Humana 2012 Annual Report Download - page 124

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Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The weighted-average fair value of each option granted during 2012, 2011, and 2010 is provided below. The
fair value was estimated on the date of grant using the Black-Scholes pricing model with the weighted-average
assumptions indicated below:
2012 2011 2010
Weighted-average fair value at grant date ........................ $30.15 $28.29 $19.58
Expected option life (years) ................................... 4.4 4.8 5.2
Expected volatility .......................................... 46.3% 46.8% 43.8%
Risk-free interest rate at grant date ............................. 0.8% 1.7% 2.7%
Dividend yield (1) .......................................... 1.2% 0.5% None
(1) As discussed in Note 14, in April 2011, our Board of Directors approved the initiation of a quarterly cash
dividend policy.
When valuing employee stock options, we stratify the employee population into three homogenous groups
that historically have exhibited similar exercise behaviors. These groups are executive officers, directors, and all
other employees. We value the stock options based on the unique assumptions for each of these employee
groups.
We calculate the expected term for our employee stock options based on historical employee exercise
behavior and base the risk-free interest rate on a traded zero-coupon U.S. Treasury bond with a term substantially
equal to the option’s expected term.
The volatility used to value employee stock options is based on historical volatility. We calculate historical
volatility using a simple-average calculation methodology based on daily price intervals as measured over the
expected term of the option.
Activity for our option plans was as follows for the year ended December 31, 2012:
Shares Under
Option
Weighted-Average
Exercise Price
(shares in thousands)
Options outstanding at December 31, 2011 .............................. 3,144 $53.60
Granted ...................................................... 384 85.84
Exercised ..................................................... (1,227) 48.93
Cancelled ..................................................... (9) 70.24
Forfeited ..................................................... (59) 51.98
Options outstanding at December 31, 2012 .............................. 2,233 $61.68
Options exercisable at December 31, 2012 .............................. 1,189 $57.12
As of December 31, 2012, outstanding stock options, substantially all of which are expected to vest, had an
aggregate intrinsic value of $25 million, and a weighted-average remaining contractual term of 3.7 years. As of
December 31, 2012, exercisable stock options had an aggregate intrinsic value of $15 million, and a weighted-
average remaining contractual term of 2.4 years. The total intrinsic value of stock options exercised during 2012
was $45 million, compared with $88 million during 2011 and $11 million during 2010. Cash received from stock
option exercises totaled $60 million in 2012, $134 million in 2011, and $17 million in 2010.
Total compensation expense not yet recognized related to nonvested options was $9 million at
December 31, 2012. We expect to recognize this compensation expense over a weighted-average period of
approximately 1.8 years.
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