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Derivative Instruments | 3 Months Ended
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Mar. 31, 2012
Derivative Instruments [Abstract] |
Derivative Instruments | 9. Derivative Instruments The following tables summarize the location and fair values of individual derivative instruments reported in the Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011. Amounts are presented gross of the effect of offsetting balances even where a legal right of offset exists. Fair Values of Derivative Instruments
|  | Derivative Asset |  |  | Derivative Liability |
|  | Balance Sheet Location |  | Fair Value |  |  | Balance Sheet Location |  | Fair value |
March 31, 2012 |  |  |  |  |  |  |  |  |  |  |  |
Derivatives held for trading |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  | Derivative assets |  | $ | — |  |  | Derivative liabilities |  | $ | 201,129 |
Interest rate swaps |  | Derivative assets |  |  | 385,509 |  |  | Derivative liabilities |  |  | 185,593 |
|  | Derivative liabilities |  |  | 949 |  |  | Derivative assets |  |  | 185,150 |
Currency swaps |  | Derivative assets |  |  | — |  |  | Derivative liabilities |  |  | 1,574 |
Futures contracts |  | Derivative assets |  |  | 4,564 |  |  | Derivative liabilities |  |  | — |
Other contracts |  | Derivative assets |  |  | — |  |  | Derivative liabilities |  |  | 129 |
Total derivatives held for trading |  |  |  |  | 391,022 |  |  |  |  |  | 573,575 |
Call options on long-term debt |  | Derivative assets |  |  | 67,735 |  |  | Derivative liabilities |  |  | — |
Total non-VIE derivatives |  |  |  | $ | 458,757 |  |  |  |  | $ | 573,575 |
Variable Interest Entities |  |  |  |  |  |  |  |  |  |  |  |
Currency swaps |  | VIE—Derivative liabilities |  |  | 15,634 |  |  | VIE—Derivative liabilities |  |  | 89,919 |
Interest rate swaps |  | VIE—Derivative liabilities |  |  | — |  |  | VIE—Derivative liabilities |  |  | 1,930,259 |
Total VIE derivatives |  |  |  | $ | 15,634 |  |  |  |  | $ | 2,020,178 |
December 31, 2011: |  |  |  |  |  |  |  |  |  |  |  |
Derivatives held for trading |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  | Derivative assets |  | $ | — |  |  | Derivative liabilities |  | $ | 190,653 |
Interest rate swaps |  | Derivative assets |  |  | 411,652 |  |  | Derivative liabilities |  |  | 251,303 |
|  | Derivative liabilities |  |  | 30,859 |  |  | Derivative assets |  |  | 242,500 |
Currency swaps |  | Derivative assets |  |  | — |  |  | Derivative liabilities |  |  | 2,423 |
Futures contracts |  | Derivative assets |  |  | — |  |  | Derivative liabilities |  |  | 627 |
Other contracts |  | Derivative assets |  |  | — |  |  | Derivative liabilities |  |  | 361 |
Total derivatives held for trading |  |  |  |  | 442,511 |  |  |  |  |  | 687,867 |
Call options on long-term debt |  | Derivative assets |  |  | 6,055 |  |  | Derivative liabilities |  |  | — |
Total non-VIE derivatives |  |  |  | $ | 448,566 |  |  |  |  | $ | 687,867 |
Variable Interest Entities |  |  |  |  |  |  |  |  |  |  |  |
Currency swaps |  | VIE—Derivative liabilities |  |  | 27,779 |  |  | VIE—Derivative liabilities |  |  | 90,857 |
Interest rate swaps |  | VIE—Derivative liabilities |  |  | — |  |  | VIE—Derivative liabilities |  |  | 2,023,974 |
Total VIE derivatives |  |  |  | $ | 27,779 |  |  |  |  | $ | 2,114,831 |
Amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral are not offset against fair value amounts recognized for derivative instruments on the Consolidated Balance Sheets. The amounts representing the right to reclaim cash collateral and posted margin, recorded in "Other assets" were $7,139 and $47,421 as of March 31, 2012 and December 31, 2011, respectively. The amounts representing the obligation to return cash collateral, recorded in "Other liabilities" were $0 as of March 31, 2012 and December 31, 2011. The following tables summarize the location and amount of gains and losses of derivative contracts in the Consolidated Statements of Total Comprehensive Income for the three month periods ended March 31, 2012 and 2011, respectively:
|  | Location of Gain or (Loss) Recognized in Consolidated Statements of Total Comprehensive Income |  | Amount of Gain or (Loss) Recognized in Consolidated Statements of Total Comprehensive Income |
|  |  |  | March 31, 2012 |  |  | March 31, 2011 |
Financial Guarantee: |  |  |  |  |  |  |  |  |  |
Credit derivatives |  | Net change in fair value of credit derivatives |  | $ | (7,222 | ) |  | $ | (8,903 | )
Financial Services derivatives products: |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | Derivative products |  |  | 42,185 |  |  |  | 23,692 |
