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

20 Custom House Street, Boston, Massachusetts 02110
(Address of principal executive offices including zip code)

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 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. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes ý No o

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, 2003, was approximately $161,809,618.

As of March 12, 2004, there are 15,259,991 Common Shares with a par value of $0.01 per share outstanding.

Portions of the registrant's definitive proxy statement for its Annual Meeting of Shareholders to be held on May 21, 2004, which Safety Insurance Group, Inc. (the "Company", "we", "our", "us") intends to file within 120 days after its December 31, 2003 year-end, are incorporated by reference into Part III hereof.

In this discussion, all dollar amounts are presented in thousands, except share and per share data.

We are a leading provider of private passenger automobile insurance in Massachusetts. In addition to private passenger automobile insurance (which represented 81.0% of our direct written premiums in 2003), we offer a portfolio of property and casualty insurance products, including commercial automobile, homeowners, dwelling fire, umbrella and business owner policies. Operating exclusively in Massachusetts through our insurance subsidiaries, Safety Insurance Company ("Safety Insurance") and Safety Indemnity Insurance Company (together referred to as the "Insurance Subsidiaries"), we have established strong relationships with 548 independent insurance agents in 758 locations throughout Massachusetts. We have used these relationships and our extensive knowledge of the Massachusetts market to become the second largest private passenger automobile carrier, capturing a 10.6% share of the Massachusetts private passenger automobile insurance market, and the fourth largest commercial automobile carrier, with a 7.9% share of the Massachusetts commercial automobile insurance market, in 2003 according to statistics compiled by Commonwealth Automobile Reinsurers ("CAR"). In addition, we were also ranked the 52^nd largest automobile writer in the country according to A.M. Best, based on 2002 direct written premiums. We were incorporated under the laws of Delaware in 2001, but through our predecessors, we have underwritten insurance in Massachusetts since 1979.

Our share of the Massachusetts private passenger automobile insurance market has grown from 8.8% in 1999 to 10.6% in 2003. As a result of this increased market share and the expansion of our product offerings, our direct written premiums have increased by 63.7% between 1999 and 2003, from $349,206 to $571,545. We have also maintained profitability in part by managing our cost structure through, for example, the use of technology.

The Internet address for the Company's website is www.SafetyInsurance.com. All press releases and SEC filings for the Company 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 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 or incorporated by reference into this report and the URL above is intended to be an inactive textual reference only.

We Have Strong Relationships with Independent Agents. In 2002, independent agents accounted for approximately 79.9% of the Massachusetts automobile insurance market measured by direct written premiums as compared to only about 40.4% nationwide, according to A.M. Best. For that reason, our strategy is centered around, and we sell exclusively through, a network of 548 independent agents (of which 118 are Exclusive Representative Producers ("ERPs")) in 758 locations throughout Massachusetts. 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 and increased our direct written premiums from the prior year. We have achieved profitable growth by, among other things:

We Are a Technological Leader. We have dedicated significant human and financial resources to the development of advanced information systems. Our technology efforts have benefited us in two distinct ways. First, we continue to develop technology that empowers our independent agent customers to make it easier for them to transact business with their clients and with Safety. In our largest business line, private passenger automobile insurance, our agents now submit approximately 98% of all applications for new policies or endorsements for existing policies to us electronically through our proprietary information portal, the Agents Virtual Community. Second, our investment in technology has allowed us to re-engineer internal back office processes to provide more efficient service at lower cost. Our adjusted statutory expense ratios have been below the average industry statutory expense ratio in each of the past five years. Our systems have also improved our overall productivity, as evidenced by our direct written premiums per employee increasing to $1,106 in 2003 from $741 in 1999.

We Have an Experienced, Committed and Knowledgeable Management Team. Our Management Team owns approximately 11% of the common stock of Safety on a fully diluted basis. Our Management Team, led by our Chief Executive Officer and President, David F. Brussard, has an average of over 28 years of industry experience per executive, as well as an average of over 22 years of experience with Safety. The team has demonstrated an ability to operate successfully within the regulated Massachusetts private passenger automobile insurance market.

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:

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

The Massachusetts Market for Private Passenger Automobile Insurance. Private passenger automobile insurance is heavily regulated in Massachusetts. In many respects, the private passenger automobile insurance market in Massachusetts is unique, in comparison to other states. This is due to a number of factors, including unusual regulatory conditions, the market dominance of domestic companies, the relative absence of large national companies, and the heavy reliance on independent insurance agents as the market's principal distribution channel. For many insurance companies, these factors present substantial challenges, but we believe they provide us a competitive advantage, because, as our financial history shows, we have a thorough understanding of this market.

The principal factors that generally distinguish the Massachusetts private passenger automobile insurance market from that market in other states are as follows:

Historically, we have focused on underwriting private passenger automobile insurance. Since 1997, we have expanded the breadth of our product line in order for agents to address a greater portion of their clients' insurance needs through selling multiple Safety products. The table below shows our premiums in each of these product lines for the periods indicated and the portions of our total premiums each product line represented.

Private Passenger Automobile (81.0% of 2003 direct written premiums). Private passenger automobile insurance is our primary product, and we support all Massachusetts policy forms and limits of coverage. Private passenger automobile policies provide coverage for bodily injury and property

damage to others, no-fault personal injury coverage for the insured/insured's car occupants, and physical damage coverage for an insured's own vehicle for collision or other perils. We have priced our private passenger coverage competitively by offering group discounts since 1995 and Safe Driver Insurance Plan rate deviations from 1996 to 2001. In 2002, 2003 and 2004, we did not file for any Safe Driver Insurance Plan deviation. We currently offer approximately 180 affinity group discount programs ranging from 3% to 5% discounts.

Commercial Automobile (10.2% of 2003 direct written premiums). Our commercial automobile program supports all Massachusetts policy forms and limits of coverage including endorsements that broaden coverage over and above that offered on the standard Massachusetts policy forms. Commercial automobile policies provide coverage for bodily injury and property damage to others, no-fault personal injury coverage, and physical damage coverage for an insured's own vehicle for collision or other perils resulting from the ownership or use of commercial vehicles in a business. We offer insurance for commercial vehicles used for business purposes such as private passenger-type vehicles, trucks, tractors and trailers, and insure individual vehicles as well as commercial fleets. Commercial automobile policies are written at a standard rate with qualifying risks eligible for preferred lower rates. We received approval for a rate increase of 6.3% effective December 1, 2003.

Homeowners (7.4% of 2003 direct written premiums). We offer a broad selection of coverage forms for qualified policyholders. Homeowners policies provide coverage for losses to a dwelling and its contents from numerous perils, and coverage for liability to others arising from ownership or occupancy. We write policies on homes, condominiums, and apartments. We offer loss-free credits of up to 16% for eight years of loss free experience, along with a discount of 10% when a home is written together with an automobile. All forms of homeowners coverage are written at a standard rate with qualifying risks eligible for preferred lower rates. We received approval for a rate increase of 9.0% effective March 1, 2004.

Business Owners Policies (Less than 1.0% of 2003 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 (Less than 1.0% of 2003 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 of 10% when an umbrella policy is written together with an automobile insurance policy. We write policies at standard rates with limits of $1.0 million to $5.0 million.

Dwelling Fire (Less than 1.0% of 2003 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 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 (Less than 1.0% of 2003 direct written premiums). We offer an excess liability product to clients for whom we underwrite both commercial automobile and business owner policies. The program is directed at commercial automobile risks with private passenger-type automobiles or light and medium trucks. We write commercial umbrella policies at standard rates with limits ranging from $1.0 million to $5.0 million.

Inland Marine (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 $5,000 must meet our underwriting guidelines and be appraised.

Watercraft (Included in our Homeowners direct written premiums). We offer watercraft coverage for small and medium sized pleasure craft with maximum lengths of 32 feet, values less than $75,000, and maximum speeds of 39 knots. We write this coverage as an endorsement to our homeowner's policies.

One of the emerging issues in the insurance industry is mold liability and property coverage under homeowners and similar property-related policies. Property damage as a result of mold is uncommon in Massachusetts, unlike in the southern sections of the United States, most notably Texas. Generally, insurance policies exclude mold coverage unless it is the result of a covered loss. However, as a result of the increased public perception that mold liability is a concern for insurers, we have filed and received approval for a number of mold endorsements from the Commissioner which limit our mold property exposure to $10,000 on each of our homeowners and dwelling fire policies and limit our liability exposure to $50,000 on these policies. On business owner and commercial package policies, the property coverage is limited to $15,000 per policy and liability coverage is eliminated. We have eliminated mold coverage on our personal umbrella and commercial umbrella polices. These endorsements cover all new and renewal policies in these lines effective on or after September 1, 2002.

In addition, 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 Act of 2002. See "J. Reinsurance", discussed below.

We distribute our products exclusively through independent agents, unlike some of our competitors, which use multiple distribution channels. We believe this gives us a competitive advantage with the agents. We have two types of independent agents, those with which we have voluntarily entered into an agreement, which we refer to as voluntary agents, and those that CAR has assigned to us as ERPs. Our voluntary agents have authority pursuant to our voluntary agency agreement to bind Safety Insurance for any coverage that is within the scope of their authority. We reserve the ability under Massachusetts law to cancel any coverage, other than private passenger automobile insurance, within the first 30 days after it is bound. In total, our 548 independent agents have 758 offices (some agencies have more than one office) and approximately 3,000 customer service representatives.

Voluntary Agents. In 2003, we obtained approximately 73.3% of our direct written premiums for automobile insurance and 100% of our direct written premiums for all of our other lines of business through our voluntary agents. As of December 31, 2003, we had agreements with 430 voluntary agents. Our voluntary agents are located in all regions of Massachusetts.

We look for agents with profitable portfolios of business. To become a voluntary agent for our Company, we generally require that an agency: (i) have been in business for at least five years; (ii) have

exhibited a three year average 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) currently write policies for a minimum of two automobile carriers; (iv) make a commitment for us to underwrite at least 500 policies from the agency during the first twelve months after entering an agreement with us; and (v) offer multiple product lines. Every year, we review the performance of our agents during the prior year. If an agent fails to meet our profitability standards, we try to work with the agent to improve the profitability of the business it places with us. We generally terminate contracts each year with a few agencies, which, despite our efforts, have been consistently unable to meet our standards. Although independent agents usually represent several unrelated insurers, our goal is to be one of the top two insurance companies represented in each of our agencies, as measured by premiums. No individual agency generated more than 3% of our direct written premiums in 2003.

Exclusive Representative Producers. In 2003, our ERPs generated approximately 26.7% of our direct written premiums for automobile insurance. As of December 31, 2003, we had 84 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. An ERP's policy portfolio typically includes a significant percentage of what are considered to be under-priced automobile policies.

Massachusetts law guarantees the provision of motor vehicle insurance coverage to all qualified applicants. To facilitate this system, 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. The number of mandated ERP policies assigned to a Massachusetts insurance carrier is intended to be proportionate to its voluntary market share. However, because no insurer can control the relative volumes of voluntary and ERP business with certainty, carriers are usually either relatively oversubscribed or undersubscribed with ERP policies. Periodically, CAR assigns or re-assigns an ERP to the most undersubscribed insurer.

We continuously monitor our ERP subscription level to attempt to reduce our exposure to becoming oversubscribed with ERP business. By properly managing our ERP subscription levels, we reduce the probability that we will be forced to write excessive levels of ERP business, which is usually unprofitable. According to the March 2, 2004 CAR Private Passenger Subscription Report, as of December 31, 2003, our ERP policies totaled 118,407, or approximately 99.3% of our market share percentage of ERP policies, making us the fourth most undersubscribed carrier as of that date.

From time to time, as our market share grows, we are required to add a new ERP. When we need to add an ERP, we can either negotiate an agreement to obtain one we select from an oversubscribed carrier or have CAR assign one to us.

We view the independent agent as our customer and business partner. As a result, our marketing efforts focus on developing interdependent relationships with leading Massachusetts agents that write profitable business and positioning ourselves as the preferred insurance carrier of those agents, thereby receiving a larger portion of each agent's aggregate business. We do not market ourselves to potential policyholders.

Commission Schedule and Profit Sharing Plan. We have several programs designed to attract profitable new private passenger automobile business from agents by paying them more than the minimum commission the law requires (which is 11.0% of premiums for 2003, and 10.5% in 2004). We recognize our top performing agents by making them members of our President's Club or Executive Club. In 2003 and 2004, President's Club members receive a commission equal to 15.0% and 14.5% of premiums, respectively for each new policy with a driver in Safe Driver Insurance Plan step 9 or 10, while Executive Club members receive a commission equal to 13.0% and 12.5% of premiums, respectively for such policies. In 2003, President's Club members earned an additional bonus of 5% of premiums, and Executive Club members earned an additional bonus of up to 3% of premiums, on all new step 9 and 10 business, in each case if the average of the Safe Driver Insurance Plan steps of all new business based on automobile exposures they submit during the year was 11.5 or less. In 2003, 68.7% of our drivers were in Safe Driver Insurance Plan steps 9 or 10, as compared to 69.3% for the Massachusetts private passenger automobile industry as a whole, based on the number of drivers per month in each step according to the Automobile Insurers Bureau.

