STOCK-BASED COMPENSATION

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 United Fire common stock to employees, with 568,746 authorized shares available for future issuance at December 31, 2012. 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 United Fire's 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 United Fire common stock will be issued to the awardee. All awards are generally granted free of charge to the eligible employees of United Fire as designated by the Board of Directors.

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



Authorized Shares Available for Future Award Grants	Year Ended December 31, 2012		Inception to Date
Beginning balance	653,511		1,900,000
Number of awards granted	(98,135	)	(1,443,824	)
Number of awards forfeited or expired	13,370		112,570
Ending balance	568,746		568,746
Number of option awards exercised	48,825		226,842
Number of unrestricted stock awards granted	1,135		3,620
Number of restricted stock awards vested	—		—

Non-Qualified Non-Employee Director Stock Option and Restricted Stock Plan

The United Fire Group, Inc. 2005 Non-Qualified Non-Employee Director Stock Option and Restricted Stock Plan (the "Director Plan") authorizes the issuance of restricted and unrestricted stock awards and non-qualified stock options to purchase shares of United Fire’s common stock to non-employee directors. At December 31, 2012, we had 130,012 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:



Authorized Shares Available for Future Award Grants	Year Ended December 31, 2012		Inception to Date
Beginning balance	160,009		300,000
Number of awards granted	(29,997	)	(175,991	)
Number of awards forfeited or expired	—		6,003
Ending balance	130,012		130,012
Number of option awards exercised	—		—

Stock-Based Compensation Expense

In 2012, 2011, and 2010, we recognized stock-based compensation expense of $1,764, $1,829 and $1,787, respectively.

As of December 31, 2012, we had $2,821 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 that are accelerated by the Board of Directors, in which case we will recognize any remaining compensation expense in the period in which the awards are accelerated.



2013	$	1,122
2014	849
2015	637
2016	190
2017	23
Total	$	2,821

Analysis of Award Activity

The analysis below details the award activity for 2012 and the awards outstanding at December 31, 2012, 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 (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2012	1,188,772		$	27.95
Granted	120,595		20.96
Exercised	(54,825	)	17.39
Forfeited or expired	(12,100	)	24.49
Outstanding at December 31, 2012	1,242,442		$	27.78	5.38	$	1,005
Exercisable at December 31, 2012	822,589		$	30.91	2.94	$	386

Intrinsic value is the difference between our share price on the last day of trading (i.e., December 31, 2012) 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 $229, $35 and $27 in 2012, 2011 and 2010, respectively.

At December 31, 2012, we had 54,338 shares of restricted stock awards outstanding, of which 18,576 shares were granted in May 2008 at a fair market value of $33.43 per share, 29,360 shares were granted in February 2011 at a fair market value of $20.54 per share, which resulted in compensation expense that is recognized over a five year vesting period from the date of grant, and 6,402 shares were granted in May 2012 at a fair market value of $20.90 per share, which resulted in compensation expense that will be recorded over a one year vesting period. In 2012, 2011 and 2010 we recognized $329, $245 and $127, respectively, in compensation expense related to these awards. At December 31, 2012, we had $467 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 $1,187 and $1,013 at December 31, 2012 and 2011, 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,	2012			2011			2010
Risk-free interest rate	1.37		%	2.99		%	3.03		%
Expected volatility	37.06		%	55.47		%	59.03		%
Expected option life (in years)	7			7			7
Expected dividends (in dollars)	$	0.60		$	0.60		$	0.60
Weighted-average grant-date fair value of options granted during the year (in dollars)	$	5.90		$	8.99		$	9.00

The following table summarizes information regarding the stock options outstanding and exercisable at December 31, 2012:



				Options Outstanding				Options Exercisable
Range of Exercise Prices				Number Outstanding (in shares)	Weighted-Average Remaining Contractual Life (in years)	Weighted-Average Exercise Price		Number Exercisable (in shares)	Weighted-Average Exercise Price
$	15.01	-	21.00	436,434	7.72	$	19.60	117,895	$	18.66
21.01		-	28.00	172,842	4.77	22.43		112,923	22.71
28.01		-	35.00	325,666	4.14	33.01		291,771	32.90
35.01		-	41.00	307,500	3.71	36.84		300,000	36.89
$	15.01	-	41.00	1,242,442	5.38	$	27.78	822,589	$	30.91