Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2017

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, 2017 and December 31, 2016, 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:
March 31, 2017:	Carrying Amount			Total Fair Value			Level 1		Level 2			Level 3
Financial assets:
Fixed income securities:
Municipal obligations	$	456,707		$	456,707		$	—	$	456,707		$	—
Corporate obligations	1,774,924			1,774,924			—		1,774,924			—
Foreign obligations	29,463			29,463			28,525		938			—
U.S. government obligations	42,009			42,009			42,009		—			—
U.S. agency obligations	4,018			4,018			—		4,018			—
Residential mortgage-backed securities	2,314,487			2,314,487			—		1,658,670			655,817
Collateralized debt obligations	153,104			153,104			—		153,104			—
Other asset-backed securities	669,287			669,287			—		603,480			65,807
Fixed income securities, pledged as collateral:
U.S. government obligations	64,908			64,908			64,908		—			—
Short term investments	347,055			347,055			245,631		101,424			—
Other investments ⁽²⁾	478,688			463,023			112,798		—			15,536
Cash and cash equivalents	118,772			118,772			56,724		62,048			—
Loans	4,237			4,227			—		—			4,227
Derivative assets:
Interest rate swaps—asset position	74,397			74,397			—		15,455			58,942
Other assets	7,039			7,039			—		—			7,039
Variable interest entity assets:
Fixed income securities:
Corporate obligations	2,663,719			2,663,719			—		—			2,663,719
Restricted cash	5,005			5,005			5,005		—			—
Loans	11,015,305			11,015,305			—		—			11,015,305
Derivative assets:
Currency swaps-asset position	75,459			75,459			—		75,459			—
Total financial assets	$	20,298,583		$	20,282,908		$	555,600	$	4,906,227		$	14,486,392
Financial liabilities:
Long term debt, including accrued interest	$	1,412,450		$	1,375,493		$	—	$	1,057,242		$	318,251
Derivative liabilities:
Credit derivatives	14,496			14,496			—		—			14,496
Interest rate swaps—asset position	(2,711		)	(2,711		)	—		(2,711		)	—
Interest rate swaps—liability position	232,013			232,013			—		84,979			147,034
Futures contracts	437			437			437		—			—
Liabilities for net financial guarantees written⁽¹⁾	3,141,107			5,007,413			—		—			5,007,413
Variable interest entity liabilities:
Long-term debt	11,564,054			11,564,054			—		8,847,412			2,716,642
Derivative liabilities:
Interest rate swaps—liability position	2,064,105			2,064,105			—		2,064,105			—
Total financial liabilities	$	18,425,951		$	20,255,300		$	437	$	12,051,027		$	8,203,836



	Carrying Amount			Total Fair Value			Fair Value Measurements Categorized as:
December 31, 2016:	Carrying Amount			Total Fair Value			Level 1		Level 2			Level 3
Financial assets:
Fixed income securities:
Municipal obligations	$	374,368		$	374,368		$	—	$	374,368		$	—
Corporate obligations	1,802,165			1,802,165			—		1,802,165			—
Foreign obligations	43,135			43,135			42,212		923			—
U.S. government obligations	36,186			36,186			36,186		—			—
U.S. agency obligations	4,060			4,060			—		4,060			—
Residential mortgage-backed securities	2,351,595			2,351,595			—		1,654,882			696,713
Collateralized debt obligations	113,923			113,923			—		113,923			—
Other asset-backed securities	828,783			828,783			—		762,793			65,990
Fixed income securities, pledged as collateral:
U.S. government obligations	64,905			64,905			64,905		—			—
Short term investments	430,788			430,788			371,367		59,421			—
Other investments ⁽²⁾	450,307			435,238			83,791		—			14,934
Cash and cash equivalents	91,025			91,025			46,587		44,438			—
Loans	4,160			4,066			—		—			4,066
Derivative assets:
Interest rate swaps—asset position	77,206			77,206			—		16,950			60,256
Futures contracts	536			536			536		—			—
Other assets	7,382			7,382			—		—			7,382
Variable interest entity assets:
Fixed income securities:
Corporate obligations	2,622,566			2,622,566			—		—			2,622,566
Restricted cash	4,873			4,873			4,873		—			—
Loans	10,658,963			10,658,963			—		—			10,658,963
Derivative assets:
Currency swaps—asset position	80,407			80,407			—		80,407			—
Total financial assets	$	20,047,333		$	20,032,170		$	650,457	$	4,914,330		$	14,130,870
Financial liabilities:
Obligations under investment agreements	$	82,358		$	82,333		$	—	$	—		$	82,333
Long term debt, including accrued interest	1,536,352			1,494,340			—		1,147,728			346,612
Derivative liabilities:
Credit derivatives	15,349			15,349			—		—			15,349
Interest rate swaps—asset position	(61,839		)	(61,839		)	—		(61,839		)	—
Interest rate swaps—liability position	365,776			365,776			—		220,587			145,189
Liabilities for net financial guarantees written ⁽¹⁾	3,009,943			4,490,070			—		—			4,490,070
Variable interest entity liabilities:
Long-term debt	11,155,936			11,155,936			—		8,573,716			2,582,220
Derivative liabilities:
Interest rate swaps—liability position	2,078,601			2,078,601			—		2,078,601			—
Total financial liabilities	$	18,182,476		$	19,620,566		$	—	$	11,958,793		$	7,661,773

(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.


