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.


(c)                                  “Committee”
means the Compensation Committee of the Board of Directors.


(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.