UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

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

20 Custom House Street, Boston, Massachusetts 02110

(Address of principal executive offices including zip code)

(617) 951-0600

(Registrant’s telephone number, including area code)

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

Title of each class	Name of each exchange on which 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 o No x

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

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 x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer o Accelerated filer x Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x

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, 2006, was approximately $679,472,762.

As of February 26, 2007, there were 16,100,432 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 18, 2007, which Safety Insurance Group, Inc. (the “Company”, “we”, “our”, “us”) intends to file within 120 days after its December 31, 2006 year-end, are incorporated by reference into Part III hereof.

SAFETY INSURANCE GROUP, INC.
Table of Contents

		Page No.
PART I.
Item 1.	Business		1
Item 1A.	Risk Factors		30
Item 1B.	Unresolved Staff Comments		35
Item 2.	Properties		35
Item 3.	Legal Proceedings		36
Item 4.	Submission of Matters to a Vote of Security Holders		36
PART II.
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		37
Item 6.	Selected Financial Data		39
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation		42
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		69
Item 8.	Financial Statements and Supplementary Data		70
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		98
Item 9A.	Controls and Procedures		98
Item 9B.	Other Information		98
PART III.
Item 10.	Directors, Executive Officers and Corporate Governance		99
Item 11.	Executive Compensation		99
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		100
Item 13.	Certain Relationships and Related Transactions, and Directors Independence		100
Item 14.	Principal Accountant Fees and Services		100
PART IV.
Item 15.	Exhibits, Financial Statement Schedules		100
SIGNATURES			109

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

PART I.

ITEM 1. BUSINESS

General

We are a leading provider of private passenger automobile insurance in Massachusetts. In addition to private passenger automobile insurance (which represented 76.0% of our direct written premiums in 2006), we offer a portfolio of property and casualty insurance products, including commercial automobile, homeowners, dwelling fire, umbrella and business owner policies. Operating exclusively in Massachusetts through our insurance subsidiaries, Safety Insurance Company (“Safety Insurance”), Safety Indemnity Insurance Company (“Safety Indemnity”) and Safety Property and Casualty Insurance Company (“Safety P&C”) which was organized in December 2006 but has not yet commenced writing business (together referred to as the “Insurance Subsidiaries”), we have established strong relationships with 652 independent insurance agents in 760 locations throughout Massachusetts. We have used these relationships and our extensive knowledge of the Massachusetts market to become the second largest private passenger automobile carrier, capturing an approximate 11.2% share of the Massachusetts private passenger automobile insurance market, and the third largest commercial automobile carrier, with an 11.8% share of the Massachusetts commercial automobile insurance market, in 2006 according to statistics compiled by Commonwealth Automobile Reinsurers (“CAR”). In addition, we were also ranked the 44 th largest automobile writer in the country according to A.M. Best, based on 2005 direct written premiums. We were incorporated under the laws of Delaware in 2001, but through our predecessors, we have underwritten insurance in Massachusetts since 1979.

We have maintained profitability in part by managing our cost structure through, for example, the use of technology. Our share of the Massachusetts private passenger automobile insurance market has grown from 10.4% in 2001 to 11.2% in 2006 and we have continued to expand our product offerings. Our direct written premiums have increased by 33.4% between 2001 and 2006, from $471,866 to $629,511. However, our direct written premiums decreased by 3.0% between 2005 and 2006 as a result of a state mandated private passenger automobile rate decrease of 8.7% effective January 1, 2006. On December 15, 2006 the Commissioner of Insurance further reduced the private passenger automobile rates 11.7% effective April 1, 2007. As a result, we anticipate a further reduction in private passenger automobile direct written premiums for 2007.

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

Our Competitive Strengths

We Have Strong Relationships with Independent Agents. In 2005, independent agents accounted for approximately 78.2% of the Massachusetts automobile insurance market measured by direct written

premiums as compared to only about 40.9% nationwide, according to A.M. Best. For that reason, our strategy is centered around, and we sell exclusively through, a network of 652 independent agents (of which 157 are Exclusive Representative Producers (“ERPs”)) in 760 locations throughout Massachusetts. 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 our agents address effectively 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. We must compete with other insurance carriers for the business of independent agents.

We Have an Uninterrupted Record of Profitable Operations. In every year since our inception in 1979, we have been profitable. We have achieved our profitable growth by, among other things:

· Increasing by 9.0% the number of private passenger automobile exposures we underwrite from 427,000 in 2001 to 465,416 in 2006 and the average premium we receive per automobile exposure from $918 to $1,019.

· Maintaining a statutory combined ratio (refer to page 41 for a definition of statutory combined ratio) that is consistently below industry averages;

· Taking advantage of the institutional knowledge our management has amassed during our long operating history in the unique Massachusetts market;

· Introducing new lines of insurance products, such as homeowners, which unlike private passenger automobile do not have state-established maximum premium rates;

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

· Maintaining a high-quality investment portfolio.

We Are a Technological Leader. We have dedicated significant human and financial resources to the development of advanced information systems. Our technology efforts have benefited us in two distinct ways. First, we continue to develop technology that empowers our independent agent customers to make it easier for them to transact business with their clients and with the Insurance Subsidiaries. In our largest business line, private passenger automobile insurance, our agents now submit approximately 98% of all applications for new policies or endorsements for existing policies to us electronically through our proprietary information portal, the Agents Virtual Community (“AVC”). Second, our investment in technology has allowed us to re-engineer internal back office processes to provide more efficient service at lower cost. Our adjusted statutory expense ratios have been below the average industry statutory expense ratio in each of the past five years. Our systems have also improved our overall productivity, as evidenced by our direct written premiums per employee increasing to $1,087 in 2006 from $929 in 2001.

We Have an Experienced, Committed and Knowledgeable Management Team. Our senior management team owns approximately 7% of the common stock of Safety Insurance Group, Inc. on a fully diluted basis. Our senior management team, led by our President, Chief Executive Officer and Chairman of the Board, David F. Brussard, has an average of over 27 years of industry experience per executive, as well as an average of over 25 years of experience with Safety. The team has demonstrated an ability to operate successfully within the regulated Massachusetts private passenger automobile insurance market.

Our Strategy

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

· Further penetrate the Massachusetts private passenger and commercial automobile insurance markets;

· Continue to selectively cross-sell homeowners, dwelling fire, personal umbrella in the personal lines market and business owner policies, commercial property package and commercial umbrella in the commercial lines market in order to capture a larger share of the total Massachusetts 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.

The Massachusetts Property and Casualty Insurance Market

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

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

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

· Compulsory Insurance. Massachusetts motorists must obtain automobile insurance prior to registering a vehicle with the Registry of Motor Vehicles. Insurers are required to notify the Registry of Motor Vehicles when coverage is cancelled and the Registry of Motor Vehicles is authorized to seize the license plates of uninsured motor vehicles.

· “Take All Comers.” With very few exceptions, CAR, which is the residual market program for automobile insurance in Massachusetts, may not refuse to cover an applicant. Servicing carriers of CAR, such as us, may not refuse to issue a policy to an applicant based on the applicant’s driving record or other underwriting criteria commonly used by insurers in other states to decide whether to insure a motorist.

· Standard Policy Form. The policy form that is used by all automobile insurers is developed by the Commissioner and must be used by all companies. The policy consists of several mandatory coverages: no fault coverage (i.e., “personal injury protection”); minimum limits of bodily injury and property damage liability coverage; and coverage for accidents caused by uninsured or hit-and-run motorists. In addition to these standard mandatory coverages, several additional optional coverages (such as higher bodily injury and property damage liability coverages, and collision and comprehensive coverages) must be offered. No carrier may offer any other type of coverage or deductible or use any form of policy endorsement without the prior approval of the Commissioner, which can be granted only after a formal hearing.

· Premium Rates are “fixed and established” by the Commissioner . In Massachusetts, automobile insurance companies are obligated to use premium rates that are determined on an annual basis by the Commissioner. As a matter of law, the Commissioner’s rate must be adequate, which the Massachusetts courts have ruled requires that the rate be sufficient to allow insurers the opportunity to earn a reasonable rate of return. The rate setting process involves a lengthy and complex administrative proceeding in which the Commissioner considers historic information related to claim costs as well as outside factors affecting insurance costs. Different data is presented for the Commissioner’s consideration by the Automobile Insurers Bureau (on behalf of the insurance industry), the State Rating Bureau, and the Massachusetts Attorney General. At the close of this proceeding, the Commissioner sets a premium rate for each of several classes of drivers, many different types of vehicles, and thirty-three different geographic territories within Massachusetts. The Commissioner usually sets the rate on or before December 15 th of the preceding year. The Commissioner mandated average rate decreases in private passenger automobile premiums of 8.7% and 1.7% for 2006 and 2005, respectively, and an increase of 2.5% for 2004. Beginning in 2007 the effective date of the Commissioner’s rate decision will be April 1st of each year as compared to January 1st of 2006 and prior rate decisions. Hence, the 2006 rates will be in effect from January 1, 2006, until March 31, 2007. The Commissioner announced on December 15, 2006, an 11.7% statewide average rate decrease effective April 1, 2007. In addition, the Commissioner annually establishes the minimum commission rate that insurers must pay their auto insurance agents. The Commissioner approved a commission rate, as a percentage of premiums of 11.8%, 10.9%, and 10.5%, in 2006, 2005, and 2004, respectively. The Commissioner approved a commission rate of 13.0% effective April 1, 2007.

· Safe Driver Insurance Plan. In other states, insurance companies are free to design their own systems for rewarding drivers with superior driving records by providing lower prices to such drivers and charging higher prices for drivers who have caused claims or who have poor driving records. In Massachusetts, all companies must use the system the Commissioner has developed. Known as the Safe Driver Insurance Plan, the system was revised effective January 1, 2006 and is based on points assessed for at-fault accidents and conviction of certain traffic violations. The Plan consists of a series of points ranging from 0 points to 45 points, with each point above 0 points imposing surcharges on motorists. The revised Plan offers credits to motorists with two excellent driver awards, an Excellent Driver Discount Plus (Credit code 99) for a driver with no accidents or violations in the preceding 6 years, and an Excellent Driver Discount (Credit code 98) for a driver with no accidents or violations in the preceding 5 years. Each driver is assigned points by the state. The Safe Driver Insurance Plan system is revenue neutral, which means that the aggregate cost of the discounts must be funded by the aggregate income of the surcharges.

· Price competition is limited. An insurer may charge less than the Commissioner’s fixed and established premium rates by offering discounts to all members of a particular class of motorists, but only if the discount is approved by the Commissioner after a public hearing. During the years 1996 to 2001, most insurance companies offered rate discounts for drivers with the best driving records. We offered competitively priced discounts during the 1996 to 2001 time period, but like most of our competitors, we have discontinued using these discounts since 2001. Only two companies offered such discounts in 2005, further reduced to one company in 2006.

· Affinity Group Marketing. In addition to the use of class discounts, insurers can charge lower rates than the Commissioner’s fixed rate by providing discounts to all members of an affinity group. An affinity group consists of all of the employees of a particular employer or the members of a trade union, association or other organization. These discounts must be filed with the Commissioner and are subject to the Commissioner’s approval. We currently offer discounts to 192 groups

representing approximately 9.0% of the private passenger automobile policies we issue, with discounts ranging from 3% to 5%.

· Exclusive Representative Producers. As noted above, the Commissioner sets a different rate for each of thirty-three territories in Massachusetts. The methodology the Commissioner uses to adjust the rates among each territory results in the reduction of rates in high cost urban communities from the actuarially appropriate rate while increasing rates in suburban and rural parts of Massachusetts. As a result, in the aggregate, rates in urban communities are considered inadequate by most insurers. In order to ensure that motorists living in such communities have access to automobile insurance, licensed insurance producers located in such areas who have not been appointed as a voluntary agent of a company may apply to CAR, to be appointed as an involuntary agent, or ERP, of an insurer selected by CAR. ERPs are assigned to all insurers writing private passenger automobile insurance in Massachusetts and ERP assignments are generally based upon an insurer’s market share. On September 30, 2005, the Commissioner instructed CAR to complete a redistribution of all ERPs to establish for all servicing carriers overall parity in the quantity and quality of their ERP exposures. ERP assignments and other recent related developments are discussed further in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations, Executive Summary and Overview.

· Commonwealth Automobile Reinsurers. In order to protect insurers from the assignment of ERPs and certain other insurance regulatory conditions, the Massachusetts Legislature created CAR, which runs a reinsurance pool. CAR is governed by a committee that is appointed by the Commissioner, but its rules and decisions are subject to the review and approval of the Commissioner. Under CAR’s current rules, companies may cede to the reinsurance pool private passenger policies that they determine are not likely to be profitable. As a result, CAR operates at an underwriting deficit. This deficit is allocated among every private passenger automobile insurance company based on a complex formula that takes into consideration a company’s voluntary market share, the amount of business it cedes to CAR and credits the company earns under a system CAR has designed to encourage carriers to voluntarily write business in selected under-priced classes and territories. We have developed underwriting and actuarial analysis systems to evaluate the profitability of ceding a risk to CAR or writing it voluntarily. CAR also runs a reinsurance pool for commercial automobile policies and beginning January 1, 2006, we are one of six servicing carriers that can service commercial automobile policies for CAR. Commercial automobile business that is not written in the voluntary market is apportioned to one of the six servicing carriers who handle the business on behalf of CAR. The underwriting result of CAR’s commercial automobile pool is allocated among every Massachusetts commercial automobile insurance company, based each company’s commercial automobile voluntary market share.

· Proposed Reform of CAR. On December 31, 2004, the then Commissioner approved new rules for CAR, which became effective on January 1, 2005 (the “Approved Rules”). Pursuant to the Approved Rules, CAR’s current system of assigning ERPs to each insurer and providing reinsurance to insurers is to be replaced by the Massachusetts Autombile Insurance Plan (the “MAIP”). The MAIP is a type of assigned risk plan similar to that used to manage the automobile insurance residual market in most other states. On June 20, 2005, the Massachusetts Superior Court ruled that the Commissioner lacked the statutory authority to implement the Approved Rules and ordered them vacated. As a result, the Approved Rules did not go into effect. The Commissioner appealed the decision of the Massachusetts Superior Court. On August 23, 2006, the Massachusetts Supreme Judicial Court overturned the decision of the Massachusetts Superior Court and unanimously ruled that the Commissioner did not need legislative approval to put in place the provisions in the Approved Rules which establish an assigned risk plan. On December 13, 2006, the Commissioner approved changes to the MAIP that called for three year phase in of an assigned risk

plan beginning April 1, 2007, to minimize disruption to consumers and agents. On January 19, 2007, following the dismissal of the Commissioner by newly elected Governor Deval Patrick, Acting Commissioner Joseph G. Murphy suspended the MAIP Rules (the “Suspended Rules”) for a period not to exceed 90 days. A hearing was held on February 15, 2007, for testimony regarding the Suspended Rules and recommendations or amendments to those Rules. At this time we are unable to predict whether the Suspended Rules will be delayed for more than 90 days, modified, adopted or rescinded. The Suspended Rules and other recent related developments are discussed further in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations, Executive Summary and Overview.

· Dominance of Domestic Companies. Many large national private passenger automobile insurance writers, such as State Farm, Allstate, Progressive, Berkshire Hathaway (GEICO), and Farmers, write very little or no private passenger automobile insurance business in Massachusetts. We actively participate in major industry policy-making organizations in Massachusetts, such as the Automobile Insurers Bureau and CAR, where our employees serve on a number of committees.

· Prominence of Independent Insurance Agents. Finally, and perhaps most importantly to our Company’s success, approximately 78.2% of the direct written premiums in the Massachusetts automobile insurance market was placed by independent agents in 2005, according to A.M. Best. Nationally, independent agents wrote only about 40.8% of the automobile insurance market in 2005, according to A.M. Best. Accordingly, to be successful, a company must have a strategy designed to encourage the best agents to place their best business with that company. We have designed a system of agent commissions, profit sharing, bonuses and other strategies, such as our information technology capabilities, that we believe favorably distinguishes our company from our competitors. We aggressively market our company to independent agents in attempting to get the best agents and the best business.

Products

Historically, we have focused on underwriting private passenger automobile insurance, which is written through our subsidiary, Safety Insurance, at rates that are determined on an annual basis by the Commissioner. 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 which will be used to add a third pricing tier to certain of our insurance products for our agents to sell to their clients. 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.

	For the Years Ended December 31,
Direct Written Premiums	2006				2005				2004
Private passenger automobile	$	478,175	76.0	%	$	521,062	80.3	%	$	509,038	81.0	%
Commercial automobile	88,174		14.0		69,963		10.8		65,057		10.4
Homeowners	49,644		7.9		47,055		7.2		45,175		7.2
Business owners policies	9,204		1.5		7,073		1.1		5,332		0.8
Personal umbrella	1,811		0.3		1,645		0.3		1,647		0.3
Dwelling fire	1,971		0.3		1,878		0.3		1,728		0.3
Commercial umbrella	532		—		437		—		318		—
Total	$	629,511	100.0	%	$	649,113	100.0	%	$	628,295	100.0	%

Our product lines are as follows:

Private Passenger Automobile (76.0% of 2006 direct written premiums). Private passenger automobile insurance is our primary product, and we support all Massachusetts policy forms and limits of coverage. Private passenger automobile policies provide coverage for bodily injury and property damage to others, no-fault personal injury coverage for the insured/insured’s car occupants, and physical damage coverage for an insured’s own vehicle for collision or other perils. We have priced our private passenger coverage competitively by offering group discounts since 1995 and Safe Driver Insurance Plan rate deviations from 1996 to 2001. Since 2001, we have not filed for any Safe Driver Insurance Plan deviation. We currently offer approximately 192 affinity group discount programs ranging from 3% to 5% discounts.

Commercial Automobile (14.0% of 2006 direct written premiums). Our commercial automobile program supports all Massachusetts policy forms and limits of coverage including endorsements that broaden coverage over and above that offered on the standard Massachusetts policy forms. Commercial automobile policies provide coverage for bodily injury and property damage to others, no-fault personal injury coverage, and physical damage coverage for an insured’s own vehicle for collision or other perils resulting from the ownership or use of commercial vehicles in a business. We offer insurance for commercial vehicles used for business purposes such as private passenger-type vehicles, trucks, tractors and trailers, and insure individual vehicles as well as commercial fleets. Commercial automobile policies are written at a standard rate with qualifying risks eligible for preferred lower rates. We received approval for a rate increase of 2.1% effective December 16, 2004, and did not file for a rate change during 2005 or 2006.

Homeowners (7.9.% of 2006 direct written premiums). We offer a broad selection of coverage forms for qualified policyholders. Homeowners policies provide coverage for losses to a dwelling and its contents from numerous perils, and coverage for liability to others arising from ownership or occupancy. We write policies on homes, condominiums, and apartments. We offer loss-free credits of up to 16% for eight years of loss free experience, along with a discount of 15% when a home is written together with an automobile. All forms of homeowners coverage are written at a standard rate with qualifying risks eligible for preferred lower rates. We received approval for a rate increase of 3.4% effective March 1, 2007.

Business Owners Policies (1.5% of 2006 direct written premiums). We serve eligible small and medium sized commercial accounts with a program that covers apartments and residential condominiums; mercantile establishments, including limited cooking restaurants; offices, including office condominiums; processing and services businesses; special trade contractors; and wholesaling businesses. Business owner policies provide liability and property coverage for many perils, including business interruption from a covered loss. Equipment breakdown coverage is automatically included, and a wide range of additional coverage is available to qualified customers. We write policies for business owners at standard rates with qualifying risks eligible for preferred lower rates.

Commercial Package Policies (Included in our Business Owners Policies direct written premiums). For larger commercial accounts, or those clients that require more specialized or tailored coverages, we offer a commercial package policy program that covers a more extensive range of business enterprises. Commercial package policies provide any combination of property, general liability, crime and inland marine insurance. Property automatically includes equipment breakdown coverage, and a wide range of additional coverage is available to qualified customers. We write commercial package policies at standard rates with qualifying risks eligible for preferred lower rates.

Personal Umbrella (Less than 0.3% of 2006 direct written premiums). We offer personal excess liability coverage over and above the limits of individual automobile, watercraft, and homeowner’s insurance policies to clients. We offer a discount of 10% when an umbrella policy is written together with an automobile insurance policy. We write policies at standard rates with limits of $1,000 to $5,000.

Dwelling Fire (0.3% of 2006 direct written premiums). We underwrite dwelling fire insurance, which is a limited form of a homeowner’s policy for non-owner occupied residences. We offer superior construction and protective device credits, with a discount of 5% when a dwelling fire policy is issued along with an automobile policy. We write all forms of dwelling fire coverage at standard rates with qualifying risks eligible for preferred lower rates.

Commercial Umbrella (Less than 0.1% of 2006 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.

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

Distribution

We distribute our products exclusively through independent agents, unlike some of our competitors, which use multiple distribution channels. We believe this gives us a competitive advantage with the agents. We have two types of independent agents: those with which we have voluntarily entered into an agreement, which we refer to as voluntary agents, and those that CAR has assigned to us as ERPs. With the exception of our ERPs, we do not accept business from insurance brokers. Our voluntary agents have authority pursuant to our voluntary agency agreement to bind our Insurance Subsidiaries for any coverage that is within the scope of their authority. We reserve the ability under Massachusetts law to cancel any coverage, other than private passenger automobile insurance, within the first 30 days after it is bound. In total, our 652 independent agents have 760 offices (some agencies have more than one office) and approximately 4,500 customer service representatives.

Voluntary Agents. In 2006, we obtained approximately 77.0% of our direct written premiums for automobile insurance and 100% of our direct written premiums for all of our other lines of business through our voluntary agents. As of February 28, 2007, we had agreements with 495 voluntary agents. Our voluntary agents are located in all regions of Massachusetts.

We look for agents with profitable portfolios of business. To become a voluntary agent for our Company, we generally require that an agency: (i) have been in business for at least five years; (ii) have exhibited a three year private passenger average ratio of losses, excluding loss adjustment expenses, to net earned premiums (“pure loss ratio”) of 64.0% or less on the portion of the agent’s portfolio that we would underwrite; (iii) make a commitment for us to underwrite at least 500 policies from the agency during the first twelve months after entering an agreement with us; and (iv) offer multiple product lines. Every year, we review the performance of our agents during the prior year. If an agent fails to meet our profitability standards, we try to work with the agent to improve the profitability of the business it places with us. We generally terminate contracts each year with a few agencies, which, despite our efforts, have been consistently unable to meet our standards. Although independent agents usually represent several unrelated insurers, our goal is to be one of the top two insurance companies represented in each of our agencies, as measured by premiums. No individual agency generated more than 3.0% of our direct written premiums in 2006.

Exclusive Representative Producers. In 2006, our ERPs generated approximately 23.0% of our direct written premiums for automobile insurance. As of December 31, 2006, we had 63 private passenger automobile ERPs. CAR defines ERPs as licensed dwelling fire or casualty insurance agents or brokers who have a place of business in Massachusetts, but have no existing voluntary independent agency relationship with an automobile insurer conducting business in Massachusetts. An ERP’s policy portfolio typically includes a significant percentage of what are considered to be under-priced automobile policies.

Massachusetts law guarantees that CAR provide motor vehicle insurance coverage to all qualified applicants. To facilitate this system, under CAR’s current rules, any qualified licensed insurance producer that is unable to obtain a voluntary automobile relationship with an insurer becomes an ERP and is assigned to an insurer, which is then required to write that agent’s policies. The number of mandated ERP policies assigned to a Massachusetts insurance carrier is intended to be proportionate to its voluntary market share. However, because no insurer can control the relative volumes of voluntary and ERP business with certainty, carriers are usually either relatively oversubscribed or undersubscribed with ERP policies. Periodically, CAR assigns or re-assigns an ERP to the most undersubscribed insurer.

On September 30, 2005, the Commissioner instructed CAR to complete a redistribution of all ERPs to establish for all servicing carriers overall parity in the quantity and quality of their ERP exposures. The redistribution plan for ERPs, as adopted by the CAR Governing Committee on November 16 and December 14, 2005, was approved by the Commissioner on January 27, 2006. On January 31, 2006, CAR notified each reassigned ERP and all servicing carriers of the redistribution. According to the January 31, 2006 CAR Private Passenger ERP Redistribution Summary, 18 Safety ERPs with 25,590 exposures were assigned to other servicing carriers beginning with new business effective March 1, 2006 and renewal business May 1, 2006. In addition, CAR assigned 29 ERPs with 24,670 exposures from other servicing carriers to Safety. However 25 of these ERPs with 23,116 exposures were given voluntary contracts by their former servicing carrier or other carriers and were, as a result, no longer eligible for assignment to Safety as ERPs. The redistribution and other recent related CAR developments are discussed further in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations, Executive Summary and Overview.

Beginning January 1, 2006, CAR implemented a Limited Servicing Carrier Program (the “LSC program”) for ceded commercial automobile policies. CAR approved Safety and five other servicing carriers through a Request for Proposal to process approximately $200,000 of ceded commercial automobile business based on CAR data as of December 31, 2005, which will be spread equitably among the six servicing carriers. CAR assigned 353 voluntary agents (many of which were already voluntary agents of Safety) and 103 ERPs to Safety for the LSC program.

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.

	For the Years Ended December 31,
	2006					2005					2004
Line of Business	Exposures		Change			Exposures		Change			Exposures		Change
Private passenger automobile
Voluntary agents		366,220		3.7	%		353,109		3.4	%		341,517		2.3	%
Exclusive Representative Producers		99,196		-15.3			117,112		-0.4			117,616		7.4
Private passenger automobile total		465,416		-1.0			470,221		2.4			459,133		3.5
Commercial automobile
Voluntary Agents		48,117		3.7			46,396		7.5			43,174		5.7
Exclusive Representative Producers		6,619		180.5			2,360		9.6			2,153		4.3
Commercial automobile total		54,736		12.3			48,756		7.6			45,327		5.6
Homeowners		64,020		-0.3			64,193		-2.9			66,120		-2.0
Business owners policies		4,838		22.5			3,950		24.4			3,174		19.3
Personal umbrella		7,705		2.9			7,491		0.2			7,478		0.7
Dwelling fire		2,173		-3.2			2,245		-5.7			2,381		-2.4
Commercial umbrella		311		25.9			247		30.7			189		13.9
Total		599,199		0.4			597,103		2.3			583,802		3.0
Voluntary agents total		493,384		3.3			477,631		2.9			464,033		2.0
Exclusive Representative Producers total		105,815		-11.4	%		119,472		-0.2	%		119,769		7.3	%

Our total written exposures increased by 0.4% for the year ended December 31, 2006. The increase was the result of our voluntary agent written exposures increasing by 3.3% and our ERP written exposures decreasing by 11.4%. Our private passenger exposures decreased by 1.0% primarily as a result of the CAR ERP redistribution. Our commercial automobile exposures increased by 12.3% primarily as a result of the CAR LSC program. Our homeowners and dwelling fire exposures decreased 0.3% and 3.2%, respectively, due to our continued re-underwriting of coastal properties. Our business owners policies, personal umbrella and commercial umbrella exposures increased 22.5%, 2.9% and 25.9% respectively primarily as a result of our voluntary agents efforts to sell multiple products to their clients

Marketing

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

· To offer a range of products, which we believe enables our agents to meet the insurance needs of their clients, and overcomes agents’ resistance to placing their clients’ automobile insurance and other coverages with different insurers;

· To price our products competitively, including offering discounts when and where appropriate for safer drivers and for affinity groups, and also offering account discounts for policyholders that have both an automobile and homeowners policy 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.

Commission Schedule and Profit Sharing Plan. We have several programs designed to attract profitable new private passenger automobile business from agents by paying them more than the minimum commission the law requires (which is 11.8% of premiums for 2006, and 13.0% in 2007). We recognize our top performing agents by making them members of our President’s Club or Executive Club. In 2006, President’s Club members received a commission equal to 17.0% of premiums for each new policy with a safe driver credit code of 99 and 98 (drivers with no accidents or violations in the prior six and five years respectively), while Executive Club members received a commission equal to 14.0% of premiums for such policies. In 2006, 62.7% of our drivers were in Safe Driver Insurance Plan credit code 99 and 98, as compared to 62.7% for the Massachusetts private passenger automobile industry as a whole, based on the number of drivers per month in each step according to CAR.

Further, we have a competitive agency incentive commission program under which we pay agents up to 8.0% of premiums based on the loss ratio on their business.

We have received no inquiries from the Commissioner, the Massachusetts Attorney General, or any other government agency relative to how we conduct our contingent commissions and profit sharing programs.

Service and Support. We believe that the level and quality of service and support we provide helps differentiate us from other insurers. We have made a significant investment in information technology designed to facilitate our agents’ business. Our AVC website helps agents manage their work efficiently. We provide a substantial amount of information online that agents need to serve their customers, such as information about the status of new policies, bill payments and claims. Providing this type of content reduces the number of customer calls we receive and empowers the agent’s customer service representatives by enabling them to respond to customers’ inquiries while the customer is on the telephone. Finally, we believe that the knowledge and experience of our employees enhance the quality of support we provide.

Underwriting

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

· Pricing of discounts offered on our private passenger automobile product;

· Pricing of our commercial automobile, homeowners, dwelling fire, personal umbrella, business owners policies, commercial umbrella and commercial package products;

· Determining which policies to cede to CAR’s reinsurance pool and which to retain; and

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

We are organized into three underwriting units, a separate unit for Massachusetts private passenger automobile, a separate unit for all other personal lines underwriting including homeowners, dwelling fire, personal umbrella and inland marine coverages, and a separate unit for commercial lines, including commercial auto, business owners policies, commercial umbrella and commercial package policies.

Pricing. Our pricing strategy for private passenger automobile insurance primarily depends on the maximum permitted premium rates and minimum permitted commission levels mandated by the

Commissioner. For several years prior to 2002, we offered discounts off the state-mandated rates to drivers in the lower Safe Driver Insurance Plan steps, as did a number of other insurers. However, starting in 1998, we began to reduce the discounts we offered, in light of the reductions or minimal increases in average rates the Commissioner has mandated in each year since 1998. We currently do not offer any Safe Driver Insurance Plan credit code-based discounts.

Although we do not currently offer any Safe Driver Insurance Plan discounts, we do offer group discounts to members of 192 affinity groups, including the Boston College Alumni Association, the Massachusetts Bar Association and the Massachusetts Medical Society. In general, we target affinity groups with a mature and stable membership base along with favorable driving records, offering between a 3% and 5% discount (with 4% being the average discount offered). Approximately 9.0% of the private passenger policies we issue receive an affinity group discount.

Subject to Commissioner review, CAR sets the premium rates for commercial automobile policies reinsured through CAR. Subject to Commissioner review, we set rates for commercial automobile policies that are not reinsured through CAR, and for all other insurance lines we offer, including homeowners, dwelling fire, personal umbrella, commercial umbrella, commercial package policies and business owner policies. We base our rates on industry loss cost data, our own loss experience, residual market deficits, catastrophe modeling and prices charged by our competitors in the Massachusetts market. We have two pricing tiers for most products, utilizing Safety Insurance for standard rates and Safety Indemnity for preferred rates. In December 2006, we formed Safety P&C which will be used to add a third pricing tier to our insurance products for our agents to sell to their clients. We received approval for a rate increase of 2.1% for our commercial automobile line effective December 16, 2004, and did not file for a rate change during 2005 or 2006. We received approval for a rate increase of 3.4% for our homeowners line effective March 1, 2007.

Cede/Retain Decisions. Under CAR’s current rules for private passenger policies, we must decide, within 23 days after the effective date of a new policy or before renewing an existing policy, whether to cede it to CAR’s reinsurance pool. Each Massachusetts private passenger automobile insurer must bear a portion of the losses of the private passenger reinsurance pool. Under CAR’s current rules, we are able to reduce our total allocated share of the losses of the reinsurance pool by ceding less business to the pool than our proportionate share. As a result, in determining whether to cede an under priced policy to CAR’s private passenger automobile reinsurance pool, we attempt to evaluate whether we are likely to incur greater total losses by ceding it to the pool or by retaining it. According to the January 19, 2007 CAR Cession Volume Analysis—Private Passenger Report, as of November 30, 2006, we have ceded 4.9% of our private passenger automobile business to the pool in 2006, compared to an average of 5.1% for the industry. Our goal is to cede only those policies that incur less total losses resulting from a cession to CAR, than the total losses incurred by retaining the policy.

CAR also runs a reinsurance pool for commercial automobile policies and beginning January 1, 2006, we are one of six servicing carriers that can service commercial automobile policies for CAR. Commercial automobile business that is not written in the voluntary market is apportioned to one of the six servicing carriers who handle the business on behalf of CAR. Each Massachusetts commercial automobile insurer must bear a portion of the losses of the commercial reinsurance pool that is serviced by the six servicing carriers.

Bulk Policy Transfers and New Voluntary Agents. From time to time, we receive proposals from existing voluntary agents to transfer a portfolio of the agent’s business from another insurer to us. Our underwriters model the profitability of these portfolios before we accept these transfers. Among other things, we usually require that the private passenger portion of the portfolio have a pure loss ratio of 64.0% or less on the portion of the agent’s portfolio that we would underwrite. In addition, we require any new voluntary agent to commit to transfer a portfolio to us consisting of at least 500 policies.

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

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

Technology

The focuses of our information technology effort are:

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

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

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

We believe that our technology initiatives have increased revenue and decreased costs. For example, these initiatives have allowed us to reduce the number of call-center transactions which we perform, and to transfer many manual processing functions from our internal operations to our independent agents. We also believe that these initiatives have contributed to our overall increases in productivity. In 1990, we had 399 employees and $154,997 in direct written premiums. As of December 31, 2006, we had 579 employees and $629,511 in direct written premiums, which represents an increase from $388 direct written premiums per employee in 1990 to $1,087 direct written premiums per employee in 2006.

Internal Applications (Intranet). Our employees access our proprietary applications through our corporate intranet. Our intranet applications streamline internal processes and improve overall operational efficiencies in areas including:

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

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

The RadicalGlass.com application allows our claims department to contain glass costs by increasing the windshield repair to replacement ratio. For every windshield that is repaired rather than replaced there is an average savings of $290 per windshield claim.

A VIP Claims Center was introduced during 2006 to provide increased service levels to our independent insurance agents and their clients. The VIP Claims Center uses 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, through reduced cycle times.

Billing. Proprietary billing systems, integrated with the systems of our print and lock-box vendors, expedite the processing and collection of premium receipts and finance charges from agents and policyholders. We believe the sophistication of our direct bill system helps us to limit our bad debt expense. In both 2006 and 2005 our bad debt expense as a percentage of direct written premiums was less than 0.2%.

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

Listed below are examples of the business critical applications agents may access through AVC.

New Business and Endorsement Processing. Agents can perform new business and endorsement processing with our point of sale application. Agents can upload policy data to our system directly from their agency system or rate quote software in AVC’s secure Web environment without having to re-enter policy information. Agents are then able to download many of these transactions to their agency management system the next business day.

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

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

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

Claims

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

Casualty Claims

We have a proven record of settling casualty claims below the industry average in Massachusetts. According to the Automobile Insurers Bureau, our average casualty claim settlement during the period from January 1994 through June 30, 2006, was $5,514, approximately 3.9% lower than the Massachusetts industry average of $5,737.

We have adopted stringent claims settlement procedures, which include guidelines that establish maximum settlement offers for soft tissue injuries, which constituted approximately 72% of our bodily injury claims. If we are unable to settle these claims within our guidelines, we generally take the claim to litigation. We believe that these procedures result in providing our adjusters with a uniform approach to negotiation.

We believe an important component of handling claims efficiently is prompt investigation and settlement. We find that faster claims settlements often result in less expensive claims settlements. Our E-Claim reporting system is an online product that reduces the time it takes for agents to notify our adjusters about claims, thereby enabling us to contact third-party claimants and other witnesses quickly. After business hours we outsource claims adjustment support to an independent firm whose employees contact third-party claimants and other witnesses. We believe that early notification results in our adjusters conducting prompt investigations of claims and compiling more accurate information about those claims. Our claims workload management software also assists our adjusters in handling claims quickly.

We believe the structure of our casualty claims unit allows us to respond quickly to claimants anywhere in the Commonwealth of Massachusetts. Comprising 122 people, the department is organized into distinct claim units that contain loss costs for soft tissue injuries. Field adjusters are located geographically for prompt response to claims, with our litigation unit focused on managing loss costs and litigation expenses for serious injury claims.

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

Property Claims

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

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

Reserves

Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the loss to the insurer and the insurer’s payment of that loss. To recognize liabilities for unpaid losses, insurers establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the expenses associated with investigating and paying the losses, or loss adjustment expenses. Every quarter, we review and establish our reserves. Regulations promulgated by the Commissioner require us to annually obtain a certification from either a qualified actuary or an approved loss reserve specialist 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, 2006, is adequate to cover the ultimate net cost of losses and claims incurred as of that date.

Management determines its loss and 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 $327,472 to a high of $377,497 as of December 31, 2006. The Company’s loss and LAE reserves, based on management’s best estimate, were set at $370,980 as of December 31, 2006. The ultimate liability may be greater or less than reserves carried at the balance sheet date. Establishment of appropriate reserves is an inherently uncertain process, and there can be no certainty that currently established reserves will prove adequate in light of subsequent actual experience. To the extent that reserves are inadequate and are strengthened, the amount of such increase is treated as a charge to earnings in the period that the deficiency is recognized. To the extent that reserves are redundant and are released, the amount of the release is a credit to earnings in the period the redundancy is recognized. We do not discount any of our reserves.

The following table presents development information on changes in the reserves for losses and loss adjustment expenses (“LAE”) of our Insurance Subsidiaries for the three years ended December 31, 2006.

	For the Years Ended December 31,
	2006			2005			2004
Reserves for losses and LAE, beginning of year	$	450,716		$	450,897		$	383,551
Less reinsurance recoverable on unpaid losses and LAE	(80,550		)	(84,167		)	(73,539		)
Net reserves for losses and LAE, beginning of year	370,166			366,730			310,012
Incurred losses and LAE related to:
Current year	396,653			425,213			431,839
Prior years	(42,747		)	(39,620		)	(6,778		)
Total incurred losses and LAE	353,906			385,593			425,061
Paid losses and LAE related to:
Current year	219,879			237,557			217,989
Prior years	133,213			144,600			150,354
Total paid losses and LAE	353,092			382,157			368,343
Net reserves for losses and LAE, end of year	370,980			370,166			366,730
Plus reinsurance recoverables on unpaid losses and LAE	78,464			80,550			84,167
Reserves for losses and LAE, end of year	$	449,444		$	450,716		$	450,897

At the end of each period, the reserves were re-estimated for all prior accident years. Our prior year reserves decreased by $42,747, $39,620 and $6,778 during 2006, 2005 and 2004, respectively. The decrease in prior year reserves during 2006 resulted from re-estimations of prior year ultimate loss and LAE liabilities and is primarily composed of reductions of $23,945 in the Company’s retained automobile reserves and $14,006 in the CAR assumed reserves. It is not appropriate to extrapolate future favorable or unfavorable development of reserves from this past experience.

The following table represents the development of reserves, net of reinsurance, for calendar years 1996 through 2006. 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, 2006.

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

In evaluating the information in the table, it should be noted that each amount entered incorporates the effects of all changes in amounts entered for prior periods. Thus, if the 2004 estimate for a previously incurred loss was $150,000 and the loss was reserved at $100,000 in 2000, the $50,000 deficiency (later estimate minus original estimate) would be included in the cumulative redundancy (deficiency) in each of the years 2000-2004 shown in the table. It should further be noted that the table does not present accident or policy year development data. In addition, conditions and trends that have affected the development of

liability in the past may not necessarily recur in the future. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies from the table.

	As of and for the Year Ended December 31,
	2006		2005		2004		2003		2002		2001		2000		1999		1998		1997		1996
Reserves for losses and LAE originally estimated	$	370,980	$	370,166	$	366,730	$	310,012	$	266,636	$	227,377	$	211,834	$	206,613	$	195,990	$	195,145	$	189,420
Cumulative amounts paid as of:
One year later			133,213		144,600		150,354		137,092		118,141		114,016		107,937		92,791		75,233		68,246
Two years later					202,435		201,287		199,119		168,344		163,768		133,414		113,323		105,046		96,219
Three years later							232,539		225,350		196,340		185,396		154,395		135,024		125,574		111,706
Four years later									238,087		212,079		194,891		163,903		144,985		136,730		121,100
Five years later											217,009		204,290		167,829		149,548		141,843		126,924
Six years later													206,324		171,148		150,940		143,457		128,804
Seven years later															171,871		152,243		143,998		129,356
Eight years later																	152,533		144,727		129,535
Nine years later																			144,900		130,047
Ten years later																					130,163

	As of and for the Year Ended December 31,
	2006	2005			2004			2003			2002			2001		2000			1999			1998			1997			1996
Reserves re-estimated as of:
One year later		$	327,419		$	327,110		$	303,234		$	266,817		$	225,115	$	204,531		$	179,650		$	169,940		$	171,803		$	161,083
Two years later					304,891			291,100			269,941			227,764		206,340			176,008			156,590			153,846			144,727
Three years later								280,507			264,961			231,190		208,587			175,868			154,867			147,455			134,721
Four years later											260,398			229,699		209,517			176,025			154,530			146,059			131,694
Five years later														227,428		208,343			175,367			154,572			145,670			131,051
Six years later																208,232			174,469			153,926			145,607			130,903
Seven years later																			174,121			153,920			145,465			130,730
Eight years later																						153,778			145,452			130,599
Nine years later																									145,335			130,590
Ten years later																												130,476
Cumulative (redundancy) deficiency 2006		(42,747		)	(61,839		)	(29,505		)	(6,238		)	51		(3,602		)	(32,492		)	(42,212		)	(49,810		)	(58,944		)

	As of and for the Year Ended December 31,
	2006		2005		2004		2003		2002		2001		2000		1999		1998		1997		1996
Gross liability-end of year	$	449,444	$	450,716	$	450,897	$	383,551	$	333,297	$	302,556	$	302,131	$	315,226	$	311,846	$	319,453	$	326,802
Reinsurance recoverables	78,464		80,550		84,167		73,539		66,661		75,179		90,297		108,613		115,856		124,308		137,382
Net liability-end of year	370,980		370,166		366,730		310,012		266,636		227,377		211,834		206,613		195,990		195,145		189,420
Gross estimated liability—latest			400,145		374,010		346,264		323,264		281,539		275,274		241,959		225,313		220,803		210,654
Reinsurance recoverables—latest			72,726		69,119		65,757		62,866		54,111		67,042		67,838		71,535		75,468		80,178
Net estimated liability—latest			327,419		304,891		280,507		260,398		227,428		208,232		174,121		153,778		145,335		130,476

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, 2006, 2005 and 2004 we decreased loss reserves related to prior years by $42,747, $39,620 and $6,778, respectively. Reserves and development are discussed further in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations, Executive Summary and Overview.

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

Reinsurance

We reinsure with other insurance companies a portion of our potential liability under the policies we have underwritten, thereby protecting us against an unexpectedly large loss or a catastrophic occurrence that could produce large losses. Reinsurance involves an insurance company transferring (ceding) a portion of its exposure on insurance underwritten by it to another insurer (reinsurer). The reinsurer assumes a portion of the exposure in return for a share of the premium. Reinsurance does not legally discharge an insurance company from its primary liability for the full amount of the policies, but it does make the reinsurer liable to the company for the reinsured portion of any loss realized.

We are selective in choosing our reinsurers, seeking only those companies that we consider to be financially stable and adequately capitalized. In an effort to minimize exposure to the insolvency of a reinsurer, we continuously evaluate and review the financial condition of our reinsurers. Swiss Re, our primary reinsurer, maintains an A.M. Best rating of “A+” (Superior). All of our other reinsures have an A.M. Best rating of “A” (excellent) or better except for Folksamerica, Endurance Re, Montpelier Re and Amlin Bermuda which are rated “A-” (excellent).

We maintain reinsurance coverage to help lessen the effect of losses from catastrophic events, maintaining coverage that during 2006 protected us in the event of a “415-year storm” (that is, a storm of a severity expected to occur once in a 415 year period). We use various software products to measure our exposure to catastrophe losses and the probable maximum loss to us for catastrophe losses such as hurricanes. The models include estimates for our share of the catastrophe losses generated in the residual market for property insurance by the Massachusetts Property Insurance Underwriting Association. In 2006, we purchased three layers of excess catastrophe reinsurance providing coverage for property losses in excess of $15,000 up to a maximum of $250,000. Our reinsurers co-participation is 90.0% of $15,000 for the 1 st layer, 90.0% of $30,000 for the 2 nd layer, and 90.0% of $190,000 for the 3 rd layer.

In the aftermath of Hurricane Katrina in 2005, the reinsurance market has seen from the various software modelers, increases in the estimate of damage from hurricanes in the southern and northeast portions of the United States due to revised estimations of increased hurricane activity and increases in the estimation of demand surge in the periods following a significant event. While we have continued to manage our exposure to catastrophes such as hurricanes, and have not increased the amount of property we insure subject to a loss from a hurricane, the changes to the various software models during 2006 have increased our modeled probable maximum loss due to catastrophic events. We have adjusted our reinsurance programs as a result of the changes to the models. In 2007, we have purchased four layers of excess catastrophe reinsurance providing coverage for property losses in excess of $15,000 up to a maximum of $280,000. Our reinsurers co-participation is 90.0% of $15,000 for the 1 st layer, 85.0% of $30,000 for the 2 nd layer, 85.0% of $190,000 for the 3 rd layer, and 50% of $30,000 for the 4 th layer. As a result of these changes to the models, and our revised reinsurance program, we maintain coverage that protects us in the event of a “300-year storm” (that is, a storm of a severity expected to occur once in a 300 year period).

We also have casualty excess of loss reinsurance for large casualty losses occurring in our automobile, homeowners, dwelling fire, business owners policies, commercial package policies, personal umbrella and commercial umbrella lines of business in excess of $1,000 up to a maximum of $5,000, with an annual aggregate deductible of $500. We have property excess of loss reinsurance coverage for large property losses, with coverage in excess of $1,500 up to a maximum of $15,000, for our homeowners, business owner, and commercial package policies. In addition, we have a quota share reinsurance agreement under which we cede 90.0% of the premiums and losses under our personal and commercial umbrella policies with an annual aggregate deductible of $75. We also have a reinsurance agreement with Hartford Steam Boiler

Inspection and Insurance Company, which is a quota share agreement under which we cede 100% of the premiums and losses for the equipment breakdown coverage under our business owner policies and commercial package policies.

In the wake of the September 11, 2001, tragedies, reinsurers have begun to exclude coverage for claims in connection with any act of terrorism. Our reinsurance programs for 2006 and 2007 excludes coverage for acts of terrorism, except for fire or collapse losses as a result of terrorism, under homeowners, dwelling fire, private passenger automobile and commercial automobile policies. For business owner policies and commercial package policies, terrorism is excluded if the total insured value is greater than $20,000.

The Terrorism Risk Insurance Act of 2002 (“TRIA”) was signed into law on November 26, 2002, and expired December 31, 2005. The Terrorism Risk Insurance Extension Act of 2005 (“TRIEA”) was signed into law on December 22, 2005, which reauthorizes TRIA for two years, while expanding the private sector role and reducing the federal share of compensation for insured losses under the program. The intent of this legislation is to provide federal assistance to the insurance industry for the needs of commercial insurance policyholders with the potential exposure for losses due to acts of terrorism. The TRIEA provides reinsurance for certified acts of terrorism. Effective January 1, 2006, we issued policy endorsements for all commercial policyholders to comply with TRIEA after obtaining Commissioner approval.

As of December 31, 2006, we had no material amounts recoverable from any reinsurer, excluding the residual markets described below. On March 10, 2005, our Board of Directors adopted a resolution that prohibits Safety from purchasing finite reinsurance (reinsurance that transfers only a relatively finite or limited amount of risk to the reinsurer) without approval by the Board. To date, the Company has never purchased a finite reinsurance contract.

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

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. In the past, competition in the Massachusetts private passenger automobile market has included offering significant discounts from the maximum permitted rates, and there can be no assurance that these conditions will not recur. Further, we and others compete on the basis of the commissions and other cash and non-cash incentives provided to agents. Although a number of national insurers that are much larger than we are do not currently compete in a material way in the Massachusetts private passenger automobile market, if one or more of these companies decided to aggressively enter the market it could have a material adverse effect on us. These companies include some that would be able to sustain significant losses in order to acquire market share, as well as others which use distribution methods that compete with the independent agent channel. There can be no assurance that we will be able to compete effectively against these companies in the future.

In Massachusetts, as of December 31, 2006, 19 insurers actively wrote private passenger automobile insurance, according to CAR. Of these 19 insurers, 4 are national companies which use independent agents to sell their products, 8 are regional or Massachusetts-only companies which use independent agents to sell their products (including us) and 7 are national, regional or Massachusetts-only companies which sell their products directly to policyholders. Our principal competitors within the Massachusetts private passenger automobile insurance industry are both regional companies, Commerce Group, Inc. and Arbella Insurance Group, which held 31.1% and 9.7% market shares based on automobile exposures, respectively, in 2006 according to CAR.

Employees

At December 31, 2006, we employed 579 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, 2006, there were no securities below investment grade (as defined by Moody’s, S&P, and the Securities Valuation Office of the NAIC (see further details below)) in our fixed income securities portfolio. 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), and no more than 0.5% of our portfolio may be invested in securities of any one issuer rated “Baa”, or the lowest investment grade assigned by Moody’s. We continually monitor the mix of taxable and tax-exempt securities, in an attempt to maximize our total after-tax return. Since 1986, our investment manager has been Deutsche Asset Management, formerly known as Scudder Investments.

The following table reflects the composition of our investment portfolio at December 31, 2006 and 2005:

	At December 31,
	2006					2005
	Estimated Fair Value		% of Portfolio			Estimated Fair Value		% of Portfolio
U.S. Treasury securities and obligations of U.S. Government agencies(1)	$	183,436		19.5	%	$	125,220		17.5	%
Obligations of states and political subdivisions	434,359			46.2		322,609			45.1
Asset-backed securities(1)	178,611			19.0		123,475			17.3
Corporate and other securities	139,874			14.8		141,234			19.8
Subtotal, fixed maturity securities	$	936,280		99.5		$	712,538		99.7
Equity securities	4,325			0.5		2,005			0.3
Totals	$	940,605		100.0	%	$	714,543		100.0	%

(1) Obligations of U.S. Government agencies include collateralized mortgage obligations issued, guaranteed and/or insured by the following issuers: Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) and Small Business Administration (SBA). The total of these fixed maturity securities was $175,394 and $117,766 at amortized cost and $173,539 and $115,284 at fair value as of December 31, 2006 and 2005, respectively. As such, the asset-backed securities presented exclude such

issuers already presented under U.S. Treasury securities and obligations of U.S. Government Agencies.

While we have held common equity securities in our investment portfolio in the past, as of December 31, 2006, we held no such securities in our investment portfolio, except for interests in mutual funds to fund the Safety Insurance Company Executive Incentive Compensation Plan, a non-qualified deferred compensation plan maintained for the purpose of providing deferred compensation to a select group of management. We made the decision to divest common equity securities in order to maximize the current investment income earned by our portfolio and to reduce our overall investment risk. We continuously evaluate market conditions and we expect in the future to purchase common equity securities.

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

The following table reflects our investment results for each year in the three-year period ended December 31, 2006:

	For the Years Ended December 31,
	2006			2005			2004
Average cash and invested securities (at cost)	$	917,980		$	837,200		$	734,576
Net investment income(1)	$	40,293		$	31,573		$	27,259
Net effective yield(2)	4.4		%	3.8		%	3.7		%

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

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

Net effective yield increased in 2006 from 2005 primarily due to an increase of $80,780 in average cash and investment securities (at cost) and a shift to fixed maturity securities from cash and cash equivalents related to management’s investment strategy to lengthen the portfolio duration. Net effective yield increased in 2005 from 2004 due to higher yields on our short-term investments combined with a $72,871 increase in average cash and cash equivalents.

As of December 31, 2006, our portfolio of fixed maturity investments was comprised entirely of investment grade corporate fixed maturity securities, U.S. government and agency securities and asset-backed securities (i.e., all our securities received a rating assigned by Moody’s of Baa or higher, except the few securities not rated by Moody’s which received Standard and Poor’s ratings of A- or higher, as well as a rating assigned by the Securities Valuation Office of the National Association of Insurance Commissioners of 1 or 2.)

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

	December 31, 2006
	Estimated Fair Value		Percent
U.S. Treasury securities and obligations of U.S. Government agencies	$	183,436		19.6	%
Aaa/Aa	584,191			62.4
A	106,092			11.3
Baa	39,845			4.3
Not rated (Standard & Poor’s rating of A- or higher)	22,716			2.4
Total	$	936,280		100.0	%

Ratings are assigned by Moody’s, or the equivalent, as discussed above. Such ratings are generally assigned upon the issuance of the securities and are subject to revision on the basis of ongoing evaluations. Ratings in the table are as of the date indicated.

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

The Securities Valuation Office of the National Association of Insurance Commissioners evaluates all public and private bonds purchased as investments by insurance companies. The Securities Valuation Office assigns one of six investment categories to each security it reviews. Category 1 is the highest quality rating and Category 6 is the lowest. Categories 1 and 2 are the equivalent of investment grade debt as defined by rating agencies such as Standard & Poor’s Ratings Services and Moody’s, while Categories 3-6 are the equivalent of below investment grade securities. Securities Valuation Office ratings are reviewed at least annually. At December 31, 2006, approximately 88.5% of our fixed maturity investments were rated Category 1, and 11.5% of our fixed maturity investments were rated Category 2, the two highest ratings assigned by the Securities Valuation Office. At December 31, 2006, we had no fixed maturity investments rated Category 3 or lower by the Securities Valuation Office.

The following table indicates the composition of our fixed income security portfolio (at carrying value) by time to maturity as of December 31, 2006:

	December 31, 2006
	Estimated Fair Value		Percent
Due in one year or less	$	24,589		2.6	%
Due after one year through five years	167,133			17.9
Due after five years through ten years	160,940			17.2
Due after ten years through twenty years	218,783			23.4
Due after twenty years	12,685			1.4
Asset-backed securities	352,150			37.5
Totals	$	936,280		100.0	%

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

Ratings

A.M. Best, which rates insurance companies based on factors of concern to policyholders, currently assigns Safety Insurance an “A (Excellent)” rating. Our “A” rating was reaffirmed by A.M. Best on April 18, 2006. Such rating is the third highest rating of 13 ratings that A.M. Best assigns to solvent insurance companies, which currently range from “A++ (Superior)” to “D (Very Vulnerable).” Publications of A.M. Best indicate that the “A” rating is assigned to those companies that in A.M. Best’s opinion have a strong ability to meet their obligations to policyholders over a long period of time. In evaluating a company’s financial and operating performance, A.M. Best reviews the company’s profitability, leverage and liquidity, as well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its loss reserves, the adequacy of its surplus, its capital structure, the experience and competence of its management and its market presence. A.M. Best’s ratings reflect its opinion of an insurance company’s financial strength, operating performance and ability to meet its obligations to policyholders and are not evaluations directed to purchasers of an insurance company’s securities.

In assigning Safety Insurance’s rating, A.M. Best recognized its excellent capitalization, sustained operating profitability, and favorable market position as an automobile insurer in Massachusetts. A.M. Best also noted among our positive attributes: favorable operating earnings in recent years; our disciplined underwriting approach; and expertise in the highly regulated Massachusetts automobile insurance industry. A.M. Best cited other factors that partially offset these positive attributes, including our geographic concentration, elevated underwriting leverage and limited product scope. We are subject to the competitive and highly regulated Massachusetts private passenger automobile market, which is characterized by mandated rates set by the Commissioner.

Supervision and Regulation

Introduction. Our principal operations are conducted through the Insurance Subsidiaries which are subject to comprehensive regulation by the Division of Insurance, of which the Commissioner is the senior official. The Commissioner is appointed by the Governor. We are subject to the authority of the Commissioner in many areas of our business under Massachusetts law, including:

· our licenses to transact insurance;

· the premium 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;

· 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 a financial examination of all licensees domiciled in Massachusetts. We were most recently examined for the five-year period ending December 31, 2003. The Division had no material findings as a result of this examination.

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

Insurance Regulation Concerning Dividends. We rely on dividends from the Insurance Subsidiaries for our cash requirements. The insurance holding company law of Massachusetts requires notice to the Commissioner of any dividend to the stockholders of an insurance company. The Insurance Subsidiaries may not make an “extraordinary dividend” until thirty days after the Commissioner has received notice of the intended dividend and has not objected in such time. As historically administered by the Commissioner, this provision requires the prior approval by the Commissioner of an extraordinary dividend. An extraordinary dividend is defined as any dividend or distribution that, together with other distributions made within the preceding twelve months exceeds the greater of 10% of the insurer’s surplus as of the preceding December 31, or the insurer’s net income for the twelve-month period ending the preceding December 31, in each case determined in accordance with statutory accounting practices. Under Massachusetts law, an insurer may pay cash dividends only from its unassigned funds, also known as its earned surplus, and the insurer’s remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. At year-end 2006, the statutory surplus of Safety Insurance was $457,505 and its net income for 2006 was $110,075. A maximum of $110,075 will be available by the end of 2007 for such dividends without prior approval of the Division.

Acquisition of Control of a Massachusetts Domiciled Insurance Company. Massachusetts law requires advance approval by the Commissioner of any change in control of an insurance company that is domiciled in Massachusetts. That law presumes that control exists where any person, directly or indirectly, owns, controls, holds the power to vote or holds proxies representing 10% or more of our outstanding voting

stock. Even persons who do not acquire beneficial ownership of more than 10% of the outstanding shares of our common stock may be deemed to have acquired control if the Commissioner determines that control exists in fact. Any purchaser of shares of common stock representing 10% or more of the voting power of our capital stock will be presumed to have acquired control of 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. The Massachusetts Insurers Insolvency Fund must pay any claim up to $300 of a policyholder of an insolvent insurer if the claim existed prior to the declaration of insolvency or arose within sixty days after the declaration of insolvency. Members of the Massachusetts Insurers Insolvency Fund are assessed the amount the Massachusetts Insurers Insolvency Fund deems necessary to pay its obligations and expenses in connection with handling covered claims. Subject to certain exceptions, assessments are made in the proportion that each member’s net written premiums for the prior calendar year for all property and casualty lines bore to the corresponding net written premiums for Massachusetts Insurers Insolvency Fund members for the same period. As a matter of Massachusetts law, insurance rates and premiums include amounts to recoup any amounts paid by insurers for the costs of the Massachusetts Insurers Insolvency Fund. With respect to private passenger automobile insurance rates and premiums, the Commissioner has historically made an adjustment in his or her annual rate decision reflecting any Massachusetts Insurers Insolvency Fund-related costs reported by the industry in its rate filing. By statute, no insurer in Massachusetts may be assessed in any year an amount greater than two percent of that insurer’s direct written premium for the calendar year prior to the assessment. We account for allocations from the Massachusetts Insurers Insolvency Fund as underwriting expenses. In 2006 and 2004, we incurred charges of $464 and $2,538, respectively, for our allocation from the Massachusetts Insurers Insolvency Fund for the insolvencies of other insurers. In 2005, we received a refund of prior years’ assessments of $50. CAR also assesses its members as a result of insurer insolvencies. Because CAR is not able to recover an insolvent company’s share of the net CAR losses from the Massachusetts Insurers Insolvency Fund, CAR must increase each of its member’s share of the deficit in order to compensate for the insolvent carrier’s inability to pay its deficit assessment. It is anticipated that there will be additional assessments from time to time relating to various insolvencies.

