Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2015

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 September 30, 2015 and December 31, 2014, including the level within the fair value hierarchy at which fair value measurements are categorized. As required by the Fair Value Measurement Topic of the ASC 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:
							Level 1		Level 2			Level 3
September 30, 2015:
Financial assets:
Fixed income securities:
Municipal obligations	$	419,001		$	419,001		$	—	$	419,001		$	—
Corporate obligations	1,587,578			1,587,578			—		1,587,578			—
Foreign obligations	103,654			103,654			—		103,654			—
U.S. government obligations	30,863			30,863			30,863		—			—
U.S. agency obligations	4,281			4,281			—		4,281			—
Residential mortgage-backed securities	1,871,483			1,871,483			—		1,487,694			383,789
Collateralized debt obligations	81,912			81,912			—		81,912			—
Other asset-backed securities	858,104			858,104			—		858,104			—
Fixed income securities, pledged as collateral:
U.S. government obligations	64,972			64,972			64,972		—			—
Short term investments	364,780			364,780			305,950		58,830			—
Other investments	314,934			302,791			—		290,723			12,068
Cash and cash equivalents	27,099			27,099			27,099		—			—
Loans	5,499			5,479			—		—			5,479
Derivative assets:
Credit derivatives	1,345			1,345			—		—			1,345
Interest rate swaps—asset position	89,743			89,743			—		23,796			65,947
Interest rate swaps—liability position	—			—			—		—			—
Futures contracts	—			—			—		—			—
Other assets	9,322			9,322			—		—			9,322
Variable interest entity assets:
Fixed income securities:
Corporate obligations	2,679,895			2,679,895			—		—			2,679,895
Restricted cash	5,895			5,895			5,895		—			—
Loans	12,183,061			12,183,061			—		—			12,183,061
Total financial assets	$	20,703,421		$	20,691,258		$	434,779	$	4,915,573		$	15,340,906
Financial liabilities:
Obligations under investment agreements	$	100,358		$	100,858		$	—	$	—		$	100,858
Long term debt, including accrued interest	1,457,996			1,318,300			—		139,002			1,179,298
Derivative liabilities:
Credit derivatives	31,232			31,232			—		—			31,232
Interest rate swaps—asset position	(63,785		)	(63,785		)	—		(63,785		)	—
Interest rate swaps—liability position	408,168			408,168			—		270,049			138,119
Futures contracts	220			220			220		—			—
Liabilities for net financial guarantees written ⁽¹⁾	2,414,692			3,044,698			—		—			3,044,698
Variable interest entity liabilities:
Long-term debt	12,791,012			12,791,012			—		10,647,480			2,143,532
Derivative liabilities:
Interest rate swaps—liability position	2,065,224			2,065,224			—		2,065,224			—
Currency swaps—asset position	(31,429		)	(31,429		)	—		(31,429		)	—
Total financial liabilities	$	19,173,688		$	19,664,498		$	220	$	13,026,541		$	6,637,737

(1)

The carrying value of net financial guarantees written includes the following balance sheet items: Premium receivables; Reinsurance recoverable on paid and unpaid losses; Deferred ceded premium; Subrogation recoverable; Insurance intangible asset; Unearned premiums; Loss and loss expense reserves; Ceded premiums payable, premiums taxes payable and other deferred fees recorded in Other liabilities.



	Carrying Amount			Total Fair Value			Fair Value Measurements Categorized as:
							Level 1		Level 2			Level 3
December 31, 2014:
Financial assets:
Fixed income securities:
Municipal obligations	$	525,792		$	525,792		$	—	$	525,792		$	—
Corporate obligations	1,385,594			1,385,594			—		1,381,786			3,808
Foreign obligations	127,757			127,757			—		127,757			—
U.S. government obligations	42,979			42,979			42,979		—			—
U.S. agency obligations	29,486			29,486			—		29,486			—
Residential mortgage-backed securities	1,710,955			1,710,955			—		1,516,562			194,393
Collateralized debt obligations	21,122			21,122			—		21,122			—
Other asset-backed securities	882,001			882,001			—		882,001			—
Fixed income securities, pledged as collateral:
U.S. government obligations	64,267			64,267			64,267		—			—
Short term investments	360,065			360,065			358,190		1,875			—
Other investments	357,016			349,468			—		336,013			13,455
Cash and cash equivalents	73,903			73,903			73,903		—			—
Loans	5,714			5,634			—		—			5,634
Derivative assets:
Credit derivatives	2,043			2,043			—		—			2,043
Interest rate swaps—asset position	106,974			106,974			—		106,974			—
Interest rate swaps—liability position	—			—			—		—			—
Futures contracts	—			—			—		—			—
Other assets	12,036			12,036			—		—			12,036
Variable interest entity assets:
Fixed income securities:
Corporate obligations	2,743,050			2,743,050			—		—			2,743,050
Restricted cash	7,708			7,708			7,708		—			—
Loans	12,371,177			12,371,177			—		—			12,371,177
Total financial assets	$	20,829,639		$	20,822,011		$	547,047	$	4,929,368		$	15,345,596
Financial liabilities:
Obligations under investment agreements	$	160,079		$	161,821		$	—	$	—		$	161,821
Long term debt, including accrued interest	1,273,805			1,379,864			—		—			1,379,864
Derivative liabilities:
Credit derivatives	75,502			75,502			—		—			75,502
Interest rate swaps—asset position	(54,666		)	(54,666		)	—		(54,666		)	—
Interest rate swaps—liability position	385,546			385,546			—		243,659			141,887
Futures contracts	562			562			562		—			—
Other contracts	—			—			—		—			—
Liabilities for net financial guarantees written ⁽¹⁾	2,923,652			4,539,000			—		—			4,539,000
Variable interest entity liabilities:
Long-term debt	12,882,076			12,882,076			—		11,618,412			1,263,664
Derivative liabilities:
Interest rate swaps—liability position	2,133,268			2,133,268			—		2,133,268			—
Currency swaps—liability position	66,895			66,895			—		66,895			—
Total financial liabilities	$	19,846,719		$	21,569,868		$	562	$	14,007,568		$	7,561,738

(1)

Information about Valuation Inputs for Variable Interest Entity Assets and Liabilities Classified as Level 3

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 September 30, 2015 and December 31, 2014 is summarized below:



	CLOs			Other ⁽¹⁾
September 30, 2015:
Notional outstanding	$	341,668		$	913,647
Weighted average reference obligation price	98.5			85.9
Weighted average life (WAL) in years	1.0			4.2
Weighted average credit rating	AA			BBB-
Weighted average relative change ratio	36.3		%	45.3		%
CVA percentage	7.48		%	22.91		%
Fair value of derivative liabilities	$	1,740		$	28,125

December 31, 2014:
Notional outstanding	$	549,923		$	921,036
Weighted average reference obligation price	98.9			86.8
Weighted average life (WAL) in years	1.8			5.7
Weighted average credit rating	AA			BBB-
Weighted average relative change ratio	35.9		%	49.0		%
CVA percentage	5.40		%	15.82		%
Fair value of derivative liabilities	$	2,027		$	71,104

(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 $58,482, WAL of 0.4 and liability fair value of $22 as of September 30, 2015. Other inputs to the valuation of these transactions at September 30, 2015 include weighted average quotes of less than 1% of notional, weighted average rating of A+ and Ambac CVA percentage of 1.09%. As of December 31, 2014, these contracts had a combined notional outstanding of $58,800, WAL of 1.2 years and liability fair value of $328. Other inputs to the valuation of these transactions at December 31, 2014 include weighted average quotes of 1% of notional, weighted average rating of A and Ambac CVA percentage of 2.21% .

