Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 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 September 30, 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:
September 30, 2017:	Carrying Amount			Total Fair Value			Level 1		Level 2			Level 3
Financial assets:
Fixed income securities:
Municipal obligations	$	539,254		$	539,254		$	—	$	539,254		$	—
Corporate obligations	1,285,468			1,285,468			—		1,285,468			—
Foreign obligations	30,210			30,210			29,271		939			—
U.S. government obligations	89,824			89,824			89,824		—			—
Residential mortgage-backed securities	2,279,639			2,279,639			—		1,568,968			710,671
Collateralized debt obligations	90,925			90,925			—		90,925			—
Other asset-backed securities	662,798			662,798			—		597,660			65,138
Fixed income securities, pledged as collateral:
Short-term	99,424			99,424			99,424		—			—
Short term investments	716,516			716,516			412,681		303,835			—
Other investments ⁽¹⁾	439,987			423,971			68,318		40,050			17,661
Cash and cash equivalents	107,018			107,018			63,115		43,903			—
Loans	10,390			10,370			—		—			10,370
Derivative assets:
Interest rate swaps—asset position	75,051			75,051			—		13,001			62,050
Futures contracts	2,236			2,236			2,236		—			—
Other assets	6,337			6,337			—		—			6,337
Variable interest entity assets:
Fixed income securities:
Corporate obligations	2,785,608			2,785,608			—		—			2,785,608
Restricted cash	37,793			37,793			37,793		—			—
Loans	11,557,788			11,557,788			—		—			11,557,788
Derivative assets:
Currency swaps-asset position	57,714			57,714			—		57,714			—
Total financial assets	$	20,873,980		$	20,857,944		$	802,662	$	4,541,717		$	15,215,623
Financial liabilities:
Long term debt, including accrued interest	$	1,405,670		$	1,392,295		$	—	$	1,053,453		$	338,842
Derivative liabilities:
Credit derivatives	8,961			8,961			—		—			8,961
Interest rate swaps—asset position	(1,152		)	(1,152		)	—		(1,152		)	—
Interest rate swaps—liability position	83,090			83,090			—		83,090			—
Liabilities for net financial guarantees written⁽²⁾	3,302,677			5,187,773			—		—			5,187,773
Variable interest entity liabilities:
Long-term debt	12,229,569			12,229,569			—		9,283,185			2,946,384
Derivative liabilities:
Interest rate swaps—liability position	2,088,922			2,088,922			—		2,088,922			—
Total financial liabilities	$	19,117,737		$	20,989,458		$	—	$	12,507,498		$	8,481,960



	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 ⁽¹⁾	450,307			435,237			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		$	20,032,169		$	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 ⁽²⁾	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)	Excluded from the fair value measurement categories in the table above are investment funds of $297,942 and $336,513 as of September 30, 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 September 30, 2017 and December 31, 2016 is summarized below:



	September 30, 2017				December 31, 2016
Notional outstanding		$	397,003		$	737,380
Weighted average reference obligation price		93.7			93.5
Weighted average life (WAL) in years		6.5			5.2
Weighted average credit rating		BBB+			A-
Weighted average relative change ratio		29.4		%	31.6		%
CVA percentage		8.41		%	11.14		%
Fair value of derivative liabilities		$	8,961		$	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 September 30, 2017:
Balance, beginning of period	$	765,682		$	6,691		$	52,729		$	2,722,316		$	11,301,298		$	(2,804,218	)	$	12,044,498
Total gains/(losses) realized and unrealized:
Included in earnings	8,330			(354		)	2,031			(18,064		)	137,513			(62,887		)	66,569
Included in other comprehensive income	8,557			—			—			81,356			327,087			(84,793		)	332,207
Purchases	—			—			—			—			—			—			—
Settlements	(6,760		)	—			(1,671		)	—			(208,110		)	5,514			(211,027		)
Transfers into Level 3	—			—			—			—			—			—			—
Transfers out of Level 3	—			—			—			—			—			—			—
Balance, end of period	$	775,809		$	6,337		$	53,089		$	2,785,608		$	11,557,788		$	(2,946,384	)	$	12,232,247
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	$	—		$	(354	)	$	1,889		$	(18,064	)	$	137,513		$	(62,887	)	$	58,097

Three Months Ended September 30, 2016:
Balance, beginning of period	$	722,670		$	8,687		$	(104,032	)	$	2,577,293		$	11,074,772		$	(2,258,009	)	$	12,021,381
Total gains/(losses) realized and unrealized:
Included in earnings	15,804			(958		)	(12,220		)	307,147			690,431			(378,139		)	622,065
Included in other comprehensive income	12,334			—			—			(55,755		)	(221,934		)	49,126			(216,229		)
Purchases	7,126			—			—			—			—			—			7,126
Settlements	(5,460		)	—			(2,854		)	—			(66,503		)	3,722			(71,095		)
Transfers into Level 3	—			—			—			—			—			—			—
Transfers out of Level 3	—			—			—			—			—			—			—
Balance, end of period	$	752,474		$	7,729		$	(119,106	)	$	2,828,685		$	11,476,766		$	(2,583,300	)	$	12,363,248
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	$	—		$	(958	)	$	(12,450	)	$	307,147		$	690,431		$	(378,139	)	$	606,031




