Our underwriting results for 2008 included $177.1 million of net losses from hurricanes Gustav and Ike, partially offset by $104.1 million of prior year favorable loss development. The Company’s financial impact from hurricanes Gustav and Ike, net of reinsurance, reinstatements and reductions in incentive accruals, was approximately $140.0 million. Our investment results for 2008 included $244.9 million of net realized and unrealized investment losses which were comprised of $82.4 million in net losses from fixed maturities, $103.5 million in net losses from equity securities and $59.0 million in net losses from other investments.
Our underwriting results for 2007 included net losses totalling $88.6 million from windstorms Kyrill and Gonu, floods in Australia and the U.K. and wildfires in California, partially offset by $36.4 million of prior year favorable loss development. Our investment results for 2007 included $26.5 million of net realized and unrealized investment gains which were comprised of $19.9 million in net gains from fixed maturities, $7.5 million in net gains from equity securities and $0.9 million in net losses from other investments.
We believe that our computations of our fully converted tangible book value per share and our change in fully converted tangible book value per share, as adjusted for dividends, are measurements which are important to our investors, analysts and other interested parties who benefit from having an objective and consistent basis for comparison with other companies within our industry.
During 2006, we saw significant price increases in U.S. peak property zones, particularly in the case of business exposed to hurricanes and earthquakes, resulting from significant hurricane losses experienced throughout 2004 and 2005. These losses led to an increase in perceived catastrophe risk by market participants, catastrophe modeling firms and rating agencies which directly and indirectly led to increased prices.
(1) Represents an inter-segment reinsurance cover with Montpelier Syndicate 5151. This intercompany arrangement is eliminated in consolidation.
In the normal course of its business, Montpelier Bermuda purchases reinsurance in order to manage its exposures. The amount and type of reinsurance that it enters into is dependent on a variety of factors, including the cost of a particular reinsurance cover and the nature of its gross premiums written during a particular period.
As of December 31, 2008 and 2007, Montpelier Bermuda’s IBNR reserves represented 51% and 53% of its total gross loss and LAE reserves, respectively.
On June 5, 2008, the Company acquired all the outstanding share capital of Blue Ocean. See Note 1.
Montpelier Capital Trust III used the proceeds from the sale of the Trust Preferred Securities and the issuance of its share capital to purchase the Junior Notes, due March 30, 2036, in the principal amount of $100.0 million issued by the Company. The Junior Notes bear interest at the same rates as the Trust Preferred Securities discussed above.
As a provider of short tail reinsurance and insurance, mainly from natural and man-made catastrophes, we could become liable for significant losses on short notice. As a result, we have structured our fixed maturity investment portfolio with high-quality securities with a short average duration in order to reduce our sensitivity to interest rate fluctuations and to provide adequate liquidity for the settlement of our expected liabilities. As of December 31, 2008, our fixed maturities had an average credit quality of “AA+” (Very Strong) by Standard & Poor’s and an average duration of 2.3 years. Nonetheless, if our calculations with respect to the timing of the payment of our liabilities are incorrect, or if we improperly structure our investments, we could be forced to liquidate investments prior to maturity, potentially at a significant loss.
Favorable development of prior period net losses experienced as a percentage of our opening net loss reserves across all underwriting years were 14.7%, 4.1% and 1.6% for the years ended December 31, 2008, 2007 and 2006, respectively. Based on this experience and the current makeup of our loss reserves, we believe it is reasonably likely that our net loss and LAE reserves could increase or decrease by 10% from current amounts. As such, as of December 31, 2008, we estimate that a 10% change in our net loss and LAE reserves would result in an increase or decrease of our net income and shareholders’ equity by $68.6 million. The net income and shareholders’ equity impact of the change in net reserves may be partially offset by adjustments to items such as reinstatement premium, profit commission expense, incentive compensation and other corporate expenses.