Further, we have a competitive profit sharing program under which we pay agents up to 50% of the underwriting profits on their business.

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. This investment includes providing each of our agents with high-speed access to the Internet through a network, which we own. In addition, our Agents Virtual Community website helps agents manage their work efficiently. We provide a substantial amount of information online that agents need to serve their customers, such as information about the status of new policies, bill payments and claims. Providing this type of content reduces the number of customer calls we receive and empowers the 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.

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

We are organized into a personal lines underwriting unit, which includes private passenger automobile, homeowners, dwelling fire, personal umbrella and inland marine coverages, as well as a

separate unit for commercial lines, including commercial auto, business owners policies, commercial umbrella and commercial package policies.

Pricing. Our pricing strategy for private passenger automobile insurance primarily depends on the maximum permitted premium rates and minimum permitted commission levels mandated by the Commissioner. For several years prior to 2003, we offered discounts off the state-mandated rates to drivers in the lower Safe Driver Insurance Plan steps, as did a number of other insurers. However, starting in 1998, we began to reduce the discounts we offered, in light of the reductions or minimal increases in average rates the Commissioner has mandated in each year since 1998. We currently do not offer any Safe Driver Insurance Plan step-based discounts. As a result primarily of reducing discounts and of our insureds purchasing new cars (for which we are permitted to charge higher premiums), our average premium received per policy, did not change in 2001, increased 5.2% in 2002 and increased 6.9% in 2003.

In addition to Safe Driver Insurance Plan discounts, we also offer group discounts to members of 180 affinity groups, including the Boston College Alumni Association, the Massachusetts Bar Association and the Massachusetts Medical Society. In general, we target affinity groups with a mature and stable membership base along with favorable driving records, offering between a 3% and 5% discount (with 4% being the average discount offered). Approximately 11.0% of the private passenger policies we issue receive an affinity group discount.

CAR and the Commissioner set the premium rates for commercial automobile policies reinsured through CAR. Subject to Commissioner review, we set rates for commercial automobile policies that are not reinsured through CAR, and for all other insurance lines we offer, including homeowners, dwelling fire, personal umbrella, commercial umbrella, commercial package policies and business owner policies. We base our rates on industry loss cost data, our own loss experience, catastrophe modeling and prices charged by our competitors in the Massachusetts market. We received approval for a rate increase of 6.3% for our commercial automobile line effective December 1, 2003, and also received approval for a rate increase of 9.0% for our homeowners line effective March 1, 2004.

Cede/Retain Decisions. Under CAR's rules, we must decide, within 23 days after the effective date of a new policy or before renewing an existing policy, whether to cede it to CAR's reinsurance pool. Each Massachusetts automobile insurer must bear a portion of the losses of the reinsurance pool. Under CAR's rules, we are able to reduce our total allocated share of the losses of the reinsurance pool by 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 attempt to evaluate whether we are likely to incur greater total losses by ceding it to the pool or by retaining it. According to the March 1, 2004 CAR Cession Volume Analysis—Private Passenger Report, as of December 31, 2003, we have ceded 7.4% of our private passenger automobile business to the pool in 2003, compared to an average of 6.9% for the industry. Our goal is to cede only those policies that incur less total losses resulting from a cession to CAR, than the total losses incurred by retaining the policy.

CAR also runs a reinsurance pool for commercial automobile policies. We analyze whether to cede or retain our business in that line in a similar fashion. According to the March 1, 2004 CAR Cession Volume Analysis-All Other Than Private Passenger Report, as of December 31, 2003, we have ceded 16.5% of our commercial automobile business to the pool in 2003, compared to an average of 28.0% for the industry.

Bulk Policy Transfers and New Voluntary Agents. From time to time, we receive proposals from existing voluntary agents to transfer a portfolio of the agent's business from another insurer to us. Our underwriters model the profitability of these portfolios before we accept these transfers. Among other things, we usually require that the portfolio have a pure loss ratio of 64% or less on the portion of the

agent's portfolio that we would underwrite. In addition, we require any new voluntary agent to commit to transfer a portfolio to us consisting of at least 500 policies.

Policy Processing and Rate Pursuit. Our underwriting department assists in processing policy applications, endorsements, renewals and cancellations. In the past three years, we have introduced new proprietary software that enables agents to connect to our network and enter policy and endorsement applications for private passenger automobile insurance from their office computers. In our private passenger automobile insurance line, our agents now submit approximately 98% of all applications for new policies or endorsements for existing policies through our proprietary information portal, the Agents Virtual Community.

Our rate pursuit team aggressively monitors all insurance transactions to make sure we receive the correct premium for the risk insured. We accomplish this by verifying Massachusetts pricing criteria, such as proper classification of drivers, the make, model and age of insured vehicles and the availability of discounts. We verify that operators are properly listed and classified, assignment of operators to vehicles, vehicle garaging, vehicle preinspection requirements and in some cases the validity of discounts. In our homeowners and dwelling fire lines, our team has completed a project to update the replacement costs for each dwelling. We use third-party software to assist in this appraisal effort.

We believe that our technology initiatives have increased revenue and decreased cost. For example, these initiatives have allowed us to reduce the number of call-center transactions which we perform, and to transfer many manual processing functions from our internal operations to our independent agents. We also believe that these initiatives have contributed to our overall increases in productivity. In 1990, we had 399 employees and $154,997 in direct written premiums. As of December 31, 2003, we had 517 employees and $571,545 in direct written premiums, which represents an increase from $388 direct written premiums per employee in 1990 to $1,106 direct written premiums per employee in 2003.

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:

External Applications. Agency employees can securely access business critical applications through our corporate extranet, which we call Agents Virtual Community. Agents Virtual Community includes Web-enabled applications, advanced security and an Internet-enabled communications network, which we believe constitutes many of our agents' only high-speed Internet connection. We believe that Agents Virtual Community is unique to the Massachusetts private passenger automobile insurance industry because using Agents Virtual Community allows an agent to access a variety of vendors and other carriers over the Internet through a single portal. We currently have a patent application pending on Agents Virtual Community. The patent application pertains to the method and system by which Agents Virtual Community delivers customer services to independent insurance agents. The capability for agency personnel to schedule online appointments with third-party vendors (such as glass repair retailers and rental car agencies) for their clients is also available. We designed Agents Virtual Community to be scalable so that these types of vendors and potentially, other insurers, can link to the network and create a "once and done" environment for the independent agent.

Listed below are examples of the business critical applications agents may access through Agents Virtual Community.

New Business and Endorsement Processing. Agents can perform new business and endorsement processing with our point of sale application. Agents can upload policy data to our system directly from their agency system or rate quote software in Agents Virtual Community's secure Web environment without having to re-enter policy information.

Inquiry Access. Inquiry Access is a customer service application designed to provide agency customer service representatives with real-time access to our database of insured information. This application allows agents to view the status of claims, billing and policy detail.

Policyholder Inquiry. Policyholder Inquiry provides 24 hours a day, 7 days a week self-service account information to our policyholders through our website or through their independent agent's website. This application provides policyholders with round-the-clock access to billing and claims information.

Other Tools and Services. Agents Virtual Community gives agents access to electronic versions of underwriting manuals, which include updated guidelines for acceptable risks, commission levels and product pricing. Further, we have our agents using third-party software (the XNET Cost Estimator from Marshall Swift/Boeck) that we make available through Agents Virtual Community to help assess home replacement costs. This initiative helps ensure that we receive the correct premium with respect to homeowners policies and provide the correct level of coverage against home loss. Finally, we provide agents a daily report of all their insurance transactions processed through Agents Virtual Community. This report allows our agents to monitor their performance and review profitability goals.

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.

We have a proven record of settling casualty claims below the industry average in Massachusetts. According to the Automobile Insurers Bureau, our average casualty claim settlement during the period from January 1994 through December 31, 2002 was $5,252, approximately 6.7% lower than the Massachusetts industry average of $5,631.

We have adopted stringent claims settlement procedures, which include guidelines that establish maximum settlement offers for soft tissue injuries, which constituted approximately 75% of our bodily injury claims. 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 and on Saturdays, we outsource claims adjustment support to an independent firm whose employees contact third-party claimants and other witnesses. We believe that early notification results in our adjusters conducting prompt investigations of claims and compiling more accurate information about those claims. Our claims workload management software also assists our adjusters in handling claims quickly.

We believe the structure of our casualty claims unit allows us to respond quickly to claimants anywhere in the Commonwealth. Comprising 115 people, the department is organized geographically by territories, each with a territorial claims unit located at our headquarters in Boston and a claims adjuster in the field. Our casualty claims department makes limited use of independent adjusters.

Additionally, we utilize a special unit to investigate fraud in connection with casualty claims. This special unit has one manager and seven employees. In cases where adjusters suspect fraud in connection with a claim, we deploy this special unit to conduct investigations. We deny payment to claimants in cases in which we have succeeded in accumulating sufficient evidence of fraud.

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 Agents Virtual Community using our Power Desk software application. As agents receive calls from claimants, Power Desk permits the agent to immediately send information related to the claim directly to us and to an independent appraiser selected by the agent to value the claim. Once we receive this information, an automated system redirects the claim to the appropriate internal adjuster responsible for investigating the claim to determine liability. Upon determination of liability, the system automatically begins the process of seeking a subrogation recovery from another insurer, if liable. Our agents also have the authority to order automobile glass or body repair or reserve a rental car for our insureds without getting pre-approval from us. We believe this process results in a shorter time period from when the claimant first contacts the agent to when the claimant receives a claim payment, while enabling 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. Subrogation refers to the process by which we are reimbursed by other insurers for claims costs we incur due to the fault of their insureds. We track the amounts we pay out in claims costs and

identify cases in which we believe we can reclaim some or all of those costs through the use of our automated workload management tools.

Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the loss to the insurer and the insurer's payment of that loss. To recognize liabilities for unpaid losses, insurers establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the expenses associated with investigating and paying the losses, or loss adjustment expenses. Every quarter, we review our reserves internally. Regulations promulgated by the Commissioner require us to annually obtain a certification from either a qualified actuary or an approved loss reserve specialist that our loss and loss adjustment expenses reserves are reasonable.

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

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

When reviewing reserves, we analyze historical data and estimate the impact of various loss development factors, such as our historical loss experience and that of the industry, legislative enactments, judicial decisions, legal developments in imposition of damages, and changes and trends in general economic conditions, including the effects of inflation. There is no precise method, however, for evaluating the impact of any specific factor on the adequacy of reserves, because the eventual development of reserves is affected by many factors. After taking into account all relevant factors, management believes that our provision for unpaid losses and loss adjustment expenses at December 31, 2003 is adequate to cover the ultimate net cost of losses and claims incurred as of that date.

Management calculates its loss and LAE reserves estimates, independently from the Company's actuaries. The actuarial estimate for loss and LAE reserves, net of the effect of ceded reinsurance, ranges from a low of $278,765 to a high of $335,472 for 2003. The Company's loss and LAE reserves, based on management's best estimate, was established at $310,012 for the year ended December 31, 2003. 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. We do not discount any of our reserves.

Under purchase accounting in connection with the Company's acquisition of all of the issued and outstanding stock of Thomas Black Corporation ("TBC") on October 16, 2001 ("the Acquisition"), the Company was required to adjust to fair value the loss and loss adjustment reserves and the related reinsurance recoverables of TBC. The fair value of our reserves for losses and loss adjustment expenses

and related reinsurance recoverables was estimated as of the date of the Acquisition based on the present value of the expected underlying cash flows of the loss reserves and reinsurance recoverables, and included a profit and risk margin. In determining the fair value estimate, management adjusted our historical accounting principles generally accepted in the United States of America ("GAAP") undiscounted net loss reserves to present value assuming a 4.0% discount rate, which approximated the U.S. Treasury rate on the date of the Acquisition. The discounting pattern was actuarially developed from our historical loss data. A profit and risk margin of 6.0% was applied to the discounted loss reserves, to reflect management's estimate of the cost we would incur to reinsure the full amount of our net loss and loss adjustment expense reserves with a third party reinsurer. This margin was based upon management's assessment of the uncertainty inherent in the net loss reserves and their knowledge of the reinsurance marketplace. Management determined that there was no material difference between the historical carrying basis of the reserves for losses and loss adjustment expenses and related reinsurance recoverables at the date of Acquisition and their fair value. Accordingly, loss and loss adjustment expense reserves and related reinsurance recoverables on unpaid losses as of October 16, 2001 were recorded at estimated fair value as at October 16, 2001, which approximated carrying value at that date.

The following table presents development information on changes in the reserves for losses and loss adjustment expenses ("LAE") of our Insurance Subsidiaries for the three years ended December 31, 2003.

The increase or decrease in prior year incurred losses and LAE represents deficiences or redundancies for reserves established in prior years. The $181 of adverse development recorded during 2003 indicates that management's estimation of year-end 2002 and prior loss and LAE reserves was within 0.01% of the reserves established at December 31, 2002.

The following table represents the development of reserves, net of reinsurance, for calendar years 1993 through 2003. 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, 2003.

Information with respect to the cumulative development of gross reserves (that is, without deduction for reinsurance ceded) also appears at the bottom portion of the table.

