6. STOCK BASED COMPENSATION

Our RLI Corp. Long-Term Incentive Plan (2010 LTIP) was in place from 2010 to 2015. The 2010 LTIP provided for equity-based compensation, including stock options, up to a maximum of 4,000,000 shares of common stock (subject to adjustment for changes in our capitalization and other events). Between 2010 and 2015, we granted 2,878,000 stock options under the 2010 LTIP. The 2010 LTIP was replaced in 2015.

In 2015, our shareholders approved the 2015 RLI Corp. Long-Term Incentive Plan (2015 LTIP), which provides for equity-based compensation and replaced the 2010 LTIP. In conjunction with the adoption of the 2015 LTIP, effective May 7, 2015, options were no longer granted under the 2010 LTIP. Awards under the 2015 LTIP may be in the form of restricted stock, restricted stock units, stock options (non-qualified only), stock appreciation rights, performance units as well as other stock-based awards. Eligibility under the 2015 LTIP is limited to employees and directors of the company or any affiliate. The granting of awards under the 2015 LTIP is solely at the discretion of the board of directors. The maximum number of shares of common stock available for distribution under the 2015 LTIP is 4,000,000 shares (subject to adjustment for changes in our capitalization and other events). Since the plan’s approval in 2015, we have granted 1,944,380 awards under the 2015 LTIP, including 40,750 thus far in 2019.

Stock Options

Under the 2015 LTIP, as under the 2010 LTIP, we grant stock options for shares with an exercise price equal to the fair market value of the shares at the date of grant (subject to adjustments for changes in our capitalization, special dividends and other events as set forth in such plans). Options generally vest and become exercisable ratably over a five-year period and expire eight years after grant.

For most participants, the requisite service period and vesting period will be the same. For participants who are retirement eligible, defined by the plan as those individuals whose age and years of service equals 75, the requisite service period is deemed to be met and options are immediately expensed on the date of grant. For participants who will become retirement eligible during the vesting period, the requisite service period over which expense is recognized is the period between the grant date and the attainment of retirement eligibility. Shares issued upon option exercise are newly issued shares.

The following tables summarize option activity for the periods ended March 31, 2019 and 2018:


				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)

Outstanding options at January 1, 2019	1,964,880	$	54.24
Options granted	40,750	$	66.16
Options exercised	(50,580)	$	33.71		$	1,795
Options canceled/forfeited	(19,100)	$	57.28
Outstanding options at March 31, 2019	1,935,950	$	55.00	5.14	$	32,589
Exercisable options at March 31, 2019	702,250	$	47.84	3.73	$	16,794

				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)

Outstanding options at January 1, 2018	2,257,015	$	46.80
Options granted	36,750	$	64.42
Options exercised	(147,370)	$	30.01		$	5,001
Options canceled/forfeited	(4,800)	$	62.55
Outstanding options at March 31, 2018	2,141,595	$	48.22	4.90	$	32,883
Exercisable options at March 31, 2018	853,835	$	40.27	3.32	$	19,834

The majority of our stock options are granted annually at our regular board meeting in May. In addition, options are approved at the May meeting for quarterly grants to certain retirement eligible employees. Since stock option grants to retirement eligible employees are fully expensed when issued, the approach allows for a more even expense distribution throughout the year.

Thus far in 2019, 40,750 stock options were granted with a weighted average exercise price of $66.16 and a weighted average fair value of $11.35. We recognized $1.0 million of expense in the first quarter of 2019 related to options vesting. Since options granted under our 2010 LTIP and 2015 LTIP are non-qualified, we recorded a tax benefit of $0.2 million in the first quarter of 2019 related to this compensation expense. Total unrecognized compensation expense relating to outstanding and unvested options was $4.9 million, which will be recognized over the remainder of the vesting period. Comparatively, we recognized $1.0 million of compensation expense and a tax benefit of $0.2 million in the first quarter of 2018.

The fair value of options was estimated using a Black-Scholes based option pricing model with the following weighted average grant-date assumptions and weighted average fair values as of March 31:


	2019			2018

Weighted-average fair value of grants	$	11.35		$	9.16
Risk-free interest rates		2.94	%		2.02	%
Dividend yield		2.98	%		3.60	%
Expected volatility		22.84	%		22.93	%
Expected option life		5.11	years		5.13	years

The risk-free rate was determined based on U.S. treasury yields that most closely approximated the option’s expected life. The dividend yield was determined based on the average annualized quarterly dividends paid during the most recent five-year period and incorporated a consideration for special dividends paid in recent history. The expected volatility was calculated based on the median of the rolling volatilities for the expected life of the options. The expected option life was determined based on historical exercise behavior and the assumption that all outstanding options will be exercised at the midpoint of the current date and remaining contractual term, adjusted for the demographics of the current year’s grant.

Restricted Stock Units

In addition to stock options, restricted stock units (RSUs) are granted with a value equal to the closing stock price of the Company’s stock on the dates the shares are granted. Generally, these units have a three-year cliff vesting. When participants terminate employment with the Company after having met the definition of retirement under the 2015 LTIP, defined as those individuals whose age and years of service equals 75, the RSUs will become fully vested. In addition, the RSUs have dividend participation which accrue as additional units and are settled with granted stock units at the end of the vesting period.

As of March 31, 2019, 30,075 RSUs have been granted to employees under the 2015 LTIP and 29,793 remain outstanding. We recognized $0.1 million of expense on these units in the first quarter of 2019. Comparatively, we recognized $0.1 million of expense in the first quarter of 2018. Total unrecognized compensation expense relating to outstanding and unvested RSUs was $0.6 million, which will be recognized over the remainder of the vesting period.

In 2018, each outside director received RSUs with a fair market value of $50,000 on the date of grant as part of annual director compensation. Director RSUs vest one year from the date of grant. As of March 31, 2019, 8,430 restricted stock units have been granted to directors under the 2015 LTIP. Due to dividend participation on RSUs, which accrue as additional units, 8,656 director RSUs were outstanding as of March 31, 2019. We recognized $0.1 million of compensation expense on these units in the first quarter of 2019. Total unrecognized compensation expense relating to outstanding and unvested director RSUs was $0.1 million, which will be recognized over the remainder of the vesting period.