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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2002

OR

For the transition period from                              to                             

Commission file number 1-8993

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)

(617) 951-0600
(Registrant's telephone number, including area 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 o    No ý

        As of December 20, 2002, 15,259,991 Common Shares with a par value of $0.01 per share were outstanding.

SAFETY INSURANCE GROUP, INC.
Table of Contents

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SAFETY INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)

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

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SAFETY INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(dollars in thousands, except per share and share amounts)

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

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SAFETY INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(dollars in thousands)

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

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Safety Insurance Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

1.    Basis of Presentation

        The unaudited condensed consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America ("GAAP"). These unaudited condensed consolidated financial statements include Safety Insurance Group, Inc. ("Safety") and its subsidiaries (collectively, the "Company"). The subsidiaries consist of Safety Insurance Company, Thomas Black Corporation ("TBC"), Safety Indemnity Insurance Company, Thomas Black Insurance Agency, Inc. ("TBIA") and RBS, Inc., TBIA's holding company.

        As discussed below in Note 2, Safety acquired (the "Acquisition") all of the issued and outstanding stock of TBC on October 16, 2001. As a result of the Acquisition, the capital structure and basis of accounting of the 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 recent November 27, 2002 initial public offering ("IPO"), the use of those IPO net proceeds, the Preferred Share Exchange (as defined below) and the Direct Sale (as defined in Note 7) have further altered the current capital structure of the Company, as discussed further in Note 7, "Subsequent Events—Closing of the IPO".

        The financial data as of September 30, 2002 (successor) and for the three and nine months ended September 30, 2002 (successor) and as of September 30, 2001 (predecessor) and for the three and nine months ended September 30, 2001 (predecessor) is unaudited; however, in the opinion of the Company, the data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial condition and results of operations for the periods. These unaudited condensed consolidated financial statements may not be indicative of financial results for the full year and should be read in conjunction with the audited financial statements included in the Company's prospectus in the registration statement on Form S-1 filed with the SEC on November 21, 2002. All intercompany transactions have been eliminated.

        The Company is a leading provider of personal lines property and casualty insurance focused exclusively on the Massachusetts market. Its principal product line is private passenger automobile insurance, which accounted for 81.1% and 82.1% of its direct written premiums in the three and nine months ended September 30, 2002, respectively. The Company operates through its insurance company subsidiaries, Safety Insurance Company and Safety Indemnity Insurance Company. TBIA is the managing agent for Safety Insurance Company and Safety Indemnity Insurance Company.

2.    Acquisition and IPO

        Safety was incorporated on June 25, 2001, in the State of Delaware. On October 16, 2001, Safety acquired all of the issued and outstanding common stock of TBC and its property and casualty subsidiaries for $121.1 million in the Acquisition.

        As of September 30, 2002, approximately 72% of the outstanding common stock of Safety was owned by certain investors assembled by The Jordan Company, LLC, an investment firm that sponsored the Acquisition. The remaining 28% was owned by executive management. As of September 30, 2002, JZ Equity Partners plc, a London-based publicly traded investment trust, owned approximately 50% of the outstanding mandatorily redeemable preferred stock of Safety; the other 50% was owned by third parties. The preferred stock is cumulative, non-voting with a 6% dividend rate and is mandatorily redeemable on October 16, 2012 or upon a change in control.

        In connection with management's plan for the sale of its common stock in the IPO that closed on November 27, 2002, the Board of Directors of Safety (the "Board") declared a 23.24 for 1 common

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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, all earnings per share for the successor period presented in the consolidated financial statements of the Company have been adjusted retroactively for the stock split. The Stock Appreciation Rights ("SARs") and restricted shares referred to in Note 4 have been similarly adjusted for the stock split.

        The holders of the 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 this preferred share exchange (the "Preferred Share Exchange") upon the close of the IPO on November 27, 2002.

        See Note 7, "Subsequent Events—Closing of IPO", for further information regarding the November 27, 2002 IPO.

3.    Investment

Debt Securities

        The gross unrealized appreciation (depreciation) of investments in debt securities as of September 30, 2002 was as follows:

(1)

Obligations of U.S. Government agencies include collateralized mortgage obligations issued, guaranteed and/or insured by the following issuers: Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal National Mortgage Association (FNMA). As such, the asset-backed securities presented exclude such issuers already presented under U.S. Treasury securities and obligations.

        The amortized cost and the estimated market value of debt securities, by maturity, at September 30, 2002 are shown below. Expected maturities will differ from contractual maturities

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because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Equity Securities

        The cost and fair value of equity securities as of September 30, 2002 were follows:

        During the third quarter of 2002 there were no significant deteriorations in the credit quality of any of our holdings and we did not record any other-than-temporary impairment charges relating to our portfolio of investment securities. However, during the nine months ended September 30, 2002 there was a significant deterioration in the credit quality of two of our holdings in the telecommunications sector. Accordingly for the six months ended June 30, 2002, the Company recognized an after-tax realized loss of approximately $1.3 million for one of these securities sold in June and recorded an after-tax other-than-temporary impairment of approximately $0.7 million for the other telecommunications security. During September 2002, this other security was sold at a realized loss of approximately $0.1 million. For the nine months ended September 30, 2001, we did not record any other-than-temporary impairment charges relating to our portfolio of investment securities.

