Other-Than-Temporary Impairment Losses
Other-than-temporary impairment (“OTTI”) losses in the financial guarantee investment portfolio were $7.5 million in the second quarter of 2010, compared to OTTI losses of $675.4 million in the second quarter of 2009. The second quarter 2010 OTTI loss was driven primarily by impairment write downs on AAC-wrapped RMBS securities within its investment portfolio. The second quarter 2009 OTTI impairment loss was driven by write-downs of certain RMBS securities rated below investment grade and tax exempt securities within the investment portfolio that management intended to sell in connection with its revised investment strategies.
Net Change in Fair Value of Credit Derivatives
The net change in fair value of credit derivatives, which comprises realized gains/(losses) and other settlements from credit derivatives and unrealized gains/(losses) on credit derivatives, was a gain of $202.2 million for the second quarter of 2010, compared to a gain of $1.0 million for the second quarter of 2009.Realized losses and other settlements from credit derivative contracts represent the normal accretion into income of fees received for transactions executed in credit derivative format, offset by loss and settlement payments on such transactions. Net realized losses and other settlements from credit derivative contracts in the second quarter of 2010 and 2009 amounted to $2,777.3 million and $5.0 million, respectively. The net realized losses in the second quarter 2010 relate primarily to the counterparty settlement of the CDO of ABS portfolio that was announced on June 7, 2010. Ambac paid in the aggregate, cash of $2.6 billion and $2.0 billion of newly issued surplus notes to several counterparties to settle the $16.4 billion of CDO of ABS exposure outstanding at that time. In addition, Ambac settled other exposures for $186.5 million. Net unrealized gains on credit derivative contracts in the second quarter of 2010 and 2009 amounted to $2,979.5 million and $6.0 million, respectively. The net unrealized gain during the second quarter of 2010 is primarily the result of reclassification of unrealized losses to realized losses resulting from the commutations referenced above. Additionally, the unrealized gains were impacted by the net decrease in mark-to-market liabilities of the remaining credit derivative portfolio due to higher valuation adjustments to reflect Ambac’s own credit risk. Beginning in the second quarter 2010, the Ambac credit valuation adjustment is internally estimated using relevant data points, including the final settlement value of AAC credit default swaps (determined through auction in June 2010) and quoted prices of securities guaranteed by AAC, which indicate the market’s view of the recovery rate on AAC’s insurance obligations.