8. 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 debt (at December 31, 2017 only) and equity interests in an unconsolidated trust created in connection with its sale of Segregated Account junior surplus notes on August 28, 2014.

Fixed Income Securities:

The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at March 31, 2018 and December 31, 2017 were as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Non-credit Other-than temporary Impairments ⁽¹⁾
March 31, 2018:
Fixed income securities:
Municipal obligations	$	853,001	$	14,307	$	11,921	$	855,387	$	109
Corporate obligations ⁽²⁾	1,445,586		12,216		18,809		1,438,993		—
Foreign obligations	26,425		238		268		26,395		—
U.S. government obligations	90,281		119		3,139		87,261		—
Residential mortgage-backed securities	726,998		101,218		4,920		823,296		4,854
Collateralized debt obligations	50,754		204		—		50,958		—
Other asset-backed securities	520,863		69,678		893		589,648		—
	3,713,908		197,980		39,950		3,871,938		4,963
Short-term	321,210		4		95		321,119		—
	4,035,118		197,984		40,045		4,193,057		4,963
Fixed income securities pledged as collateral:
U.S. government obligations	84,240		—		—		84,240		—
Total collateralized investments	84,240		—		—		84,240		—
Total available-for-sale investments	$	4,119,358	$	197,984	$	40,045	$	4,277,297	$	4,963

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


(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 March 31, 2018 and December 31, 2017.


(2)	Includes Ambac's holdings of the secured notes issued by Ambac LSNI in connection with the Rehabilitation Exit Transactions.

The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at March 31, 2018, by contractual maturity, were as follows:



	Amortized Cost		Estimated Fair Value
Due in one year or less	$	461,954	$	461,683
Due after one year through five years	1,237,724		1,239,764
Due after five years through ten years	287,768		279,803
Due after ten years	833,297		832,145
	2,820,743		2,813,395
Residential mortgage-backed securities	726,998		823,296
Collateralized debt obligations	50,754		50,958
Other asset-backed securities	520,863		589,648
Total	$	4,119,358	$	4,277,297

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, excluding VIE investments, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at March 31, 2018 and December 31, 2017:



	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, 2018:
Fixed income securities:
Municipal obligations	$	495,224	$	10,775	$	30,590	$	1,146	$	525,814	$	11,921
Corporate obligations	457,056		13,566		106,696		5,243		563,752		18,809
Foreign obligations	13,806		217		1,736		51		15,542		268
U.S. government obligations	77,446		3,067		3,423		72		80,869		3,139
Residential mortgage-backed securities	13,321		531		101,462		4,389		114,783		4,920
Other asset-backed securities	34,288		123		77,184		770		111,472		893
	1,091,141		28,279		321,091		11,671		1,412,232		39,950
Short-term	120,661		95		—		—		120,661		95
Total temporarily impaired securities	$	1,211,802	$	28,374	$	321,091	$	11,671	$	1,532,893	$	40,045



	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

Management has determined that the unrealized losses reflected in the tables above are temporary in nature as of March 31, 2018 and December 31, 2017 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.

As of March 31, 2018, 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, 2018, $694,796 of the total fair value and $18,330 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, 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. 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 March 31, 2018 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. These bonds suffered material downward price movement in late 2017 and subsequently recovered most of this lost value during the first quarter of 2018. 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 March 31, 2018 are primarily the result of the 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.

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:



	Three Months Ended March 31,
	2018			2017
Gross realized gains on securities	$	11,054		$	2,659
Gross realized losses on securities	(1,388		)	(9,471		)
Net foreign exchange (losses) gains	(4,804		)	1,916
Net realized gains (losses)	$	4,862		$	(4,896	)
Net other-than-temporary impairments ⁽¹⁾	$	(299	)	$	(3,942	)


(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.

