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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009, for ACE Limited (referred to as ACE or the Company). ACE is a global insurance and reinsurance organization headquartered in Zurich, Switzerland, following a redomiciliation from the Cayman Islands in July 2008. The Company operates through four primary segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life. The reporting period includes the full results of the Combined Insurance acquisition, which closed on April 1, 2008.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased 50% to $567 million, driven by improved underwriting results and a significant reduction in net realized investment losses compared to the prior year.
• Investment Performance: Net realized losses improved from $353 million in Q1 2008 to $121 million in Q1 2009. This improvement was due to lower other-than-temporary impairments ($192 million in Q1 2009 vs. $189 million in Q1 2008) and gains on derivatives offsetting market volatility.
• Underwriting Ratios: The consolidated combined ratio increased to 87.5% from 84.6%. The loss and loss expense ratio rose to 59.7% from 55.6%, primarily due to lower favorable prior period development ($67 million in 2009 vs. $181 million in 2008) and the inclusion of Combined Insurance.
• Premium Growth: Net premiums written grew 9% year-over-year. This growth was largely attributable to the inclusion of Combined Insurance (adding 11 percentage points) and a crop insurance settlement (adding 5 percentage points). Excluding these factors, premiums declined due to foreign exchange headwinds.
• Segment Performance:
  • Global Reinsurance: Reported its first quarterly growth since Q2 2006, with net premiums written up 4% and net income up 53%.
  • Life: Net income turned positive ($68 million) from a loss of $153 million, primarily due to the inclusion of Combined Insurance's A&H business.
  • Insurance – North American: Net income declined 22% to $213 million, impacted by higher realized investment losses and adverse prior period development in long-tail lines.

Outlook, Risks, and Contingencies

• Market Conditions: Management notes a deep global recession and difficult financial markets. While some improvement was seen in debt and equity markets in late Q1 2009, the outlook remains uncertain. Pricing in the reinsurance market is firming (20-30% increases observed in Q2 2009), while direct insurance pricing is generally flat to up.
• Investment Portfolio: The portfolio holds significant gross unrealized losses ($3.4 billion total), primarily in fixed maturities due to widening credit spreads. Management maintains the ability and intent to hold these securities to recovery. A deferred tax asset of approximately $548 million has been recognized related to these losses.
• Variable Annuity Guarantees (GMIB/GMDB): The Company assumes risk on variable annuity guarantees. Fair value liabilities are sensitive to equity market declines and interest rate changes. Management estimates that a 100 basis point increase in interest rates would reduce book value by approximately $1.3 billion.
• Legal Proceedings: ACE is involved in various litigation matters, including class actions regarding "B" quotes and contingent commissions. Management believes the ultimate liability is not likely to have a material adverse effect on consolidated financial condition, though it could impact results in a specific period.
• Liquidity: The Company maintains $1.9 billion in available credit lines, with $1.3 billion utilized as of March 31, 2009. Management believes cash flows from operations are sufficient to fund current needs.

Investor Verification Checklist

• Investment Impairments: Verify the classification of $192 million in other-than-temporary impairments and the sustainability of the deferred tax asset ($548 million) related to unrealized fixed income losses.
• Combined Insurance Integration: Assess the long-term profitability contribution of the Combined Insurance acquisition, which significantly boosted Q1 2009 premiums and Life segment income.
• Variable Annuity Sensitivity: Review the sensitivity analysis for GMIB/GMDB liabilities, specifically the impact of prolonged equity market underperformance (e.g., S&P 500 below 650) on future reserves and net income.
• Foreign Exchange Impact: Monitor the impact of the strengthening U.S. dollar on the Insurance – Overseas General segment, which reported an 11.1% decline in net premiums earned on a constant dollar basis.
• Legal Exposure: Track the status of the consolidated federal class actions regarding contingent commissions and the potential settlement of the securities class action ($1.95 million).