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Table of Contents



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

FORM 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2009Oro

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

13-4181699(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)20 Custom House Street, Boston, Massachusetts 02110(Address of principal executive offices including zip code)(617) 951-0600(Registrant's telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:Title of each class

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, 2009, was approximately $427,049,535.

As
of March 9, 2010, there were 15,143,937 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 21, 2010, which Safety Insurance
Group, Inc. (the "Company", "we", "our", "us") intends to file within 120 days after its December 31, 2009 year-end, are incorporated by reference into
Part II and Part III hereof.



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Table of Contents



SAFETY INSURANCE GROUP, INC.        Table of Contents



PagePART I.Item 1.

Business


1Item 1A.

Risk Factors


28Item 1B.

Unresolved Staff Comments


35Item 2.

Properties


35Item 3.

Legal Proceedings


35Item 4.

Reserved


36PART II.Item 5.

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


37Item 6.

Selected Financial Data


39Item 7.

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


42Item 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


112Item 9A.

Controls and Procedures


112Item 9B.

Other Information


112PART III.Item 10.

Directors, Executive Officers and Corporate Governance


113Item 11.

Executive Compensation


113Item 12.

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


113Item 13.

Certain Relationships and Related Transactions, and Directors Independence


113Item 14.

Principal Accountant Fees and Services


113PART IV.Item 15.

Exhibits, Financial Statement Schedules


113SIGNATURES


122


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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 69.2% of our direct written premiums in 2009), we offer a portfolio of property and casualty insurance products, including commercial automobile, homeowners, dwelling
fire, umbrella and business owner policies. Operating virtually exclusively in Massachusetts through our insurance 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 861 in 999 locations throughout Massachusetts during 2009. 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 11.3% share of the Massachusetts private passenger automobile insurance market, and the
third largest commercial automobile carrier, with an 11.0% share of the Massachusetts commercial automobile insurance market, in 2009 according to statistics compiled by Commonwealth Automobile
Reinsurers ("CAR"). In addition, we were also ranked the 49th largest automobile writer in the country according to A.M. Best, based on 2008 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.

We
have maintained profitability in part by managing our cost structure through, for example, the use of technology. Our share of the Massachusetts private passenger automobile insurance
market has grown from 11.0% in 2004 to 11.3% in 2009 and we have continued to expand our product offerings. Our direct written premiums decreased by 2.4% between 2008 and 2009. This decrease was
largely as a result of rate decreases totaling 6.7% which we filed during 2008 under the competitive pricing system introduced to the private passenger automobile market in Massachusetts beginning
April 1, 2008. We offer additional discounts, such as when policyholders have maintained continuous coverage with us or buy other policies from us, among other things.

Our
Insurance Subsidiaries began writing private passenger automobile and homeowners insurance in New Hampshire on October 15, 2008. For the year ended December 31, 2009,
we wrote approximately 1,250 policies and $978 in direct written premiums 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.

1

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Table of Contents

Our Competitive Strengths

We Have Strong Relationships with Independent Agents.In 2008, independent agents accounted for approximately 78.7% of the
Massachusetts automobile
insurance market measured by direct written premiums as compared to only about 36.0% 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 861 (of which 2 are Exclusive Representative Producers ["ERPs"] assigned to us under regulations that have
been phased out April 1, 2009, as discussed below) in 999 locations throughout Massachusetts during 2009. 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% 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.

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We Have an Experienced, Committed and Knowledgeable Management Team.Our senior management team owns approximately 8% 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
30 years of industry experience per executive, as well as an average of over 28 years of experience with Safety. The team has demonstrated an ability to operate successfully within the
regulated Massachusetts private passenger automobile insurance market.

Our Strategy

To achieve our goal of increasing 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 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 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, she 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").

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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.

In
the second decision, the Commissioner approved and set a time table for the implementation of new CAR rules pursuant to which the former reinsurance program run by CAR has been
replaced with an assigned risk plan known as the Massachusetts Automobile Insurance Plan ("MAIP"). Under these new rules, as of April 1, 2009 we no longer are 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 new CAR rules will have on our business over the longer term.

These
decisions remove many of the factors that have historically distinguished the Massachusetts private passenger automobile insurance market from that market in other states such as
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

4

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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

2009

2008

2007Private passenger automobile

$
387,604


69.2
%
$
410,937


71.7
%
$
462,453


74.6
%Commercial automobile


67,228


12.0


75,808


13.2


82,242


13.3Homeowners


82,290


14.7


66,770


11.6


57,515


9.3Business owners policies


14,516


2.6


13,742


2.4


12,481


2.0Personal umbrella


3,459


0.6


2,663


0.5


2,158


0.3Dwelling fire


3,905


0.7


2,900


0.5


2,341


0.4Commercial umbrella


745


0.2


689


0.1


658


0.1Total

$
559,747


100.0
%
$
573,509


100.0
%
$
619,848


100.0
%


Our
product lines are as follows:

Private Passenger Automobile (69.2% of 2009 direct written premiums).Private passenger automobile insurance is our primary product,
and we support
all Massachusetts policy forms and limits of coverage. Private passenger automobile policies provide coverage for bodily injury and property damage to others, no-fault personal injury
coverage for the insured/insured's car occupants, and physical damage coverage for an insured's own vehicle for collision or other perils. We have priced our private passenger coverage competitively
by offering group discounts since 1995 and we currently offer approximately 183 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 a non 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 with their other policies.
We began using four rating tiers effective January 1, 2010. A Companion Policy Client Tier, which is policyholders that 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 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.

Commercial Automobile (12.0% of 2009 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 rate changes during 2007, 2008 or 2009. Qualifying risks eligible for preferred
rates are written through Safety Indemnity which uses 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 uses rates that are 35% lower than Safety Insurance.

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Homeowners (14.7% of 2009 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 7%
e-Customer discount for policyholders who want electronic policy issuance with one combined bill with their other policies. We received approval for a rate increase of 1.6% effective
May 1, 2008. 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
uses 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 uses rates that are
22% lower than Safety Insurance.

Business Owners Policies (2.6% of 2009 direct written premiums).We serve eligible small and medium sized commercial accounts with a
program that
covers apartments and residential condominiums; mercantile establishments, including limited cooking restaurants; offices, including office condominiums; processing and services businesses; special
trade contractors; and wholesaling businesses. Business owner policies provide liability and property coverage for many perils, including business interruption from a covered loss. Equipment breakdown
coverage is automatically included, and a wide range of additional coverage is available to qualified customers. We write policies for business owners at standard rates with qualifying risks eligible
for preferred lower rates.

Commercial Package Policies (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 (0.6% of 2009 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 a discount (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 (0.7% of 2009 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 a discount (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 (0.2% of 2009 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.

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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, which 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 861 and had 999 offices
(some agencies have more than one office) and approximately 5,613 customer service representatives during 2009.

Voluntary Agents.In 2009, we obtained approximately 92.7% 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 February 12, 2010, we had agreements with 654 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 64.0% or less on the
portion of the agent's portfolio that we would underwrite; (iii) make a commitment for us to underwrite at least 300 policies from the agency during the first twelve months after entering an
agreement with us; and (iv) offer multiple product lines. Every year, we review the 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 3.5% of our direct written premiums in 2009.

Exclusive Representative Producers.In 2009, our ERPs generated approximately 7.3% of our direct written premiums for automobile
insurance. As of
December 31, 2009, we had 2 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.

Massachusetts
law guarantees that CAR provides 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
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

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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. Approximately $111,000 is spread equitably
among the six servicing carriers. Each Massachusetts commercial automobile insurer must bear a portion of the losses of the commercial reinsurance pool that is serviced by the six servicing carriers
in the LSC 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 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. Approximately $9,000 of business is spread
equitably between the two servicing carriers. 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 31,2009

2008

2007Line of Business

Exposures

Change

Exposures

Change

Exposures

ChangePrivate passenger automobile:Voluntary agents


410,405


3.6
%

395,989


1.2
%

391,255


6.8
%ERPs


34,562


-37.5


55,342


-35.9


86,312


-13.0MAIP


10,195


13.5


8,983








Total private passenger automobile


455,162


-1.1


460,314


-3.6


477,567


2.6Commercial automobile:Voluntary agents


42,670


-4.5


44,692


-6.0


47,537


-1.2ERPs


4,556


-16.8


5,474


-10.8


6,134


-7.3Total commercial automobile


47,226


-5.9


50,166


-6.5


53,671


-1.9Other:Homeowners


97,955


23.4


79,359


14.0


69,635


8.8Business owners


7,198


8.2


6,654


25.9


5,285


9.2Personal umbrella


13,223


25.6


10,528


20.5


8,735


13.4Dwelling fire


3,788


30.3


2,908


20.0


2,424


11.6Commercial umbrella


515


12.2


459


12.0


410


31.8Total other


122,679


22.8


99,908


15.5


86,489


9.4Total


625,067


2.4


610,388


-1.2


617,727


3.1Total voluntary agents


585,949


6.6


549,572


4.6


525,281


6.5Total ERPs


39,118


-35.7
%

60,816


-34.2
%

92,446


-12.6
%


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Our total written exposures increased by 2.4% for the year ended December 31, 2009. The increase was primarily the result of our voluntary agent written
exposures increasing by 6.6% and our ERP written exposures decreasing by 35.7%. Our private passenger automobile exposures decreased by 1.1% in 2009 primarily as a result of the decrease of our ERP
written exposures due to the transition to 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 other
than auto exposures increased by 22.8% in 2009 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 2009, 30.5% of the private passenger automobile exposures we insure had a non private passenger policy with us as compared to
25.9% in 2008. In addition, 83.9% of our homeowners policyholders had a matching automobile policy with us in 2009, as compared to 79.2% in 2008.

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 2009 and 2010). 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 2009, members of these Clubs received a commission of up to 20.0% of premiums for each new private passenger auto
policy and up to 29.0% 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

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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 enhance the quality of support we provide.

Underwriting

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



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 reinsured through CAR and 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 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 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.

We
offer group discounts to members of 183 affinity groups. In general, we target affinity groups with a mature and stable membership base along with favorable driving records, offering
between a 3%

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and
8% discount (with 4% being the average discount offered). Approximately 9.0% of the private passenger policies we issue 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 2009. We received approval for a rate deviation for Safety P&C commercial automobile of 35% below our comparable Safety Insurance rate. We received approval for a rate increase of
1.6% for our homeowners line effective May 1, 2007.

Cede/Retain Decisions.Until April 1, 2009 under CAR's prior rules for private passenger policies, we had to decide within
23 days
after the effective date of renewing an existing policy whether to cede it to CAR's reinsurance pool. (Effective April 1, 2009, new policies may not be ceded to CAR). Each Massachusetts private
passenger automobile insurer must bear a portion of the losses of the private passenger reinsurance pool. Under CAR's prior rules, we were able to reduce our total allocated share of the losses of the
reinsurance pool by ceding less business to the pool than our proportionate share. As a result, in determining whether to cede an underpriced policy to CAR's private passenger automobile reinsurance
pool, we evaluated whether we were likely to incur greater total losses by ceding it to the pool or by retaining it. According to the January 26, 2010 CAR Cession Volume
AnalysisPrivate Passenger Report, as of November 30, 2009, we had ceded 2.3% of our private passenger automobile business to the pool in 2009, compared to an average of 2.0% for
the industry. Our goal was to cede only those policies that incur fewer total losses resulting from a cession to CAR than the total losses incurred by retaining the policy.

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. 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 six 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 64.0% 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 300 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% of all applications for

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new
policies or endorsements for existing policies through our proprietary information portal, the AVC. During 2007, we introduced propriety software for our commercial automobile and homeowners
insurance lines of business that offers the same functionality that we provide in 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 our
overall increases in productivity. In 1990, we had 399 employees and $154,997 in direct written premiums. As of December 31, 2009, we had 592 employees and $559,747 in direct written premiums,
which represents an increase from $388 direct written premiums per employee in 1990 to $946 direct written premiums per employee in 2009.

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 $289 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

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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 2009 and 2008
our bad debt expense as a percentage of direct written premiums was 0.2%.

External Applications

Our Agent Technology offerings helped Safety Insurance earn a number 3 National Ranking and a number 1 Massachusetts
Ranking in Deep Customer Connections, Inc.'s 2008 Ease of Doing Business survey. 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
TransactNow 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,
online declarations pages, billing inquiry, claims inquiry and online auto insurance cards to our agent's policyholders through www.SafetyInsurance.com.

Claims

Because of the unique differences between the management of casualty claims and property claims, we use separate departments for each
of these types of claims.

Casualty Claims

We have a proven record of settling casualty claims below the industry average in Massachusetts. According to the Automobile Insurers
Bureau, our average casualty claim settlement during the period from January 1994 through June 30, 2009, was $5,696, approximately 2.8% lower than the Massachusetts industry average of $5,860.

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 2009. 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.

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We
believe the structure of our casualty claims unit allows us to respond quickly to claimants anywhere in the Commonwealth of Massachusetts. Comprising 114 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 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

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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, 2009 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 $332,854
to a high of $378,692 as of December 31, 2009. The Company's loss and LAE reserves, based on our actuaries' best estimate, were set at $374,832 as of December 31, 2009. The ultimate
liability may be greater or less than reserves carried at the balance sheet date. Establishment of appropriate reserves is an inherently uncertain process, and there can be no certainty that currently
established reserves will prove adequate
in light of subsequent actual experience. To the extent that reserves are inadequate and are strengthened, the amount of such increase is treated as a charge to earnings in the period that the
deficiency is recognized. To the extent that reserves are redundant and are released, the amount of the release is a credit to earnings in the period the redundancy is recognized. We do not discount
any of our reserves.

The
following table presents development information on changes in the reserves for losses and LAE of our Insurance Subsidiaries for each year in the three year period ended
December 31, 2009.

Years Ended December 31,2009

2008

2007Reserves for losses and LAE, beginning of year

$
467,559

$
477,720

$
449,444Less reinsurance recoverable on unpaid losses and LAE


(76,489
)

(84,290
)

(78,464
)Net reserves for losses and LAE, beginning of year


391,070


393,430


370,980Incurred losses and LAE, related to:Current year


390,366


405,761


405,284Prior years


(44,065
)

(35,938
)

(30,791
)Total incurred losses and LAE


346,301


369,823


374,493Paid losses and LAE related to:Current year


235,681


229,924


229,237Prior years


126,858


142,259


122,806Total paid losses and LAE


362,539


372,183


352,043Net reserves for losses and LAE, end of year


374,832


391,070


393,430Plus reinsurance recoverables on unpaid losses and LAE


64,874


76,489


84,290Reserves for losses and LAE, end of year

$
439,706

$
467,559

$
477,720


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At
the end of each period, the reserves were re-estimated for all prior accident years. Our prior year reserves decreased by $44,065, $35,938 and $30,791, during 2009, 2008
and 2007, respectively. 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 our retained automobile reserves, $11,551 in CAR assumed reserves, and $6,103 in our retained homeowners and all other 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 1999 through 2009. 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, 2009.

