DEF 14A 1 a07-6085_1def14a.htm DEF 14A

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  x

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))

x

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):

x

No fee required.

o

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

(1)

Title of each class of securities to which transaction applies:

 

 

 

 

(2)

Aggregate number of securities to which transaction applies:

 

 

 

 

(3)

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

 

 

 

(4)

Proposed maximum aggregate value of transaction:

 

 

 

 

(5)

Total fee paid:

 

 

 

o

Fee paid previously with preliminary materials.

o

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

(1)

Amount Previously Paid:

 

 

 

 

(2)

Form, Schedule or Registration Statement No.:

 

 

 

 

(3)

Filing Party:

 

 

 

 

(4)

Date Filed:

 

 

 

 




 

GRAPHIC

 

THE CHUBB CORPORATION




15 Mountain View Road, P.O. Box 1615, Warren, New Jersey 07061-1615

 

March 23, 2007

Dear Shareholder:

You are cordially invited to attend the 2007 Annual Meeting of Shareholders of The Chubb Corporation, which will be held on April 24, 2007 at 10:00 a.m., local time, in the Amphitheater of our corporate headquarters located at 15 Mountain View Road, Warren, New Jersey 07059.

Details regarding admission to the meeting and the business to be presented at the meeting can be found in the accompanying Notice of 2007 Annual Meeting of Shareholders and Proxy Statement.

Your vote is important. Regardless of whether you are able to attend, it is important that your shares be represented at the meeting. You may vote over the internet as well as by telephone or by returning your proxy card. Directions for using these voting options are provided in the enclosed materials.

On behalf of the Board of Directors and the management of Chubb, I extend our appreciation for your continued support.

Yours sincerely,

 

GRAPHIC

 

John D. Finnegan

 

Chairman, President and Chief
Executive Officer

 




GRAPHIC

 

THE CHUBB CORPORATION

15 Mountain View Road, P.O. Box 1615, Warren, New Jersey 07061-1615

 

NOTICE OF 2007 ANNUAL MEETING OF SHAREHOLDERS

DATE AND TIME

 

Tuesday, April 24, 2007 at 10:00 a.m., local time

PLACE

 

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

ITEMS OF BUSINESS

 

(1) To elect 11 directors to serve until the next annual meeting of shareholders and until their respective successors are elected and qualified.

 

 

(2) To ratify the appointment of Ernst & Young LLP as independent auditor.

 

 

(3) To vote on an amendment to our Restated Certificate of Incorporation to provide for majority voting in the uncontested election of directors.

 

 

(4) To vote on a shareholder proposal regarding political contributions.

 

 

(5) To transact such other business as may be properly brought before the meeting or at any adjournment or postponement thereof.

RECORD DATE

 

You are entitled to vote at the annual meeting and at any adjournment or postponement thereof if you were a shareholder of record at the close of business on March 5, 2007.

ADJOURNMENTS AND POSTPONEMENTS

 

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

VOTING BY PROXY

 

To ensure your representation at the annual meeting, please fill in, sign, date and return the accompanying proxy card in the enclosed addressed envelope, or follow the instructions attached to the proxy card to vote using a telephone or by accessing the internet. The giving of a proxy will not affect your right to revoke the proxy by appropriate written notice or to vote in person should you later decide to attend the annual meeting.




 

ADMISSION TO THE MEETING

 

You are entitled to attend the annual meeting if you were a shareholder as of the close of business on March 5, 2007. For admittance to the meeting, please be prepared 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. The annual meeting will begin promptly at 10:00 a.m., local time. Please allow yourself ample time for the check-in procedures. Video and audio recording devices and other electronic devices will not be permitted at the meeting, and attendees may be subject to security inspections.

 

 

By order of the Board of Directors,

 

 

GRAPHIC

 

 

W. Andrew Macan
Vice President and Secretary

March 23, 2007

 

 

 




GRAPHIC

THE CHUBB CORPORATION




15 Mountain View Road, P.O. Box 1615, Warren, New Jersey 07061-1615

 

 

2007 ANNUAL MEETING OF SHAREHOLDERS
PROXY STATEMENT
TABLE OF CONTENTS

 

 

 

PAGE

 

Proxy and Voting Information

 

 

1

 

 

Who Can Vote

 

 

1

 

 

How Many Shares Can Be Voted

 

 

1

 

 

How You Can Vote

 

 

1

 

 

Record Holders

 

 

1

 

 

CCAP Participants

 

 

2

 

 

Brokerage and Other Account Holders

 

 

2

 

 

Voting

 

 

2

 

 

Revocation of Proxies

 

 

2

 

 

Required Votes

 

 

3

 

 

Other Matters to be Acted upon at the Annual Meeting

 

 

3

 

 

Adjournments and Postponements

 

 

3

 

 

Combined Form 10-K and Annual Report

 

 

3

 

 

Important Notice about Security

 

 

3

 

 

Corporate Governance

 

 

4

 

 

Commitment to Corporate Governance

 

 

4

 

 

Corporate Governance Guidelines

 

 

4

 

 

Director Qualifications and Candidate Considerations

 

 

5

 

 

Nominating Procedures

 

 

6

 

 

Director Election Procedures

 

 

7

 

 

Director Independence

 

 

7

 

 

Related Person Transactions

 

 

7

 

 

Lead Director

 

 

9

 

 

Contacting our Board and Audit Committee

 

 

9

 

 

Director Communications

 

 

9

 

 

Audit Committee Communications

 

 

10

 

 

Required Certifications

 

 

10

 

 

Meeting Attendance and Related Matters

 

 

10

 

 

Audit Committee

 

 

10

 

 

Compensation Committee

 

 

11

 

 

Composition; Scope of Authority

 

 

11

 

 

Processes and Procedures

 

 

11

 

 

Role of Executive Officers

 

 

11

 

 

Delegation of Authority

 

 

12

 

 

Role of Executive Compensation Consultant

 

 

12

 

 

Executive Committee

 

 

12

 

 

Finance Committee

 

 

12

 

 

Governance Committee

 

 

13

 

 

Pension & Profit Sharing Committee

 

 

13

 

 




 

Director Compensation

 

 

13

 

 

Director Compensation Table

 

 

13

 

 

Fees Earned or Paid in Cash

 

 

16

 

 

Stock Awards

 

 

16

 

 

Background

 

 

16

 

 

2006 Stock Awards

 

 

16

 

 

Option Awards

 

 

17

 

 

Change in Pension Value and Nonqualified Deferred Compensation Earnings

 

 

17

 

 

Cash Compensation

 

 

17

 

 

Cash Accounts

 

 

17

 

 

Market Value Accounts

 

 

18

 

 

Shareholders’ Equity Accounts

 

 

18

 

 

Equity Compensation

 

 

19

 

 

All Other Compensation

 

 

19

 

 

Director’s Charitable Award Program

 

 

19

 

 

Our Board of Directors

 

 

20

 

 

Committee Assignments

 

 

23

 

 

Audit Committee Report

 

 

24

 

 

Purpose

 

 

24

 

 

Composition and Meetings

 

 

24

 

 

Charter and Self-Assessment

 

 

24

 

 

Appointment of Independent Auditor

 

 

24

 

 

Review of Financial Information

 

 

24

 

 

Critical Accounting Policies

 

 

25

 

 

Auditor Independence

 

 

25

 

 

Inclusion of Consolidated Financial Statements in Form 10-K

 

 

25

 

 

Compensation Committee Report

 

 

26

 

 

Compensation Discussion and Analysis

 

 

27

 

 

Overall Executive Compensation Philosophy and Objectives

 

 

27

 

 

Setting of Executive Compensation

 

 

27

 

 

Market Data

 

 

28

 

 

Individual Performance

 

 

28

 

 

Components of Executive Compensation

 

 

28

 

 

Annual Salary

 

 

29

 

 

Annual Incentive Compensation

 

 

29

 

 

Incentive Opportunity

 

 

29

 

 

Performance Goals

 

 

29

 

 

Incentive Payouts

 

 

30

 

 

Long-Term Equity Incentive Awards

 

 

30

 

 

Equity Incentive Awards

 

 

30

 

 

Performance Shares

 

 

30

 

 

RSUs

 

 

31

 

 

Restoration Stock Options

 

 

31

 

 

Equity Grant Practices

 

 

31

 

 

Non-Compete and Clawback Provisions

 

 

32

 

 

Perquisites

 

 

32

 

 

Corporate Aircraft

 

 

32

 

 

Automobile Use

 

 

32

 

 

Financial Counseling

 

 

32

 

 




 

Company-Sponsored Benefit Plans

 

 

32

 

 

Retirement Plans

 

 

32

 

 

Nonqualified Defined Contribution and Deferred Compensation Plans

 

 

33

 

 

Employment and Severance Agreements

 

 

33

 

 

Change in Control Agreements

 

 

33

 

 

Stock Ownership Guidelines

 

 

34

 

 

Changes in Executive Compensation Policies for 2007

 

 

34

 

 

Tax Policies

 

 

35

 

 

Executive Compensation

 

 

36

 

 

Summary Compensation Table

 

 

36

 

 

Grants of Plan-Based Awards

 

 

40

 

 

Outstanding Equity Awards at Fiscal Year-End

 

 

42

 

 

Option Exercises and Stock Vested

 

 

44

 

 

Pension Benefits

 

 

44

 

 

Pension Plan

 

 

44

 

 

Pension Excess Benefit Plan

 

 

45

 

 

SERP—Mr. Finnegan

 

 

46

 

 

Pension Benefits Table

 

 

46

 

 

Nonqualified Defined Contribution and Deferred Compensation Plans

 

 

47

 

 

Deferred Compensation Plan

 

 

47

 

 

CCAP Excess Benefit Plan

 

 

48

 

 

CCAP SERP—Mr. Finnegan

 

 

48

 

 

Nonqualified Defined Contribution and Deferred Compensation Table

 

 

48

 

 

Potential Payments upon Termination

 

 

49

 

 

Accrued Compensation and Benefits

 

 

49

 

 

Termination Events

 

 

49

 

 

Disability or Death

 

 

49

 

 

Retirement

 

 

49

 

 

For Cause Termination

 

 

50

 

 

Voluntary Resignation

 

 

50

 

 

Involuntary Termination without Cause

 

 

50

 

 

Change in Control

 

 

51

 

 

Estimate of Incremental Potential Payment

 

 

54

 

 

Equity Compensation Plan Information

 

 

59

 

 

Security Ownership of Certain Beneficial Owners and Management

 

 

60

 

 

Certain Transactions and Other Matters

 

 

64

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

 

64

 

 

Proposal 1 Election of Directors

 

 

65

 

 

Proposal 2 Ratification of Appointment of Independent Auditor

 

 

66

 

 

Proposal 3 Amendment to the Restated Certificate of Incorporation

 

 

67

 

 

Proposal 4 Shareholder Proposal Regarding Political Contributions

 

 

68

 

 

Solicitation of Proxies

 

 

71

 

 

2008 Shareholder Proposals and Nominations

 

 

71

 

 

Annex A The Chubb Corporation Policy on Pre-Approval of Independent Auditor Services

 

 

 A-1

 

 

Annex B Certificate of Amendment to the Restated Certificate of Incorporation

 

 

B-1

 

 

 




GRAPHIC

THE CHUBB CORPORATION




15 Mountain View Road, P.O. Box 1615, Warren, New Jersey 07061-1615

 


PROXY STATEMENT


PROXY AND VOTING INFORMATION

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 2007 Annual Meeting of Shareholders (the 2007 Annual Meeting). We will hold the 2007 Annual Meeting on Tuesday, April 24, 2007 in the Amphitheater at The Chubb Corporation, 15 Mountain View Road, Warren, New Jersey 07059, beginning at 10:00 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 first began mailing this proxy statement and accompanying proxy card on or about March 23, 2007.

