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Insurance Contracts | 3 Months Ended
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Mar. 31, 2022
Insurance [Abstract] |
Fair Value Measurements | 5. 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 has 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, certain highly liquid pooled fund investments, 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 maturity 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, certain equity investments and certain investments in fixed maturity securities. Additionally, Level 3 assets and liabilities generally include loan receivables, and certain long-term debt of variable interest entities consolidated under the Consolidation Topic of the ASC.
The Fair Value Measurement Topic of the ASC permits, as a practical expedient, the estimation of fair value of certain investments in funds using the net asset value per share of the investment or its equivalent (“NAV”). Investments in funds valued using NAV are not categorized as Level 1, 2 or 3 under the fair value hierarchy. The Investments — Equity Securities Topic of the ASC permits the measurement of certain equity securities without a readily determinable fair value at cost, less impairment, and adjusted to fair value when observable price changes in identical or similar investments from the same issuer occur (the "measurement alternative"). The fair values of investments measured under this measurement alternative are not included in the below disclosures of fair value of financial instruments. The following table sets forth the carrying amount and fair value of Ambac’s financial assets and liabilities as of March 31, 2022 and December 31, 2021, 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:
March 31, 2022: |  | Level 1 |  | Level 2 |  | Level 3
Financial assets: |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |
Municipal obligations |  | $ | 188 |  |  | $ | 188 |  |  | $ | — |  |  | $ | 188 |  |  | $ | — |
Corporate obligations |  | 577 |  |  | 577 |  |  | 1 |  |  | 564 |  |  | 12 |
Foreign obligations |  | 88 |  |  | 88 |  |  | 88 |  |  | — |  |  | — |
U.S. government obligations |  | 51 |  |  | 51 |  |  | 51 |  |  | — |  |  | — |
Residential mortgage-backed securities |  | 225 |  |  | 225 |  |  | — |  |  | 225 |  |  | — |
Collateralized debt obligations |  | 120 |  |  | 120 |  |  | — |  |  | 120 |  |  | — |
Other asset-backed securities |  | 252 |  |  | 252 |  |  | — |  |  | 178 |  |  | 74 |
Fixed maturity securities, pledged as collateral: |  |  |  |  |  |  |  |  |  |
U.S. government obligations |  | 15 |  |  | 15 |  |  | 15 |  |  | — |  |  | — |
Short-term |  | 99 |  |  | 99 |  |  | 99 |  |  | — |  |  | — |
Short term investments |  | 540 |  |  | 540 |  |  | 526 |  |  | 13 |  |  | — |
Other investments (1) |  | 660 |  |  | 652 |  |  | 92 |  |  | — |  |  | — |
Cash, cash equivalents and restricted cash |  | 67 |  |  | 67 |  |  | 67 |  |  | — |  |  | — |
Derivative assets: |  |  |  |  |  |  |  |  |  |
Interest rate swaps—asset position |  | 56 |  |  | 56 |  |  | — |  |  | 3 |  |  | 52 |
Other assets-Loans |  | 3 |  |  | 3 |  |  | — |  |  | — |  |  | 3 |
Variable interest entity assets: |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: Corporate obligations, fair value option |  | 3,131 |  |  | 3,131 |  |  | — |  |  | — |  |  | 3,131 |
Fixed maturity securities: Municipal obligation, trading |  | 114 |  |  | 114 |  |  | — |  |  | 114 |  |  | — |
Fixed maturity securities: Municipal obligations, available-for-sale |  | 119 |  |  | 119 |  |  | — |  |  | 119 |  |  | — |
Restricted cash |  | 49 |  |  | 49 |  |  | 49 |  |  | — |  |  | — |
Loans |  | 2,469 |  |  | 2,469 |  |  | — |  |  | — |  |  | 2,469 |
Derivative assets: Currency swaps-asset position |  | 42 |  |  | 42 |  |  | — |  |  | 42 |  |  | — |
Total financial assets |  | $ | 8,864 |  |  | $ | 8,856 |  |  | $ | 988 |  |  | $ | 1,567 |  |  | $ | 5,741 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |
Long term debt, including accrued interest |  | $ | 2,834 |  |  | $ | 2,315 |  |  | $ | — |  |  | $ | 2,296 |  |  | $ | 19 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |
Credit derivatives |  | 1 |  |  | 1 |  |  | — |  |  | — |  |  | 1 |
Interest rate swaps—liability position |  | 75 |  |  | 75 |  |  | — |  |  | 75 |  |  | — |
Futures contracts |  | 1 |  |  | 1 |  |  | 1 |  |  | — |  |  | — |
Liabilities for net financial guarantees written (2) |  | (970) |  |  | (197) |  |  | — |  |  | — |  |  | (197) |
Variable interest entity liabilities: |  |  |  |  |  |  |  |  |  |
Long-term debt (includes $3,701 at fair value) |  | 4,124 |  |  | 4,161 |  |  | — |  |  | 4,001 |  |  | 160 |
Derivative liabilities: Interest rate swaps—liability position |  | 1,866 |  |  | 1,866 |  |  | — |  |  | 1,866 |  |  | — |
Total financial liabilities |  | $ | 7,930 |  |  | $ | 8,221 |  |  | $ | 1 |  |  | $ | 8,238 |  |  | $ | (17) |
|  | Carrying Amount |  | Total Fair Value |  | Fair Value Measurements Categorized as:
December 31, 2021: |  | Level 1 |  | Level 2 |  | Level 3
Financial assets: |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |
Municipal obligations |  | $ | 340 |  |  | $ | 340 |  |  | $ | — |  |  | $ | 340 |  |  | $ | — |
Corporate obligations |  | 613 |  |  | 613 |  |  | 1 |  |  | 600 |  |  | 12 |
Foreign obligations |  | 87 |  |  | 87 |  |  | 87 |  |  | — |  |  | — |
U.S. government obligations |  | 45 |  |  | 45 |  |  | 45 |  |  | — |  |  | — |
Residential mortgage-backed securities |  | 252 |  |  | 252 |  |  | — |  |  | 252 |  |  | — |
Collateralized debt obligations |  | 128 |  |  | 128 |  |  | — |  |  | 128 |  |  | — |
Other asset-backed securities |  | 265 |  |  | 265 |  |  | — |  |  | 187 |  |  | 79 |
Fixed maturity securities, pledged as collateral: |  |  |  |  |  |  |  |  |  |
U.S. government obligations |  | 15 |  |  | 15 |  |  | 15 |  |  | — |  |  | — |
Short-term |  | 105 |  |  | 105 |  |  | 105 |  |  | — |  |  | — |
Short term investments |  | 414 |  |  | 414 |  |  | 369 |  |  | 46 |  |  | — |
Other investments (1) |  | 690 |  |  | 683 |  |  | 106 |  |  | — |  |  | — |
Cash, cash equivalents and restricted cash |  | 21 |  |  | 21 |  |  | 21 |  |  | 1 |  |  | — |
Derivative assets: |  |  |  |  |  |  |  |  |  |
Interest rate swaps—asset position |  | 76 |  |  | 76 |  |  | — |  |  | 5 |  |  | 71 |
Other assets - equity in sponsored VIE |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Other assets-loans |  | 3 |  |  | 3 |  |  | — |  |  | — |  |  | 3 |