Currency swaps |  | Derivative products |  |  | 156 |  |  |  | (202 | )
Futures contracts |  | Derivative products |  |  | 4,308 |  |  |  | (2,568 | )
Other derivatives |  | Derivative products |  |  | 308 |  |  |  | 82 |
Total Financial Services derivative products |  |  |  |  | 46,957 |  |  |  | 21,004 |
Call options on long-term debt |  | Other income |  |  | 61,680 |  |  |  | 16,725 |
Variable Interest Entities: |  |  |  |  |  |  |  |  |  |
Credit derivatives |  | Income (loss) on variable interest entities |  |  | — |  |  |  | (4,511 | )
Currency swaps |  | Income (loss) on variable interest entities |  |  | (11,207 | ) |  |  | (12,699 | )
Interest rate swaps |  | Income (loss) on variable interest entities |  |  | 93,715 |  |  |  | 58,829 |
Total Variable Interest Entities |  |  |  |  | 82,508 |  |  |  | 41,619 |
Total derivative contracts |  |  |  | $ | 183,923 |  |  | $ | 70,445 |
Financial Guarantee Credit Derivatives: Credit derivatives, which are privately negotiated contracts, provide the counterparty with credit protection against the occurrence of a specific event such as a payment default or bankruptcy relating to an underlying obligation. Upon a credit event, Ambac is generally required to make payments equal to the difference between the scheduled debt service payment and the actual payment made by the issuer. The majority of our credit derivatives are written on a "pay-as-you-go" basis. Similar to an insurance policy execution, pay-as-you-go provides that Ambac pays interest shortfalls on the referenced transaction as they are incurred on each scheduled payment date, but only pays principal shortfalls upon the earlier of (i) the date on which the assets designated to fund the referenced obligation have been disposed of and (ii) the legal final maturity date of the referenced obligation. In a small number of transactions, Ambac is required to (i) make a payment equal to the difference between the par value and market value of the underlying obligation or (ii) purchase the underlying obligation at its par value and a loss is realized for the difference between the par and market value of the underlying obligation. There are nine transactions, which are not "pay-as-you-go", with a combined notional of approximately $191,848 and a net liability fair value of $332 as of March 31, 2012. These transactions are primarily in the form of CLOs written between 2002 and 2005. Substantially all of Ambac's credit derivative contracts relate to structured finance transactions. Credit derivatives issued are insured by Ambac Assurance. None of our outstanding credit derivative transactions at March 31, 2012, include ratings based collateral-posting triggers or otherwise require Ambac to post collateral regardless of Ambac's ratings or the size of the mark to market exposure to Ambac. Ambac maintains internal credit ratings on its guaranteed obligations, including credit derivative contracts, solely to indicate management's view of the underlying credit quality of the guaranteed obligations. Independent rating agencies may have assigned different ratings on the credits in Ambac's portfolio than Ambac's internal ratings. The following tables summarize the net par outstanding for CDS contracts, by Ambac rating, for each major category as of March 31, 2012 and December 31, 2011:
March 31, 2012 Ambac Rating |  | CLO |  |  | Other |  |  | Total |
AAA |  | $ | 209,285 |  |  | $ | 940,559 |  |  | $ | 1,149,844 |
AA |  |  | 6,060,401 |  |  |  | 933,643 |  |  |  | 6,994,044 |
A |  |  | 1,779,648 |  |  |  | 2,917,064 |  |  |  | 4,696,712 |
BBB(1) |  |  | — |  |  |  | 511,431 |  |  |  | 511,431 |
Below investment grade(2) |  |  | — |  |  |  | 291,333 |  |  |  | 291,333 |
|  | $ | 8,049,334 |  |  | $ | 5,594,030 |  |  | $ | 13,643,364 |
December 31, 2011 Ambac Rating |  | CLO |  |  | Other |  |  | Total |
AAA |  | $ | 297,741 |  |  | $ | 913,857 |  |  | $ | 1,211,598 |
AA |  |  | 6,193,522 |  |  |  | 1,248,584 |  |  |  | 7,442,106 |
A |  |  | 1,737,314 |  |  |  | 2,967,445 |  |  |  | 4,704,759 |
BBB(1) |  |  | — |  |  |  | 518,142 |  |  |  | 518,142 |
Below investment grade(2) |  |  | — |  |  |  | 290,007 |  |  |  | 290,007 |
|  | $ | 8,228,577 |  |  | $ | 5,938,035 |  |  | $ | 14,166,612 |
(1) | BBB internal rating reflects bonds which are of medium grade credit quality with adequate capacity to pay interest and repay principal. Certain protective elements and margins may weaken under adverse economic conditions and changing circumstances. These bonds are more likely than higher rated bonds to exhibit unreliable protection levels over all cycles.
