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Note 1: The Company and its Subsidiaries
WMI Holdings Corp.
WMI Holdings Corp. (“WMIHC”) is a holding company organized and existing under the laws of the State of Washington. WMIHC, formerly known as Washington Mutual, Inc. (“WMI”), is the direct parent of WM Mortgage Reinsurance Company, Inc. (“WMMRC”), a Hawaii corporation, and WMI Investment Corp. (“WMIIC”), a Delaware corporation. As of the Petition Date (defined below), WMIIC held a variety of securities and investments. Upon emergence from bankruptcy on March 19, 2012, we had no operations other than WMMRC’s legacy reinsurance business which is being operated in runoff and has not written any new business since September 26, 2008.
WMMRC
WMMRC is a wholly-owned subsidiary of WMIHC. Prior to August 2008 (at which time WMMRC became a direct subsidiary of WMI), WMMRC was a wholly-owned subsidiary of FA Out-of-State Holdings, Inc., a second-tier subsidiary of Washington Mutual Bank (“WMB”) and third-tier subsidiary of WMI. WMMRC is a pure captive insurance company domiciled in the State of Hawaii. WMMRC was incorporated on February 25, 2000, and received a Certificate of Authority, dated March 2, 2000, from the Insurance Commissioner of the State of Hawaii.
WMMRC was organized to reinsure private mortgage insurance risk for seven primary mortgage insurers then offering private mortgage insurance on loans originated or purchased by certain former subsidiaries of WMI. The seven primary mortgage insurers are United Guaranty Residential Insurance Company (“UGRIC”), Genworth Mortgage Insurance Corporation (“GMIC”), Mortgage Guaranty Insurance Corporation (“MGIC”), PMI Mortgage Insurance Company (“PMI”), Radian Guaranty Incorporated (“Radian”), Republic Mortgage Insurance Company (“RMIC”) and Triad Guaranty Insurance Company (“Triad”).
Due to deteriorating performance in the mortgage guarantee markets and the closure and receivership of WMB, the reinsurance agreements with each of the primary mortgage insurers were terminated or placed into runoff during 2008. The agreements with UGRIC and Triad were terminated effective May 31, 2008. The agreements with all other primary mortgage insurers were placed into runoff effective September 26, 2008. As a result, effective September 26, 2008, WMMRC ceased assuming new mortgage risks from the primary carriers. Consequently, WMMRC’s continuing operations consist solely of the runoff of coverage associated with mortgages placed with the primary mortgage carriers prior to September 26, 2008. In runoff, an insurer generally writes no new business but continues to service its obligations under in force policies and otherwise continues as a licensed insurer. Management does not believe any additional adjustments to the carrying values of assets and liabilities which have been recorded at fair market value as reported in these financial statements are required as a result of WMMRC’s runoff status.
The reinsurance agreements with Triad and PMI were commuted on August 31, 2009 and October 2, 2012, respectively. The PMI transaction resulted in a loss from contract termination of $6.2 million dollars in the current period. In accordance with the commutation agreement between WMMRC and PMI, the trust assets were distributed in a manner such that PMI received $49.0 million in cash and WMMRC received all remaining trust assets equal to approximately $30.7 million.
WMIIC
WMIIC does not currently have any operations and is fully eliminated upon consolidation. Prior to September 26, 2008, WMIIC held a variety of securities and investments; however, such securities and investments were liquidated and the value thereof distributed in connection with implementing the Plan as described in Note 2: Reorganization under Chapter 11 of the United States Bankruptcy Code, below.
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Note 2: Reorganization under Chapter 11 of the United States Bankruptcy Code
Prior to September 26, 2008 (the “Petition Date”), WMI was a multiple savings and loan holding company that owned WMB and, indirectly, WMB’s subsidiaries, including Washington Mutual Bank fsb (“FSB”). As of the Petition Date, WMI also owned, directly or indirectly, several non-banking, non-debtor subsidiaries. Prior to the Petition Date, WMI was subject to regulation and examination by the Office of Thrift Supervision (the “OTS”). WMB and FSB, in turn, as depository institutions with federal thrift charters, were subject to regulation and examination by the OTS. In addition, WMI’s banking and non-banking subsidiaries were overseen by various federal and state authorities, including the Federal Deposit Insurance Corporation (“FDIC”).
On September 25, 2008 (the “Receivership Date”), the OTS, by order number 2008-36, closed WMB, appointed the FDIC as receiver for WMB (the “FDIC Receiver”) and advised that the FDIC Receiver was immediately taking possession of WMB’s assets. Immediately after its appointment as receiver, the FDIC Receiver sold substantially all the assets of WMB, including the stock of FSB, to JPMorgan Chase Bank, National Association (“JPMC”), pursuant to that certain Purchase and Assumption Agreement, Whole Bank, effective September 25, 2008 (the “Purchase and Assumption Agreement”), in exchange for payment of $1.88 billion and the assumption of all of WMB’s deposit liabilities. As a result of this transaction, substantially all of the business and accounting records of WMI became the property of JPMC and WMIHC had extremely limited access to such records. The foregoing notwithstanding, over time, limited access to such records was obtained through information sharing arrangements. Access to WMMRC’s historical records was not significantly affected by WMB’s closure and receivership.
On the Petition Date, WMI and WMIIC (together, referred to herein as the “Debtors”) each filed voluntary petitions for relief under Chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware (the “Court”) (Case No.08-12229 (MFW)).
On December 12, 2011, the Debtors filed with the Court the Seventh Amended Joint Plan of Affiliated Debtors Pursuant to Chapter 11 of the United States Bankruptcy Code (the “Filed Plan”) and a related disclosure statement (the “Disclosure Statement”). The Filed Plan was subsequently modified and, on February 24, 2012, the Court entered an order (the “Confirmation Order”) confirming the Filed Plan as modified by such modifications (the “Plan”). On March 19, 2012 (the “Effective Date”), the Plan became effective.
As previously disclosed, the Plan provided for the distribution of cash, Runoff Notes (as defined below), liquidating trust interests in WMI Liquidating Trust (the “Trust”) and newly issued shares of WMIHC’s common stock, in each case to certain holders of claims against, or former equity interests in, the Debtors. On or about March 23, 2012, the Trust distributed approximately $6.5 billion in cash and other assets as contemplated by the Plan.
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Note 3: Significant Accounting Policies
Basis of Presentation
As of March 19, 2012, the Company adopted fresh start accounting in accordance with Accounting Standards Codification (“ASC”) 852-10, Reorganizations (see Note 4: Fresh Start Accounting). The adoption of fresh start accounting resulted in the Company becoming a new entity for financial reporting purposes. Accordingly, the financial statements prior to March 19, 2012 are not comparable with the financial statements on or after March 19, 2012. Reference to “Successor” refers to the Company on or after the emergence from bankruptcy on March 19, 2012. Reference to “Predecessor” refers to WMMRC prior to the adoption of fresh start accounting and the emergence from bankruptcy.
The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for annual reporting and also under SEC Staff’s Legal Bulletin No. 2, “Modified Exchange Act Reporting” for public companies reporting while in bankruptcy proceedings.
All significant intercompany transactions and balances have been eliminated in preparing the consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Management has made significant estimates in certain areas, including valuing certain financial instruments and other assets, the determination of the contingent risk liabilities, and in determining appropriate insurance reserves. Actual results could differ substantially from those estimates.
Fair Value of Certain Financial Instruments
Fair Value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Generally, for assets that are reported at fair value, the Company uses quoted market prices or valuation models to estimate their fair value. These models incorporate inputs such as forward yield curves, market volatilities and pricing spreads, utilizing market-based inputs where readily available. The degree of management judgment involved in estimating the fair value of a financial instrument or other asset is dependent upon the availability of quoted market prices or observable market inputs. For financial instruments that are actively traded in the marketplace or whose values are based on readily available market value data, little judgment is necessary when estimating the instrument’s fair value. When observable market prices and data are not readily available, significant management judgment often is necessary to estimate fair value. In those cases, different assumptions could result in significant changes in valuation.
Fair Value Option
The Company classifies fixed-maturity investments as trading securities pursuant to Financial Accounting Standards Board (“FASB”) Fair Value Option accounting guidance. Fixed-maturity investments treated as “hold-to-maturity” investments are not recorded under the fair value option, but rather are recorded at amortized cost which, in the case of much of our investment holdings, approximates fair value. As such, changes in unrealized gains and losses on investments held at the balance sheet date are recognized and reported as a component of net investment income on the statement of operations. The Company believes Fair Value Option accounting provides better matching of investment earnings to potential cash flow generated from the investment portfolio and reduces subjectivity related to evaluating other-than-temporary impairment on the Company’s investment portfolio.
The Company has recorded a liability related to a loss contract fair market value reserve (the “Reserve”) and applies FASB Fair Value Option accounting guidance to this liability. The Reserve was initially established in compliance with ASC 805-10-55-21(b)(1) which defines a loss contract as a “contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.” The Company recorded this Reserve to properly value the net economic value of the WMMRC subsidiary as further described in Note 4: Fresh Start Accounting. At each reporting date, the Company reassesses the loss contract reserve which may result in a change to this line item in the balance sheet and statement of operations. Accordingly, any changes in the loss contract reserve at the balance sheet date are recognized and reported within the loss contract reserve fair market value change in the statement of operations. The Company believes Fair Value Option accounting provides better matching of earnings to potential cash flow generated from the WMMRC operating business.
Fair Value Measurement
The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in the FASB Fair Value Measurements and Disclosures accounting guidance. The framework is based on the inputs used in valuation and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the fair value accounting guidance hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions.
The three levels of the hierarchy are as follows:
Level 1—Inputs to the valuation methodology are quoted prices for identical assets or liabilities traded in active markets.
Level 2—Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market corroborated inputs.
Level 3—Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the inputs that market participants would use.
Fair values are based on quoted market prices when available (Level 1). The Company receives the quoted market prices from a third party, nationally recognized pricing service. When market prices are not available, the Company utilizes a pricing service to determine an estimate of fair value. The fair value is generally estimated using current market inputs for similar financial instruments with comparable terms and credit quality, commonly referred to as matrix pricing (Level 2). These valuation techniques involve some level of management estimation and judgment. The Company recognizes transfers between levels in the fair value hierarchy at the end of the reporting period.
Fixed-Maturity Securities
Fixed-maturity securities consist of U.S. Treasury securities, obligations of U.S. government agencies, commercial mortgage-backed securities and corporate debt securities. Fixed-maturity securities held in trust are for the benefit of the primary insurers as more fully described in Note 5: Insurance Activity. Investments in fixed-maturity securities are reported at their estimated fair values or amortized cost (as the case may be) and are classified as trading securities in accordance with applicable accounting guidance. Realized gains and losses on the sale of fixed-maturity securities are determined using the specific identification method and are reported as a component of net investment income within the statement of operations.
Cash Equivalents and Investments Held in Trust
Cash equivalents which include highly liquid overnight money market instruments and fixed-maturity securities, are held in trust for the benefit of the primary insurers as more fully described in Note 4: Fresh Start Accounting, and Note 5: Insurance Activity and the following information regarding restrictions on distribution of net assets of subsidiaries.
Third Party Restrictions on Distribution of Net Assets of Wholly-Owned Subsidiaries
The net assets of WMMRC are subject to restrictions from distribution from multiple sources including the primary insurers who have approval control of distribution from the trust, the Insurance Commissioner of the State of Hawaii who have approval control prior to distributions or intercompany advances, and additional restrictions as described in Note 9: Notes Payable.
Premium Recognition
Premiums assumed are earned on a daily pro-rata basis over the underlying policy terms. Premiums assumed relating to the unexpired portion of policies in force at the balance sheet date are recorded as unearned premiums.
The Company recognizes premium deficiencies when there is a probable loss on an insurance contract. Premium deficiencies are recognized if the sum of the present value of expected losses and loss adjustment expenses, expected dividends to policy holders unamortized deferred acquisition costs, and maintenance costs exceed unearned premiums and anticipated investment income. Premium deficiency reserves have been recorded totaling $15.1 million $3.1 million as of December 31, 2012 and 2011, respectively.
The Company’s premium deficiency analysis was performed on a single book basis and includes all book years and reinsurance treaties aggregated together using assumptions based on the actuarial best estimates at the balance sheet date. The calculation for premium deficiency requires significant judgment and includes estimates of future expected premiums, claims, loss adjustment expenses and investment income as of the balance sheet date. To the extent ultimate losses are higher or premiums are lower than estimated, additional premium deficiency reserves may be required in the future.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, U.S. Treasury bills and overnight investments. Except as described above in Cash Equivalents Held in Trust, the Company considers all amounts that are invested in highly liquid over-night money market instruments to be cash equivalents. The FDIC insures amounts on deposit with each financial institution up to limits as prescribed by law. The Company may hold funds with financial institutions in excess of the FDIC insured amount, however, the Company has not experienced any losses in such accounts and management believes it is not exposed to any significant credit risk on cash and cash equivalents.
Restricted cash
Restricted cash consists of amounts held for the express purposes of paying principal and interest on the Runoff Notes or other uses permitted under the terms and conditions governing the Company’s financing arrangements.
Ceding Commission Expense
The Company is required to pay a ceding commission to certain primary insurers pursuant to certain reinsurance agreements.