Variable interest entity assets: |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: Corporate obligations, fair value option |  | 3,320 |  |  | 3,320 |  |  | — |  |  | — |  |  | 3,320 |
Fixed maturity securities: Municipal obligations, available-for-sale |  | 136 |  |  | 136 |  |  | — |  |  | 136 |  |  | — |
Restricted cash |  | 2 |  |  | 2 |  |  | 2 |  |  | — |  |  | — |
Loans |  | 2,718 |  |  | 2,718 |  |  | — |  |  | — |  |  | 2,718 |
Derivative assets: Currency swaps—asset position |  | 38 |  |  | 38 |  |  | — |  |  | 38 |  |  | — |
Total financial assets |  | $ | 9,268 |  |  | $ | 9,261 |  |  | $ | 750 |  |  | $ | 1,732 |  |  | $ | 6,202 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |
Long term debt, including accrued interest |  | $ | 2,806 |  |  | $ | 2,598 |  |  | $ | — |  |  | $ | 2,575 |  |  | $ | 22 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |
Credit derivatives |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Interest rate swaps—liability position |  | 94 |  |  | 94 |  |  | — |  |  | 94 |  |  | — |
Futures contracts |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Liabilities for net financial guarantees written (2) |  | (866) |  |  | (112) |  |  | — |  |  | — |  |  | (112) |
Variable interest entity liabilities: |  |  |  |  |  |  |  |  |  |
Long-term debt (includes $4,056 at fair value) |  | 4,216 |  |  | 4,255 |  |  | — |  |  | 4,086 |  |  | 169 |
Derivative liabilities: Interest rate swaps—liability position |  | 1,940 |  |  | 1,940 |  |  | — |  |  | 1,940 |  |  | — |
Total financial liabilities |  | $ | 8,190 |  |  | $ | 8,775 |  |  | $ | — |  |  | $ | 8,695 |  |  | $ | 79 |
(1)Excluded from the fair value measurement categories in the table above are investment funds of $560 and $577 as of March 31, 2022 and December 31, 2021, respectively, which are measured using NAV as a practical expedient. Also excluded from the fair value measurements in the table above are equity securities with a carrying value of $8 and $8 as of March 31, 2022 and December 31, 2021, respectively, that do not have readily determinable fair values and have carrying amounts determined using the measurement alternative. (2)The carrying value of net financial guarantees written includes financial guarantee amounts in 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 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 maturity securities, equity interests in pooled investment funds, derivative instruments and certain variable interest entity assets and liabilities. 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. Fixed Maturity Securities: The fair values of fixed maturity investment securities are based primarily on market prices received from broker quotes or alternative pricing sources. Because many fixed maturity 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 maturity 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 March 31, 2022, approximately 6%, 90% and 4% of the fixed maturity investment portfolio (excluding variable interest entity investments) was valued using broker quotes, alternative pricing sources and internal valuation models, respectively. At December 31, 2021, approximately 6%, 90% and 4% of the fixed maturity investment portfolio (excluding variable interest entity investments) was valued using broker quotes, alternative pricing sources and internal valuation models, respectively. Ambac performs various review and validation procedures to quoted and modeled prices for fixed maturity securities, including price variance analyses, missing and static price reviews, overall valuation analysis by portfolio managers and finance managers and reviews associated with our ongoing impairment analysis. Unusual prices identified through these procedures will be evaluated further against alternative third party quotes (if available), internally modeled prices and/or other relevant data, 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 portfolio managers and finance managers. Information about the valuation inputs for fixed maturity securities classified as Level 3 is included below: Other asset-backed securities: This security is a subordinated tranche of a securitization collateralized by Ambac-insured military housing bonds. The fair value classified as Level 3 was $74 and $79 at March 31, 2022 and December 31, 2021, 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 March 31, 2022 and December 31, 2021 include the following:
March 31, 2022:
a. Coupon rate: | 5.98%
b. Average Life: | 13.97 years
c. Yield: | 11.00%
December 31, 2021:
a. Coupon rate: | 5.97%
b. Average Life: | 14.14 years
c. Yield: | 10.20%
Corporate obligations: This includes certain investments in convertible debt securities. The fair value classified as Level 3 was $12 and $12 at March 31, 2022 and December 31, 2021, respectively. Fair value was calculated by discounting cash flows to average maturity of 2.5 years and yield of 9.3% at March 31, 2022 and average maturity of 2.75 years and yield of 7.2% at December 31, 2021. Yields used are consistent with the security type and rating. 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 NAV as a practical expedient as permitted under the Fair Value Measurement Topic of the ASC. Refer to Note 4. Investments for additional information about such investments in pooled funds that are reported at fair value using NAV as a practical expedient. Derivative Instruments: Ambac’s derivative instruments primarily comprise interest rate swaps, 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 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. Factors considered in estimating the amount of any Ambac credit valuation adjustment ("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. The aggregate Ambac CVA impact reduced the fair value of derivative liabilities by less than a million dollars at both March 31, 2022 and December 31, 2021, respectively Interest rate swaps that are not centrally cleared are valued using vendor-developed models that incorporate interest rates and yield curves that are observable and regularly quoted. These models provide the net present value of the derivatives based on contractual terms and observable market data. Generally, the need for counterparty (or Ambac) CVAs on interest rate derivatives is mitigated by the existence of collateral posting agreements under which adequate collateral has been posted. Certain of these 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 determination of their fair value. Ambac's credit derivatives ("CDS") are valued using an internal model that uses traditional financial guarantee CDS pricing to calculate the fair value of the derivative contract based on the reference obligation's current pricing, remaining life and credit rating and Ambac's own credit risk. The model calculates the difference between the 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. Unobservable inputs used include Ambac's internal reference obligation credit ratings and remaining life, estimates of fees that would be charged to assume the credit derivative obligation and Ambac's CVA. Ambac is party to only one remaining credit derivative with an internal credit rating of AA at March 31, 2022. Ambac has not made any significant changes to its modeling techniques or related model inputs for the periods presented. 