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Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2010Oro

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


Commission file number 000-50070

SAFETY INSURANCE GROUP, INC.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

13-4181699(I.R.S. Employer Identification No.)20 Custom House Street, Boston, Massachusetts(Address of principal executive offices)

02110(Zip Code)


(617) 951-0600(Registrant's telephone number, including area code)

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

Title of each class

Name of each exchange on which registeredCommon Shares, $0.01 par value per share

NASDAQ Global Select Market


Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the
Act. Yes o    No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ý

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

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o
(Do not check if a
smaller reporting company)

Smaller reporting company o


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

The aggregate market value of the registrant's voting and non-voting common equity (based on the closing sales price on NASDAQ) held by
non-affiliates of the registrant as of June 30, 2010, was approximately $504,336,195.

As
of March 9, 2011, there were 15,158,195 Common Shares with a par value of $0.01 per share outstanding.

Documents Incorporated by Reference

Portions of the registrant's definitive proxy statement for its Annual Meeting of Shareholders to be held on May 20, 2011, which Safety Insurance
Group, Inc. (the "Company", "we", "our", "us") intends to file within 120 days after its December 31, 2010 year-end, are incorporated by reference into
Part II and Part III hereof.



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SAFETY INSURANCE GROUP, INC.        Table of Contents



PagePART I.Item 1.

Business


1Item 1A.

Risk Factors


28Item 1B.

Unresolved Staff Comments


34Item 2.

Properties


35Item 3.

Legal Proceedings


35Item 4.

(Removed and Reserved)


35PART II.Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


36Item 6.

Selected Financial Data


38Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations


40Item 7A.

Quantitative and Qualitative Disclosures About Market Risk


74Item 8.

Financial Statements and Supplementary Data


75Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure


114Item 9A.

Controls and Procedures


114Item 9B.

Other Information


114PART III.Item 10.

Directors, Executive Officers and Corporate Governance


115Item 11.

Executive Compensation


115Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


115Item 13.

Certain Relationships and Related Transactions, and Director Independence


115Item 14.

Principal Accounting Fees and Services


115PART IV.Item 15.

Exhibits, Financial Statement Schedules


115SIGNATURES


124


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Table of Contents

In this Form 10-K, all dollar amounts are presented in thousands, except average premium, average claim and per claim
data, share, and per share data.

PART I.

ITEM 1.    BUSINESS

General

We are a leading provider of private passenger automobile insurance in Massachusetts. In addition to private passenger automobile
insurance (which represented 68.7% of our direct written premiums in 2010), 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 and New Hampshire through our insurance company subsidiaries, Safety Insurance Company ("Safety Insurance"), Safety
Indemnity Insurance Company ("Safety Indemnity") and Safety Property and Casualty Insurance Company ("Safety P&C") (together referred to as the "Insurance Subsidiaries"), we have established strong
relationships with independent insurance agents, who numbered 783 in 908 locations throughout Massachusetts and 31 locations in New Hampshire during 2010. We have used these relationships and our
extensive knowledge of the Massachusetts market to become the second largest private passenger automobile carrier, capturing an approximate 11.4% share of the Massachusetts private passenger
automobile insurance market, and the third largest commercial automobile carrier, with an 10.7% share of the Massachusetts commercial automobile insurance market in 2010 according to statistics
compiled by Commonwealth Automobile Reinsurers ("CAR"). In addition, we were also ranked the 50th largest automobile writer in the country according to A.M. Best, based on
2009 direct written premiums. We were incorporated under the laws of Delaware in 2001, but through our predecessors, we have underwritten insurance in Massachusetts since 1979.

Our
Insurance Subsidiaries began writing private passenger automobile and homeowners insurance business in New Hampshire during 2008 and personal umbrella business during 2009. During
the years ended December 31, 2010 and 2009, the Company wrote $2,774 and $978 in direct written premiums, respectively, and approximately 3,300 and 1,250 policies, respectively, in New
Hampshire.

Website Access to Information

The Internet address for our website iswww.SafetyInsurance.com. All of our press
releases and United States Securities and Exchange Commission ("SEC") reports are available for viewing or download at our website. These documents are made available on our website as soon as
reasonably practicable after each press release is made and SEC report is filed with, or furnished to, the SEC. Copies of any current public information about our company are available without charge
upon written, telephone, faxed or e-mailed request to the Office of Investor Relations, Safety Insurance Group, Inc., 20 Custom House Street, Boston, MA 02110, Tel:
877-951-2522, Fax: 617-603-4837, or e-mail:InvestorRelations@SafetyInsurance.com. The
materials on our website are not part of this report on Form 10-K nor are they incorporated by reference into this report and the URL above is intended to be an inactive textual
reference only.

Our Competitive Strengths

We Have Strong Relationships with Independent Agents.In 2009, independent agents accounted for approximately 78.1% of the Massachusetts
automobile
insurance market measured by direct written premiums as compared to only about 35.4% nationwide, according to A.M. Best. For that reason, our strategy is centered around, and we sell
exclusively through, a network of independent agents, who numbered 783 (of which 2 are Exclusive Representative Producers ["ERPs"] assigned to us under regulations that were
phased out April 1, 2009, as discussed below) in 939 locations throughout

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Massachusetts
and New Hampshire during 2010. In order to support our independent agents and enhance our relationships with them, we:



Through
these measures, we strive to become the preferred provider of the independent agents in our agency network and capture a growing share of the total insurance business written by
these agents in Massachusetts. 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. We have
achieved our
profitability, among other things, by:



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 the Insurance Subsidiaries. In our largest business line, private passenger automobile insurance, our agents now submit
approximately 99.0% of all applications for new policies or endorsements for existing policies to us electronically through our proprietary information portal, the Agents Virtual Community ("AVC").
Our agents can also submit commercial automobile and homeowners insurance policies electronically over AVC. Second, our investment in technology has allowed us to re-engineer internal back
office processes to provide more efficient service at lower cost.

We Have an Experienced, Committed and Knowledgeable Management Team.Our senior management team owns approximately 8.0% of the common
stock of Safety
Insurance Group, Inc. on a fully diluted basis. Our senior management team, led by our President, Chief Executive Officer and Chairman of the Board, David F. Brussard, has an average of over
31 years of industry experience per executive, as well as an average of over 29 years of experience with Safety. The team has demonstrated an ability to operate successfully within the
regulated Massachusetts private passenger automobile insurance market.

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Our Strategy

To achieve our goal of increasing shareholder value, our strategy is to maintain and develop strong independent agent relationships by
providing our agents with a full package of insurance products and information technology services. We believe this strategy will allow us to:



The Massachusetts Property and Casualty Insurance Market

Introduction.We are licensed by the Commissioner of Insurance (the "Commissioner") to transact property and casualty insurance in
Massachusetts. All
of our business is extensively regulated by the Commissioner.

The Massachusetts Market for Private Passenger Automobile Insurance.Private passenger automobile insurance has been heavily regulated
in
Massachusetts. In many respects, the private passenger automobile insurance market in Massachusetts prior to 2008 was unique, in comparison to other states. This was 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 presented substantial challenges, but we believe they provided us a competitive advantage, because, as our
financial history shows, we have a thorough understanding of this market.

Changes to the Regulation of Private Passenger Automobile Insurance in Massachusetts.Since 1977, the Commissioner fixed and
established the premium
rates that all insurers must use in the Massachusetts private passenger automobile insurance market. Since 1982, CAR has managed the residual market for private passenger automobile insurance using a
reinsurance mechanism. On July 16, 2007, the Commissioner issued two decisions that significantly changed these two long standing approaches to how private passenger automobile insurance is
regulated in Massachusetts. In the first decision, the Commissioner announced that the Commissioner would not fix and establish the maximum premium rates that can be charged for private passenger
automobile insurance policies issued or renewed after April 1, 2008. In a letter accompanying the decision, the Commissioner stated that in place of the "fixed and established" system, that the
Commissioner would permit companies to file their own premium rates for approval by the Commissioner, under a system that the Commissioner has characterized as "managed competition" ("Managed
Competition").

The
Commissioner took additional steps to implement this decision. First, with respect to allowing competitive pricing, the Commissioner promulgated new regulations setting the terms and
conditions that insurers must comply with in establishing their rates to be effective April 1, 2008. The regulation contains a list of prohibited factors, including a prohibition of the use of
credit information in rating or underwriting. The Commissioner also issued a number of bulletins providing guidance on various issues, including regulatory review standards, discounts, product form,
endorsement, and new business application standards and classification plan requirements. Pursuant to this authority, we filed for various rate changes for policies issued and renewed on or after
April 1, 2008.

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In
the second decision, the Commissioner approved and set a time table for the implementation of new CAR rules pursuant to an assigned risk plan known as the Massachusetts Automobile
Insurance Plan ("MAIP") which replaced the former reinsurance program run by CAR. Under these new rules, as of April 1, 2009 we were no longer assigned ERPs whose business we must insure
(subject to the option of ceding it to CAR) and instead, we are assigned individual policies by CAR. The MAIP began with business effective on or after April 1, 2008 for new business and those
risks that have 10 or more Safe Driver Points. Beginning April 1, 2009, all business was eligible for MAIP except those risks that have no violations or accidents in the preceding three year
period (so called "Clean in three" risks). The last policy effective date on which any risk could be ceded to CAR in accordance with the current reinsurance program was March 31, 2009. Under
MAIP, policies will be assigned to us for three years, unless the policyholder is offered a voluntary policy by another insurer. We are not able at this time to determine what effect these CAR rules
will have on our business over the longer term.

These
decisions removed many of the factors that have historically distinguished the Massachusetts private passenger automobile insurance market from the market in other states,
including the use of a standard policy form, the use of a single safe driver insurance plan, and the role of ERPs and CAR.

However,
certain of the historically unique factors related to the Massachusetts private passenger automobile insurance market have not been eliminated, including compulsory insurance,
affinity group marketing, and the prominence of independent agents.

Products

Historically, we have focused on underwriting private passenger automobile insurance, which is written through our subsidiary, Safety
Insurance. In 1989, we formed Safety Indemnity to offer commercial automobile insurance at preferred rates. Since 1997, we have expanded the breadth of our product line in order for agents to address
a greater portion of their clients' insurance needs by selling multiple products. Homeowners, business owners policies, personal umbrella, dwelling fire and commercial umbrella insurance are written
by Safety Insurance at standard rates, and written by Safety Indemnity at preferred rates. In December 2006, we formed Safety P&C to offer homeowners and commercial automobile insurance at ultra
preferred rates.

The
table below shows our premiums in each of these product lines for the periods indicated and the portions of our total premiums each product line represented.

Years Ended December 31,Direct Written Premiums

2010

2009

2008Private passenger automobile

$
415,515


68.7
%
$
387,604


69.2
%
$
410,937


71.7
%Commercial automobile


62,658


10.4


67,228


12.0


75,808


13.2Homeowners


101,594


16.8


82,290


14.7


66,770


11.6Business owners


15,124


2.5


14,516


2.6


13,742


2.4Personal umbrella


4,397


0.7


3,459


0.6


2,663


0.5Dwelling fire


4,926


0.8


3,905


0.7


2,900


0.5Commercial umbrella


743


0.1


745


0.2


689


0.1Total

$
604,957


100.0
%
$
559,747


100.0
%
$
573,509


100.0
%


Our
product lines are as follows:

Private Passenger Automobile (68.7% of 2010 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

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private
passenger coverage competitively by offering group discounts since 1995 and we currently offer approximately 169 affinity group discount programs ranging from 3% to 8% discounts. Under
Massachusetts' Managed Competition regulations, we offer various new discounts including a discount of 10% when a private passenger policy is issued along with an other than private passenger policy
with us, a longevity/renewal credit of up to 4% for policyholders who maintain continuous coverage with us, and a 7% e-Customer discount for policyholders who want electronic policy
issuance with one combined bill for all of their policies with us. We began using four rating tiers effective January 1, 2010. A Companion Policy Client Tier, which is policyholders who have a
non private passenger automobile policy with us, receives a rate decrease of 2.5% from our filed base rates. A Loyal Automobile Client Tier, which is policyholders who have been insured with us for
two or more years, receives our filed base rates. A New Insurance Client Tier, which is policyholders with twelve or more months of continuous coverage or who qualify for a multi-car
discount, receives a rate increase of 2.5% from our filed base rates. A New Policyholder Tier, which is policyholders who do not qualify for the other three tiers, receives MAIP rates.

Commercial Automobile (10.4% of 2010 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 through Safety Insurance. We did not file for Massachusetts commercial automobile
insurance rate changes during 2008, 2009 or 2010. Qualifying risks eligible for preferred rates are written through Safety Indemnity which offers rates that are 20% lower than Safety Insurance.
Effective December 1, 2007, qualifying risks eligible for ultra preferred rates are written through Safety P&C which offers rates that are 35% lower than Safety Insurance.

Homeowners (16.8% of 2010 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, an account credit of up to 20% when a home is written together with an automobile, and a 5%
e-Customer discount for policyholders who want electronic policy issuance with one combined bill for all of their policies with us. We received approval for a Massachusetts rate increase
of 2.3% effective August 1, 2010. All forms of homeowners coverage are written at a standard rate through Safety Insurance. Qualifying risks eligible for preferred rates are written through
Safety Indemnity which offers rates that are 13% lower than Safety Insurance. Effective September 1, 2007, qualifying risks eligible for ultra preferred rates are written through Safety P&C
which offers rates that are 22% lower than Safety Insurance.

Business Owners Policies (2.5% of 2010 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.

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Commercial Package Policies (Included in our Business Owners Policies 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 (0.7% of 2010 direct written premiums).We offer personal excess liability coverage over and above the limits of
individual
automobile, watercraft, and homeowner's insurance policies to clients. We offer an account credit of 10% when an umbrella policy is written together with an automobile insurance policy. We write
policies at standard rates with limits of $1,000 to $5,000.

Dwelling Fire (0.8% of 2010 direct written premiums).We underwrite dwelling fire insurance, which is a limited form of a homeowner's
policy for
non-owner occupied residences. We offer superior construction and protective device credits, with an account credit of 5% 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 (0.1% of 2010 direct written premiums).We offer an excess liability product to clients for whom we underwrite both
commercial
automobile and business owner policies. The program is directed at commercial automobile risks with private passenger-type automobiles or light and medium trucks. We write commercial
umbrella policies at standard rates with limits ranging from $1,000 to $5,000.

Inland Marine (Included in our Homeowners direct written premiums).We offer inland marine coverage as an endorsement for all
homeowners and business
owner policies, and as part of our commercial package policy. Inland marine provides additional coverage for jewelry, fine arts and other items that a
homeowners or business owner policy would limit or not cover. Scheduled items valued at more than $5 must meet our underwriting guidelines and be appraised.

Watercraft (Included in our Homeowners direct written premiums).We offer watercraft coverage for small and medium sized pleasure craft
with maximum
lengths of 32 feet, valued at less than $75 and maximum speed of 39 knots. We write this coverage as an endorsement to our homeowner's policies.

In
the wake of the September 11, 2001 tragedies, the insurance industry is also impacted by terrorism, and we have filed and received approval for a number of terrorism
endorsements from the Commissioner, which limit our liability and property exposure according to the Terrorism Risk Insurance Act of 2002, the Terrorism Risk Insurance Extension Act of 2005 and the
Terrorism Risk Insurance Program Reauthorization Act of 2007. See "Reinsurance," discussed below.

Distribution

We distribute our products exclusively through independent agents, unlike some of our competitors who use multiple distribution
channels. We believe this gives us a competitive advantage with the agents. With the exception of our ERPs, we do not accept business from insurance brokers. Our voluntary agents have authority
pursuant to our voluntary agency agreement to bind our Insurance Subsidiaries for any coverage that is within the scope of their authority. We reserve the ability 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 (including our ERPs) numbered 783 and had 944 offices
(some agencies have more than one office) and approximately 5,875 customer service representatives during 2010.

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Voluntary Agents.In 2010, we obtained approximately 92.4% 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 January 31, 2011, we had agreements with 659 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 private passenger average ratio of losses, excluding loss adjustment expenses, to net earned premiums ("pure loss ratio") of 65.0% or less on the
portion of the agent's portfolio that we would underwrite; (iii) make a commitment for us to underwrite at least 500 policies from the agency during the first twelve months after entering an
agreement with us; and (iv) offer multiple product lines. Every year, we review the performance of our agents during the prior year. If an agent fails to meet our profitability standards, we
try to work with the agent to improve the profitability of the business it places with us. We generally terminate contracts each year with a few agencies, which, despite our efforts, have been
consistently unable to meet our standards. Although independent agents usually represent several unrelated insurers, our goal is to be one of the top two insurance companies represented in each of our
agencies, as measured by premiums. No individual agency generated more than 3.6% of our direct written premiums in 2010.

Exclusive Representative Producers.In 2010, our ERPs generated approximately 7.6% of our direct written premiums for automobile
insurance. As of
December 31, 2010, we had two 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 automobile insurer conducting business in Massachusetts. In addition, we are required by MAIP to write "Clean in
three" business from our former ERPs.

Massachusetts
law guarantees that CAR provide motor vehicle insurance coverage to all qualified applicants. To facilitate this system, under CAR's prior rules, any qualified licensed
insurance producer that is unable to obtain a voluntary automobile relationship with an insurer becomes an ERP and is assigned to an insurer, which is then required to write that agent's policies. As
previously noted, the MAIP began April 1, 2008 and was fully implemented by April 1, 2009. Beginning April 1, 2008 all Massachusetts agents (including ERPs) were authorized to
submit eligible business to the MAIP for random assignment to a servicing carrier such as Safety Insurance. We began receiving individual policies assigned to us from the MAIP on April 1, 2008.
As a result of CAR's new rules, effective April 1, 2009 ERPs were no longer assigned to us or any Massachusetts personal automobile insurer, and we have been instead allocated all residual
market business through the MAIP.

CAR
runs a reinsurance pool for commercial automobile policies. On January 1, 2006, CAR implemented a Limited Servicing Carrier Program ("LSC") for ceded commercial automobile
policies. CAR approved Safety Insurance and five other servicing carriers through a Request for Proposal to process ceded commercial automobile business for a five year term ending January 1,
2011. During 2010 CAR requested bids through a Request for Proposal process that reduced the number of servicing carriers from six to four. CAR approved Safety and three other servicing carriers to
process ceded commercial automobile insurance with a delayed effective date of July 1, 2011. Approximately $95,000 of ceded premium will be spread equitably among the four servicing carriers.
Subject to the Commissioner's review, CAR sets the premium rates for commercial automobile policies reinsured through CAR and this reinsurance pool can generate an underwriting result that is a profit
or deficit based upon CAR's rate level. This underwriting result is allocated among every Massachusetts commercial automobile insurance company, including us, based on a company's commercial
automobile voluntary market share.

CAR
also runs a reinsurance pool for Taxi, Limousine and Car Service risks (the "Taxi/Limo Program"). On April 25, 2007, Safety submitted through a Request for Proposal a bid to
process a

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portion
of the Taxi/Limo Program. CAR approved Safety as one of the two servicing carriers for this program beginning January 1, 2008. During 2010 CAR requested bids through a Request for
Proposal process to extend the program another five years. CAR approved Safety as one of the two servicing carriers for this program beginning January 1, 2011. Approximately $8,000 of ceded
premium is spread equitably between the two servicing carriers.

We
are assigned independent agents by CAR who can submit commercial business to us in the LSC and Taxi/Limo Program, and we classify those agents as commerical ERPs.

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

Years Ended December 31,2010

2009

2008Line of Business

Exposures

Change

Exposures

Change

Exposures

ChangePrivate passenger automobile:Voluntary agents


421,139


2.6
%

410,405


3.6
%

395,989


1.2
%ERPs


31,411


-9.1


34,562


-37.5


55,342


-35.9MAIP


17,687


73.5


10,195


13.5


8,983


Total private passenger automobile


470,237


3.3


455,162


-1.1


460,314


-3.6Commercial automobile:Voluntary agents


42,502


-0.4


42,670


-4.5


44,692


-6.0ERPs


3,699


-18.8


4,556


-16.8


5,474


-10.8Total commercial automobile


46,201


-2.2


47,226


-5.9


50,166


-6.5Other:Homeowners


117,120


19.6


97,955


23.4


79,359


14.0Business owners


7,785


8.2


7,198


8.2


6,654


25.9Personal umbrella


16,515


24.9


13,223


25.6


10,528


20.5Dwelling fire


4,729


24.8


3,788


30.3


2,908


20.0Commercial umbrella


530


2.9


515


12.2


459


12.0Total other


146,679


19.6


122,679


22.8


99,908


15.5Total


663,117


6.1


625,067


2.4


610,388


-1.2Total voluntary agents


628,007


7.2


585,949


6.6


549,572


4.6Total ERPs


35,110


-10.3
%

39,118


-35.7
%

60,816


-34.2
%


Our
total written exposures increased by 6.1% for the year ended December 31, 2010. The increase was primarily the result of our voluntary agent written exposures increasing by
7.2%. Our ERP written exposures, which include "Clean in three" exposures written by our former ERPs, decreased by 10.3%. Our private passenger automobile exposures increased by 3.3% in 2010 primarily
as a result of the increase in written exposures due to the transition to MAIP effective April 1, 2008 as discussed above. Our commercial automobile exposures decreased by 2.2% in 2010
primarily as a result of reduced exposures from ERPs submitting business through the CAR LSC program, and general economic conditions which reduced the size of the overall commercial automobile market
in Massachusetts. Our
other than auto exposures increased by 19.6% in 2010 primarily as a result of our voluntary agents' efforts to sell multiple products to their clients and our pricing strategy of offering account
discounts to policyholders who insure both their home and automobile with us. In 2010, 37.6% of the private passenger automobile exposures we insure had an other than private passenger policy with us,
compared to 30.5% and 25.9% in 2009 and 2008, respectively. In addition, 83.9% of our homeowners policyholders had a matching automobile policy with us in 2010 and 2009 compared to 79.2% in 2009.

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Marketing

We view the independent agent as our customer and business partner. As a result, a component of our marketing efforts focuses on
developing interdependent relationships with leading Massachusetts agents that write profitable business and positioning ourselves as the preferred insurance carrier of those agents, thereby receiving
a larger portion of each agent's aggregate business. Our principal marketing strategies to agents are:



Beginning
in 2007, we started a comprehensive branding campaign using a variety of radio, television, internet and print advertisements.

Commission Schedule and Profit Sharing Plan.We have several programs designed to attract profitable new business from agents by paying
them more
than the minimum commission the law requires for private passenger auto (which is 13.0% of premiums for 2010 and 2011). We recognize our top performing agents by making them members of either our
Chairman's Elite, Chairman's, President's, Executive's or Preferred Agent's Club. In 2010, members of these Clubs received a commission of up to 18.0% of premiums for each new private passenger auto
policy and up to 27.0% of premiums for each new homeowner policy.

Further,
we have a competitive agency incentive commission program under which we pay agents up to 8.0% of premiums based on the loss ratio on their business.

We
have received no inquiries from the Commissioner relative to how we conduct our contingent commissions and profit sharing programs. The Massachusetts Attorney General did question the
inclusion of contingent commission expenses in her appeal of our April 1, 2008 private passenger rate filing. The Commissioner ruled on January 25, 2008 that the inclusion of expenses
attributable to contingent commissions was reasonable and not prohibited by Massachusetts law.

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

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Underwriting

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



We
are organized into three underwriting units, a separate unit for private passenger automobile, a separate unit for all other personal lines underwriting including homeowners, dwelling
fire, personal umbrella and inland marine coverages, and a separate unit for commercial lines, including commercial auto, business owners policies, commercial umbrella and commercial package policies.

Pricing.Prior to April 1, 2008, our pricing strategy for private passenger automobile insurance primarily depended on the maximum
permitted
premium rates and minimum permitted commission levels mandated by the Commissioner. Beginning April 1, 2008 subject to the Commissioner's review, we set rates for our private passenger business
using industry loss cost data, our own loss experience, residual market deficits, catastrophe modeling and prices charged by our competitors in the Massachusetts market. Beginning April 1, 2008
subject to Commissioner's review, CAR sets the premium rates for personal automobile policies assigned to carriers by the MAIP. However, companies may only charge the insured the lower of the CAR/MAIP
rate or the company's competitive voluntary market rate. Safety Insurance's approved rate for three of our four rating tiers is lower than the CAR/MAIP rate. We began using four rating tiers effective
January 1, 2010. A Companion Policy Client Tier, which is policyholders that have an other than private passenger automobile policy with us, receives a rate decrease of 2.5% from our filed base
rates. A Loyal Automobile Client Tier, which is policyholders who have been insured with Safety two or more years, receives our filed base rates. A New Insurance Client Tier, which is policyholders
with 12 or more months of continuous coverage or who qualify for a multi-car discount, receives a rate increase of 2.5% from our filed base rates. A New Policyholder Tier, which is
policyholders that don't qualify for the other three tiers, receives MAIP rates. For a discussion of changes since 2008 in our private passenger automobile rates, see
Item 7Management's Discussion and Analysis of Financial Condition and Results of Operations,Executive Summary and Overview.

We
offer group discounts to members of 169 affinity groups. In general, we target affinity groups with a mature and stable membership base along with favorable driving records, offering
between a 3.0% and 8.0% discount (with 4.0% being the average discount offered). Approximately 7.7% of the private passenger exposures we write receive an affinity group discount.

Subject
to the Commissioner's review, CAR sets the premium rates for commercial automobile policies reinsured through CAR. Subject to the Commissioner's 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, residual market deficits, catastrophe modeling and prices charged by our
competitors in the Massachusetts market. We have three pricing tiers for most products, utilizing Safety Insurance for standard rates, Safety Indemnity for preferred rates and Safety P&C for ultra
preferred rates. We received approval for a rate increase of 2.1% for our Safety Insurance commercial automobile line effective December 16, 2004, and did not file for a rate change for the
years 2005 through 2010. We received approval for a rate deviation for Safety P&C commercial automobile of 35.0% below our

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comparable
Safety Insurance rate. We received approval for a rate increase of 1.6% for our homeowners line effective August 1, 2010.

CAR Reinsurance Pool.CAR runs a reinsurance pool for commercial automobile policies and beginning January 1, 2006, we became one
of six
servicing carriers that can service commercial automobile policies for CAR. In 2010, CAR reduced the number of servicing carriers to four, and CAR has approved Safety and three other servicing
carriers effective July 1, 2011 to continue the program. CAR also runs a reinsurance pool for taxi/limousine/car service commercial automobile policies and beginning January 1, 2008, we
became one of two servicing carriers that can service these policies for CAR. All commercial automobile business that is not written in the voluntary market is apportioned to one of the four servicing
carriers who handle the business on behalf of CAR or to one of the two servicing carriers who handle the business on behalf of CAR for taxi/limousine/car service business. Each Massachusetts
commercial automobile insurer must bear a portion of the losses of the total commercial reinsurance pool that is serviced by the approved servicing carriers.

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 private
passenger portion of the portfolio have a pure loss ratio of 65.0% or less on the portion of the agent's portfolio that we would underwrite. In addition, we require any new voluntary agent to commit
to transfer a portfolio to us consisting of at least 500 policies.

Policy Processing and Rate Pursuit.Our underwriting department assists in processing policy applications, endorsements, renewals and
cancellations.
For many years, we have used and implemented proprietary software that enables agents to connect to our network and enter policy and endorsement applications for private passenger automobile insurance
from their office computers. In our private passenger
automobile insurance line, our agents now submit approximately 99.0% of all applications for new policies or endorsements for existing policies through our proprietary information portal, the AVC. We
also offer propriety software for our commercial automobile and homeowners insurance lines of business that provides the same functionality as that of our personal automobile software.

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 pre-inspection requirements, and in some cases the validity of discounts. In our homeowners and dwelling fire lines, our team
has completed a project to update the replacement costs for each dwelling. We use third-party software to assist in these appraisal efforts.

Technology

The focuses of our information technology effort are:



We
believe that our technology initiatives have increased revenue and decreased costs. For example, these initiatives have allowed us to reduce the number of call-center
transactions which we perform, and to transfer many manual processing functions from our internal operations to our independent agents. We also believe that these initiatives have contributed to
overall increases in productivity.

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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.

The
RadicalGlass.com application allows our claims department to contain glass costs by increasing the windshield repair to replacement ratio. For every windshield that is repaired
rather than replaced there is an average savings of approximately $285 per windshield claim.

Our
first VIP Claims Center was introduced during 2006 to provide increased service levels to our independent insurance agents and their clients. We currently operate three VIP Claims
Centers which use a network of rental car centers and auto body repair shops to provide a higher level of service to the clients of the independent insurance agents while reducing costs, such as
rental expense, through reduced cycle times.

Billing.Proprietary billing systems, integrated with the systems of our print and lock-box
vendors, expedite the processing and collection of premium receipts and finance charges from agents and policyholders. We believe the sophistication of our direct bill system helps us to limit our bad
debt expense. In both 2010 and 2009, our bad debt expense as a percentage of direct written premiums was 0.2%.

External Applications

Our Agent Technology offerings are centralized within our agency portal and feature PowerDesk and Safety Express. PowerDesk is a web
based application that allows for billing inquiry, payment notification, policy inquiry and claims inquiry. Safety Express provides agents with new business and endorsement entry, real time policy
issuance for personal lines, immediate printing of declarations pages in agents' offices, policy downloads to most major agency management systems and data imports from Boston Software's WinRater
(Massachusetts) and Vertafore's PL Rater (New Hampshire). In addition, Safety provides its agents with commission downloads for all lines of business, Transformation Station and Transact Now Inquires,
e-Claims online claims reporting, e-View daily transaction reports and e-Docs online electronic document file cabinet. Safety also provides online bill pay,
(including credit and debit cards), online declarations pages, billing inquiry, claims inquiry, auto claims first notice of loss, and online auto insurance cards to our agent's policyholders through
www.SafetyInsurance.com. Safety has also updated its telephone system to provide a voice activated phone directory, automated billing inquiry and payments, and call center screen pop technology.

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.

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Casualty Claims

We have adopted stringent claims settlement procedures, which include guidelines that establish maximum settlement offers for soft
tissue injuries, which constituted approximately 81% of our bodily injury claims in 2010. 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 E-Claim reporting system is an online product that reduces the time it takes for agents to notify our adjusters about claims, thereby enabling us to contact third-party
claimants and other witnesses quickly. After business hours, 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 of Massachusetts. Comprising 118 people, the department is
organized into distinct claim units that contain loss costs for soft tissue injuries. Field adjusters are located geographically for prompt response to claims, with our litigation unit focused on
managing loss costs and litigation expenses for serious injury claims.

Additionally,
we utilize a special unit to investigate fraud in connection with casualty claims. This special unit has one manager and nine 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 private passenger and commercial automobile, homeowners and other
insurance lines. Process automation has streamlined our property claims function. Many of our property claims are now handled by the agents through AVC using our Power Desk software application. As
agents receive calls from claimants, Power Desk permits the agent to immediately send information related to the claim directly to us and to an independent appraiser selected by the agent to value the
claim. Once we receive this information, an automated system redirects the claim to the appropriate internal adjuster responsible for investigating
the claim to determine liability. Upon determination of liability, the system automatically begins the process of seeking a subrogation recovery from another insurer, if liable. We believe this
process results in a shorter time period from when the claimant first contacts the agent to when the claimant receives a claim payment, while enabling our agents to build credibility with their
clients by responding to claims in a timely and efficient manner. We benefit from decreased labor expenses from the need for fewer employees to handle the reduced property claims call volume.

Another
important factor in keeping our overall property claims costs low is collecting subrogation recoveries. We track the amounts we pay out in claims costs and identify cases in
which we believe we can reclaim some or all of those costs through the use of our automated workload management tools.

Reserves

Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the loss to the insurer and the
insurer's payment of that loss. To recognize liabilities for unpaid losses, insurers establish reserves as balance sheet liabilities representing estimates of amounts needed to pay

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reported
and unreported losses and the expenses associated with investigating and paying the losses, or loss adjustment expenses. Every quarter, we review and establish our reserves. Regulations
promulgated by the Commissioner require us to annually obtain a certification from either a qualified actuary or an approved loss reserve specialist who may be one of our employees that our loss and
loss adjustment expenses reserves are reasonable.

When
a claim is reported, claims personnel establish a "case reserve" for the estimated amount of the ultimate payment. The amount of the reserve is primarily based upon an evaluation of
the type of claim involved, the circumstances surrounding each claim and the policy provisions relating to the loss. The estimate reflects informed judgment of such personnel based on general
insurance reserving practices and on the experience and knowledge of the claims person. During the loss adjustment period, these estimates are revised as deemed necessary by our claims department
based on subsequent developments and periodic reviews of the cases.

In
accordance with industry practice, we also maintain reserves for estimated losses incurred but not yet reported. Incurred but not yet reported reserves are determined in accordance
with commonly accepted actuarial reserving techniques on the basis of our historical information and experience. We make adjustments to incurred but not yet reported reserves quarterly to take into
account changes in the volume of business written, claims frequency and severity, our mix of business, claims processing
and other items that can be expected to affect our liability for losses and loss adjustment expenses over time.

When
reviewing reserves, we analyze historical data and estimate the impact of various loss development factors, such as our historical loss experience and that of the industry,
legislative enactments, judicial decisions, legal developments in imposition of damages, and changes and trends in general economic conditions, including the effects of inflation. There is no precise
method, however, for evaluating the impact of any specific factor on the adequacy of reserves, because the eventual development of reserves is affected by many factors. After taking into account all
relevant factors, management believes that our provision for unpaid losses and loss adjustment expenses at December 31, 2010 is adequate to cover the ultimate net cost of losses and claims
incurred as of that date.

Management
determines its loss and loss adjustment expense ("LAE") reserves estimates based upon the analysis of the Company's actuaries. Management has established a process for the
Company's actuaries to follow in establishing reasonable reserves. The process consists of meeting with our claims department, establishing ultimate incurred losses by using development models
accepted by the actuarial community, and reviewing the analysis with management. The Company's estimate for loss and LAE reserves, net of the effect of ceded reinsurance, ranges from a low of $311,570
to a high of $359,802 as of December 31, 2010. The Company's loss and LAE reserves, based on our actuaries' best estimate, were set at $351,244 as of December 31, 2010. The ultimate
liability may be greater or less than reserves carried at the balance sheet date. Establishment of appropriate reserves is an inherently uncertain process, and there can be no certainty that currently
established reserves will prove adequate in light of subsequent actual experience. To the extent that reserves are inadequate and are strengthened, the amount of such increase is treated as a charge
to earnings in the period that the deficiency is recognized. To the extent that reserves are redundant and are released, the amount of the release is a credit to earnings in the period the redundancy
is recognized. We do not discount any of our reserves.

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Table of Contents

The following table presents development information on changes in the reserves for losses and LAE of our Insurance Subsidiaries for each year in the three year
period ended December 31, 2010.

Years Ended December 31,2010

2009

2008Reserves for losses and LAE, beginning of year

$
439,706

$
467,559

$
477,720Less reinsurance recoverable on unpaid losses and LAE


(64,874
)

(76,489
)

(84,290
)Net reserves for losses and LAE, beginning of year


374,832


391,070


393,430Incurred losses and LAE, related to:Current year


409,005


390,366


405,761Prior years


(48,157
)

(44,065
)

(35,938
)Total incurred losses and LAE


360,848


346,301


369,823Paid losses and LAE related to:Current year


253,476


235,681


229,924Prior years


130,960


126,858


142,259Total paid losses and LAE


384,436


362,539


372,183Net reserves for losses and LAE, end of year


351,244


374,832


391,070Plus reinsurance recoverables on unpaid losses and LAE


53,147


64,874


76,489Reserves for losses and LAE, end of year

$
404,391

$
439,706

$
467,559


At
the end of each period, the reserves were re-estimated for all prior accident years. Our prior year reserves decreased by $48,157, $44,065 and $35,938, during 2010, 2009
and 2008, respectively. The decrease in prior year reserves during 2010 resulted from re-estimations of prior year ultimate loss and LAE liabilities and is primarily composed
of reductions of $34,248 in our retained automobile reserves, $7,269 in our retained homeowners and retained all other reserves, and $5,572 in CAR assumed reserves. It is not appropriate to
extrapolate future favorable or unfavorable development of reserves from this past experience.

The
following table represents the development of reserves, net of reinsurance, for calendar years 2000 through 2010. 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, 2010.

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 2004
estimate for a previously incurred loss was $150,000 and the loss was reserved at $100,000 in 2000, the $50,000 deficiency (later estimate minus original estimate) would be included in the cumulative
redundancy (deficiency) in each of the years 2000-2004 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

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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 Years Ended December 31,2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000Reserves for losses and LAE originally estimated:

$
351,244

$
374,832

$
391,070

$
393,430

$
370,980

$
370,166

$
366,730

$
310,012

$
266,636

$
227,377

$
211,834Cumulative amounts paid as of:One year later





130,960


126,858


142,259


122,806


133,213


144,600


150,354


137,092


118,141


114,016Two years later








189,897


195,798


183,457


187,231


202,435


201,287


199,119


168,344


163,768Three years later











234,359


212,331


221,390


233,513


232,539


225,350


196,340


185,396Four years later














233,438


234,705


251,303


247,073


238,087


212,079


194,891Five years later

















244,454


257,061


255,798


243,677


217,009


204,290Six years later




















260,628


258,588


246,488


218,419


206,324Seven years later























259,553


247,211


219,397


206,801Eight years later


























247,299


219,673


207,180Nine years later





























219,716


207,249Ten years later
































207,370




As of and for the Years Ended December 31,2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000Reserves re-estimated as of:One year later




$
326,675

$
347,004

$
357,492

$
340,189

$
327,419

$
327,110

$
303,234

$
266,817

$
225,115

$
204,531Two years later








307,918


325,317


311,972


310,614


304,891


291,100


269,941


227,764


206,340Three years later











297,224


287,875


289,109


297,790


280,507


264,961


231,190


208,587Four years later














269,446


274,840


284,542


277,835


260,398


229,699


209,517Five years later

















264,408


276,272


271,205


257,836


227,428


208,343Six years later




















270,441


267,764


253,711


225,705


208,232Seven years later























264,563


251,656


223,554


207,084Eight years later


























250,380


222,431


205,891Nine years later





























221,771


205,240Ten years later
































204,909Cumulative redundancy 2010




$
(48,157
)
$
(83,152
)
$
(96,206
)
$
(101,534
)
$
(105,758
)
$
(96,289
)
$
(45,449
)
$
(16,256
)
$
(5,606
)
$
(6,925
)




As of and for the Years Ended December 31,2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000Gross liability-end of year

$
404,391

$
439,706

$
467,559

$
477,720

$
449,444

$
450,716

$
450,897

$
383,551

$
333,297

$
302,556

$
302,131Reinsurance recoverables


53,147


64,874


76,489


84,290


78,464


80,550


84,167


73,539


66,661


75,179


90,297Net liability-end of year


351,244


374,832


391,070


393,430


370,980


370,166


366,730


310,012


266,636


227,377


211,834Gross estimated liability-latest





385,722


368,894


359,109


325,873


320,979


331,094


326,584


310,816


274,903


271,083Reinsurance recoverables-latest





59,047


60,976


61,885


56,427


56,571


60,653


62,021


60,436


53,132


66,174Net estimated liability-latest




$
326,675

$
307,918

$
297,224

$
269,446

$
264,408

$
270,441

$
264,563

$
250,380

$
221,771

$
204,909


As the table shows, our net reserves grew at a faster rate than our gross reserves over the ten-year period. As we have grown, we have
been able to retain a greater percentage of our direct business. Additionally, in the past we conducted substantial business as a servicing carrier for other insurers, in which we would service the
residual market automobile insurance business assigned to other carriers

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for
a fee. All business generated through this program was ceded to the other carriers. As we reduced the amount of our servicing carrier business, our proportion of reinsurance ceded diminished.

The
table also shows that we have substantially benefited in the current and prior years from releasing redundant reserves. In the years ended December 31, 2010, 2009 and 2008 we
decreased loss reserves related to prior years by $48,157, $44,065 and $35,938, respectively. Reserves and development are discussed further in Item 7Management's Discussion and
Analysis of Financial Condition and Results of Operations,Executive Summary and Overview.

As
a result of our focus on core business lines since our founding in 1979, we believe we have no 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, primarily in our homeowners line of business. 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 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. Swiss Re, our primary reinsurer, maintains an A.M. Best rating of "A" (Excellent). Most
of our reinsurers have an A.M. Best rating of "A" (Excellent), however in no case is a reinsurer rated below "A-" (Excellent).

We
maintain reinsurance coverage to help lessen the effect of losses from catastrophic events, maintaining coverage that during 2010 protected us in the event of a "140-year
storm" (that is, a storm of a severity expected to occur once in a 140 year period). We use various software products to measure our exposure to catastrophe losses and the probable maximum loss
to us for catastrophe losses such as hurricanes. The models include estimates for our share of the catastrophe losses generated in the residual market for property insurance by the Massachusetts
Property Insurance Underwriting Association ("FAIR Plan"). In 2010, we purchased four layers of excess catastrophe reinsurance providing coverage for property losses in excess of $30,000 up to a
maximum of $450,000. Our reinsurers' co-participation is 85.0% of $50,000 for the 1st layer, 85.0% of $70,000 for the 2nd layer, 80.0% of $250,000
for the 3rd layer, and 80.0% of $50,000 for the 4th layer.

In
the aftermath of Hurricane Katrina in 2005, the reinsurance market has seen from the various software modelers, increases in the estimate of damage from hurricanes in the southern and
northeast portions of the United States due to revised estimations of increased hurricane activity and increases in cost of repairs due to increased estimates in the amount of "demand surge" in the
periods following a significant event. While we have continued to manage our exposure to catastrophes such as hurricanes, the changes to the various software models during the past few years, and
again in 2010, have increased our modeled probable maximum loss due to catastrophic events. We continue to adjust our reinsurance programs as a result of the changes to the models. For 2011, we have
purchased four layers of excess catastrophe reinsurance providing coverage for property losses in excess of $30,000 up to a maximum of $535,000. Our reinsurers' co-participation is 85.0%
of $50,000 for the 1st layer, 85.0% of $80,000 for the 2nd layer, 80.0% of $250,000 for the 3rd layer, and 80.0% of $125,000 for the
4th layer. As a result of these changes to the models, and our revised reinsurance program, we maintain coverage that protects us in the event of a "140-year storm"
(that is, a storm of a severity expected to occur once in a 140 year period).

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We
also have casualty excess of loss reinsurance for large casualty losses occurring in our automobile, homeowners, dwelling fire, business owners, and commercial package lines of
business in excess of $2,000 up to a maximum of $10,000. We have property excess of loss reinsurance coverage for large property losses, with coverage in excess of $2,000 up to a maximum of $15,000,
for our homeowners, business owners, and commercial package policies. In addition, we have a quota share reinsurance agreement for personal and commercial umbrella lines of business under which we
ceded 80.0% of the premiums for 2010. Effective January 1, 2011 we have ended our quota share agreement and we have purchased excess of loss reinsurance for umbrella large losses in excess of
$1,000 up to a maximum of
$5,000. We also have various reinsurance agreements with Hartford Steam Boiler Inspection and Insurance Company, of which the primary contract is a quota share agreement under which we cede 100% of
the premiums and losses for the equipment breakdown coverage under our business owner policies and commercial package policies.

In
the wake of the September 11, 2001 tragedies, reinsurers have begun to exclude coverage for claims in connection with any act of terrorism. Our reinsurance program excludes
coverage for acts of terrorism, except for fire or collapse losses as a result of terrorism, under homeowners, dwelling fire, private passenger automobile and commercial automobile policies. For
business owner policies and commercial package policies, terrorism is excluded if the total insured value is greater than $20,000.

The
Terrorism Risk Insurance Act of 2002 ("TRIA") was signed into law on November 26, 2002, and expired December 31, 2005. The Terrorism Risk Insurance Extension Act of
2005 was signed into law on December 22, 2005, and expired December 31, 2007. The Terrorism Risk Insurance Extension Act of 2007 ("TRIEA") was signed into law on December 26, 2007
which reauthorized TRIA for seven years, expanded the definition of an "Act of Terrorism" while expanding the private sector role and reducing the federal share of compensation for insured losses
under the program. The intent of this legislation is to provide federal assistance to the insurance industry for the needs of commercial insurance policyholders with the potential exposure for losses
due to acts of terrorism. The TRIEA provides reinsurance for certified acts of terrorism. Effective January 1, 2008, we began to issue policy endorsements for all commercial policyholders to
comply with TRIA after obtaining the Commissioner's approval.

In
addition to the above mentioned reinsurance programs and as described in more detail above underThe Massachusetts Property and Casualty Insurance
Market,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. This residual market mechanism is being phased out, as described earlier. 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. The FAIR Plan has grown dramatically over the past few years as insurance carriers have reduced their exposure to coastal property. The FAIR Plan's exposure to catastrophe
losses increased and as a result, the FAIR Plan decided to buy reinsurance to reduce their exposure to catastrophe losses. On July 1, 2010, the FAIR Plan purchased $1,000,000 of catastrophe
reinsurance for property losses in excess of $200,000. As of December 31, 2010, we had no material amounts recoverable from any reinsurer, excluding $44,897 recoverable from CAR.

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

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Table of Contents

Competition

The property and casualty insurance business is highly competitive and many of our competitors have substantially greater financial and
other resources than we do. We compete with both large national writers and smaller regional companies. Our competitors include companies which, like us, serve the independent agency market, as well
as companies which sell insurance directly to customers. Direct writers may have certain competitive advantages over agency writers, including increased name recognition, loyalty of the customer base
to the insurer rather than to an independent agency and potentially, lower cost structures. A material reduction in the amount of business independent agents sell would adversely affect us. Further,
we and others compete on the basis of the commissions and other cash and non-cash incentives provided to agents. Although historically, a number of national insurers that are much larger
than we are have chosen not to compete in a material way in the Massachusetts private passenger automobile market, if one or more of these companies decided to aggressively enter the market it could
have a material adverse effect on us. The Commissioner announced that Managed Competition reforms were, in part, designed to make Massachusetts more appealing to these companies. Since 2008, new
companies have entered the market including Progressive Insurance Company, Peerless (a subsidiary of Liberty Mutual), AIG, Vermont Mutual, Preferred Mutual, IDS, Occidental, GEICO, Harleysville,
Foremost and Allstate. These companies include some that would be able to sustain significant losses in order to acquire market share, as well as others which use distribution methods that compete
with the independent agent channel. There can be no assurance that we will be able to compete effectively against these companies in the future.

Our
principal competitors within the Massachusetts private passenger automobile insurance market are, Commerce Group, Inc., Liberty Mutual (including Peerless) and Arbella
Insurance Group, which held 29.9%, 10.9% and 9.7% market shares based on automobile exposures, respectively, in 2010 according to CAR.

Employees

At December 31, 2010, we employed 581 employees. Our employees are not covered by any collective bargaining agreement.
Management considers our relationship with our employees to be good.

Investments

Investment income is an important source of revenue for us and the return on our investment portfolio has a material effect on our net
earnings. Our investment objective is to focus on maximizing total returns while investing conservatively. We maintain a high quality investment portfolio consistent with our established investment
policy. As of December 31, 2010, all securities in our fixed income securities portfolio were rated investment grade by Moody's, except for one security which represented less than 0.1% of our
portfolio and approximately 4.1% of our portfolio which Moody's does not rate. According to our investment guidelines, no more than 2.0% of our portfolio may be invested in the securities of any one
issuer (excluding U.S. government backed securities). This one issuer must be rated "A" or above by Moody's. In addition, no more than 0.5% of our portfolio may be invested in securities of any one
issuer rated "Baa," or the lowest investment grade assigned by Moody's. We continually monitor the mix of taxable and tax-exempt securities in an attempt to maximize our total
after-tax return. Since 1986, we have utilized the services of a third-party investment manager.

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The
following table reflects the composition of our investment portfolio as of December 31, 2010 and 2009:

As of December 31,2010

2009Estimated
Fair Value

% of
Portfolio

Estimated
Fair Value

% of
PortfolioU.S. Treasury Securities

$
86,269


8.0
%
$
12,532


1.2
%Obligations of states and political subdivisions


445,190


41.2


483,421


47.0Residential mortgage-backed securities(1)


252,661


23.4


300,461


29.2Commercial mortgage-backed securities


63,591


5.9


72,916


7.1Other asset-backed securities


17,405


1.6


22,300


2.2Corporate and other securities


198,121


18.3


126,699


12.3Subtotal, fixed maturity securities


1,063,237


98.4


1,018,329


99.0Equity securities(2)


14,624


1.4


9,876


1.0Other invested assets


2,817


0.2


409


Totals

$
1,080,678


100.0
%
$
1,028,614


100.0
%


(1)Residential
mortgage-backed securities consists primarily of obligations of U.S. Government agencies including collateralized mortgage obligations and
mortgage-backed securities guaranteed and/or insured by the following issuers: Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National
Mortgage Association (FNMA) and the Federal Home Loan Bank (FHLB). The total of these fixed maturity securities was $237,335 and $289,447 at amortized cost and $252,592 and $300,172 at fair value as
of December 31, 2010 and 2009, respectively.(2)Equity
securities include interest in mutual funds of $11,210 and $9,736 at cost and $11,699 and $9,876 at fair value as of December 31, 2010 and
2009, respectively.


The
principal risks inherent in holding mortgage-backed securities and other pass-through securities are prepayment and extension risks, which affect the timing of when cash
flows will be received. When interest rates decline, mortgages underlying mortgage-backed securities tend to be prepaid more rapidly than anticipated, causing early repayments. When interest rates
rise, the underlying mortgages tend to be prepaid at a slower rate than anticipated, causing the principal repayments to be extended. Although early prepayments may result in acceleration of income
from recognition of any unamortized discount, the proceeds typically are reinvested at a lower current yield, resulting in a net reduction of future investment income. In addition, in the current
market environment, such investments can also contain liquidity risks.

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

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Table of Contents

The
following table reflects our investment results for each year in the three-year period ended December 31, 2010:

Years Ended December 31,2010

2009

2008Average cash and invested securities (at cost)

$
1,069,858

$
1,061,916

$
1,060,554Net investment income(1)

$
41,395

$
43,308

$
45,771Net effective yield(2)


3.9
%

4.1
%

4.3
%


(1)After
investment expenses, excluding realized investment gains or losses.(2)Net
investment income for the period divided by average invested securities and cash for the same period.


Net
effective annual yield declined in 2010 to 3.9% from 4.1% in 2009 and 4.3% in 2008. The 2010 and 2009 decreases primarily resulted from lower short-term interest rates,
risk reduction actions related to municipal bonds, and ongoing maintenance of short duration to protect the portfolio from rising interest rates.

As
of December 31, 2010, our portfolio of fixed maturity investments was comprised entirely of investment grade corporate fixed maturity securities, U.S. government and agency
securities and asset-backed securities, except the few securities not rated by Moody's and one security representing less than 0.1% of our portfolio.

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

As of December 31, 2010Estimated
Fair Value

PercentU.S. Treasury securities and obligations of U.S. Government agencies

$
349,168


32.8
%Aaa/Aa


491,480


46.2A


122,440


11.5Baa


57,054


5.4Ba


328


Not rated(1)


42,767


4.1Total

$
1,063,237


100.0
%


(1)Not
rated by Moody's (Rated investment grade by Standard & Poor's).


Ratings
are assigned by Moody's as discussed above. 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 (the "SVO") evaluates all public and private bonds purchased as investments by insurance companies.
The

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SVO
assigns one of six investment categories to each security it reviews. Category 1 is the highest quality rating and Category 6 is the lowest. Categories 1 and 2 are the
equivalent of investment grade debt as defined by rating agencies such as Standard & Poor's Ratings Services and Moody's, while Categories 3-6 are the equivalent of below
investment grade securities. SVO ratings are reviewed at least annually. At December 31, 2010, 94.4% of our available for sale fixed maturity investments were rated Category 1 and 5.5%
were rated Category 2, the two highest ratings assigned by the SVO. One security which represents less than 0.1% of our available for sale fixed maturity investments was rated Category 3
by the SVO.

The
following table indicates the composition of our fixed income security portfolio (at carrying value) by time to maturity as of December 31, 2010.

As of December 31, 2010Estimated
Fair Value

PercentDue in one year or less

$
91,803


8.6
%Due after one year through five years


268,862


25.3Due after five years through ten years


248,919


23.4Due after ten years through twenty years


111,030


10.4Due after twenty years


8,966


0.8Asset-backed securities(1)


333,657


31.5Total

$
1,063,237


100.0
%


(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.


Ratings

A.M. Best, which rates insurance companies based on factors of concern to policyholders, currently assigns Safety Insurance an "A
(Excellent)" rating. Our "A" rating was reaffirmed by A.M. Best on April 27, 2010. Such rating is the third highest rating of 13 ratings that A.M. Best assigns to solvent
insurance companies, which currently range from "A++ (Superior)" to "D (Very Vulnerable)." Publications of A.M. Best indicate that the "A" rating is assigned to those companies that
in A.M. Best's opinion have a strong ability to meet their obligations to policyholders over a long period of time. In evaluating a company's financial and operating performance, A.M.
Best reviews the Company's profitability, leverage and liquidity, as well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated fair value of its assets,
the adequacy of its loss reserves, the adequacy of its surplus, its capital structure, the experience and competence of its management and its market presence. A.M. Best's ratings reflect its
opinion of an insurance company's financial strength, operating performance and ability to meet its obligations to policyholders and are not evaluations directed to purchasers of an insurance
company's securities.

In
assigning Safety Insurance's rating, A.M. Best recognized its strong risk-adjusted capitalization and its favorable operating performance and market position as a
leading personal automobile writer in Massachusetts. A.M. Best also noted among our positive attributes: sustained operating profitability in recent years; our disciplined underwriting
approach; and expertise in the highly regulated Massachusetts automobile insurance industry. A.M. Best cited other factors that partially offset these positive

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attributes,
including our concentration of business in the Massachusetts private passenger automobile market which exposes our business to regulatory actions.

Supervision and Regulation

Introduction.Our principal operations are conducted through the Insurance Subsidiaries which are subject to comprehensive regulation by
the Division
of Insurance, of which the Commissioner is the senior official. The Commissioner is appointed by the Governor. We are subject to the authority of the
Commissioner in many areas of our business under Massachusetts law, including:



In
addition, the Commissioner periodically conducts a financial examination of all licensees domiciled in Massachusetts. We were most recently examined for the five-year
period ending December 31, 2008. The Division had 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 provide prior notice to
the Commissioner for material transactions between our insurance company subsidiaries and other affiliates in our holding company system. These holding company statutes also require, among other
things, prior approval of the payment of extraordinary dividends or distributions and any acquisition of a domestic insurer.

Insurance Regulation Concerning Dividends.We rely on dividends from the Insurance Subsidiaries for our cash requirements. The insurance
holding
company law of Massachusetts requires notice to the Commissioner of any dividend to the shareholders of an insurance company. The Insurance Subsidiaries may not make an "extraordinary dividend" until
thirty days after the Commissioner has received notice of the intended dividend and has not objected in such time. As historically administered by the Commissioner, this provision requires the prior
approval by the Commissioner of an extraordinary dividend. An extraordinary dividend is defined as any dividend or distribution that, together with other distributions made within the preceding twelve
months exceeds the greater of 10% of the insurer's surplus as of the preceding December 31, or the insurer's net income for the twelve-month period ending the preceding December 31, in
each case determined in accordance with statutory accounting practices. Under Massachusetts law, an insurer may pay cash dividends only from its unassigned funds, also known as its earned surplus, and
the insurer's remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. At year-end 2010, the statutory surplus of Safety
Insurance was $582,432 and its net income for 2010 was $51,560. A maximum of $58,243 will be available during 2011 for such dividends without prior approval of the Commissioner.

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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 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 the Insurance Subsidiaries unless, following application by that purchaser the Commissioner determines that the acquisition does not constitute a change of control
or is otherwise not subject to
regulatory review. These requirements may deter, delay or prevent transactions affecting the control of or the ownership of our common stock, including transactions that could be advantageous to our
stockholders.

Protection Against Insurer Insolvency.Massachusetts law requires that insurers licensed to do business in Massachusetts participate in
the
Massachusetts Insurers Insolvency Fund ("Insolvency Fund"). The Insolvency Fund must pay any claim up to $300 of a policyholder of an insolvent insurer if the claim existed prior to the declaration of
insolvency or arose within sixty days after the declaration of insolvency. Members of the Insolvency Fund are assessed the amount the Insolvency Fund deems necessary to pay its obligations and
expenses in connection with handling covered claims. Subject to certain exceptions, assessments are made in the proportion that each member's net written premiums for the prior calendar year for all
property and casualty lines bore to the corresponding net written premiums for Insolvency Fund members for the same period. As a matter of Massachusetts law, insurance rates and premiums include
amounts to recoup any amounts paid by insurers for the costs of the Insolvency Fund. By statute, no insurer in Massachusetts may be assessed in any year an amount greater than two percent of that
insurer's direct written premium for the calendar year prior to the assessment. We account for allocations from the Insolvency Fund as underwriting expenses. CAR also assesses its members as a result
of insurer insolvencies. Because CAR is not able to recover an insolvent company's share of the net CAR losses from the Insolvency Fund, CAR must increase each of its member's 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 future assessments from time to time relating to various insolvencies.

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

A
ratio result falling outside the usual range of IRIS ratios is not considered a failing result; rather, unusual values are viewed as part of the regulatory early monitoring system.
Furthermore, in some years, it may not be unusual for financially sound companies to have several ratios with results outside the usual ranges. Generally, an insurance company will become subject to
regulatory scrutiny if it falls outside the usual ranges of four or more of the ratios. In 2010 and 2009, all our ratios for all our Insurance Subsidiaries were within the normal range. In 2008, all
our ratios for all our Insurance Subsidiaries were within the normal range, with the exception of Change in Net Premiums Written for Safety P&C. The unusual value resulted due to a
one-time prospective adjustment made to premiums effective January 1, 2007 related to Safety P&C's entry to the intercompany pooling arrangement among the Insurance Subsidiaries.

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Table of Contents

Risk Based Capital Requirements.The NAIC has adopted a formula and model law to implement risk based capital requirements for most
property and
casualty insurance companies, which are designed to determine minimum capital requirements and to raise the level of protection that statutory surplus provides for policyholder obligations. The risk
based capital formula for property and casualty insurance companies measures three major areas of risk facing property and casualty insurers:



Under
Massachusetts law, insurers having less total adjusted capital than that required by the risk based capital calculation will be subject to varying degrees of regulatory action,
depending on the level of capital inadequacy.

The
risk based capital law provides for four levels of regulatory action. The extent of regulatory intervention and action increases as the level of total adjusted capital to risk based
capital falls. The first level, the company action level, as defined by the NAIC, requires an insurer to submit a plan of corrective actions to the Commissioner if total adjusted capital falls below
200% of the risk based capital amount. The regulatory action level, as defined by the NAIC requires an insurer to submit a plan containing corrective actions and requires the Commissioner to perform
an examination or other analysis and issue a corrective order if total adjusted capital falls below 150% of the risk based capital amount. The authorized control level, as defined by the NAIC,
authorizes the Commissioner to take whatever regulatory actions he or she considers necessary to protect the best interest of the
policyholders and creditors of the insurer which may include the actions necessary to cause the insurer to be placed under regulatory control, i.e., rehabilitation or liquidation, if total
adjusted capital falls below 100% of the risk based capital amount. The fourth action level is the mandatory control level, as defined by the NAIC, which requires the Commissioner to place the insurer
under regulatory control if total adjusted capital falls below 70% 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, 2010, 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 above underThe Massachusetts Property and Casualty Insurance Market, prior to April 1, 2008, regulation
of private passenger automobile insurance in Massachusetts differed significantly from how this line of insurance is regulated in other states. These differences included the requirements that the
premium rate we and all insurers must charge was fixed and established by the Commissioner, that our ability and that of our competitors to deviate from the rate set by the Commissioner was
restricted, and that some of our insurance producers are assigned to us as a matter of law. Beginning April 1, 2008, Massachusetts moved to Managed Competition and transitioned to an assigned
risk plan. SeeThe Massachusetts Property and Casualty Insurance Market, as discussed above.

Dodd-Frank Wall Street Reform and Consumer Protection Act.On July 21, 2010, the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the "Reform Act") was signed into law. The Reform Act makes sweeping changes to the regulation of financial services entities, products and markets. Although the provisions of
the bill do not appear to directly affect our business, as detailed regulations are developed to implement the provisions of the bill, there may be changes in the regulatory environment that affect
the way we conduct our operations or the cost of compliance, or both.

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Executive Officers and Directors

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

Name

Age

Position

Years
Employed
by SafetyDavid F. Brussard


59

President, Chief Executive Officer and Chairman of the Board


35William J. Begley, Jr.


56

Vice President, Chief Financial Officer and Secretary


25James D. Berry


51

Vice PresidentInsurance Operations


28George M. Murphy


44

Vice PresidentMarketing


22Robert J. Kerton


64

Vice PresidentClaims


24David E. Krupa


50

Vice PresidentClaims Operations


28Daniel D. Loranger


71

Vice PresidentManagement Information Systems and Chief Information Officer


30Edward N. Patrick, Jr.


62

Vice PresidentUnderwriting


37A. Richard Caputo, Jr.


45

Director


Frederic H. Lindeberg


70

Director


Peter J. Manning


72

Director


David K. McKown


73

Director





David F. Brussardwas appointed Chairman of the Board in March 2004 and President and Chief Executive Officer ("CEO") in June 2001.
Mr. Brussard has served as a Director of the Company since October 2001. Since January 1999, Mr. Brussard has been the CEO and President of the Insurance Subsidiaries. Previously,
Mr. Brussard served as Executive Vice President of the Insurance Subsidiaries from 1985 to 1999 and as Chief Financial Officer and Treasurer of the Insurance Subsidiaries from 1979 to 1999.
Mr. Brussard has been employed by one or more of our subsidiaries for over 35 years. Mr. Brussard is also Chairman of the Governing Committee and a member of the Budget Committee,
Executive Committee and Nominating Committee of the Automobile Insurers Bureau of Massachusetts. 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 the Company on March 4, 2002. Since January
1999, Mr. Begley has been the Chief Financial Officer and Treasurer of the Insurance Subsidiaries. Previously, Mr. Begley served as Assistant Controller of the Insurance Subsidiaries
from 1985 to 1987, as Controller from 1987 to 1990 and as Assistant Vice President/Controller from 1990 to 1999. Mr. Begley has been employed by the Insurance Subsidiaries for over
25 years. Mr. Begley also serves on the Audit Committee of Guaranty Fund Management Services, and is a member of the Board of Directors of the Massachusetts Insurers Insolvency Fund.

James D. Berry, CPCUwas appointed Vice President of Insurance Operations of the Company on October 1, 2005. Mr. Berry has been
employed by the Insurance Subsidiaries for over 28 years and has directed the Company's Massachusetts Private Passenger line of business since 2001. Mr. Berry represents Safety on the
Computer Sciences Corporation Series II Advisory Council.

George M. Murphy, CPCU,was appointed Vice President of Marketing on October 1, 2005. Mr. Murphy has been employed by the Insurance
Subsidiaries for over 22 years and most recently served as Director of Marketing.

Robert J. Kertonwas appointed Vice President of Casualty Claims of the Company on March 4, 2002. Mr. Kerton has served as Vice
President of Claims of the Insurance Subsidiaries since 1986 and has been employed by the Insurance Subsidiaries for over 24 years. Mr. Kerton previously served 18 years with
Allstate Insurance Company in various Massachusetts claim management assignments.

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Table of Contents

Mr. Kerton
has served as Chairman of the Claims Committee of the Automobile Insurers Bureau of Massachusetts, and he is a member of the Governing Board of the Massachusetts Insurance Fraud
Bureau.

David E. Krupa, CPCU,was appointed Vice President of Property Claims of the Company on March 4, 2002. Mr. Krupa has served as Vice
President of Claims of the Insurance Subsidiaries since July 1990 and has been employed by the Insurance Subsidiaries for over 28 years. Mr. Krupa was first employed by the Company in
1982 and held a series of management positions in the Claims Department before being appointed Vice President in 1990. Mr. Krupa is a member of the Auto Damage Appraisers Licensing Board of
Massachusetts. In addition, Mr. Krupa has been a member of several claims committees both at the Automobile Insurers Bureau of Massachusetts and CAR.

Daniel D. Lorangerwas appointed Vice President of Management Information Systems of the Company on March 4, 2002. Mr. Loranger has
served as Vice President of Management Information Systems and Chief Information Officer of the Insurance Subsidiaries since 1980 and has been employed by the Insurance Subsidiaries for over
30 years. Mr. Loranger began his data processing career with Raytheon Manufacturing in 1960.

Edward N. Patrick, Jr.was appointed Vice President of Underwriting of the Company on March 4, 2002. Mr. Patrick has served as Vice
President of Underwriting of the Insurance Subsidiaries since 1979 and as Secretary since 1999. He has been employed by one or more of our subsidiaries for over 37 years.
Mr. Patrick has served on several committees of CAR, including the MAIP Steering, Actuarial, Market Review, Servicing Carrier, Statistical, Automation, Reinsurance and Operations Committee.
Mr. Patrick is also on the Board of Directors of the Massachusetts Property Insurance Underwriting Association (FAIR Plan).

