NOTE 9. STOCK OPTION PLANS

Non-qualified Employee Stock Award Plan

The United Fire Group, Inc. 2008 Stock Plan (the “2008 Stock Plan”) authorizes the issuance of restricted and unrestricted stock awards, stock appreciation rights, incentive stock options, and non-qualified stock options for up to 1,900,000 shares of our common stock to employees, with 653,511 authorized shares available for future issuance at December 31, 2011. The 2008 Stock Plan is administered by the Board of Directors, which determines those employees who will receive awards, when awards will be granted, and the terms and conditions of the awards. The Board of Directors may also take any action it deems necessary and appropriate for the administration of the 2008 Stock Plan. Pursuant to the 2008 Stock Plan, the Board of Directors may, at its sole discretion, grant awards to our employees who are in positions of substantial responsibility with United Fire.

Options granted pursuant to the 2008 Stock Plan are granted to buy shares of our common stock at the market value of the stock on the date of grant. All outstanding option awards vest and are exercisable in installments of 20.0 percent of the number of shares covered by the option award each year from the grant date, unless the Board of Directors authorizes the acceleration of vesting. To the extent not exercised, vested option awards accumulate and are exercisable by the awardee, in whole or in part, in any subsequent year included in the option period, but not later than 10 years from the grant date. Restricted and unrestricted stock awards granted pursuant to the 2008 Stock Plan are granted at the market value of our stock on the date of the grant. Restricted stock awards fully vest after 5 years from the date of issuance, unless accelerated upon the approval of the Board of Directors, at which time common stock will be issued to the awardee. All awards are generally granted free of charge to eligible employees as designated by the Board of Directors.

The activity in the 2008 Stock Plan is displayed in the following table:



	Year-Ended		Inception
Authorized Shares Available for Future Award Grants	December 31, 2011		to Date
Beginning balance	833,495		1,900,000
Number of awards granted	(206,459	)	(1,345,689	)
Number of awards forfeited or expired	26,475		99,200
Ending balance	653,511		653,511
Number of option awards exercised	10,725		178,017
Number of unrestricted stock awards vested	730		2,485
Number of restricted stock awards vested	—		—

Non-qualified Non-employee Director Stock Option and Restricted Stock Plan

The 2005 Non-qualified Non-Employee Director Stock Option and Restricted Stock Plan (the "Director Plan") authorizes us to grant restricted and unrestricted stock and non-qualified stock options to purchase shares of our common stock to non-employee directors. At our annual stockholders’ meeting on May 18, 2011, our stockholders approved an amendment to the Director Plan to increase from 150,000 to 300,000 the number of shares that may be issued under the Director Plan and to extend the life of the Director Plan from December 31, 2014 to December 31, 2020. At December 31, 2011, we had 160,009 authorized shares available for future issuance.

The Board of Directors has the authority to determine which non-employee directors receive awards, when options and restricted and unrestricted stock shall be granted, the option price, the option expiration date, the date of grant, the vesting schedule of options or whether the options shall be immediately vested, the terms and conditions of options and restricted stock (other than those terms and conditions set forth in the plan) and the number of shares of common stock to be issued pursuant to an option agreement or restricted stock agreement. The Board of Directors may also take any action it deems necessary and appropriate for the administration of the Director Plan.

The activity in the Director Plan is displayed in the following table:



	Year-Ended		Inception
Authorized Shares Available for Future Award Grants	December 31, 2011		to Date
Beginning balance	37,003		150,000
Additional authorization	150,000		150,000
Number of awards granted	(26,994	)	(145,994	)
Number of awards forfeited or expired	—		6,003
Ending balance	160,009		160,009
Number of awards exercised	—		—

Stock-Based Compensation Expense

For 2011, 2010 and 2009, we recognized stock-based compensation expense of $1,829,000, $1,787,000, and $2,084,000, respectively.

As of December 31, 2011, we had $3,784,000 in stock-based compensation expense that has yet to be recognized through our results of operations. We expect this compensation to be recognized in subsequent years according to the following table, except with respect to awards for which the Board of Directors accelerates vesting, which will result in the recognition of any remaining compensation expense in the period in which the awards are accelerated.



(In Thousands)
2012	$	1,432
2013	996
2014	765
2015	533
2016	58
Total	$	3,784

Analysis of Award Activity

The analysis below details the award activity for 2011 and the awards outstanding at December 31, 2011, for both of our plans and ad hoc options, which were granted prior to the adoption of the other plans:



Options	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Life (Yrs)	Aggregate Intrinsic Value (In Thousands)
Outstanding at January 1, 2011	1,025,191		$	29.30
Granted	204,984		20.52
Exercised	(11,925	)	15.99
Forfeited or expired	(29,478	)	27.10
Outstanding at December 31, 2011	1,188,772		$	27.95	5.89	$	555
Exercisable at December 31, 2011	710,003		$	31.09	4.49	$	268

Intrinsic value is the difference between our share price on the last day of trading (i.e., December 31, 2011) and the price of the options when granted and represents the value that would have been received by option holders had they exercised their options on that date. These values change based on the fair market value of our shares. The intrinsic value of options exercised totaled $35,000, $27,000 and $4,000 in 2011, 2010 and 2009, respectively.

At December 31, 2011, we had 50,206 restricted stock awards outstanding, of which 19,464, were granted in May 2008 at a fair market value of $33.43 per share and 30,742 were granted in February 2011 at a fair market value of $20.54, which resulted in compensation expense that is recognized over a five-year vesting period from the date of grant. In 2011, we recognized $245,000 in compensation expense related to these awards. In each of 2010 and 2009, we recognized $127,000 in compensation expense. At December 31, 2011, we had $662,000 in compensation expense that has yet to be recognized through our results of operations related to these awards. The intrinsic value of the unvested restricted stock awards outstanding totaled $1,013,000 and $434,000 at December 31, 2011 and 2010, respectively.

Assumptions

The weighted-average grant-date fair value of the options granted under our plans has been estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:



December 31,	2011			2010			2009
Risk-free interest rate	2.99		%	3.03		%	2.72		%
Expected volatility	55.47		%	59.03		%	54.88		%
Expected option life (in years)	7			7			7
Expected dividends	$	0.60		$	0.60		$	0.60
Weighted-average grant-date fair value of options granted during the year	$	8.99		$	9.00		$	7.52

The following table summarizes information regarding the stock options outstanding and exercisable at December 31, 2011:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted-Average Remaining Contractual Life (Yrs)	Weighted-Average Exercise Price		Number Exercisable	Weighted-Average Exercise Price
$15.01 - 21.00	401,959	7.72	$	18.97	91,775	$	17.26
21.01 - 28.00	149,647	5.04	22.64		94,450	22.76
28.01 - 35.00	328,166	5.15	33.01		250,878	32.80
35.01 - 41.00	309,000	4.71	36.85		272,900	37.07
$15.01 - 41.00	1,188,772	5.89	$	27.95	710,003	$	31.09