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 marketplace, 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. Long-term Debt: Long-term debt includes AAC surplus notes, the Sitka AAC Note, Tier 2 Notes issued in connection with the Rehabilitation Exit Transactions and the Ambac UK debt issued in connection with the Ballantyne commutation. The fair values of surplus notes, Sitka AAC Note and Tier 2 Notes are classified as Level 2. The fair value of Ambac UK debt is classified as Level 3. Other Financial Assets and Liabilities: Included in Other assets are loans, the fair values of which are estimated based upon internal valuation models and are classified as Level 3. Variable Interest Entity Assets and Liabilities: The financial assets and liabilities of Legacy Financial Guarantee Insurance VIEs ("FG VIEs") consolidated under the Consolidation Topic of the ASC consist primarily of fixed maturity securities and loans held by the VIEs, derivative instruments and notes issued by the VIEs which are reported as long-term debt. As described in Note 9. Variable Interest Entities, these FG VIEs are securitization entities which have liabilities and/or assets guaranteed by AAC or Ambac UK. The fair values of FG VIE long-term debt are based on price quotes received from independent market sources when available. Such quotes are considered Level 2 and generally consider a variety of factors, including recent trades of the same and similar securities. For those instruments where quotes were not available or cannot be reasonably corroborated, fair values are based on internal valuation models. Comparable to the sensitivities of investments in fixed maturity 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 FG VIE long-term debt. FG VIE derivative asset and liability fair values are determined using vendor-developed valuation models, which incorporated observable market data related to specific derivative contractual terms including interest rates, foreign exchange rates and yield curves. The fair value of FG VIE fixed maturity securities and loan assets are generally based on Level 2 market price quotes received from independent market sources when available. When FG VIE asset fair values are not readily available from market quotes, values are estimated internally. Internal valuations of FG VIE’s fixed maturity securities or loan assets are derived from the fair values of the notes issued by the respective VIE and the VIE’s derivatives, determined as described above, adjusted for the fair values of Ambac’s financial guarantees associated with the VIE. The fair value of financial guarantees consist of: (i) estimated future premium cash flows discounted at a rate consistent with that implicit in the fair value of the VIE’s liabilities and (ii) estimates of future claim payments 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 3.9% and 3.0% at March 31, 2022 and December 31, 2021, respectively. At March 31, 2022, the range of these discount rates was between 3.2% and 5.3%. 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 2022 and 2021. 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 |  |
|  | Investments(1) |  | Other Assets(2) |  | Derivatives |  | Investments |  | Loans |  |  |  | Total
Three Months Ended March 31, 2022: |  |  |  |  |  |  |  |  |  |  |  |
Balance, beginning of period |  | $ | 91 |  |  | $ | — |  |  | $ | 70 |  |  | $ | 3,320 |  |  | $ | 2,718 |  |  |  |  | $ | 6,199 |
Total gains/(losses) realized and unrealized: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings |  | — |  |  | — |  |  | (17) |  |  | (93) |  |  | (96) |  |  |  |  | (204) |
Included in other comprehensive income |  | (4) |  |  | — |  |  | — |  |  | (96) |  |  | (76) |  |  |  |  | (176) |
Purchases |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | — |
Settlements |  | (1) |  |  | — |  |  | (2) |  |  | — |  |  | (78) |  |  |  |  | (80) |
Balance, end of period |  | $ | 86 |  |  | $ | — |  |  | $ | 52 |  |  | $ | 3,131 |  |  | $ | 2,469 |  |  |  |  | $ | 5,738 |
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 |  | $ | — |  |  | $ | — |  |  | $ | (17) |  |  | $ | (93) |  |  | $ | (96) |  |  |  |  | $ | (204) |
The amount of total gains/(losses) included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date |  | $ | (4) |  |  | $ | — |  |  | $ | — |  |  | $ | (96) |  |  | $ | (76) |  |  |  |  | $ | (176) |
Three Months Ended March 31, 2021: |  |  |  |  |  |  |  |  |  |  |  |
Balance, beginning of period |  | $ | 78 |  |  | $ | 1 |  |  | $ | 84 |  |  | $ | 3,215 |  |  | $ | 2,998 |  |  |  |  | $ | 6,376 |
Total gains/(losses) realized and unrealized: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings |  | — |  |  | — |  |  | (17) |  |  | (138) |  |  | 9 |  |  |  |  | (145) |
Included in other comprehensive income |  | (2) |  |  | — |  |  | — |  |  | 26 |  |  | 24 |  |  |  |  | 49 |
Purchases |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | — |
Settlements |  | — |  |  | — |  |  | (2) |  |  | — |  |  | (84) |  |  |  |  | (86) |
Balance, end of period |  | $ | 76 |  |  | $ | 1 |  |  | $ | 65 |  |  | $ | 3,103 |  |  | $ | 2,948 |  |  |  |  | $ | 6,194 |
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 |  | $ | — |  |  | $ | — |  |  | $ | (17) |  |  | $ | (138) |  |  | $ | 9 |  |  |  |  | $ | (145) |
The amount of total gains/(losses) included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date |  | $ | (2) |  | $ | — |  | $ | — |  | $ | 26 |  | $ | 24 |  |  |  | $ | 49
(1) Investments classified as Level 3 consist of a single other asset-backed security. (2) Other assets carried at fair value and classified as Level 3 relate to an equity interest in an Ambac sponsored VIE.
