Motley Fool Hidden Gems and Stock Advisor pick Montpelier Re (NYSE: MRH) is off to a grim start for the year. The reinsurer posted a 25% drop in fourth-quarter earnings, reporting net income of $90.5 million, or $0.97 a share, versus $121 million, or $1.26 a share, in the year-ago period. During January, the customary renewal season for many insurance policies, average renewal prices fell 10%.

The weak results reflected general softening in the reinsurance industry, as both insurance and reinsurance companies face increased competition and recalibrate their appetite for risk amid a crazy debt market.

Most analysts expected the drop in net income, but few anticipated Montpelier's announcement of large losses in the first 50 days of 2008. Management estimates that the hit, stemming from individual risk in the commercial property division, will produce $30 million to $40 million in total losses by the time Montpelier reports first-quarter 2008 results.

For the year, Montpelier's combined ratio came in at 61.3%, 1% higher than a year before, but down from 70% last summer. Net premiums written -- essentially, new business -- grew 40% to $74.5 million during the fourth quarter.

CEO Anthony Taylor adamantly remind investors that Montpelier has minimal exposure to subprime mortgages and no exposure to bond insurers. Nonetheless, the company hopes to profit from the mortgage mess; it contributed $95 million in the second half of 2007 to take advantage of mortgage bank loans that have suffered such infamous punishment lately.

Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), which holds significant reinsurance operations, took similar steps to capitalize on the market turmoil with its recent foray into municipal bond insurance after Ambac (NYSE: ABK) and MBIA (NYSE: MBI) got rocked by falling CDO values.

For 2007, Montpelier's book value grew 17.6% to $17.88 per share, a notch above where its shares trade today. Most of that increase in book value owed to a $56 million share repurchase, and Montpelier's buyback of all its outstanding warrants from founding investor White Mountains (NYSE: WTM). Between share and warrant repurchases, Montpelier reduced shares outstanding by 11%. That's not the brightest of notes, but in a quarter this gloomy, it'll have to do.

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Fool contributor Morgan Housel and The Motley Fool own shares of Berkshire Hathaway, but neither holds any financial position in the other companies mentioned in this article. Morgan appreciates your questions, comments, and complaints. The Fool's disclosure policy is all about investors writing for investors.