be sold in the absence of registration under the Securities Act unless
an exemption from registration is available, including the exemptions contained
in Rule 144. Under the Securities Act, an "affiliate" of a company is a person
that directly or indirectly controls, is controlled by, or is in common control
with that company.
The remaining 8,026,665 common shares outstanding also will be "restricted
securities" within the meaning of Rule 144 under the Securities Act and may not
be sold in the absence of registration under the Securities Act unless an
exemption from registration is available, including the exemptions contained in
Rule 144.
In general, under Rule 144, a person (or persons whose shares are
aggregated), including any person who may be deemed our affiliate, is entitled
to sell within any three-month period, a number of restricted securities that
does not exceed the greater of 1% of the then outstanding shares of common stock
and the average weekly trading volume in the over-the-counter market during the
four calendar weeks preceding each such sale, provided that at least one year
has elapsed since such shares were acquired from us or any affiliate of ours and
certain manner of sale, notice requirements and requirements as to availability
of current public information about us are satisfied. Any person who is deemed
to be our affiliate must comply with the provisions of Rule 144 (other than the
one-year holding period requirement) in order to sell shares of common stock
which are not restricted securities (such as shares acquired by affiliates
either in the offering or through purchases in the open market following the
offering). In addition, under Rule 144(k), a person who is not our affiliate,
and who has not been our affiliate at any time during the 90 days preceding any
sale, is entitled to sell such shares without regard to the foregoing
limitations, provided that at least two years have elapsed since the shares were
acquired from us or any affiliate of ours.
Pursuant to the stockholders agreement, our Management Team and the
Investors have certain demand registration rights which will continue to apply
to all of such shares after the offering. At any time after one year following
the date of this offering, such stockholders may request that we file a
registration statement under the Securities Act covering their shares, as long
as the aggregate purchase price for the proposed registration is greater than
$25 million and represents an offering of at least 5% of our outstanding common
stock. Upon receipt of any such request, we generally will be required to use
our best efforts to effect such registration. We are not required to effect any
registration requested by a stockholder if we have effected two or more
registration statements for such stockholder or if we have effected any
registration (other than on Form S-3 or any successor form relating to secondary
offerings) within six months prior to such request. We are generally obligated
to bear the expenses, other than underwriting discounts and sales commissions,
of all such registrations.
Pursuant to the stockholders agreement, our Management Team and the
Investors also have certain "piggyback" registration rights with respect to our
shares of common stock. Accordingly, if we propose to register any of our
securities, either for our own account or for the account of other stockholders,
with certain exceptions, we are required to notify such stockholders and to
include in such registration all the shares of common stock requested to be
included by them, subject to rejection of such shares under certain
circumstances by an underwriter. All holders with registration rights have
agreed not to exercise their registration rights until 180 days following the
date of this prospectus without the prior written consent of Credit Suisse First
Boston Corporation.
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No prediction can be made as to the effect, if any, future sales of shares,
or the availability of shares for future sales, will have on the market price of
our common stock prevailing from time to time. The sale of substantial amounts
of our common stock in the public market, or the perception that such sales
could occur, could harm the prevailing market price of our common stock. See
"Risk Factors--Future sales of substantial amounts of our common stock in the
public market, or the possibility of such future sales, could adversely affect
the market price of our common stock."
Our officers and directors and all holders of our outstanding shares of
common stock have entered into the lock-up agreements described in
"Underwriting."
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DESCRIPTION OF CAPITAL STOCK
The following description of select provisions of our amended and restated
certificate of incorporation, our amended and restated bylaws, and of the
Delaware General Corporation Law is necessarily general and does not purport to
be complete. This summary is qualified in its entirety by reference in each case
to the applicable provisions of our certificate of incorporation and bylaws,
which are filed as exhibits to our registration statement of which this
prospectus forms a part, and to the provisions of Delaware law. See "Where You
Can Find More Information" for information on where to obtain a current copy of
our certificate of incorporation and our bylaws.
GENERAL
At the time of the closing of the offering, the authorized capital stock of
Safety Insurance Group, Inc. will consist of 30,000,000 shares of common stock
and 5,000,000 shares of preferred stock.
COMMON STOCK
Holders of our common stock are entitled to receive such dividends as may be
declared by our board of directors out of funds legally available therefor. See
"Dividend Policy." Holders of our common stock are entitled to one vote per
share on all matters on which the holders of common stock are entitled to vote
and do not have any cumulative voting rights. In the event of our liquidation or
dissolution, holders of our common stock would be entitled to share equally and
ratably in our assets, if any, remaining after the payment of all liabilities
and the liquidation preference of any outstanding class or series of preferred
stock. The shares of common stock issued by us in the initial public offering
will be fully paid and nonassessable. The rights and privileges of holders of
our common stock are subject to the rights and preferences of the holders of any
series of preferred stock that we may issue in the future, as described below.
For a discussion of certain registration rights held by our Management Team and
the Investors under the stockholders agreement, please see "Common Stock
Eligible For Future Sale."
AUTHORIZED PREFERRED STOCK
Upon the closing of this offering, we will convert all of our outstanding
preferred shares into our common shares in the Preferred Share Exchange.
Subject to the approval by holders of shares of any class or series of
preferred stock, to the extent such approval is required, our board of directors
will have the authority following the closing of the offering to issue preferred
stock in one or more series and to fix the number of shares constituting any
such series and the designations, powers, preferences, limitations and relative
rights, including dividend rights, dividend rate, voting rights, terms of
redemption, redemption price or prices, conversion rights and liquidation
preferences of the shares constituting any series, without any further vote or
action by stockholders.
CERTAIN PROVISIONS OF OUR CERTIFICATE AND BYLAWS AND OF DELAWARE LAW
A number of provisions of our certificate of incorporation and our bylaws
deal with matters of corporate governance and the rights of stockholders. The
following discussion is a general summary of select provisions of our
certificate of incorporation, our bylaws and certain Delaware laws that might be
deemed to have a potential "anti-takeover" effect. These provisions may have the
effect of discouraging a future takeover attempt which is not approved by our
board of directors but which individual stockholders may deem to be in their
best interest or in which stockholders may be offered a substantial premium for
their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of the incumbent board of
directors or management more difficult. Some of the provisions of Massachusetts
insurance law may also have an anti-takeover effect. See "Business--Supervision
and Regulation--Acquisition of Control of a Massachusetts Domiciled Insurance
Company."
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COMMON STOCK. Our unissued shares of authorized common stock will be
available for future issuance without additional stockholder approval. While the
authorized but unissued shares are not designed to deter or prevent a change of
control, under some circumstances we could use the authorized but unissued
shares to create voting impediments or to frustrate persons seeking to effect a
takeover or otherwise gain control by, for example, issuing those shares in
private placements to purchasers who might side with our board of directors in
opposing a hostile takeover bid.
PREFERRED STOCK. The existence of authorized but unissued preferred stock
could reduce our attractiveness as a target for an unsolicited takeover bid
since we could, for example, issue shares of the preferred stock to parties that
might oppose such a takeover bid or issue shares of the preferred stock
containing terms the potential acquiror may find unattractive. This ability may
have the effect of delaying or preventing a change of control, may discourage
bids for our common stock at a premium over the market price of our common
stock, and may adversely affect the market price of, and the voting and the
other rights of the holders of, our common stock.
CLASSIFIED BOARD OF DIRECTORS AND RELATED PROVISIONS. Our certificate of
incorporation provides that our board of directors must be divided into three
classes of directors (each class containing approximately one-third of the total
number of directors) serving staggered three-year terms. As a result,
approximately one-third of our board of directors will be elected each year.
This classified board provision will prevent a third party who acquires control
of a majority of our outstanding voting stock from obtaining control of our
board of directors until the second annual stockholder meeting following the
date the acquiror obtains the controlling interest. The number of directors
constituting our board of directors is determined from time to time by our board
of directors. Our certificate of incorporation also provides that directors may
be removed only for "cause" and by the affirmative vote of the holders of a
majority of all outstanding voting stock entitled to vote. This provision, in
conjunction with the provisions of our certificate of incorporation authorizing
our board of directors to fill vacancies on the board, will prevent stockholders
from removing incumbent directors without cause and filling the resulting
vacancies with their own nominees.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS. Our certificate
of incorporation provides that stockholder action can be taken only at an annual
or special meeting of stockholders and cannot be taken by written consent in
lieu of a meeting. Our certificate of incorporation also provides that, except
as otherwise required by law, special meetings of the stockholders can only be
called by a majority of our entire board of directors or our president.
Stockholders may not call a special meeting or require that our board of
directors call a special meeting of stockholders.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINEES. Our bylaws provide that, if one of our stockholders desires to submit
a proposal or nominate persons for election as directors at an annual
stockholders' meeting, the stockholder's written notice must be received by us
not less than 120 days prior to the anniversary date of the date of the proxy
statement for the immediately preceding annual meeting of stockholders. However,
if the annual meeting is called for a date that is not within 30 days before or
after such anniversary date, notice by a stockholder must be received by us not
later than the close of business on the 10th day following the day on which
public disclosure of the date of the annual meeting was made. The notice must
describe the proposal or nomination and set forth the name and address of, and
stock held of record and beneficially by, the stockholder. Notices of
stockholder proposals or nominations must set forth the reasons for the proposal
or nomination and any material interest of the stockholder in the proposal or
nomination and a representation that the stockholder intends to appear in person
or by proxy at the annual meeting. Director nomination notices must set forth
the name and address of the nominee, arrangements between the stockholder and
the nominee and other information required under Regulation 14A of the Exchange
Act. The presiding officer of the meeting may refuse to acknowledge a proposal
or nomination not made in compliance with the procedures contained in our
bylaws. The advance notice requirements regulating stockholder nominations and
proposals may have the effect of precluding a contest for the election of
directors or the introduction of a stockholder proposal if the requisite
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procedures are not followed and may discourage or deter a third-party from
conducting a solicitation of proxies to elect its own slate of directors or to
introduce a proposal.
VOTING REQUIREMENTS ON AMENDING OUR CERTIFICATE OF INCORPORATION OR
BYLAWS. Our certificate of incorporation and our bylaws provide that amendments
to certain provisions of our bylaws, including those related to stockholder
proposals and calling special meetings of stockholders, must be approved by both
our board of directors and by the vote, at a regular or special stockholders'
meeting, of the holders of at least two-thirds of the votes entitled to be cast
by the holders of all our capital stock then entitled to vote. All other
amendments to our bylaws require either: (i) approval by a majority of our
entire board of directors (without stockholder consent) or (ii) the vote, at a
regular or special stockholders' meeting, of the holders of at least two-thirds
of the votes entitled to be cast by the holders of all our capital stock then
entitled to vote. In addition our certificate of incorporation provides that
amendments to certain provisions of our certificate of incorporation, including
those relating to the classified board, removal of directors, calling special
meetings and no stockholder action by written consent, must be approved by the
vote, at a regular or special stockholders' meeting, of the holders of at least
two-thirds of the votes entitled to be cast by the holders of all of our capital
stock then entitled to vote (in addition to the approval of our board of
directors).
BUSINESS COMBINATION STATUTE. Following the offering, we will be subject to
Section 203 of the Delaware General Corporation Law, an anti-takeover law. In
general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a business combination with an interested stockholder for a period
of three years following the date the person became an interested stockholder,
unless the business combination or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a
"business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
Generally, an "interested stockholder" is a person who, together with affiliates
and associates, owns or within three years prior to the determination of
interested stockholder status did own, 15% or more of a corporation's voting
stock. Because we were not subject to Section 203 prior to the offering, none of
our current stockholders would as of the time of the offering be considered an
interested stockholder.
LIMITATIONS ON DIRECTOR LIABILITY
Under the Delaware General Corporation Law, we may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation),
by reason of the fact that he or she is or was our director, officer, employee
or agent, or is or was serving at our request as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
such action, suit or proceeding if he or she acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to our best interests,
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his or her conduct was unlawful.
In addition, Section 102(b)(7) of the Delaware General Corporation Law
provides that a certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law (relating to liability for
unauthorized acquisitions or redemptions of, or dividends on, capital stock), or
(iv) for any transaction from which the director derived an improper personal
benefit. Our certificate of incorporation contains the provisions permitted by
Section 102(b)(7) of the Delaware General Corporation Law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe Trust
Company, N.A.
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FEDERAL INCOME AND ESTATE TAX
CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a description of the material United States federal income
and estate tax consequences of the ownership and disposition of our common stock
by non-U.S. holders. As used herein, "non-U.S. holder" means any person or
entity that holds our common stock, other than:
- an individual citizen or resident of the U.S.;
- a corporation or partnership created or organized in or under the laws of
the U.S., or of any state of the U.S. or the District of Columbia, other
than any partnership treated as foreign under U.S. Treasury Regulations;
- an estate the income of which is includable in gross income for U.S.
federal income tax purposes regardless of its source; or
- (1) a trust if a court within the U.S. is able to exercise primary
supervision over the administration of the trust and if one or more U.S.
persons have the authority to control all substantial decisions of the
trust, or (2) a trust which has made an election to be treated as a United
States person.
The summary is based on provisions of the Internal Revenue Code, existing,
temporary and proposed U.S. Treasury Regulations promulgated thereunder and
administrative and judicial interpretations of each, all as of the date hereof
and all of which are subject to change, possibly on a retroactive basis. We
assume in the summary that a non-U.S. holder holds shares of our common stock as
a capital asset within the meaning of Section 1221 of the Internal Revenue Code
(generally property held for investment). This summary is for general
information only. It does not address aspects of U.S. federal taxation other
than income and estate taxation. This summary does not discuss all the tax
consequences that may be relevant to a non-U.S. holder in light of the holder's
particular circumstances, nor does it consider any specific facts or
circumstances that may apply to a non-U.S. holder subject to special treatment
under the U.S. federal income tax laws. In particular, this summary does not
address the tax treatment of special classes of non-U.S. holders, such as banks,
insurance companies, tax-exempt entities, financial institutions,
broker-dealers, persons holding our common stock as part of a hedging or
conversion transaction or as part of a "straddle," or U.S. expatriates. In
addition, this summary does not address any state, local, or foreign tax
considerations that may be relevant to a non-U.S. holder's decision to purchase
shares of our common stock.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE
PARTICULAR U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES, AS WELL AS OTHER
U.S. FEDERAL, STATE, AND LOCAL TAX CONSEQUENCES, AND THE NON-U.S. TAX
CONSEQUENCES, TO THEM OF OWNING AND DISPOSING OF SHARES OF OUR COMMON STOCK.
INCOME TAX
DIVIDENDS
If we pay dividends on our common stock, those payments will constitute
dividends for U.S. tax purposes to the extent paid from our current or
accumulated earnings and profits, as determined under U.S. income tax
principles. To the extent those dividends exceed our current and accumulated
earnings and profits, the dividends will constitute a return of capital and
first reduce a holder's basis, but not below zero, and then will be treated as
gain from the sale of stock.