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 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 31,2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999Reserves for losses and LAEoriginally estimated:

$
374,832

$
391,070

$
393,430

$
370,980

$
370,166

$
366,730

$
310,012

$
266,636

$
227,377

$
211,834

$
206,613Cumulative amounts paid as of:One year later





126,857


140,060


122,806


133,213


144,600


150,354


137,092


118,141


114,016


107,937Two years later








193,599


151,680


187,231


202,435


201,287


199,119


168,344


163,768


133,414Three years later











180,554


200,546


233,513


232,539


225,350


196,340


185,396


154,395Four years later














213,861


239,271


247,073


238,087


212,079


194,891


163,903Five years later

















245,029


249,863


243,677


217,009


204,290


167,829Six years later




















252,653


244,400


218,419


206,324


171,148Seven years later























245,123


218,965


206,801


171,871Eight years later


























218,971


206,870


172,157Nine years later





























206,939


172,215Ten years later
































172,273


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As of and for the Years Ended December 31,2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999Reserves re-estimated as of:One year later




$
347,004

$
357,492

$
340,189

$
327,419

$
327,110

$
303,234

$
266,817

$
225,115

$
204,531

$
179,650Two years later








325,317


311,972


310,614


304,891


291,100


269,941


227,764


206,340


176,008Three years later











287,875


289,109


297,790


280,507


264,961


231,190


208,587


175,868Four years later














274,840


284,542


277,835


260,398


229,699


209,517


176,025Five years later

















276,272


271,205


257,836


227,428


208,343


175,367Six years later




















267,764


253,711


225,705


208,232


174,469Seven years later























251,656


223,554


207,084


174,121Eight years later


























222,431


205,891


173,681Nine years later





























205,240


173,163Ten years later
































172,729Cumulative redundancy 2009




$
(44,065
)
$
(68,113
)
$
(83,105
)
$
(95,326
)
$
(90,458
)
$
(42,248
)
$
(14,980
)
$
(4,946
)
$
(6,594
)
$
(33,884
)




As of and for the Years Ended December 31,2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999Gross liability-end of year

$
439,706

$
467,559

$
477,720

$
449,444

$
450,716

$
450,897

$
383,551

$
333,297

$
302,556

$
302,131

$
315,226Reinsurance recoverables


64,874


76,489


84,290


78,464


80,550


84,167


73,539


66,661


75,179


90,297


108,613Net liability-end of year


374,832


391,070


393,430


370,980


370,166


366,730


310,012


266,636


227,377


211,834


206,613Gross estimated liability-latest





413,209


391,021


346,482


332,777


337,254


330,008


312,365


275,729


271,697


240,202Reinsurance recoverables-latest





66,205


65,704


58,607


57,937


60,982


62,244


60,709


53,298


66,457


67,473Net estimated liability-latest





347,004


325,317


287,875


274,840


276,272


267,764


251,656


222,431


205,240


172,729


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 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, 2009, 2008 and 2007 we
decreased loss reserves related to prior years by $44,065, $35,938 and $30,791, 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. Reinsurance involves an insurance company transferring (ceding) a portion of its exposure
on insurance underwritten by it to another insurer (reinsurer). The reinsurer assumes a portion of the exposure in return for a share of the premium. Reinsurance does not legally discharge an
insurance company from its primary liability for the full amount of the policies, but it does make the reinsurer liable to the company for the reinsured portion of any loss realized.

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We 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). All of our other reinsurers have an A.M. Best rating of "A" (Excellent) or better except for SCOR, and Validus which are rated "A-" (Excellent).

We
maintain reinsurance coverage to help lessen the effect of losses from catastrophic events, maintaining coverage that during 2009 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. In 2009, we purchased three layers of excess catastrophe reinsurance providing coverage for property losses in excess of $30,000 up to a maximum of
$350,000. Our reinsurers' co-participation was 90.0% of $50,000 for the 1st layer, 90.0% of $50,000 for the 2nd layer and 75.0% of $220,000 for
the 3rd 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 2009 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 2010, we have 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. 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 "130-year storm"
(that is, a storm of a severity expected to occur once in a 130 year period).

We
also have casualty excess of loss reinsurance for large casualty losses occurring in our automobile, homeowners, dwelling fire, business owners policies, commercial package policies,
personal umbrella and commercial umbrella lines of business in excess of $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 $1,500 up to a maximum of $15,000, for our homeowners, business owner, and commercial package policies for 2009, and effective January 1, 2010 we purchased coverage in
excess of $2,000 up to a maximum of $15,000. In addition, we have a quota share reinsurance agreement for personal and commercial umbrella lines of business under which we cede 90.0% of the premiums
for 2009, and effective January 1, 2010 will cede 80.0% of the premiums. For 2009, we ceded 90.0% of losses under our personal and commercial umbrella policies with an annual aggregate
deductible of $75. We also have a reinsurance agreement with Hartford Steam Boiler Inspection and Insurance Company, which is a quota share agreement under which we cede 100% of the premiums and
losses for the equipment breakdown coverage under our business owner policies and commercial package policies.

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.

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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.

As
of December 31, 2009, we had no material amounts recoverable from any reinsurer, excluding the residual markets described below. 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.

In
addition to the above mentioned reinsurance programs and as described in more detail above under "The Massachusetts Property and Casualty Insurance Market," we are a participant in
CAR, 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.

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 her Managed Competition reforms were, in part, designed to make Massachusetts more appealing to these companies. Since 2008, the
following companies entered the market: Progressive Insurance Company, Peerless (a subsidiary of Liberty Mutual), AIG, Vermont Mutual, Preferred Mutual, IDS, Occidental, GEICO, Harleysville, 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
30.7%, 9.9% and 9.7% market shares based on automobile exposures, respectively, in 2009 according to CAR.

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Employees

At December 31, 2009, we employed 592 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, 2009, all securities in our fixed income securities portfolio were rated investment grade by Moody's, except for 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.

The
following table reflects the composition of our investment portfolio as of December 31, 2009 and 2008:

As of December 31,2009

2008Estimated
Fair Value

% of
Portfolio

Estimated
Fair Value

% of
PortfolioU.S. Treasury securities and obligations of U.S. Government agencies(1)

$
327,378


31.8
%
$
296,886


29.4
%Obligations of states and political subdivisions


483,421


47.0


501,621


49.6Asset-backed securities(1)


80,831


7.9


60,534


6.0Corporate and other securities


126,699


12.3


61,130


6.0Subtotal, fixed maturity securities

$
1,018,329


99.0

$
920,171


91.0Equity securities


9,876


1.0


8,040


0.8Short term securities(2)








82,928


8.2Totals

$
1,028,205


100.0
%
$
1,011,139


100.0
%


(1)Obligations
of U.S. Government agencies include collateralized mortgage obligations issued, guaranteed and/or insured by the following issuers: Government
National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) and Small Business Administration (SBA). The total of these fixed
maturity securities was $294,648 and $286,100 at amortized cost and $306,077 and $294,064 at fair value as of December 31, 2009 and 2008, respectively. As such, the asset-backed securities
presented exclude such issuers already presented under U.S. Treasury securities and obligations of U.S. Government Agencies.(2)Short
term securities consist of U.S. Treasury bills with original maturities of six months.


While
we have held common equity securities in our investment portfolio in the past, as of December 31, 2009, we held no such securities in our investment portfolio, except for
interests in mutual funds to fund the Safety Insurance Company Executive Incentive Compensation Plan, a

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non-qualified
deferred compensation plan maintained for the purpose of providing deferred compensation to a select group of management. We continuously evaluate market conditions and we
expect in the future to purchase common equity securities.

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

The
following table reflects our investment results for each year in the three-year period ended December 31, 2009:

Years Ended December 31,2009

2008

2007Average cash and invested securities (at cost)

$
1,061,916

$
1,060,554

$
1,002,349Net investment income(1)

$
43,308

$
45,771

$
44,255Net effective yield(2)


4.1
%

4.3
%

4.4
%


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


Net
effective yield declined to 4.1% in 2009 from 4.3% in 2008. Although average cash and invested securities (at cost) increased by $1,362 in 2009, there was a decrease in net
investment income primarily due to lower yields on cash and short-term securities. Net effective yield declined slightly in 2008 to 4.3% from 4.4% in 2007 and net investment income
increased primarily due to an $58,205 increase in average cash and invested securities (at cost).

As
of December 31, 2009, 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 two investments representing 0.1% of our fixed investments portfolio.

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

As of December 31, 2009Estimated
Fair Value

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

$
327,378


32.1
%Aaa/Aa


441,286


43.4A


158,983


15.6Baa


48,573


4.8Ba


325


Not rated (Standard & Poor's rating of A or higher)


41,078


4.0Not rated


706


0.1Total

$
1,018,329


100.0
%


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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 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, 2009, 95.9% of our fixed maturity investments were rated Category 1 and 4.0% of our fixed
maturity investments were rated Category 2, the two highest ratings assigned by the SVO. Two investments, which represent 0.1% of our fixed maturity investments portfolio, were 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, 2009.

As of December 31, 2009Estimated
Fair Value

PercentDue in one year or less

$
70,872


6.9
%Due after one year through five years


232,777


22.9Due after five years through ten years


184,753


18.1Due after ten years through twenty years


133,172


13.1Due after twenty years


9,847


1.0Asset-backed securities(1)


386,908


38.0Totals

$
1,018,329


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.


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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 15, 2009. 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 attributes, including our
geographic concentration, elevated underwriting leverage and limited product scope.

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, 2003. The Division had no material findings as a result of this examination. We are currently under examination by the Division for the five-year period
ending December 31, 2008.

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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 2009, the statutory surplus of Safety Insurance was $556,575 and its net income
for 2009 was $46,956. A maximum of $55,657 will be available during 2010 for such dividends without prior approval of the Commissioner.

Acquisition of Control of a Massachusetts Domiciled Insurance Company.Massachusetts law requires advance approval by the Commissioner
of any change
in control of an insurance company that is domiciled in Massachusetts. That law presumes that control exists where any person, directly or indirectly, owns, controls, holds the power to vote or holds
proxies representing 10% 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. With respect to private passenger automobile insurance rates and premiums, the

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Commissioner
has historically made an adjustment in his or her annual rate decision reflecting any Insolvency Fund-related costs reported by the industry in its rate filing. By statute, no
insurer in Massachusetts may be assessed in any year an amount greater than two percent of that insurer's direct written premium for the calendar year prior to the assessment. 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 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. In 2007, all our ratios
for all our Insurance Subsidiaries were within the normal range, with the exception of Change in Net Premiums Written for Safety Indemnity and Safety P&C due to a reapportionment of the participation
percentages in the intercompany pooling agreement among the Insurance Subsidiaries effective January 1, 2007.

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

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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, 2009, 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 under "The 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. See "The Massachusetts Property and Casualty Insurance Market," as discussed above.

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


58

President, Chief Executive Officer and Chairman of the Board

34William J. Begley, Jr.


55

Vice President, Chief Financial Officer and Secretary

24James D. Berry


50

Vice PresidentInsurance Operations

27George M. Murphy


43

Vice PresidentMarketing

21Robert J. Kerton


63

Vice PresidentClaims

23David E. Krupa


49

Vice PresidentClaims Operations

27Daniel D. Loranger


70

Vice PresidentManagement Information Systems and Chief Information Officer

29Edward N. Patrick, Jr.


61

Vice PresidentUnderwriting

36A. Richard Caputo, Jr.


44

Director

Frederic H. Lindeberg


69

Director

Peter J. Manning


71

Director

David K. McKown


72

Director




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Table of Contents

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 34 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
24 years. Mr. Begley also serves on the Audit Committee of CAR, 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. Berrywas appointed Vice President of Insurance Operations of the Company on October 1, 2005. Mr. Berry has been employed by
the Insurance Subsidiaries for over 27 years and has directed the Company's Massachusetts Private Passenger line of business since 2001. Mr. Berry serves on the Market Review Committee
of CAR and the Personal Lines Rules and Forms Committee of the Automobile Insurers Bureau of Massachusetts. He also 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 21 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 23 years. Mr. Kerton previously served 18 years with
Allstate Insurance Company in various Massachusetts claim management assignments. Mr. Kerton has served as Chairman of the Claims Committee of the Automobile Insurers Bureau of Massachusetts.
He is Vice Chairman of the Claims Committee of CAR, and is a member of the Governing Board of the Massachusetts Insurance Fraud Bureau.

David E. Krupawas 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 27 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
29 years. Mr. Loranger began his data processing career with Raytheon Manufacturing in 1960.

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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 36 years. Mr. Patrick has
served on several committees of CAR, including the MAIP Steering, Actuarial, Market Review, Servicing Carrier, Statistical, Automation and Reinsurance Operations Committees. Mr. Patrick has
served on the Operations Committee of CAR since 1984 and has served as its chairman since 1998. 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, and the
non-profit Catholic Schools Foundation.

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 48 years, worked for
BankBoston for over 32 years and had previously been the head of BankBoston's real estate department, corporate finance department, and a managing director of BankBoston's private equity unit.
Mr. McKown is currently a director of Global Partners L.P., and 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 69.2% of our direct written premiums for the year ended December 31, 2009, 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.

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Because we write insurance principally in Massachusetts, our business may be adversely affected by conditions in Massachusetts, including the potential affect 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 may enter the market in response to these changes; one national insurer recently announced that it would begin
writing automobile insurance in Massachusetts and others could follow. In addition, these developments would have a disproportionate effect on us, compared to insurers which conduct operations in
multiple states.

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.

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 $450,000 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 $450,000.

Climate change may adversely impact our results of operations.

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

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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 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.

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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 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.

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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 cede 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 replaces 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. The Commissioner mandated an average rate decrease in private passenger automobile premiums of 11.7%, 8.7% and 1.7% for 2007, 2006 and 2005, respectively. The Commissioner mandated
average rate increases of 2.5% and 2.7% for 2004 and 2003, respectively. 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 have been 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 have also filed and have been approved for a 1.9% increase in our rates effective April 19, 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%,
11.8%, and 10.9% in 2007, 2006, and 2005, respectively. We have filed for and been approved for a commission rate of 13.0% for 2008 and 2009 which first took effect on 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 obligations to
policyholders. Moreover, an "A" rating is assigned to companies that have, on balance,

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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, 2009, based upon fair
value measurement, 99.0% of our investment portfolio was invested in fixed maturity securities and 1.0% in common equity securities. Certain risks are inherent in connection with debt securities
including loss upon default and price volatility in reaction to changes in interest rates and general market factors.

