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 in 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. During 2014, Employers Mutual also began purchasing common stock from the Company to fulfill its obligations under its employee stock purchase plan (previously the shares needed for this were purchased in 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 2,250,000 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 3,000,000 shares have been reserved for issuance under the 2007 Employers Mutual Casualty Company Stock Incentive Plan (2007 Plan).

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 Senior Executive 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 of restricted stock receive compensation income equal to the amount of any dividends declared on the common stock.

The Senior Executive Compensation Committee of Employers Mutual’s Board of Directors 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 $500,000 ($325,000 net of tax), $357,000 ($233,000 net of tax) and $289,000 ($190,000 net of tax) in 2015, 2014 and 2013, respectively.

A summary of the stock option activity under Employers Mutual’s stock plans for 2015, 2014 and 2013 is as follows:



	Year ended December 31,
	2015				2014				2013
	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	1,351,802		$	14.89	1,702,938		$	14.78	2,383,578		$	14.59
Exercised	(323,486	)	14.86		(300,479	)	14.24		(609,808	)	14.18
Expired	(20,850	)	14.11		(34,421	)	15.01		(70,832	)	13.57
Forfeited	(1,295	)	14.68		(16,236	)	15.29		—		—
Outstanding, end of year	1,006,171		$	14.92	1,351,802		$	14.89	1,702,938		$	14.78

Exercisable, end of year	824,365		$	14.95	963,831		$	14.94	1,036,650		$	14.91

At December 31, 2015, 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 $71,000, with a 0.82 year weighted-average period over which the compensation expense is expected to be recognized.

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. At December 31, 2015, 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 $983,000, with a 2.52 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 2015, 2014 and 2013 is as follows:



	Year ended December 31,
	2015				2014				2013
	Number of awards		Weighted- average grant-date fair value		Number of awards		Weighted- average grant-date fair value		Number of awards		Weighted- average grant-date fair value
Non-vested, beginning of year	155,864		$	19.21	85,002		$	17.27	—		$	—
Granted	117,146		21.36		94,146		20.49		86,580		17.27
Vested	(40,941	)	18.99		(21,223	)	17.27		—		—
Forfeited	(15,125	)	19.35		(2,061	)	17.74		(1,578	)	17.27
Non-vested, end of year	216,944		$	20.40	155,864		$	19.21	85,002		$	17.27

The Company’s portion of the total intrinsic value of options exercised under Employers Mutual’s stock plans was $770,000, $606,000 and $844,000 in 2015, 2014 and 2013, 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 was $233,000 and $110,000 in 2015 and 2014, respectively (no restricted stock awards vested prior to 2014). Additional information relating to options outstanding and options vested (exercisable) at December 31, 2015 is as follows:



	December 31, 2015
($ in thousands)	Number of options	Weighted-average exercise price		Aggregate intrinsic value		Weighted-average remaining term
Options outstanding	1,006,171	$	14.92	$	10,836	3.96
Options exercisable	824,365	$	14.95	$	8,850	3.55

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 $121,000, $152,000 and $165,000 in 2015, 2014 and 2013, 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 $95,000, $103,000 and $96,000 as the Company’s portion in 2015, 2014 and 2013, 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 750,000 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 Directors of Employers Mutual, which 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 $59,000, $35,000 and $45,000 in 2015, 2014 and 2013, respectively.

During 2015, shares were purchased under the plan at prices ranging from $18.75 to $21.40. Activity under the plan was as follows:



	Year ended December 31,
	2015		2014		2013
Shares available for purchase, beginning of year	471,459		508,749		555,600
Shares purchased under the plan	(56,576	)	(37,290	)	(46,851	)
Shares available for purchase, end of year	414,883		471,459		508,749

Non-Employee Director Stock Purchase Plan

On March 14, 2013, the Company registered 300,000 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 222,306 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 $62,000, $49,000 and $36,000 in 2015, 2014 and 2013, respectively.

During 2015, shares were purchased under the plan at prices ranging from $15.51 to $18.26. Activity under the plan was as follows:



	Year ended December 31,
	2015		2014		2013
Shares available for purchase, beginning of year	279,809		294,248		224,106
Shares registered for use in the 2013 plan	—		—		300,000
Shares deregistered under the 2003 plan	—		—		(222,306	)
Shares purchased under the plan	(15,363	)	(14,439	)	(7,552	)
Shares available for purchase, end of year	264,446		279,809		294,248

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. 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 991,778 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 2015, 2014 or 2013. Activity under the plan was as follows:



	Year ended December 31,
	2015			2014			2013
Shares available for purchase, beginning of year	982,227			988,436			—
Shares registered for use in the plan	—			—			991,778
Shares purchased under the plan	(5,530		)	(6,209		)	(3,342		)
Shares available for purchase, end of year	976,697			982,227			988,436
Lowest purchase price	$	21.02		$	18.69		$	18.74
Highest purchase price	$	26.43		$	23.59		$	20.98

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 2015 and 2014 associated with this award totaled $(7,000) and $15,000, respectively. The Company recognized no compensation expense related to this award during 2013 because the fair value of the award did not exceed the floor amount in the agreement.