STOCK-BASED COMPENSATION

At December 31, 2017, the Company had one stock-based payment arrangement outstanding, the PICO Holdings, Inc. 2014 Equity Incentive Plan (the “2014 Plan”).

The 2014 Plan provides for the issuance of up to 3.3 million shares of common stock in the form of PBO, RSU, SAR, non-statutory stock options, restricted stock awards (“RSA”), performance shares, performance units, deferred compensation awards, and other stock-based awards to employees, directors, and consultants of the Company (or any present or future parent or subsidiary corporation or other affiliated entity of the Company). The 2014 Plan allows for broker assisted cashless exercises and net-settlement of income taxes and employee withholding taxes. Upon exercise of a PBO, RSU, and SAR, the employee will receive newly issued shares of PICO common stock with a fair value equal to the in-the-money value of the award, less applicable federal, state and local withholding and income taxes (however, the holder can elect to pay withholding taxes in cash).

The Company recorded total stock based compensation expense of $1.3 million, $2.9 million and $1.9 million during the years ended December 31, 2017, 2016 and 2015, respectively.

Performance-Based Options (PBO):

At various times, the Company has awarded PBO to various members of management. All of the PBO issued contain a market condition based on the achievement of a stock price target during the contractual term and vest monthly over a three year period. The vested portion of the options may be exercised only if the 30-trading-day average closing sales price of the Company’s common stock equals or exceeds 125% of the grant date stock price. The stock price contingency may be met any time before the options expire and it only needs to be met once for the PBO to remain exercisable for the remainder of the term. Compensation expense is amortized on a straight-line basis over the requisite service period for the entire award, which is the vesting period of the award. However, any unrecognized compensation expense for unvested awards can be accelerated if the vesting period is modified.

The estimated fair value of the Company’s PBO was determined using a Monte Carlo model, which incorporated the following assumptions:



	2014 10-Year Option
Grant date	11/14/2014
Expiration date	11/14/2024
Grant date stock price	$	19.51
Historical volatility	35.00		%
Risk-free rate (annualized)	2.38		%
Dividend yield (annualized)	—		%
PBO granted	167,619
Weighted average grant date fair value	$	6.51
Fair value of award on grant date	$	1,475,705

The determination of the fair value of PBO using an option valuation model is affected by the Company’s stock price, as well as assumptions regarding a number of complex and subjective variables. The volatility is calculated through an analysis based on historical daily returns of PICO’s stock over a look-back period equal to the PBO contractual term. The risk-free interest rate assumption is based upon a risk-neutral framework using the 10-year and 4.58-year zero-coupon risk-free interest rates derived from the treasury constant maturities yield curve on the grant date, for the 10-year PBO award and the 4.58-year PBO award, respectively. The dividend yield assumption is based on the expectation of no future dividend payouts by the Company.

A summary of PBO activity was as follows:



	Performance-Based Options		Weighted-Average Exercise Price Per Share
Outstanding at December 31, 2015 and 2016	453,333		$	19.51
Forfeited	(285,714	)	$	19.51
Outstanding at December 31, 2017 ⁽¹⁾	167,619		$	14.51

⁽¹⁾In November 2017, the exercise price per share of the PBO was reduced to reflect the special dividend paid to shareholders.

On January 8, 2017, 285,714 PBO expired and were canceled in conjunction with the termination of the Company’s former CEO. The remaining 167,619 PBO outstanding are exercisable for up to 10 years from the grant date.



	Performance-Based Options		Weighted-Average Exercise Price Per Share		Weighted-Average Contractual Term Remaining (Years)	Aggregate Intrinsic Value
Vested at December 31, 2015	163,704
Vested	238,413
Vested at December 31, 2016	402,117		$	19.51	4.5	—
Vested	51,216
Forfeited	(285,714	)
Vested at December 31, 2017 ⁽¹⁾	167,619		$	14.51	6.9	—

⁽¹⁾In November 2017, the exercise price per share of the PBO was reduced to reflect the special dividend paid to shareholders.

During the year ended December 31, 2016, the Company accelerated the vesting of 87,302 PBO and recorded $428,000 of additional stock-based compensation expense in conjunction with the termination of the Company’s former CEO.

As of December 31, 2017 and December 31, 2016, there were no PBO exercisable as the market condition had not been met. The was no unrecognized compensation cost related to unvested PBO at December 31, 2017 and at December 31, 2016 there was $428,000 of unrecognized compensation cost.

Restricted Stock Units (RSU):

RSU awards the recipient, who must be continuously employed by the Company until the vesting date, unless the employment contracts stipulate otherwise, the right to receive one share of the Company’s common stock. RSU issued to management do not vote and are not entitled to receive dividends, however the RSU issued to the Company’s director’s are entitled to dividends.

A summary of RSU activity was as follows:



	RSU Shares		Weighted-Average Grant Date Fair Value Per Share
Outstanding and unvested at December 31, 2014	142,131		$	19.81
Granted	23,300		$	15.68
Vested	(45,753	)	$	20.43
Forfeited	(11,020	)	$	15.72
Outstanding and unvested at December 31, 2015	108,658		$	19.07
Granted	24,326		$	10.28
Vested	(76,152	)	$	19.14
Forfeited	(8,600	)	$	17.30
Outstanding and unvested at December 31, 2016	48,232		$	14.85
Granted	54,186		$	15.01
Vested	(71,944	)	$	14.58
Forfeited	(19,999	)	$	13.82
Outstanding and unvested at December 31, 2017	10,475		$	19.51

The unrecognized compensation cost related to unvested RSU for the years ended December 31, 2017 and 2016 was $178,000 and $508,000, respectively.

During the year ended December 31, 2016, the Company accelerated the vesting of 35,714 RSU and recorded $651,000 of additional stock-based compensation expense in conjunction with the termination of the Company’s former CEO.

Stock-Settled Stock Appreciation Right (SAR):

The 466,470 previously outstanding SAR with an exercise price of $42.71 expired during the year ended December 31, 2017. Consequently, there are no such awards outstanding.