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Fair Value Measurements | 12 Months Ended
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Dec. 31, 2017
Fair Value Disclosures [Abstract] |
Fair Value Measurements | 9. FAIR VALUE MEASUREMENTS The Fair Value Measurement Topic of the ASC establishes a framework for measuring fair value and disclosures about fair value measurements. Fair Value Hierarchy: The Fair Value Measurement Topic of the ASC specifies a fair value hierarchy based on whether the inputs to valuation techniques used to measure fair value are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Company-based assumptions. The fair value hierarchy prioritizes model inputs into three broad levels as follows:
l | Level 1 |  | Quoted prices for identical instruments in active markets. Assets and liabilities classified as Level 1 include US Treasury and other foreign government obligations traded in highly liquid and transparent markets, exchange traded futures contracts, variable rate demand obligations and money market funds.
l | Level 2 |  | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Assets and liabilities classified as Level 2 generally include investments in fixed income securities representing municipal, asset-backed and corporate obligations, certain interest rate swap contracts, and most long-term debt of variable interest entities consolidated under the Consolidation Topic of the ASC.
l | Level 3 |  | Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. This hierarchy requires the use of observable market data when available. Assets and liabilities classified as Level 3 include credit derivative contracts, certain uncollateralized interest rate swap contracts, equity interests in Ambac sponsored special purpose entities and certain investments in fixed income securities. Additionally, Level 3 assets and liabilities generally include fixed income securities, loan receivables, and certain long-term debt of variable interest entities consolidated under the Consolidation Topic of the ASC.
The following table sets forth the carrying amount and fair value of Ambac’s financial assets and liabilities as of December 31, 2017 and 2016, 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
December 31, 2017: |  |  |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |
Municipal obligations |  | $ | 779,834 |  |  | $ | 779,834 |  |  | $ | — |  |  | $ | 779,834 |  |  | $ | — |
Corporate obligations |  | 860,075 |  |  | 860,075 |  |  | 450 |  |  | 859,625 |  |  | — |
Foreign obligations |  | 26,543 |  |  | 26,543 |  |  | 25,615 |  |  | 928 |  |  | — |
U.S. government obligations |  | 85,408 |  |  | 85,408 |  |  | 85,408 |  |  | — |  |  | — |
Residential mortgage-backed securities |  | 2,251,333 |  |  | 2,251,333 |  |  | — |  |  | 1,515,316 |  |  | 736,017 |
Collateralized debt obligations |  | 51,037 |  |  | 51,037 |  |  | — |  |  | 51,037 |  |  | — |
Other asset-backed securities |  | 597,942 |  |  | 597,942 |  |  | — |  |  | 525,402 |  |  | 72,540 |
Fixed income securities, pledged as collateral: |  |  |  |  |  |  |  |  |  |
U.S. government obligations |  | 99,719 |  |  | 99,719 |  |  | 99,719 |  |  | — |  |  | — |
Short term investments |  | 557,270 |  |  | 557,270 |  |  | 389,299 |  |  | 167,971 |  |  | — |
Other investments (1) |  | 431,630 |  |  | 413,977 |  |  | 56,498 |  |  | 29,750 |  |  | 17,288 |
Cash and cash equivalents |  | 623,703 |  |  | 623,703 |  |  | 615,073 |  |  | 8,630 |  |  | — |
Loans |  | 10,358 |  |  | 10,284 |  |  | — |  |  | — |  |  | 10,284 |
Derivative assets: |  |  |  |  |  |  |  |  |  |
Interest rate swaps—asset position |  | 73,199 |  |  | 73,199 |  |  | — |  |  | 11,825 |  |  | 61,374 |
Other assets |  | 5,979 |  |  | 5,979 |  |  | — |  |  | — |  |  | 5,979 |
Variable interest entity assets: |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |
Corporate obligations |  | 2,914,145 |  |  | 2,914,145 |  |  | — |  |  | — |  |  | 2,914,145 |
Restricted cash |  | 978 |  |  | 978 |  |  | 978 |  |  | — |  |  | — |
Loans |  | 11,529,384 |  |  | 11,529,384 |  |  | — |  |  | — |  |  | 11,529,384 |
Derivative assets: |  |  |  |  |  |  |  |  |  |
Currency swaps-asset position |  | 54,877 |  |  | 54,877 |  |  | — |  |  | 54,877 |  |  | — |
Total financial assets |  | $ | 20,853,695 |  |  | $ | 20,835,968 |  |  | $ | 1,173,321 |  |  | $ | 4,005,195 |  |  | $ | 15,347,011 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |
Long term debt, including accrued interest |  | 1,428,680 |  |  | 1,369,499 |  |  | — |  |  | 1,046,511 |  |  | 322,988 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |
Credit derivatives |  | 566 |  |  | 566 |  |  | — |  |  | — |  |  | 566 |
Interest rate swaps—asset position |  | (627 | ) |  | (627 | ) |  | — |  |  | (627 | ) |  | — |
Interest rate swaps—liability position |  | 81,495 |  |  | 81,495 |  |  | — |  |  | 81,495 |  |  | — |
Futures contracts |  | 1,348 |  |  | 1,348 |  |  | 1,348 |  |  | — |  |  | — |
Liabilities for net financial guarantees written (2) |  | 3,435,438 |  |  | 4,842,402 |  |  | — |  |  | — |  |  | 4,842,402 |
Variable interest entity liabilities: |  |  |  |  |  |  |  |  |  |
Long-term debt |  | 12,160,544 |  |  | 12,160,544 |  |  | — |  |  | 9,402,856 |  |  | 2,757,688 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |
Interest rate swaps—liability position |  | 2,205,264 |  |  | 2,205,264 |  |  | — |  |  | 2,205,264 |  |  | — |
Total financial liabilities |  | $ | 19,312,708 |  |  | $ | 20,660,491 |  |  | $ | 1,348 |  |  | $ | 12,735,499 |  |  | $ | 7,923,644 |
|  | Carrying Amount |  | Total Fair Value |  | Fair Value Measurements Categorized as:
Level 1 |  | Level 2 |  | Level 3
December 31, 2016: |  |  |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |
Municipal obligations |  | $ | 374,368 |  |  | $ | 374,368 |  |  | $ | — |  |  | $ | 374,368 |  |  | $ | — |
Corporate obligations |  | 1,802,165 |  |  | 1,802,165 |  |  | — |  |  | 1,802,165 |  |  | — |
Foreign obligations |  | 43,135 |  |  | 43,135 |  |  | 42,212 |  |  | 923 |  |  | — |
U.S. government obligations |  | 36,186 |  |  | 36,186 |  |  | 36,186 |  |  | — |  |  | — |
U.S. agency obligations |  | 4,060 |  |  | 4,060 |  |  | — |  |  | 4,060 |  |  | — |
Residential mortgage-backed securities |  | 2,351,595 |  |  | 2,351,595 |  |  | — |  |  | 1,654,882 |  |  | 696,713 |
Collateralized debt obligations |  | 113,923 |  |  | 113,923 |  |  | — |  |  | 113,923 |  |  | — |
Other asset-backed securities |  | 828,783 |  |  | 828,783 |  |  | — |  |  | 762,793 |  |  | 65,990 |
Fixed income securities, pledged as collateral: |  |  |  |  |  |  |  |  |  |
U.S. government obligations |  | 64,905 |  |  | 64,905 |  |  | 64,905 |  |  | — |  |  | — |
Short term investments |  | 430,788 |  |  | 430,788 |  |  | 371,367 |  |  | 59,421 |  |  | — |
Other investments (1) |  | 450,307 |  |  | 435,237 |  |  | 83,791 |  |  | — |  |  | 14,934 |
Cash and cash equivalents |  | 91,025 |  |  | 91,025 |  |  | 46,587 |  |  | 44,438 |  |  | — |
Loans |  | 4,160 |  |  | 4,066 |  |  | — |  |  | — |  |  | 4,066 |
Derivative assets: |  |  |  |  |  |  |  |  |  |
Interest rate swaps—asset position |  | 77,206 |  |  | 77,206 |  |  | — |  |  | 16,950 |  |  | 60,256 |
Interest rate swaps—liability position |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Futures contracts |  | 536 |  |  | 536 |  |  | 536 |  |  | — |  |  | — |
Other assets |  | 7,382 |  |  | 7,382 |  |  | — |  |  | — |  |  | 7,382 |
Variable interest entity assets: |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |
Corporate obligations |  | 2,622,566 |  |  | 2,622,566 |  |  | — |  |  | — |  |  | 2,622,566 |
Restricted cash |  | 4,873 |  |  | 4,873 |  |  | 4,873 |  |  | — |  |  | — |
Derivative assets: |  |  |  |  |  |  |  |  |  |
Currency swaps-asset position |  | 80,407 |  |  | 80,407 |  |  | — |  |  | 80,407 |  |  | — |
Loans |  | 10,658,963 |  |  | 10,658,963 |  |  | — |  |  | — |  |  | 10,658,963 |
Total financial assets |  | $ | 20,047,333 |  |  | $ | 20,032,169 |  |  | $ | 650,457 |  |  | $ | 4,914,330 |  |  | $ | 14,130,870 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |
Obligations under investment agreements |  | $ | 82,358 |  |  | $ | 82,333 |  |  | $ | — |  |  | $ | — |  |  | $ | 82,333 |
Long term debt, including accrued interest |  | 1,536,352 |  |  | 1,494,340 |  |  | — |  |  | 1,147,728 |  |  | 346,612 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |
Credit derivatives |  | 15,349 |  |  | 15,349 |  |  | — |  |  | — |  |  | 15,349 |
Interest rate swaps—asset position |  | (61,839 | ) |  | (61,839 | ) |  | — |  |  | (61,839 | ) |  | — |
Interest rate swaps—liability position |  | 365,776 |  |  | 365,776 |  |  | — |  |  | 220,587 |  |  | 145,189 |
Liabilities for net financial guarantees written (2) |  | 3,009,943 |  |  | 4,490,070 |  |  | — |  |  | — |  |  | 4,490,070 |
Variable interest entity liabilities: |  |  |  |  |  |  |  |  |  |
Long-term debt |  | 11,155,936 |  |  | 11,155,936 |  |  | — |  |  | 8,573,716 |  |  | 2,582,220 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |
Interest rate swaps—liability position |  | 2,078,601 |  |  | 2,078,601 |  |  | — |  |  | 2,078,601 |  |  | — |
Currency swaps—liability position |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total financial liabilities |  | $ | 18,182,476 |  |  | $ | 19,620,566 |  |  | $ | — |  |  | $ | 11,958,793 |  |  | $ | 7,661,773 |
(1) | Excluded from the fair value measurement categories in the table above are investment funds of $310,441 and $336,513 as of December 31, 2017 and 2016, respectively, which are measured using NAV per share as a practical expedient.
(2) | 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.
Determination of Fair Value: When available, Ambac uses quoted active market prices specific to the financial instrument to determine fair value, and classifies such items within Level 1. The determination of fair value for financial instruments categorized in Level 2 or 3 involves significant judgment due to the complexity of factors contributing to the valuation. Third-party sources from which we obtain independent market quotes also use assumptions, judgments and estimates in determining financial instrument values and different third parties may use different methodologies or provide different values for financial instruments. In addition, the use of internal valuation models may require assumptions about hypothetical or inactive markets. As a result of these factors, the actual trade value of a financial instrument in the market, or exit value of a financial instrument position by Ambac, may be significantly different from its recorded fair value. Ambac’s financial instruments carried at fair value are mainly comprised of investments in fixed income securities, equity interests in pooled investment funds, derivative instruments, variable interest entity assets and liabilities and equity interests in Ambac sponsored special purpose entities. Valuation of financial instruments is performed by Ambac’s finance group using methods approved by senior financial management with consultation from risk management and portfolio managers as appropriate. Preliminary valuation results are discussed with portfolio managers quarterly to assess consistency with market transactions and trends as applicable. Market transactions such as trades or negotiated settlements of similar positions, if any, are reviewed to validate fair value model results. However many of the financial instruments valued using significant unobservable inputs have very little or no observable market activity. Methods and significant inputs and assumptions used to determine fair values across portfolios are reviewed quarterly by senior financial management. Other valuation control procedures specific to particular portfolios are described further below. We reflect Ambac’s own creditworthiness in the fair value of financial liabilities by including a credit valuation adjustment (“CVA”) in the determination of fair value. A decline (increase) in Ambac’s creditworthiness as perceived by market participants will generally result in a higher (lower) CVA, thereby lowering (increasing) the fair value of Ambac’s financial liabilities as reported. Fixed Income Securities: The fair values of fixed income investment securities are based primarily on market prices received from dealer quotes or alternative pricing sources with reasonable levels of price transparency. Because many fixed income securities do not trade on a daily basis, pricing sources apply available market information through processes such as matrix pricing to calculate fair value. Such prices generally consider a variety of factors, including recent trades of the same and similar securities. In those cases, the items are classified within Level 2. For those fixed income investments where quotes were not available or cannot be reasonably corroborated, fair values are based on internal valuation models. Key inputs to the internal valuation models generally include maturity date, coupon and yield curves for asset-type and credit rating characteristics that closely match those characteristics of the specific investment securities being valued. Items valued using valuation models are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be significant inputs that are readily observable. Longer (shorter) expected maturities or higher (lower) yields used in the valuation model will, in isolation, result in decreases (increases) in fair value. Generally, lower credit ratings or longer expected maturities will be accompanied by higher yields used to value a security. At December 31, 2017, approximately 6%, 79%, and 15% of the investment portfolio (excluding variable interest entity investments) was valued using dealer quotes, alternative pricing sources with reasonable levels of price transparency and internal valuation models, respectively. At December 31, 2016, approximately 5%, 82%, and 13% of the fixed income investment portfolio (excluding variable interest entity investments) was valued using dealer quotes, alternative pricing sources with reasonable levels of price transparency and internal valuation models, respectively. Among the investments valued using internal valuation models are Ambac insured securities for which projected cash flows consist solely of Deferred Amounts and interest thereon. These securities are internally valued based upon the valuation of Ambac Assurance's surplus notes and comprise 13% and 12% of the portfolio at December 31, 2017 and 2016, respectively. Ambac performs various review and validation procedures to quoted and modeled prices for fixed income securities, including price variance analyses, missing and static price reviews, overall valuation analyses by senior traders and finance managers and reviews associated with our ongoing impairment analysis. Unusual prices identified through these procedures will be evaluated further against additional market data (if available) and/or internally modeled prices, and the pricing source values will be challenged as necessary. Price challenges generally result in the use of the pricing source’s quote as originally provided or as revised by the source following their internal diligence process. A price challenge may result in a determination by either the pricing source or Ambac management that the pricing source cannot provide a reasonable value for a security or cannot adequately support a quote, in which case Ambac would resort to using either other quotes or internal models. Results of price challenges are reviewed by senior traders and finance managers. Information about the valuation inputs for fixed income securities classified as Level 3 is included below: Residential mortgage-backed securities: A portion of these securities are guaranteed under policies that were subject to the Segregated Account Rehabilitation Plan and had projected future cash flows consisting solely of Deferred Amounts under such policies including interest thereon. The fair value of such securities classified as Level 3 was $709,950 and $696,713 at December 31, 2017 and 2016, respectively. Fair value was calculated based on the valuation of Ambac Assurance surplus notes which, under the terms of the Segregated Account Rehabilitation Plan effective in 2017, were to be redeemed in proportion with the payment of Deferred Amounts on or about the dates when such payments are made. Following the consummation of the Rehabilitation Exit Transactions on February 12, 2018, under which surplus notes tendered did receive consideration equal that paid to settle Deferred Amounts, remaining surplus notes outstanding will no longer be treated pari passu with payments on insurance obligations. Refer to Note 1. Background and Business Description for further details of the Rehabilitation Exit Transactions. The remaining portion of Level 3 residential mortgage-backed securities are an Ambac-insured re-REMIC containing distressed mortgage-backed securities as collateral, the fair value of which was $26,067 at December 31, 2017. There were $0 such securities classified as Level 3 as of December 31, 2016. Fair value was calculated using a discounted cash flow approach with expected future cash flows discounted using a yield consistent with the security type and rating. Significant inputs for the valuation at December 31, 2017 were as follows:
December 31, 2017: |  |  |
a. Coupon rate: | 2.05% |  |  |
b. Average Life: | 0.65 years |  |  |
c. Yield: | 10.00% |  |  |
Other asset-backed securities: These securities are a subordinated tranche of a resecuritization collateralized by Ambac-insured military housing bonds. The fair value of such securities classified as Level 3 was $72,540 and $65,990 at December 31, 2017 and 2016, respectively. Fair value was calculated using a discounted cash flow approach with expected future cash flows discounted using a yield consistent with the security type and rating. Significant inputs for the valuation at December 31, 2017 and 2016 include the following weighted averages:
December 31, 2017: |  | December 31, 2016:
a. Coupon rate: | 5.97% |  | a. Coupon rate: | 5.93%
b. Average Life: | 17.02 years |  | b. Average Life: | 17.74 years
c. Yield: | 12.00% |  | c. Yield: | 13.50%
Other Investments: Other investments primarily relate to investments in pooled investment funds. The fair value of pooled investment funds is determined using dealer quotes or alternative pricing sources when such investments have readily determinable fair values. When fair value is not readily determinable, pooled investment funds are valued using the net asset value (“NAV”) per share as a practical expedient as permitted under the Fair Value Measurement Topic of the ASC. Refer to Note 10. Investments for additional information about such investments in pooled funds that are reported at fair value using NAV as a practical expedient. Other investments also includes Ambac's equity interest in a non-consolidated VIE, which is carried under the equity method. Valuation of this equity interest is internally calculated using a discounted cash flow approach and is classified as Level 3. Derivative Instruments: Ambac’s derivative instruments primarily comprise interest rate and credit default swaps, and exchange traded futures contracts. Fair value is determined based upon market quotes from independent sources, when available. When independent quotes are not available, fair value is determined using valuation models. These valuation models require market-driven inputs, including contractual terms, credit spreads and ratings on underlying referenced obligations, yield curves and tax-exempt interest ratios. The valuation of certain interest rate as well as all credit derivative contracts also require the use of data inputs and assumptions that are determined by management and are not readily observable in the market. Under the Fair Value Measurement Topic of the ASC, Ambac is required to consider its own credit risk when measuring the fair value of derivatives and other liabilities. The fair value of credit derivative liabilities was reduced by $60 and $1,924 at December 31, 2017 and 2016, respectively, as a result of incorporating an Ambac CVA into the valuation model for these contracts. Interest rate swaps may also require an adjustment to fair value to reflect Ambac’s credit risk. During the three months ended June 30, 2017, interest rate swaps that had incorporated an Ambac CVA into the valuation were terminated. As a result, derivative liabilities are no longer reduced as a result of Ambac CVA at December 31, 2017 compared to $44,973 at December 31, 2016. Additional factors considered in estimating the amount of any Ambac CVA on such contracts include collateral posting provisions, right of set-off with the counterparty, the period of time remaining on the derivative and the pricing of recent terminations. As described further below, certain valuation models require other inputs that are not readily observable in the market. The selection of a model to value a derivative depends on the contractual terms of, and specific risks inherent in the instrument as well as the availability of pricing information in the market. Derivatives that are less complex may be valued primarily by reference to interest rates and yield curves that are observable and regularly quoted, such as interest rate swaps, for which we generally utilize vendor-developed models. These models provide the net present value of the derivatives based on contractual terms and observable market data. Downgrades of Ambac Assurance, as guarantor of the derivatives, have increased collateral requirements and triggered termination provisions in certain interest rate swaps. Termination activity since the initial rating downgrades of Ambac Assurance provided additional information about the replacement and/or exit value of certain derivatives, which has been incorporated into the fair value of these derivatives as appropriate. Generally, the need for counterparty (or Ambac) CVAs is mitigated by the existence of collateral posting agreements under which adequate collateral has been posted. Derivative contracts entered into with financial guarantee customers are not subject to collateral posting agreements. Counterparty credit risk related to such customer derivative assets is included in our fair value adjustments. The valuation of such derivatives is generally classified as Level 3. For derivatives that do not trade, or trade in less liquid markets such as credit derivatives, an internal model is generally used because such instruments tend to be unique, contain complex or heavily modified and negotiated terms, and pricing information is not readily available in the market. Derivative fair value models and the related assumptions are continuously re-evaluated by management and enhanced, as appropriate, based on improvements in modeling techniques. Ambac has not made any significant changes to its modeling techniques or related model inputs for the periods presented. Credit Derivatives (“C DS”): Fair value of Ambac’s CDS is determined using internal valuation models and represents the hypothetical transfer cost of the contract calculated as the difference between the net present value of the projected fees receivable under the CDS and our estimate of the fees a financial