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. Derivative instruments are transferred into Level 3 when the use of unobservable inputs becomes significant to the overall valuation. There were no transfers of financial instruments into or out of Level 3 in the periods disclosed. 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 |  | Net Gains (Losses) on Derivative Contracts |  | Income (Loss) on Variable Interest Entities |  | Other Income or (Expense)
Three Months Ended March 31, 2022: |  |  |  |  |  |  |  |
Total gains (losses) included in earnings for the period |  | $ | — |  |  | $ | (17) |  |  | $ | (188) |  |  | $ | — |
Changes in unrealized gains (losses) relating to financial instruments still held at the reporting date |  | — |  |  | (17) |  |  | (188) |  |  | — |
Three Months Ended March 31, 2021: |  |  |  |  |  |  |  |
Total gains (losses) included in earnings for the period |  | $ | — |  |  | $ | (17) |  |  | $ | (129) |  |  | $ | — |
Changes in unrealized gains (losses) relating to financial instruments still held at the reporting date |  | — |  |  | (17) |  |  | (129) |  |  | — |
Financial Guarantees In Force | Amounts presented in this Note relate only to Ambac’s non-derivative insurance business for insurance policies issued to beneficiaries, excluding consolidated VIEs. Premiums: The effect of reinsurance on premiums written and earned was as follows:
| Three Months Ended March 31,
| 2022 |  | 2021
| Written |  | Earned |  | Written |  | Earned
Direct | $ | 30 |  |  | $ | 23 |  |  | $ | (2) |  |  | $ | 17 |
Assumed | — |  |  | — |  |  | — |  |  | — |
Ceded | 18 |  |  | 8 |  |  | 7 |  |  | 3 |
Net premiums | $ | 12 |  |  | $ | 15 |  |  | $ | (9) |  |  | $ | 14 |
The following table summarizes net premiums earned by location of risk:
| Three Months Ended March 31, |  |
| 2022 |  | 2021 |  |  |  |
United States | $ | 9 |  |  | $ | 7 |  |  |  |  |
United Kingdom | 4 |  |  | 3 |  |  |  |  |
Other international | 1 |  |  | 3 |  |  |  |  |
Total | $ | 15 |  |  | $ | 14 |  |  |  |  |
Premium Receivables, including credit impairments: Premium receivables at March 31, 2022 and December 31, 2021 were $317 and $323, respectively. •Legacy financial guarantee premium receivables are discounted using an appropriate risk-free rate corresponding to the weighted average life of each policy and currency to discount the future premiums contractually due or expected to be collected. The weighted average risk-free rate at March 31, 2022 and December 31, 2021, was 2.6% and 2.2%, respectively, and the weighted average period of future premiums used to estimate the premium receivable at March 31, 2022 and December 31, 2021, was 8.2 years and 8.0 years, respectively. •Specialty property and casualty premium receivables are not discounted and are typically paid upfront. Any receivables for such amounts are generally collected in the following period. Non-payment of premium by the policyholder may lead to policy cancellation. Management evaluates premium receivables for expected credit losses ("credit impairment") in accordance with the CECL standard adopted January 1, 2020, which is further described in Note 2. Basis of Presentation and Significant Accounting Policies in the Notes to Consolidated Financial Statements included in Ambac's Annual Report on Form 10-K for the year ended December 31, 2021. The key indicator management uses to assess the credit quality of the legacy financial guarantee premium receivables is Ambac's internal risk classifications for the insured obligation determined by the Risk Management Group. Below is the amortized cost basis of financial guarantee premium receivables by risk classification code and asset class as of March 31, 2022 and December 31, 2021:
Surveillance Categories as of March 31, 2022
Type of Guaranteed Bond |  | I |  | IA |  | II |  | III |  | IV |  |  |  | Total
Public Finance: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Housing revenue |  | $ | 147 |  |  | $ | 3 |  |  | $ | 5 |  |  | $ | — |  |  | $ | — |  |  |  |  | $ | 155 |
Other |  | 2 |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 2 |
Total Public Finance |  | 149 |  |  | 3 |  |  | 5 |  |  | — |  |  | — |  |  |  |  | 157 |
Structured Finance: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-backed and home equity |  | 1 |  |  | — |  |  | — |  |  | 2 |  |  | 11 |  |  |  |  | 15 |
Structured insurance |  | 9 |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 9 |
Student loan |  | 1 |  |  | 1 |  |  | — |  |  | 8 |  |  | — |  |  |  |  | 11 |
Other |  | 6 |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 6 |
Total Structured Finance |  | 18 |  |  | 1 |  |  | — |  |  | 11 |  |  | 11 |  |  |  |  | 41 |
International: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Sovereign/sub-sovereign |  | 74 |  |  | 8 |  |  | — |  |  | 10 |  |  | — |  |  |  |  | 92 |
Investor-owned and public utilities |  | 21 |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 21 |
Other |  | 5 |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 5 |
Total International |  | 100 |  |  | 8 |  |  | — |  |  | 10 |  |  | — |  |  |  |  | 118 |
Total (1) (2) |  | $ | 267 |  |  | $ | 12 |  |  | $ | 5 |  |  | $ | 21 |  |  | $ | 11 |  |  |  |  | $ | 316 |
Surveillance Categories as of December 31, 2021
Type of Guaranteed Bond |  | I |  | IA |  | II |  | III |  | IV |  |  |  | Total
Public Finance: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Housing revenue |  | $ | 149 |  |  | $ | 3 |  |  | $ | 5 |  |  | $ | — |  |  | $ | — |  |  |  |  | $ | 157 |
Other |  | 2 |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 2 |
Total Public Finance |  | 151 |  |  | 3 |  |  | 5 |  |  | — |  |  | — |  |  |  |  | 159 |
Structured Finance: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-backed and home equity |  | 1 |  |  | — |  |  | 1 |  |  | 2 |  |  | 12 |  |  |  |  | 16 |
Student loan |  | 1 |  |  | 1 |  |  | — |  |  | 9 |  |  | — |  |  |  |  | 12 |
Structured insurance |  | 10 |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 10 |
Other |  | 7 |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 7 |
Total Structured Finance |  | 19 |  |  | 1 |  |  | 1 |  |  | 12 |  |  | 12 |  |  |  |  | 45 |
International: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Sovereign/sub-sovereign |  | 74 |  |  | 8 |  |  | — |  |  | 11 |  |  | — |  |  |  |  | 93 |
Investor-owned and public utilities |  | 28 |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 28 |
Other |  | 5 |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 5 |
Total International |  | 107 |  |  | 8 |  |  | — |  |  | 11 |  |  | — |  |  |  |  | 125 |
Total (1) (2) |  | $ | 277 |  |  | $ | 12 |  |  | $ | 6 |  |  | $ | 22 |  |  | $ | 12 |  |  |  |  | $ | 329 |
(1) Excludes specialty property and casualty premium receivables of $9 and $2 at March 31, 2022 and December 31, 2021, respectively. (2) The underwriting origination dates for all policies included are greater than five years prior to the current reporting date. Below is a rollforward of the premium receivable allowance for credit losses as of March 31, 2022 and 2021:
Three Months Ended March 31, |  | 2022 |  | 2021 |  |  |  |
Beginning balance |  | $ | 9 |  |  | $ | 17 |  |  |  |  |
Current period provision (benefit) |  | (1) |  |  | (4) |  |  |  |  |
Write-offs of the allowance |  | — |  |  | — |  |  |  |  |
Recoveries of previously written-off amounts |  | — |  |  | — |  |  |  |  |
Ending balance (1) |  | $ | 8 |  |  | $ | 13 |  |  |  |  |