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

A ratio result falling outside the usual range of Insurance Regulatory Information System ratios is not considered a failing result; rather, unusual values are viewed as part of the regulatory early monitoring system. Furthermore, in some years, it may not be unusual for financially sound companies to have several ratios with results outside the usual ranges. Generally, an insurance company will become subject to regulatory scrutiny if it falls outside the usual ranges of four or more of the ratios. In 2006 and 2005, all our ratios for both the Insurance Subsidiaries were within the normal range except for Net Change in Adjusted Policyholders’ Surplus which exceeded the higher limit of the range. In 2004, all our ratios for both the

Insurance Subsidiaries were within the normal range except for Investment Yield, which fell below the range primarily due to our investment strategy to increase tax-exempt holdings in our portfolio.

Risk Based Capital Requirements. The National Association of Insurance Commissioners (“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% of the risk based capital amount. The authorized control level, as defined by the NAIC, authorizes the Commissioner to take whatever regulatory actions he or she considers necessary to protect the best interest of the policyholders and creditors of the insurer which may include the actions necessary to cause the insurer to be placed under regulatory control, i.e., rehabilitation or liquidation, if total adjusted capital falls below 100% of the risk based capital amount. The fourth action level is the mandatory control level, as defined by the NAIC, which requires the Commissioner to place the insurer under regulatory control if total adjusted capital falls below 70% of the risk based capital amount.

The formulas have not been designed to differentiate among adequately capitalized companies that operate with higher levels of capital. Therefore, it is inappropriate and ineffective to use the formulas to rate or to rank these companies. At December 31, 2006, our Insurance Subsidiaries had total adjusted capital in excess of amounts requiring company or regulatory action at any prescribed risk based capital action level.

Regulation of Private Passenger Automobile Insurance in Massachusetts. Our principal line of business is Massachusetts private passenger automobile insurance. As described in more detail above under “The Massachusetts Property and Casualty Insurance Market”, regulation of private passenger automobile insurance in Massachusetts differs significantly from how this line of insurance is regulated in other states. These differences include the requirements that the premium rate we and all insurers must charge is fixed and established by the Commissioner, that our ability and that of our competitors to deviate from the rate set by the Commissioner is restricted, and that some of our insurance producers are assigned to us as a matter of law. See “The Massachusetts Property and Casualty Insurance Market”, as discussed above.

Executive Officers and Directors

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

			Years
			Employed
Name	Age	Position	by Safety
David F. Brussard	55	President, Chief Executive Officer and Chairman of the Board	31
William J. Begley, Jr.	52	Vice President, Chief Financial Officer and Secretary	21
James D. Berry	47	Vice President—Insurance Operations	24
George M. Murphy	40	Vice President—Marketing	18
Robert J. Kerton	60	Vice President—Claims	20
David E. Krupa	46	Vice President—Claims Operations	24
Daniel D. Loranger	67	Vice President—Management Information Systems and Chief Information Officer	26
Edward N. Patrick, Jr.	58	Vice President—Underwriting	33
A. Richard Caputo, Jr.	41	Director	—
Frederic H. Lindeberg	66	Director	—
Peter J. Manning	68	Director	—
David K. McKown	69	Director	—

David F. Brussard was appointed Chairman of the Board in March 2004 and President and Chief Executive Officer (“CEO”) in June 2001. Mr. Brussard has served as a Director of the Company since October 2001. Since January 1999, Mr. Brussard has been the CEO and President of the Insurance Subsidiaries. Previously, Mr. Brussard served as Executive Vice President of the Insurance Subsidiaries from 1985 to 1999 and as Chief Financial Officer and Treasurer of the Insurance Subsidiaries from 1979 to 1999. Mr. Brussard has been employed by one or more of our subsidiaries for over 31 years. Mr. Brussard is also Chairman of the Governing Committee and a member of the Budget Committee, Executive Committee and Nominating Committee of the Automobile Insurers Bureau of Massachusetts and is Chairman of the Governing Committee and a member of the Budget and Personnel Committee of CAR. Mr. Brussard is also on the Board of Trustees of the Insurance Library Association of Boston.

William J. Begley, Jr. was appointed Chief Financial Officer, Vice President and Secretary of the Company on March 4, 2002. Since January 1999, Mr. Begley has been the Chief Financial Officer and Treasurer of the Insurance Subsidiaries. Previously, Mr. Begley served as Assistant Controller of the Insurance Subsidiaries from 1985 to 1987, as Controller from 1987 to 1990 and as Assistant Vice President/Controller from 1990 to 1999. Mr. Begley has been employed by the Insurance Subsidiaries for over 21 years. Mr. Begley also serves on the Audit Committee of CAR and is a member of the Board of Directors of the Massachusetts Insurers Insolvency Fund.

James D. Berry was appointed Vice President of Insurance Operations of the Company on October 1, 2005. Mr. Berry has been employed by the Insurance Subsidiaries for over 24 years and has directed the Company’s Massachusetts Private Passenger line of business since 2001. Mr. Berry serves on the Market Review Committee of CAR and the Personal Lines Rules and Forms Committee of the Automobile Insurers Bureau of Massachusetts. He also represents Safety on the Computer Sciences Corporation Series II Advisory Council.

George M. Murphy was appointed Vice President of Marketing on October 1, 2005. Mr. Murphy has been employed by the Insurance Subsidiaries for over 18 years and most recently served as Director of Marketing.

Robert J. Kerton was appointed Vice President of Casualty Claims of the Company on March 4, 2002. Mr. Kerton has served as Vice President of Claims of the Insurance Subsidiaries since 1986 and has been employed by the Insurance Subsidiaries for over 20 years. Mr. Kerton previously served 18 years with Allstate Insurance Company in various Massachusetts claim management assignments. Mr. Kerton serves as Chairman of the Claims Committee of the Automobile Insurers Bureau of Massachusetts, Vice Chairman of the Claims Committee of CAR, a member of the Governing Board of the Massachusetts Insurance Fraud Bureau.

David E. Krupa was appointed Vice President of Property Claims of the Company on March 4, 2002. Mr. Krupa has served as Vice President of Claims of the Insurance Subsidiaries since July 1990 and has been employed by the Insurance Subsidiaries for over 24 years. Mr. Krupa was first employed by the Company in 1982 and held a series of management positions in the Claims Department before being appointed Vice President in 1990. In addition, Mr. Krupa has been a member of several claims committees both at the Automobile Insurers Bureau of Massachusetts and CAR.

Daniel D. Loranger was appointed Vice President of Management Information Systems of the Company on November 7, 1980. Mr. Loranger has served as Vice President of Management Information Systems and Chief Information Officer of the Insurance Subsidiaries since 1980 and has been employed by the Insurance Subsidiaries for over 26 years. Mr. Loranger began his data processing career with Raytheon Manufacturing in 1960.

Edward N. Patrick, Jr. was appointed Vice President of Underwriting of the Company on March 4, 2002. Mr. Patrick has served as Vice President of Underwriting of the Insurance Subsidiaries since 1979 and as Secretary since 1999. He has been employed by one or more of our subsidiaries for over 33 years. Mr. Patrick has served on several committees of CAR, including the MAIP Steering, Actuarial, Market Review, Servicing Carrier, Statistical, Automation and Reinsurance Operations Committees. Mr. Patrick has also served on the Operations Committee of CAR since 1984 and has served as its chairman since 1998.

A. Richard Caputo, Jr. has served as a director of the Company since June 2001. Mr. Caputo has been with The Jordan Company L.P. and its predecessors, a private investment firm, since 1990. Mr. Caputo is also a director of TAL International, Inc., Universal Technical Institute, Inc. and various privately held companies.

Frederic H. Lindeberg has served as a director of the Company since August 2004. Mr. Lindeberg has had a consulting practice providing taxation, management and investment counsel since 1991, focusing on finance, real estate, manufacturing and retail industries. Mr. Lindeberg retired in 1991 as Partner-In-Charge of various KPMG tax offices, after 24 years of service where he provided both accounting and tax counsel to various clients. Mr. Lindeberg was formerly an adjunct professor at Penn State Graduate School of Business. Mr. Lindeberg is currently a director of TAL International, Inc.

Peter J. Manning has served as a director of the Company since September 2003. Mr. Manning retired in 2003 as Vice Chairman of FleetBoston Financial, after 31 years with FleetBoston Financial Corporation (formerly BankBoston) where he also held the positions of Comptroller and Executive Vice President and Chief Financial Officer. Mr. Manning started his career with Coopers & Lybrand in 1962 prior to his 1972 employment with BankBoston. He currently is a director of Thermo Fisher Scientific, and various non-profit companies and is Chairman of the Board of the Tournament Players Club of Boston.

David K. McKown has served as director of the Company since November 2002. Mr. McKown has been a Senior Advisor to Eaton Vance Management since 2000, focusing on business origination in real estate and asset-based loans. Mr. McKown retired in March 2000 having served as a Group Executive with BankBoston since 1993, where he focused on acquisitions and high-yield bank debt financings. Mr. McKown has been in the banking industry for 47 years, worked for BankBoston for over 32 years and

had previously been the head of BankBoston’s real estate department, corporate finance department, and a managing director of BankBoston’s private equity unit. Mr. McKown is currently a director of Global Partners L.P., of Newcastle Investment Corp., and various privately held companies.

ITEM 1A. RISK FACTORS

An investment in our common stock involves a number of risks. Any of the risks described below could result in a significant or material adverse effect on our results of operations or financial condition, and a corresponding decline in the market price of our common stock.

Because we are primarily a private passenger automobile insurance carrier, our business may be adversely affected by conditions in this industry.

Approximately 76.0% of our direct written premiums for the year ended December 31, 2006, were generated from private passenger automobile insurance policies. As a result of our focus on that line of business, negative developments in the economic, competitive or regulatory conditions affecting the private passenger automobile insurance industry could have a material adverse effect on our results of operations and financial condition. In addition, these developments would have a disproportionate effect on us, compared to insurers which conduct operations in multiple business lines.

Because we write insurance only in Massachusetts, our business may be adversely affected by conditions in Massachusetts.

All of our direct written premiums are generated in Massachusetts. Our revenues and profitability are therefore subject to prevailing regulatory, economic, demographic, competitive and other conditions in Massachusetts. Changes in any of these conditions could make it more costly or difficult for us to conduct our business. Adverse regulatory developments in Massachusetts, which could include, among others, reductions in the maximum rates permitted to be charged, inadequate rate increases or more fundamental changes in the design or implementation of the Massachusetts automobile insurance regulatory framework, could have a material adverse effect on our results of operations and financial condition. In addition, these developments would have a disproportionate effect on us, compared to insurers which conduct operations in multiple states.

We have exposure to claims related to severe weather conditions, which may result in an increase in claims frequency and severity.

We are subject to claims arising out of severe weather conditions, such as rainstorms, snowstorms and ice storms, that may have a significant effect on our results of operations and financial condition. The incidence and severity of weather conditions are inherently unpredictable. There is generally an increase in claims frequency and severity under the private passenger automobile insurance we write when severe weather occurs because a higher incidence of vehicular accidents and other insured losses tend to occur as a result of severe weather conditions. In addition, we have exposure to an increase in claims frequency and severity under the homeowners and other property insurance we write because property damage may result from severe weather conditions.

Because some of our insureds live near the Massachusetts coastline, we also have a potential exposure to losses from hurricanes and major coastal storms such as Nor’easters. Although we purchase catastrophe reinsurance to limit our exposure to these types of natural catastrophes, in the event of a major catastrophe resulting in property losses to us in excess of $280,000, our losses would exceed the limits of this reinsurance.

If we are not able to attract and retain independent agents, it could adversely affect our business.

We market our insurance solely through independent agents. We must compete with other insurance carriers for the business of independent agents. Some of our competitors offer a larger variety of products, lower prices for insurance coverage or higher commissions. While we believe that the commissions and services we provide to our agents are competitive with other insurers, changes in commissions, services or products offered by our competitors could make it harder for us to attract and retain independent agents to sell our insurance products.

Established competitors with greater resources may make it difficult for us to market our products effectively and offer our products at a profit.

The property and casualty insurance business is highly competitive and many of our competitors have substantially greater financial and other resources than us. We compete with both large national writers and smaller regional companies. Further, our competitors include other companies which, like us, serve the independent agency market, as well as companies which sell insurance directly to customers. Direct writers may have certain competitive advantages over agency writers, including increased name recognition, loyalty of the customer base to the insurer rather than to an independent agency and, potentially, lower cost structures. A material reduction in the amount of business independent agents sell would directly and negatively affect our profitability and our ability to compete with insurers that do not rely solely on the independent agency market to sell their products. In the past, competition in the Massachusetts personal auto insurance market has included offering significant discounts from the maximum permitted rates, and there can be no assurance that these conditions will not recur. Further, our Company and others compete on the basis of the commissions and other cash and non-cash incentives provided to agents. Although a number of national insurers that are much larger than we are do not currently compete in a material way in the Massachusetts personal auto market, if one or more of these companies decided to aggressively enter the market it could reduce our share of the Massachusetts market and thereby have a material adverse effect on us. These companies include some that would be able to sustain significant losses in order to acquire market share, as well as others which use distribution methods that compete with the independent agent channel.

As a holding company, Safety Insurance Group, Inc. is dependent on the results of operations of the Safety Insurance Company .

Safety Insurance Group, Inc. is a company and a legal entity separate and distinct from Safety Insurance Company, our principal operating subsidiary. As a holding company without significant operations of its own, the principal sources of Safety Insurance Group, Inc.’s funds are dividends and other distributions from Safety Insurance Company. Our rights to participate in any distribution of assets of Safety Insurance Company are subject to prior claims of policyholders, creditors and preferred stockholders, if any, of Safety Insurance Company (except to the extent that our rights, if any, as a creditor are recognized). Consequently, our ability to pay debts, expenses and cash dividends to our stockholders may be limited. The ability of Safety Insurance Company to pay dividends is subject to limits under Massachusetts insurance law. Further, the ability of Safety Insurance Group, Inc. to pay dividends, and our subsidiaries’ ability to incur indebtedness or to use the proceeds of equity offerings, will be subject to limits under our revolving credit facility.

We are subject to comprehensive regulation by Massachusetts and our ability to earn profits may be restricted by these regulations.

General Regulation. We are subject to regulation by government agencies in Massachusetts, and we must obtain prior approval for certain corporate actions. We must comply with regulations involving:

· transactions between an insurance company and any of its affiliates;

· the payment of dividends;

· the acquisition of an insurance company or of any company controlling an insurance company;

· approval or filing of premium rates and policy forms;

· solvency standards;

· minimum amounts of capital and surplus which must be maintained;

· limitations on types and amounts of investments;

· restrictions on the size of risks which may be insured by a single company;

· limitation of the right to cancel or non-renew policies in some lines;

· regulation of the right to withdraw from markets or terminate involvement with agencies;

· requirements to participate in residual markets;

· licensing of insurers and agents;

· deposits of securities for the benefit of policyholders; and

· reporting with respect to financial condition.

In addition, insurance department examiners from Massachusetts perform periodic financial and market conduct examinations of insurance companies. Such regulation is generally intended for the protection of policyholders rather than security holders.

Massachusetts requires that all licensed property and casualty insurers bear a portion of the losses suffered by some insureds as a result of impaired or insolvent insurance companies by participating in the Massachusetts Insurers Insolvency Fund (“Insolvency Fund”). Members of the Insolvency Fund are assessed a proportionate share of the obligations and expenses of the Insolvency Fund in connection with an insolvent insurer. In 2006 and 2004, the Company received notice of assessments from the Insolvency Fund amounting to $464 and $2,538, respectively. In 2005, the Company received a refund of prior years’ assessments from the Insolvency Fund of $50. These assessments were made by the Insolvency Fund to cover the cost of paying eligible claims of policyholders of these insolvent insurers, and by CAR, to recover the shares of net CAR losses that would have been assessed to the insolvent companies but for their insolvencies. In addition, Massachusetts has established an underwriting association in order to ensure that property insurance is available for owners of high risk property who are not able to obtain insurance from private insurers. The losses of this underwriting association are shared by all insurers that write property and casualty insurance in Massachusetts. We are assessed from time to time to pay these losses. The effect of these assessments could reduce our profitability in any given period and limit our ability to grow our business.

Because we are unable to predict with certainty changes in the political, economic or regulatory environments in Massachusetts in the future, there can be no assurance that existing insurance-related laws and regulations will not become more restrictive in the future or that new restrictive laws will not be enacted and, therefore, it is not possible to predict the potential effects of these laws and regulations on us.

Massachusetts Personal Auto Regulation. We are subject to the extensive regulation of the private passenger automobile insurance industry in Massachusetts. Owners of registered automobiles are required to maintain minimum automobile insurance coverages. Generally, we are required by law to issue a policy to any applicant who seeks it. We are assigned certain agents that have been unable to obtain a voluntary contract with another insurer. We call these agents ERPs. In addition, we are required to participate in a state mandated reinsurance program run by CAR, to which we cede certain undesirable risks and from

which we are allocated a portion of the program’s overall losses. This program operates at an underwriting deficit and results in expense for us. Our ability to earn profits may be restricted by these requirements.

Our marketing and underwriting strategies are limited by maximum premium rates and minimum agency commission levels for personal automobile insurance, which are mandated by the Commissioner. The Commissioner mandated an average rate decrease in private passenger automobile premiums of 8.7% and 1.7% for 2006 and 2005, respectively. The Commissioner mandated average rate increases of 2.5% and 2.7% for 2004 and 2003, respectively, and no rate change for 2002. Beginning in 2007 the effective date of the Commissioner’s rate decision will be April 1 st of each year as compared to January 1st of 2006 and prior rate decisions. The 2006 rates will be in effect from January 1, 2006 until March 31, 2007. The Commissioner announced on December 15, 2006, an 11.7% statewide average private passenger automobile insurance rate decrease for 2007 which will take effect on April 1, 2007. In addition, the Commissioner annually establishes the minimum commission rate that insurers must pay their auto insurance agents. The Commissioner approved a commission rate, as a percentage of premiums of 11.8%, 10.9%, 10.5%, and 11.0%, in 2006, 2005, 2004, and 2003, respectively. The Commissioner approved a commission rate of 13.0% for 2007 which will take effect on April 1, 2007. Premium rates are set following a proceeding in which the Commissioner considers historic information relating to claims costs as well as outside factors affecting insurance costs. If the information considered does not accurately predict the future benefit and expense costs of insurers, or if the Commissioner otherwise sets inadequate premium rates, our future profitability could decrease. Future increases in commission rates would also decrease our profitability.

We may enter new markets and there can be no assurance that our diversification strategy will be effective.

Although we intend to concentrate on our core businesses in Massachusetts, we also may seek to take advantage of prudent opportunities to expand our core businesses into other states where we believe the independent agent distribution channel is strong. As a result of a number of factors, including the difficulties of finding appropriate expansion opportunities and the challenges of operating in an unfamiliar market, we may not be successful in this diversification. Additionally, in order to carry out any such strategy we would need to obtain the appropriate licenses from the insurance regulatory authority of any such state. Today, we do not possess any licenses outside of Massachusetts and we could encounter unexpected regulatory obstacles that prevent us from obtaining these licenses in a timely fashion, or at all.

Our failure to maintain a commercially acceptable financial strength rating would significantly and negatively affect our ability to implement our business strategy successfully.

A.M. Best has currently assigned Safety Insurance an ‘‘A (Excellent)’’ rating. An ‘‘A’’ rating is A.M.Best’s third highest rating, out of 13 possible rating classifications for solvent companies. An ‘‘A’’ rating is assigned to insurers that in A.M. Best’s opinion have a strong ability to meet their ongoing obligations to policyholders. Moreover, an ‘‘A’’ rating is assigned to companies that have, on balance, excellent balance sheet strength, operating performance and business profile when compared to the standards established by A.M. Best. A.M. Best bases its ratings on factors that concern policyholders and not upon factors concerning investor protection. Such ratings are subject to change and are not recommendations to buy, sell or hold securities. An important factor in an insurer’s ability to compete effectively is its A.M. Best rating. Our A.M. Best rating is lower than those of some of our competitors. Any future decrease in our rating could affect our competitive position.

Our losses and loss adjustment expenses may exceed our reserves, which could significantly affect our business.

The reserves for losses and loss adjustment expenses that we have established are estimates of amounts needed to pay reported and unreported claims and related expenses based on facts and circumstances known to us as of the time we established the reserves. Reserves are based on historical

claims information, industry statistics and other factors. The establishment of appropriate reserves is an inherently uncertain process. If our reserves are inadequate and are strengthened, we would have to treat the amount of such increase as a charge to our earnings in the period that the deficiency is recognized. As a result of these factors, there can be no assurance that our ultimate liability will not materially exceed our reserves and have a negative effect on our results of operations and financial condition.

Due to the inherent uncertainty of estimating reserves, it has been necessary, and may over time continue to be necessary, to revise estimated future liabilities as reflected in our reserves for claims and policy expenses. The historic development of reserves for losses and loss adjustment expenses may not necessarily reflect future trends in the development of these amounts. Accordingly, it is not appropriate to extrapolate redundancies or deficiencies based on historical information.

If we lose key personnel, our ability to implement our business strategy could be delayed or hindered.

Our future success depends significantly upon the efforts of certain key management personnel, including David F. Brussard, our Chief Executive Officer and President. We have entered into employment agreements with Messrs. Brussard, Begley, Kerton, Krupa, Loranger, Patrick, Murphy, and Berry, the eight members of our Management Team. The loss of key personnel could prevent us from fully implementing our business strategy and could significantly and negatively affect our financial condition and results of operations. As we continue to grow, we will need to recruit and retain additional qualified management personnel, and our ability to do so will depend upon a number of factors, such as our results of operations and prospects and the level of competition then prevailing in the market for qualified personnel.

Market fluctuations and changes in interest rates can have significant and negative effects on our investment portfolio.

Our results of operations depend in part on the performance of our invested assets. As of December 31, 2006, based upon fair value measurement, 99.5% of our investment portfolio was invested in fixed maturity securities and 0.5% in common equity securities. Certain risks are inherent in connection with debt securities including loss upon default and price volatility in reaction to changes in interest rates and general market factors.

We may not be able to successfully alleviate risk through reinsurance arrangements which could cause us to reduce our premiums written in certain lines or could result in losses.

In order to reduce risk and to increase our underwriting capacity, we purchase reinsurance. The availability and the cost of reinsurance protection is subject to market conditions, which are outside of our control. As a result, we may not be able to successfully alleviate risk through these arrangements. For example, if reinsurance capacity for homeowners risks were reduced as a result of terrorist attacks, climate change or other causes, we might seek to reduce the amount of homeowners business we write. In addition, we are subject to credit risk with respect to our reinsurance because the ceding of risk to reinsurers does not relieve us of our liability to our policyholders. A significant reinsurer’s insolvency or inability to make payments under the terms of a reinsurance treaty could have a material adverse effect on our results of operations and financial condition.

There are anti-takeover provisions contained in our organizational documents and in laws of the State of Delaware and the Commonwealth of Massachusetts that could impede an attempt to replace or remove our management or prevent the sale of our company, which could diminish the value of our common stock.

Our certificate of incorporation, bylaws and the laws of Delaware contain provisions that may delay, deter or prevent a takeover attempt that stockholders might consider in their best interests. For example,

our organizational documents provide for a classified board of directors with staggered terms, prevent stockholders from taking action by written consent, prevent stockholders from calling a special meeting of stockholders, provide for supermajority voting requirements to amend our certificate of incorporation and certain provisions of our bylaws and provide for the filling of vacancies on our board of directors by the vote of a majority of the directors then in office. These provisions will render the removal of the incumbent board of directors or management more difficult. In addition, these provisions may prevent stockholders from receiving the benefit of any premium over the market price of our common stock offered by a bidder in a potential takeover. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.

The Massachusetts insurance law prohibits any person from acquiring control of us, and thus indirect control of Safety Insurance Group, Inc., without the prior approval of the Commissioner. That law presumes that control exists where any person, directly or indirectly, owns, controls, holds the power to vote or holds proxies representing 10% or more of our outstanding voting stock. Even persons who do not acquire beneficial ownership of more than 10% of the outstanding shares of our common stock may be deemed to have acquired such control if the Commissioner determines that such control exists in fact. Therefore, any person seeking to acquire a controlling interest in us would face regulatory obstacles which could delay, deter or prevent an acquisition that stockholders might consider in their best interests.

Section 203 of the General Corporation Law of Delaware, the jurisdiction in which the Company is organized, may affect the ability of an “interested stockholder” to engage in certain business combinations including mergers, consolidations or acquisitions of additional shares, for a period of three years following the time that the stockholder becomes an interested stockholder. An interested stockholder is defined to include persons owning directly or indirectly 15% or more of the outstanding voting stock of the corporation.

Future sales of shares of our common stock by our existing stockholders in the public market, or the possibility or perception of such future sales, could adversely affect the market price of our stock.

Investors currently known to be the beneficial owners of greater than 5.0% of our outstanding common stock, hold approximately 20.4% of the common stock of Safety Insurance Group, Inc. on a fully diluted basis. No prediction can be made as to the effect, if any, that future sales of shares by our existing stockholders, or the availability of shares for future sale, will have on the prevailing market price of our common stock from time to time. Sales of substantial amounts of our common stock in the public market by our existing stockholders, or the possibility or perception that such sales could occur, could cause the prevailing market prices for our common stock to decrease. If such sales reduce the market price of our common stock, our ability to raise additional capital in the equity markets may be adversely affected.

ITEM 1B. UNRESOLVED STAFF COMMENTS

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

ITEM 2. PROPERTIES

We conduct most of our operations in approximately 89 thousand square feet of leased space at 20 Custom House Street in downtown Boston, Massachusetts. Our lease expires in December 2008.

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of the Company’s shareholders during the fourth quarter of 2006.

PART II.

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

As of February 26, 2007, there were 27 holders of record of the Company’s common stock, par value $0.01 per share, and we estimate another 12,200 held in “Street Name”.

The Company’s common stock (symbol: SAFT) is listed on the NASDAQ Global Select Market. The following table sets forth the high and low sales prices per share for each full quarterly period within the Company’s two most recent fiscal years.

2006	High		Low
First Quarter	$	46.31	$	37.50
Second Quarter	$	50.08	$	40.80
Third Quarter	$	56.03	$	46.40
Fourth Quarter	$	53.96	$	48.61

2005	High		Low
First Quarter	$	40.54	$	30.13
Second Quarter	$	34.61	$	26.20
Third Quarter	$	37.23	$	32.52
Fourth Quarter	$	44.34	$	34.27

The closing price of the Company’s common stock on February 23, 2007 was $46.37 per share.

During 2006, the Company declared and paid four quarterly cash dividends to stockholders, which totaled $13,733. The Company’s Board of Directors declared a quarterly cash dividend on February 15, 2007, of $0.25 per share to stockholders of record on March 1, 2007, payable on March 15, 2007. The Company plans to continue to declare and pay quarterly cash dividends in 2007, depending on the Company’s financial position and the regularity of its cash flows.

The Company relies on dividends from its Insurance Subsidiaries for a portion of its cash requirements. The payment by the Company of any cash dividends to the holders of common stock therefore depends on the receipt of dividend payments from its Insurance Subsidiaries. The payment of dividends by the Insurance Subsidiaries is subject to limitations imposed by Massachusetts law, as discussed in Item 1, Business, Supervision and Regulation, “Insurance Regulation Concerning Dividends”, and also in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.

COMMON STOCK PERFORMANCE GRAPH

Set forth below is a line graph comparing the dollar change in the cumulative total shareholder return on the Company’s Common Stock, for the period beginning on November 27, 2002 (the close of the Company’s IPO and first trade date for the Company’s common stock) and ending on December 31, 2006, with the cumulative total return of the NASDAQ Stock Market Index and a peer group comprised of six selected property & casualty insurance companies over the same period. The peer group consists of Baldwin & Lyons, Inc., the Commerce Group, Inc., Mercury General Corp., State Auto Financial Corp., Selective Insurance Group, Inc., and 21 st Century Insurance Group. The graph shows the change in value of an initial $100 investment on November 27, 2002, assuming re-investment of all dividends.

Comparative Cumulative Total Returns since 11/27/2002 IPO Among
Safety Insurance Group, Inc.,
Property & Casualty Insurance Peer Group and the NASDAQ Stock Market Index

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth our selected historical consolidated financial data as of and for each of the five years ended December 31, 2006.

The selected historical consolidated financial data for the years ended December 31, 2006, 2005 and 2004 and as of December 31, 2006, 2005, and 2004 have been derived from the financial statements of Safety Insurance Group, Inc. included in this annual report which have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. The selected historical consolidated financial data for the years ended December 31, 2003 and 2002 and as of December 31, 2003 and 2002 have been derived from Safety Insurance Group, Inc.’s consolidated financial statements not included in this annual report, which have been audited by PricewaterhouseCoopers LLP.

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

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

	For the Year Ended December 31,
	2006		2005		2004		2003		2002
Direct written premiums	$	629,511	$	649,113	$	628,295	$	571,545	$	516,556
Net written premiums	620,908		632,836		618,923		566,970		517,614
Net earned premiums	624,933		622,831		592,292		540,248		489,256
Investment income	40,293		31,573		27,259		26,086		26,142
Net realized gains (losses) on investments	358		305		1,274		10,051		(277		)
Finance and other service income	15,128		16,748		15,615		15,409		14,168
Total revenue	680,712		671,457		636,440		591,794		529,289
Loss and loss adjustment expenses	353,906		385,593		425,061		420,969		375,178
Underwriting, operating and related expenses	162,220		146,669		145,075		130,636		128,866
Other expenses	—		—		—		—		6,250
Interest expenses	86		948		672		646		7,254
Total expenses	516,212		533,210		570,808		552,251		517,548
Income before income taxes	164,500		138,247		65,632		39,543		11,741
Income tax expense	52,559		43,065		20,642		11,061		1,280
Net income before preferred share dividends	111,941		95,182		44,990		28,482		10,461
Dividends on mandatorily redeemable preferred shares	—		—		—		—		(1,219		)
Net income available to common shareholders	$	111,941	$	95,182	$	44,990	$	28,482	$	9,242
Net income per common share available to common shareholders:
Basic	$	7.07	$	6.11	$	2.94	$	1.87	$	1.44
Diluted	$	6.99	$	5.97	$	2.90	$	1.86	$	1.38
Cash dividends paid per common share	$	0.86	$	0.60	$	0.44	$	0.34	$	—
Weighted average number of common shares outstanding:
Basic	15,838,335		15,578,039		15,315,877		15,259,991		6,433,786
Diluted	16,005,913		15,953,737		15,526,892		15,340,047		6,699,338

	Year Ended December 31,
	2006			2005			2004			2003			2002
Balance Sheet Data:
Total cash and investment securities	$	966,888		$	877,570		$	820,269		$	699,920		$	638,663
Total assets	1,355,748			1,257,675			1,206,445			1,076,296			978,596
Losses and loss adjustment expenses reserves	449,444			450,716			450,897			383,551			333,297
Total debt	—			—			19,956			19,956			19,956
Total liabilities	859,400			869,726			901,111			808,276			733,344
Mandatorily redeemable preferred stock	—			—			—			—			22,680
Total shareholders’ equity	496,348			387,949			305,334			268,020			245,252
Statutory Data:
Policyholders’ surplus (at period end)	$	457,505		$	350,833		$	278,161		$	258,551		$	234,204
Loss ratio(1)	56.6		%	61.9		%	71.7		%	78.0		%	77.5		%
Expense ratio(1)	26.2			23.4			23.7			23.5			24.9
Combined ratio(1)	82.8		%	85.3		%	95.4		%	101.5		%	102.4		%
GAAP Ratios:
Loss ratio(1)	56.6		%	61.9		%	71.8		%	77.9		%	76.7		%
Expense ratio(1)	26.0			23.5			24.5			24.2			26.3
Combined ratio(1)	82.6		%	85.4		%	96.3		%	102.1		%	103.0		%

(1) The loss ratio is the ratio of losses and loss adjustment expenses to net earned premiums. The expense ratio, when calculated on a statutory accounting basis, is the ratio of underwriting expenses to net written premiums, and when calculated on a GAAP basis is the ratio of underwriting expense to net earned premiums. The combined ratio is the sum of the loss ratio and the expense ratio. Please refer to Insurance Ratios under Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources for a discussion on the comparison of the above statutory insurance ratios to our GAAP ratios.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

Executive Summary and Overview

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

We are a leading provider of private passenger automobile insurance in Massachusetts. In addition to private passenger automobile insurance (which represented 76.0% of our direct written premiums in 2006), we offer a portfolio of other insurance products, including commercial automobile (14.0% of 2006 direct written premiums), homeowners (7.9% of 2006 direct written premiums), dwelling fire, umbrella and business owner policies (totaling 2.1% of 2006 direct written premiums). Operating exclusively in Massachusetts through our insurance company subsidiaries, Safety Insurance, Safety Indemnity, and Safety P&C, which was formed in December 2006 but has not yet commenced writing business, (together referred to as the “Insurance Subsidiaries”), we have established strong relationships with 652 independent insurance agents in 760 locations throughout Massachusetts. We have used these relationships and our extensive knowledge of the Massachusetts market to become the second largest private passenger automobile and third largest commercial automobile insurance carrier in Massachusetts, capturing an approximate 11.2% and 11.8% share respectively of the Massachusetts automobile market in 2006, according to the CAR Cession Volume Analysis Report of January 19, 2007, based on automobile exposures. These statistics total, for each vehicle insured, the number of months during the year insurance for that vehicle is in effect, to arrive at an aggregate number of car-months for each insurer; this aggregate number, divided by 12, equals the insurer’s number of car-years, a measure we refer to in this discussion as automobile exposures.

Massachusetts Automobile Insurance Market

We are subject to the extensive regulation of the private passenger automobile insurance industry in Massachusetts, which represented 76.0% of our direct written premiums in 2006. Owners of registered automobiles in Massachusetts are required to maintain minimum automobile insurance coverages. We are required to participate in a state-mandated reinsurance program run by CAR to which we cede certain unprofitable risks and from which we are allocated a portion of the overall losses. As a servicing carrier of CAR, we are required to issue a policy to all qualified applicants. This program operates at an underwriting deficit. This deficit is allocated among every Massachusetts automobile insurance company,

including us, based on a complex formula that takes into consideration a company’s voluntary market share, the rate at which it cedes business to CAR, and the company’s utilization of a credit system CAR has designed to encourage carriers to reduce their use of CAR. In addition, based on our market share, we are assigned certain licensed producers by CAR that have been unable to obtain a voluntary contract with another insurer. We call these agents Exclusive Representative Producers, or ERPs.

On December 31, 2004, the Commissioner approved new rules for CAR, which became effective on January 1, 2005 (the “Approved Rules”). The Approved Rules provided for the adoption of an assigned risk plan by CAR. Shortly thereafter, litigation was commenced in Suffolk Superior Court by Commerce Insurance Company against the Commissioner seeking an order permanently enjoining implementation and/or enforcement of the Approved Rules. Certain ERPs, Arbella Mutual Insurance Company and the Center for Insurance Research intervened as plaintiffs and CAR intervened as a defendant in this lawsuit. On June 20, 2005, the Massachusetts Superior Court ruled that the Commissioner lacked the statutory authority to implement the Approved Rules and ordered them vacated. As a result, the Approved Rules did not go into effect. The Commissioner appealed the decision of the Massachusetts Superior Court. On August 23, 2006, the Massachusetts Supreme Judicial Court overturned the decision of the Massachusetts Superior Court and unanimously ruled that the Commissioner did not need legislative approval to put in place the provisions in the Approved Rules which establish an assigned risk plan. On October 18, 2006, the Commissioner reviewed the Approved Rules and proposed changes (the “Revised Rules”) that would, in part, establish an assigned risk plan called the Massachusetts Automobile Insurance Plan (the “MAIP”). As proposed, the Revised Rules would: 1) eliminate provisions in the current CAR Rules that are no longer necessary in light of the litigation described above; 2) integrate the Revised Rules into the current CAR Rules; 3) set a timetable for the implementation of the MAIP; and 4) revise the MAIP to conform with the Supreme Judicial Court’s remand regarding the so-called “clean in three” provisions contained in the Approved Rules. A hearing was held November 10, 2006, on the Revised Rules and on December 13, 2006, the Commissioner approved changes to the MAIP rules (the “MAIP Rules”) that called for three year phase in of an assigned risk plan beginning April 1, 2007.

On January 5, 2007, Deval L. Patrick was sworn in as Governor of the Commonwealth of Massachusetts replacing outgoing Governor Mitt Romney. The Commissioner of Insurance Julianne M. Bowler was replaced by the new Governor and on January 19, 2007, Acting Commissioner, Joseph G. Murphy, suspended the MAIP Rules (the “Suspended Rules”) for a period not to exceed 90 days. A hearing was held on February 15, 2007, for testimony regarding recommendations or amendments to the Suspended Rules. At this time, we are unable to predict whether the Suspended Rules will be adopted and what the financial impact of the Suspended Rules on us would be if they are adopted.

Governor Patrick has selected former Massachusetts Superior Court Justice, Nonnie Burns, to be Massachusetts Commissioner of Insurance effective February 26, 2007, and Governor Patrick has appointed a commission to study and report on the Massachusetts private passenger automobile system. We are unable to predict what, if any, changes the commission may recommend.

While the litigation described above was pending and before the MAIP Rules were approved, in order to address certain perceived inequities in the distribution of ERP exposures, CAR approved on June 15, 2005, rules to modify the ERP subscription relief process, making the reassignment of ERP exposures from an oversubscribed servicing carrier more timely and responsive, while enhancing equity in the ERP distribution for all servicing carriers (the “ERP Subscription Rules”). Also, the practice of two and three-party agreements between ERPs and servicing carriers was prohibited. On September 30, 2005, the Commissioner approved the ERP Subscription Rules, and instructed CAR to complete a redistribution of all ERPs to establish for all servicing carriers overall parity in the quantity and quality of their ERP exposures. The redistribution plan for ERPs, as adopted by the CAR Governing Committee on November 16 and December 14, 2005, was approved by the Commissioner on January 27, 2006. On January 31, 2006, CAR notified each reassigned ERP and all servicing carriers of the redistribution.

According to the January 31, 2006 CAR Private Passenger ERP Redistribution Summary, 18 Safety ERPs with 25,590 exposures were assigned to other servicing carriers beginning with new business effective March 1, 2006 and renewal business May 1, 2006. In addition, CAR assigned 29 ERPs with 24,670 exposures from other servicing carriers to Safety. However 25 of these ERPs with 23,116 exposures were given voluntary contracts by their former servicing carrier or other carriers and were, as a result, no longer eligible for assignment to Safety as ERPs. We expect that the redistribution of ERPs will eliminate our disproportionate share of high loss ratio ERP business, and would therefore result in a reduction of the expense we have incurred because of our historic disproportionate share of high loss ratio ERPs.

CAR also runs a reinsurance pool for commercial automobile policies and beginning January 1, 2006, CAR has implemented a Limited Servicing Carrier Program (“LSC”) for ceded commercial automobile policies. CAR approved Safety and five other servicing carriers through a Request for Proposal to process approximately $200,000 of ceded commercial automobile business based on CAR data as of December 31, 2005, which will be spread equitably among the six servicing carriers. Each Massachusetts commercial automobile insurer must bear a portion of the losses of the commercial reinsurance pool that is serviced by the six servicing carriers in the LSC program. Subject to Commissioner 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.

Each year, the Commissioner sets maximum premium rates that may be charged and minimum commissions that must be paid to agents for private passenger automobile insurance. Beginning in 2007, the effective date of the Commissioner’s rate decision will be April 1 st of each year as compared to January 1st of 2006 and prior rate decisions. The 2006 rates will be in effect from January 1, 2006 until March 31, 2007. The Commissioner announced on December 15, 2006, an 11.7% statewide average private passenger automobile insurance rate decrease for 2007, compared to a 8.7% decrease for 2006. Coinciding with the 2006 rate decision, the Commissioner also approved a 13.0% commission rate agents receive for selling private passenger automobile insurance, as a percentage of premiums, compared to a commission rate of 11.8% in 2006.

While state-mandated average maximum private passenger automobile insurance rates decreased 8.7% for 2006, our average premium per automobile exposure in the year ended December 31, 2006, decreased from the year ended December 31, 2005, by approximately 6.8%. This lesser decrease was primarily the result of purchases of new automobiles by our insureds. We believe that the continued benefits of our rate pursuit initiative, which validates insured rating classifications and discount eligibility, also contributed to the lesser decrease than state mandated average premiums received per automobile exposure. The table below shows average Massachusetts-mandated private passenger automobile premium rate changes and changes in our average premium per automobile exposure from 1997-2006.

Massachusetts Private Passenger Rate Decisions

	State Mandated			Safety Change in
	Average Rate			Average Premium per
Year	Change(1)			Automobile Exposure(2)
2006		(8.7	)%		(6.8	)%
2005		(1.7	)%		0.1	%
2004		2.5	%		6.1	%
2003		2.7	%		6.9	%
2002		0.0	%		5.2	%
2001		(8.3	)%		0.0	%
2000		0.7	%		7.4	%
1999		0.7	%		10.9	%
1998		(4.0	)%		2.8	%
1997		(6.2	)%		(5.1	)%

(1) Source: Commissioner rate decisions for 1997 - 2006.

(2) Source: Safety Insurance.

Statutory Accounting Principles

Our results are reported in accordance with GAAP, which differ from amounts reported in accordance with statutory accounting principles (“SAP”) as prescribed by insurance regulatory authorities. Specifically, under GAAP:

· Policy acquisition costs such as commissions, premium taxes and other variable costs incurred in connection with writing new and renewal business are capitalized and amortized on a pro rata basis over the period in which the related premiums are earned, rather than expensed as incurred, as required by SAP.

· Certain assets are included in the consolidated balance sheets whereas, under SAP, such assets are designated as “non admitted assets,” and charged directly against statutory surplus. These assets consist primarily of premium receivables that are outstanding over ninety days, federal deferred tax assets in excess of statutory limitations, furniture, equipment, leasehold improvements and prepaid expenses.

· Amounts related to ceded reinsurance are shown gross of ceded unearned premiums and reinsurance recoverables, rather than netted against unearned premium reserves and loss and loss adjustment expense reserves, respectively, as required by SAP.

· Fixed maturities securities, which are classified as available-for-sale, are reported at current market values, rather than at amortized cost, or the lower of amortized cost or market, depending on the specific type of security, as required by SAP.

· Equity securities are reported at quoted market values, which may differ from the National Association of Insurance Commissioners market values as required by SAP.

· The differing treatment of income and expense items results in a corresponding difference in federal income tax expense. Changes in deferred income taxes are reflected as an item of income tax benefit or expense, rather than recorded directly to surplus as regards policyholders, as required by SAP. Admittance testing may result in a charge to unassigned surplus for non-admitted portions of deferred tax assets. Under GAAP reporting, a valuation allowance may be recorded against the deferred tax asset and reflected as an expense.

Insurance Ratios

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

Our statutory insurance ratios are outlined in the following table:

	For the Years Ended December 31,
	2006		2005		2004
Statutory Ratios:
Loss Ratio	56.6	%	61.9	%	71.7	%
Expense Ratio	26.2		23.4		23.7
Combined Ratio	82.8	%	85.3	%	95.4	%

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

Our GAAP insurance ratios are outlined in the following table:

	For the Years Ended December 31,
	2006		2005		2004
GAAP Ratios:
Loss Ratio	56.6	%	61.9	%	71.8	%
Expense Ratio	26.0		23.5		24.5
Combined Ratio	82.6	%	85.4	%	96.3	%

Stock-Based Compensation

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 (“NQSOs”), stock appreciation rights and restricted stock (“RS”) awards.

On March 10, 2006, the Board of Directors (“Board”) of the Company approved amendments to the Incentive Plan, subject to shareholder approval, to (i) increase the number of shares of common stock available for issuance by 1,250,000 shares, (ii) remove obsolete provisions, and (iii) make other non-material changes. A total of 1,250,000 shares of common stock had previously been authorized for issuance under the Incentive Plan. The Incentive Plan, as amended, was approved by the shareholders at the 2006 Annual Meeting of Shareholders which was held on May 19, 2006. Under the Incentive Plan, as amended, the maximum number of shares of common stock with respect to which awards may be granted is 2,500,000. As of December 31, 2006, there were 1,289,991 shares available for future grant. The Board and the Compensation Committee intend to issue more awards under the Incentive Plan in the future. Grants outstanding under the Incentive Plan as of December 31, 2006, were comprised of 126,790 restricted shares and 373,996 nonqualified stock options. Grants made under the Incentive Plan are as follows.

Exercise

Type of

Number of

Price(1) or

Equity

Awards

Fair Value(2)

Awarded

Effective Date

Granted

per Share

Vesting Terms

Expiration Date

NQSOs

November 27, 2002

379,000

12.00

(1)

5 years, 20% annually

November 27, 2012

NQSOs

February 20, 2003

99,000

13.30

(1)

5 years, 20% annually

February 20, 2013

NQSOs

March 31, 2003

292,000

13.03

(1)

3 years, 30%-30%-40%

March 31, 2013

NQSOs

August 21, 2003

10,000

15.89

(1)

5 years, 20% annually

August 21, 2013

NQSOs

March 25, 2004

111,000

18.50

(1)

5 years, 20% annually

March 25, 2014

March 25, 2004

70,271

18.50

(2)

3 years, 30%-30%-40%

N/A

NQSOs

August 30, 2004

10,000

21.40

(1)

5 years, 20% annually

August 30, 2014

NQSOs

March 16, 2005

78,000

35.23

(1)

5 years 20% annually

March 16, 2015

March 16, 2005

56,770

35.23

(2)

3 years, 30%-30%-40%

N/A

March 16, 2005

4,000

35.23

(2)

No vesting period(3)

N/A

NQSOs

March 10, 2006

126,225

42.85

(1)

5 years, 20% annually

March 10, 2016

March 10, 2006

58,342

42.85

(2)

3 years, 30%-30%-40%

N/A

March 10, 2006

4,000

42.85

(2)

No vesting period(3)

N/A

(1) The exercise price of the options grant effective on November 27, 2002, is equal to the IPO price of our stock on that same day. The exercise price of the remaining option grants is equal to the closing price of our common stock on the grant effective date.

(2) The fair value of the restricted stock grant is equal to the closing price of our common stock on the grant effective date.

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

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. In the aftermath of Hurricane Katrina in 2005, the reinsurance market has seen from the various software modelers, increases in the estimate of damage from hurricanes in the southern and northeast portions of the United States due to revised estimations of increased hurricane activity and increases in the estimation of demand surge in the periods following a significant event. We have adjusted our reinsurance programs as a result of the changes to the models. As of January 2007, our catastrophe reinsurance provides gross per occurrence reinsurance coverage up to $280,000. As a result of the changes to the models, and our revised reinsurance program, our catastrophe reinsurance protects us in the event of a “300-year storm”

(that is, a storm of a severity expected to occur once in a 300-year period). Swiss Re, our primary reinsurer, maintains an A.M. Best rating of “A+” (Superior). All of our other reinsurers have an A.M. Best rating of “A” (Excellent) or better except for Folksamerica, Montpelier Re, Endurance Re and Amlin Bermuda which are rated “A-” (Excellent). We are a participant in CAR, a state-established body that runs the residual market reinsurance programs for both private passenger and commercial automobile insurance in Massachusetts under which premiums, expenses, losses and loss adjustment expenses on ceded business are shared by all insurers writing automobile insurance in Massachusetts. We also participate in the Massachusetts Property Insurance Underwriting Association (“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 has increased and as a result the FAIR Plan has decided to buy reinsurance to reduce their exposure to catastrophe losses. On July 1, 2006, the FAIR Plan purchased $455,000 of catastrophe reinsurance for property losses in excess of $180,000. At December 31, 2006, we had no material amounts recoverable from any reinsurer, excluding the residual markets described above.

On March 10, 2005, our Board of Directors adopted a resolution that prohibits Safety from purchasing finite reinsurance (reinsurance that transfers only a 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.

Effects of Inflation

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

Critical Accounting Policies and Estimates

Loss and Loss Adjustment Expense Reserves.

Significant periods of time can elapse between the occurrence of an insured loss, the reporting to us of that loss and our final payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities. Our reserves represent estimates of amounts needed to pay reported and unreported losses and the expenses of investigating and paying those losses, or loss adjustment expenses. Every quarter, we review our previously established reserves and adjust them, if necessary.

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

In accordance with industry practice, we also maintain reserves for estimated losses incurred but not yet reported (“IBNR”). IBNR reserves are determined in accordance with commonly accepted actuarial reserving techniques on the basis of our historical information and experience. We review and make adjustments to incurred but not yet reported reserves quarterly.

judicial decisions, legal developments in imposition of damages, and changes and trends in general economic conditions, including the effects of inflation. A change in any of these factors from the assumption implicit in our estimate can cause our actual loss experience to be better or worse than our reserves, and the difference can be material. There is no precise method, however, for evaluating the impact of any specific factor on the adequacy of reserves, because the eventual development of reserves is affected by many factors.

Management determines the Company’s loss and LAE reserves estimate based upon the analysis of the Company’s actuaries. A reasonable estimate is derived by selecting a point estimate within a range of indications as calculated by the Company’s actuaries using generally accepted actuarial techniques. The key assumption in most actuarial analysis is that past patterns of frequency and severity will repeat in the future, unless a significant change in the factors described above takes place. Our key factors and resulting assumptions are the ultimate frequency and severity of claims, based upon the most recent ten years of claims reported to the Company, and the data CAR reports to us to calculate our share of the residual market, as of the date of the applicable balance sheet. For each accident year and each coverage within a line of business our actuaries calculate the ultimate losses incurred. Our total reserves are the difference between the ultimate losses incurred and the cumulative loss and loss adjustment payments made to date. Our IBNR reserves are calculated as the difference between our total reserves and the outstanding case reserves at the end of the accounting period. To determine ultimate losses our actuaries calculate a range of indications and select a point estimation using such actuarial techniques as:

· Paid Loss Indications: This method projects ultimate loss estimates based upon extrapolations of historic paid loss trends. This method tends to be used on short tail lines such as automobile physical damage.

· Incurred Loss Indications: This method projects ultimate loss estimates based upon extrapolations of historic incurred loss trends. This method tends to be used on long tail lines of business such as automobile liability and homeowner’s liability.

· Bornhuetter-Ferguson Indications: This method projects ultimate loss estimates based upon extrapolations of an expected amount of IBNR, which is added to current incurred losses or paid losses. This method tends to be used on small, immature, or volatile lines of business, such as our BOP and umbrella lines of business.

· Bodily Injury Code Indications: This method projects ultimate loss estimates for our private passenger and commercial automobile bodily injury coverage based upon extrapolations of the historic number of accidents and the historic number of bodily injury claims per accident. Projected ultimate bodily injury claims are then segregated into expected claims by type of injury (e.g. soft tissue injury vs. hard tissue injury) based on past experience. An ultimate severity, or average paid loss amounts, is estimated based upon extrapolating historic trends. Projected ultimate loss estimates using this method are the aggregate of estimated losses by injury type.

Such techniques assume that past experience, adjusted for the effects of current developments and anticipated trends, are an appropriate basis for predicting our ultimate losses, total reserves and resulting IBNR reserves. It is possible that the final outcome may fall above or below these amounts as a result of a number of factors, including immature data, sparse data, or significant growth in a line of business. Using these methodologies our actuaries established a range of reasonably possible estimations for net reserves of approximately $327,472 to $377,497 as of December 31, 2006, as compared to a range of $332,266 to $382,506 for 2005. In general, the low and high values of the ranges represent reasonable minimum and maximum values of the indications based on the techniques described above. The companies selected point estimate of net loss and LAE reserves based upon the analysis of the company’s actuaries was $370,980 as of December 31, 2006, as compared to $370,166 for 2005.

The following tables present the point estimation of the recorded reserves and the range of estimations by line of business for net loss and LAE reserves as of December 31, 2006 and December 31, 2005.

Range of Net Reserves for Losses and LAE as of December 31, 2006

Line of Business

Low

Recorded

High

Private passenger automobile

240,371

274,889

276,195

Commercial automobile

48,306

53,340

56,262

Homeowners

29,086

31,048

31,782

All other

9,709

11,703

13,258

Total

327,472

370,980

377,497

Range of Net Reserves for Losses and LAE as of December 31, 2005

Line of Business	Low		Recorded		High
Private passenger automobile	$	253,277	$	278,415	$	288,410
Commercial automobile	47,135		51,946		52,772
Homeowners	25,185		30,745		31,750
All other	6,669		9,060		9,574
Total	$	332,266	$	370,166	$	382,506

The following tables present our total net reserves and the corresponding case reserves and IBNR reserves for each line of business as of December 31, 2006 and December 31, 2005.

December 31, 2006

Line of Business

Case

IBNR

Total

Private passenger automobile

207,645

10,371

218,016

CAR assumed private passenger auto

34,424

22,449

56,873

Commercial automobile

29,229

6,566

35,795

CAR assumed commercial automobile

12,606

4,939

17,545

Homeowners

15,844

5,426

21,270

FAIR Plan assumed homeowners

5,651

4,127

9,778

All other

5,303

6,400

11,703

Total net reserves for losses and LAE

310,702

60,278

370,980

	December 31, 2005
Line of Business	Case	IBNR	Total
Private passenger automobile	$196,009	$15,318	$211,327
CAR assumed private passenger auto	43,509	23,579	67,088
Commercial automobile	29,361	7,621	36,982
CAR assumed commercial automobile	6,700	8,264	14,964
Homeowners	16,194	7,303	23,497
FAIR Plan assumed homeowners	3,492	3,756	7,248
All other	3,649	5,411	9,060
Total net reserves for losses and LAE	$298,914	$71,252	$370,166

For our private passenger automobile, commercial automobile and homeowners lines of business as of December 31, 2006 and 2005, due to the relatively long time we have been writing these lines of insurance, and our stable long-term trends in frequency and severity, the range of reserves is relatively narrow. We recorded reserves slightly higher than the mid-point of the range.

For our all other lines of business as of December 31, 2006 and 2005, due to the relatively short time we have been writing these lines of business, the sparse amount of data and the resulting immature history available for our analysis, the range of reserves are relatively wide. We recorded reserves closer to the high of the range of projections.

Our IBNR reserves for CAR assumed private passenger and commercial automobile business are 39.5% and 28.2% respectively of our total reserves for CAR assumed private passenger and commercial automobile business as of December 31, 2006 due to the reporting delays in the information we receive from CAR, as described further in the section on CAR Loss and Loss Adjustment Expense Reserves.

The following tables present information by line of business for our total net reserves and the corresponding direct less ceded (retained) reserves and assumed reserves as of December 31, 2006 and December 31, 2005.

Net Reserves for Losses and LAE as of December 31, 2006

Line of Business

Direct less Ceded

Assumed

Net

Private passenger automobile

218,016

CAR assumed private passenger automobile

56,873

Net private passenger automobile

274,889

Commercial automobile

35,795

CAR assumed commercial automobile

17,545

Net commercial automobile

53,340

Homeowners

21,270

FAIR Plan assumed homeowners

9,778

Net homeowners

31,048

All other

11,703

—

11,703

Total net reserves for losses and LAE

286,784

84,196

370,980

Net Reserves for Losses and LAE as of December 31, 2005

Line of Business	Direct less Ceded			Assumed		Net
Private passenger automobile		$	211,327
CAR assumed private passenger automobile				$	67,088
Net private passenger automobile						$	278,415
Commercial automobile		36,982
CAR assumed commercial automobile				14,964
Net commercial automobile						51,946
Homeowners		23,497
FAIR Plan assumed homeowners				7,248
Net homeowners						30,745
All other		9,060		—		9,060
Total net reserves for losses and LAE		$	280,866	$	89,300	$	370,166

CAR Loss and Loss Adjustment Expense Reserves

We are a participant in CAR and assume a significant portion of losses and LAE on business ceded by the industry participants to CAR. We estimate reserves for assumed losses and LAE that have not yet been reported to us by CAR. Our estimations are based upon the same factors we use for our own reserves, plus additional factors due to the nature of and the information we receive from CAR.

The CAR deficit, which consists of premium ceded to CAR less CAR losses and LAE, is allocated among every automobile insurance company writing business in Massachusetts based on a complex formula (the “Participation Ratio”) that takes into consideration a company’s voluntary market share, the amount of business it cedes to CAR and credits the company earns under a system CAR has designed to encourage carriers to voluntarily write business in selected under-priced classes and territories.

We receive a Settlement of Balances report from CAR that reports our share of CAR premium, losses and LAE, on a lagged basis, seventy-five days after the end of every quarter. CAR-published financial data is always at least one quarter behind the financial data we report. For example, when we reported our financial results for the year ended December 31, 2006, we had nine months of reported 2006 CAR financial data, and we had to estimate and record as IBNR reserves what CAR would report to us for the last three months of the year.

We receive our final calendar year Participation Ratio report from CAR eight months after the end of that year, and thus we have to estimate for six quarters our share of the CAR deficit. For example, for the year ended December 31, 2005 we had to estimate our 2005 policy year CAR Participation Ratio beginning with the first quarter of 2005 through the second quarter of 2006.

Because of the lag in CAR estimates, and in order to try to validate to the extent possible the information CAR does provide, we must try to estimate the effects of the actions of our competitors in order to establish our Participation Ratio. Before final Participation Ratios are available, we estimate the size of CAR and the resulting deficit based on historical analysis of CAR results, and estimations of our competitors’ current cession strategies. Even after our final Participation Ratio is available from CAR, we must continue to estimate the size of CAR, and the resulting deficit based upon data published by CAR and our own continuing analysis. As a result, changes in our reserves for CAR may continue to occur until all claims are finally settled. The Loss Reserving Committee at CAR meets 70 days after the end of each quarter to estimate the CAR deficit for all active policy years and publishes estimations, which we use to estimate our share of the deficit. The estimation that CAR calculates is based on data it collects from 19 servicing carriers which settle, reserve and report claims using a variety of methods. Any delays or errors in the collection of this data could have a significant impact on the accuracy of CAR’s estimations.

Although we rely to a significant extent in setting our reserves on the information CAR provides, we are cautious in our use of that information, both because of the delays described above and because the CAR estimates incorporate data CAR receives from all other CAR servicing carriers in Massachusetts. We do not have direct access to that data or firsthand knowledge of how those carriers are currently conducting their operations. As a result, we are cautious in recording CAR reserves for the calendar years that we have to estimate our Participation Ratio and these reserves are subject to significant judgments and estimates.