guarantor of comparable credit quality would charge to provide the same protection at the balance sheet date. Financial guarantee contracts, including CDS, are typically priced to capture some portion of the spread that would be observed in the capital markets for the underlying (insured) obligation. Because of this relationship and in the absence of severe credit deterioration, changes in the fair value of our credit default swaps will generally be less than changes in the fair value of the underlying reference obligations. Key variables used in the valuation of our credit derivatives include the balance of unpaid notional, expected term, fair values of the underlying reference obligations, reference obligation credit ratings and the CVA applied against Ambac Assurance liabilities by market participants. Notional balances, expected remaining term and reference obligation credit ratings are monitored and determined by Ambac’s Risk Management group. Fair values of the underlying reference obligations are obtained from broker quotes when available or are estimated internally using the same methodologies used to value Ambac’s fixed income securities in its investment portfolio. Ambac reflects changes in reference obligation credit ratings within the fair value of its CDS contracts by changing the percentage of the obligation's market spread (over LIBOR) that would be captured as a CDS fee at the valuation date. We adjust this percentage (“relative change ratio”) in our valuations based on internal rating changes such that the resulting fair value liability of the CDS contract, excluding the effect of Ambac's own credit risk, will increase up to the full amount of the unrealized loss on the reference obligation as the credit rating declines. Ambac incorporates its own credit risk into the valuation of its CDS liabilities by applying a CVA to the calculations described above. The Ambac CVA represents the difference between the present value of the hypothetical fees discounted at LIBOR compared to discount rates that incorporate Ambac credit risk. Information about the above described model inputs used to determine the fair value 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 December 31, 2017 and 2016 is summarized below:
December 31, |  | 2017 |  | 2016
Number of CDS transactions |  | 2 |  |  | 8 |
Notional outstanding |  | $ | 325,890 |  |  | $ | 737,380 |
Weighted average reference obligation price |  | 99.3 |  |  | 93.5 |
Weighted average life (WAL) in years |  | 6.5 |  |  | 5.2 |
Weighted average credit rating |  | A |  |  | A- |
Weighted average relative change ratio |  | 23.6 | % |  | 31.6 | %
CVA percentage |  | 9.64 | % |  | 11.14 | %
Fair value of derivative liabilities |  | $ | 566 |  |  | $ | 15,349 |
The maximum potential amount of future payments under Ambac’s credit derivative contracts is generally the notional outstanding amount included in the above table plus future interest payments by the derivative reference obligations. Since Ambac’s credit derivatives typically reference obligations of or assets held by special purpose entities that meet the definition of a VIE, the amount of maximum potential future payments for credit derivatives is included in the table in Note 3. Special Purpose Entities, Including Variable Interest Entities. Changes in fair value are recorded in “Net change in fair value of credit derivatives” on the Consolidated Statements of Total Comprehensive Income (Loss). Although CDS contracts are accounted for at fair value, they are surveilled similar to non-derivative financial guarantee contracts. As with financial guarantee insurance policies, Ambac’s Risk Management group tracks credit migration of CDS contracts’ reference obligations from period to period. Credits are assigned risk classifications by the Risk Management group. As of December 31, 2017, there are no CDS contracts on Ambac’s adversely classified credit listing. As of December 31, 2016, there were two CDS contracts on Ambac’s adversely classified credit listing, with a net derivative liability fair value of $6,123 and total notional outstanding of $67,783. Significant unobservable inputs for credit derivatives include WAL, internal credit rating, relative change ratio and CVA percentage. A longer (shorter) WAL, lower (higher) reference obligation credit rating, higher (lower) relative change ratio or lower (higher) CVA, in isolation, would result in an increase (decrease) in the fair value liability measurement. A change in an internal credit rating of a reference obligation in our model will generally result in a directionally opposite change in the relative change ratio. Also, a shorter (longer) WAL will generally correspond with a lower (higher) CVA percentage. Financial Guarantees: Fair value of net financial guarantees written represents our estimate of the cost to Ambac to completely transfer its insurance obligation to another market participant of comparable credit worthiness. In theory, this amount should be the same amount that another market participant of comparable credit worthiness would hypothetically charge in the market place, on a present value basis, to provide the same protection as of the balance sheet date. This fair value estimate of financial guarantees is presented on a net basis and includes direct and assumed contracts written, net of ceded reinsurance contracts. The fair value estimate of financial guarantees is computed by utilizing cash flows calculated at the policy level. For direct and assumed contracts, net cash flows for each policy includes future: (i) installment premium receipts, (ii) gross claim payments, (iii) subrogation receipts, and (iv) unpaid claims on claims presented and not yet paid for policies allocated to the Segregated Account, including Deferred Amounts and interest thereon. The timing of future claim payments of the Segregated Account was at the sole discretion of the Rehabilitator until the Segregated Account rehabilitation was concluded on February 12, 2018. For ceded reinsurance contracts, net cash flows for each policy includes future: (i) installment ceded premium payments, (ii) ceding commission receipts, (iii) ceded claim receipts, and (iv) ceded subrogation payments. For each assumed,or ceded reinsurance contract, the respective undiscounted cash flow components are aggregated to determine if we are in a net asset or net liability position. U.S. GAAP requires that the nonperformance risk of a financial liability be included in the estimation of fair value, which includes considering Ambac Assurance’s own credit risk. Accordingly, for each contract in a net liability position, we estimate the fair value using internally developed discount rates and market pricing that incorporate Ambac’s own credit risk and subsequently apply a profit margin. This profit margin represents