UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑K

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
Or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number 000‑50070

SAFETY INSURANCE GROUP, INC.

(Exact name of registrant as specified in its charter)

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

20 Custom House Street, Boston, Massachusetts 02110

(Address of principal executive offices including zip code)

(617) 951‑0600

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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. ☒

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

Large accelerated filer ☒	Accelerated filer                  ☐
Non-accelerated filer    ☐    (Do not check if smaller reporting company)	Smaller reporting company ☐    Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐ 

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

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, 2017, was approximately $981,491,695.

As of February 16, 2018 there were 15,219,974 Common Shares with a par value of $0.01 per share outstanding.

Documents Incorporated by Reference

Portions of the registrant’s definitive proxy statement for its Annual Meeting of Shareholders to be held on May 23, 2018, which Safety Insurance Group, Inc. (the “Company”, “we”, “our”, “us”) intends to file within 120 days after its December 31, 2017 year‑end, are incorporated by reference into Part II and Part III hereof.

SAFETY INSURANCE GROUP, INC.

Table of Contents

PART I.		Page
Item 1.	Business	1
Item 1A.	Risk Factors	23
Item 1B.	Unresolved Staff Comments	29
Item 2.	Properties	29
Item 3.	Legal Proceedings	30
Item 4.	Mine Safety Disclosures	30
PART II.
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	31
Item 6.	Selected Financial Data	33
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	35
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	60
Item 8.	Financial Statements and Supplementary Data	61
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	99
Item 9A.	Controls and Procedures	99
Item 9B.	Other Information	100
PART III.
Item 10.	Directors, Executive Officers and Corporate Governance	101
Item 11.	Executive Compensation	101
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related
	Stockholder Matters	101
Item 13.	Certain Relationships and Related Transactions, and Director Independence	101
Item 14.	Principal Accounting Fees and Services	101
PART IV.
Item 15.	Exhibits, Financial Statement Schedules	101
Item 16	Form 10-K Summary	113
SIGNATURES		114

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

PART I.

ITEM 1.    BUSINESS

General

We are a leading provider of private passenger and commercial automobile insurance in Massachusetts. In addition to private passenger and commercial automobile insurance, we offer a portfolio of property and casualty insurance products, including homeowners, dwelling fire, umbrella and business owner policies. Operating exclusively in Massachusetts, New Hampshire and Maine through our insurance company subsidiaries, Safety Insurance Company ("Safety Insurance"), Safety Indemnity Insurance Company ("Safety Indemnity") and Safety Property and Casualty Insurance Company ("Safety P&C") (together referred to as the "Insurance Subsidiaries"), we have established strong relationships with independent insurance agents, who numbered 892 in 1,107 locations throughout these three states during 2017.  We have used these relationships and, in particular, our extensive knowledge of the Massachusetts market to become the second largest commercial automobile carrier, capturing an approximate 15.6% share of the Massachusetts commercial automobile insurance market, and the fourth largest private passenger automobile carrier, with a 9.3% share of the Massachusetts private passenger automobile insurance market in 2017 according to statistics compiled by Commonwealth Automobile Reinsurers ("CAR").  We also are the third largest homeowners insurance carrier in Massachusetts with a 7.3% share of that market.  We were ranked the 48th largest automobile writer in the country according to A.M. Best, based on 2016 direct written premiums.  We were incorporated under the laws of Delaware in 2001, but through our predecessors, we have underwritten insurance in Massachusetts since 1979.

Our Insurance Subsidiaries began writing insurance in New Hampshire during 2008 and Maine in 2016.  The table below shows the amount of direct written premiums written in each state during the years ended December 31, 2017, 2016, and 2015.

	Years Ended December 31,
Direct Written Premiums	2017		2016		2015
Massachusetts	$	799,427	$	785,376	$	762,999
New Hampshire		27,637		26,128		22,731
Maine		252		55		-
Total	$	827,316	$	811,559	$	785,730

Website Access to Information

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

Our Competitive Strengths

We Have Strong Relationships with Independent Agents.  In 2017, Independent agents accounted for approximately 61.6% of the Massachusetts automobile insurance market measured by direct written premiums as

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compared to approximately 31.3% nationwide, based on data made available by Independent Insurance Agents and Brokers of America, Inc. and Commonwealth Automobile Reinsurers. For that reason, our strategy is centered around, and we sell exclusively through, a network of independent agents, who numbered 892 in 1,107 locations throughout Massachusetts, New Hampshire and Maine during 2017.  In order to support our independent agents and enhance our relationships with them, we:

· provide our agents with a portfolio of property and casualty insurance products at competitive prices to help them effectively address the insurance needs of their clients;

· provide our agents with a variety of technological resources which enable us to deliver superior service and support to them; and

· offer our agents competitive commission schedules and profit sharing programs.

Through these measures, we strive to become the preferred provider of the independent agents in our agency network and capture a growing share of the total insurance business written by these agents in Massachusetts, New Hampshire and Maine.  We must compete with other insurance carriers for the business of independent agents.

We Have a History of Profitable Operations.  In 36 out of 37 years since our inception in 1979, we have been profitable.  The lone year in which we did not have profits was 2015 when we were impacted by claims related to the highest recorded snowfall totals in Massachusetts history.  We have achieved our profitability, among other things, by:

· maintaining a consistent level of private passenger automobile premiums, which totaled $468,883 in 2017 compared to $465,723 in 2013.

· growing our commercial automobile premiums, which totaled $129,524 in 2017 compared to $86,016 in 2013;

· growing our homeowner premiums which totaled $187,624 in 2017 compared to $144,925 in 2013;

· maintaining a combined ratio that is typically below industry averages (refer to Insurance Ratios under Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion on insurance ratios);

· taking advantage of the institutional knowledge our management has amassed during its long tenure in the industry;

· introducing new lines and forms of insurance products;

· investing in technology to simplify internal processes and enhance our relationships with our agents; and

· maintaining a high-quality investment portfolio.

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

We Have an Experienced, Committed and Knowledgeable Management Team.  Our senior managementteam has an average of over 29 years of experience with Safety and a demonstrated ability to operate successfully within the property and casualty market. Our senior management team along with our Board of Directors, collectively owns approximately 2.3% of the common stock of Safety Insurance Group, Inc. on a fully diluted basis. 

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Our Strategy

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

· further penetrate the Massachusetts, New Hampshire and Maine markets in all lines of business;

· implement rates, forms and billing options that allow us to cross-sell private passenger automobile, homeowners, dwelling fire, and personal umbrella policies in the personal lines market and commercial automobile, business owner policies, commercial property package and commercial umbrella policies in the commercial lines market in order to capture a larger share of the total Massachusetts, New Hampshire and Maine property and casualty insurance business written by each of our independent agents; and

· continue to expand our technology to enable independent agents to more easily serve their customers and conduct business with us, thereby strengthening their relationships with us.

