compensation and casualty reinsurance. Workers’ compensation and casualty treaty reinsurance production increased 29% to $18.8 million in 2011 from $14.6 million in 2010. The retention of existing excess workers’ compensation customers in 2011 remained strong.
The Company believes the non-GAAP financial measure of “operating earnings” is informative when analyzing the trends relating to the Company’s insurance operations. Operating earnings consist of net income attributable to shareholders excluding after-tax realized investment gains and losses, losses on early retirement of senior notes and junior subordinated deferrable interest debentures, merger-related corporate expenses and results from discontinued operations, as applicable. The Company believes that because these excluded items arise from events that are largely within management’s discretion and whose fluctuations can distort comparisons between periods, a measure excluding their impact is useful in analyzing the Company’s operating trends. Investment gains or losses are realized based on management’s decision to dispose of an investment, and investment losses are realized based on management’s judgment that a decline in the market value of an investment is other than temporary. Early retirement of senior notes occurs based on management’s decision to redeem or repurchase these notes prior to maturity. The Company did not incur any merger-related corporate expenses in 2010 or 2009. Discontinued operations results from management’s decision to exit or sell a particular business. Thus, these excluded items are not reflective of the Company’s ongoing earnings capacity, and trends in the earnings of the Company’s underlying insurance operations can be more clearly identified without the effects. For these reasons, management uses the measure of operating earnings to assess performance and make operating plans and decisions, and the Company believes that analysts and investors typically utilize measures of this type as one element of their evaluations of insurers’ financial performance. However, gains or losses from the excluded items, particularly as to investments, can occur frequently and should not be considered as nonrecurring items. Further, operating earnings should not be considered a substitute for net income attributable to shareholders, the most directly comparable GAAP measure, as an indication of the Company’s overall financial performance and may not be calculated
in the same manner as similarly titled measures utilized by other companies. For reconciliations of the respective operating earnings amounts to the corresponding net income amounts for the indicated periods, see the table on page 32 captioned “Non-GAAP Financial Measures - Reconciliation to GAAP” which can be found in Part II, Item 6 - Selected Financial Data.
recognition of realized investment gains and losses. During 2010 and 2009, the Company recognized $35.2 million and $(2.8) million, respectively, of net gains (losses) on the sales of securities.
Loss on early retirement of 2033 Senior Notes. During 2010, the Company recognized a loss of $5.0 million, net of an income tax benefit of $2.7 million on the early retirement of $143.8 million in aggregate principal amount of the 2033 Senior Notes.
Mortgage-backed securities comprised 21% of the Company’s total invested assets at December 31, 2011. Sixty five percent of the Company’s mortgage-backed securities portfolio, based on fair values, has been rated as investment grade by nationally recognized statistical rating organizations. These ratings do not take into account the diminished probability of losses in those instances where the securities were purchased at discounts to their face values, as was a substantial portion of the Company’s mortgage-backed securities portfolio. Pursuant to the NAIC’s process in which, among other things, such discounts are taken into account along with modeling of potential losses with respect to the securities’ underlying collateral, the percentage of the Company’s mortgage-backed securities portfolio having received an NAIC rating equivalent to an investment grade rating, based on fair values, was 95%. Mortgage-backed securities subject the Company to a degree of interest rate risk, including prepayment and extension risk, which is generally a function of the sensitivity of each security’s underlying collateral to prepayments under varying interest rate environments and the repayment priority of the securities in the particular securitization structure, and can subject the Company to credit risk, depending on the nature of the underlying collateral, the characteristics of the underlying borrowers and such repayment priority. The Company seeks to manage this risk by emphasizing the more predictable payment classes and securities with stable collateral. See Part I, Item 1A - Risk Factors and “Overview”. At December 31, 2011, the market value of this portfolio was $1,585.9 million, as compared with a total amortized cost of $1,522.0 million.
At December 31, 2011, municipal fixed maturity securities represented approximately 34% of the Company’s total invested assets, of which approximately 18% were collateralized by obligations issued or guaranteed by U.S. government
At December 31, 2011, the Company had investments in general obligation bonds of the state of California and special revenue bonds of municipalities and other political subdivisions within California which had a total fair value of $303.0 million and an amortized cost of $280.6 million, substantially all of which have investment grade ratings.