17. Stock-Based Associate Compensation Plans

Four equity compensation plans currently permit us to grant various types of equity awards. We currently grant incentive stock options, nonqualified stock options, service-based restricted stock units and performance-based restricted stock units to associates, including some with market-based performance objectives, under our shareholder-approved plans. We also have a Holiday Stock Plan that permits annual awards of one share of common stock to each full-time associate for each full calendar year of service up to a maximum of 10 shares. One of our equity compensation plans permits us to grant stock to our outside directors as a component of their annual compensation.

Stock-based compensation cost after tax was $11 million, $9 million and $8 million for the years ended December 31, 2012, 2011 and 2010, respectively. The related income tax benefit recognized was $5 million, $4 million and $3 million for the years ended December 31, 2012, 2011 and 2010, respectively. Options exercised during the year ended December 31, 2012, had intrinsic value of $6 million. Options exercised during the years ended December 31, 2011 and 2010 had intrinsic value less than $1 million. (Intrinsic value is the market price less the exercise price.) Options vested during the year ended December 31, 2012, 2011 and 2010 had total intrinsic value of $5 million, $2 million, and $1 million, respectively.

As of December 31, 2012, we had $19 million of unrecognized total compensation cost related to nonvested stock options and restricted stock unit awards. That cost will be recognized over a weighted-average period of 1.8 years.

Stock Options

Stock options are granted to associates at an exercise price that is equal to the fair value as reported on the Nasdaq Global Select Market for the grant date and are exercisable over 10-year periods. The stock options generally vest ratably over a three-year period. In determining the share-based compensation amounts, we estimate the fair value of each option granted on the date of grant using a binomial option‑pricing model. We make assumptions in four areas to develop the binomial option-pricing model:

·	Weighted-average expected term is based on historical experience of similar awards with consideration for current exercise trends.

·	Expected volatility is based on our stock price over a historical period that approximates the expected term.

·	Dividend yield is determined by dividing the annualized per share dividend by the stock price on the date of grant.

·	Risk-free rates are the implied yield currently available on zero-coupon U.S. Treasury issues with a remaining term approximating the expected term.

The following weighted average assumptions were used in determining fair value for option grants issued during 2012 and 2011:



		2012		2011
Weighted-average expected term		8-10 years		9 years
Expected volatility		25.26-26.20%		26.06-26.12%
Dividend yield		4.51.-4.52%		4.70-5.29%
Risk-free rates		1.58-2.00%		2.86-3.41%
Weighted-average fair value of options granted during the period	$	6.78	$	7.29

This is a summary of options information:



(Dollars in millions, shares in thousands)	Shares		Weighted-average exercise price		Aggregate intrinsic value
Outstanding at January 1, 2012	9,357	$	36.71
Granted	536		35.63
Exercised	(708)		30.77
Forfeited or expired	(1,248)		35.66
Outstanding at December 31, 2012	7,937		37.34	$	26

Options exercisable at end of period	6,594	$	38.20	$	18

Cash received from the exercise of options was $10 million and $1 million for the years ended December 31, 2012 and 2011, and less than $1 million for the year ended 2010. We acquired 311,524shares totaling $12 million from associates in consideration for option exercises during 2012.

Options outstanding and exercisable consisted of the following at December 31, 2012:



(Shares in thousands)
	Options outstanding					Options exercisable
Range of exercise prices	Shares	Weighted-average remaining contractual life			Weighted-average exercise price		Shares		Weighted-average exercise price
$25.00 to $29.99	1,359	6.39	yrs	$	26.58		1,087	$	26.57
$30.00 to $34.99	1.355	5.06	yrs		33.40		797		32.99
$35.00 to $39.99	2,328	3.95	yrs		38.08		1,815		38.77
$40.00 to $44.99	1,740	2.53	yrs		42.56		1,740		42.56
$45.00 to $49.99	1,155	2.93	yrs		45.26		1,155		45.26
Total	7,937	4.10	yrs		37.34		6,594		38.20

The weighted-average remaining contractual life for exercisable awards as of December 31, 2012 was 3.2 years. Under all active shareholder approved plans, a total of 17.3 million shares were authorized to be granted. These include the 7 million shares available under the Cincinnati Financial Corporation 2012 Stock Compensation Plan approved by shareholders in 2012. At December 31, 2012, 9.3 million shares remained available for future issuance under the plans. During 2012 we granted 24,118 shares of common stock to our directors for 2011 board service fees. We currently issue new shares or use treasury shares for stock-based compensation award issues or exercises.

Restricted Stock Units

Service-based restricted stock units are granted to associates at fair value of the shares on the date of grant less the present value of the dividends that holders of restricted stock units will not receive on the shares underlying the restricted stock units during the vesting period. Service-based restricted stock units cliff vest three years after the date of grant. Service-based restricted stock units vested during the year had an intrinsic value of less than $1 million, $13 million and $5 million for the years ended December, 31, 2012, 2011 and 2010, respectively. Service-based shares are issued out of treasury shares.

We have performance-based awards that vest on the first day of March after a three-calendar-year performance period. These awards vest according to the level of total shareholder return achieved compared to a peer group over a three-year period with payouts ranging from 0-125%. Total shareholder return is calculated by Bloomberg using annualized total return of a stock to an investor due to capital gain appreciation plus reinvestment of all dividends. We issued 53,150 shares of performance-based restricted stock units during 2012 at the target-level performance hurdle for the three-year performance period ending December 31, 2011, as we achieved a three-year total shareholder return which exceeded four of our eight peers. For the three-year performance period ended December 31, 2012, our total shareholder return exceeded all peers in our peer group. We expect payout of these shares at the maximum level to occur on March 1, 2013. Performance-based shares are issued out of treasury shares.

These performance-based awards are valued using a Monte-Carlo valuation on the date of grant, which uses a risk-neutral framework to model future stock price movements based upon the risk-free rate of return, the volatility of each peer and the correlations of each peer being modeled. Compensation cost is recognized regardless of whether the market-based performance objective has been satisfied. We make assumptions to develop the Monte-Carlo model as follows:

·	Correlation coefficients are based upon the price data used to calculate the historical volatilities. The correlation coefficients are used to model the way in which each entity tends to move in relation to each other.

·	Expected volatility is based on our stock price over a historical period that approximates the expected term. We have used the historical volatilities of 2.87 for 2012 grants and 2.59‑2.87 years for 2011 grants.

·	Dividend yield has been modeled assuming that the holder of the award is not entitled to receive dividends that are paid during the performance period. Dividend yields of 4.51% for 2012 grants and 4.68%-5.26% for 2011 grants were used.

·	Risk-free rates are equal to the yield, as of the measurement date, of the zero-coupon U.S. Treasury bill that is commensurate with the performance period. Risk-free rates used were 0.40% for 2012 grants and 0.65%-1.25% for 2011 grants.

This is a summary of restricted stock unit and performance-based share information, assuming a target payout for performance-based shares, for the year 2012:



(Shares in thousands)	Service-based shares		Weighted-average grant-date fair value	Performance-based shares		Weighted-average grant-date fair value
Nonvested at January 1, 2012	563	$	26.05	156	$	25.86
Granted	403		31.14	110		34.89
Vested	(7)		27.84	(53)		22.88
Forfeited or canceled	(29)		27.96	(4)		30.98
Nonvested at December 31, 2012	930		28.18	209		31.26