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

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required
to write down the value of our investments, which could materially harm our results of operations and financial condition.

Recent
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 is subject to market conditions, which are outside of our control. As a result, we may not be able to successfully alleviate risk through these arrangements. For example, if
reinsurance capacity for homeowners risks were reduced as a result of terrorist attacks, 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 combinations including mergers, consolidations or acquisitions of additional shares, for a period of

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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 26.9% 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.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

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

ITEM 2.    PROPERTIES

We conduct most of our operations in approximately 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.

The
focus of the AG's investigation was on the insured values determined by us for purposes of charging premiums for physical damage insurance coverage. In 2008, coverage for motorcycles
represented 1.9% of our total private passenger automobile insurance. We have been cooperating with the AG and responding to the CID and various related additional requests for information by the AG
since that time.

In
connection with the matters addressed by the CID, the AG delivered a letter to Safety Insurance dated February 2, 2009, in which the AG stated that it "has reason to believe
that Safety Insurance Company has violated the Massachusetts Consumer Protection Act , G.L. c. 93A, §2, by engaging in unfair and deceptive acts and practices regarding motorcycle
insurance. Specifically, the AG stated it "has reason to believe that the Company overcharged its customers for motorcycle insurance and engaged in related unfair claims settlement practices." By
issuing this letter the AG met a statutory prerequisite to filing a civil complaint under the Massachusetts Consumer Protection Act against the Company.

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On
January 14, 2010, we announced that we reached an agreement with the Massachusetts Attorney General's office to change the way in which we calculated motorcycle insurance
premiums for certain types of coverage dating back to January 1, 2002. Under the terms of the settlement, Safety Insurance will be returning approximately $7,200 to policyholders.

We
are working with the Attorney General's office to identify the policies on which refunds will be issued and the amount of the refunds to each individual policyholder. We will notify
policyholders of the amounts of any refunds offered and, upon release of the appropriate releases from the policyholders, we intend to issue the refund checks in August 2010.

ITEM 4.    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 8, 2010, there were 23 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.

2009

High

LowFirst quarter

$
41.34

$
28.44Second quarter

$
34.60

$
29.87Third quarter

$
34.01

$
30.13Fourth quarter

$
37.37

$
32.63




2008

High

LowFirst quarter

$
39.55

$
32.82Second quarter

$
39.82

$
35.12Third quarter

$
44.16

$
35.45Fourth quarter

$
43.00

$
29.68


The
closing price of the Company's common stock on March 10, 2010 was $37.97 per share.

During
2009, the Company declared and paid four quarterly cash dividends to shareholders, which totaled $24,840. During 2008, the Company declared and paid four quarterly cash dividends
to shareholders, which totaled $26,015. On February 16, 2010, the Company's Board of Directors declared a quarterly cash dividend of $0.40 per share to shareholders of record on March 1,
2010, payable on March 15, 2010. The Company plans to continue to declare and pay quarterly cash dividends in 2010, 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 21, 2010 in Boston, MA, which the Company intends to file with the U.S. Securities and
Exchange Commission within 120 days after December 31, 2009 (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 24, 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. 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, 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. At December 31, 2008, the Company had purchased 232,013 of its common shares on the open market under the program at
a cost of $7,516.

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, 2004 and ending on December 31, 2009, 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, 2009,
assuming re-investment of all dividends.

Comparative Cumulative Total Returns since December 31, 2004 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, 2009.

The
selected historical consolidated financial data for the years ended December 31, 2009, 2008 and 2007 and as of December 31, 2009 and 2008 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, 2006 and 2005 and as of December 31, 2007, 2006 and 2005 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, other than statutory data, in conformity with U. S. generally accepted accounting principles ("GAAP"). We have
derived the
statutory data from the annual statements of our Insurance Subsidiaries filed with insurance regulatory authorities, which were prepared in accordance with statutory accounting practices, which vary
in certain respects from GAAP.

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

Years Ended December 31,2009

2008

2007

2006

2005Direct written premiums

$
559,747

$
573,509

$
619,848

$
629,511

$
649,113Net written premiums


532,629


552,904


600,572


620,908


632,836Net earned premiums


531,969


576,556


609,208


624,933


622,831Investment income


43,308


45,771


44,255


40,293


31,573Net realized (losses) gains on investments


(167
)

678


(6
)

358


305Finance and other service income


16,844


17,995


16,623


15,128


16,748Total revenue


591,954


641,000


670,080


680,712


671,457Loss and loss adjustment expenses


346,301


369,823


374,493


353,906


385,593Underwriting, operating and related expenses


171,124


172,987


170,657


162,220


146,669Interest expenses


135


81


83


86


948Total expenses


517,560


542,891


545,233


516,212


533,210Income before income taxes


74,394


98,109


124,847


164,500


138,247Income tax expense


20,242


27,851


37,434


52,559


43,065Net income

$
54,152

$
70,258

$
87,413

$
111,941

$
95,182Earnings per weighted average common share:Basic(1)

$
3.49

$
4.32

$
5.40

$
7.02

$
6.07Diluted(1)

$
3.48

$
4.31

$
5.38

$
6.96

$
5.93Cash dividends paid per common share

$
1.60

$
1.60

$
1.30

$
0.86

$
0.60Number of shares used in computing earnings per share:Basic(1)


15,533,331


16,265,185


16,189,131


15,953,607


15,674,374Diluted(1)


15,552,063


16,308,394


16,251,067


16,079,841


16,050,072


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Table of Contents

Years Ended December 31,2009

2008

2007

2006

2005Balance Sheet Data:Total cash and investment securities

$
1,102,675

$
1,071,590

$
1,055,316

$
966,888

$
877,570Total assets


1,427,837


1,437,817


1,446,992


1,355,748


1,257,675Losses and loss adjustment expenses reserves


439,706


467,559


477,720


449,444


450,716Total liabilities


807,402


834,446


876,992


859,400


869,726Total shareholders' equity


620,435


603,371


570,000


496,348


387,949Statutory Data:Policyholders' surplus (at period end)

$
556,575

$
560,462

$
514,957

$
457,505

$
350,833Loss ratio(2)


65.1
%

64.1
%

61.5
%

56.6
%

61.9
%Expense ratio(2)


32.1


30.7


28.3


26.2


23.4Combined ratio(2)


97.2
%

94.8
%

89.8
%

82.8
%

85.3
%GAAP Ratios:Loss ratio(2)


65.1
%

64.1
%

61.5
%

56.6
%

61.9
%Expense ratio(2)


32.2


30.0


28.0


26.0


23.5Combined ratio(2)


97.3
%

94.1
%

89.5
%

82.6
%

85.4
%


(1)Earnings
per share data and number of shares used in computing shares outstanding for years 2005-2008 have been restated to conform to ASC
260Participating Securities and the Two Class Method (prior authoritative literature Emerging Issue Tasks 03-6-1, Determining Whether Instruments Granted in Share
Based-Payment Transactions are Participating Securities). 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 statutory accounting
basis, is the ratio of underwriting expenses to net written premiums, and when calculated on a GAAP basis is the ratio of underwriting expense to net earned premiums. The combined ratio is the sum of
the loss ratio and the expense ratio. Please refer to Insurance Ratios under Item 7Management's Discussion and Analysis of Financial Condition and Results of Operations for further
discussion on the comparison of the above statutory insurance ratios to 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 69.2% of our direct written
premiums in 2009), we offer a portfolio of other insurance products, including commercial automobile (12.0% of 2009 direct written premiums), homeowners (14.7% of 2009 direct written premiums),
dwelling fire, umbrella and business owner policies (totaling 4.1% of 2009 direct written premiums). Operating virtually exclusively in Massachusetts 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 861 in 999
locations throughout Massachusetts during 2009. We have used these relationships and our extensive knowledge of the Massachusetts market to become the second largest private passenger automobile and
third largest commercial automobile insurance carrier in Massachusetts, capturing an approximate 11.3% and 11.0% share, respectively, of the Massachusetts private passenger and commercial automobile
markets in 2009, according to the Commonwealth Automobile Reinsurers ("CAR") Cession Volume Analysis Report of March 3, 2010, 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 discussion as automobile exposures.

Our
Insurance Subsidiaries began writing private passenger automobile and homeowners insurance in New Hampshire on October 15, 2008. For the year ended December 31, 2009,
we wrote approximately 1,250 policies and $978 in direct written premiums in New Hampshire.

Massachusetts Automobile Insurance Market

We have been subject to extensive regulation in the private passenger automobile insurance industry in Massachusetts, which represented
69.2% of our direct written premiums in 2009. 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

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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. CAR operates at an underwriting deficit. This deficit is allocated among every Massachusetts automobile insurance company, including us, based on a complex formula that takes
into consideration a company's voluntary market share, the rate at which it cedes business to CAR, and the company's utilization of a credit system CAR has designed to encourage carriers to reduce
their use of CAR. 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 is 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 current reinsurance program run by CAR has been replaced with an assigned risk plan, the
Massachusetts Automobile Insurance Plan ("MAIP"). Under these new rules, as of April 1, 2009 we no longer are 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. We are not able at this time to determine
what effect these new CAR rules will have on our business.

The
Commissioner's decision to implement an assigned risk plan brought to a close a lengthy period of regulatory and judicial consideration of the Massachusetts private passenger
residual market.

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, she would institute
a system that introduces competitive pricing to the Massachusetts private passenger automobile insurance market, which the
Commissioner has 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 "Regulation"). The Regulation governs the rate filing that an insurer can file.

In
addition, the Regulation prohibits the following rating and underwriting factors:



The
Commissioner has issued a number of bulletins addressing issues related to the implementation of Managed Competition (the "Rating Bulletins"). Rating Bulletins 2008-11
and 2009-13 limits voluntary market rates to a level no higher than the rates in the residual market. Rating Bulletin 2008-17 describes how companies may place risks among
company affiliates within an insurer group.

We
are not able at this time to determine what effect these bulletins will have on our business over the long term.

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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 is spread equitably among the
six servicing carriers. Each Massachusetts commercial automobile insurer must bear a portion of the losses of the
commercial reinsurance pool that is serviced by the six servicing carriers in the LSC 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 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.

As
noted above, in 2007 and previous years, the Commissioner set the maximum premium rates that could be charged and minimum commissions that had to be paid to agents for private
passenger automobile insurance. Beginning in 2007, the effective date of the Commissioner's rate decision was April 1st as compared to January 1st of 2006 and prior rate
decisions. The 2006 rates were in effect from January 1, 2006 until March 31, 2007. The Commissioner announced on December 15, 2006, an 11.7% statewide average private passenger
automobile insurance rate decrease for 2007, compared to an 8.7% decrease for 2006. Coinciding with the 2007 rate decision, the Commissioner also approved a 13.0% commission rate which agents receive
for selling private passenger automobile insurance, as a percentage of premiums, compared to a commission rate of 11.8% in 2006.

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 also filed and have been 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 that 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 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. We have also filed and
have been approved for a 1.9% increase in our rates effective April 19, 2010. Our rates include a 13.0% commission rate for agents. Our direct written premiums decreased by 2.4% in 2009
primarily as a result of Managed Competition rate decreases effective on and after April 1, 2008.

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. 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 written premiums, if
calculated on a SAP basis, or net earned premiums, if 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
statutory insurance ratios are outlined in the following table:

Years Ended December 31,2009

2008

2007Statutory Ratios:Loss Ratio


65.1
%

64.1
%

61.5
%Expense Ratio


32.1


30.7


28.3Combined Ratio


97.2
%

94.8
%

89.8
%


Under
GAAP, the loss ratio is computed in the same manner as under SAP, but the expense ratio is determined by matching underwriting expenses to the period over which net premiums were
earned, rather than to the period that net premiums were written.

Our
GAAP insurance ratios are outlined in the following table:

Years Ended December 31,2009

2008

2007GAAP Ratios:Loss Ratio


65.1
%

64.1
%

61.5
%Expense Ratio


32.2


30.0


28.0Combined Ratio


97.3
%

94.1
%

89.5
%


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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, 2009, there were 920,434 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, 2009, were comprised of 298,834 restricted shares and 215,337 nonqualified stock options.

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/A


(1)The
exercise price of the options grant effective on November 27, 2002, is equal to the IPO price of our 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 our Board of
Directors.


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Reinsurance

We reinsure with other insurance companies a portion of our potential liability under the policies we have underwritten, thereby
protecting us against an unexpectedly large loss or a catastrophic occurrence that could produce large losses, primarily in our homeowners line of business. We use various software products to measure
our exposure to catastrophe losses and the probable maximum loss to us for catastrophe losses such as hurricanes. The models include estimates for our share of the catastrophe losses generated in the
residual market for property insurance by the 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. As of
January 1 2010, our catastrophe reinsurance provides gross per occurrence reinsurance coverage up to $450,000. As a result of the changes to the models, and our revised reinsurance program, our
catastrophe reinsurance protects us in the event of a "130-year storm" (that is, a storm of a severity expected to occur once in a 130-year period). Swiss Re, our primary
reinsurer, maintains an A.M. Best rating of "A"
(Excellent). All of our other reinsurers have an A.M. Best rating of "A" (Excellent) or better except for SCOR and Validus which are rated "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, 2009, the FAIR Plan purchased $1,100,000 of catastrophe
reinsurance for property losses in excess of $180,000. At December 31, 2009, we had no material amounts recoverable from any reinsurer, excluding the residual markets described above.

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.

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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.

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:



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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 $332,854 to $378,692 as of
December 31, 2009, as compared to a range of $346,014 to $394,268 for 2008. 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. The Company's selected point estimate of net loss and LAE reserves based upon the analysis of our actuaries was $374,832 as of December 31, 2009, as
compared to $391,070 for December 31, 2008.

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, 2009
and December 31, 2008.

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




As of December 31, 2008Line of Business

Low

Recorded

HighPrivate passenger automobile

$
239,026

$
271,445

$
272,098Commercial automobile


55,452


60,063


60,364Homeowners


35,452


40,772


40,944All other


16,084


18,790


20,862Total

$
346,014

$
391,070

$
394,268


For
our private passenger automobile, commercial automobile and homeowners lines of business as of December 31, 2009 and 2008, due to the relatively long time we have been writing
these lines of insurance and our stable long-term trends in frequency and severity, the range of reserves is relatively narrow. For our all other lines of business as of
December 31, 2009 and 2008, due to the relatively short time we have been writing these lines of business, the sparse amount of data and the resulting immature history available for our
analysis, the range of reserves is relatively wide. We have recorded reserves closer to the high in the ranges of our projections.

