Travelers 2003 Annual Report Download - page 138

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136
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCENTIVE PLANS, Continued
The significant assumptions used in estimating the fair value on the date of the grant for original options and
reload options granted in 2003 and 2002 and for replacement awards issued August 20, 2002 to Travelers
employees who held Citigroup stock option awards on that date were as follows:
2003 2002
Ex
p
ected life of stock o
p
tions 3
y
ears 4
y
ears
Expected volatility of TPC stock (1) 29.4% 36.8%
Risk-free interest rate 2.04% 3.17%
Expected annual dividend per TPC share $ 0.26 $ 0.20
Expected annual forfeiture rate 5% 5%
(1) The expected volatility is based on the average volatility of an industry peer group of entities because
Travelers only became publicly traded in March 2002.
In accordance with FAS 123, the exchange of options in conjunction with a spinoff is considered a modification
and therefore the modification guidance was applied to the replacement awards issued on August 20, 2002. For
vested replacement options, any excess of the fair value of the modified options issued over the fair value of the
original options at the date of exchange was recognized as additional compensation cost. For nonvested
replacement options, any excess of the fair value of the modified options issued over the fair value of the original
options at the date of exchange is added to the remaining unrecognized compensation cost of the original option
and recognized over the remaining vesting period.
Under FAS 123, reload options are treated as separate grants from the original grants and as a result are
separately valued when granted. Reload options are exercisable for the remaining term of the related original
option and therefore would generally have a shorter estimated life. Shares received through option exercises
under the reload program are subject to restriction on sale. Discounts (as measured by the estimated cost of
protection) have been applied to the fair value of reload options granted to reflect these sales restrictions.
Awards issued prior to 2002 were granted in Citigroup stock options. The estimated fair value effect of stock
options for 2001 were derived by applying the following significant assumptions underlying the Citigroup stock
option plan.
2001
Ex
p
ected life of stock o
p
tions 3
y
ears
Expected volatility of Citigroup stock 38.6%
Risk-free interest rate 4.52%
Expected annual dividend per Citigroup share $ 0.92
Expected annual forfeiture rate 5%