Who Can Vote

Our Board has set March 5, 2007 as the record date for the 2007 Annual Meeting. Shareholders of record of our common stock at the close of business on March 5, 2007 may vote at the 2007 Annual Meeting.

How Many Shares Can Be Voted

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, 407,355,123 shares of our common stock were outstanding.

How You Can Vote

Record Holders

If your shares are registered in your name with Computershare Trust Company, N.A., our dividend agent, transfer agent and registrar, you are considered a shareholder of record, and these proxy materials are being sent directly to you by us. Shareholders of record can vote in person at the 2007 Annual Meeting or give their proxy to be voted at the 2007 Annual Meeting in any one of the following ways:

·       over the internet;

·       by telephone; or

·       by completing and mailing the enclosed proxy card.

The internet and telephone voting procedures have been set up for your convenience. These procedures are designed to authenticate your identity, to allow you to give voting instructions and to confirm that those instructions have been recorded properly. If you are a shareholder of record and you would like to vote by using the internet or by telephone, please refer to the voting instructions attached to your proxy card. If you wish to vote using the enclosed proxy card, please specify your voting instructions using the boxes provided, sign, date and return your proxy card before the 2007 Annual Meeting, and we will vote your shares as you direct.




CCAP Participants

If you are a participant in the Capital Accumulation Plan of The Chubb Corporation, Chubb & Son Inc. and Participating Affiliates (the CCAP), your proxy will include all shares allocated to you in the CCAP (Plan Shares), which you may vote over the internet, by telephone, by completing and mailing the enclosed proxy card or by voting in person at the 2007 Annual Meeting. Your proxy will serve as a voting instruction for the trustee of the CCAP. If your voting instructions are not received by April 20, 2007, any Plan Shares you hold will be voted in proportion to the way the other participants in the CCAP vote their shares.

Brokerage and Other Account Holders

You are considered to be the beneficial owner of shares held for you in an account by a broker, bank or other nominee. These proxy materials are being forwarded to you with respect to those shares by your broker, bank or nominee who is the shareholder of record. You have the right to direct your broker, bank or nominee on how to vote, and you may also attend the 2007 Annual Meeting. Your broker, bank or nominee has enclosed a voting instruction card. Beneficial owners of shares who wish to vote at the 2007 Annual Meeting must obtain a legal proxy from their broker, bank or nominee and present it at the 2007 Annual Meeting. The availability of telephone and internet voting for beneficial owners will depend on the voting processes of the 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.

Voting

Whether you vote over the internet, by telephone or by mail, you can specify whether you wish to vote your shares for or have your vote withheld from all, some, or none of the nominees for election as director (Proposal 1 on the proxy card). You can also specify whether you vote for or against, or abstain from, Proposals 2, 3 and 4. If you abstain, your vote will not count for or against Proposals 2, 3 and 4.

If you duly execute the proxy card but do not specify how you want to vote, your shares will be voted as our Board recommends, which is “FOR” the election of each of the nominees for director as set forth under Proposal 1 below, “FOR” ratification of the appointment of Ernst & Young LLP as independent auditor as described in Proposal 2 below, “FOR” the amendment to our Restated Certificate of Incorporation as described in Proposal 3 below and “AGAINST” the shareholder proposal regarding political contributions as described in Proposal 4 below.

Revocation of Proxies

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:

·       by notifying our Corporate Secretary of the revocation in writing;

·       by delivering a duly executed proxy card bearing a later date;

·       by properly submitting a new timely and valid proxy via the internet or by telephone after the date of the revoked proxy; or

·       by voting in person at the 2007 Annual Meeting.

You will not revoke a proxy merely by attending the 2007 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.

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Required Votes

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 2007 Annual Meeting is necessary to constitute a quorum. For “Proposal 1—Election of Directors,” directors will be elected by a plurality of the votes cast at the 2007 Annual Meeting. This means that the 11 nominees receiving the greatest number of votes will be elected as directors. Approval of “Proposal 2—Ratification of Appointment of Independent Auditor” and “Proposal 4—Shareholder Proposal Regarding Political Contributions” each requires the affirmative vote of a majority of the votes cast on the proposal at the 2007 Annual Meeting. Approval of “Proposal 3—Amendment to the Restated Certificate of Incorporation” requires the affirmative vote of two-thirds of the votes cast on the proposal at the 2007 Annual Meeting. Abstentions are counted as shares present at the 2007 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 2007 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 Proposals 1, 2, 3 and 4.

Other Matters to be Acted upon at the Annual Meeting

Our Board currently is not aware of any matters other than those specifically stated in the Notice of 2007 Annual Meeting of Shareholders to be presented for action at the 2007 Annual Meeting. If any matter other than those stated in the Notice of 2007 Annual Meeting of Shareholders is presented at the 2007 Annual Meeting on which a vote may properly be taken, the shares represented by proxies will be voted in accordance with the judgment of the person or persons voting those shares.

Adjournments and Postponements

Any action on the items of business described above may be considered at the 2007 Annual Meeting at the time and on the date specified above or at any time and date to which the 2007 Annual Meeting may be properly adjourned or postponed.

Combined Form 10-K and Annual Report

We have prepared a combined Form 10-K for the year ended December 31, 2006 and 2006 Annual Report to Shareholders (the 2006 Annual Report) in accordance with the rules of the Securities and Exchange Commission (the SEC). A copy of the 2006 Annual Report, which is not a part of the proxy soliciting materials, accompanies this proxy statement and proxy card. The 2006 Annual Report is available on our website at www.chubb.com/investors. It also is available without charge by sending a written request to our Corporate Secretary at 15 Mountain View Road, P.O. Box 1615, Warren, New Jersey 07061-1615.

Important Notice about Security

All 2007 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 2007 Annual Meeting. Attendees may be subject to security inspections. Video and audio recording devices and other electronic devices will not be permitted at the 2007 Annual Meeting.

3




CORPORATE GOVERNANCE

Commitment to Corporate Governance

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 New York Stock Exchange (NYSE). The key components of this framework are set forth in the following documents:

·       our Restated Certificate of Incorporation;

·       our By-Laws;

·       our Audit Committee Charter;

·       our Corporate Governance & Nominating Committee Charter;

·       our Organization & Compensation Committee Charter;

·       our Corporate Governance Guidelines;

·       our Code of Business Conduct; and

·       our Code of Ethics for CEO and Senior Financial Officers.

Copies of each 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.

Corporate Governance Guidelines

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:

·       the size of our Board;

·       director independence and minimum qualifications;

·       factors to be considered in selecting candidates to serve on our Board;

·       director nominating procedures, including the procedures by which shareholders may propose director candidates;

·       director election standards and our policy with respect to directors who do not receive a majority of the votes cast in uncontested elections;

·       term limits, director retirement, director resignations upon job change and Board vacancies;

·       directors’ outside directorships and outside audit committee service;

·       the role and responsibilities of the independent Lead Director;

·       director responsibilities;

·       director attendance at Board meetings, committee meetings and the annual meeting of shareholders;

·       executive sessions of our independent directors;

·       director access to management and our Board’s ability to retain outside consultants;

·       director compensation;

·       stock ownership guidelines for directors and certain employees;

·       administration of our legal compliance and ethics program;

4




·       charitable contributions and related party transactions;

·       director orientation and continuing education;

·       management succession and evaluation of our Chief Executive Officer;

·       annual self-assessments of our Board and each of our Audit Committee, our Corporate Governance & Nominating Committee (our Governance Committee) and our Organization & Compensation Committee (our Compensation Committee); and

·       shareholder access to our Board and Audit Committee.

Director Qualifications and Candidate Considerations

Our Board 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 Governance Committee is responsible, among other things, for:

·       recruiting qualified independent directors, consisting of persons with diverse backgrounds and skills who have the time and ability to exercise independent judgment and perform our Board’s function effectively and who meet the needs of our Board; and

·       identifying the respective qualifications needed for directors serving on our Board committees and serving as chairmen of such committees, recommending to our Board the nomination of persons meeting such respective qualifications to the appropriate committees of our Board and as chairmen of such committees, and taking a leadership role in shaping our corporate governance policies.

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 considers a number of factors in selecting director candidates, including:

·       the personal and professional ethics, integrity and values of the candidate;

·       the independence of the candidate under legal, regulatory and other applicable standards, including the ability of the candidate to represent all of our shareholders without any conflicting relationship with any particular constituency;

·       the diversity of the existing Board, so that we maintain a diverse body of directors, with diversity reflecting gender, ethnic background and geographic and professional experience;

·       whether the professional experience and industry expertise of the candidate will complement that of the existing Board;

·       the compatibility of the candidate with the existing Board;

·       the length of tenure of the members of the existing Board;

·       the number of other public company boards of directors on which the candidate serves or intends to serve, with the general expectation that the candidate would not serve on the boards of directors of more than four other public companies;

5




·       the number of public company audit committees on which the candidate serves or intends to serve, with the general expectation that, if the candidate is to be considered for service on our Audit Committee, the candidate would not serve on the audit committees of more than two other public companies;

·       the candidate’s service on the boards of directors of other for-profit companies, not-for-profit organizations, trade associations or industry associations;

·       the ability and willingness of the candidate to devote sufficient time to carrying out his or her Board duties and responsibilities effectively;

·       the commitment of the candidate to serve on our Board for an extended period of time; and

·       such other attributes of the candidate and external factors as our Governance Committee deems appropriate.

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.

Nominating Procedures

The primary purpose of our nominating procedures is to identify and recruit outstanding individuals to serve on our Board. Our Board has delegated responsibility for identifying director candidates to our Governance Committee, which 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 may, in its discretion, 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. For a shareholder proposed candidate to be considered, in addition to complying with the notice period described in our By-Laws, the shareholder must provide:

·       all information relating to each person whom the shareholder proposes to nominate for election as a director as would be required to be disclosed in a solicitation of proxies for the election of such person as a director pursuant to Regulation 14A under the Securities Exchange Act of 1934 (Exchange Act), including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if so elected;

·       the name and address of the shareholder giving the notice, as they appear on our books, and of the beneficial owner of those shares; and

·       the class and number of shares which are owned beneficially and of record by the shareholder and the beneficial owner.

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 “2008 Shareholder Proposals and Nominations” and the SEC rules applicable to shareholder proposal submission procedures.

6




Director Election Procedures

Pursuant to New Jersey law and our Restated Certificate of Incorporation, our directors currently are elected by a plurality of the votes cast. To address the possibility of an uncontested election in which a director-nominee is elected, despite having received a majority of “withheld” votes, our Board has adopted a corporate governance guideline. This guideline provides that, in an uncontested election, any nominee who receives a greater number of votes “withheld” from his or her election than votes “for” such election is required to tender his or her resignation following certification of the shareholder vote. Our Governance Committee is required to make a recommendation to our Board as to whether or not to accept such resignation and our Board is required to take action with respect to our Governance Committee’s recommendation within 90 days following the date of the election. These procedures are described in full in our Corporate Governance Guidelines.