(1)At March 31, 2022 and 2021, $1 and $— of premiums were past due. Legacy Financial Guarantee Premium Receivables: Gross premiums are received either upfront or in installments. For premiums received upfront, an unearned premium revenue (“UPR”) liability is established, which is initially recorded as the cash amount received. For installment premium policies, a premium receivable asset and offsetting UPR liability is initially established in an amount equal to: (i) the present value of future contractual premiums due (the “contractual” method) or (ii) if the assets underlying the insured obligation are homogenous pools which are contractually prepayable, the present value of premiums to be collected over the expected life of the transaction (the “expected” method). Below is the gross premium receivable roll-forward (direct and assumed contracts) for the affected periods:
Three Months Ended March 31, |  | 2022 |  | 2021
Beginning premium receivable |  | $ | 320 |  |  | $ | 370 |
Premium receipts |  | (15) |  |  | (12) |
Adjustments for changes in expected and contractual cash flows for contracts (1) |  | 3 |  |  | (8) |
Accretion of premium receivable discount for contracts |  | 2 |  |  | 2 |
Changes to allowance for credit losses |  | 1 |  |  | 4 |
Other adjustments (including foreign exchange) |  | (3) |  |  | — |
Ending premium receivable (2) |  | $ | 308 |  |  | $ | 356 |
(1) Adjustments for changes in expected and contractual cash flows primarily due to indexation offset by reductions in insured exposure as a result of early policy terminations and unscheduled principal paydowns. (2) Premium receivable includes premiums to be received in foreign denominated currencies most notably in British Pounds and Euros. At March 31, 2022 and 2021, premium receivables include British Pounds of $101 (£77) and $122 (£89), respectively, and Euros of $16 (€15) and $21 (€18), respectively. The following table summarizes the future gross undiscounted premiums to be collected and future premiums earned, net of reinsurance at March 31, 2022:
| Future Premiums to be Collected (1) |  | Future Premiums to be Earned Net of Reinsurance (2)
Three months ended: |  |  |
June 30, 2022 | $ | 8 |  |  | $ | 6 |
September 30, 2022 | 9 |  |  | 6 |
December 31, 2022 | 6 |  |  | 6 |
Twelve months ended: |  |  |
December 31, 2023 | 30 |  |  | 24 |
December 31, 2024 | 29 |  |  | 23 |
December 31, 2025 | 28 |  |  | 22 |
December 31, 2026 | 27 |  |  | 22 |
Five years ended: |  |  |
December 31, 2031 | 115 |  |  | 89 |
December 31, 2036 | 77 |  |  | 55 |
December 31, 2041 | 34 |  |  | 22 |
December 31, 2046 | 16 |  |  | 9 |
December 31, 2051 | 5 |  |  | 3 |
December 31, 2056 | — |  |  | — |
Total | $ | 384 |  |  | $ | 288 |
(1)Future premiums to be collected are undiscounted, gross of allowance for credit losses, and are used to derive the discounted premium receivable asset recorded on Ambac's balance sheet. (2)Future premiums to be earned, net of reinsurance relate to the unearned premiums liability and deferred ceded premium asset recorded on Ambac’s balance sheet. The use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral is required in the calculation of the premium receivable, as further described in Note 2. Basis of Presentation and Significant Accounting Policies in the Notes to Consolidated Financial Statements included in Ambac's Annual Report on Form 10-K for the year ended December 31, 2021. This results in a different premium receivable balance than if expected lives were considered. If installment paying policies are retired or prepay early, premiums reflected in the premium receivable asset and amounts reported in the above table for such policies may not be collected. Future premiums to be earned also considers the use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral, which may result in different unearned premium than if expected lives were considered. If those bonds types are retired early, premium earnings may be negative in the period of call or refinancing. Loss and Loss Expense Reserves: Ambac’s loss and loss expense reserves (“loss reserves”) are based on management’s on-going review of the insured portfolio. Below are the components of the loss and loss expense reserves and the subrogation recoverable asset at at March 31, 2022 and December 31, 2021:
|  |  |  | Legacy Financial Guarantee
|  | Specialty Property and Casualty |  | Present Value of Expected Net Cash Flows |  |  |  |
Balance Sheet Line Item |  | Gross Loss and Loss Expense Reserves |  | Claims and Loss Expenses |  | Recoveries |  | Unearned Premium Revenue |  | Gross Loss and Loss Expense Reserves
March 31, 2022: |  |  |  |  |  |  |  |  |  |
Loss and loss expense reserves |  | $ | 36 |  |  | $ | 1,168 |  |  | $ | (95) |  |  | $ | (42) |  |  | $ | 1,067 |
Subrogation recoverable |  | — |  |  | 52 |  |  | (1,766) |  |  | — |  |  | (1,714) |
Totals |  | $ | 36 |  |  | $ | 1,221 |  |  | $ | (1,861) |  |  | $ | (42) |  |  | $ | (647) |
December 31, 2021: |  |  |  |  |  |  |  |  |  |
Loss and loss expense reserves |  | $ | 32 |  |  | $ | 1,749 |  |  | $ | (155) |  |  | $ | (56) |  |  | $ | 1,570 |
Subrogation recoverable |  | — |  |  | 88 |  |  | (2,180) |  |  | — |  |  | (2,092) |
Totals |  | $ | 32 |  |  | $ | 1,837 |  |  | $ | (2,335) |  |  | $ | (56) |  |  | $ | (522) |
Below is the loss and loss reserve expense roll-forward, net of subrogation recoverable and reinsurance, for the affected periods:
Three Months Ended March 31, | 2022 |  | 2021
Beginning gross loss and loss expense reserves | $ | (522) |  |  | $ | (397) |
Reinsurance recoverable | 55 |  |  | 33 |
Beginning balance of net loss and loss expense reserves | (578) |  |  | (430) |
Losses and loss expenses (benefit): |  |  |
Current year | 1 |  |  | — |
Prior years | 23 |  |  | 8 |
Total (1) (2) | 24 |  |  | 8 |
Loss and loss expenses paid (recovered): |  |  |
Current year | — |  |  | — |
Prior years | (150) |  |  | 25 |
Total | (150) |  |  | 25 |
Foreign exchange effect | (1) |  |  | — |
Ending net loss and loss expense reserves | (404) |  |  | (447) |
Impact of VIE consolidation | (292) |  |  | — |
Reinsurance recoverable (3) | 49 |  |  | 33 |
Ending gross loss and loss expense reserves | $ | (647) |  |  | $ | (414) |
(1)Total losses and loss expenses (benefit) includes $(7) and $(1) for the three months ended March 31, 2022 and 2021, respectively, related to ceded reinsurance. (2)Ambac records the impact of estimated recoveries related to securitized loans in RMBS transactions that breached certain representations and warranties ("R&W's) by transaction sponsors within losses and loss expenses (benefit). The losses and loss expense incurred associated with changes in estimated R&W's for the three months ended March 31, 2022 and 2021, was $224 and $3, respectively. (3)Represents reinsurance recoverable on future loss and loss expenses. Additionally, the Balance Sheet line "Reinsurance recoverable on paid and unpaid losses" includes reinsurance recoverables (payables) of $0 and $0 as of March 31, 2022 and 2021, respectively, related to previously presented loss and loss expenses and subrogation. For 2022, the adverse development in prior years was primarily attributable to the reduction in the R&W recoverable partially offset by the positive benefit of the Puerto Rico restructuring. For 2021, the adverse development in prior years was primarily due to deterioration of Puerto Rico credits. Legacy Financial Guarantee Loss Reserves: The tables below summarize information related to policies currently included in Ambac’s loss and loss expense reserves or subrogation recoverable at March 31, 2022 and December 31, 2021, excluding consolidated VIEs. Gross par exposures include capital appreciation bonds which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bond. The weighted average risk-free rate used to discount loss reserves at March 31, 2022 and December 31, 2021,was 2.4% and 1.2%, respectively.
