Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2018

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, 2018 and December 31, 2017, 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:
September 30, 2018:	Carrying Amount			Total Fair Value			Level 1		Level 2			Level 3
Financial assets:
Fixed income securities:
Municipal obligations	$	970,464		$	970,464		$	—	$	970,464		$	—
Corporate obligations	1,319,368			1,319,368			—		1,319,368			—
Foreign obligations	34,007			34,007			32,906		1,101			—
U.S. government obligations	92,207			92,207			92,207		—			—
Residential mortgage-backed securities	278,775			278,775			—		278,775			—
Collateralized debt obligations	87,721			87,721			—		87,721			—
Other asset-backed securities	438,759			438,759			—		366,665			72,094
Fixed income securities, pledged as collateral:
U.S. government obligations	84,186			84,186			84,186		—			—
Short term investments	562,060			562,060			454,746		107,314			—
Other investments ⁽¹⁾	411,604			390,729			63,520		—			17,955
Cash and cash equivalents	52,505			52,505			31,094		21,411			—
Loans	10,082			12,189			—		—			12,189
Derivative assets:
Interest rate swaps—asset position	50,699			50,699			—		7,287			43,412
Interest rate swaps—liability position	(437		)	(437		)	—		(437		)	—
Futures contracts	—			—			—		—			—
Other assets	4,887			4,887			—		—			4,887
Variable interest entity assets:
Fixed income securities: Corporate obligations	2,718,377			2,718,377			—		—			2,718,377
Restricted cash	1,024			1,024			1,024		—			—
Loans	4,563,091			4,563,091			—		—			4,563,091
Derivative assets: Currency swaps-asset position	61,543			61,543			—		61,543			—
Total financial assets	$	11,656,736		$	11,637,968		$	675,497	$	3,221,212		$	7,432,005
Financial liabilities:
Long term debt, including accrued interest	$	3,294,482		$	3,333,145		$	—	$	2,968,246		$	364,899
Derivative liabilities:
Credit derivatives	1,175			1,175			—		—			1,175
Interest rate swaps—asset position	—			—			—					—
Interest rate swaps—liability position	59,728			59,728			—		59,728			—
Futures contracts	428			428			428		—			—
Liabilities for net financial guarantees written⁽²⁾	(644,090		)	786,156			—		—			786,156
Variable interest entity liabilities:
Long-term debt	5,585,860			5,585,860			—		5,354,580			231,280
Derivative liabilities: Interest rate swaps—liability position	1,657,173			1,657,173			—		1,657,173			—
Total financial liabilities	$	9,954,756		$	11,423,665		$	428	$	10,039,727		$	1,383,510



	Carrying Amount			Total Fair Value			Fair Value Measurements Categorized as:
December 31, 2017:	Carrying Amount			Total Fair Value			Level 1		Level 2			Level 3
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


(1)	Excluded from the fair value measurement categories in the table above are investment funds of $309,254 and $310,441 as of September 30, 2018 and December 31, 2017, 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.

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 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, 2018 and December 31, 2017 is summarized below:



	September 30, 2018				December 31, 2017
Number of CDS transactions		2			2
Notional outstanding		$	303,650		$	325,890
Weighted average reference obligation price		98.3			99.3
Weighted average life (WAL) in years		5.9			6.5
Weighted average credit rating		A			A
Weighted average relative change ratio		23.1		%	23.6		%
CVA percentage		6.75		%	9.64		%
Fair value of derivative liabilities		$	1,175		$	566

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 2018 and 2017. 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, 2018:
Balance, beginning of period	$	68,802		$	5,255		$	45,613		$	2,756,924		$	10,751,199		$	(2,517,638	)	$	11,110,155
Total gains/(losses) realized and unrealized:
Included in earnings	376			(368		)	(2,080		)	(7,811		)	(29,439		)	3,101			(36,221		)
Included in other comprehensive income	3,218			—			—			(30,736		)	(122,908		)	28,064			(122,362		)
Purchases	—			—			—			—			—			—			—
Issuances	—			—			—			—			—			—			—
Sales	—			—			—			—			—			—			—
Settlements	(302		)	—			(1,296		)	—			(89,296		)	17,841			(73,053		)
Deconsolidation of VIEs	—			—			—			—			(5,946,465		)	2,237,352			(3,709,113		)
Balance, end of period	$	72,094		$	4,887		$	42,237		$	2,718,377		$	4,563,091		$	(231,280	)	$	7,169,406
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	$	—		$	(368	)	$	(2,179	)	$	(7,811	)	$	(29,439	)	$	3,101		$	(36,696	)

