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

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

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

We are a leading provider of property and casualty insurance focused primarily on the Massachusetts market. Our principal product line is automobile insurance. In addition to private passenger automobile insurance (which represented 67.2% of our direct written premiums in 2011) and commercial automobile insurance (10.5% of 2011 direct written premiums), we offer a portfolio of other insurance products, including homeowners (18.1% of 2011 direct written premiums) and dwelling fire, umbrella and business owner policies (totaling 4.2% of 2011 direct written premiums). Operating exclusively in Massachusetts and New Hampshire through our insurance company subsidiaries, Safety Insurance, Safety Indemnity, and Safety P&C (together referred to as the "Insurance Subsidiaries"), we have established strong relationships with independent insurance agents, who numbered 852 in 987 locations throughout Massachusetts and New Hampshire during 2011. We have used these relationships and our extensive knowledge of the Massachusetts market to become the third largest private passenger automobile and the third largest commercial automobile insurance carrier in Massachusetts, capturing an approximate 11.5% and 13.2% share, respectively, of the Massachusetts private passenger and commercial automobile markets in 2012 according to the Commonwealth Automobile Reinsurers ("CAR") Cession Volume Analysis Report of August 1, 2012, based on automobile exposures. These statistics total, for each vehicle insured, the number of months during the year insurance for that vehicle is in effect, to arrive at an aggregate number of car-months for each insurer; this aggregate number divided by 12 equals the insurer's number of car-years, a measure we refer to in this report as automobile exposures.

The Insurance Subsidiaries began writing private passenger automobile and homeowners insurance in New Hampshire during 2008, personal umbrella insurance in New Hampshire during 2009, and commercial automobile insurance in New Hampshire during 2011. During the six months ended June 30, 2012 and 2011, we wrote $3,963 and $2,462 respectively, in direct written premiums in New Hampshire.

Recent Trends and Events

† For the quarter ended June 30, 2012, loss and loss adjustment expenses incurred decreased by $11,489, or 10.1%, to $102,695 from $114,184 for the comparable 2011 period. The decrease was primarily due to the absence of catastrophe losses during the quarter ended June 30, 2012, compared to $22,050 in pre-tax catastrophic weather event losses recorded during the comparable 2011 quarter.

† We filed and were approved for a Massachusetts private passenger automobile rate increase of 3.6% which was effective May 15, 2012.

† We filed and were approved for a Massachusetts homeowners rate increase of 6.9% and a Massachusetts personal umbrella rate increase of 2.1%, both of which will be effective September 15, 2012.

† We filed and were approved for a New Hampshire automobile rate increase of 6.1%, which was effective July 15, 2012 and a New Hampshire homeowners rate increase of 5.1% which will be effective September 15, 2012.

Massachusetts Automobile Insurance Market

We have been subject to extensive regulation in the private passenger automobile insurance industry in Massachusetts, which represented 67.2% of our direct written premiums in 2011. Private passenger automobile insurance has been heavily regulated in Massachusetts. In many respects, the private passenger automobile insurance market in Massachusetts prior to 2008 was unique, in comparison to other states. This was due to a number of factors, including unusual regulatory conditions, the market dominance of domestic companies, the relative absence of large national companies, and the heavy reliance on independent insurance agents as the market's principal distribution channel. Perhaps most significantly, prior to 2008, the Massachusetts Commissioner of Insurance (the "Commissioner") fixed and established the premium rates and the rating plan to be used by all insurance companies doing business in the private passenger automobile insurance market and the Massachusetts private passenger automobile insurance residual market mechanism featured a reinsurance program run by CAR in which companies were assigned producers.

In 2008, the Commissioner issued a series of decisions to introduce what she termed "managed competition" to Massachusetts automobile insurance premium rates and in doing so replaced the fixed and established regime with a prior approval rate review process, governed by regulations that set certain terms and conditions that insurers must comply with in establishing their rates. The Commissioner also replaced the former reinsurance program with an assigned risk plan.

These decisions removed many of the factors that had historically distinguished the Massachusetts private passenger automobile insurance market from the market in other states. However, certain of the historically unique factors have not been eliminated, including compulsory insurance, affinity group marketing, and the prominence of independent agents.

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

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

During 2011, we increased our rates approximately 3.7%, and on March 1, 2012, we began using 17 rating tiers which resulted in a rate increase of 0.7%. Our rates include a 13.0% commission rate for agents. Our direct automobile written premiums increased by 5.5% in 2011 with increased exposures and average written premium per exposure in our private passenger and commercial automobile lines of business.

Insurance Ratios

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

Our GAAP insurance ratios are outlined in the following table.

                  Three Months Ended June 30,      Six Months Ended June 30,
                    2012              2011           2012            2011
GAAP ratios:
Loss ratio              64.6 %             76.8 %       63.8 %            80.4 %
Expense ratio           30.2               29.6         30.7              29.6
Combined ratio          94.8 %            106.4 %       94.5 %           110.0 %

Stock-Based Compensation

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

The maximum number of shares of common stock with respect to which awards may be granted is 2,500,000. Shares of stock covered by an award under the Incentive Plan that are forfeited will again be available for issuance in connection with future grants of awards under the plan. At June 30, 2012, there were 617,698 shares available for future grant. The Board of Directors and the Compensation Committee intend to issue more awards under the Incentive Plan in the future.

