WMI HOLDINGS CORP. – 10-Q/A – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 The following discussion should be read in conjunction with our financial statements and the related notes, included elsewhere in this Form 10-Q. The following is a discussion and analysis of our results of operations for the six months ended June 30, 2012 and 2011 and financial condition as of June 30, 2012 and December 31, 2011. (Dollars in thousands, except per share data and as otherwise indicated).  

References herein to the "Company", "we", "us", "our" or "Successor" generally are intended to refer to WMI Holdings Corp. and its subsidiaries on a consolidated basis.

FORWARD-LOOKING STATEMENTS AND INFORMATION

  This quarterly report includes forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this report that address activities, events, conditions or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business and these statements are not guarantees of future performance. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements may include be identified by the words "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "strategy," "future," "opportunity," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Such forward-looking statements involve risks and uncertainties that may cause actual events, results or performance to differ materially from those indicated by such statements. These risks are identified and discussed in this quarterly report under Risk Factors in Part II, Item 1A of this Report. These risk factors will be important to consider in determining future results and should be reviewed in their entirety. These forward-looking statements are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that the events, results or trends identified in these forward-looking statements will occur or be achieved. Forward-looking statement speak only as of the date they are made, and we do not undertake to update any forward-looking statement, except as required by law.  Background  WMI Holdings Corp.WMI Holdings Corp. ("WMIHC") is a holding company organized and existing under the law of the State of Washington. WMIHC formerly known as Washington Mutual, Inc. ("WMI"), is the direct parent of WM Mortgage Reinsurance Company, Inc. ("WMMRC" or "Predecessor"), 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 the Effective Date, we had no operations other than WMMRC's legacy reinsurance business with respect to mortgage insurance which is being operated in runoff mode.  Prior to September 26, 2008 (the "Petition Date"), WMI was a multiple savings and loan holding company that owned Washington Mutual Bank ("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 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"). 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 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, among other things, 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") (publicly available at http://www.fdic.gov/about/freedom/popular.html), in exchange for payment of $1.88 billion and the assumption of all of WMB's deposit liabilities.                                           26 

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  On the Petition Date, WMI and WMIIC (together, referred to herein as the "Debtors") each commenced with the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") voluntary petitions for relief under chapter 11 of title 11 of the United States Code ("Chapter 11") 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 provides for the distribution of cash, Runoff Notes (as defined below), liquidating trust interests in WMI Liquidating Trust (the "Trust") and newly issued shares of the Company'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.  WMIHC's Amended and Restated Articles of Incorporation authorize the Company to issue up to 500,000,000 shares of common stock, and up to 5,000,000 shares of preferred stock (in one or more series), in each case with a par value of $0.00001 per share. On the Effective Date of the Plan and pursuant to its terms, WMIHC issued 200,000,000 shares of common stock, with 194,670,501 shares having been issued to WMIHC's new shareholders and 5,329,499 shares having been deposited into the Disputed Equity Escrow (as discussed below) on the Effective Date. As of August 8, 2012, 4,402,977 shares of common stock remain on deposit in the Disputed Equity Escrow. No shares of the WMIHC's preferred stock are issued or outstanding.  On the Effective Date, the Debtors (and now the Liquidating Trust on behalf of the Debtors) continued to dispute whether the interests of certain former holders of "Equity Interests" or "Claims" (in each case as those terms are defined in the Plan) against the Debtors should be allowed. As a result, pursuant to the Plan, on the Effective Date, a "Disputed Equity Escrow" (as defined in the Plan) was created for the benefit of each holder of an "Disputed Equity Interest" (as such term is defined in the Plan). Such Disputed Equity Escrow was created to hold shares of the Company's common stock (as well as any dividends, gains or income attributable in respect of such common stock) allocable, on a pro rata basis, to each holder of such a Disputed Equity Interest if and when such Disputed Equity Interest becomes an "Allowed Equity Interest" (as such term is defined in the Plan). All such Equity Interests will constitute Disputed Equity Interests pursuant to the Plan until such time, or from time to time, as each Disputed Equity Interest has been compromised and settled or allowed or disallowed by a final order of the Court.  The Liquidating Trustee acts as escrow agent with respect to the Disputed Equity Escrow. Until such time as all of the Company's common stock has been distributed from the Disputed Equity Escrow in accordance with the Plan (e.g., as a result of all Disputed Equity Claims becoming Allowed Equity Interests or all Disputed Equity Claims being disallowed), the Liquidating Trustee is vested with the authority to exercise voting or consent rights with respect to such stock; provided, however, that the Liquidating Trustee is obligated to vote or consent, as the case may be, as to such stock in the same proportion as all other holders of WMIHC's common stock have voted or consented, in each case on an issue-by-issue basis. The Liquidating Trust has no right to or entitlement in any shares of common stock held in the Disputed Equity Escrow. Additionally, WMIHC does not have any right to, or interest in, any shares of common stock held by the Disputed Equity Escrow unless or until such time as WMIHC repurchases or otherwise acquires such common stock.  For more information regarding the Disputed Equity Escrow, see Section 26.3 of the Plan. For more information regarding the Plan and related matters, please refer to copies of the Plan Disclosure Statement and Confirmation, each of which were attached as exhibits 2.1, 2.2, and 2.3 to that certain Form 8-K filed by WMIHC on March 26, 2012.                                           27 