A. Richard Caputo, Jr.has served as a director of the Company since June 2001. Mr. Caputo is a managing principal of The Jordan Company, a
private investment firm, which he has been with since 1990. Mr. Caputo is also a director of TAL International, Inc., Universal Technical Institute, Inc. and various privately
held companies.

Frederic H. Lindeberghas served as a director of the Company since August 2004. Mr. Lindeberg has had a consulting practice providing
taxation, management and investment counsel since 1991, focusing on finance, real estate, manufacturing and retail industries. Mr. Lindeberg retired in 1991 as
Partner-In-Charge of various KPMG tax offices, after 24 years of service where he provided both accounting and tax counsel to various clients. Mr. Lindeberg was
formerly an adjunct professor at Penn State Graduate School of Business. Mr. Lindeberg is currently a director of TAL International, Inc.

Peter J. Manninghas served as a director of the Company since September 2003. Mr. Manning retired in 2003 as Vice Chairman of FleetBoston
Financial, after 31 years with FleetBoston Financial Corporation (formerly BankBoston) where he also held the positions of Comptroller and Executive Vice President and Chief Financial Officer.
Mr. Manning started his career with Coopers & Lybrand in 1962 prior to his 1972 employment with BankBoston. He currently is a director of Thermo Fisher Scientific, the
non-profit Catholic Schools Foundation, the Hyde Park Savings Bank and the Lahey Clinic.

David K. McKownhas served as director of the Company since November 2002. Mr. McKown has been a Senior Advisor to Eaton Vance Management
since 2000, focusing on business origination in real estate and asset-based loans. Mr. McKown retired in March 2000 having served as a Group Executive with BankBoston since 1993, where he
focused on acquisitions and high-yield bank debt financings. Mr. McKown has been in the banking industry for 51 years, worked for BankBoston for over 32 years and had
previously been the head of BankBoston's real estate department, corporate finance

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department,
and a managing director of BankBoston's private equity unit. Mr. McKown is currently a director of Global Partners L.P., Newcastle Investment Corp., and various privately
held companies.

ITEM 1A.    RISK FACTORS

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

Because we are primarily a private passenger automobile insurance carrier, our business may be adversely affected by conditions in this industry.

Approximately 68.7% of our direct written premiums for the year ended December 31, 2010, were generated from private passenger
automobile insurance policies. As a result of our focus on that line of business, negative developments in the economic, competitive or regulatory conditions affecting the private passenger automobile
insurance industry could have a material adverse effect on our results of operations and financial condition. In addition, these developments would have a disproportionate effect on us, compared to
insurers which conduct operations in multiple business lines.

Because we write insurance principally in Massachusetts, our business may be adversely affected by conditions in Massachusetts, including the potential effect of the
Commissioner's new Managed Competition.

Almost all of our direct written premiums are currently generated in Massachusetts. Our revenues and profitability are therefore
subject to prevailing regulatory, economic, demographic, competitive and other conditions in Massachusetts. Changes in any of these conditions could make it more costly or difficult for us to conduct
our business. Massachusetts has recently enacted significant changes to the regulatory framework relating to private passenger automobile insurance. These changes include rate competition and
restructuring the private passenger automobile insurance residual market. The Commissioner intends that these changes will increase competition and result in lower premiums in private passenger
automobile insurance in the state. We cannot estimate how these regulatory changes will affect our private passenger automobile insurance business over the longer term. Adverse results could include
loss of market share, decreased revenue, and/or increased costs. Additional competitors have entered the market in response to these changes. In addition, these developments could 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 $535,000 our losses
would exceed the limits of this reinsurance in addition to losses from our quota share retention of a portion of the risk up to $535,000.

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Climate change may adversely impact our results of operations.

There are concerns that the increase in weather-related catastrophes and other losses incurred by the industry in recent years may be
indicative of changing weather patterns. This change in weather patterns could lead to higher overall losses which we may not be able to recover, particularly in light of the current competitive
environment, and higher reinsurance costs. Climate change could also have an impact on issuers of securities in which we invest, resulting in realized and unrealized losses in future periods which
could have a material adverse impact on our results of operations and/or financial position.

If we are not able to attract and retain independent agents, it could adversely affect our business.

We market our insurance solely through independent agents. We must compete with other insurance carriers for the business of
independent agents. Some of our competitors offer a larger variety of products, lower prices for insurance coverage or higher commissions. While we believe that the commissions and services we provide
to our agents are competitive with other insurers, changes in commissions, services or products offered by our competitors could make it harder for us to attract and retain independent agents to sell
our insurance products.

Established competitors with greater resources may make it difficult for us to market our products effectively and offer our products at a profit.

The property and casualty insurance business is highly competitive and many of our competitors have substantially greater financial and
other resources than we do. We compete with both large national writers and smaller regional companies. Further, our competitors include other companies which, like us, serve the independent agency
market, as well as companies which sell insurance directly to customers. Direct writers may have certain competitive advantages over agency writers, including increased name recognition, loyalty of
the customer base to the insurer rather than to an independent agency and, potentially, lower cost structures. A material reduction in the amount of business independent agents sell would directly and
negatively affect our profitability and our ability to compete with insurers that do not rely solely on the independent agency market to sell their products. Further, our Company and others compete on
the basis of the commissions and other cash and non-cash incentives provided to agents. Although a number of national insurers that are much larger than we are do not currently compete in
a material way in the Massachusetts personal auto market, if one or more of these companies decided to aggressively enter the market it could reduce our share of the Massachusetts market and thereby
have a material adverse effect on us. These companies include some that would be able to sustain significant losses in order to acquire market share, as well as others which use distribution methods
that compete with the independent agent channel. Progressive Corporation, GEICO and Allstate, large insurers that market directly to policyholders rather than through agents, along with other carriers
have entered the Massachusetts
private passenger automobile insurance market. We are unable to predict the long-term effects on our business of the new Managed Competition regulatory environment.

As a holding company, Safety Insurance Group, Inc. is dependent on the results of operations of the Safety Insurance Company.

Safety Insurance Group, Inc. is a company and a legal entity separate and distinct from Safety Insurance Company, our principal
operating subsidiary. As a holding company without significant operations of its own, the principal sources of Safety Insurance Group, Inc.'s funds are dividends and other distributions from
Safety Insurance Company. Our rights to participate in any distribution of assets of Safety Insurance Company are subject to prior claims of policyholders, creditors and preferred shareholders, if
any, of Safety Insurance Company (except to the extent that our rights, if any, as a creditor are recognized). Consequently, our ability to pay debts, expenses and cash dividends to our

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shareholders
may be limited. The ability of Safety Insurance Company to pay dividends is subject to limits under Massachusetts insurance law. Further, the ability of Safety Insurance
Group, Inc. to pay dividends, and our subsidiaries' ability to incur indebtedness or to use the proceeds of equity offerings, will be subject to limits under our revolving credit facility.

We are subject to comprehensive 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:



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 by
participating in the Massachusetts Insurers Insolvency Fund ("Insolvency Fund"). Members of the Insolvency Fund are assessed a proportionate share of the obligations and expenses of the Insolvency
Fund in connection with an insolvent insurer. These assessments are made by the 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 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

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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.

Massachusetts Personal Auto Regulation.We have been 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. Historically, we have been required by law to issue a policy to any applicant who seeks
it. Prior to April 1, 2008, we were assigned certain agents that have been unable to obtain a voluntary contract with another insurer. We call these agents ERPs. In addition, we were required
to participate in a state mandated reinsurance program run by CAR, to which we ceded certain undesirable risks and from which we are allocated a portion of the program's overall losses. On
April 1, 2008, an assigned risk plan ("MAIP") for private passenger automobile insurance started a transition away from the prior system of ERPs assigned to Safety and began the assignment of
individual risks to us. The MAIP was fully implemented April 1, 2009 and replaced CAR as the private passenger automobile insurance residual market in Massachusetts. These programs operate at
an underwriting deficit and result in expense for us. Our ability to earn profits may be restricted by these requirements.

Our
marketing and underwriting strategies had been limited by maximum premium rates and minimum agency commission levels for personal automobile insurance, which were mandated by the
Commissioner prior to April 1, 2008. Under Massachusetts' Managed Competition regulations, we decreased our rates an average 6.7% effective in 2008. We filed modifications in our rating
structure effective April 1, 2009 that included three rating tiers which resulted in no change in our average total rates. We filed and were approved for a 0.3% decrease in our rates effective
June 1, 2009, a 2.9% rate increase in our rates effective October 1, 2009, and a fourth rating tier which resulted in an increase in our rates of 0.4% effective January 1, 2010.
We filed and were approved for a 1.9% increase in our rates effective April 19, 2010 and we also filed and were approved for a 0.5% decrease in our rates effective June 15, 2010. In
addition, prior to April 1, 2008, the Commissioner annually established the minimum commission rate that insurers must pay their auto insurance agents. The Commissioner approved a commission
rate, as a percentage of premiums, of 13.0% in 2007 and we filed for and were approved for a commission rate of 13.0% for 2008, 2009 and 2010 beginning April 1, 2008.

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 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.

On
June 20, 2007, we applied for admission in the State of New Hampshire for a Certificate of Authority to transact insurance business. On October 16, 2007, the State of
New Hampshire Insurance
Department issued a Certificate of Authority for property and casualty insurance to each of the Insurance Subsidiaries. We began writing business in New Hampshire late in 2008.

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

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obligations
to policyholders. Moreover, an "A" rating is assigned to companies that have, on balance, excellent balance sheet strength, operating performance and business profile when compared to the
standards established by A.M. Best. A.M. Best bases its ratings on factors that concern policyholders and not upon factors concerning investor protection. Such ratings are subject to
change and are not recommendations to buy, sell, or hold securities. An important factor in an insurer's ability to compete effectively is its A.M. Best rating. Our A.M. Best rating is
lower than those of some of our competitors. Any future decrease in our rating could affect our competitive position.

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

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

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

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

Our future success depends significantly upon the efforts of certain key management personnel, including David F. Brussard, our Chief
Executive Officer and President. We have entered into employment agreements with Messrs. Brussard, Begley, Kerton, Krupa, Loranger, Patrick, Murphy, and Berry, the eight 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.

Market fluctuations and changes in interest rates can have significant and negative effects on our investment portfolio.

Our results of operations depend in part on the performance of our invested assets. As of December 31, 2010, based upon fair
value measurement, 98.4% of our investment portfolio was invested in fixed maturity securities, 1.4% in common equity securities and 0.2% in other invested assets. Certain risks are inherent in
connection with debt securities including loss upon default and price volatility in reaction to changes in interest rates and general market factors.

We
have a significant investment portfolio and adverse capital market conditions, including but not limited to volatility and credit spread changes, will impact the liquidity and value
of our investments, potentially resulting in higher realized or unrealized losses. Values of our investments can also be impacted by reductions in price transparency and changes in investor confidence
and preferences, potentially resulting in higher realized or unrealized losses. If the carrying value of our investments

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exceeds
the fair value, and the decline in fair value is deemed to be other-than-temporary, we will be required to write down the value of our investments, which could
materially harm our results of operations and financial condition.

Developments
in the global financial markets may adversely affect our investment portfolio and overall performance. Global financial markets have recently experienced unprecedented and
challenging conditions. If conditions further deteriorate, our business could be affected in different ways. Continued turbulence in the U.S. economy and contraction in the credit markets could
adversely affect our
profitability, demand for our products or our ability to raise rates, and could also result in declines in market value and future impairments of our investment assets.

We may not be able to successfully alleviate risk through reinsurance arrangements which could cause us to reduce our premiums written in certain lines or could result in
losses.

In order to reduce risk and to increase our underwriting capacity, we purchase reinsurance. The availability and the cost of
reinsurance protection are subject to market conditions, which are outside of our control. As a result, we may not be able to successfully alleviate risk through these arrangements. For example, if
reinsurance capacity for homeowner's risks were reduced as a result of terrorist attacks, climate change or other causes, we might seek to reduce the amount of homeowners business we write. In
addition, we are subject to credit risk with respect to our reinsurance because the ceding of risk to reinsurers does not relieve us of our liability to our policyholders. A significant reinsurer's
insolvency or inability to make payments under the terms of a reinsurance treaty could have a material adverse effect on our results of operations and financial condition.

There are anti-takeover provisions contained in our organizational documents and in laws of the State of Delaware and the Commonwealth of Massachusetts that
could impede an attempt to replace or remove our management or prevent the sale of our company, which could diminish the value of our common stock.

Our certificate of incorporation, bylaws and the laws of Delaware contain provisions that may delay, deter or prevent a takeover
attempt that shareholders might consider in their best interests. For example, our organizational documents provide for a classified board of directors with staggered terms, prevent shareholders from
taking action by written consent, prevent shareholders from calling a special meeting of shareholders, provide for supermajority voting requirements to amend our certificate of incorporation and
certain provisions of our bylaws and provide for the filling of vacancies on our board of directors by the vote of a majority of the directors then in office. These provisions will render the removal
of the incumbent board of directors or management more difficult. In addition, these provisions may prevent shareholders from receiving the benefit of any premium over the market price of our common
stock offered by a bidder in a potential takeover. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if
they are viewed as discouraging takeover attempts in the future.

The
Massachusetts insurance law prohibits any person from acquiring control of us, and thus indirect control of Safety Insurance Group, Inc., 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 shareholders might consider in their best interests.

Section 203
of the General Corporation Law of Delaware, the jurisdiction in which the Company is organized, may affect the ability of an "interested stockholder" to engage in
certain business

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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.

Future sales of shares of our common stock by our existing shareholders in the public market, or the possibility or perception of such future sales, could adversely affect
the market price of our stock.

Investors currently known to be the beneficial owners of greater than 5.0% of our outstanding common stock hold approximately 30.0% of
the common stock of Safety Insurance Group, Inc. on a fully diluted basis. No prediction can be made as to the effect, if any, that future sales of shares by our existing shareholders, or the
availability of shares for future sale, will have on the prevailing market price of our common stock from time to time. Sales of substantial amounts of our common stock in the public market by our
existing shareholders, or the possibility or perception that such sales could occur, could cause the prevailing market prices for our common stock to decrease. If such sales reduce the market price of
our common stock, our ability to raise additional capital in the equity markets may be adversely affected.

Our business depends on the uninterrupted operation of our systems and business functions, including our information technology, telecommunications and other business
systems. Our business continuity and disaster recovery plans may not sufficiently address all contingencies.

Our business is highly dependent upon our ability to execute, in an efficient and uninterrupted fashion, necessary business functions,
such as processing new and renewal business, providing customer service, and processing and paying claims. A shut-down of or inability to access our facility, a power outage, or a failure
of one or more of our information technology, telecommunications or other systems could significantly impair our ability to perform such functions on a timely basis. If sustained or repeated, such a
business interruption, systems failure or service denial could result in a deterioration in the level of service we provide to our agents and policyholders. We have established a business continuity
plan in an effort to ensure the continuation of core business operations in the event that normal business operations could not be performed due to a
catastrophic event. While we continue to test and assess our business continuity plan to ensure it meets the needs of our core business operations and addresses multiple business interruption events,
there is no assurance that core business operations could be performed upon the occurrence of such an event, which may result in a material adverse effect on our financial position and results of
operations.

If we experience difficulties with outsourcing relationships, our ability to conduct our business might be negatively impacted.

We outsource certain business and administrative functions to third parties and may do so increasingly in the future. If we fail to
develop and implement our outsourcing strategies or our third-party providers fail to perform as anticipated, we may experience operational difficulties, increased costs and a loss of business that
may have a material adverse effect on our results of operations or financial condition. By outsourcing certain business and administrative functions to third parties, we may be exposed to enhanced
risk of data security breaches. Any breach of data security could damage our reputation and/or result in monetary damages, which, in turn, could have a material adverse effect on our results of
operations or financial condition.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

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

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ITEM 2.    PROPERTIES

We conduct most of our operations in approximately 104 thousand square feet of leased space at 20 Custom House Street in
downtown Boston, Massachusetts. Our lease expires in December 2018.

ITEM 3.    LEGAL PROCEEDINGS

Our Insurance Subsidiaries are parties to a number of lawsuits arising in the ordinary course of their insurance business. We believe
that the ultimate resolution of these lawsuits will not, individually or in the aggregate, have a material adverse effect on our financial condition.

In
addition, on November 21, 2008, the Massachusetts Office of the Attorney General (the "AG") delivered a civil investigative demand (the "CID") to Safety Insurance. The CID
directed the Company to produce certain information related to its policies and practices in connection with underwriting insurance policies on motorcycles and adjusting total loss claims under such
policies. Other insurance companies are also being investigated by the AG related to their policies and practices related to motorcycle insurance.

On
January 14, 2010, we announced that we had reached an agreement with the AG to change the way in which we calculated motorcycle premiums for certain types of coverage dating
back to January 1, 2002. Under the terms of the settlement, we agreed to pay refunds to certain motorcycle policyholders. We deposited $7,408 into a trust fund to be used to pay the amount of
those refunds and paid $330 to the Commonwealth of Massachusetts, which included reimbursement of costs and expenses related to the implementation of the settlement by the AG. Of the total settlement
to date, $7,547 was recorded as an increase to Underwriting, operating and other expenses for the year ended December 31, 2009 and $191 of additional refunds subsequently identified by the AG
and deposited to the trust fund by us in July 2010 was recorded as Underwriting, operating and other expenses for the year ended December 31, 2010.

We
worked with the Attorney General's office to identify the policies on which refunds would be issued and the amount of refunds to be paid to each individual policyholder. During the
quarter ended September 30, 2010, the Company first notified approximately 21 thousand policyholders of the amount of individual refunds offered and requested receipt of appropriate
releases from them in order to access the trust fund to issue refund checks. As of March 3, 2011, a total of approximately $6,219 in refund checks has been issued to about 15 thousand
policyholders. The final total of refunds paid may be more or less than currently estimated; however, in management's opinion, any future expenses related to the settlement will not have a material
adverse effect upon the overall financial position of the Company.

ITEM 4.    (REMOVED AND RESERVED)

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PART II.

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

As of March 9, 2011, there were 24 holders of record of the Company's common stock, par value $0.01 per share, and we estimate
another 8,000 held in "Street Name."

The
Company's common stock (symbol: SAFT) is listed on the NASDAQ Global Select Market. The following table sets forth the high and low close prices per share for each full quarterly
period within the Company's two most recent fiscal years.

2010

High

LowFirst quarter

$
39.20

$
33.83Second quarter

$
38.57

$
35.02Third quarter

$
43.82

$
37.28Fourth quarter

$
49.36

$
42.20




2009

High

LowFirst quarter

$
41.34

$
28.44Second quarter

$
34.60

$
29.87Third quarter

$
34.01

$
30.13Fourth quarter

$
37.37

$
32.63


The
closing price of the Company's common stock on March 9, 2011 was $47.35 per share.

During
2010, the Company declared and paid four quarterly cash dividends to shareholders, which totaled $27,098. During 2009, the Company declared and paid four quarterly cash dividends
to shareholders, which totaled $24,840. On February 15, 2011, the Company's Board of Directors declared a quarterly cash dividend of $0.50 per share to shareholders of record on March 1,
2011, payable on March 15, 2011. The Company plans to continue to declare and pay quarterly cash dividends in 2011, depending on the Company's financial position and the regularity of its cash
flows.

The
Company relies on dividends from its Insurance Subsidiaries for a portion of its cash requirements. The payment by the Company of any cash dividends to the holders of common stock
therefore depends on the receipt of dividend payments from its Insurance Subsidiaries. The payment of dividends by the Insurance Subsidiaries is subject to limitations imposed by Massachusetts law, as
discussed in Item 1Business, Supervision and Regulation,Insurance Regulation Concerning Dividends, and also in
Item 7Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.

The
information called for by Item 201 (d) of Regulation S-K regarding securities authorized for issuance under equity compensation plans will be
contained in the Company's Proxy Statement for its Annual Meeting of Shareholders, to be held on May 20, 2011 in Boston, MA, which the Company intends to file with the U.S. Securities and
Exchange Commission within 120 days after December 31, 2010 (the Company's fiscal year end), and such information is incorporated herein by reference.

On
August 3, 2007, the Board of Directors approved a share repurchase program of up to $30,000 of the Company's outstanding common shares. On March 19, 2009, the Board of
Directors increased this existing share repurchase program by authorizing repurchase of up to $60,000 of the Company's outstanding common shares. On August 4, 2010, the Board of Directors again
increased the existing share repurchase program by authorizing repurchase of up to $90,000 of the Company's outstanding common shares. Under the program, the Company may repurchase shares of its
common stock for cash in public or private transactions, in the open market or otherwise, at management's discretion. The timing of such repurchases and actual number of shares repurchased will depend
on a variety of factors including price, market conditions and applicable regulatory and corporate requirements. The program does not require the Company to repurchase any specific number of shares
and may be modified, suspended or terminated at any time without prior notice.

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During
the year ended December 31, 2010, the Company purchased 162,907 of its common shares on the open market under the program at a cost of $5,814 resulting in total shares
purchased of 1,727,455 at a cost of $55,526 as of December 31, 2010. During the year ended December 31, 2009, the Company purchased 1,332,535 of its common shares on the open market
under the program at a cost of $42,196, resulting in total shares purchased of 1,564,548 at a cost of $49,712 as of December 31, 2009.

COMMON STOCK PERFORMANCE GRAPH

Set forth below is a line graph comparing the dollar change in the cumulative total shareholder return on the Company's Common Stock,
for the period beginning on December 31, 2005 and ending on December 31, 2010, with the cumulative total return of the NASDAQ Stock Market Index and a peer group comprised of six
selected property & casualty insurance companies over the same period. The peer group consists of Baldwin & Lyons, Inc., the Harleysville Group, Inc., Mercury General
Corp., State Auto Financial Corp., Selective Insurance Group, Inc., and Donegal Group, Inc. The graph shows the change in value of an initial $100 investment on December 31, 2010,
assuming re-investment of all dividends.

Comparative Cumulative Total Returns since December 31, 2005 Among
Safety Insurance Group, Inc.,
Property & Casualty Insurance Peer Group and the NASDAQ Stock Market Index

GRAPHIC

The
foregoing performance graph and data shall not be deemed "filed" as part of this Form 10-K for purposes of Section 18 of the Securities Exchange Act of 1934
or otherwise subject to the liabilities of that section and should not be deemed incorporated by reference into any other filing of the Company under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent the Company specifically incorporates it by reference into such filing.

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ITEM 6.    SELECTED FINANCIAL DATA

The following table sets forth our selected historical consolidated financial data as of and for each of the five years ended
December 31, 2010, 2009, 2008, 2007, and 2006.

The
selected historical consolidated financial data for the years ended December 31, 2010, 2009 and 2008 and as of December 31, 2010 and 2009 have been derived from the
financial statements of Safety Insurance Group, Inc. included in this annual report which have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting
firm. The selected historical consolidated financial data for the years ended December 31, 2007 and 2006 and as of December 31, 2008, 2007 and 2006 have been derived from Safety
Insurance Group, Inc.'s consolidated financial statements not included in this annual report, which have been audited by PricewaterhouseCoopers LLP.

We
have prepared the selected historical consolidated financial data in conformity with U. S. generally accepted accounting principles.

The
selected financial data presented below should be read in conjunction with Item 7Management's Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and the accompanying notes included in this Form 10-K in order to more fully understand the historical consolidated financial
data.

Years Ended December 31,2010

2009

2008

2007

2006Direct written premiums

$
604,957

$
559,747

$
573,509

$
619,848

$
629,511Net written premiums


576,807


532,629


552,904


600,572


620,908Net earned premiums


551,950


531,969


576,556


609,208


624,933Net investment income


41,395


43,308


45,771


44,255


40,293Net realized gains (losses) on investments


863


(167
)

678


(6
)

358Finance and other service income


18,511


16,844


17,995


16,623


15,128Total revenue


612,719


591,954


641,000


670,080


680,712Loss and loss adjustment expenses


360,848


346,301


369,823


374,493


353,906Underwriting, operating and related expenses


172,823


171,124


172,987


170,657


162,220Interest expenses


88


135


81


83


86Total expenses


533,759


517,560


542,891


545,233


516,212Income before income taxes


78,960


74,394


98,109


124,847


164,500Income tax expense


22,618


20,242


27,851


37,434


52,559Net income

$
56,342

$
54,152

$
70,258

$
87,413

$
111,941Earnings per weighted average common share:Basic(1)

$
3.74

$
3.49

$
4.32

$
5.40

$
7.02Diluted(1)

$
3.74

$
3.48

$
4.31

$
5.38

$
6.96Cash dividends paid per common share

$
1.80

$
1.60

$
1.60

$
1.30

$
0.86Number of shares used in computing earnings per share:Basic(1)


15,065,696


15,533,331


16,265,185


16,189,131


15,953,607Diluted(1)


15,084,295


15,552,063


16,308,394


16,251,067


16,079,841


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Years Ended December 31,2010

2009

2008

2007

2006Balance Sheet Data:Total cash and investment securities

$
1,120,969

$
1,103,084

$
1,071,590

$
1,055,316

$
966,888Total assets


1,439,452


1,427,837


1,437,817


1,446,992


1,355,748Losses and loss adjustment expenses reserves


404,391


439,706


467,559


477,720


449,444Total liabilities


785,976


807,402


834,446


876,992


859,400Total shareholders' equity


653,476


620,435


603,371


570,000


496,348GAAP Ratios:Loss ratio(2)


65.4
%

65.1
%

64.1
%

61.5
%

56.6
%Expense ratio(2)


31.3


32.2


30.0


28.0


26.0Combined ratio(2)


96.7
%

97.3
%

94.1
%

89.5
%

82.6
%


(1)Earnings
per share data and number of shares used in computing shares outstanding for years 2006-2008 have been restated to conform to ASC 260, Participating Securities and the Two Class Method. Please refer to
Financial Statement footnote 2 for additional details.(2)The
loss ratio is the ratio of losses and loss adjustment expenses to net earned premiums. The expense ratio, when calculated on a GAAP basis is the ratio
of underwriting expense to net earned premiums. The combined ratio is the sum of the loss ratio and the expense ratio. Please refer toInsurance Ratiosunder Item 7Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion on our GAAP ratios.


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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our accompanying consolidated financial statements
and notes thereto, which appear elsewhere in this document. In this discussion, all dollar amounts are presented in thousands, except share and per share data.

The following discussion contains forward-looking statements. We intend statements which are not historical in nature to be, and are hereby identified as
"forward-looking statements" to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, the Company's senior management may make forward-looking
statements orally to analysts, investors, the media and others. This safe harbor requires that we specify important factors that could cause actual results to differ materially from those contained in
forward-looking statements made by or on behalf of us. We cannot promise that our expectations in such forward-looking statements will turn out to be correct. Our actual results could be materially
different from and worse than our expectations. See "Forward-Looking Statements" below for
specific important factors that could cause actual results to differ materially from those contained in forward-looking statements.

Executive Summary and Overview

In this discussion, "Safety" refers to Safety Insurance Group, Inc. and "our Company," "we," "us" and "our" refer to Safety
Insurance Group, Inc. and its consolidated subsidiaries. Our subsidiaries consist of Safety Insurance Company ("Safety Insurance"), Safety Indemnity Insurance Company ("Safety Indemnity"),
Safety Property and Casualty Insurance Company ("Safety P&C"), Whiteshirts Asset Management Corporation ("WAMC"), and Whiteshirts Management Corporation, which is WAMC's holding company.

We
are a leading provider of private passenger automobile insurance in Massachusetts. In addition to private passenger automobile insurance (which represented 68.7% of our direct written
premiums in 2010), we offer a portfolio of other insurance products, including commercial automobile (10.4% of 2010 direct written premiums), homeowners (16.8% of 2010 direct written premiums),
dwelling fire, umbrella and business owner policies (totaling 4.1% of 2010 direct written premiums). Operating exclusively in Massachusetts and New Hampshire through our insurance company
subsidiaries, Safety Insurance, Safety Indemnity, and Safety P&C (together referred to as the "Insurance Subsidiaries"), we have established strong relationships with independent insurance agents, who
numbered 783 in 939 locations throughout Massachusetts and New Hampshire during 2010. We have used these relationships and our extensive knowledge of the Massachusetts market to become the second
largest private passenger automobile and the third largest commercial automobile insurance carrier in Massachusetts, capturing an approximate 11.4% and 10.7% share, respectively, of the Massachusetts
private passenger and commercial automobile markets in 2010, according to the Commonwealth Automobile Reinsurers ("CAR") Cession Volume Analysis Report of March 3, 2011, 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 report as automobile exposures.

Our
Insurance Subsidiaries began writing private passenger automobile and homeowners insurance business in New Hampshire during 2008 and personal umbrella business during 2009. During
the years ended December 31, 2010 and 2009, the Company wrote $2,774 and $978 in direct written premiums, respectively, and approximately 3,300 and 1,250 policies, respectively, in New
Hampshire.

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Massachusetts Automobile Insurance Market

We have been subject to extensive regulation in the private passenger automobile insurance industry in Massachusetts, which represented
68.7% of our direct written premiums in 2010. Owners of registered automobiles in Massachusetts are required to maintain minimum automobile insurance coverage. Prior to April 1, 2008, the
Commissioner of Insurance (the "Commissioner") had fixed and established the maximum rates that could be charged for private passenger automobile insurance. Prior to April 1, 2008, as a
servicing carrier of CAR, we were required to issue a policy to all qualified applicants. In addition, based on our market share prior to April 1, 2009, we had been assigned certain licensed
producers by CAR that were unable to obtain a voluntary contract with another insurer. We call these agents Exclusive Representative Producers, or ERPs.

On
July 16, 2007, the Commissioner issued two decisions that significantly changed how private passenger automobile insurance was regulated in Massachusetts. In the first
decision, the Commissioner approved and set a time table for the implementation of new CAR rules pursuant to which the reinsurance program run by CAR was replaced with an assigned risk plan, the
Massachusetts Automobile Insurance Plan ("MAIP"). Under these new rules, as of April 1, 2009 we are no longer assigned ERPs and instead, we were assigned individual policies by CAR. The MAIP
began with business effective on or after April 1, 2008 for new business and those risks that had 10 or more Safe Driver Points. Beginning April 1, 2009, all business was eligible for
MAIP except those risks that have no violations or accidents in the preceding three year period (so called "Clean in three" risks). The last policy effective date on which any risk could be ceded to
CAR was March 31, 2009.

In
the second decision referenced above, the Commissioner announced that she would not fix and establish the maximum premium rates that can be charged for private passenger automobile
insurance policies issued or renewed after April 1, 2008. In a letter accompanying the decision, the Commissioner stated that in place of the "fixed and established" system, the Commissioner
would institute a system that introduces competitive pricing to the Massachusetts private passenger automobile insurance market, which the Commissioner described as "managed competition" ("Managed
Competition"). On October 5, 2007, the Commissioner issued a Competitive Rating Regulation; 211 CMR 79.00: Private Passenger Motor Vehicle Insurance Rates that describes the technical details
of Managed Competition.

The
Commissioner has also issued a number of bulletins addressing issues related to the implementation of Managed Competition (the "Rating Bulletins").

On
May 27, 2010, the Massachusetts Office of the Attorney General (the "AG") issued proposed regulations that, if adopted, would apply to the sale, marketing, claims processing,
rating, and underwriting of private passenger automobile insurance offered or provided in the Commonwealth of Massachusetts. The proposed regulations describe various acts by insurers and insurance
producers which would be considered to be unfair trade practices, under Massachusetts' unfair trade practices act, M.G.L. c. 93A. The AG held two public hearings on the proposed regulations in
June 2010, and may
issue final regulations later in 2011. We are not able at this time to determine what effect these proposed regulations will have on our business over the long term.

CAR
runs a reinsurance pool for commercial automobile policies and beginning January 1, 2006, CAR implemented a Limited Servicing Carrier Program ("LSC") for ceded commercial
automobile policies. CAR approved Safety Insurance and five other servicing carriers through a Request for Proposal to process ceded commercial automobile business, which was spread equitably among
the six servicing carriers. In 2010 CAR reduced the number of servicing carriers to four, and CAR has approved Safety and three other servicing carriers effective July 1, 2011 to continue the
program. Subject to the Commissioner's review, CAR sets the premium rates for commercial automobile policies reinsured through CAR and this reinsurance pool can generate an underwriting result that is
a profit or deficit based upon CAR's rate level. This underwriting result is allocated among every Massachusetts

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commercial
automobile insurance company, including us, based on a company's commercial automobile voluntary market share.