Three Months Ended September 30, 2017:
Balance, beginning of period	$	765,682		$	6,691		$	52,729		$	2,722,316		$	11,301,298		$	(2,804,218	)	$	12,044,498
Total gains/(losses) realized and unrealized:
Included in earnings	8,330			(354		)	2,031			(18,064		)	137,513			(62,887		)	66,569
Included in other comprehensive income	8,557			—			—			81,356			327,087			(84,793		)	332,207
Purchases	—			—			—			—			—			—			—
Issuances	—			—			—			—			—			—			—
Sales	—			—			—			—			—			—			—
Settlements	(6,760		)	—			(1,671		)	—			(208,110		)	5,514			(211,027		)
Transfers out of Level 3	—			—			—			—			—			—			—
Balance, end of period	$	775,809		$	6,337		$	53,089		$	2,785,608		$	11,557,788		$	(2,946,384	)	$	12,232,247
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	$	—		$	(354	)	$	1,889		$	(18,064	)	$	137,513		$	(62,887	)	$	58,097




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, 2018:
Balance, beginning of period	$	808,557		$	5,979		$	60,808		$	2,914,145		$	11,529,384		$	(2,757,688	)	$	12,561,185
Total gains/(losses) realized and unrealized:
Included in earnings	35,842			(1,092		)	(14,137		)	(80,974		)	(204,561		)	180,314			(84,608		)
Included in other comprehensive income	(52,804		)	—			—			(97,199		)	(371,610		)	85,837			(435,776		)
Purchases	—			—			—			—			—			—			—
Sales	—			—			—			—			—			—			—
Settlements	(714,192		)	—			(4,434		)	(17,595		)	(443,657		)	22,905			(1,156,973		)
Transfers into Level 3	—			—			—			—			—			—			—
Transfers out of Level 3	(5,309		)	—			—			—			—			—			(5,309		)
Deconsolidation of VIEs	—			—			—			—			(5,946,465		)	2,237,352			(3,709,113		)
Balance, end of period	$	72,094		$	4,887		$	42,237		$	2,718,377		$	4,563,091		$	(231,280	)	$	7,169,406
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	$	—		$	(1,092	)	$	(14,433	)	$	(80,974	)	$	(70,659	)	$	37,637		$	(129,521	)

Nine Months Ended September 30, 2017:
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	34,628			(1,045		)	53,329			(49,518		)	515,904			(143,194		)	410,104
Included in other comprehensive income	25,654			—			—			228,487			913,477			(233,187		)	934,431
Purchases	35,781			—			—			—			—			—			35,781
Sales	(79,319		)	—			—			—			—			—			(79,319		)
Settlements	(25,716		)	—			100,042			(15,927		)	(530,556		)	12,217			(459,940		)
Transfers into Level 3	22,078			—			—			—			—			—			22,078
Transfers out of Level 3	—			—			—			—			—			—			—
Balance, end of period	$	775,809		$	6,337		$	53,089		$	2,785,608		$	11,557,788		$	(2,946,384	)	$	12,232,247
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	$	—		$	(1,045	)	$	5,640		$	(49,518	)	$	515,904		$	(143,194	)	$	327,787