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WMMRC

  WMMRC is a wholly-owned subsidiary of the Company. 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 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 on loans originated or purchased by former subsidiaries of WMIHC. 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 such, effective September 26, 2008, WMMRC ceased assuming new mortgage risks from the primary carriers. Consequently, the Company'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 adjustments to the carrying values of assets and liabilities as reported in these financial statements are required as a result of the runoff status.  

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.  

Segments

  The Company manages its business on the basis of one operating segment, property and casualty reinsurance, in accordance with GAAP. Within the property and casualty reinsurance segment, our current risks arise solely from the reinsurance of mortgage insurance policies that are placed on certain residential mortgage loans. The majority of these policies are required by mortgage lenders as a stipulation to approve the mortgage loans. The mortgage insurance policies protect the beneficiaries of the policy from all or a portion of default-related losses.  

Business Overview and Operating Environment

  WMIHC has retained Blackstone Advisory Partners L.P. ("Blackstone") to assist WMIHC in developing its acquisition strategy and to provide financial advisory services in connection with potential transactions.  Under the terms of the agreement, Blackstone will work with us to consider potential mergers, acquisitions or business combinations. Blackstone will assist with developing an acquisition strategy, identifying and evaluating strategic opportunities, collecting and analyzing information regarding potential target companies, determining the valuation of potential target companies and advising on capital-raising, if needed, to fund this external growth strategy.  

There can be no assurance that any transaction will occur or if so on what terms.

  With respect to our current operations, the Company currently operates a single business, WMMRC, whose sole activity is the reinsurance of mortgage insurance policies that has been in runoff mode since September 26, 2008. Since that date, WMMRC has not underwritten any new policies (and by extension any new risk). WMMRC, through predecessor companies, began reinsuring risks in 1997 and continued through September 25, 2008.                                           28

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  The nature of the reinsurance contracts are mainly excess-of-loss contracts whereby WMMRC takes a portion of the risk, usually five or ten percent, with a stated attachment and exit point. Each calendar year, or book year, is treated separately from other years when calculating losses. In return for accepting a portion of the risk, WMMRC receives, net of ceding commission, a percentage of the premium that ranges from 25 to 40 percent.  Beginning in 2006, the housing market and related credit markets experienced a downturn that in 2012 has shown initial signs of stabilizing. During that period, housing prices declined materially, credit guidelines tightened, delays in mortgage servicing and foreclosure activities have occurred (and continue to occur), and deterioration in the credit performance of mortgage loans has occured. In addition, the macro-economic environment during that period has demonstrated limited economic growth, stubbornly high unemployment, and limited median wage gains.  While the macro-economic outlook remains guarded, there are indications that the housing market has begun to stabilize nationally. Recent reports show housing prices in certain locales have increased somewhat on a year-over-year basis, and that housing sales in certain market have begun to recover, although they remain well below their long-run average. Nevertheless, despite these early signs of market improvement, WMMRC's operating environment remains challenged as much of its results over the next several years will be directly affected by the significant inventory of pending defaulted mortgages at its ceding companies arising primarily from mortgages originated in calendar years 2005 through 2008.  