A summary of stock based awards granted under the Incentive Plan during the six months ended June 30, 2012 is as follows:

Type of                    Number of      Fair
Equity                      Awards      Value per
Awarded   Effective Date    Granted     Share (1)        Vesting Terms
  RS      March 8, 2012       77,844   $     41.75   3 years, 30%-30%-40%
  RS      March 8, 2012        4,000   $     41.75   No vesting period (2)
  RS      March 21, 2012      20,912   $     41.96   5 years, 20% annually

(2) The shares cannot be sold, assigned, pledged, or otherwise transferred, encumbered or disposed of until the recipient is no longer a member of the Board of Directors.

Reinsurance

We reinsure with other insurance companies a portion of our potential liability under the policies we have underwritten, thereby protecting us against an unexpectedly large loss or a catastrophic occurrence that could produce large losses, primarily in our homeowners line of business. We use various software products to measure our exposure to catastrophe losses and the probable maximum loss to us for catastrophe losses such as hurricanes. The models include estimates for our share of the catastrophe losses generated in the residual market for property insurance by the Massachusetts Property Insurance Underwriting Association ("FAIR Plan"). The reinsurance market has seen from the various software modelers, increases in the estimate of damage from hurricanes in the southern and northeast portions of the United States due to revised estimations of increased hurricane activity and increases in the estimation of demand surge in the periods following a significant event. We continue to manage and model our exposure and adjust our reinsurance programs as a result of the changes to the models. As of January 1, 2012, we have purchased four layers of excess catastrophe reinsurance providing $485,000 of coverage for property losses in excess of $50,000 up to a maximum of $535,000. Our reinsurers' co-participation is 50.0% of $30,000 for the 1st layer, 80.0% of $90,000 for the 2nd layer, 80.0% of $200,000 for the 3rd

layer, and 80.0% of $165,000 for the 4th layer. As a result of the changes to the models and our revised reinsurance program, our catastrophe reinsurance in 2012 protects us in the event of a "140-year storm" (that is, a storm of a severity expected to occur once in a 140-year period). Swiss Re, our primary reinsurer, maintains an A.M. Best rating of "A" (Excellent). Most of our other reinsurers have an A.M. Best rating of "A" (Excellent) however in no case is a reinsurer rated below "A-" (Excellent). Our losses from the individual catastrophe events of 2011 were less than our reinsurance retention.

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 has grown dramatically over the past few years as insurance carriers have reduced their exposure to coastal property. The FAIR Plan's exposure to catastrophe losses increased and as a result, the FAIR Plan decided to buy reinsurance to reduce their exposure to catastrophe losses. On July 1, 2011, the FAIR Plan purchased $1,000,000 of catastrophe reinsurance for property losses in excess of $200,000. At June 30, 2012, we had no material amounts recoverable from any reinsurer, excluding $42,768 recoverable from CAR.

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

Effects of Inflation

We do not believe that inflation has had a material effect on our consolidated results of operations, except insofar as inflation may affect interest rates.

                             Results of Operations



Three and Six Months Ended June 30, 2012 Months Compared to Three and Six Months
                              Ended June 30, 2011



The following table shows certain of our selected financial results.



                                       Three Months Ended June 30,           Six Months Ended June 30,
                                         2012               2011               2012              2011
Direct written premiums             $       185,830    $       173,130    $      362,083    $      337,214
Net written premiums                $       176,993    $       167,825    $      346,291    $      325,344
Net earned premiums                 $       159,070    $       148,720    $      314,606    $      293,366
Net investment income                        10,500              9,470            20,409            19,635
Net realized gains on
investments                                     617              1,277             1,073               858
Finance and other service income              4,521              4,470             9,026             8,875
Total revenue                               174,708            163,937           345,114           322,734
Loss and loss adjustment
expenses                                    102,695            114,184           200,739           235,814
Underwriting, operating and
related expenses                             48,010             44,071            96,548            86,700
Interest expenses                                22                 21                44                43
Total expenses                              150,727            158,276           297,331           322,557
Income before income taxes                   23,981              5,661            47,783               177
Income tax expense                            7,025              1,576            13,618                45
Net income                          $        16,956    $         4,085    $       34,165    $          132
Earnings per weighted average
common share:
Basic                               $          1.11    $          0.27    $         2.24    $         0.01
Diluted                             $          1.11    $          0.27    $         2.24    $         0.01
Cash dividends paid per common
share                               $          0.50    $          0.50    $         1.00    $         1.00

Direct Written Premiums. Direct written premiums for the quarter ended June 30, 2012 increased by $12,700, or 7.3%, to $185,830 from $173,130 for the comparable 2011 period. Direct written premiums for the six months ended June 30, 2012 increased

by $24,869, or 7.4%, to $362,083 from $337,214 for the comparable 2011 period. The 2012 increases occurred primarily in our personal automobile, commercial automobile, and homeowners business lines, which experienced increases of 4.9%, 1.0%, and 4.4%, respectively, in average written premium per exposure. Written exposures decreased slightly in our personal automobile line by 0.4% and increased by 14.5% and 8.9% respectively, in our commercial automobile and homeowners lines. The increase in homeowners exposures is primarily the result of our pricing strategy of offering account discounts to policyholders who insure both an automobile and home with us. The increase in commercial automobile exposures is a result of additional business submitted through the CAR LSC program as the number of Limited Servicing Carriers was reduced from six to four effective July 1, 2011.