(2) | Below investment grade ("BIG") internal ratings reflect bonds which are of speculative grade credit quality with the adequacy of future margin levels for payment of interest and repayment of principal potentially adversely affected by major ongoing uncertainties or exposure to adverse conditions.
The tables below summarize information by major category as of March 31, 2012 and December 31, 2011:
|  | CLO |  |  | Other |  |  | Total |
March 31, 2012 |  |  |  |  |  |  |  |  |
Number of CDS transactions |  |  | 42 |  |  |  | 22 |  |  |  | 64 |
Remaining expected weighted-average life of obligations (in years) |  |  | 2.5 |  |  |  | 6.0 |  |  |  | 3.9 |
Gross principal notional outstanding |  | $ | 8,049,334 |  |  | $ | 5,594,030 |  |  | $ | 13,643,364 |
Net derivative liabilities at fair value |  | $ | (51,688 | ) |  | $ | (149,441 | ) |  | $ | (201,129 | )
|  | CLO |  |  | Other |  |  | Total |
December 31, 2011 |  |  |  |  |  |  |  |  |
Number of CDS transactions |  |  | 44 |  |  |  | 24 |  |  |  | 68 |
Remaining expected weighted-average life of obligations (in years) |  |  | 2.7 |  |  |  | 6.0 |  |  |  | 4.1 |
Gross principal notional outstanding |  | $ | 8,228,577 |  |  | $ | 5,938,035 |  |  | $ | 14,166,612 |
Net derivative liabilities at fair value |  | $ | (54,320 | ) |  | $ | (136,333 | ) |  | $ | (190,653 | )
The maximum potential amount of future payments under Ambac's credit derivative contracts written on a "pay-as-you-go" basis is generally the gross principal notional outstanding amount included in the above table plus future interest payments payable by the derivative reference obligations. For contracts that are not written with pay-as-you-go terms, the maximum potential future payment is represented by the principal notional only. Since Ambac's credit derivatives typically reference obligations of or assets held by SPEs that meet the definition of a VIE, the amount of maximum potential future payments for credit derivatives is included in the table in Note 5, Special Purpose Entities Including Variable Interest Entities. Changes in fair value of Ambac's credit derivative contracts are accounted for at fair value since they do not qualify for the financial guarantee scope exception under ASC Topic 815. Changes in fair value are recorded in "Net change in fair value of credit derivatives" on the Consolidated Statements of Total Comprehensive Income. 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 surveillance group tracks credit migration of CDS contracts' reference obligations from period to period. Adversely classified credits are assigned risk classifications by the surveillance group. As of March 31, 2012, there are four CDS contracts on Ambac's adversely classified credit listing, with a net derivative liability fair value of $50,999 and total notional principal outstanding of $291,333. As of March 31, 2011 there were three CDS contracts on Ambac's adversely classified credit listing, with a net derivative liability fair value of $22,561 and a total notional principal outstanding of $242,915. Financial Services Derivative Products: Ambac, through its subsidiary Ambac Financial Services ("AFS"), provided interest rate and currency swaps to states, municipalities and their authorities, asset-backed issuers and other entities in connection with their financings. AFS manages its interest rate swaps business with the goal of being market neutral to changes in benchmark interest rates while retaining some basis risk and excess interest rate sensitivity as an economic hedge against the effects of rising interest rates elsewhere in the Company, including on Ambac's financial guarantee exposures. Basis risk in the portfolio arises primarily from (i) variability in the ratio of benchmark tax-exempt to taxable interest rates, (ii) potential changes in the counterparty bond issuers' bond-specific variable rates relative to taxable interest rates, and (iii) variability between Treasury and swap rates. The derivative portfolio also includes an unhedged Sterling-denominated exposure to Consumer Price Inflation in the United Kingdom. As of March 31, 2012 and December 31, 2011 the notional amounts of AFS's trading derivative products are as follows:
Type of derivative |  | Notional March 31, 2012 |  |  | Notional December 31, 2011 |
Interest rate swaps—receive-fixed/pay-variable |  | $ | 1,083,238 |  |  | $ | 1,370,995 |
Interest rate swaps—pay-fixed/receive-variable |  |  | 2,518,844 |  |  |  | 3,798,305 |
Interest rate swaps—basis swaps |  |  | 175,835 |  |  |  | 175,835 |
Currency swaps |  |  | 9,561 |  |  |  | 13,559 |
Futures contracts |  |  | 295,000 |  |  |  | 53,500 |
Other contracts |  |  | 118,450 |  |  |  | 118,930 |
Derivatives of Consolidated Variable Interest Entities Certain VIEs consolidated under ASC Topic 810 entered into derivative contracts to meet specified purposes within the securitization structure. The notional for VIE derivatives outstanding as of March 31, 2012 and December 31, 2011 are as follows:
|  | Notional |  |  |  |
Type of VIE derivative |  | March 31, 2012 |  |  | December 31, 2011 |
Interest rate swaps—receive-fixed/pay-variable |  | $ | 1,755,561 |  |  | $ | 1,702,113 |
Interest rate swaps—pay-fixed/receive-variable |  |  | 4,678,049 |  |  |  | 4,535,626 |
Currency swaps |  |  | 743,814 |  |  |  | 721,168 |
Credit derivatives |  |  | 21,017 |  |  |  | 20,934 |
Call Options on Long-Term Debt Ambac Assurance has certain contractual options to repurchase its surplus notes at a discount to their par value which are considered stand-alone derivatives. The surplus notes are classified under Long-term debt on the Consolidated Balance Sheets. The amount of surplus notes that may be repurchased under these stand-alone options is $500,000 at March 31, 2012 and December 31, 2011. These call options expire on June 7, 2012. The fair value of the options was $67,735 and $6,055 as of March 31, 2012 and December 31, 2011, respectively. Gains of $61,680 and $16,725 from the change in fair value of the call options were recognized within Other income (loss) in the Consolidated Statements of Total Comprehensive Income for the three month periods ended March 31, 2012 and 2011, respectively. The board of directors of Ambac Assurance has approved the exercise of all options to purchase surplus notes issued by Ambac Assurance. The exercise of such options also requires the approval of OCI and the Rehabilitator of the Segregated Account. Ambac Assurance is seeking such approvals. There can be no assurance that such approvals will be obtained. Contingent Features in Derivatives Related to Ambac Credit Risk Ambac's interest rate swaps with professional swap-dealer counterparties and certain front-end counterparties are generally executed under standardized derivative documents including collateral support and master netting agreements. Under these agreements, Ambac is required to post collateral in the event net unrealized losses exceed predetermined threshold levels. Additionally, given that Ambac Assurance is no longer rated by an independent rating agency, counterparties have the right to terminate the swap positions. As of March 31, 2012 and December 31, 2011, the aggregate fair value of all derivative instruments with contingent features linked to Ambac's own credit risk that are in a net liability position after considering legal rights of offset was $187,988 and $266,626, respectively, related to which Ambac had posted assets as collateral with a fair value of $287,762 and $263,530, respectively. All such ratings-based contingent features have been triggered as requiring maximum collateral levels to be posted by Ambac while preserving counterparties' rights to terminate the contracts. Assuming all contracts terminated on March 31, 2012, settlement of collateral balances and net derivative liabilities would result in a net receipt of cash and/or securities by Ambac. If counterparties elect to exercise their right to terminate, the actual termination payment amounts will be determined in accordance with derivative contract terms, which may result in amounts that differ from market values as reported in Ambac's financial statements.

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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