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

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No.              )

 

 

SAFETY INSURANCE GROUP, INC.
20 Custom House Street, Boston, Massachusetts 02110

April 16, 2007

To Our Shareholders:

I am pleased to invite you to attend the 2007 Annual Meeting of Shareholders of Safety Insurance Group, Inc., which will be held at 10:00 a.m. on Friday, May 18, 2007, at the Company’s headquarters, 20 Custom House Street, Boston, Massachusetts 02110.

The accompanying Notice of the Annual Meeting of Shareholders and Proxy Statement describe in detail the matters to be acted on at this year’s Annual Meeting.

If you plan to attend the meeting, please bring a form of personal identification with you and, if you are acting as proxy for another shareholder, please bring written confirmation from the shareholder for whom you are acting as proxy.

Whether or not you expect to attend the meeting, please sign and return the enclosed Proxy Card in the envelope provided. Your cooperation will assure that your shares are voted and will also greatly assist our officers in preparing for the meeting. If you attend the meeting, you may withdraw any proxy previously given and vote your shares in person if you so desire.

 

SAFETY INSURANCE GROUP, INC.

20 Custom House Street, Boston, Massachusetts 02110

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 18, 2007

April 16, 2007

To Our Shareholders:

The 2007 Annual Meeting of Shareholders of Safety Insurance Group, Inc. will be held on Friday, May 18, 2007 at 10:00 a.m. at the Company’s headquarters, 20 Custom House Street, Boston, Massachusetts 02110. At this meeting you will be asked to consider and vote upon the following:

 

The Board of Directors has fixed April 2, 2007 as the Record Date for determining the shareholders of the Company entitled to notice of and to vote at the 2007 Annual Meeting and any adjournment thereof.

The Company’s 2007 Annual Report to Shareholders is enclosed with the mailing of this Notice of Annual Meeting of Shareholders, Proxy Statement and Proxy Card.

We urge you to attend and to participate at the meeting, no matter how many shares you own. Even if you do not expect to attend the meeting personally, we urge you to please vote, and then sign, date and return the enclosed Proxy Card in the postpaid envelope provided.

	By Order of the Board of Directors,
	WILLIAM J. BEGLEY, JR.
	Vice President, Chief Financial Officer and Secretary

 

Table of Contents

		Page
GENERAL INFORMATION		1
PROPOSAL 1: ELECTION OF THE COMPANY’S DIRECTORS		3
PROPOSAL 2: RATIFICATION OF APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2007		7
EXECUTIVE OFFICERS		9
EXECUTIVE COMPENSATION		10
Compensation Discussion and Analysis		10
Compensation Committee Report		14
Summary Compensation Table		15
Grants of Plan-Based Awards		16
Outstanding Equity Awards at Fiscal Year-End		19
Option Exercises and Stock Vested		20
Nonqualified Deferred Compensation		20
Potential Payments Upon Termination or Change in Control		21
DIRECTOR COMPENSATION		25
REPORT OF THE AUDIT COMMITTEE		26
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT		27
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE		28
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION		28
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		28
OTHER MATTERS		29
APPENDIX A—AUDIT COMMITTEE CHARTER		A-1
APPENDIX B—COMPENSATION COMMITTEE CHARTER		B-1
APPENDIX C—NOMINATING AND GOVERNANCE COMMITTEE CHARTER		C-1

 

SAFETY INSURANCE GROUP, INC.

20 Custom House Street, Boston, Massachusetts 02110

PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 18, 2007

GENERAL INFORMATION

This Proxy Statement is being furnished in connection with the solicitation of proxies on behalf of the Board of Directors (the “Board”) of Safety Insurance Group, Inc. (the “Company”) for the 2007 Annual Meeting of Shareholders to be held on May 18, 2007 at 10:00 a.m. at the Company’s headquarters located at 20 Custom House Street, Boston, Massachusetts 02110 (the “2007 Annual Meeting”).

The record date for determining shareholders entitled to vote at the 2007 Annual Meeting has been fixed at the close of business on April 2, 2007 (the “Record Date”). As of the Record Date, 16,223,163 shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), were outstanding and entitled to be voted. Every shareholder will be entitled to one vote for each share of Common Stock recorded in his or her name on the Company’s books as of the Record Date. The Company mailed this Proxy Statement and the related form of proxy (the “Proxy”) on or about April 23, 2007.

With respect to Proposal 1, Election of the Company’s Directors, the shares of Common Stock represented by the enclosed Proxy will be voted as directed by the shareholder or, in the absence of such direction, in favor of the election of the nominee for director designated herein. So long as a quorum (a majority of issued and outstanding shares of Common Stock entitled to vote at the 2007 Annual Meeting) is present at the 2007 Annual Meeting either in person or by proxy, a plurality of the votes properly cast is required to elect the directors. Votes withheld from a director nominee, abstentions and broker non-votes (when a registered broker holding a customer’s shares in the name of the broker has not received voting instructions on a matter from the customer and is barred from exercising discretionary authority to vote on the matter, which the broker indicates on the Proxy Card) will be treated as present at the 2007 Annual Meeting for the purpose of determining a quorum but will not be counted as votes cast.

With respect to Proposal 2, Ratification of Appointment of Independent Registered Public Accounting Firm, an affirmative vote of a majority of the shares present or represented and entitled to vote on such proposal is required for approval. Abstentions are included in the number of shares present or represented and entitled to vote on the proposal and therefore have the practical effect of a vote against the proposal. Broker non-votes are not so included and therefore have no effect on the outcome of the proposal.

The enclosed Proxy confers discretionary authority with respect to any other proposals that may properly be brought before the 2007 Annual Meeting. As of the date hereof, management is not aware of any other matters to be presented for action at the 2007 Annual Meeting. If any other matters properly come before the 2007 Annual Meeting, however, the Proxies solicited hereby will be voted in accordance with the recommendation of the Board.

Any shareholder giving a Proxy may revoke it at any time before it is exercised by delivering written notice thereof to the Secretary. Any shareholder attending the 2007 Annual Meeting may vote in person

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whether or not the shareholder has previously filed a Proxy. Presence at the 2007 Annual Meeting by a shareholder who has signed a Proxy, however, does not in itself revoke the Proxy.

The enclosed Proxy is being solicited by the Board. The cost of soliciting Proxies will be borne by the Company, and will consist primarily of preparing and mailing the Proxies and Proxy Statements. The Company will also request persons, firms and corporations holding shares of Common Stock in their names, or in the names of their nominees, which shares are beneficially owned by others, to send this Proxy material to and obtain Proxies from such beneficial owners and will reimburse such holders for their reasonable expenses in so doing.

The Company’s Annual Report to Shareholders for the fiscal year ended December 31, 2006, including financial statements and the report of the Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, thereon, accompanies this Proxy Statement. The Annual Report to Shareholders is neither a part of this Proxy Statement nor incorporated herein by reference.

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PROPOSAL 1

ELECTION OF THE COMPANY’S DIRECTORS

The Board has five members and consists of three classes. Each class serves three years, with terms of office of the respective classes expiring in successive years.

Mr.  Frederic H. Lindeberg, whose term expires at this year’s 2007 Annual Meeting, has been nominated for re-election to a three-year term ending at the 2010 Annual Meeting of Shareholders and until his successor, if any, is elected and duly qualified. The remaining four directors will continue to serve in accordance with their terms. THE BOARD RECOMMENDS A VOTE “FOR” PROPOSAL 1 WHICH CALLS FOR THE ELECTION OF THE 2007 NOMINEE.

*                     Nominated at the 2007 Annual Meeting to a term ending in 2010.

(1)             Member of the Audit Committee.

(2)             Member of the Compensation Committee.

(3)             Member of the Nominating and Governance Committee.

(4)             Member of the Investment Committee.

(C)           Chairman of the Committee referenced.

The following information with respect to the principal occupation, business experience, recent business activities involving the Company and other affiliations of the nominee and directors has been furnished to the Company by the nominee and directors.

Nominee for Director

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.

Directors Continuing in Office

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 three insurance subsidiaries, Safety Insurance Company, Safety Indemnity Insurance Company, and Safety Property and Casualty Insurance Company (together referred to as the “Insurance Subsidiaries”). Previously, Mr. Brussard served as Executive Vice President of the Insurance Subsidiaries from 1985 to 1999 and as

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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 Commonwealth Automobile Reinsurers (“CAR”). Mr. Brussard is also on the Board of Trustees of the Insurance Library Association of Boston.

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

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., Newcastle Investment Corp., and various privately held companies.

Certain Information Regarding the Board of Directors

Meetings of the Board of Directors

During 2006, the following meetings of the Board were held: five meetings of the Board, four meetings of the Audit Committee, two meetings of the Compensation Committee, two meetings of the Nominating and Governance Committee and four meetings of the Investment Committee. All of the incumbent Directors attended at least 75% of the Board and committee meetings held while they were members during 2006.

Board Committees

The Board has determined that Frederic H. Lindeberg, Peter J. Manning, David K. McKown, and A. Richard Caputo, Jr. are “independent directors” as determined pursuant to the Marketplace Rules promulgated by the National Association of Securities Dealers, Inc. ( the “NASDAQ Marketplace Rules”) and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”).

The Audit Committee is comprised of Peter J. Manning (Chairman), Frederic H. Lindeberg and David K. McKown (the “Audit Committee”). The Board has determined that Peter J. Manning is an Audit Committee financial expert, as established by the rules and regulations of the SEC. For information regarding the functions performed by the Audit Committee, please refer to the “Report of the Audit Committee” included in this Proxy Statement, as well as the Charter of the Audit Committee, attached hereto in Appendix A to this Proxy Statement.

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The Compensation Committee is comprised of David K. McKown (Chairman), Frederic H. Lindeberg and Peter J. Manning. For information regarding the functions performed by the Compensation Committee, please refer to the “Report of the Compensation Committee” included in this Proxy Statement, as well as the Charter of the Compensation Committee, attached hereto in Appendix B to this Proxy Statement.