In general, dividends we pay to a non-U.S. holder will be subject to U.S.
withholding tax at a 30% rate of the gross amount (or a lower rate prescribed by
an applicable income tax treaty) unless the dividends are effectively connected
with a trade or business carried on by the non-U.S. holder within the United
States and, if a treaty applies, are attributable to a permanent establishment
of the non-U.S.
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<Page>
holder within the United States. Dividends effectively connected with such a
U.S. trade or business, and, if a treaty applies, attributable to such a
permanent establishment of a non-U.S. holder, generally will not be subject to
U.S. withholding tax if the non-U.S. holder files certain forms, including
Internal Revenue Service Form W-8ECI (or any successor form), with the payor of
the dividend, and generally will be subject to U.S. federal income tax on a net
income basis, in the same manner as if the non-U.S. holder were a resident of
the United States. A non-U.S. holder that is a corporation may be subject to an
additional branch profits tax at a rate of 30% (or such lower rate as may be
specified by an applicable income tax treaty) on the repatriation or deemed
repatriation from the U.S. of its "effectively connected earnings and profits,"
subject to certain adjustments and exceptions. Under applicable Treasury
Regulations a non-U.S. holder (including, in certain cases of non-U.S. holders
that are entities, the owner or owners of such entities) will be required to
satisfy certain certification requirements in order to claim a reduced rate of
withholding pursuant to an applicable income tax treaty.
DISPOSITION OF OUR COMMON STOCK
Generally, non-U.S. holders will not be subject to U.S. federal income tax,
or withholding thereof, in respect of gain recognized on a disposition of our
common stock unless:
- the gain is effectively connected with the holder's conduct of a trade or
business within the U.S., or if a tax treaty applies, is attributable to a
permanent establishment or fixed base of the holder in the U.S.; in any
such case gain will be subject to regular graduated U.S. income tax rates
and the branch profits tax described above may also apply if the non-U.S.
holder is a corporation;
- in the case of a non-U.S. holder who is a non-resident alien individual
and holds our common stock as a capital asset, the holder is present in
the U.S. for 183 or more days in the taxable year of the sale and other
conditions are met;
- we are or have been a "United States real property holding corporation"
for U.S. federal income tax purposes and certain other conditions are met;
we do not believe we are or have been a United States real property
holding corporation and do not expect to become one in the future; or
- the holder is subject to tax pursuant to U.S. federal income tax
provisions applicable to certain U.S. expatriates.
ESTATE TAX
If an individual non-U.S. holder owns, or is treated as owning, our common
stock at the time of his or her death, such stock would generally be includable
in the individual's gross estate for U.S. federal estate tax purposes. In such
case, our common stock may be subject to U.S. federal estate tax imposed on the
estates of nonresident aliens, in the absence of a contrary provision contained
in an applicable estate tax treaty.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, we must report annually to the IRS and to each non-U.S. holder
the amount of dividends that we paid to a holder, and the amount of tax that we
withhold on those dividends. These reporting requirements apply regardless of
whether withholding was reduced or eliminated by an applicable tax treaty. This
information may also be made available to the tax authorities of a country in
which the non-U.S. holder resides or is established.
Dividends paid on our common stock to a non-U.S. holder will generally be
subject to backup withholding tax at a 30% rate, if the holder falls to
establish an exemption or to furnish other information (which is generally
provided by furnishing a properly executed IRS Form W-8BEN or any successor
form).
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Payments of proceeds from the sale of our common stock by a non-U.S. holder
made to or through a U.S. office of a broker are generally subject to both
information reporting and backup withholding tax unless the holder certifies its
non-U.S., status under penalties of perjury or otherwise establishes entitlement
to an exemption (for example, that it is a corporation) and the broker has no
actual knowledge to the contrary. Payments of proceeds from the sale of our
common stock by a non-U.S. holder made to or through a non-U.S. office of a
broker generally will not be subject to information reporting or backup
withholding. However, payments made to or through certain non-U.S. offices,
including the non-U.S. offices of a U.S. broker and foreign brokers with certain
types of connections to the U.S. are generally subject to information reporting,
but not backup withholding, unless the holder certifies its non-U.S. status
under penalties of perjury or otherwise establishes entitlement to an exemption.
Backup withholding is not an additional tax. A non-U.S. holder may obtain a
refund of any excess amounts withheld under the backup withholding rules by
filing an appropriate claim for refund with the IRS.
Non-U.S. holders should consult their tax advisors regarding the application
of information reporting and backup withholding in their particular situation,
including the availability of and procedure for obtaining an exemption from
backup withholding under current U.S. Treasury Regulations.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated November 21, 2002, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation and Jefferies &
Company, Inc. are acting as representatives, the following respective numbers of
shares of common stock.
<Table>
<Caption>
NUMBER OF
SHARES
UNDERWRITER ---------
Credit Suisse First Boston Corporation...................... 3,659,250
Jefferies & Company, Inc.................................... 1,440,750
Advest, Inc................................................. 150,000
Cochran, Caronia & Co....................................... 150,000
Dowling & Partners Securities, LLC.......................... 150,000
Invemed Associates LLC...................................... 150,000
Janney Montgomery Scott LLC................................. 150,000
Keefe, Bruyette & Woods, Inc................................ 150,000
---------
Total..................................................... 6,000,000
=========
</Table>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 900,000 additional shares at the initial public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a selling concession of $0.5040 per share. The
underwriters and selling group members may allow a discount of $0.10 per share
on sales to other broker/dealers. After the initial public offering, the
representatives may change the public offering price and concession and discount
to broker/dealers.
The calculations of total underwriting discounts and commissions in the
following table do not include 333,334 shares being sold in this offering to
certain of our existing stockholders who are, with one exception, individuals
who work for The Jordan Company, at a price equal to the initial public offering
price of $12.00 per share. These shares will be subject to the lock-up agreement
described below and restricted to the extent required by the Conduct Rules of
the National Association of Securities Dealers, Inc. from sale, transfer,
assignment, pledge or hypothecation for a period of three months following the
date of this prospectus. The underwriters will not receive any underwriting
discounts or commissions on these shares, resulting in proceeds to us of
$4,000,008. The following table summarizes the compensation and estimated
expenses we will pay:
<Table>
<Caption>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
Underwriting discounts and commissions
paid by us............................ $0.84 $0.84 $5,040,000 $5,796,000
Expenses payable by us.................. $0.42 $0.36 $2,500,000 $2,500,000
</Table>
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The representatives have informed us that the underwriters do not expect
discretionary sales to exceed 5% of the shares of common stock being offered.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any offer, sale, pledge, disposition or filing,
without the prior written consent of Credit Suisse First Boston Corporation for
a period of 180 days after the date of this prospectus. However, during this
180-day period, we may register shares of our common stock on Form S-8 under the
Securities Act, grant options to purchase shares of our common stock under our
stock option plan (so long as such options are not exercisable within the
180-day period) and issue shares upon the exercise of stock options outstanding
on the date of this prospectus.
Our officers and directors and all holders of our outstanding shares of
common stock have agreed that they will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any shares of our common
stock or securities convertible into or exchangeable or exercisable for any
shares of our common stock, enter into a transaction that would have the same
effect, or enter into any swap, hedge or other arrangement that transfers, in
whole or in part, any of the economic consequences of ownership of our common
stock, whether any of these transactions are to be settled by delivery of our
common stock or other securities, in cash or otherwise, or publicly disclose the
intention to make any offer, sale, pledge or disposition, or to enter into any
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation until 180 days after
the date of this prospectus.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments that the underwriters may be required
to make in that respect.
Our common stock has been approved for listing on The Nasdaq Stock Market's
National Market under the symbol "SAFT."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price was determined by negotiation between
us and the underwriters. The principal factors considered in determining the
initial public offering price included:
- our future prospects and those of our industry in general;
- our sales, earnings and other financial and operating information in
recent periods; and
- the price-earnings ratios, price-book value ratios, market prices of
securities and financial and operating information of companies engaged in
activities similar to ours.
We cannot be sure that the initial public offering price will correspond to
the price at which the common stock will trade in the public market following
this offering or that an active trading market for the common stock will develop
and continue after this offering.
In connection with the offering, the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short
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position may be either a covered short position or a naked short position.
In a covered short position, the number of shares over-allotted by the
underwriters is not greater than the number of shares that they may
purchase in the over-allotment option. In a naked short position, the
number of shares involved is greater than the number of shares in the
over-allotment option. The underwriters may close out any covered short
position by either exercising their over-allotment option and/or
purchasing shares in the open market.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option, a naked short position, the position
can only be closed out by buying shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned
that there could be downward pressure on the price of the shares in the
open market after pricing that could adversely affect investors who
purchase in the offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may have the effect of raising or maintaining the market price of our common
stock or preventing or retarding a decline in the market price of the common
stock. As a result the price of our common stock may be higher than the price
that might otherwise exist in the open market. These transactions may be
effected on The Nasdaq National Market and, if commenced, may be discontinued at
any time.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters or selling group members, if any,
participating in this offering. The representatives may agree to allocate a
number of shares to underwriters and selling group members for sale to their
online brokerage account holders. Internet distributions will be allocated by
the underwriters and selling group members that will make internet distributions
on the same basis as other allocations.
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NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are made. Any resale of the common stock in Canada must
be made under applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made under available
statutory exemptions or under a discretionary exemption granted by the
applicable Canadian securities regulatory authority. Purchasers are advised to
seek legal advice prior to any resale of the common stock.
REPRESENTATIONS OF PURCHASERS
By purchasing common stock in Canada and accepting a purchase confirmation a
purchaser is representing to us and the dealer from whom the purchase
confirmation is received that:
- the purchaser is entitled under applicable provincial securities laws to
purchase the common stock without the benefit of a prospectus qualified
under those securities laws;
- where required by law, that the purchaser is purchasing as principal and
not as agent; and
- the purchaser has reviewed the text above under Resale Restrictions.
RIGHTS OF ACTION--ONTARIO PURCHASERS ONLY
Under Ontario securities legislation, a purchaser who purchases a security
offered by this prospectus during the period of distribution will have a
statutory right of action for damages, or while still the owner of the shares,
for rescission against us in the event that this prospectus contains a
misrepresentation. A purchaser will be deemed to have relied on the
misrepresentation. The right of action for damages is exercisable not later than
the earlier of 180 days from the date the purchaser first had knowledge of the
facts giving rise to the cause of action and three years from the date on which
payment is made for the shares. The right of action for rescission is
exercisable not later than 180 days from the date on which payment is made for
the shares. If a purchaser elects to exercise the right of action for
rescission, the purchaser will have no right of action for damages against us.
In no case will the amount recoverable in any action exceed the price at which
the shares were offered to the purchaser and if the purchaser is shown to have
purchased the securities with knowledge of the misrepresentation, we will have
no liability. In the case of an action for damages, we will not be liable for
all or any portion of the damages that are proven to not represent the
depreciation in value of the shares as a result of the misrepresentation relied
upon. These rights are in addition to, and without derogation from, any other
rights or remedies available at law to an Ontario purchaser. The foregoing is a
summary of the rights available to an Ontario purchaser. Ontario purchasers
should refer to the complete text of the relevant statutory provisions.
ENFORCEMENT OF LEGAL RIGHTS
All of our directors and officers as well as the experts named herein may be
located outside of Canada and, as a result, it may not be possible for Canadian
purchasers to effect service of process within Canada upon us or those persons.
All or a substantial portion of our assets and the assets of those persons may
be located outside of Canada and, as a result, it may not be possible to satisfy
a judgment against us or those persons in Canada or to enforce a judgment
obtained in Canadian courts against us or those persons outside of Canada.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and about the eligibility of the common
stock for investment by the purchaser under relevant Canadian legislation.
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VALIDITY OF COMMON STOCK
The validity of the shares of common stock offered hereby will be passed
upon for us by LeBoeuf, Lamb, Greene & MacRae, L.L.P., a limited liability
partnership including professional corporations, and for the underwriters by
Dewey Ballantine LLP, New York, New York.
EXPERTS
The consolidated financial statements of Safety Insurance Group, Inc. and
its subsidiaries as of December 31, 2001 and 2000, for the successor period
October 16, 2001 through December 31, 2001, for the predecessor period
January 1, 2001 through October 15, 2001 and for the predecessor years ended
December 31, 2000 and 1999 included in this prospectus have been so included in
reliance on the reports of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered in this prospectus. This prospectus, filed as part of the registration
statement, does not contain all of the information set forth in the registration
statement and its exhibits and schedules, portions of which have been omitted as
permitted by the rules and regulations of the SEC. For further information about
us and our common stock, we refer you to the registration statement and to its
exhibits and schedules. Statements in this prospectus about the contents of any
contract, agreement or other document are not necessarily complete and, in each
instance, we refer you to the copy of such contract, agreement or document filed
as an exhibit to the registration statement, with each such statement being
qualified in all respects by reference to the document to which it refers.
Anyone may inspect the registration statement and its exhibits and schedules
without charge at the public reference facilities the SEC maintains at 450 Fifth
Street, N.W., Washington, D.C. 20549. You may obtain copies of all or any part
of these materials from the SEC upon the payment of certain fees prescribed by
the SEC. You may obtain further information about the operation of the SEC's
Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also inspect
these reports and other information without charge at a web site maintained by
the SEC. The address of this site is http://www.sec.gov.
Upon completion of this offering, we will become subject to the
informational requirements of the Exchange Act and will be required to file
reports, proxy statements and other information with the SEC. You will be able
to inspect and copy these reports, proxy statements and other information at the
public reference facilities maintained by the SEC at the address noted above.
You also will be able to obtain copies of this material from the Public
Reference Room of the SEC as described above, or inspect them without charge at
the SEC's web site. We intend to furnish our stockholders with annual reports
containing consolidated financial statements audited by an independent
accounting firm.
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SAFETY INSURANCE GROUP, INC.
TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE(S)
----------------
CONSOLIDATED FINANCIAL STATEMENTS:
Reports of Independent Accountants........................ F-2-F-3
Statements of Operations.................................. F-4
Balance Sheets............................................ F-5
Statements of Changes in Stockholders' Equity............. F-6
Statements of Comprehensive Income........................ F-7
Statements of Cash Flows.................................. F-8
Notes to Consolidated Financial Statements................ F-9-F-28
INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Statements of Operations.................................. F-29
Balance Sheets............................................ F-30
Statements of Changes in Stockholders' Equity............. F-31
Statements of Comprehensive Income........................ F-32
Statements of Cash Flows.................................. F-33
Notes to Interim Condensed Consolidated Financial
Statements (Unaudited).................................... F-34-F-39
</Table>
F-1
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Safety Insurance Group, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, comprehensive income, changes in
stockholders' equity and cash flows present fairly, in all material respects,
the financial position of Safety Insurance Group, Inc. and its subsidiaries at
December 31, 2001 and the results of their operations and their cash flows for
the period October 16, 2001 through December 31, 2001 in conformity with
accounting practices generally accepted in the United States of America. These
financial statements are the responsibility of management; our responsibility is
to express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
May 31, 2002, except
as to Note 2, which is as of November 12, 2002
F-2
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Safety Insurance Group, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, comprehensive income, changes in
stockholders' equity and cash flows present fairly, in all material respects,
the financial position of Safety Insurance Group, Inc. and its subsidiaries
(formerly Thomas Black Corporation) at December 31, 2000 and the results of
their operations and their cash flows for the period January 1, 2001 through
October 15, 2001 and for the years ended December 31, 2000 and 1999, in
conformity with accounting practices generally accepted in the United States of
America. These financial statements are the responsibility of management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 15, 2002
F-3
<Page>
SAFETY INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<Table>
<Caption>
PREDECESSOR PREDECESSOR SUCCESSOR
------------------- ----------- ------------
YEAR ENDED JANUARY 1- OCTOBER 16-
DECEMBER 31, OCTOBER 15, DECEMBER 31,
------------------- ----------- ------------
1999 2000 2001 2001
-------- -------- ----------- ------------
Premiums earned, net............................. $300,020 $381,413 $347,098 $ 100,175
Investment income................................ 23,870 26,889 22,246 5,359
Net realized investment gains (losses)........... 8,102 (1,246) (766) (4,284)
Finance and other service income................. 10,989 12,656 10,559 2,950
-------- -------- -------- ----------
Total income............................... 342,981 419,712 379,137 104,200
-------- -------- -------- ----------
Losses and loss adjustment expenses.............. 225,241 275,139 276,383 75,559
Underwriting, operating and related expenses..... 91,357 115,567 89,297 30,212
Transaction expenses............................. -- 406 5,605 3,874
Interest expense................................. 1,418 1,071 550 1,823
-------- -------- -------- ----------
Total expenses............................. 318,016 392,183 371,835 111,468
-------- -------- -------- ----------
Income (loss) before income taxes................ 24,965 27,529 7,302 (7,268)
Income tax expense (benefit)..................... 8,667 8,255 1,678 (1,666)
-------- -------- -------- ----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND
PREFERRED STOCK DIVIDENDS...................... 16,298 19,274 5,624 (5,602)
Excess of fair value of acquired net assets over
cost........................................... -- -- -- 117,523
-------- -------- -------- ----------
NET INCOME................................. $ 16,298 $ 19,274 $ 5,624 $ 111,921
======== ======== ======== ==========
Dividends on mandatorily redeemable preferred
stock.......................................... -- -- -- (280)
-------- -------- -------- ----------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS...... $ 16,298 $ 19,274 $ 5,624 $ 111,641
======== ======== ======== ==========
EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) available to common
stockholders before extraordinary item
Basic.......................................... $ 19.95 $ 22.50 $ 6.26 $ (1.07)
======== ======== ======== ==========
Diluted........................................ $ 19.95 $ 22.50 $ 6.26 $ (1.07)
======== ======== ======== ==========
Exraordinary item
Basic.......................................... $ -- $ -- $ -- $ 21.29
======== ======== ======== ==========
Diluted........................................ $ -- $ -- $ -- $ 21.29
======== ======== ======== ==========
Net income available to common stockholders
Basic.......................................... $ 19.95 $ 22.50 $ 6.26 $ 20.23
======== ======== ======== ==========
Diluted........................................ $ 19.95 $ 22.50 $ 6.26 $ 20.23
======== ======== ======== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING
Basic.......................................... 816,800 856,800 898,300 5,519,500
======== ======== ======== ==========
Diluted........................................ 816,800 856,800 898,300 5,810,000
======== ======== ======== ==========
</Table>
The accompanying notes are an integral part of these financial statements.
F-4
<Page>
SAFETY INSURANCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
PREDECESSOR SUCCESSOR
DECEMBER 31, DECEMBER 31,
2000 2001
------------ ------------
ASSETS:
Investment securities available for sale:
Bonds..................................................... $450,084 $507,292
Preferred stocks.......................................... 13,122 --
Common stocks............................................. 28,124 9,716
-------- --------
Total investment securities............................. 491,330 517,008
Cash and cash equivalents................................... 13,676 12,278
Accounts receivable, net of allowance for doubtful accounts
of $225,647 in 2001 and $89,850 in 2000................... 105,834 118,244
Accrued investment income................................... 5,721 5,958
Taxes receivable............................................ 1,539 4,224
Notes receivable............................................ 1,100 --
Receivable from reinsurers related to paid loss and loss
adjustment expenses....................................... 38,935 38,454
Receivable from reinsurers related to unpaid loss and loss
adjustment expenses....................................... 90,297 75,179
Prepaid reinsurance premiums................................ 19,870 23,121
Deferred policy acquisition costs........................... 27,630 31,598
Deferred income taxes....................................... 17,033 18,141
Equipment and leasehold improvements, net................... 3,954 10
Deferred debt issuance costs................................ -- 2,679
Equity and deposits in pools................................ 15,871 11,720
Other assets................................................ 549 560
-------- --------
Total assets.............................................. $833,339 $859,174
======== ========
LIABILITIES:
Loss and loss adjustment expense reserves................... $302,131 $302,556
Unearned premium reserves................................... 214,349 235,794
Accounts payable and accrued liabilities.................... 45,491 40,828
Accrued transaction expenses................................ -- 2,650
Outstanding claims drafts................................... 16,751 19,015
Payable to reinsurers....................................... 27,857 27,129
Capital lease obligations................................... 426 40
Debt........................................................ 13,383 99,500
-------- --------
Total liabilities......................................... 620,388 727,512
-------- --------
MANDATORILY REDEEMABLE PREFERRED STOCK...................... -- 22,680
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY:
Common stock: $0.01 par value; 9,296,000 shares authorized,
5,810,000 outstanding..................................... -- 58
Capital stock: Class A common, $0.01 par value; 2,000,000
shares authorized; 1,514,000 shares issued and
outstanding............................................... 15 --
Additional paid-in capital.................................. 5,814 2,442
Accumulated other comprehensive income, net of taxes........ 1,653 (4,457)
Promissory notes receivable from management................. -- (702)
Retained earnings........................................... 221,350 111,641
-------- --------
228,832 108,982
Less:
Unearned ESOP shares...................................... (10,064) --
Treasury stock; 555,000 common shares at cost............. (5,817) --
-------- --------
Total stockholders' equity.............................. 212,951 108,982
-------- --------
Total liabilities, mandatorily redeemable preferred stock
and stockholders' equity.................................. $833,339 $859,174
======== ========
</Table>
The accompanying notes are an integral part of these financial statements.
F-5
<Page>
SAFETY INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($ IN THOUSANDS)
<Table>
<Caption>
ACCUMULATED PROMISSORY
OTHER NOTES
COMPREHENSIVE ADDITIONAL RECEIVABLE UNEARNED
COMMON INCOME/(LOSS), PAID-IN FROM RETAINED TREASURY ESOP
STOCK NET OF TAXES CAPITAL MANAGEMENT EARNINGS STOCK SHARES
-------- -------------- ---------- ------------ --------- -------- ---------
Balance at December 31, 1998........... $15 $ 8,822 $ 2,517 $ -- $ 185,778 $(5,817) $(20,167)
Net income............................. 16,298
Change in unearned ESOP shares......... 4,684
Additional paid-in capital............. 1,527
Other comprehensive income, net of
deferred federal income taxes........ (18,552)
--- ------- ------- ----- --------- ------- --------
Balance at December 31, 1999........... 15 (9,730) 4,044 -- 202,076 (5,817) (15,483)
--- ------- ------- ----- --------- ------- --------
Net income............................. 19,274
Change in unearned ESOP shares......... 5,419
Additional paid-in capital............. 1,770
Other comprehensive income, net of
deferred federal income taxes........ 11,383
--- ------- ------- ----- --------- ------- --------
Balance at December 31, 2000........... 15 1,653 5,814 -- 221,350 (5,817) (10,064)
--- ------- ------- ----- --------- ------- --------
Net income, January 1 to October 15,
2001................................. 5,624
Change in unearned ESOP shares......... 5,034
Sale of unearned ESOP shares........... (360) 5,030
Additional paid-in capital............. 5,642
Other comprehensive income, net of
deferred federal income taxes........ 6,597
--- ------- ------- ----- --------- ------- --------
Balance at October 15, 2001............ 15 8,250 11,096 -- 226,974 (5,817) --
Purchase transaction................... (15) (8,250) (11,096) -- (226,974) 5,817 --
Issuance of common stock and promissory
notes from management................ 58 2,442 (695)
Net income, October 16, 2001 to
December 31, 2001.................... 111,921
Accrued interest on promissory notes
from management...................... (7)
Accrued dividends on promissory notes
from management...................... (280)
Other comprehensive income, net of
deferred federal income taxes........ (4,457)
--- ------- ------- ----- --------- ------- --------
Balance at December 31, 2001........... $58 $(4,457) $ 2,442 $(702) $ 111,641 $ -- $ --
=== ======= ======= ===== ========= ======= ========
<Caption>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Balance at December 31, 1998........... $171,148
Net income............................. 16,298
Change in unearned ESOP shares......... 4,684
Additional paid-in capital............. 1,527
Other comprehensive income, net of
deferred federal income taxes........ (18,552)
--------
Balance at December 31, 1999........... 175,105
--------
Net income............................. 19,274
Change in unearned ESOP shares......... 5,419
Additional paid-in capital............. 1,770
Other comprehensive income, net of
deferred federal income taxes........ 11,383
--------
Balance at December 31, 2000........... 212,951
--------
Net income, January 1 to October 15,
2001................................. 5,624
Change in unearned ESOP shares......... 5,034
Sale of unearned ESOP shares........... 4,670
Additional paid-in capital............. 5,642
Other comprehensive income, net of
deferred federal income taxes........ 6,597
--------
Balance at October 15, 2001............ 240,518
Purchase transaction................... (240,518)
Issuance of common stock and promissory
notes from management................ 1,805
Net income, October 16, 2001 to
December 31, 2001.................... 111,921
Accrued interest on promissory notes
from management...................... (7)
Accrued dividends on promissory notes
from management...................... (280)
Other comprehensive income, net of
deferred federal income taxes........ (4,457)
--------
Balance at December 31, 2001........... $108,982
========
</Table>
The accompanying notes are an integral part of these financial statements.
F-6
<Page>
SAFETY INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ IN THOUSANDS)
<Table>
<Caption>
PREDECESSOR SUCCESSOR
PREDECESSOR YEAR JANUARY 1, OCTOBER 16,
ENDED DECEMBER 31, 2001 THROUGH 2001 THROUGH
------------------- OCTOBER 15, DECEMBER 31,
1999 2000 2001 2001
-------- -------- ------------ -------------
NET INCOME (LOSS)................................. $ 16,298 $19,274 $ 5,624 $111,921
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Change in unrealized holding gains (losses)..... (13,286) 10,573 6,099 (7,241)
Reclassification adjustment for gains (losses)
included in net income........................ (5,266) 810 498 2,784
-------- ------- ------- --------
Unrealized gains (losses) on securities
available for sale........................ (18,552) 11,383 6,597 (4,457)
COMPREHENSIVE INCOME (LOSS)....................... $ (2,254) $30,657 $12,221 $107,464
======== ======= ======= ========
</Table>
The accompanying notes are an integral part of these financial statements.
F-7
<Page>
SAFETY INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<Table>
<Caption>
PREDECESSOR PREDECESSOR SUCCESSOR
YEAR ENDED JANUARY 1, OCTOBER 16,
DECEMBER 31, 2001 THROUGH 2001 THROUGH
--------------------------- OCTOBER 15, DECEMBER 31,
1999 2000 2001 2001
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 16,298 $ 19,274 $ 5,624 $ 111,921
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary item........................................ -- -- -- (117,523)
Depreciation and amortization............................. 1,990 1,886 1,303 99
Amortization of bond premiums............................. 104 402 1,017 730
Provision for deferred income taxes....................... 846 (2,219) 1,018 (1,932)
Gains on sale of fixed assets............................. (26) (42) (16) --
Net realized (gains) losses on sale of investments........ (8,102) 1,246 766 4,284
ESOP compensation expense................................. 6,211 7,189 4,671 --
Changes in assets and liabilities:
Accounts receivable....................................... (13,222) (21,455) (28,318) 15,908
Accrued investment income................................. (1,123) (859) 339 (576)
Receivable from reinsurers................................ 4,234 10,376 21,647 (6,048)
Prepaid reinsurance premiums.............................. 4,224 9,602 (2,724) (527)
Deferred policy acquisition costs......................... (5,085) (6,541) (6,652) 2,685
Other assets.............................................. (1,180) (1,181) (6,802) 8,252
Loss and loss adjustment expense reserves................. 3,381 (13,096) 5,525 (5,100)
Unearned premium reserves................................. 26,717 39,016 38,113 (16,668)
Accounts payable and accrued liabilities.................. 7,621 5,990 (18,015) 13,351
Accrued transaction expenses.............................. -- -- 5,483 (2,833)
Payable to reinsurers..................................... (770) (5,579) (4,425) 3,698
Other liabilities......................................... (1,043) 3,769 (401) 2,279
--------- --------- --------- ---------
Net cash provided by operating activities................... 41,075 47,778 18,153 12,000
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Bonds purchased........................................... (798,939) (256,644) (259,159) (185,095)
Proceeds from sale of bonds............................... 361,541 191,176 219,399 146,090
Proceeds from maturities of bonds......................... 359,759 47,143 21,625 --
Stocks purchased.......................................... (39,475) (12,499) -- --
Proceeds from sale of stocks.............................. 84,864 9 -- 27,986
Fixed assets purchased.................................... (2,589) (2,213) (670) (11)
Proceeds from sale of fixed assets........................ 32 77 62 --
Purchase of TBC........................................... -- -- -- (121,097)
--------- --------- --------- ---------
Net cash used for investing activities...................... (34,807) (32,951) (18,743) (132,127)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in notes receivable.............................. 6 279 1,100 --
Payment of long-term debt................................. (4,500) (4,617) (13,382) --
Sale of unearned ESOP shares.............................. -- -- 4,670 --
Proceeds from issuance of common stock.................... -- -- -- 1,805
Proceeds from issuance of mandatorily redeemable preferred
stock................................................... -- -- -- 22,400
Net proceeds from issuance of debt........................ -- -- -- 96,722
Captial contribution...................................... -- -- 6,004 --
--------- --------- --------- ---------
Net cash provided from (used for) financing activities...... (4,494) (4,338) (1,608) 120,927
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING
PERIOD.................................................... 1,774 10,489 (2,198) 800
Cash and cash equivalents at beginning of year/period....... 1,413 3,187 13,676 11,478
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR/PERIOD............. $ 3,187 $ 13,676 $ 11,478 $ 12,278
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year/period for:
Federal and state income taxes.......................... 8,591 11,961 2,963 800
Interest................................................ 1,418 797 804 1
</Table>
The accompanying notes are an integral part of these financial statements.
