Share-Based Compensation

In May 2005, the Company adopted the 2005 Incentive Award Plan (the “2005 Plan”), which succeeded a prior plan. A maximum of 4,920,750 shares of common stock under the 2005 Plan are authorized for issuance upon exercise of options, stock appreciation rights and other awards, or upon vesting of restricted or deferred stock awards. As of December 31, 2014, only options and restricted stock awards have been granted under these plans. Beginning January 1, 2008, options granted, for which the Company has recognized share-based compensation expense become exercisable at a rate of 25% per year beginning one year from the date granted, are granted at the market price on the date of grant, and expire after 10 years. Prior to January 1, 2008, shares became exercisable at a rate of 20% per year.



	Year Ended December 31,
	2014		2013		2012
	(Amounts in thousands)
Cash received from option exercises	$	6,247	$	1,446	$	2,492
Compensation cost	4,112		974		(370		)
Excess tax benefit	148		202		86

No stock options were awarded in 2014 and 2012. In 2013, the fair value of stock option awards was estimated on the date of grant using a closed-form option valuation model (Black-Scholes) based on the following table, which provides the weighted-average values of assumptions used in the calculation of grand-date fair values during the years ended December 31, 2013.



	2013
Weighted-average grant-date fair value	$7.11
Expected volatility	33.16% - 33.18%
Weighted-average expected volatility	33.17%
Risk-free interest rate	0.88% - 1.60%
Expected dividend yield	5.40% - 5.76%
Expected term in months	72

Expected volatilities are based on historical volatility of the Company’s stock over the term of the options. The Company estimated the expected term of options, which represents the period of time that options granted are expected to be outstanding, by using historical exercise patterns and post-vesting termination behavior. The risk free interest rate is determined based on U.S. Treasury yields with equivalent remaining terms in effect at the time of the grant.

A summary of the stock option activity under the Company’s plans as of December 31, 2014 and changes during the year then ended is presented below:



	Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in 000’s)
Outstanding at January 1, 2014	433,750	$	49.11
Granted	0
Exercised	(155,050)	$	46.34
Canceled or expired	(30,700)	$	57.10
Outstanding at December 31, 2014	248,000	$	49.85	3.7	$	1,774
Exercisable at December 31, 2014	188,000	$	51.86	2.2	$	985

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all options been exercised on December 31, 2014. The aggregate intrinsic value of stock options exercised was $1,160,000, $862,000, and $392,000 during 2014, 2013, and 2012, respectively. The total fair value of options vested was $142,000, $146,000, and $407,000 during 2014, 2013, and 2012, respectively.

The following table presents information regarding stock options outstanding at December 31, 2014:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Options	Weighted-Avg. Remaining Contractual Life (Years)	Weighted- Avg. Exercise Price		Number of Options	Weighted- Avg. Exercise Price
$33.61-47.61	105,500	6.5	$	43.67	45,500	$	43.86
$50.01-52.13	63,500	2.2	$	51.03	63,500	$	51.03
$54.93-58.83	79,000	1.3	$	57.14	79,000	$	57.14

As of December 31, 2014, $344,000 of total unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted-average period of 2.4 years.

Under the 2005 Plan, the Compensation Committee of the Company’s Board of Directors granted performance vesting restricted stock units to the Company’s senior management and key employees.

The following table presents the grants summary:



	Grant Year
	2014	2013	2012
Three-year performance period ending December 31,	2016	2015	2014
Vesting shares, target (net of forfeited)	86,500	80,500	80,500
Vesting shares, maximum (net of forfeited)	162,188	181,125	181,125

The restricted stock unit activity as of December 31, 2014, 2013, and 2012 and changes during the years then ended is as follows:



	2014			2013			2012
	Shares	Weighted- Average Fair Value per Share		Shares	Weighted- Average Fair Value per Share		Shares	Weighted- Average Fair Value per Share
Outstanding at January 1	170,500	$	39.64	169,000	$	42.22	135,000	$	40.70
Granted	93,500	$	45.17	84,500	$	36.82	92,000	$	44.01
Vested	0			0			0
Forfeited/Canceled	(16,500)	$	43.99	(3,000)	$	36.82	(3,000)	$	44.01
Expired	(80,500)	$	44.01	(80,000)	$	40.22	(55,000)	$	41.40
Outstanding at December 31	167,000	$	41.15	170,500	$	39.64	169,000	$	42.22

The restricted stock units vest at the end of a three-year performance period beginning with the year of the grant, and then only if, and to the extent that, the Company’s performance during the performance period achieves the threshold established by the Compensation Committee of the Company’s Board of Directors. For 2012 grants, vesting was based on the Company’s cumulative underwriting income and net premium written growth. For 2013 and 2014 grants, vesting will be based on the Company’s cumulative underwriting income, annual underwriting income, and net earned premium growth. As of December 31, 2014, 7,000, 4,000, and 11,500 target restricted stock units granted in 2014, 2013, and 2012, respectively, have been forfeited because the recipients are no longer employed by the Company.

The fair value of each restricted share grant was determined based on the market price on the grant date. Compensation cost is recognized based on management’s best estimate that performance goals will be achieved. If such goals are not met, no compensation cost is recognized and any recognized compensation cost would be reversed. For the 2012 grants, the achievement of the performance condition set by the Compensation Committee was no longer considered probable, and previously recognized compensation costs were reversed.