XML 144 R18.htm IDEA: XBRL DOCUMENT

Investments

12 Months Ended

Dec. 31, 2019

Investments, Debt and Equity Securities [Abstract]

10. INVESTMENTS

Ambac’s non-VIE invested assets are primarily comprised of fixed income securities classified as available-for-sale and interests in pooled investment funds which are reported within Other investments on the Consolidated Balance Sheets. Interests in pooled investment funds in the form of common stock or in-substance common stock are classified as trading securities, while limited partner interests in such funds are reported using the equity method. Other investments also include Ambac's equity interest 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 fixed income investments, excluding VIE investments, at December 31, 2019 and 2018 were as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Non-Credit Other- than-temporary Impairments ⁽¹⁾
December 31, 2019
Fixed income securities:
Municipal obligations	$	194	$	22	$	—	$	215	$	—
Corporate obligations ⁽²⁾	1,396		36		2		1,430		—
Foreign obligations	44		1		—		44		—
U.S. government obligations	157		2		2		156		—
Residential mortgage-backed securities	200		47		—		248		—
Commercial mortgage-backed securities	49		1		—		50		—
Collateralized debt obligations	147		—		1		146		—
Other asset-backed securities	263		24		—		287		—
	2,450		132		5		2,577		—
Short-term	653		—		—		653		—
	3,103		132		5		3,230		—
Fixed income securities pledged as collateral:
Short-term	85		—		—		85		—
Total collateralized investments	85		—		—		85		—
Total available-for-sale investments	$	3,187	$	132	$	5	$	3,314	$	—

December 31, 2018
Fixed income securities:
Municipal obligations	$	883	$	14	$	17	$	880	$	—
Corporate obligations ⁽²⁾	1,289		6		17		1,278		—
Foreign obligations	30		—		—		31		—
U.S. government obligations	94		1		1		94		—
Residential mortgage-backed securities	222		38		1		259		—
Collateralized debt obligations	133		—		2		131		—
Other asset-backed securities	370		73		1		442		—
	3,021		133		38		3,116		—
Short-term	430		—		—		430		—
Total available-for-sale investments	$	3,451	$	133	$	38	$	3,546	$	—


(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, 2019 and 2018.


(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 December 31, 2019, by contractual maturity, were as follows:



	Amortized Cost		Estimated Fair Value
Due in one year or less	$	749	$	749
Due after one year through five years	1,157		1,173
Due after five years through ten years	477		501
Due after ten years	145		160
	2,528		2,583
Residential mortgage-backed securities	200		248
Commercial mortgage-backed securities	49		50
Collateralized debt obligations	147		146
Other asset-backed securities	263		287
Total	$	3,187	$	3,314

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 December 31, 2019 and 2018:



	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, 2019
Fixed income securities:
Municipal obligations	$	13	$	—	$	10	$	—	$	23	$	—
Corporate obligations	63		2		5		—		68		2
Foreign obligations	20		—		—		—		20		—
U.S. government obligations	36		2		2		—		38		2
Residential mortgage-backed securities	5		—		—		—		5		—
Commercial mortgage-backed securities	7		—		—		—		7		—
Collateralized debt obligations	53		—		63		1		116		1
Other asset-backed securities	2		—		7		—		10		—
	200		4		88		1		288		5
Short-term	201		—		—		—		201		—
Total temporarily impaired securities	$	401	$	4	$	88	$	1	$	489	$	5



	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, 2018
Fixed income securities:
Municipal obligations	$	538	$	16	$	29	$	1	$	566	$	17
Corporate obligations	307		9		190		9		497		17
Foreign obligations	1		—		5		—		6		—
U.S. government obligations	6		—		58		—		64		1
Residential mortgage-backed securities	35		1		—		—		35		1
Collateralized debt obligations	124		2		—		—		124		2
Other asset-backed securities	14		—		77		1		91		1
	1,024		27		360		11		1,384		38
Short-term	115		—		—		—		115		—
Total temporarily impaired securities	$	1,139	$	27	$	360	$	11	$	1,499	$	38

Management has determined that the unrealized losses reflected in the tables above are temporary in nature as of December 31, 2019 and 2018 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) no management 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. 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. 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, highly liquid pooled fund investments plus the scheduled maturities and interest payments from the remaining securities in the portfolio. 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. 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.

For securities that have indications of possible other-than-temporary impairment but for which management does not intend to sell and will not more likely than not be required to sell, management compares 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 are discounted at the effective interest rate implicit in the security. For debt securities that are beneficial interests in securitized financial assets, the effective interest rate is the current yield used to accrete the beneficial interest. For floating rate securities, future cash flows and the discount rate used are 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, 2019, $29 of the total fair value and $0 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, 2018, $660 of the total fair value and $18 of the unrealized loss related to below investment grade and non-rated securities. The remainder of gross unrealized losses as of December 31, 2019, are primarily on investment grade fixed-rate securities purchased during periods of lower interest rates. Management believes that the timely receipt of all principal and interest on these positions is probable.

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. 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.

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,	2019			2018			2017
Gross realized gains on securities	$	64		$	111		$	29
Gross realized losses on securities	(5		)	(7		)	(19		)
Foreign exchange (losses) gains	22			7			(5		)
Net realized gains (losses)	$	81		$	111		$	5
Net other-than-temporary impairments ⁽¹⁾	$	—		$	(3	)	$	(20	)


(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.

During the Segregated Account Rehabilitation Proceedings, changes in the estimated timing of claim payments on Ambac insured securities contributed to net other-than-temporary impairments for the year ended December 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 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, 2019, 2018 and 2017 for which a portion of an other-than-temporary impairment was recognized in other comprehensive income:



Year Ended December 31,	2019		2018		2017
Balance, beginning of period	12		67		52
Additions for credit impairments recognized on:
Securities not previously impaired	—		1		3
Securities previously impaired	—		—		12
Reductions for credit impairments previously recognized on:
Securities that matured or were sold during the period	(1	)	(56	)	—
Balance, end of period	12		12		67

Counterparty Collateral, Deposits with Regulators and Other Restrictions

Ambac routinely pledges and receives collateral related to certain transactions. Cash, cash equivalents and securities held directly in Ambac’s investment portfolio with a fair value of $85 and $103 at December 31, 2019 and 2018, 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 “Short-term investments pledged as collateral, at fair value”. Refer to Note 11. Derivative Instruments for further information on cash collateral. There was no cash or securities received from other counterparties that were re-pledged by Ambac.

Securities carried at $6 and $6 at December 31, 2019 and 2018, respectively, were deposited by Ambac Assurance and Everspan with governmental authorities or designated custodian banks as required by laws affecting insurance companies. Invested assets carried at $1 at December 31, 2019 were deposited as security in connection with a letter of credit issued for an office lease.

Securities carried at $197 and $210 at December 31, 2019 and 2018, respectively, were pledged as collateral and as sources of funding to repay the Secured Notes issued by Ambac LSNI. The securities may not be transferred or repledged by Ambac LSNI. Collateral may be sold to fund redemptions of the Secured Notes.

Ambac Assurance also pledged for the benefit of the holders of Secured Notes (other than Ambac Assurance) the proceeds of interest payments and partial redemption of the Secured Notes held by Ambac Assurance. The amount of such proceeds held by Ambac Assurance was $55 and $19 at December 31, 2019 and 2018 and is included in Restricted cash on the Consolidated Balance Sheet. Ambac Assurance may, from time to time, sell all or a portion of the Secured Notes it owns. In the event that Ambac Assurance sells any of the Secured Notes it owns, the proceeds must be used to redeem a like amount of the Ambac Note at par. The price at which Ambac Assurance sells the Secured Notes may differ from the price at which it redeems the Secured Notes.