F-8
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements have been prepared on the basis of
accounting principles generally accepted in the United States of America
("GAAP"). The consolidated financial statements include Safety Insurance
Group, Inc. and its subsidiaries (the "Company"). The subsidiaries consist of
Safety Insurance Company, Thomas Black Corporation, Safety Indemnity Insurance
Company, Thomas Black Insurance Agency, Inc. ("TBIA"), and RBS, Inc., TBIA's
holding company. The Company is a leading provider of personal lines property
and casualty insurance focused exclusively on the Massachusetts market. Its
principal product line is private passenger automobile insurance, which
accounted for 83.1% of its direct written premiums in 2001. The Company operates
through its insurance company subsidiaries, Safety Insurance Company and Safety
Indemnity Insurance Company. TBIA is the managing agent for Safety Insurance
Company and Safety Indemnity Insurance Company. All intercompany transactions
have been eliminated.
The accompanying consolidated financial statements have been revised from
those filed with the Securities and Exchange Commission on April 26, 2002 to
account for the Management Subscription Agreement and the Restricted Stock Plan,
as described in Note 6, as variable plans in accordance with EITF 00-23 "Issues
Related to the Accounting for Stock Compensation under APB Opinion 25 and FASB
Interpretation No. 44." The after tax impact of this revision was an increase in
the net loss before and after extraordinary item of $806,590 for the successor
period October 16, 2001 through December 31, 2001.
2. ACQUISITION AND IPO
The Company was incorporated on June 25, 2001, in the State of Delaware. On
October 16, 2001, the Company acquired (the "Acquisition") all of the issued and
outstanding common stock of Thomas Black Corporation ("TBC") and its property
and casualty subsidiaries for $121.1 million. In connection with the
Acquisition, an allocation of purchase price of $121.1 million was made to the
estimated fair values of the assets acquired and the liabilities assumed as of
the acquisition date of October 16, 2001 as follows (in millions):
<Table>
Assets:
Investments and cash........................................ $523.2
Accounts receivable......................................... 128.0
Reinsurance recoverables.................................... 107.6
Present value of future profits............................. 34.3
Deferred tax asset.......................................... 12.5
Other assets................................................ 58.2
------
Total..................................................... 863.8
------
Liabilities:
Loss and loss adjustment expenses........................... 307.6
Unearned premium reserves................................... 252.5
Debt........................................................ 8.0
Other liabilities........................................... 53.8
------
Total..................................................... 621.9
------
Estimated fair value of net assets acquired................. 241.9
------
Less: write-down of non-current
Non-financial assets
Property and leasehold improvements....................... $ (3.3)
------
Adjusted estimated fair value of net assets acquired........ 238.6
------
Excess of estimated fair value of net assets over purchase
price..................................................... $117.5
======
</Table>
F-9
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION AND IPO (CONTINUED)
In connection with financing the Acquisition, the Company incurred debt of
$99.5 million and issued 22,400 shares of Series A senior mandatorily redeemable
preferred stock at $1,000 per share. At October 16, 2001, the estimated fair
value of net assets acquired approximated their carrying values as net assets
are comprised primarily of investments, cash and short term receivables. The
excess of estimated fair value of net assets over purchase price of
$117.5 million was recorded as an extraordinary gain in accordance with
FAS 141, "Business Combinations." See Note 3 for the methodology used in
determining the fair value of loss and loss adjustment expense reserves.
Approximately 72% of the outstanding common stock of the Company is owned by
certain investors assembled by The Jordan Company, LLC, an investment firm that
sponsored the Acquisition. The remaining 28% is owned by executive management.
(See Note 12 regarding promissory notes received from management.) JZ Equity
Partners plc, a London-based publicly traded investment trust, owns
approximately 50% of the outstanding mandatorily redeemable preferred stock of
the Company; the other 50% is owned by third parties. The preferred stock is
cumulative, non-voting with a 6% dividend rate and is mandatorily redeemable on
October 16, 2012 or upon a change in control (See Note 9).
In connection with management's announced plan for the sale of its common
stock in a proposed initial public offering (the "IPO") in 2002, the Company has
changed its name to Safety Insurance Group, Inc. In conjunction with the IPO,
the Board of Directors of the Company declared a 23.24 for 1 common stock split
on November 12, 2002 in the form of a stock dividend that is anticipated to
become effective immediately after the time the Company files its amended and
restated certificate of incorporation, prior to the offering. In accordance with
the provisions of FAS 128, "Earnings Per Share", all earnings per share for the
successor period presented in the consolidated financial statements of the
Company for the successor period have been adjusted retroactively for the stock
split. The SARs and restricted shares referred to in Note 6 have been similarly
adjusted for the stock split.
The holders of the preferred stock have agreed in principle to amend the
terms of the preferred stock to cause it to automatically convert into common
stock upon the closing of the IPO at the IPO price (the "exchange"). Assuming an
IPO price of $13.50 per share (the midpoint of the price range set forth on the
cover page of the preliminary prospectus for the IPO), it is anticipated that
there will be 1.659 million additional common shares issued in connection with
the exchange.
On June 25, 2002, the Board of Directors of the Company adopted the 2002
Management Omnibus Incentive Plan ("Incentive Plan"). The Incentive Plan
provides for a variety of awards, including nonqualified stock options, stock
appreciation rights and restricted stock awards. On July 1, 2002, the Board
authorized the Company to grant 379,000 options to purchase shares of common
stock to certain employees and one nominee for director, pursuant to the
Incentive Plan. These grants will be effective as of the date of the IPO and at
an exercise price equal to the IPO price.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Cash equivalents consist of money market accounts which are stated at fair
value.
PREMIUMS AND UNEARNED PREMIUMS
Premiums are earned over the terms of the respective policies, which are
generally under one year. Unearned premiums represent the portion of premiums
written applicable to the unexpired terms of the policies.
F-10
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCE AND OTHER SERVICE INCOME
Finance and other service income includes revenues from premium installment
charges, which are recognized when earned.
ACCOUNTS RECEIVABLE
Amounts included in accounts receivable represent premiums and finance
charges on monthly installment billing. A substantial majority of the Company's
premiums are billed on a monthly installment basis.
LOSS AND LOSS ADJUSTMENT EXPENSES
Liabilities for loss and loss adjustment expenses ("LAE") include case basis
estimates for open claims reported prior to year-end and estimates of unreported
claims and claim adjustment expenses. The estimates are continually reviewed and
modified to reflect current conditions, and any resulting adjustments are
reflected in current operating results. Adjustments for anticipated salvage and
subrogation are recorded on incurred and reported and incurred but not reported
losses.
As noted in Note 2, in conjunction with the Acquisition, the assets and
liabilities acquired were valued at fair market value. Accordingly, loss and
loss adjustment expense reserves and related reinsurance recoverables on unpaid
losses as of October 16, 2001 are recorded at estimated fair value as at October
16, 2001 which approximated carrying value at that date. The fair value of the
Company's reserves for losses and LAE and related reinsurance recoverables was
estimated based on the present value of the expected underlying cash flows of
the loss and LAE reserves and reinsurance recoverables, and included a risk
premium and a profit and risk margin. In determining the fair value estimate,
management adjusted the Company's historical GAAP undiscounted net loss and LAE
reserves to present value assuming a 4% discount rate, which approximated the
U.S. Treasury rate on the date of the Acquisition. The discounting pattern was
actuarially developed from the Company's historical loss data. A profit and risk
margin of 6% was applied to the discounted loss and LAE reserves, to reflect
management's estimate of the cost the Company would incur to reinsure the full
amount of its net loss and LAE reserves with a third party reinsurer. This
margin was based upon management's assessment of the uncertainty inherent in the
net loss and LAE reserves and their knowledge of the reinsurance marketplace.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
As part of purchase accounting, the carrying value of all equipment and
leasehold improvements held on the date of the Acquisition was reduced to zero.
Subsequent purchases of equipment and leasehold improvements are carried at cost
less accumulated depreciation. Maintenance and repairs are charged to expense as
incurred; improvements are capitalized.
Methods of depreciation and useful lives by asset category are as follows:
<Table>
<Caption>
LIFE DEPRECIATION METHOD
--------- ------------------------------
Automobiles........................................ 3 years Straight-line
Data processing equipment.......................... 3/5 years Double-declining balance
Equipment.......................................... 5 years Straight-line
Furniture and fixtures............................. 7 years Straight-line
Leasehold improvements............................. 10 years Straight-line
</Table>
F-11
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED ACQUISITION COSTS
Amounts which vary with and are primarily related to acquiring new and
renewal business, principally commissions and premium taxes, are deferred and
amortized ratably over the effective period of the policies. All other
acquisition expenses are charged to expense as incurred. Deferred acquisition
costs are reviewed for any potential premium deficiency at each balance sheet
date. A premium deficiency represents future estimated losses, loss adjustment
expenses and amortization of deferred acquisition costs in excess of the related
unearned premiums. If a premium deficiency is determined to exist, the amount
thereof is deducted from the Company's deferred acquisition cost asset in
respect of the relevant business and is charged to earnings in the current
period as an expense. To the extent the amount of the premium deficiency exceeds
the related deferred acquisition cost balance, the deficiency is recorded as a
liability and is charged to earnings in the current period. Premium deficiency
expense during 2001, 2000 and 1999 amounted to $422,403, $471,523 and $509,336,
respectively, related to assumed business from the Massachusetts residual
markets facility, with respect to which the Company has no deferred acquisition
cost asset and thus was recorded as a liability.
EQUITY AND DEPOSITS IN POOLS
Equity and deposits in pools represents the net receivable cash amounts due
from the residual market mechanisms for automobile (CAR) and homeowner
(Massachusetts Property Insurance Underwriting Association plan) insurance in
Massachusetts. See Note 10 for a discussion of the Company's accounting for
amounts ceded to and assumed from residual markets.
INCOME TAXES
The Company and its subsidiaries file a consolidated United States federal
income tax return. Due to the Acquisition (see Note 2), Thomas Black Corporation
and its subsidiaries will file a consolidated United States federal income tax
return for the stub period prior to the Acquisition. For the stub period
subsequent to the Acquisition, Thomas Black Corporation and its subsidiaries
will join in filing a consolidated United States federal income tax return with
the Company as the new parent of the consolidated group.
Deferred income taxes are generally recognized when assets and liabilities
have different values for financial statement and tax reporting purposes, and
for other temporary taxable and deductible differences as defined by Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes". A
valuation allowance is established where management has assessed that it is more
likely than not that the Company will not be able to utilize the full deferred
tax asset.
SEGMENTS
The Company comprises one business segment: property and casualty insurance
operations.
INVESTMENTS
Investments in debt and equity securities available-for-sale are reported at
fair value. Fair values are derived from external market quotations. Unrealized
gains or losses on debt securities, reported at fair value, are excluded from
earnings and reported in a separate component of stockholders' equity, net of
federal income taxes, until realized. Realized gains or losses on the sale or
maturity of investments are determined on the basis of the specific cost
identification method and are credited or charged to investment income. Debt and
equity securities that experience declines in value that are
F-12
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
other than temporary are written down with a corresponding charge to net
realized losses on investments. As part of purchase accounting, the cost of all
securities held on the date of the Acquisition was increased by $12.7 million to
reset the cost to fair value. Investment income is recognized on an accrual
basis of accounting. Bonds not backed by other loans are amortized using the
interest method. Loan-backed bonds and structured securities are amortized using
the interest method and significant changes in estimated cash flows from the
original purchase assumptions are accounted for using the retrospective method.
TRANSACTION EXPENSES
Transaction expenses in the predecessor periods represent costs incurred by
the seller and paid by the Company in connection with the Acquisition. These
costs were non-recurring in nature and did not result from ongoing insurance
operations. Such seller costs primarily included transaction expenses in the
predecessor period related primarily to transaction bonuses to employees, fees
paid to TBC's investment banker and legal fees.
Transaction expenses in the successor period represent those costs incurred
by the buyer that are not capitalized as part of the Acquisition as such costs
primarily relate to internal costs associated with the Acquisition.
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs represent those costs incurred by the Company
in connection with securing financing for the Acquisition. These costs include
closing and arranger's fees and are being amortized over the life of the related
loans.
STOCK-BASED COMPENSATION
As described in Note 6, certain members of management were granted stock
appreciation rights ("SARs") on October 16, 2001. The SARs vest 20% per annum
commencing on December 31, 2002. The SARs have been accounted for in accordance
with the provisions of FASB Interpretation No. 28 "Accounting for Stock
Appreciation Rights and Other Variable Stock Options or Awards Plans"
("FIN 28"). Under FIN 28, compensation expense is accrued over the period or
periods in which the employee performs the related services and is recognized to
the extent that the fair market value of the Company's stock exceeds the
exercise price of the SARs. Changes in the fair market value of the stock in an
accounting period, to the extent it still exceeds the exercise price, are
recorded as compensation expense.
PROMISSORY NOTES RECEIVED FROM MANAGEMENT
In connection with the Acquisition, the Company obtained promissory notes
from the executive management team to finance management's purchase of the
Company's common stock, including the restricted stock purchased by management.
In accordance with the provisions of EITF 85-1, "Classifying Notes Received
for Capital Stock", all outstanding principal and accrued interest related to
these notes are recorded as contra-equity in the consolidated financial
statements.
See Note 12 for terms of promissory notes received from management.
F-13
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share ("EPS") amounts are based on the weighted
average number of common shares outstanding. Diluted earnings per share amounts
are based on the weighted average number of common shares and the net effect of
potentially dilutive common shares outstanding. Management has determined that
290,500 shares of restricted stock held by management are potentially dilutive
for the successor period. For the successor period ended October 16, 2001
through December 31, 2001, management restricted stock was antidilutive due to
the net loss before extraordinary item. In accordance with the provisions of
FAS 128, EPS is determined based upon net income, before and after any
extraordinary items, less any declared or accrued dividends on the mandatorily
redeemable preferred stock. In addition, EPS is calculated for an extraordinary
item. EPS for the successor period has been retroactively restated for the stock
split (see Note 2).
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions
involving various types of financial instruments, including investments in debt
and equity securities. All 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.
