Share-based Compensation

6 Months Ended

Jun. 30, 2019

Share-based Payment Arrangement [Abstract]

The fair value method of accounting is used for share-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 risk-free rate of return assumption is based on the five-year U.S. Treasury constant maturity rate on the measurement date. The expected dividend yield is based on our history and expected dividend payouts. The expected award life is based upon the average holding period over the history of the incentive plan. The expected volatility assumption is based on the historical change in our stock price over the previous five years preceding the measurement date.

The following table summarizes the assumptions we used for the six months ended June 30, 2019 and 2018:



	For the Six Months Ended June 30,
	2019	2018
Risk-free rate of return	1.88%	2.73%
Expected dividend yields	1.76%	1.87%
Expected award life (years)	4.50	4.49
Expected volatility	18.37%	18.13%

Argo Group’s 2019 Omnibus Incentive Plan

In May 2019, our shareholders approved the 2019 Omnibus Incentive Plan (the “2019 Plan”), which provides equity-based and cash-based performance-related incentives to key employees, non-employee directors and other service providers. The intent of the 2019 Plan is to encourage and provide for the acquisition of an ownership interest in Argo Group, enabling us to attract and retain qualified and competent persons to serve as members of a management team and the Board of Directors. The 2019 Plan authorizes 1,885,000 shares of common stock to be granted as equity-based awards. All awards granted after December 31, 2018 will be issued under the 2019 Plan. No further grants will be made under any prior plan; however, any awards under a prior plan that are outstanding as of the effective date shall remain subject to the terms and conditions of, and be governed by, such prior plan.

Awards granted under the 2019 Plan may be in the form of stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance awards, other stock-based awards or other cash-based awards. Awards may be granted either alone or in addition to or in tandem with other awards authorized under the 2019 Plan. Awards that settled in stock will count as one share for the purposes reducing the share reserve under the 2019 Plan. 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.

Stock options and stock appreciation rights are required to have an exercise that is not less than the fair market value on the date of grant. The term of these awards is not to exceed ten years.

Restricted Shares

A summary of restricted share activity as of June 30, 2019 and changes during the six months then ended is as follows:



	Shares		Weighted-Average Grant Date Fair Value
Outstanding at January 1, 2019	897,005		$	46.82
Granted	200,785		$	68.69
Vested and issued	(399,882	)	$	35.86
Expired or forfeited	(53,116	)	$	55.04
Outstanding at June 30, 2019	644,792		$	59.77

The restricted shares vest over one to four years. Expense recognized under this plan for the restricted shares was $3.5 million and $7.2 million for the three and six months ended June 30, 2019 respectively, as compared to $4.8 million and $8.2 million for the three and six months ended June 30, 2018. Compensation expense for all share-based compensation awards is included in “Underwriting, acquisition and insurance expenses” in the accompanying Consolidated Statements of Income. As of June 30, 2019, there was $31.6 million of total unrecognized compensation cost related to restricted share compensation arrangements granted by Argo Group.

Stock-Settled SARs

A summary of stock-settled SARs activity as of June 30, 2019 and changes during the six months then ended is as follows:



	Shares		Weighted-Average Exercise Price
Outstanding at January 1, 2019	810,759		$	33.89
Exercised	(97,644	)	$	36.70
Expired or forfeited	(7,167	)	$	37.85
Outstanding at June 30, 2019	705,948		$	33.46

As of June 30, 2019, all stock-settled SARs are fully vested. 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. There was no expense recognized for the three months ending June 30, 2019 for stock-settled SARs. Expense recognized for the six months ended June 30, 2019 for the stock-settled SARs was $0.4 million. Expense recognized for the stock-settled SARs was $0.4 million and $1.5 million for the three and six months ended June 30, 2018, respectively. As of June 30, 2019, there was no unrecognized compensation cost related to stock-settled SARs outstanding.

Cash-Settled SARs

A summary of cash-settled SARs activity as of June 30, 2019 and changes during the six months then ended is as follows:



	Shares		Weighted-Average Exercise Price
Outstanding at January 1, 2019	58,428		$	30.71
Exercised	(37,330	)	$	29.53
Expired or forfeited	(1,193	)	$	19.37
Outstanding at June 30, 2019	19,905		$	33.59

As of June 30, 2019, all the cash-settled SARs are fully vested. 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 $0.4 million and $0.6 million for the three and six months ended June 30, 2019 respectively, as compared to $0.3 million and $0.8 million for the three and six months ended June 30, 2018. As of June 30, 2019, there was no unrecognized compensation cost related to cash-settled SARs outstanding.