Fair Value Measurements

6 Months Ended

Jun. 30, 2018

Fair Value Disclosures [Abstract]

Fair Value Measurements

7. FAIR VALUE MEASUREMENTS

The Fair Value Measurement Topic of the ASC establishes a framework for measuring fair value and disclosures about fair value measurements.

Fair Value Hierarchy:

The Fair Value Measurement Topic of the ASC specifies a fair value hierarchy based on whether the inputs to valuation techniques used to measure fair value are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Company-based assumptions. The fair value hierarchy prioritizes model inputs into three broad levels as follows:

l	Level 1	Quoted prices for identical instruments in active markets. Assets and liabilities classified as Level 1 include US Treasury and other foreign government obligations traded in highly liquid and transparent markets, exchange traded futures contracts, variable rate demand obligations and money market funds.
l	Level 2	Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Assets and liabilities classified as Level 2 generally include investments in fixed income securities representing municipal, asset-backed and corporate obligations, certain interest rate swap contracts and most long-term debt of variable interest entities consolidated under the Consolidation Topic of the ASC.
l	Level 3	Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. This hierarchy requires the use of observable market data when available. Assets and liabilities classified as Level 3 include credit derivative contracts, certain uncollateralized interest rate swap contracts, equity interests in Ambac sponsored special purpose entities and certain investments in fixed income securities. Additionally, Level 3 assets and liabilities generally include loan receivables, and certain long-term debt of variable interest entities consolidated under the Consolidation Topic of the ASC.

The following table sets forth the carrying amount and fair value of Ambac’s financial assets and liabilities as of June 30, 2018 and December 31, 2017, 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:
June 30, 2018:							Level 1		Level 2			Level 3
Financial assets:
Fixed income securities:
Municipal obligations	$	899,122		$	899,122		$	—	$	899,122		$	—
Corporate obligations	1,350,787			1,350,787			450		1,350,337			—
Foreign obligations	25,442			25,442			24,346		1,096			—
U.S. government obligations	82,413			82,413			82,413		—			—
Residential mortgage-backed securities	512,309			512,309			—		512,309			—
Collateralized debt obligations	65,457			65,457			—		65,457			—
Other asset-backed securities	579,397			579,397			—		510,595			68,802
Fixed income securities, pledged as collateral:
U.S. government obligations	84,641			84,641			84,641		—			—
Short term investments	393,447			393,447			314,070		79,377			—
Other investments (1)	394,396			378,471			59,834		—			21,571
Cash and cash equivalents	44,398			44,398			23,993		20,405			—
Loans	10,007			12,039			—		—			12,039
Derivative assets:
Interest rate swaps—asset position	56,147			56,147			—		9,208			46,939
Interest rate swaps—liability position	(161		)	(161		)	—		(161		)	—
Futures contracts	524			524			524		—			—
Other assets	5,255			5,255			—		—			5,255
Variable interest entity assets:
Fixed income securities: Corporate obligations	2,756,924			2,756,924			—		—			2,756,924
Restricted cash	1,052			1,052			1,052		—			—
Loans	10,751,199			10,751,199			—		—			10,751,199
Derivative assets: Currency swaps-asset position	60,403			60,403			—		60,403			—
Total financial assets	$	17,988,518		$	17,974,625		$	506,682	$	3,508,148		$	13,662,729
Financial liabilities:
Long term debt, including accrued interest	$	3,033,947		$	3,147,361		$	—	$	2,733,359		$	414,002
Derivative liabilities:
Credit derivatives	1,326			1,326			—		—			1,326
Interest rate swaps—asset position	—			—			—					—
Interest rate swaps—liability position	66,322			66,322			—		66,322			—
Liabilities for net financial guarantees written (2)	(463,146		)	1,022,545			—		—			1,022,545
Variable interest entity liabilities:
Long-term debt	11,454,746			11,454,746			—		8,937,108			2,517,638
Derivative liabilities: Interest rate swaps—liability position	1,992,227			1,992,227			—		1,992,227			—
Total financial liabilities	$	16,085,422		$	17,684,527		$	—	$	13,729,016		$	3,955,511

	Carrying Amount			Total Fair Value			Fair Value Measurements Categorized as:
December 31, 2017:							Level 1		Level 2			Level 3
Financial assets:
Fixed income securities:
Municipal obligations	$	779,834		$	779,834		$	—	$	779,834		$	—
Corporate obligations	860,075			860,075			450		859,625			—
Foreign obligations	26,543			26,543			25,615		928			—
U.S. government obligations	85,408			85,408			85,408		—			—
Residential mortgage-backed securities	2,251,333			2,251,333			—		1,515,316			736,017
Collateralized debt obligations	51,037			51,037			—		51,037			—
Other asset-backed securities	597,942			597,942			—		525,402			72,540
Fixed income securities, pledged as collateral:
U.S. government obligations	99,719			99,719			99,719		—			—
Short term investments	557,270			557,270			389,299		167,971			—
Other investments (1)	431,630			413,977			56,498		29,750			17,288
Cash and cash equivalents	623,703			623,703			615,073		8,630			—
Loans	10,358			10,284			—		—			10,284
Derivative assets:
Interest rate swaps—asset position	73,199			73,199			—		11,825			61,374
Other assets	5,979			5,979			—		—			5,979
Variable interest entity assets:
Fixed income securities: Corporate obligations	2,914,145			2,914,145			—		—			2,914,145
Restricted cash	978			978			978		—			—
Loans	11,529,384			11,529,384			—		—			11,529,384
Derivative assets: Currency swaps—asset position	54,877			54,877			—		54,877			—
Total financial assets	$	20,853,695		$	20,835,968		$	1,173,321	$	4,005,195		$	15,347,011
Financial liabilities:
Long term debt, including accrued interest	$	1,428,680		$	1,369,499		$	—	$	1,046,511		$	322,988
Derivative liabilities:
Credit derivatives	566			566			—		—			566
Interest rate swaps—asset position	(627		)	(627		)	—		(627		)	—
Interest rate swaps—liability position	81,495			81,495			—		81,495			—
Futures contracts	1,348			1,348			1,348		—			—
Liabilities for net financial guarantees written (2)	3,435,438			4,842,402			—		—			4,842,402
Variable interest entity liabilities:
Long-term debt	12,160,544			12,160,544			—		9,402,856			2,757,688
Derivative liabilities: Interest rate swaps—liability position	2,205,264			2,205,264			—		2,205,264			—
Total financial liabilities	$	19,312,708		$	20,660,491		$	1,348	$	12,735,499		$	7,923,644

(1) Excluded from the fair value measurement categories in the table above are investment funds of $297,066 and $310,441 as of June 30, 2018 and December 31, 2017, respectively, which are measured using NAV per share as a practical expedient.

(2) 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.

Determination of Fair Value:

When available, Ambac uses quoted active market prices specific to the financial instrument to determine fair value, and classifies such items within Level 1. The determination of fair value for financial instruments categorized in Level 2 or 3 involves significant judgment due to the complexity of factors contributing to the valuation. Third-party sources from which we obtain independent market quotes also use assumptions, judgments and estimates in determining financial instrument values and different third parties may use different methodologies or provide different values for financial instruments. In addition, the use of internal valuation models may require assumptions about hypothetical or inactive markets. As a result of these factors, the actual trade value of a financial instrument in the market, or exit value of a financial instrument position by Ambac, may be significantly different from its recorded fair value.

Ambac’s financial instruments carried at fair value are mainly comprised of investments in fixed income securities, equity interests in pooled investment funds, derivative instruments, variable interest entity assets and liabilities and interests in Ambac sponsored special purpose entities. Valuation of financial instruments is performed by Ambac’s finance group using methods approved by senior financial management with consultation from risk management and portfolio managers as appropriate. Preliminary valuation results are discussed with portfolio managers quarterly to assess consistency with market transactions and trends as applicable. Market transactions such as trades or negotiated settlements of similar positions, if any, are reviewed to validate fair value model results. However many of the financial instruments valued using significant unobservable inputs have very little or no observable market activity. Methods and significant inputs and assumptions used to determine fair values across portfolios are reviewed quarterly by senior financial management. Other valuation control procedures specific to particular portfolios are described further below.

We reflect Ambac’s own creditworthiness in the fair value of financial liabilities by including a credit valuation adjustment (“CVA”) in the determination of fair value. A decline (increase) in Ambac’s creditworthiness as perceived by market participants will generally result in a higher (lower) CVA, thereby lowering (increasing) the fair value of Ambac’s financial liabilities as reported.

