Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2015

Summary of Carrying Amount and Fair Value of Ambac's Financial Assets and Liabilities

The following table sets forth the carrying amount and fair value of Ambac’s financial assets and liabilities as of March 31, 2015 and December 31, 2014, including the level within the fair value hierarchy at which fair value measurements are categorized. As required by the Fair Value Measurement Topic of the ASC financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.



	Carrying Amount			Total Fair Value			Fair Value Measurements Categorized as:
							Level 1		Level 2			Level 3
March 31, 2015:
Financial assets:
Fixed income securities:
Municipal obligations	$	525,188		$	525,188		$	—	$	525,188		$	—
Corporate obligations	1,609,769			1,609,769			—		1,609,769			—
Foreign obligations	125,164			125,164			—		125,164			—
U.S. government obligations	30,297			30,297			30,297		—			—
U.S. agency obligations	4,427			4,427			—		4,427			—
Residential mortgage-backed securities	1,846,477			1,846,477			—		1,583,745			262,732
Collateralized debt obligations	88,238			88,238			—		88,238			—
Other asset-backed securities	636,190			636,190			—		636,190			—
Fixed income securities, pledged as collateral:
U.S. government obligations	64,813			64,813			64,813		—			—
Short term investments	220,980			220,980			215,207		5,773			—
Other investments	332,609			328,187			—		310,578			17,609
Cash and cash equivalents	26,641			26,641			26,641		—			—
Loans	5,494			5,476			—		—			5,476
Derivative assets:
Credit derivatives	—			—			—		—			—
Interest rate swaps—asset position	113,622			113,622			—		113,622			—
Interest rate swaps—liability position	—			—			—		—			—
Other assets	10,036			10,036			—		—			10,036
Variable interest entity assets:
Fixed income securities:
Corporate obligations	2,704,657			2,704,657			—		—			2,704,657
Restricted cash	6,219			6,219			6,219		—			—
Loans	12,789,201			12,789,201			—		—			12,789,201
Total financial assets	$	21,140,022		$	21,135,582		$	343,177	$	5,002,694		$	15,789,711
Financial liabilities:
Obligations under investment agreements	$	111,967		$	114,438		$	—	$	—		$	114,438
Long term debt, including accrued interest	1,301,390			1,381,938			—		—			1,381,938
Derivative liabilities:
Credit derivatives	76,377			76,377			—		—			76,377
Interest rate swaps—asset position	(68,481		)	(68,481		)	—		(68,481		)	—
Interest rate swaps—liability position	438,518			438,518			—		284,694			153,824
Futures contracts	942			942			942		—			—
Liabilities for net financial guarantees written ⁽¹⁾	2,662,701			4,152,094			—		—			4,152,094
Variable interest entity liabilities:
Long-term debt	13,341,902			13,341,902			—		11,309,803			2,032,099
Derivative liabilities:
Interest rate swaps—liability position	2,081,082			2,081,082			—		2,081,082			—
Currency swaps—liability position	44,631			44,631			—		44,631			—
Total financial liabilities	$	19,991,029		$	21,563,441		$	942	$	13,651,729		$	7,910,770

(1)

The carrying value of net financial guarantees written includes the following balance sheet items: Premium receivables; Reinsurance recoverable on paid and unpaid losses; Deferred ceded premium; Subrogation recoverable; Insurance intangible asset; Unearned premiums; Loss and loss expense reserves; Ceded premiums payable, premiums taxes payable and other deferred fees recorded in Other liabilities.



	Carrying Amount			Total Fair Value			Fair Value Measurements Categorized as:
							Level 1		Level 2			Level 3
December 31, 2014:
Financial assets:
Fixed income securities:
Municipal obligations	$	525,792		$	525,792		$	—	$	525,792		$	—
Corporate obligations	1,385,594			1,385,594			—		1,381,786			3,808
Foreign obligations	127,757			127,757			—		127,757			—
U.S. government obligations	42,979			42,979			42,979		—			—
U.S. agency obligations	29,486			29,486			—		29,486			—
Residential mortgage-backed securities	1,710,955			1,710,955			—		1,516,562			194,393
Collateralized debt obligations	21,122			21,122			—		21,122			—
Other asset-backed securities	882,001			882,001			—		882,001			—
Fixed income securities, pledged as collateral:
U.S. government obligations	64,267			64,267			64,267		—			—
Short term investments	360,065			360,065			358,190		1,875			—
Other investments	357,016			349,468			—		336,013			13,455
Cash and cash equivalents	73,903			73,903			73,903		—			—
Loans	5,714			5,634			—		—			5,634
Derivative assets:
Credit derivatives	2,043			2,043			—		—			2,043
Interest rate swaps—asset position	106,974			106,974			—		106,974			—
Interest rate swaps—liability position	—			—			—		—			—
Futures contracts	—			—			—		—			—
Other assets	12,036			12,036			—		—			12,036
Variable interest entity assets:
Fixed income securities:
Corporate obligations	2,743,050			2,743,050			—		—			2,743,050
Restricted cash	7,708			7,708			7,708		—			—
Loans	12,371,177			12,371,177			—		—			12,371,177
Total financial assets	$	20,829,639		$	20,822,011		$	547,047	$	4,929,368		$	15,345,596
Financial liabilities:
Obligations under investment agreements	$	160,079		$	161,821		$	—	$	—		$	161,821
Long term debt, including accrued interest	1,273,805			1,379,864			—		—			1,379,864
Derivative liabilities:
Credit derivatives	75,502			75,502			—		—			75,502
Interest rate swaps—asset position	(54,666		)	(54,666		)	—		(54,666		)	—
Interest rate swaps—liability position	385,546			385,546			—		243,659			141,887
Futures contracts	562			562			562		—			—
Other contracts	—			—			—		—			—
Liabilities for net financial guarantees written ⁽¹⁾	2,923,652			4,539,000			—		—			4,539,000
Variable interest entity liabilities:
Long-term debt	12,882,076			12,882,076			—		11,618,412			1,263,664
Derivative liabilities:
Interest rate swaps—liability position	2,133,268			2,133,268			—		2,133,268			—
Currency swaps—liability position	66,895			66,895			—		66,895			—
Total financial liabilities	$	19,846,719		$	21,569,868		$	562	$	14,007,568		$	7,561,738

