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Special Purpose Entities, Including Variable Interest Entities | 3 Months Ended
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Mar. 31, 2020
Accounting Policies [Abstract] |
Special Purpose Entities, Including Variable Interest Entities | 3. VARIABLE INTEREST ENTITIES A mbac, with its subsidiaries, has engaged in transactions with variable interest entities ("VIEs,") in various capacities.
• | Ambac provides financial guarantees, including credit derivative contracts, for various debt obligations issued by special purpose entities, including VIEs ("FG VIEs");
• | Ambac sponsors special purpose entities that issued notes to investors for various purposes; and
• | Ambac is an investor in collateralized debt obligations, mortgage-backed and other asset-backed securities issued by VIEs and its ownership interest is generally insignificant to the VIE and/or Ambac does not have rights that direct the activities that are most significant to such VIE.
FG VIEs: Ambac’s subsidiaries provide financial guarantees in respect of assets held or debt obligations of VIEs. Ambac’s primary variable interest exists through this financial guarantee insurance or credit derivative contract. The transaction structures provide certain financial protection to Ambac. Generally, upon deterioration in the performance of a transaction or upon an event of default as specified in the transaction legal documents, Ambac will obtain certain control rights that enable Ambac to remediate losses. These rights may enable Ambac to direct the activities of the entity that most significantly impact the entity’s economic performance. Under a 2018 Stipulation and Order, the OCI requires Ambac Assurance to obtain their approval with respect to the exercise of certain significant control rights in connection with policies that had previously been allocated to the Segregated Account. Accordingly, Ambac Assurance does not have the right to direct the most significant activities of those FG VIEs.
• | We determined that Ambac’s subsidiaries generally have the obligation to absorb a FG VIE's expected losses given that they have issued financial guarantees supporting certain liabilities (and in some cases certain assets). As further described below, Ambac consolidates certain FG VIEs in cases where we also have the power to direct the activities that most significantly impact the VIE’s economic performance due to one or more of the following: (i) the transaction experiencing deterioration and breaching performance triggers, giving Ambac the ability to exercise certain control rights, (ii) Ambac being involved in the design of the VIE and receiving control rights from its inception, such as may occur from loss remediation activities, or (iii) the transaction not experiencing deterioration, however due to the passive nature of the VIE, Ambac's contingent control rights upon a future breach of performance triggers is considered to be the power over the most significant activity.
• | A VIE is deconsolidated in the period that Ambac no longer has such control rights, which could occur in connection with the execution of remediation activities on the transaction or amortization of insured exposure, either of which may reduce the degree of Ambac’s control over a VIE.
• | Assets and liabilities of FG VIEs that are consolidated are reported within Variable interest entity assets or Variable interest entity liabilities on the Consolidated Balance Sheets.
• | The election to use the fair value option is made on an instrument by instrument basis. Ambac has elected the fair value option for consolidated FG VIE financial assets and financial liabilities, except in cases where Ambac was involved in the design of the VIE and was granted control rights at its inception.
◦ | When the fair value option is elected, changes in the fair value of the FG VIE's financial assets and liabilities are reported within Income (loss) on variable interest entities in the Consolidated Statements of Total Comprehensive Income (Loss), except for the portion of the total change in fair value of financial liabilities caused by changes in the instrument-specific credit risk which is presented separately in Other comprehensive income (loss).
◦ | In cases where the fair value option has not been elected, the FG VIE's invested assets are fixed income securities and are considered available-for-sale as defined by the Investments - Debt Securities Topic of the ASC. These assets are reported in the financial statements at fair value with unrealized gains and losses reflected in Accumulated Other Comprehensive Income in Stockholders' Equity.
The financial liabilities of these FG VIEs consist of long term debt obligations and are carried at par less unamortized discount. Income from the FG VIE's available-for-sale securities (including investment income, realized gains and losses and credit impairments as applicable) and interest expense on long term debt are reported within Income (loss) on variable interest entities in the Consolidated Statements of Total Comprehensive Income (Loss).