The Nominating and Governance Committee is comprised of Frederic H. Lindeberg (Chairman), Peter J. Manning and David K. McKown (the “Nominating and Governance Committee”). For information regarding the functions performed by the Nominating and Governance Committee, please refer to the Charter of the Nominating and Governance Committee, attached hereto in Appendix C to this Proxy Statement.

The Investment Committee is comprised of David F. Brussard (Chairman), William J. Begley, Jr., the Company’s Chief Financial Officer, and A. Richard Caputo, Jr. (the “Investment Committee”). The Investment Committee reviews and evaluates, as may be appropriate, information relating to the Company’s invested assets and its investment policies, strategies, objectives and activities.

Nominating and Governance Committee Policies

Pursuant to the Charter of the Nominating and Governance Committee, attached hereto in Appendix C to this Proxy Statement, the Nominating and Governance Committee has developed the following policies and procedures related to the nomination process for directors of the Company and the means by which shareholders may communicate with the Board:

Shareholder Recommendations for Director-Nominees

The Nominating and Governance Committee will consider recommendations from shareholders as to candidates to be nominated for election to the Board. A shareholder wishing to submit such a recommendation should send a letter to the Secretary of the Company at Safety Insurance Group, Inc., 20 Custom House Street, Boston, Massachusetts 02110, who will forward such recommendations to the Chairman of the Nominating and Governance Committee. Recommendations must be in writing and should include the candidate’s name and qualifications for Board membership. This policy is not intended to replace the provisions in the Company’s Bylaws related to shareholder nominations for director, but rather addresses the Nominating and Governance Committee’s position on recommendations from shareholders for potential director-nominees. Shareholders wishing to nominate persons for director must comply with the Company’s Bylaws and any applicable rules of the SEC.

Director-Nominee Evaluation Process

The Nominating and Governance Committee intends to utilize a variety of methods for identifying and evaluating nominees for director. The Nominating and Governance Committee will regularly assess the appropriate size of the Board, and whether any vacancies are expected due to retirement or otherwise. In the event that vacancies arise, the Nominating and Governance Committee will consider various potential candidates for director. Candidates may come to the attention of the Nominating and Governance Committee through current Board members, professional search firms, shareholders or other persons. In evaluating candidates, the Nominating and Governance Committee seeks to achieve a balance of knowledge, experience and capability on the Board.

Shareholder Communications to the Board

Shareholders may communicate directly with any member of the Board or the entire Board by sending correspondence to the Office of Investor Relations, Safety Insurance Group, Inc., 20 Custom House Street, Boston Massachusetts 02110, or emailing InvestorRelations@SafetyInsurance.com. Any such

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correspondence must contain a clear notation indicating that it is a “Shareholder-Director Communication,” and must indicate whether the intended recipients are all members of the Board or certain specified individual directors. The Office of Investor Relations will make copies of all such correspondence and circulate them to the appropriate director or directors.

Director Attendance at Annual Meetings

Directors are encouraged but not required to attend the Company’s Annual Meetings. Two directors attended last year’s Annual Meeting.

Minimum Qualifications for Directors

In addition to the preceding policies and procedures adopted by the Nominating and Governance Committee, at the direction of the Board, the Board and Nominating and Governance Committee continue to evaluate their position on establishing minimum qualifications for directors. The Board seeks members with diverse business and professional backgrounds and outstanding integrity, judgment and such other skills and experiences as will enhance the Board’s ability to best serve the interest of the Company. The Board has not approved any criteria for nominees for director and believes that establishing such criteria is best left to an evaluation of the needs of the Company at the time the nomination is to be considered. Similarly, the Nominating and Governance Committee has not identified specific, minimum qualifications for director nominees or any specific qualities or skills that it believes are necessary for one or more of the Company’s directors to possess.

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PROPOSAL 2

RATIFICATION OF APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP
AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2007

The Audit Committee of the Board selected PricewaterhouseCoopers LLP (“PwC”) to continue as the Company’s independent registered public accounting firm for 2007. PwC is the Company’s independent registered public accounting firm for the most recently completed fiscal year ended December 31, 2006. A representative of PwC is expected to be present at the 2007 Annual Meeting. The representative will have an opportunity to make a statement if he or she desires to do so and will be available to respond to appropriate questions from shareholders.

Ratification of PwC as our independent registered public accounting firm for the fiscal year ending December 31, 2007 requires the affirmative vote of the holders of a majority of the shares of Common Stock present in person or represented by proxy and entitled to vote. THE BOARD RECOMMENDS A VOTE “FOR” PROPOSAL 2 WHICH CALLS FOR THE RATIFICATION OF THE APPOINTMENT OF PWC.

If our shareholders do not ratify the selection of PwC, the appointment of the independent registered public accounting firm will be reconsidered by our Audit Committee. Even if the selection is ratified, the Audit Committee, in its discretion, may direct the appointment of a different independent accounting firm at any time during the year if the Audit Committee believes that such a change would be in the best interests of the Company and its shareholders.

