Note 3: Insurance Activity

The Company, through WMMRC, reinsures mortgage guaranty risks of mortgage loans originated by affiliates of the Company during the period from 1997 through 2008. WMMRC is (or was) a party to reinsurance agreements with UGRIC, GMIC, MGIC, PMI, Radian, RMIC and Triad. The agreements with UGRIC and Triad were placed into runoff effective May 31, 2008. The agreements with all other primary mortgage insurers were placed into runoff effective September 26, 2008. The reinsurance agreements with Triad, PMI and UGRIC were commuted on August 31, 2009, October 2, 2012 and April 3, 2014, respectively.

On April 3, 2014, WMMRC, a wholly-owned subsidiary of the Company, and UGRIC entered into a Commutation Agreement and Mutual Release (the “Commutation Agreement”), a copy of which was attached as Exhibit 10.1 to the Company’s Form 8-K filed on April 7, 2014. The effectiveness of the Commutation Agreement was conditioned upon obtaining certain consents, approvals and waivers, as described further below. On May 19, 2014, the Commutation Agreement became effective. Pursuant to the Commutation Agreement, WMMRC and UGRIC agreed to the commutation and termination of (i) the trust and trust account (the “Trust Account”) established by that certain trust agreement dated December 31, 1998 between WMMRC, UGRIC and US Bank, National Association, as trustee, pursuant to which WMMRC established a Trust Account for the benefit of UGRIC, in order to secure obligations of WMMRC and (ii) the reinsurance agreements and related arrangements described more specifically in the Commutation Agreement (the “Commutation”).

The Commutation Agreement became effective upon the completion of the following events, all of which have been obtained: (a) the State of Hawaii, Insurance Division approved the Commutation Agreement; (b) the Company entered into a Limited Waiver Agreement with the First Indenture Trustee in order to permit the Commutation under the terms of the First Lien Indenture; (c) the Company entered into a Limited Waiver Agreement with the Second Indenture Trustee in order to permit the Commutation under the terms of the Second Lien Indenture; (d) the Company received a Consent from the agent and requisite lenders under the Financing Agreement in order to permit the Commutation under the Financing Agreement; and (e) WMI Liquidating Trust, the beneficial owner of at least two-thirds in aggregate principal amount of the notes outstanding under the First Lien Indenture and the Second Lien Indenture, and Cede & Co., the registered holder of at least two-thirds in aggregate principal amount of the notes outstanding under the First Lien Indenture and the Second Lien Indenture, consented to both limited waiver agreements.

In accordance with the terms of the Commutation Agreement, UGRIC was paid $17.7 million in cash and WMMRC was paid all remaining cash and assets remaining in the Trust Account, which totaled $65.4 million (the “WMMRC Amount”) from the Commutation.

The WMMRC Amount was deposited into WMMRC’s custodial account. WMMRC requested and received approval from the State of Hawaii, Insurance Division to declare a dividend or distribution of all or a portion of the WMMRC Amount to the Company. The Company deposited such dividend or distribution to the extent constituting Runoff Proceeds (as defined in the Indentures) directly into the Collateral Account (as defined in the Indentures) for distribution to the note holders in accordance with the Indentures. On July 1, 2014, WMIHC repaid $62.7 million of principal and $679 thousand of interest relating to the Runoff Notes. On July 15, 2014, WMIHC repaid an additional $16.2 million of principal and $257 thousand of interest relating to the Runoff Notes. At July 15, 2014 (the date of the $16.2 million principal payment), the remaining outstanding balance of First Lien Runoff Notes was reduced to $2.9 million, and Second Lien Runoff Notes principal balance totaled $26.5 million.

All agreements between WMMRC and the primary mortgage insurers are on an excess of loss basis, except for certain reinsurance treaties with GMIC and Radian during 2007 and 2008, which are reinsured on a 50 percent quota share basis. Pursuant to the excess of loss reinsurance treaties, WMMRC reinsures a second loss layer which ranges from 5 percent to 10 percent of the risk in force in excess of the primary mortgage insurer’s first loss percentage which range from 4 percent to 5 percent. Each calendar year, or book year, is treated separately from other years when calculating losses. In return for accepting a portion of the risk, WMMRC receives, net of ceding commission, a percentage of the premium that ranges from 25 to 40 percent.

As security for the ceding insurers, WMMRC has entered into separate trust agreements with each of the primary mortgage insurance companies whereby a portion of the funds from premiums assumed are held in trust accounts for the benefit of each separate insurer. Pursuant to the terms of the reinsurance agreements, WMMRC is required to keep such assets in trust for a minimum of five (5) years and are subject to claims for up to ten (10) years from termination of obligations arising from the last year in which insurance business was written prior to runoff. Release of funds from the trust by WMMRC requires approval from the primary mortgage guaranty companies.

Premiums assumed and earned are as follows for the periods ended September 30, 2014 and 2013, respectively:

	Three Months		Three Months		Nine Months		Nine Months
	ended September 30,		ended September 30,		ended September 30,		ended September 30,
	2014		2013		2014		2013
Premiums assumed	$	1,564	$	2,790	$	5,276	$	9,353
Change in unearned premiums		71		143		238		(1,281	)
Premiums earned	$	1,635	$	2,933	$	5,514	$	8,072

The components of the liability for losses and loss adjustment reserves are as follows as of September 30, 2014 and December 31, 2013, respectively:

	September 30,		December 31,
	2014		2013
Case-basis reserves	$	17,787	$	41,159
IBNR reserves		107		713
Premium deficiency reserves		4,272		2,442
Total losses and loss adjustment reserves	$	22,166	$	44,314

Losses and loss adjustment reserve activity are as follows for the nine months ended September 30, 2014 and the year ended December 31, 2013, respectively:

	September 30,			December 31,
	2014			2013
Balance at beginning of period	$	44,314		$	82,524
Incurred (released) - prior periods		4,531			(6,159	)
Paid - prior periods		(26,679	)		(32,051	)
Total losses and loss adjustment reserves	$	22,166		$	44,314

The loss contract fair market reserve balance is analyzed and adjusted quarterly. The balance in the reserve was $16.0 million at September 30, 2014 and $46.3 million at December 31, 2013. The fair market value of this reserve decreased by $30.3 million and $1.0 million during the nine months ended September 30, 2014 and September 30, 2013, respectively. The decreases resulted in corresponding decreases in expense of $30.3 million and $1.0 million for the nine months ended September 30, 2014 and September 30, 2013, respectively.