Critical Accounting Policies

  Our condensed consolidated financial statements are prepared in accordance with GAAP, which requires management to make estimates and assumptions that affect reported and disclosed amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. We believe that the critical accounting policies set forth in our audited balance sheets on Form 8-K/A as of at March 19, 2012 and December 31, 2011 continue to describe the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. These accounting policies pertain to premium revenues and risk transfer, valuation of investments, loss and loss adjustment expense reserves, our values under fresh start accounting and the resulting loss contract fair market value reserve. If actual events differ significantly from the underlying judgments or estimates used by management in the application of these accounting policies, there could be a material effect on our results of operations and financial condition.  

The Company adopted fresh start accounting in accordance with ASC 852 (Reorganizations) ("ASC 852"). Note 4: Fresh Start Accounting of the accompanying condensed consolidated financial statements more fully describe the Company's application of this standard.

Recently issued accounting standards and their impact to the Company have been presented under "New Accounting Pronouncements" in Note 3: Significant Accounting Policies of the accompanying condensed consolidated financial statements.

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 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 it believes that it satisfied both of the aforementioned conditions.  The Company's Reorganization value ("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                                           29

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  transactions analysis and (c) the discounted cash flow analysis. The application of these methodologies requires certain key estimates, judgments and assumptions, including financial projections, 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, management also has recorded a full valuation allowance relative to these assets. The valuation allowance was determined 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 and Item 1A. Risk Factors-Risks Related to WMIHC's Business.  No cash will be used for Plan-related liabilities as the Company will not be 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 an 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 exist with respect to the pre-petition operations and financial position of Washington Mutual, Inc. 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. Information in the accompanying condensed consolidated 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.                                           30

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Results of Operations for the six months ended June 30, 2012 and 2011

  As discussed in Note 3: Significant Accounting Policies, the financial statements prior to March 19, 2012, are not necessarily comparable with the financial statements for periods on or after March 19, 2012; however, while there is a different basis of accounting post-emergence, substantially all of the operating assets and liabilities remain consistent between Predecessor and Successor. Accordingly, the results of operations below are made on a comparative basis for the six months ended June 30, 2012 and 2011.  For the six months ended June 30, 2012, we reported a net loss of $11.1 million, as compared to a net loss of $3.3 million reported for the same period in 2011. The total revenue for the six months ended June 30, 2012 was $18.7 million, compared to total revenue of $24.0 million for the same period in 2011. The decrease in revenues is consistent with the status of the WMMRC subsidiary which is in runoff mode. No new business is being undertaken and the revenues are expected to continue to decrease.  Underwriting expenses defined as losses and loss adjustment expenses and ceding commission expenses decreased by $3.0 million from $23.0 million for the six months ending June 30, 2012 compared to $26.0 million for the six months ending June 30, 2011. This trend is consistent with the runoff nature of the WMMRC subsidiary. As more fully described in Note 3: Significant Accounting Policies of the accompanying condensed consolidated financial statements, due to the current condition of the mortgage insurance market, WMMRC has recorded reserves at the higher of (a) reserves estimated by the consulting actuary for each primary mortgage guaranty carrier and (b) ceded case reserves and incurred but not recorded ("IBNR") loss levels reported by the primary mortgage guaranty carriers as of each reporting period. 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.  For the six months ended June 30, 2012, our investment portfolio reported a net investment income of $6.3 million, or a return of 1.54 percent on our investment account, as compared to a net investment income of $6.0 million, or a return of 1.72 percent, for the same period in 2011.  

General and administrative expenses

  For the six months ended June 30, 2012, our general and administrative expenses totaled $2.0 million, an increase from general and administrative expenses totaling $1.3 million for the same period in 2011. The increase in these expenses is primarily attributable to resuming public financial reporting after emerging from bankruptcy earlier this year.  

Interest expense

  For the six months ended June 30, 2012, we incurred $4.8 million of interest expense which is payable on the Runoff Notes. No such interest expense was incurred during the same period in 2011 due to the fact that the Runoff Notes were not issued and outstanding then. Because "Runoff Proceeds" (as such term is defined in the Indentures) have not been available to pay accrued interest on the Runoff Notes to date, our obligation to pay interest on the Runoff Notes has been satisfied using the "pay-in-kind" or "PIK" feature available under the Indentures. As a result, $3.4 million of "PIK Notes" were issued in satisfaction of our obligation to pay interest on the Runoff Notes. The remaining interest expense of $1.4 million is accrued interest since the last interest payment period. This accrued interest will be converted to PIK Notes at the next payment date if there is not cash available to satisfy the required interest payment.  