STATUTORY ACCOUNTING PRACTICES
The Company's insurance subsidiaries, domiciled in the Commonwealth of
Massachusetts, prepare statutory financial statements in accordance with the
accounting practices prescribed or permitted by the Division of Insurance of the
Commonwealth of Massachusetts (the "Division"). Prescribed statutory accounting
practices are those practices that are incorporated directly or by reference in
state laws, regulations, and general administrative rules applicable to all
insurance enterprises domiciled in a particular state. Permitted statutory
accounting practices include practices not prescribed by the Division, but
allowed by the Division. (See Note 14.)
RECLASSIFICATIONS
Certain 2000 and 1999 amounts have been reclassified to conform to the 2001
presentation.
F-14
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS
DEBT SECURITIES
The gross unrealized appreciation (depreciation) of investments in debt
securities was as follows:
<Table>
<Caption>
DECEMBER 31, 2001
----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ -------------- ----------- ------------
U.S. Treasury securities and
obligations of U.S. Government
agencies(1)........................ $179,159,244 $ 572,785 $(3,362,189) $176,369,840
Obligations of states and political
subdivisions....................... 130,281,738 3,617 (2,488,640) 127,796,715
Mortgage-backed securities........... 80,103,327 55,383 (1,435,616) 78,723,094
Corporate and other securities....... 124,381,838 594,331 (573,681) 124,402,488
------------ ---------- ----------- ------------
Totals............................. $513,926,147 $1,226,116 $(7,860,126) $507,292,137
============ ========== =========== ============
</Table>
- ------------------------
(1) Obligations of U.S. Government agencies include collateralized mortgage
obligations issued, guaranteed and/or insured by the following issuers:
Government National Mortgage Association (GNMA), Federal Home Loan Mortgage
Corporation (FHLMC), and Federal National Mortgage Association (FNMA). The
total of these debt securities was $117.6 million, $124.1 million and
$125.2 million for 2001, 2000 and 1999, respectively.
<Table>
<Caption>
DECEMBER 31, 2000
----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ -------------- ----------- ------------
U.S. Treasury securities and
obligations of U.S. Government
agencies........................... $195,533,162 $1,176,604 $(1,859,228) $194,850,538
Obligations of states and political
subdivisions....................... 122,625,437 5,081,191 (179,234) 127,527,394
Mortgage-backed securities........... 42,229,811 214,111 (157,293) 42,286,629
Corporate and other securities....... 88,909,445 428,603 (3,918,226) 85,419,822
------------ ---------- ----------- ------------
Totals............................. $449,297,855 $6,900,509 $(6,113,981) $450,084,383
============ ========== =========== ============
</Table>
The amortized cost and the estimated market value of debt securities, by
maturity, at December 31, 2001 are shown below. 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.
<Table>
<Caption>
ESTIMATED
AMORTIZED FAIR
COST VALUE
------------ ------------
Due in one year or less..................................... $ 22,021,577 $ 22,032,103
Due after one year through five years....................... 87,883,684 87,836,119
Due after five years through ten years...................... 114,811,554 113,260,651
Due after ten years through twenty years.................... 34,127,510 33,078,970
Due after twenty years...................................... 56,563,069 54,749,245
Asset-backed securities..................................... 198,518,753 196,335,049
------------ ------------
Totals.................................................... $513,926,147 $507,292,137
============ ============
</Table>
F-15
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
Gross gains of $153,421 and $2,832,021 and gross losses of $(5,206,479) and
$(3,597,624) were realized on sales of bonds for the period October 16, 2001
through December 31, 2001 and for the period January 1, 2001 through
October 15, 2001, respectively. Gross gains of $753,097 and $1,929,330 and gross
losses of $2,001,426 and $4,825,559 were realized for the year ended
December 31, 2000 and 1999, respectively. Proceeds from bonds maturing were $0,
$21,625,000, $47,142,688 and $359,758,500 for the period October 16, 2001
through December 31, 2001, for the period January 1, 2001 through October 15,
2001, for the years ended December 31, 2000 and 1999, respectively.
EQUITY SECURITIES
The cost and fair value of equity securities as of December 31, 2000 and
2001 were as follows:
<Table>
<Caption>
2000 2001
------------------------- -----------------------
FAIR FAIR
COST VALUE COST VALUE
----------- ----------- ---------- ----------
Common Stocks............................... $27,000,000 $28,123,885 $ -- $ --
Preferred Stocks............................ 12,498,911 13,121,542 9,939,060 9,716,404
----------- ----------- ---------- ----------
Total Stocks.............................. $39,498,911 $41,245,427 $9,939,060 $9,716,404
=========== =========== ========== ==========
</Table>
There were gross unrealized gains of $0 and $1,815,266 and gross unrealized
losses of $222,656 and $68,750 on stocks at December 31, 2001 and 2000,
respectively.
There were $856,293 of gross gains and gross losses of $87,115 on sales of
stock for the period October 16, 2001 through December 31, 2001. There were no
gross gains or losses for the period January 1, 2001 through October 15, 2001 on
sales of stock. Gross gains of $9,090 and $13,708,654 and gross losses of $6,575
and $2,710,308 were realized for the years ended December 31, 2000 and 1999,
respectively.
The Company has not written down any securities for other than temporary
losses for the periods October 16, 2001 through December 31, 2001 and
January 1, 2001 through October 15, 2001 or for the years ended December 31,
2000 and 1999.
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
As part of the application of purchase accounting, equipment and leasehold
improvements with a net book value of $3,274,072 on the date of the Acquisition
were reduced to zero. Equipment and leasehold improvements at December 31, 2001
represent those items purchased subsequent to October 16, 2001. At December 31,
2000, the Company held equipment and leasehold improvements with a carrying
value of $3,953,972 which is net of accumulated depreciation of $11,288,744.
Depreciation and amortization expense for the period October 15, 2001
through December 31, 2001, for the predecessor period ended October 15, 2001,
and the years ended December 31, 2000 and 1999 was $343, $1,303,260, $1,886,384
and $1,989,794, respectively.
F-16
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. EMPLOYEE BENEFIT PLANS
STOCK APPRECIATION RIGHTS ("SARS") AGREEMENTS
The Company entered into SARs agreements with executive management on
October 16, 2001. Under the terms of the agreements, the Company granted 103,488
SARs on October 16, 2001 for past and future services. The agreements designate
the number of "covered shares" for each executive and other employees and
established the exercise price of $6.88 per share.
The SARs vest 20% at the end of each year commencing on December 31, 2002.
In addition, the SARs will become fully vested and automatically exercised upon
an initial public offering. As soon as practicable after the exercise of the
SARs with respect to a share of common stock, the participant shall receive a
cash payment equal to the fair market value of a share of common stock on the
date of exercise over the exercise price of $6.88 per share.
For the successor period ended December 31, 2001, no compensation expense
has been recorded related to the SARs. Upon the IPO, compensation expense
related to the SARs will be recognized as a charge to earnings as measured by
the IPO price taking into account 100% vesting of all SARs in accordance with
FIN 28.
MANAGEMENT SUBSCRIPTION AGREEMENTS
On October 16, 2001, the Company entered into a management subscription
agreement with certain employees. The management subscription agreement contains
certain Company call and employee put options that allow the employee to put the
stock owned by the employee at the time of exercise to the Company under certain
circumstances outside of the Company's control and within the employee's control
(E.G., employee retirement or resignation). The management subscription
agreement is being accounted for as a variable plan in accordance with EITF
00-23, "Issues Related to the Accounting for Stock Compensation under APB
Opinion No. 25 and FASB Interpretation No. 44," whereby employee compensation
expenses are being recorded over the period of service of the employee in
accordance with FIN 28. The Company call and employee put options expire upon an
IPO, at which point variable plan accounting ceases and the liability accrued at
the IPO date would be re-classified to paid-in capital. Compensation expense
related to the management subscription agreement totaled $1,120,823 for the
Successor Period ended December 31, 2001. See Note 12 for terms of recourse
promissory notes received from management.
RESTRICTED STOCK PLAN
On October 16, 2001, Safety Holdings implemented a Restricted Stock Plan.
The Restricted Stock Plan permits the board of directors to grant or sell
restricted shares of common stock to select employees of the Company or any of
its affiliates. The purpose of the Restricted Stock Plan is to promote the
Company's success and to attract and retain valuable employees.
The maximum number of shares of common stock which may be granted or sold
under this plan is 290,500. The board of directors has the authority to
determine the persons to whom restricted shares are granted or sold, the times
when such shares will be granted or sold, the number of shares to be granted or
sold and the terms and conditions of each award, including, without limitation,
those related to dividends. Such restricted share awards, except for awards
granted or sold before January 1, 2002, will vest according to the terms
established by the board of directors at the time restricted shares are granted
or sold. Any awards granted or sold before January 1, 2002, except as described
below, shall
F-17
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
not become vested until the last day of each calendar year commencing with the
2002 calendar year as set forth in the table below:
<Table>
<Caption>
PERCENTAGE OF
TOTAL SHARES
AWARDED
YEAR ENDED BECOMING VESTED
- ---------- ---------------
December 31, 2002........................................... 0.0%
December 31, 2003........................................... 0.0%
December 31, 2004........................................... 60.0%
December 31, 2005........................................... 80.0%
December 31, 2006........................................... 100.0%
</Table>
Vesting, however, is contingent upon continuous employment. Unless otherwise
determined by the board of directors, upon a participant's termination of
employment prior to December 31, 2006, all of the participant's restricted
shares not yet vested will be forfeited. The board of directors has the right to
amend or terminate the Restricted Stock Plan at any time, subject to certain
limitations, but no amendment or termination may alter the rights of a
participant under any awards previously granted or sold.
On October 16, 2001, the Company entered into Executive Restricted Stock
Award Agreements under the Restricted Stock Plan with two employees of the
Company. Under these agreements, 290,500 restricted shares of common stock were
sold by the Company to management at a cost of $0.43 per share, which
approximated the fair value of the shares at the date of the sale. These
restricted shares will vest in full upon the earlier of the consummation of a
change of control, public offering or according to the schedule contained in the
Restricted Stock Plan denoted above. The management subscription agreement
contains put and call provisions which under certain circumstances may require
the Company to purchase the restricted shares at a price based upon a formula
calculation. The restricted stock plan is being accounted for in accordance with
EITF 00-23 whereby employee compensation expense is being recorded over the
period of service of the employee in accordance with FIN 28. The put and call
provisions expire upon an IPO or the consummation of a change of control.
Compensation expense related to these agreements was $120,085 for the Successor
Period ended December 31, 2001. See Note 12 for terms of recourse promissory
notes received from Management.
THE SAFETY INSURANCE 401(K) RETIREMENT PLAN
In 1995, upon the inception of the ESOP, as defined below, management
discontinued all employer and employee contributions to its then existing
qualified defined contribution profit-sharing/retirement plan (the "Retirement
Plan"). As a result, the rights of each participant to his/her account on the
date of the discontinuance of contributions, to the extent of the fair market
value under the general investment fund, became fully vested and nonforfeitable.
With the termination of the ESOP, as described below, the Company
reestablished TBC's previously frozen Retirement Plan, effective January 1,
2002. The Retirement Plan is a defined contribution plan which is available to
all eligible employees of the Company. An employee must be 21 years of age to be
eligible to participate in the Retirement Plan and is allowed to contribute up
to 15% of eligible compensation. The Retirement Plan is administered by the
Company and is subject to the provisions of the Employee Retirement Income
Security Act of 1974 ("ERISA"). Under the
F-18
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
Retirement Plan, the Company shall make a matching contribution on behalf of
each participant who is employed on the last day of the year in an amount equal
to 50% of the first 8% of the participant's compensation contributed to the
Retirement Plan.
ESOP PLAN
Prior to the Acquisition, TBC had a leveraged employee stock ownership plan
(the "ESOP") with a 30% interest in the issued and outstanding common stock of
TBC (287,700 shares). The ESOP covered substantially all the employees and was
subject to the applicable provisions of ERISA. The ESOP was noncontributory on
the part of participants and employer contributions were made at the discretion
of the board of directors. In conjunction with the establishment of the ESOP,
TBC obtained a loan of $36,000,000 to finance the purchase of 30% of TBC's
shares. The loan was collateralized by shares of TBC held by the ESOP but
unallocated to ESOP participants. The ESOP was accounted for in accordance with
Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership
Plans." Compensation expense related to the ESOP was $4,670,628, $7,188,921 and
$6,210,989 for the period January 1, 2001 through October 15, 2001 and the years
ended December 31, 2000 and 1999, respectively. There was no compensation
expense for the successor period ended December 31, 2001 related to the ESOP.
The Company has filed to terminate the ESOP in conjunction with the Acquisition.
XSOP PLAN
Prior to the Acquisition, TBC also had a supplemental executive stock
ownership plan (the "XSOP"). The XSOP provided certain employees not eligible to
fully participate in the ESOP under the applicable provisions of the Internal
Revenue Code and ERISA with benefits they would have been entitled to under the
provisions of the ESOP. Total compensation expense related to the XSOP during
the predecessor period ended October 15, 2001 and the years ended December 31,
2000 and 1999 was ($1,119,236), $1,695,855 and $1,547,328, respectively. The net
credit to compensation expense for the predecessor period ended October 15, 2001
is comprised of a credit to compensation expense of ($2,478,802) resulting from
the revaluation of the December 31, 2000 XSOP obligation at the 2001 fair value
of TBC's shares and an expense of $1,359,566 relating to the compensation earned
by employees in the 2001 predecessor period. There was no compensation expense
for the successor period ended December 31, 2001 related to the XSOP. The XSOP
obligations of $7,201,954 and $8,309,398 at December 31, 2001 and 2000,
respectively, were unfunded. The XSOP Plan was terminated in conjunction with
the Acquisition.
F-19
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company has various noncancelable long-term operating leases. The
approximate minimum annual rental payments due under these lease agreements as
of December 31, 2001 are as follows:
<Table>
2002........................................................ $ 2,472,969
2003........................................................ 2,472,969
2004........................................................ 2,472,969
2005........................................................ 2,472,969
2006 and after.............................................. 8,416,407
-----------
Total minimum lease payments................................ $18,308,283
===========
</Table>
Certain lease agreements contain renewal options and, in addition to the
minimum annual rentals, generally provide for payment of a share of the real
estate taxes and operating expenses in excess of a base amount. Rental expense
was $1,996,976 for the period January 1, 2001 through October 15, 2001; $535,752
for the period October 16, 2001 through December 31, 2001 and $2,478,496 and
$2,092,806 for the years ended December 31, 2000 and 1999, respectively. All
leases expire prior to 2009. The Company expects that in the normal course of
business, leases that expire will be renewed.
