UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of

the Securities Exchange Act of 1934 (Amendment No.   )

 

Filed by the Registrant þ

Filed by a Party other than the Registrant o

Check the appropriate box:

o  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

þ  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to § 240.14a-12

 

The Chubb Corporation

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

þ   No fee required.

(1)  Title of each class of securities to which transaction applies:

 

(2)  Aggregate number of securities to which transaction applies:

 

 

(4)  Proposed maximum aggregate value of transaction:

 

 

o  Fee paid previously with preliminary materials.

 

 

(1)  Amount Previously Paid:

 

(2)  Form, Schedule or Registration Statement No.:

 

(3)  Filing Party:

 

(4)  Date Filed:

 

 

 

NOTICE OF 2010 ANNUAL MEETING OF SHAREHOLDERS

 

 

By order of the Board of Directors,

 

W. Andrew Macan

Vice President and Secretary

 

March 18, 2010

 

2010 ANNUAL MEETING OF SHAREHOLDERS
PROXY STATEMENT
TABLE OF CONTENTS

 

 

PROXY STATEMENT

 

Our Board of Directors (our Board) has provided you with these proxy materials in connection with its solicitation of proxies to be voted at the 2010 Annual Meeting of Shareholders (the 2010 Annual Meeting). We will hold the 2010 Annual Meeting on Tuesday, April 27, 2010 in the Amphitheater at The Chubb Corporation, 15 Mountain View Road, Warren, New Jersey 07059, beginning at 8:00 a.m., local time. Please note that throughout these proxy materials we may refer to The Chubb Corporation as “Chubb,” “we,” “us” or “our.” We mailed the instructions for accessing our annual meeting materials, which include this proxy statement, the proxy card, voting instructions and our Annual Report on Form 10-K for the year ended December 31, 2009 (the 2009 10-K), on or before March 18, 2010.

 

 

As permitted by rules adopted by the Securities and Exchange Commission (the SEC), we have made our annual meeting materials available to our shareholders electronically via the internet. On or before March 18, 2010, we mailed to our shareholders a notice containing instructions on how to access our annual meeting materials, how to request paper copies of these materials and how to vote online or by telephone. Unless you affirmatively request a paper copy of our annual meeting materials by following the instructions set forth in the notice, you will not receive a paper copy of our annual meeting materials in the mail. However, due to an ambiguity in the regulations promulgated under the Employee Retirement Income Security Act of 1974, as amended (ERISA), unless we have previously received a written consent to deliver materials electronically, we have assumed that participants in the Capital Accumulation Plan of The Chubb Corporation (the CCAP) have affirmatively requested paper copies of our annual meeting materials and, therefore, have mailed or will mail copies of the annual meeting materials to each participant in the CCAP whose account holds shares of our stock.

 

The SEC’s rules also permit us to deliver a single notice or set of annual meeting materials to one address shared by two or more of our shareholders. This delivery method is referred to as “householding” and can result in significant cost savings. To take advantage of this opportunity, we have delivered only one notice or set of annual meeting materials to multiple shareholders who share an address, unless we received contrary instructions from such impacted shareholders prior to our mailing date. We agree to deliver promptly, upon written or oral request, a separate copy of the notice or set of annual meeting materials, as requested, to any shareholder at the shared address to which a single copy of those documents was delivered. For future meetings, if you prefer to receive separate copies of our annual meeting materials, please contact Broadridge Financial Solutions, Inc. at 800-542-1061 or in writing at Broadridge, Householding Department, 51 Mercedes Way, Edgewood, New York 11717. If you are currently a shareholder sharing an address with another shareholder and wish to receive only one copy of our future annual meeting materials for your household, please contact Broadridge at the above phone number or address.

 

 

Our Board has set March 8, 2010 as the record date for the 2010 Annual Meeting. Shareholders of record of our common stock at the close of business on March 8, 2010 may vote at the 2010 Annual Meeting.

 

 

Each shareholder has one vote for each share of common stock owned at the close of business on the record date. On the record date, 328,527,950 shares of our common stock were outstanding.

 

If your shares are registered in your name with BNY Mellon Shareowner Services, our dividend agent, transfer agent and registrar, you are considered a shareholder of record, and the notice containing instructions on accessing our annual meeting materials online or requesting a paper copy thereof is being sent directly to you by us. Shareholders of record can vote in person at the 2010 Annual Meeting or give their proxy to be voted at the 2010 Annual Meeting in any one of the following ways:

 

 

If you are a participant in the CCAP, your proxy will include all shares allocated to you in the CCAP (Plan Shares), which you may vote in person at the 2010 Annual Meeting or over the internet, by telephone or, provided that you have not delivered a written consent to receive our materials electronically, by completing and mailing the proxy card accompanying your paper copy of the annual meeting materials. Your proxy will serve as a voting instruction for the trustee of the CCAP. If your voting instructions are not received by April 22, 2010, any Plan Shares you hold will not be voted.

 

You are considered to be the beneficial owner of shares you hold in an account maintained by a broker, bank or other nominee, which may be referred to as shares held in “street name.” For shares held in street name, your broker, bank or nominee, who is the shareholder of record, has forwarded you the instructions for accessing, or requesting paper copies of, our annual meeting materials. You have the right to direct your broker, bank or nominee on how to vote these shares, and you may also attend the 2010 Annual Meeting. Your broker, bank or nominee has enclosed a voting instruction card. Beneficial owners of shares who wish to vote at the 2010 Annual Meeting must obtain a legal proxy from their broker, bank or nominee and present it at the 2010 Annual Meeting. The availability of telephone and internet voting for beneficial owners will depend on the voting processes of their broker, bank or nominee. Please refer to the voting instructions of your broker, bank or nominee for directions as to how to vote shares that you beneficially own.

 

Whether you vote over the internet, by telephone or by mail, you can specify whether you vote your shares for or against each of the nominees for election as a director (Proposal 1 on the proxy card). You can also specify whether you vote for or against or abstain from the ratification of Ernst & Young LLP as independent auditor (Proposal 2 on the proxy card).

 

If you are a shareholder of record and return a signed and dated proxy card without marking any voting selections, your shares will be considered present and entitled to vote and will be voted “FOR” the election of each of the director nominees and “FOR” the ratification of Ernst & Young LLP as independent auditor. If any other matter is properly presented at the meeting, your proxy (one of the individuals named on your proxy card) will vote your shares using his best judgment.

 

Please note that this year, the rules that guide how brokers vote your shares have changed. Brokers may no longer vote your shares in the absence of your specific instructions as to how to vote with respect to the election of nominees for director or any other matter that is not considered a routine matter by the New York Stock Exchange (NYSE). Please return your voting instruction card to your broker so that your vote can be counted. If you are a beneficial owner of shares held in street name and return a signed and dated proxy card without marking any voting selections for the election of director nominees, your shares will not be voted and will not be considered as present and entitled to vote with respect to the election of each of the director nominees. The

ratification of Ernst & Young LLP as independent auditor is considered a routine matter by the NYSE. If you are a beneficial owner of shares held in street name and return a signed and dated voting instruction card without marking any voting selection with respect to ratification of Ernst & Young LLP as independent auditor, your shares will be considered as present and entitled to vote with respect to that proposal and voted “FOR” this proposal.

 

If you are a shareholder of record or a holder of Plan Shares, you may revoke your proxy at any time before it is exercised in any of four ways:

 

 

You will not revoke a proxy merely by attending the 2010 Annual Meeting. To revoke a proxy, you must take one of the actions described above.

 

If you hold your shares in a brokerage or other account, you may submit new voting instructions by contacting your broker, bank or nominee.

 

The presence, in person or by proxy, of the holders of a majority of all outstanding shares of our common stock entitled to vote at the 2010 Annual Meeting is necessary to constitute a quorum. Each of the proposals to be voted upon at the 2010 Annual Meeting requires the affirmative vote of a majority of the votes cast on the proposal. Abstentions are counted as shares present at the 2010 Annual Meeting for purposes of determining a quorum. Similarly, shares which brokers do not have the authority to vote in the absence of timely instructions from beneficial owners (broker non-votes) also are counted as shares present at the 2010 Annual Meeting for purposes of determining a quorum. Abstentions and broker non-votes are not considered votes cast and will not be counted either for or against these proposals and, accordingly, will have no effect on the outcome of the vote for Proposal 1 or 2.

 

Any action on the items of business described above may be considered at the 2010 Annual Meeting at the time and on the date specified above or at any time and date to which the 2010 Annual Meeting may be properly adjourned or postponed.

