Financial Guarantee Insurance Contracts (Tables)

9 Months Ended

Sep. 30, 2013

Summary of Gross Premium Receivable Roll-Forward (Direct and Assumed Contracts)

Below is the gross premium receivable roll-forward (direct and assumed contracts) for the affected periods:


	Successor Ambac			Predecessor Ambac
	Period from May 1 through September 30, 2013			Period from January 1 through April 30, 2013			Period from January 1 through December 31, 2012
Beginning premium receivable	$	1,531,631		$	1,620,621		$	2,028,479
Premium payments received		(49,940	)		(48,296	)		(155,626	)
Adjustments for changes in expected life of homogeneous pools and actual changes to contractual cash flows		(70,900	)		(28,237	)		(299,906	)
Accretion of premium receivable discount		17,232			14,740			50,407
Uncollectible premiums		(14,800	)		(634	)		(28,031	)
Other adjustments (including foreign exchange)		22,787			(26,563	)		25,298

Ending premium receivable	$	1,436,010		$	1,531,631		$	1,620,621

Effect of Reinsurance on Premiums Written and Earned

The effect of reinsurance on premiums written and earned was as follows:


	Successor Ambac					Predecessor Ambac
	Three months ended September 30, 2013					Three Months Ended September 30, 2012
	Written			Earned		Written			Earned
Direct	($	34,380	)	$	73,997	($	55,310	)	$	117,864
Assumed		—			24		—			25
Ceded		(4,017	)		3,072		(2,082	)		4,815

Net premiums	($	30,363	)	$	70,949	($	53,228	)	$	113,074


	Successor Ambac					Predecessor Ambac
	Five Months Ended September 30, 2013					Four Months Ended April 30, 2013					Nine Months Ended September 30, 2012
	Written			Earned		Written			Earned		Written			Earned
Direct	($	68,461	)	$	136,029	($	14,125	)	$	138,468	($	175,777	)	$	323,658
Assumed		—			40		—			32		—			118
Ceded		(7,055	)		7,081		(1,098	)		8,500		(18,055	)		12,710

Net premiums	($	61,406	)	$	128,988	($	13,027	)	$	130,000	($	157,722	)	$	311,066

Summarized Future Gross Undiscounted Premiums Expected to be Collected and Future Expected Premiums Earned, Net of Reinsurance

The table below summarizes the future gross undiscounted premiums expected to be collected, and future expected premiums earned, net of reinsurance by Successor Ambac at September 30, 2013:


	Future premiums expected to be collected ⁽¹⁾		Future expected premiums to be earned, net of reinsurance ⁽¹⁾
Three months ended:
December 31, 2013	$	33,020	$	51,560

Twelve months ended:
December 31, 2014		125,309		186,459
December 31, 2015		125,159		167,106
December 31, 2016		118,632		154,135
December 31, 2017		112,526		143,323

Five years ended:
December 31, 2022		497,121		591,581
December 31, 2027		392,615		414,028
December 31, 2032		277,704		257,483
December 31, 2037		131,553		124,457
December 31, 2042		48,449		42,002
December 31, 2047		14,564		14,429
December 31, 2052		3,639		4,692
December 31, 2057		92		296

Total	$	1,880,383	$	2,151,551

(1)

The future premiums expected to be collected and future premiums expected to be earned, net of reinsurance disclosed in the above table relate to the discounted premium receivable asset and unearned premium liability recorded on Ambac’s balance sheet. The use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral is required in the calculation of the premium receivable as described above, which results in a higher premium receivable balance than if expected lives were considered. If installment paying policies are retired early premiums reflected in the premium receivable asset and amounts reported in the above table for such policies may not be collected in the future.

Summary of Loss Reserve Roll-Forward, Net of Subrogation Recoverable and Reinsurance

Below is the loss reserve roll-forward, net of subrogation recoverable and reinsurance, for the affected periods:


	Successor Ambac			Predecessor Ambac
	Period from May 1 through September 30, 2013			Period from January 1 through April 30, 2013			Period from January 1 through December 31, 2012
Beginning balance of loss and loss expense reserves, net of subrogation recoverable and reinsurance	$	5,434,517		$	5,974,731		$	6,230,780

Changes in the loss and loss expense reserves due to:
Current year:
Establishment of new loss and loss expense reserves, gross of RMBS subrogation and net of reinsurance		47,838			2,748			464,058
Claim and loss expense payments, net of subrogation and reinsurance		(163	)		(58	)		(20,765	)
Establishment of RMBS subrogation recoveries, net of reinsurance		(315	)		(159	)		—

Total current year		47,360			2,531			443,293


Prior years:
Change in previously established loss and loss expense reserves, gross of RMBS subrogation and net of reinsurance		(322,165	)		(52,642	)		72,700
Claim and loss (payments) recoveries, net of subrogation and reinsurance		(2,376	)		20,902			(944,860	)
Change in previously established RMBS subrogation recoveries, net of reinsurance		119,294			(12,596	)		172,818

Total prior years		(205,247	)		(44,336	)		(699,342	)

Net change in loss and loss expense reserves		(157,887	)		(41,805	)		(256,049	)
Net consolidation of certain VIE’s		—			(498,409	)		—

Ending loss and loss expense reserves, net of subrogation recoverable and reinsurance	$	5,276,630		$	5,434,517		$	5,974,731

Summary of Information Related to Policies Currently Included in Ambac's Loss Reserves or Subrogation Recoverable

The tables below summarize information related to policies currently included in Ambac’s loss reserves or subrogation recoverable at September 30, 2013 and December 31, 2012. The weighted average risk-free rate used to discount loss reserves at September 30, 2013 and December 31, 2012 was 2.9% and 1.6%, respectively.

Successor Ambac – Surveillance Categories (at September 30, 2013)


	I/SL			IA			II			III			IV			V			Total
Number of policies		18			43			27			76			144			1			309
Remaining weighted-average contract period (in years)		13			16			19			18			10			6			13
Gross insured contractual payments outstanding:
Principal	$	849,629		$	2,185,961		$	2,112,936		$	5,676,583		$	11,491,293		$	47		$	22,316,449
Interest		531,290			1,736,991			653,033			2,360,215			2,406,091			18			7,687,638

Total	$	1,380,919		$	3,922,952		$	2,765,969		$	8,036,798		$	13,897,384		$	65		$	30,004,087

Gross undiscounted claim liability	$	8,053		$	82,907		$	112,807		$	2,857,566		$	8,072,462		$	65		$	11,133,860
Discount, gross claim liability		(1,157	)		(8,757	)		(19,038	)		(1,143,340	)		(1,068,635	)		(4	)		(2,240,931	)

Gross claim liability before all subrogation and before reinsurance	$	6,896		$	74,150		$	93,769		$	1,714,226		$	7,003,827		$	61		$	8,892,929

Less:
Gross RMBS subrogation⁽¹⁾		—			—			—			(5,139	)		(2,366,105	)		—			(2,371,244	)
Discount, RMBS subrogation		—			—			—			14			9,374			—			9,388

Discounted RMBS subrogation, before reinsurance		—			—			—			(5,125	)		(2,356,731	)		—			(2,361,856	)

Less:
Gross other subrogation⁽²⁾		—			—			(17,834	)		(106,799	)		(717,871	)		—			(842,504	)
Discount, other subrogation		—			—			7,868			30,060			38,522			—			76,450

Discounted other subrogation, before reinsurance		—			—			(9,966	)		(76,739	)		(679,349	)		—			(766,054	)

Gross claim liability, net of all subrogation and discounts, before reinsurance	$	6,896		$	74,150		$	83,803		$	1,632,362		$	3,967,747		$	61		$	5,765,019

Less: Unearned premium reserves		(4,306	)		(43,904	)		(61,877	)		(282,949	)		(98,255	)		—			(491,291	)
Plus: Loss adjustment expenses reserves		—			86			1,778			2,469			121,994			—			126,327

Claim liability reported on Balance Sheet, before reinsurance⁽³⁾	$	2,590		$	30,332		$	23,704		$	1,351,882		$	3,991,486		$	61		$	5,400,055

Reinsurance recoverable reported on Balance Sheet	$	182		$	2,699		$	2,742		$	118,493		$	13,284		$	—		$	137,400

(1)	RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for representation and warranty breaches.

(2)	Other subrogation represents subrogation, including subrogation from RMBS transactions, other than subrogation as defined in (1) above.