(1)

Information about Valuation Inputs for Variable Interest Entity Assets and Liabilities Classified as Level 3

Information about the above described model inputs used to determine the fair value of each class of credit derivatives, including the CVA as a percentage of the gross mark-to-market liability before considering Ambac credit risk (“CVA percentage”), as of March 31, 2015 and December 31, 2014 is summarized below:



	CLOs			Other ⁽¹⁾
March 31, 2015:
Notional outstanding	$	466,453		$	1,069,317
Weighted average reference obligation price	99.1			86.8
Weighted average life (WAL) in years	1.5			5.8
Weighted average credit rating	AA			BBB
Weighted average relative change ratio	36.2		%	44.8		%
CVA percentage	5.21		%	19.34		%
Fair value of derivative liabilities	$	1,533		$	74,794

December 31, 2014:
Notional outstanding	$	549,923		$	921,036
Weighted average reference obligation price	98.9			86.8
Weighted average life (WAL) in years	1.8			5.7
Weighted average credit rating	AA			BBB-
Weighted average relative change ratio	35.9		%	49.0		%
CVA percentage	5.40		%	15.82		%
Fair value of derivative liabilities	$	2,027		$	71,104

(1)

Excludes contracts for which fair values are based on credit derivative quotes rather than reference obligation quotes. Such contracts have a combined notional outstanding of $58,801, WAL of 0.9 years and liability fair value of $50 as of March 31, 2015. Other inputs to the valuation of these transactions at March 31, 2015 include weighted average quotes of less than 1% of notional, weighted average rating of A and Ambac CVA percentage of 2.02% . As of December 31, 2014, these contracts had a combined notional outstanding of $58,800, WAL of 1.2 years and liability fair value of $328. Other inputs to the valuation of these transactions at December 31, 2014 include weighted average quotes of 1% of notional, weighted average rating of A and Ambac CVA percentage of 2.21% .

Summary of Changes in Level 3 Fair Value Category

The following tables present the changes in the Level 3 fair value category for the periods presented in 2015 and 2014. Ambac classifies financial instruments in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Thus, the gains and losses presented below include changes in the fair value related to both observable and unobservable inputs.



Level 3 - Financial Assets and Liabilities Accounted for at Fair Value
										VIE Assets and Liabilities
	Investments			Other assets			Derivatives			Investments			Loans			Long-term debt			Total
Three Months Ended March 31, 2015:
Balance, beginning of period	$	198,201		$	12,036		$	(215,346	)	$	2,743,050		$	12,371,177		$	(1,263,664	)	$	13,845,454
Total gains/(losses) realized and unrealized:
Included in earnings	5,729			(295		)	(13,921		)	92,120			1,110,927			(839,998		)	354,562
Included in other comprehensive income	(5,706		)	—			—			(130,513		)	(562,621		)	67,625			(631,215		)
Purchases	84,504			—			—			—			—			—			84,504
Issuances	—			—			—			—			—			—			—
Sales	—			—			—			—			—			—			—
Settlements	(19,996		)	(1,705		)	(934		)	—			(130,282		)	3,938			(148,979		)
Transfers into Level 3	—			—			—			—			—			—			—
Transfers out of Level 3	—			—			—			—			—			—			—
Balance, end of period	$	262,732		$	10,036		$	(230,201	)	$	2,704,657		$	12,789,201		$	(2,032,099	)	$	13,504,326
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	—		$	(295	)	$	(14,364	)	$	92,120		$	1,110,927		$	(839,998	)	$	348,390