• | Upon initial consolidation of a FG VIE, Ambac recognizes a gain or loss in earnings for the difference between: (i) the fair value of the consideration paid, the fair value of any non-controlling interests and the reported amount of any previously held interests and (ii) the net amount, as measured on a fair value basis, of the assets and liabilities consolidated. Upon deconsolidation of a FG VIE, we recognize a gain or loss for the difference between: (i) the fair value of any consideration received, the fair value of any retained non-controlling investment in the VIE and the carrying amount of any non-controlling interest in the VIE and (ii) the carrying amount of the VIE’s assets and liabilities. Gains or losses from consolidation and deconsolidation that are reported in earnings are reported within Income (loss) on variable interest entities on the Consolidated Statements of Total Comprehensive Income (Loss).
• | The impact of consolidating such FG VIEs on Ambac’s balance sheet is the elimination of transactions between the consolidated FG VIEs and Ambac’s operating subsidiaries and the inclusion of the FG VIE’s third party assets and liabilities. For a financial guarantee insurance policy issued to a consolidated VIE, Ambac does not reflect the financial guarantee insurance policy in accordance with the related insurance accounting rules under the Financial Services –
Insurance Topic of the ASC. Consequently, upon consolidation, Ambac eliminates the insurance assets and liabilities associated with the policy from the Consolidated Balance Sheets. Such insurance assets and liabilities may include premium receivables, reinsurance recoverable, deferred ceded premium, subrogation recoverable, unearned premiums, loss and loss expense reserves, ceded premiums payable and insurance intangible assets. For investment securities owned by Ambac that are debt instruments issued by the VIE, the investment securities balance is eliminated upon consolidation. FG VIEs which are consolidated may include non-recourse assets or liabilities. FG VIEs' liabilities (and in some cases assets) that are insured by the Company are with recourse, because the Company guarantees the payment of principal and interest in the event the issuer defaults. FG VIEs' assets and liabilities that are not insured by the Company are without recourse, because Ambac has not issued a financial guarantee and is under no obligation for the payment of principal and interest of these instruments. Therefore, the Company’s exposure to consolidated FG VIEs is limited to the financial guarantees issued for recourse assets and liabilities and any additional variable interests held by Ambac. Additionally, Ambac’s general creditors, other than those specific policy holders which own the VIE debt obligations, do not have rights with regard to the assets of the VIEs. Ambac evaluates the net income effects and earnings per share effects to determine attributions between Ambac and non-controlling interests as a result of consolidating a VIE. Ambac has determined that the net income and earnings per share effect of consolidated FG VIEs are attributable to Ambac’s interests through financial guarantee premium and loss payments with the VIE. The following table summarizes the carrying values of assets and liabilities, along with other supplemental information related to VIEs that are consolidated as a result of financial guarantees of Ambac UK and Ambac Assurance:
| March 31, 2020 |  | December 31, 2019
| Ambac UK |  | Ambac Assurance |  | Total VIEs |  | Ambac UK |  | Ambac Assurance |  | Total VIEs
Fixed income securities, at fair value: |  |  |  |  |  |  |  |  |  |  |
Corporate obligations, fair value option | $ | 2,806 |  |  | $ | — |  |  | $ | 2,806 |  |  | $ | 2,957 |  |  | $ | — |  |  | $ | 2,957 |
Municipal obligations, available-for-sale (1) | — |  |  | 122 |  |  | 122 |  |  | — |  |  | 164 |  |  | 164 |
Total FG VIE fixed income securities, at fair value | 2,806 |  |  | 122 |  |  | 2,928 |  |  | 2,957 |  |  | 164 |  |  | 3,121 |
Restricted cash | 1 |  |  | 1 |  |  | 2 |  |  | 1 |  |  | 1 |  |  | 2 |
Loans, at fair value (2) | 2,932 |  |  | — |  |  | 2,932 |  |  | 3,108 |  |  | — |  |  | 3,108 |
Derivative assets | 62 |  |  | — |  |  | 62 |  |  | 52 |  |  | — |  |  | 52 |
Other assets | — |  |  | 1 |  |  | 1 |  |  | 1 |  |  | 2 |  |  | 3 |
Total FG VIE assets | $ | 5,801 |  |  | $ | 124 |  |  | $ | 5,925 |  |  | $ | 6,119 |  |  | $ | 167 |  |  | $ | 6,286 |
Accrued interest payable | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 1 |  |  | $ | — |  |  | $ | 1 |
Long-term debt: |  |  |  |  |  |  |  |  |  |  |
Long-term debt, at fair value (3) | 4,092 |  |  | — |  |  | 4,092 |  |  | 4,351 |  |  | — |  |  | 4,351 |
Long-term debt, at par less unamortized discount | — |  |  | 171 |  |  | 171 |  |  | — |  |  | 203 |  |  | 203 |
Total long-term debt | 4,092 |  |  | 171 |  |  | 4,263 |  |  | 4,351 |  |  | 203 |  |  | 4,554 |
Derivative liabilities | 1,610 |  |  | — |  |  | 1,610 |  |  | 1,657 |  |  | — |  |  | 1,657 |
Total FG VIE liabilities | $ | 5,702 |  |  | $ | 171 |  |  | $ | 5,873 |  |  | $ | 6,009 |  |  | $ | 203 |  |  | $ | 6,212 |
Number of FG VIEs consolidated | 6 |  |  | 1 |  |  | 7 |  |  | 6 |  |  | 1 |  |  | 7 |
(1) | Available-for-sale FG VIE fixed income securities consist of municipal obligations with an amortized cost basis of $116 and $139, and aggregate gross unrealized gains and (losses) of $6 and $25 at March 31, 2020 and December 31, 2019, respectively. All such securities had contractual maturities due after ten years as of March 31, 2020.
(2) | The unpaid principal balances of loan assets carried at fair value were $2,439 as of March 31, 2020 and $2,618 as of December 31, 2019.
(3) | The unpaid principal balances of long-term debt carried at fair value were $3,550 as of March 31, 2020 and $3,800 as of December 31, 2019.
The following schedule details the components of Income (loss) on variable interest entities for the affected periods:
|  | Three Months Ended March 31,
|  | 2020 |  | 2019
Net change in fair value of VIE assets and liabilities reported under the fair value option |  | $ | — |  |  | $ | 2 |
Less: Credit risk changes of fair value option long-term debt reported through other comprehensive income (loss) |  | (4 | ) |  | — |
Net change in fair value of VIE assets and liabilities reported in earnings |  | (4 | ) |  | 2 |
Investment income on available-for-sale securities |  | 2 |  |  | 2 |
Net realized investment gains (losses) on available-for-sale securities |  | 8 |  |  | — |
Interest expense on long-term debt carried at par less unamortized cost |  | (2 | ) |  | (2 | )
Other expenses |  | — |  |  | — |
Gain (loss) from consolidating FG VIEs |  | — |  |  | 15 |
Income (loss) on variable interest entities |  | $ | 3 |  |  | $ | 16 |
As further discussed in Note 7. Financial Guarantee Insurance Contracts in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, on February 12, 2019, in connection with the COFINA POA, the COFINA Class 2 Trust was established. Ambac was required to consolidate the COFINA Class 2 Trust, which resulted in a gain of $15. The 2019 balance sheet impact of this additional VIE on the date of consolidation was an increase to total consolidated assets and liabilities by $292 and $364, respectively. Ambac did not consolidate any VIE for the three months ended March 31, 2020. Ambac also deconsolidated no VIE for the three months ended March 31, 2020, and no VIEs for the three months ended March 31, 2019. The following table displays the carrying amount of the assets, liabilities and maximum exposure to loss of Ambac’s variable interests in non-consolidated VIEs resulting from financial guarantee and derivative contracts by major underlying asset classes, as of March 31, 2020 and December 31, 2019:
| Carrying Value of Assets and Liabilities
| Maximum Exposure To Loss (1) |  | Insurance Assets (2) |  | Insurance Liabilities (3) |  | Net Derivative Assets (Liabilities) (4)
March 31, 2020: |  |  |  |  |  |  |
Global structured finance: |  |  |  |  |  |  |
Mortgage-backed—residential | $ | 5,063 |  |  | $ | 2,075 |  |  | $ | 609 |  |  | — |
Other consumer asset-backed | 1,276 |  |  | 30 |  |  | 235 |  |  | — |
Other commercial asset-backed | 100 |  |  | 3 |  |  | 2 |  |  | — |
Other | 1,046 |  |  | 6 |  |  | 18 |  |  | 9 |