Net Written Premiums. Net written premiums for the quarter ended June 30, 2012 increased by $9,168, or 5.5%, to $176,993 from $167,825 for the comparable 2011 period. Net written premiums for the six months ended June 30, 2012 increased by $20,947, or 6.4%, to $346,291 from $325,344 for the comparable 2011 period. The 2012 increase was primarily due to the factors that increased direct personal automobile and homeowners written premiums.

Net Earned Premiums. Net earned premiums for the quarter ended June 30, 2012 increased by $10,350, or 7.0%, to $159,070 from $148,720 for the comparable 2011 period. Net earned premiums for the six months ended June 30, 2012 increased by $21,240, or 7.2% to $314,606 from $293,366 for the comparable 2011 period. The 2012 increase was primarily due to the factors that increased direct personal automobile and homeowners written premiums.

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

                                  Three Months Ended June 30,           Six Months Ended June 30,
                                    2012               2011               2012              2011
Written Premiums
Direct                         $       185,830    $       173,130    $      362,083    $      337,214
Assumed                                  4,006              4,530             8,729             8,697
Ceded                                  (12,843 )           (9,835 )         (24,521 )         (20,567 )
Net written premiums           $       176,993    $       167,825    $      346,291    $      325,344

Earned Premiums
Direct                         $       166,868    $       155,481    $      329,274    $      306,952
Assumed                                  4,154              4,000             8,421             7,890
Ceded                                  (11,952 )          (10,761 )         (23,089 )         (21,476 )
Net earned premiums            $       159,070    $       148,720    $      314,606    $      293,366

Net Investment Income. Net investment income for the quarter ended June 30, 2012 increased by $1,030, or 10.9%, to $10,500 from $9,470 for the comparable 2011 period. Net investment income for the six months ended June 30, 2012 increased by $774, or 3.9%, to $20,409 from $19,635 for the comparable 2011 period. Net effective annualized yield on the investment portfolio increased to 3.8% and 3.7%, respectively, for the quarter and six months ended June 30, 2012, from 3.5% and 3.6 % for the comparable 2011 periods. Our duration was 3.6 years at June 30, 2012 compared to 3.7 years at December 31, 2011.

Net Realized Gains on Investments. Net realized gains on investments were $617 for the quarter ended June 30, 2012 compared to net realized gains of $1,277 for the comparable 2011 period. Net realized gains on investments were $1,073 for the six months ended June 30, 2012 compared to net realized gains of $858 for the comparable 2011 period.

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

                                                                   As of June 30, 2012
                                                                       Gross Unrealized Losses (3)
                                   Cost or         Gross              Non-OTTI                  OTTI           Estimated
                                  Amortized      Unrealized          Unrealized              Unrealized          Fair
                                    Cost           Gains               Losses                Losses (4)          Value
U.S. Treasury securities         $     7,521    $        284    $                   -     $              -    $     7,805
Obligations of states and
political subdivisions               450,661          29,597                     (183 )                  -        480,075
Residential mortgage-backed
securities (1)                       205,604          14,483                     (197 )                  -        219,890
Commercial mortgage-backed
securities                            45,896           1,256                       (4 )                  -         47,148
Other asset-backed securities         14,373             899                        -                    -         15,272
Corporate and other
securities                           333,053          12,961                     (697 )                  -        345,317
Subtotal, fixed maturity
securities                         1,057,108          59,480                   (1,081 )                  -      1,115,507
Equity securities (2)                 21,037           1,346                      (80 )                  -         22,303
Totals                           $ 1,078,145    $     60,826    $              (1,161 )   $              -    $ 1,137,810

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

(3) Our investment portfolio included 172 securities in an unrealized loss position at June 30, 2012.

(4) Amounts in this column represent other-than-temporary impairments recognized in accumulated other comprehensive income.

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

                                                            As of June 30, 2012
                                                          Estimated
                                                         Fair Value        Percent
U.S. Treasury securities and obligations of U.S.
Government agencies                                     $     232,481           20.8 %
Aaa/Aa                                                        542,916           48.7
A                                                             142,620           12.8
Baa                                                            72,045            6.5
Ba                                                             43,358            3.9
B                                                              50,642            4.5
Caa                                                             2,869            0.3
Not rated                                                      28,576            2.5
Total                                                   $   1,115,507          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.

As of June 30, 2012, 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. We have no exposure to European sovereign debt.

The following table illustrates the gross unrealized losses included in our investment portfolio and the fair value of those securities, aggregated by investment category. The table also illustrates the length of time that they have been in a continuous unrealized loss position as of June 30, 2012.

. . .