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Losses and Loss Expense Reserve | 6 Months Ended
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Jun. 30, 2012
Losses and Loss Expense Reserve [Abstract] |
Losses and Loss Expense Reserve | 6. Losses and Loss Expense Reserve A loss reserve is recorded on the balance sheet on a policy-by-policy basis for the excess of: (a) the present value of expected net cash flows to be paid under an insurance contract, over (b) the UPR for that contract. Below is the loss reserve roll-forward, net of subrogation recoverable and reinsurance for the six months ended June 30, 2012 and the year ended December 31, 2011:
|  | Six months Ended June 30, 2012 |  |  | Year Ended December 31, 2011 |
Beginning balance of net loss reserves, net of subrogation recoverable and reinsurance |  |  | 6,230,780 |  |  |  | 4,424,450 |
Changes in the loss reserves due to: |  |  |  |  |  |  |  |
Current year: |  |  |  |  |  |  |  |
Establishment of new loss reserves, gross of subrogation and net of reinsurance |  |  | 147,712 |  |  |  | 503,697 |
Claim payments, net of subrogation and reinsurance |  |  | (2,968 | ) |  |  | (2,442 | )
Establishment of subrogation recoveries, net of reinsurance |  |  | — |  |  |  | (9,761 | )
Total current year |  |  | 144,744 |  |  |  | 491,494 |
Prior year: |  |  |  |  |  |  |  |
Change in previously established loss reserves, gross of subrogation and net of reinsurance |  |  | 662,809 |  |  |  | 1,683,831 |
Change in previously established subrogation recoveries, net of reinsurance |  |  | (64,420 | ) |  |  | (324,151 | )
Claim recoveries (payments), net of subrogation recoverable and reinsurance |  |  | 28,705 |  |  |  | (179,440 | )
Total prior year |  |  | 627,094 |  |  |  | 1,180,240 |
Changes in loss reserves |  |  | 771,838 |  |  |  | 1,671,734 |
Net deconsolidation of certain VIEs |  |  | — |  |  |  | 134,596 |
Ending loss reserves, net of subrogation recoverable and reinsurance |  | $ | 7,002,618 |  |  | $ | 6,230,780 |
The adverse development in loss reserves established in prior years for the six months ended June 30, 2012 was driven by higher estimated losses in the RMBS and asset-backed portfolios, offset by higher expected subrogation recoveries. The adverse development in loss reserves established in prior years for the year ended December 31, 2011 was primarily due to the continued deterioration of collateral supporting structured finance policies, including RMBS and student loan exposures which resulted in greater expected ultimate losses, partially offset by higher expected subrogation recoveries related to representation and warranty breaches on insured RMBS securitizations. The net change in loss and loss expense reserves, net of reinsurance, of $771,838 and $1,671,734 for the six month period and year ended June 30, 2012 and December 31, 2011, respectively, are included in loss and loss expenses in the Consolidated Statements of Total Comprehensive Income. Loss expense reserves, net of reinsurance, were $138,419 and $86,171 at June 30, 2012 and December 31, 2011. Such reserves are established for surveillance, legal and other mitigation expenses associated with adversely classified credits. Total loss and loss expenses of $741,411 and $196,398 for the three month periods ended June 30, 2012 and 2011, respectively, and $739,091 and $1,116,045 for the six month periods ended June 30, 2012 and 2011, respectively, are included in the Consolidated Statements of Total Comprehensive Income. During the three and six month periods ended June 30, 2012 and 2011, respectively, reinsurance recoveries of losses included in loss and loss expenses in the Consolidated Statements of Total Comprehensive Income were $9,334 and $17,051, respectively, and $21,852 and $24,742, respectively. The tables below summarize information related to policies currently included in Ambac’s loss reserves at June 30, 2012 and December 31, 2011: Surveillance Categories (at June 30, 2012)
