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 awarded 2,576,867 stock options and restricted stock units under the 2015 LTIP.

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 nine-month periods ended September 30, 2020 and 2019:

						Weighted
				Weighted		Average		Aggregate
	Number of			Average		Remaining		Intrinsic
	Options			Exercise		Contractual		Value
	Outstanding			Price		Life		(in 000’s)
Outstanding options at January 1, 2020		1,667,290		$	62.52
Options granted		275,977			93.39
Options exercised		(177,045	)		49.13			$	7,639
Options canceled/forfeited		(6,410	)		73.42
Outstanding options at September 30, 2020		1,759,812		$	68.67		5.14	$	29,740
Exercisable options at September 30, 2020		807,570		$	59.03		3.82	$	20,054

						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		324,525			81.27
Options exercised		(493,615	)		45.61			$	18,157
Options canceled/forfeited		(59,050	)		60.92
Outstanding options at September 30, 2019		1,736,740		$	61.52		5.43	$	54,515
Exercisable options at September 30, 2019		622,290		$	52.78		4.03	$	24,975

Through 2019, the majority of our annual stock option grants were authorized at our regular board meeting in May. In addition, quarterly grants to certain retirement eligible employees were historically authorized at the May meeting. Since stock option grants to retirement eligible employees are fully expensed when issued, the approach allowed for a more even expense distribution throughout the year. In 2020, the annual stock option grants and quarterly grants to retirement eligible employees were authorized at the August board meeting to allow the Company additional time to assess the financial impact of the COVID-19 pandemic.

In the first nine months of 2020, 275,977 stock options were granted with a weighted average exercise price of $93.39 and a weighted average fair value of $13.33. We recognized $1.3 million of expense in the third quarter of 2020 and $2.8 million in the first nine months of 2020 related to options vesting. Since options granted under our 2015 LTIP are non-qualified, we recorded a tax benefit of $0.3 million in the third quarter of 2020 and $0.6 million in the first nine months of 2020 related to this compensation expense. Total unrecognized compensation expense relating to outstanding and unvested options was $5.6 million, which will be recognized over the remainder of the vesting period. Comparatively, we recognized $1.2 million of compensation expense in the third quarter of 2019 and $3.6 million in the first nine months of 2019. We recorded a tax benefit of $0.2 million in the third quarter of 2019 and $0.7 million in the first nine months of 2019 related to this compensation expense.

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:

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.

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. 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. 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. RSUs are generally granted at our regular board meeting in May, but were granted at the August board meeting in 2020 to allow the Company additional time to assess the financial impact of the COVID-19 pandemic.

As of September 30, 2020, 58,420 RSUs have been granted to employees under the 2015 LTIP and 41,826 remain outstanding. We recognized $0.2 million of expense on these units in the third quarter of 2020 and $0.5 million in the first nine months of 2020. Total unrecognized compensation expense relating to outstanding and unvested RSUs was $1.6 million, which will be recognized over the remainder of the vesting period. Comparatively, we recognized $0.3 million in the third quarter of 2019 and $0.6 million in the first nine months of 2019.

In 2020 and 2019, each outside director was granted a whole number of RSUs with a fair market value corresponding to $50,000 on the date of grant as part of annual director compensation. Director RSUs vest on the earlier of one year from the date of grant or the next annual shareholders meeting. As of September 30, 2020, 20,445 restricted stock units have been granted to directors under the 2015 LTIP and 5,375 remain outstanding. We recognized $0.1 million of compensation expense on these units in the third quarter of 2020 and $0.2 million in the first nine months of 2020. Comparatively, we recognized $0.1 million of compensation expense on these units in the third quarter of 2019 and $0.5 million in the first nine months of 2019.