That quad ring passage is the only way gear lube passes between the drive halves, so is very important to fill from the bottom and vent out the top. There is a hollow passage way around the shift shaft on the lower unit that also sees water. There is a drain hole for it as noted, you want to clean it out if you separate the drive. They tend to collect junk and get clogged.
On the left side of the impeller housing in the picture is another hollow passage way that allows water to drain around the bearing carrier which has seals around the it and also the prop shaft. That's how water gets to the prop when you run on muffs on the trailer.
