10. INVESTMENTS

Ambac’s non-VIE 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 include Ambac's interests 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 December 31, 2017 and 2016 were as follows:



	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value		Non-Credit Other- than-temporary Impairments ⁽¹⁾
December 31, 2017
Fixed income securities:
Municipal obligations	$	845,778	$	3,456	$	69,400	$	779,834	$	—
Corporate obligations	858,774		6,772		5,471		860,075		—
Foreign obligations	26,245		409		111		26,543		—
U.S. government obligations	86,900		261		1,753		85,408		—
Residential mortgage-backed securities	2,214,512		67,303		30,482		2,251,333		23,832
Collateralized debt obligations	50,754		283		—		51,037		—
Other asset-backed securities	531,660		66,899		617		597,942		—
	4,614,623		145,383		107,834		4,652,172		23,832
Short-term	557,476		3		209		557,270		—
	5,172,099		145,386		108,043		5,209,442		23,832
Fixed income securities pledged as collateral:
U.S. government obligations	99,719		—		—		99,719		—
Total collateralized investments	99,719		—		—		99,719		—
Total available-for-sale investments	$	5,271,818	$	145,386	$	108,043	$	5,309,161	$	23,832

December 31, 2016
Fixed income securities:
Municipal obligations	$	376,064	$	5,509	$	7,205	$	374,368	$	—
Corporate obligations	1,803,136		19,589		20,560		1,802,165		—
Foreign obligations	41,932		1,303		100		43,135		—
U.S. government obligations	33,732		2,551		97		36,186		—
U.S. agency obligations	4,063		—		3		4,060		—
Residential mortgage-backed securities	2,284,425		110,955		43,785		2,351,595		35,232
Collateralized debt obligations	113,650		493		220		113,923		—
Other asset-backed securities	778,383		58,028		7,628		828,783		—
	5,435,385		198,428		79,598		5,554,215		35,232
Short-term	430,827		5		44		430,788		—
	5,866,212		198,433		79,642		5,985,003		35,232
Fixed income securities pledged as collateral:
U.S. government obligations	64,833		72		—		64,905		—
Total collateralized investments	64,833		72		—		64,905		—
Total available-for-sale investments	$	5,931,045	$	198,505	$	79,642	$	6,049,908	$	35,232


(1)	Represents the amount of non-credit other-than-temporary impairment losses remaining in accumulated other comprehensive income on securities that also had a credit impairment. These losses are included in gross unrealized losses as of December 31, 2017 and 2016.

The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at December 31, 2017, by contractual maturity, were as follows:



	Amortized Cost		Estimated Fair Value
Due in one year or less	$	714,761	$	714,507
Due after one year through five years	556,370		556,387
Due after five years through ten years	376,420		376,686
Due after ten years	827,341		761,269
	2,474,892		2,408,849
Residential mortgage-backed securities	2,214,512		2,251,333
Collateralized debt obligations	50,754		51,037
Other asset-backed securities	531,660		597,942
Total	$	5,271,818	$	5,309,161

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 on Fixed Income Securities:

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, 2017 and 2016:



	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, 2017
Fixed income securities:
Municipal obligations	$	667,335	$	68,578	$	32,525	$	822	$	699,860	$	69,400
Corporate obligations	292,028		3,377		87,272		2,094		379,300		5,471
Foreign obligations	8,122		81		1,700		30		9,822		111
U.S. government obligations	74,188		1,653		5,525		100		79,713		1,753
Residential mortgage-backed securities	668,524		12,524		418,617		17,958		1,087,141		30,482
Other asset-backed securities	26,655		58		88,023		559		114,678		617
	1,736,852		86,271		633,662		21,563		2,370,514		107,834
Short-term	251,926		209		—		—		251,926		209
Total temporarily impaired securities	$	1,988,778	$	86,480	$	633,662	$	21,563	$	2,622,440	$	108,043



	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, 2016
Fixed income securities:
Municipal obligations	$	98,147	$	2,045	$	122,928	$	5,160	$	221,075	$	7,205
Corporate obligations	963,513		20,232		6,492		328		970,005		20,560
Foreign obligations	5,063		100		—		—		5,063		100
U.S. government obligations	6,037		93		5,045		4		11,082		97
U.S. agency obligations	4,060		3		—		—		4,060		3
Residential mortgage-backed securities	226,889		7,201		550,807		36,584		777,696		43,785
Collateralized debt obligations	6,986		23		25,780		197		32,766		220
Other asset-backed securities	115,622		203		77,712		7,425		193,334		7,628
	1,426,317		29,900		788,764		49,698		2,215,081		79,598
Short-term	65,176		44		—		—		65,176		44
Total temporarily impaired securities	$	1,491,493	$	29,944	$	788,764	$	49,698	$	2,280,257	$	79,642