4.    Employee Benefit Plans and Stock-Based Compensation

Stock Appreciation Rights Agreements

        Safety entered into SARs agreements with executive management on October 16, 2001. Under the terms of the agreements, Safety granted 103,488 SARs on October 16, 2001 for past and future services. The agreements designate the number of "covered shares" for each executive and other employees and established the exercise price of $6.88 per share.

        Prior to the IPO, the SARs were to vest 20% at the end of each year commencing on December 31, 2002. As of the close of the November 27, 2002 IPO, the SARs became fully vested and were automatically exercised. Soon thereafter, the participants each received a cash payment equal to the excess of the $12.00 IPO price per common share over the exercise price of $6.88 per share.

        For the nine months ended September 30, 2002, no compensation expense was recorded related to the SARs. However, upon the close of the November 27, 2002 IPO, compensation expense related to the SARs of $0.5 million was recognized as a charge to earnings in the fourth quarter of 2002 as measured by the $12.00 IPO price per share, taking into account 100% vesting of all SARs in

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accordance with FIN 28, Accounting for Stock Appreciation Rights and Other Variable Stock Options or Awards Plans.

Management Subscription Agreement

        On October 16, 2001, the Company entered into a management subscription agreement with certain employees. The management subscription agreement contains certain Company call and employee put options that allow the employee to put the stock owned by the employee at the time of exercise at a price based upon a formula calculation to the Company under certain circumstances outside of the Company's control and within the employee's control (e.g., employee retirement or resignation). The management subscription agreement is being accounted for as a variable plan in accordance with EITF 00-23, Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44, whereby employee compensation expenses are being recorded over the period of service of the employee in accordance with FIN 28. Compensation expense related to the management subscription agreement totaled approximately $4.1 million and $0 for the nine months ended September 30, 2002 and 2001, respectively. The Company call and employee put options terminated upon the November 27, 2002 IPO, when variable plan accounting ceased and the liability accrued at the IPO date was re-classified to paid-in capital.

Employee Stock Ownership Plan ("ESOP")

        Prior to the Acquisition, TBC had a leveraged ESOP with a 30% interest in the issued and outstanding common stock of TBC (287,700 shares). The ESOP covered substantially all the employees and was subject to the applicable provisions of ERISA. The ESOP was noncontributory on the part of participants and employer contributions were made at the discretion of the Board. In conjunction with the establishment of the ESOP, TBC obtained a loan of $36.0 million to finance the purchase of 30% of the Company's shares. The loan was collateralized by shares of TBC held by the ESOP but unallocated to ESOP participants. The ESOP was accounted for in accordance with Statement of Position 93-6, Employers' Accounting for Employee Stock Ownership Plans. Compensation expense related to the ESOP was $0 and $4.5 million for the nine months ended September 30, 2002 and 2001, respectively. The Company filed to terminate the ESOP in conjunction with the Acquisition. During the third quarter of 2002, a favorable determination was received from the IRS for the proposed termination date of October 16, 2001.

Supplemental Executive Stock Ownership Plan ("XSOP")

        Prior to the Acquisition, TBC also had an XSOP. The XSOP provided certain employees not eligible to fully participate in the ESOP under the applicable provisions of the Internal Revenue Code and ERISA with benefits they would have been entitled to under the provisions of the ESOP. Total compensation expense related to the XSOP during the nine months ended September 30, 2001 was a net credit of $1.1 million, comprised of a credit of $2.5 million resulting from the revaluation of the December 31, 2000 XSOP obligation at the 2001 fair value of TBC's shares and an expense of $1.4 million relating to the compensation earned by employees in the nine months ended September 30, 2001. There was no compensation expense for the nine months ended September 30, 2002 related to the XSOP. The XSOP Plan was terminated in conjunction with the Acquisition.

Restricted Stock Plan

        On October 16, 2001, the Company implemented a Restricted Stock Plan. The Restricted Stock Plan permits the Board to grant or sell restricted shares of common stock to select employees of the Company or any of its affiliates. The purpose of the Restricted Stock Plan is to promote the Company's success and to attract and retain valuable employees. The maximum number of shares of common stock that may be granted or sold under this plan is 290,500. The Board has the authority to

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determine the persons to whom restricted shares are granted or sold, the times when such shares will be granted or sold, the number of shares to be granted or sold and the terms and conditions of each award, including, without limitation, those related to dividends. Such restricted share awards, except for awards granted or sold before January 1, 2002, will vest according to the terms established by the Board at the time restricted shares are granted or sold. Any awards granted before January 1, 2002, except as described below, shall not become vested until the last day of each calendar year commencing with the 2002 calendar year as set forth in the table below:

        Vesting, however, is contingent upon continuous employment. Unless otherwise determined by the Board, upon a participant's termination of employment prior to December 31, 2006, all of the participant's restricted shares not yet vested will be forfeited. The Board has the right to amend or terminate the Restricted Stock Plan at any time, subject to certain limitations, but no amendment or termination may alter the rights of a participant under any awards previously granted.