Summary of Changes in Level 3 Fair Value Category

The following tables present the changes in the Level 3 fair value category for the periods presented in 2015 and 2014. 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
	Investments			Other assets			Derivatives			Investments			Loans			Long-term debt			Total
Three Months Ended September 30, 2015:
Balance, beginning of period	$	380,332		$	9,704		$	(119,309	)	$	2,747,181		$	13,005,216		$	(2,166,826	)	$	13,856,298
Total gains/(losses) realized and unrealized:
Included in earnings	8,429			(382		)	20,073			39,630			44,404			(59,760		)	52,394
Included in other comprehensive income	(4,288		)	—			—			(106,916		)	(471,321		)	79,314			(503,211		)
Purchases	28			—			—			—			—			—			28
Issuances	—			—			—			—			—			—			—
Sales	—			—			—			—			—			—			—
Settlements	(712		)	—			(2,822		)	—			(70,115		)	3,740			(69,909		)
Transfers into Level 3	—			—			—			—			—			—			—
Transfers out of Level 3	—			—			—			—			—			—			—
Deconsolidation of VIEs	—			—			—			—			(325,123		)	—			(325,123		)
Balance, end of period	$	383,789		$	9,322		$	(102,058	)	$	2,679,895		$	12,183,061		$	(2,143,532	)	$	13,010,477
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	$	—		$	(382	)	$	(12,285	)	$	39,630		$	102,901		$	(107,567	)	$	22,297

Three Months Ended September 30, 2014:
Balance, beginning of period	$	66,352		$	12,782		$	(218,661	)	$	2,688,388		$	13,743,231		$	(1,375,049	)	$	14,917,043
Total gains/(losses) realized and unrealized:
Included in earnings	835			(381		)	3,885			105,116			209,028			(16,961		)	301,522
Included in other comprehensive income	(254		)	—			—			(141,821		)	(678,944		)	62,314			(758,705		)
Purchases	—			—			—			—			—			—			—
Issuances	—			—			—			—			—			—			—
Sales	(3,388		)	—			—			—			—			—			(3,388		)
Settlements	(885		)	—			(1,126		)	—			(73,042		)	4,102			(70,951		)
Transfers into Level 3	—			—			—			—			—			—			—
Transfers out of Level 3	—			—			—			—			(696,789		)	36,891			(659,898		)
Balance, end of period	$	62,660		$	12,401		$	(215,902	)	$	2,651,683		$	12,503,484		$	(1,288,703	)	$	13,725,623
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	$	—		$	(381	)	$	3,229		$	105,116		$	215,296		$	(16,047	)	$	307,213



Level 3 - Financial Assets and Liabilities Accounted for at Fair Value
										VIE Assets and Liabilities
	Investments			Other assets			Derivatives			Investments			Loans			Long-term debt			Total
Nine Months Ended September 30, 2015:
Balance, beginning of period	$	198,201		$	12,036		$	(215,346	)	$	2,743,050		$	12,371,177		$	(1,263,664	)	$	13,845,454
Total gains/(losses) realized and unrealized:
Included in earnings	21,066			(1,009		)	20,640			14,490			701,562			(922,849		)	(166,100		)
Included in other comprehensive income	(48,611		)	—			—			(77,645		)	(311,773		)	35,303			(402,726		)
Purchases	234,880			—			—			—			—			—			234,880
Issuances	—			—			—			—			—			—			—
Sales	—			—			—			—			—			—			—
Settlements	(21,747		)	(1,705		)	4,430			—			(252,782		)	7,678			(264,126		)
Transfers into Level 3	—			—			88,218			—			—			—			88,218
Transfers out of Level 3	—			—			—			—			—			—			—
Deconsolidation of VIEs	—			—			—			—			(325,123		)	—			(325,123		)
Balance, end of period	$	383,789		$	9,322		$	(102,058	)	$	2,679,895		$	12,183,061		$	(2,143,532	)	$	13,010,477
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	$	—		$	(1,009	)	$	(20,081	)	$	14,490		$	760,059		$	(970,656	)	$	(217,197	)