Fixed Income Securities:

The fair values of fixed income investment securities are based primarily on market prices received from dealer quotes or alternative pricing sources with reasonable levels of price transparency. Because many fixed income securities do not trade on a daily basis, pricing sources apply available market information through processes such as matrix pricing to calculate fair value. Such prices generally consider a variety of factors, including recent trades of the same and similar securities. In those cases, the items are classified within Level 2. For those fixed income investments where quotes were not available or cannot be reasonably corroborated, fair values are based on internal valuation models. Key inputs to the internal valuation models generally include maturity date, coupon and yield curves for asset-type and credit rating characteristics that closely match those characteristics of the specific investment securities being valued. Items valued using valuation models are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be significant inputs that are readily observable. Longer (shorter) expected maturities or higher (lower) yields used in the valuation model will, in isolation, result in decreases (increases) in fair value. Generally, lower credit ratings or longer expected maturities will be accompanied by higher yields used to value a security. At June 30, 2018, approximately 4%, 94% and 2% of the fixed income investment portfolio (excluding variable interest entity investments) was valued using dealer quotes, alternative pricing sources with reasonable levels of price transparency and internal valuation models, respectively. At December 31, 2017, approximately 6%, 79% and 15% of the fixed income investment portfolio (excluding variable interest entity investments) was valued using dealer quotes, alternative pricing sources with reasonable levels of price transparency and internal valuation models, respectively. At December 31, 2017, among the investments valued using internal valuation models were Ambac insured securities for which projected cash flows consisted solely of Deferred Amounts and interest thereon. These securities were internally valued based upon the valuation of Ambac Assurance's surplus notes and comprised 13% of the portfolio at December 31, 2017.

Ambac performs various review and validation procedures to quoted and modeled prices for fixed income securities, including price variance analyses, missing and static price reviews, overall valuation analysis by senior traders and finance managers and reviews associated with our ongoing impairment analysis. Unusual prices identified through these procedures will be evaluated further against alternative third party quotes (if available) and/or internally modeled prices, and the pricing source values will be challenged as necessary. Price challenges generally result in the use of the pricing source’s quote as originally provided or as revised by the source following their internal diligence process. A price challenge may result in a determination by either the pricing source or Ambac management that the pricing source cannot provide a reasonable value for a security or cannot adequately support a quote, in which case Ambac would resort to using either other quotes or internal models. Results of price challenges are reviewed by senior traders and finance managers.

Information about the valuation inputs for fixed income securities classified as Level 3 is included below:

Residential mortgage-backed securities: A portion of these securities were guaranteed under policies that were subject to the Segregated Account Rehabilitation Plan and had projected future cash flows consisting solely of Deferred Amounts under such policies including interest thereon. As described in Note 1. Background and Business Description, upon consummation of the Rehabilitation Exit Transactions on February 12, 2018, all Deferred Amounts have been settled. The fair value of such securities classified as Level 3 was $0 and $709,950 at June 30, 2018 and December 31, 2017, respectively. Fair value was calculated based on the valuation of Ambac Assurance surplus notes which, under the terms of the Segregated Account Rehabilitation Plan, were to be redeemed in proportion with the payment of Deferred Amounts on or about the dates when such payments were to be made.

The remaining portion of Level 3 residential mortgage-backed securities as of December 31, 2017 is an Ambac-insured re-REMIC containing distressed mortgage-backed securities as collateral. This security was transfered from Level 3 to Level 2 during the second quarter of 2018. The fair value of this security was $26,067 as of December 31, 2017. Fair value was calculated using a discounted cash flow approach with expected future cash flows discounted using a yield consistent with the security type and rating. Significant inputs for the valuations at December 31, 2017 were as follows:

December 31, 2017
a. Coupon rate:	2.05%
b. Average Life:	0.65 years
c. Yield:	10.00%

Other asset-backed securities: These securities are a subordinated tranche of a resecuritization collateralized by Ambac-insured military housing bonds. The fair value of such securities classified as Level 3 was $68,802 and $72,540 at June 30, 2018 and December 31, 2017, respectively. Fair value was calculated using a discounted cash flow approach with expected future cash flows discounted using a yield consistent with the security type and rating. Significant inputs for the valuation at June 30, 2018 and December 31, 2017 include the following weighted averages:

June 30, 2018:		December 31, 2017:
a. Coupon rate:	5.97%	a. Coupon rate:	5.97%
b. Average Life:	16.65 years	b. Maturity:	17.02 years
c. Yield:	12.75%	c. Yield:	12.00%

Other Investments:

Other investments primarily relate to investments in pooled investment funds. The fair value of pooled investment funds is determined using dealer quotes or alternative pricing sources when such investments have readily determinable fair values. When fair value is not readily determinable, pooled investment funds are valued using the net asset value (“NAV”) per share as a practical expedient as permitted under the Fair Value Measurement Topic of the ASC. Refer to Note 8. Investments for additional information about such investments in pooled funds that are reported at fair value using NAV as a practical expedient.

Other investments also includes Ambac's equity interest in a non-consolidated VIE, which is carried under the equity method. Valuation of this equity interest is internally calculated using a discounted cash flow approach and is classified as Level 3.

Derivative Instruments:

Ambac’s derivative instruments primarily comprise interest rate and credit default swaps and exchange traded futures contracts. Fair value is determined based upon market quotes from independent sources, when available. When independent quotes are not available, fair value is determined using valuation models. These valuation models require market-driven inputs, including contractual terms, credit spreads and ratings on underlying referenced obligations, yield curves and tax-exempt interest ratios. The valuation of certain interest rate as well as all credit derivative contracts also require the use of data inputs and assumptions that are determined by management and are not readily observable in the market. Under the Fair Value Measurement Topic of the ASC, Ambac is required to consider its own credit risk when measuring the fair value of derivatives. Additional factors considered in estimating the amount of any Ambac CVA on such contracts include collateral posting provisions, right of set-off with the counterparty, the period of time remaining on the derivative and the pricing of recent terminations.

As described further below, the selection of a model to value a derivative depends on the contractual terms of, and specific risks inherent in the instrument as well as the availability of pricing information in the market.

Derivatives that are less complex may be valued primarily by reference to interest rates and yield curves that are observable and regularly quoted, such as interest rate swaps, for which we generally utilize vendor-developed models. These models provide the net present value of the derivatives based on contractual terms and observable market data. Downgrades of Ambac Assurance, as guarantor of the derivatives, have increased collateral requirements and triggered termination provisions in certain interest rate swaps. Termination activity since the initial rating downgrades of Ambac Assurance provided additional information about the replacement and/or exit value of certain derivatives, which has been incorporated into the fair value of these derivatives as appropriate. Generally, the need for counterparty (or Ambac) CVAs is mitigated by the existence of collateral posting agreements under which adequate collateral has been posted. Derivative contracts entered into with financial guarantee customers are not subject to collateral posting agreements. Counterparty credit risk related to such customer derivative assets is included in our fair value adjustments.

For derivatives that do not trade, or trade in less liquid markets such as credit derivatives, an internal model is generally used because such instruments tend to be unique, contain complex or heavily modified and negotiated terms and pricing information is not readily available in the market. Derivative fair value models and the related assumptions are continuously re-evaluated by management and enhanced, as appropriate, based on improvements in modeling techniques. Ambac has not made any significant changes to its modeling techniques or related model inputs for the periods presented.

Credit Derivatives (“CDS”):

Fair value of Ambac’s CDS is determined using internal valuation models and represents the hypothetical transfer cost of the contract calculated as the difference between the net present value of the projected fees receivable under the CDS and our estimate of the fees a financial guarantor of comparable credit quality would charge to provide the same protection at the balance sheet date. Financial guarantee contracts, including CDS, are typically priced to capture some portion of the spread that would be observed in the capital markets for the underlying (insured) obligation. Because of this relationship and in the absence of severe credit deterioration, changes in the fair value of our credit default swaps will generally be less than changes in the fair value of the underlying reference obligations.

Key variables used in the valuation of our credit derivatives include the balance of unpaid notional, expected term, fair values of the underlying reference obligations, reference obligation credit ratings and the CVA applied against Ambac Assurance liabilities by market participants. Notional balances, expected remaining term and reference obligation credit ratings are monitored and determined by Ambac’s portfolio risk management group. Fair values of the underlying reference obligations are obtained from broker quotes when available or are estimated internally using the same methodologies used to value Ambac’s fixed income securities in its investment portfolio.

Ambac reflects changes in reference obligation credit ratings within the fair value of its CDS contracts by changing the percentage of the obligation's market spread (over LIBOR) that would be captured as a CDS fee at the valuation date. We adjust this percentage (“relative change ratio”) in our valuations based on internal rating changes such that the resulting fair value liability of the CDS contract, excluding the effect of Ambac's own credit risk, will increase up to the full amount of the unrealized loss on the reference obligation as the credit rating declines. Ambac incorporates its own credit risk into the valuation of its CDS liabilities by applying a CVA to the calculations described above. The Ambac CVA represents the difference between the present value of the hypothetical fees discounted at LIBOR compared to discount rates that incorporate Ambac credit risk.

