9 INVESTMENTS

The amortized cost and estimated fair value of investments, excluding VIE investments, at December 31, 2011 and December 31, 2010 were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Non-credit other- than-temporary Impairments⁽¹⁾
December 31, 2011
Fixed income securities:
Municipal obligations	$	1,858,493	$	144,989	$	483	$	2,002,999	$	—
Corporate obligations		1,087,629		63,074		23,203		1,127,500		—
Foreign obligations		89,951		4,844		—		94,795		—
U.S. government obligations		107,717		3,847		2		111,562		—
U.S. agency obligations		80,960		5,911		—		86,871		—
Residential mortgage-backed securities		1,119,517		350,816		57,816		1,412,517		20,907
Collateralized debt obligations		48,686		142		2,591		46,237		—
Other asset-backed securities		953,944		53,965		60,101		947,808		—

		5,346,897		627,588		144,196		5,830,289		20,907
Short-term		783,015		57		1		783,071		—
Other		100		—		—		100		—

		6,130,012		627,645		144,197		6,613,460		20,907

Fixed income securities pledged as collateral:
U.S. government obligations		259,401		1,525		124		260,802		—
Residential mortgage-backed securities		2,557		171		—		2,728		—

Total collateralized investments		261,958		1,696		124		263,530		—

Total investments	$	6,391,970	$	629,341	$	144,321	$	6,876,990	$	20,907


December 31, 2010
Fixed income securities:
Municipal obligations	$	1,878,857	$	54,093	$	11,614	$	1,921,336	$	—
Corporate obligations		897,670		44,015		23,777		917,908		—
Foreign obligations		113,127		5,328		—		118,455		—
U.S. government obligations		153,609		3,299		35		156,873		—
U.S. agency obligations		81,696		6,598		—		88,294		—
Residential mortgage-backed securities		1,239,107		300,302		40,717		1,498,692		1,111
Collateralized debt obligations		40,997		391		9,132		32,256		—
Other asset-backed securities		1,019,894		28,274		43,857		1,004,311		—

		5,424,957		442,300		129,132		5,738,125		1,111
Short-term		991,567		—		—		991,567		—
Other		100		—		—		100		—

		6,416,624		442,300		129,132		6,729,792		1,111

Fixed income securities pledged as collateral:
U.S. government obligations		113,232		2,170		—		115,402		—
Residential mortgage-backed securities		7,686		431		—		8,117		—

Total collateralized investments		120,918		2,601		—		123,519		—

Total investments	$	6,537,542	$	444,901	$	129,132	$	6,853,311	$	1,111

(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 December 31, 2011 and December 31, 2010.

Foreign obligations at December 31, 2011 and 2010 consist primarily of government issued securities which are denominated in Pounds Sterling and held by Ambac UK.

The amortized cost and estimated fair value of investments, excluding VIE investments, at December 31, 2011, by contractual maturity, were as follows:


	Amortized Cost		Estimated Fair Value
Due in one year or less	$	558,644	$	560,337
Due after one year through five years		922,516		957,806
Due after five years through ten years		1,129,842		1,200,935
Due after ten years		1,656,264		1,748,622

		4,267,266		4,467,700
Residential mortgage-backed securities		1,122,074		1,415,245
Collateralized debt obligations		48,686		46,237
Other asset-backed securities		953,944		947,808

	$	6,391,970	$	6,876,990

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Unrealized Losses:

The following table shows gross unrealized losses and fair values of Ambac's investments, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2011 and 2010:


	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, 2011:
Fixed income securities:
Municipal obligations.	$	9,359	$	309	$	14,635	$	174	$	23,994	$	483
Corporate obligations		155,528		6,220		178,861		16,983		334,389		23,203
U.S. government obligations		130,422		126		—		—		130,422		126
Residential mortgage-backed securities		125,826		14,495		105,705		43,321		231,531		57,816
Collateralized debt obligations		33,037		840		12,482		1,751		45,519		2,591
Other asset-backed securities		181,792		8,319		204,855		51,782		386,647		60,101