CAR
also runs a reinsurance pool for Taxi, Limousine and Car Service risks (the "Taxi/Limo Program"). On April 25, 2007, Safety submitted through a Request for Proposal a bid to
process a portion of the Taxi/Limo Program. CAR approved Safety as one of the two servicing carriers for this program beginning January 1, 2008, and CAR has again approved Safety beginning
January 1, 2011 as one of the two servicing carriers.

Under
Managed Competition, we decreased our rates an average 6.7% in 2008. During 2009, we increased our rates an average of 2.6% in a series of rate filings during the year. We began
using three rating tiers effective April 1, 2009. We filed and were approved for a 0.3% rate decrease effective June 1, 2009 and a 2.9% rate increase effective October 1, 2009. We
filed and were approved for a rate increase of 0.4% and began using four rating tiers effective January 1, 2010. A Companion Policy Client Tier, which is policyholders who have an other than
private passenger automobile policy with us, receives a rate decrease of 2.5% from our filed base rates. A Loyal Automobile Client Tier, which is policyholders who have been insured with Safety two or
more years, receives our filed base rates. A New Insurance Client Tier, which is policyholders with twelve or more months of continuous coverage or who qualify for a multi-car discount,
receives a rate increase of 2.5% from our filed base rates. A New Policyholder Tier, which is policyholders who do not qualify for the other three tiers, receives MAIP rates. We filed and were
approved for a 1.9% increase in our rates effective April 19, 2010 and we also filed and were approved for a 0.5% decrease in our rates effective June 15, 2010. Our rates include a 13.0%
commission rate for agents. Our direct written premiums increased by 8.1% in 2010 primarily as a result of increased exposures and average written premium per exposure in our private passenger and
homeowner lines of business.

Statutory Accounting Principles

Our results are reported in accordance with GAAP, which differ from amounts reported in accordance with statutory accounting principles
("SAP") as prescribed by insurance regulatory authorities, which in general reflect a liquidating, rather than going concern concept of accounting. Specifically, under GAAP:



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Insurance Ratios

The property and casualty insurance industry uses the combined ratio as a measure of underwriting profitability. The combined ratio is
the sum of the loss ratio (losses and loss adjustment expenses incurred as a percent of net earned premiums) plus the expense ratio (underwriting expenses as a percent of net earned premiums,
calculated on a GAAP basis). The combined ratio reflects only underwriting results and does not include income from investments or finance and other service income. Underwriting profitability is
subject to significant fluctuations due to competition, catastrophic events, weather, economic and social conditions, and other factors.

Our
GAAP insurance ratios are outlined in the following table:

Years Ended December 31,2010

2009

2008GAAP Ratios:Loss Ratio


65.4
%

65.1
%

64.1
%Expense Ratio


31.3


32.2


30.0Combined Ratio


96.7
%

97.3
%

94.1
%


Stock-Based Compensation

On June 25, 2002, the Board of Directors of the Company (the "Board") adopted the 2002 Management Omnibus Incentive Plan (the
"Incentive Plan"). The Incentive Plan provides for a variety of awards, including nonqualified stock options ("NQSOs"), stock appreciation rights and restricted stock ("RS") awards.

On
March 10, 2006, the Board approved amendments to the Incentive Plan, subject to shareholder approval, to (i) increase the number of shares of common stock available for
issuance by 1,250,000 shares, (ii) remove obsolete provisions, and (iii) make other non-material changes. A total of 1,250,000 shares of common stock had previously been
authorized for issuance under the Incentive Plan. The Incentive Plan, as amended, was approved by the shareholders at the 2006 Annual Meeting of Shareholders which was held on May 19, 2006.
Under the Incentive Plan, as amended, the maximum number of shares of common stock with respect to which awards may be granted is 2,500,000. As of December 31, 2010, there were 813,484 shares
available for future grant. The Board and the Compensation Committee intend to issue more awards under the Incentive Plan in the future. Grants outstanding under the Incentive Plan as of
December 31, 2010, were comprised of 301,501 restricted shares and 151,003 nonqualified stock options.

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Grants made under the Incentive Plan are as follows:

Type of
Equity
Awarded

Effective Date

Number of
Awards
Granted

Exercise
Price(1) or
Fair Value(2)
per Share

Vesting Terms

Expiration DateNQSOs

November 27, 2002


379,000

$
12.00
(1)
5 years, 20% annually

November 27, 2012NQSOs

February 20, 2003


99,000

$
13.30
(1)
5 years, 20% annually

February 20, 2013NQSOs

March 31, 2003


292,000

$
13.03
(1)
3 years, 30%-30%-40%

March 31, 2013NQSOs

August 21, 2003


10,000

$
15.89
(1)
5 years, 20% annually

August 21, 2013NQSOs

March 25, 2004


111,000

$
18.50
(1)
5 years, 20% annually

March 25, 2014RS

March 25, 2004


70,271

$
18.50
(2)
3 years, 30%-30%-40%

N/ANQSOs

August 30, 2004


10,000

$
21.40
(1)
5 years, 20% annually

August 30, 2014NQSOs

March 16, 2005


78,000

$
35.23
(1)
5 years, 20% annually

March 16, 2015RS

March 16, 2005


56,770

$
35.23
(2)
3 years, 30%-30%-40%

N/ARS

March 16, 2005


4,000

$
35.23
(2)
No vesting period(3)

N/ANQSOs

March 10, 2006


126,225

$
42.85
(1)
5 years, 20% annually

March 10, 2016RS

March 10, 2006


58,342

$
42.85
(2)
3 years, 30%-30%-40%

N/ARS

March 10, 2006


4,000

$
42.85
(2)
No vesting period(3)

N/ARS

February 26, 2007


65,760

$
45.62
(2)
3 years, 30%-30%-40%

N/ARS

February 26, 2007


4,000

$
45.62
(2)
No vesting period(3)

N/ARS

March 22, 2007


49,971

$
38.78
(2)
5 years, 20% annually

N/ARS

March 10, 2008


76,816

$
35.80
(2)
3 years, 30%-30%-40%

N/ARS

March 10, 2008


4,000

$
35.80
(2)
No vesting period(3)

N/ARS

March 20, 2008


45,779

$
34.37
(2)
5 years, 20% annually

N/ARS

March 9, 2009


95,953

$
28.66
(2)
3 years, 30%-30%-40%

N/ARS

March 9, 2009


4,000

$
28.66
(2)
No vesting period(3)

N/ARS

March 19, 2009


38,046

$
33.24
(2)
5 years, 20% annually

N/ARS

March 9, 2010


77,360

$
38.78
(2)
3 years, 30%-30%-40%

N/ARS

March 9, 2010


4,000

$
38.78
(2)
No vesting period(3)

N/ARS

March 23, 2010


25,590

$
38.09
(2)
5 years, 20% annually

N/A


---

Reinsurance

We reinsure with other insurance companies a portion of our potential liability under the policies we have underwritten, thereby
protecting us against an unexpectedly large loss or a catastrophic occurrence that could produce large losses, primarily in our homeowners line of business. We use various software products to measure
our exposure to catastrophe losses and the probable maximum loss to us for catastrophe losses such as hurricanes. The models include estimates for our share of the catastrophe losses generated in the
residual market for property insurance by the Massachusetts Property Insurance Underwriting Association ("FAIR Plan"). In the aftermath of Hurricane Katrina in 2005, the reinsurance market has seen
from the various software modelers, increases in the estimate of damage from hurricanes in the southern and northeast portions of the United States due to revised estimations of increased hurricane
activity and increases in the estimation of demand surge in the periods following a significant event. We continue to adjust our reinsurance programs as a result of the changes to the models and the
number of homes we write. As of January 1, 2011, our catastrophe

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reinsurance
provides gross per occurrence reinsurance coverage up to $535,000. As a result of the changes to the models, and our revised reinsurance program, our catastrophe reinsurance in 2011
protects us in the event of a "140-year storm" (that is, a storm of a severity expected to occur once in a 140-year period). Swiss Re, our primary reinsurer, maintains
an A.M. Best rating of "A" (Excellent). Most of our other reinsurers have an A.M. Best rating of "A" (Excellent) however in no case is a reinsurer rated below "A-"
(Excellent).

We
are a participant in CAR, a state-established body that runs the residual market reinsurance programs for both private passenger and commercial automobile insurance in Massachusetts
under which premiums, expenses, losses and loss adjustment expenses on ceded business are shared by all insurers writing automobile insurance in Massachusetts. We also participate in the FAIR Plan in
which premiums, expenses, losses and loss adjustment expenses on homeowners business that cannot be placed in the voluntary market are shared by all insurers writing homeowners insurance in
Massachusetts. The FAIR Plan has grown dramatically over the past few years as insurance carriers have reduced their exposure to coastal property. The FAIR Plan's exposure to catastrophe losses
increased and as a result, the FAIR Plan decided to buy reinsurance to reduce their exposure to catastrophe losses. On July 1, 2010, the FAIR Plan purchased $1,000,000 of catastrophe
reinsurance for property losses in excess of $200,000. At December 31, 2010, we had no material amounts recoverable from any reinsurer, excluding $44,897 recoverable from CAR.

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

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.

Critical Accounting Policies and Estimates

Loss and Loss Adjustment Expense Reserves.

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

When
a claim is reported, claims personnel establish a "case reserve" for the estimated amount of the ultimate payment. The amount of the reserve is primarily based upon an evaluation of
the type of claim involved, the circumstances surrounding each claim and the policy provisions relating to the loss. The estimate reflects the informed judgment of such personnel based on general
insurance reserving practices and on the experience and knowledge of the claims person. During the loss adjustment period, these estimates are revised as deemed necessary by our claims department
based on subsequent developments and periodic reviews of the cases.

In
accordance with industry practice, we also maintain reserves for estimated losses incurred but not yet reported ("IBNR"). IBNR reserves are determined in accordance with commonly
accepted actuarial reserving techniques on the basis of our historical information and experience. We review and make adjustments to incurred but not yet reported reserves quarterly.

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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.

Management
determines our loss and LAE reserves estimate based upon the analysis of our actuaries. A reasonable estimate is derived by selecting a point estimate within a range of
indications as calculated by our actuaries using generally accepted actuarial techniques. The key assumption in most actuarial analysis is that past patterns of frequency and severity will repeat in
the future, unless a significant change in the factors described above takes place. Our key factors and resulting assumptions are the ultimate frequency and severity of claims, based upon the most
recent ten years of claims reported to the Company, and the data CAR reports to us to calculate our share of the residual market, as of the date of the applicable balance sheet. For each accident year
and each coverage within a line of business our actuaries calculate the ultimate losses incurred. Our total reserves are the difference between the ultimate losses incurred and the cumulative loss and
loss adjustment payments made to date. Our IBNR reserves are calculated as the difference between our total reserves and the outstanding case reserves at the end of the accounting period. To determine
ultimate losses, our actuaries calculate a range of indications and select a point estimation using such actuarial techniques as:



Such
techniques assume that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting our ultimate losses, total
reserves and resulting IBNR reserves. It is possible that the final outcome may fall above or below these amounts as a result of a number of factors, including immature data, sparse data, or
significant growth in a line of business. Using these methodologies, our actuaries established a range of reasonably possible estimations for net reserves of approximately $311,570 to $359,802 as of
December 31, 2010 compared to a range of $332,854 to $378,692 for 2009. In general, the low and high values of the ranges represent reasonable minimum and maximum values of the indications
based on the techniques described above. Our

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Table of Contents

selected
point estimate of net loss and LAE reserves based upon the analysis of our actuaries was $351,244 as of December 31, 2010 compared to $374,832 for December 31, 2009. We have
recorded reserves closer to the high in the ranges of our projections.

The
following tables present the point estimation of the recorded reserves and the range of estimations by line of business for net loss and LAE reserves as of December 31, 2010
and December 31, 2009.

As of December 31, 2010Line of Business

Low

Recorded

HighPrivate passenger automobile

$
213,803

$
240,129

$
244,749Commercial automobile


40,413


45,772


46,483Homeowners


38,814


44,741


47,181All other


18,540


20,602


21,389Total

$
311,570

$
351,244

$
359,802




As of December 31, 2009Line of Business

Low

Recorded

HighPrivate passenger automobile

$
228,414

$
258,552

$
258,843Commercial automobile


48,556


54,785


55,272Homeowners


39,967


42,750


44,223All other


15,917


18,745


20,354Total

$
332,854

$
374,832

$
378,692


The
following tables present our total net reserves and the corresponding case reserves and IBNR reserves for each line of business as of December 31, 2010 and December 31,
2009.

As of December 31, 2010Line of Business

Case

IBNR

TotalPrivate passenger automobile

$
230,330

$
50

$
230,380CAR assumed private passenger auto


7,274


2,475


9,749Commercial automobile


30,424


4,143


34,567CAR assumed commercial automobile


7,325


3,880


11,205Homeowners


25,117


8,467


33,584FAIR Plan assumed homeowners


5,567


5,590


11,157All other


11,452


9,150


20,602Total net reserves for losses and LAE

$
317,489

$
33,755

$
351,244




As of December 31, 2009Line of Business

Case

IBNR

TotalPrivate passenger automobile

$
220,907

$
16,812

$
237,719CAR assumed private passenger auto


15,402


5,431


20,833Commercial automobile


32,287


7,867


40,154CAR assumed commercial automobile


8,063


6,568


14,631Homeowners


16,268


9,262


25,530FAIR Plan assumed homeowners


5,218


12,002


17,220All other


7,967


10,778


18,745Total net reserves for losses and LAE

$
306,112

$
68,720

$
374,832


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Table of Contents

Our
IBNR reserves consist of our estimate of the total loss reserves required less our case reserves. The IBNR reserves for CAR assumed private passenger and commercial automobile
business are 25.4% and 34.6%, respectively, of our total reserves for CAR assumed private passenger and commercial automobile business as of December 31, 2010 due to the reporting delays in the
information we receive from CAR, as described further in the section onCAR Loss and Loss Adjustment Expense Reserves.Our IBNR reserves for FAIR Plan
assumed homeowners are 51.3% of our total reserves for FAIR Plan assumed homeowners at December 31, 2010 due to similar reporting delays in the information we receive from FAIR Plan.

The
following tables present information by line of business for our total net reserves and the corresponding retained (i.e. direct less ceded) reserves and assumed reserves as of
December 31, 2010 and December 31, 2009.

As of December 31, 2010Line of Business

Retained

Assumed

NetPrivate passenger automobile

$
230,380CAR assumed private passenger automobile




$
9,749Net private passenger automobile







$
240,129Commercial automobile


34,567CAR assumed commercial automobile





11,205Net commercial automobile








45,772Homeowners


33,584FAIR Plan assumed homeowners





11,157Net homeowners








44,741All other


20,602





20,602Total net reserves for losses and LAE

$
319,133

$
32,111

$
351,244




As of December 31, 2009Line of Business

Retained

Assumed

NetPrivate passenger automobile

$
237,719CAR assumed private passenger automobile




$
20,833Net private passenger automobile







$
258,552Commercial automobile


40,154CAR assumed commercial automobile





14,631Net commercial automobile








54,785Homeowners


25,530FAIR Plan assumed homeowners





17,220Net homeowners








42,750All other


18,745





18,745Total net reserves for losses and LAE

$
322,148

$
52,684

$
374,832


CAR Loss and Loss Adjustment Expense Reserves

We are a participant in CAR and assume a portion of losses and LAE on business ceded by the industry participants to CAR. We estimate
reserves for assumed losses and LAE that have not yet been reported to us by CAR. Our estimations are based upon the same factors we use for our own reserves, plus additional factors due to the nature
of and the information we receive from CAR. The portion of reserves based upon CAR estimates for private passenger automobile line of business has declined substantially over time as a result of the
institution of the MAIP and phase-out of the private passenger automobile CAR reinsurance pool on April 1, 2009, as described elsewhere in this report.

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The CAR deficit, which consists of premium ceded to CAR less CAR losses and LAE, is allocated among every automobile insurance company writing business in
Massachusetts based on a complex formula (the "Participation Ratio") 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 to voluntarily write business in selected under-priced classes and territories.

We
receive a Settlement of Balances report from CAR that reports our share of CAR premium, losses and LAE on a lagged basis, seventy-five days after the end of every quarter.
CAR-published financial data is always at least one quarter behind the financial data we report. For example, when we reported our financial results for the year ended December 31,
2009, we had nine months of reported 2009 CAR financial data, and we had to estimate and record as IBNR reserves what CAR would report to us for the last three months of the year.

We
receive our final calendar year Participation Ratio report from CAR eight months after the end of that year, and thus we have to estimate for six quarters our share of the CAR
deficit. For example, for the year ended December 31, 2009 we had to estimate our 2009 policy year CAR Participation Ratio beginning with the first quarter of 2009 through the second quarter of
2010.

Because
of the lag in CAR estimates, and in order to try to validate to the extent possible the information CAR does provide, we must try to estimate the effects of the actions of our
competitors in order to establish our Participation Ratio. Before final Participation Ratios are available, we estimate the size of CAR and the resulting deficit based on historical analysis of CAR
results and estimations of our competitors' cession strategies. Even after our final Participation Ratio is available from CAR, we must continue to estimate the size of CAR and the resulting deficit
based upon data published by CAR and our own continuing analysis. As a result, changes in our reserves for CAR may continue to occur until all claims are finally settled. The Loss Reserving Committee
at CAR meets 70 days after the end of each quarter to estimate the CAR deficit for all active policy years and publishes estimations, which we use to estimate our share of the deficit. The
estimation that CAR calculates is based on data it collects from 19 servicing carriers which settle, reserve and report claims using a variety of methods. Any delays or errors in the collection of
this data could have a significant impact on the accuracy of CAR's estimations.

Although
we rely to a significant extent in setting our reserves on the information CAR provides, we are cautious in our use of that information, both because of the delays described
above and because the CAR estimates incorporate data CAR receives from all other CAR servicing carriers in Massachusetts. We do not have direct access to that data or firsthand knowledge of how those
carriers are currently conducting their operations. As a result, we are cautious in recording CAR reserves for the calendar years for which we have to estimate our Participation Ratio and these
reserves are subject to significant judgments and estimates.

Sensitivity Analysis

Establishment of appropriate reserves is an inherently uncertain process. There can be no certainty that currently established reserves
based on our key assumptions regarding frequency and severity in our lines of business, or our assumptions regarding our share of the CAR loss will prove adequate in light of subsequent actual
experience. To the extent that reserves are inadequate and are strengthened, the amount of such increase is treated as a charge to earnings in the period that the deficiency is recognized. To the
extent that reserves are redundant and are released, the amount of the release is a credit to earnings in the period the redundancy is recognized. For the year ended December 31, 2010, a
1 percentage-point change in the loss and LAE ratio would result in a change in reserves of $5,519. Each 1 percentage-point change in the loss and loss expense ratio would have had a
$3,588 effect on net income, or $0.24 per diluted share.

49

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Table of Contents

Our
assumptions consider that past experience, adjusted for the effects of current developments and anticipated trends, are an appropriate basis for establishing our reserves. Our
individual key
assumptions could each have a reasonable possible range of plus or minus 5 percentage-points for each estimation, although there is no guarantee that our assumptions will not have more than a
5 percentage point variation. The following sensitivity tables present information for each of our primary lines of business on the effect each 1 percentage-point change in each of our
key assumptions on unpaid frequency and severity could have on our retained (i.e., direct minus ceded) loss and LAE reserves and net income for the year ended December 31, 2010. In
evaluating the information in the table, it should be noted that a 1 percentage-point change in a single assumption would change estimated reserves by 1 percentage-point. A
1 percentage-point change in both our key assumptions would change estimated reserves within a range of plus or minus 2 percentage-points.

-1 Percent
Change in
Frequency

No
Change in
Frequency

+1 Percent
Change in
FrequencyPrivate passenger automobile direct minus ceded loss and LAEreserves-1 Percent Change in SeverityEstimated decrease in reserves

$
(4,608
)
$
(2,304
)
$
Estimated increase in net income


2,995


1,498


No Change in SeverityEstimated (decrease) increase in reserves


(2,304
)




2,304Estimated increase (decrease) in net income


1,498





(1,498
)+1 Percent Change in SeverityEstimated increase in reserves





2,304


4,608Estimated decrease in net income





(1,498
)

(2,995
)Commercial automobile direct minus ceded loss and LAE reserves-1 Percent Change in SeverityEstimated decrease in reserves


(691
)

(346
)

Estimated increase in net income


449


225


No Change in SeverityEstimated (decrease) increase in reserves


(346
)




346Estimated increase (decrease) in net income


225





(225
)+1 Percent Change in SeverityEstimated increase in reserves





346


691Estimated decrease in net income





(225
)

(449
)Homeowners direct minus ceded loss and LAE reserves-1 Percent Change in SeverityEstimated decrease in reserves


(672
)

(336
)

Estimated increase in net income


437


218


No Change in SeverityEstimated (decrease) increase in reserves


(336
)




336Estimated increase (decrease) in net income


218





(218
)+1 Percent Change in SeverityEstimated increase in reserves





336


672Estimated decrease in net income





(218
)

(437
)All other direct minus ceded loss and LAE reserves-1 Percent Change in SeverityEstimated decrease in reserves


(412
)

(206
)

Estimated increase in net income


268


134


No Change in SeverityEstimated (decrease) increase in reserves


(206
)




206Estimated increase (decrease) in net income


134





(134
)+1 Percent Change in SeverityEstimated increase in reserves





206


412Estimated decrease in net income





(134
)

(268
)


50

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Table of Contents

Our estimated share of CAR loss and LAE reserves is based on assumptions about our Participation Ratio, the size of CAR, and the resulting deficit
(similar assumptions apply with respect to the FAIR Plan). Our assumptions consider that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate
basis for establishing our CAR reserves. Each of our assumptions could have a reasonably possible range of plus or minus 5 percentage-points for each estimation.

The
following sensitivity table presents information of the effect each 1 percentage-point change in our assumptions on our share of reserves for CAR and other residual markets
could have on our assumed loss and LAE reserves and net income for the year ended December 31, 2010. In evaluating the
information in the table, it should be noted that a 1 percentage-point change in our assumptions would change estimated reserves by 1 percentage-point.

-1 Percent
Change in
Estimation

+1 Percent
Change in
EstimationCAR assumed private passenger automobileEstimated (decrease) increase in reserves

$
(97
)
$
97Estimated increase (decrease) in net income


63


(63
)CAR assumed commercial automobileEstimated (decrease) increase in reserves


(112
)

112Estimated increase (decrease) in net income


73


(73
)FAIR Plan assumed homeownersEstimated (decrease) increase in reserves


(112
)

112Estimated increase (decrease) in net income


73


(73
)


Reserve Development Summary

The changes we have recorded in our reserves in the past illustrate the uncertainty of estimating reserves. Our prior year reserves
decreased by $48,157, $44,065 and $35,938 for the years ended December 31, 2010, 2009 and 2008, respectively.

The
following table presents a comparison of prior year development of our net reserves for losses and LAE for the years ended December 31, 2010, 2009 and 2008. Each accident year
represents all claims for an annual accounting period in which loss events occurred, regardless of when the losses are actually reported, booked or paid. Our financial statements reflect the aggregate
results of the current and all prior accident years.

Years Ended December 31,Accident Year

2010

2009

20082000 & prior

$
(600
)
$
(620
)
$
(1,192
)2001


(496
)

(1,004
)

(958
)2002


(1,031
)

(1,431
)

(1,973
)2003


(1,669
)

(1,385
)

(2,507
)2004


(2,147
)

(3,827
)

(6,619
)2005


(4,488
)

(5,999
)

(8,258
)2006


(7,996
)

(9,829
)

(6,714
)2007


(9,662
)

(8,079
)

(7,717
)2008


(10,992
)

(11,891
)

2009


(9,076
)




All prior years

$
(48,157
)
$
(44,065
)
$
(35,938
)


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The
decreases in prior years reserves during the 2010, 2009 and 2008 periods resulted from re-estimations of prior year ultimate loss and LAE liabilities. The 2010 decrease
is primarily composed of reductions of $34,248 in our retained automobile reserves, $7,269 in our retained homeowners and all other reserves and $5,572 in CAR assumed reserves. The 2009 decrease is
primarily composed of reductions of $24,979 in our retained automobile reserves and $11,551 in CAR assumed reserves and $6,103 in our retained homeowners and all other reserves. The 2008 decrease is
primarily composed of reductions of $21,752 in our retained automobile reserves and $8,905 in CAR assumed reserves.

The
following table presents information by line of business for prior year development of our net reserves for losses and LAE for the year ended December 31, 2010.

Accident Year

Private Passenger
Automobile

Commercial
Automobile

Homeowners

All Other

Total2000 & prior

$
(532
)
$
(52
)
$
13

$
(29
)
$
(600
)2001


(338
)

(26
)

(28
)

(104
)

(496
)2002


(641
)

(124
)

(56
)

(210
)

(1,031
)2003


(1,008
)

(285
)

(27
)

(349
)

(1,669
)2004


(1,091
)

(633
)

(51
)

(372
)

(2,147
)2005


(3,095
)

(634
)

(389
)

(370
)

(4,488
)2006


(4,600
)

(2,079
)

(870
)

(447
)

(7,996
)2007


(6,426
)

(1,267
)

(1,417
)

(552
)

(9,662
)2008


(7,660
)

(1,402
)

(869
)

(1,061
)

(10,992
)2009


(6,553
)

(1,374
)

(831
)

(318
)

(9,076
)All prior years

$
(31,944
)
$
(7,876
)
$
(4,525
)
$
(3,812
)
$
(48,157
)


To
further clarify the effects of changes in our reserve estimates for CAR and other residual markets, the next two tables break out the information in the table above by source of the
business (i.e., non-residual market vs. residual market).

The
following table presents information by line of business for prior year development of retained reserves for losses and LAE for the year ended December 31, 2010; that is, all
our reserves except for business ceded or assumed from CAR and other residual markets.

Accident Year

Retained
Private Passenger
Automobile

Retained
Commercial
Automobile

Retained
Homeowners

Retained
All Other

Total2000 & prior

$
(309
)
$
(50
)
$
13

$
(29
)
$
(375
)2001


(241
)

(17
)

(28
)

(104
)

(390
)2002


(545
)

(111
)

(56
)

(210
)

(922
)2003


(962
)

(255
)

(27
)

(349
)

(1,593
)2004


(1,073
)

(666
)

(61
)

(372
)

(2,172
)2005


(3,047
)

(593
)

(367
)

(370
)

(4,377
)2006


(4,396
)

(1,858
)

(836
)

(447
)

(7,537
)2007


(5,696
)

(1,006
)

(1,316
)

(552
)

(8,570
)2008


(6,274
)

(1,024
)

(479
)

(1,061
)

(8,838
)2009


(4,913
)

(1,212
)

(300
)

(318
)

(6,743
)All prior years

$
(27,456
)
$
(6,792
)
$
(3,457
)
$
(3,812
)
$
(41,517
)


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Table of Contents

The following table presents information by line of business for prior year development of reserves assumed from CAR and other residual markets for losses and LAE
for the year ended December 31, 2010.

Accident Year

CAR Assumed
Private Passenger
Automobile

CAR Assumed
Commercial
Automobile

FAIR Plan
Homeowners

Total2000 & prior

$
(223
)
$
(2
)
$


$
(225
)2001


(97
)

(9
)




(106
)2002


(96
)

(13
)




(109
)2003


(46
)

(30
)




(76
)2004


(18
)

33


10


252005


(48
)

(41
)

(22
)

(111
)2006


(204
)

(221
)

(34
)

(459
)2007


(730
)

(261
)

(101
)

(1,092
)2008


(1,386
)

(378
)

(390
)

(2,154
)2009


(1,640
)

(162
)

(531
)

(2,333
)All prior years

$
(4,488
)
$
(1,084
)
$
(1,068
)
$
(6,640
)


Our
private passenger automobile line of business prior year reserves decreased by $31,944 for the year ended December 31, 2010. The decrease was primarily due to improved
retained private passenger results of $24,326 for the accident years 2005 through 2009, and improved assumed CAR results for the private passenger automobile pool of $3,026 for accident years 2008
through 2009. The improved retained private passenger results were primarily due to fewer IBNR claims than previously estimated and better than previously estimated severity on our established bodily
injury and property damage case reserves. The improved CAR results were due primarily to improved CAR private passenger loss ratios as published and reported by the CAR Loss Reserving Committee.

Our
commercial automobile line of business prior year reserves decreased by $7,876 for the year ended December 31, 2010 due primarily to fewer IBNR claims than previously
estimated.

Our
retained homeowners line of business prior year reserves decreased by $3,457 for the year ended December 31, 2010. Our FAIR Plan homeowners reserve decreased by $1,068 for the
year ended December 31, 2010.

Our
retained other line of business prior year reserves which consists primarily of business owners, personal umbrella and dwelling fire policies decreased by $3,812 for the year ended
December 31, 2010.

In
estimating all our loss reserves, including CAR, we follow the guidance prescribed by ASC 944,Financial
ServicesInsurance.

For
further information, see Results of Operations:Losses and Loss Adjustment Expenses.

Other-Than-Temporary Impairments.

We use a systematic methodology to evaluate declines in fair values below cost or amortized cost of our investments. This methodology
ensures that we evaluate available evidence concerning any declines in a disciplined manner.

In
our determination of whether a decline in fair value below amortized cost is an other-than-temporary impairment ("OTTI"), we consider and evaluate several
factors and circumstances including the issuer's overall financial condition, the issuer's credit and financial strength ratings, a weakening of the general market conditions in the industry or
geographic region in which the issuer operates, a prolonged period (typically six months or longer) in which the fair value of an

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issuer's
securities remains below our amortized cost, and any other factors that may raise doubt about the issuer's ability to continue as a going concern.

We
adopted ASC 320,InvestmentsDebt and Equity Securitieseffective April 1, 2009. ASC 320 requires entities to
separate an OTTI of a debt security into two components when there are credit related losses associated with the impaired debt security for which the Company asserts that it does not have the intent
to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. Prior to April 1, 2009, we had to determine whether we
had the intent and ability to hold the investment for a sufficient period of time for the value to recover. When the analysis of the above factors resulted in the Company's conclusion that declines in
market values were other-than-temporary, the cost of the security was written down to market value and the reduction in value was reflected as a realized loss. The adoption of
ASC 320 did not have an impact on our consolidated results of operations or financial position.

Effective
under ASC 320, the amount of the OTTI related to a credit loss is recognized in earnings, and the amount of the OTTI related to other factors is recorded as a component of
other comprehensive income (loss). In instances where no credit loss exists but it is more likely than not that the Company will have to sell the debt security prior to the anticipated recovery, the
decline in market value below amortized cost is recognized as an OTTI in earnings. In periods after the recognition of an OTTI on debt securities, the Company accounts for such securities as if they
had been purchased on the measurement date of the OTTI at an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. For debt securities for which OTTI
was recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected will be accreted or amortized into net investment income.

For
further information, see Results of Operations:Net Realized Gains (Losses) on Investments.

Results of Operations

The following table shows certain of our selected financial results:

Years Ended December 31,2010

2009

2008Direct written premiums

$
604,957

$
559,747

$
573,509Net written premiums


576,807


532,629


552,904Net earned premiums


551,950


531,969


576,556Net investment income


41,395


43,308


45,771Net realized gains (losses) on investments


863


(167
)

678Finance and other service income


18,511


16,844


17,995Total revenue


612,719


591,954


641,000Loss and loss adjustment expenses


360,848


346,301


369,823Underwriting, operating and related expenses


172,823


171,124


172,987Interest expenses


88


135


81Total expenses


533,759


517,560


542,891Income before income taxes


78,960


74,394


98,109Income tax expense


22,618


20,242


27,851Net income

$
56,342

$
54,152

$
70,258


54

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Table of Contents

YEAR ENDED DECEMBER 31, 2010 COMPARED TO YEAR ENDED DECEMBER 31, 2009

Direct Written Premiums.Direct written premiums for the year ended December 31, 2010, increased by $45,210, or 8.1%, to $604,957
from
$559,747 for the comparable 2009 period. The 2010 increase occurred primarily in our personal automobile and homeowners lines, which experienced increases of 3.8% and 3.2%, respectively, in average
written premium per exposure and increases of 3.3% and 19.6%, respectively, in written exposures. The increase in homeowners exposures is primarily the result of our pricing strategy of offering
account discounts to policyholders who insure both an automobile and home with us. Partially offsetting these increases was a 4.6% decrease in average written premium per exposure and a 2.2% decrease
in written exposures in our commercial automobile line. This decrease is primarily a result of reduced exposures from ERPs submitting business through the CAR
LSC program and general economic conditions which have reduced the size of the overall commercial automobile insurance market in Massachusetts.

Net Written Premiums.Net written premiums for the year ended December 31, 2010, increased by $44,178, or 8.3%, to $576,807 from
$532,629 for
2009. The 2010 increase was primarily due to the factors that increased direct written premiums.

Net Earned Premiums.Net earned premiums for the year ended December 31, 2010, increased by $19,981, or 3.8%, to $551,950 from
$531,969 for
the comparable 2009 period. The 2010 increase was principally due to the factors that increased direct written premiums combined with decreases in earned premiums ceded to CAR, and partially offset by
decreases in earned premiums assumed from CAR. Earned premiums assumed from and ceded to CAR decreased as a result of the phase-out of the CAR personal automobile reinsurance pool, which
was fully replaced by an assigned risk plan, the MAIP, beginning with personal automobile policy effective dates after March 31, 2009.

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

Years Ended December 31,2010

2009Written PremiumsDirect

$
604,957

$
559,747Assumed


13,738


14,564Ceded


(41,888
)

(41,682
)Net written premiums

$
576,807

$
532,629Earned PremiumsDirect

$
580,942

$
555,020Assumed


14,134


26,552Ceded


(43,126
)

(49,603
)Net earned premiums

$
551,950

$
531,969


Net Investment Income.Net investment income for the year ended December 31, 2010 decreased by $1,913, or 4.4%, to $41,395 from
$43,308 for
the comparable 2009 period. The 2010 decrease primarily resulted from lower short-term interest rates, risk reduction actions related to municipal bonds, and ongoing maintenance of short
duration to protect the portfolio from rising interest rates. Net effective annual yield decreased to 3.9% for the year ended December 31, 2010 from 4.1% for the comparable 2009 period. Our
duration was 3.4 years at December 31, 2010, up slightly from 3.3 years at December 31, 2009.

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Table of Contents

Net Realized Gains (Losses) on Investments.Net realized gains on investments were $863 for the year ended December 31, 2010
compared to net
realized losses of $167 for the year ended December 31, 2009.

The
gross unrealized gains and losses on investments in fixed maturity securities, equity securities, including interests in mutual funds, were as follows:

As of December 31, 2010Gross Unrealized
Losses(3)Cost or
Amortized
Cost

Gross
Unrealized
Gains

Non-OTTI
Unrealized
Losses

OTTI
Unrealized
Losses(4)

Estimated
Fair ValueU.S. Treasury securities

$
87,830

$
280

$
(1,841
)
$


$
86,269Obligations of states and political subdivisions


436,082


12,014


(2,906
)




445,190Residential mortgage-backed securities(1)


237,405


15,295


(39
)




252,661Commercial mortgage-backed securities


61,259


2,332








63,591Other asset-backed securities


16,543


862








17,405Corporate and other securities


191,235


7,769


(883
)




198,121Subtotal, fixed maturity securities


1,030,354


38,552


(5,669
)




1,063,237Equity securities(2)


13,704


920








14,624Other invested assets


2,817











2,817Totals

$
1,046,875

$
39,472

$
(5,669
)
$


$
1,080,678


---

As
of December 31, 2010, with the exception of one security which represented less than 0.1% of our total investment in fixed income securities, our portfolio of fixed maturity
investments was comprised entirely of investment grade corporate fixed maturity securities, U.S. government and agency securities, and asset-backed securities. All of our securities received a rating
assigned by Moody's of Ba or higher, except the few securities not rated by Moody's, all of which are rated investment grade by Standard & Poor's. The Company holds no subprime mortgage debt
securities. All of the Company's holdings in mortgage-backed securities are either U.S. Government or Agency guaranteed or are rated investment grade by either Moody's or Standard & Poor's.

The
following table illustrates the gross unrealized losses included in the Company's investment portfolio and the fair value of those securities, aggregated by investment category. The
table also

56

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Table of Contents

illustrates
the length of time that they have been in a continuous unrealized loss position as of December 31, 2010.

As of December 31, 2010Less than 12 Months

12 Months or More

TotalEstimated
Fair Value

Unrealized
Losses

Estimated
Fair Value

Unrealized
Losses

Estimated
Fair Value

Unrealized
LossesU.S. Treasury securities

$
38,318

$
1,841

$


$


$
38,318

$
1,841Obligations of states and political subdivisions


109,883


2,490


7,325


416


117,208


2,906Residential mortgage-backed securities


1,312


31


298


8


1,610


39Corporate and other securities


27,736


883








27,736


883Total temporarily impaired securities

$
177,249

$
5,245

$
7,623

$
424

$
184,872

$
5,669


As
of December 31, 2010, we held insured investment securities of approximately $244,893 which represented approximately 22.7% of our total investment portfolio. Approximately
$63,398 of these securities are pre-refunded, meaning that funds have been set aside in escrow to satisfy the future interest and principal obligations of the bond.

The
following table shows our insured investment securities that are backed by financial guarantors including pre-refunded securities as of December 31, 2010. We do
not have any direct investment holdings in a financial guarantee insurance company.

As of December 31, 2010Financial Guarantor

Total

Pre-refunded
Securities

Exposure Net
of Pre-refunded
SecuritiesMunicipal bondsAmbac Assurance Corporation

$
32,055

$
12,214

$
19,841Financial Guaranty Insurance Company


267


267


Assured Guaranty Municipal Corporation


91,819


34,936


56,883National Public Finance Guaranty Corporation


116,704


15,981


100,723Total municipal bonds


240,845


63,398


177,447Other asset-backed securitiesAmbac Assurance Corporation


4,048





4,048Total other asset-backed securities


4,048





4,048Total

$
244,893

$
63,398

$
181,495


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Table of Contents

The following table shows our insured investments by Moody's rating where it is available with and without the impact of the insurance guarantee as of
December 31, 2010.

As of December 31, 2010Rating

Rating
With
Insurance

Rating
Without
InsuranceAaa

$
3,866

$
3,866Aa1


28,976


28,976Aa2


65,265


65,265Aa3


88,550


77,461A1


11,964


12,887A2


11,003


18,021A3


12,546


15,694Baa1


267


267Baa2


4,048


4,048Totals

$
226,485

$
226,485


We
reviewed the unrealized losses in our fixed income and equity portfolio as of December 31, 2010 for potential OTTI. We held no securities at December 31, 2010 with a
material (20% or greater) unrealized loss for four or more consecutive quarters. Specific qualitative analysis was performed for securities appearing on our "Watch List," if any. Qualitative analysis
considered such factors as the financial condition and the near term prospects of the issuer, whether the debtor is current on its
contractually obligated interest and principal payments, changes to the rating of the security by a rating agency, and the historical volatility of the fair value of the security.

Of
the $5,669 gross unrealized losses as of December 31, 2010, $4,747 relates to obligations of U.S. Treasuries, states and political subdivisions. The remaining $922 of gross
unrealized losses relates to holdings of investment grade residential mortgage-backed, corporate and other securities.

The
unrealized losses recorded on the investment portfolio at December 31, 2010 resulted from fluctuations in market interest rates and other temporary market conditions as
opposed to fundamental changes in the credit quality of the issuers of such securities. Given our current level of liquidity, the fact that we do not intend to sell these securities, and that it is
more likely than not that we will not be required to sell these securities prior to recovery of the cost basis of these securities, these decreases in values are viewed as being temporary.

During
the year ended December 31, 2010 and 2009, there was no significant deterioration in the credit quality of any of our holdings and no OTTI charges were recorded related to
our portfolio of investment securities.

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



58

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Fair
values for our fixed maturity securities are based on prices provided by our custodian bank and our investment manager. Both our custodian bank and our investment manager use a
variety of independent, nationally recognized pricing services to determine market valuations. If the pricing service cannot provide fair value determinations, we obtain non-binding price
quotes from broker-dealers. A minimum of two quoted prices is obtained for the majority of our available for sale fixed maturity securities in our investment portfolio. Our custodian bank is our
primary provider of quoted prices from third-party pricing services and broker-dealers. To provide reasonable assurance of the validity of each price or quote, a secondary third-party pricing service
or broker-dealer quote is obtained from our investment manager. An examination of the pricing data is then performed for each security. If the variance between the primary and secondary price quotes
for a security is within an accepted tolerance level, the quoted price obtained from our custodian bank is used in our financial statements for the security. If the variance between the primary and
secondary price quotes exceeds an accepted tolerance level, we obtain a quote from an alternative source, if possible, and we document and resolve any differences between the pricing sources. In
addition, we may request that our investment manager and their traders provide input as to which vendor is providing prices that their traders believe are reflective of fair value for the security.
Following this process, we may decide to value the security in our financial statements using the secondary or alternative source if we believe that pricing is more reflective of the security's value
than the primary pricing provided by our custodian bank. We analyze market valuations received to verify reasonableness, to understand the key assumptions used and their sources, and to determine an
appropriate ASC 820 fair value hierarchy level based upon trading activity and the observability of market inputs. Based on this evaluation and investment class analysis, each price is classified into
Level 1, 2 or 3.

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

Our
Level 1 securities consist of equity securities whose values are based on quoted prices in active markets for identical assets. Our Level 2 securities are comprised of
our available for sale fixed maturity securities whose fair value was determined using observable market inputs. Fair values for securities for which quoted market prices were unavailable were
estimated based upon reference to observable inputs such as benchmark interest rates, market comparables, and other relevant inputs. Investments valued using these inputs include U.S. Treasury
securities and obligations of U.S. Government agencies, obligations of international government agencies, obligations of states and political subdivisions, corporate securities, commercial and
residential mortgage-backed securities, and other asset-backed securities. Inputs into the fair value application that are utilized by asset class include but are not limited
to:



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All
unadjusted estimates of fair value for our fixed maturities priced by the pricing services as described above are included in the amounts disclosed in Level 2.

In
order to ensure the fair value determination is representative of an exit price (consistent with ASC 820), our procedures for validating quotes or prices obtained from third-parties
include, but are not limited to, obtaining a minimum of two price quotes for each fixed maturity security if possible, as discussed above, the periodic testing of sales activity to determine if there
are any significant differences between the market price used to value the security as of the balance sheet date and the sales price of the security for sales that occurred around the balance sheet
date, and the periodic review of reports provided by our investment manager regarding those securities with ratings changes and securities placed on our "Watch List." In addition, valuation techniques
utilized by pricing services and prices obtained from external sources are reviewed by our external investment manager, whose investment professionals are familiar with the securities being priced and
the markets in which they trade to ensure the fair value determination is representative of an exit price (consistent with ASC 820).

Our
entire available for sale portfolio was priced based upon quoted market prices or other observable inputs as of December 31, 2010. There were no significant changes to the
valuation process during the year ended December 31, 2010. As of December 31, 2010 and December 31, 2009, no quotes or prices obtained were adjusted by management. All broker
quotes obtained were non-binding.

The
following table summarizes our total fair value measurements for available for sale investments for the period ending December 31, 2010.

As of December 31, 2010Total

Level 1 Inputs

Level 2 Inputs

Level 3 InputsU.S. Treasury securities

$
86,269

$


$
86,269

$
Obligations of states and political subdivisions


445,190





445,190


Residential mortgage-backed securities


252,661





252,661


Commercial mortgage-backed securities


63,591





63,591


Other asset-backed securities


17,405





17,405


Corporate and other securities


198,121





198,121


Equity securities


14,624


14,624





Totals

$
1,077,861

$
14,624

$
1,063,237

$



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The
following table summarizes the changes in our Level 3 fair value measurements for the year ended December 31, 2010.

Other
Asset-Backed
SecuritiesBalance at January 1, 2010

$
2,504Net gains included in earnings


183Net gains included in other comprehensive income


1,180Purchases and sales


(3,867
)Transfers in (out) of Level 3


Balance at December 31, 2010

$
Amount of total losses included in earnings attributable to the change in unrealized losses related to assets still held at December 31,
2010

$



Transfers
in and out of Level 3 are attributable to changes in the ability to observe significant inputs in determining fair value exit pricing. On January 1, 2010 our
Level 3 securities consisted of one asset-backed security whose price was based solely on a single broker quote which was deemed to be obtained through unobservable inputs. This security was
sold in October 2010.

Finance and Other Service Income.Finance and other service income includes revenues from premium installment charges, which we
recognize when
earned, and other miscellaneous income and fees. Finance and other service income for the year ended December 31, 2010, was $18,511 compared to $16,844 for the comparable 2009 period.

Losses and Loss Adjustment Expenses.Losses and loss adjustment expenses incurred for the year ended December 31, 2010, increased
by $14,547,
or 4.2%, to $360,848 from $346,301 for the comparable 2009 period. Our GAAP loss ratio for the year ended December 31, 2010, increased to 65.4% compared to 65.1% for the comparable 2009 period.
Our GAAP loss ratio excluding loss adjustment expenses for the year ended December 31, 2010 increased to 56.0% from 55.8% for the comparable 2009 period. Total prior year favorable development
included in the pre-tax results for the year ended December 31, 2010 was $48,157, compared to prior year favorable development of $44,065 for the comparable 2009 period.

Underwriting, Operating and Related Expenses.Underwriting, operating and related expense for the year ended December 31, 2010
increased by
$1,699, or 1.0%, to $172,823 from $171,124 for the comparable 2009 period. Our GAAP expense ratios for the year ended December 31, 2010 decreased to 31.3% compared to 32.2% for the comparable
2009 period.

Interest Expenses.Interest expense for the year ended December 31, 2010 was $88 compared to $135 for the comparable 2009 period.
The credit
facility commitment fee included in interest expense was $75 for both the years ended December 31, 2010 and 2009.

Income Tax Expense.Our effective tax rates were 28.6% and 27.2% for the years ended December 31,
2010 and 2009, respectively. These effective rates were lower than the statutory rate of 35% primarily due to adjustments for tax-exempt investment income.

Net Income.Net income for the year ended December 31, 2010 increased by $2,190, or 4.0%, to $56,342 from $54,152 for the
comparable 2009
period. This increase was primarily due to the factors discussed above.

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YEAR ENDED DECEMBER 31, 2009 COMPARED TO YEAR ENDED DECEMBER 31, 2008

Direct Written Premiums.Direct written premiums for the year ended December 31, 2009, decreased by $13,762, or 2.4%, to $559,747
from
$573,509 for the comparable 2008 period. The 2009 decrease occurred primarily in our personal and commercial automobile lines, which experienced decreases of 4.5% and 5.8%, respectively, in average
written premium per exposure and decreases of 1.1% and 5.9%, respectively, in written exposures. The decrease in average written premium per exposure in our personal automobile line was primarily the
result of rate of rate decreases totaling 6.7% which we filed under the competitive pricing system introduced to the private passenger automobile market in Massachusetts beginning April 1,
2008. The decrease in exposures in our personal automobile line was primarily a result of the decrease in our ERP written exposures due to the transition to the MAIP effective April 1, 2008 as
discussed above. Our commercial automobile exposures decreased by 5.9% in 2009 primarily as a result of reduced exposures from ERPs submitting business through the CAR LSC program, and general
economic conditions which have reduced the size of the overall commercial automobile market in Massachusetts. Our homeowners line average written premium per exposure decreased by 0.1% with a 23.4%
increase in written exposures. The increase in homeowners exposures is primarily the result of our pricing strategy of offering account discounts to policyholders who insure both an automobile and
home with us.

Net Written Premiums.Net written premiums for the year ended December 31, 2009, decreased by
$20,275, or 3.7%, to $532,629 from $552,904 for 2008. This decrease was due to the factors that decreased direct written premiums combined with decreases in premiums assumed from CAR, and partially
offset by decreases in premiums ceded to CAR. Written premiums assumed and ceded to CAR decreased as a result of the phase-out of the CAR personal automobile reinsurance pool, which was
replaced by an assigned risk plan, the MAIP. Beginning with policy effective dates after March 31, 2009, all personal automobile business was eligible for MAIP and could no longer be ceded to
CAR.

Net Earned Premiums.Net earned premiums for the year ended December 31, 2009, decreased by $44,587, or 7.7%, to $531,969 from
$576,556 for
the comparable 2008 period. This decrease was due to the factors that decreased direct and net written premiums.

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

Years Ended December 31,2009

2008Written PremiumsDirect

$
559,747

$
573,509Assumed


14,564


37,439Ceded


(41,682
)

(58,044
)Net written premiums

$
532,629

$
552,904Earned PremiumsDirect

$
555,020

$
595,673Assumed


26,552


46,125Ceded


(49,603
)

(65,242
)Net earned premiums

$
531,969

$
576,556


Net Investment Income.Net investment income for the year ended December 31, 2009, was $43,308, compared to $45,771 for 2008, a
decrease of
5.4%. Average cash and investment securities (at cost) increased by $1,363, or less than 0.1%, to $1,061,916 for the year ended December 31, 2009, from

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$1,060,554
for the comparable 2008 period. The net effective yield on the investment portfolio decreased to 4.1% during the year ended December 31, 2009, compared to 4.3% during 2008 primarily
due to lower yields on cash and short-term securities. Our duration increased to 3.3 years at December 31, 2009, from 3.2 years at December 31, 2008.

Net Realized Gains (Losses) on Investments.Net realized losses on investments were $167 for the year ended December 31, 2009
compared to net
realized gains of $678 for the year ended December 31, 2008.

The
gross unrealized gains and losses on investments in fixed maturity securities and equity securities, including interests in mutual funds, were as follows:

As of December 31, 2009Gross Unrealized Losses(3)Cost or
Amortized
Cost

Gross
Unrealized
Gains

Non-OTTI
Unrealized
Losses

OTTI
Unrealized
Losses(4)

Estimated
Fair ValueU.S. Treasury securities

$
12,738

$
203

$
(409
)
$


$
12,532Obligations of states and political subdivisions


468,319


16,218


(1,116
)




483,421Residential mortgage-backed securities(1)


289,736


11,271


(546
)




300,461Commercial mortgage-backed securities


73,431


594


(1,109
)




72,916Other asset-backed securities


22,781


879


(1,360
)




22,300Corporate and other securities


122,439


4,737


(477
)




126,699Subtotal, fixed maturity securities


989,444


33,902


(5,017
)




1,018,329Equity securities(2)


9,736


140








9,876Other invested assets


409











409Totals

$
999,589

$
34,042

$
(5,017
)
$


$
1,028,614


(1)Residential
mortgage-backed securities consists primarily of obligations of U.S. Government agencies including collateralized mortgage obligations and
mortgage backed securities guaranteed and/or insured by the following issuers: Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National
Mortgage Association (FNMA) and the Federal Home Loan Bank (FHLB). The total of these fixed maturity securities was $289,447 at amortized cost and $300,172 at fair value as of December 31,
2009.(2)Equity
securities includes interests in mutual funds of $9,736 at cost and $9,876 at December 31, 2009 held to fund the Company's executive deferred
compensation plan.(3)The
Company's investment portfolio included 89 securities in an unrealized loss position at December 31, 2009.(4)Amounts
in this column represent OTTI recognized in accumulated other comprehensive income.


As
of December 31, 2009, with the exception of two securities which represented 0.1% of our total investment in fixed income securities, our portfolio of fixed maturity
investments was comprised entirely of investment grade corporate fixed maturity securities, U.S. government and agency securities and asset-backed securities. All of our securities received a rating
assigned by Moody's of Ba or higher, except the few securities not rated by Moody's. The Company holds no subprime mortgage debt securities. All of the Company's holdings in mortgage-backed securities
are either U.S. Government or Agency guaranteed or are rated investment grade by either Moody's or Standard & Poor's.

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The following table illustrates the gross unrealized losses included in the Company's investment portfolio and the fair value of those securities, aggregated by
investment category. The table also illustrates the length of time that they have been in a continuous unrealized loss position as of December 31, 2009.

As of December 31, 2009Less than 12 Months

12 Months or More

TotalEstimated
Fair Value

Unrealized
Losses

Estimated
Fair Value

Unrealized
Losses

Estimated
Fair Value

Unrealized
LossesU.S. Treasury securities

$
9,832

$
409

$


$


$
9,832

$
409Obligations of states and political subdivisions


47,585


257


13,483


859


61,068


1,116Residential mortgage-backed securities


33,753


523


855


23


34,608


546Commercial mortgage-backed securities


4,940


67


38,260


1,042


43,200


1,109Other asset-backed securities








6,616


1,360


6,616


1,360Corporate and other securities


26,217


315


5,143


162


31,360


477Total temporarily impaired securities

$
122,327

$
1,571

$
64,357

$
3,446

$
186,684

$
5,017


As
of December 31, 2009, we held insured investment securities of approximately $306,599 which represented approximately 29.8% of our total investment portfolio. Approximately
$36,823 of these securities are pre-refunded, meaning that funds have been set aside in escrow to satisfy the future interest and principal obligations of the bond.

The
following table shows our insured investment securities that are backed by financial guarantors including pre-refunded securities as of December 31, 2009. We do
not have any direct investment holdings in a financial guarantee insurance company.

As of December 31, 2009Financial Guarantor

Total

Pre-refunded
Securities

Exposure Net
of Pre-refunded
SecuritiesMunicipal bondsAmbac Assurance Corporation

$
42,424

$
3,446

$
38,978Financial Guaranty Insurance Company


271


271


Assured Guaranty Municipal Corporation


111,310


19,428


91,882National Public Finance Guaranty Corporation


144,968


13,678


131,290Total municipal bonds


298,973


36,823


262,150Other asset-backed securitiesAmbac Assurance Corporation


4,112





4,112Financial Guaranty Insurance Company


2,504





2,504Syncora Corporation (XL Capital Assurance)


1,010





1,010National Public Finance Guaranty Corporation








Total other asset-backed securities


7,626





7,626Total

$
306,599

$
36,823

$
269,776


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Table of Contents

The
following table shows our insured investments by Moody's rating where it is available with and without the impact of the insurance guarantee as of December 31, 2009.

As of December 31, 2009Rating

Rating
With
Insurance

Rating
Without
InsuranceAaa

$
3,999

$
3,999Aa1


10,477


10,477Aa2


32,561


32,561Aa3


140,047


81,919A1


45,307


79,787A2


16,451


29,371A3


28,934


33,430Baa1


271


271Baa2


4,112


4,112Ba2





6,232Totals

$
282,159

$
282,159


We
reviewed the unrealized losses in our fixed income and equity portfolio as of December 31, 2009 for potential OTTI. We obtained specific qualitative analysis regarding certain
debt securities held at December 31, 2009 with a material (20% or greater) unrealized loss for four or more consecutive quarters. Specific qualitative analysis was also performed for any
additional securities appearing on our "Watch List." Qualitative analysis considered such factors as the financial condition and the near term prospects of the issuer, whether the debtor is current on
its contractually obligated interest and principal payments, changes to the rating of the security by a rating agency and the historical volatility of the fair value of the security.

Of
the $5,017 gross unrealized losses as of December 31, 2009, $1,525 relates to fixed maturity obligations of U.S. Treasuries and obligations of states and political
subdivisions. The remaining $3,492 of gross unrealized losses relates primarily to holdings of investment grade mortgage-backed and other securities.

The
unrealized losses recorded on the investment portfolio at December 31, 2009 resulted from fluctuations in market interest rates and other temporary market conditions as
opposed to fundamental changes in the credit quality of the issuers of such securities. Given our current level of liquidity, the fact that we do not intend to sell these securities, and that it's
more likely than not that we will not be required to sell these securities prior to recovery of the cost basis of these securities, these decreases in values are viewed as being temporary.

During
the year ended December 31, 2009, there was no significant deterioration in the credit quality of any of our holdings. During the year ended December 31, 2008, there
was a significant deterioration in the issuer's financial condition of one of our holdings, American International Group, Inc. Accordingly, in the third quarter of 2008 we recorded an OTTI
charge of $1,032 for this security. We sold this security during the third quarter of 2009 and recognized an additional loss of $14.

ASC
820,Fair Value Measurements and Disclosureprovides a revised definition of fair value, establishes a framework for measuring fair
value, and expands financial statement disclosure requirements for fair value information. Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants (an exit price). ASC 820 establishes a fair value hierarchy that distinguishes between inputs based on market data from independent
sources ("observable inputs") and a reporting entity's internal assumptions based upon the best information available when external market data is limited or

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unavailable
("unobservable inputs"). The fair value hierarchy in ASC 820 prioritizes fair value measurements into three levels based on the nature of the inputs as follows:



Fair
values for the Company's fixed maturity securities are based on prices provided by its custodian bank and its investment manager. Both the custodian bank and the investment manager
use a variety of independent, nationally recognized pricing services to determine market valuations. If the pricing service cannot provide fair value determinations, the Company obtains
non-binding price quotes from broker-dealers. A minimum of two quoted prices is obtained for the majority of fixed maturity securities in the Company's investment portfolio. The Company's
custodian bank is its primary provider of quoted prices from third-party pricing services and broker-dealers. To provide reasonable assurance of the validity of each price or quote, a secondary
third-party pricing service or broker-dealer quote is obtained from the Company's investment manager. An examination of the pricing data is then performed for each security. If the variance between
the primary and secondary price quotes for a security is within an accepted tolerance level, the quoted price obtained from the Company's custodian bank is used in the Company's financial statements
for the security. If the variance between the primary and secondary price quotes exceeds an accepted tolerance level, the Company obtains a quote from an alternative source, if possible, and documents
and resolves any differences between the pricing sources. In addition, the Company may request that its investment manager and their traders provide input as to which vendor is providing prices that
their traders believe are reflective of fair value for the security. Following this process, the Company may decide to value the security in its financial statements using the secondary or alternative
source if it believes that pricing is more reflective of the security's value than the primary pricing provided by its custodian bank. The Company analyzes market valuations received to verify
reasonableness, to understand the key assumptions used and their sources, and to determine an appropriate ASC 820 fair value hierarchy level based upon trading activity and the
observability of market inputs. Based on this evaluation and investment class analysis, each price is classified into Level 1, 2 or 3.

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

Our
Level 1 securities consist of equity securities whose values are based on quoted prices in active markets for identical assets. Our Level 2 securities are comprised of
fixed maturity securities whose fair value was determined using observable market inputs. Fair values for securities for which quoted market prices were unavailable were estimated based upon reference
to observable inputs such as benchmark interest rates, market comparables, and other relevant inputs. Investments valued using these inputs include U.S. Treasury securities and obligations of U.S.
Government agencies, obligations of international government agencies, obligations of states and political subdivisions, corporate securities, commercial and residential mortgage-backed securities,
and other asset-backed securities. Inputs into the fair value application that are utilized by asset class include but are not limited to:



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All
unadjusted estimates of fair value for fixed maturities priced by the pricing services as described above are included in the amounts disclosed in Level 2 of the hierarchy
with the exception of one asset-backed security. On January 1 and December 31, 2009, our Level 3 securities consisted of one asset-backed security whose price was based solely on
a single broker quote which was deemed to be obtained through unobservable inputs.

In
order to ensure the fair value determination is representative of an exit price (consistent with ASC 820), our procedures for validating quotes or prices obtained from third-parties
include, but are not limited to, obtaining a minimum of two price quotes for each fixed maturity security if possible, as discussed above, the periodic testing of sales activity to determine if there
are any significant differences between the market price used to value the security as of the balance sheet date and the sales price of the security for sales that occurred around the balance sheet
date, and the periodic review of reports provided by its investment manager regarding those securities with ratings changes and securities placed on our "Watch List." In addition, valuation techniques
utilized by pricing services and prices obtained from external sources are reviewed by our external investment manager, whose investment professionals are familiar with the securities being priced and
the markets in which they trade to ensure the fair value determination is representative of an exit price (consistent with ASC 820).

Approximately
99.8% of our portfolio was priced based upon quoted market prices or other observable inputs as of December 31, 2009. There were no significant changes to the
valuation process during the year ending 2009.

As
of December 31, 2009 and December 31, 2008, no quotes or prices obtained were adjusted by management. All broker quotes obtained were non-binding.

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The
following table summarizes our total fair value measurements and the fair value measurements based on Level 3 inputs for available for sale investments as of
December 31, 2009.

As of December 31, 2009Total

Level 1 Inputs

Level 2 Inputs

Level 3 InputsU.S. Treasury securities

$
12,532

$


$
12,532

$
Obligations of states and political subdivisions


483,421





483,421


Residential mortgage-backed securities


300,461





300,461


Commercial mortgage-backed securities


72,916





72,916


Other asset-backed securities


22,300





19,796


2,504Corporate and other securities


126,699





126,699


Equity securities


9,876


9,876





Totals

$
1,028,205

$
9,876

$
1,015,825

$
2,504


The
following table summarizes the changes in our Level 3 fair value measurements for the year ended December 31, 2009.

Other
Asset-Backed
SecuritiesBalance at January 1, 2009

$
1,842Net gains and losses included in earnings


Net gains included in other comprehensive income


662Purchases and sales


Transfers in (out) of Level 3


Balance at December 31, 2009

$
2,504Amount of total losses included in earnings attributable to the changein unrealized losses related to assets still held at December 31, 2009

$



On
January 1 and December 31, 2009, one fixed maturity security was manually priced solely using broker quotes. This was deemed to render the fair value measurements as
based upon unobservable inputs and accordingly, it was classified within Level 3. Transfers in and out of Level 3 would be attributable to changes in the ability to observe significant
inputs in determining fair value exit pricing. As noted in the table above, no transfers were made in or out of Level 3 inputs during the year ended December 31, 2009.

Finance and Other Service Income.Finance and other service income includes revenues from premium installment charges, which we
recognize when
earned, and other miscellaneous income and fees. Finance and other service income for the year ended December 31, 2009, was $16,844 compared to $17,995 for the comparable 2008 period.

Losses and Loss Adjustment Expenses.Losses and loss adjustment expenses incurred for the year ended December 31, 2009, decreased
by $23,522,
or 6.4%, to $346,301 from $369,823 for the comparable 2008 period. Our GAAP loss ratio for the year ended December 31, 2009, increased to 65.1% compared to 64.1% for the comparable 2008 period.
Our GAAP loss ratio excluding loss adjustment expenses for the year ended December 31, 2009 increased to 55.8% from 55.1% for the comparable 2008 period. The loss ratio increased primarily as a
result of the decrease in our personal automobile earned premium per exposure. Total prior year favorable development included in the pre-tax results for the year ended December 31,
2009 was $44,065, compared to prior year favorable development of $35,938 for the comparable 2008 period.

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Underwriting, Operating and Related Expenses.Underwriting, operating and related expense for the year ended December 31, 2009
decreased by
$1,863, or 1.1%, to $171,124 from $172,987 for the comparable 2008 period. Our GAAP expense ratios for the year ended December 31, 2009 increased to 32.2% compared to 30.0% for the comparable
2008 period. The expense ratio increased primarily as a result of decreases in net earned premiums as discussed above. In addition, an amount of $7,547 related to our January 2010 agreement with the
Massachusetts Attorney General's office was recorded as an increase to our underwriting expenses for the year ended December 31, 2009. For further information, please see
Part IItem 3,Legal Proceedings.

Interest Expenses.Interest expense for the year ended December 31, 2009 was $135 compared to $81 for the comparable 2008 period.
The credit
facility commitment fee included in interest expense was $75 for both the years ended December 31, 2009 and 2008.

Income Tax Expense.Our effective tax rates were 27.2% and 28.4% for the years ended December 31, 2009 and 2008, respectively.
These effective
rates were lower than the statutory rate of 35% primarily due to adjustments for tax-exempt investment income.

Net Income.Net income for the year ended December 31, 2009 decreased by $16,106, or 22.9%, to
$54,152 from $70,258 for the comparable 2008 period. This decrease was primarily due to the factors discussed above.

Liquidity and Capital Resources

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

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

Net
cash provided by operating activities was $51,106, $64,478, and $72,815 during the years ended December 31, 2010, 2009 and 2008, respectively. Our operations typically
generate substantial positive cash flows from operations as most premiums are received in advance of the time when claim and benefit payments are required. These positive operating cash flows are
expected to continue to meet our liquidity requirements.

Net
cash used by investing activities was $54,420 during the year ended December 31, 2010, which resulted primarily from purchases of fixed maturities in excess of sales,
paydowns, calls, and maturities of fixed maturities.Net cash provided by investing activities was $16,091 during the year ended December 31, 2009, which resulted primarily from sales, paydowns,
calls, and maturities of fixed maturities and short-term securities in excess of purchases of fixed maturities. Net cash used by investing activities was $28,880 during the year ended
December 31, 2008, which resulted primarily from purchases of fixed maturities in excess of sales, paydowns, calls, and maturities of fixed maturities.

