Ace Ltd.'s shares fell 20 percent — the most in 15 years — after Citigroup Inc. downgraded the firm on an analyst's expectations of reinsurance costs arising from equity-based retirement products.

Last night the insurer responded by saying that even under current market conditions, the company would expect to earn "reasonable operating income" in 2009 on this variable annuity reinsurance line of business.

Using a total exposure figure, referred to by analyst Joshua Shanker as a measure of risk, was "incompatible... with reality as we know it", said Ace chief executive officer Evan Greenberg.

Ace slipped $9.96, or 20 percent, to $40.45 in New York Stock Exchange composite trading yesterday, the biggest fall since the company's public offering in 1993. The Swiss-domiciled insurer, which also sells property and casualty coverage and has its principal executive offices in Bermuda, is down 35 percent this year.

Variable annuities are policies that have guaranteed minimum payouts or monthly withdrawal benefits. Investors and analysts are worried that with recent declines in the stock market that insurers will have to dip into reserves to help meet the minimum payments.

For Ace, it took on the risk of meeting those minimum payments when it reinsured the products, Mr. Shanker wrote in the note.

"The contracts Ace has engaged will cost it, should the markets decline in an unexpected and extended way," Mr. Shanker wrote.

Despite having stopped writing this line last year, Ace has seen its risk from variable annuities skyrocket throughout 2008, Mr. Shanker said. The company's exposure to two variable annuity products increased to more than $7 billion combined at the end of the third quarter, from about $1.6 billion at the end of 2007, he added.

Because of the increased exposure and risk, Shanker cut his 2008 earnings estimate for Ace to $7.75 per share from $7.80 per share. He lowered his 2009 estimate to $6.95 per share from $7.20 per share.

Last night, Ace responded by stating that its net amount risk (NAR) variable annuity death benefit reinsurance exposure was $6.5 billion at September 30, 2008. Ace said NAR is not a measure of risk, but a metric used to indicate total exposure if all covered individuals were to die immediately with account values fixed at current market levels.

"Using the NAR as a measure of risk is like deciding that the world is literally ending tomorrow," Mr. Greenberg said. "It is essentially measuring insurance risk solely by adding together all of the limits of all policies issued and then assuming that every one must be paid at once.

"It is, frankly, completely incompatible with the nature of the insurance business and with reality as we know it."

Ace also disclosed expected premiums and claims payments for the line of business in question for the next 12 months. Based on market conditions at September 30, 2008, Ace expects to earn between $150 million and $200 million.

"As a reminder, substantial premiums will continue into the future and reserves are established to offset future losses. As a result, an increase in claims paid does not translate directly into a decrease in income."

The company stopped writing variable annuity reinsurance last year because management decided "it had sufficient aggregate exposure to this long-tail catastrophe line of risk".

It was a dismal day for the Bermuda insurance sector, with most of the Island's US-listed companies falling by more than the Dow's 5.07 percent plunge yesterday.

The Dow finished below 8,000, while the Standard & Poor's 500 Index hit a five-year low.

Aspen plunged 18 percent, XL Capital 16 percent, Montpelier 14 percent and IPC 12 percent. Axis, Endurance and White Mountains all saw their share prices tumble 11 percent.

The Island's financial guarantors were even worse hit with Syncora Holdings plummeting 32 percent, while Ram Holdings finished 28 percent lower, Assured Guaranty dipped 15 percent and Primus Guaranty shed six percent.