Sensitivity Analysis

Establishment of appropriate reserves is an inherently uncertain process. There can be no certainty that currently established reserves based on our key assumptions regarding frequency and severity in our lines of business, or our assumptions regarding our share of the CAR loss will prove adequate in light of subsequent actual experience. To the extent that reserves are inadequate and are strengthened, the amount of such increase is treated as a charge to earnings in the period that the deficiency is recognized. To the extent that reserves are redundant and are released, the amount of the release is a credit to earnings in the period the redundancy is recognized. For the year ended December 31, 2006, a 1 percentage-point change in the loss and LAE ratio would result in a change in reserves of $6,249. Each 1 percentage-point change in the loss and loss expense ratio would have a $4,062 effect on net income, or $0.25 per diluted share.

Our assumptions consider that past experience, adjusted for the effects of current developments and anticipated trends, are an appropriate basis for establishing our reserves. Our individual key assumptions could each have a reasonable possible range of plus or minus 5 percentage-points for each estimation, although there is no guarantee that our assumptions will not have more than a 5 percentage point variation. The following sensitivity tables present information for each of our primary lines of business on the effect each 1 percentage-point change in each of our key assumptions on unpaid frequency and severity could have on our direct minus ceded loss and LAE reserves and net income for the year ended December 31, 2006. In evaluating the information in the table, it should be noted that a 1 percentage-point change in a single assumption would change estimated reserves by 1 percentage-point. A 1 percentage-point change in both our key assumptions would change estimated reserves within a range of plus or minus 2 percentage-points.

–1 Percent

+1 Percent

Change in

Frequency

Private passenger automobile direct minus ceded loss and LAE reserves

–1 percent change in severity

Estimated decrease in reserves

(4,360

)

(2,180

)

—

Estimated increase in net income

2,834

1,417

—

No change in severity

Estimated (decrease) increase in reserves

(2,180

)

—

2,180

Estimated increase (decrease) in net income

1,417

—

(1,417

)

+1 percent change in severity

Estimated increase in reserves

—

2,180

4,360

Estimated decrease in net income

—

(1,417

)

(2,834

)

Commercial automobile direct minus ceded loss and LAE reserves

–1 percent change in severity

Estimated decrease in reserves

(716

)

(358

)

—

Estimated increase in net income

465

233

—

No change in severity

Estimated (decrease) increase in reserves

(358

)

—

358

Estimated increase (decrease) in net income

233

—

(233

)

+1 percent change in severity

Estimated increase in reserves

—

358

716

Estimated decrease in net income

—

(233

)

(465

)

Homeowners direct minus ceded loss and LAE reserves

–1 percent change in severity

Estimated decrease in reserves

(425

)

(213

)

—

Estimated increase in net income

277

138

—

No change in severity

Estimated (decrease) increase in reserves

(213

)

—

213

Estimated increase (decrease) in net income

138

—

(138

)

+1 percent change in severity

Estimated increase in reserves

—

213

425

Estimated decrease in net income

—

(138

)

(277

)

All other direct minus ceded loss and LAE reserves

–1 percent change in severity

Estimated decrease in reserves

(234

)

(117

)

—

Estimated increase in net income

152

—

No change in severity

Estimated (decrease) increase in reserves

(117

)

—

117

Estimated increase (decrease) in net income

—

(76

)

+1 percent change in severity

Estimated increase in reserves

—

117

234

Estimated decrease in net income

—

(76

)

(152

)

Our estimated share of CAR loss and LAE reserves is based on assumptions about our Participation Ratio, the size of CAR, and the resulting deficit (similar assumptions apply with respect to the FAIR Plan). Our assumptions consider that past experience, adjusted for the effects of current developments and anticipated trends, are an appropriate basis for establishing our CAR reserves. Each of our assumptions could have a reasonably possible range of plus or minus 5 percentage-points for each estimation. The following sensitivity table presents information of the effect each 1 percentage-point change in our assumptions on our share of reserves for CAR and other residual markets could have on our assumed loss and LAE reserves and net income for the year ended December 31, 2006. In evaluating the information in the table, it should be noted that a 1 percentage-point change in our assumptions would change estimated reserves by 1 percentage-point.

- 1 Percent

+1 Percent

Change in

Estimation

CAR assumed private passenger automobile

Estimated (decrease) increase in reserves

(569

)

—

569

Estimated increase (decrease) in net income

370

—

(370

)

CAR assumed commercial automobile

Estimated (decrease) increase in reserves

(175

)

—

175

Estimated increase (decrease) in net income

114

—

(114

)

FAIR Plan assumed homeowners

Estimated (decrease) increase in reserves

(98

)

—

Estimated increase (decrease) in net income

—

(64

)

Reserve Development Summary

The changes we have recorded in our reserves in the past illustrate the uncertainty of estimating reserves. The Company’s prior year reserves decreased by $42,747, $39,620 and $6,778 for the years ended December 31, 2006, 2005 and 2004, respectively.

The following table presents a comparison of prior year development of our net reserves for losses and LAE for the years ended December 31, 2006, 2005 and 2004. Each accident year represents all claims for an annual accounting period in which loss events occurred, regardless of when the losses were actually reported, booked, or paid. Our financial statements reflect the aggregate results of the current and all prior accident years.

Prior Year Net Loss and LAE Reserve Development Summary

	For the years ended December 31,
Accident Year	2006			2005			2004
1996 & Prior	$	(110	)	$	(11	)	$	(129	)
1997	(3		)	(5		)	(11		)
1998	(28		)	7			(504		)
1999	(208		)	(892		)	(12		)
2000	238			(276		)	1,588
2001	(2,159		)	(317		)	2,495
2002	(2,292		)	(3,489		)	(304		)
2003	(6,029		)	(7,155		)	(9,901		)
2004	(11,627		)	(27,482		)	—
2005	(20,529		)	—			—
All Prior Years	$	(42,747	)	$	(39,620	)	$	(6,778	)

The decrease in prior year reserves during the 2006 period resulted from re-estimations of prior year ultimate loss and LAE liabilities and is composed primarily of a reduction of $23,945 in the Company’s retained automobile reserves and a reduction of $14,006 in CAR assumed reserves. The decrease in prior year reserves during the 2005 period resulted from re-estimations of prior year ultimate loss and LAE liabilities and is composed primarily of a reduction of $22,162 in CAR assumed reserves and a reduction of $14,600 in the Company’s retained automobile reserves. The decrease in prior year reserves during the 2004 period is composed primarily of a reduction of $6,854 in CAR assumed reserves, a reduction of $2,523 in our homeowners line of business, and an increase of $2,928 in the Company’s retained automobile reserves.

The following table presents information by line of business for prior year development of our net reserves for losses and LAE for the year ended December 31, 2006.

Prior Year Net Loss and LAE Reserve Development Summary

	Private Passenger				Commercial
Accident Year	Automobile				Automobile				Homeowners				All Other				Total
1996 & prior		$	(39	)		$	(71	)		$	—			$	—		$	(110	)
1997		(3		)		—				—				—			(3		)
1998		(17		)		(11		)		—				—			(28		)
1999		(81		)		(129		)		2				—			(208		)
2000		(159		)		85				303				9			238
2001		(1,862		)		(172		)		(112		)		(13		)	(2,159		)
2002		(1,174		)		(692		)		(355		)		(71		)	(2,292		)
2003		(4,103		)		(1,319		)		(542		)		(65		)	(6,029		)
2004		(7,759		)		(2,733		)		(1,036		)		(99		)	(11,627		)
2005		(15,984		)		(1,728		)		(2,376		)		(441		)	(20,529		)
All prior years		$	(31,181	)		$	(6,770	)		$	(4,116	)		$	(680	)	$	(42,747	)

To further clarify the effects of changes in our reserve estimates for CAR and other residual markets, the next two tables break out the information in the table above by source of the business (i.e., non-residual market vs. residual market).

The following table presents information by line of business for prior year development of direct minus ceded reserves for losses and LAE for the year ended December 31, 2006; that is, all our reserves except for business ceded or assumed from CAR and other residual markets.

Prior Year Net Direct minus Ceded Loss and LAE Reserve Development Summary

	Retained				Retained
	Private Passenger				Commercial				Retained				Retained
Accident Year	Automobile				Automobile				Homeowners				All Other				Total
1996 & prior		$	(39	)		$	(71	)		$	—			$	—		$	(110	)
1997		(3		)		—				—				—			(3		)
1998		(17		)		(1		)		—				—			(18		)
1999		(81		)		(103		)		—				—			(184		)
2000		(159		)		101				300				9			251
2001		(1,706		)		(189		)		(98		)		(13		)	(2,006		)
2002		(859		)		(708		)		(320		)		(71		)	(1,958		)
2003		(3,510		)		(1,190		)		(476		)		(65		)	(5,241		)
2004		(3,719		)		(2,530		)		(860		)		(99		)	(7,208		)
2005		(7,722		)		(1,439		)		(1,976		)		(441		)	(11,578		)
All prior years		$	(17,815	)		$	(6,130	)		$	(3,430	)		$	(680	)	$	(28,055	)

The following table presents information by line of business for prior year development of reserves assumed from CAR and other residual markets for losses and LAE for the year ended December 31, 2006.

Prior Year assumed Loss and LAE Reserve Development Summary

	CAR Assumed				CAR Assumed
	Private Passenger				Commercial				FAIR Plan
Accident Year	Automobile				Automobile				Homeowners				All Other			Total
1996 & prior		$	—			$	—			$	—			$	—	$	—
1997						—				—				—		—
1998		—				(10		)		—				—		(10		)
1999		—				(26		)		2				—		(24		)
2000		—				(16		)		3				—		(13		)
2001		(156		)		17				(14		)		—		(153		)
2002		(315		)		16				(35		)		—		(334		)
2003		(593		)		(129		)		(66		)		—		(788		)
2004		(4,040		)		(203		)		(176		)		—		(4,419		)
2005		(8,262		)		(289		)		(400		)		—		(8,951		)
All prior years		$	(13,366	)		$	(640	)		$	(686	)		$	—	$	(14,692	)

Our private passenger automobile line of business prior year reserves decreased by $31,181 for the year ended December 31, 2006. The decrease was primarily due to reductions in our retained private passenger automobile reserves for the 2005, 2004 and 2003 accident years by $7,722, $3,719 and $3,510, respectively, primarily due to better than previously estimated severity on our established bodily injury and property damage case reserves and fewer IBNR claims than previously estimated. In addition, the decrease was due to improved assumed CAR results for the private passenger automobile pool for the 2005 accident year of $8,262 and for the 2004 accident year of $4,040. The improved CAR results were due primarily to improved CAR private passenger loss ratios for 2005 and 2004 as published and reported by the CAR Loss Reserving Committee at the December 4, 2006 meeting, as compared to the published results at the September 6, 2006 meeting.

Our commercial automobile line of business prior year reserves decreased by $6,770 for the year ended December 31, 2006. The decrease was primarily due to more favorable commercial automobile bodily injury severity than previously estimated for the 2005, 2004 and 2003 accident years and fewer IBNR claims than previously estimated.

Our Homeowners line of business prior year reserves decreased by $4,116 for the year ended December 31, 2006, primarily as a result of improved severity on our established case reserves for 2005 and 2004 related to our retained homeowners business.

In estimating all our loss reserves, including CAR, we follow the guidance prescribed by Statement of Financial Accounting Standards (“FAS”) No. 60, “Accounting and Reporting by Insurance Enterprises” and FAS No. 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts.”

For further information, see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations: Losses and Loss Adjustment Expenses.”

Other-Than-Temporary Impairments.

We use a systematic methodology to evaluate declines in market values below cost or amortized cost of our investments. This methodology ensures that we evaluate available evidence concerning any declines in a disciplined manner.

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

We record other-than-temporary impairments as realized losses, which serve to reduce net income and earnings per share. We record temporary losses as unrealized losses, which do not impact net income and earnings per share but reduce other comprehensive net income. The risks inherent in our assessment of other-than-temporary impairments include the risk that market factors may differ from our expectations, or that the credit assessment could change in the near term, resulting in a charge to earnings.

For further information, see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations: Net Realized Investment Losses.”

Results of Operations

The following table shows certain of our selected financial results:

	For the Year Ended December 31,
	2006		2005		2004
Direct written premiums	$	629,511	$	649,113	$	628,295
Net written premiums	620,908		632,836		618,923
Net earned premiums	624,933		622,831		592,292
Net investment income	40,293		31,573		27,259
Net realized gains on investments	358		305		1,274
Finance and other service income	15,128		16,748		15,615
Total revenue	680,712		671,457		636,440
Loss and loss adjustment expenses	353,906		385,593		425,061
Underwriting, operating and related expenses	162,220		146,669		145,075
Interest expenses	86		948		672
Total expenses	516,212		533,210		570,808
Income before income taxes	164,500		138,247		65,632
Income tax expense	52,559		43,065		20,642
Net income	$	111,941	$	95,182	$	44,990

YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005

Direct Written Premiums. Direct written premiums for the year ended December 31, 2006, decreased by $19,602, or 3.0% to $629,511 from $649,113 for 2005. The 2006 decrease occurred primarily in our personal automobile line, which experienced a 6.8% decrease in average written premium and a 1.0% decrease in written exposures. Offsetting these results, our commercial automobile line’s average written premium increased by 13.2% with a 12.3% increase in written exposures. Our homeowners line average written premium increased by 5.7% with a 0.3% decrease in written exposures.

Net Written Premiums. Net written premiums for the year ended December 31, 2006, decreased by $11,928 or 1.9% to $620,908 from $632,836 for 2005. This was primarily due to the factors that decreased direct written premiums offset with a decrease in premiums ceded to CAR.

Net Earned Premiums. Net earned premiums for the year ended December 31, 2006, increased by $2,102, or 0.3%, to $624,933 from $622,831 for 2005, primarily due to a decrease in premiums ceded to CAR.

Net Investment Income. Investment income for the year ended December 31, 2006, was $40,293 compared to $31,573 for 2005, an increase of 27.6%. Average cash and investment securities (at amortized cost) increased by $80,780, or 9.6%, to $917,980 for the year ended December 31, 2006, from $837,200 for 2005. The net effective yield on the investment portfolio increased to 4.4% during the year ended December 31, 2006, compared to 3.8% during 2005. Our duration increased to 4.6 years at December 31, 2006, from 3.2 years at December 31, 2005.

Net Realized Gains on Investments. Net realized gains on investments increased to $358 for the year ended December 31, 2006 from $305 for 2005.

The gross unrealized appreciation (depreciation) of investments in fixed maturity securities, including redeemable preferred stocks that have characteristics of fixed maturities, and equity securities, was as follows:

December 31, 2006

Gross

Estimated

Amortized

Unrealized

Fair

Cost

Gains

Losses

Value

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

185,390

929

(2,883

)

183,436

Obligations of states and political subdivisions

429,888

6,485

(2,014

)

434,359

Asset-backed securities(1)

180,294

339

(2,022

)

178,611

Corporate and other securities

140,962

853

(1,941

)

139,874

Subtotal, fixed maturity securities

936,534

8,606

(8,860

)

936,280

Equity securities

4,038

287

—

4,325

Totals

940,572

8,893

(8,860

)

940,605

(1) Obligations of U.S. Government agencies include collateralized mortgage obligations issued, guaranteed and/or insured by the following issuers: Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) and Small Business Administration (SBA). The total of these fixed maturity securities was $175,394 at amortized cost and $173,539 at fair value as of December 31, 2006. As such, the asset-backed securities presented exclude such issuers already presented under U.S. Treasury securities and obligations of U.S. Government Agencies.

As of December 31, 2006, our portfolio of fixed maturity investments was comprised entirely of investment grade corporate fixed maturity securities, U.S. government and agency securities and asset-backed securities (i.e., all our securities received a rating assigned by Moody’s of Baa or higher, except the few securities not rated by Moody’s which received Standard & Poor’s ratings of A- or higher, as well as a rating assigned by the Securities Valuation Office of the National Association of Insurance Commissioners of 1 or 2).

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

	December 31, 2006
	Estimated
	Fair Value		Percent
U.S. Treasury securities and obligations of U.S. Government agencies	$	183,436		19.6	%
Aaa/Aa	584,191			62.4
A	106,092			11.3
Baa	39,845			4.3
Not rated (Standard & Poor’s rating of A- or higher)	22,716			2.4
Total	$	936,280		100.0	%

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

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

The following table illustrates the gross unrealized losses included in the Company’s investment portfolio and the fair value of those securities, aggregated by investment category. The table also illustrates the length of time that they have been in a continuous unrealized loss position as of December 31, 2006.

As of December 31, 2006

Less than 12 Months

12 Months or More

Total

EstimatedFair Value

Unrealized
Losses

EstimatedFair Value

Unrealized
Losses

EstimatedFair Value

Unrealized
Losses

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

5,850

104,796

2,801

110,646

2,883

Obligations of states and political subdivisions

12,423

107,904

1,971

120,327

2,014

Asset-backed securities

62,362

537

74,521

1,485

136,883

2,022

Corporate and other securities

46,132

778

57,118

1,163

103,250

1,941

Total temporarily impaired securities

126,767

1,440

344,339

7,420

471,106

8,860

The unrealized losses recorded on the fixed maturity investment portfolio at December 31, 2006 resulted from fluctuations in market interest rates as opposed to fundamental changes in the credit quality of the issuers of such securities. Therefore, these decreases in values are viewed as being temporary as we have the intent and ability to retain such investments for a period of time sufficient to allow for recovery in market value.

Of the $8,860 gross unrealized losses as of December 31, 2006, $4,897 relates to fixed maturity obligations of U.S. government agencies and obligations of states and political subdivisions. The remaining $3,963 of gross unrealized losses relates primarily to holdings of investment grade asset-backed, corporate and other fixed maturity securities.

During the years ended December 31, 2006 and 2005, there was no significant deterioration in the credit quality of any of the Company’s holdings and no other-than-temporary impairment charges were recorded related to the Company’s portfolio of investment securities

Finance and Other Service Income. Finance and other service income includes revenues from premium installment charges, which we recognize when earned, and other miscellaneous income and fees. Finance and other service income for the year ended December 31, 2006, was $15,128 compared to $16,748 for the 2005 period. The decrease was primarily due to the decreases in direct premiums written..

Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses incurred for the year ended December 31, 2006, decreased by $31,687 or 8.2%, to $353,906 from $385,593 for the comparable 2005 period. Our GAAP loss ratio for the year ended December 31, 2006, decreased to 56.6% compared to 61.9% for the comparable 2005 period. Our GAAP loss ratio excluding loss adjustment expenses for the year ended December 31, 2006, decreased to 49.2% from 54.9% for the comparable 2005 period. The loss ratio improved as a result of a decrease in personal and commercial automobile bodily injury and physical damage claim frequency due in part to very favorable weather in 2006 and an increase in favorable development in our personal and commercial automobile and homeowners lines prior years results. Total prior year favorable development included in the pre-tax results for the year ended December 31, 2006 was $42,747 compared to prior year favorable development of $39,620 for the comparable 2005 period.

Underwriting, Operating and Related Expenses. Underwriting, operating and related expense for the year ended December 31, 2006 increased by $15,551, or 10.6%, to $162,220 from $146,669 for the comparable 2005 period. Our GAAP expense ratios for the year ended December 31, 2006, increased to 26.0% compared to 23.5% for the comparable 2005 period. The increase was primarily due to higher accrued agents’ contingent commissions and higher 2006 policy year mandated personal automobile commissions. The increase in accrued agents’ contingent commissions was due to the improved underwriting results for the year ended December 31, 2006 compared to the year ended December 31, 2005.

Interest Expenses. Interest expense for the year ended December 31, 2006 was $86 compared to $948 for the comparable 2005 period due to the pay down of the balance outstanding under our credit facility of $19,956 on December 8, 2005.

Income Tax Expense. Our effective tax rates were 32.0% and 31.2% for the years ended December 31, 2006 and 2005, respectively. These effective rates were lower than the statutory rate of 35% primarily due to adjustments for tax-exempt investment income and a $1,161 tax benefit recorded as a reduction to income tax expense for the year ended December 31, 2005. This tax benefit represents a reduction in federal income tax reserves for tax years 2001 through 2003 during 2005 upon completion of an examination of the Company’s federal income tax returns for the tax periods ended December 31, 2003, 2002, and 2001 by the Internal Revenue Service.

Net Income. Net income for the year ended December 31, 2006 increased by $16,759, or 17.6%, to $111,941 from $95,182 for the comparable 2005 period. This increase was primarily due to the decrease in the loss ratio and improved investment results as discussed above.

YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004

Direct Written Premiums. Direct written premiums for the year ended December 31, 2005, increased by $20,818, or 3.3% to $649,113 from $628,295 for 2004. The 2005 increase occurred primarily in our personal automobile line, which experienced a 0.1% increase in average written premium and a 2.4% increase in written exposures. In addition, our commercial automobile line’s average written premium decreased by 0.3%, with a 7.6% increase in written exposures. Our homeowners line average written premium increased by 7.3%, with a 2.9% decrease in written exposures.

Net Written Premiums. Net written premiums for the year ended December 31, 2005, increased by $13,913 or 2.2% to $632,836 from $618,923 for 2004. This was primarily due to the factors that increased direct written premiums combined with a decrease in premiums ceded to CAR.

Net Earned Premiums. Net earned premiums for the year ended December 31, 2005, increased by $30,539, or 5.2%, to $622,831 from $592,292 for 2004. This was primarily due to the factors that increased direct written premiums combined with a decrease in premiums ceded to CAR.

Net Investment Income. Investment income for the year ended December 31, 2005, was $31,573 compared to $27,259 for 2004. Average cash and investment securities (at amortized cost) increased by $102,624, or 14.0%, to $837,200 for the year ended December 31, 2005, from $734,576 for 2004 due to a $72,871 increase in average cash and a $29,753 increase in average securities. Net effective yield on the investment portfolio remained relatively unchanged at 3.8% during the year ended December 31, 2005, compared to 3.7% during 2004. Our duration decreased to 3.2 years at December 31, 2005, from 3.4 years at December 31, 2004.

Net Realized Gains on Investments. Net realized gains on investments decreased to $305 for the year ended December 31, 2005, from $1,274 for 2004.

	December 31, 2005
	Amortized Cost		Gross Unrealized Gains			Gross Unrealized Losses				Estimated Fair Value
U.S. Treasury securities and obligations of U.S. Government agencies(1)	$	127,764		$	142		$	(2,686	)	$	125,220
Obligations of states and political subdivisions	321,250			4,385			(3,026		)	322,609
Asset-backed securities(1)	124,531			293			(1,349		)	123,475
Corporate and other securities	140,385			2,309			(1,460		)	141,234
Subtotal, fixed maturity securities	713,930			7,129			(8,521		)	712,538
Equity securities	1,895			110			—			2,005
Totals	$	715,825		$	7,239		$	(8,521	)	$	714,543

exclude such issuers already presented under U.S. Treasury securities and obligations of U.S. Government Agencies.

As of December 31, 2005, our portfolio of fixed maturity investments was comprised entirely of investment grade corporate fixed maturity securities, U.S. government and agency securities and asset-backed securities (i.e., all our securities received a rating assigned by Moody’s Investors Service, Inc. (“Moody’s”) of Baa or higher, except the few securities not rated by Moody’s which received Standard & Poor’s ratings of A- or higher, as well as a rating assigned by the Securities Valuation Office of the National Association of Insurance Commissioners of 1 or 2).

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

	December 31, 2005
	Estimated Fair Value		Percent
U.S. Treasury securities and obligations of U.S. Government agencies	$	122,237		17.2	%
Aaa/Aa	443,200			62.1
A	86,179			12.1
Baa	46,183			6.5
Not rated (Standard & Poor’s rating of A- or higher)	14,739			2.1
Total	$	712,538		100.0	%

	As of December 31, 2005
	Less than 12 Months					12 Months or More					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
U.S. Treasury securities and obligations of U.S. Government agencies	$	52,119		$	581	$	65,746		$	2,105	$	117,865		$	2,686
Obligations of states and political subdivisions	53,872			872		97,361			2,154		151,233			3,026
Asset-backed securities	54,816			526		37,560			823		92,376			1,349
Corporate and other securities	38,830			603		31,707			857		70,537			1,460
Total temporarily impaired securities	$	199,637		$	2,582	$	232,374		$	5,939	$	432,011		$	8,521

The unrealized losses recorded on the fixed maturity investment portfolio at December 31, 2005, resulted from fluctuations in market interest rates as opposed to fundamental changes in the credit quality of the issuers of such securities. Therefore, these decreases in value are viewed as being temporary as we have the intent and ability to retain such investments for a period of time sufficient to allow for recovery in market value.

Of the $8,521 gross unrealized losses as of December 31, 2005, $5,712 relates to fixed maturity obligations of U.S. government agencies and obligations of states and political subdivisions. The remaining $2,809 of gross unrealized losses relates primarily to holdings of investment grade asset-backed, corporate and other fixed maturity securities.

During the years ended December 31, 2005 and 2004, there was no significant deterioration in the credit quality of any of the Company’s holdings and no other-than-temporary impairment charges were recorded related to the Company’s portfolio of investment securities

Finance and Other Service Income. Finance and other service income includes revenues from premium installment charges, which we recognize when earned, and other miscellaneous income and fees. Finance and other service income for the year ended December 31, 2005 were $16,748 compared to $15,615 for the 2004 period. This resulted from increases in premium installment billing fees primarily due to growth in the number of policies combined with an increase in miscellaneous income from CAR.

Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses incurred for the year ended December 31, 2005, decreased by $39,468, or 9.3%, to $385,593 from $425,061 for the comparable 2004 period. Our GAAP loss ratio for the year ended December 31, 2005, decreased to 61.9% compared to 71.8% for the comparable 2004 period. Our GAAP loss ratio excluding loss adjustment expenses for the year ended December 31, 2005, decreased to 54.9% from 64.6% for the comparable 2004 period. The loss ratio improved as a result of favorable loss development of $22,162 in CAR assumed prior years reserves, favorable loss development of $14,600 in the Company’s prior years retained automobile reserves, a decrease in personal and commercial bodily injury claim frequency in our automobile lines of business, favorable loss development of $1,872 in FAIR Plan assumed prior years reserves, and favorable loss development of $986 in retained homeowners prior years reserves in 2005 compared to favorable loss development of $6,854 in CAR assumed prior years reserves, $2,523 in retained homeowner prior years reserves, $329 in FAIR Plan assumed prior years reserves, and an increase of $2,928 in the Company’s retained automobile prior years reserves in 2004.

Underwriting, Operating and Related Expenses. Underwriting, operating and related expense for the year ended December 31, 2005 increased by $1,594, or 1.1%, to $146,669 from $145,075 for the comparable 2004 period. Our GAAP expense ratios for the year ended December 31, 2005 decreased to 23.5% compared to 24.5% for the comparable 2004 periods and is partly due to a decrease in expenses related to assessments from the Massachusetts Insurers Insolvency Fund. The Company received a $50 assessment refund of prior years assessments in 2005 compared to a $2,538 assessment paid and expensed in 2004.

Interest Expenses. Interest expense for the year ended December 31, 2005 was $948 compared to $672 for the comparable 2004 period due to increased LIBOR rates on our credit facility advances in 2005.

Income Tax Expense. Our effective tax rates were 31.2% and 31.5% for the year ended December 31, 2005 and 2004, respectively. These effective rates were lower than the statutory rate of 35% primarily due to adjustments for tax-exempt investment income and a $1,161 tax benefit recorded as a reduction to income tax expense for the year ended December 31, 2005. This tax benefit represents a reduction in federal income tax reserves for tax years 2001 through 2003 during 2005 upon completion of an examination of the Company’s federal income tax returns for the tax periods ended December 31, 2003, 2002, and 2001 by the Internal Revenue Service.

Net Income. Net income for the year ended December 31, 2005, increased by $50,192, or 111.6%, to $95,182 from $44,990 for the comparable 2004 period. This increase was primarily due to the increase in premiums and decrease in the loss ratio, as discussed above.

Liquidity and Capital Resources

As a holding company, Safety’s assets consist primarily of the stock of our direct and indirect subsidiaries. Our principal source of funds to meet our obligations and pay dividends to shareholders, therefore, is dividends and other permitted payments from our subsidiaries, principally Safety Insurance. Safety is the borrower under our credit facilities.

Safety Insurance’s sources of funds primarily include premiums received, investment income and proceeds from sales and redemptions of investments. Safety Insurance’s principal uses of cash are the payment of claims, operating expenses and taxes, the purchase of investments and payment of dividends to Safety.

Net cash provided by operating activities was $101,227, $116,417, and $126,176 during the years ended December 31, 2006, 2005 and 2004, respectively. Our operations typically generate substantial positive cash flows from operations as most premiums are received in advance of the time when claim and benefit payments are required. These positive operating cash flows are expected to continue to meet our liquidity requirements.

Net cash used for investing activities was $230,397 and $82,770 during the years ended December 31, 2006 and 2005, which resulted primarily from purchases of fixed maturities in excess of sales and maturities of fixed maturities. Net cash provided by investing activities was $7,820 during the year ended December 31, 2004, which resulted primarily from sales and maturities of fixed maturities in excess of purchases of fixed maturities.

Net cash used for financing activities was $7,574, $26,293, and $4,607 during the years ended December 31, 2006, 2005, and 2004, respectively. Net cash used for financing activities is primarily comprised of dividend payments to shareholders during 2006 and 2004 and of the pay down of the revolving credit facility and dividend payments to shareholders in 2005.

Credit Facility

Safety has a $30,000 revolving credit facility with Citizens Bank of Massachusetts which expires on June 17, 2008. Loans under the credit facility bear interest at our option at either (i) the LIBOR rate plus 1.5% per annum or (ii) the higher of Citizens Bank of Massachusetts’ prime rate or 0.5% above the federal funds rate plus 1.5% per annum. Interest only is payable prior to maturity. The obligations of Safety under the credit facility are secured by pledges of Safety’s assets and the capital stock of our operating subsidiaries. The credit facility is guaranteed by our non-insurance company subsidiaries. The credit facility contains covenants including requirements to maintain minimum risk based capital ratios and statutory surplus of Safety Insurance as well as limitations or restrictions on indebtedness, liens, dividends, and other matters. As of December 31, 2006, we were in compliance with all such covenants.

We paid down the balance of $19,956 on December 8, 2005, and had no amounts outstanding on our credit facility at December 31, 2006 and 2005. The credit facility commitment fee included in interest expenses was computed at a rate of 0.25% on the $30,000 commitment at December 31, 2006 and 2005.

Regulatory Matters

Our insurance subsidiaries are subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid to their parent without prior approval of the Commissioner. The Massachusetts statute limits the dividends an insurer may pay in any twelve-month period, without the prior permission of the Commissioner, to the greater of (i) 10% of the insurer’s surplus as of the preceding December 31 or (ii) the insurer’s net income for the twelve-month period ending the preceding December 31, in each case determined in accordance with statutory accounting practices. Our insurance company subsidiaries may not declare an “extraordinary dividend” (defined as any dividend or distribution that, together with other distributions made within the preceding twelve months, exceeds the limits established by Massachusetts statute) until thirty days after the Commissioner has received notice of the intended dividend and has not objected. As historically administered by the Commissioner, this provision requires the Commissioner’s prior approval of an extraordinary dividend. Under Massachusetts law, an insurer may pay cash dividends only from its unassigned funds, also known as earned surplus, and the insurer’s remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. At year-end 2006, the statutory surplus of Safety Insurance was $457,505, and its net income for 2006 was $110,075. As a result, a maximum of $110,075 is available in 2007 for such dividends without prior approval of the Division. During the year ended December 31, 2006, Safety Insurance recorded dividends to Safety of $7,859.

The maximum dividend permitted by law is not indicative of an insurer’s actual ability to pay dividends, which may be constrained by business and regulatory considerations, such as the impact of dividends on surplus, which could affect an insurer’s ratings or competitive position, the amount of premiums that can be written and the ability to pay future dividends.

On February 15, 2007, our Board approved a quarterly cash dividend on our common stock of $0.25 per share payable on March 15, 2007 to shareholders of record on March 1, 2007. On November 3, 2006, our Board approved a quarterly cash dividend on our common stock of $0.25 per share, or $4,010, which was paid on December 15, 2006. On August 10, 2006, our Board approved a quarterly cash dividend on our common stock of $0.25 per share, or $4,003, which was paid on September 15, 2005. On May 5, 2006, our Board approved a quarterly cash dividend on our common stock of $0.18 per share, or $2,876, which was paid on June 15, 2006. On February 16, 2006, our Board approved a quarterly cash dividend on our common stock of $0.18 per share, or $2,844, which was paid on March 15, 2006. On November 3, 2005, our Board approved a quarterly cash dividend on our common stock of $0.18 per share, or $2,835, which was paid on December 15, 2005. On August 18, 2005, our Board approved a quarterly cash dividend on our common stock of $0.18 per share, or $2,832, which was paid on September 15, 2005. On May 19, 2005, our

Board approved a quarterly cash dividend on our common stock of $0.12 per share, or $1,881, which was paid on June 15, 2005. On February 17, 2005, our Board approved a quarterly cash dividend on our common stock of $0.12 per share, or $1,861, which was paid on March 15, 2005. We plan to continue to declare and pay quarterly cash dividends in 2007, depending on our financial position and the regularity of our cash flows.

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

Off-Balance Sheet Arrangements

We have no material obligations under a guarantee contract meeting the characteristics identified in paragraph 3 of Financial Accounting Standards Board (“FASB”) Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements, Including Indirect Guarantees of Indebtedness of Others”. We have no material retained or contingent interests in assets transferred to an unconsolidated entity. We have no material obligations, including contingent obligations, under contracts that would be accounted for as derivative instruments. We have no obligation, including contingent obligations, arising out of a variable interest in an unconsolidated entity held by, and material to, us, where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with us. We have no direct investments in real estate and no holdings of mortgages secured by commercial real estate. Accordingly, we have no material off-balance sheet arrangements.

Contractual Obligations

We have obligations to make future payments under contracts and credit-related financial instruments and commitments. At December 31, 2006, certain long-term aggregate contractual obligations and credit-related commitments are summarized as follows:

	Payments Due by Period
	Within One Year		Two to Three Years			Four to Five Years			After five Years			Total
Loss and LAE reserves	$	220,228		$	197,755		$	26,967		$	4,494	$	449,444
Capital lease obligations	39			—			—			—		39
Operating leases	3,073			3,263			105			8		6,449
Total contractual obligations	$	223,340		$	201,018		$	27,072		$	4,502	$	455,932

As of December 31, 2006, the Company had loss and LAE reserves of $449,444, reinsurance recoverables of $78,464 and net loss and LAE reserves of $370,980. Our loss and LAE reserves are estimates as described in more detail under “Critical Accounting Policies and Estimates”. The specific amounts and timing of obligations related to case reserves, IBNR reserves and related LAE reserves are not set contractually, and the amounts and timing of these obligations are unknown. Nonetheless, based upon our cumulative claims paid over the last ten years, the Company estimates that its loss and LAE reserves will be paid in the period shown above. While management believes that historical performance of loss payment patterns is a reasonable source for projecting future claims payments, there is inherent

uncertainty in this estimated projected settlement of loss and LAE reserves, and as a result these estimates will differ, perhaps significantly, from actual future payments. Our operations typically generate substantial positive cash flows from operations as most premiums are received in advance of the time when claim and benefit payments are required. These positive operating cash flows are expected to continue to meet our liquidity requirements, including any unexpected variations in the timing of claim settlements.

Forward-Looking Statements

Forward-looking statements might include one or more of the following, among others:

· Projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure or other financial items;

· Descriptions of plans or objectives of management for future operations, products or services;

· Forecasts of future economic performance, liquidity, need for funding and income; and

· Descriptions of assumptions underlying or relating to any of the foregoing.

Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “aim,” “projects,” or words of similar meaning and expressions that indicate future events and trends, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may”. All statements that address expectations or projections about the future, including statements about the Company’s strategy for growth, product development, market position, expenditures and financial results, are forward-looking statements.

Forward-looking statements are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. There are a number of factors, many of which are beyond our control, that could cause actual future conditions, events, results or trends to differ significantly and/or materially from historical results or those projected in the forward-looking statements. These factors include but are not limited to the competitive nature of our industry and the possible adverse effects of such competition. Although a number of national insurers that are much larger than we are do not currently compete in a material way in the Massachusetts private passenger automobile market, if one or more of these companies decided to aggressively enter the market it could have a material adverse effect on us. Other significant factors include conditions for business operations and restrictive regulations in Massachusetts, the possibility of losses due to claims resulting from severe weather, the possibility that the Commissioner may approve future Rule changes that change the operation of the residual market, our possible need for and availability of additional financing, and our dependence on strategic relationships, among others, and other risks and factors identified from time to time in our reports filed with the SEC. Refer to Part 1, Item 1A—Risk Factors.

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

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

	-100 Basis Point Change			No Change			+100 Basis Point Change
As of December 31, 2006
Estimated fair value		$	980,493		$	936,280		$	890,038
Estimated increase (decrease) in fair value		$	44,213		$	—		$	(46,242	)
As of December 31, 2005
Estimated fair value		$	740,163		$	712,538		$	684,924
Estimated increase (decrease) in fair value		$	27,625		$	—		$	(27,614	)

With respect to floating rate debt, we are exposed to the effects of changes in prevailing interest rates. At December 31, 2006, we had no debt outstanding under our credit facility. Assuming the full utilization of our current available credit facility, a 2.0% increase in the prevailing interest rate on our variable rate debt would result in interest expense increasing approximately $600 for 2007, assuming that all of such debt is outstanding for the entire year.

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

SAFETY INSURANCE GROUP, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page(s)
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm		71
Balance Sheets		73
Statements of Operations		74
Statements of Changes in Shareholders’ Equity		75
Statements of Comprehensive Income		76
Statements of Cash Flows		77
Notes to Consolidated Financial Statements		78

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Safety Insurance Group, Inc.:

We have completed integrated audits of Safety Insurance Group, Inc.’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedules

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Safety Insurance Group, Inc. at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for

external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

March 1, 2007

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Balance Sheets
(Dollars in thousands, except share data)

	December 31,
	2006		2005
Assets
Investment securities available for sale:
Fixed maturities, at fair value (amortized cost: $936,534 and $713,930)	$	936,280	$	712,538
Equity securities, at fair value (cost: $4,038 and $1,895)	4,325		2,005
Total investment securities	940,605		714,543
Cash and cash equivalents	26,283		163,027
Accounts receivable, net of allowance for doubtful accounts	158,190		154,421
Accrued investment income	9,776		7,856
Taxes recoverable	1,781		318
Receivable from reinsurers related to paid loss and loss adjustment expenses	13,282		18,750
Receivable from reinsurers related to unpaid loss and loss adjustment expenses	78,464		80,550
Ceded unearned premiums	33,042		37,174
Deferred policy acquisition costs	47,404		45,480
Deferred income taxes	16,868		18,120
Equity and deposits in pools	26,166		14,631
Other assets	3,887		2,805
Total assets	$	1,355,748	$	1,257,675
Liabilities
Loss and loss adjustment expense reserves	$	449,444	$	450,716
Unearned premium reserves	333,404		341,562
Accounts payable and accrued liabilities	48,666		44,372
Outstanding claims drafts	16,279		19,825
Payable to reinsurers	11,568		12,985
Capital lease obligations	39		266
Total liabilities	859,400		869,726
Commitments and contingencies (Note 6)
Shareholders’ equity
Common stock: $0.01 par value; 30,000,000 shares authorized; 16,096,004 and 15,787,947 shares issued and outstanding, respectively	161		158
Additional paid-in capital	129,785		120,451
Accumulated other comprehensive income (loss), net of taxes	21		(833		)
Retained earnings	366,381		268,173
Total shareholders’ equity	496,348		387,949
Total liabilities and shareholders’ equity	$	1,355,748	$	1,257,675

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

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Operations
(Dollars in thousands, except per share and share data)

	For the Years Ended December 31,
	2006		2005		2004
Net earned premiums	$	624,933	$	622,831	$	592,292
Net investment income	40,293		31,573		27,259
Net realized gains on investments	358		305		1,274
Finance and other service income	15,128		16,748		15,615
Total revenue	680,712		671,457		636,440
Losses and loss adjustment expenses	353,906		385,593		425,061
Underwriting, operating and related expenses	162,220		146,669		145,075
Interest expenses	86		948		672
Total expenses	516,212		533,210		570,808
Income before income taxes	164,500		138,247		65,632
Income tax expense	52,559		43,065		20,642
Net income	$	111,941	$	95,182	$	44,990
Earnings per weighted average common share:
Basic	$	7.07	$	6.11	$	2.94
Diluted	$	6.99	$	5.97	$	2.90
Cash dividends paid per common share	$	0.86	$	0.60	$	0.44
Weighted average number of common shares outstanding:
Basic	15,838,335		15,578,039		15,315,877
Diluted	16,005,913		15,953,737		15,526,892

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

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands)

							Accumulated				Promissory
							Other				Notes
				Additional			Comprehensive				Receivable							Total
	Common			Paid-in			Income/(Loss),				From				Retained			Shareholders’
	Stock			Capital			Net of Taxes				Management				Earnings			Equity
Balance at December 31, 2003		$	153		$	111,074		$	12,650			$	(34	)	$	144,177			$	268,020
Net income															44,990				44,990
Payments on promissory notes from management												34							34
Other comprehensive loss, net of deferred federal income taxes								(3,941		)									(3,941		)
Exercise of options and unearned compensation on restricted stock, net of deferred federal income taxes		2			2,996														2,998
Dividends paid															(6,767		)		(6,767		)
Balance at December 31, 2004		155			114,070			8,709				—			182,400				305,334
Net income															95,182				95,182
Other comprehensive loss, net of deferred federal income taxes								(9,542		)									(9,542		)
Exercise of options and unearned compensation on restricted stock, net of deferred federal income taxes		3			5,926														5,929
Tax contingency reserve adjustment					455														455
Dividends paid															(9,409		)		(9,409		)
Balance at December 31, 2005		158			120,451			(833		)		—			268,173				387,949
Net income															111,941				111,941
Other comprehensive gain, net of deferred federal income taxes								854											854
Exercise of options and unearned compensation on restricted stock, net of deferred federal income taxes		3			9,334														9,337
Dividends paid															(13,733		)		(13,733		)
Balance at December 31, 2006		$	161		$	129,785		$	21			$	—		$	366,381			$	496,348

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

Safety Insurance Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Dollars in thousands)

	For the Years Ended December 31,
	2006			2005			2004
Net income	$	111,941		$	95,182		$	44,990
Other comprehensive gain (loss), net of taxes:
Change in unrealized holding gains, net of tax (benefit) expense of $585, $(5,031), and $(1,676)	1,087			(9,344		)	(3,113		)
Reclassification adjustment for gains included in net income, net of tax benefit of $(125), $(107), and $(446)	(233		)	(198		)	(828		)
Unrealized gains (losses) on securities available for sale	854			(9,542		)	(3,941		)
Comprehensive income	$	112,795		$	85,640		$	41,049

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

Safety Insurance Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)

	For the Years Ended December 31,
	2006			2005			2004
Cash flows from operating activities:
Net income	$	111,941		$	95,182		$	44,990
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, net	8,493			8,312			8,041
Provision (benefit) for deferred income taxes	792			(303		)	(1,865		)
Gains on sale of fixed assets	(23		)	—			(4		)
Net realized gains on investments	(358		)	(305		)	(1,274		)
Changes in assets and liabilities:
Accounts receivable	(3,769		)	(3,970		)	(16,306		)
Accrued investment income	(1,920		)	(848		)	216
Receivable from reinsurers	7,554			3,847			17,895
Ceded unearned premiums	4,132			6,228			(9,928		)
Deferred policy acquisition costs	(1,924		)	(2,561		)	(2,742		)
Other assets	(13,365		)	8,883			4,717
Loss and loss adjustment expense reserves	(1,272		)	(181		)	67,346
Unearned premium reserves	(8,158		)	3,776			36,559
Accounts payable and accrued liabilities	4,294			688			6,187
Payable to reinsurers	(1,417		)	(4,005		)	(28,348		)
Other liabilities	(3,773		)	1,674			692
Net cash provided by operating activities	101,227			116,417			126,176
Cash flows from investing activities:
Fixed maturities purchased	(355,158		)	(155,647		)	(101,281		)
Equity securities purchased	(2,607		)	(1,290		)	(1,279		)
Proceeds from sales of fixed maturities	113,564			63,365			103,043
Proceeds from maturities of fixed maturities	14,300			11,125			7,520
Proceed from sales of equity securities	485			443			245
Fixed assets purchased	(1,004		)	(766		)	(432		)
Proceeds from sales of fixed assets	23			—			4
Net cash (used for) provided by investing activities	(230,397		)	(82,770		)	7,820
Cash flows from financing activities:
Payments on revolving credit facility	—			(19,956		)	—
Payments on promissory notes from management	—			—			34
Proceeds and excess tax benefits from exercise of stock options	6,159			3,072			2,126
Dividends paid to shareholders	(13,733		)	(9,409		)	(6,767		)
Net cash used for financing activities	(7,574		)	(26,293		)	(4,607		)
Net (decrease) increase in cash and cash equivalents	(136,744		)	7,354			129,389
Cash and cash equivalents, beginning of year	163,027			155,673			26,284
Cash and cash equivalents, end of year	$	26,283		$	163,027		$	155,673
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal and state income taxes	$	50,000		$	44,776		$	16,900
Interest	$	77		$	1,030		$	785

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

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

1. Basis of Presentation

The consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include Safety Insurance Group, Inc. and its subsidiaries (the “Company”). The subsidiaries consist of Safety Insurance Company, Safety Indemnity Insurance Company, Safety Property and Casualty Insurance Company (“Safety P&C”), Whiteshirts Asset Management Corporation (“WAMC”), and Whiteshirts Management Corporation, which is WAMC’s holding company. All intercompany transactions have been eliminated.

The Company was incorporated on June 25, 2001, in the State of Delaware. On October 16, 2001, the Company acquired (the “Acquisition”) all of the issued and outstanding common stock of Thomas Black Corporation (“TBC”) and its property and casualty subsidiaries. TBC subsequently merged with and into Safety Insurance Group, Inc. with Safety Insurance Group, Inc. being the corporation surviving the merger.

The Company is a leading provider of personal lines property and casualty insurance focused exclusively on the Massachusetts market. The Company’s principal product line is private passenger automobile insurance, which accounted for 76.0% of its direct written premiums in 2006. The Company operates through its insurance company subsidiaries, Safety Insurance Company and Safety Indemnity Insurance Company (together with Safety P&C referred to as the “Insurance Subsidiaries”). In 2007, the Company intends to commence operations through Safety P&C, a third insurance company subsidiary formed in December 2006.

2. Summary of Significant Accounting Policies

Investments

Investments in fixed maturities available for sale, which include taxable and non-taxable bonds and redeemable preferred stocks, are reported at fair value. Investments in equity securities available for sale, which include interests in mutual funds, are reported at fair value. Fair values are derived from external market quotations. Unrealized gains or losses on fixed maturity and equity securities, reported at fair value, are excluded from earnings and reported in a separate component of shareholders’ equity, known as “Accumulated other comprehensive income (loss), net of taxes”, until realized. Realized gains or losses on the sale or maturity of investments are determined on the basis of the specific cost identification method. Fixed maturities and equity securities that experience declines in value that are other-than-temporary are written down to fair value with a corresponding charge to net realized losses on investments.

Investment income is recognized on an accrual basis of accounting. Bonds not backed by other loans are amortized using the interest method. Loan-backed bonds and structured securities are amortized using the interest method and significant changes in estimated cash flows from the original purchase assumptions are accounted for using the retrospective method.

Cash Equivalents

Cash equivalents, consisting of money market accounts and United States (“U.S.”) Treasury bills with original maturities of three months or less, are stated at cost, which approximates fair value.

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

Accounts Receivable

Amounts included in accounts receivable represent premiums as well as finance charges, the majority of which are both billed on a monthly installment basis. Accounts receivable are stated net of allowances for doubtful accounts. At December 31, 2006 and 2005, these allowances were $153 and $220, respectively. Uncollected premium balances over ninety days past due are written off.

Deferred Policy Acquisition Costs

Amounts that vary with and are primarily related to acquiring new and renewal business, principally commissions and premium taxes, are deferred and amortized ratably over the effective period of the policies. All other acquisition expenses are expensed as incurred. Deferred policy acquisition costs are reviewed to determine if they are recoverable from future income, and if not, are charged to expense. Future investment income attributable to related premiums is taken into account in measuring the recoverability of the carrying value of this asset. Amortization of acquisition costs in the amount of $97,274, $93,515 and $88,425 were charged to underwriting expenses for the years ended December 31, 2006, 2005 and 2004, respectively.

Equity and Deposits in Pools

Equity and deposits in pools represents the net receivable cash amounts due from the residual market mechanisms, Commonwealth Automobile Reinsurers (“CAR”), for automobile and Massachusetts Property Insurance Underwriting Association (“FAIR Plan”), for homeowner insurance in Massachusetts. See Note 8 for a discussion of the Company’s accounting for amounts assumed from residual markets.

Equipment and Leasehold Improvements

Purchases of equipment and leasehold improvements are carried at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred; improvements are capitalized.

Methods of depreciation and useful lives by asset category are as follows:

	Life	Depreciation Method
Automobiles	3 years	Straight-line
Data processing equipment	3-5 years	Double-declining balance
Equipment	5 years	Straight-line
Furniture and fixtures	7 years	Straight-line
Leasehold improvements	Over lease term	Straight-line

Losses and Loss Adjustment Expenses

Liabilities for losses and loss adjustment expenses (“LAE”) include case basis estimates for open claims reported prior to year-end and estimates of unreported claims and claim adjustment expenses. The estimates are continually reviewed and modified to reflect current conditions, and any resulting adjustments are reflected in current operating results. Adjustments for anticipated salvage and subrogation are recorded on incurred and reported and incurred but not reported losses.

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

Premiums and Unearned Premiums

Premiums are earned over the terms of the respective policies, which are generally one year. Unearned premiums represent the portion of premiums written applicable to the unexpired terms of the policies.

Ceded premiums are charged to income over the terms of the respective policies and the applicable term of the reinsurance contracts with third party reinsurers. Ceded unearned premiums represent the unexpired portion of premiums ceded to CAR and other reinsurers.

Premiums received in advance of the policy effective date are recorded as a liability and not recognized as income until earned. Such amounts are included in accounts payable and accrued liabilities and totaled $17,335 and $20,437 at December 31, 2006 and 2005, respectively.

Reinsurance

Liabilities for unearned premiums and unpaid losses are stated before deductions for ceded reinsurance. The ceded amounts are carried as receivables. Earned premiums are stated net of deductions for ceded reinsurance.

The Company, as primary insurer, will be required to pay losses in their entirety in the event that the reinsurers are unable to discharge their obligations under the reinsurance agreements.

Promissory Notes Received From Management

In connection with the Acquisition, the Company obtained promissory notes from the executive management team to finance management’s purchase of the Company’s common stock, including the restricted stock purchased by management.

In accordance with the provisions of the Financial Accounting Standards Board’s Emerging Issues Task Force (“EITF”) No. 85-1, “Classifying Notes Received for Capital Stock,” all outstanding principal and accrued interest related to these notes are recorded as contra-equity in the consolidated financial statements.

See Note 10 for terms of promissory notes received from management.

Finance and Other Service Income

Finance and other service income includes revenues from premium installment charges, which are recognized when earned.

Income Taxes

The Company and its subsidiaries file a consolidated U.S. federal income tax return. The method of allocation among members of the consolidated group is subject to a written agreement approved by the Board. The consolidated tax liability is allocated on the basis of the members’ proportionate contribution to consolidated taxable income.

Deferred income taxes are generally recognized when assets and liabilities have different values for financial statement and tax reporting purposes, and for other temporary taxable and deductible differences

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

as defined by Statement of Financial Accounting Standards (“FAS”) No. 109, “Accounting for Income Taxes”. A valuation allowance is established where management has assessed that it is more likely than not that the Company will not be able to utilize the full deferred tax asset.

Earnings per Weighted Average Common Share

Basic earnings per weighted average common share (“EPS”) are calculated by dividing net income by the weighted average number of basic common shares outstanding during the period. Diluted EPS are calculated by dividing net income by the weighted average number of basic common shares outstanding and the net effect of potentially dilutive common shares . At December 31, 2006, 2005 and 2004, the Company’s potentially dilutive instruments were common shares under options of 373,996, 496,086 and 711,410, respectively, and common shares under restriction of 118,790, 94,417 and 70,271, respectively.

	For the Years Ended December 31,
	2006		2005		2004
Earnings per weighted average common share:
Basic	$	7.07	$	6.11	$	2.94
Diluted	$	6.99	$	5.97	$	2.90
Weighted average number of common shares outstanding:
Basic	15,838,335		15,578,039		15,315,877
Effect of dilutive securities
Stock options	126,235		351,681		196,655
Restricted stock	41,343		24,017		14,360
Weighted average number of common shares outstanding:
Diluted	16,005,913		15,953,737		15,526,892

Diluted EPS excludes stock options with exercise prices and exercise tax benefits greater than the average market price of the Company’s common stock during the period because their inclusion would be anti-dilutive. There were 186,225 anti-dilutive stock options for the year ended December 31, 2006 and no anti-dilutive stock options for the years ended December 31, 2005 and 2004.

Share-Based Compensation

Prior to January 1, 2006, the Company accounted for share-based compensation to employees and non-employee directors in accordance with the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, as allowed by FAS 123, “Accounting for Stock-Based Compensation” and as amended by FAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”. Accordingly, no compensation cost related to stock options was reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The Company historically reported pro forma results under the disclosure-only provisions of FAS 123.

Effective January 1, 2006, the Company adopted FAS 123R (revised 2004), “Share-Based Payment,” which requires the Company to measure and recognize the cost of employee services received in exchange for an award of equity instruments. Under the provisions of FAS 123R, share-based compensation cost is

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

measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant).

As permitted by FAS 123R, the Company elected the modified prospective transition method. Under the modified prospective transition method, (i) compensation expense for share-based awards granted prior to January 1, 2006 is recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FAS 123 as adjusted to incorporate forfeiture assumptions under FAS 123R, and (ii) compensation expense for all share-based awards granted subsequent to December 31, 2005 is based on the grant date fair value estimated in accordance with the provisions of FAS 123R. Results for periods prior to January 1, 2006 have not been restated.

See Note 5 for further information regarding share-based compensation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Financial Instruments

In the normal course of business, the Company enters into transactions involving various types of financial instruments, including investments in fixed maturities and equity securities. Investment transactions have credit exposure to the extent that a counter party may default on an obligation to the Company. Credit risk is a consequence of carrying, trading and investing in securities. To manage credit risk, the Company focuses on higher quality fixed income securities, reviews the credit strength of all companies in which it invests, limits its exposure in any one investment and monitors the portfolio quality, taking into account credit ratings assigned by recognized statistical rating organizations.

Statutory Accounting Practices

The Company’s insurance subsidiaries, domiciled in the Commonwealth of Massachusetts, prepare statutory financial statements in accordance with the accounting practices prescribed or permitted by the Commonwealth of Massachusetts Division of Insurance (“the Division”). Prescribed statutory accounting practices are those practices that are incorporated directly or by reference in state laws, regulations, and general administrative rules applicable to all insurance enterprises domiciled in a particular state. Permitted statutory accounting practices include practices not prescribed by the Division, but allowed by the Division. See Note 12 for further information.

Recent Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140” (“FAS 155”). This statement permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. This statement also adds clarity regarding interest-only strips and principal-only strips that are not subject

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

to the requirements of Statement No. 133, and requires companies to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments containing an embedded derivative that requires bifurcation. FAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not believe FAS 155 will have a material impact on its consolidated results of operations or financial position.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement 109” (“FIN 48”). This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not believe the adoption of FIN 48 will have a material impact on its consolidated results of operations or financial position.

Reclassifications

Prior period amounts have been reclassified to conform to the current year presentation.

Segments

The Company comprises one business segment: property and casualty insurance operations. Management organizes the business around private passenger automobile insurance in Massachusetts sold exclusively through independent agents and offers other personal and commercial insurance as complementary products. In accordance with FAS 131, “Disclosures About Segments of an Enterprise and Related Information”, the financial information of the segment is presented consistent with the way results are regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

3. Investments

December 31, 2006

Gross

Estimated

Amortized

Unrealized

Fair

Cost

Gains

Losses

Value

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

185,390

929

(2,883

)

183,436

Obligations of states and political subdivisions

429,888

6,485

(2,014

)

434,359

Asset-backed securities(1)

180,294

339

(2,022

)

178,611

Corporate and other securities

140,962

853

(1,941

)

139,874

Subtotal, fixed maturity securities

936,534

8,606

(8,860

)

936,280

Equity securities

4,038

287

—

4,325

Totals

940,572

8,893

(8,860

)

940,605

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

	December 31, 2005
			Gross			Gross				Estimated
	Amortized		Unrealized			Unrealized				Fair
	Cost		Gains			Losses				Value
U.S. Treasury securities and obligations of U.S. Government agencies(1)	$	127,764		$	142		$	(2,686	)	$	125,220
Obligations of states and political subdivisions	321,250			4,385			(3,026		)	322,609
Asset-backed securities(1)	124,531			293			(1,349		)	123,475
Corporate and other securities	140,385			2,309			(1,460		)	141,234
Subtotal, fixed maturity securities	713,930			7,129			(8,521		)	712,538
Equity securities	1,895			110			—			2,005
Totals	$	715,825		$	7,239		$	(8,521	)	$	714,543

The amortized cost and the estimated fair value of fixed maturity securities, by maturity, at December 31, 2006, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	December 31, 2006
	Amortized Cost		Estimated Fair Value
Due in one year or less	$	24,777	$	24,589
Due after one year through five years	168,560		167,133
Due after five years through ten years	160,460		160,940
Due after ten years through twenty years	214,737		218,783
Due after twenty years	12,312		12,685
Asset-backed securities	355,688		352,150
Totals	$	936,534	$	936,280

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

The gross realized gains (losses) on sales of fixed maturities and equity securities were as follows for the periods indicated:

	For the Years Ended December 31,
	2006				2005				2004
Gross realized gains
Fixed maturity securities		$	1,058			478				1,535
Equity securities		31				12				2
Gross realized losses
Fixed maturity securities		(722		)		(185		)		(263		)
Equity securities		(9		)		0				0
Net realized gains on investments		$	358			$	305			$	1,274

Proceeds from fixed maturities maturing were $14,300, $11,125, and $7,520 for the years ended December 31, 2006, 2005, and 2004, respectively.

The following tables illustrate the gross unrealized losses included in the Company’s investment portfolio and the fair value of those securities aggregated by investment category. The tables also illustrate the length of time that they have been in a continuous unrealized loss position.

As of December 31, 2006

Less than 12 Months

12 Months or More

Total

Estimated

Unrealized

Estimated

Unrealized

Estimated

Unrealized

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

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

5,850

104,796

2,801

110,646

2,883

Obligations of states and political subdivisions

12,423

107,904

1,971

120,327

2,014

Asset-backed securities

62,362

537

74,521

1,485

136,883

2,022

Corporate and other securities

46,132

778

57,118

1,163

103,250

1,941

Total temporarily impaired securities

126,767

1,440

344,339

7,420

471,106

8,860

	As of December 31, 2005
	Less than 12 Months					12 Months or More					Total
	Estimated		Unrealized			Estimated		Unrealized			Estimated		Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
U.S. Treasury securities and obligations of U.S. Government agencies	$	52,119		$	581	$	65,746		$	2,105	$	117,865		$	2,686
Obligations of states and political subdivisions	53,872			872		97,361			2,154		151,233			3,026
Asset-backed securities	54,816			526		37,560			823		92,376			1,349
Corporate and other securities	38,830			603		31,707			857		70,537			1,460
Total temporarily impaired securities	$	199,637		$	2,582	$	232,374		$	5,939	$	432,011		$	8,521

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

The Company’s investment portfolio included 222 securities in an unrealized loss position at December 31, 2006. The Company’s methodology of assessing other-than-temporary impairment is based upon analysis of each security as of the balance sheet date and considers various factors including the length of time and the extent to which fair value has been less than the cost, the financial condition and the near term prospects of the issuer, whether the debtor is current on its contractually obligated interest and principal payments, and the Company’s intent to hold the investment for a period of time sufficient to allow for recovery of its costs.