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 June 30, 2018 and December 31, 2017 is summarized below:

	June 30, 2018				December 31, 2017
Number of CDS transactions		2			2
Notional outstanding		$	311,237		$	325,890
Weighted average reference obligation price		98.1			99.3
Weighted average life (WAL) in years		6.1			6.5
Weighted average credit rating		A			A
Weighted average relative change ratio		23.4		%	23.6		%
CVA percentage		8.06		%	9.64		%
Fair value of derivative liabilities		$	1,326		$	566

The maximum potential amount of future payments under Ambac’s credit derivative contracts is generally the gross notional outstanding amount included in the above table plus future interest payments by the derivative reference obligations. Since Ambac’s credit derivatives typically reference obligations of or assets held by special purpose entities that meet the definition of a VIE, the amount of maximum potential future payments for credit derivatives is included in the table in Note 3. Variable Interest Entities.

Changes in fair value are recorded in “Net change in fair value of credit derivatives” on the Consolidated Statements of Total Comprehensive Income (Loss). Although CDS contracts are accounted for at fair value, they are surveilled similar to non-derivative financial guarantee contracts. As with financial guarantee insurance policies, Ambac’s Risk Management group tracks credit migration of CDS contracts’ reference obligations from period to period. Credits are assigned risk classifications by the Risk Management group. As of June 30, 2018, there are no CDS contracts on Ambac’s adversely classified credit listing.

Significant unobservable inputs for credit derivatives include WAL, internal credit rating, relative change ratio and CVA percentage. A longer (shorter) WAL, lower (higher) reference obligation credit rating, higher (lower) relative change ratio or lower (higher) CVA, in isolation, would result in an increase (decrease) in the fair value liability measurement. A change in an internal credit rating of a reference obligation in our model will generally result in a directionally opposite change in the relative change ratio. Also, a shorter (longer) WAL will generally correspond with a lower (higher) CVA percentage.

Financial Guarantees:

Fair value of net financial guarantees written represents our estimate of the cost to Ambac to completely transfer its insurance obligation to another market participant of comparable credit worthiness. In theory, this amount should be the same amount that another market participant of comparable credit worthiness would hypothetically charge in the market place, on a present value basis, to provide the same protection as of the balance sheet date. This fair value estimate of financial guarantees is presented on a net basis and includes direct and assumed contracts written, net of ceded reinsurance contracts.

The fair value estimate of financial guarantees is computed by utilizing cash flows calculated at the policy level. For direct and assumed contracts, net cash flows for each policy includes future: (i) installment premium receipts, (ii) gross claim payments, (iii) subrogation receipts, and, (iv) at December 31, 2017, unpaid claims on claims presented and not yet paid for policies allocated to the Segregated Account, including Deferred Amounts and interest thereon. The timing of future claim payments of the Segregated Account was at the sole discretion of the Rehabilitator until the Segregated Account rehabilitation was concluded on February 12, 2018. For ceded reinsurance contracts, net cash flows for each policy includes future: (i) installment ceded premium payments, (ii) ceding commission receipts, (iii) ceded claim receipts, and (iv) ceded subrogation payments. For each assumed,or ceded reinsurance contract, the respective undiscounted cash flow components are aggregated to determine if we are in a net asset or net liability position. U.S. GAAP requires that the nonperformance risk of a financial liability be included in the estimation of fair value, which includes considering Ambac Assurance’s own credit risk. Accordingly, for each contract in a net liability position, we estimate the fair value using internally developed discount rates and market pricing that incorporate Ambac’s own credit risk and subsequently apply a profit margin. This profit margin represents what another market participant would require to assume the financial guarantee contracts. A profit margin was developed based on discussions with the third-party institutions with valuation expertise and discussions with industry participants. The discount rates used for contracts in a net liability position are derived from the rates implicit in the fair value of surplus notes and guaranteed securities with future cash flows that are highly dependent upon Ambac financial guarantee payments. For each contract in a net asset position, we estimate the fair value using a discount rate that is commensurate with a hypothetical buyer’s cost of capital.

This methodology is based on management’s expectations of how a market participant would estimate net cash flows. We are aware of a number of factors that may cause such fair or exit value to differ, perhaps materially. For example, (i) since no financial guarantor with Ambac Assurance’s credit quality is writing or otherwise obtaining financial guarantee business (e.g. reinsurance or novation of policies from other insurers) we do not have access to observable pricing data points and (ii) at December 31, 2017, certain segments of Ambac's financial guarantees were allocated to the Segregated Account and timing of the payments of such liabilities were at the sole discretion of the Rehabilitator.