Losses and Loss Adjustment Reserves
The losses and loss adjustment reserve includes case basis estimates of reported losses and supplemental amounts for incurred but not reported losses (“IBNR”). A default is considered the incident (e.g., the failure to make timely payment of mortgage payments) that may give rise to a claim for mortgage insurance. In establishing the losses and loss adjustment reserve, the Company utilizes the findings of an independent consulting actuary. The consulting actuary estimates ultimate loss rates based upon industry data and claims and exposure data provided by the primary mortgage insurance carriers and assumptions of prepayment speed relative to loans reinsured by the Company. The fully developed ultimate loss rates are then applied to cumulative earned premium and reduced for cumulative losses and loss adjustment expenses paid to arrive at the liability for unpaid losses and loss adjustment expenses. Actuarial methods utilized by the consulting actuary to derive the ultimate loss rates, include the loss development method, simulated loss development method, Bornhuetter-Ferguson method and simulated Bornhuetter-Ferguson method on a paid and incurred basis. Due to the current condition of the mortgage insurance market, WMMRC has recorded reserves at the higher of (x) reserves estimated by the consulting actuary for each primary mortgage guaranty carrier and (y) ceded case reserves and IBNR levels reported by the primary mortgage guaranty carriers as of December 31, 2012 and 2011, respectively. Management believes that its aggregate liability for unpaid losses and loss adjustment expenses at period end represents its best estimate, based upon the available data, of the amount necessary to cover the current cost of losses. However, due to the inherent uncertainty arising from fluctuations in the persistency rate of mortgage insurance claims, the Company’s size and lack of prior operating history, external factors such as future changes in regional or national economic conditions, judicial decisions, federal and state legislation related to mortgage restructuring and foreclosure restrictions, claims denials and coverage rescissions by primary carriers and other factors beyond management’s control, it is not presently possible to determine whether actual loss experience will conform to the assumptions used in determining the estimated amounts for such liability at the balance sheet date. Accordingly, the ultimate liability could be significantly higher or lower, as the case may be, of the amount indicated in the financial statements and there can be no assurance that the reserve amounts recorded will be sufficient. As adjustments to these estimates become necessary, such adjustments are reflected in current operations.
Loss Contract Fair Market Value Reserves
A loss contract fair market value reserve relating to contractual obligations of WMMRC was established at March 19, 2012 as a result of applying Fresh Start Accounting (more fully described in Note 4) and in compliance with ASC 805-10-55-21(b)(1) which defines a loss contract as a “contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.” The fair market value of this reserve is analyzed quarterly and is adjusted accordingly. This adjustment to the reserve produces an expense or contra-expense in the statement of operations.
Fresh Start Accounting
The Company adopted fresh start accounting in accordance with ASC 852 (Reorganizations) (“ASC 852”). See Note 4: Fresh Start Accounting for a description of the Company’s application of this standard.
Comprehensive Income (Loss)
The Company has no comprehensive income (loss) other than the net income (loss) disclosed in the consolidated statement of operations.
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed by dividing net income (loss) applicable to the Company’s common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is computed by dividing net income (loss) applicable to the Company’s common shareholders by the weighted average number of common shares outstanding during the period and the effect of all dilutive common stock equivalents (of which we had zero). If common share equivalents existed, in periods where there is a net loss, diluted loss per common share is equal to basic loss per common share, since the effect of including any common share equivalents would be antidilutive.
Share based compensation
On May 22, 2012, WMIH’s board of directors approved the 2012 Long-Term Incentive Plan (the “2012 Plan”) to award restricted stock to its non-employee directors and to have a plan in place for awards to executives and others in connection with the Company’s operations and future strategic plans. A total of 2 million shares of common stock were reserved for future issuance under the Plan, which became effective upon the board of directors approval on May 22, 2012. The 2012 Plan provides for the granting of restricted shares and other cash and share based awards. The value of restricted stock is determined using the fair market value of the shares on the issuance date.
Income Taxes
The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the carrying amounts and tax bases of assets and liabilities and losses carried forward and tax credits. Deferred tax assets and liabilities are measured using enacted tax rates and laws applicable to the years in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to the extent that it is more likely than not that deferred tax assets will not be realized.
The Company recognizes the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. Penalties and interest, of which there are none, would be reflected in income tax expense. Tax years are open to the extent the Company has net operating loss carry-forwards available to be utilized currently.
Dividend Policy
WMIHC currently has no plans to pay a dividend. The Financing Agreement includes restrictions related to the payment of dividends.
New Accounting Pronouncements
On October 1, 2012 the FASB issued Accounting Standards Update No. 2012-04 Technical Corrections and Improvements which includes changes to clarify the codification or correct unintended application of guidance that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. This standard is effective for periods beginning after December 15, 2012 for public entities. The Company has reviewed this standard and determined it has no material impact on the Company’s consolidated financial position, results of operations, or disclosure requirements.
On August 27, 2012 the FASB issued Accounting Standards Update 2012-03 Technical Amendments and Corrections to SEC Sections Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22. This standard is effective upon publication for public entities. The Company has reviewed this standard and determined it has no material impact on the Company’s consolidated financial position, results of operations, or disclosure requirements.
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Note 4: Fresh Start Accounting
Under ASC 852, the application of fresh start accounting results in the allocation of reorganization value to the fair value of assets, and is required when (a) the reorganization value of assets immediately prior to confirmation of a plan of reorganization is less than the total of all post-petition liabilities and allowed claims and (b) the holders of voting shares immediately prior to the confirmation of the plan of reorganization receive less than 50 percent of the voting shares of the emerging entity. The Company adopted fresh start accounting as of the Effective Date, which represents the date on which all material conditions precedent to the effectiveness of the Plan were satisfied or waived. As of the Effective Date, the Company believes that it satisfied both of the aforementioned conditions.
The Company’s reorganization value (the “Equity Value”), upon emergence from bankruptcy, was determined to be $76.6 million, which represents management’s best estimate of fair value based on a calculation of the present value of the Company’s consolidated assets and liabilities as at March 19, 2012. As part of our fresh start reporting, we applied various valuation methodologies to calculate the reorganization value of the Successor. These methods included (a) the comparable company’s analysis, (b) the precedent transactions analysis and (c) the discounted cash flow analysis. The application of these methodologies requires certain key estimates, judgments and assumptions, including financial projections used by the Company, for example, to calculate and analyze losses attributable to reinsurance and other metrics, the amount of cash available to fund operations and current market conditions. Such projections, judgments and assumptions are inherently subject to significant uncertainties and there can be no assurance that such estimates, assumptions and projections reflected in the valuation will be realized and actual results may vary materially.
A significant difference exists between the Equity Value determined by management and the value determined by the Court in an opinion dated September 13, 2011 in which the Court expressed its view with respect to the Company’s value (including the value of net operating loss carry forward items relating to taxes (“NOLs”)). While the NOL asset has been recorded on the Company’s opening balance sheet at the value assigned by the Court, management also has recorded a full valuation allowance relative to these assets. The valuation allowance was determined to be necessary as management is unable to identify potential earnings from its existing operations and assets which would allow the Company to benefit from the utilization of these NOLs now or in the future. In the event that earnings are recognized in future periods, the availability of NOLs could result in additional value to the shareholders. The utilization of NOLs may be subject to significant additional limits. See Note 7: Federal Income Taxes for additional detail. No cash will be used for Plan-related liabilities as WMIHC is not liable for pre-petition claims under the terms of the Plan and the estimated minimum level of cash required for ongoing reserves was deducted from total projected cash to arrive at the amount of remaining or available cash. The Effective Date Equity Value of $76.6 million is intended to reflect a value that a willing buyer would pay for the Company’s assets immediately after emerging from bankruptcy.
The value of a business is subject to uncertainties and contingencies that are difficult to predict and will fluctuate with changes in factors affecting the prospects of such a business. As a result, the estimates set forth herein are not necessarily indicative of actual outcomes, which may be significantly more or less favorable than those set forth herein. These estimates assume that the Company will continue as the owner and operator of these businesses and related assets and that such businesses and assets will be operated in accordance with WMMRC’s historical business practices, which is the basis for financial projections. The financial projections are based on projected market conditions and other estimates and assumptions including, but not limited to, general business, economic, competitive, regulatory, market and financial conditions, all of which are difficult to predict and generally beyond the Company’s control. Depending on the actual results of such factors, operations or changes in financial markets, these valuation estimates may differ significantly from that disclosed herein.
The Company’s Equity Value was first allocated to its tangible assets and identifiable intangible assets and the excess (if any) of reorganization value over the fair value of tangible and identifiable intangible assets would be recorded as goodwill. Liabilities existing as of the Effective Date, other than deferred taxes, were recorded at the present value of amounts expected to be paid using appropriate risk adjusted interest rates. The only intangible asset identified related to reinsurance contracts which were held by WMMRC. The contracts were evaluated to determine whether the value attributable to such contracts was either above market or in a loss contract position. After taking such evaluation into consideration, a loss contract fair market value reserve totaling $63.1 million was recorded. WMMRC’s deferred taxes were determined in conformity with applicable income tax accounting standards.
Material differences, including with respect to its business operations, financial performance, asset size and other factors, exist with respect to the pre-petition operations and financial position of WMI and its subsidiaries as compared with the post-emergence operations and financial position of the Company. In order to address such differences, in preparing these and future financial statements, management has concluded that it is appropriate to use the financial information of the Company’s wholly-owned subsidiary, WMMRC as the basis for its past and ongoing financial reporting. Information in these Financial Statements labeled as “Predecessor” refers to periods prior to the adoption of fresh start reporting, while those labeled as “Successor” refer to periods following the Company’s reorganization and emergence from bankruptcy.
Adjustments recorded to the Predecessor, after giving effect to the implementation of the Plan and to record assets and liabilities at fair value pursuant to the adoption of fresh start accounting are summarized below:
| (dollars in thousands except per share amounts) | Predecessor March 19, 2012 |
Reorganization Adjustments (a) |
Fair Value Adjustments (b) |
Successor March 19, 2012 |
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ASSETS |
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Investments held in trust, at fair value: |
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|
Fixed-maturity securities |
$ | 303,169 | $ | — | $ | — | $ | 303,169 | ||||||||
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Cash equivalents held in trust |
26,249 | — | — | 26,249 | ||||||||||||
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|
|
|
|
|
|
|
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Total investments held in trust |
329,418 | — | — | 329,418 | ||||||||||||
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Cash and cash equivalents |
7,014 | 75,000 | (c) | — | 82,014 | |||||||||||
|
Fixed-maturity securities, at fair value |
6,049 | — | — | 6,049 | ||||||||||||
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Accrued investment income |
2,313 | — | — | 2,313 | ||||||||||||
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Other assets |
3,389 | 210,000 | (d) | (210,000) | (i) | 3,389 | ||||||||||
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|
|
|
|
|
|
|
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Total assets |
$ | 348,183 | $ | 285,000 | $ | (210,000) | $ | 423,183 | ||||||||
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|
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|
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Liabilities: |
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Notes payable—principal |
$ | — | $ | 130,000 | (e) | $ | — | $ | 130,000 | |||||||
|
Losses and loss adjustment reserves |
141,010 | — | — | 141,010 | ||||||||||||
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Losses payable |
7,585 | — | — | 7,585 | ||||||||||||
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Unearned premiums |
409 | — | — | 409 | ||||||||||||
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Accrued ceding commissions |
466 | — | — | 466 | ||||||||||||
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Loss contract fair market value reserve |
— | — | 63,064 | (j) | 63,064 | |||||||||||
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Other liabilities |
27,156 | (23,109) | (f) | 2 | (f) | 4,049 | ||||||||||
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|
|
|
|
|
|
|
|
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Total liabilities |
176,626 | 106,891 | 63,066 | 346,583 | ||||||||||||
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|
|
|
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Shareholders’ equity: |
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|
Common stock, $.00001 par value; 500,000,000 authorized, 200,000,000 shares issued and outstanding |
— | 2 | (g) | — | 2 | |||||||||||
|
Common stock, $1 par value, 1,000 shares issued and outstanding |
1 | — | (1) | (k) | — | |||||||||||
|
Additional paid-in capital (Predecessor) |
69,879 | — | (69,879) | (l) | — | |||||||||||
|
Additional paid-in capital (Successor) |
— | 154,998 | (g) | (78,400) | (m) | 76,598 | ||||||||||
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Retained earnings |
101,677 | 23,109 | (h) | (124,786) | (n) | — | ||||||||||
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|
|
|
|
|
|
|
|
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Total shareholders’ equity |
171,557 | 178,109 | (273,066) | 76,600 | ||||||||||||
|
|
|
|
|
|
|
|
|
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|
Total liabilities and shareholders’ equity |
$ | 348,183 | $ | 285,000 | $ | (210,000) | $ | 423,183 | ||||||||
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|
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|
|
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The following notes relate to the table above and should be read in conjunction with the information in such table.