 

The 2009 10-K is not a part of the proxy soliciting materials. However, the instructions for accessing the 2009 10-K online and for requesting a paper copy are included in the notice you received regarding our annual meeting materials. The 2009 10-K is available on our website at www.chubb.com/investors, as well as on a website maintained by Broadridge at www.proxyvote.com. It also is available without charge by sending a written request to our Corporate Secretary at 15 Mountain View Road, Warren, New Jersey 07059.

 

All 2010 Annual Meeting attendees may be asked to present a valid, government-issued photo identification (federal, state or local), such as a driver’s license or passport, and proof of beneficial ownership if you hold your shares through a broker, bank or other nominee before entering the 2010 Annual Meeting. Attendees may be subject to security inspections. Video and audio recording devices and other electronic devices will not be permitted at the 2010 Annual Meeting.

 

Our Board and management have a strong commitment to effective corporate governance. We have in place a comprehensive corporate governance framework for our operations which, among other things, takes into account the requirements of the Sarbanes-Oxley Act of 2002, the SEC and the NYSE. The key components of this framework are set forth in the following documents:

 

 

Copies of these documents are available on our website at www.chubb.com/investors. Copies also are available without charge by sending a written request to our Corporate Secretary.

 

Our Corporate Governance Guidelines address a number of policies and principles employed in the operation of our Board and our business generally, including our policies with respect to:

 

 

 

Our Board of Directors has established our Governance Committee which is comprised solely of directors satisfying the independence requirements of the NYSE. A copy of the charter of our Governance Committee is available on our website at www.chubb.com/investors. Copies also are available by sending a written request to our Corporate Secretary. Our Board has delegated to our Governance Committee responsibility for, among other things:

 

 

We require that a majority of the directors on our Board meet the criteria for independence under applicable law and the requirements of the NYSE. We believe that variety in the lengths of service among the directors benefits us and our shareholders. Accordingly, we do not have term limits for service on our Board. As an alternative to term limits, all director nominations are considered annually by our Governance Committee. Individuals who would be age 72 or older at the time of election are ineligible for nomination to serve on our Board. While our Board does not require that in every instance directors who retire or change from the position they held when they were elected to our Board resign, it does require that our Governance Committee consider the desirability of continued Board membership under the circumstances.

 

Our Governance Committee takes a holistic approach in identifying and considering director nominees. The Governance Committee primarily focuses on the composition and competencies of our Board as a whole and how the traits possessed by individual director nominees will complement one another. While evaluating individual director nominees within this framework, the factors that our Governance Committee considers include:

 

 

 

Our Governance Committee has the discretion to weight these factors as it deems appropriate. The importance of these factors may vary from candidate to candidate.

 

The primary purpose of our nominating procedures is to identify and recruit outstanding individuals to serve on our Board. Our Governance Committee meets periodically to consider the slate of nominees for election at our next annual meeting of shareholders. If appropriate, our Governance Committee schedules follow-up meetings and interviews with potential candidates. Our Governance Committee submits its recommended nominee slate to our Board for approval.

 

Our Governance Committee will consider candidates recommended by directors, members of management and our shareholders. In addition, our Governance Committee is authorized to engage one or more search firms to assist in the recruitment of director candidates.

 

The procedures for shareholders to propose director candidates are set forth in Article I, Section 10 of our By-Laws. Our Governance Committee may make such additional inquiries of the candidate or the proposing shareholder as our Governance Committee deems appropriate. This information is necessary to allow our Governance Committee to evaluate the shareholder’s proposed candidate on the same basis as those candidates referred through directors, members of management or by consultants retained by our Governance Committee.

 

Shareholders wishing to propose a candidate for consideration should refer to Article I, Section 10 of our By-Laws, the information set forth under the heading “2011 Shareholder Proposals and Nominations” and the SEC rules applicable to shareholder proposal submission procedures.

 

In uncontested elections, our directors are elected by the affirmative vote of a majority of the votes cast. In the event that an incumbent director receives less than the affirmative vote of a majority of the votes cast and the director would otherwise remain in office by operation of New Jersey law, the affected director is required to tender his or her resignation. Our Governance Committee is required to promptly consider the resignation and make a recommendation to our Board as to whether or not to accept such resignation. Our Board is required to take action with respect to our Governance Committee’s recommendation within 90 days after the date of the election. These procedures are described in full in our Corporate Governance Guidelines.

 

Our Governance Committee reviews each director’s independence annually in accordance with the standards set forth in our Corporate Governance Guidelines and the requirements of the NYSE. No member of our Board will be considered independent unless our Governance Committee determines that the director has no material relationship with us that would affect the director’s independence and that the director satisfies the independence requirements of all applicable laws, rules and regulations. To facilitate the analysis of whether a director has a

relationship with us that could affect his or her independence, our Board has identified in our Corporate Governance Guidelines the following categories of relationships which should not affect a director’s independence or are deemed immaterial and, therefore, are not considered by our Governance Committee in determining director independence:

 

 

 

 

Our Board reviewed director independence in 2009 based on the assessment of our Governance Committee. As a result of this review, our Board determined that each of our directors, other than John D. Finnegan, who is our Chairman, President and Chief Executive Officer, was independent as defined in the listing standards of the NYSE and, in the case of the members of our Audit Committee, Section 10A(m)(3) of the Exchange Act.

 

Our Governance Committee has adopted a written policy governing the review and approval of transactions in which we are a participant and in which any of our officers, our directors, holders of five percent or more of our common stock or any of their respective immediate family members (as defined by the SEC) has a material direct or indirect interest. These individuals collectively are referred to as related persons. This policy prohibits us from participating in any transaction in which a related person has a direct or indirect material interest unless:

 

 

In the event that a related person inadvertently fails to obtain the appropriate approvals prior to engaging in a transaction in which the related person has a material direct or indirect interest and in which we are a participant, the related person is required to seek ratification of the transaction by the appropriate decision maker referenced above as soon as reasonably practicable after discovery of such failure.

 

Our Governance Committee has identified categories of transactions that are appropriate and generally do not give rise to conflicts of interest or the appearance of impropriety, which, accordingly, do not require approval or ratification. These categories of transactions, referred to as permitted transactions under the policy, are:

 

 

 

Related person transactions since January 1, 2009 are discussed under the heading “Certain Transactions and Other Matters.”

 

As noted in our Corporate Governance Guidelines, the determination of our Board’s leadership structure is an integral part of our succession planning process. Based on our Board’s current composition as well as Mr. Finnegan’s business experience and day-to-day involvement in our operations, our Board has determined that the most effective leadership structure for our Board is for the roles of Chief Executive Officer and Chairman of the Board to be combined. To ensure our Board’s independence and proper functioning, our Board has also elected a Lead Director with substantial authority over our Board’s operations. Our Board has determined that this structure currently is beneficial because it fosters the development and implementation of business strategies, while also providing the balance of an empowered independent Board.

 

The Lead Director has the following authority:

 

 

 

The Lead Director serves on our Executive Committee and is eligible to serve on any or all other committees of our Board. The Lead Director is elected annually and is not subject to term limits. James M. Zimmerman currently serves as our Lead Director.

 

Our Board recognizes that one of its key responsibilities is to understand and evaluate how the material risks to which we are subject interrelate, how they affect our business and how management addresses those risks. Pursuant to its charter, our Audit Committee is responsible for overseeing our major risk exposures and related mitigation strategies. Our Chief Risk Officer and other members of senior management report quarterly (and more frequently if warranted) to the Audit Committee on these subjects. In turn, the Audit Committee members regularly report on these matters to our Board. In addition, our Lead Director generally attends meetings of the Audit Committee and, as he deems appropriate, he (or any other member of the Audit Committee) may discuss matters (risk-related or otherwise) raised during those meetings in the executive sessions of our independent directors at which he presides. Any member of the Board may attend Audit Committee meetings and are regularly invited to do so. From time to time, members of senior management also make presentations to the other committees of the Board as well as to the full Board on a variety of topics that include discussion of risks that we face.

 

Parties interested in contacting our Board, the Chairman of the Board, the Lead Director, the independent directors as a group or any individual director are invited to do so by writing to them in care of our Corporate Secretary at:

 

The Chubb Corporation
15 Mountain View Road
Warren, New Jersey 07059

 

Complaints and concerns relating to our accounting, internal controls over financial reporting or auditing matters should be communicated to our Audit Committee using the procedures described below. Communications addressed to a particular director will be referred to that director. All other communications addressed to our Board will be referred to our Lead Director and tracked by the Corporate Secretary.