Property and Casualty Insurance Market

Introduction.  We are licensed by the respective state insurance departments to transact property and casualty insurance in Massachusetts, New Hampshire, and Maine.  All of our business is regulated by these departments, with the most extensive oversight from our domestic regulator, the Massachusetts Division of Insurance.

Products

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

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

	Years Ended December 31,
Direct Written Premiums	2017				2016				2015
Private passenger automobile	$	468,908	56.7	%	$	467,845	57.7	%	$	468,187	59.6	%
Commercial automobile		129,529	15.7			120,641	14.9			108,013	13.8
Homeowners		187,623	22.7			182,128	22.4			170,410	21.7
Business owners		22,734	2.7			22,933	2.8			22,223	2.8
Personal umbrella		7,870	0.9			7,693	1.0			6,925	0.9
Dwelling fire		9,603	1.2			9,256	1.1			8,920	1.1
Commercial umbrella		1,049	0.1			1,063	0.1			1,052	0.1
Total	$	827,316	100.0	%	$	811,559	100.0	%	$	785,730	100.0	%

Our product lines are as follows:

Private Passenger Automobile (56.7% of 2017 direct written premiums).  Private passenger automobile insurance is our primary product.  These 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 filed and were approved for a Massachusetts private passenger automobile insurance rate increase of 3.6% effective July 15, 2017.  We filed and were approved for a New Hampshire private

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passenger automobile rate increase of 4.1% which was effective December 1, 2016. We are writing private passenger automobile insurance policies in Maine with our initially filed rates.

Commercial Automobile (15.7% of 2017 direct written premiums).  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.  We filed and were approved for a Massachusetts commercial automobile insurance rate increase of 3.8% effective April 1, 2017. We filed and were approved for a New Hampshire commercial automobile insurance rate increase of 6.1% effective March 1, 2017.  We are writing commercial automobile insurance policies in Maine with our initially filed rates.

Homeowners (22.7% of 2017 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 filed and were approved for a Massachusetts rate increase of 3.6% which was effective November 1, 2016. We filed and were approved for a New Hampshire homeowners rate increase of 4.4%, which was effective December 1, 2016.  We are writing homeowners insurance policies in Maine with our initially filed rates.    

Business Owners Policies (2.7% of 2017 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.

Personal Umbrella (0.9% of 2017 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 write policies at standard rates with limits of $1,000 to $5,000.

Dwelling Fire (1.2% of 2017 direct written premiums).  We underwrite dwelling fire insurance, which is a limited form of a homeowner's policy for non-owner occupied residences.  We write all forms of dwelling fire coverage at standard rates with qualifying risks eligible for preferred lower rates.

Commercial Umbrella (0.1% of 2017 direct written premiums).  We offer an excess liability product to clients for whom we underwrite both commercial automobile and business owner policies.  The program is directed at commercial automobile risks with private passenger-type automobiles or light and medium trucks.  We write commercial umbrella policies at standard rates with limits ranging from $1,000 to $5,000.

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

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

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In the wake of the September 11, 2001 tragedies, the insurance industry also was impacted by terrorism, and we have filed and received approval for a number of terrorism endorsements, which limit our liability and property exposure according to the Terrorism Risk Insurance Act of 2002, the Terrorism Risk Insurance Extension Act of 2005, the Terrorism Risk Insurance Program Reauthorization Act of 2007 and the Terrorism Risk Insurance Program Reauthorization of 2015.  See "Reinsurance," discussed below.

Distribution

We distribute our products exclusively through independent agents, unlike some of our competitors who use multiple distribution channels.  We believe this gives us a competitive advantage with the agents.  With the exception of personal automobile business assigned to us by the Massachusetts Automobile Insurance Plan (“MAIP”) or written through CAR’s commercial automobile Servicing Carrier program, we do not accept business from insurance brokers.  Our voluntary agents have authority pursuant to our voluntary agency agreement to bind our Insurance Subsidiaries for any coverage that is within the scope of their authority.  We reserve the ability to cancel any coverage bound, in accordance with applicable law.  In total, our independent agents numbered 892 and had 1,107 offices (some agencies have more than one office) and approximately 8,551 customer service representatives during 2017.

Voluntary Agents.  In 2017, we obtained approximately 91.1% 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, 2017, we had agreements with 728 voluntary agents.  Our voluntary agents are located in all regions of Massachusetts, New Hampshire and Maine.

We look for agents with profitable portfolios of business.  To become a voluntary agent for our Company, we generally require that an agency: (i) have been in business for at least five years; (ii) have exhibited a three year private passenger average ratio of losses, excluding loss adjustment expenses, to net earned premiums ("pure loss ratio") of 65.0% or less on the portion of the agent's portfolio that we would underwrite; (iii) make a commitment for us to underwrite at least 300 policies from the agency during the first twelve months after entering an agreement with us; and (iv) offer multiple product lines. Every year, we review the performance of our agents during the prior year.  If an agent fails to meet our profitability standards, we try to work with the agent to improve the profitability of the business it places with us.  We generally terminate contracts each year with a few agencies, which, despite our efforts, have been consistently unable to meet our standards.  Although independent agents usually represent several unrelated insurers, our goal is to be one of the top two insurance companies represented in each of our agencies, as measured by premiums.  No individual agency generated more than 5.0% of our direct written premiums in 2017.

Massachusetts law guarantees that CAR provides motor vehicle insurance coverage to all qualified applicants.  Under the MAIP, personal automobile policies are assigned to us for three years, unless the policyholder is offered a voluntary policy by another insurer.  All Massachusetts agents are authorized to submit eligible business to the MAIP for random assignment to a servicing carrier such as Safety Insurance.  We are allocated all private passenger residual market business through the MAIP.

CAR runs a reinsurance pool for ceded commercial automobile policies through the Commercial Automobile Program (the “Commercial Automobile Program”).  CAR has appointed Safety and three other servicing carriers to process ceded commercial automobile insurance.  Safety was reappointed for this program beginning January 1, 2017 for an additional five-year term.  Approximately $156,000 of ceded premium is spread equitably among the four servicing carriers.  Subject to the Commissioner's review, CAR sets the premium rates for commercial automobile policies reinsured through CAR and this reinsurance pool can generate an underwriting result that is a profit or deficit based upon CAR's rate level.  This underwriting result is allocated among every Massachusetts commercial automobile insurance company, including us, based on a company's commercial automobile voluntary market share.

CAR also runs a reinsurance pool for Taxi, Limousine and Car Service risks (the "Taxi/Limo Program").  CAR reappointed Safety as one of the two servicing carriers for this program beginning January 1, 2017 for an additional five-year term.  Approximately $11,100 of ceded premium was spread equitably between the two servicing carriers.