As of December 31, the Company’s fixed income securities portfolio was comprised entirely of investment grade securities as defined by Moody’s Investor Services, Inc., Standard and Poor’s, or the Securities Valuation Office of the National Association of Insurance Commissioners. The unrealized losses recorded on the fixed maturity investment portfolio at December 31, 2006, resulted from fluctuations in market interest rates as opposed to fundamental changes in the credit quality of the issuers of such securities. Therefore, these decreases in values are viewed as being temporary as the Company has the intent and ability to retain such investments for a period of time sufficient to allow for recovery in market value.

During the years ended December 31, 2006, 2005 and 2004, there was no significant deterioration in the credit quality of any of the Company’s holdings and no other-than-temporary impairment charges were recorded related to the Company’s portfolio of investment securities.

Net Investment Income

The components of net investment income were as follows:

	For the Years Ended December 31,
	2006		2005		2004
Interest and dividends on fixed maturities	$	38,875	$	28,201	$	27,161
Dividends on equity securities	163		44		23
Interest on cash and cash equivalents	2,466		4,400		1,078
Total investment income	41,504		32,645		28,262
Investment expenses	1,211		1,072		1,003
Net investment income	$	40,293	$	31,573	$	27,259

4. Equipment and Leasehold Improvements

At December 31, 2006 and 2005, the Company held equipment and leasehold improvements with a carrying value of $1,196 and $1,041, which is net of accumulated depreciation of $2,638 and $1,881, respectively. Depreciation and amortization expense for the years ended December 31, 2006, 2005 and 2004 was $850, $699 and $767, respectively.

5. Employee Benefit Plans

The Safety Insurance 401(k) Retirement Plan

The Company sponsors the Safety Insurance Company 401(k) qualified defined contribution retirement plan (the “Retirement Plan”). The Retirement Plan is available to all eligible employees of the Company. An employee must be 21 years of age to be eligible to participate in the Retirement Plan, and is

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

allowed to contribute on a pre-tax basis up to the maximum allowed under federal law. The Retirement Plan is administered by the Company and is subject to the provisions of the Employee Retirement Income Security Act of 1974. At the close of each Retirement Plan year, the Company makes a matching contribution equal to 100% of the amount each participant contributed during the plan year from their total pay, up to a maximum amount of 8% of the participant’s base salary, to those participants who have contributed to the Retirement Plan and were employed on the last day of the Retirement Plan year. Compensation expense related to the Retirement Plan was $1,661, $1,066 and $1,074 for the years ended December 31, 2006, 2005 and 2004, respectively.

Management Omnibus Incentive Plan

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

On March 10, 2006, the Board of Directors (“Board”) of the Company approved amendments to the Incentive Plan, subject to shareholder approval, to (i) increase the number of shares of common stock available for issuance by 1,250,000 shares, (ii) remove obsolete provisions, and (iii) make other non-material changes. A total of 1,250,000 shares of common stock had previously been authorized for issuance under the Incentive Plan. The Incentive Plan, as amended, was approved by the shareholders at the 2006 Annual Meeting of Shareholders which was held on May 19, 2006. Under the Incentive Plan, as amended, the maximum number of shares of common stock with respect to which awards may be granted is 2,500,000. At December 31, 2006, there were 1,289,991 shares available for future grant. The Board and the Compensation Committee intend to issue more awards under the Incentive Plan in the future.

Grants made under the Incentive Plan are as follows:

Exercise

Type of

Number of

Price(1) or

Equity

Awards

Fair Value(2)

Awarded

Effective Date

Granted

per Share

Vesting Terms

Expiration Date

NQSOs

November 27, 2002

379,000

12.00(1)

5 years, 20% annually

November 27, 2012

NQSOs

February 20, 2003

99,000

13.30(1)

5 years, 20% annually

February 20, 2013

NQSOs

March 31, 2003

292,000

13.03(1)

3 years, 30%-30%-40%

March 31, 2013

NQSOs

August 21, 2003

10,000

15.89(1)

5 years, 20% annually

August 21, 2013

NQSOs

March 25, 2004

111,000

18.50(1)

5 years, 20% annually

March 25, 2014

March 25, 2004

70,271

18.50(2)

3 years, 30%-30%-40%

N/A

NQSOs

August 30, 2004

10,000

21.40(1)

5 years, 20% annually

August 30, 2014

NQSOs

March 16, 2005

78,000

35.23(1)

5 years, 20% annually

March 16, 2015

March 16, 2005

56,770

35.23(2)

3 years, 30%-30%-40%

N/A

March 16, 2005

4,000

35.23(2)

No vesting period(3)

N/A

NQSOs

March 10, 2006

126,225

42.85(1)

5 years, 20% annually

March 10, 2016

March 10, 2006

58,342

42.85(2)

3 years, 30%-30%-40%

N/A

March 10, 2006

4,000

42.85(2)

No vesting period(3)

N/A

(1) The exercise price of the stock option grant is equal to the closing price of the Company’s common stock on the grant effective date.

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

(2) The fair value of the restricted stock grant is equal to the closing price of the Company’s common stock on the grant effective date.

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

Stock Options

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

	2006					2005					2004
	Shares		Weighted			Shares		Weighted			Shares		Weighted
	Under		Average			Under		Average			Under		Average
	Option		Exercise Price			Option		Exercise Price			Option		Exercise Price
Outstanding at beginning of year	496,086			$	17.04	711,410			$	13.60	771,000			$	12.59
Granted during the year	126,225			42.85		78,000			35.23		121,000			18.74
Forfeited during the year	(2,600	)		27.07		(54,656	)		16.38		(10,800	)		16.19
Exercised during the year	(245,715	)		14.23		(238,668	)		12.87		(169,790	)		12.52
Outstanding at end of year	373,996			27.53		496,086			17.04		711,410			13.60
Exercisable at end of year	26,275			$	17.82	49,640			$	13.98	134,690			$	12.62

At December 31, 2006, the aggregate intrinsic value of outstanding shares under option was $8,668 with a weighted average remaining contractual term of 7.7 years. At December 31, 2006, the aggregate intrinsic value of outstanding shares under option and exercisable was $864 with a weighted average remaining contractual term of 6.7 years. Aggregate intrinsic value represents the total pretax intrinsic value, based upon the Company’s closing stock price of $50.71 on December 31, 2006, which would have been received by the option holders had all option holders exercised their options as of that date. The range of exercise prices on stock options outstanding under the Incentive Plan was $12.00 to $42.85 at December 31, 2006, $12.00 to $35.23 at December 31, 2005 and $12.00 to $21.40 at December 31, 2004. The weighted average grant-date fair value of options granted during the twelve months ended December 31, 2006, 2005 and 2004 was estimated at $16.05, $12.62 and $5.13, respectively. The total intrinsic value of options exercised during the twelve months ended December 31, 2006, 2005 and 2004 was $8,963, $6,563 and $3,193, respectively.

Cash received from options exercised was $3,497, $3,072, and $2,126 for the years ended December 31, 2006, 2005, and 2004, respectively.

A summary of the status of non-vested options as of December 31, 2006, is presented below:

				Weighted Average
	Number of			Grant Date
	Shares			Exercise Price
Non-vested at January 1, 2006		446,446			$	17.39
Granted during the year		126,225			42.85
Vested during the year		(222,350	)		14.71
Forfeited during the year		(2,600	)		27.07
Non-vested at December 31, 2006		347,721			$	28.27

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

As of December 31, 2006, there was $2,265 of unrecognized compensation expense related to non-vested option awards that is expected to be recognized over a weighted average period of 3.4 years.

As a result of adopting FAS 123R on January 1, 2006, the Company’s net income for the twelve months ended December 31, 2006 was lowered by $554, net of income tax benefit of $299. The impact on basic and diluted EPS for the twelve months ended December 31, 2006 was a reduction of $0.04 and $0.03 per share.

FAS 123R requires the disclosure of pro forma information for periods prior to adoption. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FAS 123 to these stock options.

	For the Years Ended December 31,
	2005				2004
Net income, as reported		$	95,182			$	44,990
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(537		)		(457		)
Pro forma net income		$	94,645			$	44,533
Earnings per weighted average share:
Basic—as reported		$	6.11			$	2.94
Basic—pro forma		$	6.08			$	2.91
Diluted—as reported		$	5.97			$	2.90
Diluted—proforma		$	5.95			$	2.90

The fair value of stock options used to compute both pro forma and actual net income and earnings per share disclosures for the years ended December 31, 2006, 2005 and 2004 is the estimated fair value at grant date using the Black-Scholes option-pricing model with the following assumptions:

	For the Years Ended December 31,
	2006	2005	2004
Expected dividend yield	1.36% - 2.52%	1.36% - 2.52%	1.87% - 2.52%
Expected volatility	0.20 - 0.36	0.20 - 0.31	0.20 - 0.31
Risk-free interest rate	3.23% - 4.76%	3.23% - 4.35%	3.23% - 4.07%
Expected holding period	6.5-7 years	7 years	7 years

Expected dividend yield is the Company’s dividend yield on the measurement date and is based on the assumption that the current yield will continue in the future. Expected volatility is based on historical volatility of the Company’s common stock as well as the volatility of a peer group of property and casualty insurers measured for a period equal to the expected holding period of the option. The risk-free interest rate is based upon the yield on the measurement date of a zero-coupon U.S. Treasury bond with a maturity period equal to the expected holding period of the option. The expected holding period is based upon the simplified method provided in SEC Staff Accounting Bulletin No. 107 “Share-Based Payment”, which utilizes the mid-points between the vesting dates and the expiration date of the option award to calculate the overall expected term.

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

Restricted Stock

Restricted stock awarded to employees in the form of unvested shares is recorded at the market value of the Company’s common stock on the grant date and amortized ratably as expense over the requisite service period.

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

	2006						2005						2004
	Shares			Weighted			Shares			Weighted			Shares		Weighted
	Under			Average			Under			Average			Under		Average
	Restriction			Fair Value			Restriction			Fair Value			Restriction		Fair Value
Outstanding at beginning of year		98,417			$	27.77		70,271			$	18.50		—		$	—
Granted during the year		62,342			42.85			60,770			35.23			70,271		18.50
Forfeited during the year		—			—			(11,543	)		27.55			—		—
Vested and unrestricted during the year		(33,969	)		25.97			(21,081	)		18.50			—		—
Outstanding at end of year		126,790			$	35.67		98,417			$	27.77		70,271		$	18.50

As of December 31, 2006, there was $2,829 of unrecognized compensation expense related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 1.4 years. The total fair value of the shares that were vested and unrestricted during the twelve months ended December 31, 2006 was $882. For the years ended December 31, 2006, 2005 and 2004, the Company recorded compensation expense related to restricted stock of $1,146, $586 and $195 net of income tax benefits of $617, $316 and $105, respectively.

6. Commitments and Contingencies

Lease Commitments

The Company has various noncancelable long-term operating leases. The approximate minimum annual rental payments due under these lease agreements as of December 31, 2006 are as follows:

2007	$	3,073
2008	3,128
2009	135
2010	60
2011 and after	53
Total minimum lease payments	$	6,449

Certain lease agreements contain renewal options and, in addition to the minimum annual rentals, generally provide for payment of a share of the real estate taxes and operating expenses in excess of a base amount. Rental expense was $3,147, $3,042 and $2,826 for the years ended December 31, 2006, 2005 and 2004, respectively. All leases expire prior to 2013. The Company expects that in the normal course of business, leases that expire will be renewed.

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

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. In 2006, the Company received notice of assessments from the Insolvency Fund amounting to $464 which it expensed for the year ended December 31, 2006. In 2005 the Company received a refund of prior years’ assessments from the Insolvency Fund of $50, which was credited for the year ended December 31, 2005. In 2004, the Company received notice of assessments from the Insolvency Fund amounting to $2,538 which it expensed for the year ended December 31, 2004.

It is anticipated that there will be additional assessments from time to time relating to various insolvencies. Although the timing and amounts of any future assessments are not known, based upon existing knowledge, management’s opinion is that such future assessments will not have a material effect upon the financial position of the Company.

7. Debt

Secured Revolving Credit Facility

The Company has a $30,000 revolving credit facility with Citizens Bank of Massachusetts which expires on June 17, 2008. Loans under the credit facility bear interest at the Company’s option at either (i) the LIBOR rate plus 1.5% per annum or (ii) the higher of Citizens Bank of Massachusetts’ prime rate or 0.5% above the federal funds rate plus 1.5% per annum. Interest only is payable prior to maturity. The obligations of the Company under the credit facility are secured by pledges of the Company’s assets and the capital stock of its operating subsidiaries. The credit facility is guaranteed by the non-insurance company subsidiaries of the Company. The credit facility contains covenants including requirements to maintain minimum risk based capital ratios and statutory surplus of Safety Insurance Company as well as limitations or restrictions on indebtedness, liens, dividends, and other matters. As of December 31, 2006, the Company was in compliance with all such covenants.

The Company paid down the balance of $19,956 on December 8, 2005, and had no amounts outstanding on its credit facility at December 31, 2006, and at December 31, 2005. The credit facility commitment fee included in interest expenses was computed at a rate of 0.25% on the $30,000 commitment at December 31, 2006 and December 31, 2005.

Capital Lease Obligation

During 2003, the Company entered in to a three-year term lease agreement to finance the acquisition of new equipment. Minimum payments due under this capital lease obligation as of December 31, 2006 are $39.

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

The Company incurred interest expense of $86, $948 and $672 for the years ended December 31, 2006, 2005 and 2004, respectively, related to all current outstanding obligations during these periods.

8. Reinsurance

The Company cedes insurance to CAR and to other reinsurers. The Company has a property catastrophe excess of loss agreement and a casualty excess of loss agreement that qualify as reinsurance treaties and are designed to protect against large or unusual loss and LAE activity. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.

The Company is subject to concentration of credit risk with respect to reinsurance ceded to CAR. At December 31, 2006 and 2005, respectively, reinsurance receivables on paid and unpaid loss and LAE with a carrying value of $77,246 and $84,099 and ceded unearned premiums of $29,937 and $32,186 were associated with CAR. The Company assumes a proportionate share of the obligations from CAR. The Company makes an estimate of its share of assumed activity from the most recent quarter reported by CAR and records adjustments to the reported activity to reflect its anticipated final assumed obligations. The Company’s participation in CAR resulted in assumed net losses of $4,753, $5,771 and $39,038 for the years ended December 31, 2006, 2005 and 2004, respectively.

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

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

	For the Years Ended December 31,
	2006			2005			2004
Written Premiums
Direct	$	629,511		$	649,113		$	628,295
Assumed	68,934			66,772			86,505
Ceded	(77,537		)	(83,049		)	(95,877		)
Net written premiums	$	620,908		$	632,836		$	618,923
Premiums Earned
Direct	$	636,953		$	638,142		$	599,608
Assumed	69,650			73,966			78,634
Ceded	(81,670		)	(89,277		)	(85,950		)
Net premiums earned	$	624,933		$	622,831		$	592,292
Loss and LAE
Direct	$	368,933		$	411,184		$	434,053
Assumed	52,247			57,546			94,136
Ceded	(67,274		)	(83,137		)	(103,128		)
Net loss and LAE	$	353,906		$	385,593		$	425,061

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

9. Loss and Loss Adjustment Expense Reserves

The following table sets forth a reconciliation of beginning and ending reserves for losses and LAE as shown in the Company’s consolidated financial statements for the years indicated:

	For the Years Ended December 31,
	2006			2005			2004
Reserves for losses and LAE, beginning of year	$	450,716		$	450,897		$	383,551
Less reinsurance recoverable on unpaid losses and LAE	(80,550		)	(84,167		)	(73,539		)
Net reserves for losses and LAE, beginning of year	370,166			366,730			310,012
Incurred losses and LAE related to:
Current year	396,653			425,213			431,839
Prior years	(42,747		)	(39,620		)	(6,778		)
Total incurred losses and LAE	353,906			385,593			425,061
Paid losses and LAE related to:
Current year	219,879			237,557			217,989
Prior years	133,213			144,600			150,354
Total paid losses and LAE	353,092			382,157			368,343
Net reserves for losses and LAE, end of year	370,980			370,166			366,730
Plus reinsurance recoverables on unpaid losses and LAE	78,464			80,550			84,167
Reserves for losses and LAE, end of year	$	449,444		$	450,716		$	450,897

At the end of each period, the reserves were re-estimated for all prior accident years. The Company’s prior year reserves decreased by $42,747, $39,620, and $6,778 for the years ended December 31, 2006, 2005, and 2004, respectively. The decrease in prior year reserves during 2006 resulted from re-estimations of prior years ultimate loss and LAE liabilities and is primarily composed of reductions of $23,945 in the Company’s retained automobile reserves, $14,006 in CAR assumed reserves, and $3,430 in the Company’s retained homeowners reserves, and $686 in FAIR Plan assumed reserves. The decrease in prior year reserves during 2005 resulted from re-estimations of prior years ultimate loss and LAE liabilites and is composed of reductions of $22,162 in CAR assumed reserves, $14,600 in the Company’s retained automobile reserves, $1,872 in FAIR Plan assumed reserves and $986 in the Company’s retained homeowners reserves. The decrease in prior year reserves during 2004 resulted from re-estimations of prior years ultimate loss and LAE liabilities and is composed of reductions of $6,854 in CAR assumed reserves, $2,523 in the Company’s retained homeowner reserves, $329 in FAIR Plan assumed reserves, and an increase of $2,928 in the Company’s retained automobile reserves for 2004.

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

10. Related Party Transactions

In connection with the Acquisition, each member of the executive management team issued a recourse promissory note to, and entered into a pledge agreement with the Company. Pursuant to the notes, the Company loaned management an aggregate of $695 in order to purchase common stock in connection with the Acquisition and the Restricted Stock Plan. Pursuant to pledge agreements, the

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

management team pledged the common stock back to the Company as security for the loans made under the promissory notes. The notes bore interest at a rate of 5% annually and were due and payable on the earlier of December 31, 2011 or 90 days after any management team member ceases to be an employee of the Company. Each member could prepay his note at any time without penalty. At December 31, 2003, the loans were carried in the financial statements at $34, which represents the outstanding principal and accrued interest on the notes. During 2004 the Company received $34 representing prepayments of all outstanding loan principal and accrued interest through the dates of final payments. Such loans had been recorded as contra-equity in accordance with the accounting policy described in Note 2.

11. Income Taxes

Provision for income taxes has been calculated in accordance with the provision of Statement No. 109. A summary of the income tax expense in the Consolidated Statements of Income is shown below:

	For the Years Ended December 31,
	2006		2005			2004
Current Income Taxes:
Federal	$	51,760	$	43,366		$	22,505
State	7		2			2
	51,767		43,368			22,507
Deferred Income Taxes:
Federal	792		(303		)	(2,702		)
State	—		—			837
	792		(303		)	(1,865		)
Total income tax expense	$	52,559	$	43,065		$	20,642

The income tax expense attributable to the consolidated results of operations is different from the amounts determined by multiplying income before federal income taxes by the statutory federal income tax rate. The sources of the difference and the tax effects of each were as follows:

	For the Years Ended December 31,
	2006			2005			2004
Federal income tax expense, at statutory rate	$	57,575		$	48,387		$	22,971
Tax-exempt investment income, net	(5,148		)	(4,013		)	(3,424		)
State taxes, net	5			—			544
Changes in tax estimates	—			(1,161		)	85
Other, net	127			(148		)	466
Total income tax expense	$	52,559		$	43,065		$	20,642

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

The deferred income tax asset (liability) represents the tax effects of temporary differences attributable to the Company’s consolidated federal tax return group. Its components were as follows:

	December 31,
	2006			2005
Deferred tax assets:
Discounting of loss reserves	$	9,201		$	9,803
Discounting of unearned premium reserve	21,319			21,715
Bad debt allowance	297			322
Depreciation	749			716
Employee benefits	2,831			1,515
Transaction related costs	—			174
State loss carryforwards	2,543			4,060
Net unrealized losses on investments	—			449
Other	636			681
Total deferred tax assets before valuation allowance	37,576			39,435
Valuation allowance for deferred tax assets	(3,178		)	(4,742		)
Total deferred tax assets, net of valuation allowance	34,398			34,693
Deferred tax liabilities:
Deferred acquisition costs	(16,591		)	(15,918		)
Investments	(638		)	(655		)
Net unrealized gains on investments	(11		)	—
Other	(290		)	—
Total deferred tax liabilities	(17,530		)	(16,573		)
Net deferred tax asset	$	16,868		$	18,120

The Company believes, based upon consideration of objective and verifiable evidence, including its recent earnings history and its future expectations, that the Company’s taxable income in future years will be sufficient to realize all federal deferred tax assets. A valuation allowance of $3,178 and $4,742 was established against state deferred tax assets at December 31, 2006 and 2005, respectively. This valuation allowance is based upon management’s assessment that it is more likely than not that the Company will not be able to utilize these state deferred tax assets.

During the year ended December 31, 2005, an examination of the Company’s federal income tax returns for the tax periods ended December 31, 2003, 2002, and 2001 by the Internal Revenue Service (“IRS”) was completed. The Company recorded a $1,616 tax benefit representing a reduction in federal income tax reserves for tax years 2001 through 2003, resulting from a settlement reached with the IRS in August 2005. Of this total tax benefit, $455 was recorded as an increase to additional paid-in capital and $1,161 was recorded as a reduction to income tax expense for the year ended December 31, 2005. The Company is not currently under examination by the IRS.

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

12. Statutory Net Income and Surplus

Statutory Accounting Practices

The Company’s insurance company subsidiaries, domiciled in the Commonwealth of Massachusetts, prepare statutory financial statements in accordance with the accounting practices prescribed or permitted by the Division. Statutory net income of the Company’s insurance company subsidiaries was $116,073, $97,337 and $44,575 for the years ended December 31, 2006, 2005 and 2004, respectively. Statutory capital and surplus of the Company’s insurance subsidiaries was $457,505 and $350,833 at December 31, 2006 and 2005, respectively.

Dividends

The Company’s Insurance Subsidiaries are subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid to their parent without prior approval of the Commonwealth of Massachusetts Commissioner of Insurance (the “Commissioner”). Massachusetts statute limits the dividends an insurer may pay in any twelve month period, without the prior permission of the Commissioner, to the greater of (i) 10% of the insurer’s surplus as of the preceding December 31 or (ii) the insurer’s net income for the twelve-month period ending the preceding December 31, in each case determined in accordance with statutory accounting practices. The Company’s Insurance Subsidiaries may not declare an “extraordinary dividend” (defined as any dividend or distribution that, together with other distributions made within the preceding twelve months, exceeds the limits established by Massachusetts statute) until thirty days after the Commissioner has received notice of the intended dividend and has not objected. As historically administered by the Commissioner, this provision requires the Commissioner’s prior approval of an extraordinary dividend. Under Massachusetts law, an insurer may pay cash dividends only from its unassigned funds, also known as earned surplus, and the insurer’s remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. At year-end 2006, the statutory surplus of Safety Insurance was $457,505 and its net income for 2006 was $110,075. As a result, a maximum of $110,075 is available in 2007 for such dividends without prior approval of the Commissioner.

13. Fair Value of Financial Instruments

The Company uses various financial instruments in the normal course of its business. Certain insurance contracts are excluded by Statement of Financial Accounting Standards No. 107, “Disclosures about Fair Value of Financial Instruments,” and, therefore, are not included in the amounts discussed.

At December 31, 2006 and 2005, investments in fixed maturities and equity securities had a fair value, which equaled carrying value, of $940,605 and $714,543, respectively. There were no investments in fixed maturities and equity securities for which a quoted market price or dealer price was not available at December 31, 2006 or 2005, respectively.

The carrying values of cash and cash equivalents and investment income accrued approximate fair value.

At December 31, 2006 and 2005 the Company had no amounts outstanding on its secured credit facility.

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

14. Quarterly Results of Operations

An unaudited summary of the Company’s 2006 and 2005 quarterly performance, and audited annual performance, is as follows:

Year ended December 31, 2006

First

Second

Third

Fourth

Total

Quarter

Year

Total revenue

170,941

169,628

170,829

169,314

680,712

Net income

30,802

29,138

29,105

22,896

111,941

Earnings per weighted average common share:

Basic

1.96

1.84

1.83

1.44

7.07

Diluted

1.94

1.81

1.42

6.99

Cash dividends paid per common share

0.18

0.25

0.86

	Year ended December 31, 2005
	First		Second		Third		Fourth		Total
	Quarter		Quarter		Quarter		Quarter		Year
Total revenue	$	168,251	$	168,133	$	169,840	$	165,233	$	671,457
Net income	14,502		23,246		30,475		26,959		95,182
Earnings per weighted average common share:
Basic	0.94		1.49		1.95		1.72		6.11
Diluted	0.92		1.46		1.92		1.69		5.97
Cash dividends paid per common share	0.12		0.12		0.18		0.18		0.60

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures are adequate and effective and ensure that all information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and that information required to be disclosed in such reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework , our management concluded that our internal control over financial reporting was effective as of December 31, 2006.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Changes in Internal Control over Financial Reporting

There have been no significant changes in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rules 13a-15 and 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

The following disclosures relate to actions taken by the Board of Directors of the Company (the “Board”), the Compensation Committee of the Board and the Board of Directors of Safety Insurance Company and would otherwise have been filed during the first fiscal quarter of 2007 on a Form 8-K under the heading “Item 1.01. Entry into a Material Definitive Agreement.”

· Upon recommendation from the Compensation Committee, on February 26, 2007, the Board approved the 2006 annual executive cash bonus pool in the total amount of $2,309 pusuant to the Annual Performance Incentive Plan. Of the total pool, the following amounts were allocated to the Company’s CEO and Named Executive Officers; David F. Brussard, $858; Daniel D. Loranger, $314; Edward N. Patrick, Jr., $276; William J. Begley, Jr., $238; David E. Krupa, $176.

· Upon recommendation from the Compensation Committee, on February 26, 2007, the Board approved executive long-term incentive awards to certain members of senior management pursuant to our 2002 Management Omnibus Incentive Plan, as Amended. The long-term incentive awards were granted in a total amount of $3,000 in the form of restricted stock, to be effective on and given a fair value of the closing price of our common stock on February 26, 2007. The restricted stock vests in three annual installments of 30% on February 26, 2008, 30% on February 26, 2009, and 40% on February 26, 2010. Of the total award, the following amounts were allocated to the Company’s CEO and Named Executive Officers; David F. Brussard, $1,200 worth of restricted stock; Daniel D. Loranger, $375 worth of restricted stock; Edward N. Patrick, Jr., $375 worth of restricted stock; William J. Begley, Jr., $375 worth of restricted stock; and David E. Krupa $163 worth of restricted stock. The form of restricted stock agreement that will be entered into is attached hereto as Exhibit 10.22.

• Upon recommendation from the Compensation Committee, on February 26, 2007, the Board approved executive deferred compensation awards pursuant to the Executive Incentive Compensation Plan in a total amount of $1,923. Of the total award, the following amounts were allocated to the Company’s CEO and Named Executive Officers; David F. Brussard, $750; Daniel D. Loranger, $309; Edward N. Patrick, Jr., $262; William J. Begley, Jr., $225; David E. Krupa, $140.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE

The information called for by Item 401 of Regulation S-K, regarding directors, executive officers, promoters and control persons, and not provided in Part I. Item 1, “Business”, will be contained in the Company’s Proxy Statement for its Annual Meeting of Shareholders, to be held on May, 18, 2007, in Boston, MA, which the Company intends to file with the U.S. Securities and Exchange Commission within 120 days after December 31, 2006, (the Company’s fiscal year end), and such information is incorporated herein by reference.

The information called for by Item 405 of Regulation S-K regarding compliance with Section 16(a) of the Exchange Act and disclosures relating to delinquent filers will be contained in the Company’s Proxy Statement for its Annual Meeting of Shareholders, to be held on May 18, 2007, in Boston, MA, which the Company intends to file with the U.S. Securities and Exchange Commission within 120 days after December 31, 2006, (the Company’s fiscal year end), and such information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information called for by Item 402 of Regulation S-K regarding Executive and Director compensation will be contained in the Company’s Proxy Statement for its Annual Meeting of Shareholders, to be held on May, 18, 2007, in Boston, MA, which the Company intends to file with the U.S. Securities and Exchange Commission within 120 days after December 31, 2006, (the Company’s fiscal year end), and such information is incorporated herein by reference.

The information called for by Items 407(e)(4) and (e)(5) of Regulation S-K regarding Corporate Governance will be contained in the Company’s Proxy Statement for its Annual Meeting of Shareholders, to be held on May, 18, 2007, in Boston, MA, which the Company intends to file with the U.S. Securities and Exchange Commission within 120 days after December 31, 2006, (the Company’s fiscal year end), and such information is incorporated herein by reference except for the Compensation Committee Report, which shall not be deemed to be “filed”.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information called for by Item 403 of Regulation S-K regarding Stock Ownership of Certain Beneficial Owners and Stock Ownership of Directors and Executive Officers will be contained in the Company’s Proxy Statement for its Annual Meeting of Shareholders, to be held on May, 18, 2007, in Boston, MA, which the Company intends to file with the U.S. Securities and Exchange Commission within 120 days after December 31, 2006, (the Company’s fiscal year end), and such information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information called for by Item 404 of Regulation S-K regarding Transactions with Related Persons, Promoters and Certain Control Persons will be contained in the Company’s Proxy Statement for its Annual Meeting of Shareholders, to be held on May, 18, 2007, in Boston, MA, which the Company intends to file with the U.S. Securities and Exchange Commission within 120 days after December 31, 2006, (the Company’s fiscal year end), and such information is incorporated herein by reference.

The information called for by Item 407(a) of Regulation S-K regarding Corporate Governance related to Director Independence will be contained in the Company’s Proxy Statement for its Annual Meeting of Shareholders, to be held on May, 18, 2007, in Boston, MA, which the Company intends to file with the U.S. Securities and Exchange Commission within 120 days after December 31, 2006, (the Company’s fiscal year end), and such information is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information called for by Item 9(e) of Schedule 14A regarding fees for services performed by the Company’s independent public accountants will be contained in the Company’s Proxy Statement for its Annual Meeting of Shareholders, to be held on May 18, 2007, in Boston, MA, which the Company intends to file with the U.S. Securities and Exchange Commission within 120 days after December 31, 2006, (the Company’s fiscal year end), and such information is incorporated herein by reference.

PART IV.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(a) The following documents are filed as a part of this report:

1. Financial Statements: The Consolidated Financial Statements for the year ended December 31, 2006 are contained herein as listed in the Index to Consolidated Financial Statements on page 70.

2. Financial Statement Schedules: The Financial Statement Schedules are contained herein as listed in the Index to Financial Statement Schedules on page 101.

3. Exhibits: The exhibits are contained herein as listed in the Index to Exhibits on page 110.

100

SAFETY INSURANCE GROUP, INC.

INDEX TO FINANCIAL STATEMENT SCHEDULES

			Page
	Schedules
I		Summary of Investments—Other than Investments in Related Parties	102
II		Condensed Financial Information of the Registrant	103
III		Supplementary Insurance Information	105
IV		Reinsurance	106
V		Valuation and Qualifying Accounts	107
VI		Supplemental Information Concerning Property and Casualty Insurance Operations	108

101

Safety Insurance Group, Inc.

Summary of Investments—Other than Investments in Related Parties

Schedule I

At December 31, 2006

(Dollars in thousands)

Amount at

which shown

in the Balance

Cost

Fair Value

Sheet

Fixed maturities:

Bonds:

U.S. government and government agencies and authorities

185,390

183,436

States, municipalities and political subdivisions

429,888

434,359

Corporate bonds

318,400

315,601

Redeemable preferred stocks

2,856

2,884

Total fixed maturities

936,534

936,280

Equity securities:

Common Stocks
Industrial, miscellaneous and all other

4,038

4,325

Total equity securities

4,038

4,325

Total investments

940,572

940,605

102

Safety Insurance Group, Inc.

Condensed Financial Information of the Registrant

Condensed Balance Sheets

Schedule II

(Dollars in thousands)

	December 31,			December 31,
	2006			2005
Assets
Investments in consolidated affiliates		$	499,371		$	389,469
Other		77			—
Total assets		$	499,448		$	389,469
Liabilities
Accounts payable and other liabilities		$	3,100		$	1,520
Total liabilities		3,100			1,520
Shareholders’ equity		496,348			387,949
Total liabilities and shareholders’ equity		$	499,448		$	389,469

Safety Insurance Group, Inc.

Condensed Financial Information of the Registrant

Condensed Statements of Income and Comprehensive Income

Schedule II

(Dollars in thousands)

	For the Years Ended December 31,
	2006			2005			2004
Revenues, net of income taxes	$	—		$	—		$	—
Expenses	1,742			2,007			1,542
Net loss	(1,742		)	(2,007		)	(1,542		)
Earnings from consolidated affiliates	113,683			97,189			46,532
Consolidated net income	111,941			95,182			44,990
Other net comprehensive gains (losses), net of taxes	854			(9,542		)	(3,941		)
Consolidated comprehensive net income	$	112,795		$	85,640		$	41,049

103

Safety Insurance Group, Inc.

Condensed Financial Information of the Registrant

Condensed Statements of Cash Flows

Schedule II

(Dollars in thousands)

	For the Years Ended December 31,
	2006			2005			2004
Consolidated net income	$	111,941		$	95,182		$	44,990
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed earnings in consolidated subsidiaries	(113,683		)	(97,189		)	(46,532		)
Amortization	2,616			903			301
Dividends received from consolidated subsidiaries	7,859			24,900			8,201
Changes in assets and liabilities:
Other assets	(77		)	2,070			(101		)
Accounts payable and accrued liabilities	1,580			427			222
Net cash provided by operating activities	10,236			26,293			7,081
Contribution to subsidiaries	—			—			(2,474		)
Net cash used for investing activities	—			—			(2,474		)
Payments on revolving credit facility	—			(19,956		)	—
Proceeds from exercise of stock options	3,497			3,072			2,126
Dividends paid	(13,733		)	(9,409		)	(6,767		)
Payments on promissory notes from management	—			—			34
Net cash used for financing activities	(10,236		)	(26,293		)	(4,607		)
Net increase (decrease) in cash and cash equivalents	—			—			—
Cash and cash equivalents, beginning of year	—			—			—
Cash and cash equivalents, end of year	$	—		$	—		$	—

104

Safety Insurance Group, Inc.

Supplementary Insurance Information

Schedule III

(Dollars in thousands)

Future Policy

Other

Benefits,

Amortization

Deferred

Benefits,

Policy

Claims,

of Deferred

Policy

Losses,

Claims and

Net

Losses, and

Policy

Other

Acquisition

Claims and Loss

Unearned

Benefits

Premium

Investment

Settlement

Acquisition

Operating

Premiums

Segment

Costs

Expenses

Premiums

Payable

Revenue

Income

Expenses

Costs

Expenses

Written

Years Ended:

December 31, 2006

$ 47,404

$ 449,444

$ 333,404

$ —

$ 624,933

$ 40,293

$ 353,906

$ 97,274

$ 64,946

$ 620,908

December 31, 2005

45,480

450,716

341,562

—

622,831

31,573

385,593

93,515

53,154

632,836

December 31, 2004

42,919

450,897

337,786

—

592,292

27,259

425,061

88,425

56,650

618,923

105

Safety Insurance Group, Inc.

Reinsurance

Schedule IV

(Dollars in thousands)

Percentage

Assumed from

of Amount

Gross

Ceded to Other

Other

Net

Assumed

Total Premiums

Amount

Companies

Amount

to Net

Years ended:

December 31, 2006

636,953

81,670

69,650

624,933

11.1

December 31, 2005

638,142

89,277

73,966

622,831

11.9

December 31, 2004

599,608

85,950

78,634

592,292

13.3

106

Safety Insurance Group, Inc.

Valuation and Qualifying Accounts

Schedule V

(Dollars in thousands)

	Balance at			Charged to Costs			Charged to						Balance at
Description	Beginning of Period			and Expenses			Other Accounts			Deductions(1)			End of Period
December 31, 2006
Allowance for Doubtful Accounts		$	220		$	806		$	—		$	873		$	153
December 31, 2005
Allowance for Doubtful Accounts		183			901			—			864			220
December 31, 2004
Allowance for Doubtful Accounts		484			442			—			743			183

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

107

Safety Insurance Group, Inc.
Supplemental Information Concerning Property and Casualty Insurance Operations
Schedule VI
(Dollars in thousands)

Reserves for

Claims and Claims

Amortization

Deferred

Unpaid Claims

Discount,

Adjustment Expenses

of Deferred

Paid Claims

Affiliations

Policy

and Claims

if any,

Net

Incurred Related to

Policy

and Claims

With

Acquisition

Adjustment

deducted in

Unearned

Earned

Investment

Current

Prior

Acquisition

Adjustment

Premiums

Registrant

Costs

Expenses

Column C

Premiums

Income

Year

Costs

Expenses

Written

Consolidated Property & Casualty Subsidiaries

2006	$	47,404	$	449,444	$	—	$	333,404	$	624,933	$	40,293	$	396,653	$	(42,747	)	$	97,274	$	353,092	$	620,908
2005	45,480		450,716		—		341,562		622,831		31,573		425,213		(39,620		)	93,515		382,157		632,836
2004	42,919		450,897		—		337,786		592,292		27,259		431,839		(6,778		)	88,425		368,343		618,923

108

SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the first day of March, 2007.

		SAFETY INSURANCE GROUP, INC.
By:		/s/ David F. Brussard
		David F. Brussard, President, Chief Executive Officer and Chairman of the Board

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David F. Brussard and William J. Begley, Jr., and each of them individually, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each such attorney-in-fact and agent, or his substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, to all intents and purposes and as fully as he might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed by the following persons in the capacities and on the date indicated:

	Signature		Title		Date
/s/ DAVID F. BRUSSARD		President, Chief Executive Officer and		March 1, 2007
David F. Brussard		Chairman of the Board (Principal Executive Officer)
/s/ WILLIAM J. BEGLEY, JR.		Chief Financial Officer, Vice		March 1, 2007
William J. Begley, Jr.		President and Secretary (Principal Financial and Accounting Officer)
/s/ A. RICHARD CAPUTO, JR.		Director		March 1, 2007
A. Richard Caputo, Jr.
/s/ FREDERIC H. LINDEBERG		Director		March 1, 2007
Frederic H. Lindeberg
/s/ PETER J. MANNING		Director		March 1, 2007
Peter J. Manning
/s/ DAVID K. MCKOWN		Director		March 1, 2007
David K. McKown

109

SAFETY INSURANCE GROUP, INC.

INDEX TO EXHIBITS

Exhibit
Number		Description
3.1		Form of Amended and Restated Certificate of Incorporation of Safety Insurance Group, Inc.**
3.2		Form of Amended and Restated Bylaws of Safety Insurance Group, Inc.**
4		Form of Stock Certificate for the Common Stock**
10.1		Lease Agreement between Thomas Black Corporation and Aman, Inc. for the lease of office space located on the 1st through 6th, 11th and 12th floors of 20 Custom House Street, Boston, Massachusetts, dated June 11, 1987, and as amended on October 11, 1988, September 14, 1989, September 19, 1990, February 23, 1994, December 20, 1996, June 24, 2002, and July 26, 2004.**
10.2		Tax Indemnity Agreement by and among Safety Holdings, Inc. and the Management Team, dated October 16, 2001.**
10.3		Management Consulting Agreement by and among TJC Management Corporation and Safety Holdings, Inc., dated October 16, 2001.**
10.4		Form of First Amendment to the Management Consulting Agreement by and among TJC Management Corporation and Safety Group.**
10.5		2001 Restricted Stock Plan (1) **
10.6		Executive Incentive Compensation Plan (1) **
10.7		2002 Management Omnibus Incentive Plan, as Amended (4)
10.8		Reinsurance Terms Sheet between Safety Insurance Company and Swiss Re America Corporation, effective January 1, 2002.**
10.9		Excess Catastrophe Reinsurance Program Terms Sheet between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Blanch Inc., effective January 1, 2002.**
10.10		Property Risk Excess of Loss Reinsurance Program Terms Sheet between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Blanch Inc. , effective January 1, 2002.**
10.11		Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and the Hartford Steam Boiler Inspection and Insurance Company, effective July 1, 2003. (4) .
10.12		Employment Agreement by and between Safety Insurance Group, Inc. and David F. Brussard, dated November 8, 2004. (1) *
10.13		Employment Agreement by and between Safety Insurance Group, Inc. and William J. Begley, Jr., dated November 8, 2004. (1) *
10.14		Employment Agreement by and between Safety Insurance Group, Inc. and Edward N. Patrick, Jr., dated November 8, 2004. (1) *
10.15		Employment Agreement by and between Safety Insurance Group, Inc. and Daniel F. Crimmins, dated November 8, 2004. (1) *
10.16		Employment Agreement by and between Safety Insurance Group, Inc. and Daniel D. Loranger, dated November 8, 2004. (1) *
10.17		Employment Agreement by and between Safety Insurance Group, Inc. and Robert J. Kerton, dated November 8, 2004. (1) *
10.18		Employment Agreement by and between Safety Insurance Group, Inc. and David E. Krupa, dated November 8, 2004. (1) *
10.19		Safety Insurance Company Executive Incentive Compensation Plan—Basic Document (1)(2)
10.20		Safety Insurance Company Executive Incentive Compensation Plan—Adoption Agreement (1)(2)
10.21		Safety Insurance Company Executive Incentive Compensation Plan—Rabbi Trust Agreement (1)(2)

110

10.22		Form of Restricted Stock Notice and Agreement (with vesting) under the 2002 Management Omnibus Incentive Plan (1)(2)
10.23		Form of Restricted Stock Notice and Agreement (without vesting) under the 2002 Management Omnibus Incentive Plan (1)(2)
10.24		Form of Nonqualified Stock Option Notice and Agreement under the 2002 Management Omnibus Incentive Plan (1)(2)
10.25		Form of Incentive Stock Option Notice and Agreement under the 2002 Management Omnibus Incentive Plan (1)(2)
10.26		Form of Stock Appreciation Right Notice and Agreement under the 2002 Management Omnibus Incentive Plan (1)(2)
10.27		Employment Agreement by and between Safety Insurance Group, Inc. and James D. Berry, dated October 1, 2005. (1)(3)
10.28		Employment Agreement by and between Safety Insurance Group, Inc. and George M. Murphy, dated October 1, 2005. (1)(3)
10.29		Excess Catastrophe Reinsurance Contract between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Blanch Inc., effective January 1, 2006. (4)
10.30		Property Excess of Loss Reinsurance Contract between Safety Insurance Company, Safety Indemnity Insurance Company and Benfield Blanch Inc., effective January 1, 2006. (4)
10.31		Casualty Excess of Loss Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Re America Corporation, effective January 1, 2006. (4)
10.32		Addendum No. 1 to Casualty Excess of Loss Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Re America Corporation, effective January 1, 2006. (4)
10.33		Property Catastrophe Excess of Loss Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Re America Corporation, effective January 1, 2006. (4)
10.34		Umbrella Liability Quota Share Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and Swiss Re America Corporation, effective January 1, 2006. (4)
10.35		Addendum No. 1 to Reinsurance Agreement between Safety Insurance Company, Safety Indemnity Insurance Company and the Hartford Steam Boiler Inspection and Insurance Company, effective April 1, 2006. (4)
10.36		Annual Performance Incentive Plan (4)
21		Subsidiaries of Safety Insurance Group, Inc. (4)
23		Consent of PricewaterhouseCoopers LLP. (4)
24		Power of Attorney**
31.1		CEO Certification Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (4)
31.2		CFO Certification Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (4)
32.1		CEO Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (4)
32.2		CFO Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (4)

(1) Denotes management contract or compensation plan or arrangement.

(2) Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2004 filed on March 16, 2005.

111

(3) Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2005 filed on March 16, 2006.

(4) Included herein.

* Incorporated herein by reference to the Registrant’s Form 10-Q for the quarterly period ended September 30, 2004 filed on November 9, 2004.

** Incorporated herein by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-87056) filed April 26, 2002, and as amended on Form S-8 (Reg. No. 333-110676) filed on November 21, 2003 and as amended on Form S-8 (Reg. No. 333-140423) filed on February 2, 2007.

112

Exhibit 10.7

Safety Insurance Group, Inc.

2002 Management Omnibus Incentive Plan, as Amended

Table of Contents

			Page

	ARTICLE 1 Establishment, Objectives, and Duration		1
	ARTICLE 2 Definitions		1
	ARTICLE 3 Administration		5
	ARTICLE 4 Shares Subject to the Plan and Maximum Awards		5
	ARTICLE 5 Eligibility and Participation		6
	ARTICLE 6 Options		7
	ARTICLE 7 Stock Appreciation Rights		8
	ARTICLE 8 Restricted Stock		10
	ARTICLE 9 Termination of Service		11
	ARTICLE 10 Restrictions on Shares		12
	ARTICLE 11 Performance Measures		12
	ARTICLE 12 Beneficiary Designation		13
	ARTICLE 13 Rights of Participants		13
	ARTICLE 14 Change in Control		13
	ARTICLE 15 Amendment, Modification, and Termination		14
	ARTICLE 16 Withholding		15
	ARTICLE 17 Indemnification		15
	ARTICLE 18 Successors		15
	ARTICLE 19 Legal Construction		16

Safety Insurance Group, Inc.

2002 Management Omnibus Incentive Plan, as Amended

ARTICLE 1

Establishment, Objectives, and Duration

1.1 Establishment of the Plan . Safety Insurance Group, Inc., a corporation organized and existing under Delaware law (hereinafter referred to as the “Company”), hereby establishes an incentive compensation plan to be known as the “Safety Insurance Group, Inc. 2002 Management Omnibus Incentive Plan, as amended” (hereinafter referred to as the “Plan”), as set forth in this document. The Plan permits the grant of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, and Restricted Stock.

The Plan first became effective when approved by the Board on June 25, 2002. The Plan, as amended, will become effective on May 19, 2006 if it is approved by the stockholders at the 2006 annual meeting. The Plan shall remain in effect as provided in Section 1.3 hereof.

1.2 Objectives of the Plan . The objectives of the Plan are to optimize the profitability and growth of the Company through incentives which are consistent with the Company’s goals and which link the personal interests of Participants to those of the Company’s shareholders; to provide Participants with an incentive for excellence in individual performance; and to promote teamwork among Participants.

The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of Participants who make significant contributions to the Company’s success and to allow Participants to share in the success of the Company.

1.3 Duration of the Plan . The Plan shall remain in effect, subject to the right of the Board to amend or terminate the Plan at any time pursuant to Article 15 hereof, until all Shares subject to it shall have been purchased or acquired according to the Plan’s provisions.

ARTICLE 2

Definitions

Whenever used in the Plan, the following terms shall have the meanings set forth below, and, when the meaning is intended, the initial letter of the word shall be capitalized:

2.1 “Affiliate” means any person or entity which, at the time of reference, directly, or indirectly through one or more intermediaries, controls or is controlled by the Company.

2.2 “Award” means, individually or collectively, a grant under this Plan of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, or Restricted Stock.

2.3 “Award Agreement” means an agreement entered into by the Company and each Participant setting forth the terms and provisions applicable to Awards granted under the Plan.

2.4 “Board” means the Board of Directors of the Company.

2.5 “Cause” means (i) the willful engaging by the Participant in misconduct that is demonstrably injurious to the Company (monetarily or otherwise), as determined by the Board in its sole discretion, (ii) the Participant’s conviction of, or pleading guilty or nolo contendere to, a felony involving moral turpitude, (iii) the Participant’s violation of any confidentiality, non-solicitation, or non-competition covenant to which the Participant is subject, or (iv) the Participant’s poor performance, as determined by the Board, based on reasonable business objectives, after written notice from the Company and a reasonable opportunity to correct such poor performance.

2.6 “Change in Control” will be deemed to have occurred as of the first day any of the following events occurs:

(a) the closing of any merger, combination, consolidation or similar business transaction involving the Company in which the holders of Shares immediately prior to such closing are not the holders, directly or indirectly, of a majority of the ordinary voting securities of the surviving Person in such transaction immediately after such closing;

(b) the closing of any sale or transfer by the Company of all or substantially all of its assets to an acquiring Person in which the holders of Shares immediately prior to such closing are not the holders of a majority of the ordinary voting securities of the acquiring Person immediately after such closing; or

(c) the closing of any sale by the holders of Shares of an amount of Shares that equals or exceeds a majority of the Shares immediately prior to such closing to a Person in which the holders of the Shares immediately prior to such closing are not the holders of a majority of the ordinary voting securities of such Person immediately after such closing.

2.7 “Code” means the Internal Revenue Code of 1986, as amended from time to time.

2.8 “Committee” means the Compensation Committee of the Board, as specified in Article 3 herein, or such other Committee appointed by the Board to administer the Plan with respect to grants of Awards.

2.9 “Company” means Safety Insurance Group, Inc., a corporation organized and existing under Delaware law, and any successor thereto as provided in Article 19 herein.

2.10 “Consultant” means an independent contractor who is performing consulting services for one or more entities in the Group and who is not an employee of any entity in the Group.

2.11 “Director” means a member of the Board or a member of the board of directors of an Affiliate.

2.12 “Disability” shall have the meaning ascribed to such term in the long-term disability plan maintained by the Company, or if no such plan exists, at the discretion of the Committee.

2.13 “Employee” means any employee of the Group, including any employees who are also Directors. Nonemployee Directors and Consultants shall not be considered Employees under this Plan.

2.14 “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto.

2.15 “Exercise Price” means the price at which a Share may be purchased by a Participant pursuant to an Option.

2.16 “Fair Market Value” shall be determined in good faith by the Committee.

2.17 “Freestanding SAR” means an SAR that is granted independently of any Options, as described in Article 7 herein.

2.18 “Good Reason” means, with respect to an Employee, (a) a material reduction in an Employee’s authority, perquisites, position or responsibilities (other than such a reduction in perquisites which affects all of the Company’s senior executives on a substantially equal or proportionate basis), (b) the relocation of the Employee’s primary place of business or the relocation of the Employee to another Company (or Affiliate) office more than 75 miles from the location of the Employee’s principal office, or, if applicable, (c) the Employee’s employer’s willful, material violation of its obligations under his or her employment agreement, in each case, after 60 days prior written notice to the Employee’s employer and its board of directors and the Employee’s employer’s failure thereafter to cure such reduction or violation.

2.19 “Group” means the Company and the Affiliates.

2.20 “Incentive Stock Option” or “ISO” means an option to purchase Shares granted under Article 6 herein and which is designated as an Incentive Stock Option intended to meet the requirements of Code Section 422.

2.21 “Named Executive Officer” means a Participant who, as of the date of vesting and/or payout of an Award, as applicable, is one of the group of “covered

employees,” as defined in the regulations promulgated under Code Section 162(m), or any successor statute.

2.22 “Nonemployee Director” shall have the meaning ascribed to such term in Rule 16b-3 of the Exchange Act.

2.23 “Nonqualified Stock Option” or “NQSO” means an option to purchase Shares granted under Article 6 herein and which is not intended to meet the requirements of Code Section 422.

2.24 “Option” means an Incentive Stock Option or a Nonqualified Stock Option, as described in Article 6 herein.

2.25 “Outside Director” shall have the meaning ascribed to such term under the regulations promulgated with respect to Code Section 162(m).

2.26 “Participant” means a current or former Employee, Director, or Consultant who has outstanding an Award granted under the Plan.

2.27 “Performance-Based Exception” means the performance-based exception from the tax deductibility limitations of Code Section 162(m).

2.28 “Period of Restriction” means the period during which the transfer of Shares of Restricted Stock is limited in some way (based on the passage of time, the achievement of performance goals, or upon the occurrence of other events as determined by the Committee, at its discretion), and the Shares are subject to a substantial risk of forfeiture, as provided in Article 8 herein.

2.29 “Person” shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a “group,” as defined in Section 13(d) thereof.

2.30 “Restricted Stock” means an Award granted to a Participant pursuant to Article 8 herein.

2.31 “Shares” means the shares of common stock of the Company, par value $0.01 per share, subject to adjustment pursuant to Section 4.2 herein.

2.32 “Stock Appreciation Right” or “SAR” means an Award, granted alone or in connection with a related Option, designated as an SAR, pursuant to the terms of Article 7 herein.

2.33 “Tandem SAR” means an SAR that is granted in connection with a related Option pursuant to Article 7 herein.

2.34 “Termination of Service” means, if an Employee, termination of employment with all entities in the Group, if a Director, termination of service on the Board and the board of directors of any Affiliate, as applicable, and if a Consultant, termination of the consulting relationship with all entities in the Group.

ARTICLE 3

Administration

3.1 The Committee . The Plan shall be administered by the Committee. To the extent the Company deems it to be necessary or desirable with respect to any Awards made hereunder, the members of the Committee may be limited to Nonemployee Directors or Outside Directors, who shall be appointed from time to time by, and shall serve at the discretion of, the Board.

3.2 Authority of the Committee . Except as limited by law or by the Articles of Incorporation or the By-laws of the Company, and subject to the provisions herein, the Committee shall have full power to select the persons who shall participate in the Plan; determine the sizes and types of Awards; determine the terms and conditions of Awards in a manner consistent with the Plan; construe and interpret the Plan and any agreement or instrument entered into under the Plan as they apply to Participants; establish, amend, or waive rules and regulations for the Plan’s administration as they apply to Participants; and (subject to the provisions of Article 15 herein) amend the terms and conditions of any outstanding Award to the extent such terms and conditions are within the discretion of the Committee as provided in the Plan. Further, the Committee shall make all other determinations which may be necessary or advisable for the administration of the Plan, as the Plan applies to Participants. As permitted by law, the Committee may delegate its authority as identified herein.

3.3 Decisions Binding . All determinations and decisions made by the Committee pursuant to the provisions of the Plan and all related orders and resolutions of the Board shall be final, conclusive and binding on all persons, including the Company, its shareholders, Affiliates, Participants, and their estates and beneficiaries.

ARTICLE 4

Shares Subject to the Plan and Maximum Awards

4.1 Number of Shares Available for Grants .

(a) Subject to Section 4.2 herein, the maximum number of Shares that may be issued pursuant to Awards under the Plan shall be 2,500,000. Shares underlying lapsed or forfeited Awards of Restricted Stock shall not be treated as having been issued pursuant to an Award under the Plan. Shares withheld from an Award of Restricted Stock to satisfy tax withholding obligations shall be counted as Shares issued pursuant to an Award under the Plan. Shares that are potentially deliverable under an Award that expires or is canceled, forfeited, settled in cash or otherwise settled without the delivery of Shares shall not be treated as having been issued under the Plan. Shares that are withheld to satisfy the Exercise Price of an Option or tax withholding obligations related to an Option or SAR shall not be deemed to be Shares issued under the Plan.

(b) Unless the Committee determines that Code Section 162(m) will not apply to an Award, or that an Award should not be designed to comply with the Performance-Based Exception, the following limitations shall apply to grants of Awards under the Plan:

(1) Options : The maximum aggregate number of Shares with respect to which Options may be granted in any one calendar year to any one Participant shall be 1,250,000;

(2) SARs : The maximum aggregate number of Shares with respect to which Stock Appreciation Rights may be granted in any one calendar year to any one Participant shall be 1,250,000; and

(3) Restricted Stock : The maximum aggregate number of Shares of Restricted Stock that may be granted in any one calendar year to any one Participant shall be 1,250,000.

4.2 Adjustments in Authorized Shares . In the event of any change in corporate capitalization, such as a stock split or a stock dividend, or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Code Section 368) or any partial or complete liquidation of the Company, an adjustment shall be made to the number and kind of Shares which may be delivered pursuant to Section 4.1, to the number, kind and/or price of Shares subject to outstanding Awards granted under the Plan, and to the individual Award limitations set forth in subsections 4.1(b)(1) through 4.1(b)(3), as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; provided, however, that the number of Shares subject to any Award shall always be rounded to the nearest whole number, with one-half (½) of a Share rounded up to the next whole number.

ARTICLE 5

Eligibility and Participation

5.1 Eligibility . Persons eligible to participate in this Plan include all Employees, Directors and Consultants of the Group, as determined by the Committee.

5.2 Actual Participation . Subject to the provisions of the Plan, the Committee may, from time to time, select from all eligible Employees, Directors and Consultants those to whom Awards shall be granted and shall determine the nature and amount of each Award.

ARTICLE 6

Options

6.1 Grant of Options . Subject to the terms and provisions of the Plan, Options may be granted to Participants in such number (subject to Article 4 herein), and upon such terms, and at any time and from time to time as shall be determined by the Committee; provided, however, that ISOs may be granted only to Employees.

6.2 Award Agreement . Each Option grant shall be evidenced by an Award Agreement that shall specify the Exercise Price, the duration of the Option, the number of Shares to which the Option pertains, and such other provisions as the Committee shall determine. The Award Agreement also shall specify whether the Option is intended to be an ISO or an NQSO.

6.3 Exercise Price . The Exercise Price for each grant of an Option under this Plan shall be at least equal to one hundred percent (100%) of the Fair Market Value of a Share on the date the Option is granted. However, in the case of an ISO granted to a Participant who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any subsidiary, the Exercise Price for each grant of an Option shall be not less than one hundred ten percent (110%) of the Fair Market Value of a Share on the date the Option is granted. The Exercise Price will be subject to adjustment in accordance with the provisions of Section 4.2 of the Plan.

6.4 Duration of Options . Each Option granted to a Participant shall expire at such time as the Committee shall determine at the time of grant; provided, however, that no Option shall be exercisable later than the tenth (10th) anniversary date of its grant. However, in the case of an ISO granted to a Participant who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any subsidiary, such Option shall not be exercisable after the expiration of five (5) years from the date such Option is granted or such shorter term as the Committee may determine.

6.5 Exercise of Options . Options granted under this Article 6 shall be exercisable at such times and be subject to such restrictions and conditions as set forth in the Award Agreement and as the Committee shall in each instance approve, which need not be the same for each grant or for each Participant.

6.6 Payment .

(a) Options granted under this Article 6 shall be exercised by the delivery of a written notice of exercise to the Company, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares.

(b) The Exercise Price of any Option shall be payable to the Company in full (i) in cash or its equivalent, (ii) if permitted by the Committee, by tendering

previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the total Exercise Price (provided that the Shares, other than Shares purchased by the Participant on the open market, must have been held by the Participant for at least six (6) months prior to their tender), or (iii) by a combination of (i) and (ii).

(c) If the Company’s shares are publicly traded, an Option may be exercised by means of a cashless exercise with the assistance of a broker or by any other means permitted by the Committee in accordance with such terms and conditions as the Committee, in its sole discretion, shall determine to be consistent with the Plan’s purpose and applicable law.