 

Complaints and concerns relating to our accounting, internal controls over financial reporting or auditing matters should be communicated to our Audit Committee, which consists solely of non-employee directors. Any such communication may be anonymous and may be reported to our Audit Committee through our General Counsel by writing to:

 

Executive Vice President and General Counsel
The Chubb Corporation
15 Mountain View Road
Warren, New Jersey 07059
GeneralCounsel@chubb.com

All such concerns will be reviewed under our Audit Committee’s direction and oversight by the General Counsel, our Internal Audit Department or such other persons as our Audit Committee determines to be appropriate. Confidentiality will be maintained to the fullest extent possible, consistent with the need to conduct an adequate review. Prompt and appropriate corrective action will be taken when and as warranted in the judgment of our Audit Committee. The General Counsel will prepare a periodic summary report of all such communications for our Audit Committee.

 

Our Code of Business Conduct provides that we will not discharge, demote, suspend, threaten, harass or in any manner discriminate against any employee in the terms and conditions of employment based upon any lawful actions of such employee with respect to good faith reporting of complaints regarding accounting matters or otherwise as specified in Section 806 of the Sarbanes-Oxley Act of 2002.

 

Our directors are expected to attend all Board meetings, meetings of committees on which they serve and the annual meeting of shareholders. Twelve of our directors attended the 2009 Annual Meeting of Shareholders. Directors also are expected to spend the time needed and to meet as frequently as necessary to properly discharge their responsibilities. In 2009, our Board met seven times. All of our incumbent directors attended at least 75% of the meetings of our Board and the committees on which they serve.

 

Our Audit Committee is directly responsible for the appointment, compensation and retention (or termination) of our independent auditor. Our Audit Committee also is responsible for the oversight of the integrity of our financial statements, risk management, compliance with legal and regulatory requirements, the independence and qualifications of our independent auditor, the performance of our internal audit function and independent auditor and other significant financial matters. For 2009, our Board designated Joel J. Cohen, Martin G. McGuinn and Daniel E. Somers as our audit committee financial experts (as defined by SEC rules). In 2009, our Audit Committee met eight times. The Audit Committee Report for 2009 is set forth under the heading “Audit Committee Report.”

 

Each member of our Compensation Committee satisfies the independence requirements of the NYSE and the independence standards set forth in our Corporate Governance Guidelines. Our Compensation Committee’s primary responsibilities include establishing our general compensation philosophy and overseeing the development, implementation and administration of our compensation, benefit and perquisite programs. It also evaluates the performance and sets all aspects of the compensation paid to our Chief Executive Officer and reviews and approves the compensation paid to our other executive officers. In addition, our Compensation Committee is responsible for recommending the form and amount of compensation for our non-employee directors to our Governance Committee. The principal duties and responsibilities of our Compensation Committee are set forth in its charter, which is available on our website at www.chubb.com/investors.

 

In 2009, our Compensation Committee met five times.

 

During the first quarter of each year, our Compensation Committee evaluates our performance relative to the pre-established goals under The Chubb Corporation Annual Incentive Compensation Plan (2006) (the Annual Incentive Plan), in the case of annual incentive compensation, The Chubb Corporation Long-Term Incentive Plan (2009) (the 2009 LTIP), in the case of long-term incentive awards, and for certain other plans in which our named executive officers identified under the heading “Executive Compensation—Summary Compensation Table” (our NEOs) do not participate. In addition, our Compensation Committee evaluates our Chief Executive Officer’s overall individual performance and contributions over the prior year. Our Chief Executive Officer presents our

Compensation Committee with his evaluation of each of the other NEOs, which includes a review of contributions and performance during the prior year, strengths, weaknesses, development plans, succession potential and compensation recommendations. Our Compensation Committee then makes a final determination of compensation amounts for each NEO with respect to each of the elements of the executive compensation program for both compensation based on prior year performance and target compensation for the current year.

 

Mid-year, typically in June, our Compensation Committee considers each NEO’s total compensation as compared with that of the named executive officers of a peer group of companies. Information regarding this peer group analysis is set forth under the heading “Compensation Discussion and Analysis—Setting of Executive Compensation.” This peer group review provides our Compensation Committee with an external basis to evaluate our overall compensation program, including an assessment of its pay to performance relationship. Following this presentation of competitive market data, our Compensation Committee makes decisions, in consultation with our Chief Executive Officer regarding the other NEOs, assessing the need for any modifications to executive compensation opportunities and overall program design for implementation in the following year. Final approval of any program or individual changes typically occurs in the first quarter of the following year, at or around the same time that our Compensation Committee is evaluating overall performance for the just-completed year to determine actual award amounts payable under our incentive-based plans.

 

Our Compensation Committee, and through it our Board, retains final authority with respect to our compensation, benefit and perquisite programs and all actions taken thereunder. However, as noted above, our Chief Executive Officer recommends to our Compensation Committee compensation actions for each of the other NEOs. Our other NEOs evaluate the performance of and recommend compensation actions for other members of our senior management team to our Chief Executive Officer. Our Chief Executive Officer, after making any adjustments he deems appropriate, presents these recommendations to our Compensation Committee for consideration and compensation action. Compensation actions for the rest of our employees are determined by management, with our Compensation Committee receiving and approving aggregated information (e.g., aggregate incentive compensation and equity awards) by employee level with respect to such actions. None of our employees has a role in determining or recommending the amount or form of non-employee director compensation.

 

Subject to an aggregate limit of 400,000 shares of our common stock, our Compensation Committee has delegated authority to our Chief Executive Officer to make equity grants to employees at or below the level of Senior Vice President. In accordance with the terms of this delegation of authority, our Compensation Committee periodically reviews all such awards. If our Compensation Committee ratifies the awards, the number of shares so ratified is restored to our Chief Executive Officer’s pool of awardable shares. Our Chief Executive Officer uses this authority to grant performance, promotion, retention and new hire awards. Our Compensation Committee has retained exclusive authority for granting equity awards to employees above the level of Senior Vice President, as well as for certain of our Senior Vice Presidents, including those subject to the reporting requirements of Section 16 of the Exchange Act.

 

Pursuant to its charter, our Compensation Committee has the sole authority to retain any compensation consultant to be used to assist in the evaluation of executive compensation and to approve the fees and terms of such retention. In accordance with this authority, our Compensation Committee directly engaged a compensation consulting firm, Compensation Advisory Partners LLC (CAP or the Compensation Consultant), effective September 21, 2009. CAP has been engaged by our Compensation Committee to assist in reviewing our overall compensation strategy and total compensation package and to provide input on the competitive market for executive talent, evolving executive compensation market practices, program design and regulatory compliance. CAP does not provide any other services to us.

 

Prior to the retention of CAP, our Compensation Committee directly retained the Executive Remuneration Services group at the compensation consulting firm, Mercer (US) Inc. (Mercer or the Compensation Consultant), to

perform the services described above. Our Compensation Committee previously determined that there was overlap between the structuring of our compensation programs by our Compensation Committee and their implementation and administration by management. Accordingly, our Compensation Committee authorized our management to retain other consulting groups within Mercer to assist with our medical, prescription and dental benefit plans and to serve as the actuary for our qualified and nonqualified defined benefit pension plans. To ensure that these management level services did not impair the Compensation Consultant’s objectivity, all of these services required the pre-approval of our Compensation Committee and the nature of the services rendered together with the Compensation Consultant’s aggregate fees for such services were reviewed periodically. In 2009, we paid Mercer approximately $440,000 in fees related to executive compensation consulting. During 2009, we paid approximately $3,369,000 to Mercer (US) Inc. and certain of its international affiliates for additional HR consulting services.

 

Mercer is a subsidiary of Marsh & McLennan Companies, Inc., and, as a result, it has over 700 affiliates that operate in numerous distinct areas of business unrelated to Mercer’s compensation consulting practice, including in the property and casualty insurance industry in which we operate. In connection with insurance business relationships we have with certain of these affiliates, we paid an aggregate of approximately $153 million to such affiliates during 2009 relating to brokerage commissions, reinsurance procurement, service and collection fees and other consulting services.

 

Our Executive Committee, which consists of the Chairman of the Board, our Lead Director and the Chairmen of our Audit, Compensation and Governance Committees, is responsible for overseeing our business, property and affairs during the intervals between the meetings of our Board, if necessary. Our Executive Committee did not meet during 2009.

 

Our Finance Committee oversees and regularly reviews the purchase and sale of securities in our investment portfolio. In 2009, our Finance Committee met four times.

 

As noted above, our Governance Committee assists our Board in identifying individuals qualified to become members of our Board and oversees the annual evaluation of our Board and each committee. As provided in its charter, our Governance Committee also makes recommendations to our Board on a variety of corporate governance and nominating matters, including recommending standards of independence, director nominees, appointments to committees of our Board, designees for chairmen of each of our Board committees, non-employee director compensation and corporate governance guidelines. In 2009, our Governance Committee met four times.

