The Hartford 2009 Annual Report Download - page 233

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-84
18. Stock Compensation Plans (continued)
Stock Option Awards
Under the 2005 Stock Plan, options granted generally 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.
The valuation model incorporates ranges of assumptions for inputs, and therefore, those ranges are disclosed below. The term structure
of volatility is generally 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,
2009 2008 2007
Expected dividend yield 3.2% 2.9% 2.0%
Expected annualized spot volatility 57.8% - 57.8% 37.0% - 32.2% 21.0% - 31.3%
Weighted average annualized volatility 57.8% 33.3% 29.0%
Risk-free spot rate 0.3% - 4.2% 2.0% - 5.0% 4.4% - 5.2%
Expected term 7.3 years 8 years 8 years
A summary of the status of non-qualified stock options included in the Company’ s Stock Plan as of December 31, 2009 and changes
during the year ended December 31, 2009 is presented below:
Number of Options
(in thousands)
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic Value
Outstanding at beginning of year 5,829 $ 60.43 3.8 $ —
Granted 1,411 7.04
Exercised — —
Forfeited (719) 57.82
Expired (52) 52.02
Outstanding at end of year 6,469 49.76 3.8 —
Exercisable at end of year 5,203 $ 57.05 2.6 —
Weighted average fair value of options granted $3.06
The weighted average grant-date fair value of options granted during the years ended December 31, 2009, 2008 and 2007 was $3.06,
$21.57 and $31.43, respectively. The total intrinsic value of options exercised during the years ended December 31, 2009, 2008 and
2007 was zero, $4, and $114, respectively.