what another market participant would require to assume the financial guarantee contracts. A profit margin was developed based on discussions with the third-party institutions with valuation expertise, discussions with industry participants and yields on Ambac Assurance surplus notes. The discount rates used for contracts in a net liability position are derived from the rates implicit in the fair value of surplus notes and guaranteed securities with future cash flows that are highly dependent upon Ambac financial guarantee payments. For each contract in a net asset position, we estimate the fair value using a discount rate that is commensurate with a hypothetical buyer’s cost of capital. This methodology is based on management’s expectations of how a market participant would estimate net cash flows. We are aware of a number of factors that may cause such fair or exit value to differ, perhaps materially. For example, (i) since no financial guarantor with Ambac Assurance’s credit quality is writing or otherwise obtaining financial guarantee business (e.g. reinsurance or novation of policies from other insurers) we do not have access to observable pricing data points and (ii) certain segments of Ambac's financial guarantees were allocated to the Segregated Account and timing of the payments of such liabilities were at the sole discretion of the Rehabilitator. Long-term Debt: Long-term debt includes surplus notes issued by Ambac Assurance, surplus notes issued by the Segregated Account of Ambac Assurance, which became obligations of Ambac Assurance when the Rehabilitation Exit Transactions were effectuated on February 12, 2018, and notes outstanding to third parties arising from Ambac Assurance's secured borrowing transaction. The fair values of Ambac Assurance surplus notes and the secured borrowing notes are based on market prices received from dealer quotes or alternative pricing sources with reasonable levels of price transparency. The fair value of Segregated Account surplus notes were classified as Level 3 and are internally estimated considering market transactions when available and internally developed discounted cash flow models. Internal valuation estimates of Segregated Account surplus notes considered differences in contractual accrued interest and seniority of payment relative to Ambac Assurance surplus notes. Other Financial Assets and Liabilities: The fair values of Ambac’s equity interest in Ambac sponsored special purpose entities (included in Other assets), Loans, and Obligations under investment agreements are estimated based upon internal valuation models that discount expected cash flows using discount rates consistent with the credit quality of the obligor after considering collateralization. Variable Interest Entity Assets and Liabilities: The financial assets and liabilities of VIEs consolidated under the Consolidation Topic of the ASC consist primarily of fixed income securities, loans, derivative and debt instruments and are generally carried at fair value. These consolidated VIEs are securitization entities which have liabilities and/or assets guaranteed by Ambac Assurance. The fair values of VIE debt instruments are determined using the same methodologies used to value Ambac’s fixed income securities in its investment portfolio as described above. VIE debt fair value is based on market prices received from dealer quotes or alternative pricing sources with reasonable levels of price transparency. Such quotes are considered Level 2 and generally consider a variety of factors, including recent trades of the same and similar securities. For those VIE debt instruments where quotes were not available, the debt instrument fair values are considered Level 3 and are based on internal discounted cash flow models. Comparable to the sensitivities of investments in fixed income securities described above, longer (shorter) expected maturities or higher (lower) yields used in the valuation model will, in isolation, result in decreases (increases) in fair value liability measurement for VIE debt. VIE debt instruments considered Level 3 include fixed rate, floating rate and zero coupon notes secured by various asset types, primarily European ABS. Information about the valuation inputs for the various VIE debt categories classified as Level 3 is as follows: European ABS transactions: The fair value of such obligations classified as Level 3 was $2,757,688 and $2,551,278 at December 31, 2017 and 2016, 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 for comparable notes from the same securitization entity. Significant inputs for the valuation at December 31, 2017 and 2016 include the following weighted averages:
December 31, 2017 |  | December 31, 2016
a. Coupon rate: | 0.40% |  | a. Coupon rate: | 0.46%
b. Maturity: | 15.28 years |  | b. Maturity: | 16.16 years
c. Yield: | 4.82% |  | c. Yield: | 4.95%
US Commercial ABS transaction: The fair value of such obligations classified as Level 3 was $0 and $30,942 at December 31, 2017 and 2016, respectively. Fair values were calculated as the sum of the present value of expected future cash flows from the underlying VIE assets plus the present value of the related Ambac financial guarantee cash flows. The discount rates applied to cash flows sourced from VIE assets were based on interest rates for similar obligations. The fair value of financial guarantee cash flows include internal estimates of future loss payments by Ambac, when applicable, discounted at a rate that incorporates Ambac’s own credit risk. As a result of a negotiated settlement to refinance this Ambac-insured debt, the final paydown of the bond occurred in October 2017. Significant inputs for the valuation at December 31, 2016, include the following weighted averages:
December 31, 2016 |  |
a. Coupon rate: | 5.88% |  |  |
b. Maturity: | 20.85 years |  |  |
c. Yield: | 5.86% |  |  |