 

During our 2009 fiscal year, each of Sheila P. Burke, Martin G. McGuinn, Daniel E. Somers, Karen Hastie Williams, James M. Zimmerman and Alfred W. Zollar served on our Compensation Committee. None of these individuals has at any time been an officer or employee of Chubb. During our 2009 fiscal year, none of our executive officers served as a member of the board of directors or compensation committee of any entity for which a member of our Board or Compensation Committee served as an executive officer.

 

Our Governance Committee, with the assistance of our Compensation Committee, is responsible for establishing and overseeing non-employee director compensation. The Compensation and Governance Committees consult periodically with the Compensation Consultant to evaluate and, if appropriate, adjust non-employee director compensation. To benchmark the competitiveness of our non-employee director compensation, the Compensation and Governance Committees utilize the same peer group of companies described below under the heading “Compensation Discussion and Analysis—Setting of Executive Compensation.” Consistent with our compensation philosophy for our NEOs, our non-employee director compensation program is designed to target total non-employee director compensation in the second quartile of the compensation paid to non-employee directors in this peer group.

 

The following table sets forth the compensation we paid to our non-employee directors in 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table summarizes the cash components of our 2009 non-employee director compensation program:

 

 

 

With respect to non-employee directors, the 2009 LTIP is administered by our Governance Committee with the assistance of our Compensation Committee. Subject to adjustment upon the occurrence of certain events described below, as of March 8, 2010, a maximum of 548,114 shares of our common stock were issuable to non-employee directors under the 2009 LTIP.

 

Based upon its market analysis, a peer group comparison and the recommendation of the Compensation Consultant and Compensation Committee, our Governance Committee approved deferred stock unit awards to each of our non-employee directors in the amount of approximately $100,000 on April 28, 2009. The deferred stock units vested immediately upon grant, but the issuance of the shares underlying such awards was mandatorily deferred until following the recipient’s separation of service from our Board.

 

 

Since the adoption of The Chubb Corporation Long-Term Stock Incentive Plan for Non-Employee Directors (2004) (2004 Director Plan) in April 2004, our Board’s practice has been to refrain from granting stock options to non-employee directors. The only stock options that have been granted to non-employee directors since the adoption of the 2004 Director Plan were granted on a non-discretionary basis pursuant to a restoration stock option feature that was included in the terms of stock options granted under predecessor plans to the 2004 Director Plan. The restoration stock option feature provides for an automatic grant of a new stock option if, upon exercise of the original stock option, shares are exchanged in a stock-for-stock exercise. The restoration stock option feature only applies if the original stock option is exercised within seven years of the grant date and if the fair market value of our common stock on the date of exercise is at least 25% higher than the exercise price of the original stock option. The grant date of the restoration stock option is the date of exercise of the original option and the exercise price is the average of the high and low prices of our common stock on the date that the original option is exercised.

 

Cash Compensation.  Under the Deferred Compensation Plan for Directors, non-employee directors may defer receipt of all or a portion of their cash compensation. Amounts of deferred compensation are payable at the option of the non-employee director either upon the non-employee director’s separation of service from our Board or at a specified date chosen by the non-employee director at the time the deferral election is made. The Deferred Compensation Plan for Directors provides that amounts deferred may be invested in:

 

 

 

A non-employee director participating in the Deferred Compensation Plan for Directors may elect to receive the compensation deferred in either a lump sum or in annual installments. All amounts are paid in cash, except for the market value accounts which we pay in shares of our common stock. Deferred compensation represents an unsecured obligation payable out of our general corporate assets.

Cash Accounts.  Interest bearing accounts (cash accounts) bear interest at the lesser of 120% of the applicable long-term federal interest rate and Citibank, N.A.’s prime rate in effect on the first day of each January, April, July and October during the deferral period. At December 31, 2009, we maintained cash accounts for two non-employee directors, one of whom deferred 2009 compensation into this account pursuant to the Deferred Compensation Plan for Directors.

Market Value Accounts.  Market value accounts, which are denominated in units with one unit having the equivalent value of one share of our common stock, track the value of shares of our common stock. On each date compensation otherwise would have been paid in accordance with our normal practice (the credit date), non-employee directors deferring cash compensation into market value accounts are credited with the number of market value units equal to the quotient of:

 

 

When we pay cash dividends on our common stock, the market value account of each participating non-employee director is credited with the number of market value units equal to:

 

 

At December 31, 2009, we maintained market value accounts for six non-employee directors, two of whom deferred 2009 compensation into a market value account pursuant to the Deferred Compensation Plan for Directors.

Shareholders’ Equity Accounts.  Shareholders’ equity accounts, which are denominated in units, track the book value per share of our common stock. On each date compensation otherwise would have been paid in accordance with our normal practice, non-employee directors deferring cash compensation into shareholders’ equity accounts are credited with the number of shareholders’ equity units equal to the quotient of:

 

 

When we pay cash dividends on our common stock, the shareholders’ equity account of each participating non-employee director is credited with the number of shareholders’ equity units equal to:

 

 

At December 31, 2009, we did not maintain shareholders’ equity accounts for any of our non-employee directors.

Equity Compensation.  Prior to 2009, we offered non-employee directors the option of deferring receipt of all or a portion of their equity compensation. At December 31, 2009, we maintained deferred equity accounts for seven non-employee directors who had elected to defer receipt of all or a portion of the shares they would have been

entitled to receive upon settlement of pre-2009 equity grants. Amounts of voluntarily deferred equity are payable at the option of the non-employee director either upon the non-employee director’s separation of service from our Board or at a specified date chosen by the non-employee director at the time the deferral election is made. Non-employee directors receive current payment of dividend equivalents on their deferred equity, whether such deferral is voluntary or mandatory. We declare and pay dividend equivalents on equity held in director deferral accounts at the same rate and at the same time as we declare and pay dividends on our common stock generally.

 

In 2009, our Governance Committee determined that deferred stock units would be the primary equity award structure under the 2009 LTIP for our non-employee directors. Accordingly, in April 2009, our non-employee directors were awarded deferred stock units which vested immediately upon grant but the issuance of the shares underlying such awards was mandatorily deferred until following each recipient’s separation of service from our Board.

 

Directors’ Group Term Life Insurance Program.  Our non-employee directors have the option of purchasing $50,000 in group term life insurance coverage for themselves. Directors pay the full cost of the coverage, which is based on coverage rates for our active employees. Mmes. Baird and Williams and Messrs. Small, Somers and Zollar have elected to purchase life insurance coverage under this program. In connection with the premiums they paid to purchase life insurance policies under Directors’ Group Term Life Insurance Program, income was imputed in 2009 to Mmes. Baird and Williams in the respective amounts of $107 and $531 and to Messrs. Small, Somers and Zollar in the respective amounts of $318, $165 and $178. The imputed income represented the difference between the group rates on these policies and the IRS prescribed coverage values.

Director’s Charitable Award Program.  Effective January 1, 1992, we established the Director’s Charitable Award Program. Under this program, each non-employee director, following his or her first election to our Board by our shareholders, was entitled to request that we direct one or more charitable contributions totaling up to $500,000 to eligible tax exempt organizations. We have elected to fund the Director’s Charitable Award Program through the proceeds of “second-to-die” life insurance policies that we have purchased on the lives of the participating non-employee directors. We are the owner and beneficiary of these policies. Non-employee directors have no rights in these policies or the benefits thereunder.

 

Under the terms of these policies, participating non-employee directors are paired and, upon the death of the second paired non-employee director, we use the proceeds of these policies to fund the contributions to the organizations selected by the non-employee directors. At December 31, 2009, ten non-employee directors were participating in the program. For seven of these non-employee directors, we paid the full premium on the life insurance policies through which we fund the program prior to 2009. For Messrs. McGuinn, Søderberg and Somers, the premiums paid in 2009 in connection with their participation in this program, which also are reflected in the “All Other Compensation” column of the Director Compensation Table set forth under the heading “Corporate Governance—Directors’ Compensation,” were $26,234, $28,219 and $26,234, respectively.

 

In March 2008, our Board voted to close the Director’s Charitable Award Program to future participants (with currently eligible participants under the Director’s Charitable Award Program being grandfathered). In addition, we may further amend or terminate the Director’s Charitable Award Program at our election at any time. Participating non-employee directors are entitled to change their designated charities at any time.