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
Nine Months Ended September 30, 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	34,628			(1,045		)	53,329			(49,518		)	515,904			(143,194		)	410,104
Included in other comprehensive income	25,654			—			—			228,487			913,477			(233,187		)	934,431
Purchases	35,781			—			—			—			—			—			35,781
Sales	(79,319		)	—			—			—			—			—			(79,319		)
Settlements	(25,716		)	—			100,042			(15,927		)	(530,556		)	12,217			(459,940		)
Transfers into Level 3	22,078			—			—			—			—			—			22,078
Transfers out of Level 3	—			—			—			—			—			—			—
Balance, end of period	$	775,809		$	6,337		$	53,089		$	2,785,608		$	11,557,788		$	(2,946,384	)	$	12,232,247
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	$	—		$	(1,045	)	$	5,640		$	(49,518	)	$	515,904		$	(143,194	)	$	327,787

Nine Months Ended September 30, 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	42,823			(967		)	(23,250		)	571,739			1,367,063			(712,696		)	1,244,712
Included in other comprehensive income	35,570			—			—			(331,610		)	(1,385,893		)	355,086			(1,326,847		)
Purchases	99,018			—			—			—			—			—			99,018
Settlements	(14,619		)	—			3,336			—			(194,728		)	216,582			10,571
Transfers in Level 3	100,798			—			—			—			—			—			100,798
Transfers out of Level 3	—			—			—			—			—			737,898			737,898
Balance, end of period	$	752,474		$	7,729		$	(119,106	)	$	2,828,685		$	11,476,766		$	(2,583,300	)	$	12,363,248
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	$	—		$	(967	)	$	(24,026	)	$	571,739		$	1,367,063		$	(712,696	)	$	1,201,113

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 September 30, 2017									Three Months Ended September 30, 2016
	Other Asset Backed Securities			Non-Agency RMBS			Total Investments			Other Asset Backed Securities			Non-Agency RMBS			Total Investments
Balance, beginning of period	$	65,366		$	700,316		$	765,682		$	71,820		$	650,850		$	722,670
Total gains/(losses) realized and unrealized:
Included in earnings	420			7,910			8,330			999			14,805			15,804
Included in other comprehensive income	(383		)	8,940			8,557			336			11,998			12,334
Purchases	—			—			—			—			7,126			7,126
Settlements	(265		)	(6,495		)	(6,760		)	(256		)	(5,204		)	(5,460		)
Transfers into Level 3	—			—			—			—			—			—
Transfers out of Level 3	—			—			—			—			—			—
Balance, end of period	$	65,138		$	710,671		$	775,809		$	72,899		$	679,575		$	752,474
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:
	Nine Months Ended September 30, 2017									Nine Months Ended September 30, 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	1,129			33,499			34,628			1,560			41,263			42,823
Included in other comprehensive income	(1,217		)	26,871			25,654			1,401			34,169			35,570
Purchases	—			35,781			35,781			—			99,018			99,018
Sales	—			(79,319		)	(79,319		)	—			—			—
Settlements	(764		)	(24,952		)	(25,716		)	(769		)	(13,850		)	(14,619		)
Transfers into Level 3	—			22,078			22,078			70,707			30,091			100,798
Transfers out of Level 3	—			—			—			—			—			—
Balance, end of period	65,138			710,671			775,809			72,899			679,575			752,474
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 September 30, 2017									Three Months Ended September 30, 2016
	Interest Rate Swaps			Credit Derivatives			Total Derivatives			Interest Rate Swaps			Credit Derivatives			Total Derivatives
Balance, beginning of period	$	61,735		$	(9,006	)	$	52,729		$	(85,825	)	$	(18,207	)	$	(104,032	)
Total gains/(losses) realized and unrealized:
Included in earnings	1,852			179			2,031			(13,953		)	1,733			(12,220		)
Settlements	(1,537		)	(134		)	(1,671		)	(2,628		)	(226		)	(2,854		)
Transfers into Level 3	—			—			—			—			—			—
Transfers out of Level 3	—			—			—			—			—			—
Balance, end of period	$	62,050		$	(8,961	)	$	53,089		$	(102,406	)	$	(16,700	)	$	(119,106	)
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	$	1,852		$	37		$	1,889		$	(13,953	)	$	1,503		$	(12,450	)




Level 3 - Derivatives by Class:
	Nine Months Ended September 30, 2017:									Nine Months Ended September 30, 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	45,474			7,855			53,329			(41,804		)	18,554			(23,250		)
Settlements	101,509			(1,467		)	100,042			4,047			(711		)	3,336
Transfers into Level 3	—			—			—			—			—			—
Transfers out of Level 3	—			—			—			—			—			—
Balance, end of period	$	62,050		$	(8,961	)	$	53,089		$	(102,406	)	$	(16,700	)	$	(119,106	)
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	$	5,715		$	(75	)	$	5,640		$	(41,804	)	$	17,778		$	(24,026	)

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 September 30, 2017:
Total gains or losses included in earnings for the period	$	8,330	$	134	$	45		$	1,852		$	56,562	$	(354	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		37			1,852			56,562		(354		)

Three Months Ended September 30, 2016:
Total gains or losses included in earnings for the period	$	15,804	$	226	$	1,507		$	(13,953	)	$	619,439	$	(958	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		1,503			(13,953		)	619,439		(958		)

Nine Months Ended September 30, 2017:
Total gains or losses included in earnings for the period	$	34,628	$	1,467	$	6,388		$	45,474		$	323,192	$	(1,045	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		(75		)	5,715			323,192		(1,045		)

Nine Months Ended September 30, 2016:
Total gains or losses included in earnings for the period	$	42,823	$	711	$	17,843		$	(41,804	)	$	1,226,106	$	(967	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		17,778			(41,804		)	1,226,106		(967		)