AIG 2008 Annual Report Download - page 306

The following weighted-average assumptions were used for stock options granted:
2008 2007 2006
Expected annual dividend yield(a) .......................... 3.77% 1.39% 0.92%
Expected volatility(b) .................................... 53.27% 32.82% 23.50%
Risk-free interest rate(c) .................................. 4.43% 4.08% 4.61%
Expected term(d) ....................................... 4 years 7 years 7 years
(a) The dividend yield is determined at the grant date.
(b) In 2008, expected volatility is the average of historical volatility (based on seven years of daily stock price
changes) and the implied volatility of actively traded options on AIG shares.
(c) The interest rate curves used in the valuation model were the U.S. Treasury STRIP rates with terms from
3 months to 10 years.
(d) In 2008, the expected term is 4 years based on the average time to exercise derived from the output of the
valuation model. In 2007 and 2006, the contractual term of the option was generally 10 years with an expected
term of 7 years calculated based on an analysis of historical employee and executive exercise behavior and
employee turnover (post-vesting terminations). The early exercise rate is a function of time elapsed since the
grant. Fifteen years of historical data were used to estimate the early exercise rate.
Additional information with respect to AIG’s stock option plans is as follows:
As of or for the Year Ended December 31, 2008 Shares
Weighted Average
Exercise Price
Weighted
Average
Remaining
Contractual
Life
Aggregate
Intrinsic Values
(In millions)
Options:
Outstanding at beginning of year ....... 36,363,769 $63.83 $59
Granted ........................ 1,144,000 23.52 —
Exercised ...................... (336,422) 48.59 2
Forfeited or expired . . ............. (2,905,712) 58.60 —
Outstanding at end of year ........... 34,265,635 $63.08 4.18 $—
Options exercisable at end of year ...... 30,269,601 $64.63 3.61 $—
Weighted average fair value per share of
options granted .................. $10.61
Vested and expected-to-vest options at December 31, 2008, included in the table above, totaled 32,962,793,
with a weighted average exercise price of $64.46, a weighted average contractual life of 3.91 years and a zero
aggregate intrinsic value.
At December 31, 2008, total unrecognized compensation cost (net of expected forfeitures) was $48 million
with a blended weighted average period of 1.09 years. The cost of awards outstanding under these plans at
December 31, 2008 is expected to be recognized over approximately three years.
The intrinsic value of options exercised during 2008, 2007 and 2006 was approximately $2 million,
$360 million, and $215 million, respectively. The grant date fair value of options vesting during 2008, 2007
and 2006 was approximately $67 million, $63 million and $97 million, respectively. AIG received $16 million,
$482 million and $104 million in cash during 2008, 2007 and 2006, respectively, from the exercise of stock options.
The tax benefits realized as a result of stock option exercises were $0.5 million, $16 million and $35 million in 2008,
2007 and 2006, respectively. The weighted average grant date fair values of options granted was $10.61, $20.97 and
$23.41 in 2008, 2007 and 2006, respectively.
300 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)