Net
cash used for financing activities was $30,865, $66,550, and $29,795 during the years ended December 31, 2010, 2009, and 2008, respectively. Net cash used for financing
activities is primarily comprised of dividend payments to shareholders and the acquisition of treasury stock. Net cash used for financing activities during 2010 decreased by $35,685 compared to 2009
primarily due to the decrease in treasury stock acquisitions. Net cash used for financing activities during 2009 increased by $36,755 compared to 2008 primarily due to the increase in treasury stock
acquisitions.

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The Insurance Subsidiaries maintain a high degree of liquidity within their respective investment portfolios in fixed maturity and short-term
investments. Recently, the financial markets have experienced unprecedented declines in value, including many securities currently held by us. We believe that recent and ongoing government actions,
including The Emergency Economic Stabilization Act of 2008, the 2009 American Recovery and Reinvestment Act and other U.S. and global government programs and the quality of the assets we hold will
allow us to realize these securities' anticipated long-term economic value. Furthermore, as of December 31, 2010, we had the intent and ability to retain such investments for the
period of time anticipated to allow for this expected recovery in fair value. We do not anticipate the need to sell these securities to meet the Insurance Subsidiaries cash requirements. We expect the
Insurance Subsidiaries to generate sufficient operating cash to meet all short-term and long-term cash requirements. However, there can be no assurance that unforeseen business
needs or other items will not occur causing us to have to sell securities before their values fully recover; thereby causing us to recognize additional impairment charges in that time period.

Credit Facility

On August 14, 2008, we entered into an Amended and Restated Revolving Credit Agreement (the "New Credit Agreement") with RBS
Citizens, NA ("RBS Citizens"). The New Credit Agreement amended and restated the terms of our existing Revolving Credit Agreement with
RBS Citizens prior to its expiration date of August 17, 2008. The New Credit Agreement extends the maturity date to August 14, 2013 and provides a $30,000 revolving credit facility with
an accordion feature allowing for future expansion of the committed amount up to $50,000. Loans under the credit facility bear interest at our option of either (i) the LIBOR rate plus 1.25% per
annum or (ii) the higher of RBS Citizens prime rate or 0.5% above the federal funds rate plus 1.25% per annum. Interest only is payable prior to maturity.

Our
obligations under the credit facility are secured by pledges of our assets and the capital stock of our operating subsidiaries. The credit facility is guaranteed by our
non-insurance company subsidiaries. The credit facility contains 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, and other matters. Among other covenants, the credit facility restricts our payment of dividends (i) if a default under
the credit facility is continuing or would result therefrom or (ii) in an amount in excess of 50% of our prior year's net income, as determined in accordance with GAAP. Although we paid $27,098
in dividends to shareholders in 2010 which exceeded 50% of our prior year net income by $22, prior consent to pay the excess amount was obtained from RBS Citizens. As of December 31, 2010, we
were in compliance with all other covenants. In addition, the credit facility includes customary events of default, including a cross-default provision permitting the lenders to accelerate the
facility if the Company (i) defaults in any payment obligation under debt having a principal amount in excess of $10,000 or (ii) fails to perform any other covenant permitting
acceleration of all such debt.

We
had no amounts outstanding on our credit facility at December 31, 2010 and 2009. The credit facility commitment fee included in interest expenses was computed at a rate of
0.25% on the $30,000 commitment at December 31, 2010, 2009 and 2008.

Regulatory Matters

Our insurance subsidiaries are subject to various regulatory restrictions that limit the maximum amount of dividends available to be
paid to their parent without prior approval of the Commissioner. The Massachusetts statute limits the dividends an insurer may pay in any twelve-month period, without the prior permission of the
Commissioner, to the greater of (i) 10% of the insurer's surplus as of the preceding December 31 or (ii) the insurer's net income for the twelve-month period ending the preceding
December 31, in each case determined in accordance with statutory accounting practices.

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Our
insurance company subsidiaries may not declare an "extraordinary dividend" (defined as any dividend or distribution that, together with other distributions made within the preceding twelve months,
exceeds the limits established by Massachusetts statute) until thirty days after the Commissioner has received notice of the intended dividend and has not objected. As historically
administered by the Commissioner, this provision requires the Commissioner's prior approval of an extraordinary dividend. Under Massachusetts law, an insurer may pay cash dividends only from its
unassigned funds, also known as earned surplus, and the insurer's remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. At
year-end 2010, the statutory surplus of Safety Insurance was $582,432, and its net income for 2010 was $51,560. As a result, a maximum of $58,243 is available in 2011 for such dividends
without prior approval of the Commissioner. During the year ended December 31, 2010, Safety Insurance recorded dividends to Safety of $28,198.

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

Since
the initial public offering of its common stock in November 2002, the Company has paid regular quarterly dividends to shareholders of its common stock. Quarterly dividends paid
during 2010 and 2009 were as follows:

Declaration Date

Record
Date

Payment
Date

Dividend per
Common Share

Total
Dividends PaidNovember 2, 2010

December 1, 2010

December 15, 2010

$
0.50

$
7,525August 4, 2010

September 1, 2010

September 15, 2010

$
0.50

$
7,510May 5, 2010

June 1, 2010

June 15, 2010

$
0.40

$
6,038February 16, 2010

March 1, 2010

March 15, 2010

$
0.40

$
6,024November 2, 2009

December 1, 2009

December 15, 2009

$
0.40

$
6,024August 4, 2009

September 1, 2009

September 15, 2009

$
0.40

$
6,137May 5, 2009

June 1, 2009

June 15, 2009

$
0.40

$
6,205February 17, 2009

March 2, 2009

March 13, 2009

$
0.40

$
6,474


On
February 15, 2011, our Board approved a quarterly cash dividend on our common stock of $0.50 per share which will be paid on March 15, 2011 to shareholders of record on
March 1, 2011. We plan to continue to declare and pay quarterly cash dividends in 2011, depending on our financial position and the regularity of our cash flows.

On
August 3, 2007, our Board approved a share repurchase program of up to $30,000 of Safety's outstanding common shares. On March 19, 2009, our Board increased this
existing share repurchase program by authorizing repurchase of up to $60,000 of Safety's outstanding common shares. On August 4, 2010, our Board again increased the existing share repurchase
program by authorizing repurchase of up to $90,000 of Safety's outstanding common shares. Under the program, Safety may repurchase shares of its common stock for cash in public or private
transactions, in the open market or otherwise, at management's discretion. The timing of such repurchases and actual number of shares repurchased will depend on a variety of factors including price,
market conditions and applicable regulatory and corporate requirements. The program does not require Safety to repurchase any specific number of shares and may be modified, suspended or terminated at
any time without prior notice. During the year ended December 31, 2010, we purchased 162,907 shares of our common shares on the open market under the program at a cost of $5,814. During the
year ended December 31, 2009, we purchased 1,332,535 of our common shares on the open market under the program at a cost of $42,196. As of December 31, 2010 the Company had purchased
1,727,455 shares on the open market at

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a
cost of $55,526. As of December 31, 2009, we had purchased 1,564,548 of our common shares on the open market under the program at a cost of $49,712.

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

Off-Balance Sheet Arrangements

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

Contractual Obligations

We have obligations to make future payments under contracts and credit-related financial instruments and commitments. At
December 31, 2010, certain long-term aggregate contractual obligations and credit-related commitments are summarized as follows:

Payments Due by PeriodWithin
One Year

Two to Three
Years

Four to Five
Years

After
Five Years

TotalLoss and LAE reserves

$
198,152

$
177,932

$
24,263

$
4,044

$
404,391Purchase commitments


889


1,779


1,779


519


4,966Operating leases


4,183


8,876


8,856


13,425


35,340Total contractual obligations

$
203,224

$
188,587

$
34,898

$
17,988

$
444,697


As
of December 31, 2010, the Company had loss and LAE reserves of $404,391, unpaid reinsurance recoverables of $53,147 and net loss and LAE reserves of $351,244. Our loss and LAE
reserves are estimates as described in more detail under "Critical Accounting Policies and Estimates." The specific amounts and timing of obligations related to case reserves, IBNR reserves and
related LAE reserves are not set contractually, and the amounts and timing of these obligations are unknown. Nonetheless, based upon our cumulative claims paid over the last ten years, the Company
estimates that its loss and LAE reserves will be paid in the period shown above. While management believes that historical performance of loss payment patterns is a reasonable source for projecting
future claims payments, there is inherent uncertainty in this estimated projected settlement of loss and LAE reserves, and as a result these estimates will differ, perhaps significantly, from actual
future payments. Our operations typically generate substantial positive cash flows from operations as most premiums are received in advance of the time when claim and benefit payments are required.
These positive

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operating
cash flows are expected to continue to meet our liquidity requirements, including any unexpected variations in the timing of claim settlements.

Forward-Looking Statements

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



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

Forward-looking
statements are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. There are a number of factors,
many of which are beyond our control, that could cause actual future conditions, events, results or trends to differ significantly and/or materially from historical results or those projected in the
forward-looking statements. These factors include but are not limited to the competitive nature of our industry and the possible adverse effects of such competition. Although a number of national
insurers that are much larger than we are do not currently compete in a material way in the Massachusetts private passenger automobile market, if one or more of these companies decided to aggressively
enter the market it could have a material adverse effect on us. Other significant factors include conditions for business operations and restrictive regulations in Massachusetts, the possibility of
losses due to claims resulting from severe weather, the possibility that the Commissioner may approve future Rule changes that change the operation of the residual market, the possibility that the
AG's proposed regulations will be enacted and existing insurance-related laws and regulations will become further restrictive in the future, our possible need for and availability of additional
financing, and our dependence on strategic relationships, among others, and other risks and factors identified from time to time in our reports filed with the SEC. Refer to Part I,
Item 1ARisk Factors.

Some
other factors, such as market, operational, liquidity, interest rate, equity and other risks, are described elsewhere in this Annual Report on Form 10-K. Factors
relating to the regulation and supervision of our Company are also described or incorporated in this report. There are other factors besides those described or incorporated in this report that could
cause actual conditions, events or results to differ from those in the forward-looking statements.

Readers
are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We do not undertake any obligation to
update publicly or revise any forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk.Market risk is the risk that we will incur losses due to adverse changes in market rates and prices. We have exposure to
market risk
through our investment activities and our financing activities. Our primary market risk exposure is to changes in interest rates. We use both fixed and variable rate debt as sources of financing. We
have not entered, and do not plan to enter, into any derivative financial instruments for trading or speculative purposes.

Interest Rate Risk.Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. Our
exposure to
interest rate changes primarily results from our significant holdings of fixed rate investments and from our financing activities. Our fixed maturity investments include U.S. and foreign government
bonds, securities issued by government agencies, obligations of state and local governments and governmental authorities, corporate bonds and asset-backed securities, most of which are exposed to
changes in prevailing interest rates.

We
manage our exposure to risks associated with interest rate fluctuations through active review of our investment portfolio by our management and Board and consultation with third-party
financial advisors. As a general matter, we do not attempt to match the durations of our assets with the durations of our liabilities, and the majority of our liabilities are "short tail." Our goal is
to maximize the total after-tax return on all of our investments. An important strategy that we employ to achieve this goal is to try to hold enough in cash and short-term
investments in order to avoid liquidating longer-term investments to pay claims.

Based
upon the results of interest rate sensitivity analysis, the following table shows the interest rate risk of our investments in available for sale fixed maturities, measured in
terms of fair value (which is equal to the carrying value for all our available for sale fixed maturity securities).

-100 Basis Point Change

No Change

+100 Basis Point ChangeAs of December 31, 2010Estimated fair value

$
1,098,612

$
1,063,237

$
1,024,251Estimated increase (decrease) in fair value

$
35,375

$


$
(38,986
)As of December 31, 2009Estimated fair value

$
1,054,564

$
1,018,329

$
978,022Estimated increase (decrease) in fair value

$
36,235

$


$
(40,307
)


With
respect to floating rate debt, we are exposed to the effects of changes in prevailing interest rates. At December 31, 2010, we had no debt outstanding under our credit
facility. Assuming the full utilization of our current available credit facility, a 2.0% increase in the prevailing interest rate on our variable rate debt would result in interest expense increasing
approximately $600 for 2010, assuming that all of such debt is outstanding for the entire year.

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

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

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

SAFETY INSURANCE GROUP, INC.  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



PageConsolidated Financial Statements:Report of Independent Registered Public Accounting Firm

76Balance Sheets

77Statements of Operations

78Statements of Changes in Shareholders' Equity

79Statements of Comprehensive Income

80Statements of Cash Flows

81Notes to Consolidated Financial Statements

82


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Report of Independent Registered Public Accounting Firm

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

In
our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Safety Insurance
Group, Inc. and its subsidiaries at December 31, 2010 and December 31, 2009, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the
index appearing under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also
in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for these financial
statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, appearing on Management's Report on Internal Control over Financial Reporting under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial
statement schedules, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 14, 2011

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Safety Insurance Group, Inc. and Subsidiaries        Consolidated Balance Sheets        (Dollars in thousands, except share data)

December 31,2010

2009AssetsInvestments:Securities available for sale:Fixed maturities, at fair value (amortized cost: $1,030,354 and $989,444)

$
1,063,237

$
1,018,329Equity securities, at fair value (cost: $13,704 and $9,736)


14,624


9,876Other invested assets, at cost, which approximates fair value


2,817


409Total investments


1,080,678


1,028,614Cash and cash equivalents


40,291


74,470Accounts receivable, net of allowance for doubtful accounts


145,726


137,238Accrued investment income


9,471


10,044Taxes recoverable


5,061


Receivable from reinsurers related to paid loss and loss adjustment expenses


4,579


6,851Receivable from reinsurers related to unpaid loss and loss adjustment expenses


53,147


64,874Ceded unearned premiums


12,461


13,698Deferred policy acquisition costs


52,824


47,900Deferred income taxes


3,643


8,335Equity and deposits in pools


19,971


23,840Other assets


11,600


11,973Total assets

$
1,439,452

$
1,427,837LiabilitiesLoss and loss adjustment expense reserves

$
404,391

$
439,706Unearned premium reserves


306,053


282,434Accounts payable and accrued liabilities


54,239


59,869Taxes payable





3,916Payable to reinsurers


5,571


4,674Other liabilities


15,722


16,803Total liabilities


785,976


807,402Commitments and contingencies (Note 6)Shareholders' equityCommon stock: $0.01 par value; 30,000,000 shares authorized;16,795,504 and 16,624,220 shares issued


168


166Additional paid-in capital


151,317


144,814Accumulated other comprehensive income, net of taxes


21,972


18,866Retained earnings


535,545


506,301Treasury stock, at cost: 1,727,455 and 1,564,548 shares


(55,526
)

(49,712
)Total shareholders' equity


653,476


620,435Total liabilities and shareholders' equity

$
1,439,452

$
1,427,837


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

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Safety Insurance Group, Inc. and Subsidiaries        Consolidated Statements of Operations        (Dollars in thousands, except per share and share data)

Years Ended December 31,2010

2009

2008Net earned premiums

$
551,950

$
531,969

$
576,556Net investment income


41,395


43,308


45,771Net realized gains (losses) on investments


863


(167
)

678Finance and other service income


18,511


16,844


17,995Total revenue


612,719


591,954


641,000Losses and loss adjustment expenses


360,848


346,301


369,823Underwriting, operating and related expenses


172,823


171,124


172,987Interest expenses


88


135


81Total expenses


533,759


517,560


542,891Income before income taxes


78,960


74,394


98,109Income tax expense


22,618


20,242


27,851Net income

$
56,342

$
54,152

$
70,258Earnings per weighted average common share:Basic

$
3.74

$
3.49

$
4.32Diluted

$
3.74

$
3.48

$
4.31Cash dividends paid per common share

$
1.80

$
1.60

$
1.60Number of shares used in computing earnings per share:Basic


15,065,696


15,533,331


16,265,185Diluted


15,084,295


15,552,063


16,308,394


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

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Safety Insurance Group, Inc. and Subsidiaries        Consolidated Statements of Changes in Shareholders' Equity        (Dollars in thousands)

Common
Stock

Additional
Paid-in
Capital

Accumulated
Other
Comprehensive
Income/(Loss),
Net of Taxes

Retained
Earnings

Treasury
Stock

Total
Shareholders'
EquityBalance at December 31, 2007

$
162

$
134,224

$
4,453

$
432,746

$
(1,585
)
$
570,000Net income











70,258





70,258Other comprehensive income, net of deferred federal income taxes








(10,981
)







(10,981
)Exercise of options, net of deferred federal income taxes


1


2,729











2,730Unearned compensation on restricted stock, net of deferred federal income taxes


2


3,308











3,310Dividends paid











(26,015
)




(26,015
)Acquisition of treasury stock














(5,931
)

(5,931
)Balance at December 31, 2008


165


140,261


(6,528
)

476,989


(7,516
)

603,371Net income











54,152





54,152Other comprehensive income, net of deferred federal income taxes








25,394








25,394Exercise of options, net of deferred federal income taxes





1,002











1,002Unearned compensation on restricted stock, net of deferred federal income taxes


1


3,551











3,552Dividends paid











(24,840
)




(24,840
)Acquisition of treasury stock














(42,196
)

(42,196
)Balance at December 31, 2009


166


144,814


18,866


506,301


(49,712
)

620,435Net income











56,342





56,342Other comprehensive income, net of deferred federal income taxes








3,106








3,106Exercise of options, net of deferred federal income taxes


1


2,416











2,417Unearned compensation on restricted stock, net of deferred federal income taxes


1


4,087











4,088Dividends paid











(27,098
)




(27,098
)Acquisition of treasury stock














(5,814
)

(5,814
)Balance at December 31, 2010

$
168

$
151,317

$
21,972

$
535,545

$
(55,526
)
$
653,476


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

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Safety Insurance Group, Inc. and Subsidiaries        Consolidated Statements of Comprehensive Income        (Dollars in thousands)

Years Ended December 31,2010

2009

2008Net income

$
56,342

$
54,152

$
70,258Other comprehensive income (loss), net of taxes:Unrealized holding gains (losses), during the period, net of tax expense (benefit) of $1,975, $13,615 and $(5,676)


3,667


25,285


(10,540
)Reclassification adjustment for (gains) losses included in net income, net of tax (expense) benefit of $(302), $59, and $(237)


(561
)

109


(441
)Unrealized gains (losses) on securities available for sale


3,106


25,394


(10,981
)Comprehensive income

$
59,448

$
79,546

$
59,277


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

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Safety Insurance Group, Inc. and Subsidiaries        Consolidated Statements of Cash Flows        (Dollars in thousands)

Years Ended December 31,2010

2009

2008Cash flows from operating activities:Net income

$
56,342

$
54,152

$
70,258Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization, net


12,533


12,049


11,254Provision (benefit) for deferred income taxes


3,020


(3,024
)

315Net realized (gains) losses on investments


(863
)

167


(678
)Gains on sales of fixed assets


(9
)




Changes in assets and liabilities:Accounts receivable


(8,488
)

1,554


17,551Accrued investment income


573


(87
)

1,015Receivable from reinsurers


13,999


15,599


10,013Ceded unearned premiums


1,237


7,922


7,198Deferred policy acquisition costs


(4,924
)

(1,213
)

1,965Other assets


(888
)

4,686


(3,410
)Loss and loss adjustment expense reserves


(35,315
)

(27,853
)

(10,161
)Unearned premium reserves


23,619


(7,261
)

(30,850
)Accounts payable and accrued liabilities


(5,630
)

8,758


1,088Payable to reinsurers


897


(3,617
)

(2,371
)Other liabilities


(4,997
)

2,646


(372
)Net cash provided by operating activities


51,106


64,478


72,815Cash flows from investing activities:Fixed maturities purchased


(350,852
)

(200,796
)

(108,209
)Equity securities purchased


(7,525
)

(5,315
)

(6,073
)Other invested assets purchased


(2,500
)

(475
)

Short-term securities purchased








(82,892
)Proceeds from sales and paydowns of fixed maturities


220,217


103,284


127,439Proceeds from maturities, redemptions, and calls of fixed maturities


84,954


32,986


42,591Proceeds from sales of equity securities


3,580


3,680


3,991Proceeds from sales of other invested assets


91


66


Proceeds from maturities of short-term securities





82,996


Fixed assets purchased


(2,394
)

(335
)

(5,727
)Proceeds from sales of fixed assets


9





Net cash (used for) provided by investing activities


(54,420
)

16,091


(28,880
)Cash flows from financing activities:Proceeds from stock options exercised


1,990


367


1,415Excess tax benefits from stock options exercised


57


119


736Dividends paid to shareholders


(27,098
)

(24,840
)

(26,015
)Acquisition of treasury stock


(5,814
)

(42,196
)

(5,931
)Net cash used for financing activities


(30,865
)

(66,550
)

(29,795
)Net (decrease) increase in cash and cash equivalents


(34,179
)

14,019


14,140Cash and cash equivalents at beginning of year


74,470


60,451


46,311Cash and cash equivalents at end of period

$
40,291

$
74,470

$
60,451Supplemental disclosure of cash flow information:Cash paid during the year for:Federal and state income taxes

$
28,300

$
14,109

$
32,420Interest

$
123

$
75

$
139


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

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Safety Insurance Group, Inc. and Subsidiaries        Notes to Consolidated Financial Statements        (Dollars in thousands, except per share and share data)

1.     Basis of Presentation

The consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America ("GAAP"). The
consolidated financial statements include Safety Insurance Group, Inc. and its subsidiaries (the "Company"). The subsidiaries consist of Safety Insurance Company, Safety Indemnity Insurance
Company, Safety Property and Casualty Insurance Company, Whiteshirts Asset Management Corporation ("WAMC"), and Whiteshirts Management Corporation, which is WAMC's holding company. All intercompany
transactions have been eliminated.

The
Company was incorporated on June 25, 2001 in the State of Delaware. On October 16, 2001, the Company acquired all of the issued and outstanding common stock of Thomas
Black Corporation ("TBC") and its property and casualty subsidiaries. TBC subsequently merged with and into Safety Insurance Group, Inc. with Safety Insurance Group, Inc. being the
corporation surviving the merger.

The
Company is a leading provider of personal lines property and casualty insurance focused primarily on the Massachusetts market. The Company's principal product line is private
passenger automobile insurance, which accounted for 68.7% of its direct written premiums in 2010. The Company operates through its insurance company subsidiaries, Safety Insurance Company, Safety
Indemnity Insurance Company and Safety Property and Casualty Company (together referred to as the "Insurance Subsidiaries").

The
Company began writing private passenger automobile and homeowners insurance business in New Hampshire during 2008 and began writing New Hampshire personal umbrella business during
2009. During the years ended December 31, 2010 and 2009, the Company wrote $2,774 and $978, respectively, in direct written premiums in New Hampshire.

2.     Summary of Significant Accounting Policies

Investments

Investments in fixed maturities available for sale, which include taxable and non-taxable bonds and redeemable preferred
stocks, are reported at fair value. Investments in equity securities available for sale, which include interests in mutual funds, are reported at fair value. Fair values for fixed maturity securities
are based on estimates obtained from independent pricing services. Fair values for equity securities are derived from external market quotations. Short-term investments, which consist of
U.S. Treasury bills, are reported at amortized cost which approximates fair value. Other invested assets, which include collateral loans, are state at cost, which approximates fair value. Unrealized
gains or losses on fixed maturity and equity securities reported at fair value are excluded from earnings and reported in a separate component of shareholders' equity, known as "Accumulated other
comprehensive income (loss), net of 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.
Fixed maturities and equity securities that experience declines in value that are other-than-temporary are written down to fair value with a corresponding charge to net
realized losses on investments.

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

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Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

Cash Equivalents

Cash equivalents, consisting of money market accounts and United States ("U.S.") Treasury bills with original maturities of three
months or less, are stated at amortized cost, which approximates fair value.

Accounts Receivable

Amounts included in accounts receivable represent premiums as well as finance charges, the majority of which are both billed on a
monthly installment basis. Accounts receivable are stated net of allowances for doubtful accounts. At December 31, 2010 and 2009, these allowances were $362 and $210, respectively. Uncollected
premium balances over ninety days past due are written off.

Deferred Policy Acquisition Costs

Amounts that vary with and are primarily related to 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 expensed as incurred. Deferred policy acquisition costs are reviewed to determine if they
are recoverable from future income, and if not, are charged to expense. Future investment income attributable to related premiums is not taken into account in measuring the recoverability of the
carrying value of this asset. Amortization of acquisition costs in the amount of $101,980, $96,503 and $100,899 was charged to underwriting expenses for the years ended December 31, 2010, 2009
and 2008, respectively.

Equity and Deposits in Pools

Equity and deposits in pools represents the net receivable amounts from the residual market mechanisms, Commonwealth Automobile
Reinsurers ("CAR"), for automobile and Massachusetts Property Insurance Underwriting Association ("FAIR Plan"), for homeowner insurance in Massachusetts. See Note 8 for a discussion of the
Company's accounting for amounts assumed from residual markets.

Equipment and Leasehold Improvements

Equipment and leasehold improvements are carried at cost less accumulated depreciation. The costs of computer software developed or
obtained for internal use are capitalized and amortized over the estimated life of the business system, beginning when the software is ready for its intended use. Maintenance and repairs are charged
to expense as incurred; improvements are capitalized.

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Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

Methods
of depreciation and useful lives by asset category are as follows:

Life

Depreciation MethodAutomobiles

3 years

Straight-lineData processing equipment

3-5 years

Double-declining balanceEquipment

5 years

Straight-lineFurniture and fixtures

7 years

Straight-lineLeasehold improvements

Over lease term

Straight-lineSoftware

3-10 years

Straight-line or double declining balance


Losses and Loss Adjustment Expenses

Liabilities for losses and loss adjustment expenses ("LAE") include case basis estimates for open claims reported prior to
year-end and estimates of unreported claims and claim adjustment expenses. 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.

Premiums and Unearned Premiums

Premiums are earned over the terms of the respective policies, which are generally one year. Unearned premiums represent the portion of
premiums written applicable to the unexpired terms of the policies.

Ceded
premiums are charged to income over the terms of the respective policies and the applicable term of the reinsurance contracts with third party reinsurers. Ceded unearned premiums
represent the unexpired portion of premiums ceded to CAR and other reinsurers.

Premiums
received in advance of the policy effective date are recorded as a liability and not recognized as income until earned. Such amounts are included in accounts payable and accrued
liabilities and totaled $13,793 and $15,302 at December 31, 2010 and 2009, respectively.

Reinsurance

Liabilities for unearned premiums and unpaid losses are stated before deductions for ceded reinsurance. The ceded amounts are carried
as receivables. Earned premiums are stated net of deductions for ceded reinsurance.

The
Company, as primary insurer, will be required to pay losses in their entirety in the event that the reinsurers are unable to discharge their obligations under the reinsurance
agreements.

Finance and Other Service Income

Finance and other service income includes revenues from premium installment charges, which are recognized when earned.

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Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

Income Taxes

The Company and its subsidiaries file a consolidated U.S. federal income tax return. The method of allocation among members of
the consolidated group is subject to a written agreement approved by the Board of Directors (the "Board"). The consolidated tax liability is allocated on the basis of the members' proportionate
contribution to consolidated taxable income.

Deferred
income taxes are generally recognized when assets and liabilities have different values for financial statement and tax reporting purposes, and for other temporary taxable and
deductible differences as defined by Accounting Standards Codification ("ASC") 740,Income Taxes.A valuation allowance is established where management
has assessed that it is more likely than not that the Company will not be able to utilize the full deferred tax asset.

Earnings per Weighted Average Common Share

Basic earnings per weighted average common share ("EPS") is calculated by dividing net income by the weighted average number of basic
common shares outstanding during the period including unvested restricted shares which are considered participating securities. Diluted earnings per share amounts are based on the weighted average
number of common shares including unvested restricted shares and the net effect of potentially dilutive common shares outstanding. At December 31, 2010, 2009 and 2008, the Company's potentially
dilutive instruments were common shares under options of 151,003, 215,337 and 238,666, respectively.

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Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

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

Years Ended December 31,2010

2009

2008Net income as reported

$
56,342

$
54,152

$
70,258Less dividends:Distributed to common shareholders


26,598


24,422


25,677Distributed to participating security holders


500


419


338Total undistributed earnings

$
29,244

$
29,311

$
44,243Undistributed earnings to common shareholders

$
28,706

$
28,804

$
43,649Undistributed earnings to participating security holders

$
538

$
507

$
594Net income available to common shareholders for basicand diluted earnings per share

$
56,342

$
54,152

$
70,258Weighted average number of common shares outstanding


14,788,562


15,264,244


16,046,937Common equivalent sharesrestricted stock


277,134


269,087


218,248Weighted average common and common equivalent shares outstanding used to calculate basic earnings per share


15,065,696


15,533,331


16,265,185Common equivalent sharesstock options


18,599


18,732


43,209Weighted average common and common equivalent shares outstanding used to calculate diluted earnings per share


15,084,295


15,552,063


16,308,394Basic earnings per share

$
3.74

$
3.49

$
4.32Diluted earnings per share

$
3.74

$
3.48

$
4.31


Diluted
EPS excludes stock options with exercise prices and exercise tax benefits greater than the average market price of the Company's common stock during the period because their
inclusion would be anti-dilutive. There were 97,203, 167,925 and 168,925 anti-dilutive stock options for the year ended December 31, 2010, 2009 and 2008, respectively.

Share-Based Compensation

Prior to January 1, 2006, the Company accounted for share-based compensation to employees and non-employee directors
in accordance with the recognition and measurement principles of ASC 718,Share Based Compensation. Accordingly, no compensation cost related to stock
options was reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The Company
historically reported pro forma results under the disclosure-only provisions of ASC 718.

ASC
718 requires the Company to measure and recognize the cost of employee services received in exchange for an award of equity instruments. Under the provisions of ASC 718, effective
January 1, 2006, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period (generally
the vesting period of the equity grant).

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Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

As
permitted by ASC 718, the Company elected the modified prospective transition method. Under the modified prospective transition method, (i) compensation expense for share-based
awards granted prior to January 1, 2006 is recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes as adjusted to incorporate
forfeiture assumptions, and (ii) compensation expense for all share-based awards granted subsequent to December 31, 2005 is based on the grant date fair value estimated in accordance
with the provisions of ASC 718. Results for periods prior to January 1, 2006 have not been restated.

See
Note 5 for further information regarding share-based compensation.

Use of Estimates

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

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 Commonwealth of Massachusetts Division of Insurance ("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 12 for further information.

Recent Accounting Pronouncements

ASC 855,Subsequent Events,establishes principles and requirements for
subsequent events. ASC 855 is effective for interim and annual financial periods ending after June 15, 2009, and was applied prospectively. In February 2010, the FASB issued
updated guidance which amended the subsequent events disclosure requirements to eliminate the requirement for SEC filers to disclose the date through which it has evaluated subsequent events, clarify
the period through which conduit bond obligors must evaluate subsequent events and refine the scope of the disclosure requirements for reissued financial statements. The updated guidance was effective
upon issuance. The adoption of the guidance had no impact on the Company's consolidated financial condition or results of operations.

In
January 2010, the FASB issued ASC Update No. 2010-06 (Topic 820),Improving Disclosures about Fair Value
Measurements,which amends and clarifies existing guidance related to fair value measurements and disclosures. This guidance requires new disclosures for (1) transfers
in and out of Level 1 and Level 2 and reasons for such transfers; and (2) the separate presentation of purchases, sales, issuances and settlement in the Level 3
reconciliation. It also clarifies guidance around disaggregation and disclosures of inputs and valuation techniques for Level 2 and Level 3 fair value measurements. The Company adopted
this guidance effective for quarter ended March 31, 2010, except for the new disclosures in the Level 3 reconciliation. The Level 3 disclosures are effective for periods ending
after December 15, 2010 and were implemented for year end December 31, 2010. The adoption of the guidance did not have an impact on the Company's consolidated financial condition or
results of operations.

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Safety Insurance Group, Inc. and Subsidiaries        Notes to Consolidated Financial Statements        (Dollars in thousands, except per share and share data)

In October 2010, the FASB issued updated guidance to address diversity in practice for the accounting of costs associated with acquiring or renewing
insurance contracts. This guidance modifies the definition of acquisition costs to specify that a cost be directly related to the successful acquisition of a new or renewal insurance contract in order
to be deferred. The guidance also specifies that advertising costs only should be included as deferred acquisition costs if the direct-response advertising accounting criteria are met. The new
guidance is effective for reporting periods beginning after December 15, 2011 and should be applied prospectively, with retrospective application permitted. The Company is in process of
evaluating the impact of adoption on its consolidated financial conditions and results of operations.

Reclassifications

Prior period amounts have been reclassified to conform to the current year presentation.

Segments

The Company comprises one business segment: property and casualty insurance operations. Management organizes the business around
private passenger automobile insurance in Massachusetts sold exclusively through independent agents and offers other personal and commercial insurance as complementary products. In accordance with
ASC 280,Segment Reporting,the financial information of the segment is presented consistent with the way results are regularly evaluated by the
chief operating decision maker in deciding how to allocate resources and in assessing performance.