Audit Fees Billed for Services Performed Related to 2006 and 2005 Services

Audit Fees

Aggregate fees billed were $760,541 and $738,750 for 2006 and 2005, respectively. The fees in this category are for professional services rendered in connection with the audits of the Company’s annual financial statements, including the Company’s internal control over financial reporting, set forth in the Company’s Annual Report on Form 10-K, the review of the Company’s quarterly financial statements set forth in its Quarterly Reports on Form 10-Q, and the performance of other services that generally only the Company’s independent registered public accounting firm can provide, such as consents.

Audit-Related Fees

Aggregate fees billed were $27,500 and $36,891 for 2006 and 2005, respectively. The fees in this category were for professional services rendered in connection with employee benefit plan audits as well as other audit-related services.

Tax Fees

Aggregate fees billed were $34,191 and $83,246 for 2006 and 2005, respectively. The fees in this category were for professional services rendered in connection with tax compliance and tax consulting services.

All Other Fees

Aggregate fees billed were $3,000 and $3,345 for 2006 and 2005, respectively. The fees in this category were for the Company’s licensing of PwC proprietary research tools and regulatory assistance related to the Company’s employee benefit plan.

The Audit Committee has considered and determined that the provision of non-audit services provided in 2006 and 2005 are compatible with maintaining PwC’s independence.

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Audit Committee’s Pre-Approval Policies and Procedures

The Company’s Audit Committee has established a policy that all audit and permissible non-audit services provided by the independent auditors will be pre-approved by the Audit Committee. These services may include audit services, audit-related services, tax services and other services. The Audit Committee considers whether the provision of each non-audit service is compatible with maintaining the independence of the Company’s auditors. Pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. During fiscal years 2006 and 2005, all audit services and all non-audit services provided to the Company by PwC were pre-approved in accordance with the Audit Committee’s pre-approval policies and procedures described above.

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EXECUTIVE OFFICERS

Occupations of Executive Officers

The table below sets forth certain information concerning our executive officers as of the date of this Proxy Statement.

 

David F. Brussard. For information regarding Mr. Brussard, refer above to “Directors Continuing in Office”.

William J. Begley, Jr. was appointed Chief Financial Officer (“CFO”), Vice President and Secretary of the Company on March 4, 2002. Since January 1999, Mr. Begley has been the CFO 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 20 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 25 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 21 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, and is 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

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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.

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Our compensation program objective is to attract and retain individuals key to our future success, to motivate and reward employees in achieving our business goals and to align the long-term interests of employees with those of shareholders.

Objectives of the Company’s Compensation Program

The Compensation Committee of the Board of Directors (for purposes of this analysis, the “Committee”) is responsible for recommending to the Board compensation for the Chief Executive Officer and for determining the compensation of the other Named Executive Officers. The Committee acts pursuant to a charter that has been approved by the Board. The Committee bases its compensation policies and decisions on the following principles.

·       Compensation should be structured to allow us to motivate, retain and attract executive talent.

·       Compensation should be directly linked to the Company’s and individual’s performance as well as the level of responsibility.

·       Compensation should be driven by our long-term financial performance and in doing so work to align the interests of management and shareholders.

·       Compensation should reflect the value of each officer’s position in the marketplace and within the Company.

Policies and Practices Related to the Company’s Compensation Program

We strive to create an overall compensation package for each Named Executive Officer that satisfies these objectives, recognizing that certain elements of compensation are better suited to reflect different compensation objectives. The primary goal is to provide strong performance based total compensation plans that enable us to provide highly competitive compensation when our performance leads the peer group and industry.

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The Committee directly engaged Thomas B. Wilson of the Wilson Group as its compensation consultant. Mr. Wilson reports directly to the Committee and is responsible for reviewing Committee materials, attending Committee meetings, assisting the Committee with program design and generally providing advice and counsel to the Committee as compensation issues arise. In 2006, Mr. Wilson performed a study of the compensation of executive management at the Company and at ten comparable property and casualty insurance companies. Although the median size of the peer group companies is larger than we are, these companies reflect a market where we are likely to recruit executive leaders or compete to retain our executives. The selected comparable companies for 2006 were:

21st Century Insurance Group
Baldwin & Lyons, Inc.
Commerce Group, Inc.
Donegal Group, Inc.
Erie Indemnity Company
Harleysville Group, Inc.
Infinity Property & Casualty Corporation
Mercury General Corporation
Selective Insurance Group, Inc.
State Auto Financial Corporation

The Committee will regularly review the list of comparable companies and refine it as appropriate.

Equity Grant Practices

The exercise price of each stock option awarded to our executive officers under our incentive compensation programs is the closing price of our common stock on the date of grant, which is the date when the Compensation Committee acts to approve equity awards for senior executives. Performance-based equity awards are also granted to our named executive officers at this time. The date that the Compensation Committee approves these equity awards is scheduled in advance and is based on the timing of the completion of annual performance and compensation review process.