Estate Enhancement Program.  Prior to 2002, we maintained The Chubb Corporation Estate Enhancement Program for Non-Employee Directors. This program was offered to non-employee directors as an estate enhancement benefit pursuant to which a participant could exchange deferred compensation for a split-dollar whole-life insurance benefit. The program was designed so that it would be cost neutral to us, with the after-tax cost of the program (including amounts we will receive upon payout of the life insurance benefit) to us being intended to approximate the participant’s foregone deferred compensation. During 2009, Mr. Small recognized imputed income of $668 in connection with the premiums paid on the insurance policies purchased in connection with his participation in the program.

 

Our Board oversees our business operations, assets, affairs and performance. In accordance with our long-standing practice, each of the director nominees other than our Chief Executive Officer is independent. Set forth below are the name, age, length of service on our Board and principal occupation of each director nominee, together with certain other biographical information and factors considered by our Governance Committee and the Board in nominating each director nominee for election to our Board. Unless otherwise indicated, each nominee has served for at least ten years in the business position currently or most recently held. The age of each director is as of April 27, 2010, the date of the 2010 Annual Meeting.

 

 

Our Board has established the five committees described above under the headings “Corporate Governance—Audit Committee,” “—Compensation Committee,” “—Executive Committee,” “—Finance Committee,” and “—Governance Committee” to assist our Board in fulfilling its responsibilities. The charter for each of our Audit, Compensation and Governance Committees, which are available on our website at www.chubb.com/investors, requires that all members satisfy the independence requirements of the NYSE. Our Governance Committee annually considers committee assignments, with appointments being effective as of the date of the annual meeting of shareholders. Current members of our committees are identified below:

 

Audit Committee
Daniel E. Somers (Chair)
Zoë Baird
Joel J. Cohen
Martin G. McGuinn
Alfred W. Zollar

 

Compensation Committee
Martin G. McGuinn (Chair)
Sheila P. Burke
Daniel E. Somers
Karen Hastie Williams
James M. Zimmerman
Alfred W. Zollar

 

Executive Committee
John D. Finnegan (Chair)
James I. Cash, Jr.
Martin G. McGuinn
Daniel E. Somers
James M. Zimmerman

 

Finance Committee
John D. Finnegan (Chair)
Sheila P. Burke
Klaus J. Mangold
Jess Søderberg

 

Governance Committee
James I. Cash, Jr. (Chair)
Zoë Baird
Joel J. Cohen
Lawrence M. Small
Karen Hastie Williams

 

Our Board has formed our Audit Committee to assist our Board in monitoring:

 

 

At December 31, 2009, our Audit Committee was comprised of five directors, each of whom our Board determined to be independent and each of whom satisfied the applicable legal and regulatory independence requirements. Mr. Somers served as the Chairman of our Audit Committee during 2009 and our Board designated him, together with Messrs. Cohen and McGuinn, as the audit committee financial experts. Information regarding the respective experience of Messrs. Cohen, McGuinn and Somers is set forth under the heading “Our Board of Directors.”

 

Our Governance Committee and the full Board consider Audit Committee membership annually. Committee appointments are effective as of the date of the annual meeting of shareholders. In addition to Messrs. Cohen, McGuinn and Somers, Ms. Baird and Mr. Zollar currently serve on our Audit Committee. Our Audit Committee met eight times during 2009.

 

Our Audit Committee operates pursuant to its written charter, which is available on our website at www.chubb.com/investors. The Audit Committee Charter has been approved by our Audit Committee and our Board and it is subject to review at least annually. It was last revised in February 2005.

 

Pursuant to its charter, our Audit Committee performs an annual self-assessment. For 2009, our Audit Committee concluded that, in all material respects, it had fulfilled its responsibilities and satisfied the requirements of its charter and applicable laws and regulations.

 

Under its charter, our Audit Committee, among other things, is directly responsible for the appointment, compensation, retention and oversight of the work of the independent auditor engaged for the purpose of preparing or issuing an audit report or related work or performing other audit, review or attest services for us. Our Audit Committee has appointed Ernst & Young LLP to serve as independent auditor. Our Audit Committee has recommended to our Board that Ernst & Young’s appointment as independent auditor be submitted for ratification by our shareholders. This matter is described under the heading “Proposal 2—Ratification of Appointment of Independent Auditor.”

 

Management is responsible for our internal controls over the financial reporting process and the independent auditor is responsible for performing an independent audit of our consolidated financial statements in accordance with generally accepted auditing standards and for issuing a report on its audit. Our Audit Committee is charged with overseeing and monitoring these activities on behalf of our Board. During 2009 and the first quarter of 2010, our Audit Committee reviewed and discussed with management and the independent auditor our quarterly financial statements and our audited consolidated financial statements for the year ended December 31, 2009. Our Audit

Committee discussed with the independent auditor the matters required to be discussed by the statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T.

 

The Audit Committee has received the written disclosures and the letter from the independent accountant required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the audit committee concerning independence, and has discussed with the independent accountant the independent accountant’s independence.

 

Based on the foregoing, our Audit Committee recommended to our Board that the audited consolidated financial statements be included in the 2009 10-K filed with the SEC.

 

The foregoing report has been furnished by the following members of our Board who comprise our Audit Committee:

 

 

This Audit Committee Report shall not be deemed to be “soliciting material,” to be “filed” with the SEC, subject to Regulation 14A or 14C or to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically request that the information be treated as soliciting material, nor shall it be incorporated by reference into any document filed under the Securities Act of 1933, as amended (Securities Act), or the Exchange Act unless we specifically incorporate it by reference.

 

Our Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis included under the heading “Compensation Discussion and Analysis” pursuant to Item 402(b) of SEC Regulation S-K.

 

Based upon the review and discussion described in the preceding paragraph, our Compensation Committee recommended to our Board that the “Compensation Discussion and Analysis” be included in our proxy statement on Schedule 14A prepared in connection with the 2010 Annual Meeting and that the “Compensation Discussion and Analysis” be incorporated by reference into the 2009 10-K for the year ended December 31, 2009.

 

The foregoing report has been furnished by the following members of our Board who comprise our Compensation Committee:

 

 

This Compensation Committee Report shall not be deemed to be “soliciting material,” to be “filed” with the SEC, subject to Regulation 14A or 14C or to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically request that the information be treated as soliciting material, nor shall it be incorporated by reference into any document filed under the Securities Act or the Exchange Act unless we specifically incorporate it by reference.

 

This Compensation Discussion and Analysis describes the 2009 compensation program for our NEOs. During 2009, our executive management team consisted of the following NEOs:

 

 

The property and casualty insurance industry is comprised of hundreds of companies vying for part of the multibillion-dollar market for personal, commercial and specialty lines of insurance coverage. Within this competitive environment, we are considered to be one of the world’s preeminent insurers, offering extensive business and personal insurance solutions globally. We distinguish ourselves with an approach that focuses on providing premier customer service, quality underwriting and highly disciplined cost management. It is imperative to our success and long-term viability that our business continues to be managed by highly experienced, focused and capable executives who possess the dedication to oversee our global organization on a day-to-day basis and have the vision to anticipate and respond to market developments. It is also important that we concentrate on retaining and developing the capabilities of our emerging leaders to ensure that we continue to have an appropriate depth of executive talent.

 

Our executive compensation program is intended to attract, reward and retain a management team with the individual and collective abilities that fit our profile described above. With this philosophy in mind, our executive compensation program is intended to motivate our employees to achieve the following objectives:

 

 

As discussed more fully below, a substantial portion of an executive’s compensation incorporates performance criteria that support and reward achievement of our annual operating plan and long-term business goals. Specifically, compensation decisions for our NEOs are linked to corporate goals based on financial results (merit-based salary increases and Annual Incentive Plan awards), absolute stock price appreciation (restricted stock unit (RSU)) and a combination of total shareholder return relative to companies in the S&P 500 Index and stock price appreciation (performance unit awards). For 2009, approximately 71% of Mr. Finnegan’s total target compensation was performance-based (Annual Incentive Plan award and performance unit award). The percentages of performance-based pay relative to total target compensation for Messrs. Spiro, Degnan, Krump, Morrison and Robusto were approximately 67%, 68%, 55%, 56% and 56%, respectively.

 

Our Compensation Committee is responsible for establishing the philosophy and objectives that underlie our executive compensation program and guiding its design and administration. Additional information on the structure, scope of authority and operation of our Compensation Committee, as well as the roles of the

Compensation Consultant and management in determining compensation, is set forth under the heading “Corporate Governance—Compensation Committee.”

