8. 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 and are reported within Other investments on the Consolidated Balance Sheets. Other investments also includes Ambac's equity interest in an unconsolidated trust created in connection with its sale of Segregated Account junior surplus notes on August 28, 2014.

The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at March 31, 2016 and December 31, 2015 were as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Non-credit other-than temporary Impairments ⁽¹⁾
March 31, 2016
Fixed income securities:
Municipal obligations	$	380,190	$	10,609	$	4,969	$	385,830	$	—
Corporate obligations	1,626,276		27,929		7,901		1,646,304		—
Foreign obligations	92,596		4,106		61		96,641		—
U.S. government obligations	32,185		1,357		93		33,449		—
U.S. agency obligations	4,195		—		9		4,186		—
Residential mortgage-backed securities	2,229,764		103,842		59,551		2,274,055		43,928
Collateralized debt obligations	100,949		59		1,667		99,341		—
Other asset-backed securities	1,073,604		39,431		2,580		1,110,455		—
	5,539,759		187,333		76,831		5,650,261		43,928
Short-term	436,759		1		—		436,760		—
	5,976,518		187,334		76,831		6,087,021		43,928
Fixed income securities pledged as collateral:
U.S. government obligations	64,667		251		—		64,918		—
Total collateralized investments	64,667		251		—		64,918		—
Total available-for-sale investments	$	6,041,185	$	187,585	$	76,831	$	6,151,939	$	43,928

December 31, 2015
Fixed income securities:
Municipal obligations	$	424,048	$	4,910	$	8,188	$	420,770	$	—
Corporate obligations	1,610,912		7,089		24,332		1,593,669		—
Foreign obligations	96,638		1,491		1,823		96,306		—
U.S. government obligations	26,086		789		188		26,687		—
U.S. agency obligations	4,239		—		27		4,212		—
Residential mortgage-backed securities	1,942,285		99,670		64,617		1,977,338		41,673
Collateralized debt obligations	85,706		42		1,481		84,267		—
Other asset-backed securities	802,842		41,177		3,492		840,527		—
	4,992,756		155,168		104,148		5,043,776		41,673
Short-term	225,789		1		1		225,789		—
	5,218,545		155,169		104,149		5,269,565		41,673
Fixed income securities pledged as collateral:
U.S. government obligations	64,612		—		57		64,555		—
Total collateralized investments	64,612		—		57		64,555		—
Total available-for-sale investments	$	5,283,157	$	155,169	$	104,206	$	5,334,120	$	41,673


(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 March 31, 2016 and December 31, 2015.

The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at March 31, 2016, by contractual maturity, were as follows:



	Amortized Cost		Estimated Fair Value
Due in one year or less	$	536,088	$	536,300
Due after one year through five years	1,061,175		1,070,684
Due after five years through ten years	864,905		881,715
Due after ten years	174,700		179,389
	2,636,868		2,668,088
Residential mortgage-backed securities	2,229,764		2,274,055
Collateralized debt obligations	100,949		99,341
Other asset-backed securities	1,073,604		1,110,455
Total	$	6,041,185	$	6,151,939

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 March 31, 2016 and December 31, 2015:



	Less Than 12 Months				12 Months or More				Total
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
March 31, 2016
Fixed income securities:
Municipal obligations	$	58,996	$	1,587	$	76,741	$	3,382	$	135,737	$	4,969
Corporate obligations	266,795		5,198		137,811		2,703		404,606		7,901
Foreign obligations	1,838		17		1,556		44		3,394		61
U.S. government obligations	7,903		73		8,436		20		16,339		93
U.S. agency obligations	—		—		4,186		9		4,186		9
Residential mortgage-backed securities	624,811		35,383		304,949		24,168		929,760		59,551
Collateralized debt obligations	67,563		1,550		19,767		117		87,330		1,667
Other asset-backed securities	409,620		2,540		15,345		40		424,965		2,580
	1,437,526		46,348		568,791		30,483		2,006,317		76,831
Short-term	1,983		—		—		—		1,983		—
	1,439,509		46,348		568,791		30,483		2,008,300		76,831
Fixed income securities, pledged as collateral:
U. S. government obligations	—		—		—		—		—		—
Total collateralized investments	—		—		—		—		—		—
Total temporarily impaired securities	$	1,439,509	$	46,348	$	568,791	$	30,483	$	2,008,300	$	76,831



	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, 2015:
Fixed income securities:
Municipal obligations	$	117,008	$	2,070	$	114,708	$	6,118	$	231,716	$	8,188
Corporate obligations	938,916		21,331		92,581		3,001		1,031,497		24,332
Foreign obligations	34,904		1,018		8,584		805		43,488		1,823
U.S. government obligations	2,938		18		10,658		170		13,596		188
U.S. agency obligations	—		—		4,212		27		4,212		27
Residential mortgage-backed securities	584,699		53,367		213,303		11,250		798,002		64,617
Collateralized debt obligations	77,538		1,481		—		—		77,538		1,481
Other asset-backed securities	450,690		3,456		19,274		36		469,964		3,492
	2,206,693		82,741		463,320		21,407		2,670,013		104,148
Short-term	9,982		1		—		—		9,982		1
	2,216,675		82,742		463,320		21,407		2,679,995		104,149
Fixed income securities, pledged as collateral:
U. S. government obligations	64,555		57		—		—		64,555		57
Total collateralized investments	64,555		57		—		—		64,555		57
Total temporarily impaired securities	$	2,281,230	$	82,799	$	463,320	$	21,407	$	2,744,550	$	104,206