Long-term Debt:

Long-term debt includes Ambac Assurance senior surplus notes and junior surplus notes, notes outstanding to third parties arising from Ambac Assurance's Secured Borrowing transaction (redeemed in June 2018) and the Ambac Note and Tier 2 Notes issued in connection with the Rehabilitation Exit Transactions. The fair values of senior surplus notes, the Secured Borrowing notes, the Ambac Note and Tier 2 Notes are classified as Level 2. The fair value of junior surplus notes are classified as Level 3.

Other Financial Assets and Liabilities:

The fair values of Loans and Ambac’s equity interest in Ambac sponsored VIEs (included in Other assets) are estimated based upon internal valuation models and are classified as Level 3.

Variable Interest Entity Assets and Liabilities:

The financial assets and liabilities of VIEs consolidated under the Consolidation Topic of the ASC consist primarily of fixed income securities, loans, derivative and debt instruments and are generally carried at fair value. These consolidated VIEs are securitization entities which have liabilities and/or assets guaranteed by Ambac Assurance. The fair values of VIE debt instruments are determined using the same methodologies used to value Ambac’s fixed income securities in its investment portfolio as described above. VIE debt fair value is based on market prices received from dealer quotes or alternative pricing sources with reasonable levels of price transparency. Such quotes are considered Level 2 and generally consider a variety of factors, including recent trades of the same and similar securities. For those VIE debt instruments where quotes were not available, the debt instrument fair values are considered Level 3 and are based on internal discounted cash flow models. Comparable to the sensitivities of investments in fixed income securities described above, longer (shorter) expected maturities or higher (lower) yields used in the valuation model will, in isolation, result in decreases (increases) in fair value liability measurement for VIE debt. VIE debt instruments considered Level 3 include fixed rate, floating rate and zero coupon notes secured by various asset types, primarily European ABS. Information about the valuation inputs for the various VIE debt categories classified as Level 3 is as follows:

European ABS transactions: The fair value of such obligations classified as Level 3 was $2,517,638 and $2,757,688 at June 30, 2018 and December 31, 2017, respectively. Fair values were calculated by using a discounted cash flow approach. The discount rates used were based on the rates implied from the third party quoted values for comparable notes from the same securitization entity. Significant inputs for the valuation at June 30, 2018 and December 31, 2017 include the following weighted averages:

June 30, 2018:		December 31, 2017:
a. Coupon rate:	0.36%	a. Coupon rate:	0.40%
b. Maturity:	14.80 years	b. Maturity:	15.28 years
c. Yield:	5.84%	c. Yield:	4.82%

VIE derivative asset and liability fair values are determined using valuation models. When specific derivative contractual terms are available and may be valued primarily by reference to interest rates, foreign exchange rates and yield curves that are observable and regularly quoted, the derivatives are valued using vendor-developed models. Other derivatives within the VIEs that include significant unobservable valuation inputs are valued using internally developed models. VIE derivative fair value balances at June 30, 2018 and December 31, 2017 were developed using vendor-developed models and do not use significant unobservable inputs.

The fair value of VIE assets are obtained from market quotes when available. Typically VIE asset fair values are not readily available from market quotes and are estimated internally. The consolidated VIEs are securitization entities in which net cash flows from assets and derivatives (after adjusting for financial guarantor cash flows and other expenses) will be paid out to note holders or equity interests. Our valuation of VIE assets (fixed income securities or loans), therefore, are derived from the fair value of notes and derivatives, as described above, adjusted for the fair value of cash flows from Ambac’s financial guarantee. The fair value of financial guarantee cash flows include: (i) estimated future premiums discounted at a rate consistent with that implicit in the fair value of the VIE’s liabilities and (ii) internal estimates of future loss payments by Ambac discounted at a rate that includes Ambac’s own credit risk. Estimated future premium payments to be paid by the VIEs were discounted at a weighted average rate of 3.4% and 3.1% at June 30, 2018 and December 31, 2017, respectively. The value of future loss payments to be paid by Ambac to the VIEs was adjusted to include an Ambac CVA appropriate for the term of expected Ambac claim payments.