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Table of Contents

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, 2009
and December 31, 2008.

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




As of December 31, 2008Line of Business

Case

IBNR

TotalPrivate passenger automobile

$
210,626

$
22,561

$
233,187CAR assumed private passenger auto


23,992


14,266


38,258Commercial automobile


32,704


10,302


43,006CAR assumed commercial automobile


9,372


7,685


17,057Homeowners


17,466


9,015


26,481FAIR Plan assumed homeowners


5,886


8,405


14,291All other


8,084


10,706


18,790Total net reserves for losses and LAE

$
308,130

$
82,940

$
391,070


Our
IBNR reserves for CAR assumed private passenger and commercial automobile business are 26.1% and 44.9% respectively of our total reserves for CAR assumed private passenger and
commercial automobile business as of December 31, 2009 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.

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, 2009 and December 31, 2008.

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


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As of December 31, 2008Line of Business

Retained

Assumed

NetPrivate passenger automobile

$
233,187CAR assumed private passenger automobile




$
38,258Net private passenger automobile







$
271,445Commercial automobile


43,006CAR assumed commercial automobile





17,057Net commercial automobile








60,063Homeowners


26,481FAIR Plan assumed homeowners





14,291Net homeowners








40,772All other


18,790





18,790Total net reserves for losses and LAE

$
321,464

$
69,606

$
391,070


CAR Loss and Loss Adjustment Expense Reserves

We are a participant in CAR and assume a significant 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
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,
2008, we
had nine months of reported 2008 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, 2008 we had to estimate our 2008 policy year CAR Participation Ratio beginning with the first quarter of 2008 through the second quarter of
2009.

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' current 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

51

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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.

The
portion of reserves based upon CAR estimates for private passenger automobile line of business has declined 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.

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, 2009, a
1 percentage-point change in the loss and LAE ratio would result in a change in reserves of $5,320. Each 1 percentage-point change in the loss and loss expense ratio would have had a
$3,458 effect on net income, or $0.22 per diluted share.

Our
assumptions consider that past experience, adjusted for the effects of current developments and anticipated trends, are an appropriate basis for establishing our reserves. Our
individual key assumptions could each have a reasonable possible range of plus or minus 5 percentage-points for each estimation, although there is no guarantee that our assumptions will not
have more than a 5 percentage point variation. The following sensitivity tables present information for each of our primary lines of business on the effect each 1 percentage-point change
in each of our key assumptions on unpaid frequency and severity could have on our retained (i.e., direct minus ceded) loss and LAE reserves and net income for the year ended December 31,
2009. 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.

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-1 Percent
Change in
Frequency

No
Change in
Frequency

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

$
(4,754
)
$
(2,377
)
$
Estimated increase in net income


3,090


1,545


No Change in SeverityEstimated (decrease) increase in reserves


(2,377
)




2,377Estimated increase (decrease) in net income


1,545





(1,545
)+1 Percent Change in SeverityEstimated increase in reserves





2,377


4,754Estimated decrease in net income





(1,545
)

(3,090
)Commercial automobile direct minus ceded loss and LAE reserves-1 Percent Change in SeverityEstimated decrease in reserves


(803
)

(402
)

Estimated increase in net income


522


261


No Change in SeverityEstimated (decrease) increase in reserves


(402
)




402Estimated increase (decrease) in net income


261





(261
)+1 Percent Change in SeverityEstimated increase in reserves





402


803Estimated decrease in net income





(261
)

(522
)Homeowners direct minus ceded loss and LAE reserves-1 Percent Change in SeverityEstimated decrease in reserves


(511
)

(255
)

Estimated increase in net income


332


166


No Change in SeverityEstimated (decrease) increase in reserves


(255
)




255Estimated increase (decrease) in net income


166





(166
)+1 Percent Change in SeverityEstimated increase in reserves





255


511Estimated decrease in net income





(166
)

(332
)All other direct minus ceded loss and LAE reserves-1 Percent Change in SeverityEstimated decrease in reserves


(375
)

(187
)

Estimated increase in net income


244


122


No Change in SeverityEstimated (decrease) increase in reserves


(187
)




187Estimated increase (decrease) in net income


122





(122
)+1 Percent Change in SeverityEstimated increase in reserves





187


375Estimated decrease in net income





(122
)

(244
)


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.

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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, 2009. 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

$
(208
)
$
208Estimated increase (decrease) in net income


135


(135
)CAR assumed commercial automobileEstimated (decrease) increase in reserves


(146
)

146Estimated increase (decrease) in net income


95


(95
)FAIR Plan assumed homeownersEstimated (decrease) increase in reserves


(172
)

172Estimated increase (decrease) in net income


112


(112
)


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 $44,065, $35,938 and $30,791 for the years ended December 31, 2009, 2008 and 2007, 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, 2009, 2008 and 2007. 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

2009

2008

20071999 & prior

$
(280
)
$
(517
)
$
(446
)2000


(340
)

(675
)

(700
)2001


(1,004
)

(958
)

(575
)2002


(1,431
)

(1,973
)

(839
)2003


(1,385
)

(2,507
)

(109
)2004


(3,827
)

(6,619
)

(4,429
)2005


(5,999
)

(8,258
)

(9,704
)2006


(9,829
)

(6,714
)

(13,989
)2007


(8,079
)

(7,717
)

2008


(11,891
)




All prior years

$
(44,065
)
$
(35,938
)
$
(30,791
)


The
decreases in prior years reserves during the 2009, 2008 and 2007 periods resulted from re-estimations of prior year ultimate loss and LAE liabilities. The 2009 decrease
is primarily composed of reductions of $24,979 in our retained automobile reserves, $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 2007 decrease is primarily composed of reductions of $15,503 in our retained
automobile reserves and $11,335 in CAR assumed reserves.

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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, 2009.

Accident Year

Private Passenger
Automobile

Commercial
Automobile

Homeowners

All Other

Total1999 & prior

$
(276
)
$
(4
)
$


$


$
(280
)2000


(325
)

(15
)







(340
)2001


(540
)

(166
)




(298
)

(1,004
)2002


(1,069
)

(253
)

1


(110
)

(1,431
)2003


(884
)

(234
)

1


(268
)

(1,385
)2004


(2,498
)

(528
)

(222
)

(579
)

(3,827
)2005


(4,364
)

(897
)

(370
)

(368
)

(5,999
)2006


(6,583
)

(1,499
)

(681
)

(1,066
)

(9,829
)2007


(4,706
)

(1,409
)

(864
)

(1,100
)

(8,079
)2008


(9,244
)

(1,036
)

(1,301
)

(310
)

(11,891
)All prior years

$
(30,489
)
$
(6,041
)
$
(3,436
)
$
(4,099
)
$
(44,065
)


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, 2009; 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

Total1999 & prior

$
(250
)
$
(1
)
$


$


$
(251
)2000


(211
)

(6
)







(217
)2001


(343
)

(152
)




(298
)

(793
)2002


(755
)

(246
)

1


(110
)

(1,110
)2003


(483
)

(256
)

1


(268
)

(1,006
)2004


(1,974
)

(679
)

(214
)

(579
)

(3,446
)2005


(3,435
)

(833
)

(352
)

(368
)

(4,988
)2006


(5,472
)

(1,169
)

(600
)

(1,066
)

(8,307
)2007


(2,985
)

(781
)

(480
)

(1,100
)

(5,346
)2008


(4,409
)

(539
)

(360
)

(310
)

(5,618
)All prior years

$
(20,317
)
$
(4,662
)
$
(2,004
)
$
(4,099
)
$
(31,082
)


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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, 2009.

Accident Year

CAR Assumed
Private Passenger
Automobile

CAR Assumed
Commercial
Automobile

FAIR Plan
Homeowners

Total1999 & prior

$
(26
)
$
(3
)
$


$
(29
)2000


(114
)

(9
)




(123
)2001


(197
)

(14
)




(211
)2002


(314
)

(7
)




(321
)2003


(401
)

22





(379
)2004


(524
)

151


(8
)

(381
)2005


(929
)

(64
)

(18
)

(1,011
)2006


(1,111
)

(330
)

(81
)

(1,522
)2007


(1,721
)

(628
)

(384
)

(2,733
)2008


(4,835
)

(497
)

(941
)

(6,273
)All prior years

$
(10,172
)
$
(1,379
)
$
(1,432
)
$
(12,983
)


Our
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 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.

Our
commercial automobile line of business prior year reserves decreased by $6,041 for the year ended December 31, 2009 due primarily to fewer IBNR claims than previously
estimated.

Our
retained homeowners line of business prior year reserves decreased by $2,004 for the year ended December 31, 2009. Our FAIR Plan homeowners reserve decreased by $1,432 for the
year ended December 31, 2009.

In
estimating all our loss reserves, including CAR, we follow the guidance prescribed by ASC 944 Financial Services-Insurance (prior authoritative literature Financial Accounting
Statement of Financial Accounting Standards No. 60,Accounting and Reporting by Insurance Enterpriseand FAS No. 113, Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts).

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 Securities(prior authoritative literatureFSP
FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments)
effective April 1, 2009. ASC 320 requires entities to separate an other-than-temporary impairment 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
securities 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 Investment Losses."

Results of Operations

The following table shows certain of our selected financial results:

Years Ended December 31,2009

2008

2007Direct written premiums

$
559,747

$
573,509

$
619,848Net written premiums


532,629


552,904


600,572Net earned premiums


531,969


576,556


609,208Net investment income


43,308


45,771


44,255Net realized (losses) gains on investments


(167
)

678


(6
)Finance and other service income


16,844


17,995


16,623Total revenue


591,954


641,000


670,080Loss and loss adjustment expenses


346,301


369,823


374,493Underwriting, operating and related expenses


171,124


172,987


170,657Interest expenses


135


81


83Total expenses


517,560


542,891


545,233Income before income taxes


74,394


98,109


124,847Income tax expense


20,242


27,851


37,434Net income

$
54,152

$
70,258

$
87,413


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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 and obligations of U.S. Government agencies(1)

$
315,992

$
12,341

$
(955
)
$


$
327,378Obligations of states and political subdivisions


468,319


16,218


(1,116
)




483,421Asset-backed securities(1)


82,694


606


(2,469
)




80,831Corporate 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








9,876Totals

$
999,180

$
34,042

$
(5,017
)
$


$
1,028,205


(1)Obligations
of U.S. Government agencies include collateralized mortgage obligations issued, guaranteed and/or insured by the following issuers: Government
National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) and Small Business Administration (SBA). The total of these fixed
maturity securities was $294,648 at amortized cost and $306,077 at fair value as of December 31, 2009. As such, the asset-backed securities presented exclude such issuers already presented
under U.S. Treasury securities and obligations of U.S. Government Agencies.(2)Equity
securities consist solely of interests in mutual funds 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.

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

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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 and obligations of U.S. Government agencies

$
43,585

$
932

$
566

$
23

$
44,151

$
955Obligations of states and political subdivisions


47,585


257


13,483


859


61,068


1,116Asset-backed securities


4,940


67


45,165


2,402


50,105


2,469Corporate and other securities


26,217


315


5,143


162


31,360


477Subtotal, fixed maturity securities


122,327


1,571


64,357


3,446


186,684


5,017Equity securities

















Total 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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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





6,232$
282,159

$
282,159


We
reviewed the unrealized losses in our fixed income portfolio as of December 31, 2009 for potential other than temporary asset impairments. 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, $2,071 relates to fixed maturity obligations of U.S. Government agencies and obligations of states and political
subdivisions. The remaining $2,946 of gross unrealized losses relates primarily to holdings of investment grade asset-backed, corporate, other fixed maturity and equity securities.

The
unrealized losses recorded on the fixed maturity 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
other-than-temporary impairment 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 Disclosure(prior authoritative literatureFAS157,Fair Value
Measurements) provides a revised definition of fair value, establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair
value information. Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an
exit price). ASC 820 establishes a fair value hierarchy that distinguishes between inputs based on market data from independent sources

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("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 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 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
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. 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

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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 the 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.

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

As of December 31, 2009Total

Level 1 Inputs

Level 2 Inputs

Level 3 InputsU.S. Treasury securities and obligations of U.S. Government agencies

$
327,378

$


$
327,378

$
Obligations of states and political subdivisions


483,421





483,421


Asset-backed securities


80,831





78,327


2,504Corporate and other securities


126,699





126,699


Equity securities


9,876


9,876





Total investment securities

$
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.

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

$



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

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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.

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.

YEAR ENDED DECEMBER 31, 2008 COMPARED TO YEAR ENDED DECEMBER 31, 2007

Direct Written Premiums.Direct written premiums for the year ended December 31, 2008, decreased by $46,339, or 7.5% to $573,509
from $619,848
for 2007. The 2008 decrease occurred primarily in our personal and commercial automobile lines, which experienced decreases of 7.9% and 2.3%, respectively, in average written premium per exposure and
decreases of 3.6% and 6.5%, respectively, in written exposures. The decrease in our personal automobile line was largely as a result 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. Offsetting these decreases, our homeowners line average written
premium per exposure increased by 1.8% with a 14.0% increase in written exposures.

Net Written Premiums.Net written premiums for the year ended December 31, 2008, decreased by $47,668 or 7.9% to $552,904 from
$600,572 for
2007. This decrease was primarily 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. These decreases in CAR premiums are primarily due to the replacement of the current reinsurance program run by CAR with an assigned risk plan effective April 1, 2008 as discussed above in
"Executive Summary and Overview:Massachusetts Automobile Insurance Market."

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Net Earned Premiums.Net earned premiums for the year ended December 31, 2008, decreased by $32,652, or 5.4%, to $576,556 from
$609,208 for
2007. This decrease was due to the factors that decreased direct and net written premiums.

Net Investment Income.Net investment income for the year ended December 31, 2008, was $45,771 compared to $44,255 for 2007, an
increase of
3.4%. Average cash and investment securities (at cost) increased by $58,205, or 5.8%, to $1,060,554 for the year ended December 31, 2008, from $1,002,349 for 2007. The net effective yield on
the investment portfolio decreased to 4.3% during the year ended December 31, 2008, compared to 4.4% during 2007. Our duration decreased to 3.2 years at December 31, 2008, from
4.2 years at December 31, 2007.

Net Realized Gains (Losses) on Investments.Net realized gains on investments was $678 for the year ended December 31, 2008
compared to net
realized losses of $6 for the year ended December 31, 2007.