As part of our commitment to maintain the highest corporate governance standards, our Board is recommending that our shareholders approve an amendment to our Restated Certificate of Incorporation at the 2007 Annual Meeting that, if approved, will replace our plurality voting standard in uncontested director elections with a majority of the votes cast standard. For more information, see below under the heading “Proposal 3—Amendment to the Restated Certificate of Incorporation.” If this proposal is approved by our shareholders, then the first annual election of directors for which the new election procedures would be effective is the 2008 Annual Meeting of Shareholders.

Director Independence

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, are deemed immaterial and, therefore, are not considered by our Governance Committee in determining director independence:

·       charitable contributions made by us to any organization:

·        pursuant to our Matching Gifts Program on terms applicable to employees and directors;

·        in amounts that do not exceed $25,000 per year; or

·        that have been approved by our Governance Committee;

·       commercial relationships with any entity or organization where the annual sales to, or purchases from, us are less than two percent of our annual revenue and less than two percent of the annual revenue of the other entity or organization; and

·       insurance, reinsurance and other risk transfer arrangements entered into in the ordinary course of business on an arm’s length basis.

Our Board reviewed director independence in 2006 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.

Related Person Transactions

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

7




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:

·       the transaction is a permitted transaction (as defined below);

·       in the case of our executive officers and holders of five percent or more of our common stock, the transaction is reported to and approved by our Board, our Governance Committee or another Board committee comprised of disinterested directors; or

·       in the case of our directors and nominees for director, the transaction is reported to and approved by a majority of the disinterested members of our Governance Committee or, if less than a majority of our Governance Committee is disinterested, a majority of the disinterested members of our Board.

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:

·       the purchase of insurance products or services from us on an arms’ length basis in the ordinary course of business and on terms and conditions generally available to other insureds;

·       claims activity relating to insurance policies administered on an arms’ length basis in the ordinary course of business and consistent with the administration of the claims of other insureds;

·       any transaction or series of transactions with an aggregate dollar amount involved of $100,000 or less;

·       transactions within the scope of a related person’s ordinary business duties to us, where the benefits inuring to the related person relate solely to our performance review process (and resulting compensation and advancement decisions);

·       our payment or reimbursement of a related person’s expenses incurred in performing his or her Chubb-related responsibilities;

·       the receipt of compensation and benefits from us, provided that such arrangements are approved in accordance with the policies and procedures established by our Board or a committee thereof;

·       the purchase or sale of our securities in the open market or pursuant to any equity compensation plan approved by our Compensation Committee, our Governance Committee or our Board and our shareholders;

·       any transaction with an entity or organization with whom the related person is serving or affiliated solely at our request;

·       any transaction in which the related person’s interest arises only: (i) from the related person’s position as a director of another corporation or organization that is a party to the transaction; (ii) from the direct or indirect ownership by the related person and all other related persons, in the aggregate, of less than a ten percent equity interest in another person (other than a partnership) which is a party to the transaction; or (iii) from both such position and ownership; and

·       any transaction in which the related person’s interest arises only from the related person’s position as a limited partner in a partnership in which the related person and all other related persons have

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an interest of less than ten percent, and the person is not a general partner of and does not have another position in the partnership.

Related person transactions during 2006 are discussed under the heading “Certain Transactions and Other Matters.”

Lead Director

Our Board annually elects an independent director to serve as Lead Director to ensure our Board’s independence and proper functioning when, as is currently the case, the offices of Chief Executive Officer and Chairman of the Board are combined. The Lead Director has the following authority:

·       to call special meetings of our Board;

·       to call special meetings of any committee of our Board;

·       with the consent of a majority of the members of our Executive Committee, to call special meetings of our shareholders;

·       in the absence of the Chairman of the Board, to preside at meetings of our Board;

·       to preside at all executive sessions of the non-employee directors and the independent directors;

·       in the absence of the Chairman of the Board, to preside at meetings of our shareholders;

·       to provide direction regarding the meeting schedule, information to be sent to our Board and the agenda for our Board meetings to assure that there is sufficient time for discussion of all agenda items;

·       at the Lead Director’s discretion, to attend meetings of any committee on which he or she is not otherwise a member;

·       to hire independent legal, financial or other advisors as he or she deems desirable or appropriate, without consulting or obtaining the approval of any member of management in advance; and

·       to exercise such additional powers as may be conferred upon the office of Lead Director by resolution of our Board or our Governance Committee from time to time.

The Lead Director serves on our Executive Committee and is eligible to serve on any or all other committees of our Board. The office of Lead Director is not subject to term limits. Joel J. Cohen has served as our Lead Director since December 2003 when Mr. Finnegan succeeded Mr. Cohen as Chairman of the Board.

Contacting our Board and Audit Committee

Director Communications

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
P.O. Box 1615
Warren, New Jersey 07061-1615

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.

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Audit Committee Communications

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
P.O. Box 1615
Warren, New Jersey 07061-1615
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.

Required Certifications

As of the mailing date of this proxy statement, our Chief Executive Officer and Chief Financial Officer have timely delivered the certifications required under applicable rules of the SEC and the NYSE.

Meeting Attendance and Related Matters

Our directors are expected to attend all Board meetings, meetings of committees on which they serve and the annual meeting of shareholders. In 2006, our Board met eight times. Nine of our directors attended the 2006 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. All of our incumbent directors attended at least 75% of the meetings of our Board and the committees on which they serve, except for Dr. Klaus J. Mangold. Dr. Mangold’s attendance fell below 75% as a result of two unrelated illnesses that prevented him from traveling to and, therefore, attending our Board and committee meetings in April and September 2006.

In connection with its decision to recommend that Dr. Mangold be nominated for election to our Board at the 2007 Annual Meeting, our Governance Committee fully considered the circumstances surrounding Dr. Mangold’s absences in 2006 and discussed this matter with him. In the course of these discussions, Dr. Mangold expressed his commitment to dedicate the necessary time to discharge his responsibilities as a director and committee member.

Audit Committee

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, our 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. Our Board has designated Joel J. Cohen and Daniel E. Somers as our audit committee financial experts (as defined by SEC rules). In 2006, our Au

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dit Committee met eight times. The Audit Committee Report for 2006 is set forth under the heading “Audit Committee Report.”

Compensation Committee

Composition; Scope of Authority

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, subject to the approval of our Board, 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 principle duties and responsibilities of our Compensation Committee are set forth in its charter, which is available on our web site at www.chubb.com/investors.

Processes and Procedures

In 2006, 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 Stock Incentive Plan (2004) (the 2004 Employee Plan), 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 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 both pay based on prior year performance and target pay 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 assess the pay and performance relationship of our overall compensation program. Following this presentation of competitive market data, our Compensation Committee formulates 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 fiscal year, at or around the same time that our Compensation Committee is evaluating overall performance for the prior year to determine award amounts payable under our incentive-based plans.

Role of Executive Officers

Our Compensation Committee, and through it our Board, retains final authority with respect to our compensation, benefit and perquisite programs and all action taken thereunder. However, as noted above, our Chief Executive Officer recommends to our Compensation Committee compensation actions for each of the other NEOs. Our Vice Chairmen recommend compensation actions for other members of our senior management team to our Chief Executive Officer, who, after making any adjustments he deems

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appropriate, presents these recommendations to our Compensation Committee. In addition, our Compensation Committee oversees the performance evaluations of senior management. Compensation actions for the rest of our employees are determined by management, with our Compensation Committee receiving and approving aggregate statistics (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.

Delegation of Authority

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 below the level of Executive Vice President. In accordance with the terms of this delegation of authority, our Compensation Committee 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 Executive Vice President.

Role of Executive Compensation Consultant

In 2006, as permitted by its charter, our Compensation Committee retained the services of a compensation consulting firm, Mercer Human Resource Consulting (the Consultant), to assist our Compensation Committee in reviewing our compensation strategy and each of our NEO’s total compensation packages. At the request of our Compensation Committee, the Consultant provided input on the competitive market for executive talent, evolving executive compensation market practices, program design and regulatory compliance.

Our Compensation Committee determined that there was substantial overlap between the structuring of our compensation programs by our Compensation Committee and their implementation and administration by certain members of management pursuant to the direction and oversight of our Compensation Committee. Our Compensation Committee also determined that requiring management to utilize a separate consultant to assist in such implementation and administration would result in an inefficient use of corporate resources. Accordingly, our Compensation Committee authorized our management to utilize the services of the Consultant, subject to the Chairman of our Compensation Committee’s periodic review of the nature of the services rendered, together with the Consultant’s fees for such services, to ensure that the Consultant’s independence from management would not be impaired. Pursuant to its charter, our Compensation Committee has the sole authority to retain and terminate any compensation consultant to be used to assist in the evaluation of executive compensation and to approve the Consultant’s fees and retention terms.

Executive Committee

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 2006.

Finance Committee

Our Finance Committee oversees and regularly reviews the purchase and sale of securities in our investment portfolio. In 2006, our Finance Committee met four times.

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Governance Committee

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 2006, our Governance Committee met four times.

Pension & Profit Sharing Committee

Our Pension & Profit Sharing Committee oversees and regularly reviews our retirement and profit sharing plans. In 2006, our Pension & Profit Sharing Committee met three times.

Director Compensation

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 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.

Director Compensation Table

The following table sets forth the compensation we paid to our non-employee directors in 2006:

Name(1)

 

 

 

Fees
Earned
or Paid
in Cash
($)

 

Stock
Awards
($)
(2)

 

Option
Awards
($)
(3)

 

Non-Equity
Incentive
Plan
Compensation
($)

 

Change
in Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
(4)

 

All Other
Compensation
($)
(5)

 

Total
($)

 

Zoë Baird

 

$

101,000

 

$

86,176

 

 

 

 

 

 

$

19,838

 

 

 

$

9,603

 

 

$

216,617

 

Sheila P. Burke

 

108,500

 

86,176

 

 

 

 

 

 

 

 

 

 

 

194,676

 

James I. Cash, Jr.

 

90,000

 

86,176

 

 

 

 

 

 

 

 

 

 

 

176,176

 

Joel J. Cohen

 

162,500

 

86,176

 

$

301,927

 

 

 

 

 

 

 

 

 

 

550,603

 

James M. Cornelius(6)

 

105,500

 

86,176

 

 

 

 

 

 

 

 

 

 

 

191,676

 

Klaus J. Mangold

 

85,000

 

86,176

 

 

 

 

 

 

 

 

 

 

 

171,176

 

David G. Scholey

 

91,000

 

86,176

 

 

 

 

 

 

24,865

 

 

 

 

 

202,041

 

Raymond G.H. Seitz(7)

 

91,000

 

86,176

 

 

 

 

 

 

 

 

 

 

 

177,176

 

Lawrence M. Small

 

83,500

 

86,176

 

 

 

 

 

 

 

 

 

 

 

169,676

 

Daniel E. Somers

 

122,000

 

86,176

 

 

 

 

 

 

 

 

 

7,395

 

 

215,571

 

Karen Hastie Williams

 

99,000

 

86,176

 

 

 

 

 

 

 

 

 

9,603

 

 

194,779

 

Alfred W. Zollar

 

114,500

 

86,176

 

 

 

 

 

 

 

 

 

 

 

200,676

 


(1)           Compensation for Mr. Finnegan is not included in this table because he does not receive compensation for services that he renders as a member of our Board. Information regarding Mr. Finnegan’s compensation is set forth below under the headings “Compensation Discussion and Analysis” and “Executive Compensation.”

