STOCKHOLDERS' EQUITY

(A) Changes in Common Stock Shares Outstanding

Details of changes in shares of common stock outstanding are provided below.



	Years Ended December 31,
	2014	2013	2012
	(In thousands)

Common stock shares outstanding:
Shares outstanding at beginning of year	3,635	3,635	3,635
Shares exercised under stock option plan	1	—	—

Shares outstanding at end of year	3,636	3,635	3,635

(B) Dividend Restrictions

The Company is restricted by state insurance laws as to dividend amounts which may be paid to stockholders without prior approval from the Colorado Division of Insurance. The restrictions are based on the greater of statutory earnings from operations excluding capital gains or 10% of statutory surplus of the Company. The maximum dividend payment which may be made without prior approval in 2015 is $118.2 million.

On August 22, 2014, the Board of Directors of the Company declared a cash dividend to stockholders on record as of October 31, 2014 and payable December 4, 2014. The dividends approved were $0.36 per common share to Class A stockholders and $0.18 per common share to Class B stockholders. A dividend in the same amounts per share on Class A and Class B shares was declared in August and paid in December of 2013.

The Colorado Division of Insurance imposes minimum risk-based capital requirements on insurance companies that were developed by the National Association of Insurance Commissioners ("NAIC"). The formulas for determining the amount of risk-based capital ("RBC") specify various weighting factors that are applied to statutory financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of the Company's regulatory total adjusted capital to its authorized control level RBC, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The Company's current authorized control level RBC of $72.4 million is significantly below its total adjusted capital of $1.3 billion.

(D) Share-Based Payments

The Company has a stock and incentive plan ("1995 Plan") which provides for the grant of any or all of the following types of awards to eligible employees: (1) stock options, including incentive stock options and nonqualified stock options; (2) stock appreciation rights, in tandem with stock options or freestanding; (3) restricted stock; and (4) performance awards. The Company has issued only nonqualified stock options under the 1995 Plan. The 1995 Plan began on April 21, 1995, and was amended on June 25, 2004 to extend the termination date to April 20, 2010. The number of shares of Class A, $1.00 par value, common stock which were allowed to be issued under the 1995 Plan, or as to which stock appreciation rights or other awards were allowed to be granted, could not exceed 300,000. All shares under the 1995 Plan have been issued. Effective June 20, 2008, the Company’s shareholders approved a 2008 Incentive Plan (“2008 Plan”). The 2008 Plan is substantially similar to the 1995 Plan and authorized an additional number of Class A, $1.00 par value, common stock shares eligible for issue not to exceed 300,000.

All of the employees of the Company and its subsidiaries are eligible to participate in the two Plans. In addition, directors of the Company are eligible to receive the same types of awards as employees except that they are not eligible to receive incentive stock options. Company directors, including members of the Compensation and Stock Option Committee, are eligible for nondiscretionary stock options. The directors’ grants vest 20% annually following one full year of service to the Company from the date of grant. The employees’ grants vest 20% annually following three full years of service to the Company from the date of grant. All grants issued expire after ten years.

In 2006, the Company adopted and implemented a limited stock buy-back program with respect to the 1995 Plan which provides option holders the additional alternative of selling shares acquired through the exercise of options directly back to the Company. Option holders may elect to sell such acquired shares back to the Company at any time within ninety (90) days after the exercise of options at the prevailing market price as of the date of notice of election. The buy-back program did not alter the terms and conditions of the Plan, however the program necessitated a change in accounting from the equity classification to the liability classification. In 2008, the Company implemented another limited stock buy-back program, substantially similar to the 2006 program, for shares issued under the 2008 Plan.

The Company uses the current fair value method to measure compensation cost. As of December 31, 2014, the liability balance was $9.3 million versus $5.9 million as of December 31, 2013. A summary of shares available for grant and stock option activity is detailed below.



		Options Outstanding
	Shares Available For Grant	Shares		Weighted-Average Exercise Price
Stock Options:
Balance at January 1, 2014	291,000	36,668		$	229.24
Exercised	—	(6,400	)	$	165.64
Forfeited	—	(500	)	$	255.13
Expired	—	—		$	—
Stock options granted	—	—		$	—

Balance at December 31, 2014	291,000	29,768		$	242.48



	Stock Appreciation Rights Outstanding
	Awards		Weighted-Average Exercise Price

Balance at January 1, 2014	99,461		$	156.93
Exercised	(3,425	)	$	119.87
Forfeited	(3,850	)	$	171.27
Granted	—		$	—

Balance at December 31, 2014	92,186		$	157.71

The total intrinsic value of options exercised was $1.1 million and $2.5 million for the years ended December 31, 2014 and 2013, respectively. The total share-based liabilities paid were $1.1 million and $2.5 million for the years ended December 31, 2014 and 2013, respectively. For the years ended December 31, 2014 and 2013, the total cash received by the Company from the exercise of options under the Plan was $0.2 million and $0.0 million. The total fair value of shares vested during the years ended December 31, 2014 and 2013 was $1.1 million and $0.7 million, respectively.

The following table summarizes information about stock options and SARs outstanding at December 31, 2014.



	Options and SARs Outstanding
	Number Outstanding		Weighted-Average Remaining Contractual Life	Number Exercisable

Exercise prices:
$255.13 (options)	21,768		3.3 years	17,415
$208.05 (options)	8,000		3.5 years	8,000
$236.00 (SARs)	250		3.6 years	200
$114.64 (SARs)	25,918		4.1 years	17,161
$132.56 (SARs)	30,518		7.0 years	8,904
$210.22 (SARs)	35,500		9.0 years	1,800


Totals	121,954			53,480

Aggregate intrinsic value
(in thousands)	$	11,079		$	4,812

The aggregate intrinsic value in the table above is based on the closing stock price of $269.25 per share on December 31, 2014.

In estimating the fair value of the options/SARs outstanding at December 31, the Company employed the Black-Scholes option pricing model with assumptions as detailed below.



	December 31, 2014		December 31, 2013

Expected term of options	3.3 to 9.0 years		0 to 10 years
Expected volatility:
Range	19.67% to 37.75%		21.03% to 42.71%
Weighted-average	22.91	%	30.50	%
Expected dividend yield	0.13	%	0.16	%
Risk-free rate:
Range	0.13% to 1.62%		0.12% to 3.93%
Weighted-average	0.56	%	2.10	%

The Company reviewed the contractual term relative to the options as well as perceived future behavior patterns of exercise. Volatility is based on the Company’s historical volatility over the expected term.

The pre-tax compensation expense/(benefit) recognized in the financial statements related to the two Plans was $4.4 million, $5.7 million and $1.1 million for the years ended December 31, 2014, 2013 and 2012, respectively. The related tax (benefit)/expense recognized was $(1.5) million, $(2.0) million and $(0.4) million for the years ended December 31, 2014, 2013 and 2012, respectively.

For the years ended December 31, 2014, 2013 and 2012, the total pre-tax compensation expense related to nonvested options not yet recognized was $2.3 million, $3.7 million and $1.7 million, respectively. This amount is expected to be recognized over a weighted-average period of 2.3 years. The Company recognizes compensation cost over the graded vesting periods.