| (a) | These adjustments are necessary to give effect to the Plan, including the receipt of cash proceeds associated with the contribution of cash from certain creditors, issuance of debt securities, issuance of 200 million shares of common stock and other transactions as contemplated under the Plan. |
| (b) | These adjustments are necessary to reflect assets and liabilities at fair value and elimination of Predecessor equity. The primary operating business of the Successor is the WMMRC subsidiary which has a net asset value higher than its Fair Market Value (“FMV”). |
| (c) | This adjustment reflects $75 million of cash contributed to the Company on the Effective Date by certain creditors. |
| (d) | This adjustment reflects the Court’s valuation of WMMRC of $140 million and additional value attributable to the NOLs. These items have been adjusted to FMV as part of the application of Fresh Start Accounting. The Court’s valuation is presented solely for information purposes, however, because management does not believe that the Court’s valuation necessarily reflects the actual or FMV of the Company’s assets and liabilities under GAAP. This adjustment is eliminated as described in (i) below. |
| (e) | This adjustment reflects the issuance of $130 million of Runoff Notes as described in Note 9: Notes Payable below. |
| (f) | This adjustment reflects eliminating an intercompany payable occurring from carve-out allocated costs related to historic charges allocated as if services had been performed and charged to the Predecessor in accordance with Staff Accounting Bulletin (“SAB”) Topic 1B and 1B1. The methodology for these charges is based on applying the current contractual relationships described in Note 8: Service Agreements and Related Party Transactions as if they had been in place since the formation of WMMRC. The impact on historic earnings is described in (h) below. Additionally, this eliminates the offsetting intercompany amount created when Predecessor common stock is eliminated. |
| (g) | This adjustment reflects the calculated value of the 200 million shares of common stock issued before adjusting for FMV as a result of Fresh Start Accounting. This amount results from the use of the Court-assigned (non-GAAP) values attributed to assets and liabilities which are then utilized in calculating the resulting balance attributable to equity. The common stock is recorded at par value calculated as 200 million shares at a par value of $0.00001 per share. The remainder of the value is then attributed to additional paid-in capital. |
| (h) | This adjustment increases the retained earnings of the Predecessor due to the elimination of the carve-out costs which decreased historic earnings of the Predecessor. The resulting intercompany payable is described in (f) above. These costs and the related retained earnings are eliminated as the costs were allocated in accordance with SAB Topics 1B and 1B1 and would have eliminated in consolidation. |
| (i) | This adjustment reflects the elimination of the Court assigned values described in (d) above. There has been no goodwill recorded as a result of this transaction. WMMRC is reported as the Predecessor and therefore is carried at FMV in individual line items. Management believes that the Court’s valuation was inconsistent with GAAP and such information related to such valuation is being presented here for informational purposes only. Therefore, elimination is required to present the opening balance sheet in accordance with GAAP. |
| (j) | This adjustment is required to reflect a loss contract fair market value reserve of $63.1 million relating to contractual obligations of WMMRC. This is in compliance with ASC 805-10-55-21(b)(1) which defines a loss contract as a “contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.” The net assets or equity value of WMMRC totaled $171.6 million prior to reorganization and fair value adjustments. The elimination of the costs and intercompany payable allocated to the predecessor in accordance with SAB Topic 1B and 1B1 and described in (f) above increase the equity value to $194.7 million. The value of WMMRC was reduced by $63.1 million based upon the FMV analysis described above. |
|
Predecessor retained earnings |
$ | 101,677 | ||
|
Adjustment for carve-out allocations |
23,109 | |||
|
|
|
|||
|
Predecessor adjusted retained earnings |
124,786 | |||
|
Predecessor additional paid-in capital |
69,879 | |||
|
Predecessor common stock eliminated in consolidation |
(1) | |||
|
|
|
|||
|
Predecessor equity value |
194,664 | |||
|
Fair market value of WMMRC |
131,600 | |||
|
|
|
|||
|
Loss contract fair market reserve allowance |
$ | 63,064 | ||
|
|
|
| (k) | This adjustment reflects the elimination of common stock of the Predecessor. |
| (l) | This adjustment reflects the elimination of additional paid-in capital of the Predecessor. |
| (m) | This adjustment reflects the reduction of equity value resulting from fresh start accounting. It is comprised of a reduction (relative to Court assigned FMV) in WMMRC’s FMV totaling $8.4 million and the elimination of the Court assigned value of $70 million related to NOLs. Although the Company has substantial NOLs they are subject to a 100 percent valuation allowance as described in Note 7: Federal Income Taxes, and there can be no assurance the Company will be able to realize any benefit from the NOLs. |
|
Fair market value of WMMRC (Court assigned) |
$ | 140,000 | ||
|
Fair market value of WMMRC |
131,600 | |||
|
|
|
|||
|
Fair market value reduction |
8,400 | |||
|
Elimination of Court assigned value related to NOLs |
70,000 | |||
|
|
|
|||
|
Total change in fair market value affecting Equity Value |
$ | 78,400 | ||
|
|
|
|||
|
Court assigned Equity Value recorded as additional paid-in capital |
$ | 154,998 | ||
|
Total change in fair market value affecting Equity Value |
78,400 | |||
|
|
|
|||
|
Additional paid-in capital at March 19, 2012 |
$ | 76,598 | ||
|
|
|
| (n) | This adjustment reflects the elimination of adjusted retained earnings of the Predecessor. |
|
Predecessor retained earnings |
$ | 101,677 | ||
|
Adjustment for carve-out allocations |
23,109 | |||
|
|
|
|||
|
Predecessor adjusted retained earnings |
$ | 124,786 | ||
|
|
|
|
|||
Note 5: 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 and PMI were commuted on August 31, 2009 and October 2, 2012, respectively
All agreements 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 percentages which range from 4 percent to 5 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 is 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 December 31, 2012, 2011 and 2010 respectively:
| Successor | Predecessor | Predecessor | Predecessor | |||||||||||||||
| Period from March 20, 2012 through September 30, 2012 |
Period from January 1, 2012 through March 19, 2012 |
Year ended December 31, 2011 |
Year ended December 31, 2010 |
|||||||||||||||
|
Premiums assumed |
$ | 14,210 | $ | 6,130 | $ | 34,562 | $ | 45,271 | ||||||||||
|
Change in unearned premiums |
184 | 47 | 222 | 324 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
|
Premiums earned |
$ | 14,394 | $ | 6,177 | $ | 34,784 | $ | 45,595 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
The components of the liability for losses and loss adjustment reserves are as follows as of December 31, 2012 and 2011:
| Successor | Predecessor | Predecessor | ||||||||||||
| December 31, 2012 |
December 31, 2011 |
December 31, 2010 |
||||||||||||
|
Case-basis reserves |
$ | 66,173 | $ | 132,970 | $ | 174,858 | ||||||||
|
IBNR reserves |
1,298 | 6,049 | 9,028 | |||||||||||
|
Premium deficit reserves |
15,053 | 3,100 | 6,150 | |||||||||||
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 82,524 | $ | 142,119 | $ | 190,036 | ||||||||
|
|
|
|
|
|
|
|||||||||
Losses and loss adjustment reserve activity are as follows for the years ended December 30, 2012, 2011 and 2010:
| Successor | Predecessor | Predecessor | ||||||||||||
| December 31, 2012 |
December 31, 2011 |
December 31, 2010 |
||||||||||||
|
Balance at beginning of period |
$ | 142,119 | $ | 190,036 | $ | 256,426 | ||||||||
|
Incurred—prior periods |
30,111 | 47,321 | 60,078 | |||||||||||
|
Paid or terminated—prior periods |
(89,706) | (95,238) | (126,468) | |||||||||||
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 82,524 | $ | 142,119 | $ | 190,036 | ||||||||
|
|
|
|
|
|
|
|||||||||
The loss contract fair market reserve balance is analyzed and adjusted quarterly. The balances in the reserve was $52.2 million at December 31, 2012 and $0 at December 31, 2011 as the loss contract fair market reserve was established on March 19, 2012 at $63.1 million (as more fully described in Note 4—Fresh Start Accounting). The fair market value of this reserve was decreased by $10.9 million during the period ended December 31, 2012 resulting in a decrease in expense of $10.9 million. This change was partially the result of the commutation of PMI which was effective on October 2, 2012.
|
|||
Note 6: Investment Securities
The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of fixed-maturity securities held in trust at December 31, 2012, are as follows:
| Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
|
Trading Securities: |
||||||||||||||||
|
Obligations of U.S. government sponsored enterprises |
$ | 97,103 | $ | 1,416 | $ | (156) | $ | 98,363 | ||||||||
|
Corporate debt securities |
91,997 | 3,010 | (34) | 94,973 | ||||||||||||
|
Commercial paper |
54,949 | — | — | 54,949 | ||||||||||||
|
Foreign corporate debt securities |
18,305 | 379 | (18) | 18,666 | ||||||||||||
|
Commercial mortgage-backed securities |
10,541 | 64 | (87) | 10,518 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total fixed-maturity securities |
272,895 | 4,869 | (295) | 277,469 | ||||||||||||
|
Less total unrestricted fixed-maturity securities |
75,659 | 168 | (18) | 75,809 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total fixed-maturity securities held in trust |
$ | 197,236 | $ | 4,701 | $ | (277) | $ | 201,660 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of fixed-maturity securities held in trust at December 31, 2011, are as follows:
| Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
|
Trading Securities: |
||||||||||||||||
|
U.S. Treasury securities |
$ | 250 | $ | — | $ | — | $ | 250 | ||||||||
|
Obligations of U.S. government sponsored enterprises |
122,874 | 2,029 | (267) | 124,636 | ||||||||||||
|
Corporate debt securities |
129,916 | 3,791 | (845) | 132,862 | ||||||||||||
|
Foreign corporate debt securities |
26,800 | 546 | (117) | 27,229 | ||||||||||||
|
Commercial mortgage-backed securities |
19,138 | 76 | (146) | 19,068 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total fixed-maturity securities |
298,978 | 6,442 | (1,375) | 304,045 | ||||||||||||
|
Less total unrestricted fixed-maturity securities |
5,348 | 151 | (9) | 5,490 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total fixed-maturity securities held in trust |
$ | 293,630 | $ | 6,291 | $ | (1,366) | $ | 298,555 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Amortized cost and estimated fair value of fixed-maturity securities at December 31, 2012 by contractual maturity are as follows:
| Amortized Cost |
Estimated Fair Value |
|||||||
|
Maturity in: |
||||||||
|
2013 |
$ | 82,371 | $ | 82,577 | ||||
|
2014-2017 |
99,575 | 103,196 | ||||||
|
2018-2022 |
39,888 | 40,136 | ||||||
|
Thereafter |
40,520 | 41,042 | ||||||
|
Mortgage-backed securities |
10,541 | 10,518 | ||||||
|
|
|
|
|
|||||
|
Total fixed-maturity securities |
$ | 272,895 | $ | 277,469 | ||||
|
|
|
|
|
|||||
Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Net investment income for the periods ending December 31, 2012, 2011 and 2010, is summarized as follows:
| Successor | Predecessor | Predecessor | Predecessor | |||||||||||||||
| Period from March 20, 2012 through December 31, 2012 |
Period from January 1, 2012 through March 19, 2012 |
Year ended December 31, 2011 |
Year ended December 31, 2010 |
|||||||||||||||
|
Investment income: |
||||||||||||||||||
|
Amortization of premium or discount on fixed-maturity |
$ | (1,837) | $ | (523) | $ | (2,750) | $ | (2,822) | ||||||||||
|
Investment income on fixed-maturity securities |
7,232 | 2,467 | 12,920 | 17,410 | ||||||||||||||
|
Interest income on cash and equivalents |
161 | 3 | 49 | 47 | ||||||||||||||
|
Realized net gain (loss) from sale of investment |
2,747 | 176 | 1,206 | 4,796 | ||||||||||||||
|
Unrealized (losses) gains on trading securities held at period end |
(1,410) | 1,049 | (2,828) | 396 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
|
Net investment income |
$ | 6,893 | $ | 3,172 | $ | 8,597 | $ | 19,827 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
The following tables show how the Company’s investments are categorized in accordance with fair value measurement, as of December 31, 2012 and 2011:
| December 31, 2012 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
Class of Security: |
||||||||||||||||
|
Obligations of U.S. government sponsored securities |
$ | 11,362 | $ | 87,001 | $ | — | $ | 98,363 | ||||||||
|
Corporate debt securities |
22,833 | 72,141 | — | 94,974 | ||||||||||||
|
Commercial paper |
54,948 | — | — | 54,948 | ||||||||||||
|
Foreign corporate debt securities |
1,001 | 17,665 | — | 18,666 | ||||||||||||
|
Commercial mortgage-backed securities |
— | 10,518 | — | 10,518 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 90,144 | $ | 187,325 | $ | — | $ | 277,469 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| December 31, 2011 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
Class of Security: |
||||||||||||||||
|
U.S. Treasury securities |
$ | 250 | $ | — | $ | — | $ | 250 | ||||||||
|
Obligations of U.S. government sponsored securities |
42,927 | 81,709 | — | 124,636 | ||||||||||||
|
Corporate debt securities |
— | 132,862 | — | 132,862 | ||||||||||||
|
Foreign corporate debt securities |
— | 27,229 | — | 27,229 | ||||||||||||
|
Commercial mortgage-backed securities |
— | 19,068 | — | 19,068 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 43,177 | $ | 260,868 | $ | — | $ | 304,045 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
A review of the fair value hierarchy classifications of the Company’s investments is conducted quarterly. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications are reported as transfers in or transfers out of the applicable Level at end of the calendar quarter in which the reclassifications occur. During the year ended December 31, 2012, $17.7 million of investments were transferred from Level 2 to Level 1 as a result of improving market conditions for short-term and investment grade corporate securities.
