XML 16 R12.htm IDEA: XBRL DOCUMENT v2.3.0.15
Special Purposes Entities, Including Variable Interest Entities
9 Months Ended
Sep. 30, 2011
Special Purposes Entities, Including Variable Interest Entities [Abstract] 
Special Purposes Entities, Including Variable Interest Entities

(4) Special Purpose Entities, Including Variable Interest Entities

Ambac has engaged in transactions with special purpose entities, including VIEs, in various capacities. Ambac most commonly has provided financial guarantees, including credit derivative contracts, for various debt obligations issued by special purpose entities, including VIEs. Ambac has also sponsored two special purpose entities that issued medium-term notes to fund the purchase of certain financial assets. Finally, Ambac is an investor in collateralized debt obligations, mortgage-backed and other asset-backed securities issued by VIEs and its ownership interest is generally insignificant to the VIE and/or Ambac does not have rights that direct the activities that are most significant to such VIE.

Financial Guarantees:

Ambac has provided financial guarantees in respect of assets held or debt obligations of special purpose entities, including VIEs. Ambac's primary variable interest exists through this financial guarantee insurance or credit derivative contract. The transaction structure provides certain financial protection to Ambac. This financial protection can take several forms; however, the most common are over-collateralization, first loss and excess spread. In the case of over-collateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the debt obligations guaranteed by Ambac Assurance), the structure allows the transaction to experience defaults among the securitized assets before a default is experienced on the debt obligations that have been guaranteed by Ambac Assurance. In the case of first loss, the financial guarantee insurance policy only covers a senior layer of losses on assets held or debt issued by special purpose entities, including VIEs. The first loss with respect to the assets is either retained by the asset seller or sold off in the form of equity or mezzanine debt to other investors. In the case of excess spread, the securitized assets contributed to special purpose entities, including VIEs, generate interest cash flows that are in excess of the interest payments on the related debt; such excess cash flow is applied to redeem debt, thus creating over-collateralization. Generally, upon deterioration in the performance of a transaction or upon an event of default as specified in the transaction legal documents, Ambac will obtain certain loss remediation rights. These rights enable Ambac to direct the activities of the entity that most significantly impact the entity's economic performance.

 

We determined that Ambac generally has the obligation to absorb the VIE's expected losses given that we have issued financial guarantees supporting the liabilities (and in certain cases assets) of a VIE. We also determined for certain transactions that experienced the aforementioned performance deterioration, that we had the power, through voting rights or similar rights, to direct the activities of certain VIEs that most significantly impact the VIE's economic performance because: a) certain triggers had been breached in these transactions resulting in Ambac having the ability to exercise certain loss remediation activities, or b) due to the passive nature of the VIEs' activities, Ambac's contingent loss remediation rights upon a breach of certain triggers in the future is considered to be the power to direct the activities that most significantly impact the VIEs' economic performance.

Ambac Sponsored VIEs:

A subsidiary of Ambac has transferred financial assets to two special purpose entities. The business purpose of these entities is to provide certain financial guarantee clients with funding for their debt obligations. These special purpose entities are legal entities that are demonstrably distinct from Ambac. Ambac, its affiliates or its agents cannot unilaterally dissolve these entities. The permitted activities of these entities are limited to those outlined below. As a result of the adoptions of both ASU-2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets and ASU 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprise Involved with Variable Interest Entities, effective on January 1, 2010, Ambac was required to consolidate these VIEs. As a result of the Rehabilitation Proceedings of the Segregated Account on March 24, 2010, Ambac was required to deconsolidate these entities because Ambac's policies issued to these entities have been allocated to the Segregated Account. The consolidation of these entities did not have any effects on Ambac's beginning retained earnings as these entities were accounted for at fair value before initial consolidation. Prior to 2010 and upon deconsolidation, Ambac has elected to account for its equity interest in these entities at fair value under the fair value option in accordance with ASC Topic 825, Financial Instruments. We believe that the fair value of the investments in these entities provides for greater transparency for recording profit or loss as compared to the equity method under ASC Topic 323, Investments – Equity Method in Joint Ventures. At September 30, 2011 and December 31, 2010 the fair value of these entities is $17,332 and $17,909, respectively and is reported within Other Assets within the Consolidated Balance Sheets. The change in fair value of these entities is ($1,119) and ($1,753) for the three months ended September 30, 2011 and 2010, respectively, and ($577) and ($85) for the nine months ended September 30, 2011 and 2010, respectively. For the nine months ended September 30, 2011 and the six months ended September 30, 2010, income from these entities is included within Financial Guarantee: Other (loss) income on the Consolidated Statement of Operations. For the three months ended March 31, 2010, while the entities were consolidated, income was included in Financial Guarantee: Income (loss) on variable interest entities on the Consolidated Statements of Operations.

Since their inception, there have been 15 individual transactions with these entities, of which 5 transactions were outstanding as of September 30, 2011 and December 31, 2010. Total principal amount of debt outstanding was $583,497 and $588,967 at September 30, 2011 and December 31, 2010, respectively. In each case, Ambac sold assets to these entities. The assets are composed of asset-backed securities and utility obligations with a weighted average rating of A- at September 30, 2011 and weighted average life of 9.0 years. At December 31, 2010, the weighted average rate was BBB+ and weighted average life was 9.0 years. The purchase by these entities was financed through the issuance of medium-term notes ("MTNs"), which are cross-collateralized by the purchased assets. The MTNs have the same expected weighted average life as the purchased assets. Derivative contracts (interest rate swaps) are used within the entities for economic hedging purposes only. Hedges are established at the time MTNs are issued to purchase financial assets. The activities of these entities are contractually limited to purchasing assets from Ambac, issuing MTNs to fund such purchase, executing derivative hedges and obtaining financial guarantee policies with respect to indebtedness incurred. As of September 30, 2011 and December 31, 2010 Ambac Assurance had financial guarantee insurance policies issued for all assets, MTNs and derivative contracts owned and outstanding by the entities.

Insurance premiums paid to Ambac Assurance by these entities are earned in a manner consistent with other insurance policies, over the risk period. Additionally, any losses incurred on such insurance policies are included in Ambac's Consolidated Statements of Operations. Under the terms of an Administrative Agency Agreement, Ambac provides certain administrative duties, primarily collecting amounts due on the obligations and making interest payments on the MTNs.

There were no assets sold to these entities during the three and nine months ended September 30, 2011 and 2010. Ambac Assurance earned premiums for issuing the financial guarantee policies on the assets, MTNs and derivative contracts of $180 and $544 for the three months ended September 30, 2011 and 2010, respectively; and $607 and $1,941 for the nine months ended September 30, 2011 and 2010, respectively. Ambac paid no claims to these entities under its financial guarantee policies during the three and nine months ended September 30, 2011 and the three months ended September 30, 2010. For the nine months ended September 30, 2010 Ambac paid claims of $24,411 to these entities. Ambac also earned fees for providing other services amounting to $12 and $12 for the three months ended September 30, 2011 and 2010, respectively; and $35 and $47 for the nine months ended September 30, 2011 and 2010, respectively.

 

Derivative contracts are provided by Ambac Financial Services to these entities. Consistent with other non-hedging derivatives, Ambac Financial Services accounts for these contracts on a trade date basis at fair value. Ambac Financial Services paid $170 and received $25 for the three months ended September 30, 2011 and 2010, respectively; and received $3,905 and $6,335 for the nine months ended September 30, 2011 and 2010, respectively, under these derivative contracts.