OTHER
In connection with the Acquisition, the Company entered into an agreement
with members of its management team to indemnify them for any tax loss they may
incur in connection with the purchase of its common stock at the time that the
Company acquired TBC, due to a determination by the Internal Revenue Service
that the value of such stock was higher than the purchase price agreed upon by
the Company and its management team. The agreement provides that in such case
the Company would pay the executives an amount such that, after payment of taxes
on the payment, they would retain an amount equal to (i) the excess value of the
common stock multiplied by a percentage equal to the difference between the
combined U.S. federal, state and local tax rate on ordinary income and the
combined U.S. federal, state and local tax rate on long-term capital gains, plus
(ii) related interest, penalties or additions, and the executive's portion of
applicable payroll taxes, if any. Under the agreement, the Company would also
loan to members of its management team an amount equal to the excess value of
the common stock (as determined by the Internal Revenue Service) multiplied by
the applicable capital gains tax rate, which loan would be secured by the common
stock owned by such executive.
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, liabilities related to
those proceedings could be established in the near term if estimates of the
ultimate resolutions of those proceedings are revised.
Commonwealth Automobile Reinsurers (CAR), a state-established body which
runs the residual market reinsurance programs for private passenger automobile
insurance in Massachusetts, assesses its losses to its members as a result of
insurer insolvencies. Because CAR is not able to recover an insolvent company's
share of the net CAR losses from the Massachusetts Insurers Insolvency Fund,
F-20
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CAR must increase each of its member's share of the deficit in order to
compensate for the insolvent carrier's inability to pay its deficit assessment.
It is anticipated that there will be additional assessments from time to time
relating to various insolvencies.
Under the terms of the stock subscription agreement with executive
management, in the event employment by the Company of a member of executive
management is terminated, whether voluntarily or involuntarily, the Company may
repurchase from the terminated manager, or the terminated manager may cause the
Company to repurchase, the manager's common stock for a determined price per
share, as specified in the management subscription agreement ("calls and puts").
The price is determined based upon the reason for and the date of a manager's
termination. None of the calls or puts are exercisable at December 31, 2001 as
all members of executive management are employed by the Company.
The stockholders agreement entered into in connection with the Acquisition
also provides that a change of control of the Company requires the consent of
the executive management's representative on the board of directors. In the
event such consent has not been obtained, the Company must repurchase the common
stock held by executive management at an aggregate value of $9.7 million.
The above described provisions in the stock subscription agreement and the
stockholders agreement terminate in the event of an initial public offering
consented to by executive management's representative on the board of directors.
8. DEBT
Debt at December 31, 2000 and 2001 consisted of the following:
<Table>
<Caption>
2000 2001
----------- -----------
Term note payable maturing March 31, 2002................... $13,382,562 --
Senior secured term loan.................................... -- $55,000,000
Senior subordinated notes................................... -- 30,000,000
Senior secured revolving credit facility.................... -- 14,500,000
----------- -----------
$13,382,562 $99,500,000
=========== ===========
</Table>
TERM NOTE PAYABLE
On April 1, 1995, TBC obtained a long-term loan relating to the creation of
the ESOP (the "Note"), with a principal balance of $36 million. The Note had an
interest rate of LIBOR plus 1.25%. The total outstanding balance at
December 31, 2000 was $13.4 million. Upon closing of the Acquisition, the
Company paid down the outstanding balance on the Note. The interest rate on the
loan was 7.69% at December 31, 2000 and an average of 4.86%, 7.81% and 6.53% for
the period January 1, 2001 through October 15, 2001 and the years ended
December 31, 2000 and 1999, respectively.
SENIOR SECURED REVOLVING CREDIT FACILITY AND TERM LOAN
As part of the funding for the Acquisition, the Company entered into a
$20 million revolving credit facility and a $55 million senior secured term loan
with a bank group in October 2001. The obligations of the Company on these loans
are collateralized by (i) a 100% pledge of the stock of Safety Insurance
Company, Inc., RBS, Inc. and TBIA, and (ii) a perfected first priority security
interest, subject to permitted liens, in all of the assets, whenever acquired,
of TBC, RBS, Inc. and
F-21
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT (CONTINUED)
TBIA. Both loans bear interest at LIBOR plus 3.75%. At December 31, 2001, the
Company had utilized advances of $14.5 million under the revolving credit
facility. The interest rate on both loans was 6.125% at December 31, 2001 and an
average of 6.16% for the period October 16, 2001 through December 31, 2001.
The revolving credit facility matures on August 31, 2006. The term loan
matures in December 2007 and interest is payable in quarterly installments due
at the end of each calendar quarter end. Principal repayments under the term
loan are due as follows:
<Table>
<Caption>
TERM LOAN
-----------
2002........................................................ $ 4,000,000
2003........................................................ 6,000,000
2004........................................................ 8,000,000
2005........................................................ 10,000,000
2006 and thereafter......................................... 27,000,000
-----------
Total....................................................... $55,000,000
===========
</Table>
The revolving credit facility and the term loan also contain specified
financial and operating covenants, the most significant of which concern the
amounts of risk based capital, debt to capitalization ratios and statutory
surplus levels.
SENIOR SUBORDINATED NOTES
The Company also issued $30 million of senior subordinated notes to obtain
funds for the Acquisition. Interest is payable semi-annually on each April 30
and October 31. The senior subordinated notes mature December 31, 2011 and may
be redeemed at the option of the Company prior to maturity with no redemption
premium or penalty. The senior subordinated notes have an interest rate of 13%.
The Company incurred interest expense of $1,823,052 and $549,839 for the
period October 16, 2001 through December 31, 2001 and for the period January 1,
2001 through October 15, 2001, respectively, and $1,070,974 and $1,418,197 for
the years ended December 1, 2000 and 1999, respectively.
9. MANDATORILY REDEEMABLE PREFERRED STOCK
In connection with the Acquisition (see Note 2), the Company issued 22,400
shares of the 100,000 authorized shares of 6% Series A senior preferred stock at
$1,000 per share. The stock has a liquidation preference and entitles its
holders to receive dividends of $60 per share per annum. To the extent that the
dividends are not paid, they accrue in arrears.
The preferred stock is redeemable at any time at the option of the Company
at the stock's liquidation preference plus any accrued dividends. The stock is
mandatorily redeemable (at the issue price) at the earlier of October 16, 2012
or upon a change in control of the Company.
The preferred stock at December 31, 2001 is carried in the financial
statements at its liquidation preference of $22.4 million plus accrued dividends
of $0.28 million.
The preferred stock does not contain a beneficial conversion feature as the
pending conversion is outside of the terms of the original preferred stock
agreement.
F-22
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. REINSURANCE
The Company cedes insurance to the Massachusetts Commonwealth Automobile
Reinsurers ("CAR") and to other reinsurers. The Company is subject to
concentration of credit risk with respect to reinsurance ceded to CAR. At
December 31, 2001 and 2000, respectively, reinsurance receivables on paid and
unpaid loss and LAE with a carrying value of $94.9 million and $71.4 million and
prepaid reinsurance premiums of $19.3 million and $15.9 million were associated
with CAR. The Company's participation in CAR resulted in assumed net losses of
$6.9 million for the period October 16, 2001 through December 31, 2001 and
$21.3 million for the period January 1, 2001 through October 15, 2001 and
$21.7 million and $22.3 million for the years ended December 31, 2000 and 1999,
respectively.
As a servicing carrier for CAR, the Company has entered into service
contracts with several insurance carriers under which the Company services the
residual market business assigned to the carriers by CAR (the "buyout program").
Business generated through the buyout program is 100% ceded to the applicable
carrier and serviced for a fee. Servicing carrier fees amounted to $86,679 for
the period October 16, 2001 through December 31, 2001 and $371,233 for the
period January 1, 2001 through October 15, 2001 and $558,159 and $1,786,506 for
the years ended December 31, 2000 and 1999, respectively.
The effect of reinsurance on net written and earned premiums and losses and
LAE is as follows:
<Table>
<Caption>
PREDECESSOR SUCCESSOR
PREDECESSOR YEAR ENDED JANUARY 1, OCTOBER 16,
DECEMBER 31, 2001 THROUGH 2001 THROUGH
--------------------------- OCTOBER 15, DECEMBER 31,
1999 2000 2001 2001
------------ ------------ ------------ ------------
WRITTEN PREMIUMS
Direct.............................. $349,205,831 $427,457,241 $391,627,973 $ 80,238,218
Assumed............................. 45,049,480 51,174,984 31,587,066 13,581,632
Ceded............................... (63,294,704) (48,601,873) (40,728,998) (10,839,839)
------------ ------------ ------------ ------------
Net written premiums.................. $330,960,607 $430,030,352 $382,486,041 $ 82,980,011
------------ ------------ ------------ ------------
PREMIUM EARNED
Direct.............................. $322,838,377 $389,870,942 $351,010,890 $ 97,049,887
Assumed............................. 44,700,004 49,745,706 34,091,414 13,438,028
Ceded............................... (67,518,675) (58,203,876) (38,004,802) (10,312,976)
------------ ------------ ------------ ------------
Net premiums earned................... $300,019,706 $381,412,772 $347,097,502 $100,174,939
------------ ------------ ------------ ------------
LOSS AND LOSS ADJUSTMENT EXPENSES
Direct.............................. $260,968,735 $297,389,160 $293,802,883 $ 70,139,351
Assumed............................. 52,925,407 53,846,869 45,884,975 15,643,395
Ceded............................... (88,652,653) (76,097,531) (63,304,834) (10,223,263)
------------ ------------ ------------ ------------
Net loss and LAE expenses............. $225,241,489 $275,138,498 $276,383,024 $ 75,559,483
============ ============ ============ ============
</Table>
The Company has a property catastrophe excess of loss and a casualty excess
of loss reinsurance agreement which are designed to protect against large or
unusual losses and LAE activity. Reinsurance contracts do not relieve the
Company from its obligations to policyholders. Failure of reinsurers to honor
their obligations could result in losses to the Company; consequently,
allowances are established for amounts deemed uncollectible. 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.
F-23
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. 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:
<Table>
<Caption>
PREDECESSOR SUCCESSOR
PREDECESSOR YEAR ENDED JANUARY 1, OCTOBER 16,
DECEMBER 31, 2001 THROUGH 2001 THROUGH
----------------------------- OCTOBER 15, DECEMBER 31,
1999 2000 2001 2001
------------- ------------- ------------- -------------
Reserve for losses and LAE,
beginning of year................ $ 311,845,712 $ 315,226,492 $ 302,130,921 $ 307,655,732
Less reinsurance recoverable on
unpaid losses and LAE............ (115,855,940) (108,613,117) (90,296,693) (83,501,444)
------------- ------------- ------------- -------------
Net reserves for losses and LAE,
beginning of year................ 195,989,772 206,613,375 211,834,228 224,154,288
------------- ------------- ------------- -------------
Incurred losses and LAE, related
to: Current year................. 251,291,508 302,101,981 282,983,076 76,262,127
Prior years...................... (26,050,019) (26,963,483) (6,600,052) (702,644)
------------- ------------- ------------- -------------
Total incurred losses and LAE...... 225,241,489 275,138,498 276,383,024 75,559,483
------------- ------------- ------------- -------------
Paid losses and LAE related to:
Current year..................... 121,826,861 161,980,934 164,215,267 58,168,611
Prior years...................... 92,791,025 107,936,711 99,847,697 14,168,334
------------- ------------- ------------- -------------
Total paid losses and LAE.......... 214,617,886 269,917,645 264,062,964 72,336,945
------------- ------------- ------------- -------------
Net reserves for losses and LAE,
end of year...................... 206,613,375 211,834,228 224,154,288 227,376,826
Plus reinsurance recoverables on
unpaid losses and LAE............ 108,613,117 90,296,693 83,501,444 75,179,351
------------- ------------- ------------- -------------
Reserves for losses and LAE, end of
year............................. $ 315,226,492 $ 302,130,921 $ 307,655,732 $ 302,556,177
============= ============= ============= =============
</Table>
At the end of each period, the reserves were re-estimated for all prior
accident years and were decreased by $702,644 for the period October 15, 2001
through December 31, 2001, $6,600,052 for the period January 1, 2001 through
October 15, 2001, and $26,963,483 and $26,050,019 for the years ended
December 31, 2000 and 1999, respectively. Conditions and trends that have
affected development of the loss and LAE reserves in the past may not
necessarily occur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies upon these developments.
The Company applies a consistent reserving philosophy. The reserve for loss
and loss adjustment expenses represents management's best estimate of the
ultimate net cost of all loss and loss adjustment expenses incurred after
reinsurance. These estimates are based on actuarial studies performed by
management and independent actuaries which have inherent limitations as to the
accuracy of the estimates due to the fact that the ultimate liability for claims
is subject to the outcome of events yet to occur. Accordingly, the amounts the
Company will ultimately incur from losses and loss adjustment expenses could
differ materially in the near term from the amounts recorded at December 31,
2001.
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 environmental liabilities.
F-24
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RELATED PARTY TRANSACTIONS
During 2001, the Company entered into a ten-year management consulting
agreement with TJC Management Corporation ("TJC"), an affiliate of The Jordan
Company. Under the management consulting agreement, TJC renders consulting
services to the Company in connection with financial and business affairs,
relationships with lenders, stockholders and other third parties, and the
expansion of the Company's business. The Agreement will automatically renew for
successive one-year terms starting December 31, 2011 unless terminated pursuant
to its provisions. Under the Agreement, the Company is required to pay a
management fee of $1.0 million per year, payable in quarterly installments.
In addition to the $1.0 million management fee, the management consulting
agreement provides for:
- an investment banking and sponsorship fee payable up to 2% of the
aggregate consideration (i) paid by the Company for any Acquisition by the
Company of all or substantially all of the outstanding capital stock,
warrants or options or substantially all of the business or assets of
another individual or business entity, or (ii) paid to the Company in
connection with any sale by the Company of all or substantially all of its
stock, warrants, options, business or assets or the stock, warrants,
options, business or assets of any of its subsidiaries;
- a financial consulting fee of up to 1% of the amount obtained or made
available to the Company pursuant to any debt, equity or other financing
by the Company with the assistance of TJC; and
- payment by the Company of an amount equal to TJC's out-of-pocket expenses,
including an allocable amount of TJC's overhead expenses attributable to
services provided to the Company.
Upon consummation of the Acquisition, the Company paid TJC a closing fee of
$2.5 million in lieu of any fee otherwise payable to TJC as described above.
This has been expensed in the statement of operations for the successor period
ended December 31, 2001.
In connection with the Acquisition, each member of the executive management
team issued a recourse promissory note to, and entered into a pledge agreement
with, the Company. Pursuant to the notes, the Company loaned management an
aggregate of $695,000 in order to purchase common stock in connection with the
Acquisition and the Restricted Stock Plan. Pursuant to pledge agreements, the
management team pledged the common stock back to the Company as security for the
loans made under the promissory notes. The notes bear interest at a rate of 5%
annually and are due and payable on the earlier of December 31, 2011 or 90 days
after any management team member ceases to be an employee of the Company. Each
member may prepay his note at any time without penalty. At December 31, 2001,
the loans are carried in the financial statements at $702,240 which represents
the outstanding principal and accrued interest on the notes. Such loans have
been recorded as contra-equity in accordance with the accounting policy
described in Note 3. The interest rate on the notes is below a market rate and
triggers compensation expense recognition for the shares held by management,
including the restricted stock, as described in Note 6.