Nine Months Ended September 30, 2014:
Balance, beginning of period	$	67,783		$	13,384		$	(186,934	)	$	2,475,182		$	13,398,895		$	(1,514,605	)	$	14,253,705
Total gains/(losses) realized and unrealized:
Included in earnings	1,676			(983		)	(36,323		)	235,178			735,597			(268,951		)	666,194
Included in other comprehensive income	(595		)	—			—			(58,677		)	(270,727		)	24,066			(305,933		)
Purchases	—			—			—			—			70,000			—			70,000
Issuances	—			—			—			—			—			—			—
Sales	(3,388		)	—			—			—			—			—			(3,388		)
Settlements	(2,608		)	—			7,355			—			(733,492		)	433,896			(294,849		)
Transfers into Level 3	—			—			—			—			—			—			—
Transfers out of Level 3	(208		)	—			—			—			(696,789		)	36,891			(660,106		)
Balance, end of period	$	62,660		$	12,401		$	(215,902	)	$	2,651,683		$	12,503,484		$	(1,288,703	)	$	13,725,623
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	$	—		$	(983	)	$	(39,830	)	$	235,178		$	736,732		$	(264,899	)	$	666,198

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



Level 3 - Investments by Class:
	Other Asset Backed Securities			Corporate Obligations			U.S. Agency Obligations		Non-Agency RMBS			Total Investments
Three Months Ended September 30, 2015:
Balance, beginning of period	$	—		$	—		$	—	$	380,332		$	380,332
Total gains/(losses) realized and unrealized:
Included in earnings	—			—			—		8,429			8,429
Included in other comprehensive income	—			—			—		(4,288		)	(4,288		)
Purchases	—			—			—		28			28
Issuances	—			—			—		—			—
Sales	—			—			—		—			—
Settlements	—			—			—		(712		)	(712		)
Transfers into Level 3	—			—			—		—			—
Transfers out of Level 3	—			—			—		—			—
Balance, end of period	$	—		$	—		$	—	$	383,789		$	383,789
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	$	—		$	—		$	—	$	—		$	—

Three Months Ended September 30, 2014:
Balance, beginning of period	$	62,601		$	3,751		$	—	$	—		$	66,352
Total gains/(losses) realized and unrealized:
Included in earnings	859			(24		)	—		—			835
Included in other comprehensive income	(272		)	18			—		—			(254		)
Purchases	—			—			—		—			—
Issuances	—			—			—		—			—
Sales	(3,388		)	—			—		—			(3,388		)
Settlements	(885		)	—			—		—			(885		)
Transfers into Level 3	—			—			—		—			—
Transfers out of Level 3	—			—			—		—			—
Balance, end of period	$	58,915		$	3,745		$	—	$	—		$	62,660
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:
	Other Asset Backed Securities			Corporate Obligations			U.S. Agency Obligations			Non-Agency RMBS			Total Investments
Nine Months Ended September 30, 2015:
Balance, beginning of period	$	—		$	3,808		$	—		$	194,393		$	198,201
Additions of VIEs consolidated	—			—			—			—			—
Total gains/(losses) realized and unrealized:
Included in earnings	—			(19		)	—			21,085			21,066
Included in other comprehensive income	—			(286		)	—			(48,325		)	(48,611		)
Purchases	—			—			—			234,880			234,880
Issuances	—			—			—			—			—
Sales	—			—			—			—			—
Settlements	—			(3,503		)	—			(18,244		)	(21,747		)
Transfers into Level 3	—			—			—			—			—
Transfers out of Level 3	—			—			—			—			—
Balance, end of period	$	—		$	—		$	—		$	383,789		$	383,789
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	$	—		$	—		$	—		$	—		$	—