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



Level 3 - Investments by Class:
	Three Months Ended September 30, 2018								Three Months Ended September 30, 2017
	Other Asset Backed Securities			Non-Agency RMBS		Total Investments			Other Asset Backed Securities			Non-Agency RMBS			Total Investments
Balance, beginning of period	$	68,802		$	—	$	68,802		$	65,366		$	700,316		$	765,682
Total gains/(losses) realized and unrealized:
Included in earnings	376			—		376			420			7,910			8,330
Included in other comprehensive income	3,218			—		3,218			(383		)	8,940			8,557
Purchases	—			—		—			—			—			—
Sales	—			—		—			—			—			—
Settlements	(302		)	—		(302		)	(265		)	(6,495		)	(6,760		)
Transfers out of Level 3	—			—		—			—			—			—
Balance, end of period	$	72,094		$	—	$	72,094		$	65,138		$	710,671		$	775,809
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:
	Nine Months Ended September 30, 2018									Nine Months Ended September 30, 2017
	Other Asset Backed Securities			Non-Agency RMBS			Total Investments			Other Asset Backed Securities			Non-Agency RMBS			Total Investments
Balance, beginning of period	$	72,540		$	736,017		$	808,557		$	65,990		$	696,713		$	762,703
Total gains/(losses) realized and unrealized:
Included in earnings	1,115			34,727			35,842			1,129			33,499			34,628
Included in other comprehensive income	(666		)	(52,138		)	(52,804		)	(1,217		)	26,871			25,654
Purchases	—			—			—			—			35,781			35,781
Sales	—			—			—			—			(79,319		)	(79,319		)
Settlements	(895		)	(713,297		)	(714,192		)	(764		)	(24,952		)	(25,716		)
Transfers into Level 3	—			—			—			—			22,078			22,078
Balance, end of period	$	72,094		$	—		$	72,094		$	65,138		$	710,671		$	775,809
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	—		$	—		$	—		$	—		$	—		$	—



Level 3 - Derivatives by Class:
	Three Months Ended September 30, 2018									Three Months Ended September 30, 2017
	Interest Rate Swaps			Credit Derivatives			Total Derivatives			Interest Rate Swaps			Credit Derivatives			Total Derivatives
Balance, beginning of period	$	46,939		$	(1,326	)	$	45,613		$	61,735		$	(9,006	)	$	52,729
Total gains/(losses) realized and unrealized:
Included in earnings	(2,330		)	250			(2,080		)	1,852			179			2,031
Included in other comprehensive income	—			—			—			—			—			—
Purchases	—			—			—			—			—			—
Sales	—			—			—			—			—			—
Settlements	(1,197		)	(99		)	(1,296		)	(1,537		)	(134		)	(1,671		)
Transfers into Level 3	—			—			—			—			—			—
Balance, end of period	$	43,412		$	(1,175	)	$	42,237		$	62,050		$	(8,961	)	$	53,089
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	$	(2,330	)	$	151		$	(2,179	)	$	1,852		$	37		$	1,889




Level 3 - Derivatives by Class:
	Nine Months Ended September 30, 2018									Nine Months Ended September 30, 2017
	Interest Rate Swaps			Credit Derivatives			Total Derivatives			Interest Rate Swaps			Credit Derivatives			Total Derivatives
Balance, beginning of period	$	61,374		$	(566	)	$	60,808		$	(84,933	)	$	(15,349	)	$	(100,282	)
Total gains/(losses) realized and unrealized:
Included in earnings	(13,824		)	(313		)	(14,137		)	45,474			7,855			53,329
Included in other comprehensive income	—			—			—			—			—			—
Purchases	—			—			—			—			—			—
Sales	—			—			—			—			—			—
Settlements	(4,138		)	(296		)	(4,434		)	101,509			(1,467		)	100,042
Transfers into Level 3	—			—			—			—			—			—
Balance, end of period	$	43,412		$	(1,175	)	$	42,237		$	62,050		$	(8,961	)	$	53,089
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	$	(13,824	)	$	(609	)	$	(14,433	)	$	5,715		$	(75	)	$	5,640

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, 2018:
Total gains or losses included in earnings for the period	$	376	$	99	$	151		$	(2,330	)	$	(34,149	)	$	(368	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		151			(2,330		)	(34,149		)	(368		)

Three Months Ended September 30, 2017:
Total gains or losses included in earnings for the period	$	8,330	$	134	$	45		$	1,852		$	56,562		$	(354	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		37			1,852			56,562			(354		)

Nine Months Ended September 30, 2018:
Total gains or losses included in earnings for the period	$	35,842	$	296	$	(609	)	$	(13,824	)	$	(105,221	)	$	(1,092	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		(609		)	(13,824		)	(113,996		)	(1,092		)

Nine Months Ended September 30, 2017:
Total gains or losses included in earnings for the period	$	34,628	$	1,467	$	6,388		$	45,474		$	323,192		$	(1,045	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date	—		—		(75		)	5,715			323,192			(1,045		)