Travelers 2008 Annual Report Download - page 235

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. SHARE-BASED INCENTIVE COMPENSATION (Continued)
Period Option granted Option Award Vesting terms
2008, 2007 and 2006 ..... Options vest at end of 3-year period (cliff vest)
April 2004 through 2005 . . Options vest over 4-year period, 50% on 2nd anniversary of the date of
grant, and 25% of the option shares vest on each of the 3rd and
4th anniversaries of the grant date. Certain 2005 special option shares
vest 50% on each of the 4th and 5th anniversaries of the grant date.
Prior to April 2004 ...... Options vest over 4-year period, 25% each year on the anniversary of the
grant date; or options vest over 5-year period, 20% each year on the
anniversary of the grant date.
In addition to the stock option awards described above, certain stock option awards that were
granted under legacy plans permit an employee exercising an option to be granted a new option (a
reload option) at an exercise price equal to the closing price of the Company’s common stock on the
date on which the original option is exercised. The reload option is permitted on certain stock option
awards granted prior to January 2003 at an amount equal to the number of shares of the common
stock used to satisfy both the exercise price and withholding taxes due upon exercise of an option and
vest either six months or one year after the grant date and are exercisable for the remaining term of
the related original option.
The fair value of each option award is estimated on the date of grant by application of a variation
of the Black-Scholes option pricing model using the assumptions noted in the following table. The
expected term of newly granted stock options is the time to vest plus half the remaining time to
expiration. This considers the vesting restriction and represents an even pattern of exercise behavior
over the remaining term. Reload options are exercisable for the remaining term of the original option
and therefore would 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 estimated option term based on the mid-month of the option
grant. The expected dividend is based upon the Company’s current quarter dividend annualized and
assumed to be constant over the expected 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 option
exercises under the reload program are subject to restriction on sale. A 10% discount, as measured by
the estimated cost of protecting against changes in market value, 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 years ended December 31, 2008, 2007 and
2006:
2008 Original Grants Reload Grants
Expected term of stock options ............. 6 - 7 years 1 - 3 years
Expected volatility of the Company’s stock ..... 22.8% - 29.9% 19.1% - 31.4%
Weighted average volatility ................ 23.1% 23.9%
Expected annual dividend per share .......... $1.16 - $1.20 $1.16 - $1.20
Risk-free rate .......................... 2.61% - 3.75% 1.36% - 3.42%
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