15. EMPLOYMENT BENEFIT PLANS

Postretirement Health Care and Other Benefits:

Ambac provides postretirement and postemployment / severance benefits, including health and life benefits for certain employees who meet certain age and service requirements. None of the plans are currently funded. Postretirement and postemployment benefits expenses, including severance benefits paid, was $4,164, $8,846 and $2,570 for the years ended December 31, 2017, 2016 and 2015, respectively.

Effective August 1, 2005, new employees were not eligible for postretirement benefits. The current postretirement benefit requires retirees to purchase their own medical insurance policy with a portion of their premium being reimbursed by Ambac. The unfunded accumulated postretirement benefit obligation was $7,820 as of December 31, 2017. The assumed health care cost trend rates range from 5.6% in 2018, decreasing ratably to 4.5% in 2025. 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, 2017, by $182 and the 2017 benefit expense by $11. 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, 2017 by $258 and the 2017 benefit expense by $17.

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



2018		2019		2020		2021		2022		2023-2027		Total
$	282	$	311	$	327	$	353	$	387	$	2,452	$	4,112

The discount rate used in determining the projected benefit obligations for the postretirement plan is selected by reference to the year-end Citigroup pension liability index with similar duration to that of the benefit plan. The rates used for the projected plan benefit obligations at the measurement date for December 31, 2017 and 2016 were 3.50% 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’ compensation, as defined in the plan, plus 50% of contributions up to an additional 2% of compensation, subject to limits set by the Internal Revenue Code. The total cost of the Savings Incentive Plan was $691, $911 and $1,042 for the years December 31, 2017, 2016 and 2015, respectively.

Incentive Compensation - Stock Units and Cash:

Incentive compensation is a key component of our compensation strategy. Our incentive compensation awards generally have two components: short term incentive compensation or annual bonuses and long term incentive plan awards. Annual decisions with regard to incentive compensation are generally made in the first quarter of each year and are based on Company performance and individual and business unit performance of the previous year. For all employees, an allocation of incentive compensation is made between annual bonuses and LTIP awards. Beginning for the 2016 performance year, the annual bonus was settled via cash and vested restricted stock units for certain employees.

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 2,793,323 shares are available for future grant as of December 31, 2017.

In March 2014, Ambac developed a long term incentive compensation plan (“LTIP”) as a sub-plan of the 2013 Plan. The LTIP is intended to be an annual program that allows for both cash and equity performance awards to certain US employees. Beginning with grants issued in 2017, the entire LTIP award was issued as equity performance awards to 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 $2,159, $283 and $253 for the years ended December 31, 2017, 2016 and 2015, respectively.

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



Year Ended December 31,	2017 ⁽¹⁾		2016		2015
Stock options	$	—	$	—	$	956
Restricted stock units	1,640		3,463		1,257
Performance awards ^{(2) (3)}	2,653		1,790		892
Total stock-based compensation	$	4,293	$	5,253	$	3,105
Total stock-based compensation (after-tax)	$	4,293	$	5,194	$	3,105

(1)

As discussed in Note 2. Basis of Presentation and Significant Accounting Policies , we adopted ASU 2016-09 as of January 1, 2017. One of the provisions of this ASU requires entities to make an accounting policy election with respect to forfeitures of share-based payment awards. We elected to account for forfeitures as they occur and adopted this provision of ASU 2016-09 using a modified retrospective approach resulting in recording a cumulative-effect adjustment to equity of $137.


(2)	Represents expense related to performance stock units portion of performance awards. Certain performance awards are split evenly between performance stock units and cash. Cash based compensation expense related to performance awards granted to US employees was $1,565, $1,790 and $892 for the years ended December 31, 2017, 2016 and 2015, respectively.


(3)	A performance award issued to Ambac's former Chief Executive Officer in the form of performance stock units has yet to be expensed given the performance conditions have not been met.

Stock Options:

Stock options were awarded to the former Chief Executive Officer in 2015 (vested January 1, 2016), with an expiry term of seven years from the grant date, subject to earlier expiration upon the recipient's departure from the Company. 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 2016 or 2017.