In evaluating the information in the table, it should be noted that each amount entered incorporates the effects of all changes in amounts entered for prior periods. Thus, if the 1998 estimate for a previously incurred loss was $150,000 and the loss was reserved at $100,000 in 1994, the $50,000 deficiency (later estimate minus original estimate) would be included in the cumulative redundancy (deficiency) in each of the years 1995-1998 shown in the table. It should further be noted that the table does not present accident or policy year development data. In addition, conditions and trends that have affected the development of liability in the past may not necessarily recur in the future. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies from the table.

As the table shows, our net reserves grew at a faster rate than our gross reserves over the ten-year period. As we have grown, we have been able to retain a greater percentage of our direct business. Additionally, we used to conduct substantial business as a servicing carrier for other insurers, in which we would service the residual market automobile insurance business assigned to other carriers for a fee. All business generated through this program was ceded to the other carriers. As we reduced the amount of our servicing carrier business, our proportion of reinsurance ceded diminished.

The table also shows that we have substantially benefited in prior years from releasing redundant reserves. Massachusetts private passenger automobile insurance pricing was very favorable in the early to mid-1990s and the reserves we established for business written during that period developed favorably, allowing us to release substantial reserves in following years. As maximum permitted rates declined in the latter part of the 1990s through 2003, and the redundancies resulting from favorable development of earlier years were released, our redundancies in subsequent years began to diminish. In the year ended December 31, 2001 we released $7,303 in reserves relating to prior years, compared to $2,262 in 2002. For the year ended December 31, 2003, we strengthened loss reserves related to prior years by $181.

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.

We reinsure with other insurance companies a portion of our potential liability under the policies we have underwritten, thereby protecting us against an unexpectedly large loss or a catastrophic

occurrence that could produce large losses. Reinsurance involves an insurance company transferring (ceding) a portion of its exposure on insurance underwritten by it to another insurer (reinsurer). The reinsurer assumes a portion of the exposure in return for a share of the premium. Reinsurance does not legally discharge an insurance company from its primary liability for the full amount of the policies, but it does make the reinsurer liable to the company for the reinsured portion of any loss realized.

We are very selective in choosing our reinsurers, seeking only those companies that we consider to be financially stable and adequately capitalized. In an effort to minimize exposure to the insolvency of a reinsurer, we continuously evaluate and review the financial condition of our reinsurers. All of our reinsurers have an A.M. Best rating of "A" or better, except for Lloyd's of London, which is rated "A-." Swiss Re, our primary reinsurer, maintains an A.M. Best rating of "A+" (Superior).

We maintain reinsurance coverage to help lessen the effect of losses from catastrophic events, maintaining coverage that protects us in the event of a "100-year storm" (that is, a storm of a severity expected to occur once in a 100 year period). We use various software products to measure our exposure to catastrophe losses to model the probable maximum loss to us for catastrophe losses such as hurricanes. In 2003, we had excess catastrophe reinsurance contracts with our reinsurers having a co-participation of 95.0% for catastrophe property losses in excess of $5,000 up to a maximum of $100,000.

Beginning in 2004 we have changed our reinsurance coverage to protect us in the event of a "180-year storm" (that is, a storm of a severity expected to occur once in a 180-year period). We have purchased five layers of excess catastrophe reinsurance contracts providing coverage for property losses in excess of $5,000 up to a maximum of $160,000. Our reinsurers co-participation is 70.0% of $5,000 for the 1^st layer, 80.0% of $5,000 for the 2^nd layer, 90.0% of $15,000 for the 3^rd layer, 90.0% of $30,000 for the 4^th layer and 95% of $100,000 for the 5^th layer.

We also have a casualty excess of loss reinsurance contract for large casualty losses occurring in our automobile, homeowners, dwelling fire, business owners policies, commercial package policies, personal umbrella and commercial umbrella lines of business in excess of $1,000 up to a maximum of $5,000, with an annual aggregate deductible of $500. In addition, we have a quota share reinsurance agreement under which we cede 90.0% of the premiums and losses under our personal and commercial umbrella policies. We also have a reinsurance agreement with Hartford Steam Boiler Inspection and Insurance Company, which is a quota share agreement under which we cede 100% of the premiums and losses for the equipment breakdown coverage under our business owner policies and commercial package policies. We have property excess of loss reinsurance coverage for large property losses, with coverage in excess of $1,000 up to a maximum of $10,000, for our homeowners, business owner, and commercial package policies.

In the wake of the September 11, 2001 tragedies, reinsurers have begun to exclude coverage for claims in connection with any act of terrorism. Our reinsurance programs for 2003 and 2004 excludes coverage for acts of terrorism, except for fire or collapse losses as a result of terrorism, under homeowners, dwelling fire, private passenger automobile and commercial automobile policies. For business owner policies and commercial package policies, terrorism is excluded if the total insured value is greater than $20,000.

The Terrorism Risk Insurance Act of 2002 (TRIA) was signed into law on November 26, 2002. 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 TRIA provides reinsurance for certified acts of terrorism. Effective February 24, 2003 we issued policy endorsements for all commercial policyholders to comply with TRIA after obtaining Commissioner approval.

As of December 31, 2003, we had no material amounts recoverable from any reinsurer, excluding the residual markets described below.

In addition to the above mentioned reinsurance programs, we are a participant in CAR, the Massachusetts mandated residual market under which premiums, expenses, losses and loss adjustment expenses on ceded business are shared by all insurers writing automobile insurance in Massachusetts. We also participate in the Massachusetts Property Insurance Underwriting Association in which premiums, expenses, losses and loss adjustment expenses on homeowners business that cannot be placed in the voluntary market are shared by insurers writing homeowners insurance in Massachusetts.

The property and casualty insurance business is highly competitive and many of our competitors have substantially greater financial and other resources than us. We compete with both large national writers and smaller regional companies. 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. In the past, competition in the Massachusetts private passenger automobile market has included offering significant discounts from the maximum permitted rates, and there can be no assurance that these conditions will not recur. Further, we and others compete on the basis of the commissions and other cash and non-cash incentives provided to agents. Although a number of national insurers that are much larger than we are do not currently compete in a material way in the Massachusetts 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. 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.

In Massachusetts, as of December 31, 2003, 19 insurers actively wrote private passenger automobile insurance, according to CAR. Of these 19 insurers, 4 are national companies which use independent agents to sell their products, 7 are regional or Massachusetts-only companies which use independent agents to sell their products (including us) and 8 are national, regional or Massachusetts-only companies which sell their products directly to policyholders. Our principal competitors within the Massachusetts private passenger automobile insurance industry are both regional companies, Commerce Group, Inc. and Arbella Insurance Group which held 27.7% and 9.7% market shares based on automobile exposures, respectively, in 2003 according to CAR.

At March 10, 2004, we employed 522 employees. Our employees are not covered by any collective bargaining agreement. Management considers our relationship with our employees to be good.

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, 2003, there were no securities below investment grade (i.e., rated Category 3 or lower by the Securities Valuation Office of the National Association of Insurance Commissioners) in our fixed income securities portfolio. According to our investment guidelines, no more than 1% of our portfolio may be invested in the securities of any one

issuer (excluding U.S. government-backed securities), and no more than 0.5% of our portfolio may be invested in securities rated "BBB," or the lowest investment grade assigned by Moody's. We continually monitor the mix of taxable and tax-exempt securities, in an attempt to maximize our total after-tax return. Since 1986, our investment manager has been Deutsche Asset Management, formerly known as Scudder Investments.

The following table reflects the composition of our investment portfolio at December 31, 2003, 2002 and 2001:

While we have held common equity securities in our investment portfolio in the past, as of December 31, 2003, we held no such securities in our investment portfolio. We made the decision to divest common equity securities in order to maximize the current investment income earned by our portfolio and to reduce our overall investment risk. We continuously evaluate market conditions and we expect in the future to purchase common equity securities.

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

The following table reflects our investment results for each year in the three-year period ended December 31, 2003:

Net effective yield declined as a result of a change in management's investment strategy to shorten the duration of our portfolio, shift to higher rated securities, and increase our tax-exempt holdings.

The following table indicates the composition of our fixed income security portfolio (at carrying value) by rating(1), as of December 31, 2003:

Moody's rating system utilizes nine symbols to indicate the relative investment quality of a rated bond. Aaa rated bonds are judged to be of the best quality and are considered to carry the smallest degree of investment risk. Aa rated bonds are also judged to be of high quality by all standards. Together with Aaa bonds, these bonds comprise what are generally known as high grade bonds. Bonds rated A possess many favorable investment attributes and are considered to be upper medium grade obligations. Baa rated bonds are considered as medium grade obligations; they are neither highly protected nor poorly secured. Bonds rated Ba or lower (those rated B, Caa, Ca and C) are considered to be too speculative to be of investment quality.

The Securities Valuation Office of the National Association of Insurance Commissioners evaluates all public and private bonds purchased as investments by insurance companies. The Securities Valuation Office assigns one of six investment categories to each security it reviews. Category 1 is the highest quality rating and Category 6 is the lowest. Categories 1 and 2 are the equivalent of investment grade debt as defined by rating agencies such as Standard & Poor's Ratings Services and Moody's, while Categories 3-6 are the equivalent of below investment grade securities. Securities Valuation Office ratings are reviewed at least annually. At December 31, 2003, approximately 14.3% of our fixed maturity investments were rated Category 1, and 85.7% of our fixed maturity investments were rated Category 2, the two highest ratings assigned by the Securities Valuation Office. At December 31, 2003, we had no fixed maturity investments rated Category 3 or lower by the Securities Valuation Office.

The following table indicates the composition of our fixed income security portfolio (at carrying value) by time to maturity as of December 31, 2003:

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 November 25, 2003. Such rating is the third highest rating of 13 ratings that A.M. Best assigns to solvent insurance companies, which currently range from "A++ (Superior)" to "D (Very Vulnerable)." Publications of A.M. Best indicate that the "A" rating is assigned to those companies that in A.M. Best's opinion have a strong ability to meet their obligations to policyholders over a long period of time. In evaluating a company's financial and operating performance, A.M. Best reviews the company's profitability, leverage and liquidity, as well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its loss reserves, the adequacy of its surplus, its capital structure, the experience and competence of its management and its market presence. A.M. Best's ratings reflect its opinion of an insurance company's financial strength, operating performance and ability to meet its obligations to policyholders and are not evaluations directed to purchasers of an insurance company's securities.

In reaffirming Safety Insurance's rating, A.M. Best recognized the occurrence of the Acquisition, our November 27, 2002 initial public offering ("IPO") and noted certain of our positive attributes, including our conservative reserving philosophy, our strict underwriting discipline, our favorable market position in Massachusetts, our efforts at product diversification, our long-term commitment to the independent agency force, our proven track record of dealing successfully with the changes in the Massachusetts automobile insurance market and our substantial reinsurance protection. A.M. Best cited certain factors that partially offset these attributes, including our geographic concentration in Massachusetts and our focus in the private passenger automobile market. We are subject to the competitive and highly regulated Massachusetts private passenger automobile market, which is characterized by mandated rates set by the Commissioner.

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, 1998. The Division had no material findings as a result of this examination.

Insurance Holding Company Regulation. Our principal operating subsidiaries are insurance companies, and therefore we are subject to certain laws in Massachusetts regulating insurance holding company systems. These laws require that we file a registration statement with the Commissioner that discloses the identity, financial condition, capital structure and ownership of each entity within our corporate structure and any transactions among the members of our holding company system. In some instances, we must provide prior notice to the Commissioner for material transactions between our insurance company subsidiaries and other affiliates in our holding company system. These holding company statutes also require, among other things, prior approval of the payment of extraordinary dividends or distributions and any acquisition of a domestic insurer.

Insurance Regulation Concerning Dividends. We rely on dividends from our insurance company subsidiaries for our cash requirements. The insurance holding company law of Massachusetts requires notice to the Commissioner of any dividend to the stockholders of an insurance company. Our insurance company subsidiaries may not make an "extraordinary dividend" until thirty days after the Commissioner has received notice of the intended dividend and has not objected in such time. As historically administered by the Commissioner, this provision requires the prior approval by the Commissioner of an extraordinary dividend. An extraordinary dividend is defined as any dividend or distribution that, together with other distributions made within the preceding twelve months exceeds the greater of 10% of the insurer's surplus as of the preceding December 31, or the insurer's net income for the twelve-month period ending the preceding December 31, in each case determined in accordance with statutory accounting practices. Under Massachusetts law, an insurer may pay cash dividends only from its unassigned funds, also known as its earned surplus, and the insurer's remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. At year-end 2003, the statutory surplus of Safety Insurance was $258,551 and its net income for 2003 was $27,007. A maximum of $27,007 will be available by the end of 2004 for such dividends without prior approval of the Division.

