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 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 $2,385, $2,201, and $2,113 for the years ended December 31, 2011, 2010, and 2009, respectively.

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

On March 10, 2006, the Board 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. The maximum number of shares of common stock with respect to which awards may be granted is 2,500,000. Shares of stock covered by an award under the Incentive Plan that are forfeited will again be available for issuance in connection with future grants of awards under the plan. At December 31, 2011, there were 718,859 shares available for future grant. The Board of Directors and the Compensation Committee intend to issue more awards under the Incentive Plan in the future.

A summary of stock based awards granted under the Incentive Plan during the years 2007 through 2011 is as follows

Type of		Number of
Equity		Awards	Fair Value
Awarded	Effective Date	Granted	per Share		Vesting Terms
RS	February 26, 2007	65,760	$	45.62 (1)	3 years, 30%-30%-40%
RS	February 26, 2007	4,000	$	45.62 (1)	No vesting period (2)
RS	March 22, 2007	49,971	$	38.78 (1)	5 years, 20% annually
RS	March 10, 2008	76,816	$	35.80 (1)	3 years, 30%-30%-40%
RS	March 10, 2008	4,000	$	35.80 (1)	No vesting period (2)
RS	March 20, 2008	45,779	$	34.37 (1)	5 years, 20% annually
RS	March 9, 2009	95,953	$	28.66 (1)	3 years, 30%-30%-40%
RS	March 9, 2009	4,000	$	28.66 (1)	No vesting period (2)
RS	March 19, 2009	38,046	$	33.24 (1)	5 years, 20% annually
RS	March 9, 2010	77,360	$	38.78 (1)	3 years, 30%-30%-40%
RS	March 9, 2010	4,000	$	38.78 (1)	No vesting period (2)
RS	March 23, 2010	25,590	$	38.09 (1)	5 years, 20% annually
RS	March 9, 2011	68,637	$	47.35 (1)	3 years, 30%-30%-40%
RS	March 9, 2011	4,000	$	47.35 (1)	No vesting period (2)
RS	March 23, 2011	22,567	$	44.94 (1)	5 years, 20% annually

(1) The fair value per share of the restricted stock grant is equal to the closing price of the Company's common stock on the grant date.

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

The fair value of stock options used to compute net income and EPS for the years ended December 31, 2011, 2010, and 2009 is the estimated fair value at grant date using the Black-Scholes option-pricing model with the following assumptions:

	Years Ended December 31,
	2011	2010	2009
Expected dividend yield	1.68%	1.36% - 1.68%	1.36% - 2.16%
Expected volatility	0.36	0.31 - 0.36	0.28 - 0.36
Risk-free interest rate	4.76%	4.35% - 4.76%	3.23% - 4.76%
Expected holding period	6.5 years	6.5 - 7 years	6.5 - 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. There were no stock options granted during the years ended December 31, 2011, 2010, and 2009.

	Years Ended December 31,
	2011			2010			2009
	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	151,003	$	37.30	215,337	$	35.40	238,666	$	33.66
Exercised during the year	(25,303)		35.66	(64,334)		30.93	(22,329)		16.45
Forfeited during the year	-		-	-		-	(1,000)		42.85
Outstanding at end of year	125,700		37.63	151,003		37.30	215,337		35.40
Exercisable at end of year	125,700	$	37.63	127,058	$	36.26	154,847	$	33.11

At December 31, 2011, 2010, and 2009,the aggregate intrinsic value of outstanding shares under option was $554, $1,573, and $971 with a weighted average remaining contractual term of 3.7, 4.7, and 5.5 years, respectively. Aggregate intrinsic value represents the total pretax intrinsic value, based upon the Company's closing year-end stock price of $40.48, $47.72 and $36.23 at December 31, 2011, 2010, and 2009, respectively, which would have been received by the option holders had all option holders exercised their options as of those dates. The range of exercise prices on stock options outstanding under the Incentive Plan was $13.30 to $42.85 at both December 31, 2011 and 2010, and $12.00 to $42.85 at December 31, 2009. The total intrinsic value of options exercised during the years ended December 31, 2011, 2010, and 2009 was $156, $1,080 and $442, respectively.

A summary of the status of non-vested options as of December 31, 2011 is presented below.

As of March 31, 2011, all compensation expense related to non-vested option awards had been recognized. Cash received from options exercised was $902, $1,990 and $367 for the years ended December 31, 2011, 2010, and 2009, respectively.

As a result of adopting ASC 718, Compensation-Stock Compensation on January 1, 2006, the Company's net income for the twelve months ended December 31, 2011 was lowered by $45, net of income tax benefit of $25. The Company's net income for the twelve months ended December 31, 2010 was lowered by $240, net of income tax benefit of $129. The impact on basic and diluted EPS was a reduction of less than $0.01 per share for the twelve months ended December 31, 2011 and a reduction of $0.02 per share for the twelve months ended December 31, 2010.

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.

	Years Ended December 31,
	2011			2010			2009
	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	301,501	$	35.13	298,834	$	34.28	246,325	$	38.77
Granted during the year	95,204		46.78	106,950		38.61	137,999		29.92
Vested and unrestricted during the year	(114,009)		34.67	(104,283)		36.27	(84,852)		40.20
Forfeited during the year	(579)		37.75	-		-	(638)		36.57
Outstanding at end of year	282,117	$	39.24	301,501	$	35.13	298,834	$	34.28

As of December 31, 2011, there was $6,528 of unrecognized compensation expense related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 1.6 years. The total fair value of the shares that were vested and unrestricted during the years ended December 31, 2011, 2010, and 2009 was $3,953, $3,782 and $3,412, respectively. For the years ended December 31, 2011, 2010, and 2009, the Company recorded compensation expense related to restricted stock of $2,870, $2,617 and $2,493, net of income tax benefits of $1,545, $1,409 and $1,342, respectively.