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We are assigned independent agents by CAR who can submit commercial business to us in the Commercial Automobile Program and the Taxi/Limo Program, and we classify those agents as Exclusive Representative Producers (“ERPs”). 

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

		Years Ended December 31,
		2017			2016			2015
Line of Business		Exposures	Change		Exposures	Change		Exposures	Change
Private passenger automobile:
	Voluntary agents	434,236	(2.8)	%	446,939	(3.5)	%	462,917	(1.8)	%
	MAIP	9,896	(10.0)		11,000	22.1		9,007	4.6
	Total private passenger automobile	444,132	(3.0)		457,939	(3.0)		471,924	(1.7)
Commercial automobile:
	Voluntary agents	62,419	1.8		61,315	0.5		60,995	4.2
	ERP	12,364	24.8		9,907	30.4		7,596	20.6
	Total commercial automobile	74,783	5.0		71,222	3.8		68,591	5.8
Other:
Homeowners		160,313	(1.0)		161,890	(0.5)		162,703	2.4
Business owners		9,497	(8.6)		10,385	2.2		10,166	4.4
Personal umbrella		23,232	(3.0)		23,952	(0.5)		24,083	2.6
Dwelling fire		7,116	(2.1)		7,270	(1.5)		7,381	4.0
Commercial umbrella		677	(2.5)		694	0.6		690	3.0
	Total other	200,835	(1.6)		204,191	(0.4)		205,023	2.6
	Total	719,750	(1.9)		733,352	(1.6)		745,538	0.1
Total voluntary agents		697,490	(2.1)		712,445	(2.3)		728,935	(0.2)

In 2017, 60.3% of the private passenger automobile exposures we insure had an other than private passenger policy with us, compared to 58.4% and 55.8% in 2016 and 2015, respectively.  In addition, 81.7% of our homeowners’ policyholders had a matching automobile policy with us in 2017 compared to 81.9% in 2016 and 81.8% in 2015.

Marketing

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

· to offer a range of products, which we believe enables our agents to meet the insurance needs of their clients;

· to price our products competitively, including offering discounts when and where appropriate for safer drivers for our personal automobile products, loss-free credits for our homeowner products and also offering account discounts for policyholders that have more than one policy with us;

· to design, price and market our products to our agents for their customers to place all their insurance with us;

· to offer agents competitive commissions, with incentives for placing their more profitable business with us; and

· to provide a level of support and service that enhances the agent's ability to do business with its clients and with us.

We have a comprehensive branding campaign using a variety of radio, television, digital and print advertisements.

Commission Schedule and Profit Sharing Plan.  We have several programs designed to attract profitable new business from agents by paying them competitive commissions. We recognize our top performing agents by making

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them members of either our Chairman's Elite, Chairman's, President's, Executive's or Preferred Agent's Club.  In 2017, members of these Clubs received a commission of up to 18.0% of premiums for each new private passenger auto policy, up to 22.0% of premiums for each new homeowner policy, up to 20.0% for each new commercial auto policy and up to 20% for each new commercial property policy.

Further, we have a competitive agency incentive commission program under which we pay agents up to 7.5% of premiums based on the loss ratio 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.  Our AVC website helps agents manage their work efficiently.  We provide a substantial amount of information online that agents need to serve their customers, such as information about the status of new policies, bill payments and claims.  Providing this type of content reduces the number of customer calls we receive and empowers the agent's customer service representatives by enabling them to respond to customers' inquiries while the customer is on the telephone.  Finally, we believe that the knowledge and experience of our employees enhances the quality of support we provide.

Underwriting

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

· pricing of our private passenger automobile, commercial automobile, homeowners, dwelling fire, personal umbrella, business owners, commercial umbrella and commercial package products;

· developing new products, coverages, forms and discounts, as well as  expansion into new states;

· determining underwriting guidelines for all our products; and

· evaluating whether to accept transfers of a portion of an existing or potential new agent's portfolio from another insurer.

Pricing.  Subject to the applicable state insurance department’s review, we set rates for all of our products using our own loss experience, industry loss cost data, residual market deficits, catastrophe modeling and prices charged by our competitors.  We have three pricing segments for most products, utilizing Safety Insurance for standard rate, Safety Indemnity for preferred rates and Safety P&C for ultra preferred rates.

Massachusetts Residual Automobile Insurance Markets.  Commonwealth Automobile Reinsurers (“CAR”) establishes the rates for personal automobile policies assigned to carriers through the Massachusetts Automobile Insurance Plan (“MAIP”).  In accordance with Massachusetts law, insurers may only charge MAIP policyholders the lower of the MAIP rate or the company's competitive voluntary market rate.  CAR also sets rates for commercial automobile policies, including taxi/limousine/car service policies, reinsured through the CAR residual market pool.  All commercial automobile business and taxi/limousine/car service business that is not written in the voluntary market in Massachusetts is apportioned to one of these servicing carriers who handle that business on behalf of CAR.  Every Massachusetts commercial automobile insurer must bear a portion of the losses of the total commercial reinsurance pool that is serviced by the approved servicing carriers.  We are one of four servicing carriers in CAR’s Commercial Automobile Program and one of two servicing carriers in CAR’s Taxi/Limo Program.

Bulk Policy Transfers and New Voluntary Agents.  From time to time, we receive proposals from an existing voluntary agent 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.  We generally require any new voluntary agent to commit to transfer a portfolio to us consisting of at least 300 policies.

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Policy Processing.  Our underwriting department assists in processing policy applications, endorsements, renewals and cancellations.  Our proprietary software, Safety Express, provides our agents with new business and endorsement entry, real-time policy issuance for personal lines, immediate printing of declarations pages in agents' offices, policy downloads to most major agency management systems and data imports from Boston Software's WinRater (Massachusetts) and Vertafore's PL Rater (New Hampshire and Maine).

In personal lines, our agents now submit approximately 99% of all applications for new policies or endorsements for existing policies through Safety Express.

Rate Pursuit.  We aggressively monitor all insurance transactions to make sure we receive the correct premium for the risk insured.  We accomplish this by verifying pricing criteria.  For automobile policies, we verify proper classification of drivers, the make, model, and age of insured vehicles, and the availability of discounts.  We also verify that operators are properly listed and classified, assignment of operators to vehicles, and vehicle garaging.  In our homeowners and dwelling fire lines, we use third party software to evaluate property characteristics and we conduct property inspections.  We have a premium audit program in our business owners program, as well as other loss control reviews for additional commercial lines of business.

Product Management.  The Product Management department is responsible for the overall review and updating of our products.  The department maintains an annual schedule where each line of business is reviewed and benchmarked with our major competitors.   Product offerings, discounts, rate levels and underwriting guidelines are reviewed and updates are performed as required.  The department also is responsible for updating producer materials such as rate and rule manuals, and underwriting guidelines as well as promotional materials.  In conjunction with the underwriting operations area, the department works with third party vendors that assist with risk information gathering and rate pursuit for in force policies.   The department also provides product training and general marketplace education for the organization.