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

Protection Against Insurer Insolvency. Massachusetts law requires that insurers licensed to do business in Massachusetts participate in the Massachusetts Insurers Insolvency Fund. The Massachusetts Insurers Insolvency Fund must pay any claim up to $300 of a policyholder of an insolvent insurer if the claim existed prior to the declaration of insolvency or arose within sixty days after the declaration of insolvency. Members of the Massachusetts Insurers Insolvency Fund are assessed the amount the Massachusetts Insurers Insolvency Fund deems necessary to pay its obligations and expenses in connection with handling covered claims. Subject to certain exceptions, assessments are made in the proportion that each member's net written premiums for the prior calendar year for all property and casualty lines bore to the corresponding net written premiums for Massachusetts Insurers Insolvency Fund members for the same period. As a matter of Massachusetts law, insurance rates and premiums include amounts to recoup any amounts paid by insurers for the costs of the Massachusetts Insurers Insolvency Fund. With respect to private passenger automobile insurance rates and premiums, the Commissioner has historically made an adjustment in his or her annual rate decision reflecting any Massachusetts Insurers Insolvency Fund-related costs reported by the industry in its rate filing. By statute, no insurer in Massachusetts may be assessed in any year an amount greater than two percent of that insurer's direct written premium for the calendar year prior to the assessment. We account for allocations from the Massachusetts Insurers Insolvency Fund as underwriting expenses. Underwriting expenses in 2003, 2002 and 2001 included $3,423, $2,103 and $1,398 of charges representing our allocation from the Massachusetts Insurers Insolvency Fund for the insolvencies of other insurers. CAR also assesses its members as a result of insurer insolvencies. Because CAR is not able to recover an insolvent company's share of the net CAR losses from the Massachusetts Insurers Insolvency Fund, CAR must increase each of its member's share of the deficit in order to compensate for the insolvent carrier's inability to pay its deficit assessment. It is anticipated that there will be additional assessments from time to time relating to various insolvencies.

The Insurance Regulatory Information System. The Insurance Regulatory Information System was developed to help state regulators identify companies that may require special financial attention. The Insurance Regulatory Information System consists of a statistical phase and an analytical phase whereby financial examiners review annual statements and financial ratios. The statistical phase consists of 12 key financial ratios based on year-end data that are generated from the National Association of Insurance Commissioners' database annually; each ratio has an established "usual range" of results. These ratios assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies.

A ratio result falling outside the usual range of Insurance Regulatory Information System ratios is not considered a failing result; rather, unusual values are viewed as part of the regulatory early monitoring system. Furthermore, in some years, it may not be unusual for financially sound companies to have several ratios with results outside the usual ranges. Generally, an insurance company will become subject to regulatory scrutiny if it falls outside the usual ranges of four or more of the ratios. For 2003 and 2002, all our ratios for both our insurance companies were within the normal range. However, for 2001, our subsidiaries had one ratio falling outside the normal range. The test that measures estimated current reserve deficiency to surplus generated a value for 2001 of 30.3% for Safety Insurance and 27.6% for Safety Indemnity Insurance Company, each exceeding the normal value of 25%. The value is partially a result of our adoption of statutory accounting principles promulgated by the National Association of Insurance Commissioners in 2001. In particular, our treatment for assumed

obligations for underwriting pool business from CAR and the Massachusetts Property Insurance Underwriting Association plan changed from "netting" (recording the combined obligation from premiums, expenses and losses) to "gross" (recording separate amounts for premiums, expenses and losses, which resulted in reporting a net loss). The level of premiums earned for 2001 is thereby increased relative to the levels reported during 1999 and 2000, influencing the results of this ratio. This same test resulted in a ratio of 8.0% for Safety Insurance and 7.0% for Safety Indemnity Insurance Company for 2003, and 5.0% for both our Insurance Subsidiaries for 2002, all within the normal range.

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

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

The risk based capital law provides for four levels of regulatory action. The extent of regulatory intervention and action increases as the level of total adjusted capital to risk based capital falls. The first level, the company action level, as defined by the National Association of Insurance Commissioners, requires an insurer to submit a plan of corrective actions to the Commissioner if total adjusted capital falls below 200% of the risk based capital amount. The regulatory action level, as defined by the National Association of Insurance Commissioners requires an insurer to submit a plan containing corrective actions and requires the Commissioner to perform an examination or other analysis and issue a corrective order if total adjusted capital falls below 150% of the risk based capital amount. The authorized control level, as defined by the National Association of Insurance Commissioners, authorizes the Commissioner to take whatever regulatory actions he or she considers necessary to protect the best interest of the policyholders and creditors of the insurer which may include the actions necessary to cause the insurer to be placed under regulatory control, i.e., rehabilitation or liquidation, if total adjusted capital falls below 100% of the risk based capital amount. The fourth action level is the mandatory control level, as defined by the National Association of Insurance Commissioners, which requires the Commissioner to place the insurer under regulatory control if total adjusted capital falls below 70% of the risk based capital amount.

The formulas have not been designed to differentiate among adequately capitalized companies that operate with higher levels of capital. Therefore, it is inappropriate and ineffective to use the formulas to rate or to rank these companies. At December 31, 2003, 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 "B. The Massachusetts Property and Casualty Insurance Market", regulation of private passenger automobile insurance in Massachusetts differs significantly from how this line of insurance is regulated in other states. These differences include the requirements that we not deny coverage to any applicant; that the premium rate we and all insurers must charge is fixed and established by the Commissioner;

that our ability and that of our competitors to deviate from the rate set by the Commissioner is restricted, and that some of our insurance producers are assigned to us as a matter of law. See "B. The Massachusetts Property and Casualty Insurance Market", as discussed above.

We conduct our operations in approximately 86,930 square feet of leased space at 20 Custom House Street in downtown Boston, Massachusetts. Our lease expires in December 2008.

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

There were no matters submitted to a vote of the Company's shareholders during the fourth quarter of 2003.

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 Safety
David F. Brussard	52	President, Chief Executive Officer and Director	28
William J. Begley, Jr.	49	Vice President, Chief Financial Officer and Secretary	18
Daniel F. Crimmins	65	Vice President—Marketing	19
Robert J. Kerton	57	Vice President—Casualty Claims	17
David E. Krupa	43	Vice President—Property Claims	21
Daniel D. Loranger	64	Vice President—Management Information Systems and Chief Information Officer	23
Edward N. Patrick, Jr.	55	Vice President—Underwriting	30
Bruce R. Berkowitz	45	Director	—
A. Richard Caputo, Jr.	37	Director	—
Peter J. Manning	65	Director	—
David K. McKown	66	Director	—

David F. Brussard was appointed President and Chief Executive Officer ("CEO") in June 2001 and 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 28 years. Mr. Brussard is also a member of the governing committee, budget committee, executive committee and nominating committee of the Automobile Insurers Bureau and is a member of the governing, actuarial and defaulted broker committees of Commonwealth Automobile Reinsurers. 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 18 years. Mr. Begley also serves on the audit committee of CAR.

Daniel F. Crimmins was appointed Vice President of Marketing of the Company on March 4, 2002. Mr. Crimmins has served as Vice President of Marketing of the Insurance Subsidiaries since 1985 and has been employed by the Insurance Subsidiaries for over 19 years. Mr. Crimmins has over 41 years of experience in the insurance industry. Mr. Crimmins is a member of the market review committee of CAR and the Insurance Managers Association.

Robert J. Kerton was appointed Vice President of Casualty Claims of the Company on March 4, 2002. Mr. Kerton has served as Vice President of Casualty Claims of the Insurance Subsidiaries since 1986 and has been employed by the Insurance Subsidiaries for over 17 years. Mr. Kerton previously served 18 years with Allstate Insurance Company in various Massachusetts claim management assignments. Mr. Kerton serves as Chairman of the Automobile Insurers Bureau claims committee, vice chairman of the CAR claims committee and on the governing board of the Massachusetts Insurance Fraud Bureau.

David E. Krupa was appointed Vice President of Property Claims of the Company on March 4, 2002. Mr. Krupa has served as Vice President of Property Claims of the Insurance Subsidiaries since July 1990 and has been employed by the Insurance Subsidiaries for over 21 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. In addition, Mr. Krupa has been a member of several claims committees both at the Automobile Insurers Bureau and CAR.

Daniel D. Loranger was appointed Vice President of Management Information Systems of 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 23 years. Mr. Loranger began his data processing career with Raytheon Manufacturing in 1960. BEYOND COMPUTING MAGAZINE awarded Mr. Loranger the first place 2000 Partnership Award for the strategic alliance of technology with the Company's business objectives and for development of internal software for the Company.

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 30 years. Mr. Patrick has served on several committees of CAR, including the market review, servicing carrier, statistical, automation and reinsurance operations committees. Mr. Patrick has also served on the CAR operations committee since 1984 and has served as its chairman since 1998.

Bruce R. Berkowitz has served as a director of the Company since November 2002. In December 2001, Mr. Berkowitz became a Deputy Chairman and a director of Olympus Re Holdings, Ltd. Mr. Berkowitz has been a member of the board of trustees of First Union Real Estate Equity and Mortgage Investments since 2000, President and a director of Fairholme Funds, Inc. since 1999, and managing member of Fairholme Capital Management, L.L.C. since 1997. Mr. Berkowitz was a managing director of Salomon Smith Barney Inc. from 1993 to 1997.

A. Richard Caputo, Jr. has served as a director of the Company since June 2001. Mr. Caputo has been a managing director of The Jordan Company L.P. and its predecessors, a private merchant banking firm, since 1990. Mr. Caputo is also a director of AmeriKing, Inc., GSFI, Inc., GSFI Holdings, Inc., Jackson Products, Inc., and various privately held companies. AmeriKing, Inc., is

currently the subject of Chapter 11 proceedings, and prior to commencement of those proceedings Mr. Caputo was appointed a Vice President of that company.

Peter J. Manning has served as a director of Safety since September 2003. Mr. Manning retired in 2003 as Vice Chairman of FleetBoston Financial, after thirty-one 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 Electron, Papa Gino's, and various non-profit companies and is Chairman of the Board of the Tournament Players Club of Boston.

David K. McKown has served as director of the Company since November 2002. Mr. McKown has been a Senior Advisor to Eaton Vance Management since 2000, focusing on business origination in real estate and asset-based loans. Mr. McKown retired in March 2000 having served as a Group Executive with BankBoston since 1993, where he focused on acquisitions and high-yield bank debt financings. Mr. McKown worked for BankBoston for over 40 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 Equity Office Properties Trust, Newcastle Investment, and various privately held companies.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

As of March 12, 2004, there were 49 holders of record of the Company's common stock, par value $0.01 per share, not including stock held in "Street Name".

The Company's common stock (symbol: SAFT) is listed on the NASDAQ National Market. The following table shows the quarterly range of the daily high and low sales prices per share during the past five quarters in 2002 and 2003 that the Company has been public:

		High		Low
Quarter Ended:
	December 31, 2002	$	15.40	$	12.00
	March 31, 2003	$	14.75	$	12.88
	June 30, 2003	$	15.41	$	12.94
	September 30, 2003	$	16.85	$	14.20
	December 31, 2003	$	18.46	$	15.10

The closing price of the Company's common stock on March 12, 2004 was $18.70 per share.

During 2003 the Company declared and paid four quarterly cash dividends to stockholders, which totaled $5,188. The Company's Board of Directors declared a quarterly cash dividend on February 24, 2004 of $0.10 per share to stockholders of record on March 1, 2004, payable on March 15, 2004. The Company plans to continue to declare and pay quarterly cash dividends in 2004, 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.O., Business, Supervision and Regulation, "Insurance Regulation Concerning Dividends", and also in Item 7.D., Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.

The following table sets forth our selected historical consolidated financial data as of and for each of the five years ended December 31, 2003. Prior to October 16, 2001, Thomas Black Corporation was the ultimate parent company of Safety Insurance. In the Acquisition, on October 16, 2001, Safety Insurance Group, Inc. became the parent company of Thomas Black Corporation.

The selected historical consolidated financial data for the years ended December 31, 2003 and 2002, the successor period October 16, 2001 to December 31, 2001, and for the predecessor period January 1, 2001 to October 15, 2001, and as of December 31, 2003 and 2002 have been derived from the financial statements of Safety Insurance Group, Inc. included in this annual report which have been audited by PricewaterhouseCoopers LLP, independent accountants. The selected historical consolidated financial data as of December 31, 2001 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. The selected historical consolidated financial data for the years ended December 31, 2000, 1999 and as of December 31, 2000 and 1999 have been derived from Thomas Black Corporation's consolidated financial statements not included in this annual report, which have been audited by PricewaterhouseCoopers LLP. As a result of the Acquisition, financial data for periods

prior to the Acquisition may not be comparable with financial data for periods following the Acquisition.

We have prepared the selected historical consolidated financial data, other than statutory data, in conformity with GAAP. We have derived the statutory data from the annual statements of our Insurance Subsidiaries filed with insurance regulatory authorities, which were prepared in accordance with statutory accounting practices, which vary in certain respects from GAAP.

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

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" on page 49 for specific important factors that could cause actual results to differ materially from those contained in forward-looking statements.

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"), Thomas Black Corporation ("TBC"), Safety Indemnity Insurance Company, Thomas Black Insurance Agency, Inc. ("TBIA") and RBS, Inc., TBIA's holding company.