(d) Subject to any governing rules or regulations, as soon as practicable after receipt of a written notification of exercise of an Option, provisions for full payment therefor and satisfaction or provision for satisfaction of any tax withholding or other obligations, the Company shall (i) deliver to the Participant, in the Participant’s name or the name of the Participant’s designee, a Share certificate or certificates in an appropriate amount based upon the number of Shares purchased under the Option, or (ii) cause to be issued in the Participant’s name or the name of the Participant’s designee, in book-entry form, an appropriate number of Shares based upon the number of Shares purchased under the Option.

6.7 Nontransferability of Options .

(a) Incentive Stock Options . No ISO granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, during the lifetime of a Participant, all ISOs granted to such Participant under the Plan shall be exercisable only by such Participant.

(b) Nonqualified Stock Options . Except as otherwise provided in a Participant’s Award Agreement, no NQSO granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in a Participant’s Award Agreement, during the lifetime of a Participant, all NQSOs granted to such Participant under the Plan shall be exercisable only by such Participant.

ARTICLE 7

Stock Appreciation Rights

7.1 Grant of SARs .

(a) Subject to the terms and conditions of the Plan, SARs may be granted to Participants at any time and from time to time as shall be determined by the Committee. The Committee may grant Freestanding SARs, Tandem SARs, or any combination of these forms of SAR.

(b) The Committee shall have complete discretion in determining the number of SARs granted to each Participant (subject to Article 4 herein) and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such SARs.

(c) The grant price of a Freestanding SAR shall equal the Fair Market Value of a Share on the date of grant of the SAR. The grant price of Tandem SARs shall equal the Exercise Price of the related Option.

7.2 Exercise of Tandem SARs .

(a) Tandem SARs may be exercised for all or part of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option. A Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable.

(b) Notwithstanding any other provision of this Plan to the contrary, with respect to a Tandem SAR granted in connection with an ISO: (i) the Tandem SAR will expire no later than the expiration of the underlying ISO; (ii) the value of the payout with respect to the Tandem SAR may be for no more than one hundred percent (100%) of the difference between the Exercise Price of the underlying ISO and the Fair Market Value of the Shares subject to the underlying ISO at the time the Tandem SAR is exercised; and (iii) the Tandem SAR may be exercised only when the Fair Market Value of the Shares subject to the ISO exceeds the Exercise Price of the ISO.

7.3 Exercise of Freestanding SARs . Freestanding SARs may be exercised upon whatever terms and conditions the Committee, in its sole discretion, imposes upon them and sets forth in the Award Agreement.

7.4 SAR Agreement . Each SAR grant shall be evidenced by an Award Agreement that shall specify the grant price, the term of the SAR, and such other provisions as the Committee shall determine.

7.5 Term of SARs . The term of an SAR granted under the Plan shall be determined by the Committee, in its sole discretion; provided, however, that such term shall not exceed ten (10) years.

7.6 Payment of SAR Amount . Upon exercise of an SAR, a Participant shall be entitled to receive payment from the Company in an amount determined by multiplying:

(a) the difference between the Fair Market Value of a Share on the date of exercise over the grant price; by

(b) the number of Shares with respect to which the SAR is exercised.

At the discretion of the Committee, the payment upon SAR exercise may be in cash, in Shares of equivalent value, or in some combination thereof.

7.7 Nontransferability of SARs . Except as otherwise provided in a Participant’s Award Agreement, no SAR granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in a Participant’s Award Agreement, during the lifetime of a Participant, all SARs granted to such Participant under the Plan shall be exercisable only by such Participant.

ARTICLE 8

Restricted Stock

8.1 Grant of Restricted Stock . Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Shares of Restricted Stock to Participants in such amounts as the Committee shall determine.

8.2 Restricted Stock Agreement . Each Restricted Stock grant shall be evidenced by an Award Agreement that shall specify the Period(s) of Restriction, the number of Shares of Restricted Stock granted, and such other provisions as the Committee shall determine.

8.3 Transferability . Except as provided in this Article 8, the Shares of Restricted Stock granted herein may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated until the end of the applicable Period of Restriction established by the Committee and specified in the Award Agreement, or upon earlier satisfaction of any other conditions, as specified by the Committee in its sole discretion and set forth in the Award Agreement. During the lifetime of a Participant, all rights with respect to the Restricted Stock granted to such Participant under the Plan shall be available only to such Participant.

8.4 Restrictions .

(a) Subject to the terms hereof, the Committee shall impose such conditions and/or restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable and as are set forth in the Award Agreement including, without limitation, a requirement that Participants pay a stipulated purchase price for each Share of Restricted Stock, restrictions based upon the achievement of specific performance goals (Company-wide, divisional, and/or individual), time-based restrictions on vesting following the attainment of the performance goals, and/or restrictions under applicable federal or state securities laws.

(b) The Company shall retain the certificates representing Shares of Restricted Stock in the Company’s possession until such time as all conditions and/or restrictions applicable to such Shares have been satisfied.

(c) Except as otherwise provided in this Article 8, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant after the last day of the applicable Period of Restriction.

8.5 Voting Rights . During the Period of Restriction, subject to any limitations imposed under the By-laws of the Company, Participants holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares.

8.6 Dividends and Other Distributions . Subject to the Committee’s right to determine otherwise at the time of grant, during the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder may receive or be credited with regular dividends paid with respect to the underlying Shares while they are so held. The Committee may apply any restrictions to the dividends that the Committee deems appropriate and as are set forth in the Award Agreement. Without limiting the generality of the preceding sentence, if the grant or vesting of Restricted Stock awarded to a Named Executive Officer is designed to comply with the requirements of the Performance-Based Exception, the Committee may apply any restrictions it deems appropriate to the payment of dividends declared with respect to such Restricted Stock, such that the dividends and/or the Restricted Stock maintain eligibility for the Performance-Based Exception.

ARTICLE 9

Termination of Service

Each Award Agreement shall set forth the extent to which the Participant shall have the right to exercise Options and SARs, and receive unvested Shares of Restricted Stock, following Termination of Service with the Group. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Awards issued pursuant to the Plan, and may reflect distinctions based on the reasons for Termination of Service; provided, however, that the following shall automatically apply to the extent different provisions are not set forth in a Participant’s Award Agreement:

(a) If the Termination of Service is by the Company for Cause, by a Nonemployee Director or Consultant for any reason, or by an Employee without Good Reason, all previously unexercised Options and SARs shall expire and all unvested Restricted Stock shall be forfeited upon the date of Termination of Service.

(b) If the Participant is an Employee and the Termination of Service is by the Participant for Good Reason, all previously unexercised Options and SARs may be exercised for a period of three (3) months after the date of the Participant’s Termination of Service and all unvested Restricted Stock shall be forfeited as of such date.

(c) If the Termination of Service is a result of the Participant’s death or Disability, all previously unexercised Options and SARs may be exercised for a period of 12 months after the date of the Participant’s Termination of Service and all unvested Restricted Stock shall vest.

(d) If the Termination of Service is by the Company for any reason other than Cause or the Participant’s Disability, all previously unexercised Options and SARs may be exercised for a period of three (3) months after the date of the Participant’s Termination of Service and all unvested Restricted Stock which was not granted during the year in which such Termination of Service occurs shall vest. Any Restricted Stock granted during the year of Termination of Service shall be forfeited.

ARTICLE 10

Restrictions on Shares

All Shares acquired pursuant Awards granted hereunder, and Participants’ right to exercise Options and SARS and/or receive Shares upon exercise or vesting of an Award, shall be subject to all applicable restrictions contained in the Company’s By-laws, shareholders agreement or insider trading policy, and any other restrictions imposed by the Committee, including, without limitation, restrictions under applicable securities laws, under the requirements of any stock exchange or market upon which such Shares are then listed and/or traded, and restrictions under any blue sky or state securities laws applicable to such Shares.

ARTICLE 11

Performance Measures

If Awards under the Plan are subject to Code Section 162(m) and the Committee determines that such Awards should be designed to comply with the Performance-Based Exception, the performance measure(s), the attainment of which determine the degree of payout and/or vesting, to be used for purposes of such Awards shall be chosen from among earnings per share, economic value added, market share (actual or targeted growth), net income (before or after taxes), operating income, return on assets (actual or targeted growth), return on capital (actual or targeted growth), return on equity (actual or targeted growth), return on investment (actual or targeted growth), gross or net underwriting results, revenue (actual or targeted growth), share price, stock price growth, total shareholder return, or such other performance measures as are approved by the Committee and the Company’s shareholders.

The Committee shall have the discretion to adjust the determinations of the degree of attainment of the pre-established performance goals; provided, however, that Awards which are designed to qualify for the Performance-Based Exception, and which are held by Named Executive Officers, may not be adjusted upward (the Committee shall retain the discretion to adjust such Awards downward).

In the event that applicable tax laws change to permit the Committee to alter the governing performance measures without obtaining shareholder approval of such changes, the Committee shall have sole discretion to make such changes without obtaining shareholder approval. In addition, Awards that are not intended to qualify for the Performance-Based Exception may be based on these or such other performance measures as the Committee may determine.

ARTICLE 12

Beneficiary Designation

Subject to the terms and conditions of the Plan and applicable Award Agreement, each Participant may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing during the Participant’s lifetime with the party chosen by the Company, from time to time, to administer the Plan. In the absence of any such designation, benefits remaining unpaid at the Participant’s death shall be paid to the Participant’s estate.

ARTICLE 13

Rights of Participants

13.1 Continued Service . Nothing in the Plan shall:

(a) interfere with or limit in any way the right of the Company to terminate any Participant’s employment, service as a Director, or service as a Consultant with the Group at any time, or

(b) confer upon any Participant any right to continue in the service of any member of the Group as an Employee, Director or Consultant.

13.2 Participation . Participation is determined by the Committee. No person shall have the right to be selected to receive an Award under the Plan, or, having been so selected, to be selected to receive a future Award.

ARTICLE 14

Change in Control

14.1 Treatment of Outstanding Awards . Upon the occurrence of a Change in Control, unless otherwise specifically prohibited under applicable laws, or by the rules and regulations of any governing governmental agencies or national securities exchanges:

(a) any and all Options and SARs granted hereunder shall become immediately exercisable; and

(b) any restriction periods and restrictions imposed on Restricted Stock shall lapse.

14.2 Termination, Amendment, and Modifications of Change-in-Control Provisions . Notwithstanding any other provision of this Plan or any Award Agreement

provision, the provisions of this Article 14 may not be terminated, amended, or modified on or after the date of a Change in Control to affect adversely any Award theretofore granted under the Plan without the prior written consent of the Participant with respect to said Participant’s outstanding Awards; provided, however, that the Board, upon recommendation of the Committee, may terminate, amend, or modify this Article 14 at any time and from time to time prior to the date of a Change in Control.

ARTICLE 15

Amendment, Modification, and Termination

15.1 Amendment, Modification, and Termination . The Board may at any time and from time to time, alter, amend, suspend or terminate the Plan or any Award hereunder in whole or in part; provided, however, that no amendment which requires shareholder approval in order for the Plan to continue to comply with any applicable tax or securities or the rules of any securities exchange on which the securities of the Company are listed, shall be effective unless such amendment shall be approved by the requisite vote of shareholders of the Company entitled to vote thereon; provided further that no such shall alteration, amendment, suspension or termination shall adversely affect any Award hereunder without the consent of the Participant to whom such Award shall have been made.

15.2 Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events . The Committee may make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4.2 hereof) affecting the Company or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan; provided that no such adjustment shall be authorized to the extent that such authority would be inconsistent with the Plan’s meeting the requirements, if applicable, of Code Section 162(m), as amended from time to time.

15.3 Compliance with Code Section 162(m) . At all times when Code Section 162(m) is applicable, all Awards granted under this Plan to Named Executive Officers, or to Participants who will likely become Named Executive Officers at the time of vesting or payment, shall be awarded and administered to comply with the requirements of Code Section 162(m), unless the Committee determines that such compliance is not desired. In addition, if changes are made to Code Section 162(m) or the regulations promulgated thereunder to permit greater flexibility with respect to any Award or Awards available under the Plan, the Committee may, subject to this Article 15, make any adjustments it deems appropriate.

ARTICLE 16

Withholding

16.1 Tax Withholding . The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount (in cash or Shares) sufficient to satisfy any taxes required by federal, state, or local law or regulation to be withheld with respect to any taxable event arising as a result of this Plan.

16.2 Share Withholding . Participants may elect, subject to the approval of the Committee, to satisfy all or part of such withholding requirement by having the Company withhold Shares having a Fair Market Value equal to the amount to be withheld up to the minimum statutory total tax withholding rate (or such other rate that will not result in a negative accounting impact). All such elections shall be irrevocable, made in writing, signed by the Participant, and shall be subject to any restrictions or limitations that the Committee, in its sole discretion, deems appropriate.

ARTICLE 17

Indemnification

Each person who is or shall have been a member of the Committee, or of the Board, shall be indemnified and held harmless by the Company to the fullest extent permitted by applicable law against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of any judgment in any such action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification is subject to the person having been successful in the legal proceedings or having acted in good faith and what is reasonably believed to be a lawful manner in the Company’s best interests. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s Articles of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.

ARTICLE 18

Successors

All obligations of the Company under the Plan with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of

such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.

ARTICLE 19

Legal Construction

19.1 Gender and Number . Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural.

19.2 Severability . In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

19.3 Requirements of Law . The granting of Awards and the issuance of Shares under the Plan shall be subject to, and may be made contingent upon satisfaction of, all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

19.4 Governing Law . To the extent not preempted by federal law, the Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the state of New York, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Plan to the substantive law of another jurisdiction.

19.5 Code Section 409A Compliance . To the extent applicable, it is intended that this Plan and any Awards granted hereunder comply with the requirements of Section 409A of the Code and any related regulations or other guidance promulgated with respect to such Section by the U.S. Department of the Treasury or the Internal Revenue Service (“Section 409A”). Any provision that would cause the Plan or any Award granted hereunder to fail to satisfy Section 409A shall have no force or effect until amended to comply with Section 409A, which amendment may be retroactive to the extent permitted by Section 409A.

Exhibit 10.29

Excess Catastrophe
Reinsurance Contract
Effective: January 1, 2006

issued to

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts

[GRAPHIC]

Excess Catastrophe
Reinsurance Contract
Effective: January 1, 2006

issued to

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts

Third Excess Catastrophe Reinsurance

Reinsurers	Participations

American Agricultural Insurance Company	0.900	%
American Re-Insurance Company, A Delaware Corporation	3.000
Aspen Insurance UK Limited	4.000
Catlin Insurance Company Ltd.	1.500
Da Vinci Reinsurance Ltd.	2.400
Endurance Specialty Insurance Ltd.	3.500
Folksamerica Reinsurance Company	3.000
Harbor Point Services Inc. (for Federal Insurance Company)	5.000
Hannover Re (Bermuda), Ltd.	6.500
Montpelier Reinsurance Limited	5.000
Odyssey America Reinsurance Corporation	3.000
Partner Reinsurance Company	4.500
Platinum Underwriters Reinsurance, Inc.	4.500
Renaissance Reinsurance, Ltd.	3.600
XL Re Ltd	6.000

Through Benfield Limited
Amlin Bermuda Limited	3.348
Lloyd’s Underwriters Per Signing Schedule(s)	26.952

Through Direct Market
Swiss Reinsurance America Corporation	3.300

Total	90.000 % part of 100% share in the interests and liabilities of the “Reinsurer”

Fourth Excess Catastrophe Reinsurance

Reinsurers	Participations

American Agricultural Insurance Company	0.900	%
American Re-Insurance Company, A Delaware Corporation	3.000
Aspen Insurance UK Limited	2.500
Catlin Insurance Company Ltd.	1.500
Da Vinci Reinsurance Ltd.	2.000
Endurance Specialty Insurance Ltd.	3.500
Folksamerica Reinsurance Company	2.000
Harbor Point Services Inc. (for Federal Insurance Company)	5.000
Hannover Re (Bermuda), Ltd.	7.000
Montpelier Reinsurance Limited	5.000
Odyssey America Reinsurance Corporation	3.000
Partner Reinsurance Company	4.500
Platinum Underwriters Reinsurance, Inc.	3.500
Renaissance Reinsurance, Ltd.	3.000
Swiss Re Underwriters Agency, Inc. (for Swiss Reinsurance America Corporation)	5.500
XL Re Ltd	6.000

Through Benfield Limited
Amlin Bermuda Limited	3.015
Lloyd’s Underwriters Per Signing Schedule(s)	24.885

Through Direct Market
Swiss Reinsurance America Corporation	4.200

Total	90.000 % part of 100% share in the interests and liabilities of the “Reinsurer”

Table of Contents

Article		Page

	Classes of Business Reinsured

II	Commencement and Termination	1

III	Territory (BRMA 51A)	2

IV	Exclusions	2

V	Retention and Limit	4

VI	Reinstatement	4

VII	Definitions	5

VIII	Other Reinsurance	6

IX	Loss Occurrence	6

X	Loss Notices and Settlements	8

XI	Salvage and Subrogation	9

XII	Reinsurance Premium	9

XIII	Late Payments	10

XIV	Offset (BRMA 36C)	11

XV	Access to Records (BRMA 1D)	11

	Net Retained Lines (BRMA 32E)	11

XVII	Liability of the Reinsurer	11

	Errors and Omissions (BRMA 14F)	12

XIX	Currency (BRMA 12A)	12

XX	Taxes (BRMA 50B)	12

XXI	Federal Excise Tax	12

XXII	Unauthorized Reinsurers	12

XXIII	Insolvency	14

XXIV	Arbitration	14

XXV	Service of Suit (BRMA 49C)	15

XXVI	Governing Law	16

XXVII	Agency Agreement	16

XXVIII	Severability (BRMA 72E)	16

XXIX	Intermediary (BRMA 23A)	16

	Schedule A

Excess Catastrophe
Reinsurance Contract
Effective: January 1, 2006

issued to

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts
( hereinafter referred to collectively as the “Company”)

The Subscribing Reinsurer(s) Executing the
Interests and Liabilities Agreement(s)
Attached Hereto
(hereinafter referred to as the “Reinsurer”)

Article I - Classes of Business Reinsured

By this Contract the Reinsurer agrees to reinsure the excess liability which may accrue to the Company under its policies, contracts and binders of insurance or reinsurance (hereinafter called “policies”) in force on the effective date hereof or issued or renewed on or after that date, and classified by the Company as Fire, Allied Lines, Homeowners Multiple Peril (Section I only), Commercial Multiple Peril (Section I only), Inland Marine and Automobile Physical Damage (not to include Collision coverage) business, subject to the terms, conditions and limitations set forth herein and in Schedule A attached to and forming part of this Contract.

Article II - Commencement and Termination

A. This Contract shall become effective at 12:01 a.m., Eastern Standard Time, January 1, 2006, with respect to losses arising out of loss occurrences commencing at or after that time and date, and shall remain in force until 12:01 a.m., Eastern Standard Time, January 1, 2007.

B. Notwithstanding the provisions of paragraph A above, the Company may terminate a Subscribing Reinsurer’s percentage share in this Contract at any time by giving written notice to the Subscribing Reinsurer in the event any of the following circumstances occur:

The Subscribing Reinsurer’s policyholders’ surplus at the inception of this Contract has been reduced by more than 20.0% of the amount of surplus 12 months prior to that date; or

2. The Subscribing Reinsurer’s policyholders’ surplus at any time during the term of this Contract has been reduced by more than 20.0% of the amount of surplus at the date of the Subscribing Reinsurer’s most recent financial statement filed with regulatory authorities and available to the public as of the inception of this Contract; or

3. The Subscribing Reinsurer’s A.M. Best’s rating has been assigned or downgraded below A- and/or Standard & Poor’s rating has been assigned or downgraded below BBB+; or

4. The Subscribing Reinsurer has become merged with, acquired by or controlled by any other company, corporation or individual(s) not controlling the Subscribing Reinsurer’s operations previously; or

5. A State Insurance Department or other legal authority has ordered the Subscribing Reinsurer to cease writing business; or

6. The Subscribing Reinsurer has become insolvent or has been placed into liquidation or receivership (whether voluntary or involuntary) or proceedings have been instituted against the Subscribing Reinsurer for the appointment of a receiver, liquidator, rehabilitator, conservator or trustee in bankruptcy, or other agent known by whatever name, to take possession of its assets or control of its operations; or

7. The Subscribing Reinsurer has reinsured its entire liability under this Contract without the Company’s prior written consent; or

8. The Subscribing Reinsurer has ceased assuming new and renewal property treaty reinsurance business.

C. If this Contract is terminated or expires while a loss occurrence covered hereunder is in progress, the Reinsurer’s liability hereunder shall, subject to the other terms and conditions of this Contract, be determined as if the entire loss occurrence had occurred prior to the termination or expiration of this Contract, provided that no part of such loss occurrence is claimed against any renewal or replacement of this Contract.

Article III - Territory (BRMA 51A)

The territorial limits of this Contract shall be identical with those of the Company’s policies.

Article IV - Exclusions

This Contract does not apply to and specifically excludes the following:

Loss or damage occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, martial law or confiscation by order of any government or public authority, but not excluding loss or damage which would be covered under a standard form of policy containing a standard war exclusion clause.

2. Nuclear risks as defined in the “Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance” attached to and forming part of this Contract.

3. Liability as a member, subscriber or reinsurer of any Pool, Syndicate or Association; and any combination of insurers or reinsurers formed for the purpose of covering specific perils, specific classes of business or for the purpose of insuring risks located in specific geographical areas; but this exclusion shall not apply to FAIR Plans or to SIR Pool, Franklin Pool, Coastal Pools, Beach Plans or similar plans, however styled. It is understood and agreed, however, that this reinsurance does not include any increase in liability to the Company resulting from (a) the inability of any other participant in a FAIR Plan, SIR Pool, Franklin Pool, Coastal Pool, Beach Plan or similar plan to meet its liability, or (b) any claim against such a FAIR Plan, SIR Pool, Franklin Pool, Coastal Pool, Beach Plan or similar plan, or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund.

4. Financial guarantee and insolvency

5. Third party liability

6. All classes of business not specifically listed in the Classes of Business Reinsured Article.

7. Reinsurance assumed, except pro rata local agency reinsurance on specific risks.

8. Ex-gratia payments.

9. Risks excluded under the provisions of the “Total Insured Value Clause” attached to and forming part of this Contract.

10. All liability of the Company arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. “Insolvency fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, however denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part.

11. Loss or liability excluded under the “Terrorism Exclusion Clause” attached to and forming part of this Contract.

12. Loss and/or damage and/or costs and/or expenses arising from Seepage and/or Pollution and/or Contamination, other than contamination from Smoke Damage. Nevertheless, this exclusion does not preclude any payment of the cost of the removal of debris of property damaged by a loss otherwise covered hereunder, but subject always to a limit of 25.0% of the Company’s property loss under the original policy.

Article V - Retention and Limit

A. As respects each excess layer of reinsurance coverage provided by this Contract, the Company shall retain and be liable for the first amount of ultimate net loss, shown as “Company’s Retention” for that excess layer in Schedule A attached hereto, arising out of each loss occurrence. The Reinsurer shall then be liable, as respects each excess layer, for the percentage, shown as “Reinsurer’s Percentage” for that excess layer, of the amount by which such ultimate net loss exceeds the Company’s applicable retention, but the liability of the Reinsurer under each excess layer shall not exceed the percentage, shown as “Reinsurer’s Percentage” for that excess layer, of the amount, shown as “Reinsurer’s Per Occurrence Limit” for that excess layer in Schedule A attached hereto, as respects any one loss occurrence.

B. No claim shall be made under any excess layer of coverage provided by this Contract in any one loss occurrence unless at least two risks insured or reinsured by the Company are involved in such loss occurrence. For purposes hereof, the Company shall be the sole judge of what constitutes “one risk.”

C. As respects each excess layer of reinsurance coverage provided by this Contract, the Company shall retain, net and unreinsured elsewhere, in addition to its initial retention each loss occurrence, the percentage shown as “Company’s Coreinsurance” for that excess layer in Schedule A attached hereto, as respects any one loss occurrence.

Article VI - Reinstatement

A. In the event all or any portion of the reinsurance under any excess layer of reinsurance coverage provided by this Contract is exhausted by loss, the amount so exhausted shall be reinstated immediately from the time the loss occurrence commences hereon. For each amount so reinstated the Company agrees to pay additional premium equal to the product of the following:

1. The percentage of the occurrence limit for the excess layer reinstated (based on the loss paid by the Reinsurer under that excess layer); times

2. The earned reinsurance premium for the excess layer reinstated for the term of this Contract (exclusive of reinstatement premium).

B. Whenever the Company requests payment by the Reinsurer of any loss under any excess layer hereunder, the Company shall submit a statement to the Reinsurer of reinstatement premium due the Reinsurer for that excess layer. If the earned reinsurance premium for any excess layer for the term of this Contract has not been finally determined as of the date of any such statement, the calculation of reinstatement premium due for that excess layer shall be based on the annual deposit premium for that excess layer and shall be readjusted when the earned reinsurance premium for that excess layer for the term of this Contract has been finally determined. Any reinstatement premium shown to be due the Reinsurer for any excess layer as reflected by any such statement (less prior payments, if any, for that excess layer) shall be payable by the Company concurrently with payment by the Reinsurer of the requested loss for that excess layer. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurer as promptly as possible after receipt and verification of the Company’s statement.

C. Notwithstanding anything stated herein, the liability of the Reinsurer under any excess layer of reinsurance coverage provided by this Contract shall not exceed either of the following:

1 The percentage, shown as “Reinsurer’s Percentage” for that excess layer, of the amount, shown as “Reinsurer’s Per Occurrence Limit” for that excess layer in Schedule A attached hereto, as respects loss or losses arising out of any one loss occurrence; or

2 The percentage, shown as “Reinsurer’s Percentage” for that excess layer, of the amount, shown as “Reinsurer’s Annual Limit” for that excess layer in Schedule A attached hereto, in all during the term of this Contract.

Article VII - Definitions

A. “Ultimate net loss” as used herein is defined as the sum or sums (including loss in excess of policy limits, extra contractual obligations and loss adjustment expense, as hereinafter defined) paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company’s ultimate net loss has been ascertained.

B. “Loss in excess of policy limits” and “extra contractual obligations” as used herein shall be defined as follows:

1 “Loss in excess of policy limits” shall mean 80.0% of any amount paid or payable by the Company in excess of its policy limits, but otherwise within the terms of its policy, such loss in excess of the Company’s policy limits having been incurred because of, but not limited to, failure by the Company to settle within the policy limits or by reason of the Company’s alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of an action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such an action.

2 “Extra contractual obligations” shall mean 80.0% of any punitive, exemplary, compensatory or consequential damages paid or payable by the Company, not covered by any other provision of this Contract and which arise from the handling of any claim on business subject to this Contract, such liabilities arising because of, but not limited to, failure by the Company to settle within the policy limits or by reason of the Company’s alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of an action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such an action. An extra contractual obligation shall be deemed, in all circumstances, to have occurred on the same date as the loss covered or alleged to be covered under the policy.

The amount included in ultimate net loss for any one loss occurrence as respects loss in excess of policy limits and extra contractual obligations shall not exceed 25.0% of the Company’s indemnity loss hereunder arising out of that loss occurrence.

Notwithstanding anything stated herein, this Contract shall not apply to any loss in excess of policy limits or any extra contractual obligation incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder.

Savings Clause (Applicable only if the Subscribing Reinsurer is domiciled in the State of New York): In no event shall coverage be provided to the extent that such coverage is not permitted under New York law.

C “Loss adjustment expense” as used herein shall mean expenses assignable to the investigation, appraisal, adjustment, settlement, litigation, defense and/or appeal of specific claims, regardless of how such expenses are classified for statutory purposes. Loss adjustment expense shall include, but not be limited to, interest on judgments, expenses of outside adjusters, and declaratory judgment expenses or other legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto, but shall not include office expenses or salaries of the Company’s regular employees not classified as loss adjusters.

Article VIII - Other Reinsurance

A. The Company shall maintain in force property per risk excess of loss reinsurance, recoveries under which shall inure to the benefit of this Contract.

B The Company shall be permitted to carry underlying property catastrophe excess of loss reinsurance, recoveries under which shall inure solely to the benefit of the Company and be entirely disregarded in applying all of the provisions of this Contract.

Article IX - Loss Occurrence

A. The term “loss occurrence” shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one “loss occurrence” shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event, except that the term “loss occurrence” shall be further defined as follows:

As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto.

2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period

of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured’s premises by strikers, provided such occupation commenced during the aforesaid period.

3. As regards earthquake (the epicentre of which need not necessarily be within the territorial confines referred to in paragraph A of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company’s “loss occurrence.”

4. As regards “freeze,” only individual losses directly occasioned by collapse, breakage of glass and water damage (including, but not limited to, those caused by bursting frozen pipes and tanks) may be included in the Company’s “loss occurrence.”

5. As regards firestorms, brush fires and any other fires or series of fires, irrespective of origin (except as provided in subparagraphs 2 and 3 above), which spread through trees, grassland or other vegetation, all individual losses sustained by the Company which occur during any period of 168 consecutive hours within 150-mile radius of any one fixed point selected by the Company may be included in the Company’s “loss occurrence.” However, an individual loss subject to this subparagraph cannot be included in more than one “loss occurrence.”

B. Except for those “loss occurrences,” referred to in subparagraphs 1 and 2 of paragraph A above, the Company may choose the date and time when any such period of consecutive hours commences, provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss, and provided that only one such period of 168 consecutive hours shall apply with respect to one event.

C. As respects those “loss occurrences” referred to in subparagraphs 1 and 2 of paragraph A above, if the disaster, accident or loss occasioned by the event is of greater duration than 72 consecutive hours, then the Company may divide that disaster, accident or loss into two or more “loss occurrences,” provided no two periods overlap and no individual loss is included in more than one such period and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss.

D. No individual losses occasioned by an event that would be covered by 72 hours clauses may be included in any “loss occurrence” claimed under the 168 hours provision.

E. Any date change, including leap-year calculations, shall not in and of itself be regarded as an event for purposes of this Contract.

1. This includes any loss, damage, cost, claim or expense, whether preventative, remedial or otherwise, directly or indirectly arising out of or relating to:

a. The calculation, comparison, differentiation, sequencing or processing of data involving a date change, including leap-year calculations, by any computer

system, hardware, program or software and/or any microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the insured or not; or

b. Any change, alteration or modification involving a date change, including leap-year calculations, to any such computer system, hardware, program or software or any microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the insured or not.

This subparagraph shall apply regardless of any other cause or event that contributes concurrently or in any sequence to the loss, damage, cost, claim or expense.

However, this subparagraph shall not apply as respects physical damage occurring at the insured’s premises arising out of the perils covered under this Contract.

2. Notwithstanding subparagraph 1 above, this Contract shall not cover any costs and expenses, whether preventative, remedial or otherwise, arising out of or relating to change, alteration or modification of any computer system, hardware, program or software or any microchip, integrated circuit or similar device in computer or non-computer equipment, whether the property of the insured or not.

F. Losses arising, directly or indirectly, out of:

1. Loss of, alteration of, or damage to;

2. A reduction in the functionality, availability or operation of

A computer system, hardware, program, software, data, information repository, microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the policyholder of the Company or not, do not in and of themselves constitute an event unless arising out of one or more of the following perils:

Fire, lightning, explosion, aircraft or vehicle impact, falling objects, windstorm, hail, tornado, cyclone, hurricane, earthquake, volcano, tsunami, flood, freeze or weight of snow.

Article X - Loss Notices and Settlements

A. Whenever losses sustained by the Company appear likely to result in a claim hereunder, the Company shall notify the Reinsurer, and the Reinsurer shall have the right to participate in the adjustment of such losses at its own expense.

B. All loss settlements made by the Company, provided they are within the terms of this Contract, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all amounts for which it may be liable upon receipt of reasonable evidence of the amount paid (or scheduled to be paid, but no more than 10 days in advance of the date of payment of claims) by the Company.

Article XI - Salvage and Subrogation

The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights.

Article XII - Reinsurance Premium

A. As premium for each excess layer of reinsurance coverage provided by this Contract, the Company shall pay the Reinsurer the greater of the following:

1. The amount, shown as “Minimum Premium” for that excess layer in Schedule A attached hereto (or a pro rata portion of the Subscribing Reinsurer’s share, in the event that such Subscribing Reinsurer’s share under any excess layer is terminated prior to January 1, 2007); or

2. The percentage, shown as “Premium Rate” for that excess layer in Schedule A attached hereto, of the Company’s net earned premium for the term of this Contract

B. The Company shall pay the Reinsurer an deposit premium for each excess layer of the amount, shown as “Deposit Premium” for that excess layer in Schedule A attached hereto, in four equal installments of the amount, shown as “Quarterly Deposit Premium” for that excess layer in Schedule A attached hereto, on January 1, April 1, July 1 and October 1 of 2006. In the event that a Subscribing Reinsurer’s share under any excess layer hereof is terminated prior to January 1, 2007, no quarterly deposit installments for such layer(s) shall be due to such Subscribing Reinsurer after the effective date of termination.

C. Within 60 days after the termination or expiration of this Contract, the Company shall provide a report to the Reinsurer setting forth the premium due hereunder for each excess layer, computed in accordance with paragraph A, and any additional premium due the Reinsurer or return premium due the Company for each such excess layer shall be remitted promptly.

D. “Net earned premium” as used herein is defined as gross earned premium of the Company for the classes of business reinsured hereunder, less the earned portion of premiums ceded by the Company for reinsurance which inures to the benefit of this Contract. For purposes of calculating net earned premium, 90.0% of Homeowners Multiple Peril and 80.0% of Commercial Multiple Peril total basic policy premium on indivisible premium policies shall be considered subject premium.

Article XIII - Late Payments

A. The provisions of this Article shall not be implemented unless specifically invoked, in writing, by one of the parties to this Contract.

B. In the event any premium, loss or other payment due either party is not received by the Intermediary named in the Intermediary Article (BRMA 23A) (hereinafter referred to as the “Intermediary”) by the payment due date, the party to whom payment is due may, by notifying the Intermediary in writing, require the debtor party to pay, and the debtor party agrees to pay, an interest penalty on the amount past due calculated for each such payment on the last business day of each month as follows:

1 The number of full days which have expired since the due date or the last monthly calculation, whichever the lesser; times

2 1/365ths of the six-month United States Treasury Bill rate as quoted in The Wall Street Journal on the first business day of the month for which the calculation is made; times

3 The amount past due, including accrued interest.

It is agreed that interest shall accumulate until payment of the original amount due plus interest penalties have been received by the Intermediary.

C. The establishment of the due date shall, for purposes of this Article, be determined as follows:

1. As respects the payment of routine deposits and premiums due the Reinsurer, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 30 business days after the date of transmittal by the Intermediary of the initial billing for each such payment.

2. Any claim or loss payment due the Company hereunder shall be deemed due 30 business days after the proof of loss or demand for payment is transmitted to the Reinsurer. If such loss or claim payment is not received within the 30 business days, interest will accrue on the payment or amount overdue in accordance with paragraph B above, from the date the proof of loss or demand for payment was transmitted to the Reinsurer.

3. As respects any payment, adjustment or return due either party not otherwise provided for in subparagraphs 1 and 2 of this paragraph, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 30 business days following transmittal of written notification that the provisions of this Article have been invoked.

For purposes of interest calculations only, amounts due hereunder shall be deemed paid upon receipt by the Intermediary.

D. Nothing herein shall be construed as limiting or prohibiting a Subscribing Reinsurer from contesting the validity of any claim, or from participating in the defense of any claim or suit

or prohibiting either party from contesting the validity of any payment or from initiating any arbitration or other proceeding in accordance with the provisions of this Contract. If the debtor party prevails in an arbitration or other proceeding, then any interest penalties due hereunder on the amount in dispute shall be null and void. If the debtor party loses in such proceeding, then the interest penalty on the amount determined to be due hereunder shall be calculated in accordance with the provisions set forth above unless otherwise determined by such proceedings. If a debtor party advances payment of any amount it is contesting, and proves to be correct in its contestation, either in whole or in part, the other party shall reimburse the debtor party for any such excess payment made plus interest on the excess amount calculated in accordance with this Article.

E. Interest penalties arising out of the application of this Article that are $100 or less from any party shall be waived unless there is a pattern of late payments consisting of three or more items over the course of any 12-month period.

Article XIV - Offset (BRMA 36C)

The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise.

Article XV - Access to Records (BRMA 1D)

The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance.

Article XVI - Net Retained Lines (BRMA 32E)

A. This Contract applies only to that portion of any policy which the Company retains net for its own account (prior to deduction of any underlying reinsurance specifically permitted in this Contract), and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any policy which the Company retains net for its own account shall be included.

B. The amount of the Reinsurer’s liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts which may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise.

Article XVII - Liability of the Reinsurer

A The liability of the Reinsurer shall follow that of the Company in every case and be subject in all respects to all the general and specific stipulations, clauses, waivers and modifications of the Company’s policies and any endorsements thereon. However, in no event shall this

be construed in any way to provide coverage outside the terms and conditions set forth in this Contract.

B. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third party or any persons not parties to this Contract.

Article XVIII - Errors and Omissions (BRMA 14F)

Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery.

Article XIX - Currency (BRMA 12A)

A. Whenever the word “Dollars” or the “$” sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars.

B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company.

Article XX - Taxes (BRMA 50B)

In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or the District of Columbia.

Article XXI - Federal Excise Tax

A. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of the Internal Revenue Code) to the extent such premium is subject to the Federal Excise Tax.

B. In the event of any return of premium becoming due hereunder the Reinsurer will deduct the applicable percentage from the return premium payable hereon and the Company or its agent should take steps to recover the tax from the United States Government.

Article XXII - Unauthorized Reinsurers

A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company’s ceded United States

outstanding loss and loss adjustment expense reserves (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences) by:

Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or

2. Escrow accounts for the benefit of the Company; and/or

3. Cash advances;

If, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved.

B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an “evergreen clause,” which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes:

1. To reimburse itself for the Reinsurer’s share of losses and/or loss adjustment expense paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer;

2. To reimburse itself for the Reinsurer’s share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer;

3. To fund a cash account in an amount equal to the Reinsurer’s share of any ceded outstanding loss and loss adjustment expense reserves (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences) funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date;

4. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer’s share of the Company’s ceded outstanding loss and loss adjustment expense reserves (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences), if so requested by the Reinsurer.

In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(1) or B(3), or in the case of B(2), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn.

Article XXIII - Insolvency

A. In the event of the insolvency of one or both of the reinsured companies, this reinsurance shall be payable directly to the company or to its liquidator, receiver, conservator or statutory successor on the basis of the liability of the company without diminution because of the insolvency of the company or because the liquidator, receiver, conservator or statutory successor of the company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the company Shall give written notice to the Reinsurer of the pendency of a claim against the company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the company solely as a result of the defense undertaken by the Reinsurer.

B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the company.

C. It is further understood and agreed that, in the event of the insolvency of one or both of the reinsured companies, the reinsurance under this Contract shall be payable directly by the Reinsurer to the company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the company or (2) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the company to such payees.

Article XXIV - Arbitration

A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd’s London Underwriters. In the event that either party should fail to choose an Arbiter within 30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, the two Arbiters shall request the American Arbitration Association to appoint the Umpire. If the American Arbitration Association fails to appoint the Umpire within

30 days after it has been requested to do so, either party may request a justice of a Court of general jurisdiction of the state in which the arbitration is to be held to appoint the Umpire.

B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction.

C. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers participating under the terms of this Contract from several to joint.

D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties.

E. Any arbitration proceedings shall take place at a location mutually agreed upon by the parties to this Contract, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the state in which the Company has its principal office.

Article XXV - Service of Suit (BRMA 49C)

(Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities)

A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the Jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer’s rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States.

B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract.

Article XXVI - Governing Law

This Contract shall be governed by and construed in accordance with the law of the Commonwealth of Massachusetts.

Article XXVII - Agency Agreement

If more than one reinsured company is named as a party to this Contract, the first named company shall be deemed the agent of the other reinsured companies for purposes of sending or receiving notices required by the terms and conditions of this Contract, and for purposes of remitting or receiving any monies due any party.

Article XXVIII - Severability (BRMA 72E)

If any provision of this Contract shall be rendered illegal or unenforceable by the laws, regulations or public policy of any state, such provision shall be considered void in such state, but this shall not affect the validity or enforceability of any other provision of this Contract or the enforceability of such provision in any other jurisdiction.

Article XXIX - Intermediary (BRMA 23A)

Benfield Inc. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through Benfield Inc. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company.

In Witness Whereof, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at:

Boston, Massachusetts, this 9 th day of Jan. in the year 2006.

	/s/ [Illegible]
	Safety Insurance Company
	Safety Indemnity Insurance Company

Schedule A

Excess Catastrophe
Reinsurance Contract
Effective: January 1, 2006

issued to

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts

	Third Excess			Fourth Excess
Company’s Coreinsurance	10.0		%	10.0		%
Reinsurer’s Percentage	90.0		%	90.0		%
Company’s Retention	$	30,000,000		$	60,000,000
Reinsurer’s Per Occurrence Limit	$	30,000,000		$	190,000,000
Reinsurer’s Annual Limit	$	60,000,000		$	380,000,000
Minimum Premium	$	1,980,000		$	4,940,000
Adjustable Premium Rate	2.226		%	5.553		%
Deposit Premium	$	2,475,000		$	6,175,000
Quarterly Deposit Premium	$	618,750		$	1,543,750

The figures listed above for each excess layer shall apply to each Subscribing Reinsurer in the percentage share for that excess layer as expressed in its Interests and Liabilities Agreement attached hereto.

Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (U.S.A.)

This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.

2. Without in any way restricting the operation of paragraph (1) of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to:

Nuclear reactor power plants including all auxiliary property on the site, or

II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and “critical facilities” as such, or

III. Installations for fabricating complete fuel elements or for processing substantial quantities of “special nuclear material,” and for reprocessing, salvaging, chemically separating, storing or disposing of “spent” nuclear fuel or waste materials, or

IV. Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission.

3. Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate

(a) where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or

(b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof.

4. Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against.

5. It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard.

6. The term “special nuclear material” shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof.

7. Reassured to be sole judge of what constitutes:

(a) substantial quantities, and

(b) the extent of installation, plant or site.

Note .-Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that

(a) all policies issued by the Reassured on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.

(b) with respect to any risk located in Canada policies issued by the Reassured on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.

Total Insured Value Exclusion Clause

It is the mutual intention of the parties to exclude risks, other than Offices, Hotels, Apartments, Hospitals, Educational Establishments and Public Utilities (except Railroad Schedules), and Builders Risks on the above classes, where at the time of cession, the Total Insured Value over all interests exceeds $250,000,000. However, the Company shall be protected hereunder, subject to the other terms and conditions of this Contract, if subsequent to cession being made, the Company becomes acquainted with the true facts of the case and discovers that the mutual intention has been inadvertently breached; on condition that the Company shall at the first opportunity, and certainly by next anniversary of the original policy, exclude the risk in question.

It is agreed that this mutual intention does not apply to Contingent Business Interruption or to interests traditionally underwritten as Inland Marine or to Stock and/or Contents written on a blanket basis except where the Company is aware that the Total Insured Value of $250,000,000 is already exceeded for buildings, machinery, equipment and direct use and occupancy at the key location.

It is understood and agreed that this Clause shall not apply hereunder where the Company writes 100% of the risk.

Terrorism Exclusion Clause

A. Notwithstanding any provision to the contrary within this Contract or any addendum thereto, it is agreed that this Contract excludes loss, damage, cost or expense directly or indirectly caused by, contributed to by, resulting from, arising out of or in connection with any “act of terrorism,” as defined in the Terrorism Risk Insurance Act of 2002, as amended by the Terrorism Risk Insurance Extension Act of 2005 (together the “Terrorism Act”), on primary or excess property and casualty insurance issued by the Company, regardless of any other cause or event contributing concurrently or in any sequence to the loss.

B. Notwithstanding the above and subject otherwise to the terms, conditions and limitations of this Contract, this Contract will pay actual loss or damage caused by any act of terrorism which does not meet the definition of “insured loss” set forth in the Terrorism Act or meets the definition of “insured loss” as set forth in the Terrorism Act, but results in loss under a policy that is not included in “property and casualty insurance” as defined in the Terrorism Act, provided, in either case, (1) such loss or damage occurs in a line of insurance otherwise covered by this Contract, and (2) in no event will this Contract provide coverage for loss, damage, cost or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with biological, chemical, radioactive or nuclear explosion, pollution, contamination and/or fire following thereon.

Interests and Liabilities Agreement

American Agricultural Insurance Company
Indianapolis, Indiana
( hereinafter referred to as the “Subscribing Reinsurer” )

with respect to the

Excess Catastrophe
Reinsurance Contract
Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the “Reinsurer” as set forth in the attached Contract captioned above:

0.900% of the Third Excess Catastrophe Reinsurance

0.900% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective at 12:01 a.m., Eastern Standard Time, January 1, 2006 and shall continue in force until 12:01 a.m., Eastern Standard Time, January 1, 2007, unless earlier terminated in accordance with the provisions of the attached Contract.

The Subscribing Reinsurer’s share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Columbus, Ohio, this 12 th day of January in the year 2006.

	/s/ Virgil R. Maxwell
	American Agricultural Insurance Company

		Virgil R. Maxwell Vice President-Domestic Underwriting

Interests and Liabilities Agreement

American Re-Insurance Company
A Delaware Corporation
( hereinafter referred to as the “Subscribing Reinsurer” )

with respect to the

Excess Catastrophe
Reinsurance Contract
Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the “Reinsurer” as set forth in the attached Contract captioned above:

3.000% of the Third Excess Catastrophe Reinsurance
3.000% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective at 12:01 a.m., Eastern Standard Time, January 1, 2006, and shall continue in force until 12:01 a.m., Eastern Standard Time, January 1, 2007, unless earlier terminated in accordance with the provisions of the attached Contract.

The Subscribing Reinsurer’s share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Princeton, New Jersey, this 2 nd day of March in the year 2006.

	/s/ Illegible
	American Re-Insurance Company, A Delaware Corporation

Interests and Liabilities Agreement

Aspen Insurance UK Limited
London, England
( hereinafter referred to as the “Subscribing Reinsurer ”)

with respect to the

Excess Catastrophe
Reinsurance Contract
Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company

and

Safety Indemnity Insurance Company
both of Boston, Massachusetts

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the “Reinsurer” as set forth in the attached Contract captioned above:

4.000% of the Third Excess Catastrophe Reinsurance
2.500% of the Fourth Excess Catastrophe Reinsurance

The Subscribing Reinsurer’s share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Hamilton, Bermuda, this 13 th day of January in the year 2006.

	/s/ Illegible
	Aspen Insurance UK Limited

Interests and Liabilities Agreement

Catlin Insurance Company Ltd.

Hamilton, Bermuda

( hereinafter referred to as the “Subscribing Reinsurer” )

with respect to the

Excess Catastrophe

Reinsurance Contract

Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company

and

Safety Indemnity Insurance Company

both of Boston, Massachusetts

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the “Reinsurer” as set forth in the attached Contract captioned above:

1.500% of the Third Excess Catastrophe Reinsurance

1.500% of the Fourth Excess Catastrophe Reinsurance

The Subscribing Reinsurer’s share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

In Witness Whereof , the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Hamilton, Bermuda, this 12 th day of January in the year 2006

	/s/ Illegible
	Catlin Insurance Company Ltd.

Catlin Inusrance

Company Ltd.

All amendments, [Illegible] and claims to be agreed.

Interests and Liabilities Agreement

Federal Insurance Company

Indianapolis, Indiana

through

Harbor Point Services Inc.

Bernardsville, New Jersey

( hereinafter referred to as the “Subscribing Reinsurer” )

with respect to the

Excess Catastrophe

Reinsurance Contract

Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company

and

Safety Indemnity Insurance Company

both of Boston, Massachusetts

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the “Reinsurer” as set forth in the attached Contract captioned above:

5.000% of the Third Excess Catastrophe Reinsurance

5.000% of the Fourth Excess Catastrophe Reinsurance

The Subscribing Reinsurer’s share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

In Witness Whereof , the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Bernardsville, New Jersey, this 13 th day of January in the year 2006.

	/s/ Julia D. Hassan
	Harbor Point Services Inc. (for and on behalf of Federal Insurance Company) Julia D. Hassan

Reference Nos.: T806 & T807

Interests and Liabilities Agreement

Da Vinci Reinsurance Ltd.

Hamilton, Bermuda

(hereinafter referred to as the “Subscribing Reinsurer”)

with respect to the

Excess Catastrophe

Reinsurance Contract

Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company

and

Safety Indemnity Insurance Company

both of Boston, Massachusetts

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the “Reinsurer” as set forth in the attached Contract captioned above:

2.400% of the Third Excess Catastrophe Reinsurance

2.000% of the Fourth Excess Catastrophe Reinsurance

The Subscribing Reinsurer’s share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

In Witness Whereof , the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Hamilton, Bermuda, this 12th day of January in the year 2006

	/s/ Illegible
	Da Vinci Reinsurance Ltd.

DAVINCI REINSURANCE LTD.

UNDERWRITTEN BY RENAISSANCE U/W MGRS.

Interests and Liabilities Agreement

Endurance Specialty Insurance Ltd.

Hamilton, Bermuda

(hereinafter referred to as the “Subscribing Reinsurer”)

with respect to the

Excess Catastrophe

Reinsurance Contract

Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company

and

Safety Indemnity Insurance Company

both of Boston, Massachusetts

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the “Reinsurer” as set forth in the attached Contract captioned above:

3.500% of the Third Excess Catastrophe Reinsurance

3.500% of the Fourth Excess Catastrophe Reinsurance

The Subscribing Reinsurer’s share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Hamilton, Bermuda, this 12th day of January in the year 2006.

	/s/ Illegible
	Endurance Specialty Insurance Ltd.

Interests and Liabilities Agreement

Folksamerica Reinsurance Company

New York, New York

(hereinafter referred to as the “Subscribing Reinsurer”)

with respect to the

Excess Catastrophe

Reinsurance Contract

Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company

and

Safety Indemnity Insurance Company

both of Boston, Massachusetts

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the “Reinsurer” as set forth in the attached Contract captioned above:

3.000% of the Third Excess Catastrophe Reinsurance

2.000% of the Fourth Excess Catastrophe Reinsurance

The Subscribing Reinsurer’s share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

New York, New York, this 31 day of January in the year 2006.

	/s/ Robert Kuehn
	Vice President
	Folksamerica Reinsurance Company

Interests and Liabilities Agreement

Hannover Re (Bermuda), Ltd.

Hamilton, Bermuda

(hereinafter referred to as the “Subscribing Reinsurer”)

with respect to the

Excess Catastrophe

Reinsurance Contract

Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company

and

Safety Indemnity Insurance Company

both of Boston, Massachusetts

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the “Reinsurer” as set forth in the attached Contract captioned above:

6.500% of the Third Excess Catastrophe Reinsurance UX 305 3203 06

7.000% of the Fourth Excess Catastrophe Reinsurance UX 305 7204 06

In any action, suit or proceeding to enforce the Subscribing Reinsurer’s obligations under the attached Contract, service of process may be made upon Mendes & Mount, 750 Seventh Avenue, New York, New York 10019.

In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Hamilton, Bermuda, this 12th day of January in the year .

	/s/ Illegible
	Hannover Re (Bermuda), Ltd.

Hannover re

Hannover Re (Bermuda), Ltd.

Hannover re®

Hannover Re (Bermuda), Ltd.

Interests and Liabilities Agreement

Montpelier Reinsurance Limited

Hamilton, Bermuda

(hereinafter referred to as the “Subscribing Reinsurer”)

with respect to the

Excess Catastrophe

Reinsurance Contract

Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company

and

Safety Indemnity Insurance Company

both of Boston, Massachusetts

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the “Reinsurer” as set forth in the attached Contract captioned above:

5.000% of the Third Excess Catastrophe Reinsurance

5.000% of the Fourth Excess Catastrophe Reinsurance

The Subscribing Reinsurer’s share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Hamilton, Bermuda, this 13th day of January in the year 2006.

	MONTPELIER
	Montpelier Reinsurance Limited

Interests and Liabilities Agreement

Odyssey America Reinsurance Corporation

Stamford, Connecticut

(hereinafter referred to as the “Subscribing Reinsurer”)

with respect to the

Excess Catastrophe

Reinsurance Contract

Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company

and

Safety Indemnity Insurance Company

both of Boston, Massachusetts

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the “Reinsurer” as set forth in the attached Contract captioned above:

3.000% of the Third Excess Catastrophe Reinsurance

3.000% of the Fourth Excess Catastrophe Reinsurance

The Subscribing Reinsurer’s share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Stamford, Connecticut, this 24th day of January in the year 2006.

	/s/ Illegible
	Odyssey America Reinsurance Corporation

Interests and Liabilities Agreement

Partner Reinsurance Company
Pembroke Parish, Bermuda
( hereinafter referred to as the “ Subscribing Reinsurer ”)

with respect to the

Excess Catastrophe
Reinsurance Contract
Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the “Reinsurer” as set forth in the attached Contract captioned above:

4.500% of the Third Excess Catastrophe Reinsurance

4.500% of the Fourth Excess Catastrophe Reinsurance

The Subscribing Reinsurer’s share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Pembroke Parish, Bermuda, this 16 th day of January in the year 2006.

	/s/ Illegible
	Partner Reinsurance Company

Interests and Liabilities Agreement

Platinum Underwriters Reinsurance, Inc.
Baltimore, Maryland
( hereinafter referred to as the “Subscribing Reinsurer” )

with respect to the

Excess Catastrophe
Reinsurance Contract
Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the “Reinsurer” as set forth in the attached Contract captioned above:

4.500% of the Third Excess Catastrophe Reinsurance
3.500% of the Fourth Excess Catastrophe Reinsurance

The Subscribing Reinsurer’s share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

In Witness Whereof , the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

New York, New York, this 11 day of January in the year 2006.

	/s/ Illegible
	Platinum Underwriters Reinsurance, Inc.

Interests and Liabilities Agreement

Renaissance Reinsurance, Ltd.
Hamilton, Bermuda
( hereinafter referred to as the “Subscribing Reinsurer” )

with respect to the

Excess Catastrophe
Reinsurance Contract
Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the “Reinsurer” as set forth in the attached Contract captioned above:

3.600% of the Third Excess Catastrophe Reinsurance
3.000% of the Fourth Excess Catastrophe Reinsurance

The Subscribing Reinsurer’s share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

In Witness Whereof , the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Hamilton, Bermuda, this 12 th day of January in the year 2006.

	/s/ Illegible
	Renaissance Reinsurance, Ltd.

Interests and Liabilities Agreement

Swiss Reinsurance America Corporation
Armonk, New York
through
Swiss Re Underwriters Agency, Inc.
Calabasas, California
( hereinafter referred to as the “Subscribing Reinsurer” )

with respect to the

Excess Catastrophe
Reinsurance Contract
Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the “Reinsurer” as set forth in the attached Contract captioned above:

0%		of the Third Excess Catastrophe Reinsurance
5.500%		of the Fourth Excess Catastrophe Reinsurance

The Subscribing Reinsurer’s share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

In Witness Whereof , the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Calabasas, California, this 26 th day of January in the year 2006.

	/s/ Illegible
	Swiss Re Underwriters Agency, Inc. (for Swiss Reinsurance America Corporation)

Interests and Liabilities Agreement

XL Re Ltd
Hamilton, Bermuda
( hereinafter referred to as the “Subscribing Reinsurer”)

with respect to the

Excess Catastrophe
Reinsurance Contract
Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston. Massachusetts

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the “Reinsurer” as set forth in the attached Contract captioned above:

6.000% of the Third Excess Catastrophe Reinsurance

6.000% of the Fourth Excess Catastrophe Reinsurance

The Subscribing Reinsurer’s share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Hamilton, Bermuda, this 8 th day of February in the year 2006.

	/s/ Illegible
	XL Re Ltd.

Interests and Liabilities Agreement

Amlin Bermuda Limited
Hamilton, Bermuda
( hereinafter referred to as the “Subscribing Reinsurer”)

with respect to the

Excess Catastrophe
Reinsurance Contract
Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the “Reinsurer” as set forth in the attached Contract captioned above:

3.348% of the Third Excess Catastrophe Reinsurance

3.015% of the Fourth Excess Catastrophe Reinsurance

The Subscribing Reinsurer’s share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Hamilton, Bermuda, this 1 st day of February in the year 2006

	/s/ Illegible
	Amlin Bermuda Limited

Interests and Liabilities Agreement

Certain Underwriting Members of Lloyd’s
shown in the Signing Schedules attached hereto
(hereinafter referred to as the “Subscribing Reinsurer”)

with respect to the

Excess Catastrophe
Reinsurance Contract
Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts

The Subscribing Reinsurer hereby accepts the following percentage shares in the Interests and liabilities of the “Reinsurer” as set forth in the attached Contract captioned above:

26.952% of the Third Excess Catastrophe Reinsurance

24.885% of the Fourth Excess Catastrophe Reinsurance

The Agreement shall become effective at 12:01 a.m., Eastern Standard Time, January 1, 2006, and shall continue in force until 12:01 a.m., Eastern Standard Time, January 1, 2007, unless earlier terminated in accordance with the provisions of the attached Contract.

The Subscribing Reinsurer’s share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

In any action, suit or proceeding to enforce the Subscribing Reinsurer’s obligations under the attached Contract, service of process may be made upon Mendes & Mount, 750 Seventh Avenue, New York, New York 10019.

Signed for and on behalf of the Subscribing Reinsurer in the Signing Schedules attached hereto.

Signing Schedule

attaching to and forming part of the

Interests and Liabilities Agreement
of

Certain Underwriting Members of Lloyd’s

with respect to the

Excess Catastrophe
Reinsurance Contract
Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company
as defined in the above captioned Contract

Contract Number: B 1108 2006 S3P1123

3 rd Excess Limits: USD 30,000,000 excess of USD 30,000,000

Signing Schedule

attaching to and forming part of the

Interests and Liabilities Agreement
of

Certain Underwriting Members of Lloyd’s

with respect to the

Excess Catastrophe
Reinsurance Contract
Effe ctive: January 1, 2006

issued to and duly executed by

Safety Insurance Company
as defined in the above captioned Contract

Contract Number: B 1108 2006 S3P1123

4 th Excess Limits: USD 190,000,000 excess of USD 60,000,000

Excess Catastrophe
Reinsurance Contract
Effective: January 1, 2006

Issued to

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts

Table of Contents

Article		Page

I	Classes of Business Reinsured	1
II	Commencement and Termination	1
III	Territory (BRMA 51A)	2
IV	Exclusions	2
V	Retention and Limit	4
VI	Reinstatement	4
VII	Definitions	5
VIII	Other Reinsurance	6
IX	Loss Occurrence	6
X	Loss Notices and Settlements	8
XI	Salvage and Subrogation	9
XII	Reinsurance Premium	9
XIII	Late Payments	10
XIV	Offset (BRMA 36C)	11
XV	Access to Records (BRMA 1D)	11
XVI	Net Retained Lines (BRMA 32E)	11
XVII	Liability of the Reinsurer	11
XVIII	Errors and Omissions (BRMA 14F)	12
XIX	Currency (BRMA 12A)	12
XX	Taxes (BRMA 50B)	12
XXI	Federal Excise Tax	12
XXII	Unauthorized Reinsurers	12
XXIII	Insolvency	14
XXIV	Arbitration	14
XXV	Service of Suit (BRMA 49C)	15
XXVI	Governing Law	16
XXVII	Agency Agreement	16
XXVIII	Severability (BRMA 72E)	16
XXIX	Intermediary (BRMA 23A)	16
	Schedule A

Excess Catastrophe
Reinsurance Contract
Effective: January 1, 2006

issued to

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts
(hereinafter referred to collectively as the “Company”)

The Subscribing Reinsurer(s) Executing the
Interests and Liabilities Agreement(s)
Attached Hereto
(hereinafter referred to as the “Reinsurer”)

Article I - Classes of Business Reinsured

Article II - Commencement and Termination

A. This Contract shall become effective at 12.01 a.m., Eastern Standard Time, January 1, 2006, with respect to losses arising out of loss occurrences commencing at or after that time and date, and shall remain in force until 12:01 a.m., Eastern Standard Time, January 1, 2007.