Legal and Regulatory Compliance.  The Legal and Regulatory Compliance department provides legal and compliance support to all business units within the company.  The department serves as the primary liaison with regulators, government, industry trade associations and residual market mechanisms.  The department also provides legal support to all areas of the company, including general corporate matters and vendor contracting.  The department monitors legal and regulatory changes affecting the enterprise and provides guidance on how to comply with those changes.  The department additionally reviews business unit operations to identify and address compliance vulnerabilities.

Data Governance.  The Data Governance department uses Safety’s data assets to support decision-making in areas including underwriting, pricing, claims, reserving, reinsurance and assessing catastrophe risks.  Data analytics are used to analyze and estimate exposures, loss trends and other risks, and are leveraged to improve company business performance and customer satisfaction.

Technology

The focuses of our information technology (IT) efforts are:

· to support the strategic goals, objectives and business needs of the Company by aligning our IT annual goals with those of the business assuring that IT resources are being utilized efficiently;

· to constantly re-engineer internal processes to allow more efficient operations, resulting in lower operating costs;

· to make it easier for independent agents and policyholders to transact business with us;

· to enable agents to efficiently provide their clients with a high level of service; and

· to maintain and support a secure computing environment.

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

Internal Applications (Intranet)

Our employees access our proprietary and vendor supplied applications through our corporate intranet.  Our intranet applications streamline internal processes and improve overall operational efficiencies in areas including:

Claims.  Our claims workload management application allows our claims and subrogation adjusters to better manage the claims process.  Subrogation refers to the process by which we are reimbursed by other insurers for claims costs we incur due to the fault of their insureds.  The use of this application has reduced the time it takes for us to respond to and settle claims, which we believe helps reduce the total amount of our claims expense.

The automated adjuster assignment system categorizes our new claims by severity and assigns them to the appropriate adjuster responsible for investigation.  Once assigned, the integrated workload management tools facilitate the work of promptly assigning appraisers, investigating liability, issuing checks and receiving subrogation receipts.

The RadicalGlass.com application allows our claims department to contain glass costs by increasing the windshield repair to replacement ratio.  For every windshield that is repaired rather than replaced there is an average savings of approximately $321 per windshield claim.

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

Billing.  Proprietary and vendor supplied billing systems, integrated with the systems of our print and lock-box vendors, expedite the processing and collection of premium receipts and finance charges from agents and policyholders.  We believe the sophistication of our direct bill systems help us to limit our bad debt expense.  Our bad debt expense as a percentage of direct written premiums was 0.1% in both 2017 and 2016.

External Applications

Our Agent Technology offerings are centralized within our agency portal and feature PowerDesk and Safety Express.  PowerDesk is a web based application that allows for billing inquiry, agent payments on behalf of their policyholders, policy inquiry and claims inquiry.  Safety Express provides agents with new business and endorsement entry, real time policy issuance for personal lines, immediate printing of declarations pages in agents' offices, policy downloads to most major agency management systems and data imports from Boston Software's WinRater (Massachusetts) and Vertafore's PL Rater (New Hampshire and Maine). In addition, we provide our agents with commission and claims download for all lines of business, Transformation Station and Transact Now Inquires, e-Claims online claims reporting, e-View daily transaction reports and e-Docs online electronic document file cabinet. 

We also provide electronic billing (eBill), online bill pay (including credit and debit cards), online declarations pages, billing inquiry, claims inquiry, auto and homeowners claims first notice of loss, online auto insurance cards, and bill pay reminder alerts to our agent's policyholders through our public website, SafetyInsurance.com.  We have also updated our telephone system to provide a voice activated phone directory, automated billing inquiry and payments, and call center screen pop-up technology. 

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We additionally provide policyholders mobile technology through our Safety Mobile App for iPhone and Android devices.  Safety Mobile provides consumers with access to their agent information, bill pay capabilities, the ability to report an automobile or homeowners claim and access to their insurance card, among other features.

Claims

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

Casualty Claims

We have adopted stringent claims settlement procedures, which include guidelines that establish settlement ranges for soft tissue injuries, which constituted approximately 65% of our bodily injury claims in 2017.  If we are unable to settle these claims within our pricing guidelines, we explore other cost effective options including alternative disputes resolutions and/or litigation. We believe that these procedures result in providing our adjusting staff 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. Our insureds are able to report claims directly by phone, web or mobile application.  In addition, we utilize an after- hours reporting vendor to ensure that new claims can be reported 24 hours per day and 365 days per year.

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.  Comprising 120 people, the department is organized into distinct claim units that contain loss costs on injury claims.  Field adjusters are located geographically for prompt response to claims, with our litigation unit focused on managing loss costs and litigation expenses for serious injury claims.

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

Property Claims

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

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

Reserves

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

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

In accordance with industry practice, we also maintain reserves for estimated losses incurred but not yet reported.  Incurred but not yet reported reserves are determined in accordance with commonly accepted actuarial reserving techniques on the basis of our historical information and experience. We make adjustments to incurred but not yet reported reserves quarterly to take into account changes in 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, 2017 is adequate to cover the ultimate net cost of losses and claims incurred as of that date.

Management determines its loss and loss adjustment expense ("LAE") reserves estimates based upon the analysis of the Company's actuaries.  Management has established a process for the Company's actuaries to follow in establishing reasonable reserves.  The process consists of meeting with our claims department, establishing ultimate incurred losses by using development models accepted by the actuarial community, and reviewing the analysis with management.  The Company's estimate for loss and LAE reserves, net of the effect of ceded reinsurance, ranges from a low of $440,918 to a high of $510,166 as of December 31, 2017.  The Company's net loss and LAE reserves, based on our actuaries' best estimate, were set at $490,969 as of December 31, 2017.  The ultimate liability may be greater or less than reserves carried at the balance sheet date.  Establishment of appropriate reserves is an inherently uncertain process, and there can be no certainty that currently established reserves will prove adequate in light of subsequent actual experience.  To the extent that reserves are inadequate and are strengthened, the amount of such increase is treated as a charge to earnings in the period that the deficiency is recognized.  To the extent that reserves are redundant and are released, the amount of the release is a credit to earnings in the period the redundancy is recognized.  We do not discount any of our reserves.

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The following table presents development information on changes in the reserves for losses and LAE of our Insurance Subsidiaries for each year in the three year period ended December 31, 2017.

