17. EMPLOYMENT BENEFIT PLANS

Postretirement Health Care and Other Benefits:

Ambac provides postretirement and postemployment benefits, including health and life benefits for certain employees who meet certain age and service requirements. None of the plans are currently funded. For Successor Ambac, postretirement and postemployment benefits expense was $2,570, $2,249 and $2,101 for the years ended December 31, 2015 and 2014 and eight months ended December 31, 2013, respectively. For Predecessor Ambac, postretirement and postemployment benefits expense was $1,344 for the four months ended April 30, 2013.

Effective August 1, 2005, new employees were not eligible for postretirement benefits. In 2013, postretirement benefits offered to retirees were amended such that Ambac would no longer sponsor a health plan beginning in 2014. This required retirees to purchase their own insurance policy with a portion of their premium being reimbursed by Ambac. The unfunded accumulated postretirement benefit obligation was $10,427 as of December 31, 2015. The assumed health care cost trend rates range from 6.0% in 2016, decreasing ratably to 4.5% in 2022. Increasing the assumed health care cost trend rate by one percentage point in each future year would increase the accumulated postretirement benefit obligation at December 31, 2015, by $1,695 and the 2015 benefit expense by $169. Decreasing the assumed health care cost trend rate by one percentage point in each future year would decrease the accumulated postretirement benefit obligation at December 31, 2015 by $1,328 and the 2015 benefit expense by $129.

The following table sets forth projected benefit payments from Ambac’s postretirement plan over the next ten years for current retirees:



2016		2017		2018		2019		2020		2021-2025		Total
$	312	$	319	$	338	$	358	$	368	$	2,276	$	3,971

The discount rate used in determining the projected benefit obligations for the postretirement plan is selected by reference to the year-end Moody’s corporate AA rate as well as other high-quality indices with similar duration to that of the benefit plans. The rate used for the projected plan benefit obligations at the measurement date for December 31, 2015 and 2014 was 4.25% and 4.00%, respectively.

Savings Incentive Plan:

Substantially all employees of Ambac Assurance are covered by a defined contribution plan (the “Savings Incentive Plan”). Ambac Assurance makes employer matching contributions equal 100% of the employees’ contributions, up to 3% of such participants’ base compensation plus 50% of contributions to an additional 2% of base compensation, subject to limits set by the Internal Revenue Code. For Successor Ambac, the total cost of the Savings Incentive Plan was $1,042, $1,056 and $683 for the years December 31, 2015 and 2014 and eight months ended December 31, 2013, respectively. For Predecessor Ambac, the total cost of the Savings Incentive Plan was $447 for the four months ended April 30, 2013.

Incentive Compensation - Stock and Cash

Employees, directors and consultants of Ambac are eligible to participate in Ambac’s 2013 Incentive Compensation Plan (“2013 Plan”) subject to the discretion of the compensation committee of Ambac’s Board of Directors. The 2013 Plan provides for incentives and rewards that are valued or determined by reference to Ambac common stock as traded on the NASDAQ exchange. There are 4,000,000 shares of Ambac’s common stock authorized for awards under the 2013 Plan of which 3,356,429 shares are available for future grant as of December 31, 2015.

In March 2014, Ambac developed a long term incentive compensation plan (“LTIP”) as a sub-plan of the 2013 Plan. The LTIP, approved by the Compensation Committee of the Board of Directors, is a significant component of management’s compensation program that is intended to strike an appropriate balance between short and long-term incentives aimed at fostering retention and aligning management's interest with those of Ambac's stakeholders. Awards granted under the LTIP are designed to further the financial and operational objectives of both Ambac and Ambac Assurance. The LTIP is intended to be an annual program that allows for both cash and equity performance awards to US employees. In 2015, Ambac UK 's Board of Directors adopted a long term incentive plan which provides cash based performance awards to Ambac UK employees. Cash based compensation expense related to performance awards granted to Ambac UK employees was $253 for the year ended December 31, 2015.

Employees of Ambac previously participated in Ambac Financial Group Inc.’s 1997 Equity Plan, which provided for the granting of stock options, stock appreciation rights, restricted stock units, performance units and other awards that were valued or determined by reference to its common stock. The 1997 Equity Plan was cancelled upon Ambac’s emergence from bankruptcy in 2013. No stock grants were made under the 1997 Equity Plan in 2013.