1. The Subscribing Reinsurer’s policyholders’ surplus at the inception of this Contract has been reduced by more than 20.0% of the amount of surplus 12 months prior to that date; or

3. The Subscribing Reinsurer’s A.M. Best’s rating has been assigned or downgraded below A- and/or Standard & Poor’s rating has been assigned or downgraded below BBB+; or

5. A State Insurance Department or other legal authority has ordered the Subscribing Reinsurer to cease writing business; or

7. The Subscribing Reinsurer has reinsured its entire liability under this Contract without the Company’s prior written consent; or

8. The Subscribing Reinsurer has ceased assuming new and renewal property treaty reinsurance business.

Article III - Territory (BRMA 51A)

The territorial limits of this Contract shall be identical with those of the Company’s policies.

Article IV - Exclusions

This Contract does not apply to and specifically excludes the following

1. Loss or damage occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, martial law or confiscation by order of any government or public authority, but not excluding loss or damage which would be covered under a standard form of policy containing a standard war exclusion clause.

2. Nuclear risks as defined in the “Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance” attached to and forming part of this Contract.

4. Financial guarantee and insolvency.

5. Third party liability.

6. All classes of business not specifically listed in the Classes of Business Reinsured Article.

7. Reinsurance assumed, except pro rata local agency reinsurance on specific risks.

8. Ex-gratia payments.

9. Risks excluded under the provisions of the “Total Insured Value Clause” attached to and forming part of this Contract.

11. Loss or liability excluded under the “Terrorism Exclusion Clause” attached to and forming part of this Contract.

Article V - Retention and Limit

Article VI - Reinstatement

1. The percentage of the occurrence limit for the excess layer reinstated (based on the loss paid by the Reinsurer under that excess layer); times

2. The earned reinsurance premium for the excess layer reinstated for the term of this Contract (exclusive of reinstatement premium).

C. Notwithstanding anything stated herein, the liability of the Reinsurer under any excess layer of reinsurance coverage provided by this Contract shall not exceed either of the following:

1. The percentage, shown as “Reinsurer’s Percentage for that excess layer, of the amount, shown as “Reinsurer’s Per Occurrence Limit” for that excess layer in Schedule A attached hereto, as respects loss or losses arising out of any one loss occurrence; or

2. The percentage, shown as “Reinsurer’s Percentage” for that excess layer, of the amount, shown as “Reinsurer’s Annual Limit” for that excess layer in Schedule A attached hereto, in all during the term of this Contract.

Article VII - Definitions

B. “Loss in excess of policy limits” and “extra contractual obligations” as used herein shall be defined as follows:

1. “Loss in excess of policy limits” shall mean 80.0% of any amount paid or payable by the Company in excess of its policy limits, but otherwise within the terms of its policy, such loss in excess of the Company’s policy limits having been incurred because of, but not limited to, failure by the Company to settle within the policy limits or by reason of the Company’s alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of an action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such an action.

2. “Extra contractual obligations” shall mean 80.0% of any punitive, exemplary, compensatory or consequential damages paid or payable by the Company, not covered by any other provision of this Contract and which arise from the handling of any claim on business subject to this Contract, such liabilities arising because of, but not limited to, failure by the Company to settle within the policy limits or by reason of the Company’s alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of an action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such an action. An extra contractual obligation shall be deemed, in all circumstances, to have occurred on the same date as the loss covered or alleged to be covered under the policy.

C. “Loss adjustment expense” as used herein shall mean expenses assignable to the investigation, appraisal, adjustment, settlement, litigation, defense and/or appeal of specific claims, regardless of how such expenses are classified for statutory purposes. Loss adjustment expense shall include, but not be limited to, interest on judgments, expenses of outside adjusters, and declaratory judgment expenses or other legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto, but shall not include office expenses or salaries of the Company’s regular employees not classified as loss adjusters.

Article VIII - Other Reinsurance

A. The Company shall maintain in force property per risk excess of loss reinsurance, recoveries under which shall inure to the benefit of this Contract.

B. The Company shall be permitted to carry underlying property catastrophe excess of loss reinsurance, recoveries under which shall inure solely to the benefit of the Company and be entirely disregarded in applying all of the provisions of this Contract.

Article IX - Loss Occurrence

1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto.

2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period

D. No individual losses occasioned by an event that would be covered by 72 hours clauses may be included in any “loss occurrence” claimed under the 168 hours provision.

E. Any date change, including leap-year calculations, shall not in and of itself be regarded as an event for purposes of this Contract.

This includes any loss, damage, cost, claim or expense, whether preventative, remedial or otherwise, directly or indirectly arising out of or relating to:

a. The calculation, comparison, differentiation, sequencing or processing of data involving a date change, including leap-year calculations, by any computer

system, hardware, program or software and/or any microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the insured or not; or

b. Any change, alteration or modification involving a data change, including leap-year calculations, to any such computer system, hardware, program or software or any microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the insured or not.

This subparagraph shall apply regardless of any other cause or event that contributes concurrently or in any sequence to the loss, damage, cost, claim or expense.

However, this subparagraph shall not apply as respects physical damage occurring at the insured’s premises arising out of the perils covered under this Contract.

F. Losses arising, directly or indirectly, out of:

1. Loss of, alteration of, or damage to:

2. A reduction in the functionality availability or operation of

Fire, lightning, explosion, aircraft or vehicle impact, falling objects, windstorm, hail, tornado, cyclone, hurricane, earthquake, volcano, tsunami, flood, freeze or weight of snow.

Article X - Loss Notices and Settlements

Article XI - Salvage and Subrogation

Article XII - Reinsurance Premium

A. As premium for each excess layer of reinsurance coverage provided by this Contract, the Company shall pay the Reinsurer the greater of the following:

1 The amount, shown as “Minimum Premium” for that excess layer in Schedule A attached hereto (or a pro rata portion of the Subscribing Reinsurer’s share, in the event that such Subscribing Reinsurer’s share under any excess layer is terminated prior to January 1, 2007); or

2 The percentage, shown as “Premium Rate” for that excess layer in Schedule A attached hereto, of the Company’s net earned premium for the term of this Contract.

Article XIII - Late Payments

A. The provisions of this Article shall not be implemented unless specifically invoked, in writing, by one of the parties to this Contract.

B. In the event any premium, loss or other payment due either party is not received by the intermediary named in the Intermediary Article (BRMA 23A) (hereinafter referred to as the “Intermediary”) by the payment due date, the party to whom payment is due may, by notifying the Intermediary in writing, require the debtor party to pay, and the debtor party agrees to pay, an interest penalty on the amount past due calculated for each such payment on the last business day of each month as follows:

1. The number of full days which have expired since the due date or the last monthly calculation, whichever the lesser; times

2. 1/365ths of the six-month United States Treasury Bill rate as quoted in The Wall Street Journal on the first business day of the month for which the calculation is made; times

3. The amount past due, including accrued interest.

It is agreed that interest shall accumulate until payment of the original amount due plus interest penalties have been received by the Intermediary.

C. The establishment of the due date shall, for purposes of this Article, be determined as follows:

As respects the payment of routine deposits and premiums due the Reinsurer, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 30 business days after the date of transmittal by the Intermediary of the initial billing for each such payment.

For purposes of interest calculations only, amounts due hereunder shall be deemed paid upon receipt by the Intermediary.

D. Nothing herein shall be construed as limiting or prohibiting a Subscribing Reinsurer from contesting the validity of any claim, or from participating in the defense of any claim or suit,

Article XIV - Offset (BRMA 36C)

Article XV - Access to Records (BRMA 1D)

The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance.

Article XVI - Net Retained Lines (BRMA 32E)

Article XVII - Liability of the Reinsurer

A. The liability of the Reinsurer shall follow that of the Company in every case and be subject in all respects to all the general and specific stipulations, clauses, waivers and modifications of the Company’s policies and any endorsements thereon. However, in no event shall this

be construed in any way to provide coverage outside the terms and conditions set forth in this Contract.

B. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third party or any persons not parties to this Contract.

Article XVIII - Errors and Omissions (BRMA 14F)

Article XIX - Currency (BRMA 12A)

Article XX - Taxes (BRMA 50B)

Article XXI - Federal Excise Tax

Article XXII - Unauthorized Reinsurers

A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company’s ceded United States

outstanding loss and loss adjustment expense reserves (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences) by:

Clean, irrevocable and unconditional letters of credit issued and confirmed. If confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities: and/or

2. Escrow accounts for the benefit of the Company; and/or

3. Cash advances;

1. To reimburse itself for the Reinsurer’s share of losses and/or loss adjustment expense paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer;

2. To reimburse itself for the Reinsurer’s share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer;

Article XXIII - Insolvency

A. In the event of the insolvency of one or both of the reinsured companies, this reinsurance shall be payable directly to the company or to its liquidator, receiver, conservator or statutory successor on the basis of the liability of the company without diminution because of the insolvency of the company or because the liquidator, receiver, conservator or statutory successor of the company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the company shall give written notice to the Reinsurer of the pendency of a claim against the company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the company solely as a result of the defense undertaken by the Reinsurer.

Article XXIV - Arbitration

30 days after it has been requested to do so, either party may request a justice of a Court of general jurisdiction of the state in which the arbitration is to be held to appoint the Umpire.

Article XXV - Service of Suit (BRMA 49C)

A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer’s rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States.

Article XXVI - Governing Law

This Contract shall be governed by and construed in accordance with the law of the Commonwealth of Massachusetts.

Article XXVII - Agency Agreement

Article XXVIII - Severability (BRMA 72E)

Article XXIX - Intermediary (BRMA 23A)

In Witness Whereof , the Company by its duly authorized representative has executed this Contract as of the date undermentioned at:

Boston, Massachusetts, this 9 th day of Jan. in the year 2006.

	/s/ Illegible
	Safety Insurance Company
	Safety Indemnity Insurance Company

Schedule A

Excess Catastrophe
Reinsurance Contract
Effective: January 1, 2006

issued to

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts

	Third Excess			Fourth Excess

Company’s Coreinsurance	10.0		%	10.0		%
Reinsurer’s Percentage	90.0		%	90.0		%
Company’s Retention	$	30,000,000		$	60,000,000
Reinsurer’s Per Occurrence Limit	$	30,000,000		$	190,000,000
Reinsurer’s Annual Limit	$	60,000,000		$	380,000,000
Minimum Premium	$	1,980,000		$	4,940,000
Adjustable Premium Rate	2.226		%	5.553		%
Deposit Premium	$	2,475,000		$	6,175,000
Quarterly Deposit Premium	$	618,750		$	1,543,750

Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (U.S.A.)

1. This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.

2. Without in any way restricting the operation of paragraph (1) of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to:

I. Nuclear reactor power plants including all auxilliary property on the site, or

II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and “critical facilities” as such, or

IV. Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive Isotopes or other products of nuclear fission.

(a) where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or

Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against.

8. The term “special nuclear material” shall have the meaning given it in the Atomic Energy Act of 1964 or by any law amendatory thereof.

7. Reassured to be sole judge of what constitutes:

(a) substantial quantities, and

(b) the extent of installation, plant or site.

Note. Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that

Total Insured Value Exclusion Clause

It is agreed that this mutual intention does not apply to Contingent Business interruption or to interests traditionally underwritten as Inland Marine or to Stock and/or Contents written on a blanket basis except where the Company is aware that the Total Insured Value of $250,000,000 is already exceeded for buildings, machinery, equipment and direct use and occupancy at the key location.

It is understood and agreed that this Clause shall not apply hereunder where the Company writes 100% of the risk.

Terrorism Exclusion Clause

Exhibit 10.30

Property Excess of Loss
Reinsurance Contract
Effective: January 1, 2006

Issued to

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts

Table of Contents

Article		Page

	Classes of Business Reinsured

II	Commencement and Termination

III	Territory (BRMA 51A)	2

IV	Exclusions	2

V	Retention and Limit	3

VI	Reinstatement	4

VII	Definitions	5

VIII	Loss Occurrence	6

IX	Loss Notices and Settlements	9

X	Salvage and Subrogation	9

XI	Reinsurance Premium	9

XII	Late Payments	10

XIII	Offset (BRMA 36C)	11

XIV	Access to Records (BRMA 1D)	11

XV	Liability of the Reinsurer	12

XVI	Net Retained Lines (BRMA 32B)	12

XVII	Errors and Omissions (BRMA 14F)	12

XVIII	Currency (BRMA 12A)	12

XIX	Taxes (BRMA 50B)	13

XX	Federal Excise Tax	13

XXI	Unauthorized Reinsurers	13

XXII	Insolvency	14

XXIII	Arbitration	15

XXIV	Service of Suit (BRMA 49C)	16

XXV	Agency Agreement	16

XXVI	Governing Law (BRMA 71B)	16

XXVII	Severability (BRMA 72E)	17

XXVIII	Intermediary (BRMA 23A)	17

	Schedule A

Property Excess of Loss
Reinsurance Contract
Effective: January 1, 2006

issued to

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts
( hereinafter referred to collectively as the “Company”)

The Subscribing Reinsurer(s) Executing the
Interests and Liabilities Agreement(s)
Attached Hereto
(hereinafter referred to as the “Reinsurer” )

Article I - Classes of Business Reinsured

By this Contract the Reinsurer agrees to reinsure the excess liability which may accrue to the Company under its policies, contracts and binders of insurance or reinsurance (hereinafter called “policies”) in force on the effective date hereof or issued or renewed on or after that date, and classified by the Company as Fire, Allied Lines, Homeowners Multiple Peril (Section I only), Commercial Multiple Peril (Section I only) and Inland Marine business, subject to the terms, conditions and limitations set forth herein and in Schedule A attached to and forming part of this Contract.

Article II - Commencement and Termination

A. This Contract shall become effective at 12:01 a.m., Eastern Standard Time, January 1, 2006, with respect to losses occurring at or after that time and date, and shall remain in force until 12:01 a.m., Eastern Standard Time, January 1, 2007.

1. The Subscribing Reinsurer’s policyholders’ surplus at the inception of this Contract has been reduced by more than 20.0% of the amount of surplus 12 months prior to that date; or

2 . The Subscribing Reinsurer’s policyholders’ surplus at any time during the term of this Contract has been reduced by more than 20.0% of the amount of surplus at the date

of the Subscribing Reinsurer’s most recent financial statement filed with regulatory authorities and available to the public as of the inception of this Contract; or

3. The Subscribing Reinsurer’s A.M. Best’s rating has been assigned or downgraded below A- and/or Standard & Poor’s rating has bean assigned or downgraded below BBB+; or

5. A State Insurance Department or other legal authority has ordered the Subscribing Reinsurer to cease writing business; or

7. The Subscribing Reinsurer has reinsured its entire liability under this Contract without the Company’s prior written consent; or

8. The Subscribing Reinsurer has ceased assuming new and renewal property treaty reinsurance business.

C. The Reinsurer shall have no liability hereunder with respect to losses occurring after the effective date of termination.

Article III - Territory (BRMA 51A)

The territorial limits of this Contract shall be identical with those of the Company’s policies

Article IV - Exclusions

This Contract does not apply to and specifically excludes the following

2. Nuclear risks as defined in the “Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance” attached to and forming part of this Contract.

3. Liability as a member, subscriber or reinsurer of any Pool, Syndicate or Association; and any combination of insurers or reinsurers formed for the purpose of covering

specific perils, specific classes of business or for the purpose of insuring risks located in specific geographical areas; but this exclusion shall not apply to FAIR Plans or to SIR Pool, Franklin Pool, Coastal Pools, Beach Plans or similar plans, however styled. It is understood and agreed, however, that this reinsurance does not include any increase in liability to the Company resulting from (a) the inability of any other participant in a FAIR Plan. SIR Pool, Franklin Pool, Coastal Pool, Beach Plan or similar plan to meet its liability, or (b) any claim against such a FAIR Plan, SIR Pool, Franklin Pool, Coastal Pool, Beach Plan or similar plan, or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund.

4. Financial guarantee and insolvency.

5. Third party liability.

6. All liability of the Company arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. “Insolvency fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, however denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part.

7. All classes of business not specifically listed in the Classes of Business Reinsured Article.

8. Reinsurance assumed, except pro rata local agency reinsurance on specific risks.

9. Ex-gratia payments.

10. Risks excluded under the provisions of the “Total Insured Value Clause” attached to and forming part of this Contract.

11. Loss or liability excluded under the “Terrorism Exclusion Clause” attached to and forming part of this Contract.

Article V - Retention and Limit

each risk, each loss. The Reinsurer shall then be liable, as respects each excess layer, for the amount by which such ultimate net loss exceeds the Company’s applicable retention, but the liability of the Reinsurer under each excess layer shall not exceed the amount, as respects each risk, each loss, shown as “Reinsurer’s Per Risk Limit” for that excess layer in Schedule A attached hereto, nor shall it exceed the amount, shown as “Reinsurer’s Per Occurrence Limit” for that excess layer in Schedule A attached hereto, as respects any one loss occurrence for the contract year under consideration.

B. The Company shall be the sole judge of what constitutes “one risk,” except that in no event shall a building and its contents be considered more than one risk.

C. The Company shall be permitted to carry facultative reinsurance, recoveries under which shall inure to the benefit of this Contract.

Article VI - Reinstatement

1. As respects the First Excess Layer:

a. For the first and second amount, shown as “Reinsurer’s Per Risk Limit” for that excess layer in Schedule A attached hereto, of ultimate net loss so reinstated, the Company shall pay no additional premium.

b. For the third amount, shown as “Reinsurer’s Per Risk Limit” for that excess layer in Schedule A attached hereto, of ultimate net loss so reinstated, the Company agrees to pay additional premium equal to the product of the following:

The percentage of the per risk limit for the excess layer reinstated (based on the loss paid by the Reinsurer under that excess layer); times

ii. The earned reinsurance premium for the excess layer reinstated for the term of this Contract (exclusive of reinstatement premium).

2. As respects the Second Excess Layer:

a. For the first amount, shown as “Reinsurer’s Per Risk Limit” for that excess layer in Schedule A attached hereto, of ultimate net loss so reinstated, the Company shall pay no additional premium.

b. For the second amount, shown as “Reinsurer’s Per Risk Limit” for that excess layer in Schedule A attached hereto, of ultimate net loss so reinstated, the Company agrees to pay additional premium equal to the product of the following:

The percentage of the per risk limit for the excess layer reinstated (based on the loss paid by the Reinsurer under that excess layer); times

ii. The earned reinsurance premium for the excess layer reinstated for the term of this Contract (exclusive of reinstatement premium).

3. As respects the Third Excess Layer, for each amount so reinstated, the Company agrees to pay additional premium equal to the product of the following:

a. The percentage of the per risk limit for the excess layer reinstated (based on the loss paid by the Reinsurer under that excess layer); times

b. The earned reinsurance premium for the excess layer reinstated for the term of this Contract (exclusive of reinstatement premium).

C. Notwithstanding anything stated herein, the liability of the Reinsurer under any excess layer of reinsurance coverage provided by this Contract shall not exceed any of the following:

1. The amount, shown as “Reinsurer’s Per Risk Limit” for that excess layer in Schedule A attached hereto, as respects each risk, each loss; or

2. The amount, shown as “Reinsurer’s Per Occurrence Limit” for that excess layer in Schedule A attached hereto, as respects loss or losses arising out of any one loss occurrence; or

3. The amount, shown as “Reinsurer’s Term Limit” for that excess layer in Schedule A attached hereto, in all during the term of this Contract.

Article VII - Definitions

A. “Ultimate net loss” as used herein is defined as the sum or sums (including loss in excess of policy limits, extra contractual obligations, and all loss adjustment expense, as hereinafter defined) paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company’s ultimate net loss has been ascertained.

B. “Loss in excess of policy limits” and “extra contractual obligations” as used herein shall be defined as follows:

“Loss in excess of policy limits” shall mean 90.0% of any amount paid or payable by the Company in excess of its policy limits, but otherwise within the terms of its policy, such loss in excess of the Company’s policy limits having been incurred because of, but not limited to, failure by the Company to settle within the policy limits or by reason of the Company’s alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of an action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such an action.

2 “Extra contractual obligations” shall mean 90.0% of any punitive, exemplary, compensatory or consequential damages paid or payable by the Company, not covered by any other provision of this Contract and which arise from the handling of any claim on business subject to this Contract, such liabilities arising because of, but not limited to, failure by the Company to settle within the policy limits or by reason of the Company’s alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such an action. An extra contractual obligation shall be deemed, in all circumstances, to have occurred on the same date as the loss covered or alleged to be covered under the policy.

C. “Loss adjustment expense” as used herein shall mean expenses assignable to the investigation, appraisal, adjustment, settlement, litigation, defense and/or appeal of specific claims, regardless of how such expenses are classified for statutory reporting purposes. Loss adjustment expense shall include, but not be limited to, interest on judgments, expenses of outside adjusters, and declaratory judgment expenses or other legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto, but shall not include office expenses or salaries of the Company’s regular employees not classified as loss adjusters.

Article VIII - Loss Occurrence

Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one “loss occurrence” shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event, except that the term “loss occurrence” shall be further defined as follows:

2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured’s premises by strikers, provided such occupation commenced during the aforesaid period.

included in more than one such period and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss.

D. No individual losses occasioned by an event that would be covered by 72 hours clauses may be included in any “loss occurrence” claimed under the 168 hours provision.

E. Any date change, including leap-year calculations, shall not in and of itself be regarded as an event for purposes of this Contract.

This includes any loss, damage, cost, claim or expense, whether preventative, remedial or otherwise, directly or indirectly arising out of or relating to:

a. The calculation, comparison, differentiation, sequencing or processing of data involving a date change, including leap-year calculations, by any computer system, hardware, program or software and/or any microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the insured or not: or

This subparagraph shall apply regardless of any other cause or event that contributes concurrently or in any sequence to the loss, damage, cost, claim or expense.

However, this subparagraph shall not apply as respects physical damage occurring at the insured’s premises arising out of the perils covered under this Contract.

F. Losses arising, directly or indirectly, out of:

1. Loss of, alteration of, or damage to;

2. A reduction in the functionality, availability or operation of

Fire, lightning, explosion, aircraft or vehicle impact, falling objects, windstorm, hail, tornado, cyclone, hurricane, earthquake, volcano, tsunami, flood, freeze or weight of snow.

Article IX - Loss Notices and Settlements

A. Whenever a loss sustained by the Company appears likely to result in a claim hereunder, the Company shall notify the Reinsurer, and the Reinsurer shall have the right to participate in the adjustment of the loss at its own expense.

Article X - Salvage and Subrogation

Article XI - Reinsurance Premium

A. As premium for each excess layer of reinsurance coverage provided by this Contract, the Company shall pay the Reinsurer the greater of the following:

1. The amount, shown as “Annual Minimum Premium” for that excess layer in Schedule A attached hereto (or a pro rata portion thereof if a Subscribing Reinsurer’s share under that excess layer is terminated in accordance with the provisions of this Contract); or

2. The percentage, shown as “Premium Rate” for that excess layer in Schedule A attached hereto, of the Company’s net earned premium for the term of this Contract.

B. The Company shall pay the Reinsurer an annual deposit premium for each excess layer of the amount, shown as “Annual Deposit Premium” for that excess layer in Schedule A attached hereto, in four equal installments of the amount, shown as “Quarterly Deposit Premium” for that excess layer in Schedule A attached hereto, on January 1, April 1, July 1 and October 1 of 2006. In the event a Subscribing Reinsurer’s share under any excess

layer hereof is terminated, no quarterly deposit premium installment for such layer(s) shall be due to such Subscribing Reinsurer after the effective date of termination.

Article XII - Late Payments

A. The provisions of this Article shall not be implemented unless specifically invoked, in writing, by one of the parties to this Contract.

B. In the event any premium, loss or other payment due either party is not received by the intermediary named in the intermediary Article (BRMA 23A) (hereinafter referred to as the “Intermediary”) by the payment due date, the party to whom payment is due may, by notifying the Intermediary in writing, require the debtor party to pay, and the debtor party agrees to pay, an interest penalty on the amount past due calculated for each such payment on the last business day of each month as follows:

1. The number of full days which have expired since the due date or the last monthly calculation, whichever the lesser; times

2. 1/365ths of the six-month United States Treasury Bill rate as quoted in The Wall Street Journal on the first business day of the month for which the calculation is made; times

3. The amount past due, including accrued interest

It is agreed that interest shall accumulate until payment of the original amount due plus interest penalties have been received by the Intermediary.

C. The establishment of the due date shall, for purposes of this Article, be determined as follows:

For purposes of interest calculations only, amounts due hereunder shall be deemed paid upon receipt by the Intermediary.

D. Nothing herein shall be construed as limiting or prohibiting a Subscribing Reinsurer from contesting the validity of any claim, or from participating in the defense of any claim or suit, or prohibiting either party from contesting the validity of any payment or from initiating any arbitration or other proceeding in accordance with the provisions of this Contract. If the debtor party prevails in an arbitration or other proceeding, then any interest penalties due hereunder on the amount in dispute shall be null and void. If the debtor party loses in such proceeding, then the interest penalty on the amount determined to be due hereunder shall be calculated in accordance with the provisions set forth above unless otherwise determined by such proceedings. If a debtor party advances payment of any amount it is contesting, and proves to be correct in its contestation, either in whole or in part, the other party shall reimburse the debtor party for any such excess payment made plus interest on the excess amount calculated in accordance with this Article.

Article XIII - Offset (BRMA 36C)

Article XIV - Access to Records (BRMA 1D)

The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance.

Article XV - Liability of the Reinsurer

B. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third party or any persons not parties to this Contract.

Article XVI - Net Retained Lines (BRMA 32B)

A. This Contract applies only to that portion of any policy which the Company retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any policy which the Company retains net for its own account shall be included.

Article XVII - Errors and Omissions (BRMA 14F)

Article XVIII - Currency (BRMA 12A)

Article XIX - Taxes (BRMA 50B)

Article XX - Federal Excise Tax

A. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon as imposed under Section 4371 of the Internal Revenue Code to the extent such premium is subject to the Federal Excise Tax.

Article XXI - Unauthorized Reinsurers

A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company’s ceded United States outstanding loss and loss adjustment expense reserves (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences) by:

1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or

2. Escrow accounts for the benefit of the Company; and/or

3. Cash advances;

if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved.

its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes:

1. To reimburse itself for the Reinsurer’s share of losses and/or loss adjustment expense paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer;

2. To reimburse itself for the Reinsurer’s share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer;

Article XXII - Insolvency

A. In the event of the insolvency of one or both of the reinsured companies, this reinsurance shall be payable directly to the company or to its liquidator, receiver, conservator or statutory successor on the basis of the liability of the company without diminution because of the insolvency of the company or because the liquidator, receiver, conservator or statutory successor of the company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the company shall give written notice to the Reinsurer of the pendency of a claim against the company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the company solely as a result of the defense undertaken by the Reinsurer.

C. It is further understood and agreed that, in the event of the insolvency of one or both of the reinsured companies, the reinsurance under this Contract shall be payable directly by the Reinsurer to the company or to its liquidator, receiver or statutory successor, except as provided by Section 411B(a) of the New York Insurance Law or except (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the company or (2) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the company to such payees.

Article XXIII - Arbitration

D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two

Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties.

Article XXIV - Service of Suit (BRMA 49C)

Article XXV - Agency Agreement

Article XXVI - Governing Law (BRMA 71B)

This Contract shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts.

Article XXVII - Severability (BRMA 72E)

Article XXVIII - Intermediary (BRMA 23A)

In Witness Whereof, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at:

Boston, Massachusetts, this 9 th day of January in the year 2006.

	/s/ [Illegible]
	Safety Insurance Company
	Safety Indemnity Insurance Company

Schedule A
Property Excess of Loss
Reinsurance Contract
Effective: January 1, 2006

issued to

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts

	First Excess			Second Excess			Third Excess
Company’s Retention	$	1,500,000		$	2,500,000		$	5,000,000

Reinsurer’s Per Risk Limit	$	1,000,000		$	2,500,000		$	10,000,000

Reinsurer’s Per Occurrence Limit	$	2,000,000		$	5,000,000		$	10,000,000

Reinsurer’s Term Limit	$	4,000,000		$	7,500,000		$	20,000,000

Premium Rate	0.194		%	0.2323		%	0.3872		%

Annual Minimum and Deposit Premium	$	100,000		$	120,000		$	200,000

Quarterly Minimum and Deposit Premium	$	25,000		$	30,000		$	50,000

Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (U.S.A.)

This Reinsurance does not cover any loss of liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.

2. Without in any way restricting the operation of paragraph (1) of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to:

Nuclear reactor power plants including all auxiliary property on the site, or

II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and “critical facilities” as such, or

IV. Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission.

(a) where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or

4. Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against.

6. The term “special nuclear material” shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof.

7. Reassured to be sole judge of what constitutes:

(a) substantial quantities, and

(b) the extent of installation, plant or site

Note. -Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that

Total Insured Value Exclusion Clause

It is understood and agreed that this Clause shall not apply hereunder where the Company writes 100% of the risk.

Terrorism Exclusion Clause

Interests and Liabilities Agreement

Aspen Insurance UK Limited
London, England
( hereinafter referred to as the “Subscribing Reinsurer” )

with respect to the

Property Excess of Loss
Reinsurance Contract
Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the “Reinsurer” as set forth in the attached Contract captioned above:

2.5%		of the First Property Excess of Loss Reinsurance
2.5%		of the Second Property Excess of Loss Reinsurance
2.5%		of the Third Property Excess of Loss Reinsurance

The Subscribing Reinsurer’s share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

In Witness Whereof , the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Hamilton, Bermuda, this 13 th day of January in the year 2006.

	/s/ [Illegible]
	Aspen Insurance UK Limited

Interests and Liabilities Agreement

Hannover Ruckversicherungs-Aktiengesellschaft
Hannover, Germany
( hereinafter referred to as the “Subscribing Reinsurer” )

with respect to the

Property Excess of Loss
Reinsurance Contract
Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the “Reinsurer” as set forth in the attached Contract captioned above:

10.0%		of the First Property Excess of Loss Reinsurance
10.0%		of the Second Property Excess of Loss Reinsurance
10.0%		of the Third Property Excess of Loss Reinsurance

The Subscribing Reinsurer’s share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

In Witness Whereof , the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Hannover, Germany, this 20 th day of January in the year 2006.

	/s/ [Illegible]
	Hannover Ruckversicherungs - Aktiengesellschaft

Interests and Liabilities Agreement

Certain Underwriting Members of Lloyd’s
shown in the Signing Schedules attached hereto
( hereinafter referred to as the “Subscribing Reinsurer” )

with respect to the

Property Excess of Loss
Reinsurance Contract
Effective: January 1, 2006

issued to and duly executed by

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the “Reinsurer” as set forth in the attached Contract captioned above:

87.5%		of the First Property Excess of Loss Reinsurance
87.5%		of the Second Property Excess of Loss Reinsurance
87.5%		of the Third Property Excess of Loss Reinsurance

The Subscribing Reinsurer’s share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the Interests and liabilities of the other reinsurers.

Signed for and on behalf of the Subscribing Reinsurer in the Signing Schedules attached hereto.

Signing Schedule

attaching to and forming part of the

Interests and Liabilities Agreement
of

Certain Underwriting Members of Lloyd’s

with respect to the

BUREAU REFERENCE

61215 09/01/06

BROKER NUMBER 1108

PROPORTION %	SYNDICATE	UNDERWRITER’S REFERENCE
23.647	2001	RAB1508806ME
10.642	2791	R1106NG00552
14.190	1414	XR06AB018E5X
10.642	958	AVRAXNEN5401
7.094	2020	P357807L0X
7.095	2010	N06A7650A001
14.190	2003	AF3000101515

TOTAL LINE	No. OF SYNDICATES
87.500	7

THE LIST OF UNDERWRITING MEMBERS
OF LLOYDS IS IN RESPECT OF 2006
YEAR OF ACCOUNT

BUREAU USE ONLY
USE3 55 13197

Signing Schedule

attaching to and forming part of the

Interests and Liabilities Agreement
of

Certain Underwriting Members of Lloyd’s

BUREAU REFERENCE

61216 09/01/06

BROKER NUMBER 1108

PROPORTION %	SYNDICATE	UNDERWRITER’S REFERENCE
17.500	2001	RAB1508906EE
13.125	2791	R1106PG00553
13.125	1414	XR06AB019P5X
8.750	958	AVRAXNEN5402
8.750	2010	N06A7660A001
8.750	2020	P556726B0X
17.500	2003	AF0000101516

TOTAL LINE	No. OF SYNDICATES
87.500	7

THE LIST OF UNDERWRITING MEMBERS
OF LLOYDS IS IN RESPECT OF 2006
YEAR OF ACCOUNT

BUREAU USE ONLY
USE3 55 13197

Signing Schedule

attaching to and forming part of the

Interests and Liabilities Agreement

Certain Underwriting Members of Lloyd’s

with respect to the

BUREAU REFERENCE

61226 09/01/06

BROKER NUMBER 1108

PROPORTION %	SYNDICATE	UNDERWRITER’S REFERENCE
17.949	2001	RAB1509006NE
13.462	2791	R1106RG00554
11.218	1414	XR06AB020N5X
8.974	958	AVRAXNEN5403
8.974	2020	P556727L0X
8.974	2010	N06A7670A001
17.949	2003	AF6000101517

TOTAL LINE	No. OF SYNDICATES
87.500	7

THE LIST OF UNDERWRITING MEMBERS
OF LLOYDS IS IN RESPECT OF 2006
YEAR OF ACCOUNT

BUREAU USE ONLY
USE3 55 13197

Property Excess of Loss
Reinsurance Contract
Effective: January 1, 2006

issued to

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts

Table of Contents

Article		Page
	Classes of Business Reinsured	1
II	Commencement and Termination	1
III	Territory (BRMA 51A)	2
IV	Exclusions	2
V	Retention and Limit	3
VI	Reinstatement	4
VII	Definitions	5
VIII	Loss Occurrence	6
IX	Loss Notices and Settlements	9
X	Salvage and Subrogation	9
XI	Reinsurance Premium	9
XII	Late Payments	10
XIII	Offset (BRMA 36C)	11
XIV	Access to Records (BRMA 1D)	11
XV	Liability of the Reinsurer	12
XVI	Net Retained Lines (BRMA 32B)	12
XVII	Errors and Omissions (BRMA 14F)	12
XVIII	Currency (BRMA 12A)	12
XIX	Taxes (BRMA 50B)	13
XX	Federal Excise Tax	13
XXI	Unauthorized Reinsurers	13
XXII	Insolvency	14
XXIII	Arbitration	15
XXIV	Service of Suit (BRMA 49C)	16
XXV	Agency Agreement	16
XXVI	Governing Law (BRMA 71B)	16
XXVII	Severability (BRMA 72E)	17
XXVIII	Intermediary (BRMA 23A)	17
	Schedule A

Property Excess of Loss
Reinsurance Contract
Effective: January 1, 2006

Issued to

Safety Insurance Company
and
Safety Indemnity Insurance Company
both of Boston, Massachusetts
( hereinafter referred to collectively as the “Company”)

The Subscribing Reinsurer(s) Executing the
Interests and Liabilities Agreement(s)
Attached Hereto
( hereinafter referred to as the “Reinsurer”)

Article I - Classes of Business Reinsured

By this Contract the Reinsurer agrees to reinsure the excess liability which may accrue to the Company under its policies, contracts and binders of insurance or reinsurance (hereinafter called “policies”) in force on the effective date hereof or issued or renewed on or after that date, and classified by the Company as Fire, Allied Lines. Homeowners Multiple Peril (Section I only). Commercial Multiple Peril (Section I only) and Inland Marine business, subject to the terms, conditions and limitations set forth herein and in Schedule A attached to and forming part of this Contract.

Article II - Commencement and Termination

A. This Contract shall become effective at 12:01 a.m., Eastern Standard Time, January 1, 2006 with respect to losses occurring at or after that time and date, and shall remain in force until 12:01 a.m., Eastern Standard Time, January 1, 2007.

The Subscribing Reinsurer’s policyholders’ surplus at the inception of this Contract has been reduced by more than 20.0% of the amount of surplus 12 months prior to that date; or

2. The Subscribing Reinsurer’s policyholders’ surplus at any time during the term of this Contract has been reduced by more than 20.0% of the amount of surplus at the date

of the Subscribing Reinsurer’s most recent financial statement filed with regulatory authorities and available to the public as of the inception of this Contract; or

3. The Subscribing Reinsurer’s A.M. Best’s rating has been assigned or downgraded below A- and/or Standard & Poor’s rating has been assigned or downgraded below BBB+; or

5. A State Insurance Department or other legal authority has ordered the Subscribing Reinsurer to cease writing business; or

7. The Subscribing Reinsurer has reinsured its entire liability under this Contract without the Company’s prior written consent; or

8. The Subscribing Reinsurer has ceased assuming new and renewal property treaty reinsurance business.

C. The Reinsurer shall have no liability hereunder with respect to losses occurring after the effective date of termination.

Article III - Territory (BRMA 51A)

The territorial limits of this Contract shall be identical with those of the Company’s policies.

Article IV - Exclusions

This Contract does not apply to and specifically excludes the following:

2. Nuclear risks as defined in the “Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance” attached to and forming part of this Contract.

3. Liability as a member, subscriber or reinsurer of any Pool, Syndicate or Association; and any combination of insurers or reinsurers formed for the purpose of covering

specific perils, specific classes of business or for the purpose of insuring risks located in specific geographical areas; but this exclusion shall not apply to FAIR Plans or to SIR Pool, Franklin Pool, Coastal Pools, Beach Plans or similar plans, however styled. It is understood and agreed, however, that this reinsurance does not include any increase in liability to the Company resulting from (a) the inability of any other participant in a FAIR Plan, SIR Pool, Franklin Pool, Coastal Pool, Beach Plan or similar plan to meet its liability, or (b) any claim against such a FAIR Plan, SIR Pool, Franklin Pool, Coastal Pool, Beach Plan or similar plan, or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund.

4. Financial guarantee and insolvency.

5. Third party liability.

7. All classes of business not specifically listed in the Classes of Business Reinsured Article.

8. Reinsurance assumed, except pro rata local agency reinsurance on specific risks

9. Ex-gratia payments.

10. Risks excluded under the provisions of the “Total Insured Value Clause” attached to and forming part of this Contract.

11. Loss or liability excluded under the “Terrorism Exclusion Clause” attached to and forming part of this Contract.

Article V - Retention and Limit

B. The Company shall be the sole judge of what constitutes “one risk,” except that in no event shall a building and its contents be considered more than one risk.

C. The Company shall be permitted to carry facultative reinsurance, recoveries under which shall inure to the benefit of this Contract.

Article VI - Reinstatement

1. As respects the First Excess Layer:

a. For the first and second amount, shown as “Reinsurer’s Per Risk limit” for that excess layer in Schedule A attached hereto, of ultimate net loss so reinstated, the Company shall pay no additional premium.

The percentage of the per risk limit for the excess layer reinstated (based on the loss paid by the Reinsurer under that excess layer); times

ii. The earned reinsurance premium for the excess layer reinstated for the term of this Contract (exclusive of reinstatement premium).

2. As respects the Second Excess Layer:

The percentage of the per risk limit for the excess layer reinstated (based on the loss paid by the Reinsurer under that excess layer); times

ii. The earned reinsurance premium for the excess layer reinstated for the term of this Contract (exclusive of reinstatement premium).

3. As respects the Third Excess Layer, for each amount so reinstated, the Company agrees to pay additional premium equal to the product of the following:

a. The percentage of the per risk limit for the excess layer reinstated (based on the loss paid by the Reinsurer under that excess layer); times

b. The earned reinsurance premium for the excess layer reinstated for the term of this Contract (exclusive of reinstatement premium).

C. Notwithstanding anything stated herein, the liability of the Reinsurer under any excess layer of reinsurance coverage provided by this Contract shall not exceed any of the following:

The amount, shown as “Reinsurer’s Per Risk Limit” for that excess layer in Schedule A attached hereto, as respects each risk, each loss; or

2. The amount, shown as “Reinsurer’s Per Occurrence Limit” for that excess layer in Schedule A attached hereto, as respects loss or losses arising out of any one loss occurrence; or

3. The amount, shown as “Reinsurer’s Term Limit” for that excess layer in Schedule A attached hereto, in all during the term of this Contract.

Article VII - Definitions

B. “Loss in excess of policy limits” and “extra contractual obligations” as used herein shall be defined as follows:

2. “Extra contractual obligations” shall mean 90.0% of any punitive, exemplary, compensatory or consequential damages paid or payable by the Company, not covered by any other provision of this Contract and which arise from the handling of any claim on business subject to this Contract, such liabilities arising because of, but not limited to, failure by the Company to settle within the policy limits or by reason of the Company’s alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such an action. An extra contractual obligation shall be deemed, in all circumstances, to have occurred on the same date as the loss covered or alleged to be covered under the policy.

C. “Loss adjustment expense” as used herein shall mean expenses assignable to the investigation, appraisal, adjustment, settlement, litigation, defense and/or appeal of specific claims, regardless of how such expenses are classified for statutory reporting purposes. Loss adjustment expense shall include, but not be limited to, interest on judgments, expenses of outside adjusters, and declaratory judgment expenses or other legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto, but shall not include office expenses or salaries of the Company’s regular employees not classified as loss adjusters.

Article VIII - Loss Occurrence

As regards windstorm, hall, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto.

D. No individual losses occasioned by an event that would be covered by 72 hours clauses may be included in any “loss occurrence” claimed under the 168 hours provision.

E. Any date change, including leap-year calculations, shall not in and of itself be regarded as an event for purposes of this Contract.

This includes any loss, damage, cost, claim or expense, whether preventative remedial or otherwise, directly or indirectly arising out of or relating to:

This subparagraph shall apply regardless of any other cause or event that contributes concurrently or in any sequence to the loss, damage, cost, claim or expense.

However, this subparagraph shall not apply as respects physical damage occurring at the insured’s premises arising out of the perils covered under this Contract.

F. Losses arising, directly or indirectly, out of:

1 Loss of, alteration of, or damage to;

2 A reduction in the functionality, availability or operation of

Fire, lightning, explosion, aircraft or vehicle impact, falling objects, windstorm, hail, tornado, cyclone, hurricane, earthquake, volcano, tsunami, flood, freeze or weight of snow.

Article IX - Loss Notices and Settlements

Article X - Salvage and Subrogation

Article XI - Reinsurance Premium

A. As premium for each excess layer of reinsurance coverage provided by this Contract, the Company shall pay the Reinsurer the greater of the following:

1 The amount, shown as “Annual Minimum Premium” for that excess layer in Schedule A attached hereto (or a pro rata portion thereof if a Subscribing Reinsurer’s share under that excess layer is terminated in accordance with the provisions of this Contract); or

2 The percentage, shown as “Premium Rate” for that excess layer in Schedule A attached hereto, of the Company’s net earned premium for the term of this Contract.

layer hereof is terminated, no quarterly deposit premium installment for such layer(s) shall be due to such Subscribing Reinsurer after the effective date of termination.

Article XII - Late Payments

A. The provisions of this Article shall not be implemented unless specifically invoked, in writing, by one of the parties to this Contract.

The number of full days which have expired since the due date or the last monthly calculation, whichever the lesser; times

2. 1/365ths of the six-month United States Treasury Bill rate as quoted in The Wall Street Journal on the first business day of the month for which the calculation is made; times

3. The amount past due, including accrued interest

It is agreed that interest shall accumulate until payment of the original amount due plus interest penalties have been received by the Intermediary.

C. The establishment of the due date shall, for purposes of this Article, be determined as follows:

For purposes of interest calculations only, amounts due hereunder shall be deemed paid upon receipt by the Intermediary.

Article XIII - Offset (BRMA 36C)

Article XIV - Access to Records (BRMA 1D)

The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance.

Article XV - Liability of the Reinsurer

B. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third party or any persons not parties to this Contract.

Article XVI - Net Retained Lines (BRMA 32B)

Article XVII - Errors and Omissions (BRMA 14F)

Article XVIII - Currency (BRMA 12A)

A. Whenever the word “Dollars” or the $ sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars.

Article XIX - Taxes (BRMA 50B)

Article XX - Federal Excise Tax

Article XXI - Unauthorized Reinsurers

2. Escrow accounts for the benefit of the Company; and/or

3. Cash advances;

its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes:

To reimburse itself for the Reinsurer’s share of losses and/or loss adjustment expense paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer;

2. To reimburse itself for the Reinsurer’s share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer:

In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(1) or B(3). or in the case of B(2), the actual amount determined to be due the Company shall promptly return to the Reinsurer the excess amount so drawn.

Article XXII - Insolvency

A. In the event of the insolvency of one or both of the reinsured companies, this reinsurance shall be payable directly to the company or to its liquidator, receiver, conservator or statutory successor on the basis of the liability of the company without diminution because of the insolvency of the company or because the liquidator, receiver, conservator or statutory successor of the company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the company shall give written notice to the Reinsurer of the pendency of a claim against the company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the company solely as a result of the defense undertaken by the Reinsurer.

Article XXIII - Arbitration

A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd’s London Underwriters. In the event that either party should fall to choose an Arbiter within 30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fall to agree upon the selection of an Umpire within 30 days following their appointment, the two Arbiters shall request the American Arbitration Association to appoint the Umpire. If the American Arbitration Association fails to appoint the Umpire within 30 days after it has been requested to do so, either party may request a justice of a Court of general jurisdiction of the state in which the arbitration is to be held to appoint the Umpire.

B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but falling to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction.

D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two

Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties.

Article XXIV - Service of Suit (BRMA 49C)

B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract.

Article XXV - Agency Agreement

Article XXVI - Governing Law (BRMA 71B)

This Contract shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts.

Article XXVII - Severability (BRMA 72E)

Article XXVIII - Intermediary (BRMA 23A)

In Witness Whereof, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at:

Boston, Massachusetts, this 9 th day of Jan in the year 2006.

				/s/ Illegible
				Safety Insurance Company
				Safety Indemnity Insurance Company

Schedule A

Property Excess of Loss

Reinsurance Contract

Effective: January 1, 2006

issued to

Safety Insurance Company

and

Safety Indemnity Insurance Company

both of Boston, Massachusetts

	First Excess			Second Excess			Third Excess
Company’s Retention	$	1,500,000		$	2,500,000		$	5,000,000

Reinsurer’s Per Risk Limit	$	1,000,000		$	2,500,000		$	10,000,000

Reinsurer’s Per Occurrence Limit	$	2,000,000		$	5,000,000		$	10,000,000

Reinsurer’s Term Limit	$	4,000,000		$	7,500,000		$	20,000,000

Premium Rate	0.194		%	0.2323		%	0.3872		%

Annual Minimum and Deposit Premium	$	100,000		$	120,000		$	200,000

Quarterly Minimum and Deposit Premium	$	25,000		$	30,000		$	50,000

Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (U.S.A.)

2. Without in any way restricting the operation of paragraph (1) of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to:

Nuclear reactor power plants including all auxilliary property on the site, or

Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and “critical facilities” as such, or

IV. Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission.

(a) where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or

6. The term “special nuclear material” shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof.

7. Reassured to be sole judge of what constitutes:

(a) substantial quantities, and

(b) the extent of installation, plant or site

Note. -Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that

12/12/57

N.M.A. 1119

BRMA 36B

Total Insured Value Exclusion Clause

It is understood and agreed that this Clause shall not apply hereunder where the Company writes 100% of the risk.

BRMA 53B

Terrorism Exclusion Clause

Exhibit 10.31

CASUALTY EXCESS OF LOSS
REINSURANCE AGREEMENT
NO. POR327454

EFFECTIVE January l, 2006

between

SAFETY INSURANCE COMPANY
SAFETY INDEMNITY INSURANCE COMPANY
Boston, Massachusetts

and

SWISS REINSURANCE AMERICA CORPORATION
Armonk, New York

CASUALTY EXCESS OF LOSS REINSURANCE AGREEMENT NO POR327454

ARTICLE	CONTENTS	PAGE

	PREAMBLE	1
I	BUSINESS COVERED	1
II	EFFECTIVE DATE AND TERMINATION	2
III	TERRITORY	2
IV	LIMIT AND RETENTION	2
V	ULTIMATE NET LOSS	3
VI	LOSS IN EXCESS OF POLICY LIMITS	4
VII	EXTRA CONTRACTUAL OBLIGATIONS	5
VIII	EXCLUSIONS	6
IX	SPECIAL ACCEPTANCE	7
X	LOSS OCCURRENCE	8
XI	REINSURANCE PREMIUM	9
XII	CONTINGENT COMMISSION	10
XIII	REPORTS AND REMITTANCES	10
XIV	CLAIMS	11
XV	SALVAGE AND SUBROGATION	12
XVI	ACCESS TO RECORDS	13
XVII	TAXES	13
XVIII	CURRENCY	13
XIX	OFFSET	13
XX	ERRORS OR OMISSIONS	14
XXI	DISPUTE RESOLUTION	14
XXII	INSOLVENCY	16
XXIII	SPECIAL TERMINATION	16
XXIV	AMENDMENTS	18
	SIGNATURES	19

ATTACHMENTS:		POLLUTION LIABILITY EXCLUSION CLAUSE - REINSURANCE INSOLVENCY FUNDS EXCLUSION CLAUSE
		NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A.
		NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA
		NUCLEAR INCIDENT EXCLUSION CLAUSE - REINSURANCE - NO. 4
		PHARMACEUTICAL / MEDICAL COMPANY EXCLUSION LISTING

CASUALTY EXCESS OF LOSS
REINSURANCE AGREEMENT
NO. POR327454
(hereinafter referred to as the “Agreement”)

between

SAFETY INSURANCE COMPANY
SAFETY INDEMNITY INSURANCE COMPANY
Boston, Massachusetts

(hereinafter referred to as the “Company”)

and

SWISS REINSURANCE AMERICA CORPORATION
Armonk, New York

(hereinafter referred to as the “Reinsurer”)

ARTICLE I - BUSINESS COVERED

A The Reinsurer shall indemnify the Company on an excess of loss basis in respect of the Company’s Ultimate Net Loss paid by the Company as a result of losses occurring during the term of this Agreement, for Policies in force as of January 1, 2006, and new and renewal Policies becoming effective on or after said date, subject to the terms and conditions contained herein.

B. This Agreement is solely between the Company and the Reinsurer, and nothing contained in this Agreement shall create any obligations or establish any rights against the Reinsurer in favor of any person or entity not a party hereto.

C The performance of obligations by both parties under this Agreement shall be in accordance with a fiduciary standard of good faith and fair dealing.

D. The term “Policies” shall mean each of the Company’s binders, policies and contracts of insurance on the business covered hereunder.

E. Under this Agreement, the indemnity for reinsured loss applies solely to the following Classes of Insurance as respects voluntary automobile business written by the Company, except as excluded under Article VIII - Exclusions of this Agreement. However, as respects Automobile Liability and Automobile Collision coverage added to the Commonwealth Automobile Facility, the Reinsurer shall provide 80% recovery as respects Extra Contractual Obligations resulting from losses arising and covered under said facility.

CLASSES OF INSURANCE

1. Automobile Liability

Bodily Injury Liability, Property Damage Liability, Medical Payments, Uninsured Motorists, Underinsured Motorists and No-Fault Coverage.

2 Automobile Collision

3 Homeowners (Section II only)

4 Commercial and Personal Umbrella Liability

5 Businessowners (Section II only)

ARTICLE II - EFFECTIVE DATE AND TERMINATION

A This Agreement shall become effective with respect to losses occurring on and after 12:01 a.m., Eastern Standard Time, January 1, 2006, and shall remain in full force until terminated. This Agreement may be terminated at the close of any calendar quarter by either party giving to the other 90 days prior written notice by certified mail of its intention to do so.

B. During the running of such notice as stipulated in Paragraph A. above, the Reinsurer shall participate in business coming within the terms of this Agreement until the date of termination of this Agreement.

C. In the event of termination of this Agreement, the Reinsurer shall be liable for losses occurring prior to the date of termination; however, the Reinsurer shall have no liability for losses occurring subsequent to the termination of this Agreement.

ARTICLE III - TERRITORY

This Agreement applies to Policies issued by the Company within the Commonwealth of Massachusetts and shall apply to losses covered hereunder wherever occurring.

ARTICLE IV - LIMIT AND RETENTION

A. The Company shall retain the first $1,000,000 of Ultimate Net Loss as respects any one Loss Occurrence. The Reinsurer shall then be liable for the amount by which the Company’s Ultimate Net Loss exceeds the Company’s retention of $1,000,000, but the liability of

the Reinsurer shall never exceed $5,000,000 with respect to any one Loss Occurrence.

B The addition to the Company’s retention set forth in Paragraph A. above, the Company shall be subject to an annual aggregate deductible of $500,000. Each loss paid by the Company in excess of $1,000,000 retention shall be accumulated and retained by the Company until the total accumulated excess amount totals $500,000. Thereafter, losses in excess of the $1,000,000 retention shall be recovered from the Reinsurer for the balance of the calendar year.

C The Company’s retention and the Reinsurer’s limit of liability for each Loss Occurrence, set forth in Paragraph A. above, shall apply irrespective of the number of Policies affected or number of hazards in one Policy and regardless of the number of Classes of Insurance involved.

D Reinsurance of the Company’s retention, set forth above, shall not be deducted in arriving at the Company’s Ultimate Net Loss herein.

E It is understood that as respects Commercial and Personal Umbrella Liability business, this Agreement shall apply to the Company’s retention under the Umbrella Liability Quota Share Reinsurance Agreement No. POR327548.

F The Company warrants that the maximum limit of liability, per occurrence set forth under each Policy subject to this Agreement shall not exceed $1,000,000.

ARTICLE V - ULTIMATE NET LOSS

A The term “Ultimate Net Loss” shall mean the actual sum paid by the Company in settlement of losses or liability including interest accrued prior to judgment after making deductions for all recoveries, including subrogation, salvages, and claims upon other reinsurances, whether collectible or not, which inure to the benefit of the Reinsurer under this Agreement, and shall exclude all expenses incurred by the Company; provided, however, that in the event of the insolvency of the Company, Ultimate Net Loss shall mean the amount of loss for which the Company is liable, and payment by the Reinsurer shall be made to the liquidator, receiver, conservator or statutory successor of the Company in accordance with the provisions of Article 13 - Insolvency of this Agreement.

B The term “Ultimate Net Loss” shall include 80% of Loss In Excess of Policy Limits and 80% of Extra Contractual Obligations, as defined herein, but only as respects business covered under this Agreement.

All Loss Adjustment Expenses defined below shall be apportioned in the same proportion that each party’s interest bears to the

Company’s Ultimate Net Loss. The Reinsurer shall not be liable for any portion of the Company’s Loss Adjustment Expenses, unless the Company’s Ultimate Net Loss exceeds its retention.

D In the event a verdict, award or judgment is ultimately compromised, reduced or reversed on appeal, the Reinsurer shall indemnify the Company for the Loss Adjustment Expenses incurred in obtaining such reduction or reversal in the ratio that the benefit each party derives from such reduction, reversal or compromise bears to the total benefit derived therefrom. However, all Loss Adjustment Expenses incurred up to the time of the original verdict or judgment shall be considered separate and apart from appeal expenses and shall be prorated in proportion to each party’s interests in such original verdict or judgment.

E. The term “Loss Adjustment Expenses” shall mean all expenses incurred by the Company in connection with the investigation, settlement, defense or litigation, including court costs and post-judgment interest, of any claim or loss covered by the Policies reinsured under this Agreement, but shall exclude the salaries and expenses of Company employees, office expenses, Declaratory Judgment Expenses and other overhead expenses.

F The term “Declaratory Judgment Expenses” shall mean all legal expenses, incurred in the representation of the Company in litigation brought to determine the Company’s defense and/or indemnification obligations.

G. All recoveries, salvages or payments recovered or received subsequent to a loss settlement under this Agreement shall be applied as if recovered or received prior to the aforesaid settlement and all necessary adjustments to the loss settlement shall be made by the parties hereto.

H. Nothing in this Article shall be construed to mean that losses are not recoverable hereunder until the Ultimate Net Loss of the Company has been ascertained.

ARTICLE VI - LOSS IN EXCESS OF POLICY LIMITS

A “Loss in Excess of Policy Limits” is defined as loss in excess of the limit of the original Policy, such loss in excess of the limit having been incurred because of failure by the Company to settle within the Policy, limit or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or in the preparation or prosecution of an appeal consequent upon such action.

B However, this Article shall not apply where the loss has been incurred due to fraud by a member of the Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder.

C For the purposes of this Article, the word “loss” shall mean any amounts which the Company would have been contractually liable to pay had it not been for the limit of the original Policy.

D With respect to coverage provided under this Article, recoveries from any insurance or reinsurance other than this Agreement, whether collectible or not, shall be deducted to arrive at the amount of the Company’s Ultimate Net Loss.

ARTICLE VII - EXTRA CONTRACTUAL OBLIGATIONS

A “Extra Contractual Obligations” are defined as those liabilities not covered under any other provision of this Agreement and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the Policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or in the preparation or prosecution of an appeal consequent upon such action.

B The date on which an Extra Contractual Obligation is incurred by the Company shall be deemed, in all circumstances, to be the data of the original accident, casualty, disaster or loss occurrence.

C However, coverage hereunder as respects Extra Contractual Obligations shall not apply where the loss has been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder.

D Recoveries, collectible or retention from any other form of insurance or reinsurance including deductibles or self-insured retention which protect the Company against Extra Contractual Obligations, whether collectible or not, shall inure to the benefit of the Reinsurer and shall be deducted from the total amount of Extra contractual obligation for purposes of determining the loss hereunder.

E If any provision of this Article shall be rendered illegal or unenforceable by the laws, regulations or public policy of any state, such provision shall be considered void in such state, but this shall not affect the validity or enforceability of any other provision of this Article or the enforceability of such provision in any other jurisdiction.

