The Hartford 2008 Annual Report Download - page 466

Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Stock Compensation Plans (continued)
Stock Option Awards
Under the 2005 Stock Plan, all options granted have an exercise price equal to the market price of the Company’s common
stock on the date of grant, and an option’s maximum term is ten years. Certain options become exercisable over a three year
period commencing one year from the date of grant, while certain other options become exercisable at the later of three
years from the date of grant or upon specified market appreciation of the Company’s common shares. For any year, no
individual employee may receive an award of options for more than 1,000,000 shares.
The Company uses a hybrid lattice/Monte-Carlo based option valuation model (the “valuation model”) that incorporates the
possibility of early exercise of options into the valuation. The valuation model also incorporates the Company’s historical
termination and exercise experience to determine the option value. For these reasons, the Company believes the valuation
model provides a fair value that is more representative of actual experience than the value calculated under the
Black-Scholes model.
The valuation model incorporates ranges of assumptions for inputs, and therefore, those ranges are disclosed below. The
term structure of volatility is constructed utilizing implied volatilities from exchange-traded options on the Company’s
stock, historical volatility of the Company’s stock and other factors. The Company uses historical data to estimate option
exercise and employee termination within the valuation model, and accommodates variations in employee preference and
risk-tolerance by segregating the grantee pool into a series of behavioral cohorts and conducting a fair valuation for each
cohort individually. The expected term of options granted is derived from the output of the option valuation model and
represents, in a mathematical sense, the period of time that options are expected to be outstanding. The risk-free rate for
periods within the contractual life of the option is based on the U.S. Constant Maturity Treasury yield curve in effect at the
time of grant.
For the year ended December 31,
2008 2007 2006
Expected dividend yield 2.9% 2.0% 1.9%
Expected annualized spot volatility 32.2% - 37.0% 21.0% - 31.3% 20.2% - 32.3%
Weighted average annualized volatility 33.3% 29.0% 28.9%
Risk-free spot rate 2.0% - 5.0% 4.4% - 5.2% 4.4% - 4.6%
Expected term 8 years 8 years 7 years
A summary of the status of non-qualified stock options included in the Company’s Stock Plan as of December 31, 2008 and
changes during the year ended December 31, 2008 is presented below:
Weighted
Average
Weighted Remaining
Number of Options Average Contractual Aggregate
(in thousands) Exercise Price Term Intrinsic Value
Outstanding at beginning of year 6,323 $ 58.76 4.2 $ 180
Granted 431 69.26
Exercised (445) 46.45
Forfeited (49) 94.95
Expired (431) 55.85
Outstanding at end of year 5,829 60.43 3.8 —
Exercisable at end of year 5,006 $ 57.44 3.1 —
Weighted average fair value of
options granted $ 21.57
The weighted average grant-date fair value of options granted during the years ended December 31, 2008, 2007 and 2006
was $21.57 $31.43 and $27.66, respectively. The total intrinsic value of options exercised during the years ended
December 31, 2008, 2007 and 2006 was $4, $114 and $99, respectively.
F-89
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009