As discussed below under "The Acquisition", Safety acquired all of the issued and outstanding stock of TBC on October 16, 2001 ("the Acquisition"). As a result of the Acquisition, the capital structure and basis of accounting of our Company differ from those of TBC prior to the Acquisition. Therefore, the financial data with respect to periods prior to the Acquisition ("predecessor" period) may not be comparable to data for periods subsequent to the Acquisition ("successor" period). In addition, the November 27, 2002 IPO, the use of those IPO net proceeds, the Preferred Share Exchange, as defined below, and a direct sale of 350,000 additional shares of common stock (the "Direct Sale") have further altered the current capital structure of our Company.

We are a leading provider of private passenger automobile insurance in Massachusetts. In addition to private passenger automobile insurance (which represented 81.0% of our direct written premiums in 2003), we offer a portfolio of insurance products, including commercial automobile (10.2% of 2003 direct written premiums), homeowners (7.4% of 2003 direct written premiums), dwelling fire, umbrella and business owner policies. Operating exclusively in Massachusetts through our insurance company subsidiaries, Safety Insurance Company and Safety Indemnity Insurance Company (together referred to as the "Insurance Subsidiaries"), we have established strong relationships with 548 independent insurance agents in 758 locations throughout Massachusetts. We have used these relationships and our extensive knowledge of the Massachusetts market to become the second largest private passenger automobile insurance carrier in Massachusetts, capturing an approximately 10.6% share of the Massachusetts private passenger automobile market in 2003, according to the CAR Cession Volume Analysis Report of March 1, 2004 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.

As discussed below, the November 27, 2002 IPO, the use of IPO net proceeds, the Preferred Share Exchange (as defined below) and the Direct Sale of 350,000 common shares altered our capital structure.

In connection with the Company's plan for the sale of our common stock in the IPO, the Board of Directors of Safety (the "Board") declared a 23.24 for 1 common stock split on November 12, 2002 in the form of a stock dividend that became effective immediately after the Company filed its amended and restated certificate of incorporation prior to the offering. In accordance with the provisions of FAS 128, Earnings Per Share, earnings per share presented in the consolidated financial statements of the Company have been adjusted retroactively for the stock split.

The holders of our preferred stock agreed to amend the terms of the preferred stock to cause it to automatically convert into common stock upon the closing of the IPO at the IPO price. Based upon the $12.00 per share IPO price, 1,866,665 additional common shares were issued in connection with the preferred share exchange (the "Preferred Share Exchange") upon the close of the IPO.

As of December 31, 2003, the Company had 15,259,991 common shares outstanding. The 5,809,992 common shares outstanding prior to the November 27, 2002 IPO increased to 14,359,991 at the IPO due to the addition of the new 6,333,334 common shares sold at IPO, the 350,000 common shares sold as part of the Direct Sale, and an additional 1,866,665 common shares issued in the Preferred Share Exchange. On December 5, 2002, the 14,359,991 shares outstanding increased to 15,259,991 common shares outstanding due to the underwriters purchase of an additional 900,000 common shares pursuant to their over-allotment option exercise.

On June 25, 2002, 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, SARs and restricted stock awards. The maximum number of shares of common stock with respect to which awards may be granted under the Incentive Plan is 1,250,000. The grants made since inception under the Incentive Plan are as follows:

Effective Date	Number of Option Granted	Exercise Price per Share	Vesting Terms	Expiration Date
November 27, 2002	379,000	$12.00(1)	over 5 years, 20% annually	November 27, 2012
February 20, 2003	99,000	$13.30(2)	over 5 years, 20% annually	February 20, 2013
March 31, 2003	292,000	$13.03(2)	over 3 years, 30%-30%-40%	March 31, 2013
August 21, 2003	10,000	$15.89(2)	over 5 years, 20% annually	August 21, 2013

The Board and the Compensation Committee intend to issue more options under the Incentive Plan in the future, not to exceed the maximum number of shares that may be granted.

On October 16, 2001, Safety acquired TBC, the holding company for our insurance and other subsidiaries, from a group of shareholders consisting primarily of TBC's founder and members of his immediate family. We accounted for the Acquisition using the purchase method of accounting, in accordance with the treatment of a business combination under Statement of Financial Accounting Standards No. 141, Business Combinations. Under purchase accounting: (i) we recorded the assets and liabilities of TBC at their estimated fair value at the date of Acquisition; (ii) we used the excess of

acquired net assets over the purchase price to reduce the estimated fair values of all non-current, non-financial assets, principally equipment and leasehold improvements; and (iii) we recorded the remaining $117,523 excess of the estimated fair value of net assets over purchase price as an extraordinary gain in the consolidated statement of operations for the period October 16, 2001 through December 31, 2001 in accordance with SFAS No. 141.

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. Swiss Re, our primary reinsurer, maintains an A.M. Best rating of "A+" (Superior). All of our other reinsurers have an A.M. Best rating of "A" (Excellent) or better, except for Lloyd's of London that is rated "A-" (also Excellent). We are a participant in Commonwealth Automobile Reinsurers ("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 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 all insurers writing homeowners insurance in Massachusetts. As of December 31, 2003, we had no material amounts recoverable from any reinsurer, excluding the residual markets described above.

We are subject to the extensive regulation of the private passenger automobile insurance industry in Massachusetts, which represented 81.0% of our direct written premiums in 2003. Owners of registered automobiles are required to maintain minimum automobile insurance coverages. Generally, we are required by law to issue a policy to any applicant who seeks it. We are also required to participate in a state-mandated reinsurance program run by CAR to which we cede certain unprofitable risks and from which we are allocated a portion of the overall losses. This program operates at an underwriting deficit. This deficit is allocated among every Massachusetts automobile insurance company, including us, based on a complex formula that takes into consideration a company's voluntary market share, the rate at which it cedes business to CAR, and the company's utilization of a credit system CAR has designed to encourage carriers to reduce their use of CAR. In addition, based on our market share, we are assigned certain licensed producers by CAR that have been unable to obtain a voluntary contract with another insurer. We call these agents Exclusive Representative Producers, or ERPs.

Proposals to materially change certain CAR rules are under consideration. In a letter to the Massachusetts Insurance Commissioner (the "Commissioner") dated June 25, 2002, the Massachusetts Attorney General reported that his office has determined that CAR's current methodology for assigning ERPs and distributing the CAR deficit must be changed to produce a fair and equitable market. The Attorney General's letter describes several factors that he believes support his findings and which he believes should be corrected in order to comply with Massachusetts law governing CAR. The Attorney General's letter calls on the Commissioner to work with him to address these issues. The letter has engendered discussion and dialogue among various parties that could result in material changes to CAR's rules. In response to the AG's letter and other factors, including a request by the Commissioner to interested parties for suggestions on reforming CAR, sixteen of the nineteen private passenger automobile insurers in Massachusetts (including Safety Insurance), representing approximately 67% of the Massachusetts private passenger automobile insurance market, has formed the "Concerned Industry Committee" for the purpose of developing a proposal for reform. This group has not yet submitted its

proposal formally to the Commissioner or others in Massachusetts government. It is uncertain whether and to what extent the issues raised by the Attorney General will be addressed by CAR. We cannot be certain whether any material changes, if adopted by CAR, would affect our profitability.

Each year, the Commissioner sets maximum premium rates that may be charged and minimum commissions that must be paid to agents for private passenger automobile insurance. The Commissioner announced on December 15, 2003, a 2.5% statewide average private passenger automobile insurance rate increase for 2004, as compared to a 2.7% increase for 2003 and no change for 2002. The Massachusetts Attorney General appealed the Commissioner's 2004 rate decision to the Massachusetts Supreme Judicial Court on January 5, 2004. A decision by the Court is not expected for several months and we cannot predict whether this appeal will be successful or what effect it may have on our profitability. During the period from 1996 through 2003 average rates decreased in four out of eight of those years. Coinciding with the 2004 rate decision, the Commissioner also approved a decrease to 10.5% in the commission rate agents receive for selling private passenger automobile insurance, as a percentage of premiums, as compared to a decrease from 11.7% in 2002 to 11.0% in 2003.

While state-mandated average maximum private passenger automobile insurance rates increased 2.7% for 2003, our average premium per automobile exposure in the twelve months ended December 31, 2003 increased from the twelve months ended December 31, 2002 by approximately 6.9%. This increase was primarily the result of purchases of new automobiles by our insureds. Further, we believe that the continued benefits of our rate pursuit initiative, which validates insured rating classifications and discount eligibility, contributed to the increase in our average premiums received per automobile exposure. The table below shows average Massachusetts-mandated private passenger automobile premium rate changes and changes in our average premium per automobile exposure from 1992-2003.

Year	State Mandated Average Rate Change⁽¹⁾		Safety Change in Average Premium per Automobile Exposure
2003	2.7	%	6.9	%(2)
2002	0.0	%	5.2	%
2001	(8.3	)%	0.0	%
2000	0.7	%	7.4	%
1999	0.7	%	10.9	%
1998	(4.0	)%	2.8	%
1997	(6.2	)%	(5.1	)%
1996	(4.5	)%	(7.7	)%
1995	(6.1	)%	(3.6	)%
1994	2.9	%	1.0	%
1993	5.7	%	5.3	%
1992	8.0	%	4.9	%

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, which

include acquisition costs, as a percent of net written premiums, if calculated on a statutory accounting 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 income. Underwriting profitability is subject to significant fluctuations due to competition, catastrophic events, economic and social conditions and other factors.

Our statutory insurance ratios for the years ended December 31, 2003, 2002 and 2001, respectively, are outlined in the following table:

		For the Years Ended December 31,
		2003		2002		2001
Safety Statutory Ratios:
	Loss Ratio		78.0	%	77.5	%	78.8	%
	Expense Ratio		23.5		24.9		26.1
	Combined Ratio		101.5	%	102.4	%	104.9	%

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 for the years ended December 31, 2003, 2002 and 2001, respectively, are outlined in the following table:

		For the Years Ended December 31,
		2003		2002		2001
Safety GAAP Ratios:
	Loss Ratio		77.9	%	76.7	%	78.7	%
	Expense Ratio		24.2		26.3		26.3
	Combined Ratio		102.1	%	103.0	%	105.0	%

Our results are reported in accordance with GAAP, which differ from amounts reported in accordance with SAP as prescribed by insurance regulatory authorities. Specifically, under GAAP:

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.

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. Refer to "Results of Operations: Losses and Loss Adjustment Expenses" for a more detailed discussion.

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.

We also maintain reserves for estimated losses incurred but not yet reported. Incurred but not yet reported reserves are determined in accordance with commonly accepted actuarial reserving techniques on the basis of our historical information and experience. We review and make adjustments to incurred but not yet reported reserves quarterly.

When reviewing reserves, we analyze historical data and estimate the impact of various loss development factors, such as our historical loss experience and that of the industry, trends in claims frequency and severity, our mix of business, our claims processing procedures, legislative enactments, judicial decisions, legal developments in imposition of damages, and changes and trends in general economic conditions, including the effects of inflation. A change in any of these factors from the assumption implicit in our estimate can cause our actual loss experience to be better or worse than our reserves, and the difference can be material. There is no precise method, however, for evaluating the impact of any specific factor on the adequacy of reserves, because the eventual development of reserves is affected by many factors. Establishment of appropriate reserves is an inherently uncertain process, and currently established reserves may not prove adequate in light of subsequent actual experience. To the extent that reserves are inadequate and are strengthened, the amount of such an 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 reserves.

In 2003, we strengthened our prior years reserves by $181. In 2002 and 2001, our reserve reviews indicated that our reserves established in prior years were slightly higher than necessary, and so in those years we released $2,262 and $7,303, respectively, of previously established reserves for losses and loss adjustment expenses. The changes we have recorded in our reserves in the past three years illustrate the uncertainty of estimating reserves. It is not appropriate to extrapolate future favorable or unfavorable development of reserves from this past experience.

We use a systematic methodology to evaluate declines in market values below cost or amortized cost of our investments. This methodology ensures that we evaluate available evidence concerning any declines in a disciplined manner. Refer to "Results of Operations: Net Realized Investment Losses" for a more detailed discussion.

In our determination of whether a decline in market value below amortized cost is an other-than-temporary impairment, 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 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 record other-than-temporary impairments as a realized loss, which serves to reduce net income and earnings per share. We record temporary losses as unrealized losses, which do not impact net income and earnings per share but reduce other comprehensive net income. The risks inherent in our assessment of other-than-temporary impairments include the risk that market factors may differ from our expectations, or that the credit assessment could change in the near term, resulting in a charge to earnings.

The table below shows certain of our selected financial results for the years ended December 31, 2003, 2002 and 2001. For comparative purposes, the predecessor and successor periods have been combined under the caption "For the Year Ended December 31, 2001."

Direct Written Premiums. Direct written premiums for the year ended December 31, 2003 increased by $54,989, or 10.6%, to $571,545 from $516,556 for the comparable 2002 period. The 2003 increase occurred primarily in our private passenger automobile line which experienced a 6.9% increase in average written premium and a 2.8% increase in written exposures. In addition, we increased our commercial automobile line average rates by 7.1% effective December 16, 2002 and had a 6.9% increase in written exposures, while we increased our homeowners line average rates by 9.3% effective February 19, 2003, which was partly offset by a 2.4% decrease in written exposures.