	Years Ended December 31,
	2017		2016			2015
Reserves for losses and LAE at beginning of year	$	560,321	$	553,977	$	482,012
Less receivable from reinsurers related to unpaid losses and LAE		(83,724)		(68,261)		(61,245)
Net reserves for losses and LAE at beginning of year		476,597		485,716		420,767
Incurred losses and LAE, related to:
Current year		545,671		538,881		642,882
Prior years		(41,784)		(45,448)		(30,313)
Total incurred losses and LAE		503,887		493,433		612,569
Paid losses and LAE related to:
Current year		325,049		328,046		415,256
Prior years		164,466		174,506		132,364
Total paid losses and LAE		489,515		502,552		547,620
Net reserves for losses and LAE at end of period		490,969		476,597		485,716
Plus receivable from reinsurers related to unpaid losses and LAE		83,085		83,724		68,261
Reserves for losses and LAE at end of period	$	574,054	$	560,321	$	553,977

The following table represents the development of reserves, net of reinsurance, for calendar years 2007 through 2017. 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, 2017.

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.

	As of and for the Year Ended December 31,
	2017	2016	2015	2014		2013	2012	2011	2010	2009	2008	2007
Reserves for losses and
LAE originally estimated:	$ 490,969	$ 476,597	$ 485,716	$ 420,767		$ 394,668	$ 371,657	$ 352,098	$ 351,244	$ 374,832	$ 391,070	$ 393,430
Cumulative amounts paid as of:
One year later		164,466	174,505	132,364	34,098	133,288	124,855	130,204	128,854	130,960	126,858	142,259
Two years later			250,305	189,367		178,411	175,822	181,739	176,774	183,061	189,897	195,798
Three years later				223,465		207,626	199,741	211,578	205,171	211,182	217,695	234,359
Four years later						223,743	213,847	223,941	219,310	224,831	233,160	248,560
Five years later							221,363	231,433	224,354	232,177	239,553	254,915
Six years later								233,137	226,644	233,853	241,587	257,362
Seven years later									227,147	235,158	241,999	257,889
Eight years later										235,292	242,705	258,173
Nine years later											242,793	258,786
Ten years later												258,841
	As of and for the Year Ended December 31,
	2017	2016	2015	2014		2013	2012	2011	2010	2009	2008	2007
Reserves re-estimated as of:
One year later		$ 434,813	$ 440,268	$ 390,452		$ 357,300	$ 342,767	$ 334,788	$ 314,561	$ 326,676	$ 347,004	$ 357,492
Two years later			406,253	348,660		328,182	308,028	309,096	293,480	294,696	307,918	325,317
Three years later				313,100		295,788	283,592	282,441	273,332	279,542	282,565	297,224
Four years later						274,214	263,787	268,759	254,652	264,697	271,693	281,068
Five years later							250,064	255,925	245,869	252,249	261,845	274,179
Six years later								248,353	238,404	247,023	254,308	268,596
Seven years later									235,047	242,223	250,760	263,797
Eight years later										240,150	247,037	261,319
Nine years later											245,811	259,489
Ten years later												258,467
Cumulative
(redundancy) deficiency 2016		(41,784)	(79,463)	(107,667)		(120,454)	(121,593)	(103,745)	(116,197)	(134,682)	(145,259)	(134,963)
	As of and for the Year Ended December 31,
	2017	2016	2015	2014		2013	2012	2011	2010	2009	2008	2007
Gross liability-end of year	$ 574,054	$ 560,321	$ 553,977	$ 482,012		$ 455,014	$ 423,842	$ 403,872	$ 404,391	$ 439,706	$ 467,559	$ 477,720
Reinsurance recoverables	83,085	83,724	68,261	61,245		60,346	52,185	51,774	53,147	64,874	76,489	84,290
Net liability-end of year	490,969	476,597	485,716	420,767		394,668	371,657	352,098	351,244	374,832	391,070	393,430
Gross estimated liability-latest		497,416	449,661	362,788		316,454	285,188	282,146	267,161	277,563	287,583	305,015
Reinsurance recoverables-latest		62,603	43,408	49,688		42,240	35,124	33,793	32,114	37,413	41,772	46,548
Net estimated liability-latest		434,813	406,253	313,100		274,214	250,064	248,353	235,047	240,150	245,811	258,467

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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 2013 estimate for a previously incurred loss was $150 and the loss was reserved at $100 in 2009, the $50 deficiency (later estimate minus original estimate) would be included in the cumulative (redundancy) deficiency in each of the years 2009-2013 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, in the past we conducted substantial business as a servicing carrier for other insurers, in which we would service the residual market automobile insurance business assigned to other carriers for a fee.  All business generated through this program was ceded to the other carriers.  As we reduced the amount of our servicing carrier business, our proportion of reinsurance ceded diminished.

The table also shows that we have substantially benefited in the current and prior years from releasing redundant reserves.  In the years ended December 31, 2017, 2016, and 2015 we decreased loss reserves related to prior years by $41,784, $45,448 and $30,313, respectively.  Reserves and development are discussed further in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations, Executive Summary and Overview.

As a result of our focus on core business lines since our founding in 1979, we believe we have no specific exposure to asbestos or environmental pollution liabilities.

Reinsurance

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 reinsure with other insurance companies a portion of our potential liability under the policies we have underwritten, thereby protecting us against an unexpectedly large loss or a catastrophic occurrence that could produce large losses, primarily in our homeowners line of business.   We are selective in choosing our reinsurers, seeking only those companies that we consider to be financially stable and adequately capitalized.  In an effort to minimize exposure to the insolvency of a reinsurer, we continually evaluate and review the financial condition of our reinsurers.  Swiss Re, our primary reinsurer, maintains an A.M. Best rating of "A+" (Superior). Most of our other reinsurers have an A.M. Best rating of “A+” (Superior) or “A” (Excellent).

We maintain reinsurance coverage to help lessen the effect of losses from catastrophic events, maintaining coverage that during 2017 protected us in the event of a "130-year storm" (that is, a storm of a severity expected to occur once in a 130-year period).  We use various software products to measure our exposure to catastrophe losses and the probable maximum loss to us for catastrophe losses such as hurricanes.  The models include estimates for our share of the catastrophe losses generated in the residual market for property insurance by the Massachusetts Property Insurance Underwriting Association ("FAIR Plan").  In 2017, we purchased four layers of excess catastrophe reinsurance providing $615,000 of coverage for property losses in excess of $50,000 up to a maximum of $665,000.  Our reinsurers’ co-participation is 65.0% of $100,000 for the 1st layer, 80.0% of $280,000 for the 2nd layer, 80.0% of $135,000 for the 3rd layer, and 80.0% of $100,000 for the 4th layer.

For 2018, we have purchased four layers of excess catastrophe reinsurance providing $615,000 of coverage for property losses in excess of $50,000 up to a maximum of $665,000.  Our reinsurers’ co-participation is 50.0% of $50,000 for the 1st layer, 80.0% of $50,000 for the 2nd layer, 80.0% of $250,000 for the 3rd layer and 80% of $265,000

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for the 4th layer. As a result of the changes to the models, and our revised reinsurance program, our catastrophe reinsurance in 2018 protects us in the event of a “137-year storm” (that is, a storm of a severity expected to occur once in a 137-year period). 

We also have casualty excess of loss reinsurance for large casualty losses occurring in our automobile, homeowners, dwelling fire, business owners, and commercial package lines of business in excess of $2,000 up to a maximum of $10,000.  We have property excess of loss reinsurance coverage for large property losses, with coverage in excess of $2,000 up to a maximum of $20,000, for our homeowners, business owners, and commercial package policies.  In addition, we have liability excess of loss reinsurance for umbrella large losses in excess of $1,000 up to a maximum of $10,000.  We also have various reinsurance agreements with Hartford Steam Boiler Inspection and Insurance Company, of which the primary contract is a quota share agreement under which we cede 100% of the premiums and losses for the equipment breakdown coverage under our business owner policies and commercial package policies.

Our reinsurance program excludes coverage for acts of terrorism, except for fire or collapse losses as a result of terrorism, under homeowners, dwelling fire, private passenger automobile and commercial automobile policies.

The Terrorism Risk Insurance Act of 2002 ("TRIA") was signed into law on November 26, 2002, and expired December 31, 2005.  The Terrorism Risk Insurance Extension Act of 2005 was signed into law on December 22, 2005, and expired December 31, 2007.  The Terrorism Risk Insurance Extension Act of 2007 ("TRIEA") was signed into law on December 26, 2007 which reauthorized TRIA for seven years, expanded the definition of an "Act of Terrorism" while expanding the private sector role and reducing the federal share of compensation for insured losses under the program.  TRIA expired on December 31, 2014, but on January 12, 2015 Congress reauthorized TRIA retroactive to January 1, 2015 with the program now lasting through 2020.  The intent of this legislation is to provide federal assistance to the insurance industry for the needs of commercial insurance policyholders with the potential exposure for losses due to acts of terrorism.  The TRIEA provides reinsurance for certified acts of terrorism.

In addition to the above mentioned reinsurance programs and as described in more detail above under The Massachusetts Property and Casualty Insurance Market, we are a participant in CAR, a state-established body that runs the residual market reinsurance programs for commercial automobile insurance in Massachusetts under which premiums, expenses, losses and loss adjustment expenses on ceded business are shared by all insurers writing automobile insurance in Massachusetts.  We also participate in the FAIR Plan in which premiums, expenses, losses and loss adjustment expenses on homeowners business that cannot be placed in the voluntary market are shared by all insurers writing homeowners insurance in Massachusetts.  The FAIR Plan’s exposure to catastrophe losses increased and as a result, the FAIR Plan decided to buy reinsurance to reduce their exposure to catastrophe losses.  On July 1, 2017, the FAIR Plan purchased $2,000,000 of catastrophe reinsurance for property losses with retention of $100,000. 

On December 15, 2015, the Company filed for arbitration with a reinsurer in regards to the reinsurance recoverable resulting from the 2015 winter storm losses that are admissible under our contract.  The total amount of recoverable in dispute, which is based on our total incurred loss, was $20,918 and $22,838 as of December 31, 2017 and 2016, respectively.  The change in the recovery is attributable to changes in the total incurred loss for reserve development.  On January 8, 2018 the Company received a final order from the panel of arbitrators in which the reinsurer would pay the Company $9,200 for settlement of all paid and outstanding losses. The remaining unrecovered amount of $11,718 was expensed in 2017. 

At December 31, 2017 and December 31, 2016, the reinsurance recoverable on paid and unpaid loss and loss adjustment expenses related to the 2015 snow event from all reinsurers was $675 and $31,701, respectively. 

At December 31, 2017, we also had $104,992 due from CAR comprising of loss and loss adjustment expense reserves, unearned premiums and reinsurance recoverables.

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

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Competition

The property and casualty insurance business is highly competitive and many of our competitors have substantially greater financial and other resources than we do.  We compete with both large national writers and smaller regional companies.  Our competitors include companies which, like us, serve the independent agency market, as well as companies which sell insurance directly to customers. Direct writers may have certain competitive advantages over agency writers, including increased name recognition, loyalty of the customer base to the insurer rather than to an independent agency and potentially, lower cost structures.  A material reduction in the amount of business independent agents sell would adversely affect us.  Further, we and others compete on the basis of the commissions and other cash and non-cash incentives provided to agents. 

Although historically, a number of national insurers that are much larger than we are have chosen not to compete in a material way in the Massachusetts private passenger automobile market, since 2008, several new companies have entered the market.  These companies include some that would be able to sustain significant losses in order to acquire market share, as well as others which use distribution methods that compete with the independent agent channel.  There can be no assurance that we will be able to compete effectively against these companies in the future.

Our principal competitors within the Massachusetts private passenger automobile insurance market are  MAPFRE SA, Government Employees Insurance Company and  Liberty Mutual Company, which held 25.5%, 10.4% and 9.8% market shares based on automobile exposures, respectively, in 2017 according to CAR.

As of November 2017 we became the second largest writer of commercial automobile insurance in Massachusetts with a market share of 15.6%. Other principal competitors in the Massachusetts commercial automobile insurance market are MAPFRE SA, Arbella Mutual Insurance Company and The Travelers Indemnity Insurance Company, which held 15.6%, 10.9% and 7.6% market shares based on automobile exposures, respectively, according to CAR.  This includes our share of residual market business as one of four servicing carriers in CAR’s Commercial Automobile Program and one of two servicing carriers in CAR’s Taxi/Limo Program.

We are the third largest writer of homeowners insurance business in Massachusetts, with a market share of 7.3% in 2017.  Our principal competitors within the Massachusetts homeowners insurance market are MAPFRE SA, Liberty Mutual and Arbella Mutual Insurance Company, which held 13.5%, 11.0% and 6.8% market shares respectively in 2017.

Employees

At December 31, 2017, we employed 623 employees.  Our employees are not covered by any collective bargaining agreement.  Management considers our relationship with our employees to be good.

Investments

Investment income is an important source of revenue for us and the return on our investment portfolio has a material effect on our net earnings.  Our investment objective is to focus on maximizing total returns while investing conservatively.  We maintain a high-quality investment portfolio consistent with our established investment policy.  As of December 31, 2017, our portfolio of fixed maturity investments was comprised principally of investment grade corporate fixed maturity securities, U.S. government and agency securities, and asset-backed securities.  The portion of our non-investment grade portfolio of fixed maturity investments is primarily comprised of variable rate secured and senior bank loans and high yield bonds. 