Net loss

  Net loss for the six months ended June 30, 2012 totaled $11.1 million compared to a net loss of $3.3 million for the same period in 2011. The primary factors impacting the increase in loss of $7.8 million for the period are related to the interest expense of $4.8 million which did not exist in prior periods, a revenue reduction of $5.3 million between the two periods partially offset by a decrease in underwriting expense of $3.0 million as a result of WMMRC being in a runoff mode and increases of $0.7 million from general and administrative expense.  

Comprehensive Income (Loss)

The Company has no comprehensive income (loss) other than the net income (loss) disclosed in the condensed consolidated statement of operations.

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Net Premiums Earned

  The majority of WMMRC's reinsurance contracts require net premiums to be written and earned monthly. In a few cases, the net premiums earned reflect the pro rata inclusion into income of net premiums written over the life of the reinsurance contracts. Details of net premiums earned are provided in the following table:                                          Successor                Predecessor            Successor                Predecessor        Predecessor                                                                                                                Period from                                                                   Three              Period from               January 1,                                      Three Months                 Months            March 20, 2012            2012 through         Six Months                                     Ended June 30,            Ended June 30,       through June 30,             March 19,        ended June 30,                                          2012                      2011                  2012                     2012                2011 Premiums assumed                   $          5,224          $          8,831     $            6,235          $       6,130     $         17,938 Change in unearned premiums                      44                        54                     52                     47                  118  Premiums earned                    $          5,268          $          8,885     $            6,287          $       6,177     $         18,056    For the six months ended June 30, 2012, net premiums totaled $12.5 million a decrease of $5.6 million when compared to premiums of $18.1 million for the same period in 2011.  

Losses Incurred and Losses and Loss Adjustment Expenses

  Losses incurred include losses paid and changes in loss reserves, including reserves for IBNR, premium deficiency reserves net of actual and estimated loss recoverable amounts. Details of net losses incurred for the six months ended June 30, 2012 and 2011, are provided in the following table:                                            Successor               Predecessor            Successor               Predecessor        Predecessor                                                                                                                Period from                                                                    Three              Period from              January 1,                                        Three Months                Months            March 20, 2012           2012 through         Six Months                                       Ended June 30,           Ended June 30,       through June 30,            March 19,        ended June 30,                                            2012                     2011                  2012                    2012                2011 Losses incurred                      $          9,424         $         12,791     $           10,037         $      11,467     $         23,691    We establish reserves for each contract based on estimates of the ultimate cost of all losses including losses incurred but not reported. These estimated ultimate reserves are based on reports received from ceding companies, industry data and historical experience as well as our own actuarial estimates. Quarterly, we review these estimates on a contract by contract basis and adjust as we deem necessary based on updated information and our internal actuarial estimates.  

For the six months ended June 30, 2012 and 2011, the loss ratios for our business were 173 percent and 131 percent, respectively. The loss ratio is calculated by dividing incurred losses for the period by earned premiums. The ratio provides a measure of underwriting profit or, in this case, loss.

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The components of the liability for losses and loss adjustment reserves are as follows at June 30, 2012 and December 31, 2011:

                                            Successor           Predecessor                                           June 30,          December 31,                                             2012                2011               Case-basis reserves        $  114,401         $     132,970               IBNR reserves                   5,430                 6,049               Premium deficit reserves       12,827                 3,100                Total                      $  132,658         $     142,119   

Losses and loss adjustment reserve activity are as follows for the periods ended June 30, 2012 and December 31, 2011:

                                           Successor            Predecessor                                          June 30,           December 31,                                            2012                 2011              Balance at January 1       $  142,119          $     190,036               Incurred - prior periods       21,504                 47,321              Paid - prior periods          (30,965 )              (95,238 )               Total                      $  132,658          $     142,119    Net Investment Income (Loss)  

A summary of our net investment income (loss) for the six months ended June 30, 2012 and 2011 is as follows:

                                                Successor                  Predecessor              Successor                     Predecessor             Predecessor                                                                            Three                Period from                    Period from                                             Three Months                   Months              March 20, 2012                January 1, 2012            Six Months                                            Ended June 30,              Ended June 30,         through June 30,              through March 19,     

   ended June 30,                                                 2012                        2011                    2012                          2012                     2011 Investment income: Amortization of premium or discount on fixed-maturity                            $           (669 )          $           (654 )     $             (756 )          $              (523 )     $         (1,299 ) Investment income on fixed-maturity securities                                           2,878                       3,199                    3,279                          2,467                  6,803 Interest income on cash and equivalents                                             15                          13                       15                              3                     38 Realized net gain (loss) from sale of investment                                             278                       1,090                      271                            176         

1,186

 Unrealized (losses) gains on trading securities held at year end                           (323 )                       675                      273                          1,049                   (753 )  Net investment income                     $          2,179            $          4,323       $            3,082            $             3,172       $          5,975    For the six months ended June 30, 2012, investment income, net of all fees and expenses, resulted in a gain of 1.54 percent on our investment portfolio. This compares to income of 1.72 percent for the same period in 2011.  

Income Taxes

  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 property and casualty insurance companies. The Company, 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 period ending June 30, 2012 or December 31, 2011 associated with the Company's tax liability from the preceding year.                                           33 

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  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, recognition of unearned premiums, net operating losses and unrealized gains and losses on investments. As of June 30, 2012 and December 31, 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 Company has no current tax liability due as a result of its loss position for both the six months ended June 30, 2012 and 2011. More detailed information regarding the Company's tax position including net operating loss carry forwards is provided in Note 7: Federal Income Taxes of the accompanying condensed consolidated financial statements.  

Investments

General

  We hold investments at both WMIHC and WMMRC and the two portfolios consist entirely of fixed income instruments, including commercial paper and overnight money market funds. Value of the consolidated Company's total investments increased from $345.0 million on December 31, 2011 to $403.2 million on June 30, 2012.  We work with investment broker dealers and, in the case of WMMRC, collateral trustees, in determining whether a market for a financial instrument is active or inactive. We regularly obtain indicative pricing from market markers and from multiple dealers and compare the level of pricing variances as a way to observe market liquidity for certain investment securities. We also obtain trade history and live market quotations from publicly quoted sources, such as Bloomberg, for trade volume and frequency observation.  

While we obtain market pricing information from broker dealers, the ultimate fair value of our investments is based on portfolio statements provided by financial institutions that hold our accounts.

There were no transfers between Level 1, Level 2 and Level 3 fair value measurements during the six months ended June 30, 2012.

Please refer to Note 6: Investment Securities of the financial statements for additional information regarding our investment securities.

WMIHC

  On the Effective Date, WMIHC received $75 million of cash as contemplated by the Plan. We invested $74 million in agency discount notes, corporate obligations and overnight money market funds. These investment securities are all scheduled to mature within six months after purchase and we intend to hold them to maturity. WMIHC's investment portfolio is recorded at amortized cost. At June 30, 2012, the portfolio was valued at $73.9 million with the final maturity of those investments scheduled to occur on or about December 28, 2012.  

WMMRC

  WMMRC's investments are valued at fair value and any unrealized gains or losses are reflected in net investment income (loss) in the condensed consolidated statements of income. At June 30, 2012, over 93 percent of WMMRC's investment portfolio was held in six trusts for the benefit of primary mortgage insurers with whom WMMRC established agreements to reinsure private mortgage insurance risk. The total portfolio, including funds in overnight money market, was valued at approximately $328.5 million. Approximately 22 percent of the portfolio consists of securities that will mature within the next 12 months and 69 percent of the securities will mature within the next five years.                                           34

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Liquidity and Capital Resources

General

  WMIHC is organized as a holding company with no operations of its own. With respect to its own operations, WMIHC has minimal continuing cash needs, other than with respect to the payment most of administrative expenses and interest payments on "Runoff Notes" (as defined in the Indentures). Such interest payments are payable solely from "Runoff Proceeds" (as defined in the Indentures) received by WMIHC from WMMRC from time to time. Except in limited circumstances, the Runoff Notes are nonrecourse to WMIHC. See Note 9: Notes Payable. In addition, all of our significant operations are conducted through our wholly-owned reinsurance subsidiary, WMMRC, which formerly underwrote risks associated with our property and casualty reinsurance programs, but has been operating in runoff mode since the Petition Date. There are restrictions on WMMRC's ability to pay dividends which are described in more detail below. WMIHC does not currently expect to pay dividends on our common shares.  