Net Written Premiums. Net written premiums for the year ended December 31, 2003 increased by $49,356, or 9.5%, to $566,970 from $517,614 for the comparable 2002 period. This was primarily due to an increase in direct written premiums, partly offset by an increase in premiums ceded to CAR.

Net Earned Premiums. Net earned premiums for the year ended December 31, 2003 increased by $50,992, or 10.4%, to $540,248 from $489,256 for the comparable 2002 period. This was primarily due to increased rates on private passenger automobile, commercial automobile and homeowners product lines.

Investment Income. Investment income for the year ended December 31, 2003 decreased to $26,086 from $26,142 for the comparable 2002 period. Average cash and investment securities (at amortized cost) increased by $79,008 or 14.1% to $638,931 for the year ended December 31, 2003 from $559,923 for the comparable 2002 period. Offsetting the effect of this increase was a decrease in net effective yield on our investment portfolio to 4.1% from 4.7% during the same period in 2003 due to declining interest rates, as well as a change in management's investment strategy to shorten the

portfolio duration, shift to higher rated securities, and increase tax-exempt holdings. Our duration decreased to 4.2 years at December 31, 2003 from 5.0 years at December 31, 2002. In addition, during the third quarter of 2003, a retrospective adjustment was made which decreased investment income by $595 due to a periodic revaluation of our asset-backed securities using revised prepayment assumptions and resulting assumed cash flows associated with the loans underlying these securities.

Net Realized Gains (Losses) on Investments. Net realized gains (losses) on investments for the year ended December 31, 2003 increased to $10,051 gain from $(277) loss for the comparable 2002 period. This increase was primarily due to the sale of certain securities related to our current investment strategy to shorten portfolio duration as protection against future increases in interest rates.

The gross unrealized appreciation (depreciation) of investments in fixed maturities securities was as follows:

As of December 31, 2003, our portfolio of fixed maturity investments was comprised entirely of investment grade corporate fixed maturities securities, U.S. government and agency securities and asset-backed securities (i.e., all our securities received a rating assigned by Moody's Investors Services, Inc. of Baa or higher, except the few securities not rated by Moody's which received S&P ratings of Aaa/Aa or higher, as well as a rating assigned by the Securities Valuation Office of the National Association of Insurance Commissioners of 1 or 2).

The composition of our fixed income security portfolio by Moody's rating⁽¹⁾ was as follows:

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 and any other factors that may raise doubt about the issuer's ability to continue as a going concern.

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

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, 2003.

The unrealized losses recorded on the fixed maturity investment portfolio at December 31, 2003 resulted primarily from fluctuations in market interest rates as opposed to fundamental changes in the credit quality of the issuers of such securities. Therefore, these decreases in values are viewed as being temporary as we have the intent and ability to retain such investments for a period of time sufficient to allow for recovery in market value.

Of the $1,993 gross unrealized losses as of December 31, 2003, $1,593 relates to fixed maturity obligations of states and political subdivisions and U.S. government agencies. The remaining $400 of

gross unrealized losses relates to holdings of investment grade asset-backed, corporate and other fixed maturities securities. Gross unrealized losses increased to $1,993 at December 31, 2003 from $926 at December 31, 2002.

During the last half of 2003 and 2002, there were no significant deteriorations in the credit quality of any of our holdings and no other-than-temporary impairment charges were recorded related to our portfolio of investment securities. However, during the first quarter of 2003 there was a significant deterioration in the credit quality of one of our holdings, Continental Airlines. Accordingly, during the first quarter of 2003 we recorded an other-than-temporary impairment of $837 for this security. During May 2003, this security was sold at a realized gain of $426. In comparison, during the second quarter of 2002 there was a significant deterioration in the credit quality of two of our holdings in the telecommunications sector. We recognized a realized loss of $2,020 for one of these securities, which was sold in June 2002. In addition, we recorded an other-than-temporary impairment charge of $1,043 for the other telecommunications security. During September 2002, this security was sold at a realized loss of $79.

Finance and Other Services Income. Finance and other services income includes revenues from premium installment charges, which we recognize when earned, and other miscellaneous income and fees. Finance and other services income for the year ended December 31, 2003 increased by $1,241, or 8.8%, to $15,409 from $14,168 for the comparable 2002 period. This increase was due to a $1,172 increase in premium installment billing fees due to growth in the number of policies and the fee charged per policy, coupled with a $69 increase in miscellaneous income from CAR.

Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses incurred for the year ended December 31, 2003 increased $45,791, or 12.2%, to $420,969 from $375,178 for the comparable 2002 period. Our GAAP loss ratio for the year ended December 31, 2003 increased to 77.9% compared to 76.7% for the comparable 2002 period. Our GAAP loss ratio excluding loss adjustment expenses for the year ended December 31, 2003 increased to 70.2% compared to 68.3% for the comparable 2002 period. The 2003 increase in our GAAP loss ratio excluding loss adjustment expenses is primarily due to increased claim frequency and severity from unusually harsh winter conditions in Massachusetts during the first quarter of 2003 on our homeowners line of business.

Underwriting, Operating and Related Expenses. Underwriting, operating and related expense for the year ended December 31, 2003 increased by $1,770, or 1.4%, to $130,636 from $128,866 for the comparable 2002 period.

Massachusetts law requires that we participate in the Massachusetts Insurers Insolvency Fund, which pays claims 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. We account for allocations from the Massachusetts Insurers Insolvency Fund as underwriting expenses. Underwriting expenses in 2003 and 2002 included $3,423 and $2,103 of charges representing our allocation from the Massachusetts Insurers Insolvency Fund. 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 on the consolidated financial position of the Company.

Our GAAP expense ratio (a percentage of net premiums earned) for the year ended December 31, 2003 improved to 24.2% compared to 26.3% for the comparable 2002 period. This improvement was a result of an increase in earned premiums coupled with ongoing cost control programs, employee productivity improvements through the use of technology, and reduced expenses assumed from CAR.

Other Expenses. Other expenses for the year ended December 31, 2003 decreased to $0 from $6,250 for the comparable 2002 period. Other expenses in 2002 was comprised of $4,000 of TJC management termination fee expense related to services that ceased at the IPO, and $2,250 of

unamortized deferred debt issuance costs related to the Acquisition debt which were expensed upon the repayment of this debt, concurrent with the IPO.

Interest Expense. Interest expense for the year ended December 31, 2003 decreased by $6,608 to $646 from $7,254 for the comparable 2002 period. Interest expense for the 2002 period was related to old debt facilities that were extinguished concurrent with Safety's IPO on November 27, 2002. Primarily as a result of the IPO, Safety significantly reduced debt outstanding to $19,956 at December 31, 2003 from $96,500 prior to the November 27, 2002 IPO.

Income Taxes. Our effective tax rate on net income before preferred stock dividends was 28.0% and 10.9% for the years ended December 31, 2003 and 2002, respectively. For the years ended December 31, 2003 and 2002, the effective rate was lower than the statutory rate of 35% primarily due to adjustments for tax-exempt investment income.

Net Income Before Preferred Stock Dividends. Net income for the year ended December 31, 2003 increased to $28,482 from net income before preferred stock dividends of $10,461 for the comparable 2002 period.

Direct Written Premiums. Direct written premiums for the year ended December 31, 2002 increased by $44,690, or 9.5%, to $516,556 from $471,866 for the comparable 2001 period. This increase was primarily due to an approximate 5.2% increase in the average written premium per automobile exposure on our private passenger automobile business, a 2.2% increase in our private passenger automobile written exposures, and a 7.6% increase in our commercial automobile written exposures. We also increased our average rates on commercial automobile insurance by 7.2% effective January 1, 2002, and in addition we increased our average rates on homeowners insurance by 9.8% effective February 19, 2002.

Net Written Premiums. Net written premiums for the year ended December 31, 2002 increased by $52,148, or 11.2%, to $517,614 from $465,466 for the comparable 2001 period. This increase was primarily due to the increase in direct written premiums, and an increase in assumed premiums from CAR.

Net Earned Premiums. Net earned premiums for the year ended December 31, 2002 increased by $41,983, or 9.4%, to $489,256 from $447,273 for the comparable 2001 period. This increase was primarily due to an approximately 4.4% increase in automobile exposures for which we earned premiums in our private passenger automobile business, an increase in assumed premiums from CAR, and the increased rates on our private passenger automobile, commercial automobile and homeowners lines.

Investment Income. Investment income for the year ended December 31, 2002 decreased by $1,463, or 5.3%, to $26,142 from $27,605 for the comparable 2001 period. An increase of $47,460 or 9.3% in average invested securities and cash (at amortized cost) to $559,923 for the year ended December 31, 2002 from $512,463 for the year ended December 31, 2001 was more than offset by a decrease in net effective yield on our investment portfolio to 4.7% from 5.4% during the same period due to declining interest rates on our investment portfolio, as well as a change in management's investment strategy to shorten the duration of our portfolio, shift to higher rated securities, and increase our tax-exempt holdings.

Net Realized Losses on Investments. Net realized losses on investments for the year ended December 31, 2002 decreased by $4,773 to $277 from $5,050 for the comparable 2001 period. The 2001 net realized losses resulted primarily from the sale of certain securities that had significantly declined in credit quality from the date of purchase and from sales of securities in the ordinary course following the resetting of their carrying value under purchase accounting as of the date of the Acquisition.

The gross unrealized appreciation (depreciation) of investments in fixed maturities securities as of December 31, 2002, was as follows:

As of December 31, 2002, our portfolio of fixed maturity investments was comprised entirely of investment grade corporate fixed maturities securities, U.S. government and agency securities and asset-backed securities (i.e., all our securities received a rating assigned by Moody's Investors Services, Inc. of Baa or higher, as well as a rating assigned by the Securities Valuation Office of the National Association of Insurance Commissioners of 1 or 2). In addition, all fixed maturity securities we held were publicly traded.

In connection with the purchase price allocation adjustments recorded effective with the Acquisition, we increased our net cost basis in investment securities held by an aggregate of approximately $12,679 to their fair market values as of October 16, 2001. None of our gross unrealized losses of $926 as of December 31, 2002 has existed for longer than six months and at a value of less than 80% of cost. As of December 31, 2001, we had gross unrealized losses of $8,083, of which approximately $7,286 related to fixed maturity obligations of the U.S. government, states, and government agency asset-backed securities. The remaining $797 of gross unrealized losses at that date related to holdings of investment grade corporate fixed maturities securities in a variety of industries and sectors, including banking, retail, finance, consumer product, telecommunications, entertainment, utilities and aerospace.

The unrealized losses recorded on the fixed maturity investment portfolio at December 31, 2002 resulted primarily from fluctuations in market interest rates as opposed to fundamental changes in the credit quality of the issuers of such securities. Therefore, these decreases in values are viewed as being temporary as we have the intent and ability to retain such investments for a period of time sufficient to allow for recovery in market value.

Of the $926 gross unrealized losses as of December 31, 2002, $99 relates to fixed maturity obligations of states and political subdivisions, and U.S. government agencies. The remaining $827 of gross unrealized losses relates to holdings of investment grade asset-backed, corporate and other fixed maturities securities.

Gross unrealized losses for the year ended December 31, 2002 decreased from $8,083 at December 31, 2001 to $926 at December 31, 2002. During the year ended December 31, 2002, there was a significant deterioration in the credit quality of two of our holdings in the telecommunications

sector. The Company recognized an after-tax realized loss of $2,020 for one of these securities sold in June and recorded an other-than-temporary impairment charge of $1,043 for the other telecommunications security. During September 2002, this other security was sold at a realized loss of $79. For the year ended December 31, 2001, we did not record any other-than-temporary impairment charges relating to our portfolio of investment securities.

Finance and Other Service Income. Finance and other service income includes revenues from premium installment charges, which we recognize when earned, and other miscellaneous income and fees. Finance and other service income for the year ended December 31, 2002 increased by $2,362, or 20.0%, to $14,168 from $11,806 for the comparable 2001 period. These increases were due to a $1,900 increase in premium installment billing fees due to growth in the number of policies and the fee charged per policy, as well as $500 increase in miscellaneous income from CAR.

Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses incurred for the year ended December 31, 2002 increased $23,236, or 6.6%, to $375,178 from $351,942 for the comparable 2001 period. Our GAAP loss ratio for the year ended December 31, 2002 decreased to 76.7% compared to 78.7% for the comparable 2001 period. Our GAAP loss ratio, excluding loss adjustment expenses for the year ended December 31, 2002 increased to 68.3% compared to 67.9% for the year ended December 31, 2001. We experienced higher assumed residual market losses during the year ended December 31, 2002 than for the year ended December 31, 2001, which is the result of our increased share of 2002 CAR results, a higher CAR loss ratio and strengthening of prior year CAR reserves. Finally, in 2002 we released $2,262 of loss reserves related to prior years, compared to $7,303 in 2001.

Underwriting, Operating and Related Expenses. Underwriting, operating and related expenses for the year ended December 31, 2002 increased by $11,060, or 9.4%, to $128,866 from $117,806 for the comparable 2001 period. Our GAAP expense ratios (a percentage of net premiums earned) were 26.3% for the years ended December 31, 2002 and 2001.

Underwriting, operating and related expenses for the year ended December 31, 2002 included $4,476 in compensation expenses related to put and call options on shares held by management, while the comparable 2001 period included $6,801 related to $3,354 of expense incurred under the employee stock ownership plan and the supplemental executive stock ownership plan, both of which were terminated at the Acquisition, $2,000 in compensation paid to our former majority owner, $1,238 in compensation expense related to put and call options on shares held by management and $209 in fees paid to TJC Management.

Transaction Expenses. Transaction expenses for the year ended December 31, 2002 decreased to $0 from $9,479 for the comparable 2001 period. The transaction expenses for the year ended December 31, 2001 represent costs incurred by the seller and paid by us in connection with the Acquisition. Such seller costs primarily included transaction expenses in the predecessor period related primarily to transaction bonuses to employees, fees paid to Thomas Black Corporation's investment banker and legal fees. These costs were non-recurring in nature and did not result from ongoing insurance operations.

Other Expenses. Other expenses for the year ended December 31, 2002 increased to $6,250 from $0 for the comparable 2001 period. Other expenses are comprised of $4,000 of TJC management

termination fee expense related to services that ceased at the IPO, and $2,250 of unamortized deferred debt issuance costs related to the Acquisition debt which were expensed upon the repayment of this debt, concurrent with the IPO.

Interest Expenses. Interest expenses for the year ended December 31, 2002 increased by $4,881 to $7,254 from $2,373 for the comparable 2001 period. Interest expenses for 2002 were related to Acquisition debt that was extinguished at the IPO, as well as indebtedness incurred in connection with the IPO. Interest expenses for 2001 were related to the employee stock ownership plan debt that was extinguished at the Acquisition, as well as indebtedness incurred in connection with the Acquisition. Primarily as a result of the IPO, we significantly reduced our debt outstanding to $19,956 at December 31, 2002 from $99,500 at December 31, 2001.

Income Taxes. Our effective tax rate on net income before preferred stock dividends was 10.9% and 33.0% for the year ended December 31, 2002 and 2001, respectively. For the year ended December 31, 2002, the effective rate was lower than the statutory rate of 35% primarily due to adjustments for tax-exempt investment income. For the year ended December 31, 2001, the effective tax rate was lower than the statutory rate of 35% primarily due to adjustments for tax-exempt investment income, offset by non-deductible employee stock ownership plan and certain Acquisition related transaction expenses. See note 13 to our consolidated financial statements.

Net Income Before Extraordinary Item and Preferred Stock Dividends. Net income before extraordinary item and preferred dividends for the year ended December 31, 2002 increased to $10,461 from $22 for the comparable 2001 period.

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, are dividends and other permitted payments from our subsidiaries, principally our indirect subsidiary, Safety Insurance. Our direct subsidiary, TBC, directly owns Safety Insurance. TBC is the borrower under our new credit facilities. As a holding company, its principal source of cash to pay amounts owed under the credit facility and its other obligations and dividends to us are dividends and other permitted payments from Safety Insurance.

Safety Insurance's sources of funds primarily include premiums received, investment income and proceeds from sales and redemptions of investments. 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 TBC.

Net cash provided by operating activities was $85,185 and $85,379 during the years ended December 31, 2003 and 2002, respectively. Our operations typically generate substantial positive cash flows from operations as most premiums are received in advance of the time when claim and benefit payments are required. These positive operating cash flows are expected to continue to meet our liquidity requirements.

Net cash used for investing activities was $89,205 and $63,656 during the year ended December 31, 2003 and 2002, respectively, which resulted primarily from purchases of fixed maturities in excess of sales of fixed maturities.

Net cash used for financing activities was $4,473 during the year ended December 31, 2003, which resulted from dividends paid to shareholders less paydown of management notes. Financing activities were a source of $776 liquidity for us during the year ended December 31, 2002 when we obtained cash to pay down our long-term debt principally from borrowings under our new 2002 credit facility, and also from issuing our common stock in our IPO that closed November 27, 2002.

New 2002 Credit Facility. Concurrent with the closing of our IPO and repayment of the old credit facility, TBC obtained a new $30,000 revolving credit facility. Fleet National Bank is the lender under this new credit facility. TBC borrowed the entire $30,000 under this new credit facility at the closing of the IPO and paid down the balance to $19,956 on December 5, 2002 with the approximately $10,000 net proceeds from the exercise of the underwriter's over-allotment option for 900,000 shares of our common stock. Loans under the new credit facility bear interest at our option at either (i) the LIBOR rate plus 1.50% per annum or (ii) the higher of Fleet National Bank's prime rate or 0.50% above the federal funds rate plus 1.50% per annum. The new credit facility is due and payable at maturity on November 27, 2005, which is three years from the closing of the IPO. Interest only is payable prior to maturity. The obligations of TBC under the new credit facility are secured by pledges of the assets of TBC and the capital stock of TBC's operating subsidiaries. The new credit facility is guaranteed by the non-insurance company subsidiaries of TBC. The new credit facility contains covenants including requirements to maintain minimum risk based capital ratios and statutory surplus of Safety Insurance as well as limitations or restrictions on indebtedness, liens, dividends, and other matters. As of December 31, 2003, we were in compliance with all such covenants.

Old 2001 Credit Facility. In connection with the Acquisition, TBC borrowed a total of $69,500 under our old credit facility. Fleet National Bank was the arranger under this facility, which consisted of a $55,000 term loan and a $20,000 revolving credit facility. We borrowed the entire amount of the term loan and $14,500 under the revolving credit facility to fund the Acquisition and had paid down $3,000 on the term loan prior to closing our IPO. The interest rate under our old credit facility was 5.0% at the closing of the IPO. We used proceeds from our IPO, the Direct Sale and the new credit facility to repay all our borrowings under our old credit facility on that date.

Senior Subordinated Notes. Safety issued $30,000 in 13.0% senior subordinated notes to obtain funds for the Acquisition. Interest on these notes was payable semiannually on each April 30 and October 31. The senior subordinated notes would have matured December 31, 2011. The notes could be redeemed at our option prior to maturity with no redemption premium or penalty. The notes also contained specified financial and operating covenants. We used proceeds from the IPO, the Direct Sale and the New Credit Facility to repay these notes along with approximately $0.3 million of unpaid accrued interest on that date.

Senior Redeemable Preferred Stock. Safety issued $22,400 of its senior redeemable cumulative preferred stock in connection with the Acquisition. This preferred stock was entitled to cumulative dividends at a rate of 6% per year, a liquidation preference of $22,400 and was required to be redeemed on the earlier of October 16, 2012 or the date of a change in control of our Company.

When we completed the Preferred Share Exchange at the closing of the IPO, all of our outstanding preferred stock was converted into shares of our common stock, valued at the IPO price. Based on the IPO price of $12.00 per share, we issued an aggregate of 1,866,665 shares of common stock in the Preferred Share Exchange. We used proceeds from the IPO, the Direct Sale and our new 2002 credit facility to pay accrued dividends of $1,500 on the preferred shares on that date.

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 DOI. 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 2003, the statutory surplus of Safety Insurance was $258,551, and its net income for 2003 was $27,007. A maximum of $27,007 is available in 2004 for such dividends without prior approval of the Commissioner. During the year ended December 31, 2003, Safety Insurance declared dividends to TBC in the amount of $6,670.

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.

On both February 24, 2004 and November 21, 2003, our Board approved a quarterly cash dividend on our common stock of $0.10 per share, or $1,526 based on 15,259,991 common shares outstanding, paid on March 15, 2004 and December 15, 2003 to shareholders of record on March 1, 2004 and December 1, 2003, respectively. On August 21, 2003, our Board approved an increase in our quarterly cash dividend from $0.07 per share to $0.10 per share, or $1,526 based on 15,259,991 common shares outstanding, paid on September 15, 2003 to shareholders of record on September 1, 2003. On both May 22 and February 20, 2003, our Board approved a quarterly cash dividend on our common stock of $0.07 per share, or $1,068 based on 15,259,991 common shares outstanding, paid on June 16 and March 17, 2003 to shareholders of record on June 2 and March 3, 2003, respectively. We plan to continue to declare and pay quarterly cash dividends in 2004, depending on our financial position and the regularity of our cash flows.

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

We have no material obligations under a guarantee contract meeting the characteristics identified in paragraph 3 of Financial Accounting Standards Board ("FASB") Interpretation No. ("FIN") 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 obligation, 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.

We have obligation to make future payments under contracts and credit-related financial instruments and commitments. At December 31, 2003, certain long-term aggregate contractual obligations and credit-related commitments are summarized as follows:

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 give our expectations or predictions of future conditions, events or results. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. There are a number of factors—many of which are beyond our control—that could cause actual future conditions, events, results or trends to differ significantly and/or materially from historical results or those projected in the forward-looking statements. These factors include but are not limited to the competitive nature of our industry and the possible adverse effects of such competition, conditions for business operations and restrictive regulations in Massachusetts, claims related to severe weather, 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 those set forth under the caption "Risk Factors" in our prospectus in the registration statement on Form S-1 filed with the SEC on November 22, 2002.

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

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

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.

The following tables show the interest rate sensitivity of our financial instruments measured in terms of fair value (which is equal to the carrying value for all our securities).

An important market risk for all of our outstanding long-term debt is interest rate risk. We continue to monitor the interest rate environment and to evaluate refinancing opportunities as maturity dates approach. With respect to floating rate debt, we are also exposed to the effects of changes in prevailing interest rates. At December 31, 2003 we had $19,956 of debt outstanding under our new credit facility at a variable rate of 2.8%. A 2.0% change in the prevailing interest rate on our variable rate debt would result in interest expense fluctuating approximately $400 for 2003, assuming that all of such debt is outstanding for the entire year.

Equity Risk. Equity risk is the risk that we will incur economic losses due to adverse changes in equity prices. In the past, our exposure to changes in equity prices primarily resulted from our holdings of common stocks, mutual funds and other equities. While we have in the past held common equity securities in our investment portfolio, presently we hold none. We continuously evaluate market conditions and we expect in the future to purchase equity securities. We principally managed equity price risk through industry and issuer diversification and asset allocation techniques.

		Page(s)
Consolidated Financial Statements:
Reports of Independent Auditors		52-53
Balance Sheets		54
Statements of Operations		55
Statements of Changes in Shareholders' Equity		56
Statements of Comprehensive Income		57
Statements of Cash Flows		58
Notes to Consolidated Financial Statements		59-84

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in shareholders' equity, comprehensive income and cash flows present fairly, in all material respects, the financial position of Safety Insurance Group, Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for the years ended December 31, 2003 and 2002 and the period from October 16, 2001 through December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the accompanying consolidated statements of operations, changes in shareholders' equity, comprehensive income and cash flows present fairly, in all material respects, the results of operations and cash flows of Safety Insurance Group, Inc. and its subsidiaries (formerly Thomas Black Corporation) for the period from January 1, 2001 through October 15, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except share data)

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Operations

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

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Delaware		13-4181699
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Title of each class		Name of each exchange on which registered
Common Shares, $0.01 par value per share		NASDAQ National Market

		Years Ended December 31,
Direct Written Premiums		Years Ended December 31,
Direct Written Premiums		2003				2002				2001
Private passenger automobile		$	463,199	81.0	%	$	421,116	81.5	%	$	392,334	83.1	%
Commercial automobile			58,042	10.2			50,858	9.9			42,591	9.0
Homeowners			42,460	7.4			38,027	7.4			31,863	6.8
Business owners policies			4,301	0.8			3,282	0.6			2,251	0.5
Personal umbrella			1,579	0.3			1,528	0.3			1,469	0.3
Dwelling fire			1,729	0.3			1,580	0.3			1,263	0.3
Commercial umbrella			235	—			165	—			95	—

	Total	$	571,545	100.0	%	$	516,556	100.0	%	$	471,866	100.0	%

		Successor									Predecessor
		Year Ended December 31, 2003			Year Ended December 31, 2002			October 16- December 31, 2001			January 1- October 15, 2001
Reserves for losses and LAE, beginning of year/period		$	333,297		$	302,556		$	307,655		$	302,131
Less reinsurance recoverable on unpaid losses and LAE			(66,661	)		(75,179	)		(83,501	)		(90,297	)

Net reserves for losses and LAE, beginning of year/period			266,636			227,377			224,154			211,834

Incurred losses and LAE, related to:
	Current year		420,788			377,440			76,262			282,983
	Prior years		181			(2,262	)		(703	)		(6,600	)

Total incurred losses and LAE			420,969			375,178			75,559			276,383

Paid losses and LAE related to:
	Current year		240,501			217,778			58,168			164,215
	Prior years		137,092			118,141			14,168			99,848

Total paid losses and LAE			377,593			335,919			72,336			264,063

Net reserves for losses and LAE, end of year/period			310,012			266,636			227,377			224,154
Plus reinsurance recoverables on unpaid losses and LAE			73,539			66,661			75,179			83,501

Reserves for losses and LAE, end of year/period		$	383,551		$	333,297		$	302,556		$	307,655