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(2)           Pursuant to The Chubb Corporation Long-Term Stock Incentive Plan for Non-Employee Directors (2004) (the 2004 Director Plan), on April 25, 2006, each non-employee director received stock units representing the right to receive 445 shares of our common stock valued at $50.65 per share. These awards vested immediately upon grant. Accordingly, the grant date fair value of each of these awards, calculated in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004) Share Based Payment (FAS 123(R)), is the same as the amount of compensation expense we reflected in our financial statements with respect to each of these awards ($22,539 per non-employee director). The grant date fair value of each of these awards is estimated based on the fair market value of our common stock on the date of grant. In addition, on April 25, 2006, each non-employee director also received a target award of 1,333 performance shares valued at $47.74 per share. These awards vested immediately upon grant. Accordingly, the grant date fair value of each of these awards, calculated in accordance with FAS 123(R), is the same as the amount of compensation expense we reflected in our financial statements with respect to each of these awards ($63,637 per non-employee director). The grant date fair value of each of these awards is estimated based on the fair market value of our common stock on the date of grant discounted to reflect that these awards do not receive dividend equivalents during the performance period.

Including the 2006 stock unit and performance share awards described in the preceding paragraph, as of December 31, 2006, each non-employee director had three outstanding stock unit awards and two outstanding performance share awards. The following table sets forth these awards for each non-employee director as of December 31, 2006:

Grant Date

 

 

 

Stock Units(a)

 

Performance Shares(a)(b)

 

April 27, 2004

 

 

644

 

 

 

 

 

April 26, 2005

 

 

574

 

 

 

1,722

 

 

April 25, 2006

 

 

445

 

 

 

1,333

 

 

Total

 

 

1,663

 

 

 

3,055

 

 

 

(a)          Each stock unit and each performance share is the equivalent of one share of our common stock.

(b)          Represents target award. Actual payout may range from 0% to 200% of target. Additional information regarding non-employee director performance shares is set forth under the heading “Director Compensation—Stock Awards.” Excludes the April 27, 2004 performance share awards that were earned as of December 31, 2006. The actual payment of these awards was made on February 6, 2007, with each non-employee director receiving, or being entitled to receive, 2,760 shares of our common stock.

(3)           Represents a restoration stock option award to purchase shares of our common stock acquired upon exercise of the original stock option grant pursuant to a predecessor plan to the 2004 Director Plan. This award vested immediately upon grant. Accordingly, the grant date fair value of this award, calculated in accordance with FAS 123(R), is the same as the amount of compensation expense we reflected in our financial statements with respect to this award ($301,927). The fair value of this award was estimated on the grant date using the Black-Scholes option pricing model.

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The following table sets forth the option awards outstanding for each non-employee director at December 31, 2006:

Name

 

 

 

Aggregate Number of
Shares Subject to
Option Awards
 (a)

 

Zoë Baird

 

 

40,000

 

 

Sheila P. Burke

 

 

56,000

 

 

James I. Cash, Jr.

 

 

32,000

 

 

Joel J. Cohen

 

 

111,371

(b)

 

James M. Cornelius

 

 

 

 

Klaus J. Mangold

 

 

16,000

 

 

David G. Scholey

 

 

96,000

 

 

Raymond G.H. Seitz

 

 

72,000

 

 

Lawrence M. Small

 

 

105,943

 

 

Daniel E. Somers

 

 

2,000

 

 

Karen Hastie Williams

 

 

24,000

 

 

Alfred W. Zollar

 

 

24,000

 

 

 

(a)           All outstanding options are fully vested.

(b)           Includes the 2006 restoration stock option awards to purchase 22,465 shares of our common stock, the dollar value of which is reflected in the “Option Awards” column of the Director Compensation Table set forth under the heading “Corporate Governance—Director Compensation.”

(4)           Represents interest on cash accounts and the increase in value of shareholders’ equity accounts, in each case, under The Chubb Corporation Deferred Compensation Program for Directors (1987), as amended (the Director Deferred Compensation Program), which exceeded 120% of the applicable long-term federal interest rate in 2006.

(5)           Represents premiums paid in 2006 for life insurance policies through which we will fund three of our non-employee directors’ charitable contributions under the Director’s Charitable Award Program. See below under “Director Compensation—All Other Compensation.”  At December 31, 2006, seven of our other non-employee directors also participated in this program. However, the life insurance premiums relating to their participation in the Director’s Charitable Award Program were fully funded prior to 2006.

(6)           Mr. Cornelius retired from our Board as of December 31, 2006.

(7)           Mr. Seitz will retire from our Board effective as of April 24, 2007.

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Fees Earned or Paid in Cash

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

Item

 

 

 

Amount

 

Annual Director Retainer

 

$

50,000

 

Lead Director Annual Supplemental Retainer

 

50,000

 

Audit Committee Chairman Retainer

 

20,000

 

Audit Committee Member Retainer

 

7,500

 

Compensation Committee Chairman Retainer

 

15,000

 

Compensation Committee Member Retainer

 

7,500

 

Executive Committee Retainer

 

7,500

 

Finance Committee Member Retainer

 

7,500

 

Governance Committee Chairman Retainer

 

12,500

 

Governance Committee Member Retainer

 

7,500

 

Pension & Profit Sharing Committee Member Retainer

 

7,500

 

Board Meeting Fee

 

2,000

 

Committee Meeting Fee

 

2,000

 

 

Stock Awards

Background.   The 2004 Director Plan is administered by our Governance Committee with the assistance of our Compensation Committee. Subject to adjustment upon the occurrence of certain events described below, a maximum of 500,000 shares of our common stock may be issued under the 2004 Director Plan.

Pursuant to the 2004 Director Plan, each non-employee director receives an annual equity grant valued at approximately $90,000 (or such higher amount as our Governance Committee may determine, not to exceed the value of 3,000 shares of our common stock). Each annual award consists of performance shares and stock units, with performance shares comprising 75% of the award and stock units comprising the remaining 25% of the award.

The 2004 Director Plan also authorizes our Governance Committee to make grants to non-employee directors in addition to the annual grants described in the preceding paragraph. We anticipate that discretionary grants will be made only to address special circumstances, such as when one or more non-employee directors are called upon to provide services to us above and beyond those services required of non-employee directors generally. No such discretion was exercised during 2006. Our Governance Committee also may exercise discretionary authority to make awards to any non-employee director who is first elected to our Board other than at the time of an annual meeting of shareholders.

2006 Stock Awards.   Following our 2006 Annual Meeting of Shareholders on April 25, 2006, each of our non-employee directors received an equity grant of 1,333 performance shares and stock units representing the right to receive 445 shares of our common stock. As with performance shares awarded to NEOs under the 2004 Employee Plan described under the heading “Compensation Discussion and Analysis—Components of Executive Compensation,” the actual number of shares payable to each of our non-employee directors can vary from 0% to 200% of the original target award based on our total shareholder return relative to total shareholder returns over a three-year performance cycle for the other companies in the S&P 500 Index. For information regarding the actual number of performance shares that a non-employee director can earn over the performance cycle, see the table set forth under the heading “Compensation Discussion and Analysis—Components of Executive Compensation.”  The performance cycle

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commenced on January 1, 2006 and ends on December 31, 2008. The ultimate value of the performance share awards also will depend on the value of our common stock at the end of the performance cycle.

Unlike the performance shares awarded to our NEOs, non-employee directors vested immediately in their performance share awards. Accordingly, a non-employee director whose service as a member of our Board terminates during a performance cycle will be entitled to receive the same payment in respect of performance shares without proration that would have been payable had his or her service continued until the end of the applicable performance cycle. Any amount payable to a departed non-employee director generally will be paid at the same time as amounts in respect of similar awards are paid to other participants in the 2004 Director Plan (or at such earlier time as our Governance Committee may permit). However, if a non-employee director is removed from our Board for cause (or resigns in anticipation of such removal), the non-employee director will forfeit all rights to receive any payment in respect of his or her outstanding performance shares.

The stock units vested immediately upon grant. However, if a non-employee director is removed from our Board for cause (or resigns in anticipation of such removal), the non-employee director will forfeit all rights to receive any payment in respect of his or her outstanding stock units.

Option Awards

Since the adoption of the 2004 Director Plan, the practice of our Governance Committee has been to refrain from granting stock options to non-employee directors. The stock options granted to Mr. Cohen in 2006 were not granted on a discretionary basis, but rather 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 value market 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.

Change in Pension Value and Nonqualified Deferred Compensation Earnings

Cash Compensation.   Under the Director Deferred Compensation Program, 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 termination of service or at a specified date chosen by the non-employee director at the time the deferral election is made. The Director Deferred Compensation Program provides that amounts deferred may be invested in:

·       an interest bearing account;

·       a market value account; or

·       a shareholders’ equity account.

A non-employee director participating in the Director Deferred Compensation Program 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 prime rate of Citibank, N.A. in effect on the first day of each January, April, July and October during the deferral period. At December 31, 2006, we maintained cash accounts for two non-employee directors, one of whom deferred

17




2006 compensation into a cash account pursuant to the Director Deferred Compensation Program. During 2006, Citibank’s prime rate exceeded 120% of the applicable long-term federal interest rate. We have reported interest accruing on cash accounts in excess of 120% of the applicable long-term federal interest rate in the “Change in Pension Value and Nonqualified Deferred Compensation Earnings” column of the Director Compensation Table set forth under the heading “Corporate Governance—Director Compensation.”

In December 2006, our Board amended the Director Deferred Compensation Program to limit the interest rate earned on compensation deferred into cash accounts to the lesser of 120% of the applicable long-term federal interest rate and Citibank’s prime rate. Accordingly, non-employee directors with compensation deferred into cash accounts will not receive interest on such amounts in future years in excess of 120% of the applicable long-term federal interest rate.

Market Value Accounts.   Market value accounts, which are denominated in units with one unit being the equivalent 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:

·       the amount of compensation deferred by the non-employee director, divided by

·       the closing share price of our common stock on the NYSE on the credit date or on the trading day preceding the credit date if the credit date is not a trading day.

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:

·       the product of (i) the amount of the dividend per share, multiplied by (ii) the number of units in the non-employee director’s market value account on the dividend payment date, divided by

·       the closing share price of our common stock on the NYSE on the dividend payment date or on the trading day preceding the dividend payment date if the dividend payment date is not a trading day.

At December 31, 2006, we maintained market value accounts for nine non-employee directors, six of whom deferred 2006 compensation into a market value account pursuant to the Director Deferred Compensation Program.

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:

·       the amount of compensation deferred by the non-employee director, divided by

·       the shareholders’ equity per share as reported in our annual report to shareholders for the immediately preceding year.

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:

·       the product of (i) the amount of the dividend per share, multiplied by (ii) the number of units in the non-employee director’s shareholders’ equity account on the dividend payment date, divided by

·       the closing share price of our common stock on the NYSE on the dividend payment date or on the trading day preceding the dividend payment date if the dividend payment date is not a trading day.