Management has determined that the unrealized losses reflected in the tables above are temporary in nature as of December 31, 2017 and 2016 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 December 31, 2017, 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, 2017, $1,855,694 of the total fair value and $100,503 of the unrealized loss related to below investment grade and non-rated securities. Of the securities that were in a gross unrealized loss position at December 31, 2016, $890,952 of the total fair value and $53,273 of the unrealized loss related to below investment grade and non-rated securities. As discussed further below, most of the securities in a gross unrealized loss position that are below investment grade or non-rated are guaranteed by Ambac Assurance. 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 obligations

The gross unrealized losses on municipal obligations as of December 31, 2017 are primarily the result of the price declines on Ambac-insured Puerto Rico bonds, especially Puerto Rico Sales Tax Financing Corporation's Senior Sales Tax Revenue bonds. These bonds are below investment grade, long-dated zero coupon securities subject to higher than average price volatility that suffered additional downward price movement in late 2017 following the hurricanes that impacted Puerto Rico. Management has the ability and intent to hold these bonds and by virtue of the Ambac financial guarantee, believes that it is probable that all amounts due on the bonds will be paid timely and in full.

Corporate obligations

The gross unrealized losses on corporate obligations as of December 31, 2016 and to a lesser extent at December 31, 2017 resulted from an increase in interest rates since purchase (or the Fresh Start Reporting Date of April 30, 2013 if owned as of that date). 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 $30,482 of unrealized losses on residential mortgage-backed securities, $30,482 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 either the purchase date or Fresh Start Reporting Date of April 30, 2013 for securities owned prior to such date. 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 were allocated to the Segregated Account, expected future cash flows included assumptions about the timing and amount of Ambac Assurance claim payments, including interest on Deferred Amounts, although the actual timing of such payments were at the sole discretion of the Rehabilitator. These assumptions are used to project future cash flows for each security and at December 31, 2017 incorporate the 6.5% discount on the settlement of Deferred Amounts as part of the Rehabilitation Exit Transactions described in Note 1. Management considered this analysis in making our determination that a credit loss has not occurred at December 31, 2017 on these transactions.

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

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



Year Ended December 31,	2017			2016			2015
Gross realized gains on securities	$	29,080		$	17,344		$	58,218
Gross realized losses on securities	(18,945		)	(8,239		)	(10,558		)
Foreign exchange (losses) gains	(4,769		)	30,179			5,816
Net realized gains	$	5,366		$	39,284		$	53,476
Net other-than-temporary impairments ⁽¹⁾	$	(20,171	)	$	(21,819	)	$	(25,659	)


(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.

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. Future changes in our estimated liquidity needs could result in a determination that Ambac no longer has the ability to hold 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, 2017 and 2016 for which a portion of an other-than-temporary impairment was recognized in other comprehensive income:



Year Ended December 31,	2017		2016		2015
Balance, beginning of period	$	52,070	$	31,176	$	14,062
Additions for credit impairments recognized on:
Securities not previously impaired	3,310		3,572		10,900
Securities previously impaired	11,705		17,322		6,214
Balance, end of period	$	67,085	$	52,070	$	31,176

Counterparty Collateral, Deposits with Regulators and Other Restrictions:

Ambac routinely pledges and receives collateral related to certain transactions. Ambac pledges cash and securities it holds in its investment portfolio to investment agreement (prior to repayment in March 2017) and derivative counterparties, as collateral. Securities pledged to investment agreement counterparties were not to 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 collateral owned by Ambac that was pledged to investment agreement and derivative counterparties at December 31, 2017 and 2016:



	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, 2017:
Pledged cash and securities owned by Ambac	$	120,645	$	—	$	120,645

December 31, 2016:
Pledged cash and securities owned by Ambac	$	291,545	$	88,940	$	202,605

Securities carried at $5,974 and $5,872 at December 31, 2017 and 2016, 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 $346,212 and $360,759 at December 31, 2017 and 2016, respectively, were held by a bankruptcy remote trust to collateralize and fund repayment of debt issued through a 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 consolidated financial statements. Refer to Note 3. 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). 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, 2017 and 2016, respectively:



	Municipal obligations		Corporate obligations		Mortgage and asset- backed securities		Total		Weighted Average Underlying Rating ⁽¹⁾
December 31, 2017:
Ambac Assurance Corporation ⁽²⁾	$	706,715	$	32,660	$	2,702,887	$	3,442,262	CC
National Public Finance Guarantee Corporation	20,733		—		—		20,733		BBB-
Assured Guaranty Municipal Corporation	5,998		—		—		5,998		BBB+
Total	$	733,446	$	32,660	$	2,702,887	$	3,468,993	CC

December 31, 2016:
Ambac Assurance Corporation ⁽²⁾	$	81,651	$	—	$	2,739,073	$	2,820,724	CC
National Public Finance Guarantee Corporation	38,687		—		—		38,687		A-
Assured Guaranty Municipal Corporation	25,660		—		—		25,660		AA
MBIA Insurance Corporation	—		2,630		—		2,630		BBB+
Total	$	145,998	$	2,630	$	2,739,073	$	2,887,701	CC


(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 corporate obligations and asset-backed securities with a fair value of $170,280 and $118,813 at December 31, 2017 and 2016, respectively, insured by Ambac UK.

Equity Interests:

Ambac's investment portfolio includes equity interests in various pooled investment funds, which are classified as trading. The fair value and additional information about such investments in pooled funds, by investment type, is summarized in the table below. Except as noted in the table, fair value reported is determined using NAV per share as a practical expedient. There are no unfunded commitments applicable to any of these investments for the periods disclosed.



Class of Funds	December 31, 2017		December 31, 2016		Redemption frequency	Redemption notice period
Real estate properties ⁽¹⁾	$	33,154	$	33,303	quarterly	10 business days
Diversified hedge fund strategies ⁽²⁾	53,054		53,985		semi-monthly	15 - 30 days
Interest rate products ^{(3) (7)}	136,603		261,315		daily, weekly or monthly	0 - 30 days
Illiquid investments ⁽⁴⁾	67,787		39,068		quarterly	180 days
Insurance-linked investments ⁽⁵⁾	22,666		—		quarterly	90-120 days
Equity market investments ^{(6) (7)}	53,675		32,633		daily	0 days
Total equity investments in pooled funds	$	366,939	$	420,304


(1)	Investments consist of UK property to generate income and capital growth.


(2)	Investments seek diversified exposure to hedge fund core strategies to produce high risk-adjusted returns, with low long-term correlation to traditional markets and with targeted volatility levels. Funds may have the right to defer redemptions under certain circumstances.

(3)

This class of funds includes investments in a range of instruments including leveraged loans, CLOs, asset-backed securities and floating rate notes to generate income and capital appreciation. Funds with less frequent redemption periods limit redemptions to as little as 15% per period. Funds with a same day redemption notice period are redeemable only weekly, while funds that may be redeemed any business day have notice periods of 15-30 days.


(4)	This class seeks to obtain high long-term total return through investments with low liquidity and defined term, resulting in expected capital distributions to subscribers between 2020 and 2023. Redemptions cannot occur prior to the expiration of the investment lock-up period in May 2018.

(5)

This class aims to provide returns from the insurance and reinsurance markets through investments in catastrophe bonds, life insurance and other insurance linked investments. Redemption periods are quarterly, subject to 90-day notice for January/July redemption dates and 120-day notice for April/October redemption dates with redemptions greater than 3.5% during the first five years following share issuance subject to redemption fees.


(6)	Investments represent a diversified exposure to global equity market returns through holdings of various regional market index funds.


(7)	Interest rate products include $2,823 at December 31, 2017 and $51,158 at December 31, 2016 and equity market investments include $53,675 at December 31, 2017 and $32,633 at December 31, 2016 that have readily determinable fair.

Ambac also holds interests in an unconsolidated trust created in connection with the 2014 sale of Segregated Account junior surplus notes. The investment in debt securities is accounted for as trading and the equity interest is accounted for under the equity method and included in Other Investments on the Consolidated Balance Sheets.

Investment Income:

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



Year Ended December 31,	2017			2016			2015
Fixed income securities	$	337,454		$	288,554		$	257,404
Short-term investments	7,898			1,505			299
Loans	520			337			420
Investment expense	(8,098		)	(9,347		)	(8,786		)
Securities available-for-sale and short-term	337,774			281,049			249,337
Other investments	23,179			32,318			16,952
Total net investment income	$	360,953		$	313,367		$	266,289

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 interests 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:



Year Ended December 31,	2017		2016		2015
Net gains (losses) recognized during the period on trading securities	$	18,242	$	27,654	$	12,615
Less: net gains (losses) recognized during the reporting period on trading securities sold during the period	4,854		7,474		4,966
Unrealized gains (losses) recognized during the reporting period on trading securities still held at the reporting date	$	13,388	$	20,180	$	7,649