(3)	Claim liability reported on the Balance Sheet, before reinsurance is included in the Consolidated Balance Sheets as follows:


Losses and loss expense reserve (net of potential subrogation recoveries of $1,971,883)	$	5,884,660
Subrogation recoverable (includes gross potential recovery of $1,156,027)		(484,605	)

	$	5,400,055

Predecessor Ambac – Surveillance Categories (at December 31, 2012)


	I/SL			IA			II			III			IV			V			Total
Number of policies		14			12			28			114			147			1			316
Remaining weighted-average contract period (in years)		15			21			18			20			8			6			13
Gross insured contractual payments outstanding:
Principal	$	311,157		$	786,998		$	1,245,793		$	9,161,747		$	12,554,628		$	47		$	24,060,370
Interest		166,276			715,129			379,237			4,905,775			3,076,746			20			9,243,183

Total	$	477,433		$	1,502,127		$	1,625,030		$	14,067,522		$	15,631,374		$	67		$	33,303,553

Gross undiscounted claim liability	$	2,135		$	40,898		$	49,521		$	4,051,076		$	7,976,765		$	67		$	12,120,462
Discount, gross claim liability		(219	)		(3,532	)		(3,247	)		(1,342,910	)		(788,720	)		(3	)		(2,138,631	)

Gross claim liability before all subrogation and before reinsurance	$	1,916		$	37,366		$	46,274		$	2,708,166		$	7,188,045		$	64		$	9,981,831

Less:
Gross RMBS subrogation⁽¹⁾		—			—			—			(16,170	)		(2,544,993	)		—			(2,561,163	)
Discount, RMBS subrogation		—			—			—			312			37,626			—			37,938

Discounted RMBS subrogation, before reinsurance		—			—			—			(15,858	)		(2,507,367	)		—			(2,523,225	)

Less:
Gross other subrogation⁽²⁾		—			—			—			(141,012	)		(766,717	)		—			(907,729	)
Discount, other subrogation		—			—			—			21,238			15,711			—			36,949

Discounted other subrogation, before reinsurance		—			—			—			(119,774	)		(751,006	)		—			(870,780	)

Gross claim liability, net of all subrogation and discounts, before reinsurance	$	1,916		$	37,366		$	46,274		$	2,572,534		$	3,929,672		$	64		$	6,587,826

Less: Unearned premium reserves		(1,179	)		(21,626	)		(17,120	)		(450,247	)		(113,622	)		—			(603,794	)
Plus: Loss adjustment expenses reserves	$	—		$	—		$	—		$	—		$	138,108		$	—		$	138,108

Claim liability reported on Balance Sheet, before reinsurance⁽³⁾	$	737		$	15,740		$	29,154		$	2,122,287		$	3,954,158		$	64		$	6,122,140

Reinsurance recoverable reported on Balance Sheet	$	—		$	1,078		$	7,085		$	128,333		$	22,590		$	—		$	159,086

(1)	RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for representation and warranty breaches.

(2)	Other subrogation represents subrogation, including subrogation from RMBS transactions, other than subrogation as defined in (1) above.

(3)	Claim liability reported on the Balance Sheet, before reinsurance is included in the Consolidated Balance Sheets as follows:


Losses and loss expense reserve (net of potential subrogation recoveries of $2,611,430)	$	6,619,486
Subrogation recoverable (includes gross potential recovery of $782,575)		(497,346	)

	$	6,122,140

Summary of Balance of Subrogation Recoveries and Related Claim Liabilities, by Estimation Approach

The balance of RMBS subrogation recoveries and the related claim liabilities, by estimation approach, at September 30, 2013 and December 31, 2012, are as follows:


	Successor Ambac – September 30, 2013
Approach	Count		Gross loss reserve before subrogation recoveries		Subrogation recoveries^{(1) (2)}			Gross loss reserve after subrogation recoveries
Adverse samples		27	$	2,235,026	$	(1,404,088	)	$	830,938
Random samples		21		1,096,081		(957,768	)		138,313

Totals		48	$	3,331,107	$	(2,361,856	)	$	969,251


	Predecessor Ambac – December 31, 2012
Approach	Count		Gross loss reserve before subrogation recoveries		Subrogation recoveries ^{(1) (2)}			Gross loss reserve after subrogation recoveries
Adverse samples		27	$	2,331,878	$	(1,442,817	)	$	889,061
Random samples		22		1,231,466		(1,080,408	)		151,058

Totals		49	$	3,563,344	$	(2,523,225	)	$	1,040,119

(1)

The amount of recorded subrogation recoveries related to each securitization is limited to ever-to-date paid losses plus projected paid losses for each policy. To the extent significant losses have been paid but not yet recovered, the recorded amount of RMBS subrogation recoveries may exceed the expected future claims for a given policy. The net cash inflow for these policies is recorded as a “Subrogation recoverable” asset. For those transactions where the subrogation recovery is less than expected future claims, the net cash outflow for these policies is recorded as a “Losses and loss expense reserve” liability.