Elements of Executive Compensation

The Committee, after reviewing information provided by the Wilson Group, determines what it believes to be the appropriate level of each of the various cash and non-cash compensation components. After receiving the results of the Wilson Group study and considering our compensation philosophy and the actual practices of the selected peer group, the Committee determined that the elements of targeted overall compensation for executive officers should include the following:

Base Salaries

Base salary should be targeted at the median (50th percentile) of peer group companies and reflect the roles, responsibilities and individual performance of the executives. Currently, based on the executive officers’ employment contracts, salary increases are based on the change in cost of living for the Boston metropolitan market as reported by the Department of Labor statistics. The Committee establishes base salaries pursuant to employment agreements based on each officer’s individual performance within a structure intended to be competitive with comparable companies.

Annual Cash Incentives

Annual cash incentive compensation should directly reflect the actual performance of the Company. We established the Annual Performance Incentive Plan so that we can provide executive and management employees selected by the Board, including the Named Executive Officers, with an opportunity to earn

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meaningful financial rewards for the accomplishment of specific financial and strategic objectives of the Company. The targets and ranges of payouts are set to achieve the 75th percentile of the peer group market. However, the amount actually awarded to an officer varies with the performance of the Company. There is a limit on the amount awarded annually (150% of the target payout) and no annual incentives are paid unless threshold performance levels are satisfied. In addition, Mr. Brussard’s employment agreement with the Company provides for a minimum annual cash incentive award of not less than 35% of the total cash incentive awards paid in such year to officers who hold such positions entitled Vice President or higher.

On or before the end of the first 90 days of each year, the Committee selects the participants to whom incentive awards are granted, establishes the target incentive awards, and establishes the performance objective or objectives that must be satisfied to receive an incentive award. Performance objectives are based upon the relative or comparative achievement of one or more of the following criteria, as determined by the Committee: net income, earnings before income taxes (“EBIT”), earnings per share, return on shareholders equity, expense management, profitability of an identifiable business unit or product, ratio of claims to revenues, revenue growth, earnings growth, total shareholder return, cash flow, return on assets, pretax operating income, net economic profit (operating earnings minus a charge for capital), customer satisfaction, agency satisfaction, employee satisfaction, quality of services, strategic innovation, or any combination of the foregoing.

For 2006, the financial measure established by the Committee was based upon our business goals and was set at the average of our 2005 and 2004 EBIT, adjusted to reflect previous non-recurring items. The target incentive awards, which are a percentage of base salary, were determined by the Committee based on the salary level and position of the officer within the Company. The three levels of payout, target, threshold (at 50% of target EBIT), and maximum (at 150% of target EBIT), were established for 2006 for our executive officers as follows:

 

The Company’s financial performance exceeded 150% of target EBIT for 2006 and Messrs. Brussard, Begley, Loranger, Patrick, and Krupa earned the following annual incentive awards in 2006: $857,649, $238,235, $314,471, $276,353, and $176,295, respectively.

The Committee has the discretion to pay a prorated portion of the cash incentive opportunity for attainment of performance objective levels between threshold, target, and maximum.

Performance-Based Nonqualified Deferred Compensation

The Company maintains a nonqualified deferred compensation plan, the Executive Incentive Compensation Plan (“EICP”), to further its objective of providing its executive officers with compensation that is competitive with that provided by comparable companies. The EICP is a performance based program that allocates 1.75% of the Insurance Subsidiaries annual consolidated statutory net income to a pool that is then distributed as deferred compensation to the eligible executives. The amount allocated is based on the total annual cash compensation (salary plus annual incentive) of the eligible executives. The Insurance Subsidiaries achieved a combined statutory net income of $116,072,576 in 2006 and Messrs. Brussard, Begley, Loranger, Patrick, and Krupa earned the following allocations under the EICP in 2006: $749,970, $224,991, $309,411, $261,913, and $139,610, respectively. The allocations are retained by the Company, invested in mutual funds, and only paid to the executive upon employment termination or a change in control as defined in the EICP.

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On August 21, 2003, our Board approved an amendment to the EICP to provide a deferred compensation benefit with a supplemental matching provision that mirrors our 401(k) plan and on March 15, 2005, this provision was amended to provide that the participant’s compensation for this purpose means the participant’s base salary and annual incentive received (or deferred) in the plan year. Our intention was to provide additional retirement benefits to eligible executives in the absence of a traditional defined benefit pension arrangement. The amendments enable the executive officer to elect to defer amounts from his current compensation above the federally limited amount he can defer under the tax-qualified 401(k) plan and receive the Company’s matching contribution on such supplemental deferrals. In accordance with these amendments, the Company made a matching contribution in an amount equal to 75% of the participant’s elective deferrals under the plan up to a maximum of 8% of the participant’s compensation during the plan year. Amounts deferred under the EICP do not include amounts deferred under the 401(k) plan, thus the Company’s matching contributions under the EICP do not include amounts the Company has matched under the 401(k) plan. We made the following employer matching contributions for 2006 to the EICP on behalf of the Named Executive Officers: Mr. Brussard-$77,697; Mr. Begley-$14,720; Mr. Loranger-$24,230; Mr. Patrick-$19,475; and Mr. Krupa-$10,743.

