Certain of our reinsurance contracts include provisions that adjust premiums or acquisition expenses based upon the loss experience under the contracts. Reinstatement premiums are the premiums charged for the restoration of the reinsurance limit of a reinsurance contract to its full amount, generally coinciding with the payment by the reinsurer of losses. These premiums relate to the future coverage obtained for the remainder of the initial contract term. Additional premiums are those premiums triggered by losses and not related to reinstatement of limits. WBNR and EBNR include estimates of reinstatement premiums and additional premiums based on reinsurance contract provisions and loss experience and rely on the estimates of unpaid losses and LAE.
Non-catastrophe reserves were $2,217,126,000 as of December 31, 2008 representing 91% of our unpaid losses and LAE. When estimating unpaid losses and LAE, we segregate the business into classes by reinsurance subsidiary, by type of coverage and by type of contract (resulting in approximately 133 classes). Within each class the business is further segregated by Underwriting Year, starting with 2002, our first year of operations.
We use reinsurance accounting for assumed and ceded transactions when risk transfer requirements have been met. Risk transfer analysis evaluates significant assumptions relating to the amount and timing of expected cash flows, as well as the interpretation of underlying contract terms which may include loss limits or loss mitigation provisions. Reinsurance contracts that do not transfer sufficient insurance risk are accounted for as reinsurance deposit liabilities with interest expense charged to other income and credited to the liability.
The net decrease in the fair value of derivatives for the years ended December 31, 2008 and 2007 was $14,114,000 and $5,007,000, respectively. We entered into four derivative contracts during 2008, of which two were option agreements to purchase industry loss warranty retrocessional protection. The third derivative was a contract under which we can recover up to $120,000,000 from the counterparty if modeled losses from both a first and second catastrophe event resulting from U.S. wind, California earthquake or European wind exceeded a specified attachment point. The fourth was a derivative contract we entered into with Topiary that provides us with catastrophe loss protection. See “Financial Condition, Liquidity and Capital Resources” for additional discussion of Topiary.
Income taxes and the effective tax rate for the years ended December 31, 2008 and 2007 were as follows ($ in thousands):
Net foreign currency exchange gains for the years ended December 31, 2007 and 2006 were $2,775,000 and $738,000, respectively. We routinely transact business in various currencies other than the U.S. dollar. Foreign currency exchange gains and losses result from the re-valuation into U.S. dollars of assets and liabilities denominated in currencies other than the U.S. dollar as well as fluctuations in the amounts of assets and liabilities denominated in currencies other than the U.S. dollar and the exchange rates of the currencies. We periodically monitor our largest foreign currency exposures and may purchase or sell foreign currency denominated invested assets based on these exposures. The net foreign currency exchange gain in 2007 was the result of our holding more non-U.S. dollar denominated assets than non-U.S. dollar denominated liabilities, primarily the Euro and the British pound sterling in the normal course of doing business in these currencies, while the U.S. dollar declined in value against these currencies.
The net unrealized loss position of our portfolio of commercial mortgage-backed securities (“CMBS”) was $105,482,000 as of December 31, 2008. We believe that this net unrealized loss is primarily attributable to a widening of interest rate spreads as well as to the loss of liquidity in the financial markets during the second half of 2008. Our CMBS are evaluated on a periodic basis using analytical techniques and various metrics including but not limited to the level of subordination, debt-service-coverage ratios, loan-to-value ratios, delinquencies, defaults and foreclosures. As of December 31, 2008, our CMBS had a weighted average credit rating of Aaa, weighted average current credit support of 27.4%, a weighted average original loan to value of 68.3% and a weighted average life of 4.8 years. Our portfolio consists primarily of senior tranches of CMBS with strong subordination and low loan-to-value ratios. We currently expect to collect the cash flows from principal repayments and interest payments associated with our CMBS and do not consider these investments to be other-than-temporarily impaired as of December 31, 2008.