VIE derivative asset and liability fair values are determined using valuation models. When specific derivative contractual terms are available and may be valued primarily by reference to interest rates, foreign exchange rates and yield curves that are observable and regularly quoted, the derivatives are valued using vendor-developed models. Other derivatives within the VIEs that include significant unobservable valuation inputs are valued using internally developed models. VIE derivative fair value balances at December 31, 2017 and 2016 were developed using vendor-developed models and do not use significant unobservable inputs. The fair value of VIE assets are obtained from market quotes when available. Typically VIE asset fair values are not readily available from market quotes and are estimated internally. The consolidated VIEs are securitization entities in which net cash flows from assets and derivatives (after adjusting for financial guarantor cash flows and other expenses) will be paid out to note holders or equity interests. Our valuation of VIE assets (fixed income securities or loans), therefore, are derived from the fair value of notes and derivatives, as described above, adjusted for the fair value of cash flows from Ambac’s financial guarantee. The fair value of financial guarantee cash flows include: (i) estimated future premiums discounted at a rate consistent with that implicit in the fair value of the VIE’s liabilities and (ii) internal estimates of future loss payments by Ambac discounted at a rate that includes Ambac’s own credit risk. Estimated future premium payments to be paid by the VIEs were discounted at a weighted average rate of 3.1% and 3.6% at December 31, 2017 and 2016, respectively. The value of future loss payments to be paid by Ambac to the VIEs was adjusted to include an Ambac CVA appropriate for the term of expected Ambac claim payments. Additional Fair Value Information for Financial Assets and Liabilities Accounted for at Fair Value: The following tables present the changes in the Level 3 fair value category for the periods presented in 2017, 2016 and 2015. 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 |  |
Year Ended December 31, 2017 |  | Investments |  | Other Assets |  | Derivatives |  | Investments |  | Loans |  | Long-term Debt |  | Total
Balance, beginning of period |  | $ | 762,703 |  |  | $ | 7,382 |  |  | $ | (100,282 | ) |  | $ | 2,622,566 |  |  | $ | 10,658,963 |  |  | $ | (2,582,220 | ) |  | $ | 11,369,112 |
Total gains/(losses) realized and unrealized: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings |  | 65,195 |  |  | (1,403 | ) |  | 62,847 |  |  | 70,928 |  |  | 550,021 |  |  | 35,009 |  |  | 782,597 |
Included in other comprehensive income |  | 6,392 |  |  | — |  |  | — |  |  | 253,429 |  |  | 1,004,284 |  |  | (254,093 | ) |  | 1,010,012 |
Purchases |  | 35,781 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 35,781 |
Sales |  | (79,319 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (79,319 | )
Settlements |  | (29,963 | ) |  | — |  |  | 98,243 |  |  | (32,778 | ) |  | (683,884 | ) |  | 43,616 |  |  | (604,766 | )
Transfers into Level 3 |  | 47,768 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 47,768 |
Transfers out of Level 3 |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Deconsolidation of VIEs |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Balance, end of period |  | $ | 808,557 |  |  | $ | 5,979 |  |  | $ | 60,808 |  |  | $ | 2,914,145 |  |  | $ | 11,529,384 |  |  | $ | (2,757,688 | ) |  | $ | 12,561,185 |
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 |  | $ | — |  |  | $ | (1,403 | ) |  | $ | 8,913 |  |  | $ | 70,928 |  |  | $ | 547,004 |  |  | $ | 36,851 |  |  | $ | 662,293 |
Level-3 Financial Assets and Liabilities Accounted for at Fair Value |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  | VIE Assets and Liabilities |  |
Year Ended December 31, 2016 |  | Investments |  | Other Assets |  | Derivatives |  | Investments |  | Loans |  | Long-term Debt |  | Total
Balance, beginning of period |  | $ | 488,884 |  |  | $ | 8,696 |  |  | $ | (99,192 | ) |  | $ | 2,588,556 |  |  | $ | 11,690,324 |  |  | $ | (3,180,170 | ) |  | $ | 11,497,098 |
Total gains/(losses) realized and unrealized: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings |  | 54,600 |  |  | (1,314 | ) |  | (15,374 | ) |  | 508,873 |  |  | 1,166,898 |  |  | (842,748 | ) |  | 870,935 |
Included in other comprehensive income |  | 40,518 |  |  | — |  |  | — |  |  | (474,863 | ) |  | (1,944,821 | ) |  | 486,218 |  |  | (1,892,948 | )
Purchases |  | 99,018 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 99,018 |
Sales |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Settlements |  | (28,682 | ) |  | — |  |  | 14,284 |  |  | — |  |  | (253,438 | ) |  | 216,582 |  |  | (51,254 | )
Transfers into Level 3 |  | 108,365 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 108,365 |
Transfers out of Level 3 |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 737,898 |  |  | 737,898 |
Deconsolidations of VIEs |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Balance, end of period |  | $ | 762,703 |  |  | $ | 7,382 |  |  | $ | (100,282 | ) |  | $ | 2,622,566 |  |  | $ | 10,658,963 |  |  | $ | (2,582,220 | ) |  | $ | 11,369,112 |
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 |  | $ | — |  |  | $ | (1,314 | ) |  | $ | (16,351 | ) |  | $ | 508,873 |  |  | $ | 1,166,898 |  |  | $ | (842,748 | ) |  | $ | 815,358 |
Level-3 Financial Assets and Liabilities Accounted for at Fair Value |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  | VIE Assets and Liabilities |  |
Year Ended December 31, 2015 |  | Investments |  | Other Assets |  | Derivatives |  | Investments |  | Loans |  | Long-term Debt |  | Total
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 |  | 30,083 |  |  | (1,635 | ) |  | 16,571 |  |  | (7,263 | ) |  | 569,617 |  |  | (1,152,681 | ) |  | (545,308 | )
Included in other comprehensive income |  | (73,559 | ) |  | — |  |  | — |  |  | (147,231 | ) |  | (612,941 | ) |  | 93,812 |  |  | (739,919 | )
Purchases |  | 359,193 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 359,193 |
Sales |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Settlements |  | (25,034 | ) |  | (1,705 | ) |  | 11,365 |  |  | — |  |  | (312,406 | ) |  | (17,085 | ) |  | (344,865 | )
Transfers into Level 3 |  | — |  |  | — |  |  | 88,218 |  |  | — |  |  | — |  |  | (840,552 | ) |  | (752,334 | )
Transfers out of Level 3 |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Deconsolidation of VIEs |  | — |  |  | — |  |  | — |  |  | — |  |  | (325,123 | ) |  | — |  |  | (325,123 | )
Balance, end of period |  | $ | 488,884 |  |  | $ | 8,696 |  |  | $ | (99,192 | ) |  | $ | 2,588,556 |  |  | $ | 11,690,324 |  |  | $ | (3,180,170 | ) |  | $ | 11,497,098 |
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 |  | $ | — |  |  | $ | (1,635 | ) |  | $ | (25,980 | ) |  | $ | (7,263 | ) |  | $ | 589,634 |  |  | $ | (1,161,991 | ) |  | $ | (607,235 | )
The tables below provide roll-forward information by class of investments and derivatives measured using si gnificant unobservable inputs.
Level-3 Investments by Class |  |  |  |  |  |  |  |  |  |  |  |
|  | 2017 |  | 2016
Year Ended December 31, |  | Other asset backed securities |  | Non-Agency RMBS |  | Total investments |  | Other asset backed securities |  | Non-Agency RMBS |  | Total investments
Balance, beginning of period |  | $ | 65,990 |  |  | $ | 696,713 |  |  | $ | 762,703 |  |  | $ | — |  |  | $ | 488,884 |  |  | $ | 488,884 |
Total gains/(losses) realized and unrealized: |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings |  | 1,433 |  |  | 63,762 |  |  | 65,195 |  |  | 1,908 |  |  | 52,692 |  |  | 54,600 |
