STOCK-BASED COMPENSATION

The Company has no stock-based compensation plans of its own; however, Employers Mutual has several stock plans which utilize the common stock of the Company. Employers Mutual can provide the common stock required under its plans by: 1) using shares of common stock that it currently owns; 2) purchasing common stock on the open market; or 3) directly purchasing common stock from the Company at the current fair value. Employers Mutual has historically purchased common stock from the Company for use in its stock plans and its non-employee director stock plans. Beginning with the second quarter 2014 purchase, Employers Mutual is also purchasing common stock from the Company to fulfill its obligations under its employee stock purchase plan (previously the shares needed for this were purchased on the open market).

Stock Plans

Employers Mutual currently maintains two separate stock plans for the benefit of officers and key employees of Employers Mutual and its subsidiaries. A total of 1,500,000 shares of the Company’s common stock have been reserved for issuance under the 2003 Employers Mutual Casualty Company Incentive Stock Option Plan (2003 Plan) and a total of 2,000,000 shares have been reserved for issuance under the 2007 Employers Mutual Casualty Company Stock Incentive Plan (2007 Plan). A third stock plan, the 1993 Employers Mutual Casualty Company Incentive Stock Option Plan (1993 Plan), is no longer active. The time period for exercising options granted under the 1993 Plan expired during 2012. A total of 105,120 shares reserved for issuance under the 1993 Plan were deregistered on April 26, 2013.

The 2003 Plan permits the issuance of incentive stock options only, while the 2007 Plan permits the issuance of performance shares, performance units, and other stock-based awards, in addition to qualified (incentive) and non-qualified stock options, stock appreciation rights, restricted stock and restricted stock units. Both plans provide for a ten-year time limit for granting awards. No additional options can be granted under the 2003 Plan due to the expiration of the term of the plan. Options granted under the plans generally have a vesting period of five years, with options becoming exercisable in equal annual cumulative increments commencing on the first anniversary of the option grant. Option prices cannot be less than the fair value of the common stock on the date of grant.

Beginning in 2013, Employers Mutual's compensation committee began issuing restricted stock, rather than stock options. With the exception of death or permanent disability, any unvested shares of restricted stock are forfeited on termination of employment, including retirement. Restricted stock awards granted under the 2007 Plan generally have a vesting period of four years, with shares vesting in equal annual cumulative increments commencing on the first anniversary of the grant. Holders of unvested shares receive compensation income equal to the amount of any dividends declared.

The Senior Executive Compensation and Stock Option Committee (the “Committee”) of Employers Mutual’s Board of Directors (the “Board”) grants the awards and is the administrator of the plans. The Company’s Compensation Committee must consider and approve all awards granted to the Company’s executive officers.

The Company recognized compensation expense from these plans of $357 ($233 net of tax), $289 ($190 net of tax) and $240 ($174 net of tax) in 2014, 2013 and 2012, respectively.

A summary of the stock option activity under Employers Mutual’s stock plans for 2014, 2013 and 2012 is as follows:



	Year ended December 31,
	2014				2013				2012
	Number of options		Weighted- average exercise price		Number of options		Weighted- average exercise price		Number of options		Weighted- average exercise price
Outstanding, beginning of year	1,135,207		$	22.17	1,588,958		$	21.89	1,437,095		$	21.92
Granted	—		—		—		—		263,162		20.98
Exercised	(200,304	)	21.36		(406,532	)	21.26		(42,619	)	17.97
Expired	(22,945	)	22.52		(47,219	)	20.35		(68,680	)	21.51
Forfeited	(10,825	)	22.94		—		—		—		—
Outstanding, end of year	901,133		$	22.34	1,135,207		$	22.17	1,588,958		$	21.89

Exercisable, end of year	642,464		$	22.41	686,863		$	22.37	894,706		$	21.96

Employers Mutual uses the average of the high and low trading prices of the Company's stock on the date of grant to determine the fair value of its restricted stock awards. Employers Mutual estimated the fair value of the 2012 option grant on the date of grant using the Black-Scholes-Merton option-pricing model with the following weighted-average assumptions:



	Year ended December 31,
	2012
Estimated dividend yield	3.81	%
Expected volatility	25.2% - 44.7%
Weighted-average volatility	35.61	%
Risk-free interest rate	0.06% - 1.51%
Expected term (years)	0.25 - 6.40

The expected term of the options granted to individuals who were not eligible to retire as of the grant date was estimated using historical data that excluded certain option exercises that occurred prior to the normal vesting period due to the retirement of the option holders. The expected term used for options granted to individuals who were eligible to retire as of the grant date was three months, reflecting the fact that upon retirement all unvested options immediately become vested, and the option holder has 90 days to exercise his or her outstanding options.