Consolidation of VIEs:

Except for consolidations resulting from the adoption of ASU 2009-17 on January 1, 2010, upon initial consolidation of a VIE, we recognize a gain or loss in earnings for the difference between: a) the fair value of the consideration paid, the fair value of any non-controlling interests and the reported amount of any previously held interests and b) the net amount, as measured on a fair value basis, of the assets and liabilities consolidated. Upon deconsolidation of a VIE, we recognize a gain or loss for the difference between: a) the fair value of any consideration received, the fair value of any retained non-controlling investment in the VIE and the carrying amount of any non-controlling interest in the VIE and b) the carrying amount of the VIE's assets and liabilities. Gains or losses from consolidation and deconsolidation that are reported in earnings are reported within Financial Guarantee: Income (loss) on variable interest entities.

Upon the adoption of ASU 2009-17, Ambac generally measured the assets and liabilities of newly consolidated VIEs at fair value, as the carrying amount transition method was not practical. The carrying amount transition method (whereby assets, liabilities, and non-controlling interests of the VIE are recorded in amounts that would have been carried in the consolidated financial statements if ASU 2009-17 had been effective when Ambac first met the conditions to be the primary beneficiary) was used for one VIE. Ambac has elected to account for the financial assets and liabilities of the VIEs which were consolidated at fair value under the fair value option in accordance with ASC Topic 825, Financial Instruments in subsequent periods. The fair value option is elected to allow for consistency in the measurement attributes of assets and liabilities of these VIEs. For VIEs where the assets, liabilities, and non-controlling interests were measured at initial consolidation under the carrying amount transition method, balances continue to be measured and reported based on other applicable GAAP guidance.

Impact of ASU 2009-17 and ASU 2009-16

As a result of adopting ASU 2009-17, a cumulative effect gain adjustment of $705,046 was recorded as a net increase to total equity as of January 1, 2010, which includes changes to the opening balance of retained earnings and accumulated other comprehensive loss, net of taxes as Ambac was required to consolidate 83 additional VIEs. The types of entities that Ambac was required to consolidate included: (i) RMBS securitization trusts as a result of financial guarantee insurance policies on the senior debt of such trusts; (ii) collateralized debt obligation trusts as a result of credit derivative financial guarantee contracts issued to investors of the debt of such trust; (iii) international and other asset-backed securitizations as a result of insurance policies on the debt of such financing entities; and (iv) other transactions, including the Ambac sponsored special purpose entities, Juneau and Aleutian. The net impact of consolidating these VIEs on Ambac's balance sheet at adoption of ASU 2009-17 and ASU 2009-16 was as follows:

 

  •  

Ambac was required to recognize the assets and liabilities of the VIE. The aggregate amount of the VIE assets and liabilities recorded upon adoption were generally recognized at fair value as described above.

 

  •  

For a financial guarantee policy issued to a consolidated VIE, Ambac does not reflect the financial guarantee insurance policy in accordance with the related insurance accounting rules under ASC Topic 944, Financial Services—Insurance. The financial guarantee policy would be eliminated upon consolidation. Consequently, Ambac eliminated insurance assets (premium receivables, reinsurance recoverables, deferred ceded premium, subrogation recoverable and deferred acquisition costs) and insurance liabilities (unearned premiums, loss and loss expense reserves and ceded premiums payable) from the Consolidated Balance Sheet.

 

  •  

For VIEs consolidated as a result of Ambac's credit derivative transactions, the consolidation results in offsetting increases to assets and liabilities with no transition effect. The credit derivative liabilities remained on Ambac's consolidated financial statements and were not eliminated upon the consolidation of the VIE because Ambac's credit derivative contracts are not entered into directly with the VIE, but rather entered into with third parties, typically the holders of the notes issued by the VIEs.

 

  •  

For investment securities owned by Ambac that are debt instruments issued by the VIE, the investment securities balance is eliminated upon consolidation.