Additional Fair Value Information for Financial Assets and Liabilities Accounted for at Fair Value:

The following tables present the changes in the Level 3 fair value category for the periods presented in 2018 and 2017. 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, 2018:
Balance, beginning of period	$	77,630		$	5,621		$	49,908		$	2,955,763		$	11,558,331		$	(2,696,516	)	$	11,950,737
Total gains/(losses) realized and unrealized:
Included in earnings	282			(366		)	(2,682		)	(4,137		)	27,466			17,228			37,791
Included in other comprehensive income	(3,514		)	—			—			(177,107		)	(672,595		)	161,650			(691,566		)
Purchases	—			—			—			—			—			—			—
Sales	—			—			—			—			—			—			—
Settlements	(287		)	—			(1,613		)	(17,595		)	(162,003		)	—			(181,498		)
Transfers out of Level 3	(5,309		)	—			—			—			—			—			(5,309		)
Balance, end of period	$	68,802		$	5,255		$	45,613		$	2,756,924		$	10,751,199		$	(2,517,638	)	$	11,110,155
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	$	—		$	(366	)	$	(2,773	)	$	(4,137	)	$	27,466		$	17,228		$	37,418
Three Months Ended June 30, 2017:
Balance, beginning of period	$	721,624		$	7,039		$	(102,588	)	$	2,663,719		$	11,015,305		$	(2,716,642	)	$	11,588,457
Total gains/(losses) realized and unrealized:
Included in earnings	16,479			(348		)	54,115			(26,259		)	32,198			14,100			90,285
Included in other comprehensive income	10,812			—			—			100,783			402,842			(102,138		)	412,299
Purchases	25,930			—			—			—			—			—			25,930
Sales	—			—			—			—			—			—			—
Settlements	(9,163		)	—			101,202			(15,927		)	(149,047		)	462			(72,473		)
Balance, end of period	$	765,682		$	6,691		$	52,729		$	2,722,316		$	11,301,298		$	(2,804,218	)	$	12,044,498
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	$	—		$	(348	)	$	4,240		$	(26,259	)	$	32,198		$	14,100		$	23,931

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, 2018:
Balance, beginning of period	$	808,557		$	5,979		$	60,808		$	2,914,145		$	11,529,384		$	(2,757,688	)	$	12,561,185
Total gains/(losses) realized and unrealized:
Included in earnings	35,466			(724		)	(12,057		)	(73,163		)	(175,122		)	177,213			(48,387		)
Included in other comprehensive income	(56,022		)	—			—			(66,463		)	(248,703		)	57,773			(313,415		)
Purchases	—			—			—			—			—			—			—
Sales	—			—			—			—			—			—			—
Settlements	(713,890		)	—			(3,138		)	(17,595		)	(354,360		)	5,064			(1,083,919		)
Transfers out of Level 3	(5,309		)	—			—			—			—			—			(5,309		)
Balance, end of period	$	68,802		$	5,255		$	45,613		$	2,756,924		$	10,751,199		$	(2,517,638	)	$	11,110,155
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	$	—		$	(724	)	$	(12,254	)	$	(73,163	)	$	(175,122	)	$	177,213		$	(84,050	)
Six Months Ended June 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	26,298			(691		)	51,298			(31,454		)	378,390			(80,307		)	343,534
Included in other comprehensive income	17,097			—			—			147,131			586,391			(148,394		)	602,225
Purchases	35,781			—			—			—			—			—			35,781
Sales	(79,319		)	—			—			—			—			—			(79,319		)
Settlements	(18,956		)	—			101,713			(15,927		)	(322,446		)	6,703			(248,913		)
Transfers in Level 3	22,078			—			—			—			—			—			22,078
Balance, end of period	$	765,682		$	6,691		$	52,729		$	2,722,316		$	11,301,298		$	(2,804,218	)	$	12,044,498
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	$	—		$	(691	)	$	3,914		$	(31,454	)	$	378,390		$	(80,307	)	$	269,852

