Stock based Compensation

12 Months Ended

Dec. 31, 2014

(11) Stock-Based Compensation

Our stock-based compensation plan, the 2008 Flexible Incentive Plan, is administered by the Compensation Committee of the Board of Directors. We currently have restricted stock awards, restricted stock units and stock options outstanding under this plan. Each restricted stock award and unit entitles the recipient to one share or equivalent unit of our common stock. Outstanding restricted stock awards and units vest over a period of up to five years, which is the requisite service period. Each option granted under the plan may be used to purchase one share of our common stock. Outstanding options vest over a period of up to five years, which is the requisite service period, and expire six to ten years after the grant date.

In 2013, our stockholders authorized the issuance of up to 2.0 million shares of our common stock under the 2013 Employee Stock Purchase Plan (ESPP). The ESPP encourages share ownership by providing employees the opportunity to purchase HCC common stock at 85% of the closing price of the stock on either the first day or the last day of each six-month offering period (whichever is lower). Employees can invest between 1% and 15% of their base salary, subject to a maximum of the lesser of 1,500 shares in each offering period or $25,000 in each calendar year. We issued 0.1 million shares of common stock during 2014 upon completion of the first two ESPP offering periods. We recognize expense related to the ESPP over each offering period. The expense includes the 15% discount and the fair value of the “look-back” option calculated using a Black-Scholes option pricing model.

The consolidated statements of earnings reflect total stock-based compensation expense of $25.1 million, $16.2 million and $13.2 million in 2014, 2013 and 2012, respectively. The total tax benefit recognized in earnings from stock-based compensation arrangements was $8.8 million, $5.7 million and $4.6 million in 2014, 2013 and 2012, respectively. At December 31, 2014, there was approximately $29.3 million of total unrecognized compensation expense related to unvested restricted stock awards and units, options and our employee stock purchase plan that is expected to be recognized over a weighted-average period of 1.6 years. At December 31, 2014, 3.7 million shares of our common stock were authorized and reserved for the exercise of options and release of restricted stock units, of which 0.9 million shares were reserved for awards previously granted and 2.8 million shares were reserved for future issuance.

Restricted Stock

We measure the fair value of our restricted stock awards and units based on the closing price of our common stock on the grant date and expense that value on a straight-line basis over the vesting period.

Certain awards of restricted stock and restricted stock units contain a performance condition based on the ultimate results for the applicable underwriting year. The number of such shares that vest could be higher or lower than initially granted. We measure fair value for these awards based on the closing price of our common stock on the grant date, and we recognize expense on a straight-line basis over the vesting period for those restricted stock awards or units expected to vest. These awards earn dividends or dividend equivalents during the vesting period.

Beginning in 2013, certain of our executive officers were granted performance-based restricted stock. This restricted stock vests after three years and can vest from 0% to 200% of the initial shares granted. Vesting is based equally on an operating return on equity performance factor (ROE factor) and a total shareholder return performance factor (TSR factor). The ROE factor is calculated by comparing our actual results over the three-year period to an internal target, whereas the TSR factor is calculated by comparing our TSR over the three-year period to that of nine peer companies. The ROE factor qualifies as a performance condition and those awards are accounted for in the same manner as the other restricted stock grants described above. The TSR factor qualifies as a market condition, and we determine the fair value at grant date using a Monte Carlo simulation model that takes into account the probabilities of numerous outcomes of our TSR as well as that of the peer companies. This fair value is expensed on a straight-line basis over the vesting period and is not adjusted for the ultimate number of shares to vest. No dividends are earned during the vesting period on these shares.

The fair value of restricted stock awards that vested during 2014, 2013 and 2012 was $13.0 million, $14.4 million and $10.9 million, respectively. The fair value of restricted stock units that vested during 2014, 2013 and 2012 was $0.4 million, $1.6 million and $2.6 million, respectively.

The following table details activity for our restricted stock awards and units during 2014.

			Weighted-		Weighted-
			average		average		Aggregate
	Number		grant date		contractual		intrinsic
	of shares		fair value		life		value
Restricted Stock Awards

Outstanding, beginning of year		1,437	$	32.91
Awarded		398		44.73
Vested		(271)		28.30
Forfeited		(6)		40.70
Outstanding, end of year		1,558		36.70		1.6 years	$	83,383

Restricted Stock Units

Outstanding, beginning of year		135	$	33.91
Awarded		13		45.17
Vested		(9)		28.41
Outstanding, end of year		139		35.31		1.1 years	$	7,457
Expected to vest, end of year		132				1.0 years		7,069

Stock Options

The table below shows the weighted-average fair value of options granted and the related weighted-average assumptions used in the Black-Scholes model, which we use to determine the fair value of an option on its grant date. We expense the fair value on a straight-line basis over the option’s vesting period. The risk-free interest rate is based on the U.S. Treasury rate that most closely approximates each option’s expected term. We based our expected volatility on the historical volatility of our stock over a period matching each option’s expected term. Our dividend yield is based on an average of our historical dividend payments divided by the stock price. We used historical exercise patterns by grant type to estimate the expected option life.

	2014			2013			2012

Fair value of options granted	$	6.51		$	7.17		$	7.89
Risk free interest rate		1.4	%		1.0	%		1.1	%
Expected volatility		18.4	%		23.0	%		31.4	%
Expected dividend yield		2.1	%		1.8	%		2.1	%
Expected option life		4.1 years			4.9 years			6.6 years

The following table details our stock option activity during 2014.

			Weighted-		Weighted-
			average		average		Aggregate
	Number		exercise		contractual		intrinsic
	of shares		price		life		value

Outstanding, beginning of year		1,293	$	29.50
Granted		10		52.51
Exercised		(461)		25.66
Forfeited and expired		(40)		37.28
Outstanding, end of year		802		31.61		4.2 years	$	17,575
Vested or expected to vest, end of year		771		31.49		4.2 years		16,983
Exercisable, end of year		311		29.26		3.7 years		7,554

The aggregate intrinsic value (the amount by which the fair value of the underlying stock exceeds the exercise price) of options exercised during 2014, 2013 and 2012 was $10.1 million, $5.6 million and $10.2 million, respectively. Exercise of options during 2014, 2013 and 2012 resulted in cash receipts of $11.8 million, $10.3 million and $60.0 million, respectively. The tax benefits realized from stock options exercised during 2014, 2013 and 2012 were $3.5 million, $2.0 million and $3.7 million, respectively.

Common Stock Grants

In 2012 and 2013, we granted fully-vested common stock valued at $80,000 to each non-management director as part of their annual compensation for serving on our Board of Directors. Beginning in 2014, we granted fully-vested common stock valued at $110,000 to each non-management director. New directors were granted a pro-rata portion of the value for the applicable year based on the date they joined the Board. Two directors who had previously deferred their annual grants under a deferred compensation plan retired in 2014. Upon retirement, additional shares valued at $323,000, representing the increase in value of the deferred amounts, were issued to the former directors. We also granted $200,000 of fully vested common stock to the chairman of our Board in each of the past three years. The number of shares granted was based on our closing stock price on the grant date, which was either the day of the Annual Meeting of Shareholders, the day the director joined the Board or the date the values in the deferred compensation plan were paid.

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

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