During the Segregated Account Rehabilitation Proceedings, changes in the estimated timing of claim payments 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 three months ended March 31, 2017, 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 also 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, 2018 and 2017 for which a portion of an other-than-temporary impairment was recognized in other comprehensive income:



	Three Months Ended March 31,
	2018			2017
Balance, beginning of period	$	67,085		$	52,070
Additions for credit impairments recognized on:
Securities not previously impaired	226			307
Securities previously impaired	64			1,985
Reductions for credit impairments previously recognized on:
Securities that matured or were sold during the period	(23,742		)	—
Balance, end of period	$	43,633		$	54,362

Counterparty Collateral, Deposits with Regulators and Other Restrictions:

Ambac routinely pledges and receives collateral related to certain transactions. Cash and securities held directly in Ambac’s investment portfolio with a fair value of $107,060 and $120,645 at March 31, 2018 and December 31, 2017, respectively, were pledged to derivative counterparties. Ambac’s derivative counterparties have the right to re-pledge the investment 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”. There was no cash or securities received from other counterparties that were re-pledged by Ambac.

Securities carried at $5,926 and $5,974 at March 31, 2018 and December 31, 2017, 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 $256,553 and $346,212 at March 31, 2018 and December 31, 2017, 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 for a further description of this transaction.

As further discussed in Note 1. Background and Business Description, Ambac LSNI, an unconsolidated special purpose entity, issued Secured Notes in connection with the Rehabilitation Exit Transactions of February 12, 2018. Securities with a fair value of $367,816 at March 31, 2018 were pledged as collateral and as sources of funding to repay the Secured Notes. The securities may not be sold or repledged by Ambac LSNI. Ambac LSNI qualifies as a VIE that is not consolidated in Ambac's unaudited consolidated financial statements.

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 March 31, 2018 and December 31, 2017, respectively:



	Municipal Obligations		Corporate Obligations ⁽³⁾		Mortgage and Asset- backed Securities		Total		Weighted Average Underlying Rating ⁽¹⁾
March 31, 2018:
Ambac Assurance Corporation ⁽²⁾	$	785,791	$	813,720	$	1,283,502	$	2,883,013	CC
National Public Finance Guarantee Corporation	18,913		—		—		18,913		BBB-
Assured Guaranty Municipal Corporation	6,000		—		—		6,000		BBB+
Total	$	810,704	$	813,720	$	1,283,502	$	2,907,926	CC

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


(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 $169,943 and $170,280 at March 31, 2018 and December 31, 2017, respectively, insured by Ambac UK.


(3)	2018 includes Ambac's holdings of the secured notes issued by Ambac LSNI in connection with the Rehabilitation Exit Transactions. These secured notes are insured by Ambac Assurance.

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.



	Fair Value
Class of Funds	March 31, 2018		December 31, 2017		Redemption Frequency	Redemption Notice Period
Real estate properties ⁽¹⁾	$	34,752	$	33,154	quarterly	10 business days
Diversified hedge fund strategies ⁽²⁾	56,394		53,054		semi-monthly	15 - 30 days
Interest rate products ^{(3) (7)}	142,856		136,603		daily, weekly or monthly	0 - 30 days
Illiquid investments ⁽⁴⁾	71,366		67,787		quarterly	180 days
Insurance-linked investments ⁽⁵⁾	23,637		22,666		quarterly	90-120 days
Equity market investments ^{(6) (7)}	54,682		53,675		daily	0 days
Total equity investments in pooled funds	$	383,687	$	366,939


(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 $2,853 at March 31, 2018 and $2,823 at December 31, 2017 and equity market investments include $54,682 at March 31, 2018 and $53,675 at December 31, 2017 that have readily determinable fair values priced through pricing vendors.

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.

Investment Income:

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



	Three Months Ended March 31,
	2018			2017
Fixed income securities	$	109,351		$	74,069
Short-term investments	2,840			989
Loans	187			89
Investment expense	(1,827		)	(1,997		)
Securities available-for-sale and short-term	110,551			73,150
Other investments	(311		)	8,409
Total net investment income	$	110,240		$	81,559

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:



	Three Months Ended March 31,
	2018			2017
Net gains (losses) recognized during the period on trading securities	$	(1,579	)	$	7,211
Less: net gains (losses) recognized during the reporting period on trading securities sold during the period	1,933			1,283
Unrealized gains (losses) recognized during the reporting period on trading securities still held at the reporting date	$	(3,512	)	$	5,928