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Special Purpose Entities, Including Variable Interest Entities | 3 Months Ended
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Mar. 31, 2012
Special Purpose Entities, Including Variable Interest Entities [Abstract] |
Special Purpose Entities, Including Variable Interest Entities | 5. 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. Ambac is also 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. In 2011, Ambac entered into a secured borrowing transaction under which two VIEs were created for the purpose of resecuritizing certain invested assets and collateralizing the borrowing. These VIEs are consolidated because Ambac was involved in their design and holds a significant amount of the beneficial interests issued by the VIEs. VIE debt outstanding to third parties under this secured borrowing transaction was $28,320 and $35,600 as of March 31, 2012 and December 31, 2011, respectively. The debt represents the senior-most tranche of the securitization structure and is to be repaid from the non-insurance proceeds of certain RMBS securities which are guaranteed by Ambac Assurance. Such securities had a fair value of $179,339 and $172,880 as of March 31, 2012 and December 31, 2011, respectively. Refer to Note 8, Investments for further discussion of the restrictions on these securities. 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 may 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. With respect to existing VIEs involving Ambac financial guarantees, Ambac is generally required to consolidate a VIE in the period that applicable triggers result in Ambac having control over the VIE's most significant economic activities. A VIE is deconsolidated in the period that Ambac no longer has such control, which generally occurs in connection with allocation to the Segregated Account, execution of remediation activities on the transaction or amortization of insured exposure, any of which may reduce the degree of Ambac's control over a VIE. 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. Ambac does not consolidate these entities because Ambac's policies issued to these entities have been allocated to the Segregated Account, thereby limiting Ambac's control over the entities' most significant economic activities. 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. Refer to Note 7 for further information on the valuation technique and inputs used to measure the fair value of Ambac's equity interest in these entities. At March 31, 2012 and December 31, 2011 the fair value of these entities is $16,023 and $16,779, respectively, and is reported within Other assets on the Consolidated Balance Sheets. The change in fair value of these entities is ($756) and $1,096 for the three months ended March 31, 2012 and 2011, respectively. Since their inception, there have been 15 individual transactions with these entities, of which 5 transactions were outstanding as of March 31, 2012. Total principal amount of debt outstanding was $576,387 and $578,562 at March 31, 2012 and December 31, 2011, 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 March 31, 2012 and weighted average life of 8.1 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 March 31, 2012 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 Total Comprehensive Income. 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 months ended March 31, 2012 and 2011. Ambac Assurance earned premiums for issuing the financial guarantee policies on the assets, MTNs and derivative contracts of $145 and $235 for the three months ended March 31, 2012 and 2011, respectively. Ambac paid no claims to these entities under its financial guarantee policies for the three months ended March 31, 2012 and 2011. Ambac also earned fees for providing other services amounting to $11 and $11 for the three months ended March 31, 2012 and 2011, respectively. Derivative contracts are provided by Ambac Financial Services to these entities. Consistent with other derivatives, Ambac Financial Services ("AFS") accounts for these contracts on a trade date basis at fair value. AFS paid $138 and $131 for the three months ended March 31, 2012 and 2011, respectively, under these derivative contracts. Consolidation of VIEs: 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 Income (loss) on variable interest entities. The variable interest in VIE generally involves one or more of the following: a financial guarantee policy issued to the VIE, a written credit derivative contract that references liabilities of the VIE or an investment in securities issued by the VIE. The impact of consolidating such VIEs on Ambac's balance sheet is follows. 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 eliminates insurance assets (premium receivables, reinsurance recoverable, 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 Sheets. For investment securities owned by Ambac that are debt instruments issued by the VIE, the investment securities balance is eliminated upon consolidation. Income (loss) on variable interest entities included losses of $0 and $8,422 for the three month periods ended March 31, 2012 and 2011, respectively, related to VIEs that were no longer consolidated as of the end the respective periods. Such losses for the three months ended March 31, 2011 primarily related to the impact of deconsolidating a VIE during that period. As of March 31, 2012, consolidated VIE assets and liabilities relating to 18 consolidated entities were $16,857,878 and $16,672,670, respectively. As of December 31, 2011, consolidated VIE assets and liabilities relating to 19 consolidated entities were $16,543,207 and $16,379,386, 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 outside trustees 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 March 31, 2012 and December 31, 2011:
|  | March 31, 2012 |  |  | December 31, 2011 |
Investments: |  |  |  |  |  |  |  |
Corporate obligations |  | $ | 2,184,665 |  |  | $ | 2,199,338 |
Total variable interest entity assets: Fixed income securities |  | $ | 2,184,665 |  |  | $ | 2,199,338 |
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 March 31, 2012 and December 31, 2011:
|  | Estimated fair value |  |  | Unpaid principal balance |
March 31, 2012: |  |  |  |  |  |  |  |
Loans |  | $ | 14,460,077 |  |  | $ | 13,901,703 |
Long-term debt |  | $ | 14,426,274 |  |  | $ | 15,344,542 |
December 31, 2011: |  |  |  |  |  |  |  |
Loans |  | $ | 14,126,994 |  |  | $ | 13,735,799 |
Long-term debt |  | $ | 14,039,450 |  |  | $ | 15,134,711 |
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 March 31, 2012 and December 31, 2011:
|  | Carrying Value of Assets and Liabilities |