Surveillance Categories as of March 31, 2022
| I |  | IA |  | II |  | III |  | IV |  | V |  | Total
Number of policies | 34 |  |  | 14 |  |  | 8 |  |  | 14 |  |  | 124 |  |  | 5 |  |  | 199 |
Remaining weighted-average contract period (in years) (1) | 9 |  | 17 |  | 14 |  | 15 |  | 14 |  | 7 |  | 14
Gross insured contractual payments outstanding: |  |  |  |  |  |  |  |  |  |  |  |  |
Principal | $ | 1,297 |  |  | $ | 305 |  |  | $ | 457 |  |  | $ | 1,265 |  |  | $ | 2,105 |  |  | $ | 40 |  |  | $ | 5,469 |
Interest | 608 |  |  | 348 |  |  | 308 |  |  | 174 |  |  | 683 |  |  | 22 |  |  | 2,143 |
Total | $ | 1,905 |  |  | $ | 653 |  |  | $ | 766 |  |  | $ | 1,439 |  |  | $ | 2,788 |  |  | $ | 62 |  |  | $ | 7,612 |
Gross undiscounted claim liability | $ | 8 |  |  | $ | 5 |  |  | $ | 45 |  |  | $ | 572 |  |  | $ | 867 |  |  | $ | 62 |  |  | $ | 1,559 |
Discount, gross claim liability | (1) |  |  | (1) |  |  | (5) |  |  | (155) |  |  | (208) |  |  | (7) |  |  | (377) |
Gross claim liability before all subrogation and before reinsurance | 7 |  |  | 5 |  |  | 40 |  |  | 416 |  |  | 659 |  |  | 55 |  |  | 1,182 |
Less: |  |  |  |  |  |  |  |  |  |  |  |  |
Gross RMBS subrogation (2) | — |  |  | — |  |  | — |  |  | — |  |  | (1,537) |  |  | — |  |  | (1,537) |
Discount, RMBS subrogation | — |  |  | — |  |  | — |  |  | — |  |  | 35 |  |  | — |  |  | 35 |
Discounted RMBS subrogation, before reinsurance | — |  |  | — |  |  | — |  |  | — |  |  | (1,502) |  |  | — |  |  | (1,502) |
Less: |  |  |  |  |  |  |  |  |  |  |  |  |
Gross other subrogation (3) | — |  |  | (5) |  |  | — |  |  | (33) |  |  | (350) |  |  | (12) |  |  | (401) |
Discount, other subrogation | — |  |  | — |  |  | — |  |  | 4 |  |  | 34 |  |  | 3 |  |  | 41 |
Discounted other subrogation, before reinsurance | — |  |  | (5) |  |  | — |  |  | (29) |  |  | (316) |  |  | (10) |  |  | (360) |
Gross claim liability, net of all subrogation and discounts, before reinsurance | 7 |  |  | — |  |  | 40 |  |  | 387 |  |  | (1,159) |  |  | 45 |  |  | (680) |
Less: Unearned premium revenue | (5) |  |  | (3) |  |  | (5) |  |  | (12) |  |  | (16) |  |  | (1) |  |  | (42) |
Plus: Loss expense reserves | 1 |  |  | — |  |  | — |  |  | 3 |  |  | 35 |  |  | — |  |  | 39 |
Gross loss and loss expense reserves | $ | 3 |  |  | $ | (3) |  |  | $ | 35 |  |  | $ | 378 |  |  | $ | (1,140) |  |  | $ | 44 |  |  | $ | (683) |
Reinsurance recoverable reported on Balance Sheet (4) | $ | 1 |  |  | $ | — |  |  | $ | 9 |  |  | $ | 22 |  |  | $ | (18) |  |  | $ | — |  |  | $ | 14 |
(1)Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies. (2)RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for representation and warranty ("R&W") breaches. (3)Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance transactions including RMBS. (4)Reinsurance recoverable reported on the Balance Sheet includes reinsurance recoverables of $14 related to future loss and loss expenses and $0 related to presented loss and loss expenses and subrogation.
Surveillance Categories as of December 31, 2021
| I |  | IA |  | II |  | III |  | IV |  | V |  | Total
Number of policies | 34 |  |  | 15 |  |  | 7 |  |  | 14 |  |  | 130 |  |  | 5 |  |  | 205 |
Remaining weighted-average contract period (in years) (1) | 9 |  | 12 |  | 14 |  | 15 |  | 13 |  | 7 |  | 14
Gross insured contractual payments outstanding: |  |  |  |  |  |  |  |  |  |  |  |  |
Principal | $ | 904 |  |  | $ | 840 |  |  | $ | 459 |  |  | $ | 1,300 |  |  | $ | 2,759 |  |  | $ | 40 |  |  | $ | 6,302 |
Interest | 589 |  |  | 612 |  |  | 308 |  |  | 169 |  |  | 1,284 |  |  | 22 |  |  | 2,984 |
Total | $ | 1,493 |  |  | $ | 1,452 |  |  | $ | 767 |  |  | $ | 1,469 |  |  | $ | 4,043 |  |  | $ | 62 |  |  | $ | 9,286 |
Gross undiscounted claim liability | $ | 5 |  |  | $ | 16 |  |  | $ | 45 |  |  | $ | 544 |  |  | $ | 1,423 |  |  | $ | 62 |  |  | $ | 2,095 |
Discount, gross claim liability | — |  |  | (1) |  |  | (3) |  |  | (109) |  |  | (185) |  |  | (4) |  |  | (303) |
Gross claim liability before all subrogation and before reinsurance | 5 |  |  | 15 |  |  | 42 |  |  | 435 |  |  | 1,238 |  |  | 57 |  |  | 1,792 |
Less: |  |  |  |  |  |  |  |  |  |  |  |  |
Gross RMBS subrogation (2) | — |  |  | — |  |  | — |  |  | — |  |  | (1,737) |  |  | — |  |  | (1,737) |
Discount, RMBS subrogation | — |  |  | — |  |  | — |  |  | — |  |  | 7 |  |  | — |  |  | 7 |
Discounted RMBS subrogation, before reinsurance | — |  |  | — |  |  | — |  |  | — |  |  | (1,730) |  |  | — |  |  | (1,730) |
Less: |  |  |  |  |  |  |  |  |  |  |  |  |
Gross other subrogation (3) | — |  |  | (5) |  |  | — |  |  | (33) |  |  | (583) |  |  | (12) |  |  | (633) |
Discount, other subrogation | — |  |  | — |  |  | — |  |  | 2 |  |  | 24 |  |  | 2 |  |  | 28 |
Discounted other subrogation, before reinsurance | — |  |  | (5) |  |  | — |  |  | (31) |  |  | (559) |  |  | (10) |  |  | (605) |
Gross claim liability, net of all subrogation and discounts, before reinsurance | 5 |  |  | 10 |  |  | 42 |  |  | 404 |  |  | (1,051) |  |  | 47 |  |  | (543) |
Less: Unearned premium revenue | (3) |  |  | (10) |  |  | (5) |  |  | (14) |  |  | (24) |  |  | (1) |  |  | (56) |
Plus: Loss expense reserves | 1 |  |  | — |  |  | — |  |  | 4 |  |  | 40 |  |  | — |  |  | 45 |
Gross loss and loss expense reserves | $ | 3 |  |  | $ | 1 |  |  | $ | 38 |  |  | $ | 394 |  |  | $ | (1,036) |  |  | $ | 46 |  |  | $ | (554) |
Reinsurance recoverable reported on Balance Sheet (4) | $ | 1 |  |  | $ | 1 |  |  | $ | 10 |  |  | $ | 22 |  |  | $ | (11) |  |  | $ | — |  |  | $ | 23 |
(1)Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies. (2)RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for R&W breaches. (3)Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance transactions, including RMBS. (4)Reinsurance recoverable reported on the Balance Sheet includes reinsurance recoverables of $24 related to future loss and loss expenses and $0 related to presented loss and loss expenses and subrogation. COVID-19: The COVID-19 pandemic had an impact on general economic conditions; including, but not limited to, higher unemployment; volatility in the capital markets; closure or severe curtailment of the operations and, hence, revenues, of many businesses and public and private enterprises to which we are directly or indirectly exposed. While the impact of the pandemic on the economy and markets in general has mostly subsided, there remains lingering effects, such as government relief programs, supply chain disruptions, inflation, and employment shortages, which may continue to adversely impact transactions insured in our legacy financial guarantee business. In particular, this includes the U.S. government's temporary relief measures that required mortgage loan servicers to offer relief to borrowers who suffer hardship as a result of COVID-19. These relief measures included moratoriums on foreclosures and evictions as