Nine Months Ended September 30, 2014:
Balance, beginning of period	$	64,073		$	3,502		$	208		$	—		$	67,783
Additions of VIEs consolidated	—			—			—			—			—
Total gains/(losses) realized and unrealized:
Included in earnings	1,748			(72		)	—			—			1,676
Included in other comprehensive income	(910		)	315			—			—			(595		)
Purchases	—			—			—			—			—
Issuances	—			—			—			—			—
Sales	(3,388		)	—			—			—			(3,388		)
Settlements	(2,608		)	—			—			—			(2,608		)
Transfers into Level 3	—			—			—			—			—
Transfers out of Level 3	—			—			(208		)	—			(208		)
Balance, end of period	$	58,915		$	3,745		$	—		$	—		$	62,660
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:
	Interest Rate Swaps			Credit Derivatives			Total Derivatives
Three Months Ended September 30, 2015:
Balance, beginning of period	$	(52,819	)	$	(66,490	)	$	(119,309	)
Total gains/(losses) realized and unrealized:
Included in earnings	(16,879		)	36,952			20,073
Included in other comprehensive income	—			—			—
Purchases	—			—			—
Issuances	—			—			—
Sales	—			—			—
Settlements	(2,473		)	(349		)	(2,822		)
Transfers into Level 3	—			—			—
Transfers out of Level 3	—			—			—
Balance, end of period	$	(72,171	)	$	(29,887	)	$	(102,058	)
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	$	(16,879	)	$	4,594		$	(12,285	)

Three Months Ended September 30, 2014:
Balance, beginning of period	$	(129,010	)	$	(89,651	)	$	(218,661	)
Total gains/(losses) realized and unrealized:
Included in earnings	(3,532		)	7,417			3,885
Included in other comprehensive income	—			—			—
Purchases	—			—			—
Issuances	—			—			—
Sales	—			—			—
Settlements	(530		)	(596		)	(1,126		)
Transfers into Level 3	—			—			—
Transfers out of Level 3	—			—			—
Balance, end of period	$	(133,072	)	$	(82,830	)	$	(215,902	)
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	$	(3,532	)	$	6,761		$	3,229



Level 3 - Derivatives by Class:
	Interest Rate Swaps			Credit Derivatives			Total Derivatives
Nine Months Ended September 30, 2015:
Balance, beginning of period	$	(141,887	)	$	(73,459	)	$	(215,346	)
Total gains/(losses) realized and unrealized:
Included in earnings	(24,106		)	44,746			20,640
Included in other comprehensive income	—			—			—
Purchases	—			—			—
Issuances	—			—			—
Sales	—			—			—
Settlements	5,604			(1,174		)	4,430
Transfers into Level 3	88,218			—			88,218
Transfers out of Level 3	—			—			—
Balance, end of period	$	(72,171	)	$	(29,887	)	$	(102,058	)
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	$	(24,106	)	$	4,025		$	(20,081	)

Nine Months Ended September 30, 2014:
Balance, beginning of period	$	(92,612	)	$	(94,322	)	$	(186,934	)
Total gains/(losses) realized and unrealized:
Included in earnings	(49,903		)	13,580			(36,323		)
Included in other comprehensive income	—			—			—
Purchases	—			—			—
Issuances	—			—			—
Sales	—			—			—
Settlements	9,443			(2,088		)	7,355
Transfers into Level 3	—			—			—
Transfers out of Level 3	—			—			—
Balance, end of period	$	(133,072	)	$	(82,830	)	$	(215,902	)
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	$	(49,903	)	$	10,073		$	(39,830	)

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 affected periods 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 (loss) on variable interest entities			Other income or (loss)
Three Months Ended September 30, 2015:
Total gains or losses included in earnings for the period	$	8,429	$	1,693	$	35,259	$	(16,879	)	$	24,274		$	(382	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		4,594		(16,879		)	34,964			(382		)

Three Months Ended September 30, 2014:
Total gains or losses included in earnings for the period	$	835	$	596	$	6,820	$	(3,532	)	$	297,183		$	(381	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		6,761		(3,532		)	304,365			(381		)

Nine Months Ended September 30, 2015:
Total gains or losses included in earnings for the period	$	21,066	$	2,519	$	42,227	$	(24,106	)	$	(206,797	)	$	(1,009	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		4,025		(24,106		)	(196,107		)	(1,009		)

Nine Months Ended September 30, 2014:
Total gains or losses included in earnings for the period	$	1,676	$	2,088	$	11,491	$	(49,903	)	$	701,824		$	(983	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		10,074		(49,903		)	707,011			(983		)