Travelers 2006 Annual Report Download - page 218

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
206
11. SHARE-BASED INCENTIVE COMPENSATION (Continued)
generally have a shorter expected term. The expected volatility is based on the average historical volatility
of the common stock of an industry peer group of entities, due to the limited Company stock history, over
the estimatedoption term based on the mid-month of the option grant. Theexpected dividend is based
upon the Company’s current quarter dividend annualized and assumed to be constant over theexpected
option term. The risk-free interest rate for each option is the interpolated market yield for the mid-month
of the option grant on a U.S. Treasury bill with a term comparable to the expected option term of the
granted stock option. Shares received through optionexercises under the reload program are subject to
restriction on sale. A 10% discount, as measured by the estimated cost of protection, has been applied to
the fair value of reload options granted to reflect these sales restrictions. The following assumptions were
used in estimating the fair value of options on grant date for the year ended December 31, 2006:
Original Grants Reload Grants
Expected term of stock options...................... 5 – 7 years 1 – 4 years
Expected volatility of the Company’s stock............ 22.6% – 32.0%15.9% – 30. 4%
Weighted average volatility......................... 30.3% 18.0 %
Expected annual dividend per share. ................. $0.92 - $1.04 $0.92 - $1.0 4
Risk free rate ..................................... 4.30% – 5.10% 4.30% – 5.17%
The significant assumptions used in estimating the fair value on the date of the grant for original
options and reload options granted in 2005 and 2004 and for the awards assumed on April 1, 2004 from
SPC at the merger were as follows:
2005 2004
Expected life of stock options .....................................6 years 3 years
Expected volatility of the Company’s stock..........................32.0% 32.1%
Risk-free interest rate............................................ 3.96%2.50%
Expectedannual dividend per share. ............................... $ 0.89 $ 0.88
Expected annual forfeiture rate.................................... 5% 5%