The
gross unrealized gains (losses) of investments in fixed maturity securities and equity securities, including interests in mutual funds, was as follows:

As of December 31, 2008Gross Unrealized
Losses(3)Cost or
Amortized
Cost

Gross
Unrealized
Gains

Non-OTTI
Unrealized
Losses

OTTI
Unrealized
Losses(4)

Estimated
Fair ValueU.S. Treasury securities and obligations of U.S. Government agencies(1)

$
288,598

$
8,532

$
(244
)
$


$
296,886Obligations of states and political subdivisions


498,339


9,414


(6,132
)




501,621Asset-backed securities(1)


77,656





(17,122
)




60,534Corporate and other securities


65,243


420


(4,533
)




61,130Subtotal, fixed maturity securities


929,836


18,366


(28,031
)




920,171Equity securities(2)


8,419





(379
)




8,040Short term securities


82,928











82,928Totals

$
1,021,183

$
18,366

$
(28,410
)
$


$
1,011,139


(1)Obligations
of U.S. Government agencies include collateralized mortgage obligations issued, guaranteed and/or insured by the following issuers: Government
National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) and Small Business Administration (SBA). The total of these fixed
maturity securities was $286,100 at amortized cost and $294,064 at fair value as of December 31, 2008. As such, the asset-backed securities presented exclude such issuers already presented
under U.S. Treasury securities and obligations of U.S. Government Agencies.(2)Equity
securities consist solely of interests in mutual funds held to fund the Company's executive deferred compensation plan.(3)The
Company's investment portfolio included 161 securities in an unrealized loss position at December 31, 2008.(4)Amounts
in this column represent OTTI recognized in accumulated other comprehensive income.


As
of December 31, 2008, our portfolio of fixed maturity investments was comprised entirely of investment grade corporate fixed maturity securities, U.S. government and agency
securities and asset-

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backed
securities. All of our securities received a rating assigned by Moody's of Baa or higher, except the few securities not rated by Moody's.

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

As of
December 31, 2008Estimated
Fair Value

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

$
296,886


32.3
%Aaa/Aa


421,417


45.8A


147,086


16.0Baa


35,252


3.8Not rated


19,530


2.1Total

$
920,171


100.0
%


Ratings
are assigned by Moody's, or the equivalent, 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.

In
our determination of other-than-temporary impairments, we consider several factors and circumstances including the issuer's overall financial condition, the
issuer's credit and financial strength ratings, a weakening of the general market conditions in the industry or geographic region in which the issuer operates, a prolonged period (typically six months
or longer) in which the fair value of an issuer's securities remains below our amortized cost, our ability and intent to hold these investments for a period of time sufficient to allow for recovery of
our costs, and any other factors that may raise doubt about the issuer's ability to continue as a going concern.

Other-than-temporary
impairments are recorded as realized losses, which serve to reduce net income and earnings per share. Temporary losses are recorded as
unrealized losses, which do not impact net income and earnings per share but reduce other comprehensive net income. The risks inherent in the assessment of other-than-temporary
impairments include the risk that market factors may differ from our expectations; we may decide to subsequently sell a security for unforeseen business needs; or the credit assessment could change in
the near term, resulting in a charge to earnings.

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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, 2008.

As of December 31, 2008Less 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 and obligations of U.S. Government agencies

$
4,300

$
9

$
9,770

$
235

$
14,070

$
244Obligations of states and political subdivisions


116,605


4,524


32,220


1,608


148,825


6,132Asset-backed securities


24,036


7,876


36,498


9,246


60,534


17,122Corporate and other securities


21,503


931


16,307


3,602


37,810


4,533Subtotal, fixed maturity securities


166,444


13,340


94,795


14,691


261,239


28,031Equity securities


2,458


353


33


26


2,491


379Total temporarily impaired securities

$
168,902

$
13,693

$
94,828

$
14,717

$
263,730

$
28,410


Of
the $28,410 gross unrealized losses as of December 31, 2008, $6,376 relates to fixed maturity obligations of U.S. Government agencies and obligations of states and political
subdivisions. The remaining $22,034 of gross unrealized losses relates primarily to holdings of investment grade asset-backed, corporate, other fixed maturity and equity securities.

We
continue to hold no subprime mortgage debt securities. All of our holdings in mortgage-backed securities are either U.S. Government or agency guaranteed or are rated Aaa/AAA. The
unrealized losses recorded on the fixed maturity investment portfolio at December 31, 2008, 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 and our positive operating cash flows, we intend to and believe we have the ability to hold these
securities for a period of time sufficient to allow for recovery in fair value. Therefore, these decreases in values are viewed as being temporary.

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, we recorded an other-than-temporary impairment charge of $1,032 for this security. During the year ended December 31, 2007, there was no
significant deterioration in the credit quality of any of our holdings.

On
January 1, 2008, we adopted ASC 820,Fair Value Measurements and Disclosures(prior authoritative literatureFAS157, Fair Value Measurements).
ASC 820 provides a revised definition of fair value, establishes a framework for measuring fair value and expands financial
statement disclosure requirements for fair value information. Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants (an exit price). The statement 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:



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We
use observable inputs for the vast majority of our investment portfolio. Fair value measurements for securities for which quoted prices are unavailable are estimated based upon
reference to observable inputs, such as benchmark interest rates, market comparables, broker quotes and other relevant inputs. In circumstances where quoted prices or observable inputs are adjusted to
reflect management's best
estimate of fair value, such fair value measurements are considered a lower level measurement in the ASC 820 fair value hierarchy.

As
of December 31, 2008, approximately 99.8% of the investment portfolio recorded at fair value was priced based upon quoted market prices or other observable inputs. The
following table summarizes our total fair value measurements and the fair value measurements based on Level 3 inputs for investments as of December 31, 2008.

As of December 31, 2008Total

Level 1 Inputs

Level 2 Inputs

Level 3 InputsU.S. Treasury securities and obligations of U.S. Government agencies

$
296,886

$


$
296,886

$
Obligations of states and political subdivisions


501,621





501,621


Asset-backed securities


60,534





58,692


1,842Corporate and other securities


61,130





61,130


Equity securities


8,040


8,040





Short term securities


82,928





82,928


Total investment securities

$
1,011,139

$
8,040

$
1,001,257

$
1,842


The
following table summarizes the changes in our Level 3 fair value measurements for the year ended December 31, 2008.

Asset-Backed
SecuritiesBalance at January 1, 2008

$
3,758Net gains and losses included in earnings


Net gains included in other comprehensive income


(1,916
)Purchases and sales


Transfers in (out) of Level 3


Balance at December 31, 2008

$
1,842Amount of total losses included in earnings attributable to the change in unrealized losses related to assets still held at December 31,
2008

$



On
January 1 and December 31, 2008, 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, 2008.

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

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fees.
Finance and other service income for the year ended December 31, 2008, was $17,995 compared to $16,623 for the 2007 period.

Losses and Loss Adjustment Expenses.Losses and loss adjustment expenses incurred for the year ended December 31, 2008, decreased
by $4,670 or
1.2%, to $369,823 from $374,493 for the comparable 2007 period. Our GAAP loss ratio for the year ended December 31, 2008, increased to 64.1% compared to 61.5% for the comparable 2007 period.
Our GAAP loss ratio excluding loss adjustment expenses for the year ended December 31, 2008, increased to 55.1% from 52.7% for the comparable 2007 period. The loss ratio increased primarily as
a result of a decrease in personal automobile average earned premiums per exposure. In addition, for the quarter ended December 31, 2008, the pre-tax net impact of catastrophes was
an estimated $4,000 in losses related to the December 2008 New England ice storm compared to no catastrophe losses for the comparable 2007 period. Total prior year favorable development included in
the pre-tax results for the year ended December 31, 2008 was $35,938 compared to prior year favorable development of $30,791 for the comparable 2007 period.

Underwriting, Operating and Related Expenses.Underwriting, operating and related expense for the year ended December 31, 2008
increased by
$2,330 or 1.4%, to $172,987 from $170,657 for the comparable 2007 period. Our GAAP expense ratios for the year ended December 31, 2008, increased to 30.0% compared to 28.0% for the comparable
2007 period. The expense ratio increased primarily as a result of decreases in net earned premiums as discussed above.

Interest Expenses.Interest expense for the year ended December 31, 2008 was $81 compared to $83 for the comparable 2007 period.
The credit
facility commitment fee included in interest expense was $75 for both 2008 and 2007.

Income Tax Expense.Our effective tax rates were 28.4% and 30.0% for the years ended December 31, 2008 and 2007, 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, 2008 decreased by $17,155 or 19.6%, to $70,258 from $87,413 for the
comparable 2007
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 $64,069, $72,815, and $116,828 during the years ended December 31, 2009, 2008 and 2007, respectively. The 2009 and 2008 decline in
net cash provided by operating activities was primarily due to the decrease of $13,762 and $46,339, respectively, in direct written premiums, as discussed above. 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 provided by investing activities was $16,500 during the year ended December 31, 2009, which resulted primarily from sales, paydowns, calls, and maturities of fixed
maturities and short term

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securities
in excess of purchases of fixed maturities. Net cash used by investing activities was $28,880 and $74,814 during the years ended December 31, 2008 and 2007, which resulted primarily
from purchases of fixed maturities in excess of sales, paydowns, calls, and maturities of fixed maturities. The reduction in cash provided by investing activities in 2009 and 2008 compared to 2007 was
a result of a redeployment of cash received from sales, paydowns, and maturities of fixed income securities to cash and cash equivalents.

Net
cash used for financing activities was $66,550, $29,795, and $21,986 during the years ended December 31, 2009, 2008, and 2007, respectively. Net cash used for financing
activities is primarily comprised of the acquisition of treasury stock and dividend payments to shareholders. Net cash used for financing activities during 2009 increased by $36,625 compared to 2008
primarily due to the increase in treasury stock acquisitions.

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, 2009, 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 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 our 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 our prior year's net income, as determined in accordance with
GAAP. As of December 31, 2009, the Company was in compliance with all such 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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The
Company had no amounts outstanding on its credit facility at December 31, 2009 and 2008. 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, 2009, 2008 and 2007.

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. 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 2009, the statutory surplus of Safety Insurance was $556,575, and its net income for 2009 was $46,956. As a result,
a maximum of $55,657 is available in 2010 for such dividends without prior approval of the Commissioner. During the year ended December 31, 2009, Safety Insurance recorded dividends to Safety
of $64,412.

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 2009 and 2008 were as follows:

Declaration Date

Record
Date

Payment
Date

Dividend per
Common Share

Total
Dividends PaidNovember 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

$
6,474November 3, 2008

December 1, 2008

December 15, 2008

$
0.40

$
6,498August 4, 2008

September 2, 2008

September 15, 2008

$
0.40

$
6,533May 6, 2008

June 2, 2008

June 13, 2008

$
0.40

$
6,506February 15, 2008

March 3, 2008

March 14, 2008

$
0.40

$
6,478


On
February 16, 2010, our Board approved a quarterly cash dividend on our common stock of $0.40 per share which will be paid on March 15, 2010 to shareholders of record on
March 1, 2010. We plan to continue to declare and pay quarterly cash dividends in 2010, depending on our financial position and the regularity of our cash flows.

On
August 3, 2007, the Board of Directors approved a share repurchase program of up to $30,000 of the Company's outstanding common shares. On March 24, 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. Under the program, the Company may repurchase shares
of its common

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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, 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. At December 31, 2008, the Company had purchased 232,013 of its common shares on the open market under the program at
a cost of $7,516.

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(prior
authoritative literatureFinancial Accounting Standards Board Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements, Including Indirect Guarantees of Indebtedness of Others). 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, 2009, 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

$
215,456

$
193,471

$
26,382

$
4,397

$
439,706Purchase commitments


879


1,758


1,758


1,392


5,787Operating leases


4,082


8,406


8,574


17,900


38,962Total contractual obligations

$
220,417

$
203,635

$
36,714

$
23,689

$
484,455


As
of December 31, 2009, the Company had loss and LAE reserves of $439,706, unpaid reinsurance recoverables of $64,874 and net loss and LAE reserves of $374,832. Our loss and LAE
reserves are estimates as described in more detail underCritical Accounting Policies and Estimates. The specific amounts and timing of obligations
related to case reserves, IBNR reserves and related LAE

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reserves
are not set contractually, and the amounts and timing of these obligations are unknown. Nonetheless, based upon our cumulative claims paid over the last ten years, the Company estimates that
its loss and LAE reserves will be paid in the period shown above. While management believes that historical performance of loss payment patterns is a reasonable source for projecting future claims
payments, there is inherent uncertainty in this estimated projected settlement of loss and LAE reserves, and as a result these estimates will differ, perhaps significantly, from actual future
payments. Our operations typically generate substantial positive cash flows from operations as most premiums are received in advance of the time when claim and benefit payments are required. These
positive operating cash flows are expected to continue to meet our liquidity requirements, including any unexpected variations in the timing of claim settlements.

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, 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.

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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.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

-100 Basis
Point Change

No Change

+100 Basis
Point ChangeAs of December 31, 2009Estimated fair value

$
1,054,564

$
1,018,329

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

$
36,235

$


$
(40,307
)As of December 31, 2008Estimated fair value

$
955,481

$
920,171

$
880,704Estimated increase (decrease) in fair value

$
35,310

$


$
(39,467
)


With
respect to floating rate debt, we are exposed to the effects of changes in prevailing interest rates. At December 31, 2009, 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. In the past, our
exposure to changes
in equity prices primarily resulted from our holdings of common stocks, mutual funds and other equities. While we have in the past held common equity securities in our investment portfolio, presently
we hold none, except for interests in mutual funds to fund the executive deferred compensation plan. We continuously evaluate market conditions and we expect in the future to purchase equity
securities. We principally managed equity price risk through industry and issuer diversification and asset allocation techniques.