The amount of stock-based compensation expense and corresponding after-tax expense are as follows:



	Successor Ambac						Predecessor Ambac
					Period from May 1		Period from Jan 1
	Year Ended December 31,				through		through
	2015		2014		December 31, 2013		April 30, 2013
Stock options	$	956	$	444	$	56	$	—
Restricted stock units	1,257		2,816		1,050		—
Performance stock units ⁽¹⁾	892		190		—		—
Total stock-based compensation	$	3,105	$	3,450	$	1,106	$	—
Total stock-based compensation (after-tax)	$	3,105	$	3,450	$	1,106	$	—

(1)

Represents expense related to performance stock units portion of performance awards. Performance awards, except for performance awards issued to Ambac's Chief Executive Officer, are split evenly between performance stock units and cash. Performance awards issued to Ambac's Chief Executive Officer were all in the form of performance stock units. Cash based compensation expense related to performance awards granted to US employees was $892 and $190 for the years ended December 31, 2015 and 2014, respectively.

Stock Options:

Stock options were awarded to directors in 2013 (vested on April 30, 2014) and to the Chief Executive Officer in 2015 (vests January 1, 2016), all with an expiry term of seven years from the grant date. The Company intends to use Treasury shares first and then, if necessary, issue new shares to satisfy stock option exercises. No stock options were awarded in 2014.

The Black-Scholes-Merton model was used to estimate the fair value of the service condition based stock options on the grant date. The following assumptions were used in estimating the fair value of options on the grant date:



	2015			2013
Risk-free interest rate	1.283		%	0.963		%
Expected volatility	42.8		%	50.2		%
Dividend yield	0.0		%	0.0		%
Expected life	4.13 years			3.33 years
Weighted-average grant-date fair value per share	$	8.69		$	7.50

The expected volatility is based on implied volatilities from traded options on Ambac’s stock, the historical volatility of Ambac’s stock, and the historical volatilities of our peer industry group. Peer group historical volatilities were considered due to the fact that Ambac stock had been traded for a time period less than the expected life of the options. A zero dividend yield was assumed based on the uncertainty of Ambac making dividend payments over the expected life of these options. The risk-free interest rate reflects the U.S. Treasury yield curve in effect at the time of the grant. The expected life represents the period of time that options granted are expected to be outstanding and is based on certain factors we believe will influence exercise behavior.

A summary of option activity for 2015 is as follows:



	Shares	Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Life ( in years)
Year Ended December 31, 2015
Outstanding at beginning of period	66,668	$	20.63
Granted	110,000	24.55
Exercised	—	—
Forfeited or expired	—	—
Outstanding at end of period	176,668	$	23.07	$	—	5.77
Exercisable	66,668	$	20.63	$	—	4.98

All stock options granted to directors in 2013 were fully vested during 2014. Stock options issued to the Chief Executive Officer in 2015 remain unvested as of December 31, 2015. Total unrecognized compensation costs related to unvested stock options granted were $0 as of December 31, 2015. No stock options were exercised during the years ended December 31, 2015 and 2014, eight months ended December 31, 2013 or four months ended April 30, 2013.

Restricted Stock Units (“RSUs”):

RSUs were awarded to employees in 2013 that vested in two installments, 50% on the grant date and 50% on the first anniversary of the grant date. RSU awards to employees provided for accelerated vesting upon change in control or death or disability. Such employee RSUs will settle and convert into Ambac shares upon the earlier of (a) the employee’s termination of employment (other than for cause) and (b) the second anniversary of the applicable vesting date.

RSUs are awarded annually to directors that vest on the last day of April of the following year. These RSUs will not settle until the respective director’s termination from the board of directors or, if earlier, upon a change in control. All RSUs provide for accelerated vesting upon a change in control, death or disability or involuntary removal other than for cause (not including removal pursuant to a shareholder vote at a regularly scheduled annual meeting of shareholders). Upon termination (other than for cause), the RSUs shall vest as of the date of such termination in an amount equal to the number of then outstanding RSUs multiplied by a fraction, the numerator of which shall be the number of calendar days which have lapsed since the grant date and the denominator of which shall be the total number of calendar days of the original vesting period.