 

The impact of the above items upon adoption of ASU 2009-17 and ASU 2009-16 on January 1, 2010 is summarized below:

 

Addition of VIE assets

    $ 23,112,303   

Addition of VIE liabilities

      (22,798,176 ) 
  

 

 

  

Net VIE assets added upon adoption

      314,127   
  

 

 

  

Elimination of insurance assets

      (833,716 ) 

Elimination of insurance liabilities

      1,269,477   
  

 

 

  

Net insurance liabilities eliminated upon adoption

      435,761   
  

 

 

  

Elimination of intercompany invested assets

      (44,842 ) 
  

 

 

  

Net decrease of Shareholders' deficit upon adoption

    $ 705,046   
  

 

 

  

As a result of the establishment of the Segregated Account and the rehabilitation proceedings with respect to the Segregated Account, including the terms of the management services agreement which permit OCI to terminate the agreement with Ambac at any point in time, Ambac no longer has the unilateral power to direct the activities of the VIEs that most significantly impact the entity's economic performance for those insurance policies that were allocated to the Segregated Account. Accordingly, Ambac deconsolidated 49 VIEs, including 43 RMBS securitization trusts and certain other entities including the Ambac sponsored VIEs, Juneau and Aleutian, effective March 24, 2010. While the RMBS securitization and other trusts are not related parties of Ambac, the company continues to provide financial guarantee policies on the senior debt or assets of such trusts upon deconsolidation. The effect of this deconsolidation was to reverse a significant portion of the transition adjustment to adopt ASU 2009-17 and ASU 2009-16 on January 1, 2010 and to deconsolidate one additional VIE which was consolidated as of December 31, 2009, effectively re-establishing insurance accounting for such transactions. Financial Guarantee: Income (loss) on variable interest entities included no losses for the three month periods ended September 30, 2011 and 2010; and losses of $8,422 and $495,077 for the nine month periods ended September 30, 2011 and 2010, respectively, related to VIEs that were no longer consolidated as of the end the respective periods. The losses on these VIEs is primarily a result of deconsolidation, including for 2010 the deconsolidation of transactions allocated to the Segregated Account as discussed above, as the carrying value of the re-established net insurance liabilities exceeded the net liabilities of the VIEs which were carried at fair value in consolidation.

As of September 30, 2011, consolidated VIE assets and liabilities relating to 18 consolidated entities were $16,683,842 and $16,476,994, respectively. As of December 31, 2010, consolidated VIE assets and liabilities relating to 19 consolidated entities were $17,930,829 and $17,696,445, respectively. Ambac is not primarily liable for, and does not guarantee all of the debt obligations issued by the VIEs. Ambac would only be required to make payments on the guaranteed debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due. Additionally, Ambac's creditors do not have rights with regard to the assets of the VIEs. Ambac evaluates the net income statement effects and earnings per share effects to determine attributions between Ambac and non-controlling interests as a result of consolidating a VIE. Ambac has determined that the net changes in fair value of most consolidated VIE assets and liabilities are attributable to Ambac due to Ambac's interest through financial guarantee premium and loss payments with the VIE.

The financial reports of certain VIEs are prepared by an outside trustee and are not available within the time constraints Ambac requires to ensure the financial accuracy of the operating results. As such, the financial results of certain VIEs are consolidated on a time lag that is no longer than 90 days.

The table below provides the fair value of fixed income securities, by asset-type, held by consolidated VIEs as of September 30, 2011 and December 31, 2010:

 

     September 30, 2011      December 31, 2010  

Investments:

      

Corporate obligations

    $ 2,106,447       $ 1,904,361   
  

 

 

     

 

 

  

Total Variable interest entity assets: Fixed income securities

    $ 2,106,447       $ 1,904,361   
  

 

 

     

 

 

  

 

The following table provides supplemental information about the loans held as assets and long-term debt associated with the VIEs for which the fair value option has been elected as of September 30, 2011 and December 31, 2010:

 

     Estimated fair
value		      Unpaid principal
balance		  

September 30, 2011:

      

Loans

    $ 14,046,967       $ 13,904,890   

Long-term debt

    $ 14,418,379       $ 16,105,767   

December 31, 2010:

      