3.     Investments

The gross unrealized gains and losses on investments in fixed maturity securities, and equity securities, including interests in mutual funds were as follows for
the periods indicated:

As of December 31, 2010Gross Unrealized Losses(3)Cost or
Amortized
Cost

Gross
Unrealized
Gains

Non-OTTI
Unrealized
Losses

OTTI
Unrealized
Losses(4)

Estimated
Fair
ValueU.S. Treasury securities

$
87,830

$
280

$
(1,841
)
$


$
86,269Obligations of states and political subdivisions


436,082


12,014


(2,906
)




445,190Residential mortgage-backed securities(1)


237,405


15,295


(39
)




252,661Commercial mortgage-backed securities


61,259


2,332








63,591Other asset-backed securities


16,543


862








17,405Corporate and other securities


191,235


7,769


(883
)




198,121Subtotal, fixed maturity securities


1,030,354


38,552


(5,669
)




1,063,237Equity securities(2)


13,704


920








14,624Other invested assets


2,817











2,817Totals

$
1,046,875

$
39,472

$
(5,669
)
$


$
1,080,678


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Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)



As of December 31, 2009Gross Unrealized Losses(3)Cost or
Amortized
Cost

Gross
Unrealized
Gains

Non-OTTI
Unrealized
Losses

OTTI
Unrealized
Losses(4)

Estimated
Fair
ValueU.S. Treasury securities

$
12,738

$
203

$
(409
)
$


$
12,532Obligations of states and political subdivisions


468,319


16,218


(1,116
)




483,421Residential mortgage-backed securities(1)


289,736


11,271


(546
)




300,461Commercial mortgage-backed securities


73,431


594


(1,109
)




72,916Other asset-backed securities


22,781


879


(1,360
)




22,300Corporate and other securities


122,439


4,737


(477
)




126,699Subtotal, fixed maturity securities


989,444


33,902


(5,017
)




1,018,329Equity securities(2)


9,736


140








9,876Other invested assets


409











409Totals

$
999,589

$
34,042

$
(5,017
)
$


$
1,028,614


(1)Residential
mortgage-backed securities consists primarily of obligations of U.S. Government agencies including collateralized mortgage obligations and
mortgage-backed securities guaranteed and/or insured by the following issuers: Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National
Mortgage Association (FNMA) and the Federal Home Loan Bank (FHLB). The total of these fixed maturity securities was $237,335 and $289,447 at amortized cost and $252,592 and $300,172 at fair value as
of December 31, 2010 and 2009, respectively.(2)Equity
securities includes interests in mutual funds of $11,210 and $9,736 at cost and $11,699 and $9,876 at fair value as of December 31, 2010 and
2009, respectively, held to fund the Company's executive deferred compensation plan.(3)The
Company's investment portfolio included 80 and 89 securities in an unrealized loss position at December 31, 2010 and 2009, respectively.(4)Amounts
in this column represent all other-than-temporary impairment ("OTTI") recognized in accumulated other comprehensive income.


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

As of December 31, 2010Amortized
Cost

Estimated
Fair ValueDue in one year or less

$
90,998

$
91,803Due after one year through five years


259,870


268,862Due after five years through ten years


243,706


248,919Due after ten years through twenty years


111,668


111,030Due after twenty years


8,905


8,966Asset-backed securities


315,207


333,657Totals

$
1,030,354

$
1,063,237


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Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

The
gross realized gains (losses) on investments were as follows for the periods indicated:

Years Ended December 31,2010

2009

2008Gross realized gainsFixed maturity securities

$
1,592

$
453

$
2,251Equity securities


32





Short term securities





1


Gross realized lossesFixed maturity securities


(753
)

(303
)

(1,116
)Equity securities


(8
)

(318
)

(457
)Total gains (losses) on investments

$
863

$
(167
)
$
678


Proceeds
from maturities, redemptions and calls of fixed maturities maturing were $84,954, $32,986 and $42,591 for the year ended December 31, 2010, 2009 and 2008, respectively.

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

The
following tables as of December 31, 2010 and December 31, 2009 illustrate the gross unrealized losses included in the Company's investment portfolio and the fair value
of those securities aggregated by investment category. The tables also illustrate the length of time that they have been in a continuous unrealized loss position.

As of December 31, 2010Less than 12 Months

12 Months or More

TotalEstimated
Fair Value

Unrealized
Losses

Estimated
Fair Value

Unrealized
Losses

Estimated
Fair Value

Unrealized
LossesU.S. Treasury securities

$
38,318

$
1,841

$


$


$
38,318

$
1,841Obligations of states and political subdivisions


109,883


2,490


7,325


416


117,208


2,906Residential mortgage-backed securities


1,312


31


298


8


1,610


39Corporate and other securities


27,736


883








27,736


883Total temporarily impaired securities

$
177,249

$
5,245

$
7,623

$
424

$
184,872

$
5,669


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Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)



As of December 31, 2009Less than 12 Months

12 Months or More

TotalEstimated
Fair Value

Unrealized
Losses

Estimated
Fair Value

Unrealized
Losses

Estimated
Fair Value

Unrealized
LossesU.S. Treasury securities

$
9,832

$
409

$


$


$
9,832

$
409Obligations of states and political subdivisions


47,585


257


13,483


859


61,068


1,116Residential mortgage-backed securities


33,753


523


855


23


34,608


546Commercial mortgage-backed securities


4,940


67


38,260


1,042


43,200


1,109Other asset-backed securities








6,616


1,360


6,616


1,360Corporate and other securities


26,217


315


5,143


162


31,360


477Total temporarily impaired securities

$
122,327

$
1,571

$
64,357

$
3,446

$
186,684

$
5,017


As
of December 31, 2010, the Company held insured investment securities of approximately $244,893 which represented approximately 22.7% of the Company's total investment
portfolio. Approximately $63,398 of these securities are pre-refunded, meaning that funds have been set aside in escrow to satisfy the future interest and principal obligations of the
bond.

The
following table shows the Company's insured investment securities that are backed by financial guarantors including pre-refunded securities as of December 31,
2010. The Company does not have any direct investment holdings in a financial guarantee insurance company.

As of December 31, 2010Financial Guarantor

Total

Pre-refunded
Securities

Exposure Net
of Pre-refunded
SecuritiesMunicipal bondsAmbac Assurance Corporation

$
32,055

$
12,214

$
19,841Financial Guaranty Insurance Company


267


267


Assured Guaranty Municipal Corporation


91,819


34,936


56,883National Public Finance Guaranty Corporation


116,704


15,981


100,723Total municipal bonds


240,845


63,398


177,447Other asset-backed securitiesAmbac Assurance Corporation


4,048





4,048Total other asset-backed securities


4,048





4,048Total

$
244,893

$
63,398

$
181,495


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Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

The
following table shows the Company's insured investments by Moody's rating where it is available both with and without the impact of the insurance guarantee as of December 31,
2010.

As of December 31, 2010Rating

Rating
With
Insurance

Rating
Without
InsuranceAaa

$
3,866

$
3,866Aa1


28,976


28,976Aa2


65,265


65,265Aa3


88,550


77,461A1


11,964


12,887A2


11,003


18,021A3


12,546


15,694Baa1


267


267Baa2


4,048


4,048Totals

$
226,485

$
226,485


Other-Than-Temporary Impairments

ASC 320,InvestmentsDebt and Equity Securitiesrequires entities to
separate an OTTI of a debt security into two components when there are credit related losses associated with the impaired debt security for which the Company asserts that it does not have the intent
to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. Prior to April 1, 2009, the Company had to determine
whether it had the intent and ability to hold the investment for a sufficient period of time for the value to recover. When the analysis of the above factors resulted in the Company's conclusion that
declines in market values were other-than-temporary, the cost of the security was written down to market value and the reduction in value was reflected as a realized loss.

Effective
under ASC 320, the amount of the OTTI related to a credit loss is recognized in earnings, and the amount of the OTTI related to other factors is recorded as a component
of other comprehensive income (loss). In instances where no credit loss exists but it is more likely than not that the Company will have to sell the debt security prior to the anticipated recovery,
the decline in market value below amortized cost is recognized as an OTTI in earnings. In periods after the recognition of an OTTI on debt securities, the Company accounts for such securities as if
they had been purchased on the measurement date of the OTTI at an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. For debt securities for which
OTTI was recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected will be accreted or amortized into net investment income

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

The
unrealized losses in the Company's fixed income portfolio as of December 31, 2010 were reviewed for potential other- than-temporary asset impairments. The Company
held no debt and equity securities at December 31, 2010 with a material (20% or greater) unrealized loss for four or more

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Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

consecutive
quarters. Specific qualitative analysis was also performed for any additional securities appearing on the Company's "Watch List," if any. Qualitative analysis considered such factors as
the financial condition and the near term prospects of the issuer, whether the debtor is current on its contractually obligated interest and principal payments, changes to the rating of the security
by a rating agency and the historical volatility of the fair value of the security.

The
qualitative analysis performed by the Company concluded that the unrealized losses recorded on the investment portfolio at December 31, 2010 resulted from fluctuations in
market interest rates and other temporary market conditions as opposed to fundamental changes in the credit quality of the issuers of such securities. Therefore, decreases in fair values of the
Company's securities are viewed as being temporary.

During
the year ended December 31, 2010 and 2009, there was no significant deterioration in the credit quality of any of the Company's holdings and no OTTI charges were recorded
related to the Company's portfolio of investment securities.

Based
upon the qualitative analysis performed, the Company's decision to hold these securities, the Company's current level of liquidity and its positive operating cash flows, management
believes it is more likely than not that it will not be required to sell any of its securities before the anticipated recovery in the fair value to its amortized cost basis.

ASC 320,InvestmentsDebt and Equity Securitiesrequires that the Company record, as of the beginning of the interim
period of adoption, a cumulative effect adjustment to reclassify the noncredit component of a previously recognized OTTI from retained earnings to other comprehensive income (loss). At April 1,
2009 and December 31, 2010, there were no amounts included in accumulated other comprehensive income related to securities which were considered by the Company to be
other-than-temporarily impaired.

Net Investment Income

The components of net investment income were as follows:

Years Ended December 31,2010

2009

2008Interest and dividends on fixed maturities

$
42,332

$
44,160

$
45,207Dividends on equity securities


294


161


270Interest on other invested assets


12


11


Interest on short-term securities





67


35Interest on cash, and cash equivalents


84


232


1,588Total investment income


42,722


44,631


47,100Investment expenses


1,327


1,323


1,329Net investment income

$
41,395

$
43,308

$
45,771


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Safety Insurance Group, Inc. and Subsidiaries        Notes to Consolidated Financial Statements        (Dollars in thousands, except per share and share data)

Fair Value Measurements

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



Fair
values for the Company's fixed maturity securities are based on prices provided by its custodian bank and its investment manager. Both the custodian bank and the investment manager
use a variety of independent, nationally recognized pricing services to determine market valuations. If the pricing service cannot provide fair value determinations, the Company obtains
non-binding price
quotes from broker-dealers. A minimum of two quoted prices is obtained for the majority of our available for sale fixed maturity securities in the Company's investment portfolio. The Company's
custodian bank is its primary provider of quoted prices from third-party pricing services and broker-dealers. To provide reasonable assurance of the validity of each price or quote, a secondary
third-party pricing service or broker-dealer quote is obtained from the Company's investment manager. An examination of the pricing data is then performed for each security. If the variance between
the primary and secondary price quotes for a security is within an accepted tolerance level, the quoted price obtained from the Company's custodian bank is used in the Company's financial statements
for the security. If the variance between the primary and secondary price quotes exceeds an accepted tolerance level, the Company obtains a quote from an alternative source, if possible, and documents
and resolves any differences between the pricing sources. In addition, the Company may request that its investment manager and their traders provide input as to which vendor is providing prices that
their traders believe are reflective of fair value for the security. Following this process, the Company may decide to value the security in its financial statements using the secondary or alternative
source if it believes that pricing is more reflective of the security's value than the primary pricing provided by its custodian bank. The Company analyzes market valuations received to verify
reasonableness, to understand the key assumptions used and their sources, and to determine an appropriate ASC 820 fair value hierarchy level based upon trading activity and the observability of
market inputs. Based on this evaluation and investment class analysis, each price is classified into Level 1, 2 or 3.

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

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Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

The
Company's Level 1 securities consist of equity securities whose values are based on quoted prices in active markets for identical assets. The Company's Level 2
securities are comprised of our available for sale fixed maturity securities whose fair value was determined using observable market inputs. Fair values for securities for which quoted market prices
were unavailable were estimated based upon reference to observable inputs such as benchmark interest rates, market comparables, and other relevant inputs. Investments valued using these inputs include
U.S. Treasury securities and obligations of U.S. Government agencies, obligations of international government agencies, obligations of states and political subdivisions, corporate securities,
commercial and residential mortgage-backed securities, and other asset-backed securities. Inputs into the fair value application that are utilized by asset class include but are not limited
to:



All
unadjusted estimates of fair value for our fixed maturities priced by the pricing services as described above are included in the amounts disclosed in Level 2.

In
order to ensure the fair value determination is representative of an exit price (consistent with ASC 820), the Company's procedures for validating quotes or prices obtained
from third-parties include, but are not limited to, obtaining a minimum of two price quotes for each available for sale fixed maturity security if possible, as discussed above, the periodic testing of
sales activity to determine if there are any significant differences between the market price used to value the security as of the balance sheet date and the sales price of the security for sales that
occurred around the balance sheet date, and the periodic review of reports provided by its investment manager regarding those securities with ratings changes and securities placed on the Company's
"Watch List." In addition, valuation techniques utilized by pricing services and prices obtained from external sources are reviewed by the Company's external investment manager, whose investment
professionals are familiar with the securities

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Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

being
priced and the markets in which they trade to ensure the fair value determination is representative of an exit price (consistent with ASC 820).

The
Company's entire available for sale portfolio was priced based upon quoted market prices or other observable inputs as of December 31, 2010. There were no significant changes
to the valuation process during the year ended December 31, 2010. As of December 31, 2010 and 2009, no quotes or prices obtained were adjusted by management. All broker quotes obtained
were non-binding.

The
following tables summarize our total fair value measurements for available for sale investments for the periods indicated.

As of December 31, 2010Total

Level 1 Inputs

Level 2 Inputs

Level 3 InputsU.S. Treasury securities

$
86,269

$


$
86,269

$
Obligations of states and political subdivisions


445,190





445,190


Residential mortgage-backed securities


252,661





252,661


Commercial mortgage-backed securities


63,591





63,591


Other asset-backed securities


17,405





17,405


Corporate and other securities


198,121





198,121


Equity securities


14,624


14,624





Totals

$
1,077,861

$
14,624

$
1,063,237

$





As of December 31, 2009Total

Level 1 Inputs

Level 2 Inputs

Level 3 InputsU.S. Treasury securities

$
12,532

$


$
12,532

$
Obligations of states and political subdivisions


483,421





483,421


Residential mortgage-backed securities


300,461





300,461


Commercial mortgage-backed securities


72,916





72,916


Other asset-backed securities


22,300





19,796


2,504Corporate and other securities


126,699





126,699


Equity securities


9,876


9,876





Totals

$
1,028,205

$
9,876

$
1,015,825

$
2,504


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Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

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

Other
Asset-Backed
SecuritiesBalance at January 1, 2010

$
2,504Net gains included in earnings


183Net gains included in other comprehensive income


1,180Purchases and sales


(3,867
)Transfers in (out) of Level 3


Balance at December 31, 2010

$
Amount of total losses included in earnings attributable to the change in unrealized losses related to assets still held at December 31,
2010

$





Other
Asset-Backed
SecuritiesBalance at January 1, 2009

$
1,842Net gains and losses included in earnings


Net gains included in other comprehensive income


662Purchases and sales


Transfers in (out) of Level 3


Balance at December 31, 2009

$
2,504Amount of total losses included in earnings attributable to the change in unrealized losses related to assets still held at December 31,
2009

$



Transfers
in and out of Level 3 are attributable to changes in the ability to observe significant inputs in determining fair value exit pricing. On January 1, 2010, our
Level 3 securities consisted of one asset-backed security whose price was based solely on a single broker quote which was deemed to be obtained through unobservable inputs. This security was
sold in October 2010.

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Safety Insurance Group, Inc. and Subsidiaries        Notes to Consolidated Financial Statements        (Dollars in thousands, except per share and share data)

4.     Equipment and Leasehold Improvements

The carrying value of equipment and leasehold improvements by classification was as follows:

As of December 31,2010

2009Software

$
10,655

$
8,976Data processing equipment


3,295


3,063Leasehold improvements


2,524


2,501Other equipment


2,183


1,729Furniture and fixtures


926


924Automobiles


10


53Total cost


19,593


17,246Less accumulated depreciation and amortization


10,728


8,248Equipment and leasehold improvements, net

$
8,865

$
8,998


Depreciation
and amortization expense for the years ended December 31, 2010, 2009 and 2008 was $2,526, $2,698 and $2,443, respectively.

5.     Employee Benefit Plans

The Safety Insurance 401(k) Retirement Plan

The Company sponsors the Safety Insurance Company 401(k) qualified defined contribution retirement plan (the "Retirement Plan"). The
Retirement Plan is available to all eligible employees of the Company. An employee must be 21 years of age to be eligible to participate in the Retirement Plan and is allowed to contribute on a
pre-tax basis up to the maximum allowed under federal law. The Retirement Plan is administered by the Company and is subject to the provisions of the Employee Retirement Income Security
Act of 1974. At the close of each Retirement Plan year, the Company makes a matching contribution equal to 100% of the amount each participant contributed during the plan year from their total pay, up
to a maximum amount of 8% of the participant's base salary, to those participants who have contributed to the Retirement Plan and were employed on the last day of the Retirement Plan year.
Compensation expense related to the Retirement Plan was $2,201, $2,113 and $2,031 for the years ended December 31, 2010, 2009 and 2008, respectively.

Management Omnibus Incentive Plan

Long-term incentive compensation is provided under the Company's 2002 Management Omnibus Incentive Plan ("the Incentive
Plan") which provides for a variety of stock-based compensation awards, including nonqualified stock options ("NQSOs"), incentive stock options, stock appreciation rights and restricted stock ("RS")
awards.

On
March 10, 2006, the Board approved amendments to the Incentive Plan, subject to shareholder approval, to (i) increase the number of shares of common stock available for
issuance by 1,250,000 shares, (ii) remove obsolete provisions, and (iii) make other non-material changes. A total of 1,250,000 shares of common stock had previously been
authorized for issuance under the Incentive Plan. The Incentive Plan, as amended, was approved by the shareholders at the 2006 Annual Meeting of Shareholders which was held on May 19, 2006. The
maximum number of shares of common stock with

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Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

respect
to which awards may be granted is 2,500,000. Shares of stock covered by an award under the Incentive Plan that are forfeited will again be available for issuance in connection with future
grants of awards under the plan. At December 31, 2010, there were 813,484 shares available for future grant. The Board of Directors and the Compensation Committee intend to issue more awards
under the Incentive Plan in the future.

A
summary of stock based awards granted under the Incentive Plan is as follows:

Type of
Equity
Awarded

Effective Date

Number of
Awards
Granted

Exercise
Price(1) or
Fair Value(2)
per Share

Vesting Terms

Expiration DateNQSOs

November 27, 2002


379,000

$
12.00
(1)
5 years, 20% annually

November 27, 2012NQSOs

February 20, 2003


99,000

$
13.30
(1)
5 years, 20% annually

February 20, 2013NQSOs

March 31, 2003


292,000

$
13.03
(1)
3 years, 30%-30%-40%

March 31, 2013NQSOs

August 21, 2003


10,000

$
15.89
(1)
5 years, 20% annually

August 21, 2013NQSOs

March 25, 2004


111,000

$
18.50
(1)
5 years, 20% annually

March 25, 2014RS

March 25, 2004


70,271

$
18.50
(2)
3 years, 30%-30%-40%

N/ANQSOs

August 30, 2004


10,000

$
21.40
(1)
5 years, 20% annually

August 30, 2014NQSOs

March 16, 2005


78,000

$
35.23
(1)
5 years, 20% annually

March 16, 2015RS

March 16, 2005


56,770

$
35.23
(2)
3 years, 30%-30%-40%

N/ARS

March 16, 2005


4,000

$
35.23
(2)
No vesting period(3)

N/ANQSOs

March 10, 2006


126,225

$
42.85
(1)
5 years, 20% annually

March 10, 2016RS

March 10, 2006


58,342

$
42.85
(2)
3 years, 30%-30%-40%

N/ARS

March 10, 2006


4,000

$
42.85
(2)
No vesting period(3)

N/ARS

February 26, 2007


65,760

$
45.62
(2)
3 years, 30%-30%-40%

N/ARS

February 26, 2007


4,000

$
45.62
(2)
No vesting period(3)

N/ARS

March 22, 2007


49,971

$
38.78
(2)
5 years, 20% annually

N/ARS

March 10, 2008


76,816

$
35.80
(2)
3 years, 30%-30%-40%

N/ARS

March 10, 2008


4,000

$
35.80
(2)
No vesting period (3)

N/ARS

March 20, 2008


45,779

$
34.37
(2)
5 years, 20% annually

N/ARS

March 9, 2009


95,953

$
28.66
(2)
3 years, 30%-30%-40%

N/ARS

March 9, 2009


4,000

$
28.66
(2)
No vesting period (3)

N/ARS

March 19, 2009


38,046

$
33.24
(2)
5 years, 20% annually

N/ARS

March 9, 2010


77,360

$
38.78
(2)
3 years, 30%-30%-40%

N/ARS

March 9, 2010


4,000

$
38.78
(2)
No vesting period(3)

N/ARS

March 23, 2010


25,590

$
38.09
(2)
5 years, 20% annually

N/A


(1)The
exercise price of the options grant effective on November 27, 2002, is equal to the IPO price of the Company's stock on that same day. The
exercise price of the remaining option grants is equal to the closing price of our common stock on the grant date.(2)The
fair value per share of the restricted stock grant is equal to the closing price of the Company's common stock on the grant date.(3)The
shares cannot be sold, assigned, pledged, or otherwise transferred, encumbered or disposed of until the recipient is no longer a member of the Board of
Directors.


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Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)




Stock Options

The fair value of stock options used to compute both net income and earnings per share disclosures for the years ended
December 31, 2010, 2009 and 2008 is the estimated fair value at grant date using the Black-Scholes option-pricing model with the following assumptions:

Years Ended December 31,2010

2009

2008Expected dividend yield

1.36% - 1.68%

1.36% - 2.16%

1.36% - 2.52%Expected volatility

0.31 - 0.36

0.28 - 0.36

0.20 - 0.36Risk-free interest rate

4.35% - 4.76%

3.23% - 4.76%

3.23% - 4.76%Expected holding period

6.5 - 7 years

6.5 - 7 years

6.5 - 7 years


Expected
dividend yield is the Company's dividend yield on the measurement date and is based on the assumption that the current yield will continue in the future. Expected volatility is
based on historical volatility of the Company's common stock as well as the volatility of a peer group of property and casualty insurers measured for a period equal to the expected holding period of
the option. The risk-free interest rate is based upon the yield on the measurement date of a zero-coupon U.S. Treasury bond with a maturity period equal to the expected holding
period of the option. The expected holding period is based upon the simplified method provided in SEC Staff Accounting Bulletin No. 107,Share-Based
Payment, which utilizes the mid-points between the vesting dates and the expiration date of the option award to calculate the overall expected term. There were no
stock options granted during the twelve months ended December 31, 2010, 2009 and 2008.

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

2010

2009

2008Shares
Under
Option

Weighted
Average
Exercise Price

Shares
Under
Option

Weighted
Average
Exercise Price

Shares
Under
Option

Weighted
Average
Exercise PriceOutstanding at beginning of year


215,337

$
35.40


238,666

$
33.66


334,588

$
28.25Exercised during the year


(64,334
)

30.93


(22,329
)

16.45


(95,722
)

14.79Forfeited during the year








(1,000
)

42.85


(200
)

18.50Outstanding at end of year


151,003


37.30


215,337


35.40


238,666


33.66Exercisable at end of year


127,058

$
36.26


154,847

$
33.11


120,631

$
30.33


At
December 31, 2010, the aggregate intrinsic value of outstanding shares under option was $1,573 with a weighted average remaining contractual term of 4.7 years. At
December 31, 2009, the aggregate intrinsic value of outstanding shares under option and exercisable was $971 with a weighted average remaining contractual term of 5.5 years. At
December 31, 2008, the aggregate intrinsic value of outstanding shares under option and exercisable was $1,629 with a weighted average remaining contractual term of 6.3 years. Aggregate
intrinsic value represents the total pretax intrinsic value, based upon the Company's closing year end stock price of $47.72, $36.23 and $38.06 for December 31, 2010, 2009 and 2008,
respectively, which would have been received by the option holders had all option holders exercised their options as of those dates. The range of exercise prices on stock options outstanding under the
Incentive Plan was $13.30 to $42.85 at December 31, 2010, and $12.00 to $42.85 at December 31, 2009 and 2008. The total intrinsic value of options exercised during the years ended
December 31, 2010, 2009 and 2008 was $1,080, $442 and $2,227, respectively.

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Safety Insurance Group, Inc. and Subsidiaries        Notes to Consolidated Financial Statements        (Dollars in thousands, except per share and share data)

A summary of the status of non-vested options as of December 31, 2010 is presented below:

Number of
Shares

Weighted Average
Grant Date
Exercise PriceNon-vested at beginning of year


60,490

$
41.26Vested during the year


(36,545
)

40.22Non-vested at end of year


23,945

$
42.85


As
of December 31, 2010, there was $65 of unrecognized compensation expense related to non-vested option awards that is expected to be recognized over a weighted
average period of 0.2 years.

Cash
received from options exercised was $1,990, $367 and $1,416 for the years ended December 31, 2010, 2009, and 2008, respectively.

As
a result of adopting ASC 718,Compensation-Stock Compensationon January 1, 2006, the Company's net income for the twelve months
ended December 31, 2010 was lowered by $240, net of income tax benefit of $129. The Company's net income for the twelve months ended December 31, 2009 was lowered by $336, net of income
tax benefit of $181. The impact on basic and diluted EPS for the twelve months ended December 31, 2010 and 2009 was a reduction of $0.02 and $0.02 per share, respectively.

Restricted Stock

Restricted stock awarded to employees in the form of unvested shares is recorded at the market value of the Company's common stock on
the grant date and amortized ratably as expense over the requisite service period.

The
following table summarizes restricted stock activity under the Incentive Plan for the years ending December 31.

2010

2009

2008Shares
Under
Restriction

Weighted
Average
Fair Value

Shares
Under
Restriction

Weighted
Average
Fair Value

Shares
Under
Restriction

Weighted
Average
Fair ValueOutstanding at beginning of year


298,834

$
34.28


246,325

$
38.77


186,751

$
41.85Granted during the year


106,950


38.61


137,999


29.92


126,595


35.28Vested and unrestricted during the year


(104,283
)

36.27


(84,852
)

40.20


(67,021
)

40.79Forfeited during the year








(638
)

36.57





Outstanding at end of year


301,501

$
35.13


298,834

$
34.28


246,325

$
38.77


As
of December 31, 2010, there was $6,511 of unrecognized compensation expense related to non-vested restricted stock awards that is expected to be recognized over a
weighted average period of 1.8 years. The total fair value of the shares that were vested and unrestricted during the years ended December 31, 2010, 2009 and 2008 was $3,782, $3,412 and
$2,733, respectively. For the years ended December 31, 2010, 2009 and 2008, the Company recorded compensation expense related to restricted stock of $2,617, $2,493 and $2,230, net of income tax
benefits of $1,409, $1,342 and $1,201, respectively.

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Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

6.     Commitments and Contingencies

Lease Commitments

The Company has various non-cancelable long-term operating leases. The approximate minimum annual rental
payments due under these lease agreements as of December 31, 2010 are as follows:

2011

$
4,1832012


4,4512013


4,4252014


4,3622015 and after


17,919Total minimum lease payments

$
35,340


Certain
lease agreements contain renewal options and, in addition to the minimum annual rentals, generally provide for payment of a share of the real estate taxes and operating expenses
in excess of a base amount. Rental expense was $4,112, $4,113 and $3,962 for the years ended December 31, 2010, 2009 and 2008, respectively. All leases expire prior to 2019. The Company expects
that in the normal course of business, leases that expire will be renewed.

An
eighth amendment to a lease agreement for the lease of office space was executed on April 5, 2007. Under the provisions of this amendment, additional space was occupied and the
lease term was extended an additional ten years commencing on January 1, 2009, with an option to renew for one additional five year term.

Contingencies

Various claims, generally incidental to the conduct of normal business, are pending or alleged against the Company from time to time.
In the opinion of management, based in part on the advice of legal counsel, the ultimate resolution of such claims will not have a material adverse effect on the Company's consolidated financial
statements. However, if estimates of the ultimate resolutions of those proceedings are revised, liabilities related to those proceedings could be adjusted in the near term.

Massachusetts
law requires that insurers licensed to do business in Massachusetts participate in the Massachusetts Insurers Insolvency Fund ("Insolvency Fund"). Members of the Insolvency
Fund are assessed a proportionate share of the obligations and expenses of the Insolvency Fund in connection with an insolvent insurer. It is anticipated that there will be additional assessments from
time to time relating to various insolvencies. Although the timing and amounts of any future assessments are not known, based upon existing knowledge, management's opinion is that such future
assessments will not have a material effect upon the financial position of the Company.

On
November 21, 2008, the Massachusetts Office of the Attorney General (the "AG") delivered a civil investigative demand (the "CID") to Safety Insurance Company. The CID directed
the Company to produce certain information related to its policies and practices in connection with underwriting insurance policies on motorcycles and adjusting total loss claims under such policies.
Other insurance companies are also being investigated by the AG related to their policies and practices related to motorcycle insurance.

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Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

On
January 14, 2010, the Company announced it had reached an agreement with the AG to change the way in which the Company calculated motorcycle premiums for certain types of
coverage dating back to January 1, 2002. Under the terms of the settlement, the Company agreed to pay refunds to certain motorcycle policyholders. The Company has deposited $7,408 into a trust
fund to be used to pay the amount of those refunds and has paid $330 to the Commonwealth of Massachusetts, which includes reimbursement of costs and expenses related to the implementation of the
settlement by the AG. Of
the total settlement to date, $7,547 was recorded as an increase to the Company's Underwriting, operating and other expenses for the year ended December 31, 2009 and $191 of additional refunds
subsequently identified by the AG and deposited to the trust fund by the Company in July 2010 was recorded as Underwriting, operating and other expenses for the year ended December 31, 2010.

The
Company worked with the Attorney General's office to identify the policies on which refunds would be issued and the amount of refunds to be paid to each individual policyholder.
During the quarter ended September 30, 2010, the Company first notified approximately 21 thousand policyholders of the amount of individual refunds offered and requested receipt of
appropriate releases from them in order to access the trust fund to issue refund checks. As of March 3, 2011, a total of approximately $6,219 in refund checks has been issued to about
15 thousand policyholders. The final total of refunds paid may be more or less than currently estimated; however, in management's opinion, any future expenses related to the settlement will not
have a material adverse effect upon the overall financial position of the Company.

7.     Debt

On August 14, 2008, the Company entered into an Amended and Restated Revolving Credit Agreement (the "New Credit Agreement") with RBS Citizens, NA ("RBS
Citizens"). The New Credit Agreement amended and restated the terms of the Company's existing Revolving Credit Agreement with RBS Citizens prior to its expiration date of August 17, 2008. The
New Credit Agreement extends the maturity date to August 14, 2013 and provides a $30,000 revolving credit facility with an accordion feature allowing for future expansion of the committed
amount up to $50,000. Loans under the credit facility bear interest at the Company's option at either (i) the LIBOR rate plus 1.25% per annum or (ii) the higher of RBS Citizens prime
rate or 0.5% above the federal funds rate plus 1.25% per annum. Interest only is payable prior to maturity.

The
Company's obligations under the credit facility are secured by pledges of its assets and the capital stock of its operating subsidiaries. The credit facility is guaranteed by the
Company's non-insurance company subsidiaries. The credit facility contains covenants including requirements to maintain minimum risk based capital ratios and statutory surplus of Safety
Insurance Company as well as limitations or restrictions on indebtedness, liens, and other matters. Among other covenants, the credit facility restricts the Company's payment of dividends
(i) if a default under the credit facility is continuing or would result therefrom or (ii) in an amount in excess of 50% of the Company's prior year's net income, as determined in
accordance with GAAP. Although the Company paid $27,098 in dividends to shareholders in 2010 which exceeded 50% of its prior year net income by $22, prior consent to pay the excess amount was obtained
from RBS Citizens. As of December 31, 2010, the Company was in compliance with all other covenants. In addition, the credit facility includes customary events of default, including a
cross-default provision permitting the lenders to accelerate the facility if the Company (i) defaults in any payment obligation under debt having a principal amount in excess of $10,000 or
(ii) fails to perform any other covenant permitting acceleration of all such debt.