		635,964		30,309		516,538		114,011		1,152,502		114,320
Short-term		5,773		1		—		—		5,773		1

Total temporarily impaired securities	$	641,737	$	30,310	$	516,538	$	114,011	$	1,158,275	$	144,321


December 31, 2010:
Fixed income securities:
Municipal obligations	$	281,760	$	7,633	$	33,946	$	3,981	$	315,706	$	11,614
Corporate obligations		51,806		1,691		212,417		22,086		264,223		23,777
U.S. government obligations		4,981		35		—		—		4,981		35
Residential mortgage-backed securities		22,180		537		127,782		40,180		149,962		40,717
Collateralized debt obligations		—		—		30,433		9,132		30,433		9,132
Other asset-backed securities		101,950		1,515		440,731		42,342		542,681		43,857

Total temporarily impaired securities	$	462,677	$	11,411	$	845,309	$	117,721	$	1,307,986	$	129,132

Management has determined that the unrealized losses reflected in the tables above are temporary in nature as of December 31, 2011 and 2010 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 fixed income investment portfolio against the projected net cash outflow from operating activities and debt service. For purposes of this assessment, available liquidity from the fixed income investment portfolio is comprised of the fair value of securities for which management has asserted its intent to sell 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. As of December 31, 2011 and 2010, management has not asserted an intent to sell any securities in an unrealized loss position from its portfolio. 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 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, 2011, 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 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, 2011, $268,633 of the total fair value and $77,947 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, 2010, $110,120 of the total fair value and $31,521 of the unrealized loss related to below investment grade securities and non-rated securities.

Corporate Obligations

Gross unrealized losses on corporate obligations during the year ended December 31, 2011 is primarily the result of an increase in credit spreads on life insurers. Of the $16,983 of unrealized losses on corporate obligations greater than 12 months, one security comprises $7,014 of the total. This security, which was purchased in multiple lots, is a closed-block life insurance issuance that is insured by Assured Guaranty Municipal Corporation, has been in an unrealized loss position for 30-48 months. Another security comprises $6,494 of the total. This security, which is an issuance by a large diversified financial services company that has a credit support agreement from its AA-rated parent, has been in an unrealized loss position for 54 months. The unrealized losses on these securities are the result of general credit spread widening since the date of purchase. Given the investment grade ratings, management believes that timely receipt of all principal and interest is probable.

Residential mortgage-backed securities

The gross unrealized loss on mortgage-backed securities as of December 31, 2011 is primarily related to Alt-A residential mortgage-backed securities. Of the $43,321 of unrealized losses on mortgage-backed securities for greater than 12 months, $42,984, or 99.2%, is attributable to 16 individual Alt-A securities. These individual securities have been in an unrealized loss position for 48 months. Each of these Alt-A securities have very similar characteristics such as vintage of the underlying collateral (2004-2007) and placement in the structure (generally class-A tranche rated triple-A at issuance). The significant declines in fair value relate to the actual and potential effects of declining U.S. housing prices, the recession and weak economic conditions in general on the performance of collateral underlying residential mortgage backed securities. This has been reflected in decreased liquidity for RMBS securities and increased risk premiums demanded by investors resulting in a required return on investment that is significantly higher than at the time the securities were purchased.

As part of the quarterly impairment review process, management estimates expected future cash flows from residential mortgage backed securities, considering the likelihood of a wide dispersion of possible outcomes to develop cash flow scenarios. Management has contracted consultants to model each of the securities in our portfolio. This approach includes the utilization of market accepted software tools 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. These assumptions are used to project various future cash flow scenarios for each security. The expected future cash flows used to assess impairment are derived by probability-weighting the various cash flow scenarios. Management considered this analysis in making our determination that non-receipt of contractual cash flows is not probable on these transactions.