In 2015, a RSU award was granted to the Chief Executive Officer under the 2013 Plan. This award will vest in three equal installments on January 1, 2016, 2017 and 2018 ("Time-Based RSUs"). The vesting of the Time-Based RSUs are expressly conditioned upon Mr. Tavakoli's continued service with Ambac as either an employee or as a member of the Board of Directors through the applicable vesting date.

As of December 31, 2015, 208,502 RSUs remained outstanding, of which (i) 78,460 units required future service as a condition to the delivery of the underlying shares of common stock and (ii) 130,042 units did not require future service. As of December 31, 2014, 185,800 RSUs remained outstanding, of which (i) 33,136 units required future service as a condition to the delivery of the underlying shares of common stock and (ii) 152,664 units did not require future service.

A summary of RSU activity for 2015 is as follows:



	Shares		Weighted Average Grant Date Fair Value
Outstanding at beginning of period	185,800		$	22.33
Granted	79,281		23.71
Delivered or returned to plan ⁽¹⁾	(56,579	)	20.63
Forfeited	—		—
Outstanding at end of period	208,502		$	23.32


(1)	When restricted stock unit awards issued by Ambac become taxable compensation to employees, shares may be withheld to cover the employee’s withholding taxes. For the year ended December 31, 2015, Ambac purchased 24,268 of shares from employees that settled restricted stock units to meet the required tax withholdings.

Ambac’s closing share price on the grant date was used to estimate the fair value of the service condition based RSU on the grant date. The weighted average grant date fair value of RSUs granted during 2015, 2014 and 2013 was $23.71, $30.18 and $20.63, respectively. As of December 31, 2015, there was $957 of total unrecognized compensation costs related to unvested RSUs granted. These costs are expected to be recognized over a weighted average period of 0.4 years. The fair value for RSUs vested and delivered during the year ended December 31, 2015 and 2014, eight months ended December 31, 2013 and four months ended April 30, 2013 was $864, $37, $19 and $0, respectively.

Performance Stock Awards ("PSUs"):

In 2014 and 2015, performance awards were granted under the LTIP to certain members of management ("LTIP Awards"). These grants vest in 3 years and are evenly split between PSUs and cash. Actual awards will be based on performance at both Ambac and Ambac Assurance. Actual awards can payout 0% to 200% of the number of units granted. Ambac performance will be evaluated relative to cumulative earnings before interest, taxes, depreciation and amortization over the vesting period (exclusive of Ambac Assurance and its subsidiaries' earnings), which is intended to reward participants on generating taxable income from new business development. Over the same period, Ambac Assurance performance will be evaluated according to changes in a ratio of Ambac Assurance's assets to its insurance and financial obligations, which is intended to reward participants for increases in the relative value of Ambac Assurance. Other than voluntary termination or involuntary termination for cause, and provided that a participant's employment with the Company is not terminated within the first year of the performance period, the performance awards shall partially vest as of the date of such termination in the proportion of the number of calendar days which have lapsed since the grant date and the denominator of which shall be the total number of calendar days of the original vesting period. Settlements of all performance awards shall be within 60 days after the end of the performance period, including those that had a partial vesting.

In 2015, a performance award was granted to the Chief Executive Officer under the 2013 Plan. This award will vest upon the emergence of the Segregated Account from rehabilitation (or a similar event as determined in the sole and absolute discretion of the Compensation Committee of Ambac's Board of Directors), provided that such emergence occurs no later than January 1, 2019.

A summary of PSU activity for 2015 is as follows:



	Shares⁽¹⁾		Weighted Average Grant Date Fair Value
Outstanding at beginning of period	35,412		$	29.78
Granted	107,852		24.62
Delivered	—		—
Forfeited	(12,719	)	25.78
Outstanding at end of period	130,545		$	25.91


(1)	Represents performance share units at 100% of units granted for LTIP Awards.

As of December 31, 2015 there was $2,382 of total unrecognized compensation costs related to the PSU portion of unvested performance awards, which are expected to be recognized over a weighted average period of 2.1 years.