Total global structured finance | 7,485 |  |  | 2,114 |  |  | 864 |  |  | 9 |
Global public finance | 22,533 |  |  | 285 |  |  | 329 |  |  | (2 | )
Total | $ | 30,018 |  |  | $ | 2,399 |  |  | $ | 1,193 |  |  | $ | 7 |
December 31, 2019: |  |  |  |  |  |  |
Global structured finance: |  |  |  |  |  |  |
Mortgage-backed—residential | $ | 5,373 |  |  | $ | 1,913 |  |  | $ | 523 |  |  | $ | — |
Other consumer asset-backed | 1,373 |  |  | 31 |  |  | 216 |  |  | — |
Other commercial asset-backed | 314 |  |  | 9 |  |  | 6 |  |  | — |
Other | 1,107 |  |  | 7 |  |  | 18 |  |  | 8 |
Total global structured finance | 8,165 |  |  | 1,961 |  |  | 762 |  |  | 8 |
Global public finance | 23,341 |  |  | 287 |  |  | 321 |  |  | — |
Total | $ | 31,506 |  |  | $ | 2,247 |  |  | $ | 1,083 |  |  | $ | 7 |
(1) | Maximum exposure to loss represents the maximum future payments of principal and interest on insured obligations and derivative contracts. Ambac’s maximum exposure to loss does not include the benefit of any financial instruments (such as reinsurance or hedge contracts) that Ambac may utilize to mitigate the risks associated with these variable interests.
(2) | Insurance assets represent the amount included in “Premium receivables” and “Subrogation recoverable” for financial guarantee insurance contracts on Ambac’s Consolidated Balance Sheets.
(3) | Insurance liabilities represent the amount included in “Loss and loss expense reserves” and “Unearned premiums” for financial guarantee insurance contracts on Ambac’s Consolidated Balance Sheets.
(4) | Net derivative assets (liabilities) represent the fair value recognized on credit derivative contracts and interest rate swaps on Ambac’s Consolidated Balance Sheets.
Ambac Sponsored Non-consolidated VIEs: In 1994, Ambac established a VIE to provide certain financial guarantee clients with funding for their debt obligations. This VIE was established as a separate legal entity, demonstrably distinct from Ambac and that Ambac, its affiliates or its agents could not unilaterally dissolve. The permitted activities of this entity are contractually limited to purchasing assets from Ambac, issuing medium-term notes ("MTNs") to fund such purchases, executing derivative hedges and obtaining financial guarantee policies with respect to indebtedness incurred. Ambac does not consolidate this entity because the exercise of related control rights in such policies remain subject to OCI approval under the Stipulation and Order, as discussed above. Ambac elected to account for its equity interest in this entity at fair value under the fair value option in accordance with the Financial Instruments Topic of the ASC. We believe that the fair value of the investments in this entity provides for greater transparency for recording profit or loss as compared to the equity method under the Investments – Equity Method and Joint Ventures Topic of the ASC. Refer to Note 7. Fair Value Measurements for further information on the valuation technique and inputs used to measure the fair value of Ambac’s equity interest in this entity. At March 31, 2020 and December 31, 2019 the fair value of this entity was $3 and $3, respectively, and is reported within Other assets on the Consolidated Balance Sheets.
• | Total principal amount of debt outstanding was $378 and $403 at March 31, 2020 and December 31, 2019, respectively. In each case, Ambac sold assets to this entity, which are composed of utility obligations with a weighted average rating of BBB+ at March 31, 2020 and weighted average life of 0.9 years. The purchase by this entity of financial assets was financed through the issuance of MTNs, which are cross-collateralized by the purchased assets. The MTNs have the same expected weighted average life as the purchased assets. Derivative contracts (interest rate swaps) are used within the entity for economic hedging purposes only. Derivative positions were established at the time MTNs were issued to purchase financial assets. As of March 31, 2020 Ambac Assurance had financial guarantee
insurance policies issued for all assets, MTNs and derivative contracts owned and outstanding by the entity.