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At December 31, 2006, we maintained shareholders’ equity accounts for two non-employee directors. However, neither of these non-employee directors deferred 2006 compensation into shareholders’ equity accounts. In 2006, the incremental increase in the value of the shareholders’ equity unit accounts exceeded 120% of the applicable long-term federal interest rate. Accordingly, we reported this excess amount in the “Change in Pension Value and Nonqualified Deferred Compensation Earnings” column of the Director Compensation Table set forth under the heading “Corporate Governance—Director Compensation.”

In December 2006, our Board amended the Director Deferred Compensation Program to allow non-employee directors with deferred compensation in the shareholders’ equity accounts to transfer such amounts into cash accounts. Both non-employee directors for whom we had maintained shareholders’ equity accounts elected to make this transfer. Accordingly, as discussed above under the description of cash accounts, non-employee directors will not receive earnings on such amounts in future years that exceed 120% of the applicable long-term federal interest rate. Moreover, we do not expect any of our non-employee directors to defer future compensation into shareholders’ equity accounts.

Equity Compensation.   We offer non-employee directors the option of deferring receipt of all or a portion of their equity compensation. Amounts of voluntarily deferred equity are payable at the option of the non-employee director either upon the non-employee director’s termination of service 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. 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. At December 31, 2006, we maintained deferred equity accounts for seven non-employee directors, each of whom deferred 2006 equity compensation.

All Other Compensation

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, may 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 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, 2006, 10 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 2006. For the remaining three non-employee directors who participate in this program, the premiums paid in 2006, which also are reflected in the “All Other Compensation” column of the Director Compensation Table set forth under the heading “Corporate Governance—Director Compensation,” are as follows:

Name

 

 

 

Amount

 

Zoë Baird

 

 

$

9,603

 

 

Daniel E. Somers

 

 

7,395

 

 

Karen Hastie Williams

 

 

9,603

 

 

 

We may amend or terminate the Director’s Charitable Award Program at our election at any time. In addition, the non-employee director is entitled to change his or her designated charities at any time.

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OUR BOARD OF DIRECTORS

Our Board oversees our business operations, assets, affairs and performance. In accordance with our long-standing practice, each of our directors other than our Chief Executive Officer is independent. Our Corporate Governance Guidelines provide that no director may be nominated to a new term if the director would be age 72 or older at the time of election.

The name, age, length of service on our Board and principal occupation of each director nominee, together with certain other biographical information, are set forth below. Our shareholders elected each of this year’s nominees to serve as directors during 2006. Unless otherwise indicated, each nominee has served for at least five years in the business position currently or most recently held. The age of each director is as of April 24, 2007, the date of the 2007 Annual Meeting.

GRAPHIC

 

ZOË BAIRD (Age 54)

Director since 1998

Zoë Baird is President of the Markle Foundation, a private philanthropy that focuses on using information and communications technologies to address critical public needs, particularly in the areas of health care and national security.

Ms. Baird’s career spans business, government and academia. She has been Senior Vice President and General Counsel of Aetna, Inc., a senior visiting scholar at Yale Law School, counselor and staff executive at General Electric Co., and a partner in the law firm of O’Melveny and Myers. She was Associate General Counsel to President Jimmy Carter and an attorney in the Office of Legal Counsel of the Department of Justice. She served on President Clinton’s Foreign Intelligence Advisory Board from 1993 - 2001 and on the International Competition Policy Advisory Committee to the Attorney General. Ms. Baird served on the Technology & Privacy Advisory Committee to the Secretary of Defense in 2003 - 2004, which advised on the use of technology to counter terrorism. She is on a number of non-profit and corporate boards, including the Convergys Corporation, Boston Properties, Brookings Institution and IBM’s World Community Grid Advisory Board, among others.

GRAPHIC

 

SHEILA P. BURKE (Age 56)

Director since 1997

Deputy Secretary and Chief Operating Officer, Smithsonian Institution, since January 2004. Ms. Burke previously was Under Secretary for American Museums and National Programs, Smithsonian Institution, from June 2000 to December 2003 and Executive Dean and Lecturer in Public Policy of the John F. Kennedy School of Government, Harvard University, from November 1996 until June 2000. Ms. Burke is also a member of the Medicare Payment Advisory Commission. Ms. Burke also serves on the boards of Wellpoint Inc., the Kaiser Commission on the Future of Medicaid and Uninsured and the Georgetown University School of Nursing. Ms. Burke also serves as Chair of the Kaiser Family Foundation.

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GRAPHIC

 

JAMES I. CASH, JR. (Age 59)

Director since 1996

Retired from The James E. Robison Professor of Business Administration, Harvard University. Dr. Cash was a member of the Harvard Business School faculty from July 1976 to October 2003. He also serves on the boards of General Electric Company, Microsoft Corporation, Wal-Mart and Phase Forward Inc. Dr. Cash also serves on the boards of the National Association of Basketball Coaches Foundation, the Bert King Foundation, Massachusetts General Hospital and Partners Healthcare.

GRAPHIC

 

JOEL J. COHEN (Age 69)

Director since 1984

Chairman and Co-Chief Executive Officer of Sagent Advisors Inc., a financial advisory firm, since September 2003. Mr. Cohen has been Lead Director of Chubb’s Board since December 2003 and was Chairman of the Board (non-executive) from December 2002 to December 2003. Mr. Cohen previously was Managing Director and co-head of Global Mergers and Acquisitions at Donaldson, Lufkin & Jenrette Securities Corporation (DLJ), a leading investment and merchant bank, until his retirement in November 2000. He had been associated with DLJ since October 1989. He had previously served as General Counsel to the Presidential Task Force on Market Mechanisms and as a partner of the law firm Davis Polk & Wardwell. Mr. Cohen also serves on the boards of Borders Group, Inc. and Maersk, Inc.

GRAPHIC

 

JOHN D. FINNEGAN (Age 58)

Director since 2002

President and Chief Executive Officer of The Chubb Corporation since December 2002 and Chairman since December 2003. Mr. Finnegan previously had been Executive Vice President of General Motors Corporation, which is primarily engaged in the development, manufacture and sale of automotive vehicles, and Chairman and President of General Motors Acceptance Corporation, a finance company and subsidiary of General Motors Corporation, from May 1999 to December 2002. He was Vice President and Group Executive of General Motors and also President of General Motors Acceptance Corporation from November 1997 to April 1999. Mr. Finnegan was associated with General Motors Corporation from 1976 to December 2002. Mr. Finnegan also serves on the Board of Directors of Merrill Lynch & Co., Inc.

GRAPHIC

 

KLAUS J. MANGOLD (Age 63)

Director since 2001

Executive Advisor to the Chairman of DaimlerChrysler AG since December 2003. Dr. Mangold previously served as a member of the Board of Management of DaimlerChrysler AG and as Chairman of the Board of Management of DaimlerChrysler Services AG, a provider of financial services and a subsidiary of DaimlerChrysler AG, until December 2003. DaimlerChrysler AG is primarily engaged in the development, manufacture, distribution, sale and financing of a wide range of automotive products. Dr. Mangold also serves on the boards of Metro AG, Magna International Inc. and Jenoptik AG. He is also a Vice Chairman of Rothschild and Cie, London-Paris and Chairman of the Advisory Board of Rothschild and Cie, Germany.

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GRAPHIC

 

SIR DAVID G. SCHOLEY, CBE (Age 71)

Director since 1991

Senior Advisor, UBS Investment Bank, a global, integrated investment services firm and bank, since 1995. Sir David was formerly Chairman of Close Brothers Group plc, Executive Chairman of S.G. Warburg & Co. Ltd., and a Director of Vodafone Group plc, Anglo American plc, General Electric Companies plc, British Telecom plc, J. Sainsbury plc, Bank of England and British Broadcasting Corporation. He also was Chairman of the Trustees of the National Portrait Gallery, London and a Trustee of the Glyndebourne Arts Trust.

GRAPHIC

 

LAWRENCE M. SMALL (Age 65)

Director since 1989

Secretary of the Smithsonian Institution since January 2000. The Smithsonian Institution is the world’s largest museum and research complex, with 18 museums and galleries, the National Zoo, and several research facilities around the world. Mr. Small previously had been President and Chief Operating Officer of Fannie Mae, a shareholder-owned, New York Stock Exchange listed company and the nation’s largest source of financing for home mortgages, from 1991 to 2000. Mr. Small also serves on the boards of Marriott International, Inc., New York City’s Spanish Repertory Theatre, the National Gallery of Art, the John F. Kennedy Center for the Performing Arts and the Woodrow Wilson International Center for Scholars.

GRAPHIC

 

DANIEL E. SOMERS (Age 59)

Director since 2003

Vice Chairman of Blaylock and Partners LP, an investment banking firm, since January 2002. Mr. Somers previously had been President and Chief Executive Officer of AT&T Broadband, a provider of cable and broadband services, from December 1999 to October 2001 and Senior Executive Vice President and Chief Financial Officer at AT&T Corp., a telecommunications company, from May 1997 to December 1999. Mr. Somers serves on the board of The Lubrizol Corporation. He is also Vice Chairman of the Board of Trustees of Stonehill College.

GRAPHIC

 

KAREN HASTIE WILLIAMS (Age 62)

Director since 2000

Partner, Crowell & Moring LLP, attorneys, from 1982 until her retirement in January 2005. Ms. Williams also serves on the boards of Continental Airlines Inc., Gannett Company, Inc., SunTrust Banks, Inc. and Washington Gas Light Holdings, Inc. She is also a Trustee of Amherst College, the Black Student Fund and the NAACP Legal Defense and Education Fund.

GRAPHIC

 

ALFRED W. ZOLLAR (Age 52)

Director since 2001

General Manager, Tivoli Software, IBM Corporation, which manufactures and sells computer services, hardware and software, since July 2004. Mr. Zollar previously had been General Manager, eServer iSeries, IBM Corporation, from January 2003 to July 2004; General Manager, Lotus Software, which designs and develops business software and was a subsidiary of IBM Corporation, from January 2000 to January 2003; General Manager, Network Computing Software Division, IBM Corporation from 1998 to 2000 and General Manager, Network Software, IBM Corporation, from 1996 to 1998. Mr. Zollar also serves on the board of the Executive Leadership Council and on the National Advisory Board of the National Society of Black Engineers.

 

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COMMITTEE ASSIGNMENTS

Our Board has established the six committees described above under the headings “Corporate Governance—Audit Committee,” “—Compensation Committee,” “—Executive Committee,” “—Finance Committee,” “—Governance Committee” and “—Pension & Profit Sharing 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

Joel J. Cohen (Chair)
Zoë Baird
Daniel E. Somers
Alfred W. Zollar

 

Compensation Committee

Daniel E. Somers (Chair)
Sheila P. Burke
Lawrence M. Small
Karen Hastie Williams

 

Executive Committee

John D. Finnegan (Chair)
James I. Cash, Jr.
Joel J. Cohen
Daniel E. Somers

 

Finance Committee

John D. Finnegan (Chair)
Sheila P. Burke
Klaus J. Mangold
David G. Scholey
Raymond G.H. Seitz
Alfred W. Zollar

 

Governance Committee

James I. Cash, Jr. (Chair)
Zoë Baird
Joel J. Cohen
Karen Hastie Williams

 

Pension & Profit Sharing Committee

Sheila P. Burke
Klaus J. Mangold
David G. Scholey
Raymond G.H. Seitz
Alfred W. Zollar

 

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AUDIT COMMITTEE REPORT

Purpose

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

·       the integrity of our financial statements;

·       our compliance with legal and regulatory requirements;

·       the independence and qualifications of our independent auditor;

·       the performance of our internal auditors and independent auditor; and

·       other significant financial matters.