Other asset-backed securities

The increase in gross unrealized losses on other asset-backed securities during the year ended December 31, 2011 is the result of overall risk aversion in the market due to economic uncertainty in the United States and abroad, as well as a flight to higher quality, more liquid investments. Of the $51,782 of unrealized losses on other asset-backed securities greater than 12 months, one security comprises $31,836 of the total. This security, which is secured by lease payments on an IRS facility and is insured by Ambac Assurance, has been in an unrealized loss position for 48 months. The unrealized loss on this security is largely due to the illiquid nature of this structured transaction which does not trade in the broad secondary market. Management believes that the timely receipt of all principal and interest on this position as well as on other asset-backed securities 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 years ended December 31, 2011 and 2010:


	2011			2010
Gross realized gains on securities	$	21,590		$	159,201
Gross realized losses on securities		(5,679	)		(86,588	)
Gains on investment agreement terminations		3,119			74,551
Loss on sale of subsidiary		—			(521	)
Gain on extinguishment of corporate debentures		—			10,693
Foreign exchange gains		1,436			2,115

Net realized gains	$	20,466		$	159,451


Net other–than-temporary impairments⁽¹⁾	$	(63,843	)	$	(59,803	)

(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.

Other-than-temporary impairment charges to earnings were $63,843 for the year ended December 31, 2011. These losses primarily resulted from adverse changes to projected cash flows on securities guaranteed by Ambac Assurance and on certain Alt-A residential mortgage-backed securities. As further described in Note 1, on March 24, 2010, the OCI commenced Segregated Account Rehabilitation Proceedings in order to permit the OCI to facilitate an orderly run-off and/or settlement of the liabilities allocated to the Segregated Account. As a result of actions taken by OCI, financial guarantee payments on securities guaranteed by Ambac Assurance which have been allocated to the Segregated Account were suspended in March 2010 and are no longer under the control of Ambac management. Claim payments under Segregated Account policies have remained suspended throughout the year ended December 31, 2011. Further, delays in the estimated effective date of the Segregated Account Rehabilitation Plan and resumption of claim payments thereunder have resulted in adverse changes in projected cash flows on certain impaired Ambac-wrapped securities during year ended December 31, 2011. Other-than-temporary impairment charges were $59,803 for the year ended December 31, 2010. Charges in 2010 included $42,656 related to credit losses on securities guaranteed by Ambac Assurance arising from the impact of the Segregated Account Rehabilitation Plan on projected cash flows. Additionally, other-than-temporary impairment charges of $17,147 for the year ended December 31, 2010, related to securities that management intended to sell primarily to meet liquidity needs at that time. As of December 31, 2011, management has not asserted an intent to sell any securities in an unrealized loss position from its portfolio. Future changes in our estimated liquidity needs could result in a determination that Ambac no longer has the ability to hold such securities, which could result in additional other-than-temporary impairment charges. Management's cash flow projections used in the impairment evaluation of Ambac-wrapped securities as of December 31, 2011 include an assumption that claim payments under the Segregated Account Rehabilitation Plan resume in June 2012. Delays in the effective date of the Segregated Account Rehabilitation Plan beyond this date could result in additional other-than-temporary impairment charges.

The following table presents a roll-forward of Ambac's cumulative credit impairments that were recognized in earnings on securities held as of December 31, 2011 and December 31, 2010:


	Credit Impairment
	2011			2010
Balance as of January 1	$	139,766		$	98,654
Additions for credit impairments recognized on:
Securities not previously impaired		57,446			27,057
Securities previously impaired		6,397			15,599
Reductions for credit impairments previously recognized on:
Securities that matured or were sold during the period		(2,292	)		(1,544	)

Balance as of December 31	$	201,317		$	139,766

Counterparty Collateral, Deposits with Regulators and Other Restrictions:

Ambac routinely pledges and receives collateral related to certain business lines and/or transactions. The following is a description of those arrangements by collateral source:

(1)

Cash and securities held in Ambac's investment portfolio—Ambac pledges assets it holds in its investment portfolio to investment and repurchase agreement and derivative counterparties. 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, pledged securities are separately classified on the Consolidated Balance Sheets as "Fixed income securities pledged as collateral, at fair value".

