Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 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 June 30, 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
June 30, 2015:
Financial assets:
Fixed income securities:
Municipal obligations	$	449,343		$	449,343		$	—	$	449,343		$	—
Corporate obligations	1,624,891			1,624,891			—		1,624,891			—
Foreign obligations	110,022			110,022			—		110,022			—
U.S. government obligations	58,313			58,313			58,313		—			—
U.S. agency obligations	4,318			4,318			—		4,318			—
Residential mortgage-backed securities	1,963,408			1,963,408			—		1,583,076			380,332
Collateralized debt obligations	86,627			86,627			—		86,627			—
Other asset-backed securities	595,499			595,499			—		595,499			—
Fixed income securities, pledged as collateral:
U.S. government obligations	34,903			34,903			34,903		—			—
Short term investments	197,070			197,070			194,430		2,640			—
Other investments	354,784			343,761			—		331,697			12,064
Cash and cash equivalents	33,965			33,965			33,965		—			—
Loans	5,674			5,598			—		—			5,598
Derivative assets:
Credit derivatives	—			—			—		—			—
Interest rate swaps—asset position	80,389			80,389			—		23,187			57,202
Interest rate swaps—liability position	—			—			—		—			—
Futures contracts	272			272			272		—			—
Other assets	9,704			9,704			—		—			9,704
Variable interest entity assets:
Fixed income securities:
Corporate obligations	2,747,181			2,747,181			—		—			2,747,181
Restricted cash	5,944			5,944			5,944		—			—
Loans	13,005,216			13,005,216			—		—			13,005,216
Total financial assets	$	21,367,523		$	21,356,424		$	327,827	$	4,811,300		$	16,217,297
Financial liabilities:
Obligations under investment agreements	$	112,215		$	113,708		$	—	$	—		$	113,708
Long term debt, including accrued interest	1,316,726			1,187,422			—		—			1,187,422
Derivative liabilities:
Credit derivatives	66,490			66,490			—		—			66,490
Interest rate swaps—asset position	(48,212		)	(48,212		)	—		(48,212		)	—
Interest rate swaps—liability position	324,506			324,506			—		214,485			110,021
Futures contracts	—			—			—		—			—
Liabilities for net financial guarantees written ⁽¹⁾	2,531,427			2,939,202			—		—			2,939,202
Variable interest entity liabilities:
Long-term debt	13,595,792			13,595,792			—		11,428,966			2,166,826
Derivative liabilities:
Interest rate swaps—liability position	2,049,431			2,049,431			—		2,049,431			—
Currency swaps—liability position	25,578			25,578			—		25,578			—
Total financial liabilities	$	19,973,953		$	20,253,917		$	—	$	13,670,248		$	6,583,669

(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 June 30, 2015 and December 31, 2014 is summarized below:



	CLOs			Other ⁽¹⁾
June 30, 2015:
Notional outstanding	$	433,555		$	955,902
Weighted average reference obligation price	99.0			85.3
Weighted average life (WAL) in years	1.3			6.3
Weighted average credit rating	AA			BBB-
Weighted average relative change ratio	36.2		%	45.0		%
CVA percentage	8.20		%	28.12		%
Fair value of derivative liabilities	$	1,518		$	64,936

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 $58,482, WAL of 0.7 years and liability fair value of $36 as of June 30, 2015. Other inputs to the valuation of these transactions at June 30, 2015 include weighted average quotes of less than 0% of notional, weighted average rating of A+ and Ambac CVA percentage of 2.25% . 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 June 30, 2015:
Balance, beginning of period	$	262,732		$	10,036		$	(230,201	)	$	2,704,657		$	12,789,201		$	(2,032,099	)	$	13,504,326
Total gains/(losses) realized and unrealized:
Included in earnings	6,908			(332		)	14,489			(117,260		)	(453,769		)	(23,091		)	(573,055		)
Included in other comprehensive income	(38,617		)	—			—			159,784			722,169			(111,636		)	731,700
Purchases	150,348			—			—			—			—			—			150,348
Issuances	—			—			—			—			—			—			—
Sales	—			—			—			—			—			—			—
Settlements	(1,039		)	—			8,185			—			(52,385		)	—			(45,239		)
Transfers into Level 3	—			—			88,218			—			—			—			88,218
Transfers out of Level 3	—			—			—			—			—			—			—
Balance, end of period	$	380,332		$	9,704		$	(119,309	)	$	2,747,181		$	13,005,216		$	(2,166,826	)	$	13,856,298
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	$	—		$	(332	)	$	14,081		$	(117,260	)	$	(453,769	)	$	(23,091	)	$	(580,371	)