A description of our Named Executive Officers’ benefits under the EICP and other material terms of the EICP can be found in the narrative following the Nonqualified Deferred Compensation Plan table.

Long-Term Incentives

We use our 2002 Management Omnibus Incentive Plan (the “Incentive Plan”) to grant long-term equity-based incentive awards. A description of the Incentive Plan can be found in the narrative following the Grants of Plan-Based Awards table. Long-term incentive compensation, which may include nonqualified stock options, incentive stock options, stock appreciation rights and restricted stock awards, is intended to reinforce the long-term growth in shareholder value of the corporation. The type of equity and amount awarded annually are based on the performance of the Company. Guidelines have been established for both annual awards and overall ownership targets as a multiple of salary. The target value is established at the 75th percentile of the peer group market, but the actual amount awarded and accumulated reflects our historical performance. On March 10, 2006, the Committee approved the following awards of restricted stock to each of the Named Executive Officers: Mr. Brussard-23,337; Mr. Begley-7,001; Mr. Loranger-8,751; Mr. Patrick-8,751; and Mr. Krupa-3,501. These grants were effective on March 10, 2006 and the stock vests in three annual installments of 30%, 30% and 40% beginning on the first anniversary date of these grants.

Other Employee Benefits

In addition to the main elements of compensation previously discussed in this section, our Named Executive Officers are eligible for the same welfare and defined benefits as are available to all of our employees. These benefits include medical and dental insurance, short- and long-term disability insurance, life and accidental death insurance, and a 401(k) plan. The 401(k) plan allows employees to contribute on a pre-tax basis up to the maximum allowed under federal law. At the close of each 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, provided the participant is employed on the last day of the plan year. We have no pension plan for employees at this time.

We provide our Named Executive Officers with certain perquisites that the Committee believes are reasonable, competitive and consistent with our overall compensation philosophy. In 2006, these perquisites included use of an automobile, an automobile parking space, home insurance coverage and automobile insurance coverage.

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Section 162(m)

Section 162(m) of the Internal Revenue Code limits publicly-held companies to an annual deduction for federal income tax purposes of $1,000,000 for compensation paid to our CEO and the next four most highly compensated officers determined at the end of each year. Performance-based compensation that meets certain requirements, including shareholder approval, is excluded from this limitation under Section 162(m). In general, compensation qualifies as performance-based compensation under Section 162(m) if (i) it is conditioned on the achievement of one or more pre-established, objective performance goals, (ii) such goal or goals are established by a committee of the Board consisting solely of two or more outside directors and (iii) material terms of the performance goals under which the compensation is payable are disclosed to, and subsequently approved by, the corporation’s shareholders prior to payment. The Incentive Plan and the Annual Performance Incentive Plan are designed to comply with Section 162(m) requirements.

Compensation Committee Report

The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management, and based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and Form 10-K.

 

The above Report of the Compensation Committee of the Board of Directors does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this Report by reference therein.

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Summary Compensation Table

The following table shows the cash and non-cash compensation for the last fiscal year awarded to or earned by the five individuals who served as our CEO, CFO, and the three other most highly compensated executive officers (the “Named Executive Officers” or “NEOs”) during fiscal year ended December 31, 2006.

 

(1)             Bonuses for prior years were previously reported in this column. Under current reporting rules, however, only purely discretionary or guaranteed bonuses are disclosed in this column. As discussed more fully in the Compensation Discussion and Analysis, the Named Executive Officers earn cash bonuses under the shareholder approved Annual Performance Incentive Plan based on one or more pre-established performance measures. Accordingly, annual incentive amounts are reported in the Non-Equity Incentive Plan Compensation column.

(2)             The amounts in this column are calculated based on FAS 123R and equal the financial statement compensation cost for restricted stock awards as reported in our consolidated statement of income for the fiscal year ended December 31, 2006. Under FAS 123R, a pro-rata portion of the total expense at the time the restricted award is granted is recognized over the applicable service period generally corresponding with the vesting schedule of the grant. The expenses reported in this column relate to restricted stock grants originally made on March 25, 2004, March 16, 2005 and March 10, 2006. The original total cost of these awards was based on the number of shares awarded and the fair market value of the Company’s common stock on the date the grant was made.

(3)             The amounts in this column are calculated based on FAS 123R and equal the financial statement compensation cost for stock option awards as reported in our consolidated statement of income for the fiscal year ended December 31, 2006. Under FAS 123R, a pro-rata portion of the total expense at time of grant is recognized over the applicable service period generally corresponding with the vesting schedule of the grant. The initial expense is based on the fair value of the stock option grants as estimated using the Black-Scholes option-pricing model. The assumptions used to arrive at the Black-Scholes value are disclosed in Note 5 to our consolidated financial statements included in our 2006 Annual Report on Form 10-K.

(4)             The amounts under this column consist of an annual cash incentive award earned in 2006 under the Annual Performance Incentive Plan.