(2)

The sponsor’s repurchase obligation may differ depending on the terms of the particular transaction and the status of the specific loan, such as whether it is performing or has been liquidated or charged off. The estimated subrogation recovery for these transactions is based primarily on loan level data provided through trustee reports received in the normal course of our surveillance activities or provided by the sponsor. While this data may not include all the components of the sponsor’s contractual repurchase obligation we believe it is the best information available to estimate the subrogation recovery.

Summary of Rollforward of RMBS Subrogation, by Estimation Approach

Below is the rollforward of RMBS subrogation, by estimation approach, for the affected periods:


	Random sample			Number of transactions			Adverse sample			Number of transactions			Total
Successor Ambac:
Discounted RMBS subrogation (gross of reinsurance) at May 1, 2013	$	1,004,252			20		$	1,478,666			29			2,482,918

Changes recognized through September 30, 2013:
Additional transactions reviewed		2,426			1			—			n/a			2,426
Additional adverse sample loans reviewed		—			n/a			—			n/a			—
Impact of sponsor actions ⁽¹⁾		—			n/a			—			n/a			—
All other changes ⁽²⁾		(48,910	)		n/a			(74,578	)		(2	)		(123,488	)

Discounted RMBS subrogation (gross of reinsurance) at September 30, 2013	$	957,768			21		$	1,404,088			27		$	2,361,856


Predecessor Ambac
Discounted RMBS subrogation (gross of reinsurance) at December 31, 2012	$	1,080,408			22		$	1,442,817			27		$	2,523,225

Changes recognized through April 30, 2013:
Additional transactions reviewed		—			n/a			—			n/a			—
Additional adverse sample loans reviewed		—			n/a			—			n/a			—
Impact of sponsor actions ⁽¹⁾		(54,195	)		n/a			—			n/a			(54,195	)
All other changes ⁽²⁾		(21,961	)		(2	)		35,849			2			13,888

Discounted RMBS subrogation (gross of reinsurance) at April 30, 2013	$	1,004,252			20		$	1,478,666			29		$	2,482,918


	Random sample			Number of transactions		Adverse sample			Number of transactions			Total
Predecessor Ambac:
Rollforward:
Discounted RMBS subrogation (gross of reinsurance) at January 1, 2012	$	1,262,794			16	$	1,457,472			30		$	2,720,266

Changes recognized in 2012: Additional transactions reviewed		54,467			6		(35,486	)		(1	)		18,981
Additional adverse sample loans reviewed		—			n/a		—			—			—
Adverse loans repurchased by the sponsor		—			n/a		35			—			35
All other changes ⁽¹⁾		(236,853	)		n/a		20,796			(2	)		(216,057	)

Discounted RMBS subrogation (gross of reinsurance) at December 31, 2012	$	1,080,408			22	$	1,442,817			27		$	2,523,225

(1)	Sponsor actions include loan repurchases, direct payments to Ambac, and other contributions from sponsors.

(2)

Other changes which may impact RMBS subrogation recoveries include changes in actual or projected collateral performance, changes in the creditworthiness of a sponsor, and/or the projected timing of recoveries. For the five months ended September 30, 2013, Successor Ambac added 1 transaction to the Random Sample subrogation population and removed 2 transactions from the Adverse Sample subrogation population; however, the impacts on RMBS subrogation disclosed in the Random Sample column relate to that, as well as other transactions. For the four months ended April 30, 2013, Predecessor Ambac transferred 2 transactions from the Random Sample population to the Adverse Sample population; however, the impacts on RMBS subrogation disclosed in the Adverse Sample column relate to those, as well as other transactions.

- Definition

Tabular disclosure of insured financial obligations with credit deterioration related to the claim liability on financial guarantee insurance contracts as of the end of each annual and interim reporting period detailing, at a minimum, the following for each surveillance category or grouping used to track and monitor the entity's insured financial obligations: (1) number of issued and outstanding financial guarantee insurance contracts; (2) remaining weighted average contract period; (3) insured contractual payments outstanding, segregating principal and interest; (4) gross claim liability; (5) gross potential recoveries; (6) net discount of both the claim liability and potential recoveries; (7) net claim liability; (8) reinsurance recoverable; and (9) unearned premium revenue.

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