  The objective of liquidity management is to ensure the Company has the continuing ability to maintain cash flows that are adequate to fund operations and meet obligations and other commitments on a timely and cost-effective basis. The Company establishes and maintains liquidity guidelines for itself as well as its principal operating subsidiary. Funds held by WMMRC are not available to WMIHC to satisfy its liquidity needs. Any dividend or payment by WMMRC to WMIHC must be approved by the Insurance Commissioner of the State of Hawaii. In addition, all dividends paid by WMMRC to WMIHC must first be used to make payments on the Runoff Notes in accordance with the Indentures.  Our sources of liquidity include premium receipts, investment income, cash on hand, investment securities and our $125 million financing facility. Because of the limited nature of WMIHC's operations, and the runoff nature of WMMRC's business, as discussed above, cash is primarily used to pay reinsurance losses and loss adjustment expenses, ceding commissions, interest obligations on the Runoff Notes (only if WMIHC is in receipt of Runoff Proceeds; otherwise WMIHC pays interest using the "payment-in-kind" ("PIK") option available under the Indentures) and general administrative expenses.  The Company monitors operating activities, forecasts liquidity needs and adjusts composition of investment securities in order to address liquidity needs. The Company currently has negative monthly operating cash flows mainly due to loss expenses at WMMRC. As a result, the Company maintains a very high quality and short duration investment portfolio in order to match its liability profile at both levels of the consolidated organization.  

  On the Effective Date, all shares of common and preferred equity securities previously issued by Washington Mutual, Inc. 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 preferred stock, each with a par value of $0.00001 per share. As of June 30, 2012, 200,000,000 shares of WMIHC's common stock were issued and outstanding; no shares of its preferred stock are issued or outstanding.  We expect our existing capital structure is sufficient to sustain our business operations and currently do not anticipate incurring additional indebtedness or raising additional equity. The foregoing notwithstanding, the Company may, subject to market conditions, as well as limitations set forth in the documentation governing the Financing Agreement (defined below) and Runoff Note Indentures (defined below), determine to incur additional indebtedness or raise additional equity capital in connection with undertaking one or more acquisitions.                                           35 

  While WMIHC is not subject to regulatory capital requirements, WMMRC is required to comply with various solvency and liquidity requirements pursuant to the insurance laws of the State of Hawaii. WMMRC is required to maintain minimum capital and surplus requirements of an amount established under applicable Hawaiian law and deemed appropriate by the Insurance Commissioner of the State of Hawaii. As of June 30, 2012, management believes that WMMRC is compliant with applicable statutory solvency, liquidity and minimum capital and surplus requirements. The payment of dividends is subject to statutory restrictions imposed by Hawaiian insurance laws and regulations and requires approval from the Insurance Commissioner of the State of Hawaii. In addition, the Financing Agreement and the Indentures impose restrictions on WMMRC business activities. During the quarter ended June 30, 2012, WMMRC paid no dividends to its parent.  

  As of March 19, 2012, a Financing Agreement (the "Financing Agreement") was entered into by and among 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, severally and not jointly, from time to time party hereto (each a "Lender" and collectively, the "Lenders") 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 million and (b) a tranche B term loan in the aggregate principal amount of $100 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, 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 sector. The Lenders are severally, and not jointly, obligated to extend such credit to WMIHC. As of June 30, 2012, no loans are outstanding under the Financing Agreement. 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.  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 within 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 a 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 an interest payment due and payable in respect of the Runoff Notes on June 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. The aggregate face amount of PIK Notes issued totaled approximately $3.4 million.                                           36

  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.  On March 19, 2012, WMIHC entered into an Investment Management Agreement with WMMRC. Under the terms of this agreement, WMIHC receives a fee from WMMRC 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.  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.  

  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, use for a limited time of the Company's health insurance plan for its employees. The TSA has an initial term of six months and either party may terminate one or more of the services offered upon ten (10) days written notice to the other party.  See Note 4: Fresh Start Accounting of the accompanying condensed consolidated financial statements 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.  As a result of the reorganization an intangible asset was 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. The Company adopted the fair value option relative to this reserve. The reserve will be evaluated periodically for changes to its value. During the period ended June 30, 2012, the value was analyzed and remained unchanged. This reserve is expected to improve operating results in future periods as it will reduce future losses. For additional information see Note 3: Significant Accounting Policies and Note 4: Fresh Start Accounting.  

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