THG 2018 Annual Report

STOCK OPTIONS Under the 2014 Stock Plan, options may be granted to eligible employees, directors or consultants at an exercise price equal to the PDUNHW SULFH RI WKH &RPSDQ\¶V FRPPRQ VWRFN RQ WKH GDWH RI JUDQW 2SWLRQ VKDUHV PD\ EH H[HUFLVHG VXEMHFW WR WKH WHUPV SUHVFULE ed by WKH &RPSHQVDWLRQ &RPPLWWHH RI WKH %RDUG RI 'LUHFWRUV WKH ³&RPPLWWHH´ DW WKH WLPH RI JUDQW 2SWLRQV JUDQWHG LQ DQG generally vest over 3 years with 33 1/3% vesting in each year. Options must be exercised not later than ten years from the date of grant. ,QIRUPDWLRQ RQ WKH &RPSDQ\¶V VWRFN RSWLRQV LV VXPPDU ized below. YEARS ENDED DECEMBER 31 2018 2017 2016 (in whole shares and dollars) Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price Outstanding, beginning of year 1,062,177 $ 75.53 1,396,152 $ 68.63 1,619,948 $ 56.57 Granted 301,152 110.98 460,610 90.85 587,340 82.17 Exercised (210,190) 69.41 (464,726) 63.12 (589,666) 48.99 Forfeited or cancelled (54,063) 89.09 (329,859) 85.22 (221,470) 68.61 Outstanding, end of year 1,099,076 $ 85.75 1,062,177 $ 75.53 1,396,152 $ 68.63 Exercisable, end of year 515,286 $ 69.83 423,883 $ 62.41 441,256 $ 53.59 Cash received for options exercised for the years ended December 31, 2018, 2017 and 2016 was $14.3 million, $20.5 million and $15.8 million, respectively. The intrinsic value of options exercised for the years ended December 31, 2018, 2017 and 2016 was $9.6 million, $15.6 million and $21.1 million, respectively. The excess tax expense realized from options exercised for the years ended December 31, 2018, 2017 and 2016 was $1.6 million, $4.0 million, and $5.6 million, respectively. The aggregate intrinsic value at December 31, 2018 for shares outstanding and shares exercisable was $34.1 million and $24.2 million, respectively. At December 31, 2018, the weighted average remaining contractual life for shares outstanding and shares exercisable was 7.5 years and 6.2 years, respectively. Additional information about employee options outstanding and exercisable at December 31, 2018 is included in the following table: Options Outstanding Options Currently Exercisable Range of Exercise Prices Number Weighted Average Remaining Contractual Lives Weighted Average Exercise Price Number Weighted Average Exercise Price $36.81 to $46.47 64,367 3.44 $ 41.61 64,367 $ 41.61 $57.99 93,778 5.14 57.99 93,778 57.99 $70.24 to $72.66 165,924 6.16 70.27 165,924 70.27 $74.88 to $82.74 190,120 7.30 80.75 112,847 80.49 $87.50 to $91.19 285,280 8.20 90.66 78,370 90.89 $110.57 to $124.14 299,607 9.18 110.98 ² ² The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model. For all options granted through December 31, 2018, the exercise price equaled the market price on the grant date. Compensation cost related to options is based upon the grant date fair value and expensed on a straight-line basis over the service period for each separately vesting portion of the option as if the option was, in substance, multiple awards. The weighted average grant date fair value of options granted during the years ended December 31, 2018, 2017 and 2016 was $16.30, $13.05 and $10.83, respectively. The following significant assumptions were used to determine the fair value for options granted in the years indicated. 2018 2017 2016 Dividend yield 1.740% to 1.954% 2.193% to 2.286% 2.04% to 2.46% Expected volatility 17.943% to 18.500% 18.341% to 21.694% 18.08% to 21.31% Weighted average expected volatility 18.20% 19.52% 19.57% Risk-free interest rate 2.365% to 2.969% 1.324% to 2.201% 0.77% to 1.97% Expected term, in years 2.5 to 6.0 2.5 to 6.0 2.5 to 5.5 115 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP