Financial Guarantee Insurance Contracts (Tables)

3 Months Ended

Mar. 31, 2013

Summary of Gross Premium Receivable Roll-Forward (Direct and Assumed Contracts)

Below is the gross premium receivable roll-forward (direct and assumed contracts) for the periods ended March 31, 2013 and December 31, 2012:


	March 31, 2013			December 31, 2012
Beginning premium receivable	$	1,620,621		$	2,028,479
Premium payments received		(35,115	)		(155,626	)
Adjustments for changes in expected life of homogeneous pools and actual changes to contractual cash flows		(14,524	)		(299,906	)
Accretion of premium receivable discount		11,190			50,407
Uncollectible premiums		(201	)		(28,031	)
Other adjustments (including foreign exchange)		(38,873	)		25,298

Ending premium receivable	$	1,543,098		$	1,620,621

Effect of Reinsurance on Premiums Written and Earned

The effect of reinsurance on premiums written and earned was as follows:


	Three Months Ended March 31,
	2013						2012
	Written			Earned			Written			Earned
Direct	($	3,530	)	$	107,079		($	92,594	)	$	97,148
Assumed		—			24			—			25
Ceded		1,014			(6,847	)		16,854			(2,223	)

Net premiums	($	2,516	)	$	100,256		($	75,740	)	$	94,950

Summarized Future Gross Undiscounted Premiums Expected to be Collected and Future Expected Premiums Earned, Net of Reinsurance

The table below summarizes the future gross undiscounted premiums expected to be collected, and future expected premiums earned, net of reinsurance at March 31, 2013:


	Future premiums expected to be collected ⁽¹⁾		Future expected premiums to be earned, net of reinsurance ⁽¹⁾
Three months ended:
June 30, 2013	$	34,028	$	58,929
September 30, 2013		32,009		55,616
December 31, 2013		30,709		52,685

Twelve months ended:
December 31, 2014		132,258		194,154
December 31, 2015		126,751		177,515
December 31, 2016		120,311		165,528
December 31, 2017		114,183		154,685

Five years ended:
December 31, 2022		502,819		639,948
December 31, 2027		396,110		452,156
December 31, 2032		283,899		290,129
December 31, 2037		149,835		149,612
December 31, 2042		51,437		42,639
December 31, 2047		15,846		14,828
December 31, 2052		3,639		4,692
December 31, 2057		92		297

Total	$	1,993,926	$	2,453,413

(1)

The future premiums expected to be collected and future premiums expected to be earned, net of reinsurance disclosed in the above table relate to the discounted premium receivable asset and unearned premium liability recorded on Ambac’s balance sheet. The use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral is required in the calculation of the premium receivable as described above, which results in a higher premium receivable balance than if expected lives were considered. If installment paying policies are retired early premiums reflected in the premium receivable asset and amounts reported in the above table for such policies may not be collected in the future.

Summary of Loss Reserve Roll-Forward, Net of Subrogation Recoverable and Reinsurance

Below is the loss reserve roll-forward, net of subrogation recoverable and reinsurance for the three months ended March 31, 2013 and the year ended December 31, 2012:


	Three Months Ended March 31, 2013			Year Ended December 31, 2012
Beginning balance of loss and loss expense reserves, net of subrogation recoverable and reinsurance	$	5,974,731		$	6,230,780

Changes in the loss and loss expense reserves due to:
Current year:
Establishment of new loss and loss expense reserves, gross of RMBS subrogation and net of reinsurance		4,083			464,058
Paid claims and loss expenses, net of subrogation and reinsurance		(58	)		(20,765	)
Establishment of RMBS subrogation recoveries, net of reinsurance		(188	)		—

Total current year		3,837			443,293

Prior years:
Change in previously established loss and loss expense reserves, gross of RMBS subrogation and net of reinsurance		(129,090	)		72,700
Paid claims and loss expenses, net of subrogation and reinsurance		12,365			(944,860	)
Change in previously established RMBS subrogation recoveries, net of reinsurance		34,617			172,818

Total prior years		(82,108	)		(699,342	)

Net change in loss and loss expense reserves		(78,271	)		(256,049	)

Ending loss and loss expense reserves, net of subrogation recoverable and reinsurance	$	5,896,460		$	5,974,731

Summary of Information Related to Policies Currently Included in Ambac's Loss Reserves or Subrogation Recoverable

The tables below summarize information related to policies currently included in Ambac’s loss reserves or subrogation recoverable at at March 31, 2013 and December 31, 2012. The weighted average risk-free rate used to discount loss reserves at March 31, 2013 and December 31, 2012 was 2.2% and 1.6%, respectively.

Surveillance Categories (at March 31, 2013)


	I/SL			IA			II			III			IV			V			Total
Number of policies		13			19			23			100			149			1			305
Remaining weighted-average contract period (in years)		13			19			20			19			7			6			12
Gross insured contractual payments outstanding:
Principal	$	375,901		$	1,720,891		$	1,204,275		$	7,567,920		$	12,001,394		$	47		$	22,870,428
Interest		217,054			1,286,857			535,433			3,574,483			2,421,012			18			8,034,857

Total	$	592,955		$	3,007,748		$	1,739,708		$	11,142,403		$	14,422,406		$	65		$	30,905,285

Gross undiscounted claim liability	$	6,442		$	56,453		$	42,156		$	4,036,278		$	7,973,957		$	65		$	12,115,351
Discount, gross claim liability		(525	)		(4,740	)		(8,465	)		(1,367,508	)		(900,496	)		(2	)		(2,281,736	)

Gross claim liability before all subrogation and before reinsurance	$	5,917		$	51,713		$	33,691		$	2,668,770		$	7,073,461		$	63		$	9,833,615

Less:
Gross RMBS subrogation⁽¹⁾		—			(93	)		—			(6,417	)		(2,490,885	)		—			(2,497,395	)
Discount, RMBS subrogation		—			1			—			18			10,007			—			10,026

Discounted RMBS subrogation, before reinsurance		—			(92	)		—			(6,399	)		(2,480,878	)		—			(2,487,369	)

Less:
Gross other subrogation⁽²⁾		—			—			(20,043	)		(139,834	)		(779,446	)		—			(939,323	)
Discount, other subrogation		—			—			7,644			22,212			36,059			—			65,915

Discounted other subrogation, before reinsurance		—			—			(12,399	)		(117,622	)		(743,387	)		—			(873,408	)

Gross claim liability, net of all subrogation and discounts, before reinsurance	$	5,917		$	51,621		$	21,292		$	2,544,749		$	3,849,196		$	63		$	6,472,838

Less: Unearned premium reserves		(3,931	)		(30,958	)		(10,341	)		(413,644	)		(104,597	)		—			(563,471	)
Plus: Loss adjustment expenses reserves		—			32			3,300			5,593			126,917			—			135,842

Claim liability reported on Balance Sheet, before reinsurance⁽³⁾	$	1,986		$	20,695		$	14,251		$	2,136,698		$	3,871,516		$	63		$	6,045,209

Reinsurance recoverable reported on Balance Sheet	$	—		$	2,781		$	2,465		$	137,915		$	17,521		$	—		$	160,682

(1)	RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for representation and warranty breaches.

(2)	Other subrogation represents subrogation, including subrogation from RMBS transactions, other than subrogation as defined in (1) above.

(3)	Claim liability reported on the Balance Sheet, before reinsurance is included in the Consolidated Balance Sheets as follows:


Loss and loss expense reserve (net of potential subrogation recoveries of $2,482,302)	$	6,590,216
Subrogation recoverable (includes gross potential recovery of $878,475)		(545,007	)

	$	6,045,209

Surveillance Categories (at December 31, 2012)


	I/SL			IA			II			III			IV			V			Total
Number of policies		14			12			28			114			147			1			316
Remaining weighted-average contract period (in years)		15			21			18			20			8			6			13
Gross insured contractual payments outstanding:
Principal	$	311,157		$	786,998		$	1,245,793		$	9,161,747		$	12,554,628		$	47		$	24,060,370
Interest		166,276			715,129			379,237			4,905,775			3,076,746			20			9,243,183

Total	$	477,433		$	1,502,127		$	1,625,030		$	14,067,522		$	15,631,374		$	67		$	33,303,553

Gross undiscounted claim liability	$	2,135		$	40,898		$	49,521		$	4,051,076		$	7,976,765		$	67		$	12,120,462
Discount, gross claim liability		(219	)		(3,532	)		(3,247	)		(1,342,910	)		(788,720	)		(3	)		(2,138,631	)

Gross claim liability before all subrogation and before reinsurance	$	1,916		$	37,366		$	46,274		$	2,708,166		$	7,188,045		$	64		$	9,981,831

Less:
Gross RMBS subrogation⁽¹⁾		—			—			—			(16,170	)		(2,544,993	)		—			(2,561,163	)
Discount, RMBS subrogation		—			—			—			312			37,626			—			37,938

Discounted RMBS subrogation, before reinsurance		—			—			—			(15,858	)		(2,507,367	)		—			(2,523,225	)

Less:
Gross other subrogation⁽²⁾		—			—			—			(141,012	)		(766,717	)		—			(907,729	)
Discount, other subrogation		—			—			—			21,238			15,711			—			36,949

Discounted other subrogation, before reinsurance		—			—			—			(119,774	)		(751,006	)		—			(870,780	)

Gross claim liability, net of all subrogation and discounts, before reinsurance	$	1,916		$	37,366		$	46,274		$	2,572,534		$	3,929,672		$	64		$	6,587,826

Less: Unearned premium reserves		(1,179	)		(21,626	)		(17,120	)		(450,247	)		(113,622	)		—			(603,794	)
Plus: Loss adjustment expenses reserves	$	—		$	—		$	—		$	—		$	138,108		$	—		$	138,108

Claim liability reported on Balance Sheet, before reinsurance⁽³⁾	$	737		$	15,740		$	29,154		$	2,122,287		$	3,954,158		$	64		$	6,122,140

Reinsurance recoverable reported on Balance Sheet	$	—		$	1,078		$	7,085		$	128,333		$	22,590		$	—		$	159,086

(1)	RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for representation and warranty breaches.

(2)	Other subrogation represents subrogation, including subrogation from RMBS transactions, other than subrogation as defined in (1) above.

(3)	Claim liability reported on the Balance Sheet, before reinsurance is included in the Consolidated Balance Sheets as follows:


Loss and loss expense reserve (net of potential subrogation recoveries of $2,611,430)	$	6,619,486
Subrogation recoverable (includes gross potential recovery of $782,575)		(497,346	)

	$	6,122,140

Summary of Balance of Subrogation Recoveries and Related Claim Liabilities, by Estimation Approach

The balance of RMBS subrogation recoveries and the related claim liabilities, by estimation approach, at March 31, 2013 and December 31, 2012, are as follows:


	March 31, 2013
Approach	Count		Gross loss reserve before subrogation recoveries		Subrogation recoveries⁽¹⁾⁽²⁾			Gross loss reserve after subrogation recoveries
Adverse samples		29	$	2,424,630	$	(1,483,726	)	$	940,904
Random samples		20		1,015,011		(1,003,643	)		11,368

Totals		49	$	3,439,641	$	(2,487,369	)	$	952,272


	December 31, 2012
Approach	Count		Gross loss reserve before subrogation recoveries		Subrogation recoveries ⁽¹⁾⁽²⁾			Gross loss reserve after subrogation recoveries
Adverse samples		27	$	2,331,878	$	(1,442,817	)	$	889,061
Random samples		22		1,231,466		(1,080,408	)		151,058

Totals		49	$	3,563,344	$	(2,523,225	)	$	1,040,119

(1)

The amount of recorded subrogation recoveries related to each securitization is limited to ever-to-date paid losses plus projected future paid losses for each policy. To the extent significant losses have been paid but not yet recovered, the recorded amount of RMBS 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.

(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.

Summary of Rollforward of RMBS Subrogation, by Estimation Approach

Below is the rollforward of RMBS subrogation, by estimation approach, for the period December 31, 2012 through March 31, 2013:


	Random sample			Number of transactions			Adverse sample		Number of transactions		Total
Rollforward:
Discounted RMBS subrogation (gross of reinsurance) at December 31, 2012	$	1,080,408			22		$	1,442,817		27	$	2,523,225

Changes recognized in 2013:
Additional transactions reviewed		—			n/a			—		n/a		—
Additional adverse sample loans reviewed		—			n/a			—		n/a		—
Impact of sponsor actions ⁽¹⁾		(54,195	)		(2	)		—		n/a		(54,195	)
All other changes ⁽²⁾		(22,570	)		n/a			40,909		2		18,339

Discounted RMBS subrogation (gross of reinsurance) at March 31, 2013	$	1,003,643			20		$	1,483,726		29	$	2,487,369

(1)	Sponsor actions include loan repurchases, direct payments to Ambac, and other contributions from sponsors.

(2)

Other changes which may impact RMBS subrogation recoveries include changes in actual or projected collateral performance, changes in the creditworthiness of a sponsor, and/or the projected timing of recoveries. For the three months ended March 31, 2013, an additional two transactions were added to the Adverse Sample subrogation population; however, the impacts on RMBS subrogation disclosed in the Adverse Sample column relate to those, as well as other, transactions.

- Definition

Tabular disclosure of insured financial obligations with credit deterioration related to the claim liability on financial guarantee insurance contracts as of the end of each annual and interim reporting period detailing, at a minimum, the following for each surveillance category or grouping used to track and monitor the entity's insured financial obligations: (1) number of issued and outstanding financial guarantee insurance contracts; (2) remaining weighted average contract period; (3) insured contractual payments outstanding, segregating principal and interest; (4) gross claim liability; (5) gross potential recoveries; (6) net discount of both the claim liability and potential recoveries; (7) net claim liability; (8) reinsurance recoverable; and (9) unearned premium revenue.

+ References+ Details

- Definition

Tabular disclosure of the activity in the reserve for settling insured claims and expenses incurred in the claims settlement process for the period. The estimated liability includes the amount of money that will be required for future payments of (a) claims that have been reported to the insurer, (b) claims related to insured events that have occurred but that have not been reported to the insurer as of the date the liability is estimated, and (c) claim adjustment expenses. Claim adjustment expenses include costs incurred in the claim settlement process such as legal fees; outside adjuster fees; and costs to record, process, and adjust claims.

+ References+ Details