ARTICLE VIII - EXCLUSIONS

THIS AGREEMENT DOES NOT COVER

A. THE FOLLOWING GENERAL CATEGORIES

1 Ex-gratia payments

2 Risks subject to a deductible or a self-insured retention excess of $25,000.

3 Loss or damage caused directly or indirectly by: (a) enemy attack by armed forces including action taken by military, naval or air forces in resisting an actual or an immediately impending enemy attack; (b) invasion; (c) insurrection; (d) rebellion; (e) revolution; (f) intervention; (g) civil war; and (h) usurped power.

4 Reinsurance assumed by the Company

5 Business derived from any Pool, Association, including Joint Underwriting Association, Syndicate, Exchange, Plan, Fund or other facility directly as a member, subscriber or participant, or indirectly by way of reinsurance or assessments; provided this exclusion shall not apply to Automobile or Workers Compensation assigned risks which may be currently or subsequently covered hereunder.

6 Pollution Liability as per the attached Pollution Liability Exclusion Clause - Reinsurance

7 Insolvency Funds as per the attached Insolvency Funds Exclusion Clause.

8 Nuclear Incident Exclusion Clauses which are attached and made part of this Agreement:

a Nuclear Incident Exclusion Clause - Liability - Reinsurance - U.S.A.

b Nuclear Incident Exclusion Clause - Liability - Reinsurance - Canada.

c Nuclear Incident Exclusion Clause - Reinsurance - No. 4.

9 Any actual or alleged liability whatsoever for any claim or claims in respect of loss or losses, directly or indirectly arising out of, resulting from, or in consequence of asbestos, in whatever form or quantity.

B THE FOLLOWING RISKS AS RESPECTS AUTOMOBILE LIABILITY AND AUTOMOBILE COLLISION

1 Vehicles used in or while in practice or preparation for, a prearranged racing, speed, exhibition or demolition contest.

2 All vehicles classified as “Public Automobiles” except church buses, social service agency automobiles, van pools and vehicles used for the transportation of employees.

3 Fire, police emergency or municipal vehicles

The rental or leasing of vehicles to others

5 Logging trucks

6 Vehicles engaged in the transportation or distribution of fireworks, fuses, explosives, ammunitions, natural or artificial fuel, gas, or liquefied petroleum gases or gasoline.

C In the event the Company is inadvertently bound on any risk which is excluded under this Agreement and identified below, the reinsurance provided under this Agreement shall apply to such risk until discovery by the Company within its Home Office of the existence of such risk and for 30 days thereafter, and shall then cease unless within the 30 day period, the Company has received from the Reinsurer written notice of its approval of such risk:

As respects Automobile Liability And Collision.

Items 2. through 6. of Section B. of this Article

ARTICLE IX - SPECIAL ACCEPTANCE

Policies which are beyond the terms, conditions or limitations of this Agreement may be submitted to the Reinsurer for special acceptance hereunder; and such Policies, if accepted in writing by the Reinsurer, shall be subject to all of the terms, conditions and limitations of this Agreement, except as modified by the special acceptance. Premiums and losses derived from any special acceptance shall be included with other data for rating purposes under this Agreement.

ARTICLE X - LOSS OCCURRENCE

The term “Loss Occurrence” shall mean any accident or occurrence or series of accidents or occurrences arising out of any one event and happening within the term and scope of this Agreement. Without limiting the generality of the foregoing, the term “Loss Occurrence” shall be held to include:

A As respects Products Bodily Injury and Products Property Damage Liability, injuries to all persons and all damage to property of others occurring during a Policy Period and proceeding from or traceable to the same causative agency shall be deemed to arise out of one Loss Occurrence, and the date of such Loss Occurrence shall be deemed to be the commencing date of the Policy Period. For the purpose of this provision, each annual period of a Policy which continues in force for more than one year shall be deemed to be a separate Policy Period.

B. As respects Bodily Injury Liability (other than Automobile and Products), said term shall also be understood to mean, as regards each original assured, injuries to one or more than one person resulting from infection, contagion, poisoning, or contamination proceeding from or traceable to the same causative agency.

C. As respects Property Damage Liability (other than Automobile and Products), said term shall also, subject to Provisions 1. and 2. below, be understood to mean loss or losses caused by a series of operations, events, or occurrences arising out of operations at one specific site and which cannot be attributed to any single one of such operations, events or occurrences, but rather to the cumulative effect of the same. In assessing each and every Loss Occurrence within the foregoing definition, it is understood and agreed that:

the series of operations, events or occurrences shall not extend over a period longer than 12 consecutive months; and

2 the Company may elect the date on which the period of not exceeding 12 consecutive months shall be deemed to have commenced.

In the event that the series of operations, events or occurrences extend over a period longer than 12 consecutive months, then each consecutive period of 12 months, the first of which commences on the date elected under 2. above, shall form the basis of claim under this Agreement.

ARTICLE XI - REINSURANCE PREMIUM

A The Company shall pay to the Reinsurer a premium for the reinsurance provided hereunder a rate of .12%. Such rate shall be applied to the Company’s Subject Earned Premium for the quarterly period being reported.

B The term “Subject Earned Premium” as used herein is equal to the sum of the Net Premium Written on the business covered hereunder during the period under consideration, plus the unearned premium reserve as respects premiums in force at the beginning of such period, less the unearned premium reserve as respects premiums in force at the end of the period, said unearned premium is to be calculated on an actual daily basis or in accordance with the Company’s methodology, as agreed.

C The term “Net Premiums Written” shall mean gross premiums written less returns, allowances and reinsurances which inure to the benefit of the Reinsurer.

ARTICLE XII - CONTINGENT COMMISSION

A The Reinsurer shall allow the Company a contingent commission of 15% of the profit, if any, accruing to the Reinsurer hereunder, such profit to be computed on the following formula:

CONTINGENT COMMISSION COMPUTATION FOR THE PERIOD

INCOME

1 Premiums received by the Reinsurer, as determined under Article XI - Reinsurance Premium of this Agreement, for the Period.

OUTGO

2 Incurred Losses of the Reinsurer during the Period

3 Deficit, if any, brought forward from the preceding Period.

The amount by which Income exceeds Outgo is profit

The amount by which Outgo exceeds Income is deficit.

C The term “Incurred Losses” means all losses and Loss Adjustment Expenses paid less recoveries, including salvage and subrogation, during the current Period as respects losses which occurred during the period for which computation is being made plus the reserve for all unpaid losses and Loss Adjustment Expenses outstanding at the end of the current Period.

D The term “Period” means the actual time covered by each adjustment of commission.

E The Company shall calculate the commission adjustment for each Period, 36 months after the close of such Period. The first calculation of commission adjustment shall cover the Period January 1, 2006 through December 31, 2006, and thereafter adjustments shall be made for each subsequent Period commencing January 1 and ending the following December 31.

F If, for any Period, the Income of the plan exceeds the total of the Items shown under Outgo of the plan, the Reinsurer shall pay to the Company, within 30 days after verification of the Company’s calculations, 15% of the difference. If, for any Period, the total of the Items shown under Outgo of the plan exceeds the Income of the plan, the difference shall be carried forward to the next Period’s calculation of commission adjustment as a deficit.

G In case notice of termination has been given

1 By the Company, no further adjustments of commission shall be made.

2 By the Reinsurer, no further adjustments of commission shall be made until the expiration of all liability and the settlement of all losses covered under this Agreement.

ARTICLE XIII - REPORTS AND REMITTANCES

A The Company shall furnish the Reinsurer with all necessary data respecting premiums and losses for as long as one of the parties hereto has a claim against the other arising from this Agreement.

B Within 30 days after the close of each calendar quarter, the Company shall submit an account to the Reinsurer summarizing Subject Earned Premium by Line of Business, and the reinsurance premium due. Such reinsurance premium shall be remitted within 45 days after the close of each calendar quarter.

C In respect of Paragraph B above

All quarterly account statements shall be sent to the Reinsure at:

a E-Mail/XML or EDI Formats reaccount_[Illegible].com, or

b Standard Mail

Swiss Reinsurance America Corporation Accounting Department

175 King Street

Armonk, NY 10504

Telephone: 914-828-8000

Facsimile: 914-828-5919

2. All checks and supporting documentation shall be sent to the Reinsurer through one of the options set forth below:

a. WIRE TRANSFER

i) All wires should be sent to

The Bank of New York
1 Wall Street
New York, NY 10286
Account Name: Swiss Reinsurance America Corporation
Account Number:
ABA Number:

(ii All supporting documentation should be sent to

Swiss Reinsurance America Corporation
Accounting Department
175 King Street
Armonk, NY 10504

b LOCK BOX

Both checks and supporting documentation shall be sent to

Swiss Reinsurance America Corporation
P.O. Box 7247-[Illegible]
Philadelphia, PA 19170-[Illegible]

D. Payment by the Reinsurer of its portion of loss and Loss Adjustment Expenses paid by the Company shall be made by the Reinsurer to the Company within 15 days after proof of payment is received by the Reinsurer.

ARTICLE XIV - CLAIMS

A. The Company shall promptly notify the Reinsurer of each claim which may involve the reinsurance provided hereunder and of all subsequent developments relating thereto, stating the amount claimed and estimate of the Company’s Ultimate Net Loss and Loss Adjustment Expenses. Notwithstanding the provisions set forth in any other Article herein, prompt notification of loss shall be considered a condition precedent to liability under this Agreement.

B The Company shall advise the Reinsurer of all Claims which:

1 Are reserved by the Company for an amount in excess of 50% of its retention;

2 Originate from fatal injuries;

3 Originate from the following kinds of bodily injury:

a. Brain injuries resulting in impairment of physical function;

b. Spinal injuries resulting in a partial or total paralysis of upper or lower extremities;

c. Amputation or permanent loss of use of upper or lower extremities;

d. Severe burn injuries;

e. Loss of sight in one or both eyes;

f. All other injuries likely to result in a permanent disability rate of 50% or more.

C. The Company shall have the responsibility to investigate, defend or negotiate settlements of all claims and lawsuits related to Policies written by the Company and reinsured under this Agreement. The Reinsurer, at its own expense, may associate with the Company in the defense or control of any claim, suit or other proceeding which involves or is likely to involve the reinsurance provided under this Agreement, and the Company shall cooperate in every respect in the defense of any such claim, suit or proceeding.

ARTICLE XV - SALVAGE AND SUBROGATION

A In the event of the payment of any indemnity by the Reinsurer under this Agreement, the Reinsurer shall be subrogated, to the extent of such payment, to all of the rights of the Company against any person or entity legally responsible for damages of the loss. The Company agrees to enforce such rights; but, in case the Company refuses or neglects to do so, the Reinsurer is hereby authorized and empowered to bring any appropriate action in the name of the Company or their policyholders or otherwise to enforce such rights.

B From any amount recovered by subrogation, salvage or other means, there shall first be deducted the expenses incurred in effecting the recovery. The balance shall then be used to reimburse the excess carriers in the inverse order to that in which their respective liabilities attached, before being used to reimburse the Company for its primary loss.

ARTICLE XVI - ACCESS TO RECORDS

The Reinsurer or its duly authorized representatives shall have the right to examine, at the offices of the Company at a reasonable time, during the currency of this Agreement or anytime thereafter, all books and records of the company relating to business which is the subject of this Agreement.

ARTICLE XVII - TAXES

The Company shall be liable for all taxes on premiums paid to the Reinsurer under this Agreement, except income or profit taxes of the Reinsurer, and shall indemnify and hold the Reinsurer harmless for any such taxes which the Reinsurer may become obligated to pay to any local, state or federal taxing authority.

ARTICLE XVIII - CURRENCY

Wherever the word “dollars” or the “$” symbol is used in this Agreement, it shall mean dollars of the United States of America, excepting in those cases where the Policy is issued by the Company in Canadian dollars, in which case it shall mean dollars of Canada. In the event the Company is involved in a loss requiring payment in United States and Canadian currency, the Company’s retention and the limit of liability of the Reinsurer shall be apportioned between the two currencies in the same proportion as the amount of net loss in each currency bears to the total amount of net loss paid by the Company. For the purposes of this Agreement, where the Company receives premiums or pays losses in currencies other than United States or Canadian currency, such premiums and losses shall be converted into United States dollars at the actual rates of exchange at which the premiums and losses are entered in the Company’s books.

ARTICLE XIX - OFFSET

Each party to this Agreement together with their successors or assigns shall have and may exercise, at any time, the right to offset any balance or balances due the other (or, if more than one, any other). Such offset may include balances due under this Agreement and any other agreements heretofore or hereafter entered into between the parties regardless of whether such balances arise from premiums, losses or otherwise, and regardless of capacity of any party, whether as assuming insurer and/or coding insurer, under the various agreements involved, provided however, that in the event of insolvency of a party hereto, offsets shall only be allowed in accordance with the provisions of Section 7427 of the Insurance Law of the State of New York to the extent such statute or any other applicable law, statute or regulation governing such offset shall apply.

ARTICLE XX - ERRORS OR OMISSIONS

Errors or omissions of an administrative nature on the part of the Company shall not invalidate the reinsurance under this Agreement, provided such errors or omissions are corrected promptly after discovery thereof; but the liability of the Reinsurer under this Agreement or any exhibits, addenda, or endorsement attached hereto shall in no event exceed the limits specified herein nor be extended to cover any risks, perils, lines of business or classes of insurance generally or specifically excluded herein.

ARTICLE XXI - DISPUTE RESOLUTION

Part I - Choice Of Law And Forum

Any dispute arising under this Agreement shall be resolved in the Commonwealth of Massachusetts, and the laws of the State of Commonwealth of Massachusetts shall govern the interpretation and application of this Agreement.

Part II - Mediation

If a dispute between the Company and the Reinsurer, arising out of the provisions of this Agreement or concerning its interpretation or validity and whether arising before or after termination of this Agreement has not been settled through negotiation, both parties agree to try in good faith to settle such dispute by nonbinding mediation, before resorting to arbitration.

Part III - Arbitration

A. Resolution of Disputes - As a condition precedent to any right of action arising hereunder, any dispute not resolved by mediation between the Company and the Reinsurer arising out of the provisions of this Agreement or concerning its interpretation or validity, whether arising before or after termination of this Agreement, shall be submitted to arbitration in the manner hereinafter set forth.

B. Composition of Panel - Unless the parties agree upon a single arbitrator within 15 days after the receipt of a notice of intention to arbitrate, all disputes shall be submitted to an arbitration panel composed of two arbitrators and an umpire chosen in accordance with Paragraph C. hereof.

other party (hereinafter referred to as the “respondent”) together with its notice of intention to arbitrate. Within 30 days after receiving such notice, the respondent shall also appoint an arbitrator and notify the claimant thereof by certified mail. Before instituting a hearing, the two arbitrators so appointed shall choose an umpire. If, within 20 days after the appointment of the arbitrator chosen by the respondent, the two arbitrators fail to agree upon the appointment of an umpire, each of them shall nominate three individuals to serve as umpire, of whom the other shall decline two and the umpire shall be chosen from the remaining two by drawing lots. The name of the individual first drawn shall be the umpire.

D. Failure of Party to Appoint an Arbitrator - If the respondent fails to appoint an arbitrator within 30 days after receiving a notice of intention to arbitrate, the claimant’s arbitrator shall appoint an arbitrator on behalf of the respondent, such arbitrator shall then, together with the claimant’s arbitrator, choose an umpire as provided in Paragraph C. of Part III of this Article.

E. Submission of Dispute to Panel - Unless otherwise extended by the arbitration panel or agreed to by the parties, each party shall submit its case to the panel within 30 days after the selection of the umpire.

F. Procedure Governing Arbitration - All proceedings before the panel shall be informal and the panel shall not be bound by the formal rules of evidence. The panel shall have the power to fix all procedural rules relating to the arbitration proceedings. In reaching any decision, the panel shall give due consideration to the customs and usages of the insurance and reinsurance business.

G. Arbitration Award - The arbitration panel shall render its decision within 60 days after termination of the proceeding, which decision shall be in writing, stating the reasons therefor. The decision of the majority of the panel shall be final and binding on the parties to the proceeding. In no event, however, will the panel be authorized to award punitive, exemplary or consequential damages of whatsoever nature in connection with any arbitration proceeding concerning this Agreement.

H. Cost of Arbitration - Unless otherwise allocated by the panel, each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other parties the expense of the umpire and the arbitration.

ARTICLE XXII - INSOLVENCY

A In the event of insolvency of the Company, the reinsurance provided by this Agreement shall be payable by the Reinsurer on the basis of the liability of the Company as respects Policies covered hereunder, without diminution because of such insolvency, directly to the Company or its liquidator, receiver, conservator or statutory successor except as provided in Sections 4118 (a) (1) (A) and 1114 (c) of the New York Insurance Law.

B The Reinsurer shall be given written notice of the pendency of each claim or loss which may involve the reinsurance provided by this Agreement within a reasonable time after such claim or loss is filed in the insolvency proceedings. The Reinsurer shall have the right to investigate each such claim or loss and interpose, at its own expense, in the proceedings where the claim or loss is to be adjudicated, any defense which it may deem available to the Company, its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer.

C In addition to the offset provisions set forth in Article XVIII Offset, any debts or credits, liquidated or unliquidated, in favor of or against either party on the date of the receivership or liquidation order (except where the obligation was purchased by or transferred to be used as an offset) are deemed mutual debts or credits and shall be set off with the balance only to be allowed or paid. Although such claim on the part of either party against the other may be unliquidated or undetermined in amount of the date of entry of the receivership or liquidation order, such claim will be regarded as being in existence as of such date and any claims then in existence and held by the other party may be offset against it.

D Nothing contained in this Article is intended to change the relationship or status of the parties to this Agreement or to enlarge upon the rights or obligations of either party hereunder except as provided herein.

ARTICLE XXIII - SPECIAL TERMINATION

Notwithstanding the termination provisions set forth in Article II - Effective Date and Termination, this Agreement shall be:

1 Terminated automatically and simultaneously upon the happening of any of the following events:

a Entry of an order of liquidation, rehabilitation, receivership or conservatorship with respect to the Company or the Reinsurer by any court or regulatory authority;

b Assignment of this Agreement by either party;

c General reinsurance of any portion of the Company’s business it retains net for its own account, as determined under the provisions of this Agreement without prior consent of the Reinsurer.

2 Terminated by either party giving not less than 30 days prior written notice to the other party upon the happening of the following event:

Any transfer of control of either party by change in ownership or otherwise.

3 Terminated by the Reinsurer by giving not less than 30 days prior written notice to the Company upon the happening of the following event:

Failure of the Company to remit premiums in accordance with the provisions set forth in this Agreement.

4 Terminated in accordance with the provisions set forth in this Paragraph, upon the discovery of the following event:

A reduction of 50% or more of the Company’s policyholders surplus during any calendar year. Such reduction shall be determined by calculating the difference between the Company’s prior year annual statement and each subsequent quarterly statutory statement within such current calendar year.

As respects the event set forth in this Paragraph A.4., the Company shall be obligated to notify the Reinsurer in writing within 30 days after the filing of its quarterly statement. Upon receipt of such notification the Reinsurer shall have the right to terminate this Agreement, by giving not less than 30 days notice of its intention to do so.

B Any notice of termination pursuant to the provisions set forth in Paragraphs A.2., A.3. and A.4. above shall be sent by certified mail, return receipt requested. Such notice period shall commence upon the other party’s receipt of the notice of termination.

C In the event of termination, as provided under the provisions of this Article, the Reinsurer shall not be liable for losses occurring subsequent to the date of termination.

ARTICLE XXIV - AMENDMENTS

This Agreement may be amended by mutual consent of the parties expressed in an addendum; and such addendum, when executed by both parties, shall be deemed to be an integral part of this Agreement and binding on the parties hereto.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate, by their duly authorized representatives as of the following dates:

In Boston, MA, this 5 th day of September, 2006

ATTEST:				SAFETY INSURANCE COMPANY SAFETY INDEMNITY INSURANCE COMPANY


/s/ Illegible				/s/ Illegible


Illegible				Illegible
Name				Name


Illegible				Illegible
Title				Title

And in Armonk, New York, this 3 rd day of March, 2006

ATTEST:				SWISS REINSURANCE AMERICA CORPORATION


/s/ Illegible				/s/ Illegible


Illegible				Illegible
Name				Name


Vice President Member of Senior Management				Vice President Member of Senior Management
Title				Title

SUPPLEMENT TO THE ATTACHMENTS

DEFINITION OF IDENTIFICATION TERMS USED WITHIN THE ATTACHMENTS

A. Wherever the term “Company” or “Reinsured” to “Reassured” or whatever other term is used to designate the reinsured company or companies within the various attachments to the reinsurance agreement, the term shall be understood to mean Company or Reinsured or Reassured or whatever other term is used in the attached reinsurance agreement to designate the reinsured company or companies.

B. Wherever the term “Agreement” or “Contract” or “Policy” or whatever other term is used to designate the attached reinsurance agreement within the various attachments to the reinsurance agreement, the term shall be understood to mean Agreement or Contract or Policy or whatever other term is used to designate the attached reinsurance agreement.

C. Wherever the term “Reinsurer” or “ Reinsurers” or “Underwriters” or whatever other term is used to designate the reinsurer or reinsurers in the various attachments to the reinsurance agreement, the term shall be understood to mean Reinsurer or Reinsurers or Underwriters or whatever other term is used to designate the reinsuring company or companies.

POLLUTION LIABILITY EXCLUSION CLAUSE - REINSURANCE

This Reinsurance excludes :

(1 Any loss occurrence arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants

a) At or from premises owned, rented or occupied by an original assured; or

b) At or from any site or location used for the handling, storage, disposal, processing or treatment of waste; or

c) Which are at any time transported, handled, stored, treated disposed of, or processed as waste; or

d) At or from any site or location on which any original assured is performing operation:

(i If the pollutants are brought on or to the site or location in connection with such operations; or

(ii If the operations are to test for, monitor, clean up, remove, contain, treat, detoxify or neutralise the pollutants.

2) Any liability, loss, cost or expense arising out of any governmental direction or request to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize the pollutants.

“Pollutants” means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

Subparagraphs a) and d) (i) of paragraph (1) of this exclusion do not apply to loss occurrences caused by heat, smoke or fumes from a hostile fire. As used herein, “hostile fire” means one which becomes uncontrollable or breaks out from where it was intended to be.

“Original assured” as used herein means all insureds as defined in the policy issued by the Company.

INSOLVENCY FUNDS EXCLUSION CLAUSE

This Agreement excludes all liability of the Company arising by contract, operation of law, or otherwise from its participation or membership, whether voluntary or involuntary, in any insolvency fund or from reimbursement of any person for any such liability. “Insolvency fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, however denominated, established or governed, which provides for any assessment of or payment or assumption by any person of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part.

NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A

N.M.A 1590

1 This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers of reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association.

2 Without in any way restricting the operation of paragraph 1. of this Clause it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (new, renewal and replacement) of the classes specified in Clause II. in this paragraph 2. from the time specified in Clause III. in this paragraph 2. shall be deemed to include the following provision (specified as the Limited Exclusion Provision):

LIMITED EXCLUSION PROVISION*

I. It is agreed that the policy does not apply under any liability coverage, to injury, sickness, disease, death or destruction, bodily injury or property damage with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability.

II. Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liabilities Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies.

III. The inception dates and thereafter of all original policies as described in II. above, whether new, renewal or replacement, being policies which either

(a) become effective on or after 1st May 1960 or

(b) become effective before that date and contain the Limited Exclusion Provision set out above; provided this paragraph 2. shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Reassured on New York risks, until 90 days following approval of the Limited Exclusion Provision by the Governmental Authority having jurisdiction thereof.

3 Except for those classes of policies specified in Clause II. of paragraph 2. and without in any way restricting the operation of paragraph 1. of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages:

Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad) Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability)

shall be deemed to include with respect to such coverages, from the time specified in Clause V. of this paragraph 3., the following provision (specified as the Broad Exclusion Provision):

BROAD EXCLUSION PROVISION*

It is agreed that the policy does not apply

I under any Liability Coverage to injury, sickness, disease death or destruction, bodily injury or property damage

(a) with respect to which an insured under the policy is also an insured under nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or

(b) resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization.

II Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to immediate medical or surgical relief, first aid, to expenses incurred with respect to bodily injury, sickness, disease or death, bodily injury resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization.

III Under any Liability Coverage, to injury, sickness, disease, death or destruction, bodily injury or property damage resulting from the hazardous properties of nuclear material if

(a) the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured or (2) has been discharged or dispersed therefrom;

(b) the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or

(c) the injury, sickness, disease, death or destruction, bodily injury or property damage arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories, or possessions or Canada, this exclusion (c) applies only to injury to or destruction of property at such nuclear facility, property damage to such nuclear facility and any property thereat.

IV As used in this endorsement:

“hazardous properties” include radioactive, toxic or explosive properties; “nuclear material” means source material, special nuclear material or byproduct material; “source material,” “special nuclear material,” and “byproduct material” have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; “spent fuel” means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; “waste” means any waste material (1) containing byproduct material other than the tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed for its source material content and (2) resulting from the operation by any person or organization of any nuclear facility included within the definition of nuclear facility under paragraph (a) or (b) thereof ; “nuclear facility” means

(a) any nuclear reactor

(b) any equipment or device designed or used for (1) separating the isotopes of uranium or plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste,

(c) any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235,

(d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste

and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; “nuclear reactor” means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material; with respect to injury to or destruction of property, the word “injury” or “destruction” includes all forms of radioactive contamination of property; “property damage” includes all forms of radioactive contamination of property.

V The inception dates and thereafter of all original policies affording coverages specified in this paragraph 3., whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph 3. shall not be applicable to

i Garage and Automobile Policies issued by the Reassured on New York risks, or

(ii Statutory liability insurance required under Chapter 90, General Laws of Massachusetts,

until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof.

4 Without in any way restricting the operations of paragraph 1. of this Clause, it is understood and agreed that paragraphs 2. and 3. above are not applicable to original liability policies of the Reassured in Canada, and that with respect to such policies, this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters’ Association or the Independent Insurance Conference of Canada.

* Note The words printed in BOLD TYPE in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words.

NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA

M.M.A 1979a

2 This Agreement does not cover any loss or liability accruing to the Company as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association.

Without in any way restricting the operation of Paragraph 1. of this Clause, it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of the following classes, namely,

Personal Liability
Farmers’ Liability
Storekeepers’ Liability

which become effective on or after 31st December 1992, shall be deemed to include, from their inception dates and thereafter, the following provision:

Limited Exclusion Provision -

This Policy does not apply to bodily injury or property damage with respect to which the Insured is also insured under a contract of nuclear energy liability insurance (whether the Insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other group or pool of insurers or would be an Insured under any such policy but for its termination upon exhaustion of its limits of liability.

With respect to property, loss of use of such property shall be deemed to be property damage.

3 Without in any way restricting the operation of Paragraph 1. of this Clause, it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of any class whatsoever (other than Personal Liability, Farmers’ Liability, Storekeepers’ Liability or Automobile Liability contracts), which become effective on or after 31st December 1992, shall be deemed to include, from their inception dates and thereafter, the following provision:

Broad Exclusion Provision

It is agreed that this Policy does not apply

(a) to liability imposed by or arising from any nuclear liability act, law or statute or any law amendatory thereof; nor

(b) to bodily injury or property damage with respect to which an Insured under this Policy is also insured under a contract of nuclear energy liability insurance (whether the Insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other insurer or group or pool of insurers or would be an Insured under any such policy but for its termination upon exhaustion of its limit of liability; nor

the ownership, maintenance, operation or use of a nuclear facility by or on behalf of an Insured;

the furnishing by an Insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility; and

iii the possession, consumption, use, handling, disposal or transportation of fissionable substances, or of other radioactive material (except radioactive isotopes, away from a nuclear facility, which have reached the final stage of fabrication so as to be usable for any scientific, medical, agricultural, commercial or industrial purpose) used, distributed, handled or sold by an Insured.

As used in this Policy

The term “nuclear energy hazard” means the radioactive, toxic, explosive, or other hazardous properties of radioactive material;

(2) The term “radioactive material” means uranium, thorium, plutonium, neptunium, their respective derivatives and compounds, radioactive isotopes of other elements and any other substances which may be designated by or pursuant to any law, act or statute, or law amendatory thereof as being prescribed substances capable of releasing atomic energy, or as being requisite for the production, use or application of atomic energy;

(3) The term “nuclear facility” means

(a) any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of plutonium, thorium and uranium or any one or more of them;

(b) any equipment or device designed or used for (i) separating the isotopes of plutonium, thorium and uranium or any one or more of them, (ii) processing or utilizing spent fuel, or (iii) handling, processing or packaging waste;

(c) any equipment or device used for the processing, fabricating or alloying of plutonium, thorium and uranium enriched in the isotope uranium 233 or in the isotope uranium 235, or any one or more of them if at any time the total amount of such material in the custody of the Insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235;

(d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste radioactive material;

and includes the site on which any of the foregoing is located, together with all operations conducted thereon and all premises used for such operations.

(4) The term “fissionable substances” means any prescribed substance that is, or from which can be obtained, a substance capable of releasing atomic energy by nuclear fission.

(5) With respect to property, loss of use of such property shall be deemed to be property damage.

NUCLEAR INCIDENT EXCLUSION CLAUSE - REINSURANCE - NO. 4

1. This Reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association.

Without in any way restricting the operations of Nuclear Incident Exclusion Clauses, - Liability, - Physical Damage, - Boiler and Machinery and paragraph 1. of this Clause, it is understood and agreed that for all purposes of the reinsurance assumed by the Reinsurer from the Reinsured, all original insurance policies or contracts of the Reinsured (new, renewal and replacement) shall be deemed to include the applicable existing Nuclear Clause and/or Nuclear Exclusion Clause(s) in effect at the time and any subsequent revisions thereto as agreed upon and approved by the Insurance Industry and/or a qualified Advisory or Rating Bureau

Exhibit 10.32

ADDENDUM NO 1

to the

CASUALTY EXCESS OF LOSS
REINSURANCE AGREEMENT
NO. POR327454
(hereinafter referred to as the “Agreement”)

between

SAFETY INSURANCE COMPANY
SAFETY INDEMNITY INSURANCE COMPANY
Boston, Massachusetts
(hereinafter referred to as the “Company”)

and

SWISS REINSURANCE AMERICA CORPORATION
Armonk, New York
(hereinafter referred to as the “Reinsurer”)

It is understood and agreed that effective as of inception, January 1, 2006, Article XII - Contingent Commission is hereby deleted from this Agreement.

ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED

IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed in duplicate, by their duly authorized representatives as of the following dates:

In Boston this 2 nd day of December 2006.

ATTEST:				SAFETY INSURANCE COMPANY SAFETY INDEMNITY INSURANCE COMPANY


/s/ Janet Kelleher				/s/ Edward N. Patrick Jr.


Janet Kelleher				Edward N. Patrick Jr.
Name				Name


Controller				VP Underwriting
Title				Title

And in Armonk, New York, this 19 th day of December, 2006.

ATTEST:				SWISS REINSURANCE AMERICA CORPORATION


/s/ Robert Weireter				/s/ Jeffrey W. Isaacson


Robert Weireter				Jeffrey W. Isaacson
Name				Name


Vice President Member of Management				Vice President Member of Senior Management
Title				Title

Exhibit 10.33

PROPERTY CATASTROPHE EXCESS OF LOSS
REINSURANCE AGREEMENT
NO. POR327524

EFFECTIVE: JANUARY 01, 2006

between

SAFETY INSURANCE COMPANY
SAFETY INDEMNITY INSURANCE COMPANY
both of Boston, Massachusetts

and

SWISS REINSURANCE AMERICA CORPORATION
Armonk, New York

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE AGREEMENT NO POR327524

ARTICLE	CONTENTS	PAGE
PREAMBLE		1
ARTICLE I. - BUSINESS COVERED		1
ARTICLE II. - EFFECTIVE DATE AND TERMINATION		2
ARTICLE III. - TERRITORY		2
ARTICLE IV. - LIMIT AND RETENTION		2
ARTICLE V. - REINSTATEMENT		3
ARTICLE VI. - ULTIMATE NET LOSS		4
ARTICLE VII. - LOSS IN EXCESS OF POLICY LIMITS		4
ARTICLE VIII. - EXTRA CONTRACTUAL OBLIGATIONS		5
ARTICLE IX. - EXCLUSIONS		6
ARTICLE X. - SPECIAL ACCEPTANCE		8
ARTICLE XI. - LOSS OCCURRENCE		8
ARTICLE XII. - TERRORISM EXCESS RECOVERY		10
ARTICLE XIII. - REINSURANCE PREMIUM		11
ARTICLE XIV. - CLAIMS		13
ARTICLE XV. - SALVAGE AND SUBROGATION		13
ARTICLE XVI. - ACCESS TO RECORDS		13
ARTICLE XVII. - TAXES		14
ARTICLE XVIII. - CURRENCY		14
ARTICLE XIX. - OFFSET		14
ARTICLE XX. - ERRORS OR OMISSIONS		14
ARTICLE XXI. - DISPUTE RESOLUTION		14
ARTICLE XXII. - INSOLVENCY		16
ARTICLE XXIII. - AMENDMENTS		17

SIGNATURES		18

ATTACHMENTS		INSOLVENCY FUNDS EXCLUSION CLAUSE
		POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE
		TOTAL INSURED VALUE EXCLUSION CLAUSE
		POLLUTION AND SEEPAGE EXCLUSION CLAUSE
		NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE REINSURANCE - U.S.A.
		NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - CANADA
		NUCLEAR INCIDENT EXCLUSION CLAUSE - REINSURANCE - NO. 4

PROPERTY CATASTROPHE EXCESS OF LOSS
REINSURANCE AGREEMENT
NO. POR327524
(hereinafter referred to as the “Agreement”)

between

SAFETY INSURANCE COMPANY
SAFETY INDEMNITY INSURANCE COMPANY
both of Boston, Massachusetts
(hereinafter referred to as the “Company”)

and

SWISS REINSURANCE AMERICA CORPORATION
Armonk, New York
(hereinafter referred to as the “Reinsurer”)

ARTICLE I. - BUSINESS COVERED

A The Reinsurer shall indemnify the Company on an excess of loss basis in respect of the Company’s Ultimate Net Loss paid by the Company as a result of losses occurring during the term of this Agreement, for Policies in force as of January 01, 2006, and new and renewal Policies becoming effective on or after said date, subject to the terms and conditions contained herein.

C The performance of obligations by both parties under this Agreement shall be in accordance with a fiduciary standard of good faith and fair dealing.

D The term “Policies” shall mean each of the Company’s binders, policies and contracts of insurance on the business covered hereunder.

E Under this Agreement, the indemnity for reinsured loss applies to those Policies issued by the Company with respect to the following Lines of Business as classified in the Company’s Annual Statement, subject to the exclusions set forth in Article IX. - Exclusions

NAIC
CODE		LINE OF BUSINESS
5.1		Commercial Multiple Peril - Property
03		Allied Lines
04		Homeowners -Multiple Peril - Property
21.1		Automobile Physical Damage - Private Passenger
21.02		Automobile Fire And Theft - Commercial
01		Fire

ARTICLE II - EFFECTIVE DATE AND TERMINATION

A This Agreement shall apply to losses occurring within the period commencing 12:01 a.m., Eastern Standard Time, January 01, 2006, and ending 12:01 a.m., Eastern Standard Time, January 1, 2007.

B Upon termination of this Agreement, the Reinsurer shall be liable for losses occurring prior to the date of termination; however, the Reinsurer shall have no liability for losses occurring subsequent to the termination of this Agreement.

C If this Agreement shall terminate while a Loss Occurrence covered hereunder is in progress, it is agreed that, subject to the other conditions of this Agreement, the Reinsurer shall indemnify the Company as if the entire Loss Occurrence had occurred during the time this Agreement is in force provided such Loss Occurrence covered hereunder started before the date of termination.

ARTICLE III. - TERRITORY

This Agreement applies to risks located solely in the Commonwealth of Massachusetts except that with respect to Multiple Peril Policies covered hereunder, the territorial limits of this Agreement shall be those of the original Policies when such Policies are written to cover risks primarily located in the Commonwealth of Massachusetts.

ARTICLE IV. - LIMIT AND RETENTION

A As respects one or more than one Line of Business covered under this Agreement, the Company shall retain the first $15,000,000 of Ultimate Net Loss as respects each risk. The Reinsurer shall then be liable for the amount by which the Company’s Ultimate Net Loss exceeds the Company’s retention of $15,000,000, but the liability of the Reinsurer shall never exceed $13,500,000 (i.e., 90% of $15,000,000) each risk, nor shall the Reinsurer’s liability exceed $27,000,000 (i.e., 90% of $30,000,000) in all during the term of this Agreement. Notwithstanding the foregoing, as respects the event of terrorism, Reinsurer’s liability shall be further limited to $13,500,000 in all, during the term of this Agreement.

B Reinsurance of the Company’s retention, set forth above, shall not be deducted in arriving at the Company’s Ultimate Net Loss herein.

C It is warranted by the Company that the reinsurance provided under this Agreement shall attach only when two or more risks are involved in the same Loss Occurrence. The Company shall be the sole judge of what constitutes one risk provided, however, that:

1 A risk shall never be less than all insurable values within exterior walls and under one roof regardless of fire divisions, the number of Policies involved, and whether there is a single, multiple or unrelated named insureds involved in such risk.

2. When two or more buildings are situated at the same general location, the Company shall identify on its records at the time of acceptance by the Company, those individual buildings and all insurable values contained therein that are considered to constitute each risk. If such identification is not made, each building and all insurable values contained therein shall be considered to be a separate risk.

3 A risk shall be determined from the standpoint of the predominant peril and such peril shall be noted in the Company’s records.

D It is warranted by the Company that it shall retain at its own risk and not reinsured in any way, 10% of Ultimate Net Loss, each Loss Occurrence as set forth above.

ARTICLE V. - REINSTATEMENT

A Each claim hereunder reduces the amount of indemnity from the time of occurrence of the loss by the sum paid, but any amount so exhausted is hereby reinstated from the time the Loss Occurrence commences hereon.

B For each subsequent reinstatement, the Company agrees to pay an additional premium calculated at pro rata of the annual premium hereon, being pro rata both as to the fraction of the limit of liability of this Agreement (i.e., the fraction of $15,000,000) so reinstated and as to the fraction of unexpired annual term at the time of the Loss Occurrence.

C Nevertheless, the Reinsurer’s liability hereunder shall never exceed $13,500,000 (i.e., 90% of $15,000,000) in respect of any one Loss Occurrence and shall be further limited in all during the term of the Agreement to $27,000,000 (i.e., 90% of $30,000,000).

ARTICLE VI. - ULTIMATE NET LOSS

A The term “Ultimate Net Loss” shall mean the actual sum paid by the Company in settlement of losses or liability after making deductions for all recoveries, including subrogation, salvages, and claims upon other reinsurances, whether collectible or not, which inure to the benefit of the Reinsurer under this Agreement, and shall include Loss Adjustment Expenses incurred by the Company; provided, however, that in the event of the insolvency of the Company, Ultimate Net Loss shall mean the amount of loss and Loss Adjustment Expenses for which the Company is liable, and payment by the Reinsurer shall be made to the liquidator, receiver, conservator or statutory successor of the Company in accordance with the provisions of Article XXII. -Insolvency of this Agreement.

B The term “Ultimate Net Loss” shall include 100% of Loss In Excess of Policy Limits and 100% of Extra Contractual Obligations, as defined herein, but only as respects business covered under this Agreement.

C The term “Loss Adjustment Expenses” shall mean all expenses incurred by the Company in connection with the investigation, settlement, defense or litigation of any claim or loss covered by the Policies reinsured under this Agreement, but shall exclude the salaries and expenses of Company employees, office expenses and other overhead expenses.

D All recoveries, salvages or payments recovered or received subsequent to a loss settlement under this Agreement shall be applied as if recovered or received prior to the aforesaid settlement and all necessary adjustments to the loss settlement shall be made by the parties hereto.

E Nothing in this Article shall be construed to mean that losses are not recoverable hereunder until the Ultimate Net Loss of the Company has been ascertained.

ARTICLE VII. - LOSS IN EXCESS OF POLICY LIMITS

“Loss in Excess of Policy Limits” is defined as loss in excess of the limit of the original Policy, such loss in excess of the limit having been incurred because of failure by the Company to settle within the Policy limit or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or in the preparation or prosecution of an appeal consequent upon such action.

B However, this Article shall not apply where the loss has been incurred due to fraud by a member of the Board of Directors or a

corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder.

C. For the purposes of this Article, the word “loss” shall mean any amounts which the Company would have been contractually liable to pay had it not been for the limit of the original Policy.

D. With respect to coverage provided under this Article, recoveries from any insurance or reinsurance other than this Agreement shall be deducted to arrive at the amount of the Company’s Ultimate Net Loss.

ARTICLE VIII. - EXTRA CONTRACTUAL OBLIGATIONS

A. “Extra Contractual Obligations” are defined as those liabilities not covered under any other provision of this Agreement and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the Policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or in the preparation or prosecution of an appeal consequent upon such action.

B The date on which an Extra Contractual Obligation is incurred by the Company shall be deemed, in all circumstances, to be the date of the original accident, casualty, disaster or loss occurrence.

D Recoveries, collectibles or retention from any other form of insurance or reinsurance including deductibles or self-insured retention which protect the Company against Extra Contractual Obligations, whether collectible or not, shall inure to the benefit of the Reinsurer and shall be deducted from the total amount of Extra Contractual Obligations for purposes of determining the loss hereunder.

E If any provision of this Article shall be rendered illegal or unenforceable by the laws, regulations or public policy of any state, such provision shall be considered void in such state, but this shall not affect the validity or enforceability of any other provision of this contract or the enforceability of such provision in any other jurisdiction.

ARTICLE IX. - EXCLUSIONS

THIS AGREEMENT DOES NOT COVER

A THE FOLLOWING GENERAL CATEGORIES

1. All Lines of Business not specifically listed in Article I Business Covered.

2. Policies issued with a deductible of $100,000 or more; provided this exclusion shall not apply to Policies which customarily provide a percentage deductible on the perils of earthquake or windstorm.

3. Reinsurance assumed, except pro rata local agency reinsurance on specific risks.

4. Ex-gratia Payments

5. Loss or damage occasioned by war, invasion, revolution, bombardment, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, martial law, or confiscation by order of any government or public authority, but not excluding loss or damage which would be covered under a standard form of Policy containing a standard war exclusion clause.

6. Insolvency Funds as per the attached Insolvency Funds Exclusion Clause, which is made part of this Agreement.

7. Pool, Syndicate and Association business as per the attached Pools, Associations and Syndicates Exclusion Clause, which is made part of this Agreement.

8. Risks where the Total Insured Value, per risk, exceeds the figure specified as per the attached Total Insured Value Exclusion Clause, which is made part of this Agreement.

9. Loss resulting from damage to overhead transmission and distribution lines, including supporting structures and anything attached thereto, of any public or private utility company, cable television or telecommunication company of any kind. This exclusion shall not apply to such overhead transmission and distribution lines, including supporting structures and anything attached thereto located on the premises of any policyholder or within 1,000 feet thereof. Nor shall this exclusion apply to utility service interruption or contingent business interruption losses for any policyholder, unless such policyholder is a public or private utility company, cable television or telecommunication company of any kind.

B. THE FOLLOWING CLASSES OF BUSINESS AND TYPES OF RISKS

1. Theft Insurance

2. Insurance of wrongful conversion, embezzlement, and secretion

3. Cargo Liability

4. Mobile Homes

Manufacturer’s stock

Dealers Open Lot

C. THE FOLLOWING PERILS

Flood and/or Earthquake when written as such

Difference in Conditions, however styled

Pollution and Seepage as per the attached Pollution and Seepage Exclusion Clause, which is made part of this Agreement.

4 Nuclear Incident Exclusion Clauses which are attached and made part of this Agreement:

a Nuclear Incident Exclusion Clause - Physical Damage Reinsurance - U.S.A.

b Nuclear Incident Exclusion Clause - Physical Damage Reinsurance - Canada.

c Nuclear Incident Exclusion Clause - Reinsurance - No. 4

5 a Loss, damage or expense of whatsoever nature caused directly or indirectly by any of the following, regardless of any other cause or event contributing concurrently or in any other sequence to the loss: nuclear reaction or radiation, or radioactive contamination, however caused.

b. However, if nuclear reaction or radiation, or radioactive contamination results in fire it is specifically agreed herewith that this Agreement will pay for such fire loss or damage subject to all of the terms, conditions and limitations of this Agreement.

c. This exclusion shall not apply to loss, damage or expense originating from and occurring at risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Company to be the primary hazard.

ARTICLE X. - SPECIAL ACCEPTANCE

Risks which are beyond the terms, conditions or limitations of this Agreement may be submitted to the Reinsurer for special acceptance hereunder; and such risks, if accepted in writing by the Reinsurer, shall be subject to all of the terms, conditions and limitations of this Agreement, except as modified by the special acceptance. Premiums and losses derived from any special acceptance shall be included with other data for rating purposes under this Agreement.

ARTICLE XI. - LOSS OCCURRENCE

A. The term “Loss Occurrence” shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one Loss Occurrence shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event except that the term “Loss Occurrence” shall be further defined as follows:

2 As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company, occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours

during the continued occupation of an assured’s premises by strikers, provided such occupation commenced during the aforesaid period.

3 As regards earthquake (the epicentre of which need not necessarily be within the territorial confines referred to in the opening paragraph of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company’s Loss Occurrence.

4 As regards Freeze, only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting of frozen pipes and tanks) may be included in the Company’s Loss Occurrence.

As regards Terrorism, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. Should such an event of Terrorism give rise to other perils which, in an unbroken chain of causation, have occasioned the losses, the cause of the losses is understood to be that event of Terrorism.

a “Terrorism,” for purposes of this Agreement, shall mean any actual or threatened violent act or act harmful to human life, tangible or intangible property or infrastructure directed towards or having the effect of (i) influencing or protesting against any de jure or de facto government or policy thereof, (ii) intimidating, coercing or putting in fear a civilian population or section thereof for the purpose of establishing or advancing a specific ideological, religious or political system of thought, perpetrated by a specific individual or group directly or indirectly through agents acting on behalf of said individual or group or (iii) retaliating against any country for direct or vicarious support by that country of any other government or political system.

b Any act declared pursuant to the Terrorism Risk Insurance Act of 2002, as amended, shall also be considered “Terrorism” for purposes of this Agreement.

B For all Loss Occurrences the Company may choose the date and time when any such period of consecutive hours commences provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss and provided that only one such period of 168 consecutive hours shall apply with respect to one event except for those Loss Occurrences referred to in 1., 2., and 5. above, where only one such period of 72 consecutive hours shall

apply with respect to one event regardless of the duration of the event.

C No individual losses occasioned by an event that would be covered by 72 hours clauses may be included in any Loss Occurrence claimed under the 168 hours provision.

ARTICLE XII. - TERRORISM EXCESS RECOVERY

A For purposes of this Article:

“Act” shall mean the Terrorism Risk Insurance Act of 2002, any amendments thereto and any regulations promulgated thereunder.

2 “Affiliate,” “Insured Losses,” and “Program Year” shall have the meanings provided in the Act.

3 “Company” shall include the Company and all affiliates

B This reinsurance shall not apply to any fines civil penalties or surcharges assessed pursuant to the Act.

C To the extent that the Company allocates Insured Losses and/or federal assistance under the Act among affiliates, claims, contracts or otherwise in any manner which impacts the reinsurance provided hereunder, the Company shall apply a reasonable allocation method acceptable to the Reinsurer.

D To the extent that an Insured Loss is otherwise payable hereunder, the reinsurance provided by this Agreement shall apply only to the portion of liability, loss, cost and/or expense retained by the Company net of any federal assistance pursuant to the Act. For each Program Year, the liability of the Reinsurer for Insured Losses under this Agreement shall be reduced by the ratio that the financial assistance under the Act allocated to Policies subject to this Agreement bears to the Company’s total Insured Losses subject to this Agreement. If the Company does not make such allocation, the liability of the Reinsurer for Insured Losses in any Program Year under this Agreement shall be reduced by the ratio that the financial assistance available to the Company under the Act for that Program Year bears to the Company’s total Insured Losses for the same Program Year.

E The parties recognize that, for any Program Year, the Reinsurer may without waiver of the foregoing Paragraphs make payments for Insured Losses which, together with available financial assistance under the Act and the Company retentions and/or deductibles hereunder, exceed the Company’s Insured Losses. In such event, the Reinsurer’s proportional share of all such excess recovery (hereafter “Reinsurer’s Excess Share”) shall inure to the benefit of the

Reinsurer. All excess recovery described in this Paragraph shall be allocated to the Reinsurer and the Company in proportion to the respective liability of each for Insured Losses, net of federal assistance under the Act, salvage, subrogation and other similar recoveries, as applicable.

F In the event of a Reinsurer’s Excess Share, the Company shall

1. Promptly pay the Reinsurer’s Excess Share to the Reinsurer; or

2 Upon request of the Reinsurer at any time and at the Reinsurer’s sole discretion, instead assign to the Reinsurer its rights to recover directly from the federal government any portion of Reinsurer’s Excess Share not already paid to the Reinsurer. The Company shall cooperate with and assist the Reinsurer, at its own expense, to the extent reasonably necessary for the Reinsurer to exercise those rights. If the Reinsurer is unable, for any reason, to exercise any right assigned to it by the Company pursuant to this Article, the Company shall pay the Reinsurer’s Excess Share to the Reinsurer as if no assignment had taken place to the extent that the Company has not been deemed to have forfeited the right to financial assistance under the Act by virtue of the attempted assignment.

G In the event of an Insured Loss, the Company shall provide the Reinsurer with a monthly report detailing claim settlement activities and financial assistance under the Act. Calculations for each Program Year shall continue to be made until the settlement of all Insured Losses covered hereunder.

ARTICLE XIII. - REINSURANCE PREMIUM

A The Company shall pay to the Reinsurer a premium for the reinsurance provided under this Agreement at a rate of 1.2117%. Such rate shall be applied to the Company’s Subject Earned Premium for the Agreement Year being reported subject to an annual deposit premium of $1,347,470 payable in four equal installments of $336,868 at the beginning of each calendar quarter.

Swiss Reinsurance Corporation shall have a 90% share in the minimum and deposit premiums set forth above.

B. As promptly as possible after the expiration of this Agreement, the Company shall render a statement to the Reinsurer showing the actual reinsurance premium due hereunder. If such premium calculations differ from the deposit previously paid, the debtor party shall pay the outstanding balance as soon as practicable, However, in no event shall the annual adjusted premium be less than a minimum of $1,077,976.

C The term “Subject Earned Premium” as used herein is equal to the sum of the Net Premiums Written on the business covered hereunder during the period under consideration, plus the unearned premium reserve as respects premiums in force at the beginning of such period, less the unearned premium reserve as respects premiums in force at the end of the period, said unearned premium is to be calculated on an actual daily basis or in accordance with the Company’s methodology, as agreed.

D The term “Net Premiums Written” shall mean gross premiums written less returns, allowances and reinsurances which inure to the benefit of the Reinsurer.

E The following percentages of the Company’s premium shall be allocated to the business covered under this Agreement: 90% Homeowners

F In respect of Paragraph B. above

1 All account statements shall be sent to

a E-Mail/XML or EDI Formats reaccount_armonk@swissre.com, or

b Standard Mail

Swiss Reinsurance America Corporation
Accounting Department
175 King Street
Armonk, NY 10504
Telephone: 914-828-8000
Facsimile: 914-828-5919

2. All checks and supporting documentation shall be sent to the Reinsurer through one of the options set forth below:

a WIRE TRANSFER

(i All wires should be sent to:

The Bank of New York
1 Wall street
New York, NY 10286
Account Name: Swiss Reinsurance America Corporation
Account Number:
ABA Number:

(ii All supporting documentation should be sent to

Swiss Reinsurance America Corporation
Accounting Department
175 King street
Armonk, NY 10504

ARTICLE XIV. - CLAIMS

A The Company shall promptly notify the Reinsurer of each claim which may involve the reinsurance provided hereunder and of all subsequent developments relating thereto, stating the amount claimed and estimate of the Company’s Ultimate Net Loss and Loss Adjustment Expenses. Notwithstanding the provisions set forth in any other Article herein, prompt notification of loss shall be considered a condition precedent to liability under this Agreement.

B The Company shall have the responsibility to investigate, defend or negotiate settlements of all claims and lawsuits related to Policies written by the Company and reinsured under this Agreement. The Reinsurer, at its own expense, may associate with the Company in the defense or control of any claim, suit or other proceeding which involves or is likely to involve the reinsurance provided under this Agreement, and the Company shall cooperate in every respect in the defense of any such claim, suit or proceeding.

ARTICLE XV - SALVAGE AND SUBROGATION

ARTICLE XVI. - ACCESS TO RECORDS

The Reinsurer or its duly authorized representatives shall have the right to examine, at the offices of the Company at a reasonable time, during the currency of this Agreement or anytime thereafter, all books and records of the Company relating to business which is the subject of this Agreement.

ARTICLE XVII. - TAXES

ARTICLE XVIII - CURRENCY

Wherever the word “dollars” or the “$” symbol is used in this Agreement, it shall mean dollars of the United States of America.

ARTICLE XIX. - OFFSET

Each party to this Agreement together with their successors or assigns shall have and may exercise, at any time, the right to offset any balance or balances due the other (or, if more than one, any other). Such offset may include balances due under this Agreement and any other agreements heretofore or hereafter entered into between the parties regardless of whether such balances arise from premiums, losses or otherwise, and regardless of capacity of any party, whether as assuming insurer and/or ceding insurer, under the various agreements involved, provided however, that in the event of insolvency of a party hereto, offsets shall only be allowed in accordance with the provisions of Section 7427 of the Insurance Law of the State of New York to the extent such statute or any other applicable law, statute or regulation governing such offset shall apply.

ARTICLE XX - ERRORS OR OMISSIONS

Errors or omissions of an administrative nature on the part of the Company shall not invalidate the reinsurance under this Agreement, provided such errors or omissions are corrected promptly after discovery thereof; but the liability of the Reinsurer under this Agreement or any exhibits, addenda, or endorsements attached hereto shall in no event exceed the limits specified herein nor be extended to cover any risks, perils, lines of business or classes of insurance generally or specifically excluded herein.

ARTICLE_XXI. - DISPUTE RESOLUTION

Part I - Choice Of Law And Forum

Any dispute arising under this Agreement shall be resolved in the State of Massachusetts, and the laws of the state of Massachusetts shall govern the interpretation and application of this Agreement.

Part II - Mediation

Part III - Arbitration

C. Appointment of Arbitrators - The members of the arbitration panel shall be chosen from disinterested persons with at least 10 years experience in the insurance and reinsurance business. Unless a single arbitrator is agreed upon, the party requesting arbitration (hereinafter referred to as the “claimant”) shall appoint an arbitrator and give written notice thereof by certified mail, to the other party (hereinafter referred to as the “respondent”) together with its notice of intention to arbitrate. Within 30 days after receiving such notice, the respondent shall also appoint an arbitrator and notify the claimant thereof by certified mail. Before instituting a hearing, the two arbitrators so appointed shall choose an umpire. If, within 20 days after the appointment of the arbitrator chosen by the respondent, the two arbitrators fail to agree upon the appointment of an umpire, each of them shall nominate three individuals to serve as umpire, of whom the other shall decline two and the umpire shall be chosen from the remaining two by drawing lots. The name of the individual first drawn shall be the umpire.

E. Submission of Dispute to Panel - Within 30 days after the notice of appointment of all arbitrators, the panel shall meet, and determine a timely period of discovery, discovery procedures and schedules for hearings.

F. Procedure Governing Arbitration - All proceedings before the panel shall be informal and the panel shall not be bound by the formal rules of evidence. The panel shall have the power to fix all procedural rules relating to the arbitration proceeding. In reaching any decision, the panel shall give due consideration to the customs and usages of the insurance and reinsurance business.

G. Arbitration Award - The arbitration panel shall render its decision within 60 days after termination of the proceeding, which decision shall be in writing, stating the reasons therefor. The decision of the majority of the panel shall be final and binding on the parties to the proceeding. In no event however, will the panel be authorized to award punitive, exemplary or consequential damages of whatsoever nature in connection with any arbitration proceeding concerning this Agreement.

ARTICLE XXII. - INSOLVENCY

A. In the event of insolvency of the Company, the reinsurance provided by this Agreement shall be payable by the Reinsurer on the basis of the liability of the Company as respects Policies covered hereunder, without diminution because of such insolvency, directly to the Company or its liquidator, receiver, conservator or statutory successor except as provided in Sections 4118(a)(1)(A) and 1114(c) of the New York Insurance Law.

B. The Reinsurer shall be given written notice of the pendency of each claim or loss which may involve the reinsurance provided by this Agreement within a reasonable time after such claim or loss is filed in the insolvency proceedings. The Reinsurer shall have the right to investigate each such claim or loss and interpose, at its own expense, in the proceedings where the claim or loss is to be adjudicated, any defense which it may deem available to the Company, its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer.

In addition to the offset provisions set forth in Article XIX. - Offset, any debts or credits, liquidated or unliquidated, in favor of or against either party on the date of the receivership or liquidation order (except where the obligation was purchased by or transferred to be used as an offset) are deemed mutual debts or credits and shall be set off with the balance only to be allowed or paid. Although such claim on the part of either party against the other may be unliquidated or undetermined in amount on the date of the entry of the receivership or liquidation order, such claim will be regarded as being in existence as of such date and any claims then in existence and held by the other party may be offset against it.

D. Nothing contained in this Article is intended to change the relationship or status of the parties to this Agreement or to enlarge upon the rights or obligations of either party hereunder except as provided herein.

ARTICLE XXIII - AMENDMENTS

This Agreement may be amended by mutual consent of the parties expressed in an addendum; and such addendum, when executed by both, parties, shall be deemed to be an integral part of this Agreement and binding on the parties hereto.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate, by their duly authorized representatives as of the following dates:

In Boston, Massachusetts this 21st day of March, 2006

ATTEST:				SAFETY INSURANCE COMPANY SAFETY INDEMNITY INSURANCE COMPANY


/s/ Glenn Hiltpold, F.C.A.S.				/s/ Edward N. Patrick Jr.


Glenn Hiltpold				Edward N. Patrick Jr.
Name				Name


DIRECTOR-ACTUARIAL SERVICES				VP Underwriting
Title				Title

And in Armonk New York, this 10th day of March, 2006.

ATTEST				SWISS REINSURANCE AMERICA CORPORATION


/s/ James Bronneck				/s/ Jeffrey Illegible


James Bronneck				Jeffrey Illegible
Name				Name


Vice President Member of Management				Senior Vice President Member of Senior Management
Title				Title

SUPPLEMENT TO THE ATTACHMENTS

DEFINITION OF IDENTIFICATION TERMS USED WITHIN THE ATTACHMENTS

A Wherever the term “Company” or “Reinsured” or “Reassured” or whatever other term is used to designate the reinsured company or companies within the various attachments to the reinsurance agreement, the term shall be understood to mean Company or Reinsured or Reassured or whatever other term is used in the attached reinsurance agreement to designate the reinsured company or companies.

B Wherever the term “Agreement” or “Contract” or “Policy” or whatever other term is used to designate the attached reinsurance agreement within the various attachments to the reinsurance agreement, the term shall be understood to mean Agreement or Contract or Policy or whatever other term is used to designate the attached reinsurance agreement.