(2)	Excluded from the fair value measurement categories in the table above are investment funds of $334,689 and $336,513 as of March 31, 2017 and December 31, 2016, respectively, which are measured using NAV per share as a practical expedient.

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 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, 2017 and December 31, 2016 is summarized below:



	March 31, 2017				December 31, 2016
Notional outstanding		$	722,492		$	737,380
Weighted average reference obligation price		93.8			93.5
Weighted average life (WAL) in years		5.1			5.2
Weighted average credit rating		A-			A-
Weighted average relative change ratio		31.5		%	31.6		%
CVA percentage		11.10		%	11.14		%
Fair value of derivative liabilities		$	14,496		$	15,349

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 2017 and 2016. 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, 2017:
Balance, beginning of period	$	762,703		$	7,382		$	(100,282	)	$	2,622,566		$	10,658,963		$	(2,582,220	)	$	11,369,112
Total gains/(losses) realized and unrealized:
Included in earnings	9,819			(343		)	(2,817		)	(5,195		)	346,192			(94,407		)	253,249
Included in other comprehensive income	6,285			—			—			46,348			183,549			(46,257		)	189,925
Purchases	9,851			—			—			—			—			—			9,851
Issuances	—			—			—			—			—			—			—
Sales	(79,319		)	—			—			—			—			—			(79,319		)
Settlements	(9,793		)	—			511			—			(173,399		)	6,242			(176,439		)
Transfers into Level 3	22,078			—			—			—			—			—			22,078
Balance, end of period	$	721,624		$	7,039		$	(102,588	)	$	2,663,719		$	11,015,305		$	(2,716,642	)	$	11,588,457
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	$	—		$	(343	)	$	(3,017	)	$	(5,195	)	$	346,192		$	(94,407	)	$	243,230

Three Months Ended March 31, 2016:
Balance, beginning of period	$	488,884		$	8,696		$	(99,192	)	$	2,588,556		$	11,690,324		$	(3,180,170	)	$	11,497,098
Total gains/(losses) realized and unrealized:
Included in earnings	12,403			(285		)	(7,983		)	93,267			160,541			(1,952		)	255,991
Included in other comprehensive income	28,019			—			—			(59,100		)	(268,402		)	72,860			(226,623		)
Purchases	91,875			—			—			—			—			—			91,875
Settlements	(4,246		)	—			(2,719		)	—			(66,222		)	106,197			33,010
Transfers into Level 3	94,555			—			—			—			—			—			94,555
Transfers out of Level 3	—			—			—			—			—			214,649			214,649
Balance, end of period	$	711,490		$	8,411		$	(109,894	)	$	2,622,723		$	11,516,241		$	(2,788,416	)	$	11,960,555
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	$	—		$	(285	)	$	(8,245	)	$	93,267		$	160,541		$	(1,952	)	$	243,326

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



Level 3 - Investments by Class:
	Three Months Ended March 31, 2017										Three Months Ended March 31, 2016
		Other Asset Backed Securities			Non-Agency RMBS			Total Investments			Other Asset Backed Securities			Non-Agency RMBS			Total Investments
Balance, beginning of period		$	65,990		$	696,713		$	762,703		$	—		$	488,884		$	488,884
Total gains/(losses) realized and unrealized:
Included in earnings		353			9,466			9,819			289			12,114			12,403
Included in other comprehensive income		(279		)	6,564			6,285			1,045			26,974			28,019
Purchases		—			9,851			9,851			—			91,875			91,875
Issuances		—			—			—			—			—			—
Sales		—			(79,319		)	(79,319		)	—			—			—
Settlements		(257		)	(9,536		)	(9,793		)	(255		)	(3,991		)	(4,246		)
Transfers into Level 3		—			22,078			22,078			70,707			23,848			94,555
Balance, end of period		$	65,807		$	655,817		$	721,624		$	71,786		$	639,704		$	711,490
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:
	Three Months Ended March 31, 2017									Three Months Ended March 31, 2016
	Interest Rate Swaps			Credit Derivatives			Total Derivatives			Interest Rate Swaps			Credit Derivatives			Total Derivatives
Balance, beginning of period	$	(84,933	)	$	(15,349	)	$	(100,282	)	$	(64,649	)	$	(34,543	)	$	(99,192	)
Total gains/(losses) realized and unrealized:
Included in earnings	(3,869		)	1,052			(2,817		)	(20,849		)	12,866			(7,983		)
Included in other comprehensive income	—			—			—			—			—			—
Purchases	—			—			—			—			—			—
Issuances	—			—			—			—			—			—
Sales	—			—			—			—			—			—
Settlements	710			(199		)	511			(2,467		)	(252		)	(2,719		)
Balance, end of period	$	(88,092	)	$	(14,496	)	$	(102,588	)	$	(87,965	)	$	(21,929	)	$	(109,894	)
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	$	(3,869	)	$	852		$	(3,017	)	$	(20,849	)	$	12,604		$	(8,245	)

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, 2017:
Total gains or losses included in earnings for the period	$	9,819	$	199	$	853	$	(3,869	)	$	246,590	$	(343	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		852		(3,869		)	246,590		(343		)

Three Months Ended March 31, 2016:
Total gains or losses included in earnings for the period	$	12,403	$	252	$	12,614	$	(20,849	)	$	251,856	$	(285	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		12,604		(20,849		)	251,856		(285		)