• | Insurance premiums paid to Ambac Assurance by this entity are earned in a manner consistent with other insurance policies, over the risk period. Additionally, any losses incurred on such insurance policies are included in Ambac’s Consolidated Statements of Total Comprehensive Income (Loss). Under the terms of an Administrative Agency Agreement, Ambac provides certain administrative duties, primarily collecting amounts due on the obligations and making interest payments on the MTNs.
On August 28, 2014, Ambac monetized its ownership of the junior surplus note issued to it by Ambac Assurance by depositing the junior surplus note into a newly formed VIE trust in exchange for cash and an owner trust certificate, which represents Ambac's right to residual cash flows from the junior surplus note. Ambac does not consolidate the VIE since it does not have a variable interest in the trust. Ambac reports its owner trust certificate as an equity investment within Other investments on the Consolidated Balance Sheets with associated results from operations included within Net investment income (loss): Other investments on the Consolidated Statements of Total Comprehensive Income (Loss). The equity investment had a carrying value of $47 and $46 as of March 31, 2020 and December 31, 2019, respectively. On February 12, 2018, Ambac formed a VIE, Ambac LSNI, LLC ("Ambac LSNI"). Ambac LSNI issued Secured Notes in connection with the Rehabilitation Exit Transactions. Ambac does not consolidate the VIE since it does not have a variable interest in the trust. Ambac reports its holdings of Secured Notes within Fixed Income Securities in the Consolidated Balance Sheets. The carrying value of Secured Notes held by Ambac was $495 and $535 at March 31, 2020 and December 31, 2019, respectively. Ambac's debt obligation to the VIE (the Ambac Note) had a carrying value of $1,685 and $1,763 at March 31, 2020 and December 31, 2019, respectively, and is reported within Long-term debt on the Consolidated Balance Sheets.

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- Definition Tabular disclosure of the significant judgments and assumptions made in determining whether a variable interest (as defined) held by the entity requires the variable interest entity (VIE) (as defined) to be consolidated and (or) disclose information about its involvement with the VIE, individually or in aggregate (as applicable); the nature of restrictions, if any, on the consolidated VIE's assets and on the settlement of its liabilities reported by an entity in its statement of financial position, including the carrying amounts of such assets and liabilities; the nature of, and changes in, the risks associated with involvement in the VIE; how involvement with the VIE affects the entity's financial position, financial performance, and cash flows; the lack of recourse if creditors (or beneficial interest holders) of the consolidated VIE have no recourse to the general credit of the primary beneficiary (if applicable); the terms of arrangements, giving consideration to both explicit arrangements and implicit variable interests, if any, that could require the entity to provide financial support to the VIE, including events or circumstances that could expose the entity to a loss; the methodology used by the entity for determining whether or not it is the primary beneficiary of the variable interest entity; the significant factors considered and judgments made in determining that the power to direct the activities of a VIE that most significantly impact the VIE's economic performance are shared (as defined); the carrying amounts and classification of assets and liabilities of the VIE included in the statement of financial position; the entity's maximum exposure to loss, if any, as a result of its involvement with the VIE, including how the maximum exposure is determined and significant sources of the entity's exposure to the VIE; a comparison of the carrying amounts of the assets and liabilities and the entity's maximum exposure to loss; information about any liquidity arrangements, guarantees, and (or) other commitments by third parties that may affect the fair value or risk of the entity's variable interest in the VIE; whether or not the entity has provided financial support or other support (explicitly or implicitly) to the VIE that it was not previously contractually required to provide or whether the entity intends to provide that support, including the type and amount of the support and the primary reasons for providing the support; and supplemental information the entity determines necessary to provide. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -SubTopic 10 -Section 50 -Paragraph 5A -URI http://asc.fasb.org/extlink&oid=118582676&loc=SL6759159-111685 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -SubTopic 10 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=118582676&loc=d3e5747-111685 Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=118582676&loc=SL6228884-111685 Reference 4: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=118582676&loc=d3e5710-111685 Reference 5: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=118582676&loc=d3e5728-111685 + Details
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