 

Our Compensation Committee, with the assistance of the Compensation Consultant, reviews the compensation of similarly situated officers of a representative peer group of companies on an annual basis to ensure that our executive compensation program is competitive with the companies with which we believe we compete for executive talent. The overall peer group is comprised of companies similar in size and scope to us within the property and casualty and broader insurance industries as well as the financial services industry. In 2009, the 19 companies comprising our peer group, of which seven were in the property and casualty insurance industry, were:

 

 

Our Compensation Committee has established what it believes to be challenging performance goals—both on an absolute basis and relative to our peers, with an emphasis on our property and casualty insurance industry peers (indicated above with an asterisk). Accordingly, total compensation for our NEOs is targeted between the 50^th and 75^th percentiles of our peers, combined salary and annual cash incentive compensation is targeted at the median of our peers and long-term incentive awards are targeted between the 50^th and 75^th percentiles. During 2009, we achieved the second highest operating income (net income excluding after-tax realized investment gains) per share result in our 127 year history. The total compensation for Messrs. Finnegan and Degnan exceeded the 75^th percentile as a result of their individual performance as well as our strong absolute and relative performance. Mr. Spiro’s total compensation slightly exceeded the 75^th percentile goal, reflective of the external market for attracting the superior talent that he provides, his excellent performance and our financial results. While our Compensation Committee recognizes the outstanding contributions to our financial results attributable to Messrs. Krump, Morrison and Robusto, each of them was recently promoted and each received raises in 2008 and 2009, which brought their respective total compensation packages close to the 25^th percentile of other NEOs within our peer group.

 

Our emphasis on long-term performance-based compensation supports our need for executives to maintain a longer-term focus on our business, while merit-based salary increases and annual incentive compensation reward the delivery of strong annual results. For 2009, approximately 70% of Mr. Finnegan’s total target compensation represented long-term equity incentive awards. The percentage of long-term equity incentive awards relative to total target compensation for Messrs. Spiro and Degnan was approximately 62% and 60%, respectively. The percentage of long-term equity incentive awards relative to total target compensation for Messrs. Krump, Morrison and Robusto was approximately 35%, 37% and 37%, respectively.

 

Our executive compensation program provides our Compensation Committee with the flexibility to make annual compensation decisions based on individual performance. Specifically, our program is designed to provide our Compensation Committee with the ability to adjust individual compensation, significantly in some cases, to the extent the executive achieves individual annual performance goals and strengthens his or her competencies, performance and potential over a longer period. Our Compensation Committee believes that this flexibility is imperative to reward and recognize the key skills, talents and contributions to annual performance and overall long-term company success. Each year, our Compensation Committee evaluates Mr. Finnegan’s performance. Mr. Finnegan, in turn, presents our Compensation Committee with his evaluation of each of the other NEOs, which includes a review of contributions and performance over the prior year, strengths, weaknesses, development plans,

succession potential and compensation recommendations. Our Compensation Committee then makes a final determination of compensation amounts for each NEO with respect to each of the elements of the executive compensation program for actual compensation relative to the preceding year and target compensation for the current year.

 

Our Compensation Committee reviews tally sheets prepared by management on an annual basis. The tally sheets set forth all components of the NEOs’ compensation, including base salary, annual incentive compensation, equity incentive awards, benefits and perquisites, retirement plan accruals and total payments upon various termination scenarios. Our Compensation Committee uses these tally sheets to confirm that it has a full understanding of our NEOs’ comprehensive compensation packages.

 

During 2009, with the assistance of the Compensation Consultant, our Compensation Committee performed an assessment of the primary components of our executive compensation program—annual salary, annual incentive compensation, long-term equity incentive awards and deferred compensation plan. Our Compensation Committee reviewed each component from an internal perspective, including the alignment of our overall executive compensation philosophy and objectives to our business strategy, and from an external perspective, which considered our peer group and evolving market trends. The assessment revealed that our overall executive compensation program is aligned with our business strategy of emphasizing operating income and shareholder return and reflects market practices in terms of incentive mix, metrics and equity use. Based on the assessment, the Compensation Committee determined that these components of our executive compensation program did not encourage inappropriate risk-taking by our NEOs.

 

In reaching this conclusion, our Compensation Committee noted that:

 

 

In addition to the risk assessment of the compensation programs in which our NEOs participate, in February 2010, our Compensation Committee undertook a risk analysis of our other compensation programs and determined that these compensation programs do not create any risk that is reasonably likely to have a material adverse effect on us.

 

Section 162(m) of the Internal Revenue Code limits to $1 million per year the federal income tax deduction to public corporations for compensation paid for any fiscal year to the CEO and the three most highly compensated executive officers (other than the CFO) as of the end of the fiscal year as determined in accordance with the Exchange Act. This limitation does not apply to qualifying “performance-based compensation.” Our Compensation Committee has designed our annual incentive compensation awards and performance unit awards to qualify for the performance-based compensation exception to the $1 million limit. In establishing targets for meeting the performance-based compensation exception, our Compensation Committee anticipated using negative discretion in calculating final incentive payouts. In addition, our NEOs (other than Mr. Spiro) generally are required to defer compensation that would not otherwise be deductible. Due to guidance issued in 2007 by the Internal Revenue Service (IRS), the compensation of Mr. Spiro, our principal financial officer for 2009, was not subject to the Section 162(m) limitation on deductibility.

 

Our Compensation Committee believes that our shareholders are best served by not restricting our Compensation Committee’s discretion and flexibility in crafting compensation plans and arrangements, such as annual salaries and RSU awards, even though they may result in certain non-deductible compensation expenses. Accordingly, our Compensation Committee may from time to time approve elements of compensation for one or more of our NEOs that are not fully deductible and reserves the right to do so in the future.

 

Our executive compensation program consists of annual and long-term compensation and company-sponsored benefit plans. Each component is designed for a specific purpose and contributes to an overall total compensation package that is competitive, predominantly performance-based and valued by our executives.

 

Annual salary is designed to provide a fixed level of compensation to our NEOs based on their skills, background, and market data, as well as to retain their services. Annual salaries are generally targeted at the median of our peer group because we want to provide attractive and competitive levels of base compensation to ensure our ability to attract and retain superior talent. In addition to considering peer group data, individual performance and contributions, our Compensation Committee determines annual salaries based upon the skills, knowledge and competencies of each NEO, as reviewed and recommended annually by Mr. Finnegan (for all NEOs other than himself). Setting of annual salaries is important because each NEO’s target annual incentive compensation is then developed based on annual salary levels.

 

In February 2009, our Compensation Committee reviewed annual salaries for each of our NEOs based upon the above factors. Although we achieved another year of excellent performance, at that time, our Compensation Committee decided to maintain the 2008 base salaries in 2009 for all of our NEOs given that Mr. Spiro’s annual salary had just been fixed in October 2008 and each of Messrs. Degnan, Krump, Morrison and Robusto had received substantial increases in connection with their respective promotions in June 2008. The Compensation Committee also determined that Mr. Finnegan’s salary remained competitive without adjustment. Accordingly, the 2009 base salaries for Messrs. Finnegan, Spiro, Degnan, Krump, Morrison and Robusto were set at $1,275,000, $750,000, $825,000, $550,000, $480,000, and $450,000, respectively. In September 2009, our Board extended for one year the mandatory retirement date for Mr. Degnan so that he could remain our Chief Operating Officer until the end of 2010. In connection with this decision to defer Mr. Degnan’s retirement, the Compensation Committee undertook a comprehensive review of the compensation of our NEOs during the third quarter of 2009. As a result of that analysis, the Compensation Committee approved base salary increases for Messrs. Degnan, Krump, Morrison and Robusto of 6.0%, 5.5%, 6.3% and 13.3%, respectively. Accordingly, effective September 1, 2009, the annual base salaries for Messrs. Degnan, Krump, Morrison and Robusto increased to $874,500, $580,000, $510,000 and $510,000, respectively. Due to his recent hire in 2008, our Compensation Committee decided to maintain Mr. Spiro’s base salary for the remainder of 2009.

 

Our Annual Incentive Plan is designed to support our compensation strategy by linking a significant portion of total annual cash compensation to the achievement of critical business goals on an annual basis. All of our salaried employees, including our NEOs, are eligible to participate in the Annual Incentive Plan.

 

Incentive Opportunity.  As discussed under the heading “Compensation Discussion and Analysis—Setting of Executive Compensation,” baseline opportunities for annual incentive compensation awards (combined with salary) are generally set at the median for executives with commensurate positions at our peers. Our Compensation Committee establishes the range of potential payments for Mr. Finnegan’s annual incentive compensation based upon its analysis of market data from our peer group of companies, advice from the Compensation Consultant and subject to the minimum annual incentive compensation award target of $1.6 million as provided for in his employment agreement. For the other NEOs, our Compensation Committee establishes the annual incentive compensation payment range after taking into consideration Mr. Finnegan’s recommendations, advice from the Compensation Consultant and market data from our peer group of companies. For information regarding the potential ranges of awards under the Annual Incentive Plan for our NEOs in 2009, see the information set forth under the heading “Executive Compensation—Grants of Plan-Based Awards.” Baseline opportunities are disclosed in the “target” column.

