INVESTMENTS

Ambac’s invested assets are primarily comprised of fixed income securities classified as available-for-sale and equity interests in pooled investment funds. Such equity interests in the form of common stock or in-substance common stock are classified as trading securities.

The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at December 31, 2014 and 2013 were as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Non-credit other- than-temporary Impairments ⁽¹⁾
Successor Ambac - December 31, 2014
Fixed income securities:
Municipal obligations	$	523,019	$	9,769	$	6,996	$	525,792	$	—
Corporate obligations	1,382,195		12,815		9,416		1,385,594		—
Foreign obligations	126,041		3,060		1,344		127,757		—
U.S. government obligations	42,328		1,078		427		42,979		—
U.S. agency obligations	29,524		—		38		29,486		—
Residential mortgage-backed securities	1,557,059		167,396		13,500		1,710,955		7,773
Collateralized debt obligations	21,346		50		274		21,122		—
Other asset-backed securities	833,366		48,794		159		882,001		—
	4,514,878		242,962		32,154		4,725,686		7,773
Short-term	360,069		—		4		360,065		—
	4,874,947		242,962		32,158		5,085,751		7,773
Fixed income securities pledged as collateral:
U.S. government obligations	64,378		—		111		64,267		—
Total collateralized investments	64,378		—		111		64,267		—
Total available-for-sale investments	$	4,939,325	$	242,962	$	32,269	$	5,150,018	$	7,773

Successor Ambac - December 31, 2013
Fixed income securities:
Municipal obligations	$	1,405,293	$	857	$	28,427	$	1,377,723	$	—
Corporate obligations	1,508,377		4,886		23,894		1,489,369		—
Foreign obligations	131,709		69		6,901		124,877		—
U.S. government obligations	128,415		9		2,176		126,248		—
U.S. agency obligations	32,214		10		70		32,154		—
Residential mortgage-backed securities	1,516,877		59,853		18,105		1,558,625		852
Collateralized debt obligations	184,118		217		463		183,872		—
Other asset-backed securities	1,020,251		8,795		36,598		992,448		—
	5,927,254		74,696		116,634		5,885,316		852
Short-term	271,118		1		—		271,119		—
	6,198,372		74,697		116,634		6,156,435		852
Fixed income securities pledged as collateral:
U.S. government obligations	126,196		27		—		126,223		—
Total collateralized investments	126,196		27		—		126,223		—
Total available-for-sale investments	$	6,324,568	$	74,724	$	116,634	$	6,282,658	$	852


(1)	Represents the amount of non-credit other-than-temporary impairment losses remaining in accumulated other comprehensive loss on securities that also had a credit impairment. These losses are included in gross unrealized losses as of December 31, 2014 and 2013.

The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at December 31, 2014, by contractual maturity, were as follows:



	Amortized Cost		Estimated Fair Value
Due in one year or less	$	551,712	$	551,618
Due after one year through five years	845,986		846,430
Due after five years through ten years	931,471		935,797
Due after ten years	198,385		202,095
	2,527,554		2,535,940
Residential mortgage-backed securities	1,557,059		1,710,955
Collateralized debt obligations	21,346		21,122
Other asset-backed securities	833,366		882,001
Total	$	4,939,325	$	5,150,018

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.

Unrealized Losses:

The following table shows gross unrealized losses and fair values of Ambac’s available-for-sale investments, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2014 and 2013:



	Less Than 12 Months				12 Months or More				Total
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
December 31, 2014
Fixed income securities:
Municipal obligations	$	77,788	$	1,244	$	135,076	$	5,752	$	212,864	$	6,996
Corporate obligations	453,504		4,998		172,045		4,418		625,549		9,416
Foreign government obligations	20,827		748		14,277		596		35,104		1,344
U.S. government obligations	7,223		154		14,735		273		21,958		427
U.S. agency obligations	25,039		2		4,378		36		29,417		38
Residential mortgage-backed securities	413,203		12,391		10,076		1,109		423,279		13,500
Collateralized debt obligations	5,012		274		—		—		5,012		274
Other asset-backed securities	248,823		155		68		4		248,891		159
	1,251,419		19,966		350,655		12,188		1,602,074		32,154
Short-term	8,803		4		—		—		8,803		4
	$	1,260,222	$	19,970	$	350,655	$	12,188	$	1,610,877	$	32,158
Fixed income securities, pledged as collateral:
U. S. government obligations	64,267		111		—		—		64,267		111
Total collateralized investments	64,267		111		—		—		64,267		111
Total temporarily impaired securities	1,324,489		20,081		350,655		12,188		1,675,144		32,269