Composition and Meetings

During 2006, our Audit Committee was composed 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. Cornelius served as the Chairman of our Audit Committee during 2006 and our Board designated him, together with Messrs. Cohen and Somers, as the audit committee financial experts. Information regarding the respective experience of Messrs. Cohen and Somers is set forth under the heading “Our Board of Directors.” Mr. Cornelius retired from our Board on December 31, 2006 and our Board appointed Mr. Cohen to serve as the Chairman of our Audit Committee for the remainder of Mr. Cornelius’s term.

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 and Somers, Ms. Baird and Mr. Zollar currently serve on our Audit Committee. Our Audit Committee met eight times during 2006.

Charter and Self-Assessment

Our Audit Committee operates pursuant to its written charter, which has been approved by our Audit Committee and our Board. The Audit Committee Charter is subject to review at least annually. It was last revised in February 2006.

Pursuant to its charter, our Audit Committee performs an annual self-assessment. For 2006, 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.

Appointment of Independent Auditor

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.”

Review of Financial Information

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

24




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 2006 and the first quarter of 2007, our Audit Committee reviewed and discussed with management and the independent auditor our quarterly financial statements, our audited consolidated financial statements for the year ended December 31, 2006 and the results of the independent auditor’s review of our 2006 quarterly financial statements. In particular, our Audit Committee discussed with the independent auditor the matters required to be discussed by Statement on Auditing Standards No. 61, Communications with Audit Committees, as amended by Statement on Auditing Standards No. 90, Audit Committee Communications, and SEC Final Rule Release Nos. 33-8183 and 33-8183a.

Critical Accounting Policies

During its discussions with the independent auditor, our Audit Committee reviewed our critical accounting policies and practices and alternative treatments of financial information.

Auditor Independence

Our Audit Committee received the written disclosures and the letter from the independent auditor required by Independence Standards Board Standard No. 1 and discussed with the independent auditor the firm’s independence and objectivity. Our Audit Committee reviewed and approved all fees of the independent auditor for the years ended December 31, 2006 and 2005, and determined that the provision of these services is compatible with maintaining the independence of the independent auditor.

Inclusion of Consolidated Financial Statements in Form 10-K

Based on the foregoing, our Audit Committee recommended to our Board that the audited consolidated financial statements be included in our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC.

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

Joel J. Cohen (Chair)

 

Daniel E. Somers

Zoë Baird

 

Alfred W. Zollar

 

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.

25




COMPENSATION COMMITTEE REPORT

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 2007 Annual Meeting and that the “Compensation Discussion and Analysis” be incorporated by reference into our Annual Report on Form 10-K for the year ended December 31, 2006.

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

Daniel E. Somers (Chair)

 

Lawrence M. Small

Sheila P. Burke

 

Karen Hastie Williams

 

 

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.

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COMPENSATION DISCUSSION AND ANALYSIS

Overall Executive Compensation Philosophy and Objectives

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 have distinguished 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 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 collective and individual abilities that fit this profile. With this philosophy in mind, our executive compensation program is intended to motivate our employees to achieve the following objectives:

·       enhance our market reputation as a provider of the highest quality customer service;

·       attain superior financial performance in both the short- and long-term;

·       be personally accountable for the performance of the business units and functions for which they are responsible; and

·       make decisions about our business that will maximize long-term shareholder value.

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 (annual incentive plan awards), absolute stock price appreciation (restricted stock unit and performance share awards) and total shareholder return relative to companies in the S&P 500 Index (performance share awards). For 2006, approximately 70% of Mr. Finnegan’s total target compensation was performance-based. The percentage of performance-based pay relative to total target compensation for the other NEOs was, on average, 65%.

Setting of Executive Compensation

Our Compensation Committee is responsible for establishing the philosophy and objectives that underlie our executive compensation program and guide its design and administration. Additional information on the structure, scope of authority and operation of our Compensation Committee is set forth under the heading “Corporate Governance—Compensation Committee.”

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Market Data

Our Compensation Committee, with the assistance of the Consultant, reviews the compensation of similarly situated officers of a representative peer group of companies on an annual basis to ensure our executive compensation program is competitive with the companies with which we believe we compete for executive talent. The 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 2006, the 22 companies comprising our peer group were:

ACE Ltd.

 

Cigna Corp.

 

Prudential Financial, Inc.

Aetna, Inc.

 

Genworth Financial, Inc.

 

Principal Financial Group, Inc.

Aflac, Inc.

 

Hartford Financial Services

 

SAFECO Corp.

Allstate Corp.

 

Lincoln National Corp.

 

St. Paul Travelers Cos., Inc.

American International Group

 

Mellon Financial Corp.

 

State Street Corp.

Bank of New York Co., Inc.

 

MetLife, Inc.

 

XL Capital Ltd.

BB&T Corp.

 

PNC Financial Svcs Grp, Inc.

 

 

CNA Financial Corp.

 

Progressive Corp.

 

 

 

We set target total compensation for our NEOs between the 50th and 75th percentiles of this peer group of companies. Combined salary and annual incentive compensation is targeted at the median of the peer group. Long-term incentives are targeted between the 50th and 75th percentiles. 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 2006, approximately 72% of Mr. Finnegan’s total target compensation represented long-term equity-based incentives. The percentage of long-term equity-based pay relative to total target compensation for the other NEOs was, on average, 63%.

Individual Performance

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 increase or decrease 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 improvements 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.

Components of Executive Compensation

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.

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Annual Salary

Annual salary is designed to provide a fixed level of compensation to our NEOs based on their skill and background, as well as to retain their services. As discussed above, annual salaries are generally targeted at the median of our peer group. In addition to supporting  our objective of rewarding individual performance and contributions, our Compensation Committee determines annual salaries taking into consideration 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.

Our Compensation Committee reviewed annual salaries for each of our NEOs in March 2006. Based upon the above factors, for 2006, our NEOs, other than Mr. Finnegan, received a 5.6% increase in annual salary, on average. Mr. Finnegan’s employment agreement provides for a minimum annual salary of $1,200,000 per year. In 2005, Mr. Finnegan’s annual salary was increased to $1,275,000, which became his new minimum annual salary pursuant to the terms of his employment agreement. Our Compensation Committee determined that his existing annual salary was competitive with annual salaries paid to other chief executive officers in our peer group. Accordingly, his 2006 annual salary remained $1,275,000.

Annual Incentive Compensation

Our annual incentive compensation program 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,” target annual incentive compensation awards are generally set at the median for executives with commensurate positions at our peer group of companies. Our Compensation Committee establishes the range of potential payments for Mr. Finnegan’s annual incentive compensation based upon its analysis of competitive market data and subject to the minimum annual incentive compensation award target of 125% of annual salary 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 and the competitive market data. For information regarding the potential ranges of annual incentive compensation awards for our NEOs in 2006, see the information set forth under the heading “Executive Compensation—Grants of Plan-Based Awards.”

Performance Goals.   Our Compensation Committee generally determines actual incentive compensation awards for our NEOs by applying performance multipliers (established pursuant to pre-determined formulas) to the target awards. At the beginning of 2006, our Compensation Committee established operating income per share as the performance goal for Messrs. Finnegan, O’Reilly, Motamed, and Degnan because our Compensation Committee believed that tying annual incentive compensation awards to an operating income per share goal provided an effective means of directly linking executive compensation to our shareholders’ interests. Under the performance metrics established by our Compensation Committee, each percentage increase or decrease in 2006 operating income per share relative to the 2005 operating income per share of $3.87 would result in an increase (up to the maximum permitted award) or decrease in the actual 2006 annual incentive compensation award multiplier. For example, if 2006 operating income per share was $4.83 (25% higher than in 2005), the actual incentive compensation award multiplier would be 25% higher than in 2005. Conversely, if 2006 operating income per share was $2.90 (25% lower than in 2005), the actual incentive compensation award multiplier would be 25% lower than in 2005.

For Mr. Krump, our Compensation Committee established business unit, leadership, performance management, succession planning and other non-financial performance goals in addition to operating income per share.

29




Incentive Payouts.   Actual operating income per share in 2006 of $5.60 was 45% higher than in 2005. As a result, awards to Messrs. Finnegan, O’Reilly, Motamed and Degnan were set at $3,242,850, $1,262,300, $1,502,500 and $1,215,200, respectively.

In addition to his significant contributions to our overall operating income per share in 2006, our Compensation Committee recognized Mr. Krump’s achievement of the other performance goals it had established for him at the beginning of the year. As a result, Mr. Krump’s annual incentive compensation award was set at $659,750.

Long-Term Equity Incentive Awards

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:

·       placing a significant portion of total compensation at risk;

·       linking long-term performance-based awards with shareholder value; and

·       retaining our highly-skilled and valued senior management.

All elected and appointed officers throughout our global operations (approximately 1,700 employees), including our NEOs, participate in our long-term equity incentive compensation program. Target long-term equity incentive grants are designed to achieve our desired competitive market position of being between the 50th and 75th percentiles of our peer group of companies and are commensurate with the individual’s level within our organization. For 2006, the target equity award for Mr. Finnegan was $7,600,000. The target equity awards for the other NEOs averaged $2,065,000. These target levels were determined based on analysis of data from our peer group of companies.

Under the 2004 Employee Plan, annual equity grants to our NEOs are in the form of performance shares, based on relative total shareholder return, and restricted stock units (RSUs). Consistent with our emphasis on performance-based compensation, for officers above the level of Vice President, including our NEOs, performance shares generally constitute 75% of the annual equity award, while RSUs generally constitute the remaining 25%.

Our Compensation Committee manages the potential dilutive effect of equity awards by monitoring our annual “run rates”—the number of shares granted as a percentage of our fully diluted common shares outstanding—relative to the peer companies. Our Compensation Committee also evaluates guidelines used by certain institutional advisory services and considers advice from the Consultant. Our annual run rate has dropped from approximately 2.5% in 2003 to less than 1% in 2006. This decrease is primarily attributable to the fact that fewer full-value shares are needed to provide a target award value (e.g., performance shares and RSUs) than would be required for an award of stock options and the reduction in the number of participants in the 2004 Employee Plan.

Performance Shares.   Performance shares 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 499 other companies in the S&P 500 as the competition for our shareholders’ investment dollars. The value of performance shares is directly linked to the total return delivered to our investors, thus motivating our senior officers to deliver superior returns over an extended performance cycle. Performance shares also support retention, as they are subject to forfeiture if the recipient’s employment terminates before the end of the applicable performance period for any reason other than death, disability or retirement, or with the consent of our Compensation Committee.

30




The number of performance shares 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:

TSR
Percentile
Ranking

 

 

 

Shares Earned
(% of Target)

 

85th & above

 

 

200

%

 

75th

 

 

150

%

 

50th

 

 

100

%

 

25th

 

 

50

%

 

Below 25th

 

 

0

%

 

 

For relative performance between these levels, the number of shares earned is interpolated. The final dollar value of each recipient’s performance share award is also dependent on the price of our common stock at the end of the three-year performance period, thus providing an additional link to shareholders’ interests and providing our senior executives with significant earnings leverage based on our results.