C Wherever the term “Reinsurer” or “Reinsurers” or “Underwriters” or whatever other term is used to designate the reinsurer or reinsurers in the various attachments to the reinsurance agreement, the term shall be understood to mean Reinsurer or Reinsurers or Underwriters or whatever other term is used to designate the reinsuring company or companies.

INSOLVENCY FUNDS EXCLUSION CLAUSE

This Agreement excludes all liability of the Company arising by contract, operation of law, or otherwise from its participation or membership, whether voluntary or involuntary, in any insolvency fund or from reimbursement of any person for any such liability. “Insolvency fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, which provides for any assessment of or payment or assumption by any person of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part.

POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE

SECTION A

Excluding:

(a) All Business derived directly or indirectly from any Pool, Association or Syndicate which maintains its own reinsurance facilities.

(b) Any Pool or Scheme (whether voluntary or mandatory) formed after March 1, 1968, for the purpose of insuring Property whether on a country-wide basis or in respect of designated areas. This Exclusion shall not apply to so-called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage.

SECTION B

It is agreed that business, written by the Company for the same perils, which is known at the time to be insured by or in excess of underlying amounts placed in the following Pools, Associations or Syndicates, whether by way of insurance or reinsurance is excluded hereunder:

Industrial Risk Insurers (successor to Factory Insurance Association and Oil Insurance Association); Associated Factory Mutuals; Improved Risk Mutuals.

Any Pool, Association or Syndicate formed for the purpose of writing oil, Gas or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs.

United States Aircraft Insurance Group, Canadian Aircraft Insurance Group, Associated Aviation Underwriters, American Aviation Underwriters.

SECTION B does not apply

(a) Where the Total Insured Value over all interests of the risk in question is less than $350,000,000.

(b) To interests traditionally underwritten as Inland Marine or Stock and/or contents written on a Blanket basis.

(c) To Contingent Business Interruption, except when the Company is aware that the key location is known at the time to be insured in any Pool, Association or Syndicate named above.

(d) To risks as follows: Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (other than Railroad Schedules) and Builders Risks on the classes of risks specified in this subsection (d) only.

SECTION C

NEVERTHELESS the Reinsurer specifically agrees that Liability accruing to the Company from its participation in:

(a) The following so-called “Coastal Pools”

ALABAMA INSURANCE UNDERWRITING ASSOCIATION

FLORIDA WINDSTORM UNDERWRITING ASSOCIATION

LOUISIANA INSURANCE UNDERWRITING ASSOCIATION

MISSISSIPPI WINDSTORM INSURANCE UNDERWRITING ASSOCIATION

NORTH CAROLINA INSURANCE UNDERWRITING ASSOCIATION

SOUTH CAROLINA WINDSTORM AND HAIL UNDERWRITING ASSOCIATION

TEXAS CATASTROPHE PROPERTY INSURANCE ASSOCIATION

and

(b) All “Fair Plan” and “Rural Risk Plan” Business

for all perils otherwise protected hereunder will not be excluded, except however, that this reinsurance does not include any increase in such liability resulting from:

(1) The inability for any other participant in such “Coastal Pool” and/or “Fair Plan” and/or “Rural Risk Plan” to meet its liability.

(2) Any Claim against such “Coastal Pool” and/or “Fair Plan” and/or “Rural Risk Plan” or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund (as defined in the Insolvency Funds Exclusion Clause incorporated in this agreement) .

TOTAL INSURED VALUE EXCLUSION CLAUSE

It is the mutual intention of the parties to exclude risks, other than Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (except Railroad schedules) and Builders Risk on the above classes where, at the time of the cession, the Total Insured Value over all interests exceeds $350,000,000. However, the Company shall be protected hereunder, subject to the other terms and conditions of this Agreement, if subsequently to cession being made the Company becomes acquainted with the true facts of the case and discovers that the mutual intention has been inadvertently breached, the Company shall at the first opportunity, and certainly by next anniversary of the original policy, exclude the risk in question.

It is agreed that this mutual intention does not apply to Contingent Business Interruption or to interest traditionally underwritten as Inland Marine or to Stock and/or Contents written on a blanket basis except where the Company is aware that the Total Insured Value of $350,000,000 is already exceeded for buildings, machinery, equipment and direct use and occupancy at the key location.

It is understood and agreed that this Clause shall not apply hereunder where the Company writes 100% of the risk.

Notwithstanding anything contained herein to the contrary, it is the mutual intention of the parties in respect of bridges and tunnels to exclude such risks where the Total Insured Value over all interests exceeds $350,000,000.

POLLUTION AND SEEPAGE EXCLUSION CLAUSE

This Reinsurance does not apply to:

Pollution, seepage, contamination or environmental impairment (hereinafter collectively referred to as “pollution”) insurances, however styled;

2 Loss or damage caused directly or indirectly by pollution, unless said loss or damage follows as a result of a loss caused directly by a peril covered hereunder;

Expenses resulting from any governmental direction or request that material present in or part of or utilized on an insured’s property be removed or modified, except as provided in 5. below;

4 Expenses incurred in testing for and/or monitoring pollutants;

Expenses incurred in removing debris, unless (A) the debris results from a loss caused directly by a peril covered hereunder, and (B) the debris to be removed is itself covered hereunder, and (C) the debris is on the insured’s premises, subject, however, to a limit of $5,000 plus 25% of (i) the property damage loss, any risk, any one location, any one original insured, and (ii) any deductible applicable to the loss;

6 Expenses incurred to extract pollutants from land or water at the insured’s premises unless (A) the release, discharge, or dispersal of pollutants results from a loss caused directly by a peril covered hereunder, and (B) such expenses shall not exceed $10,000;

Loss of income due to any increased period of time required to resume operations resulting from enforcement of any law regulating the prevention, control, repair, clean-up or restoration of environmental damage;

8. Claims under 5. and/or 6. above, unless notice thereof is given to the Company by the insured within 180 days after the date of the loss occurrence to which such claims relate.

Where no pollution exclusion has been accepted or approved by an insurance regulatory authority for use in a policy that is subject to this Agreement or where a pollution exclusion that has been used in a policy is overturned, either in whole or in part, by a court having jurisdiction, there shall be no recovery for pollution under this Agreement unless said pollution loss or damage follows as a result of a loss caused directly by a peril covered hereunder.

Nothing herein shall be deemed to extend the coverage afforded by this reinsurance to property or perils specifically excluded or not covered under the terms and conditions of the original policy involved.

NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE U.S.A.

N.M.A 1119

1 This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.

2 Without in any way restricting the operation of paragraph 1. of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to:

I Nuclear reactor power plants including all auxiliary property on the site, or

II Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and critical facilities as such, or

IV Installations other than those listed in paragraph 2. III. above using substantial quantities of radioactive isotopes or other products of nuclear fission.

3 Without in any way restricting the operation of paragraphs 1. and 2. of this Clause, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith, except that this paragraph 3. shall not operate:

(a) where the Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or

(b) where the said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However, on and after 1st January, 1960, this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof.

4 Without in any way restricting the operation of paragraphs 1., 2. and 3. of this Clause, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against.

5 It is understood and agreed this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard.

6 The term “special nuclear material” shall have the meaning given to it by the Atomic Energy Act of 1954 or by any law amendatory thereof.

7 Reassured to be sole judge of what constitutes

(a) substantial quantities, and

(b) the extent of installation, plant or site

NOTE: - Without in any way restricting the operation of paragraph 1 hereof, it is understood and agreed that

(a) all policies issued by the Reassured on or before 31st December, 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December, 1960 whichever first occurs whereupon all the provisions of this Clause shall apply,

(b) with respect to any risk located in Canada policies issued by the Reassured on or before 31st December, 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December, 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.

NUCLEAR INCIDENT EXCLUSION CLAUSE — PHYSICAL DAMAGE — REINSURANCE CANADA

N.M.A 1980a

1 This Agreement does net cover any loss or liability accruing to the Company directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.

2 Without in any way restricting the operation of paragraph 1. of this clause, this Agreement does not cover any loss or liability accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to:

a Nuclear reactor power plants including all auxiliary property on the site, or

b Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and critical facilities as such, or

c Installations for fabricating complete fuel elements or for processing substantial quantities of radioactive materials, and for reprocessing, salvaging, chemically separating, storing or disposing of spent nuclear fuel or waste materials, or

d Installations other than those listed in c. above using substantial quantities of radioactive isotopes or other products of nuclear fission.

3 Without in any way restricting the operation of paragraphs 1. and 2. of this clause, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith, except that this paragraph 3. shall not operate:

a where the Company does not have knowledge of such nuclear reactor power plant or nuclear installation, or

b where the said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused.

4 Without in any way restricting the operation of paragraphs 1., 2. and 3. of this clause, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against.

5 This clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Company to be the primary hazard.

6 The term “radioactive material” means uranium, thorium, plutonium, neptunium, their respective derivatives and compounds, radioactive isotopes of other elements and any other substances which may be designated by or pursuant to any law, act or statute, or any law amendatory thereof as being prescribed substances capable of releasing atomic energy, or as being requisite for the production, use or application of atomic energy.

7 Company to be sole judge of what constitutes

a substantial quantities, and

b the extent of installation, plant or site

8 Without in any way restricting the operation of paragraphs 1., 2., 3. and 4. of this clause, this Agreement does not cover any loss or liability accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, caused:

by any nuclear incident as defined in or pursuant to the Nuclear Liability Act or any other nuclear liability act, law or statute, or any law amendatory thereof, or nuclear explosion, except for ensuing loss or damage which results directly from fire, lightning or explosion of natural, coal or manufactured gas;

(b) by contamination by radioactive material

NOTE Without in any way restricting the operation of paragraphs 1., 2., 3. and 4. of this clause, paragraph 8. of this clause shall only apply to all original contracts of the Company whether new, renewal or replacement which become effective on or after December 31, 1992.

April 1, 1996

NUCLEAR INCIDENT EXCLUSION CLAUSE - REINSURANCE - NO. 4

1 This Reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association.

2 Without in any way restricting the operations of Nuclear Incident Exclusion Clauses, - Liability, - Physical Damage, - Boiler and Machinery and paragraph 1. of this Clause, it is understood and agreed that for all purposes of the reinsurance assumed by the Reinsurer from the Reinsured, all original insurance policies or contracts of the Reinsured (new, renewal and replacement) shall be deemed to include the applicable existing Nuclear Clause and/or Nuclear Exclusion Clause(s) in effect at the time and any subsequent revisions thereto as agreed upon and approved by the Insurance Industry and/or a qualified Advisory or Rating Bureau.

Exhibit 10.34

UMBRELLA
LIABILITY QUOTA SHARE
REINSURANCE AGREEMENT
NO. POR327548

EFFECTIVE JANUARY 1, 2006

between

SAFETY INSURANCE COMPANY
SAFETY INDEMNITY INSURANCE COMPANY
both of Boston, Massachusetts

and

SWISS REINSURANCE AMERICA CORPORATION
Armonk, New York

UMBRELLA LIABILITY QUOTA SHARE REINSURANCE AGREEMENT NO. POR327548

ARTICLE	CONTENTS	PAGE

	PREAMBLE	1
I	BUSINESS COVERED	1
II	EFFECTIVE DATE AND TERMINATION	2
III	TERRITORY	3
IV	DEFINITION OF ULTIMATE NET LIABILITY	3
V	EXCESS REINSURANCE	3
VI	RETENTION	3
VII	DEFINITION OF LOSS OCCURRENCE	3
VIII	LOSS IN EXCESS OF POLICY LIMITS	3
IX	EXTRA CONTRACTUAL OBLIGATIONS	4
X	EXCLUSIONS	5
XI	SPECIAL ACCEPTANCE	7
XII	UNDERLYING INSURANCE	7
XIII	REINSURANCE PREMIUM	8
XIV	COMMISSION	8
XV	LOSSES, LOSS ADJUSTMENT EXPENSES AND SALVAGES	8
XVI	REPORTS AND REMITTANCES	9
XVII	CLAIMS	11
XVIII	POLICY FORM	12
XIX	ACCESS TO RECORDS	12
XX	TAXES	12
XXI	CURRENCY	12
XXII	OFFSET	12
XXIII	ERRORS OR OMISSIONS	13
XXIV	DISPUTE RESOLUTION	13
XXV	INSOLVENCY	15
XXVI	SPECIAL TERMINATION	15
XXVII	AMENDMENTS	16
	SIGNATURES	17

ATTACHMENTS		POLLUTION LIABILITY EXCLUSION CLAUSE - REINSURANCE INSOLVENCY FUNDS EXCLUSION CLAUSE
		NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A.
		NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA
		NUCLEAR INCIDENT EXCLUSION CLAUSE - REINSURANCE - NO. 4

UMBRELLA
LIABILITY QUOTA SHARE
REINSURANCE AGREEMENT
NO. POR327548
(hereinafter referred to as the “Agreement”)

between

SAFETY INSURANCE COMPANY
SAFETY INDEMNITY INSURANCE COMPANY
both of Boston, Massachusetts

and

SWISS REINSURANCE AMERICA CORPORATION
Armonk, New York
(hereinafter referred to as the “Reinsurer”)

ARTICLE I - BUSINESS COVERED

A. By this Agreement the Company obligates itself to cede to the Reinsurer and the Reinsurer obligates itself to accept from the Company a 90% Quota Share participation of the Company’s Ultimate Net Liability for new and renewal Policies becoming effective on or after January 1, 2006, as respects losses occurring on or after January 1, 2006. This Quota Share is subject to a maximum cession limit of $4,500,000 each Policy (90% share of the Company’s Ultimate Net Liability of $5,000,000).

B Notwithstanding the provisions of paragraph A. above, the Company shall retain an annual aggregate deductible of $75,000 as respects Ultimate Net Liability otherwise subject to cession under this Agreement. Thereafter, the cession and limit set forth in paragraph A. above shall apply.

C Any loss arising under this Agreement with respect to 80% of Extra Contractual Obligations and 80% of Loss In Excess of Policy Limits as defined herein shall be recovered in the same proportion as the contractual loss recoverable hereunder provided such contractual loss plus Extra Contractual Obligations and Loss In Excess of Policy Limits shall never exceed the maximum cession limit set forth under paragraph A. above.

D This Agreement is solely between the Company and the Reinsurer, and nothing contained in this Agreement shall create any obligations or establish any rights against the Reinsurer in favor of any person or entity not a party hereto.

E. The performance of obligations by both parties under this Agreement shall be in accordance with a fiduciary standard of good faith and fair dealing.

F The term “Policies” shall mean each of the Company’s binders, policies and contracts of insurance on the business covered hereunder.

G Under this Agreement, the indemnity for reinsured loss applies only to Personal and Commercial Umbrella Liability Policies, except as excluded under Article X - Exclusions of this Agreement.

ARTICLE II - EFFECTIVE DATE AND TERMINATION

A. This Agreement shall become effective 12:01 a.m., Eastern Standard Time on January 1, 2006, and shall remain in force until terminated. This Agreement may be terminated at the close of any calendar quarter by either party giving to the other not less than 90 days prior written notice by certified mail of its intention to do so.

B During the running of such notice as stipulated in Paragraph A. above, the Reinsurer shall participate in business coming within the terms of this Agreement until the date of termination of this Agreement.

C In the event of termination of this Agreement, the Company shall have the option of continuing or terminating the liability in force at the date of termination as set forth below. The Company may exercise such option provided written notice of the Company’s election is given by certified mail to the Reinsurer prior to the date of termination. If the Company does not choose to exercise its option prior to the date of termination, such option shall revert to the Reinsurer.

The Reinsurer shall be liable for losses occurring subsequent to the date of termination for all policies covered hereunder and in force at the date of termination of this Agreement until their natural expiry, cancellation or next anniversary of such business, whichever first occurs; but in no case shall this reinsurance be extended for longer than 12 months, after the termination date. At such time, the Reinsurer shall return to the Company the unearned premiums, less commissions applicable, for the unexpired periods.

2 All reinsurance hereunder shall be automatically cancelled as of the date of termination and the Reinsurer shall be released of all liability as respects losses occurring subsequent to the date of termination. The Reinsurer shall return to the Company the unearned premiums on the business in force hereunder at the date of termination, less the commission allowed thereon.

ARTICLE III - TERRITORY

This Agreement applies to Policies issued by the Company within the United States of America, its territories and possessions, and Canada and shall apply to losses covered hereunder wherever occurring.

ARTICLE IV - DEFINITION OF ULTIMATE NET LIABILITY

The term “Ultimate Net Liability” shall mean the remaining portion of the Company’s gross liability on each Policy reinsured under this Agreement after deducting recoveries from all other reinsurance, whether specific or general and whether collectible or not, other than the reinsurance provided in Article VI - Excess Reinsurance.

ARTICLE V - EXCESS REINSURANCE

The Company has the right to maintain excess reinsurance as provided for in the Casualty Excess of Loss Reinsurance Agreement No. POR327454 on that portion of its Ultimate Net Liability which it retains net for its own account and recoveries under such excess reinsurance shall inure solely to the benefit of the Company.

ARTICLE VI - RETENTION

The Company warrants that it shall retain net for its own account and not reinsure in any way 10% of its Ultimate Net Liability.

ARTICLE VII - DEFINITION OF LOSS OCCURRENCE

A The term “Loss Occurrence” as used herein shall be the definition of ‘occurrence’ as set forth in the Company’s Policy, provided, however, in the event said term is not defined in any Policy covered hereunder, then as respects such Policy the term “each Loss Occurrence” as used herein shall be understood to mean each accident or occurrence or series of accidents or occurrences arising out of one event and happening within the term and scope of this Agreement.

B. If the date of loss, accident or occurrence cannot be specifically determined, the date of loss, accident or occurrence shall be the inception date of the original Policy (i.e., the Policy reinsured hereunder), such Policy period shall be deemed not to exceed 12 calendar months.

ARTICLE VIII - LOSS IN EXCESS OF POLICY LIMITS

A “Loss in Excess of Policy Limits” is defined as loss in excess of the limit of the original Policy, such loss in excess of the limit

having been incurred because of failure by the Company to settle within the Policy limit or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or in the preparation or prosecution of an appeal consequent upon such action.

C For the purposes of this Article, the word “loss” shall mean any amounts which the Company would have been contractually liable to pay had it not been for the limit of the original Policy.

ARTICLE IX - EXTRA CONTRACTUAL OBLIGATIONS

B. The date on which an Extra Contractual Obligation is incurred by the Company shall be deemed, in all circumstances, to be the date of the original accident, casualty, disaster or loss occurrence.

D Extra Contractual Obligations shall not include loss arising out of engineering or other services or any other non-claims related activity provided to the insured by the Company.

E Recoveries, collectibles or retention from any other form of insurance or reinsurance including deductibles or self-insured retention which protect the Company against Extra Contractual Obligations, whether collectible or not, shall inure to the benefit of the Reinsurer and shall be deducted from the total amount of Extra Contractual Obligations for purposes of determining the loss hereunder.

F The provisions of this Article shall apply only if the Company also writes the underlying primary Policy.

G If any provision of this Article shall be rendered illegal or unenforceable by the laws, regulations or public policy of any state, such provision shall be considered void in such state, but this shall not affect the validity or enforceability of any other provision of this Article or the enforceability of such provision in any other jurisdiction.

ARTICLE X - EXCLUSIONS

THIS AGREEMENT DOES NOT COVER:

A. THE FOLLOWING GENERAL CATEGORIES

1. All business not specifically classified and covered as set forth under Article I - Business Covered.

2 Ex-gratia payments

3. Risks subject to a deductible or a self-insured retention excess of $25,000.

4. Loss or damage caused directly or indirectly by: (a) enemy attack by armed forces including action taken by military, naval or air forces in resisting an actual or an immediately impending enemy attack; (b) invasion; (c) insurrection; (d) rebellion; (e) revolution; (f) intervention; (g) civil war; and (h) usurped power.

5. Reinsurance assumed by the Company.

6 Business derived from any Pool, Association, including Joint Underwriting Association, Syndicate, Exchange, Plan, Fund or other facility directly as a member, subscriber or participant, or indirectly by way of reinsurance or assessments; provided this exclusion shall not apply to Automobile or Workers Compensation assigned risks which may be currently or subsequently covered hereunder.

Pollution Liability as per the attached Pollution Liability Exclusion Clause - Reinsurance

8 Insolvency Funds as per the attached Insolvency Funds Exclusion Clause.

9 Nuclear Incident Exclusion Clauses which are attached and made part of this Agreement:

a. Nuclear Incident Exclusion Clause - Liability - Reinsurance - U.S.A.

b. Nuclear Incident Exclusion Clause - Liability - Reinsurance - Canada.

c. Nuclear Incident Exclusion Clause - Reinsurance - No. 4.

10 Any actual or alleged liability whatsoever for any claim or claims in respect of loss or losses, directly or indirectly arising out of, resulting from, or in consequence of asbestos, in whatever form or quantity.

B THE FOLLOWING INSURANCE COVERAGES

1 Fiduciary Liability

2 Fidelity and Surety

3 Credit and Financial Guarantee

4 Securities and Exchange Liability.

5. Retroactive coverage.

6. Malpractice or Professional Liability except incidental Malpractice Liability.

7 Directors’ and Officers’ Liability and Errors and Omissions Liability, except with respect to volunteer non-remunerative work in church, school and civil organizations.

8. Advertisers’, Broadcasters’ and Telecasters Liability as respects Personal Injury Liability

9 Liquor Law Liability except Host Liquor Law Liability

10. Kidnap, Extortion and Ransom Liability

11. Boiler and Machinery Insurance

12 Protection and Indemnity (Ocean Marine).

C THE FOLLOWING RISKS

1. Politicians, labor leaders or law-enforcement officials

2 Newspapers or magazine reporters editors, columnists or publishers

3 Authors journalists or writers

4 Radio and television broadcasters

5 Public lecturers

6 Celebrities and professional entertainers including athletes actors or other individuals who maintain a high public profile.

7 Any person who represents a moral hazard or who has been sued for libel or slander.

8 Automobile drivers:

a. In Assigned Risk, Excess Market or Non-Standard Plans

b. With more than one moving violation or chargeable accident within the last 36 months.

c With any convictions for reckless driving or driving while intoxicated.

D Business specifically excluded by the Company’s Personal and Commercial Umbrella Liability Policy.

E. In the event the Company is inadvertently bound on any risk which is excluded under Sections C. or D. above, the reinsurance provided under this Agreement shall apply to such risk until discovery by the Company within its Home Office of the existence of such risk and for 30 days thereafter, and shall then cease unless within the 30 day period, the Company has received from the Reinsurer written notice of its approval of such risk.

ARTICLE XI - SPECIAL ACCEPTANCE

ARTICLE XII - UNDERLYING INSURANCE

A It is understood that underlying limits hereunder is required and shall be maintained in accordance with the Company’s Agent Procedures for Personal Umbrella dated September 15, 2003 and Commercial Umbrella Agent Procedures dated June 1, 2004, on file with the Reinsurer.

B Other underlying limits may be required for certain classes of risks and shall be so stated in the Company’s Umbrella Underwriting Guidelines.

ARTICLE XIII - REINSURANCE PREMIUM

A The Company shall cede to the Reinsurer that portion of the Company’s Net Premiums Written applicable to the Policies reinsured hereunder which corresponds to the Reinsurer’s Quota Share participation in such Policies.

B The term “Net Premiums Written” shall mean gross and additional premiums less return premiums and less premiums ceded on all other reinsurance.

ARTICLE XIV - COMMISSION

A The Reinsurer shall make a commission allowance of 31.5% to the Company’s Net Premiums Written ceded hereunder. The Company shall debit the Reinsurer with the commission allowance in the monthly accounts.

B Such commission allowance includes provision for all brokerage and commission, premium taxes of all kinds, all board, bureau and exchange assessments and any other expenses whatsoever except Loss Adjustment Expenses.

ARTICLE XV - LOSSES, LOSS ADJUSTMENT EXPENSES AND SALVAGES

A. The Reinsurer shall pay its pro rata share of losses including prejudgment interest paid by the Company arising under Policies covered under this Agreement, and the Reinsurer shall benefit proportionately in all recoveries, including salvage and subrogation.

B. The Reinsurer shall pay its pro rata share of Loss Adjustment Expenses paid by the Company in connection with the investigation, settlement, defense or litigation including court costs and postjudgment interest of any claim or loss which is the subject matter of Policies covered under this Agreement. The term “Loss Adjustment Expenses” shall include all claim or loss expenses including Declaratory Judgment Expenses, but shall exclude the

salaries and expenses of Company employees, office expenses and other overhead expenses

C Declaratory Judgment Expenses are defined below and the Reinsurer shall be liable for such expenses in accordance with the following:

1 The term “Declaratory Judgment Expenses” shall mean all legal expenses, incurred in the representation of the Company in litigation brought to determine the Company’s defense and/or indemnification obligations, that are allocable to any specific claim or loss applicable to Policies subject to this Agreement. In addition, the Company shall promptly notify the Reinsurer of any Declaratory Judgment Expenses subject to this Agreement.

2 Declaratory Judgment Expenses shall be recovered in accordance with the provisions set forth in Paragraph B. of this Article, provided such Declaratory Judgment Expense shall be limited to no more than $2,700,000, each applicable Policy in any one Loss Occurrence.

D The Company shall promptly notify the Reinsurer of each claim which may involve the reinsurance provided hereunder and of all subsequent developments relating thereto.

E The Company shall have the responsibility to investigate, defend or negotiate settlements of all claims and lawsuits related to Policies written by the Company and reinsured under this Agreement. The Reinsurer, at its own expense, may associate with the Company in the defense or control of any claim, suit or other proceeding which involves or is likely to involve the reinsurance provided under this Agreement, and the Company shall cooperate in every respect in the defense of any such claim, suit or proceeding.

ARTICLE XVI - REPORTS AND REMITTANCES

A The Company shall provide the Reinsurer with a quarterly account as well as quarterly and annual reports in accordance with the provisions set forth in Paragraphs C., E. and F. below.

B Quarterly Account - Within 30 days after the close of each quarter the Company shall forward a quarterly account summarizing the following transactions under this Agreement during such quarter:

1 Net Premiums Written ceded segregated by Line of Business

2 Commissions

Loss and Loss Adjustment Expenses paid less recoveries, including salvage and subrogation, segregated by Line of Business, by year of loss.

The balance due either party shall be paid within 60 days after the close of each quarter for the transactions during each quarter.

C. In respect of Paragraph B. above:

1. All Monthly Account Statements shall be sent to the Reinsurer at:

a E-Mail/XML or KDI Formats: reaccount_armonk@swissre.com, or

b Standard Mail

Swiss Reinsurance America Corporation
Accounting Department
175 King Street
Armonk, NY 10504
Telephone: 914-828-8000
Facsimile: 914-828-5919

2 All checks and supporting documentation shall be sent to the Reinsurer through one of the options set forth below:

a WIRE TRANSFER

(i) All wires should be sent to:

The Bank of New York
l Wall Street
New York, NY 10286
Account Name: Swiss Reinsurance America Corporation
Account Number: 8900489197
ABA Number: 021000018 (SWIFT: IRVTUS3N)

(ii) All supporting documentation should be sent to

Swiss Reinsurance America Corporation
Accounting Department
175 King Street
Armonk, NY 10504

b LOCK BOX

Both checks and supporting documentation shall be sent to:

Swiss Reinsurance America Corporation
P.O. Box 7247-7281
Philadelphia, PA 19170-7281

D The Company may make a request for immediate payment by the Reinsurer for any individual gross loss covered hereunder in excess of $90,000 (i.e., 90% of $100,000, and the Reinsurer will be credited with amounts so paid in the subsequent monthly account.

E. Quarterly Report - The Company shall furnish the Reinsurer within 60 days after the close of each calendar quarter the following information as respects the business ceded hereunder:

1 Unearned premium reserves segregated by Line of Business at the end of the calendar quarter and calculated on the actual daily basis or in accordance with the Company’s methodology, as agreed.

2 Estimated loss and Loss Adjustment Expense reserves outstanding at the end of the calendar quarter segregated by Line of Business, by year of loss.

H Annual Report - The Company shall furnish the Reinsurer within 60 days after the close of each calendar year a summary of the business ceded hereunder:

1 Net Premiums Written ceded during the year segregated by Line of Business;

2. Unearned premium reserves segregated by Line of Business;

3 Losses and Loss Adjustment Expenses paid, less recoveries, including salvage and subrogation, during the year segregated by Line of Business, by year of loss;

4. Losses and Loss Adjustment Expenses outstanding at the end of the year segregated by Line of Business, by year of loss.

ARTICLE XVII - CLAIMS

A The Company shall promptly notify the Reinsurer of each claim which may involve the reinsurance provided hereunder and of all subsequent developments relating thereto, stating the amount claimed and estimate of the Company’s Ultimate Net Loss and Allocated Loss Adjustment Expenses. Notwithstanding the provisions set forth in any other Article herein, prompt notification of loss shall be considered a condition precedent to liability under this Agreement.

B The Company shall advise the Reinsurer of all claims which

1 Are reserved by the Company for an amount in excess of 50% of the underlying Policy limit;

2 Originate from fatal injuries

3 Originate from the following kinds of bodily injury:

a. Brain injuries resulting in impairment of physical function;

b. Spinal injuries resulting in a partial or total paralysis of upper or lower extremities;

c. Amputation or permanent loss of use of upper or lower extremities;

d. Severe burn injuries;

e. Loss of sight in one or both eyes

f. All other injuries likely to result in a permanent disability rate of 50% or more.

ARTICLE XVIII - POLICY FORM

The Company and the Reinsurer have agreed on the Company’s form as respects the Policies covered under this Agreement and the Company shall advise the Reinsurer of any change in such Policy form, 90 days prior to its implementation.

ARTICLE XIX - ACCESS T O RECORDS

The Reinsurer or its duly authorized representatives shall have the right to examine, at the offices of the Company at a reasonable time, during the currency of this Agreement or anytime thereafter, all books and records of the Company relating to business which is the subject of this Agreement.

ARTICLE XX - TAXES

ARTICLE XXI - CURRENCY

Wherever the word “dollars” or the “$” symbol in used in this Agreement, it shall mean dollars of the United States of America, excepting in those cases where the Policy is issued by the Company in Canadian dollars, in which case it shall mean dollars of Canada. In the event the Company is involved in a loss requiring payment in United States and Canadian currency, the Company’s retention and the limit of liability of the Reinsurer shall be apportioned between the two currencies in the same proportion as the amount of net loss in each currency bears to the total amount of net loss paid by the Company. For the purposes of this

Agreement, where the Company receives premiums or pays losses in currencies other than United States or Canadian currency, such premiums and losses shall be converted into United States dollars at the actual rates of exchange at which the premiums and losses are entered in the Company’s books.

ARTICLE XXII - OFFSET

Each party to this Agreement together with their successors or assigns shall have and may exercise, at any time, the right to offset any balance or balances due the other (or, if more than one, any other). Such offset may include balances due under this Agreement and any other agreements heretofore or hereafter entered into between the parties regardless of whether such balances arise from premiums, losses or otherwise, and regardless of capacity of any party, whether as assuming insurer and/or ceding insurer, under the various agreements involved, provided however, that in the event of insolvency of a party hereto, offsets shall only be allowed in accordance with the provisions of Section 7427 of the Insurance Law of the State of New York to the extent such statute or any other applicable law, statute or regulation governing such offset shall apply.

ARTICLE XXIII - ERRORS OR OMISSIONS

Errors or omissions of an administrative nature on the part of the Company shall not invalidate the reinsurance under this Agreement, provided such errors or omissions are corrected promptly after discovery thereof; but the liability of the Reinsurer under this Agreement or any exhibits, addenda, or endorsements attached hereto shall in no event exceed the limits specified herein nor be extended to cover any risks, perils, lines of business or classes of insurance generally or specifically excluded herein.

ARTICLE XXIV - DISPUTE RESOLUTION

Part I - Choice of Law And Forum

Any dispute arising under this Agreement shall be resolved in the State of New York, and the laws of the State of New York shall govern the interpretation and application of this Agreement.

Part II - Mediation

Part III - Arbitration

B Composition of Panel - Unless the parties agree upon a single arbitrator within 15 days after the receipt of a notice of intention to arbitrate, all disputes shall be submitted to an arbitration panel composed of two arbitrators and an umpire chosen in accordance with Paragraph C. hereof.

E Submission of Dispute to Panel - Unless otherwise extended by the arbitration panel or agreed to by the parties, each party shall submit its case to the panel within 30 days after the selection of the umpire.

F Procedure Governing Arbitration - All proceedings before the panel shall be informal and the panel shall not be bound by the formal rules of evidence. The panel shall have the power to fix all procedural rules relating to the arbitration proceeding. In reaching any decision, the panel shall give due consideration to the customs and usages of the insurance and reinsurance business.

G Arbitration Award - The arbitration panel shall render its decision within 60 days after termination of the proceeding, which decision shall be in writing, stating the reasons therefor. The decision of the majority of the panel shall be final and binding on the parties to the proceeding. In no event, however, will the panel be authorized to award punitive, exemplary or consequential damages of whatsoever nature in connection with any arbitration proceeding concerning this Agreement.

H Cost of Arbitration - Unless otherwise allocated by the panel, each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other parties the expense of the umpire and the arbitration.

ARTICLE XXV - INSOLVENCY

A In the event of insolvency of the Company, the reinsurance provided by this Agreement shall be payable by the Reinsurer on the basis of the liability of the Company as respects Policies covered hereunder, without diminution because of such insolvency, directly to the Company or its liquidator, receiver, conservator or statutory successor except as provided in Sections 4118(a)(1)(A) and 1114(c) of the New York Insurance Law.

C In addition to the offset provisions set forth in Article XXI - Offset, any debts or credits, liquidated or unliquidated, in favor of or against either party on the date of the receivership or liquidation order (except where the obligation was purchased by or transferred to be used as an offset) are deemed mutual debts or credits and shall be set off with the balance only to be allowed or paid. Although such claim on the part of either party against the other may be unliquidated or undetermined in amount on the date of the entry of the receivership or liquidation order, such claim will be regarded as being in existence as of such date and any claims then in existence and held by the other party may be offset against it.

ARTICLE XXVI - SPECIAL TERMINATION

A Notwithstanding the termination provisions set forth in Article II Effective Date and Termination, this Agreement shall be:

1. Terminated automatically and simultaneously upon the happening of any of the following events:

a Entry of an order of liquidation, rehabilitation, receivership or conservatorship with respect to the Company or the Reinsurer by any court or regulatory authority;

b Assignment of this Agreement by either party;

c Any transfer of control of either party by change in ownership or otherwise;

d General reinsurance of any portion of the Company’s business it retains net for its own account, as determined under the provisions of this Agreement without prior consent of the Reinsurer.

2 Terminated in accordance with the provisions set forth in this Paragraph, upon the discovery of the following event:

As respects the event set forth in this Paragraph A.2., the Company shall be obligated to notify the Reinsurer in writing within 30 days after the filing of its quarterly statement. Upon receipt of such notification the Reinsurer shall have the right to terminate this Agreement, by giving not less than 30 days notice of its intention to do so.

B Any notice of termination pursuant to provisions set forth in Paragraph A.2. above shall be sent by certified mail, return receipt requested. Such notice period shall commence upon the other party’s receipt of the notice of termination.

C In the event of termination, the Reinsurer shall not be liable for losses occurring subsequent to the date of termination and the Reinsurer shall return to the Company the unearned premiums, if any, on the business in force at the date of termination, less any commission allowed thereon.

ARTICLE XXVII - AMENDMENTS

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate, by their duly authorized representatives as of the following dates:

In Boston, MA, this 5th day of September, 2006.

ATTEST				SAFETY INSURANCE COMPANY SAFETY INDEMNITY INSURANCE COMPANY


/s/ Illegible				/s/ Illegible


Illegible				Illegible
Name				Name

And in Armonk, New York this 2 nd day of March 2006

ATTEST				SWISS REINSURANCE AMERICA CORPORATION


/s/ Illegible				/s/ Illegible


Illegible				Illegible
Name				Name


Vice President Member of Management				Vice President Member of Senior Management
Title				Title

SUPPLEMENT TO THE ATTACHMENTS

DEFINITION OF IDENTIFICATION TERMS USED WITHIN THE ATTACHMENTS

A. Wherever the term “Company” or “Reinsured” or “Reassured” or whatever other term is used to designate the reinsured company or companies within the various attachments to the reinsurance agreement, the term shall be understood to mean Company or Reinsured or Reassured or whatever other term is used in the attached reinsurance agreement to designate the reinsured company or companies.

POLLUTION LIABILITY EXCLUSION CLAUSE — REINSURANCE

This Reinsurance excludes

(1 Any loss occurrence arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants

a) At or from premises owned, rented or occupied by an original assured; or

b) At or from any site or location used for the handling, storage, disposal, processing or treatment of waste; or

c) Which are at any time transported, handled, stored, treated, disposed of, or processed as waste; or

d) At or from any site or location on which any original assured is performing operations;

(i) If the pollutants are brought on or to the site or location in connection with such operations; or

(ii If the operations are to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize the pollutants.

(2) Any liability, loss, cost or expense arising out of any governmental direction or request to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants.

“Original assured” as used herein means all insureds as defined in the policy issued by the Company.

INSOLVENCY FUNDS EXCLUSION CLAUSE

This Agreement excludes all liability of the Company arising by contract, operation of law, or otherwise from its participation or membership, whether voluntary or involuntary, in any insolvency fund or from reimbursement of any person for any such liability. “Insolvency fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, which provides for any assessment of or payment or assumption by any person of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part.

NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A

N.M.A 1590

1. This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association.

2 Without in any way restricting the operation of paragraph 1. of this Clause it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (new, renewal and replacement) of the classes specified in Clause II. in this paragraph 2. from the time specified in clause III. in this paragraph 2 . shall be deemed to include the following provision (specified as the Limited Exclusion Provision):

LIMITED EXCLUSION PROVISION*

III. The inception dates and thereafter of all original policies as described in II. above, whether new, renewal or replacement, being policies which either

(a) become effective on or after 1st May, 1960, or

3 Except for those classes of policies specified in Clause II. of paragraph 2 . and without in any way restricting the operation of paragraph 1. of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages:

shall be deemed to include with respect to such coverages, from the time specified in Clause V. of this paragraph 3., the following provision (specified as the Broad Exclusion Provision):

BROAD EXCLUSION PROVISION*

It is agreed that the policy does not apply:

I. Under any Liability Coverage to injury, sickness, disease death or destruction, bodily injury or property damage

II Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to immediate medical or surgical relief, first aid, to expenses incurred with respect to bodily injury, sickness, disease or death, bodily injury resulting from the hazardous properties of nuclear material and arising out of the question of a nuclear facility by any person or organization.

III Under any Liability Coverage, to injury, sickness, disease, death or destruction, bodily injury or property damage resulting from the hazardous properties of nuclear material, if

(a) the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured or (2) has been discharged or dispersed therefrom;

(b) the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or

IV As used in this endorsement

(a) any nuclear reactor

(b) any equipment or device designed or used for (1) separating the isotopes of uranium or plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste,

(d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste

(i Garage and Automobile Policies issued by the Reassured on New York risks, or

(ii Statutory liability insurance required under Chapter 90, General Laws of Massachusetts,

until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof.

4. Without in any way restricting the operations of paragraph 1. of this Clause, it is understood and agreed that paragraphs 2. and 3. above are not applicable to original liability policies of the Reassured in Canada, and that with respect to such policies, this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters’ Association or the Independent Insurance Conference of Canada.

* NOTE:

The words printed in BOLD TYPE in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words.

NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - RElNSURANCE - CANADA

N.M.A. 1979a

This Agreement does not cover any loss or liability accruing to the Company as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association.

2 Without in any way restricting the operation of Paragraph 1. of this Clause, it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of the following classes, namely,

Personal Liability

Farmers’ Liability

Storekeepers’ Liability

which become effective on or after 3lst December 1992, shall be deemed to include, from their inception dates and thereafter, the following provision:

Limited Exclusion Provision

With respect to property, loss of use of such property shall be deemed to be property damage

Broad Exclusion Provision

It is agreed that this Policy does not apply:

(a) to liability imposed by or arising from any nuclear liability act, law or statute or any law amendatory thereof; nor

(i) the ownership, maintenance, operation or use of a nuclear facility by or on behalf of an Insured;

(ii) the furnishing by an Insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility; and

(iii) the possession, consumption, use, handling, disposal or transportation of fissionable substances, or of other radioactive material (except radioactive isotopes, away from a nuclear facility, which have reached the final stage of fabrication so as to be usable for any scientific, medical, agricultural, commercial or industrial purpose) used, distributed, handled or sold by an Insured.

As used in this Policy:

(1) The term “nuclear energy hazard” means the radioactive, toxic, explosive, or other hazardous properties of radioactive material;

The term “nuclear facility” means

(a) any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of plutonium, thorium and uranium or any one or more of them;

(c) any equipment or device used for the processing, fabricating or alloying of plutonium, thorium or uranium enriched in the isotope uranium 233 or in the isotope uranium 235, or any one or more of them if at any time the total amount of such material in the custody of the Insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235;

(d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste radioactive material;

and includes the site on which any of the foregoing is located, together with all operations conducted thereon and all premises used for such operations.

(4) The term “fissionable substance” means any prescribed substance that is, or from which can be obtained, a substance capable of releasing atomic energy by nuclear fission.

(5) With respect to property, loss of use of such property shall be deemed to be property damage.

April 1, 1996

NUCLEAR INCIDENT EXCLUSION CLAUSE - REINSURANCE - NO. 4

2. Without in any way restricting the operations of Nuclear Incident Exclusion Clauses, - Liability, - Physical Damage, - Boiler and Machinery and paragraph 1. of this Clause, it is understood and agreed that for all purposes of the reinsurance assumed by the Reinsurer from the Reinsured, all original insurance policies or contracts of the Reinsured (new, renewal and replacement) shall be deemed to include the applicable existing Nuclear Clause and/or Nuclear Exclusion Clause(s) in effect at the time and any subsequent revisions thereto as agreed upon and approved by the Insurance Industry and/or a qualified Advisory or Rating Bureau.

Exhibit 10.35
Ref. No. 2003-015-01

ADDENDUM NO. 1
ATTACHED TO AND FORMING A PART OF
THE REINSURANCE AGREEMENT

(hereinafter referred to as “Agreement”)

between

SAFETY INSURANCE COMPANY
SAFETY INDEMNITY INSURANCE COMPANY

(hereinafter referred to as the “Company”)

and

THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY
(hereinafter referred to as the “Reinsurer”)

IT IS UNDERSTOOD AND AGREED that, effective April , 2006, the following amendments are made to the Agreement to which this Addendum attaches:

Article 4, Forms, Rates and Rules , is hereby amended to read as follows:

“ARTICLE 4 - FORMS, RATES AND RULES

Reinsurance will be provided only in accordance with forms, rates and rules mutually acceptable to the Company and the Reinsurer. As respects Businessowners and Commercial Package policies, the agreed forms shall be those set forth in the Agreement, and the rates and rules shall be those set forth in the “Binding Authority and Preferred Guidelines” effective 1/20/03 on file with the Reinsurer. The “Binding Authority and Preferred Guidelines” may be amended from time to time, as mutually agreed to by the Company and the Reinsurer.”

2. Paragraph C., of Article 5, Definitions, is hereby deleted.

3. Paragraphs B., C. and D. of Article 7, Other Provisions , are hereby deleted.

4. Article 11 , Reinsurance Premium, is hereby amended to read as follows:

“ARTICLE 11 - REINSURANCE PREMIUM

A. For Businessowners policies attaching on or after April 1, 2006, the Company shall pay to the Reinsurer 4.05% of the Company’s Net Premiums Written. The term “Net Premiums Written” as used herein means the Businessowners gross package premiums, plus additional premiums less cancellations and return premiums.

B. For Commercial Package policies attaching on or after April 1, 2006, the Company shall pay to the Reinsurer 6.94% of the Company’s Net Premiums Written. The term “Net Premiums Written” as used herein means the Commercial Package gross property policy premiums, plus additional premiums less cancellations and return premiums.

Ref. No. 2003-015-01

C. In the event Special Acceptances are covered hereunder as set forth in Article 16, Special Acceptances , the Company shall pay to the Reinsurer the reinsurance premium agreed upon for said Special Acceptances.”

5. Article 12, Ceding Commission, is hereby deleted.

6. Paragraph A. of Article 13, Reports and Remittances , is hereby amended to read as follows:

“A. Within 30 days after the close of each month, the Company shall report to the Reinsurer the Net Premiums Written during that month and the Reinsurance Premium as calculated in accordance with Article 11 . Payment will be immediately due and payable by the debtor party.”

7. “Exhibit - Referral Guidelines” attached to the Agreement is hereby deleted.

All other terms and conditions of the Agreement to which this Addendum attaches are unchanged and apply with full force and effect.

IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed, in duplicate, in Boston, Massachusetts, this 10 day of August, 2006.

	SAFETY INSURANCE COMPANY SAFETY INDEMNITY INSURANCE COMPANY


By:	/s/ Illegible


Attest:		/s/ Illegible

and in Hartford, Connecticut, this 10 day of August, 2006.

	THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY

	By:	/s/ Michael A. Petruzzello
		Michael A. Petruzzello, Executive Vice President and Chief Underwriting Officer


	By:	/s/ Jeffrey P. Watt
		Jeffrey P. Watt, Senior Vice President

EXHIBIT 10.36

Safety Insurance Group, Inc.
ANNUAL PERFORMANCE INCENTIVE PLAN

Section 1. Establishment and Purpose

Safety Insurance Group, Inc. (hereinafter referred to as the “Company”) hereby establishes a short-term incentive compensation plan to be known as the “Safety Insurance Group, Inc. Annual Performance Incentive Plan” (hereinafter referred to as the “Plan”).

The purpose of the Plan is to provide designated key executive employees of the Company with meaningful financial rewards for the accomplishment of financial and strategic objectives of the Company. Awards payable under the Plan are intended to constitute “performance-based compensation” under Section 162(m) of the Code and regulations promulgated thereunder, and the Plan shall be construed consistently with such intention.

Section 2. Definitions

Unless the context requires otherwise, the following words, when capitalized, shall have the meanings ascribed below:

(a) “Board” means the Board of Directors of the Company.

(b) “Code” means the Internal Revenue Code of 1986, as amended.

(d) “Company” means Safety Insurance Group, Inc.

(e) “Covered Employee” shall have the meaning set forth in Section 162(m) of the Code.

(f) “Participant” means (i) each Covered Employee and (ii) each other executive officer selected by the Committee to participate in the Plan.

(g) “Performance Period” means the fiscal year of the Company or such other periods as may be designated by the Committee.

(h) “Plan” means the Safety Insurance Group, Inc. Annual Performance Incentive Plan, as may be amended from time to time.

(i) “Subsidiary” means any corporation in which the Company owns, directly or indirectly, at least fifty percent (50%) of the total combined voting power of all classes of stock, or any other entity (including, but not limited to, partnerships and joint ventures) in which the Company owns, directly or indirectly, at least fifty percent (50%) of the combined equity thereof.

Section 3. Administration

The Plan shall be administered by the Compensation Committee of the Board of Directors. The Committee shall have responsibility to construe and interpret the Plan; provided, however, that in no event shall the Plan be interpreted in a manner which would cause any award to a Covered Employee to fail to qualify as performance-based compensation under Section 162(m) of the Code. The Committee shall establish the performance objectives for any Performance Period in accordance with Section 5 and certify whether such performance objectives have been achieved. Any determination made or decision or action taken or to be taken by the Committee, arising out of or in connection with the construction, administration, interpretation and effect of the Plan and of its rules and regulations, shall, to the fullest extent permitted by law (but subject to the limitations on the discretion of the Committee applicable to awards intended to qualify as performance-based compensation under Section 162(m) of the Code) be within the Committee’s absolute discretion and shall be conclusive and binding on all persons, including the Company, its Subsidiaries, its stockholders, the Participants and their estates and beneficiaries.

The Committee may employ such legal counsel, consultants and agents (including counsel or agents who are employees of the Company) as it may deem desirable to assist with the administration of the Plan and may rely upon any opinion received from any such counsel, consultant or agent and any computation received from such consultant or agent. All expenses incurred in the administration of the Plan, including, without limitation, for the engagement of any counsel, consultant or agent, shall be paid by the Company. No member or former member of the Board or the Committee shall be liable for any act, omission, interpretation, construction or determination made in connection with the Plan other than as a result of such individual’s willful misconduct.

Section 4. Eligibility

Eligibility under the Plan is limited to Participants designated by the Committee, in its sole and absolute discretion. In addition to Covered Employees, the Committee may designate as a Participant in the Plan any “executive officer” of the Company, as such term is defined in Rule 3b-7 of the Securities Exchange Act of 1934. Members of the Board who are not employees of the Company shall not be eligible to participate in the Plan.

Section 5. Determination of Incentive Awards

(a) Designation of Participants, Performance Period and Performance Criteria . On or before the end of the first 90 days of each Performance Period (or such other date as may be required or permitted under Section 162(m) of the Code), the Committee shall select the Participants to whom incentive awards shall be granted, designate the applicable Performance Period, establish the Target Incentive Bonus for each Participant, and

establish the performance objective or objectives that must be satisfied in order for a Participant to receive an incentive award for such Performance Period. Any such performance objectives will be based upon the relative or comparative achievement of one or more of the following criteria, as determined by the Committee:

	(i)		net income,
	(ii)		earnings before income taxes,
	(iii)		earnings per share,
	(iv)		return on shareholders equity,
	(v)		expense management,
	(vi)		profitability of an identifiable business unit or product,
	(vii)		ratio of claims to revenues,
	(viii)		revenue growth,
	(ix)		earnings growth,
	(x)		total shareholder return,
	(xi)		cash flow,
	(xii)		return on assets,
	(xiii)		pretax operating income,
	(xiv)		net economic profit (operating earnings minus a charge for capital),
	(xv)		customer satisfaction,
	(xvi)		agency satisfaction,
	(xvii)		employee satisfaction,
	(xviii)		quality of services,
	(xix)		strategic innovation, or
	(xx)		any combination of the foregoing.

(b) Target Incentive Bonus. Each Participant will have an incentive award opportunity (the “Target Incentive Bonus”) that will be based on achieving the target performance objectives established by the Committee. The Target Incentive Bonus will be a percentage of the Participant’s annual salary at the end of the Performance Period. If the performance objectives established by the Committee are met at the target level, the Participant will receive an incentive award equal to 100% of the Target Incentive Bonus.

(c) Range of Incentive Payouts. The incentive awards under this Plan can range between 50% and 150% of the Target Incentive Bonus; provided, however, that the maximum incentive award that may be paid to a Participant for any calendar year shall not exceed $1,200,000. This range will be associated with the actual performance achieved by the Participant and the Company as reviewed and approved by the Committee.

(d) Determination of Performance. The Participant will have a portion of his or her award linked to the financial and business performance of the Company and a portion linked to his or her individual performance and/or the performance of his or her corresponding business unit. The weighting

and goals will be established by the Committee pursuant to Section 5(a) above; provided, however, that except with respect to award opportunities for the Chief Executive Officer (the “CEO”) of the Company, the Committee may receive input from the CEO with respect to the foregoing.

(e) Committee Certification and Approval of Awards. As soon as reasonably practicable after the end of each Performance Period, the Committee will (i) determine whether the performance objectives for the Performance Period have been satisfied, (ii) determine the amount of the incentive award to be paid to each Participant for such Performance Period and (iii) certify such determination in writing. If the individual or Company does not meet the minimum performance requirements, the Participant will receive no incentive award for the specified Performance Period.

(f) Committee Discretion. Notwithstanding the foregoing, with respect to a Participant who is a Covered Employee, the Committee retains the discretion to reduce or eliminate the amount of the incentive award otherwise payable to such Participant under this Section 5. In addition, with respect to a Participant who is not a Covered Employee, the Committee retains the discretion to increase, reduce or eliminate the amount of the incentive award otherwise payable to such Participant under this Section 5.

(g) Methodology for Determinations. In making a determination under any part of this Section 5, the Committee shall give consideration to such factors as it deems appropriate, including, without limitation, the degree to which the established performance objectives have been obtained and whether the Participant has materially contributed to the overall results of the Company. To assist in making such determinations, the Committee may seek input from the CEO (except with respect to the CEO’s own award) and may request such other advice and recommendations as it deems appropriate.

Section 6. Payment of Incentive Awards

(a) General Rule. Except as otherwise expressly provided hereunder, payment of any incentive amount determined under Section 5 shall be made to each Participant as soon as practicable after the Committee certifies that one or more of the applicable performance objectives have been attained. Any such payments shall be made in cash or, at the discretion of the Committee, in an equivalent value of shares of common stock of the Company.

(b) Voluntary Deferral. Notwithstanding Section 6(a), the Committee may permit a Participant to defer all or a portion of an incentive award otherwise payable pursuant to the Participant’s timely and validly made election made in accordance with such terms as the Company, the Board or committee thereof may determine.

(c) Change in Control . Upon the occurrence of a Change in Control (as such term is defined in a Participant’s employment agreement with the Company, or in the absence of such agreement, in the Safety Insurance Group, Inc. 2002 Management Omnibus Incentive Plan, as amended from time to time), all performance objectives for the then current Performance Period shall be deemed to have been achieved at target levels of performance and the Committee shall cause each Participant to be paid an amount in cash based on such assumed performance prorated for the Performance Period as soon as practicable but in no event later than 30 business days following the occurrence of such Change in Control.

Section 7. Termination of Employment

Unless otherwise determined by the Committee, a Participant shall have no right to an incentive award under the Plan for any Performance Period in which the Participant is not actively employed by the Company or a Subsidiary on the last day of the Performance Period to which such award relates.

Section 8. Amendment or Termination of the Plan

The Board or the Committee may at any time amend, suspend, discontinue or terminate the Plan; provided, however, that no such action shall be effective without approval by the shareholders of the Company to the extent necessary to continue to qualify the amounts payable to Covered Employees as performance-based compensation under Section 162(m). Notwithstanding the foregoing, no amendment, suspension, discontinuance or termination of the Plan shall adversely affect the rights of any Participant or beneficiary in respect of any award that the Committee has determined to be payable to a Participant in accordance with the terms hereof or as to any amounts awarded.

Section 9. General Provisions

(a) Effective Date and Duration of the Plan. The Plan shall be effective with respect to calendar years beginning on or after January 1, 2006, subject to approval of the Plan by the shareholders of the Company at the 2006 Annual Meeting. The Plan will remain in effect until such time as it shall be terminated by the Board, pursuant to Section 8 above.

(b) Designation of Beneficiary. Each Participant may designate a beneficiary or beneficiaries (which beneficiary may be an entity other than a natural person) to receive any payments which may be made following the Participants death. Such designation may be changed or canceled at any time without the consent of any such beneficiary. Any such designation, change or cancellation must be made in a form approved by the Committee and shall not be effective until received by the Committee. If no beneficiary has been named, or the designated beneficiary or beneficiaries shall have predeceased the Participant, the beneficiary shall

be the Participant’s spouse or, if no spouse survives the Participant, the Participant’s estate. If a Participant designates more than one beneficiary, the rights of such beneficiaries shall be payable in equal shares, unless the Participant has designated otherwise.

(c) No Right of Continued Employment. Nothing contained in the Plan shall create any rights of employment in any Participant or in any way affect the right and power of the Company to discharge any Participant or otherwise terminate the Participant’s employment at any time with or without cause or to change the terms of employment in any way.

(d) No Limitations on Corporate Actions. Nothing contained in the Plan shall be construed to prevent the Company from taking any corporate action (including, without limitation, making provision for the payment of other incentive compensation, whether payable in cash or otherwise, or whether pursuant to a plan or otherwise) which is deemed by it to be appropriate or in its best interest, whether or not such action would have an adverse effect on any awards made under the Plan. No employee, beneficiary or other person shall have any claim against the Company as a result of any such action.

(e) No Right to Specific Assets. Nothing contained in the Plan (including, without limitation, the provisions of Section 6 hereof) shall be construed to create in any Participant or beneficiary any claim against, right to or lien on any particular assets of the Company or to require the Company to segregate or otherwise set aside any assets or create any fund to meet any of its obligations hereunder.

(f) No Contractual Right to Incentive. Nothing in this Plan shall be construed to give any Participant any right, whether contractual or otherwise, to receive any incentive with respect to any Performance Period unless and until the Committee shall have expressly determined that such a Participant is entitled to receive such an award pursuant to the terms of the Plan.

(g) Non-alienation of Benefits. Except as expressly provided herein, no Participant or beneficiary shall have the power or right to sell, transfer, assign, pledge or otherwise encumber the Participant’s interest under the Plan.

(h) Withholding. Any amount payable to a Participant or a beneficiary under this Plan shall be subject to any applicable Federal, state and local income and employment taxes and any other amounts that the Company is required at law to deduct and withhold from such payment.

(i) Severability. If any provision of this Plan is held unenforceable, the remainder of the Plan shall continue in full force and effect without regard to such unenforceable provision and shall be applied as though the unenforceable provision were not contained in the Plan.

(j) Governing Law. To the extent not preempted by federal law, the Plan shall be construed in accordance with and governed by the laws of the state of New York, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Plan to the substantive law of another jurisdiction.

(k) Code Section 409A Compliance . To the extent applicable, it is intended that this Plan and any incentive awards granted hereunder comply with the requirements of Section 409A of the Code and any related regulations or other guidance promulgated with respect to such Section by the U.S. Department of the Treasury or the Internal Revenue Service (“Section 409A”). Any provision that would cause the Plan or any incentive award granted hereunder to fail to satisfy Section 409A shall have no force or effect until amended to comply with Section 409A, which amendment may be retroactive to the extent permitted by Section 409A.

Exhibit 21

ORGANIZATIONAL CHART

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-110676 and 333-140423) of Safety Insurance Group, Inc. of our report dated March 1, 2007 relating to the financial statements, financial statement schedules, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 1, 2007

Exhibit 31.1

CERTIFICATIONS

I, David F. Brussard, certify that:

1. I have reviewed this annual report on Form 10-K of Safety Insurance Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fourth fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize andreport financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting.

/s/ DAVID F. BRUSSARD
David F. Brussard
President, Chief Executive Officer and Chairman of
the Board
(Principal Executive Officer)
March 1, 2007

Exhibit 31.2

CERTIFICATIONS (continued)

I, William J. Begley Jr., certify that:

1. I have reviewed this annual report on Form 10-K of Safety Insurance Group, Inc.;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ WILLIAM J. BEGLEY, JR.
William J. Begley, Jr.
Vice President, Chief Financial Officer and Secretary
(Principal Financial Officer)

March 1, 2007

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

In connection with this annual report of Safety Insurance Group, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2006, as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”), I, David F. Brussard, President, Chief Executive Officer and Chairman of the Board of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

· The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

· The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Report.

/s/ DAVID F. BRUSSARD
David F. Brussard
President, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
March 1, 2007

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

In connection with this annual report of Safety Insurance Group, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2006, as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”), I, William J. Begley, Jr., Vice President, Chief Financial Officer and Secretary of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

· The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

/s/ WILLIAM J. BEGLEY, JR.
William J. Begley, Jr.
Vice President, Chief Financial Officer and
Secretary (Principal Financial Officer)
March 1, 2007