On May 16, 2017, our stockholders approved the Arthur J. Gallagher & Co. 2017 Long-Term Incentive Plan (which we refer to as the LTIP), which replaced our previous stockholder-approved Arthur J. Gallagher & Co. 2014 Long-Term Incentive Plan (which we refer to as the 2014 LTIP). The LTIP term began May 16, 2017 and terminates on the date of the annual meeting of stockholders in 2027, unless terminated earlier by our board of directors. All of our officers, employees and

non-employee

directors are eligible to receive awards under the LTIP. The compensation committee of our board of directors determines the annual number of shares delivered under the LTIP. The LTIP provides for

non-qualified

and incentive stock options, stock appreciation rights, restricted stock and restricted stock units, any or all of which may be made contingent upon the achievement of performance criteria.

Shares of our common stock available for issuance under the LTIP include authorized and unissued shares of common stock or authorized and issued shares of common stock reacquired and held as treasury shares or otherwise, or a combination thereof. The number of available shares will be reduced by the aggregate number of shares that become subject to outstanding awards granted under the LTIP. To the extent that shares subject to an outstanding award granted under either the LTIP or prior equity plans are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or by reason of the settlement of such award in cash, then such shares will again be available for grant under the LTIP.

The maximum number of shares available under the LTIP for restricted stock, restricted stock unit awards and performance unit awards settled with stock (i.e., all awards other than stock options and stock appreciation rights) is 2.8 million at September 30, 2019.

The LTIP provides for the grant of stock options, which may be either

tax-qualified

incentive stock options or

non-qualified

options and stock appreciation rights. The compensation committee determines the period for the exercise of a

non-qualified

stock option,

tax-qualified

incentive stock option or stock appreciation right, provided that no option can be exercised later than

seven years after its date of grant. The exercise price of a

non-qualified

stock option or

tax-qualified

incentive stock option and the base price of a stock appreciation right cannot be less than 100% of the fair market value of a share of our common stock on the date of grant, provided that the base price of a stock appreciation right granted in tandem with an option will be the exercise price of the related option.

Upon exercise, the option exercise price may be paid in cash, by the delivery of previously owned shares of our common stock, through a

net-exercise

arrangement, or through a broker-assisted cashless exercise arrangement. The compensation committee determines all of the terms relating to the exercise, cancellation or other disposition of an option or stock appreciation right upon a termination of employment, whether by reason of disability, retirement, death or any other reason. Stock option and stock appreciation right awards under the LTIP are

non-transferable.

On March 14, 2019, the compensation committee granted 1,283,300 options under the LTIP to our officers and key employees that become exercisable at the rate of 34%, 33% and 33% on the anniversary date of the grant in 2022, 2023 and 2024, respectively. On March 15, 2018, the compensation committee granted 1,261,000 options under the LTIP to our officers and key employees that become exercisable at the rate of 34%, 33% and 33% on the anniversary date of the grant in 2021, 2022 and 2023, respectively. The 2019 and 2018 options expire seven years from the date of grant, or earlier in the event of certain terminations of employment. For our executive officers age 55 or older, stock options awarded after 2012 are no longer subject to forfeiture upon such officers’ departure from the company after two years from the date of grant.

During the three-month periods ended September 30, 2019 and 2018, we recognized $3.4 million and $3.7 million, respectively, of compensation expense related to our stock option grants. During the nine-month periods ended September 30, 2019 and 2018, we recognized $10.5 million and $10.1 million, respectively, of compensation expense related to our stock option grants.

For purposes of expense recognition, the estimated fair values of the stock option grants are amortized to expense over the options’ vesting period. We estimated the fair value of stock options at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:


	2019			2018
Expected dividend yield		1.7	%		2.3	%
Expected risk-free interest rate		2.5	%		2.7	%
Volatility		15.6	%		15.1	%
Expected life (in years)		5.5			5.5

Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. The weighted average fair value per option for all options granted during the nine-month periods ended September 30, 2019 and 2018, as determined on the grant date using the Black-Scholes option pricing model, was $10.71 and $9.27, respectively.

The following is a summary of our stock option activity and related information for 2019 (in millions, except exercise price and year data):


	Nine-month period ended September 30, 2019
	Shares Under Option			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Beginning balance		8.8		$	50.16
Granted		1.3			79.59
Exercised		(1.5	)		42.60
Forfeited or canceled		(0.2	)		56.16

Ending balance		8.4		$	55.92		3.90	$	281.0

Exercisable at end of period		2.4		$	44.92		2.00	$	106.3

Ending unvested and expected to vest		5.8		$	59.74		4.61	$	170.2

Options with respect to 13.2 million shares (less any shares of restricted stock issued under the

LTIP - see

Note

to these unaudited consolidated financial statements) were available for grant under the LTIP at September

2019

The total intrinsic value of options exercised during the nine-month periods ended September 30, 2019 and 2018 was $60.9 million and $47.2 million, respectively. As of September 30, 2019, we had approximately $32.2 million of total unrecognized compensation expense related to nonvested options. We expect to recognize that cost over a weighted average period of approximately four years.

Other information regarding stock options outstanding and exercisable at September 30, 2019 is summarized as follows (in millions, except exercise price and year data):


					Options Outstanding						Options Exercisable
							Weighted
							Average
							Remaining		Weighted				Weighted
							Contractual		Average				Average
					Number		Term		Exercise		Number		Exercise
Range of Exercise Prices					Outstanding		(in years)		Price		Exercisable		Price
$	39.17	—	$	39.17		0.4		0.45	$	39.17		0.3	$	39.17
	43.71	—		43.71		1.9		3.46		43.71		0.5		43.71
	46.17	—		46.87		2.1		2.03		46.46		1.6		46.56
	47.92			63.60		1.5		4.46		56.81		—		—
	70.74	—		70.74		1.2		5.46		70.74		—		—
	79.59	—		79.59		1.3		6.46		79.59		—		—

$	39.17	—	$	79.59		8.4		3.90	$	55.92		2.4	$	44.92