According to our investment guidelines, no more than 2.0% of our portfolio may be invested in the securities of any one issuer (excluding U.S. government-backed securities).  This one issuer must be rated "A" or above by Moody's.  In addition, no more than 0.5% of our portfolio may be invested in securities of any one issuer rated "Baa," or the lowest investment grade assigned by Moody's.  Of the less than 15.0% of our portfolio invested in senior bank loans and high yield bonds at December 31, 2017, no more than 5.0% may be invested in the securities of any one issuer, no more than

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10.0% may be invested in any issuers total outstanding debt issue, and a maximum of 10.0% may be invested in securities unrated or rated "B-" or below by Moody's.  We continually monitor the mix of taxable and tax-exempt securities in an attempt to maximize our total after-tax return.  Since 1986, we have utilized the services of a third-party investment manager.

The following table reflects the composition of our investment portfolio as of December 31, 2017 and 2016.

		As of December 31,
		2017				2016
		Estimated		% of		Estimated		% of
		Fair Value		Portfolio		Fair Value		Portfolio
U.S. Treasury Securities		$	1,791	0.1	%	$	302	0.0	%
Obligations of states and political subdivisions			403,084	30.8			390,433	30.5
Residential mortgage-backed securities (1)			222,766	17.0			252,631	19.7
Commercial mortgage-backed securities			39,369	3.0			35,454	2.8
Other asset-backed securities			72,613	5.6			70,410	5.5
Corporate and other securities			432,403	33.1			405,039	31.6
	Subtotal, fixed maturity securities		1,172,026	89.6			1,154,269	90.1
Equity securities (2)			111,867	8.6			105,095	8.2
Other invested assets (3)			23,162	1.8			21,142	1.7
		$	1,307,055	100.0	%	$	1,280,506	100.0	%

(1) Residential mortgage-backed securities consists primarily of obligations of U.S. Government agencies including collateralized mortgage obligations and mortgage-backed securities guaranteed and/or insured by the following issuers: Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) and the Federal Home Loan Bank (FHLB).

(2) Equity securities include preferred stock, interests in mutual funds held to fund the Company's executive deferred compensation plan.

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

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

The Company invests in bank loans which are primarily investments in senior secured floating rate loans that banks have made to corporations.  The loans are generally priced at an interest rate spread over the floating rate feature; this asset class provides protection against rising interest rates.  However, this asset class is subject to default risk since these investments are typically below investment grade.

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

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The following table reflects our investment results for each year in the three-year period ended December 31, 2017.

	Years Ended December 31,
	2017			2016			2015
Average cash and invested securities (at cost)	$	1,268,728		$	1,231,358		$	1,213,718
Net investment income (1)	$	38,758		$	38,413		$	40,534
Net effective yield (2)		3.1	%		3.1	%		3.3	%

(1) After investment expenses, excluding realized investment gains or losses.

(2) Net investment income for the period divided by average invested securities and cash for the same period.

As of December 31, 2017, our portfolio of fixed maturity investments was comprised principally of investment grade corporate fixed maturity securities, U.S. government and agency securities, and asset-backed securities.  The portion of our non-investment grade portfolio of fixed maturity investments is primarily comprised of variable rate secured, senior bank loans and high yield bonds. 

The composition of our fixed income security portfolio by Moody's rating is presented in the following table.

	As of December 31,
		2017				2016
	Estimated					Estimated
	Fair Value		Percent			Fair Value	Percent
U.S. Treasury securities and obligations of U.S. Government agencies	$	222,766	19.0	%	$	252,989	22.0	%
Aaa/Aa		411,794	35.1			390,432	33.8
A		239,015	20.4			237,787	20.6
Baa		142,176	12.1			124,340	10.8
Ba		51,205	4.4			40,667	3.5
B		75,673	6.5			68,449	5.9
Caa/Ca		7,087	0.6			11,072	1.0
C		-	-			416	-
D		248	-			355	-
Not rated		22,062	1.9			27,762	2.4
Total	$	1,172,026	100.0	%	$	1,154,269	100.0	%

Ratings are generally assigned upon the issuance of the securities and are subject to revision on the basis of ongoing evaluations. Ratings in the table are as of the date indicated.

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”, “C” and “D”) are considered to be too speculative to be of investment quality.

The Securities Valuation Office of the National Association of Insurance Commissioners (the "SVO") evaluates all public and private bonds purchased as investments by insurance companies. The SVO assigns one of six investment categories to each security it reviews. Category 1 is the highest quality rating and Category 6 is the lowest. Categories 1 and 2 are the equivalent of investment grade debt as defined by rating agencies such as Standard & Poor's Ratings Services and Moody's, while Categories 3-6 are the equivalent of below investment grade securities. SVO ratings are reviewed at least annually. At December 31, 2017, 76.0% of our available for sale fixed maturity investments were rated Category 1 and 10.8% were rated Category 2, the two highest ratings assigned by the SVO.

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The following table indicates the composition of our fixed income security portfolio (at carrying value) by time to maturity as of December 31, 2017.

	As of December 31, 2017
	Estimated
	Fair Value		Percent
Due in one year or less	$	63,886		5.5	%
Due after one year through five years		297,433		25.4
Due after five years through ten years		246,193		21.0
Due after ten years through twenty years		224,328		19.1
Due after twenty years		5,440		0.5
Asset-backed securities (1)		334,746		28.5
Totals	$	1,172,026		100.0	%

(1) Actual maturities of asset-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Prepayment rates are influenced by a number of factors that cannot be predicted with certainty, including: the relative sensitivity of the underlying mortgages or other collateral to changes in interest rates; a variety of economic, geographic and other factors; and the repayment priority of the securities in the overall securitization structures.

Ratings

A.M. Best, which rates insurance companies based on factors of concern to policyholders, currently assigns Safety Insurance an "A (Excellent)" rating.  Our "A" rating was reaffirmed by A.M. Best on May 10, 2017.  Such rating is the third highest rating of 13 ratings that A.M. Best assigns to solvent insurance companies, which currently range from "A++ (Superior)" to "D (Very Vulnerable)."  Publications of A.M. Best indicate that the "A" rating is assigned to those companies that in A.M. Best's opinion have a strong ability to meet their obligations to policyholders over a long period of time. In evaluating a company's financial and operating performance, A.M. Best reviews the Company's profitability, leverage and liquidity, as well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated fair value of its assets, the adequacy of its loss reserves, the adequacy of its surplus, its capital structure, the experience and competence of its management and its market presence.  A.M. Best's ratings reflect its opinion of an insurance company's financial strength, operating performance and ability to meet its obligations to policyholders and are not evaluations directed to purchasers of an insurance company's securities.

In assigning Safety Insurance's rating, A.M. Best recognized its solid risk-adjusted capitalization, conservative operating strategy, and long-standing agency relationships. A.M. Best also noted among our positive attributes our favorable investment leverage, our disciplined underwriting approach, and our expertise in the closely managed Massachusetts automobile insurance market, where rates, until recently, were historically established by the Commissioner.  A.M. Best cited other factors that partially offset these positive attributes, including our concentration of business in the Massachusetts private passenger automobile market which exposes our business to regulatory actions.

Supervision and Regulation

Introduction.  Our principal operations are conducted through the Insurance Subsidiaries which are subject to comprehensive regulation by state insurance departments, primarily through our domestic regulator, the Massachusetts 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:

· our licenses to transact insurance;

· the rates and policy forms we may use;

· our financial condition including the adequacy of our reserves and provisions for unearned premium;

· the solvency standards that we must maintain;

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· the type and size of investments we may make;

· the prescribed or permitted statutory accounting practices we must use; and

· the nature of the transactions we may engage in with our affiliates.

In addition, the Commissioner periodically conducts financial and market conduct examinations of all licensees domiciled in Massachusetts.  Our most recent financial and market conduct examinations were for the five-year period ending December 31, 2013.  The Division had no material findings as a result of these examinations.

We are also required to be licensed by the insurance department in each state in which we do business, as well as to comply with the various laws and regulations of those jurisdictions, including those governing our use of rates and policy forms in those states.

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 and that we file an annual Enterprise Risk Management report with the Commissioner.

Insurance Regulation Concerning Dividends.  We rely on dividends from the Insurance Subsidiaries for our cash requirements.  The insurance holding company law of Massachusetts requires notice to the Commissioner of any dividend to the shareholders of an insurance company.  The Insurance Subsidiaries may not make an "extraordinary dividend" until thirty days after the Commissioner has received notice of the intended dividend and has not objected in such time.  As historically administered by the Commissioner, this provision requires the prior approval by the Commissioner of an extraordinary dividend.  An extraordinary dividend is defined as any dividend or distribution that, together with other distributions made within the preceding twelve months exceeds the greater of 10.0% 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 December 31, 2017, the statutory surplus of Safety Insurance was $617,577 and its net income for 2018 was $57,982.  A maximum of $61,758 will be available during 2018 for such dividends without prior approval of the Commissioner.

Acquisition of Control of a Massachusetts Domiciled Insurance Company.  Massachusetts law requires advance approval by the Commissioner of any change in control of an insurance company that is domiciled in Massachusetts.  That law presumes that control exists where any person, directly or indirectly, owns, controls, holds the power to vote or holds proxies representing 10.0% or more of our outstanding voting stock.  Even persons who do not acquire beneficial ownership of more than 10.0% 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 10.0% or more of the voting power of our capital stock will be presumed to have acquired control of the Insurance Subsidiaries unless, following application by that purchaser the Commissioner determines that the acquisition does not constitute a change of control or is otherwise not subject to regulatory review.  These requirements may deter, delay or prevent transactions affecting the control of or the ownership of our common stock, including transactions that could be advantageous to our stockholders.

Protection Against Insurer Insolvency.  Massachusetts law requires that insurers licensed to do business in Massachusetts participate in the Massachusetts Insurers Insolvency Fund ("Insolvency Fund").  The Insolvency Fund must pay any claim up to $300 of a policyholder of an insolvent insurer if the claim existed prior to the declaration of insolvency or arose within sixty days after the declaration of insolvency.  Members of the Insolvency Fund are assessed the amount the Insolvency Fund deems necessary to pay its obligations and expenses in connection with handling covered claims.  Subject to certain exceptions, assessments are made in the proportion that each member's net written

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premiums for the prior calendar year for all property and casualty lines bore to the corresponding net written premiums for Insolvency Fund members for the same period.  As a matter of Massachusetts law, insurance rates and premiums include amounts to recoup any amounts paid by insurers for the costs of the Insolvency Fund.  By statute, no insurer in Massachusetts may be assessed in any year an amount greater than two percent of that insurer's direct written premium for the calendar year prior to the assessment.  We account for allocations from the Insolvency Fund as underwriting expenses.  CAR also assesses its members as a result of insurer insolvencies.  Because CAR is not able to recover an insolvent company's share of the net CAR losses from the Insolvency Fund, CAR must increase each of its member's shares of the deficit in order to compensate for the insolvent carrier's inability to pay its deficit assessment.  It is anticipated that there will be future assessments from time to time relating to various insolvencies.

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

A ratio result falling outside the usual range of IRIS ratios is not considered a failing result; rather, unusual values are viewed as part of the regulatory early monitoring system. Furthermore, in some years, it may not be unusual for financially sound companies to have several ratios with results outside the usual ranges.  Generally, an insurance company will become subject to regulatory scrutiny if it falls outside the usual ranges of four or more of the ratios.  In 2017, 2016, and 2015 all our ratios for all our Insurance Subsidiaries were within the normal range.

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

· underwriting, which encompasses the risk of adverse loss developments and inadequate pricing;

· declines in asset values arising from market and/or credit risk; and

· off-balance sheet risk arising from adverse experience from non-controlled assets, guarantees for affiliates or other contingent liabilities and reserve and premium growth.

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

The risk-based capital law provides for four levels of regulatory action. The extent of regulatory intervention and action increases as the level of total adjusted capital to risk-based capital falls.  The first level, the company action level, as defined by the NAIC, requires an insurer to submit a plan of corrective actions to the Commissioner if total adjusted capital falls below 200% of the risk-based capital amount. The regulatory action level, as defined by the NAIC requires an insurer to submit a plan containing corrective actions and requires the Commissioner to perform an examination or other analysis and issue a corrective order if total adjusted capital falls below 150.0% of the risk-based capital amount. The authorized control level, as defined by the NAIC, authorizes the Commissioner to take whatever regulatory actions he or she considers necessary to protect the best interest of the policyholders and creditors of the insurer which may include the actions necessary to cause the insurer to be placed under regulatory control, i.e., rehabilitation or liquidation, if total adjusted capital falls below 100.0% of the risk-based capital amount. The fourth action level is the mandatory control level, as defined by the NAIC, which requires the Commissioner to place the insurer under regulatory control if total adjusted capital falls below 70.0% of the risk-based capital amount.

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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, 2017, our Insurance Subsidiaries had total adjusted capital in excess of amounts requiring company or regulatory action at any prescribed risk-based capital action level.

Own Risk Solvency Assessment.  On January 11, 2017, the Division adopted the National Association of Insurance Commissioners’ Own Risk Solvency Assessment (“ORSA”) Act requiring the Company to file its assessment on an annual basis.  ORSA is an internal process undertaken by an insurer or insurance group to assess the adequacy of its risk management and current and prospective solvency positions under normal and severe stress scenarios.  We have completed this filing for the 2017 period.

Executive Officers and Directors

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