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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, 2009 and December 31, 2008, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2009 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, 2009, 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 12, 2010

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

December 31,2009

2008AssetsInvestment securities available for sale:Fixed maturities, at fair value (amortized cost: $989,444 and $929,836)

$
1,018,329

$
920,171Equity securities, at fair value (cost: $9,736 and $8,419)


9,876


8,040Short term securities, at amortized cost which approximates fair value





82,928Total investment securities


1,028,205


1,011,139Cash and cash equivalents


74,470


60,451Accounts receivable, net of allowance for doubtful accounts


137,238


138,792Accrued investment income


10,044


9,957Taxes recoverable





5,300Receivable from reinsurers related to paid loss and loss adjustment expenses


6,851


10,835Receivable from reinsurers related to unpaid loss and loss adjustment expenses


64,874


76,489Ceded unearned premiums


13,698


21,620Deferred policy acquisition costs


47,900


46,687Deferred income taxes


8,335


18,986Equity and deposits in pools


23,840


23,578Other assets


12,382


13,983Total assets

$
1,427,837

$
1,437,817LiabilitiesLoss and loss adjustment expense reserves

$
439,706

$
467,559Unearned premium reserves


282,434


289,695Accounts payable and accrued liabilities


59,869


51,111Taxes payable


3,916


Payable to reinsurers


4,674


8,291Other liabilites


16,803


17,790Total liabilities


807,402


834,446Commitments and contingencies (Note 6)Shareholders' equityCommon stock: $0.01 par value; 30,000,000 shares authorized; 16,624,220 and 16,464,530 shares issued


166


165Additional paid-in capital


144,814


140,261Accumulated other comprehensive income (loss), net of taxes


18,866


(6,528
)Retained earnings


506,301


476,989Treasury stock, at cost: 1,564,548 and 232,013 shares


(49,712
)

(7,516
)Total shareholders' equity


620,435


603,371Total liabilities and shareholders' equity

$
1,427,837

$
1,437,817


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 31,2009

2008

2007Net earned premiums

$
531,969

$
576,556

$
609,208Net investment income


43,308


45,771


44,255Net realized (losses) gains on investments


(167
)

678


(6
)Finance and other service income


16,844


17,995


16,623Total revenue


591,954


641,000


670,080Losses and loss adjustment expenses


346,301


369,823


374,493Underwriting, operating and related expenses


171,124


172,987


170,657Interest expenses


135


81


83Total expenses


517,560


542,891


545,233Income before income taxes


74,394


98,109


124,847Income tax expense


20,242


27,851


37,434Net income

$
54,152

$
70,258

$
87,413Earnings per weighted average common share:Basic

$
3.49

$
4.32

$
5.40Diluted

$
3.48

$
4.31

$
5.38Cash dividends paid per common share

$
1.60

$
1.60

$
1.30Number of shares used in computing earnings per share:Basic


15,533,331


16,265,185


16,189,131Diluted


15,552,063


16,308,394


16,251,067


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, 2006

$
161

$
129,785

$
21

$
366,381

$


$
496,348Net income











87,413





87,413Other comprehensive income, net of deferred federal income taxes








4,432








4,432Exercise of options and unearned compensation on restricted stock, net of deferred federal income taxes


1


4,439











4,440Dividends paid











(21,048
)




(21,048
)Acquisition of treasury stock














(1,585
)

(1,585
)Balance 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 and unearned compensation on restricted stock, net of deferred federal income taxes


3


6,037











6,040Dividends 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 and unearned compensation on restricted stock, net of deferred federal income taxes


1


4,553











4,554Dividends 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
)
$
620,435


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 31,2009

2008

2007Net income

$
54,152

$
70,258

$
87,413Other comprehensive income (loss), net of taxes:Unrealized holding gains (losses), during the period, net of tax expense (benefit) of $13,615, $(5,676) and $2,384


25,285


(10,540
)

4,428Reclassification adjustment for losses (gains) included in net income, net of tax benefit (expense) of $59, $(237), and $2


109


(441
)

4Unrealized gains (losses) on securities available for sale


25,394


(10,981
)

4,432Comprehensive income

$
79,546

$
59,277

$
91,845


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 31,2009

2008

2007Cash flows from operating activities:Net income

$
54,152

$
70,258

$
87,413Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization, net


12,049


11,254


10,037(Benefit) provision for deferred income taxes


(3,024
)

315


1,094Net realized losses (gains) on investments


167


(678
)

6Changes in assets and liabilities:Accounts receivable


1,554


17,551


1,847Accrued investment income


(87
)

1,015


(1,196
)Receivable from reinsurers


15,599


10,013


(5,591
)Ceded unearned premiums


7,922


7,198


4,224Deferred policy acquisition costs


(1,213
)

1,965


(1,248
)Other assets


4,277


(3,410
)

2,548Loss and loss adjustment expense reserves


(27,853
)

(10,161
)

28,276Unearned premium reserves


(7,261
)

(30,850
)

(12,859
)Accounts payable and accrued liabilities


8,758


1,088


1,357Payable to reinsurers


(3,617
)

(2,371
)

(906
)Other liabilities


2,646


(372
)

1,826Net cash provided by operating activities


64,069


72,815


116,828Cash flows from investing activities:Fixed maturities purchased


(200,796
)

(108,209
)

(284,398
)Equity securities purchased


(5,315
)

(6,073
)

(4,306
)Short term securities purchased





(82,892
)

Proceeds from sales, paydowns and calls of fixed maturities


125,748


143,374


193,289Proceeds from maturities of fixed maturities


10,522


26,656


24,000Proceeds from sales of equity securities


3,680


3,991


4,635Proceeds from maturities of short-term securities


82,996





Fixed assets purchased


(335
)

(5,727
)

(8,034
)Net cash provided by (used for) investing activities


16,500


(28,880
)

(74,814
)Cash flows from financing activities:Proceeds and excess tax benefits from exercise of stock options


486


2,151


647Dividends paid to shareholders


(24,840
)

(26,015
)

(21,048
)Acquisition of treasury stock


(42,196
)

(5,931
)

(1,585
)Net cash used for financing activities


(66,550
)

(29,795
)

(21,986
)Net increase in cash and cash equivalents


14,019


14,140


20,028Cash and cash equivalents at beginning of year


60,451


46,311


26,283Cash and cash equivalents at end of period

$
74,470

$
60,451

$
46,311Supplemental disclosure of cash flow information:Cash paid during the year for:Federal and state income taxes

$
14,109

$
32,420

$
34,250Interest

$
75

$
139

$
83


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 69.2% of its direct written premiums in 2009. 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").

On
June 20, 2007, the Company 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 Company's insurance company subsidiaries. The Company began writing private passenger automobile and homeowners insurance business in New Hampshire on October 15, 2008.

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. 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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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, 2009 and 2008, these allowances were $210 and $110, 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 taken into account in measuring the recoverability of the carrying
value of this asset. Amortization of acquisition costs in the amount of $96,503, $100,899 and $101,785 was charged to underwriting expenses for the years ended December 31, 2009, 2008 and 2007,
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.

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


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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)

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 $15,302 and $14,033 at December 31, 2009 and 2008, 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.

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 ASC 740,Income Taxes,(prior authoritative literature Financial Accounting Standard FAS 109,
"Accounting for Income Taxes.") A valuation allowance is established where management has assessed that it is more likely than not that the Company will not be able to utilize the full deferred tax
asset.

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Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Earnings per Weighted Average Common Share

Basic earnings per weighted average common share 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, 2009, 2008 and 2007, the Company's potentially dilutive
instruments were common shares under options of 215,337, 238,666 and 334,588, respectively.

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

Years Ended December 31,2009

2008

2007Net income as reported

$
54,152

$
70,258

$
87,413Less dividends:Distributed to common shareholders


24,422


25,677


20,818Distributed to participating security holders


419


338


230Total undistributed earnings

$
29,311

$
44,243

$
66,365Undistributed earnings to common shareholders

$
28,804

$
43,649

$
65,680Undistributed earnings to participating security holders

$
507

$
594

$
685Net income available to common shareholders for basic and diluted earnings per share

$
54,152

$
70,258

$
87,413Weighted average number of common shares outstanding


15,264,244


16,046,937


16,022,074Common equivalent sharesrestricted stock


269,087


218,248


167,057Weighted average common and common equivalent shares outstanding used to calculate basic earnings per share


15,533,331


16,265,185


16,189,131Common equivalent sharesstock options


18,732


43,209


61,936Weighted average common and common equivalent shares outstanding used to calculate diluted earnings per share


15,552,063


16,308,394


16,251,067Basic earnings per share

$
3.49

$
4.32

$
5.40Diluted earnings per share

$
3.48

$
4.31

$
5.38


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 167,925, 168,925 and 174,925, anti-dilutive stock options for the year ended December 31, 2009, 2008 and 2007.

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, (prior authoritative literature Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed by FAS 123,
"Accounting for Stock-Based

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Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Compensation" and as amended by FAS 148, "Accounting for Stock-Based CompensationTransition and
Disclosure.") 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, (prior
authoritative literature FAS 123.)

Effective
January 1, 2006, the Company adopted ASC 718,Share Based Compensation(prior authoritative literature
FAS 123R (revised 2004), "Share-Based Payment,") which 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, (prior authoritative literature FAS 123R), 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).

As
permitted by ASC 718, (prior authoritative literature FAS 123R), 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, (prior authoritative literature FAS 123R). 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

In June 2009, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Codification ("ASC") 105, Generally Accepted Accounting
Principles(prior authoritative literatureStatement of Financial Accounting Standard ("FAS") No.168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles).ASC 105 is now the single source of
authoritative nongovernmental GAAP. ASC 105 reorganizes the thousands of

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Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

GAAP
pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant Securities and Exchange Commission guidance organized using the same
topical structure in separate sections. ASC 105 was effective for financial statements issued for reporting periods that end after September 15, 2009. As of September 30, 2009,
all of the Company's disclosures in its consolidated financial statements are now referenced in accordance with ASC 105. The implementation of ASC 105 did not have an impact on the
Company's consolidated results of operations or financial position as it does not change authoritative guidance.

ASC 820,Fair Value Measurements and Disclosures(prior authoritative literatureFAS No.157, Fair Value Measurements) defines fair value, sets out a framework
for measuring fair value and requires additional disclosures about fair value
measurements. This standard applies to fair value measurements already required or permitted by existing standards and was effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Company adopted ASC 820 on January 1, 2008. The adoption of ASC 820 did not have an impact on the Company's consolidated results of operations or
financial position. See Note 3, "Investments," for further information regarding the Company's investments and fair value measurements.

ASC 825,Financial Instruments(prior authoritative literatureFAS No. 159,The Fair
Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115)permits an entity to choose to measure many
financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be
reported in earnings. ASC 825 was effective for fiscal years beginning after November 15, 2007. The Company has chosen not to elect the fair value option permitted by this statement.

ASC 260,Other Presentation MattersParticipating Securities and the Two Class Method(prior authoritative
literatureEmerging Issues Task Force 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities)addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting. ASC 260 requires that
such
instruments that hold unforfeitable rights to dividends or dividend equivalents, regardless of whether paid or unpaid, should be considered participating securities and accordingly, should be included
in the calculation of earnings per share ("EPS") under the two-class method instead of the treasury stock method. Under the Company's employee incentive compensation plan, restricted stock
grantees have unforfeitable rights to dividends before the vesting period and are therefore, participating securities and treated as a separate class of securities in calculating earning per share.
The Company adopted ASC 260 effective January 1, 2009, and has since used the two-class method to calculate earnings per share. In accordance with the adoption provisions of
ASC 260, all prior period earnings per share data has been adjusted retroactively to conform to the provisions of ASC 260. For the years ended December 31, 2008 and 2007 basic EPS
was reduced by $0.06 cents per share and diluted EPS was reduced by $0.05 cents per share from previously disclosed amounts.

ASC 320,InvestmentsDebt and Equity Securities(prior authoritative literatureFASB Staff Position ("FSP")
FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments)
requires entities to separate an other-than-temporary impairment of a debt security into two components when there are credit related losses associated with the impaired debt
security for which management 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. The amount of the other-than-temporary impairment related to a credit loss is recognized in earnings, and the amount of

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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
other-than-temporary impairment related to other factors is recorded in other comprehensive loss. The Company adopted ASC 320 effective April 1, 2009. The adoption
of ASC 320 did not have an impact on the Company's consolidated results of operations or financial position. For further information, see Note 3, "Investments."

ASC 825, Financial Instruments(prior authoritative literature FSP FAS 107-1 and Accounting Principles
Board 28-1,Interim Disclosures about Fair Value of Financial Instruments) requires disclosures about fair value of financial
instruments in interim and annual financial statements and is effective for periods ending after June 15, 2009. The Company adopted ASC 825 effective for its interim reporting period
ending June 30, 2009, and its adoption did not have an impact on the Company's consolidated financial condition or results of operations. For further information, see Note 3,
"Investments."

ASC 820,Fair Value Measurements and Disclosures(prior authoritative literature FSP FAS 157-4, Determining Fair Value When Volume and Level of Activity for the Asset or Liability
Have Significantly Decreased and Identifying Transactions that are Not
Orderly) expands certain disclosure requirements and is effective for periods ending after June 15, 2009. The Company adopted ASC 820 effective for its interim
period ending June 30, 2009, and its adoption did not have an impact on the Company's consolidated financial condition or results of operations.

ASC 855,Subsequent Events(prior authoritative literature FAS No. 165,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 shall be applied prospectively.

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 820,Segment Reporting(prior authoritative standard FAS 131, "Disclosures About Segments of an Enterprise and
Related Information,") the financial information of the segment is presented consistent with the way results are regularly evaluated by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.

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

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, 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 and obligations of U.S. Government agencies(1)

$
315,992

$
12,341

$
(955
)
$


$
327,378Obligations of states and political subdivisions


468,319


16,218


(1,116
)




483,421Asset-backed securities(1)


82,694


606


(2,469
)




80,831Corporate 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








9,876Totals

$
999,180

$
34,042

$
(5,017
)
$


$
1,028,205




As of December 31, 2008Gross Unrealized Losses(3)Cost or
Amortized
Cost

Gross
Unrealized
Gains

Non-OTTI
Unrealized
Losses

OTTI
Unrealized
Losses(4)

Estimated
Fair
ValueU.S. Treasury securities and obligations of U.S. Government agencies(1)

$
288,598

$
8,532

$
(244
)
$


$
296,886Obligations of states and political subdivisions


498,339


9,414


(6,132
)




501,621Asset-backed securities(1)


77,656





(17,122
)




60,534Corporate and other securities


65,243


420


(4,533
)




61,130Subtotal, fixed maturity securities


929,836


18,366


(28,031
)




920,171Equity securities(2)


8,419





(379
)




8,040Short term securities


82,928











82,928Totals

$
1,021,183

$
18,366

$
(28,410
)
$


$
1,011,139


(1)Obligations
of U.S. Government agencies include collateralized mortgage obligations issued, guaranteed and/or insured by the following issuers: Government
National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) and Small Business Administration (SBA). The total of these fixed
maturity securities was $294,648 and $286,100 at amortized cost and $306,077 and $294,064 at fair value as of December 31, 2009 and December 31, 2008, respectively. As such, the
asset-backed securities presented exclude such issuers already presented under U.S. Treasury securities and obligations of U.S. Government Agencies.(2)Equity
securities consist solely of interests in mutual funds held to fund the Company's executive deferred compensation plan.(3)The
Company's investment portfolio included 89 and 161 securities in an unrealized loss position as of December 31, 2009 and December 31,
2008, respectively.(4)Amounts
in this column represent OTTI recognized in accumulated other comprehensive income.