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 awarded in 2015:



Year Ended December 31,	2015
Risk-free interest rate	1.283		%
Expected volatility	42.8		%
Dividend yield	0.0		%
Expected life	4.13 years
Weighted-average grant-date fair value per share	$	8.69

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 2017 is as follows:



	Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Life ( in years)
Year Ended December 31, 2017
Outstanding at beginning of period	143,334		$	23.64
Granted	—		—
Exercised	—		—
Forfeited or expired	(16,667	)	20.63
Outstanding at end of period	126,667		$	24.03	$	—	1.23
Exercisable	126,667		$	24.03	$	—	1.23

All stock options granted were fully vested as of December 31, 2017. Total unrecognized compensation costs related to unvested stock options granted were $0 as of December 31, 2017. No stock options were exercised during the years ended December 31, 2017, 2016 and 2015, respectively.

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. These RSU awards provided for accelerated vesting upon change in control or death or disability. These employee RSUs settled and converted 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.

In 2015 and 2016, RSU awards were granted to the former Chief Executive Officer. The 2015 award would vest in three equal installments on January 1, 2016, 2017 and 2018, with certain accelerated vesting features. The 2016 award would vest in three equal installments on December 31, 2016, 2017 and 2018. The former Chief Executive Officer departed the Company in 2016 and pursuant to the terms set forth in his settlement agreements and the RSU award agreements, (i) the service requirement for the entire 2015 award was met and the entire RSU award vested in 2016 and (ii) the service requirement for one-third of the 2016 RSU award was met and vested in 2016 with the remaining two-thirds of the 2016 RSU award forfeited.

In 2016, RSU awards were granted to certain Executive Officers. The awards vest in three equal installments on February 21, 2017, 2018 and 2019 ("Time-Based RSUs"). The vesting of the Time-Based RSUs are expressly conditioned upon the respective Executive's continued service with Ambac through the applicable vesting date.

In 2017, RSU awards were granted to certain employees as consideration for a portion of their annual bonus. These awards vest upon grant, but settlement, other than for employment tax withholdings, occurs in two equal installments on March 2, 2018 and 2019, or upon termination if earlier.

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.

As of December 31, 2017, 221,803 RSUs remained outstanding, of which (i) 68,654 units required future service as a condition to the delivery of the underlying shares of common stock and (ii) 153,149 units did not require future service and are deferred for future settlement. As of December 31, 2016, 264,230 RSUs remained outstanding, of which (i) 102,794 units required future service as a condition to the delivery of the underlying shares of common stock, (ii) 103,486 units vested on December 31, 2016 but were not settled until January 3, 2017 and (ii) 57,950 units did not require future service and are deferred for future settlement.

A summary of RSU activity for 2017 is as follows:



	Shares		Weighted Average Grant Date Fair Value
Outstanding at beginning of period	264,230		$	16.47
Granted	70,432		20.22
Delivered or returned to plan ⁽¹⁾	(112,859	)	13.96
Forfeited	—		—
Outstanding at end of period	221,803		$	18.93


(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, 2017, Ambac purchased 56,410 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 2017, 2016 and 2015 was $20.22, $14.34 and $23.71, respectively. As of December 31, 2017, there was $478 of total unrecognized compensation costs related to unvested RSUs granted. These costs are expected to be recognized over a weighted average period of 0.6 years. The fair value for RSUs vested and delivered during the year ended December 31, 2017, 2016 and 2015 was $2,536, $2,965 and $864, respectively.

Performance Stock Awards ("PSUs"):

Performance awards granted vest in 3 years and 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 pre-tax income. Over the same period, Ambac Assurance performance will be evaluated according to changes in a ratio or value of Ambac Assurance's assets relative 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 (reduced to six months for the 2016 and 2017 grants to employees other than executive officers), 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 the 2015 and 2016 performance awards shall be within 60 days after the end of the performance period, including those with a partial vesting. The 2017 performance awards shall be within 75 days after the end of the performance period, including those with a partial vesting.

In 2015, a performance award was granted to the former Chief Executive Officer. This award will vest on February 12, 2018 upon the emergence of the Segregated Account from rehabilitation.

A summary of PSU activity for 2017 is as follows:



	Shares		Weighted Average Grant Date Fair Value
Outstanding at beginning of period	227,073		$	21.29
Granted ⁽¹⁾	153,317		22.35
Delivered ⁽²⁾	(38,464	)	29.78
Forfeited ⁽¹⁾	(26,378	)	20.26
Performance adjustment ⁽³⁾	7,395		29.78
Outstanding at end of period	322,943		$	21.06


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


(2)	Reflects the number of performance shares attributable to the performance goals attained over the completed performance period and for which service conditions have been met.


(3)	Represents the increase (decrease) in shares issued for awards granted in 2014 based upon the attainment of performance metrics at the end of the performance period.

As of December 31, 2017 there was $3,523 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 1.6 years.