|  | Maximum Exposure To Loss(1) |  |  | Insurance Assets(2) |  |  | Insurance Liabilities(3) |  |  | Derivative Liabilities(4) |
March 31, 2012: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Global Structured Finance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  | $ | 13,306,646 |  |  | $ | 13,628 |  |  | $ | 22,702 |  |  | $ | 120,592 |
Mortgage-backed—residential |  |  | 29,262,148 |  |  |  | 709,898 |  |  |  | 5,268,393 |  |  |  | — |
Mortgage-backed—commercial |  |  | 693,627 |  |  |  | — |  |  |  | — |  |  |  | 6,793 |
Other consumer asset-backed |  |  | 7,689,924 |  |  |  | 122,947 |  |  |  | 1,259,153 |  |  |  | 36,711 |
Other commercial asset-backed |  |  | 12,251,503 |  |  |  | 489,489 |  |  |  | 974,307 |  |  |  | 7,366 |
Other |  |  | 7,150,257 |  |  |  | 139,530 |  |  |  | 567,141 |  |  |  | 2,194 |
Total Global Structured Finance |  |  | 70,354,105 |  |  |  | 1,475,492 |  |  |  | 8,091,696 |  |  |  | 173,656 |
Global Public Finance |  |  | 38,173,945 |  |  |  | 577,454 |  |  |  | 703,043 |  |  |  | 19,140 |
Total |  | $ | 108,528,050 |  |  | $ | 2,052,946 |  |  | $ | 8,794,739 |  |  | $ | 192,796 |
|  | Carrying Value of Assets and Liabilities |
|  | Maximum Exposure To Loss(1) |  |  | Insurance Assets(2) |  |  | Insurance Liabilities(3) |  |  | Derivative Liabilities(4) |
December 31, 2011: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Global Structured Finance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  | $ | 14,093,243 |  |  | $ | 15,096 |  |  | $ | 105,219 |  |  | $ | 120,614 |
Mortgage-backed—residential |  |  | 30,307,753 |  |  |  | 783,329 |  |  |  | 5,396,711 |  |  |  | — |
Mortgage-backed—commercial |  |  | 685,870 |  |  |  | — |  |  |  | — |  |  |  | 6,241 |
Other consumer asset-backed |  |  | 7,851,980 |  |  |  | 129,234 |  |  |  | 1,315,146 |  |  |  | 35,583 |
Other commercial asset-backed |  |  | 13,363,434 |  |  |  | 559,884 |  |  |  | 1,045,477 |  |  |  | 4,541 |
Other |  |  | 7,552,264 |  |  |  | 139,586 |  |  |  | 643,864 |  |  |  | 1,837 |
Total Global Structured Finance |  |  | 73,854,544 |  |  |  | 1,627,129 |  |  |  | 8,506,417 |  |  |  | 168,816 |
Global Public Finance |  |  | 37,893,726 |  |  |  | 569,032 |  |  |  | 700,690 |  |  |  | 14,850 |
Total |  | $ | 111,748,270 |  |  | $ | 2,196,161 |  |  | $ | 9,207,107 |  |  | $ | 183,666 |
(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.

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- Definition Tabular disclosure of the significant judgments and assumptions made in determining whether a variable interest (as defined) held by the entity requires the variable interest entity (VIE) (as defined) to be consolidated and (or) disclose information about its involvement with the VIE, individually or in aggregate (as applicable); the nature of restrictions, if any, on the consolidated VIE's assets and on the settlement of its liabilities reported by an entity in its statement of financial position, including the carrying amounts of such assets and liabilities; the nature of, and changes in, the risks associated with involvement in the VIE; how involvement with the VIE affects the entity's financial position, financial performance, and cash flows; the lack of recourse if creditors (or beneficial interest holders) of the consolidated VIE have no recourse to the general credit of the primary beneficiary (if applicable); the terms of arrangements, giving consideration to both explicit arrangements and implicit variable interests, if any, that could require the entity to provide financial support to the VIE, including events or circumstances that could expose the entity to a loss; the methodology used by the entity for determining whether or not it is the primary beneficiary of the variable interest entity; the significant factors considered and judgments made in determining that the power to direct the activities of a VIE that most significantly impact the VIE's economic performance are shared (as defined); the carrying amounts and classification of assets and liabilities of the VIE included in the statement of financial position; the entity's maximum exposure to loss, if any, as a result of its involvement with the VIE, including how the maximum exposure is determined and significant sources of the entity's exposure to the VIE; a comparison of the carrying amounts of the assets and liabilities and the entity's maximum exposure to loss; information about any liquidity arrangements, guarantees, and (or) other commitments by third parties that may affect the fair value or risk of the entity's variable interest in the VIE; whether or not the entity has provided financial support or other support (explicitly or implicitly) to the VIE that it was not previously contractually required to provide or whether the entity intends to provide that support, including the type and amount of the support and the primary reasons for providing the support; and supplemental information the entity determines necessary to provide. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6970148&loc=SL6228884-111685 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Glossary Variable Interest Entity -URI http://asc.fasb.org/extlink&oid=6528138 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 167 -Appendix D -Paragraph 23A Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name FASB Interpretation (FIN) -Number 46R -Paragraph 2, 14, 15, 16, 23, 24, 25, 26 -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. Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 167 -Appendix D -Paragraph 22E Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -SubTopic 10 -Section 50 -Paragraph 5A -URI http://asc.fasb.org/extlink&oid=6970148&loc=SL6759159-111685 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 140 -Paragraph 35 -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. Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 167 -Appendix D -Paragraph 22B Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name FASB Interpretation (FIN) -Number 46R -Paragraph 4 -Subparagraph g -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. Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name FASB Staff Position (FSP) -Number FAS140-4/FIN46(R)-8 -Paragraph C4 -Subparagraph d -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. Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 167 -Appendix D -Paragraph 24 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6970148&loc=d3e5710-111685 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=6970148&loc=d3e5728-111685 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -SubTopic 10 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=6970148&loc=d3e5747-111685 + Details
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