	Less Than 12 Months⁽¹⁾
	Fair Value		Gross Unrealized Loss
December 31, 2013
Fixed income securities:
Municipal obligations	$	437,683	$	28,427
Corporate obligations	877,356		23,894
Foreign government obligations	117,905		6,901
U.S. government obligations	70,044		2,176
U.S. agency obligations	5,834		70
Residential mortgage-backed securities	644,502		18,105
Collateralized debt obligations	137,685		463
Other asset-backed securities	629,957		36,598
	2,920,966		116,634
Short-term	—		—
Total temporarily impaired securities	$	2,920,966	$	116,634


(1)	As a result of the implementation of Fresh Start, amortized cost for available for sale securities were set to equal fair value on April 30, 2013. Accordingly, as of December 31, 2013 Successor Ambac did not have any gross unrealized losses that were in a continuous unrealized loss position for greater than 12 months.

Management has determined that the unrealized losses reflected in the tables above are temporary in nature as of December 31, 2014 and 2013 based upon (i) no unexpected principal and interest payment defaults on these securities; (ii) analysis of the creditworthiness of the issuer and financial guarantor, as applicable, and analysis of projected defaults on the underlying collateral; (iii) management has no intent to sell these investments in debt securities; and (iv) it is not more likely than not that Ambac will be required to sell these debt securities before the anticipated recovery of its amortized cost basis. The assessment under (iv) is based on a comparison of future available liquidity from the investment portfolio against the projected net cash outflow from operating activities and debt service. For purposes of this assessment, available liquidity from the investment portfolio is comprised of the fair value of securities for which management has asserted its intent to sell, the fair value of other securities that are available for sale and in an unrealized gain position, plus the scheduled maturities and interest payments from the remaining securities in the portfolio. To the extent that securities that management intends to sell are in an unrealized loss position, they would have already been considered other-than-temporarily impaired with the amortized cost written down to fair value. Because the above-described assessment indicates that future available liquidity exceeds projected net cash outflow, it is not more likely than not that we would be required to sell securities in an unrealized loss position before the recovery of their amortized cost basis. In the liquidity assessment described above, principal payments on securities pledged as collateral are not considered to be available for other liquidity needs until the collateralized positions are projected to be settled. Projected interest receipts on securities pledged as collateral generally belong to Ambac and are considered to be sources of available liquidity from the investment portfolio.

As of December 31, 2014, for securities that have indications of possible other-than-temporary impairment but which management does not intend to sell and will not more likely than not be required to sell, management compared the present value of cash flows expected to be collected to the amortized cost basis of the securities to assess whether the amortized cost will be recovered. Cash flows were discounted at the effective interest rate implicit in the security at the date of acquisition (or Fresh Start Reporting Date of April 30, 2013 for securities purchased prior to that date) or for debt securities that are beneficial interests in securitized financial assets, at a rate equal to the current yield used to accrete the beneficial interest. For floating rate securities, future cash flows and the discount rate used were both adjusted to reflect changes in the index rate applicable to each security as of the evaluation date. Of the securities that were in a gross unrealized loss position at December 31, 2014, $473,656 of the total fair value and $16,001 of the unrealized loss related to below investment grade securities and non-rated securities. Of the securities that were in a gross unrealized loss position at December 31, 2013, $821,308 of the total fair value and $36,900 of the unrealized loss related to below investment grade securities and non-rated securities. With respect to Ambac-wrapped securities guaranteed under policies that have been allocated to the Segregated Account, future cash flows used to measure credit impairment represents the sum of (i) the bond’s intrinsic cash flows and (ii) the estimated Ambac Assurance claim payments, including interest on Deferred Amounts. Ambac estimates the timing of such claim payment receipts but the actual timing of such amounts are at the sole discretion of the Rehabilitator. Further modifications to the Segregated Account Rehabilitation Plan or to the rules and guidelines promulgated thereunder, orders from the Rehabilitation Court or actions by the Rehabilitator with respect to the form, amount and timing of satisfying permitted policy claims, or making payments on Deferred Amounts or surplus notes, may have a material effect on the fair value of Ambac-wrapped securities and future recognition of other-than-temporary impairments. Refer to Note 1. Background and Business Description for information relating to the amended Segregated Account Rehabilitation Plan. Ambac’s assessment about whether a decline in value is other-than-temporary reflects management’s current judgment regarding facts and circumstances specific to a security and the factors noted above, including Ambac's intention to sell securities and ability to hold temporarily impaired securities until recovery. If that judgment changes, Ambac may ultimately record a charge for other-than-temporary impairment in future periods.

