STOCK-BASED COMPENSATION

The Company has a stock-based compensation plan for non-employee directors. Employers Mutual also 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's current practice is to purchase common stock from the Company for use in all of its stock plans (including its non-employee director stock purchase plan and its employee stock purchase plan). A portion of the compensation expense recognized by Employers Mutual (as the requisite service period for restricted stock awards/units is rendered) is allocated to the Company’s property and casualty insurance subsidiaries though their participation in the pooling agreement.

Stock Plans

On May 26, 2017, the Company registered 150,000 shares of its common stock for use in the EMC Insurance Group Inc. 2017 Non-Employee Director Stock Plan (the "2017 Director Plan"). The 2017 Director Plan provides for the awarding of non-qualified stock options, restricted stock, restricted stock units and other stock-based awards to the Company's non-employee directors. During 2018 and 2017, 2,800 and 2,000 shares of restricted stock were granted to non-employee directors of the Company under this plan. These shares of restricted stock vest over a one year period. Dividends on the unvested restricted stock are accrued and paid to the directors at the time of vesting.

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 3,000,000 shares of the Company’s common stock have been reserved for issuance under the 2007 Employers Mutual Casualty Company Stock Incentive Plan (2007 Plan), and a total of 1,000,000 shares have been reserved for issuance under the Employers Mutual Casualty Company 2017 Stock Incentive Plan (2017 Plan).

Both of Employers Mutual's plans permit 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 grants can be made under the 2007 Plan due to the expiration of the term of the plan. 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. Awards granted to directors are approved by the Company's Corporate Governance and Nominating Committee.

Options granted under the 2007 Plan generally had 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 could not be less than the fair value of the common stock on the date of grant. 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. With the exception of death, permanent disability or a change in control, any unvested shares of restricted stock are forfeited on termination of employment, including retirement. Holders of unvested shares of restricted stock receive compensation income equal to the amount of any dividends declared on the common stock.

During 2017, Employers Mutual began issuing restricted stock unit awards rather than restricted stock awards. In connection with this change, Employers Mutual now acquires stock to fulfill its obligations to the recipients of the restricted stock unit awards on the date they vest, rather than on the grant date of the awards. Because of this change, an account Employers Mutual established to hold previously granted restricted stock awards until they vest will periodically contain excess shares of the Company's stock stemming from forfeitures and surrenders. During 2018, the Company repurchased 30,523 shares of stock from this unvested restricted stock account at an average cost of $26.30. These repurchased shares are not deemed to be shares repurchased under the Company's stock repurchase program. Like restricted stock awards, restricted stock unit awards generally have a vesting period of four years, with shares vesting in equal annual cumulative increments commencing on the first anniversary of the grant. Upon death, disability or change in control, any granted but unvested restricted stock units become fully vested and settled. Upon qualifying for "Approved Retirement" [attaining 70 points (combined age plus whole years of continuous service) with a minimum age of 55 years, or reaching age 65], restricted stock units will generally become non-forfeitable on a pro-rated basis over the 12 months following the grant date. Settlement of non-forfeitable restricted stock units is deferred until the date on which the restricted stock units would otherwise vest and settle pursuant to the normal four-year vesting schedule. Holders of unvested restricted stock units do not receive compensation income equal to the amount of dividends declared on the common stock.

During 2016, 2,000 shares of restricted stock were granted to non-employee directors of the Company under the 2007 Plan. These shares of restricted stock vest over a period of three years, or upon a director reaching 75 years of age while an active director. The directors are entitled to receive compensation income (equal to the amount of dividends paid on the Company's common stock) earned on unvested shares of restricted stock.

The Company recognized compensation expense from these plans totaling $1.2 million ($949,000 net of tax), $801,000 ($521,000 net of tax) and $788,000 ($512,000 net of tax) in 2018, 2017 and 2016, respectively. Due to the historically small number of forfeitures, the Company has elected to recognize the reduction to compensation expense from forfeitures as they occur.

A summary of the stock option activity under Employers Mutual’s stock plans for 2018, 2017 and 2016 is as follows:



	Year ended December 31,
	2018				2017				2016
	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	406,311		$	14.51	649,012		$	14.65	1,006,171		$	14.92
Exercised	(93,802	)	14.51		(222,921	)	14.88		(321,312	)	15.31
Expired	(30,577	)	14.42		(18,805	)	15.16		(34,947	)	16.32
Forfeited	—		—		(975	)	13.99		(900	)	13.99
Outstanding, end of year	281,932		$	14.52	406,311		$	14.51	649,012		$	14.65

Exercisable, end of year	281,932		$	14.52	406,311		$	14.51	593,224		$	14.72

As discussed above, during 2017 Employers Mutual began issuing restricted stock unit awards to eligible employees. These awards are accounted for as liability-based awards, whereby the liability is remeasured at each reporting date as the average of the high and low trading prices of the Company's common stock on that date. Upon settlement, the Company will receive the full fair value for all shares issued. The Company's share of this liability at December 31, 2018 was $1.2 million. A summary of restricted stock unit awards activity for 2018 and 2017 is as follows:



	Year ended December 31,
	2018	2017
	Number of awards	Number of awards
Non-vested, beginning of year	114,055	—
Granted	120,439	116,288
Vested	28,365	—
Forfeited	3,236	2,233
Non-vested, end of year	202,893	114,055

For restricted stock awards, the average of the high and low trading prices of the Company's common stock on the dates of grant were used to determine their fair values. In 2016, the Company received the full fair value, as of the grant date, for all shares issued in connection with Employers Mutual's grant of restricted stock awards. At December 31, 2018, the Company’s portion of the unrecognized compensation cost associated with restricted stock awards that are not currently vested was $314,000 with a 0.84 year weighted-average period over which the compensation expense is expected to be recognized. The Company's portion of the total fair value of restricted stock awards that vested was $429,000, $545,000 and $414,000 in 2018, 2017 and 2016, respectively. A summary of restricted stock awards activity for 2018, 2017 and 2016 is as follows:



	Year ended December 31,
	2018				2017				2016
	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	144,050		$	22.96	234,281		$	22.31	216,944		$	20.40
Granted	2,800		25.27		2,000		26.95		118,588		24.56
Vested	(63,849	)	22.42		(85,192	)	21.31		(69,057	)	19.98
Forfeited	(15,844	)	22.91		(7,039	)	22.57		(32,194	)	22.73
Non-vested, end of year	67,157		$	23.57	144,050		$	22.96	234,281		$	22.31

The Company’s portion of the total intrinsic value of options exercised under Employers Mutual’s stock plans was $339,000, $901,000 and $1.1 million in 2018, 2017 and 2016, 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. Additional information relating to options outstanding and options vested (exercisable) at December 31, 2018 is as follows:



	December 31, 2018
($ in thousands, except share and per share amounts)	Number of options	Weighted-average exercise price		Aggregate intrinsic value		Weighted-average remaining term
Options outstanding	281,932	$	14.52	$	4,918	2.18
Options exercisable	281,932	$	14.52	$	4,918	2.18

Incentive stock options generally do not generate income tax deductions for the Company. The Company has recorded a deferred income tax benefit for non-qualified stock options and restricted stock awards that have been issued. The Company’s portion of the current income tax deduction realized from exercises of non-qualified stock options was $56,000, $239,000 and $284,000 in 2018, 2017 and 2016, 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), which reduce income tax expense. The income tax benefit that results from disqualifying dispositions of stock purchased through the exercise of incentive stock options is immaterial.

Employee Stock Purchase Plan

On May 30, 2008, the Company registered 750,000 shares of its common stock for use in the Employers Mutual Casualty Company 2008 Employee Stock Purchase Plan. All employees are eligible to participate in the plan, though this plan is currently suspended pending the outcome of Employers Mutual's non-binding indicative proposal to purchase all outstanding shares of the Company. An employee may participate in the plan, when not suspended, 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 $116,000, $100,000 and $78,000 in 2018, 2017 and 2016, respectively.

During 2018, shares were purchased under the plan at prices ranging from $20.90 to $24.70. Activity under the plan was as follows:



	Year ended December 31,
	2018		2017		2016
Shares available for purchase, beginning of year	271,585		349,404		414,883
Shares purchased under the plan	(95,055	)	(77,819	)	(65,479	)
Shares available for purchase, end of year	176,530		271,585		349,404

Non-Employee Director Stock Purchase Plan

On March 14, 2013, the Company registered 300,000 shares of its 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, as well as non-employee directors of the Company, are eligible to participate in the plan, though this plan is currently suspended pending the outcome of Employers Mutual's non-binding indicative proposal to purchase all outstanding shares of the Company. When this plan is not suspended, each eligible director could 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 was authorized 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. Expenses allocated to the Company in connection with this plan totaled $53,000, $65,000 and $84,000 in 2018, 2017 and 2016, respectively.

During 2018, shares were purchased under the plan at prices ranging from $18.95 to $19.99. Activity under the plan was as follows:



	Year ended December 31,
	2018		2017		2016
Shares available for purchase, beginning of year	235,373		249,843		264,446
Shares purchased under the plan	(10,151	)	(14,470	)	(14,603	)
Shares available for purchase, end of year	225,222		235,373		249,843

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.

Employers Mutual did not participate in this plan in 2018, 2017 or 2016. Activity under the plan was as follows:



	Year ended December 31,
	2018			2017			2016
Shares available for purchase, beginning of year	965,801			971,222			976,697
Shares purchased under the plan	(5,301		)	(5,421		)	(5,475		)
Shares available for purchase, end of year	960,500			965,801			971,222
Lowest purchase price	$	23.87		$	26.94		$	22.09
Highest purchase price	$	32.38		$	31.09		$	30.50