Our combined ratio increased by 4.0 points to 95.6% for 2008 compared to 91.6% for 2007. The loss ratio component increased 2.3 points for 2008, principally due to the increase in current year catastrophe losses and attritional prior years’ reserve development, partially offset by the absence of development on A&E reserves in 2008. The commission and brokerage ratio component increased by 1.1 points for 2008 due to the increased commission rates on new insurance programs and higher contingent commissions. The other underwriting expense ratio component increased minimally by 0.6 points for 2008.
Over the past few years, we had reallocated our equity investment portfolio to include: 1) publicly traded equity securities and 2) private equity limited partnership investments. The objective of this portfolio diversification was to enhance the risk-adjusted total return of the investment portfolio by allocating a prudent portion of the portfolio to higher return asset classes. We had limited our allocation to these asset classes because of 1) the potential for volatility in their values and 2) the impact of these investments on regulatory and rating agency capital adequacy models. As a result of the dramatic slowdown in the global economy and the liquidity crisis affecting the financial markets, we significantly reduced our exposure to public equities during the fourth quarter of 2008 and correspondingly increased our holdings in short-term investments during the fourth quarter. At December 31, 2008, the market or fair value of investments in equity and limited partnership securities approximated 16% of shareholders’ equity, a decrease of 22 points from the 38% of shareholders’ equity at December 31, 2007.
At December 31, 2008, the gross reserves for A&E losses were comprised of $161.0 million representing case reserves reported by ceding companies, $139.7 million representing additional case reserves established by us on assumed reinsurance claims, $133.8 million representing case reserves established by us on direct excess insurance claims, including Mt. McKinley, and $352.3 million representing IBNR reserves.
Because the survival ratio was developed as a comparative measure of reserve strength and does not indicate absolute reserve adequacy, we consider, but do not rely on, the survival ratio when evaluating our reserves. In particular, we note that year to year loss payment variability can be material. This is due, in part, to our orientation to negotiated settlements, particularly on our Mt. McKinley exposures, which significantly reduces the credibility and utility of this measure as an analytical tool. During 2008, we made asbestos net claim payments of $46.2 million to Mt McKinley high profile claimants where the claim was either closed or a settlement had been reached. Such payments, which are non-repetitive, distort downward our three year survival ratio for 2008 and will continue to do so for 2009 and 2010. Adjusting for such settlements, recognizing that total settlements are generally considered fully reserved to an agreed settlement, we consider that our adjusted asbestos survival ratio for net unsettled claims is 9.2 years, which is closer to prevailing industry norms.
As the timing of payments for claims and benefits cannot be predicted with certainty, we maintain portfolios of long term invested assets with varying maturities, along with short-term investments that provide additional liquidity for payment of claims. At December 31, 2008 and 2007, we held cash and short-term investments of $2,095.5 million and $2,476.3 million, respectively. All of our short-term investments are readily marketable and can be converted to cash. In addition to these cash and short-term investments at December 31, 2008, we had $606.4 million of available for sale fixed maturity securities maturing within one year or less, $2,605.8 million maturing within one to five years and $5,669.0 million maturing after five years. Our $136.7 million of equity securities are comprised primarily of publicly traded securities that can be easily liquidated. We believe that these fixed maturity and equity securities, in conjunction with the short-term investments and positive cash flow from operations, provide ample sources of liquidity for the expected payment of losses in the near future. We do not anticipate selling securities or using available credit facilities to pay losses and LAE but have the ability to do so. Sales of securities might result in realized capital gains or losses and at December 31, 2008 we had $178.4 million of net pre-tax unrealized depreciation, comprised of $612.1 million of pre-tax unrealized depreciation and $433.7 million of pre-tax unrealized appreciation.
In December 2008, the FASB issued FASB Staff Position FAS 132(R)-1 “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FAS 132(R)-1”). FAS 132(R)-1 requires additional disclosures about plan assets. Additional disclosures include investment policies and strategies, fair value of each major plan asset category, inputs and valuation techniques used to develop fair value and any significant concentrations of risk. This FASB Staff Position is effective for fiscal years ending after December 15, 2009. The Company will adopt FAS 132(R)-1 for the reporting period ending December 31, 2009.
The tables below display the potential impact of a parallel and immediate 10% and 20% increase and decrease in foreign exchange rates on the valuation of invested assets subject to foreign currency exposure for the periods indicated. This analysis includes the after-tax impact of translation from transactional currency to functional currency as well as the after-tax impact of translation from functional currency to the U.S. dollar reporting currency.