well as the expansion of forbearance and subsequent repayment options. While these relief measures have largely since expired, the resulting delays in starting mortgage foreclosure processes and the impact of potential post-forbearance related mortgage loan modifications may have an adverse impact on our insured RMBS transactions. Consequently, we could experience a modest increase in claim payments for certain of our insured RMBS obligations following the resumption of foreclosure activity and the implementation of post-forbearance mortgage loan modifications. We are continuously evaluating and updating our view of the macro economic environment as well as our specific credit view of each of our insured exposures considering the significant uncertainties brought upon us by the COVID-19 pandemic. Accordingly, despite the current economic recovery, our loss reserves may be under-estimated as a result of the ultimate scope, duration and magnitude of the effects of COVID-19 pandemic. Through March 31, 2022, we have not paid any claims related to COVID-19. Puerto Rico Ambac has exposure to the Commonwealth of Puerto Rico (the "Commonwealth") and its instrumentalities across several different issuing entities with total net par exposure of $784. Components of Puerto Rico net par outstanding include capital appreciation bonds which are reported at the par amount at the time of issuance of the related insurance policy as opposed to the current accreted value of the bonds. The Commonwealth of Puerto Rico and certain of its instrumentalities have defaulted on their debt service payments, including payments owed on bonds insured by AAC. We have been paying claims for several years on most of our exposure to Puerto Rico, which consisted of several different issuing entities (all below investment grade). These issuing entities, which have been part of the PROMESA restructuring process that began in 2016, each have their own credit risk profile attributable to discrete revenue sources, direct general obligation pledges, and/or general obligation guarantees. On March 15, 2022, the Eighth Amended Plan Title III Joint Plan of Adjustment for the Commonwealth of Puerto Rico, et al. ("Eighth Amended POA") together with the Qualifying Modifications for PRIFA and CCDA ("PRIFA QM" and "CCDA QM", respectively) became effective and resolved the PROMESA restructuring process for the GO, PBA, PRIFA and CCDA issuing entities that have portions of their bonds insured by AAC. Ambac insured bond effective date transactions On March 15, 2022, and pursuant to bondholder elections: (i) all of the remaining outstanding AAC-insured GO and PBA bonds or about 94 were satisfied and eliminated via commutation or acceleration and (ii) about 39% and 19% of the par of AAC's outstanding AAC-insured PRIFA and CCDA bonds, respectively, or about $172, were reduced via commutation. The AAC-insured PRIFA and CCDA bondholders who failed to elect commutation had their bondholders’ respective shares of consideration available under the Commonwealth Plan and the PRIFA QM, or CCDA QM, as applicable, deposited into newly formed trusts. These trusts are being consolidated by Ambac as further discussed in Note 9. Variable Interest Entities. Since the effective date, the remainder of those PRIFA and CCDA bonds belonging to bondholders who elected not to commute their AAC insurance policies and were deposited into trusts together with such policies have all been accelerated, satisfying and eliminating all of the Ambac-insured PRIFA and CCDA bonds. Puerto Rico Highway and Transportation Authority Bonds AAC's remaining unrestructured PROMESA Puerto Rico exposure, the Puerto Rico Highway and Transportation Authority ("PRHTA"), is subject to the PRHTA Plan of Adjustment ("PRHTA POA"), which was filed on May 2, 2022. A confirmation hearing for the PRHTA POA is expected to follow later in 2022. Creditor recoveries under the PRHTA POA are based upon the PRHTA/CCDA PSA. AAC signed a joinder to the PRHTA/ CCDA PSA on July 15, 2021. The PRHTA/CCDA PSA, originally executed on May 5, 2021, provides for certain consideration for holders of bonds issued by certain Commonwealth instrumentalities, PRHTA, and CCDA on account of their claims against the Commonwealth arising from such bonds ("Clawback" claims). Under the PRHTA/CCDA PSA, PRHTA creditors will share $389 of cash proceeds, including a $264 interim distribution, payable once the PRHTA distribution condition has been met pursuant to the Eighth Amended POA. In addition, PRHTA creditors will receive an approximately 69% share, subject to a lifetime nominal cap of $3,698, of the Clawback Creditors' portion of the outperformance of the Commonwealth's sales and use tax ("SUT") relative to the certified 2020 Commonwealth Fiscal Plan's projections (the "Clawback CVI"). The Clawback CVI instrument will be distributed once the PRHTA distribution condition has been met pursuant to the Eighth Amended POA. The PRHTA Clawback CVI is subject to a PRHTA-specific waterfall: holders of PRHTA ’68 bonds will receive the first dollars of Clawback CVI, followed by holders of PRHTA ’98 bonds. The value of the Clawback CVI is highly uncertain, given the contingent, outperformance-driven structure of the instrument. Changes in our assumed values of the Clawback CVI or in the actual performance of the Clawback CVI could cause an adverse change in our reserves, which could be material. As a result, a significant decrease in our assumed values of the Clawback CVI could have a material adverse impact on our results of operations and financial condition. PRHTA bondholders will also receive new PRHTA bonds or cash with a face amount of $1,245. Of the $1,245 in new bonds or cash, approximately $646.4 will be allocated to holders of PRHTA '68 bonds and approximately $598.6 will be allocated to holders of PRHTA '98 bonds. The new PRHTA bonds or cash will be distributed to creditors upon consummation of the PRHTA POA. AAC and other PRHTA creditors will receive restriction fees and consummation costs payable at the effective date of the PRHTA POA. Puerto Rico Considerations The Eighth Amended POA and the qualifying modifications for PRIFA and CCDA became effective on March 15, 2022, and on that date and since, AAC-insured Puerto Rico exposures have been significantly reduced via commutation and acceleration. However, uncertainty remains as to our remaining exposures as to (i) the value or perceived value of the consideration provided by or on behalf of the debtors under the Eighth Amended POA, PRIFA QM, and CCDA QM; (ii) the extent to which exposure management strategies, such as commutation and acceleration, will be executed for PRHTA; (iii) the tax treatment of the consideration provided by or on behalf of the debtors under the Eighth Amended POA, PRIFA QM, and CCDA QM; (iv) whether and when the PRHTA POA will be confirmed; and (vii) other