Stock Based Compensation

9 Months Ended

Sep. 30, 2022

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Stock Based Compensation

5. 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 3,237,225 awards under the 2015 LTIP, including 336,805 thus far in 2022.

Compensation expense is based on the probable number of awards expected to vest. The total compensation expense related to equity awards was $2.4 million and $6.2 million in the three and nine-month periods ended September 30, 2022, respectively, compared to $1.6 million and $4.8 million, respectively, for the same period in 2021. The total income tax benefit was $0.4 million and $1.0 million for the three and nine-month periods ended September 30, 2022, compared to $0.2 million and $0.7 million, respectively, for the same period in 2021. Total unrecognized compensation expense relating to outstanding and unvested awards was $8.2 million, which will be recognized over the weighted average vesting period of 2.23 years.

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 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 nine-month period ended September 30, 2022:

				Weighted	Aggregate
		Weighted		Average	Intrinsic
		Average		Remaining	Value
	Options	Exercise Price		Contractual Life	(in 000’s)
Outstanding options at January 1, 2022	1,669,325	$	78.63
Options granted	320,100		115.27
Options exercised	(98,967)		59.98
Options canceled/forfeited	(9,485)		93.40
Outstanding options at September 30, 2022	1,880,973	$	85.78	4.86	$	37,402
Exercisable options at September 30, 2022	960,605	$	71.37	3.48	$	30,181

The intrinsic value, which is the difference between the fair value and the exercise price, of options exercised was $5.5 million and $8.4 million during the first nine months of 2022 and 2021, respectively.

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 September 30:

	2022			2021
Weighted-average fair value of grants	$	20.99		$	17.01
Risk-free interest rates		2.86	%		0.70	%
Dividend yield		2.50	%		2.06	%
Expected volatility		22.89	%		22.73	%
Expected option life		5.06	years		4.97	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 units are granted. For employees, these units generally have a three-year cliff vesting, but have an accelerated vesting feature for participants who are retirement eligible, defined by the plan as those individuals whose age and years of service equals 75. For directors, these units vest on the earlier of one year from the date of grant or the next annual shareholders meeting. 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. The total fair value of restricted stock units that vested was $2.5 million and $2.2 million during the first nine months of 2022 and 2021, respectively.

		Weighted
		Average
		Grant Date
	RSUs	Fair Value
Nonvested at January 1, 2022	45,068	$	97.67
Granted	16,705		116.60
Reinvested	291		108.78
Vested	(21,380)		93.07
Forfeited	(1,291)		76.82
Nonvested at September 30, 2022	39,393	$	108.25