			Page No.
PART I.
Item 1.	Business		1
	A.	General	1
	B.	The Massachusetts Property and Casualty Insurance Market	3
	C.	Products	5
	D.	Distribution	7
	E.	Marketing	8
	F.	Underwriting	9
	G.	Technology	11
	H.	Claims	12
	I.	Reserves	14
	J.	Reinsurance	17
	K.	Competition	19
	L.	Employees	19
	M.	Investments	19
	N.	Ratings	22
	O.	Supervision and Regulation	22
Item 2.	Properties		26
Item 3.	Legal Proceedings		26
Item 4.	Submission of Matters to a Vote of Security Holders		26
Item 4A.	Executive Officers of the Registrant		26
PART II.
Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters		29
Item 6.	Selected Financial Data		29
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operation		32
	A.	Executive Summary
	B.	Critical Accounting Policies	37
	C.	Results of Operations—For the years ended December 21, 2003, 2002 and 2001	39
	D.	Liquidity and Capital Resources	46
	E.	Forward-Looking Statements	49
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		50
Item 8.	Financial Statements and Supplementary Data		51
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		85
Item 9A.	Controls and Procedures		85
PART III.
Item 10.	Directors and Executive Officers of the Registrant		85
Item 11.	Executive Compensation		85
Item 12.	Security Ownership of Certain Beneficial Owners and Management		85
Item 13.	Certain Relationships and Related Transactions		86
Item 14.	Principal Accounting Fees and Services		86
PART IV.
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		86
SIGNATURES			96

		December 31, 2003
		Amount		Percent
U.S. Government and Government Agency Fixed Income Securities		$	137,507	20.4	%
Aaa/Aa			414,072	61.5
A			86,125	12.8
Baa			35,932	5.3

	Total	$	673,636	100.0	%

		December 31, 2003
		Amount		Percent
Due in one year or less		$	7,573	1.1	%
Due after one year through five years			176,475	26.2
Due after five years through ten years			204,156	30.3
Due after ten years through twenty years			63,108	9.4
Due after twenty years			17,760	2.6
Mortgage- and Asset-backed securities(1)			204,564	30.4

	Total	$	673,636	100.0	%

			Successor								Predecessor
			Year Ended December 31,					October 16- December 31,			January 1- October 15,			Year Ended December 31,
			2003		2002			2001⁽¹⁾			2001⁽¹⁾			2000			1999
Income Statement Data:
	Direct written premium		$	571,545	$	516,556		$	80,238		$	391,628		$	427,457		$	349,206
	Net written premiums			566,970		517,614			82,980			382,486			430,030			330,961
	Net earned premiums			540,248		489,256			100,175			347,098			381,413			300,020
	Investment income			26,086		26,142			5,359			22,246			26,889			23,870
	Net realized gain (loss) on investments			10,051		(277	)		(4,284	)		(766	)		(1,246	)		8,102
	Finance and other services income			15,409		14,168			2,546			9,260			10,514			9,154

		Total revenue		591,794		529,289			103,796			377,838			417,570			341,146
	Losses and loss adjustment expenses			420,969		375,178			75,559			276,383			275,139			225,241
	Underwriting, operating and related expenses			130,636		128,866			29,808			87,998			113,425			89,522
	Transaction expenses(2)			—		—			3,874			5,605			406			—
	Other expenses			—		6,250			—			—			—			—
	Interest expense			646		7,254			1,823			550			1,071			1,418

		Total expenses		552,251		517,548			111,064			370,536			390,041			316,181

Income (loss) before income taxes				39,543		11,741			(7,268	)		7,302			27,529			24,965
Income tax expense (benefit)				11,061		1,280			(1,666	)		1,678			8,255			8,667

Net income (loss) before extraordinary item and preferred stock dividends				28,482		10,461			(5,602	)		5,624			19,274			16,298
	Excess of fair value of acquired net assets over purchase price			—		—			117,523			—			—			—

Net income before preferred stock dividends			$	28,482	$	10,461		$	111,921		$	5,624		$	19,274		$	16,298
Dividends on mandatorily redeemable preferred stock				—		(1,219	)		(280	)		—			—			—

Net income available to common stockholders			$	28,482	$	9,242		$	111,641		$	5,624		$	19,274		$	16,298

Net income (loss) per common share before extraordinary item:
	Basic		$	1.87	$	1.44		$	(1.07	)	$	6.26		$	22.50		$	19.95

	Diluted		$	1.86	$	1.38		$	(1.07	)	$	6.26		$	22.50		$	19.95

Extraordinary item per common share:
	Basic	$	—	$	—	$	21.29	$	—	$	—	$	—

	Diluted	$	—	$	—	$	21.29	$	—	$	—	$	—

Net income available to common stockholders per common share:
	Basic	$	1.87	$	1.44	$	20.23	$	6.26	$	22.50	$	19.95

	Diluted	$	1.86	$	1.38	$	20.23	$	6.26	$	22.50	$	19.95

Cash dividends paid per common share		$	0.34	$	—	$	—	$	—	$	—	$	—

Weighted average number of common shares outstanding:
	Basic		15,259,991		6,433,786		5,519,500		898,300		856,800		816,800

	Diluted		15,340,047		6,699,338		5,810,000		898,300		856,800		816,800

	December 31, 2003
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S Treasury securities and obligations of U.S. Government agencies(1)	$	141,401	$	2,049	$	(695	)	$	142,755
Obligations of states and political subdivisions		301,101		10,080		(898	)		310,283
Asset-backed securities		80,351		2,614		(234	)		82,731
Corporate and other securities		131,322		6,711		(166	)		137,867

Totals	$	654,175	$	21,454	$	(1,993	)	$	673,636

		December 31, 2003
		Amount		Percent
U.S. Government and Government
Agency Fixed Income Securities		$	137,507	20.4	%
Aaa/Aa			414,072	61.5
A			86,125	12.8
Baa			35,932	5.3

	Total	$	673,636	100.0	%

	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury securities and obligations of U.S. Government agencies	$	40,613	$	695	$	94	$	—	$	40,707	$	695
Obligations of states and political subdivisions		97,402		898		—		—		97,402		898
Asset-backed securities		16,811		83		3,636		151		20,447		234
Corporate and other securities		15,067		166		—		—		15,067		166

Total temporarily impaired securities	$	169,893	$	1,842	$	3,730	$	151	$	173,623	$	1,993

		Payments Due by Period
		Within One Year		Two to Three Years		Four to Five Years		After Five Years		Total
Debt		$	—	$	19,956	$	—	$	—	$	19,956
Capital lease obligations			214		466		19		—		699
Operating leases			2,659		5,448		5,683		—		13,790

	Total contractual obligations	$	2,873	$	25,870	$	5,702	$	—	$	34,445

		Fair Value as of December 31, 2003
		-100 Basis Point Change		As Of 12/31/2003		+100 Basis Point Change
Bonds and preferred stocks		$	704,721	$	673,636	$	642,652
Cash and cash equivalents			26,284		26,284		26,284

	Total	$	731,005	$	699,920	$	668,936

		As of and for the Year Ended December 31,
		2003		2002		2001		2000		1999		1998		1997		1996		1995		1994		1993
Reserves for losses and LAE originally estimated		$	310,012	$	266,636	$	227,377	$	211,834	$	206,613	$	195,990	$	195,145	$	189,420	$	175,125	$	149,197	$	123,720
Cumulative amounts paid as of:
	One year later				137,092		118,141		114,016		107,937		92,791		75,233		68,246		56,912		45,098		38,238
	Two years later						168,347		163,768		133,414		113,323		105,046		96,219		82,299		66,041		55,639
	Three years later								185,398		154,395		135,024		125,574		111,706		93,866		78,052		65,354
	Four years later										163,904		144,985		136,730		121,100		99,854		82,918		70,713
	Five years later												149,549		141,843		126,924		103,384		84,597		73,212
	Six years later														143,459		128,804		105,284		85,201		73,678
	Seven years later																129,358		105,759		85,678		73,917
	Eight years later																		105,823		85,951		73,928
	Nine years later																				85,971		73,984
	Ten years later																						73,976

		As of and for the Year Ended December 31,
		2003	2002		2001		2000			1999			1998			1997			1996			1995			1994			1993
Reserves re-estimated as of:
	One year later		$	266,817	$	225,115	$	204,531		$	179,650		$	169,940		$	171,803		$	161,083		$	140,728		$	128,012		$	103,866
	Two years later					227,771		206,340			176,008			156,590			153,846			144,727			125,496			108,979			96,002
	Three years later							208,592			175,868			154,867			147,455			134,721			114,597			99,167			85,774
	Four years later										176,029			154,530			146,059			131,694			108,705			91,086			80,193
	Five years later													154,576			145,670			131,051			106,763			87,335			76,885
	Six years later																145,612			130,903			106,578			86,352			74,571
	Seven years later																			130,735			106,545			86,429			74,072
	Eight years later																						106,396			86,416			74,158
	Nine years later																									86,378			74,123
	Ten years later																												74,121
Cumulative deficiency/(redundancy) 2003				181		394		(3,242	)		(30,584	)		(41,414	)		(49,533	)		(58,685	)		(68,729	)		(62,819	)		(49,599	)

	As of and for the Year Ended December 31,
	2003		2002		2001		2000		1999		1998		1997		1996		1995		1994		1993
Gross liability—end of year	$	383,551	$	333,297	$	302,556	$	302,131	$	315,226	$	311,846	$	319,453	$	326,802	$	303,330	$	276,835	$	243,402
Reinsurance recoverables		73,539		66,661		75,179		90,297		108,613		115,856		124,308		137,382		128,205		127,638		119,682
Net liability—end of year		310,012		266,636		227,377		211,834		206,613		195,990		195,145		189,420		175,125		149,197		123,720
Gross estimated liability—latest				333,527		283,939		277,345		245,119		226,820		221,520		211,104		181,427		158,215		142,924
Reinsurance recoverables—latest				66,710		56,168		68,753		69,090		72,244		75,908		80,369		75,031		71,837		68,803
Net estimated liability—latest				266,817		227,771		208,592		176,029		154,576		145,612		130,735		106,396		86,378		74,121

		As of and for the Year Ended December 31,
		2003			2002			2001⁽¹⁾			2000			1999
Balance Sheet Data:
	Total cash & investments	$	699,920		$	638,663		$	529,286		$	505,006		$	447,836
	Total assets		1,076,296			978,596			859,174			833,339			770,009
	Losses and loss adjustment expenses reserves		383,551			333,297			302,556			302,131			315,226
	Total debt		19,956			19,956			99,500			13,383			18,000
	Total liabilities		808,276			733,344			727,512			620,388			594,905
	Mandatorily redeemable preferred stock		—			—			22,680			—			—
	Total stockholders' equity		268,020			245,252			108,982			212,951			175,105
Statutory Data:
	Policyholders' surplus (at period end)	$	258,551		$	234,204		$	220,081		$	192,577		$	185,529
	Loss ratio(3)		78.0	%		77.5	%		78.8	%		73.5	%		76.0	%
	Expense ratio(3)		23.5			24.9			25.0			27.3			28.6

	Combined ratio(3)		101.5	%		102.4	%		103.8	%		100.8	%		104.6	%
GAAP Ratios:
	Loss ratio(3)		77.9	%		76.7	%		78.7	%		72.1	%		75.1	%
	Expense ratio(3)		24.2			26.3			26.3			29.7			29.8

	Combined ratio(3)		102.1	%		103.0	%		105.0	%		101.8	%		104.9	%

		December 31, 2003			December 31, 2002
Assets
Investment securities available for sale:
	Fixed maturities, at fair value (amortized cost: $654,175 and $581,854)	$	673,636		$	603,886
Cash and cash equivalents			26,284			34,777
Accounts receivable, net of allowance for doubtful accounts			134,145			122,005
Accrued investment income			7,224			6,812
Taxes receivable			1,484			1,546
Receivable from reinsurers related to paid loss and loss adjustment expenses			47,503			40,886
Receivable from reinsurers related to unpaid loss and loss adjustment expenses			73,539			66,661
Prepaid reinsurance premiums			33,474			30,967
Deferred policy acquisition costs			40,177			36,992
Deferred income taxes			8,692			6,245
Equity and deposits in pools			26,989			24,983
Other assets			3,149			2,836

	Total assets	$	1,076,296		$	978,596

Liabilities
Loss and loss adjustment expense reserves		$	383,551		$	333,297
Unearned premium reserves			301,227			271,998
Accounts payable and accrued liabilities			37,497			33,222
Outstanding claims drafts			20,045			19,391
Payable for securities			—			18,814
Payable to reinsurers			45,338			36,666
Capital lease obligations			662			—
Debt			19,956			19,956

Total liabilities			808,276			733,344

Commitments and contingencies (Note 7)
Shareholders' equity
Common stock: $0.01 par value; 30,000,000 shares authorized; and 15,259,991 issued and outstanding			153			153
Additional paid-in capital			111,074			110,632
Accumulated other comprehensive income, net of taxes			12,650			14,321
Promissory notes receivable from management			(34	)		(737	)
Retained earnings			144,177			120,883

	Total shareholders' equity		268,020			245,252

Total liabilities and shareholders' equity		$	1,076,296		$	978,596