 

Performance Goal.  Since 2007, annual incentive compensation awards have been earned based on our adjusted operating income. We define adjusted operating income as net income excluding after-tax realized investment gains and losses and adjusted to account for the loss of investment income attributable to our repurchase of shares of our common stock. Our Compensation Committee believes that adjusted operating income provides an effective means of directly linking executive compensation to our shareholders’ interests. We adjust for investment income so that the calculation is not distorted by the impact of our continuing commitment to return capital to shareholders through our share repurchase program.

 

Pool Funding.  Each year we fund an aggregate award pool for all Annual Incentive Plan participants in an amount equal to 8.8% of adjusted operating income subject to a minimum funding condition that requires us to achieve operating income greater than 50% of the prior year’s operating income. This means that each percentage increase or decrease in 2009 operating income relative to 2008 operating income will result in a proportional increase or decrease in the 2009 Annual Incentive Compensation award pool, thus providing a direct link between incentive payouts and year over year performance.

 

Performance Multiplier.  Actual incentive compensation awards for our NEOs are earned by applying a performance multiplier to each NEO’s baseline opportunity. The performance multiplier is derived by dividing the total Annual Incentive Compensation award pool by the total baseline opportunities for all participants covered by the Annual Incentive Plan.

 

Incentive Payouts.  Adjusted operating income in 2009 was $2.3 billion, which was approximately 7.0% higher than 2008 adjusted operating income of $2.2 billion. This created a 2009 award pool of $202.7 million. Based upon this award pool and total baseline opportunities, awards to Messrs. Spiro, Degnan, Krump, Morrison and Robusto were set at $1,563,300, $1,974,700, $806,000, $708,700 and $708,700, respectively. These amounts reflect our formulaic approach to calculating bonuses and the Compensation Committee did not make any adjustments. Our Compensation Committee decided to adjust the formulaic approach for Mr. Finnegan to reflect his outstanding performance towards the achievement of enterprise financial goals and the development of a rigorous succession plan that included comprehensive competencies for CFO, COO, CAO and CEO. With this adjustment, the award to Mr. Finnegan was increased by $206,500 to $3,750,000.

 

The incentive payouts for our NEOs who are subject to the $1 million compensation limit under Section 162(m) of the Internal Revenue Code are below their respective targets established by our Compensation Committee to meet the performance-based compensation exception.

 

In 2009, our Board adopted, and our shareholders approved the 2009 LTIP to replace the 2004 Employee Plan. The terms of the new plan and types of awards granted thereunder are substantially similar to those of the 2004 Employee Plan. Our NEOs received their 2009 equity awards under the 2004 Employee Plan and did not begin receiving equity awards under the new plan until 2010.

 

Equity Incentive Awards.  Long-term equity incentive awards made pursuant to the 2004 Employee Plan are designed to support several of our compensation objectives, including:

 

 

All employees at or above the level of Assistant Vice President (approximately 1,700 employees), including our NEOs, participate in our long-term equity incentive award program. Target long-term equity incentive awards are designed to achieve our desired competitive market position of being between the 50^th and 75^th percentiles of our peer group of companies and are commensurate with the individual’s level within our organization. For 2009, the target long-term equity incentive awards for Messrs. Finnegan, Spiro and Degnan were $7,600,000, $2,650,000 and $3,000,000, respectively. The target long-term equity incentive award for each of Messrs. Krump, Morrison, and Robusto was $550,000. These target levels were determined based on analysis of data from our peer group of companies.

 

Annual equity incentive awards to our NEOs are in the form of performance units and RSUs. Consistent with our emphasis on performance-based compensation, for officers at or above the level of Senior Vice President, including our NEOs, performance units generally constitute 75% of the annual equity award, while RSUs generally constitute the remaining 25%. We believe our emphasis on performance-based long-term equity incentive awards is consistent with the practice of our peer group companies.

 

Our Compensation Committee manages the potential dilutive effect of equity incentive awards by monitoring our “run rate”—the number of shares granted as a percentage of our fully diluted common shares outstanding—relative to our peer companies. Our Compensation Committee also evaluates guidelines used by certain institutional advisory services and considers advice from the Compensation Consultant. Our annual run rate was approximately 0.6% in 2009, which we believe is conservative relative to the practices of our peer group companies. Our conservative run rate is primarily attributable to the fact that fewer full-value shares are needed to provide a target award value in the form of performance units and RSUs than would be required for an award of stock options as well as our limited participation levels.

 

Performance Units.  Performance units are intended to motivate our senior officers to achieve superior total shareholder return—share price appreciation plus reinvested dividends (TSR)—versus companies in the Standard & Poor 500 Index (S&P 500) over a three-year performance period. We view the other companies in the S&P 500 as the competition for our shareholders’ investment dollars. The value of performance units is directly linked to the total return delivered to our shareholders, thus motivating our senior officers to deliver superior returns over an extended performance period. Performance units also support retention, as they are subject to forfeiture if the recipient’s employment terminates before the shares are settled for any reason other than death, disability, retirement or with the consent of our Compensation Committee.

The number of performance units earned for each three-year performance period can vary from 0% to 200% of the original target award based on our relative TSR versus S&P 500 companies as follows:

 

 

For relative performance between the 25^th and 85^th percentiles, the number of shares earned is determined by multiplying the relative percentile of comparative performance achieved by two. The final dollar value of each recipient’s performance unit award is also dependent on the price of our common stock at the award’s settlement date, thus providing an additional link to shareholders’ interests and providing our senior officers with significant value potential based on our results.

 

The performance period for the performance units granted in 2007 ended on December 31, 2009. Our TSR over the performance period was 0.4%, which positioned us at the 66.1 percentile of companies in the S&P 500. Based on the performance scale above, each of our NEOs (other than Mr. Spiro), like all recipients of 2007 performance units who did not forfeit such awards due to termination of their employment, received in February 2010 the number of shares of common stock equal to 132.2% of the respective target number of performance units granted in 2007. Information regarding the vesting of each NEO’s respective 2007 performance unit award is set forth under the heading “Executive Compensation—Option Exercises and Stock Vested.”

 

The number and grant date fair value of performance units granted to our NEOs in 2009 for the performance period running from January 1, 2009 to December 31, 2011 is set forth under the heading “Executive Compensation—Grants of Plan-Based Awards.”

 

RSUs.  RSUs are intended to align management’s interests with those of our shareholders and serve as a strong retention tool for key employees. Like performance units, RSUs support retention because they generally cliff vest on the third anniversary of the date of grant, provided the recipient remains employed by us over that period. The number and grant date value of RSUs granted to NEOs in 2009 is set forth under the heading “Executive Compensation—Grants of Plan-Based Awards.”

 

Stock Options.  We discontinued the use of stock options as part of our core long-term equity incentive award program in 2004. However, we still utilize stock option grants as a means of providing tax-efficient equity awards to certain internationally-based employees. In addition, stock options granted to all participants, including participating NEOs, under predecessor plans to the 2004 Employee Plan included a restoration option feature that provides the optionee with the right to receive a restoration stock option upon exercise of the original option if shares are exchanged in a stock-for-stock exercise within seven years of the grant date and our stock price is at least 25% above the exercise price on the exercise date. Restoration stock options are granted on the same date the original stock option award is exercised, have an exercise price equal to the average of the high and low prices of our common stock on the grant date and have a term equal to the remaining term of the original option.

 

Equity Grant Practices.  Our Compensation Committee approves and grants annual equity awards at a regularly scheduled meeting in the first quarter of each year based on market data from our peer group of companies, advice from the Compensation Consultant and recommendations from Mr. Finnegan for the other NEOs. There is no relationship between the timing of equity incentive award grants and our release of material, non-public information. Although our Compensation Committee has the discretion to do so, our Compensation Committee generally does not make interim equity award grants to employees at or above the level of Executive Vice President, including our NEOs.

 

As discussed under the heading “Corporate Governance—Compensation Committee,” our Compensation Committee has delegated authority to Mr. Finnegan to grant equity awards to employees up to and including the level of Senior Vice President pursuant to guidelines that specify the range of award values an employee could

receive based on his or her level within our organization. These guidelines are adjusted on a periodic basis as warranted by competitive market conditions. Grants made by Mr. Finnegan pursuant to this authority are effective on the last business day of the month (date of hire for newly hired employees), with the number of shares awarded determined by dividing the award value by the average of the high and low prices of our common stock on the grant date. These grants are reported to our Compensation Committee at its next regularly scheduled meeting following the date of grant.

