Health Net 2014 Annual Report Download - page 150

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-40
using the income approach based on discounted cash flows. We estimate our non-recurring Level 3 assets held for sale
based on a combination of the discounted total consideration expected to be received in connection with the services
and asset sale agreements, income approach based on a discounted cash flow methodology, and replacement cost
methodology.
The significant unobservable inputs used in the fair value measurement of our embedded contractual derivative
are the estimated growth in Health Net health care expenditures and the estimated growth in national health care
expenditures. Significant increases (decreases) in the estimated growth in Health Net health care expenditures or
decreases (increases) in the estimated growth in national health expenditures would result in a significantly lower
(higher) fair value measurement. The significant unobservable input used in the fair value measurement of our state-
sponsored health plans settlement account deficit asset is our discount rate. Significant increases (decreases) in the
discount rate would result in a significantly lower (higher) fair value measurement.
Note 8—Long-Term Equity Compensation
For the year ended December 31, 2014 the compensation cost that has been charged against income under our
various stock option and long-term incentive plans ("the Plans") was $28.3 million. The total income tax benefit
recognized in the income statement for share-based compensation arrangements was $10.9 million (See Note 2).
Stock options and other equity awards, including but not limited to restricted stock, restricted stock units
("RSUs") and performance share units ("PSUs") have been granted to certain employees, officers and non-employee
directors under the Plans. The grant of a single RSU or PSU under our 2006 Long-Term Incentive Plan reduces the
number of shares of common stock available for issuance under that plan by 1.75 shares of common stock. RSUs and
PSUs granted under that plan prior to May 21, 2009 reduce the number of shares of common stock available for
issuance under the 2006 Long-Term Incentive Plan by two shares of common stock for each award. The grant of an
option under the 2006 Long-Term Incentive Plan reduces the number of shares of common stock available for issuance
under that plan by one share of common stock.
Stock options are granted with an exercise price at or above the fair market value of the Company’s common
stock on the date of grant. Effective May 21, 2009, stock option grants carry a maximum term of seven years, and, in
general, stock options and other equity awards vest based on one to four years of continuous service. Stock option
grants made prior to May 21, 2009 carry a maximum term of ten years. As of December 31, 2014, there were no
outstanding options or awards that had market or performance condition accelerated vesting provisions. Certain stock
options and other equity awards provide for accelerated vesting upon the occurrence of a change in control (as defined
in the Plans) under the circumstances set forth in the Plans and equity award agreements. At the end of the maximum
term, unexercised stock options are set to expire.
PSUs were granted in 2014. These PSUs have a one-year performance period. Vesting of these PSUs is subject to
the recipient's continued employment and these PSUs are earned at 0% or 100% with vesting beginning no earlier than
one year after the grant date. The number of shares, if any, to be delivered in connection with these PSUs is dependent
upon the Company’s satisfaction of certain performance criteria as outlined in each PSU award agreement.
As of December 31, 2014, we have reserved up to an aggregate of 6.5 million shares of our common stock for
issuance under the Plans.
The fair value of each option award is estimated on the date of grant using a closed-form option valuation model
("Black-Scholes") based on assumptions, including the risk-free interest rate, expected option term or life, expected
volatility, and expected dividend yield, if any. Expected volatilities are based on implied volatilities from traded options
on our stock and historical volatility of our stock. We estimated the expected term of options by using historical data to
estimate option exercise and employee termination within a lattice-based valuation model. Separate groups of
employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected
term of options granted is derived from a lattice-based option valuation model and represents the period of time that
options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is
based on the U.S. Treasury Strip yields in effect at the time of grant with maturity dates approximately equal to the
expected life of the option at the grant date.