|  | I/SL |  |  | IA |  |  | II |  |  | III |  |  | IV |  |  | V |  |  | Total |
Number of policies |  |  | 29 |  |  |  | 9 |  |  |  | 39 |  |  |  | 122 |  |  |  | 153 |  |  |  | 1 |  |  |  | 353 |
Remaining weighted-average contract period (in years) |  |  | 21 |  |  |  | 10 |  |  |  | 18 |  |  |  | 18 |  |  |  | 10 |  |  |  | 6 |  |  |  | 14 |
Gross insured contractual payments outstanding: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Principal |  |  | 1,471,818 |  |  |  | 149,122 |  |  |  | 2,025,972 |  |  |  | 10,755,291 |  |  |  | 13,190,115 |  |  |  | 47 |  |  |  | 27,592,365 |
Interest |  |  | 904,999 |  |  |  | 72,942 |  |  |  | 1,136,858 |  |  |  | 6,355,180 |  |  |  | 3,459,207 |  |  |  | 22 |  |  |  | 11,929,208 |
Total |  |  | 2,376,817 |  |  |  | 222,064 |  |  |  | 3,162,830 |  |  |  | 17,110,471 |  |  |  | 16,649,322 |  |  |  | 69 |  |  |  | 39,521,573 |
Gross undiscounted claim liability |  |  | 43,445 |  |  |  | 34,536 |  |  |  | 55,755 |  |  |  | 4,261,839 |  |  |  | 8,837,054 |  |  |  | 69 |  |  |  | 13,232,698 |
Discount, gross claim liability |  |  | (3,686 | ) |  |  | (3,690 | ) |  |  | (3,740 | ) |  |  | (1,227,473 | ) |  |  | (807,445 | ) |  |  | (16 | ) |  |  | (2,046,050 | )
Gross claim liability before all subrogation and before reinsurance |  |  | 39,759 |  |  |  | 30,846 |  |  |  | 52,015 |  |  |  | 3,034,366 |  |  |  | 8,029,609 |  |  |  | 53 |  |  |  | 11,186,648 |
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gross RMBS subrogation (1) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (203,515 | ) |  |  | (2,610,036 | ) |  |  | — |  |  |  | (2,813,551 | )
Discount, RMBS subrogation |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,995 |  |  |  | 40,365 |  |  |  | — |  |  |  | 43,360 |
Discounted RMBS subrogation, before reinsurance |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (200,520 | ) |  |  | (2,569,671 | ) |  |  | — |  |  |  | (2,770,191 | )
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gross other subrogation (2) |  |  | — |  |  |  | (83 | ) |  |  | (0 | ) |  |  | (51,912 | ) |  |  | (813,462 | ) |  |  | — |  |  |  | (865,457 | )
Discount, other subrogation |  |  | — |  |  |  | 22 |  |  |  | 0 |  |  |  | 7,001 |  |  |  | 26,373 |  |  |  | — |  |  |  | 33,396 |
Discounted other subrogation, before reinsurance |  |  | — |  |  |  | (61 | ) |  |  | (0 | ) |  |  | (44,911 | ) |  |  | (787,089 | ) |  |  | — |  |  |  | (832,060 | )
Gross claim liability, net of all subrogation and discounts, before reinsurance |  |  | 39,759 |  |  |  | 30,785 |  |  |  | 52,015 |  |  |  | 2,788,935 |  |  |  | 4,672,849 |  |  |  | 53 |  |  |  | 7,584,396 |
Less: Unearned premium reserves |  |  | (21,956 | ) |  |  | (1,987 | ) |  |  | (23,501 | ) |  |  | (364,919 | ) |  |  | (146,339 | ) |  |  | — |  |  |  | (558,702 | )
Plus: Loss adjustment expenses reserves |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 139,872 |  |  |  | — |  |  |  | 139,872 |
Claim liability reported on Balance Sheet, before reinsurance (3) |  |  | 17,803 |  |  |  | 28,798 |  |  |  | 28,514 |  |  |  | 2,424,016 |  |  |  | 4,666,382 |  |  |  | 53 |  |  |  | 7,165,566 |
Reinsurance recoverable reported on Balance Sheet |  |  | 2,124 |  |  |  | — |  |  |  | 6,240 |  |  |  | 143,202 |  |  |  | 18,395 |  |  |  | — |  |  |  | 169,961 |
(1) | RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for representations and warranty breaches.
(2) | Other subrogation represents subrogation other than subrogation as defined in (1) above.