The performance period for the performance shares granted in April 2004 ended on December 31, 2006. Our TSR over the performance period was 60%, positioning us at the 71.5th percentile of companies in the S&P 500. Based on the performance scale above, our NEOs, like all recipients of 2004 performance shares, received payouts in February 2007 equivalent to 143% of the target number of performance shares granted in 2004. Information regarding the vesting of each NEO’s respective 2004 performance share award is set forth under the heading “Executive Compensation—Option Exercises and Stock Vested.”

The number and grant date value of performance shares granted to our NEOs in 2006 for the performance period running from January 1, 2006 to December 31, 2009 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 shares, RSUs support retention because they generally 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 2006 is set forth under the heading “Executive Compensation—Grants of Plan-Based Awards.”

Restoration Stock Options.   We discontinued the use of stock options as part of our core long-term incentive 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 our 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 a term equal to the remaining term of the original option.

Equity Grant Practices.   Our Compensation Committee approves annual equity award grants at its regularly scheduled meeting in March based on competitive market data and recommendations from Mr. Finnegan for the other NEOs. There is no relationship between the timing of annual equity award grants and our release of material, non-public information. Although our Compensation Committee has the discretion to do so under the 2004 Employee Plan, with the potential exception of new hires, our Compensation Committee generally does not make interim equity award grants to employees above the level of Senior Vice President, including our NEOs.

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As discussed under the heading “Corporate Governance—Compensation Committee,” our Compensation Committee has delegated authority to Mr. Finnegan to grant equity awards under the 2004 Employee Plan to employees below the level of Executive Vice President pursuant to guidelines which 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. These grants are effective on the last business day of the month, 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.

Non-Compete and Clawback Provisions.   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 executives contain non-competition provisions. Failure to comply with these provisions results in the forfeiture of unvested 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.

Perquisites

In addition to our standard benefits package discussed below, we also provide certain executives, including each of our NEOs, with a limited range of perquisites detailed below. The incremental cost and valuation of these perquisites is set forth under the heading “Executive Compensation—Summary Compensation Table.”

Corporate Aircraft.   We own two corporate aircraft and lease a third for senior executives to conduct our business. Our Board has authorized Mr. Finnegan’s business use of the corporate aircraft in order to minimize and more efficiently utilize his travel time, protect the confidentiality of his travel and our business and enhance his personal security. Our Board also permits Mr. Finnegan and each of Messrs. O’Reilly, Motamed and Degnan limited use of the corporate aircraft for personal travel. The annual personal use of the corporate aircraft for Mr. Finnegan is limited to 35 hours, and for Messrs. O’Reilly, Motamed and Degnan to 20 hours.

Automobile Use.   Similar to the use of the corporate aircraft, we provide Mr. Finnegan with a car and driver for all of his business travel needs in order 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.

In addition, during 2006, we provided all domestic employees above the level of Assistant Vice President, including our NEOs other than Mr. Finnegan, a monthly automobile allowance of $350. We grossed-up all of the recipients of this benefit to cover income taxes.

Financial Counseling.   We offer all of our employees above the level of Vice President, including our NEOs, financial counseling services. These services include income tax preparation, portfolio management and estate planning.

Company-Sponsored Benefit Plans

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

Retirement Plans.   We maintain the Pension Plan of The Chubb Corporation, Chubb & Son Inc., and Participating Affiliates (the Pension Plan), our tax-qualified defined benefit plan, and the Pension Excess

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Benefit Plan of The Chubb Corporation, Chubb & Son Inc., and Participating Affiliates (the Pension Excess Benefit Plan), our unqualified excess defined benefit plan, to help us attract and retain our employees. Our NEOs participate in these plans on the same terms and conditions as other employees, except that Mr. Finnegan is entitled to a supplemental pension benefit under his employment agreement that was negotiated when he joined Chubb (the SERP). Information about our retirement plans is set forth under the heading “Executive Compensation—Pension Benefits.”

Nonqualified Defined Contribution and Deferred Compensation Plans.   We maintain The Chubb Corporation Key Employee Deferred Compensation Plan (2005) (the Deferred Compensation Plan), our nonqualified deferred compensation plan for our elected officers, including our NEOs, to provide them with an additional tool to enhance their retirement planning and wealth management. This plan allows participants to defer receipt, and thus the tax liability, of income (salary, annual incentive compensation, equity compensation and CCAP matching contributions in excess of the limits under the Internal Revenue Code of 1986, as amended (the Internal Revenue Code)) to retirement or a later specified date. We also maintain the Defined Contribution Excess Benefit Plan of The Chubb Corporation, Federal Insurance Company, Vigilant Insurance Company and Chubb Life Insurance Company of New Hampshire (the CCAP Excess Benefit Plan), 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). 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.”

Employment and Severance Agreements

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. 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 create a specific compensation package with incentives and guarantees in order to retain his 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.”

Change in Control Agreements

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, O’Reilly, Motamed and Degnan in the event of a threat or occurrence of a change in control. Our Board continues to believe that change in control agreements are imperative to diminish the inevitable distraction of these NEOs by virtue of the personal uncertainties and risks created by a pending or threatened change in control and to encourage their full attention and dedication to our business in the event of any threatened or pending change in control.

As such, we have individual change in control agreements with Messrs. Finnegan, O’Reilly, Motamed and Degnan. 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.”

33




Stock Ownership Guidelines

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

The guidelines are designed to maintain stock ownership at levels high enough to assure our shareholders of our senior executives’ commitment to value creation, while taking into account an individual executive’s need for portfolio diversification. Under these guidelines, senior executives, 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. There is a five-year phase-in period beginning on the later of becoming an officer subject to the stock ownership guidelines and the date the guidelines were adopted. Our current stock ownership guidelines for executive officers are as follows:

Position

 

 

 

Ownership Level

Chief Executive Officer

 

5x Salary

Vice Chairmen

 

3x Salary

Executive Vice Presidents

 

2x Salary

Senior Vice Presidents

 

1x Salary

 

Our Compensation Committee reviews the guidelines on a regular basis and monitors the executives’ progress toward meeting their target ownerships levels. Owned shares, unvested restricted stock, 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 shares do not count toward satisfaction of the guidelines.

The stock ownership of our NEOs as of the end of 2006 was:

Named Executive Officer

 

 

 

Target No. of Shares*

 

Actual No. of Shares Owned

 

John D. Finnegan

 

 

120,487

 

 

 

387,841

 

 

Michael O’Reilly

 

 

37,989

 

 

 

211,771

 

 

Thomas F. Motamed

 

 

41,107

 

 

 

194,075

 

 

John J. Degnan

 

 

36,571

 

 

 

202,783

 

 

Paul J. Krump

 

 

16,556

 

 

 

51,925

 

 


*                    Based on a per share price of $52.91, which was the closing price of our common stock on December 29, 2006, and the respective salaries of our NEOs as of that date.

As shown in the above table, each of our NEOs has met his required number of shares, well ahead of the initial 2009 deadline.

Changes in Executive Compensation Policies for 2007

On March 1, 2007, our Compensation Committee determined that 2007 operating income, adjusted to account for the reduction in investment income attributable to our repurchase of shares of our common stock during 2007, would be the performance metric utilized in determining 2007 annual incentive compensation awards. This was a change from the use of operating income per share as the performance metric utilized in determining annual incentive compensation awards for 2006.

Beginning January 1, 2007, we changed our automobile allowance benefit to provide elected officers with a monthly allowance of $500 without an income tax gross-up.

34




Tax Policies

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 any individual who is identified as a named executive officer as of the end of the fiscal year 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 (which permit our Compensation Committee to recognize individual performance through the exercise of negative discretion, as it did in 2006) and performance share awards to qualify for the performance-based compensation exception to the $1 million limit. In addition, our NEOs are permitted to defer compensation that would not otherwise be deductible, including salary payments above $1 million and RSU awards.

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, restricted stock and RSU awards, even though such plans and arrangements may result in certain non-deductible compensation expenses. Accordingly, our Compensation Committee may from time to time approve elements of compensation for certain executive officers that are not fully deductible, and reserves the right to do so in the future, in appropriate circumstances.

35




EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth information regarding compensation paid to, or earned by, our NEOs during 2006:

Name and
Principal Position

 

 

 

Year

 

Salary
($)
(1)

 

Bonus
($)

 

Stock
Awards
($)
(2)

 

Option
Awards
($)
(3)

 

Non-Equity
Incentive
Plan
Compensation
($)
(4)

 

Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
(5)

 

All Other
Compensation
($)
(6)

 

Total 
($)

 

John D. Finnegan

 

2006

 

$

1,275,000

 

 

 

 

$

7,136,716

 

$

1,928,732

 

 

$

3,242,850

 

 

 

$

3,024,142

 

 

 

$

154,864

 

 

$

16,762,304

 

Chairman, President

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and CEO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Michael O'Reilly

 

2006

 

661,251

 

 

 

 

3,702,421

 

 

 

1,262,300

 

 

 

1,157,421

 

 

 

103,467

 

 

6,886,860

 

Vice Chairman and CFO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thomas F. Motamed

 

2006

 

715,001

 

 

 

 

4,438,189

 

 

 

1,502,500

 

 

 

1,389,173

 

 

 

137,546

 

 

8,182,409

 

Vice Chairman and COO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

John J. Degnan

 

2006

 

636,250

 

 

 

 

3,586,370

 

 

 

1,215,200

 

 

 

657,610

 

 

 

118,503

 

 

6,213,933

 

Vice Chairman and CAO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paul J. Krump

 

2006

 

432,875

 

 

 

 

411,572

 

281,637

 

 

659,750

 

 

 

368,979

 

 

 

49,759

 

 

2,204,572

 

Executive Vice

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

President

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)          $275,000 of Mr. Finnegan’s salary for 2006 was deferred under the Deferred Compensation Plan. Additional information regarding the Deferred Compensation Plan is set forth under the heading “Executive Compensation—Nonqualified Defined Contribution and Deferred Compensation Plans.”