| 2012 | 2011 | |||||||||||||||
| Transfers from Level 1 to Level 2 |
Transfers from Level 2 to Level 1 |
Transfers from Level 1 to Level 2 |
Transfers from Level 2 to Level 1 |
|||||||||||||
|
Class of Securities: |
||||||||||||||||
|
Corporate securities |
$ | — | $ | 16,745 | $ | — | $ | — | ||||||||
|
Foreign corporate debt securities |
— | 1,001 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total Transfers |
$ | — | $ | 17,746 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
|||
Note 7: Federal Income Taxes
For the year ended December 31, 2012, the Company recorded a loss of approximately $15.8 million. The Company has not recorded an income tax expense or benefit for the years ended December 31, 2012 or 2011. The Company recorded an income tax benefit for the period ended December 31, 2010 due to forgiveness of indebtedness exchanged for certain tax benefits.
| 2012 | 2011 | 2010 | ||||||||||
|
Current federal income tax expense |
$ | — | $ | — | 33,401 | |||||||
|
Provision for doubtful federal income tax receivable |
— | — | (46,428) | |||||||||
|
Deferred federal income tax (benefit) expense |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
|
Federal income tax benefit |
$ | — | $ | — | $ | (13,027) | ||||||
|
|
|
|
|
|
|
|||||||
The items accounting for the difference between income taxes computed at the US federal statutory rate and our effecive rate were as follows:
| Successor | Predecessor | Predecessor | Predecessor | |||||||||||||||
| Period from March 20, 2012 through December 31, 2012 |
Period from January 1, 2012 through March 19, 2012 |
Year ended December 31, 2011 |
Year ended December 31, 2010 |
|||||||||||||||
|
Income tax at the federal statutory rate of 35% |
(35)% | (35)% | (35)% | (35)% | ||||||||||||||
|
Effect of: |
||||||||||||||||||
|
Tax benefit recovered from parent in bankruptcy |
— | — | — | (610) | ||||||||||||||
|
Fresh start accounting adjustments |
— | — | (3) | (7) | ||||||||||||||
|
Worthless stock deduction |
(23,718) | — | — | — | ||||||||||||||
|
Cancelation of debt |
2,401 | — | — | 439 | ||||||||||||||
|
Reduction in NOL due to 382 Limitation |
4,518 | — | — | — | ||||||||||||||
|
Change in valuation allowance |
16,834 | 35 | 38 | 42 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
|
Effective Rate |
— % | — % | — % | (171)% | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
The Company files a consolidated federal income tax return. Pursuant to a tax sharing agreement, WMMRC’s federal income tax liability is calculated on a separate return basis determined by applying 35 percent to taxable income, in accordance with the provisions of the Internal Revenue Code that apply to mortgage insurance companies. WMIHC, as WMMRC’s parent, pays federal income taxes on behalf of WMMRC and settles the federal income tax obligation on a current basis in accordance with the tax sharing agreement. WMMRC made no tax payments to WMIHC during the year ending December 31, 2012, 2011 or 2010 associated with the Company’s tax liability from the preceding year.
On November 23, 2010, the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”), approved a Stipulation and Agreement between WMI and WMMRC that provides for the forgiveness of the note payable and associated accrued interest to WMI (WMMRC’s ultimate parent at that time) totaling $13.0 million at the date of the agreement, in exchange for certain tax benefits outstanding prior to WMI’s bankruptcy. Due to the WMI’s status in bankruptcy, WMMRC had deemed this uncollectible and expensed this future benefit in a prior year. As such, during 2010, WMMRC recorded a current tax benefit of $13.0 million.
Deferred federal income taxes arise from temporary differences between the valuation of assets and liabilities as determined for financial reporting purposes and income tax purposes. Temporary differences principally relate to discounting of loss reserves, net operating losses and unrealized gains and losses on investments. As of December 31, 2012 and 2011, the Company recorded a valuation allowance equal to 100 percent of the net deferred federal income tax asset due to uncertainty regarding the Company’s ability to realize these benefits in the future. The amount of deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income are revised.
The components of the net deferred tax asset as of December 31, 2012, 2011 and 2010, are as follows:
| 2012 | 2011 | 2010 | ||||||||||
|
Deferred federal income tax asset: |
||||||||||||
|
Losses and loss adjustments expenses |
$ | 2,832 | $ | 4,097 | $ | 5,906 | ||||||
|
Net operating loss carryforward |
2,088,461 | 5,013 | 43 | |||||||||
|
Accruals and reserves |
18,276 | — | — | |||||||||
|
Accrual class action settlement |
— | 1,400 | 1,400 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total deferred federal income tax asset |
2,109,569 | 10,510 | 7,349 | |||||||||
|
Deferred federal income tax liabilities: |
||||||||||||
|
Net unrealized gains on investments |
1,946 | 1,774 | 2,764 | |||||||||
|
Total deferred federal income tax liabilities |
1,946 | 1,774 | 2,764 | |||||||||
|
Less: Valuation allowance |
2,107,623 | 8,736 | 4,585 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Net deferred federal income tax asset |
$ | — | $ | — | $ | — | ||||||
|
|
|
|
|
|
|
|||||||
On March 19, 2012, WMIHC emerged from bankruptcy. Prior to emergence, WMI abandoned the stock of WMB, thereby generating a worthless stock deduction of approximately $8.37 billion which gives rise to an NOL for the current year. Under Section 382 of the Internal Revenue Code, and based on the Company’s analysis, we believe that the Company experienced an “ownership change” (generally defined as a greater than 50 percent change (by value) in our equity ownership over a three-year period) on March 19, 2012, and the Company’s ability to use the Company’s pre-change of control NOLs and other pre-change tax attributes against our post-change income was limited. The Section 382 limitation is applied annually so as to limit the use of our pre-change NOLs to an amount that generally equals the value of our stock immediately before the ownership change multiplied by a designated federal long-term tax-exempt rate. Due to applicable limitations under IRC Section 382 and a reduction of tax attributes due to cancellation of indebtedness, a portion of these NOLs were limited and will expire unused. We believe that the total available and utilizable NOL carry forward at December 31, 2012 is approximately $5.97 billion. At December 31, 2012 there was no limitation on the use of these NOLs. These NOLs will begin to expire in 2029. The Company’s ability to utilize the NOLs or realize any benefits related to the NOLs is subject to a number of risks.
The Company accounts for uncertain tax positions in accordance with the income taxes accounting guidance. The Company has analyzed filing positions in the federal and state jurisdiction where it is required to file tax returns, as well as the open tax years in these jurisdictions. Tax years 2008 to present are subject to examination by the Internal Revenue Service. The Company believes that its federal income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain federal income tax positions have been recorded. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the provision for federal income taxes. The Company did not incur any federal income tax related interest income, interest expense or penalties for the periods ended December 31, 2012, 2011 and 2010.
|
|||
Note 8: Service Agreements and Related Party Transactions
WMMRC has engaged a Hawaiian-based service provider to provide accounting and related management services for its operations. In exchange for performing these services, WMMRC pays such service provider a management fee.
WMIHC entered into an Investment Management Agreement and an Administrative Services Agreement with WMMRC on March 19, 2012. Total amounts incurred under these agreements totaled $1.5 million for the period from March 20, 2012 to December 31, 2012 and zero for all other periods. The expense and related income eliminate on consolidation. These agreements are described below.
On March 19, 2012, WMIHC entered into an Investment Management Agreement with WMMRC. Under the terms of this agreement WMIHC receives from WMMRC a fee equal to the product of (x) the ending dollar amount of assets under management during the calendar month in question and (y) .002 divided by 12. WMIHC is responsible for investing the funds of WMMRC based on applicable investment criteria and subject to rules and regulations to which WMMRC is subject. The Investment Management Agreement has been approved by the Insurance Commissioner of the State of Hawaii.
On March 19, 2012, WMIHC entered into an Administrative Services Agreement with WMMRC. Under the terms of this agreement, WMIHC receives from WMMRC a fee of $110 thousand per month. WMIHC is responsible for providing administrative services to support, among other things, supervision, governance, financial administration and reporting, risk management, and claims management as may be necessary, together with such other general or specific administrative services that may be reasonably required or requested by WMMRC in the ordinary course of its business. The Administrative Services Agreement has been approved by the Insurance Commissioner of the State of Hawaii.
On March 23, 2012, WMIHC and the Trust entered into a Transition Services Agreement (the “TSA”). Pursuant to the TSA, each party will make available certain services and employees. The TSA provides the Company with office space for its current employees and basic infrastructure and support services to allow the Company to operate. The TSA provides the Trust with access to certain of the Company’s employees and, initially, limited use of the Company’s health insurance plan for its employees. The TSA was amended on September 24, 2012 and the term of the agreement was extended through March 31, 2013 subject to automatic renewal for successive additional three-month terms unless earlier terminated by either party upon at least 30 days’ written notice prior to the expiration of the term. Either party may terminate one or more of the services offered upon 10 days’ written notice to the other party.
In connection with implementing the Plan, certain holders of specified “Allowed Claims” had the right to elect to receive such holder’s “Pro Rata Share of the Common Stock Election”. Essentially, the Plan defines the “Pro Rata Share of the Common Stock Election” as ten million (10,000,000) shares of WMIHC’s common stock (i.e. five percent (5%)) issued and outstanding on the Effective Date. Holders exercising the foregoing election did so in lieu of receiving (i) 50% of such holder’s interest in and to certain litigation proceeds that could be realized by the Trust on account of certain claims and causes of action asserted by the Trust as contemplated by the Plan (“Litigation Proceeds”), and (ii) some or all of the Runoff Notes to which such holder may be entitled (if such holder elected to receive Runoff Notes in accordance with the terms of the Plan).
If a holder exercised the election described above and, as a result of such election, received shares of WMIHC’s common stock, then such holder’s share of Runoff Notes to which the election was effective (i.e., One Dollar ($1.00) of original principal amount of Runoff Notes for each share of WMIHC’s common stock) were not issued. In addition, as a result of making the aforementioned election, such holders conveyed to, and WMIHC retains an economic interest in, the Litigation Proceeds equal to fifty percent (50%) of the Litigation Proceeds to which the electing holder otherwise would have been entitled and such holder’s rights in respect of distributions from the Trust will be adjusted to the extent Litigation Proceeds are received by WMIHC). Distributions, if any, to WMIHC on account of the foregoing will be effected in accordance with the Plan and Confirmation Order.
As of December 31, 2012, WMIHC had not received any Litigation Proceeds in connection with the foregoing. Given the speculative nature of litigation, there can be no assurance that WMIHC will receive any value or distributions on account of Litigation Proceeds.
See Note 4: Fresh Start Accounting for a discussion of fees attributed to WMMRC in accordance with SAB Topics 1B and 1B1 which address common cost and expense allocations for pre-Effective Date periods in Fresh Start Accounting section.
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Note 9: Notes Payable
On the Effective Date, WMIHC issued $110 million aggregate principal amount of its 13% Senior First Lien Notes due 2030 (the “First Lien Notes”) under an indenture, dated as of March 19, 2012 (the “First Lien Indenture”), between WMIHC and Wilmington Trust, National Association, as Trustee (the “First Lien Trustee”). Additionally, WMIHC issued $20 million aggregate principal amount of its 13% Senior Second Lien Notes due 2030 (the “Second Lien Notes” and, together with the First Lien Notes, the “Runoff Notes”) under an indenture, dated as of March 19, 2012 (the “Second Lien Indenture” and, together with the First Lien Indenture, the “Indentures”), between WMIHC and Law Debenture Trust Company of New York, as Trustee (the “Second Lien Trustee” and, together with the First Lien Trustee, the “Trustees”). The Runoff Notes are scheduled to mature on March 19, 2030 and pay interest quarterly.
The Runoff Notes are secured by, and have a specified priority in right of payment in, (a) a securities or deposit account into which WMIHC will deposit distributions it receives of Runoff Proceeds (as defined in the Indentures) (the “Collateral Account”) and (b) the equity interests in, and assets of, either WMMRC, or such other entity as holds (or may hold in the future) WMMRC’s existing portfolio of assets, to the extent a lien has been granted therein (with any such lien subject to regulatory approval). No such regulatory approval has been obtained as of the date on which these audited financial statements are being published.
WMIHC will, and has agreed to cause WMMRC to, deposit all distributions, dividends or other receipts in respect of Runoff Proceeds Distributions (as defined in the Indentures) on the date paid to WMIHC in the Collateral Account established in accordance with the terms of the Indentures. On any interest payment date, payments are made from the Collateral Account and from any other Runoff Proceeds Distributions in the priority set forth in the Indentures. The obligations created by the Runoff Notes are nonrecourse to WMIHC (except for certain actions for specific performance) and, except in certain limited circumstances as more fully described in Section 7.16 of the Indentures with respect to Runoff Proceeds Distributions in the Collateral Account or for failure to comply with certain specified covenants relating to (i) the deposit of Runoff Proceeds in the Collateral Account, (ii) payment of Runoff Proceeds in the Collateral Account in accordance with the order of priority established in the Indentures, (iii) failure to seek to obtain the appropriate regulatory approval to permit the dividend of Runoff Proceeds to WMIHC and (iv) the failure to cause WMMRC to deposit Runoff Proceeds into a segregated account.
In connection with interest payments due and payable in respect of the Second Lien Notes on June 1, September 1and December 1, 2012, WMIHC elected, consistent with the terms of the Indentures, to issue PIK Notes (as defined in the Indentures) in lieu of making such interest payment in cash. In connection with interest payments due and payable in respect of the First Lien Notes on June 1 and December 1, 2012, and WMIHC elected, consistent with the terms of the Indentures, to issue PIK Notes in lieu of making such interest payment in cash. The September 1, 2012 interest payments on the First Lien Notes were paid in cash. The aggregate face amount of PIK Notes issued and outstanding as of December 31, 2012 totals approximately $8.3 million.
Outstanding amounts under these notes totaled $136.3 million as of December 31, 2012 and zero as of December 31, 2011. Principal payments totaled $2.0 million and zero for the periods ended December 31, 2012 and 2011 respectively. At December 31, 2012 $25.0 million was held in the restricted cash account, this amount was subsequently used to pay principal and interest on the runoff notes as more fully described in Note 16: Subsequent Events.
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Note 10: Financing Arrangements
As of March 19, 2012, a Financing Agreement (the “Financing Agreement”) was entered into by and among the WMIHC, each current subsidiary of WMIHC and any additional subsidiary or person who later agrees to or becomes a Guarantor (each a “Guarantor” collectively, the “Guarantors”), the lenders from time to time party thereto (each a “Lender” and collectively, the “Lenders”), on a several and not joint basis, and U.S. Bank National Association, a national banking association, as administrative agent for the Lenders (together with its successors and assigns, in such capacity, the “Agent”). The credit facility established by the Financing Agreement may be used for only certain specific purposes.
The facility consists of (a) a tranche A term loan and a tranche A-1 term loan in the aggregate principal amount of $25.0 million and (b) a tranche B term loan in the aggregate principal amount of $100.0 million. The proceeds of (a) the tranche A term loan and tranche. A-1 term loan can be used to fund working capital and for general corporate purposes of the Company, and (b) the tranche B term loan can be used to fund certain permitted acquisitions and permitted originations (as these terms are defined in the Financing Agreement) which are limited to acquisitions and originations of business in the financial services or insurance sectors. The Lenders are severally, and not jointly, obligated to extend such credit to WMIHC. The facility is secured by substantially all of WMIHC’s assets and the Lenders must have an additional first priority lien on any new business and assets acquired. As of December 30, 2012, no loans were outstanding under the Financing Agreement.
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Note 11: Capital Stock
On the Effective Date, all shares of common and preferred equity securities previously issued by WMI were cancelled and extinguished. As of the Effective Date, and pursuant to WMIHC’s Amended and Restated Articles of Incorporation, WMIHC is authorized to issue up to 500,000,000 shares of common stock and up to 5,000,000 shares of blank check preferred stock, each with a par value of $0.00001 per share. 200,000,000 shares of common stock were issued by WMIHC pursuant to the Court approved Plan and in reliance on Section 1145 of the Bankruptcy Code on the Effective Date.
On October 18, 2012, 1,156,078 shares of restricted common stock were issued under the 2012 Long-Term Incentive Plan.
WMIHC issued restricted share grants to members of the board of directors totaling $550 thousand of aggregate intrinsic value during the year ended December 31, 2012, and zero for the years ended 2011 and 2010. The restricted shares vest over a three year period and the resulting unamortized value related to the unvested restricted share grant totals $407 thousand at December 31, 2012 and zero for the years ended December 31, 2011 and 2010. The unamortized value of $407 thousand at December 31, 2012 will be amortized over the next 2.2 years. Net stock-based compensation totaled $143 thousand for the year ended December 31, 2012 and zero for the years ended December 31, 2011 and 2010. The share grants were issued at the fair market value determined to be the trading price at the close of business on October 18, 2012, the date the grants were approved by the board of directors.
A summary of WMIHC’s restricted share award activity for the years ended December 31, 2012 and 2011 is presented below:
| Number of Restricted Stock Awards Outstanding |
Weighted Average Grant Date Fair Value |
Aggregate Intrinsic Value (in thousands) |
||||||||||
|
Outstanding—January 1, 2011 |
— | $ | — | $ | — | |||||||
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Restricted stock awards granted |
— | — | — | |||||||||
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Restricted stock awards released or forfeited |
— | — | — | |||||||||
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Outstanding—December 31, 2011 |
— | — | — | |||||||||
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Restricted stock awards granted |
1,156,078 | 0.4761 | 550 | |||||||||
|
Restricted stock awards released or forfeited |
— | — | — | |||||||||
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Outstanding—December 31, 2012 |
1,156,078 | $ | 0.4761 | $ | 550 | |||||||
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Common Shares Subject to Repurchase—WMIHC has issued the total number of shares subject to the restricted stock grants, however, until vested they are subject to repurchase. The restricted shares vest 1/3 per year over a three year period annually on March 19th. Until March 19, 2013, all of the restricted shares remain subject to repurchase. On March 19, 2013 385,360 of the shares will become vested assuming none are forfeited. WMIHC has the right to repurchase any unvested (but issued) shares of common stock at $0.0001 per share upon the termination of service in the case of a director. The shares subject to repurchase are not deemed to be issued for accounting purposes.
A summary of the Company’s restricted shares issued and subject to repurchase as of the years ended December 31, 2012 and 2011 is presented below:
| Shares | ||||
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Shares subject to repurchase—January 1, 2011 |
— | |||
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Unvested shares repurchased |
— | |||
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Unvested shares—December 31, 2011 |
— | |||
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Shares issued subject to vesting during the period |
1,156,078 | |||
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Shares vested during the period |
— | |||
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Unvested shares—December 31, 2012 |
1,156,078 | |||
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As of December 31, 2012, 201,156,078 shares of WMIHC’s common stock were issued and outstanding. No shares of WMIHC’s preferred stock are issued or outstanding. See Note 14: Net (loss) Income Per Common Share for further information on shares used for EPS calculations.
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Note 12: Pending Litigation
Except as described below, for the period ended December 31, 2012, the Company was not a party to, or aware of, any pending legal proceedings or investigations against the Company requiring disclosure at this time.
The Company notes that Article XLI of the Plan includes, among other things, customary discharge, injunction, bar order and release provisions which, when taken together, operate to insulate the Company from and against any liabilities in respect of claims and causes of action that arose prior to the Petition Date. In addition, the Plan also includes a customary exculpation clause in favor of the Debtors, their directors, officers and others named therein for conduct during the pendency of the Company’s Chapter 11 proceedings (other than in respect of willful misconduct or conduct that was grossly negligent).
WMMRC Litigation
With respect to WMIHC’s sole operating subsidiary, WMMRC, on October 22, 2007, lead plaintiffs Robert Alexander and James Reed filed a putative Class Action Complaint (the “Class Action Complaint”) in the United States District Court, Eastern District of Pennsylvania (the “Pennsylvania Action”) against WMMRC, WMI, WMB and Washington Mutual Bank fsb (“FSB”, and collectively, the “Defendants”) alleging that the Defendants violated Section 8 of the Real Estate Settlement Procedures Act (“RESPA”), 12 U.S.C. § 2607, by collecting referral payments or unearned fees in the form of reinsurance premiums. Specifically, plaintiffs allege that the private mortgage insurance policies procured in connection with their loans are subject to captive reinsurance arrangements between private mortgage insurers and WMMRC. Plaintiffs have alleged that a percentage of the mortgage insurance premiums paid by borrowers are ceded to WMMRC, but that the risk assumed by WMMRC is not commensurate with the premiums that it receives. According to plaintiffs, these allegedly excessive reinsurance premiums were disguised kickbacks paid to WMI through the captive reinsurance arrangements in exchange for the placement of its primary mortgage business. The complaint seeks treble damages, attorney’s fees and defense costs.
On December 21, 2007, the Defendants filed a Motion to Dismiss Plaintiffs’ Complaint. That motion was denied. The Defendants subsequently filed an interlocutory appeal of the denial with the Third Circuit Court of Appeals. Following the Third Circuit’s October 2009 decision in Alston v. Countrywide Financial Corp., 585 F.3d 753 (3d Cir. 2009), which raised similar issues, the petition for appeal in the Pennsylvania Action was denied and the matter was returned to the district court. On January 11, 2010, the Pennsylvania Action was removed from the Civil Suspense File and re-opened for final disposition by the district court. A joint discovery plan was approved by the district court on February 2, 2010. The Pennsylvania Action remained stayed as to WMI due to its bankruptcy filing.
On March 1, 2010, WMMRC filed an Amended Answer to the Class Action Complaint. In addition, pursuant to the parties’ joint discovery plan, three additional motions were filed on March 1, 2010. The FDIC, in its capacity as receiver for WMB, and JPMC, as successor to FSB, filed motions to dismiss the complaint for lack of subject matter jurisdiction.
Additionally, the FDIC, as receiver, filed a motion to strike plaintiffs’ class allegations against the FDIC for failure to comply with procedural requirements of the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”). The FDIC’s motion to dismiss was granted on June 28, 2011.
In 2011, the parties reached a preliminary compromise and settlement in the Class Action Complaint. That compromise was subsequently memorialized in a written settlement agreement. Pursuant to the Federal Rules of Civil Procedure, the settlement must be approved by the United States District Court, Eastern District of Pennsylvania (the “District Court”). On June 4, 2012, Plaintiffs filed a motion for preliminary approval of the settlement and on June 25, 2012, the District Court entered an order preliminarily approving such settlement. In accordance with GAAP guidance on Loss Contingencies, in 2010 management recorded an accrual for estimated anticipated settlements of $4 million as a component of other liabilities on the balance sheet and as a component of general and administrative expenses on the statement of operations. The amount of such accrual as of December 31, 2012 is zero as on or about July 16, 2012, the settlement amount was deposited into a settlement distribution escrow account and the settlement amount will remain on deposit in such account until the District Court finally approves the settlement. A final hearing to approve the settlement of the Class Action Complaint was held on November 27, 2012 and the District Court issued an order finally approving the settlement on December 4, 2012. At December 31, 2011 the accrual corresponds to the $4 million settlement amount.
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Note 13: Restriction on Distribution of Net Assets from Subsidiary
WMMRC has net assets totaling $167.0 million and $175.0 million as of December 31, 2012 and 2011 respectively. These net assets are not immediately available for distribution to WMIHC due to restrictions imposed by trust agreements, and the requirement that the Insurance Commissioner of the State of Hawaii must approve dividends from WMMRC. Distributions from WMMRC to WMIHC are further restricted by the terms of the Runoff Notes described in Note 9: Notes Payable.
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Note 14: Net (loss) Income Per Common Share
Basic and diluted net (loss) income per share attributable to common shareholders is computed by dividing net (loss) income, excluding net (loss) income allocated to participating securities, by the weighted average number of shares outstanding less the weighted average of unvested restricted shares outstanding.
There were no dilutive effects from any equity instruments for any of the periods presented, therefore diluted net (loss) income per share was the same as basic net (loss) income for all periods presented. There were no participating shares for any period other than the period from March 20, 2012 to December 31, 2012.
The following table sets forth the compuation of basic and diluted net (loss) income per share:
(in thousands, except per share data):
| Successor | Predecessor | Predecessor | Predecessor | |||||||||||||||
| Period from March 20, 2012 to December 31, 2012 |
Period from January 1, 2012 to March 19, 2012 |
Year Ended December 31, 2011 |
Year Ended December 31, 2010 |
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Numerator for basic and diluted net (loss) income per share: |
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Net (loss) income |
$ | (12,353) | $ | (3,433) | $ | (10,873) | $ | 5,412 | ||||||||||
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Less: Net (loss) income allocated to participating securities |
(18) | — | — | — | ||||||||||||||
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Net (loss) income attributable to common shareholders |
$ | (12,335) | $ | (3,433) | $ | (10,873) | $ | 5,412 | ||||||||||
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Denominator for basic and diluted net (loss) income per share: |
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Weighted average share outstanding |
200,298,083 | 1,000 | 1,000 | 1,000 | ||||||||||||||
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Weighted average unvested restricted shares outstanding |
(298,083) | — | — | — | ||||||||||||||
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Denominator for basic and diluted net (loss) income per share: |
200,000,000 | 1,000 | 1,000 | 1,000 | ||||||||||||||
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Basic and diluted net (loss) income per share attributable to common shareholders |
$ | (0.06) | $ | (3,433.00) | $ | (10,873.00) | $ | 5,412.00 | ||||||||||
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Note 15: Quarterly Financial Information (Unaudited)
Following is a summary of the unaudited interim results of operations for the year ended December 31, 2012 and 2011 (in thousands, except per share amounts):
| Total Revenue | Net Income (Loss) | Earnings per share – basic and diluted |
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Successor |
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March 20 to March 31, 2012 |
$ | 1,922 | $ | 472 | $ | 0.00 | ||||||
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Second Quarter |
7,447 | (8,173) | (0.04) | |||||||||
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Third Quarter |
7,336 | 5,299 | 0.03 | |||||||||
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Fourth Quarter |
4,582 | (9,951) | (0.05) | |||||||||
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Total |
$ | 21,287 | $ | (12,353) | $ | (0.06) | ||||||
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Predecessor |
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January 1 to March 19, 2012 |
$ | 9,349 | $ | (3,433) | $ | (3,433.00) | ||||||
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Year Ended December 31, 2011 |
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First Quarter |
$ | 10,823 | $ | (1,891) | $ | (1,891.00) | ||||||
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Second Quarter |
13,208 | (1,368) | (1,368.00) | |||||||||
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Third Quarter |
9,103 | (6,264) | (6,264.00) | |||||||||
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Fourth Quarter |
10,247 | (1,350) | (1,350.00) | |||||||||
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Total |
$ | 43,381 | $ | (10,873) | $ | (10,873.00) | ||||||
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Note 16: Subsequent Events
On March 1, 2013, WMIHC paid holders of First Lien Notes approximately $25.0 million. This cash payment represented approximately $3.7 million in interest due and payable on the First Lien Notes in the ordinary course, as well as approximately $21.3 million of principal. The foregoing payment was possible as a result of cash received from WMMRC in connection with the commutation arrangements with PMI Mortgage Insurance Company (“PMI”) approved by the Insurance Commissioner of the State of Hawaii and previously disclosed in a Form 8-K filed by the Company with the SEC on October 9, 2012. This cash was transferred to WMIHC as restricted cash upon approval for distribution by the Insurance Commissioner of the State of Hawaii.
To effectuate the commutation, WMMRC entered into a Commutation and Release Agreement with PMI, dated July 17, 2012 and in accordance with that agreement, PMI was paid $49.0 million in cash and WMMRC was paid all cash and assets remaining in the trust account after the payment to PMI and each party was released from certain liabilities. WMMRC received $30.7 million from the commutation.
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Basis of Presentation
As of March 19, 2012, the Company adopted fresh start accounting in accordance with Accounting Standards Codification (“ASC”) 852-10, Reorganizations (see Note 4: Fresh Start Accounting). The adoption of fresh start accounting resulted in the Company becoming a new entity for financial reporting purposes. Accordingly, the financial statements prior to March 19, 2012 are not comparable with the financial statements on or after March 19, 2012. Reference to “Successor” refers to the Company on or after the emergence from bankruptcy on March 19, 2012. Reference to “Predecessor” refers to WMMRC prior to the adoption of fresh start accounting and the emergence from bankruptcy.
The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for annual reporting and also under SEC Staff’s Legal Bulletin No. 2, “Modified Exchange Act Reporting” for public companies reporting while in bankruptcy proceedings.
All significant intercompany transactions and balances have been eliminated in preparing the consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Management has made significant estimates in certain areas, including valuing certain financial instruments and other assets, the determination of the contingent risk liabilities, and in determining appropriate insurance reserves. Actual results could differ substantially from those estimates.
Fair Value of Certain Financial Instruments
Fair Value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Generally, for assets that are reported at fair value, the Company uses quoted market prices or valuation models to estimate their fair value. These models incorporate inputs such as forward yield curves, market volatilities and pricing spreads, utilizing market-based inputs where readily available. The degree of management judgment involved in estimating the fair value of a financial instrument or other asset is dependent upon the availability of quoted market prices or observable market inputs. For financial instruments that are actively traded in the marketplace or whose values are based on readily available market value data, little judgment is necessary when estimating the instrument’s fair value. When observable market prices and data are not readily available, significant management judgment often is necessary to estimate fair value. In those cases, different assumptions could result in significant changes in valuation.
Fair Value Option
The Company classifies fixed-maturity investments as trading securities pursuant to Financial Accounting Standards Board (“FASB”) Fair Value Option accounting guidance. Fixed-maturity investments treated as “hold-to-maturity” investments are not recorded under the fair value option, but rather are recorded at amortized cost which, in the case of much of our investment holdings, approximates fair value. As such, changes in unrealized gains and losses on investments held at the balance sheet date are recognized and reported as a component of net investment income on the statement of operations. The Company believes Fair Value Option accounting provides better matching of investment earnings to potential cash flow generated from the investment portfolio and reduces subjectivity related to evaluating other-than-temporary impairment on the Company’s investment portfolio.
The Company has recorded a liability related to a loss contract fair market value reserve (the “Reserve”) and applies FASB Fair Value Option accounting guidance to this liability. The Reserve was initially established in compliance with ASC 805-10-55-21(b)(1) which defines a loss contract as a “contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.” The Company recorded this Reserve to properly value the net economic value of the WMMRC subsidiary as further described in Note 4: Fresh Start Accounting. At each reporting date, the Company reassesses the loss contract reserve which may result in a change to this line item in the balance sheet and statement of operations. Accordingly, any changes in the loss contract reserve at the balance sheet date are recognized and reported within the loss contract reserve fair market value change in the statement of operations. The Company believes Fair Value Option accounting provides better matching of earnings to potential cash flow generated from the WMMRC operating business.
Fair Value Measurement
The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in the FASB Fair Value Measurements and Disclosures accounting guidance. The framework is based on the inputs used in valuation and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the fair value accounting guidance hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions.
The three levels of the hierarchy are as follows:
Level 1—Inputs to the valuation methodology are quoted prices for identical assets or liabilities traded in active markets.
Level 2—Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market corroborated inputs.
Level 3—Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the inputs that market participants would use.
Fair values are based on quoted market prices when available (Level 1). The Company receives the quoted market prices from a third party, nationally recognized pricing service. When market prices are not available, the Company utilizes a pricing service to determine an estimate of fair value. The fair value is generally estimated using current market inputs for similar financial instruments with comparable terms and credit quality, commonly referred to as matrix pricing (Level 2). These valuation techniques involve some level of management estimation and judgment. The Company recognizes transfers between levels in the fair value hierarchy at the end of the reporting period.
Fixed-Maturity Securities
Fixed-maturity securities consist of U.S. Treasury securities, obligations of U.S. government agencies, commercial mortgage-backed securities and corporate debt securities. Fixed-maturity securities held in trust are for the benefit of the primary insurers as more fully described in Note 5: Insurance Activity. Investments in fixed-maturity securities are reported at their estimated fair values or amortized cost (as the case may be) and are classified as trading securities in accordance with applicable accounting guidance. Realized gains and losses on the sale of fixed-maturity securities are determined using the specific identification method and are reported as a component of net investment income within the statement of operations.
Cash Equivalents and Investments Held in Trust
Cash equivalents which include highly liquid overnight money market instruments and fixed-maturity securities, are held in trust for the benefit of the primary insurers as more fully described in Note 4: Fresh Start Accounting, and Note 5: Insurance Activity and the following information regarding restrictions on distribution of net assets of subsidiaries.
Third Party Restrictions on Distribution of Net Assets of Wholly-Owned Subsidiaries
The net assets of WMMRC are subject to restrictions from distribution from multiple sources including the primary insurers who have approval control of distribution from the trust, the Insurance Commissioner of the State of Hawaii who have approval control prior to distributions or intercompany advances, and additional restrictions as described in Note 9: Notes Payable.
Premium Recognition
Premiums assumed are earned on a daily pro-rata basis over the underlying policy terms. Premiums assumed relating to the unexpired portion of policies in force at the balance sheet date are recorded as unearned premiums.
The Company recognizes premium deficiencies when there is a probable loss on an insurance contract. Premium deficiencies are recognized if the sum of the present value of expected losses and loss adjustment expenses, expected dividends to policy holders unamortized deferred acquisition costs, and maintenance costs exceed unearned premiums and anticipated investment income. Premium deficiency reserves have been recorded totaling $15.1 million $3.1 million as of December 31, 2012 and 2011, respectively.
The Company’s premium deficiency analysis was performed on a single book basis and includes all book years and reinsurance treaties aggregated together using assumptions based on the actuarial best estimates at the balance sheet date. The calculation for premium deficiency requires significant judgment and includes estimates of future expected premiums, claims, loss adjustment expenses and investment income as of the balance sheet date. To the extent ultimate losses are higher or premiums are lower than estimated, additional premium deficiency reserves may be required in the future.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, U.S. Treasury bills and overnight investments. Except as described above in Cash Equivalents Held in Trust, the Company considers all amounts that are invested in highly liquid over-night money market instruments to be cash equivalents. The FDIC insures amounts on deposit with each financial institution up to limits as prescribed by law. The Company may hold funds with financial institutions in excess of the FDIC insured amount, however, the Company has not experienced any losses in such accounts and management believes it is not exposed to any significant credit risk on cash and cash equivalents.
Restricted cash
Restricted cash consists of amounts held for the express purposes of paying principal and interest on the Runoff Notes or other uses permitted under the terms and conditions governing the Company’s financing arrangements.
Ceding Commission Expense
The Company is required to pay a ceding commission to certain primary insurers pursuant to certain reinsurance agreements.
Losses and Loss Adjustment Reserves
The losses and loss adjustment reserve includes case basis estimates of reported losses and supplemental amounts for incurred but not reported losses (“IBNR”). A default is considered the incident (e.g., the failure to make timely payment of mortgage payments) that may give rise to a claim for mortgage insurance. In establishing the losses and loss adjustment reserve, the Company utilizes the findings of an independent consulting actuary. The consulting actuary estimates ultimate loss rates based upon industry data and claims and exposure data provided by the primary mortgage insurance carriers and assumptions of prepayment speed relative to loans reinsured by the Company. The fully developed ultimate loss rates are then applied to cumulative earned premium and reduced for cumulative losses and loss adjustment expenses paid to arrive at the liability for unpaid losses and loss adjustment expenses. Actuarial methods utilized by the consulting actuary to derive the ultimate loss rates, include the loss development method, simulated loss development method, Bornhuetter-Ferguson method and simulated Bornhuetter-Ferguson method on a paid and incurred basis. Due to the current condition of the mortgage insurance market, WMMRC has recorded reserves at the higher of (x) reserves estimated by the consulting actuary for each primary mortgage guaranty carrier and (y) ceded case reserves and IBNR levels reported by the primary mortgage guaranty carriers as of December 31, 2012 and 2011, respectively. Management believes that its aggregate liability for unpaid losses and loss adjustment expenses at period end represents its best estimate, based upon the available data, of the amount necessary to cover the current cost of losses. However, due to the inherent uncertainty arising from fluctuations in the persistency rate of mortgage insurance claims, the Company’s size and lack of prior operating history, external factors such as future changes in regional or national economic conditions, judicial decisions, federal and state legislation related to mortgage restructuring and foreclosure restrictions, claims denials and coverage rescissions by primary carriers and other factors beyond management’s control, it is not presently possible to determine whether actual loss experience will conform to the assumptions used in determining the estimated amounts for such liability at the balance sheet date. Accordingly, the ultimate liability could be significantly higher or lower, as the case may be, of the amount indicated in the financial statements and there can be no assurance that the reserve amounts recorded will be sufficient. As adjustments to these estimates become necessary, such adjustments are reflected in current operations.
Loss Contract Fair Market Value Reserves
A loss contract fair market value reserve relating to contractual obligations of WMMRC was established at March 19, 2012 as a result of applying Fresh Start Accounting (more fully described in Note 4) and in compliance with ASC 805-10-55-21(b)(1) which defines a loss contract as a “contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.” The fair market value of this reserve is analyzed quarterly and is adjusted accordingly. This adjustment to the reserve produces an expense or contra-expense in the statement of operations.
Fresh Start Accounting
The Company adopted fresh start accounting in accordance with ASC 852 (Reorganizations) (“ASC 852”). See Note 4: Fresh Start Accounting for a description of the Company’s application of this standard.
Comprehensive Income (Loss)
The Company has no comprehensive income (loss) other than the net income (loss) disclosed in the consolidated statement of operations.
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed by dividing net income (loss) applicable to the Company’s common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is computed by dividing net income (loss) applicable to the Company’s common shareholders by the weighted average number of common shares outstanding during the period and the effect of all dilutive common stock equivalents (of which we had zero). If common share equivalents existed, in periods where there is a net loss, diluted loss per common share is equal to basic loss per common share, since the effect of including any common share equivalents would be antidilutive.
Share based compensation
On May 22, 2012, WMIH’s board of directors approved the 2012 Long-Term Incentive Plan (the “2012 Plan”) to award restricted stock to its non-employee directors and to have a plan in place for awards to executives and others in connection with the Company’s operations and future strategic plans. A total of 2 million shares of common stock were reserved for future issuance under the Plan, which became effective upon the board of directors approval on May 22, 2012. The 2012 Plan provides for the granting of restricted shares and other cash and share based awards. The value of restricted stock is determined using the fair market value of the shares on the issuance date.
Income Taxes
The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the carrying amounts and tax bases of assets and liabilities and losses carried forward and tax credits. Deferred tax assets and liabilities are measured using enacted tax rates and laws applicable to the years in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to the extent that it is more likely than not that deferred tax assets will not be realized.
The Company recognizes the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. Penalties and interest, of which there are none, would be reflected in income tax expense. Tax years are open to the extent the Company has net operating loss carry-forwards available to be utilized currently.
Dividend Policy
WMIHC currently has no plans to pay a dividend. The Financing Agreement includes restrictions related to the payment of dividends.
New Accounting Pronouncements
On October 1, 2012 the FASB issued Accounting Standards Update No. 2012-04 Technical Corrections and Improvements which includes changes to clarify the codification or correct unintended application of guidance that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. This standard is effective for periods beginning after December 15, 2012 for public entities. The Company has reviewed this standard and determined it has no material impact on the Company’s consolidated financial position, results of operations, or disclosure requirements.
On August 27, 2012 the FASB issued Accounting Standards Update 2012-03 Technical Amendments and Corrections to SEC Sections Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22. This standard is effective upon publication for public entities. The Company has reviewed this standard and determined it has no material impact on the Company’s consolidated financial position, results of operations, or disclosure requirements.
|
|||
Adjustments recorded to the Predecessor, after giving effect to the implementation of the Plan and to record assets and liabilities at fair value pursuant to the adoption of fresh start accounting are summarized below:
| (dollars in thousands except per share amounts) | Predecessor March 19, 2012 |
Reorganization Adjustments (a) |
Fair Value Adjustments (b) |
Successor March 19, 2012 |
||||||||||||
|
ASSETS |
||||||||||||||||
|
Investments held in trust, at fair value: |
||||||||||||||||
|
Fixed-maturity securities |
$ | 303,169 | $ | — | $ | — | $ | 303,169 | ||||||||
|
Cash equivalents held in trust |
26,249 | — | — | 26,249 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total investments held in trust |
329,418 | — | — | 329,418 | ||||||||||||
|
Cash and cash equivalents |
7,014 | 75,000 | (c) | — | 82,014 | |||||||||||
|
Fixed-maturity securities, at fair value |
6,049 | — | — | 6,049 | ||||||||||||
|
Accrued investment income |
2,313 | — | — | 2,313 | ||||||||||||
|
Other assets |
3,389 | 210,000 | (d) | (210,000) | (i) | 3,389 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total assets |
$ | 348,183 | $ | 285,000 | $ | (210,000) | $ | 423,183 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||||||||||
|
Liabilities: |
||||||||||||||||
|
Notes payable—principal |
$ | — | $ | 130,000 | (e) | $ | — | $ | 130,000 | |||||||
|
Losses and loss adjustment reserves |
141,010 | — | — | 141,010 | ||||||||||||
|
Losses payable |
7,585 | — | — | 7,585 | ||||||||||||
|
Unearned premiums |
409 | — | — | 409 | ||||||||||||
|
Accrued ceding commissions |
466 | — | — | 466 | ||||||||||||
|
Loss contract fair market value reserve |
— | — | 63,064 | (j) | 63,064 | |||||||||||
|
Other liabilities |
27,156 | (23,109) | (f) | 2 | (f) | 4,049 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total liabilities |
176,626 | 106,891 | 63,066 | 346,583 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Shareholders’ equity: |
||||||||||||||||
|
Common stock, $.00001 par value; 500,000,000 authorized, 200,000,000 shares issued and outstanding |
— | 2 | (g) | — | 2 | |||||||||||
|
Common stock, $1 par value, 1,000 shares issued and outstanding |
1 | — | (1) | (k) | — | |||||||||||
|
Additional paid-in capital (Predecessor) |
69,879 | — | (69,879) | (l) | — | |||||||||||
|
Additional paid-in capital (Successor) |
— | 154,998 | (g) | (78,400) | (m) | 76,598 | ||||||||||
|
Retained earnings |
101,677 | 23,109 | (h) | (124,786) | (n) | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total shareholders’ equity |
171,557 | 178,109 | (273,066) | 76,600 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total liabilities and shareholders’ equity |
$ | 348,183 | $ | 285,000 | $ | (210,000) | $ | 423,183 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The following notes relate to the table above and should be read in conjunction with the information in such table.
| (a) | These adjustments are necessary to give effect to the Plan, including the receipt of cash proceeds associated with the contribution of cash from certain creditors, issuance of debt securities, issuance of 200 million shares of common stock and other transactions as contemplated under the Plan. |
| (b) | These adjustments are necessary to reflect assets and liabilities at fair value and elimination of Predecessor equity. The primary operating business of the Successor is the WMMRC subsidiary which has a net asset value higher than its Fair Market Value (“FMV”). |
| (c) | This adjustment reflects $75 million of cash contributed to the Company on the Effective Date by certain creditors. |
| (d) | This adjustment reflects the Court’s valuation of WMMRC of $140 million and additional value attributable to the NOLs. These items have been adjusted to FMV as part of the application of Fresh Start Accounting. The Court’s valuation is presented solely for information purposes, however, because management does not believe that the Court’s valuation necessarily reflects the actual or FMV of the Company’s assets and liabilities under GAAP. This adjustment is eliminated as described in (i) below. |
| (e) | This adjustment reflects the issuance of $130 million of Runoff Notes as described in Note 9: Notes Payable below. |
| (f) | This adjustment reflects eliminating an intercompany payable occurring from carve-out allocated costs related to historic charges allocated as if services had been performed and charged to the Predecessor in accordance with Staff Accounting Bulletin (“SAB”) Topic 1B and 1B1. The methodology for these charges is based on applying the current contractual relationships described in Note 8: Service Agreements and Related Party Transactions as if they had been in place since the formation of WMMRC. The impact on historic earnings is described in (h) below. Additionally, this eliminates the offsetting intercompany amount created when Predecessor common stock is eliminated. |
| (g) | This adjustment reflects the calculated value of the 200 million shares of common stock issued before adjusting for FMV as a result of Fresh Start Accounting. This amount results from the use of the Court-assigned (non-GAAP) values attributed to assets and liabilities which are then utilized in calculating the resulting balance attributable to equity. The common stock is recorded at par value calculated as 200 million shares at a par value of $0.00001 per share. The remainder of the value is then attributed to additional paid-in capital. |
| (h) | This adjustment increases the retained earnings of the Predecessor due to the elimination of the carve-out costs which decreased historic earnings of the Predecessor. The resulting intercompany payable is described in (f) above. These costs and the related retained earnings are eliminated as the costs were allocated in accordance with SAB Topics 1B and 1B1 and would have eliminated in consolidation. |
| (i) | This adjustment reflects the elimination of the Court assigned values described in (d) above. There has been no goodwill recorded as a result of this transaction. WMMRC is reported as the Predecessor and therefore is carried at FMV in individual line items. Management believes that the Court’s valuation was inconsistent with GAAP and such information related to such valuation is being presented here for informational purposes only. Therefore, elimination is required to present the opening balance sheet in accordance with GAAP. |
| (j) | This adjustment is required to reflect a loss contract fair market value reserve of $63.1 million relating to contractual obligations of WMMRC. This is in compliance with ASC 805-10-55-21(b)(1) which defines a loss contract as a “contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.” The net assets or equity value of WMMRC totaled $171.6 million prior to reorganization and fair value adjustments. The elimination of the costs and intercompany payable allocated to the predecessor in accordance with SAB Topic 1B and 1B1 and described in (f) above increase the equity value to $194.7 million. The value of WMMRC was reduced by $63.1 million based upon the FMV analysis described above. |
|
Predecessor retained earnings |
$ | 101,677 | ||
|
Adjustment for carve-out allocations |
23,109 | |||
|
|
|
|||
|
Predecessor adjusted retained earnings |
124,786 | |||
|
Predecessor additional paid-in capital |
69,879 | |||
|
Predecessor common stock eliminated in consolidation |
(1) | |||
|
|
|
|||
|
Predecessor equity value |
194,664 | |||
|
Fair market value of WMMRC |
131,600 | |||
|
|
|
|||
|
Loss contract fair market reserve allowance |
$ | 63,064 | ||
|
|
|
| (k) | This adjustment reflects the elimination of common stock of the Predecessor. |
| (l) | This adjustment reflects the elimination of additional paid-in capital of the Predecessor. |
| (m) | This adjustment reflects the reduction of equity value resulting from fresh start accounting. It is comprised of a reduction (relative to Court assigned FMV) in WMMRC’s FMV totaling $8.4 million and the elimination of the Court assigned value of $70 million related to NOLs. Although the Company has substantial NOLs they are subject to a 100 percent valuation allowance as described in Note 7: Federal Income Taxes, and there can be no assurance the Company will be able to realize any benefit from the NOLs. |
|
Fair market value of WMMRC (Court assigned) |
$ | 140,000 | ||
|
Fair market value of WMMRC |
131,600 | |||
|
|
|
|||
|
Fair market value reduction |
8,400 | |||
|
Elimination of Court assigned value related to NOLs |
70,000 | |||
|
|
|
|||
|
Total change in fair market value affecting Equity Value |
$ | 78,400 | ||
|
|
|
|||
|
Court assigned Equity Value recorded as additional paid-in capital |
$ | 154,998 | ||
|
Total change in fair market value affecting Equity Value |
78,400 | |||
|
|
|
|||
|
Additional paid-in capital at March 19, 2012 |
$ | 76,598 | ||
|
|
|
| (n) | This adjustment reflects the elimination of adjusted retained earnings of the Predecessor. |
|
Predecessor retained earnings |
$ | 101,677 | ||
|
Adjustment for carve-out allocations |
23,109 | |||
|
|
|
|||
|
Predecessor adjusted retained earnings |
$ | 124,786 | ||
|
|
|
|
Predecessor retained earnings |
$ | 101,677 | ||
|
Adjustment for carve-out allocations |
23,109 | |||
|
|
|
|||
|
Predecessor adjusted retained earnings |
124,786 | |||
|
Predecessor additional paid-in capital |
69,879 | |||
|
Predecessor common stock eliminated in consolidation |
(1) | |||
|
|
|
|||
|
Predecessor equity value |
194,664 | |||
|
Fair market value of WMMRC |
131,600 | |||
|
|
|
|||
|
Loss contract fair market reserve allowance |
$ | 63,064 | ||
|
|
|
| (k) | This adjustment reflects the elimination of common stock of the Predecessor. |
| (l) | This adjustment reflects the elimination of additional paid-in capital of the Predecessor. |
| (m) | This adjustment reflects the reduction of equity value resulting from fresh start accounting. It is comprised of a reduction (relative to Court assigned FMV) in WMMRC’s FMV totaling $8.4 million and the elimination of the Court assigned value of $70 million related to NOLs. Although the Company has substantial NOLs they are subject to a 100 percent valuation allowance as described in Note 7: Federal Income Taxes, and there can be no assurance the Company will be able to realize any benefit from the NOLs. |
|
Fair market value of WMMRC (Court assigned) |
$ | 140,000 | ||
|
Fair market value of WMMRC |
131,600 | |||
|
|
|
|||
|
Fair market value reduction |
8,400 | |||
|
Elimination of Court assigned value related to NOLs |
70,000 | |||
|
|
|
|||
|
Total change in fair market value affecting Equity Value |
$ | 78,400 | ||
|
|
|
|||
|
Court assigned Equity Value recorded as additional paid-in capital |
$ | 154,998 | ||
|
Total change in fair market value affecting Equity Value |
78,400 | |||
|
|
|
|||
|
Additional paid-in capital at March 19, 2012 |
$ | 76,598 | ||
|
|
|
| (n) | This adjustment reflects the elimination of adjusted retained earnings of the Predecessor. |
|
Predecessor retained earnings |
$ | 101,677 | ||
|
Adjustment for carve-out allocations |
23,109 | |||
|
|
|
|||
|
Predecessor adjusted retained earnings |
$ | 124,786 | ||
|
|
|
|
Predecessor retained earnings |
$ | 101,677 | ||
|
Adjustment for carve-out allocations |
23,109 | |||
|
|
|
|||
|
Predecessor adjusted retained earnings |
124,786 | |||
|
Predecessor additional paid-in capital |
69,879 | |||
|
Predecessor common stock eliminated in consolidation |
(1) | |||
|
|
|
|||
|
Predecessor equity value |
194,664 | |||
|
Fair market value of WMMRC |
131,600 | |||
|
|
|
|||
|
Loss contract fair market reserve allowance |
$ | 63,064 | ||
|
|
|
|
Fair market value of WMMRC (Court assigned) |
$ | 140,000 | ||
|
Fair market value of WMMRC |
131,600 | |||
|
|
|
|||
|
Fair market value reduction |
8,400 | |||
|
Elimination of Court assigned value related to NOLs |
70,000 | |||
|
|
|
|||
|
Total change in fair market value affecting Equity Value |
$ | 78,400 | ||
|
|
|
|||
|
Court assigned Equity Value recorded as additional paid-in capital |
$ | 154,998 | ||
|
Total change in fair market value affecting Equity Value |
78,400 | |||
|
|
|
|||
|
Additional paid-in capital at March 19, 2012 |
$ | 76,598 | ||
|
|
|
|
|||
Premiums assumed and earned are as follows for the periods ended December 31, 2012, 2011 and 2010 respectively:
| Successor | Predecessor | Predecessor | Predecessor | |||||||||||||||
| Period from March 20, 2012 through September 30, 2012 |
Period from January 1, 2012 through March 19, 2012 |
Year ended December 31, 2011 |
Year ended December 31, 2010 |
|||||||||||||||
|
Premiums assumed |
$ | 14,210 | $ | 6,130 | $ | 34,562 | $ | 45,271 | ||||||||||
|
Change in unearned premiums |
184 | 47 | 222 | 324 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
|
Premiums earned |
$ | 14,394 | $ | 6,177 | $ | 34,784 | $ | 45,595 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
The components of the liability for losses and loss adjustment reserves are as follows as of December 31, 2012 and 2011:
| Successor | Predecessor | Predecessor | ||||||||||||
| December 31, 2012 |
December 31, 2011 |
December 31, 2010 |
||||||||||||
|
Case-basis reserves |
$ | 66,173 | $ | 132,970 | $ | 174,858 | ||||||||
|
IBNR reserves |
1,298 | 6,049 | 9,028 | |||||||||||
|
Premium deficit reserves |
15,053 | 3,100 | 6,150 | |||||||||||
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 82,524 | $ | 142,119 | $ | 190,036 | ||||||||
|
|
|
|
|
|
|
|||||||||
Losses and loss adjustment reserve activity are as follows for the years ended December 30, 2012, 2011 and 2010:
| Successor | Predecessor | Predecessor | ||||||||||||
| December 31, 2012 |
December 31, 2011 |
December 31, 2010 |
||||||||||||
|
Balance at beginning of period |
$ | 142,119 | $ | 190,036 | $ | 256,426 | ||||||||
|
Incurred—prior periods |
30,111 | 47,321 | 60,078 | |||||||||||
|