(5)             The amounts under this column include the following items: (A) annual deferred compensation bonus earned in 2006 under the EICP (Mr. Brussard—$749,970, Mr. Begley—$224,991, Mr. Loranger—$309,411, Mr. Patrick—$261,913, and Mr. Krupa—$139,610); (B) employer matching contributions to our 401(k) plan for the plan year ended December 31, 2006 on behalf of each NEO ($17,600 each to Mr. Brussard, Mr. Begley, Mr. Loranger, Mr. Patrick; and $15,000 to Mr. Krupa); (C) employer matching contribution to the EICP for the plan year ended December 31, 2006 on behalf of each NEO (Mr. Brussard—$77,697, Mr. Begley—$14,720, Mr. Loranger—$24,230, Mr. Patrick—$19,475, and Mr. Krupa—$10,743); (D) term life insurance premiums (Mr. Brussard—$4,954, Mr. Begley—$2,442, Mr. Loranger—$25,834, Mr. Patrick—$4,960, and Mr. Krupa—$1,002); (E) use of auto by Mr. Brussard—$15,858; (F) parking (Mr. Brussard—$6,180, Mr. Begley—$2,040, Mr. Loranger—$2,040, Mr. Patrick—$2,040, and Mr. Krupa—$2,040); and (G) homeowner and automobile insurance premiums (Mr. Brussard—$4,308, Mr. Begley—$5,919, Mr. Loranger—$2,756, Mr. Patrick—$6,403, and Mr. Krupa—$3,662).

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Grants of Plan-Based Awards

The following table summarizes the 2006 grants of non-equity and equity plan-based awards to the NEOs. All of these non-equity and equity plan-based awards were granted under the Annual Performance Incentive Plan and the Incentive Plan.

(1)             These columns represent the range of cash bonus incentive payouts that were targeted for fiscal 2006 performance under the Annual Performance Incentive Plan as described above in the Compensation Discussion and Analysis. Although the table refers to these payouts in future terms, they have already been earned and paid to the NEOs. The actual cash bonus incentive amounts paid are reported in the Non-Equity Incentive Plan Compensation column in the Summary Compensation Table.

(2)             This column represents restricted stock awarded for fiscal 2005 performance under the Incentive Plan. The restricted stock was awarded effective March 10, 2006, with respect to which sale or transfer rights shall vest over three years with installments of 30% on March 10, 2007, 30% on March 10, 2008, and the remaining 40% on March 10, 2009, provided the grantee is still an employee of the Company on such dates. The accounting expense for the year ended December 31, 2006 related to this grant to the NEOs is included in the Stock Awards column (e) in the Summary Compensation Table.

Employment Agreements

David F. Brussard. Under his employment agreement with the Company, Mr. Brussard has agreed to serve as CEO and President of the Company for a five-year term ending December 31, 2009, which automatically renews for successive one-year terms thereafter, subject to at least 180 days’ advance notice by either party of a decision not to renew the employment agreement. Under the terms of the employment agreement effective November 8, 2004, Mr. Brussard is entitled to receive an initial annual base salary of $675,000, to be increased on an annual basis to reflect increases in the cost of living index specified therein or as otherwise determined by the Board or the Committee. As determined in the sole discretion of the Board, Mr. Brussard will also be paid an annual bonus of not less than 35% of the total amount of bonuses paid in such year to officers of the Company who hold positions entitled Vice President or higher. Mr. Brussard is also entitled to certain perquisites, including reimbursement of expenses, paid vacations, health, life and other similar insurance benefits and a car, all as determined by the Board.

Other Named Executive Officers. On November 8, 2004, we entered into employment contracts with each of Mr. Begley, Mr. Loranger, Mr. Patrick, and Mr. Krupa. Each of these employment agreements has a term ending December 31, 2007 and automatically renews for successive one-year terms unless either party provides written notice not to renew at least 180 days prior to the scheduled expiration date. Under their respective employment agreements effective on November 8, 2004, Messrs. Begley, Loranger, Patrick, and Krupa are entitled to receive initial annual base salaries of $250,000, $330,000, $290,000, and

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$185,000, respectively, to be increased on an annual basis to reflect increases in the cost of living index specified therein or as otherwise determined by the Board or the Compensation Committee. As determined in the sole discretion of the Board or the Committee, Messrs. Begley, Loranger, Patrick, and Krupa are each paid an annual bonus based on our performance. In addition, Messrs. Begley, Loranger, Patrick, and Krupa are also entitled to certain perquisites, including reimbursement of expenses, paid vacations, health, life and other similar insurance benefits.

Incentive Plan

The Incentive Plan provides for a variety of awards, including nonqualified stock options, incentive stock options, stock appreciation rights and restricted stock awards. The maximum number of shares of common stock with respect to which awards may be granted under the Incentive Plan is 2,500,000. This share limitation and the per-share price of such shares are subject to adjustment to reflect stock splits, stock dividends and changes in our capital structure. Shares of stock covered by an award under the Incentive Plan that are forfeited will again be available for issuance in connection with future grants of awards under the plan.