The expected volatility of options granted to individuals who were not eligible to retire as of the grant date was computed by using the historical daily prices of the Company’s common stock for a period covering the most recent 6.4 years, which approximates the average term of the options. The expected volatility of options granted to individuals who were eligible to retire as of the grant date was computed by using the historical daily prices for the most recent 90 days.

At December 31, 2014, the Company’s portion of the unrecognized compensation cost associated with option awards issued under Employers Mutual’s stock plans that are not currently vested was $194, with a 1.56 year weighted-average period over which the compensation expense is expected to be recognized. At December 31, 2014, the Company’s portion of the unrecognized compensation cost associated with restricted stock awards issued under Employers Mutual’s stock plans that are not currently vested was $690, with a 2.76 year weighted-average period over which the compensation expense is expected to be recognized. A summary of non-vested restricted stock activity under Employers Mutual’s stock plans for 2014 and 2013 is as follows:



	Year ended December 31,
	2014				2013
	Number of awards		Weighted- average grant-date fair value		Number of awards		Weighted- average grant-date fair value
Non-vested, beginning of year	56,668		$	25.90	—		$	—
Granted	62,764		30.74		57,720		25.90
Vested	(14,117	)	25.90		—		—
Forfeited	(1,375	)	26.61		(1,052	)	25.90
Non-vested, end of year	103,940		$	28.81	56,668		$	25.90

The Company’s portion of the total intrinsic value of options exercised under Employers Mutual’s stock plans was $606, $844 and $54 in 2014, 2013 and 2012, respectively. Under the terms of the pooling and quota share agreements, these amounts were paid to Employers Mutual. The Company receives the full fair value, as of the exercise date, for all shares issued in connection with option exercises. The Company also receives the full fair value, as of the grant date, for all shares issued in connection with the grant of restricted stock awards. The Company's portion of the total fair value of restricted stock awards that vested in 2014 was $110 (no restricted stock awards vested prior to 2014). Additional information relating to options outstanding and options vested (exercisable) at December 31, 2014 is as follows:



	December 31, 2014
	Number of options	Weighted-average exercise price		Aggregate intrinsic value		Weighted-average remaining term
Options outstanding	901,133	$	22.34	$	11,164	4.30
Options exercisable	642,464	$	22.41	$	7,912	3.61

The 2003 Plan does not generally generate income tax deductions for the Company because only incentive stock options could be issued under the plan. The Company has recorded a deferred income tax benefit for a portion of the compensation expense associated with the March 2008 grant and for all subsequent grants (all made under the 2007 Plan) because non-qualified options and restricted stock awards were issued. The Company’s portion of the current income tax deduction realized from exercises of non-qualified stock options was $152, $165 and $2 in 2014, 2013 and 2012, respectively. These actual deductions are generally in excess of the deferred tax benefits recorded in conjunction with the compensation expense (referred to as excess tax benefits) and are reflected in the statement of cash flows as a financing cash inflow (outflow if less) with an offsetting cash flow from operating activities of $103, $96 and $(3) as the Company’s portion in 2014, 2013 and 2012, respectively. The income tax benefit that results from disqualifying dispositions of stock purchased through the exercise of incentive stock options is deemed immaterial.

Employee Stock Purchase Plan

On May 30, 2008, the Company registered 500,000 shares of the Company’s common stock for use in the Employers Mutual Casualty Company 2008 Employee Stock Purchase Plan. All employees are eligible to participate in the plan. An employee may participate in the plan by delivering, during the first twenty days of the calendar month preceding the first day of an election period, a payroll deduction authorization to the plan administrator; or making a cash contribution (employees designated as “Insiders” are required to give six months advance notice prior to participating in the plan). Participants pay 85 percent of the fair market value of the stock on the date of purchase. The plan is administered by the Board of Employers Mutual, and the Board has the right to amend or terminate the plan at any time; however, no such amendment or termination shall adversely affect the rights and privileges of participants. Expenses allocated to the Company in connection with this plan totaled $35, $45 and $39 in 2014, 2013 and 2012, respectively.