(3) | Claim liability reported is included in the Consolidated Balance Sheets as follows:
Loss and loss expense reserve (net of potential remediation subrogation of $1,965,070) |  | $ | 7,607,663 |
Subrogation recoverable (includes gross potential remediation of $805,121) |  |  | (442,097 | )
|  | $ | 7,165,566 |
Loss reserves ceded to reinsurers at June 30, 2012 and December 31, 2011 were $162,948 and $153,480, respectively. Amounts were included in reinsurance recoverable on the Consolidated Balance Sheet. Surveillance Categories (at December 31, 2011)
|  | I/SL |  |  | IA |  |  | II |  |  | III |  |  | IV |  |  | V |  |  | Total |
Number of policies |  |  | 27 |  |  |  | 10 |  |  |  | 38 |  |  |  | 125 |  |  |  | 129 |  |  |  | 1 |  |  |  | 330 |
Remaining weighted-average contract period (in years) |  |  | 18 |  |  |  | 10 |  |  |  | 17 |  |  |  | 19 |  |  |  | 9 |  |  |  | 6 |  |  |  | 13 |
Gross insured contractual payments outstanding: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Principal |  | $ | 2,222,493 |  |  | $ | 354,713 |  |  | $ | 2,060,102 |  |  | $ | 13,342,814 |  |  | $ | 13,092,057 |  |  | $ | 47 |  |  | $ | 31,072,226 |
Interest |  |  | 1,069,538 |  |  |  | 100,448 |  |  |  | 1,088,036 |  |  |  | 8,117,496 |  |  |  | 3,587,812 |  |  |  | 29 |  |  |  | 13,963,359 |
Total |  | $ | 3,292,031 |  |  | $ | 455,161 |  |  | $ | 3,148,138 |  |  | $ | 21,460,310 |  |  | $ | 16,679,869 |  |  | $ | 76 |  |  | $ | 45,035,585 |
Gross undiscounted claim liability |  | $ | 48,573 |  |  | $ | 10,667 |  |  | $ | 52,355 |  |  | $ | 4,766,815 |  |  | $ | 7,632,709 |  |  | $ | 75 |  |  | $ | 12,511,194 |
Discount, gross claim liability |  |  | (4,208 | ) |  |  | (2,316 | ) |  |  | (3,800 | ) |  |  | (1,440,704 | ) |  |  | (828,061 | ) |  |  | (20 | ) |  |  | (2,279,109 | )
Gross claim liability before all subrogation and before reinsurance |  | $ | 44,365 |  |  | $ | 8,351 |  |  | $ | 48,555 |  |  | $ | 3,326,111 |  |  | $ | 6,804,648 |  |  | $ | 55 |  |  | $ | 10,232,085 |
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gross RMBS subrogation (1) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (461,725 | ) |  |  | (2,316,920 | ) |  |  | — |  |  |  | (2,778,645 | )
Discount, RMBS subrogation |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 12,278 |  |  |  | 46,101 |  |  |  | — |  |  |  | 58,379 |
Discounted RMBS subrogation, before reinsurance |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (449,447 | ) |  |  | (2,270,819 | ) |  |  | — |  |  |  | (2,720,266 | )
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gross other subrogation (2) |  |  | — |  |  |  | (256 | ) |  |  | — |  |  |  | (52,871 | ) |  |  | (667,744 | ) |  |  | — |  |  |  | (720,871 | )
Discount, other subrogation |  |  | — |  |  |  | 77 |  |  |  | — |  |  |  | 6,550 |  |  |  | 45,912 |  |  |  | — |  |  |  | 52,539 |
Discounted other subrogation, before reinsurance |  |  | — |  |  |  | (179 | ) |  |  | — |  |  |  | (46,321 | ) |  |  | (621,832 | ) |  |  | — |  |  |  | (668,332 | )
Gross claim liability, net of all subrogation and discounts, before reinsurance |  |  | 44,365 |  |  |  | 8,172 |  |  |  | 48,555 |  |  |  | 2,830,343 |  |  |  | 3,911,997 |  |  |  | 55 |  |  |  | 6,843,487 |
Less: Unearned premium reserves |  |  | (25,264 | ) |  |  | (5,126 | ) |  |  | (22,111 | ) |  |  | (335,332 | ) |  |  | (158,687 | ) |  |  | — |  |  |  | (546,520 | )
Plus: Loss adjustment expenses reserves |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 87,294 |  |  |  | — |  |  |  | 87,294 |
Claim liability reported on Balance Sheet, before reinsurance (3) |  |  | 19,101 |  |  |  | 3,046 |  |  |  | 26,444 |  |  |  | 2,495,011 |  |  |  | 3,840,603 |  |  |  | 55 |  |  |  | 6,384,261 |
Reinsurance recoverable reported on Balance Sheet |  |  | 1,117 |  |  |  | 9 |  |  |  | 5,714 |  |  |  | 139,499 |  |  |  | 13,563 |  |  |  | — |  |  |  | 159,902 |
(1) | RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for representations and warranty breaches.
(2) | Other subrogation represents subrogation other than subrogation as defined in (1) above.