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(2)          Reflects the dollar amount recognized for financial statement reporting purposes during 2006 for each NEO, as computed pursuant to FAS 123(R), disregarding any estimates relating to service-based vesting conditions, in respect of all outstanding RSU, restricted stock, and performance share awards as follows:

Employee Equity Award Expensing

 

Named Executive

 

 

 

Stock Award Type

 

Grant
Date

 

Shares
(#)

 

Per Share
Fair Value
($)

 

Recognized
2006
($)

 

John D. Finnegan

 

RSUs

 

04/27/2004

 

54,284

 

 

$

35.00

 

 

$

633,313

 

 

RSUs

 

03/03/2005

 

48,094

 

 

39.51

 

 

633,398

 

 

RSUs

 

03/02/2006

 

39,892

 

 

47.63

 

 

527,793

 

 

Performance Shares

 

04/27/2004

 

162,858

 

 

32.74

 

 

1,777,324

 

 

Performance Shares

 

03/03/2005

 

144,286

 

 

37.02

 

 

1,780,489

 

 

Performance Shares

 

03/02/2006

 

119,678

 

 

44.73

 

 

1,784,399

 

Michael O'Reilly

 

RSUs

 

04/27/2004

 

19,678

 

 

35.00

 

 

229,577

 

 

 

RSUs

 

03/03/2005

 

15,820

 

 

39.51

 

 

208,349

 

 

 

RSUs

 

03/02/2006

 

13,122

 

 

47.63

 

 

173,611

 

 

 

Restricted Stock

 

11/29/2002

 

17,116

 

 

29.21

 

 

99,992

 

 

 

Performance Shares

 

04/27/2004

 

59,036

 

 

32.74

 

 

644,280

 

 

 

Performance Shares

 

03/03/2005

 

47,462

 

 

37.02

 

 

585,681

 

 

 

Performance Shares

 

03/02/2006

 

39,368

 

 

44.73

 

 

1,760,931

 

Thomas F. Motamed

 

RSUs

 

04/27/2004

 

22,320

 

 

35.00

 

 

260,400

 

 

RSUs

 

03/03/2005

 

18,826

 

 

39.51

 

 

247,938

 

 

RSUs

 

03/02/2006

 

15,614

 

 

47.63

 

 

206,582

 

 

Restricted Stock

 

11/29/2002

 

34,234

 

 

29.21

 

 

199,995

 

 

Performance Shares

 

04/27/2004

 

66,964

 

 

32.74

 

 

730,800

 

 

Performance Shares

 

03/03/2005

 

56,480

 

 

37.02

 

 

696,963

 

 

Performance Shares

 

03/02/2006

 

46,848

 

 

44.73

 

 

2,095,511

 

John J. Degnan

 

RSUs

 

04/27/2004

 

18,784

 

 

35.00

 

 

219,147

 

 

 

RSUs

 

03/03/2005

 

15,376

 

 

39.51

 

 

202,502

 

 

 

RSUs

 

03/02/2006

 

12,754

 

 

47.63

 

 

168,743

 

 

 

Restricted Stock

 

11/29/2002

 

17,116

 

 

29.21

 

 

99,992

 

 

 

Performance Shares

 

04/27/2004

 

56,358

 

 

32.74

 

 

615,054

 

 

 

Performance Shares

 

03/03/2005

 

46,134

 

 

37.02

 

 

569,294

 

 

 

Performance Shares

 

03/02/2006

 

38,266

 

 

44.73

 

 

1,711,638

 

Paul J. Krump

 

RSUs

 

04/27/2004

 

2,856

 

 

35.00

 

 

33,320

 

 

RSUs

 

03/03/2005

 

2,530

 

 

39.51

 

 

33,320

 

 

RSUs

 

03/02/2006

 

2,204

 

 

47.63

 

 

29,160

 

 

Restricted Stock

 

12/06/2001

 

6,000

 

 

33.22

 

 

29,898

 

 

Performance Shares

 

04/27/2004

 

8,572

 

 

32.74

 

 

93,549

 

 

Performance Shares

 

03/03/2005

 

7,594

 

 

37.02

 

 

93,710

 

 

Performance Shares

 

03/02/2006

 

6,614

 

 

44.73

 

 

98,615

 


The grant date fair value of each of these awards is estimated based on the fair market value of our common stock on the date of grant discounted, in the case of performance shares, to reflect that performance share awards do not receive dividend equivalents during the performance cycle. For the 2006 performance share awards granted to our retirement-eligible NEOs (Messrs. O’Reilly, Motamed and Degnan), amounts recognized equal the full grant date fair value for the grants made to such

37




NEOs, as required pursuant to FAS 123(R). Information regarding our FAS 123(R) calculations is set forth in footnote 12 to the financial statements included in the 2006 Annual Report.

(3)          In 2004, we eliminated stock options from our core long-term incentive program. Amounts in this column reflect the dollar amount recognized for financial statement reporting purposes during 2006 for each of Messrs. Finnegan and Krump, as computed pursuant to FAS 123(R), in respect of non-discretionary restoration stock options granted to Mr. Finnegan and Mr. Krump, respectively, upon their exercises in 2006 of vested stock options. The restoration stock option feature is described under the heading “Compensation Discussion and Analysis—Components of Executive Compensation.” Restoration stock options are fully vested on the grant date. Accordingly, the grant date fair value of these awards is the same as the amount of compensation expense we reflect in our financial statements with respect to these awards. The grant date fair value of each restoration stock option was estimated using the Black-Scholes option pricing model. Information regarding our FAS 123(R) calculations is set forth in footnote 12 to the financial statements included in the 2006 Annual Report.

(4)          Reflects 2006 non-equity incentive plan compensation to be paid in March 2007 under our Annual Incentive Plan. Additional information regarding non-equity incentive compensation is set forth under the headings “Compensation Discussion and Analysis—Components of Executive Compensation” and “Executive Compensation—Grants of Plan-Based Awards.”

(5)          Reflects solely the aggregate change in pension value under our defined benefit plans as follows: Mr. Finnegan’s benefits under the SERP, $3,024,142; Mr. O’Reilly’s benefits under the Pension Plan and Pension Excess Benefit Plan, $16,140 and $1,141,281, respectively; Mr. Motamed’s benefits under the Pension Plan and Pension Excess Benefit Plan, $90,365 and $1,298,808, respectively; Mr. Degnan’s benefits under the Pension Plan and Pension Excess Benefit Plan, $60,681 and $596,929, respectively; and Mr. Krump’s benefits under the Pension Plan and Pension Excess Benefit Plan, $41,124 and $327,855, respectively. Information regarding our valuation assumptions with respect to these amounts is set forth under the heading “Executive Compensation—Components of Executive Compensation.”

(6)          The following table sets forth the elements of the amounts set forth in the “All Other Compensation” column:

Named Executive

 

 

 

Perquisites
and Other
Personal
Benefits
($)
(a)

 

Tax
Reimbursement
($)
(b)

 

Registrant
Contributions
to Defined
Contribution
Plans ($)
(c)

 

Total
($)

 

John D. Finnegan

 

 

$

24,334

 

 

 

 

 

 

$

130,530

 

 

$

154,864

 

Michael O'Reilly

 

 

41,899

 

 

 

$

4,406

 

 

 

57,162

 

 

103,467

 

Thomas F. Motamed

 

 

67,699

 

 

 

4,185

 

 

 

65,662

 

 

137,546

 

John J. Degnan

 

 

58,637

 

 

 

4,406

 

 

 

55,460

 

 

118,503

 

Paul J. Krump

 

 

9,525

 

 

 

3,665

 

 

 

36,569

 

 

49,759

 


(a)           Amounts represent the incremental cost to us for each of the respective benefits. The incremental cost of the personal use of corporate aircraft expense is calculated by multiplying the direct operating cost per hour by the NEO’s personal use hours. Direct operating cost is comprised of fuel, landing/parking fees, crew fees and expenses, custom fees, flight services/charts, variable maintenance costs, catering, aircraft supplies and other miscellaneous expenses. Incremental cost of financial planning represents the actual cost incurred by us. The automobile allowance provided to our NEOs (other than Mr. Finnegan) represents the actual cost incurred by us. The incremental cost of Mr. Finnegan’s automobile and driver was calculated by multiplying the variable expenses of owning and operating the car Mr.

38




Finnegan uses by the personal use percentage of the total vehicle miles in 2006. The variable expenses are comprised of gas, maintenance, driver overtime, and miscellaneous driving expenses. Mr. Finnegan’s personal use percentage for 2006 was approximately 13% of the total vehicle miles. As stipulated in Mr. Finnegan’s employment agreement, we pay the annual membership fee of $7,400 for Mr. Finnegan’s country club membership but do not recognize any incremental cost due to his personal use because the annual membership fee is fixed. Any additional costs resulting from Mr. Finnegan’s personal country club use are paid directly by him. Additional information regarding perquisites is set forth under the heading “Compensation Discussion and Analysis—Components of Executive Compensation.” Details regarding the amounts included in “Perquisites and Other Personal Benefits” column are set forth in the following table:

Named Executive

 

 

 

Personal Use
of Corporate
Aircraft
($)

 

Financial
Planning
($)

 

Automobile
Allowance
($)

 

Company
Provided
Automobile
and Driver
($)

 

Total
($)

 

John D. Finnegan

 

 

$

10,314

 

 

 

$

8,100

 

 

 

 

 

 

$

5,920

 

 

$

24,334

 

Michael O'Reilly

 

 

36,649

 

 

 

 

 

 

$

5,250

 

 

 

 

 

41,899

 

Thomas F. Motamed

 

 

52,916

 

 

 

9,533

 

 

 

5,250

 

 

 

 

 

67,699

 

John J. Degnan

 

 

46,812

 

 

 

6,575

 

 

 

5,250

 

 

 

 

 

58,637

 

Paul J. Krump

 

 

 

 

 

4,275

 

 

 

5,250

 

 

 

 

 

9,525

 


(b)          Reflects tax reimbursement for the automobile allowance paid to our NEOs (other than Mr. Finnegan) in 2006. Tax reimbursements were discontinued effective January 1, 2007. Additional information regarding this tax reimbursement is set forth under the headings “Compensation Discussion and Analysis—Components of Executive Compensation” and “Compensation Discussion and Analysis—Changes in Executive Compensation Policies for 2007.”

(c)           Reflects 2006 matching contributions under the CCAP and the CCAP Excess Benefit Plan.

39




Grants of Plan-Based Awards

The following table sets forth information regarding 2006 grants to our NEOs under our Annual Incentive Plan and 2004 Employee Plan:

 

 

 

Estimated Possible Payouts
Under Non-Equity

 

Estimated Future Payouts
Under Equity Incentive

 

All Other
Stock
Awards:
Number
of Shares

 

All Other
Option
Awards:
Number of
Securities

 

Exercise or
Base Price

 

Closing
Market
Price on

 

Grant Date
Fair Value
of Stock

 

 

 

 

 

Incentive Plan Awards(1)

 

Plan Awards(2)

 

of Stock

 

Underlying

 

of Option

 

Grant

 

and Option

 

Named Executive

 

 

 

Grant Date

 

Threshold
($)

 

Target
($)

 

Maximum
($)

 

Threshold
(#)

 

Target
(#)

 

Maximum
(#)

 

or Units
(#)
(3)

 

Options
(#)
(4)

 

Awards
($/Sh)
(5)

 

Date
($/Sh)
(5)

 

Awards
($)
(6)

 

John D. Finnegan

 

 

03/02/2006

 

 

 

$

860,625

 

 

$

1,721,250

 

$

4,080,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

03/02/2006

 

 

 

 

 

 

 

 

 

 

 

59,839

 

 

119,678

 

 

239,356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

5,353,197

 

 

 

 

03/02/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39,892

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,900,056

 

 

 

 

04/28/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

129,750

 

 

 

$

51.455

 

 

 

$

51.540

 

 

 

945,878

 

 

 

 

12/27/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

141,826

 

 

 

53.510

 

 

 

53.480

 

 

 

982,854

 

 

Michael O’Reilly

 

 

03/02/2006

 

 

 

335,000

 

 

670,000

 

1,675,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

03/02/2006

 

 

 

 

 

 

 

 

 

 

 

19,684

 

 

39,368

 

 

78,736

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,760,931

 

 

 

 

 

03/02/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

625,001

 

 

Thomas F. Motamed

 

 

03/02/2006

 

 

 

398,750

 

 

797,500

 

1,957,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

03/02/2006

 

 

 

 

 

 

 

 

 

 

 

23,424

 

 

46,848

 

 

93,696

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,095,511

 

 

 

 

03/02/2006