        On October 16, 2001, the Company entered into Executive Restricted Stock Award Agreements under the Restricted Stock Plan with two employees of the Company. Under these agreements, 290,500 restricted shares of common stock were sold at a cost of $0.43 per share, which approximated the fair value of the shares at the date of the sale. These restricted shares vest in full upon the earlier of the consummation of a change of control, public offering or according to the schedule contained in the Restricted Stock Plan denoted above. Accordingly, these restricted shares are included in diluted earnings per share and diluted common shares outstanding as of September 30, 2002. The restricted shares are subject to the put and call provisions of the Management Subscription Agreement, which under certain circumstances may require the Company to purchase the restricted shares at a price based upon a formula calculation. The put and call provisions expire upon an IPO or the consummation of a change of control. The restricted stock plan is being accounted for in accordance with EITF 00-23 whereby employee compensation expense is being recorded over the period of service of the employee in accordance with FIN 28. Compensation expense related to these agreements was $0.4 million and $0 for the nine months ended September 30, 2002 and 2001, respectively.

        These restricted shares vested in full and the put and call provisions applicable to them terminated on the November 27, 2002 IPO date.

Management Omnibus Incentive Plan

        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 after adjustment for the stock dividend declared in connection with the IPO. On July 1, 2002, the Board authorized the grant of 379,000 options to purchase shares of common stock to certain employees and one nominee for director, pursuant to the Incentive Plan. These grants were effective on the IPO date at an exercise price equal to the $12.00 per share IPO price, have a ten year term and vest in five equal annual installments beginning on the first anniversary date of these grants.

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5.    Loss and Loss Adjustment Expense Reserves

        The following table sets forth a reconciliation of beginning and ending reserves for losses and loss adjustment expenses ("LAE"), as shown in the Company's unaudited condensed consolidated financial statements for the period indicated:

        At the end of the period, the reserves were re-estimated for all prior accident years and were increased by $0.6 million for the nine months ended September 30, 2002. Conditions and trends that have affected development of the loss and LAE reserves in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies from past reserve development.

        As of September 30, 2002, the Company had no material amounts recoverable from any reinsurer, excluding the residual markets described below.

        The Company is a participant in Commonwealth Automobile Reinsurers ("CAR"), a state-established body that runs the residual market reinsurance programs for 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. The Company also participates 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.

        The Company applies a consistent reserving philosophy. The reserve for losses and loss adjustment expenses represents management's best estimate of the ultimate net cost of all losses and loss adjustment expenses incurred. These estimates are based on actuarial studies, which have inherent limitations as to the accuracy of the estimates due to the fact that the ultimate liability for claims is subject to the outcome of events yet to occur. Accordingly, the amounts the Company will ultimately incur from losses and loss adjustment expenses could differ materially in the near term from the amounts recorded at September 30, 2002.

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

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6.    Commitments and contingencies

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

        Massachusetts law requires that insurers licensed to do business in Massachusetts participate in the Massachusetts Insurers Insolvency Fund ("Insolvency Fund"). Members of the Insolvency Fund are assessed a proportionate share of the obligations and expenses of the Insolvency Fund in connection with an insolvent insurer. CAR also assesses its members as a result of insurer insolvencies. Because CAR is not able to recover an insolvent company's share of the net CAR losses from the Insolvency Fund, CAR must increase each of its member's share of the deficit in order to compensate for the insolvent carrier's inability to pay its deficit assessment. It is anticipated that there will be additional assessments from time to time relating to various insolvencies. On October 28, 2002, the Company received notice of assessments from the Insolvency Fund related to prior year losses amounting to $2.1 million, which it expensed for the nine months ended September 30, 2002.

7.    Subsequent Events

Affirmation of A.M. Best Rating

        On November 19, 2002, the Company received notification from A.M. Best affirming its existing "A (Excellent)" rating.

Closing of IPO

        The Company sold 6,333,334 shares of its common stock at $12.00 per share in its IPO that closed on November 27, 2002. Net proceeds of approximately $72.7 million were received on that date from the IPO and a direct sale of 350,000 additional shares of common stock (the "Direct Sale") after deducting estimated underwriting discounts and estimated offering expenses, as well as $30.0 million borrowings under our new credit facility. These net proceeds and borrowings were used to repay principal, interest and dividends on the outstanding debt. The Company also received net proceeds of approximately $10.0 million on December 5, 2002 when the underwriters exercised their over-allotment option in full.

        As of September 30, 2002 the Company had 5,809,992 common shares outstanding. This amount increased to 14,359,991 at the close of the IPO on November 27, 2002 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 the 1,866,665 common shares issued in the preferred share exchange. As of December 5, 2002, the Company had 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 that same date. For further discussion of the transactions the Company consummated in connection with the IPO, see "The Preferred Share Exchange" and "The Direct Sale" in our prospectus in the registration statement on Form S-1 filed with the SEC on November 21, 2002.

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