(2)	Cash and securities pledged to Ambac under derivative agreements—Ambac may re-pledge securities it holds from certain derivative counterparties to other derivative counterparties in accordance with its rights and obligations under those agreements.

The following table presents (i) the sources of collateral either received from various counterparties where Ambac is permitted to sell or re-pledge or directly held in the investment portfolio and (ii) how that collateral was pledged to various investment agreement, derivative and repurchase agreement counterparties at December 31, 2011 and December 31, 2010:


	Fair Value of Cash and Underlying Securities		Fair Value of Cash and Securities Pledged to Investment and Repurchase Agreement Counterparties		Fair Value of Cash and Securities Pledged to Derivative Counterparties
December 31, 2011:
Sources of Collateral:
Cash and securities pledged directly from the investment portfolio	$	874,987	$	564,036	$	310,951
Cash and securities pledged from its derivative counterparties		—		—		—

December 31, 2010:
Sources of Collateral:
Cash and securities pledged directly from the investment portfolio	$	962,919	$	846,124	$	116,795
Cash and securities pledged from its derivative counterparties		7,005		—		7,005

Securities carried at $7,132 and $6,947 at December 31, 2011 and December 31, 2010, respectively, were deposited by Ambac Assurance and Everspan with governmental authorities or designated custodian banks as required by laws affecting insurance companies.

At December 31, 2011, securities with a fair value of $172,880 were held by a bankruptcy remote trust to collateralize and fund repayment of debt issued through a resecuritization 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 and Note 12, Long-term Debt 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. Ambac obtains underlying ratings through ongoing dialogue with rating agencies and other sources. 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, 2011 and 2010, respectively:


	Municipal obligations		Corporate obligations		Mortgage and asset- backed securities		Short-term		Total		Weighted Average Underlying Rating⁽¹⁾
2011:
Ambac Assurance Corporation	$	59,881	$	4,624	$	1,123,858	$	—	$	1,188,363		B+
National Public Finance Guarantee Corporation		816,683		82,392		—		—		899,075		A+
Assured Guaranty Municipal Corporation		446,978		160,204		9,263		24,000		640,445		A
Assured Guaranty Corporation		—		—		38,424		—		38,424		CCC+
Financial Guarantee Insurance Corporation		17,350		—		7,724		—		25,074		BBB+
MBIA Insurance Corporation		—		19,082		3,769		—		22,851		BBB-

Total	$	1,340,892	$	266,302	$	1,183,038	$	24,000	$	2,814,232		BBB

2010:
Ambac Assurance Corporation	$	55,786	$	4,547	$	840,228	$	—	$	900,561		BB
National Public Finance Guarantee Corporation		815,824		80,942		—		—		896,766		AA-
Assured Guaranty Municipal Corporation		399,408		151,094		25,805		22,500		598,807		A
Assured Guaranty Corporation		—		—		45,047		—		45,047		CCC+
Financial Guarantee Insurance Corporation		16,428		—		11,800		—		28,228		BBB+
MBIA Insurance Corporation		—		19,547		5,630		—		25,177		BBB-

Total	$	1,287,446	$	256,130	$	928,510	$	22,500	$	2,494,586		BBB+

(1)	Ratings are based on the lower of Standard & Poor's or Moody's rating. If unavailable, Ambac's internal rating is used.

Investment Income:

Net investment income was comprised of the following:


	2011			2010
Fixed income securities	$	355,522		$	357,151
Short-term investments		1,789			1,625
Other investments		—			2,205
Hedge amortization		—			7
Loans		890			920

Total investment income		358,201			361,908
Investment expense		(3,411	)		(3,345	)

Net investment income	$	354,790		$	358,563