Three Months Ended June 30, 2014:
Balance, beginning of period	$	66,923		$	13,122		$	(202,482	)	$	2,546,762		$	13,269,452		$	(1,284,394	)	$	14,409,383
Total gains/(losses) realized and unrealized:
Included in earnings	422			(340		)	(25,959		)	74,317			204,722			(61,028		)	192,134
Included in other comprehensive income	(124		)	—			—			67,309			328,415			(29,627		)	365,973
Purchases	—			—			—			—			—			—			—
Issuances	—			—			—			—			—			—			—
Sales	—			—			—			—			—			—			—
Settlements	(869		)	—			9,780			—			(59,358		)	—			(50,447		)
Transfers into Level 3	—			—			—			—			—			—			—
Transfers out of Level 3	—			—			—			—			—			—			—
Balance, end of period	$	66,352		$	12,782		$	(218,661	)	$	2,688,388		$	13,743,231		$	(1,375,049	)	$	14,917,043
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	$	—		$	(340	)	$	(27,284	)	$	74,317		$	204,722		$	(61,028	)	$	190,387



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
Six Months Ended June 30, 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	12,637			(627		)	568			(25,140		)	657,158			(863,089		)	(218,493		)
Included in other comprehensive income	(44,323		)	—			—			29,271			159,548			(44,011		)	100,485
Purchases	234,852			—			—			—			—			—			234,852
Issuances	—			—			—			—			—			—			—
Sales	—			—			—			—			—			—			—
Settlements	(21,035		)	(1,705		)	7,251			—			(182,667		)	3,938			(194,218		)
Transfers into Level 3	—			—			88,218			—			—			—			88,218
Transfers out of Level 3	—			—			—			—			—			—			—
Balance, end of period	$	380,332		$	9,704		$	(119,309	)	$	2,747,181		$	13,005,216		$	(2,166,826	)	$	13,856,298
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	$	—		$	(627	)	$	(1,933	)	$	(25,140	)	$	657,158		$	(863,089	)	$	(233,631	)

Six Months Ended June 30, 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	841			(602		)	(40,208		)	130,062			526,569			(251,990		)	364,672
Included in other comprehensive income	(341		)	—			—			83,144			408,217			(38,248		)	452,772
Purchases	—			—			—			—			70,000			—			70,000
Issuances	—			—			—			—			—			—			—
Sales	—			—			—			—			—			—			—
Settlements	(1,723		)	—			8,481			—			(660,450		)	429,794			(223,898		)
Transfers into Level 3	—			—			—			—			—			—			—
Transfers out of Level 3	(208		)	—			—			—			—			—			(208		)
Balance, end of period	$	66,352		$	12,782		$	(218,661	)	$	2,688,388		$	13,743,231		$	(1,375,049	)	$	14,917,043
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	$	—		$	(602	)	$	(42,315	)	$	130,062		$	521,436		$	(248,852	)	$	359,729

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



Level 3 - Investments by Class:
	Other Asset Backed Securities			Corporate Obligations			U.S. Agency Obligations		Non-Agency RMBS			Total Investments
Three Months Ended June 30, 2015:
Balance, beginning of period	$	—		$	—		$	—	$	262,732		$	262,732
Total gains/(losses) realized and unrealized:
Included in earnings	—			—			—		6,908			6,908
Included in other comprehensive income	—			—			—		(38,617		)	(38,617		)
Purchases	—			—			—		150,348			150,348
Issuances	—			—			—		—			—
Sales	—			—			—		—			—
Settlements	—			—			—		(1,039		)	(1,039		)
Transfers into Level 3	—			—			—		—			—
Transfers out of Level 3	—			—			—		—			—
Balance, end of period	$	—		$	—		$	—	$	380,332		$	380,332
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 June 30, 2014:
Balance, beginning of period	$	63,367		$	3,556		$	—	$	—		$	66,923
Total gains/(losses) realized and unrealized:
Included in earnings	446			(24		)	—		—			422
Included in other comprehensive income	(343		)	219			—		—			(124		)
Purchases	—			—			—		—			—
Issuances	—			—			—		—			—
Sales	—			—			—		—			—
Settlements	(869		)	—			—		—			(869		)
Transfers into Level 3	—			—			—		—			—
Transfers out of Level 3	—			—			—		—			—
Balance, end of period	$	62,601		$	3,751		$	—	$	—		$	66,352
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 - Investments by Class:
	Other Asset Backed Securities			Corporate Obligations			U.S. Agency Obligations			Non-Agency RMBS			Total Investments
Six Months Ended June 30, 2015:
Balance, beginning of period	$	—		$	3,808		$	—		$	194,393		$	198,201
Additions of VIEs consolidated	—			—			—			—			—
Total gains/(losses) realized and unrealized:										—
Included in earnings	—			(19		)	—			12,656			12,637
Included in other comprehensive income	—			(286		)	—			(44,037		)	(44,323		)
Purchases	—			—			—			234,852			234,852
Issuances	—			—			—			—			—
Sales	—			—			—			—			—
Settlements	—			(3,503		)	—			(17,532		)	(21,035		)
Transfers into Level 3	—			—			—			—			—
Transfers out of Level 3	—			—			—			—			—
Balance, end of period	$	—		$	—		$	—		$	380,332		$	380,332
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	$	—		$	—		$	—		$	—		$	—

