2. Key Assumptions a. General Operating Plan. The Projections reflect a mortgage insurance captive in a state of runoff with its existing reinsured loans affiliated with six (6) primary Mortgage Insurance (“MI”) companies. As of September 25, 2008, WMMRC was no longer able to accept new mortgage insurance business from the MI companies since new reinsured loans (WMB-originated or acquired loans) would no longer be affiliated with the Debtors or WMMRC. As a result, no additional or new business has been added to WMMRC since such date and no new business is anticipated nor forecasted in the Projections. Generally, WMMRC’s share of premiums (in addition to the risk associated therewith) will be collected on actively reinsured loans for a term of 10 years, based on the loan origination date. Premiums will continue to be collected until such time as the loan is refinanced, matures, or claims on such loans have been fully paid. Based on the last active date of new business being added, WMMRC will continue to receive its share of mortgage insurance premium from the MIs through 2018.
The Projections contained herein assume that WMMRC will continue to collect premiums and pay losses through 2018. No new business ventures nor opportunities for expansion of Reorganized WMI are included in the Projections, the results of which may materially affect results. Moreover, the Projections do not take into account nor assume that Reorganized WMI raises new capital or engages in new business lines subsequent to the Effective Date of the Seventh Amended Plan, the proceeds of which could be used to effectuate an expanded business model. By March 31, 2019, the Debtors assume that 1) premiums will no longer be collected, 2) no risk exposure will exist, and 3) all remaining assets contained within the six MI affiliated trusts will become unrestricted and used to pay off the remaining Runoff Notes or retained by the Reorganized WMI less a final commutation settlement amount. The Projections include assumptions relating to capital requirements and final commutation settlement negotiations in 2018 and 2019. Variances to these assumptions may affect results.
Methodology. The Projections are primarily based upon actuarial forecasts of future premiums, incurred losses, and paid losses over the Projection Period that were provided to the Debtors by their professionals in a report dated December 19, 2011, which includes actuarial projections as of September 30, 2011. Based on activity to date, the Debtors continue to believe that such actuarial projections continue to reflect a reasonable forecast over the Projection Period—such that no modification other than updates to actual results through November 30, 2011 have been made. The Projections also contain the Debtors’ assumptions, including forecasts for investment earnings, general and administrative expenses, public reporting expenses, and the amounts and timing of capital available for distribution.
b. Projected Statement of Operations
Premium Revenue: Revenues consist entirely of premiums earned as part of the WMMRC’s reinsurance agreements with its six MI partners. WMMRC’s typical reinsurance agreements are referred to as a “4/10/40” excess of loss structure. After the first 4% of losses are paid by the primary MI (“4”), WMMRC would be responsible for the next 10% of losses (“10”) with the primary MI being responsible for all other losses above the reinsurer’s layer. For taking on such risk, the MI pays WMMRC 40% (“40”) of the mortgage insurance premiums that the MI collects from the borrower. Typically these mortgage insurance premiums are contained in the borrower’s monthly payment to the loan servicer, who then forwards on such payment to the MI. All ceded premium revenues are deposited into each respective trust account (“Trust”) by the MI on a monthly basis (though they are netted against any losses for which WMMRC is responsible before such deposit). Based on November 30, 2011 data, WMMRC currently reinsures approximately 68,000 loans with origination dates between 1997 and 2008. Consistent with the operating plan, WMMRC will see the number of loans decrease over time so that by 2019 no loans will be reinsured by WMMRC. Premium projections were based on actuary forecasts of premium persistency of each of the loans, by origination year, over the Projection Period. Losses Paid: Consistent with the “4/10/40” structure above, losses paid represent the losses for which the Debtors are responsible. Based on November 30, 2011 data, WMMRC reinsures loans with the six Mortgage Insurers of approximately $16.6 billion dollars (“original risk in force”). Based on the WMMRC’s current risk exposure relative to the $16.6 billion of mortgage insurance currently being provided, taking into account current loans outstanding and the amount of losses relative to WMMRC’s starting risk layer (4%), WMMRC has $0.7 billion of potential loss exposure (or aggregate risk exposure) remaining assuming one hundred percent (100%) frequency and severity of loss claims. The amount and timing of losses paid through the Projection Period were based on actuary forecasts which assumed total future paid losses of $216 million as of September 30, 2011—all of which will be paid over the Projection Period. The amount of losses related to an insured loan is based on frequency and severity forecasts while the timing of paid losses is based on assumptions related to the MIs timing on payments once a claim becomes delinquent. The total losses indicated were adjusted by the Debtors to reflect actual results through November 2011.
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