(3) | Claim liability reported is included in the Consolidated Balance Sheets as follows:
Loss and loss expense reserve (net of potential remediation subrogation of $1,890,797) |  | $ | 7,044,070 |
Subrogation recoverable (includes gross potential remediation of $829,469) |  |  | (659,810 | )
|  | $ | 6,384,260 |
Ambac records estimated subrogation recoveries for breaches of representations and warranties by sponsors of certain RMBS transactions utilizing an Adverse and Random Sample approach. Ambac has updated its estimated subrogation recoveries to $2,770,191 ($2,741,210 net of reinsurance) at June 30, 2012 from $2,720,266 ($2,692,414 net of reinsurance) at December 31, 2011. The balance of subrogation recoveries and the related claim liabilities, by estimation approach, at June 30, 2012 and December 31, 2011, are as follows:
|  | June 30, 2012 |
Approach |  | Count |  |  | Gross claim liability before subrogation recoveries |  |  | Subrogation recoveries(1) |  |  | Gross claim liability after subrogation recoveries |
Adverse samples |  |  | 29 | (2) |  | $ | 2,853,854 |  |  | $ | (1,553,195 | ) |  | $ | 1,300,659 |
Random samples |  |  | 16 | (2 ) |  |  | 1,318,084 |  |  |  | (1,216,996 | ) |  |  | 101,088 |
Totals |  |  | 45 |  |  | $ | 4,171,938 |  |  | $ | (2,770,191 | ) |  | $ | 1,401,747 |
|  | December 31, 2011 |
Approach |  | Count |  |  | Gross claim liability before subrogation recoveries |  |  | Subrogation recoveries(1) |  |  | Gross claim liability after subrogation recoveries |
Adverse samples |  |  | 30 | (2) |  | $ | 2,637,479 |  |  | $ | (1,457,472 | ) |  | $ | 1,180,006 |
Random samples |  |  | 16 | (2) |  |  | 1,140,102 |  |  |  | (1,262,794 | ) |  |  | (122,691 | )
Totals |  |  | 46 |  |  | $ | 3,777,581 |  |  | $ | (2,720,266 | ) |  | $ | 1,057,315 |
(1) | The amount of recorded subrogation recoveries related to each securitization is limited to ever-to-date paid losses plus the present value of projected future paid losses for each policy. To the extent significant losses have been paid but not yet recovered, the recorded amount of 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 “Loss and loss expense reserve” liability. Of the $2,770,191 of subrogation recoveries recorded at June 30, 2012, $805,121 was included in “Subrogation recoverable” and $1,965,070 was included in “Loss and loss expense reserves.” Of the $2,720,266 of subrogation recoveries recorded at December 31, 2011, $829,469 was included in “Subrogation recoverable” and $1,890,797 was included in “Loss and loss expense reserves.”
(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.
Below is the rollforward of RMBS subrogation, by estimation approach, for the period December 31, 2011 through June 30, 2012:
|  | Random sample |  |  | Number of transactions |  |  | Adverse sample |  |  | Number of transactions |  |  | Total |
Rollforward: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Discounted RMBS subrogation (gross of reinsurance) at December 31, 2011 |  | $ | 1,262,794 |  |  |  | 16 |  |  | $ | 1,457,472 |  |  |  | 30 |  |  |  | 2,720,266 |
Additional transactions reviewed |  |  | — |  |  |  | n/a |  |  |  | — |  |  |  | n/a |  |  |  | — |
Additional adverse sample loans reviewed |  |  | — |  |  |  | n/a |  |  |  | — |  |  |  | n/a |  |  |  | — |
Adverse loans repurchased by the sponsor |  |  | — |  |  |  | n/a |  |  |  | 36 |  |  |  | n/a |  |  |  | 36 |
All other changes (1) |  |  | (45,798 | ) |  |  | n/a |  |  |  | 95,687 |  |  |  | (1 | ) |  |  | 49,889 |
Discounted RMBS subrogation (gross of reinsurance) at June 30, 2012 |  | $ | 1,216,996 |  |  |  | 16 |  |  | $ | 1,553,195 |  |  |  | 29 |  |  |  | 2,770,191 |
(1) | Other changes which may impact subrogation recoveries include changes in actual or projected collateral performance and/or the projected timing of recoveries. For the six months ended June 30, 2012, one transaction was removed from the Adverse Sample subrogation population; however, the impacts on RMBS subrogation disclosed in the Adverse Sample column relate to multiple transactions.

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- Definition The entire disclosure for liabilities related to future policy benefits and unpaid claims and claim adjustments. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 944 -SubTopic 40 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=6482852&loc=d3e14931-158439 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 944 -SubTopic 40 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6482485&loc=d3e14764-158437 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher AICPA -Name Statement of Position (SOP) -Number 94-5 -Paragraph 11 -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 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 944 -SubTopic 40 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6482485&loc=d3e14754-158437 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 03 -Paragraph 13 -Article 7 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 60 -Paragraph 60 -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 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 944 -SubTopic 210 -Section S99 -Paragraph 1 -Subparagraph (SX 210.7-03.13(a)(1),(b)) -URI http://asc.fasb.org/extlink&oid=6879938&loc=d3e572229-122910 + Details
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