THG 2018 Annual Report

The expected GLYLGHQG \LHOG LV EDVHG RQ WKH &RPSDQ\¶V GLYLGHQG SD\RXW UDWH V LQ WKH \HDU QRWHG ([SHFWHG YRODWLOLW\ LV EDVHG JHQHUDOO\ RQ WKH &RPSDQ\¶V KLVWRULFDO GDLO\ VWRFN SULFH YRODWLOLW\ 7KH ULVN -free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term of options granted represents the period of time that options are expected to be outstanding and is derived primarily using historical exercise, forfeit and cancellation behavior, along with certain other factors expected to differ from historical data. The fair value of shares that vested during the years ended December 31, 2018 and 2017 was $9.3 million and $8.3 million, respectively. As of December 31, 2018, the Company had unrecognized compensation expense of $3.7 million related to unvested stock options that is expected to be recognized over a weighted average period of 1.5 years. RESTRICTED STOCK UNITS Stock grants may be awarded to eligible employees at a price established by the Committee (which may be zero). Under the 2014 Stock Plan, the Company may award shares of restricted stock, restricted stock units, as well as shares of unrestricted stock. Restricted stock grants may vest based upon performance criteria, market criteria or continued employment and be in the form of shares or units. Vesting periods are established by the Committee. The Company granted market-based restricted share units in 2018, 2017 and 2016. These units generally vest after 3 years of continued employment and after the achievement of certain stock performance targets. The Company also granted time-based restricted stock units to eligible employees in 2018, 2017 and 2016 that generally vest after 3 years of continued employment. The following table summarizes information about employee restricted stock units: YEARS ENDED DECEMBER 31 2018 2017 2016 Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Time-based restricted stock units: Outstanding, beginning of year 298,528 $ 83.45 269,063 $ 73.91 301,897 $ 54.54 Granted 152,529 111.66 130,075 90.40 143,107 83.43 Vested (72,710) 72.69 (70,590) 59.29 (139,183) 42.97 Forfeited (1) (45,866) 94.04 (30,020) 84.88 (36,758) 69.07 Outstanding, end of year 332,481 $ 97.28 298,528 $ 83.45 269,063 $ 73.91 Performance and market-based restricted stock units: 102,586 $ 81.21 115,057 $ 78.82 196,142 $ 47.89 Granted 35,063 118.60 60,101 79.48 126,796 73.42 Vested (14,032) 70.24 (17,642) 56.45 (144,141) 40.95 Forfeited (1) (53,779) 89.79 (54,930) 82.27 (63,740) 58.54 Outstanding, end of year (2) 69,838 $ 95.58 102,586 $ 81.21 115,057 $ 78.82 (1) As a result of the sale of Chaucer and included in forfeitures in 2018 are 19,655 shares of time-based restricted stock units, 43,449 shares of performance-based restricted stock units and 2,705 shares of market-based restricted stock units that were awarded to Chaucer employees. (2) At December 31, 2018, only market-based awards were outstanding . In 2018, 2017 and 2016, the Company granted market-based awards totaling 31,688, 56,571, and 87,213, respectively, to certain members of senior management, which are included in the table above as performance and market-based restricted stock activity. The vestin J RI WKHVH VWRFN XQLWV LV EDVHG RQ WKH UHODWLYH WRWDO VKDUHKROGHU UHWXUQ ³765´ RI WKH &RPSDQ\ 7KLV PHWULF LV JHQHUDOO\ EDV ed on relative TSR for a three year period as compared to a group of Property and Casualty peer companies. The fair value of market-based awards was estimated at the date of grant using a valuation model. These units have the potential to range from 0% to 150% of the shares disclosed. In 2018, market-based restricted stock units of 3,115 were included as granted due to completion levels in excess of 100% for units granted in 2015. The weighted average grant date fair value of these awards was $70.24. In 2017, market-based restricted stock units of 5,881 were included as granted due to completion levels in excess of 100% for units granted in 2014. The weighted average grant date fair value of these awards was $56.45. In 2016, performance and market-based stock units of 2,268 and 30,134 were included as granted due to completion levels in excess of 100% for units granted in 2014 and 2013, respectively. The weighted average grant date fair value of these awards was $57.00 and $41.77, respectively. 116 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT