Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2013

Summary of Carrying Amount and Fair Value of Ambac's Financial Assets and Liabilities

The following table sets forth the carrying amount and fair value of Ambac’s financial assets and liabilities as of March 31, 2013 and December 31, 2012, including the level within the fair value hierarchy at which fair value measurements are categorized. As required by ASC Topic 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.


	Carrying Amount			Total Fair Value			Fair Value Measurements Categorized as:
	Carrying Amount			Total Fair Value			Level 1		Level 2			Level 3
March 31, 2013
Financial assets:
Fixed income securities:
Municipal obligations	$	1,794,355		$	1,794,355		$	—	$	1,794,355		$	—
Corporate obligations		1,069,073			1,069,073			—		1,065,421			3,652
Foreign obligations		11,878			11,878			—		11,878			—
U.S. government obligations		98,312			98,312			98,312		—			—
U.S. agency obligations		53,975			53,975			—		53,975			—
Residential mortgage-backed securities		1,536,889			1,536,889			—		1,536,889			—
Collateralized debt obligations		27,357			27,357			—		23,452			3,905
Other asset-backed securities		810,451			810,451			—		760,217			50,234
Fixed income securities, pledged as collateral:
U.S. government obligations		228,228			228,228			228,228		—			—
Short term investments		767,932			767,932			765,379		2,553			—
Other investments		113,812			113,812			—		113,712			100
Cash		53,135			53,135			53,135		—			—
Loans		8,691			7,119			—		—			7,119
Derivative assets:
Interest rate swaps—asset position		112,811			112,811			—		112,811			—
Interest rate swaps—liability position		—			—			—		—			—
Futures contracts		—			—			—		—			—
Other assets		14,230			14,230			—		—			14,230
Variable interest entity assets:
Fixed income securities:
Corporate obligations		2,414,607			2,414,607			—		—			2,414,607
Restricted cash		2,258			2,258			2,258		—			—
Loans		14,327,840			14,318,834			—		202,023			14,116,811

Total financial assets	$	23,445,834		$	23,435,256		$	1,147,312	$	5,677,286		$	16,610,658

Financial liabilities:
Obligations under investment and repurchase agreements	$	363,297		$	362,208		$	—	$	—		$	362,208
Liabilities subject to compromise		1,690,312			909,138			—		909,138			—
Long term debt, including accrued interest		399,505			1,110,259			—		—			1,110,259
Derivative liabilities:
Credit derivatives		203,307			203,307			—		—			203,307
Interest rate swaps—asset position		(65,636	)		(65,636	)		—		(65,636	)		—
Interest rate swaps—liability position		366,949			366,949			—		241,567			125,382
Futures contracts		911			911			911		—			—
Other contracts		215			215			—		215			—
Liabilities for net financial guarantees written		6,921,299			4,576,031			—		—			4,576,031
Variable interest entity liabilities:
Long-term debt		14,229,373			14,207,206			—		12,296,617			1,910,589
Derivative liabilities:
Interest rate swaps—liability position		2,231,863			2,231,863			—		2,231,863			—
Currency swaps—liability position		85,762			85,762			—		85,762			—

Total financial liabilities	$	26,427,157		$	23,988,213		$	911	$	15,699,526		$	8,287,776


	Carrying Amount			Total Fair Value			Fair Value Measurements Categorized as:
	Carrying Amount			Total Fair Value			Level 1		Level 2			Level 3
December 31, 2012
Financial assets:
Fixed income securities:
Municipal obligations	$	1,848,932		$	1,848,932		$	—	$	1,848,932		$	—
Corporate obligations		1,077,972			1,077,972			—		1,074,316			3,656
Foreign obligations		70,112			70,112			—		70,112			—
U.S. government obligations		127,283			127,283			127,283		—			—
U.S. agency obligations		82,535			82,535			—		82,535			—
Residential mortgage-backed securities		1,455,582			1,455,582			—		1,455,582			—
Collateralized debt obligations		33,342			33,342			—		26,860			6,482
Other asset-backed securities		706,637			706,637			—		656,373			50,264
Fixed income securities, pledged as collateral:
U.S. government obligations		265,779			265,779			265,779		—			—
Short term investments		661,658			661,658			657,886		3,772			—
Other investments		100			100			—		—			100
Cash		43,837			43,837			43,837		—			—
Loans		9,203			7,387			—		—			7,387
Derivative assets:
Interest rate swaps—asset position		124,853			124,853			—		124,853			—
Interest rate swaps—liability position		—			—			—		—			—
Futures contracts		1,253			1,253			1,253		—			—
Other assets		14,557			14,557			—		—			14,557
Variable interest entity assets:
Fixed income securities:
Corporate obligations		2,261,294			2,261,294			—		—			2,261,294
Restricted cash		2,290			2,290			2,290		—			—
Loans		15,568,711			15,560,051			—		200,978			15,359,073

Total financial assets	$	24,355,930		$	24,345,454		$	1,098,328	$	5,544,313		$	17,702,813

Financial liabilities:
Obligations under investment and repurchase agreements	$	362,017		$	361,905		$	—	$	—		$	361,905
Liabilities subject to compromise		1,690,312			434,823			—		434,823			—
Long term debt, including accrued interest		377,524			801,277			—		—			801,277
Derivative liabilities:
Credit derivatives		213,585			213,585			—		—			213,585
Interest rate swaps—asset position		(73,264	)		(73,264	)		—		(73,264	)		—
Interest rate swaps—liability position		390,774			390,774			—		282,022			108,752
Futures contracts		—			—			—		—			—
Other contracts		220			220			—		220			—
Liabilities for net financial guarantees written		7,074,808			3,091,257			—		—			3,091,257
Variable interest entity liabilities:
Long-term debt		15,436,008			15,414,233			—		12,457,732			2,956,501
Derivative liabilities:
Interest rate swaps—liability position		2,131,315			2,131,315			—		2,131,315			—
Currency swaps—liability position		90,466			90,466			—		90,466			—

Total financial liabilities	$	27,693,765		$	22,856,591		$	—	$	15,323,314		$	7,533,277

Information about Valuation Inputs for Fixed Income Securities Classified as Level 3

Significant inputs for the interest only strips valuation at March 31, 2013 and December 31, 2012 include the following weighted averages:

March 31, 2013

Coupon rate: 0.345%

Maturity: 20.89 years

Yield: 6.03%

December 31, 2012

Coupon rate: 0.345%

Maturity: 21.14 years

Yield: 6.08%

Collateralized debt obligations (“CDO”): Securities are floating rate senior notes where the underlying securities of the CDO consist of subordinated bank perpetual preferred securities. The fair value of such securities classified as Level 3 was $3,905 and $6,482 at March 31, 2013 and December 31, 2012, respectively. Fair value was calculated using a discounted cash flow approach with expected future cash flows discounted using a yield curve consistent with the security type and rating. Significant inputs for the valuation at March 31, 2013 and December 31, 2012 include the following weighted averages:

March 31, 2013

Coupon rate: 0.85%

Maturity: 1.24 years

Yield: 3.85%

December 31, 2012

Coupon rate: 1.05%

Maturity: 1.51 years

Yield: 5.92%

Other asset-backed securities: These securities are floating rate investment grade notes collateralized by various asset types. The fair value of such securities classified as Level 3 was $50,234 and $50,264 at March 31, 2013 and December 31, 2012, respectively. Fair value was calculated using a discounted cash flow approach with expected future cash flows discounted using a yield curve consistent with the security type and rating. Significant inputs for the valuation at March 31, 2013 and December 31, 2012 include the following weighted averages:

March 31, 2013

Coupon rate: 0.69%

Maturity: 7.62 years

Yield: 7.50%

December 31, 2012

Coupon rate: 0.71%

Maturity: 7.86 years

Yield: 7.50%

European ABS transactions: The fair value of such obligations classified as Level 3 was $1,910,589 and $2,956,501 at March 31, 2013 and December 31, 2012, respectively. Fair values were calculated by using a discounted cash flow approach. The discount rates used were based on the rates implied from the third party quoted values (Level 2) for comparable notes from the same securitization. Significant inputs for the valuation at March 31, 2013 and December 31, 2012 include the following weighted averages:

March 31, 2013

Coupon rate: 1.59%

Maturity: 18.26 years

Yield: 3.98%

December 31, 2012

Coupon rate: 1.64%

Maturity: 12.34 years

Yield: 4.02%

Summary of Information about Described Model Inputs Used to Determine Fair Value of Each Class of Credit Derivatives

Information about the above described model inputs used to determine the fair value of each class of credit derivatives, including the CVA as a percentage of the gross mark-to-market liability before considering Ambac credit risk (“CVA percentage”), as of March 31, 2013 and December 31, 2012 is summarized below:

As of March 31, 2013


	CLOs			Other⁽¹⁾
Notional outstanding	$	5,702,366		$	3,238,742
Weighted average reference obligation price		97.4			86.9
Weighted average life (WAL) in years		2.1			4.5
Weighted average credit rating		AA-			A
Weighted average relative change ratio		34.5	%		37.8	%
CVA percentage		41.4	%		49.4	%
Fair value of derivative liabilities	$	(30,736	)	$	(115,014	)

As of December 31, 2012


	CLOs			Other⁽¹⁾
Notional outstanding	$	6,155,767		$	3,701,387
Weighted average reference obligation price		96.5			86.9
Weighted average life (WAL) in years		2.2			4.2
Weighted average credit rating		AA-			A
Weighted average relative change ratio		34.4	%		38.2	%
CVA percentage		55.0	%		55.0	%
Fair value of derivative liabilities	$	(34,645	)	$	(116,086	)

(1)

Excludes contracts for which fair values are based on credit derivative quotes rather than reference obligation quotes. Such contracts have a combined notional outstanding of $1,263,630, WAL of 7.5 years and liability fair value of ($57,557) as of March 31, 2013. Other inputs to the valuation of these transactions at March 31, 2013 include weighted average quotes of 9% of notional, weighted average rating of A and Ambac CVA percentage of 50.0%. As of December 31, 2012, these contracts had a combined notional outstanding of $1,424,623, WAL of 7.9 years and liability fair value of ($62,854). Other inputs to the valuation of these transactions at December 31, 2012 include weighted average quotes of 10% of notional, weighted average rating of A and Ambac CVA percentage of 55.0%.

Summary of Changes in Level 3 Fair Value Category

The following tables present the changes in the Level 3 fair value category for the three months ended March 31, 2013 and 2012. Ambac classifies financial instruments in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Thus, the gains and losses presented below include changes in the fair value related to both observable and unobservable inputs.

Level-3 financial assets and liabilities accounted for at fair value


										VIE Assets and Liabilities
Three months ended March 31, 2013	Investments			Other assets			Derivatives			Investments			Loans			Long-term debt			Total
Balance, beginning of period	$	60,402		$	14,557		$	(322,337	)	$	2,261,294		$	15,359,073		$	(2,956,501	)	$	14,416,488
Additions of VIEs consolidated		—			—			—			—			—			—			—
Total gains/(losses) realized and unrealized:
Included in earnings		(23	)		(327	)		(3,162	)		297,294			400,456			(127,393	)		566,845
Included in other comprehensive income		698			—			—			(143,981	)		(955,455	)		193,905			(904,833	)
Purchases		—			—			—			—			—			—			—
Issuances		—			—			—			—			—			—			—
Sales		—			—			—			—			—			—			—
Settlements		(3,286	)		—			(3,190	)		—			(687,263	)		4,864			(688,875	)
Transfers in Level 3		—			—			—			—			—			—			—
Transfers out of Level 3		—			—			—			—			—			974,536			974,536
Deconsolidation of VIEs		—			—			—			—			—			—			—

Balance, end of period	$	57,791		$	14,230		$	(328,689	)	$	2,414,607		$	14,116,811		$	(1,910,589	)	$	14,364,161

The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	—		$	(327	)	$	(5,684	)	$	297,294		$	400,456		$	(127,393	)	$	564,346


										VIE Assets and Liabilities
Three months ended March 31, 2012	Investments			Other assets			Derivatives			Investments			Loans			Long-term debt			Total
Balance, beginning of period	$	97,522		$	16,779		$	(486,775	)	$	2,199,338		$	14,126,994		$	(1,934,642	)	$	14,019,216
Additions of VIEs consolidated		—			—			—			—			—			—			—
Total gains/(losses) realized and unrealized:
Included in earnings		(49	)		(756	)		122,327			(82,816	)		166,665			(136,563	)		68,808
Included in other comprehensive income		7,814			—			—			68,143			415,857			(63,205	)		428,609
Purchases		—			—			—			—			—			—			—
Issuances		—			—			—			—			—			—			—
Sales		—			—			—			—			—			—			—
Settlements		(2,742	)		—			8,832			—			(249,439	)		13,030			(230,319	)
Transfers in Level 3		58,905			—			—			—			—			(665,264	)		(606,359	)
Transfers out of Level 3		—			—			—			—			—			—			—
Deconsolidation of VIEs		—			—			—			—			—			—			—

Balance, end of period	$	161,450		$	16,023		$	(355,616	)	$	2,184,665		$	14,460,077		$	(2,786,644	)	$	13,679,955

The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	—		$	(756	)	$	107,245		$	(82,816	)	$	167,146		$	(136,563	)	$	54,256

The tables below provide roll-forward information by class of investments and derivatives measured using significant unobservable inputs.

Level-3 Investments by class


Three months ended March 31, 2013	Collateralized Debt Obligations			Other Asset Backed Securities			Corporate Obligations			U.S. Agency Obligations		Total Investments
Balance, beginning of period	$	6,482		$	50,264		$	3,656		$	—	$	60,402
Total gains/(losses) realized and unrealized:
Included in earnings		(3	)		—			(20	)		—		(23	)
Included in other comprehensive income		113			569			16			—		698
Purchases		—			—			—			—		—
Issuances		—			—			—			—		—
Sales		—			—			—			—
Settlements		(2,687	)		(599	)		—			—		(3,286	)
Transfers in Level 3		—			—			—			—		—
Transfers out of Level 3		—			—			—			—		—

Balance, end of period	$	3,905		$	50,234		$	3,652		$	—	$	57,791

The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	—		$	—		$	—		$	—	$	—

Level-3 Investments by class


Three months ended March 31, 2012	Collateralized Debt Obligations			Other Asset Backed Securities		Corporate Obligations			U.S. Agency Obligations			Total Investments
Balance, beginning of period	$	12,482		$	75,886	$	7,930		$	1,224		$	97,522
Total gains/(losses) realized and unrealized:
Included in earnings		(2	)		—		(46	)		(1	)		(49	)
Included in other comprehensive income		101			8,072		(354	)		(5	)		7,814
Purchases		—			—		—			—			—
Issuances		—			—		—			—			—
Sales		—			—		—			—			—
Settlements		(2,742	)		—		—			—			(2,742	)
Transfers in Level 3		—			53,068		5,837			—			58,905
Transfers out of Level 3		—			—		—			—			—

Balance, end of period	$	9,839		$	137,026	$	13,367		$	1,218		$	161,450

The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	—		$	—	$	—		$	—		$	—

Level-3 Derivatives by class


Three months ended March 31, 2013	Interest Rate Swaps			Credit Derivatives			Call Options on Long-term debt		Total Derivatives
Balance, beginning of period	$	(108,752	)	$	(213,585	)	$	—	$	(322,337	)
Additions of VIEs consolidated
Total gains/(losses) realized and unrealized:
Included in earnings		(15,949	)		12,787			—		(3,162	)
Included in other comprehensive income		—			—			—		—
Purchases		—			—			—		—
Issuances		—			—			—		—
Sales		—			—			—		—
Settlements		(681	)		(2,509	)		—		(3,190	)
Transfers in Level 3		—			—			—		—
Transfers out of Level 3		—			—			—		—
Deconsolidation of VIEs		—			—			—		—

Balance, end of period	$	(125,382	)	$	(203,307	)	$	—	$	(328,689	)

The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	(15,949	)	$	10,265		$	—	$	(5,684	)

Level-3 Derivatives by class


Three months ended March 31, 2012	Interest Rate Swaps			Credit Derivatives			Call Options on Long-term debt		Total Derivatives
Balance, beginning of period	$	(302,177	)	$	(190,653	)	$	6,055	$	(486,775	)
Additions of VIEs for ASC 2009-17
Total gains/(losses) realized and unrealized:
Included in earnings		67,869			(7,222	)		61,680		122,327
Included in other comprehensive income		—			—			—		—
Purchases		—			—			—		—
Issuances		—			—			—		—
Sales		—			—			—		—
Settlements		12,086			(3,254	)		—		8,832
Transfers in Level 3		—			—			—		—
Transfers out of Level 3		—			—			—		—
Deconsolidation of VIEs		—			—			—		—

Balance, end of period	$	(222,222	)	$	(201,129	)	$	67,735	$	(355,616	)

The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	61,598		$	(16,033	)	$	61,680	$	107,245

Summary of Gains and Losses (Realized and Unrealized) Relating to Level 3 Assets and Liabilities Included in Earnings

Gains and losses (realized and unrealized) relating to Level 3 assets and liabilities included in earnings for the three months ended March 31, 2013 and 2012 are reported as follows:


	Net investment income			Realized gains or (losses) and other settlements on credit derivative contracts		Unrealized gains or (losses) on credit derivative contracts			Derivative products revenues (interest rate swaps)			Income on variable interest entities			Other income
Three months ended 2013
Total gains or losses included in earnings for the period	$	(23	)	$	2,509	$	10,278		$	(15,949	)	$	570,357		$	(327	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date		—			—		10,266			(15,949	)		570,357			(327	)
Three months ended 2012
Total gains or losses included in earnings for the period	$	(49	)	$	3,254	$	(10,476	)	$	67,869		$	(52,714	)	$	60,924
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date		—			—		(16,033	)		61,598			(52,233	)		60,924

- Definition

Tabular disclosure of the amount of gains or losses for the period included in earnings or resulted in a change to net assets, have arisen from the use of significant unobservable inputs (level 3) to measure the fair value of assets, liabilities, and financial instruments classified in shareholders' equity.

+ References+ Details

- Definition

Tabular disclosure of the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments, assets, and liabilities. Such certain disclosures about the financial instruments, assets, and liabilities include: (1) the fair value of the required items together with their carrying amounts (as appropriate) and (2) the methodology and assumptions used in developing such estimates of fair value.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 107

-Paragraph 14

-Subparagraph a

-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 2: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 159

-Paragraph 18

-Subparagraph c(2), d, e, f

-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 3: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 825

-SubTopic 10

-Section 50

-Paragraph 10

-Subparagraph (a)

-URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13433-108611

Reference 4: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 107

-Paragraph 15

-Subparagraph b-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 5: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 825

-SubTopic 10

-Section 50

-Paragraph 11

-URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13467-108611

Reference 6: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 159

-Paragraph 19

-Subparagraph a, b, c(1), d(1)

-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 820

-SubTopic 10

-Section 50

-Paragraph 2

-Subparagraph (a)

-URI http://asc.fasb.org/extlink&oid=7578670&loc=d3e19207-110258

Reference 8: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 825

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+ Details