Municipal and corporate obligations

The gross unrealized losses on municipal and corporate obligations as of December 31, 2014 are primarily the result of the increase in interest rates since April 30, 2013. These securities are primarily fixed-rate securities with an investment grade credit rating. Management believes that the timely receipt of all principal and interest on these positions is probable.

Residential mortgage-backed securities

Of the $13,500 of unrealized losses on residential mortgage-backed securities, $11,358 is attributable to Ambac-wrapped securities. The unrealized loss on these securities is primarily the result of discount accretion, which has exceeded the increase in fair value since April 30, 2013. As part of the quarterly impairment review process, management estimates expected future cash flows from residential mortgage-backed securities. This approach includes the utilization of market accepted software models in conjunction with detailed data of the historical performance of the collateral pools, which assists in the determination of assumptions such as defaults, severity and voluntary prepayment rates that are largely driven by home price forecasts as well as other macro-economic factors. Additionally, for Ambac-wrapped securities that are allocated to the Segregated Account, expected future cash flows include assumptions about the timing of Ambac Assurance claim payments, including interest on Deferred Amounts, although the actual timing of such payments are at the sole discretion of the Rehabilitator. These assumptions are used to project future cash flows for each security. Management considered this analysis in making our determination that a credit loss has not occurred at December 31, 2014 on these transactions.

Realized Gains and Losses and Other-Than-Temporary Impairments:

The following table details amounts included in net realized gains and other-than-temporary impairments included in earnings for the affected periods:



	Successor Ambac						Predecessor Ambac
				Period from May 1			Period from January 1
	Year Ended			through			through			Year Ended
	December 31, 2014			December 31, 2013			April 30, 2013			December 31, 2012
Gross realized gains on securities	$	63,366		$	22,983		$	47,448		$	73,404
Gross realized losses on securities	(9,824		)	(10,347		)	(320		)	(1,128		)
Foreign exchange (losses) gains	5,235			(8,169		)	6,177			(175		)
Net realized gains	$	58,777		$	4,467		$	53,305		$	72,101
Net other-than-temporary impairments ⁽¹⁾	$	(25,794	)	$	(46,764	)	$	(467	)	$	(5,990	)


(1)	Other-than-temporary impairments exclude impairment amounts recorded in other comprehensive income under ASC Paragraph 320-10-65-1, which comprise non-credit related amounts on securities that are credit impaired but which management does not intend to sell and it is not more likely than not that the company will be required to sell before recovery of the amortized cost basis.

During 2002 and 2003 Ambac recognized investment realized losses relating to its investment in asset-backed notes issued by National Century Financial Enterprises, Inc. (“NCFE”). These notes defaulted and NCFE filed for protection under Chapter 11 of the U.S. Bankruptcy Code in November 2002. In connection with a full and final settlement of a lawsuit brought by NCFE bondholders against Credit Suisse Securities LLC, a subsidiary of Ambac Assurance received cash recoveries of $39,978 in the period from January 1 through April 30, 2013. Additionally, $1,441 and $35 of other recoveries were received from NCFE in the eight months ended December 31, 2013 and year ended December 31, 2014, respectively. These amounts were recorded within gross realized gains on securities.

Since commencement of the Segregated Account Rehabilitation Proceedings, changes in the estimated timing of claim payments have resulted in adverse changes in projected cash flows on certain impaired Ambac-wrapped securities. Such changes in estimated claim payments on Ambac-wrapped securities contributed to net other-than-temporary impairments for the periods presented in the table above. Further changes to the timing of estimated claim payments could result in additional other-than-temporary impairment charges in the future. Successor Ambac’s other-than-temporary impairments relate to adverse changes in projected cash flows on certain Ambac-wrapped securities as well as the company’s intent to sell certain securities that were in an unrealized loss position as of the impairment evaluation dates. Future changes in our estimated liquidity needs could result in a determination that Ambac no longer has the ability to hold additional securities that are in an unrealized loss position, which could result in additional other-than-temporary impairment charges.

The following table presents a roll-forward of Ambac’s cumulative credit losses on debt securities held as of December 31, 2014 and 2013 for which a portion of an other-than-temporary impairment was recognized in other comprehensive income:



	Credit Impairment
Successor Ambac:
Balance as of January 1, 2014	$	1,182
Additions for credit impairments recognized on:
Securities not previously impaired	12,873
Securities previously impaired	7
Reductions for credit impairments previously recognized on:
Securities that matured or were sold during the period	—
Securities that no longer have a portion of other-than-temporary impairment in other comprehensive income because of Ambac's intent to sell such securities	—
Balance as of December 31, 2014	$	14,062

Successor Ambac:
Balance as of May 1, 2013	$	—
Additions for credit impairments recognized on:
Securities not previously impaired	1,185
Securities previously impaired	—
Reductions for credit impairments previously recognized on:
Securities that matured or were sold during the period	(3		)
Balance as of December 31, 2013	$	1,182

Predecessor Ambac:
Balance as of January 1, 2013	$	183,300
Additions for credit impairments recognized on:
Securities not previously impaired	—
Securities previously impaired	—
Reductions for credit impairments previously recognized on:
Securities that matured or were sold during the period⁽¹⁾	(183,300		)
Balance as of April 30, 2013	$	—

Predecessor Ambac:
Balance as of January 1, 2012	$	201,317
Additions for credit impairments recognized on:
Securities not previously impaired	824
Securities previously impaired	5,166
Reductions for credit impairments previously recognized on:
Securities that matured or were sold during the period	(24,007		)
Balance as of December 31, 2012	$	183,300

(1)

Includes reductions made in connection with Fresh Start, under which the cost basis of all invested assets were set to fair value as of the Fresh Start Reporting Date. As described in Note 3. Special Purpose Entities, including Variable Interest Entities, adopting Fresh Start results in a new reporting entity with no beginning retained earnings or accumulated deficit. Therefore cumulative credit impairments for Successor Ambac on May 1, 2013 are $0.

Counterparty Collateral, Deposits with Regulators and Other Restrictions:

Ambac routinely pledges and receives collateral related to certain business lines and/or transactions. The following is a description of those arrangements by collateral source:

(1)

Cash and securities held in Ambac’s investment portfolio—Ambac pledges assets it holds in its investment portfolio to investment agreement and derivative counterparties. Securities pledged to investment agreement counterparties may not then be re-pledged to another entity. Ambac’s counterparties under derivative agreements have the right to pledge or rehypothecate the securities and as such, these pledged securities are separately classified on the Consolidated Balance Sheets as “Fixed income securities pledged as collateral, at fair value”.


(2)	Cash and securities pledged to Ambac under derivative agreements—Ambac may re-pledge securities it holds from certain derivative counterparties to other derivative counterparties in accordance with its rights and obligations under those agreements.

The following table presents (i) the sources of collateral either received from various counterparties where Ambac is permitted to sell or re-pledge the collateral or collateral held directly in the investment portfolio and (ii) how that collateral was pledged to various investment agreement, derivative and repurchase agreement counterparties at December 31, 2014 and 2013:



	Fair Value of Cash and Underlying Securities		Fair Value of Cash and Securities Pledged to Investment Agreement Counterparties		Fair Value of Cash and Securities Pledged to Derivative Counterparties
December 31, 2014:
Sources of Collateral:
Cash and securities pledged directly from the investment portfolio	$	379,423	$	156,916	$	222,507
Cash and securities pledged from derivative counterparties	—		—		—

December 31, 2013:
Sources of Collateral:
Cash and securities pledged directly from the investment portfolio	$	500,986	$	371,723	$	129,263
Cash and securities pledged from derivative counterparties	690		—		—

Securities carried at $6,790 and $6,799 at December 31, 2014 and 2013, respectively, were deposited by Ambac Assurance and Everspan with governmental authorities or designated custodian banks as required by laws affecting insurance companies.