Paid or terminated—prior periods |
(89,706) | (95,238) | (126,468) | |||||||||||
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 82,524 | $ | 142,119 | $ | 190,036 | ||||||||
|
|
|
|
|
|
|
|||||||||
|
|||
The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of fixed-maturity securities held in trust at December 31, 2012, are as follows:
| Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
|
Trading Securities: |
||||||||||||||||
|
Obligations of U.S. government sponsored enterprises |
$ | 97,103 | $ | 1,416 | $ | (156) | $ | 98,363 | ||||||||
|
Corporate debt securities |
91,997 | 3,010 | (34) | 94,973 | ||||||||||||
|
Commercial paper |
54,949 | — | — | 54,949 | ||||||||||||
|
Foreign corporate debt securities |
18,305 | 379 | (18) | 18,666 | ||||||||||||
|
Commercial mortgage-backed securities |
10,541 | 64 | (87) | 10,518 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total fixed-maturity securities |
272,895 | 4,869 | (295) | 277,469 | ||||||||||||
|
Less total unrestricted fixed-maturity securities |
75,659 | 168 | (18) | 75,809 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total fixed-maturity securities held in trust |
$ | 197,236 | $ | 4,701 | $ | (277) | $ | 201,660 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of fixed-maturity securities held in trust at December 31, 2011, are as follows:
| Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
|
Trading Securities: |
||||||||||||||||
|
U.S. Treasury securities |
$ | 250 | $ | — | $ | — | $ | 250 | ||||||||
|
Obligations of U.S. government sponsored enterprises |
122,874 | 2,029 | (267) | 124,636 | ||||||||||||
|
Corporate debt securities |
129,916 | 3,791 | (845) | 132,862 | ||||||||||||
|
Foreign corporate debt securities |
26,800 | 546 | (117) | 27,229 | ||||||||||||
|
Commercial mortgage-backed securities |
19,138 | 76 | (146) | 19,068 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total fixed-maturity securities |
298,978 | 6,442 | (1,375) | 304,045 | ||||||||||||
|
Less total unrestricted fixed-maturity securities |
5,348 | 151 | (9) | 5,490 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total fixed-maturity securities held in trust |
$ | 293,630 | $ | 6,291 | $ | (1,366) | $ | 298,555 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Amortized cost and estimated fair value of fixed-maturity securities at December 31, 2012 by contractual maturity are as follows:
| Amortized Cost |
Estimated Fair Value |
|||||||
|
Maturity in: |
||||||||
|
2013 |
$ | 82,371 | $ | 82,577 | ||||
|
2014-2017 |
99,575 | 103,196 | ||||||
|
2018-2022 |
39,888 | 40,136 | ||||||
|
Thereafter |
40,520 | 41,042 | ||||||
|
Mortgage-backed securities |
10,541 | 10,518 | ||||||
|
|
|
|
|
|||||
|
Total fixed-maturity securities |
$ | 272,895 | $ | 277,469 | ||||
|
|
|
|
|
|||||
Net investment income for the periods ending December 31, 2012, 2011 and 2010, is summarized as follows:
| Successor | Predecessor | Predecessor | Predecessor | |||||||||||||||
| Period from March 20, 2012 through December 31, 2012 |
Period from January 1, 2012 through March 19, 2012 |
Year ended December 31, 2011 |
Year ended December 31, 2010 |
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|
Investment income: |
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|
Amortization of premium or discount on fixed-maturity |
$ | (1,837) | $ | (523) | $ | (2,750) | $ | (2,822) | ||||||||||
|
Investment income on fixed-maturity securities |
7,232 | 2,467 | 12,920 | 17,410 | ||||||||||||||
|
Interest income on cash and equivalents |
161 | 3 | 49 | 47 | ||||||||||||||
|
Realized net gain (loss) from sale of investment |
2,747 | 176 | 1,206 | 4,796 | ||||||||||||||
|
Unrealized (losses) gains on trading securities held at period end |
(1,410) | 1,049 | (2,828) | 396 | ||||||||||||||
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|
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|
|
|
|
|
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Net investment income |
$ | 6,893 | $ | 3,172 | $ | 8,597 | $ | 19,827 | ||||||||||
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The following tables show how the Company’s investments are categorized in accordance with fair value measurement, as of December 31, 2012 and 2011:
| December 31, 2012 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
Class of Security: |
||||||||||||||||
|
Obligations of U.S. government sponsored securities |
$ | 11,362 | $ | 87,001 | $ | — | $ | 98,363 | ||||||||
|
Corporate debt securities |
22,833 | 72,141 | — | 94,974 | ||||||||||||
|
Commercial paper |
54,948 | — | — | 54,948 | ||||||||||||
|
Foreign corporate debt securities |
1,001 | 17,665 | — | 18,666 | ||||||||||||
|
Commercial mortgage-backed securities |
— | 10,518 | — | 10,518 | ||||||||||||
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|
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Total |
$ | 90,144 | $ | 187,325 | $ | — | $ | 277,469 | ||||||||
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| December 31, 2011 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
Class of Security: |
||||||||||||||||
|
U.S. Treasury securities |
$ | 250 | $ | — | $ | — | $ | 250 | ||||||||
|
Obligations of U.S. government sponsored securities |
42,927 | 81,709 | — | 124,636 | ||||||||||||
|
Corporate debt securities |
— | 132,862 | — | 132,862 | ||||||||||||
|
Foreign corporate debt securities |
— | 27,229 | — | 27,229 | ||||||||||||
|
Commercial mortgage-backed securities |
— | 19,068 | — | 19,068 | ||||||||||||
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|
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Total |
$ | 43,177 | $ | 260,868 | $ | — | $ | 304,045 | ||||||||
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|
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| 2012 | 2011 | |||||||||||||||
| Transfers from Level 1 to Level 2 |
Transfers from Level 2 to Level 1 |
Transfers from Level 1 to Level 2 |
Transfers from Level 2 to Level 1 |
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|
Class of Securities: |
||||||||||||||||
|
Corporate securities |
$ | — | $ | 16,745 | $ | — | $ | — | ||||||||
|
Foreign corporate debt securities |
— | 1,001 | — | — | ||||||||||||
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Total Transfers |
$ | — | $ | 17,746 | $ | — | $ | — | ||||||||
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The Company recorded an income tax benefit for the period ended December 31, 2010 due to forgiveness of indebtedness exchanged for certain tax benefits.
| 2012 | 2011 | 2010 | ||||||||||
|
Current federal income tax expense |
$ | — | $ | — | 33,401 | |||||||
|
Provision for doubtful federal income tax receivable |
— | — | (46,428) | |||||||||
|
Deferred federal income tax (benefit) expense |
— | — | — | |||||||||
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|
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Federal income tax benefit |
$ | — | $ | — | $ | (13,027) | ||||||
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The items accounting for the difference between income taxes computed at the US federal statutory rate and our effecive rate were as follows:
| Successor | Predecessor | Predecessor | Predecessor | |||||||||||||||
| Period from March 20, 2012 through December 31, 2012 |
Period from January 1, 2012 through March 19, 2012 |
Year ended December 31, 2011 |
Year ended December 31, 2010 |
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|
Income tax at the federal statutory rate of 35% |
(35)% | (35)% | (35)% | (35)% | ||||||||||||||
|
Effect of: |
||||||||||||||||||
|
Tax benefit recovered from parent in bankruptcy |
— | — | — | (610) | ||||||||||||||
|
Fresh start accounting adjustments |
— | — | (3) | (7) | ||||||||||||||
|
Worthless stock deduction |
(23,718) | — | — | — | ||||||||||||||
|
Cancelation of debt |
2,401 | — | — | 439 | ||||||||||||||
|
Reduction in NOL due to 382 Limitation |
4,518 | — | — | — | ||||||||||||||
|
Change in valuation allowance |
16,834 | 35 | 38 | 42 | ||||||||||||||
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Effective Rate |
— % | — % | — % | (171)% | ||||||||||||||
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The components of the net deferred tax asset as of December 31, 2012, 2011 and 2010, are as follows:
| 2012 | 2011 | 2010 | ||||||||||
|
Deferred federal income tax asset: |
||||||||||||
|
Losses and loss adjustments expenses |
$ | 2,832 | $ | 4,097 | $ | 5,906 | ||||||
|
Net operating loss carryforward |
2,088,461 | 5,013 | 43 | |||||||||
|
Accruals and reserves |
18,276 | — | — | |||||||||
|
Accrual class action settlement |
— | 1,400 | 1,400 | |||||||||
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|
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Total deferred federal income tax asset |
2,109,569 | 10,510 | 7,349 | |||||||||
|
Deferred federal income tax liabilities: |
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|
Net unrealized gains on investments |
1,946 | 1,774 | 2,764 | |||||||||
|
Total deferred federal income tax liabilities |
1,946 | 1,774 | 2,764 | |||||||||
|
Less: Valuation allowance |
2,107,623 | 8,736 | 4,585 | |||||||||
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Net deferred federal income tax asset |
$ | — | $ | — | $ | — | ||||||
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A summary of WMIHC’s restricted share award activity for the years ended December 31, 2012 and 2011 is presented below:
| Number of Restricted Stock Awards Outstanding |
Weighted Average Grant Date Fair Value |
Aggregate Intrinsic Value (in thousands) |
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|
Outstanding—January 1, 2011 |
— | $ | — | $ | — | |||||||
|
Restricted stock awards granted |
— | — | — | |||||||||
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Restricted stock awards released or forfeited |
— | — | — | |||||||||
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Outstanding—December 31, 2011 |
— | — | — | |||||||||
|
Restricted stock awards granted |
1,156,078 | 0.4761 | 550 | |||||||||
|
Restricted stock awards released or forfeited |
— | — | — | |||||||||
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Outstanding—December 31, 2012 |
1,156,078 | $ | 0.4761 | $ | 550 | |||||||
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A summary of the Company’s restricted shares issued and subject to repurchase as of the years ended December 31, 2012 and 2011 is presented below:
| Shares | ||||
|
Shares subject to repurchase—January 1, 2011 |
— | |||
|
Unvested shares repurchased |
— | |||
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|
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|
Unvested shares—December 31, 2011 |
— | |||
|
Shares issued subject to vesting during the period |
1,156,078 | |||
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Shares vested during the period |
— | |||
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|
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|
Unvested shares—December 31, 2012 |
1,156,078 | |||
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The following table sets forth the compuation of basic and diluted net (loss) income per share:
(in thousands, except per share data):
| Successor | Predecessor | Predecessor | Predecessor | |||||||||||||||
| Period from March 20, 2012 to December 31, 2012 |
Period from January 1, 2012 to March 19, 2012 |
Year Ended December 31, 2011 |
Year Ended December 31, 2010 |
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|
Numerator for basic and diluted net (loss) income per share: |
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|
Net (loss) income |
$ | (12,353) | $ | (3,433) | $ | (10,873) | $ | 5,412 | ||||||||||
|
Less: Net (loss) income allocated to participating securities |
(18) | — | — | — | ||||||||||||||
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Net (loss) income attributable to common shareholders |
$ | (12,335) | $ | (3,433) | $ | (10,873) | $ | 5,412 | ||||||||||
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Denominator for basic and diluted net (loss) income per share: |
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|
Weighted average share outstanding |
200,298,083 | 1,000 | 1,000 | 1,000 | ||||||||||||||
|
Weighted average unvested restricted shares outstanding |
(298,083) | — | — | — | ||||||||||||||
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Denominator for basic and diluted net (loss) income per share: |
200,000,000 | 1,000 | 1,000 | 1,000 | ||||||||||||||
|
|
|
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|
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|
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|
Basic and diluted net (loss) income per share attributable to common shareholders |
$ | (0.06) | $ | (3,433.00) | $ | (10,873.00) | $ | 5,412.00 | ||||||||||
|
|||
Following is a summary of the unaudited interim results of operations for the year ended December 31, 2012 and 2011 (in thousands, except per share amounts):
| Total Revenue | Net Income (Loss) | Earnings per share – basic and diluted |
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|
Successor |
||||||||||||
|
March 20 to March 31, 2012 |
$ | 1,922 | $ | 472 | $ | 0.00 | ||||||
|
Second Quarter |
7,447 | (8,173) | (0.04) | |||||||||
|
Third Quarter |
7,336 | 5,299 | 0.03 | |||||||||
|
Fourth Quarter |
4,582 | (9,951) | (0.05) | |||||||||
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Total |
$ | 21,287 | $ | (12,353) | $ | (0.06) | ||||||
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Predecessor |
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|
January 1 to March 19, 2012 |
$ | 9,349 | $ | (3,433) | $ | (3,433.00) | ||||||
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Year Ended December 31, 2011 |
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|
First Quarter |
$ | 10,823 | $ | (1,891) | $ | (1,891.00) | ||||||
|
Second Quarter |
13,208 | (1,368) | (1,368.00) | |||||||||
|
Third Quarter |
9,103 | (6,264) | (6,264.00) | |||||||||
|
Fourth Quarter |
10,247 | (1,350) | (1,350.00) | |||||||||
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|
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|
Total |
$ | 43,381 | $ | (10,873) | $ | (10,873.00) | ||||||
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