Loans

    $ 15,800,918       $ 16,750,029   

Long-term debt

    $ 15,885,711       $ 18,156,968   

Effective April 1, 2011, Ambac consolidated one additional VIE. The assets of this VIE consist primarily of identified intangible assets associated with its subsidiaries' operations. The intangible assets recorded at fair value upon consolidation on April 1, 2011 were $326,342, and are being amortized over their estimated useful lives. The weighted-average amortization period at the consolidation date was 28 years. Amortization expense for intangible assets for the three and nine months ended September 30, 2011 was $5,708 and $13,870, respectively, and is included in Financial Guarantee: Income (loss) on variable interest entities on the Consolidated Statement of Operations. As of September 30, 2011, Ambac determined that as a result of lower projected future operating income from the VIE's subsidiaries, the intangible assets of this VIE were impaired. Accordingly, an impairment charge of $58,309 was recorded, which is included in Financial Guarantee: Income (loss) on variable interest entities for the three and nine months ended September 30, 2011. As of September 30, 2011, the gross carrying amount of intangible assets and accumulated amortization related to this VIE were $254,163 and $0, respectively.

Variable Interests in Non-Consolidated VIEs

The following table displays the carrying amount of the assets, liabilities and maximum exposure to loss of Ambac's variable interests in non-consolidated VIEs resulting from financial guarantee and credit derivative contracts by major underlying asset classes, as of September 30, 2011 and December 31, 2010:

 

     Carrying Value of Assets and Liabilities  
     Maximum
Exposure To
Loss(1)		      Insurance
Assets (2)		      Insurance
Liabilities(3) 		     Derivative
Liabilities(4) 		 

September 30, 2011:

            

Global Structured Finance:

            

Collateralized debt obligations

    $ 15,386,022       $ 16,395       $ 106,337       $ 154,118   

Mortgage-backed – residential

      31,513,086         950,382         4,685,225         —     

Mortgage-backed – commercial

      720,756         —           —           6,736   

Other consumer asset-backed

      9,681,726         168,889         1,255,341         26,224   

Other commercial asset-backed

      12,502,341         543,900         932,464         5,176   

Other

      7,606,536         144,203         650,103         2,367   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total Global Structured Finance

      77,410,467         1,823,769         7,629,470         194,621   

Global Public Finance

      38,706,170         583,865         729,216         13,641   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total

    $ 116,116,637       $ 2,407,634       $ 8,358,686       $ 208,262   
  

 

 

     

 

 

     

 

 

     

 

 

  

 

     Carrying Value of Assets and Liabilities  
     Maximum
Exposure  To
Loss(1)		      Insurance
Assets (2)		      Insurance
Liabilities(3) 		     Derivative
Liabilities(4) 		 

December 31, 2010:

            

Global Structured Finance:

            

Collateralized debt obligations

      20,976         36,372         122,158         168,219   

Mortgage-backed – residential

      35,304         962,835         4,192,877         95   

Mortgage-backed – commercial

      935         —           —           7,340   

Other consumer asset-backed

      12,705         171,725         1,049,142         23,148   

Other commercial asset-backed

      18,406         710,685         716,796         5,444   

Other

      8,635         145,110         504,199         1,974   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total Global Structured Finance

      96,961         2,026,727         6,585,172         206,220   

Global Public Finance

      41,358         638,626         774,000         9,786   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total

      138,319         2,665,353         7,359,172         216,006   
  

 

 

     

 

 

     

 

 

     

 

 

  

 

(1) Maximum exposure to loss represents the gross maximum future payments of principal and interest on insured obligations and credit derivative contracts. Ambac's maximum exposure to loss does not include the benefit of any financial instruments (such as reinsurance or hedge contracts) that Ambac may utilize to mitigate the risks associated with these variable interests.
(2) Insurance assets represent the amount recorded in "Premium receivables" and "Subrogation recoverable" for financial guarantee contracts on Ambac's Consolidated Balance Sheets.
(3) Insurance liabilities represent the amount recorded in "Losses and loss expense reserve" and "Unearned premiums" for financial guarantee contracts on Ambac's Consolidated Balance Sheets.
(4) Derivative liabilities represent the fair value recognized on credit derivative contracts on Ambac's Consolidated Balance Sheets.