8. Investments

The amortized cost and estimated fair value of investments, excluding VIE investments, at March 31, 2012 and December 31, 2011 were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Non-credit other- than-temporary Impairments⁽¹⁾
March 31, 2012
Fixed income securities:
Municipal obligations	$	1,817,105	$	154,317	$	139	$	1,971,283	$	—
Corporate obligations		1,093,463		70,590		15,855		1,148,198		—
Foreign obligations		66,433		4,130		—		70,563		—
U.S. government obligations		127,134		2,701		639		129,196		—
U.S. agency obligations		80,908		5,253		—		86,161		—
Residential mortgage-backed securities		1,152,486		316,650		42,479		1,426,657		14,318
Collateralized debt obligations		44,800		328		1,709		43,419		—
Other asset-backed securities		913,726		23,247		49,317		887,656		—

		5,296,055		577,216		110,138		5,763,133		14,318
Short-term		893,649		173		—		893,822		—
Other		100		—		—		100		—

		6,189,804		577,389		110,138		6,657,055		14,318

Fixed income securities pledged as collateral:
U.S. government obligations		284,033		1,079		368		284,744		—
Residential mortgage-backed securities		2,813		205		—		3,018		—

Total collateralized investments		286,846		1,284		368		287,762		—

Total investments	$	6,476,650	$	578,673	$	110,506	$	6,944,817	$	14,318


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

(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 March 31, 2012 and December 31, 2011.

Foreign obligations at March 31, 2012 and December 31, 2011 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 March 31, 2012, by contractual maturity, were as follows:


	Amortized Cost		Estimated Fair Value
Due in one year or less	$	784,189	$	788,333
Due after one year through five years		914,085		955,103
Due after five years through ten years		1,140,063		1,223,801
Due after ten years		1,524,488		1,616,830

		4,362,825		4,584,067
Residential mortgage-backed securities		1,155,299		1,429,675
Collateralized debt obligations		44,800		43,419
Other asset-backed securities		913,726		887,656

	$	6,476,650	$	6,944,817

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 March 31, 2012 and December 31, 2011:


	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, 2012:
Fixed income securities:
Municipal obligations.	$	2,108	$	17	$	7,293	$	122	$	9,401	$	139
Corporate obligations		185,885		2,445		131,320		13,410		317,205		15,855
U.S. government obligations		222,333		1,007		—		—		222,333		1,007
Residential mortgage-backed securities		126,752		9,257		111,127		33,222		237,879		42,479
Collateralized debt obligations		25,954		422		9,839		1,287		35,793		1,709
Other asset-backed securities		208,591		1,124		201,573		48,193		410,164		49,317

		771,623		14,272		461,152		96,234		1,232,775		110,506
Short-term		4,599		—		—		—		4,599		—

Total temporarily impaired securities	$	776,222	$	14,272	$	461,152	$	96,234	$	1,237,374	$	110,506


	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		144,320
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

Management has determined that the unrealized losses reflected in the tables above are temporary in nature as of March 31, 2012 and December 31, 2011 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 March 31, 2012 and December 31, 2011, management has not asserted an intent to sell any securities in an unrealized loss position. 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 March 31, 2012, 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 March 31, 2012, $294,507 of the total fair value and $63,042 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, 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.

Corporate Obligations

Gross unrealized losses on corporate obligations during the three month period ended March 31, 2012 is primarily the result of an increase in credit spreads on life insurers. Of the $13,410 of unrealized losses on corporate obligations greater than 12 months, one security comprises $6,736 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 33-51 months. Another security comprises $4,620 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 57 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 during the three month period ended March 31, 2012 is primarily related to Alt-A residential mortgage-backed securities. Of the $33,222 of unrealized losses on mortgage-backed securities for greater than 12 months, $33,168, or 99.8%, is attributable to 16 individual Alt-A securities. These individual securities have been in an unrealized loss position for 51 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 gross unrealized losses on other asset-backed securities during the three month period ended March 31, 2012 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 $48,193 of unrealized losses on other asset-backed securities greater than 12 months, one security comprises $29,812 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 51 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 three month period ended March 31, 2012 and 2011:


	Three months ended March 31,
	2012			2011
Gross realized gains on securities	$	824		$	3,609
Gross realized losses on securities		(321	)		(862	)
Foreign exchange losses		(111	)		(297	)

Net realized gains	$	392		$	2,450

Net other–than-temporary impairments⁽¹⁾	$	(3,071	)	$	(1,713	)

(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 $3,071 and $1,713 for the three month period ended March 31, 2012 and 2011, respectively. 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. On March 24, 2010, OCI commenced the 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 three month period ended March 31, 2012. Delays in the estimated timing of resumption of claim payments have resulted in adverse changes in projected cash flows on certain impaired Ambac-wrapped securities during the three month period ended March 31, 2012. Further delays in the resumption of claim payments could result in additional other-than-temporary impairment charges in the future. As of March 31, 2012, 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.

The following table presents a roll-forward of Ambac's cumulative credit impairments that were recognized in earnings on securities held as of March 31, 2012 and 2011:


	Credit Impairment
	2012		2011
Balance as of January 1	$	201,317	$	139,766
Additions for credit impairments recognized on:
Securities not previously impaired		2,609		856
Securities previously impaired		462		857
Reductions for credit impairments previously recognized on:
Securities that matured or were sold during the period		—		—

Balance as of March 31	$	204,388	$	141,479

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 March 31, 2012 and December 31, 2011:


	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
March 31, 2012:
Sources of Collateral:
Cash and securities pledged directly from the investment portfolio	$	858,143	$	563,242	$	294,901
Cash and securities pledged from its 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		—		—		—

Securities carried at $7,066 and $7,132 at March 31, 2012 and December 31, 2011, 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 $179,339 and $172,880 at March 31, 2012 and December 31, 2011, respectively, 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 unaudited consolidated financial statements. Refer to Note 5, Special Purpose Entities, including Variable Interest Entities for a further description of this transaction.