On March 10, 2006, our Board approved amendments to the 2002 Management Omnibus 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 2002 Management Omnibus Incentive Plan. The Incentive Plan was approved by the shareholders at the 2006 Annual Meeting of Shareholders which was held on May 19, 2006.

The Committee has broad authority to administer the Incentive Plan, including the authority to select plan participants, determine when awards will be made, determine the type and amount of awards, determine the exercise price of options and stock appreciation rights, determine any limitations, restrictions or conditions applicable to each award, determine the terms of any instrument that evidences an award, determine the manner in which awards may be exercised and interpret the Incentive Plan’s provisions. Awards under the Incentive Plan are generally granted for a ten-year term, but may terminate earlier if the participant’s employment terminates before the end of such term. The exercise price for each option granted under the Incentive Plan will be the fair market value of a share of common stock on the date of grant. The exercise price of options granted under the Incentive Plan may be paid (i) in cash, (ii) by delivery of previously acquired shares of common stock, (iii) by any combination of (i) and (ii), (iv) pursuant to a cashless exercise program through an independent broker (as permitted by applicable law), or (v) by any other means the committee approves, in its discretion.

The Incentive Plan also contains provision applicable upon a change in control. These provisions and the effect they would have on the Named Executive Officers’ outstanding awards can be found in the section entitled Potential Payments Upon Termination or Change in Control.

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Restricted Stock Awards

On March 10, 2006, the Committee, after reviewing information provided by the Wilson Group, determined what it believed to be the appropriate level of each of the various compensation components. Based upon the Company’s performance in 2005, the Committee awarded restricted stock to our eight executive officers at a total market value of $2,500,000 on the date of the grant. The Committee awarded 40% of the shares to Mr. Brussard, or 23,337 shares at $42.85, the closing price of the Company’s common stock on the grant date and 60% to the remaining executive officers. The distribution among the remaining officers was made by the Committee, after reviewing the recommendations of the CEO. Provided there is no termination in service, the shares vest on March 20, 2007, 2008, and 2009 with respect to 30%, 30%, and 40% of the shares, respectively. The shares have voting and dividend rights and are held in custody by the Company during the period of restriction.

Equity Compensation Plan Information

The following table sets forth information regarding all of our equity compensation plans as of December 31, 2006.

(1)             The equity compensation plan approved by shareholders is the 2002 Management Omnibus Incentive Plan, as Amended.

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Outstanding Equity Awards at Fiscal Year-End

The following table shows the unexercised stock options, unvested restricted stock, and other equity incentive plan awards held at fiscal year end December 31, 2006 by the NEOs.

(1)             Represents non-qualified stock option award effective November 27, 2002, which vest in five equal 20% annual installments beginning on November 27, 2003, provided the grantee is still an employee of the Company on such dates.

(2)             Represents non-qualified stock option award effective March 31, 2003, which vest over three years with installments of 30% on March 31, 2004, 30% on March 31, 2005, and the remaining 40% on March 31, 2006, provided the grantee is still an employee of the Company on such dates.

(3)             Represents restricted stock award effective March 25, 2004, which vest over three years with installments of 30% on March 16, 2005, 30% on March 16, 2006, and the remaining 40% on March 16, 2007, provided the grantee is still an employee of the Company on such dates.

(4)             Represents restricted stock award effective March 16, 2005, which vest over three years with installments of 30% on March 16, 2006, 30% on March 16, 2007, and the remaining 40% on March 16, 2008, provided the grantee is still an employee of the Company on such dates.

(5)             Represents restricted stock awards effective March 10, 2006, which vest over three years with installments of 30% on March 10, 2007, 30% on March 10, 2008, and the remaining 40% on March 10, 2009, provided the grantee is still an employee of the Company on such dates.

(6)             The amounts in this column were calculated using a per share value of $50.71, the closing market price of a share of the Company’s common stock on December 29, 2006, the last business day of the year.

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Option Exercises and Stock Vested

The following table summarizes information with respect to stock option awards exercised and restricted stock awards vested during the fiscal year ended December 31, 2006 for each of the Named Executive Officers.

(1)             Value determined by multiplying the difference between the market value and exercise price per share by the number of shares acquired on options exercised.

(2)             Value determined by multiplying the number of vested shares by the closing market price of a share of the Company’s common stock on the vesting date or on the previous business day in the event the vesting date is not a business day.

Nonqualified Deferred Compensation

The following table summarizes information with respect to the participation of each of the NEOs in the EICP, a non-qualified deferred compensation plan, as of December 31, 2006.

(1)             Includes employer matching contribution to the EICP in January 2006 for the plan year ended December 31, 2005 on behalf of each NEO (Mr. Brussard—$74,212, Mr. Begley—$15,495, Mr. Loranger—$24,795, Mr. Patrick—$20,175, and Mr. Krupa—$7,538); and annual deferred compensation bonus paid in March 2006 and earned for the year ended 2005 under the EICP (Mr. Brussard—$644,436, Mr. Begley—$204,282, Mr. Loranger—$279,936, Mr. Patrick—$232,956, and Mr. Krupa—$117,612).

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