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Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

The
Company had no amounts outstanding on its credit facility at December 31, 2010 and 2009. The credit facility commitment fee included in interest expenses was computed at a
rate of 0.25% on the $30,000 commitment at December 31, 2010 and 2009.

8.     Reinsurance

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

The
Company is subject to concentration of credit risk with respect to reinsurance ceded to CAR. At December 31, 2010 and 2009, respectively, reinsurance receivables on paid and
unpaid loss and LAE with a carrying value of $39,513 and $54,812 and ceded unearned premiums of $8,908 and $10,212 were associated with CAR. The Company assumes a proportionate share of the
obligations from CAR. The Company makes an estimate of its share of assumed activity from the most recent quarter reported by CAR and records adjustments to the reported activity to reflect its
anticipated final assumed obligations. The Company's participation in CAR resulted in assumed net income of $4,241 and $6,299 for 2010 and 2009 and assumed net losses of $4,251 for the year ended
December 31, 2008.

CAR
has been, with few exceptions, required by law to issue a policy to any applicant who seeks it. As a servicing carrier of CAR, this requirement has applied to the Company.

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Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

The
effect of assumed and ceded premiums on net written and earned premiums and losses and LAE is as follows:

Years Ended December 31,2010

2009

2008Written PremiumsDirect

$
604,957

$
559,747

$
573,509Assumed


13,738


14,564


37,439Ceded


(41,888
)

(41,682
)

(58,044
)Net written premiums

$
576,807

$
532,629

$
552,904Earned PremiumsDirect

$
580,942

$
555,020

$
595,673Assumed


14,134


26,552


46,125Ceded


(43,126
)

(49,603
)

(65,242
)Net earned premiums

$
551,950

$
531,969

$
576,556Loss and LAEDirect

$
368,542

$
357,269

$
372,951Assumed


4,712


13,241


38,548Ceded


(12,406
)

(24,209
)

(41,676
)Net loss and LAE

$
360,848

$
346,301

$
369,823


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Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

9.     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 years indicated:

Years Ended December 31,2010

2009

2008Reserves for losses and LAE, beginning of year

$
439,706

$
467,559

$
477,720Less reinsurance recoverable on unpaid losses and LAE


(64,874
)

(76,489
)

(84,290
)Net reserves for losses and LAE, beginning of year


374,832


391,070


393,430Incurred losses and LAE, related to:Current year


409,005


390,366


405,761Prior years


(48,157
)

(44,065
)

(35,938
)Total incurred losses and LAE


360,848


346,301


369,823Paid losses and LAE related to:Current year


253,476


235,681


229,924Prior years


130,960


126,858


142,259Total paid losses and LAE


384,436


362,539


372,183Net reserves for losses and LAE, end of year


351,244


374,832


391,070Plus reinsurance recoverables on unpaid losses and LAE


53,147


64,874


76,489Reserves for losses and LAE, end of year

$
404,391

$
439,706

$
467,559


At
the end of each period, the reserves were re-estimated for all prior accident years. The Company's prior year reserves decreased by $48,157, $44,065, and $35,938 for the
years ended December 31, 2010, 2009, and 2008, respectively. The decrease in prior year reserves during 2010 resulted from re-estimations of prior year ultimate loss and LAE
liabilities and is
primarily composed of reductions of $34,248 in our retained automobile reserves, $7,269 in our retained homeowners and retained all other reserves, and $5,572 in CAR assumed reserves. The decrease in
prior year reserves during 2009 resulted from re-estimations of prior year ultimate loss and LAE liabilities and is primarily composed of reductions of $24,979 in the Company's retained
automobile reserves, $11,551 in reserves assumed from CAR, and $6,103 in the Company's retained homeowners and all other reserves. The decrease in prior year reserves during 2008 resulted from
re-estimations of prior years ultimate loss and LAE liabilities and is primarily composed of reductions of $21,752 in the Company's retained automobile reserves and $8,905 in reserves
assumed from CAR.

The
Company's private passenger automobile line of business prior year reserves decreased by $31,944 for the year ended December 31, 2010. The decrease was primarily due to
improved retained private passenger results of $24,326 for the accident years 2005 through 2009, and improved assumed CAR results for the private passenger automobile pool of $3,026 for accident years
2008 through 2009. The Company's private passenger automobile line of business prior year reserves decreased by $30,489 for the year ended December 31, 2009. The decrease was primarily due to
improved retained private passenger results of $18,275 for the accident years 2004 through 2008, and improved assumed CAR results for the private passenger automobile pool of $8,596 for accident years
2005 through 2008. The improved retained private passenger results were primarily due to fewer incurred but not yet reported

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Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

claims
than previously estimated and better than previously estimated severity on the Company's established bodily injury and property damage case reserves. The improved CAR results were due primarily
to improved CAR private passenger loss ratios as published and reported by the CAR Loss Reserving Committee.

Due
to the nature of the risks that the Company underwrites and has historically underwritten, management does not believe that it has an exposure to asbestos or environmental pollution
liabilities.

10.   Income Taxes

A summary of the income tax expense in the Consolidated Statements of Income is shown below:

Years Ended December 31,2010

2009

2008Current Income Taxes:Federal

$
19,603

$
23,243

$
27,534State


(5
)

23


219,598


23,266


27,536Deferred Income Taxes:Federal


3,020


(3,024
)

315State








3,020


(3,024
)

315Total income tax expense

$
22,618

$
20,242

$
27,851


The
income tax expense attributable to the consolidated results of operations is different from the amounts determined by multiplying income before federal income taxes by the statutory
federal income tax rate. The sources of the difference and the tax effects of each were as follows:

Years Ended December 31,2010

2009

2008Federal income tax expense, at statutory rate

$
27,636

$
26,038

$
34,338Tax-exempt investment income, net


(5,169
)

(6,023
)

(6,723
)State taxes, net


(7
)

20


2Other, net


158


207


234Total income tax expense

$
22,618

$
20,242

$
27,851


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Safety Insurance Group, Inc. and Subsidiaries        Notes to Consolidated Financial Statements        (Dollars in thousands, except per share and share data)

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:

Years Ended December 31,2010

2009Deferred tax assets:Discounting of loss reserves

$
8,006

$
8,890Discounting of unearned premium reserve


21,517


19,883Bad debt allowance


406


353Employee benefits


5,999


5,571State loss carryforwards


35


410AG motorcycle policies settlement


486


2,641Rent incentive


1,032


1,164Other





1,670Total deferred tax assets before valuation allowance


37,481


40,582Valuation allowance for deferred tax assets


(35
)

(2,079
)Total deferred tax assets, net of valuation allowance


37,446


38,503Deferred tax liabilities:Deferred acquisition costs


(18,488
)

(16,765
)Investments


(560
)

(502
)Net unrealized gains on investments


(11,831
)

(10,159
)Depreciation


(359
)

(354
)Software development costs


(1,787
)

(1,549
)Premium acquisition expenses


(778
)

(839
)Total deferred tax liabilities


(33,803
)

(30,168
)Net deferred tax asset

$
3,643

$
8,335


The
Company believes, based upon consideration of objective and verifiable evidence, including 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 of $35 and $2,079 was established against state deferred tax assets at December 31, 2010 and
2009, respectively. 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.

The
Company adopted the provisions of ASC 740,Income Taxeson January 1, 2007. This interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 requires that the Company determine
whether the benefits of its tax positions have a more likely than not chance of being sustained upon audit based upon the technical merits of the tax position. This interpretation also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. As a result of the implementation of ASC 740, the Company recognized no
adjustment to its consolidated balance sheet or statement of operations. The Company believes that the positions taken on its income tax returns for open tax years will be

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Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

sustained
upon examination by the IRS. Therefore, the Company has not recorded a liability under ASC 740.

As
of December 31, 2010, 2009, and 2008, the Company had no unrecognized tax benefits, and none which if recognized would affect the effective tax rate. The Company does not
currently anticipate significant changes in the amount of unrecognized income tax benefits during the next twelve months.

The
Company records interest and penalties associated with audits as a component of Income before income taxes. Penalties are recorded in Underwriting, operating and other expenses, and
interest expense is recorded in Interest expenses in the Consolidated Statement of Operations. The Company had no interest and penalties accrued as of December 31, 2010 and 2009.

As
of December 31, 2010, the Company was no longer subject to examination of its U.S. federal tax returns for years prior to 2007. The Company is not currently under examination
by the IRS. During the year 2009, the Massachusetts Department of Revenue concluded its review of the 2005 and 2006 tax periods. The resulting audit adjustments were immaterial to the Company's
financial position.

11.   Share Repurchase Program

On August 3, 2007, the Board approved a share repurchase program of up to $30,000 of the Company's outstanding common shares. On March 19, 2009, the
Board increased this existing share repurchase program by authorizing repurchase of up to $60,000 of the Company's outstanding common shares. On August 4, 2010, the Board again increased the
existing share repurchase program by authorizing repurchase of up to $90,000 of the Company's outstanding common shares. Under the program, the Company may repurchase shares of its common stock for
cash in public or private transactions, in the open market or otherwise, at management's discretion. The timing of such repurchases and actual number of shares repurchased will depend on a variety of
factors including price, market conditions and applicable regulatory and corporate requirements. The program does not require the Company to repurchase any specific number of shares and may be
modified, suspended or terminated at any time without prior notice. During the year ended December 31, 2010, the Company purchased 162,907 shares of its common shares on the open market under
the program at a cost of $5,814. During the year ended December 31, 2009, the Company purchased 1,332,535 of its common shares on the open market under the program at a cost of $42,196. As of
December 31, 2010 the Company had purchased 1,727,455 shares on the open market at a cost of $55,526. As of December 31, 2009, the Company had purchased 1,564,548 of its common shares on
the open market under the program at a cost of $49,712.

12.   Statutory Net Income and Surplus

Statutory Accounting Practices

The Company's insurance company subsidiaries, domiciled in the Commonwealth of Massachusetts, prepare statutory financial statements in
accordance with the accounting practices prescribed or permitted by the Division. Statutory net income of the Company's insurance company subsidiaries was $56,246, $51,640 and $75,144 for the years
ended December 31, 2010, 2009 and 2008, respectively. Statutory capital and surplus of the Company's insurance subsidiaries was $582,432 and $556,575 at December 31, 2010 and 2009,
respectively.

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Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

Dividends

The Insurance Subsidiaries are subject to various regulatory restrictions that limit the maximum amount of dividends available to be
paid to their parent without prior approval of the Commonwealth of Massachusetts Commissioner of Insurance (the "Commissioner"). Massachusetts statute limits the dividends an insurer may pay in any
twelve month period, without the prior permission of the Commissioner, to the greater of (i) 10% of the insurer's surplus as of the preceding December 31 or (ii) the insurer's net
income for the twelve-month period ending the preceding December 31, in each case determined in accordance with statutory accounting practices. Our insurance company subsidiaries may not
declare an "extraordinary dividend" (defined as any dividend or distribution that, together with other distributions made within the preceding twelve months, exceeds the limits established by
Massachusetts statute) until thirty days after the Commissioner has received notice of the intended dividend and has not objected. As historically administered by the Commissioner, this provision
requires the Commissioner's prior approval of an extraordinary dividend. Under Massachusetts law, an insurer may pay cash dividends only from its unassigned funds, also known as earned surplus, and
the insurer's remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. At year-end 2010, the statutory surplus of Safety
Insurance was $582,432 and its net income for 2010 was $51,560. As a result, a maximum of $58,243 is available in 2011 for such dividends without prior approval of the Commissioner. During the year
ended December 31, 2010, Safety Insurance recorded dividends to Safety of $28,198.

13.   Fair Value of Financial Instruments

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



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

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Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

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

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

The
Company's Level 1 securities consist of equity securities whose values are based on quoted prices in active markets for identical assets. The Company's Level 2
securities are comprised of our available fixed maturity securities whose fair value was determined using observable market inputs. Fair values for securities for which quoted market prices were
unavailable were estimated based upon reference to observable inputs such as benchmark interest rates, market comparables, and other relevant inputs. Investments valued using these inputs include U.S.
Treasury securities and obligations of U.S. Government agencies, obligations of international government agencies, obligations of states and political subdivisions, corporate securities, commercial
and residential mortgage-backed securities, and
other asset-backed securities. Inputs into the fair value application that are utilized by asset class include but are not limited to:



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Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)



All
unadjusted estimates of fair value for our fixed maturities priced by the pricing services as described above are included in the amounts disclosed in Level 2.

In
order to ensure the fair value determination is representative of an exit price (consistent with ASC 820), the Company's procedures for validating quotes or prices obtained from
third-parties include, but are not limited to, obtaining a minimum of two price quotes for each fixed maturity security if possible, as discussed above, the periodic testing of sales activity to
determine if there are any significant differences between the market price used to value the security as of the balance sheet date and the sales price of the security for sales that occurred around
the balance sheet date, and the periodic review of reports provided by its investment manager regarding those securities with ratings changes and securities placed on its "Watch List." In addition,
valuation techniques utilized by pricing services and prices obtained from external sources are reviewed by the Company's external investment manager, whose investment professionals are familiar with
the securities being priced and the markets in which they trade to ensure the fair value determination is representative of an exit price (consistent with ASC 820).

The
Company's entire available for sale portfolio was priced based upon quoted market prices or other observable inputs as of December 31, 2010. There were no significant changes
to the valuation process during the year ended December 31, 2010. As of December 31, 2010 and December 31, 2009, no quotes or prices obtained were adjusted by management. All
broker quotes obtained were non-binding.

At
December 31, 2010 and 2009 investments in fixed maturities and equity securities classified as available for sale had a fair value which equaled carrying value of $1,077,861
and $1,028,205, respectively. At December 31, 2010 and 2009 other invested assets had a carrying value at cost of $2,817 and $409, which approximates fair value. At December 31, 2010 and
2009, we held no short-term investments. The carrying values of cash and cash equivalents and investment income accrued approximates fair value.

At
December 31, 2010 and 2009 the Company had no amounts outstanding on its secured credit facility.

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Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share and share data)

14.   Quarterly Results of Operations

An unaudited summary of the Company's 2010 and 2009 quarterly performance, and audited annual performance, is as follows:

Year ended December 31, 2010First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Total
YearTotal revenue

$
148,355

$
151,398

$
154,431

$
158,535

$
612,719Net income


12,774


15,089


15,467


13,012


56,342Earnings per weighted average common share:Basic


0.85


1.00


1.03


0.86


3.74Diluted


0.85


1.00


1.03


0.86


3.74Cash dividends paid per common share


0.40


0.40


0.50


0.50


1.80




Year ended December 31, 2009First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Total
YearTotal revenue

$
149,542

$
146,306

$
148,329

$
147,777

$
591,954Net income


11,844


15,015


17,024


10,269


54,152Earnings per weighted average common share:Basic


0.73


0.96


1.11


0.68


3.49Diluted


0.73


0.96


1.11


0.68


3.48Cash dividends paid per common share


0.40


0.40


0.40


0.40


1.60


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Table of Contents

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

None.

ITEM 9A.    CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer,
we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended [the "Exchange Act"]) as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO have concluded that our
disclosure controls and procedures are adequate and effective and ensure that all information required to be disclosed is recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and that information required to be disclosed in such reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to
allow timely decisions regarding required disclosures.

Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework inInternal
ControlIntegrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2010.

PricewaterhouseCoopers LLP,
the Company's independent registered public accounting firm, has audited the effectiveness of Safety Insurance Group, Inc.'s internal control
over financial reporting as of December 31, 2010, as stated in their report which is included herein.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by
Exchange Act Rules 13a-15 and 15d-15 that occurred during our last fiscal quarter that
have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

ITEM 9B.    OTHER INFORMATION

The following disclosures relate to actions taken by the Board of Directors of the Company (the "Board"), the Compensation Committee of
the Board and the Board of Directors of Safety Insurance Company and would otherwise have been filed during the first fiscal quarter of 2011 on a Form 8-K.



114

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PART III



ITEMS 10-14.

Within 120 days after the close of its fiscal year, the Company intends to file with the Securities and Exchange Commission a
definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 as amended, which will include the matters required by these items.

PART IV.

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

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Table of Contents

SAFETY INSURANCE GROUP, INC.        INDEX TO FINANCIAL STATEMENT SCHEDULES



PageSchedulesI

Summary of InvestmentsOther than Investments in Related Parties


117II

Condensed Financial Information of the Registrant


118III

Supplementary Insurance Information


120IV

Reinsurance


121V

Valuation and Qualifying Accounts


122VI

Supplemental Information Concerning Property and Casualty Insurance Operations


123


116

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Table of Contents



Safety Insurance Group, Inc.        Summary of InvestmentsOther than Investments in Related Parties        Schedule I        At December 31, 2010    
(Dollars in thousands)

Cost or
Amortized Cost

Estimated
Fair Value

Amount at
which shown
in the Balance
SheetFixed maturities:Bonds:U.S. government and government agencies and authorities

$
325,165

$
338,861

$
338,861States, municipalities and political subdivisions


436,083


445,190


445,190Corporate bonds


269,106


279,186


279,186Total fixed maturities


1,030,354


1,063,237


1,063,237Equity securities:Common stocks:Industrial, miscellaneous and all other


13,704


14,624


14,624Total equity securities


13,704


14,624


14,624Other long-term investments


2,817


2,817


2,817Total investments

$
1,046,875

$
1,080,678

$
1,080,678


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Table of Contents



Safety Insurance Group, Inc.        Condensed Financial Information of the Registrant        Condensed Balance Sheets        Schedule II        (Dollars in
thousands)

December 31,2010

2009AssetsInvestments in consolidated affiliates

$
654,408

$
621,386Other


75


46Total assets

$
654,483

$
621,432LiabilitiesAccounts payable and other liabilities

$
1,007

$
997Total liabilities


1,007


997Shareholders' equity


653,476


620,435Total liabilities and shareholders' equity

$
654,483

$
621,432


Safety Insurance Group, Inc.        Condensed Financial Information of the Registrant        Condensed Statements of Income and Comprehensive Income        Schedule II        (Dollars in thousands)

For the Years Ended December 31,2010

2009

2008Revenues, net of income taxes

$


$


$
Expenses


1,270


1,335


1,496Net loss


(1,270
)

(1,335
)

(1,496
)Earnings from consolidated affiliates


57,612


55,487


71,754Consolidated net income


56,342


54,152


70,258Other net comprehensive income (loss), net of taxes


3,106


25,394


(10,981
)Consolidated comprehensive net income

$
59,448

$
79,546

$
59,277


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Safety Insurance Group, Inc.        Condensed Financial Information of the Registrant        Condensed Statements of Cash Flows        Schedule II        (Dollars
in thousands)

Years Ended December 31,2010

2009

2008Consolidated net income

$
56,342

$
54,152

$
70,258Adjustments to reconcile net income to net cash provided by operating activities:Undistributed earnings in consolidated subsidiaries


(57,612
)

(55,487
)

(71,754
)Amortization


4,013


3,877


3,888Changes in assets and liabilities:Other assets


(29
)

19


5,037Accounts payable and accrued liabilities


10


(304
)

366Net cash provided by operating activities


2,724


2,257


7,795Dividends received from consolidated subsidiaries


28,198


64,412


22,735Net cash provided by investing activities


28,198


64,412


22,735Proceeds from exercise of stock options


1,990


367


1,416Dividends paid


(27,098
)

(24,840
)

(26,015
)Acquisition of treasury stock


(5,814
)

(42,196
)

(5,931
)Net cash used for financing activities


(30,922
)

(66,669
)

(30,530
)Net increase in cash and cash equivalents








Cash and cash equivalents, beginning of year








Cash and cash equivalents, end of year

$


$


$



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Safety Insurance Group, Inc.

Supplementary Insurance Information

Schedule III

(Dollars in thousands)

Segment

Deferred
Policy
Acquisition
Costs

Future Policy
Benefits,
Losses,
Claims and Loss
Expenses

Unearned
Premiums

Other Policy
Claims and
Benefits Payable

Premium
Revenue

Net
Investment
Income

Benefits,
Claims,
Losses, and
Settlement
Expenses

Amortization
of Deferred
Policy
Acquisition
Costs

Other
Operating
Expenses

Premiums
WrittenYears Ended:December 31, 2010

$
52,824

$
404,391

$
306,053

$


$
551,950

$
41,395

$
360,848

$
101,980

$
70,843

$
576,807December 31, 2009


47,900


439,706


282,434





531,969


43,308


346,301


96,503


74,621


532,629December 31, 2008


46,687


467,559


289,695





576,556


45,771


369,823


100,899


72,088


552,904


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Safety Insurance Group, Inc.        Reinsurance        Schedule IV        (Dollars in thousands)

Total Premiums

Gross
Amount

Ceded to Other
Companies

Assumed from
Other
Companies

Net
Amount

Percentage
of Amount
Assumed
to NetYears ended:December 31, 2010

$
580,942

$
43,126

$
14,134

$
551,950


2.6
%December 31, 2009


555,020


49,603


26,552


531,969


5.0December 31, 2008


595,673


65,242


46,125


576,556


8.0


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Safety Insurance Group, Inc.        Valuation and Qualifying Accounts        Schedule V        (Dollars in thousands)

Description

Balance at
Beginning of Period

Charged to Costs
and Expenses

Charged to
Other Accounts

Deductions(1)

Balance at
End of PeriodDecember 31, 2010Allowance for Doubtful Accounts

$
210

$
1,231

$


$
1,079

$
362December 31, 2009Allowance for Doubtful Accounts


110


1,274





1,174


210December 31, 2008Allowance for Doubtful Accounts


29


1,169





1,088


110


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


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Safety Insurance Group, Inc.
Supplemental Information Concerning Property and Casualty Insurance Operations

Schedule VI

(Dollars in thousands)

Claims and Claims
Adjustment Expenses
Incurred Related toReserves for
Unpaid Claims
and Claims
Adjustment
Expenses









Amortization
of Deferred
Policy
Acquisition
CostsDeferred
Policy
Acquisition
Costs

Discount,
if any,
deducted in
Column C







Paid Claims
and Claims
Adjustment
ExpensesAffiliations With Registrant

Unearned
Premiums

Earned
Premiums

Net
Investment
Income

Current
Year

Prior
Year

Premiums
WrittenConsolidated Property & Casualty Subsidiaries2010

$
52,824

$
404,391

$


$
306,053

$
551,950

$
41,395

$
409,005

$
(48,157
)
$
101,980

$
384,436

$
576,8072009


47,900


439,706





282,434


531,969


43,308


390,366


(44,065
)

96,503


362,539


532,6292008


46,687


467,559





289,695


576,556


45,771


405,761


(35,938
)

100,899


372,183


552,904


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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 14th day of March, 2011.

SAFETY INSURANCE GROUP, INC.By:

/s/ DAVID F. BRUSSARD David F. Brussard, President, Chief Executive Officer and Chairman of the Board


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David F. Brussard
and William J. Begley, Jr., and each of them individually, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution for
him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto each such attorney-in-fact and agent, or his substitutes, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and about the premises, to all intents and purposes and as fully as he might or could do in person, hereby ratifying and
confirming all that each such attorney-in-fact and agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed by the following persons in the capacities and on the date indicated:

Signature

Title

Date/s/ DAVID F. BRUSSARD David F. Brussard

President, Chief Executive Officer and
Chairman of the Board (Principal Executive
Officer)

March 14, 2011/s/ WILLIAM J. BEGLEY, JR. William J. Begley, Jr.

Vice President, Chief Financial Officer and
Secretary (Principal Financial Officer)

March 14, 2011/s/ A. RICHARD CAPUTO, JR. A. Richard Caputo, Jr.

Director

March 14, 2011/s/ FREDERIC H. LINDEBERG Frederic H. Lindeberg

Director

March 14, 2011/s/ PETER J. MANNING Peter J. Manning

Director

March 14, 2011/s/ DAVID K. MCKOWN David K. McKown

Director

March 14, 2011


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SAFETY INSURANCE GROUP, INC.        INDEX TO EXHIBITS

Exhibit
Number

Description3.1

Form of Amended and Restated Certificate of Incorporation of Safety Insurance Group, Inc.(1)3.2

Form of Amended and Restated Bylaws of Safety Insurance Group, Inc.(1)4

Form of Stock Certificate for the Common Stock(1)10.1

Lease Agreement between Thomas Black Corporation and Aman, Inc. for the lease of office space located on the 1st through 6th, 11th and 12th floors of 20 Custom House Street, Boston, Massachusetts,
dated June 11, 1987, and as amended on October 11, 1988, September 14, 1989, September 19, 1990, February 23, 1994, December 20, 1996, June 24, 2002, July 26, 2004 and April 5, 2007(2)10.2

Tax Indemnity Agreement by and among Safety Holdings, Inc. and the Management Team, dated October 16, 2001(1)10.3

2001 Restricted Stock Plan(1)(4)10.4

Executive Incentive Compensation Plan(1)(4)10.5

2002 Management Omnibus Incentive Plan, as Amended(7)10.6

Reinsurance Terms Sheet between Safety Insurance Company and Swiss Re America Corporation, effective January 1, 2002(1)10.7

Excess Catastrophe Reinsurance Program Terms Sheet between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Blanch Inc., effective January 1, 2002(1)10.8

Property Risk Excess of Loss Reinsurance Program Terms Sheet between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Blanch Inc., effective January 1, 2002(1)10.9

Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and the Hartford Steam Boiler Inspection and Insurance Company, effective July 1, 2003(1)10.10

Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and David F. Brussard, as of December 31, 2008(3)(4)(11)10.11

Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and William J. Begley, Jr., as of December 31, 2008(3)(4)(11)10.12

Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and Edward N. Patrick, Jr., as of December 31, 2008(3)(4)(11)10.13

Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and Daniel D. Loranger, as of December 31, 2008(3)(4)(11)10.14

Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and Robert J. Kerton, as of December 31, 2008(3)(4)(13)10.15

Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and David E. Krupa, as of December 31, 2008(3)(4)(11)10.16

Safety Insurance Company Executive Incentive Compensation PlanBasic Document(4)(5)(12)10.17

Safety Insurance Company Executive Incentive Compensation PlanAdoption Agreement(4)(5)(12)10.18

Safety Insurance Company Executive Incentive Compensation PlanRabbi Trust Agreement(4)(5)(12)10.19

Form of Restricted Stock Notice and Agreement (with vesting) under the 2002 Management Omnibus Incentive Plan(4)(5)10.20

Form of Restricted Stock Notice and Agreement (without vesting) under the 2002 Management Omnibus Incentive Plan(4)(5)10.21

Form of Nonqualified Stock Option Notice and Agreement under the 2002 Management Omnibus Incentive Plan(4)(5)10.22

Form of Incentive Stock Option Notice and Agreement under the 2002 Management Omnibus Incentive Plan(4)(5)10.23

Form of Stock Appreciation Right Notice and Agreement under the 2002 Management Omnibus Incentive Plan(4)(5)10.24

Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and James D. Berry, as of December 31, 2008(4)(6)(13)10.25

Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and George M. Murphy, as of December 31, 2008(4)(6)(13)10.26

Excess Catastrophe Reinsurance Contract between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Blanch Inc., effective January 1, 2006(7)10.27

Property Excess of Loss Reinsurance Contract between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Blanch Inc., effective January 1, 2006(7)10.28

Casualty Excess of Loss Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Re America Corporation, effective January 1, 2006(7)


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Table of Contents

Exhibit
Number

Description10.29

Addendum No. 1 to Casualty Excess of Loss Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Re America Corporation, effective January 1, 2006(7)10.30

Property Catastrophe Excess of Loss Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Re America Corporation, effective January 1, 2006(7)10.31

Umbrella Liability Quota Share Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Re America Corporation, effective January 1, 2006(7)10.32

Addendum No. 1 to Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and the Hartford Steam Boiler Inspection and Insurance Company, effective April 1, 2006(7)10.33

Annual Performance Incentive Plan(4)(7)10.34

Excess Catastrophe Reinsurance Contract between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Inc., effective January 1, 2007(8)10.35

Addendum No. 1 to Excess Catastrophe Reinsurance Contract between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Inc., adding Safety Property and Casualty Insurance Company as a named
reinsured company, effective January 1, 2007(8)10.36

Property Excess of Loss Reinsurance Contract between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Inc., effective January 1, 2007(8)10.37

Addendum No. 1 to Property Excess of Loss Reinsurance Contract between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Inc., adding Safety Property and Casualty Insurance Company as a
named reinsured company, effective January 1, 2007(8)10.38

Property Catastrophe Excess of Loss Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Reinsurance America Corporation, effective January 1, 2007(8)10.39

Addendum No. 2 to Casualty Excess of Loss Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Reinsurance America Corporation, effective January 1,
2007(8)10.40

Addendum No. 2 to Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and The Hartford Steam Boiler Inspection and Insurance Company, effective January 1, 2007(8)10.41

Addendum No. 1 to Umbrella Liability Quota Share Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Re America Corporation, adding Safety Property and Casualty
Insurance Company as a named reinsured company, effective September 1, 2007(9)10.42

Addendum No. 3 to Casualty Excess of Loss Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Re America Corporation, adding Safety Property and Casualty Insurance
Company as a named reinsured company, effective September 1, 2007(9)10.43

Amended and Restated Revolving Credit Agreement with RBS Citizens(10)10.44

Amendment to Annual Performance Incentive Plan(4)(11)10.45

Amendment to Management Omnibus Incentive Plan dated December 31, 2008(4)(11)10.46

Service Line for Homeowners Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company, and Safety Property and Casualty Insurance Company and The Hartford Steam Boiler Inspection and
Insurance Company, effective August 1, 2010(14)10.47

Equipment Breakdown for Homeowners Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company, and Safety Property and Casualty Insurance Company and the Hartford Steam Boiler Inspection
and Insurance Company, effective August 1, 2010(14)10.48

Amendment to Management Omnibus Incentive Plan dated August 4, 2010(4)(15)21

Subsidiaries of Safety Insurance Group, Inc.(9)23

Consent of PricewaterhouseCoopers LLP(15)24

Power of Attorney(1)31.1

CEO Certification Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(15)31.2

CFO Certification Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(15)32.1

CEO Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(15)


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Exhibit
Number

Description32.2

CFO Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(15)


(1)Incorporated
herein by reference to the Registrant's Registration Statement on Form S-1 (File No. 333-87056) filed
April 26, 2002, and as amended on Form S-8 (Reg. No. 333-110676) filed on November 21, 2003 and as amended on Form S-8 (Reg.
No. 333-140423) filed on February 2, 2007.(2)Incorporated
herein by reference to the Registrant's Registration Statement on Form S-1 (File No. 333-87056) filed
April 26, 2002, and as amended on Form S-8 (Reg. No. 333-110676) filed on November 21, 2003 and as amended on Form S-8 (Reg.
No. 333-140423) filed on February 2, 2007, and as incorporated herein by reference on Form 10-Q for the quarterly period ended June 30, 2007, as
filed on August 9, 2007.(3)Incorporated
herein by reference to the Registrant's Form 10-Q for the quarterly period ended September 30, 2004 filed on
November 9, 2004.(4)Denotes
management contract or compensation plan or arrangement.(5)Incorporated
herein by reference to the Registrant's Form 10-K for the year ended December 31, 2004 filed on March 16,
2005.(6)Incorporated
herein by reference to the Registrant's Form 10-K for the year ended December 31, 2005 filed on March 16,
2006.(7)Incorporated
herein by reference to the Registrant's Form 10-K for the year ended December 31, 2006 filed on March 1, 2007.(8)Incorporated
herein by reference to the Registrant's Form 10-Q for the quarter ended September 30, 2007 filed on
November 9, 2007.(9)Incorporated
herein by reference to the Registrant's Form 10-K for the year ended December 31, 2007 filed on March 14,
2008.(10)Incorporated
herein by reference to the Registrant's Form 8-K filed on August 20, 2008.(11)Incorporated
herein by reference to the Registrant's Form 8-K filed on December 31, 2008.(12)Incorporated
herein by reference to the Registrant's Form 10-Q for the quarter ended September 30, 2008, as filed on
November 7, 2008.(13)Incorporated
herein by reference to the Registrant's Form 10-K for the year ended December 31, 2008 filed on March 13,
2009.(14)Incorporated
herein by reference to the Registrant's Form 10-Q for the quarter ended June 30, 2010, as filed on August 6,
2010.(15)Included
herein.


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