Securities with fair value of $0 and $240,150 at December 31, 2014 and 2013, respectively, were held by a bankruptcy remote trust to collateralize and fund repayment of debt issued through a re-securitization transaction. The third party debt was fully repaid in 2013 and trust was liquidated in 2014. Prior to liquidation of the trust, the securities could not be sold or repledged by the trust. These assets were held and the secured debt issued by entities that qualified as VIEs and were consolidated in Ambac’s consolidated financial statements. Refer to Note 4. Special Purpose Entities, Including Variable Interest Entities for a further description of this transaction.

Guaranteed Securities:

Ambac’s fixed income portfolio includes securities covered by guarantees issued by Ambac Assurance and other financial guarantors (“insured securities”). The published rating agency ratings on these securities reflect the higher of the financial strength rating of the financial guarantor or the rating of the underlying issuer. Rating agencies do not always publish separate underlying ratings (those ratings excluding the insurance by the financial guarantor) because the insurance cannot be legally separated from the underlying security by the insurer. In the event these underlying ratings are not available from the rating agencies, Ambac will assign an internal rating. The following table represents the fair value, including the value of the financial guarantee, and weighted-average underlying rating, excluding the financial guarantee, of the insured securities at December 31, 2014 and 2013, respectively:



	Municipal obligations		Corporate obligations		Mortgage and asset- backed securities		Short-term		Total		Weighted Average Underlying Rating ⁽¹⁾
December 31, 2014:
Ambac Assurance Corporation ⁽²⁾	$	53,164	$	—	$	2,146,555	$	—	$	2,199,719	CCC-
Assured Guaranty Municipal Corporation	119,492		—		—		—		119,492		A
National Public Finance Guarantee Corporation	67,895		—		—		—		67,895		A-
MBIA Insurance Corporation	—		32,460		—		—		32,460		A+
Assured Guaranty Corporation	—		—		—		—		—
Financial Guarantee Insurance Corporation	—		—		—		—		—
Total	$	240,551	$	32,460	$	2,146,555	$	—	$	2,419,566	CCC

December 31, 2013:
Ambac Assurance Corporation ⁽²⁾	$	64,596	$	—	$	1,747,283	$	—	$	1,811,879	CCC+
Assured Guaranty Municipal Corporation	372,392		77,163		—		—		449,555		A+
National Public Finance Guarantee Corporation	532,752		—		—		—		532,752		AA-
MBIA Insurance Corporation	—		55,086		—		—		55,086		A-
Assured Guaranty Corporation	—		—		2,917		—		2,917		D
Financial Guarantee Insurance Corporation	—		—		2,869		—		2,869		D
Total	$	969,740	$	132,249	$	1,753,069	$	—	$	2,855,058	BB-


(1)	Ratings are based on the lower of Standard & Poor’s or Moody’s rating. If unavailable, Ambac’s internal rating is used.


(2)	Includes asset-backed securities with a fair value of $51,395 and $50,953 at December 31, 2014 and 2013, respectively, insured by Ambac UK.

Investment Income:

Net investment income was comprised of the following for the affected periods:



	Successor Ambac						Predecessor Ambac
				Period from May 1			Period from January 1
	Year Ended			through			through			Year Ended
	December 31, 2014			December 31, 2013			April 30, 2013			December 31, 2012
Fixed income securities	$	299,694		$	147,014		$	118,097		$	386,385
Short-term investments	3,092			1,528			677			1,405
Loans	529			306			146			714
Investment expense	(10,477		)	(5,982		)	(2,549		)	(5,602		)
Securities available-for-sale and short-term	292,838			142,866			116,371			382,902
Other investments	8,108			3,580			369			—
Total net investment income	$	300,946		$	146,446		$	116,740		$	382,902

Net investment income from Other investments primarily represents changes in fair value on securities classified as trading or under the fair value option. The portion of net gains related to such securities still held at the end of each period is as follows:



	Successor Ambac					Predecessor Ambac
				Period from May 1		Period from January 1
	Year Ended			through		through		Year Ended
	December 31, 2014			December 31, 2013		April 30, 2013		December 31, 2012
Net gains recognized during the period on trading securities	$	6,713		$	3,580	$	369	$	—
Less: net gains and (losses) recognized during the reporting period on trading securities sold during the period	(487		)	1,702		—		—
Unrealized gains and (losses) recognized during the reporting period on trading securities still held at the reporting date	$	7,200		$	1,878	$	369	$	—