Three Months Ended March 31, 2014:
Balance, beginning of period	$	67,783		$	13,384		$	(186,934	)	$	2,475,182		$	13,398,895		$	(1,514,605	)	$	14,253,705
Total gains/(losses) realized and unrealized:
Included in earnings	419			(262		)	(14,249		)	55,745			321,847			(190,962		)	172,538
Included in other comprehensive income	(217		)	—			—			15,835			79,802			(8,621		)	86,799
Purchases	—			—			—			—			70,000			—			70,000
Issuances	—			—			—			—			—			—			—
Sales	—			—			—			—			—			—			—
Settlements	(854		)	—			(1,299		)	—			(601,092		)	429,794			(173,451		)
Transfers into Level 3	—			—			—			—			—			—			—
Transfers out of Level 3	(208		)	—			—			—			—			—			(208		)
Balance, end of period	$	66,923		$	13,122		$	(202,482	)	$	2,546,762		$	13,269,452		$	(1,284,394	)	$	14,409,383
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	—		$	(262	)	$	(15,024	)	$	55,745		$	316,714		$	(187,824	)	$	169,349

The tables below provide roll-forward information by class of investments and derivatives measured using significant unobservable inputs.



Level 3 - Investments by Class:
	Collateralized Debt Obligations		Other Asset Backed Securities			Corporate Obligations			U.S. Agency Obligations			Non-Agency RMBS			Total Investments
Three Months Ended March 31, 2015:
Balance, beginning of period	$	—	$	—		$	3,808		$	—		$	194,393		$	198,201
Total gains/(losses) realized and unrealized:
Included in earnings	—		—			(19		)	—			5,748			5,729
Included in other comprehensive income	—		—			(286		)	—			(5,420		)	(5,706		)
Purchases	—		—			—			—			84,504			84,504
Issuances	—		—			—			—			—			—
Sales	—		—			—			—			—			—
Settlements	—		—			(3,503		)	—			(16,493		)	(19,996		)
Transfers into Level 3	—		—			—			—			—			—
Transfers out of Level 3	—		—			—			—			—			—
Balance, end of period	$	—	$	—		$	—		$	—		$	262,732		$	262,732
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	—	$	—		$	—		$	—		$	—		$	—

Three Months Ended March 31, 2014:
Balance, beginning of period	$	—	$	64,073		$	3,502		$	208		$	—		$	67,783
Total gains/(losses) realized and unrealized:
Included in earnings	—		443			(24		)	—			—			419
Included in other comprehensive income	—		(295		)	78			—			—			(217		)
Purchases	—		—			—			—			—			—
Issuances	—		—			—			—			—			—
Sales	—		—			—			—			—			—
Settlements	—		(854		)	—			—			—			(854		)
Transfers into Level 3	—		—			—			—			—			—
Transfers out of Level 3	$	—	$	—		$	—		$	(208	)	$	—		$	(208	)
Balance, end of period	$	—	$	63,367		$	3,556		$	—		$	—		$	66,923
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	—	$	—		$	—		$	—		$	—		$	—



Level 3 - Derivatives by Class:
	Interest Rate Swaps			Credit Derivatives			Total Derivatives
Three Months Ended March 31, 2015:
Balance, beginning of period	$	(141,887	)	$	(73,459	)	$	(215,346	)
Total gains/(losses) realized and unrealized:
Included in earnings	(11,422		)	(2,499		)	(13,921		)
Included in other comprehensive income	—			—			—
Purchases	—			—			—
Issuances	—			—			—
Sales	—			—			—
Settlements	(515		)	(419		)	(934		)
Transfers into Level 3	—			—			—
Transfers out of Level 3	—			—			—
Balance, end of period	$	(153,824	)	$	(76,377	)	$	(230,201	)
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	(11,422	)	$	(2,942	)	$	(14,364	)

Three Months Ended March 31, 2014:
Balance, beginning of period	$	(92,612	)	$	(94,322	)	$	(186,934	)
Total gains/(losses) realized and unrealized:
Included in earnings	(21,631		)	7,382			(14,249		)
Included in other comprehensive income	—			—			—
Purchases	—			—			—
Issuances	—			—			—
Sales	—			—			—
Settlements	(524		)	(775		)	(1,299		)
Transfers into Level 3	—			—			—
Transfers out of Level 3	—			—			—
Balance, end of period	$	(114,767	)	$	(87,715	)	$	(202,482	)
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	(21,631	)	$	6,607		$	(15,024	)

Summary of Gains and Losses (Realized and Unrealized) Relating to Level 3 Assets and Liabilities Included in Earnings

Gains and losses (realized and unrealized) relating to Level 3 assets and liabilities included in earnings for the affected periods are reported as follows:



	Net investment income		Realized gains or (losses) and other settlements on credit derivative contracts		Unrealized gains or (losses) on credit derivative contracts			Derivative products revenues (interest rate swaps)			Income (loss) on variable interest entities		Other income or (loss)
Three Months Ended March 31, 2015:
Total gains or losses included in earnings for the period	$	5,729	$	419	$	(2,918	)	$	(11,422	)	$	363,049	$	(295	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		(2,942		)	(11,422		)	363,049		(295		)

Three Months Ended March 31, 2014:
Total gains or losses included in earnings for the period	$	419	$	775	$	6,607		$	(21,631	)	$	186,630	$	(262	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		6,607			(21,631		)	184,635		(262		)

- Definition

Tabular disclosure of the fair value of financial instruments, including financial assets and financial liabilities, and the measurements of those instruments, assets, and liabilities.

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