Notes receivable of $1,100,000 at December 31, 2000 represent amounts due
from TBC's former majority stockholder. In conjunction with the Acquisition,
these notes were repaid.
F-25
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES
Provision for income taxes has been calculated in accordance with the
provision of Statement No. 109. A summary of the income tax expense (benefit) in
the Consolidated Statements of Income is shown below:
<Table>
<Caption>
PREDECESSOR SUCCESSOR
PREDECESSOR YEAR ENDED JANUARY 1, OCTOBER 16,
DECEMBER 31, 2001 THROUGH 2001 THROUGH
------------------------ OCTOBER 15, DECEMBER 31,
1999 2000 2001 2001
---------- ----------- ------------ ------------
CURRENT INCOME TAXES:
Federal.................................. $7,840,407 $10,457,718 $ 773,153 $ 263,524
State.................................... (19,639) 16,746 (113,481) 1,368
---------- ----------- ---------- -----------
7,820,768 10,474,464 659,672 264,892
---------- ----------- ---------- -----------
DEFERRED INCOME TAXES:
Federal.................................. 722,847 (2,233,314) 849,247 (2,086,064)
State.................................... 122,719 14,216 168,791 154,540
---------- ----------- ---------- -----------
845,566 (2,219,098) 1,018,038 (1,931,524)
---------- ----------- ---------- -----------
Total income tax (benefit)/expense......... $8,666,334 $ 8,255,366 $1,677,710 $(1,666,632)
========== =========== ========== ===========
</Table>
The income tax (benefit)/expense attributable to the consolidated results of
operations are different from the amounts determined by multiplying income
before federal income taxes by the statutory federal income tax rate. The
sources of the difference and the tax effects of each were as follows:
<Table>
<Caption>
PREDECESSOR SUCCESSOR
PREDECESSOR YEAR ENDED JANUARY 1, OCTOBER 16,
DECEMBER 31, 2001 THROUGH 2001 THROUGH
----------------------- OCTOBER 15, DECEMBER 31,
1999 2000 2001 2001
---------- ---------- ------------ ------------
Federal income tax (benefit)/expense at
statutory rate............................ $8,737,504 $9,635,326 $2,555,671 $(2,543,935)
Tax-exempt investment income, net........... (549,198) (1,865,514) (1,652,374) (415,312)
State taxes, net............................ 67,002 20,125 35,952 101,340
ESOP........................................ 528,743 619,490 (126,267) (723)
Transaction costs........................... -- -- 690,848 1,214,165
Other, net.................................. (117,717) (154,061) 173,880 (22,167)
---------- ---------- ---------- -----------
Total income tax (benefit)/expense.......... $8,666,334 $8,255,366 $1,677,710 $(1,666,632)
========== ========== ========== ===========
</Table>
F-26
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
The deferred income tax asset (liability) represents the tax effects of
temporary differences attributable to the Company's consolidated federal tax
return group. Its components were as follows:
<Table>
<Caption>
DECEMBER 31,
--------------------------
2000 2001
----------- ------------
DEFERRED TAX ASSETS:
Discounting of loss reserves............................ $ 7,416,038 $ 7,500,151
Discounting of unearned premium reserve................. 13,937,255 15,982,412
Bad debt allowance...................................... 39,983 100,412
Depreciation............................................ 631,160 1,892,993
Employee benefits....................................... 4,129,055 2,866,571
Alternative minimum tax credits......................... -- 314,815
----------- ------------
Total deferred tax assets................................. 26,153,491 28,657,354
----------- ------------
DEFERRED TAX LIABILITIES:
Deferred acquisition costs.............................. (7,966,275) (9,502,620)
Other................................................... (238,147) (137,479)
Investments............................................. (26,239) (3,269,985)
Net unrealized gains on investments..................... (889,981) 2,394,177
----------- ------------
Total deferred tax liabilities............................ (9,120,642) (10,515,907)
----------- ------------
Net deferred tax asset.................................... $17,032,849 $ 18,141,447
=========== ============
</Table>
Gross deferred income tax assets totaled $31,643,280 and $27,494,834 at
December 31, 2001 and 2000, respectively. Gross deferred income tax liabilities
totaled $13,501,833 and $10,461,985 at December 31, 2001 and 2000, respectively.
The Company believes, based on its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all federal deferred tax assets. A valuation allowance has
been established in 2001 in the amount of $679,091 against certain state
deferred tax assets. This valuation allowance is based upon management's
assessment that it is more likely than not that the Company will not be able to
utilize these state deferred tax assets. In determining the adequacy of future
income, the Company considered the future reversal of its existing temporary
differences and available tax planning strategies that could be implemented, if
necessary. At December 31, 2001, there are available alternative minimum tax
credit carryforwards of $314,815. The alternative minimum tax credit
carryforwards have no expiration date.
14. STATUTORY NET INCOME AND SURPLUS
STATUTORY ACCOUNTING PRACTICES
The Company's insurance subsidiaries, domiciled in the Commonwealth of
Massachusetts, prepare statutory financial statements in accordance with the
accounting practices prescribed or permitted by the Division. Statutory net
income of the Company's insurance subsidiaries was $10.3 million, $11.3 million
and $11.2 million for the years ended December 31, 2001, 2000 and 1999,
respectively. Statutory capital and surplus of the Company's insurance
subsidiaries was $220.1 and $192.6 at December 31, 2001 and 2000, respectively.
In 1998, the National Association of Insurance Commissioners ("NAIC") adopted
the Codification of Statutory Accounting Principles guidance, which replaces the
current accounting practices and procedures manual as the NAIC's primary
guidance on statutory accounting as of January 1, 2001. The codification
provides guidance for areas where statutory
F-27
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STATUTORY NET INCOME AND SURPLUS (CONTINUED)
accounting has been silent and changes current statutory accounting in some
areas, e.g. deferred income taxes are recorded. The Division has adopted the
codification guidance, effective January 1, 2001. The effect of adoption was an
increase to the statutory capital and surplus of the Company's insurance
subsidiaries of approximately $16.2 million.
DIVIDENDS
The Company's 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 Division. The Company's insurance
company subsidiaries may not declare an "extraordinary dividend" 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. An
extraordinary dividend is defined as any dividend or distribution that, together
with other distributions made within the preceding twelve months, exceeds the
greater of (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. Under Massachusetts law an insurer may pay cash dividends only from
its unassigned funds, also known as earned surplus, and the insurer's remaining
surplus must be both reasonable in relation to its outstanding liabilities and
adequate to its financial needs. At year-end 2001, the statutory surplus of
Safety Insurance was $220.1 million, and its net income for 2001 was
$10.3 million. A maximum of $22.0 million will be available by the end of 2002
for such dividends without prior approval of the Division.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses various financial instruments in the normal course of its
business. Certain insurance contracts are excluded by Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments," and, therefore, are not included in the amounts discussed.
At December 31, 2001 and 2000, investments in fixed maturities had a fair
value, which equaled carrying value, of $507.3 million and $450.1 million,
respectively. There were no investments in fixed maturities for which a quoted
market price or dealer price were not available at December 31, 2001 and 2000,
respectively.
The carrying values of cash and cash equivalents and investment income
accrued approximates fair value.
At December 31, 2001 and 2000, the carrying value of $69.5 million of the
senior secured revolving credit facility and term loan and $13.4 million of
debt, respectively, approximated its fair value. At December 31, 2001 the
carrying value of the senior subordinated notes approximated fair value. At
December 31, 2001, the shares of mandatorily redeemable preferred stock had a
carrying value of $22.7 million, which approximated their fair value. Fair value
of the preferred stock is based upon the liquidation value plus accrued
dividends at December 31, 2001. There was no preferred stock outstanding at
December 31, 2000.
F-28
<Page>
SAFETY INSURANCE GROUP, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
PREDECESSOR SUCCESSOR
------------ -----------
SIX MONTHS ENDED JUNE 30,
--------------------------
2001 2002
------------ -----------
Premiums earned, net........................................ $218,013 $ 241,420
Investment income........................................... 13,979 13,659
Net realized investment losses.............................. (591) (2,388)
Finance and other service income............................ 6,589 8,024
-------- ----------
Total income.............................................. 237,990 260,715
-------- ----------
Loss and loss adjustment expenses........................... 172,433 182,926
Underwriting, operating and related expenses................ 58,568 65,645
Transaction expenses........................................ 109 --
Interest expense............................................ 387 4,151
-------- ----------
Total expenses............................................ 231,497 252,722
-------- ----------
Income before income taxes.................................. 6,493 7,993
Income tax expense.......................................... 2,143 2,524
-------- ----------
Net income before preferred stock dividends............... 4,350 5,469
Dividends on mandatorily redeemable preferred stock......... -- (672)
-------- ----------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS................. $ 4,350 $ 4,797
======== ==========
EARNINGS PER COMMON SHARE:
Net income available to common stockholders
Basic..................................................... $ 4.88 $ 0.87
======== ==========
Diluted................................................... $ 4.88 $ 0.83
======== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic..................................................... 891,300 5,519,500
======== ==========
Diluted................................................... 891,300 5,810,000
======== ==========
</Table>
The accompanying notes are an integral part of these financial statements.
F-29
<Page>
SAFETY INSURANCE GROUP, INC.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEET
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
SUCCESSOR
JUNE 30, 2002
-------------
ASSETS
Investment securities available for sale
Bonds..................................................... $480,428
Preferred stocks.......................................... 9,896
--------
Total investment securities............................. 490,324
Cash and cash equivalents................................... 26,561
Accounts receivable......................................... 133,742
Reinsurance recoverables.................................... 92,079
Deferred policy acquisition costs........................... 38,213
Deferred income taxes....................................... 14,811
Receivable for securities sold.............................. 58,079
Prepaid reinsurance premiums................................ 29,840
Other assets................................................ 36,607
--------
Total Assets............................................ $920,256
========
LIABILITIES
Loss and loss adjustment expense reserves................... $309,351
Unearned premium reserves................................... 286,447
Debt........................................................ 98,500
Payable for securities purchased............................ 21,150
Other liabilities........................................... 62,338
--------
Total liabilities....................................... 777,786
--------
MANDATORILY REDEEMABLE PREFERRED STOCK...................... 23,352
--------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY
Common stock: $0.01 par value; 9,296,000 shares authorized;
5,810,000 shares outstanding.............................. 58
Additional paid-in capital.................................. 2,442
Accumulated other comprehensive income, net of taxes........ 900
Promissory notes receivable from management................. (720)
Retained earnings........................................... 116,438
--------
Total stockholders' equity.............................. 119,118
--------
Total liabilities, mandatorily redeemable preferred stock
and stockholders' equity.................................. $920,256
========
</Table>
The accompanying notes are an integral part of these financial statements.
F-30
<Page>
SAFETY INSURANCE GROUP, INC.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($ IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
ACCUMULATED PROMISSORY
OTHER NOTES
COMPREHENSIVE RECEIVABLE TOTAL
COMMON INCOME/(LOSS), ADDITIONAL FROM RETAINED STOCKHOLDERS'
STOCK NET OF TAXES PAID-IN CAPITAL MANAGEMENT EARNINGS EQUITY
-------- -------------- --------------- ---------- -------- -------------
Balance at December 31, 2001........... $58 $(4,457) $2,442 $(702) $111,641 $108,982
--- ------- ------ ----- -------- --------
Net income, January 1, 2002 to
June 30, 2002........................ 5,469 5,469
Accrued interest on promissory notes
from management...................... (18) (18)
Other comprehensive income, net of
deferred federal income taxes........ 5,357 5,357
Accrued dividends on mandatorily
redeemable preferred stock........... (672) (672)
--- ------- ------ ----- -------- --------
Balance at June 30, 2002............... $58 $ 900 $2,442 $(720) $116,438 $119,118
=== ======= ====== ===== ======== ========
</Table>
The accompanying notes are an integral part of these financial statements.
F-31
<Page>
SAFETY INSURANCE GROUP, INC.
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
PREDECESSOR SUCCESSOR
----------- ---------
SIX MONTHS ENDED JUNE 30,
---------------------------
2001 2002
----------- ---------
NET INCOME.................................................. $ 4,350 $ 5,469
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Change in unrealized holding gains (losses)............... (1,372) 3,805
Reclassification adjustment for gains included in net
income.................................................. 384 1,552
------- -------
Unrealized gains (losses) on securities available for
sale.................................................. (988) 5,357
COMPREHENSIVE INCOME (LOSS)................................. $ 3,362 $10,826
======= =======
</Table>
The accompanying notes are an integral part of these financial statements.
F-32
<Page>
SAFETY INSURANCE GROUP, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
PREDECESSOR SUCCESSOR
----------- ---------
SIX MONTHS ENDED JUNE 30,
---------------------------
2001 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 4,350 $ 5,469
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 833 246
Amortization of bond premiums............................. 587 1,852
Provision for deferred income taxes 1,697 446
Gains on sale of fixed assets............................. (4) --
Net realized losses on sale of investments................ 591 2,388
ESOP compensation expense................................. 3,508 --
Changes in assets and liabilities:
Accounts receivable....................................... (16,263) (15,498)
Accrued investment income................................. 21 (69)
Receivable from reinsurers................................ 26,266 21,554
Prepaid reinsurance premiums.............................. (1,956) (6,719)
Deferred policy acquisition costs......................... (6,722) (6,615)
Other assets.............................................. (4,252) (11,528)
Loss and loss adjustment expense reserves................. 10 6,795
Unearned premium reserves................................. 40,265 50,653
Accounts payable and accrued liabilities.................. (27,329) (18,477)
Accrued transaction expenses.............................. -- 147
Payable to reinsurers..................................... (11,875) (7,035)
Other liabilities......................................... 908 19,191
--------- ---------
Net cash provided by operating activities............... 10,635 42,800
========= =========
CASH FLOWS FROM INVESTING ACTIVITIES:
Bonds purchased........................................... (197,743) (143,425)
Proceeds from sale of bonds............................... 183,680 166,342
Proceeds from maturities of bonds......................... 10,750 7,750
Receivable for securities sold............................ -- (58,079)
Fixed assets purchased.................................... (491) (105)
Proceeds from sale of fixed assets........................ 50 --
--------- ---------
Net cash used for investing activities.................. (3,754) (27,517)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt................................. (5,419) (1,000)
--------- ---------
Net cash used for financing activities.................. (5,419) (1,000)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS DURING PERIOD..... 1,462 14,283
Cash and cash equivalents at beginning of year/period....... 13,676 12,278
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR/PERIOD............. $ 15,138 $ 26,561
========= =========
</Table>
The accompanying notes are an integral part of these financial statements.