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, 2019 and 2018, respectively:



	Municipal Obligations		Corporate Obligations ⁽³⁾		Mortgage and Asset- backed Securities		Total		Weighted Average Underlying Rating ^{(1) (3)}
December 31, 2019:
Ambac Assurance Corporation ⁽²⁾	$	176	$	535	$	442	$	1,153	B-
National Public Finance Guarantee Corporation	11		—		—		11		BBB-
Total	$	187	$	535	$	442	$	1,164	B-

December 31, 2018:
Ambac Assurance Corporation ⁽²⁾	$	833	$	656	$	599	$	2,089	CCC
National Public Finance Guarantee Corporation	16		—		—		16		BBB-
Total	$	849	$	656	$	599	$	2,105	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 $0 and $145 at December 31, 2019 and 2018, respectively, insured by Ambac UK.


(3)	Represents Ambac's holdings of secured notes issued by Ambac LSNI in connection with the Rehabilitation Exit Transactions. Ambac LSNI secured notes are insured by Ambac Assurance and are excluded from the calculation of weighted average underlying rating.

Other Investments

Ambac's investment portfolio includes interests in various pooled investment funds. Fair value and additional information about investments in pooled funds, by investment type, is summarized in the table below. Except as noted in the table, fair value as reported is determined using net asset value ("NAV") as a practical expedient. In addition to these investments, Ambac has unfunded commitments at December 31, 2019 of $41 to private credit funds and $48 to a hedge fund.



Class of Funds December 31,	2019		2018		Redemption Frequency	Redemption Notice Period
Real estate properties ⁽¹⁾	$	16	$	16	quarterly	10 business days
Hedge funds ⁽²⁾	65		—		quarterly	90 days
High yield and leveraged loans ^{(3) (8)}	176		114		daily	0 - 30 days
Private credit ⁽⁴⁾	51		84		quarterly	180 days if permitted
Insurance-linked investments ⁽⁵⁾	3		29		fully redeemed	none
Equity market investments ^{(6) (8)}	55		44		daily	0 days
Investment grade floating rate income ⁽⁷⁾	66		63		weekly	0 days
Total equity investments in pooled funds	$	432	$	351


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


(2)	This class seeks to generate superior risk-adjusted returns through selective asset sourcing, active trading and hedging strategies within structured credit markets, including mortgage-backed securities, commercial real estate securities and loans, CLOs, REITs and asset backed securities.


(3)	This class of funds includes investments in a range of instruments including high-yield bonds, leveraged loans, CLOs, ABS and floating rate notes to generate income and capital appreciation.


(4)	This class aims to obtain high long-term return primarily through credit and preferred equity investments with low liquidity and defined term.


(5)	This class seeks to generate returns from insurance markets through investments in catastrophe bonds, life insurance and other insurance linked investments.


(6)	This class of funds includes investments in a range of instruments that include funds that have diversified exposure to global equity market returns through holdings of market index funds.


(7)	This class of funds includes investments in high quality floating rate debt securities including ABS and corporate floating rate notes (FRNs) as well as ultra-short term bonds and money market instruments.


(8)	High yield and leveraged loans products include $81 at December 31, 2019 and $27 at December 31, 2018 and equity market investments include $55 at December 31, 2019 and $44 at December 31, 2018 that have readily determinable fair values priced through pricing vendors.

Ambac also holds an equity interest in an unconsolidated trust created in connection with the 2014 sale of Segregated Account junior surplus notes that is accounted for under the equity method.

Investment Income

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



Year Ended December 31,	2019			2018			2017
Fixed income securities	$	183		$	265		$	337
Short-term investments	17			11			8
Loans	1			1			1
Investment expense	(6		)	(7		)	(8		)
Securities available-for-sale and short-term	196			271			338
Other investments	32			2			23
Total net investment income	$	227		$	273		$	361

Net investment income from Other investments primarily represents changes in fair value on securities classified as trading

or under the fair value option, income from investment limited partnerships accounted for under the equity method and the above noted equity interest in an unconsolidated trust accounted for under the equity method.

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,	2019		2018			2017
Net gains (losses) recognized during the period on trading securities	$	24	$	(3	)	$	18
Less: net gains (losses) recognized during the reporting period on trading securities sold during the period	7		1			5
Unrealized gains (losses) recognized during the reporting period on trading securities still held at the reporting date	$	17	$	(4	)	$	13