11.	Share-based Compensation

The fair value method of accounting is used for equity-based compensation plans. Under the fair value method, compensation cost is measured based on the fair value of the award at the measurement date and recognized over the requisite service period. We use the Black-Scholes model to estimate the fair values on the measurement date for share options and share appreciation rights (“SARs”). The Black-Scholes model uses several assumptions to value a share award. The volatility assumption is based on the historical change in our stock price over the previous five years preceding the measurement date. The risk-free rate of return assumption is based on the five-year U.S. Treasury constant maturity rate on the measurement date. The expected award life is based upon the average holding period over the history of the incentive plan. The expected dividend yield is based on our history and expected dividend payouts.

The following table summarizes the assumptions we used for the three months ended March 31, 2015 and 2014:

	For the Three Months Ended March 31,
	2015		2014
Risk-free rate of return		1.47%		1.74%
Expected dividend yields		1.63%		1.49%
Expected award life (years)		4.71	4.85
Expected volatility		22.09%		24.91%

All outstanding awards were adjusted to reflect the 10% stock dividend, resulting in a 10% increase to the number of awards outstanding and a 9.09% reduction in the exercise price.

Argo Group’s Long-Term Incentive Plans

In November 2007, our shareholders approved the 2007 Long-Term Incentive Plan (the “2007 Plan”), which provides for an aggregate of 4.5 million shares of our common stock that may be issued to executives, non-employee directors, and other key employees. As of May 2014, 1,457,800 shares remained available for grant under the 2007 Plan. In May 2014, our shareholders approved the 2014 Long-Term Incentive Plan (the “2014 Plan”), which provides for an additional 2.8 million shares of our common stock to be available for issuance to executives, non-employee directors and other key employees. The share awards may be in the form of share options, SARs, restricted shares, restricted share awards, restricted share units awards, performance awards, other share-based awards and other cash-based awards. Shares issued under this plan may be shares that are authorized and unissued or shares that we reacquired, including shares purchased on the open market. Share options and SARs will count as one share for the purposes of the limits under the incentive plans; restricted shares, restricted share units, performance units, performance shares or other share-based incentive awards which settle in common shares will count as 2.75 shares for purpose of the limits under the 2014 Plan.

Share options may be in the form of incentive share options, non-qualified share options and restorative options. Share options are required to have an exercise price that is not less than the market value on the date of grant. We are prohibited from repricing the options. The term of the share options cannot exceed seven years from the grant date.

A summary of restricted share activity as of March 31, 2015 and changes during the three months then ended is as follows:

	Shares			Weighted-Average Grant Date Fair Value
Outstanding at January 1, 2015		313,716		$	35.17
Granted		51,873		$	46.57
Vested and issued		(110,982	)	$	29.88
Expired or forfeited		(3,569	)	$	36.38
Outstanding at March 31, 2015		251,038		$	39.85

The restricted shares vest over two to four years. Expense recognized under this plan for the restricted shares was $1.5 million and $0.7 million for the three months ended March 31, 2015 and 2014, respectively. Compensation expense for all share-based compensation awards is included in “Underwriting, acquisition and insurance expense” in the accompanying Consolidated Statements of Income. As of March 31, 2015, there was $8.0 million of total unrecognized compensation cost related to restricted share compensation arrangements granted by Argo Group.

A summary of stock-settled SARs activity as of March 31, 2015 and changes during the three months then ended is as follows:

	Shares			Weighted-Average Exercise Price
Outstanding at January 1, 2015		1,313,901		$	28.65
Granted		243,306		$	37.33
Exercised		(24,622	)	$	28.11
Expired or forfeited		(9,210	)	$	30.68
Outstanding at March 31, 2015		1,523,375		$	29.26

The stock-settled SARs vest over a one to four year period. Upon exercise of the stock-settled SARs, the employee is entitled to receive shares of our common stock equal to the appreciation of the stock as compared to the exercise price. Expense recognized for the stock-settled SARs was $0.6 million for the three months ended March 31, 2015 and 2014. As of March 31, 2015, there was $3.9 million of total unrecognized compensation cost related to stock-settled SARs outstanding.

A summary of cash-settled SARs activity as of March 31, 2015 and changes during the three months then ended is as follows:

	Shares			Weighted-Average Exercise Price
Outstanding at January 1, 2015		2,001,451		$	32.76
Granted		866,673		$	47.83
Exercised		(31,461	)	$	29.77
Expired or forfeited		(70,547	)	$	36.28
Outstanding at March 31, 2015		2,766,116		$	37.42

The cash-settled SARs vest over a one to four year period. Upon exercise of the cash-settled SARs, the employee is entitled to receive cash payment for the appreciation in the value of our common stock over the exercise price. We account for the cash-settled SARs as liability awards, which require the awards to be revalued at each reporting period. Expense recognized for the cash-settled SARs was $2.7 million for the three months ended March 31, 2015 and 2014. As of March 31, 2015, there was $14.5 million of total unrecognized compensation cost related to cash-settled SARs outstanding.