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Notes to Consolidated Financial Statements

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




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, 2009Amortized
Cost

Estimated
Fair ValueDue in one year or less

$
69,739

$
70,872Due after one year through five years


223,076


232,777Due after five years through ten years


178,479


184,753Due after ten years through twenty years


131,120


133,172Due after twenty years


9,687


9,847Asset-backed securities


377,343


386,908Totals

$
989,444

$
1,018,329


The
gross realized (losses) gains on sales of fixed maturity, short-term, and equity securities were as follows for the periods indicated:

Years Ended December 31,2009

2008

2007Gross realized gainsFixed maturity securities

$
453

$
2,251

$
962Equity securities








175Short term securities


1





Gross realized lossesFixed maturity securities


(303
)

(1,116
)

(1,142
)Equity securities


(318
)

(457
)

(1
)Net realized (losses) gains on fixed maturity and equity securities

$
(167
)
$
678

$
(6
)


Proceeds
from fixed maturities maturing were $10,522, $26,656 and $24,000 for the year ended December 31, 2009, 2008 and 2007, 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, 2009 and December 31, 2008 illustrate the gross unrealized losses included in the Company's investment portfolio and the fair value
of those securities

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Notes to Consolidated Financial Statements

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

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, 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 and obligations of U.S. Government agencies

$
43,585

$
932

$
566

$
23

$
44,151

$
955Obligations of states and political subdivisions


47,585


257


13,483


859


61,068


1,116Asset-backed securities


4,940


67


45,165


2,402


50,105


2,469Corporate and other securities


26,217


315


5,143


162


31,360


477Subtotal, fixed maturity securities


122,327


1,571


64,357


3,446


186,684


5,017Equity securities

















Total temporarily impaired securities

$
122,327

$
1,571

$
64,357

$
3,446

$
186,684

$
5,017




As of December 31, 2008Less 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 and obligations of U.S. Government agencies

$
4,300

$
9

$
9,770

$
235

$
14,070

$
244Obligations of states and political subdivisions


116,605


4,524


32,220


1,608


148,825


6,132Asset-backed securities


24,036


7,876


36,498


9,246


60,534


17,122Corporate and other securities


21,503


931


16,307


3,602


37,810


4,533Subtotal, fixed maturity securities


166,444


13,340


94,795


14,691


261,239


28,031Equity securities


2,458


353


33


26


2,491


379Total temporarily impaired securities

$
168,902

$
13,693

$
94,828

$
14,717

$
263,730

$
28,410


As
of December 31, 2009, the Company held insured investment securities of approximately $306,599 which represented approximately 29.8% of the Company's 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.

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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 table shows the Company's insured investment securities that are backed by financial guarantors including pre-refunded securities as of
December 31, 2009. The Company does 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 secuirities


7,626





7,626Total

$
306,599

$
36,823

$
269,776


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,
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





6,232$
282,159

$
282,159


Other-Than-Temporary Impairments

ASC 320,InvestmentsDebt and Equity Securities(prior authoritative
literatureFSP FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary
Impairments) requires entities to

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Notes to Consolidated Financial Statements

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

separate
an other-than-temporary impairment ("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 securities 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

As
of December 31, 2009, with the exception of two securities which represented 0.1% of the Company's total investment in fixed income securities, the Company's fixed income
securities portfolio was comprised entirely of investment grade corporate fixed maturity securities, U.S. Government and Agency securities, states and political subdivision securities, and
asset-backed securities (i.e., all securities received a rating assigned by Moody's Investors Service, Inc. of Baa 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.

The
unrealized losses in the Company's fixed income portfolio as of December 31, 2009 were reviewed for potential other than temporary asset impairments. The Company 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.

The
qualitative analysis performed by the Company concluded that the unrealized losses recorded on the fixed maturity 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. Therefore, decreases in fair
values of the Company's securities 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
other-than-temporary impairment

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Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

charge
of $1,032 for this security. We sold this security during the third quarter of 2009 and recognized an additional loss of $14.

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 Securities(prior authoritative literatureFAS 115-2 and
FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments) requires 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 December 31, 2009 and December 31, 2008, 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 31,2009

2008

2007Interest and dividends on fixed maturities

$
44,160

$
45,207

$
43,025Dividends on equity securities


161


270


311Interest on short term securities


78


35


Interest on cash, and cash equivalents


232


1,588


2,236Total investment income


44,631


47,100


45,572Investment expenses


1,323


1,329


1,317Net investment income

$
43,308

$
45,771

$
44,255


Fair Value Measurements

ASC 820,Fair Value Measurements and Disclosure(prior authoritative
literatureFAS157,Fair Value Measurements) provides a revised definition of fair value, establishes a framework for measuring fair value
and expands financial statement disclosure requirements for fair value information. Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants (an exit price). ASC 820 establishes a fair value hierarchy that distinguishes between inputs based on market data from
independent sources ("observable inputs") and a reporting entity's internal assumptions based upon the best information available when external market data is limited or unavailable ("unobservable
inputs"). The fair value hierarchy in ASC 820 prioritizes fair value measurements into three levels based on the nature of the inputs as follows:



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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
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).

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 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. On January 1 and December 31, 2009, the Company's 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), 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 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

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Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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 the Company's 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.

The
following tables summarize our total fair value measurements and the fair value measurements based on Level 3 inputs for investments for the periods indicated.

As of December 31, 2009Total

Level 1 Inputs

Level 2 Inputs

Level 3 InputsU.S. Treasury securities and obligations of U.S. Government agencies

$
327,378

$


$
327,378

$
Obligations of states and political subdivisions


483,421





483,421


Asset-backed securities


80,831





78,327


2,504Corporate and other securities


126,699





126,699


Equity securities


9,876


9,876





Total investment securities

$
1,028,205

$
9,876

$
1,015,825

$
2,504




As of December 31, 2008Total

Level 1 Inputs

Level 2 Inputs

Level 3 InputsU.S. Treasury securities and obligations of U.S. Government agencies

$
296,886

$


$
296,886

$
Obligations of states and political subdivisions


501,621





501,621


Asset-backed securities


60,534





58,692


1,842Corporate and other securities


61,130





61,130


Equity securities


8,040


8,040





Short term securities


82,928





82,928


Total investment securities

$
1,011,139

$
8,040

$
1,001,257

$
1,842


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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 table summarizes the changes in the Company's Level 3 fair value measurements for the periods indicated.

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

$





Asset-Backed
SecuritiesBalance at January 1, 2008

$
3,758Net gains and losses included in earnings


Net losses included in other comprehensive income


(1,916
)Purchases and sales


Transfers in (out) of Level 3


Balance at December 31, 2008

$
1,842Amount of total losses included in earnings attributable to the change in unrealized losses related to assets still held at December 31,
2008

$



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 tables above, no transfers were made in or out of Level 3 inputs during the years ended December 31, 2009 and 2008.

4.     Equipment and Leasehold Improvements

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

As of December 31,2009

2008Software

$
8,244

$
8,244Data processing equipment


3,795


3,559Leasehold improvements


2,501


2,501Other equipment


1,729


1,645Furniture and fixtures


924


908Automobiles


53


53Total cost


17,246


16,910Less accumulated depreciation and amortization


8,248


5,550Equipment and leasehold improvements, net

$
8,998

$
11,360


Depreciation
and amortization expense for the years ended December 31, 2009, 2008 and 2007 was $2,698, $2,443 and $1,153 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)

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 $2,113, $2,031 and $1,900 for the years ended December 31, 2009, 2008 and 2007, 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 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, 2009, there were 920,434 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.

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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 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/A


(1)The
exercise price of the options grant effective on November 27, 2002, is equal to the IPO price of our 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.


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, 2009, 2008 and 2007 is the estimated fair value at grant date using the Black-Scholes option-pricing model with the following assumptions:

Years Ended December 31,2009

2008

2007Expected dividend yield

1.36% - 2.16%

1.36% - 2.52%

1.36% - 2.52%Expected volatility

0.28 - 0.36

0.20 - 0.36

0.20 - 0.36Risk-free interest rate

3.23% - 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


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Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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, 2009, 2008 and 2007.

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

2009

2008

2007Shares
Under
Option

Weighted
Average
Exercise Price

Shares
Under
Option

Weighted
Average
Exercise Price

Shares
Under
Option

Weighted
Average
Exercise PriceOutstanding at beginning of year


238,666

$
33.66


334,588

$
28.25


373,996

$
27.53Exercised during the year


(22,329
)

16.45


(95,722
)

14.79


(28,508
)

14.95Forfeited during the year


(1,000
)

42.85


(200
)

18.50


(10,900
)

38.38Outstanding at end of year


215,337


35.40


238,666


33.66


334,588


28.25Exercisable at end of year


154,847

$
33.11


120,631

$
30.33


142,008

$
20.97


At
December 31, 2009, the aggregate intrinsic value of outstanding shares under option 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. At
December 31, 2007 the aggregate intrinsic value of outstanding shares under option and exercisable was $3,552 with a weighted average remaining contractual term of 6.7 years. Aggregate
intrinsic value represents the total pretax intrinsic value, based upon the Company's closing year end stock price of $36.23, $38.06 and $36.62 for December 31, 2009, 2008 and 2007,
respectively. Those amounts 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 $12.00 to $42.85 at December 31, 2009, 2008, and 2007. The total intrinsic value of options exercised during the years ended December 31, 2009, 2008 and 2007
was $442, $2,227 and $618, respectively.

A
summary of the status of non-vested options as of December 31, 2009 is presented below:

Number of
Shares

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


118,035

$
37.06Vested during the year


(56,545
)

32.47Forfeited during the year


(1,000
)

42.85Non-vested at end of year


60,490

$
41.26


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Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

As
of December 31, 2009, there was $435 of unrecognized compensation expense related to non-vested option awards that is expected to be recognized over a weighted
average period of 1.0 years.

Cash
received from options exercised was $367, $1,416 and $426 for the years ended December 31, 2009, 2008, and 2007, respectively.

As
a result of adopting ASC 718,Compensation-Stock Compensation(prior authoritative literature FAS 123R) on
January 1, 2006, 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 Company's net income for the twelve
months ended December 31, 2008 was lowered by $375, net of income tax benefit of $202. The impact on basic and diluted EPS for the twelve months ended December 31, 2009 was a reduction
of $0.02 and $0.02 per share, respectively. The impact on basic and diluted EPS for the twelve months ended December 31, 2008 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.

2009

2008

2007Shares
Under
Restriction

Weighted
Average
Fair Value

Shares
Under
Restriction

Weighted
Average
Fair Value

Shares
Under
Restriction

Weighted
Average
Fair ValueOutstanding at beginning of year


246,325

$
38.77


186,751

$
41.85


126,790

$
35.67Granted during the year


137,999


29.92


126,595


35.28


119,731


42.77Vested and unrestricted during the year


(84,852
)

40.20


(67,021
)

40.79


(57,740
)

30.27Forfeited during the year


(638
)

36.57








(2,030
)

38.78Outstanding at end of year


298,834

$
34.28


246,325

$
38.77


186,751

$
41.85


As
of December 31, 2009, there was $6,407 of unrecognized compensation expense related to non-vested restricted stock awards that is expected to be recognized over a
weighted average period of 1.7 years. The total fair value of the shares that were vested and unrestricted during the twelve months ended December 31, 2009, 2008 and 2007 was $3,412,
$2,733 and $1,748, respectively. For the years ended December 31, 2009, 2008 and 2007, the Company recorded compensation expense related to restricted stock of $2,493, $2,230 and $1,801 net of
income tax benefits of $1,342, $1,201 and $970, 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, 2009 are as follows:

2010

$
4,0822011


4,0692012


4,3372013


4,3072014 and after


22,166Total minimum lease payments

$
38,961


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 $4,113, $3,962 and $3,482 for the years ended December 31, 2009, 2008 and 2007, 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.

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 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)

The
focus of the AG's investigation was on the insured values determined by us for purposes of charging premiums for physical damage insurance coverage. In 2008, coverage for motorcycles
represented 1.9% of the Company's total private passenger automobile insurance. The Company has been cooperating with the AG and responding to the CID and various related additional requests for
information by the AG since that time.

In
connection with the matters addressed by the CID, the AG delivered a letter to Safety Insurance Company dated February 2, 2009, in which the AG stated that it "has reason to
believe that Safety Insurance Company has violated the Massachusetts Consumer Protection Act, G.L. c. 93A, §2, by engaging in unfair and deceptive acts and practices
regarding motorcycle insurance. Specifically, the AG stated it "has reason to believe that the Company overcharged its customers for motorcycle insurance and engaged in related unfair claims
settlement practices." By issuing this letter the AG met a statutory prerequisite to filing a civil complaint under the Massachusetts Consumer Protection Act against the Company.

On
January 14, 2010, the Company announced it had reached an agreement with the Massachusetts Attorney General's office to change the way in which it calculated motorcycle
insurance premiums for certain types of coverage dating back to January 1, 2002. Under the terms of the settlement, it is anticipated that Safety will be returning approximately $7,200 to
policyholders.

The
Company is working with the Attorney General's office to identify the policies on which refunds will be issued and the amount of the refunds to each individual policyholder. The
Company will notify policyholders of the amounts of any refunds offered and, upon receipt of the appropriate releases from the policyholders, intends to issue the refund checks in August 2010.

7.     Debt

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 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 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
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 our prior year's net income, as determined in accordance with GAAP. As of
December 31, 2009, the Company was in compliance with all such 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, 2009 and 2008. 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, 2009, 2008 and 2007.

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, 2009 and 2008, respectively, reinsurance receivables on paid and
unpaid loss and LAE with a carrying value of $54,812 and $70,717 and ceded unearned premiums of $10,212 and $18,378 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 $6,299 for 2009 and assumed net losses of $4,251 and $4,962 for the years ended
December 31, 2008 and 2007, respectively.