 

We provide certain executives, including each of our NEOs, with a limited range of perquisites. The incremental cost and valuation of these perquisites for the NEOs is set forth under the heading “Executive Compensation—Summary Compensation Table.”

 

Corporate Aircraft.  During 2009, we owned one corporate aircraft and leased a second. From time to time, we have leased a third aircraft on a per trip basis. Senior executives use these aircraft to minimize and more efficiently utilize their travel time, protect the confidentiality of their travel and our business and enhance their personal security. Our Board also permits Messrs. Finnegan and Degnan limited use of the corporate aircraft for personal travel. The annual personal use of the corporate aircraft for Messrs. Finnegan and Degnan is limited to 35 hours and 20 hours, respectively.

 

Automobile Use/Allowance.  As required pursuant to his employment agreement, we provide Mr. Finnegan with a car and driver for all of his business travel needs to minimize and more efficiently utilize his travel time and enhance his personal security. Mr. Finnegan’s personal use of the car and driver is primarily for his commute to and from the office. Mr. Finnegan bears the applicable taxes with respect to his personal usage. We provide all domestic employees at or above the level of Vice President, including our NEOs other than Mr. Finnegan, a monthly automobile allowance of $500. Recipients of this benefit bear the applicable income taxes with respect thereto.

 

Financial Counseling.  We offer all of our domestic employees at or above the level of Senior Vice Presidents, including our NEOs, financial counseling services. These services include income tax preparation, portfolio management and estate planning. Recipients of this benefit bear the applicable income taxes with respect thereto.

 

We maintain company-sponsored retirement and deferred compensation plans for the benefit of all of our salaried employees, including our NEOs. These benefits are designed to assist employees, including our NEOs, in providing for their financial security and personal needs in a manner that recognizes individual goals and preferences.

 

Retirement Plans.  We maintain the Pension Plan of The Chubb Corporation (the Pension Plan), which is our tax-qualified defined benefit plan, and the Pension Excess Benefit Plan of The Chubb Corporation (the Pension Excess Benefit Plan), which is our nonqualified excess defined benefit plan, to help us attract and retain our employees. Our NEOs participate in the Pension Plan on the same terms and conditions as other employees. Our NEOs participate in the Pension Excess Benefit Plan on the same terms and conditions as other highly compensated employees, except that Mr. Finnegan is entitled to a supplemental pension benefit under his employment agreement (the Pension SERP). Information about our retirement plans is set forth under the heading “Executive Compensation—Pension Benefits.”

 

We also maintain the CCAP, which is a qualified 401(k) savings plan, for all eligible employees. The CCAP provides employees with an opportunity to voluntarily defer pre-tax or after-tax dollars into a 401(k) account. Chubb provides matching contributions on an annual basis equal to the lesser of 4% or the actual percentage deferred by the participant.

 

Nonqualified Defined Contribution and Deferred Compensation Plans.  We maintain The Chubb Corporation Key Employee Deferred Compensation Plan (2005) (the 2005 Deferred Compensation Plan) and The Chubb Corporation Executive Deferred Compensation Plan (collectively, the Deferred Compensation Plans), which are

our nonqualified deferred compensation plans for our employees at or above the level of Vice President, including our NEOs, to provide them with additional tools to enhance their retirement planning and wealth management. These plans allow participants to defer receipt, and thus the tax liability, of income (salary, annual incentive compensation and equity compensation) to a later specified date. We also maintain the Defined Contribution Excess Benefit Plan of The Chubb Corporation (the CCAP Excess Benefit Plan), which is our nonqualified excess defined contribution plan, and the CCAP-related supplemental executive retirement plan for Mr. Finnegan pursuant to his employment agreement (the CCAP SERP). None of these plans provide for above-market returns. Information about our nonqualified defined contribution and deferred compensation plans is set forth under the heading “Executive Compensation—Nonqualified Defined Contribution and Deferred Compensation Plans.”

 

To protect our competitive position, since 2005, individual equity award agreements for each of our employees, including our NEOs, have contained non-disclosure, non-solicitation and invention assignment covenants. In addition, the NEO equity award agreements and those of certain other senior officers contain non-competition provisions. Failure to comply with these provisions, among other potential consequences, results in the forfeiture of unsettled awards. Our Compensation Committee also may require repayment of any awards that are settled within one year prior to the breach of the applicable covenant and within one year after termination of employment. Additionally, we may seek an injunction, restraining order or such other equitable relief restraining the officer from committing any violation of the covenants.

 

In 2009, we adopted a policy on the recoupment of performance-based compensation in restatement situations. The policy provides that if we are required to restate our financial statements due to material noncompliance with any financial reporting requirement under the securities laws, as a result of misconduct of a senior executive, the independent members of the Board, in their sole discretion, have the right to cause such senior executive to reimburse us for (1) any bonus or other incentive-based or equity-based compensation received by that senior executive during the 12-month period following the first public issuance or filing with the SEC (whichever first occurs) of the document containing such financial statements; and (2) any profits realized from the sale of our stock during that 12-month period. A senior executive means any of our officers who are subject to Section 16 of the Exchange Act and any of our other officers who the Board designates.

 

In general, it is our Board’s policy not to enter into employment agreements with, or provide executive severance benefits to, our executive officers beyond those generally available to our salaried employees, other than the change in control agreements discussed below. As a result, our NEOs serve at the will of our Board. The only exception to this policy is the employment agreement with Mr. Finnegan that we entered into when he was hired in 2002. Our Compensation Committee believed, and continues to believe, that it is in our best interest and the best interests of our shareholders to have a specific compensation package with incentives and guarantees in order to retain Mr. Finnegan’s services. A description of, and the amount of the estimated payments and benefits payable to Mr. Finnegan upon a termination of employment under, his employment agreement is set forth under the heading “Executive Compensation—Potential Payments upon Termination or a Change in Control.”

 

Our Board has determined that it is in our best interest and the best interests of our shareholders to assure that we will have the continued dedication of Messrs. Finnegan and Spiro in the event of a threat or occurrence of a change in control. Our Board continues to believe that change in control agreements diminish the inevitable distraction of these individuals by virtue of the personal uncertainties and risks created by a pending or threatened change in control and encourage their full attention and dedication to our business in the event of any pending or threatened change in control. As such, we have individual change in control agreements with Messrs. Finnegan and Spiro. The change in control agreement for Mr. Spiro requires both a change in control event as well as a termination event to trigger benefits. A description of, and the amount of the estimated payments and benefits payable upon a change in control under, these agreements is set forth under the heading “Executive Compensation—Potential

Payments upon Termination or a Change in Control.” Mr. Finnegan’s change in control agreement provides for a gross-up payment in connection with the determination that a payment would be subject to the excise tax under Section 280G of the Internal Revenue Code. Mr. Degnan is retirement-eligible. Consequently, he is no longer entitled to any enhanced benefits under his change in control agreement.

 

Our Board, based upon our Compensation Committee’s recommendation, adopted executive share ownership guidelines in 2004. Our Compensation Committee believes that these guidelines promote our objective of increasing shareholder value by encouraging senior officers to acquire and maintain a meaningful equity stake in Chubb.

 

The guidelines were designed to maintain share ownership at levels high enough to assure our shareholders of our senior officers’ commitment to value creation, while taking into account each individual officer’s need for portfolio diversification. Under these guidelines, senior officers, including each of our NEOs, are expected, over time, to acquire and hold shares of our common stock equal in value to a multiple of their annual salaries. Owned shares, unvested RSUs, shares allocated in our retirement plans and shares deferred until termination of employment count toward satisfying the guidelines. Unexercised stock options and unearned performance units do not count toward satisfaction of the guidelines. There is a five-year phase-in period beginning on the later of becoming an officer subject to the share ownership guidelines and the date the guidelines were adopted in February 2004. Our current share ownership guidelines are as follows:

 

 

Our Compensation Committee reviews the guidelines on a periodic basis and monitors the officers’ progress toward meeting their target ownerships levels. The share ownership of our NEOs at the end of 2009 was:

 

 

 

 

As shown in the above table, each of our NEOs has met his required ownership threshold. We generally discourage our employees (including our NEOs) from engaging in hedging transactions in our common stock that would allow the employee to continue to own shares of our common stock without the full risks and rewards of ownership.

 

The following table sets forth information regarding NEO compensation during 2009, 2008 and 2007:

 

 

 

 

 

 

 

 

 

The following table sets forth information regarding 2009 grants to our NEOs under our Annual Incentive Plan and 2004 Employee Plan: