Travelers 2013 Annual Report Download - page 240

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. SHARE-BASED INCENTIVE COMPENSATION (Continued)
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. As of December 31, 2012, there were no longer any options eligible
for reload.
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 were exercisable for the remaining term of the original option
and therefore generally had a shorter expected term. Beginning in April 2010, due to the Company
having attained sufficient history with respect to changes in its stock prices over time, the expected
volatility assumption is based on the historical volatility of the Company’s common stock for the same
period as the estimated option term based on the mid-month of the option grant. Prior to April 2010,
the expected volatility was based on the average historical volatility of the common stock of an industry
peer group of entities due to the limited Company stock history. 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
were subject to either a one-year or two-year restriction on sale. A discount, as measured by the
estimated cost of protecting against changes in market value - 5% for one-year sales restrictions and
10% for two-year sales restrictions - had 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, 2013, 2012 and 2011:
2013 Original Grants
Expected term of stock options .............. 6 years
Expected volatility of the Company’s stock ...... 28.7% - 28.8%
Weighted average volatility .................. 28.8%
Expected annual dividend per share ........... $1.84
Risk-free rate ........................... 1.11% - 1.14%
2012 Original Grants Reload Grants
Expected term of stock options .............. 6 years 1 year
Expected volatility of the Company’s stock ...... 28.5% - 28.6% 22.9% - 23.5%
Weighted average volatility .................. 28.6% 23.4%
Expected annual dividend per share ........... $1.64 - $1.84 $1.64 - $1.84
Risk-free rate ........................... 1.02% - 1.17% 0.10% - 0.17%
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