Management has determined that the unrealized losses reflected in the tables above are temporary in nature as of March 31, 2016 and December 31, 2015 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, trading securities 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 March 31, 2016, 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 March 31, 2016, $1,053,711 of the total fair value and $63,981 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, 2015, $953,000 of the total fair value and $69,214 of the unrealized loss related to below investment grade securities and non-rated securities. With respect to Ambac insured 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 insured securities and future recognition of other-than-temporary impairments. Refer to Note 1. Background and Business Description and to Note 1. Background and Business Description in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 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. 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 March 31, 2016 are primarily the result of the increase in interest rates since the Fresh Start Reporting Date of 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 $59,551 of unrealized losses on residential mortgage-backed securities, $57,269 is attributable to Ambac insured securities. The unrealized loss on these securities is primarily the result of discount accretion, which has exceeded the increase in fair value since the Fresh Start Reporting Date of 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 insured 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 March 31, 2016 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:



	Three Months Ended March 31,
	2016			2015
Gross realized gains on securities	$	1,928		$	50,654
Gross realized losses on securities	(3,609		)	(3,737		)
Net foreign exchange gains	2,783			7,184
Net realized gains	$	1,102		$	54,101
Net other-than-temporary impairments ⁽¹⁾	$	(9,334	)	$	(3,119	)


(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 Ambac will be required to sell before recovery of the amortized cost basis.

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 insured securities. Such changes in estimated claim payments on Ambac insured 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. 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 March 31, 2016 and 2015 for which a portion of an other-than-temporary impairment was recognized in other comprehensive income:



	Three Months Ended March 31,
	2016		2015
Balance, beginning of period	$	31,176	$	14,062
Additions for credit impairments recognized on:
Securities not previously impaired	580		1,660
Securities previously impaired	8,756		1,457
Reductions for credit impairments previously recognized on:
Securities that matured or were sold during the period	—		—
Balance, end of period	$	40,512	$	17,179

Counterparty Collateral, Deposits with Regulators and Other Restrictions:

Ambac routinely pledges and receives collateral related to certain business lines and/or transactions. Ambac pledges assets it holds in its investment portfolio to investment agreement and derivative counterparties as collateral. 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”.

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 agreements, derivative and repurchase agreement counterparties at March 31, 2016 and December 31, 2015:



	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
March 31, 2016:
Sources of Collateral:
Cash and securities pledged directly from the investment portfolio	$	368,086	$	108,367	$	259,719

December 31, 2015:
Sources of Collateral:
Cash and securities pledged directly from the investment portfolio	$	338,007	$	108,379	$	229,628

Securities carried at $5,939 and $6,762 at March 31, 2016 and December 31, 2015, 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 $381,249 and $396,100 at March 31, 2016 and December 31, 2015, respectively, were held by a bankruptcy remote trust to collateralize and fund repayment of debt issued through a re-securitization transaction. The securities may not be sold or repledged by the trust. These assets are held and the secured debt is issued by entities that qualify as VIEs and are consolidated in Ambac’s unaudited consolidated financial statements. Refer to Note 3. Special Purpose Entities, Including Variable Interest Entities ("VIEs") 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 March 31, 2016 and December 31, 2015, respectively:



	Municipal obligations		Corporate obligations		Mortgage and asset- backed securities		Short-term		Total		Weighted Average Underlying Rating ⁽¹⁾
March 31, 2016:
Ambac Assurance Corporation ⁽²⁾	$	58,532	$	—	$	2,516,589	$	55	$	2,575,176	CC
National Public Finance Guarantee Corporation	45,850		—		—		—		45,850		A-
Assured Guaranty Municipal Corporation	29,788		—		—		—		29,788		AA-
MBIA Insurance Corporation	—		25,746		—		—		25,746		A+
Total	$	134,170	$	25,746	$	2,516,589	$	55	$	2,676,560	CC

December 31, 2015:
Ambac Assurance Corporation ⁽²⁾	$	60,836	$	—	$	2,216,317	$	—	$	2,277,153	CC
National Public Finance Guarantee Corporation	47,846		—		—		—		47,846		A-
Assured Guaranty Municipal Corporation	57,715		—		—		—		57,715		A+
MBIA Insurance Corporation	—		25,645		—		—		25,645		A+
Total	$	166,397	$	25,645	$	2,216,317	$	—	$	2,408,359	CCC-


(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 $118,968 and $119,802 at March 31, 2016 and December 31, 2015, insured by Ambac UK.

Investment Income:

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



	Three Months Ended March 31,
	2016			2015
Fixed income securities	$	59,426		$	65,585
Short-term investments	553			42
Loans	106			132
Investment expense	(2,103		)	(2,427		)
Securities available-for-sale and short-term	57,982			63,332
Other investments	2,839			9,651
Total net investment income	$	60,821		$	72,983

Net investment income from Other investments primarily represents changes in fair value on securities classified as trading or under the fair value option plus income from Ambac's equity interest in an unconsolidated trust created in connection with its sale of Segregated Account junior surplus notes. The portion of net unrealized gains (losses) related to trading securities still held at the end of each period is as follows:



	Three Months Ended March 31,
	2016		2015
Net gains (losses) recognized during the period on trading securities	$	1,707	$	7,819
Less: net gains (losses) recognized during the reporting period on trading securities sold during the period	406		1,564
Unrealized gains (losses) recognized during the reporting period on trading securities still held at the reporting date	$	1,301	$	6,255