Six Months Ended June 30, 2014:
Balance, beginning of period	$	64,073		$	3,502		$	208		$	—		$	67,783
Additions of VIEs consolidated	—			—			—			—			—
Total gains/(losses) realized and unrealized:
Included in earnings	889			(48		)	—			—			841
Included in other comprehensive income	(638		)	297			—			—			(341		)
Purchases	—			—			—			—			—
Issuances	—			—			—			—			—
Sales	—			—			—			—			—
Settlements	(1,723		)	—			—			—			(1,723		)
Transfers into Level 3	—			—			—			—			—
Transfers out of Level 3	—			—			(208		)	—			(208		)
Balance, end of period	$	62,601		$	3,751		$	—		$	—		$	66,352
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 June 30, 2015:
Balance, beginning of period	$	(153,824	)	$	(76,377	)	$	(230,201	)
Total gains/(losses) realized and unrealized:
Included in earnings	4,195			10,294			14,489
Included in other comprehensive income	—			—			—
Purchases	—			—			—
Issuances	—			—			—
Sales	—			—			—
Settlements	8,592			(407		)	8,185
Transfers into Level 3	88,218			—			88,218
Transfers out of Level 3	—			—			—
Balance, end of period	$	(52,819	)	$	(66,490	)	$	(119,309	)
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	$	4,195		$	9,886		$	14,081

Three Months Ended June 30, 2014:
Balance, beginning of period	$	(114,767	)	$	(87,715	)	$	(202,482	)
Total gains/(losses) realized and unrealized:
Included in earnings	(24,740		)	(1,219		)	(25,959		)
Included in other comprehensive income	—			—			—
Purchases	—			—			—
Issuances	—			—			—
Sales	—			—			—
Settlements	10,497			(717		)	9,780
Transfers into Level 3	—			—			—
Transfers out of Level 3	—			—			—
Balance, end of period	$	(129,010	)	$	(89,651	)	$	(218,661	)
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	$	(24,740	)	$	(2,544	)	$	(27,284	)



Level 3 - Derivatives by Class:
	Interest Rate Swaps			Credit Derivatives			Total Derivatives
Six Months Ended June 30, 2015:
Balance, beginning of period	$	(141,887	)	$	(73,459	)	$	(215,346	)
Total gains/(losses) realized and unrealized:
Included in earnings	(7,227		)	7,795			568
Included in other comprehensive income	—			—			—
Purchases	—			—			—
Issuances	—			—			—
Sales	—			—			—
Settlements	8,077			(826		)	7,251
Transfers into Level 3	88,218			—			88,218
Transfers out of Level 3	—			—			—
Deconsolidation of VIEs	—			—			—
Balance, end of period	$	(52,819	)	$	(66,490	)	$	(119,309	)
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	$	(7,227	)	$	5,294		$	(1,933	)

Six Months Ended June 30, 2014:
Balance, beginning of period	$	(92,612	)	$	(94,322	)	$	(186,934	)
Total gains/(losses) realized and unrealized:
Included in earnings	(46,371		)	6,163			(40,208		)
Included in other comprehensive income	—			—			—
Purchases	—			—			—
Issuances	—			—			—
Sales	—			—			—
Settlements	9,973			(1,492		)	8,481
Transfers into Level 3	—			—			—
Transfers out of Level 3	—			—			—
Deconsolidation of VIEs	—			—			—
Balance, end of period	$	(129,010	)	$	(89,651	)	$	(218,661	)
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	$	(46,371	)	$	4,056		$	(42,315	)

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 June 30, 2015:
Total gains or losses included in earnings for the period	$	6,908	$	407	$	9,886		$	4,195		$	(594,120	)	$	(332	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		9,886			4,195			(594,120		)	(332		)

Three Months Ended June 30, 2014:
Total gains or losses included in earnings for the period	$	422	$	717	$	(1,936	)	$	(24,740	)	$	218,011		$	(340	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		(2,544		)	(24,740		)	218,011			(340		)

Six Months Ended June 30, 2015:
Total gains or losses included in earnings for the period	$	12,637	$	826	$	6,968		$	(7,227	)	$	(231,071	)	$	(627	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		5,294			(7,227		)	(231,071		)	(627		)

Six Months Ended June 30, 2014:
Total gains or losses included in earnings for the period	$	841	$	1,492	$	4,671		$	(46,371	)	$	404,641		$	(602	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		4,056			(46,371		)	402,646			(602		)