During 2014, shares were purchased under the plan at prices ranging from $24.93 to $30.32. Activity under the plan was as follows:



	Year ended December 31,
	2014		2013		2012
Shares available for purchase, beginning of year	339,166		370,400		407,102
Shares purchased under the plan	(24,860	)	(31,234	)	(36,702	)
Shares available for purchase, end of year	314,306		339,166		370,400

Non-Employee Director Stock Purchase Plan

On March 14, 2013, the Company registered 200,000 shares of the Company’s common stock for issuance under the 2013 Employers Mutual Casualty Company Non-Employee Director Stock Purchase Plan. All non-employee directors of Employers Mutual and its subsidiaries and affiliates are eligible to participate in the plan. Each eligible director can purchase shares of common stock at 75 percent of the fair value of the stock on the exercise date in an amount equal to a minimum of 25 percent and a maximum of 100 percent of their annual cash retainer. The plan will continue through the period of the 2023 annual meetings. The plan is administered by the Corporate Governance and Nominating Committee of the Board of Directors of Employers Mutual. The Board may amend or terminate the plan at any time; however, no such amendment or termination shall adversely affect the rights and privileges of the participants. The 2003 Employers Mutual Casualty Company Non-Employee Director Stock Option Plan is no longer active. All outstanding options granted under this plan expired in May, 2013, and no further options can be granted due to the expiration of the term of the plan. On April 26, 2013, a total of 148,204 shares reserved for issuance under the 2003 Employers Mutual Casualty Company Non-Employee Director Stock Option Plan were deregistered. Expenses allocated to the Company in connection with this plan totaled $49, $36 and $22 in 2014, 2013 and 2012, respectively.

During 2014, shares were purchased under the plan at prices ranging from $21.56 to $24.31. Activity under the plan was as follows:



	Year ended December 31,
	2014		2013		2012
Shares available for purchase, beginning of year	196,165		149,404		155,467
Shares registered for use in the 2013 plan	—		200,000		—
Shares deregistered under the 2003 plan	—		(148,204	)	—
Shares purchased under the plan	(9,626	)	(5,035	)	(6,063	)
Shares available for purchase, end of year	186,539		196,165		149,404

Dividend Reinvestment Plan

The Company maintains a dividend reinvestment and common stock purchase plan (the “Plan”) which provides stockholders with the option of reinvesting cash dividends in additional shares of the Company’s common stock. Participants can also purchase additional shares of common stock without incurring broker commissions by making optional cash contributions to the plan, and sell shares of common stock through the plan.

Effective March 14, 2012, the Company’s Board of Directors temporarily suspended the issuance of shares of common stock under the Plan. Accordingly, on March 26, 2012, a total of 161,185 shares reserved under the Company's dividend reinvestment and common stock purchase plan were deregistered. As a result, dividend reinvestments and optional cash purchases were temporarily not permitted under the Plan. The temporary suspension of the issuance of shares of common stock under the Plan was due to a late filing of an amendment to a Current Report on Form 8-K. On March 29, 2013, the Company filed a Form S-3 Registration Statement with the Securities and Exchange Commission registering 661,185 shares of common stock for use in the Plan, which was reinstated for the third quarter dividend payment.

Employers Mutual did not participate in this plan in 2014, 2013 or 2012. Activity under the plan was as follows:



	Year ended December 31,
	2014			2013			2012
Shares available for purchase, beginning of year	658,957			—			161,236
Shares registered for use in the plan	—			661,185			—
Shares deregistered under the plan	—			—			(161,185		)
Shares purchased under the plan	(4,139		)	(2,228		)	(51		)
Shares available for purchase, end of year	654,818			658,957			—
Lowest purchase price	$	28.03		$	28.11		$	21.38
Highest purchase price	$	35.39		$	31.47		$	23.22

Stock Appreciation Rights (SAR) agreement

On October 19, 2006, Employers Mutual entered into a stock appreciation rights (SAR) agreement with the Company’s Executive Vice President and Chief Operating Officer (Mr. Murray) at that time. Because the SAR agreement will be settled in cash, it is considered to be a liability-classified award under ASC Topic 718. As a result, the value of this agreement must be re-measured at fair value at each financial statement reporting date, subject to a minimum fair value stipulated in the SAR agreement. The full value of this agreement was expensed in 2006 because Mr. Murray was eligible for retirement and was entitled to keep the award at retirement, and as a result, the award did not have any subsequent service requirements. Subsequent changes in the fair value of this agreement are reflected as compensation expense, until the agreement is ultimately settled in 2016. Expenses allocated to the Company during 2014 associated with this award totaled $15. The Company did not recognize any compensation expense related to this award during either 2013 or 2012 because the fair value of the award did not exceed the floor amount in the agreement.