F-33
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2001 AND 2002
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements have been prepared
on the basis of accounting principles generally accepted in the United States of
America ("GAAP"). These interim condensed consolidated financial statements
include Safety Insurance Group, Inc. and its subsidiaries (the "Company"). The
subsidiaries consist of Safety Insurance Company, Thomas Black Corporation,
Safety Indemnity Insurance Company, Thomas Black Insurance Agency, Inc. ("TBIA")
and RBS, Inc., TBIA's holding company. The interim financial data as of
June 30, 2002 (successor) and for the six months ended June 30, 2002 (successor)
and June 30, 2001 (predecessor) is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods. All intercompany transactions have been eliminated.
The Company is a leading provider of personal lines property and casualty
insurance focused exclusively on the Massachusetts market. Its principal product
line is private passenger automobile insurance, which accounted for 82.6% of its
direct written premiums in the six months ended June 30, 2002. The Company
operates through its insurance company subsidiaries, Safety Insurance Company
and Safety Indemnity Insurance Company. TBIA is the managing agent for Safety
Insurance Company and Safety Indemnity Insurance Company.
2. ACQUISITION AND IPO
The Company was incorporated on June 25, 2001, in the State of Delaware. On
October 16, 2001, the Company acquired (the "Acquisition") all of the issued and
outstanding common stock of Thomas Black Corporation ("TBC") and its property
and casualty subsidiaries for $121.1 million.
Approximately 72% of the outstanding common stock of the Company is owned by
certain investors assembled by The Jordan Company, LLC, an investment firm that
sponsored the Acquisition. The remaining 28% is owned by executive management.
JZ Equity Partners plc, a London-based publicly traded investment trust, owns
approximately 50% of the outstanding mandatorily redeemable preferred stock of
the Company; the other 50% is owned by third parties. The preferred stock is
cumulative, non-voting with a 6% dividend rate and is mandatorily redeemable on
October 16, 2012 or upon a change in control.
In connection with management's announced plan for the sale of its common
stock in a proposed initial public offering (the "IPO") in 2002, the Company has
changed its name to Safety Insurance Group, Inc. In conjunction with the IPO,
the Board of Directors of the Company declared a 23.24 for 1 common stock split
on November 12, 2002 in the form of a stock dividend that is anticipated to
become effective immediately after the time the Company files its amended and
restated certificate of incorporation prior to the offering. In accordance with
the provisions of FAS 128, "Earnings Per Share," all earnings per share for the
successor period presented in the consolidated financial statements of the
Company for the successor period have been adjusted retroactively for the stock
split. The SARs and restricted shares referred to in Note 6 have been similarly
adjusted for the stock split.
The holders of the preferred stock have agreed in principle to amend the
terms of the preferred stock to cause it to automatically convert into common
stock upon the closing of the IPO at the IPO price (the "exchange"). Assuming an
IPO price of $13.50 per share (the midpoint of the price range set forth on the
cover page of the preliminary prospectus for the IPO), it is anticipated that
there will be 1.659 million additional common shares issued in connection with
the exchange.
F-34
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
JUNE 30, 2001 AND 2002
2. ACQUISITION AND IPO (CONTINUED)
On June 25, 2002, the Board of Directors of the Company adopted the 2002
Management Omnibus Incentive Plan ("Incentive Plan"). The Incentive Plan
provides for a variety of awards, including nonqualified stock options, stock
appreciation rights and restricted stock awards. On July 1, 2002, the Board
authorized the Company to grant 379,000 options to purchase shares of common
stock to certain employees and one nominee for director, pursuant to the
Incentive Plan. These grants will be effective as of the date of the IPO and at
an exercise price equal to the IPO price.
3. INVESTMENTS
DEBT SECURITIES
The gross unrealized appreciation (depreciation) of investments in debt
securities as of June 30, 2002 was as follows:
<Table>
<Caption>
JUNE 30, 2002
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
($ IN THOUSANDS)
U.S. Treasury securities and obligations of
U.S. Government agencies.......................... $117,289 $ 696 $(1,947) $116,038
Obligations of states and political subdivisions.... 173,266 2,443 (138) 175,571
Mortgage-backed securities.......................... 81,602 987 (904) 81,685
Corporate and other securities...................... 106,933 1,441 (1,240) 107,134
-------- ------ ------- --------
Totals.............................................. $479,090 $5,567 $(4,229) $480,428
======== ====== ======= ========
</Table>
The amortized cost and the estimated market value of debt securities, by
maturity, at June 30, 2002 are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<Table>
<Caption>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
($ IN THOUSANDS)
Due in one year or less..................................... -- --
Due after one year through five years....................... $ 89,693 $ 90,021
Due after five years through ten years...................... 113,295 114,715
Due after ten through twenty years.......................... 62,837 63,721
Due after twenty years...................................... 66,919 65,354
-------- --------
Asset-backed securities..................................... 146,346 146,617
-------- --------
Totals...................................................... $479,090 $480,428
======== ========
</Table>
EQUITY SECURITIES
The cost and fair value of equity securities as of June 30, 2002 were
follows:
<Table>
<Caption>
JUNE 30, 2002
---------------------
COST FAIR VALUE
-------- ----------
Preferred Stocks.......................................... $9,850 $9,896
====== ======
</Table>
F-35
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
JUNE 30, 2001 AND 2002
3. INVESTMENTS (CONTINUED)
During the second quarter of 2002, there was a significant deterioration in
the credit quality of two of the Company's holdings in the telecommunications
sector. The Company recognized an after tax realized loss of approximately
$1.3 million for one of these securities which was sold in June. In addition,
the Company recorded an after-tax other-than-temporary impairment charge of
approximately $0.7 million for the other telecommunications security. The
Company did not write down any securities for other-than-temporary losses for
the six months ended June 30, 2001.
4. EMPLOYEE BENEFIT PLANS
STOCK APPRECIATION RIGHTS (THE "SARS") AGREEMENTS
The Company entered into SARs agreements with executive management on
October 16, 2001. Under the terms of the agreements, the Company granted 103,488
SARs on October 16, 2001 for past and future services. The agreements designate
the number of "covered shares" for each executive and other employees and
established the exercise price of $6.88 per share.
The SARs vest 20% at the end of each year commencing on December 31, 2002.
In addition, the SARs will become fully vested and automatically exercised upon
an initial public offering. As soon as practicable after the exercise of the
SARs with respect to a share of common stock, the participant shall receive a
cash payment equal to the fair market value of a share of common stock on the
date of exercise over the exercise price of $6.88 per share.
For the six months ended June 30, 2002, no compensation expense has been
recorded related to the SARs. Upon the IPO, compensation expense related to the
SARs will be recognized as a charge to earnings as measured by the IPO price
taking into account 100% vesting of all SARs in accordance with FIN 28,
"Accounting for Stock Appreciation Rights and Other Variable Stock Options or
Awards Plans."
MANAGEMENT SUBSCRIPTION AGREEMENTS
On October 16, 2001, the Company entered into a management subscription
agreement with certain employees. The management subscription agreement contains
certain Company call and employee put options that allow the employee to put the
stock owned by the employee at the time of exercise at a price based upon a
formula calculation to the Company under certain circumstances outside of the
Company's control and within the employee's control (e.g., employee retirement
or resignation). The Company call and employee put options expire upon an IPO,
at which point variable plan accounting ceases and the liability accrued at the
IPO date would be re-classified to paid-in capital. Compensation expense related
to the management subscription agreement totaled $2,689,974 for the six months
ended June 30, 2002.
ESOP PLAN
Prior to the acquisition, TBC had a leveraged employee stock ownership plan
(the "ESOP") with a 30% interest in the issued and outstanding common stock of
TBC (287,700 shares). The ESOP covered substantially all the employees and was
subject to the applicable provisions of ERISA. The ESOP was noncontributory on
the part of participants and employer contributions were made at the discretion
of the board of directors. In conjunction with the establishment of the ESOP,
TBC obtained a loan of
F-36
<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
JUNE 30, 2001 AND 2002
4. EMPLOYEE BENEFIT PLANS (CONTINUED)
$36,000,000 to finance the purchase of 30% of the Company's shares. The loan was
collateralized by shares of TBC held by the ESOP but unallocated to ESOP
participants. The ESOP was accounted for in accordance with Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans."
Compensation expense related to the ESOP was $0 and $3,508,400 for the six
months ended June 30, 2002 and 2001, respectively. The Company has filed to
terminate the ESOP plan in conjunction with the Acquisition.
XSOP PLAN
Prior to the acquisition, TBC also had a supplemental executive stock
ownership plan (the "XSOP"). The XSOP provided certain employees not eligible to
fully participate in the ESOP under the applicable provisions of the Internal
Revenue Code and ERISA with benefits they would have been entitled to under the
provisions of the ESOP. Total compensation expense related to the XSOP during
the six months ended June 30, 2001 was a net credit of $1,365,863, comprised of
a $2,045,814 revaluation credit for the 2001 fair value of TBC's shares offset
by a $679,951 expense for compensation earned by employees in the six months
ended June 30, 2001. There was no compensation expense for the six months ended
June 30, 2002 related to the XSOP. The XSOP Plan was terminated in conjunction
with the Acquisition.
The fair values of the ESOP and XSOP shares were revalued later in 2001.
Based upon the revalued shares price, pre-tax expense would have been reduced by
approximately $690,000 had the revalued share prices been utilized at June 30,
2001.
RESTRICTED STOCK PLAN
On October 16, 2001, the Company implemented a Restricted Stock Plan. The
Restricted Stock Plan permits the board of directors to grant or sell restricted
shares of common stock to select employees of the Company or any of its
affiliates. The purpose of the Restricted Stock Plan is to promote the Company's
success and to attract and retain valuable employees. The maximum number of
shares of common stock that may be granted or sold under this plan is 290,500.
The board of directors has the authority to determine the persons to whom
restricted shares are granted or sold, the times when such shares will be
granted or sold, the number of shares to be granted or sold and the terms and
conditions of each award, including, without limitation, those related to
dividends. Such restricted share awards, except for awards granted or sold
before January 1, 2002, will vest according to the terms established by the
board of directors at the time restricted shares are granted or sold. Any awards
granted before January 1, 2002, except as described below, shall not become
vested until the last day of each calendar year commencing with the 2002
calendar year as set forth in the table below:
<Table>
<Caption>
PERCENTAGE OF
TOTAL SHARES
AWARDED BECOMING
YEAR ENDED VESTED
- ---------- ----------------
December 31, 2002........................................... 0.0%
December 31, 2003........................................... 0.0%
December 31, 2004........................................... 60.0%
December 31, 2005........................................... 80.0%
December 31, 2006........................................... 100.0%
</Table>
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<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
JUNE 30, 2001 AND 2002
4. EMPLOYEE BENEFIT PLANS (CONTINUED)
Vesting, however, is contingent upon continuous employment. Unless otherwise
determined by the board of directors, upon a participant's termination of
employment prior to December 31, 2006, all of the participant's restricted
shares not yet vested will be forfeited. The board of directors has the right to
amend or terminate the Restricted Stock Plan at any time, subject to certain
limitations, but no amendment or termination may alter the rights of a
participant under any awards previously granted.
On October 16, 2001, the Company entered into Executive Restricted Stock
Award Agreements under the Restricted Stock Plan with two employees of the
Company. Under these agreements, 290,500 restricted shares of common stock were
sold at a cost of $0.43 per share, which approximated the fair value of the
shares at the date of the sale. These restricted shares will vest in full upon
the earlier of the consummation of a change of control, public offering or
according to the schedule contained in the Restricted Stock Plan denoted above.
The restricted shares contain put and call provisions, which under certain
circumstances may require the Company to purchase the restricted shares at a
price based upon a formula calculation. The put and call provisions expire upon
an IPO or the consummation of a change of control. Compensation expense related
to these agreements was $288,204 for the six months ended June 30, 2002.
5. 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 period indicated:
<Table>
<Caption>
SUCCESSOR SIX
MONTHS ENDED
JUNE 30, 2002
-------------
Reserves for losses and loss adjustment expenses, beginning
year...................................................... $302,556,177
Less reinsurance recoverable on unpaid losses and loss
adjustment expenses....................................... (75,179,352)
------------
Net reserves for losses and loss adjustment expenses,
beginning of year......................................... 227,376,825
------------
Incurred losses and loss adjustment expenses, related to:
Current year.............................................. 182,208,906
Prior years............................................... 716,785
------------
Total incurred losses and loss adjustment expenses.......... 182,925,691
------------
Paid losses and loss adjustment expenses related to:
Current year.............................................. 95,059,992
Prior year................................................ 78,565,994
------------
Total paid losses and loss adjustment expenses.............. 173,625,986
------------
Net reserves for losses and loss adjustment expenses, end of
year...................................................... 236,676,530
Plus reinsurance recoverables on unpaid losses and loss
adjustment expenses....................................... 72,674,849
------------
Reserves for losses and loss adjustment expenses, end of
year...................................................... $309,351,379
============
</Table>
At the end of the period, the reserves were re-estimated for all prior
accident years and were increased by $716,715 for the six months ended June 30,
2002. Conditions and trends that have affected development of the loss and LAE
reserves in the past may not necessarily occur in the future. Accordingly, it
may not be appropriate to extrapolate future redundancies or deficiencies upon
these developments.
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<Page>
SAFETY INSURANCE GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
JUNE 30, 2001 AND 2002
5. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES (CONTINUED)
The Company applies a consistent reserving philosophy. The reserve for loss
and loss adjustment expenses represents management's best estimate of the
ultimate net cost of all loss and loss adjustment expenses incurred after
reinsurance. These estimates are based on actuarial studies performed by
management and independent actuaries which have inherent limitations as to the
accuracy of the estimates due to the fact that the ultimate liability for claims
is subject to the outcome of events yet to occur. Accordingly, the amounts the
Company will ultimately incur from losses and loss adjustment expenses could
differ materially in the near term from the amounts recorded at June 30, 2002.
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 environmental liabilities.
6. COMMITMENTS AND 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, liabilities related to
those proceedings could be established in the near term if estimates of the
ultimate resolutions of those proceedings are revised.
Commonwealth Automobile Reinsurers (CAR), a state-established body which
runs the residual market reinsurance programs for private passenger automobile
insurance in Massachusetts, assesses its losses to its members as a result of
insurer insolvencies. Because CAR is not able to recover an insolvent company's
share of the net CAR losses from the Massachusetts Insurers Insolvency Fund, CAR
must increase each of its member's share of the deficit in order to compensate
for the insolvent carrier's inability to pay its deficit assessment. It is
anticipated that there will be additional assessments from time to time relating
to various insolvencies.
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