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

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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 reinsurance on net written and earned premiums and losses and LAE is as follows:

Years Ended December 31,2009

2008

2007Written PremiumsDirect

$
559,747

$
573,509

$
619,848Assumed


14,564


37,439


53,256Ceded


(41,682
)

(58,044
)

(72,532
)Net written premiums

$
532,629

$
552,904

$
600,572Earned PremiumsDirect

$
555,020

$
595,673

$
628,124Assumed


26,552


46,125


57,839Ceded


(49,603
)

(65,242
)

(76,755
)Net earned premiums

$
531,969

$
576,556

$
609,208Loss and LAEDirect

$
357,269

$
372,951

$
391,639Assumed


13,241


38,548


46,119Ceded


(24,209
)

(41,676
)

(63,265
)Net loss and LAE

$
346,301

$
369,823

$
374,493


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 31,2009

2008

2007Reserves for losses and LAE, beginning of year

$
467,559

$
477,720

$
449,444Less reinsurance recoverable on unpaid losses and LAE


(76,489
)

(84,290
)

(78,464
)Net reserves for losses and LAE, beginning of year


391,070


393,430


370,980Incurred losses and LAE, related to:Current year


390,366


405,761


405,284Prior years


(44,065
)

(35,938
)

(30,791
)Total incurred losses and LAE


346,301


369,823


374,493Paid losses and LAE related to:Current year


235,681


229,924


229,237Prior years


126,858


142,259


122,806Total paid losses and LAE


362,539


372,183


352,043Net reserves for losses and LAE, end of year


374,832


391,070


393,430Plus reinsurance recoverables on unpaid losses and LAE


64,874


76,489


84,290Reserves for losses and LAE, end of year

$
439,706

$
467,559

$
477,720


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

At the end of each period, the reserves were re-estimated for all prior accident years. The Company's prior year reserves decreased by $44,065,
$35,938, and $30,791 for the years ended December 31, 2009, 2008, and 2007, respectively. 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 decrease in prior year reserves during 2007 resulted from
re-estimations of prior years ultimate loss and LAE liabilities and is primarily composed of reductions of $15,503 in the Company's retained automobile reserves, $11,335 in CAR assumed
reserves and $2,941 in the Company's retained homeowner's reserves.

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 Company's private passenger automobile line of business prior year reserves decreased by $26,960 for the year ended December 31, 2008. The decrease was primarily due to
improved retained private passenger results of $17,313 for accident years 2002 through 2007, and improved assumed CAR results for the private passenger automobile pool of $7,847 for accident years
2004 through 2007. The improved retained private passenger results were primarily due to fewer incurred but not yet reported claims than previously estimated and better than previously estimated
severity on the Company's established bodily injury and property damage case reserves. The 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 31,2009

2008

2007Current Income Taxes:Federal

$
23,243

$
27,534

$
36,314State


23


2


2623,266


27,536


36,340Deferred Income Taxes:Federal


(3,024
)

315


1,094State








(3,024
)

315


1,094Total income tax expense

$
20,242

$
27,851

$
37,434


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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
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 31,2009

2008

2007Federal income tax expense, at statutory rate

$
26,038

$
34,338

$
43,696Tax-exempt investment income, net


(6,023
)

(6,723
)

(6,486
)State taxes, net


20


2


17Other, net


207


234


207Total income tax expense

$
20,242

$
27,851

$
37,434


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 31,2009

2008Deferred tax assets:Discounting of loss reserves

$
8,890

$
9,266Discounting of unearned premium reserve


19,883


18,765Bad debt allowance


353


397Depreciation





29Net unrealized losses on investments





3,877Employee benefits


5,571


4,944State loss carryforwards


410


984AG motorcycle policies settlement


2,641


Rent incentive


1,164


Other


831


867Total deferred tax assets before valuation allowance


39,743


39,129Valuation allowance for deferred tax assets


(2,079
)

(1,619
)Total deferred tax assets, net of valuation allowance


37,664


37,510Deferred tax liabilities:Deferred acquisition costs


(16,765
)

(16,341
)Investments


(502
)

(456
)Net unrealized gains on investments


(10,159
)

Depreciation


(354
)

Software development costs


(1,549
)

(1,727
)Total deferred tax liabilities


(29,329
)

(18,524
)Net deferred tax asset

$
8,335

$
18,986


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 $2,079 and $1,619 was established against state deferred tax assets at December 31, 2009
and 2008, respectively. This

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Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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 Taxes, (prior authoritative literature FIN 48) on 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 sustained upon examination by the IRS. Therefore, the Company has not recorded a liability under ASC 740.

As
of December 31, 2009, 2008, and 2007, 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, 2009 and 2008.

As
of December 31, 2009, the Company was no longer subject to examination of its U.S. federal tax returns for years prior to 2006. 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 of Directors approved a share repurchase program of up to $30,000 of the Company's outstanding common shares. On
March 24, 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. 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, 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. At December 31, 2008, the Company had purchased 232,013 of its common shares on the open market under the program at
a cost of $7,516.

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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)

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 $51,640, $75,144 and $89,683 for the years
ended December 31, 2009, 2008 and 2007, respectively. Statutory capital and surplus of the Company's insurance subsidiaries was $556,575 and $560,462 at December 31, 2009 and 2008,
respectively.

Dividends

The Insurance Subsidiaries are subject to various regulatory restrictions that limit the maximum amount of dividends available to be
paid to their parent without prior approval of the Commonwealth of Massachusetts Commissioner of Insurance (the "Commissioner"). Massachusetts statute limits the dividends an insurer may pay in any
twelve month period, without the prior permission of the Commissioner, to the greater of (i) 10% of the insurer's surplus as of the preceding December 31 or (ii) the insurer's net
income for the twelve-month period ending the preceding December 31, in each case determined in accordance with statutory accounting practices. Our insurance company subsidiaries may not
declare an "extraordinary dividend" (defined as any dividend or distribution that, together with other distributions made within the preceding twelve months, exceeds the limits established by
Massachusetts statute) until thirty days after the Commissioner has received notice of the intended dividend and has not objected. As historically administered by the Commissioner, this provision
requires the Commissioner's prior approval of an extraordinary dividend. Under Massachusetts law, an insurer may pay cash dividends only from its unassigned funds, also known as earned surplus, and
the insurer's remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. At year-end 2009, the statutory surplus of Safety
Insurance was $556,575 and its net income for 2009 was $46,956. As a result, a maximum of $55,657 is available in 2010 for such dividends without prior approval of the Commissioner. During the year
ended December 31, 2009, Safety Insurance recorded dividends to Safety of $64,412.

13.   Fair Value of Financial Instruments

ASC 820,Fair Value Measurements and Disclosure(prior authoritative literatureFAS157, Fair Value
Measurements) provides a revised definition of fair value, establishes a framework for measuring fair value and expands financial statement
disclosure requirements for fair value information. Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants (an exit price). ASC 820 establishes a fair value hierarchy that distinguishes between inputs based on market data from
independent sources ("observable inputs") and a reporting entity's internal assumptions based upon the best information available when external market data is limited or unavailable ("unobservable
inputs"). The fair value hierarchy in ASC 820 prioritizes fair value measurements into three levels based on the nature of the inputs as follows:



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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
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).

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 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. On January 1 and December 31, 2009, the Company's 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), 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

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Safety Insurance Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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 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 the Company's 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.

At
December 31, 2009 and 2008, investments in fixed maturities and equity securities had a fair value, which equaled carrying value, of $1,028,205 and $928,211, respectively. At
December 31, 2009 and 2008, short term investments of $0 and $82,928, respectively, are reported at amortized cost which
approximates fair value. The carrying values of cash and cash equivalents and investment income accrued approximate fair value.

At
December 31, 2009 and 2008 the Company had no amounts outstanding on its secured credit facility.

14.   Quarterly Results of Operations

An unaudited summary of the Company's 2009 and 2008 quarterly performance, and audited annual performance, is as follows:

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




Year ended December 31, 2008First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Total
YearTotal revenue

$
166,805

$
164,796

$
156,498

$
152,901

$
641,000Net income


19,045


20,931


18,358


11,924


70,258Earnings per weighted average common share:Basic


1.18


1.29


1.13


0.73


4.32Diluted


1.17


1.28


1.12


0.73


4.31Cash 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, 2009.

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, 2009, 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 2010 on a Form 8-K.



112

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Table of Contents



PART III



ITEMS    10-14.

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

PART IV.

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

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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


115II

Condensed Financial Information of the Registrant


116III

Supplementary Insurance Information


118IV

Reinsurance


119V

Valuation and Qualifying Accounts


120VI

Supplemental Information Concerning Property and Casualty Insurance Operations


121


114

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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, 2009    
(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

$
315,992

$
327,378

$
327,378States, municipalities and political subdivisions


468,319


483,421


483,421Corporate bonds


205,133


207,530


207,530Total fixed maturities


989,444


1,018,329


1,018,329Equity securities:Common stocksIndustrial, miscellaneous and all other


9,736


9,876


9,876Total equity securities


9,736


9,876


9,876Total investments

$
999,180

$
1,028,205

$
1,028,205


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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 31,2009

2008AssetsInvestments in consolidated affiliates

$
621,386

$
604,607Other


46


65Total assets

$
621,432

$
604,672LiabilitiesAccounts payable and other liabilities

$
997

$
1,301Total liabilities


997


1,301Shareholders' equity

$
620,435

$
603,371Total liabilities and shareholders' equity

$
621,432

$
604,672


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 31,2009

2008

2007Revenues, net of income taxes

$


$


$
Expenses


1,335


1,496


1,789Net loss


(1,335
)

(1,496
)

(1,789
)Earnings from consolidated affiliates


55,487


71,754


89,202Consolidated net income


54,152


70,258


87,413Other net comprehensive income (loss), net of taxes


25,394


(10,982
)

4,432Consolidated comprehensive net income

$
79,546

$
59,276

$
91,845


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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 31,2009

2008

2007Consolidated net income

$
54,152

$
70,258

$
87,413Adjustments to reconcile net income to net cashprovided by operating activities:Undistributed earnings in consolidated subsidiaries


(55,487
)

(71,754
)

(89,202
)Amortization


3,877


3,888


3,870Changes in assets and liabilities:Other assets


19


5,037


(5,025
)Accounts payable and accrued liabilities


(304
)

366


(2,165
)Net cash provided by (used for) operating activities


2,257


7,795


(5,109
)Dividends received from consolidated subsidiaries


64,412


22,735


27,316Net cash provided by investing activities


64,412


22,735


27,316Proceeds from exercise of stock options


367


1,416


426Dividends paid


(24,840
)

(26,015
)

(21,048
)Acquisition of treasury stock


(42,196
)

(5,931
)

(1,585
)Net cash used for financing activities


(66,669
)

(30,530
)

(22,207
)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, 2009

$
47,900

$
439,706

$
282,434

$


$
531,969

$
43,308

$
346,301

$
96,503

$
74,609

$
532,629December 31, 2008


46,687


467,559


289,695





576,556


45,771


369,823


100,899


72,088


552,904December 31, 2007


48,652


477,720


320,545





609,208


44,255


374,493


101,785


68,872


600,572


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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, 2009

$
555,020

$
49,603

$
26,552

$
531,969


5.0
%December 31, 2008


595,673


65,242


46,125


576,556


8.0December 31, 2007


628,124


76,755


57,839


609,208


9.5


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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, 2009Allowance for Doubtful Accounts

$
110

$
1,274




$
1,174

$
210December 31, 2008Allowance for Doubtful Accounts


29


1,169





1,088


110December 31, 2007Allowance for Doubtful Accounts


153


1,383





1,507


29


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


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Table of Contents

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
ExpensesDeferred
Policy
Acquisition
Costs

Discount,
if any,
deducted in
Column CAffiliations With Registrant

Unearned
Premiums

Earned
Premiums

Net
Investment
Income

Current
Year

Prior
Year

Amortization of
Deferred Policy
Acquisition Costs

Paid Claims and
Claims Adjustment
Expenses

Premiums
WrittenConsolidated Property & Casualty Subsidiaries2009

$
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


552,9042007


48,652


477,720





320,545


609,208


44,255


405,284


(30,791
)

101,785


352,044


600,572


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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 15th day of March, 2010.

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 15, 2010/s/ WILLIAM J. BEGLEY, JR. William J. Begley, Jr.

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

March 15, 2010/s/ A. RICHARD CAPUTO, JR. A. Richard Caputo, Jr.

Director

March 15, 2010/s/ FREDERIC H. LINDEBERG Frederic H. Lindeberg

Director

March 15, 2010/s/ PETER J. MANNING Peter J. Manning

Director

March 15, 2010/s/ DAVID K. MCKOWN David K. McKown

Director

March 15, 2010


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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, 200(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

Employment Agreement by and between Safety Insurance Group, Inc. and Daniel F. Crimmins, dated November 8, 2004(3)(4)10.14

Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and Daniel D. Loranger, as of December 31, 2008(3)(4)(11)10.15

Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and Robert J. Kerton, as of December 31, 2008(3)(4)(13)10.16

Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and David E. Krupa, as of December 31, 2008(3)(4)(11)10.17

Safety Insurance Company Executive Incentive Compensation PlanBasic Document(4)(5)(12)10.18

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

Safety Insurance Company Executive Incentive Compensation PlanRabbi Trust Agreement(4)(5)(12)10.20

Form of Restricted Stock Notice and Agreement (with vesting) under the 2002 Management Omnibus Incentive Plan(4)(5)10.21

Form of Restricted Stock Notice and Agreement (without vesting) under the 2002 Management Omnibus Incentive Plan(4)(5)10.22

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

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

Form of Stock Appreciation Right Notice and Agreement under the 2002 Management Omnibus Incentive Plan(4)(5)10.25

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

Amended and Restated Employment Agreement by and between Safety Insurance Group, Inc. and George M. Murphy, as of December 31, 2008(4)(6)(13)10.27

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

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


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Table of Contents

Exhibit
Number

Description10.29

Casualty Excess of Loss Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Re America Corporation, effective January 1, 200(7)10.30

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)10.31

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)10.32

Umbrella Liability Quota Share Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Re America Corporation, effective January 1, 2006(7)10.33

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)10.34

Annual Performance Incentive Plan(4)(7)10.35

Excess Catastrophe Reinsurance Contract between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Inc., effective January 1, 2007(8)10.36

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)10.37

Property Excess of Loss Reinsurance Contract between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Inc., effective January 1, 2007(8)10.38

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)10.39

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)10.40

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)10.41

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)10.42

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
CasualtyInsurance Company as a named reinsured company, effective September 1, 2007(9)10.43

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)10.44

Amended and Restated Revolving Credit Agreement with RBS Citizens(10)10.45

Amendment to Annual Performance Incentive Plan(4)(11)10.46

Amendment to Management Omnibus Incentive Plan(4)(11)21

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

Consent of PricewaterhouseCoopers LLP(14)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(14)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(14)32.1

CEO Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(14)32.2

CFO Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(14)


(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


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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)Included
herein.


125

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