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 June 30, 2018									Three Months Ended June 30, 2017
	Other Asset Backed Securities			Non-Agency RMBS			Total Investments			Other Asset Backed Securities			Non-Agency RMBS			Total Investments
Balance, beginning of period	$	72,321		$	5,309		$	77,630		$	65,807		$	655,817		$	721,624
Total gains/(losses) realized and unrealized:
Included in earnings	282			—			282			356			16,123			16,479
Included in other comprehensive income	(3,514		)	—			(3,514		)	(555		)	11,367			10,812
Purchases	—			—			—			—			25,930			25,930
Sales	—			—			—			—			—			—
Settlements	(287		)	—			(287		)	(242		)	(8,921		)	(9,163		)
Transfers out of Level 3	—			(5,309		)	(5,309		)	—			—			—
Balance, end of period	$	68,802		$	—		$	68,802		$	65,366		$	700,316		$	765,682
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:
	Six Months Ended June 30, 2018									Six Months Ended June 30, 2017
	Other Asset Backed Securities			Non-Agency RMBS			Total Investments			Other Asset Backed Securities			Non-Agency RMBS			Total Investments
Balance, beginning of period	$	72,540		$	736,017		$	808,557		$	65,990		$	696,713		$	762,703
Total gains/(losses) realized and unrealized:
Included in earnings	739			34,727			35,466			709			25,589			26,298
Included in other comprehensive income	(3,884		)	(52,138		)	(56,022		)	(834		)	17,931			17,097
Purchases	—			—			—			—			35,781			35,781
Sales	—			—			—			—			(79,319		)	(79,319		)
Settlements	(593		)	(713,297		)	(713,890		)	(499		)	(18,457		)	(18,956		)
Transfers into Level 3	—			—			—			—			22,078			22,078
Transfers out of Level 3	—			(5,309		)	(5,309		)	—			—			—
Balance, end of period	68,802			—			68,802			65,366			700,316			765,682
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 June 30, 2018									Three Months Ended June 30, 2017
	Interest Rate Swaps			Credit Derivatives			Total Derivatives			Interest Rate Swaps			Credit Derivatives			Total Derivatives
Balance, beginning of period	$	50,926		$	(1,018	)	$	49,908		$	(88,092	)	$	(14,496	)	$	(102,588	)
Total gains/(losses) realized and unrealized:
Included in earnings	(2,465		)	(217		)	(2,682		)	47,491			6,624			54,115
Included in other comprehensive income	—			—			—			—			—			—
Purchases	—			—			—			—			—			—
Sales	—			—			—			—			—			—
Settlements	(1,522		)	(91		)	(1,613		)	102,336			(1,134		)	101,202
Balance, end of period	$	46,939		$	(1,326	)	$	45,613		$	61,735		$	(9,006	)	$	52,729
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	$	(2,465	)	$	(308	)	$	(2,773	)	$	4,049		$	191		$	4,240

Level 3 - Derivatives by Class:
	Six Months Ended June 30, 2018									Six Months Ended June 30, 2017
	Interest Rate Swaps			Credit Derivatives			Total Derivatives			Interest Rate Swaps			Credit Derivatives			Total Derivatives
Balance, beginning of period	$	61,374		$	(566	)	$	60,808		$	(84,933	)	$	(15,349	)	$	(100,282	)
Total gains/(losses) realized and unrealized:
Included in earnings	(11,494		)	(563		)	(12,057		)	43,622			7,676			51,298
Included in other comprehensive income	—			—			—			—			—			—
Purchases	—			—			—			—			—			—
Sales	—			—			—			—			—			—
Settlements	(2,941		)	(197		)	(3,138		)	103,046			(1,333		)	101,713
Balance, end of period	$	46,939		$	(1,326	)	$	45,613		$	61,735		$	(9,006	)	$	52,729
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	$	(11,494	)	$	(760	)	$	(12,254	)	$	3,863		$	51		$	3,914

Invested assets and VIE long-term debt are transferred into Level 3 when internal valuation models that include significant unobservable inputs are used to estimate fair value. All such securities that have internally modeled fair values have been classified as Level 3. Non-agency RMBS securities transferred from Level 2 into Level 3 in 2017, and out of Level 3 into Level 2 in 2018, consist of an Ambac-insured re-REMIC collateralized by distressed mortgage-backed securities.

Derivative instruments are transferred into Level 3 when the use of unobservable inputs becomes significant to the overall valuation. There were no transfers of derivative instruments into or out of Level 3 in the periods disclosed.

There were no transfers between Level 1 and Level 2 for the periods presented. All transfers between fair value hierarchy Levels 1, 2, and 3 are recognized at the beginning of each accounting period.

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, 2018:
Total gains or losses included in earnings for the period	$	282	$	91	$	(308	)	$	(2,465	)	$	40,557		$	(366	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		(308		)	(2,465		)	40,557			(366		)
Three Months Ended June 30, 2017:
Total gains or losses included in earnings for the period	$	16,479	$	1,134	$	5,490		$	47,491		$	20,039		$	(348	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		191			4,049			20,039			(348		)
Six Months Ended June 30, 2018:
Total gains or losses included in earnings for the period	$	35,466	$	197	$	(760	)	$	(11,494	)	$	(71,072	)	$	(724	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		(760		)	(11,494		)	(71,072		)	(724		)
Six Months Ended June 30, 2017:
Total gains or losses included in earnings for the period	$	26,298	$	1,333	$	6,343		$	43,622		$	266,629		$	(691	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		51			3,863			266,629			(691		)