Included in other comprehensive income |  | 6,130 |  |  | 262 |  |  | 6,392 |  |  | (5,597 | ) |  | 46,115 |  |  | 40,518 |
Purchases |  | — |  |  | 35,781 |  |  | 35,781 |  |  | — |  |  | 99,018 |  |  | 99,018 |
Sales |  | — |  |  | (79,319 | ) |  | (79,319 | ) |  | — |  |  | — |  |  | — |
Settlements |  | (1,013 | ) |  | (28,950 | ) |  | (29,963 | ) |  | (1,028 | ) |  | (27,654 | ) |  | (28,682 | )
Transfers into Level 3 |  | — |  |  | 47,768 |  |  | 47,768 |  |  | 70,707 |  |  | 37,658 |  |  | 108,365 |
Transfers out of Level 3 |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Balance, end of period |  | $ | 72,540 |  |  | $ | 736,017 |  |  | $ | 808,557 |  |  | $ | 65,990 |  |  | $ | 696,713 |  |  | $ | 762,703 |
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 |  |  |  |  |  |  |  |
|  | 2015
Year Ended December 31, 2015 |  | Other asset backed securities |  | Corporate obligations |  | Non-Agency RMBS |  | Total investments
Balance, beginning of period |  | $ | — |  |  | $ | 3,808 |  |  | $ | 194,393 |  |  | $ | 198,201 |
Total gains/(losses) realized and unrealized: |  |  |  |  |  |  |  |
Included in earnings |  | — |  |  | (19 | ) |  | 30,102 |  |  | 30,083 |
Included in other comprehensive income |  | — |  |  | (286 | ) |  | (73,273 | ) |  | (73,559 | )
Purchases |  | — |  |  | — |  |  | 359,193 |  |  | 359,193 |
Sales |  | — |  |  | — |  |  | — |  |  | — |
Settlements |  | — |  |  | (3,503 | ) |  | (21,531 | ) |  | (25,034 | )
Transfers into Level 3 |  | — |  |  | — |  |  | — |  |  | — |
Transfers out of Level 3 |  | — |  |  | — |  |  | — |  |  | — |
Balance, end of period |  | $ | — |  |  | $ | — |  |  | $ | 488,884 |  |  | $ | 488,884 |
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 |  |  |  |  |  |  |  |  |  |
|  | 2017 |  | 2016
Year Ended December 31, |  | Interest rate swaps |  | Credit derivatives |  | Total derivatives |  | Interest rate swaps |  | Credit derivatives |  | Total derivatives
Balance, beginning of period |  | $ | (84,933 | ) |  | $ | (15,349 | ) |  | $ | (100,282 | ) |  | $ | (64,649 | ) |  | $ | (34,543 | ) |  | $ | (99,192 | )
Total gains/(losses) realized and unrealized: |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings |  | 46,475 |  |  | 16,372 |  |  | 62,847 |  |  | (35,480 | ) |  | 20,106 |  |  | (15,374 | )
Included in other comprehensive income |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Purchases |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Sales |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Settlements |  | 99,832 |  |  | (1,589 | ) |  | 98,243 |  |  | 15,196 |  |  | (912 | ) |  | 14,284 |
Transfers into Level 3 |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Transfers out of Level 3 |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Balance, end of period |  | $ | 61,374 |  |  | $ | (566 | ) |  | $ | 60,808 |  |  | $ | (84,933 | ) |  | $ | (15,349 | ) |  | $ | (100,282 | )
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 |  | $ | 6,716 |  |  | $ | 2,197 |  |  | $ | 8,913 |  |  | $ | (35,480 | ) |  | $ | 19,129 |  |  | $ | (16,351 | )
Level-3 Derivatives by Class |  |  |  |  |  |
|  | 2015
Year Ended December 31, |  | Interest rate swaps |  | Credit derivatives |  | Total derivatives
Balance, beginning of period |  | $ | (141,887 | ) |  | $ | (73,459 | ) |  | $ | (215,346 | )
Total gains/(losses) realized and unrealized: |  |  |  |  |  |
Included in earnings |  | (25,130 | ) |  | 41,701 |  |  | 16,571 |
Included in other comprehensive income |  | — |  |  | — |  |  | — |
Purchases |  | — |  |  | — |  |  | — |
Sales |  | — |  |  | — |  |  | — |
Settlements |  | 14,150 |  |  | (2,785 | ) |  | 11,365 |
Transfers into Level 3 |  | 88,218 |  |  | — |  |  | 88,218 |
Transfers out of Level 3 |  | — |  |  | — |  |  | — |
Balance, end of period |  | $ | (64,649 | ) |  | $ | (34,543 | ) |  | $ | (99,192 | )
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 |  | $ | (25,130 | ) |  | $ | (850 | ) |  | $ | (25,980 | )
Invested assets and VIE long-term debt are transferred into Level 3 when internal valuation models that include significant unobservable inputs are used to estimate fair value. All such securities that have internally modeled fair values have been classified as Level 3. Non-agency RMBS securities transferred into Level 3 in 2017 consist of an Ambac-insured re-REMIC collateralized by distressed mortgage-backed securities and certain Ambac-insured RMBS for which projected cash flows consist solely of Deferred Amounts and interest thereon. Non-agency RMBS transferred into Level 3 in 2016 consist of certain investments in Ambac-wrapped RMBS securities for which projected cash flows consist solely of Deferred Amounts and interest thereon. Other asset-backed securities transferred into Level 3 in 2016 consist of a subordinated tranche of a resecuritization collateralized by Ambac-insured military housing bonds. These invested assets were internally valued as management could not corroborate the reasonableness of third party quotes. Derivative instruments are transferred into Level 3 when the use of unobservable inputs becomes significant to the overall valuation. Derivative instruments transferred into Level 3 in 2015 consisted of certain interest rate swap assets with counterparty credit adjustments. There were no transfers between Level 1 and Level 2 for the periods presented. All transfers between fair value hierarchy Levels 1, 2, and 3 are recognized at the beginning of each accounting period. 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 |  | Interest rate swaps |  | Income (loss) on variable interest entities |  | Other income or (loss)
Year Ended December 31, 2017 |  |  |  |  |  |  |  |  |  |  |  |
Total gains or losses included in earnings for the period |  | 65,195 |  |  | 1,589 |  |  | 14,783 |  |  | 46,475 |  |  | 655,956 |  |  | (1,403 | )
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date |  | — |  |  | — |  |  | 2,197 |  |  | 6,716 |  |  | 654,783 |  |  | (1,403 | )
Year Ended December 31, 2016 |  |  |  |  |  |  |  |  |  |  |  |
Total gains or losses included in earnings for the period |  | $ | 54,600 |  |  | $ | 912 |  |  | $ | 19,194 |  |  | $ | (35,480 | ) |  | $ | 833,023 |  |  | $ | (1,314 | )
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date |  | — |  |  | — |  |  | 19,129 |  |  | (35,480 | ) |  | 833,023 |  |  | (1,314 | )
Year Ended December 31, 2015 |  |  |  |  |  |  |  |  |  |  |  |
Total gains or losses included in earnings for the period |  | $ | 30,083 |  |  | $ | 2,785 |  |  | $ | 38,916 |  |  | $ | (25,130 | ) |  | $ | (590,327 | ) |  | $ | (1,635 | )
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date |  | — |  |  | — |  |  | (850 | ) |  | (25,130 | ) |  | (579,620 | ) |  | (1,635 | )

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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