factors, including market conditions such as interest rate movements and credit spread changes on the new CVI instruments. Ambac’s loss reserves may prove to be understated or overstated, possibly materially, due to favorable or unfavorable developments or results with respect to these factors. While our reserving scenarios account for a wide range of possible outcomes, reflecting the significant uncertainty regarding future developments and outcomes, given our significant exposure to Puerto Rico and the economic, fiscal, legal and political uncertainties associated therewith, our loss reserves may ultimately prove to be insufficient to cover our losses, potentially having a material adverse effect on our results of operations and financial position, and may be subject to material volatility. Conversely, Ambac’s loss reserves may prove to be overstated, possibly materially, due to favorable developments or results with respect to the factors described in the preceding paragraph. Ambac has considered these developments and other factors in evaluating its Puerto Rico loss reserves. While management believes its reserves are adequate to cover losses in its Public Finance insured portfolio, there can be no assurance that Ambac may not incur additional losses in the future, given the circumstances described herein. Such additional losses may have a material adverse effect on Ambac’s results of operations and financial condition and may result in adverse consequences such as impairing the ability of AAC to honor its financial obligations; the initiation of rehabilitation proceedings against AAC; decreased likelihood of AAC delivering value to Ambac, through dividends or otherwise; and a significant drop in the value of securities issued or insured by Ambac or AAC. For public finance credits, including Puerto Rico, as well as other issuers, for which Ambac has an estimate of expected loss at March 31, 2022, the possible increase in loss reserves under stress or other adverse conditions and circumstances was estimated to be approximately $220. This possible increase in loss reserves under stress or other adverse conditions is significant and if we were to experience such incremental losses, our stockholders’ equity as of March 31, 2022, would decrease from $974 to $754. However, there can be no assurance that losses may not exceed such amount. Representation and Warranty Recoveries: Ambac records estimated RMBS R&W subrogation recoveries for breaches of R&W by sponsors of certain RMBS transactions. For a discussion of the approach utilized to estimate RMBS R&W subrogation recoveries, see Note 2. Basis of Presentation and Significant Accounting Policies 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, 2021. Ambac has recorded RMBS R&W subrogation recoveries of $1,502 ($1,480 net of reinsurance) and $1,730 ($1,704 net of reinsurance) at March 31, 2022 and December 31, 2021, respectively. The reduction in recorded RMBS R&W recoveries since December 31, 2021, is primarily attributable to management’s view of the effect on certain of AAC’s R&W litigations of the March 17, 2022 decision of the New York Court of Appeals in the case entitled U.S. Bank National Association v. DLJ Mortgage Capital, Inc. relating to Home Equity Asset Trust 2007-1, a residential mortgage-backed securities trust. The decision is relevant to AAC's breach-of-contract cases relating to its insured RMBS transactions and may affect one of the bases upon which AAC seeks recovery with respect to a significant portion of breaching loans in AAC's RMBS cases. However, management believes there remain other alternative paths to recovery for such breaching loans. Our ability to realize R&W subrogation recoveries is subject to significant uncertainty, including risks inherent in litigation, including adverse rulings or decisions in our cases or in litigations to which AAC is not a party that set precedents or resolve questions of law that impact our own claims; collectability of such amounts from counterparties (and/or their respective parents and affiliates); timing of receipt of any such recoveries; intervention by OCI, which could impede our ability to take actions required to realize such recoveries; and uncertainty inherent in the assumptions used in estimating such recoveries. Failure to realize R&W subrogation recoveries for any reason or the realization of R&W subrogation recoveries materially below the amount recorded on Ambac's consolidated balance sheet would have a material adverse effect on our results of operations and financial condition. If we were unable to realize R&W subrogation recoveries recorded on Ambac's consolidated balance sheet, our stockholders’ equity as of March 31, 2022, would decrease from $974 to $(505). Additionally, failure to realize R&W subrogation recoveries, or the realization of recoveries significantly below those recorded on the balance sheet, may result in adverse consequences such as impairing the ability of AAC to honor its financial obligations; the initiation of rehabilitation proceedings against AAC; AAC not being able to deliver value to Ambac, through dividends or otherwise; and a significant drop in the value of securities issued or insured by Ambac or AAC. Reinsurance Recoverables, Including Credit Impairments: Amounts recoverable from reinsurers are estimated in a manner consistent with the associated loss and loss expense reserves. The Company reports its reinsurance recoverables net of an allowance for amounts that are estimated to be uncollectible. The allowance for credit losses is based upon Ambac's ongoing review of amounts outstanding. Key indicators management uses to assess the credit quality of reinsurance recoverables are financial performance of the reinsurers, collateral posted by the reinsurers and independent rating agency credit ratings. The evaluation begins with a comparison of the fair value of collateral posted by the reinsurer to the recoverable, net of ceded premiums payable. Any shortfall of collateral posted is evaluated against our assessment of the reinsurer's financial strength, including its credit rating to determine whether an allowance is considered necessary. Ambac has uncollateralized credit exposure of $30 and $31 and has recorded an allowance for credit losses of less than a million at March 31, 2022 and December 31, 2021. The uncollateralized credit exposure includes legacy liabilities obtained from the acquisitions of PWIC and the 21st Century Companies of $29, which are also supported by an unlimited, uncapped indemnity from Enstar Holdings (US) and 21st Century Premier Insurance Company, respectively.

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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/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=123874694&loc=d3e19207-110258 + Details
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